NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Background
Pernix Group, Inc. (the Company, Pernix Group, PGI or Pernix) 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, 2016 and December 31, 2015, Pernix Group is over 96.0% owned by Ernil Continental, S.A., BVI. (Ernil), Halbarad Group, Ltd., BVI, (Halbarad) and Affiliates. The Company conducts its operations through the parent and its subsidiaries.
Pernix is a diversified construction company that is engaged in two primary operating business segments - construction services and power services. Construction services include pre-construction (pre-con) consulting services, construction management, design build and general contracting delivered either in lump-sum, guaranteed maximum cost or cost-plus contract models. Power services include operating and maintenance of power production facilities typically with longer term contracts. Pernix has full-scale construction and management capabilities, with some of the Companys subsidiaries located in the United States, Guam, Fiji, Vanuatu, South Korea, Africa and Germany. The Company provides services in a broad range of end markets, including construction, construction management, power and facility operations and maintenance services. In addition to these two operating segments, the corporate operations are a separately reported segment.
The Companys subsidiaries and consolidated joint ventures, which include Pernix Building Group, LLC, Pernix-Serka Joint Venture (PSJV), Pernix-SHBC Joint Venture (SHBC), Pernix LTC (PLTC), Pernix Fiji, Ltd. (PFL), Vanuatu Utilities and Infrastructure (VUI), Pernix Guam LLC (PPG), Pernix Papa New Guinea (PPNG) and Pernix Kaseman Joint Venture, LLC (PKJV) also bid on and /or execute construction projects with support from the Pernix corporate office. Dck ecc Guam Pacific JV LLC is a variable interest entity for which the Company is the primary beneficiary.
Pernix has two power segment subsidiaries that manage the construction and facilities operations and management activities in Fiji and Vanuatu, respectively. VUI is wholly-owned and PFL is majority-owned since November 25, 2014, when PFL sold 249,999 of its common shares to Fijian Holdings Limited (FHL) for a 25% non-controlling interest for FJD 4.35 million ($2.3 million USD).
2. Significant Accounting Policies
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of all majority-owned subsidiaries over which the Company exercises control and joint ventures when determined to be variable interest entities (VIE) in which the Company is the primary beneficiary. During the three months ended March 31, 2016, the VIE and related financial results primarily relate to our PPG acquisition in June 2015 as discussed in Note 3. All inter-company accounts have been eliminated in consolidation. The consolidated financial statements of the Company for the three months ended March 31, 2016 and 2015 reflect the impact of quasi-reorganization accounting.
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 consolidated financial statements relate to revenues under long-term contracts, including estimates of costs to complete projects and provisions for contract losses, fair market value allocation of assets purchased in business combinations, allowances for doubtful accounts, reserves for self-insured risk, valuation of options in connection with various share-based compensation plans, insurance accruals, impairment evaluations for goodwill and definite lived intangibles, and the valuation allowance against deferred tax assets. Accordingly, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized. Actual results could vary materially.
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Table of Contents
Revenue Recognition
Pernix offers our services
through two
operating business segments: construction and power services which are supported by the corporate segment. Revenue recognition for each of the non-corporate segments is described by segment below.
Construction Revenue.
Revenue from construction contracts is recognized using the percentage-of-completion method of accounting based upon costs incurred and estimated total projected costs. Our current projects with the U.S. Government are design/build and design/bid/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.
Revenues and gross profit on contracts can be significantly affected by change orders and claims that may not have been approved by the customer until the later stages of a contract or subsequent to project completion. This method of revenue recognition requires that we 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. Certain change orders may be accounted for based on probability of cost recovery. For these change orders if it is not probable that costs will be recovered through a change in the contract price, the costs attributable to such pending change orders are treated as contract costs without incremental revenue. For contracts where it is probable that the costs will be recovered through a change order, total estimated contract revenue is increased by the lesser of the amount expected to be recovered or the costs expected to be incurred. Revenues recognized in excess of amounts billed and the associated costs are classified as current assets, since it is anticipated that these earnings and costs will be billed and collected in the next fiscal year. 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 24 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 costs of construction revenue and in revenue to the extent the contract is complete.
Power Services Revenue.
The Company receives 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. The Company also receives fixed payments in connection with the long term concession deed for O&M services in Fiji.
Cost of Construction Revenue
. Cost of 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 and indirect overhead in cost of construction revenue 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. Contract duration typically extends beyond 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
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, we may also present claims to our clients, vendors and subcontractors for costs that we believe were not our responsibility or may be beyond our scope of work. 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, 2016 and December 31, 2015, the Company
had no significant receivables or payables related
to contract claims.
Cash and Cash Equivalents
The Companys cash equivalents include highly liquid investments which have an initial maturity of three months or less.
Restricted cash
The Companys restricted cash represents required cash balances maintained in conjunction with PFLs financing agreements related to ongoing constructions projects.
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Table of Contents
Inventory
Inventory primarily represents the value of spare parts which the Company is required to maintain for use in the diesel power generators operated and maintained by the Company in Fiji. Inventories are valued at the lower of cost or market, generally using the first-in, first-out method, and are primarily homogenous in nature. As of March 31, 2016 and December 31, 2015, the value of the spare parts inventory is $
1.9
million and $1.8 million, respectively.
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 major additions and improvements are capitalized while maintenance and repairs are expensed as incurred. The cost of property, plant and equipment sold or otherwise disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operating income for the respective period. 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 lesser of their estimated useful lives or the remaining terms of the underlying lease agreement.
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 for the three months ended March 31, 2016.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase consideration over the fair value of the net assets of businesses acquired. Goodwill is not amortized. Instead, goodwill is tested for impairment at least annually or more frequently if indicators of impairment exist, such as a significant sustained change in the business climate or a current expectation of an impending disposal. The Company conducts its annual impairment evaluation in the fourth quarter of each year. There were no impairment triggering events identified during the three months ended March 31, 2016.
Other intangible assets with definite lives consist primarily of customer contracts/backlog and tradename. The customer contracts / backlog intangible assets are being amortized to costs of construction revenue in the consolidated statements of operations on a straight-line basis over a weighted average life ranging from two to three years. The tradename intangible asset is being amortized to general and administrative expenses in the consolidated statements of operations on a straight-line basis over 2 years. See Note 4 for more information.
Construction and power contract intangibles
In connection with the quasi-reorganization asset valuations, $0.3 million of contracts were recognized as intangible assets and are amortized in proportion to the anticipated completion of the contracts. As of March 31, 2016 the remaining weighted average life on contract intangible assets is 7 years. Amortization expense of the contract intangible assets was less than $0.1 million for the three months ended March 31, 2016 and 2015 and the remaining balance as of March 31, 2016 was $0.1 million.
Income Taxes
Pernix Group, Inc. is a U.S. corporation that files a separate U.S. corporate income tax return, which includes its respective share of earnings from its U.S. subsidiaries. PFL is a Fijian corporation and files a Fijian corporate tax return. PPG is a wholly owned Guam limited liability company which does not file a separate Guam tax return as it is a disregarded entity included in the U.S. 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.
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.
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Table of Contents
At the date of the quasi-reorganization, deferred taxes were reported in conformity with applicable income tax accounting standards, net of applicable valuation allowances. Deferred tax assets and liabilities 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.
Allowance for Doubtful Accounts
The Company records its accounts receivable net of an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on managements evaluation of the contracts involved and the financial condition of its clients. The factors considered by the Company in its contract evaluations include, but are not limited to; client typedomestic and foreign, federal, state and local government or commercial client, historical contract performance, historical collection and delinquency trends, client credit worthiness and general economic conditions. There was no allowance for doubtful accounts as of March 31, 2016.
Fair Value of Financial Instruments
The Company determines the fair values of its financial instruments based on inputs or assumptions that market participants would use in pricing an asset or a liability. The Company categorizes its instruments using a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 inputs are unobservable inputs based on the Companys assumptions used to measure assets and liabilities at fair value. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and the short-term debt agreements approximate fair value because of the short maturities of these instruments.
The Companys fair value measurement methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methodologies or assumptions to determine fair value could result in a different fair value measurement at the reporting date.
From time to time, the Company holds financial instruments such as marketable securities, receivables related to sales-type leases, and foreign currency contracts. As of March 31, 2016 and 2015, the Company did not hold any such financial instruments.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries, where the functional currency is not the U.S. dollar, have been translated at year-end exchange rates and profit and loss accounts have been translated using weighted-average yearly exchange rates. Foreign currency translation gains and losses are included as a component of Accumulated Other Comprehensive Earnings (Loss). Assets and liabilities of an entity that are denominated in currencies other than an entitys functional currency are re-measured into the functional currency using end of period exchange rates or historical rates where applicable to certain balances. Gains and losses related to these re-measurements are recorded within the statement of operations as a component of other expense (income), net.
From time to time, the Company is exposed to foreign currency exchange risk on various foreign transactions and the Company attempts to reduce this risk and manage cash flow exposure of certain payables and anticipated transactions by entering into forward exchange contracts. As of March 31, 2016 and December 31, 2015, the foreign currency risk
is not material and
there were no foreign exchange contracts outstanding. The Company historically has not applied hedge accounting treatment to its forward exchange contracts.
Stock-Based Compensation
Principal awards issued under the Companys stock-based compensation plans include qualified stock options to employees, non-qualified stock options and awards,
restricted stock units
and other types of awards.
The Company recognizes the expense associated with stock option awards over the period during which an employee, director or consultant is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
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Table of Contents
Stock option awards for employees and directors are classified as equity instruments and are valued at the grant date and are not subject to re-measurement. The option valuation is performed using a Black Scholes fair value model. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions can materially affect fair value estimates. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. During the three months ended March 31, 2016 and 2015, compensation expense related to stock options was approximately $
0.1
million for both periods.
Reclassification
Certain reclassifications were made to prior year amounts to conform with current year presentation.
3. Acquisitions and Partial Sale to Non-controlling Interest
Papa New Guinea Transactions
On March 31, 2016, PGI and its subsidiary, Pernix Papa New Guinea Ltd. (PPNG), consummated two interdependent transactions, the first of which was the sale by PGI of a non-controlling interest in PPNG to FHL for seven million Kina (USD $
2,343,803
as of March 31, 2016). The second transaction was the purchase by PPNG of Basic Industries Ltd. (BIL), from PHL Holdings Ltd. (PHL) for one million Kina (USD $
334,827
as of March 31, 2016). FHL, a shareholder of PHL, serves as guarantor, indemnifying PPNG in accordance with the terms of the purchase agreement.
The assets and liabilities of the acquired business are recorded at their estimated fair values at the date of acquisition.
The results of operations for BIL during the three months ended March 31, 2016 were insignificant.
Transaction costs were nominal and were expensed as incurred. The Company has estimated the fair value of the assets acquired and liabilities assumed for BIL at the date of acquisition based upon information available to the Company at the reporting date. The estimated fair value of the total assets acquired was approximately $1.7 million, consisting primarily of property and equipment ($1.1 million) and prepayments ($0.4 million). The estimated fair value of the total liabilities assumed was $1.3 million, consisting primarily of assumed debt ($1.2 million). The Company is still in the process of finalizing appraisals of tangible and intangible assets in order to complete its purchase price allocation for the acquisition of BIL. As additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), the Company may revise its estimates of fair value to more accurately allocate the purchase price.
BE&K Building Group Acquisition
On June 30, 2015, the Pernix Building Group, LLC (PBG), a wholly owned subsidiary of Pernix, acquired a 100% membership interest in KBR Building Group, LLC from BE&K, Inc., a subsidiary of KBR, Inc., for $22.0 million in cash subject to working capital adjustments, of which $0.9 million was paid on the acquisition date, based on a net working capital target of negative $6.0 million. During the fourth quarter, management finalized a $4.0 million working capital adjustment reducing the purchase price to $18.9 million. As discussed in Note 4, the Company returned $0.4 million to the seller in April 2016. The KBR Building Group, LLC, now known as BE&K Building Group (BEK BG), is a diversified construction services company serving advanced manufacturing, industrial, life sciences, and commercial/mixed-use clients providing comprehensive pre-construction and at-risk construction management services. The addition of BEK BG personnel, resources, past experience and past performance will serve to expand Pernixs U.S. domestic base and its private sector coverage.
dck Pacific Guam LLC & dck-ecc Pacific Guam LLC Acquisition
On June 15, 2015, Pernix Guam, LLC (PPG), a wholly owned subsidiary of Pernix, acquired certain assets of dck Pacific Guam LLC (the LLC) and a 55% membership interest in dck-ecc Pacific Guam LLC joint venture (the JV), (collectively the PPG Acquisition) for a purchase price of $1.8 million, of which $0.3 million is subject to certain terms and conditions.
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Table of Contents
The JV is a variable interest entity (VIE) in which PPG holds a 55% membership interest. PPG is the primary beneficiary of the JV and as a result, consolidates the JV in its entirety. PPG controls all activities and has a 96% economic interest in the activities of the P-109 project, which represents the most significant remaining activities of the JV. PPG has no obligation to absorb the
expected losses of, nor the right to receive the expected residual returns deriving from non P-109 activity of the JV. It is expected that the non-P109 JV activity will be concluded within the first half of 2016 and will not impact the Companys consolidated financial statements after the completion of these non P-109 projects. The consolidated financial statements as of March 31, 2016 include the following assets and liabilities of the JV which relate solely to the non P-109 projects and the Company h
as no rights or obligations with respect to these items:
|
|
Non P-109
|
|
|
|
Contract receivables
|
$
|
181,576
|
Contract payables and accrued expenses
|
|
(772,659)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
(333,736)
|
4. Goodwill and Other Intangible Assets
Goodwill and other intangible assets subject to amortization consisted of the following:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Contracts / Backlog
|
$
|
7,972,000
|
$
|
(2,467,085)
|
$
|
5,504,915
|
|
$
|
7,972,000
|
$
|
(1,723,497)
|
$
|
6,248,503
|
Tradename
|
|
1,200,000
|
|
(450,000)
|
|
750,000
|
|
|
1,200,000
|
|
(300,000)
|
|
900,000
|
Total Other Intangible Assets
|
$
|
9,172,000
|
$
|
(2,917,085)
|
|
6.254,915
|
|
$
|
9,172,000
|
$
|
(2,023,497)
|
|
7,148,503
|
Goodwill
|
|
|
|
|
|
20,023,832
|
|
|
|
|
|
|
19,141,273
|
Total Goodwill and Other Intangible Assets
|
$
|
26,278,747
|
|
|
|
|
|
$
|
26,289,776
|
|
|
Construction Segment
|
Other Intangible Assets Subject to Amortization:
|
|
|
Balance as of December 31, 2015
|
$
|
7,148,503
|
Amortization
|
|
(893,588)
|
Balance as of March 31, 2016
|
|
6,254,915
|
|
|
|
Goodwill:
|
|
|
Balance as of December 31, 2015
|
|
19,141,273
|
Adjustments
|
|
882,559
|
Balance as of March 31, 2016
|
|
20,023,832
|
Goodwill and Other Intangibles as of March 31, 2016
|
$
|
26,278,747
|
During the quarter ended March 31, 2016, the Company adjusted goodwill to a) correct the December 31, 2015 classification of goodwill, resulting in an increase of approximately $531,000 and b) reflect approximately $351,000 that was erroneously paid to the Company as part of the working capital adjustment for the Pernix Building Group, LLC acquisition in 2015, as an increase to goodwill.
Amortization of intangible assets for the three months ended March 31, 2016 was $0.9
million, of which
$0.7 million
was recorded in construction costs and $0.2
million was recorded in general and administrative expenses on the consolidated statements of operations. Amortization expense relating to remaining amortizable intangible assets
will be $2.7 million in 2016, $2.6 million in 2017, and $1.0 million
in 2018.
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Table of Contents
5. Recently Issued Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08). ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09; instead, the amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09. The Company is currently evaluating the impact that the adoption of ASU 2016-08 will have on the companys financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Companys fiscal year beginning December 1, 2017 and subsequent interim periods. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the companys financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. The Company is evaluating the impact of adopting this ASU on its consolidated financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). The main provisions of this guidance, which is intended to simplify the presentation of deferred income taxes, require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period
. Adoption of the standard is not expected to have a material impact on the condensed consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) (ASU 2015-14), which deferred the effective date of ASU 2014-09 (ASU 2014-09) issued in May 2014. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. With the issuance of ASU 2015-14, the FASB delayed the effective date for implementation of ASU 2014-09. Deferral of the effective date requires the Company to adopt the new standard not later than January 1, 2018. Management is currently evaluating the impact the adoption of ASU 2014-09 will have on the Companys consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified.
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Table of Contents
In August 2015, the FASB issued ASU No. 2015-15, InterestImputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit ArrangementsAmendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, and in April 2015, the FASB issued ASU 2015-03, Interest Imputation of Interest (Subtopic 835-30) (ASU 2015-03).The guidance in update 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The discount, premium, or debt issuance costs shall not be classified as a deferred charge or deferred credit. An entity should apply the guidance on a retrospective basis, with applicable disclosures for a change in an accounting principle. ASU 2015-03 and 2015-15 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years with early adoption permitted and applied on a retrospective basis. Management has adopted ASU 2015-15 in these financial statements and the adoption did not have a material impact on the Company's financial position, results of operations or cash flows.
6. 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, 2016 and 2015 and from construction contractual agreements on which work has not yet begun as well as awarded not booked backlog where a contractual agreement has not been signed but there is a high degree of certainty that we expect to recognize revenue in the future. The following summarizes changes in backlog on construction contracts during the three months ended March 31:
|
|
March 31, 2016
|
|
March 31, 2015
|
Beginning balance
|
$
|
379,432,495
|
$
|
21,501,972
|
New construction contracts / amendments to contracts
|
|
180,411,473
|
|
15,477,730
|
Less: construction contracts revenue earned
|
|
75,075,830
|
|
9,328,570
|
Ending balance
|
$
|
484,768,138
|
$
|
27,651,132
|
|
|
|
|
|
The table includes $
51.3
million of awarded not booked associated with BEK BG and includes the fees associated with contracts under the cost plus fee contractual arrangement. The table excludes our long term contract or memorandum of understanding for power operating and maintenance services.
The Company has three loss contracts as of March 31, 2016 of $0.4 million, $0.3 million and $0.1 million which are 95%, 24% and 29% complete, respectively. The Company also assumed three loss contracts in connection with the 2015 acquisition of BEK BG. These projects are 99%, 66% and 46% complete as of March 31, 2016 with estimated contract costs in excess of contract revenue of $1.3 million, $1.3 million and $0.6 million, respectively. The Company recorded a provision for losses of approximately $1.7 million based on estimated costs in excess of contract revenue during the three months ended March 31, 2016 associated with these contracts.
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Table of Contents
7. Cost and Estimated Earnings on Uncompleted Contracts
Billings, costs incurred, and estimated earnings on uncompleted contracts as of March 31, 2016 and December 31, 2015 were as follows:
|
|
|
|
|
Cost and Estimated Earnings on Uncompleted Contracts
|
|
March 31, 2016
|
|
December 31, 2015
|
Cost incurred on uncompleted contracts
|
$
|
268,018,972
|
$
|
207,563,345
|
Estimated earnings
|
|
9,812,364
|
|
10,007,049
|
Total cost and estimated earnings on uncompleted contracts
|
|
277,831,336
|
|
217,570,394
|
Plus: Acquired net costs and estimated earnings in excess of billings
|
|
|
|
15,009,186
|
Less: Billings to date
|
|
268,421,528
|
|
222,415,720
|
Net
|
$
|
9,409,808
|
$
|
10,163,860
|
|
|
|
|
|
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
|
$
|
15,143,193
|
$
|
16,563,199
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
(5,733,385)
|
|
(6,399,339)
|
|
$
|
9,409,808
|
$
|
10,163,860
|
8. Short-term and long-term borrowings
The current and non-current portions of the Companys outstanding borrowings as of March 31, 2016 are as follows:
|
|
Current Portion
|
|
Non-Current Portion
|
Term Loans
|
|
|
|
|
4.5% 2-year term loan related party
|
$
|
|
$
|
6,000,000
|
6.8% 2-year term loan related party
|
|
|
|
1,462,500
|
Variable interest rate 5-year term loan
|
|
341,180
|
|
1,235,717
|
Total term loans
|
|
341,180
|
|
8,698,217
|
|
|
|
|
|
Lines of Credit
|
|
|
|
|
Variable interest rate $1,500,000 line-of-credit
|
|
1,498,816
|
|
|
Variable interest rate $750,000 line-of-credit
|
|
750,000
|
|
|
Variable interest rate $975,000 line-of-credit
|
|
784,044
|
|
|
Total lines of credit
|
|
3,032,860
|
|
|
Total borrowings
|
$
|
3,374,040
|
$
|
8,698,217
|
Maturities
The Companys debt as of March 31, 2016 matures as follows:
2016
|
$
|
3,305,405
|
2017
|
|
7,820,049
|
2018
|
|
373,974
|
2019
|
|
391,155
|
2020
|
|
181,674
|
Total debt
|
$
|
12,072,257
|
Total interest expense incurred by the Company for the three months ended March 31, 2016 was $0.1 million, and the interest expense incurred during the three months ended March 31, 2015 was nominal. The Companys weighted-average interest rate on short-term borrowings outstanding as of March 31, 2016 was 4.28%. The Company had no outstanding borrowings as of March 31, 2015.
16
Table of Contents
Letters of Credit
As of March 31, 2016, the Company had FJD 10.5 million ($5.1 million USD) and WST 2.7 million ($1.2 million USD) in outstanding letters of credit and guarantees with financial institutions, which expire at various dates in 2016.
Pernix Group, Inc.
On July 14, 2015, the Company entered into a two-year term loan agreement with Bent Marketing Ltd., an affiliate of a major shareholder, for $6.0 million. Interest accrues at 4.5% and is paid quarterly. The term loan matures on August 15, 2017 at which time the principal and all unpaid interest is due.
Pernix Guam
On November 24, 2015, Pernix Guam, LLC entered into a letter of credit agreement with Australia New Zealand Banking Group Limited (ANZ) for
$0.75 million
. The interest is based on the Asian Prime rate plus 0.50% (
4.00
% as of March 31, 2016). Principal and interest are paid monthly. Loan origination fees equal 1.00% of each loan amount and there are no prepayment penalties. The letter of credit is subject to the same covenants as outlined in Pernix Guam LLC term loan with ANZ bank as noted below except that the gearing ratio that limits net total liabilities to shareholder funds has been adjusted to 2.00:1
. The letter of credit has been reduced to zero as $0.75 million was converted to a draw on the line of credit as of March 31, 2016.
On July 21, 2015, PFL entered into a two-year working capital loan from Fiji Holdings Limited on behalf of Pernix Guam for FJD 3.0 million ($1.5 million USD as of March 31, 2016). Interest is paid monthly at an annual rate of 6.8% with the principal and any unpaid interest due at maturity. There is an interest prepayment penalty equivalent to two months interest.
On June 18
,
2015, Pernix Guam, LLC entered into a five year term loan agreement with ANZ in the amount of $1.83 million. The agreement also provides a revolving line of credit of $1.5 million. The term loan interest is based on the Asian Prime rate plus 1.00% (
4.50
% as of March 31, 2016). The line of credit matures one year from the date of the note. The interest rate applicable to the line of credit facility is the Asian Prime rate plus 0.5
% (4.00% as
of March 31, 2016). Principal and interest are paid monthly for both facilities.
As of March 31, 2016, $1.6 million and $1.5 million was outstanding on the term loan and line of credit, respectively. The term loan and line of credit are subject to annual covenants to be maintained for the term of the loan, which includes maintaining backlog of at least $20.0 million, a gearing ratio that limits net total liabilities to shareholder funds to 2.50:1 and a debt service coverage ratio of 1.25:1 EBITDA to debt and interest. Pernix Guam, LLC has received a waiver from its annual compliance with all covenants as of and for the three months ended March 31, 2016 as the entity has only been operational for nine months.
Pernix Fiji Limited (PFL) Debt Agreements
PFL had an existing letter of credit of FJD 6.0 million ($2.9 million USD) for the establishment of a performance security and indemnity guarantee to facilitate supply of transformers and switchgear for the new Kinoya 33KV Substation project. PFL increased its letter of credit by FJD 4.5 million ($2.2 million USD) for the establishment of a performance security and indemnity guarantee on behalf of Pernix Group for the Samoa Hydro Rehab Project established with Electric Power Corporation (EPC). As of March 31, 2016, the total indemnity guarantee facility was FJD 10.5 million ($5.1 million USD) and WST 2.7 million ($1.2 million USD). The Company also increased its temporary overdraft facility with ANZ to FJD 2.0 million ($0.975 million USD). As of March 31, 2016, $0.8 million is outstanding on the temporary overdraft facility with ANZ.
The agreement is secured by all real and personal property of PFL up to FJD 1.0 million ($0.5 million USD as of March 31, 2016), a corporate guarantee of FJD 4.0 million ($1.9 million USD as of March 31, 2016) issued by PGI to ANZ, an Unconditional, Irrevocable and On Demand standby letter of credit given by the FEA to ANZ, and a restricted cash term deposit of FJD 2.0 million ($0.98 million USD as of March 31, 2016).
17
Table of Contents
The interest rate applicable to the line of credit is the Bank's published Index Rate minus a margin of
4.95%
(
Interest rate of 5% per annum as of March 31, 2016). 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. The fee charged by ANZ was 0.5% of the letter of credit value. The balance of the credit facility was allocated to the finance operating lease facility and credit card facility.
In connection with the letter of credit facility, 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, 2016, the PFL gearing ratio is 1.81 and PFL is in compliance with all covenants
.
Pernix MAP Limited
On January 18, 2016, the Company established an unconditional, irrevocable letter of credit with ANZ Bank to meet the security requirements of the EPC Hydro Rehab contract. Pernix MAP has a letter of credit of WST 2.7 million ($1.2 million USD) as an advance payment guarantee for the Samoa Hydro Rehab project with the EPC. An establishment fee of 0.5% of the guarantee amount was charged followed by a semi-annual fee of 1.0%. For each bank guarantee, the fee is payable on the date of the drawdown and afterwards semi-annually. The agreement is secured by all real and personal property of Pernix MAP Limited.
Pernix Group, Inc. and Pernix RE, LLC
On November 14, 2014, PGI and Pernix RE, LLC entered into a loan and security agreement with Barrington Bank & Trust Company, National Association to establish a revolving credit facility and a letter of credit facility, each expiring on November 10, 2016, with an option to extend the term of the agreement.
The revolving credit facility provides a borrowing capacity of $5.0 million. Loans under the revolving credit facility will bear interest at the LIBOR rate determined on periodic reset dates, plus an applicable margin ranging from 1.6% to 2.75% based on the Companys liquidity, as defined. The letter of credit provides up to $10.0 million in aggregate of standby or trade letters of credit which accrue interest at Prime rate (3.50% at March 31, 2016) plus 4% for standby letters of credit and Prime rate plus 0.75% for trade letters of credit. Interest for each facility is payable on the periodic reset dates and borrowings are payable by the maturity of the agreement. Borrowings under each facility are secured by all real and personal property of PGI and Pernix RE, LLC.
The agreement requires the Company to pay a facility fee of 1.6% per annum of the then outstanding undrawn letter of credit and imposes various restrictions on the Company, such as, among others, the requirement to maintain minimum net income of $1.00 and minimum liquidity equal to the amount outstanding on the credit facility, as
defined. No amounts were outstanding under the revolving credit or letter of credit facility as of March 31, 2016 or 2015. The Companys primary use of the credit facility is to fund potential working capital needs.
Fair Value of Debt
In accordance with ASC 820 Fair Value Measurements, the fair values of the Companys short-term borrowings are based on quoted market prices at the date of measurement. The Companys credit facilities approximate fair value as they bear interest rates that approximate market. These inputs used to determine fair value are considered Level 2 inputs.
The fair values of the Companys long-term borrowings, the exit price of which cannot be determined using quoted market prices, is established using market and income valuation techniques and are considered Level 2 inputs. The aggregate carrying value of the Companys borrowings is $
12.1
million and the estimated aggregate fair value using the income approach is $
13.0
million.
18
Table of Contents
9. Stockholders Equity
Certificate of Amendment of the Corporations Restated Certificate of Incorporation
- In connection with the Series A Preferred Stock sale that was effective on December 30, 2013, the Company amended its Restated Certificate of Incorporation and its Certificate of Designation for Series A Preferred Stock to increase the total number of shares of stock which the Company shall have authority to issue to 25,500,000, consisting of 20,000,000 shares of Common Stock, par value $.01 per share (Common Stock), and 5,500,000 shares of Preferred Stock, par value $.01 per share (Preferred Stock).
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) and 4,000,000 shares have been designated Series C Cumulative Convertible Preferred Stock (Series C Preferred Stock).
In June, 2015 the Company sold 1,540,000 and 1,260,000 shares of Series C Preferred Stock (par value $0.01) to Ernil and Halbarad, respectively for $10.00 per share, resulting in proceeds received by the Company of $28.0 million. There were two separate investment transactions for both Ernil and Halbarad. Ernil purchased 550,000 and 990,000 shares and Halbarad purchased 450,000 and 810,000 shares of Series C Preferred Stock on June 10, 2015 and June 26, 2015, respectively. The Company used the proceeds to fund the acquisition of the BEK BG and related operating activities. From and after July 1, 2015, holders of Series C Preferred Stock are entitled to receive, when, and if declared by the Board of Directors, cumulative dividends at the annual rate of 8%. From July 1, 2015 through July 1, 2016, all dividends accumulated will be paid to the holder of Series C Preferred Stock in the form of the Companys common stock valued solely for these purposes at $4.48 per share. Thereafter, such dividends will be payable in cash, bi-annually on January 1 and July 1 in arrears. Series C Preferred Stock have no voting rights and rank senior to common stock and are on parity with Series A and Series B preferred stock. As of March 31, 2016, 2,800,000 shares of the Series C Preferred Stock were issued and outstanding. The Series C Preferred Stock is convertible into 2,800,000 shares of Pernix Group common stock at the Companys option and have a liquidation preference of $10.00 per share. Dividends accumulated for Series C Preferred Stock as of March 31, 2016 were
$1.7 million
. No dividends were declared or paid on the Series C Preferred Stock during the three months ended March 31, 2016.
On December 30, 2013 the Company sold 550,000 and 450,000 shares of Series A Preferred Stock to Ernil and Halbarad, respectively for $5.00 per share, resulting in proceeds received by the Company of $5.0 million. Holders of Series A Preferred Stock are entitled to receive, when and as declared by the Board of Directors, 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, 2016, 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 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, which was in excess of the fair value of the Companys common stock. The dividends accumulated but not paid as of March 31, 2016 were $99,726. Dividends paid during the three months ended March 31, 2015 were $98,630.
As of March 31, 2016 and December 31, 2015, 170,000 shares of the Series B Preferred Stock were issued and outstanding and are convertible into 11,334 shares of common stock. Holders of Series B Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, 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 and C Preferred Stock with respect to dividends and upon liquidation. As of March 31, 2016 and December 31, 2015, Series B Preferred Stock dividends of $310,412 and $296,637 were accumulated, respectively.
No dividends were declared or paid during the three months ended March 31, 2016 and 2015, respectively.
Common Stock
As of March 31, 2016 and December 31, 2015, 9,403,697 shares of the Companys common stock were issued and outstanding and over 96.0% of those shares were owned by Ernil, Halbarad and affiliated companies.
19
Table of Contents
10. Computation of Net Earnings Per Share
A reconciliation of the numerator and denominator of basic and diluted earnings per share for the three months ending March 31, 2016 and 2015 is provided as follows:
|
|
March 31, 2016
|
|
March 31, 2015
|
Numerator Net income (loss) attributable to stockholders
|
$
|
(4,844,821)
|
$
|
(2,066,945)
|
Less: Preferred stock dividends, including amounts paid and accumulated
|
|
671,966
|
|
112,253
|
Net loss attributable to common stockholders of Pernix
|
|
(5,516,787)
|
|
(2,179,198)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average common shares outstanding
|
|
9,403,697
|
|
9,403,697
|
|
|
|
|
|
Basic and dilutive net earnings (loss) per share
|
$
|
(0.59)
|
$
|
(0.23)
|
|
|
|
|
|
Basic and diluted net loss per common share have been computed using the weighted-average number of shares of common stock outstanding during the periods. Diluted earnings per share is computed by dividing earnings by the number of fully diluted shares, which includes the effect of dilutive potential issuances of common shares as determined using earnings from continuing operations. The impact of the potential issuances of common stock related to the Companys convertible preferred stock and outstanding stock options has been excluded from earnings per share for the three months ended March 31, 2016 and 2015, since inclusion would be anti-dilutive. For the three months ended March 31, 2016, the number of anti-dilutive potential common shares excluded from the computation of diluted earnings per share wa
s 5,199,141.
11. Stock-based compensation plans
2014 Equity Incentive Plan (EIP) -
In late 2013, the Companys shareholders and board of directors adopted the 2014 Equity Incentive Plan 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 are reserved for issuance under the EIP.
Stock Options
The options expire 10 years from the grant date or upon plan expiration in late 2023, whichever is earlier. On February 18, 2016, 197,500 options were granted to employees, all of which cliff vest in 3 years except for 20,000 options that cliff vest in two years. The estimated fair value of the 197,500 stock options awarded on February 18, 2016 is $0.1 million. As of March 31, 2016, a total
of 1,466,500 options
remain outstanding.
Restricted Stock Units
On February 18, 2016, the Company granted 149,500 restricted stock units to select officers and employees which cliff vest in 5 years from date of issuance. The estimated fair value of the restricted stock awarded is $0.3 million.
2013 Long Term Incentive Plan (LTIP) -
The LTIP is a non-employee Director and Consultant compensation plan. Awards may include stock options, stock awards, restricted stock, restricted stock units, and other stock or cash awards. The options expire 10 years from the grant date or upon plan expiration in late 2022, whichever is earlier. No additional shares are anticipated to be awarded under the LTIP. As of March 31, 2016, a total of 78,500 options were outstanding and vested under this plan.
2012 Employee Incentive Stock Option Plan (ISOP) -
The 2012 Incentive Stock Option Plan provides for the issuance of qualified stock options to employees. The options expire 10 years from the grant date or upon plan expiration in late 2021, whichever is earlier. As of March 31, 2016, a total of
226,000
options were outstanding under this plan. No additional shares are anticipated to be awarded under the ISOP.
20
Table of Contents
Option awards to employees and directors under the Companys stock compensation plans are classified as equity instruments and are valued at the grant date using the Black Scholes fair value model. The options vest ratably on the anniversary of the grant date over a three to five year period, except for the February 18, 2016 option grant which will vest in two to three years. Pernix recognizes the cost over the period 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 the quarters ended March 31, 2016 or 2015. 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:
|
|
2016
|
|
2015
|
EIP
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
Options outstanding, at beginning of year
|
|
1,322,000
|
$
|
1.52
|
|
1,395,000
|
$
|
1.55
|
Granted
|
|
197,500
|
|
1.71
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited / expired
|
|
53,000
|
|
2.07
|
|
48,000
|
|
2.07
|
Options outstanding, at March 31
|
|
1,466,500
|
|
1.63
|
|
1,347,000
|
|
1.53
|
Options exercisable, at March 31
|
|
528,400
|
$
|
1.64
|
|
132,333
|
$
|
2.07
|
|
|
2016
|
|
2015
|
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
|
|
78,500
|
$
|
2.09
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited / expired
|
|
|
|
|
|
|
|
|
Options outstanding, at March 31
|
|
78,500
|
|
2.09
|
|
78,500
|
|
2.09
|
Options exercisable, at March 31
|
|
78,500
|
$
|
2.09
|
|
56,833
|
$
|
2.09
|
|
|
2016
|
|
2015
|
ISOP
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
Options outstanding, at beginning of year
|
|
226,000
|
$
|
2.09
|
|
283,500
|
$
|
2.09
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited / expired
|
|
|
|
|
|
57,500
|
|
2.09
|
Options outstanding, at March 31
|
|
226,000
|
|
2.09
|
|
226,000
|
|
2.09
|
Options exercisable, at March 31
|
|
192,745
|
$
|
2.09
|
|
146,667
|
$
|
2.09
|
21
Table of Contents
The following table summarizes information about stock options outstanding at March 31, 2016:
Plan
|
|
Number Outstanding
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
Aggregate Grant Date Intrinsic Value
|
EIP
|
|
1,466,500
|
|
9.1
|
$
|
1.64
|
$
|
4,225,895
|
|
|
|
|
|
|
|
|
|
LTIP
|
|
78,500
|
|
6.8
|
$
|
2.09
|
$
|
32,185
|
|
|
|
|
|
|
|
|
|
ISOP
|
|
226,000
|
|
6.6
|
$
|
2.09
|
$
|
68,060
|
The weighted average grant date fair value per option outstanding at March 31, 2016 and 2015
was $0.88 a
nd $
0.84
, respectively. 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:
|
|
2016 grants
|
|
|
|
Risk-free interest rate
|
|
1.32 - 1.36%
|
Dividend yield
|
|
0.0%
|
Expected volatility
|
|
30.0%
|
Expected life in years
|
|
5.8 - 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 as 96% of our shares are held by four owners and therefore, there is limited trading volume. The weighted average expected life in years for all grants is calculated for each year. The Company estimated a forfeiture rate of
25
% on all employees except for a forfeiture rate of
5
% for one executive employee. These rates will be used going forward subject to refinement as experience changes.
Total share-based compensation expense for each of the three months ended March 31, 2016 and
2015 was less than $0.1 million and $0.1 million, respectively. As of March 31, 2016 and 2015, there was $0.6 million and
$
0.7
million, 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 1.6 years, which is equivalent to the average vesting period.
The Company received no cash during the periods ending March 31, 2016 and 2015, respectively, related to stock awards exercised
as only 799,645
options were vested as of March 31, 2016 and no options were exercised during the periods. The unvested options at March 31, 2016 have no intrinsic value and the vested options also have no intrinsic value based on the trading price of the Companys common stock 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 the qualified ISOP plan options as the related expense is not tax
deductible. 53,000 options and 105,500 o
ptions were
forfeited
or cancelled during the first three months of 2016 and 2015, respectively.
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 per employee which varies by Company entity. The Company incurred approximately $0.3 million and less than $0.1 million of expense associated with the 401K match during the three months ended March 31, 2016 and 2015, respectively. The increase in 401K matching contributions is primarily attributable to the acquisitions of BEK BG and PPG.
12. Commitments and Contingencies
Pernixs 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
22
Table of Contents
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 1.3 million (or approx. $
0.6
million USD as of March 31, 2016) if found to be negligent or FJD 0.8 million (or approx. $
0.4
million USD as of March 31, 2016) if not found to be negligent in accordance with its agreement with the Fiji Electricity Authority. In Vanuatu, during the Memorandum of Understanding (MOU) period, the insurance deductible is 10 million Vatu (or approx. $
0.1
million USD) as of March 31, 2016.
VUI began to manage the power structure on Vanuatu on January 1, 2011 pursuant to a MOU 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 retender of the concession and required that any company who participates in the retender 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. On October 16, 2014 the Court issued its decision in favor of UNELCO and the government has issued a new agreement to VUI to continue to operate the plant under the MOU terms until the retender process is completed. As of the date of this report, VUI continues to operate and maintain the system.
On March 17, 2016 UNELCO filed suit against VUI and The Republic of Vanuatu. The suit is an attempt by UNELCO to invalidate the current temporary MOU and force the Government to remove VUI during the pendency of the re-tender that is currently estimated to take at least another year. There are no damages currently claimed by claimant in the lawsuit. VUI has countersued for in excess of $1.3 Billion vatu (approximately $12.0 million USD) for intentional interference with contract, fraudulent misrepresentation, misleading and deceptive conduct among other claims.
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.
13. 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 restricted cash term deposits, trade receivables and financial guarantees.
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.
Pernix Group may utilize 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 2016 or 2015.
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Table of Contents
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, 2016 the Company had a FJD 4.0 million ($
2.0
million USD) financial guarantee of PFLs line of credit with ANZ. No amounts are outstanding under the ANZ line of credit and the Company does not anticipate any payment risk under this guarantee as of March 31, 2016.
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, 2016. 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, 2016 and December 31, 2015, the amount of domestic bank deposits that exceeded or are not covered by FDIC insurance was $
4.3
million and $4.5 million, respectively. Certain financial institutions are located in foreign countries which do not have FDIC insurance and as of March 31, 2016 and December 31, 2015, the amount of bank deposits in these financial institutions was $
3.6
million and $1.6 million, respectively. These foreign bank deposits include our restricted cash.
14. Related Party Transactions Not Described Elsewhere
The Companys shareholders include SHBC, which holds less than 6% of Pernixs stock at March 31, 2016. SHBC is a civil, electrical and mechanical engineering firm and construction contractor with over 4,000 employees and over fifty (50) years experience.
SHBC was established in part to construct the new U.S. Embassy in Fiji which was completed in 2011. The joint venture limited partnership agreement between SHBC and Pernix 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 other expenses of $0.1 million during the three months ending March 31, 2016 and 2015 for this discretionary item.
Computhink is a related party as it is owned by a company related to SHBC. Pernix is the lessor to a lease with Computhink for office space in the Companys Corporate headquarters. The lease term ends June 30, 2016 and Computhink rent amounts to $2,387 per month. The Companys charges to Computhink were less than $0.1 million for each of the three months ended March 31, 2016 and 2015.
Total related party accounts receivable and payables, net are summarized as follows for the three months ended March 31:
|
|
2016
|
|
2015
|
Note payable and accrued interest to Bent Marketing Ltd
|
$
|
(6,067,315)
|
$
|
|
Note payable to FHL
|
|
(1,462,500)
|
|
|
Accounts receivable from Computhink
|
|
2,582
|
|
52,736
|
Accounts payable to SHBC
|
|
(4,998)
|
|
(829)
|
Totals
|
$
|
(7,532,231)
|
$
|
51,907
|
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Table of Contents
15. 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.
The following table sets forth certain segment information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of Segment Reporting, Information by Segment
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
General Construction
|
|
Power Generation Services
|
|
Corporate
|
|
Total
|
Revenue
|
$
|
75,098,581
|
$
|
1,334,997
|
$
|
12,746
|
$
|
76,446,324
|
Interest income (expense), net
|
|
(67,267)
|
|
30,906
|
|
|
|
(36,361)
|
Other expense- related party
|
|
(50,736)
|
|
|
|
(68,055)
|
|
(118,791)
|
Depreciation and amortization
|
|
1,081,287
|
|
41,176
|
|
16,567
|
|
1,139,030
|
Income tax benefit (expense)
|
|
(49,597)
|
|
34,171
|
|
|
|
(15,426)
|
Net income (loss) attributable to the common stockholders of Pernix Group Inc. and Subsidiaries
|
|
(2,979,937)
|
|
432,810
|
|
(2,297,694)
|
|
(4,844,821)
|
Total capital expenditures
|
|
319,497
|
|
166,867
|
|
|
|
486,364
|
Total assets
|
$
|
98,856,826
|
$
|
7,375,464
|
$
|
2,183,956
|
$
|
108,416,246
|
Schedule of Segment Reporting, Information by Segment
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
General Construction
|
|
Power Generation Services
|
|
Corporate
|
|
Total
|
Revenue
|
$
|
9,328,570
|
$
|
1,264,087
|
$
|
18,233
|
$
|
10,610,890
|
Interest income (expense), net
|
|
|
|
(69)
|
|
|
|
(69)
|
Other expense- related party
|
|
(21,700)
|
|
|
|
|
|
(21,700)
|
Depreciation and amortization
|
|
6,845
|
|
21,284
|
|
26,100
|
|
54,229
|
Income tax expense
|
|
18,936
|
|
(36,704)
|
|
|
|
(17,768)
|
Net income (loss) attributable to the common stockholders of Pernix Group Inc. and Subsidiaries
|
|
(1,204,889)
|
|
306,219
|
|
(1,280,528)
|
|
(2,179,198)
|
Total capital expenditures
|
|
|
|
61,584
|
|
19,523
|
|
81,107
|
Total assets
|
$
|
12,740,660
|
$
|
6,602,762
|
$
|
5,669,675
|
$
|
25,013,097
|
Geographical Information
The basis used to attribute revenues to individual countries is based upon the country associated with the contract. (e.g., contract is with a U.S. entity then the revenues are attributed to the U.S.) The basis used to attribute fixed assets to individual countries is based upon the physical location of the fixed asset.
|
|
Total Revenue
|
|
Property and Equipment - Net
|
Location Revenue and net fixed assets
|
|
March 31, 2016
|
|
March 31, 2015
|
|
March 31, 2016
|
|
December 31, 2015
|
United States (1)
|
$
|
68,908,927
|
$
|
6,718,581
|
$
|
2,566,904
|
$
|
2,412,564
|
Fiji
|
|
1,101,258
|
|
3,566,775
|
|
368,727
|
|
353,620
|
Guam
|
|
3,104,370
|
|
|
|
1,309,183
|
|
1,288,418
|
Vanuatu
|
|
329,629
|
|
325,534
|
|
2,521
|
|
7,239
|
Other
|
|
3,002,140
|
|
|
|
1,161,092
|
|
7,771
|
Total revenue and net fixed assets
|
$
|
76,446,324
|
$
|
10,610,890
|
$
|
5,408,427
|
$
|
4,069,612
|
(1)
Revenue associated with Department Of State (DOS) projects included in the U.S. total.
25
Table of Contents
Major Customer
During the three months ended March 31, 2016, revenue of $21.7 million or 28.4% of consolidated revenue was generated through one customer. This customer also has $17.5 million or 36.7% of consolidated accounts receivable outstanding as of March 31, 2016. All amounts are deemed collectable.
During the three months ended March 31, 2015, the Company generated revenue of approximately 89% of consolidated revenue through three major customers. The Bureau of Overseas Building Operations (OBO) is a major customer primarily through the award of five projects since 2011 that generated revenue of $1.7 million or 16% of consolidated revenue for the three months ended March 31, 2015. The FEA is a major customer through two construction projects and O&M agreements. During the three months ended March 31, 2015, $3.6 million or 34% of consolidated revenue was generated from this customer. Revenues generated from a third customer were $4.1 million or 38% of consolidated revenue for the three months ended March 31, 2015.
16. Income taxes
The income tax expense for the first three months ended March 31, 2016 of approximately $15,500 is comprised of a foreign deferred tax expense of approximately $21,000 and a current state tax benefit of approximately $5,500 for PGI. There were no interest or penalties for this quarter. The $18,000 income tax expense for the first three months ended March 31, 2015 reflects a current expense of $37,000 for PFL and a domestic current deferred tax benefit of approximately $19,000.
As of March 31, 2016, the Company has total net operating and capital loss carryforwards from U.S. operations of approximately $86.3 million. The Companys deferred tax assets at March 31, 2016 consist primarily of the deferred tax assets related to those loss carryforwards. The Company evaluates the need to maintain a valuation allowance for deferred tax assets based on the assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. As of March 31, 2016 and December 31, 2015, the Company maintained a full valuation allowance on $31.1 million and $25.2 million of net deferred tax assets, respectively.