UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 31, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT

For the Transition Period from to

Commission File Number 001-31756

(Exact Name of Registrant as Specified in Its Charter)


Delaware		13-1947195
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

One Church Street, Suite 201, Rockville, Maryland 20850

(Address of Principal Executive Offices) (Zip Code)

(301) 315-0027

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed since Last Report)

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 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 þ 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 þ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $.15 par value	AGX	New York Stock Exchange

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Common stock, $0.15 par value: 15,689,969 shares as of December 7, 2020.

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	October 31,				October 31,
	2020		2019		2020		2019
REVENUES	$	127,331	$	58,406	$	274,971	$	171,009
Cost of revenues		106,988		52,414		234,989		183,078
GROSS PROFIT (LOSS) (Note 2)		20,343		5,992		39,982		(12,069)
Selling, general and administrative expenses		9,398		12,135		28,827		31,761
Impairment loss		—		—		—		2,072
INCOME (LOSS) FROM OPERATIONS		10,945		(6,143)		11,155		(45,902)
Other income, net		175		3,578		1,714		7,472
INCOME (LOSS) BEFORE INCOME TAXES		11,120		(2,565)		12,869		(38,430)
Income tax (expense) benefit (Note 10)		(1,666)		(1,996)		1,391		4,936
NET INCOME (LOSS)		9,454		(4,561)		14,260		(33,494)
Net income (loss) attributable to non-controlling interests		—		2,294		(40)		2,007
NET INCOME (LOSS) ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC.		9,454		(6,855)		14,300		(35,501)
Foreign currency translation adjustments		(321)		235		(650)		(825)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC.	$	9,133	$	(6,620)	$	13,650	$	(36,326)

NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. (Note 11)
Basic	$	0.60	$	(0.44)	$	0.91	$	(2.27)
Diluted	$	0.60	$	(0.44)	$	0.91	$	(2.27)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic		15,680		15,633		15,659		15,617
Diluted		15,833		15,633		15,795		15,617

CASH DIVIDENDS PER SHARE (Note 12)	$	0.25	$	0.25	$	1.75	$	0.75

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	October 31,		January 31,
	2020		2020
	(Unaudited)		(Note 1)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	353,213	$	167,363
Short-term investments		90,017		160,499
Accounts receivable, net		30,607		37,192
Contract assets		27,223		33,379
Other current assets (Note 10)		37,760		23,322
TOTAL CURRENT ASSETS		538,820		421,755
Property, plant and equipment, net		20,966		22,539
Goodwill		27,943		27,943
Other purchased intangible assets, net		4,324		5,001
Deferred taxes		—		7,894
Right-of-use and other assets		3,447		2,408
TOTAL ASSETS	$	595,500	$	487,540

LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	48,836	$	35,442
Accrued expenses (Note 10)		51,650		35,907
Contract liabilities		160,544		72,685
TOTAL CURRENT LIABILITIES		261,030		144,034
Deferred taxes		472		—
Other noncurrent liabilities		3,334		2,476
TOTAL LIABILITIES		264,836		146,510

COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)

STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.10 per share – 500,000 shares authorized; no shares issued and outstanding		—		—
Common stock, par value $0.15 per share – 30,000,000 shares authorized; 15,693,202 and 15,638,202 shares issued at October 31 and January 31, 2020, respectively; 15,689,969 and 15,634,969 shares outstanding at October 31 and January 31, 2020, respectively		2,354		2,346
Additional paid-in capital		152,149		148,713
Retained earnings		176,186		189,306
Accumulated other comprehensive loss		(1,766)		(1,116)
TOTAL STOCKHOLDERS’ EQUITY		328,923		339,249
Non-controlling interests		1,741		1,781
TOTAL EQUITY		330,664		341,030
TOTAL LIABILITIES AND EQUITY	$	595,500	$	487,540

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2020 AND 2019

(Dollars in thousands)

(Unaudited)


	Common Stock			Additional				Accumulated
	Outstanding	Par		Paid-in		Retained		Other Comprehensive		Non-controlling		Total
	Shares	Value		Capital		Earnings		Loss		Interests		Equity
Balances, August 1, 2020	15,669,969	$	2,351	$	150,847	$	170,653	$	(1,445)	$	1,741	$	324,147
Net income	—		—		—		9,454		—		—		9,454
Foreign currency translation loss	—		—		—		—		(321)		—		(321)
Stock compensation expense	—		—		786		—		—		—		786
Stock option exercises	20,000		3		516		—		—		—		519
Cash dividends	—		—		—		(3,921)		—		—		(3,921)
Balances, October 31, 2020	15,689,969	$	2,354	$	152,149	$	176,186	$	(1,766)	$	1,741	$	330,664

Balances, August 1, 2019	15,633,302	$	2,346	$	147,445	$	211,167	$	(1,406)	$	(483)	$	359,069
Net (loss) income	—		—		—		(6,855)		—		2,294		(4,561)
Foreign currency translation gain	—		—		—		—		235		—		235
Stock compensation expense	—		—		586		—		—		—		586
Cash dividends	—		—		—		(3,911)		—		—		(3,911)
Balances, October 31, 2019	15,633,302	$	2,346	$	148,031	$	200,401	$	(1,171)	$	1,811	$	351,418

Balances, February 1, 2020	15,634,969	$	2,346	$	148,713	$	189,306	$	(1,116)	$	1,781	$	341,030
Net income (loss)	—		—		—		14,300		—		(40)		14,260
Foreign currency translation loss	—		—		—		—		(650)		—		(650)
Stock compensation expense	—		—		2,199		—		—		—		2,199
Stock option exercises	55,000		8		1,237		—		—		—		1,245
Cash dividends	—		—		—		(27,420)		—		—		(27,420)
Balances, October 31, 2020	15,689,969	$	2,354	$	152,149	$	176,186	$	(1,766)	$	1,741	$	330,664

Balances, February 1, 2019	15,573,869	$	2,337	$	144,961	$	247,616	$	(346)	$	(196)	$	394,372
Net (loss) income	—		—		—		(35,501)		—		2,007		(33,494)
Foreign currency translation loss	—		—		—		—		(825)		—		(825)
Stock compensation expense	—		—		1,512		—		—		—		1,512
Stock option exercises	59,433		9		1,558		—		—		—		1,567
Cash dividends	—		—		—		(11,714)		—		—		(11,714)
Balances, October 31, 2019	15,633,302	$	2,346	$	148,031	$	200,401	$	(1,171)	$	1,811	$	351,418

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended October 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	14,260	$	(33,494)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Deferred income tax expense (benefit)		8,366		(4,521)
Depreciation		2,798		2,610
Stock compensation expense		2,199		1,512
Lease expense		1,318		637
Amortization of purchased intangible assets		677		864
Changes in accrued interest on short-term investments		482		1,106
Impairment loss		—		2,072
Other		111		60
Changes in operating assets and liabilities
Accounts receivable		6,585		1,274
Contract assets		6,156		7,992
Other assets		(15,976)		(1,760)
Accounts payable and accrued expenses		27,725		(12,523)
Contract liabilities		87,859		50,072
Net cash provided by operating activities		142,560		15,901

CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of short-term investments		170,000		164,000
Purchases of short-term investments		(100,000)		(75,000)
Purchases of property, plant and equipment		(1,412)		(6,308)
Net cash provided by investing activities		68,588		82,692

CASH FLOWS FROM FINANCING ACTIVITIES
Payments of cash dividends		(27,420)		(11,714)
Proceeds from the exercise of stock options		1,245		1,567
Net cash used in financing activities		(26,175)		(10,147)

EFFECTS OF EXCHANGE RATE CHANGES ON CASH		877		(282)
NET INCREASE IN CASH AND CASH EQUIVALENTS		185,850		88,164
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		167,363		164,318
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	353,213	$	252,482

SUPPLEMENTAL CASH FLOW INFORMATION (Notes 7 and 10)

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARGAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2020

(Tabular dollar amounts in thousands, except per share data)

(Unaudited)

NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

Argan, Inc. (“Argan”) conducts operations through its wholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”); The Roberts Company, Inc. (“TRC”); Atlantic Projects Company Limited and affiliates (“APC”) and Southern Maryland Cable, Inc. (“SMC”). Argan and these consolidated subsidiaries are hereinafter collectively referred to as the “Company.”

Through GPS and APC, the Company provides a full range of engineering, procurement, construction, commissioning, operations management, maintenance, project development, technical and other consulting services to the power generation market, including the renewable energy sector. The wide range of customers includes independent power producers, public utilities, power plant equipment suppliers and global energy plant construction firms with projects located in the continental United States (the “US”), the Republic of Ireland (“Ireland”) and the United Kingdom (the “UK”). Including consolidated variable interest entities (“VIEs”), GPS and APC represent the Company’s power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment provides on-site services that support maintenance turnarounds, shutdowns and emergency mobilizations for industrial plants primarily located in the southeast region of the US and that are based on its expertise in producing, delivering and installing fabricated metal components such as piping systems and pressure vessels. Through SMC, which conducts business as SMC Infrastructure Solutions, the telecommunications infrastructure services segment provides project management, construction, installation and maintenance services to commercial, local government and federal government customers primarily in the mid-Atlantic region of the US.

Basis of Presentation and Significant Accounting Policies

The condensed consolidated financial statements include the accounts of Argan, its wholly-owned subsidiaries and its financially controlled VIEs. All significant inter-company balances and transactions have been eliminated in consolidation.

In Note 14, the Company has provided certain financial information relating to the operating results and assets of its reportable segments based on the manner in which management disaggregates the Company’s financial reporting for purposes of making internal operating decisions. The Company’s fiscal year ends on January 31 each year.

The condensed consolidated balance sheet as of October 31, 2020, the condensed consolidated statements of earnings and stockholders’ equity for the three and nine months ended October 31, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended October 31, 2020 and 2019 are unaudited. The condensed consolidated balance sheet as of January 31, 2020 has been derived from audited financial statements. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the US Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements, the notes thereto, and the independent registered public accounting firm’s report thereon, that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (“Fiscal 2020”).

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, considered necessary to present fairly the financial position of the Company as of October 31, 2020, and its earnings and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

Accounting Policies

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes, which, among other changes, eliminates the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the expected loss for the entire year. In these instances, the estimated annual effective income tax rate shall be used to calculate the tax without limitation. The new standard also requires the recognition of a franchise (or similar) tax that is partially based on income as an income-based tax and the recording of any incremental tax that is incurred by the Company as a non-income based tax. The requirements of this new guidance, effective for the Company on February 1, 2021, are not expected to alter the Company’s current accounting for income taxes.

In 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The requirements of this new standard cover, among other provisions, the methods that businesses shall use to estimate amounts of uncollectible notes and accounts receivable. Adoption of this new guidance, which became effective for the Company on February 1, 2020, did not affect the Company's consolidated financial statements.

There are no other recently issued accounting pronouncements that have not yet been adopted that the Company considers material to its condensed consolidated financial statements.

The carrying value amounts presented in the condensed consolidated balance sheets for the Company’s current assets, which primarily include cash and cash equivalents, short-term investments, accounts receivable and contract assets, and its current liabilities are reasonable estimates of their fair values due to the short-term nature of these items.

Variable Interest Entity

In January 2018, the Company was deemed to be the primary beneficiary of a VIE that is performing the project development activities related to the planned construction of a new natural gas-fired power plant. Consideration for the Company’s engineering and financial support includes the right to build the power plant pursuant to a turnkey engineering, procurement and construction (“EPC”) services contract that has been negotiated and announced. The account balances of the VIE are included in the condensed consolidated financial statements, including development costs incurred by the VIE during the three and nine-month periods ended October 31, 2020 and 2019. The total amounts of the project development costs included in the balances for property, plant and equipment as of October 31 and January 31, 2020 were $7.4 million and $6.9 million, respectively. Recovery of the Company's investment in this project will most likely depend on the successful completion of the project development efforts, including the arrangement of financing for the construction and operation of the corresponding power plant.

NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS

The Company’s recognition of revenues under contracts with customers is based on a single comprehensive five-step model that requires reporting entities to:

Identify the contract,

Identify the performance obligations of the contract,

Determine the transaction price of the contract,

Allocate the transaction price to the performance obligations, and

Recognize revenue.

Major provisions of the standard cover the determination of which goods and services are distinct and represent separate performance obligations, the evaluation of whether revenues should be recognized at a point in time or over time, and the appropriate treatment for variable consideration.

The Company’s revenues are recognized primarily under various types of long-term construction contracts, including those for which revenues are based on either a fixed-price or a time-and-materials basis, and are primarily recognized over time as performance obligations are satisfied due to the continuous transfer of control to the project owner or other customer. Revenues from fixed-price contracts, including a portion of estimated gross profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the percentage-of-completion method.

If, at any time, the estimate of contract profitability indicates an anticipated loss on a contract, the Company will recognize the total loss in the reporting period that it is identified and an amount is estimable. Revenues from time-and-materials contracts are recognized when the related services are provided to the customer.

Almost all of the Company’s fixed-price contracts are considered to have a single performance obligation. Although multiple promises to transfer individual goods or services may exist, they are not typically distinct within the context of such contracts because contract promises included therein are interrelated or the contracts require the Company to perform critical integration so that the customer receives a completed project. The Company’s accounting for its assurance-type warranties provided under contracts with customers is conducted in accordance with the specific professional guidance established to cover such arrangements.

The transaction price for a contract represents the accounting value of the contract awarded to the Company that is used to determine the amount of revenues recognized as of the balance sheet date. It may reflect amounts of variable consideration, which could be either increases or decreases to the transaction price. These adjustments can be made from time-to-time during the period of contract performance as circumstances evolve related to such items as changes in the scope and price of contracts, claims, incentives and liquidated damages.

Contract assets generally include amounts that represent the rights to receive payment for goods or services that have been transferred to the project owner, with the rights conditional upon something other than the passage of time. Contract liabilities generally include the amounts that reflect obligations to provide goods or services for which payment has been received. The balances of accounts receivable exclude billed amounts which, pursuant to the terms of the applicable contract, are not paid by project owners until a defined phase of a contract or project has been completed and accepted. These retained amounts are reflected in contract assets or contract liabilities depending on the net contract position of the particular contract. Retention amounts and the length of retention periods may vary. Retention amounts related to active contracts are considered current regardless of the term of the applicable contract; such amounts are generally collected by the completion of the applicable contract. The total of amounts retained by project owners under construction contracts at October 31 and January 31, 2020 were $32.5 million and $20.0 million, respectively.

Variable Consideration

Amounts for contract variations for which the Company has project-owner directive for additional work or other scope change, but not for the price associated with the corresponding additional effort, are included in the transaction price when it is considered probable that the applicable costs will be recovered through a modification to the contract price. The effects of any revision to a transaction price can be determined at any time and they could be material. The Company may include in the corresponding transaction price a portion of the amount claimed in a dispute that it expects to receive from a project owner. Once a settlement of the dispute has been reached with the project owner, the transaction price may be revised again to reflect the final resolution. The aggregate amount of such contract variations included in the transaction prices that were used to determine project-to-date revenues at October 31, 2020 and January 31, 2020 were $8.0 million and $21.2 million, respectively. Variations related to the Company’s contracts typically represent modifications to the existing contracts and performance obligations, and do not represent new performance obligations. Actual costs related to any changes in the scope of the corresponding contract are expensed as they are incurred. Changes to total estimated contract costs and losses, if any, are reflected in operating results for the period in which they are determined.

The Company’s long-term contracts typically have schedule dates and other performance objectives that if not achieved could subject the Company to liquidated damages. At the outset of each of the Company’s contracts, the potential amounts of liquidated damages typically are not constrained, or subtracted, from the transaction price as the Company believes that it has included activities in its contract plan, and the associated costs, that will be effective in preventing such damages. Of course, circumstances may change as the Company executes the corresponding contract.

The transaction price is reduced by an applicable amount when the Company no longer considers it probable that a future reversal of revenues will not occur when the matter is resolved. The Company considers potential liquidated damages, the costs of other related items and potential mitigating factors in determining the adequacy of its regularly updated estimates of the amounts of gross profit expected to be earned on active projects.

The Company records adjustments to revenues and profits on contracts, including those associated with contract variations and estimated cost changes, using a cumulative catch-up method. Under this method, the impact of an adjustment to the amount of revenues recognized to date is recorded in the period that the adjustment is identified. Estimated variable consideration amounts are determined by the Company based primarily on the single most likely amount in the range of possible consideration amounts. Revenues and profits in future periods of contract performance are recognized using the adjusted amounts of transaction price and estimated contract costs.

Accounting for the Loss Subcontract

In its Form 10-K Annual Report for the year ended January 31, 2019 (“Fiscal 2019”), the Company disclosed that APC was completing the mechanical installation of the boiler for a biomass-fired power plant under construction in Teesside, England (the “TeesREP Project”) that had encountered significant operational and contractual challenges. The consolidated operating results for the year ended January 31, 2019 reflected unfavorable gross profit adjustments related to this project. The disclosure explained that the construction project was behind the schedule originally established for the job and warned that the TeesREP Project may continue to impact the Company’s consolidated operating results negatively until it reaches completion.

Subsequent to the release of the Company’s consolidated financial statements for Fiscal 2019, APC’s estimates of the costs of the unfavorable financial impacts of the difficulties on the TeesREP Project escalated substantially. For the nine-month period ended October 31, 2019, the Company recorded a loss related to this project in the amount of $31.2 million, including $0.3 million recorded in the three months ended October 31, 2019, and reversed profit in the amount of $0.7 million that had been recorded in prior fiscal years.

Construction activities on the TeesREP Project were suspended on March 24, 2020 due to the COVID-19 pandemic. At that time, APC had completed approximately 90% of its subcontracted work. As a condition for resuming its efforts on the TeesREP Project, APC entered into an amendment to the subcontract with its customer, effective June 1, 2020, covering the various terms and conditions for completion of the installation of the boiler (“Amendment No. 2”). The agreement represented a global settlement of past commercial differences with both parties making significant concessions, and converted the billing arrangements for the remaining work to a time-and-materials basis.

Amendment No. 2 was treated as a modification of the original subcontract as the arrangement continued to represent a single performance obligation to its customer, the delivery of a complete functioning and integrated boiler that was only partially satisfied when the modification to the subcontract occurred. During October 2020, APC and its customer agreed to additional contractual changes that effectively recognized APC’s completion of the single performance obligation and that establishes a time-and-materials contractual arrangement covering all works requested by APC’s customer until completion of the power plant construction.

The effects of these changes on the financial results reported for the subcontract were the primary reasons for the reductions to the subcontract loss that were recorded during the three and nine months ended October 31, 2020, in the approximate favorable amounts of $2.8 million and $4.1 million, respectively. Accordingly, the final amount of the TeesREP fixed price subcontract loss was $29.5 million, and the remaining subcontract loss reserve balance was eliminated as of October 31, 2020. At January 31, 2020, the subcontract loss reserve balance was $5.8 million. This balance was included in accrued expenses in the accompanying condensed consolidated balance sheet. Final closeout adjustments may result in future changes in the amount of the subcontract loss recognized as of October 31, 2020; however, APC has included an estimate of these costs in accrued expenses in the accompanying condensed consolidated balance sheet as of October 31, 2020. The total amounts of accounts receivable and contract assets related to the TeesREP Project and included in the condensed consolidated balance sheets were $7.3 million as of October 31, 2020 and $19.2 million as of January 31, 2020.

Remaining Unsatisfied Performance Obligations (“RUPO”)

The amount of RUPO represents the unrecognized revenue value of active contracts with customers as determined under the revenue recognition rules of US GAAP. Increases to RUPO during a reporting period represent the transaction prices associated with new contracts, as well as additions to the transaction prices of existing contracts. The amounts of such changes may vary significantly each reporting period based on the timing of major new contract awards and the occurrence and assessment of contract variations.

At October 31, 2020, the Company had RUPO of $604.7 million. The largest portion of RUPO at any date usually relates to EPC service contracts with typical performance durations of 2 to 3 years. However, the length of certain significant construction projects may exceed three years. The Company estimates that approximately 63% of the RUPO amount at October 31, 2020 will be included in the amount of consolidated revenues that will be recognized over the next twelve months. Most of the remaining amount of the RUPO amount at October 31, 2020 is expected to be recognized in revenues over the following eighteen months.

Revenues for future periods will also include amounts related to customer contracts started or awarded subsequent to October 31, 2020. It is important to note that estimates may be changed in the future and that cancellations, deferrals, scope adjustments may occur related to work included in the amount of RUPO at October 31, 2020. Accordingly, RUPO may be adjusted to reflect project delays and cancellations, revisions to project scope and cost and foreign currency exchange fluctuations, or to revise estimates, as effects become known. Such adjustments may materially reduce future revenues below Company estimates.

Disaggregation of Revenues

The following table presents consolidated revenues for the three and nine months ended October 31, 2020 and 2019, disaggregated by the geographic area where the corresponding projects were located:


	Three Months Ended				Nine Months Ended
	October 31,				October 31,
	2020		2019		2020		2019
United States	$	109,241	$	39,629	$	241,616	$	117,045
United Kingdom		9,759		10,349		22,595		35,631
Republic of Ireland		8,331		8,256		10,760		18,007
Other		—		172		—		326
Consolidated Revenues	$	127,331	$	58,406	$	274,971	$	171,009

Each year, the majority of consolidated revenues are recognized pursuant to fixed-price contracts with most of the remaining portions earned pursuant to time-and-material contracts. Consolidated revenues are disaggregated by reportable segment in Note 14 to the condensed consolidated financial statements.

NOTE 3 – CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

At October 31 and January 31, 2020, significant amounts of cash and cash equivalents were invested in mutual funds with net assets invested in high-quality money market instruments. Such investments include US Treasury obligations; obligations of US government agencies, authorities, instrumentalities or sponsored enterprises; and repurchase agreements secured by US government obligations. Due to market conditions, returns on money market instruments are currently minimal. The Company considers all liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

Short-term investments as of October 31 and January 31, 2020 consisted solely of certificates of deposit purchased from Bank of America (the “Bank”) with weighted average initial maturities of 292 days and 165 days, respectively (the “CDs”). The Company has the intent and ability to hold the CDs until they mature, and they are carried at cost plus accrued interest which approximates fair value. The total carrying value amounts as of October 31 and January 31, 2020 included accrued interest, which was $0.5 million at January 31, 2020. The amount of accrued interest at October 31, 2020 was insignificant. Interest income is recorded when earned and is included in other income. At October 31 and January 31, 2020, the weighted average annual interest rates of the outstanding CDs were 0.2% and 1.8%, respectively.

In addition, the Company has a substantial portion of its cash on deposit in the US at the Bank in excess of federally insured limits. Management does not believe that the combined amount of the CD investments and the cash deposited with the Bank represents a material risk. The Company also maintain certain Euro-based bank accounts in Ireland and certain pound sterling-based bank accounts in the UK in support of the operations of APC.

NOTE 4 – ACCOUNTS AND NOTES RECEIVABLE

The Company generally extends credit to a customer based on an evaluation of the customer’s financial condition without requiring tangible collateral. Exposure to losses on accounts and notes receivable is expected to differ due to the varying financial condition of each customer. The Company monitors its exposure to credit losses and may establish an allowance for a credit loss based on management’s estimate of the loss that is expected to occur over the remaining life of the particular financial asset. At October 31 and January 31, 2020, the amounts of credit losses expected by management were insignificant. The amounts of the provision for credit losses for the three and nine months ended October 31, 2020 and the provision for uncollectible accounts for the three and nine months ended October 31, 2019 were also insignificant.

As of October 31, 2020, there were outstanding invoices billed to one former customer and unbilled costs incurred on the related project, with balances included in accounts receivable and contract assets, in the aggregate amount of $24.5 million, for which the recovery time will most likely depend on the resolution of the outstanding legal dispute between the parties (see Note 8).

As of October 31, 2020, there were past due notes receivable from project developers in the aggregate amount of $1.7 million, for which full receipt will most likely depend on the successful financing of the related projects.

NOTE 5 – PURCHASED INTANGIBLE ASSETS

At both October 31, 2020 and January 31, 2020, the goodwill balances related to the acquisitions of GPS and TRC were $18.5 million and $9.5 million, respectively. Primarily due to the significant reduction of the fair value of the business of APC deemed to have occurred as a result of the substantial contract loss discussed in Note 2 above, the Company recorded an impairment loss in the first quarter ended April 30, 2019 in the amount of $2.1 million, which was the remaining balance of goodwill associated with APC. No other changes were made to the balances of goodwill during the nine-month periods ended October 31, 2020 or 2019. Management does not believe that any events or circumstances that have occurred or arisen since January 31, 2020 require an updated assessment of the goodwill balances of either GPS or TRC.

The Company’s purchased intangible assets, other than goodwill, consisted of the following elements as of October 31 and January 31, 2020:


		October 31, 2020						January 31,
	Estimated	Gross		Accumulated		Net		2020, (net
	Useful Life	Amounts		Amortization		Amount		amounts)
Trade names	15 years	$	8,142	$	4,849	$	3,293	$	3,699
Process certifications	7 years		1,897		1,332		565		768
Customer relationships	4-10 years		1,346		880		466		534
Totals		$	11,385	$	7,061	$	4,324	$	5,001

NOTE 6 – FINANCING ARRANGEMENTS

The Company maintains financing arrangements with the Bank that are described in an Amended and Restated Replacement Credit Agreement (the “Credit Agreement”), dated May 15, 2017. The Credit Agreement provides a revolving loan with a maximum borrowing amount of $50.0 million that is available until May 31, 2021 with interest at the 30-day London Interbank Offered Rate (“LIBOR”) plus 2.0%. The Company may also use the borrowing ability to cover other credit instruments issued by the Bank for the Company’s use in the ordinary course of business. As of October 31 and January 31, 2020, the Company had letters of credit outstanding under the Credit Agreement, but no borrowings, in the approximate amounts of $1.7 million and $9.9 million, respectively. The Company expects that it will negotiate either an extension or a replacement agreement prior to the current expiration date of the Credit Agreement.

The Company has pledged the majority of its assets to secure its financing arrangements. The Bank’s consent is not required for acquisitions, divestitures, cash dividends or significant investments as long as certain conditions are met. The Bank requires that the Company comply with certain financial covenants at its fiscal year-end and at each of its fiscal quarter-ends. The Credit Agreement also includes other terms, covenants and events of default that are customary for a credit facility of its size and nature. As of October 31 and January 31, 2020, the Company was in compliance with the financial covenants.

In support of the current project development activities of the VIE described in Note 1, the Bank issued a letter of credit, outside the scope of the Credit Agreement, in the amount of $3.4 million for which the Company has provided cash collateral.

NOTE 7 – COMMITMENTS

Leases

The Company determines if a contract is or contains a lease at inception or upon modification of the contract. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The Company does not apply this accounting to those leases with terms of twelve (12) months or less and that do not include options to purchase the underlying assets that the Company is reasonably certain to exercise.

The Company’s operating leases primarily cover office space that expire on various dates through May 2024 and certain equipment used by the Company in the performance of its construction services contracts. Other construction equipment is rented, with periods of expected usage less than one year, or owned. Certain leases contain renewal options, which are included in expected lease terms if they are reasonably certain of being exercised by the Company. Other equipment leases are embedded in broader arrangements with subcontractors or construction equipment suppliers. The Company has no finance leases.

None of the operating leases include significant amounts for incentives, rent holidays or price escalations. Under certain lease agreements, the Company is obligated to pay property taxes, insurance, and maintenance costs.

Operating lease right-of-use assets and associated lease liabilities are recognized in the balance sheet at the lease commencement date based on the present value of future minimum lease payments to be made over the expected lease term. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate (LIBOR plus 2.0%) at the commencement date in determining the present value of future payments. The expected lease term includes an option to extend or to terminate the lease when it is reasonably certain that the Company will exercise such option.

Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. Operating lease expense amounts for the three months ended October 31, 2020 and 2019 were $0.5 million and $0.1 million, respectively. Operating lease expense amounts for the nine months ended October 31, 2020 and 2019 were $1.3 million and $0.6 million, respectively. Operating lease payments for the three months ended October 31, 2020 and 2019 were $0.3 million and $0.2 million, respectively. Operating lease payments for the nine months ended October 31, 2020 and 2019 were $1.2 million and $0.6 million, respectively. For operating leases as of October 31, 2020, the weighted average lease term is 32 months and the weighted average discount rate is 3.3%.

The Company also uses equipment and occupies facilities under short-term rental agreements. Rent expense amounts incurred under operating leases and short-term rental agreements (including portions of the lease expense amounts disclosed above) and included in costs of revenues for the three and nine months ended October 31, 2020 were $2.3 million and $4.2 million, respectively. Rent expense incurred under these types of arrangements and included in costs of revenues for the three and nine months ended October 31, 2019 was $0.9 million and $3.2 million, respectively. Rent expense included in selling, general and administrative expenses for the three and nine months ended October 31, 2020 was $0.2 million and $0.7 million, respectively. Rent expense included in selling, general and administrative expenses for the three and nine months ended October 31, 2019 was $0.1 million and $0.5 million, respectively.

The following is a schedule of future minimum lease payments for the operating leases that were recognized in the condensed consolidated balance sheet as of October 31, 2020, including operating leases added during the three and nine months ended October 31, 2020 in the amounts of approximately $0.5 million and $2.3 million, respectively, covering primarily certain construction-site assets required by GPS:


Years Ending January 31,
Remainder of 2021	$	505
2022		1,648
2023		856
2024		242
2025		85
Thereafter		20
Total lease payments		3,356
Less interest portion		90
Present value of lease payments		3,266
Less current portion (included in accrued expenses)		2,760
Non-current portion	$	506

The future minimum lease payments presented above include amounts due under a long-term lease covering the primary offices and plant for TRC with the founder and current chief executive officer of TRC at an annual rate of $0.3 million through April 30, 2021.

Performance Bonds and Guarantees

In the normal course of business and for certain major projects, the Company may be required to obtain surety or performance bonding, to cause the issuance of letters of credit, or to provide parent company guarantees (or some combination thereof) in order to provide performance assurances to clients on behalf of its contractor subsidiaries. As these subsidiaries are wholly-owned, any actual liability is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. When sufficient information about claims on guaranteed or bonded projects would be available and monetary damages or other costs or losses would be determined to be probable, the Company would record such losses. Any amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress as of October 31, 2020 are not estimable.

On behalf of APC, Argan has provided a parent company performance guarantee to its customer, the EPC services contractor on the TeesREP Project. Earlier this year, and in connection with the negotiation of Amendment No. 2, the Company replaced an outstanding letter of credit in the amount of $7.6 million with a surety bond.

As of October 31, 2020, the Company has also provided a financial guarantee, subject to certain terms and conditions, on behalf of GPS to an original equipment manufacturer in the amount of $3.6 million in support of business development efforts. The fair value of this guarantee at October 31, 2020 is considered to be immaterial.

Warranties

The Company generally provides assurance-type warranties for work performed under its construction contracts. The warranties cover defects in equipment, materials, design or workmanship, and most warranty periods typically run from nine to twenty-four months after the completion of construction on a particular project. Because of the nature of the Company’s projects, including project owner inspections of the work both during construction and prior to substantial completion, the Company has not experienced material unexpected warranty costs in the past. Warranty costs are estimated based on experience with the type of work and any known risks relative to each completed project. The accruals of liabilities, which are established to cover estimated future warranty costs, are recorded as the contracted work is performed, and they are included in the amounts of accrued expenses in the condensed consolidated balances sheets. The liability amounts may be periodically adjusted to reflect changes in the estimated size and number of expected warranty claims.

NOTE 8 – LEGAL CONTINGENCIES

In the normal course of business, the Company may have pending claims and legal proceedings. In the opinion of management, based on information available at this time, there are no current claims and proceedings that could have a material adverse effect on the condensed consolidated financial statements except for the matter described below.

In January 2019, GPS filed a lawsuit against Exelon West Medway II, LLC and Exelon Generation Company, LLC (together referred to as “Exelon”) for Exelon’s breach of contract and failure to remedy various conditions which negatively impacted the schedule and the costs associated with the construction by GPS of a gas-fired power plant for Exelon in Massachusetts. As a result, the Company believes that Exelon has received the benefits of the construction efforts of GPS and the corresponding progress made on the project without making payments to GPS for the value received (see Note 4). In March 2019, Exelon provided GPS with a notice intending to terminate the EPC contract under which GPS had been providing services to Exelon. At that time, the construction project was nearly complete and both of the power generation units included in the plant had successfully reached first fire. The completion of various prescribed performance tests and the clearance of punch-list items were the primary tasks necessary to be accomplished by GPS in order to achieve substantial completion of the power plant. Nevertheless, and among other actions, Exelon provided contractual notice requiring GPS to vacate the construction site. Exelon has asserted that GPS failed to fulfill certain obligations under the contract and was in default, withholding payments from GPS on invoices rendered to Exelon in accordance with the terms of the contract between the parties.

With vigor, GPS intends to continue to assert its rights under the EPC contract with Exelon, to pursue the collection of amounts owed under the EPC contract and to defend itself against the allegations that GPS did not perform in accordance with the contract. During the nine months ended October 31, 2020, most of the litigation activities of the legal teams has focused on the completion of discovery. The difficulties experienced by the legal teams in completing certain discovery activities, due in part to COVID-19 restrictions, resulted in the court granting extensions of the discovery period which is now closed for both parties. The next phase of the case is pre-trial. The Company expects that a mediation will be scheduled for Spring 2021. If the mediation is not successful in resolving the disputes, then the Company expects that trial will occur during the mid-to-late Summer 2021.

NOTE 9 – STOCK-BASED COMPENSATION

The Company’s board of directors may make awards under the 2011 Stock Plan (the “2011 Plan”) or the 2020 Stock Plan (the “2020 Plan”) to officers, directors and key employees (together, the “Stock Plans”). On June 23, 2020, the Company’s stockholders approved the adoption of the 2020 Plan, and the allocation of 500,000 shares of the Company’s common stock for issuance thereunder, which had been established by the Company’s board of directors earlier in the current year. The 2020 Plan will serve to replace the 2011 Plan; the Company’s authority to make awards pursuant to the 2011 Plan will expire on July 19, 2021.

The features of the 2020 Plan are similar to those included in the 2011 Plan. Awards may include nonqualified stock options, incentive stock options, and restricted or unrestricted stock. The specific provisions for each award made pursuant to the terms of the Stock Plans are documented in a written agreement between the Company and the awardee. All stock options awarded under the Stock Plans shall have an exercise price per share at least equal to the common stock’s market value on the date of grant. Stock options shall have terms no longer than ten years. Typically, stock options are awarded with one-third of each stock option vesting on each of the first three anniversaries of the corresponding award date. As of October 31, 2020, there were approximately 2,170,400 shares of the Company’s common stock reserved for issuance under the Stock Plans; this number includes 688,999 shares of common stock available for future awards.

Summaries of stock option activity under the Company’s approved stock option plans for the nine months ended October 31, 2020 and 2019, along with corresponding weighted average per share amounts, are presented below (shares in thousands):


		Exercise		Remaining
	Shares	Price		Term (years)	Fair Value
Outstanding, February 1, 2020	1,271	$	44.83	7.18	$	11.06
Granted	172	$	33.81
Exercised	(55)	$	22.69
Forfeited	(24)	$	55.61
Outstanding, October 31, 2020	1,364	$	44.14	6.96	$	10.52
Exercisable, October 31, 2020	865	$	46.40	5.97	$	11.76

		Exercise		Remaining
	Shares	Price		Term (years)	Fair Value
Outstanding, February 1, 2019	1,140	$	44.01	7.54	$	11.22
Granted	168	$	46.67
Exercised	(59)	$	26.36
Forfeited	(38)	$	46.34
Outstanding, October 31, 2019	1,211	$	45.18	7.28	$	11.27
Exercisable, October 31, 2019	753	$	45.81	6.25	$	10.22

The changes in the number of non-vested options to purchase shares of common stock for the nine months ended October 31, 2020 and 2019, and the weighted average fair value per share for each number, are presented below (shares in thousands):


	Shares	Fair Value
Non-vested, February 1, 2020	448	$	9.74
Granted	172	$	5.68
Vested	(112)	$	9.81
Forfeitures	(9)	$	8.08
Non-vested, October 31, 2020	499	$	8.35

	Shares	Fair Value
Non-vested, February 1, 2019	375	$	10.05
Granted	168	$	10.32
Vested	(57)	$	9.28
Forfeitures	(28)	$	10.47
Non-vested, October 31, 2019	458	$	10.22

Pursuant to the terms of the 2011 Plan and as described in the corresponding agreements with the executives, the Company awarded performance-based restricted stock units to two senior executives in April 2020, 2019 and 2018 covering 45,000, 36,000 and 36,000 maximum total numbers of shares of common stock, respectively, plus a number of shares to be determined based on the amount of cash dividends deemed paid on shares earned pursuant to the awards. The release of the stock restrictions depends on the total return performance of the Company’s common stock measured against the performance of a peer-group of common stocks over three-year periods. The fair value amounts for restricted stock units were determined by using the per share market price of the Company’s common stock on the dates of award and the target number of shares for the awards (50% of the maximum number), by assigning equal probabilities to the thirteen possible payout outcomes at the ends of the three-year vesting periods, and by computing the weighted average of the outcome amounts. For each case, the estimated fair value amount was calculated to be 88.5% of the aggregate market value of the target number of shares on the award date.

The fair values of stock options and restricted stock units are recorded as stock compensation expense over the vesting periods of the corresponding awards. Expense amounts related to stock awards were $0.8 million and $0.6 million for the three months ended October 31, 2020 and 2019, respectively. Expense amounts related to stock awards were $2.2 million

and $1.5 million for the nine months ended October 31, 2020 and 2019, respectively. At October 31, 2020, there was $3.8 million in unrecognized compensation cost related to outstanding stock awards that the Company expects to expense over the next three years.

The total intrinsic value amounts of the stock options exercised during the nine months ended October 31, 2020 and 2019 were $1.2 million and $1.4 million, respectively. At October 31, 2020, the aggregate market value amounts of the shares of common stock subject to outstanding and exercisable stock options that were “in-the-money” exceeded the aggregate exercise prices of such options by $4.7 million and $3.3 million, respectively.

The Company estimates the weighted average fair value of stock options on the date of award using a Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company believes that its past stock option exercise activity is sufficient to provide it with a reasonable basis upon which to estimate the expected life of newly awarded stock options. Risk-free interest rates are determined by blending the rates for three to five year US Treasury notes. The dividend yield is based on the Company’s current annual regular dividend amount. The calculations of the expected volatility factors are based on the monthly closing prices of the Company’s common stock for the five-year periods preceding the dates of the corresponding awards.

The fair value amounts of stock options granted during the nine months ended October 31, 2020 and 2019 were estimated on the corresponding dates of the awards using the Black-Scholes option-pricing model reflecting the following weighted average assumptions:


	Nine Months Ended October 31,
	2020		2019
Dividend yield	3.0	%	2.2	%
Expected volatility	30.0	%	33.1	%
Risk-free interest rate	0.5	%	2.0	%
Expected life (in years)	3.4		3.3

NOTE 10 – INCOME TAXES

Income Tax Expense Reconciliation

The Company’s income tax amounts for the nine months ended October 31, 2020 and 2019 differed from corresponding amounts computed by applying the federal corporate income tax rate of 21% to the income (loss) before income taxes for the periods as presented in the table below.


	Nine Months Ended October 31,
	2020		2019
Computed expected income tax (expense) benefit	$	(2,702)	$	8,070
Difference resulting from:
Net operating loss carryback		4,390		—
Foreign tax rate differential		(77)		(766)
Stock options		66		(170)
State income taxes, net of federal tax effect		(40)		185
Net operating losses deemed unrealizable		—		(6,280)
Bad debt loss		—		5,026
Adjustments and other differences		(246)		(1,129)
Income tax benefit	$	1,391	$	4,936

Foreign income tax expense amounts for the nine months ended October 31, 2020 and 2019 were not material. A valuation allowance in the amount of $6.3 million was established against the deferred tax asset amount created by the net operating loss of APC’s subsidiary in the UK for the nine months ended October 31, 2019. As the subsidiary is expected to report income for the current year, approximately $0.1 of tax benefit was recorded during the nine-month period ended October 31, 2020.

Net Operating Loss Carryback

In an effort to combat the adverse economic impacts of the COVID-19 crisis, the US Congress passed the Coronavirus, Aid, Relief, and Economic Security Act ( the “CARES Act”) that was signed into law on March 27, 2020. This wide-ranging legislation was an emergency economic stimulus package that includes spending and tax breaks aimed at strengthening the US economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19. The CARES Act has provided many opportunities for taxpayers to evaluate their 2018 and 2019 income tax returns to identify potential tax refunds. One such area is the utilization of net operating losses (“NOLs”). The tax changes of the CARES Act remove the limitations on the future utilization of certain NOLs and re-establish a carryback period for certain losses to five years. The NOLs eligible for carryback under the CARES Act include the Company’s domestic NOL for the year ended January 31, 2020, which was approximately $39.5 million. Substantially all of this loss now may be carried back for application against the Company’s taxable income for the year ended January 31, 2015.

As the carryback of the NOL was not available until the current fiscal year, the tax benefit associated with the NOL for Fiscal 2020 was recorded in deferred tax assets as of January 31, 2020 in the amount of $8.3 million. With the enactment of the CARES Act, the asset was moved to income taxes receivable (included in other current assets in the condensed consolidated financial statements as of October 31, 2020) with a value of approximately $12.7 million. The carryback provides a favorable rate benefit for the Company as the loss, which was incurred in a year where the statutory federal tax rate was 21%, will be carried back to a tax year where the tax rate was higher. The substantial portion of the net amount of this tax benefit, which is approximately $4.4 million, was recorded in the three-month period ended April 30, 2020 and is, therefore, reflected as income tax benefit in the results for the nine-month period ended October 31, 2020.

Research and Development Tax Credits

During Fiscal 2019, the Company completed a detailed review of the activities of its engineering staff on major EPC services projects in order to identify and quantify the amounts of research and development credits that may be available to reduce prior year income taxes. This study focused on project costs incurred during the three-year period ended January 31, 2018. Based on the results of the study, management identified and estimated significant amounts of income tax benefits that were not previously recognized in the Company’s operating results for any prior year reporting period. The amount of research and development tax credit benefit recognized during the fourth quarter of Fiscal 2019 was $16.2 million. As described below, the IRS is examining the research and development credits that were included in the amendments of the Company’s consolidated federal income tax returns for the years ended January 31, 2016 and 2017 that were filed in January 2019.