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Section 1: 8-K/A (FORM 8-K/A)

cui20200329_8k.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K/A

Amendment No. 1

 

CURRENT REPORT

 

PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported):

April 1, 2020

 

Commission File Number: 0-29923

 

Orbital Energy Group, Inc.

(Exact Name of registrant as specified in Its Charter)

 

 

   Colorado

 

84-1463284

   (State or jurisdiction of

 

(I.R.S. Employer

   incorporation or organization)

 

Identification No.)

     

   1924 Aldine Western, Houston, Texas

 

77038

   (Address of Principal Executive Offices)

 

(zip code)

 

(832) 467-1420

 

(Registrant’s telephone number)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a- 12)

 

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.1 4d-2(b))

 

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value

OEG

Nasdaq Capital Market

 

 

 

Item 2.01 Completion of Acquisition or Disposition of Assets.

 

This Current Report on Form 8-K/A is being filed as an amendment to the Current Report on Form 8-K filed by Orbital Energy Group, Inc. (f/k/a: CUI Global, Inc.) ("Orbital Energy Group" or the "Company") with the Securities and Exchange Commission (the "SEC") on April 6, 2020 (the "Original Form 8-K").  The Original Form 8-K reported, among other things, the completion by the Company on April 1, 2020 of its acquisition of Reach Construction Group, LLC.  The acquisition was effectuated pursuant to the Equity Purchase Agreement (the “Agreement”), dated as of April 1, 2020 (the “Agreement”), between Orbital Energy Group and Brandon S. Martin (the "Seller").  Orbital Energy Group issued 2,000,000 shares of restricted common stock issued to the Seller ($1.2 million estimated fair value as of April 1, 2020) along with two seller notes for a combined total of $35 million (Adjusted to $6.5 million following preliminary working capital adjustment as of April 1, 2020) and an earn-out not in excess of $30 million ($1.1 million estimated fair value as of April 1, 2020.) The seller notes were subject to a $28.5 million preliminary working capital adjustment.

 

This Current Report on Form 8-K/A amends and restates Item 9.01 of the Original Form 8-K to present certain financial statements of Reach Construction Group, LLC and to present certain unaudited pro forma financial statements of the Company in connection with the Company's acquisition of Reach Construction Group, LLC, which financial statements and unaudited pro forma financial statements are filed as exhibits hereto and are incorporated herein by reference. All of the other items in the Original Form 8-K remain the same and are hereby incorporated by reference into this Current Report on Form 8-K/A.

 

The press release is available at the Company’s website, www.orbitalenergygroup.com.

 

Section 9 - Financial Statement and Exhibits

 

Item 9.01 Financial Statement and Exhibits.

 

 

(a)    Financial Statements of Business Acquired

 

The following financial statements of Reach Construction Group, LLC are filed as Exhibit 99.1 to this Current Report on Form 8-K/A:

 

(i)     Audited financial statements as of and for the year ended December 31, 2018.

 

(ii)   Audited financial statements as of and for the year ended December 31, 2019.

 

(iii)  Unaudited financial statements as of and for the three months ended March 31, 2020.

 

(b)   Pro Forma Financial Information

 

The following unaudited pro forma financial statements are filed as Exhibit 99.2 to this Current Report on Form 8-K/A:

 

(i)  Unaudited pro forma balance sheet as of March 31, 2020

 

(ii)  Unaudited pro forma income statement for the year ended December 31, 2019 and the three months ended March 31, 2020.

 

(d)     Exhibits

 

Exhibit No.

 

Description of Exhibit

Exhibit 23.1   Consent of Smith Kesler & Company, P.A.
Exhibit 99.1  

Financial Statements of Reach Construction Group, LLC

Exhibit 99.2   Pro Forma Financial Statements
Exhibit 99.3   Press release of Orbital Energy Group, Inc. f/k/a CUI Global, Inc. dated April 6, 2020, is incorporated by reference to Exhibit 99.1 to the Original Form 8-K.

 

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Signed and submitted this 31st day of July 2020.

 

 

Orbital Energy Group, Inc.

(Registrant)

 

 By:

   /s/ Daniel N. Ford

 

        Daniel N. Ford

 

        Chief Financial Officer

 

 

 
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Section 2: EX-23.1 (EXHIBIT 23.1)

ex_196402.htm

Exhibit 23.1

 

 

 

 

 

 

 

 

 

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

 

 

 

 

 

 

To Whom It May Concern:

 

We consent to the use, in the current report Form 8-K, of Orbital Energy Group, Inc. of our reports dated July 22, 2020, on our audits of the balance sheets of Reach Construction Group, LLC as of December 31, 2019 and 2018, and the related statements of income and member’s deficit and cash flows for the years then ended, and the reference to us under the caption “Experts”.

 

                                         

Smith, Kesler & Company, P.A.                                                  

 Research Triangle Park, North Carolina                                    

 

July 31, 2020

 

 
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Section 3: EX-99.1 (EXHIBIT 99.1 - REACH CONSTRUCTION GROUP, LLC FINANCIAL STATEMENTS)

ex_189953.htm

Exhibit 99.1

 

 

 

 

 

 

 

 

 

REACH CONSTRUCTION GROUP, LLC

FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITOR’S REPORT

FOR THE YEAR ENDED

DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REACH CONSTRUCTION GROUP, LLC

 

 

Index

 

 

  Page
   
Independent Auditor’s Report 1
   
Balance Sheet  2-3
   
Statement Of Income And Member’s Deficit  4
   
Statement Of Cash Flows 5
   
Notes To The Financial Statements 6-12

 

 

 

   

Independent Auditor’s Report

 

 

 

To the Member of

Reach Construction Group, LLC:

 

We have audited the accompanying financial statements of Reach Construction Group, LLC, which com- prise the balance sheet as of December 31, 2018, and the related statements of income and member’s deficit, and cash flows for the year then ended, and the related notes to the financial statements.

 

Management’s Responsibility For The Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in ac- cordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presenta- tion of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the as- sessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropri- ateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Reach Construction Group, LLC as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

Substantial Doubt About The Company’s Ability To Continue As a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 11 to the financial statements, at December 31, 2018, the Company had a $454,591 working capital deficit and a $363,717 retained deficit in equity. These factors create a substantial doubt whether the Company is capable to continue as a going concern. Management’s evalu- ation of the events and conditions and management’s plans regarding these matters are also described in Note 11. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

 

 

  Smith, Kesler & Company

                       Research Triangle Park, North Carolina

 

July 22, 2020

 

 

 

 

REACH CONSTRUCTION GROUP, LLC

BALANCE SHEET

DECEMBER 31, 2018

 

ASSETS

 

 

Current Assets (Note 6):                
Cash (Notes 1 and 7)           $ 58,122  
                 
Accounts Receivable (Notes 1 and 7):                
Construction Contracts:                

Current billings

  $ 130,298          

Retainage

    389,740          

Total Accounts Receivable

            520,038  
                 

Cost and estimated profit in excess of billings on uncompleted contracts (Notes 1 and 5)

            135,329  
                 

Due from member (Note 10)

            84,744  
                 

Total Current Assets

            798,233  
                 
                 
Property And Equipment, At Cost (Notes 1, 3 and 6):                

Equipment

    268,510          
                 

Vehicles

    241,586          
                 

Total

    510,096          
                 

Less: Accumulated depreciation (including expense of $109,814 in 2018)

    (208,028 )        
                 

Net Property And Equipment

            302,068  
                 

Total Assets

          $ 1,100,301  

 

2

 

REACH CONSTRUCTION GROUP, LLC

BALANCE SHEET

DECEMBER 31, 2018

 

 

LIABILITIES AND MEMBER'S DEFICIT

 

 

Current Liabilities:                
Accounts Payable:                

Trade

  $ 361,332          

Retainage

    12,924          
Total Accounts Payable           $ 374,256  
                 

Line of credit (Note 6)

            730,000  
                 

Current portion of notes payable (Note 3)

            106,181  
                 

Accrued payroll taxes and withholdings

            12,428  
                 

Accrued payroll

            29,959  
                 

Total Current Liabilities

            1,252,824  
                 
                 
Non-Current Liabilities:                
Non-current portion of notes payable (Note 3)             211,194  
                 
Total Liabilities             1,464,018  
                 
                 
Member's Deficit             (363,717 )
                 
Total Liabilities And Member's Deficit           $ 1,100,301  

 

See accompanying notes and independent auditor's report.

 

3

 

REACH CONSTRUCTION GROUP, LLC

STATEMENT OF INCOME AND MEMBER'S DEFICIT

FOR THE YEAR ENDED DECEMBER 31, 2018

 

 

Revenues (Notes 1 and 7):                
Construction contracts   $ 5,354,166          
Construction costs (Note 8)     (5,906,039 )        
                 
Gross Loss From Operations           $ (551,873 )
                 
                 
General And Administrative Expenses:                

Administrative salaries

    876,218          

Advertising

    8,236          

Insurance

    75,515          

Office

    55,972          

Professional fees

    153,369          

Rent (Note 8)

    36,000          

Retirement (Note 9)

    41,424          

Taxes and licenses

    68,924          

Telephone and utilities

    39,456          

Travel

    36,447          
                 

Total General And Administrative Expenses

            1,391,561  
                 

Loss From Operations

            (1,943,434 )
                 
                 

Other Expense:

               

Loss on disposal of fixed assets

    (2,524 )        

Interest expense

    (50,226 )        
                 

Total Other Expense

            (52,750 )
                 

Loss Before Provision For Income Taxes

            (1,996,184 )
                 

Provision for income taxes (Note 2)

            -0-  
                 

Net Loss

            (1,996,184 )
                 

Member's equity, beginning of the year

            1,632,467  
                 

Member's Deficit, End Of The Year

          $ (363,717 )

 

See accompanying notes and independent auditor's report.

 

4

 

REACH CONSTRUCTION GROUP, LLC

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2018

 

Cash Flows From Operating Activities:                

Net Loss

          $  (1,996,184 )

Adjustments To Reconcile Net Loss To Net Cash Provided By Operating Activities:

               

Depreciation

  $ 109,814          

Loss on disposal of fixed assets

    2,524          
                 

Changes In Assets And Liabilities:

               

Accounts receivable

    4,769,972          

Cost and estimated profit in excess of billings on uncompleted contracts

    793,414          

Prepaid expenses

    13,728          

Accounts payable

    (3,505,216 )        

Accrued expenses

    (5,953 )        
                 

Total Adjustments

            2,178,283  
                 

Net Cash Provided By Operating Activities

            182,099  
                 
                 
Cash Flows From Investing Activities:                

Proceeds from disposal of fixed assets

    15,713          
                 

Net Cash Provided By Investing Activities

            15,713  
                 
                 

Cash Flows From Financing Activities:

               

Principal payments on notes payable

    (66,446 )        

Net member activity

    (665,851 )        

Net line of credit activity

    525,000          
                 

Net Cash Used In Financing Activities

            (207,297 )
                 

Net Decrease In Cash

            (9,485 )
                 

Cash, beginning of the year

            67,607  
                 

Cash, End Of The Year

          $ 58,122  

 

See accompanying notes and independent auditor's report.

 

5

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

 

a.

The Company's Activities, Operating Cycle and Use of Estimates:

The Company is engaged in solar farm construction in North Carolina. The work is performed under unit-price and fixed-price contracts modified by incentive and penalty provisions.

 

The operating cycle of the Company's contracts varies, but is typically about one year. Assets and liabilities related to long-term contracts are included in current assets and liabilities in the accompanying Balance Sheet, as they will be liqui- dated in the normal course of contract completion, although this may require more than one year, depending on the contract period.

 

The preparation of financial statements in conformity with generally accepted ac- counting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contin- gent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

b.

Revenue and Cost Recognition:

Revenues from long-term construction contracts for financial reporting purposes are reported on the percentage-of-completion method. The percentage com- pleted for each contract is determined by the ratio of cost to date to estimated total cost, and this percentage is applied to the total estimated profit to determine the profit earned to date. That method is used because management considers total cost to be the best available measure of progress on the contract. No gross profit is recognized until the contract has reached 10% of completion. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that estimates used will change within the near term. Contract costs include direct materials, labor and payroll taxes, subcontracts and other direct costs as well as indirect costs such as depreciation, insurance, fuel, repairs and unassigned labor which are essential for contract performance. General and administrative costs are charged to expense as incurred. Provision is made for the entire amount of future estimated losses on contracts in the period when it first becomes known. Claims for additional contract compensation are not reflected in the accounts until the year in which such claims are allowed. When contracts extend over one or more fiscal years, revisions in cost and earnings estimated during the course of the work are reflected in the accounting period in which the facts which require revision become known. The asset, "cost and estimated profit in excess of billings on uncompleted contracts", represents revenues recognized in excess of the amounts billed. The liability, "billings in excess of cost and estimated profit on uncompleted contracts", represents billings in excess of revenues recognized.

 

Income from construction contracts for income tax purposes is reported on the cash basis method of accounting. Under this method, income on long-term contracts is recognized upon receipt and expenses when paid.

 

(Continued)

6

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

 

(Continued)

 

 

c.

Property and Equipment:

Property and equipment are carried at cost. Major additions and betterments are charged to property accounts while maintenance and repairs which do not improve or extend the life of the respective assets are expensed currently. Depreciation is provided for over the estimated useful lives of the respective assets by using the straight-line method which approximates the decline in value of the assets. Property items retired, or otherwise disposed of, are eliminated from the asset accounts and accumulated depreciation accounts. Gains and losses from disposals are included in earnings.

 

 

d.

Accounts Receivable:

Accounts receivable are stated at the amounts expected to be collected in future periods. Doubtful accounts are eliminated from accounts receivable by the direct write-off method. Subsequent collections of accounts which have been written off are reported as income in the period collected. The Company uses the direct write-off method due to the historically immaterial amounts of bad debts incurred. The direct write-off method is not in accordance with generally accepted accounting principles. Had generally accepted accounting principles been used, the financial statements taken as a whole would not change materially from the statements presented.

 

The schedule of aged accounts receivable for current billings at December 31, 2018, is as follows:

 

    0 - 30 Days   $ 82,629          
  31 - 60 Days     42,230          
  61 - 90 Days     220          
Over 90 Days     5,219          
            $ 130,298  

 

As of the date of the report, the Company had collected all of the foregoing balance of accounts receivable.

 

 

e.

Supplemental Cash Flow Information:

For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents.

 

In 2018, there were non-cash investing and financing activities of $111,889, rep- resenting the purchase of fixed assets and assumption of notes payable, which are not reflected in the Statement of Cash Flows.

 

In 2018, there were non-cash investing and financing activities of $41,910, representing the disposal of a vehicle and the payment to a former member, which are not reflected in the Statement of Cash Flows.

 

(Continued)

7

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

 

(Continued)

 

In 2018, there were non-cash investing and financing activities of $104,828, rep- resenting the disposal of fixed assets and payment of notes payable, which are not reflected in the Statement of Cash Flows.

 

In 2018, there were non-cash investing activities of $60,735, representing the trade-in of fixed assets, which are not reflected in the Statement of Cash Flows.

 

Interest Paid During The Year   $ 50,226  
Income Taxes Paid During The Year   $ -0-  

 

 

f.

Advertising:

Advertising costs are expensed as incurred.

 

 

g.

Subsequent Events:

Management has evaluated subsequent events through July 22, 2020, which is the date the financial statements were available to be issued.

 

 

2.

INCOME TAXES:

 

The Company’s member elected to be taxed as an “S” Corporation under the Internal Revenue Code and similar state law. Instead of paying company income taxes, the member is taxed individually on the Company’s pass through income. Therefore, no provision or liability for Federal or state income taxes has been made.

 

Management continually evaluates its income tax position based on tax laws and regulations and records adjustments as appropriate. This evaluation takes into consideration the status of any taxing authorities’ examinations, recent positions taken by the taxing authorities and the overall tax environment. As of December 31, 2018, management estimates that upon audit, the effects of any uncertain tax positions would be non-material to the financial statements as a whole. The tax returns filed by the Company are subject to examination, generally for three years after they were filed. As of December 31, 2018, there were no audits in process by Federal or state agencies.

 

 

3.

NOTES PAYABLE:

 

Notes payable are scheduled as follows:

 

    2018  
    Current     Non-Current  

Notes payable to Ally Financial, collateralized by vehicles, due in monthly installments ranging from $584 to $1,053, including interest ranging from 3.34% to 8.99% per annum

  $ 22,067     $ 95,959  
                 
Note payable to GM Financial, collat- eralized by a vehicle, due in monthly installments of $1,213, including interest at 3% per annum     12,864       49,386  
                 
Notes payable to CAT Financial, collat- eralized by equipment, due in monthly installments of $1,208 and $3,849, including interest at 0% and 0.9% per annum     71,250       65,849  
                 
Total Notes Payable   $ 106,181     $ 211,194

 

(Continued)

8

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

 

(Continued)

 

The aggregate annual maturities of long-term debt are as follows:

 

Year ending December 31, 2019

    $ 106,181  

2020

      90,572  

2021

      43,265  

2022

      33,666  

2023

      29,633  

Thereafter

      14,058  

 

 

4.

BACKLOG:

 

The following schedule presents a reconciliation of gross contract revenues to be earned in the future from contracts signed as of December 31:

 

Balance of revenues to be earned on signed contracts, January 1   $ 960,823          
                 
New contracts and contract adjustments entered into January 1 through December 31     4,990,843          
                 
Less: Contract revenues earned January 1 through December 31     (5,354,166 )        
                 
Balance Of Revenues To Be Earned On Signed Contracts At December 31           $ 597,500  
                 
Estimated Gross Profit To Be Earned On Signed Contracts At December 31           $ 82,500  

 

 

5.

CONTRACTS-IN-PROGRESS:

 

Information with respect to contracts-in-progress is as follows:

 

(Continued)

9

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

 

(Continued)

 

Cost incurred on uncompleted contracts   $ 116,643          
Estimated profit thereon     18,686          
                 
Total     135,329          
                 
Billings on uncompleted contracts     -0-          
                 
Net Under Billings           $ 135,329   

 

The foregoing is included in the accompanying Balance Sheet under the following captions:

 

Cost and estimated profit in excess of billings on uncompleted contracts   $ 135,329          
                 
Billings in excess of cost and estimated profit on uncompleted contracts     -0-          
                 
Net Under Billings           $ 135,329  

 

 

6.

LINE OF CREDIT:

 

The Company has available a $750,000 line of credit with SunTrust Bank. Interest is payable monthly at LIBOR (currently 2.49%) plus 2.5% per annum, with a minimum rate of 2.5%. The line of credit is collateralized by all assets and guaranteed by the member. At December 31, 2018, there was an outstanding balance of $730,000.

 

 

7.

CONCENTRATIONS:

 

 

a.

Cash:

Cash deposits at banks potentially subject the Company to credit risk. Deposits at each institution are insured by FDIC up to $250,000. Cash balances at risk and cash balances shown on the Balance Sheet may differ because of outstanding checks and deposits. A summary of the total insured and uninsured amounts held at December 31, 2018, follows:

 

Total cash held   $ 82,207          
Portion insured by FDIC     (82,207 )        
                 
Uninsured Cash Balances             -0-  

 

 

b.

Accounts Receivable:

Two customers, individually, at December 31, 2018 accounted for more than 10% of the Company’s accounts receivable and retainage. The total of accounts receivable and retainage for these customers was $472,369 at December 31, 2018.

 

 

c.

Revenues:

Two customers, individually, for 2018 provided more than 10% of the Company’s gross revenues. Revenues earned on contracts with these customers totaled $4,501,420 for 2018.

 

10

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

 

8.

OPERATING LEASES:

 

The Company leases equipment and office facilities under non-cancelable operating leases. Total lease expense for 2018 was $181,861, of which $145,861 was charged to construction costs. The following is a schedule, by year, of future minimum rentals under the leases at December 31:

 

Year ending December 31, 2019     $ 325,514          
2020       338,616          
2021       167,664          
              $ 831,794  

 

 

9.

RETIREMENT PLAN:

 

Employees of the Company may participate in a 401(k) retirement plan, whereby the em- ployees may elect to make contributions pursuant to a salary reduction agreement upon meeting age and service requirements. The Company matches employee contributions up to 4.5% of their salary. Administrative expenses and matching contributions were $41,424 for 2018.

 

The Company may, at its discretion, make a profit sharing contribution to the Plan. No contribution was made for 2018.

 

 

10.

RELATED PARTY TRANSACTIONS:

 

At December 31, 2018, the Company was owed $84,744 by the member. The loan is non- interest bearing and due on demand but collection is not expected in the next twelve months.

 

In 2018, the Company paid $4,311 in legal fees to the manager of a former member.

 

 

11.

GOING CONCERN:

 

Management believes the Company's present cash flows indicate there is substantial doubt as to the Company's ability to continue as a going concern as they will not enable it to meet its obligations for twelve months from the date these financial statements are available to be issued. Management has developed a plan to address this issue. The Company sold in April, 2020 to Orbital Energy Group, Inc., a publicly-traded company listed on the Nasdaq. Reach will rely on the Parent Company's cash balance and positive working capital that the Parent Company will manage in the next twelve months. In addition, the Company has increased forecasted revenues for the remainder of 2020 and 2021, which are expected to provide increasing cash flows and profitability based on project schedules, budgets, and the Company’s ability to execute on these projects. The Parent Company may need to seek additional funding sources in the form of debt or equity during the next twelve months. Con- sidering the above factors, and additional measures that may be available to generate cash, management believes the Company will have sufficient cash flows to meet its obligations for the twelve-month period from the date the financial statements are available to be issued. However, the ability to meet obligations depends on the Company's ability to execute on its plans, of which success cannot be assured. As such, substantial doubt has not been alleviated.

 

11

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

 

12.

SUBSEQUENT PRONOUNCEMENTS:

 

Effective January 1, 2019, accounting principles generally accepted in the United States of America, pursuant to ASC 606, require the Company to adopt new revenue recognition pol- icies. Under the guidelines of the newly effective revenue recognition guidelines, manage- ment has retrospectively evaluated contracts-in-progress as of December 31, 2018. Con- tracts-in-progress have been evaluated for uninstalled materials, the combination of con- tracts, and multiple performance obligations within one contract. Based on management’s evaluation of the contracts-in-progress, there are no material retrospective effects necessary as of December 31, 2018.

 

 

13.

SUBSEQUENT EVENTS:

 

In April, 2020, the Company was acquired by Orbital Energy Group, Inc., a publically traded company.

 

12

 

 

 

 

 

 

 

REACH CONSTRUCTION GROUP, LLC

FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITOR’S REPORT

FOR THE YEAR ENDED

DECEMBER 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

REACH CONSTRUCTION GROUP, LLC

 

Index

 

  Page
   
Independent Auditor’s Report 1
   
Balance Sheet  2-3
   
Statement Of Income And Member’s Deficit  4
   
Statement Of Cash Flows 5
   
Notes To The Financial Statements 6-13

 

 

 

 

   

Independent Auditor’s Report

 

 

 

To the Member of

Reach Construction Group, LLC:

 

We have audited the accompanying financial statements of Reach Construction Group, LLC, which com- prise the balance sheet as of December 31, 2019, and the related statements of income and member’s deficit, and cash flows for the year then ended, and the related notes to the financial statements.

 

Management’s Responsibility For The Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in ac- cordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presenta- tion of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the as- sessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropri- ateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Reach Construction Group, LLC as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

Substantial Doubt About The Company’s Ability To Continue As a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 11 to the financial statements, at December 31, 2019, the Company had a $10,769,401 working capital deficit and a $10,735,198 retained deficit in equity. These factors create a substantial doubt whether the Company is capable to continue as a going concern. Management’s eval- uation of the events and conditions and management’s plans regarding these matters are also described in Note 11. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

 

  Smith, Kesler & Company

                       Research Triangle Park, North Carolina

 

July 22, 2020

 

1

 

REACH CONSTRUCTION GROUP, LLC

BALANCE SHEET

DECEMBER 31, 2019

 

 

ASSETS

 

 

Current Assets (Note 6):                
Cash (Notes 1 and 7)           $ 669,253  
                 
Accounts Receivable (Notes 1, 7 and 12):                
Construction Contracts:                
Current billings   $ 3,693,440           
Retainage     1,868,647           
Total Accounts Receivable             5,562,087  
                 
Cost and estimated profit in excess of billings on uncompleted contracts (Notes 1 and 5)             335,249  
                 
Prepaid insurance             10,719  
                 
Total Current Assets             6,577,308  
                 
                 

Property And Equipment, At Cost (Notes 1, 3 and 6):

               

Equipment

    268,510          
                 

Vehicles

    442,712          
                 

Total

    711,222          
                 

Less: Accumulated depreciation (including expense of $118,415 in 2019)

    (294,089 )        
                 

Net Property And Equipment

            417,133  
                 

Total Assets

          $ 6,994,441  

 

 

2

 

REACH CONSTRUCTION GROUP, LLC

BALANCE SHEET

DECEMBER 31, 2019

 

 

LIABILITIES AND MEMBER'S DEFICIT

 

 

Current Liabilities:                
Accounts Payable (Note 12):                

Trade

  $ 10,345,711          

Retainage

  $ 541,613          
Total Accounts Payable           $ 10,887,324  
                 

Billings in excess of cost and estimated profit on uncompleted contracts (Notes 1 and 5)

            2,969,721  
                 

Accrued losses on contracts-in-progress (Notes 1 and 5)

            2,460,227  
                 

Accrued payroll

            161,271  
                 

Current portion of notes payable (Note 3)

            118,166  
                 

Line of credit (Note 6)

            750,000  
                 

Total Current Liabilities

            17,346,709  
                 
                 
Non-Current Liabilities:                

Non-current portion of notes payable (Note 3)

    311,025          
                 

Due to member (Note 10)

    71,905          
                 

Total Non-Current Liabilities

            382,930  
                 

Total Liabilities

            17,729,639  
                 
                 

Member's Deficit

            (10,735,198 )
                 

Total Liabilities And Member's Deficit

          $ 6,994,441  

 

See accompanying notes and independent auditor's report.

 

3

 

REACH CONSTRUCTION GROUP, LLC

STATEMENT OF INCOME AND MEMBER'S DEFICIT

FOR THE YEAR ENDED DECEMBER 31, 2019

 

 

Revenues (Notes 1 and 7):                
Construction contracts   $ 12,148,773          
Construction costs (Note 8)     (19,750,886 )        
                 
Gross Loss From Operations           $ (7,602,113 )
                 
                 
General And Administrative Expenses:                

Administrative salaries

    1,990,333          

Administrative depreciation

    21,559          

Insurance

    137,350          

Office (Note 8)

    82,743          

Professional fees

    167,546          

Repairs

    5,810          

Rent (Note 8)

    34,440          

Retirement (Note 9)

    42,410          

Taxes and licenses

    117,091          

Telephone and utilities

    59,570          

Travel

    71,759          
                 

Total General And Administrative Expenses

            2,730,611  
                 

Loss From Operations

            (10,332,724 )
                 
                 
Other Expense:                
Interest expense             (38,757 )
                 
Loss Before Provision For Income Taxes             (10,371,481 )
                 
Provision for income taxes (Note 2)             -0-  
                 
Net Loss             (10,371,481 )
                 
Member's deficit, beginning of the year             (363,717 )
                 
Member's Deficit, End Of The Year           $ (10,735,198 )

 

See accompanying notes and independent auditor's report.

 

4

 

 REACH CONSTRUCTION GROUP, LLC

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2019

 

 

Cash Flows From Operating Activities:                

Net Loss

          $ (10,371,481 )
Adjustments To Reconcile Net Loss To Net Cash Provided By Operating Activities:                

Depreciation

  $ 118,415          
                 

Changes In Assets And Liabilities:

               

Accounts receivable

    (5,042,048 )        

Cost and estimated profit in excess of billings on uncompleted contracts

    (199,920 )        

Prepaid expenses

    (10,719 )        

Accounts payable

    10,513,068          

Billings in excess of cost and estimated profit on uncompleted contracts

    2,969,721          

Accrued losses on contracts-in-progress

    2,460,227          

Accrued expenses

    118,884          
                 

Total Adjustments

            10,927,628  
                 

Net Cash Provided By Operating Activities

            556,147  
                 
                 
Cash Flows From Investing Activities:                

Capital expenditures

    (16,001 )        
                 

Net Cash Used In Investing Activities

            (16,001 )
                 
                 

Cash Flows From Financing Activities:

               

Principal payments on notes payable

    (110,555 )        

Net member activity

    161,540          

Net line of credit activity

    20,000          
                 

Net Cash Provided By Financing Activities

            70,985  
                 

Net Increase In Cash

            611,131  
                 

Cash, beginning of the year

            58,122  
                 

Cash, End Of The Year

          $ 669,253  

 

See accompanying notes and independent auditor's report.

 

5

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

 

a.

The Company's Activities, Operating Cycle and Use of Estimates:

The Company is engaged in solar farm construction primarily in North Carolina. The work is performed primarily for private entities under unit-price and fixed-price contracts modified by incentive and penalty provisions. Payment is typically due in installments, based on terms specified in the contracts.

 

The operating cycle of the Company's contracts varies, but is typically about one year. Assets and liabilities related to long-term contracts are included in current assets and liabilities in the accompanying Balance Sheet, as they will be liqui- dated in the normal course of contract completion, although this may require more than one year, depending on the contract period.

 

The preparation of financial statements in conformity with generally accepted ac- counting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contin- gent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

b.

Revenue and Cost Recognition:

On January 1, 2019, the Company adopted Accounting Standards Update 2014- 09 (ASC Topic 606), “Revenue from Contracts with Customers” using the modi- fied retrospective method of transition in which the new guidance was applied retrospectively to contracts that were not completed as of January 1, 2019. Based on management’s evaluation of the contracts-in-progress, there are no material retrospective adjustments as of December 31, 2018.

 

The Company considers each contract to be one performance obligation, unless circumstances dictate otherwise. Some of the Company’s contracts may contain multiple performance obligations. For contracts with multiple performance obli- gations, the Company allocates the contract's transaction price to each perfor- mance obligation using the Company’s best estimate of the standalone selling price of each distinct good or service in the contract. Revenue is recognized as performance obligations are satisfied.

 

The Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evalua- tion requires significant judgment and the decision to combine a group of con- tracts or separate the combined or single contract into multiple performance obli- gations could change the amount of revenue and profit recorded in a given period.

 

(Continued)

6

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

(Continued)

 

Revenues from long-term construction contracts for financial reporting purposes are reported on the percentage-of-completion method (an input method). The percentage completed for each contract is determined by the ratio of cost to date to estimated total cost, and this percentage is applied to the total estimated profit to determine the profit earned to date. That method is used because management considers total cost to be the best available measure of progress on the contract. When the Company determines there are significant uninstalled ma- terials on a contract, the Company recognizes revenue for the transfer of the goods, but only in an amount equal to the cost of those goods. In those circum- stances, the Company excludes the costs of the goods from the cost-to-cost cal- culation to be consistent with the cost-to-cost methodology. No gross profit is recognized until the contract has reached 10% of completion. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that estimates used will change within the near term. Contract costs include direct materials, labor and payroll taxes, subcontracts and other direct costs as well as indirect costs such as depreciation, insurance, repairs and unassigned labor which are essential for contract performance. General and administrative costs are charged to expense as incurred. Provision is made for the entire amount of future estimated losses on contracts in the period when it first becomes known. Contract modifications are routine in the performance of the Company's contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or ser- vices that are not distinct, and, therefore, are accounted for as part of the existing contract. The nature of the Company’s contracts gives rise to several types of variable consideration, including claims and award and incentive fees. The Com- pany includes in the contract estimates additional revenue for submitted contract modifications or claims against the customer when the Company believes it has an enforceable right to the modification or claim, the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, the Company considers the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. The Company includes award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and the Company’s best judgment at the time. When contracts extend over one or more fiscal years, revisions in cost and earnings estimated during the course of the work are reflected in the accounting period in which the facts which require revision become known. The asset, "cost and esti- mated profit in excess of billings on uncompleted contracts", represents revenues recognized in excess of the amounts billed. The liability, "billings in excess of cost and estimated profit on uncompleted contracts", represents billings in excess of revenues recognized. The liability “accrued losses on contracts-in-progress”, rep- resents estimated losses on uncompleted contracts in excess of the amounts rec- ognized on the percentage-of-completion method of accounting.

 

Income from construction contracts for income tax purposes is reported on the cash basis method of accounting. Under this method, income on long-term contracts is recognized upon receipt and expenses when paid.

 

 

c.

Property and Equipment:

Property and equipment are carried at cost. Major additions and betterments are charged to property accounts while maintenance and repairs which do not improve or extend the life of the respective assets are expensed currently.

 

(Continued)

7

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

(Continued)

 

Depreciation is provided for over the estimated useful lives of the respective assets by using the straight-line method which approximates the decline in value of the assets. Property items retired, or otherwise disposed of, are eliminated from the asset accounts and accumulated depreciation accounts. Gains and losses from disposals are included in earnings.

 

 

d.

Accounts Receivable:

Accounts receivable are stated at the amounts expected to be collected in future periods. Doubtful accounts are eliminated from accounts receivable by the direct write-off method. Subsequent collections of accounts which have been written off are reported as income in the period collected. The Company uses the direct write-off method due to the historically immaterial amounts of bad debts incurred. The direct write-off method is not in accordance with generally accepted account- ing principles. Had generally accepted accounting principles been used, the financial statements taken as a whole would not change materially from the statements presented.

 

The schedule of aged accounts receivable for current billings at December 31, 2019, is as follows:

 

    0 - 30 Days     $ 1,755,473          
  31 - 60 Days       1,932,117          
  61 - 90 Days                  
Over 90 Days       5,850          
              $ 3,693,440  

     

As of the date of the report, the Company had collected $2,976,871 of the fore- going balance of accounts receivable. None of the over ninety days accounts receivable were collected.

 

 

e.

Supplemental Cash Flow Information:

For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents.

 

In 2019, there were non-cash investing and financing activities of $278,504, rep- resenting the purchase of fixed assets and assumption of notes payable, which are not reflected in the Statement of Cash Flows.

 

In 2019, there were non-cash investing activities of $47,383, representing the trade-in of fixed assets, which are not reflected in the Statement of Cash Flows.

 

In 2019, there were non-cash investing and financing activities of $56,134, repre- senting the disposal of fixed assets and payment of notes payable, which are not reflected in the Statement of Cash Flows.

(Continued)

8

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

(Continued)

 

In 2019, there were non-cash investing and financing activities of $4,841, repre- senting the trade-in of fixed assets and payoff of member loan, which are not reflected in the Statement of Cash Flows.

 

Interest Paid During The Year

  $ 38,757  

Income Taxes Paid During The Year

  $ -0-  

 

 

f.

Advertising:

Advertising costs are expensed as incurred.

 

 

g.

Subsequent Events:

Management has evaluated subsequent events through July 22, 2020, which is the date the financial statements were available to be issued.

 

 

2.

INCOME TAXES:

 

The Company’s member elected to be taxed as an “S” Corporation under the Internal Revenue Code and similar state law. Instead of paying company income taxes, the member is taxed individually on the Company’s pass through income. Therefore, no provision or liability for Federal or state income taxes has been made.

 

Management continually evaluates its income tax position based on tax laws and regulations and records adjustments as appropriate. This evaluation takes into consideration the status of any taxing authorities’ examinations, recent positions taken by the taxing authorities and the overall tax environment. As of December 31, 2019, management estimates that upon audit, the effects of any uncertain tax positions would be non-material to the financial state- ments as a whole. The tax returns filed by the Company are subject to examination, gener- ally for three years after they were filed. As of December 31, 2019, there were no audits in process by Federal or state agencies.

 

9

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

3.

NOTES PAYABLE:

 

Notes payable are scheduled as follows:

 

    2019  
    Current     Non-Current  
             

Notes payable to Ally Financial, collat-eralized by vehicles, due in monthly installments ranging from $584 to $2,833, including interest ranging from 3.34% to 13.49% per annum

  $ 47,105     $ 227,580  
                 

Note payable to Jaguar Financial Group, collateralized by a vehicle, due in monthly installments of $1,854, including interest at 6.79% per annum

    16,742       71,914  
                 
Notes payable to CAT Financial, collat- eralized by equipment, due in month-ly installments of $1,208 and $3,849, including interest at 0% and 0.9% per annum     54,319       11,531  
                 
Total Notes Payable   $ 118,166     $ 311,025  

 

The aggregate annual maturities of long-term debt are as follows:

 

Year ending December 31, 2020

    $ 118,166  

 2021

      73,974  

 2022

      68,590  

 2023

      75,403  

 2024

      66,366  

   Thereafter

      26,692  

 

 

4.

BACKLOG:

 

The following schedule presents a reconciliation of gross contract revenues to be earned in the future from contracts signed as of December 31:

 

Balance of revenues to be earned on signed contracts, January 1   $ 597,500  
         
New contracts and contract adjustments entered into January 1 through December 31     25,184,464  
         
Less: Contract revenues earned January 1 through December 31     (12,148,773 )
         
Balance Of Revenues To Be Earned On Signed Contracts At December 31   $ 13,633,191  
         
Estimated Gross Profit To Be Earned On Signed Contracts At December 31   $ 1,007,191  

 

10

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

5.

CONTRACTS-IN-PROGRESS:

 

Information with respect to contracts-in-progress is as follows:

 

Cost incurred on uncompleted contracts   $ 18,747,449  
Estimated loss thereon     (7,666,860 )
         
Total     11,080,589  
         
Billings on uncompleted contracts     (16,175,288 )
         
Net Over Billings   $

(5,094,699

)

 

 

 

The foregoing is included in the accompanying Balance Sheet under the following captions:

 

Cost and estimated profit in excess of billings on uncompleted contracts   $ 335,249  
Billings in excess of cost and estimated profit on uncompleted contracts     (2,969,721 )
Accrued losses on contracts-in-progress     (2,460,227 )
         
Net Over Billings   $

(5,094,699

)

 

 

6.

LINE OF CREDIT:

 

The Company has available a $750,000 revolving line of credit with Truist. Interest is paya- ble monthly at LIBOR (currently 2.49%) plus 2.5% per annum, with a minimum rate of 2.5%. The line of credit is collateralized by all assets and guaranteed by the member. The line of credit has no established maturity date. At December 31, 2019, there was an outstanding balance of $750,000.

 

 

7.

CONCENTRATIONS:

 

 

a.

Cash:

Cash deposits at banks potentially subject the Company to credit risk. Deposits at each institution are insured by FDIC up to $250,000. Cash balances at risk and cash balances shown on the Balance Sheet may differ because of outstanding checks and deposits. A summary of the total insured and uninsured amounts held at December 31, 2019, follows:

 

Total cash held   $ 669,253  
Portion insured by FDIC     (250,000 )
         
Uninsured Cash Balances   $

419,253

 

 

 

b.

Accounts Receivable:

Three customers, individually, at December 31, 2019 accounted for more than 10% of the Company’s accounts receivable and retainage. The total of accounts receivable and retainage for these customers was $5,058,066 at December 31, 2019.

 

 

c.

Revenues:

Four customers, individually, for 2019 provided more than 10% of the Company’s gross revenues. Revenues earned on contracts with these customers totaled $11,327,800 for 2019.

 

(Continued)

11

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

8.

OPERATING LEASES:

 

The Company leases equipment and office facilities under non-cancelable operating leases. Total lease expense for 2019 was $393,364 of which $300,794 was charged to construction costs. The following is a schedule, by year, of future minimum rentals under the leases at December 31:

 

Year ending December 31, 2020     $ 527,085  
 2021       540,187  
 2022       310,933  
           
      $ 1,378,205  

 

 

9.

RETIREMENT PLAN:

 

Employees of the Company may participate in a 401(k) retirement plan, whereby the em- ployees may elect to make contributions pursuant to a salary reduction agreement upon meeting age and service requirements. The Company matches employee contributions up to 4.5% of their salary. Administrative expenses and matching contributions were $42,410 for 2019.

 

The Company may, at its discretion, make a profit sharing contribution to the Plan. No contribution was made for 2019.

 

 

10.

RELATED PARTY TRANSACTIONS:

 

At December 31, 2019, the Company owes $71,905 to the member. The loan is non-interest bearing and due on June 30, 2022.

 

 

11.

GOING CONCERN:

 

Management believes the Company's present cash flows indicate there is substantial doubt as to the Company's ability to continue as a going concern as they will not enable it to meet its obligations for twelve months from the date these financial statements are available to be issued. Management has developed a plan to address this issue. The Company sold in April, 2020 to Orbital Energy Group, Inc., a publicly-traded company listed on the Nasdaq. Reach will rely on the Parent Company's cash balance and positive working capital that the Parent Company will manage in the next twelve months. In addition, the Company has increased forecasted revenues for the remainder of 2020 and 2021, which are expected to provide increasing cash flows and profitability based on project schedules, budgets, and the Company’s ability to execute on these projects. The Parent Company may need to seek additional funding sources in the form of debt or equity during the next twelve months. Con- sidering the above factors, and additional measures that may be available to generate cash, management believes the Company will have sufficient cash flows to meet its obligations for the twelve-month period from the date the financial statements are available to be issued. However, the ability to meet obligations depends on the Company's ability to execute on its plans, of which success cannot be assured. As such, substantial doubt has not been alleviated.

 

12

 

REACH CONSTRUCTION GROUP, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

 

12.

UNCERTAINTY:

 

Subsequent to December 31, 2019, local, U.S., and world governments have encouraged self-isolation to curtail the spread of the global pandemic, coronavirus disease (COVID-19), by mandating temporary work stoppage in many sectors and imposing limitations on travel and size and duration of group meetings. Most industries are experiencing disruption to business operations and the impact of reduced consumer spending. There is unprecedented uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any government actions to mitigate them. Accordingly, while management cannot quan- tify the financial and other impact to the Company as of July 22, 2020, management believes that a material impact on the Company's financial position and results of future operations is reasonably possible.

 

At December 31, 2019, the Company has approximately $1.2 million of accounts receivable that is currently in dispute by the owner on eight different projects. The Company has antic- ipated approximately $1.8 million of change orders on uncompleted projects that have not been recorded. In August, 2020, mediation is scheduled to resolve all claims and counter- claims.

 

At December 31, 2019, the Company recorded approximately $700,000 of disputed liabilities to a subcontractor. These labilities are recorded in the accompanying financial statements. Management believes the matter will be resolved as the changes are in excess of the exe- cuted contracts.

 

The Company is involved in various other lawsuits and disputes, none of which have been resolved as of the date of this report. No adjustment has been recorded in the accompanying financial statements should the Company ultimately be unsuccessful with these aforemen- tioned issues.

 

 

13.

SUBSEQUENT EVENTS:

 

In April, 2020, the Company was acquired by Orbital Energy Group, Inc., a publically traded company.

 

13

 

 

REACH CONSTRUCTION GROUP, LLC

FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED 

MARCH 31, 2020 AND 2019

(Unaudited)

 

 

 

REACH CONSTRUCTION GROUP, LLC

 

Index

 

  Page
   
Balance Sheet  1
   
Statement Of Income And Member’s Deficit  2
   
Statement Of Cash Flows 3
   
Notes To The Financial Statements 4-5

 

 

 

 

Reach Construction Group, LLC
Balance Sheet
March 31, 2020 and December 31, 2019

 

   

Reach Construction Group, LLC

 
   

As of March 31,

   

As of December 31,

 

(in thousands)

 

2020

   

2019

 
   

(Unaudited)

         

Assets:

               

Current Assets:

               

Cash and cash equivalents

  $ 19       669  

Trade accounts receivable, net of allowance

    6,972       3,693  

Retention receivable

    1,830       1,869  

Contract assets

    269       335  

Prepaid expenses

    0       11  

Total current assets

    9,090       6,577  
                 
                 

Property and equipment, less accumulated depreciation

    382       417  

Deposits and other assets

    427       -  

Total assets

  $ 9,899     $ 6,994  
                 

Liabilities and Stockholders' Equity:

               

Current Liabilities:

               

Accounts payable

  $ 11,949       10,887  

Line of credit

    450       750  

Notes payable, current

          118  

Accrued expenses

    1,225       161  

Contract liabilities

    3,781       5,430  

Total current liabilities

    17,405       17,346  

Notes payable, noncurrent

    3,398       311  

Due to member

          72  

Total liabilities

    20,803       17,729  
                 

Commitments and contingencies

               
                 

Member's deficit

    (10,904 )     (10,735 )

Total liabilities and member's deficit

  $ 9,899     $ 6,994  

 

 

1

 

Reach Construction Group, LLC
Statement of Operations
Three Months Ended March 31, 2020 and March 31, 2019

(Unaudited)

   

Reach Construction Group, LLC

 
   

3 Months Ended

   

3 Months Ended

 

(in thousands)

 

March 31,

   

March 31,

 
   

2020

   

2019

 
                 

Revenues

  $ 9,244     $ 679  
                 

Cost of revenues

    8,823       1,075  
                 

Gross profit

    421       (396 )
                 

Operating expenses:

               

General and administrative expenses

    560       463  

Depreciation and amortization

    12       -  
                 

Total operating expenses

    572       463  
                 

Continuing loss from operations

    (151 )     (859 )
                 

Interest expense

    (18 )     (7 )
                 

Loss before income taxes

    (169 )     (866 )

Provision for income taxes

           
                 

Net loss

    (169 )     (866 )
                 
Member's deficit, beginning of the year     (10,735 )     (364 )
                 
Member's deficit, end of the year   $ (10,904 )   $ (1,230 )

 

 

2

 

 

Reach Construction Group, LLC

 

Statement of Cash Flows

 

For the Three Monts Ended March 31, 2020 and March 31 2019

 
(Unaudited)  

(in thousands)

 

Three months ended March 31, 2020

   

Three months ended March 31, 2019

 

Cash Flows From Operating Activities:

               

Net Loss

  $ (169 )   $ (866 )

Adjustment To Reconcile Net Loss To Net Cash Provided by Operating Activiites:

               
                 

Depreciation

    36        
                 

Changes In Assets and Liabilities:

               

Accounts Receivable

    (3,240 )     54  

Contract assets

    67        

Prepaid Expenses

    11        

Accounts Payable

    2,065       614  

Contract liabilities

    (1,649 )      

Accrued Expenses

    60       (39 )

Total Adjustments

    (2,650 )     629  
                 

Net Cash Used by Operating Activities

    (2,819 )     (237 )
                 

Cash Flows From Investing Activities:

               

Net Cash Used In Investing Activities

           
                 

Cash Flows from Financing Activities:

               

Principal Payments on Notes Payable

    (31 )     (23 )

Net Member Activity

    (500 )     334  

Loan from Orbital Energy Group, Inc.

    3,000        

Net Line of Credit Activity

    (300 )      

Net Cash Provided by Financing Activities

    2,169       311  
                 

Net (decrease) increase In Cash

    (650 )     74  
                 

Cash, Beginning of the Year

    669       58  
                 

Cash, Three Months End of period

  $ 19     $ 132  
                 

 

 

3

Reach Construction Group, LLC

Notes to Unaudited Financial Statements

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

 

a.

The Company's Activities, Operating Cycle and Use of Estimates:

 

                      The Company is engaged in solar farm construction primarily in North Carolina. The work is performed primarily for private entities under unit-price and fixed-price contracts modified by incentive and penalty provisions. Payment is typically due in installments, based on terms specified in the contracts.

 

The operating cycle of the Company's contracts varies, but is typically about one year. Assets and liabilities related to long-term contracts are included in current assets and liabilities in the accompanying Balance Sheet, as they will be liquidated in the normal course of contract completion, although this may require more than one year, depending on the contract period.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

b.

Revenue and Cost Recognition:

 

On January 1, 2019, the Company adopted Accounting Standards Update 2014- 09 (ASC Topic 606), “Revenue from Contracts with Customers” using the modified retrospective method of transition in which the new guidance was applied retrospectively to contracts that were not completed as of January 1, 2019. Based on management’s evaluation of the contracts-in-progress, there were no material retrospective adjustments as of December 31, 2018.

 

The Company considers each contract to be one performance obligation, unless circumstances dictate otherwise. Some of the Company’s contracts may contain multiple performance obligations. For contracts with multiple performance obligations, the Company allocates the contract's transaction price to each performance obligation using the Company’s best estimate of the standalone selling price of each distinct good or service in the contract. Revenue is recognized as performance obligations are satisfied.

 

The Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

 

Revenues from long-term construction contracts for financial reporting purposes are reported on the percentage-of-completion method (an input method). The percentage completed for each contract is determined by the ratio of cost to date to estimated total cost, and this percentage is applied to the total estimated profit to determine the profit earned to date. That method is used because management considers total cost to be the best available measure of progress on the contract. When the Company determines there are significant uninstalled materials on a contract, the Company recognizes revenue for the transfer of the goods, but only in an amount equal to the cost of those goods. In those circum- stances, the Company excludes the costs of the goods from the cost-to-cost calculation to be consistent with the cost-to-cost methodology. No gross profit is recognized until the contract has reached 10% of completion. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that estimates used will change within the near term. Contract costs include direct materials, labor and payroll taxes, subcontracts and other direct costs as well as indirect costs such as depreciation, insurance, repairs and unassigned labor which are essential for contract performance. General and administrative costs are charged to expense as incurred. Provision is made for the entire amount of future estimated losses on contracts in the period when it first becomes known. Contract modifications are routine in the performance of the Company's contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract. The nature of the Company’s contracts gives rise to several types of variable consideration, including claims and award and incentive fees. The Company includes in the contract estimates additional revenue for submitted contract modifications or claims against the customer when the Company believes it has an enforceable right to the modification or claim, the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, the Company considers the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. The Company includes award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and the Company’s best judgment at the time. When contracts extend over one or more fiscal years, revisions in cost and earnings estimated during the course of the work are reflected in the accounting period in which the facts which require revision become known. The asset, "cost and estimated profit in excess of billings on uncompleted contracts,” represents revenues recognized in excess of the amounts billed. The liability, "billings in excess of cost and estimated profit on uncompleted contracts,” represents billings in excess of revenues recognized. The liability “accrued losses on contracts-in-progress,” represents estimated losses on uncompleted contracts in excess of the amounts recognized on the percentage-of-completion method of accounting.

 

Income from construction contracts for income tax purposes is reported on the cash basis method of accounting. Under this method, income on long-term contracts is recognized upon receipt and expenses when paid.

 

 

c.

Property and Equipment:                                                                                                                       

Property and equipment are carried at cost. Major additions and betterments are charged to property accounts while maintenance and repairs, which do not improve or extend the life of the respective assets are expensed currently. Depreciation is provided for over the estimated useful lives of the respective assets by using the straight-line method which approximates the decline in value of the assets. Property items retired, or otherwise disposed of, are eliminated from the asset accounts and accumulated depreciation accounts. Gains and losses from disposals are included in earnings.

 

4

 

 

d.

Accounts Receivable:                                                                                                                                              

Accounts receivable are stated at the amounts expected to be collected in future periods. Doubtful accounts are eliminated from accounts receivable by the direct write-off method. Subsequent collections of accounts which have been written off are reported as income in the period collected. The Company uses the direct write-off method due to the historically immaterial amounts of bad debts incurred. The direct write-off method is not in accordance with generally accepted accounting principles. Had generally accepted accounting principles been used, the financial statements taken as a whole would not change materially from the statements presented.

 

2.           INCOME TAXES:

 

The Company’s member elected to be taxed as an “S” Corporation under the Internal Revenue Code and similar state law. Instead of paying company income taxes, the member is taxed individually on the Company’s pass-through income. Therefore, no provision or liability for Federal or state income taxes has been made.

 

Management continually evaluates its income tax position based on tax laws and regulations and records adjustments as appropriate. This evaluation takes into consideration the status of any taxing authorities’ examinations, recent positions taken by the taxing authorities and the overall tax environment. As of March 31, 2020 and December 31, 2019, management estimates that upon audit, the effects of any uncertain tax positions would not be material to the financial statements as a whole. The tax returns filed by the Company are subject to examination, generally for three years after they were filed. As of March 31, 2020 and December 31, 2019, there were no audits in process by Federal or state agencies.

 

3.           NOTES PAYABLE:

 

Notes payable are scheduled as follows:

 

 

(in thousands)

 

March 31, 2020

   

December 31, 2019

 
   

Current

   

Non-current

   

Current

   

Non-Current

 

Notes payable to Ally Financial, collateralized by vehicles, due in monthly installments ranging from $1 to $3, including interest ranging from 3.34% to 13.49% per annum.

  $ 46     $ 217     $ 47     $ 228  
                                 

Note payable to Jaguar Financial Group, collateralized by a vehicle, due in monthly installments of $2, including interest at 6.79% per annum.

    17       67       17       72  
                                 

Notes payable to CAT Financial, collateralized by equipment, due in monthly installments of $1,208 including interest at 0% and 0.9% per annum.

    51             54       11  
                                 

Total Notes Payable

  $ 114     $ 284     $ 118     $ 311  

 

4.           LINE OF CREDIT:

 

The Company has available a $750,000 revolving line of credit with Truist. Interest is payable monthly at LIBOR plus 2.5% per annum, with a minimum rate of 2.5%. The interest rate was 4.08% and 4.99% at March 31, 2020 and December 31, 2019, respectively. The line of credit is collateralized by all assets and guaranteed by the member. The line of credit has no established maturity date. At March 31, 2020 and December 31, 2019, there was an outstanding balance of $450,000 and $750,000, respectively.

 

 

 

 

5
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Section 4: EX-99.2 (EXHIBIT 99.2 - PRO FORMA FINANCIAL STATEMENTS)

ex_189958.htm

Exhibit 99.2

 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

On April 1, 2020, Orbital Energy Group, Inc. formerly known as CUI Global, Inc., a Colorado corporation (“Orbital Energy”, the “Company”, “we”, or “our”) entered into an equity purchase agreement to acquire the assets of Reach Construction Group, LLC ("Reach"), an industry-leading solar construction company.  The Company paid $35 million via seller financing subject to final working capital adjustment, 2 million shares of Company stock with a fair value of $1.2 million or $0.61 per share, and an earn out with a fair value of $1.1 million and not in excess of $30 million. See Note 5 for schedule of consideration paid for acquisition. 

 

The following unaudited pro forma condensed combined balance sheet as of March 31, 2020 and statements of operations for the year ended December 31, 2019 and for the three-month period ended March 31, 2020, give effect to our acquisition of Reach and the incremental borrowings incurred to fund the acquisition. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined statements of operations to give effect to or remove the effect of events that are (1) directly attributable to the Reach acquisition, (2) factually supportable, and (3) expected to have a continuing impact on our results. The unaudited pro forma condensed combined statements of operations do not reflect any of Orbital Energy management’s expectations for revenue enhancements, cost savings from the combined companies’ operating efficiencies, synergies or other restructurings, or the costs and related liabilities that would be incurred to achieve such revenue enhancements, cost savings from operating efficiencies, synergies or restructurings, which could result from the Reach acquisition.

 

The following pro forma financial information is based on our historical consolidated financial statements and the historical financial statements of the acquired Reach business and is intended to provide you with information about how the Reach transaction might have affected our historical consolidated statement of operations if it had closed as of January 1, 2019. The pro forma balance sheet as of March 31, 2020 is as if the acquisition had closed on that date.

 

The pro forma financial information below is based on available information and assumptions that we believe are reasonable. The pro forma financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our results of operations would have been had the transaction described above occurred on the date indicated. The pro forma financial information also should not be considered representative of our future financial condition or results of operations.

 

1

 

   

Historical

   

Unaudited Pro Forma Adjustments

       
   

Orbital Energy Group, Inc.

   

Reach Construction Group, LLC

   

Reach Construction Group, LLC

           
   

As of March 31,

   

As of March 31,

   

Acquisition

     

Pro Forma

 

(in thousands, except share and per share amounts)

 

2020

   

2020

   

Related & Other

 

Note

 

Combined

 
   

(Unaudited)

   

(Unaudited)

                   

Assets:

                                 

Current Assets:

                                 
Cash and cash equivalents   $ 6,740     $ 19     $       $ 6,759  
Trade accounts receivable, net of allowance     3,853       6,972       (132 ) 2a     10,693  
Retention accounts receivable           1,830       132   2a     1,962  
Inventories     1,186                     1,186  
Contract assets     2,716       269               2,985  
Note receivable, current portion     3,000             (3,000 ) 3a      
Convertible note receivable     200                     200  
Prepaid expenses and other current assets     3,866       427               4,293  
Assets held for sale - current     8,344                     8,344  
Total current assets     29,905       9,517       (3,000 )       36,422  
                                   
                                   
Property and equipment, less accumulated depreciation     5,323       382               5,705  
Investment in VPS - equity method     4,419                     4,419  
Right of use assets - Operating leases     6,329             890   3b     7,219  
Goodwill                 7,444   3c     7,444  
Other intangible assets, less accumulated amortization     3,714             13,737   3d     17,451  
Restricted cash     1,027                     1,027  
Note receivable     3,322                     3,322  
Deposits and other assets     990                    

990

 
Total assets   $ 55,029     $ 9,899     $ 19,071       $ 83,999  
                                   

Liabilities and Stockholders' Equity:

                                 

Current Liabilities:

                                 
Accounts payable   $ 1,899     $ 11,949     $       $ 13,848  
Line of credit           450               450  
Notes payable, current     966                     966  
Operating lease obligations, current portion     1,082             470   3b     1,552  
Financing lease obligations, current portion                 118   2b, 3e     118  
Accrued expenses     2,041       1,225       (4 ) 2b     3,262  
Contract liabilities     1,849       3,781               5,630  
Liabilities held for sale, current     5,597                     5,597  

Total current liabilities

    13,434       17,405       584         31,423  
Notes payable, noncurrent           3,398       3,082   3a, 3e     6,480  
Operating lease obligations, less current portion     5,247             420   3b     5,667  
Financing lease obligations, less current portion                 284   3e     284  
Contingent consideration                 1,050   3f     1,050  
Deferred tax liabilities                 1,523   3g     1,523  
Other long-term liabilities     188                     188  

Total liabilities

    18,869       20,803       6,943         46,615  
                                   

Commitments and contingencies

                                 
                                   

Stockholders' Equity:

                                 
Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued at March 31, 2020                          
Common stock, par value $0.001; 325,000,000 shares authorized; 28,420,685 shares issued and outstanding at March 31, 2020     29             2   3h     31  
Additional paid-in capital     170,115             1,222   3h     171,337  
Treasury stock at cost; 353,063 shares held at March 31, 2020     (413 )                   (413 )
Accumulated deficit     (129,615 )     (10,904 )     10,904   3i     (129,615 )
Accumulated other comprehensive loss     (3,956 )                   (3,956 )

Total stockholders' equity

    36,160       (10,904 )     12,128         37,384  

Total liabilities and stockholders' equity

  $ 55,029     $ 9,899     $ 19,071       $ 83,999  

 

See accompanying notes to unaudited pro forma financial statements

 

2

 

    Historical       Unaudited Pro Forma Adjustments            
   

Orbital Energy Group, Inc.

   

Reach Construction Group, LLC

                   
   

For the Year Ended

   

For the Year Ended

   

Reach Construction Group, LLC

           

(in thousands, except share and per share amounts)

 

December 31,

   

December 31,

   

Acquisition

     

Pro Forma

 
   

2019

   

2019

   

Related & Other

 

Note

 

Combined

 
     

(Unaudited)

      (Unaudited)                    
                                   

Revenues

  $ 23,492     $ 12,149     $       $ 35,641  
                                   

Cost of revenues

    17,680       19,751               37,431  
                                   

Gross profit (loss)

    5,812       (7,602 )             (1,790 )
                                   

Operating expenses:

                                 

Selling, general and administrative expense

    20,063       2,708               22,771  

Depreciation and amortization

    1,544       22       4,249  

3j

    5,815  

Research and development

    139                     139  

Provision for bad debt

    131                     131  

Other operating income

    (20 )                   (20 )
                                   

Total operating expenses

    21,857       2,730       4,249         28,836  
                                   

Continuing loss from operations

    (16,045 )     (10,332 )     (4,249 )       (30,626 )
                                   

Other income

    567                     567  

Interest expense

    (61 )     (39 )     (389 )

3k

    (489 )
                                   

Loss from continuing operations before income taxes and equity in net loss of affiliate

    (15,539 )     (10,371 )     (4,638 )       (30,548 )

Net loss of affiliate

    (1,043 )                   (1,043 )

Loss from continuing operations before taxes

    (16,582 )     (10,371 )     (4,638 )       (31,591 )
Income tax benefit     (2,956 )           (1,109 ) 3g     (4,065 )
                                   

Loss from continuing operations, net of income taxes

    (13,626 )     (10,371 )     (3,529 )       (27,526 )
                                   

Basic and diluted weighted average number of shares outstanding

    28,654,500       28,654,500       28,654,500         28,654,500  
                                   

Loss from continuing operations per common share - basic and diluted

  $ (0.48 )   $ (0.36 )   $ (0.12 )     $ (0.96 )
                                   

 

See accompanying notes to unaudited pro forma financial statements

 

3

 

   

Historical

   

Unaudited Pro Forma Adjustments

       
   

Orbital Energy Group, Inc.

   

Reach Construction Group, LLC

                   
   

For the Three Months Ended

   

For the Three Months Ended

   

Reach Construction Group, LLC

           

(in thousands, except share and per share amounts)

 

March 31,

   

March 31,

   

Acquisition

     

Pro Forma

 
   

2020

   

2020

   

Related & Other

 

Note

 

Combined

 
     

(Unaudited)

     

(Unaudited)

                   

Revenues

  $ 5,688     $ 9,244     $       $ 14,932  
                                   

Cost of revenues

    5,129       8,823               13,952  
                                   

Gross profit

    559       421               980  
                                   

Operating expenses:

                                 

Selling, general and administrative expense

    7,192       560               7,752  

Depreciation and amortization

    407       12       593  

3j

    1,012  

Research and development

    17                     17  

Provision for bad debt

    6                     6  
                                   

Total operating expenses

    7,622       572       593         8,787  
                                   

Continuing loss from operations

    (7,063 )     (151 )     (593 )       (7,807 )
                                   
Other expense     (1,032 )                   (1,032 )
Interest expense     (11 )     (18 )     (97 ) 3k     (126 )
                                   

Loss from continuing operations before income taxes and equity in net loss of affiliate

    (8,106 )     (169 )     (690 )       (8,965 )

Net loss of affiliate

    (446 )                   (446 )

Loss from continuing operations before taxes

    (8,552 )     (169 )     (690 )       (9,411 )
Income tax benefit     (1,600 )           (155 ) 3g     (1,755 )
                                   

Loss from continuing operations, net of income taxes

    (6,952 )     (169 )     (535 )       (7,656 )
                                   

Basic and diluted weighted average number of shares outstanding

    28,420,730       28,420,730       28,420,730         28,420,730  
                                   

Loss from continuing operations per common share - basic and diluted

  $ (0.24 )   $ (0.01 )   $ (0.02 )     $ (0.27 )

 

See accompanying notes to unaudited pro forma financial statements

 

4

 

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

 

 

     1. Basis of Pro Forma Presentation

 

The unaudited pro forma condensed combined statements of operations have been prepared using the historical consolidated financial statements of Orbital Energy Group, Inc., formerly known as CUI Global Inc., and the historical financial statements of Reach Construction Group, LLC.  Because we now control Reach Construction Group, LLC, we have applied acquisition accounting as if the acquisition had closed as of January 1, 2019 for the pro forma statement of operations and as if the acquisition had closed as of March 31, 2020 for the the pro forma balance sheet. Purchase accounting adjustments are further described in Note 3 below.

 

In addition to presenting Orbital Energy Group operations as reported in our historical financial statements, our unaudited condensed combined pro forma statement of operations for the year ended December 31, 2019 includes the results of Reach Construction Group, LLC for the year ended December 31, 2019. We believe presenting these combined results is useful in illustrating the presentation of our pro forma condensed combined statement of operations for the year ended December 31, 2019.

 

2.   Conformity Adjustments

 

Certain reclassifications have been made to the historical presentation of Orbital Energy Group, LLC to conform to the presentation used in our  unaudited pro forma financial information as follows.

 

 

a.

Represents a reclassification from Trade accounts receivable to Retention accounts receivable

 

 

b.

Represents a reclassification from Accrued expenses to Financing lease obligations, current portion

 

3.

Transaction-Related Adjustments

 

 

a.

Represents the elimination of a $3.0 million Note receivable held by Orbital Energy Group, Inc. with Reach Construction Group, LLC, prior to the acquisition of Reach Construction Group, LLC by Orbital Energy Group, Inc.

 

 

b.

Represents Orbital Energy Group, Inc.'s adoption of ASU 2016-02, Leases (Topic 842) effective January 1, 2019.  The adoption of ASU 2016-02 was not applicable in the Reach historical financials, as that business had not yet implemented ASC 842.  

 

 

c.

Represents the implied goodwill of the Reach Construction Group, LLC purchased by Orbital Energy Group, Inc.

 

 

d.

Represents the the addition of Orbital Energy's fair value estimate of the acquired Reach Construction Group LLC intangibles. Other intangible assets, acquired values, useful lives and pro forma amortization expense is as follows:

(In thousands)

                               
   

Acquired Value

   

Amortization Period in Years

   

2019 Pro Forma Amortization

   

2020 3-Month Pro Forma Amortization

 

Customer Relationships/backlog

   $ 8,647       5      $ 1,729      $ 432  

Tradename

    1,878       1       1,878        

Non-complete agreements

    3,212       5       642       161  

Total

   $ 13,737              $ 4,249      $ 593  

 

 

 

e.

Represents seller financed debt including a $5.0 million 18-month subordinated note payable, and a $1.5 million 3-year subordinated note payable, offset by $0.4 million of Reach debt that was reclassified to Financing lease obligations. 

 

 

f.

Represents the estimated fair value at acquisition of the contingent consideration agreement. In accordance with the Reach purchase agreement, the Seller is able to earn up to an aggregate maximum of $30 million payable over a 10-year term beginning after repayment of the 3 year seller note. The earn out entitles the seller to 50% of the adjusted annual EBITDA in excess of $20 million, for the duration of the earn-out period.  The Company has recorded a contingent liability associated with this earn out of $1.1 million based on projected adjusted annual EBITDA expected to be generated over the earn-out period. Any changes to expected adjusted annual EBITDA in future periods would change the fair value of the contingent liability and impact future earnings.

 

 

g.

Represents the tax effect of the amortization of book-tax differences as a result of purchase accounting adjustments.

 

 

h.

Represents the estimated fair value at acquisition of 2,000,000 restricted shares issued by Orbital Energy Group, Inc. as partial consideration for the purchase of Reach Construction Group, LLC.

 

 

i.

Represents reversal of historical Reach Construction Group, LLC accumulated deficit as of the acquisition date.

 

 

j.

Represents the estimated amortization of acquisition intangibles.

 

 

k.

Represents estimated interest expense on seller financed debt.

 

5