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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q/A

 

(Amendment No. 1)

 

x

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

 

For the quarterly period ended March 31, 2017

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period

from                                          to

 

Commission File Number: 001-33961

 

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-0953973

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

One Commerce Square
2005 Market Street, 17th Floor
Philadelphia, PA

 

19103

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (215) 309-7700

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  o     No  x

 

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  o     No  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

o

 

Accelerated Filer

x

Non-Accelerated Filer

o

 

Smaller Reporting Company

o

 

 

 

Emerging Growth Company

o

 

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

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  o     No  x

 

There were 52,960,817 shares of the Registrant’s Common Stock outstanding at March 31, 2018.

 

 

 



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Explanatory Note

 

As previously disclosed in the Company’s Current Report on the Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 21, 2017, the Board of Directors (the “Board”) of Hill International, Inc. (“Hill” or the “Company”), upon the recommendation of the Audit Committee of the Board, determined that the Company’s previously issued financial statements for each of the years ended December 31, 2016, 2015 and 2014 and each of the quarters ended March 31, June 30, and September 30, 2016 and 2015 included in the Company’s Annual Reports on Form 10-K filed with the SEC on March 31, 2017, as amended by the Company’s Form 10-K/A (Amendment No. 1) filed with the SEC on May 1, 2017 (as amended, the “Original Form 10-K”) and each of the Quarterly Reports on Form 10-Q for such periods as well as the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (the “Original Form 10-Q”), could no longer be relied upon. The Company filed its 10-K/A Amendment No. 2 (the “Amended 10-K “) that restated and amend the Company’s Original Form 10-K on May 8, 2018. As a result, the Company is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to restate and amend the Company’s Original Form 10-Q.

 

The Board’s decision to restate its financial statements was in connection with the Company’s review of the accounting for the May 2017 sale of the its Construction Claims Group and other comprehensive income (loss), including foreign currency translation adjustments related to intercompany balances. The Company determined that it had not accounted for foreign currency gains/losses on intercompany and other transactions not in accordance with U.S. generally accepted accounting principles (“US GAAP”). The review identified additional transactions and accounting practices not in accordance with US GAAP.

 

This Amendment reflects the correction of the following errors identified subsequent to the filing of the Original Form 10-Q:

 

A.            The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under Accounting Standard Codification (ASC) 830 “Foreign Currency Matters.”

B.            The Company identified departures from US GAAP under ASC 605-35 “Construction-Type and Production-Type Contracts” in its historical accounting for revenue recognition on nine long-term customer contracts with fee constraints (e.g., fixed fee, lump sum, maximum contract value). The Company enters into agreements for construction management and consulting services with customers, and the guidance of ASC 605-35 states that contracts for construction consulting services, such as under agency contracts or construction management agreements, fall within the scope of the standard and should follow either Percentage of Completion or Completed Contract methods of accounting. Historically, the Company had not consistently applied the percentage of completion method of revenue recognition.

C.            The Company discovered that it had not properly performed the required impairment testing of amortizable intangible assets in accordance with US GAAP in that an asset that was no longer in use as of July 2013 was not identified and impaired. In addition, an improper useful life was used for some of the Company’s internally developed software assets resulting in an improper amount of amortization expense being recorded in previous periods.

D.            The Company discovered that the amounts of liabilities pertaining to the obligation for end of service benefits in six foreign countries were improperly accounted for under the guidance in ASC 715 “Compensation — Retirement Benefits”.

E.             The Company determined the accrual for uncertain tax benefits taken with respect to income tax matters in Libya had been improperly released during 2013 and 2014 prior to the expiration of the statute of limitations on the Libyan tax authority’s right to audit the related tax years.

F.              During the restatement process, the Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts.

G.            Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact.

 

The following sections in the Original Form 10-Q have been revised in this Amendment to reflect the restatement:

 

·                  Part I - Item - 1. Financial Statements.

·                  Part I - Item - 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

·                  Part I - Item - 3. Quantitative and Qualitative Disclosures About Market Risk.

·                  Part I - Item - 4. Controls and Procedures.

·                  Part II - Item — 1A. Risk Factors.

 



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This Amendment does not reflect adjustments for events occurring after the filing of the Original Form 10-Q except to the extent they are otherwise required to be included and discussed herein and did not substantively modify or update the disclosures herein other than as required to reflect the adjustments described above. See Note 2 to the accompanying consolidated financial statements, set forth in Item 1 of this Amendment, for details of the restatement and its impact on the consolidated financial statements.

 

See “Item 9A — Controls and Procedures” to the Company’s Amended Form 10-K filed on May 8, 2018 that discloses additional material weaknesses in the Company’s internal controls associated with the restatement, as well as management’s restated conclusion that the Company’s internal controls over financial reporting were not effective as of December 31, 2016. As disclosed therein, management is currently developing and implementing the changes needed in the Company’s internal control over financial reporting to remediate these material weaknesses. These changes are still in process.

 

We are also filing updated certifications from our Interim Chief Executive Officer and Interim Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Amendment.

 



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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

 

Index to Form 10-Q/A (Amendment No. 1)

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

7

 

 

 

 

Consolidated Balance Sheets at March 31, 2017 (unaudited) and December 31, 2016

7

 

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)

8

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Earnings for the three months ended March 31, 2017 and 2016 (unaudited)

9

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)

10

 

 

 

 

Notes to Consolidated Financial Statements

11

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4.

Controls and Procedures

44

 

 

 

PART II

OTHER INFORMATION

46

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosures

46

 

 

 

Item 5

Other Information

46

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

 

 

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PART I

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and it is our intent that any such statements be protected by the safe harbor created thereby. Except for historical information, the matters set forth herein including, but not limited to, any projections of revenues, earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), margin, profit improvement, cost savings or other financial items; any statements of belief, any statements concerning our plans, strategies and objectives for future operations; and any statements regarding future economic conditions or performance, are forward-looking statements.

 

These forward-looking statements are based on our current expectations, estimates and assumptions and are subject to certain risks and uncertainties. Although we believe that the expectations, estimates and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.

 

Those forward-looking statements may concern, among other things:

 

·                  The markets for our services;

·                  Projections of revenues and earnings, anticipated contractual obligations, funding requirements or other financial items;

·                  Statements concerning our plans, strategies and objectives for future operations; and

·                  Statements regarding future economic conditions or performance.

 

Important factors that could cause our actual results to differ materially from estimates or projections contained in our forward-looking statements include:

 

·                  The risks set forth in Item 1A, “Risk Factors,” in our most recent Annual Report on Form 10K/A;

·                  Unfavorable global economic conditions may adversely impact our business;

·                  Our backlog may not be fully realized as revenue;

·                  We may incur difficulties in implementing the Profit Improvement Plan;

·                  Our expenses may be higher than anticipated;

·                  Modifications and termination of client contracts;

·                  Control and operational issues pertaining to business activities that we conduct pursuant to joint ventures with other parties;

·                  Difficulties we may incur in implementing our acquisition strategy;

·                  The need to retain and recruit key technical and management personnel; and

·                  Unexpected adjustments and cancellations related to our backlog.

 

Other factors that may affect our business, financial position or results of operations include:

 

·                  Unexpected delays in collections from clients, particularly those located in the Middle East;

·                  Special risks of our ability to obtain debt financing or otherwise raise capital to meet required working capital needs and to support potential future acquisition activities;

·                  Special risks of international operations, including uncertain political and economic environments, acts of terrorism or war, potential incompatibilities with foreign joint venture partners, foreign currency fluctuations, civil disturbances and labor issues; and

·                  Special risks of contracts with governmental entities, including the failure of applicable governing authorities to take necessary actions to secure or maintain funding for particular projects with us, the unilateral termination of contracts by the government and reimbursement obligations to the government for funds previously received.

 

We do not intend, and undertake no obligation, to update any forward-looking statement. In accordance with the Reform Act, Item 1A of this Report entitled “Risk Factors” contains cautionary statements that accompany those forward-looking statements. You should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those

 

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cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-Q/A, in our other filings with the SEC or in materials incorporated therein by reference.

 

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PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements.

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

(As restated)

 

(As restated)

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

20,413 

 

$

25,637 

 

Cash - restricted

 

3,544

 

4,312

 

Accounts receivable, less allowance for doubtful accounts of $68,302 and $71,082

 

167,289

 

164,844

 

Accounts receivable - affiliates

 

7,335

 

5,712

 

Prepaid expenses and other current assets

 

7,799

 

7,751

 

Income taxes receivable

 

2,900

 

3,554

 

Current assets held for sale

 

53,351

 

54,651

 

Total current assets

 

262,631

 

266,461

 

Property and equipment, net

 

15,715

 

16,389

 

Cash - restricted, net of current portion

 

327

 

313

 

Retainage receivable

 

17,775

 

17,225

 

Acquired intangibles, net

 

5,474

 

6,006

 

Goodwill

 

51,467

 

50,665

 

Investments

 

4,421

 

3,501

 

Deferred income tax assets

 

3,176

 

3,200

 

Other assets

 

4,009

 

4,224

 

Non-current assets held for sale

 

32,924

 

32,091

 

Total assets

 

$

397,919 

 

$

400,075 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current maturities of notes payable and long-term debt

 

$

4,492 

 

$

1,983 

 

Accounts payable and accrued expenses

 

87,993

 

85,680

 

Income taxes payable

 

4,622

 

4,874

 

Current portion of deferred revenue

 

5,094

 

12,943

 

Other current liabilities

 

8,592

 

8,157

 

Current liabilities held for sale

 

24,199

 

25,888

 

Total current liabilities

 

134,992

 

139,525

 

Notes payable and long-term debt, net of current maturities

 

150,808

 

142,120

 

Retainage payable

 

1,000

 

961

 

Deferred income taxes

 

629

 

560

 

Deferred revenue

 

19,612

 

22,804

 

Other liabilities

 

13,341

 

12,666

 

Non-current liabilities held for sale

 

4,400

 

5,087

 

Total liabilities

 

324,782

 

323,723

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 1,000 shares authorized, none issued

 

 

 

Common stock, $0.0001 par value; 100,000 shares authorized, 58,848 shares and 58,835 shares issued at March 31, 2017 and December 31, 2016, respectively

 

6

 

6

 

Additional paid-in capital

 

190,863

 

190,353

 

Accumulated deficit

 

(83,703

)

(81,349

)

Accumulated other comprehensive loss

 

(6,168

)

(4,611

)

 

 

100,998

 

104,399

 

Less treasury stock of 6,977 shares at March 31, 2017 and December 31, 2016, respectively

 

(30,041

)

(30,041

)

Hill International, Inc. share of equity

 

70,957

 

74,358

 

Noncontrolling interests

 

2,180

 

1,994

 

Total equity

 

73,137

 

76,352

 

Total liabilities and stockholders’ equity

 

$

397,919 

 

$

400,075 

 

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017 

 

2016 

 

 

 

(As restated)

 

(As restated)

 

 

 

 

 

 

 

Revenues

 

116,120

 

136,899

 

Direct expenses

 

78,509

 

93,301

 

Gross profit

 

37,611

 

43,598

 

Selling, general and administrative expenses

 

33,463

 

37,793

 

Share of loss (profit) of equity method affiliates

 

34

 

(15

)

Operating profit

 

4,114

 

5,820

 

Interest and related financing fees, net

 

749

 

628

 

Earnings before income taxes

 

3,365

 

5,192

 

Income tax expense

 

1,349

 

456

 

Earnings from continuing operations

 

2,016

 

4,736

 

Loss from discontinued operations

 

(4,251

)

(1,243

)

Net (loss) earnings

 

(2,235

)

3,493

 

Less: net earnings (loss) - noncontrolling interests

 

119

 

(11

)

Net (loss) earnings attributable to Hill International, Inc.

 

$

(2,354

)

$

3,504 

 

 

 

 

 

 

 

Basic earnings per common share from continuing operations

 

0.04

 

0.09

 

Basic loss per common share from discontinued operations

 

(0.09

)

(0.02

)

Basic (loss) earnings per common share - Hill International, Inc.

 

$

(0.05

)

$

0.07 

 

Basic weighted average common shares outstanding

 

51,860

 

51,631

 

 

 

 

 

 

 

Diluted earnings per common share from continuing operations

 

0.04

 

0.09

 

Diluted loss per common share from discontinued operations

 

(0.09

)

(0.02

)

Diluted (loss) earnings per common share - Hill International, Inc.

 

$

(0.05

)

$

0.07 

 

Diluted weighted average common shares outstanding

 

51,860

 

51,722 

 

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017 

 

2016 

 

 

 

(As restated)

 

(As restated)

 

Net (loss) earnings

 

$

(2,235

)

$

3,493 

 

Foreign currency translation adjustment, net of tax

 

(1,558

)

(3

)

Other, net

 

 

34

 

Comprehensive (loss) earnings

 

(3,793

)

3,524

 

Comprehensive earnings (loss) attributable to noncontrolling interests

 

119

 

(11

)

Comprehensive (loss) earnings attributable to Hill International, Inc.

 

$

(3,912

)

$

3,535 

 

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017 

 

2016 

 

 

 

(As restated)

 

(As restated)

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) earnings

 

$

(2,235

)

$

3,493 

 

Loss from discontinued operations

 

4,251

 

1,243

 

(Loss) earnings from continuing operations

 

2,016

 

4,736

 

Adjustments to reconcile net (loss) earnings to net cash (used in):

 

 

 

 

 

Depreciation and amortization

 

1,595

 

1,906

 

Provision for bad debts

 

(526

)

1,271

 

Amortization of deferred loan fees

 

444

 

444

 

Deferred tax benefit

 

452

 

4,387

 

Stock based compensation

 

461

 

668

 

Unrealized foreign exchange losses (gains) on intercompany balances

 

(1,813

)

206

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

736

 

397

 

Accounts receivable

 

(2,617

)

(9,161

)

Accounts receivable - affiliate

 

(1,615

)

(4,262

)

Prepaid expenses and other current assets

 

(287

)

330

 

Income taxes receivable

 

1,366

 

(281

)

Retainage receivable

 

(310

)

(281

)

Other assets

 

(2,037

)

9,796

 

Accounts payable and accrued expenses

 

2,150

 

(5,933

)

Income taxes payable

 

(328

)

(4,637

)

Deferred revenue

 

(10,010

)

726

 

Other current liabilities

 

156

 

2,538

 

Retainage payable

 

39

 

266

 

Other liabilities

 

185

 

508

 

Net cash (used in) provided by continuing operations

 

(9,943

)

3,624

 

Net cash used in discontinued operations

 

(6,146

)

(2,781

)

Net cash (used in) provided by in operating activities

 

(16,089

)

843

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of business

 

(123

)

(58

)

Payments for purchase of property and equipment

 

(372

)

(392

)

Net cash used in investing activities of continuing operations

 

(495

)

(450

)

Net cash provided by investing activities of discontinued operations

 

 

44

 

Net cash used in investing activities

 

(495

)

(406

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on term loans

 

(314

)

(348

)

Net borrowings on revolving loans

 

10,990

 

819

 

Proceeds from stock issued under employee stock purchase plan

 

49

 

10

 

Proceeds from exercise of stock options

 

 

86

 

Net cash provided by financing activities

 

10,725

 

567

 

Effect of exchange rate changes on cash

 

635

 

(4,058

)

Net decrease in cash and cash equivalents

 

(5,224

)

(3,054

)

Cash and cash equivalents — beginning of period

 

25,637

 

24,089

 

Cash and cash equivalents — end of period

 

$

20,413 

 

$

21,035 

 

 

See accompanying notes to consolidated financial statements.

 

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HILL INTERNATIONAL, INC.AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — The Company

 

Hill International, Inc. (“Hill” or the “Company”) is a professional services firm that provides program management, project management, construction management and other consulting services primarily to the buildings, transportation, environmental, energy and industrial markets worldwide.  Hill’s clients include the U.S. federal government, U.S. state and local governments, foreign governments and the private sector.

 

Note 2 — Restatement and Revision of Previously Reported Consolidated Financial Statements

 

As previously disclosed on Form 8-K filed on September 21, 2017, the Board of Directors (the “Board”) of Hill International, Inc. (the “Company”), upon the recommendation of the Audit Committee of the Board, determined that the Company’s previously issued financial statements for each of the years ended December 31, 2016, 2015 and 2014 and the quarters ended March 31, June 30, and September 30, 2015 and 2016 included in the Company’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for such periods and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (collectively, the “Non-Reliance Periods”) can no longer be relied upon. The nature of the restatement matters and adjustments along with the impact on the Company’s previously issued financial statements for each of the years ended December 31, 2016, 2015 and 2014 and the quarters ended March 31, June 30, and September 30, 2015 and 2016 included in the Company’s Annual Reports on Form 10-K are disclosed on Form 10K/A (Amendment No. 2), which was filed with the SEC on filed May 4, 2018. This Note 2 to the consolidated financial statements discloses the nature of the restatement matters and adjustments and shows the impact of the restatement as of and for the three months ended March 31, 2017 and 2016.

 

The following errors were identified as part of the restatement:

 

A.            In connection with the accounting for the May 2017 sale of its Construction Claims Group, the Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with accounting principles generally accepted in the United States (“US GAAP”). The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under Accounting Standard Codification (ASC) 830 “Foreign Currency Matters.” The correction of the error resulted in a reduction to retained earnings of $46,601,000 and a reduction to accumulated other comprehensive loss of $46,601,000 at March 31, 2017, and selling, general and administrative (“SG&A”) expenses decreased $1,813,000 and increased $206,000 for the three months ended March 31, 2017 and 2016, respectively.

 

B.            The Company identified departures from US GAAP under ASC 605-35 “Construction-Type and Production-Type Contracts” in its historical accounting for revenue recognition on nine long-term customer contracts with fee constraints (e.g., fixed fee, lump sum, maximum contract value). The Company enters into agreements for construction management and consulting services with customers, and the guidance of ASC 605-35-15-3D states that contracts for construction consulting services, such as under agency contracts or construction management agreements, fall within the scope of the standard and should follow either Percentage of Completion or Completed Contract methods of accounting. Historically, the Company had not consistently applied the percentage of completion method of revenue recognition. The correction to properly apply U.S. GAAP to the identified contracts resulted in an increase of $3,130,000 and $2,581,000 in revenues for the three months ended March 31, 2017 and 2016, respectively; an increase of $821,000 in accounts receivable, an increase in accumulated other comprehensive loss of $1,000

 

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and an increase in deferred revenues of $7,513,000 at March 31, 2017.

 

C.            The Company discovered that it had not properly performed the required impairment testing of amortizable intangible assets in accordance with US GAAP in that certain assets no longer in use were not identified and impaired. In addition, an improper useful life was used for some of the Company’s internally developed software assets resulting in an improper amount of amortization expense being recorded in previous periods. The net effect of correcting these errors resulted in a $458,000 decrease in property plant and equipment, a $722,000 decrease in acquired intangibles, an increase of $567,000 in assets held for sale and a $213,000 decrease in accumulated other comprehensive loss at March 31, 2017; a $565,000 increase in earnings from discontinued operations for the three months ended March 31, 2017; and increases of $29,000 and $28,000 to SG&A expense for the three months ended March 31, 2017 and 2016, respectively.

 

D.            The Company discovered that the amounts of liabilities pertaining to the obligation for end of service benefits in certain foreign countries were improperly accounted for under the guidance in ASC 715 “Compensation — Retirement Benefits”. The net effect of the corrections of these errors resulted in a $349,000 decrease in other liabilities at March 31, 2017; and a $458,000 increase in liabilities held for sale at March 31, 2017.

 

E.             The Company determined the accrual for uncertain tax benefits taken with respect to income tax matters in Libya had been improperly released during 2013 and 2014 prior to the expiration of the statute of limitations on the Libyan tax authority’s right to audit the related tax years. The correction of these errors resulted in an increase of $4,408,000 in other liabilities at March 31, 2017; and a decrease of $695,000 in accumulated other comprehensive loss at March 31, 2017.

 

F.              The Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts. The net corrections of these transactions resulted in a $5,421,000 increase and $52,000 decrease in revenues for the three months ended March 31, 2017 and 2016, respectively; a $5,305,000 increase in direct expenses for the three months ended March 31, 2017; an increase of $473,000 and a decrease of $839,000 in SG&A expenses for the three months ended March 31, 2017 and 2016, respectively; a $1,057,000 decrease and a $390,000 increase in net loss from discontinued operations for the three months ended March 31, 2017 and 2016, respectively; an increase of $36,000 in investments at March 31, 2017; a $755,000 increase in assets held for sale at March 31, 2017; a $1,243,000 increase in accounts payable and accrued expenses at March 31, 2017; a $77,000 increase in other current liabilities at March 31, 2017; a decrease in current liabilities held for sale of $1,915,000 at March 31, 2017; a $984,000 decrease in other liabilities at March 31, 2017;  an increase in liabilities held for sale of $1,738,000 at March 31, 2017; an increase of $329,000 in additional paid in capital at March 31, 2017; a decrease of $563,000 to accumulated other comprehensive loss at March 31, 2017; an increase in noncontrolling interest of $36,000 at March 31, 2017; and an increase of $58,000 and a decrease of $15,000 in net earnings-noncontrolling interest for the three months ended March 31, 2017 and 2016, respectively. In conjunction with the sale of the construction claims group in 2016, interest expense of $552,000 and $415,000 for the three months ended March 31, 2017 and 2016, respectively, was reclassified from discontinued operations to continuing operations. In addition, the adjustment to forfeitures resulted in a $422,000 increase in retained earnings at March 31, 2017; a $422,000 decrease in additional paid in capital at March 31, 2017; and a $91,000 decrease in selling, general and administrative expenses for the three months ended March 31, 2017.

 

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G.            Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact was a $1,129,000 increase in deferred income tax assets at March 31, 2017; a decrease of $1,751,000 to assets held for sale at March 31, 2017; an increase in income tax payable of $858,000 at March 31, 2017; an increase in current liabilities held for sale of $208,000 at March 31, 2017; an increase in deferred income taxes of $10,000 at March 31, 2017; liabilities held for sale decreased $1,647,000 at March 31, 2017; retained earnings increased $235,000 at March 31, 2017; accumulated other comprehensive loss increased $286,000 at March 31 2017; and income tax expense increased $695,000 and $290,000 for the three months ended March 31, 2017 and 2016, respectively.

 

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Consolidated Balance Sheet

 

 

 

March 31, 2017

 

 

 

As
Previously
Reported

 

Adjustment

 

As Restated

 

Reference

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,413

 

$

 

$

20,413

 

 

 

Cash - restricted

 

3,544

 

 

3,544

 

 

 

Accounts receivable, less allowance for doubtful accounts of $68,302

 

166,468

 

821

 

167,289

 

B

 

Accounts receivable - affiliates

 

7,335

 

 

7,335

 

 

 

Prepaid expenses and other current assets

 

7,799

 

 

7,799

 

 

 

Income taxes receivable

 

2,900

 

 

2,900

 

 

 

Current assets held for sale

 

53,351

 

 

53,351

 

 

 

Total current assets

 

261,810

 

821

 

262,631

 

 

 

Property and equipment, net

 

16,173

 

(458

)

15,715

 

C

 

Cash - restricted, net of current portion

 

327

 

 

327

 

 

 

Retainage receivable

 

17,775

 

 

17,775

 

 

 

Acquired intangibles, net

 

6,196

 

(722

)

5,474

 

C

 

Goodwill

 

51,467

 

 

51,467

 

 

 

Investments

 

4,385

 

36

 

4,421

 

F

 

Deferred income tax assets

 

2,047

 

1,129

 

3,176

 

G

 

Other assets

 

4,009

 

 

4,009

 

 

 

Assets held for sale

 

33,353

 

(429

)

32,924

 

C, F, G

 

Total assets

 

$

397,542

 

$

377 

 

$

397,919

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Due to banks

 

$

 

$

 

$

 

 

 

Current maturities of notes payable and long-term debt

 

4,492

 

 

4,492

 

 

 

Accounts payable and accrued expenses

 

86,750

 

1,243

 

87,993

 

F

 

Income taxes payable

 

3,764

 

858

 

4,622

 

G

 

Current portion of deferred revenue

 

5,094

 

 

5,094

 

 

 

Other current liabilities

 

8,515

 

77

 

8,592

 

F

 

Current liabilities held for sale

 

25,906

 

(1,707

)

24,199

 

F, G

 

Total current liabilities

 

134,521

 

471

 

134,992

 

 

 

Notes payable and long-term debt, net of current maturities

 

150,808

 

 

150,808

 

 

 

Retainage payable

 

1,000

 

 

1,000

 

 

 

Deferred income taxes

 

619

 

10

 

629

 

G

 

Deferred revenue

 

12,099

 

7,513

 

19,612

 

B

 

Other liabilities

 

10,266

 

3,075

 

13,341

 

D, E, F

 

Liabilities held for sale

 

3,851

 

549

 

4,400

 

D, F, G

 

Total liabilities

 

313,164

 

11,618

 

324,782

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 1,000 shares authorized, none issued

 

 

 

 

 

 

Common stock, $0.0001 par value; 100,000 shares authorized, 58,848 shares issued at March 31, 2017

 

6

 

 

6

 

 

 

Additional paid-in capital

 

190,956

 

(93

)

190,863

 

F

 

Retained earnings (deficit)

 

(24,734

)

(58,969

)

(83,703

)

A, B, C, D, E, F, G

 

Accumulated other comprehensive loss

 

(53,953

)

47,785

 

(6,168

)

A, C, E, F, G

 

 

 

112,275

 

(11,277

)

100,998

 

 

 

Less treasury stock of 6,977 shares at December 31, 2016

 

(30,041

)

 

(30,041

)

 

 

Hill International, Inc. share of equity

 

82,234

 

(11,277

)

70,957

 

 

 

Noncontrolling interests

 

2,144

 

36

 

2,180

 

F

 

Total equity

 

84,378

 

(11,241

)

73,137

 

 

 

Total liabilities and stockholders’ equity

 

$

397,542

 

$

377

 

$

397,919

 

 

 

 

14



Table of Contents

 

 

 

Consolidated Statement of Operations

 

 

 

Three months ended March 31, 2017

 

 

 

As
Previously
Reported

 

Adjustment

 

As Restated

 

Reference

 

Revenues

 

107,569

 

8,551

 

116,120

 

B, F

 

Direct expenses

 

73,204

 

5,305

 

78,509

 

F

 

Gross Profit

 

34,365

 

3,246

 

37,611

 

 

 

Selling, general and administrative expenses

 

34,865

 

(1,402

)

33,463

 

A, C, F

 

Share of loss of equity method affiliates

 

34

 

 

34

 

 

 

Operating profit

 

(534

)

4,648

 

4,114

 

 

 

Interest and related financing fees, net

 

197

 

552

 

749

 

F

 

(Loss)earnings before income taxes

 

(731

)

4,096

 

3,365

 

 

 

Income tax expense

 

654

 

695

 

1,349

 

G

 

Loss from continuing operations

 

(1,385

)

3,401

 

2,016

 

 

 

Loss from discontinued operations

 

(5,665

)

1,414

 

(4,251

)

C, F, G

 

Net (loss) earnings

 

(7,050

)

4,815

 

(2,235

)

 

 

Less: net earnings - noncontrolling interest

 

61

 

58

 

119

 

F

 

Net Loss attributiable to Hill International, Inc.

 

$

(7,111

)

$

4,757

 

$

(2,354

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss)earnings per common share from continuing operations

 

$

(0.03

)

$

0.07

 

$

0.04

 

 

 

Basic loss per common share from discontinued operations

 

(0.11

)

0.02

 

(0.09

)

 

 

Basic loss per common share - Hill International, Inc.

 

$

(0.14

)

$

0.09

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

51,860

 

 

51,860

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per common share from continuing operations

 

$

(0.03

)

$

0.07

 

$

0.04

 

 

 

Diluted loss per common share from discontinued operations

 

(0.11

)

0.02

 

(0.09

)

 

 

Diluted loss per common share - Hill International, Inc.

 

$

(0.14

)

$

0.09

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

51,860

 

 

51,860

 

 

 

 

15



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Consolidated Statement of Operations

 

 

 

Three months ended March 31, 2016

 

 

 

As
Previously
Reported

 

Adjustment

 

As Restated

 

Reference

 

Revenues

 

134,370

 

2,529

 

136,899

 

B, F

 

Direct expenses

 

93,301

 

 

93,301

 

 

 

Gross Profit

 

41,069

 

2,529

 

43,598

 

 

 

Selling, general and administrative expenses

 

38,398

 

(605

)

37,793

 

A, C, F

 

Share of loss of equity method affiliates

 

(15

)

 

(15

)

 

 

Operating profit

 

2,686

 

3,134

 

5,820

 

 

 

Interest and related financing fees, net

 

213

 

415

 

628

 

F

 

(Loss)earnings before income taxes

 

2,473

 

2,719

 

5,192

 

 

 

Income tax expense

 

166

 

290

 

456

 

G

 

Loss from continuing operations

 

2,307

 

2,429

 

4,736

 

 

 

Loss from discontinued operations

 

(853

)

(390

)

(1,243

)

F

 

Net (loss) earnings

 

1,454

 

2,039

 

3,493

 

 

 

Less: net earnings - noncontrolling interest

 

4

 

(15

)

(11

)

F

 

Net Loss attributiable to Hill International, Inc.

 

$

1,450

 

$

2,054

 

$

3,504

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per common share from continuing operations

 

$

0.04

 

$

0.05

 

$

0.09

 

 

 

Basic loss per common share from discontinued operations

 

(0.01

)

(0.01

)

(0.02

)

 

 

Basic loss per common share - Hill International, Inc.

 

$

0.03

 

$

0.04

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

51,631

 

 

51,631

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per common share from continuing operations

 

$

0.04

 

$

0.05

 

$

0.09

 

 

 

Diluted loss per common share from discontinued operations

 

(0.01

)

(0.01

)

(0.02

)

 

 

Diluted loss per common share - Hill International, Inc.

 

$

0.03

 

$

0.04

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

51,722

 

 

51,722

 

 

 

 

 

 

Consolidated Statement of Comprehensive Loss

 

 

 

Three months ended March 31, 2017

 

 

 

As Previously
Reported

 

Adjustment

 

As Restated

 

Reference

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

(7,050

)

4,815

 

$

(2,235

)

A, B, C, F

 

Foreign currency translation adjustment, net

 

440

 

(1,998

)

(1,558

)

A, B, C, E, F, G

 

Other, net

 

 

 

 

 

 

Comprehensive loss

 

(6,610

)

2,817

 

(3,793

)

 

 

Comprehensive loss attributable to noncontrolling interest

 

128

 

(9

)

119

 

 

 

Comprehensive loss attributable to Hill International, Inc.

 

$

(6,738

)

2,826

 

$

(3,912

)

 

 

 

16



Table of Contents

 

 

 

Consolidated Statement of Comprehensive Income

 

 

 

Three months ended March 31, 2016

 

 

 

As Previously
Reported

 

Adjustment

 

As Restated

 

Reference

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,454

 

2,039

 

$

3,493

 

A, B, C, F, G

 

Foreign currency translation adjustment, net

 

434

 

(437

)

(3

)

A, B, C, E, F, G

 

Other, net

 

34

 

 

34

 

 

 

Comprehensive loss

 

1,922

 

1,602

 

3,524

 

 

 

Comprehensive loss attributable to noncontrolling interest

 

(752

)

741

 

(11

)

A

 

Comprehensive loss attributable to Hill International, Inc.

 

$

2,674

 

861

 

$

3,535

 

 

 

 

In addition to the items noted above as part of the Restatement, the Company identified departures from US GAAP in its historical preparation and presentation of its statement of cash flows. The Company did not report its cash flows in the reporting currency equivalent of foreign currency using the exchange rates in effect at the time of the cash flows, or an appropriate average rate to approximate the rates in effect at the time of the cash flows. The impact of properly preparing a cash flow statement in each functional currency, translating the cash flow statement using the appropriate rate in effect at the time of a transaction, or substantially equivalent average rate for the period, and consolidation of the individual functional currency cash flows, as prescribed by the guidance in ASC 230, is depicted in the table below.  The adjustments noted in the cash flow statements that follow are both a result of items “A” through “G” explained above, as well as the foreign currency effect from cash flow statements prepared in functional currency and appropriately translated.

 

17



Table of Contents

 

 

 

Consolidated Statement of Cash Flows
Three Months Ended March 31, 2017

 

 

 

As Previously
Reported

 

Adjustment

 

As restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

(7,050

)

4,815

 

$

(2,235

)

Loss from discontinued operations

 

5,665

 

(1,414

)

4,251

 

(Loss) earnings from continuing operations

 

(1,385

)

3,401

 

2,016

 

Adjustments to reconcile net (loss) earnings to net cash (used in):

 

 

 

 

 

 

 

Depreciation and amortization

 

1,566

 

29

 

1,595

 

Provision for bad debts

 

(526

)

 

(526

)

Amortization of deferred loan fees

 

444

 

 

444

 

Deferred tax benefit

 

93

 

359

 

452

 

Stock based compensation

 

552

 

(91

)

461

 

Unrealized foreign exchange losses (gains) on intercompany balances

 

 

(1,813

)

(1,813

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

812

 

(76

)

736

 

Accounts receivable

 

(1,308

)

(1,309

)

(2,617

)

Accounts receivable - affiliate

 

(1,621

)

6

 

(1,615

)

Prepaid expenses and other current assets

 

61

 

(348

)

(287

)

Income taxes receivable

 

732

 

634

 

1,366

 

Retainage receivable

 

(550

)

240

 

(310

)

Other assets

 

(337

)

(1,700

)

(2,037

)

Accounts payable and accrued expenses

 

1,544

 

606

 

2,150

 

Income taxes payable

 

(1,129

)

801

 

(328

)

Deferred revenue

 

(8,721

)

(1,289

)

(10,010

)

Other current liabilities

 

257

 

(101

)

156

 

Retainage payable

 

38

 

1

 

39

 

Other liabilities

 

513

 

(328

)

185

 

Net cash used in continuing operations

 

(8,965

)

(978

)

(9,943

)

Net cash (used in) provided by discontinued operations

 

(6,554

)

408

 

(6,146

)

Net cash used in operating activities

 

(15,519

)

(570

)

(16,089

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of businesses, net of cash aquired

 

 

(123

)

(123

)

Payments for purchase of property and equipment

 

(241

)

(131

)

(372

)

Net cash used in investing activities of continuing operations

 

(241

)

(254

)

(495

)

Net cash used in investing activities of discontinued operations

 

(458

)

458

 

 

Net cash used in investing activities

 

(699

)

204

 

(495

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on term loans

 

(314

)

 

(314

)

Net borrowings on revolving loans

 

10,997

 

(7

)

10,990

 

Proceeds from stock issued under employee stock purchase plan

 

49

 

 

49

 

Net cash provided by financing activities

 

10,732

 

(7

)

10,725

 

Effect of exchange rate changes on cash

 

262

 

373

 

635

 

Net decrease in cash and cash equivalents

 

(5,224

)

 

(5,224

)

Cash and cash equivalents — beginning of period

 

25,637

 

 

25,637

 

Cash and cash equivalents — end of period

 

$

20,413

 

 

$

20,413

 

 

18



Table of Contents

 

 

 

Consolidated Statement of Cash Flows
Three Months Ended March 31, 2016

 

 

 

As Previously
Reported

 

Adjustment

 

As restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

1,454

 

2,039

 

$

3,493

 

Loss from discontinued operations

 

853

 

390

 

1,243

 

(Loss) earnings from continuing operations

 

2,307

 

2,429

 

4,736

 

Adjustments to reconcile net (loss) earnings to net cash (used in):

 

 

 

 

 

 

 

Depreciation and amortization

 

1,878

 

28

 

1,906

 

Provision for bad debts

 

1,271

 

 

1,271

 

Amortization of deferred loan fees

 

444

 

 

444

 

Deferred tax benefit

 

749

 

3,638

 

4,387

 

Stock based compensation

 

668

 

 

668

 

Unrealized foreign exchange losses (gains) on intercompany balances

 

 

206

 

206

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

378

 

19

 

397

 

Accounts receivable

 

(1,897

)

(7,264

)

(9,161

)

Accounts receivable - affiliate

 

(4,149

)

(113

)

(4,262

)

Prepaid expenses and other current assets

 

18

 

312

 

330

 

Income taxes receivable

 

(292

)

11

 

(281

)

Retainage receivable

 

(281

)

 

(281

)

Other assets

 

3,979

 

5,817

 

9,796

 

Accounts payable and accrued expenses

 

(6,558

)

625

 

(5,933

)

Income taxes payable

 

(3,867

)

(770

)

(4,637

)

Deferred revenue

 

(2,533

)

3,259

 

726

 

Other current liabilities

 

3,633

 

(1,095

)

2,538

 

Retainage payable

 

266

 

 

266

 

Other liabilities

 

(995

)

1,503

 

508

 

Net cash (used in) provided by continuing operations

 

(4,981

)

8,605

 

3,624

 

Net cash (used in) provided by discontinued operations

 

368

 

(3,149

)

(2,781

)

Net cash (used in) provided by operating activities

 

(4,613

)

5,456

 

843

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of businesses, net of cash aquired

 

 

(58

)

(58

)

Payments for purchase of property and equipment

 

(141

)

(251

)

(392

)

Net cash used in investing activities of continuing operations

 

(141

)

(309

)

(450

)

Net cash (used in) provided by investing activities of discontinued operations

 

(31

)

75

 

44

 

Net cash used in investing activities

 

(172

)

(234

)

(406

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on term loans

 

(314

)

1,133

 

(348

)

Net borrowings on revolving loans

 

1,202

 

(1,550

)

819

 

Proceeds from stock issued under employee stock purchase plan

 

10

 

 

10

 

Proceeds from exercise of stock options

 

86

 

 

86

 

Net cash provided by financing activities

 

984

 

(417

)

567

 

Effect of exchange rate changes on cash

 

747

 

(4,805

)

(4,058

)

Net decrease in cash and cash equivalents

 

(3,054

)

 

(3,054

)

Cash and cash equivalents — beginning of period

 

24,089

 

 

24,089

 

Cash and cash equivalents — end of period

 

$

21,035

 

 

$

21,035

 

 

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Note 3 - Discontinued Operations

 

In early 2016, the Company began to investigate the sale of its Construction Claims Group (the “Claims Group”). The pending sale of that segment represents a strategic shift that will have a major effect on its operations and financial results. Accordingly, the Company had classified the assets and liabilities of that segment as held for sale and has reflected its operations and cash flows as discontinued operations for all periods presented.

 

On December 20, 2016, the Company and its subsidiary Hill International N.V. (“Hill N.V.” and, collectively with the Company, the “Sellers”) entered into a Stock Purchase Agreement (as amended on May 3, 2017, the “Agreement”) with Liberty Mergeco, Inc. (the “US Purchaser”) and Liberty Bidco UK Limited (the “UK Purchaser” and, collectively with the US Purchaser, the “Purchasers”) pursuant to which the Purchasers will acquire the Claims Group by the US Purchaser’s acquisition of all of the stock of Hill International Consulting, Inc. from the Company and the UK Purchaser’s acquisition of all of the stock of Hill International Consulting B.V. from Hill N.V. for a total purchase price of $140.0 million in cash reduced by assumed indebtedness and certain other items, as set forth in the Agreement. The transaction closed effective May 5, 2017. See Note 19 for further information.

 

The carrying amounts of assets and liabilities of the discontinued operations which have been classified as held for sale are as follows (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

(As restated)

 

(As restated)

 

Accounts receivable, net

 

$

48,580

 

$

50,892

 

Prepaid expenses and other current assets

 

2,775

 

3,064

 

Income taxes receivable

 

1,996

 

695

 

Total current assets classified as held for sale

 

$

53,351

 

$

54,651

 

 

 

 

 

 

 

Property and equipment, net

 

4,907

 

4,617

 

Acquired intangibles, net

 

3,500

 

3,397

 

Goodwill

 

23,907

 

23,461

 

Investments

 

7

 

6

 

Other assets

 

603

 

610

 

Total non-current assets classified as held for sale

 

$

32,924

 

$

32,091

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

20,329

 

21,539

 

Income taxes payable

 

8

 

92

 

Deferred revenue

 

1,684

 

1,562

 

Other current liabilities

 

2,178

 

2,695

 

Total current liabilities classified as held for sale

 

$

24,199

 

$

25,888

 

 

 

 

 

 

 

Deferred income taxes

 

599

 

385

 

Deferred revenue

 

437

 

1,012

 

Retained Earnings

 

457

 

457

 

Other liabilities

 

2,907

 

3,233

 

Total non-current liabilities classified as held for sale

 

$

4,400

 

$

5,087

 

 

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The line items constituting earnings from discontinued operations consist of the following (in thousands):

 

 

 

March 31,

 

 

 

2017

 

2016

 

 

 

(As restated)

 

(As restated)

 

Revenues

 

$

44,030

 

$

41,851

 

Direct expenses

 

21,994

 

19,678

 

Gross profit

 

22,036

 

22,173

 

Selling, general and administrative expenses

 

22,960

 

20,132

 

Operating (loss) profit

 

(924

)

2,041

 

Interest and related financing fees, net

 

3,095

 

2,769

 

Loss before income taxes

 

(4,019

)

(728

)

Income tax expense

 

232

 

515

 

Net loss from discontinued operations

 

$

(4,251

)

$

(1,243

)

 

In connection with the sale of the Construction Claims Group, the Company will be required to pay off the Secured Credit Facilities (See Note 19). Accordingly, the Company has allocated to discontinued operations all interest expense related to the Secured Credit Facilities. During the first quarter of 2017, the Company charged discontinued operations approximately $1.6 million of costs related to the pending sale of the Construction Claims and $0.4 million for a potential tax liability related to foreign jurisdictions. See Notes 18 and 19 for further information.

 

Note 4 - Liquidity

 

The amount of revenues attributable to operations in the Middle East and Africa is approximately $51,491,000 of total consolidated revenue for the three months ended March 31, 2017.  There has been significant political upheaval and civil unrest in this region, most notably in Libya and Iraq where the Company had substantial operations. In 2012, due to the overthrow of the Libyan government, the Company reserved a $59,937,000 receivable from the Libyan Organization for Development of Administrative Centres (“ODAC”). Subsequently, the Company received payments totaling approximately $9,511,000. During the quarter ended March 31, 2017, the Company wrote off approximately $3,593,000 and maintains a reserve of approximately $2,777,000 against accounts receivable from various projects in Iraq. This shortfall of cash flows continues to put a considerable strain on its liquidity.

 

The Company continues to experience slowing of collections from its clients in the Middle East, primarily Oman. In 2012, the Company commenced operations on the Muscat International Airport (the “Oman Airport”) project with the Ministry of Transport and Communications (the “MOTC”) in Oman.  The original contract term expired in November 2014. In October 2014, the Company applied for a twelve-month extension of time amendment (the “first extension”) which was subsequently approved in March 2016 and the Company continued to work on the Oman Airport project. The Company began to experience delays in payments during the second quarter of 2015 when MOTC commenced its formal review and certification of the Company’s invoices. In October 2015, the MOTC paid the Company for work performed in April and May 2015. In December 2015, the Company began discussions with the MOTC on a second extension of time amendment (“the second extension”) and has since commenced additional work, which management expects to last through approximately June 2018. The MOTC resumed payments in 2016, paying the Company approximately $42,000,000 during 2016 and approximately $12,728,000 through April 2017. At March 31, 2017, accounts receivable from the Oman Airport totaled approximately $29,200,000, of which approximately $18,700,000 was past due based on contractual terms.

 

The delays in payments from MOTC and other foreign governments have had a negative impact on the Company’s liquidity, financial covenants, financial position and results of operations. As a result, the Company has had to rely heavily on debt and equity transactions to fund its operations over the past few years.

 

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Note 5 — Basis of Presentation

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2016. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the consolidated financial statements. The consolidated financial statements include the accounts of Hill and its wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with US 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. Actual results could differ from those estimates. The interim operating results are not necessarily indicative of the results for a full year.

 

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Note 6 — Accounts Receivable

 

The components of accounts receivable are as follows (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

(As restated)

 

(As restated)

 

Billed

 

$

191,243

 

$

200,134

 

Retainage, current portion

 

11,242

 

10,824

 

Unbilled

 

33,106

 

24,968

 

 

 

235,591

 

235,926

 

Allowance for doubtful accounts

 

(68,302

)

(71,082

)

Total

 

$

167,289

 

$

164,844

 

 

Unbilled receivables primarily represent revenue earned on contracts, which the Company is contractually precluded from billing until predetermined future dates.

 

In 2012, the Company commenced operations on the Muscat International Airport (the “Oman Airport”) project with the Ministry of Transport and Communications (the “MOTC”) in Oman. The original contract term expired in November 2014. In October 2014, the Company applied for a twelve-month extension of time amendment (the “first extension”) which was subsequently approved in March 2016 and the Company continued to work on the Oman Airport project. The Company began to experience delays in payments during the second quarter of 2015 when MOTC commenced its formal review and certification of the Company’s invoices. In December 2015, the Company began discussions with the MOTC on a second extension of time amendment (the “second extension”) and has since commenced additional work, which management expects to last through approximately June 2018. When the MOTC resumed payments in 2016, the Company received approximately $42,000,000 during that year. At March 31, 2017, accounts receivable from the Oman Airport totaled approximately $29,200,000, of which approximately $18,700,000, was past due based on contractual terms. Through April 2017, the Company received payments totaling approximately $12,728,000 against this receivable.

 

In addition, there is approximately $17,000,000 included in non-current Retainage Receivable in the consolidated balance sheet at March 31, 2017. Of that amount, approximately $8,400,000 relates to retention and approximately $8,600,000 relates to a Defect and Liability Period (“DLP”). Retention represents five percent of each monthly invoice which is retained by MOTC. Fifty percent of the retention will be released one year from the commencement of the DLP and the balance will be released upon the issuance of final Completion Certificates. DLP represents the period by which the contractor must address any defect issues. This period commences upon the issuance of a “Taking Over Certificate” (by MOTC) to contractors for up to a period of 24 months and ends with a final certificate closing the project.

 

The delays in payments from MOTC and other foreign governments have had a negative impact on the Company’s liquidity, financial covenants, financial position and results of operations.

 

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Note 7 — Intangible Assets

 

The following table summarizes the Company’s acquired intangible assets (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

(As restated)

 

(As restated)

 

(As restated)

 

(As restated)

 

Client relationships

 

$

16,859

 

$

11,931

 

$

16,699

 

$

11,298

 

Acquired contract rights

 

2,005

 

1,901

 

2,058

 

1,912

 

Trade names

 

967

 

525

 

959

 

500

 

Total

 

$

19,831

 

$

14,357

 

$

19,716

 

$

13,710

 

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

$

5,474

 

 

 

$

6,006

 

 

 

 

Amortization expense related to intangible assets was as follows (in thousands):

 

Three Months Ended March 31,

 

2017

 

2016

 

(As restated)

 

(As restated)

 

$

559

 

$

872

 

 

The following table presents the estimated amortization expense based on our present intangible assets for the next five years (in thousands):

 

 

 

Estimated

 

 

 

Amortization

 

Year ending December 31,

 

Expense

 

 

 

(As restated)

 

2017 (remaining 9 months)

 

$

1,529

 

2018

 

1,005

 

2019

 

1,001

 

2020

 

739

 

2021

 

342

 

 

Note 8 — Goodwill

 

The following table summarizes the changes in the Company’s carrying value of goodwill during 2017 (in thousands):

 

 

 

As restated

 

Balance, December 31, 2016

 

$

50,665

 

Additions

 

 

Translation adjustments

 

802

 

Balance, March 31, 2017

 

$

51,467

 

 

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Note 9 — Accounts Payable and Accrued Expenses

 

Below are the components of accounts payable and accrued expenses (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

(As restated)

 

(As restated)

 

Accounts payable

 

$

29,808

 

$

30,944

 

Accrued payroll and related expenses

 

34,616

 

32,618

 

Accrued subcontractor fees

 

11,012

 

9,188

 

Accrued agency fees

 

5,742

 

5,702

 

Accrued legal and professional fees

 

2,476

 

2,223

 

Other accrued expenses

 

4,339

 

5,005

 

 

 

$

87,993

 

$

85,680

 

 

Note 10 — Notes Payable and Long-Term Debt

 

Outstanding debt obligations are as follows (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Term Loan Facility

 

$

112,878

 

$

112,884

 

Domestic Revolving Credit Facility

 

25,000

 

16,500

 

International Revolving Credit Facility

 

11,274

 

11,102