NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 – Organization and Summary of Significant Accounting Policies
Overview
The Goldfield Corporation (the “Company”) was incorporated in Wyoming in 1906 and subsequently reincorporated in Delaware in 1968. The Company’s principal line of business is the construction of electrical infrastructure for the utility industry and industrial customers, and to a lesser extent, real estate development. The principal market for the Company’s electrical construction operation is primarily in the Southeast, mid-Atlantic and Texas-Southwest regions of the United States. The Company’s real estate development operation is along the east coast of Central Florida.
Basis of Financial Statement Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments necessary to present fairly the Company’s financial position, results of operations, and changes in cash flows for the interim periods reported. These adjustments are of a normal recurring nature. All consolidated financial statements presented herein are unaudited with the exception of the consolidated balance sheet as of December 31, 2019, which was derived from the audited consolidated financial statements. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year. These statements should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on customer specific information and historical write-off experience. The Company reviews its allowance for doubtful accounts quarterly. Account balances are charged off against the allowance after reasonable means of collection have been exhausted and the potential for recovery is considered remote. As of March 31, 2020 and December 31, 2019, upon its review, management determined it was not necessary to record an allowance for doubtful accounts due to the majority of accounts receivable being generated by electrical utility customers whom the Company considers creditworthy based on timely collection history and other considerations.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates. Management considers the most significant estimates in preparing these consolidated financial statements to be the estimated costs at completion of electrical construction contracts in progress.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable and accrued billings, cash surrender value of life insurance policies, accounts payable and notes payable.
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value guidance establishes a valuation hierarchy, which requires maximizing the use of observable inputs when measuring fair value.
The three levels of inputs that may be used are:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Observable market based inputs or other observable inputs.
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data. These values are generally determined using valuation models incorporating management’s estimates of market participant assumptions.
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Fair values of financial instruments are estimated through the use of public market prices, quotes from financial institutions, and other available information. Management considers the carrying amounts reported on the consolidated balance sheets for cash and cash equivalents, accounts receivable and accrued billings, accounts payable and accrued liabilities, to approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of cash surrender value of life insurance is considered by management to approximate fair value as the carrying value is based on the current settlement value under the contract, as provided by the carrier and as such, is classified as Level 2.
Land and Land Development Costs and Residential Properties Under Construction
The costs of a land purchase and any development expenses up to the initial construction phase of any residential property development project are recorded under the asset “land and land development costs.” Once construction commences, both the land development costs and construction costs are recorded under the asset “residential properties under construction.” The assets “land and land development costs” and “residential properties under construction” relating to specific projects are recorded as current assets when the estimated project completion date is less than one year from the date of the consolidated financial statements, or as non-current assets when the estimated project completion date is one year or more from the date of the consolidated financial statements.
In accordance with Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-lived Assets, land and residential properties under construction are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying amount or basis is not expected to be recovered, impairment losses are recorded and the related assets are adjusted to their estimated fair value. The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, other than in a forced or liquidation sale. The Company also complies with ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Company did not record an impairment write-down to its land, land development costs or residential properties under construction carrying value for either of the three months ended March 31, 2020 and 2019.
Goodwill and Intangible Assets
Intangible assets with finite useful lives recorded in connection with a historical acquisition are amortized over the term of the related contract or useful life, as applicable. Intangible assets held by the Company with finite useful lives include customer relationships and trademarks. The Company reviews the values recorded for intangible assets and goodwill to assess recoverability from future operations annually or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. As of December 31, 2019, the Company assessed the recoverability of its long-lived assets and goodwill, by reviewing relevant events and circumstances to evaluate the qualitative factors in addition to the quantitative impairment test. As a result, there was no impairment of the carrying amounts of such assets.
Reclassifications
Certain amounts associated with Operating Leases previously presented under the caption “right of use asset amortization” on the Consolidated Statement of Cash Flows have been reclassified to “operating leases” to conform to the change in the operating leases presentation on the Consolidated Statement of Cash Flows. This reclassification had no impact on the total amount of cash from operating activities for the three months ended March 31, 2019.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, which eliminates Step 2 of the current goodwill impairment test. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the recorded amount of goodwill allocated to that reporting unit. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The Company adopted ASU 2017-04 on January 1, 2020 and the adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.
In June 2016 the FASB issued ASU-2016-13, Financial Instruments – Credit Losses. This update required immediate recognition of management’s estimates of current expected credit losses. This update was effective for the Company in the first quarter of 2020. The adoption of ASU 2016-13 did not have a significant impact on the Company’s consolidated financial statements.
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In December 2019, the FASB issued ASU-2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which will be effective for the Company in fiscal year 2021. This update simplifies the accounting for interim period tax law changes and loss limitations, ownership changes in equity investments, intraperiod tax allocations and the step up of tax basis in goodwill that is not acquired during a business combination. ASU-2019-12 will be adopted in 2021 and is not expected to have a significant impact on the Company’s consolidated financial statements.
COVID-19
The Company did not incur significant disruptions to its operations during the first quarter of 2020 from COVID-19. At this time, the Company is unable to predict the impact that COVID-19 will have on its consolidated financial statements in future periods due to numerous uncertainties. The Company is closely monitoring its efforts to manage the impact of the pandemic on all aspects of the Company’s business and consolidated financial statements. Please refer to Item 1A. Risk Factors for an additional Risk Factor added by the Company regarding COVID-19.
Note 2 – Contract Assets and Contract Liabilities
On January 1, 2018 the Company adopted the accounting standard ASC 606 and all the related amendments (the “revenue standard”) to all applicable contracts using the modified retrospective method. Applicable contracts did not include contracts considered substantially complete. Contracts that were modified before the beginning of the earliest period presented were not retrospectively restated. Instead, the Company reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price as of the date of adoption. Adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, results of operations and cash flows.
The following table presents the net contract assets and liabilities for the electrical construction operations as of the dates indicated:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
$ Change
|
|
Contract assets (1)
|
|
$
|
19,841,766
|
|
|
$
|
9,321,368
|
|
|
$
|
10,520,398
|
|
Contract liabilities (2)
|
|
|
(1,288,535
|
)
|
|
|
(1,008,679
|
)
|
|
|
(279,856
|
)
|
Net contract assets
|
|
$
|
18,553,231
|
|
|
$
|
8,312,689
|
|
|
$
|
10,240,542
|
|
______________________________________
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Contract assets consist of amounts under the caption “Costs and estimated earnings in excess of billings on uncompleted contracts.”
|
|
(2) Contract liabilities consist of the aggregate of amounts presented under the caption “Billings in excess of costs and estimated earnings on uncompleted contracts” and any contract loss accruals included in “Accounts payable and accrued liabilities.”
|
|
The following table presents the changes in the net contract assets and liabilities for the electrical construction operations for the three months ended March 31, 2020:
|
|
$ Change
|
|
Cumulative adjustment due to changes in contract values (1)
|
|
$
|
1,009,673
|
|
Cumulative adjustment due to changes in estimated costs at completion
|
|
|
(515,157
|
)
|
Revenue recognized in the period
|
|
|
33,822,038
|
|
Amounts reclassified to receivables
|
|
|
(23,737,080
|
)
|
Impairment of contract assets (2)
|
|
|
(338,932
|
)
|
Total
|
|
$
|
10,240,542
|
|
______________________________________
|
|
|
|
|
(1) Amount attributable to contract modifications accounted for on a cumulative catch-up basis where the customer has approved a change in the scope or price of the contract, where the modification is treated as part of the existing contract and where the remaining goods and services are not distinct.
|
|
(2) Adjustment amount due to changes in contract losses.
|
|
For the three months ended March 31, 2020, $0.4 million of the total revenue recognized in the current period was attributable to the contract liability billings in excess of costs and estimated earnings on uncompleted contracts’ balance as of December 31, 2019.
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Table of Contents
Note 3 – Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted as a response to the economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes modifications for net operating loss carrybacks and carryforwards, limitations of business interest expense for tax, immediate refund of alternative minimum tax credit carryovers as well as a technical correction to the Tax Cuts and Jobs Act of 2017 for qualified improvement property. Specifically, the CARES Act allows corporate taxpayers to carryback net operating losses originating during 2018 through 2020 for up to five years when the maximum tax rate was 35%. The enactment of the CARES Act has resulted in a material benefit to the Company’s income tax provision for the three months ended March 31, 2020.
The ultimate impact of the CARES Act may differ from this estimate due to changes in interpretations and assumptions, guidance that may be issued and actions the Company may take in response to the CARES Act. The Company will continue to assess the impact that various provisions will have on its business.
The following table presents the provision for income tax and the effective tax rates from continuing operations for the dates as indicated:
|
Three Months Ended March 31,
|
|
|
2020
|
|
|
2019
|
|
Income tax provision
|
$
|
(105,914
|
)
|
|
$
|
827,264
|
|
Effective income tax rate
|
|
(7.7
|
)%
|
|
|
31.7
|
%
|
Prior to the enactment of the CARES Act, the Company’s expected tax rate for the year ending December 31, 2020, which was calculated based on the estimated annual operating results for the year, was 29.6%. However, due to the favorable impact of discrete items of 4.8%, the majority of which are related to the CARES Act, the resulting expected annual rate is 24.8%. The expected tax rate differs from the federal statutory rate of 21% due to nondeductible expenses and state income taxes, offset by the discrete items.
The Company’s effective tax rate for the three months ended March 31, 2020 was (7.7)% and differs from the federal statutory rate of 21% due to nondeductible expenses and state income taxes offset by the full impact of discrete items totaling $513,000 recorded in the first quarter of 2020. The discrete items were recorded in connection with the net operating loss carryback provisions of the CARES Act and to a lesser extent a state mandated income tax refund. The effective tax rate is lower than the expected annual tax rate of 24.8% due to the full impact of discrete items reported in the first quarter of 2020 which will reduce over the year. The effective tax rate for the three months ended March 31, 2019 was 31.7% which differed from the federal statutory rate of 21% due to nondeductible expenses and state income taxes. The decrease in the 2020 expected tax rate when compared to 2019 is attributable to a decrease in the 2020 estimated nondeductible expenses and the effects of the CARES Act.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which establishes the recognition requirements. Deferred tax assets and liabilities are recognized for the future tax effects attributable to temporary differences and carryforwards between the consolidated financial statement carrying amounts of existing assets and liabilities and the 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 in income in the period that includes the enactment date.
As of March 31, 2020, the Company’s deferred tax liabilities are primarily comprised of tax depreciation in excess of book depreciation and are offset by deferred tax assets, largely comprised of state bonus depreciation carryovers, accrued vacation, inventory adjustments, accrued remediation costs and accrued workers’ compensation claims. The carrying amounts of deferred tax assets are reduced by a valuation allowance, if based on the available evidence, it is more likely than not such assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the deferred tax assets are expected to be recovered or settled. In the assessment for a valuation allowance, appropriate consideration is given to positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and tax planning alternatives. If the Company determines it will not be able to realize all or part of the deferred tax assets, a valuation allowance would be recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.
Based on assumptions with respect to forecasts of future taxable income and tax planning, among others, the Company anticipates being able to generate sufficient taxable income to utilize the deferred tax assets. Therefore, the Company has not recorded a valuation allowance against deferred tax assets. The minimum amount of future taxable income required to be generated to fully realize the deferred tax assets as of March 31, 2020 is approximately $3.1 million.
The Company has gross unrecognized tax benefits of $4,000 as of both March 31, 2020 and December 31, 2019. The Company believes that it is reasonably possible that the liability for unrecognized tax benefits related to certain state income tax matters may be settled within the next twelve months. The federal statute of limitation has expired for tax years prior to 2015 and relevant state statutes vary. The Company is currently not under any income tax audits or examinations and does not expect the assessment of any significant additional tax in excess of amounts provided.
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Table of Contents
The Company accrues interest and penalties related to unrecognized tax benefits as interest expense and other general and administrative expenses, respectively, and not as a component of income taxes.
Note 4 – Commitments and Contingencies Related to Discontinued Operations
Discontinued operations represent former mining activities, the last of which ended in 2002. Pursuant to an agreement with the United States Environmental Protection Agency (the “EPA”), the Company performed certain remediation actions at a property sold over fifty years ago. This remediation work was completed by September 30, 2015. The Company has established a contingency provision related to discontinued operations, which was $0.5 million as of both March 31, 2020 and December 31, 2019. No change to the provision was required for either of the three months ended March 31, 2020 or 2019.
The remaining balance of the accrued remediation costs as of March 31, 2020 mainly represents estimated future charges for EPA response costs, monitoring of the property, and legal costs. The total costs to be incurred in future periods may vary from this estimate. The amounts recorded in the aforementioned contingency provision are not discounted. The provision will be reviewed periodically based upon facts and circumstances available at the time.
Note 5 – Notes Payable and Other Long-Term Debt
Notes Payable
The following table presents the balances of notes payable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates
|
|
Truist Bank
|
|
Maturity Date
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Working Capital Loan
|
|
November 28, 2021
|
|
$
|
10,000,000
|
|
|
|
—
|
|
|
|
2.75
|
%
|
|
|
—
|
%
|
$38.2 Million Equipment Loan
|
|
March 9, 2024
|
|
|
30,294,000
|
|
|
|
32,244,000
|
|
|
|
2.75
|
%
|
|
|
3.52
|
%
|
$ 4.5 Million Equipment Loan
|
|
March 7, 2024
|
|
|
4,500,000
|
|
|
|
—
|
|
|
|
2.75
|
%
|
|
|
—
|
%
|
Total notes payable
|
|
|
|
|
44,794,000
|
|
|
|
32,244,000
|
|
|
|
|
|
|
|
|
|
Less unamortized debt issuance costs
|
|
|
|
|
63,672
|
|
|
|
71,577
|
|
|
|
|
|
|
|
|
|
Total notes payable, net
|
|
|
|
|
44,730,328
|
|
|
|
32,172,423
|
|
|
|
|
|
|
|
|
|
Less current portion of notes payable, net
|
|
|
|
|
8,895,427
|
|
|
|
7,769,497
|
|
|
|
|
|
|
|
|
|
Notes payable net, less current portion
|
|
|
|
$
|
35,834,901
|
|
|
$
|
24,402,926
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020, the Company, and the Company’s wholly owned subsidiaries Southeast Power Corporation (“Southeast Power”), Pineapple House of Brevard, Inc. (“Pineapple House”), Bayswater Development Corporation (“Bayswater”), Power Corporation of America (“PCA”), Precision Foundations, Inc. (“PFI”) and C and C Power Line, Inc. (“C&C”), collectively (the “Debtors,”) were parties to a Master Loan Agreement, dated May 24, 2018 (the “2018 Master Loan Agreement”), with Branch Banking and Trust Company, now known as Truist Bank (the “Bank”), as amended on March 7, 2019 by the First Amendment to the 2018 Master Loan Agreement (the “Amendment”), and on December 6, 2019 by the Note Modification Agreement and related Addendum to Note Modification to the 2018 Master Loan Agreement (collectively, the “Ancillary Loan Document”).
As of March 31, 2020, the Company, the Debtors and the Bank were parties to the Working Capital Loan, evidenced by a promissory note and a series of related ancillary agreements with the Bank, under the 2018 Master Loan Agreement and the Amendment, that has a maximum principal amount of $23.0 million. On March 23, 2020, the Company drew $10.0 million from its Working Capital Loan to enhance liquidity in view of the uncertainties caused by the COVID-19 pandemic. As of March 31, 2020, borrowings under the Working Capital Loan were $10.0 million. There were no borrowings under the Working Capital Loan as of December 31, 2019.
As a credit guarantor to the Bank, the Company is contingently liable for the guaranty of a subsidiary obligation under an irrevocable letter of credit related to workers’ compensation. The amount of this letter of credit was $0.6 million as of both March 31, 2020 and December 31, 2019.
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Table of Contents
As of March 31, 2020, the Company, the Debtors and the Bank were parties to a $38.2 Million Equipment Loan. Under the documentation related to the $38.2 Million Equipment Loan, principal payments of $598,000 plus accrued interest commenced on March 9, 2019 and continued monthly thereafter until and including the payment due on December 9, 2019. Thereafter, equal monthly principal payments of $650,000, plus accrued interest, commenced on January 9, 2020, and will continue monthly thereafter until the March 9, 2024 maturity date. Borrowings under the $38.2 Million Equipment Loan were $30.3 million as of March 31, 2020 and $32.2 million as of December 31, 2019.
As of March 31, 2020, the Company, the Debtors and the Bank were also parties to a $4.5 Million Equipment Loan. Under the documentation related to the $4.5 Million Equipment Loan, borrowings will be made only for the purchase of equipment currently held by the Company under master lease agreements and will not exceed the cost of the lease buy-out. Interest only payments on any amounts drawn commenced on April 7, 2019, and continued monthly through and including the payment due on March 7, 2020. Thereafter, principal payments of $93,750 plus accrued interest commenced on April 7, 2020, and will continue monthly thereafter until and including the payment due on March 7, 2024. As of March 31, 2020, the borrowings under the $4.5 Million Equipment Loan were $4.5 million, which amount was drawn on March 2, 2020. There were no borrowings under the $4.5 Million Equipment Loan as of December 31, 2019.
As of March 31, 2020, all loan agreements between the Debtors and the Bank, under the 2018 Master Loan Agreement, the Amendment, and the Ancillary Loan Document are guaranteed by the Debtors and include the grant of a continuing security interest in all now owned and after acquired and wherever located personal property of the Debtors.
The Working Capital Loan, the $38.2 Million Equipment Loan and the $4.5 Million Equipment Loan each bear interest at a rate per annum equal to one month LIBOR (as defined in the documentation related to each loan) plus 1.80%, which will be adjusted monthly and subject to a maximum rate as described in the documentation related to each loan.
The Company’s debt arrangements contain various financial and other covenants including, but not limited to: minimum tangible net worth, maximum debt to tangible net worth ratio and fixed charge coverage ratio. Other loan covenants prohibit, among other things, a change in legal form of the Company, and entering into a merger or consolidation. The loans also have cross-default provisions whereby any default under any loans of the Company (or its subsidiaries) with the Bank, will constitute a default under all of the other loans of the Company (and its subsidiaries) with the Bank.
Note 6 – Commitments and Contingencies
Performance Bonds
In certain circumstances, the Company is required to provide performance bonds to secure its contractual commitments. Management is not aware of any performance bonds issued for the Company that have ever been called by a customer. As of March 31, 2020, outstanding performance bonds issued on behalf of the Company’s electrical construction subsidiaries amounted to approximately $51.0 million.
Collective Bargaining Agreements
C&C, one of the Company’s electrical construction subsidiaries, is party to collective bargaining agreements with unions representing workers performing field construction operations. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to the ones contained in the expiring agreements. The agreements require the subsidiary to pay specified wages, provide certain benefits to their respective union employees and contribute certain amounts to multi-employer pension plans and employee benefit trusts. The subsidiary’s multi-employer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on such subsidiary’s union employee payrolls, which cannot be determined for future periods because contributions depend on, among other things, the number of union employees that such subsidiary employs at any given time; the plans in which it may participate vary depending on the projects it has ongoing at any time; and the need for union resources in connection with those projects. If the subsidiary withdraws from, or otherwise terminates its participation in, one or more multi-employer pension plans, or if the plans were to otherwise become substantially underfunded, such subsidiary could be assessed liabilities for additional contributions related to the underfunding of these plans. The Company is not aware of any amounts of withdrawal liability that have been incurred as a result of a withdrawal by C&C from any multi-employer defined benefit pension plans.
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Table of Contents
Legal Proceedings
The Company is involved in various legal claims arising in the ordinary course of business. The Company has concluded that the ultimate disposition of these matters should not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. The Company expenses legal fees as incurred.
Note 7 – Income Per Share of Common Stock
Basic income per common share is computed by dividing net income by the weighted average number of common stock shares outstanding during the period. Diluted income per share reflects the potential dilution that could occur if common stock equivalents, such as stock options outstanding, were exercised into common stock that subsequently shared in the earnings of the Company.
As of March 31, 2020 and 2019, the Company had no common stock equivalents. For both the three months ended March 31, 2020 and 2019 the computation of the weighted average number of common stock shares outstanding excludes 3,291,238 shares of Treasury Stock.
Note 8 – ASC 606 Revenue Recognition and Significant Accounting Policies Disclosures
On January 1, 2018, the Company adopted the revenue standard ASC 606 and all the related amendments (the “revenue standard”). Adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, results of operations and cash flows. Upon adoption the Company concluded that the cumulative effect of initially applying the revenue standard was immaterial and consequently did not record an adjustment to the opening balance of retained earnings.
The Company’s significant accounting policies are detailed in “Note 1: Organization and Summary of Significant Accounting Policies” within Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s accounting policies as a result of adopting the revenue standard are discussed below.
To determine the proper revenue recognition method for contracts for electrical construction services, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of the contracts, the Company provides a significant service of integrating a complex set of tasks and components into a single project or capability. Hence, the entire contract is accounted for as one performance obligation. However, less likely, if a contract is separated into more than one performance obligation, the Company allocates the total transaction price for each performance obligation in an amount based on the estimated relative stand-alone selling prices of the promised goods or services underlying each performance obligation.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company generally recognizes revenue over time as it performs because of continuous transfer of control to the customer. Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The cost-to-cost measure of progress is generally used for its contracts because it best depicts the transfer of control to the customer which occurs as the Company incurs costs on the contracts. 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. Revenue is recorded proportionally as costs are incurred.
Due to the nature of the work required to be performed on many of the performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. The Company estimates variable consideration at the most likely amount which the Company expects to receive. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of all information (historical, current and forecasted) that is reasonably available to the Company.
11
Table of Contents
Contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
The Company has a standard and disciplined quarterly estimated costs at completion process in which management reviews the progress and execution of our performance obligations. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), and execution by our subcontractors, among other variables. Based on this analysis, any quarterly adjustments to net revenue, cost of electrical construction revenue and the related impact to operating income are recognized as necessary in the period they become known.
The following table disaggregates the Company’s revenue for the dates indicated:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Electrical construction operations (1)
|
|
|
|
|
|
|
|
|
Southeast
|
|
$
|
19,376,187
|
|
|
$
|
19,350,874
|
|
mid-Atlantic
|
|
|
10,415,045
|
|
|
|
12,053,703
|
|
Texas-Southwest
|
|
|
12,490,180
|
|
|
|
9,540,921
|
|
Other electrical construction (2)
|
|
|
783,980
|
|
|
|
441,820
|
|
Total electrical construction operations
|
|
|
43,065,392
|
|
|
|
41,387,318
|
|
Real estate development operations
|
|
|
1,774,116
|
|
|
|
6,092,938
|
|
Total revenue
|
|
$
|
44,839,508
|
|
|
$
|
47,480,256
|
|
______________________________________
|
|
|
|
|
|
|
|
|
(1) Principal electrical construction operations include revenue from transmission lines, distribution systems, substations and drilled pier foundations.
|
|
(2) Other electrical construction includes revenue from storm work, fiber optics and other miscellaneous electrical construction items.
|
|
The aggregate amount of the transaction price allocated to performance obligations that were unsatisfied as of March 31, 2020 is $81.6 million. Of this total, $71.3 million is expected to be satisfied within the next twelve months and the remaining balance of $10.3 million is expected to be satisfied thereafter.
Note 9 – Customer Concentration
For the three months ended March 31, 2020 and 2019, the three largest customers accounted for 44.9% and 55.7%, respectively, of the Company’s total revenue.
Note 10 – Goodwill and Other Intangible Assets
The following table presents the gross and net balances of our goodwill and intangible assets as of the dates indicated:
|
|
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Useful
Life
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Indefinite-lived and non-amortizable
acquired intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Indefinite
|
|
|
$
|
101,407
|
|
|
$
|
—
|
|
|
$
|
101,407
|
|
|
$
|
101,407
|
|
|
$
|
—
|
|
|
$
|
101,407
|
|
Definite-lived and amortizable acquired intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/Names
|
|
|
15
|
|
|
$
|
640,000
|
|
|
$
|
(266,668
|
)
|
|
$
|
373,332
|
|
|
$
|
640,000
|
|
|
$
|
(256,001
|
)
|
|
$
|
383,999
|
|
Customer relationships
|
|
|
20
|
|
|
|
350,000
|
|
|
|
(109,375
|
)
|
|
|
240,625
|
|
|
|
350,000
|
|
|
|
(105,000
|
)
|
|
|
245,000
|
|
Non-competition agreement
|
|
|
5
|
|
|
|
10,000
|
|
|
|
(10,000
|
)
|
|
|
—
|
|
|
|
10,000
|
|
|
|
(10,000
|
)
|
|
|
—
|
|
Other
|
|
|
1
|
|
|
|
13,800
|
|
|
|
(13,800
|
)
|
|
|
—
|
|
|
|
13,800
|
|
|
|
(13,800
|
)
|
|
|
—
|
|
Total
|
|
|
|
|
|
$
|
1,013,800
|
|
|
$
|
(399,843
|
)
|
|
$
|
613,957
|
|
|
$
|
1,013,800
|
|
|
$
|
(384,801
|
)
|
|
$
|
628,999
|
|
12
Table of Contents
Amortization of definite-lived intangible assets will be approximately $60,000 annually for 2020 through 2025.
Note 11 – Leases
In February 2016, the FASB issued ASU 2016-02, ASC 842 Leases to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). On January 1, 2019, the Company adopted the accounting pronouncement issued using the modified retrospective method. 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 classification. In addition, the Company elected not to utilize the hindsight practical expedient to determine the lease term for existing leases. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company did not recognize right-of-use assets or lease liabilities, including not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components. Adoption of the new standard resulted in the recording of additional operating lease right-of-use assets and operating lease liabilities of approximately $4.3 million and $4.3 million, respectively, as of January 1, 2019. The adoption of this standard did not impact the Company’s retained earnings, liquidity, results of operations or its compliance with its debt covenants. The Company modified existing controls and processes to support the adoption of the new lease accounting standard that the Company adopted as of January 1, 2019.
From time to time, the Company enters into leases primarily for the electrical construction operation’s equipment needs and to a lesser extent office facilities. These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of equipment rather than purchasing them. The Company’s leases have remaining terms ranging from months to seven years, some of which may include options to extend the lease term. Currently, all of the Company’s leases contain fixed payment terms. Additionally, all of our month-to-month leases are cancelable by the Company, at any time and are not included in our right-of-use asset or liability. At March 31, 2020, the Company had no leases with residual value guarantees. Typically, the Company has purchase options on the equipment underlying its long-term leases and many of its short-term rental arrangements. The Company has concluded that it is not reasonably certain that such options will be exercised as the Company does not currently have a compelling economic reason to exercise the options. However, the Company may exercise some of these purchase options when the need for equipment is on-going and the purchase option price is attractive.
Financing Leases
The Company currently does not have any leases that are classified as financing leases under ASC 842 Leases.
Operating Lease Right-of-Use Assets
Operating lease right-of-use assets are reported under “Operating lease right-of-use assets,” on the Company’s consolidated balance sheet. The current portion operating lease liabilities are reported under “Current portion of operating lease liability” and the non-current portion is reported under “Other accrued liabilities,” respectively on the Company’s consolidated balance sheet. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate to calculate present value, the Company determines this rate, by estimating the Company’s incremental borrowing rate, at the lease commencement date. The majority of the operating lease right-of-use assets are for equipment used in the Company’s electrical construction operations. The incremental borrowing rate used for these leases is based on the interest rate of the outstanding notes payable at the date of lease execution, which reflects the rate the Company would incur to finance the equipment. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
13
Table of Contents
The following table presents a summary of the Company’s lease assets and lease liabilities as of the dates indicated:
|
|
Classification
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Lease Assets
|
|
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
10,532,835
|
|
|
$
|
6,861,099
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
Current portion of operating lease liability
|
|
$
|
2,210,264
|
|
|
$
|
1,880,957
|
|
Non-current operating lease liabilities
|
|
Other accrued liabilities
|
|
|
8,424,697
|
|
|
|
4,987,088
|
|
Total lease liabilities
|
|
|
|
$
|
10,634,961
|
|
|
$
|
6,868,045
|
|
The total weighted-average incremental borrowing rate and remaining lease term for the Company’s operating leases was 3.67% and 5.88 years, respectively, as of March 31, 2020. Operating lease costs for the three months ended March 31, 2020 were $0.7 million, which approximate the cash payments for this period.
The following table presents the Company’s maturity analysis of its operating lease liabilities as of the date indicated:
|
|
|
|
March 31, 2020
|
|
2020
|
|
|
|
$
|
1,755,204
|
|
2021
|
|
|
|
|
1,964,927
|
|
2022
|
|
|
|
|
1,890,828
|
|
2023
|
|
|
|
|
1,847,400
|
|
2024 and beyond
|
|
|
|
|
4,384,356
|
|
Total lease payments
|
|
|
|
$
|
11,842,715
|
|
Less: interest
|
|
|
|
|
(1,207,754
|
)
|
Present value of lease liabilities
|
|
|
|
$
|
10,634,961
|
|
Note 12 – Business Segment Information
Segment
The Company is currently involved in two segments, electrical construction and real estate development. There were no material amounts of sales or transfers between segments and no material amounts of foreign sales. Any inter-segment sales have been eliminated.
14
Table of Contents
The following table sets forth certain segment information for the dates indicated:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Electrical construction
|
|
$
|
43,065,392
|
|
|
$
|
41,387,318
|
|
Real estate development
|
|
|
1,774,116
|
|
|
|
6,092,938
|
|
Total revenue
|
|
$
|
44,839,508
|
|
|
$
|
47,480,256
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Electrical construction
|
|
$
|
40,363,663
|
|
|
$
|
38,353,612
|
|
Real estate development
|
|
|
1,511,546
|
|
|
|
4,888,792
|
|
Corporate
|
|
|
1,364,603
|
|
|
|
1,322,811
|
|
Total operating expenses
|
|
$
|
43,239,812
|
|
|
$
|
44,565,215
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Electrical construction
|
|
$
|
2,701,729
|
|
|
$
|
3,033,706
|
|
Real estate development
|
|
|
262,570
|
|
|
|
1,204,146
|
|
Corporate
|
|
|
(1,364,603
|
)
|
|
|
(1,322,811
|
)
|
Total operating income
|
|
$
|
1,599,696
|
|
|
$
|
2,915,041
|
|
Other (expenses) income, net
|
|
|
|
|
|
|
|
|
Electrical construction
|
|
$
|
(256,328
|
)
|
|
$
|
(324,313
|
)
|
Real estate development
|
|
|
—
|
|
|
|
(4,852
|
)
|
Corporate
|
|
|
30,693
|
|
|
|
21,009
|
|
Total other expenses, net
|
|
$
|
(225,635
|
)
|
|
$
|
(308,156
|
)
|
Net income (loss) before taxes
|
|
|
|
|
|
|
|
|
Electrical construction
|
|
$
|
2,445,401
|
|
|
$
|
2,709,393
|
|
Real estate development
|
|
|
262,570
|
|
|
|
1,199,294
|
|
Corporate
|
|
|
(1,333,910
|
)
|
|
|
(1,301,802
|
)
|
Total net income before taxes
|
|
$
|
1,374,061
|
|
|
$
|
2,606,885
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Electrical construction
|
|
$
|
4,974,021
|
|
|
$
|
11,642,297
|
|
Real estate development
|
|
|
139
|
|
|
|
—
|
|
Corporate
|
|
|
47,782
|
|
|
|
723,884
|
|
Total
|
|
$
|
5,021,942
|
|
|
$
|
12,366,181
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
Electrical construction
|
|
$
|
2,856,206
|
|
|
$
|
2,552,235
|
|
Real estate development
|
|
|
8,289
|
|
|
|
5,674
|
|
Corporate
|
|
|
28,317
|
|
|
|
23,170
|
|
Total
|
|
$
|
2,892,812
|
|
|
$
|
2,581,079
|
|
Operating income (loss) equals total operating revenue less operating costs and expenses inclusive of depreciation and amortization, and selling, general and administrative expenses. Operating costs and expenses also include any gains or losses on the sale of property and equipment. Operating income (loss) excludes interest expense, interest income, other income and income taxes.
The following table sets forth assets by segment as of the dates indicated:
Assets
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Electrical construction
|
|
$
|
120,847,274
|
|
|
$
|
111,064,071
|
|
Real estate development
|
|
|
6,916,753
|
|
|
|
7,578,440
|
|
Corporate
|
|
|
21,417,759
|
|
|
|
10,724,667
|
|
Total
|
|
$
|
149,181,786
|
|
|
$
|
129,367,178
|
|
15
Table of Contents