NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
In this report, the terms Pernix Group, Pernix, PGI, the Company, are used to refer to Pernix Group, Inc. (formerly known as Telesource International, Inc.) and its consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years.
Overview
Pernix Group is a global company managed from Lombard, Illinois and was originally formed in 1995 as Telesource International, Inc. In 2001, the Company was incorporated in Delaware and became an SEC registrant. As of March 31, 2014, Pernix Group is over 96.0% owned by Ernil Continental, S.A., BVI, Halbarad Group, Ltd., BVI, and Affiliates. The Company conducts its operations through the parent and its twelve subsidiaries, including Pernix LTC JV established in early 2014 in connection with a nanotechnology laboratory project on the campus of Texas A&M University. The Companys two primary operating business segments are general construction and power generation services. In addition to these two operating segments, the Corporate operations are a separately reported segment.
Pernix has full-scale construction and management capabilities, with subsidiaries in the South Pacific islands of Fiji and Vanuatu, Niger, United Arab Emirates, Azerbaijan, Sierra Leone and the United States. The Company provides our services in a broad range of end markets, including construction, construction management, power and facility operations and maintenance (O&M) services.
The construction and power generation segments offer diversified general contracting, design/build and construction management services to public and private agencies. The Company has provided construction and power generation services since 1995 and has established a strong reputation within our markets by delivering complex projects and providing innovative facility O&M solutions to clients world-wide with an unwavering commitment to safety, quality, social responsibility and total customer satisfaction. The Company has internationally experienced management teams with a proven track record of successfully completing complex projects around the globe and in some of the most remote locations on the planet. The Company has over fifteen years of experience providing our services in both domestic and international territories. The general construction and power generation services segments are supported by the Corporate segment which also manages the corporate headquarters building.
2. Significant Accounting Policies
Basis of Presentation
The interim condensed consolidated financial statements and notes thereto of Pernix Group have been prepared by management without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal and recurring nature. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys 2013 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2014.
8
Table of Contents
Principles of Consolidation and Presentation
The condensed consolidated financial statements include the accounts of all majority-owned subsidiaries and joint ventures, as well as material variable interest entities in which the Company is the primary beneficiary. All intercompany accounts have been eliminated in consolidation.
Reclassification
Certain reclassifications were made to prior years amounts presentation in the condensed consolidated balance sheet and statement of operations to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. The more significant estimates affecting amounts reported in the condensed consolidated financial statements relate to revenues under long-term contracts, including estimates of costs to complete projects and provisions for contract losses, valuation of options in connection with various share-based compensation plans, insurance accruals, the valuation allowance against deferred tax assets, and assumptions used in the valuations obtained in connection with the quasi-reorganization that are inherently subject to uncertainties and contingencies beyond the control of the Company. Accordingly, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized. Actual results could vary materially.
Revenue Recognition
The Company offers services through two operating business segments: General Construction and Power Generation Services which are supported by the Corporate segment. Revenue recognition for each of non-corporate segments is described by segment below.
General Construction Revenue.
Revenue from construction contracts is recognized using the percentage-of-completion method of accounting based upon costs incurred and estimated total project costs. Our current projects with the United States Government are design/build contracts with fixed contract prices and include provisions of termination for convenience by the party contracting with us. Such provisions also allow payment to us for the work performed through the date of termination. Our design/build capacity expansion project for FEA is also a fixed price contract while our design / build contract pertaining to the nanotechnology lab at Texas A&M University is a cost plus fee contract.
The Company only uses approved contract changes in its revenue recognition calculation. This method of revenue recognition requires that the Company estimate future costs to complete a project. Estimating future costs requires judgment of the value and timing of material, labor, scheduling, product deliveries, contractual performance standards, liability claims, impact of change orders, contract disputes as well as productivity. In addition, sometimes clients, vendors and subcontractors will present claims against us for recovery of costs they incurred in excess of what they expected to incur, or for which they believe they are not contractually responsible. In turn, the Company may also present claims to our clients, vendors and subcontractors for costs that management believes were not the Companys responsibility or may be beyond our scope of work. The Company will include costs associated with these claims in their financial information when such costs can be reliably identified and estimated. Similarly, the Company will include in revenue amounts equal to costs for claims, where the outcome is probable that the claim will be found in the favor of the Company. Costs and estimated earnings in excess of amounts billed to customers are recognized as an asset. Amounts billed in excess of costs and estimated earnings are recognized as a liability. The Company will record a provision for losses when estimated costs exceed estimated revenues. Contracts are generally completed in approximately 18 months from the date on which the Company is ordered to proceed with substantial work. In situations where the Company is responsible for procurement of construction materials, shipping and handling expenses are included in the contract costs of sales and in revenue to the extent the contract is
9
Table of Contents
complete. Some contracts require the Company to warranty facilities constructed for up to one year following substantial completion of the project. As of March 31, 2014, the Company reserved 2.5% or approximately $3.0 million of the total contact costs for potential warranty costs on the Sather project. The Company estimates the warranty reserve necessary based on potential future costs for project management, insurance, materials, labor, housing and if appropriate, costs to remobilize to the site. The reserve is reflected as billings in excess of costs on the consolidated balance sheet. The adequacy of the reserve is evaluated on at least a quarterly basis.
Power Generation Services Revenue.
The Company receives a combination of fixed and variable monthly payments as compensation for its production of power. The variable payments are recognized based upon power produced and billed to the customer as earned during each accounting period.
Cost of Construction Revenue.
Cost of construction revenue consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs, equipment expense (primarily depreciation, maintenance, and repairs), interest associated with construction projects, and insurance costs. The Company records a portion of depreciation in cost of revenue and indirect overhead dependent on the nature of charges and the related project agreements. If not chargeable to individual projects, overhead costs are expensed in the period incurred. Contracts frequently extend over a period of more than one year. Revisions in cost and profit estimates during construction are recognized in the accounting period in which the facts that require the revision become known. Losses on contracts are provided for in total when determined, regardless of the degree of project completion.
Contract Claims
The Company records contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such cases, the Company records revenue only to the extent that contract costs relating to the claim have been incurred. As of March 31, 2014 and 2013, the Company had no significant receivables related to contract claims.
Income Taxes
PGI and PFL file separate corporate income tax returns. Pernix Group, Inc. is a U.S. corporation that files a separate U.S. corporate income tax return. Pernix Fiji, Ltd. is a Fijian corporation and files a Fijian corporate tax return.
Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply 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.
We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. If the Company is unable to estimate our effective tax rate on an annual basis, it will use its best estimate of taxable income using quarterly results. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which it occurs. Items included in income tax expense in the periods in which they occur include the tax effects of material restructuring and impairments, cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.
A valuation reserve is recorded to offset the deferred tax benefit if management has determined it is more likely than not that the deferred tax assets will not be realized. The need for a valuation allowance is assessed each quarter.
At the date of the quasi-reorganization, deferred taxes were reported in conformity with applicable income tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities
10
Table of Contents
were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities. In accordance with the quasi-reorganization requirements, tax benefits realized in periods after the quasi-reorganization that were not recognized at the date of the quasi-reorganization will be recorded directly to equity.
Inventories
-
The inventory represents the value of spare parts maintained by the Company for use in the diesel power generators. Inventories are valued at the lower of cost or market, generally using the first-in, first-out (FIFO) method with certain exceptions for items that are homogenous in nature.
Property and Equipment
- Property and equipment are initially recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are expensed as incurred. Typically, estimated useful lives range from three to ten years for equipment, furniture and fixtures and 39 years for buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining terms of the underlying lease agreement. As a result of the quasi-reorganization, the carrying value of property and equipment was reduced $0.4 million to an insignificant amount as of September 30, 2012, the new cost basis, and the accumulated depreciation was also removed. The new cost basis will be amortized over the remaining estimated useful lives of these assets.
The new cost basis excludes the accumulated depreciation that had accrued on or before September 30, 2012. Total depreciation expense was $45,039 and $57,908 for the first quarter of 2014 and 2013, respectively ($32,862 and $13,803 after the quasi-reorganization impact). In March 2013, the Company purchased the building where its corporate headquarters is located from Baron Real Estate Holdings, a related party under common control for $1.1 million, which approximates the carrying value of the related party seller.
Long-lived assets to be held and used are reviewed for impairment whenever events or circumstances indicate that the assets may be impaired. For assets to be held and used, impairment losses are recognized based upon the excess of the assets carrying amount over the fair value of the asset. For long-lived assets to be disposed, impairment losses are recognized at the lower of the carrying amount or fair value less cost to sell. There was no such impairment subsequent to the quasi-reorganization through March 31, 2014.
3. Recently Issued Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-05, Service Concession Arrangements. This ASU clarifies that, unless certain circumstances are met, operating entities should not account for certain concession arrangements with public-sector entities as leases and should not recognize the related infrastructure as property, plant and equipment. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management is in the process of determining the impact on the companys financial position, results of operations and cash flows.
Other pronouncements issued recently are not expected to have a material impact on the Companys financial position, results of operations or cash flows.
4. Contract Backlog
Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted construction contracts in progress at March 31, 2014 and from construction contractual agreements on which work has not yet begun. The following summarizes changes in backlog on construction contracts during the periods ended March 31, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
March 31, 2013
|
Beginning balance
|
$
|
37,125,652
|
$
|
67,901,575
|
New construction contracts / amendments to contracts
|
|
46,829,751
|
|
15,446,506
|
Less: construction contracts revenue earned
|
|
13,644,158
|
|
16,090,401
|
Ending balance
|
$
|
70,311,245
|
$
|
67,257,680
|
|
|
|
|
|
11
Table of Contents
Management anticipates that approximately $61.6 million of the $70.3 million of backlog as of March 31, 2014 will be recognized as revenue during 2014 and the remaining $8.7 million after 2014. The table does not include revenue associated with our long term contract or memo of understanding for power operating and maintenance services or construction segment stipend income that is related to contracts that were not ultimately awarded to the Company as they are not directly related to core construction work. Additionally, the table does not include the $6.9 million contract modification received on the Companys Texas A&M University project that was awarded to Pernix LTC JV on April 30, 2014. On January 15, 2014, a Certificate of Substantial Completion was received related to the Sather project and approximately $5.8 million remains in the backlog as of March 31, 2014 and is related to estimated close out and project management work through January 2015 when the warranty period expires.
5. Short-term and long-term borrowings
As of December 31, 2013, PFL had a line of credit agreement with Australia and New Zealand Banking Group Limited (ANZ) which provides borrowing capacity up to FJD 2 million ($1.1 million USD as of March 31, 2014) and was secured by all real and personal property of PFL. On March 12, 2014, PFL modified its line of credit agreement with ANZ to increase the available line to FJD 6.9 million ($3.8 million USD as of March 31, 2014) and an additional EURO 17.3 million ($23.8 million USD as of March 31, 2014) to facilitate the Kinoya plant expansion project financing needs.
The agreement is secured by all real and personal property of PFL up to FJD 1.0 million ($0.55 million USD as of March 31, 2014), corporate guarantee of FJD 4.0 million ($2.2 million USD as of March 31, 2014) issued by Pernix Group to ANZ, Unconditional, Irrevocable and On Demand Stand by Letter of Credit given by Wartsila and Fiji Electricity Authority Bankers to ANZ on account of Pernix (Fiji) Limited and Term deposit of FJD 1.0 million ($0.55 million USD). The remaining terms and conditions of the line of credit agreement remain substantially the same after the amendment.
The Company paid FJD 100,000 ($0.06 million USD as of March 31, 2014) loan approval fee for the increase in the borrowing capacity under the line of credit as well as a commitment fee of 1% per annum when the line of credit is not fully drawn within three months of acceptance of the line of credit offer. The interest rate applicable to the line of credit is the Bank's published Index Rate minus a margin of 3.70% (Interest rate of 6.25% per annum at March 31, 2014).
As of March 2014, FJD 4.2 million ($2.3 million USD as of March 31, 2014) and Euro 5.0 million ($2.0 million USD as of March 31, 2014) of the line of credit was allocated to facilitate the issuance of the performance security and advance payment guarantee to Fiji Electricity Authority for the design, build, supply and install of 35MW Heavy Fuel Oil Wartsila Diesel Engines. An establishment fee of 0.9% of the guarantee amount was charged followed by a semi-annual fee of 0.9%. For each bank guarantee, the fee is payable on the date of the drawdown and afterwards semi-annually. There were no amounts drawn on the line of credit as of March 31, 2014.
In connection with the line of credit, PFL is subject to a gearing ratio covenant that limits net total liabilities less non-current subordinated debt to 2.1 times effective equity, as well as other customary covenants. As of March 31, 2014, the PFL gearing ratio is 1.56 and PFL is in compliance with all covenants as of March 31, 2014.
12
Table of Contents
6. Cost and Estimated Earnings on Uncompleted Contracts
Long-term construction contracts in progress are accounted for using the percentage-of-completion method. Billings, costs incurred, and estimated earnings on uncompleted contracts as of March 31, 2014 and December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
Cost and Estimated Earnings on Uncompleted Contracts
|
|
March 31, 2014
|
|
December 31, 2013
|
Cost incurred on uncompleted contracts
|
$
|
129,895,254
|
$
|
211,750,908
|
Estimated earnings
|
|
11,234,658
|
|
18,207,952
|
Total cost and estimated earnings on uncompleted contracts
|
|
141,129,912
|
|
229,958,860
|
Less: Billings to date
|
|
149,581,573
|
|
238,309,368
|
Net
|
$
|
(8,451,661
)
|
$
|
(8,350,508
)
|
|
|
|
|
|
These amounts are included in the accompanying condensed consolidated balance sheets under the following captions:
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
$
|
333,365
|
$
|
56,679
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
(8,785,026)
|
|
(8,407,187)
|
|
$
|
(8,451,661)
|
$
|
(8,350,508)
|
7. Stockholders Equity
Preferred Stock
The Company has 5,500,000 shares of authorized Preferred Stock. 1,000,000 of these shares have been designated as Series A Cumulative Convertible Preferred Stock (Series A Preferred Stock) and 400,000 shares were designated as Series B Cumulative Convertible Preferred Stock (Series B Preferred Stock).
On December 30, 2013 the Company sold 550,000 and 450,000 shares of Series A Preferred Stock to Ernil Continental, S.A., BVI and Halbarad Group, Ltd., BVI, respectively, for $5.00 per share, resulting in proceeds received of $5.0 million. The Company anticipates using the proceeds for potential acquisitions and operating activities as needed. Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at the annual rate of 8%, payable quarterly, have no voting rights and rank senior to common stock. As of March 31, 2014, 1,000,000 shares of the Series A Preferred Stock were issued and outstanding. The Series A Preferred Stock is convertible into 1,428,572 shares of Pernix Group common stock computed by multiplying the number of shares to be converted by the purchase price of $5.00 per share and dividing the result by the conversion price of $3.50. As of March 31, 2014 and December 31, 2013, no dividends were accrued. The dividends incurred and paid for the quarters ended March 31, 2014 and 2013 were $100,822 and $0, respectively
Holders of Series B Preferred Stock are entitled to receive cumulative dividends at an annual rate of $0.325 per share, have no voting rights, and rank senior to common stock and are on parity with Series A Preferred Stock with respect to dividends and upon liquidation. During the first quarter of 2014 and for the year ended December 31, 2013, the Company issued no Series B Preferred Stock. Each share of Series B Preferred Stock is convertible into Pernix Group common stock using the conversion rate as defined in each Series B Preferred Stock Purchase Agreement. As of March 31, 2014 and 2013, 170,000 shares of the Series B Preferred Stock were issued and outstanding and are convertible into 11,334 shares of common stock. As of March 31, 2014 and December 31, 2013, preferred stock dividends of $199,760 and $186,137, respectively, were accrued. The dividends incurred for both of the quarters ended March 31, 2014 and 2013 were $13,623. No dividends were paid on the Series B Preferred Stock during the quarters ended March 31, 2014 and 2013.
Common Stock
As of March 31, 2014 and 2013, 9,403,697 shares of the Companys common stock were issued and outstanding and over 96.0% of those shares were owned by Ernil Continental, S.A., BVI., Halbarad Group, Ltd., BVI and affiliated companies.
13
Table of Contents
8. Computation of Net Earnings (Loss) Per Share
A reconciliation of the numerator and denominator of basic and diluted earnings per share is provided as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
March 31, 2013
|
Numerator Net income (loss)
|
$
|
176,516
|
$
|
(502,941)
|
Less: Preferred stock dividends
|
|
114,445
|
|
13,623
|
Basic net income (loss) available to common stockholders
|
|
62,071
|
|
(516,564)
|
|
|
|
|
|
Denominator
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
Basic
|
|
9,403,697
|
|
9,403,697
|
|
|
|
|
|
Diluted
|
|
9,455,266
|
|
9,403,697
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
0.01
|
$
|
(0.05)
|
|
|
|
|
|
Diluted earnings (loss) per share
|
$
|
0.01
|
$
|
(0.05)
|
Basic and diluted net income from continuing operations per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. The impact of potential issuances of common shares from the Company's convertible preferred stock is excluded from the diluted earnings per share calculation for the quarter ended March 31, 2014, since inclusion would be antidilutive. For the quarter ended March 31, 2013, the impact of potential issuances of common shares from the Company's convertible preferred stock and outstanding stock options is excluded from the diluted earnings per share calculation, since inclusion would be antidilutive. See Note 9 in the notes to our condensed consolidated financial statements.
9. Stock-based compensation plans
2014 Equity Incentive Plan
(EIP)-
In late 2013, the Companys shareholders and board of directors adopted the 2014 EIP that provides for the issuance of a variety of equity awards to employees, non-employee directors and consultants. Under the terms of this plan, 1.8 million shares, which were previously allocated for issuance under the LTIP and ISOP, are reserved for issuance under the EIP. On February 8, 2014, 375,000 options were granted with a three year vesting schedule. The Company incurred expense associated with the EIP during the first quarter of 2014 of less than $0.1 million and no such expense during the first quarter of 2013.
2013 Long Term Incentive Plan (LTIP) -
During late 2012 the Companys shareholders approved the LTIP. The LTIP is a non-employee Director and Consultant compensation plan. On February 8, 2013, 78,500 options were granted to six non-employee directors with a three year vesting schedule. As of March 31, 2014, a total of 35,166 options were vested under this plan. The remaining 706,500 shares available to be awarded were transferred to the EIP as described above during late 2013. No additional shares are anticipated to be awarded under the LTIP.
Employee Incentive Stock Option Plan (ISOP)
Under the ISOP Plan, The table below summarizes activity for the ISOP for the first quarter of 2014 and 2013. Options granted in 2012 and 2013 had vesting periods of 5 years and 3 years, respectively. As of March 31, 2014, a total of 373,750 options were outstanding under this plan. The remaining 1,126,250 shares available to be awarded were transferred to the EIP as described above during late 2013. No additional shares are anticipated to be awarded under the ISOP.
Option awards to employees and directors under the Companys stock compensation plans are classified as equity and are valued at the grant date using the Black Scholes fair value model. Pernix recognizes the cost over the period
14
Table of Contents
during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Cash flows resulting from the exercise of related options are included in financing cash flows. There were no options exercised during 2014 or 2013.
The Company will issue new shares of common stock upon exercise of the options.
The following summarizes stock option activity for the quarters ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
EIP
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
Options outstanding, at beginning of year
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
Granted
|
|
375,000
|
|
2.07
|
|
|
|
N/A
|
Exercise
|
|
|
|
N/A
|
|
|
|
N/A
|
Forfeited / expired
|
|
3,000
|
|
2.07
|
|
|
|
N/A
|
Options outstanding, at March 31
|
|
372,000
|
|
2.07
|
|
|
|
N/A
|
Options exercisable, at March 31
|
|
50,000
|
$
|
2.07
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
LTIP
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
Options outstanding, at beginning of year
|
|
78,500
|
$
|
2.09
|
|
|
$
|
N/A
|
Granted
|
|
|
|
N/A
|
|
78,500
|
|
2.09
|
Exercise
|
|
|
|
N/A
|
|
|
|
N/A
|
Forfeited / expired
|
|
|
|
N/A
|
|
|
|
N/A
|
Options outstanding, at March 31
|
|
78,500
|
|
2.09
|
|
78,500
|
|
2.09
|
Options exercisable, at March 31
|
|
35,166
|
$
|
2.09
|
|
13,500
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
ISOP
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
Options outstanding, at beginning of year
|
|
379,000
|
$
|
2.09
|
|
152,500
|
$
|
2.09
|
Granted
|
|
|
|
N/A
|
|
347,500
|
|
2.09
|
Exercise
|
|
|
|
N/A
|
|
|
|
N/A
|
Forfeited / expired
|
|
5,250
|
|
2.09
|
|
121,000
|
|
2.09
|
Options outstanding, at March 31
|
|
373,750
|
|
2.09
|
|
379,000
|
|
2.09
|
Options exercisable, at March 31
|
|
134,166
|
$
|
2.09
|
|
23,500
|
$
|
2.09
|
15
Table of Contents
The following table summarizes information about stock options outstanding at March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Number Outstanding
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
Aggregate Grant Date Intrinsic Value
|
EIP
|
|
372,000
|
|
9.8
|
$
|
2.07
|
$
|
|
|
|
|
|
|
|
|
|
|
LTIP
|
|
78,500
|
|
8.8
|
$
|
2.09
|
$
|
|
|
|
|
|
|
|
|
|
|
ISOP
|
|
373,750
|
|
8.5
|
$
|
2.09
|
$
|
|
The weighted average grant date fair value of options granted during the quarter ended March 31, 2014 and 2013 were $0.93 and $0.98 per option. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 grant
|
|
2013 grant
|
|
2014 grant
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
1.1%
|
|
1.1%
|
|
1.8%
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Expected volatility
|
|
50.0%
|
|
50.0%
|
|
45.0%
|
Expected life in years
|
|
6.5
|
|
6.0
|
|
6.0
|
The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on the Companys history of not paying a dividend to any common class of stock. Expected volatility is based on volatilities of publicly traded competitors and companies from our peer group. The weighted average expected life in years for all grants as a group is then calculated for each year. During 2013, the forfeiture rate utilized was zero as the plans were relatively new and no significant and reliable history regarding share option exercise and employee termination patterns to estimate forfeiture rates existed until late 2013. Based on the data accumulated during 2013, the Company estimated a forfeiture rate of 25% and used this rate in calculating the compensation expense related to the 2014 EIP grant.
Total share-based compensation expense for the quarters ended March 31, 2014 and 2013 was less than $0.1 million for each period. As of March 31, 2014 and December 31, 2013, there was $479,521 and $303,966, respectively of total unrecognized compensation expense related to non-vested share-based awards. The compensation expense is expected to be recognized over a remaining weighted average period of 2.4 years, which is equivalent to the average vesting period.
The options exercisable at March 31, 2014 have intrinsic value of $1.91 per option based on the trade on that date on the Over the Counter Quotation Board. However, the stock is not actively traded and the trading price of the stock is volatile. The Company did not realize any tax deductions for this qualified ISOP plan options as the related expense is not tax deductible. A total of 8,250 options and zero options were forfeited or cancelled during the first quarter 2014 and 2013, respectively under the aforementioned plans.
Other than the ISOP, LTIP and EIP, the Company did not have any equity related compensation plans as of March 31, 2014. The Company has a 401K matching plan through which it contributes up to 8% of an employees salary at a matching rate of 50% of employee contributions, subject to an annual limitation of $4,000 per employee. The Company incurred $41,960 and $35,342 of expense associated with the 401K match during the first quarter 2014 and 2013, respectively.
16
Table of Contents
10. Commitments and Contingencies
Pernix Groups power generation activities involve significant risks of environmental damage, equipment damage and failures, personal injury and fines and costs imposed by regulatory agencies. Though management believes its safety programs and record is excellent and its insurance programs are adequate, if a liability claim is made against it, or if there is an extended outage or equipment failure or damage at one of the Companys power plants for which it is inadequately insured or subject to a coverage exclusion, and the Company is unable to defend against these claims successfully or obtain indemnification or warranty recoveries, the Company may be required to pay substantial amounts, which could have a materially adverse effect on its financial condition. In Fiji, the Company is liable for a deductible of FJD 1,250,000 (or approx. $683,000 USD as of March 31, 2014) if found to be negligent or 750,000 FJD (or approx. $409,800 USD as of March 31, 2014) if not found to be negligent in accordance with its agreement with the Fiji Electricity Authority. In Vanuatu, during the MOU period, the insurance deductible is 10 million Vatu (or approx. $107,000 USD) as of March 31, 2014.
On August 5, 2013, PFL experienced a diesel engine incident. A 7.5 MW engine was damaged by what the Company believes to be a component failure. In November
2013, FEA advised the total contribution from PFL for the G1 repair is FJD 244,467 ($133,577 USD) which the Company has accrued at March 31, 2014. The engine CAT G1 was commissioned in October 2013 and was available for generation.
VUI began to manage the power structure on Vanuatu on January 1, 2011 pursuant to a memo of understanding with the government of Vanuatu. The prior concessionaire, Unelco, filed a claim against the government alleging improper tender of the work. No claims have been filed against VUI but VUI joined the suit as a second defendant in order to protect its interests in the tender. In February 2014, during hearings in the Supreme Court of the Republic of Vanuatu (the Court), the Government of Vanuatu proposed a settlement with Unelco that would leave VUI without a claim to defend pertaining to the concession and would effectively end the litigation in UNELCOs favor. The proposed settlement called for a re-tender of the concession and required that any company who participates in the re-tender must waive any outstanding claims against the Government of Vanuatu. VUI in response presented its position to the court arguing that VUI should have an opportunity to be heard and that the Court should not accept the proposed settlement. The Justice is considering VUIs position and as of the date of this report has not yet rendered a decision. The Company anticipates that VUI will appeal any decision and stay the re-tender until appeals are complete which VUIs counsel anticipates would not occur prior to July 2014. If the re-tender process would begin around July 2014, it would likely not be completed until at least December 2014. The Company believes VUI will continue to provide O&M services until the retender is complete and a long term concession deed is awarded. As of the date of this report, VUI continues to operate and maintain the system and awaits a decision regarding the longer term concession deed.
In March 2014, the Utilities Regulatory Authority (URA or Commission) in Vanuatu issued a decision on the electricity tariff as it pertains to VUI operations. The terms of the ruling may result in lower revenue to VUI coupled with increased responsibilities for street lighting maintenance and an opportunity to share in efficiency savings related to the hydro operations in Vanuatu, along with other measures. VUI had the opportunity to file a notice of grievance to the Commission on or before April 12, 2014; however, VUI has chosen to operate under the decision and reduce costs to maximize the man-month fee to the extent allowed by the Court under the terms of any settlement accepted by the Court. In connection with these developments, the Company assessed if the related asset group was impaired as of March 31, 2014 and found that it was not impaired.
The Company offers warranties on its construction services and power generating plants. The Company usually has warranties from its vendors. If warranty issues remain on projects that are substantially complete, revenue is not recognized to the extent of the estimated exposure. Should the Company be required to cover the cost of repairs not covered by the warranties of the Companys vendors or should one of the Companys major vendors be unable to cover future warranty claims, the Company could be required to expend substantial funds, which could harm its financial condition.
17
Table of Contents
The Company and its subsidiaries are lessees in non-cancelable leasing agreements for office buildings, equipment and vehicles which expire at various dates. The related lease payments are expensed on a straight-line basis over the lease term, including, as applicable, any free-rent period during which the Company has the right to use the asset. For leases with renewal options where the renewal is reasonably assured, the lease term, including the renewal period is used to determine the appropriate lease classification and to compute periodic rental expense. None of the Companys current lease agreements have been determined to be capital leasing agreements.
11. Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, trade receivables and financial guarantees. The Companys cash balances and short-term investments are maintained in accounts held by major banks and financial institutions located primarily in the U.S., Niger, Azerbaijan, Sierra Leone, Fiji and Vanuatu as of March 31, 2014 and 2013. The Company maintains its cash accounts at numerous financial institutions. Certain accounts covered by the Federal Deposit Insurance Corporation (FDIC) are insured up to $250,000 per institution. As of March 31, 2014 and December 31, 2013, the amount of domestic bank deposits that exceeded or are not covered by the FDIC insurance was $14,375,248 and $17,920,452, respectively. Certain financial institutions are located in foreign countries which do not have FDIC insurance and, as of March 31, 2014 and December 31, 2013, the amount of bank deposits in these financial institutions was $785,734 and $1,409,144, respectively.
If the Company extends a significant portion of its credit to clients in a specific geographic area or industry, the Company may experience disproportionately high levels of default if those clients are adversely affected by factors particular to their geographic area or industry. The Companys customer base includes governments, government agencies and quasi-government organizations, which are dispersed across many different industries and geographic locations.
From time to time, Pernix Group utilizes foreign exchange contracts to reduce exposure to foreign exchange risks associated with payments for services and products related to the various construction and other projects. No such contracts were employed during March 31, 2014 or 2013.
From time to time, the Company is required to utilize standby letters of credit or similar financial guarantees in the normal course of its business, and this is a typical practice for the industry segments in which the Company operates. The amount, duration, and structure of such standby letters of credit or similar financial instruments varies depending on the nature and scope of the project involved. As of March 31, 2014 the Company had a FJD 4.0 million ($2.2 million USD) financial guarantee (issued by Pernix Group) to ANZ related to PFLs line of credit. The Company does not anticipate any payment risk under this guarantee as of March 31, 2014.
12. Related Party Debt
As of March 31, 2013, the Company had $2.8 million of outstanding debt under agreements with related parties. Included in short term debt as of March 31, 2013 was $0.5 of new debt outstanding under an agreement with Baron Real Estate Holdings with interest accruing at a rate of 4.0% per annum. The note was payable in twelve monthly installments beginning in March 2013 and was obtained in connection with the corporate headquarters building and land purchase in March 2013. The note was fully repaid in December 2013.
13. Related Party Transactions Not Described Elsewhere
The Companys shareholders include SHBC, which holds less than 6% of Pernix Groups stock at March 31, 2014. SHBC is a civil, electrical and mechanical engineering firm and construction contractor with over 4,000 employees and over fifty (50) years experience.
18
Table of Contents
As noted earlier, SHBC and Pernix Group have formed a joint venture (Pernix/SHBC JV). This joint venture was established in part to construct the new U.S. Embassy in Fiji which is now complete. The joint venture limited partnership agreement between SHBC and Pernix Group also provides for Pernix to make a payment to SHBC of 6.5% per annum of the unreturned capital. No such payments have been made to date though the Company has accrued interest expense of less than $0.1 million during the three month periods ending March 31, 2014 and 2013.
Computhink is a related party as it is owned by a company related to SHBC. Computhink provided various facility management, computer software and other outside services related to the Corporate headquarters. Charges from Computhink were less than $0.1 million for the quarter ended March 31, 2013 and there were no such expenses during the first quarter of 2014. Subsequent to the Companys purchase of the Corporate headquarter facilities, Pernix Group assumed, as lessor, the lease to Computhink. The lease term ends April 30, 2016 and Computhink pays $6,368 per month, with a
3% rent escalation clause. The Companys charges to Computhink were less than $0.1 million for rent, building management, utilities, personnel services, office supplies, photocopying and printing service charges for the three months ended March 31, 2014 and 2013.
Total related party accounts receivable and payables, net are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31, 2013
|
Accounts receivable from Computhink
|
$
|
46,796
|
$
|
39,447
|
Accounts payable to SHBC
|
|
|
|
(4,860)
|
Total
|
$
|
46,796
|
$
|
34,587
|
|
|
|
|
|
14. Business Segment Information
Pernix Group has elected to organize its segment information around its products and services. Pernix Group has three segments: General Construction, Power Generation Services and Corporate. There were no material amounts of transfers between segments. Any inter-segment revenues have been eliminated.
19
Table of Contents
The following table sets forth certain segment information for the periods indicated: