Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. These factors include:
|
|
●
|
the need for additional funding;
|
|
|
●
|
our lack of a significant operating history;
|
|
|
●
|
the fact that our sole officer and director has significant control over our voting stock;
|
|
|
●
|
the loss of key personnel or failure to attract, integrate and retain additional personnel;
|
|
|
●
|
corporate governance risks;
|
|
|
●
|
economic downturns;
|
|
|
●
|
the level of competition in our industry and our ability to compete;
|
|
|
●
|
our ability to respond to changes in our industry;
|
|
|
●
|
our ability to protect our intellectual property and not infringe on others’ intellectual property;
|
|
|
●
|
our ability to scale our business;
|
|
|
●
|
our ability to maintain supplier relationships;
|
|
|
●
|
our ability to obtain and retain customers;
|
|
|
●
|
our ability to execute our business strategy in a very competitive environment;
|
|
|
●
|
trends in and the market for recreational pools and services;
|
|
|
●
|
lack of insurance policies;
|
|
|
●
|
dependence on a small number of customers;
|
|
|
●
|
changes in laws and regulations;
|
|
|
●
|
the market for our common stock;
|
|
|
●
|
our ability to effectively manage our growth;
|
|
|
●
|
dilution to existing stockholders;
|
|
|
●
|
costs and expenses associated with being a public company;
|
|
|
●
|
client lawsuits, damages, judgements and settlements required to be paid in connection therewith and the effects thereof on our reputation;
|
|
|
●
|
health risks, economic slowdowns and rescissions and other negative outcomes caused by COVID-19 and governmental responses thereto;
|
|
|
●
|
economic downturns both in the United States and globally;
|
|
|
●
|
risk of increased regulation of our operations; and
|
|
|
●
|
other risk factors included under “Risk Factors” below and under “Item 1A. Risk Factors” in our latest Annual Report on Form 10-K.
|
You should read the matters described and incorporated by reference in “Risk Factors“ and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations“ contained in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on May 19, 2020 (the “Annual Report”).
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under “Part I - Financial Information” – “Item 1. Financial Statements”.
In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the industries in which we operate in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Reliant”, “Reliant Holdings” and “Reliant Holdings, Inc.” refer specifically to Reliant Holdings, Inc. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this Report only:
|
|
●
|
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
|
|
|
●
|
“SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
|
|
|
●
|
“Securities Act” refers to the Securities Act of 1933, as amended.
|
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us at http://www.sec.gov (our filings can be found at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001682265). Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.
Corporate Information
Our principal executive offices are located at 12343 Hymeadow Drive, Suite 3-A, Austin, Texas 78750, and our telephone number is (512) 407-2623. Our website address is www.reliantholdingsinc.com. The information on, or that may be accessed through, our website is not incorporated by reference into this Report and should not be considered a part of this Report.
Organizational History
We were formed as a Nevada corporation on May 19, 2014.
On May 23, 2014, we, along with Reliant Pools, Inc. (“Reliant Pools”) and the stockholders of Reliant Pools, entered into an Agreement for the Exchange of Common Stock (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the stockholders of Reliant Pools exchanged 2.1 million shares of common stock, representing 100% of the outstanding common stock of Reliant Pools, for 2.1 million shares of our common stock (the “Exchange”). As a result of the Exchange, Reliant Pools became our wholly-owned subsidiary. The President of Reliant Pools, and its largest stockholder at the time of the Exchange was Michael Chavez, our then President, then Chief Executive Officer and then sole director. The following shares of restricted common stock were issued in connection with the Exchange: 900,000 shares of common stock to Michael Chavez, our then President, then Chief Executive Officer and then sole director; 750,000 shares of common stock to Elijah May, our current Chief Executive Officer and sole director; and 450,000 shares of common stock to Becky Spohn, our former Controller.
Reliant Pools was originally formed as a Texas General Partnership (Reliant Pools, G.P.) in September 2013, and was owned by Mr. Chavez, Mr. May, Ms. Spohn, and a third party, who subsequently was unable to perform the services required for him to vest his interest, which interest was subsequently terminated, leaving Mr. Chavez, Mr. May and Ms. Spohn as the sole owners of Reliant Pools, G.P. In May 2014, Reliant Pools, G.P. was converted from a Texas General Partnership to a Nevada corporation, Reliant Pools, Inc., with the same ownership as described above at the time of the Exchange.
On October 10, 2018, the Company incorporated a new wholly-owned subsidiary in Texas, Reliant Custom Homes, Inc. The Company is exploring opportunities to expand operations in the Austin, Texas area as a custom home builder. To date, the Company has engaged a consultant in connection with custom home builder services, and has purchased land located in Lago Vista, Texas, in the Texas Hill Country, outside of Austin, Texas, on which it intends to construct a custom home which it then plans to sell. Current plans are for the custom home to be approximately 2,300 square feet. In April 2020, the Company obtained a construction loan for $221,000 for the construction costs associated with the build, but has not yet drawn any proceeds on the loan, or began construction.
Organizational Structure
The following chart reflects our current organization structure, including our wholly-owned subsidiaries.
Description of Business Operations
Residential Pools
We, through our wholly-owned subsidiary Reliant Pools (which has been in operation since September 2013), are an award winning, custom, swimming pool construction company located in the greater Austin, Texas market. In the future, we also plan to offer residential swimming pool maintenance services. We assist customers with the design of, and then construct, recreational pools which blend in with the surroundings, geometric pools which complement the home’s architecture and water features (e.g., waterfalls and negative edge pools) which provide the relaxing sounds of moving water. We won four Association of Pool & Spa Professionals (ARSP) Region 3 Design Awards for our designs in 2016 and one award in 2017. Moving forward, we plan on expanding our operations through an accretive business model in which we plan to acquire competitors in both the custom pool construction and pool maintenance/service industries locally, regionally, and nationally, funding permitting.
To date, the majority of our growth has been through referral business. We offer a wide variety of pool projects based upon price and the desires of the client. When our sales personnel meet with a prospective customer, we provide them with an array of projects from the basic pool building to more high-end projects that may include waterfalls, mason work, backyard lighting and in-ground spas to highlight the outdoor living experience.
Custom Homes
On October 10, 2018, the Company incorporated a new wholly-owned subsidiary in Texas, Reliant Custom Homes, Inc. The Company is exploring opportunities to expand operations in the Austin, Texas area as a custom home builder. To date, the Company has engaged a consultant in connection with custom home builder services, and has purchased land located in Lago Vista, Texas, in the Texas Hill Country, outside of Austin, Texas, on which it intends to construct a custom home which it then plans to sell. Current plans are for the custom home to be approximately 2,300 square feet. In April 2020, the Company obtained a construction loan for $221,000 for the construction costs associated with the build, but has not yet drawn any proceeds on the loan or began construction.
The construction of our planned custom home is anticipated to be conducted under the supervision of an on-site construction manager. Substantially all of our construction work is planned to be performed by independent subcontractors under contracts that establish a specific scope of work at an agreed-upon price. In addition, we anticipate that our construction field manager will interact with homebuyers throughout the construction process and instruct homebuyers on post-closing home maintenance.
We plan to maintain efficient construction operations and use industry and company-specific construction practices.
Generally, we anticipate the construction materials to be used in our home builder operations will be readily available from numerous sources. However, the cost of certain building materials, especially lumber, steel, concrete, copper, and petroleum-based materials, is influenced by changes in global commodity prices, national tariffs, and other foreign trade factors. Additionally, the ability to consistently source qualified labor at reasonable prices may be challenging and we cannot determine the extent to which necessary building materials and labor will be available at reasonable prices in the future.
We currently anticipate building custom homes on a built-to-order basis where we do not begin construction of the home until we have a signed contract with a customer. However, we may in the future also build speculative (“spec”) homes, which would allow us to compete with existing homes available in the market, especially for homebuyers that require a home within a short time frame.
We plan to market our custom home services around the end of fiscal 2020.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April, many U.S. states and local jurisdictions, including Travis, County, Texas, where the Company has its operations, began issuing ‘stay-at-home’ orders, which continue in various forms as of the date of this report. Notwithstanding such ‘stay-at-home’ and similar orders, the Company has actually seen an increase in demand for new pools during the pandemic. The Company believes that this is because homeowners are spending more time at home and possibly because they have more disposable income due to the unavailability of other entertainment choices and travel requirements. However, the full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic. For example, it is possible that the current outbreak or continued spread of COVID-19, including, but not limited to, expected increases in the number of persons infected with COVID-19 during the fall and winter months, will cause a global recession, which will result in a decrease in the demand for our services, or future ‘stay-at-home’ orders will prevent us from engaging new clients or completing pool builds then in progress. Additionally, the Company has had issues with sub-contractors coming down with COVID-19 which has caused construction delays and has further seen delays in permitting caused by COVID-19 issues. Furthermore, there is a risk that city inspections cease altogether for a period of time as a result of potential future COVID-19 ‘stay-at-home’ orders, although none are currently planned. Notwithstanding the above, the demand for pools remains high in Austin and surrounding areas.
Future impacts of the coronavirus and the government’s response to such virus, including declines in spending of disposable income and potential future recessions, cannot be predicted at this time and may result in negative impacts on our operating results, cash flow and prospects, all of which may cause the value of our securities to decline in value.
Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations to support our operations for the foreseeable future, but will need to raise additional funding as discussed below, to satisfy a settlement in principle with a former client; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the pandemic.
The pandemic is developing rapidly and the full extent to which COVID-19 will ultimately impact us depends on future developments, including the duration and spread of the virus, as well as potential seasonality of new outbreaks.
Plan of Operations
We had a working capital deficit of $160,336 as of September 30, 2020. With our current cash on hand, expected revenues, and based on our current average monthly expenses, we anticipate the need for additional funding in order to continue our operations at their current levels, to pay the costs associated with being a public company, for the next 12 months, and to satisfy a settlement in principle of outstanding claims with a former customer as described under “Part I” - “Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 6. Commitments and Contingencies” hereof. We may also require additional funding in the future to expand or complete acquisitions. Our plan for the next twelve months is to continue using the same marketing and management strategies and continue providing a quality product with excellent customer service while also seeking to expand our operations organically or through acquisitions as funding and opportunities arise, and, as discussed above, we have also purchased a homesite which we intend to construct a custom home on which we then plan to sell. As our business continues to grow, customer feedback will be integral in making small adjustments to improve the product and overall customer experience. We plan to raise additional required funding when required through the sale of debt or equity, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues. Furthermore, in order to pay amounts owed in connection with proposed settlements, we may be forced to liquidate assets and/or abandon certain of our business plans. If we are unable to pay such amounts, we may be forced to cease operations and/or seek bankruptcy protection.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
We had revenue of $555,073 for the three months ended September 30, 2020, compared to revenue of $591,891 for the three months ended September 30, 2019, a decrease of $36,818 or 6.2% from the prior period. We recognize revenue based on the percentage that a job is complete rather than upon completion. As such, total revenue recognized for each period may be different than the product of total completed pools during each period multiplied by the average pool contract price of each pool during such period, as the construction of certain pools may have started in one period and ended in another.
We had cost of goods sold of $407,229 for the three months ended September 30, 2020, compared to cost of goods sold of $401,284 for the three months ended September 30, 2019, an increase of $5,945 or 1.5% from the prior period.
Cost of goods sold increased mainly due to an increase in pool equipment and masonry, stone and tile. The timing of our cost of goods sold is materially impacted based on the overall scope and timing of the projects we are working on. The expenses which attributed to the increase in cost of goods sold for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, included:
|
|
|
For the
Three
|
|
|
For the
Three
|
|
|
|
|
|
|
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
|
|
|
|
|
Cost of Goods Sold Expense
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
Increase /(Decrease)
|
|
|
Percentage
Change
|
|
|
Cost of decking
|
|
$
|
37,509
|
|
|
$
|
65,191
|
|
|
$
|
(27,682
|
)
|
|
|
(42
|
)%
|
|
Plaster used in the construction of pools
|
|
|
26,717
|
|
|
|
24,605
|
|
|
|
2,112
|
|
|
|
9
|
%
|
|
Gunite used in the construction of pools
|
|
|
39,083
|
|
|
|
39,047
|
|
|
|
36
|
|
|
*
|
|
|
Pool equipment used to filter and circulate the water used in our pools
|
|
|
80,127
|
|
|
|
63,570
|
|
|
|
16,557
|
|
|
|
26
|
%
|
|
Masonry, stone and tile installed in and around our pools and coping expenses associated therewith
|
|
|
52,507
|
|
|
|
33,612
|
|
|
|
18,895
|
|
|
|
56
|
%
|
|
Excavation and steel expenses
|
|
|
67,730
|
|
|
|
54,506
|
|
|
|
13,224
|
|
|
|
24
|
%
|
|
Other, including labor
|
|
|
103,556
|
|
|
|
120,753
|
|
|
|
(17,197
|
)
|
|
|
(14
|
)%
|
|
Total
|
|
$
|
407,229
|
|
|
$
|
401,284
|
|
|
$
|
5,945
|
|
|
|
1
|
%
|
* Less than 1%.
Cost of goods sold represents our pool construction costs, including raw materials, outsourced labor, installed equipment, tile and coping expenses, excavation costs and permit expenses. We anticipate our cost of goods sold increasing in approximate proportion to increases in revenue and decreasing in approximate proportion to decreases in revenue, moving forward, as our cost of goods sold are factored into the price we charge for our pools and represent the cost of pool construction, the majority of which is not fixed and varies depending on the total number of pools and construction projects we complete during each period and the size and complexity of such projects.
We had gross margin of $147,844 for the three months ended September 30, 2020, compared to gross margin of $190,607 for the three months ended September 30, 2019, a decrease of $42,763 or 22.4% from the prior period due to the reasons described above. Gross margin as a percentage of revenue was 26.6% and 32.2% for the three months ended September 30, 2020 and 2019, respectively.
We had operating expenses consisting solely of general and administrative expenses of $164,913 for the three months ended September 30, 2020, compared to operating expenses consisting solely of general and administrative expenses of $110,378 for the three months ended September 30, 2019. Operating expenses increased by $54,535 or 49% from the prior period mainly due to an additional accrual of $49,000 that was booked related to settlement of the lawsuit settled during the period. General and administrative expenses include the salaries of our employees, commissions and the fees paid to contract employees.
We had interest income of $0 for the three months ended September 30, 2020, compared to interest income of $32 for the three months ended September 30, 2019. Interest income was in connection with interest generated by funds the Company maintained in its savings account.
We had interest expense of $320 and $127, for the three months ended September 30, 2020 and 2019, respectively, due to interest paid in connection with the purchase of a car used by our Chief Executive Officer, as described in greater detail under “Liquidity and Capital Resources” below.
We had net loss of $17,389 for the three months ended September 30, 2020, compared to net income of $80,134 for the three months ended September 30, 2019, a decrease in net income of $97,523 or 122%, mainly due to the decrease in revenue and the increase in general and administrative expenses as described above.
For the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
We had revenue of $1,381,051 for the nine months ended September 30, 2020, compared to revenue of $1,310,232 for the nine months ended September 30, 2019, an increase of $70,819 or 5.4% from the prior period. Revenue increased due to an increase in pool count during the comparable periods and general timing of contracts as well as the higher priced pools being completed in the current period. We recognize revenue based on the percentage that a job is complete rather than upon completion. As such, total revenue recognized for each period may be different than the product of total completed pools during each period multiplied by the average pool contract price of each pool during such period, as the construction of certain pools may have started in one period and ended in another.
We had cost of goods sold of $974,228 for the nine months ended September 30, 2020, compared to cost of goods sold of $869,962 for the nine months ended September 30, 2019, an increase of $104,266 or 12.0% from the prior period, mainly due to the increase in projects during the period as disclosed above.
Cost of goods sold increased mainly due to the number of pools completed combined with the increase in other costs, including masonry, stone and tile, excavation and steel and gunite. We have seen increased costs of gunite, masonry and pool equipment costs associated with higher end projects and increases in the average cost of constructed pools during the current period compared to the last. The expenses which attributed to the increase in cost of goods sold for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, included:
|
|
|
For the
Nine
|
|
|
For the
Nine
|
|
|
|
|
|
|
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
|
|
|
|
|
Cost of Goods Sold Expense
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
Increase/
(Decrease)
|
|
|
Percentage
Change
|
|
|
Cost of decking
|
|
$
|
127,951
|
|
|
$
|
153,463
|
|
|
$
|
(25,512
|
)
|
|
|
(17
|
)%
|
|
Plaster used in the construction of pools
|
|
|
78,388
|
|
|
|
67,152
|
|
|
|
11,236
|
|
|
|
17
|
%
|
|
Gunite used in the construction of pools
|
|
|
106,903
|
|
|
|
87,578
|
|
|
|
19,325
|
|
|
|
22
|
%
|
|
Pool equipment used to filter and circulate the water used in our pools
|
|
|
151,000
|
|
|
|
137,215
|
|
|
|
13,785
|
|
|
|
10
|
%
|
|
Masonry, stone and tile installed in and around our pools and coping expenses associated therewith
|
|
|
130,436
|
|
|
|
88,798
|
|
|
|
41,638
|
|
|
|
47
|
%
|
|
Excavation and steel expenses
|
|
|
145,027
|
|
|
|
116,201
|
|
|
|
28,826
|
|
|
|
25
|
%
|
|
Other, including labor
|
|
|
234,523
|
|
|
|
219,555
|
|
|
|
14,968
|
|
|
|
7
|
%
|
|
Total
|
|
$
|
974,228
|
|
|
$
|
869,962
|
|
|
$
|
104,266
|
|
|
|
12
|
%
|
Cost of goods sold represent our pool construction costs, including raw materials, outsourced labor, installed equipment, tile and coping expenses, excavation costs and permit expenses. We anticipate our cost of goods sold increasing in approximate proportion to increases in revenue and decreasing in approximate proportion to decreases in revenue, moving forward, as our cost of goods sold are factored into the price we charge for our pools and represent the cost of pool construction, the majority of which is not fixed and varies depending on the total number of pools and construction projects we complete during each period and the size and complexity of such projects.
We had gross margin of $406,823 for the nine months ended September 30, 2020, compared to gross margin of $440,270 for the nine months ended September 30, 2019, a decrease of $33,447 or 7.6% from the prior period due to the reasons described above. Gross margin as a percentage of revenue was 29.5% and 33.6% for the nine months ended September 30, 2020 and 2019, respectively.
We had operating expenses consisting solely of general and administrative expenses of $802,262 for the nine months ended September 30, 2020, compared to operating expenses consisting solely of general and administrative expenses of $355,036 for the nine months ended September 30, 2019. Operating expenses increased by $447,226 or 126% from the prior period mainly due to an accrual related to lawsuit settlement expenses. General and administrative expenses include the salaries of our employees, commissions and the fees paid to contract employees.
We had interest income of $22 for the nine months ended September 30, 2020, compared to interest income of $73 for the nine months ended September 30, 2019. Interest income was in connection with interest generated by funds the Company maintained in its savings account.
We had interest expense of $862 and $388, for the nine months ended September 30, 2020 and 2019, respectively, due to interest paid in connection with the purchase of a car used by our Chief Executive Officer, as described in greater detail under “Liquidity and Capital Resources” below.
We had a net loss of $347,279 for the nine months ended September 30, 2020, compared to net income of $84,919 for the nine months ended September 30, 2019, an increase in net loss of $432,198, mainly due to the increase in general and administrative expenses as described above in connection with accruals related to lawsuits, offset by the increase in revenues and increase in cost of revenues, each as discussed above.
Liquidity and Capital Resources
We had total assets of $281,451 as of September 30, 2020, consisting of total current assets of $238,946, which included cash of $205,082, real estate inventory of $33,448, federal income tax receivable of $416, and equipment, net of accumulated depreciation, of $42,505. Federal income tax receivable relates to a payment made by the Company to the United States Treasury in March 2016, in anticipation of Federal income tax the Company estimated would be owed at the end of the 2016 calendar year. There was no tax due for the years ended December 31, 2016, 2017, 2018 or 2019, due to the utilization of a net loss carryforward and application of prepaid taxes. Included in real estate inventory as of September 30, 2020 is the value of the land which the Company acquired in the third quarter of 2019, which it plans to build a custom home on. Equipment increased by $35,166 in connection with the purchase of a new vehicle as discussed below.
We had total liabilities of $523,335 as of September 30, 2020, which included current liabilities of $448,282, including accounts payable and accrued liabilities of $166,458 (which included accrued lawsuit settlements of $145,000), contract liabilities, relating to billings in excess of costs and estimated earnings on uncompleted jobs of $275,017, and current portion of note payable of $6,807, and long-term liabilities including a long-term note payable, net of current portion of $75,053 relating to a vehicle (discussed below) and the PPP Note discussed below. The $145,000 of accrued lawsuit settlements represents amounts accrued in connection with the lawsuits described in greater detail under “Part I” - “Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 6. Commitments and Contingencies” hereof.
On February 11, 2020, we purchased a Hyundai Genesis G80 for use by Mr. May. The Vehicle had a total purchase price of $50,616, including $11,000 which was paid as a down payment in cash. We entered into a term note, secured by the vehicle, for the remaining amount of the purchase price, which amount accrues interest at the rate of 3.99% per annum and is payable at the rate of $660 per month through maturity on February 27, 2025.
On April 28, 2020, the Company secured a construction loan from First United Bank and Trust Company to be used to develop the land purchased in the third quarter of 2019. The loan is in the amount of $221,000, bears interest at the rate of 6.25% per annum and is repayable on April 28, 2021. As of September 30, 2020 and through the date of this filing, no amount had been advanced on the loan.
On May 11, 2020, we (through Reliant Pools) received a loan (the “Loan”) from Wells Fargo Bank N.A. (the “Lender”) in the principal amount of $51,113, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan is evidenced by a promissory note (the “Note”), dated effective May 4, 2020, issued by the Company to the Lender. The Note is unsecured, matures on May 4, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on November 2, 2020, following an initial deferral period as specified under the PPP. The Note may be prepaid at any time prior to maturity with no prepayment penalties. Proceeds from the Loan will be available to the Company to fund designated expenses, including certain payroll costs, rent, utilities and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent Loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP (including that up to 60% of such Loan funds are used for payroll). The Company has used the entire Loan amount for designated qualifying expenses and plans to apply for forgiveness of the respective Loan in accordance with the terms of the PPP. No assurance can be given that the Company will obtain forgiveness of the Loan in whole or in part. With respect to any portion of the Loan that is not forgiven, the Loan will be subject to customary provisions for a loan of this type, including customary events of default.
We had a working capital deficit of $209,336 as of September 30, 2020, compared to working capital of $147,056 as of December 31, 2019.
We had $110,656 of net cash used in operating activities for the nine months ended September 30, 2020, which was mainly due to $396,279 of net loss, offset by an increase of $178,527 in contract liabilities and $111,484 of accounts payable and accrued liabilities. During the period, a $275,000 lawsuit was settled and an additional lawsuit was still outstanding for which we accrued $145,000, which lawsuit has since been settled in principle. We had $83,909 of net cash provided by operating activities for the nine months ended September 30, 2019, due mainly to net income of $84,919.
We had $11,000 of net cash used in investing activities for the nine months ended September 30, 2020, which was solely due to the down payment on the vehicle purchase described above.
We had $46,058 of net cash provided by financing activities for the nine months ended September 30, 2020, which was due to the proceeds from the PPP Loan discussed above, offset by payments on our vehicle loan. We had $18,248 of cash used in financing activities for the nine months ended September 30, 2019, which was due solely to payments on note payable and related party advances.
We do not currently have any additional commitments or identified sources of additional capital from third parties or from our officers, directors or majority stockholders. Additional financing may not be available on favorable terms, if at all.
In the future, we may be required to seek additional capital by selling additional debt or equity securities, or otherwise be required to bring cash flows in balance when we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then stockholders. Financing may not be available in amounts or on terms acceptable to us, or at all. In the event we are unable to raise additional funding and/or obtain revenues sufficient to support our expenses, we may be forced to curtail or abandon our business operations, and any investment in the Company could become worthless.
Critical Accounting Policies:
Emerging Growth Company. Section 107 of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“new revenue standard”) to all contracts using the modified retrospective method. The adoption of the new revenue standard had no material impact on our consolidated financial statements as it did not require a change in revenue recognition. As such, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Revenue is recognized based on the following five step model:
|
|
-
|
Identification of the contract with a customer
|
|
|
-
|
Identification of the performance obligations in the contract
|
|
|
-
|
Determination of the transaction price
|
|
|
-
|
Allocation of the transaction price to the performance obligations in the contract
|
|
|
-
|
Recognition of revenue when, or as, the Company satisfies a performance obligation
|
All of the Company’s revenue is currently generated from the design and installation of swimming pools. As such no further disaggregation of revenue information is provided.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
Performance Obligations Satisfied Over Time
Revenue for our contracts that satisfy the criteria for over time recognition is recognized as the work progresses. The majority of our revenue is derived from construction contracts and projects that typically span between 4 to 12 months. Our construction contracts will continue to be recognized over time because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. Contract costs include labor, material, and indirect costs.
Performance Obligations Satisfied at a Point in Time
Revenue for our contracts that do not satisfy the criteria for over time recognition is recognized at a point in time. Substantially all of our revenue recognized at a point in time is for work performed for pool maintenance or repairs. Unlike our construction contracts that use a cost-to-cost input measure for performance, the pool maintenance or repairs utilize an output measure for performance based on the completion of a unit of work. The typical time frame for completion of these services is less than one month. Upon fulfillment of the performance obligation, the customer is provided an invoice (or equivalent) demonstrating transfer of control or completion of service to the customer. We believe that point in time recognition remains appropriate for these contracts and will continue to recognize revenues upon completion of the performance obligation and issuance of an invoice.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.
Backlog
On September 30, 2020, we had approximately $2,300,000 of remaining performance obligations on our construction contracts, which we also refer to as backlog. We expect to recognize our current backlog as revenue during the fourth quarter of 2020 and first half of 2021.
Contract Estimates
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, and the performance of subcontractors.
Variable Consideration
Transaction price for our contracts may include variable consideration, which includes increases to transaction price for approved and unapproved change orders, claims and incentives, and reductions to transaction price for liquidated damages. Change orders, claims and incentives are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation. We estimate variable consideration for a performance obligation at the most likely amount to which we expect to be entitled (or the most likely amount we expect to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which we will be entitled (or will be incurred in the case of liquidated damages). We include variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in our favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue. No adjustment on any one contract was material to our condensed consolidated financial statements for the nine months ended September 30, 2020.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) on the consolidated balance sheet. On our construction contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs prior to revenue recognition, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.
The Company recognizes revenue from the design and installation of swimming pools.
Accounts Receivable and Allowances. The Company does not charge interest to its customers and carries its customers’ receivables at their face amounts, less an allowance for doubtful accounts. Included in accounts receivable are balances billed to customers pursuant to retainage provisions in certain contracts that are due upon completion of the contract and acceptance by the customer, or earlier as provided by the contract. Based on the Company’s experience in recent years, the majority of customer balances at each balance sheet date are collected within twelve months. As is common practice in the industry, the Company classifies all accounts receivable, including retainage, as current assets. The contracting cycle for certain long-term contracts may extend beyond one year, and accordingly, collection of retainage on those contracts may extend beyond one year.
The Company grants trade credit, on a non-collateralized basis (with the exception of lien rights against the property in certain cases), to its customers and is subject to potential credit risk related to changes in business and overall economic activity. The Company analyzes specific accounts receivable balances, historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the event that a customer balance is deemed to be uncollectible, the account balance is written-off against the allowance for doubtful accounts.
Classification of Construction Contract-related Assets and Liabilities. Costs and estimated earnings in excess of billings on uncompleted contracts are presented as a current asset in the accompanying consolidated balance sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are presented as a current liability in the accompanying consolidated balance sheets. The Company’s contracts vary in duration, with the duration of some larger contracts exceeding one year. Consistent with industry practices, the Company includes the amounts realizable and payable under contracts, which may extend beyond one year, in current assets and current liabilities. The vast majority of these balances are settled within one year.
Equipment. Equipment, consisting mainly of two vehicles, is stated at cost. The Company depreciates the cost of equipment using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations for the period. The cost of maintenance and repairs is charged to operations as incurred; significant renewals improvements are capitalized. Depreciation expense was approximately $11,636 and $5,081 for the nine months ended September 30, 2020 and 2019, respectively. The estimated useful life of the vehicle is five years.