Variable Interest Entities

3 Months Ended

Apr. 30, 2013

Variable Interest Entities [Abstract]

VARIABLE INTEREST ENTITIES

NOTE 2—VARIABLE INTEREST ENTITIES

Moxie Energy, LLC (“Moxie”), a Delaware limited liability company, has been sponsoring the development of two natural gas-fired power plants located in the Marcellus Shale natural gas region of Pennsylvania. The strategy of Moxie is to develop these power plants (the “Moxie Projects,” both of which are limited liability companies wholly owned by Moxie) near the natural gas source and to provide electricity to the power grid in the northeastern United States, eliminating the need to transport natural gas via pipeline over long distances to supply the power production plants. The Moxie Projects have been engaged in the lengthy process of planning the construction, ownership and operation of the power plants.

Under a development agreement with Moxie, as amended and restated, Gemma Power, Inc. (“GPI,” an affiliate of GPS that is wholly owned by Argan) has supported the development of these two projects with loans that are being made in order to cover most of the costs of the development efforts. As of April 30, 2013, GPI had provided approximately $7,863,000 to the Moxie Projects under short-term development loans, which are due by September 30, 2014 and accrue interest at an annual rate of 20%. GPI has been authorized by the Company’s board of directors to extend loans to the Moxie Projects that could total up to $10 million, as currently contemplated by the agreement. Moxie has supported the arrangement by providing GPI with a first priority lien and security interest in all of the assets of the Moxie Projects, limited recourse guarantees of all of the obligations of the projects to GPI, and first priority liens on its membership interests in the two projects. The admission of any additional investor that would change the control of Moxie or either of the Moxie Projects would be subject to the prior approval of GPI. Pursuant to the development agreement, Moxie provided GPI with the right to receive development success fees and granted GPS the right to provide construction services for the two projects under engineering, procurement and construction contracts.

In April 2013, the Company announced that Moxie had reached an agreement for the purchase of its membership interest in one of the Moxie Projects, Moxie Liberty LLC (“Moxie Liberty”), by a third party investor. The consummation of the purchase of Moxie Liberty is contingent upon the investor securing permanent financing for the project, which shall occur no later than August 2, 2013. In addition, the investor made several commitments in order to support the continuing progress of this project. These include commitments 1) to provide collateral in the form of cash or letters of credit supporting Moxie Liberty’s securing the right to connect to the electricity grid, 2) to make equipment deposit payments to the manufacturer of the natural gas-fired turbines, and 3) to commence payments to GPS under the corresponding engineering, procurement and construction contact. The equipment deposit funding will be provided by the investor under secured loans bearing annual interest of 10%. The investor has stated that it does not require additional funding in order to fulfill these commitments. The membership interest purchase agreement requires Moxie Liberty to continue to conduct the remaining development activities. However, the rights of Moxie Liberty to conduct any activities that deviate from the development plan are subject to the approval of the investor.

In April 2013, the Company also announced that GPI consented to Moxie Liberty’s secured lending arrangement with the investor and agreed to equal priority with the investor regarding claims (neither party shall have a priority of payment over or be subordinate to the other) and the method for sharing the proceeds of any debt payments made by Moxie Liberty. Finally, in late April 2013, GPS and Moxie Liberty entered into an engineering, procurement and construction contract for the Liberty Generating Station (the “EPC Contract”). The contract confirmed that earlier in the month Moxie Liberty had provided GPS with a limited notice to proceed with the commencement of certain work covered by the EPC Contract. The total price of the effort contemplated by the EPC Contract shall become fixed so long as full notice to proceed with construction is received by GPS by July 1, 2013.

Primarily due to the Moxie Projects not having sufficient equity investment to permit the entities to finance their activities without additional financial support, these entities were considered to be variable interest entities (“VIEs”) under current accounting guidance. Despite not having an ownership interest in the Moxie Projects, the Company concluded that GPI was the primary beneficiary of these VIEs due substantially to the significance of GPI’s loans to the entities, the risk that GPI could absorb significant losses if the development projects are not successful, the opportunity for GPI to receive development success fees and the intent of the parties for GPI to be awarded large contracts for the construction of the two power plants. Accordingly, the Company included the accounts of the Moxie Project VIEs in its consolidated financial statements for the year ended January 31, 2013.

During April 2013, the power to direct the economic activities of Moxie Liberty that most affect its economic performance shifted to the third party investor through the completion of the agreements described above. GPI is no longer the primary source of financing for Moxie Liberty. The primary source of financing for the pre-construction phase is the investor who is providing significant financing in order to secure connection to the electricity grid and to pay for the natural gas-fired turbines, the most significant equipment components of the power plant. Through the EPC Contract, GPS has transitioned into its typical role of engineering, procurement and construction contractor where it is subject to the direction of the project owner, in this case Moxie Liberty, and where the investor is making payments directly to GPS in order to cover certain pre-construction costs incurred under the EPC Contract.

Further, the identification of sources and closing of the permanent financing for the Moxie Liberty project are activities being directed and completed primarily by the investor.

As a result, the Company has ceased the consolidation of Moxie Liberty. The elimination of the accounts of Moxie Liberty from the Company’s consolidated financial statements resulted in a gain which was recorded in the three month period ended April 30, 2013 in the amount of $1,120,000. This consolidation accounting did not eliminate GPI’s note receivable from Moxie Liberty in the amount of $4,125,000 and corresponding accrued interest of $571,000. Accordingly, the total amount of $4,696,000, which approximated the Company’s amount of maximum exposure to loss as of April 30, 2013, was included in prepaid expenses and other assets in the condensed consolidated balance sheet. This balance, along with any development success fees related to the Moxie Liberty project, will be paid to GPI at the closing of the membership purchase agreement.

The Company will continue to consolidate the accounts of the other Moxie Project, Moxie Patriot LLC, until GPI is no longer considered to be the primary beneficiary (see Note 16 for subsequent events related to Moxie Patriot). Net operating losses associated with the Moxie Project entities (before corresponding income tax benefit) and included in the consolidated results of operations for the three months ended April 30, 2013 and 2012 were $261,000 and $281,000, respectively. The condensed consolidated balance sheets as of April 30, 2013 and January 31, 2013 included the following amounts related to the consolidated VIEs.

	April 30, 2013		January 31, 2013
Cash and cash equivalents	$	278,000	$	190,000
Property, plant and equipment		3,248,000		5,309,000
Total assets	$	3,526,000	$	5,499,000
Accounts payable	$	208,000	$	334,000
Accrued expenses		365,000		747,000
Total liabilities	$	573,000	$	1,081,000

The balances for accrued expenses as of April 30, 2013 and January 31, 2013 represented amounts due to Moxie.