Quarterly Report (10-q)

Date : 05/15/2019 @ 10:38PM
Source : Edgar (US Regulatory)
Stock : Williams Industrial Services Group Inc. (WLMS)
Quote : 2.25  0.0 (0.00%) @ 9:39PM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission File No. 001-16501

PICTURE 1

Williams Industrial Services Group Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

73-1541378

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

100 Crescent Centre Parkway, Suite 1240

Tucker, GA 30084

(Address of principal executive offices) (Zip code)

 

(770) 879-4400

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


 

 

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

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

N/A

N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 

As of May 10, 2019, there were 19,000,381   shares of common stock of Williams Industrial Services Group Inc. outstanding.

 

 

 


 

 

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

Table of Contents

 

 

Part I—FINANCIAL INFORMATION  

3

 

 

Item 1. Financial Statements  

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (unaudited)  

3

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)  

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018 (unaudited)  

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)  

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)  

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)  

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

21

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk  

27

 

 

Item 4. Controls and Procedures  

27

 

 

Part II—OTHER INFORMATION  

 

 

 

Item 1. Legal Proceedings  

27

 

 

Item 1A. Risk Factors  

27

 

 

Item 6. Exhibits  

28

 

 

SIGNATURES  

29

 

 


 

Part I—FINANCIAL INFORMATIO N

Item 1.   Financial Statements .

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET S (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

March 31, 2019

  

December 31, 2018

ASSETS

  

 

 

  

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,325

 

$

4,475

Restricted cash

 

 

467

 

 

467

Accounts receivable, net of allowance of $140 and $140, respectively

 

 

24,956

 

 

22,724

Contract assets

 

 

11,141

 

 

8,218

Other current assets

 

 

1,789

 

 

1,735

Total current assets

 

 

41,678

 

 

37,619

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

330

 

 

335

Goodwill

 

 

35,400

 

 

35,400

Intangible assets, net

 

 

12,500

 

 

12,500

Other long-term assets

 

 

9,916

 

 

1,650

Total assets

 

$

99,824

 

$

87,504

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,917

 

$

2,953

Accrued compensation and benefits

 

 

12,131

 

 

10,859

Contract liabilities

 

 

3,202

 

 

3,278

Short-term borrowings

 

 

44

 

 

3,274

Current portion of long-term debt

 

 

613

 

 

525

Other current liabilities

 

 

9,003

 

 

5,518

Current liabilities of discontinued operations

 

 

490

 

 

640

Total current liabilities

 

 

34,400

 

 

27,047

Long-term debt, net

 

 

32,898

 

 

32,978

Deferred tax liabilities

 

 

2,727

 

 

2,682

Other long-term liabilities

 

 

5,760

 

 

1,396

Long-term liabilities of discontinued operations

 

 

5,218

 

 

5,188

Total liabilities

 

 

81,003

 

 

69,291

Commitments and contingencies (Note 9 and 11)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 170,000,000 shares authorized and 19,767,605 and 19,767,605 shares issued, respectively, and 19,000,381 and 18,660,218 shares outstanding, respectively

 

 

197

 

 

197

Paid-in capital

 

 

80,709

 

 

80,424

Accumulated other comprehensive income

 

 

18

 

 

 —

Retained earnings (deficit)

 

 

(62,094)

 

 

(62,397)

Treasury stock, at par (767,224 and 1,107,387 common shares, respectively)

 

 

(9)

 

 

(11)

Total stockholders’ equity

 

 

18,821

 

 

18,213

Total liabilities and stockholders’ equity

 

$

99,824

 

$

87,504

 

See accompanying notes to condensed consolidated financial statements.

3


 

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands, except share and per share data)

  

2019

  

2018

Revenue

 

$

50,652

 

$

43,121

Cost of revenue

 

 

43,970

 

 

36,671

 

 

 

 

 

 

 

 Gross profit

 

 

6,682

 

 

6,450

 

 

 

 

 

 

 

Selling and marketing expenses

 

 

240

 

 

426

General and administrative expenses

 

 

4,762

 

 

6,590

Depreciation and amortization expense

 

 

72

 

 

221

Total operating expenses

 

 

5,074

 

 

7,237

 

 

 

 

 

 

 

Operating income (loss)

 

 

1,608

 

 

(787)

 

 

 

 

 

 

 

Interest expense, net

 

 

1,474

 

 

1,378

Other (income) expense, net

 

 

(325)

 

 

(212)

Total other (income) expense, net

 

 

1,149

 

 

1,166

 

 

 

 

 

 

 

Income (loss) from continuing operations before income tax

 

 

459

 

 

(1,953)

Income tax (benefit) expense

 

 

64

 

 

285

Income (loss) from continuing operations

 

 

395

 

 

(2,238)

 

 

 

 

 

 

 

Loss from discontinued operations before income tax

 

 

(64)

 

 

(1,708)

Income tax (benefit) expense

 

 

28

 

 

42

Loss from discontinued operations

 

 

(92)

 

 

(1,750)

 

 

 

 

 

 

 

Net income (loss)

 

$

303

 

$

(3,988)

 

 

 

 

 

 

 

Basic earnings (loss) per common share  

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.02

 

$

(0.12)

Income (loss) from discontinued operations

 

 

 —

 

 

(0.10)

Basic earnings (loss) per common share  

 

$

0.02

 

$

(0.22)

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.02

 

$

(0.12)

Income (loss) from discontinued operations

 

 

 —

 

 

(0.10)

Diluted earnings (loss) per common share

 

$

0.02

 

$

(0.22)

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS ) (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2019

  

2018

Net income (loss)

 

$

303

 

$

(3,988)

Foreign currency translation adjustment

 

 

18

 

 

 —

Comprehensive income (loss)

 

$

321

 

$

(3,988)

 

See accompanying notes to condensed consolidated financial statements.

5


 

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT Y (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

$0.01 Per Share

 

 

Paid-in

 

 

Earnings  

 

Treasury Shares

 

 

 

(in thousands, except share data)

  

Shares

  

 

Amount

  

 

Capital

  

 

(Deficit)

 

Shares

 

 

Amount

  

 

Total

Balance, December 31, 2017

 

19,360,026

 

$

193

 

$

78,910

 

$

(36,962)

 

(1,413,640)

 

$

(14)

 

$

42,127

Issuance of restricted stock units

 

167,841

 

 

 2

 

 

(2)

 

 

 —

 

 —

 

 

 —

 

 

 —

Tax withholding on restricted stock units

 

 —

 

 

 —

 

 

(186)

 

 

 —

 

(23,161)

 

 

 —

 

 

(186)

Stock-based compensation

 

 —

 

 

 —

 

 

753

 

 

 —

 

 —

 

 

 —

 

 

753

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(3,988)

 

 —

 

 

 —

 

 

(3,988)

Balance, March 31, 2018

 

19,527,867

 

$

195

 

$

79,475

 

$

(40,950)

 

(1,436,801)

 

$

(14)

 

$

38,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Other

 

 

Retained

 

 

 

 

 

 

 

 

 

 

$0.01 Per Share

 

 

Paid-in

 

 

Comprehensive

 

 

Earnings  

 

Treasury Shares

 

 

 

(in thousands, except share data)

  

Shares

  

 

Amount

  

 

Capital

  

 

Income

  

 

(Deficit)

  

Shares

  

 

Amount

  

 

Total

Balance, December 31, 2018

 

19,767,605

 

$

197

 

$

80,424

 

$

 —

 

$

(62,397)

 

(1,107,387)

 

$

(11)

 

$

18,213

Issuance of restricted stock units

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

390,901

 

 

 4

 

 

 4

Tax withholding on restricted stock units

 

 —

 

 

 —

 

 

(123)

 

 

 —

 

 

 —

 

(50,738)

 

 

(2)

 

 

(125)

Stock-based compensation

 

 —

 

 

 —

 

 

408

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

408

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

18

 

 

 —

 

 —

 

 

 —

 

 

18

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

303

 

 —

 

 

 —

 

 

303

Balance, March 31, 2019

 

19,767,605

 

$

197

 

$

80,709

 

$

18

 

$

(62,094)

 

(767,224)

 

$

(9)

 

$

18,821

 

See accompanying notes to condensed consolidated financial statements.

6


 

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2019

  

2018

Operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

303

 

$

(3,988)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Net loss from discontinued operations

 

 

92

 

 

1,750

Deferred income tax provision (benefit)

 

 

45

 

 

202

Depreciation and amortization on plant, property and equipment and intangible assets

 

 

72

 

 

221

Amortization of deferred financing costs

 

 

154

 

 

56

Loss on disposals of property, plant and equipment

 

 

 —

 

 

117

Bad debt expense

 

 

189

 

 

(67)

Stock-based compensation

 

 

305

 

 

194

Paid-in-kind interest

 

 

 —

 

 

642

Changes in operating assets and liabilities, net of businesses acquired and sold:

 

 

 

 

 

 

Accounts receivable

 

 

(2,421)

 

 

7,311

Contract assets

 

 

(2,923)

 

 

1,641

Other current assets

 

 

(54)

 

 

1,765

Other assets

 

 

403

 

 

(194)

Accounts payable

 

 

5,964

 

 

(1,092)

Accrued and other liabilities

 

 

517

 

 

268

Contract liabilities

 

 

(76)

 

 

(1,755)

Net cash provided by (used in) operating activities, continuing operations

 

 

2,570

 

 

7,071

Net cash provided by (used in) operating activities, discontinued operations

 

 

(212)

 

 

(4,864)

Net cash provided by (used in) operating activities

 

 

2,358

 

 

2,207

Investing activities:

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(68)

 

 

(54)

Net cash provided by (used in) investing activities, continuing operations

 

 

(68)

 

 

(54)

Net cash provided by (used in) investing activities, discontinued operations

 

 

 —

 

 

319

Net cash provided by (used in) investing activities

 

 

(68)

 

 

265

Financing activities:

 

 

 

 

 

 

Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation

 

 

(121)

 

 

(186)

Proceeds from short-term borrowings

 

 

42,266

 

 

 —

Repayments of short-term borrowings

 

 

(45,497)

 

 

 —

Repayments of long-term debt

 

 

(88)

 

 

 —

Net cash provided by (used in) financing activities, continuing operations

 

 

(3,440)

 

 

(186)

Net cash provided by (used in) financing activities, discontinued operations

 

 

 —

 

 

 —

Net cash provided by (used in) financing activities

 

 

(3,440)

 

 

(186)

Net change in cash, cash equivalents and restricted cash

 

 

(1,150)

 

 

2,286

Cash, cash equivalents and restricted cash, beginning of period

 

 

4,942

 

 

16,156

Cash, cash equivalents and restricted cash, end of period

 

$

3,792

 

$

18,442

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

1,092

 

$

673

 

See accompanying notes to condensed consolidated financial statements.

7


 

 WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT S (UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Business

Effective June 29, 2018, Global Power Equipment Group Inc. changed its name to Williams Industrial Services Group Inc. (together with its wholly owned subsidiaries, “Williams,” the “Company,” “we,” “us” or “our,” unless the context indicates otherwise) to better align its name with the Williams business. Since March 19, 2019, the Company’s stock has traded on the OTCQX® Best Market under the ticker symbol “WLMS.” Williams has been safely helping plant owners and operators enhance asset value for more than 50 years. The Company provides a broad range of construction, maintenance and support services to customers in energy, power and industrial end markets. The Company’s mission is to be the preferred provider of construction, maintenance, and specialty services through commitment to superior safety performance, focus on innovation, and dedication to delivering unsurpassed value to its customers.

Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) on a basis consistent with that used in the Annual Report on Form 10-K for the year ended December 31, 2018, filed by the Company with the United States (the “U.S.”) Securities and Exchange Commission (“SEC”) on April 1, 2019 (the “2018 Report”), and include all normal recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets and statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the periods indicated. All significant intercompany transactions have been eliminated. These notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the 2018 Report. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three month period is not necessarily indicative of the results to be expected for the full year.

The Company reports on a fiscal quarter basis utilizing a “modified” 4-4-5 calendar (modified in that the fiscal year always begins on January 1 and ends on December 31). However, the Company has continued to label its quarterly information using a calendar convention. The effects of this practice are modest and only exist when comparing interim period results. The reporting periods and corresponding fiscal interim periods are as follows:

 

 

 

 

 

 

 

 

 

 

Reporting Interim Period

 

Fiscal Interim Period

 

  

2019

  

2018

Three Months Ended March 31

 

January 1, 2019 to March 31, 2019

 

January 1, 2018 to April 1, 2018

Three Months Ended June 30

 

April 1, 2019 to June 30, 2019

 

April 2, 2018 to July 1, 2018

Three Months Ended September 30

 

July 1, 2019 to September 29, 2019

 

July 2, 2018 to September 30, 2018

 

 

NOTE 2—LIQUIDITY

The Company’s condensed consolidated financial statements have been prepared on a going concern basis, which assumes that it will be able to meet its obligations and continue its operations during the twelve-month period following the issuance of this Quarterly Report on Form 10-Q for the three months ended March 31, 2019 (this “Form 10-Q”). These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

During 2018, management completed a series of multi-year liquidity initiatives, which included:

·

Exiting from all of the former Products division businesses;

·

Reducing the corporate headquarters personnel and consolidating the administrative offices into Tucker, Georgia;

·

Refinancing the Initial Centre Lane Facility (as defined in Note 9) with the New Centre Lane Facility (as defined in Note 9), which is a four-year, $35.0 million senior secured credit agreement (for additional information, please refer to “Note 9 Debt”); and

8


 

·

Entering into the MidCap Facility (as defined in Note 9), which is a three-year, $15.0 million secured asset-based revolving credit facility and allows for up to $6.0 million of non-cash collateralized letters of credit (for additional information, please refer to “Note 9 Debt”).

The MidCap Facility generally provides adequate liquidity for the Company’s working capital needs. However, due to certain borrowing base eligibility limitations and exclusions within the MidCap Facility, there are instances where the Company would not have sufficient availability under the MidCap Facility to meet its growth working capital requirements. The borrowing base eligibility limitations and exclusions that have the most impact on availability under the MidCap Facility are customer concentration limits, exclusion of receivables from the Company’s joint ventures, and exclusion of receivables related to projects on which there is an underlying surety bond.

In early 2019, the Company identified a large, second quarter 2019 customer project which, for approximately a six week timeframe, will have very significant working capital requirements. Additionally, the project has an underlying payment and performance surety bond making the resulting receivables unavailable for borrowing under the MidCap Facility. The combination of those two factors, if not addressed, would have resulted in the Company having inadequate cash to continue operations. On March 29, 2019, the Company negotiated a contract amendment with the customer which provides for the payment of the Company’s weekly invoices prior to the related payroll disbursements and a consent letter with the lender which increases the Company’s borrowing availability by increasing the concentration limit on a major customer’s receivables during the second quarter. The Company believes the combination of these two measures adequately addresses its near-term liquidity concerns.

As a result, management has concluded that as of the date of this report, management’s plan has alleviated the substantial doubt regarding the Company’s ability to continue as a going concern for the twelve-month period following the issuance of these condensed consolidated financial statements. However, the Company’s liquidity will be periodically, and for certain intervals, significantly constrained due to the working capital requirements that will be needed to execute its plans to grow the business. The risk factors described in the 2018 Report under the heading “Item 1A. Risk Factors,” are still relevant to the Company’s operations.

NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Accounting Standards Codification (“ASC”) Topic 718, “Compensation–Stock Compensation” and applies to all share-based payment transactions to nonemployees in which a grantor acquires goods and services to be used or consumed in a grantor’s own operations by issuing share-based awards. Upon adoption of ASU 2018-07, an entity should only re-measure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. In the first quarter of 2019, the Company adopted ASU 2018-07, which did not have a material impact on its financial position, results of operations and cash flows.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify the tax effects stranded in accumulated other comprehensive income as a result of the enactment of comprehensive tax legislation in December 2017, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), to retained earnings. The Company adopted ASU 2018-02 effective January 1, 2019 and elected not to reclassify the income tax effects stranded in accumulated other comprehensive income to retained earnings and, as a result, there was no impact on the Company’s financial position, results of operations or cash flows. 

In February 2016, the FASB issued ASU 2016-02, “Leases” (ASC Topic 842), which, together with its related clarifying ASUs (collectively, “ASU 2016-02”), amended the previous guidance for lease accounting and related disclosure requirements. The new guidance requires the recognition of right-of-use assets and lease liabilities on the balance sheet for leases with terms greater than twelve months or leases that contain a purchase option that is reasonably certain to be exercised. Lessees are required to classify leases as either finance or operating leases. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. For leases with a term of twelve months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts

9


 

recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. On January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective method, meaning it has been applied to leases that existed or have been entered into on or after January 1, 2019 without adjusting comparative periods in the financial statements. Please refer to “Note 4–Leases” for further discussion of the adoption and the impact on the Company’s financial statements.

 

NOTE 4—LEASES

On January 1, 2019, the Company adopted ASU 2016-02, which amended the previous guidance for lease accounting and related disclosure requirements. The new guidance requires the recognition of right-of-use assets and lease liabilities on the balance sheet for leases with terms greater than 12 months or leases that contain a purchase option that is reasonably certain to be exercised. Lessees are required to classify leases as either finance or operating leases. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. 

The Company elected to utilize the package of practical expedients in ASC 842-10-65-1(f) that, upon adoption of ASU 2016-02, allows entities to (1) not reassess whether any expired or existing contracts are or contain leases, (2) retain the classification of leases (e.g., operating or finance lease) existing as of the date of adoption and (3) not reassess initial direct costs for any existing leases.

The Company adopted ASU 2016-02 using the modified retrospective method, and accordingly, the new guidance was applied to leases that existed as of January 1, 2019. This resulted in the recognition of lease liabilities of $8.7 million and right-of-use-assets of $8.5 million on January 1, 2019, which included the impact of eliminating prior year deferred rent. The adoption of ASU 2016-02 did not have a material impact on the Company’s results of operations or cash flows.

The Company primarily leases office space and related equipment, as well as equipment, modular units and vehicles directly used in providing services to our customers. The Company’s leases have remaining lease terms of 1 to 10 years. Most leases contain renewal options for varying periods, which are at the Company’s sole discretion and included in the expected lease term if they are reasonably certain of being exercised.

Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate to determine the present value of the lease as the rate implicit in the lease is typically not readily determinable.

Short-term leases (leases with an initial term of 12 months or less or leases that are cancelable by the lessee and lessor without significant penalties) are not recorded on the condensed consolidated balance sheet and are expensed on a straight-line basis over the lease term. The majority of the Company’s short-term leases relate to equipment used in delivering services to its customers. These leases are entered into at agreed upon hourly, daily, weekly or monthly rental rates for an unspecified duration and typically have a termination for convenience provision. Such equipment leases are considered short-term in nature unless it is reasonably certain that the equipment will be leased for a term greater than 12 months.

The components of lease expense for the three months ended March 31, 2019 were as follows:

 

 

 

 

Lease Cost/(Sublease Income) (in thousands)

 

Three Months Ended March 31, 2019

Operating lease cost

 

$

1,227

Short-term lease cost

 

 

306

Sublease income

 

 

(9)

Total lease cost

 

$

1,524

Lease cost related to finance leases were not significant for the three months ended March 31, 2019.

10


 

Information related to the Company’s right-of use assets and lease liabilities as of March 31, 2019 was as follows:

 

 

 

 

 

 

Lease Assets/Liabilities (in thousands)

 

Balance Sheet Classification

 

March 31, 2019

Lease Assets 

 

 

 

 

 

Right-of-use assets

 

Other long-term assets

 

$

8,073

 

 

 

 

 

 

Lease Liabilities

 

 

 

 

 

Short-term lease liabilities

 

Other current liabilities

 

$

3,638

Long-term lease liabilities

 

Other long-term liabilities

 

 

4,643

Total lease liabilities

 

 

 

$

8,281

 

Supplemental information related to the Company’s leases for the three months ended March 31, 2019 was as follows:

 

 

 

 

(in thousands)

 

Three Months Ended

March 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash used by operating leases

 

$

1,238

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

578

Right-of-use assets obtained in exchange for new finance lease liabilities

 

 

27

Weighted-average remaining lease term - operating leases

 

 

2.56 years

Weighted-average remaining lease term - finance leases

 

 

5 years

Weighted-average discount rate - operating leases

 

 

9%

Weighted-average discount rate - finance leases

 

 

9%

 

Total remaining lease payments under the Company’s operating and finance leases are as follows:

 

 

 

 

 

 

 

 

 

Operating Leases

 

Finance Leases

Year Ended December 31,

 

(in thousands)

Remainder of 2019

 

$

3,459

 

$

 4

2020

 

 

2,933

 

 

 6

2021

 

 

2,308

 

 

 6

2022

 

 

626

 

 

 6

2023

 

 

144

 

 

 6

Thereafter

 

 

 1

 

 

 —

Total lease payments

 

$

9,471

 

$

28

Less: interest

 

 

(1,217)

 

 

(1)

Present value of lease liabilities

 

$

8,254

 

$

27

 

 

NOTE 5—CHANGES IN BUSINESS

Restructuring Charges

In 2018, the Company made the decision to relocate its corporate headquarters to Tucker, Georgia and vacated its leased office space in Irving, Texas on September 30, 2018. In March 2019, the Company subleased the Irving, Texas office space until November 2019, when the lease expires. The balance of the restructuring accrual is included in other current liabilities on the Company’s condensed consolidated balance sheets.

The following table shows the restructuring activities for the three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

(in thousands)

    

 

Lease

    

 

Severance

    

 

Total

Balance, December 31, 2018

 

$

367

 

$

2,889

 

$

3,256

Payments for restructuring

 

 

(97)

 

 

(1,012)

 

 

(1,109)

Balance, March 31, 2019

 

$

270

 

$

1,877

 

$

2,147

11


 

Discontinued Operations

Electrical Solutions

During the fourth quarter of 2017, the Company made the decision to exit and sell its Electrical Solutions segment (which was comprised solely of Koontz-Wagner Custom Controls Holdings LLC (“Koontz-Wagner”), a wholly owned subsidiary of the Company) in an effort to reduce the Company’s outstanding term debt. The Company determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented. In connection with the Company’s decision to sell the Electrical Solutions segment, the Company performed an impairment analysis on this segment’s finite- and indefinite-lived intangible assets (customer relationships and trade names, respectively) and determined that their carrying value exceeded their fair value. As a result, in the fourth quarter of 2017, the Company recorded an impairment charge of $9.7 million related to these intangible assets. After the impairment charge, the fair value of this segment’s intangible assets was zero at December 31, 2017. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs. There were no non-recurring fair value re-measurements related to the Electrical Solutions segment during the year ended December 31, 2018 or three months ended March 31, 2019.

In spite of the Company’s efforts, which included retaining financial advisors to sell all or part of Koontz-Wagner’s operations, inside or outside of a federal bankruptcy or state court proceeding (including Chapter 11 of Title 11 of the U.S. Bankruptcy Code), the proposed disposition did not progress as planned due, primarily, to the absence of viable bids in the sale process, the inability of Koontz-Wagner to fund its ongoing operations or obtain financing to do so, and Koontz-Wagner’s deteriorating financial performance. As a result, on July 11, 2018, Koontz-Wagner filed a voluntary petition for relief under Chapter 7 of Title 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Texas. The filing was for Koontz-Wagner only, not for the Company as a whole, and was completely separate and distinct from the Williams business and operations. 

As a result of the July 11, 2018 bankruptcy of Koontz-Wagner, the Company recorded $11.4 million of exit costs, which were included in loss from discontinued operations in the Company’s consolidated statements of operations for the year ended December 31, 2018. These charges consisted of a $4.0 million fee related to a fifth amendment of the Initial Centre Lane Facility, a pension withdrawal liability of $2.9 million related to Koontz-Wagner’s International Brotherhood of Electrical Workers Local Union 1392 multi-employer pension plan, a $1.8 million negotiated settlement of the Company’s guarantee of Koontz-Wagner’s Houston facility lease agreement and a $2.7 million liability as a result of the Company providing affected Koontz-Wagner employees with 60 days of salary continuation, as well as the difference between each employee’s cost of health care at the time of their employment termination and the cost of continued benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The Company satisfied the liability related to the lease guarantee settlement and substantially all of the salary and benefit continuation liability through cash payments by the end of 2018. The pension liability is expected to be satisfied by annual cash payments of $0.3 million each, paid in quarterly installments, over the next twenty years.

Mechanical Solutions

On March 21, 2018, the Company closed on the sale of its office building in Heerlen, Netherlands for $0.3 million, resulting in an immaterial gain on sale, which was reflected in loss from discontinued operations before income tax expense (benefit) in the Company’s condensed consolidated statement of operations for the three months ended March 31, 2018.

In connection with the sale of its Mechanical Solutions segment during 2017, the Company entered into a transition services agreement with the purchaser to provide certain accounting and administrative services for an initial period of nine months. During the three months ended March 31, 2019, the Company did not provide services for the purchaser. For the three months ended March 31, 2018, the Company provided less than $0.1 million in services for the purchaser, which was included in general and administrative expenses from continuing operations in the condensed consolidated statement of operations.

In April 2019, the purchaser of our former Mechanical Solutions segment went into receivership. As of March 31, 2019, the Company reserved $0.2 million of uncollected receivables related to the transition services agreement. This charge was included in general and administrative expenses from continuing operations in the condensed consolidated statement of operations for the three months ended March 31, 2019. The Company has remaining balances of $0.2 million and $0.8 million included in other current assets and other current liabilities, respectively, on the March 31, 2019 condensed consolidated balance sheet.

12


 

 

As of March 31, 2019 and December 31, 2018, the Company did not have any assets related to its Electrical and Mechanical Solutions’ discontinued operations. The following table presents a reconciliation of the carrying amounts of major classes of liabilities of Electrical and Mechanical Solutions’ discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

  

March 31, 2019

 

December 31, 2018

Liabilities:

 

 

 

 

 

 

Accrued compensation and benefits 

 

$

108

 

$

259

Other current liabilities

 

 

382

 

 

381

Current liabilities of discontinued operations

 

 

490

 

 

640

Liability for pension obligation

 

 

2,763

 

 

2,781

Liability for uncertain tax positions

 

 

2,455

 

 

2,407

Long-term liabilities of discontinued operations

 

 

5,218

 

 

5,188

Total liabilities of discontinued operations

 

$

5,708

 

$

5,828

 

The following table presents a reconciliation of the major classes of line items constituting the net income (loss) from discontinued operations. In accordance with GAAP, the amounts in the table below do not include an allocation of corporate overhead.

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

2019

  

2018

Revenue

 

 

 

 

 

 

Electrical Solutions

 

$

 —

 

$

12,844

Total revenue

 

 

 —

 

 

12,844

Cost of revenue

 

 

 

 

 

 

Electrical Solutions

 

 

 —

 

 

13,455

Total cost of revenue

 

 

 —

 

 

13,455

 

 

 

 

 

 

 

Selling and marketing expenses

 

 

 —

 

 

(61)

General and administrative expenses

 

 

10

 

 

1,143

Gain on disposal - Mechanical Solutions

 

 

 —

 

 

(24)

Other

 

 

54

 

 

39

Loss from discontinued operations before income tax

 

 

(64)

 

 

(1,708)

Income tax expense (benefit)

 

 

28

 

 

42

Loss from discontinued operations 

 

$

(92)

 

$

(1,750)

 

 

NOTE 6—REVENUE

Disaggregation of Revenue

Disaggregated revenue by type of contract was as follows.  

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2019

 

2018

Cost-plus reimbursement contracts

 

$

43,503

 

$

33,777

Fixed-price contracts

 

 

7,149

 

 

9,344

Total

 

$

50,652

 

$

43,121

 

Disaggregated revenue by the geographic area where the work was performed was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2019

 

2018

United States

 

$

49,204

 

$

43,121

Canada

 

 

1,449

 

 

 —

Total

 

$

50,652

 

$

43,121

 

13


 

Contract Balances

The Company enters into contracts that allow for periodic billings over the contract term that are dependent upon specific advance billing terms, as services are provided, or as milestone billings based on completion of certain phases of work. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported in the Company’s condensed consolidated balance sheets as contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported in the Company’s condensed consolidated balance sheets as contract liabilities. At any point in time, each project in process could have either contract assets or contract liabilities.

The following table provides information about contract assets and contract liabilities from contracts with customers.

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2019

  

2018

Costs incurred on uncompleted contracts

 

$

43,403

 

$

36,675

Earnings recognized on uncompleted contracts

 

 

7,265

 

 

6,446

Total

 

 

50,668

 

 

43,121

Less—billings to date

 

 

(42,729)

 

 

(38,569)

Net

 

$

7,939

 

$

4,552

Contract assets

 

$

11,141

 

$

9,846

Contract liabilities

 

 

(3,202)

 

 

(5,294)

Net

 

$

7,939

 

$

4,552

 

For the three months ended March 31, 2019, the Company recognized revenue of approximately $0.9 million that was included in the corresponding contract liability balance at December 31, 2018.

Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Remainder of 2019

 

2020

 

2021

 

Thereafter

 

Total

Remaining performance obligations

 

$

138,044

 

$

136,482

 

$

95,662

 

$

108,487

 

$

478,675

 

 

 

NOTE 7—EARNINGS (LOSS) PER SHARE

As of March 31, 2019, the Company’s 19,000,381 shares outstanding included 288,137 shares of contingently issued but unvested restricted stock. As of March 31, 2018, the Company’s 18,091,066 shares outstanding included 6,060 shares of contingently issued but unvested restricted stock. Restricted stock is excluded from the calculation of basic weighted average shares outstanding, but its impact, if dilutive, is included in the calculation of diluted weighted average shares outstanding.

Basic earnings (loss) per common share are calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted earnings (loss) per common share are based on the weighted average common shares outstanding during the period, adjusted for the potential dilutive effect of common shares that would be issued upon the vesting and release of restricted stock awards and units.

14


 

Basic and diluted loss per common share from continuing operations were calculated as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands, except per share data)

  

2019

  

2018

Income (loss) from continuing operations

 

$

395

 

$

(2,238)

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

18,514,895

 

 

17,939,888

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

0.02

 

$

(0.12)

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

18,514,895

 

 

17,939,888

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

Unvested portion of restricted stock units and awards

 

 

145,510

 

 

 —

Weighted average diluted common shares outstanding

 

 

18,660,405

 

 

17,939,888

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

$

0.02

 

$

(0.12)

 

The weighted average number of shares outstanding used in the computation of basic and diluted loss per common share as of March 31, 2018 did not include the effect of the following potential outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted loss per common share because the effect would have been anti-dilutive.

 

 

 

 

 

Three Months Ended March 31,

 

2019

  

2018

Unvested service-based restricted stock and restricted stock unit awards

257,109

 

6,060

Unvested performance- and market-based restricted stock unit awards

636,957

 

404,304

Stock options

122,000

 

122,000

 

 

 

NOTE 8—INCOME TAXES

The effective income tax rate for continuing operations for the three months ended March 31, 2019 and 2018 was as follows:

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2019

    

2018

Effective income tax rate for continuing operations

 

13.9%

 

(14.6)%

 

The effective income tax rate differs from the statutory federal income tax rate of 21% primarily because of the full valuation allowances recorded on the Company’s deferred tax assets. 

For the three months ended March 31, 2019, the Company recorded income tax expense from continuing operations of $0.1 million, or 13.9% of pretax income from continuing operations compared with income tax expense from continuing operations of $0.3 million, or (14.6)% of pretax loss from continuing operations in the same period for 2018. The decrease in income tax provision from continuing operations for the three months ended March 31, 2019 compared with the corresponding period in 2018 was primarily related to a $0.2 million increase in indefinite-lived deferred tax assets related to an interest expense addback under Section 163(j) of the Internal Revenue Code and the post-2017 U.S. net operating loss that can be used to offset indefinitely-lived intangible deferred tax liabilities.

As of March 31, 2019 and 2018, the Company would have needed to generate approximately $277.8 million and $250.9 million, respectively, of future financial taxable income to realize its deferred tax assets.

The Company’s foreign subsidiaries may generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in its operations outside of the U.S. Pursuant to ASC Topic No. 740-30, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes. As of March 31, 2019 and 2018, the Company did not have any undistributed earnings in its foreign subsidiaries because all of their earnings were either taxed as deemed dividends or included with the provisional estimate of one-time transition tax as of December 31,

15


 

2017.

As of both March 31, 2019 and December 31, 2018, the Company provided for a total liability of $3.4 million, of which $2.5 million was related to our discontinued operations for unrecognized tax benefits related to various federal, foreign and state income tax matters, which was included in long-term deferred tax assets and other long-term liabilities. If recognized, the entire amount of the liability would affect the effective tax rate. As of March 31, 2019, the Company accrued approximately $1.7 million, of which $1.3 million was related to our discontinued operations, in other long-term liabilities for potential payment of interest and penalties related to uncertain income tax positions.

NOTE 9—DEBT

As of March 31, 2019 and December 31, 2018, the Company had the following debt, net of unamortized deferred financing costs:

 

 

 

 

 

 

 

(in thousands)

  

March 31, 2019

  

December 31, 2018

MidCap Facility

 

$

44

 

$

3,274

Current portion of New Centre Lane Facility

 

 

613

 

 

525

Current debt

 

$

657

 

$

3,799

 

 

 

 

 

 

 

New Centre Lane Facility

 

 

34,212

 

 

34,387

Unamortized deferred financing costs

 

 

(1,314)

 

 

(1,409)

Long-term debt, net

 

$

32,898

 

$

32,978

 

 

 

 

 

 

 

Total debt, net

 

$

33,555

 

$

36,777

 

MidCap Facility

On October 11, 2018, the Company entered into a three-year, $15.0 million Credit and Security Agreement with MidCap Financial Trust (“MidCap”), as agent and as a lender, and other lenders that may be added as a party thereto (the “MidCap Facility”). The MidCap Facility is a secured asset-based revolving credit facility that provides borrowing availability against 85% of eligible accounts receivable and the lesser of 80% of eligible contract assets and $1.0 million, after certain customary exclusions and reserves, and allows for up to $6.0 million of non-cash collateralized letters of credit. The borrowing base eligibility limitations and exclusions that have the most impact on availability under the MidCap facility are customer concentration limits, exclusion of receivables from the Company’s joint ventures, and exclusion of receivables related to projects on which there is an underlying surety bond. The Company can, if necessary, make daily borrowings under the MidCap Facility with same day funding. The outstanding loan balance under the MidCap Facility is reduced through the daily automated sweeping of the Company’s depository accounts to the lender’s account under the terms of deposit account control agreements. As of March 31, 2019 and December 31, 2018, the Company had less than $0.1 million and $3.3 million, respectively, outstanding under the MidCap Facility, which was included in short-term borrowings on the condensed consolidated balance sheets. As of March 31, 2019, the Company had $5.0 million in available borrowings under the MidCap facility.

Borrowings under the MidCap Facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus 6.0% per year, subject to a minimum LIBOR rate of 1.0%, and are payable in cash on a monthly basis.

The Company must pay a customary unused line fee equal to 0.5% per annum of the average unused portion of the commitments under the MidCap Facility, certain other customary administration fees and a minimum balance fee. In addition, while any letters of credit are outstanding under the MidCap Facility, the Company must pay a letter of credit fee equal to 6.0% per annum, in addition to any other customary fees required by the issuer of the letter of credit.

The Company’s obligations under the MidCap Facility are secured by first priority liens on substantially all of its assets, other than the Excluded Collateral (as defined in the MidCap Facility), subject to the terms of an intercreditor agreement, dated as of October 11, 2018 (the “Intercreditor Agreement”), entered into by an affiliate of Centre Lane, as a lender under the New Centre Lane Facility (as defined below), and MidCap, as agent, and to which the Company consented. The Intercreditor Agreement was entered into as required by the MidCap Facility and the New Centre Lane Facility. The first priority liens previously granted by the Company and certain of its wholly owned subsidiaries in favor of the Centre Lane affiliate in connection with the New Centre Lane Facility are also subject to the Intercreditor Agreement, which, among other things, specifies the relative lien priorities of the secured parties under each of the MidCap Facility and the New Centre Lane Facility in the relevant collateral. It contains customary provisions regarding, among other things, the rights of the respective secured parties to take

16


 

enforcement actions against the collateral and certain limitations on amending the documentation governing each of the MidCap Facility and the New Centre Lane Facility. It additionally provides secured parties under each of the MidCap Facility and the New Centre Lane Facility the option, in certain instances, to purchase all outstanding obligations of the Company under the other respective loan.

The Company may from time to time voluntarily prepay outstanding amounts under the MidCap Facility, in whole or in part, in a minimum amount of $0.1 million. If at any time the amount outstanding under the MidCap Facility exceeds the borrowing base in effect at such time, the Company must repay the excess amount in cash, cash collateralize liabilities under letters of credit, or cause the cancellation of outstanding letters of credit (or any combination of the foregoing), in an aggregate amount equal to such excess. The Company is also required to repay certain amounts outstanding under the MidCap Facility upon the occurrence of certain events involving the assets upon which the borrowing base is calculated, including receipt of payments or proceeds from the Company’s accounts receivable, certain casualty proceeds in excess of $25,000, and receipt of proceeds following certain asset dispositions. The Company also has certain reimbursement obligations in the event of payments by the agent or a lender against draws under outstanding letters of credit.

In the event the MidCap Facility is terminated (by reason of an event of default or otherwise) 90 days or more prior to the maturity date, the Company will be required to pay a prepayment fee in an amount equal to the aggregate commitment under the MidCap Facility at the time of termination, multiplied by 2.0% in the first year following October 11, 2018, 1.5% in the second year, and 1.0% in the first nine months of the third year.

The MidCap Facility requires the Company to regularly provide financial information to the lenders, and, beginning on December 31, 2018, to maintain certain total leverage and fixed charge coverage ratios and meet minimum consolidated adjusted EBITDA and minimum liquidity requirements (each of which as defined in the MidCap Facility). As of March 31, 2019, the Company was in compliance with all the contractual requirements.

The MidCap Facility also contains customary representations and warranties, as well as customary affirmative and negative covenants. The MidCap Facility contains covenants that may, among other things, limit the Company’s ability to incur additional debt, incur liens, make investments, engage in mergers, dispositions or sale-leasebacks, engage in new lines of business or certain transactions with affiliates and change accounting policies or fiscal year.

Events of default under the MidCap Facility include, but are not limited to, failure to timely pay any amounts due and owing, a breach of certain covenants or any representations or warranties, the commencement of any bankruptcy or other insolvency proceeding, judgments in excess of certain acceptable amounts, certain events related to ERISA matters, impairment of security interests in collateral or invalidity of guarantees or security documents, and a default or event of default under the New Centre Lane Facility or the Intercreditor Agreement.

Upon default, MidCap would have the right to declare all borrowings under the MidCap Facility to be immediately due and payable, together with accrued interest and fees, and exercise remedies under the other Financing Documents (as defined in the MidCap Facility).

New Centre Lane Facility

On September 18, 2018, the Company refinanced and replaced its initial Centre Lane Facility, a 4.5-year senior secured term loan facility with an affiliate of Centre Lane as Administrative Agent and Collateral Agent, and the other lenders from time to time party thereto (as amended, the “Initial Centre Lane Facility”), with a four-year, $35.0 million senior secured credit agreement with an affiliate of Centre Lane as Administrative Agent and Collateral Agent, and the other lenders from time to time party thereto (the “New Centre Lane Facility”). The New Centre Lane Facility requires payment of an annual administration fee of $25,000. Borrowings under the New Centre Lane Facility bear interest at LIBOR (with a minimum rate of 2.5%) plus 10% per year, payable monthly in cash. The Company must repay an amount equal to 0.25% of the original aggregate principal amount of the New Centre Lane Facility in consecutive quarterly installments, beginning on December 31, 2018 through June 30, 2019. The Company must repay an amount equal to 0.50% of the original aggregate principal amount of the New Centre Lane Facility in consecutive quarterly installments, beginning on September 30, 2019.

The Company’s obligations under the New Centre Lane Facility are guaranteed by all of its wholly owned domestic subsidiaries, subject to customary exceptions. The Company’s obligations are secured by first priority security interests on substantially all of its assets and those of its wholly owned domestic subsidiaries. This includes 100% of the voting equity interests of the Company’s domestic subsidiaries and 65% of the voting equity interests of other directly owned foreign subsidiaries, subject to customary exceptions.

17


 

Beginning on September 19, 2019, the Company may voluntarily prepay the New Centre Lane Facility at any time or from time to time, in whole or in part, in a minimum amount of $1.0 million of the outstanding principal amount, plus any accrued but unpaid interest on the aggregate principal amount being prepaid, plus a prepayment premium, to be calculated as follows (the “Prepayment Premium”):

 

 

 

 

 

 

Prepayment Premium as a

 

 

Percentage of Aggregate

Period

 

Outstanding Principal Prepaid

September 19, 2019 to September 18, 2021

 

 

1%

After September 18, 2021

 

 

0%

Subject to certain exceptions, the Company must prepay an aggregate principal amount equal to 75% of its Excess Cash Flow (as defined in the New Centre Lane Facility), minus the sum of all voluntary prepayments, within five business days after the date that is 90 days following the end of each fiscal year. The New Centre Lane Facility also requires mandatory prepayment of certain amounts in the event the Company or its subsidiaries receive proceeds from certain events and activities, including, among others, asset sales, casualty events, the issuance of indebtedness and equity interests not otherwise permitted under the New Centre Lane Facility and the receipt of tax refunds or extraordinary receipts in excess of $500,000, plus, in certain instances, the applicable Prepayment Premium, calculated as set forth above.

The New Centre Lane Facility contains customary representations and warranties, as well as customary affirmative and negative covenants. The New Centre Lane Facility contains covenants that may, among other things, limit the Company’s ability to incur additional debt, incur liens, make investments or capital expenditures, declare or pay dividends, engage in mergers, acquisitions and dispositions, engage in new lines of business or certain transactions with affiliates and change accounting policies or fiscal year.

Events of default under the New Centre Lane Facility include, but are not limited to, a breach of any of the financial covenants or any representations or warranties, failure to timely pay any amounts due and owing, the commencement of any bankruptcy or other insolvency proceeding, judgments in excess of certain acceptable amounts, the occurrence of a change in control, certain events related to ERISA matters and impairment of security interests in collateral or invalidity of guarantees or security documents.

Upon a default under the New Centre Lane Facility, the Company’s senior secured lenders would have the right to accelerate the then-outstanding amounts under such facility and to exercise their rights and remedies to collect such amounts, which would include foreclosing on collateral constituting substantially all of the Company’s assets and those of its subsidiaries. However, in October 2018, the Company entered into the MidCap Facility, which provides for a secured asset-based revolving credit facility that provides borrowing availability against 85% of eligible accounts receivable and 80% of eligible contract assets; as such, the lenders under the MidCap Facility hold a first priority lien on the Company’s accounts receivable and contract assets.

The Company’s borrowing rate under the New Centre Lane Facility as of March 31, 2019 was 12.5%.

Initial Centre Lane Facility

As disclosed in the 2018 Report, for the period from January 1, 2018 to September 17, 2018, the Company had outstanding borrowings under the Initial Centre Lane Facility. The Initial Centre Lane Facility did not provide for working capital borrowings or access to additional letters of credit. These restrictions were addressed in September 2018, at which time the Initial Centre Lane Facility was refinanced and replaced, and October 2018, as a result of the Company entering into the New Centre Lane Facility and the MidCap Facility, respectively.

Letters of Credit and Bonds

In line with industry practice, the Company is often required to provide letters of credit and surety and performance bonds to customers. These letters of credit and bonds provide credit support and security for the customer if the Company fails to perform its obligations under the applicable contract with such customer.

The MidCap Facility allows for up to $6.0 million of non-cash collateralized letters of credit at 6.0% interest, of which the Company had $2.8 million outstanding as of March 31, 2019. There were no amounts drawn upon these letters of credit.

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In addition, as of March 31, 2019 and December 31, 2018, the Company had outstanding payment and performance surety bonds of $59.2 million and $51.1 million, respectively.

Deferred Financing Costs

Deferred financing costs are amortized over the terms of the related debt facilities using the effective yield method. The following table summarizes the amortization of deferred financing costs related to the Company's debt facilities and recognized in interest expense on the condensed consolidated statements of operations:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2019

 

2018

Initial Centre Lane Facility

 

$

 —

 

$

56

New Centre Lane Facility

 

 

95

 

 

 —

MidCap Facility

 

 

59

 

 

 —

Total

 

$

154

 

$

56

The following table summarizes unamortized deferred financing costs on the Company's condensed consolidated balance sheets:    

 

 

 

 

 

 

 

 

 

(in thousands)

    

Location

    

March 31, 2019

 

December 31, 2018

New Centre Lane Facility

 

Long-term debt, net

 

$

1,314

 

$

1,409

MidCap Facility

 

Other long-term assets

 

 

595

 

 

654