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United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

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 — 333-92445

PERNIX GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		36-4025775
(State or other jurisdiction of		(IRS employer identification no.)
Incorporation or organization)
151 E. 22nd Street, Lombard, Illinois		60148
(Address of principal executive offices)		(Zip code)

(630) 620-4787

(Registrant’s telephone number, including area code)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 x No o

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 file,” and “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

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

On August 6, 2016, 9,903,697 shares of our common stock were outstanding.

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PERNIX GROUP, INC.

TABLE OF CONTENTS

		Page No.
	PART I. Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets - June 30, 2016 (unaudited) and December 31, 2015	3
	Condensed Consolidated Statements of Operations (unaudited) - Six Months Ended June 30, 2016 and 2015	4
	Condensed Consolidated Statements of Operations (unaudited) - Three Months Ended June 30, 2016 and 2015	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Six and Three Months Ended June 30, 2016 and 2015	6
	Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) - Six Months Ended June 30, 2016 and 2015	7
	Condensed Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2016 and 2015	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	39
Item 4.	Controls and Procedures	40
	PART II. Other Information
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
	Signatures	42

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ITEM 1: FINANCIAL STATEMENTS

PERNIX GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
				As of
Assets					(Unaudited) June 30, 2016			December 31, 2015
Current assets:
Cash and cash equivalents			$		12,106,136		$	18,792,712
Restricted cash					975,144			952,502
Accounts and other receivables					49,687,687			48,219,748
Inventories					1,904,003			1,844,953
Cost and estimated earnings in excess billings					9,690,699			16,563,199
Prepaid expenses and other current assets					2,199,558			1,453,539
Total current assets					76,563,227			87,826,653
Property and equipment, net					5,127,919			4,069,612
Deferred tax asset					5,262			552,756
Other assets					856,120			689,323
Intangible assets, net:
Customer contract backlog					4,761,322			6,248,503
Goodwill					20,023,832			19,141,273
Tradename					600,000			900,000
Total assets			$		107,937,682		$	119,428,120
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable			$		42,307,732		$	37,757,695
Accrued trade liabilities					11,625,196			32,339,972
Billings in excess of costs and estimated earnings					5,584,152			6,399,339
Other current liabilities					12,476,381			7,770,659
Current maturities on term loan and line of credit					2,677,961			2,544,959
Total current liabilities					74,671,422			86,812,624
Other non-current liabilities					352,080			698,867
Deferred tax liability					5,262			552,756
Long-term debt					16,599,457			8,744,686
Total liabilities					91,628,221			96,808,933
Commitments and contingencies
Stockholders' equity:
Pernix Group, Inc. and Subsidiaries Stockholders' equity
Series A convertible senior preferred stock, $0.01 par value. Authorized 1,000,000 shares, $5,000,000 liquidation preference, 1,000,000 shares issued and outstanding at June 30, 2016 and December 31, 2015					10,000			10,000
Series B convertible senior preferred stock, $0.01 par value. Authorized 400,000 shares, 170,000 shares issued and outstanding at June 30, 2016 and December 31, 2015, $850,000 involuntary liquidation preference					1,700			1,700
Series C convertible senior preferred stock, $0.01 par value. Authorized 4,000,000 shares, $28,000,000 liquidation preference, 2,800,000 shares issued and outstanding at June 30, 2016 and at December 31, 2015					28,000			28,000
Common stock, $0.01 par value. Authorized 20,000,000 shares, 9,903,697 issued and outstanding (including 500,000 shares declared as a stock dividend on June 17, 2016 and issued August 1, 2016)					99,037			94,037
Additional paid-in capital					45,308,081			45,147,931
Accumulated deficit - since September 30, 2012					(32,478,450)			(24,586,359)
Accumulated comprehensive income (loss) - since September 30, 2012					(554,749)			(583,408)
Total Pernix Group, Inc. and Subsidiaries Stockholders' equity					12,413,619			20,111,901
Non-controlling interest					3,895,842			2,507,286
Total stockholders' equity					16,309,461			22,619,187
Total liabilities and stockholders' equity			$		107,937,682		$	119,428,120
See accompanying notes to the condensed consolidated financial statements.

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PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

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See accompanying notes to the condensed consolidated financial statements.

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PERNIX GROUP, INC
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
					Six Months Ended June 30,
					2016						2015
Consolidated net income (loss)				$	(7,684,470)			$			(5,502,170)
Other comprehensive income (loss):
Foreign currency translation adjustment					(47,409)						(252,806)
Total comprehensive income (loss)				$	(7,731,879)			$			(5,754,976)
Net income (loss) attributable to non-controlling interests				$	207,621			$			53,691
Foreign currency translation attributable to non-controlling interests					(76,068)						(63,993)
Total comprehensive income attributable to non-controlling interest				$	131,553			$			(10,302)
Total comprehensive income (loss) attributable to the stockholders of Pernix Group, Inc. and Subsidiaries				$	(7,863,432)			$			(5,744,674)

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PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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PERNIX GROUP, INC

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

			Six  Months Ended June 30,
			2016				2015
Cash flows from operating activities:
Consolidated net loss	$		(7,684,470)		$		(5,502,170)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization			2,311,394				105,416
Quasi-Reorganization adjustments			57,668				100,419
Stock compensation expense			165,150				185,054
Changes in assets and liabilities:
Accounts receivable			(1,805,100)				(4,044,480)
Inventories			(59,050)				(226,771)
Cost and estimated earnings in excess of billings			6,341,328				5,234,820
Prepaid and other current assets			211,085				2,809,312
Accounts payable and accrued expenses			(12,504,663)				(7,634,422)
Billings in excess of cost and estimated earnings			(815,187)				(633,512)
Net cash provided by (used in) operating activities			(13,781,845)				(9,606,334)
Cash flows provided by (used in) investing activities:
Capital expenditures			(551,947)				(240,567)
Acquisitions			(334,827)				(24,407,585)
Restricted cash			(22,642)				97,335
Net cash provided by (used in) investing activities			(909,416)				(24,550,817)
Cash flows provided by (used in) financing activities:
Proceeds from sale of preferred stock			—				28,000,000
Proceeds from long-term debt			9,080,212				3,053,816
Dividends paid			—				(98,630)
Distributions to non-controlling interest holders			(1,086,800)				—
Partial sale of non-controlling interest in subsidiary			2,343,803				—
Payment of debt			(2,315,721)				—
Net cash provided by (used in) financing activities			8,021,494				30,955,186
Effect of exchange rate changes on cash and cash equivalents			(16,809)				169,675
Net decrease in cash and cash equivalents			(6,686,576)				(3,032,290)
Cash and cash equivalents at beginning of year			18,792,712				11,169,169
Cash and cash equivalents at end of period	$		12,106,136		$		8,136,879
Cash paid during the period for interest	$		138,437		$		—
Cash paid during the period for interest - related party	$		284,729		$		—
Cash paid during the period for income taxes	$		—		$		33,000
Supplemental disclosure of non-cash investing and financing transactions:
Preferred Series C Stock dividends declared in common stock	$		1,000,000		$		—
Accumulated preferred stock dividends	$		227,001		$		127,124
See accompanying notes to the condensed consolidated financial statements.

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PERNIX GROUP, INC. AND SUBSIDIARIES

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 June 30, 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 Company’s 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 Company’s 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 Papua New Guinea (PPNG), Pernix-MAP joint venture in Samoa (Pernix-MAP) 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.

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 six months ended June 30, 2016, the financial results of the consolidated VIE 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 and six months ended June 30, 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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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. 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 period.  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. 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 June 30, 2016 and December 31, 2015, the Company had no significant receivables or payables related to contract claims.

Cash and Cash Equivalents—The Company’s cash equivalents include highly liquid investments which have an initial maturity of three months or less.

Restricted cash— The Company’s restricted cash represents required cash balances maintained in conjunction with PFL’s financing agreements related to ongoing construction projects.

 

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 June 30, 2016 and December 31, 2015, the value of the spare parts inventory is $1.6 million and $1.6 million, respectively.

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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 asset’s 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 six months ended June 30, 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.

  

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 June 30, 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 six months ended June 30, 2016 and 2015 and the remaining balance as of June 30, 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 files a separate Guam 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.

 

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.

 

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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 management’s 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 type—domestic 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 June 30, 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 Company’s 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 Company’s 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 June 30, 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 entity’s 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 June 30, 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 Company’s 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).

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.

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3. Acquisitions and Partial Sale to Non-controlling Interest

Papua New Guinea Transactions

On March 31, 2016, PGI and its subsidiary, Pernix Papua 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 results of operations for BIL during the three and six months ended June 30, 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. The Company expects to complete its purchase price allocation in the third quarter of 2016.

 

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 of 2015, 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.

 dck Pacific Guam LLC & dck-ecc Pacific Guam LLC Acquisition

 

On June 15, 2015, 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.

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. The Remaining non P-109 activity is not significant and will not impact the Company’s consolidated financial statements after the completion of these non P-109 projects.  The consolidated financial statements as of June 30, 2016 include the following assets and liabilities of the JV which relate solely to the non P-109 projects and the Company has no rights or obligations with respect to these items:

		Non P-109
Contract receivables	$	94,477
Contract payables and accrued expenses		(193,528)
Billings in excess of costs and estimated earnings on uncompleted contracts		(279,442)

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Pro Forma Information

 

The following unaudited pro forma information illustrates the effect on the Company’s revenue and net earnings for the three and six months ended June 30, 2015, assuming that the 2015 acquisitions had taken place on January 1, 2014.  No pro forma information is necessary for the three and six months ended June 30, 2016 as the results of the acquired businesses are included in the Company’s consolidated statements of operations for those periods.

		Six months ended June 30, 2015				Three months ended June 30, 2015
Revenues:
As reported	$	21,694,777		$		11,083,887
Pro forma	$	154,917,597		$		67,900,580
Net loss attributable to common stockholders:
As reported	$	(5,781,585)		$	(3,602,387)
Pro forma	$	(4,776,477)		$	(3,770,183)
Basic and diluted loss per share:
As reported	$	(0.61)		$	(0.38)
Pro forma	$	(0.60)		$	(0.44)

 

These pro forma results of operations have been prepared for comparative purposes only and include certain adjustments to actual financial results for the periods presented, such as estimated additional amortization and depreciation expense as a result of intangibles and fixed assets acquired, measured at fair value. They do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated or that may result in the future.

The pro forma results include adjustments for non-recurring transaction costs of $1.7 million for the six months ended June 30, 2015.  Actual acquisition revenue included in the three and six months ended June 30, 2016 statements of operations were $62.1 million and $127.6 million, respectively.  Actual acquisition loss before income taxes included in the three and six months ended June 30, 2016 statements of operations was $(1.1) million and $(3.0) million, respectively.  The revenue and earnings (losses) for the six months ended June 30, 2015 were insignificant as a result of the acquisition dates.

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4. Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets subject to amortization consisted of the following:

 

  

		Construction Segment
Other Intangible Assets Subject to Amortization:
Balance as of December 31, 2015	$	7,148,503
Amortization		(1,787,181)
Balance as of June 30, 2016		5,361,322
Goodwill:
Balance as of December 31, 2015		19,141,273
Adjustments		882,559
Balance as of June 30, 2016		20,023,832
Goodwill and Other Intangibles as of June 30, 2016	$	25,385,154

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 June 30, 2016 was $0.9 million.  Amortization for the six months ended June 30, 2016 was $1.8 million, of which $1.5 million was recorded in construction costs and $0.3 million was recorded in general and administrative expenses on the consolidated statements of operations. Amortization expense relating to remaining amortizable intangible assets will be $1.8 million in 2016, $2.6 million in 2017, and $1.0 million in 2018.

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 Company’s 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 annual periods beginning after December 15, 2016 and interim periods within that annual period. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the Company’s financial position, results of operations or cash flows.

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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 Company’s consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified.

In August 2015, the FASB issued ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments 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.

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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 June 30, 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 six months ended June 30:

		June 30, 2016		June 30, 2015
Beginning balance	$	379,432,495	$	21,501,972
New construction contracts / amendments to contracts		393,057,839		190,021,442
Less: construction contracts revenue earned		145,328,813		18,967,323
Ending balance	$	627,161,521	$	192,556,091

The table includes $163.8 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 and memorandum of understanding for power operating and maintenance services.

The Company has three loss contracts as of June 30, 2016 of $0.4 million, $0.2 million and $0.3 million which are 98%, 78% and 38% complete, respectively. The Company also assumed three loss contracts in connection with the 2015 acquisition of BEK BG. These projects are 99%, 82% and 72% complete as of June 30, 2016 with estimated contract costs in excess of contract revenue of $1.3 million, $1.2 million and $0.6 million, respectively. The Company recorded a provision for losses of approximately $0.1 million based on estimated costs in excess of contract revenue during the six months ended June 30, 2016 associated with these contracts.

7. Cost and Estimated Earnings on Uncompleted Contracts

Billings, costs incurred, and estimated earnings on uncompleted contracts as of June 30, 2016 and December 31, 2015 were as follows:

Cost and Estimated Earnings on Uncompleted Contracts		June 30, 2016		December 31, 2015
Cost incurred on uncompleted contracts	$	341,653,094	$	207,563,345
Estimated earnings		11,994,478		10,007,049
Total cost and estimated earnings on uncompleted contracts		353,647,572		217,570,394
Plus: Acquired net costs and estimated earnings in excess of billings		—		15,009,186
Less: Billings to date		349,541,025		222,415,720
Net	$	4,106,547	$	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	$	9,690,699	$	16,563,199
Billings in excess of costs and estimated earnings on uncompleted contracts		(5,584,152)		(6,399,339)
Net	$	4,106,547	$	10,163,860

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8. Short-term and long-term borrowings

The current and non-current portions of the Company’s outstanding borrowings are as follows:

		June 30, 2016					December 31, 2015
		Current Portion			Non-Current Portion		Current Portion			Non-Current Portion
Term Loans
4.5% 2-year term loan – related party	$	—		$	8,000,000	$	—	$	—
4.5% 2-year term loan – related party		—			6,000,000		—		6,000,000
6.8% 2-year term loan – related party		—			1,455,900		—		1,425,300
Variable interest rate 5-year term loan		348,934			1,143,557		341,180		1,319,386
Short-term debt		—			—		204,963		—
Total term loans	$	348,934		$	16,599,457	$	546,143	$	8,744,686
Lines of Credit
Variable interest rate $1,500,000  line-of-credit	$	1,498,816		$	—	$	1,498,816	$	—
Variable interest rate $750,000 line-of-credit		—			—		500,000		—
Variable interest rate $975,000 line-of-credit		830,211			—		—		—
Total lines of credit		2,329,027			—		1,998,816		—
Total borrowings	$	2,677,961		$	16,599,457	$	2,544,959	$	8,744,686

 

 

Maturities—The Company’s debt as of June 30, 2016 matures as follows:

 

2016	$	2,516,565
2017		7,814,052
2018		8,373,974
2019		391,155
2020		181,672
Total debt	$	19,277,418

 

Total interest expense incurred by the Company for the six months ended June 30, 2016 was $0.4 million, and the interest expense incurred during the six months ended June 30, 2015 was less than $0.1 million. The Company’s weighted-average interest rate on short-term borrowings outstanding as of June 30, 2016 was 4.38%.

Letters of Credit

As of June 30, 2016, the Company had FJD 8.3 million ($4.0 million USD) and WST 2.7 million ($1.0 million USD) in outstanding letters of credit and guarantees with financial institutions, which expire at various dates during the remainder of 2016.

Pernix Group, Inc.

In May 2016, the Company entered into a two-year term loan agreement with Bent Marketing Ltd., an affiliate of a major shareholder, for $8.0 million. Interest accrues at 4.5% and is paid quarterly. The term loan matures on May 23, 2018 at which time the principal and all unpaid interest is due. There is no prepayment penalty for this borrowing.

In July 2015, the Company entered into a two-year term loan agreement with Bent Marketing Ltd. 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.

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Pernix Guam

On November 24, 2015, Pernix Guam, LLC entered into a line 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 June 30, 2016). Principal and interest are paid monthly. Loan origination fees equal 1.00% of each loan amount and there are no prepayment penalties. The line 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.  No amount is outstanding on this line of credit as of June 30, 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 June 30, 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 June 30, 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 June 30, 2016). Principal and interest are paid monthly for both facilities.

 

As of June 30, 2016, $1.5 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 the annual compliance will be effective with the year ended December 31, 2016.

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”). However, the advance payment guarantee of FJD 2.3 million (USD $1.1 million) issued on behalf of Pernix-MAP to EPC was cancelled. The letter of credit was not renewed and the facility was reduced to FJD 2.3 million ($1.1 million USD) representing a performance security equivalent to 10% of the contract value. As of June 30, 2016, the total indemnity guarantee facility was FJD 8.3 million ($4.0 million USD) and WST 2.7 million ($1.0 million USD). The Company also increased its temporary overdraft facility with ANZ to FJD 2.0 million ($0.97 million USD). As of June 30, 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 June 30, 2016), a corporate guarantee of FJD 4.0 million ($1.9 million USD as of June 30, 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 ($0.97 million USD as of June 30, 2016).

 

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 June 30, 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 June 30, 2016, the PFL gearing ratio is 2.06 and PFL is in compliance with all covenants.

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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, as noted above.  Pernix-MAP has a letter of credit of WST 2.7 million ($1.0 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 Company’s 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 the Prime rate (3.50% at June 30, 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 June 30, 2016 or 2015. The Company’s 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 carrying amounts of the Company’s short-term borrowings approximate fair value because of their short maturities.

The fair values of the Company’s 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 Company’s borrowings is $19.3 million and the estimated aggregate fair value using the income approach is $20.9 million.

9. Stockholders’ Equity

Certificate of Amendment of the Corporation’s 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).

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Series C Preferred

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%.  Cumulative dividends due for the period from July 1, 2015 through July 1, 2016 will be paid to the holder of Series C Preferred Stock in the form of 500,000 shares of the Company’s common stock.  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 June 30, 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 Company’s option and have a liquidation preference of $10.00 per share. In June 2016, the Company’s Board of Directors declared the issuance of 500,000 shares of the Company’s common stock as a stock dividend to the holders of Series C Preferred Stock in accordance with the terms of the Amended Certificate of Designation for Series C Preferred Stock. The common shares were issued on August 1, 2016.

 

Series A Preferred

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 June 30, 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 Company’s common stock. The dividends accumulated but not paid as of June 30, 2016 and 2015 were $199,452 and $99,726, respectively.

 

Series B Preferred

As of June 30, 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 June 30, 2016 and December 31, 2015, Series B Preferred Stock dividends of $324,186 and $296,637 were accumulated, respectively. No dividends were declared or paid during the six months ended June 30, 2016 and 2015, respectively.

 

Common Stock —As of June 30, 2016 and December 31, 2015, 9,903,697 shares and 9,403,697 shares of the Company’s common stock were issued and outstanding, respectively and over 96.0% of those shares were owned by Ernil, Halbarad and affiliated companies.

10. Computation of Net Earnings (Loss) Per Share

A reconciliation of the numerator and denominator of basic and diluted earnings per share for the six months ending June 30, 2016 and 2015 is provided as follows:

		June 30, 2016		June 30, 2015
Numerator — Net income (loss) attributable to stockholders	$	(7,892,091)	$	(5,555,861)
Less: Preferred stock dividends, including amounts paid and accumulated		727,002		225,724
Net loss attributable to common stockholders of Pernix		(8,619,093)		(5,781,585)
Denominator:
Weighted average common shares outstanding		9,442,141		9,403,697
Basic and dilutive net earnings (loss) per share	$	(0.91)	$	(0.61)

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A reconciliation of the numerator and denominator of basic and diluted earnings per share for the three months ending June 30, 2016 and 2015 is provided as follows:

		June 30, 2016		June 30, 2015
Numerator — Net income (loss) attributable to stockholders	$	(3,047,271)	$	(3,488,916)
Less: Preferred stock dividends, including amounts paid and accumulated		363,501		113,471
Net loss attributable to common stockholders of Pernix		(3,410,772)		(3,602,387)
Denominator:
Weighted average common shares outstanding		9,480,602		9,403,697
Basic and dilutive net earnings (loss) per share	$	(0.36)	$	(0.38)

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 Company’s convertible preferred stock and outstanding stock options has been excluded from earnings per share for the three and six months ended June 30, 2016 and 2015, since inclusion would be anti-dilutive. For the three and six months ended June 30, 2016, the number of anti-dilutive potential common shares excluded from the computation of diluted earnings per share was 4,835,734 and 5,039,903, respectively.

11. Stock-based compensation plans

2014 Equity Incentive Plan (EIP) - In late 2013, the Company’s 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 June 30, 2016, a total of 1,456,500 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 June 30, 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 June 30, 2016, a total of 226,000 options were outstanding under this plan. No additional shares are anticipated to be awarded under the ISOP.

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Option awards to employees and directors under the Company’s 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 cliff 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).  There were no options exercised during the six months ended June 30, 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 six months ended June 30:

		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	$	1.55		1,395,000	$	1.55
Granted		197,500		0.54		—		—
Exercised		—		—		—		—
Forfeited / expired		63,000		2.07		48,000		2.07
Options outstanding, at June 30		1,456,500		1.56		1,347,000		1.53
Options exercisable, at June 30		521,800	$	1.63		165,943	$	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 June 30		78,500		2.09		78,500		2.09
Options exercisable, at June 30		78,500	$	2.09		62,513	$	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 June 30		226,000		2.09		226,000		2.09
Options exercisable, at June 30		192,745	$	2.09		161,570	$	2.09

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The following table summarizes information about stock options outstanding at June 30, 2016: 

Plan		Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Aggregate Grant Date Intrinsic Value
EIP		1,456,500		9.6	$	1.88	$	4,567,420
LTIP		78,500		6.6	$	2.09	$	32,185
ISOP		226,000		6.3	$	2.09	$	68,060

The weighted average grant date fair value per option outstanding at June 30, 2016 and 2015 was $0.72 and $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 for 2016 grants:

		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 Company’s 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 the three months ended June 30, 2016 and 2015 was less than $0.1 million for both periods. Total share-based compensation expense for the six months ended June 30, 2016 and 2015 was $0.2 million for both periods.  As of June 30, 2016 and 2015, there was $0.5 million and $0.6 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 1.4 years, which is equivalent to the average vesting period.

The Company received no cash during the periods ending June 30, 2016 and 2015, respectively, related to stock awards as only 793,045 options were vested as of June 30, 2016 and no options were exercised during the periods. The unvested options at June 30, 2016 have an intrinsic value of $0.3 million and the vested options have an intrinsic value of $0.3 million based on the trading price of the Company’s 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. 63,000 options and 105,500 options were forfeited or cancelled during the first six months of 2016 and 2015, respectively.

 

The Company has a 401K matching plan through which it contributes up to 9% of an employee’s 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 $0.5 million and less than $0.1 million of expense associated with the 401K match during the six months ended June 30, 2016 and 2015, respectively. The increase in 401K matching contributions is primarily attributable to the acquisitions of BEK BG and PPG.

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12. Commitments and Contingencies

Pernix’s power generation activities involve significant risks of environmental damage, equipment damage and failures, personal injury and fines and costs imposed by regulatory agencies. Though management believes its safety programs and record is excellent and its insurance programs are adequate, if a liability claim is made against it, or if there is an extended outage or equipment failure or damage at one of the Company’s 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 June 30, 2016) if found to be negligent or FJD 0.8 million (or approx. $0.4 million USD as of June 30, 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. $0.09 million USD) as of June 30, 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 UNELCO’s 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 Company’s vendors or should one of the Company’s 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 cash and 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 Company’s 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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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 June 30, 2016 the Company had a FJD 4.0 million ($1.9 million USD) financial guarantee of PFL’s line of credit with ANZ. No amounts are outstanding under the ANZ line of credit and the Company does not anticipate any payment under this guarantee as of June 30, 2016.

The Company’s 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 June 30, 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 June 30, 2016 and December 31, 2015, the amount of domestic bank deposits that exceeded or are not covered by FDIC insurance was $8.3 million and $4.5 million, respectively. Certain financial institutions are located in foreign countries which do not have FDIC insurance and as of June 30, 2016 and December 31, 2015, the amount of bank deposits in these financial institutions was $3.3 million and $1.6 million, respectively. These foreign bank deposits include our restricted cash.

14. Related Party Transactions — Not Described Elsewhere

The Company’s shareholders include SHBC, which holds less than 6% of Pernix’s stock at June 30, 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 less than $0.1 million during the six months ending June 30, 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 Company’s corporate headquarters. The lease term ended June 30, 2016 and Computhink continues to rent on a month to month basis. The Company’s charges to Computhink were less than $0.1 million for each of the six months ended June 30, 2016 and 2015.

 

Total amounts due (to) from related parties are summarized as follows at June 30, 2016 and December 31, 2015:

		June 30, 2016		December 31, 2015
Note payable and accrued interest to Bent Marketing Ltd	$	(14,114,627)	$	(6,000,000)
Note payable to FHL		(1,455,900)		(1,425,300)
Accounts receivable from Computhink		2,047		2,384
Accounts payable to SHBC		(4,998)		—
Totals	$	(15,573,478)	$	(7,422,916)

 

15. Business Segment Information

Pernix Group has organized 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.

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The following table sets forth certain segment information for the periods indicated:

Schedule of Segment Reporting, Information by Segment
Six Months Ended June 30, 2016
			General Construction			Power Generation Services			Corporate			Total
Revenue		$	145,328,813		$	2,893,748	$		35,042	$		148,257,603
Interest income (expense), net			(138,502)			64,212			—			(74,290)
Interest expense- related party			(102,048)			—			(182,681)			(284,729)
Depreciation and amortization			2,217,657			49,318			44,419			2,311,394
Income tax benefit (expense)			(65,137)			(15,433)			—			(80,570)
Net income (loss) attributable to the common stockholders of Pernix Group Inc. and Subsidiaries			(5,227,249)			1,145,359			(4,810,201)			(8,892,091)
Total capital expenditures			359,967			176,786			15,194			551,947
Total assets		$	94,428,953		$	7,237,410	$		6,271,319	$		107,937,682

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Schedule of Segment Reporting, Information by Segment
Six Months Ended June 30, 2015
		General Construction		Power Generation Services		Corporate		Total
Revenue	$	18,967,323	$	2,668,682	$	58,772	$	21,694,777
Interest income (expense), net		71		2,278		—		2,349
Interest expense- related party		(42,916)		—		—		(42,916)
Depreciation and amortization		13,690		42,568		49,158		105,416
Income tax expense		(14,080)		(113,037)		—		(127,117)
Net income (loss) attributable to the common stockholders of Pernix Group Inc. and Subsidiaries		(3,586,290)		602,000		(2,797,295)		(5,781,585)
Total capital expenditures		112,904		108,140		19,523		240,567
Total assets	$	110,676,561	$	7,855,261	$	7,255,991	$	125,787,813

Schedule of Segment Reporting, Information by Segment
Three Months Ended June 30, 2016
		General Construction			Power Generation Services		Corporate		Total
Revenue	$	70,230,232		$	1,558,751	$	22,296	$	71,811,279
Interest income (expense), net		(71,235)			33,306		—		(37,929)
Interest expense- related party		(51,312)			—		(114,626)		(165,938)
Depreciation and amortization		1,136,370			8,142		27,852		1,172,364
Income tax benefit (expense)		(15,540)			(49,604)		—		(65,144)
Net income (loss) attributable to the common stockholders of Pernix Group Inc. and Subsidiaries		(2,247,312)			712,549		(2,512,508)		(4,047,271)
Total capital expenditures		40,470			9,919		15,194		65,583
Total assets	$	94,428,953		$	7,237,410	$	6,271,319	$	107,937,682

Schedule of Segment Reporting, Information by Segment
Three Months Ended June 30, 2015
		General Construction		Power Generation Services		Corporate		Total
Revenue	$	9,638,753	$	1,404,595	$	40,539	$	11,083,887
Interest income (expense), net		71		2,347		—		2,418
Interest expense- related party		(21,216)		—		—		(21,216)
Depreciation and amortization		11,224		33,444		10,484		55,152
Income tax expense		(33,016)		(76,333)		—		(109,349)
Net income (loss) attributable to the common stockholders of Pernix Group Inc. and Subsidiaries		(2,381,401)		295,781		(1,516,767)		(3,602,387)
Total capital expenditures		112,904		46,556		—		159,460
Total assets	$	110,676,561	$	7,855,261	$	7,255,991	$	125,787,813

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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		Six Months Ended June 30, 2016		Six Months Ended June 30, 2015		June 30, 2016		December 31, 2015
United States (1)	$	122,134,131	$	13,053,531	$	2,537,246	$	2,412,564
Fiji		2,577,661		8,029,593		360,451		353,620
Guam		13,830,451		—		1,209,676		1,288,418
Vanuatu		672,657		611,653		3,645		7,239
Mozambique		4,313,741		—		—		—
Other		4,728,962		—		1,016,901		7,771
Total revenue and net fixed assets	$	148,257,603	$	21,694,777	$	5,127,919	$	4,069,612

		Total Revenue
Location – Revenue		Three Months Ended June 30, 2016		Three Months Ended June 30, 2015
United States (1)	$	53,225,204	$	6,334,950
Fiji		1,476,403		4,462,818
Guam		10,726,081		—
Vanuatu		343,028		286,119
Mozambique		4,313,741		—
Other		1,726,822		—
Total revenue	$	71,811,279	$	11,083,887

(1)

Revenue associated with Department Of State (“DOS”) projects, which are commonly performed outside of the U.S. are included in the U.S. total.

Major Customer

During the six months ended June 30, 2016, revenue of $37.7 million or 25.4% of consolidated revenue was generated through one customer. During the three months ended June 30, 2016, revenue from this customer was $6.9 million or 22.3% of total revenue. This customer also has $9.4 million or 18.9% of consolidated accounts receivable outstanding as of June 30, 2016. All amounts are deemed collectable.

During the six months ended June 30, 2015, the Company generated revenue of approximately 87% 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 $4.0 million or 19% of consolidated revenue for the six months ended June 30, 2015.  The FEA is a major customer through two construction projects and O&M agreements.  During the six months ended June 30, 2015, $8.0 million or 38% of consolidated revenue was generated from this customer.  Revenues generated from a third customer were $6.3 million or 30% of consolidated revenue for the six months ended June 30, 2015.

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16. Income taxes

The income tax expense for the first six months ended June 30, 2016 of approximately $80,600 is comprised of a foreign deferred tax expense of approximately $75,100 and a current state tax benefit of approximately $5,500 for PGI. There were no interest or penalties for the first half of 2016. The $127,000 income tax expense for the first six months ended June 30, 2015 reflects a current state income tax expense of $14,000 and a current foreign tax expense of approximately $113,000 for PFL.

As of June 30, 2016, the Company has total net operating and capital loss carryforwards from U.S. operations of approximately $85.5 million. The Company’s deferred tax assets at June 30, 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 June 30, 2016 and December 31, 2015, the Company maintained a full valuation allowance on $31.7 million and $28.9 million of net deferred tax assets, respectively.

17. Subsequent Events

Pernix Guam Line of Credit

On July 11, 2016, Pernix Guam, LLC executed an agreement with ANZ extending the maturity date of the $1.5 million USD revolving line of credit facility to October 31, 2016.

Pernix Group, Inc. Insurance Financing Agreement

In July 2016, Pernix Group, Inc. entered into a short term financing agreement with IPFS Corporation. The $0.8 million principal balance, which is at an annual percentage rate of 5.49%, matures March 30, 2017.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You are cautioned that this Quarterly Report on Form 10-Q and, in particular, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in Part I, contains forward-looking statements concerning future operations and performance of the Company within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to market, operating and economic risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. Factors that may cause such differences include, among others: increased competition, increased costs, changes in general market conditions, changes in the regulatory environment, changes in anticipated levels of government spending on infrastructure, and changes in loan relationships or sources of financing, political instability or violence. Such forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report and the 2015 annual consolidated financial statements and notes thereto included in the Company’s Form 10-K Annual Report filed with the Securities and Exchange Commission (SEC).

The financial information discussed in the MD&A includes amounts that may be derived from utilizing certain accounting estimates and assumptions. The following highlights accounting estimates and assumptions which the Company considers to be critical to the preparation of our financial statements because they inherently involve significant judgments and uncertainties. The Company cautions that these estimates are developed based upon available information at the time that the estimate was developed. However, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment as more current information becomes known.

Construction revenues are determined by applying the percentage of completion method. Our current projects are delivered through either construction management, general contracting or design/build methodologies using either lump sum, guaranteed maximum price or cost plus contracts. Revenues recognized under the percentage of completion method, require application of a percentage (actual costs incurred through the reporting date divided by the total estimated costs to complete the project) to the fixed contract price. The resultant amount is recorded as revenue for the applicable period. This method of revenue recognition requires us to 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, warranty expense, as well as productivity. In addition, sometimes clients, vendors and subcontractors will present claims against us for recovery of costs they incurred in excess of what they expected to incur, or for which they believe they are not contractually responsible. In turn, the Company may present claims to our clients, vendors and subcontractors for costs that management believe were not the Company’s responsibility or may be beyond our scope of work. The Company will include costs associated with these claims in the financial information when such costs can be reliably identified and estimated. Similarly, the Company will include in revenue amounts equal to costs for claims, where the outcome is probable that the claim will be found in the favor of the Company. The Company will record a provision for losses when estimated costs exceed estimated revenues.

Our estimates, assumptions and judgments are continually evaluated based on known information and experience. However, the actual amounts could be significantly different from our estimates.

In this report, we use the terms “Pernix Group”, “PGI”, “the Company”, ‘we”, “us”, and “our” to refer to Pernix Group, Inc. and its condensed consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years. We refer to the three months ended June 30, 2016 and 2015 as the “second quarter of 2016” and the “second quarter of 2015”, respectively.

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Company Overview

 

Pernix Group is a global company operating across multiple industry sectors providing a wide variety of services, employing approximately 475 employees across various international and US domestic locations. The Company is over 96.0% owned by Ernil Continental, S.A., BVI, Halbarad Group, Ltd., BVI, and Affiliates. The Company conducts its operations through the parent and its subsidiaries. The Company’s two primary operating business segments are construction and power services. In addition to these two operating segments, the corporate operations are a separately reported segment that provides administrative support to the operating segments.

 

Pernix has full-scale construction and management capabilities, with some of our subsidiaries located in the United States, Guam, Fiji, Vanuatu, Papua New Guinea, South Korea, Africa, and Germany. We provide our services in a broad range of end markets, including construction, construction management, and power operations and maintenance (“O&M”) 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. Markets include both U.S. Department of State (“DOS”) and other government clients and private sector commercial clients, the latter typically in either technically based or commercial facilities.

 

Power services focus includes operating and maintenance of power production facilities typically with longer term contracts.

 

We have provided construction and power services since 1995 and have established a strong reputation within our markets by delivering complex projects and providing innovative facility O&M solutions to clients world-wide with an unwavering commitment to safety, quality, social responsibility and total customer satisfaction. We have established domestic & international experience, high-performance management teams with a proven track record of successfully completing complex projects around the globe and in some of the most remote locations. We have over twenty years of experience providing our services in domestic and international locations. We believe that these attributes are the foundation of Pernix’s success.

 

We believe the unique collection of resources, experience, operational and financial attributes that Pernix possesses properly positions the Company for future growth, diversification and financial success. The acquisitions of BE&K Building Group (“BE&K BG”) and certain assets of dck Pacific Guam, LLC and dck-ecc Pacific Guam, LLC Joint Venture Interest (collectively, “PPG”), along with our recent transactions with FHL, wherein PGI sold a non-controlling interest in Pernix Papua New Guinea (“PPNG”) for $2.4 million and PPNG acquired Basic Industries Limited (“BIL”) from FHL for $0.3 million, has significantly increased diversification of end markets, services and geographic footprint, increased critical mass, and expanded the subcontractor/vendor base as well as the project partner network globally.

Business Segments

Construction Segment

Our construction segment includes both general contracting and construction management services with significant pre-con consulting. We have responsibility from contract award through the successful completion of each project.

General Contracting

 

Our general contracting services are focused on our domestic and international projects where we have developed a global network of suppliers and subcontractors. Together with these strategic partners, we utilize niche capabilities and experience that address customer design, budget and schedule requirements. This not only assists Pernix Group in winning larger projects, but also mitigates cost, design and other risks, provides experience managing larger projects, expands relations with more subcontractors and vendors, and enhances the number and type of contract opportunities that Pernix can qualify for, bid on and win.

 

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Additionally, most of our construction team members have worked on complex domestic and international projects. We have the expertise required to successfully conduct full scale construction projects anywhere in the world. We have demonstrated that we can execute the most technically and geographically challenging projects within time and budget parameters while meeting the exacting quality and safety requirements of the contract, thereby exceeding our clients’ expectations. Pernix Group has the ability to self-perform multiple trades when doing so brings efficiencies and value to a project and our customers.

 

Construction Management

We have significant experience in providing at-risk and agency construction management services on complex facility projects typically in the private sector across specific market centers-of-excellence including Advanced Manufacturing, Food/Beverage, Biotech/Pharma, Healthcare, Higher Education and other General Commercial Mixed use sectors.

 

Our experience has proven that early involvement in a project and its design is one of the keys to its success. Our proven approach works in line with our customers’ needs and expectations to develop a plan and an execution schedule that saves time and money and ensures timely completion of our projects. Our state-of-the-art construction management services provide a systematic project review, including a comprehensive construction and start-up schedule. By establishing a singular point of responsibility, we provide continuous updates on project milestones and ensure the safest working environment while we deliver projects on time and on budget.

 

Design Build

Pernix embraces the design/build model to ensure design excellence and successful completion of construction projects from analysis, architecture and permitting, through engineering, construction, completion and customer acceptance. By establishing a singular point of responsibility, we deliver on our promise to fulfill all project requirements and specifications on-time and on-budget.

 

We are committed to understanding the unique requirements and specifications of each project to provide a comprehensive single source solution. This value-added partnership leverages our ability to align and manage the best resources for all aspects of the project.

Power Services Segment

Although virtually everyone in the world relies on it, the needs and resources required to generate power can vary widely from location to location. From the types of fuels and technologies employed to the plethora of regulations governing the development, construction and operation of power generation plants, Pernix Group understands the unique needs and requirements of different projects in diverse geographic locations.

 

Our Power Services business segment includes plant Engineering, Procurement, and Construction (“EPC”), O&M services, and Build, Own, Operate, Transfer (“BOOT”) capabilities.  Pernix focuses its service offerings on small to mid-size power plants as well as transmission and distribution grids and underground cable installation.

 

Operations and Maintenance (O&M)

 

Pernix Group’s Power O&M services provide an integrated scope of services covering all aspects of power operations. Specifically, our O&M services include maintenance & operations, engineering, on-going reliability studies, construction management, recovery/rebuild, specialty services and rehabilitation. Prior to assuming operating responsibility for customer operations, we perform plant audits and provide a comprehensive plan, including timelines for assuming responsibility of the operation, as well as initial and long-term maintenance requirements. Our intense focus on machine performance and OEM maintenance requirements ensures efficient and long term operation of equipment.  We also partner closely with public and private entities to improve plant processes, performance, reliability and customer service while reducing operating costs as circumstances allow.

 

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Pernix focuses on operating efficiency and reliability while maintaining safety, security and environmental stewardship. The Pernix Group power segment prides itself in being a steward of the environment and the assets entrusted to us by the communities in which we work. Accordingly, Pernix Group goes to great lengths to ensure that power segment employees are not transient operators, but ones who live and work in the community and depend upon the same power being provided to our customers.  This is part of our commitment to bring jobs and add value to the communities we serve.

Engineering, Procurement, and Construction (EPC)

 

Pernix Group relies on its construction capability and strong affiliation with world-class design firms and subcontractors to provide comprehensive global power EPC solutions. We have the resources to properly fit technology with our customers’ special requirements, budget and environmental considerations and constraints. Power plants are a significant investment and become a crucial part of a community’s survival, hence we take great care to understand what our customer requires, and ensure that the end product exceeds their expectations for today and contemplates their needs for the future. We accomplish this by partnering with our customers throughout all project phases to understand and recognize the unique requirements of each customer and each project phase, and leverage our ability to align and manage the best resources for all aspects of each particular project.

 

Pernix Group differentiates itself in its ability to efficiently scale its services to various size projects, ranging from small to mid-sized projects on a stand-alone project basis to large projects in association with our strategic partners. The variation in the scale of projects on which we work reflects the well thought out design, agility and efficiency in our operations. Pernix also has a wealth of experience upgrading existing facilities including the addition of new capacity or the refurbishment or replacement of outdated equipment at customer sites. These upgrade projects typically produce significant cost savings and performance improvements for our customers and can often be carried out while the power plant continues to operate, resulting in even greater cost savings.

 

As noted in the construction segment discussion, our state-of-the-art construction management services provide a systematic project review, including a comprehensive construction and start-up schedule. Our power plant construction methodology is not limited to building a facility; we also provide start up and commissioning services to ensure that the equipment is fully integrated with all other operating systems as well the transmission/distribution system and power grid. Furthermore, we provide the appropriate training for startup as well as future operations and maintenance.  In many cases, Pernix manages and operates many of the plants that we build. Due to our years of experience and diverse geographic footprint, we have developed strong regional and in-country relationships with engine and turbine manufacturers, suppliers of parts for power plants and distribution/ transmission systems, software developers and suppliers for control systems, Customer Information Systems (CIS), and Geographic Information Systems (GIS).  For this reason, Pernix is able to provide world-class power plant O&M services which are broad in scope and competitively priced.

 

Build, Own, Operate, Transfer (BOOT)

 

In addition to our O&M services and EPC, Pernix Group has the ability to implement projects via a BOOT model to help our customers finance and manage their current and potential infrastructure projects. Up-front costs are eliminated and the customer ultimately attains ownership of the final product. This is very similar in concept to a toll road. BOOT makes it easy for the customer to execute critically needed projects now despite budget constraints which would otherwise require deferring such projects well into the future.

 

Organizations such as the World Bank, U.S. EX-IM Bank and other international finance institutions (IFIs) have a history of lending money to aid customers in improving and privatizing their infrastructure. The BOOT model is another financial tool available to cash or budget constrained customers to achieve their infrastructure improvement goals. BOOT is one of several financing options that the Pernix Group may be able to offer our clients.

 

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Current Power Operations & Maintenance Services

Our power projects to date have been primarily international with specific focus in the North and South Pacific. Our power services segment currently operates power plants in the Republic of the Fiji Islands (Fiji) and the Republic of Vanuatu (Vanuatu). Although the revenue from our power operations represents a small percentage of consolidated revenue, it historically accounts for a significant portion of the gross profit.

 

Pernix Fiji Limited (f.k.a. Telesource Fiji, Limited)

 

PFL is a subsidiary of Pernix that conducts power service activities in Fiji. PFL has long-term contract with the Fiji Electricity Authority (“FEA”) to operate and maintain two separate diesel fired power generation plants. The O&M contract for these plants expires in May 2028 and includes management of a total of 110 MW of diesel power generation installed capacity in Fiji. In November 2014, FHL, an unrelated third party, acquired a 25% interest or 249,999 common shares of PFL for $2.3 million. Prior to this transaction, PFL was a wholly-owned subsidiary of Pernix.

 

The Kinoya Power Plant, which consist of three phased-in plants situated near Suva, the capital of Fiji, is part of the FEA grid and is the largest diesel fueled power plant in Fiji with an installed capacity of 86.1 MW.  The Vuda Power Plant, situated between Nadi and Lautoka is the second largest diesel fueled power plant in Fiji with an installed capacity of 24.2 MW for a total combined installed capacity of 110 MW. The Kinoya and Vuda Power Plants are fully compliant with the applicable laws of Fiji relative to power plant operations such as the Labor Industrial Act and the Environmental Act, and complies with manufacturers guidelines by applying prudent engineering practice in the operation and maintenance of the power plant in both locations.

In late 2015, the Company’s existing O&M service agreement was amended to reflect the award of the 36 MW expansion project at Kinoya (as Pernix had been the EPC contractor).  The Company’s total operated capacity of 110 MW is inclusive of the 36 MW expansion.  

 

Demonstrative of PFL’s outstanding O&M performance record, FEA has rated the PFL-managed Vuda and Kinoya power stations first and second out of five power stations in Fiji, and the FEA report stated “...it is no coincidence that the two Telesource (Pernix) stations are ranked first and second. They have a dedicated technically based health, safety and environmental officer who is actively involved in carrying out frequent and regular in house risk management checks”. FEA is a utility wholly-owned by the Government of Fiji and is responsible for the generation, transmission, distribution and retail sale of electricity on the islands of Viti Levu, Vanua Levu and Ovalau.  FEA serves approximately 90% of the country’s population.  PFL is therefore very proud of the positive recognition given to it by FEA.

Vanuatu Utilities and Infrastructure Limited (VUI)

 

In late 2010, VUI was selected by the Government of the Republic of Vanuatu to provide O&M services for the Luganville power plant in Vanuatu. VUI earns a monthly fee based on man hours necessary to operate and maintain the facilities. The costs associated with earning the management fee are included in salaries and employee benefits and also in general and administrative expenses in the consolidated statement of operations.

 

The Utilities Regulatory Authority monitors and reports on the performance of electric utilities in Vanuatu. These reports bring transparency to the performance of the power providers, having recently described how well VUI provided services to its customers since VUI began to manage the power structure on Vanuatu on January 1, 2011. This report found VUI to have performed well in all areas including network performance, safety performance, customer service, reliability and quality of supply, and legislative and regulatory compliance.

Corporate Segment

The Corporate segment covers the indirect activities supporting the Company’s construction and power activities. The Corporate segment earnings consist of rental revenue generated from the Company’s headquarters in Lombard, Illinois.

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Executive Summary

The Company is very excited about its transformation and diversification in conjunction with our recent acquisitions. These acquisitions have diversified our customer base, strengthened our DOS and commercial businesses including our work in the Pacific Rim region, and continue to position us for growth.

 

We have successfully completed projects for The Boeing Company, Gulfstream Aerospace, FUJIFILM Diosynth Biotechnologies USA, SYNNEX Corporation and Ferguson Enterprises during the six months ended June 30, 2016. BE&K BG was awarded two projects in the second quarter of 2016 by the Texas A&M University System, one of the largest higher education systems in the nation to construct a $29.2 million, Multi-Purpose Academic Facility in McAllen, Texas; and a $41.2 million, Nursing and Health Sciences Building to be constructed in Commerce, Texas.

We are actively pursuing additional DOS projects, as well as large commercial and advanced manufacturing opportunities in North America along with other large projects in Guam with potential award expectations in the second half of 2016.

 

Management continues to focus on bidding and winning new contracts on a stand-alone basis as well as with our strategic partners, pursuing both existing as well as new customers. In addition, management continues to integrate its acquisitions to capture synergies amongst its operations.  The Company maintains the benefit of having $85.5 million of net operating and capital loss carryforwards that may be used to offset future U.S. federal and state taxable earnings. These benefits are potentially advantageous to our existing business and could be enhanced by our plan to grow through acquisitions that are accretive to earnings.

 

During the three months ended June 30, 2016 and 2015, the Company generated revenues of $71.8 million and $11.1 million, respectively. Construction revenue increased $60.6 million primarily attributable to our recent acquisitions, while power services revenue increased $0.2 million. New awards and related change orders with contract value in excess of $280.2 million were granted to the Company during the six months ended June 30, 2016 and our backlog is $627.2 million as of June 30, 2016.

 

“We continue to track to our plans,” said Nidal Zayed, Pernix’s CEO & President, “in the last quarter we’ve mobilized teams to our major projects in Mozambique and Germany, we have significantly increased our backlog in the U.S. market and abroad, and our corporate structure and risk mitigation strategy allows us to continue to aggressively bid new work while not over extending. We’ve streamlined and improved processes and our teams are becoming more aligned each day for maximum efficiency. We continue to grow strategic partnerships, and enhance our supply chain relationships for maximum results and project execution.”

Results of Operations for the six months ended June 30, 2016 compared to the six months ended June 30, 2015

Revenues

Total revenues increased $126.6 million to $148.3 million for the six months ended June 30, 2016 compared to 2015. This increase is comprised of $125.8 million of revenue associated with the Pernix Guam and BEK BG acquisitions, an increase in organic construction revenue of $0.6 million and an increase of $0.2 million in power services and other revenue.

 

Construction – Including recent acquisitions, construction revenues for the six months ended June 30, 2016 were $145.3 million compared to $19.0 million in the prior period. Excluding our recent acquisitions, construction revenues for the six months ended June 30, 2016 compared to the prior period increased $0.6 million primarily driven by the timing of newly awarded contracts in 2016 partially offset by the completion of previously awarded projects. The top five BEK BG projects accounted for approximately 48% of the revenue generated during the first half of 2016 which were in the life sciences, higher education and aerospace industries located in the south, mid-Atlantic and south east region of the United States.

 

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Service Fees — Power plant service revenues were approximately $2.9 million and $2.7 million for the six months ended June 30, 2016 and 2015, respectively, a $0.2 million increase over the prior period. The increase is due to an increase in fixed fees associated with the new O&M award in Kinoya post completion of the power plant construction in 2015, partially offset by a reduction in production.

Costs and Expenses

Construction Costs - Total construction costs increased $121.9 million to $140.4 million as compared to the prior period. Increased costs associated with the BEK BG and PPG acquisitions were $121.0 million while organic construction costs increased by $0.9 million primarily due to amortization costs in the current period partially offset by higher loss contract provision in the prior period. Construction costs in 2016 include amortization expense of $1.5 million related to customer contracts / backlog in connection with our June 2015 acquisitions.

 

Operations and Maintenance Costs — Power plant costs were relatively flat at $1.1 million for the six months ended June 30, 2016 compared to $1.1 million for the prior period, reflecting higher labor and insurance expense offset by a reduction in maintenance expense incurred during the six months ended June 30, 2016.

Gross Profit

Gross profit increased $4.7 million to $6.8 million, for the six months ended June 30, 2016 from $2.1 million in the prior period. Gross profit associated with our recent acquisitions was $4.7 million while organic gross profit was flat.

Operating Expenses

Salaries and Employee Benefits increased $5.6 million to $9.0 million for the six months ended June 30, 2016 compared to the prior period reflecting $5.7 million of increased costs associated with the BEK BG and PPG acquisitions.

 

General and Administrative expenses increased $1.0 million to $5.0 million for the six months ended June 30, 2016 compared to the prior period.  This increase includes lower organic costs of $0.8 million related to non-recurring transaction costs in the prior period offset by higher professional fees in the current period, and $1.8 million of general and administrative costs associated with the BEK BG and PPG acquisitions.

 

Other Income (Expense)

Other income (expense) increased from less than ($0.1) million to ($0.4) million for the six months ended June 30, 2016 compared to 2015 primarily attributable to interest expense associated with debt obligations.

 

Pretax Income (Loss)

Consolidated pretax loss increased ($2.2) million to a pretax loss of ($7.6) million for the six months ended June 30, 2016 compared to pretax loss of ($5.4) million for the prior period, primarily due to pre-tax loss of ($3.0) million related to our recent acquisitions and an increase in general and administrative expenses .

 

Consolidated Net Income (Loss) Attributable to Common Stockholders

Consolidated net loss was ($8.9) million and ($5.8) million for the six months ended June 30, 2016 and 2015, respectively, an increase in net loss of ($3.1) million for the reasons noted above as well as an increase in preferred stock dividends and non-controlling interest net income.

Results of Operations for the three months ended June 30, 2016 compared to the three months ended June 30, 2015

Revenues

Total revenues increased $60.7 million to $71.8 million for the three months ended June 30, 2016 compared to 2015. This increase is comprised of $60.2 million of revenue associated with the Pernix Guam and BEK BG acquisitions, an increase in organic construction revenue of $0.3 million and an increase of $0.2 million in power services and other revenue.

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Construction – Including recent acquisitions, construction revenues for the three months ended June 30, 2016 were $70.2 million compared to $9.6 million in the prior period. Excluding our recent acquisitions, construction revenues for the three months ended June 30, 2016 compared to the prior period increased $0.3 million primarily driven by the timing of newly awarded contracts in 2016 partially offset by the completion of previously awarded projects. The top five BEK BG projects accounted for approximately 50% of the revenue generated during the second quarter which were in the life sciences, higher education and aerospace industries located in the south, mid-Atlantic and south east region of the United States.

 

Service Fees — Power plant service revenues were approximately $1.6 million and $1.4 million for the three months ended June 30, 2016 and 2015, respectively, a $0.2 million increase over the prior period. The increase is due to an increase in fixed fees associated with the new O&M award in Kinoya post completion of the power plant construction in 2015.

Costs and Expenses

Construction Costs - Total construction costs increased $58.3 million to $67.5 million as compared to the prior period. Increased costs associated with the BEK BG and PPG acquisitions were $57.4 million while organic construction costs increased $0.8 million. Construction costs in 2016 include amortization expense of $0.7 million related to customer contracts / backlog in connection with our June 2015 acquisitions.

 

Operations and Maintenance Costs — Power plant costs decreased $0.1 million to $0.5 million for the three months ended June 30, 2016 compared to $0.6 million for the prior period, reflecting lower labor and maintenance expense incurred during the three months ended June 30, 2016 in Kinoya.

 

Gross Profit

Gross profit increased $2.5 million to $3.8 million, for the three months ended June 30, 2016 from $1.3 million in the prior period. Gross profit associated with our recent acquisitions was $2.8 million and organic gross profit was $1.0 million, a decrease of $0.3 million. The non-acquisition decrease in gross profit is primarily due to the prior year completion of an older OBO project which had higher recognized margin in 2015.

 

Operating Expenses

Salaries and Employee Benefits increased $3.1 million to $4.8 million for the three months ended June 30, 2016 compared to the prior period reflecting $3.1 million of increased costs associated with the BEK BG and PPG acquisitions.

 

General and Administrative expenses decreased $1.1 million to $1.8 million for the three months ended June 30, 2016 compared to the prior period.  This decrease is primarily due to lower organic costs of $1.7 million related to non-recurring transaction costs in the prior period offset by $0.6 million of general and administrative costs associated with the BEK BG and PPG acquisitions.

 

Other Income (Expense)

Other income (expense) increased ($0.2) million to ($0.2) million for the three months ended June 30, 2016 compared to the prior period primarily attributable to interest expense associated with debt obligations.

 

Pretax Income (Loss)

Consolidated pretax loss decreased $0.3 million to a pretax loss of ($3.0) million for the three months ended June 30, 2016 compared to pretax loss of ($3.3) million for the prior period, primarily due to pre-tax loss of ($0.9) million related to our recent acquisitions and a decrease in general and administrative expenses noted above.

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Consolidated Net Income (Loss) Attributable to Common Stockholders

Consolidated net loss was ($4.0) million and ($3.6) million for the three months ended June 30, 2016 and 2015, respectively, a decrease in net loss of ($0.4) million for the reasons noted above as well as an increase in preferred stock dividend partially offset by a slight decrease in non-controlling interest net income.

Liquidity and Capital Resources

		June 30, 2016		December 31, 2015
Cash and cash equivalents	$	12,106,136	$	18,792,712
		Six Months Ended June 30, 2016		Six Months Ended June 30, 2015
Cash (used in) provided by operating activities	$	(13,781,845)	$	(9,606,334)
Cash (used in) provided by investing activities		(909,416)		(24,550,817)
Cash (used in) provided by financing activities		8,021,494		30,955,186
Effect of exchange rates on cash		(16,809)		169,675
Increase (decrease) in cash and cash equivalents	$	(6,686,576)	$	(3,032,290)

Cash Requirements

We generate cash flows primarily from serving as the general contractor on construction projects for our global customers through the operation and maintenance of power plants, financing obtained from third party banks and affiliated parties, and sales of common and preferred stock.

During the six months ended June 30, 2016, the $6.7 million decrease in the cash balance is most significantly related to the Company’s $13.8 million cash used in operating activities. The cash used in operating activities is largely attributable to the consolidated net loss, material purchases made on active contracts and the timing of accounts payable and accrual activity.  The net cash used in investing activities reflects the acquisition of BIL and capital expenditures.  Financing activities include $2.3 million of cash received related to the partial sale of equity in a subsidiary to a non-controlling interest and $9.1 million of proceeds from debt which were offset by $1.0 million of distributions to non-controlling interests and $2.3 million of debt repayment. Total outstanding debt as of June 30, 2016 was $19.3 million. 

 

Although the Company’s positive working capital position at year-end changed to a negative position as of March 31, 2016, it is now back to a positive position as of June 30, 2016.  It is our opinion that, in the absence of significant unanticipated cash demands, current and forecasted cash flow from our operations, combined with equity and debt financing capability will provide sufficient funds to meet anticipated operating requirements, capital expenditures and other business needs. We also believe that collections on the outstanding receivables with a timely payment history as well as funds available from various funding sources will permit the construction operations to meet the payment obligations to vendors and subcontractors.

 

As of June 30, 2016, the Company’s total assets exceeded total liabilities by $16.3 million. The Company has $85.5 million in net operating loss carryforwards that it may utilize in the future to offset future taxable income. The Company does not currently have material commitments for capital expenditures as of June 30, 2016.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.

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ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2016. Based on this evaluation, its CEO and CFO concluded the Company’s disclosure controls and procedures are effective to ensure that information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures and that such information is recorded, processed, summarized and reported within the time periods required by the Exchange Act.

(b) Changes in internal controls over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the three month period ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls.

Because of the inherent limitations in all control systems, no control system can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of a person, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Notwithstanding these limitations, with the changes referenced above, we believe that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any significant pending legal proceedings which involve us or any of our properties or subsidiaries.

ITEM 1A. RISK FACTORS

Not Applicable.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit 31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act of 1934
Exhibit 31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act of 1934
Exhibit 32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2004.
Exhibit 32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2004.

(101.INS)*		XBRL Instance Document		N/A
(101.SCH)*		XBRL Taxonomy Extension Schema Document		N/A
(101.CAL)*		XBRL Taxonomy Extension Calculation Linkbase Document		N/A
(101.LAB)*		XBRL Taxonomy Extension Label Linkbase Document		N/A
(101.PRE)*		XBRL Taxonomy Extension Presentation Linkbase Document		N/A
(101.DEF)*		XBRL Taxonomy Extension Definition Linkbase Document		N/A

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Pernix Group, Inc.
	(Registrant)
Dated: August 9, 2016	/s/ Nidal Z. Zayed
	Nidal Z. Zayed
	President and Chief Executive Officer
	/s/ Marco A. Martinez
	Marco A. Martinez
	Senior Vice President and Chief Financial Officer

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