UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File No. 001-37707
THE PECK COMPANY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 47-2150172 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
4050 Williston Road, #511 South Burlington, Vermont |
05403 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(802) 658-3378
(Registrant’s telephone number)
N/A
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.0001 par value | PECK | Nasdaq Capital Market |
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 requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [X] | Smaller reporting company | [X] |
| Emerging growth company | [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
The number of shares of the registrant’s common stock outstanding as of May 14, 2020 was 5,298,159.
THE PECK COMPANY HOLDINGS, INC.
Form 10-Q
Table of Contents
| 2 |
The Peck Company Holdings, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2020 and December 31, 2019
| March 31, 2020 | December 31, 2019 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 56,548 | $ | 95,930 | ||||
| Accounts receivable, net of allowance | 7,127,680 | 7,294,605 | ||||||
| Costs and estimated earnings in excess of billings | 1,470,076 | 1,272,372 | ||||||
| Other current assets | 139,048 | 201,326 | ||||||
| Total current assets | 8,793,352 | 8,864,233 | ||||||
| Property and equipment: | ||||||||
| Building and improvements | 672,727 | 672,727 | ||||||
| Vehicles | 1,283,364 | 1,283,364 | ||||||
| Tools and equipment | 517,602 | 517,602 | ||||||
| Solar arrays | 6,386,025 | 6,386,025 | ||||||
| 8,859,718 | 8,859,718 | |||||||
| Less accumulated depreciation | (2,348,019 | ) | (2,193,007 | ) | ||||
| 6,511,911 | 6,666,711 | |||||||
| Other Assets: | ||||||||
| Captive insurance investment | 198,105 | 140,875 | ||||||
| Total assets | $ | 15,503,156 | $ | 15,671,819 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable, includes bank overdrafts of $631,936 and $1,496,695 at March 31, 2020 and December 31, 2019, respectively | $ | 2,496,275 | $ | 4,274,517 | ||||
| Accrued expenses | 138,125 | 119,211 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 287,451 | 126,026 | ||||||
| Due to stockholders | 51,315 | 342,718 | ||||||
| Line of credit | 5,622,691 | 3,185,041 | ||||||
| Current portion of deferred compensation | 27,880 | 27,880 | ||||||
| Current portion of long-term debt | 376,814 | 426,254 | ||||||
| Total current liabilities | 9,000,551 | 8,501,647 | ||||||
| Long-term liabilities: | ||||||||
| Deferred compensation, net of current portion | 81,133 | 88,883 | ||||||
| Deferred tax liability | 955,420 | 1,098,481 | ||||||
| Long-term debt, net of current portion | 1,881,923 | 1,966,047 | ||||||
| Total liabilities | 11,919,027 | 11,655,058 | ||||||
| Commitments and Contingencies (Note 9) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock – 0.0001 par value 1,000,000 shares authorized, 0 issued and outstanding | - | - | ||||||
| Common stock – 0.0001 par value 49,000,000 shares authorized, 5,298,159 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | 529 | 529 | ||||||
| Additional paid-in capital | 412,356 | 412,356 | ||||||
| Retained earnings | 3,171,244 | 3,603,876 | ||||||
| Total Stockholders’ equity | 3,584,129 | 4,016,761 | ||||||
| Total liabilities and stockholders’ equity | $ | 15,503,156 | $ | 15,671,819 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 3 |
The Peck Company Holdings, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended March 31, 2020 and 2019
| Three Months ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Earned revenue | $ | 3,984,680 | $ | 3,850,477 | ||||
| Cost of earned revenue | 3,668,167 | 2,963,450 | ||||||
| Gross profit | 316,513 | 887,027 | ||||||
| Warehousing and other operating expenses | 192,942 | 207,507 | ||||||
| General and administrative expenses | 617,748 | 257,709 | ||||||
| Total operating expenses | 810,690 | 456,216 | ||||||
| Operating (loss) income | (494,177 | ) | 421,811 | |||||
| Other expenses | ||||||||
| Interest expense | (80,766 | ) | (44,659 | ) | ||||
| Income (loss) before income taxes | (574,943 | ) | 377,152 | |||||
| (Benefit) provision for income taxes | (142,311 | ) | 500 | |||||
| Net (loss) income | $ | (432,632 | ) | $ | 376,652 | |||
| Proforma information | ||||||||
| Net income | $ | 377,152 | ||||||
| Income tax expense | 104,547 | |||||||
| $ | 272,605 | |||||||
| Net (loss) income per share: | ||||||||
| Weighted average shares outstanding | ||||||||
| Basic | 5,298,159 | 3,234,501 | ||||||
| Diluted | 5,298,159 | 3,234,501 | ||||||
| Basic | $ | (0.08 | ) | $ | 0.12 | |||
| Diluted | $ | (0.08 | ) | $ | 0.12 | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
The Peck Company Holdings, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
March 31, 2020
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Retained | ||||||||||||||||||
| Shares | Amounts | Capital | Earnings | Total | ||||||||||||||||
| Balance as of January 1, 2020 | 5,298,159 | $ | 529 | $ | 412,356 | $ | 3,603,876 | $ | 4,016,761 | |||||||||||
| Net (loss) | - | - | - | (432,632 | ) | (432,632 | ) | |||||||||||||
| Ending Balance, March 31, 2020 | 5,298,159 | $ | 529 | $ | 412,356 | $ | 3,171,244 | $ | 3,584,129 | |||||||||||
The Peck Company Holdings, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
March 31, 2019
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Retained | ||||||||||||||||||
| Shares | Amounts | Capital | Earnings | Total | ||||||||||||||||
| Balance as of January 1, 2019 | 3,234,501 | $ | 323 | $ | 552,630 | $ | 4,518,085 | $ | 5,071,038 | |||||||||||
| Cash distributions to stockholders in 2019 prior to June 20, 2019 | - | - | - | (190,199 | ) | (190,199 | ) | |||||||||||||
| Net Income | - | - | - | 376,652 | 376,652 | |||||||||||||||
| Ending Balance, March 31, 2019 | 3,234,501 | $ | 323 | $ | 552,630 | $ | 4,704,538 | $ | 5,257,491 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
The Peck Company Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Cash flows from operating activities | ||||||||
| Net (loss) income | $ | (432,632 | ) | $ | 376,652 | |||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation | 155,012 | 150,483 | ||||||
| Deferred finance charge amortization | 1,535 | - | ||||||
| Deferred tax benefit | (143,061 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 166,925 | (585,222 | ) | |||||
| Other current assets | 62,278 | - | ||||||
| Costs and estimated earnings in excess of billings | (197,704 | ) | - | |||||
| Accounts payable | (1,778,242 | ) | 136,232 | |||||
| Accrued expenses | 18,914 | (2,025 | ) | |||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 161,425 | - | ||||||
| Deferred compensation | (7,750 | ) | (13.376 | ) | ||||
| Net cash (used in) provided by operating activities | (1,993,300 | ) | 62,744 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of solar arrays and equipment | - | (18,798 | ) | |||||
| Investment in captive insurance | (57,230 | ) | (58,215 | ) | ||||
| Net cash used in investing activities | (57,230 | ) | (77,013 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net borrowings on line of credit | 2,437,650 | 317,568 | ||||||
| Payments of long-term debt | (135,099 | ) | (124,428 | ) | ||||
| Payments to stockholders | (291,403 | ) | (112,968 | ) | ||||
| Stockholder distributions paid | - | (190,199 | ) | |||||
| Net cash provided by (used in) financing activities | 2,011,148 | (110,027 | ) | |||||
| Net decrease in cash | (39,382 | ) | (124,296 | ) | ||||
| Cash, beginning of period | 95,930 | 313,217 | ||||||
| Cash, end of period | $ | 56,548 | $ | 188,921 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 79,231 | �� | $ | 44,659 | |||
| Income taxes | 366 | 250 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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The Peck Company Holding, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
a) Organization
The Peck Company Holdings, Inc. is a solar engineering, construction and procurement contractor for commercial and industrial customers across the Northeastern United States. The Company also provides electrical contracting services and data and communication services. The work is performed under fixed-price and modified fixed-price contracts and time and materials contracts. The Company is incorporated in the State of Delaware and has its corporate headquarters in South Burlington, Vermont.
On February 26, 2019, Peck Electric Co., a privately held company, entered into a Share Exchange Agreement (the “Exchange Agreement”) with Jensyn Acquisition Corp. (“Jensyn”), a publicly held company whose primary business objective was to acquire, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination (the “Reverse Merger and Recapitalization”), with one or more target businesses (a special purpose acquisition company or “SPAC”). On June 20, 2019, with the approval of the stockholders of each of Peck Electric Co. and Jensyn, the Reverse Merger and Recapitalization was completed. In connection with the Reverse Merger and Recapitalization, Jensyn issued 3,234,501 shares of Jensyn’s Common Stock, par value $0.0001 per share (the “Common Stock”), to the stockholders of the Peck Electric Co. in exchange for all of the equity securities of Peck Electric Co., and Peck Electric Co. became a wholly-owned subsidiary of Jensyn. While Jensyn was the surviving legal entity, Peck Company Holdings, Inc. was deemed the acquiring entity for accounting purposes. Concurrent with the completion of the Reverse Merger and Recapitalization, Jensyn changed its name from “Jensyn Acquisition Corp.” to “The Peck Company Holdings, Inc.” and the symbol for its Common Stock traded on Nasdaq became “PECK”. Unless the context otherwise requires, “we,” “us,” “our,” “Peck Company” and the “Company” refer to the combined company.
b) Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other period. The accompanying financial statements should be read in conjunction with the Company’s audited financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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As a result of the Reverse Merger and Recapitalization, the Company implemented changes to the following accounting policies, adoption of an accounting policy for income taxes in the second quarter of 2019, updated accounting policy for earnings per share, deferred finance costs, fair value of financial instruments and the adoption of a new revenue recognition policy.
c) Revenue Recognition
1) Revenue Recognition Standard
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU and all subsequently issued clarifying ASUs replaced most existing revenue recognition guidance in U.S. GAAP. The ASU also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new standard in the fourth quarter 2019, effective January 1, 2019, the first day of the Company’s fiscal year, using the modified retrospective method.
As part of the adoption of the ASU, the Company elected to use the following transition practical expedients: (i) completed contracts that begin and end in the same annual reporting period have not been restated; (ii) the Company used the known transaction price for completed contracts; (iii) to exclude disclosures of transaction prices allocated to remaining performance obligations when the Company expects to recognize such revenue for all periods prior to the date of initial application of the ASU; and (iv) the Company has reflected the aggregate of all contract modifications that occurred prior to the date of initial application when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price.
The majority of the Company’s revenue is recognized over time based on the percentage of completion method with cost inputs. Revenue recognized over time primarily consists of performance obligations that are satisfied within one year or less. The majority of the Company’s revenue arrangements generally consist of a single performance obligation to transfer promised goods or services
2) Revenue Recognition Policy
Solar Power Systems Sales and Engineering, Procurement, and Construction Services
The Company recognizes revenue from the sale of solar power systems, Engineering, Procurement and Construction (“EPC”) services, and other construction type contracts over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Construction contracts, such as the sale of a solar power system combined with EPC services, are generally accounted for as a single unit of account (a single performance obligation) and are not segmented between types of services. Our contracts often require significant services to integrate complex activities and equipment into a single deliverable and are therefore generally accounted for as a single performance obligation, even when delivering multiple distinct services. For such services, the Company recognizes revenue using the cost to cost method, based primarily on contract cost incurred to date compared to total estimated contract cost. The cost to cost method (an input method) is the most faithful depiction of the Company’s performance because it directly measures the value of the services transferred to the customer. Cost of revenue includes an allocation of indirect costs including depreciation and amortization. Subcontractor materials, labor and equipment, are included in revenue and cost of revenue when management believes that the Company is acting as a principal rather than as an agent (i.e., the Company integrates the materials, labor and equipment into the deliverables promised to the customer). Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the customer. As of March 31, 2020, the Company had $0 in pre-contract costs classified as a current asset under contract assets on the Consolidated Balance Sheet. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments on construction contracts are typically due within 30 to 45 days of billing, depending on the contract. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.
For sales of solar power systems in which the Company sells a controlling interest in the project to a customer, revenue is recognized for the consideration received when control of the underlying project is transferred to the customer. Revenue may also be recognized for the sale of a solar power system after it has been completed due to the timing of when a sales contract has been entered into with the customer.
Energy Generation
Revenue from net metering credits is recorded as electricity is generated from the solar arrays and billed to customers (PPA off-taker) at the price rate stated in the applicable power purchase agreement (PPA).
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Operation and Maintenance and Other Miscellaneous Services
Revenue for time and materials contracts is recognized as the service is provided.
3) Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue based on the timing of satisfaction of performance obligations for the three months ended March 31:
| March 31, 2020 | March 31, 2019 | |||||||
| Performance obligations satisfied over time | ||||||||
| Solar | $ | 3,229,844 | $ | 2,451,716 | ||||
| Electrical | 491,640 | 1,133,106 | ||||||
| Data and Network | 263,196 | 265,655 | ||||||
| Total | $ | 3,984,680 | $ | 3,850,477 | ||||
During the periods ended March 31, 2020 and 2019, there was no revenue recognized based on the satisfaction of performance obligation at a point in time.
4) Variable Consideration
The nature of the Company’s contracts gives rise to several types of variable consideration, including claims and unpriced change orders; award and incentive fees; and liquidated damages and penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in the Company’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied.
5) Remaining Performance Obligation
Remaining performance obligations, or backlog, represents the aggregate amount of the transaction price allocated to the remaining obligations that the Company has not performed under its customer contracts. The Company has elected to use the optional exemption in ASC 606-10-50-14, which exempts an entity from such disclosures if a performance obligation is part of a contract with an original expected duration of one year or less.
6) Warranties
The Company generally provides limited warranties for work performed under its construction contracts. The warranty periods typically extend for a limited duration following substantial completion of the Company’s work on a project. Historically, warranty claims have not resulted in material costs incurred, and any estimated costs for warranties are included in the individual contract cost estimates for purposes of accounting for long-term contracts.
e) Accounts Receivable
Accounts receivable are recorded when invoices are issued and presented on the condensed balance sheet net of the allowance for doubtful accounts. The allowance, which was $84,000 at March 31, 2020 and December 31, 2019, is estimated based on historical losses, the existing economic condition, and the financial stability of the Company’s customers. Accounts are written off against the reserve when they are determined to be uncollectible.
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f) Project Assets
Project assets primarily consist of costs related to solar power projects that are in various stages of development that are capitalized prior to the completion of the sale of the project, and are actively marketed and intended to be sold. In contrast to contract assets, the Company holds a controlling interest in the project itself. These project related costs include costs for land, development, and construction of a PV solar power system. Development costs may include legal, consulting, permitting, transmission upgrade, interconnection, and other similar costs. The Company typically classifies project assets as noncurrent due to the nature of solar power projects (long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months. Once the Company enters into a definitive sales agreement, such project assets are classified as current until the sale is completed and the Company has met all of the criteria to recognize the sale as revenue. Any income generated by a project while it remains within project assets is accounted for as a reduction to the basis in the project. If a project is completed and begins commercial operation prior to the closing of a sales arrangement, the completed project will remain in project assets until placed in service. All expenditures related to the development and construction of project assets, whether fully or partially owned, are presented as a component of cash flows from operating activities. Project assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A project is considered commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. A partially developed or partially constructed project is considered to be commercially viable or recoverable if the anticipated selling price is higher than the carrying value of the related project assets. The Company examines a number of factors to determine if the project is expected to be recoverable, including whether there are any changes in environmental, permitting, market pricing, regulatory, or other conditions that may impact the project. Such changes could cause the costs of the project to increase or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project assets and adjust the carrying value to the estimated fair value, with the resulting impairment recorded within “Selling, general and administrative” expense.
Project Asset were $0 for the three months ended March 31, 2020 and 2019, respectively.
g) Property and Equipment
Property and equipment greater than $1,000 are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the assets, required installation costs, and any expenditures that substantially add to the value or substantially extend the useful life of the assets.
The solar arrays represent project assets that the Company may temporarily own and operate after being placed into service. The Company reports solar arrays at cost, less accumulated depreciation. The Company begins depreciation on the solar arrays when they are placed in service.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:
| Buildings and improvements | 39 years |
| Vehicles | 3-5 years |
| Tools and equipment | 3-7 years |
| Solar arrays | 20 years |
Total depreciation expense for the three months ended March 31, 2020 and March 31, 2019 was $155,012 and $150,483, respectively.
The cost of assets sold, retired, or otherwise disposed of, and the related allowance for depreciation are eliminated from the accounts and any resulting gain or loss is included in operations. The cost of maintenance and repairs are charged to expense as incurred, while significant renewals or betterments are capitalized.
h) Long-Lived Assets
The Company assesses long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of such assets may not be recoverable. These events and changes in circumstances may include a significant decrease in the market price of a long-lived asset; a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; a significant adverse change in the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; a current period operating or cash flow loss combined with a history of such losses or a projection of future losses associated with the use of a long-lived asset; or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
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When impairment indicators are present, the Company compares undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If the carrying value of the asset group exceeds the undiscounted future cash flows, the Company measures any impairment by comparing the fair value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted cash flows for the asset group, (ii) third-party valuations, and/or (iii) information available regarding the current market value for such assets.
If the fair value of an asset group is determined to be less than its carrying value, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs. Estimating future cash flows requires significant judgment, and such projections may vary from the cash flows eventually realized.
The Company considers a long-lived asset to be abandoned after the Company has ceased use of such asset and they have no intent to use or repurpose the asset in the future. Abandoned long-lived assets are recorded at their salvage value, if any.
i) Asset Retirement Obligations
The Company develops, constructs, and operates certain solar arrays with land lease agreements that include a requirement for the removal of the assets at the end of the term of the agreement. The Company recognizes such asset retirement obligations (“ARO”) in the period in which they are incurred based on the present value of estimated third-party recommissioning costs, and they capitalize the associated asset retirement costs as part of the carrying amount of the related assets. Once an asset is placed into service, the asset retirement cost is subsequently depreciated on a straight-line basis over the estimated useful life of the asset. Changes in AROs resulting from the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense. The AROs were not deemed significant to the financial statements and were therefore not recorded as a liability at March 31, 2020 and December 31, 2019.
j) Concentration and Credit Risks
The Company occasionally has cash balances in a single financial institution during the year in excess of the Federal Deposit Insurance Corporation limit of up to $250,000 per financial institution. The differences between book and bank balances are outstanding checks and deposits in transit. At March 31, 2020, the uninsured balances were immaterial.
k) Income Taxes
Through June 20, 2019 (the date of the closing of the Exchange Agreement) the former Peck Electric had elected to be taxed as an S-Corporation under the Internal Revenue Code and similar codes in states in which the Company was subject to taxation. While this election was in effect, the income (whether distributed or not) was taxed for federal income tax purposes to former Peck Electric stockholders. Accordingly, no provision for federal income tax was required. However, the Company did calculate a proforma provision. The provision for income taxes for former Peck Electric was primarily for Vermont minimum taxes. As of the date of the completion of the Exchange Agreement, the Company effectively became a C-Corporation, which changed the level of taxation from the stockholders to the Company. The deferred tax assets and liabilities that arise out of the change of tax status have been recorded to account for the temporary differences that existed on the date of the change resulting in a deferred tax liability of $1,506,362.
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The financial statements of the Company account for deferred tax assets and liabilities in accordance with Accounting Standards Codification (“ASC”) 740, Income taxes.
The Company also uses a more-likely-than-not measurement for all tax positions taken or expected to be taken on a tax return in order for those tax positions to be recognized in the financial statements. If the Company were to incur interest and penalties related to income taxes, these would be included in the provision for income taxes. Generally, the three tax years previously filed remain subject to examination by federal and state tax authorities.
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l) Sales Tax
The Company’s accounting policy is to exclude state sales tax collected and remitted from revenues and costs of sales, respectively.
m) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates their estimates, including those related to inputs used to recognize revenue over time, specifically percentage-of-completion. Actual results could differ from those estimates.
n) Recently Issued Accounting Pronouncements
Prior to June 20, 2019, the Company was defined as a non-public entity for purposes of applying transition guidance related to new or revised accounting standards under GAAP, and was required to adopt new or revised accounting standards after the required adoption dates that applied to public companies. Subsequent to June 20, 2019, the Company maintains its emerging growth company status until no later than December 31, 2021. The Company will maintain the election available to an emerging growth company to use any extended transition period applicable to non-public companies when complying with a new or revised accounting standard. The Company retains its emerging growth status and therefore elects to adopt new or revised accounting standards on the adoption date required for a private company.
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either operating or financing, with such classifications affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. This standard was recently delayed for emerging growth companies that elected to adopt new accounting standards on the adoption date required for private companies and will be effective for the Company’s annual reporting period in 2022 and interim periods beginning first quarter of 2023. The Company is evaluating the impact ASU 2016-02 will have on its financial statements and associated disclosures.
In June 2016 the FASB issued ASU No. 2016-13,Financial Instruments-Credit losses (Topic 326). This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. The update will replace the current incurred loss model with an expected loss model. Under the incurred loss model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (that is has been “incurred”). Under the expected loss model, a loss (or allowance) is recognized upon initial recognitions of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The incurred loss model considers past events and conditions, while the expected loss model includes expectations for the future which have yet to occur. ASU 2018-19 was issued in November 2018 and excludes operating leases from the new guidance. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. As an Emerging Growth Company, the standard is effective for the Company’s 2022 annual reporting period and interim periods beginning first quarter of 2023. The Company is evaluating the impact of ASU 2016-13 will have on its financial statements and associated disclosures.
In December 2019, the FASB issued ASU No. 2019-12,Income Taxes (Topic 740).This ASU reduces the complexity over accounting for income taxes by removing certain exceptions and amending guidance to improve consistent application of accounting over income taxes. We are currently assessing the provision of this guidance to determine whether or not its adoption will have an impact on our consolidated financial statements and related disclosures. The guidance is effective January 1, 2021 with early adoption permitted.
o) Deferred Finance Costs
Deferred financing costs relate to the Company’s debt and equity instruments. Deferred financing costs relating to debt instruments are amortized over the terms of the related instrument using the effective interest method. The Company incurred $21,547 of deferred financing costs for the year ended December 31, 2019 in connection with a refinance of its revolving line of credit. Amortization expense associated with deferred financing costs, which is included in interest expense, totaled $1,535 for the three months ended March 31, 2020 and $0 for the three months ended March 31, 2019. Debt financing costs relating to the equity credit line were offset against additional paid in capital as the shares issued were fully earned on the execution of the agreement. The Company incurred $413,032 of deferred financing costs that was recorded to additional paid in capital for the year ended December 31, 2019.
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p) Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, cash collateral deposited with insurance carriers, deferred compensation plan liabilities, accounts payable and other current liabilities, and debt obligations.
Fair value is the price that would be received to sell an asset or the amount paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value guidance establishes a valuation hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs that may be used are: (i) Level 1 - quoted market prices in active markets for identical assets or liabilities; (ii) Level 2 - observable market-based inputs or other observable inputs; and (iii) Level 3 - significant unobservable inputs that cannot be corroborated by observable market data, which are generally determined using valuation models incorporating management estimates of market participant assumptions. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Fair values of financial instruments are estimated using public market prices, quotes from financial institutions and other available information. Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their fair values. Management believes the carrying values of notes and other receivables, cash collateral deposited with insurance carriers, and outstanding balances on its credit facilities approximate their fair values.
The earnout provision of the Share Exchange is considered a Level 3 measurement. Given that the probability of such provisions being achieved is highly unlikely, no value was assigned to the earnout provision.
q) Subsequent Events
The Company has evaluated subsequent events through the date of this filing and based on its evaluation there are no events that are required to be disclosed herein.
r) Cash and cash equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less as cash equivalents.
Note 2. EXCHANGE AGREEMENT/REVERSE MERGER AND RECAPITALIZATION
As discussed in Note 1, on June 20, 2019, the Company consummated the Reverse Merger and Recapitalization pursuant to the Exchange Agreement between Jensyn and Peck Electric Co. The materials actions arising from the agreement are outlined below:
a) Exchange of Shares
Upon the closing of the Exchange Agreement, the stockholders of Peck Electric Co. exchanged their shares of capital stock in Peck Electric Co. for 3,234,501 shares of the Jensyn’s Common Stock (the “Share Exchange”), representing approximately 59% of Jensyn’s outstanding shares after giving effect to the Reverse Merger and Recapitalization. As a result of the Share Exchange, Peck Electric became a wholly owned subsidiary of the Company.
| 13 |
Upon the closing of the Reverse Merger and Recapitalization and after giving effect to the issuances of Common Stock and the conversion of 4,194,500 rights to purchase Common Stock into 419,450 shares of Common Stock. In addition, 1,819,482 shares of the Company’s Common Stock were issued to Jensyn shareholders upon the closing of the Reverse Merger and Recapitalization. The Company also redeemed a total of 492,037 shares of its Common Stock pursuant to the terms of the Company’s Second Amended and Restated Certificate of Incorporation resulting in a total payment to redeeming stockholders of $5,510,814.
i. warrants exercisable for 2,097,250 shares of Common Stock, consisting of 3,900,000 warrants originally sold as part of units in Jensyn’s initial public offering (the “IPO”) and 294,500 warrants sold as part of the units issued in a private placement simultaneously with the consummation of the Jensyn IPO. Each warrant entitles its holder to purchase one-half of one share of Common Stock at an exercise price of $5.75 per half share ($11.50 per whole share)
ii. warrants exercisable for 195,000 shares of Common Stock, consisting of 390,000 private warrants originally sold as part of Firm Units in the IPO. Each warrant entitled its holder to purchase one-half of one share of Common Stock at an exercise price of $5.75 per half share ($11.50 per whole share).
iii. Purchase option for 390,000 Units was originally sold as part of the IPO. Each Unit has an exercise price of $12.00 per Unit and consists of the following:
| o | One share of Common Stock | |
| o | One right to receive one-tenth (1/10) of a share of Common Stock issued upon exercise of the Unit |
One warrant entitling its holder to purchase one-half of one share of Common Stock at an exercise price of $5.75 per half share ($11.50 per whole share).
b) Earnout
In the event that the earnout provisions of Exchange Agreement are deemed to have been met by June 30, 2020, the end of the Earnout Period, then the Company shall issue 898,473 shares of Common Stock to the original Peck Electric Co. stockholders, issue 11,231 shares of Common Stock to Exit Strategy Partners, LLC, and issue shares of Common Stock to certain of the initial stockholders of the Company a number of shares of the Company’s Common Stock equal to the number of shares of the Company’s Common Stock forfeited and canceled by such stockholders to the extent that such shares are used to satisfy Company obligations or to induce investors to make an equity investment in the Company at or prior to the Closing as described below under “Issuance of Additional Shares and Forfeiture of Sponsor Shares.” Earnout provision will be met in the event that (a) the Company’s Adjusted EBITDA for the twelve (12) month period commencing on the first full month that is after the Closing Date (the “Earnout Period”) is $5,000,000 or more (the “Adjusted EBITDA Target) or (b) the closing Stock Price is $12.00 or more after the Closing Date (the “Stock Price Target”) and prior to the end of the Earnout Period.
c) Issuance of Additional Shares and Forfeiture of Sponsor Shares
In connection with the Reverse Merger and Recapitalization arising out of the Exchange Agreement, the Company issued 493,299 shares of Common Stock in exchange for the cancellation of approximately $5,618,675 of obligations and, as contemplated by the Exchange Agreement, certain insiders and their transferees have agreed to forfeit and cancel 281,758 shares of Common Stock. As of December 31, 2019, 257,799 shares of Common Stock were forfeited and new shares will be issued if the earnout provisions of Exchange Agreement are deemed to have been met by June 30, 2020, the end of the Earnout Period. The remaining 23,959 shares of Common Stock are pending forfeiture and cancellation as of March 31, 2020.
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Note 3. LIQUIDITY AND FINANCIAL CONDITION
For the three months ended March 31, 2020, the Company experienced a net operating loss and negative cash flow from operations. At March 31, 2020, the Company had balances of cash of $56,548, working capital deficit of $206,449 and total stockholders’ equity of $3,441,809. To date, the Company has relied predominantly on operating cash flow and borrowings from its credit facilities to fund its operations.
On April 24, 2020, the Company received a loan under the CARES Act Payroll Protection Program (“PPP”) of $1,487,624. Proceeds from the loan used to cover documented expenses related to payroll, rent and utilities, during the 8-week period, subsequent to the cash being received by the Company, are eligible to be forgiven. The forgiveness amount allows for not more than 25% of the forgiveness to be for non-payroll items and is subject to reduction if employees are terminated or wages are reduced. The remaining unforgiven amount of the loan bears interest at 1% per annum and matures on April 24, 2022. Initial principal payments are deferred for the first six months; however, interest still accrues during this time. There are no collateral requirements or prepayment penalties associated with the loan.
Due to the impact of the COVID-19 pandemic, the Company had several current projects paused and the commencement of future projects delayed at March 31. 2020. All projects are anticipated to begin promptly once the Stay at Home orders of the State of Vermont expire or are relaxed. The current Stay at Home order is expected to end on May 15, 2020. However, as the Company does support and maintain critical infrastructure, several projects were deemed essential and allowed to continue.
Under the terms of the Company’s equity line of credit, Lincoln Park Capital is required to purchase shares up to a total value of $15,000,000 pursuant to certain terms and conditions. The Company can require the purchase of 50,000 shares of Common Stock under a regular purchase. On the next day following a regular purchase, the Company can require the purchase of an accelerated purchase equal to 200% of the shares sold in the regular purchase as well as an additional accelerated purchase equal to 300% of the shares sold in the regular purchase. The total number of shares authorized under the Purchase Agreement total 3,024,194 which would allow the Company to maximize the equity line of credit within 10 business days.
The Company believes its current cash on hand including the proceeds received under the PPP loan, the availability under the equity line of credits, the collectability of its accounts receivable and project backlog are sufficient to meet its operating and capital requirements for at least the next twelve months from the date these financial statements are issued.
Note 4. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
| March 31, 2020 | December 31, 2019 | |||||||
| Accounts receivable - contracts in progress | $ | 7,044,538 | $ | 7,190,412 | ||||
| Accounts receivable - retainage | 167,142 | 188,193 | ||||||
| 7,211,680 | 7,378,605 | |||||||
| Allowance for doubtful accounts | (84,000 | ) | (84,000 | ) | ||||
| Total | $ | 7,127,680 | $ | 7,294,605 | ||||
Bad debt expense was $0 for March 31, 2020 and 2019, respectively.
Contract assets represent revenue recognized in excess of amounts billed, unbilled receivables, and retainage. Unbilled receivables represent an unconditional right to payment subject only to the passage of time, which are reclassified to accounts receivable when they are billed under the terms of the contract. Contract assets were as follows at March 31, 2020 and December 31, 2019:
| March 31, 2020 | December 31, 2019 | |||||||
| Costs in excess of billings | $ | 1,470,076 | $ | 1,272,372 | ||||
| Unbilled receivables | - | 206,213 | ||||||
| Retainage | 167,142 | 188,193 | ||||||
| $ | 1,637,218 | $ | 1,666,778 | |||||
Contract liabilities represent amounts billed to clients in excess of revenue recognized to date, billings in excess of costs, and retainage. The Company anticipates that substantially all incurred cost associated with contract assets as of March 31, 2020 will be billed and collected within one year. Contract liabilities were as follows at March 31, 2020 and December 31, 2019:
| March 31, 2020 | December 31, 2019 | |||||||
| Billings in excess of costs | $ | 287,451 | $ | 126,026 | ||||
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Note 5. CONTRACTS IN PROGRESS
Information with respect to contracts in progress is as follows:
| March 31, 2020 | December 31, 2019 | |||||||
| Expenditures to date on uncompleted contracts | $ | 9,879,528 | $ | 4,699,855 | ||||
| Estimated earnings thereon | 2,005,741 | 1,409,060 | ||||||
| 11,885,269 | 6,108,915 | |||||||
| Less billings to date | (10,702,644 | ) | (5,168,782 | ) | ||||
| 1,182,625 | 940,133 | |||||||
| Plus under billings remaining on contracts 100% complete | - | 206,213 | ||||||
| Total | $ | 1,182,625 | $ | 1,146,346 | ||||
Included in accompanying balance sheets under the following captions:
| March 31, 2020 | December 31, 2019 | |||||||
| Cost and estimated earnings in excess of billings | $ | 1,470,076 | $ | 1,272,372 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | (287,451 | ) | (126,026 | ) | ||||
| $ | 1,182,625 | $ | 1,146,346 | |||||
Note 6. LONG-TERM DEBT
A summary of long-term debt is as follows:
| March 31, 2020 | December 31, 2019 | |||||||
| NBT Bank, National Association, 4.25% interest rate, secured by all business assets, payable in monthly installments of $5,869 through September 2026, with a balloon payment at maturity. | $ | 708,258 | $ | 723,230 | ||||
| NBT Bank, National Association, 4.00% interest rate, secured by all business assets, payable in monthly installments of $12,070 through January 2021. | 117,577 | 153,258 | ||||||
| NBT Bank, National Association, 4.20% interest rate, secured by building, payable in monthly installments of $3,293 through September 2026, with a balloon payment at maturity. | 265,591 | 274,476 | ||||||
| NBT Bank, National Association, 4.15% interest rate, secured by all business assets, payable in monthly installments of $3,677 through April 2026. | 234,755 | 244,920 | ||||||
| NBT Bank, National Association, 4.20% interest rate, secured by all business assets, payable in monthly installments of $5,598 through October 2026, with a balloon payment at maturity. | 459,373 | 474,464 | ||||||
| NBT Bank, National Association, 4.85% interest rate, secured by a piece of equipment, payable in monthly installments of $2,932 including interest, through May 2023. | 93,277 | 110,413 | ||||||
| Various vehicle loans, interest ranging from 0% to 6.99%, total current monthly installments of approximately $8,150, secured by vehicles, with varying terms through September 2025. | 307,105 | 333,510 | ||||||
| National Bank of Middlebury, 3.95% interest rate for the initial 5 years, after which the loan rate will adjust equal to the Federal Home Loan Bank of Boston 5/20 – year Advance Rate plus 2.75%, loan is subject to a floor rate of 3.95%, secured by solar panels and related equipment, payable in monthly installments of $2,388 including interest, through December 2024. | 91,269 | 98,033 | ||||||
| 2,277,205 | 2,412,304 | |||||||
| Less current portion | (376,814 | ) | (426,254 | ) | ||||
| 1,900,391 | 1,986,050 | |||||||
| Less debt issuance costs | (18,468 | ) | (20,003 | ) | ||||
| $ | 1,881,923 | $ | 1,966,047 | |||||
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Maturities of long-term debt are as follows:
| Year ending March 31: | Amount | ||||
| Remainder of 2020 | $ | 291,155 | |||
| 2021 | 306,504 | ||||
| 2022 | 304,574 | ||||
| 2023 | 262,008 | ||||
| 2024 | 213,524 | ||||
2025 and thereafter | 899,440 | ||||
| $ | 2,277,205 | ||||
Note 7. LINE OF CREDIT
The Company has a working capital line of credit with NBT Bank with a limit of $6,000,000 and a variable interest rate based on the Wall Street Journal Prime rate, currently 3.25%. The line of credit is payable upon demand with a maturity date of September 2020. The balance outstanding was $5,622,691 and $2,663,124 at March 31, 2020 and December 31, 2019, respectively Borrowing is based on 80% of eligible accounts receivable. The line is secured by all business assets and it and is subject to certain financial covenants. These financial covenants consist of a minimum debt service coverage ratio of 1.20 to 1.00 measured on a quarterly basis and are in effect beginning September 2020.
The Company has a line of credit with NBT Bank with a limit of $2,000,000 to fund the development of certain solar arrays. The line has a variable interest rate based on the Wall Street Journal Prime rate, currently 4.75%. The maturity date is September 2020.There were no borrowings at March 31, 2020 and the balance was $510,100 at December 31, 2019. The line is secured by all business assets and is subject to certain financial covenants. These financial covenants consist of a minimum debt service coverage ratio of 1.20 to 1.00 measured on a quarterly basis and are in effect beginning September 2020.
Note 8. COMMITTMENTS AND CONTINGENCIES
In 2015, the Company entered into two twenty-five-year non-cancelable lease agreements for land on which they constructed solar arrays. One lease has fixed annual rent of $2,500. The second lease has annual rent of $2,500 with an annual increase of 2%.
In 2017, the Company entered into a twenty-year non-cancelable lease agreement for land on which it constructed solar arrays. The lease has annual rent of $3,500 with an annual increase of 2%.
In 2018, the Company entered into a twenty-year non-cancelable lease agreement for land on which it constructed solar arrays. The lease has annual rent of $26,000.
In 2019, the Company entered into a two-year non-cancelable lease agreement for equipment used in solar installations. The leases have a combined annual rent of $45,832.
The Company leases a vehicle under a non-cancelable operating lease. In addition, the Company occasionally pays rent for storage on a month-to-month basis.
Total rent expense for all of the non-cancelable leases above were $12,030 and $26,000 for the quarters ended March 31, 2020 and 2019, respectively.
The Company also rents equipment to be used on jobs under varying terms not exceeding one year. Total rent expense under short term rental agreements was $87,626 and $44.123 for the quarters ended March 31, 2020 and 2019, respectively.
Future minimum lease payments required under all of the non-cancelable operating leases are as follows:
| Year ending December 31: | Amount | ||||
| Remainder of 2020 | $ | 68,776 | |||
| 2021 | 54,201 | ||||
| 2022 | 35,236 | ||||
| 2023 | 35,371 | ||||
| 2024 | 35,508 | ||||
| 2025 | 35,231 | ||||
| Thereafter | 448,546 | ||||
| $ | 712,869 | ||||
Note 9. UNION ASSESSMENTS
The Company employs members of the International Brotherhood of Electrical Workers Local 300 (IBEW). The union fee assessments payable are both withholdings from employees and employer assessments. Union fees are for monthly dues, defined contribution pension, health and welfare funds as part of multi-employer plans. All union assessments are based on the number of hours worked or a percentage of gross wages as stipulated in the agreement with the Union.
The Company has an agreement with the IBEW in respect to rates of pay, hours, benefits, and other employment conditions. During the years ended March 31, 2020 and 2019, the Company incurred the following union assessments.
| March 31, 2020 | March 31, 2019 | |||||||
| Pension fund | $ | 73,170 | $ | 81,441 | ||||
| Welfare fund | 214,028 | 255,314 | ||||||
| National employees benefit fund | 20,519 | 25,614 | ||||||
| Joint apprenticeship and training committee | 2,841 | 3,688 | ||||||
| 401(k) matching | - | 8,735 | ||||||
| Total | $ | 310,558 | $ | 374,792 | ||||
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Note 10. PROVISION FOR INCOME TAXES
In connection with the closing of the Reverse Merger and Recapitalization, the Company’s tax status changed from an S-corporation to a C-corporation. As a result, the Company is responsible for federal and state income taxes and must record deferred tax assets and liabilities for the tax effects of any temporary differences that exist on the date of the change. When push down accounting does not apply as part of a business combination, U.S. GAAP requires the effect of the change in tax status to be recognized in the financial statements and the effect is included in income (loss) from continuing operations. The Company recorded deferred income tax expense and a corresponding deferred tax liability of $1,098,481 as of and for the year ended December 31, 2019, of which $1,506,362 was recorded at the time of conversion to a C Corporation (see note 1 (k) income taxes).
The Company’s unaudited statements of operations also present pro-forma income tax expense for the period ended March 31, 2019 at the statutory rate.
The provision for income taxes at March 31, 2020 and 2019 consists of the following:
| March 31, 2020 | March 31, 2019 | |||||||
| Current | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 750 | 500 | ||||||
| Total current | 750 | 500 | ||||||
| Deferred | ||||||||
| Federal | (108,437 | ) | - | |||||
| State | (34,624 | ) | - | |||||
| Total deferred tax liability | $ | (143,061 | ) | - | ||||
| (Benefit) provision for Income Taxes | $ | (142,311 | ) | $ | 500 | |||
The Company’s total deferred tax assets and liabilities at March 31, 2020 and December 31, 2019 are as follows:
| March 31, 2020 | December 31, 2019 | |||||||
| Deferred tax assets (liabilities) | ||||||||
| Accruals and reserves | $ | 23,280 | $ | 4,157 | ||||
| Net operating loss | 521,315 | 421,940 | ||||||
| Total deferred tax assets | 544,595 | 426,097 | ||||||
| Property and equipment | (1,500,015 | ) | (1,524,578 | ) | ||||
| Total deferred tax liabilities | (1,500,015 | ) | (1,524,578 | ) | ||||
| Net deferred tax asset (liabilities) | $ | (955,420 | ) | $ | (1,098,481 | ) | ||
Reconciliation between the effective tax on income from operations and the statutory tax rate is as follows:
| March 31, 2020 | March 31, 2019 | |||||||
| Income tax (benefit) expense at federal statutory rate | $ | (120,738 | ) | $ | 104,547 | |||
| Federal taxes on period Company was a flow through entity | - | (104,547 | ) | |||||
| Permanent differences | 13,238 | - | ||||||
| State and local taxes net of federal benefit | (33,901 | ) | 500 | |||||
| Income tax (benefit) expense | $ | (142,311 | ) | $ | 500 | |||
Note 11. CAPTIVE INSURANCE
The Company and other companies are members of an offshore heterogeneous group captive insurance holding company entitled Navigator Casualty, LTD. (NCL). NCL is located in the Cayman Islands and insures claims relating to workers’ compensation, general liability, and auto liability coverage.
Premiums are developed through the use of an actuarially determined loss forecast. Premiums paid totaled $174,891 and $117,528 for the years ended December 31, 2019 and 2018, respectively. The loss funding, derived from the actuarial forecast, is broken-out into two categories by the actuary known as the “A & B” Funds. The “A” Fund pays for the first $100,000 of any loss and the “B” Fund contributes to the remainder of the loss layer up to $300,000 total per occurrence.
Each shareholder has equal ownership and invests a one-time cash capitalization of $36,000. This is broken out into two categories, $35,900 of redeemable preference shares and $100 for a single common share. Each shareholder represents a single and equal vote on NCL’s Board of Directors.
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Summary financial information on NCL as of September 30, 2019 is:
| Total assets | $ | 68,741,297 | ||
| Total liabilities | $ | 34,086,013 | ||
| Comprehensive income | $ | 5,762,011 |
NCL’s fiscal year end is September 30, 2019.
| March 31, 2020 | December 31, 2019 | |||||||
| Investment in NCL | ||||||||
| Capital | $ | 36,000 | $ | 36,000 | ||||
| Cash security | 158,785 | 101,555 | ||||||
| Investment income in excess of losses (incurred and reserves) | 3,320 | 3,320 | ||||||
| Total investment | $ | 198,105 | $ | 140,875 | ||||
Note 12. RELATED PARTY TRANSACTIONS
In 2014, the minority stockholders of Peck Electric Co., who sold the building that the Company occupies, lent the proceeds to the majority stockholders of Peck Electric Co. who contributed $400,000 of the net proceeds as paid in capital. At March 31, 2020, the amount owed of $100,000 is included in the “due to stockholders” as there is a right to offset.
In May 2018, stockholders of the Company bought out a minority stockholder of Peck Electric Co. The Company advanced $250,000 for the stock purchase which is included in the “due from stockholders”. At March 31, 2020 and December 31, 2019, the amounts of $602,463 and $337,000, respectively, are included in the “due to stockholders” as there is a right to offset.
In 2019, the Company’s majority stockholder loaned $286,964 to the Company to help with cash flow needs and the amount is included in the “due to stockholders” at March 31, 2020.
The Company was an S-corporation through June 20, 2019 and as a result, the taxable income of the Company is reported on the owner’s tax returns and they are taxed individually. As a result, the Company has accrued a distribution for taxes of $266,814 at March 31, 2020 and December 31, 2019, respectively, to the owners of Peck Electric Co. for the period during which the Company was an S-corporation, which is included in the “due to stockholders” value below.
The amounts below include amounts due to/from stockholders as of March 31, 2020 and December 31, 2019:
| March 31, 2020 | December 31, 2019 | |||||||
| Due to stockholders consists of unsecured notes to stockholders with interest at the mid-term AFR rate (2.08% at March 31, 2020). | $ | 51,315 | $ | 342,718 | ||||
Note 13. DEFERRED COMPENSATION PLAN
In 2018, the Company entered into a deferred compensation agreement with a former minority stockholder. The agreement provides for deferred income benefits and is payable over the post-retirement period. The Company accrues the present value of the estimated future benefit payments over the period from the date of the agreement to the retirement date. The minimum commitment for future compensation under the agreement is $155,000, the net present value of which is $109,013. The Company will also pay the former stockholder a solar management fee of 24.5% of the available cash flow from the solar arrays put into service on or before December 31, 2017 over the life of the arrays. The amount is de minimis and therefore not recorded on the balance sheet as of March 31, 2020 and December 31, 2019 and recorded in the statement of operations when incurred.
Note 14. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
As a result of the Reverse Merger and Recapitalization, the Company has retrospectively adjusted the weighted average of shares of common stock outstanding prior to June 20, 2019 by multiplying them by the exchange ratio used to determine the number of shares of common stock into which they converted.
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| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Numerator: | ||||||||
| Net (loss) income | $ | (432,632 | ) | $ | 376,652 | |||
| Denominator: | ||||||||
| Weighted average shares outstanding: | ||||||||
| Basic | 5,298,159 | 3,234,501 | ||||||
| Diluted | 5,298,159 | 3,234,501 | ||||||
| Basic income (loss) per share | (0.08 | ) | 0.12 | |||||
| Diluted income (loss) per share | (0.08 | ) | 0.12 | |||||
| Pro forma C-corporation Earnings per share: | ||||||||
| Numerator | ||||||||
| Net (loss) income | $ | 272,605 | ||||||
| Denominator: | ||||||||
| Weighted average shares outstanding: | ||||||||
| Basic | 3,234,501 | |||||||
| Diluted | 3,234,501 | |||||||
| Basic income per share | $ | 0.08 | ||||||
| Diluted income per share | $ | 0.08 | ||||||
The Company has contingent share arrangements and warrants arising from the Reverse Merger and Recapitalization and Jensyn’s IPO as discussed in Note 2. The potential issuance of additional shares of Common Stock from these arrangements were excluded from the diluted EPS calculation because the prevailing market and operating conditions at the present time do not indicate that any additional shares of Common Stock will be issued. These instruments could result in dilution in future periods. Below is a schedule of the potential share issuances arising from these contingencies that were excluded from the calculations above:
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Earnout provision, includes new shares of Common Stock that may be issued to former Peck Electric Co. shareholders | 898,473 | - | ||||||
| Earnout provision, includes new shares of Common Stock that may be issued to Exit Strategy | 11,231 | - | ||||||
| Earnout provision, including new shares of Common Stock that may be issued to holders of forfeited and canceled shares | 257,799 | - | ||||||
| Option to purchase Common Stock, from Jensyn’s IPO | 429,000 | - | ||||||
| Warrants to purchase Common Stock, from Jensyn’s IPO | 2,292,250 | - | ||||||
Note 15. SUBSEQUENT EVENTS
Peck Electric Co., a Vermont corporation and a wholly-owned subsidiary of the Company (the “Borrower”), applied for and received a loan (the “PPP Loan”) from NBT Bank, N.A. (the “Lender”) in the principal amount of $1,487,624 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020.
The Loan is evidenced by a promissory note (the “PPP Note”), dated April 24, 2020, issued by the Borrower to the Lender. The PPP Note matures on April 24, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on November 24, 2020, following an initial deferral period as specified under the PPP. The PPP Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loan will be available to the Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. The Company intends that the Borrower will use the entire PPP Loan amount for designated qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the PPP.
With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the PPP Note and cross-defaults on any other loan with the Lender or other creditors.
The Company entered into an Exchange and Subscription Agreement (the “Exchange Agreement”) dated April 22, 2020 with GreenSeed Investors, LLC, a Delaware limited liability company (“GSI”), and Solar Project Partners, LLC, a Delaware limited liability company (“SPP”).
Pursuant to the Exchange Agreement, the Company subscribed for 500,000 Units of Class B Preferred Membership units of GSI in exchange for 200,000 shares of the Company’s Series A Preferred Stock (the “Preferred Shares”). In addition, the Company subscribed for and purchased 100,000 Units of SPP in exchange for the issuance by the Company of a Warrant to acquire 275,000 shares of the Company’s Common Stock at an exercise price of $15.00 per share.
The Exchange Agreement provides that as long as the dividend payment on the Preferred Shares in each calendar quarter is equal to the aggregate distribution with respect to the GSI Units, such payments and distributions shall be offset and neither GSI nor the Company need to make any cash payments to the other.
The Company granted to GSI the right to repurchase up to 400,000 (in tranches of 50,000) of the Units at a valuation of $4,000,000.
The Company granted to GSI registration rights with respect to the Preferred Shares, the Warrant, and the Common Stock underlying the Warrant.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements as of and for the three ended March 31, 2020 and March 31, 2019 and related notes included in Part 1, Item 1 of this Quarterly Report on Form 10-Q. The following discussion and analysis should also be read together with our audited consolidated financial statements and related notes for the year ended December 31, 2019.
This discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements. Our future results and financial condition may also differ materially from those that we currently anticipate as a result of the factors described in the sections entitled “Risk Factors” in the filings that we make with the U.S. Securities and Exchange Commission (the “SEC”). Throughout this section, unless otherwise noted, “we,” “us,” “our” and the “Company” refer to The Peck Company Holdings, Inc.
Business Introduction / Overview
The Peck Company Holdings, Inc., the principal office of which is located in South Burlington, Vermont, is one of the largest commercial solar engineering, procurement and construction (“EPC”) companies in the country and is expanding across the Northeastern United States (“U.S.”). The Company is a second-generation family business founded under the name Peck Electric Co. (“Peck Electric”) in 1972 as a traditional electrical contractor. The Company’s core values are to align people, purpose, and profitability, and since taking leadership in 1994, Jeffrey Peck, the Company’s Chief Executive Officer, has applied such core values to expand into the solar industry. Today, the Company is guided by the mission to facilitate the reduction of carbon emissions through the expansion of clean, renewable energy and we believe that leveraging such core values to deploy resources toward profitable business is the only sustainable strategy to achieve these objectives.
The world recognizes the need to transition to a reliable, renewable energy grid in the next 50 years. Vermont and Hawaii are leading the way in the U.S. with renewable energy goals of 75% by 2032 and 100% by 2045, respectively. California committed to 100% carbon-free energy by 2045. The majority of the other states in the U.S. also have renewable energy goals regardless of current Federal solar policy. We are a member of Renewable Energy Vermont, an organization that advocates for clean, practical and renewable solar energy. The Company intends to use near-term incentives to take advantage of long-term, sustainable energy transformation with a commitment to the environment and to its shareholders. Our triple bottom line, which is geared towards people, environment, and profit, has always been our guide since we began installing renewable energy and we intend that it remain our guide over the next 50 years as we construct our energy future.
After installing more than 125 megawatts of solar energy, we believe that we are well-positioned for what we believe to be the coming transformation to an all renewable energy economy. As a result of the completion of our business combination transaction with Jensyn Acquisition Corp. (“Jensyn”) on June 20, 2019, pursuant to which we acquired Peck Electric Co. (the “Reverse Merger and Recapitalization”), we have now opened our family company to the public market as part of our strategic growth plan. We are expanding across the Northeastern U.S. to serve the fast-growing demand for clean renewable energy. We are open to partnering with others to accelerate our growth process, and we are expanding our portfolio of company-owned solar arrays to establish recurring revenue streams for many years to come. We have established a leading presence in the market after five decades of successfully serving our customers, and we are now ready for new opportunities and the next five decades of success.
We have a three-pronged growth strategy that includes (1) organic expansion across the Northeastern United States, (2) conducting accretive merger and acquisition transactions to expand geographically, and (3) investing into company-owned solar assets.
Equity and Ownership Structure
On June 20, 2019, Jensyn consummated the Reverse Merger and Recapitalization, which resulted in the acquisition of 100% of the issued and outstanding equity securities of Peck Electric by Jensyn, and in Peck Electric becoming a wholly-owned subsidiary of Jensyn. Jensyn was originally incorporated as a special purpose acquisition company, formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar Recapitalization. Simultaneously with the Reverse Merger and Recapitalization, we changed our name to “The Peck Company Holdings, Inc.” We conduct all of our business operations exclusively through our wholly-owned subsidiary, Peck Electric. Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refers to The Peck Company Holdings, Inc. and its subsidiary after June 20, 2019, and “Peck Electric” refers to the business of Peck Electric before June 20, 2019. Upon closing of the Reverse Merger and Recapitalization, Peck Electric was deemed the accounting acquirer and takes over the historical information for the Company.
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The following discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include estimates used to review the Company’s, impairments and estimations of long-lived assets, revenue recognition utilizing a cost to cost method, allowances for uncollectible accounts, and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue from contracts with customers under Accounting Standards Codification (“ASC”) Topic 606 (“Topic 606”). Under Topic 606, revenue is recognized when, or as, control of promised goods and services is transferred to customers, and the amount of revenue recognized reflects the consideration to which an entity expects to be entitled in exchange for the goods and services transferred. We primarily recognize revenue over time utilizing the cost-to-cost measure of progress on contracts for specific projects and for certain master service and other service agreements.
Contracts.We derive revenue primarily from construction projects performed under: (i) master and other service agreements, which are typically priced using either a time and materials or a fixed price per unit basis; and (ii) contracts for specific projects requiring the construction and installation of an entire infrastructure system or specified units within an infrastructure system, which are subject to multiple pricing options, including fixed price, unit price, time and materials, or cost plus a markup.
The total contract transaction price and cost estimation processes used for recognizing revenue over time under the cost-to-cost method is based on the professional knowledge and experience of our project managers, engineers and financial professionals. Management reviews estimates of total contract transaction price and total project costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected variable consideration are factors that influence estimates of the total contract transaction price, total costs to complete those contracts and our profit recognition. Changes in these factors could result in revisions to revenue in the period in which the revisions are determined, which could materially affect our consolidated results of operations for that period. Provisions for losses on uncompleted contracts are recorded in the period in which such losses are determined.
Performance Obligations. A performance obligation is a contractual promise to transfer a distinct good or service to a customer and is the unit of account under Topic 606. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. Our contracts often require significant services to integrate complex activities and equipment into a single deliverable and are therefore generally accounted for as a single performance obligation, even when delivering multiple distinct services. Contract amendments and change orders, which are generally not distinct from the existing contract, are typically accounted for as a modification of the existing contract and performance obligation. The vast majority of our performance obligations are completed within one year.
When more than one contract is entered into with a customer on or close to the same date, management evaluates whether those contracts should be combined and accounted for as a single contract as well as whether those contracts should be accounted for as one, or more than one, performance obligation. This evaluation requires significant judgment and is based on the facts and circumstances of the various contracts.
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Union Labor
The Company uses union labor in order to construct and maintain the solar, electric and data work that comprise the core activities of its business. As such, contributions were made by the Company to the National Joint Apprenticeship and Training Committee, the National Electrical Benefit Funds, Union Pension Plans and a union Health and Welfare Fund. Each employee contributes monthly to the International Brotherhood of Electrical Workers (“IBEW”). The Company’s contract with the IBEW expires May 31, 2022.
The Company’s management believes that access to unionized labor provides a unique advantage for growth, because workforce resources can be scaled efficiently utilizing labor unions in other states to meet specific project needs in other states without substantially increasing fixed costs for the Company.
Business Insurance / Captive Insurance Group
In 2018, Peck Electric joined a captive insurance group. The Company’s management believes that belonging to a captive insurance group will stabilize business insurance expenses and will lock in lower rates that are not subject to change from year-to-year and instead are based on the Company’s favorable experience modification rate.
Revenue Drivers
The Company’s business includes the design and construction of solar arrays for its customers. Revenue is recognized for each construction project on a percentage of completion basis. From time to time, the Company constructs solar arrays for its own account or purchases a solar array that must still be constructed. In these instances, no revenue is recognized for the construction of the solar array. In instances where the Company owns the solar array, revenue is recognized for the sale of the electricity generated to third parties. As a result, depending on whether it is building for others or for its own account, the Company’s revenue is subject to significant variation.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2019
REVENUE AND COST OF GOODS SOLD
Consolidated revenue for the three months ended March 31, 2020 increased 3.5% to $3.98 million, compared to $3.85 million in the corresponding period in 2019. The Company had several projects that were ceased or delayed due to the current COVID-19 pandemic. The Company anticipates that these projects will continue or begin once the current Vermont Stay at Home orders are lifted or relaxed.
Gross profit decreased 66.1% to $0.3 million for the three months ended March 31, 2020, compared to $0.8 million in the corresponding period in 2019. Gross margin as a percentage of sales was 7.5% for the three months ended March 31, 2020, compared to 23.0% in the corresponding period in 2019. Lower gross margin for the three months ended March 31, 2020 was the result of inefficiencies in labor costs due to the uncertainty of the COVID-19 pandemic. In addition, the Company incurred unplanned expenditures on two large solar projects due to the winter conditions in the Northeast.
Total operating expenses for the three months ended March 31, 2020 were $0.8 million, or 19.9% of sales, compared to $0.5 million in the corresponding period in 2019, or 12.1% of sales. The increase in operating expenses for the three months ended March 31, 2020 was the result of an increase in the operational infrastructure required to support the current growth trajectory as well as the additional expense of being a publicly-listed company.
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Income tax benefit for the three months ended March 31, 2020 was $142,311 compared to the income tax provision for the three months ended March 31, 2019 of $500.
Backlog for the three months ended March 31, 2020 was $23.2 million, compared to the corresponding period in 2019 of $8.5 million. The Company expects to realize nearly all of the backlog within the next 12 months.
SELLING AND MARKETING EXPENSES
We rely on referrals from customers and on its industry reputation, and therefore has not historically incurred significant selling and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative (“G&A”) expenses were $617,748 for the three months ended March 31, 2020, compared to $257,709 for the three months ended March 31, 2019. As a percentage of revenue, G&A expenses increased to 15.5% of revenue in the three months ended March 31, 2020, compared to 6.7% in the three months ended March 31, 2019. In total dollars, G&A expense increased primarily due to activities related to administrative expenses, consisting of accounting and legal fees, costs of becoming a public company, additional business development and investor/public relations expenses, as well as supporting infrastructure expansion in the three months ended March 31, 2020, compared to the three months ended March 31, 2019.
DEPRECIATION AND AMORTIZATION
Depreciation expenses for the three months ended March 31, 2020 were $155,012, compared to $150,483 for the three months ended March 31, 2019. Depreciation expenses were stable when compared to the three months ended March 31, 2019 as the Company has not had significant capital expenditures for the three months ended March 31, 2020.
OTHER EXPENSES
Warehousing and other operating expenses were $192,942 for the three months ended March 31, 2020, compared to $207,507 for the three months ended March 31, 2019. Warehousing and other operating expenses include Company-owned solar array depreciation and salaries associated with Company-owned solar arrays, general warehousing costs, project-related travel and performance related expenses.
NET INCOME
The net loss for the three months ended March 31, 2020 was $432,632, compared to a net profit of $376,652 for the three months ended March 31, 2019. The net loss was the result of inefficiencies in labor costs due to the uncertainty of the COVID-19 pandemic. In addition, the Company incurred unplanned expenditures on two large solar projects due to the winter conditions in the Northeast.
Certain Non-GAAP Measures
We periodically review the following key non-GAAP measures to evaluate our business and trends, measure our performance, prepare financial projections and make strategic decisions.
EBITD and, Adjusted EBITDA
Included in this presentation are discussions and reconciliations of earnings before interest, income tax and depreciation and amortization (“EBITDA”) and EBITDA adjusted for certain non-cash, non-recurring or non-core expenses (“Adjusted EBITDA”) to net income in accordance with GAAP. Adjusted EBITDA excludes certain non-cash and other expenses, certain legal services costs, professional and consulting fees and expenses, and one-time Merger expenses and certain adjustments. We believe that these non-GAAP measures illustrate the underlying financial and business trends relating to our results of operations and comparability between current and prior periods. We also use these non-GAAP measures to establish and monitor operational goals.
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These non-GAAP measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP. Using only the non-GAAP financial measures, particularly Adjusted EBITDA, to analyze our performance would have material limitations because such calculations are based on a subjective determination regarding the nature and classification of events and circumstances that investors may find significant. We compensate for these limitations by presenting both the GAAP and non-GAAP measures of our operating results. Although other companies may report measures entitled “Adjusted EBITDA” or similar in nature, numerous methods may exist for calculating a company’s Adjusted EBITDA or similar measures. As a result, the methods that we use to calculate Adjusted EBITDA may differ from the methods used by other companies to calculate their non-GAAP measures.
The reconciliations of EBITDA to net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP, are shown in the table below:
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net (loss) income | $ | (432,632 | ) | $ | 376,652 | |||
| Depreciation and amortization | 155,012 | 150,483 | ||||||
| Other (income) expense, net | 80,766 | 44,659 | ||||||
| Income tax (benefit) provision | (142,311 | ) | 500 | |||||
| EBITDA | (339,165 | ) | 572,294 | |||||
| Weighted Average shares outstanding | 5,298,159 | 3,234,501 | ||||||
| Adjusted EPS | $ | (0.06 | ) | $ | 0.18 | |||
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LIQUIDITY AND CAPITAL RESOURCES
The Company had $56,548 in cash at March 31, 2020, as compared to $95,930 at December 31, 2019.
As of March 31, 2020, The Company’s working capital deficit was $207,199, compared to a working capital surplus of $362,586 at December 31, 2019. The Company believes that the aggregate of its existing cash and cash equivalents and working line of credit will be sufficient to meet its operating cash requirements for at least the next 12 months. On April 24, 2020, the Company secured a PPP loan in the amount of $1,487,624 through the CARES Act. The Company anticipates utilizing the forgiveness provisions of the PPP loan to support cashflow needs during the continuing COVID-19 pandemic. The State of Vermont recently relaxed restrictions on outside construction allowing for work crews of up to 10 individuals to operate at a worksite. The Company has implemented the training provided by the Vermont Occupational Safety and Health Administration. The Company has received notice to proceed on several new projects and restarted projects previously paused.
Due to the impact of the COVID-19 pandemic, the Company had several current projects paused and future projects delayed at March 31. 2020. All projects are anticipated to begin promptly once the Stay at Home orders of the State of Vermont expire or are relaxed. The current Stay at Home order is expected to end on May 15, 2020. However, as the Company does support and maintain critical infrastructure, several projects were deemed essential and allowed to continue.
During 2019, the Company entered into an equity line of credit facility with potential to sell at-the-market shares. The Company would receive the cash proceeds of this sale which would help support any cash flow deficiencies that may arise. Under this agreement, Lincoln Park Capital is required to purchase the shares the Company offers in a timely manner. The Company believes the cash proceeds can be raised very quickly in the event there is a liquidity issue. The equity line of credit is in place for $15,000,000. The total number of shares authorized under the Lincoln Park Capital Purchase Agreement total 3,024,194 which would allow the Company to maximize the equity line of credit within 10 business days. As of May 8, 2020, the closing price per share of Common Stock was $4.02 which would allow the Company to utilize the equity line of credit to generate approximately $12 million.
Certain of the Company’s loan agreements contain a clause requiring lender approval for changes to the guarantor under such agreements. If this clause is implicated, such lenders may require outstanding indebtedness to become immediately due.
Cash flow used in operating activities was $1,993,300 for the three months ended March 31, 2020, compared to $62,744 of cash provided by operating activities in the three months ended March 31, 2019. The decrease in cash provided by operating activities was primarily the result of the decrease in accounts payable of approximately $1.8 million and the net loss of $574,952 for the three months ended March 31, 2020.
Net cash used in investing activities was $57,230 for the three months ended March 31, 2020, compared to $77,013 used in the three months ended March 31, 2019. The first quarter of the year is typically a slower time period for the Company with relatively small investments being made to prepare for the upcoming year. During the three months ended March 31, 2020, the Company took a conservative approach to investing in property and equipment given the uncertain nature of the current COVID-19 pandemic.
Net cash provided by financing activities was $2,011,148 for the three months ended March 31, 2020 compared to $110,027 used for the three months ended March 31, 2019. Cash provided by financing activities in the first quarter of 2020 consisted of funds received as proceeds from line of credit increase and was partially offset by principal payments for equipment notes and amounts to due to shareholders.
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The Company believes its current cash on hand including the proceeds received under the PPP loan, the availability under the equity line of credits, the collectability of its accounts receivable and project backlog are sufficient to meet its operating and capital requirements for at least the next twelve months from the date these financial statements are issued.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on its financial condition, revenues, results of operations, liquidity, or capital expenditures.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2020, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Management has determined there is a lack of supervisory review of the financial statement closing process due to limited resources and formal documentation of procedures and controls. This control deficiency constitutes a material weakness in internal control over financial reporting. As a result, our principal executive officer and principal financial and accounting officer have concluded that during the period covered by this report, our disclosure controls and procedures were not effective. We plan to take steps to remedy this material weakness in with the implementation of an “Internal Control-Integrated Framework”
Disclosure controls and procedures are designed to ensure that the information that is required to be disclosed by us in our Exchange Act report is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2020, there were no changes in internal control over financial reporting.
None.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
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In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
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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 on the 14th day of May, 2020.
| THE PECK COMPANY HOLDINGS, INC. | ||
| By: | /s/ Jeffrey Peck | |
| Jeffrey Peck | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ John Sullivan | |
| John Sullivan | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
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