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Table of Contents

 

 

 

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 September 30, 2010

 

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)

 

 

 

860 Parkview Boulevard, Lombard, Illinois 60148

(Address of principal executive offices including 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 x  No 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 o  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 November 15, 2010, 140,881,235 shares of our common stock were outstanding.

 

 

 



Table of Contents

 

PERNIX GROUP, INC.

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

 

PART I. Financial Information

 

 

 

 

Item 1.

Financial Statements:

3

 

Condensed Consolidated Balance Sheets — September 30, 2010 (unaudited) and December 31, 2009

3

 

Condensed Consolidated Statements of Operations (unaudited) — nine months ended September 30, 2010 and 2009

4

 

Condensed Consolidated Statements of Operations (unaudited) — three months ended September 30, 2010 and 2009

5

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) — nine and three months ended September 30, 2010 and 2009

6

 

Condensed Consolidated Statements of changes in Stockholders’ Equity and Comprehensive Income (Loss) — September 30, 2010 (unaudited), June 30, 2010 (unaudited), March 31, 2010 (unaudited), and December 31, 2009

7

 

Condensed Consolidated Statements of Cash Flows (unaudited) — nine months ended September 30, 2010 and 2009

8

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

Item 2.

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

22

Item 4T.

Controls and Procedures

26

 

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

27

Item 3.

Defaults Upon Senior Securities

27

Item 5.

Other Information

27

Item 6.

Exhibits

27

 

 

 

 

Signatures

28

 

2



Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

ITEM 1:  FINANCIAL STATEMENTS

 

PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

As of September 30, 2010 and December 31, 2009

 

 

 

Unaudited

 

 

 

 

 

September 30, 2010

 

December 31, 2009

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,119,450

 

$

2,994,989

 

Marketable Securities

 

 

193,788

 

Accounts receivable less allowance for doubtful accounts of $170,638 at September 30, 2010 and December 31, 2009

 

3,462,390

 

3,242,666

 

Related Party Receivables

 

111

 

180,888

 

Work in process

 

4,363,246

 

4,036,546

 

Inventories

 

5,092,391

 

4,873,458

 

Restricted cash

 

1,322

 

310,117

 

Customer backlog

 

 

292,178

 

Prepaid expenses and other current assets

 

1,478,976

 

466,131

 

Total current assets

 

17,517,886

 

16,590,761

 

Property, plant, and equipment, net

 

709,238

 

639,728

 

Restricted Cash greater than one year

 

906,933

 

652,573

 

Other assets

 

162,227

 

399,901

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

Customer Relationships

 

1,445,846

 

1,563,080

 

Trademark

 

936,984

 

936,984

 

Total assets

 

$

21,679,114

 

$

20,783,027

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Outstanding credit lines

 

$

 

$

276,343

 

Accounts payable

 

2,304,860

 

2,121,518

 

Accounts payable — related party

 

6,600

 

7,195

 

Accrued expenses

 

2,393,671

 

1,902,825

 

Interest payable — related party

 

271,511

 

214,064

 

Other current liabilities

 

1,364,647

 

638,619

 

Short term debt

 

1,402,564

 

1,448,210

 

Prepayments received on orders

 

3,774,102

 

1,616,612

 

Billings in excess of costs and estimated earnings

 

412,763

 

529,995

 

Dividend payable

 

6,945

 

 

Total current liabilities

 

11,937,663

 

8,755,381

 

 

 

 

 

 

 

Non current liabilities

 

291,648

 

72,197

 

Deferred tax liability

 

448,212

 

575,130

 

Total liabilities

 

12,677,523

 

9,402,708

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Pernix Group, Inc. and Subsidiaries Stockholders’ Equity

 

 

 

 

 

Convertible Preferred Stock, $0.01 par value, authorized 50,000,000 shares, 200,000 issued and outstanding at September 30, 2010 and none at December 31, 2009.

 

2,000

 

 

Common stock, $0.01 par value, authorized 200,000,000 shares, 140,881,235 issued at June 30, 2010 and 139,574,567 at December 31, 2009.

 

1,408,812

 

1,395,746

 

Additional paid-in capital

 

75,662,699

 

73,692,529

 

Accumulated deficit

 

(68,791,719

)

(66,031,010

)

Accumulated other comprehensive loss

 

(572,907

)

(604,440

)

Total Pernix Group, Inc. and Subsidiaries stockholders equity

 

7,708,885

 

8,452,825

 

Noncontrolling Interest

 

1,292,706

 

2,927,494

 

Total equity

 

9,001,591

 

11,380,319

 

Total liabilities and equity

 

$

21,679,114

 

$

20,783,027

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

Nine Months Ended September 30, 2010 and 2009

 

 

 

2010

 

2009

 

Revenues:

 

 

 

 

 

Construction revenues

 

$

4,924,492

 

$

8,549,011

 

Transmitter design and installation

 

7,581,681

 

 

Service fees — power generation plant

 

4,920,657

 

3,983,659

 

Service fees — related party

 

655

 

11,767

 

Finance lease revenue

 

 

5,349

 

Gross revenues

 

17,427,485

 

12,549,786

 

Costs and expenses:

 

 

 

 

 

Construction costs

 

4,025,398

 

7,166,995

 

Construction costs - related party

 

 

92,740

 

Transmitter design and installation cost

 

5,509,465

 

 

Operation and maintenance costs - power generation plant

 

2,203,122

 

2,066,021

 

Cost of revenues

 

11,737,985

 

9,325,756

 

Gross profit

 

5,689,500

 

3,224,030

 

Operating expenses:

 

 

 

 

 

Salaries and employee benefits

 

4,803,782

 

1,223,063

 

Occupancy and equipment

 

410,601

 

24,898

 

Occupancy - related party

 

76,627

 

74,356

 

General and administrative

 

2,997,410

 

1,087,550

 

Total operating expenses

 

8,288,420

 

2,409,867

 

Operating (loss)/income

 

(2,598,920

)

814,163

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest (expense)/income, net

 

(187,153

)

42,042

 

Interest expense - related party

 

(57,447

)

(56,219

)

Foreign currency exchange gain/(loss)

 

(119,801

)

(422,867

)

Other (expense)/income, net

 

77,748

 

62,632

 

Gain on sale of fixed assets

 

6,703

 

 

Total other expense

 

(279,950

)

(374,412

)

 

 

 

 

 

 

Loss before income taxes

 

(2,878,870

)

439,751

 

Income tax expense

 

506,235

 

340,115

 

Consolidated net (loss)/income

 

(3,385,105

)

99,636

 

 

 

 

 

 

 

Net loss to common stockholders

 

 

 

 

 

 

 

 

 

 

 

Less: Net loss attributable to noncontrolling interest

 

(631,341

)

(2,170

)

 

 

 

 

 

 

Net (loss)/income attributable to the stockholders of Pernix Group, Inc. and Subsidiaries

 

(2,753,764

)

101,806

 

 

 

 

 

 

 

Less: Preferred stock dividends

 

6,945

 

 

 

 

 

 

 

 

Net (loss)/income attributable to the common stockholders of Pernix Group Inc, and subsidiaries

 

$

(2,760,709

)

$

101,806

 

 

 

 

 

 

 

Basic and diluted net (loss)/income attributable to the common stockholders of Pernix Group, Inc. and Subsidiaries

 

$

(0.02

)

$

0.00

 

Weighted average shares outstanding

 

140,488,756

 

136,640,567

 

 

See accompanying notes to condensed consolidated financial statements

 

4



Table of Contents

 

PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

Three Months Ended September 30, 2010 and 2009

 

 

 

2010

 

2009

 

Revenues:

 

 

 

 

 

Construction revenues

 

$

2,636,624

 

$

2,210,327

 

Transmitter design and installation

 

2,094,534

 

 

Service fees — power generation plant

 

1,843,911

 

1,426,754

 

Service fees — related party

 

 

 

Finance lease revenue

 

 

 

Gross revenues

 

6,575,069

 

3,637,081

 

Costs and expenses:

 

 

 

 

 

Construction costs

 

2,260,461

 

1,390,971

 

Construction costs - related party

 

 

36,850

 

Transmitter design and installation cost

 

1,403,765

 

 

Operation and maintenance costs - power generation plant

 

755,376

 

637,677

 

Cost of revenues

 

4,419,602

 

2,065,498

 

Gross profit

 

2,155,467

 

1,571,583

 

Operating expenses:

 

 

 

 

 

Salaries and employee benefits

 

1,699,213

 

399,675

 

Occupancy and equipment

 

200,081

 

5,584

 

Occupancy - related party

 

26,267

 

26,245

 

General and administrative

 

798,802

 

424,852

 

Total operating expenses

 

2,724,363

 

856,356

 

Operating (loss)/income

 

(568,896

)

715,227

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest (expense)/income, net

 

(78,924

)

11,013

 

Interest expense - related party

 

(19,434

)

(19,028

)

Foreign currency exchange gain/(loss)

 

(151,916

)

(82,106

)

Other income, net

 

169,417

 

38,614

 

Gain on sale of fixed assets

 

(966

)

 

Total other expense

 

(81,823

)

(51,507

)

 

 

 

 

 

 

(Loss)/income before income taxes

 

(650,719

)

663,720

 

Income tax expense

 

184,385

 

141,814

 

Consolidated net (loss)/income

 

(835,104

)

521,906

 

 

 

 

 

 

 

Less: Net (loss)/income attributable to noncontrolling interest

 

(192,122

)

589

 

 

 

 

 

 

 

Net (loss)/income attributable to the stockholders of Pernix Group, Inc. and Subsidiaries

 

(642,982

)

521,317

 

 

 

 

 

 

 

Less: Preferred stock dividends

 

6,945

 

 

 

 

 

 

 

 

Net (loss)/income attributable to the common stockholders of Pernix Group Inc, and subsidiaries

 

$

(649,927

)

$

521,317

 

 

 

 

 

 

 

Basic and diluted net (loss)/income attributable to the common stockholders of Pernix Group, Inc. and Subsidiaries

 

$

(0.00

)

$

0.00

 

Weighted average shares outstanding

 

140,881,235

 

136,640,567

 

 

See accompanying notes to condensed consolidated financial statements

 

5



Table of Contents

 

PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

For the three months ended September 30, 2010 and September 30, 2009

 

 

 

Three Months

 

 

 

Ended September 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Net (loss)/income

 

$

(835,104

)

$

521,317

 

Other comprehensive income, net of tax:

 

 

 

 

 

Foreign currency translation adjustment

 

694,099

 

212,844

 

Total other comprehensive income, net of tax:

 

694,099

 

212,844

 

 

 

 

 

 

 

Comprehensive (loss)/income

 

$

(141,005

)

$

734,161

 

 

 

 

 

 

 

Comprehensive (loss) attributable to

 

 

 

 

 

Noncontrolling interests

 

$

(85,452

)

$

589

 

Comprehensive (loss) attributable to the stockholders of Pernix Group, Inc

 

$

(55,553

)

$

733,572

 

 

 

PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

For the nine months ended September 30, 2010 and September 30, 2009

 

 

 

Nine Months

 

 

 

Ended September 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Net (loss)/income

 

$

(3,385,105

)

$

101,806

 

Other comprehensive loss, net of tax:

 

 

 

 

 

Foreign currency translation adjustment

 

(19,244

)

(290,789

)

Total other comprehensive loss, net of tax:

 

(19,244

)

(290,789

)

 

 

 

 

 

 

Comprehensive (loss)

 

$

(3,404,349

)

$

(188,983

)

 

 

 

 

 

 

Comprehensive (loss) attributable to

 

 

 

 

 

Noncontrolling interests

 

$

(681,092

)

$

(2,170

)

Comprehensive (loss) attributable to the stockholders of Pernix Group, Inc

 

$

(2,723,257

)

$

(186,813

)

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of changes in Stockholders’ Equity and Comprehensive Income (Loss)

Periods ended September 30, 2010 (unaudited), June 30, 2010 (unaudited), March 31, 2010 (unaudited), and December 31, 2009

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Comprehensive

 

Accumulated

 

Comprehensive

 

Common

 

Preferred

 

paid-in

 

Noncontrolling

 

 

 

Total

 

Loss

 

deficit

 

income (loss)

 

Stock

 

Stock

 

capital

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

$

3,055,660

 

 

 

$

(70,663,993

)

$

(259,992

)

$

1,366,406

 

$

 

 

$

71,521,369

 

$

1,091,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of common stock - 2,934,000 shares at $0.75 per share

 

2,200,500

 

 

 

 

29,340

 

 

 

2,171,160

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income(loss)

 

4,617,350

 

$

4,632,983

 

4,632,983

 

 

 

 

 

 

 

(15,633

)

Foreign currency translation adjustment

 

(344,448

)

(344,448

)

 

(344,448

)

 

 

 

 

 

 

 

Comprehensive income:

 

4,272,902

 

$

4,288,535

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of noncontrolling interest in connection with business combination

 

1,851,257

 

 

 

 

 

 

 

 

 

 

 

 

 

1,851,257

 

Balance at December 31, 2009

 

$

11,380,319

 

 

 

$

(66,031,010

)

$

(604,440

)

$

1,395,746

 

$

 

$

73,692,529

 

$

2,927,494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of common stock - 1,306,668 shares at $0.75 per share

 

$

980,001

 

$

 

$

 

$

 

$

13,066

 

$

 

 

$

966,935

 

$

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(1,029,750

)

(889,524

)

(889,524

)

 

 

 

 

(140,226

)

Foreign currency translation adjustment

 

(465,008

)

(465,008

)

 

(368,700

)

 

 

 

(96,308

)

Comprehensive income (loss):

 

(1,494,758

)

$

(1,354,532

)

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of subsidiary shares from noncontrolling interest

 

(948,278

)

 

 

 

 

 

 

 

 

 

 

5,235

 

(953,513

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2010

 

$

9,917,284

 

 

 

$

(66,920,534

)

$

(973,140

)

$

1,408,812

 

$

 

$

74,664,699

 

$

1,737,447

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,520,251

)

$

(1,221,258

)

$

(1,221,258

)

$

 

$

 

$

 

$

 

$

(298,993

)

Foreign currency translation adjustment

 

(248,335

)

(248,335

)

 

(188,222

)

 

 

 

(60,113

)

Comprehensive income (loss):

 

(1,768,586

)

$

(2,824,125

)

 

 

 

 

 

 

 

 

 

 

 

 

Contributions from noncontrolling interest

 

843

 

 

 

 

 

 

 

 

 

 

 

 

 

843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2010

 

$

8,149,541

 

 

 

$

(68,141,792

)

$

(1,161,362

)

$

1,408,812

 

$

 

$

74,664,699

 

$

1,379,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of preferred stock - 200,000 shares at $5.00 per share

 

$

1,000,000

 

$

 

$

 

$

 

$

 

$

2,000

 

$

998,000

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(835,104

)

(649,927

)

(642,982

)

 

 

 

 

 

Foreign currency translation adjustment

 

694,099

 

(248,335

)

 

588,455

 

 

 

 

(86,478

)

Comprehensive income (loss):

 

(141,005

)

$

(3,722,387

)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock dividends

 

(6,945

)

 

 

(6,945

)

 

 

 

 

 

 

 

 

 

 

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2010

 

$

9,001,591

 

 

 

$

(68,791,719

)

$

(572,907

)

$

1,408,812

 

$

2,000

 

$

75,662,699

 

$

1,292,706

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

PERNIX GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2010 and September 30, 2009

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss)/income including noncontrolling interest

 

$

(3,385,105

)

$

99,636

 

Less noncontrolling Interest

 

631,341

 

2,170

 

Net (loss)/income

 

(2,753,764

)

101,806

 

Adjustments to reconcile net income/(loss) to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

150,631

 

94,619

 

Amortization of intangibles

 

409,412

 

 

(Gain)/loss on sale or disposal of fixed assets

 

(7,692

)

(1,775

)

Noncontrolling Interest

 

(631,341

)

(2,170

)

Provision for unbilled and uncollected accounts

 

1,004

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

Short term investments

 

188,914

 

 

Accounts receivable

 

(271,502

)

810,712

 

Accounts receivable - related party

 

180,777

 

(39,318

)

Prepaid expenses and other current assets

 

(1,221,797

)

5,132

 

Net investment in sales-type lease

 

 

454,651

 

Other assets

 

(210,662

)

9,033

 

Accounts payable

 

207,434

 

(1,017,266

)

Accounts payable - related party

 

(595

)

(10,456

)

Accrued expenses

 

482,425

 

78,710

 

Interest payable - related party

 

57,447

 

56,219

 

Billings in excess of cost and estimated earnings

 

2,181,776

 

(3,172,813

)

Other liabilities

 

1,009,186

 

(697,781

)

Deferred tax liability

 

(126,918

)

 

Net cash used in operating activities

 

(355,265

)

(3,330,697

)

Acquisition of additional subsidiary stock

 

(950,154

)

 

Investment in Pernix/UEI Joint Venture

 

2,719

 

 

Proceeds from sale of equipment

 

7,692

 

1,775

 

Capital expenditures

 

(238,638

)

(50,333

)

Net cash used in investing activities

 

(1,178,381

)

(48,558

)

Cash flows from financing activities:

 

 

 

 

 

Repayment of in indebtedness

 

(241,468

)

 

Proceeds from sale of stock

 

1,973,655

 

 

Joint venture equity

 

6,345

 

 

Net cash provided by financing activities

 

1,738,532

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(80,425

)

(167,616

)

Net decrease in cash and cash equivalents

 

124,461

 

(3,546,871

)

Cash and cash equivalents at beginning of period

 

2,994,989

 

6,313,886

 

Cash and cash equivalents at end of period

 

$

3,119,450

 

$

2,767,015

 

Supplemental disclosure:

 

 

 

 

 

Cash paid during the period for interest

 

$

56,892

 

$

 

Cash paid during the period for income taxes

 

$

184,258

 

$

289,226

 

 

 

 

 

 

 

Supplemental disclosure of noncash transactions:

 

 

 

 

 

Preferred stock dividends in dividends payable

 

$

6,945

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

 

8



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Description of Business

 

Pernix Group, Inc. (formerly Telesource International, Inc.) and its subsidiaries (“Pernix Group” or the “Company”) is an international company engaged in three business segments: General Construction, Power Generation Services, and the Design, Installation and Service of Transmitter Systems including high power radio transmitters and receivers.

 

The Company is a leading construction and power infrastructure company, offering diversified general contracting, design/build and construction management services to public agencies and private clients. We have provided power and construction services since 1995 and have established a strong reputation within our markets by executing complex projects on time and within budget while adhering to strict quality control measures.

 

We offer general contracting, pre-construction planning and comprehensive project management services, including the planning and scheduling of the manpower, equipment, materials and subcontractors required for a project. In our international markets, we also offer select self-performed construction services including construction fit-out, electrical and mechanical services, plumbing and heating, ventilation and air conditioning (“HVAC”). As a general contractor, Pernix Group pursues U.S. government contracts worldwide.

 

Pernix Group is also a global provider of power plant engineering, design, procurement, construction, operations and maintenance services. Together with our affiliates and specialty service providers, we employ industry-leading processes, technologies and business practices. Our team includes a trained staff of mechanics, engineers and technicians capable of managing multiple power plants. We have the capabilities to address a variety of power generating requirements from initial conceptual design to construction and through operating and maintaining power facilities. Our Operation and Maintenance (“O&M”) services are designed to improve the operating performance of a particular facility and to reduce overall power generation costs to our customers. The Company also invests in energy projects as an Independent Power Producer (“IPP”) if the projects are for credit worthy customers and are bankable without recourse to Pernix Group.

 

The Company implements state of the art project management tools and systems. We have extensive references from projects executed during the past 10 years and are leveraging these credentials and experiences for future growth. Our past experience includes an airport runway expansion; an adult prison; government buildings; a shortwave radio relay station; a US embassy compound; diesel power plants and the operation and maintenance of power generation facilities.

 

Pernix Group utilizes longstanding relationships with world-class design firms to ensure that our projects and customers have the benefit of the best design services available in the United States.  The Company has experience as an IPP and with Build, Own, Operate and Transfer (“BOOT”) projects. Our energy projects to date have been in the North and South Pacific and we seek and review opportunities throughout the world including North America.

 

Pernix Group acquired a 54.4% controlling interest in TransRadio SenderSysteme, Berlin, AG (“TransRadio”) on December 28, 2009 and another 23.6% on March 25, 2010, and another 4.0% on October 29, 2010 (see note 18). Through this new German subsidiary we engage in the design, distribution and installation of transmitter systems and provide related services at customer sites world-wide.

 

The Company conducts its operations through four subsidiaries from its headquarters in Lombard, Illinois, U.S.A.  In addition to the aforementioned and recently acquired German subsidiary, TransRadio, the Company’s joint venture with SHBC (“Pernix/SHBC JV” or the “JV”) bids construction projects. The Company’s wholly owned subsidiary, Telesource CNMI, Inc. (“TCNMI”), handles the management of the Company’s energy conversion facilities in the Commonwealth of the Northern Mariana Islands (“CNMI”). The Company’s other wholly owned subsidiary, Telesource (Fiji), Limited (“TFL”), manages the Company’s power generation activities in Fiji.

 

General Construction Segment

 

In 2006, the Company entered into a joint venture with SHBC, called Pernix-SHBC JV, formerly Telesource International, Inc./Sayed Behbehani & Sons Company, Joint Venture, L.P. This JV operates out of the Company’s Lombard, Illinois office and is a limited partnership with an equity split of 51% for Pernix Group and 49% for SHBC. Pernix Group, Inc. is the general partner of the

 

9



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Pernix/SHBC JV.  Pernix/SHBC JV was formed for the purpose of bidding U.S. government construction and infrastructure development projects.  In January 2007 the JV received a final award and notice to proceed with a $42.6 million contract to design and build a new embassy compound for the United States Department of State in Suva, Fiji.  The joint venture also has a wholly- owned subsidiary in Fiji named Telesource-SHBC (Fiji), Limited (“TSF”).  In addition, Pernix Group, Inc. received a contract for additional services at the same embassy compound in April of 2010 in the amount of approximately $8.1 million for a second phase of this project.  The Company consolidated Pernix/SHBC JV under the guidance related to accounting for business combinations and related disclosures.

 

Pernix Group’s strategy for the construction market is to independently seek out and bid on projects under the Pernix/SHBC and /or other joint ventures.  SHBC’s experienced personnel and success in the construction industry benefit the Company in the bidding process. The Company will employ its new systems for project management and controls that are designed to increase the likelihood of success and profitability on our projects. Pernix Group has augmented its management team by hiring prominent construction industry professionals who have a proven track record of strong operational and financial management on construction projects. Our future growth will be built on four pillars of success:  transparency, customer satisfaction, state of the art technology and a fair profit.

 

As stated above, the Pernix/SHBC JV has been awarded the contract to build a United States Embassy in Suva, Fiji. The Company will leverage its extensive experience in Fiji, primarily from building and operating power plants in the country, combined with the successful execution and completion of the United States Embassy project, to bid on and obtain additional embassy and / or U.S. government projects. Through its Fiji experience the Company has developed a strong understanding of the economic, business and cultural challenges in operating and constructing in international environments.  The Department of State intends to build approximately 60 new embassies in the next 7 years and Pernix Group, Inc. and/or the Pernix/SHBC JV will continue to bid embassy work.

 

Pernix Group has worked extensively with the United States Information Agency (previously known as Voice of America).  Along with our recent experience on the U.S. Embassy project in Suva with the State Department’s Overseas Buildings Office (“OBO”), the Company is now poised to leverage our ability to work with, understand and respond to complex U.S. government contractual and regulatory requirements. These experiences have tremendously improved our identification of potential projects and the technical proposal responses. The ability to competently and competitively respond to government-issued requests for proposals and to execute projects when awarded to the satisfaction of government contracting officers is a skill set that Pernix Group has now demonstrated on numerous projects.

 

The Company is employing custom management tools and technology to ensure that all risks inherent with the construction of complex buildings and structures is controlled and mitigated. It is the Company’s intention to continue to employ state-of-the art management practices and to employ the best project managers and superintendents resulting in producing the most value possible on our customers’ projects.

 

Pernix Group may pursue opportunities at the municipal and state levels. We may consider international projects but we will be extremely selective and only do so when the customer is very creditworthy and meets certain Company-established criteria. The Company may also bid on U.S. based non-government projects if the customers are creditworthy and the projects meet the Company’s financial pre-requisites and conditions.

 

Although our focus historically has been on the international markets, the Company intends to pursue U.S. government projects located in the continental United States wherever possible. In furtherance of this effort the Company is developing a strategy to secure and expand its bonding capacity and to identify well situated business partners.

 

Transmitter System Design, Installation and Service Segment

 

The name TransRadio dates back to 1918 when it was founded as a subsidiary of TELEFUNKEN.  A year later in 1919, TransRadio made history by introducing duplex transmission. Paying tribute to the famous name TransRadio, the new name symbolized the transition from the analogue into the digital world of radio. Today TransRadio develops, produces and distributes transmitting and receiving equipment for broadcast and news transmission, and provides services for transmitter systems. TransRadio provides high power radio transmitters to a host of customers through contracts for projects located primarily in Europe, Africa and Asia and delivers customer-tailored solutions. The core products include VHF/FM and AM transmitters and digital radio mondiale (“DRM”) transmitter systems. The professional service of TransRadio ranges from the delivery of the transmitters, antennas, power supplies and air-conditioning systems to the management of turnkey projects, including all facilities to operate a broadcasting station.

 

10



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Power Generation Services Segment

 

The Company seeks to conduct its construction and power business independently and through strategic joint ventures and other alliances. Pernix Group is committed to pursuing clean and renewable energy projects in addition to its historical energy business that has been focused on building and operating fossil fuel power generation plants. All marketing and business development activities in the North Pacific and the Oceania regions are directed through TCNMI’s Saipan office.

 

The Company is uniquely situated to bring state of the art construction and design capabilities to its power generation/utility customers. As a potential stake holder in BOOT or IPP power contracts, Pernix Group would be involved not only on the operations and financial side of projects, but also in constructing the power plants thereby giving us a vested interest to ensure that the power facilities are built under the most stringent and highest international standards.  We believe that this approach will be very appealing to our customers and will give Pernix Group a competitive advantage.

 

Pernix Group also has longstanding financial relationships with many international banks and equity investors.  Although the debt and equity markets have experienced substantial changes in the past two years and there is no assurance that we will be able to raise financing when needed or on acceptable terms, we continue to feel confident in our ability to raise the required equity and project financing necessary to pursue financially sound and bankable energy projects that meet our investment criteria.

 

Operation of Existing Power Generation Plants - Pernix Group has designed, built and currently operates and maintains, on a 20-year contract, a 20 MW diesel fired power plant on the Island of Tinian in the CNMI. We also built power plants in Fiji and currently operate and maintain, on a 20-year contract basis with the Fiji Electrical Authority (“FEA”), two separate plants with a total output of 78 MW.

 

The Company maintains a wholly owned subsidiary in the CNMI.  This subsidiary, Telesource CNMI, Inc. (TCNMI) is located on the Island of Saipan with operations on the Island of Tinian, both islands being part of the CNMI, which is a U.S. Commonwealth.  Since its incorporation in 1997 TCNMI has executed over $80 million worth of construction work in the CNMI.  TCNMI, financed, designed and built a 20 MW power plant on the Island of Tinian on a 20 year BOOT basis. Our agreement with the Commonwealth Utility Corporation (“CUC”) stipulates that we sell power into the grid based on contractually determined rates and without risk of fuel cost fluctuation. The contract for this project will expire in 2020; however, a 2001 change order provides the customer with an early termination option beginning on March 31, 2010 and available annually thereafter; however, the customer is required to give a nine-month notice and to pay an early termination fee of $6,000,000 if they choose to exercise the early termination option. No notice of early termination has been received by TCNMI or the Company. The change order also prohibits the customer from purchasing power on Tinian from any source other than TCNMI for the first 30 MW. The expanded agreement does not require additional performance by TCNMI with respect to building additional power generation capacity. The construction loan for the project was repaid in full during 2008 and the Company’s recorded remaining exposure to CUC is approximately $317K consisting of accounts receivable (net of allowance) that is secured by the plant title that is held by the Company / TCNMI. The plant title will be transferred from TCNMI to CUC upon CUC’s satisfaction of all contractual obligations to TCNMI.

 

TFL has a 20-year contract with the FEA to operate and maintain two separate diesel-fired power generation plants, with a total output of 78 MW.  The power produced at the power plants is connected directly into the main power grid of Fiji.  In addition, our contract is to sell power on a wholesale level at a contractually determined rate without assuming the risk of fuel price fluctuation.  The Company has been operating in Fiji for over eight years and is attempting to develop and expand its services in the country and the South Pacific region.

 

With respect to future power segment opportunities, based on previous experience, extensive research and basic knowledge of the energy markets, management believes there will be a growing demand for power around the world while competition, deregulation and current economic conditions could limit the market potential and opportunities.  However, future demand for these services is expected to grow due to the need to supplement or replace aging equipment coupled with the need for expansion and applications that operate at a lower cost. The strongest growth rates in electricity consumption are projected for the developing world. Our focus will be on small power plants with generating capacity of less than 75 MW given the Company’s experience in managing the related regulatory and environmental demands of plants of this size.

 

11



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The interim condensed consolidated financial statements and notes thereto of Pernix Group have been prepared by management without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, the Company believes that the disclosures are adequate to make the information presented not misleading.  The statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented.  All such adjustments are of a normal and recurring nature.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2009 Annual Report on Form 10-K.  The results of operations for the interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2010.

 

Revenue Recognition

 

Construction Revenue

 

Revenue from construction contracts are recognized using the percentage-of-completion method of accounting based upon costs incurred and estimated total projected costs. Our current projects with the United States Government are design/build contracts with a fixed contract price and include provisions of termination for convenience by the U.S. Government. Such provisions also allow payment to us for the work performed through the date of termination.

 

The Company only uses approved contract changes in its revenue recognition calculation.  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.  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, 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 will include costs associated with these claims in their 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. 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), and interest associated with construction projects, and insurance costs.  The Company records a portion of depreciation in cost of revenue. Contracts frequently extend over a period of more than one year and 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. Claims for additional contract revenue are recognized in the period when it is probable that the claim will result in additional revenue and the amount can be reasonably estimated.

 

Transmitter Revenue

 

Contracts for TransRadio products and services generally contain customer-specified acceptance provisions. The Company evaluates customer acceptance by demonstrating objectively that the criteria specified in the contract acceptance provisions are satisfied and recognizes revenue on these contracts when the objective evidence and customer acceptance are demonstrated.  Certain contracts include prepayments, which are recorded as a liability until the customer acceptance is received, at which time the prepayments are recorded as revenue.

 

Certain TransRadio contracts require training services separate from acceptance of provisions and are generally provided after the delivery of product to the customer.  These services are a separate element of the contract that is accounted for as revenue is earned.  The amount attributable to services is based on the fair value of the services in the marketplace and is typically stipulated separately with the customer.

 

12



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Power Production Revenue

 

The Company receives fixed and 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.

 

Revenue associated with the sale of the Tinian power plant constructed and sold under a sales-type lease, measured as the present value of noncancelable rents, was recognized in connection with recording the loss on sale in 1997 and 1998. The Company recognizes finance lease revenue on the resulting sales-type lease receivable at a constant rate using the interest method. Service revenues received from operating and maintaining the Tinian power plant for the duration of the lease are recognized as earned based on actual kilowatt hours of electricity produced and delivered to the lessee’s customers. To the extent that variable payments based on kilowatt-hours of production exceed the fair value of operation and maintenance services provided, the Company recognizes such contingent payments as additional finance lease revenue as they are earned.  The sales- type lease ended in February of 2009 and as such, all related lease activity related to the Tinian power plant was terminated in 2009.

 

Recently Issued Accounting Pronouncements

 

In April 2009, the FASB issued new accounting guidance on fair value measurements. The new guidance impacts certain aspects of fair value measurement and related disclosures. The new guidance was effective beginning in the second quarter of 2009. The impact of adopting this new guidance did not have a material effect on the Company’s consolidated results of operations or financial position.

 

In June 2009, the FASB issued new accounting guidance related to the accounting and disclosures for transfers of financial assets. This guidance will require entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk with respect to the assets. This guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted the guidance on January 1, 2010 and it did not have a material impact on the consolidated financial statements.

 

In June 2009, the FASB issued new accounting guidance to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance is effective for fiscal years beginning after November 15, 2009.  The Company adopted the guidance on January 1, 2010 and it did not have a material impact on the consolidated financial statements.

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance entitled, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“ASC”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This new guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and was adopted by the Company during the third quarter of 2009. The adoption of this guidance has changed how we reference various elements of GAAP when preparing our financial statement disclosures, but did not have an impact on the Company’s consolidated financial statements.

 

In September 2009, the accounting standard regarding arrangements that include software elements was updated to require tangible products that contain software and non-software elements that work together to deliver the products essential functionality to be evaluated under the accounting standard regarding multiple deliverable arrangements. This standard update must be adopted no later than January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. We are currently evaluating the impact this new standard update will have on our consolidated financial statements.

 

In October 2009, the accounting standard regarding multiple deliverable arrangements was updated to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update must be adopted no later than January 1, 2011, and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. We are currently evaluating the impact this standard update will have on our consolidated financial statements.

 

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Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Effective January 1, 2010, the Company adopted changes issued by the FASB on January 6, 2010, for a scope clarification to the FASB’s previously-issued guidance on accounting for noncontrolling interests in consolidated financial statements. These changes clarify the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a consolidated subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. The adoption of these changes had no impact on the Consolidated Financial Statements.

 

Effective January 1, 2010, the Company adopted changes issued by the FASB on February 24, 2010, to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued, otherwise known as “subsequent events.” Specifically, these changes clarified that an entity that is required to file or furnish its financial statements with the SEC is not required to disclose the date through which subsequent events have been evaluated. Other than the elimination of disclosing the date through which management has performed its evaluation for subsequent events, the adoption of these changes had no impact on the Consolidated Financial Statements.

 

In April 2010, the Financial Accounting Standard Board (“FASB”) ratified a consensus of the Emerging Issues Task Force related to the milestone method of revenue recognition. The consensus will codify a method of revenue recognition that has been common practice. Under this method, contingent consideration from research and development activities that is earned upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. This guidance is effective for annual periods beginning on or after June 15, 2010, but may be early adopted as of the beginning of an annual period. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position and results of operations.

 

Reclassification of Cost of Revenues

 

During the 2nd quarter of 2010, the Company determined that $720K of Cost of Revenue expenses had been improperly classified to Operating Expenses in the March 31, 2010 Condensed Consolidated Statements of Operations (unaudited) (“Statement of Operations”).  The expenses included personnel, occupancy and other costs that are related to revenue recognized during the 1st quarter of 2010.  The affect of this reclassification increased Transmitter design and installation cost and reduced Gross Profit in the Cost of Revenue section of the Statement of Operations for the three months ended March 31, 2010 by $720K.  Therefore, the Company reclassified the $720K improperly classified amounts from the 1st quarter of 2010 during the second quarter of 2010.  As noted earlier, the reclassification of the $720K to Cost of Revenue came from Operating Expenses.  The following specific Operating Expense categories were reduced as a result of the reclassification of Cost of Revenues; Salaries and employee benefits by $368K, Occupancy by $46K and General and administrative by $306K.

 

This reclassification did not impact the Operating Loss, Consolidated Net Loss, Statement of Cash Flows, financial position or the per share loss as reported.  Therefore, no adjustment to retained earnings or other components of equity were impacted.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current year presentation.

 

3.     Liquidity

 

As of September 30, 2010, the Company’s total assets exceeded total liabilities by $9.0 million.  This was a $2.4 million decline from December 31, 2009.  In the future, the Company expects to rely on capital contributions from its primary shareholders, Ernil Continental, Halbarad Group Ltd and SHBC as well as bank financing to support its operations.  As of September 30, 2010, the Company had outstanding short term debt of $1.4 million, an accumulated deficit of $68.8 million and total stockholders’ equity of $7.7 million.

 

The Company incurred an operating loss of $2.6 million and an operating income of $0.8 million for the nine month periods ended September 30, 2010, and September 30, 2009, respectively.  The Company incurred a net loss to common shareholders of $2.8 million and net income of $0.1 million during the nine months ended September 30, 2010 and September 30, 2009, respectively.

 

Cash used in operating activities was $0.4 million compared to cash used of $3.3 million for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.  Funds used in investing activities for the nine month periods ended September 30, 2010 and September 30, 2009 were $1.2 million and $49K, respectively.  Funds provided by financing activities and

 

14



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

representing either common or preferred stock issuances or capital contributions amounted to $1.7 million and $0 for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.

 

4.      Acquisitions of a Business

 

On December 28, 2009, Pernix Group, Inc. purchased 54.4% of the outstanding common voting shares (or 815,650 shares) of TransRadio SenderSysteme, Berlin, AG (“TransRadio”) from two shareholders of TransRadio. The Company purchased 650,000 shares at $2.70 per share from Lorna Continental, S.A. and 165,650 shares at $2.70 per share from Senna Finanz Holding, A.G. The total consideration paid for both transactions was $2,202,255.  The acquisition was financed through the sale of 2,934,000 shares of the Company’s common stock yielding $2,200,500.  The sale of these shares was to Ernil Continental, SA, BVI and Halbarad Group, Ltd., BVI who currently own approximately 85.3% of Pernix Group’s outstanding shares.

 

On March 25, 2010 the Company acquired an additional 23.6% of the outstanding common voting shares (or 354,350 shares) of TransRadio for $950,154, bringing the Company’s ownership of TransRadio to a total of 78%.  The purchase of additional shares was financed through the sale of 1,306,668 shares of the Company’s common stock yielding $980,001, again to Ernil Continental, SA, BVI and Halbarad Group, Ltd., BVI. Prior to the March 25, 2010 transaction, the Company already maintained control of TransRadio and as such recorded the March 25, 2010 acquisition as a transaction resulting in no gain or loss.  As of September 30, 2009 Pernix Group held a total of 1,170,000 common voting shares of the total 1,500,000 TransRadio shares issued and outstanding.  The following schedule presents the impact to noncontrolling interests that resulted from the acquisition of the additional shares:

 

 

 

Nine months
ended September
30,
2010

 

TransRadio loss attributable to Pernix Group, Inc.

 

$

(2,210,848

)

Transfers from the noncontrolling interest:

 

 

 

Increase in Pernix Group Inc.’s paid-in capital for purchase of 354,350 TransRadio common shares

 

5,235

 

Net transfers from noncontrolling interest

 

5,235

 

Change from net loss attributable to the stockholders of Pernix Group, Inc. and transfers to noncontrolling interest

 

$

(2,205,613

)

 

TransRadio is engaged in the development, production and distribution of transmitting and receiving equipment for broadcast and news transmission, and includes other related services. TransRadio specializes in research, development and design of modern AM, VHF/FM and DRM transmitter systems and delivers customer-tailored solutions. The professional services of TransRadio range from the delivery of transmitters, antennas, power supplies and air-conditioning systems to the management of turnkey projects, including all facilities to operate a broadcasting station. The purpose of the TransRadio acquisition is to grow the Company’s operations globally in a manner that utilizes our strong international project management, engineering strengths and experience in performing construction type projects for government entities.

 

In connection with the acquisition, the fair value of net assets acquired less the fair value of the noncontrolling interest in TransRadio exceeded the purchase price the Company paid for its interest in TransRadio, resulting in a bargain purchase gain of $5.2 million, net of $0.6 million of deferred tax impact related to the intangible assets.

 

In connection with the initial recording of the acquisition, a $1.8 million fair value of the noncontrolling interest was determined based on the recent transactions for noncontrolling shares based on the stock trading price.  In addition, intangible assets identified in connection with the TransRadio acquisition by major classes are presented below along with the anticipated amortization period and amortization expense for the next five years.  No significant amortization expense was incurred during 2009 related to these assets.

 

 

 

Amortization period

 

Annual
Amortization
Amount 2010

 

Annual
Amortization
amount 2010 - 2014

 

Accumulated
Amoritzation as of
September 30, 2010

 

Description of identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationship

 

10 years

 

$

156,308

 

$

156,308

 

$

117,231

 

Order backlog

 

1 year

 

$

292,178

 

N/A

 

$

292,178

 

Total Amortization for the period

 

 

 

$

448,486

 

$

156,308 per year

 

$

409,409

 

 

The trade name is not subject to amortization as it has an indefinite useful life.

 

15



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The unaudited actual (2010) and pro forma (2009) financial information in the table below summarizes the combined results of operations of the Company and TransRadio as though TransRadio had been combined as of the beginning of each of the periods presented. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the period, or that may result in the future.

 

 

 

For the nine months ended September 30,

 

 

 

2010

 

2009

 

Net income (loss)

 

$

(3,392,050

)

$

761,873

 

Pro forma basic earnings (loss) per share:

 

$

(0.02

)

$

0.01

 

Pro forma diluted earnings (loss) per share:

 

$

(0.02

)

$

0.01

 

Net income (loss) attributable to controlling interests

 

$

(2,760,709

)

$

618,351

 

Pro forma basic earnings (loss) attributable to controlling interests per share:

 

$

(0.02

)

$

0.00

 

Pro forma diluted earnings (loss) attributable to controlling interests per share:

 

$

(0.02

)

$

0.00

 

 

5. Short-Term borrowings:

 

The Company’s subsidiary, TransRadio, has a €500,000 (approximately $680,600 at September 30, 2010) bank credit agreement with a German bank, which renews annually. Borrowings under the credit agreement are unsecured. Interest is charged at the rate of 8.5% per annum.  As of September 30, 2010, the credit line has not been drawn upon.

 

TransRadio has outstanding short term debt at September 30, 2010 with Bent Marketing Ltd amounting to $408,360 (€300,000) and Fedor Commercial Corporate Loans amounting to $967,000 (€710,403).  These loans are due in full at December 31, 2010 and have an interest rate of 5%.  Both loans are secured through the assignment of the Qatar contract payments.

 

The Company has recorded accrued interest of $52,617 associated with the two loans as of September 30, 2010.

 

6.  Equity

 

Preferred Stock

 

The Company has 50 million shares of authorized Preferred Stock.  Ten million of these shares have been designated as Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) and during 2010, 2,000,000 shares were designated as Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”).  As of September 30, 2010 and December 31, 2009 38 million shares and 40 million shares, respectively, were undesignated.

 

Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at the annual rate of 6.5%, have no voting rights and rank senior to common stock.  As of September 30, 2010 and December 31, 2009, no Series A Preferred Stock has been issued.

 

Holders of Series B Preferred Stock are entitled to receive 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 Preferred Stock with respect to dividends and upon liquidation.  During the nine months ended September 30, 2010, the Company issued 200,000 shares of Series B Preferred Stock.  In October 2010, the Company issued 189,250 shares of Series B Preferred Stock (see note 18).  Each share of Series B Preferred Stock is convertible into common stock using the conversion rate as defined in each Series B Preferred Stock Purchase Agreement.  As of September 30, 2010, and December 31, 2009, 200,000 and 0 shares, respectively, of the Series B Preferred Stock were issued and outstanding.

 

Common Stock

 

As of September 30, 2010 and December 31, 2009, 140,881,235 and 139,574,567 shares of the Company’s common stock were issued and outstanding, respectively.

 

7.  Computation of Consolidated Net (Loss)/Income Per Share

 

Basic and diluted consolidated net (loss)/income per common share are presented in accordance with the Statement of Financial Accounting Standards Earnings Per Share disclosure, for all periods presented. In accordance with the pronouncement, basic

 

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PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and diluted consolidated net (loss)/income per common share have been computed using the weighted-average number of shares of common stock outstanding during the periods.

 

The Series B Preferred Stock, stock options, stock warrants, and convertible debt are not included in the computation of diluted consolidated net (loss)/income per common share because the inclusion would be anti-dilutive (i.e., reduce the net loss per share). The total numbers of such shares excluded from diluted consolidated net (loss)/income per common share were 33,333,334 shares for the nine months ended September 30, 2010 and 180,000 shares for the nine months ended September 30, 2009.

 

8.  Commitments and Contingent Liabilities

 

The Company is involved in various lawsuits arising in the ordinary course of business.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

 

In 1999, Telesource CNMI, Inc. was awarded a contract to build 45 housing units for the Northern Mariana Housing Agency, a government unit of the CNMI. The houses were built and subsequently occupied. The Northern Marianas Housing Corporation has filed a lawsuit against Telesource CNMI, Inc. and two other parties for approximately $3.0 million in damages related to this project. These claims involve allegations of various construction, design and other defects.  Subsequently, homeowners in the project filed their own and/or joined into this action. The consolidated matter is Case No. 06-0123, pending in the Superior Court for the Commonwealth of the Northern Mariana Islands. The Company and other defendants also have filed counter- and cross-claims.  The Company estimates that, if the claims against it are successful, the Company may have an estimated liability in the range of $500,000 to $1,200,000. The Company recorded a $300,000 estimated loss during 2004, $200,000 during 2006, and an additional $609,000 during 2007 with respect to these claims.  In 2007, the Company paid $139,000 to claimants resulting in a remaining accrual of $970,000 at December 31, 2007.  In 2008 the Company paid an additional $92,817 to claimants reducing the accrual to $877,183 at December 31, 2008.  No incremental accruals or payments were made during 2009 or the nine months of 2010 and the Company continues to defend itself in the litigation.  The Company has denied any liability and will aggressively defend itself to mitigate and/or dismiss the claims against it.

 

Pernix Group’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 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 $1,250,000 (approximately USD $669,250 at September 30, 2010) in accordance with its agreement with the Fiji Electric Authority.

 

The Company offers warranties on its construction services and power generating plants. The Company does not maintain any material warranty reserves because these warranties are usually backed by warranties from its vendors. 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 outlay substantial funds, which could harm its financial condition.

 

The Company assumed the warranty obligations of TransRadio in connection with the acquisition in December, 2009. As of September 30, 2010, the accrued warranty obligation of TransRadio amounts to $169,469. The warranty accruals each period approximate 0.06% of TransRadio sales based on historical experience.

 

The Company has an agreement with the Commonwealth of the Northern Mariana Islands to manage one of their power plants.  In accordance with Change Order No. 3 of this agreement, the Company is required to upgrade the power distribution system in certain areas of Tinian Island.  The Company is responsible for the costs of the upgrade which include labor and material.  The Company has incurred approximately $1,250,176 in costs associated with this upgrade through September 30, 2010.  The Company will be seeking certification of the upgrade by the client.  Such certification includes certain issues to be negotiated that may affect the remaining costs to complete the upgrade.  Generally, TCNMI has been diligent in completing work outlined in the specifications on a line-by-line basis and has received acceptance from CUC for ongoing work in the same manner.  Although the Company believes it sufficiently completed the upgrade in 2007, some minor additional costs may still be incurred.

 

The Company operates a power plant on the island of Tinian.  The power plant requires a permit with the local Department of Environmental Quality.  The Company currently has a temporary permit and expects to receive a permanent permit.  However, substantial consequences could occur if the Company does not receive a permanent permit.

 

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PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Minimum rental commitments under all noncancelable-operating leases, primarily related to property, vehicles, and construction equipment, in effect at September 30, 2010 are:

 

Year

 

Total Lease
payments

 

2010

 

$

171,792

 

2011

 

610,327

 

2012

 

562,800

 

2013

 

10,419

 

2014

 

2,554

 

 

On April 1, 2007 the Company entered into a sublease with Computhink, a related party, for a term of four years from May 1, 2007 through April 30, 2011.  The sublease calls for a base rental payment of $6,791 per month in the first year with a 3.0% escalation in the monthly rate in each of the three subsequent years.  Future minimum lease payments at September 30, 2010, for those leases having an initial or remaining non-cancelable lease term in excess of one year, are included in the table above.

 

We lease certain buildings, cars and equipment in Germany under non-cancelable operating leases. The building and car leases expire in 2012 and equipment leases expire in 2010. The leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs.

 

9.  Work in Process and Inventories

 

As of September 30, 2010 and December 31, 2009 the components of inventories are as follows:

 

 

 

2010

 

2009

 

Work in process

 

$

4,363,246

 

$

4,036,546

 

Raw materials

 

$

3,549,608

 

$

3,563,635

 

Supplies

 

1,542,783

 

1,309,823

 

 

 

 

 

 

 

Inventories

 

$

5,092,391

 

$

4,873,458

 

 

Work in Process inventory represent the costs associated with manufacturing the TransRadio transmitter equipment for signed contracts with customers and potential customers.   Included in these costs are material, labor and charges associated with certain subassemblies manufactured by third parties.   Raw materials consist of various components that are sold as spare parts or are incorporated in the manufacture of transmitter equipment.  The supplies inventory represents the value of spare parts maintained by the company for use in the diesel power generators.

 

10. Financial Instruments With Off-Balance Sheet Risk and Concentrations of Credit Risk

 

We enter into various arrangements not recognized in our consolidated balance sheets that have or could have an effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. The principal off-balance sheet arrangements that we enter into are non-cancelable operating leases. Minimum rental commitments under all noncancelable-operating leases with a remaining term of more than one year are primarily related to property, vehicles, and equipment.

 

11. Fair Value Disclosures

 

The Company’s financial instruments include marketable securities and foreign currency contracts. Foreign currency contracts are recorded based on the applicable foreign currency spot rate as of the balance sheet date.

 

12. Related Party Transactions — Not described Elsewhere

 

The Company’s shareholders include SHBC, which holds less than 6% of Pernix Group’s stock at September 30, 2010.    SHBC is a civil, electrical and mechanical engineering firm and construction contractor with 1,750 employees and over 50 years’ experience.

 

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PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Furthermore, as noted earlier, SHBC and Pernix Group have formed a joint venture (the Pernix/SHBC JV).  This joint venture currently has a contract to construct the new U.S. Embassy in Fiji.  The joint venture limited partnership agreement between SHBC and Pernix Group also requires a payment to SHBC of 6.5% per annum of the unreturned capital.

 

The following table provides a summary of financial information related to all services provided by SHBC to the Company:

 

 

 

Nine Months
Ended
September
30, 2010

 

Nine Months
Ended
September
30, 2009

 

Consulting Fees

 

$

 

$

25,000

 

Interest (on unreturned capital)

 

57,477

 

56,219

 

Fees on standby letters of credit

 

 

30,890

 

Total

 

$

57,477

 

$

112,109

 

 

The Company shares office space with a related company named Computhink, which is owned by a company related to SHBC.  The Computhink charges include rent and utilities for office space the Company occupies, computer hardware and software services that Computhink provides, and other outside services.  Computhink charges to the Company were $84,018 and $81,368 for the nine months ended September 30, 2010 and September 30, 2009, respectively.

 

In December of 2009 the Company agreed to loan Computhink $180,000 at an interest rate of 6.5%.  The loan was paid in full by Computhink in February of 2010.

 

The Company also utilizes office space and land from Retsa in Saipan and Tinian.  Retsa is an affiliated company of SHBC.  The Company was invoiced $1,292 for the nine months ended September 30, 2010 and invoiced in the amount of $921 for the same period in 2009.

 

Total related party accounts payable are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Accounts payable to Computhink

 

$

4,331

 

$

6,218

 

Accounts payable to Retsa

 

2,269

 

977

 

Total

 

$

6,600

 

$

7,195

 

 

13.  Bank Deposits in Excess of FDIC

 

The Company maintains its cash accounts at numerous financial institutions.  Certain of these financial institutions are located in foreign countries which do not have Federal Deposit Insurance Corporation (“FDIC”) insurance.  Those accounts covered by the FDIC are insured up to $250,000 per institution through December 31, 2013.  As of September 30, 2010, the amount of bank deposits that exceeded or are not covered by the FDIC insurance was approximately $2,892,119, of which $908,255 is restricted cash in Germany.

 

14.  Business Segment Information

 

Pernix Group, Inc. (formerly known as Telesource International, Inc.), was incorporated in Delaware in 1994.  As used herein, “ Pernix Group” consists of Pernix Group, Inc., Telesource (Fiji) Limited (TFL), Telesource CNMI (TCNMI), Pernix/Sayed Hamid Behbehani & Sons, Co. Joint Venture (Pernix/SHBC JV), Telesource SHBC (Fiji) Limited (TSF), Pernix Universal Energy, JV and TransRadio SenderSysteme Berlin AG (TransRadio).

 

Pernix Group specializes in commercial construction mainly under government contracts, the delivery of power production and transmitter design and installation.

 

The Company is headquartered in Lombard, Illinois and operates predominantly outside of United States (U.S.).  The Company manages these non — U.S. based operations from its U.S. based headquarters.  Pernix Group, Inc. (not Pernix/SHBC JV) was awarded a contract with regard to a second phase of construction at the Embassy in Fiji in April of 2010.  TFL is located in Fiji and its primary focus is producing power.  TCNMI is located in the Commonwealth of Northern Mariana Islands and its primary focus is producing power.  The Pernix/SHBC JV is based out of the U.S. and its primary focus is construction.  TSF is located in Fiji and its

 

19



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

primary focus is construction.   TransRadio is based out of Germany and the primary focus is transmitter design and installation throughout the world.

 

Pernix Group Inc. has selected to organize its segment information around its products and services.  Pernix Group, Inc. has three operating segments: construction services, transmitter design and installation and power generation and construction of power plants.  The power generation and construction of power plants segment includes an immaterial amount of sales-type lease revenues in 2009.  There were no material amounts of transfers between segments. Any inter-segment revenues have been eliminated. The following table sets forth certain segment information for the periods indicated:

 

 

 

For the Nine Months Ended September 30, 2010

 

 

 

Power Generation

 

 

 

Transmitter

 

 

 

 

 

and Construction of

 

 

 

design and

 

 

 

 

 

Power Plants

 

Construction

 

installation

 

Total

 

Revenue

 

$

4,921,312

 

$

4,924,492

 

$

7,581,681

 

$

17,427,485

 

Interest expense/(income), net

 

(7,097

)

56,788

 

194,909

 

244,600

 

Depreciation and amortization

 

64,364

 

207

 

495,472

 

560,043

 

Net income/(loss) attributable to the stockholders of Pernix Group Inc. and Subsidiaries

 

(627,697

)

77,836

 

(2,210,848

)

(2,760,709

)

Total capital expenditures

 

52,011

 

725

 

185,902

 

238,638

 

Total assets

 

6,773,553

 

672,284

 

14,233,277

 

21,679,114

 

 

 

 

For the Nine Months Ended September 30, 2009

 

 

 

Power Generation

 

 

 

Transmitter

 

 

 

 

 

and Construction of

 

 

 

design and

 

 

 

 

 

Power Plants

 

Construction

 

installation

 

Total

 

Revenue

 

$

4,000,775

 

$

8,549,011

 

$

 

$

12,549,786

 

Interest expense/(income), net

 

(11,925

)

26,102

 

 

14,177

 

Depreciation and amortization

 

71,465

 

23,154

 

 

94,619

 

Net income/(loss) attributable to the stockholders of Pernix Group Inc. and Subsidiaries

 

(715,381

)

817,187

 

 

101,806

 

Total capital expenditures

 

50,333

 

 

 

50,333

 

Total assets

 

4,282,707

 

3,048,472

 

 

7,331,179

 

 

 

 

 

For the Three Months Ended September 30, 2010

 

 

 

Power Generation

 

 

 

Transmitter

 

 

 

 

 

and Construction of

 

 

 

design and

 

 

 

 

 

Power Plants

 

Construction

 

installation

 

Total

 

Revenue

 

$

1,843,911

 

$

2,636,624

 

$

2,094,534

 

$

6,575,069

 

Interest expense/(income), net

 

(103

)

19,309

 

79,152

 

98,358

 

Depreciation and amortization

 

21,377

 

(428,910

)

66,355

 

(341,178

)

Net income/(loss) attributable to the stockholders of Pernix Group Inc. and Subsidiaries

 

29,043

 

(5,906

)

(673,063

)

(649,927

)

Total capital expenditures

 

26,182

 

725

 

151,065

 

177,972

 

Total assets

 

6,773,553

 

672,284

 

14,233,277

 

21,679,114

 

 

 

 

For the Three Months Ended September 30, 2009

 

 

 

Power Generation

 

 

 

Transmitter

 

 

 

 

 

and Construction of

 

 

 

design and

 

 

 

 

 

Power Plants

 

Construction

 

installation

 

Total

 

Revenue

 

$

1,426,754

 

$

2,210,327

 

$

 

$

3,637,081

 

Interest expense/(income), net

 

(6,739

)

14,754

 

 

8,015

 

Depreciation and amortization

 

23,442

 

(196

)

 

23,246

 

Net income/(loss) attributable to the stockholders of Pernix Group Inc. and Subsidiaries

 

(151,402

)

672,719

 

 

521,317

 

Total capital expenditures

 

38,374

 

 

 

38,374

 

Total assets

 

4,282,707

 

3,048,472

 

 

7,331,179

 

 

20



Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Geographical Information

 

 

 

Total Revenue

 

Fixed Assets - Net

 

Location

 

Sep 30, 2010

 

Sep 30, 2009

 

Sep 30, 2010

 

Sep 30, 2009

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

4,925,147

 

$

8,560,778

 

$

4,717

 

$

15,951

 

Commonwealth of Northern Mariana Islands

 

1,394,970

 

1,236,239

 

9,183

 

11,363

 

Fiji

 

3,525,687

 

2,752,770

 

212,256

 

224,503

 

Sub-Total

 

9,845,804

 

12,549,787

 

226,156

 

251,817

 

 

 

 

 

 

 

 

 

 

 

Algeria

 

(17,857

)

 

 

 

 

 

 

Asia

 

84,443

 

 

 

 

 

 

 

Austria

 

34,151

 

 

 

 

 

 

 

England

 

15,538

 

 

 

 

 

 

 

Esthonia

 

7,361

 

 

 

 

 

 

 

Ethiopia

 

969,390

 

 

 

 

 

 

 

Europe

 

62,794

 

 

 

 

 

 

 

France

 

47,355

 

 

 

 

 

 

 

Germany

 

2,087,363

 

 

 

483,082

 

 

 

Ghana

 

22,312

 

 

 

 

 

 

 

Qatar

 

2,703,932

 

 

 

 

 

 

 

Russia

 

144,584

 

 

 

 

 

 

 

Singapore

 

47,822

 

 

 

 

 

 

 

Spain

 

310,483

 

 

 

 

 

 

 

Switzerland

 

747,695

 

 

 

 

 

 

 

Taiwan

 

50,715

 

 

 

 

 

 

 

USA

 

261,167

 

 

 

 

 

 

 

Others

 

2,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub-Total

 

7,581,681

 

 

483,082

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

17,427,485

 

$

12,549,787

 

$

709,238

 

$

251,817

 

 

The September 30, 2010 revenues and fixed assets-net, include TransRadio information.  TransRadio was purchased at the end of 2009 and consequently, revenues and fixed assets-net information are excluded from the September 30, 2009 columns.

 

The basis used to attribute revenues to individual countries is based upon the country associated with the contract. (e.g., if contract is with a U.S. entity, then the revenues are attributed to the U.S.)

 

The joint venture with SHBC to build a U.S. Embassy in Fiji and Pernix Group, Inc.’s receipt of a contract for the second phase of construction work at this Embassy are the only current construction projects.

 

15.   Change in Estimate

 

During the second quarter of 2009, the Company concluded negotiations with the primary subcontractor on the Embassy project which converted the subcontract to a lump sum agreement.  During the third quarter the Company received a contract amendment increasing the contract value by $1.2 million. As a result of the revised agreement, the new contract amendment and improved cost control measures, the Company revised its estimated cost to complete for the Project.

 

In accordance with the FASB guidance pertaining to accounting for a change in an accounting estimate, the Company accounted for the change in estimated cost by applying the cumulative catch-up method.

 

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Table of Contents

 

PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16.    Billings in Excess of Cost on Uncompleted Contracts

 

Long-term construction contracts in progress are accounted for using the percentage-of-completion method. As of September 30, 2010 and December 30, 2009, respectively, balances for billings in excess of cost and estimated earnings were $412,763 and $529,995 respectively. Total billings for the projects in the first nine months of 2010 and 2009 totaled $4,807,261 and $5,376,198 respectively.

 

17.    Prepayments Related to Sales Contracts

 

Revenue on TransRadio contracts is generally recorded when the customer acceptance provisions of the agreements are met. Certain contracts require the customer to make advance payments to TransRadio to cover costs related to the design and / or procurement of the equipment.  As of September 30, 2010, the amount recorded as advanced payments received on account of orders is $3,999,051, which includes $224,949 that has been classified in long term liabilities.

 

18.    Subsequent Events

 

On October 4, 2010, the Company issued 85,150 shares of Series B Cumulative Preferred Stock to Halbarad Group, Ltd., BVI for $425,750 and 104,100 shares of Series B Cumulative Preferred Stock to Ernil Continental, S.A. BVI for $520,500.  The proceeds from these shares were used to purchase an additional 351,000 shares of TransRadio which were issued on October 29, 2010.  TransRadio’s board approved an increase of 442,200 Authorized shares.  Of the 442,200 shares Authorized, 351,000 shares were issued.  This increased the number of shares issued to 1,851,000 of which Pernix group owns 1,521,000 or 82%.

 

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

 

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.  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.  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 2009 annual consolidated financial statements and notes thereto included in the Company’s Form 10-K Annual Report filed with the Securities and Exchange Commission.

 

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, which requires the use of estimates on the future revenues and costs of a construction project.  Our current project is a design/build contract with a fixed contract price.  This contract is with the United States Government and includes provisions of termination for convenience by the party contracting with us; such provisions also allow payment to us for the work performed through the date of termination.  Revenues recognized under the Percentage of Completion method, require applying 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 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, we may 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 will include costs associated with these claims in their 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

 

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PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

“K” represents $1,000 when used below.

 

Results of Operations for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009

 

Revenues

 

Construction Revenues—Construction revenues decreased to $4.9 million from $8.5 million for the nine months ended September 30, 2010 compared to September 30, 2009.  The decrease is solely attributed to the U.S. Embassy Project in Fiji, which began in January 2007.  The Company has received two contracts with regard to the Embassy project.  The first contract, awarded in November 2006, was for approximately $42.6 million, while the second contract, (notice to proceed given on April 6, 2010) is for an $8.1 million.   Approximately 2.1% of the total project revenue related to the first contract was recognized during the first nine months of 2010 versus approximately 15.9% of total project revenue during the same period of 2009.  The first contract relating to the project was 99.3% complete at September 30, 2010 and 96.5% complete as of September 30, 2009, respectively.

 

For the nine months ended September 30, 2010 the revenue was driven by several factors all associated with the degree of completion of each contract.  In the first nine months of 2010, 48.5% of the second contract was completed which includes the startup phase as well as the interior fit out of office space.    The construction activities during the first nine months of 2009 were primarily related to the first contract and included activities such as window installation, finishing of testing of installed mechanical and electrical work and other processes related to completing the project.    The estimated $54.9 million combined revenue from the two contracts in connection with the U.S. Embassy project in Suva, Fiji, is recognized using the percentage-of-completion method of accounting.

 

Transmitter design and installation — Transmitter design and installation revenues relate to the TransRadio subsidiary which was purchased in December 2009.  Revenues are recognized pursuant to the terms of the contracts with the client, which requires customer approval of the operation of the equipment prior to invoicing.  Therefore revenue of $7.6 million for the first nine months represents those contracts that were completed during the first nine months of the year which received customer approval and release.  For the same nine month period ended on September 30, 2009, revenues of $13.5 million were recognized (although these amounts are not reported in the 2009 column as TransRadio was purchased in December, 2009).  Revenues vary depending upon the size and number of contracts completed during a period.  In 2010 there were three large contracts while in 2009 there were nine large projects contributing to the higher revenues.

 

Power Generation: Service Fees — Service fees increased $0.9 million (or 23.5%) to $4.9 million, from $4.0 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.  The increase was due to the combination of increased revenues in Fijian and CNMI operations.   Our Fijian operations contributed $773K to the increase due to larger demand of energy produced from the diesel versus hydro generated power.  FEA has several options to produce power, the most significant are diesel and hydro.  The hydro power’s availability is dependent upon the amount of rain the country receives.  Due to a shortage of rain throughout the year, FEA required more diesel-based power.   Revenue from the CNMI power plant increased by $164K due to a combination of contractually higher rates that went into effect in March of 2009 as well as slightly increased power production due to higher demand.

 

Costs and Expenses

 

Construction Costs - including Construction Costs — Related Party—Total construction costs, including construction costs — related party, decreased to $4.0 million from $7.3 million for the nine months ended September 30, 2010 compared to September 30, 2009.  As noted earlier, there are two contracts associated with the Embassy project, the first contract is near completion while the second contract was just started in the second quarter.  As the main Embassy contract nears completion, the Company experienced a decrease primarily in subcontractor, material and labor costs during the first nine months of 2010 compared to the same period in 2009.   The original contract was 99.3% complete at September 30, 2010 and 96.5% complete as of September 30, 2009.  Meanwhile, the new contract work began during the second quarter and contributed approximately $3.4 million to the costs included in this category for the nine months ended September 30, 2010.  Included costs in this category were primarily for labor, material and subcontractor costs associated with the project start up and the interior fit out of office space.

 

Transmitter design and installation cost — Transmitter design and installation costs are associated with the generation of revenues by TransRadio, which was acquired during December 2009.   The $5.5 million in cost of revenues for the period ended

 

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PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

September 30, 2010 compare to pre-acquisition costs of revenue amounting to approximately $8.1 million for the same period in 2009.  The $2.6 million decrease was due to lower sales for the same period in 2010.  On a percentage of revenue basis, Transmitter costs were higher in the 2010 period due to the product mix of the related revenues.

 

Power Generation:  Operations and Maintenance Cost—Operations and maintenance costs increased by $137K for the nine months ended September 30, 2010 to $2.2 million as compared to $2.1 million for the same period in 2009.  The increase in these costs was associated with normal maintenance costs that can vary due to the amount and type of spare parts required as well as the production hours on the engines.

 

Gross Profit

 

Gross profit increased by $2.5 million for the nine months ended September 30, 2010 to $5.7 million as compared to $3.2 million in 2009.  The increase was due primarily to the acquisition of TransRadio, which contributed $2.1 million of the increase.  In addition, power generation activities contributed $795K due to increased production that increased the variable fees without a related increase in cost of revenues.  The construction segment saw a decrease of $390K in gross profit as overall revenues were decreased year over year.

 

Operating Expenses

 

Salaries and Employee Benefits—Salaries and employee benefits increased 293% to $4.8 million for the nine months ended September 30, 2010 from $1.2 million for the nine months ended September 30, 2009.  This increase was due primarily to the acquisition of TransRadio, which has a large engineering and support staff, the costs of which are included in this category.  In addition, approximately $437K of this increase is related to additional personnel hired over the last year to improve the quality of our bids and ultimately increase the number of awarded construction projects.

 

General and Administrative Expenses—General and administrative expenses were $3.0 million during the nine months ended September 30, 2010 or $1.9 million higher than the same period ended September 30, 2009.  The increase was due to the acquisition of TransRadio and represents primarily their costs for accounting, facility and related costs.  In addition, higher levels of construction bidding resulted in higher costs for traveling to the countries where the projects will be built.  This travel is necessary in order to evaluate the construction site, local laws and other related activities.

 

Other Income (Expense)

 

Other expense decreased by $88K during the first nine months of 2010 compared to the same period ended September 30, 2009.  This increase was due primarily to the effects of a favorable exchange rate and the resultant exchange gain when compared to the same period in 2009.  Offsetting the favorable foreign currency gain was interest expense of $195K related to the TransRadio short term borrowings.

 

Consolidated Net (Loss) Income

 

Consolidated net losses were $3.4 million for the nine months ended September 30, 2010 compared to a net income of $100K for the nine months ended September 30, 2009.  The increase in the net loss was primarily due to TransRadio which experienced a net loss of $2.8 million in the 2010 period.  Results from 2009 are not included in the period because TransRadio was acquired in December 2009.  CNMI and TFL combined net income improved $659K over the same period last year while construction and the Pernix corporate office decreased $1.4 million in the first nine months of 2010 as compared to 2009.

 

Liquidity

 

As of September 30, 2010, the Company’s total assets exceeded total liabilities by $9.0 million.  This was a $2.4 million decline from December 31, 2009.  In the future, the Company expects to rely on capital contributions from its primary shareholders, Ernil Continental, Halbarad Group Ltd and SHBC as well as bank financing to support its operations.  As of September 30, 2010, the Company had outstanding short term debt of $1.4 million, an accumulated deficit of $68.8 million and total stockholders’ equity of $7.7 million.

 

The Company incurred an operating loss of $2.6 million and an operating income of $0.8 million for the nine month periods ended September 30, 2010, and September 30, 2009, respectively.  The Company incurred a net loss to common shareholders of $2.8 million and net income of $0.1 million during the nine months ended September 30, 2010 and September 30, 2009, respectively.

 

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PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash used in operating activities was $0.4 million compared to cash used of $3.3 million for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.  Funds used in investing activities for the nine month periods ended September 30, 2010 and September 30, 2009 were $1.2 million and $49K, respectively.  Funds provided by financing activities and representing either common or preferred stock issuances or capital contributions amounted to $1.7 million and $0 for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.

 

Results of Operations for the three months ended September 30, 2010 compared to the three months ended September 30, 2009

 

Revenues

 

Construction Revenues—Construction revenues increased to $2.6 million from $2.2 million for the three months ended September 30, 2010 compared to September 30, 2009.  The increase is solely attributed to the U.S. Embassy Project in Fiji, which began in January 2007.  The Company has received two contracts with regard to the Fiji Embassy project.  The first contract, awarded in November 2006, was for approximately $42.6 million, while the second contract, (notice to proceed given on April 6, 2010) is for an estimated $8.1 million.  As the new contract for $8.1 was signed after March 31, 2010, approximately $2.6 million of the construction revenue reported in the third quarter was related to the new contract with the remaining $54K related to the original contract.   Approximately .1% of the original contract total project revenue was recognized during the three months ended September 30, 2010 versus approximately 2.3% of total project revenue during the same period of 2009.   During the third quarter of 2010, work related to the original contract was associated with “punch list” items; basically these are wrap-up activities.  Meanwhile, work on the second contract started to intensify as the interior office space construction work began.   The estimated $46.8 million revenue from this project is recorded on the Percentage of Completion method.  The first contract relating to the project was 99.3% complete at September 30, 2010 and 96.5% complete as of September 30, 2009.  The new contract, also recorded on the percentage of completion method was 48.5% complete as of September 30, 2010.

 

Transmitter design and installation — Transmitter design and installation revenues relate to the TransRadio subsidiary which was purchased in December 2009.  Revenues of $1.8 million for the three months ended September 30, 2010 represent those contracts that were completed during the third quarter of the year which received customer approval and release.  For the same three month period ended on September 30, 2009, revenues of $2.1 million were recognized (as TransRadio was purchased at the end of December 2009, revenues and costs for this period in 2009 are not included in the financial statements).  Revenues vary depending upon the size and number of contracts completed during a period.

 

Power Generation:  Service Fees —Service fees increased $417K (or 29.2%) to $1.8 million, from $1.4 million for the three months ended September 30, 2010 compared to the three months ended September 30, 2009.  The increase was due to the combination of increased revenues in Fijian and CNMI operations.  Fiji’s increased revenue in the amount of $391K was due to higher demand to produce diesel power by the Fiji Electric Authority (“FEA”)  FEA has several options to produce power, the most significant are diesel and hydro.  The hydro power’s availability is dependent upon the amount of rain the country receives.  Due to a shortage of rain during the second quarter, FEA required more diesel-based power.  Revenue from the CNMI power plant increased by $26K due to a combination of contractually higher rates that went into effect.

 

Costs and Expenses

 

Construction Costs—including Construction Costs— Related Party—Construction costs, including construction costs — related party, increased to $2.3 million from $1.4 million for the three months ended September 30, 2010 compared to September 30, 2009.  As the contract for the original Embassy project nears completion, the Company experienced a decrease primarily in subcontractor costs during the third quarter of 2010 compared to the same period in 2009.   The original contract for the embassy project was 99.3% complete at September 30, 2010 and 96.5% complete as of September 30, 2009.  Meanwhile, the work for the second contract of the Fiji embassy generated the increase in cost during the third quarter as the fit out of the interior office space continued and represented $2.2 million of the $2.3 million of construction costs reported during the quarter.

 

Transmitter design and installation cost — Transmitter design and installation costs are associated with the generation of revenues by TransRadio, which was acquired during December 2009.   The $1.4 million in cost of revenues for the three month period ended September 30, 2010 compare to pre-acquisition costs of approximately $3.8 million for the same period in 2009.   The $2.4 million decrease was due to costs on higher revenues in 2009 combined with the product mix of sales during the same period.

 

Power Generation: Operations and Maintenance Costs —Operations and maintenance costs increased $118K to $755K for the three months ended September 30, 2010 compared to $637K for the three months ended September 30, 2009.  The increase in these costs was associated with an increase in maintenance costs that can vary due to the number of hours that the engines have operated and amount and type of spare parts required.

 

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PERNIX GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Gross Profit

 

Gross profit increased by $584K for the three months ended September 30, 2010 to $2.2 million as compared to $1.6 million in 2009.  The increase was due to the acquisition of TransRadio and an increase in power generation gross profit, partially offset by lower construction profit.

 

Operating Expenses

 

Salaries and Employee Benefits—Salaries and employee benefits increased 325% to $1.7 million for the three months ended September 30, 2010 from $400K for the three months ended September 30, 2009.  This increase was due primarily to the acquisition of TransRadio, which has a large engineering and support staff, the costs of which are included in this category.

 

General and Administrative Expenses—General and administrative expenses were $0.8 million during the three months ended September 30, 2010 or $0.4 million higher than the same period ended September 30, 2009.  The increase was due to the acquisition of TransRadio and represents primarily accounting, facility and related costs.  In addition, increased country research (resulting in more travel and related expenses) was required for preparing bids on construction proposals.

 

Other Income (Expense)

 

Other expense increased by $37K during the third quarter of 2010 compared to the same period ended September 30, 2009.  This increase was due primarily to interest expense and an increase in foreign exchange losses.

 

Consolidated Net (Loss) Income

 

Consolidated net loss was $0.8 million for the three months ended September 30, 2010 compared to a consolidated net income of $0.5 million for the three months ended September 30, 2009.  The decrease was due to a combination of lower revenues and higher expenses for TransRadio combined with lower construction revenues.

 

ITEM 4T.    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 September 30, 2010. 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 Exchange Act 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.

 

There were no changes in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal controls over financial reporting during the nine month period ended September 30, 2010.

 

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

 

Not Applicable.

 

ITEM 1A.  RISK FACTORS

 

Not Applicable

 

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

 

On August 2, 2010 and on September 15, 2010, the Company issued 100,000 shares on each day of Series B Cumulative Convertible Preferred Stock pursuant to an exemption under regulation S of the Securities Act for $1,000,000.  The capital raised from these transactions will be used to fund operational expenses and construction related development costs.

 

On October 4, 2010, the Company issued 189,250 shares of Series B Cumulative Convertible Preferred Stock pursuant to an exemption under regulation S of the Securities Act for $946,250.  The capital raised from this transaction was used to acquire an additional 351,000 shares of TransRadio stock.

 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 5.    OTHER INFORMATION

 

Not applicable.

 

ITEM 6.    EXHIBITS

 

(a)             Exhibits.

 

Exhibit 3.1

 

Series A Certificate of Designation

 

 

 

Exhibit 3.2

 

Series B Certificate of Designation

 

 

 

Exhibit 31.1

 

Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act of 1934

 

 

 

Exhibit 31.2

 

Certificate 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 2002.

 

 

 

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 2002.

 

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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: November 15, 2010

/s/ Nidal Zayed

 

Nidal Z. Zayed

 

President and Chief Executive Officer

 

 

 

 

 

/s/ Greg Grosvenor

 

Greg Grosvenor

 

Vice President and Chief Financial Officer

 

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