LIMBACH HOLDINGS, INC. The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management's expectations. Factors that could cause such differences are discussed in "Forward-Looking Statements" and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 and in subsequent Quarterly Reports on Form 10-Q. We assume no obligation to update any of these forward-looking statements. Overview We are an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of heating, ventilation, and air conditioning ("HVAC"), mechanical, electrical, plumbing and control systems. Our market sectors primarily include the following: healthcare, life sciences, data centers, industrial and light manufacturing, entertainment, education and government. Our customers are primarily located throughoutFlorida ,California ,Massachusetts ,New Jersey ,Pennsylvania ,Delaware ,Maryland ,Washington, D.C. ,Virginia , WestVirginia, Ohio andMichigan . As ofJanuary 1, 2021 , the Company renamed its existing two reportable segments to reflect our distinct approaches to our customer base and to better align with our owner direct strategy. The previously named Construction Segment is now known as General Contractor Relationships ("GCR"); the previously named Service Segment is now known as Owner Direct Relationships ("ODR"). The Company operates in two segments that are based on the relationship with its customer, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing or electrical services and are awarded to the Company by general contractors or construction managers and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Condensed Consolidated Statements of Operations Revenue We generate revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to our customers. The duration of our contracts generally ranges from six months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. We believe that our extensive experience in HVAC, plumbing, and electrical projects, and our internal cost review procedures during the bidding process, enable us to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. We generally invoice customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of our services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and we expect this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative consist primarily of personnel costs for our administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of our business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors' compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act. 27 -------------------------------------------------------------------------------- Table of Contents Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets, primarily including leasehold interests and certain customer relationships in the ODR segment. Other Income/Expense Other income/expense, net consists primarily of interest expense incurred in connection with our debt, net of interest income, loss on early debt extinguishment, gain and loss on the sale of property and equipment and changes in fair value of warrant liability. Deferred financing costs are amortized to interest expense using the effective interest method. Income Taxes We are taxed as a C corporation and our financial results include the effects of federal income taxes which are paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. Operating Segments As ofJanuary 1, 2021 , the Company renamed its existing two reportable segments to reflect our two distinct approaches to our customer base and to better align with our owner direct strategy. The previously named Construction Segment is now known as General Contractor Relationships ("GCR"); the previously named Service Segment is now known as Owner Direct Relationships ("ODR"). We manage and measure the performance of our business in these two operating segments. These segments are reflective of how the Company's Chief Operating Decision Makers ("CODM") reviews its operating results for the purposes of allocating resources and assessing performance. Our CODM is comprised of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 - Segment Reporting, the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. Our corporate department provides general and administrative support services to our two operating segments. We allocate costs between segments for selling, general and administrative and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. See Note 12 - Operating Segments in the notes to condensed consolidated financial statements. 28 -------------------------------------------------------------------------------- Table of Contents Comparison of Results of Operations for the three months endedMarch 31, 2021 and 2020 The following table presents operating results for the three months endedMarch 31, 2021 and 2020 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below:
Three months ended
2021 2020
(in thousands except for percentages) ($) (%) ($) (%)
Statement of Operations Data:
Revenue:
GCR $ 84,804 74.8 % $ 109,486 78.9 %
ODR 28,540 25.2 % 29,286 21.1 %
Total revenue 113,344 100.0 % 138,772 100.0 %
Gross profit:
GCR 9,395 11.1 % (1) 10,982 10.0 % (1)
ODR 7,834 27.4 % (2) 7,242 24.7 % (2)
Total gross profit 17,229 15.2 % 18,224 13.1 %
Selling, general and administrative:
GCR 9,114 10.7 % (1) 10,174 9.3 % (1)
ODR 7,354 25.8 % (2) 6,330 21.6 % (2)
Corporate 677 0.6 % 295 0.2 %
Total selling, general and administrative 17,145 15.1 % 16,799 12.1 %
Amortization of intangibles (Corporate) 104 0.1 % 143 0.1 %
Operating (loss) income:
GCR 281 0.3 % (1) 808 0.7 % (1)
ODR 480 1.7 % (2) 912 3.1 % (2)
Corporate (781) - % (438) - %
Total operating (loss) income (20) - % 1,282 0.9 %
Other expenses (Corporate) (3,297) (2.9) % (1,968) (1.4) %
Total consolidated loss before income taxes (3,317) (2.9) % (686) (0.5) %
Income tax benefit (1,035) (0.9) % (634) (0.5) %
Net loss $ (2,282) (2.0) % $ (52) - %
(1)As a percentage of GCR revenue.
(2)As a percentage of ODR revenue.
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Revenue
Three months ended
2021 2020 Increase/(Decrease)
(in thousands except for percentages) $ $ $ %
Revenue:
GCR 84,804 109,486 (24,682) (22.5) %
ODR 28,540 29,286 (746) (2.5) %
Total revenue 113,344 138,772 (25,428) (18.3) %
Revenue for the three months ended March 31, 2021 decreased by $25.4 million
compared to the revenue for the three months ended March 31, 2020 . GCR revenue
decreased by $24.7 million , or 22.5% while ODR revenue decreased by $0.7
million , or 2.5%. GCR segment revenue of $84.8 million decreased 22.5% driven by
a planned decrease in the Southern California and Mid Atlantic operating regions
and decreases in the Florida and Eastern Pennsylvania operating regions. These
decreases were partially offset by a revenue increase in the Michigan operating
region largely due to the start of new projects and the continuation of work on
existing projects. Southern California , Eastern Pennsylvania , New England and
Ohio regions' ODR revenue increased quarter over quarter nearly offset by
declines in ODR revenue in Florida and Mid Atlantic. Maintenance contract
revenue, a component of ODR revenue, increased by $0.4 million compared to March
31, 2020 .
Gross Profit
Three months ended
2021 2020 Increase/(Decrease)
(in thousands except for percentages) $ $ $ %
Gross Profit:
GCR 9,395 10,982 (1,587) (14.5) %
ODR 7,834 7,242 592 8.2 %
Total gross profit 17,229 18,224 (995) (5.5) %Total gross profit as a percentage of consolidated total revenue
15.2 % 13.1 %
Our gross profit for the three months endedMarch 31, 2021 decreased by$1.0 million compared to our gross profit for the three months endedMarch 31, 2020 . GCR gross profit decreased$1.6 million or 14.5% largely due to lower revenue at slightly higher margins. ODR gross profit increased$0.6 million , or 8.2% due to more favorable project pricing. The total gross profit percentage increased from 13.1% for the three months endedMarch 31, 2020 to 15.2% for the same period ended in 2021, mainly driven by the mix of higher margin ODR segment work coupled with slightly higher margins and lower write downs for GCR segment projects. We recorded revisions in our contract estimates for certain GCR segment projects. For projects having revisions with a material gross profit impact of$0.25 million or more, this resulted in: (1) gross profit write downs on two GCR projects of$0.7 million for the three months endedMarch 31, 2021 , one of which was within theSouthern California region for a total of$0.2 million and the other was within theEastern Pennsylvania region for a total of$0.5 million , and (2) gross profit write ups of$0.7 million on two GCR segment projects for the three months endedMarch 31, 2021 . There were no material gross profit write ups or write downs of$0.25 million or more on ODR segment projects. For the three months endedMarch 31, 2020 , we recorded revisions in our contract estimates for certain GCR segment projects. Individual GCR segment projects with revisions having a material gross profit impact of$0.25 million or more resulted in: (1) gross profit write downs on six projects totaling$3.2 million for the three months endedMarch 31, 2020 , four of which were within theSouthern California region for a total of$2.5 million , and (2) gross profit write ups totaling$1.0 million on two projects for the three months endedMarch 31, 2020 . 30 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Three months ended March 31, 2021 2020 Increase/(Decrease) (in thousands except for percentages) $ $ $ % Selling, general and administrative: GCR 9,114 10,174 (1,060) (10.4) % ODR 7,354 6,330 1,024 16.2 % Corporate 677 295 382 129.5 % Total selling, general and administrative 17,145 16,799 346 2.1 %
Selling, general and administrative as a percentage of consolidated total revenue
15.1 % 12.1 %
Our total selling, general and administrative ("SG&A") increased by
approximately $0.3 million to $17.1 million for the three months ended March 31,
2021 compared to $16.8 million for the three months ended March 31, 2020 . Total
SG&A increased due to $0.5 million increase in professional fees, a $0.4 million
increase in rent and a $0.4 million increase in stock based compensation
expense. These increases were offset by $0.5 million of lower payroll expense as
compared to the first quarter of 2020, further offset by $0.4 million related to
company-wide reductions in travel and entertainment expenses in 2021.
Additionally, total SG&A as a percentage of revenues were 15.1% for the three
months ended March 31, 2021 and 12.1% for the three months ended March 31, 2020 .
Amortization of Intangibles
Three months ended
2021 2020 Increase/(Decrease)
(in thousands except for percentages) $ $ $ %
Amortization of intangibles (Corporate) 104 143 (39) (27.3) %
Total amortization expense for the amortizable intangible assets was $0.1
million for each of the three months ended March 31, 2021 and March 31, 2020 ,
remaining relatively flat year over year.
Other Expenses
Three months ended March 31,
2021 2020 Increase/(Decrease)
(in thousands except for percentages) $ $ $ %
Other income (expenses):
Interest expense, net (1,264) (2,158) 894 (41.4) %
Gain (loss) on disposition of property and
equipment (86) 29 (115) (396.6) %
Loss on early debt extinguishment (1,961) - (1,961) 100.0 %
Gain on fair value of warrant liability 14 161 (147) (91.3) %
Total other expenses (3,297) (1,968) (1,329) 67.5 %
Other expenses, consist of interest expense of $1.3 million for the three months
ended March 31, 2021 as compared to $2.2 million of interest expense for the
three months ended March 31, 2020 . The reduction in interest expense year over
year is due to the refinancing of the higher interest rate debt with a lower
interest rate debt instrument in late February 2021 . The Company recognized a
loss on early debt extinguishment of $2.0 million in connection with its
refinancing of the 2019 Refinancing Term Loan and 2019 Revolving Credit Facility
with the Wintrust Term and Revolving Loans.
Income Taxes
The Company recorded a $1.0 million and $0.6 million income tax benefit for the
three months ended March 31, 2021 and 2020, respectively.
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The effective tax benefit rate for the three months ended March 31, 2021 was
31.2% and 92.4% for the three months ended March 31, 2020 .
GCR and ODR Backlog Information
We refer to our estimated revenue on uncompleted contracts, including the amount
of revenue on contracts for which work has not begun, less the revenue we have
recognized under such contracts, as "backlog." Backlog includes unexercised
contract options. Our backlog includes projects that have a written award, a
letter of intent, a notice to proceed or an agreed upon work order to perform
work on mutually accepted terms and conditions. Additionally, the difference
between our backlog and remaining performance obligations is due to the portion
of unexercised contract options that are excluded, under certain contract types,
from our remaining performance obligations as these contracts can be canceled
for convenience at any time by us or the customer without considerable cost
incurred by the customer. Additional information related to our remaining
performance obligations is provided in Note 16 - Remaining Performance
Obligations in the accompanying notes to our consolidated financial statements.
Given the multi-year duration of many of our contracts, revenue from backlog is
expected to be earned over a period that will extend beyond one year. Our GCR
backlog as of March 31, 2021 was $393.6 million compared to $393.5 million at
December 31, 2020 . In addition, ODR backlog as of March 31, 2021 was $52.9
million compared to $50.9 million at December 31, 2020 . Of the total backlog at
March 31, 2021 , we expect to recognize approximately $270.5 million by the end
of 2021.
Seasonality, Cyclicality and Quarterly Trends
Severe weather can impact our operations. In the northern climates where we
operate, and to a lesser extent the southern climates as well, severe winters
can slow our productivity on construction projects, which shifts revenue and
gross profit recognition to a later period. Our maintenance operations may also
be impacted by mild or severe weather. Mild weather tends to reduce demand for
our maintenance services, whereas severe weather may increase the demand for our
maintenance and spot services. Our operations also experience mild cyclicality,
as building owners typically work through maintenance and capital projects at an
increased level during the third and fourth calendar quarters of each year.
Effect of Inflation and Tariffs
The prices of products such as steel, pipe, copper and equipment from
manufacturers are subject to fluctuation and increases. It is difficult to
accurately measure the impact of inflation, tariffs and price escalation due to
the imprecise nature of the estimates required. However, these effects are, at
times, material to our results of operations and financial condition. When
appropriate, we include cost escalation factors into our bids and proposals. In
addition, we are often able to mitigate the impact of future price increases by
entering into fixed price purchase orders for materials and equipment and
subcontracts on our projects.
Liquidity and Capital Resources
Cash Flows
Our liquidity needs relate primarily to the provision of working capital
(defined as current assets less current liabilities) to support operations,
funding of capital expenditures, and investment in strategic opportunities.
Historically, liquidity has been provided by operating activities and borrowings
from commercial banks and institutional lenders.
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The following table presents summary cash flow information for the periods
indicated:
Three months ended March 31,
2021 2020
(in thousands)
Net cash (used in) provided by:
Operating activities $ (17,375) $ 3,517
Investing activities 5 (468)
Financing activities 12,409 (696)
Net (decrease) increase in cash and cash equivalents Noncash investing and financing transactions:
Right of use assets obtained in exchange for new operating lease liabilities
156 -
Right of use assets obtained in exchange for new finance lease liabilities
87 337
Right of use assets disposed or adjusted modifying operating lease liabilities
36 344
Right of use assets disposed or adjusted modifying finance lease
liabilities - (41)
Interest paid $ 1,319 $ 1,607
Our cash flows are primarily impacted from period to period by fluctuations in
working capital. Factors such as our contract mix, commercial terms, days sales
outstanding ("DSO") and delays in the start of projects may impact our working
capital. In line with industry practice, we accumulate costs during a given
month then bill those costs in the current month for many of our contracts.
While labor costs associated with these contracts are paid weekly and salary
costs associated with the contracts are paid bi-weekly, certain subcontractor
costs are generally not paid until we receive payment from our customers
(contractual "pay-if-paid" terms). We have not historically experienced a large
volume of write-offs related to our receivables and contract assets. We
regularly assess our receivables for collectability and provide allowances for
doubtful accounts where appropriate. We believe that our reserves for doubtful
accounts are appropriate as of March 31, 2021 and December 31, 2020 , but adverse
changes in the economic environment may impact certain of our customers' ability
to access capital and compensate us for our services, as well as impact project
activity for the foreseeable future.
The Company's existing current backlog is projected to provide substantial
coverage of forecasted GCR revenue for one year from the date of the financial
statement issuance. Our current cash balance, together with cash we expect to
generate from future operations along with borrowings available under our
Wintrust Loans, are expected to be sufficient to finance our short- and
long-term capital requirements (or meet working capital requirements) for the
next twelve months. In addition to the future operating cash flows of the
Company, along with its existing borrowing availability and access to financial
markets, the Company believes it will be able to meet any working capital and
future operating requirements, and capital investment forecast opportunities for
the next twelve months.
The following table represents our summarized working capital information:
As of As of
(in thousands, except ratios)
Current assets 195,855 199,417
Current liabilities (134,511) (150,294)
Net working capital $ 61,344 $ 49,123
Current ratio* 1.46 1.33
*Current ratio is calculated by dividing current assets by current liabilities.
As discussed above and in Note 7 to the accompanying condensed consolidated
financial statements, as of March 31, 2021 , the Company was in compliance with
all debt covenants as required by the Wintrust Loans.
Cash Flows (Used in) Provided by Operating Activities
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Cash flows used in operating activities were $17.4 million for the three months
ended March 31, 2021 compared to cash flows provided by operating activities of
$3.5 million for the three months ended March 31, 2020 . For the three months
ended March 31, 2021 , cash used in operating activities was significantly
impacted by an $8.9 million decrease in contract liabilities, an $8.8 million
decrease in accounts payable, including retainage, $2.0 million related to an
increase in our contract assets reflecting the shift from an overbilled position
to a neutral position, and a $2.0 million increase in other current assets.
These cash outflows were offset by an increase of $2.6 million in accounts
receivable and $2.0 million for the loss on early debt extinguishment in
connection with our debt refinancing in late February 2021 .
Cash flows provided by operating activities were $3.5 million for the three
months ended March 31, 2020 . For the three months ended March 31, 2020 , the key
components included cash inflows related to our contract assets, $6.0 million
for our contract liabilities shifting from an underbilled to an overbilled
position consistent with our renewed focus on project cash flows and $1.4
million related to accrued expenses and other current liabilities. These cash
inflows were offset by outflows of $7.3 million related to our accounts
receivable and $5.8 million related to our accounts payable, including
retainage.
Non-cash charges for depreciation and amortization were $1.5 million for the
three months ended March 31, 2021 and 2020.
Cash Flows Provided by (Used in) Investing Activities
Cash flows provided by investing activities were nearly breakeven for the three
months ended March 31, 2021 , with $0.2 million used to purchase property and
equipment, offset by $0.2 million in proceeds from the sale of property and
equipment. Cash flows used in investing activities were $0.5 million for the
three months ended March 31, 2020 . The majority of our cash used for investing
activities in both periods was for capital additions pertaining to tools and
equipment, computer software and hardware purchases, office furniture and office
related leasehold improvements.
Cash Flows Provided by (Used in) Financing Activities
Cash flows provided by financing activities were $12.4 million for the three
months ended March 31, 2021 . Net cash used in financing activities was $0.7
million for the three months ended March 31, 2020 . For the three months ended
March 31, 2021 , we received proceeds from the following: $22.8 million , net of
fees and expenses, in conjunction with our common stock offering in February
2021 , $2.0 million from the exercise of warrants and $30.0 million in connection
with the refinancing of the 2019 Refinancing Term Loan with the Wintrust Loans.
These proceeds were offset by the $39.0 million payment in full of the 2019
Refinancing Term Loan and associated $1.4 million prepayment penalty and other
extinguishment costs, a $0.5 million scheduled principal payment on the Wintrust
Term Loan, $0.7 million for payments on finance leases, $0.4 million in taxes
related to net share settlement of equity awards and $0.6 million for payments
related to debt issuance costs related to the Wintrust Term Loan and Revolver.
For the three months ended March 31, 2020 , we both borrowed and repaid a total
of $7.3 million on the 2019 Revolving Credit Facility and made finance lease
payments of $0.7 million .
Debt and Other Obligations
The Company refinanced its 2019 Refinancing and ABL Credit Agreements on
February 24, 2021 , described below and therefore had no amounts outstanding
under these agreements at March 31, 2021 . Accordingly, the Company recognized a
loss on the early debt extinguishment of $2.0 million . This loss consisted of
$2.6 million debt issuance and debt discount costs, reversed $2.0 million of CB
warrant liability due to the warrants being cancelled on the refinancing date
and paid a prepayment penalty of $1.4 million .
2019 Refinancing Agreement
On April 12, 2019 (the "Refinancing Closing Date"), Limbach Facility Services
LLC ("LFS") entered into a financing agreement (the "2019 Refinancing
Agreement") with the lenders thereto and Cortland Capital Market Services LLC ,
as collateral agent and administrative agent and CB Agent Services LLC , as
origination agent ("CB"). The 2019 Refinancing Agreement consists of (i) a $40.0
million term loan (the "2019 Refinancing Term Loan") and (ii) a new $25.0
million multi-draw delayed draw term loan (the "2019 Delayed Draw Term Loan"
and, collectively with the 2019 Refinancing Term Loan, the "2019 Term Loans").
Proceeds from the 2019 Refinancing Term Loan were used to repay the then
existing Credit Agreement, to pay related fees and expenses thereof and to fund
working capital of LFS (defined below). Management intends for proceeds of the
2019 Delayed Draw Term Loan to be used to fund permitted acquisitions under the
2019 Refinancing Agreement and related fees and expenses in connection
therewith.
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LFS and each of its subsidiaries were borrowers (the "2019 Refinancing
Borrowers") under the 2019 Refinancing Agreement. In addition, the 2019
Refinancing Agreement was guaranteed by the Company and LHLLC (each, a
"Guarantor", and together with the 2019 Refinancing Borrowers, the "Loan
Parties").
The 2019 Refinancing Agreement was secured by a first-priority lien on the real
property of the Loan Parties and a second-priority lien on substantially all
other assets of the Loan Parties, behind the 2019 ABL Credit Agreement (as
defined below). The respective lien priorities of the 2019 Refinancing Agreement
and the 2019 ABL Credit Agreement were governed by an intercreditor agreement.
2019 Refinancing Agreement - Interest Rates and Fees
The interest rate on borrowings under the 2019 Refinancing Agreement is, at the 2019 Refinancing Borrowers' option, either LIBOR (with a 2.00% floor) plus 11.00% or a base rate (with a 3.00% minimum) plus 10.00%. AtMarch 31, 2020 , the interest rates in effect on the 2019 Refinancing Term Loan was 13.00%. AtFebruary 24, 2021 andMarch 31, 2020 , the interest rate in effect on the 2019 Refinancing Term Loan was 13.00%.
2019 Refinancing Agreement - Other Terms and Conditions
The 2019 Refinancing Agreement matures onApril 12, 2022 , subject to certain adjustment. Required amortization is$1.0 million per quarter commencing with the fiscal quarter endingSeptember 30, 2020 . There was an unused line fee of 2.0% per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there was a make-whole premium on prepayments made prior to the 19-month anniversary of the Refinancing Closing Date. This make-whole provision guaranteed that the Company will pay no less than 18 months' applicable interest to the lenders under the 2019 Refinancing Agreement. The 2019 Refinancing Agreement contained representations and warranties, and covenants which were customary for debt facilities of this type. Unless the Required Lenders (as defined in the 2019 Refinancing Agreement) otherwise consent in writing, the covenants limited the ability of the Company and its restricted subsidiaries to, among other things, (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company's stockholders, (iii) purchase or redeem the Company's equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company's affiliates, (vii) sell assets and (viii) merge or consolidate with, or dispose of substantially all of the Company's assets to, other companies. In addition, the 2019 Refinancing Agreement included customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company failed to comply with the terms of the 2019 Refinancing Agreement or if other customary events occured. Furthermore, the 2019 Refinancing Agreement also contained two financial maintenance covenants for the 2019 Refinancing Term Loan, including a requirement to have sufficient collateral coverage of the aggregate outstanding principal amount of the 2019 Refinancing Term Loans and as of the last day of each month for the total leverage ratio of the Company and its Subsidiaries (the "Total Leverage Ratio ") not to exceed an amount beginning at 4.25 to 1.00 throughJune 30, 2019 , and stepping down to 2.00 to 1.00 effectiveJuly 1, 2021 . FromJuly 1, 2019 throughSeptember 30, 2019 , the Total Leverage Ratio was not to exceed 4.00 to 1.00. In addition, the parties to the 2019 Refinancing Agreement entered into an amendment which, among other changes, revised the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 through the term of such agreement. The 2019 Refinancing Agreement contained a post-closing covenant requiring the remediation of the Company's material weakness, as described in Item 9A of its 2018 Annual Report on Form 10-K, no later thanDecember 31, 2020 and to provide updates as to the progress of such remediation, provided that, if such remediation has not been completed on or prior toDecember 31, 2019 , (x) the Company shall be required to pay the post-closing fee pursuant to the terms of the Origination AgentFee Letter (as defined in the 2019 Refinancing Agreement) and (y) the applicable margin shall be increased by 1.00% per annum for the period fromJanuary 1, 2020 until the date at which the material weakness is no longer disclosed or required to be disclosed in the Company'sSEC filings or audited financial statements of the Company or related auditor's reports. As ofDecember 31, 2019 , the Company fully remediated its material weakness and the Company removed from itsSEC filings disclosure of such material weakness. In connection with the 2019 Refinancing Amendment Number One and Waiver, the parties amended certain provisions of the 2019 Refinancing Agreement, including, among other changes to: (i) require, commencingOctober 1, 2019 , a 3.00% increase in the interest rate on borrowings under the 2019 Refinancing Agreement; (ii) require the approval of CB and, generally, the lenders representing at least 50.1% of the aggregate undrawn term loan commitment or unpaid principal amount of the term loans, prior to effecting any permitted acquisition; (iii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 35 -------------------------------------------------------------------------------- Table of Contents 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 and thereafter through the term of the 2019 Refinancing Agreement; and (iv) require the liquidity of the loan parties, which is generally calculated by adding (a) unrestricted cash on hand of the Loan Parties maintained in deposit accounts subject to control agreements granting control to the collateral agent for the 2019 ABL Credit Agreement, to (b) the difference between (1) the lesser of (x)$15 million , as adjusted from time to time, and (y) 75% of certain customer accounts resulting from the sale of goods or services in the ordinary course of business minus certain reserves established by the Administrative Agent and (2) the sum of (x) the outstanding principal balance of all revolving loans under the 2019 ABL Credit Agreement plus (y) the aggregate undrawn available amount of all letters of credit then outstanding plus the amount of any obligations that arise from any draw against any letter of credit that have not been reimbursed by the borrowers or funded with a revolving loan under the 2019 ABL Credit Agreement (the "Loan Parties Liquidity"), as of the last day of any fiscal month ending on or afterNovember 30, 2019 , of at least$10,000,000 . As a condition to executing the 2019 Refinancing Amendment Number One and Waiver, the loan parties will be required to pay a non-refundable waiver fee of$400,000 and a non-refundable amendment fee of$1,000,000 (the "PIK First Amendment Fee", which shall be paid in kind by adding the PIK First Amendment Fee to the outstanding principal amount of the term loan under the 2019 Refinancing Agreement as additional principal obligations thereunder on and as of the effective date 2019 Refinancing Amendment Number One and Waiver). DuringDecember 2020 , the Company was not in compliance with the collateral coverage debt covenant as defined by the Term Loan financing agreement. The Company was required to maintain at all times a Collateral Coverage Amount (as defined in the Term Loan Financing Agreement) equal to or greater than the aggregate outstanding principal amount of the Term Loans. The Company calculated its Collateral Coverage amount at$37.9 million as ofDecember 31, 2020 , the aggregate outstanding principal amount of Term Loans was$39.0 million as of that same date for an excess of debt over collateral of$1.1 million . OnFebruary 1, 2021 , the Company, LFS and LHLLC entered into a Waiver - Collateral Coverage Amount (December 2020 ) ("December 2020 Waiver") with the lenders party thereto andCortland Capital Market Services LLC as collateral agent and administrative agent. TheDecember 2020 Waiver includes a waiver of the Company's compliance with the Collateral Coverage Amount for the month endingDecember 31, 2020 . The lender waived the event of default arising from this noncompliance as ofDecember 31, 2020 , while reserving its rights with respect to covenant compliance in future months.
2019 Refinancing Agreement - CB Warrants
In connection with the 2019 Refinancing Agreement, on the Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the "CB Warrants") to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of$7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants will be exercisable at any given time will be equal to: (i) the product of (x) the number of shares equal to 2% of the Company's issued and outstanding shares of common stock on the Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the Refinancing Closing Date andFebruary 24, 2021 , no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants was exercisable. The CB Warrants may be exercised for cash or on a "cashless basis," subject to certain adjustments, at any time after the Refinancing Closing Date until the expiration of such warrant at5:00 p.m. ,New York time, on the earlier of (i) the five (5) year anniversary of the Refinancing Closing Date, or (ii) the liquidation of the Company.
Accounting for the 2019 Term Loans and CB Warrants
The CB Warrants represented a freestanding financial instrument that was classified as a liability because the CB Warrants met the definition of a derivative instrument that does not meet the equity scope exception (i.e., the CB Warrants are not indexed to the entity's own equity). In addition, the material weakness penalty described above was evaluated as an embedded derivative liability and bifurcated from the 2019 Term Loans as it represented a non-credit related embedded feature that provides for net settlement. Both the CB Warrants liability and the embedded derivative liability were required to be initially and subsequently measured at fair value. The initial fair values of the CB Warrants liability and the embedded derivative liability approximated$0.9 million and$0.4 million , respectively, on the Refinancing Closing Date. The Company estimated these fair values by using the Black-Scholes-Merton option pricing model and a probability-weighted discounted cash flow approach, respectively. The CB Warrants liability was included in other long-term liabilities. The Company remeasured the fair value of the CB Warrants liability as ofDecember 31, 2020 andFebruary 24, 2021 prior to the refinancing date and recorded any adjustments as other income (expense). AtFebruary 24, 2021 andDecember 31, 2020 , the CB Warrants liability was$2.0 million . For the three months endedMarch 31, 2021 andMarch 31, 2020 , the Company recorded other income of$14 thousand and$0.2 million , respectively, to reflect the change in fair value of the CB Warrants liability. 36 -------------------------------------------------------------------------------- Table of Contents The proceeds for the 2019 Term Loan were first allocated to the CB Warrants liability and embedded derivative liability based on their respective fair values with a corresponding amount of$1.3 million recorded as a debt discount to the 2019 Term Loans. In addition, the Company incurred approximately$3.9 million of debt issuance costs, including$1.4 million related to the first amendment, for the 2019 Term Loans that have also been recorded as a debt discount. The combined debt discount from the CB Warrants liability, embedded derivative liability and the debt issuance costs were being amortized into interest expense over the term of the 2019 Term Loans using the effective interest method and were expensed on the refinancing date as a loss on early debt extinguishment. The Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of$0.1 million for both the three months endedMarch 31, 2021 and 2020, and recorded an additional$0.1 million and$0.4 million of interest expense for the amortization of the debt issuance costs for the three months endedMarch 31, 2021 andMarch 31, 2020 , respectively.
2019 ABL Credit Agreement
On the Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto andCitizens Bank, N.A. , as collateral agent, administrative agent and origination agent (the "2019 ABL Credit Agreement" and, together with the 2019 Refinancing Agreement, the "Refinancing Agreements"). The 2019 ABL Credit Agreement consisted of a$15.0 million revolving credit facility (the "2019 Revolving Credit Facility"). Proceeds of the 2019 Revolving Credit Facility were to be used for general corporate purposes. On the Refinancing Closing Date, the Company had nothing drawn on the ABL Credit Agreement and$14.0 million of available borrowing capacity thereunder (net of a$1.0 million reserve imposed by the lender). The 2019 Refinancing Borrowers and Guarantors under the 2019 ABL Credit Agreement were the same as under the 2019 Refinancing Agreement. The 2019 ABL Credit Agreement was secured by a second-priority lien on the real property of the Loan Parties (behind the 2019 Refinancing Agreement) and a first-priority lien on substantially all other assets of the Loan Parties.
2019 ABL Credit Agreement - Interest Rates and Fees
The interest rate on borrowings under the 2019 ABL Credit Agreement was, at the 2019 Refinancing Borrowers' option, either LIBOR (with a 2.0% floor) plus an applicable margin ranging from 3.00% to 3.50% or a base rate (with a 3.0% minimum) plus an applicable margin ranging from 2.00% to 2.50%. AtFebruary 24, 2021 andMarch 31, 2020 , the interest rate in effect on the 2019 ABL Credit Agreement was 5.25%.
2019 ABL Credit Agreement - Other Terms and Conditions
The 2019 ABL Credit Agreement was set to mature onApril 12, 2022 . There was also an unused line fee ranging from 0.250% to 0.375% per annum on undrawn amounts. The 2019 ABL Credit Agreement contained representations and warranties, and covenants which are customary for debt facilities of this type. Unless the Required Lenders otherwise consented in writing, the covenants limited the ability of the Company and its restricted subsidiaries to, among other things, generally, to (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company's stockholders, (iii) purchase or redeem the Company's equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company's affiliates, (vii) sell assets other than in the ordinary course of business or another permitted disposition of assets and (viii) merge or consolidate with, or dispose of substantially all of the Company's assets to, other companies. The 2019 ABL Credit Agreement included customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company failed to comply with the terms of the 2019 ABL Credit Agreement or if other customary events occur. The 2019 ABL Credit Agreement also contained a financial maintenance covenant for the 2019 Revolving Credit Facility, which is a requirement for the Total Leverage Ratio of the Company and its Subsidiaries not to exceed an amount beginning at 4.00 to 1.00 throughSeptember 30, 2019 , and stepping down to 1.75 to 1.00 effectiveJuly 1, 2021 . In addition, the parties to the 2019 ABL Credit Agreement entered into an amendment which, among other changes revised the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 through the term of such agreement. 37 -------------------------------------------------------------------------------- Table of Contents In connection with the 2019 ABL Credit Amendment Number One and Waiver, the parties amended certain provisions of the 2019 ABL Credit Agreement, including, among other changes to (i) require the approval of the origination agent and, generally, the lenders representing at least 50.1% of the aggregate undrawn revolving loan commitment or unpaid principal amount of the term loans, prior to effecting any permitted acquisition; (ii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 through the term of the 2019 ABL Credit Agreement; and (iii) require the Loan Parties Liquidity as of the last day of any fiscal month ending on or afterNovember 30, 2019 , of at least$10,000,000 , as described above in the Amendment Number One to 2019 Refinancing Agreement and Waiver. As a condition to executing the 2019 ABL Credit Amendment Number One and Waiver, the loan parties were required to pay a non-refundable waiver fee of$7,500 . As noted above in the section titled "2019 Refinancing Agreement - Other Terms and Conditions," the Company was subject to cross-default under our 2019 Revolving Credit Facility as a result of our failure to satisfy the Collateral Coverage Amount as defined in the Term Loan Financing Agreement, which required the company to obtain a waiver. Accordingly, onFebruary 1, 2021 , the Company, LFS and LHLLC entered into a Waiver - Collateral Coverage Amount (December 2020 ) ("December 2020 Waiver") with the lenders party thereto andCitizens Bank, N.A. , as collateral agent and administrative agent. TheDecember 2020 Waiver includes a waiver of the Company's compliance with the Collateral Coverage Amount for the month endingDecember 31, 2020 . The lender has waived the event of default arising from this noncompliance as ofDecember 31, 2020 , while reserving its rights with respect to covenant compliance in future months. AtMarch 31, 2021 andDecember 31, 2020 , the Company had irrevocable letters of credit in the amount of$3.4 million with its lender to secure obligations under its self-insurance program.
Accounting for the 2019 ABL Credit Agreement
The Company incurred approximately$0.9 million of debt issuance costs for the 2019 ABL Credit Agreement that have been recorded as a non-current deferred asset. The deferred asset is being amortized into interest expense over the term of the 2019 Term ABL Credit Agreement using the effective interest method and then expensed on the refinancing date as a loss on early debt extinguishment. The Company recorded interest expense of$23 thousand and$0.1 million for the amortization the debt issuance costs for the three months endedMarch 31, 2021 and 2020, respectively. As ofFebruary 24, 2021 , the Company had nothing drawn on the 2019 ABL Credit Agreement.
Wintrust Term and Revolving Loans
OnFebruary 24, 2021 , LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the "Guarantors") entered into a Credit Agreement (the "Credit Agreement") by and among LFS, LHLLC, Guarantors, the lenders party thereto from time to time,Wheaton Bank & Trust Company, N.A. , a subsidiary of Wintrust Financial Corporation (collectively, "Wintrust"), as administrative agent and L/C issuer,Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Credit Agreement, Lenders provide to LFS (i) a$30.0 million senior secured term loan (the "Term Loan"); and (ii) a$25.0 million senior secured revolving credit facility with a$5.0 million sublimit for the issuance of letters of credit (the "Revolving Loan" and, together with the Term Loan, the "Loans"). Proceeds of the Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Loans. The Revolving Loan bears interest, at LFS's option, at either LIBOR (with a 0.25% floor) plus 3.5% or a base rate (with a 3.0% floor) plus 0.50%, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of LFS and its subsidiaries for the most recently ended four fiscal quarters (the "Senior Leverage Ratio"). The Term Loan bears interest, at LFS's option, at either LIBOR (with a 0.25% floor) plus 4.0% or a base rate (with a 3.0% floor) plus 1.00%, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. LFS is required to make principal payments on the Term Loan in$0.5 million installments on the last business day of each month commencing onMarch 31, 2021 with a final payment of all principal and interest not sooner paid on the Term Loan due and payable onFebruary 24, 2026 . The Revolving Loan will mature and become due and payable by LFS onFebruary 24, 2026 . 38 -------------------------------------------------------------------------------- Table of Contents The Loans are secured by (i) a valid, perfected and enforceable lien of the Administrative Agent on the ownership interests held by each of LFS and Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the Administrative Agent on each of LFS and Guarantors' personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the Loans shall be jointly and severally guaranteed by each Guarantor. The Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the Credit Agreement. The Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its Subsidiaries (the "Total Leverage Ratio") not to exceed an amount beginning at 2.25 to 1.00 throughDecember 31, 2021 , and stepping down to 2.00 to 1.00 at all times thereafter, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter commencing with the fiscal quarter endingMarch 31, 2021 , and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate$4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50% of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. As ofMarch 31, 2021 , the Company was in compliance with all debt covenants as required by the Wintrust Term and Revolving Loans.
The following is a summary of the additional margin and commitment fees payable on the available term loan and revolving credit commitment:
Additional Margin
Additional Margin for Additional Margin Additional Margin
for Prime Revolving for Eurodollar for Eurodollar
Level Senior Leverage Ratio Prime Rate loans loans Term loans Revolving loans Commitment Fee
Greater than 1.00 to
I 1.00 1.00 % 0.50 % 4.00 % 3.50 % 0.25 %
Less than or equal to
II 1.00 to 1.00 0.25 % - % 3.50 % 3.00 % 0.25 %
The following table reflects our available funding capacity as of March 31,
2021 :
(in thousands)
Cash & cash equivalents $ 37,186
Credit agreement:
Revolving credit facility $ 25,000
Outstanding revolving credit facility -
Outstanding letters of credit (3,405)
Net credit agreement capacity available 21,595
Total available funding capacity $ 58,781
Cash Flow Summary
Management continues to devote additional resources to its billing and
collection efforts during the three months ended March 31, 2021 . Management
continues to expect that growth in its ODR business, which is less sensitive to
the cash flow issues presented by large GCR projects, will positively impact our
cash flow trends.
Provided that the Company's lenders continue to provide working capital funding,
we believe based on the Company's current reforecast that our current cash and
cash equivalents of $37.2 million as of March 31, 2021 , cash payments to be
received from existing and new customers, and availability of borrowing under
the revolving line of credit under our Wintrust Loans (pursuant to which we had
$21.6 million of availability as of March 31, 2021 ) will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. See Note 1 - Organization and Plan of Business Operations.
Surety Bonding
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In connection with our business, we are occasionally required to provide various
types of surety bonds that provide an additional measure of security to our
customers for our performance under certain government and private sector
contracts. Our ability to obtain surety bonds depends upon our capitalization,
working capital, past performance, management expertise and external factors,
including the capacity of the overall surety market. Surety companies consider
such factors in light of the amount of our backlog that we have currently bonded
and their current underwriting standards, which may change from time-to-time.
The bonds we provide typically reflect the contract value. As of March 31, 2021
and December 31, 2020 , the Company had approximately $160.7 million and $79.4
million in surety bonds outstanding, respectively. We believe that our $700.0
million bonding capacity provides us with a significant competitive advantage
relative to many of our competitors which have limited bonding capacity.
Insurance and Self-Insurance
We purchase workers' compensation and general liability insurance under policies
with per-incident deductibles of $250,000 per occurrence. Losses incurred over
primary policy limits are covered by umbrella and excess policies up to
specified limits with multiple excess insurers. We accrue for the unfunded
portion of costs for both reported claims and claims incurred but not reported.
The liability for unfunded reported claims and future claims is reflected on the
Condensed Consolidated Balance Sheets as current and non-current liabilities.
The liability is computed by determining a reserve for each reported claim on a
case-by-case basis based on the nature of the claim and historical loss
experience for similar claims plus an allowance for the cost of incurred but not
reported claims. The current portion of the liability is included in accrued
expenses and other current liabilities on the Condensed Consolidated Balance
Sheets. The non-current portion of the liability is included in other long-term
liabilities on the Condensed Consolidated Balance Sheets.
We are self-insured related to medical and dental claims under policies with
annual per-claimant and annual aggregate stop-loss limits. We accrue for the
unfunded portion of costs for both reported claims and claims incurred but not
reported. The liability for unfunded reported claims and future claims is
reflected on the Condensed Consolidated Balance Sheets as a current liability in
accrued expenses and other current liabilities.
The components of the self-insurance liability are reflected below as of
March 31, 2021 and December 31, 2020 :
(in thousands) March 31, 2021 December 31, 2020
Current liability - workers' compensation and general liability $ 170 $
197
Current liability - medical and dental 524 764
Non-current liability 890 890
Total liability $ 1,584 $ 1,851
Restricted cash $ 113 $ 113
The restricted cash balance represents cash set aside for the funding of
workers' compensation and general liability insurance claims. This amount is
replenished when depleted, or at the beginning of each month.
Multiemployer Pension Plans
We participate in approximately 40 multiemployer pension plans ("MEPPs") that
provide retirement benefits to certain union employees in accordance with
various collective bargaining agreements ("CBAs"). As one of many participating
employers in these MEPPs, we are responsible with the other participating
employers for any plan underfunding. Our contributions to a particular MEPP are
established by the applicable CBAs; however, required contributions may increase
based on the funded status of an MEPP and legal requirements of the Pension
Protection Act of 2006 (the "PPA"), which requires substantially underfunded
MEPPs to implement a funding improvement plan ("FIP") or a rehabilitation plan
("RP") to improve their funded status. Factors that could impact funded status
of an MEPP include, without limitation, investment performance, changes in the
participant demographics, decline in the number of contributing employers,
changes in actuarial assumptions and the utilization of extended amortization
provisions. Assets contributed to the MEPPs by us may be used to provide
benefits to employees of other participating employers. If a participating
employer stops contributing to an MEPP, the unfunded obligations of the MEPP may
be borne by the remaining participating employers.
An FIP or RP requires a particular MEPP to adopt measures to correct its
underfunding status. These measures may include, but are not limited to an
increase in a company's contribution rate as a signatory to the applicable CBA,
or changes to the benefits paid to retirees. In addition, the PPA requires that
a 5.0% surcharge be levied on employer contributions for the first year
commencing shortly after the date the employer receives notice that the MEPP is
in critical status and a 10.0% surcharge on each succeeding year until a CBA is
in place with terms and conditions consistent with the RP.
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We could also be obligated to make payments to MEPPs if we either cease to have
an obligation to contribute to the MEPP or significantly reduce our
contributions to the MEPP because we reduce the number of employees who are
covered by the relevant MEPP for various reasons, including, but not limited to,
layoffs or closure of a subsidiary assuming the MEPP has unfunded vested
benefits. The amount of such payments (known as a complete or partial withdrawal
liability) would equal our proportionate share of the MEPPs' unfunded vested
benefits. We believe that certain of the MEPPs in which we participate may have
unfunded vested benefits. Due to uncertainty regarding future factors that could
trigger withdrawal liability, we are unable to determine (a) the amount and
timing of any future withdrawal liability, if any, and (b) whether our
participation in these MEPPs could have a material adverse impact on our
financial condition, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); therefore, pursuant to
Item 301(c) of Regulation S-K, we are not required to provide the information
required by this Item.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that
evaluation as of March 31, 2021 , our Chief Executive Officer and Chief Financial
Officer concluded that our Company's disclosure controls and procedures were
effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) and
15d-15(d) of the Exchange Act that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, cannot provide absolute assurance of achieving the desired control
objectives. Our management recognizes that any control system, no matter how
well designed and operated, is based upon certain judgments and assumptions and
cannot provide absolute assurance that its objectives will be met. Similarly, an
evaluation of controls cannot provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and instances of
fraud, if any, have been detected.
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