| Restatement and Revision of Previously Reported Consolidated Financial Statements | 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 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.
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.
Consolidated Balance Sheet
March 31, 2017
As
Adjustment
As Restated
Reference
Assets
Cash and cash equivalents
$
$
—
$
Cash - restricted
—
Accounts receivable, less allowance for doubtful accounts of $68,302
B
Accounts receivable - affiliates
—
Prepaid expenses and other current assets
—
Income taxes receivable
—
Current assets held for sale
—
Total current assets
Property and equipment, net
)
C
Cash - restricted, net of current portion
—
Retainage receivable
—
Acquired intangibles, net
)
C
Goodwill
—
Investments
F
Deferred income tax assets
G
Other assets
—
Assets held for sale
)
C, F, G
Total assets
$
$
377
$
Liabilities and Stockholders’ Equity
Due to banks
$
—
$
—
$
—
Current maturities of notes payable and long-term debt
—
Accounts payable and accrued expenses
F
Income taxes payable
G
Current portion of deferred revenue
—
Other current liabilities
F
Current liabilities held for sale
)
F, G
Total current liabilities
Notes payable and long-term debt, net of current maturities
—
Retainage payable
—
Deferred income taxes
G
Deferred revenue
B
Other liabilities
D, E, F
Liabilities held for sale
D, F, G
Total liabilities
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
—
Additional paid-in capital
)
F
Retained earnings (deficit)
)
)
)
A, B, C, D, E, F, G
Accumulated other comprehensive loss
)
)
A, C, E, F, G
)
Less treasury stock of 6,977 shares at December 31, 2016
)
—
)
Hill International, Inc. share of equity
)
Noncontrolling interests
F
Total equity
)
Total liabilities and stockholders’ equity
$
$
$
Consolidated Statement of Operations
Three months ended March 31, 2017
As
Adjustment
As Restated
Reference
Revenues
B, F
Direct expenses
F
Gross Profit
Selling, general and administrative expenses
)
A, C, F
Share of loss of equity method affiliates
—
Operating profit
)
Interest and related financing fees, net
F
(Loss)earnings before income taxes
)
Income tax expense
G
Loss from continuing operations
)
Loss from discontinued operations
)
)
C, F, G
Net (loss) earnings
)
)
Less: net earnings - noncontrolling interest
F
Net Loss attributiable to Hill International, Inc.
$
)
$
$
)
Basic (loss)earnings per common share from continuing operations
$
)
$
$
Basic loss per common share from discontinued operations
)
)
Basic loss per common share - Hill International, Inc.
$
)
$
$
)
Basic weighted average common shares outstanding
—
Diluted loss per common share from continuing operations
$
)
$
$
Diluted loss per common share from discontinued operations
)
)
Diluted loss per common share - Hill International, Inc.
$
)
$
$
)
Basic weighted average common shares outstanding
—
Consolidated Statement of Operations
Three months ended March 31, 2016
As
Adjustment
As Restated
Reference
Revenues
B, F
Direct expenses
—
Gross Profit
Selling, general and administrative expenses
)
A, C, F
Share of loss of equity method affiliates
)
—
)
Operating profit
Interest and related financing fees, net
F
(Loss)earnings before income taxes
Income tax expense
G
Loss from continuing operations
Loss from discontinued operations
)
)
)
F
Net (loss) earnings
Less: net earnings - noncontrolling interest
)
)
F
Net Loss attributiable to Hill International, Inc.
$
$
$
Basic loss per common share from continuing operations
$
$
$
Basic loss per common share from discontinued operations
)
)
)
Basic loss per common share - Hill International, Inc.
$
$
$
Basic weighted average common shares outstanding
—
Diluted loss per common share from continuing operations
$
$
$
Diluted loss per common share from discontinued operations
)
)
)
Diluted loss per common share - Hill International, Inc.
$
$
$
Basic weighted average common shares outstanding
—
Consolidated Statement of Comprehensive Loss
Three months ended March 31, 2017
As Previously
Adjustment
As Restated
Reference
Net earnings
$
)
$
)
A, B, C, F
Foreign currency translation adjustment, net
)
)
A, B, C, E, F, G
Other, net
—
—
—
Comprehensive loss
)
)
Comprehensive loss attributable to noncontrolling interest
)
Comprehensive loss attributable to Hill International, Inc.
$
)
$
)
Consolidated Statement of Comprehensive Income
Three months ended March 31, 2016
As Previously
Adjustment
As Restated
Reference
Net earnings
$
$
A, B, C, F, G
Foreign currency translation adjustment, net
)
)
A, B, C, E, F, G
Other, net
—
Comprehensive loss
Comprehensive loss attributable to noncontrolling interest
)
)
A
Comprehensive loss attributable to Hill International, Inc.
$
$
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.
Consolidated Statement of Cash Flows
As Previously
Adjustment
As restated
Cash flows from operating activities:
Net (loss) earnings
$
)
$
)
Loss from discontinued operations
)
(Loss) earnings from continuing operations
)
Adjustments to reconcile net (loss) earnings to net cash (used in):
Depreciation and amortization
Provision for bad debts
)
—
)
Amortization of deferred loan fees
—
Deferred tax benefit
Stock based compensation
)
Unrealized foreign exchange losses (gains) on intercompany balances
—
)
)
Changes in operating assets and liabilities:
Restricted cash
)
Accounts receivable
)
)
)
Accounts receivable - affiliate
)
)
Prepaid expenses and other current assets
)
)
Income taxes receivable
Retainage receivable
)
)
Other assets
)
)
)
Accounts payable and accrued expenses
Income taxes payable
)
)
Deferred revenue
)
)
)
Other current liabilities
)
Retainage payable
Other liabilities
)
Net cash used in continuing operations
)
)
)
Net cash (used in) provided by discontinued operations
)
)
Net cash used in operating activities
)
)
)
Cash flows from investing activities:
Purchase of businesses, net of cash aquired
—
)
)
Payments for purchase of property and equipment
)
)
)
Net cash used in investing activities of continuing operations
)
)
)
Net cash used in investing activities of discontinued operations
)
—
Net cash used in investing activities
)
)
Cash flows from financing activities:
Payments on term loans
)
—
)
Net borrowings on revolving loans
)
Proceeds from stock issued under employee stock purchase plan
—
Net cash provided by financing activities
)
Effect of exchange rate changes on cash
Net decrease in cash and cash equivalents
)
—
)
Cash and cash equivalents — beginning of period
—
Cash and cash equivalents — end of period
$
—
$
Consolidated Statement of Cash Flows
As Previously
Adjustment
As restated
Cash flows from operating activities:
Net (loss) earnings
$
$
Loss from discontinued operations
(Loss) earnings from continuing operations
Adjustments to reconcile net (loss) earnings to net cash (used in):
Depreciation and amortization
Provision for bad debts
—
Amortization of deferred loan fees
—
Deferred tax benefit
Stock based compensation
—
Unrealized foreign exchange losses (gains) on intercompany balances
—
Changes in operating assets and liabilities:
Restricted cash
Accounts receivable
)
)
)
Accounts receivable - affiliate
)
)
)
Prepaid expenses and other current assets
Income taxes receivable
)
)
Retainage receivable
)
—
)
Other assets
Accounts payable and accrued expenses
)
)
Income taxes payable
)
)
)
Deferred revenue
)
Other current liabilities
)
Retainage payable
—
Other liabilities
)
Net cash (used in) provided by continuing operations
)
Net cash (used in) provided by discontinued operations
)
)
Net cash (used in) provided by operating activities
)
Cash flows from investing activities:
Purchase of businesses, net of cash aquired
—
)
)
Payments for purchase of property and equipment
)
)
)
Net cash used in investing activities of continuing operations
)
)
)
Net cash (used in) provided by investing activities of discontinued operations
)
Net cash used in investing activities
)
)
)
Cash flows from financing activities:
Payments on term loans
)
)
Net borrowings on revolving loans
)
Proceeds from stock issued under employee stock purchase plan
—
Proceeds from exercise of stock options
—
Net cash provided by financing activities
)
Effect of exchange rate changes on cash
)
)
Net decrease in cash and cash equivalents
)
—
)
Cash and cash equivalents — beginning of period
—
Cash and cash equivalents — end of period
$
—
$ |
