UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the fiscal year ended
OR
For the transition period from to
Commission File Number
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Orbital Energy Group, Inc.
(Exact name of registrant as specified in its charter)
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(Address and Telephone Number of Principal Executive Offices and Principal Place of Business)
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Smaller reporting 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. ☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing price of our common stock on the last business day of the registrant’s most recently completed fiscal second quarter (June 30, 2021), was approximately $
As of March 31, 2022, the registrant had
DOCUMENTS INCORPORATED BY REFERENCE
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Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Reserved |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships, Related Transactions and Director Independence |
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PART I
Corporate Overview
Orbital Energy Group, Inc. and subsidiaries (Nasdaq: OEG), formerly known as CUI Global Inc., are collectively referred to as ‘‘Orbital Energy Group,’’ the “Company,” or “OEG.” Orbital Energy Group is a Colorado corporation organized on April 21, 1998 with its principal place of business located at 1924 Aldine Western, Houston, Texas 77038. The Company is a diversified infrastructure services company serving customers in the electric power, telecommunications, and renewable markets.
In the fourth quarter of 2021, the Company's continuing operations were reclassified into three reportable segments, which include the Electric Power segment, the Telecommunications segment, and the Renewables segment. The Company’s corporate overhead activities are included in Other. Orbital Energy Group has continuing operations in two countries, including the United States and India.
In December 2021, the Company announced plans to exit its Integrated Energy Infrastructure Solutions and Services segment. Both the domestic portion of the segment, Orbital Gas Systems, North America, and the foreign segment, Orbital Gas Systems, Ltd. (Orbital-UK) was held for sale as of December 31, 2021, and considered discontinued operations.
Electric Power Segment
The Electric Power segment consists of Front Line Power Construction, LLC based in Houston, Texas, Orbital Power, Inc. based in Dallas, Texas, and Eclipse Foundation Group based in Gonzales, Louisiana. The segment provides comprehensive infrastructure solutions to customers in the electric power industry. Services performed by Front Line Power and Orbital Power, Inc. generally include but are not limited to the engineering, design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities as well as emergency restoration services. Eclipse Foundation Group, which began operations in January 2021, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation, industrial, telecommunication and disaster restoration market sectors, with expertise performing services in water, marsh and rock terrains.
Telecommunications Segment
The Telecommunications segment consists of Gibson Technical Services (GTS) along with its subsidiaries IMMCO, Inc. based in Atlanta, Georgia and Full Moon Telecom, LLC based in Florida. GTS provides engineering, design, construction, and maintenance services to the broadband and wireless telecommunication industries and was acquired by the Company effective April 13, 2021. IMMCO, Inc. provides enterprise solutions to the cable and telecommunication industries and was acquired by the Company effective July 28, 2021. Full Moon Telecom, LLC provides telecommunication services including an extensive array of wireless service capabilities and was acquired by the Company effective October 22, 2021.
Renewables Segment
Orbital Solar Services, LLC (OSS), based in Raleigh, North Carolina, makes up the Renewables segment. OSS provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction.
Discontinued Operations - Integrated Energy Infrastructure Solutions and Services
On December 28, 2021, the Board of Directors of Orbital Energy Group, Inc. approved management’s recommendation for certain restructuring and costs reduction actions to strategically reposition the Company’s business. This strategy focuses on building an infrastructure services company serving the electric power, telecommunications and renewable markets by disposing of two (2) of its subsidiaries. The two subsidiaries are:
● Orbital Gas Systems, North America, Inc. (“OGSNA”);
● Orbital Gas Systems, Ltd. (“Orbital UK”).
OGSNA and Orbital UK are collectively referred to as the “Orbital Gas Subsidiaries."
The Orbital Gas Subsidiaries provide proprietary gas measurement and sampling technologies and the integration of process control and measuring/sampling systems. These legacy businesses do not fit within the Company's future strategy to build an infrastructure services company serving the electric power, telecommunications, and renewable markets. The disposition of the Orbital Gas Subsidiaries will facilitate the Company’s restructuring and cost savings initiatives and are intended to realign and simplify its business structure and better position the Company for future growth and improved profitability.
Following is a description of the businesses held for sale:
Orbital Gas Systems, Ltd. (Orbital-UK) is based in Stone, Staffordshire in the United Kingdom and Orbital Gas Systems, North America, Inc. (Orbital North America), is based in Houston, Texas. The Integrated Energy Infrastructure Solutions and Services segment subsidiaries, collectively referred to as (“Orbital Gas Systems”) are leaders in innovative gas solutions, with more than 30 years of experience in design, installation and the commissioning of industrial gas sampling, measurement and delivery systems. Included in the U.K. is a 46,000 square foot manufacturing/administration/research and development facility.
Orbital Gas Systems manufactures and delivers integrated engineering solutions and technologies including environmental monitoring, gas metering, process control, telemetry, gas sampling and BioMethane to grid solutions. Its proprietary VE® Technology enhances the capability and speed of our GasPT® Technology. VE Technology® provides a superior method of penetrating the gas flow without the associated vortex vibration, thereby making it a ‘‘stand-alone’’ product for thermal sensing (thermowells) and trace-element sampling.
Under the United States Trademark Act of 1946, as amended, and the system of international registration of trademarks governed by international treaties, the Madrid Agreement, which maintains the international register and, in several instances, direct trademark registration in foreign countries, our discontinued operations maintain up to date the following trademarks: GasPT, IRIS, Orbital Gas Systems, and VE Technology.
As of December 31, 2021, Orbital UK was considered held for sale and its assets were written down to their expected sale price, resulting in a $9.2 million impairment in 2021.
Anticipated Growth Strategy
Our strategy includes:
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Profitably grow organically and through acquisitions into infrastructure services within the electric power, telecommunications and renewables markets. | |
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We are committed to fostering greater diversity within the industries we serve, ensuring that people of color and minority-owned and/or operated businesses have ample opportunities to join in and benefit from our growth. |
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Continuing to enhance our service capabilities, expand existing and new customer relationships and broaden our geographic footprint. |
Acquisition Strategy
Our acquisition strategy is focused on pursuing targets with profitability that is equal to or greater than that of industry peers, revenue visibility, good outlook for growth, long-standing customer relationships and entrepreneurial leaders with a proven track record in operations management. Due diligence is performed on each potential acquisition target to identify relevant synergies with our current business, along with the potential for increasing revenue, earnings and shareholder value.
Employees
As of December 31, 2021, Orbital Energy Group, Inc., with its consolidated subsidiaries, had 1,329 employees in continuing operations and 111 employees in discontinued operations. This is an increase in total employees from the 284 total employees reported as of December 31, 2020. As of December 31, 2021, 203 of its employees are members of the International Brotherhood of Electrical Workers or IBEW, which is an increase from zero IBEW members as of December 31, 2020. Most of the increase in employees relates to the acquisitions of Front Line Power Construction, LLC, and Gibson Technical Services and subsidiaries IMMCO, Inc. and Full Moon Telecom, LLC along with the growth of Orbital Power, Inc. and Eclipse Foundation Group operations during 2021. The Company values all of its employees and fosters a good working relationship. As the company continues to increase revenues, additional staff may be added to adequately support the business.
Intellectual Property Protection
The Company relies on various intellectual property laws and contractual restrictions to protect its proprietary rights in products, logos and services. These include confidentiality, invention assignment and nondisclosure agreements with employees, contractors, suppliers and strategic partners. The confidentiality and nondisclosure agreements with employees, contractors and suppliers are in perpetuity or for a sufficient length of time so as to not threaten exposure of proprietary information.
Under the United States Trademark Act of 1946, as amended, and the system of international registration of trademarks governed by international treaties, the Madrid Agreement, which maintains the international register and, in several instances, direct trademark registration in foreign countries, we and our subsidiaries actively maintain up to date the following trademarks for continuing operations: Orbital Solar Services, Orbital Power, Inc., Eclipse Foundation Group, Orbital Renewables, Gibson Technical Services, Front Line Services, LLC, IMMCO, Inc., and Full Moon Telecom, LLC.
The Company continuously reviews and updates the existing intellectual property filings and files new documentation both nationally and internationally (Patent Cooperation Treaty) in a continuing effort to maintain up-to-date protection of its intellectual property.
For those intellectual property applications pending, there is no assurance that the registrations will be granted. Furthermore, the Company is exposed to the risk that other parties may claim the Company infringes their existing patent and trademark rights, which could cause the Company’s inability to develop and market its products unless the Company enters into licensing agreements with the technology owner or could force the Company to engage in costly and potentially protracted litigation.
Competitive Business Conditions
The markets in which we operate are highly fragmented and highly competitive wherein Orbital Energy Group competes with other contractors, from small local independent companies to large national firms, in most of the geographic markets in which we operate. Several competitors are large companies that have significant financial, technical and marketing resources. Certain barriers to entry exist in the markets in which we operate such as technical expertise, high safety rating requirements, operational experience and quality, and financial resources. From time to time, new competitors that have adequate financial resources and access to technical expertise may become a competitor in our markets. A significant portion of our revenues is currently derived from unit price or fixed price agreements with price often a primary factor in customer project awards; therefore, we could be underbid by our competitors. We believe that as demand for our services increases, customers often consider other factors in choosing a service provider, including technical expertise and experience, safety ratings, financial and operational resources, geographic presence, industry reputation and dependability, which we expect to benefit larger contractors such as us. There can be no assurance, however, that our competitors will not develop the expertise, experience and resources to provide services that are superior in both price and quality to our services, or that we will be able to maintain or enhance our competitive position. Many of our customers are able to perform their own infrastructure services similar to the work we provide. Although these companies currently outsource a significant portion of these services, there can be no assurance that they will continue to do so in the future or that they will not acquire additional in-house capabilities.
RISK FACTORS
Our business is subject to various risks and uncertainties. Investors should read carefully the following factors as well as the cautionary statements referred to in ‘‘Forward-Looking Statements’’ together with all of the other information in this Form 10-K. If any of the risks and uncertainties described below or elsewhere in this annual report on Form 10-K actually occur, the Company's business, financial condition or results of operations could be materially adversely affected and/or the trading price of our common stock could decline. We also may not be able to achieve our goals or expectations.
Risks Related to Our Business and Operations, Services, Products and Industries We Serve
Historically, we have generated annual losses from operations, and we may need additional funding in the future.
Historically, on an annual basis, we have not generated sufficient revenues from operations to self-fund our capital and operating requirements. For the year ended 2021, we had a net loss of $61.2 million, an accumulated deficit as of December 31, 2021 of $210.9 million, and negative working capital including of $33.3 million, which includes current maturities of long-term debt. If we are not able to generate sufficient income and cash flows from operations to fund our operations and growth plans, we may seek additional capital from equity and debt placements or corporate arrangements. Additional capital may not be available on terms favorable to us, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve restrictive covenants or security interests in our assets. If we raise additional funds through collaboration arrangements with third parties, it may be necessary to relinquish some rights to technologies or products. If we are unable to raise adequate funds or generate them from operations, we may have to delay, reduce the scope of, or eliminate some or all of our growth plans or liquidate some or all of our assets.
There is no assurance we will achieve or sustain profitability.
For the year ended December 31, 2021, we had a net loss of $61.2 million. There is no assurance that we will achieve or sustain profitability. If we fail to achieve or sustain profitability, the price of our common stock could fall and our ability to raise additional capital could be adversely affected.
Acquisitions and strategic investments related to business expansion activities may not be successful and may divert our resources from our existing business activities, negatively affecting our operating results, cash flows and liquidity and may not enhance shareholder value.
Orbital Energy Group has focused our business on the acquisition and development of energy infrastructure services companies including Front Line Power Construction, LLC, Gibson Technical Services, IMMCO, Inc, Full Moon Telecom, LLC. and Orbital Solar Services (formerly Reach Construction Group, LLC), and the greenfield development of Orbital Power, Inc. and Eclipse Foundation Group. We may not be successful in acquiring energy infrastructure services companies that are commercially viable. We may fail to successfully develop or commercialize such services, solutions and products that we acquire. Research, development and commercialization of such acquired services, solutions and products may disproportionately divert our resources from our other business activities. Acquisitions expose us to operational challenges and risks, including the ability to profitably manage and integrate acquired operations, implement internal controls, procedures, financial reporting and accounting systems into our business. In addition, increased indebtedness, earn-out obligations and cash flow requirements may result in cash flow shortages if anticipated revenue and earnings are not realized or are delayed. Other risks for acquisitions include, among other things, the ability to retain and hire qualified personnel, costs to integrate the business and fund capital needs.
We may not be able to identify suitable acquisitions or investments or may have difficulty obtaining the necessary financing required to complete such acquisitions and investments. We may utilize our common stock, debt instruments, including convertible debt securities, which could dilute the ownership interests of our shareholders. In addition, we may pursue acquisitions our existing shareholders may not agree with.
We cannot assure you that the indemnifications granted to Orbital Energy Group, Inc. by sellers of acquired companies will be sufficient in amount, scope or duration to fully offset potential liabilities from acquired businesses which may have liabilities that we failed, or were unable, to discover during due diligence processes. Any such liabilities could have a material adverse effect on our business.
Acquisitions could result in operating difficulties, dilution and other harmful consequences.
We expect to continue to pursue acquisitions which require integration into our own business model. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions focused on energy infrastructure services. These transactions could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technologies may create unforeseen operating difficulties and expenditures. The areas where we face risks include:
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implementation or remediation of controls, procedures and policies of the acquired company; |
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diversion of management time and focus from operating our business to acquisition integration challenges; |
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coordination of product, engineering and sales and marketing functions; |
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transition of operations, users and customers into our existing customs; |
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cultural challenges associated with integrating employees from the acquired company into our organization; |
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retention of employees from the businesses we acquire; |
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integration of the acquired company’s accounting, management information, human resource and other administrative systems; |
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liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; |
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litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders, or other third parties; |
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in the case of foreign acquisitions, the need to integrate operations across different cultures, time zones, and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; |
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failure to successfully further develop the acquired technologies; and |
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other as yet unknown risks that may impact our business. |
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions could cause us to fail to realize the anticipated benefits of such acquisitions, incur unanticipated liabilities and harm our business generally.
Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, or reductions to our tangible net worth any of which could harm our business, financial condition, results of operations and prospects. Also, the anticipated benefit of many of our acquisitions may not materialize.
We could incur goodwill and intangible asset impairment expenses, which could negatively impact our profitability.
We have goodwill and intangible assets and will continue to as we acquire new businesses. We periodically review the carrying values of goodwill and intangible assets to determine whether such carrying values exceed their fair market values. Adverse changes in financial, competitive and other conditions such as declines in operating performance or other adverse changes in valuation assumptions could adversely affect the estimated fair values of the related assets and impairment to goodwill or intangible assets. See Note 5 in the notes to the audited consolidated financial statements for further details.
We utilize debt to fund our operations and acquisitions strategy, which could adversely affect our business, financial condition and results of operations or could affect our ability to access capital markets in the future. Our debt may contain restrictive covenants that may prevent Orbital Energy Group from engaging in transactions that might benefit us.
Outstanding debt and related debt service requirements could have significant consequences on our future operations including making it difficult to meet payment and other obligations. Events of default may occur if we fail to comply with the financial and other restrictive covenants included with our debt agreements which could result in an acceleration of our debts becoming due and payable which would negatively impact our ability to fund working capital, capital expenditures, acquisitions and investments and could impact our ability to obtain additional financing or limiting access to financing with reasonable terms.
We cannot assure that our business will generate future cash flow from operations, or that future borrowings will be available to us in an amount sufficient to enable us to meet our payment obligations and to fund other operational and liquidity needs.
In addition, regulatory changes and/or reforms, such as the phase-out of the London Inter-bank Offered Rate (“LIBOR”), which is expected to occur by June 30, 2023, could lead to additional volatility in interest rates and other unpredictable effects.
We have a significant amount of debt, and our significant indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations under our other debt.
We have a significant amount of debt and debt service requirements. As of December 31, 2021, we had approximately $156.6 million of outstanding debt, net of current maturities and $75.3 million of current maturities including line of credit. A large amount of the debt includes amounts borrowed during 2021 to finance a portion of the closing consideration paid in connection with our acquisition of Front Line Power Construction, LLC. This level of debt could have significant consequences on our future operations, including:
| • | making it more difficult for us to meet our payment and other obligations under our outstanding debt; | |
| • | an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which event of default could result in an acceleration of our debt maturity and higher default-level interest rates. | |
| • | reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions or strategic investments, and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes; | |
| • | subjecting us to the risk of increasing interest expense on variable rate indebtedness. | |
| • | limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to changes in our business, the industries in which we operate and the general economy; | |
| • | limiting our ability to pursue business opportunities that become available to us; and | |
| • | placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged. |
Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations on our existing indebtedness.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our operations to pay our indebtedness.
Our ability to generate cash in order to make scheduled payments on the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive, legislative, regulatory and other factors beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on the satisfaction of the covenants in our current credit agreements and those we may enter into in the future. Specifically, we will need to maintain certain financial ratios. Our business may not continue to generate sufficient cash flow from operations in the future and future borrowings may not be available to us under our senior credit facility or from other sources in an amount sufficient to service our indebtedness, to make necessary capital expenditures or to fund our other liquidity needs. If we are unable to generate cash from our operations or through borrowings, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to make payments on our indebtedness or refinance our indebtedness will depend on factors including the state of the capital markets and our financial condition at such time, as well as the terms of our financing agreements. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We may be unable to obtain sufficient bonding capacity to support certain service offerings, and the need for performance and surety bonds could reduce availability of our available working capital resources.
Some of our contracts require performance and payment bonds. If Orbital Energy Group, Inc. is unable to obtain or renew the necessary bonding capacity, we may be precluded from participation in bidding for certain contracts and from certain customers. Such bonding may require Orbital Energy Group to post letters of credit or other collateral in connection with the bonds, which could reduce our available capacity to support other needs. Standard terms in the surety market allow for sureties to issue bonds on a project-by-project basis. Sureties may decline to issue bonds at any time and can require additional collateral as a condition to issuing or renewing any bonds.
Changes to laws, governmental regulations and policies, including among other things, permitting processes and tax incentives, could affect demand for our services. Demand for construction services depends on industry activity and expenditure levels which can be affected by numerous factors. An inability to adjust to such changes could result in decreased demand for our services and adversely affect our operating results, cash flows and liquidity.
Government regulations, climate change initiatives, political and social activism each effect the industries Orbital Energy Group, Inc. serves. Changes in such could result in reduced demand for our services, delays in the timing of construction projects and possible cancellation of current or planned projects. Many of our customers must comply with strict regulatory and environmental requirements along with complex permitting processes. Our energy customers are regulated by the Federal Energy Regulatory Commission (“FERC”), among others. Our utility customers are regulated by state public utility commissions. Changes to existing, or implementation of new regulations and policies could have an adverse effect on our customers resulting in reduced demand for our services. We build renewable energy infrastructure including solar and other renewable energy projects for which the development is often dependent upon federal tax credits, existing renewable portfolio standards and other incentives. Changes to those may delay or otherwise negatively affect the demand for our services and solutions.
Our business and operating results are subject to physical risks associated with climate change.
Changes in climate have caused, and are expected to continue to cause, among other things, increasing temperatures, rising sea levels and changes to patterns and intensity of wildfires, hurricanes, floods, other storms and severe weather-related events and natural disasters. These changes have and could continue to significantly impact our future operating results and may have a long-term impact on our business, results of operation, financial condition and cash flows. While we seek to mitigate our risks associated with climate change, we recognize that there are inherent climate-related risks regardless of how and where we conduct our operations. For example, a catastrophic natural disaster could negatively impact any of our projects or office locations and the locations and service regions of our customers. Accordingly, a natural disaster has the potential to disrupt our business as well as the businesses that we serve and may cause us to experience work stoppages, project delays, financial losses and additional costs to resume operations, including increased insurance costs or loss of coverage, legal liability and reputational losses.
A lack of availability or an increase in the price of fuel, materials or equipment necessary for our business or our customers’ projects could adversely affect our business.
Pursuant to certain contracts, including fixed price and EPC contracts where we have assumed responsibility for procuring materials for a project, we are exposed to availability issues and price increases for materials that are utilized in connection with our operations, including, among other things, copper, steel and aluminum. In addition, the timing of our customers’ ongoing projects, as well as their capital budgets and decision-making with respect to the timing of the future projects, can be negatively impacted by a lack of availability or an increase in prices of certain materials. Prices and availability could be materially impacted by, among other things, supply chain and other logistical challenges, global trade relationships (e.g., tariffs, sourcing restrictions) and other general market and geopolitical conditions (e.g., inflation). For example, recent logistical challenges in connection with the COVID-19 pandemic and sourcing restrictions have resulted in uncertainty concerning availability and pricing of certain commodities and goods important to our and our customers’ businesses, including renewable energy project components (e.g., solar panels). The lack of availability of necessary materials could result in project delays, some of which could be attributable to us, and an increase in prices of materials could reduce our profitability on projects or negatively impact our customers, which could have an adverse effect on demand for our services or our business, financial condition, results of operations and cash flows.
Additionally, supply chain and other logistical challenges have negatively impacted suppliers of certain equipment necessary for the performance of our business, including, among other things, new vehicles for our fleet (both on-road and specialty vehicles) and vehicle parts (e.g., tires). Based on the significant worldwide shortage of semiconductors, as well as other factors, vehicle manufacturers are experiencing production delays with respect to vehicles we utilize in our operations. To the extent these production issues worsen or become longer-term in nature, our operations could be negatively impacted.
We are also exposed to increases in energy prices, particularly fuel prices for our fleet of vehicles, which have increased during the COVID-19 pandemic, and could increase further due to future regulatory, legislative and policy changes that result from, among other things, war in Ukraine and climate change initiatives. Furthermore, some of our fixed price contracts do not allow us to adjust our prices and, as a result, increases in fuel costs could reduce our profitability with respect to such projects. Our ability to utilize certain existing vehicles within our fleet may also be limited by new emissions or other regulations, and, due to lack of production or availability, we may not be able to procure a sufficient number of vehicles meeting any such regulations. To the extent we are unable to utilize a significant portion of our existing fleet, we may be unable to perform services, which could have an adverse effect on our future financial condition, results of operations and cash flows. The broader and longer-term implications of these challenges, as a result of the COVID-19 pandemic, the transition to a carbon-neutral economy and otherwise, remains highly uncertain and variable and could negatively impact our overall business, financial condition, results of operations and cash flows.
If our manufacturers, suppliers or our service providers are unable to provide an adequate supply of products and services, our growth could be limited, and our business could be harmed.
We rely on third parties to supply services and materials for our integrated solutions and construction offerings. In order to grow our business to achieve profitability, we may need such business partners to increase, or scale up, production and supply by a significant factor over current levels. There are technical challenges to scaling up capacity that may require the investment of substantial additional funds by our manufacturers or suppliers and hiring and retaining additional management and technical personnel who have the necessary experience. If our manufacturers and suppliers are unable to do so, we may not be able to meet the requirements to grow our business to anticipated levels. We also may represent only a small portion of our supplier’s or manufacturer’s business, and if they become capacity constrained, they may choose to allocate their available resources to other customers that represent a larger portion of their business.
Our global operations are subject to increased risks, which could harm our business, operating results and financial condition.
Our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to a number of risks, including the following:
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challenges caused by distance, and cultural differences and by doing business with foreign agencies and governments; |
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longer payment cycles in some countries; |
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uncertainty regarding liability for services and content; |
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credit risk and higher levels of payment fraud; |
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currency exchange rate fluctuations and our ability to manage these fluctuations; |
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foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.; |
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import and export requirements that may prevent us from shipping products or providing services to a particular market and may increase our operating costs; |
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potentially adverse tax consequences; |
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higher costs associated with doing business internationally; |
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political, social and economic instability abroad, terrorist attacks and security concerns in general; |
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natural disasters, public health issues including impacts from global or national health epidemics and concerns such as the recent coronavirus, and other catastrophic events; |
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reduced or varied protection for intellectual property rights in some countries; and |
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different employee/employer relationships and the existence of workers’ councils and labor unions. |
In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international venues and could expose us or our employees to fines and penalties. These numerous and sometimes conflicting laws and regulations include import and export requirements, content requirements, trade restrictions, tax laws, sanctions, internal and disclosure control rules, data privacy requirements, labor relations laws, U.S. laws such as the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments to governmental officials. Violations of these laws and regulations could result in fines, civil and criminal penalties against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation. Any such violations could include prohibitions on our ability to offer our products and services in one or more countries and could also materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results.
Our revenues depend on key customers and suppliers.
The Company’s major product and service lines in 2021 were electric power, telecommunications, and renewables and in 2020 were electric power and solar infrastructure services, and natural gas infrastructure.
During 2021, 26% of revenues were derived from two customers, one with 15% and a second with 11% of total revenues. During 2020, over 53% of revenues were derived from three customers, one with 31%, and two with 11%.
At December 31, 2021, of the gross trade accounts receivable totaling approximately $50.2 million, there were two individual customers that made up approximately 46% of the Company's total trade accounts receivable: one customer with 30%, and one customer with 16%. At December 31, 2020, of the gross trade accounts receivable totaling approximately $6.9 million, approximately 70% was due from four customers: one with 27%, a second with 16% a third with 16%, and a fourth with 11%.
During 2021 the Company had one supplier that made up 12% of purchases included in cost of revenues and in 2020, the Company has three suppliers that made up 39% of our purchases included in cost of revenues, with 14%, 13% and 12%, for the three suppliers.
There is no assurance that we will continue to maintain all of our existing key customers or vendors in the future. Should we, for any reason, discontinue our business relationship with any one of these key customers, the impact to our revenue stream would be substantial. For additional information on our concentrations, see Note 15 – Concentrations.
The novel coronavirus outbreak, or other similar pandemic, epidemic or outbreak of infectious disease, could adversely impact our business, financial condition and results of operations and acquisitions.
Certain of our suppliers and the manufacturers of certain of our products may be adversely impacted by the novel coronavirus outbreak. As a result, we may face delays or difficulty sourcing products and services, which could negatively affect our business and financial results. Even if we are able to find alternate sources for such products and services, they may cost more, which could adversely impact our results of operations and financial condition. If we temporarily close our locations for periods of time or if our partners temporarily close, demand for our products and services may be reduced, and our revenues, results of operations and financial condition could be materially adversely affected.
A significant outbreak of COVID-19 and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, and the business of any potential target business with which we consummate a business combination could be materially and adversely affected. Furthermore, we may be unable to complete a business combination if continued concerns relating to COVID-19 restrict travel, limit the ability to have meetings with potential investors or the target company’s personnel, vendors and services providers are unavailable to negotiate and consummate a transaction in a timely manner. The extent to which COVID-19 impacts our search for a business combination will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extended period of time, our ability to consummate a business combination, or the operations of a target business with which we ultimately consummate a business combination, may be materially adversely affected.
Unfavorable market conditions, market uncertainty, and/or economic downturns could reduce capital expenditures in the industries we serve.
Demand for our products, solutions and services has been, and will likely continue to be cyclical in nature. We are vulnerable to general downturns in the U.S. economy and those of the countries in which we operate. Unfavorable market conditions, market uncertainty, and/or economic downturns could have a negative effect on demand from our customers and our customers health. During such times, our customers may not have the ability to fund capital expenditures for infrastructure due to difficulty obtaining financing when there may be limited availability of debt or equity financing. This could result in project cancellations or deferral which could materially adversely affect our results of operations, cash flows and liquidity.
Demand for alternative energy sources and legislative and regulatory changes, the volatility of oil and gas markets, among others, are beyond our control. Such economic factors can negatively affect our results of operations, cash flows and liquidity.
Our failure to properly manage projects, or project delays, could result in additional costs or claims, which could have a material adverse effect on our operating results, cash flows and liquidity.
Certain of our engagements occur over extended time periods and involve large-scale, complex projects. Our ability to manage our client relationship and the project itself, such as the timely deployment of appropriate resources, including third-party contractors and our own personnel will impact the quality of our project performance. Our results of operations, cash flows and liquidity could be adversely affected if we miscalculate the resources or time needed to complete a project with capped or fixed fees, or the resources or time needed to meet contractual milestones.
We perform work under a variety of conditions, including, but not limited to, challenging and hard to reach terrain and difficult site conditions. Performing work under such conditions can result in project delays or cancellations, potentially causing us to incur unanticipated costs, reductions in revenue or the payment of liquidated damages. In addition, some of our contracts require that we assume the risk should actual site conditions vary from those expected. Some of our projects involve challenging engineering, procurement and construction phases, which may occur over extended time periods. We may encounter difficulties in engineering, delays in designs or materials provided by the customer or our vendors and subcontractors, equipment and material delivery delays, permitting delays, weather-related delays, schedule changes, delays from customer failure to timely obtain rights-of-way, delays by subcontractors in completing their portion of projects and governmental, market and political or other factors, some of which are beyond our control and could affect our ability to complete a project as originally scheduled. In some cases, delays and additional costs may be substantial, and/or we may be required to cancel or defer a project and/or compensate the customer for the delay. We may not be able to recover any of such costs. Any such delays, cancellations, errors or other failures to meet customer expectations could result in damage claims substantially in excess of the revenue associated with a project. Delays or cancellations could also negatively affect our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.
We could also encounter project delays due to opposition, including political and social activism, and such delays could adversely affect our project margins. In addition, some of our agreements require that we share in cost overages or pay liquidated damages if we do not meet project deadlines; therefore, any failure to properly estimate or manage cost, or delays in the completion of projects, could subject us to penalties, which could adversely affect our results of operations, cash flows and liquidity. Further, any defects or errors, or failures to meet our customers’ expectations, could result in large damage claims against us. Due to the substantial cost of, and potentially long lead-times necessary to acquire certain of the materials and equipment used in our complex projects, damage claims could substantially exceed the amount we can charge for our associated services.
Fixed price contracts include risk that estimated costs are not accurate. We recognize revenue for certain projects using the cost-to-cost method of accounting and variations to assumptions could reduce profitability.
Some of our contracts include fixed price master service and other service arrangements in which the price of our services may be set on a per unit or aggregate basis. Our ability to accurately estimate the costs associated with our products, solutions and services and our ability to execute within those estimates is necessary for the success of those efforts.
For certain projects we recognize revenue over time utilizing the cost-to-cost method of accounting whereby the percentage of revenue to be recognized in a period is measured by the percentage of the costs incurred to date relative to the total estimated costs for the contract. This method relies upon estimates of total estimated costs. Contract revenue and cost estimates are reviewed and revised on an ongoing basis as work progresses with adjustments recognized in the fiscal period in which the changes are made.
Estimates are based upon management’s reasonable assumptions, judgment and experience. There are inherent risks in estimates, including unanticipated delays, technical complications, job conditions, and other factors including management’s assessment of expected variables. Any such adjustments could negatively affect the results of operations, cash flows, and liquidity.
We may fail to adequately recover on claims against project owners, subcontractors or suppliers for payment or performance.
From time to time, we may bring claims against project owners for additional costs that exceed the contract price or for amounts not included in the original contract. We may also present change orders and claims to our subcontractors and suppliers. Failure to properly document the nature of change orders or claims or other reasons that may result in unsuccessful negotiations for settlement could result in reduced profits, cost overruns or project losses.
Our subcontractors and suppliers may fail or be unable to satisfy their obligations to us or other parties, or we may be unable to maintain these relationships, either of which could have a material adverse effect on our results of operations, cash flows and liquidity.
We depend on subcontractors to perform work for some of our projects. There is a risk that we could have disputes with subcontractors arising from, among other things, the quality and timeliness of the work they perform, customer concerns, or our failure to extend existing work orders or issue new work orders under a subcontracting arrangement. Our ability to fulfill our obligations as a prime contractor could be jeopardized if any of our subcontractors fail to perform the agreed-upon services on a timely basis and/or deliver the agreed-upon supplies. In addition, the absence of qualified subcontractors with whom we have satisfactory relationships could adversely affect our ability to perform under some of our contracts, or the quality of the services we provide. Additionally, in some cases, we pay our subcontractors before our customers pay us for the related services. We could experience a material decrease in profitability and liquidity if we pay our subcontractors for work performed for customers that fail to or delay paying us for the related work. Any of these factors could have a material adverse effect on our results of operations, cash flows and liquidity.
We also rely on suppliers, equipment manufacturers and lessors to obtain or provide the materials and equipment we require to conduct our operations. Any substantial limitation on the availability of suppliers or equipment, including from economic, regulatory or market conditions, could negatively affect our operations. Our results of operations, cash flows and liquidity could be adversely affected if we were unable to acquire sufficient materials or equipment to conduct our operations.
We include amounts in backlog that may not result in actual revenue or translate into profits.
Our backlog may be subject to cancellation and unexpected adjustments, as such, it is an uncertain indicator of future operating results. OEG’s backlog includes estimated amounts of revenue we expect to realize from future work on uncompleted contracts, revenue from change orders and renewal options, and master service agreements. Some of these may be cancellable on short or no advance notice. Backlog amounts are determined based on contract price, estimates of work to be completed under contracts taking into account historical trends, experience on similar projects and estimates of customer demand based upon communications with our customers. In the past, we have experienced postponements, cancellations and reduction in expected future work due to customers’ changing plans, market volatility, regulatory and other factors. There can be no assurance that actual results will be consistent with the estimates included in our forecasts and as such backlog as of any particular date is an uncertain indicator of future revenue and earnings.
We are a relatively small energy infrastructure services business and face formidable competition.
We are a relatively small company with limited capitalization in comparison to many of our competitors. Because of our size and capitalization, we believe that we have not yet established sufficient market awareness that is essential to our continued growth and success in all of our markets. We face formidable competition in every aspect of our business from other companies, many of whom have greater name recognition, more resources and broader service offerings than ours.
We also expect competition to intensify in the future. Our future success in keeping pace with technological developments and achieving product acceptance depends upon our ability to enhance our current products and to continue to develop and introduce new product offerings and enhanced performance features and functionality on a timely basis at competitive prices. Our inability, for technological or other reasons, to enhance, develop, introduce or deliver compelling products in a timely manner, or at all, in response to changing market conditions, technologies or customer expectations, could have a material adverse effect on our operating results and growth prospects. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our products and solutions with evolving industry standards and protocols in a competitive environment.
The industries we serve are highly competitive and subject to rapid technological and regulatory change as well as customer consolidation. Any of these could result in decreased demand for our services, solutions and products which could adversely affect our results of operations, cash flows and liquidity.
We compete with other companies in most of the markets in which we operate that range from small independent firms serving local markets to larger regional, national and international firms. Some of our customers employ in-house personnel to perform some of the services we provide. Most of our customers’ work is awarded through bid processes, and our project bids may not be successful which could materially adversely affect our results of operations, cash flows and liquidity.
Technological advances in the markets we serve could change our customers’ operating models and project requirements. Governmental regulations may also change our customers’ project requirements and our ability to adapt to those changing requirements could reduce the demand for our solutions, services and products.
Our business is subject to operational risk, including from operational and physical hazards that could result in substantial liabilities and negatively affect our financial condition.
Due to the nature of the services we provide and the conditions in which we operate, our business is subject to operational hazards. Though we invest in substantial resources to provide for safety including occupational health and safety programs and by carrying appropriate amounts of insurance coverage, there can be no assurance that we will be able to mitigate all hazards, including electricity, fires, explosions, mechanical failures and weather-related incidents. This could result in significant liability. The risks faced by our personnel can cause personal injuries and loss of life, severe damage to or destruction of property and equipment and other consequential damages which could lead to large damage claims, suspension of operations, government enforcement actions, regulatory penalties, civil litigation or criminal prosecution. These costs could exceed the amount we charge for the associated products, solutions and services.
If serious accidents or fatalities occur, or if our safety records deteriorate, we could be restricted from bidding on certain projects, obtaining new customers or contracts, and contracts could be terminated. Accidents in the course of our business could result in significant liabilities, employee turnover and/or an increase to the costs of our projects.
We will need to grow our organization and we may encounter difficulties in managing this growth.
As of December 31, 2021, Orbital Energy Group, Inc., together with its consolidated subsidiaries, had 1,329 full-time employees excluding 111 employees at our discontinued operations. We expect to experience growth in the number of our employees and the scope of our operations as we follow our growth strategy. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of new products, solutions and services. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize new products, solutions and services and compete effectively will depend, in part, on our ability to effectively manage any future growth.
Our operating results may vary over time and such fluctuations could cause the market price of our common stock to decline.
Our operating results may fluctuate significantly due to a variety of factors, many of which are outside of our control. Because revenues for any future period are not predictable with any significant degree of certainty, you should not rely on our past results as an indication of our future performance. If our revenues or operating results fall below the expectations of investors or securities analysts or below any estimates we may provide to the market, the price of our common shares would likely decline substantially. Factors that could cause our operating results and stock price to fluctuate include, among other things:
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varying demand for our products, solutions and services due to the financial and operating condition of our customers, and general economic conditions; |
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inability of our suppliers and subcontractors to meet our demand; |
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success and timing of new product, solutions and services introductions by us and the performance of those generally; |
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announcements by us or our competitors regarding products, solutions, services, promotions or other transactions; |
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costs related to responding to government inquiries related to regulatory compliance; |
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our ability to control and reduce product, solutions and services costs; |
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changes in the manner in which we sell products, solutions and services; |
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volatility in foreign exchange rates, changes in interest rates and/or the availability and cost of financing or other working capital to our customers. |
Our operating expenses may increase as we make further expenditures to enhance and expand our operations in order to support additional growth in our business and national stock market reporting and compliance obligations.
In the future, we expect our operations and marketing investments to increase to support our anticipated growth and as a result of our listing on the Nasdaq Stock Market. We have made significant investments in using professional services and expanding our operations. We may make additional investments in personnel and continue to expand our operations to support anticipated growth in our business. In addition, we may determine the need in the future to increase our direct sales force, add distributors and sales representatives to market and sell our products, solutions and services. Such changes to our existing sales model would likely result in higher selling, general and administrative expenses as a percentage of our revenues. We expect such increased investments could adversely affect operating income in the short term while providing long-term benefit.
Our business depends on a strong brand and failing to maintain and enhance our brand would hurt our ability to expand our base of customers.
We believe that we have not yet established sufficient market awareness in our various markets. Market awareness of our capabilities and products, solutions and services is essential to our continued growth and our success in all of our markets. We expect the brand identity that we acquired with platform companies, Front Line Power Construction, LLC, and Gibson Telecom Services along with developing brand identity with Orbital Solar Services and Orbital Power, Inc. will significantly contribute to the success of our business. Maintaining and enhancing these brands is critical to expanding our base of customers. If we fail to maintain and enhance our brands, or if we incur excessive expenses in this effort, our business, operating results and financial condition could be materially and adversely affected. Maintaining and enhancing our brands will depend largely on our ability to be a technology leader and continue to provide high-quality services, solutions, and products, which we may not do successfully.
New entrants in our markets may harm our competitive position.
New entrants seeking to gain market share by introducing new technology, services, solutions and products may make it more difficult for us to sell our services, solutions and products and could create increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.
Adverse conditions in the global economy and disruption of financial markets may significantly restrict our ability to generate revenues or obtain debt or equity financing.
The global economy continues to experience volatility and uncertainty and governments in many countries continue to evaluate and implement spending cuts designed to reduce budget deficits. These conditions and deficit reduction measures could reduce demand for our products and services, including through reduced government infrastructure projects, which would significantly jeopardize our ability to achieve our sales targets. These conditions could also affect our potential strategic partners, which in turn, could make it more difficult to execute a strategic collaboration. Moreover, volatility and disruption of financial markets could limit our customers’ ability to obtain adequate financing or credit to purchase and pay for our products, solutions and services in a timely manner, or to maintain operations and result in a decrease in sales volume. General concerns about the fundamental soundness of domestic and international economies may also cause customers to reduce purchases. Changes in governmental banking, monetary and fiscal policies to restore liquidity and increase credit availability may not be effective. Economic conditions and market turbulence may also impact our suppliers’ and subcontractors’ ability to supply sufficient resources in a timely manner, which could impair our ability to fulfill sales orders. It is difficult to determine the extent of the economic and financial market problems and the many ways in which they may affect our suppliers, customers, investors and business in general. Continuation or further deterioration of these financial and macroeconomic conditions could significantly harm sales, profitability and results of operations.
Some of our operations and certain suppliers and customers are located in areas subject to natural disasters or other events that could stop us from having our products made or shipped or could result in a substantial delay in our production or development activities.
Many of our operating units and customers are located in and around Houston, Texas, Eclipse Foundation Group is located in Gonzales, Louisiana, and Full Moon Telecom is located in Florida. The risk of hurricanes and other natural disasters in these geographic areas are significant due to the proximity to the coast and their propensity to flood. Despite precautions taken by us and our third-party providers, a natural disaster or other unanticipated problems, at our locations or at third-party providers could cause interruptions to our operations. Any disruption resulting from these events could cause significant delays in our ability to deliver our solutions, services and products until we are able to shift our manufacturing, assembly or testing from the affected contractor(s) to another third-party vendor. We cannot assure you that alternative capacity could be obtained on favorable terms, if at all.
Defects in our solutions could harm our reputation and business.
Our services and solutions are complex and have contained and may contain undetected defects or errors. Defects in our services and solutions may require us to implement design changes or updates.
Any defects or errors in our products, or the perception of such defects or errors, could result in:
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expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work around errors or defects; |
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loss of existing or potential customers; |
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delayed or lost revenue; |
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delay or failure to attain market acceptance; |
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negative publicity, which would harm our reputation; |
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warranty claims against us; |
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an increase in collection cycles for accounts receivable, which could result in an increase in our provision for doubtful accounts and the risk of costly litigation; and |
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harm to our results of operations. |
Our contract manufacturers purchase some components, subassemblies and products from a limited number of suppliers. The loss of any of these suppliers may substantially disrupt our ability to obtain orders and fulfill sales.
We rely on third-party components and technology to build and operate our solutions and we rely on our contract manufacturers to obtain the components, subassemblies and products necessary for our services and solutions. Shortages in components that we use in our solutions are possible and our ability to predict the availability of such components is limited. If shortages occur in the future, as they have in the past, our business, operating results and financial condition would be materially adversely affected. Unpredictable price increases of such components due to market demand may occur.
We depend on key personnel and will need to recruit new personnel as our business grows.
As a small company, our future success depends in a large part upon the continued service of key members of our senior management team who are critical to the overall management of Orbital Energy Group, Inc. and our subsidiary companies, as well as the development of our technologies, products, solutions and service offerings, our business culture and our strategic direction. The loss of any of our management or key personnel could seriously harm our business and we do not maintain any key-person life insurance policies on the lives of these critical individuals.
If we are successful in expanding our product and customer base, we will need to add additional key personnel as our business continues to grow. If we cannot attract and retain enough qualified and skilled staff, the growth of the business may be limited. Our ability to provide services to customers and expand our business depends, in part, on our ability to attract and retain staff with professional experiences that are relevant to technology development and other functions the Company performs. Competition for personnel with these skills is intense. We may not be able to recruit or retain the caliber of staff required to carry out essential functions at the pace necessary to sustain or expand our business.
We believe our future success will depend in part on the following:
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the continued employment and performance of our senior management; |
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our ability to retain and motivate our officers and key employees; and |
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our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, marketing, sales and customer service personnel. |
Our insurance policies may not cover all operating risks and a casualty loss beyond the limits of our coverage could adversely impact our business.
Our business is subject to operating hazards and risks relating to handling, storing, transporting and use of the products, solutions and services we sell. We maintain insurance policies in amounts and with coverage and deductibles that we believe are reasonable and prudent. Nevertheless, our insurance coverage may not be adequate to protect us from all liabilities and expenses that may arise from claims for personal injury or death or property damage arising in the ordinary course of business, and our current levels of insurance may not be maintained or available in the future at economical prices. If a significant liability claim is brought against us that is not adequately covered by insurance, we may have to pay the claim with our own funds, which could have a material adverse effect on our business, consolidated financial condition, results of operations, or cash flows.
We may become subject to lawsuits, indemnity or other claims, in the ordinary course of our business, which could materially and adversely affect our business, results of operations and cash flows.
From time to time, we are subject to various claims, lawsuits and other legal proceedings brought or threatened against us in the ordinary course of our business. These actions and proceedings may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination and other employment-related damages, breach of contract, property damage, environmental liabilities, liquidated damages, consequential damages, punitive damages and civil penalties or other losses, or injunctive or declaratory relief. We may also be subject to litigation in the normal course of business involving allegations of violations of the Fair Labor Standards Act and state wage and hour laws. In addition, we generally indemnify our customers for claims related to the services we provide and actions we take under our contracts, and, in some instances, we may be allocated risk through our contract terms for actions by our joint venture partners, equity investments, customers or other third parties.
Claimants may seek large damage awards and defending claims can involve significant costs. When appropriate, we establish accruals for litigation and contingencies that we believe to be adequate in light of current information, legal advice and our indemnity insurance coverages. We reassess our potential liability for litigation and contingencies as additional information becomes available and adjust our accruals as necessary. We could experience a reduction in our profitability and liquidity if we do not properly estimate the number of required accruals for litigation or contingencies, or if our insurance coverage proves to be inadequate or becomes unavailable, or if our self-insurance liabilities are higher than expected. The outcome of litigation is difficult to assess or quantify, as plaintiffs may seek recovery of very large or indeterminate amounts and the magnitude of the potential loss may remain unknown for substantial periods of time. Furthermore, because litigation is inherently uncertain, the ultimate resolution of any such claim, lawsuit or proceeding through settlement, mediation, or court judgment could have a material adverse effect on our business, financial condition or results of operations. In addition, claims, lawsuits and proceedings may harm our reputation or divert management’s attention from our business or divert resources away from operating our business and cause us to incur significant expenses, any of which could have a material adverse effect on our business, results of operations or financial condition.
Expanding and evolving data privacy laws and regulations could impact our business and expose us to increased liability.
The California Consumer Privacy Act (“CCPA”) became effective in 2020. CCPA created new consumer rights relating to the access to, deletion of, and sharing of personal information that is collected by businesses. Costs to comply with and implement these privacy-related and data protection measures could be significant. In addition, even our inadvertent failure to comply with federal, state, or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others. Any inability to adequately address privacy concerns, even if unfounded, or to comply with the more complex privacy or data protection laws, regulations and privacy standards, could lead to significant financial penalties, which may result in a material and adverse effect on our results of operations.
We are subject to taxation in multiple jurisdictions. As a result, any adverse development in the tax laws of any of these jurisdictions or any disagreement with our tax positions could have a material adverse effect on our business, consolidated financial condition or results of operations. In addition, our annual effective income tax rate can change materially as a result of changes in our mix of U.S. and foreign earnings and other factors, including changes in tax laws and changes made by regulatory authorities.
We are subject to taxation in, and to the tax laws and regulations of, multiple jurisdictions as a result of the global scope of our operations and our corporate and financing structure. We are also subject to transfer pricing laws with respect to our intercompany transactions. Adverse developments in these laws or regulations, or any change in position regarding the application, administration or interpretation thereof, in any applicable jurisdiction, could have a material adverse effect on our business, consolidated financial condition or results of our operations. In addition, the tax authorities in any applicable jurisdiction, including the United States, may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions. If any applicable tax authorities, including U.S. tax authorities, were to successfully challenge the tax treatment or characterization of any of our transactions, it could have a material adverse effect on our business, consolidated financial condition or consolidated results of our operations.
Our overall effective income tax rate is equal to our total tax expense as a percentage of total earnings before tax. However, income tax expense and benefits are not recognized on a global basis but rather on a jurisdictional or legal entity basis. Losses in one jurisdiction may not be used to offset profits in other jurisdictions and may cause an increase in our tax rate. Changes in statutory tax rates and laws, as well as ongoing audits by domestic and international authorities, could affect the amount of income taxes and other taxes paid by us. Also, changes in the mix of earnings (or losses) between jurisdictions and assumptions used in the calculation of income taxes, among other factors, could have a significant effect on our overall effective income tax rate.
Our operating results may be affected by fluctuations in foreign currency exchange rates, which may affect our operating results in U.S. dollar terms.
A portion of our revenue arises from our international operations. Revenues generated and expenses incurred by our international operations are often denominated in foreign currencies. As a result, our consolidated U.S. dollar financial statements are subject to fluctuations due to changes in exchange rates as revenues and expenses of our international operations are translated from local currencies into U.S. dollars. In addition, our financial results are subject to changes in exchange rates that impact the settlement of transactions. The Company does not currently undertake any hedges to protect against adverse foreign currency exposure.
A failure of our internal control over financial reporting could materially affect our business.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Internal control over financial reporting may not prevent or detect misstatements due to inherent limitations in internal control systems. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to prevent and detect fraud, and could expose us to litigation, harm our reputation, and/or adversely affect the market price of our common stock.
Risks Related to Our Intellectual Property and Technology
Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information.
We have devoted substantial resources to the development of our proprietary technology and trade secrets. In order to protect our proprietary technology and trade secrets, we rely in part on confidentiality agreements with our key employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of our trade secrets and may not provide an adequate remedy in the event of unauthorized disclosure of our trade secrets. We may have difficulty enforcing our rights to our proprietary technology and trade secrets, which could have a material adverse effect on our business, operating results and financial condition. In addition, others may independently discover trade secrets and proprietary information and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to determine and enforce the scope of our proprietary rights and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Cyber risk and the failure to maintain the integrity of our operational or security systems or infrastructure, or those of third parties with which we do business, could have a material adverse effect on our business, consolidated financial condition and results of operations.
We are subject to an increasing number of various types of information technology vulnerabilities, threats and targeted computer crimes which pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber-attacks or security breaches of our networks or systems, could result in the loss of customers and business opportunities, legal liability, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensatory costs, and additional compliance costs, any of which could materially adversely affect our business, financial condition and results of operations. While we attempt to mitigate these risks, our systems, networks, products, solutions and services remain potentially vulnerable to advanced and persistent threats. Despite our efforts, our facilities and systems and those of our customers and third-party service providers may be vulnerable to security breaches, theft, misplaced or lost data, programming and/or human errors that could lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions, which in turn could adversely affect our consolidated financial condition and results of operations.
Risks Related to Regulation and Compliance
Our failure to comply with the regulations of federal, state and local agencies that oversee transportation and safety compliance could reduce our revenue, profitability and liquidity.
OSHA establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by OSHA and various recordkeeping, disclosure and procedural requirements. Various standards, including standards for notices of hazards and safety in excavation and demolition work, may apply to our operations. We incur capital and operating expenditures and other costs in the ordinary course of business in complying with OSHA and other state and local laws and regulations, and could incur penalties and fines in the future from violations of health and safety regulations, including, in extreme cases, criminal sanctions. Our customers could cancel existing contracts and not award future business to us if we were in violation of these regulations.
From time to time, we may receive notice from the Department of Transportation (“DOT”) that our motor carrier operations will be monitored. The failure to monitor and maintain our safety performance could result in suspension or revocation of vehicle registration privileges. Our ability to service our customers could be damaged if we were not able to successfully resolve such issues, which could lead to a material adverse effect on our results of operations, cash flows and liquidity.
Our operations could affect the environment or cause exposure to hazardous substances. In addition, our properties could have environmental contamination, which could result in material liabilities.
Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products, polychlorinated biphenyls, fuel storage, air quality and the protection of endangered species. Certain of our current and historical construction operations have used hazardous materials and, to the extent that such materials are not properly stored, contained or recycled, they could become hazardous waste. Additionally, some of our contracts require that we assume the environmental risk of site conditions and require that we indemnify our customers for any damages, including environmental damages, incurred in connection with our projects. We may be subject to claims under various environmental laws and regulations, federal and state statutes and/or common law doctrines for toxic torts and other damages, as well as for natural resource damages and the investigation and clean-up of soil, surface water, groundwater, and other media under laws such as the Comprehensive Environmental Response, Compensation and Liability Act. Such claims may arise, for example, out of current or former conditions at project sites, current or former properties owned or leased by us, or contaminated sites that have always been owned or operated by third parties. For example, we own and lease facilities at which we store our equipment. Some of these facilities may contain fuel storage tanks. If these tanks were to leak, we could be responsible for the cost of remediation as well as potential fines. Liability may be imposed without regard to fault and may be strict and joint and several, such that we may be held responsible for more than our share of any contamination or other damages, or even for the entire share, and we may be unable to obtain reimbursement from the parties that caused the contamination. The obligations, liabilities, fines and costs or reputational harm associated with these and other events could be material and could have a material adverse impact on our business, financial condition, results of operations and cash flows.
We perform work in underground environments, which could affect the environment. A failure to comply with environmental laws could result in significant liabilities or harm our reputation, and new environmental laws or regulations could adversely affect our business.
Some of the work we perform is in underground environments. If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil containing pollutants and result in a rupture and discharge of pollutants. In such a case, we could incur significant costs, including clean-up costs, and we may be liable for significant fines and damages and could suffer reputational harm. Additionally, we sometimes perform directional drilling operations below certain environmentally sensitive terrains and water bodies. Due to the inconsistent nature of terrain and water bodies, it is possible that such directional drilling could cause a surface fracture releasing subsurface materials or drilling fluid. These releases alone or, in combination with releases that may contain contaminants in excess of amounts permitted by law, could potentially expose us to significant clean up and remediation costs, damages, fines and reputational harm, which could have a material adverse effect on our results of operations, cash flows and liquidity.
New environmental laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, or the imposition of new clean-up requirements could require us to incur significant costs or result in new or increased liabilities that could have a material adverse effect on our results of operations, cash flows and liquidity. We may incur work stoppages to avoid violating these laws and regulations, or we may risk fines or other sanctions if we inadvertently violate these laws and regulations, which could adversely affect our business.
Compliance with and changes in tax laws could adversely affect our financial results.
We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use, gross receipts, and value-added taxes), payroll taxes, franchise taxes, withholding taxes, and ad valorem taxes. New tax laws, treaties and regulations and changes in existing tax laws, treaties and regulations are continuously being enacted or proposed, and significant changes could result from the change in control of the U.S. Congress and presidency in 2021, all of which can result in significant changes to the tax rate on our earnings and have a material impact on our earnings and cash flows from operations. Since future changes to federal and state tax legislation and regulations are unknown, we cannot predict the ultimate impact such changes may have on our business.
In addition, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We may be audited by tax authorities, and our tax estimates and tax positions could be materially affected by many factors, including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, our ability to realize deferred tax assets and changes in uncertain tax positions. A significant increase in our tax rate can have a material adverse effect on our profitability and liquidity.
Risks Related to Our Common Stock
The trading price of our common stock may continue to be volatile, which could result in substantial losses for individual shareholders.
Our common stock trades on the Nasdaq Stock Market. There can be no assurance, however, that the trading market for our common stock will be robust. A limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market for our common stock. The trading price of our common stock has been volatile and could continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control. During calendar year 2021, our common stock traded at a low of $2.08 and a high of $9.86.
We do not believe that this volatility corresponds to any recent change in our financial condition. However, such factors as: (1) our move into the renewable energy space (specifically solar); (2) the increased market interest in alternative energy stocks; (3) our recent press release outlining our commitment to bringing greater diversity and opportunities for underrepresented minority groups in the energy industry; and, (4) the changes in Washington DC with the new administration and its emphasis on renewable energy, as well as conditions in the financial markets generally, may have caused or contributed to this volatility.
The stock market in general, and the market for energy companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Public perception and other factors outside of our control may additionally impact the stock price of companies like us that garner a disproportionate degree of public attention, regardless of actual operating performance.
As a result of this volatility, our securities could experience rapid and substantial decreases in price, and you may be able to sell securities you purchase under this prospectus only at a substantial loss to the initial offering price.
Some, but not all, of the factors that may cause the market price of our common stock to fluctuate include:
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fluctuations in our quarterly or annual financial results or the quarterly or annual financial results of companies perceived to be similar to us or relevant for our business; |
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changes in estimates of our financial results or recommendations by securities analysts; |
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failure of our services, products, and technologies to achieve or maintain market acceptance; |
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changes in market valuations of similar or relevant companies; |
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success of competitive service offerings or technologies; |
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changes in our capital structure, such as the issuance of securities or the incurrence of debt; |
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announcements by us or by our competitors of significant services, contracts, acquisitions or strategic alliances; |
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regulatory developments in the United States, foreign countries, or both; |
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litigation; |
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additions or departures of key personnel; |
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investors’ general perceptions; and |
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changes in general economic, industry or market conditions. |
These factors may materially and adversely affect the market price of our common stock, regardless of our performance. In addition, the stock market in general and the market for energy infrastructure services companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. Additionally, because the trading volume of our stock is not large, there can be a disparity between the bid and the asked price that may not be indicative of the stock’s true value.
In addition, if the market for energy stocks, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or results of operations. Further, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
A possible “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to additional price volatility.
In the future investors may purchase shares of our common stock to hedge existing exposure or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent an aggregate short exposure in our common stock becomes significant, investors with short exposure may have to pay a premium to purchase shares for delivery to share lenders at times if and when the price of our common stock increases significantly, particularly over a short period of time. Those purchases may in turn, dramatically increase the price of our common stock. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to our business prospects, financial performance or other traditional measures of value for the Company or its common stock.
Additional stock offerings in the future may dilute then-existing shareholders’ percentage ownership of the Company.
Given our plans and expectations that we will need additional capital in the future, we anticipate that we may need to issue additional shares of common stock or securities convertible or exercisable for shares of common stock, including convertible preferred stock, convertible notes, stock options or warrants. The issuance of additional securities in the future will dilute the percentage ownership and potentially voting power of then current stockholders and could negatively impact the price of our common stock and other securities.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock and make it more difficult for us to raise funds through future offerings of common stock.
We have never paid dividends on our common stock and do not expect to pay any in the foreseeable future.
Potential purchasers should not expect to receive a return on their investment in the form of dividends on our common stock. The Company has never paid cash dividends on its common stock and the Company does not expect to pay dividends in the foreseeable future.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Our ability to pay dividends may be further restricted by the terms of any of our future debt or preferred securities. Accordingly, investors must rely on sales of their own common stock after price appreciation, which may never occur, as the only way to realize their investment. Investors seeking cash dividends should not purchase shares of our stock.
There is a limited public trading market for our common stock so you may not be able to resell your stock and may not be able to turn your investment into cash.
Our common stock is currently traded on the NASDAQ Stock Market under the trading symbol ‘‘OEG.’’ Our shares of common stock are thinly traded. Due to the illiquidity, the market price may not accurately reflect our relative value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. Because our common stock is thinly traded, a large block of shares traded can lead to a dramatic fluctuation in the share price and investors may not be able to liquidate their investment in us at all or at a price that reflects the value of the business.
Nasdaq may delist our common stock from its exchange which could limit your ability to make transactions in our securities and subject us to additional trading restrictions.
If for 30 consecutive trading days, the bid price of our common stock closes below the $1.00 per share minimum required for continued listing on the Nasdaq Stock Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”), Nasdaq will send us a Notice. The Notice would not have an immediate effect on the listing of our common stock, and our common stock would continue to trade on the Nasdaq Stock Market under the symbol “OEG.” Under Nasdaq Listing Rule 5810(c)(3)(A), if during the 180 calendar day period following the date of the Notice (the “Compliance Period”), the closing bid price of our common stock would be at or above $1.00 for a minimum of 10 consecutive business days, we would regain compliance with the Minimum Bid Price Requirement and our common stock would continue to be eligible for listing on the Nasdaq Stock Market, absent noncompliance with any other requirement for continued listing. If we did not regain compliance with the Minimum Bid Price Requirement by the end of the Compliance Period (or the Compliance Period as may be extended) the Company’s common stock would be subject to delisting. If this were to happen, we would monitor the closing bid price of our common stock and may, if appropriate, consider implementing available options to regain compliance with the Minimum Bid Price Requirement under the Nasdaq Listing Rules.
If our common stock is delisted, our common stock would likely then trade only in the over-the-counter market. If our common stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity with respect to our securities; a determination that our shares are a “penny stock,” which will require brokers trading in our securities to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; a reduced amount of news and analyst coverage for our Company; and a decreased ability to issue additional securities or obtain additional financing in the future. These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.
In addition to the foregoing, if our common stock is delisted from Nasdaq and it trades on the over-the-counter market, the application of the “penny stock” rules could adversely affect the market price of our common stock and increase the transaction costs to sell those shares. The SEC has adopted regulations which generally define a “penny stock” as an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. If our common stock is delisted from Nasdaq and it trades on the over-the-counter market at a price of less than $5.00 per share, our common stock would be considered a penny stock. The SEC’s penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. If applicable in the future, these rules may restrict the ability of brokers-dealers to sell our common stock and may affect the ability of investors to sell their shares, until our common stock no longer is considered a penny stock.
Risks Relating to Stockholder Rights
Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to existing common stockholders and with the ability to adversely affect stockholder voting power and perpetuate their control.
Although we do not have any preferred stock outstanding presently, our Articles of Incorporation allow us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to issue preferred stock without further stockholder approval, as well as the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock or other preferred stockholders and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
Preferred stock could be used to dilute a potential hostile acquirer. Accordingly, any future issuance of preferred stock or any rights to purchase preferred shares may have the effect of making it more difficult for a third party to acquire control of us. This may delay, defer or prevent a change of control or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings attributable to and assets available for distribution to, the holders of our common stock and could adversely affect the rights and powers, including voting rights, of the holders of our common stock and preferred stock.
Our Articles of Incorporation limits director liability, thereby making it difficult to bring any action against them for breach of fiduciary duty.
Orbital Energy Group, Inc. is a Colorado corporation. As permitted by Colorado law, the Company’s Articles of Incorporation limits the liability of directors to Orbital Energy Group, Inc. or its stockholders for monetary damages for breach of a director’s fiduciary duty, with certain exceptions. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of the Company against a director.
Our charter documents may inhibit a takeover that stockholders consider favorable.
Provisions of our Articles of Incorporation and Bylaws may delay or discourage transactions involving an actual or potential change in control of the Company, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. These provisions:
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provide that the authorized number of directors may be changed by resolution of the board of directors; |
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provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; and |
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do not provide for cumulative voting rights. |
Item 1B. Unresolved Staff Comments
None.
In 2020, the Company relocated its headquarters to its Houston office where it rents office and warehouse space totaling approximately 40,000 square feet. Its lease expires in 2022.
In April 2021, the Company acquired Gibson Technical Services, LLC ("GTS"), which leases approximately 10,000 square feet of office and 5,000 square feet of warehouse space in Atlanta, GA. In addition, this space includes a fenced equipment yard of approximately 30,000 square feet. The lease ends in July 2028. GTS also leases warehouse space ranging from 250 square feet to 8,700 square feet in Alabama, Georgia, North Carolina, Nevada, Mississippi, Louisiana, New York, Virginia, and Oklahoma.
In July 2021, the Company acquired IMMCO, Inc, which is a subsidiary of Gibson Technical Services, LLC and which shares office space with GTS in Atlanta, GA.
In October 2021, the Company acquired Full Moon, Telecom, LLC, which runs remotely and thus has no properties associated with it.
In November 2021, the Company acquired Front Line Power Construction, LLC, which leases two industrial/office type buildings and surrounding six acres in the greater Houston area of Rosharon, Texas. The lease expires in 2024.
In April 2020, the Company sublet office space in Irving, Texas for corporate support services and Orbital Power, Inc. office personnel; the lease runs through 2023. Orbital Power, Inc. also maintains an equipment yard in Sherman, Texas that houses equipment primarily for Orbital Power, Inc. for which the lease runs until 2022.
With the acquisition of Orbital Solar (formerly Reach Construction Group, LLC), the Company leased industrial space in Sanford, North Carolina which includes approximately 4,600 square feet of warehouse space and 4,800 square feet of office space and runs through 2022.
The Company leases office and warehouse space in Tualatin, Oregon, which was its former headquarters and now sublets to outside parties.
In the future, the Company may obtain additional leased properties to support its growth strategy and expansion of operations within the energy infrastructure services industry.
The Company and its subsidiaries are not parties in any legal proceedings. No director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent of any class of voting securities of the Company or any associate of any such director, officer, affiliate of the Company or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on The Nasdaq Stock Market under the trading symbol ‘‘OEG.’’ The Company currently has authorized 325,000,000 common shares, par value $0.001 per share, and as of December 31, 2021, the Company’s issued and outstanding shares consisted of 82,259,739 shares of common stock issued and 81,906,676 shares outstanding of which 65,787,438 shares are freely tradable without restriction or limitation under the Securities Act. As of December 31, 2021, the Company had in excess of 3,000 beneficial holders of our common stock and in excess of 2,300 stockholders of record. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
The holders of Common Stock are entitled to one vote per share and do not have cumulative voting rights. Holders of the Company’s Common Stock do not have any pre-emptive or other rights to subscribe for or purchase additional shares of capital stock and no conversion rights, redemption or sinking-fund provisions.
The Company’s common stock is traded on the Nasdaq Stock Market under the trading symbol ‘‘OEG.’’ The following table sets forth, the high and low sales prices of our Common Stock on the Nasdaq during each quarter of the two most recent years.
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Low |
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| 2021 |
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| First Quarter |
$ | 9.86 | $ | 2.08 | ||||
| Second Quarter |
7.64 | 2.91 | ||||||
| Third Quarter |
4.66 | 2.92 | ||||||
| Fourth Quarter |
3.07 | 2.15 | ||||||
| 2020 |
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| First Quarter |
$ | 1.79 | $ | 1.18 | ||||
| Second Quarter |
1.31 | 0.82 | ||||||
| Third Quarter |
0.91 | 0.53 | ||||||
| Fourth Quarter |
1.19 | 0.68 | ||||||
Dividend Policy
The Company has never paid cash dividends on its common stock and the Company does not expect to pay dividends in the foreseeable future.
We currently expect to retain future earnings to finance the growth and development of our business. The timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flows; our general financial condition and future prospects; our capital requirements and surplus; contractual restrictions; the amount of distributions, if any, received by us from our subsidiaries; and other factors deemed relevant by our board of directors. Any future dividends on our common shares would be declared by and subject to the discretion of our board of directors.
Common Stock Reserved for Future Issuances
Set forth below is a summary of the outstanding securities, transactions and agreements, which relate to 237,985 shares of common stock the Company is required to reserve for potential future issuances.
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237,985 common shares reserved for outstanding options issued under our Equity Compensation Plans. As of December 31, 2021, there were reserved for issuance an aggregate of 237,985 shares of common stock for options outstanding under the Company’s 2008 Equity Incentive Plan and the Company’s 2009 Equity Incentive Plan (Executive). |
At the 2020 Annual Meeting of Shareholders, the Company’s shareholders approved the Orbital Energy Group 2020 Incentive Award Plan and authorized a share limit of 2,000,000 shares. This limit was increased to a total of 5,000,000 shares at the 2021 Annual Meeting of Shareholders. This Plan replaced the 2008 and 2009 Equity Incentive Plan, which had expired. As of December 31, 2021 there are 4,130,665 remaining shares available to grant under the 2020 Incentive Award Plan. See Note 10 Stockholders' Equity for more information on the Company's 2020 Incentive Award Plan.
Other than as described herein, as of the date of this report, there are currently no plans, arrangements, commitments or understandings for the issuance of additional shares of Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
Following is a list of all securities we sold within the past two years, which were not registered under the Securities Act. The Company relied on Section 4(2) of the Securities Act of 1933 as the basis for an exemption from registration for the following issuances.
2021 Sales of Unregistered Securities
Common Stock Issued During 2021
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| Dates of issuance |
Type of issuance |
Stock issuance recipient |
Reason for issuance |
Total no. of shares |
Fair value recorded at issuance |
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| February, June, July, and August and October 2021 |
Common stock |
Four consultants |
Services |
251,537 | 1,161 | |||||||||
| April and June 2021 |
Common stock |
Various GTS sellers |
GTS acquisition |
5,929,267 | 16,932 | |||||||||
| July 2021 |
Common stock |
Various IMMCO sellers |
IMMCO acquisition |
874,317 | 2,024 | |||||||||
| July, August, and September, October, November and December 2021 |
Common stock |
Various |
Debt payment |
3,082,299 | 8,971 | |||||||||
| October 2021 |
Common stock |
2 sellers |
Full Moon Telecom acquisition |
227,974 | 368 | |||||||||
| November 2021 |
Common stock |
2 sellers |
Front Line Power acquisition |
11,622,018 | 17,612 | |||||||||
| November 2021 |
Common stock |
4 lenders |
Portion of original issue discount on $105 million credit facility |
1,636,651 | 3,813 | |||||||||
| Total 2021 issuances |
23,624,063 | $ | 50,881 | |||||||||||
Shares Eligible for Future Sale
As of December 31, 2021, we had outstanding 81,906,676 shares of common stock. Of these shares, 65,787,438 shares are freely tradable without restriction or limitation under the Securities Act.
The 16,119,141 shares of common stock held by existing stockholders as of December 31, 2021 that are ‘‘restricted’’ within the meaning of Rule 144 adopted under the Securities Act (the ‘‘Restricted Shares’’), may not be sold unless they are registered under the Securities Act or sold pursuant to an exemption from registration, such as the exemption provided by Rule 144 promulgated under the Securities Act. The Restricted Shares were issued and sold by us in private transactions in reliance upon exemptions from registration under the Securities Act.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Important Note about Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements as of December 31, 2021 and notes thereto included in this document and our unaudited 10-Q filings for the first three quarters of 2021 and the notes thereto. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed elsewhere in this Form 10-K.
The statements that are not historical constitute ‘‘forward-looking statements.’’ Said forward-looking statements involve risks and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. These forward-looking statements are identified by the use of such terms and phrases as ‘‘expects,’’ ‘‘intends,’’ ‘‘goals,’’ ‘‘estimates,’’ ‘‘projects,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘should,’’ ‘‘future,’’ ‘‘believes,’’ and ‘‘scheduled.’’
The variables, which may cause differences include, but are not limited to, the following: general economic and business conditions; competition; success of operating initiatives; operating costs; advertising and promotional efforts; the existence or absence of adverse publicity; changes in business strategy or development plans; the ability to retain management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employment benefit costs; availability and costs of raw materials and supplies; and changes in, or failure to comply with various government regulations. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate; therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any person that the objectives and expectations of the Company will be achieved.
Overview
Orbital Energy Group, Inc. is a Colorado corporation organized on April 21, 1998. The Company’s principal place of business is located at 1924 Aldine Western, Houston, Texas 77038. Orbital Energy Group is a holding company dedicated to maximizing stockholder value through the acquisition and development of infrastructure services contractors. Through its subsidiaries, Orbital Energy Group has built a diversified portfolio of industry leading infrastructure service providers that touch many markets.
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (‘‘GAAP’’). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
While all of our significant accounting policies impact the Company’s financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would have caused a material change in our results of operations, financial position or liquidity for the periods presented in this report.
Finite-Lived Asset Impairment
The Company reviews its long-lived assets including finite-lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized as the excess of the carrying amount over the fair value. Otherwise, an impairment loss is not recognized. Management estimates the fair value and the estimated future cash flows expected. Any changes in these estimates could impact whether there was impairment and the amount of the impairment.
Fair Value of Estimates in Business Combination Accounting and Goodwill and Indefinite Lived Assets
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, ‘‘Business Combinations,’’ where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. At December 31, 2021, the Company has six operating segments comprised of eight reporting units with Gibson Technical Services, IMMCO, Inc, and Full Moon Telecom, LLC consolidating into one operating segment called Gibson Technical Services. Goodwill is recognized at the operating segment level. At December 31, 2021, operating segments with goodwill include Front Line Power Construction, LLC, Orbital Solar Services and Gibson Technical Services.
Upon acquisition of Front Line Power Construction, LLC, the Company recorded $70.2 million of goodwill. Goodwill was valued as of November 17, 2021 by a third-party valuation expert and was recorded following the recognition of Front Line Power Construction’s tangible assets and liabilities and $108.2 million of finite- and indefinite-lived identifiable intangible assets. Factors that contribute to the Company’s goodwill at Front Line Power Construction include the strong leadership of Kurt Johnson, Front Line Power Construction’s Founder and CEO, along with the skills and expertise brought by his team. Front Line Power Construction’s team provides synergies with Orbital Power Inc. that will add momentum to the comprehensive range of solutions by OEG’s Electric Power Segment.
Upon acquisition of Full Moon Telecom, LLC, the Company recorded $0.8 million of goodwill. Goodwill was valued as of October 22, 2021, by a third-party valuation expert and was recorded following the recognition of Full Moon Telecom’s tangible assets and liabilities and $0.4 million of finite- and indefinite-lived identifiable intangible assets. Factors that contribute to the Company’s goodwill in Full Moon Telecom, LLC, include the highly skilled and technically competent workforce at Full Moon. This workforce when combined with Gibson Technical Services and IMMCO provide synergies that increase the unique portfolio of services provided to their customers and further penetrate the telecommunications market.
Upon acquisition of IMMCO, Inc., the Company recorded $10.6 million of goodwill. Goodwill was valued as of July 28, 2021 by a third-party valuation expert and was recorded following the recognition of IMMCO Inc.’s tangible assets and liabilities and $6.4 million of finite- and -indefinite-lived identifiable intangible assets. Factors that contribute to the Company’s goodwill at IMMCO include the significant synergies added to the Company’s telecommunications segment by expanding the depth and breadth of the customer solutions provided.
Upon acquisition of Gibson Technical Services, the Company recorded $12.3 million of goodwill. Goodwill was valued as of April 13, 2021 by a third-party valuation expert and was recorded following the recognition of Gibson Technical Services’ tangible assets and liabilities and $22.8 million of finite- and indefinite-lived identifiable intangible assets. Factors that contribute to the Company’s goodwill in Gibson Technical Services (GTS) include GTS’s sterling reputation within the telecommunications industry which when combined with the Company’s resources, provides the Company the solid platform that will help OEG penetrate the telecommunications market and build upon to create synergies with future acquisitions.
Upon acquisition of Reach Construction Group, LLC, the Company recorded $7.0 million of goodwill. Goodwill was valued as of April 1, 2020 by a third-party valuation expert and was recorded following the recognition of Reach's tangible assets and liabilities and $13.7 million of finite-lived identifiable intangible assets. Factors that contributed to the Company's goodwill are Reach Construction's skilled workforce and reputation within its industry. The Company also expected to achieve future synergies between Reach Construction and Orbital Power, Inc. business. These synergies were expected to be achieved in the form of power line work necessary when bringing new solar power systems online.
For Orbital Solar Systems, (formally known as Reach Construction), management completed a quantitative analysis to determine potential impairment at the May 31, 2021 annual impairment test date. Goodwill in the Telecommunications segment was qualitatively reviewed to determine whether it was more likely than not that the fair value of its reporting unit was less than its carrying amount, including goodwill. To complete the qualitative review, management evaluated the fair value of the Goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. Management determined that no additional testing was necessary, and no impairment was necessary. During 2021 there were no triggering events to suggest that it was more likely than not that the fair value of each reporting unit and each indefinite-lived intangible was less than its carrying amount and thus no impairment was necessary.
Revenue Recognition
On January 1, 2018, we adopted the accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments (“new revenue standard"), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. This guidance includes the required steps to achieve the core principle that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. For the majority of contracts, revenue is still measured over time using the input cost-to-cost method or the output method. The change that most affected the transition adjustment on revenue was the requirement to limit revenue recognition on certain contracts without an enforceable right to payment for performance completed to date. Without a specific enforceable right to payment throughout the life of the contract, revenue is recorded at completion of the contact. For the Telecommunications, Electric Power, and Renewables segments, the majority of contracts are classified over time due to the guidance that allows for over time revenue recognition for construction contracts where the Company's performance creates or enhances an asset that the customer controls as the asset is being created or enhanced. This criterion is met since the Company is typically constructing the solar farms, as well as telecommunications and electric power construction services on customer owned or customer-controlled property, so the customer controls the asset as it is created.
For our construction contracts, revenue is generally recognized over time. Our fixed price construction projects use either an output method or a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For jobs under the output method, revenue is earned based on each unit in the contract completed. We construct comprehensive revenue calculations based on quantifiable measures of actual units completed multiplied by the agreed upon contract prices per item completed to measure revenue based on the output method.
The timing of revenue recognition depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. As discussed above, these performance obligations use a cost-to-cost input method or an output method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer.
For our services contracts, revenue is generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term.
For certain of our revenue streams, such as call-out repair and service work, outage services and training that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.
Our contracts with certain customers may be subject to contract cancellation clauses. Contracts with other cancellation provisions may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations and whether a contract should be accounted for over time or on a completed contract basis. Revenue is recognized for certain integration systems over time using cost-based input methods, in which significant judgement is required to evaluate assumptions including the amount of total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.
At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their stand-alone selling price are accounted for as a separate contract. For contract modifications where goods and services are not determined to be distinct and sold at their stand-alone selling price, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.
Variable Consideration
The nature of our contracts gives rise to several types of variable consideration. In rare instances, we include in our contract estimates, additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider 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. These amounts are included in our calculation of net revenue recorded for our contracts and the associated remaining performance obligations. Additionally, if the contract has a provision for liquidated damages in the case that the Company misses a timing target, or fails to meet any other contract benchmarks, the Company accounts for those estimated liquidated damages as variable consideration and will adjust revenue accordingly with periodic updates to the estimated variable consideration as the job progresses. Liquidated damages are recognized as variable consideration only when the Company estimates that they will be a factor in the performance of the contract.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, our contracts do not include a significant financing component.
Liquidity and Capital Resources
Company Conditions and Sources of Liquidity
The Company has experienced net losses and cash outflows from cash used in operating activities over the past years. As of and for the twelve months ended December 31, 2021, the Company had an accumulated deficit of $210.9 million, loss from continuing operations of $49.8 million, and net cash used in operating activities of $45.7 million.
As of December 31, 2021, the Company had Cash and cash equivalents of $26.9 million available for working capital needs and planned capital asset expenditures and a working capital deficit of approximately $33.3 million, including current maturities of debt. These factors initially raise substantial doubt about our ability to continue as a going concern, but this doubt has been alleviated by the Company’s plans to raise sufficient capital to meet our current obligations over the next twelve months, in addition to the expected recovery of our assets to satisfy liabilities in the normal course of business.
The Company has plans to access additional capital to meet its obligations for the twelve months from the date these financial statements are available to be issued. Historically, the Company has raised additional equity and debt financing to fund the expansion; refer to Note – 10 Stockholders’ Equity and Stock-Based Compensation and Note 7 — Notes Payable. The Company has also funded some of its capital expenditures through long-term financing with lenders and other investors as also described in further detail in Note 7 — Notes Payable. Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. The Company currently has an effective S-3 shelf registration statement with $112 million of aggregate offering value available for the issuance of various types of securities, including common stock, preferred stock, debt securities and/or warrants. While management will look to continue funding future acquisitions, organic growth initiatives and continuing operations by raising additional capital from sources such as sales of its debt or equity securities or notes payable in order to meet operating cash requirements, there is no assurance that management’s plans will be successful.
As the Company continues its progression to build a full-service infrastructure services platform, a successful transition to attaining profitable operations is dependent upon achieving a level of positive cash flows through generating adequate revenue growth to support the Company’s cost structure. For the twelve months ended December 31, 2021, our revenues have increased by $61.5 million resulting in a 286% increase in revenue from the prior year. The significant increase in revenues during the year was primarily driven by the strategic acquisitions of Front Line Power Construction, LLC, Gibson Technical Services, IMMCO, Inc., and Full Moon Telecom, LLC made coupled with organic growth within Orbital Power Services. In addition, two large utility scale solar projects were awarded to Orbital Solar Systems during the twelve-month period ended December 31, 2021. We anticipate, based on currently proposed plans and assumptions relating to our operations, the Company to generate sufficient revenue growth required to achieve profitability and generate positive cash flows from operations over the next twelve months. No assurance can be made that we will be able to obtain profitability and positive cash flows from our continuing operations.
The Company plans to meet its obligations as they become due over the next twelve months by raising additional capital through equity and debt financing sources and expected positive cash flows generated from operations. Given the considerations, we believe the mitigating effect of management’s plans has alleviated any substantial doubt about the Company’s ability to continue as a going concern.
Cash used in Operations
There was a use of cash from operations of approximately $45.7 million during the year ended December 31, 2021 compared to a $15.0 million use of cash in 2020. This was an increase in the use of cash from operations of approximately $30.7 million from the year ended December 31, 2020. Overall, the change in cash used in operations is primarily the result of the loss from continuing operations, net of income taxes in 2021 and changes in assets and liabilities.
Increased uses of cash in 2021 are primarily for normal administrative costs, and cash usage in the Electric Power segment primarily related to start-up costs and Renewables primarily related to its loss from operations. While the Company saw an initial cost increase from the Electric Power segment, management expects this segment to become cash flow positive, as the business environment normalizes and it continues to increase service crews deployed. The Company believes that revenue generated by recent Telecommunications and Electric Power acquisitions will improve cash flow from operating activities. The Company believes overall cash used in operations will improve through revenue growth associated with new customers and larger projects.
During 2021, in addition to the Company's net loss after non-cash items, significant factors affecting cash used in operating activities included the change in trade accounts receivable, accrued liabilities, and changes in contract liabilities. The change in trade accounts receivable accounted for a $19.2 million use of cash in operating activities and was due to increased trades account receivable balances from the Electric Power and Renewables segments. Accrued expenses and Accrued Compensation increased by $4.5 million primarily related to increased accrued compensation expense in 2021 related to the timing of payroll expense along with increased accrued expenses at the corporate level for interest payable on outstanding debt. Change in contract liabilities was a source of cash due to increased billings in excess of cash at the Renewables segment.
During 2020, in addition to the Company's net loss after non-cash items, significant factors affecting cash used in operating activities included the change in accrued liabilities, accounts payable and changes in contract liabilities. A use of cash of $1.2 million in accrued liabilities related largely to the payout of severance at CUI Canada that was accrued for in 2019. Change in accounts payable, which was a $3.5 million use of cash, was largely due to the paydown of accounts payable at the Renewables segment, which was acquired on April 1, 2020. Accounts payable paid down did not get replaced at the same rate due to decreased business activity at the Renewables segment due to the COVID-19 pandemic and timing of customer projects. Change in contract liabilities was a source of cash due to increased billings in excess of cash at the Renewables segment partially offset by the decrease in provision for loss contracts at the Renewables segment as the estimated contract losses recorded on the acquisition date were realized as vendors were paid.
During 2021 and 2020, the Company used stock and options as a form of payment to certain vendors, consultants, directors and employees. For years ended December 31, 2021 and 2020, the Company recorded a total of $12.2 million and $0.3 million, respectively for share-based compensation related to equity given, or to be given, to employees, directors and consultants for services provided and as payment for royalties earned. The increase in 2021 compared to 2020 was due to greater stock-based bonuses, and greater stock-based director compensation. In addition, there was a fair value adjustment to stock appreciation rights of $2.1 million in 2021 compared to a fair value adjustment of $0.6 million in 2020. Stock appreciate rights were exchanged for restricted stock units in the first quarter of 2022. There was no stock option vesting expense in 2021 or 2020.
Capital Expenditures and Investments
In 2021, the Company paid $132.5 million cash for acquisitions, net of cash received.
During the years ended 2021 and 2020, Orbital Energy Group invested $7.8 million and $1.7 million, respectively, in fixed assets. These investments typically include additions to equipment including vehicles and equipment for powerline service and maintenance, telecommunications service and maintenance, engineering and research and development, tooling for manufacturing, furniture, computer equipment for office personnel, facilities improvements and other fixed assets as needed for operations. The increase in 2021 was due to the start-up costs associated with the Company's Electric Power segment along with increased equipment at the Telecommunications segment. The Company anticipates further investment in fixed assets during 2022 in support of its on-going business and continued development of product lines, technologies and services.
Orbital Energy Group invested $0.7 million and $11 thousand in other intangible assets during 2021 and 2020, respectively. These investments typically include product certifications, technology rights, capitalized website development, software for engineering and research and development and software upgrades for office personnel. The increase in cash paid for investments in the current year primarily relates to VE Technology purchased by Orbital Gas Systems North America, now classified as discontinued operations.
In 2021, the Company entered into finance lease agreements that required payment of deposits. Per the agreement, these deposits should be returned 36 months after the lease commences. During 2021 the Company paid $0.8 million on finance lease deposits compared to zero in 2020.
In 2021 the Company recognized proceeds from notes receivable of $0.6 million compared to zero in 2020. Cash used in purchase of short-term investments of $1.0 million in 2021 compared to zero in 2020.
The Company made an additional $0.3 million investment in a convertible note receivable from Virtual Power Systems ("VPS") in 2020 including payments made related to the Company's transition agreement with VPS. This note was converted to equity in VPS in the third quarter of 2020 along with an additional contribution of $0.5 million and a non-cash contribution of inventory in the amount of $0.3 million.
Financing Activities
During the years ended December 31, 2021 and 2020, the Company issued payments of $2.0 million and $4 thousand, against finance leases of equipment. The Company had proceeds from notes payable in 2021 of $143.0 million, compared to $8.1 million in 2020. See Note 7, Note payable for more information on the Company's notes payable. The Company made payments on notes payable of $9.9 million in 2021 and $4.1 million in 2020.
On August 19, 2021, the Company's Telecommunications segment entered into a $4.0 million variable rate line of credit agreement. Interest accrues at a rate of 2.05% over the Daily Simple Secured Overnight Financing Rate ("SOFR") index rate. At December 31, 2021 the Company had an outstanding balance on the line of credit of $2.5 million and $1.5 million was available for borrowing. In 2020, the $0.4 million line of credit balance was held at the Renewables segment. The Renewable segment line of credit was paid and closed in the first quarter of 2021.
S-3 registration and share issuances
The Company filed an S-3 registration statement on July 17, 2020 containing a prospectus that was effective in September 2020. The Company utilized this filing in January 2021 to issue common stock for $45 million before costs. The Company filed a new S-3 shelf registration in January 2021, which, as amended, became effective in April 2021. With this filing, Orbital Energy Group may from time-to-time issue various types of securities, including common stock, preferred stock, debt securities and/or warrants, up to an aggregate amount of $150 million. The Company utilized this S-3 registration to issue additional common stock in July 2021 for $38 million before costs of approximately $2.3 million for net proceeds of approximately $35.7 million.
As the Company focuses on growing its infrastructure services market presence both organically and through strategic acquisitions, technology development, product and service line additions, and increasing Orbital’s market presence, it will fund these activities together with related operating, sales and marketing efforts for its various product offerings with cash on hand, and possible proceeds from future issuances of equity through the S-3 registration statement, and available debt.
Orbital Energy Group may raise additional capital needed to fund the further development and marketing of its products and services as well as payment of its debt obligations.
See the section entitled Recent Sales of Unregistered Securities for a complete listing of all unregistered securities transactions.
Recap of Liquidity and Capital Resources
The Company had a net loss of $61.2 million and cash used in operating activities of $45.7 million during 2021. As of December 31, 2021, the Company's accumulated deficit is $210.9 million. The Company has supplemented its liquidity by issuing $45 million of shares of stock in January 2021 and $38 million shares of stock in July 2021. In November 2021, the Company entered into a Credit Agreement with Alter Domus (US), LLC, as administrative agent and collateral agent and various lenders (the “Lenders”) in order to enable the Company to finance the acquisition of Front Line Power Construction, LLC (“Front Line”) (the “Acquisition”). Pursuant to the Credit Agreement, the Lenders made a Term Loan to Front Line in the initial principal amount of $105 million for the purposes of financing the Acquisition and the associated expenses. The Term Loan initially bears interest at the three-month Adjusted LIBOR Rate, plus the Applicable Margin, of which 2.5% may be paid in-kind. The Term Loan shall be repaid in consecutive quarterly installments of $262,500, commencing on June 30, 2022. The Credit Agreement provides for mandatory prepayments on the occurrence of events such as sales of assets, Consolidated Excess Cash Flow and Excess Receipts during the term. The Credit Agreement provides for prepayment premiums (initially 5% on prepayments made in the first 30 months of the term, declining to 1% in the final year of the term). The Term Loan matures on November 17, 2026, subject to acceleration on Events of Default. Additionally, the Company issued two, unsecured promissory notes to the sellers of Front Line in the aggregate principle amount outstanding of $86.7 million with a maturity date of May 17, 2022 and an interest rate of 6% per annum. The seller notes were amended in the first quarter of 2022 so that $35 million will be due in 2022 and the remaining portion of the seller notes will be due May 31, 2023.
At December 31, 2021, and 2020 the Company had cash and cash equivalents balances of $26.9 million and $3.0 million. At December 31, 2021 and 2020, the Company had $2.3 million and $0.6 million, respectively, of cash and cash equivalents balances at domestic financial institutions, which were covered under the FDIC insured deposits programs and $0.4 million and $0.2 million, respectively, of cash and cash equivalents covered at foreign financial institutions. At December 31, 2021 and 2020, the Company held $2.1 million and $2.2 million, respectively, in foreign bank accounts.
The following tables present our contractual obligations as of December 31, 2021:
| Payments due by period |
||||||||||||||||||||
| Less than |
||||||||||||||||||||
| (In thousands) |
1 year |
1 to 3 years |
3 to 5 years |
After 5 years |
Total |
|||||||||||||||
| Financing lease obligations: |
||||||||||||||||||||
| Minimum lease payments |
$ | 5,729 | $ | 9,980 | $ | 576 | $ | — | $ | 16,285 | ||||||||||
| Operating lease obligations: |
||||||||||||||||||||
| Operating lease - minimum payments |
5,767 | 8,789 | 4,093 | 2,714 | 21,363 | |||||||||||||||
| Notes payable obligations: |
||||||||||||||||||||
| Notes payable maturities plus interest |
97,659 | 92,077 | 130,053 | — | 319,789 | |||||||||||||||
| Total Obligations |
$ | 109,155 | $ | 110,846 | $ | 134,722 | $ | 2,714 | $ | 357,437 | ||||||||||
The above notes payable maturities reflects the agreement made with the Front Line sellers to extend the maturity date for those agreements from May 16, 2022 to May 31, 2023, with $35 million being due in 2022 and the remaining principal due in 2023.
As of December 31, 2021, the Company had an accumulated deficit of $210.9 million.
The Company expects the revenues from its continuing operations to cover operating and other expenses for the next twelve months of operations. However, in the short-term, the Company expects its operating units to need cash support as the Company acquires fixed assets to grow their businesses. Further equity issuance or borrowing may be required to fund future acquisitions.
Off-Balance Sheet Arrangements - Obligations under Certain Guarantee Contracts
The Company may enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties. As of December 31, 2021, the Company is an indemnitor on four surety bonds and had three letters of credit off-balance sheet for a total dollar value of approximately $131.8 million. Two bonds were with the Renewables segment for a total of $127.0 million dollars for two construction projects. At the Electric Power segment there were two bonds totaling $3.8 million for various unit-based construction jobs. For the projects related to these bonds, bonds, there was $110.7 million in costs left to complete the projects at December 31, 2021. The Company held three off-balance sheet letters of credit as of December 31, 2021. The Telecommunications segment had a letter of credit for $0.4 million, Discontinued UK operations for $54 thousand and Renewables for $0.6 million. The Company does not expect any liability associated with these off-balance sheet arrangements.
The following tables set forth, for the periods indicated, Revenue and income (loss) from operations by segment:
| (Dollars in thousands) |
For the Year Ended December 31, 2021 | |||||||||||||||||||
| Telecommunications |
Electric Power |
Renewables |
Other |
Total |
||||||||||||||||
| Total Revenues |
$ | 27,799 | $ | 43,599 | $ | 11,550 | $ | — | $ | 82,948 | ||||||||||
| Income (Loss) from operations |
$ | 43 | $ | (13,215 | ) | $ | (19,043 | ) | $ | (20,576 | ) | $ | (52,791 | ) | ||||||
| (Dollars in thousands) |
For the Year Ended December 31, 2020 | |||||||||||||||||||
| Telecommunications |
Electric Power |
Renewables |
Other |
Total |
||||||||||||||||
| Total Revenues |
$ | — | $ | 8,482 | $ | 13,005 | $ | — | $ | 21,487 | ||||||||||
| Loss from operations |
$ | — | $ | (4,942 | ) | $ | (5,479 | ) | $ | (11,610 | ) | $ | (22,031 | ) | ||||||
Revenue
| For the Years Ended December 31, |
||||||||||||
| Revenues by Segment |
Percent |
|||||||||||
| (Dollars in thousands) |
2021 |
Change |
2020 |
|||||||||
| Telecommunications |
$ | 27,799 | 100.0 | % | $ | — | ||||||
| Electric Power |
43,599 | 414.0 | % | 8,482 | ||||||||
| Renewables |
11,550 | (11.2 | )% | 13,005 | ||||||||
| Total revenues |
$ | 82,948 | 286.0 | % | $ | 21,487 | ||||||
2021 compared to 2020
Revenues in 2021 are attributable to newly acquired entities, continued sales, and marketing efforts. Net revenues for the year ended December 31, 2021 were greater than in 2020 due to the acquisitions in the Telecommunications and Electric Power segments and the development of the Company's Electric Power business. This increase was partially offset by lower renewables revenue at Orbital Solar Services during 2021. Revenues will fluctuate generally around the timing of customer project delivery schedules.
The Electric Power segment held backlogs of customer orders of approximately $207.7 million as of December 31, 2021 and $22.2 million at December 31, 2020. The Renewables segment held backlogs of customer orders of approximately $121.4 million as of December 31, compared to $8.1 million as of December 31, 2020. Telecommunications, had backlogs of customer orders of approximately $194.5 million compared to zero as of December 31, 2020.
Cost of Revenues
2021 compared to 2020
For the year ended December 31, 2021, the cost of revenues as a percentage of revenue increased to 94.8% from 91.1% during 2020. This increase was attributable to start-up costs at the Company’s Electric Power segment and lower margin projects during the period for Orbital Solar Services. Margins will vary based upon the mix of work provided, proprietary technology included in projects, contract labor necessary to complete projects, and the competitive markets in which the Company competes. The year ended December 31, 2021 was also affected negatively by the COVID-19 pandemic and the resulting world-wide economic slowdown.
The Company expects continued improvement in 2022 with the addition of the newly acquired companies Gibson Technical Services, IMMCO, Inc., Full Moon Telecom, LLC, and Front Line Power Construction, LLC. These acquired entities have been profitable from acquisition. With the addition of these entities, the Company expects synergies that will promote efficiencies and increase revenue in the years to come. Additionally, two large solar projects are scheduled to ramp up in 2022 and increase revenue.
Selling, General and Administrative Expense
Selling, General and Administrative (SG&A) expenses includes such items as wages, commissions, consulting, general office expenses, business promotion expenses and costs of being a public company including legal and accounting fees, insurance and investor relations. SG&A expenses are generally associated with the ongoing activities to reach new customers, promote new product lines including Telecommunications, Electric Power, and Renewables segments and other new product and service introductions.
2021 compared to 2020
During the year ended December 31, 2021, SG&A increased $31.0 million compared to the year ended December 31, 2020. The increase in SG&A for 2021 compared to 2020 was due to the addition of entities in our Telecommunications and Electric Power segments. Additionally, the Electric Power segment experienced increased start-up SG&A costs around increased payroll and insurance expense. Also contributing to SG&A were increased corporate costs largely due to strategic initiatives, which included increased professional fees and costs associated with due diligence activities related to acquisitions.
SG&A decreased to 60.3% of total revenue in 2021 compared to 88.6% of total revenue during the year ended December 31, 2020 due to economies of scale on 286.0% higher consolidated revenues.
Depreciation and Amortization
| For the Years Ended December 31, |
||||||||||||
| Depreciation and Amortization by Segment |
Percent |
|||||||||||
| (Dollars in thousands) |
2021 |
Change |
2020 |
|||||||||
| Telecommunications |
$ | 2,326 | 100.0 | % | $ | — | ||||||
| Electric Power |
5,969 | 1278.5 | % | 433 | ||||||||
| Renewables |
2,931 | (10.6 | )% | 3,278 | ||||||||
| Other |
1,684 | 10.1 | % | 1,530 | ||||||||
| Total depreciation and amortization (1) |
$ | 12,910 | 146.3 | % | $ | 5,241 | ||||||
(1) For the years ended December 31, 2021 and 2020, depreciation and amortization totals included $1.6 million and $1.5 million, respectively that were classified in income from discontinued operations on the Consolidated Statements of Operations in the Other segment. For the years ended December 31, 2021 and 2020, depreciation and amortization totals included $4.5 million and $0.5 million, respectively that were classified as cost of revenues in the Consolidated Statements of Operations.
The depreciation and amortization expenses are associated with depreciating buildings, furniture, vehicles, equipment, software and other intangible assets over the estimated useful lives of the related assets.
2021 compared to 2020
Depreciation and amortization expense in the year ended December 31, 2021 was up compared to 2020 primarily due to the amortization of Telecommunications and Electric Power segment acquisition intangibles and depreciation of equipment used by Telecommunications and Electric Power segments.
Provision for Bad Debt
Provision for bad debt in 2021 represented less than 1% of total revenues and related to miscellaneous receivables, which the Company had either recorded an allowance for doubtful collections of the receivable or for which the Company had determined the balance to be uncollectible. The provision for bad debt decreased in 2021 compared to 2020 as the 2020 provision for bad debt primarily related to accounts receivable write-offs on the Renewable segment's customer balances that were deemed to be uncollectible.
Other Income (Expense)
| For the Years Ended December 31, |
||||||||||||
| Percent |
||||||||||||
| (Dollars in thousands) |
2021 |
Change |
2020 |
|||||||||
| Foreign exchange gain (loss) |
$ | (500 | ) | (198.6 | )% | $ | 507 | |||||
| Interest income |
338 | 15.4 | % | 293 | ||||||||
| Sublet rental income |
501 | 50.9 | % | 332 | ||||||||
| Financial instrument income (expense) |
33 | (100.0 | )% | — | ||||||||
| Gain (loss) on extinguishment of debt and loan modifications |
365 | 337.0 | % | (154 | ) | |||||||
| Other, net |
40 | 900.0 | % | 4 | ||||||||
| Total other income (expense) |
$ | 777 | (20.9 | )% | $ | 982 | ||||||
Fluctuations in Other Income (Expense) are largely due to fluctuations in foreign currency rates. Foreign currency gains and losses are primarily related to intercompany receivables/payables between Orbital Energy Group and its U.K Orbital Gas Systems subsidiary. Additionally, increased gain on extinguishment of debt primarily relates to the forgiveness by the U.S. government of certain payroll protection loans partially offset by the loss on extinguishment of debt related to exchange of common stock for debt payments. The increase in financial instrument income relates to a standalone financial instrument included in the subscription agreement related to the $105 million credit agreement utilized in the funding of the acquisition of Front Line Power Construction, LLC. This financial instrument is discussed further in Note 7. Increased sublet rental income is due to an increase in the square footage subleased in 2021 related to the Company’s previous corporate office in Oregon.
Investment Income
Prior to the third quarter of 2020, based on its equity ownership and that the Company maintained a board seat and participated in operational activities of Virtual Power Systems ("VPS"), the Company maintained significant influence to account for the investment as an equity-method investment. Under the equity method of accounting, results are not consolidated, but the Company records a proportionate percentage of the profit or loss of VPS as an addition to or a subtraction from the VPS investment asset balance. With the decrease in ownership percentage following a Q3 2020 equity raise by VPS and additional board seats placed, Orbital Energy Group, Inc. no longer has significant influence to recognize the investment under the equity method. As such, the Company held the investment under the cost method as of December 31 2020 resulting in a $4.8 million loss on its equity-method investment in the six months ended June 30, 2020. The VPS investment continues to be held under the cost method and at December 31, 2021 and December 31, 2020, the Company’s basis in the investment was $1.1 million as reflected on the consolidated balance sheets.
Interest Expense
The Company incurred $8.3 million and $1.3 million of interest expense during 2021 and 2020, respectively. Interest expense is for interest on the short-term and long-term notes payable including syndicated debt agreement, seller-financed notes, non-recourse payable agreements, convertible note payable, insurance financing notes, secured promissory note, and lines of credit. The increase in interest expense in 2021 is related to the increase in notes payable outstanding as of December 31, 2021. See note 7 for more information on the Company's notes payable.
Provision (benefit) for taxes
The Company is subject to taxation in the U.S., various state and foreign jurisdictions. We continue to record a full valuation allowance against the Company's U.S. and U.K. net deferred tax assets as it is "not more likely than not," that the Company will realize a benefit from these assets in a future period. In future periods, tax benefits and related deferred tax assets will be recognized when management concludes realization of such amounts is "more likely than not."
2021 compared to 2020
In 2021, a net tax benefit of $10.5 million, was recorded to the income tax provision from continuing operations for the year ended December 31, 2021 resulting in an effective tax rate of 17.4% compared to a $1.5 million tax benefit from continuing operations for the year ended December 31, 2020 and an effective tax rate of 5.3%. For the year ended December 31, 2021, the income tax benefit primarily represents a decrease in the U.S. valuation allowance as a result of the GTS acquisition. For the year ended December 31, 2020, the income tax benefit primarily represents a decrease in the U.S. valuation allowance as a result of the Reach Construction Group, LLC acquisition. As of December 31, 2021, we have federal, state and foreign net operating loss carry forwards of approximately $97.3 million, $21.3 million, and $16.5 million, respectively, and for which the federal and state net operating loss carry-forwards will expire between 2026 and 2037.
Loss from Continuing Operations, net of income taxes
2021 compared to 2020
The Company had a loss from continuing operations, net of income taxes of $49.8 million for the year ended December 31, 2021 compared to a loss of $25.7 million in 2020. The increased loss from continuing operations, net of income taxes was attributable to start-up costs at the Company's Electric Power segment and projects with lower than normal margins during the period for the Renewables segment due to supply chain delays caused by COVID-19 leading to inefficiencies. In addition, the Company faced increased administrative costs from acquisition due diligence for the four companies acquired in 2021.
Income from Discontinued Operations, net of income taxes
2021 compared to 2020
The Company had loss from discontinued operations, net of income taxes of $11.4 million for the year ended December 31, 2021 compared to a loss of $1.7 million in 2020. The increase in loss from discontinued operations is primarily due to impairment recognized at Orbital UK in 2021 of $9.2 million. As of December 31, 2021, Orbital UK was considered held for sale and their assets were written down to their expected sale price.
Consolidated Net Loss
2021 compared to 2020
The Company had a net loss of $61.2 million for the year ended December 31, 2021 compared to a net loss of $27.4 million for the year ended December 31, 2020. The increased consolidated net loss was attributable to start-up costs at the Company's Electric Power segment and projects with lower than normal margins during the period for Renewables segment due to supply chain delays caused by COVID-19 leading to inefficiencies, as well as increased administrative costs from acquisition due diligence for the four companies acquired in 2021.
Recently Adopted and Recently Issued Accounting Standards
Information on recently adopted and recently issued accounting standards is included in Note 2 Summary of Significant Accounting Policies - Recent Accounting Pronouncements, to the Consolidated Financial Statements under Part II, Item 8, ‘‘Financial Statements and Supplementary Data.’’
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. This market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. The Company neither holds nor issues financial instruments for trading purposes.
The following sections provide quantitative information on the Company’s exposure to foreign currency exchange rate risk and stock price risk. The Company makes use of sensitivity analyses that are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.
Foreign Currency Exchange Rates
The Company conducts continuing operations in one principal currency: the U.S. dollar. This currency operates as the functional currency for the Company’s U.S. operations. Cash is managed centrally within the region with net earnings invested in the U.S. and working capital requirements met from existing U.S. intercompany liquid funds.
Foreign currency translation risk is the risk that exchange rate gains or losses arise from translating foreign entities’ statements of earnings and balance sheets from functional currency to the Company’s reporting currency, the U.S. dollar, for consolidation purposes. As currency exchange rates fluctuate, translation of our Statements of our foreign operations into U.S. dollars affects the comparability of revenues and operating expenses between years.
Revenues and operating expenses are primarily denominated in the currencies of the countries in which our continuing operations are located, which is the U.S. Our U.K. operations were reclassified to discontinued operations in 2021 and so the Company's revenues and operating expenses from continuing operations were not materially affected by foreign currency translation. We have limited operations in India and Australia. Our consolidated results of operations and cash flows are, therefore, subject to limited fluctuations due to changes in foreign currency exchange rates and is not expected to be adversely affected in the future due to changes in foreign exchange rates.
Investment Risk
The Company has an Investment Policy that, inter alia, provides an internal control structure that takes into consideration safety (credit risk and interest rate risk), liquidity and yield. Our Investment officers, CEO and CFO, oversee the investment portfolio and compile a quarterly analysis of the investment portfolio when applicable for internal use. In addition, the Company implemented an Investment Committee in 2019 to administer and operate the portfolio. At December 31, 2021, the Investment Committee is comprised of C. Stephen Cochennet, Corey A. Lambrecht, Chairman, and Nicholas M. Grindstaff, CFO. See Item 10 of this Form 10-K for more information on the Company’s Investment Committee.
Cash and cash equivalents are diversified and maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit, therefore, bear minimal credit risk.
The Company has trade receivable and revenue concentrations with large customers. See Note 15 of the Company's financial statements for more information on the Company's concentration risks.
Item 8. Financial Statements and Supplementary Data
This item includes the following financial information:
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| Reports of Independent Registered Public Accounting Firm (PCAOB ID Number |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Orbital Energy Group, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Orbital Energy Group, Inc. (a Colorado corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income and (loss), changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
As described in Note 2 to the consolidated financial statements, revenues derived from long-term fixed price contracts are recognized as the performance obligations are satisfied over time with the progress toward completion measured as a percentage of costs incurred to the total estimated cost for such performance obligation. In addition, the Company’s contracts may include variable considerations related to contract modifications through change orders or claims, and management must also estimate the variable consideration the Company expects to receive in order to estimate the total contract revenue. We identified revenue recognized over time for long-term fixed price contracts to be a critical audit matter.
The principal considerations for our determination that revenue recognized over time for long-term fixed price contracts is a critical audit matter is that auditing management’s estimate of the progress towards completion of its projects was complex and subjective. This is due to the considerable judgment required to evaluate management’s determination of the forecasted costs to complete its long-term contracts as future results may vary significantly from past estimates due to changes in facts and circumstances. In addition, auditing the Company’s measurement of variable consideration is also complex and highly judgmental and can have a material effect on the amount of revenue recognized.
Our audit procedures related to the recognition of revenue over time included the following procedures, among others. i) We tested the Company’s cost-to-cost estimates by evaluating the appropriate application of the cost to cost method; ii) tested management’s process for determining the total estimated contract cost which included evaluating the contracts and other documents that support those estimates, and testing the underlying contract costs; iii) evaluated management’s ability to reasonably estimate total contract costs by performing a comparison of the actual total estimate contract costs as compared with the prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract cost and iv) tested the estimated variable consideration by evaluating the appropriate application of the most likely amount method, and tracing amounts to supporting documentation.
Acquisition of Gibson Technical Services, IMMCO, and Front Line Power Construction
As described in Note 17 to the consolidated financial statements, during the year ended December 31, 2021, the Company completed acquisitions of Gibson Technical Services (“GTS”), IMMCO Inc., and Front Line Power Construction LLC, and the assets acquired and liabilities assumed were required to be recorded at fair value as of the acquisition date, for which the Company utilized a third party valuation firm. We identified the fair value of the acquired intangible assets, including customer relationships and trade name to be a critical audit matter.
The principal considerations for our determination that the estimation of the Company’s methods and assumptions used in estimating the fair value of these acquired intangible assets is a critical audit matter, include the significant judgment required by management when estimating the fair value of these assets.. The estimation was significant primarily to the sensitivity of the respective fair value to the underlying assumptions used to estimate the future revenues and cash flows, including revenue growth rates, gross margins, the discount rate used and the valuation methodologies applied by the third party valuation firm. In addition, the audit effort involved the use of specialists to assist in performing these procedures and evaluating the audit evidence obtained.
Our audit procedures related to the fair value of the intangible assets acquired included the following, among others (i) evaluated the reasonableness of management’s forecasted financial results by testing the revenue growth rates and gross margins by comparing such items to actual historical results to identify material changes based on the Company’s future plans for the acquired entities, corroborating the basis for increases in forecasted revenue and gross margin, as applicable (ii) utilized a valuation specialist to evaluate the methodologies used and whether they were acceptable for the underlying assets or operations and being applied correctly by performing an independent calculation, the appropriateness of the discount rate by recalculating the weighted average cost of capital, and the qualification of third-party valuation firm engaged by the Company based on their credentials and experience.
/s/
We have served as the Company’s auditor since 2019.
March 31, 2022
Consolidated Balance Sheets
As of December 31,
| December 31, | December 31, | |||||||
| (In thousands, except share and per share amounts) | 2021 | 2020 | ||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash - current | ||||||||
| Trade accounts receivable, net of allowance | ||||||||
| Inventories | ||||||||
| Contract assets | ||||||||
| Notes receivable, current portion | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Assets held for sale, current portion | ||||||||
| Total current assets | ||||||||
| Property and equipment, less accumulated depreciation | ||||||||
| Investment | ||||||||
| Right of use assets - Operating leases | ||||||||
| Right of use assets - Financing leases | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Restricted cash, noncurrent portion | ||||||||
| Note receivable | ||||||||
| Deposits and other assets | ||||||||
| Assets held for sale, noncurrent portion | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Notes payable, current | ||||||||
| Line of credit | ||||||||
| Operating lease obligations - current portion | ||||||||
| Financing lease obligations - current portion | ||||||||
| Accrued expenses | ||||||||
| Contract liabilities | ||||||||
| Financial instrument liability | ||||||||
| Liabilities held for sale, current portion | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Notes payable, less current portion | ||||||||
| Operating lease obligations, less current portion | ||||||||
| Financing lease obligations, less current portion | ||||||||
| Other long-term liabilities | ||||||||
| Liabilities held for sale, noncurrent portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock, par value $; shares authorized; shares issued at December 31, 2021 or December 31, 2020 | ||||||||
| Common stock, par value $; shares authorized; shares issued and shares outstanding at December 31, 2021 and shares issued and shares outstanding at December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock at cost; shares held at December 31, 2021 and December 31, 2020 | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Orbital Energy Group, Inc.'s stockholders' equity | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements
Consolidated Statements of Operations
For the Years Ended December 31,
| (In thousands, except share and per share amounts) |
||||||||
| 2021 |
2020 |
|||||||
| Revenues |
$ | $ | ||||||
| Cost of revenues |
||||||||
| Gross profit |
||||||||
| Operating expenses: |
||||||||
| Selling, general and administrative expense |
||||||||
| Depreciation and amortization |
||||||||
| Provision for bad debt |
||||||||
| Other operating (income) expenses |
( |
) | ||||||
| Total operating expenses |
||||||||
| Loss from operations |
( |
) | ( |
) | ||||
| Other income |
||||||||
| Interest expense |
( |
) | ( |
) | ||||
| Loss from continuing operations before income taxes and equity in net loss of affiliate |
( |
) | ( |
) | ||||
| Net loss of affiliate |
( |
) | ||||||
| Loss from continuing operations before taxes |
( |
) | ( |
) | ||||
| Income tax benefit |
( |
) | ( |
) | ||||
| Loss from continuing operations, net of income taxes |
( |
) | ( |
) | ||||
| Discontinued operations (Note 2) |
||||||||
| Loss from operations of discontinued businesses |
( |
) | ( |
) | ||||
| Income tax benefit |
( |
) | ( |
) | ||||
| Loss from discontinued operations, net of income taxes |
( |
) | ( |
) | ||||
| Net loss |
( |
) | ( |
) | ||||
| Less: net income attributable to noncontrolling interest |
||||||||
| Net loss attributable to Orbital Energy Group, Inc. |
$ | ( |
) | $ | ( |
) | ||
| Basic and diluted weighted average number of shares outstanding |
||||||||
| Loss from continuing operations per common share - basic and diluted |
$ | ( |
) | $ | ( |
) | ||
| Loss from discontinued operations per common share - basic and diluted |
$ | ( |
) | $ | ( |
) | ||
| Loss per common share - basic and diluted |
$ | ( |
) | $ | ( |
) | ||
See accompanying notes to consolidated financial statements
Consolidated Statements of Comprehensive Income and (Loss)
For the Years Ended December 31,
(In thousands)
| 2021 |
2020 |
|||||||
| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Other comprehensive income (loss) |
||||||||
| Foreign currency translation adjustment |
( |
) | ||||||
| Reclassification adjustment |
( |
) | ||||||
| Other comprehensive income (loss) |
( |
) | ||||||
| Comprehensive loss |
( |
) | ( |
) | ||||
See accompanying notes to consolidated financial statements
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31,
(In thousands, except share amounts)
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Total OEG | Non- | Total | ||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury Stock | Accumulated | Comprehensive | Stockholders' | controlling | Stockholders' | |||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Amount | Deficit | Income (Loss) | Equity | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Common stock issued for acquisition | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for compensation, services, and royalty payments | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the year ended December 31, 2021 | — | — | — | — | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Issuance of common stock via equity raises | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Common stock issued for acquisitions | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued and issuable for compensation, services and royalty payments | 2 | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Common stock issued to lenders for OID for $ million debt | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt repayment | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
For the Years Ended December 31,
(In thousands)
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangibles | ||||||||
| Amortization of debt discount | ||||||||
| Gain on extinguishment of debt and loan modifications | ( | ) | ||||||
| Amortization of note receivable discount | ( | ) | ( | ) | ||||
| Stock-based compensation and expense | ||||||||
| Fair value adjustment to liability for stock appreciation rights | ||||||||
| Fair value adjustment to financial instrument liability | ( | ) | ||||||
| Net loss of affiliate | ||||||||
| Provision for bad debt | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Non-cash unrealized foreign currency gain | ( | ) | ||||||
| Impairment of assets held for sale | ||||||||
| Inventory reserve | ( | ) | ( | ) | ||||
| Gain (loss) on disposal of assets | ( | ) | ||||||
| Gain on sale of businesses | ( | ) | ||||||
| Change in operating assets and liabilities, net of acquisition: | ||||||||
| Trade accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Right of use assets/lease liabilities, net of acquisitions: | ( | ) | ||||||
| Deposits and other assets | ( | ) | ( | ) | ||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ||||||
| Contract liabilities | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid for acquisitions, net of cash received | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Deposits on financing lease property and equipment | ( | ) | ||||||
| Cash paid for working capital adjustment on Power group disposition | ( | ) | ||||||
| Sale of discontinued operations, net of cash | ( | ) | ||||||
| Proceeds from sale of property and equipment | ||||||||
| Purchase of other intangible assets | ( | ) | ( | ) | ||||
| Purchase of convertible note receivable | ( | ) | ||||||
| Purchase of investments | ( | ) | ( | ) | ||||
| Proceeds from notes receivable | ||||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from line of credit | ||||||||
| Payments on line of credit | ( | ) | ( | ) | ||||
| Payments on financing lease obligations | ( | ) | ( | ) | ||||
| Proceeds from notes payable, net of debt discounts and issuances costs | ||||||||
| Payments on notes payable | ( | ) | ( | ) | ||||
| Proceeds from sales of common stock | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| Effect of exchange rate changes on cash | ||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash at beginning of year | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR | $ | $ | ||||||
See accompanying notes to consolidated financial statements
| 2021 |
2020 |
|||||||
| Income taxes paid (net refunded) |
$ | ( |
) | $ | ( |
) | ||
| Interest paid |
$ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
| Non-cash investment in acquisitions including seller notes, equity issued and contingent consideration |
$ | $ | ||||||
| Financing note payable issued for payment on certain insurance policies, net of insurance cancellation |
$ | $ | ||||||
| Accrued property and equipment purchases at December 31 |
$ | $ | ||||||
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Orbital Energy Group, Inc. (Orbital Energy Group, "OEG," "The Company") The Company is a diversified infrastructure services company serving customers in the electric power, telecommunications, and renewable markets. The Company’s reportable segments are the Electric Power segment, the Telecommunications segment, and the Renewables segment. In December 2021, the Company announced the planned divestiture of its previous Integrated Energy Infrastructure Solutions and Services segment. In 2020, the Company divested the remaining portion of its previous Power and Electromechanical segment.
The Electric Power segment consists of Front Line Power Construction, LLC based in Houston, Texas, Orbital Power, Inc. based in Dallas, Texas, and Eclipse Foundation Group based in Gonzales, Louisiana. The segment provides comprehensive infrastructure solutions to customers in the electric power industry. Services performed by Front Line Power and Orbital Power, Inc. generally include but are not limited to the engineering, design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities as well as emergency restoration services. Eclipse Foundation Group, which began operations in January 2021, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation, industrial, telecommunication and disaster restoration market sectors, with expertise performing services in water, marsh and rock terrains.
The Telecommunications segment is made up of Gibson Technical Services, Inc. (“GTS”) (acquired April 13, 2021). GTS is an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990 and is the parent of the following companies:
| o |
IMMCO, Inc. (acquired July 28, 2021), which includes two Indian subsidiaries and is an Atlanta-based, full-service telecom engineering and network design company providing diversified engineering services and customized software solutions to a global customer base since 1992. |
| o |
Full Moon Telecom, LLC (acquired October 22, 2021) a Florida-based telecommunications service provider that offers an extensive array of wireless service capabilities and experience including Layer 2/Layer 3 Transport, Radio Access Network (“RAN”) Integration, test and turn-up of Small Cell systems and Integration/Commissioning of Distributed Antenna (“DAS”) systems. |
The Renewables segment consists of Orbital Solar Services based in Sanford, North Carolina. Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction. The Company serves a wide variety of project types, including commercial, substation, solar farms and public utility projects.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Significant estimates include estimates used to record purchase price allocation for the Company's acquisitions, fair value measurements used in goodwill impairment tests, impairment estimations of long-lived assets, revenue recognition on cost-to-cost type contracts, allowances for uncollectible accounts, valuations of non-cash capital stock issuances, estimates of the incremental borrowing rate for long-term leases, fair value estimates and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Orbital Energy Group, Inc. and its wholly owned subsidiaries Front Line Power Construction, LLC, Orbital Power, Inc., Eclipse Foundation Group, Orbital Solar Services, Gibson Technical Services, Inc., and GTS's wholly owned subsidiaries, IMMCO, Inc. and Full Moon Telecom, LLC hereafter referred to as the ‘‘Company.’’ Additionally, the following wholly owned subsidiaries are included in these financial statements as discontinued operations: Orbital Gas Systems, Ltd., Orbital Gas Systems, North America, Inc., and the following in 2020 only: CUI Holdings Inc.(formerly CUI, Inc.), CUI Japan, CUI-Canada, and CUI Properties, LLC. The primary assets and liabilities of CUI Holdings Inc. were sold or settled during 2019 and CUI Japan, and CUI-Canada were sold or settled in 2020. CUI Properties is a dormant administrative entity. Significant intercompany accounts and transactions have been eliminated in consolidation.
Variable Interest Entity
Orbital Solar Services entered into an agreement in 2021 to form OSS-JPOW Solar Services, LLC (OSS-JPOW), a partnership with Jingoli Power, LLC. Orbital Solar Services holds a controlling interest in OSS-JPOW and the portions of OSS-JPOW’s net earnings and equity not attributable to Orbital Solar Service’s controlling interest are shown separately as noncontrolling interests in the consolidated statements of operations and consolidated balance sheets. OSS-JPOW is considered a Variable Interest Entity (VIE) to Orbital Solar Services.
Orbital Solar Services, through its controlling interest in OSS-JPOW, has the power to direct the activities that significantly affect the economic performance of OSS-JPOW and the obligation to absorb losses or the right to receive benefits that could be significant to OSS-JPOW; therefore, Orbital Solar Services is considered the primary beneficiary and consolidates OSS-JPOW. During 2021, Jingoli Power, LLC did not make contributions to or distributions from OSS-JPOW. For the year ended December 31, 2021, $
Company Conditions and Sources of Liquidity
The Company has experienced net losses and cash outflows from cash used in operating activities over the past years. As of and for the twelve months ended December 31, 2021, the Company had an accumulated deficit of $
As of December 31, 2021, the Company had Cash and cash equivalents of $
The Company has plans to access additional capital to meet its obligations for the twelve months from the date these financial statements are available to be issued. Historically, the Company has raised additional equity and debt financing to fund the expansion; refer to Note – 10 Stockholders’ Equity and Stock-Based Compensation and Note 7 — Notes Payable. The Company has also funded some of its capital expenditures through long-term financing with lenders and other investors as also described in further detail in Note 7 — Notes Payable. Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. The Company currently has an effective S-3 shelf registration statement with $
As the Company continues its progression to build a full-service infrastructure services platform, a successful transition to attaining profitable operations is dependent upon achieving a level of positive cash flows through generating adequate revenue growth to support the Company’s cost structure. For the twelve months ended December 31, 2021, our revenues have increased by $
The Company plans to meet its obligations as they become due over the next twelve months by raising additional capital through equity and debt financing sources and expected positive cash flows generated from operations. Given the considerations, we believe the mitigating effect of management’s plans has alleviated any substantial doubt about the Company’s ability to continue as a going concern.
Discontinued Operations and Sales of Businesses
As part of the Company’s stated strategy to transform Orbital Energy Group into a diversified energy infrastructure services platform serving North American energy customers, the Company’s board of directors made the decision to divest of its Orbital Gas subsidiaries. The Orbital Gas subsidiaries provide proprietary gas measurement and sampling technologies and the integration of process control and measuring/sampling systems. They are legacy businesses that are not part of the Company’s strategy of building an infrastructure services company serving the electric power, telecommunications and renewable markets. The disposition of the Orbital Gas subsidiaries will facilitate the Company’s restructuring and cost savings initiatives and are intended to realign and simplify its business structure and better position the Company for future growth and improved profitability. In the fourth quarter the Company recorded a $
Selected data for these discontinued businesses consisted of the following:
| Reconciliation of the Major Classes of Line Items Constituting Pretax Income from Discontinued Operations to the After-Tax Income from Discontinued Operations That Are Presented in the Statement of Operations |
| (In thousands) | ||||||||
| For the Year | ||||||||
| Ended December 31, | ||||||||
| Major classes of line items constituting pretax profit (loss) of discontinued operations | 2021 | 2020 | ||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ( | ) | ( | ) | ||||
| Selling, general and administrative expense | ( | ) | ( | ) | ||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Research and development | ( | ) | ( | ) | ||||
| (Provision) credit for bad debt | ( | ) | ||||||
| Impairment of assets held for sale | ( | ) | ||||||
| Gain on extinguishment of PPP loan | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income and (expense) | ( | ) | ||||||
| Pretax profit (loss) of discontinued operations related to major classes of pretax profit (loss) | ( | ) | ( | ) | ||||
| Pretax gain on sale of certain power and electromechanical businesses | ||||||||
| Total pretax income on discontinued operations | ( | ) | ( | ) | ||||
| Income tax benefit | ( | ) | ( | ) | ||||
| Total income from discontinued operations | $ | ( | ) | $ | ( | ) | ||
| Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities of the Discontinued Operation to Total Assets and Liabilities of the Disposal Group Classified as Held for Sale |
| As of December 31, | As of December 31, | |||||||
| (In thousands) | 2021 | 2020 | ||||||
| Carrying amounts of the major classes of assets included in discontinued operations: | ||||||||
| Trade accounts receivables | $ | $ | ||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Contract assets | ||||||||
| Assets held for sale, current portion | ||||||||
| Property and equipment | ||||||||
| Right of use assets - Operating leases | ||||||||
| Other intangible assets | ||||||||
| Deposits and other assets | ||||||||
| Assets held for sale, noncurrent portion | ||||||||
| Total assets of the disposal group classified as held for sale | $ | $ | ||||||
| Carrying amounts of the major classes of liabilities included in discontinued operations: | ||||||||
| Accounts payable | $ | $ | ||||||
| Contract liabilities | ||||||||
| Operating lease obligations, current portion | ||||||||
| Accrued expenses | ||||||||
| Notes payable - PPP, current portion | ||||||||
| Liabilities held for sale, current portion | ||||||||
| Operating lease obligations, less current portion | ||||||||
| Notes payable - PPP, less current portion | ||||||||
| Other long-term liabilities | ||||||||
| Liabilities held for sale, noncurrent portion | ||||||||
| Total liabilities held for sale | $ | $ | ||||||
The assets and liabilities of the disposal group classified as held for sale are classified as current on the December 31, 2021 balance sheet because it is probable that the sale will occur and proceeds will be collected within one year.
Net cash (used) provided by operating activities of discontinued operations for 2021 and 2020 was ($
Net cash provided by (used in) investing activities of discontinued operations for 2021 and 2020 was $
Fair Value of Financial Instruments
Accounting Standards Codification (‘‘ASC’’) 820 ‘‘Fair Value Measurements and Disclosures’’ (‘‘ASC 820’’) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the U.S., and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
| • | Level 1 – Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the reporting date. |
| • | Level 2 – Pricing inputs are quoted for similar assets, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes assets or liabilities valued at quoted prices adjusted for legal or contractual restrictions specific to these investments. |
| • | Level 3 – Pricing inputs are unobservable for the assets or liabilities; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. |
The Company determines when a financial instrument transfers between levels based on management’s judgment of the significance of unobservable inputs used to calculate the fair value of the financial instrument.
Management believes the carrying amounts of the short-term financial instruments, including cash and cash equivalents, investment, note receivable, accounts receivable, contract assets, prepaid expense and other assets, accounts payable, accrued liabilities, contract liabilities, and other current liabilities reflected in the accompanying consolidated balance sheet approximate fair value at December 31, 2021 and 2020 due to the relatively short-term nature of these instruments. The carrying value of the notes payable approximate fair value based on the proximity of the issuance to the balance sheet date and current market conditions, including the Company's $
Cash and Cash Equivalents
Cash includes deposits at financial institutions with maturities of three months or less. The Company at times has cash in banks in excess of FDIC insurance limits and places its temporary cash investments with high credit quality financial institutions. The Company considers all highly liquid marketable securities with maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds, certificates of deposit and commercial paper. At December 31, 2021 and 2020, the Company had $
| (In thousands) | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Cash and cash equivalents at beginning of year | $ | $ | ||||||
| Restricted cash at beginning of year | ||||||||
| Cash, cash equivalents and restricted cash at beginning of year | $ | $ | ||||||
| Cash and cash equivalents at end of year | $ | $ | ||||||
| Restricted cash at end of year | ||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | $ | ||||||
Investments and Notes Receivable
At December 31, 2021, the Company had a note receivable from Back Porch International that was originated as part of the divestiture of the Company's electromechanical components business. The note has an original stated value of $
Accounts Receivable and Allowance for Uncollectible Accounts
Accounts receivable consist of the receivables associated with revenue derived from service sales including present amounts due to contracts accounted for under fixed price, cost-to-cost, cost plus, or output method. An allowance for uncollectible accounts is recorded to allow for any amounts that may not be recoverable, based on an analysis of prior collection experience, customer credit worthiness and current economic trends. Based on management’s review of accounts receivable, an allowance for doubtful accounts of $
Activity in the allowance for doubtful accounts for the years ended December 31, 2021 and 2020 is as follows:
| (In thousands) | For the Years ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Allowance for doubtful accounts, beginning of year | $ | $ | ||||||
| Bad debt expense | ||||||||
| Deductions | ( | ) | ( | ) | ||||
| Allowance for doubtful accounts, end of year | $ | $ | ||||||
Retainage Receivables
At December 31, 2021, the Company had $
Inventories
Inventories consist of finished and unfinished products and are stated at the lower of cost or market through either the first-in, first-out (FIFO) method as a cost flow convention or through the moving average cost method.
At December 31, 2021, and 2020, inventory is presented on the balance sheet net of reserves. The Company provides reserves for inventories estimated to be excess, obsolete or unmarketable. The Company’s estimation process for assessing the net realizable value is based upon its known backlog, projected future demand, historical usage and expected market conditions. Inventory by category consists of:
| (In thousands) | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Work-in-process | ||||||||
| Total inventories | $ | $ | ||||||
Property and equipment, less accumulated depreciation
Land is recorded at cost and includes expenditures made to ready it for use. Land is considered to have an infinite useful life.
Buildings and improvements are recorded at cost.
Furniture, vehicles, and equipment are recorded at cost and include major expenditures, which increase productivity or substantially increase useful lives.
Leasehold improvements are recorded at cost and are depreciated over the lesser of the lease term or estimated useful life.
The cost of buildings, improvements, furniture, vehicles, and equipment is depreciated over the estimated useful lives of the related assets.
Depreciation is computed using the straight-line method for financial reporting purposes. The estimated useful lives for buildings, improvements, furniture, vehicles, and equipment are as follows:
| Estimated | ||||
| Useful | ||||
| Life (in years) | ||||
| Leasehold improvements | ||||
| Equipment | ||||
Maintenance, repairs and minor replacements are charged to expenses when incurred. When buildings, improvements, furniture, equipment and vehicles are sold or otherwise disposed of, the asset and related accumulated depreciation are removed and any gain or loss is included in the statement of operations.
Long-Lived Assets Including Finite-Lived Intangible Assets
Long-lived assets including finite-lived intangible assets are periodically reviewed for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. In performing the review for recoverability, the future cash flows expected to result from the use of the asset and its eventual disposition are estimated. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the long-lived asset, an impairment loss is recognized as the excess of the carrying amount over the fair value. Otherwise, an impairment loss is not recognized. Management estimates the fair value and the estimated future cash flows expected. Any changes in these estimates could impact whether there was impairment and the amount of the impairment.
Identifiable Finite-lived Intangible Assets
Intangible assets are stated at cost net of accumulated amortization and impairment. Finite-lived intangible assets includes customer relationships, technology know how, software, noncompete agreements, order backlog, and trade name. The fair value for intangible assets acquired through acquisitions is measured at the time of acquisition utilizing the following inputs, as needed:
| 1. | Inputs used to measure fair value are unadjusted quoted prices available in active markets for the identical assets or liabilities if available. |
| 2. | Inputs used to measure fair value, other than quoted prices included in 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets. This includes assets and liabilities valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full life of the asset. |
| 3. | Inputs used to measure fair value are unobservable inputs supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. |
| 4. | Expert appraisal and fair value measurement as completed by third-party experts. |
| Estimated | ||||
| Useful | ||||
| Life (in years) | ||||
| Finite-lived intangible assets | ||||
| Order backlog | ||||
| Customer Relationships- Front Line Power Construction | ||||
| Trade name - Reach Construction Group | ||||
| Customer relationships - Reach Construction Group, LLC | ||||
| Non-compete agreements - Reach Construction Group, LLC | ||||
| Customer Relationships - Gibson Technical Services | ||||
| Customer Relationships - IMMCO | ||||
| Technology- Know How | ||||
| Non-compete agreements-GTS | ||||
| Software, at cost | ||||
The Company amortizes the intangible assets that are subject to amortization on a straight line basis, which the company believes approximates the estimated consumption of their economic benefits. Intangible assets are reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for impairment testing of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.
Indefinite-Lived Intangibles and Goodwill Assets
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, ‘‘Business Combinations,’’ where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The unit of accounting for goodwill is at a level of the entity referred to as a reporting unit. Goodwill is assigned to specific reporting units for purposes of the impairment assessments. As of December 31, 2021, the Company has five operating segments that are also considered reporting units for goodwill impairment testing. The five operating segments are, Front Line Power Construction, LLC, Orbital Power Inc., Eclipse Foundation Group, Orbital Solar Services, Gibson Technical Services, which includes IMMCO, Inc. and Full Moon Telecom, LLC.
Annual Test. The Company tests for impairment of indefinite-lived intangibles and Goodwill in the second quarter of each year and whenever events or circumstances indicate that the carrying amount of Goodwill exceeds its fair value and may not be recoverable. The Company’s qualitative assessment for indefinite-lived assets at May 31, 2021, followed the guidance in ASC 350-30-35-18A and 18B. In addition, since the May 31st assessment was the first year following the acquisition of Orbital Solar Services, the Company elected to perform a third-party quantitative review. Following the quantitative and qualitative review, no impairment was identified.
Under current accounting guidance, the Company is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance includes a number of factors to consider in conducting the qualitative assessment. The Company tests for goodwill impairment in the second quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.
As detailed in ASC 350-20-35-3A, in performing its testing for Goodwill and indefinite lived intangible as of May 31, 2021, for the GTS reporting unit, management completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting unit is less than its carrying amount, including Goodwill. To complete the qualitative review, management follows the steps in ASC 350-20-35-3C to evaluate the fair values of the Goodwill and indefinite lived intangible and considers all known events and circumstances that might trigger an impairment of Goodwill or the indefinite lived intangible. At interim dates, the Company reviewed for triggering events. The Company did not identify any triggering events and no impairments to goodwill or indefinite lived assets were recorded.
Accrued expenses
Accrued expenses are liabilities that reflect expenses on the statement of operations that have not been paid or recorded in accounts payable at the end of the period. At December 31, 2021 and December 31, 2020, accrued expenses of $
| (In thousands) | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued compensation | $ | $ | ||||||
| Working capital adjustment on Front Line Power Construction acquisition | ||||||||
| Accrued interest | ||||||||
| Accrued taxes payable | ||||||||
| Other accrued expenses | ||||||||
| Total accrued expense | $ | $ | ||||||
Financial instrument liability
The Company evaluates embedded conversion features pursuant to FASB Accounting Standards Codification No. 815 (‘‘FASB ASC 815’’), ‘‘Derivatives and Hedging,’’ which requires a periodic valuation of the fair value of derivative instruments and a corresponding recognition of liabilities associated with such derivatives. The Company has limited involvement with derivative instruments and does not trade them. In November 2021, the Company identified a subscription agreement with lenders of the $
Stock-Based Compensation
The Company records its stock-based compensation expense under its stock option plans and also issues stock for services. The Company accounts for stock-based compensation using FASB Accounting Standards Codification No. 718 (‘‘FASB ASC 718’’), ‘‘Compensation – Stock Compensation.’’ FASB ASC 718 requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related service period.
Stock bonuses and restricted stock units ("RSU"s) issued to employees are recorded at fair value using the market price of the stock on the date of grant and expensed over the service period or immediately if fully vested on date of issuance. Employee stock options are recorded at fair value using the Black-Scholes or binomial option pricing model. The underlying assumptions in the Black-Scholes and binomial option pricing models used by the Company are taken from publicly available sources including: (1) volatility and grant date stock price, which are sourced from historic stock price information; (2) the appropriate discount rates are sourced from the United States Federal Reserve; and (3) other inputs are determined based on previous experience and related estimates. With regards to expected volatility, the Company utilizes an appropriate period for historical share prices for Orbital Energy Group that best reflect the expected volatility for determining the fair value of its stock options.
See Note 10 Stockholders' Equity for additional disclosure and discussion of the employee stock plan and activity.
Common stock and stock options are also recorded on the basis of their fair value, as required by FASB ASC 718, which is measured as of the date required by FASB ASC 718. In accordance with FASB ASC 718, the stock options or common stock warrants are valued using the Black-Scholes or binomial option pricing model on the basis of the market price of the underlying common stock on the ‘‘valuation date,’’ which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the performance completion date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed based off an estimate of the fair value of the stock award as valued under the Black-Scholes option pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
Common stock issued to other than employees or directors subject to performance (performance based awards) require interpretation when the counterparty’s performance is complete based on delivery, or other relevant performance criteria in accordance with the relevant agreement. When performance is complete, the common stock is issued and the expense recorded on the basis of their value as required by FASB ASC 718 on the date the performance requirement is achieved.
Defined Contribution Plans
The Company has a 401(k) retirement savings plan that allows employees to contribute to the plan after they have completed 60 days of service and are 18 years of age. The Company matches the employee's contribution up to
Revenue Recognition
The Electric Power segment provides full service building, maintenance and support to the electrical power distribution, transmission, substation, and emergency response sectors of North America through Front Line Power, Orbital Power Services and Eclipse Foundation. The Telecommunications segment composed of Gibson Technical Services and subsidiaries provides technical implementation, design, maintenance, emergency and repair support services in the broadband, wireless, and outside plant and building technologies. The Renewables segment, Orbital Solar Services, provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar and community solar construction.
For our construction contracts, revenue is generally recognized over time. Our fixed price and unit-price construction projects generally use a cost-to-cost input method or an output method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Under the output method, progress towards completion is measured based on units of work completed based on the contractual pricing amounts. Under the output method, revenue is determined by actual work achieved. For jobs under the output method, revenue is earned based on each unit in the contract completed. We construct comprehensive revenue calculations based on quantifiable measures of actual units completed multiplied by the agreed upon contract prices per item completed. Revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service.
The timing of revenue recognition also depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts where the Company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced or for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. As discussed above, these performance obligations use a cost-to-cost input method or output method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date and we are not enhancing a customer-controlled asset, we recognize revenue at the point in time when control is transferred to the customer.
For our service contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term.
For certain of our revenue streams, such as call-out repair and service work, and outage services, that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an input method as the customer receives and consumes the benefits of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicates a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable are recognized in the period when our right to consideration is unconditional. We also assess our customers' ability and intention to pay, which is based on a variety of factors, including our historical payment experience with and the financial condition of our customers. Payment terms and conditions vary by contract, and are within industry standards across our business lines. Accounts receivable are recognized net of an allowance for doubtful accounts.
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our construction projects when revenue recognized under the output method or the input cost-to-cost method exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Also included in contract assets are retainage receivables and amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to both scope and/or price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Consolidated Balance Sheets.
Contract liabilities from our construction contracts occur when amounts invoiced to our customers exceed revenues recognized under the input cost-to-cost or output method of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts and provision for future contract losses for those contracts estimated to close in a gross loss position. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue.
Balances and activity in the current contract liabilities as of and for the years ended December 31, 2021 and 2020 is as follows:
| For the Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Total contract liabilities - January 1 | $ | $ | ||||||
| Contract liability additions acquired through acquisition | ||||||||
| Contract additions, net | ||||||||
| Contract settlements | ( | ) | ||||||
| Revenue recognized | ( | ) | ||||||
| Total contract liabilities - December 31 | $ | $ | ||||||
Performance Obligations
Remaining Performance Obligations
Remaining performance obligations, represents the transaction price of contracts with customers for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of December 31, 2021, the Company's remaining performance obligations are generally expected to be filled within the next 12 months. For the contracts that are greater than 12 months the Company has approximately $
Any adjustments to net revenues, cost of revenues, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks. Changes in estimates of net revenues, cost of revenues and the related impact to operating income are recognized on a cumulative catch-up basis in the period they become known, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.
Performance Obligations Satisfied Over Time
To determine the proper revenue recognition method for our contracts satisfied over time, we evaluate whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to separate the single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.
For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In cases where we do, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized customer specific solution, and in these cases we typically use the output method or the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
Variable Consideration
The nature of our contracts gives rise to several types of variable consideration. In rare instances, we include in our contract estimates, additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider 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. These amounts are included in our calculation of net revenue recorded for our contracts and the associated remaining performance obligations. Additionally, if the contract has a provision for liquidated damages in the case that the Company misses a timing target, or fails to meet any other contract benchmarks, the Company accounts for those estimated liquidated damages as variable consideration and will adjust revenue accordingly with periodic updates to the estimated variable consideration as the job progresses. Liquidated damages are recognized as variable consideration and are estimated based on the most likely amount that is deemed probable of realization.
Significant Judgments
Our contracts with certain customers may be subject to contract cancellation clauses. Contracts with other cancellation provisions may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations and whether a contract should be accounted for over time or on a completed contract basis. Revenue is recognized for certain projects over time using cost-based input methods, in which significant judgement is required to evaluate assumptions including the amount of total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.
At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their stand-alone selling price are accounted for as a separate contract. For contract modifications where goods and services are not determined to be distinct and sold at their stand-alone selling price, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. For, example, we consider many of our contracts that coordinate multiple products into an integrated system to be a single performance obligation, while the same products would be considered separate performance obligations if not so integrated.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, our contracts do not include a significant financing component.
The following table presents our revenues disaggregated by timing of revenue recognition:
| (In thousands) | For the Year Ended December 31, 2021 | |||||||||||||||
| Telecommunications | Electric Power | Renewables | Total | |||||||||||||
| Revenues recognized at point in time | $ | $ | $ | $ | ||||||||||||
| Revenues recognized over time | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| (In thousands) | For the Year Ended December 31, 2020 | |||||||||||||||
| Telecommunications | Electric Power | Renewables | Total | |||||||||||||
| Revenues recognized at point in time | $ | $ | $ | $ | ||||||||||||
| Revenues recognized over time | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
The following table presents our revenues disaggregated by region:
| (In thousands) | For the Year Ended December 31, 2021 | |||||||||||||||
| Telecommunications | Electric Power | Renewables | Total | |||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| (In thousands) | For the Year Ended December 31, 2020 | |||||||||||||||
| Telecommunications | Electric Power | Renewables | Total | |||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Advertising
The costs incurred for producing and communicating advertising are charged to operations as incurred. Advertising expense for the years ended December 31, 2021 and 2020 were $
Income Taxes
Income taxes are accounted for under the asset and liability method of FASB Accounting Standards Codification No. 740 (‘‘FASB ASC 740’’), ‘‘Income Taxes.’’ Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that management believes it is more likely than not that such deferred tax assets will not be realized.
Valuation allowances have been established against all domestic based deferred tax assets and U.K. based deferred tax assets due to uncertainties in the Company’s ability to generate sufficient taxable income in future periods to make realization of such assets more likely than not. In future periods, tax benefits and related domestic and U.K. deferred tax assets will be recognized when management considers realization of such amounts to be more likely than not. In addition, the Company has provided for a partial valuation allowance in Canada. The Company has not provided for valuation allowances on deferred tax assets in any other jurisdiction.
The Company recognizes interest and penalties, if any, related to its tax positions in income tax expense.
Orbital Energy Group files consolidated income tax returns with its U.S. based subsidiaries for federal and many state jurisdictions in addition to separate subsidiary income tax returns in Japan, the United Kingdom and Canada. After the sale of CUI Japan in September 2020, and the final disposition of CUI-Canada assets and liabilities, the Company will only be required to file returns in the U.S. and the United Kingdom. As of December 31, 2021, the Company is not under examination by any income tax jurisdiction. The Company is no longer subject to U.S. examination for years prior to 2017.
Net Loss per Share
In accordance with FASB Accounting Standards Codification No. 260 (‘‘FASB ASC 260’’), ‘‘Earnings per Share,’’ basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of diluted shares outstanding during the period calculated using the treasury stock method. Due to the Company’s net loss in 2021 and 2020, the assumed exercise of stock options using the treasury stock method would have had an antidilutive effect and therefore all options for each of the two years were excluded from the calculation of diluted net loss per share. Accordingly, diluted net loss per share is the same as basic net loss per share for 2021 and 2020.
The following table summarizes the number of stock options outstanding:
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| Options, outstanding | ||||||||
Any common shares issued as a result of stock options would come from newly issued common shares as granted under our equity incentive plans.
The following is the calculation of basic and diluted earnings per share:
| For the Years Ended December 31, | ||||||||
| (In thousands, except dollars per share) | 2021 | 2020 | ||||||
| Continuing operations: | ||||||||
| Loss from continuing operations, net of income taxes | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations: | ||||||||
| Income from discontinued operations, net of income taxes | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted average number of shares outstanding | ||||||||
| Loss from continuing operations per common share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Earnings from discontinued operations - basic and diluted | ( | ) | ( | ) | ||||
| Loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
Foreign Currency Translation
The financial statements of the Company's foreign offices have been translated into U.S. dollars in accordance with FASB ASC 830, ‘‘Foreign Currency Matters’’ (FASB ASC 830). All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Statement of Operations amounts have been translated using an appropriately weighted average exchange rate for the year. The translation gains and losses resulting from the changes in exchange rates during 2021 and 2020 have been reported in accumulated other comprehensive income (loss), except for gains and losses resulting from the translation of short-term intercompany receivables and payables, which are included in earnings for the period.
Segment Reporting
Operating segments are defined in accordance with ASC 280-10 as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The measurement basis of segment profit or loss is income (loss) from operations. Management has identified operating segments based on the activities of the Company in accordance with ASC 280-10. These operating segments have been aggregated into reportable segments. The three reportable segments are Electric Power, Telecommunications, and Renewables and an Other category. The Electric Power segment consists of Front Line Power Construction, LLC based in Houston, Texas, Orbital Power Services based in Dallas, Texas, and Eclipse Foundation Group based in Gonzales, Louisiana. The segment provides comprehensive solutions to customers in the electric power industries. Front Line Power, LLC is a Houston-based full-service electrical infrastructure service company that provides construction, maintenance, and emergency response services for customers since 2010. Services performed by Orbital Power Services generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities as well as emergency restoration services, including the repair of infrastructure damaged by inclement weather. Eclipse Foundation Group, which began operations in January 2021, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation, industrial, communication towers and disaster restoration market sectors, with expertise in water, marsh and rock terrains.
The Telecommunications segment is made up of Gibson Technical Services, Inc. (“GTS”) (acquired April 13, 2021) GTS is an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990 and is the parent of the following companies:
| o | IMMCO, Inc. (acquired July 28, 2021), which includes two Indian subsidiaries and is an Atlanta-based, full-service telecom engineering and network design company providing diversified engineering services and customized software solutions to a global customer base since 1992. | |
| o | Full Moon Telecom, LLC (acquired October 22, 2021) a Florida-based telecommunications services provider that offers an extensive array of wireless services capabilities and experience including Layer 2/Layer 3 Transport, Radio Access Network ("RAN") Integrations, test and turn-up of Small Cell systems and Integration/Commissioning of Distributed Antenna ("DAS") systems. |
The Renewables segment consists of Orbital Solar Services based in Sanford, North Carolina. Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction. The Company serves a wide variety of project types, including commercial, substation, solar farms and public utility projects.
The Other category is made up primarily of the Company's corporate activities. This category does not include any operating segments and does not generate revenue. In addition, Orbital’s integrated operations and common administrative support for its operating units require that certain allocations be made to determine segment profitability, including allocations of shared and indirect costs (e.g., insurance costs) and general and administrative costs such as stock bonuses, and professional fees, including audit fees. Certain corporate costs are not allocated and include corporate employees’ salaries and benefits, Board of Director fees and costs, certain legal fees, due diligence costs related to prospective acquisitions, and regulatory costs associated with being a publicly traded company. Unallocated corporate expenses and costs associated with discontinued operations are included in the all-other category.
The following information represents segment activity as of and for the year ended December 31, 2021:
| (In thousands) | Telecommunications | Electric Power | Renewables | Other | Total | |||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||||||
| Depreciation and amortization (1) | ||||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Segment assets (2) | ||||||||||||||||||||
| Other intangibles assets, net | ||||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Expenditures for segment assets (3) | ||||||||||||||||||||
The following information represents segment activity as of and for the year ended December 31, 2020:
| (In thousands) | Telecommunications | Electric Power | Renewables | Other | Total | |||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | |||||||||||||||
| Depreciation and amortization (1) | ||||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Segment assets (2) | ||||||||||||||||||||
| Other intangibles assets, net | ||||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Expenditures for segment assets (3) | ||||||||||||||||||||
| (1) | For the years ended December 31, 2021 and 2020, depreciation and amortization totals included $ |
| (2) | Other category includes assets held for sale of the discontinued Orbital Gas subsidiaries. |
| (3) | Includes purchases of property and equipment and purchases of other intangible assets. |
The following information represents revenue by country:
| For the Years Ended December 31, | ||||||||||||||||
| (In thousands) | 2021 | 2020 | ||||||||||||||
| USA | $ | % | $ | % | ||||||||||||
| All Others | % | % | ||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
The Company's long-lived assets are located in the U.S.
Adoption of new accounting standards
On January 1, 2021, the Company adopted ASU No. 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides optional expedients and exceptions related to contract modifications and hedge accounting to address the transitions from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. ASU 2020-04 also temporarily allows hedge relationships to continue without de-designation upon changes due to reference rate reform. The standard is effective upon issuance and can be applied as of March 12, 2020 through December 31, 2022. There is not a material effect on the Company's financial statements due to the Company not having any current financial instruments that are affected by this new guidance.
On January 1, 2021, the Company adopted ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives, and is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. The amendments in ASU 2020-01 are effective for the Company's 2021 fiscal year, including interim periods. The new guidance does not currently have a material impact on the Company's consolidated financial statements due to the Company currently not having any equity-method investments or any derivative instruments.
On January 1, 2021, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes, which is guidance intended to simplify various aspects related to accounting for income taxes, eliminate certain exceptions within ASC 740 and clarify certain aspects of the current guidance to promote consistency among reporting entities. The pronouncement is effective for the Company's 2021 fiscal year, including interim periods. The ASU does not have a material impact on the Company's consolidated financial statements.
Recent Accounting Pronouncements
On October 28, 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance will require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. This standard was designed to provide consistent recognition and measurement guidance for revenue contracts with customers. Legacy guidance requires entities to record contract assets and contract liabilities acquired to be recorded at fair value. The amendments will be effective for the Company beginning for fiscal years beginning after December 15, 2022. Early adoption is allowed. If an entity early adopts, the entity would be required to apply the new guidance to all acquisitions made in the year of the early adoption. The Company is still reviewing the standard and as of the reporting date of this filing has not elected to early adopt.
3. INVESTMENTS AND FAIR VALUE MEASUREMENTS
The Company’s fair value hierarchy for its cash equivalents, marketable securities and financial instruments as of December 31, 2021 and December 31, 2020, respectively, was as follows:
| (In thousands) |
||||||||||||||||
| December 31, 2021 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| Contingent Consideration |
$ | $ | $ | $ | ||||||||||||
| Financial instrument liability |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
| December 31, 2020 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| Convertible note payable |
$ | $ | $ | $ | ||||||||||||
| Contingent Consideration |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
| Fair Value Measurements |
||||
| Using Significant Unobservable Inputs (Level 3 - recurring basis) |
||||
| (In thousands) |
Convertible Note Payable |
|||
| Balance at December 31, 2020 |
$ | |||
| Loss on extinguishment on amendment to remove convertible feature |
||||
| Amortization of original issue discount |
||||
| Accrued interest |
||||
| Extinguishment of note |
( |
) | ||
| Balance at December 31, 2021 |
$ | |||
| Fair Value Measurements |
||||
| Using Significant Unobservable Inputs (Level 3 - recurring basis) |
||||
| (In thousands) |
Contingent Consideration |
|||
| Balance at December 31, 2019 |
$ | |||
| Contingent consideration valued at acquisition of Reach Construction Group, LLC |
||||
| Fair Value adjustment |
||||
| Balance at December 31, 2020 |
$ | |||
| Balance at December 31, 2021 |
$ | |||
The Company evaluated the contingent consideration for fair value as of December 31, 2021 using a third-party valuation specialist. Significant unobservable inputs include projected future EBITDA, future estimated growth rate, estimated discount rate, and estimated volatility. The fair value of the contingent consideration did not change significantly from 2020 to 2021 and as a result, no adjustment was recorded.
| Fair Value Measurements |
||||
| Using Significant Unobservable Inputs (Level 3 - recurring basis) |
||||
| (In thousands) |
Convertible Note |
|||
| Receivable |
||||
| Balance at December 31, 2020 |
$ | |||
| Fair value of Financial instrument liability at inception |
||||
| Fair value adjustment |
( |
) | ||
| Balance at December 31, 2021 |
$ | |||
In conjunction with the Company issuing $
There were no transfers between Level 3 and Level 2 in 2021 as determined at the end of the reporting period.
The fair values of the reporting units subject to the Company’s quantitative impairment analysis were determined utilizing a blend of a market and an income approach to determine the estimated fair values of the reporting units, as discussed in Note 2. The fair value measurements and models were classified as non-recurring Level 3 measurements.
Investment in VPS
As of December 31, 2021, the Company had a minority interest in Virtual Power Systems ("VPS"). Prior to the third quarter of 2020, based on its equity ownership and that the Company maintained a board seat and participated in operational activities of VPS, the Company maintained significant influence to account for the investment as an equity-method investment. Under the equity method of accounting, results are not consolidated, but the Company records a proportionate percentage of the profit or loss of VPS as an addition to or a subtraction from the VPS investment asset balance. The VPS investment basis at December 31, 2021 and December 31, 2020 was $
The Company made a purchase of a convertible note receivable for $
4. PROPERTY AND EQUIPMENT, NET
Property and equipment from continuing operations is summarized as follows:
| At December 31, |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Leasehold improvements |
$ | $ | ||||||
| Equipment |
||||||||
| Property and equipment, gross |
||||||||
| Less accumulated depreciation |
( |
) | ( |
) | ||||
| Property and equipment, net |
$ | $ | ||||||
Depreciation expense from continuing operations for the years ended December 31, 2021 and 2020 was $
During the year ended December 31, 2021, the Company's continuing operations disposed of $
During the year ended December 31, 2020, the Company's continuing operations disposed of $
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company records goodwill associated with its acquisitions of businesses when the consideration paid exceeds the fair value of the net tangible and identifiable intangible assets acquired. Goodwill balances are evaluated for potential impairment on an annual basis. The current guidance requires the Company to perform an annual impairment test of our goodwill or at an interim period if there is an event that occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We are required to perform our annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. As of December 31, 2021, the Company has five operating segments that are also considered reporting units for goodwill impairment testing. The five operating segments are: Front Line Power Construction, LLC, Orbital Power Inc., Eclipse Foundation Group, Orbital Solar Services, Gibson Technical Services, which includes IMMCO, Inc. and Full Moon Telecom, LLC. The five operating segments are grouped into three reportable segments, Telecommunications (GTS Renewables (OSS), and Electric Power (FLP, OPI, and EFG).
We would be required to recognize an impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value up to but not to exceed the amount of the goodwill. Based on management's evaluation, there were no such circumstances at December 31, 2021 or 2020 that would require us to perform an interim goodwill impairment test. Upon acquisition of Reach Construction Group, LLC, (now known as Orbital Solar Services ("OSS"), considered both a reporting unit and operating segment and included in the Renewables segment, the Company recorded $
Throughout 2021, the Company acquired three companies that make up the Telecommunication reportable segment. Each company acquired, Gibson Technical Services, IMMCO, Inc., and Full Moon Telecom, LLC, is considered a reporting unit that together aggregate into one integrated operating segment called Gibson Technical Service. Goodwill for these three reporting units will be aggregated together and recognized at the operating segment level Gibson Technical Services.
Upon acquisition of Gibson Technical Services, the Company recorded $
Upon acquisition of IMMCO, Inc., the Company recorded $
Upon acquisition of Full Moon Telecom, LLC, the Company recorded $
Upon acquisition of Front Line Power Construction, LLC, which is considered both a reporting unit and an operating segment, the Company recorded $
For Orbital Solar Systems, (formally known as Reach Construction), management completed a quantitative analysis to determine potential impairment at the May 31st, 2021 annual impairment test date. Goodwill in the Telecommunications segment was qualitatively reviewed due to the fact that this review was performed within 50 days of the initial valuation of GTS. The qualitative review was performed to determine whether it was more likely than not that the fair value of its reporting unit was less than its carrying amount, including goodwill. To complete the qualitative review, management evaluated the fair value of the Goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. Management determined that no additional testing was necessary and no impairment was necessary. During management's review of goodwill as of December 31, 2021, the Company determined that there were not indicators present and no triggering events to suggest that it was more likely than not that the fair value of each reporting unit and each indefinite-lived intangible was less than its carrying amount and thus no impairment was necessary.
Other intangible assets
At December 31, 2021 and 2020, the gross carrying amount and accumulated amortization of intangible assets, other than goodwill, are as follows:
| Finite-lived intangible assets (in thousands) |
(In years) | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| Telecommunications |
Estimated Useful Life (in years) |
Weighted average remaining amortization period |
Gross Carrying Amount |
Accumulated Amortization |
Identifiable Intangible Assets, less Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Identifiable Intangible Assets, less Accumulated Amortization |
|||||||||||||||||||||||
| Customer Relationships-GTS |
$ | $ | ( |
) | $ | $ | $ | $ | |||||||||||||||||||||||
| Customer Relationships-IMMCO |
( |
) | |||||||||||||||||||||||||||||
| Customer Relationships - Full Moon |
( |
) | |||||||||||||||||||||||||||||
| Technology - Know How |
( |
) | |||||||||||||||||||||||||||||
| Software-IMMCO |
( |
) | |||||||||||||||||||||||||||||
| Non-compete agreements-GTS |
( |
) | |||||||||||||||||||||||||||||
| Total Telecommunications |
( |
) | |||||||||||||||||||||||||||||
| Electric Power |
|||||||||||||||||||||||||||||||
| Order backlog |
( |
) | |||||||||||||||||||||||||||||
| Customer relationships - Front Line |
( |
) | |||||||||||||||||||||||||||||
| Total Electric Power |
( |
) | |||||||||||||||||||||||||||||
| Renewables |
|||||||||||||||||||||||||||||||
| Customer Relationships |
( |
) | ( |
) | |||||||||||||||||||||||||||
| Trade name - Reach Construction Group |
— | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Non-compete agreements |
( |
) | ( |
) | |||||||||||||||||||||||||||
| Total Renewables |
( |
) | ( |
) | |||||||||||||||||||||||||||
| Other category |
|||||||||||||||||||||||||||||||
| Computer software |
( |
) | ( |
) | |||||||||||||||||||||||||||
| Product certifications |
— | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Total Other category |
( |
) | ( |
) | |||||||||||||||||||||||||||
| Total identifiable finite-lived other intangible assets |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Identifiable indefinite-lived other intangible assets |
|||||||||||||||||||||||||||||||
| Electric Power |
|||||||||||||||||||||||||||||||
| Trade name - Front line |
— | — | |||||||||||||||||||||||||||||
| Telecommunications |
|||||||||||||||||||||||||||||||
| Trade name - GTS |
— | — | |||||||||||||||||||||||||||||
| Trade name - IMMCO |
— | — | |||||||||||||||||||||||||||||
| Trade name - Full Moon |
— | — | |||||||||||||||||||||||||||||
| Total Telecommunications |
— | — | |||||||||||||||||||||||||||||
| Total identifiable indefinite-lived other intangible assets |
— | — | |||||||||||||||||||||||||||||
| Total identifiable other intangible assets |
( |
) | ( |
) | |||||||||||||||||||||||||||
Intangible asset amortization by category was as follows:
| For the Years Ended December 31, |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Trademarks and trade name |
$ | $ | ||||||
| Customer lists/relationships |
||||||||
| Technology-Know How |
||||||||
| Computer software |
||||||||
| Noncompete agreements |
||||||||
| Order Backlog |
||||||||
| Intangibles held by discontinued operations |
||||||||
| Total amortization |
$ | $ | ||||||
Estimated future amortization by category of finite-lived intangible assets at December 31, 2021 was as follows:
| For the Years Ended December 31, |
||||||||||||||||||||||||||||
| 2027 and |
||||||||||||||||||||||||||||
| (In thousands) |
2022 |
2023 |
2024 |
2025 |
2026 |
thereafter |
Totals |
|||||||||||||||||||||
| Trademarks and trade name |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Customer lists/relationships |
||||||||||||||||||||||||||||
| Technology-Know How |
||||||||||||||||||||||||||||
| Computer software |
||||||||||||||||||||||||||||
| Order Backlog |
||||||||||||||||||||||||||||
| Non-compete agreements |
||||||||||||||||||||||||||||
| Total amortization |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Management reviews other intangible assets for impairment when facts or circumstances suggest. As of December 31, 2021, management has evaluated the remaining finite-lived and indefinite-lived intangible assets and believes
The following table reflects the carrying amount of goodwill as of December 31, 2021 and 2020, and the 2021 activity.
| (In thousands) |
Telecommunications |
Electric Power |
Renewables |
Other |
Total |
|||||||||||||||
| Balance, December 31, 2020 |
$ | — | $ | $ | $ | $ | ||||||||||||||
| Acquisition of Gibson Technical Services |
||||||||||||||||||||
| Acquisition of IMMCO Inc. |
||||||||||||||||||||
| Acquisition of Full Moon Telecom, LLC |
||||||||||||||||||||
| Acquisition of Front Line Power Construction, LLC |
||||||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | $ | |||||||||||||||
6. INSTRUMENTS AND RISK MANAGEMENT
The Company has limited involvement with derivative instruments and does not trade them.
At December 31, 2021 and 2020, the Company had
7. NOTES PAYABLE
Notes payable is summarized as follows:
| As of December 31, |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Syndicated debt (1) |
$ | $ | ||||||
| Seller Financed notes payable - Front Line Power Construction, LLC acquisition (2) |
||||||||
| Note payable - financing notes (3) |
||||||||
| Pay-check protection loans (4) |
||||||||
| Seller financed notes payable - Reach Construction acquisition (5) |
||||||||
| Vehicle and equipment loans (6) |
||||||||
| Non-recourse payable agreements (7) |
||||||||
| Notes payable - Institutional investor (8) |
||||||||
| Conditional settlement note payable agreement (9) |
||||||||
| Full Moon - loan to prior owner (10) |
||||||||
| Subtotal |
||||||||
| Unamortized debt discount and debt issuance costs |
( |
) | ( |
) | ||||
| Total long-term debt |
||||||||
| Less short term notes and current maturities of long term notes payable |
( |
) | ( |
) | ||||
| Notes payable, less current portion |
$ | $ | ||||||
| (1) |
On November 17, 2021, the Company entered into a credit agreement and associated documents (the “Credit Agreement”) with Alter Domus (US), LLC (“Alter Domus”), as administrative agent and collateral agent and various lenders (the “Lenders”) in order to enable the Company to finance the acquisition of Front Line Power Construction, LLC. The Lenders made a Term Loan to Front Line in the initial principal amount of $ |
| (2) |
On November 17, 2021, the Company entered into two unsecured promissory notes, one with Kurt A Johnson, Jr, for $ |
| (3) | Note payable with an original balance for $ |
| (4) | On April 30, 2020 and May 2, 2020, the Company entered into unsecured loans in the aggregate principal amount of approximately $ |
| (5) | Includes two seller-financed notes payable, one for $ |
| (6) | Includes vehicle and equipment loans with interest rates ranging from |
| (7) | On September 1st and 2nd, 2020, the Company entered into non-recourse agreements for the sale of future receipts to C6 Capital. The Company received net cash proceeds of $ |
| (8) | On November 13, 2020, the Company completed a Securities Purchase Agreement with an institutional investor, pursuant to which the Company agreed to issue to the Investor an unsecured convertible instrument in the principal amount of $
In July 2021, the Company issued On March 23, 2021, the Company completed a second note payable with the same institutional investor with a face amount of $
On May 11, 2021, the Company completed a third note payable agreement with the institutional investor with a face amount of $
On December 20, 2021, the Company completed a fourth note payable agreement with the institutional investor with a face amount of $
For Streeterville payments made by exchanging stock for payments against the debt in 2021, the Company recorded a total loss of $ |
| (9) | In October 2020, the Company entered into a conditional settlement agreement with a subcontractor to make payments of $ |
|
|
|
| (10) | Represents Full Moon Telecom, LLC opening balance sheet loan to prior Full Moon Telecom, LLC owner. |
The following shows the elements of the Non-recourse payable agreements:
| (In thousands) |
||||||||||||||||||||||||
| Face Value |
Repayments |
Loan Origination Fees |
Discounts |
Amortization of Discounts |
Balance as of December 31, 2021 |
|||||||||||||||||||
| Non-recourse payable agreements |
$ | $ | ( |
) | ( |
) | $ | ( |
) | $ | $ | |||||||||||||
The following table details the maturity of the notes payable for Orbital Energy Group, Inc.:
| (In thousands) |
||||
| As of December 31, |
||||
| 2021 |
||||
| 2022 |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Less interest portion of payments |
( |
) | ||
| Total |
$ | |||
8. LINE OF CREDIT
On August 19, 2021, the Company's GTS subsidiary entered into a $
With the acquisition of Reach Construction Group, LLC in April 2020, the Company acquired with it a line of credit. The Company had a revolving line of credit with Truist bank with a balance of $
9. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company may be involved in certain legal actions arising from the ordinary course of business. While it is not feasible to predict or determine the outcome of these matters, we do not anticipate that any of these matters, or these matters in the aggregate, will have a material adverse effect on the financial position or results of operations.
Off-Balance Sheet Arrangements - Performance and Payment Bonds and Parent Guarantees
In the ordinary course of business, Orbital Energy Group and its subsidiaries are required by certain customers to provide performance and payment bonds for contractual commitments related to its projects. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will pay its subcontractors and vendors. If the Company fails to perform under a contract or to pay its subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for expenses or outlays it incurs. The bonds will remain in place as the Company completes projects and resolves any disputed matters with the customers, vendors and subcontractors related to the bonded projects. As of December 31, 2021 the total amount of the outstanding performance and payment bonds was approximately $
Additionally, from time to time, we guarantee certain obligations and liabilities of our subsidiaries that may arise in connection with, among other things, contracts with customers, equipment lease obligations, and contractor licenses. These guarantees may cover all of the subsidiary’s unperformed, undischarged and unreleased obligations and liabilities under or in connection with the relevant agreement. For example, with respect to customer contracts, a guarantee may cover a variety of obligations and liabilities arising during the ordinary course of the subsidiary’s business or operations, including, among other things, warranty and breach of contract claims, third-party and environmental liabilities arising from the subsidiary’s work and for which it is responsible, liquidated damages, or indemnity claims.
Contingent Liabilities
Orbital Energy Group, Inc. is occasionally party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, negligence or gross negligence and/or property damages, wage and hour and other employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.
Regarding all lawsuits, claims and proceedings, Orbital Energy Group, Inc. records a reserve when it is probable that a liability has been incurred and the loss can be reasonably estimated. Orbital Energy Group, Inc. discloses matters for which management believes a material loss is at least reasonably possible. None of these proceedings are expected to have a material adverse effect on Orbital Energy Group, Inc.’s consolidated financial position, results of operations or cash flows. In all instances, management has assessed the matter based on current information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation.
10. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Common Stock Dividend Restrictions
As of December 31, 2021, there are no restrictions on common stock dividends. Also, at December 31, 2021 and 2020, retained earnings were not restricted upon involuntary liquidation.
S-3 registration and share issuances
The Company filed an S-3 registration statement on July 17, 2020 containing a prospectus that was effective in September 2020. The Company utilized this filing in January 2021 to issue common stock for $
Stock Appreciation Rights ("SARS")
During the years ended December 31, 2021 and 2020, the Company issued SARS to five key executives in 2021 and four key executives in 2020. The number of SARS granted to each of the executives equated to the corresponding dollar amount of a portion of the cash bonus otherwise due to them pursuant to their employment agreements. The SARS are subject to acceleration upon a change in control or termination of the executive’s employment with the Company in certain circumstances. SARS granted in 2020 vest over
| 2021 | 2020 | |||||||
| Month Issued | April 2021 | June 2020 | ||||||
| Number Issued | ||||||||
| Interest Rate | % | % | ||||||
| Estimated Volatility | % | % | ||||||
| Stock Price at Issuance | $ | $ | ||||||
| Years to Maturity | ||||||||
| Grant date Value per Right | $ | $ | ||||||
The 2020 grant was issued with a $
The 2021 grant was issued with a $
The SARS were valued using a binomial lattice model. Because the SARS will be settled in cash, the obligation for them is accounted for as a liability rather than equity. Quarterly, the SARS are revalued and the new value is amortized. Information on the grant date value of the SARS and weighted average inputs to the binomial lattice model are as follows:
| 2021 | 2020 | |||||||
| Weighted average expected term at December 31 (years) | ||||||||
| Total fair value of all awards at December 31 | $ | $ | ||||||
| Total fair value of all vested awards at December 31 | $ | $ | ||||||
| Total intrinsic value at December 31 | $ | $ | ||||||
At December 31, 2021 and 2020 there were
Restricted Stock Units:
In 2021 the Company granted Restricted stock units to certain key employees of the Company from the Company's 2020 Incentive Award Plan. RSUs generally vest over 3 years. In 2021, there were two grants totaling
| Number of restricted stock units | Weighted-average grant date fair value | |||||||
| Non-vested shares, beginning of year | — | $ | — | |||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | — | — | ||||||
| Non-vested shares, end of year | $ | |||||||
The Company recorded $
Employee Stock Options and other share-based compensation
At the 2020 Annual Meeting of Shareholders, the Company’s shareholders approved the Orbital Energy Group 2020 Incentive Award Plan and authorized a share limit of
The purpose of the Orbital Energy Group 2020 Incentive Award Plan is to enhance our ability to attract, retain and motivate persons who make (or are expected to make) important contributions to Orbital Energy Group by providing these individuals with equity ownership opportunities. Equity awards are intended to motivate high levels of performance and align the interests of our directors, employees and consultants with those of our stockholders by giving directors, employees and consultants the perspective of an owner with an equity stake in Orbital Energy Group and providing a means of recognizing their contributions to the success of Orbital Energy Group. Our board of directors and management believe that equity awards are necessary to remain competitive in its industry and are essential to recruiting and retaining the highly qualified employees who help Orbital Energy Group meet its goals. A primary purpose of the plan is to provide OEG with appropriate capacity to issue equity compensation in anticipation of future acquisitions.
The Orbital Energy Group 2020 Incentive Award Plan provides for the grant of stock options, including ISOs and nonqualified stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock, dividend equivalents, restricted stock units (“RSUs”) and other stock or cash-based awards. Certain awards under the Orbital Energy Group 2020 Incentive Award Plan may constitute or provide for payment of “nonqualified deferred compensation” under Section 409A of the Code. All awards under the Orbital Energy Group 2020 Incentive Award Plan will be set forth in the award agreement, which will detail the terms and conditions of awards, including any applicable vesting and payment terms and post termination exercise limitations. All awards shall be subject to a minimum vesting of year from the Grant Date. A brief description of each award type follows.
|
| ● | Stock Options and SARs. Stock options provide for the purchase of shares of common stock of Orbital Energy Group in the future at an exercise price set on the grant date. ISOs, in contrast to NSOs, may provide tax deferral beyond exercise and favorable capital gains tax treatment to their holders if certain holding period and other requirements of the Code are satisfied. SARs entitle their holder, upon exercise, to receive from Orbital Energy Group an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The plan administrator will determine the number of shares covered by each option and SAR, the exercise price of each option and SAR and the conditions and limitations applicable to the exercise of each option and SAR. The exercise price of a stock option or SAR will not be less than 100% of the fair market value of the underlying share on the grant date (or |
|
| ● | Restricted Stock. Restricted stock is an award of nontransferable shares of common stock of Orbital Energy Group that remain forfeitable unless and until specified conditions are met and which may be subject to a purchase price. Upon issuance of restricted stock, recipients generally have the rights of a stockholder with respect to such shares, which generally include the right to receive dividends and other distributions in relation to the award. The terms and conditions applicable to restricted stock will be determined by the plan administrator, subject to the conditions and limitations contained in the Orbital Energy Group 2020 Incentive Award Plan. |
|
| ● | RSUs. RSUs are contractual promises to deliver shares of common stock of Orbital Energy Group in the future, which may also remain forfeitable unless and until specified conditions are met and may be accompanied by the right to receive the equivalent value of dividends paid on shares of common stock of Orbital Energy Group prior to the delivery of the underlying shares (i.e., dividend equivalent rights). The Company accounts for forfeitures of employee awards as they occur. The plan administrator may provide that the delivery of the shares underlying RSUs will be deferred on a mandatory basis or at the election of the participant. The terms and conditions applicable to RSUs will be determined by the plan administrator, subject to the conditions and limitations contained in the Orbital Energy Group 2020 Incentive Award Plan. |
|
| ● | Other Stock or Cash Based Awards. Other stock or cash-based awards are awards of cash, shares of common stock of Orbital Energy Group and other awards valued wholly or partially by referring to, or otherwise based on, shares of common stock of Orbital Energy Group or other property. Other stock or cash-based awards may be granted to participants and may also be available as a payment form in the settlement of other awards, as standalone payments and as payment in lieu of compensation to which a participant is otherwise entitled. The plan administrator will determine the terms and conditions of other stock or cash-based awards, which may include any purchase price, performance goal, transfer restrictions and vesting conditions, subject to the conditions and limitations in the Orbital Energy Group 2020 Incentive Award Plan. |
The Orbital Energy Group 2020 Incentive Award Plan provides that the plan administrator may establish compensation for non-employee directors from time to time subject to the Orbital Energy Group 2020 Incentive Award Plan’s limitations. The plan administrator will from time to time determine the terms, conditions and amounts of all non-employee director compensation in its discretion and pursuant to the exercise of its business judgment, taking into account such factors, circumstances and considerations as it shall deem relevant from time to time, provided that, the sum of any cash compensation or other compensation and the grant date fair value of any equity awards granted under the Orbital Energy Group 2020 Incentive Award Plan as compensation for services as a non-employee director during any fiscal year may not exceed $
A summary of the stock options granted to employees and directors and changes during the year are presented below:
| For the Year Ended December 31, 2021 | ||||||||||||||||
| Number of Options | Weighted Average Exercise Price ($) | Weighted Average Remaining Contract Life (years) | Aggregate Intrinsic Value ($ '000) | |||||||||||||
| Balance at beginning of year | $ | $ | — | |||||||||||||
| Exercised | ( | ) | $ | — | — | |||||||||||
| Forfeited in cash exercise | ( | ) | — | — | ||||||||||||
| Balance at end of year | $ | — | ||||||||||||||
| Exercisable | $ | — | ||||||||||||||
As of December 31, 2021 and 2020 all issued and outstanding stock options were fully vested. There was unamortized expense related to unvested stock options at December 31, 2021 and 2020. There were options granted during 2021 and 2020.
11. RELATED PARTY TRANSACTIONS
Executive Chairman of the Board of Directors, Chief Legal Counsel, and former Chief Executive Officer, William J. Clough’s son Nicholas J. Clough, serves as Vice President of Greenfield Operations, Orbital Energy Group. In 2021 and 2020, Mr. Clough received an aggregate salary of $
The Company's Front Line Power Construction, LLC subsidiary has an operating lease for a facility with Danbury Property Company LLC in Rosharon, Texas with a base rental of $
The Company's Front Line Power Construction, LLC subsidiary has an operating lease for a facility with Manvel Property Management in Rosharon, Texas with a base rent of $
The Company's Front Line Power Construction, LLC subsidiary has an operating lease for a facility with Oak Property Group in Rosharon, Texas with a base rent of $
Kurt Johnson, a greater than
Kurt Johnson, a greater than
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows:
| (In thousands) |
As of December 31, |
|||||||
| 2021 |
2020 |
|||||||
| Foreign currency translation adjustment |
$ | ( |
) | $ | ( |
) | ||
| Accumulated other comprehensive loss |
$ | ( |
) | $ | ( |
) | ||
13. RESTRUCTURING AND IMPAIRMENT CHARGES
Restructuring Charges
During the fourth quarter of 2019, the Company completed the sale of its largest group within the Power and Electromechanical segment. The Company completed the sale of its Japan operations as of September 30, 2020. The Company recorded an accrued liability of $
Activity in the termination benefit liability in 2021 is as follows:
| For the Years ended December 31, | ||||||||
| CUI-Canada termination benefits (In thousands) | 2021 | 2020 | ||||||
| January 1 liability balance | $ | $ | ||||||
| Severance accrual adjustments | ( | ) | ||||||
| Severance payouts | ( | ) | ( | ) | ||||
| Translation | ( | ) | ||||||
| December 31 liability balance | $ | $ | ||||||
14. INCOME TAXES
(Loss) income before income taxes consisted of the following:
| (In thousands) | For the Years Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | ( | ) | ( | ) | ||||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | ||
Loss from continuing operations before taxes consisted of the following:
| (In thousands) | For the Years Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| U.S. operations | $ | ( | ) | $ | ( | ) | ||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | ||
The income tax (benefit) expense allocation for the years ended December 31, 2021 and 2020 consisted of the following:
| (In thousands) | For the Years Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | ( | ) | ( | ) | ||||
| Total income tax (benefit) | $ | ( | ) | $ | ( | ) | ||
The income tax (benefit) expense from continuing operations consisted of the following:
| (In thousands) | For the Years Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Current: | ||||||||
| Federal | $ | $ | ||||||
| State and local | ||||||||
| Total current provision | ||||||||
| Deferred: | ||||||||
| Federal | ( | ) | ( | ) | ||||
| State and local | ( | ) | ( | ) | ||||
| Total deferred (benefit) | ( | ) | ( | ) | ||||
| Total income tax (benefit) | $ | ( | ) | $ | ( | ) | ||
The following table provides a reconciliation of the federal statutory tax at
| (In thousands) | For the Years Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Computed federal income taxes at the statutory rate (benefit) | $ | ( | ) | $ | ( | ) | ||
| State taxes | $ | |||||||
| Permanent tax differences and limited compensation | ( | ) | ||||||
| Foreign tax rates and tax credits differing from USA | ||||||||
| Expired NOL's | ||||||||
| Refundable Foreign R&D Credits | — | — | ||||||
| Change in valuation allowance | ( | ) | ||||||
| Total income tax (benefit) | $ | ( | ) | $ | ( | ) | ||
| Effective tax rate | % | % | ||||||
The Company accounts for income taxes under the asset-liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when it is “more likely than not” that the benefits of existing deferred tax assets will not be realized in a future period. Significant components of the Company’s deferred tax assets and liabilities as
of December 31, 2021 and 2020, respectively, are as follows:
| (In thousands) | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Inventory and accounts receivable reserves | ||||||||
| Operating lease obligations | ||||||||
| Accrued liabilities | ||||||||
| Other | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets after valuation allowance | ||||||||
| Deferred tax liabilities | ||||||||
| Intangible assets | ( | ) | ( | ) | ||||
| Property, plant and equipment | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax asset (liability) | $ | ( | ) | $ | ||||
The Company adopted the provisions of ASU 2015-17 in 2015. ASU 2015-17 requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The net deferred tax asset as of December 31, 2021 is recorded within other assets and the net deferred tax liability recorded as of December 31, 2020 was zero.
As of December 31, 2021 and 2020, the Company recorded a valuation allowance of $
The Company files consolidated income tax returns for federal and many state jurisdictions in addition to separate subsidiary income tax returns in Australia, Canada, India and the United Kingdom. The Company has an insignificant amount of foreign taxes that have not been separately presented. As of December 31, 2021, the Company is not under examination by any income tax jurisdiction. The Company is no longer subject to examination in the USA for years prior to 2018.
The Company accounts for income tax uncertainties using a threshold of "more-likely-than-not" in accordance with the provisions of ASC Topic 740, Income Taxes ("ASC 740"). As of December 31, 2021, the Company has reviewed all of its tax filings and positions taken on its returns and has not identified any material current or future effect on its consolidated results of operations, cash flows or financial position. As such, the Company has not recorded any tax, penalties or interest on tax uncertainties. It is Company policy to record any interest on tax uncertainties as a component of income tax expense.
15. CONCENTRATIONS
During 2021,
The Company’s major product lines in 2021 were electric power transmission and distribution maintenance and service, utility-scale solar construction projects and telecommunications maintenance and services and in 2020 were electric power transmission and distribution maintenance and service, utility-scale solar construction projects and natural gas infrastructure solutions.
At December 31, 2021, of the gross trade accounts receivable totaling approximately $
For the 12 months ended December 31, 2021, there was supplier concentration of approximately
For the years ended December 31, 2021 and 2020, the Company had no foreign revenue concentrations or foreign trade accounts receivable concentrations outside the United States.
16. LEASES
Effective January 1, 2019, the Company implemented the new accounting guidance on leases found in ASC 842, Leases. As part of its transition, the Company elected to utilize the transition method of adoption. Under the transition method, the Company includes the new required disclosures for the current period and provides the disclosures required by the previous guidance found in ASC 840 for the prior year comparative periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classifications and allowed the Company to exclude leases with an initial term of 12 months or less (after consideration of renewal options) from being recorded on the Company's consolidated balance sheet; the Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. At December 31, 2021 the Company did not factor in any renewal options when calculating its consolidated right-of-use assets and lease obligations as the options were not considered reasonably certain to be exercised. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The Company reviewed outstanding service contracts to determine if any of the Company's service contracts contained an embedded lease. Determining whether a contract contains a lease requires judgement. The Company did not identify any new leases through this process. The new lease accounting guidance also changes the name of leases formerly referred to as Capital leases under ASC 840 to Financing leases under ASC 842.
The Company rents office space and warehouse space, which it uses for the Corporate Headquarters in Houston, Texas through December 2022. During the year ended December 31, 2021, rent expense on this lease was approximately $
The Company sublets office space in Irving, Texas for corporate support services and Orbital Power Inc. office personnel; the lease runs through 2023. Orbital Power Inc. also maintains an equipment yard in Sherman, Texas that houses equipment primarily for Orbital Power, Inc. for which the lease runs until 2022. During the year ended December 31, 2021, rent expense on these leases were a combined average of $
Eclipse Foundation Group entered into two property leases in 2021 in Gonzales, Louisiana, both with -year lease terms. During the year ended December 31, 2021, rent expense on these leases were a combined average of $
Orbital Power Inc. and Eclipse Foundation Group rent equipment as well as vehicles for use on their jobs. These vehicle leases range from
Gibson Technical Services leases four properties, one in Georgia, North Carolina, Louisiana, and New York with lease terms ranging from
Front Line Power Construction rents three office spaces in Rosharon, Texas that run through November 2024. Rent expense on these leases when combined approximate $
The Company rents office and industrial space in Sanford, North Carolina through July 2022 as well as multiple pieces of equipment. Rent expense on these leases were a combined approximately $
Consolidated rental expense on operating leases was $
Future minimum operating lease obligations for continuing operations at December 31, 2021 are as follows for the years ended December 31:
| (In thousands) |
||||
| 2022 |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Thereafter |
||||
| Less interest portion |
( |
) | ||
| Total operating lease obligations |
$ |
Total lease cost and other lease information is as follows:
| For the Year |
For the Year |
|||||||
| Ended |
Ended |
|||||||
| December 31, |
December 31, |
|||||||
| 2021 |
2020 |
|||||||
| (In thousands) |
||||||||
| Operating lease cost |
$ | $ | ||||||
| Short-term lease cost |
||||||||
| Variable lease cost |
||||||||
| Sublease income |
( |
) | ( |
) | ||||
| Total lease cost |
$ | $ | ||||||
| Other information |
||||||||
| Cash paid for amounts included in the measurement of lease obligations: |
||||||||
| Operating cash flows used in operating leases |
$ | ( |
) | $ | ( |
) | ||
| Right-of-use assets obtained in exchange for new operating lease obligations |
$ | $ | ||||||
| Weighted-average remaining lease term - operating leases (in years) |
|
|||||||
| Weighted-average discount rate - operating leases |
% | % | ||||||
Future minimum finance lease obligations are as follows:
| (In thousands) |
||||
| 2022 |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Thereafter |
||||
| Less interest portion |
( |
) | ||
| Total financing lease obligations |
$ |
Total financing lease costs are as follows:
| For the Year |
For the Year |
|||||||
| Ended |
Ended |
|||||||
| December 31, |
December 31, |
|||||||
| 2021 |
2020 |
|||||||
| Depreciation of financing lease assets |
$ | $ | ||||||
| Interest on lease liabilities |
||||||||
| Total finance lease cost |
$ | $ | ||||||
| Other information |
||||||||
| Cash paid for amounts included in the measurement of lease obligations: |
||||||||
| Operating cash flows used in financing leases |
$ | ( |
) | $ | ||||
| Financing cash flows from financing leases |
$ | ( |
) | $ | ||||
| Right-of-use assets obtained in exchange for new financing lease obligations |
$ | $ | ||||||
| Weighted-average remaining lease term - financing leases (in years) |
— | |||||||
| Weighted-average discount rate - financing leases |
% | |||||||
Variable lease costs primarily include common area maintenance costs, real estate taxes and insurance costs passed through to the Company from lessors.
17. Business Combinations
Front Line Power Construction, LLC
On November 17, 2021, Kurt A. Johnson, Jr. (the Active Seller) and Tidal Power Group LLC, a Texas limited liability company (the Passive Seller and together with the Active Seller, collectively, the Sellers), and Orbital Energy Group, Inc., a Colorado corporation (Buyer or the Company) entered into a Membership Unit Purchase Agreement (the Purchase Agreement). Under the Purchase Agreement, the Company purchased all of the issued and outstanding membership interests of Front Line Power Construction, LLC (FLP) from the Sellers for the purpose of expanding the Company’s market opportunities and creating synergies. FLP is a Houston-based full-service electrical infrastructure service company that provides construction, maintenance, and emergency response services. The Company has included the financial results of FLP in the consolidated financial statements from the date of acquisition and recorded $
| Cash | $ | |||
| Working capital adjustment payable | ||||
| Fair value of unsecured promissory notes | ||||
| Fair value of common stock issued to Sellers | ||||
| Fair value of purchase consideration | $ |
The cash consideration paid by the Buyer includes cash paid to the Sellers of $
The Buyer issued two unsecured promissory notes to the Sellers of FLP, in the aggregate principal amount outstanding of $
The Company accounted for the acquisition as a business combination in accordance with ASC Topic 805, Business Combinations. The Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value with limited exceptions. The following table summarizes the fair values of assets and preliminary purchase price allocation for assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| Cash and cash equivalents | $ | |||
| Trade accounts receivable | ||||
| Contract assets | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Other long-term assets | ||||
| Indefinite lived intangible assets | ||||
| Definite lived intangible assets | ||||
| Accounts payable | ( | ) | ||
| Contract liabilities | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Net assets acquired | ||||
| Goodwill | ||||
| Purchase price allocation | $ |
The excess of the fair value of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce, synergies, and expanded market opportunities, for which there is no basis for U.S. income tax purposes. Goodwill amounts are not amortized, but are rather tested for impairment at least annually during the second quarter.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
| Fair Value | Useful Life | ||||
| Customer relationships | $ |
| |||
| Backlog |
| ||||
| Tradename | Indefinite | ||||
| Software |
| ||||
| Total intangible assets | $ | ||||
Full Moon Telecom, LLC
Effective October 22, 2021, the Company's subsidiary, Gibson Technical Services, Inc. ("GTS") entered into and closed upon a Purchase Agreement by and among the Company and the owners of Full Moon Telecom, LLC (“Full Moon”). Full Moon is a Florida-based privately-owned telecommunications service provider that offers an extensive array of wireless service capabilities and experience including Layer 2/Layer 3 Transport, Radio Access Network (“RAN”) Integration, test and turn-up of Small Cell systems and Integration/Commissioning of Distributed Antenna (“DAS”) systems.
The acquisition adds revenues and was accretive to earnings for GTS and OEG in its first fiscal quarter with the Company. Full Moon is a wholly-owned subsidiary of GTS, expanding GTS’s service offerings to its customers.
Full Moon’s additional capabilities include providing site surveys, regulatory support, project management, continuous wave testing, scanner walks, optimization/data collection and E911 data validation and testing. These additional skill sets combined with Full Moon’s RAN integration and DAS commissioning efforts have allowed for an expanded service offering and turnkey approach to ensuring the on time delivery and quality on end-to-end solutions to wireless customers.
Subject to the terms and conditions set forth in the Purchase Agreement, the purchase consideration for
|
| $ |
|
| |
|
| The Purchase Agreement provided for the adjustment of the selling price to adjust the final closing working capital at the acquisition date as a post-closing adjustment for net working capital above or below a 2-1 ratio for the closing working capital ratio estimated on the acquisition date and to be finalized within 45 days after the closing date of October 22, 2021. This was calculated to be an additional $ |
The Purchase Agreement contains various customary representations, warranties and covenants.
The Company accounted for the acquisition as a business combination in accordance with ASC Topic 805, Business Combinations. The Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value with limited exceptions. The following table summarizes the fair values and preliminary purchase of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| Cash and cash equivalents | $ | |||
| Trade accounts receivable | ||||
| Property and equipment | ||||
| Intangible, Tradename (indefinite) | ||||
| Intangible, Customer relationships (-year life) | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses and other liabilities | ( | ) | ||
| Net assets acquired | ||||
| Goodwill | ||||
| Purchase price allocation | $ |
The Company has included the financial results of Full Moon Telecom, LLC in the consolidated financial statements from the date of acquisition and recorded $
IMMCO, Inc.
Effective July 28, 2021, the Company entered into a share purchase agreement to acquire IMMCO, Inc., an Atlanta-based telecommunications company providing enterprise solutions to the cable and telecommunications industries since 1992. The acquisition was effectuated pursuant to the Share Purchase Agreement (the “Agreement”), with the shareholders of IMMCO (the "Seller"). Orbital Energy Group paid $
The purchase consideration was as follows (in thousands):
| Purchase Consideration | ||||
| Cash payment | $ | |||
| Fair value of common stock issued to Sellers | ||||
| Total | $ |
The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated preliminary fair values at the date of acquisition (in thousands):
| Cash and cash equivalents | $ | |||
| Trade accounts receivable, net | ||||
| Contract assets | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Intangible, customer relationships | ||||
| Intangible, trade name | ||||
| Intangible, technology know how | ||||
| Other long-term assets | ||||
| Deferred tax liability | ( | ) | ||
| Liabilities assumed | ( | ) | ||
| Net assets acquired | ||||
| Goodwill | ||||
| Purchase price allocation | $ |
The Company has included the financial results of IMMCO, Inc.in the consolidated financial statements from the date of acquisition and recorded $
Gibson Technical Services, Inc.
Effective April 13, 2021, the Company entered into a share purchase agreement to acquire Gibson Technical Services, an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990. The acquisition was effectuated pursuant to the Share Purchase Agreement (the “Agreement”), dated as of April 13, 2021, between Orbital Energy Group and the shareholders of GTS (the "Seller"). Orbital Energy Group paid $
The purchase consideration was as follows (in thousands):
| Cash payment | $ | |||
| Fair value of common stock issued to Sellers | ||||
| Total | $ |
The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated preliminary fair values at the date of acquisition (in thousands).
| Cash and cash equivalents | $ | |||
| Trade accounts receivable | ||||
| Contract assets | ||||
| Contingent receivable | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Right of use assets - Operating leases | ||||
| Intangible, customer relationships (-year life) | ||||
| Intangible, tradename (indefinite life) | ||||
| Intangible, non-compete agreements (-year life) | ||||
| Other long-term assets | ||||
| Deferred tax liability | ( | ) | ||
| Liabilities assumed | ( | ) | ||
| Net assets acquired | ||||
| Goodwill | ||||
| Purchase price allocation | $ |
The Company has included the financial results of Gibson Technical Services, Inc.in the consolidated financial statements from the date of acquisition and recorded $
Reach Construction Group, LLC
Effective April 1, 2020, the Company entered into an equity purchase agreement to acquire
(In thousands)
| Purchase Consideration | ||||
| Fair value of common stock issued to Sellers | $ | |||
| 18-Month Seller Note | ||||
| 3-year Seller Note | ||||
| Contingent consideration | ||||
| Cash payment | ||||
| Total | $ |
The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values and purchase price allocation at the date of acquisition (in thousands).
| Purchase price | $ | |||
| Cash and cash equivalents | $ | |||
| Trade accounts receivable, net of allowance | ||||
| Contract assets | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Right of use assets - Operating leases | ||||
| Intangible, customer relationships & backlog | ||||
| Intangible, trade name | ||||
| Intangible, non-compete agreements | ||||
| Deferred tax liability | ( | ) | ||
| Liabilities assumed | ( | ) | ||
| Net assets acquired | ||||
| Goodwill | ||||
| Purchase price allocation | $ |
| Revenue from April 1, 2020 acquisition date to December 31, 2020 | $ | |||
| Loss from continuing operations, net of income taxes from April 1, 2020 acquisition date to December 31, 2020 | $ | ( | ) |
The deferred tax liability recorded at acquisition was offset against the Company's valuation allowance and recorded as a tax benefit in 2020.
The table below summarizes the unaudited condensed pro forma information of the results of operations of Orbital Energy Group, Inc. for the twelve months ended December 31, 2021 and 2020 as though the Company's 2021 and 2020 acquisitions had been completed as of January 1, 2020 (in thousands):
| (Unaudited) | ||||||||
| For the Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Gross revenue | $ | $ | ||||||
| Loss from continuing operations, net of income taxes | $ | ( | ) | $ | ( | ) | ||
18. SUBSEQUENT EVENTS
Exchange agreements to exchange common shares for debt payments
Subsequent to the year ended December 31, 2021 and up through the date of issuance of the financial statements, the Company issued
Extension of maturity date of Front Line Power Construction seller notes payable
In March 2022, the Company reached an agreement with Kurt Johnson and Tidal Power to extend the maturity dates for $52 million of promissory notes (holders of the Front Line Power Construction seller notes) from the original maturity date of May 16, 2022 until May 31, 2023. The remaining balance of $
Non-recourse payable agreements signed
In March 2021, The Company signed a non-recourse agreement with C6 Capital Funding, LLC to receive $
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and its Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual report. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, the Company's management, including the CEO and the CFO, concluded that, as of December 31, 2021, the Company’s disclosure controls and procedures were effective.
Management's Annual Report on Internal Control over Financial Reporting
Management of Orbital Energy Group, Inc. is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company assets that could have a material effect on the financial statements.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of such inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (“2013 framework”). Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2021.
Orbital Energy Group management is responsible for establishing and maintaining adequate internal control over financial reporting for Orbital Energy Group, Inc. and its subsidiaries. Based on the criteria for effective internal control over financial reporting established in the 2013 framework, management has assessed the Company’s internal control over financial reporting as effective as of December 31, 2021.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our bylaws permit the number of directors to be fixed by resolution of the board of directors, but to be no less than one. The board of directors has set the maximum number of members to no more than twelve members. Directors are elected by a majority of the votes cast by the stockholders and serve a one-year term or until their successors have been elected and qualified or their earlier resignation or removal. At December 31, 2021, we have nine directors, six of whom are ‘‘independent’’ in accordance with applicable rules promulgated by the Securities and Exchange Commission and within the meaning of Rule 5605(a)(2) of the Nasdaq Stock Market.
The board of directors has five standing committees: Audit Committee, Compensation Committee, Disclosure Committee, Investment Committee and Nomination Committee, each of which has a written charter and/or statement of policy approved by our board. Our board currently appoints the members of each committee. Copies of the current committee charters and/or statement of policy for each committee are posted on our website at www.OrbitalEnergyGroup.com. During 2021, two directors missed one board meeting each. In each of those instances, the board members were informed of the meeting agenda and results. All directors attended, either in person or electronically, all of the meetings held by the committees on which such director served.
Sean P. Rooney Retired from the Board
On March 23, 2021, our director, Sean P. Rooney, formally notified the board of directors he will retire from the Orbital Energy Group board of directors when his term expired and would not seek reelection at the Company’s annual meeting in 2021.
The following are officers and directors of the Company with their ages as of December 31, 2021, and a list of the members of our five standing committees: Audit Committee, Compensation Committee, Disclosure Committee, Investment Committee and Nomination Committee.
William J. Clough, Esq. Executive Chairman of the board of directors and Chief Legal Officer of the Company and its wholly owned subsidiaries, age 70.
Mr. Clough has served on the board of directors since 2006 and was reelected at the 2021 Annual Meeting of Stockholders to serve a one-year term. A seasoned executive and entrepreneur, Mr. Clough joined the company’s Board in 2006 and was subsequently appointed chief executive officer in 2008. In his role as CEO, a position he held until 2019 with the appointment of Jim O’Neil, he led the establishment of the company’s Energy division, formed its Energy operations in North America, and guided the company to its largest Energy contract award in its history while concurrently managing the company’s Power & Electro-Mechanical division to greater than average electronics industry growth rates in recent years. As CEO, he directed company’s capital markets strategy, including leading several equity offerings to institutional investors and spearheaded the company’s uplist to the Nasdaq Capital Market in 2012.
Mr. Clough previously founded and operated a multi-state, multi-office law firm for 14 years. He received a Juris Doctorate, Cum Laude, from the University of California’s Hastings College of Law in 1990. He is a former law enforcement officer and U.S. Federal Air Marshal. Mr. Clough serves on the board of directors of privately-held Virtual Power Systems, creator of Software Defined Power®, in which Orbital Energy Group holds a minority equity investment.
James F. O’Neil III, Vice Chairman of the board of directors and Chief Executive Officer of the Company and its wholly owned subsidiaries, age 63.
Mr. O’Neil was appointed to the Board of Directors in July 2019 and reelected at the 2021 Annual Meeting of Stockholders to serve a one-year term. James (Jim) O'Neil joined Orbital Energy Group as vice chairman in July 2019 and was subsequently appointed chief executive officer in October 2019. He is a veteran executive of the power industry and has been instrumental in formulating and is overseeing execution on Orbital Energy Group’s transformation plan that reshapes the company into a diversified energy services platform.
Mr. O’Neil was previously chief operating officer, chief executive officer and president of Quanta Services, Inc. (Quanta) from 2008 to 2016, an infrastructure solutions provider for the electric power, oil and natural gas, telecommunications and renewable industries. During this period, he grew the company into a Fortune 500 enterprise with $7+ billion in annual revenue at its peak through a combination of both organic growth and many strategic acquisitions.
Mr. O’Neil joined Quanta in 1999 and over his tenure was responsible for various initiatives including the company’s growth strategy, internal audit, and merger and acquisition initiatives. He began his career at Halliburton Company in 1980 where he held various positions, lastly as Director, Global Deepwater Development.
Mr. O’Neil holds a B.S. in Civil Engineering from Tulane University.
Nicholas M. Grindstaff, Chief Financial Officer, age 59.
Mr. Grindstaff assumed the role of Chief Financial Officer for Orbital Energy Group in November 2021. Prior to that, Mr. Grindstaff served as Vice President – Finance from May 2011 and Treasurer from October 1999 through October 2021 for Quanta Services, Inc., a leading provider of specialty contracting services, delivering comprehensive infrastructure solutions for the electric and gas utility, communications, pipeline and energy industries primarily in the United States, Canada and Australia.
As an executive officer at Quanta Services, Inc. he was responsible for capital structure, which included numerous capital raises across various markets, managing acquisitions, financial planning and analysis, internal and SOX control compliance, procurement, working capital allocation, treasury operations as well as numerous other strategic initiatives. Mr. Grindstaff holds a Master of Science degree in Accounting.
Daniel N. Ford, Executive Vice President of Orbital Energy Group, Inc., age 42
Mr. Ford has a background in audit with big 4 accounting firms, including KPMG. As the former CFO of Orbital Energy Group, Mr. Ford has consistently moved OEG into a position of efficiency, and forward thinking, transforming many of the Company's accounting and financial management processes while working directly with OEG’s operating groups.
Mr. Ford has implemented improved ERP systems, worked in conjunction with Mr. Clough on the 2012, 2013 and 2017 equity raises, listing onto the Nasdaq Stock Market, various acquisitions including Orbital Gas Systems Ltd. and Reach Construction Group, LLC as well as the 2019 divestitures of the CUI Inc. power and electromechanical business units.
Mr. Ford serves on the board of the Portland Providence Medical Foundation whose purpose is to connect people with Providence to advance research, health care and wellness.
Mr. Ford earned his B.B.A with a double major in Finance and Accounting from the University of Portland and holds an MBA from George Fox University.
C. Stephen Cochennet, Director, age 65
Mr. Cochennet was elected to serve as a director at the 2018 Annual Meeting and continues to serve on the board of directors as an independent director within the meaning of Rule 5605(a)(2) of The Nasdaq Stock Market. Mr. Cochennet was reelected at the 2021 Annual Meeting of Stockholders to serve a one-year term.
Mr. Cochennet, as an independent director, serves on the nominating committee along with Messrs. Lambrecht, Addison, Williams, Ms. Thornton and Ms. Tucker. Mr. Cochennet is also a member of our Audit Committee, Compensation Committee and Investment Committee.
Mr. Cochennet has served as CEO/President, of Kansas Resource Development Company, a private oil and gas exploration company since 2011. From 2011 through 2015 he was also the CEO and president of Guardian 8 Corporation. From 2005 to 2010 Mr. Cochennet was the Chairman, President, and Chief Executive Officer of EnerJex Resources, Inc., a publicly traded SEC registered Oil and Gas Company. Prior to joining EnerJex, Mr. Cochennet was President of CSC Group, LLC in which he supported several Fortune 500 corporations, international companies, and natural gas/electric utilities as well as various startup organizations. The services provided included strategic planning, capital formation, corporate development, executive networking and transaction structuring. From 1985 to 2002, he held several executive positions with UtiliCorp United Inc. (Aquila) in Kansas City, Missouri. His responsibilities included finance, administration, operations, human resources, corporate development, natural gas/energy marketing, and managing several new startup operations. Prior to his experience at Aquila Mr. Cochennet served 6 years with the Federal Reserve System managing problem and failed banking institutions primarily within the oil and gas markets.
Mr. Cochennet graduated from the University of Nebraska with a B.A. in Finance and Economics.
Paul D. White, Employee and Director, age 61
Mr. White was appointed in April 2014 as a director to fill a vacancy and continues to serve on the board of directors. Mr. White was reelected at the 2021 Annual Meeting of Stockholders to serve a one-year term.
Mr. White is a graduate of Humboldt State University and brings to the Orbital Energy Group board of directors over 25 years of upper-level business management skills. Mr. White served for two years as the President of Orbital Gas Systems, Ltd. Prior to working for the Company, Mr. White served as Vice President of the Healthcare Division for North America of a global security company. His responsibilities included direct responsibility for profit and loss statements with approximately $120 million in revenues, along with management, control, and supervision of approximately 3,000 employees working at 44 medical centers & hospitals and over 600 medical office buildings throughout the United States. He previously served in the Office of the General Counsel and Risk Services, as an Environmental Risk Consultant with Sutter Health Support Services - Corporate Services. His key responsibilities included: formulating best practice solutions to minimize/eliminate existing and potential risk and quality concerns, patient, employee health & safety and security exposures as well as consultations of state, federal, and professional standards for Risk Control/Environmental Health, & Safety programs from agencies such as OSHA, TJC, DHS, EPA, NFPA, and DOT.
As a results-oriented business leader, Mr. White has skills in developing, managing and expanding business portfolios. Mr. White has senior management experience in contract management, public relations, program strategy and design and has been consistently recognized for effective financial management, leadership, integrity, teambuilding, and program management skills.
Corey A. Lambrecht, Director, age 52
Mr. Lambrecht was elected to serve as a director at the 2007 Annual Meeting of Stockholders and continues to serve on the board of directors as an independent director within the meaning of Rule 5605(a)(2) of The Nasdaq Stock Market. Mr. Lambrecht was reelected at the 2021 Annual Meeting to serve a one-year term.
Mr. Lambrecht, as an independent director, serves on the nominating committee along with Messrs. Cochennet, Addison, Williams, Ms. Thornton and Ms. Tucker. Mr. Lambrecht is also Chairman of our Compensation Committee and Investment Committee and a member of our Audit Committee.
Mr. Lambrecht is a 20+ year public company executive with broad experience in strategic acquisitions, corporate turnarounds, new business development, pioneering consumer products, corporate licensing, and interactive technology services. In addition, Mr. Lambrecht has held public company executive roles with responsibilities including day-to-day business operations, management, raising capital, board of directors' communication and investor relations. Mr. Lambrecht holds a certificate as a Certified Director from the UCLA Anderson Graduate School of Management Accredited Directors program.
Mr. Lambrecht, as an independent director, serves as one of six independent directors on the nominating committee along with Messrs. Cochennet, Williams, Ms. Thornton and Ms. Tucker. Mr. Lambrecht is also Chairman of our Compensation Committee.
Mr. Lambrecht is a director of ORHub, a SaaS company as well as a strategic consultant for American Rebel Holdings, Inc. He served as Director of Sales for Leveraged Marketing Associates, the worldwide leader in licensed brand extension strategies. While Executive Vice President for Smith & Wesson Holding Corporation, he was responsible for Smith & Wesson Licensing, Advanced Technologies and Interactive Marketing divisions. Previously, Mr. Lambrecht served as an independent director of Guardian 8 Holdings. He was the former President of A For Effort, an interactive database marketing company specializing in online content (advergaming) for clients such as the National Hockey League. Mr. Lambrecht's prior experience also includes Pre-IPO founder for Premium Cigars International and VP Sales/Marketing for ProductExpress.com.
Sarah Tucker, Director, age 76
Sarah Tucker was appointed to the Board of Directors in October 2019, and was elected at the 2020 Annual Meeting to serve a one-year term as an Independent Director within the meaning of Rule 5605(a)(2) of The Nasdaq Stock Market. Ms. Tucker was reelected at the 2021 Annual Meeting to serve a one-year term. Ms. Tucker, as an independent director, serves on the nominating committee along with Messrs. Cochennet, Lambrecht, Williams, Addison and Ms. Thornton.
Sarah Tucker is a veteran executive for the business strategy/development, risk management, planning, engineering, procurement and construction of oil and gas projects globally. She has led projects with budgets from $5 million to over $3 billion in refining, petrochemicals, power, and offshore (both shallow and deep-water) for oil and liquified natural gas in Angola, Brazil, China, India, Italy, Korea, Mexico, Nigeria, Oman, Qatar, Spain, the United Kingdom and the United States.
She has served as an operations executive and managing director for major engineering, construction and petrochemical technology companies including Kellogg, KBR, Kellogg-Mitsubishi Development Company, Raytheon Engineers and Constructors, Kvaerner Engineering and Construction of Norway and Silvertech of United Kingdom, a Process Control and High Integrity Safety System Solutions.
Sarah headed the Pollution Prevention Task Force Committee with eight Oil Companies' representatives participating and contributing to the Study for "Refinery Crude Unit Pollution Prevention Project" which is now an American Petroleum Institute DC Publication number 31101.
Over the past several years, she has worked closely with Mexican national oil company PEMEX to establish the country’s first deep water project valued at $14 billion.
According to her personal and professional philosophy, Sarah believes in developing strong relationships and respecting diverse cultures. As part of her philosophy, she led in 1992 a program to author a 51-page report which became the American Petroleum Institute publication, Environmental Design Considerations for Petroleum Refining Crude Processing Units.
Her parallel and subsequent effort with the World Bank was successful in striking a balance between the interests of indigenous people and major oil companies allowing projects to proceed in Africa. The publication became an influential guide for doing business in the developing world.
Paul T. Addison, Director, age 74
Paul T. Addison was appointed to the Board of Directors in June 2021, as an Independent Director within the meaning of Rule 5605(a)(2) of The Nasdaq Stock Market. Mr. Addison was reelected at the 2021 Annual Meeting to serve a one-year term. Mr. Addison, as an independent director, serves on the nominating committee along with Messrs. Cochennet, Lambrecht, Williams, Ms. Thornton and Ms. Tucker.
Paul T. Addison earned a B. A. in political science and economics from Howard University in 1969 and a M.B.A. from Harvard University in 1972.
He began his career as a loan specialist for The Economic Development Administration of the US Department of Commerce in 1972 providing loan assistance for companies that agreed to expand operations in areas of high unemployment before moving to New York in 1974 to join a Chase Manhattan subsidiary as Vice President and Treasurer that provided financing and startup capital for minority small business enterprises (a MESBIC). In 1978, he joined Citibank/Citicorp as a banker in the firm’s energy and utilities department rising to the level of a senior credit officer and Managing Director.
In this capacity, he managed the bank’s significant exposure to a large segment of the gas and electric utility industry. He also provided financial advice to the firm’s clients and on numerous occasions provided testimony before state and federal regulatory commissions. He also developed financing structures which allowed a number of utilities to rate base large nuclear projects without which a number of utilities would have suffered significant losses. This was a particular issue during the last significant construction cycle for the industry.
He also approved and structured a number of large energy project financings for the firm.
Mr. Addison continued his work in the utility industry when he joined Solomon Smith Barney (Citigroup) in 1997 as a Managing Director in the electric and gas utility space until his retirement from the firm in 2002.
Upon retirement from Citigroup, Mr. Addison became an independent director of First Energy Corporation of Akron, Ohio, serving until his mandatory retirement in 2019. In his capacity as independent director, he served as Chair of the Finance Committee, and member of the Audit Committee as a designated financial expert. He was heavily involved in numerous financings over his term on the board and significantly participated in the company’s $4.7 billion acquisition of Allegheny Energy in 2010.
Mr. Addison is also a Trustee of the Maimonides Medical Center in Brooklyn New York, where he resides. Maimonides is the largest nonprofit hospital in Brooklyn with revenues approaching $1.5 billion and serves an extremely diverse population where over 60 languages are spoken. In his capacity as Trustee, Mr. Addison serves as Chair of the Budget and Finance Committee, member of the Legal and Audit Committee, member of the Quality and Safety Committee, and member of the Executive Committee. Mr. Addison also has served as the hospital’s representative on their self-insurance malpractice company, Hospital Insurance Company (HIC). Mr. Addison also served as Chair of the Audit Committee of HIC’s parent, the Federation of Jewish Philanthropies (FOJP), until its dissolution in 2019.
Jerry Sue Thornton, Director, age 74
Dr. Thornton was appointed to the Board of Directors in July 2021, as an Independent Director within the meaning of Rule 5605(a)(2) of The Nasdaq Stock Market.
Dr. Jerry Sue Thornton earned her B.A. and M. A. in Communications from Murray State University (Kentucky) and Ph.D. in Higher Education Leadership/Administration from The University of Texas (Austin). She earned a post-doctorate certificate from Harvard University.
Dr. Thornton is President of DreamCatcher Education Consulting providing professional development, coaching and mentoring for newly appointed presidents of colleges. She is President Emeritus of the Cuyahoga Community College District serving from 1992 to 2013 which is headquartered in Cleveland, Ohio. The College serves over 30,000 students on four campuses with a budget over $300 million. She brings over 45 years of experience in leading and managing higher education institutions in Chicago, Minnesota and Ohio with a focus on workforce training and professional education.
She also has extensive corporate board service beginning in 1992 with National City Bank/Corporation, Office Max, American Greetings and Bridgestreet Worldwide, Inc. until those companies had a change of control. She later served on the Boards of American Family Insurance, Applied Industrial Technologies, Inc., Republic Powdered Metals, (RPM, Inc.) and First Energy. She is currently serving on the Boards of Barnes and Noble Education (BNED) and Parkwood LLC (an Ohio financial planning company).
Gaining extensive business experience through her board director services of public and private companies, she has been a member of compensation, nominating and governance and audit committees. From manufacturing through distribution; industrial through commercial; financial through merchandizing and energy, Dr. Thornton has amassed over 29 years of business experience. During that tenure, she has served on Special Committees of the Board of Directors involved in acquisition.
Dr. Thornton brings to the Board of Directors broad leadership and business skills as well as an extensive background in workforce/talent acquisition, development and evaluation/assessment.
La Forrest V. Williams, Director, age 70
Mr. Williams was appointed to the Board of Directors in July 2021, as an Independent Director within the meaning of Rule 5605(a)(2) of The Nasdaq Stock Market and was reelected at the 2021 Annual Meeting to serve a one-year term. Mr. Williams, as an independent director, serves on the nominating committee along with Messrs. Cochennet, Lambrecht, Addison, Ms. Thornton and Ms. Tucker.
Mr. Williams is a veteran executive of the communications, computer and information assurance business of the Department of Defense and Intelligence community. He served in the civilian Defense Intelligence Senior Executive Service and the United States Air Force senior officer corps as a communication/computer intelligence and information assurance strategist for more than 40 years. His activity in information assurance became a nexus with the vulnerabilities of the energy grid.
His accomplishments include serving as a leader in the original merging of communications and computer systems technology into one management structure for the United States Air Force. His energy focus evolved through his engagement in studying cybersecurity threats to our energy grid during his career at the National Security Agency. Mr. Williams has a history of leadership positions which includes, Chief Information Officer (CIO) of the National Security Agency (NSA), Director of Information Assurance for the U.S. European Command and Director of Legislative Affairs for the National Security Agency. Mr. Williams' experience includes leading a military Communications Group of more than 500 technicians and staff, supporting Nellis Air Force Base Nevada networks. He has installed, managed, upgraded and secured communication cable and space networks worldwide; to include the United States, Europe and South Pacific.
Mr. Williams holds a B.S. degree in Business Administration from San Jose State University and an M.S. Degree in Technology of Management Information Systems from the American University, Washington D.C. He has served at the forefront in the Information Age and was an early leader at NSA in advocating concern about the vulnerability of our nation's energy grid. His advocacy led to the formation of customer assistance teams that he established to advise on the survivability of energy systems of national security concern. He later joined the National War College faculty in 2010 to teach National Security Strategy as a visiting Professor until 2013.
He is a proven results-oriented leader with broad experience as an Air Force Colonel and three years of Board of Director experience with The Government Employees Benefit Association for federal employees. In his spare time, he is a volunteer Docent at the Smithsonian Institute in Washington D.C. and gives tours through the National Museum of American History.
Corporate Governance and Board of Directors Matters
We are committed to maintaining the highest standards of business conduct and corporate governance, which we believe are essential to running our business efficiently, serving our stockholders well and maintaining our integrity in the marketplace. We have adopted a Corporate Code of Ethics and Business Conduct, a code of business conduct and ethics for employees, directors and officers (including our principal executive officer and principal financial and accounting officer). We have also adopted the following governance guides: Charters for each of the Audit Committee, Compensation Committee, Disclosure Committee, Investment Committee, Nominating Committee, a policy for Director Independence, and Whistleblower Policy, all of which, in conjunction with our certificate of incorporation and bylaws, form the framework for our corporate governance. These corporate governance documents are available on the Internet at our website www.OrbitalEnergyGroup.com.
Our Corporate Governance Practices
We have always believed in strong and effective corporate governance procedures and practices. In that spirit, we have summarized several of our corporate governance practices below.
The Board of Director’s Role in Risk Oversight
The board of directors and its committees have an important role in the Company’s risk oversight, management and assessment process. The board regularly reviews with management the Company’s financial and business strategies, which include a discussion of relevant material risks as appropriate. The board discusses with the Company’s outside general counsel, as appropriate, its risk oversight and assessment as well as any material risks to the Company. In addition, the board delegates risk management responsibilities to the Audit Committee and Compensation Committee, which committees are each comprised of independent directors. The Audit Committee, as part of its charter, oversees the Company’s risk oversight, management and assessment of the Company and oversees and assesses the risks associated with the corporate governance and ethics of the Company. Risk considerations are a material aspect of the Compensation Committee. The Compensation Committee is responsible for overseeing the management of risks relating to executive compensation. In addition, the Compensation Committee also, as appropriate, assesses the risks relating to the Company’s overall compensation programs. The Investment Committee is responsible for overseeing and advising on possible investment opportunities as well as to administer and operate the Company’s investment portfolio. This includes aligning investment policies and strategies with the Company’s short and long-term goals, as well as setting benchmarks to evaluate long-term objectives and continual evaluation of the investment strategies. While the Committees oversee the management of the risk areas identified above, the entire board is regularly informed through committee reports about such risks. This enables the board and its committees to coordinate the risk management, assessment and oversight roles.
Adopting Governance Guidelines
Our board of directors has adopted a set of corporate governance guidelines to establish a framework within which it will conduct its business and to guide management in its running of the Company. The governance guidelines can be found on our website at www.OrbitalEnergyGroup.com and are summarized below.
Monitoring Board Effectiveness
It is important that our board of directors and its committees are performing effectively and in the best interest of the Company and its stockholders. The board of directors and each committee are responsible for annually assessing their effectiveness in fulfilling their obligations.
Conducting Formal Independent Director Sessions
On a regular basis, at the conclusion of regularly scheduled board meetings, the independent directors are encouraged to meet privately, without our management or any non-independent directors.
Hiring Outside Advisors
The board and each of its committees may retain outside advisors and consultants of their choosing at our expense, without management's consent.
Avoiding Conflicts of Interest
We expect our directors, executives and employees to conduct themselves with the highest degree of integrity, ethics and honesty. Our credibility and reputation depend upon the good judgment, ethical standards and personal integrity of each director, executive and employee. In order to provide assurances to the Company and its stockholders, we have implemented standards of business conduct, which provide clear conflict of interest guidelines to its employees and directors, as well as an explanation of reporting and investigatory procedures.
Providing Transparency
We believe that it is important that stockholders understand our governance practices. In order to help ensure transparency of our practices, we have posted information regarding our corporate governance procedures on our website at www.OrbitalEnergyGroup.com.
Whistleblower Policy
In furtherance of our governance transparency and ethical standards, we adopted a comprehensive Whistleblower Policy that encourages employees to report to proper authorities incorrect financial reporting, unlawful activity, activities that are not in line with the Orbital Energy Group Code of Business Conduct or activities, which otherwise amount to serious improper conduct. Our Whistleblower Policy is posted on our website at www.OrbitalEnergyGroup.com.
Accuracy of All Public Disclosure
It is the Company's policy that all public disclosure made by the Company should be accurate and complete, fairly present, in all material respects, the Company's financial condition and results of operations, and be made on a timely basis as required by applicable laws and securities exchange requirements. In order to oversee this policy, a Disclosure Committee Charter has been adopted by the Chief Executive Officer and Chief Financial Officer and ratified by our Audit Committee. You can view a copy of this document on our website at www.OrbitalEnergyGroup.com or obtain a copy by making a written request to the Company at Orbital Energy Group, Inc., 1924 Aldine Western, Houston, Texas 77038.
Communications with the Board of Directors
Stockholders may communicate with the board of directors by writing to the Company at Orbital Energy Group, Inc., 1924 Aldine Western, Houston, Texas 77038. Stockholders who would like their submission directed to a member of the board may so specify and the communication will be forwarded as appropriate.
Standards of Business Conduct
The board of directors has adopted a Code of Ethics and Business Conduct for all our employees and directors, including the Company's principal executive and senior financial officers. You can obtain a copy of these documents on our website at www.OrbitalEnergyGroup.com or by making a written request to the Company at Orbital Energy Group, Inc., 1924 Aldine Western, Houston, Texas 77038. We will disclose any amendments to the Code of Ethics and Business Conduct or waiver of a provision therefrom on our website at www.OrbitalEnergyGroup.com.
Ensuring Auditor Independence
We have taken several steps to ensure the continued independence of our independent registered public accounting firm. That firm reports directly to the Audit Committee, which also has the ability to pre-approve or reject any non-audit services proposed to be conducted by our independent registered public accounting firm.
Committees of the Board and Meetings
At December 31, 2021, our board of directors consists of nine directors. Six of our nine directors are ‘‘independent’’ as defined in Rule 5605(a)(2) of The Nasdaq Stock Market. Our board of directors has the following standing committees: Audit Committee, Compensation Committee, Disclosure Committee, Investment Committee and Nominating Committee. Each of the committees operates under a written charter adopted by the board of directors. All committee charters are available on our website at www.OrbitalEnergyGroup.com.
The Audit Committee is established pursuant to the Sarbanes-Oxley Act of 2002 for the purposes of overseeing the company’s accounts and financial reporting processes and audits of its financial statements. The Audit Committee reviews the financial information that will be provided to the stockholders and others, the systems of internal controls established by management and the board and the independence and performance of the Company’s audit process. The Audit Committee is directly responsible for, among other things, the appointment, compensation, retention and oversight of our independent registered public accounting firm, review of financial reporting, internal company processes of business/financial risk and applicable legal, ethical and regulatory requirements. During 2021, the Audit Committee held seven formal meetings.
At December 31, 2021, the Audit Committee is comprised of Sean P. Rooney, Chairman, C. Stephen Cochennet, and Corey A. Lambrecht. Messrs. Rooney, Cochennet, and Lambrecht are independent in accordance with Rule 10A-3 under the Securities Exchange Act of 1934 and Rule 5605(a)(2) of The Nasdaq Stock Market.
THE FOLLOWING REPORT OF THE AUDIT COMMITTEE DOES NOT CONSTITUTE SOLICITING MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE INTO ANY OTHER COMPANY FILING UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES THIS REPORT BY REFERENCE THEREIN.
Audit Committee Report
The Audit Committee reviews the financial information that will be provided to the stockholders and others, the systems of internal controls established by management and the board and the independence and performance of the Company’s audit process.
The Audit Committee has:
| • |
reviewed and discussed with management the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K and the most recent Quarterly Report on Form 10-Q; |
| • |
discussed with Grant Thornton LLP., the Company’s independent registered public accounting firm, the matters required to be discussed by General Auditing Standard 1301: Communications with Audit Committees as adopted by the Public Company Accounting Oversight Board; and |
| • |
received the written disclosures and letter from Grant Thornton LLP as required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence and has discussed with Grant Thornton LLP its independence from Orbital Energy Group. |
Based on these reviews and discussions, the Audit Committee has recommended that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Audit Committee has also considered whether the amount and nature of non-audit services provided by Grant Thornton LLP is compatible with the auditor’s independence and determined that it is compatible.
Submitted by: Audit Committee by
Sean P. Rooney, Chairman
C. Stephen Cochennet
Corey A. Lambrecht
The nominating committee consists of all of the members of the board of directors who are ‘‘independent directors’’ within the meaning of Rule 5605(a)(2) of The Nasdaq Stock Market. The nominating committee is responsible for the evaluation of nominees for election as director, the nomination of director candidates for election by the stockholders and evaluation of sitting directors. The board has developed a formal policy for the identification and evaluation of nominees, Charter of the Nominating Committee of the Board of Directors, which can be reviewed on our website at www.OrbitalEnergyGroup.com. In general, when the board determines that expansion of the board or replacement of a director is necessary or appropriate, the nominating committee will review, through candidate interviews with members of the board and management, consultation with the candidate's associates and through other means, a candidate's honesty, integrity, reputation in and commitment to the community, judgment, personality and thinking style, willingness to invest in the Company, residence, willingness to devote the necessary time, potential conflicts of interest, independence, understanding of financial statements and issues, and the willingness and ability to engage in meaningful and constructive discussion regarding Company issues. The committee reviews any special expertise, for example, that qualifies a person as an audit committee financial expert, membership or influence in a geographic or business target market, or other relevant business experience. To date the Company has not paid any fee to any third party to identify or evaluate, or to assist it in identifying or evaluating, potential director candidates.
The nominating committee considers director candidates nominated by stockholders during such times as the Company is actively considering obtaining new directors. Candidates recommended by stockholders will be evaluated based on the same criteria described above. Stockholders desiring to suggest a candidate for consideration should send a letter to the Company's secretary and include: (a) a statement that the writer is a stockholder (providing evidence if the person's shares are held in street name) and is proposing a candidate for consideration; (b) the name and contact information for the candidate; (c) a statement of the candidate's business and educational experience; (d) information regarding the candidate's qualifications to be director, including but not limited to an evaluation of the factors discussed above which the board would consider in evaluating a candidate; (e) information regarding any relationship or understanding between the proposing stockholder and the candidate; (f) information regarding potential conflicts of interest and (g) a statement that the candidate is willing to be considered and willing to serve as director if nominated and elected. Because of the small size of the Company and the limited need to seek additional directors, there is no assurance that all stockholder proposed candidates will be fully considered, that all candidates will be considered equally or that the proponent of any candidate or the proposed candidate will be contacted by the Company or the board and no undertaking to do so is implied by the willingness to consider candidates proposed by stockholders.
Disclosure Committee
We have formed a Disclosure Committee, which has been adopted by our CEO and CFO (‘‘Principal Officers’’) and ratified by our Audit Committee. The Disclosure Committee assists our Principal Officers in fulfilling their responsibility for oversight of the accuracy, completeness and timeliness of our public disclosures including, but not limited to our SEC filings, press releases, correspondence disseminated to security holders, presentations to analysts and release of financial information or earnings guidance to security holders or the investment community. The Disclosure Committee consists of our Principal Officers, the individual or representative of the firm primarily charged with investor/public relations, the Audit Committee Chairman and outside SEC counsel. Our Executive Chairman is Chairman of the committee. Our Senior Officers may replace or add new members from time to time. Our Senior Officers have the option to assume all the responsibilities of this committee or designate a committee member, who shall be a person with expertise in SEC and SRO rules and regulations with respect to disclosure, who shall have the power, acting together with our Senior Officers, to review and approve disclosure statements when time or other circumstances do not permit the full committee to meet. You may review the full text of our Disclosure Committee Charter on our website, www.OrbitalEnergyGroup.com, under the link, governance.
Generally, the committee serves as a central point to which material information should be directed and a resource for people who have questions regarding materiality and the requirement to disclose. In discharging its duties, the committee has full access to all Company books, records, facilities and personnel, including the board of directors, Audit Committee, independent public accountants and outside counsel.
Investment Committee
The purpose of the investment committee is to administer and to operate the portfolio. The members of the investment committee are fiduciaries of the portfolio, with responsibility for overseeing investment policies, general policies, guidelines, investment performance and related risk management. Committee members will fulfill their duties solely on behalf of the company’s mission. In addition to aligning investment policies and strategies with the company’s short- and long-term goals, investment committees must set benchmarks to evaluate long-term objectives and continually evaluate their strategies to keep pace with market fluctuations and changes.
The Investment Committee shall also provide initial oversight and analysis of potential acquisition targets being considered by Management. In that capacity, Investment Committee members may, among other things, participate in reviewing initial due diligence; visit prospective acquisition targets; participate in strategy and other discussions with Management; and, where appropriate, more.
At December 31, 2021, the Investment Committee is comprised of C. Stephen Cochennet, Corey A. Lambrecht, Chairman, and Nicholas M. Grindstaff, CFO.
Compensation Committee
The Compensation Committee discharges the board’s responsibilities relating to general compensation policies and practices and to compensation of our executives. In discharging its responsibilities, the Compensation Committee establishes principles and procedures in order to ensure to the board and the stockholders that the compensation practices of the Company are appropriately designed and implemented to attract, retain and reward high quality executives and are in accordance with all applicable legal and regulatory requirements. In this context, the Compensation Committee’s authority, duties and responsibilities are:
| • |
To annually review the Company’s philosophy regarding executive compensation. |
| • |
To periodically review market and industry data to assess the Company’s competitive position, and to retain any compensation consultant to be used to assist in the evaluation of directors’ and executive officers’ compensation. |
| • |
To establish and approve the Company goals and objectives, and associated measurement metrics relevant to compensation of the Company’s executive officers. |
| • |
To establish and approve incentive levels and targets relevant to compensation of the executive officers. |
| • |
To annually review and make recommendations to the board to approve, for all principal executives and officers, the base and incentive compensation, taking into consideration the judgment and recommendation of the Chief Executive Officer for the compensation of the principal executives and officers. |
| • |
To separately review, determine and approve the Chief Executive Officer’s applicable compensation levels based on the Committee’s evaluation of the Chief Executive Officer’s performance considering the Company’s and the individual goals and objectives. |
| • |
To review for any related party employee situations, to ensure appropriate controls are implemented surrounding compensation changes, bonuses and performance reviews of the related party employee, and to participate in such controls as appropriate. |
| • |
To periodically review and make recommendations to the board with respect to the compensation of directors, including board and committee retainers, meeting fees, equity-based compensation and such other forms of compensation as the Compensation Committee may consider appropriate. |
| • |
To administer and annually review the Company’s incentive compensation plans and equity-based plans. |
| • |
To review and make recommendations to the board regarding any executive employment agreements, any proposed severance arrangements or change in control and similar agreements/provisions, and any amendments, supplements or waivers to the foregoing agreements, and any perquisites, special or supplemental benefits. |
| • |
The Committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser. |
| • |
The Committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, legal counsel and other adviser retained by the Committee. The Company must provide for appropriate funding, as determined by the Committee, for payment of reasonable compensation to a compensation consultant, legal counsel or any other adviser retained by the Committee. |
| • |
The Committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser to the Committee, other than in-house legal counsel, only after taking into consideration the following factors: |
| (i) |
the provision of other services to the Company by the person that employs the compensation consultant, legal counsel or other adviser; |
| (ii) |
the amount of fees received from the Company by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser; |
| (iii) |
the policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest; |
| (iv) |
any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the Committee; |
| (v) |
any stock of the Company owned by the compensation consultant, legal counsel or other adviser; and |
| (vi) |
any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the Company. |
| • |
The Committee is not required to implement or act consistently with the advice or recommendations of the compensation consultant, legal counsel or other adviser to the Committee. |
Compensation Committee Members
The Compensation Committee of the board of directors is appointed by the board of directors to discharge the board’s responsibilities with respect to all forms of compensation of the Company’s executive officers, to administer the Company’s equity incentive plans and to produce an annual report on executive compensation for use in the Company’s Form 10-K and the proxy statement on Schedule 14A. At December 31, 2021, the Compensation Committee consists of two independent members of the board of directors, Messrs. Corey A. Lambrecht, and C. Stephen Cochennet, both of whom are ‘‘independent directors’’ within the meaning of Rule 5605(a) (2) of the Nasdaq Stock Market.
Committee Meetings
Our Compensation Committee meets formally and informally as often as necessary to perform its duties and responsibilities. The Compensation Committee held three formal meetings during fiscal 2021. On an as requested basis, our Compensation Committee receives and reviews materials prepared by management, consultants or committee members, in advance of each meeting. Depending on the agenda for the particular meeting, these materials may include, among other factors:
| • |
minutes and materials from the previous meeting(s); |
| • |
reports on year-to-date Company financial performance versus budget; |
| • |
reports on progress and levels of performance of individual and Company performance objectives; |
| • |
reports on the Company’s financial and stock performance versus a peer group of companies; |
| • |
reports from the Committee’s compensation consultant regarding market and industry data relevant to executive officer compensation; |
| • |
reports and executive compensation summary worksheets, which sets forth for each executive officer: current total compensation and incentive compensation target percentages, current equity ownership holdings and general partner ownership interest and current and projected value of each and all such compensation elements, including distributions and dividends therefrom, over a five-year period. |
Compensation Committee Charter
Our Compensation Committee Charter is posted on our website at www.OrbitalEnergyGroup.com.
Compensation Committee Interlocks and Insider Participation
None of the members of the Company’s Compensation Committee is or has at any time during the last completed fiscal year been an officer or employee of the Company. None of the Company’s executive officers has served as a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who served on the Company’s board of directors or Compensation Committee during the last completed fiscal year.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the compensation paid and accrued to be paid by the Company for the fiscal years 2020 and 2019 to the Company’s Chief Executive Officer, Chief Financial Officer and Executive Chairman/Chief Legal Counsel
Summary Compensation Table
| Name and Principal Position |
Year |
Salary (dollars) | Stock Awards (dollars) | Option Awards (dollars) | Non-equity Incentive Plan Compensation (dollars) | All Other Compensation (dollars) | Total (dollars) | ||||||||||||||||||||||||||||||||||
| William J. Clough, Executive Chairman/ Chief Legal Officer/former CEO/ Director (1) |
2021 |
$ | 831,442 | (2 | ) | $ | — | (2 | ) | $ | 3,203,800 | (2 | ) | $ | 531,250 | (2 | ) | $ | 18,669 | $ | 4,585,161 | ||||||||||||||||||||
| 2020 |
759,363 | (2 | ) | 21,887 | (2 | ) | 288,085 | (2 | ) | 300,000 | (2 | ) | 27,768 | 1,397,103 | |||||||||||||||||||||||||||
| Daniel N. Ford, Executive Vice President (3) |
2021 |
581,442 | (4 | ) | — | (4 | ) | 2,652,034 | (4 | ) | 265,625 | (4 | ) | 36,761 | 3,535,862 | ||||||||||||||||||||||||||
| 2020 |
512,346 | (4 | ) | 18,904 | (4 | ) | 224,066 | (4 | ) | 150,000 | (4 | ) | 43,121 | 948,437 | |||||||||||||||||||||||||||
| James F. O'Neil, CEO/Vice Chairman/Director (5) |
2021 |
800,000 | (6 | ) | — | (6 | ) | 5,695,644 | (6 | ) | — | (6 | ) | 41,271 | 6,536,915 | ||||||||||||||||||||||||||
| 2020 |
753,563 | (6 | ) | 8,937 | (6 | ) | 120,036 | (6 | ) | — | (6 | ) | 47,797 | 930,333 |
Footnotes:
| 1. |
Mr. Clough joined the Company on September 1, 2005. Effective September 13, 2007, Mr. Clough was appointed CEO/President of Orbital Energy Group and Chief Executive Officer of all wholly owned subsidiaries of the Company. Effective October 1, 2019 Mr. Clough stepped down as Chief Executive Officer and was appointed Executive Chairman and Chief Legal Officer. |
| 2. |
Mr. Clough is employed under a three-year employment contract with the Company, which became effective May 14, 2019. Said contract provides, in relevant part, for salary in year 1 of $750 thousand, year 2 of $800 thousand and year 3 of $850 thousand. The employment agreement includes bonus provisions for each calendar year targeted at seventy-five percent of base salary to be based on performance objectives, goals and milestones for each calendar year including company performance. Bonuses are approved based on various performance-related factors and an evaluation of current performance and includes a discretionary bonus of up to twenty-five percent of salary based upon the reasonable judgment of the compensation committee. Employee has the ability to earn a larger bonus based on the performance criteria set forth and the reasonable judgment and discretion of the compensation committee. The agreement provides for up to $9,999 of annual premium life insurance expenses along with the ordinary benefits provided to employees of the Company. The agreement entitles Mr. Clough to severance package of 2.5 times the sum of annual base salary and target bonus along with eighteen months of medical coverage under the Company's medical plans. |
| 3. |
Mr. Ford joined the Company May 15, 2008 and served as Chief Financial Officer until November 15, 2021 when he was appointed Executive Vice President. |
| 4. |
Mr. Ford is employed under a three-year employment contract with the Company, which became effective May 14, 2019. Said contract provides, in relevant part, for salary in year 1 of $500 thousand, year 2 of $550 thousand and year 3 of $600 thousand. The employment agreement includes bonus provisions for each calendar year targeted at seventy-five percent of base salary to be based on performance objectives, goals and milestones for each calendar year including company performance. Bonuses are approved based on various performance-related factors and an evaluation of current performance and includes a discretionary bonus of up to twenty-five percent of salary based upon the reasonable judgment of the compensation committee. Employee has the ability to earn a larger bonus based on the performance criteria set forth and the reasonable judgment and discretion of the compensation committee. The agreement provides for ordinary benefits provided to employees of the Company. The agreement entitles Mr. Ford to a severance package of 2.0 times the sum of annual base salary and target bonus along with eighteen months of medical coverage under the Company's medical plans. |
| 5. |
Mr. O'Neil was appointed Director July 9, 2019 and was appointed Vice Chairman and Chief Executive Officer effective October 1, 2019. |
| 6. |
Mr. O'Neil is employed under a three-year employment contract with the Company, which became effective October 1, 2019. Said contract provides, in relevant part, for salary in year 1 of $750 thousand, year 2 of $800 thousand and year 3 of $850 thousand. The employment agreement includes bonus provisions for each calendar year targeted at seventy-five percent of base salary to be based on performance objectives, goals and milestones for each calendar year including company performance. Bonuses are approved based on various performance-related factors and an evaluation of current performance and includes a discretionary bonus of up to twenty-five percent of salary based upon the reasonable judgment of the compensation committee. Employee has the ability to earn a larger bonus based on the performance criteria set forth and the reasonable judgment and discretion of the compensation committee. The agreement provides for up to $9,999 of annual premium life insurance expenses along with the ordinary benefits provided to employees of the Company. The agreement entitles Mr. O'Neil to a severance package of 2.5 times the sum of annual base salary and target bonus along with eighteen months of medical coverage under the Company's medical plans. |
| 7. |
As of December 31, 2021, Mr. Ford held 112,598 outstanding options. As of December 31, 2021, Mr. Clough, Mr. Ford and Mr. O'Neil held 1,350,000, 1,095,000, and 1,787,500 cash settled stock appreciation rights, respectively. |
| 8. |
All other compensation includes health care, insurance and 401(k) matching benefits. |
The following table summarizes potential payments upon termination of employment to each of the named executive officers employed on the last day of our most recently completed fiscal year. The amounts set forth in the table are based on the assumption that the triggering event occurred on the last business day of our last completed fiscal year.
| Involuntary |
||||||||||
| Termination or |
||||||||||
| Resignation for |
Termination |
|||||||||
| Good Reason |
upon Disability |
|||||||||
| Name |
Benefit |
|||||||||
| Salary and bonus continuation |
$ | 3,718,750 | (1) | $ | 318,750 | (1) | ||||
| William J. Clough, Executive Chairman/ Chief Legal Officer/ former CEO/Director |
Benefits |
28,003 | (1) | 28,003 | (1) | |||||
| Salary and bonus continuation |
2,100,000 | (2) | 225,000 | (2) | ||||||
| Daniel N. Ford, Chief Financial Officer |
Benefits |
29,042 | (2) | 29,042 | (2) | |||||
| Salary and bonus continuation |
3,718,750 | (3) | 318,750 | (3) | ||||||
| James F. O'Neil, CEO/ Director |
Benefits |
37,906 | (3) | 37,906 | (3) | |||||
| 1. |
Mr. Clough's employment contract with the Company entitles Mr. Clough to a severance package of 2.5 times the sum of annual base salary and target bonus along with eighteen months of medical coverage under the Company's medical plans. Under involuntary termination without cause or resignation for good reason, Mr. Clough would receive any amounts earned, accrued or owing but not yet paid; full vesting of any unvested stock options and any deferred past bonuses that have been earned but not paid. Should Mr. Clough be terminated on account of disability he is entitled to 75% of his then current annual base salary for six months and eighteen months of medical coverage. |
| 2. |
Mr. Ford's employment contract with the Company entitles Mr. Ford to a severance package of 2.0 times the sum of annual base salary and target bonus along with eighteen months of medical coverage under the Company's medical plans. Under involuntary termination without cause or resignation for good reason, Mr. Ford would receive any amounts earned, accrued or owing but not yet paid; full vesting of any unvested stock options and any deferred past bonuses that have been earned but not paid. Should Mr. Ford be terminated on account of disability he is entitled to 75% of his then current annual base salary for six months and eighteen months of medical coverage. |
| 3. |
Mr. O'Neil's employment contract with the Company entitles Mr. O'Neil to a severance package of 2.5 times the sum of annual base salary and target bonus along with eighteen months of medical coverage under the Company's medical plans. Under involuntary termination without cause or resignation for good reason, Mr. O'Neil would receive any amounts earned, accrued or owing but not yet paid; full vesting of any unvested stock options and any deferred past bonuses that have been earned but not paid. Should Mr. O'Neil be terminated on account of disability he is entitled to 75% of his then current annual base salary for six months and eighteen months of medical coverage. |
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth the outstanding equity awards at December 31, 2021 to each of the named executive officers:
| OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END |
|||||||||||||
| Name |
Number of Securities Underlying Unexercised Options (#) |
Option Exercise Price ($) |
Option Expiration |
Payout Value of Unexercised In-the-Money Options/SARs at Fiscal Year-End ($) |
|||||||||
| Daniel N. Ford (1) |
12,598 | 4.56 | 4/16/2022 |
— | |||||||||
| Daniel N. Ford (2) |
100,000 | 6.25 | 6/24/2023 |
— | |||||||||
| William J. Clough (3) |
450,000 | 1.00 | 6/1/2026 |
535,500 | |||||||||
| Daniel N. Ford (3) |
350,000 | 1.00 | 6/1/2026 |
416,500 | |||||||||
| James F. O'Neil (3) |
187,500 | 1.00 | 6/1/2026 |
223,125 | |||||||||
| William J. Clough (4) |
900,000 | 2.89 | 4/23/2024 |
— | |||||||||
| Daniel N. Ford (4) |
745,000 | 2.89 | 4/23/2024 |
— | |||||||||
| James F. O'Neil (4) |
1,600,000 | 2.89 | 4/23/2024 |
— | |||||||||
Footnotes:
| 1. |
Effective April 16, 2012, Mr. Ford received bonus options to purchase 12,598 common shares within ten years from date of issuance, at a price of $4.56 per share that vested over 4 years: 25% at year one and thereafter in equal monthly installments. |
| 2. |
Effective June 24, 2013, Mr. Ford received bonus options to purchase 100,000 common shares within ten years from date of issuance, at a price of $6.25 per share that vested one third per year over 3 years. |
| 3. | Effective June 1, 2020, Mr. Clough, Mr. Ford and Mr. O'Neil received 450,000, 350,000 and 187,500 cash-settled stock appreciation rights, respectively, within 6 years from the date of issuance, at a price of $1.00 per share that vest in equal monthly installments over 2 years. |
| 4. | Effective April 23, 2021, Mr. Clough, Mr. Ford, and Mr. O'Neil received 900,000, 745,000 and 1,600,000 cash-settled stock appreciation rights, respectively, within 3 years from the date of issuance, at a price of $2.89 per share that vests in equal monthly installments over 3 years. |
Director Compensation
For 2021, each of our directors received the following compensation pursuant to our director compensation plan:
Non-employee directors earned/received annual compensation of $100,000.
| • |
The $100,000 annual compensation for non-employee directors is issued in the form of $50,000 cash compensation and $50,000 common stock calculated by using the Nasdaq Stock Market closing price per share on the date of issuance. In addition, the chairman and member of the Investment Committee received $84,500 and $58,500, respectively of additional cash compensation for their services. | |
| • | In March 2021, each director received a 20,000 one-time award for director compensation under the Company's 2020 Equity Compensation Plan. |
| • |
At the election of each director, all or any portion of the cash compensation may be converted to stock purchase options calculated by using the strike price of ten percent (10%) above the Nasdaq Stock Market closing price per share on the date of grant. |
| • |
At the election of each director, all or any portion of the cash compensation may be converted to stock calculated by using the Nasdaq Stock Market closing price per share on the date of conversion. |
The following table sets forth the compensation of the non-employee directors for the fiscal year ended December 31, 2021:
|
|
Non- |
|||||||||||||||||||||||||||
|
|
Equity |
Nonqualified |
||||||||||||||||||||||||||
| Fees |
Incentive |
Deferred |
||||||||||||||||||||||||||
| paid in |
Stock |
Option |
Plan |
Compensation |
All Other |
|||||||||||||||||||||||
| Cash |
Awards |
Awards |
Compensation |
Earnings |
Compensation |
Total |
||||||||||||||||||||||
| Name |
($) (1) |
($) |
($) |
($) |
($) |
($) |
($) |
|||||||||||||||||||||
| Paul Addison, Director |
$ | 28,851 | $ | 28,842 | $ | — | $ | — | $ | — | $ | — | $ | 57,693 | ||||||||||||||
| C. Stephen Cochennet, Director |
146,006 | 159,194 | — | — | — | — | 305,200 | |||||||||||||||||||||
| Corey A. Lambrecht, Director |
172,006 | 159,194 | — | — | — | — | 331,200 | |||||||||||||||||||||
| Sean P. Rooney, Director |
75,006 | 146,694 | — | — | — | — | 221,700 | |||||||||||||||||||||
| Jerry Sue Thornton, Director |
20,837 | 20,830 | — | — | — | — | 41,667 | |||||||||||||||||||||
| Sarah Tucker, Director |
87,506 | 159,194 | — | — | — | — | 246,700 | |||||||||||||||||||||
| La Forrest Williams, Director |
20,837 | 20,830 | — | — | — | — | 41,667 | |||||||||||||||||||||
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial ownership of our voting shares as of December 31, 2021 by: (i) each stockholder known by us to be the beneficial owner of 5% or more of the outstanding voting shares, (ii) each of our directors and executives and (iii) all directors and executive officers as a group. Except as otherwise indicated, we believe that the beneficial owners of the voting shares listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Shares of common stock issuable upon exercise of options and warrants that are currently exercisable or that will become exercisable within 60 days of December 31, 2021 have been included in the table.
No shares of preferred stock are outstanding at the date of this report.
Beneficial Interest Table
| Percentages of |
||||||||
| Number of |
Shares |
|||||||
| Securities |
Beneficially |
|||||||
| Name and Address of Beneficial Owner (1) |
Owned |
Owned (2) |
||||||
| Paul T. Addison (3) |
8,756 | * | % | |||||
| William J. Clough (4) |
319,480 | * | % | |||||
| James F. O'Neil (5) |
1,200,263 | 1.47 | % | |||||
| C. Stephen Cochennet (6) |
184,667 | * | % | |||||
| Daniel N. Ford (7) |
220,433 | * | % | |||||
| Corey A. Lambrecht (8) |
193,672 | * | % | |||||
| Jerry Sue Thornton (9) |
6,709 | * | % | |||||
| Sarah Tucker (10) |
94,378 | * | % | |||||
| Paul D. White (11) |
50,727 | * | % | |||||
| La Forrest V. Williams (12) |
6,709 | * | % | |||||
| Kurt A. Johnson, Jr. |
||||||||
| 15502 Bayou Oaks Drive, Danbury, Texas 77534 |
4,408,807 | 5.38 | % | |||||
| Tidal Power Group LLC |
||||||||
| 4211 Chance Lane, Rosharon, Texas 77583 |
7,213,211 | 8.81 | % | |||||
| Officers, Directors, Executives as Group |
2,435,740 | 2.97 | % | |||||
Footnotes:
| 1. |
Except as otherwise indicated, the address of each beneficial owner is c/o Orbital Energy Group, Inc., 1924 Aldine Western, Houston, Texas 77038. |
| 2. |
Calculated on the basis of 81,906,676 shares of common stock outstanding at December 31, 2021 except that shares of common stock underlying options exercisable within 60 days and issued within 60 days of the date hereof are deemed to be outstanding for purposes of calculating the beneficial ownership of securities of such holder of options and shares. A * denotes less than 1 percent beneficially owned. |
| 3. | Mr. Addison is a Director. |
| 4. | Mr. Clough is a Director, Executive Chairman and Chief Legal Officer of Orbital Energy Group, Inc. |
| 5. |
Mr. O'Neil is a Director, and Chief Executive Officer of Orbital Energy Group, Inc. |
| 6. |
Mr. Cochennet is a Director. |
| 7. |
Mr. Ford’s shares include vested options to purchase 112,598 common shares. Mr. Ford is Executive Vice President and former Chief Financial Officer of Orbital Energy Group, Inc. |
| 8. |
Mr. Lambrecht’s shares include vested options to purchase 13,300 common shares. Mr. Lambrecht is a Director. |
| 9. |
Ms. Thornton is a Director. |
| 10. | Ms. Tucker is a Director. |
| 11. |
Mr. White’s shares include vested options to purchase 7,500 common shares. Mr. White is a Director. |
| 12. | Mr. Williams is a Director. |
We relied upon Section 4(2) of the Securities Act of 1933 as the basis for an exemption from registration for the issuance of the above securities.
Employee Equity Incentive Plans
At December 31, 2021, the Company had outstanding the following equity compensation plan information:
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Future issuance under equity compensation plans (excluding securities reflected in column (a)) |
||||||||||
| Plan Category |
(a) |
(b) |
(c) |
|||||||||
| Equity compensation plans approved by security holders |
2,500 | $ | 4.58 | 4,130,665 | ||||||||
| Equity compensation plans not approved by security holders |
235,485 | 6.16 | — | |||||||||
| 237,985 | $ | 6.14 | 4,130,665 | |||||||||
Equity Compensation Plans Approved by Stockholders
On May 16, 2008 the Company’s board of directors adopted the 2008 Equity Incentive Plan and authorized 1,500,000 shares of Common Stock to fund the Plan which was approved by the Company shareholders at the 2008 Annual Meeting of Shareholders. At the 2009 Annual Meeting of Shareholders, the shareholders approved an amendment to the 2008 Equity Incentive Plan to increase the number of common shares issuable under the plan from 1,500,000 to 3,000,000. These shares have been registered under Form S-8. As of December 31, 2020 there are no remaining shares available to grant under the 2008 Equity Incentive Plan.
At the 2020 Annual Meeting of Shareholders, the Company’s shareholders approved the Orbital Energy Group 2020 Incentive Award Plan and authorized a share limit of 2,000,000 shares. At the 2021 Annual Meeting of Shareholders, the Company's shareholders approved an increase in authorized share limit to 5,000,000.
The purpose of the Orbital Energy Group 2020 Incentive Award Plan is to enhance our ability to attract, retain and motivate persons who make (or are expected to make) important contributions to Orbital Energy Group by providing these individuals with equity ownership opportunities. Equity awards are intended to motivate high levels of performance and align the interests of our directors, employees and consultants with those of our stockholders by giving directors, employees and consultants the perspective of an owner with an equity stake in Orbital Energy Group and providing a means of recognizing their contributions to the success of Orbital Energy Group. Our board of directors and management believe that equity awards are necessary to remain competitive in its industry and are essential to recruiting and retaining the highly qualified employees who help Orbital Energy Group meet its goals. A primary purpose of the plan is to provide OEG with appropriate capacity to issue equity compensation in anticipation of future acquisitions.
The Orbital Energy Group 2020 Incentive Award Plan provides for the grant of stock options, including ISOs and nonqualified stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock, dividend equivalents, restricted stock units (“RSUs”) and other stock or cash-based awards. Certain awards under the Orbital Energy Group 2020 Incentive Award Plan may constitute or provide for payment of “nonqualified deferred compensation” under Section 409A of the Code. All awards under the Orbital Energy Group 2020 Incentive Award Plan will be set forth in the award agreement, which will detail the terms and conditions of awards, including any applicable vesting and payment terms and post termination exercise limitations. All Awards shall be subject to a minimum vesting of one year from the Grant Date. A brief description of each award type follows.
|
|
● |
Stock Options and SARs. Stock options provide for the purchase of shares of common stock of Orbital Energy Group in the future at an exercise price set on the grant date. ISOs, in contrast to NSOs, may provide tax deferral beyond exercise and favorable capital gains tax treatment to their holders if certain holding period and other requirements of the Code are satisfied. SARs entitle their holder, upon exercise, to receive from Orbital Energy Group an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The plan administrator will determine the number of shares covered by each option and SAR, the exercise price of each option and SAR and the conditions and limitations applicable to the exercise of each option and SAR. The exercise price of a stock option or SAR will not be less than 100% of the fair market value of the underlying share on the grant date (or 110% in the case of ISOs granted to certain significant stockholders), except with respect to certain substitute awards granted in connection with a corporate transaction. The term of a stock option or SAR may not be longer than five years and are subject to any limitations of the Plan or that the Administrator may impose or provide in the Award Agreement. |
|
|
● |
Restricted Stock. Restricted stock is an award of nontransferable shares of common stock of Orbital Energy Group that remain forfeitable unless and until specified conditions are met and which may be subject to a purchase price. Upon issuance of restricted stock, recipients generally have the rights of a stockholder with respect to such shares, which generally include the right to receive dividends and other distributions in relation to the award. The terms and conditions applicable to restricted stock will be determined by the plan administrator, subject to the conditions and limitations contained in the Orbital Energy Group 2020 Incentive Award Plan. |
|
|
● |
RSUs. RSUs are contractual promises to deliver shares of common stock of Orbital Energy Group in the future, which may also remain forfeitable unless and until specified conditions are met and may be accompanied by the right to receive the equivalent value of dividends paid on shares of common stock of Orbital Energy Group prior to the delivery of the underlying shares (i.e., dividend equivalent rights). The Company accounts for forfeitures of employee awards as they occur. The plan administrator may provide that the delivery of the shares underlying RSUs will be deferred on a mandatory basis or at the election of the participant. The terms and conditions applicable to RSUs will be determined by the plan administrator, subject to the conditions and limitations contained in the Orbital Energy Group 2020 Incentive Award Plan or as provided in the Award Agreement. |
|
|
● |
Other Stock or Cash Based Awards. Other stock or cash-based awards are awards of cash, shares of common stock of Orbital Energy Group and other awards valued wholly or partially by referring to, or otherwise based on, shares of common stock of Orbital Energy Group or other property. Other stock or cash-based awards may be granted to participants and may also be available as a payment form in the settlement of other awards, as standalone payments and as payment in lieu of compensation to which a participant is otherwise entitled. The plan administrator will determine the terms and conditions of other stock or cash-based awards, which may include any purchase price, performance goal, transfer restrictions and vesting conditions, subject to the conditions and limitations in the Orbital Energy Group 2020 Incentive Award Plan or as provided in the Award Agreement. |
The Orbital Energy Group 2020 Incentive Award Plan provides that the plan administrator may establish compensation for non-employee directors from time to time subject to the Orbital Energy Group 2020 Incentive Award Plan’s limitations. The plan administrator will from time to time determine the terms, conditions and amounts of all non-employee director compensation in its discretion and pursuant to the exercise of its business judgment, taking into account such factors, circumstances and considerations as it shall deem relevant from time to time, provided that, the sum of any cash compensation or other compensation and the grant date fair value of any equity awards granted under the Orbital Energy Group 2020 Incentive Award Plan as compensation for services as a non-employee director during any fiscal year may not exceed $250,000 per year of a non-employee director’s service as a non-employee director. The non-employee Director receiving such additional compensation may not participate in the decision to award such compensation or in other contemporaneous compensation decisions involving the non-employee Director.
As of December 31, 2021 there are 4,130,665 remaining shares available to grant under the 2020 Incentive Award Plan.
Equity Compensation Plans Not Approved by Stockholders
Pursuant to a board resolution in January 2009, following recommendation by the Compensation Committee, the 2009 Equity Incentive Plan (Executive), a Non-Qualified Stock Option Plan, was created and funded with 4,200,000 shares of $0.001 par value common stock. The Compensation Committee was appointed as the Plan Administrator to manage the plan. In October 2010 and September 2012, the board of directors authorized an additional 3,060,382 and 330,000 options, respectively, under the 2009 Equity Incentive Plan (Executive).
Issuances of stock options under the 2009 Equity Incentive Plan (Executive) were made to attract, retain and motivate executive and management employees and directors and to encourage these individuals to acquire an equity interest in the Company, to make monetary payments to certain management employees and directors based upon the value of the Company’s stock and to provide these individuals with an incentive to maximize the success of the Company and further the interest of the shareholders. The 2009 Plan allowed for the issuance of Incentive Non-Statutory Options.
The Company has outstanding at December 31, 2021, the following options issued under equity compensation plans not approved by security holders:
|
|
• |
During 2012, the Company granted options to purchase restricted common stock at $4.56 per share to officers and directors as follows: 19,800 options that vest one year after the April 16, 2012 grant date; 64,875 options that vest over four years, 25% at one year after the grant date, thereafter in equal monthly installments, and 330,000 options to purchase restricted common stock at $6.00 per share were granted to an officer that vest in equal monthly installments over the course of forty-eight consecutive months beginning September 2012. Of these 2012 grants, 37,598 remain outstanding and fully vested at December 31, 2021. |
|
|
• |
During 2013, the Company issued 350,000 options to purchase restricted common stock at $6.25 per share to three officers as follows: one third that vest one year after the June 24, 2013 grant date, one third that vest two years after the grant date and the balance that vest three years after the grant date. At December 31, 2021, 150,000 of these 2013 granted options are outstanding and fully vested. |
|
|
• |
During 2014, the Company issued options to purchase 10,000 shares of restricted common stock at a price of $6.92 per share to each board member who is not an employee of the Company. The options vested in twelve equal installments during 2014. The Company issued options to purchase 42,890 restricted shares of common stock at a price of $6.92 per share to two board members, who chose to receive a portion of their annual board compensation in the form of equity. The Company granted options to purchase 7,500 restricted shares of common stock at a price of $8.15 per share to each of the two then newly elected directors that vested August 31, 2015. Of these 2014 options grants, 47,887 options are outstanding and fully vested at December 31, 2021. |
As of December 31, 2021, there are no remaining shares available to grant under the 2009 Equity Incentive Plan (Executive).
The description of the Company’s capital stock does not purport to be complete and is subject to and qualified by its Articles of Incorporation, Bylaws, and amendments thereto and by the provisions of applicable Colorado law. The Company’s transfer agent is Computershare Trust Company, Inc., 350 Indiana Street, Suite 800, Golden, Colorado 80401.
Item 13. Certain Relationships and Related Transactions and Director Independence
The Board of Directors is responsible for the review and approval of all related party transactions. Although the Board does not have written policies and procedures with respect to the review of related party transactions, we intend that any such transactions will be reviewed by the Board of Directors or one of its committees, which will consider all relevant facts and circumstances and will consider, among other factors:
| • |
the material terms of the transaction; |
| • |
the nature of the relationship between the Company and the related party; |
| • |
the significance of the transaction to the Company; and |
| • |
whether or not the transaction would be likely to impair (or create the appearance of impairing) the judgment of a director or executive officer to act in the best interest of the Company. |
Except as set forth herein, no related party of the Company, including, but not limited to, any director, officer, nominee for director, immediate family member of a director or officer, immediate family member of any nominee for director, security holder that beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to its outstanding shares, or immediate family member of any such security holder, since the beginning of fiscal year 2021, has any material interest, direct or indirect, in any transaction or in any presently proposed transaction with the Company where the amount involved exceeds $120,000 which has or will materially affect the Company.
Chief Legal Officer and Executive Chairman of the Board of Directors, William J. Clough’s son, Nicholas J. Clough, serves as Vice President of Greenfield Operations. Additional Information on Nicholas Clough’s compensation is included in Note 11 Related Party Transactions, to the Consolidated Financial Statements under Part II, Item 8, ‘‘Financial Statements and Supplementary Data.’’
Item 14. Principal Accountants Fees and Services
Fees or controlled billings for services billed by the Company’s principal accountant, Grant Thornton LLP, were as follows:
| For the Years Ended December 31, |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Audit fees (1) |
$ | 1,064 | $ | 725 | ||||
| Tax fees and other fees (2) |
242 | 106 | ||||||
| Total Fees |
$ | 1,306 | $ | 831 | ||||
| (1) |
Includes fees for audit of the Company's consolidated financial statements, review of the related quarterly financial statements, and services that are normally provided by our independent registered public accounting firm in connection with the statutory and regulatory filings, including reviews of documents filed with the SEC. |
| (2) |
Includes fees for tax planning and tax compliance/preparation fees for professional services rendered by our independent registered public accounting firm to certain subsidiaries of the Company. |
In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, the Audit Committee has adopted an informal approval policy that it believes will result in an effective and efficient procedure to pre-approve services performed by the independent registered public accounting firm.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors and persons owning more than 10% of our common stock to file reports of ownership and reports of changes of ownership with the Securities and Exchange Commission. These reporting persons are required to furnish us with copies of all Section 16(a) forms that they file. We have made all officers and directors aware of their reporting obligations and have appointed an employee to oversee Section 16 compliance for future filings.
Stockholder Communications
Company stockholders who wish to communicate with the board of directors or an individual director may write to Orbital Energy Group, Inc., 1924 Aldine Western, Houston, Texas 77038 or to the attention of an individual director. Your letter should indicate that you are a stockholder and whether you own your shares in street name. Letters received will be retained until the next Board meeting when they will be available to the addressed director. Such communications may receive an initial evaluation to determine, based on the substance and nature of the communication, a suitable process for internal distribution, review and response or other appropriate treatment. There is no assurance that all communications will receive a response.
Certain Provisions of the Articles of Incorporation and Colorado Business Corporation Act Relating to Indemnification of Directors and Officers
The Colorado General Corporation Act, as revised, provides that if so provided in the articles of incorporation, the corporation shall eliminate or limit the personal liability of a director to the corporation or to its stockholders for monetary damages for breach of fiduciary duty as a director; except that any such provision shall not eliminate or limit the liability of a director to the corporation or to its stockholders for monetary damages for any breach of the director's duty of loyalty to the corporation or to its stockholders, acts or omissions not in good faith or, which involve intentional misconduct or a knowing violation of law, unlawful distributions, or any transaction from which the director directly or indirectly derived an improper personal benefit.
Our Articles of Incorporation and bylaws provide that a person who is performing his or her duties shall not have any liability by reason of being or having been a director of the corporation and that the Company shall indemnify and advance expenses to a director or officer in connection with a proceeding to the fullest extent permitted or required by and in accordance with the indemnification sections of Colorado statutes.
Insofar as indemnification for liabilities may be invoked to disclaim liability for damages arising under the Securities Act of 1933, as amended, or the Securities Act of 1934 (collectively, the ‘‘Acts’’), as amended, it is the position of the Securities and Exchange Commission that such indemnification is against public policy as expressed in the Acts and are therefore, unenforceable.
Reports to Stockholders
We intend to voluntarily send Form 10-Ks to our stockholders, which will include audited consolidated financial statements. We are a reporting company and file reports with the Securities and Exchange Commission (SEC), including this Form 10-K as well as quarterly reports under Form 10-Q. The public may read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The company files its reports electronically and the SEC maintains an Internet site that contains reports, proxy and information statements and other information filed by the company with the SEC electronically. The address of that site is www.sec.gov.
The company also maintains an Internet site, which contains information about the company, news releases, governance documents and summary financial data. The address of that site is www.OrbitalEnergyGroup.com.
Part IV
Item 15. Exhibits, Financial Statement Schedules
No schedules are included because the required information is inapplicable, not required or are presented in the financial statements or the related notes thereto.
The following exhibits are included as part of this Form 10-K.
| 32.2 19 |
| 101 19 |
Inline XBRL-Related Documents. |
|
| 101.INS 19 |
Inline XBRL Instance Document. |
|
| 101.SCH 19 |
Inline XBRL Taxonomy Extension Schema Document. |
|
| 101.CAL 19 |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
| 101.DEF 19 |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
| 101.LAB 19 |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
| 101.PRE 19 |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
| 104 19 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)
Footnotes to Exhibits:
| 1. |
Incorporated by reference to our Report on Form 8-K filed with the Commission on October 2, 2019. |
| 2. |
Incorporated by reference to our Report on Form 8-K filed with the Commission on November 14, 2019. |
| 3. |
Incorporated by reference to our Report on Form 8-K filed with the Commission on May 8, 2020. |
| 4. | Incorporated by reference to our Proxy Statement and Notice of 2013 Annual Stockholder Meeting filed with the Commission September 17, 2013. |
| 5. |
Incorporated by reference to our Report on Form 8-K filed with the Commission on March 3, 2015 and Form 8-K/A filed with the Commission on May 13, 2015. |
| 6. | Incorporated by reference to our Report on Form 10-K filed with the Commission on March 30, 2020. |
| 7. |
Incorporated by reference to our Report on Form 10-K filed with the Commission on March 14, 2018. |
| 8. | Incorporated by reference to our Report on Form 10-K filed with the Commission on March 18, 2019. |
| 9. |
Incorporated by reference to our Report on Form 10-Q filed with the Commission on May 15, 2019. |
| 10. | Incorporated by reference to our Report on Form 10-Q filed with the Commission on May 20, 2020. |
| 11. | Incorporated by reference to our Report on Form 8-K filed with the Commission on November 18, 2020. |
| 12. | Incorporated by reference to our Report on Form 424B5 Prospectus supplement filed with the Commission on January 4, 2021. |
| 13. | Incorporated by reference to our Report on Form 8-K filed with the Commission on January 4, 2021. |
| 14. | Incorporated by reference to our Report on Form 424B5 Prospectus supplement filed with the Commission on January 15, 2021. |
| 15. | Incorporated by reference to our Report on Form 8-K filed with the Commission on January 15, 2021. |
| 16. | Incorporated by reference to our Report on Form 8-K filed with the Commission on February 16, 2021. |
| 17. | Incorporated by reference to our Report on Form 8-K filed with the Commission on April 6, 2020. |
| 18. | Incorporated by reference to our Report on Form 8-K filed with the Commission on March 26, 2021. |
| 19. |
Filed herewith. |
None.
Pursuant to the requirements of Section 13 or 15(d) 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.
Orbital Energy Group, Inc.
| Signature |
Title |
Date |
|||
| By |
/s/ James F. O'Neil |
CEO/Principal Executive |
March 31, 2022 | ||
| James F. O'Neil |
Officer/Director |
||||
| By |
/s/ Nicholas M. Grindstaff |
CFO/ Principal Financial |
March 31, 2022 | ||
| Nicholas M. Grindstaff |
and Accounting Officer |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities on the dates indicated.
| Signature |
Title |
Date |
|||
| By |
/s/ James F. O'Neil |
CEO/Principal Executive |
March 31, 2022 | ||
| James F. O'Neil |
Officer/Director |
||||
| By |
/s/ William J. Clough |
Executive Chairman/Chief Legal |
March 31, 2022 | ||
| William J. Clough |
Counsel/Director |
||||
| By |
/s/ Nicholas M. Grindstaff |
CFO/ Principal Financial |
March 31, 2022 | ||
| Daniel N. Ford |
and Accounting Officer |
||||
| By |
/s/ Paul Addison, Director | Director |
March 31, 2022 | ||
| Paul Addison | |||||
| By |
/s/ C. Stephen Cochennet |
Director |
March 31 2022 | ||
| C. Stephen Cochennet |
|||||
| By |
/s/ Corey A. Lambrecht |
Director |
March 31, 2022 | ||
| Corey A. Lambrecht |
|||||
| By |
/s/ Jerry Sue Thornton |
Director |
March 31, 2022 | ||
| Jerry Sue Thornton |
|||||
| By |
/s/ Sarah Tucker |
Director |
March 31, 2022 | ||
| Sarah Tucker |
|||||
| By | /s/ Paul D. White | Director |
March 31, 2022 | ||
| Paul D. White | |||||
| By |
/s/ La Forrest Williams |
Director |
March 31, 2022 |
||
| La Forrest Williams |
|||||