SEC Form 10-Q filed by Williams Industrial Services Group Inc.
a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.
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(State or other jurisdiction of | (I.R.S. Employer |
(Address of principal executive offices) (Zip code)
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N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | |
* On July 24, 2023, the issuer’s common stock was suspended from trading on the NYSE American. Effective July 25, 2023, trades in the issuer’s common stock began being quoted on the OTC Pink Market under the symbol “WLMSQ.” On August 1, 2023, NYSE American filed a Form 25 to delist the issuer’s common stock and to remove it from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
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 | ☐ | |
☒ | Smaller reporting company | |||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ◻ No
As of August 11, 2023, there were
WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
Table of Contents
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Part I—FINANCIAL INFORMATION
Item 1. Financial Statements.
WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data) | June 30, 2023 |
| December 31, 2022 | |||
ASSETS |
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Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Accounts receivable, net of allowance of $ |
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Contract assets |
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Other current assets |
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Total current assets |
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Property, plant, and equipment, net |
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Goodwill |
| — |
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Intangible assets |
| — |
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Deferred tax assets |
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Other long-term assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued compensation and benefits |
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Contract liabilities |
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Short-term borrowings | | | ||||
Current portion of long-term debt | | |||||
Other current liabilities |
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Current liabilities of discontinued operations | | | ||||
Total current liabilities |
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Long-term debt, net (Note 9) |
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Deferred tax liabilities | — | | ||||
Other long-term liabilities |
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Long-term liabilities of discontinued operations | | | ||||
Total liabilities |
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Commitments and contingencies (Note 12) | ||||||
Stockholders’ equity (deficit): | ||||||
Common stock, $ |
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Paid-in capital |
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Accumulated other comprehensive loss |
| ( |
| ( | ||
Accumulated deficit |
| ( |
| ( | ||
Treasury stock, at par ( |
| ( |
| ( | ||
Total stockholders’ equity (deficit) |
| ( |
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Total liabilities and stockholders’ equity (deficit) | $ | | $ | | ||
See accompanying notes to condensed consolidated financial statements.
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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands, except per share data) |
| 2023 |
| 2022 | 2023 |
| 2022 | |||||
Revenue | $ | | $ | | $ | | $ | | ||||
Cost of revenue | | | | | ||||||||
Gross profit (loss) | ( | | | | ||||||||
Selling and marketing expenses | | | | | ||||||||
General and administrative expenses | | | | | ||||||||
Depreciation and amortization expense | | | | | ||||||||
Total operating expenses | | | | | ||||||||
Operating loss | ( | ( | ( | ( | ||||||||
Interest expense, net | | | | | ||||||||
Goodwill and intangible impairment expense | | — | | — | ||||||||
Income expense, net | ( | ( | ( | ( | ||||||||
Total other expense, net | | | | | ||||||||
Loss from continuing operations before income tax | ( | ( | ( | ( | ||||||||
Income tax expense (benefit) | ( | ( | ( | | ||||||||
Loss from continuing operations | ( | ( | ( | ( | ||||||||
Loss from discontinued operations before income tax | ( | ( | ( | ( | ||||||||
Income tax benefit | ( | ( | ( | ( | ||||||||
Income from discontinued operations | | | | | ||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Basic income (loss) per common share | ||||||||||||
Loss from continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Income from discontinued operations | | | | | ||||||||
Basic loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted income (loss) per common share | ||||||||||||
Loss from continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Income from discontinued operations | | | | | ||||||||
Diluted loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
See accompanying notes to condensed consolidated financial statements.
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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 |
| 2022 | 2023 |
| 2022 | ||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Foreign currency translation adjustment |
| |
| ( |
| |
| ( | ||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
See accompanying notes to condensed consolidated financial statements.
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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
Accumulated | ||||||||||||||||||||||
Common Shares | Other | |||||||||||||||||||||
$ | Paid-in | Comprehensive | Accumulated | Treasury Shares | ||||||||||||||||||
(in thousands, except share data) |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Shares |
| Amount |
| Total | ||||||
Balance, December 31, 2021 | | $ | | $ | | $ | ( | $ | ( | ( | $ | ( | $ | | ||||||||
Restricted stock awards granted | | — | — | — | — | — | — | — | ||||||||||||||
Stock-based compensation | — | — | ( | — | — | — | — | ( | ||||||||||||||
Foreign currency translation | — | — | — | | — | — | — | | ||||||||||||||
Net loss | — | — | — | — | ( | — | — | ( | ||||||||||||||
Balance, March 31, 2022 | | $ | | $ | | $ | | $ | ( | ( | $ | ( | $ | | ||||||||
Restricted stock units vested | | — | — | — | — | | — | — | ||||||||||||||
Tax withholding on restricted stock units | — | | ( | — | — | — | — | ( | ||||||||||||||
Stock-based compensation | — | — | | — | — | — | — | | ||||||||||||||
Foreign currency translation | — | — | — | ( | — | — | — | ( | ||||||||||||||
Net loss | — | — | — | — | ( | — | — | ( | ||||||||||||||
Balance, June 30, 2022 | | $ | | $ | | $ | ( | $ | ( | ( | $ | ( | $ | | ||||||||
Accumulated | ||||||||||||||||||||||
Common Shares | Other | |||||||||||||||||||||
$ | Paid-in | Comprehensive | Accumulated | Treasury Shares | ||||||||||||||||||
(in thousands, except share data) |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Shares |
| Amount |
| Total | ||||||
Balance, December 31, 2022 | | $ | | $ | | $ | ( | $ | ( | ( | $ | ( | $ | | ||||||||
Issuance of restricted stock awards | | — | — | — | — | — | — | — | ||||||||||||||
Issuance of restricted stock units | | — | — | — | — | — | — | — | ||||||||||||||
Tax withholding on restricted stock units | — | | ( | — | — | — | — | ( | ||||||||||||||
Stock-based compensation | — | — | | — | — | — | — | | ||||||||||||||
Foreign currency translation | — | — | — | | — | — | — | | ||||||||||||||
Net loss | — | — | — | — | ( | — | — | ( | ||||||||||||||
Balance, March 31, 2023 | | $ | | $ | | $ | ( | $ | ( | ( | $ | ( | $ | | ||||||||
Stock-based compensation | — | — | | — | — | — | — | | ||||||||||||||
Foreign currency translation | — | — | — | | — | — | — | | ||||||||||||||
Net loss | — | — | — | — | ( | — | — | ( | ||||||||||||||
Balance, June 30, 2023 | | $ | | $ | | $ | ( | $ | ( | ( | $ | ( | $ | ( | ||||||||
See accompanying notes to condensed consolidated financial statements.
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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, | ||||||
(in thousands) | 2023 |
| 2022 | |||
Operating activities: | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||
Net income from discontinued operations | ( | ( | ||||
Deferred income tax provision (benefit) | ( | | ||||
Depreciation and amortization on plant, property, and equipment | | | ||||
Amortization of deferred financing costs | | | ||||
Amortization of debt discount | | | ||||
Loss on disposals of property, plant and equipment | | — | ||||
Bad debt expense | ( | ( | ||||
Stock-based compensation | — | | ||||
Paid-in-kind interest | | — | ||||
Impairment expense | | — | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | | | ||||
Contract assets | | ( | ||||
Other current assets | | | ||||
Other assets | | ( | ||||
Accounts payable | ( | ( | ||||
Accrued and other liabilities | ( | ( | ||||
Contract liabilities | ( | ( | ||||
Net cash provided by (used in) operating activities, continuing operations | | ( | ||||
Net cash used in operating activities, discontinued operations | ( | ( | ||||
Net cash provided by (used in) operating activities | | ( | ||||
Investing activities: | ||||||
Proceeds from sale of property, plant and equipment | | — | ||||
Purchase of property, plant, and equipment | — | ( | ||||
Net cash provided by (used in) investing activities | | ( | ||||
Financing activities: | ||||||
Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation | ( | ( | ||||
Proceeds from short-term borrowings | | | ||||
Repayments of short-term borrowings | ( | ( | ||||
Proceeds from long-term debt | | — | ||||
Repayments of long-term debt | — | ( | ||||
Net cash (used in) provided by financing activities | ( | | ||||
Effect of exchange rate change on cash | — | | ||||
Net change in cash, cash equivalents and restricted cash | ( | ( | ||||
Cash, cash equivalents and restricted cash, beginning of period | | | ||||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||
Supplemental Disclosures: | ||||||
Cash paid for interest | $ | | $ | | ||
Cash paid for income taxes, net of refunds | $ | | $ | — | ||
See accompanying notes to condensed consolidated financial statements.
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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Business
Williams Industrial Services Group Inc. (together with its wholly owned subsidiaries, “Williams,” the “Company,” “we,” “us” or “our,” unless the context indicates otherwise) was initially formed in 1998 as GEEG Inc., a Delaware corporation, and in 2001 changed its name to “Global Power Equipment Group Inc.,” and, as part of a reorganization, became the successor to GEEG Holdings, L.L.C., a Delaware limited liability company. Effective June 29, 2018, the Company changed its name to Williams Industrial Services Group Inc. to better align its name with the Williams business. Williams has been safely helping power plant owners and operators enhance asset value for more than 50 years. It provides a broad range of construction, maintenance, and support services to infrastructure customers in energy, power, and industrial end markets.
In connection with the Company filing the Bankruptcy Petitions (as defined below), trading of the Company's common stock on the NYSE American LLC (the “NYSE American”) was suspended on July 22, 2023, and the delisting was effective August 11, 2023, 10 days after the NYSE American filed a Form 25 with the SEC. The Company's common stock is currently quoted on the OTC Pink Market operated by OTC Markets Group Company under the symbol "WLMSQ."
Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on a basis consistent with that used in the Annual Report on Form 10-K for the year ended December 31, 2022, filed by the Company with the U.S. Securities and Exchange Commission (“SEC”) on March 31, 2023 (the “2022 Report”). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, including all normal recurring adjustments, necessary to present fairly the unaudited condensed consolidated balance sheets and statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the periods indicated. All significant intercompany transactions have been eliminated. The December 31, 2022 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These unaudited condensed consolidated interim financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the 2022 Report. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for any interim period are not necessarily indicative of operations to be expected for the full year.
The Company reports on a fiscal quarter basis utilizing a “modified” 5-4-4 calendar (modified in that the fiscal year always begins on January 1 and ends on December 31). However, the Company has continued to label its quarterly information using a calendar convention. The effects of this practice are modest and only exist when comparing interim period results. The reporting periods and corresponding fiscal interim periods are as follows:
Reporting Interim Period | Fiscal Interim Period | |||
| 2023 |
| 2022 | |
Three Months Ended March 31 | January 1, 2023 to April 2, 2023 | January 1, 2022 to April 3, 2022 | ||
Three Months Ended June 30 | April 3, 2023 to July 2, 2023 | April 4, 2022 to July 3, 2022 | ||
Three Months Ended September 30 | July 3, 2023 to October 1, 2023 | July 4, 2022 to October 2, 2022 | ||
Going Concern
On July 22, 2023, the Company and its subsidiaries, Williams Industrial Services Group, L.L.C. (“WISG”), Williams Plant Services, LLC (“WPS”), Williams Specialty Services, LLC (“WSS”), Williams Industrial Services, LLC (“WIS”), WISG Electrical, LLC (“WISG Electrical”), Construction & Maintenance Professionals, LLC (“CMP”), Williams Global Services, Inc., Steam Enterprises, LLC, GPEG, LLC, Global Power Professional Services Inc., WISG Canada Ltd., WISG Nuclear Ltd. and WISG Electrical Ltd. (collectively with the Company, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (such court, the “Court” and such cases, the “Cases”). The Cases are being jointly administered under the caption In re Williams Industrial Services Group Inc., et al. On July 25, 2023, the Bankruptcy Court issued orders approving "first-day" relief motions on an interim basis, granting the Company authorization for certain actions, including entering into a
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Superpriority Senior Secured Revolving Credit and Security Agreement and a Superpriority Senior Secured Term Loan, Guarantee, and Security Agreement (collectively the “DIP Credit Facilities”) and paying employee wages and benefits.
Despite the bankruptcy filing, the Debtors will continue their operations as "debtors-in-possession" under the jurisdiction of the Court and actively pursue a structured sale of the Transferred Assets (as defined below) through a competitive bidding and auction process under Section 363 of the Bankruptcy Code. The outcome of the Chapter 11 proceedings and the Company's ability to successfully execute the structured sale of the Transferred Assets remain uncertain and depend on various factors, including Court approvals, negotiations with creditors, and general economic conditions. After the sale, the Company anticipates the remaining business will undergo liquidation via a Chapter 11 plan or conversion to Chapter 7. As such, the financial statements do not include any adjustments that might result from the potential outcome of these uncertainties.
These significant events and developments raise substantial doubt about the Company's ability to continue as a going concern. Continuation as a going concern is dependent upon the Company’s ability to successfully continue its operations during the Chapter 11 process, negotiate a purchase agreement, and take other steps to manage its liquidity. If the Company's liquidity improvement plan and the above-mentioned DIP Credit Facilities do not have the intended effect of addressing the Company's liquidity problems through the Chapter 11 process, the Company may be required to liquidate under Chapter 7 of the Bankruptcy Code. For additional information regarding our ongoing liquidity constraints and the DIP Credit Facilities, see below under “Note 2—Liquidity” and “Note 9—Debt” to the unaudited condensed consolidated financial statements included in this Form 10-Q.
NOTE 2—LIQUIDITY
As mentioned above, the Company and its subsidiaries, filed the Bankruptcy Petitions with the Court under Chapter 11 of the Bankruptcy Code. The Cases are being jointly administered under the caption In re Williams Industrial Services Group Inc., et al. The Debtors will continue their operations in the ordinary course of business as debtors-in-possession and pursue a structured sale of the Transferred Assets (as defined below) pursuant to a competitive bidding and auction process under Section 363 of the Code.
On July 22, 2023, prior to the filing of the Bankruptcy Petitions, the Company and certain subsidiaries (the “Sellers”) entered into a “stalking horse” Asset Purchase Agreement (the “Purchase Agreement”) with EnergySolutions Nuclear Services, LLC (“EnergySolutions”), pursuant to which, among other things, the Sellers will sell substantially all of their assets relating to (i) the business of providing a broad range of construction and maintenance services to customers in the nuclear, conventional power (fossil, hydro, natural gas), energy delivery, water and wastewater, pulp and paper, chemical and government industries, (ii) solely to the extent conducted pursuant to certain contracts of WIS, certain non-unionized pulp and paper operations, and (iii) the business as conducted by WPS and WSS (collectively, clauses (i) – (iii) are referred to as the “Business”, and the assets related to the Business and as more fully described in the Purchase Agreement, as the “Transferred Assets”). WIS will retain its water and wastewater business, the non-unionized pulp and paper business not included as part of the Business and its transmission and distribution business, and the Sellers will retain any other business not set forth in clauses (i) – (iii) above. The Purchase Agreement provides that the aggregate consideration to be paid by EnergySolutions for the sale of all of the Transferred Assets and the obligations of Sellers as set forth in the Purchase Agreement shall be an amount in cash equal to the sum of $
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In connection with filing the Bankruptcy Petitions and the entry by the Court of the Interim DIP Order on July 25, 2023, the Debtors entered into the DIP Credit Facilities. The DIP Revolving Credit Agreement allows the Debtors to access up to the lesser of the Borrowing Base (as defined in the DIP Revolving Credit Agreement) or $
In addition, the filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s and the other Debtors’ obligations under its then-outstanding debt, including approximately $
During the first six months ended June 30, 2023, the Company relied on borrowings under the Revolving Credit Facility, additional borrowings under the Term Loan and the Wynnefield Notes (each as defined in “Note 9—Debt”), and sought to diligently manage its working capital as its principal sources of liquidity prior to filing the Bankruptcy Petitions. Despite the positive cash flows from operations during this period, the Company experienced a significant increase in negative cash flows. As a result, the Company's cash position continued to decrease, leading to negative total cash flows for the six months ended June 30, 2023. These negative cash flows were primarily driven by the following factors:
| ● | Difficulties managing short-term negative cash flows that resulted from, among other things, having to fund significant weekly craft labor payrolls on large outage projects before those payrolls could be billed to the Company’s customers and collected. |
| ● | Ongoing losses incurred on fixed price contracts in the Company's Florida and Texas water business. |
| ● | Costs related to the Company’s exit from its Tampa, Florida-based transmission and distribution operations and its Norwalk, Connecticut-based transmission and distribution operations, both of which utilized cash resources and negatively impacted liquidity. |
| ● | Costs related to exiting the Company’s chemical projects in Texas. |
| ● | Challenges with the timing of billing and collecting cash from customers, particularly in periods with high revenues. |
| ● | Funding certain of the Company’s past due accounts payable, the balances for which had become larger than the Company’s vendors were willing to accept. For this reason, the Company had to make payments to certain vendors to either reduce the amounts that were past due or otherwise bring such vendors current. |
| ● | The Company has been operating with a high level of borrowings as it has had to, among other things, fund prior period losses, and therefore when revenues were growing significantly in the first six months of 2023, largely as a result of increased nuclear business due to a significant customer outage, the Company had to enter into amendments to the Revolving Credit Facility and the Term Loan to access additional funding to compensate for its working capital requirements. |
| ● | The Company’s borrowings under the Revolving Credit Facility and Term Loan both bore higher rates of interest than were in effect in prior periods and these higher interest charges need to be funded by the Company, to the extent not deferred. |
| ● | The amendments to the Revolving Credit Facility and the Term Loan in the first half of 2023 involved the incurrence by the Company of out-of-pocket counsel fees, both for the Company and for each of the lender groups involved, as well as to the Company’s financial advisors. |
| ● | The Company incurred expenses in the first and second quarter of 2023 in connection with its ongoing review of strategic alternatives. These expenses included the fees and expenses of the Company’s financial advisors, tax advisors, and counsel. |
| ● | Notwithstanding the Company’s materially higher revenues in the first six months of 2023, the Company was unable to convert pipeline opportunities into revenue sufficient to fund the losses and costs referred to above as well as fund its working capital requirements. |
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A variety of other factors can also affect the Company’s short- and long-term liquidity, the impact of which could be material, including, but not limited to: costs related to the Chapter 11 Cases; cash required generally for funding ongoing operations, projects and commitments; matters relating to the Company’s contracts, including contracts billed based on milestones that may require the Company to incur significant expenditures prior to collections from its customers and others that allow for significant upfront billing at the beginning of a project, which temporarily increases liquidity in the near term; the outcome of potential contract disputes, which may be significant and involve liquidated damages and litigation; payment collection issues, including general payment slowdowns or other factors which can lead to credit deterioration of the Company’s customers; pension obligations requiring annual contributions to multiemployer pension plans; insurance coverage for contracts that require the Company to indemnify third parties; and issuances of letters of credit and bonding arrangements.
To address the negative cash flows in the Company’s business over recent quarters, the Company conducted a comprehensive strategic alternatives process while concurrently taking aggressive steps to improve its liquidity and profitability. The implementation of these initiatives was part of a comprehensive liquidity plan, developed and implemented in 2022, which ultimately was unable to resolve ongoing liquidity issues and resulted in the Company filing the Bankruptcy Petitions.
Following the anticipated completion of the sale of the Business, the remainder of the Company is currently expected to undergo liquidation under a Chapter 11 plan or conversion to Chapter 7 of the Bankruptcy Code. The Company cannot provide any assurance that it will be able to successfully complete a sale of the Business or that it will be able to continue to fund its operations throughout the Chapter 11 process.
The Company made significant amendments to its Revolving Credit Facility (as defined below) and Term Loan (as defined below) during 2022 and 2023. In the third and fourth quarters of 2022, as well as the first and second quarters of 2023, the Company entered into a total of
The Company's liquidity plan, including the utilization of DIP Credit Facilities and the implementation of various strategic initiatives, is intended to support the Company's ongoing operations during the Chapter 11 process. The Company has been diligently working on exiting certain underperforming operations since 2022, including the discontinuation of water projects in Florida and Texas, as well as exiting transmission and distribution operations in Florida and Connecticut, and underperforming chemical projects in Texas. These measures, coupled with the filing for Chapter 11 bankruptcy protection, are expected to enable the Company to continue operating in the ordinary course of business during the Chapter 11 process.
While the core nuclear and fossil business exceeded the Company’s revenue forecast for the first half of 2023, and is continuing to perform well, revenue is expected to fall in the second half of 2023, as the Company’s outage services for a large customer concluded at the end of the second quarter. This anticipated revenue decline poses greater liquidity challenges, despite the availability of DIP Revolving Credit Agreement and DIP Term Loan Agreement funding. As noted above, EnergySolutions and the Company signed the Purchase Agreement (as defined above) pursuant to which EnergySolutions will acquire the Business, which sale is being facilitated through Section 363 of the Chapter 11 Bankruptcy Code. However, if the Company is unable to complete the sale of the business pursuant to the Section 363 sale process and is unable to address any liquidity shortfalls that may arise based on any of the foregoing factors or others that may arise in the future, the Company may be required to liquidate under Chapter 7 of the Bankruptcy Code.
In conclusion, the significant events and developments, including the negative cash flows, Chapter 11 bankruptcy filing, potential sale of assets, and liquidity challenges, raise substantial doubt about the Company's ability to continue as a going concern. The Company remains focused on continuing its operations during the Chapter 11 process and successfully completing the sale of the Business.
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NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
The Company did not implement any new accounting pronouncements during the first six months of 2023.
NOTE 4—LEASES
The Company primarily leases office space and related equipment, as well as equipment, modular units and vehicles directly used in providing services to its customers. The Company’s leases have remaining lease terms of to
In accordance with ASU 2016-02, for leases with terms greater than twelve months, the Company records the related right-of-use assets and lease liabilities at the present value of the fixed lease payments over the lease term at the lease commencement date. The Company uses its incremental borrowing rate to determine the present value of the lease as the rate implicit in the lease is typically not readily determinable.
Short-term leases (leases with an initial term of twelve months or less or leases that are cancelable by the lessee and lessor without significant penalties) are expensed on a straight-line basis over the lease term. The majority of the Company’s short-term leases relate to equipment used in delivering services to its customers. These leases are entered into at agreed upon hourly, daily, weekly, or monthly rental rates for an unspecified duration and typically have a termination for convenience provision. Such equipment leases are considered short-term in nature unless it is reasonably certain that the equipment will be leased for a term greater than twelve months.
On September 2, 2021, the Company made the decision to relocate its corporate headquarters to Atlanta, Georgia and entered into a
The components of lease expense were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
Lease Cost/(Sublease Income) (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Short-term lease cost | | | | | ||||||||
Sublease income | — | ( | ( | ( | ||||||||
Total lease cost | $ | | $ | | $ | | $ | | ||||
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Lease cost related to finance leases was not significant for the three and six months ended June 30, 2023 and 2022.
Information related to the Company’s right-of-use assets and lease liabilities were as follows:
Lease Assets/Liabilities (in thousands) | Balance Sheet Classification | June 30, 2023 | December 31, 2022 | |||||
Lease Assets | ||||||||
Right-of-use assets | $ | | $ | | ||||
Lease Liabilities | ||||||||
Short-term lease liabilities | $ | | $ | | ||||
Long-term lease liabilities | | | ||||||
Total lease liabilities | $ | | $ | | ||||
Supplemental information related to the Company’s leases were as follows:
Six Months Ended June 30, | ||||||
(dollars in thousands) | 2023 | 2022 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||
Operating cash used by operating leases | $ | | $ | | ||
Right-of-use assets obtained in exchange for new operating lease liabilities | | | ||||
Weighted-average remaining lease term - operating leases | ||||||
Weighted-average remaining lease term - finance leases | ||||||
Weighted-average discount rate - operating leases | ||||||
Weighted-average discount rate - finance leases | ||||||
Total remaining lease payments under the Company’s operating and finance leases were as follows:
Six Months Ended June 30, | (in thousands) | |||||
Remainder of 2023 | $ | | $ | | ||
2024 | | | ||||
2025 | | - | ||||
2026 | | - | ||||
2027 | | - | ||||
Thereafter | | - | ||||
Total lease payments | $ | | $ | | ||
Less: interest | ( | - | ||||
Present value of lease liabilities | $ | | $ | | ||
12
NOTE 5—CHANGES IN BUSINESS
Discontinued Operations
Electrical Solutions
During the fourth quarter of 2017, the Company made the decision to exit and sell its Electrical Solutions segment (which was comprised solely of Koontz-Wagner Custom Controls Holdings LLC (“Koontz-Wagner”), a wholly owned subsidiary of the Company) in an effort to reduce the Company’s outstanding term debt. The Company determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented.
On July 11, 2018, Koontz-Wagner filed a voluntary petition for relief under Chapter 7 of Title 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Texas. The filing was for Koontz-Wagner only, not for the Company as a whole, and was completely separate and distinct from the Williams business and operations. As a result of the July 11, 2018 bankruptcy of Koontz-Wagner, the Company recorded a pension withdrawal liability of $
Mechanical Solutions
During the third quarter of 2017, the Company made the decision to exit and sell substantially all of the operating assets and liabilities of its Mechanical Solutions segment and determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented.
As of June 30, 2023 and December 31, 2022, the Company did
(in thousands) |
| June 30, 2023 | December 31, 2022 | |||
Liabilities: | ||||||
Current liabilities of discontinued operations | $ | | $ | | ||
Liability for pension obligation | | | ||||
Liability for uncertain tax positions | | | ||||
Long-term liabilities of discontinued operations | | | ||||
Total liabilities of discontinued operations | $ | | $ | | ||
The following table presents a reconciliation of the major classes of line items constituting the net income (loss) from discontinued operations. In accordance with GAAP, the amounts in the table below do not include an allocation of corporate overhead.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Loss on disposal - Electrical Solutions | — | | — | | ||||||||
Interest expense | | | | | ||||||||
Loss from discontinued operations before income tax | ( | ( | ( | ( | ||||||||
Income tax benefit | ( | ( | ( | ( | ||||||||
Income from discontinued operations | $ | | $ | | $ | | $ | | ||||
13
NOTE 6—REVENUE
Disaggregation of Revenue
The Company’s contracts generally include a single performance obligation for which revenue is recognized over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. For cost-plus contracts, the Company recognizes revenue when services are performed and contractually billable based upon the hours incurred and agreed-upon hourly rates. Revenue on fixed-price contracts is recognized and invoiced over time using the cost-to-cost percentage-of-completion method. To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. The Company does not adjust the price of the contract for the effects of a significant financing component. Change orders are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation. The Company believes these methods of revenue recognition most accurately reflect the economics of the transactions with its customers.
The Company’s contracts may include several types of variable consideration, including change orders, rate true-up provisions, retainage, claims, incentives, penalties, and liquidated damages. The Company estimates the amount of revenue to be recognized on variable consideration using estimation methods that best predict the amount of consideration to which the Company expects to be entitled. The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of its anticipated performance and all information (historical, current, and forecasted) that is reasonably available. The Company updates its estimate of the transaction price each reporting period and the effect of variable consideration on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. In circumstances where the Company cannot reasonably determine the outcome of a contract, it recognizes revenue over time as the work is performed, but only to the extent of recoverable costs incurred (i.e. zero margin). A loss provision is recorded for the amount of any estimated unrecoverable costs in excess of total estimated revenue on a contract as soon as the Company becomes aware. The Company generally provides a limited warranty for a term of
On July 20, 2023, the Company made a strategic decision to exit the water projects business in Florida and Texas. This led to the discontinuation of a significant portion of WIS's business and operations in the water projects division. As a result of the exit, the Company made financial adjustments, reducing its contract liability by $
Disaggregated revenue by type of contract was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||
Cost-plus reimbursement contracts | $ | | $ | | $ | | $ | | ||||
Fixed-price contracts | | | | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
Disaggregated revenue by the geographic area where the work was performed was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||
United States | $ | | $ | | $ | | $ | | ||||
Canada | - | - | - | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
14
Contract Balances
The Company enters into contracts that allow for periodic billings over the contract term that are dependent upon specific advance billing terms, as services are provided, or as milestone billings based on completion of certain phases of work. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported in the Company’s unaudited condensed consolidated balance sheets as contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported in the Company’s unaudited condensed consolidated balance sheets as contract liabilities. At any point in time, each project in process could have either contract assets or contract liabilities.
The following table provides information about contract assets and contract liabilities from contracts with customers:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 |
| 2022 | |||||||
Costs incurred on uncompleted contracts | $ | | $ | | $ | | $ | | ||||
Earnings recognized on uncompleted contracts | ( | |
| |
| | ||||||
Total | | | |
| | |||||||
Less—billings to date | ( | ( | ( |
| ( | |||||||
Net | $ | | $ | | $ | | $ | | ||||
Contract assets | $ | | $ | | $ | | $ | | ||||
Contract liabilities | ( | ( | ( |
| ( | |||||||
Net | $ | | $ | | $ | | $ | | ||||
For the three and six months ended June 30, 2023, the Company recognized revenue of approximately $
Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of June 30, 2023:
(in thousands) | Thereafter | Total | |||||||||||||
Remaining performance obligations | $ | | $ | | $ | | $ | | $ | | |||||
NOTE 7—LOSS PER SHARE
As of June 30, 2023, the Company’s
Basic earnings (loss) per common share are calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted earnings (loss) per common share are based on the weighted average common shares outstanding during the period, adjusted for the potential dilutive effect of common shares that would be issued upon the vesting and release of restricted stock awards and units.
15
Basic and diluted loss per common share from continuing operations were calculated as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands, except share data) |
| 2023 | 2022 | 2023 |
| 2022 | ||||||
Loss from continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Basic loss per common share: | ||||||||||||
Weighted average common shares outstanding | | | | | ||||||||
Basic loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted loss per common share: | ||||||||||||
Weighted average common shares outstanding | | | | | ||||||||
Diluted effect: |
| |||||||||||
Unvested portion of restricted stock units and awards | — | — | — | — | ||||||||
Weighted average diluted common shares outstanding | | |
| | | |||||||
Diluted loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
The weighted average number of shares outstanding used in the computation of basic and diluted loss per common share does not include the effect of the following potential outstanding common stock. The effects of the potentially outstanding service-based restricted stock and restricted stock unit awards were not included in the calculation of diluted loss per common share because the effect would have been anti-dilutive. The effects of the potentially outstanding performance- and market-based restricted stock unit awards were not included in the calculation of diluted loss per common share because the performance and/or market conditions had not been satisfied as of June 30, 2023 and 2022.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
2023 | 2022 | 2023 |
| 2022 | |||
Unvested service-based restricted stock and restricted stock unit awards | | | | | |||
Unvested performance- and market-based restricted stock unit awards | | | | | |||
NOTE 8—INCOME TAXES
The effective income tax rate for continuing operations for the three and six months ended June 30, 2023 and 2022 was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2023 | 2022 | 2023 |
| 2022 | |||
Effective income tax rate for continuing operations | ( | |||||||
The effective income tax rate differs from the statutory federal income tax rate of
16
For the three months ended June 30, 2023, the Company recorded income tax benefit from continuing operations of $
The Company’s net deferred balance was primarily composed of indefinite lived deferred tax liabilities attributable to goodwill and trade names, and the indefinite lived deferred tax assets related to the post 2017 net operating losses and Section 163(j) interest addback. A full valuation allowance was applied to most of the remaining deferred balances. The indefinite lived deferred tax assets enabled the release of the valuation allowance to the extent that it can offset the indefinite lived deferred tax liabilities. Because all indefinite lived deferred tax liabilities were part of continued operations, and the release of valuation allowance was attributable to the future taxable income related to these deferred tax liabilities, the entire valuation allowance released was recorded in continuing operations according to ASC 740-20-45-3. As of June 30, 2023, the Company had written off $
As of June 30, 2023 and 2022, the Company would have needed to generate approximately $
The Company’s foreign subsidiaries may generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in its operations outside of the U.S. Pursuant to ASC 740-30, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested become subject to deferred income taxes. As of June 30, 2023, the Company’s Canadian subsidiary had approximately $
The Company formed the Canadian subsidiary in 2018 without significant capital input, and the majority of the undistributed earnings was expected to be repatriated as dividends to the United States at the U.S.-Canada treaty rate of
As of each of June 30, 2023 and 2022, the Company provided for a total liability of $
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The Company has incorporated the impact of the CARES Act to the tax provision. In addition, the Company deferred payments of federal employer payroll taxes of approximately $
17
NOTE 9—DEBT
The following table provides information about the Company’s debt, net of unamortized deferred financing costs:
(in thousands) |
| June 30, 2023 |
| December 31, 2022 | ||
Revolving Credit Facility | $ | | $ | | ||
Current portion of Term Loan | | - | ||||
Current debt | $ | | $ | | ||
Term loan, noncurrent portion of long-term debt | $ | | $ | | ||
Unsecured Promissory Note with Wynnefield Partners Small Cap Value, LP I | | - | ||||
Unsecured Promissory Note with Wynnefield Partners Small Cap Value, LP | | - | ||||
Unamortized debt discount from refinancing | ( | ( | ||||
Unamortized deferred financing costs | ( | ( | ||||
Long-term debt, net | $ | | $ | | ||
Total debt, net | $ | | $ | | ||
Debt Refinancing
On December 16, 2020, the Company and certain of its subsidiaries refinanced and replaced its prior revolving credit facility and term loan facility and entered into (i) the Term Loan Agreement (as defined below), which provided for senior secured term loan facilities in an aggregate principal amount of up to $
As of June 30, 2023, the Company had $
The Revolving Credit Facility
As of June 30, 2023, the borrowings under the Revolving Credit Facility bore interest at the Company's election at either (1) the base commercial lending rate of PNC, as publicly announced, plus
The Revolving Credit Agreement contains customary representations and warranties, as well as customary affirmative and negative covenants, in each case, with certain exceptions, limitations and qualifications. The Revolving Credit Facility agreement also requires the Revolving Credit Facility borrowers to regularly provide certain financial information to the lenders thereunder on a weekly, monthly, quarterly and annual basis.
18
Due to the Chapter 11 filing, the lenders are now subject to automatic stay provisions. This means that certain actions, including enforcing remedies or taking enforcement actions against the collateral, are temporarily stayed or put on hold. The lenders must now adhere to the provisions and limitations set forth under Chapter 11 of the Bankruptcy Code until further notice from the bankruptcy court.
In light of the bankruptcy filing, any further actions or changes to the agreement, such as amendments or fees, will likely require approval or supervision by the Court. The lenders' ability to exercise their rights under the agreement will be subject to the Court's approval and the bankruptcy proceedings.
The Term Loan
Following the Company's filing for Chapter 11 bankruptcy, the Term Loan, Guarantee, and Security Agreement with EICF Agent LLC and lenders are now subject to automatic stay provisions under Chapter 11 of the Bankruptcy Code. These provisions allow the Company to maintain the term loan's long-term classification and prevent it from being reclassified as current debt during the bankruptcy proceedings.
The Term Loan agreement, provided for a Term Loan with a maturity date of December 16, 2025. As of June 30, 2023, borrowings under the Term Loan bore interest at SOFR, with a minimum floor of
The Obligations (as defined in the Term Loan agreement) of the Term Loan borrowers were guaranteed by certain subsidiaries and secured by first-priority security interests on substantially all of the Term Loan credit parties' assets. Additionally, a second-priority security interest on the Term Loan credit parties' accounts receivable and inventory was established, subject to the Intercreditor Agreement.
Despite the bankruptcy filing, the Company may still prepay the Term Loan voluntarily, in whole or in part, subject to specific prepayment fees and certain conditions. Additionally, mandatory prepayments may be required under certain circumstances, including the receipt of proceeds from specific events or activities.
The Term Loan agreement included customary representations, warranties, affirmative and negative covenants, subject to certain exceptions, limitations, and qualifications. The company was required to maintain certain financial ratios and limitations on capital expenditures.
Events of default under the Term Loan agreement included various breaches or failures to pay, bankruptcy or insolvency proceedings, and other specified events. In case of an event of default, the Term Loan lenders were entitled to declare all Obligations immediately due and payable and exercise remedies under the collateral documents.
The Company made amendments to the Term Loan agreement at different times. The amendments involved modifying financial covenants, adjusting interest rates, deferring payments, and imposing additional reporting obligations. They also included amendment fees payable to the lenders.
19
The Wynnefield Notes
The Wynnefield Notes consist of (i) an Unsecured Promissory Note by and among the Company, as borrower, certain of its subsidiaries, as guarantors under a separate Guaranty Agreement, and Wynnefield Partners Small Cap Value, LP I in the aggregate principal amount of $
The Wynnefield Lenders, together with their affiliates, are the Company’s largest equity investor. Nelson Obus, a member of the Company’s Board of Directors, is a managing member of Wynnefield Capital Management, LLC, the general partner of the Wynnefield Lenders.
Following the Company's filing for Chapter 11 bankruptcy, the Wynnefield Notes are now subject to automatic stay provisions under Chapter 11 of the Bankruptcy Code. These provisions allow the Company to maintain the long-term classification and prevent it from being reclassified as current debt during the bankruptcy proceedings. The automatic stay provisions also protect the Company from certain creditor actions, providing temporary relief from debt-related enforcement actions while the bankruptcy Cases are ongoing.
Debtor-In-Possession Financial Credit Facilities
On July 22, 2023 the Debtors filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. These cases are being jointly administered under the caption In re Williams Industrial Services Group Inc., et al.
In conjunction with the bankruptcy filings, following the entry by the Court of the interim order authorizing and approving the DIP Credit Facilities on July 25, 2023 (the “Interim DIP Order”), the Debtors entered into certain debtor-in-possession financial credit agreements, consisting of the following:
| 1. | Superpriority Senior Secured Revolving Credit and Security Agreement (the “DIP Revolving Credit Agreement”), pursuant to which, and subject to the terms and conditions therein, PNC Bank, National Association, in its capacity as administrative agent, and the financial institutions from time to time party thereto, as lenders (collectively, including any financial institution that has issued letters of credit on behalf of any Debtor in connection with the DIP Revolving Credit Facility (as defined below), the “DIP Revolving Lenders”), provided the Debtors with a secured superpriority debtor-in-possession revolving credit facility in an aggregate principal amount of up to the lesser of (a) the Borrowing Base (as defined in the DIP Revolving Credit Agreement) and (b) $ |
| 2. | Superpriority Senior Secured Term Loan, Guarantee and Security Agreement (the “DIP Term Loan Agreement” and, together with the DIP Revolving Credit Agreement, the “DIP Credit Agreements”), pursuant to which, and subject to the terms and conditions therein, EICF Agent LLC, in its capacity as agent, and the lenders from time to time party thereto (collectively, the “DIP Term Loan Lenders”), provided the Debtors with a secured superpriority debtor-in-possession term loan facility in aggregate principal amount not to exceed $ |
20
With the entry of the Interim DIP Order by the Court, the DIP Revolving Lenders provided the DIP Revolving Credit Facility in the principal amount described above, and the DIP Term Loan Lenders provided a $
The borrowings under the DIP Credit Facilities are senior secured obligations of the Debtors, secured by superpriority liens on the assets of the Debtors, subject to customary exceptions. Additionally, the DIP Credit Agreements contain various covenants, including requirements for the Debtors' compliance with a 13-week budget, variance testing, reporting obligations, and other relevant provisions. The proceeds of all or a portion of the DIP Credit Facilities may be used for, among other things, post-petition working capital for the Debtors, payment of costs to administer the Cases, payment of expenses and fees of the transactions contemplated by the Cases, payment of court-approved adequate protection obligations under the DIP Credit Agreements, and payment of other costs, in each case, subject to an approved budget and such other purposes permitted under each of the DIP Credit Agreements and the Interim DIP Order or any other order of the Court.
Letters of Credit and Bonds
In line with industry practice, the Company is often required to provide letters of credit and payment and performance surety bonds to customers. These letters of credit and bonds provide credit support and security for the customer if the Company fails to perform its obligations under the applicable contract with such customer.
The Revolving Credit Facility provided for a letter of credit sublimit in an amount up to $
In addition, as of June 30, 2023 and December 31, 2022, the Company had outstanding payment and performance surety bonds of $
Deferred Financing Costs and Debt Discount:
Deferred financing costs and debt discount are amortized over the terms of the related debt facilities using the straight-line method. The following table summarizes the amortization of deferred financing costs and debt discount related to the Company's debt facilities and recognized in interest expense on the unaudited condensed consolidated statements of operations:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||
Term loan | $ | | $ | | $ | | $ | | ||||
Debt discount on term loan | | | | | ||||||||
Revolving credit facility | | | | | ||||||||
Total | $ | $ | | $ | | $ | | |||||
The following table summarizes unamortized deferred financing costs and debt discount included on the Company's unaudited condensed consolidated balance sheets:
(in thousands) |
| Location |
| June 30, 2023 | December 31, 2022 | |||
Term loan | Long-term debt, net | $ | | $ | | |||
Debt discount on term loan | Long-term debt, net | | | |||||
Revolving credit facility | Other long-term assets | | | |||||
Total | $ | | $ | | ||||
21
NOTE 10—FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
ASC 820–Fair Value Measurement defines fair value as the exit price, which is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in the active markets for identical assets and liabilities and the lowest priority to unobservable inputs (see below).
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s financial instruments as of June 30, 2023 and December 31, 2022 consisted primarily of cash and cash equivalents, restricted cash, receivables, payables, and debt instruments. The carrying values of these financial instruments approximate their respective fair values, as they are either short-term in nature or carry interest rates that are periodically adjusted to market rates.
NOTE 11—GOODWILL AND OTHER INTANGIBLE ASSETS
The Company determines the fair value of its reporting unit annually on October 1st, utilizing a combination of income, market, and cost approaches. Under the income approach, fair value is ascertained based on the present value of estimated future cash flows, discounted at a suitable risk-adjusted rate. The Company leverages its internal projections to estimate forthcoming cash flows, supplemented by an estimate of long-term growth rates based on the most recent long-term outlook for the reporting unit, which is classified within Level 3 of the fair value hierarchy. The market approach calculates fair value by employing comparative market multiples in valuation estimates. Meanwhile, the cost approach relies on the assumption that a prudent investor would not pay more for an asset than the cost of replacing or reproducing it, determined through estimating replacement cost.
As of June 30, 2023, the Company held $
The Company's Chapter 11 bankruptcy filing prompted a reevaluation of its goodwill and other intangible assets for the period ended June 30, 2023. This assessment determined that the Company's book value exceeded the fair value of its trade name and reporting unit, leading to an intangible asset impairment charge of $
Consequent to the evaluation, the Company recognized a total impairment loss of $
22
In accordance with ASC 350-20-50-1, the following information concerning the goodwill impairment is disclosed:
| 1. | Description of the Impairment Event: The Company filed Chapter 11 Bankruptcy Petitions, leading to substantial financial difficulties, and reported a trailing twelve-month operating loss from continuing operations of $ |
| 2. | Date of Assessment: The goodwill impairment assessment was executed for the period ended June 30, 2023. |
| 3. | Reasons for Impairment: The impairment stemmed from the significant devaluation of the Company's overall value and its incapacity to meet performance objectives. |
| 4. | Methodology and Assumptions: Management utilized an array of valuation methods and assumptions, including negative cash flow, historical operating income, prospects of future performance within current conditions, and economic circumstances. These factors were applied to conclude that the carrying amount of the trade name goodwill and intangible asset surpasses their respective fair values. |
| 5. | Amount of Impairment Loss: The impairment loss acknowledged for the intangible asset was $ |
| 6. | Description of Affected Reporting Units or Segments: The goodwill impairment had a bearing on the entirety of the Williams Industrial Services Group and the intangible asset is related to the Company’s trade name. |
| 7. | Future Implications: The impairment underscores the arduous financial environment and underscores the necessity for substantial management initiatives to stabilize and enhance the Company's financial performance. |
NOTE 12—COMMITMENTS AND CONTINGENCIES
Litigation and Claims
The Company is from time-to-time party to various lawsuits, including personal injury claims and other proceedings that arise in the ordinary course of its business. With respect to all such lawsuits, claims and proceedings, the Company records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that the resolution of any currently pending lawsuits, claims and proceedings, either individually or in the aggregate, will have a material adverse effect on its financial position, results of operations or liquidity. However, the outcomes of any currently pending lawsuits, claims and proceedings cannot be predicted, and therefore, there can be no assurance that this will be the case.
On July 22, 2023, the Company and its subsidiaries, Williams Industrial Services Group, L.L.C., Williams Plant Services, LLC, Williams Specialty Services, LLC, Williams Industrial Services, LLC, WISG Electrical, LLC, Construction & Maintenance Professionals, LLC, Williams Global Services, Inc., Steam Enterprises, LLC, GPEG, LLC, Global Power Professional Services Inc., WISG Canada Ltd., WISG Nuclear Ltd. and WISG Electrical Ltd. (collectively with the Company, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (such court, the “Court” and such cases, the “Cases”). The Chapter 11 Cases are being jointly administered under the caption In re Williams Industrial Services Group Inc., et al. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. No trustee has been appointed and the Company will continue to manage itself and its subsidiaries as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. It is anticipated that substantially all of the business and operations of Williams Industrial Services, LLC, the entity carrying on the Company’s water projects, will be discontinued during the course of the Cases.
On July 25, 2023, the Bankruptcy Court issued orders approving the “first day” relief motions on an interim basis (the “Interim DIP Order”), authorizing the Company to, among other things, enter into the DIP Credit Facilities and pay employee wages and benefits.
There has been no order confirming a plan of reorganization, arrangement, or liquidation of the Debtors’ assets in the Cases, and the Debtors are seeking the sale of certain assets through the Purchase Agreement and will seek Court approval of such sale.
23
The Company completed a bankruptcy filing of its Koontz-Wagner subsidiary on July 11, 2018. This could require the Company to incur legal fees and other expenses related to liabilities from this bankruptcy filing. While the Company does not anticipate these liabilities will have a material adverse effect on its results of operations, cash flows and financial position, and although the statute of limitations has run on certain claims that the Chapter 7 Trustee for the Koontz-Wagner estate might assert, there can be no assurance of the outcome. The filing was for Koontz-Wagner only, not for the Company as a whole, and was completely separate and distinct from the Williams business and operations. For additional information, please refer to “Note 5—Changes in Business” to the unaudited condensed consolidated financial statements.
Insurance
The Company maintains insurance coverage for most insurable aspects of its business and operations. The Company’s insurance programs, including, but not limited to, health, general liability, and workers’ compensation, have varying coverage limits depending upon the type of insurance. For the three and six months ended June 30, 2023, insurance expense, including insurance premiums related to the excess claim coverage and claims incurred for continuing operations, was $
The Company’s unaudited condensed consolidated balance sheets include amounts representing its probable estimated liability related to insurance-related claims that are known and have been asserted against the Company, and for insurance-related claims that are believed to have been incurred but had not yet been reported as of June 30, 2023. As of June 30, 2023, the Company provided $
Executive Severance
As of June 30, 2023, the Company had outstanding severance arrangements with senior executives. The Company’s maximum commitment under all such arrangements, which would apply if the employees covered by these arrangements were each terminated without cause, was $
NOTE 13—STOCK-BASED COMPENSATION PLANS
Effective for the second quarter of 2023, the Company reversed all its stock compensation expense for $
Management has concluded that the stock compensation, both equity and liability-based will not be paid to employees or the board of directors due to the significant devaluation of the Company's stock and the inability to meet performance objectives. Approximately $
The significant devaluation of the Company's stock occurred following the Chapter 11 bankruptcy filing and the execution of the Purchase Agreement on July 22, 2023. Given the current financial situation and the uncertainties associated with the restructuring process, it is apparent that the Company will not meet the performance objectives required to award the cash-based compensation.
As a result of these developments, the Company deemed it appropriate to reverse the stock compensation expense, as the awards are no longer expected to be settled, and the associated liability is no longer probable of being paid. These actions are consistent with the Company's ongoing efforts to manage its financial position and align its compensation plans with the current operating conditions during the Chapter 11 proceedings.
The stock compensation reversal does not impact any obligations or liabilities related to the Purchase Agreement with EnergySolutions or other aspects of the Chapter 11 proceedings.
24
NOTE 14—OTHER SUPPLEMENTARY INFORMATION
The following table summarizes other current assets included on the Company's unaudited condensed consolidated balance sheets:
(in thousands) |
| June 30, 2023 |
| December 31, 2022 | ||
Unamortized commercial insurance premiums | | | ||||
Prepaid expenses | | | ||||
Security deposits - real estate | | | ||||
Other current assets | | | ||||
Total | $ | | $ | | ||
The following table summarizes other current liabilities included on the Company's unaudited condensed consolidated balance sheets:
(in thousands) |
| June 30, 2023 |
| December 31, 2022 | ||
Short-term lease liabilities | $ | | $ | | ||
Accrued workers compensation | | | ||||
Accrued job costs | | | ||||
Accrued legal and professional fees | | | ||||
Other accrued liabilities | | | ||||
Total | $ | | $ | | ||
The following table summarizes other long-term assets included on the Company's unaudited condensed consolidated balance sheets:
(in thousands) | June 30, 2023 |
| December 31, 2022 | |||
Equity method investment in RCC | $ | | $ | | ||
Right-of-use lease assets | | | ||||
Unamortized Debt Issuance Cost | | | ||||
Unamortized software subscriptions | — | | ||||
Other long-term assets | | | ||||
Total | $ | | $ | | ||
The following table summarizes other long-term liabilities included on the Company's unaudited condensed consolidated balance sheets:
(in thousands) |
| June 30, 2023 |
| December 31, 2022 | ||
Long-term lease liabilities | $ | | $ | | ||
Liability for uncertain tax positions | | | ||||
Other long-term liabilities | | | ||||
Total | $ | | $ | | ||
NOTE 15—SUBSEQUENT EVENTS
Exiting the Water Projects in Florida and Texas
On July 20, 2023, the Company decided to exit the water projects business in Florida and Texas resulting in the discontinuation of substantially all of WIS’s business and operations in the water projects division. The exit led to financial adjustments, reducing the Company’s contract liability by $
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Chapter 11 Filing
On July 22, 2023, the Debtors filed the Bankruptcy Petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. On July 25, 2023, the Bankruptcy Court issued orders approving the “first day” relief motions on an interim basis (the “Interim DIP Order”), authorizing the Company to, among other things, enter into the DIP Credit Facilities and pay employee wages and benefits. The Debtors will continue their operations in the ordinary course of business as debtors-in-possession and pursue a structured sale of the Transferred Assets pursuant to a competitive bidding and auction process under Section 363. The Debtors are seeking the sale of the Transferred Assets through the Purchase Agreement and will seek Court approval of such sale.
Purchase Agreement
On July 22, 2023, prior to the filing of the Bankruptcy Petitions, the Company and its subsidiaries entered into a "stalking horse" Purchase Agreement with EnergySolutions. The Purchase Agreement provides for the sale of substantially all of the Sellers' assets relating to the Business to EnergySolutions for an amount in cash equal to $
Debtor-in-Possession Financing
In connection with filing the Bankruptcy Petitions and the entry by the Court of the Interim DIP Order authorizing and approving the DIP Credit Facilities on July 25, 2023, the Debtors entered into the DIP Credit Facilities, which are described in “Note 9—Debt” of these unaudited condensed consolidated financial statements.
Notice of Delisting
On July 24, 2023, the Company received written notice from the staff of NYSE Regulation that, as a result of the Cases and in accordance with Section 1003(c)(iii) of the NYSE American Company Guide, NYSE Regulation had determined to commence proceedings to delist the common stock of the Company. Trading of the Company’s common stock on the NYSE American was suspended on July 24, 2023, and the delisting became effective August 11, 2023, 10 days after the NYSE American filed the Form 25 with the SEC. The Company’s common stock is currently quoted on the OTC Pink Market operated by the by OTC Markets Group Inc. under the symbol “WLMSQ.”
Appointment of Chief Restructuring Officer
Effective on July 27, 2023, the Company appointed Edward Gavin to serve as the Chief Restructuring Officer ("CRO") of the Company for such a term and in accordance with the terms and conditions of that certain engagement letter, dated as of July 20, 2023, by and among the Company and Gavin/Solmonese LLC (the "Engagement Letter"). As further set forth in the Engagement Letter, Mr. Gavin's authority as CRO includes, in coordination with the Company's advisors and management, (i) overseeing the administration of the Cases for the Company in Delaware, (ii) representing the Company in Court proceedings as to financial matters that may come before the Court, (iii) monitoring the debtor-in-possession budget and approving all payments, and (iv) managing creditor committees and negotiating as necessary. The appointment of a CRO by the Company was a condition of obtaining the DIP Credit Facilities.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q and its exhibits contain or incorporate by reference various forward-looking statements that express a belief, expectation or intention or are otherwise not statements of historical fact. Forward-looking statements generally use forward-looking words, such as “may,” “will,” “could,” “should,” “would,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other words that convey the uncertainty of future events or outcomes. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any of these forward-looking statements, particularly given the potential impact of the Company's voluntary petitions under Chapter 11 of the United States Bankruptcy Code and the subsequent events that have occurred. Except as required by law, we undertake no obligation to further update any such statements, or the risk factors described in this Form 10-Q and in our 2022 Report under the heading "Part I—Item 1A. Risk Factors," to reflect new information, the occurrence of future events or circumstances, or otherwise. The forward-looking statements in this Form 10-Q do not constitute guarantees or promises of future performance, particularly in light of the uncertainties and risks arising from the ongoing Chapter 11 proceedings and related events. Forward-looking statements may include information concerning the following, among other items: expectations regarding risks attendant to the Chapter 11 bankruptcy process, including the Company’s ability to obtain approval from the Court with respect to motions or other requests made to the Court throughout the course of the Chapter 11 process, including with respect to the asset sale and DIP Credit Agreements; the Company’s plans to sell certain assets pursuant to Chapter 11 of the Bankruptcy Code, the outcome and timing of such sale, and the Company’s ability to satisfy closing and other conditions to such sale; the effects of Chapter 11, including increased legal and other professional costs necessary to execute the Company’s wind down, on the Company’s liquidity and results of operations; the length of time that the Company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of Chapter 11; the Company’s ability to continue funding operations through the Chapter 11 bankruptcy process, and the possibility that it may be unable to obtain any additional funding as needed; the Company’s ability to meet its financial obligations during the Chapter 11 process and to maintain contracts that are critical to its operations; the Company’s ability to comply with the restrictions imposed by the terms and conditions of the DIP Credit Agreements and other financing arrangements; objections to the Company’s wind down process, the DIP Credit Agreements, or other pleadings filed that could protract the Chapter 11 process; the effects of Chapter 11 on the interests of various constituents and financial stakeholders; the effect of the Chapter 11 filings and any potential asset sale on the Company’s relationships with vendors, regulatory authorities, employees and other third parties; risks relating to the trading price and volatility of the Company’s common stock and the effects of the delisting from NYSE American; possible proceedings that may be brought by third parties in connection with the Chapter 11 process or the potential asset sale and risks associated with third-party motions in Chapter 11; the timing or amount of any distributions, if any, to the Company’s stakeholders; employee attrition and the Company’s ability to retain senior management and other key personnel due to the distractions and uncertainties; the impact and timing of any cost-savings measures and related local law requirements in various jurisdictions; the impact of litigation and regulatory proceedings; the Company’s ability to continue as a going concern; and expectations regarding financial performance, strategic and operational plans, and other related matters.
These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors, including unpredictable or unanticipated factors that we have not discussed in this Form 10-Q. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by the forward-looking statements, particularly in light of the Chapter 11 Cases. Additionally, the Cases may result in holders of the Company’s securities receiving no value for their interests. Because of such a possibility, the value of these securities is highly speculative and poses substantial risks. Trading prices for the Company’s securities may bear little or no relationship to the actual recovery, if any, by holders of the Company’s securities in the Cases. The Company expects that holders of shares of the Company’s common stock could experience a significant or complete loss on their investment, depending on the outcome of the Cases. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.
In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. Investors should consider the areas of risk and uncertainty described above, as well as those discussed in the 2022 Report under the heading “Part I—Item 1A. Risk Factors.” The uncertainties surrounding the Company's financial condition and operations, the effects of the delisting from NYSE American, and the ongoing Chapter 11 proceedings should be given particular attention by investors. Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and we caution investors not to rely upon them unduly.
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The following discussion provides an analysis of the results of continuing operations, an overview of our liquidity and capital resources and other items related to our business. Unless otherwise specified, the financial information and discussion in this Form 10-Q are as of and for the three and six months ended June 30, 2023 and are based on our continuing operations; they exclude any results of our discontinued operations. Please refer to “Note 5—Changes in Business” to the unaudited condensed consolidated financial statements included in this Form 10-Q for additional information on our discontinued operations.
This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and our audited consolidated financial statements and notes thereto included in the 2022 Report.
Recent Developments
Bankruptcy Proceedings and Going Concern
On July 22, 2023, the Company and its subsidiaries filed the Bankruptcy Petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Cases are being jointly administered under the caption In re Williams Industrial Services Group Inc., et al. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. On July 25, 2023, the Bankruptcy Court issued orders approving the “first day” relief motions on an interim basis, authorizing the Company to, among other things, enter into the DIP Credit Facilities and pay employee wages and benefits. The Debtors will continue their operations in the ordinary course of business as debtors-in-possession. It is anticipated that substantially all of the business and operations of WIS, the entity carrying on the Company’s water projects, will be discontinued as a result of the Cases. There has been no order confirming a plan of reorganization, arrangement, or liquidation of the Debtors’ assets in the Cases, and the Debtors are seeking the sale of the Transferred Assets through the Purchase Agreement and will seek Court approval of such sale.
The bankruptcy filing and financial challenges raise substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the issuance of this Form 10-Q.
Purchase Agreement
On July 22, 2023, prior to the filing of the Bankruptcy Petitions, the Company and certain of its subsidiaries entered into the “stalking horse” Purchase Agreement with EnergySolutions, pursuant to which, among other things, the Sellers will sell substantially all of their assets relating to (i) the business of providing a broad range of construction and maintenance services to customers in the nuclear, conventional power (fossil, hydro, natural gas), energy delivery, water and wastewater, pulp and paper, chemical and government industries, (ii) solely to the extent conducted pursuant to certain contracts of WIS, certain non-unionized pulp and paper operations, and (iii) the business as conducted by WPS and WSS. WIS will retain its water and wastewater business, the non-unionized pulp and paper business not included as part of the Business and its transmission and distribution business, and the Sellers will retain any other business of the Sellers not set forth in clauses (i)-(iii) above. The Purchase Agreement provides that the aggregate consideration to be paid by EnergySolutions for the sale of all of the Transferred Assets and the obligations of the Sellers as set forth in the Purchase Agreement shall be an amount in cash equal to the sum of $60.0 million, less (i) any deductions on account of certain cure costs that may be required to be paid pursuant to the Bankruptcy Code in order to cure monetary defaults under certain contracts assumed and assigned to EnergySolutions and (ii) the aggregate amount of all overdue payables as of 11:59 p.m. E.T. on the day that is six business days prior to the closing date, subject to certain limitations. As additional consideration for the Transferred Assets, EnergySolutions will assume certain liabilities of the Sellers relating to the Business at the closing.
The transactions are part of a sale process under Section 363 of the Bankruptcy Code that will be subject to approval by the Court and compliance with agreed upon and Court-approved bidding procedures allowing for the submission of higher or otherwise better offers and satisfaction of other agreed-upon conditions. In accordance with the sale process under Section 363 of the Bankruptcy Code, notice of the proposed sale to EnergySolutions was given to third parties and competing bids are being solicited. The Company will manage the bidding process and evaluate the bids, in consultation with its advisors and as overseen by the Court.
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The Purchase Agreement contains customary representations and warranties of the parties and is subject to a number of conditions to closing and termination provisions, including that either party can terminate the Purchase Agreement if the closing has not occurred by the date that is 57 days following the date of filing the Bankruptcy Petitions, unless such date is extended by (i) the Sellers with the written consent of the applicable DIP Revolving Lenders and the DIP Term Loan Lenders for an additional period not to exceed 120 days from the date of the Purchase Agreement or (ii) EnergySolutions and the Sellers to such other subsequent date as may be mutually agreed by EnergySolutions and the Company in writing. The Purchase Agreement also provides that the Company will pay a break-up fee to EnergySolutions equal to $2.4 million upon termination of the transaction in certain circumstances and for the reimbursement of EnergySolutions’ expenses incurred in connection with the Purchase Agreement up to an aggregate amount of $1.0 million in the event of termination of the Purchase Agreement in certain circumstances.
Debtor-in-Possession Financing
In connection with filing the Bankruptcy Petitions and the entry by the Court of the Interim DIP Order on July 25, 2023, the Debtors entered into the DIP Credit Agreements. The DIP Revolving Credit Agreement allows the Debtors to access up to the lesser of the Borrowing Base (as defined in the DIP Revolving Credit Agreement) or $12.0 million, less the amount of all Prepetition Revolving Credit Obligations. The DIP Term Loan Agreement provides the Debtors with a secured superpriority debtor-in-possession term loan facility not to exceed $19.5 million, with an immediate availability of $14.0 million upon the entry of the Interim DIP Order and the balance of which will be available after entry of the final order by the Court, which has not been obtained at this time. Borrowings under the DIP Credit Facilities are senior secured obligations of the Debtors, secured by superpriority liens on the assets of the Debtors, subject to customary exceptions. The DIP Credit Agreements contain various customary covenants, as well as covenants mandating compliance by the Debtors with a 13-week budget, variance testing, and reporting requirements. The proceeds from the DIP Credit Facilities may be used for, among other things, post-petition working capital, expenses related to the bankruptcy proceedings, payment of court-approved adequate protection obligations, and other court-approved purposes. In addition, the filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s and the other Debtors’ obligations under its then-outstanding debt, including the Revolving Credit Facility, the Term Loan, and the Wynnefield Notes. These debt instruments provide that, as a result of the Bankruptcy Petitions, the principal, interest and any prepayment premiums due thereunder shall immediately become due and payable. Any efforts to enforce payment obligations under these debt instruments are automatically stayed as a result of the Bankruptcy Petitions, and the creditors’ rights of enforcement in respect of the debt are subject to the applicable provisions of the Bankruptcy Code.
Delisting from NYSE American
On July 24, 2023, the Company received written notice from the staff of NYSE Regulation that, as a result of the Cases and in accordance with Section 1003(c)(iii) of the NYSE American Company Guide, NYSE Regulation had determined to commence proceedings to delist the common stock of the Company. Trading of the Company’s common stock on the NYSE American was suspended on July 24, 2023, and the delisting became effective August 11, 2023, 10 days after the NYSE American filed the Form 25 with the SEC. The Company’s common stock is currently quoted on the OTC Pink Market operated by the by OTC Markets Group Inc. under the symbol “WLMSQ.” The Company can provide no assurance that the Company’s common stock will continue to trade on this market, whether broker-dealers will continue to provide public quotes of the Company’s common stock on this market, whether the trading volume of the Company’s common stock will be sufficient to provide for an efficient trading market or whether quotes for the Company’s common stock will continue on this market in the future.
Chief Restructuring Officer
Effective on July 27, 2023, the Company appointed Edward Gavin to serve as the Chief Restructuring Officer (“CRO”) of the Company for such a term and in accordance with the terms and conditions of that certain engagement letter, dated as of July 20, 2023 by and among and the Company and Gavin/Solmonese LLC (the “Engagement Letter”). As further set forth in the Engagement Letter, Mr. Gavin’s authority as CRO includes, in coordination with the Company’s advisors and management, (i) overseeing the administration of the Cases for the Company in Delaware, (ii) representing the Company in Court proceedings as to financial matters that may come before the Court, (iii) monitoring the debtor-in-possession budget and approving all payments, and (iv) managing creditor committees and negotiating as necessary. The appointment of a CRO by the Company was a condition of obtaining the DIP Credit Facilities.
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Backlog
The services we provide are typically carried out under construction contracts, long-term maintenance contracts and master service agreements. Total backlog represents the dollar amount of revenue expected to be recorded in the future for work performed under awarded contracts.
Revenue estimates included in our backlog can be subject to change as a result of project accelerations, cancellations or delays due to various factors, including, but not limited to, the customer’s budgetary constraints and adverse weather. These factors can also cause revenue amounts to be recognized in different periods and at levels other than those originally projected. Additional work that is not identified under the original contract is added to our estimated backlog when we reach an agreement with the customer as to the scope and pricing of that additional work. Backlog is reduced as work is performed and revenue is recognized, or upon cancellation.
Backlog is not a measure defined by GAAP, and our methodology for determining backlog may vary from the methodology used by other companies in determining their backlog amounts. Backlog may not be indicative of future operating results and projects in our backlog may be cancelled, modified, or otherwise altered by our customers. We utilize our calculation of backlog to assist in measuring aggregate awards under existing contractual relationships with our customers. We believe our backlog disclosures will assist investors in better understanding this estimate of the services to be performed pursuant to awards by our customers under existing contractual relationships.
The following tables summarize our backlog:
(in thousands) | June 30, 2023 | December 31, 2022 | ||||
Cost plus | $ | 186,158 | $ | 291,894 | ||
Lump sum | 7,487 | 41,309 | ||||
Total | $ | 193,645 | $ | 333,203 | ||
(in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | ||||
Backlog - beginning of period | $ | 234,927 | $ | 333,203 | ||
New awards | 11,053 | 27,126 | ||||
Adjustments and cancellations, net | 31,008 | 20,129 | ||||
Revenue recognized | (83,343) | (186,813) | ||||
Backlog - end of period | $ | 193,645 | $ | 193,645 | ||
Total backlog as of June 30, 2023 was $193.6 million, compared with $333.2 million on December 31, 2022, a decrease of $139.6 million driven by converting several large nuclear projects from backlog to revenue and exiting the transmission and distribution, chemical and water end-markets. At the same time, current backlog also reflects the fact that the Company is pursuing a narrower set of core markets for new business and that the release of public funding under the Inflation Reduction Act and Infrastructure Investment and Jobs Acts into those markets is moving slower than originally anticipated.
We estimate that $68.3 million, or 35.3% of total backlog on June 30, 2023, will be converted to revenue within the next twelve months and $44.6 million, or 23.1% of total backlog, will be converted to revenue within the remainder of the fiscal year. As of December 31, 2022, we estimated that approximately $178.6 million of our year-end backlog would be converted to revenue during 2023. Please refer to “Part I—Item 1. Business” under “Backlog” included in the 2022 Report for additional information.
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Results of Operations
The following summary and discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 |
| 2022 | |||||||
Revenue | $ | 83,343 | $ | 56,059 | $ | 186,813 | $ | 125,618 | ||||
Cost of revenue | 87,293 | 53,778 | 183,072 | 117,628 | ||||||||
Gross profit (loss) | (3,950) | 2,281 | 3,741 | 7,990 | ||||||||
Selling and marketing expenses | 182 | 402 | 318 | 732 | ||||||||
General and administrative expenses | 5,976 | 6,294 | 11,905 | 12,365 | ||||||||
Depreciation and amortization expense | 43 | 46 | 98 | 112 | ||||||||
Total operating expenses | 6,201 | 6,742 | 12,321 | 13,209 | ||||||||
Operating loss | (10,151) | (4,461) | (8,580) | (5,219) | ||||||||
Interest expense, net | 1,971 | 1,261 | 3,764 | 2,480 | ||||||||
Goodwill and intangible impairment expense | 47,900 | — | 47,900 | — | ||||||||
Other income, net | (86) | (240) | (147) | (419) | ||||||||
Loss from continuing operations before income tax | (59,936) | (5,482) | (60,097) | (7,280) | ||||||||
Income tax expense (benefit) | (3,162) | (171) | (3,177) | 58 | ||||||||
Loss from continuing operations | $ | (56,774) | $ | (5,311) | $ | (56,920) | $ | (7,338) | ||||
Revenue for the three months ended June 30, 2023 increased $27.3 million, or 48.6%, compared with the corresponding period in 2022. This was primarily driven by $37.2 million related to a nuclear project, partially offset by a $9.6 million reduction due to exiting the net loss projects related to the energy delivery, water and chemical businesses.
Revenue for the six months ended June 30, 2023 increased $61.2 million, or 48.7%, compared with the corresponding period in 2022. This was primarily driven by a $78.0 million increase related to a nuclear project and a $2.1 million increase in the chemical market. These gains were partially offset by a $5.9 million decrease in the water end market, $5.5 million decrease resulting from exiting the Canadian nuclear market, and a $4.8 million reduction in volume in the Company’s decommissioning market.
Gross profit for the three months ended June 30, 2023, decreased by $6.2 million compared with the corresponding period in 2022. This was primarily driven by our net loss projects related to the energy delivery, water, and chemical end markets.
Gross profit for the six months ended June 30, 2023, decreased by $4.2 million compared with the corresponding period in 2022. This decrease was primarily driven by lower profits on a nuclear project and net loss projects related to the energy delivery, water, and chemical end markets.
Operating loss for the three months ended June 30, 2023 increased by $5.7 million compared with the corresponding in 2022. This increase was primarily driven by net loss projects in the transmission and distribution, water, and chemical businesses. Please refer to the Gross Margin Reconciliation below for additional information.
Operating loss for the six months ended June 30, 2023, also experienced an increase of $3.4 million compared with the corresponding in 2022. This was primarily driven by net loss projects in the transmission and distribution, water, and chemical businesses. Additional information can be found in the Gross Margin Reconciliation below.
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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES
GROSS MARGIN RECONCILIATION
NON-GAAP FINANCIAL MEASURE (UNAUDITED)
The following table reconciles our adjusted gross margin to our actual gross margin by deducting the energy transmission and distribution projects, chemical projects and large lump sum water projects that are underperforming. We believe this information is meaningful as it isolates the impact these underperforming projects have on gross margin. Because adjusted gross margin is not calculated in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as substitute for, or superior to, financial measures prepared in accordance with GAAP.
(in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | ||||
Revenue | $ | 83,343 | $ | 186,813 | ||
Cost of revenue | 87,293 | 183,072 | ||||
Gross profit (loss) | (3,950) | 3,741 | ||||
Gross margin | (4.7)% | 2.0% | ||||
Minus: revenue from transmission and distribution business | (71) | (1,427) | ||||
Minus: revenue from Florida lump sum water projects | (2,149) | (8,713) | ||||
Minus: revenue from chemical projects | 200 | (904) | ||||
Minus: total revenue deducted | (2,020) | (11,044) | ||||
Minus: cost of revenue from transmission and distribution business | (51) | (2,878) | ||||
Minus: cost of revenue from the Florida lump sum water projects | (4,962) | (13,472) | ||||
Minus: cost of revenue from chemical projects | 969 | (515) | ||||
Minus: total cost of revenue deducted | (4,044) | (16,865) | ||||
Adjusted revenue | 81,323 | 175,769 | ||||
Adjusted cost of revenue | 83,249 | 166,207 | ||||
Adjusted gross profit (loss) | $ | (1,926) | $ | 9,562 | ||
Adjusted gross profit (loss) margin | (2.4)% | 5.4% | ||||
On July 20, 2023, WIS made a strategic decision to exit the water projects business in Florida and Texas. This led to the discontinuation of a significant portion of WIS's business and operations in the water projects division. As a result of the exit, the Company made financial adjustments, reducing its contract liability by $3.5 million and revenue by $0.6 million for the three-month and six-month periods ending June 30, 2023. Despite exiting the water projects, the Company will continue to focus on non-union pulp and paper mill maintenance and repair activities under WIS. Additionally, on July 25, 2023, the Company took steps to reject the customer contracts associated with the water projects by filing motions with the Court. The Court will assess these motions at a hearing scheduled for August 17, 2023.
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General and Administrative Expenses
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 |
| 2022 | |||||||
Employee-related expenses | $ | 2,236 | $ | 2,673 | $ | 4,533 | $ | 5,729 | ||||
Stock-based compensation expense | (614) | 608 | — | 577 | ||||||||
Professional fees | 1,731 | 1,293 | 3,599 | 2,944 | ||||||||
Other expenses | 2,623 | 1,720 | 3,773 | 3,115 | ||||||||
Total | $ | 5,976 | $ | 6,294 | $ | 11,905 | $ | 12,365 | ||||
Total general and administrative expenses for the three months ended June 30, 2023, decreased by $0.3 million, representing a decline of 5.1% compared to the corresponding period in 2022. The decrease was primarily attributable to an expense reduction resulting from a stock-based compensation adjustment related to the Chapter 11 Cases. Management's expectations regarding performance objectives were not met, leading to this adjustment, and the Company's stock experienced a drastic devaluation during the period. Additionally, employee-related expenses, including salaries and benefits, decreased, contributing to the overall expense reduction. These expense reductions were partially offset by increases in other expenses, including subscriptions, software, and hardware costs, as well as higher professional fees incurred during the period.
Total general and administrative expenses for the six months ended June 30, 2023, decreased by $0.5 million, representing a decline of 3.7% compared to the corresponding period in 2022. The decrease was primarily driven by a $1.2 million decrease in employee-related expenses, specifically related to salaries and benefits, and a $0.6 million expense reduction resulting from a stock-based compensation adjustment related to the Chapter 11 Cases. Management's expectations regarding performance objectives were not met, leading to this adjustment, and the Company's stock experienced a drastic devaluation. However, these expense reductions were offset by a $1.3 million increase in professional fees and other expenses incurred during the period.
Total Other (Income) Expense, Net
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 |
| 2022 | |||||||
Interest expense, net | $ | 1,971 | $ | 1,261 | $ | 3,764 | $ | 2,480 | ||||
Goodwill and intangible impairment expense | 47,900 | — | 47,900 | — | ||||||||
Other income, net | (86) | (240) | (147) | (419) | ||||||||
Total | $ | 49,785 | $ | 1,021 | $ | 51,517 | $ | 2,061 | ||||
Total other expense, net, for the three months ended June 30, 2023 increased $48.8 million compared with the corresponding period in 2022. The increase was driven by a $47.9 million goodwill and intangible asset impairment expense and a $0.7 million increase in interest expense related to our short-term and long-term debt and a $0.2 million decrease in other income.
Total other expense, net, for the six months ended June 30, 2023 increased $49.5 million compared with the corresponding period in 2022. The increase was driven by a $47.9 million goodwill and intangible asset impairment expense, a $1.3 million increase in interest expense related to our short-term and long-term debt and a $0.3 million decrease in other income associated with joint venture income and disposal of equipment.
The goodwill and intangible asset impairment reflects the substantial devaluation of the Company’s overall value and its inability to meet performance objectives due to the challenging financial conditions concluding in filing Chapter 11 Bankruptcy. As a result of the evaluation, we recognized a total impairment loss of $47.9 million, comprising $12.5 million contributing to an intangible asset and $35.4 million contributing to a Goodwill Asset.
Income Tax Expense
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | 2023 |
| 2022 | |||||||
Income tax expense (benefit) | $ | (3,162) | $ | (171) | $ | (3,177) | $ | 58 | ||||
Income tax expense for the interim periods is based on estimates of the effective tax rate for the entire fiscal year. The effective income tax rate is based upon the estimated income during the calendar year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods for settlements of tax audits or assessments and the resolution or identification of tax position uncertainties.
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For the three months ended June 30, 2023, the Company recorded income tax benefit from continuing operations of $3.2 million, or 5.3% of pretax loss from continuing operations, compared with income tax benefit from continuing operations of $0.2 million, or 3.1% of pretax loss from continuing operations, in the corresponding period of 2022. For the six months ended June 30, 2023, the Company recorded income tax benefit from continuing operations of $3.2 million, or 5.3% of pretax loss from continuing operations, compared with income tax expense from continuing operations of $0.1 million, or (0.8)% of pretax loss from continuing operations, in the corresponding period of 2022.
The decrease in income tax provision from continuing operations for the three and six months ended June 30, 2023, compared with the corresponding periods in 2022, was primarily related to the $2.4 million income tax benefit due to the reversal of indefinitely lived deferred tax liabilities net of the indefinitely lived deferred tax assets, and the $0.8 million income tax benefit for the release of FIN 48 tax positions, including the interest and penalties, in compliance of the Company’s policy.
Discontinued Operations
See “Note 5—Changes in Business” to the unaudited condensed consolidated financial statements included in this Form 10-Q for information regarding discontinued operations.
Liquidity and Capital Resources
As previously disclosed, on July 22, 2023, the Company, in conjunction with its subsidiaries, filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. These proceedings are being jointly administered under the caption In re Williams Industrial Services Group Inc., et al. Throughout this process, the Debtors will continue their operations as debtors-in-possession in the ordinary course of business, while simultaneously pursuing a structured sale of the Transferred Assets through a competitive bidding and auction process under Section 363 of the Bankruptcy Code.
A pivotal step in our strategic efforts occurred on July 22, 2023, prior to the filing of the Bankruptcy Petitions, as the Company and its subsidiaries entered into a "stalking horse" Purchase Agreement with EnergySolutions. This Purchase Agreement provides for the sale of substantially all of the Sellers' assets related to the Business to EnergySolutions for a cash consideration of $60.0 million, subject to certain specified deductions and adjustments as outlined in the Purchase Agreement. The water and wastewater business, the non-unionized pulp and paper business not included as part of the Business, and the transmission and distribution business associated with WIS are excluded from EnergySolutions' purchase. The Purchase Agreement is subject to Court approval and compliance with agreed-upon bidding procedures under Section 363 of the Bankruptcy Code. Following the anticipated closing of the Purchase Agreement, the remainder of the Company is currently expected to undergo liquidation under Chapter 11 plan or conversion to Chapter 7 of the Bankruptcy Code. The Company cannot provide any assurance that it will be able to successfully complete a sale of the Business or that it will be able to continue to fund its operations throughout the Chapter 11 process.
The Purchase Agreement represents a key part of our liquidity plan to address the challenges we are facing. This plan, as described in "Note 2—Liquidity," outlines a series of strategic measures that have been undertaken to mitigate liquidity concerns and ensure the continuity of our operations. These measures include utilizing DIP loans, exiting underperforming operations, reducing operating expenses, optimizing working capital cycles, and other initiatives aimed at strengthening our financial position pending the sale of the business and the subsequent winding up of our operations.
As the Chapter 11 process continues, our operations remain subject to the inherent uncertainties and risks associated with such proceedings. The outcome of the Chapter 11 Cases may lead to a notable transformation in the composition and extent of our assets and liabilities. Accordingly, the depiction of our operations, properties, liquidity, and capital resources in this Form 10-Q may not fully capture the evolving scenario during the Chapter 11 Cases.
During the first six months of 2023, our liquidity was primarily supported by borrowings under the Revolving Credit Facility, additional borrowings under the Term Loan, issuance of Wynnefield Notes, and working capital management. Moreover, strategic actions were taken, including the amendments to the Revolving Credit Facility and the Term Loan and issuance of the Wynnefield Notes, to navigate liquidity constraints and sustain operations while exploring strategic alternatives. This process culminated in the commencement of the Chapter 11 Cases.
For additional information regarding our liquidity outlook, including the uncertainty regarding our capacity to continue as a going concern pending the closing of the sale of the Business and the ongoing liquidity challenges, please refer to "Note 1—Business and Basis of Presentation" under "Going Concern," "Note 2—Liquidity," and "Note 9—Debt" within the unaudited condensed consolidated financial statements provided in this Form 10-Q.
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Net Cash Flows
Our net consolidated cash flows, including cash flows related to discontinued operations, consisted of the following:
Six Months Ended June 30, | ||||||
(in thousands) | 2023 |
| 2022 | |||
Cash flows provided by (used in): | ||||||
Operating activities | $ | 1,032 | $ | (10,263) | ||
Investing activities |
| 235 |
| (438) | ||
Financing activities |
| (1,717) |
| 8,859 | ||
Effect of exchange rate changes on cash |
| — |
| 16 | ||
Net change in cash, cash equivalents and restricted cash | $ | (450) | $ | (1,826) | ||
Cash and Cash Equivalents
As of June 30, 2023, our operating unrestricted cash and cash equivalents decreased $0.5 million to $45,582 from $0.5 million as of December 31, 2022. As of June 30, 2023, $32,361 of operating cash was held in U.S. bank accounts and $13,221 was held in Canada. Total liquidity (the sum of unrestricted cash and availability under the Revolving Credit Facility) was $5.8 million at the end of the first half of 2023.
Operating Activities
Cash flows from operating activities result primarily from earnings sources and are affected by changes in operating assets and liabilities, which consist primarily of working capital balances related to our projects. For the six months ended June 30, 2023, cash provided by operating activities increased $11.3 million compared to the corresponding period in 2022. For the six months ended June 30, 2023, cash provided by operating activities totaled $1.0 million, compared to $10.3 million of cash used in operating activities in the corresponding period in 2022. Major components of cash flows provided by operating activities for the six months ended June 30, 2023 were as follows:
Six Months Ended June 30, | |||
(in thousands) | 2023 | ||
Cash flows provided by (used in): | |||
Net loss | $ | (56,290) | |
Net income from discontinued operations | (630) | ||
Deferred income tax benefit | (2,395) | ||
Depreciation and amortization on plant, property and equipment | 98 | ||
Amortization of deferred financing costs | 415 | ||
Amortization of debt discount | 100 | ||
Loss on disposals of property, plant and equipment | 86 | ||
Bad debt expense | (205) | ||
Stock-based compensation | — | ||
Paid-in-kind interest (1) | 883 | ||
Impairment expense | 47,900 | ||
Cash effect of changes in operating assets and liabilities |
| 11,164 | |
Net cash provided by operating activities, continuing operations | 1,126 | ||
Net cash used in operating activities, discontinued operations | (94) | ||
Net cash provided by operating activities | $ | 1,032 | |
| (1) | Paid-in-kind interest is added to the Term Loan principal and will be paid at maturity. |
Cash effect of changes in operating assets and liabilities for the six months ended June 30, 2023 included the following (includes foreign currency translation conversion from Canadian dollar to United States dollar):
| ● | Accounts receivable, excluding credit losses recognized during the period, decreased $10.5 million during the six months ended June 30, 2023, which increased cash flows from operating activities. The variance is primarily attributable to the timing of billings and collections. |
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| ● | Contract liabilities, which consisted of billings on uncompleted contracts in excess of costs and estimated earnings, decreased $5.6 million during the six months of June 30, 2023, which decreased cash flows from operating activities. In addition, contract assets, which consisted of costs and estimated earnings in excess of billings on uncompleted contracts, decreased $4.7 million during the first six months of June 30, 2023, which increased cash flows from operating activities. These balances can experience significant fluctuations based on business volume and the timing of when job costs are incurred and the timing of customer billings and payments. |
| ● | Other current assets decreased $2.5 million during the six months ended June 30, 2023, which increased cash flows from operating activities. The variance was primarily due to unamortized commercial insurance premiums, security deposits related to real estate and prepaid expenses related to professional retainers and subscriptions. |
| ● | Accrued and other liabilities and accounts payable decreased $2.4 million during the six months ended June 30, 2023, which decreased cash flows from operating activities. The liabilities and payables were primarily related to a decrease in short-term lease liabilities, accrued job costs and accounts payable, partially offset by an increase in workers compensation, legal and professional fees, and accounts payable. |
| ● | Other long-term assets decreased by $1.5 million during the six months ended June 30, 2023 which increased cash flows from operating activities. The variance was primarily due to decreases in right-of-use lease assets, software subscriptions and debt issuance costs, partially offset by an increase in joint venture earnings. |
Investing Activities
Cash flows from investing activities were insignificant for the six months ended June 30, 2023, consistent with the corresponding period in 2022.
Financing Activities
For the six months ended June 30, 2023, net cash used in financing activities was $1.7 million primarily composed of cash used in prepayments exceeding our borrowings under the Revolving Credit Facility by $8.4 million and approximately $0.1 million for payment of statutory taxes related to stock-based compensation. This was partially offset by a $1.0 advancement pursuant to the Term Loan, delayed draw term loans in an aggregate principal amount of $5.0 million and $0.8 million from the Wynnefield Notes.
During the first half of 2022, net cash provided by financing activities of $8.9 million was primarily due to cash provided by our borrowings exceeding our repayments from customers under the Revolving Credit Facility by $9.5 million, partially offset by a $0.5 million payment on our Term Loan and approximately $0.2 million for payment of statutory taxes related to stock-based compensation.
For additional information about our outstanding debt, please refer to “Note 9—Debt” and “Note 15—Subsequent Events” to the unaudited condensed consolidated financial statements included in this Form 10-Q.
Effect of Exchange Rate Changes on Cash
For both the six months ended June 30, 2023 and 2022, the effect of Canadian foreign exchange rate changes on our cash balances was not material.
Liquidity Outlook
As of June 30, 2023, the Company continued to face financial challenges, including liquidity constraints, which raise substantial doubt about its ability to continued as a going concern. The Company's liquidity position has been adversely impacted by cash flow requirements related to specific projects and ongoing operations.
To address these financial challenges and ensure the continuity of its operations pending the sale of the Business, the Company filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code on July 22, 2023. The Company and its subsidiaries will operate as debtors-in-possession under the jurisdiction of the United States Bankruptcy Court for the District of Delaware in accordance with applicable provisions of the Bankruptcy Code and orders of the Court.
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In connection with the bankruptcy filing and the Court's entry of the Interim DIP Order on July 25, 2023, the Debtors entered into the DIP Credit Facilities to support their operations during the Chapter 11 process. The Company and certain of its subsidiaries also entered into the “stalking horse” Purchase Agreement with EnergySolutions Nuclear Services, LLC on July 22, 2023, prior to the filing of the Bankruptcy Petitions. The DIP Credit Facilities and the Purchase Agreement are described further elsewhere in this Form 10-Q.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. However, the recent bankruptcy filing and financial challenges raise substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the issuance of this Form 10-Q.
The Company is continuing to implement a liquidity improvement plan to address profitability and reduce operating expenses during the course of the Chapter 11 Cases. Steps taken include aggressive cost reductions, improved collection terms with customers, and discontinuing underperforming operations. The Company's plan also includes optimizing cash flow by managing labor payrolls and collections from customers. The Company anticipates it may continue to experience periodic constraints on liquidity due to cash flow requirements of specific projects through the Chapter 11 process and additional financing may be necessary to address potential liquidity shortfalls during the Chapter 11 process. The Company remains focused on implementing its liquidity improvement plan and diligently managing business operations while navigating the Chapter 11 process. The Company's continuation as a going concern is dependent upon successfully managing the Section 363 bidding process and closing on a purchase agreement, securing necessary financing and addressing liquidity challenges during the Chapter 11 process. For additional information, please refer to “Note 2—Liquidity”, “Note 9—Debt” and “Note 15—Subsequent Events” to the unaudited condensed consolidated financial statements included in this Form 10-Q.
The Company has also exited a portion of its underperforming operations within the transmission and distribution market in Florida and completed several underperforming chemical projects in Texas. On July 20, 2023, the Company made a strategic decision to exit the water projects business in Florida and Texas. This led to the discontinuation of a significant portion of WIS's business and operations in the water projects division. This action required the Company to make an adjustment that reduced our contract liability by $3.5 million and reduced revenue by $0.6 million for the three and six month periods ended June 30, 2023 but resulted in the cessation of work that resulted in net losses.
A variety of factors can affect the Company’s short- and long-term liquidity, the impact of which could be material, including, but not limited to: costs relating to the Chapter 11 Cases; the funding of certain of the Company’s previously disclosed underperforming contracts; cash required for funding ongoing operations and projects; matters relating to the Company’s contracts, including contracts billed based on milestones that may require the Company to incur significant expenditures prior to collections from its customers and others that allow for significant upfront billing at the beginning of a project, which temporarily increases liquidity in the near term; the outcome of potential contract disputes, which may be significant; payment collection issues, including those caused by economic slowdowns or other factors which can lead to credit deterioration of the Company’s customers; required interest payments on outstanding debt and operating and finance leases; pension obligations requiring annual contributions to multiemployer pension plans; insurance coverage for contracts that require the Company to indemnify third parties; and issuances of letters of credit.
Off-Balance Sheet Transactions
Our liquidity is currently not dependent on the use of off-balance sheet transactions but, in line with industry practice, we are often required to provide payment and performance surety bonds to customers and may be required to provide letters of credit. If performance assurances are extended to customers, generally our maximum potential exposure is limited in the contract with our customers. We frequently obtain similar performance assurances from third-party vendors and subcontractors for work performed in the ordinary course of contract execution. However, the total costs of a project could exceed our original cost estimates, and we could experience reduced gross profit or possibly a loss for a given project. In some cases, if we fail to meet certain performance standards, we may be subject to contractual liquidated damages.
As of June 30, 2023, we had a contingent liability for issued and outstanding standby letters of credit, generally issued to secure performance on customer contracts. As of June 30, 2023, we had $0.5 million of outstanding letters of credit under the Revolving Credit Facility sublimit and $0.4 million of outstanding cash collateralized standby letters of credit pursuant to a prior revolving credit facility with Wells Fargo Bank, National Association, and there were no amounts drawn upon these letters of credit. In addition, as of June 30, 2023, we had outstanding surety bonds of $60.3 million. Our subsidiaries also provide financial guarantees for certain contractual obligations in the ordinary course of business.
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Critical Accounting Policies and Use of Estimates
There have been no material changes to our critical accounting policies and estimates as set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2022 Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are not required to provide the information required under this item.
Item 4. Controls and Procedures.
Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, under the supervision of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Solely as a result of the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2023, our disclosure controls and procedures were not effective. However, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, notwithstanding the identified material weaknesses in our internal control over financial reporting, the financial statements in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Material Weakness in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in our 2022 Report, we identified two material weaknesses in our internal controls over financial reporting.
| 1. | We did not design and maintain effective user access controls to adequately restrict user access and the ability to modify financial data within certain financial applications, including ensuring appropriate segregation of duties relating to the preparation and review of journal entries in these financial applications. |
| 2. | We identified immaterial errors that indicated an additional deficiency existed in the Company’s internal control over financial reporting for the secondary reviews of potential loss accruals and approval of certain expenses. |
User Access Controls
To enhance the design and maintenance of effective user access controls, the Company established an access control review process to ensure appropriate segregation of duties related to the preparation and review of journal entries. The user access controls are currently designed to manage and monitor the authorization and permissions granted to individuals who require access to financial systems and data.
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The user access control enhancement incorporates:
| ● | Regular access control reviews are conducted to assess the appropriateness of user access rights. These reviews involve verifying that access permissions align with individuals' job responsibilities and are necessary for the performance of their duties. Access rights are periodically re-evaluated to ensure that they are up to date and remain relevant to employees' roles within the organization. |
Secondary Review Process/Loss Adjustments
To ensure the accuracy and reliability of our financial reporting, the Company has enhanced its secondary review process. This process involves a systematic evaluation of project cost estimates and expenses conducted by personnel within the operations, project controls and the accounting department. The secondary reviewers possess the necessary expertise and knowledge to identify potential errors, misstatements, or omissions.
In addition to the secondary review process, we evaluate the risk of potential loss adjustments that may have to be recognized during the reporting period or contingent liabilities or losses that may arise after the reporting period but before the issuance of the financial statements. These accruals are intended to ensure the appropriate recognition of potential losses in accordance with relevant accounting principles.
The enhancement of secondary reviews of potential loss accruals and approval of certain expenses include:
| ● | Management conducts a monthly project review of the accuracy of estimated costs at completion on fixed-price projects with operations, project controls and accounting to identify potential loss adjustments that may arise from changes in project execution. |
| ● | The Company reduced its threshold for project reviews with various levels of management. |
| ● | The Company increased its evaluation of project schedules, nature of costs and project execution compared to how the project was bid to identify potential risks in the estimated costs at completion. |
| ● | Senior management conducts reviews in the event of a 5% or greater discrepancy between project management and project controls. |
| ● | The secondary reviewers perform reconciliations to validate the consistency and accuracy of financial information across different sources and systems and compare the reported figures with underlying documentation, general ledger balances, and other relevant data to identify any discrepancies. |
The foregoing control deficiencies did not result in a misstatement of the Company’s interim or annual consolidated financial statements. However, these control deficiencies could have resulted in misstatements of interim or annual consolidated financial statements and disclosures that may have been material. Management has concluded that: (1) the Company has implemented changes to address the control deficiency related to the user access as described above, but those changes have not been subjected to testing by our external auditor and thus in the interim will continue to constitute a material weakness; (2) the above control deficiency pertaining to the secondary review of potential loss accruals continues to constitute a material weakness even though the Company has implemented additional procedures to improve the secondary review of potential loss accruals; and (3) in turn, the Company did not maintain effective internal control over financial reporting as of June 30, 2023.
While management is working on implementing a remediation plan regarding the current deficiencies and material weaknesses, no assurance can be made that such plan will be completed in a timely manner or that the updated controls and procedures associated with such plan will be deemed adequate after being subjected to testing.
Management’s Plan to Remediate the Material Weaknesses
Management has evaluated the user access controls material weakness described above and has updated its design and implementation of internal control over financial reporting to enhance the Company’s internal control environment. Having identified the material weakness relating to the secondary review and approval of certain expenses described above, we have initiated a review process related to this deficiency. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures.
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Changes in Internal Control over Financial Reporting
Under the applicable SEC rules, management is required to evaluate any changes in internal control over financial reporting that occurred during each fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Other than the changes described above regarding enhancements associated with ongoing remediation efforts, there were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II—OTHER INFORMATION
Item 1. Legal Proceedings.
The information included under “Litigation and Claims” in “Note 12—Commitments and Contingencies” to the unaudited condensed consolidated financial statements in this Form 10-Q is incorporated by reference into this Item.
Item 1A. | Risk Factors. |
Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition, and results of operations, and you should carefully consider them. There have not been any material changes to our risk factors from those reported in our 2022 Report other than as set forth below.
We may not be able to continue as a going concern and holders of our common stock could suffer a total loss of their investment.
Substantial doubt exists about the Company’s ability to continue as a going concern. It is likely that our equity securities will be canceled and extinguished in connection with the Chapter 11 Cases, and that the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests.
Trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. It is likely that our common stock will be canceled or that holders of such common stock will not receive any distribution with respect to, or be able to recover any portion of, their investments.
It is likely that our equity securities will be canceled, or that holders of such equity will not receive any distribution with respect to, or be able to recover any portion of, their investments. Following the filing of the Chapter 11 Cases, our common stock was delisted from the NYSE American and is now quoted on the OTC Pink Market under the symbol “WLMSQ.” Any trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock. We urge extreme caution with respect to existing and future investments in our equity and other securities. There is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.
We are subject to the risks and uncertainties associated with the Chapter 11 Cases.
During the Chapter 11 Cases, we plan to continue our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. As a consequence of filing the Chapter 11 Cases, we will be subject to the risks and uncertainties associated with bankruptcy. These risks include, but are not limited to, the following:
| ● | our ability to negotiate and consummate a Chapter 11 plan, including plans to sell certain assets pursuant to Chapter 11 of the Bankruptcy Code, the outcome and timing of such sale, and our ability to satisfy closing and other conditions to such sale; |
| ● | our ability to obtain the Bankruptcy Court’s approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Cases; |
| ● | our ability to continue funding operations through the Chapter 11 bankruptcy process, and the possibility that we may be unable to obtain any additional funding as needed; |
| ● | our ability to comply with the restrictions imposed by the terms and conditions of the DIP Credit Agreements and other financing arrangements; |
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| ● | the possibility that actions and decisions of our creditors and other third parties with interests in the Chapter 11 Cases may be inconsistent with our plans; |
| ● | the high costs of bankruptcy proceedings and related fees, particularly if delays in the Chapter 11 Cases increase fees and costs; |
| ● | objections to our wind down process, the DIP Credit Agreements, or other pleadings filed that could protract the Chapter 11 process; |
| ● | our ability to motivate and retain key employees throughout the Chapter 11 Cases; |
| ● | our ability to maintain contracts that are critical to our operations; and |
| ● | the effects of Chapter 11 on the interests of various constituents and financial stakeholders. |
Because of the risks and uncertainties associated with a voluntary filing for relief under Chapter 11 of the Bankruptcy Code and the related proceedings, we cannot accurately predict or quantify the ultimate impact that events that occur during the Chapter 11 Cases may have on ultimate recovery for stakeholders, including creditors. As mentioned above, it is likely that holders of our common stock will not recover any portion of their investments.
If we are not able to obtain confirmation of a plan of reorganization, or if current liquidity is insufficient, we could be required to liquidate under Chapter 7 of the Bankruptcy Code.
If confirmation by the Bankruptcy Court of a plan of reorganization does not occur, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of claims and interests or upon the showing of cause, the Bankruptcy Court may convert our Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code.
Our common stock has been delisted from the NYSE American.
Our common stock began trading on the OTC Pink Market under the symbol “WLMSQ” on July 25, 2023. We can provide no assurance that our common stock will continue to trade on this market, whether broker-dealers will provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future, which could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our common stock. Furthermore, because of the limited market and generally low volume of trading in our common stock, the price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, changes in the markets’ perception of our securities, and announcements made by us or third parties with interests in the Chapter 11 Cases.
The pursuit of the Chapter 11 Cases has consumed, and will continue to consume, a substantial portion of the time and attention of our corporate management and will impact how our business is conducted, which may have an adverse effect on our business and results of operations.
The requirements of the Chapter 11 Cases have consumed and will continue to consume a substantial portion of our corporate management’s time and attention and leave them with less time to devote to the operations of our business. This diversion of corporate management’s attention may have a material adverse effect on the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted.
We depend on a few highly skilled key employees to navigate the Chapter 11 Cases, and if we are unable to retain, manage, and appropriately compensate them, the outcome of the Chapter 11 Cases could be adversely affected.
Our ability to consummate a successful plan of reorganization is based on the continued service of our senior management team and other key employees, and on our ability to continue to motivate and appropriately compensate key employees. During the pendency of the Chapter 11 Cases, our employees will face considerable distraction and uncertainty, and we may experience increased levels of employee attrition. We may not be able to retain the services of our key employees in the future. If our key employees fail to work together effectively and to execute our plans and strategies, the Chapter 11 Cases could be prolonged or adversely affected.
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101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) Condensed Consolidated Statements of Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.♦ | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).♦ |
♦ Filed herewith.
* Indicates a management contract or compensatory plan or arrangement.
** Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Registration S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WILLIAMS INDUSTRIAL SERVICES GROUP INC. | ||
Date: August 16, 2023 | By: | /s/ Randall R. Lay |
Randall R. Lay | ||
Executive Vice President, Chief Financial Officer and Chief Operating Officer | ||
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