Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2019

OR

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

COMMISSION FILE NUMBER: 001-37796

Infrastructure and Energy Alternatives, Inc.
(Exact Name of Registrant as Specified in Charter)
 
Delaware
 
 
 
47-4787177
(State or Other Jurisdiction
of Incorporation)
 
 
 
(IRS Employer
Identification No.)
 
6325 Digital Way
Suite 460
Indianapolis, Indiana
 
46278
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (765) 828-2580

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbols(s)
 
Name of exchange on which registered
Common Stock, $0.0001 par value
 
IEA
 
The NASDAQ Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company þ Emerging growth Company þ

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

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

Number of shares of Common Stock outstanding as of the close of business on August 14, 2019: 22,252,489.




 
Infrastructure and Energy Alternatives, Inc.
 
Table of Contents
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. OTHER INFORMATION
 






PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC.
Condensed Consolidated Balance Sheets
($ in thousands, except per share data)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
20,311

 
71,311

Accounts receivable, net
228,347

 
225,366

Costs and estimated earnings in excess of billings on uncompleted contracts
75,591

 
47,121

Prepaid expenses and other current assets
20,415

 
12,864

        Total current assets
344,664

 
356,662

 
 
 
 
Property, plant and equipment, net
158,182

 
176,178

Goodwill
37,373

 
40,257

Intangibles
43,980

 
50,874

Company-owned life insurance
4,150

 
3,854

Other assets
164

 
188

Deferred income taxes
15,291

 
11,215

        Total assets
$
603,804

 
$
639,228

 
 
 
 
Liabilities and Stockholder's Equity (Deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
108,221

 
158,075

Accrued liabilities
112,782

 
94,059

Billings in excess of costs and estimated earnings on uncompleted contracts
80,325

 
62,234

Current portion of capital lease obligations

23,661

 
17,615

Current portion of long-term debt
31,422

 
32,580

          Total current liabilities
356,411

 
364,563

 
 
 
 
Capital lease obligations, net of current maturities
54,089

 
45,912

Long-term debt, less current portion
245,697

 
295,727

Debt - Series B Preferred Stock
32,397

 

Series B Preferred Stock - warrant obligations
4,200

 

Deferred compensation
7,005

 
6,157

Contingent consideration
4,247

 
23,082

         Total liabilities
$
704,046

 
$
735,441

 
 
 
 
Commitments and contingencies:

 

 
 
 
 
Series A Preferred Stock, par value, $0.0001 per share; 1,000,000 shares authorized; 34,965 shares and 34,965 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
34,965

 
34,965

 
 
 
 
Stockholders' equity (deficit):
 
 
 
Common stock, par value, $0.0001 per share; 100,000,000 shares authorized; 22,266,211 and 22,155,271 shares issued and 22,252,489 and 22,155,271 outstanding at June 30, 2019 and December 31, 2018, respectively
2

 
2

Treasury stock, 13,722 shares at cost
(76
)
 

Additional paid in capital
14,725

 
4,751

Retained earnings (deficit)
(149,858
)
 
(135,931
)
           Total stockholders' equity (deficit)
(135,207
)
 
(131,178
)
           Total liabilities and stockholders' equity (deficit)
$
603,804

 
$
639,228

See accompanying notes to condensed consolidated financial statements.

1



INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC.
Condensed Consolidated Statement of Operations
($ in thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
327,961

 
$
174,073

 
$
518,771

 
$
224,208

Cost of revenue
296,539

 
157,274

 
480,576

 
210,494

Gross profit
31,422

 
16,799

 
38,195

 
13,714

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
25,878

 
9,198

 
53,632

 
26,158

Income (loss) from operations
5,544

 
7,601

 
(15,437
)
 
(12,444
)
 
 
 
 
 
 
 
 
Other income (expense), net:
 
 
 
 
 
 
 
Interest expense, net
(11,496
)
 
(1,530
)
 
(21,863
)
 
(2,381
)
Other income (expense)
18,272

 
22

 
18,102

 
11

Income (loss) before benefit for income taxes
12,320

 
6,093

 
(19,198
)
 
(14,814
)
 
 
 
 
 
 
 
 
Benefit (provision) for income taxes
(6,112
)
 
(1,178
)
 
2,517

 
2,337

 
 
 
 
 
 
 
 
Net income (loss)
$
6,208

 
$
4,915

 
$
(16,681
)
 
$
(12,477
)
 
 
 
 
 
 
 
 
Net income (loss) per common share - basic
(0.61
)
 
0.20

 
(1.66
)
 
(0.60
)
Net income (loss) per common share - diluted
(0.61
)
 
0.19

 
(1.66
)
 
(0.60
)
Weighted average shares - basic
22,252,489

 
21,577,650

 
22,220,799

 
21,577,650

Weighted average shares - diluted
22,252,489

 
25,392,159

 
22,220,799

 
21,577,650


See accompanying notes to condensed consolidated financial statements.


2



INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC.
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
($ in thousands)
(Unaudited)
 
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Deficit
 
Total Equity (Deficit)
 
 
Shares
Par Value
 
 
Shares
Cost
 
 
Balance at December 31, 2017
 
21,578

2

 

 


 
(10,021
)
 
(10,019
)
Net loss
 
 
 
 
 
 
 
 
 
(17,392
)
 
(17,392
)
Issuance of Series A Preferred stock
 
 
 
 
 
 
 
 
 
(34,965
)
 
(34,965
)
Contingent consideration
 
 
 
 
 
 
 
 
 
(69,373
)
 
(69,373
)
Merger recapitalization transaction
 
 
 
 
 
 
 
 
 
(22,973
)
 
(22,973
)
Balance at March 31, 2018
 
21,578

$
2

 
$

 

$

 
$
(154,724
)
 
$
(154,722
)
Net income
 
 
 
 
 
 
 
 
 
4,915

 
4,915

Merger recapitalization transaction
 
 
 
 
 
 
 
 
 
(2,843
)
 
(2,843
)
Preferred dividends
 
 
 
 
 
 
 
 
 
(548
)
 
(548
)
Balance at June 30, 2018
 
21,578

$
2

 
$

 

$

 
$
(153,200
)
 
$
(153,198
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
22,155

2

 
4,751

 


 
(135,931
)
 
(131,178
)
Net loss
 
 
 
 
 
 
 
 
 
(22,889
)
 
(22,889
)
Share-based compensation
 
 
 
 
1,040

 
 
 
 
 
 
1,040

Share-based payment transaction
 
111


 
235

 
(14
)
(76
)
 
 
 
159

Merger transaction
 
 
 
 
 
 
 
 
 
2,754

 
2,754

Preferred dividends
 
 
 
 
(525
)
 
 
 
 
 
 
(525
)
Balance at March 31, 2019
 
22,266

$
2

 
$
5,501

 
(14
)
$
(76
)
 
$
(156,066
)
 
$
(150,639
)
Net income
 
 
 
 
 
 
 
 
 
6,208

 
6,208

Share-based compensation
 
 
 
 
720

 
 
 
 
 
 
720

Series B Preferred Stock - Warrants at close
 
 
 
 
9,422

 
 
 
 
 
 
9,422

Preferred dividends
 
 
 
 
(918
)
 
 
 
 
 
 
(918
)
Balance at June 30, 2019
 
22,266

$
2

 
$
14,725

 
(14
)
$
(76
)
 
$
(149,858
)
 
$
(135,207
)

See accompanying notes to condensed consolidated financial statements.


3



INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC.
Condensed Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(16,681
)
 
$
(12,477
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 


   Depreciation and amortization
23,801

 
3,977

   Contingent consideration fair value adjustment
(18,835
)
 

   Amortization of debt discounts and issuance costs
2,732

 
179

   Share-based compensation expense
1,760

 

   (Gain) loss on sale of equipment
762

 
(16
)
   Deferred compensation
849

 
234

   Provision for losses on uncompleted contracts

 
230

   Paid-in-kind interest
1,025

 

   Deferred income taxes
(2,517
)
 
(1,428
)
   Other
60

 

   Change in operating assets and liabilities:
 
 
 
       Accounts receivable
(3,041
)
 
(5,265
)
       Costs and estimated earnings in excess of billings on uncompleted contracts
(28,471
)
 
(26,099
)
       Prepaid expenses and other assets
(7,353
)
 
(1,453
)
       Accounts payable and accrued liabilities
(33,012
)
 
55,795

       Billings in excess of costs and estimated earnings on uncompleted contracts
18,090

 
14,484

       Net cash provided by (used in) operating activities
(60,831
)
 
28,161

 
 
 
 
Cash flow from investing activities:
 
 
 
   Company-owned life insurance
(296
)
 
(64
)
   Purchases of property, plant and equipment
(4,158
)
 
(1,548
)
   Proceeds from sale of property, plant and equipment
6,555

 
17

       Net cash provided by (used in) investing activities
2,101

 
(1,595
)
 
 
 
 
Cash flows from financing activities:
 
 
 
   Proceeds from long-term debt
9,400

 
92,772

   Payments on long-term debt
(59,334
)
 
(30,840
)
   Payments on line of credit - short term

 
(38,447
)
   Debt financing fees
(9,473
)
 
(2,144
)
   Payments on capital lease obligations
(10,119
)
 
(2,627
)
   Sale-leaseback transaction
24,343

 

   Preferred dividends

 
(548
)
   Proceeds from issuance of stock - Series B Preferred Stock
50,000

 

   Proceeds from stock-based awards, net

159

 

   Merger recapitalization transaction
2,754

 
(25,816
)
       Net cash provided by (used in) financing activities
7,730

 
(7,650
)
 
 
 
 
Net change in cash and cash equivalents
(51,000
)
 
18,916

 
 
 
 
Cash and cash equivalents, beginning of the period
71,311

 
4,877

 
 
 
 
Cash and cash equivalents, end of the period
$
20,311

 
$
23,793

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

4




INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC.
Condensed Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
(Continued)

 
Six Months Ended June 30,
 
2019
 
2018
Supplemental disclosures:
 
 
 
  Cash paid for interest
18,281

 
2,210

  Cash paid for income taxes
227

 
632

Schedule of non-cash activities:
 
 
 
   Acquisition of assets/liabilities through capital lease

 
2,709

   Acquisition-related contingent consideration, new business combinations

 
69,373

   Issuance of common shares

 
90,282

   Issuance of preferred shares

 
34,965

   Preferred dividends declared
1,443

 



5



INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)

Note 1. Business, Basis of Presentation and Significant Accounting Policies

Infrastructure and Energy Alternatives, Inc., a Delaware corporation, is a holding company organized on August 4, 2015 (together with its wholly-owned subsidiaries, “IEA” or the “Company”). The Company specializes in providing complete engineering, procurement and construction (“EPC”) services throughout the United States (“U.S.”) for the renewable energy, traditional power and civil infrastructure industries. These services include the design, site development, construction, installation and restoration of infrastructure. Although the Company has historically focused on the wind industry, its recent acquisitions have expanded its construction capabilities and geographic footprint in the areas of renewables, environmental remediation, industrial maintenance, specialty paving and heavy civil and rail infrastructure construction, creating a diverse national platform of specialty construction capabilities.

Principles of Consolidation

The accompanying condensed unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in the annual audited consolidated financial statements prepared in accordance with GAAP have been condensed or omitted.
The condensed unaudited consolidated financial statements include the accounts of IEA and its wholly-owned direct and indirect domestic and foreign subsidiaries and in the opinion of management, these financial statements reflect all adjustments that are necessary to present fairly the results of operations for the interim periods presented. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s 2018 Annual Report on Form 10-K.

Reportable Segments

We segregate our business into two reportable segments: the Renewables segment and the Heavy Civil and Industrial (“Specialty Civil”) segment. See Note 13. Segments for a description of the reportable segments and their operations.

Basis of Accounting and Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Key estimates include: the recognition of project revenue and profit or loss (which the Company defines as project revenue less project costs of revenue), in particular, on construction contracts accounted for under the percentage-of completion method, for which the recorded amounts require estimates of costs to complete projects, ultimate project profit and the amount of probable contract price adjustments as inputs; allowances for doubtful accounts; accrued self-insurance reserves; other reserves and accruals; accounting for income taxes; and the estimated impact of contingencies and ongoing litigation. While management believes that such estimates are reasonable when considered in conjunction with the Company’s consolidated financial position and results of operations, actual results could differ materially from those estimates.

“Emerging Growth Company” Reporting Requirements:

The Company qualifies as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as a company is deemed to be an “emerging growth company,” it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002. Section 107 of the JOBS Act also provides that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise

6



apply to private companies. We have elected to take advantage of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

We would cease to be an “emerging growth company” upon the earliest of:

the last day of the fiscal year following July 6, 2021, the five-year anniversary of the completion of our IPO;
the last day of the fiscal year in which our total annual gross revenues exceed $1.07 billion;
the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt
    securities; or
the date on which we become a “large accelerated filer,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock held by nonaffiliates exceeds $700 million as of the last day of our most recently completed second fiscal quarter.

We continue to monitor our status as an “emerging growth company” and are currently preparing for, and expect to be ready to comply with, the additional reporting and regulatory requirements that will be applicable to us when we cease to qualify as an “emerging growth company.”

Revenue Recognition

Revenue under construction contracts is accounted for under the percentage-of-completion method of accounting. Under the percentage-of-completion method, the Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognizes that profit over the contract term based on costs incurred. Contract costs include all direct materials, labor and subcontracted costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, depreciation and the operational costs of capital equipment. The Company also has unit-price contracts that were not significant as of June 30, 2019.

The estimation process for revenue recognized under the percentage-of-completion method is based on the professional knowledge and experience of the Company’s project managers, engineers and financial professionals. Management reviews estimates of contract revenue and costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected contract settlements are factors that influence estimates of total contract value and total costs to complete those contracts and, therefore, the Company’s profit recognition. Changes in these factors may result in revisions to revenue, costs and income, and their effects are recognized in the period in which the revisions are determined, which could materially affect the Company’s results of operations in the period in which such changes are recognized.

Revenue derived from projects billed on a fixed-price basis totaled 90.7% and 98.4% of consolidated revenue from operations for the three months ended June 30, 2019 and 2018, respectively, and totaled 90.5% and 94.5% for the six months ended June 30, 2019 and 2018, respectively. Revenue and related costs for construction contracts billed on a time and materials basis are recognized as the services are rendered. Revenue derived from projects billed on a time and materials basis also accounted for under the percentage of completion method totaled 9.3% and 1.6% of consolidated revenue from operations for the three months ended June 30, 2019 and 2018, respectively, and totaled 9.5% and 5.5% for the six months ended June 30, 2019 and 2018, respectively.

For an approved change order which can be reliably estimated as to price, the anticipated revenues and costs associated with the change order are added to the total contract value and total estimated costs of the project, respectively. When costs are incurred for a) an unapproved change order which is probable to be approved or b) an approved change order which cannot be reliably estimated as to price, the total anticipated costs of the change order are added to both the total contract value and total estimated costs for the project. Once a change order becomes approved and reliably estimable, any margin related to the change order is added to the total contract value of the project. The Company actively engages in substantive meetings with its customers to complete the final approval process and generally expects these processes to be completed within a year. The amounts ultimately realized upon final acceptance by its customers could be higher or lower than such estimated amounts.

Provisions for losses on uncompleted contracts are made in the period in which such losses become evident. The Company may incur costs subject to change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. Management determines the probability that such costs will be recovered based upon engineering studies and legal opinions, past practices with the customer and specific discussions, correspondence and/or preliminary negotiations with the customer.


7




Classification of Construction Contract-Related Assets and Liabilities

Contract costs include all direct subcontract, material, and labor costs, and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, insurance, repairs, maintenance, communications, and use of Company-owned equipment. Contract revenues are earned and matched with related costs as incurred.

Costs and estimated earnings in excess of billings on uncompleted contracts are presented as a current asset in the accompanying consolidated balance sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are presented as a current liability in the accompanying consolidated balance sheets. The Company’s contracts vary in duration, with the duration of some larger contracts exceeding one year. Consistent with industry practices, the Company includes the amounts realizable and payable under contracts, which may extend beyond one year, in current assets and current liabilities. These balances are generally settled within one year.

New Accounting Pronouncements

The effective dates shown in the following pronouncements are based on the Company's current status as an "Emerging Growth Company".
    
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance on the recognition of revenue from contracts with customers. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. To achieve this core principle, the guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance addresses several areas including transfer of control, contracts with multiple performance obligations, and costs to obtain and fulfill contracts. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The standard will be effective for our fiscal year 2019 annual financial statements and for interim periods beginning in fiscal year 2020. The Company is currently assessing the impact of the standard but the Company has determined it will adopt the modified retrospective adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is effective for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 required entities to adopt the new leases standard using a modified retrospective method and initially apply the related guidance at the beginning of the earliest period presented in the financial statements.  During July 2018, the FASB issued ASU 2018-11, which allows for an additional and optional transition method under which an entity would record a cumulative-effect adjustment at the beginning of the period of adoption. See Note 10. Commitments and Contingencies for additional information about our leases. The new guidance will be effective for our fiscal year 2020 annual financial statements and for the interim statements beginning in fiscal year 2021. The Company is in the process of implementing leasing software to assist in the integration of the future standard.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for recurring and non-recurring fair value measurements, such as the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and adds new disclosure requirements for Level 3 measurements. This ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. Certain disclosures per this ASU are required to be applied on a retrospective basis and others on a prospective basis. The Company is currently assessing the impact these changes will have on its disclosure requirements for fair value measurement.

Management has evaluated other recently issued accounting pronouncements and does not believe that they will have a significant impact on the financial statements and related disclosures.

8




Note 2. Acquisitions
 
Acquisitions

CCS

On September 25, 2018, the Company completed its acquisition of Consolidated Construction Solutions I LLC (“CCS”) for $106.6 million in cash. The Company financed this acquisition through borrowing on its credit facility as discussed in Note 9. Debt. This acquisition is being accounted for as a business combination under the acquisition method of accounting.

The wholly-owned subsidiaries of CCS, Saiia LLC (“Saiia”) and American Civil Constructors LLC (the “ACC Companies”), generally enter into long-term contracts with both government and non-government customers to provide EPC services for environmental, heavy civil and mining projects.

William Charles

On November 2, 2018, the Company acquired William Charles Construction Group, including its wholly-owned subsidiary Ragnar Benson (“William Charles”), for $77.7 million, consisting of $73.2 million in cash and $4.5 million of the Company's common stock (477,621 shares of common stock at $9.45 share price). The Company financed a portion of this acquisition through borrowing on its credit facility as discussed in Note 9. Debt. This acquisition is being accounted for as a business combination under the acquisition method of accounting.

William Charles generally enters into contracts with a mix of government and non-government customers to provide EPC services for rail civil infrastructure, environmental and heavy civil projects. A portion of the non-governmental rail civil infrastructure contracts are longer than a year.

The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition dates at fair value. The estimated values for CCS were finalized as of June 30, 2019. For William Charles the following table summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of the acquisition date at fair value. The estimated values are not yet finalized and are subject to potentially significant changes. We will finalize the amounts recognized for the William Charles acquisition as we obtain the information necessary to complete the analyses, such as appraisal information for property, plant and equipment and the accounting for income taxes. We expect to finalize these amounts as soon as possible, but no later than one year from the acquisition date.

9



Identifiable assets acquired and liabilities assumed (in thousands)
CCS
Preliminary William Charles
Cash
$
6,413

$
6,641

Accounts Receivable
58,041

69,740

Costs and estimated earnings in excess of billings on uncompleted contracts
9,512

16,095

Other current assets
1,813

7,999

Property, plant and equipment
59,952

47,899

Intangible assets:
 
 
  Customer relationships
19,500

7,000

  Backlog
8,400

5,500

  Tradename
8,900

4,500

Deferred income taxes
(2,361
)

Other non-current assets
134

75

Accounts payable and accrued liabilities
(25,219
)
(60,962
)
Billings in excess of costs and estimated earnings on uncompleted contracts
(14,194
)
(14,810
)
Debt, less current portion
(52,257
)
(15,672
)
Capital lease obligations
(1,124
)

Other liabilities
(704
)
(907
)
Total identifiable assets
76,806

73,098

Goodwill
29,773

4,581

Total purchase consideration
$
106,579

$
77,679

* - There were no measurement period adjustments for June 30, 2019 from March 31, 2019.
    
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisitions of CCS and William Charles is related to the expected, specific synergies and other benefits that the Company believes will result from combining the operations of CCS and William Charles with the operations of IEA. This goodwill is deductible for income tax purposes, with the exception of $2.9 million for CCS that is not deductible.

Impact of Acquisitions

The following table summarizes the results of operations included in the Company's condensed consolidated statement of operations for CCS and William Charles from their respective date of acquisition.

(in thousands)
Three months ended June 30, 2019
 
Six months ended June 30, 2019
 
CCS
 
William Charles
 
CCS
 
William Charles
Revenue
74,360

 
60,445

 
129,869

 
114,846

Net income (loss)
367

 
2,420

 
(2,091
)
 
51


10




The following table provides the supplemental unaudited actual and pro forma total revenue and net income of the combined entity had the acquisition date of CCS and William Charles been the first day of our fiscal year 2018:

 
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
 
Actual 2019
 
Pro forma 2018
 
Actual 2019
 
Pro forma 2018
Revenue
 
327,961

 
332,118

 
518,771

 
501,986

Net income (loss)
 
6,208

 
2,897

 
(16,681
)
 
(21,979
)
Net income (loss) per common share:
 
 
 
 
 

 

   Basic earnings per share
 
(0.61
)
 
0.11

 
(1.66
)
 
(1.04
)
   Diluted earnings per share
 
(0.61
)
 
0.09

 
(1.66
)
 
(1.04
)

The amounts in the supplemental unaudited pro forma 2018 results apply the Company's accounting policies and reflect certain adjustments to, among other things, (i) exclude the impact of transaction costs incurred in connection with the acquisitions, (ii) include additional depreciation and amortization that would have been charged assuming the same fair value adjustments to property, plant and equipment and acquired intangibles had been applied on January 1, 2018, and (iii) include additional interest expense that would have been incurred assuming the incremental borrowings the Company incurred to finance the acquisitions had been outstanding on January 1, 2018. Accordingly, these supplemental unaudited pro forma results have been prepared for comparative purposes only and are not intended to be indicative of the results of operations that would have occurred had the acquisitions actually occurred in the prior year period or indicative of the results of operations for any future period. These results do not include any potential operating efficiencies and cost savings.


Note 3. Earnings Per Share

The Company calculates earnings (loss) per share (“EPS”) in accordance with ASC 260, Earnings per Share. Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares of common stock outstanding during the period.

Income (loss) available to common stockholders is computed by deducting the dividends accumulated for the period on cumulative preferred stock from net income. If there is a net loss, the amount of the loss is increased by those preferred dividends and the contingent consideration fair value adjustment. The contingent consideration is a mark-to-market adjustment based on the decline of approximately an 80% reduction in the Company's stock price from December 31, 2018, see Note. 8 Fair Value of Financial Instruments. The Company is required to reverse the mark-to-market adjustment from the numerator as shown below.

Diluted EPS assumes the dilutive effect of (i) contingently issuable earn-out shares, (ii) Series A cumulative convertible preferred stock, using the if-converted method, and (iii) the assumed exercise of in-the-money stock options and warrants and the assumed vesting of outstanding restricted stock units (“RSUs”), using the treasury stock method.

Whether the Company has net income or a net loss determines whether potential issuances of common stock are included in the diluted EPS computation or whether they would be anti-dilutive. As a result, if there is a net loss, diluted EPS is computed in the same manner as basic EPS is computed. Similarly, if the Company has net income but its preferred dividend adjustment made in computing income available to common stockholders results in a net loss available to common stockholders, diluted EPS would be computed the same as basic EPS.

The calculations of basic and diluted EPS, are as follows ($ in thousands):

11



 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
  Net income (loss)
6,208

 
4,915

 
(16,681
)
 
(12,477
)
  Less: Convertible Preferred Share dividends
(918
)
 
(548
)
 
(1,443
)
 
(548
)
  Less: Contingent consideration fair value adjustment (see Note 8)
(18,835
)
 

 
(18,835
)
 

    Net income (loss) available to common stockholders
(13,545
)
 
4,367

 
(36,959
)
 
(13,025
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
  Weighted average common shares outstanding - basic and diluted (1)
22,252,489

 
21,577,650

 
22,220,799

 
21,577,650

  Convertible Series A Preferred

 
3,814,509

 

 

  Weighted average shares for diluted computation
22,252,489

 
25,392,159

 
22,220,799

 
21,577,650

 
 
 
 
 
 
 
 
Anti-dilutive: (2)
 
 
 
 
 
 
 
  Convertible Series A Preferred
9,122,860

 

 
7,084,004

 
2,487,928

  Series B Preferred - Warrants at closing
1,131,526

 

 
565,749

 

  RSUs
632,911

 

 
493,508

 

 
 
 
 
 
 
 
 
Basic EPS
(0.61
)
 
0.20

 
(1.66
)
 
(0.60
)
Diluted EPS
(0.61
)
 
0.19

 
(1.66
)
 
(0.60
)
(1)
The contingent earn-out shares were not included at June 30, 2019 and 2018, respectively. See Note 8. Fair Value of Financial Instruments for discussion regarding the Company's contingently issuable earn-out shares.

(2)
Warrants to purchase 8,480,000 shares of common stock at $11.50 per share were outstanding at June 30, 2019 but were not potentially dilutive as the warrants’ exercise price was greater than the average market price of the common stock during the period. 646,405 of vested and unvested Options and 817,817 of unvested RSUs were also not potentially dilutive as of June 30, 2019 as the respective exercise price or average stock price required for vesting of such award was greater than the average market price of the common stock during the period.

Series A Preferred

As of June 30, 2019, we had 34,965 shares of Series A Preferred Stock with an initial stated value of $1,000 per share plus accumulated but unpaid dividends, for total consideration of $36.9 million. Dividends are paid on the Series A Preferred Stock when declared by our Board. To extent permitted, dividends shall be paid in cash quarterly in arrears on each March 31, June 30, September 30 and December 31 on the stated value at the following rates:

6% per annum from the original issuance of the Series A Preferred Stock on March 26, 2018 (the “Closing Date”) until the date (the “18 Month Anniversary Date”) that is 18 months from the Closing Date; provided, however, if the Company does not hold a stockholders meeting to obtain shareholder approval for the issuance of common stock upon conversion of the Series A Preferred Stock within 90 days from May 20, 2019, then the rate shall be 8% during the period from the date that is 91 days from May 20, 2019 until the 18 Month Anniversary Date; and
10% per annum during the period from and after the 18 Month Anniversary Date;

So long as any shares of Series B Preferred Stock are outstanding or from and after the occurrence of any non-payment event or default event and until cured or waived, the foregoing rates will increase by 2% per annum.
    
If not paid in cash, dividends will accrue on the stated value and will increase the stated value on and effective as of the applicable dividend date without any further action by the Board at the following rates:

8% per annum during the period from May 20, 2019 through the 18 Month Anniversary Date; provided, however, if the Company does not hold a stockholders meeting to obtain shareholder approval for the issuance of common stock

12



upon conversion of the Series A Preferred Stock within 90 days from May 20, 2019, then the rate shall be 10% during the period from the date that is 91 days from the May 20, 2019 until the 18 Month Anniversary Date; and
12% per annum during the period from and after the 18 Month Anniversary Date.

As of June 30, 2019, the Company has accrued a cumulative of $2.0 million in dividends to Holders of Series A Preferred Stock as a reduction to additional paid-in capital.

Series B Preferred

As of June 30, 2019, we had 50,000 shares of Series B Preferred Stock outstanding, with each share having an initial stated value of $1,000 plus accumulated but unpaid dividends. Our common stock and Series A Preferred Stock are junior to the Series B Preferred Stock. Dividends are paid on the Series B Preferred Stock when declared by our Board. To the extent not prohibited by applicable law, dividends shall be declared and paid in cash quarterly in arrears on each March 31, June 30, September 30 and December 31 on the stated value at a rate of 15% per annum, provided that, immediately after the occurrence of a deleveraging event (as defined in the certificate governing the Series B Preferred Stock), the cash dividend rate shall instead be 13.5% per annum.

If not paid in cash, dividends will accrue on the stated value and will increase the stated value on and effective of the applicable dividend date without any further action by the Board at a rate of 18% per annum; provided that, during the period from the occurrence of a deleveraging event until the date that is two years from the occurrence of such deleveraging event, such dividend rate shall instead be 15% per annum. A deleveraging event means certain equity financings or issuances of stock where the proceeds of such equity financings are used exclusively to permanently reduce senior secured indebtedness by at least $50.0 million, or the Total Net Leverage Ratio (as defined in the Third A&R Credit Agreement as in effect on the date hereof) as of the last day of any fiscal quarter is less than or equal to 1.50:1.00.

The Company has accrued a cumulative of $1.0 million in paid-in-kind dividends to Holders of Series B Preferred Stock, which is recorded as interest expense in the Company's Statements of Operations for the quarter ended June 30, 2019. See Note 8. Fair Value of Financial Instruments for discussion regarding the Company's valuation of Preferred Series B Stock.

Stock Compensation
    
Under guidance of ASC Topic 718 “Compensation — Stock Compensation”, stock-based compensation expense is measured at the date of grant, based on the calculated fair value of the stock-based award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the award).

The fair value of the RSUs was based on the closing market price of our common stock on the date of the grant. Stock compensation expense for the RSUs is being amortized using the straight-line method over the service period. For the three months ended June 30, 2019 and 2018, we recognized $0.8 million and $0.0 million in compensation expense, respectively, and $1.8 million and $0.0 million for the six months ended June 30, 2019 and 2018, respectively.

Note 4. Accounts Receivable, Net

The following table provides details of accounts receivable, net of allowance as of the dates indicated (in thousands):

 
June 30, 2019
 
December 31, 2018
Contract receivables
$
167,734

 
$
161,408

Contract retainage
60,715

 
64,000

    Accounts receivable, gross
228,449

 
225,408

Less: allowance for doubtful accounts
(102
)
 
(42
)
    Accounts receivable, net
$
228,347

 
$
225,366


Included in costs in excess of billings as of June 30, 2019 are unapproved change orders of approximately $18.0 million for which the Company is pursuing settlement through dispute resolution.    

13




Activity in the allowance for doubtful accounts for the periods indicated is as follows (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Allowance for doubtful accounts at beginning of period
$
72

 
$
216

 
$
42

 
$
216

    Plus: provision for allowances
30

 

 
60

 

Allowance for doubtful accounts at period end
$
102

 
$
216

 
$
102

 
$
216


Note 5. Contracts in Progress

Contracts in progress were as follows as of the dates indicated (in thousands):

 
June 30, 2019
 
December 31, 2018
Costs on contracts in progress
$
1,155,577

 
$
935,820

Estimated earnings on contracts in progress
93,520

 
76,883

   Revenue on contracts in progress
1,249,097

 
1,012,703

Less: billings on contracts in progress
(1,253,831
)
 
(1,027,816
)
   Net underbillings
$
(4,734
)
 
$
(15,113
)

The above amounts have been included in the accompanying Consolidated Balance Sheets under the following captions (in thousands):

 
June 30, 2019
 
December 31, 2018
Costs and estimated earnings in excess of billings on uncompleted contracts
$
75,591

 
$
47,121

Billings in excess of costs and earnings on uncompleted contracts
(80,325
)
 
(62,234
)
   Net underbillings
$
(4,734
)
 
$
(15,113
)

Provision for loss of $0.3 million and $1.4 million as of June 30, 2019 and December 31, 2018, respectively, is included in billings in excess of costs and earnings on uncompleted contracts.

The Company recognizes a contract asset within costs and estimated earnings in excess of billings on uncompleted contracts in the consolidated balance sheet for revenue earned related to unapproved change orders that are probable of recovery. For the quarter ended June 30, 2019 and the year ended December 31, 2018, the Company had unapproved change orders of $33.2 million and $45.0 million, respectively.

14




Note 6. Property, Plant and Equipment, Net

Property, plant and equipment, net consisted of the following (in thousands):

 
June 30, 2019
 
December 31, 2018
Buildings and leasehold improvements
$
2,988

 
$
4,614

Land
17,600

 
19,394

Construction equipment
177,826

 
175,298

Office equipment, furniture and fixtures
2,787

 
2,994

Vehicles
4,434

 
4,991

 
205,635

 
207,291

Accumulated depreciation
(47,453
)
 
(31,113
)
    Property, plant and equipment, net
$
158,182

 
$
176,178


Depreciation expense of property, plant and equipment was $8,430 and $1,975 for the period ended June 30, 2019 and 2018, respectively, and was $16,906 and $3,917 for the six months ended June 30, 2019 and 2018, respectively.

Note 7. Goodwill and Intangible Assets, Net

The following table provides the changes in the carrying amount of goodwill for 2019 and 2018:

(in thousands)
Goodwill
January 1, 2018 (Renewables)
$
3,020

  Acquisitions (Specialty Civil)
37,237

December 31, 2018
$
40,257

  Acquisition adjustments (Specialty Civil)
(2,884
)
June 30, 2019
$
37,373


Intangible assets, net consisted of the following as of the dates indicated:

 
June 30, 2019
 
 
 
December 31, 2018
 
 
($ in thousands)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted Average Remaining Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted Average Remaining Life
Customer relationships
$
26,500

 
$
(2,802
)
 
$
23,698

 
6.25 years
 
$
27,000

 
$
(814
)
 
$
26,186

 
7 years
Trade name
13,400

 
(1,965
)
 
11,435

 
4.25 years
 
13,400

 
(575
)
 
12,825

 
5 years
Backlog
13,900

 
(5,053
)
 
8,847

 
1.25 years
 
13,400

 
(1,537
)
 
11,863

 
2 years
 
$
53,800

 
$
(9,820
)
 
$
43,980

 
 
 
$
53,800

 
$
(2,926
)
 
$
50,874

 
 

Amortization expense associated with intangible assets for the three months ended June 30, 2019 and 2018 totaled $3.4 million and $0.1 million, respectively, and $6.9 million and $0.1 million for the six months ended June 30, 2019 and 2018, respectively.

The following table provides the annual intangible amortization expense currently expected to be recognized for the years 2019 through 2023:


15



(in thousands)
Remainder of 2019
 
2020
 
2021
 
2022
 
2023
Amortization expense
$
6,708

 
$
11,837

 
$
6,466

 
$
6,466

 
$
5,841


Note 8. Fair Value of Financial Instruments

The Company applies ASC 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability, and are to be developed based on the best information available in the circumstances.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:

Level 1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.

The following table sets forth information regarding the Company's assets measured at fair value on a recurring basis (in thousands):    

 
 
Fair Value Measurements at Reporting Date
 
Amount recorded on balance sheet
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Liabilities as of December 31, 2018
 
 
 
 
   Contingent consideration
23,082



23,082

 
 
Fair Value Measurements at Reporting Date
 
Amount recorded on balance sheet
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Liabilities as of June 30, 2019
 
 
 
 
   Contingent consideration
4,247



4,247

   Series B Preferred Stock - Series A Conversion Warrants
4,200



4,200

   Series B Preferred Stock - Additional 6% Warrants
400



400


16




The following is a reconciliation of the beginning and ending balances for the periods indicated of recurring fair value measurements using Level 3 inputs (in thousands):

 
Contingent Consideration
Series B Preferred - Series A Conversion Warrants
Series B Preferred - Additional 6% Warrants
Beginning Balance, December 31, 2018
23,082

$

$

Preferred Series B Stock - Additional Warrants

4,200

400

Fair value adjustment
(18,835
)


Ending Balance, June 30, 2019
4,247

4,200

400


Contingent Consideration

Pursuant to the original merger agreement with M III Acquisition Corp., the Company shall issue up to an additional 9,000,000 shares of common stock, which shall be fully earned if the final 2019 adjusted EBITDA targets are achieved. As of June 30, 2019, the Company recorded an adjustment of $18.8 million to the liability primarily based on the significant decrease in the Company's stock price of approximately 80.0% (from $8.61 at December 31, 2018 to $2.04 at June 30, 2019). The quantity of shares that are expected to be earned based on the final 2019 adjusted EBITDA were not changed as of the June 30, 2019 adjustment.

The following table sets forth information regarding the Company's assets measured at fair value on a non-recurring basis (in thousands):    
 
 
Fair Value Measurements
 
Amount recorded on balance sheet
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Liabilities as of June 30, 2019
 
 
 
 
  Series B Preferred Stock
34,700



34,700

 
 
 
 
 
Equity as of June 30, 2019
 
 
 
 
  Series B Preferred Stock - Warrants at closing
10,700



10,700


On May 20, 2019, the Company entered into the Amended and Restated Equity Commitment Agreement (the “Equity Agreement”), by and among the Company and the commitment parties thereto. Pursuant to the Equity Agreement, the Company issued and sold 50,000 shares of newly designated Series B Preferred Stock, with each share having an initial stated value of $1,000 plus accumulated but unpaid dividends for gross cash proceeds of $50.0 million. The Equity Agreement also required the Company to provide warrants for common stock at closing that equaled 10% of the fully diluted issued and outstanding common stock as of such date (the “Warrants at closing”), and in the future could be required to provide additional warrants in the event of conversion of the Series A Preferred Stock (“Series A Conversion Warrants”) and warrants for up to 6% of the fully diluted issued and outstanding common stock if the Company fails to meet certain Adjusted EBITDA thresholds on a trailing twelve-month basis on the last calendar day of May 2020 through April 2021 (the “Additional 6% Warrants”).

The information below describes the balance sheet classification and the recurring/nonrecurring fair value measurement:

Series B Preferred Stock (non-recurring) - The Series B Preferred Stock was recorded at relative fair value as debt which was estimated using a discounted cashflow model based on certain significant unobservable inputs, such as accumulated dividend rates, and projected Adjusted EBITDA for the life of the Series B Preferred Stock. As of June 30, 2019, the fair value of the liability was $34.7 million and recorded on the balance sheet as debt.

Series B Preferred Stock - Warrants at closing (non-recurring) - The Warrants at closing, with an exercise price of $0.0001, represented (on an if-converted to common stock basis) 10% of the issued and outstanding common stock of the Company

17



based on the Company’s fully diluted share count on May 20, 2019 (including the number of shares of common stock that may be issued pursuant to all restricted stock awards, restricted stock units, stock options and any other securities or rights (directly or indirectly) convertible into, exchangeable for or to subscribe for common stock that are outstanding on May 20, 2019 (excluding any shares of common stock issuable (a) pursuant to the merger agreement for our business combination, (b) upon conversion of shares of Series A Preferred Stock, (c) upon the exercise of any warrant with an exercise price of $11.50 or higher or (d) upon the exercise of any equity issued pursuant to the Company’s long term incentive plan or other equity plan with a strike price of $11.50 or higher). The 2,545,934 if-converted shares of common stock at closing were valued at the closing stock price of $4.21 on May 20, 2019 and recorded in additional paid in capital.

Series B Preferred Stock - Series A Conversion Warrants (recurring) - The certificate of designation for the Series A Preferred Stock was amended in connection with the Company entering into the Equity Agreement. The conversion rights were amended to allow the Preferred Series A holder to redeem all or any portion of shares outstanding at any point in time after approval by the Company's common stockholders at a special meeting held on August 14, 2019. If converted, the holders of the Series B Preferred Stock would be entitled to additional warrants, with an exercise price of $0.0001. These warrants were fair valued using the closing stock price of $4.21 on May 20, 2019, at an estimated if-converted share count and recorded as a liability.

Series B Preferred - Additional 6% Warrants (recurring) - The Additional 6% Warrants are issuable if the Company fails to meet certain Adjusted EBITDA thresholds on a trailing twelve-month basis from May 31, 2020 through April 30, 2021. The Company recorded the Additional 6% Warrants at fair value, which was estimated using a Monte Carlo Simulation based on certain significant unobservable inputs, such as a risk rate premium, Adjusted EBITDA volatility, stock price volatility and projected Adjusted EBITDA for the Company for 2019. The Additional 6% Warrants were recorded as a liability.

Other financial instruments of the Company not listed in the table consist of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities that approximate their fair values. Additionally, management believes that the outstanding recorded balance on the line of credit and long-term debt, further discussed in Note 9. Debt, approximates fair value due to their floating interest rates.

Note 9. Debt

Debt consists of the following obligations as of:
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Term loan
285,000

 
300,000

Line of credit
12,900

 
46,500

Debt - Series B Preferred Stock (including PIK interest)
51,025

 

Commercial equipment notes
4,488

 
5,341

   Total principal due for long-term debt
353,413

 
351,841

Unamortized debt discount and issuance costs
(43,897
)
 
(23,534
)
Less: Current portion of long-term debt
(31,422
)
 
(32,580
)
   Long-term debt, less current portion
278,094

 
295,727

    
Third Amended and Restated Credit Agreement

On May 20, 2019, the Third Amended and Restated Credit and Guarantee Agreement (the “Third A&R Credit Agreement”) became effective.
Term loan borrowings mature on September 25, 2024 and are subject to quarterly amortization of principal, commencing on the last day of the first quarter of 2019, in an amount equal to 2.50% of the aggregate principal amount of such loans. Beginning with 2020, an additional annual payment is required equal to 75% of Excess Cash Flow (as defined in the A&R Credit Agreement) for the preceding fiscal year if such Excess Cash Flow is greater than $2.5 million, with the percentage of Excess Cash Flow subject to reduction based upon the Company’s consolidated leverage ratio. Borrowings under the revolving line of credit mature on September 25, 2023.


18



Borrowings under the term loan are required to be repaid on the last business day of each March, June, September and December, continuing with the first fiscal quarter following the effective date of the Third A&R Credit Agreement, in an amount equal to 2.5% of the initial balance of the Initial Term Loan and will not be able to be reborrowed.

Interest on the consenting lender term loan tranche accrues at a per annum rate of, at the Company's option, (x) LIBOR plus a margin of 8.25% or (y) an alternate base rate plus a margin of 7.25%; provided, however, that upon achieving a First Lien Net Leverage Ratio (as defined below) of no greater than 2.67:1.00, the margin shall permanently step down to (y) for LIBOR loans, 6.75% and (x) for alternative base rate loans, 5.75%. Interest on the non-consenting lender term loan tranche will stay at a per annum rate of, at the Company’s option, (x) LIBOR plus a margin of 6.25% or (y) an alternate base rate plus a margin of 5.25%. Interest on Initial Revolving Facility borrowings and Swing Line Loans accrues at a rate of, at the Company's option, (x) LIBOR plus a margin of 4.25% or (y) the applicable base rate plus a margin of 3.25%. The weighted average interest rate under the Third A&R Credit Agreement as of June 30, 2019 and December 31, 2018, was 10.6% and 8.82%, respectively.
Debt Covenants

The terms of the Third A&R Credit Agreement include customary affirmative and negative covenants and provide for customary events of default, which include, among others, nonpayment of principal or interest and failure to timely deliver financial statements. Under the Third A&R Credit Agreement, the financial covenant to which the Credit Parties are subject provides that the First Lien Net Leverage Ratio (as defined therein) may not exceed (i) prior to the fiscal quarter ending December 31, 2019, 4.75:1.0, (ii) from and prior to the fiscal quarter ending December 31, 2020, 3.50:1.0, (iii) from and prior to the fiscal quarter ending December 31, 2021, 2.75:1.0, and (iv) from and after March 31, 2022, 2.25:1.0. Under the Third A&R Credit Agreement, the Company is not be able to obtain an equity cure for any fiscal quarter ending in 2019, excluding the Series B Preferred Stock. Thereafter, the Company will have access to a customary equity cure.

The Third A&R Credit Agreement also includes certain limitations on the payment of cash dividends on the Company's common shares and provides for other restrictions on (subject to certain exceptions) liens, indebtedness (including guarantees and other contingent obligations), investments (including loans, advances and acquisitions), mergers and other fundamental changes and sales and other dispositions of property or assets, among others.

Letters of Credit and Surety Bonds

In the ordinary course of business, the Company is required to post letters of credit and surety bonds to customers in support of performance under certain contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit or surety bond commits the issuer to pay specified amounts to the holder of the letter of credit or surety bond under certain conditions. If the letter of credit or surety bond issuer were required to pay any amount to a holder, the Company would be required to reimburse the issuer, which, depending upon the circumstances, could result in a charge to earnings. As of June 30, 2019, and December 31, 2018, the Company was contingently liable under letters of credit issued under its revolving credit facility or its old credit facility, respectively, in the amount of $2.7 million and $3.0 million, respectively, related to projects. In addition, as of June 30, 2019 and December 31, 2018, the Company had outstanding surety bonds on projects of $1,698.4 million and $1,682.0 million, respectively.

As a result of our significant growth in backlog and our expectation of continued future growth, we will continue to take steps to improve our liquidity and future bonding capacity. For further discussion see Note 15. Subsequent Event.

Contractual Maturities

Contractual maturities of the Company's debt and capital lease (see Note 10. Commitments and Contingencies) obligations as of June 30, 2019 (in thousands):
Remainder of 2019
$
27,601

2020
55,528

2021
50,939

2022
46,774

2023
45,822

Thereafter
204,499

Total contractual obligations
$
431,163


Note 10. Commitments and Contingencies

Capital Leases

19



    
The Company has obligations, exclusive of associated interest, under various capital leases for equipment totaling $77.8 million and $63.5 million at June 30, 2019 and December 31, 2018, respectively. Gross property under this capitalized lease agreement at June 30, 2019 and December 31, 2018, totaled $118.6 million and $76.9 million, less accumulated depreciation of $23.5 million and $10.1 million, respectively, for net balances of $95.1 million and $66.8 million, respectively. Depreciation of assets held under the capital leases is included in cost of revenue on the Consolidated Statements of Operations.

Operating Leases
    
In the ordinary course of business, the Company enters into non-cancelable operating leases for certain of its facility, vehicle and equipment needs, including related party leases. See Note 14. Related Party Transactions. Rent and related expense for operating leases that have non-cancelable terms totaled approximately $1.5 million and $0.5 million for the three months ended June 30, 2019 and 2018, respectively and $5.2 million and $1.0 million for the six months ended June 30, 2019 and 2018, respectively.

The Company has long-term power-by-the-hour equipment rental agreements with a construction equipment manufacturer that have a guaranteed minimum monthly hour requirement. The minimum guaranteed amount based on the Company's current operations is $3.2 million per year. Total expense under these agreements was $2.3 million for the six months ended June 30, 2019.

Sale-leaseback Transaction

On March 13, 2019, the Company completed a sale-leaseback transaction related to certain assets that were acquired as part of our recent acquisitions of $25.0 million. The payments related to this transaction are over a four year term and have been included as part of the Contractual Maturities table, See Note 9. Debt.

Note 11. Concentrations

The Company had the following approximate revenue and accounts receivable concentrations, net of allowances, for the periods ended:
 
Revenue %
 
 
 
 
Accounts Receivable %
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
June 30, 2019
December 31, 2018
 
2019
2018
 
2019
2018
 
 
 
 
 
 
 
 
 
 
Company A
*

20.7
%
 
*

20.9
%
 
*

20.0
%
Company B
*

12.5
%
 
*

10.7
%
 
*

*

Company C
10.6
%
*

 
14.4
%
*

 
11.2
%
19.0
%
Company D
*

10.7
%
 
*

*

 
*

*

Company E
*

*

 
*

11.9
%
 
*

*

Company F
*

13.2
%
 
*

12.1
%
 
*

*

* Amount was not above 10% threshold

20





Note 12. Income Taxes

The Company’s statutory federal tax rate is 21.00% for the periods ended June 30, 2019 and 2018, respectively. State tax rates for the same period vary among states and range from approximately 0.8% to 12.0%. A small number of states do not impose an income tax.

The effective tax rates for the three month period ended June 30, 2019 and 2018 were 49.6% and 19.3%, respectively. The effective tax rates for the six months period ended June 30, 2019 and 2018 were 13.1% and 15.8%, respectively. The difference between the Company’s effective tax rate and the federal statutory rate primarily results from interest accrued for the the Series B Preferred Stock which is not deductible for federal and state income taxes. There were no changes in uncertain tax positions during the periods ended June 30, 2019 and 2018.

21




Note 13. Segments

The Company operated as one reportable segment for 2018 and evaluated the business as a renewable construction company. In late 2018, the Company completed two significant acquisitions that construct projects outside of the renewable market. As of June 30, 2019, we operate our business as two reportable segments: the Renewables segment and the Specialty Civil segment. The 2018 segment presentation has been recast to be consistent to the 2019 segmentation.

Each of our reportable segments is comprised of similar business units that specialize in services unique to the market that segment serves. The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses, were made based on segment revenue.

Separate measures of the Company’s assets and cash flows by reportable segment, including capital expenditures, are not produced or utilized by management to evaluate segment performance. A substantial portion of the Company’s fixed assets are owned by and accounted for in our equipment department, including operating machinery, equipment and vehicles, as well as office equipment, buildings and leasehold improvements, and are used on an interchangeable basis across our reportable segments. As such, for reporting purposes, total under/over absorption of equipment costs consisting primarily of depreciation is allocated to the Company's two reportable segments based on segment revenue.

The following is a brief description of the Company's reportable segments:

The Renewables segment operates throughout the United States and specializes in a range of services that include full EPC project delivery, design, site development, construction, installation and restoration of infrastructure services for the wind and solar industries.

The Specialty Civil segment operates throughout the United States and specializes in a range of services that include:

Heavy civil construction services such as high-altitude road and bridge construction, specialty paving, industrial maintenance and other local, state and government projects.

Environmental remediation services such as site development, environmental site closure and outsourced contract mining and coal ash management services.
  
Rail Infrastructure services such as planning, creation and maintenance of infrastructure projects for major railway and intermodal facilities construction.

Segment Revenue

Revenue by segment was as follows:
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Segment
Revenue
% of Total Revenue
 
Revenue
% of Total Revenue
 
Revenue
% of Total Revenue
 
Revenue
% of Total Revenue
Renewables
$
179,149

54.6
%
 
$
168,919

97.0
%
 
$
254,209

49.0
%
 
$
217,885

97.2
%
Specialty Civil
148,812

45.4
%
 
5,154

3.0
%
 
264,562

51.0
%
 
6,323

2.8
%
  Total revenue
$
327,961

100.0
%
 
$
174,073

100.0
%
 
$
518,771

100.0
%
 
$
224,208

100.0
%

Segment Gross Profit

Gross profit by segment was as follows:

22



 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Segment
Gross Profit
Gross Profit Margin
 
Gross Profit
Gross Profit Margin
 
Gross Profit
Gross Profit Margin
 
Gross Profit
Gross Profit Margin
Renewables
$
16,150

9.0
%
 
$
16,127

9.5
%
 
$
18,337

7.2
%
 
$
12,757

5.9
%
Specialty Civil
15,272

10.3
%
 
672

13.0
%
 
19,858

7.5
%
 
957

15.1
%
  Total gross profit
$
31,422

9.6
%
 
$
16,799

9.7
%
 
$
38,195

7.4
%
 
$
13,714

6.1
%

Note 14. Related Party Transactions

Clinton Lease Agreement

On October 20, 2017, the Company enacted a plan to restructure the ownership of a building and land which resulted in the transfer of ownership of such building and land from its consolidated subsidiary, WCI, to Clinton RE Holdings, LLC (Cayman) (“Cayman Holdings”), a directly owned subsidiary of the Infrastructure and Energy Alternatives, LLC. The lease has been classified as an operating lease with monthly payments through 2038. The Company's rent expense related to the lease during the three months ended June 30, 2019 and 2018, was $178 and $153, respectively, and for the six months ended June 30, 2019 and 2018, was $356 and $306, respectively.

Related Party Shareholders

Type of Equity
Holder
Ownership Percentage
Series A Preferred
Infrastructure and Energy Alternatives, LLC
100
%
Series B Preferred Stock, Series A Conversion Warrants, Additional 6% Warrants, Warrants at closing
Ares
60
%
Oaktree Power Opportunities Fund III Delaware, L.P.
40
%
Contingent Consideration
Infrastructure and Energy Alternatives, LLC
100
%


Note 15. Subsequent Event

Equity Commitment Agreement

On August 13, 2019, the Company entered into the Second Equity Commitment Agreement (the “Second Equity Commitment Agreement”) among the Company, funds managed by the Private Equity Group of Ares Management Corporation (NYSE:ARES) (“Ares”), a leading global alternative asset manager, and funds managed by Oaktree Capital Management (solely for the limited purposes set forth therein) (“Oaktree”). Pursuant to the Second Equity Commitment Agreement, the Company agreed to issue and sell 50,000 shares of Series B Preferred Stock (with amended terms, as compared to the terms of the existing Series B Preferred Stock) and 900,000 warrants to purchase common stock (“Warrants”) to Ares for an aggregate purchase price of $50.0 million (the “Tranche One Transaction”). Consummation of the Tranche One Transaction is subject to a number of conditions; however, funding is expected to occur within 12 business days. In addition, Ares will have the right to designate an additional member of the Company’s Board following September 13, 2019, subject to the consummation of the Tranche One Transaction and certain other conditions.

Non-Binding Indicative Term Sheet

On August 13, 2019, the Company entered into a non-binding indicative term sheet with Ares (the “Term Sheet”) providing for, among other things:

the sale to Ares and a third party not yet identified of an additional 110,000 shares of Series B Preferred Stock and 4,600,000 Warrants for an aggregate purchase price of $110.0 million, 60% of which will be purchased by Ares and 40% of which will be purchased by a third party not yet identified;
either the purchase by Ares of all issued and outstanding Series A Preferred Stock at a 10% discount to its liquidation preference and subsequent conversion of the acquired shares to Series B Preferred Stock (without giving effect to the discount), or the purchase by Ares of additional shares of Series B Preferred Stock and redemption by the Company of the issued and outstanding Series A Preferred Stock at a 10% discount to its liquidation preference using the proceeds thereof, each with an additional 1,250,000 Warrants issued to Ares (together with the sale of the additional 110,000 shares of Series B Preferred Stock, the “Tranche Two Transaction”); and
subject to the conditions described below, the entry into a merger agreement (with 60% of the consideration provided by Ares and 40% from a third party not yet identified) pursuant to which all holders of common stock (excluding Oaktree and certain insiders) would receive cash in the amount of $5.12 per share (as further described below) and Oaktree and certain insiders would receive shares in the surviving entity (the “Merger”). The broad terms of the Term Sheet and the consummation of any merger transaction are subject to further due diligence, the negotiation of definitive agreements and obtaining required approvals by all parties, including but not limited to a majority vote of the Company's unaffiliated stockholders.


The Term Sheet provides that the Tranche Two Transaction, if consummated, would include a right to participate by the Company’s common stockholders (subject, to a maximum participation of 15% of the 110,000 shares of Series B Preferred Stock being issued, and if the Merger is consummated an individual investment minimum of $50,000, an aggregate minimum of $3.0 million, a limit on the number of holders and other terms to be agreed between the Company, with approval of the special committee, and Ares).

The Warrants to be issued under Tranche One Transaction and Tranche Two Transaction will have anti-dilution provisions.

The Tranche One Transaction and the Term Sheet were reviewed and approved by a special committee of the Company’s Board of Directors consisting solely of directors who are not affiliated with the parties in the proposed transactions and recommended by the special committee for approval by the Company's Board of Directors. The Company’s Board of Directors approved the Tranche One Transaction and the Term Sheet following receipt of the recommendation of the special committee.

The Tranche Two Transaction and the Merger are proposals that remain subject to, among other things, (i) a due diligence review by Ares of the Company satisfactory to Ares in its sole subjective discretion, (ii) receipt of final internal approvals by Ares, (iii) negotiation of definitive documentation, (iv) required shareholder and regulatory approvals, including the approval of the NASDAQ, (v) approval of the special committee of the Company’s Board of Directors and (vi) participation by a not yet identified third party purchaser for 40% of the Tranche One Transaction, Tranche Two Transaction and the Merger. The Term Sheet is non-binding, and there can be no assurance that the Company will enter into a binding agreement or consummate the Tranche Two Transaction or the Merger. Because of the non-binding nature of the Term Sheet, Ares has no obligation to complete the Tranche Two Transaction or the Merger.



23




MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements can be identified by the use of forward-looking terminology including “may,” “should,” “likely,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “forecast,” “seek,” “target,” “continue,” “plan,” “intend,” “project,” or other similar words. All statements, other than statements of historical fact included in this Quarterly Report, regarding expectations for future financial performance, business strategies, expectations for our business, future operations, liquidity positions, availability of capital resources, financial position, estimated revenues and losses, projected costs, prospects, plans, objectives and beliefs of management are forward-looking statements.

These forward-looking statements are based on information available as of the date of this Quarterly Report and our management’s current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove correct. Forward-looking statements should not be relied upon as representing our views as of any subsequent date. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

our ability to consummate the Tranche One Transaction;
our ability to enter into definitive agreements for the Tranche Two Transaction and/or Merger, and to consummate the Tranche Two Transaction and/or Merger;
availability of commercially reasonable and accessible sources of liquidity and bonding;
our ability to generate cash flow and liquidity to fund operations;
the timing and extent of fluctuations in geographic, weather and operational factors affecting our customers, projects and the industries in which we operate;
our ability to identify acquisition candidates, integrate acquired businesses and realize upon the expected benefits of the acquisition of CCS and William Charles;
consumer demand;
our ability to grow and manage growth profitably;
the possibility that we may be adversely affected by economic, business, and/or competitive factors;
market conditions, technological developments, regulatory changes or other governmental policy uncertainty that affects us or our customers;
our ability to manage projects effectively and in accordance with management estimates, as well as the ability to accurately estimate the costs associated with our fixed price and other contracts, including any material changes in estimates for completion of projects;
the effect on demand for our services and changes in the amount of capital expenditures by customers due to, among other things, economic conditions, commodity price fluctuations, the availability and cost of financing, and customer consolidation;
the ability of customers to terminate or reduce the amount of work, or in some cases, the prices paid for services, on short or no notice;
customer disputes related to the performance of services;
disputes with, or failures of, subcontractors to deliver agreed-upon supplies or services in a timely fashion;
our ability to replace non-recurring projects with new projects;
the impact of U.S. federal, local, state, foreign or tax legislation and other regulations affecting the renewable energy industry and related projects and expenditures;
the effect of state and federal regulatory initiatives, including costs of compliance with existing and future safety and environmental requirements;
fluctuations in maintenance, materials, labor and other costs;
our beliefs regarding the state of the renewable wind energy market generally; and
the “Risk Factors” described in our Annual Report on Form 10-K for the year ended December 31, 2018, and in our quarterly reports, other public filings and press releases.


24



We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Throughout this section, unless otherwise noted “IEA,” “Company,” “we,” “us,” and “our” refer to Infrastructure and Energy Alternatives, Inc. and its consolidated subsidiaries. Certain amounts in this section may not foot due to rounding.

“Emerging Growth Company” Status

The Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the financial position, results of operations, and cash flows of IEA. IEA qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as a company is deemed to be an “emerging growth company,” it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. The JOBS Act also provides that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. Our financial statements may therefore not be comparable to those of companies that have adopted such new or revised accounting
standards. See Note 2. Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements for more information on “emerging growth company” reduced reporting requirements and when we would cease to be an “emerging growth company.” We continue to monitor our status as an “emerging growth company” and are currently preparing, and expect to be ready, to comply with the additional reporting and regulatory requirements that will be applicable to us when we cease to qualify as an “emerging growth company.”

Overview

We are a leading diversified infrastructure construction company with specialized energy and heavy civil expertise throughout the United States. The Company specializes in providing complete engineering, procurement and construction services throughout the United States for the renewable energy, traditional power and civil infrastructure industries. These services include the design, site development, construction, installation and restoration of infrastructure. We are one of three Tier 1 providers in the wind energy industry and have completed more than 200 wind and solar projects in 35 states. Although the Company has historically focused on the wind industry, its recent acquisitions have expanded our construction capabilities and geographic footprint to create a diverse national platform of specialty construction capabilities in the areas of environmental remediation, industrial maintenance, specialty paving, heavy civil and rail infrastructure construction. We believe we have the ability to continue to expand these services because we are well-positioned to leverage our expertise and relationships in the wind energy business to provide complete infrastructure solutions in all areas.

As previously disclosed, the Company’s recent results reflect the effect of multiple severe weather events on the Company’s wind business that began late in the third quarter and continued into the fourth quarter of 2018. These weather conditions had a significant impact on the construction of six wind projects across South Texas, Iowa, and Michigan, resulting in additional labor, equipment and material costs. Although these projects are all now in late stages of completion or completed, and we are collecting and continuing to collect on change orders relating to force majeure provisions of the contracts with respect to certain of these projects, we are continuing to feel the impacts of these events on our business, including with respect to our financial and liquidity positions and operating cash flows. In connection with the adverse weather effects, the Company took steps in May 2019 that it believes enhanced its liquidity. See “Recent Developments-May 2019.”

As described below in “Recent Developments-August 2019,” we entered into the Second Equity Commitment Agreement (as defined below) for the issuance of Series B Preferred Stock and warrants to purchase common stock, and entered into a Term Sheet for additional issuances of Series B Preferred Stock and warrants, the redemption or exchange of our Series A Preferred Stock and the Merger (as defined below). We believe these steps will continue to strengthen our balance sheet and obtain the financial flexibility we need to execute our future business plan, supporting our recent growth and a larger, more diversified platform. There can be no assurance that the Company will complete these steps or that they will provide the intended benefits. Please see “Part II, Item 1A. Risk Factors” and “Part II, Item 5. Other Information.” The Second Equity Commitment Agreement, and the issuance of the amended Series B Preferred Stock and warrants and Term Sheet was approved by a special committee of the Board of Directors consisting entirely of disinterested directors and, upon recommendation of such special committee, by the full Board of Directors.


25





Recent Developments

August 2019

Equity Commitment Agreement

On August 13, 2019, the Company entered into the Second Equity Commitment Agreement (the “Second Equity Commitment Agreement”) among the Company, funds managed by the Private Equity Group of Ares Management Corporation (NYSE:ARES) (“Ares”), a leading global alternative asset manager, and funds managed by Oaktree Capital Management (solely for the limited purposes set forth therein) (“Oaktree”). Pursuant to the Second Equity Commitment Agreement, the Company agreed to issue and sell 50,000 shares of Series B Preferred Stock (with amended terms, as compared to the terms of the existing Series B Preferred Stock) and 900,000 warrants to purchase common stock (“Warrants”) to Ares for an aggregate purchase price of $50.0 million (the “Tranche One Transaction”). Consummation of the Tranche One Transaction is subject to a number of conditions; however, funding is expected to occur within 12 business days. In addition, Ares will have the right to designate an additional member of the Company’s Board following September 13, 2019, subject to the consummation of the Tranche One Transaction and certain other conditions.
 
Non-Binding Indicative Term Sheet

On August 13, 2019, the Company entered into a non-binding indicative term sheet with Ares (the “Term Sheet”) providing for, among other things:

the sale to Ares and a third party not yet identified of an additional 110,000 shares of Series B Preferred Stock and 4,600,000 Warrants for an aggregate purchase price of $110.0 million, 60% of which will be purchased by Ares and 40% of which will be purchased by a third party not yet identified;
either the purchase by Ares of all issued and outstanding Series A Preferred Stock at a 10% discount to its liquidation preference and subsequent conversion of the acquired shares to Series B Preferred Stock (without giving effect to the discount), or the purchase by Ares of additional shares of Series B Preferred Stock and redemption by the Company of the issued and outstanding Series A Preferred Stock at a 10% discount to its liquidation preference using the proceeds thereof, each with an additional 1,250,000 Warrants issued to Ares(together with the sale of the additional 110,000 shares of Series B Preferred Stock, the “Tranche Two Transaction”); and
subject to the conditions described below, the entry into a merger agreement (with 60% of the consideration provided by Ares and 40% from a third party not yet identified) pursuant to which all holders of common stock (excluding Oaktree and certain insiders) would receive cash in the amount of $5.12 per share (as further described below) and Oaktree and certain insiders would receive shares in the surviving entity (the “Merger”). The broad terms of the Term Sheet and the consummation of any merger transaction are subject to further due diligence, the negotiation of definitive agreements and obtaining required approvals by all parties, including but not limited to a majority vote of the Company's unaffiliated stockholders.

The Term Sheet provides that the Tranche Two Transaction, if consummated, would include a right to participate by the Company’s common stockholders (subject, to a maximum participation of 15% of the 110,000 shares of Series B Preferred Stock being issued, and if the Merger is consummated an individual investment minimum of $50,000, an aggregate minimum of $3.0 million, a limit on the number of holders and other terms to be agreed between the Company, with approval of the special committee, and Ares).

The Tranche One Transaction and the Term Sheet were reviewed and approved by a special committee of the Company’s Board of Directors consisting solely of directors who are not affiliated with the parties in the proposed transactions and recommended by the special committee for approval by the Company's Board of Directors. The Company’s Board of Directors approved the Tranche One Transaction and the Term Sheet following receipt of the recommendation of the special committee.

The Tranche Two Transaction and the Merger are proposals that remain subject to, among other things, (i) a due diligence review by Ares of the Company satisfactory to Ares in its sole subjective discretion, (ii) receipt of final internal approvals by Ares, (iii) negotiation of definitive documentation, (iv) required shareholder and regulatory approvals, including the approval of the NASDAQ, (v) approval of the special committee of the Company’s Board of Directors and (vi) participation by a not yet identified third party purchaser for 40% of the Tranche One Transaction, Tranche Two Transaction and the Merger. The Term Sheet is non-

26



binding, and there can be no assurance that the Company will enter into a binding agreement or consummate the Tranche Two Transaction or the Merger. Because of the non-binding nature of the Term Sheet, Ares has no obligation to complete the Tranche Two Transaction or the Merger.

The Term Sheet is non-binding and there can be no assurance that the Company will enter into a binding agreement or consummate the Tranche Two Transactions or the Merger. Please see “Part II, Item 1A. Risk Factors” and “Part II., Item 5. Other Information” for additional important information about the Term Sheet, Tranche Two Transaction and Merger.

May 2019
    
Amended and Restated Equity Commitment Agreement

On May 20, 2019, the Company entered into the Amended and Restated Equity Commitment Agreement (the “Equity Agreement”), by and among the Company and the commitment parties thereto. The Equity Agreement amended and restated the Equity Commitment Agreement, dated May 14, 2019, in its entirety. Pursuant to the Equity Agreement, the Company issued and sold 50,000 shares of newly designated Series B Preferred Stock and Warrants exercisable into an aggregate of 2,545,934 shares of common stock at closing for gross cash proceeds of $50.0 million.

Third Amended and Restated Credit Agreement

On May 20, 2019, the Third Amended and Restated Credit Agreement (the “Third A&R Credit Agreement”) became effective. Please see “-Liquidity and Capital Resources--Third A&R Credit Documents.”

Series A Preferred Stock

On May 20, 2019, we adopted an Amended and Restated Certificate of Designations of Series A Preferred Stock which, among other things, permits us to accrue dividends and increase the stated value on the Series A Preferred Stock in lieu of paying cash dividends. Please see “-Liquidity and Capital Resources-Series A Preferred Stock.”
Company Highlights

Our long-term diversification and growth strategy has been to broaden our solar, power generation, and civil infrastructure capabilities and geographic presence and to expand the services we provide within our existing business areas. We took important steps in late 2018 by deepening our capabilities and entering new sectors that are synergistic with our existing capabilities and product offerings.
 
On September 25, 2018, we acquired CCS, a leading provider of environmental and industrial engineering services. The wholly-owned subsidiaries of CCS, Saiia and the ACC Companies, generally enter into long-term contracts with both government and non-government customers to provide EPC services for environmental, heavy-civil and mining projects. We believe our acquisition of Saiia and the ACC Companies will provide IEA with a strong and established presence in the environmental and industrial engineering markets, enhanced civil construction capabilities and an expanded domestic footprint in less-seasonal Southeast, West and Southwest markets.

On November 2, 2018, we acquired William Charles, a leader in engineering and construction solutions for the rail infrastructure and heavy civil construction industries. We believe our acquisition of William Charles will provide IEA with a market leading position in the attractive rail civil infrastructure market and continue to bolster our further growth in the heavy civil and construction footprint across the Midwest and Southwest.

    We believe that through the acquisitions above that the Company has transformed its business into a diverse national platform of specialty construction capabilities with market leadership in niche markets, including renewables, environmental remediation and industrial maintenance services, heavy civil and rail.

Economic, Industry and Market Factors

We closely monitor the effects that changes in economic and market conditions may have on our customers. General economic and market conditions can negatively affect demand for our customers’ products and services, which can lead to reductions in our customers’ capital and maintenance budgets in certain end-markets. In the face of increased pricing pressure, we strive to maintain our profit margins through productivity improvements and cost reduction programs. Other market, regulatory and industry factors could also affect demand for our services, such as:

27




changes to our customers’ capital spending plans;

mergers and acquisitions among the customers we serve;

access to capital for customers in the industries we serve

changes in tax and other incentives;

new or changing regulatory requirements or other governmental policy uncertainty;

economic, market or political developments; and

changes in technology.

We cannot predict the effect that changes in such factors may have on our future results of operations, liquidity and cash flows, and we may be unable to fully mitigate, or benefit from, such changes.

Impact of Seasonality and Cyclical Nature of Business

Our revenue and results of operations are subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, fiscal year-ends, project schedules and timing, in particular, for large non-recurring projects and holidays. Typically, our revenue is lowest in the first quarter of the year because cold, snowy or wet conditions experienced in the northern climates are not conducive to efficient or safe construction practices. Revenue in the second quarter is typically higher than in the first quarter, as some projects begin, but continued cold and wet weather and effects from thawing ground conditions can often impact second quarter productivity. The third and fourth quarters are typically our most productive quarters of the year, as a greater number of projects are underway, and weather is normally more accommodating to construction projects. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive impact on our revenue. Nevertheless, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects. Any quarter may be positively or negatively affected by adverse or unusual weather patterns, including from excessive rainfall, warm winter weather or natural catastrophes such as hurricanes or other severe weather, making it difficult to predict quarterly revenue and margin variations.

Our industry is also highly cyclical. Fluctuations in end-user demand within the industries we serve, or in the supply of services within those industries, can impact demand for our services. As a result, our business may be adversely affected by industry declines or timing of new projects. Variations in project schedules or unanticipated changes in project schedules, in particular, in connection with large construction and installation projects, can create fluctuations in revenue, which may adversely affect us in a given period. In addition, revenue from master service agreements, while generally predictable, can be subject to volatility. The financial condition of our customers and their access to capital, variations in project margins, regional, national and global economic, political and market conditions, regulatory or environmental influences, and acquisitions, dispositions or strategic investments can also materially affect quarterly results. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.

Understanding our Operating Results

Revenue

We provide engineering, building, installation, maintenance and upgrade services to our customers. We derive revenue from projects performed under fixed price contracts and other service agreements for specific projects or jobs requiring the construction and installation of an entire infrastructure system or specified units within an entire infrastructure system. We recognize a significant portion of our revenue based on the percentage-of-completion method. See Revenue Recognition for Percentage-of-Completion Projects within Critical Accounting Policies and Estimates below.

Cost of Revenue

Cost of revenue consists principally of salaries, wages and employee benefits; subcontracted services; equipment rentals and repairs; fuel and other equipment expenses, including allocated depreciation and amortization expense; material costs, parts and supplies; insurance; and facilities expenses. Project profit is calculated by subtracting a project’s cost of

28



estimated revenue, including project-related depreciation, from project revenue. Project profitability and corresponding project margins will be reduced if actual costs to complete a project exceed our estimates on fixed price and installation/construction service agreements. Estimated losses on contracts are recognized immediately when estimated costs to complete a project exceed the remaining revenue to be received over the remainder of the contract. Various factors can impact our margins on a quarterly or annual basis, including:
Seasonality and Geographical Factors. Seasonal patterns can have a significant impact on project margins. Generally, business is slower at the beginning of the year. Adverse or favorable weather conditions can impact project margins in a given period. For example, extended periods of rain or snowfall can negatively impact revenue and project margins as a result of reduced productivity from projects being delayed or temporarily halted. Conversely, in periods when weather remains dry and temperatures are accommodating, more work can be done, sometimes with less cost, which can favorably impact project margins. In addition, the mix of business conducted in different geographic areas can affect project margins due to the particular characteristics associated with the physical locations where the work is being performed, such as mountainous or rocky terrain versus open terrain. Site conditions, including unforeseen underground conditions, can also impact project margins.
Revenue Mix. The mix of revenues derived from the industries we serve and the types of services we provide within an industry will impact margins, as certain industries and services provide higher margin opportunities. Additionally, changes in our customers’ spending patterns in any of the industries we serve can cause an imbalance in supply and demand and, therefore, affect margins and mix of revenues by industry served.
Performance Risk. Overall project margins may fluctuate due to work volume, project pricing and job productivity. Job productivity can be impacted by quality of the work crew and equipment, availability of skilled labor, environmental or regulatory factors, customer decisions and crew productivity. Crew productivity can be influenced by weather conditions and job terrain, such as whether project work is in a right of way that is open or one that is obstructed (either by physical obstructions or legal encumbrances).
Subcontracted Resources. Our use of subcontracted resources in a given period is dependent upon activity levels and the amount and location of existing in-house resources and capacity. Project margins on subcontracted work can vary from project margins on self-perform work. As a result, changes in the mix of subcontracted resources versus self-perform work can impact our overall project margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist principally of compensation and benefit expenses, travel expenses and related expenses for our finance, benefits, risk management, legal, facilities, information services and executive personnel. Selling, general and administrative expenses also include outside professional and accounting fees, expenses associated with information technology used in administration of the business, various types of insurance, acquisition and transaction expenses.

Interest Expense, Net

Interest expense, net consists of contractual interest expense on outstanding debt obligations, capital leases, amortization of deferred financing costs and other interest expense, including interest expense related to financing arrangements, with all such expenses net of interest income.

Critical Accounting Policies and Estimates

This management’s discussion and analysis of our financial condition and results of operations is based upon IEA’s consolidated financial statements included in Item 1 of this Quarterly Report, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the use of estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Given that management estimates, by their nature, involve judgments regarding future uncertainties, actual results may differ from these estimates if conditions change or if certain key assumptions used in making these estimates ultimately prove to be inaccurate. For discussion of all of our significant accounting policies, see Note 1. Business, Basis of Presentation and Significant Accounting Policies to our condensed consolidated financial statements.


29



We believe that the accounting policies described below are the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management.




Revenue Recognition for Percentage-of-Completion Projects

Revenue from fixed-price contracts provides for a fixed amount of revenue for the entire project, subject to certain additions for changed scope or specifications. We recognize revenue from these contracts using the percentage-of-completion method. Under this method, the percentage of revenue to be recognized for a given project is measured by the percentage of costs incurred to date on the contract to the total estimated costs for the contract.

The estimation process for revenue recognized under the percentage-of-completion method is based on the professional knowledge and experience of our project managers, engineers and financial professionals. Our management reviews the estimates of contract revenue and costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected settlements of disputes related to contract price adjustments are factors that influence estimates of total contract value and total costs to complete those contracts and, therefore, our profit recognition. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined, which could materially affect our results of operations in the period in which such changes are recognized. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated. The substantial majority of fixed price contracts are completed within one year.

For an approved change order which can be reliably estimated as to price, the anticipated revenues and costs associated with the change order are added to the total contract value and total estimated costs of the project, respectively. When costs are incurred for a) an unapproved change order which is probable to be approved or b) an approved change order which cannot be reliably estimated as to price, the total anticipated costs of the change order are added to both the total contract value and total estimated costs for the project. Once a change order becomes approved and reliably estimable, any margin related to the change order is added to the total contract value of the project.

Business Combinations

We account for our business combinations by recognizing and measuring in the financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interests (if applicable) in the acquiree at the acquisition date. The purchase is accounted for using the acquisition method, and the fair value of purchase consideration is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess, if any, of the fair value of the purchase consideration over the fair value of the identifiable net assets is recorded as goodwill. Conversely, the excess, if any, of the net fair values of the identifiable net assets over the fair value of the purchase consideration is recorded as a gain. The fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques and these valuations require management to make significant estimates and assumptions. These estimates and assumptions are inherently uncertain and, as a result, actual results may materially differ from estimates. Significant estimates include, but are not limited to, future expected cash flows, useful lives and discount rates.

Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition, or adjust the fair values, of acquisition-related assets and liabilities and/or consideration paid, and are referred to as “measurement period” adjustments. For the period ended June 30, 2019, there were no measurement period adjustments and the Company has finalized the initial fair value measurements for CCS acquisition, see further discussion in Note 2. Merger and Acquisition included in Item 1 of this Quarterly Report on Form 10-Q.

30




Results of Operations

Three Months Ended June 30, 2019 and 2018

The following table reflects our consolidated results of operations in dollar and percentage of revenue terms for the periods indicated:

 
 
Three Months Ended June 30,
(in thousands)
 
2019
 
2018
 
 
 
 
 
 
 
Revenue
 
$
327,961

100.0
 %
 
$
174,073

100.0
 %
Cost of revenue
 
296,539

90.4
 %
 
157,274

90.3
 %
Gross profit
 
31,422

9.6
 %
 
16,799

9.7
 %
Selling, general and administrative expenses
 
25,878

7.9
 %
 
9,198

5.3
 %
Income from operations
 
5,544

1.7
 %
 
7,601

4.4
 %
Interest expense, net
 
(11,496
)
(3.5
)%
 
(1,530
)
(0.9
)%
Other income
 
18,272

5.6
 %
 
22

 %
Income from continuing operations before income taxes
 
12,320

3.8
 %
 
6,093

3.5
 %
Provision for income taxes
 
(6,112
)
(1.9
)%
 
(1,178
)
(0.7
)%
Net income
 
$
6,208

1.9
 %
 
$
4,915

2.8
 %

The following discussion and analysis of our results of operations should be read in conjunction with our condensed consolidated financial statements and the notes relating thereto, included in this report.

Revenue. Revenue increased 88.4%, or $153.9 million, in the second quarter of 2019, compared to the same period in 2018. The increase in revenue was primarily due to revenue of $134.8 million from our acquired businesses, coupled with approximately $10.2 million of growth in our Renewable operations.

Cost of revenue. Cost of revenue increased 88.5%, or $139.3 million, in the second quarter of 2019, compared to the same period in 2018, primarily due to the cost of revenue of $121.1 million from our acquired businesses, and to a lesser extent, increased cost related to increased business.

Gross profit. Gross profit increased 87.0%, or $14.6 million, in the second quarter of 2019, compared to the same period in 2018. As a percentage of revenue, gross profit remained relatively consistent period over period and totaled 9.6% in the quarter, as compared to 9.7% in the prior-year period. The Company's gross profit margin was still negatively impacted due to the continuing effort to complete the six projects affected by force majeure weather in the fourth quarter of 2018. These six projects caused a 0.4% reduction to gross margin in 2019.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 181.3%, or $16.7 million, in the second quarter of 2019, compared to the same period in 2018. Selling, general and administrative expenses were 7.9% of revenue in the second quarter of 2019, compared to 5.3% in the same period in 2018. The increase in selling, general and administrative expenses was primarily driven by $9.2 million related to our acquired businesses coupled with increased labor of $3.7 million and integration costs of $2.0 million for our expanded operations.

Interest expense, net. Interest expense, net increased by $10.0 million, in the second quarter of 2019, compared to the same period in 2018. This increase was primarily driven by the increased borrowings under our lines of credit and term loan in the third and fourth quarter of 2018, coupled with the interest on the Series B Preferred Stock.

Other income (expense). Other income increased by $18.3 million, in the second quarter of 2019, compared to the same period in 2018. The increase was primarily the result of the contingent liability fair value adjustment.

Provision for income taxes. Income tax provision increased 418.8%, or $4.9 million, to an expense of $6.1 million in the second quarter of 2019, compared to $1.2 million for the same period in 2018. The effective tax rates for the period ended June 30, 2019 and 2018 were 49.6% and 19.3%, respectively. The higher effective tax rate in the second quarter of 2019 is primarily

31



attributable to interest accrued for the Series B Preferred Stock which is not deductible for federal and state income taxes. There were no changes in uncertain tax positions during the periods ended June 30, 2019 and 2018.

Six Months Ended June 30, 2019 and 2018

The following table reflects our consolidated results of operations in dollar and percentage of revenue terms for the periods indicated:

 
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
 
 
 
 
 
 
 
Revenue
 
$
518,771

100.0
 %
 
$
224,208

100.0
 %
Cost of revenue
 
480,576

92.6
 %
 
210,494

93.9
 %
Gross profit
 
38,195

7.4
 %
 
13,714

6.1
 %
Selling, general and administrative expenses
 
53,632

10.3
 %
 
26,158

11.7
 %
Income from operations
 
(15,437
)
(3.0
)%
 
(12,444
)
(5.6
)%
Interest expense, net
 
(21,863
)
(4.2
)%
 
(2,381
)
(1.1
)%
Other income
 
18,102

3.5
 %
 
11

 %
Income (loss) from continuing operations before income taxes
 
(19,198
)
(3.7
)%
 
(14,814
)
(6.6
)%
Provision for income taxes
 
2,517

0.5
 %
 
2,337

1.0
 %
Net loss
 
$
(16,681
)
(3.2
)%
 
$
(12,477
)
(5.6
)%


Revenue. Revenue increased 131.4%, or $294.6 million, in the first six months of 2019, compared to the same period in 2018. The increase in revenue was primarily due to revenue of $244.7 million from our acquired businesses, coupled with approximately $36.3 million of growth in our Renewable operations and $13.5 million of growth in our Specialty Civil operations, excluding acquisitions.

Cost of revenue. Cost of revenue increased 128.3%, or $270.1 million, in the first six months of 2019, compared to the same period in 2018, primarily due to the cost of revenue of $225.0 million from our acquired businesses, and to a lesser extent, increased cost to finish remaining projects effected by multiple severe weather events in the fourth quarter of 2018.

Gross profit. Gross profit increased 178.5%, or $24.5 million, in the first six months of 2019, compared to the same period in 2018. As a percentage of revenue, gross profit increased to 7.4% in the first six months of 2019, as compared to 6.1% in the prior-year period. The increase in margin was primarily related to a reduction of costs on a disputed project of $8.5 million in 2018, coupled with increased gross profit from our acquired businesses of $5.9 million. While the Company's gross profit margin increased period over period, it was negatively impacted at June 30, 2019 due to the continuing effort to complete the six projects affected by force majeure weather in the fourth quarter of 2018. These six projects created a 0.8% reduction to gross margin in 2019.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by 105.0%, or $27.5 million in the first six months of 2019, compared to the same period in 2018. Selling, general and administrative expenses were 10.3% of revenue in the first six months of 2019, compared to 11.7% in the same period in 2018. The increase in selling, general and administrative expenses was primarily driven by $19.2 million related to our acquired businesses, coupled with increased labor of $6.3 million and integration costs of $4.6 million due to our expanded operations.

Interest expense, net. Interest expense, net increased by $19.5 million, in the first six months of 2019, compared to the same period in 2018. This increase was primarily driven by the increased borrowings under our lines of credit and term loan in the third and fourth quarter of 2018, coupled with interest on Series B Preferred Stock.

Other income (expense). Other income increased by $18.1 million, in the first six months of 2019, compared to the same period in 2018. The increase was primarily the result of the contingent liability fair value adjustment.

Provision for income taxes. Income tax benefit decreased by 7.7%, or $0.2 million, to a benefit of $2.5 million in the first six months of 2019, compared to $2.3 million for the same period in 2018. The effective tax rates for the period ended June 30,

32



2019 and 2018 were 13.1% and 15.8%, respectively. The lower effective tax rate in 2019 is primarily attributable to changes from permanent adjustments. There were no changes in uncertain tax positions during the periods ended June 30, 2019 and 2018.

Segment Results

The Company operated as one reportable segment for 2018 and evaluated the business as a renewable construction company. In late 2018, the Company completed two significant acquisitions that construct projects outside of the renewable market. As of June 30, 2019, we operate our business as two reportable segments: the Renewables segment and the Specialty Civil segment. The 2018 results for the Specialty Civil segment was not meaningful.

Each of our reportable segments is comprised of similar business units that specialize in services unique to the market that segment serves. Driving the end-user focused segments are differences in the economic characteristics of each segment; the nature of the services provided by each segment; the production processes of each segment; and the type or class of customer using the segment’s services.
 
The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses, were made based on segment revenue.

The following is a brief description of the Company's reportable segments:

The Renewables segment operates throughout the United States and specializes in a range of services that include full EPC project delivery, design, site development, construction, installation and restoration of infrastructure services for the wind and solar industries.

The Specialty Civil segment operates throughout the United States and specializes in a range of services that include:

Heavy civil construction services such as high-altitude road and bridge construction, specialty paving, industrial maintenance and other local, state and government projects.

Environmental remediation services such as site development, environmental site closure and outsourced contract mining and coal ash management services.
  
Rail Infrastructure services such as planning, creation and maintenance of infrastructure projects for major railway and intermodal facilities construction.

Segment Revenue

Revenue by segment were as follows:
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Segment
Revenue
% of Total Revenue
Revenue
% of Total Revenue
Revenue
% of Total Revenue
Revenue
% of Total Revenue
Renewables
$
179,149

54.6
%
$
168,919

97.0
%
$
254,209

49.0
%
$
217,885

97.2
%
Specialty Civil
148,812

45.4
%
5,154

3.0
%
264,562

51.0
%
6,323

2.8
%
  Total revenue
$
327,961

100.0
%
$
174,073

100.0
%
$
518,771

100.0
%
$
224,208

100.0
%

33




Segment Gross Profit

Gross profit by segment were as follows:
 
Three months ended June 30,
Six months ended June 30,
(in thousands)
2019
2018
2019
2018
Segment
Gross Profit
Gross Profit Margin
Gross Profit
Gross Profit Margin
Gross Profit
Gross Profit Margin
Gross Profit
Gross Profit Margin
Renewables
$
16,150

9.0
%
$
16,127

9.5
%
$
18,337

7.2
%
$
12,757

5.9
%
Specialty Civil
15,272

10.3
%
672.0

13.0
%
19,858

7.5
%
957

15.1
%
  Total gross profit
$
31,422

9.6
%
$
16,799

9.7
%
$
38,195

7.4
%
$
13,714

6.1
%

Liquidity and Capital Resources

Overview

Historically, our primary sources of liquidity have been cash flows from operations, our cash balances and availability under our A&R Credit Agreement. Because we have experienced decreased liquidity due to the increase of our required payments and interest under our Third A&R Credit Agreement, acquisition integration costs and delayed collections for costs relating to the multiple severe weather events in the third quarter and fourth quarter of 2018, we sought additional sources of liquidity in the second quarter of 2019.

As described above, in August 2019, we entered into the Second Equity Commitment Agreement for the issuance of Series B Preferred Stock and Warrants, and entered into a Term Sheet for additional issuances of Series B Preferred Stock and Warrants, the redemption or exchange of our Series A Preferred Stock and the Merger. We believe these steps will continue to strengthen our balance sheet and obtain the financial flexibility we need to execute our future business plan, supporting our recent growth and a larger, more diversified platform. There can be no assurance that the Company will complete these steps or that they will provide the intended benefits. Please see “Part II, Item 1A. Risk Factors” and “Part II., Item 5. Other Information.”

Our primary liquidity needs are for working capital, debt service, dividends on our Series A Preferred Stock and Series B Preferred Stock, income taxes, capital expenditures, insurance collateral, and strategic acquisitions. As of June 30, 2019, we had approximately $20.0 million in cash, and $34.4 million availability under our Third A&R Credit Agreement.

We anticipate that our existing cash balances, funds generated from operations, proceeds from the issuance of the Series B Preferred Stock and borrowings will be sufficient to meet our cash requirements for the next twelve months. No assurance can be given, however, that these sources will be sufficient, because there are many factors which could affect our liquidity, including some which are beyond our control. Please see “Item 1A. Risk Factors” in Part II to this Quarterly Report on Form 10-Q.

Capital Expenditures

For the six months ended June 30, 2019, we incurred $4.2 million in cash purchases for equipment. We estimate that we will spend approximately two percent of revenue for capital expenditures for 2019 and 2020. Actual capital expenditures may increase or decrease in the future depending upon business activity levels, as well as ongoing assessments of equipment lease versus buy decisions based on short and long-term equipment requirements.

Working Capital

We require working capital to support seasonal variations in our business, primarily due to the effect of weather conditions on external construction and maintenance work and the spending patterns of our customers, both of which influence the timing of associated spending to support related customer demand. Our business is typically slower in the first quarter of each calendar year. Working capital needs are generally lower during the spring when projects are awarded and we receive down payments from customers. Conversely, working capital needs generally increase during the summer or fall months due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. Again, working capital needs are typically lower and working capital is converted to cash during the winter months. These seasonal

34



trends, however, can be offset by changes in the timing of projects, which can be affected by project delays or accelerations and/or other factors that may affect customer spending.

Generally, we receive 5% to 10% cash payments from our customers upon the inception of the projects. Timing of billing milestones and project close-outs can contribute to changes in unbilled revenue. As of June 30, 2019, substantially all of our costs in excess of billings and earnings will be billed to customers in the normal course of business within the next twelve months. Net accounts receivable balances, which consist of contract billings as well as costs and earnings in excess of billings and retainage, increased to $303.9 million as of June 30, 2019 from $272.5 million as of December 31, 2018, due primarily to higher levels of revenue, timing of project activity, and collection of billings to customers.

Our billing terms are generally net 30 days, and some of our contracts allow our customers to retain a portion of the contract amount (generally, from 5% to 10%) until the job is completed. As part of our ongoing working capital management practices, we evaluate opportunities to improve our working capital cycle time through contractual provisions and certain financing arrangements. Our agreements with subcontractors often may contain a ‘‘pay-if-paid’’ provision, whereby our payments to subcontractors are made only after we are paid by our customers.

Sources and Uses of Cash

Sources and uses of cash are summarized below:
 
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
 
 
 
 
 
Net cash provided by (used in) operating activities
 
(60,831
)
 
28,161

Net cash provided by (used in) investing activities
 
2,101

 
(1,595
)
Net cash provided by (used in) financing activities
 
7,730

 
(7,650
)

Operating Activities. Net cash used in operating activities for the six months ended June 30, 2019 was $60.8 million, as compared to net cash provided by operating activities of $28.2 million over the same period in 2018. The decrease in net cash provided by operating activities reflects the timing of receipts from customers and payments to vendors in the ordinary course of business. The change is primarily attributable to $88.8 million related to the significant reduction of accounts payable.