ORBITAL INFRASTRUCTURE GROUP, INC. Important Note about Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the Company's unaudited condensed consolidated financial statements as ofSeptember 30, 2021 and notes thereto included in this document and the audited consolidated financial statements in the Company's 10-K filing for the period endedDecember 31, 2020 and the notes thereto. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. The Company's actual results could differ materially from those anticipated by such forward-looking information due to factors discussed elsewhere in this Form 10-Q. The statements that are not historical constitute "forward-looking statements." Said forward-looking statements involve risks and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, express or implied by such forward-looking statements. These forward-looking statements are identified by their use of such terms and phrases as "expects," "intends," "goals," "estimates," "projects," "plans," "anticipates," "should," "future," "believes," and "scheduled." The variables which may cause differences include, but are not limited to, the following: general economic and business conditions; changes in regulatory environment; extraordinary external events such as the current pandemic health event resulting from COVID-19; competition; success of operating initiatives; operating costs; advertising and promotional efforts; the existence or absence of adverse publicity; changes in business strategy or development plans; the ability to retain management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employment benefit costs; availability and costs of raw materials and supplies; and changes in, or failure to comply with various government regulations. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate; therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any person that the objectives and expectations of the Company will be achieved. 38
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Table of Contents OverviewOrbital Energy Group is a platform company dedicated to maximizing shareholder value through greenfield development and the acquisition of, and investment in successful, entrepreneurial led companies to profitably grow revenues by providing end-to-end solutions to customers, primarily in the renewable, electric power transmission and distribution, and telecommunications infrastructure markets.Orbital Energy Group's Electric Power and Solar Infrastructure Services segment provides comprehensive network solutions to customers in the electric power, telecommunications and solar industries. This segment includes Orbital Power Services, Orbital Solar Services, and Orbital Telecom Services. The Company started its Orbital Power Services operations during the first three months of 2020 as a full-service provider of building, maintenance and support to the electrical power distribution, transmission, substation, renewables, and emergency response sectors ofNorth America .Eclipse Foundation Group, Inc. , which began operations inJanuary 2021 within Orbital Power Services, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation, industrial, communication towers and disaster restoration market sectors, with expertise in water, marsh and rock terrains. The Company acquired Orbital Solar Services (formerlyReach Construction Group, LLC ) as ofApril 1, 2020 , which provides engineering, procurement and construction services that support the development of renewable energy generation focused on utility scale solar and community solar projects.Orbital Telecom was launched through the acquisition of GTS inApril 2021 and expanded its service offerings inJuly 2021 with the acquisition of IMMCO. The Telecom group provided both topside and bottom line benefits to the Company since acquisition. The Company has more than doubled its third-quarter revenue year over year and has also more than doubled its revenue for the first nine months of 2021 compared to the similar period in 2020. This has been accomplished through the Company's acquisition and organic growth efforts. However, ramp-up costs at Orbital Power Services contributed to lower margins and increased SG&A in theElectric Power and Solar Infrastructure Services segment during the three and nine months endedSeptember 30, 2021 . The Company also continued to incur professional fees related to mergers and acquisitions as the Company continues to pursue both organic growth and growth through acquisitions. The Company's Integrated Energy Infrastructure Solutions and Services Segment include subsidiaries,Orbital Gas Systems, Ltd. , and Orbital Gas Systems,North America, Inc. , which are leaders in innovative gas solutions with more than 30 years of experience in design, installation and the commissioning of industrial gas sampling, measurement and delivery systems providing solutions to the energy, power and processing markets. Orbital Gas Systems manufactures and delivers a broad range of technologies including environmental monitoring, gas metering, process control, telemetry, gas sampling and BioMethane. The three-and nine-month periods endedSeptember 30, 2021 for both segments continue to face headwinds due to the COVID-19 pandemic that has caused economic slowdowns throughout the world, but economic activity has begun to improve and backlogs are strong in theElectric Power and Solar Infrastructure segment. In the first half of 2020, the Company launched Orbital Power Services. The first nine months of 2020 included set up costs related toOrbital Power Services and the establishment of the Company's shared services center inDallas, Texas as well as elevated professional fees related to mergers and acquisitions as the Company pivoted from its legacy Power and Electromechanical business that was divested in the second half of 2019 with the remainingCanada andJapan business being divested in 2020. The second quarter of 2020 was affected by generally lower economic activity due to the COVID-19 pandemic that caused economic slowdowns throughout the world, which hampered growth in its electric power and solar infrastructure ventures. The first nine months of 2020 also included a$4.8 million net loss of affiliate inVirtual Power Systems ("VPS"), respectively primarily as a result of a$3.5 million impairment loss on the investment in the three months endedJune 30, 2020 . For the three and nine months endedSeptember 30, 2021 ,Orbital Energy Group, Inc. had consolidated loss from operations of$11.7 million and$47.3 million , respectively compared to consolidated loss from operations in the three and nine months endedSeptember 30, 2020 of$6.3 million and$20.6 million . During the three and nine months endedSeptember 30, 2021 ,Orbital Energy Group, Inc. had a consolidated loss from continuing operations of$10.1 million and$36.3 million , respectively compared to a loss of$5.7 million and$22.6 million , respectively, in the comparable prior-year period. During the three and nine months endedSeptember 30, 2021 ,Orbital Energy Group, Inc. had a consolidated net loss of$10.1 million and$36.3 million , respectively, compared to a consolidated net loss in the three and nine months endedSeptember 30, 2020 of$3.2 million and$19.9 million , respectively. The greater net loss for the three months endedSeptember 30, 2021 , was primarily the result of stock-based compensation, start-up costs related toOrbital Power and ongoing merger and acquisition activity. Partially offsetting these costs were$9.0 million tax benefit related to the acquisition of GTS in the nine months endedSeptember 30, 2021 and$2.5 million tax benefit related to the acquisition of IMMCO. These tax benefits partially offset higher cost of revenue and selling, general and administrative expense ("SG&A") in theElectric Power and Solar Infrastructure Services and Integrated Energy Infrastructure segments. Cost increases were associated with the inclusion of IMMCO since itsJuly 28, 2021 acquisition, GTS since itsApril 13, 2021 acquisition and the inclusion of the Orbital Solar Services business since itsApril 1, 2020 acquisition, including amortization costs on IMMCO, GTS and Orbital Solar Service's acquisition intangibles, the ramp up of theOrbital Power Services operations, and stock-based compensation. As the Company adds new service crews in the Orbital Power Services business, there is a certain amount of upfront costs related to that, including equipment, supplies and training before the new crews can start generating income for the Company. As the Company aggressively has ramped up the Orbital Power Services business, it has absorbed more of these type set-up costs than it will need to once all teams are in place and operating at full capacity. SG&A cost increases in the Other segment relate to vesting and mark to market adjustments on cash-based executive stock appreciation rights and employee performance bonus payments as well as continuing merger and acquisition costs.
Revenues from continuing operations increased for the three and nine months
ended
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Continuing Results of Operations
The following tables set forth, for the period indicated, certain financial information regarding revenue and costs by segment.
For the Three Months Ended
Integrated
Energy
Electric Power and Percent of Infrastructure Percent of Percent of Percent of
Solar Infrastructure Segment Solutions and Segment Segment Total
(dollars in thousands) Services Revenues Services Revenues Other Revenues Total Revenues
$% $% $% $%
Revenues $ 24,822 100.0 % $ 6,097 100.0 % $ - - % $ 30,919 100.0 %
Cost of revenue 22,561 90.9 % 4,608 75.6 % (38 ) - % 27,131 87.7 %
Gross profit 2,261 9.1 % 1,489 24.4 % 38 - % 3,788 12.3 %
Operating expenses:
Selling, general and
administrative 7,338 29.5 % 2,259 37.1 % 4,104 - % 13,701 44.3 %
Depreciation and
amortization 1,322 5.3 % 404 6.6 % 12 - % 1,738 5.6 %
Research and
development - - % 1 - % - - % 1 - %
Provision for
(recovery of) bad debt 93 0.4 % (6 ) (0.1 )% - - % 87 0.3 %
Other operating
Expenses (6 ) - % - - % - - % (6 ) - %
Total operating
expenses 8,747 35.2 % 2,658 43.6 % 4,116 - % 15,521 50.2 %
Loss from operations $ (6,486 ) (26.1 )% $ (1,169 ) (19.2 )% $ (4,078 ) - % $ (11,733 ) (37.9 )%
For the Three Months Ended
Integrated
Energy
Electric Power and Percent of Infrastructure Percent of Percent of Percent of
Solar Infrastructure Segment Solutions and Segment Segment Total
(dollars in thousands) Services Revenues Services Revenues Other Revenues Total Revenues
$ % $ % $ % $ %
Revenues $ 9,478 100.0 % $ 4,137 100.0 % $ - - % $ 13,615 100.0 %
Cost of revenue 8,353 88.1 % 2,908 70.3 % - - % 11,261 82.7 %
Gross profit 1,125 11.9 % 1,229 29.7 % - - % 2,354 17.3 %
Operating expenses:
Selling, general and
administrative 2,252 23.8 % 2,663 64.4 % 2,264 - % 7,179 52.7 %
Depreciation and
amortization 1,070 11.3 % 372 9.0 % 12 - % 1,454 10.7 %
Research and
development - - % 6 0.1 % - - % 6 -
Provision for bad debt - - % 15 0.4 % - - % 15 0.1 %
Other operating
expenses 23 0.2 % - 0.0 % - - % 23 0.2 %
Total operating
expenses 3,345 35.3 % 3,056 73.9 % 2,276 - % 8,677 63.7 %
Loss from operations $ (2,220 ) (23.4 )% $ (1,827 ) (44.2 )% $ (2,276 ) - % $ (6,323 ) (46.4 )%
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For the Nine Months Ended
Integrated
Energy
Electric Power and Percent of Infrastructure Percent of Percent of Percent of
Solar Infrastructure Segment Solutions and Segment Segment Total
(dollars in thousands) Services Revenues Services Revenues Other Revenues Total Revenues
$ % $ % $ % $ %
Revenues $ 41,902 100.0 % $ 14,816 100.0 % $ - - % $ 56,718 100.0 %
Cost of revenue 45,032 107.5 % 10,452 70.5 % (84 ) - % 55,400 97.7 %
Gross profit (loss) (3,130 ) (7.5 )% 4,364 29.5 % 84 - % 1,318 2.3 %
Operating expenses:
Selling, general and
administrative 23,194 55.3 % 7,207 48.7 % 13,455 - % 43,856 77.3 %
Depreciation and
amortization 3,387 8.1 % 1,250 8.4 % 31 - % 4,668 8.2 %
Research and
development - - % 2 - % - - % 2 - %
Provision for
(Recovery of) bad debt 93 - % (28 ) (0.2 )% - - % 65 0.1 %
Other operating
expenses (15 ) - % - - % - - % (15 ) - %
Total operating
expenses 26,659 63.6 % 8,431 56.9 % 13,486 - % 48,576 85.6 %
Loss from operations $ (29,789 ) (71.1 )% $ (4,067 ) (27.4 )% $ (13,402 ) - % $ (47,258 ) (83.3 )%
For the Nine Months Ended
Integrated
Energy
Electric Power and Percent of Infrastructure Percent of Percent of Percent of
Solar Infrastructure Segment Solutions and Segment Segment Total
(dollars in thousands) Services Revenues Services Revenues Other Revenues Total Revenues
$ % $ % $ % $ %
Revenues $ 13,904 100.0 % $ 13,174 100.0 % $ - - % $ 27,078 100.0 %
Cost of revenue 14,132 101.6 % 8,989 68.2 % - - % 23,121 85.4 %
Gross profit (loss) (228 ) (1.6 )% 4,185 31.8 % - - % 3,957 14.6 %
Operating expenses:
Selling, general and
administrative 4,895 35.2 % 8,294 63.0 % 7,969 - % 21,158 78.1 %
Depreciation and
amortization 2,147 15.4 % 1,108 8.4 % 30 - % 3,285 12.1 %
Research and
development - - % 51 0.4 % - - % 51 0.2 %
Provision for bad debt - - % 23 0.2 % - - % 23 0.1 %
Other operating
expenses 23 0.2 % - - % - - % 23 0.1 %
Total operating
expenses 7,065 50.8 % 9,476 72.0 % 7,999 - % 24,540 90.6 %
Loss from operations $ (7,293 ) (52.4 )% $ (5,291 ) (40.2 )% $ (7,999 ) - % $ (20,583 ) (76.0 )%
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Revenue
(dollars in thousands)
For the Three Months Ended
Revenues by Segment September 30,
2021 2020 $ Change % Change
Electric Power and Solar Infrastructure
Services $ 24,822 $ 9,478 $ 15,344 161.9 %
Integrated Energy Infrastructure
Solutions and Services 6,097 4,137 1,960 47.4 %
Total revenues $ 30,919 $ 13,615 $ 17,304 127.1 %
For the Nine Months Ended
Revenues by Segment September 30,
2021 2020 $ Change % Change
Electric Power and Solar Infrastructure
Services $ 41,902 $ 13,904 $ 27,998 201.4 %
Integrated Energy Infrastructure
Solutions and Services 14,816 13,174 1,642 12.5 %
Total revenues $ 56,718 $ 27,078 $ 29,640 109.5 %
The revenues for the three and nine months ended September 30, 2021 increased
compared to the 2020 comparable period primarily due to the additions of
Orbital Telecom Services following the acquisitions of GTS in Q2 and IMMCO in Q3
2021 and Orbital Solar Services in Q2 2020 as well as the ramp up of the Orbital
Power Services operations including a significant amount of storm-related work
in the quarter in the Electric Power and Solar Infrastructure Services segment.
In addition, the Integrated Energy Infrastructure Solutions and Services segment
increased in the three months ended September 30, 2021 due to significantly
higher revenue in our U.K. operations and slightly higher revenue in the North
American operations.
The
The Electric Power and Solar Infrastructure Services Segment held backlogs of customer orders of approximately$399.9 million as ofSeptember 30, 2021 and$30.3 million atDecember 31, 2020 . Increases to the backlog are due to the acquisitions and growth ofOrbital Telecom , the ramp up of theOrbital Power Services operations and an improved Orbital Solar Services backlog compared toDecember 31, 2020 . The Integrated Energy Infrastructure Solutions and Services segment held backlogs of customer orders of approximately$10.7 million as ofSeptember 30, 2021 , an increase from theDecember 31, 2020 backlog of$10.1 million due to the improvement in the business climate in both theU.S. andU.K. markets. Of theSeptember 30, 2021 backlog totals, the amounts expected to be recognized in the twelve and eighteen months following Q3 were approximately$191.5 million and$270.4 million , respectively. The amounts expected to be recognized in the twelve and eighteen months following Q3, consisted of$180.7 million and$259.7 million , respectively, from theElectric Power and Solar Infrastructure Services segment and$10.7 million and 10.7 million, respectively, from the Integrated Energy Infrastructure Solutions and Services segment. Cost of revenues (dollars in thousands) For the Three Months Ended Cost of revenues by Segment September 30, 2021 2020 $ Change % ChangeElectric Power and Solar Infrastructure Services$ 22,561 $ 8,353 $ 14,208 170.1 % Integrated Energy Infrastructure Solutions and Services 4,608 2,908 1,700 58.5 % Other (38 ) - (38 ) (100.0 )% Total cost of revenues$ 27,131 $ 11,261 $ 15,870 140.9 % For the Nine Months Ended Cost of revenues by Segment September 30, 2021 2020 $ Change % ChangeElectric Power and Solar Infrastructure Services$ 45,032 $ 14,132 $ 30,900 218.7 % Integrated Energy Infrastructure Solutions and Services 10,452 8,989 1,463 16.3 % Other (84 ) - (84 ) (100.0 )% Total cost of revenues$ 55,400 $ 23,121 $ 32,279 139.6 % 42
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For the three and nine months endedSeptember 30, 2021 , the cost of revenues as a percentage of revenue increased to 88% and 98% respectively from 83% and 85%, respectively from the prior-year period. This increase was primarily in theElectric Power and Solar Infrastructure Services segment and was attributable to ramp-up costs at the Company's Orbital Power Services group, and lower margin projects during the period for Orbital Solar Services. Ramp-up costs have included onboarding personnel, equipment and supplies in advance of projected work in order to obtain the necessary resources in a competitive market as we prepare for forward demand expectations. Additionally, adverse weather negatively impacted several of Orbital Power Services' fixed price jobs in the first quarter of 2021, which are now complete. Margin percentages will vary based upon the mix of natural gas systems sold, proprietary technology included in projects, contract labor necessary to complete gas related projects, mix of Orbital Power Services projects including emergency response services, new crew onboarding costs, Orbital Solar Services solar projects, the competitive markets in which the Company competes, and foreign exchange rates. The three and nine months endedSeptember 30, 2020 were affected by start-up costs at the Company's Orbital Power Services group, lower margin projects during the period for Orbital Solar Service and was also affected negatively by the COVID-19 pandemic and the resulting world-wide economic slowdown. The Company expects improvement in margins during the remainder of 2021 as Orbital Power Services continues to gain efficiencies and increase revenues, Orbital Telecom Services benefits from the acquisitions of GTS and IMMCO, as companies continue to learn to cope with the COVID-19 pandemic, and several large Orbital Solar Services solar projects begin.
Selling, General and Administrative Expenses
(dollars in thousands)
For the Three Months Ended
Selling, general, and administrative
expense by Segment September 30,
2021 2020 $ Change % Change
Electric Power and Solar Infrastructure
Services $ 7,338 $ 2,252 $ 5,086 225.8 %
Integrated Energy Infrastructure
Solutions and Services 2,259 2,663 (404 ) (15.2 )%
Other 4,104 2,264 1,840 81.3 %
Total selling, general and
administrative expense $ 13,701 $ 7,179 $ 6,522 90.8 %
For the Nine Months Ended
Selling, general, and administrative
expense by Segment September 30,
2021 2020 $ Change % Change
Electric Power and Solar Infrastructure
Services $ 23,194 $ 4,895 $ 18,299 373.8 %
Integrated Energy Infrastructure
Solutions and Services 7,207 8,294 (1,087 ) (13.1 )%
Other 13,455 7,969 5,486 68.8 %
Total selling, general and
administrative expense $ 43,856 $ 21,158 $ 22,698 107.3 %
Selling, General and Administrative (SG&A) expenses include such items as wages,
commissions, consulting, general office expenses, business promotion expenses
and costs of being a public company, including legal and accounting fees,
insurance and investor relations. SG&A expenses are generally associated with
the ongoing activities to reach new customers, promote new product and service
lines including Orbital Gas Systems, Orbital Power Services, Orbital Solar
Services, Orbital Telecom Services and other new product and service
introductions.
During the three and nine months ended September 30, 2021 , SG&A increased
$6.5 million and $22.7 million , respectively, compared to the prior-year
comparative periods. The increase in SG&A for the quarter and year-to-date
periods were due to increased SG&A costs in the Electric Power and Solar
Infrastructure Services segment primarily due to ramp-up costs at Orbital Power
Services group, which included increased payroll and insurance costs and
start-up costs at Eclipse Foundation Group , as well as $1.4 million and
$8.0 million of employee stock-based compensation vesting expense, for the three
and nine month periods, respectively. The addition of GTS in April 2021 , IMMCO
in July 2021 , and Orbital Solar Services in April 2020 compared to the first
nine months of 2020, which only included Orbital Solar Services for six of the
nine months ended September 30, 2020 , also contributed to the increase in SG&A
costs. Also contributing to the increase were increased corporate costs in the
Other segment due to a $2.4 million increase in the mark to market adjustment to
the executive cash-based stock appreciation rights and $0.8 million increase in
employee performance bonuses paid year to date. These increases were partially
offset by decreased SG&A costs in the Integrated Energy Infrastructure Solutions
and Services segment due to cost saving measures.
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Depreciation and Amortization
(dollars in thousands)
For the Three Months Ended
Depreciation and amortization expense by
Segment September 30,
2021 2020 $ Change % Change
Electric Power and Solar Infrastructure
Services $ 2,483 $ 1,197 $ 1,286 107.4 %
Integrated Energy Infrastructure
Solutions and Services 404 373 31 8.3 %
Other 12 11 1 9.1 %
Total depreciation and amortization $ 2,899 $ 1,581 $ 1,318 83.4 %
For the Nine Months Ended
Depreciation and amortization by Segment September 30,
2021 2020 $ Change % Change
Electric Power and Solar Infrastructure
Services $ 5,653 $ 2,477 $ 3,176 128.2 %
Integrated Energy Infrastructure
Solutions and Services 1,249 1,109 140 12.6 %
Other 31 30 1 3.3 %
Total depreciation and amortization
$ 3,317 91.7 %
Depreciation and amortization expenses are associated with depreciation on buildings, furniture, equipment, vehicles, and amortization of intangible assets over the estimated useful lives of the related assets.
Depreciation and amortization expense in the three and nine months endedSeptember 30, 2021 were up compared to the three and nine months endedSeptember 30, 2020 primarily due to additional amortization in theElectric Power and Solar Infrastructure Services segment including Orbital Solar Services and GTS and IMMCO acquisition intangibles that were acquired in the second quarter of 2020 and 2021 and depreciation of equipment used byOrbital Power Services which has been ramping up their capital expenditures as more crews are added.
The Company owns a cost-basis investment in VPS with a book value atSeptember 30, 2021 of$1.1 million . ThroughJune 30, 2020 , the Company accounted for its investment in VPS under the equity method of accounting and accordingly recorded income or loss of affiliate based on the equity method of accounting. The Company recorded losses in the three and nine months endedSeptember 30, 2020 of zero and$4.8 million , respectively, related to its share of VPS's loss. Due to additional outside investments into VPS during the third quarter of 2020, which diluted OEG's ownership percentage coupled with increased board seats reducing OEG's board influence, the Company's management determined that it no longer met the qualification of having significant influence necessary to record its investment under the equity method of accounting. Following this change, the Company has recorded its investment under the cost method of accounting. There were no changes in the basis in the Company's investment in the three and nine months endedSeptember 30, 2021 . 44
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Other Income (Expense), net
(dollars in thousands)
For the Three Months Ended
Other Income (Expense), net September 30,
2021 2020 $ Change % Change
Foreign exchange gain (loss) $ (395 ) $ 707 $ (1,102 ) (155.9 )%
Interest income 82 75 7 9.3 %
Rental income 129 78 51 65.4 %
Gain on extinguishment of debt 722 - 722 100.0 %
Other income 216 - 216 100.0 %
Total Other income (expense) $ 754 $ 860 $ (106 ) (12.3 )%
For the Nine Months Ended
Other Income (Expense), net September 30,
2021 2020 $ Change % Change
Foreign exchange gain (loss) $ (265 ) $ (410 ) $ 145 (35.4 )%
Interest income 245 218 27 12.4 %
Rental income 372 254 118 46.5 %
Gain on extinguishment of debt 2,412 - 2,412 100.0 %
Other income 245 - 245 100.0 %
Total Other income (expense) $ 3,009 $ 62 $ 2,947 4753.2 %
Other income (expense) changes were primarily the result of gains on
extinguishment of debt in the three and nine months ended September 30, 2021 of
$0.7 million and $2.4 million , respectively, due to the forgiveness by the U.S.
government of certain payroll protection loans and certain exchange agreements
that Company entered into in the third quarter of 2021. For the nine month
period, the gain on extinguishment was partially offset by the loss on the
extinguishment of debt due to the amendment to remove the convertible equity
feature of its convertible debt during the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 . Foreign currency gain/loss
fluctuations in the three and nine-month periods principally related to the
fluctuation in the U.K. pound in both 2020 and 2021.
Interest Expense
For the three and nine months endedSeptember 30, 2021 , the Company incurred interest expense of$1.3 million and$3.1 million , respectively compared to interest for the three and nine months endedSeptember 30, 2020 of$0.3 million and$0.5 million , respectively. The increase in interest expense in 2021 is related to the increase in notes payable outstanding in the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 . See note 16 for more information on the Company's notes payable. Income Tax Expense (Benefit)
The Company is subject to taxation in the
In the three months endedSeptember 30, 2021 , as a result of the assets acquired and liabilities assumed related to the acquisition of IMMCO, the Company recorded a$2.5 million deferred tax liability. As a result, the Company recorded a$2.5 million tax benefit for a reduction in prior recorded valuation allowances. 45
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In the three months endedJune 30, 2021 , as a result of the assets acquired and liabilities assumed related to the acquisition of GTS, the Company recorded a$9.0 million deferred tax liability. As a result, the Company recorded a$9.0 million tax benefit for a reduction in prior recorded valuation allowances. In the three months endedJune 30, 2020 , as a result of the assets acquired and liabilities assumed related to the acquisition ofReach Construction, LLC , the Company recorded a$1.6 million deferred tax liability. As a result, the Company recorded a$1.6 million tax benefit for a reduction in prior recorded valuation allowances. For the three and nine months endedSeptember 30, 2020 , the Company is allocating income tax expense (benefit) in accordance to ASC 740-20-45-7 to more than one financial statement component other than continuing operations. Prior period comparative allocations have also been made. In the nine months endedSeptember 30, 2020 , as a result of HM Revenue & Customs review, the Company recorded a$1.6 million tax benefit for estimated prior year taxes related to refunds for the surrender for cash,United Kingdom net operating losses generated related to enhanced research and development deduction claims.
For additional analysis, see Note 14, "Income Taxes," of the condensed consolidated financial statements in Part I - Item I, "Financial Statements."
Restructuring Charges During the fourth quarter of 2019, the Company completed the sale of its largest group within the Power and Electromechanical segment. The Company completed the sale of itsJapan operations as ofSeptember 30, 2020 and completed the disposal ofCanada's assets in the fourth quarter of 2020. The Company recorded an accrued liability of$4.0 million Canadian dollars ($3.1 million US dollars atDecember 31, 2019 ) for estimated employee termination costs. This accrual was adjusted down by$0.3 million Canadian dollars ($0.2 million US dollars) in 2020 based on updated estimates. The termination costs began to be paid out in the third quarter of 2020 and the majority of the remaining accrual was paid in the fourth quarter of 2020. The Company paid out an additional$0.3 million of termination benefits in the first nine months of 2021 and expect to pay the remaining$28 thousand during the remainder of 2021. For more information on the Company's restructuring charges, see Note 1 Nature of Operations, Basis of Presentation and Company Conditions under the Restructuring Charges subheading. 46
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Liquidity and Capital Resources
General
As ofSeptember 30, 2021 , the Company held cash and cash equivalents of$11.2 million and restricted cash of$1.2 million . Operations, investments, and equipment have been funded through cash on hand, the issuance of common stock authorized by itsJuly 2020 andFebruary 2021 S-3 filings, seller financing, the issuance of debt and financing through the sale of future revenues. The Company filed an S-3 in February of 2021 which became effective inApril 2021 for the issuance of additional stock or public debt. In July, 2021, the Company issued 10,410,959 shares of common stock at$3.65 a share for a total raise of$38.0 million before expenses. In August of 2021, the Company opened a$4.0 million dollar line of credit to support additional funding. The Company's cash used in operations was more in the first nine months of 2021 than in the first nine months of 2020 primarily driven by a larger net loss. Major uses of cash in the first nine months of 2021 included the acquisitions ofGibson Technical Services andIMMCO Inc. , purchases of property and equipment, completion of the purchase of the VE Technology and changes in working capital. The Company continues to work to improve its short-term liquidity through management of its working capital. Long-term liquidity is expected to benefit from revenue growth and earnings through its existing operations. Overall volume growth in the Company's businesses both organically and through acquisitions are expected to benefit cash flows as well.
Cash Used in Operations
Cash used in operations of$36.8 million was a$26.9 million increase in cash used compared to the nine-month period in 2020. Cash used in operations for the nine months endedSeptember 30, 2021 were approximately$14.5 million in the other segment,$19.3 million in theElectric Power and Solar Infrastructure Services segment,$3.0 million in the Integrated Energy Infrastructure Solutions and Services segment. Included in the Other segment is a$0.3 million source of cash related to the former discontinued operations of the Power and Electromechanical segment, which was primarily the collection of trade accounts receivable. This compares to prior year nine-month-period cash used of approximately$7.7 million used in the Other segment,$2.9 million used for theElectric Power and Solar Infrastructure Services segment$1.2 million used by the Integrated Energy Infrastructure Solutions and Services segment and$1.9 million provided by discontinued Power and Electromechanical segment. Increased uses of cash in the first nine months of 2021 are primarily for costs associated with mergers and acquisitions in theElectric Power and Solar Infrastructure Services segment in addition to normal administrative costs, ramp-up costs on the Company's Orbital Power Services group, and cash used by Orbital Solar Services operations. The Company believes that revenue generated by recent Orbital Telecom Services acquisitionsGibson Technical Services andIMMCO, Inc. will improve cash flow from operating activities. While the Company saw an initial cost increase from Orbital Power Services, management expects these groups to become cash flow positive, as the business environment normalizes and the Company continues to increase revenue-generating service crews deployed. The Company believes overall cash used in operations will improve through revenue growth associated with new customers and larger projects, the additional cash expected from operations of Orbital Solar Services when it begins work on contracts with solar developers including performing as company "of choice" for the recently-formedBlack Sunrise Century Fund , which over the next three years is expected to build over 1 gigawatt of solar power. The change in cash used in operating activities, exclusive of net loss, is primarily the result of the following line items: payment towards accounts payable increased cash used in operating activities by$2.5 million , increased cash used for right of use assets, which are partially offset by increased lease liabilities related to the ramp up of the Orbital Power Services group. Timing of cash receipts on trade accounts receivable was a$5.2 million increase in cash used in operating activities related to build up of accounts receivable at Orbital Gas Systems, Orbital Power Services partially offset by sources of cash at Orbital Solar Services, Orbital Telecom Services and receipts of final sales at CUI-Canada. Changes in prepaid expenses of$1.4 million was a source of cash and were due to timing of payments primarily related to changes in prepaid expenses at Orbital Gas Systems, Orbital Power Services, and the Other segment. During the nine months endedSeptember 30, 2021 and 2020, the Company recorded a total of$9.8 million and$12 thousand , respectively, for share-based compensation related to equity given, or to be given to directors, employees and consultants for services provided and as payment for royalties earned. The increase in expense during the first nine months of 2021 compared to the first nine months of 2020 is primarily due to employee stock-based bonuses and increased director stock-based compensation in 2021 compared to director stock-based compensation in the nine months of 2020 when director compensation was being accrued as cash compensation while the structure of their compensation was being evaluated. During the nine months ended the Company recorded$11.2 million of non-cash deferred tax benefits as a result of the acquisition of GTS and IMMCO, which allowed the Company to utilize deferred tax assets that had been fully reserved. Also during the nine months endedSeptember 30, 2021 , the Company recorded fair value adjustments of$2.5 million on unsettled stock appreciation rights held by corporate officers that will be settled in cash at a future date. 47
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Table of Contents S-3 registration The Company filed an S-3 registration statement onJuly 17, 2020 containing a prospectus that was effective inSeptember 2020 . The Company utilized this filing inJanuary 2021 to issue common stock for$45 million before costs. The Company filed a new S-3 shelf registration inJanuary 2021 , which, as amended, became effective inApril 2021 . With this filing,Orbital Energy Group may from time-to-time issue various types of securities, including common stock, preferred stock, debt securities and/or warrants, up to an aggregate amount of$150 million . The Company utilized this S-3 registration to issue additional common stock inJuly 2021 for$38 million before expenses. As the Company focuses on growing its infrastructure services market presence both organically and through strategic acquisitions, technology development, product and service line additions, and increasing Orbital's market presence, it will fund these activities together with related operating, sales and marketing efforts for its various product offerings with cash on hand, and possible proceeds from future issuances of equity through the S-3 registration statement, and available debt.Orbital Energy Group may raise additional capital needed to fund the further development and marketing of its products and services as well as payment of its debt obligations.
See the section entitled Recent Sales of
Capital Expenditures and Investments
During the first nine months of 2021 and 2020,Orbital Energy Group invested$6.6 million and$1.5 million , respectively, in property and equipment. These purchases in 2021 were primarily for capital assets associated with the Company's Orbital Power Services and Orbital Telecom Services. These investments typically include additions to equipment including vehicles and equipment for powerline service and maintenance, engineering, furniture, computer equipment for office personnel, facilities improvements and other fixed assets as needed for operations. In addition, during the nine months endedSeptember 30, 2021 and 2020, the Company paid cash for acquisitions, net of cash received of$36.9 million and$3.0 million respectively. The Company anticipates further investment in fixed assets and acquisitions during 2021 in support of its on-going business and continued development of its infrastructure services operations. The Company entered into a$3 million note receivable with Orbital Solar Services during the three months endedMarch 31, 2020 prior to theApril 1 acquisition. This payment became part of the Company's purchase consideration upon the close of the acquisition.
Financing Activities
To date in 2021, the Company issued a total of 26.0 million shares of common stock in three separate equity raises with a face amount of$83.0 million for which the Company netted$78.0 million after expenses. For the nine months endedSeptember 30, 2021 , the Company received cash proceeds of$19.4 million for the issuance of debt with a face value of$23.4 million and a weighted average stated interest rate of 8.5% and a weighted average estimated effective rate of 18.3%. In the nine months endedSeptember 30, 2021 and 2020 the Company made cash payments on notes payable of$7.5 million and$1.7 million , respectively, including$2.0 million in 2021 toward the seller notes payable related to theApril 2020 acquisition of Orbital Solar Services. The Company also implemented several exchange agreements whereby shares of common stock were exchanged for additional debt reduction. The Company recorded a$0.7 million extinguishment of debt of theReach Construction seller note due to the Company making an early cash payment in exchange for a portion of the loan being forgiven and a portion being paid by the Company with shares of its common stock. See Note 16 for more information on the Company's notes payable. In addition, the Company paid$0.4 million in the three months endedMarch 31, 2021 to close its line of credit that was acquired with the Orbital Solar Services business.
Recap of Liquidity and Capital Resources
AtSeptember 30, 2021 , the Company had unrestricted cash and cash equivalents balances of$11.2 million . AtSeptember 30, 2021 the Company had$1.8 million of cash and cash equivalents balances at domestic financial institutions that were covered under theFDIC insured deposits programs and$0.1 million and$72 thousand , at foreign financial institutions covered under theUnited Kingdom Financial Services Compensation (FSC) andCanada Deposit Insurance Corporation (CDIC), respectively. AtSeptember 30, 2021 , the Company had cash and cash equivalents of$1.0 million in European bank accounts and$72 thousand in Canadian bank accounts.
The Company had a net loss of
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Table of Contents
The Company expects the revenues from its continuing operations, and cash on
hand, to cover operating and other expenses for the next twelve months of
operations. However, in the short-term, the Company expects to continue to need
cash support as the Company's businesses increase their market positions and
revenue. The Company may issue additional debt or equity to support continuing
operations and acquisition efforts in the remaining months of 2021.
Critical Accounting Policies
The Company has adopted various accounting policies to prepare the consolidated
financial statements in accordance with Generally Accepted Accounting
Principals, ("GAAP"). Certain of the Company's accounting policies require the
application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. In the Company's 2020 Annual
Report on Form 10-K filed on March 30, 2021 , the Company identified the critical
accounting policies that affect the Company's more significant estimates and
assumptions used in preparing the Company's consolidated financial statements.
Adoption of new accounting standards
See Note 2 Summary of Significant Accounting Policies - Update of the condensed consolidated financial statements in Part I-Item I, "Financial Statements" for a description of recent accounting pronouncement adoptions, including the dates of adoption and effects on financial position, results of operations and cash flows if any.
Recent Accounting Pronouncements
See Note 11 Recent Accounting Pronouncements of the condensed consolidated financial statements in Part I-Item I, "Financial Statements" for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial position, results of operations and cash flows.
Off-Balance Sheet Arrangements
See Note 20 Commitments and Contingencies of the condensed consolidated financial statements in Part I-Item I, "Financial Statements" for a description of the Company's off-balance sheet arrangements.
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