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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

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)

151 E. 22nd Street
Lombard, Illinois 60148

(Address of principal executive offices, including zip code)

(630) 620-4787

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of Each Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes x No

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.  x Yes o No

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).  x Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

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

The aggregate market value of registrant’s common stock held by non-affiliates on June 30, 2011 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing price of a share of the registrant’s common stock on such date was approximately $228,007.

Number of shares of the registrant’s common stock outstanding as of March 30, 2012: 9,403,697

DOCUMENTS INCORPORATED BY REFERENCE: None.

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Disclosure Regarding Forward-Looking Statements

You are cautioned that the Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  When the words “believes,” “plans,” “anticipates,” “will likely result,” “will continue,” “projects,” “expects,” and similar expressions are used in the Form 10-K, they are intended to identify “forward-looking statements,” and such statements are subject to certain risks and uncertainties which would cause actual results to differ materially from those projected. Furthermore, the Company strategizes and objectively plans based upon certain current expectations and intentions which are subject to change at any time at the discretion of management and the Board. These forward-looking statements speak only as of the date this report is filed. The Company does not intend to update the forward-looking statements contained in this report, so as to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as may occur as part of its ongoing periodic reports filed with the United States (U.S.) Securities and Exchange Commission (SEC).

ITEM 1.    DESCRIPTION OF BUSINESS

In this report, we use the terms “Pernix Group,” “Pernix,” “the Company,” “we,” “us” and “our” to refer to Pernix Group, Inc. (formerly known as Telesource International, Inc.) and its consolidated subsidiaries. Unless otherwise noted, references to years are for fiscal years. We refer to the fiscal year ended December 31, 2011 as “fiscal 2011” and the fiscal year ended December 31, 2010, as “fiscal 2010.”

Overview

Pernix Group is a global company managed from Lombard, Illinois. The Company was formed in 1995 as Telesource International, Inc., a wholly-owned subsidiary of SHBC, a Kuwait-based civil, electrical and mechanical construction company. In 2001, the Company was incorporated in Delaware and became an SEC registrant. As of December 31, 2011, Pernix Group employs 175 people and is 96.8% owned by Ernil Continental, S.A., BVI., Halbarad Group, Ltd., BVI, and Affiliates. The Company conducts its operations through the parent and its eight subsidiaries.

Pernix Group is a diversified contractor that is engaged in three primary business segments: Construction Services as a Design-Build General Contractor in the public and private markets; Power Generation Services as a builder, manager and investor in Power Projects as an Independent Power Producer and as a General Contractor; and RF Transmitter Design, Installation and Service. Pernix has full-scale construction and management capabilities, with subsidiaries in the North Pacific islands of Tinian and Saipan, in the South Pacific islands of Fiji and Vanuatu, in Berlin, Germany, in Niger, Africa and in the U.S. We provide our services in a broad range of end markets, including construction, construction management, power, facility operations and maintenance services and broadcast and RF transmission markets.

The construction and power segments offer diversified general contracting, design/build and construction management services to public and private agencies. We have provided construction and power services since 1995 and have established a strong reputation within our markets by delivering complex projects and providing innovative facility operations and maintenance solutions to clients world-wide with an unwavering commitment to safety, quality, social responsibility and total customer satisfaction. We have established internationally experienced, high-performance management teams with a proven track record of successfully completing complex projects around the globe and in some of the most remote locations on the planet. We have over fifteen years of experience providing all of our services in international territories. We believe that these attributes are the foundation of Pernix’s success.

At the end of 2009, the design, manufacture, distribution and installation of RF transmitter systems and related services segment was acquired to serve as a global platform for cross-selling construction segment services. The acquired company, TransRadio SenderSysteme, Berlin, AG (TransRadio) had been a supplier to Pernix Group in connection with a broadcast station construction project that was previously completed on the remote island of Tinian. This acquisition was complementary to the Company’s core operations and augmented revenue. However, due to the violence and political turmoil from the “Arab Spring” in the Middle East coupled with the poor economic conditions in Europe, orders for transmitters and antennae have deteriorated and although the radio transmitter segment did win two contracts in March 2012, the Company does not know when historical levels of sales volumes will resume.  In March 2012, the Pernix Group management team requested and received approval from the Pernix Board of Director’s to pursue an expedited divestiture of the 82% interest in TransRadio. This divestiture is intended to curtail losses that have been generated by the radio transmitter segment and will allow the Pernix management team to focus its efforts on the Construction and Power Generation Services segments which it intends to grow organically and through acquisitions.  The Company executed a stock sale and transfer agreement for its equity interest in TransRadio on March 26, 2012 and closed the transaction on March 28, 2012. Management is in the process of determining the loss on the sale of TransRadio which it anticipates to be in the range of $1.5 million to $2.0 million.

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Pernix Group has transformed its operations from a capital intensive self-perform construction and power services company to a more agile, minimally leveraged design-build construction management services and facility O&M management company that utilizes a more collaborative approach with strategic partners who possess niche capabilities. Pernix Group provides its customers with solutions that meet their time and budget constraints. In doing so, Pernix Group has managed to develop strong partner and customer relationships, which are the drivers behind contract awards the Company received in 2011 totaling over $120.5 million, and a sole source Sather Air Force Base (Sather) CHU award in January 2012 that the Company anticipates will provide total revenue in the $95 million to $115 million range during 2012 and 2013. As of March 30, 2012, Pernix has received award notices and modifications totaling $50.2 million on this project.

Business Segments

General Construction

Our general construction services include comprehensive pre-construction planning and construction management services.  As a general contractor we have responsibility from award through the successful completion of each project we pursue.

We have developed an international network of suppliers and subcontractors that are capable of delivering products and services on a global basis. Together with these strategic partners we utilize niche capabilities and experience that cater to customer design, budget and schedule requirements. All of our construction management team members have worked on complex international projects. We have the expertise required to successfully conduct full-scale construction projects anywhere in the world. We have demonstrated that we can execute the most technically and environmentally challenging projects within time and budget parameters while meeting the exact quality and safety requirements of the project; exceeding our clients expectations at every opportunity.  Pernix Group has the ability to self-perform mechanical and electrical trades when doing so brings efficiencies and value to a project and our customers.

Many of our construction projects are for governmental owners, such as the US Department of State’s Bureau of Overseas Buildings Operations (OBO) as well as select foreign governments. In most instances the bidding process requires an initial pre-qualification stage, followed by a proposal submission stage for qualified contractors.  Pernix Group focuses its efforts in areas and on projects where we have a competitive advantage that is within our core competency. We minimize risk and develop winning strategies by thoroughly studying local markets, aligning ourselves with capable local or regional large prime-subcontractors, and establishing purchasing and logistics support locally, or regionally, whenever possible.  Our performance history and record of client retention demonstrate the successful formula Pernix and its partners have developed to grow our business and achieve customer satisfaction. To highlight our accomplishments, the OBO has awarded two contracts in 2011 totaling $120.5 million and in January 2012 a sole source award (Sather) that the Company expects will provide revenue in the $95 million to $115 million range to Pernix via its Pernix-Serka Joint Venture (PS JV). As of March 30, 2012, Pernix has received award notices and modifications totaling $50.2 million on this Sather project. PS JV has an office in Vienna, Virginia, in close proximity to U.S. Government agencies in order to closely tend to some of its most important customer relationships (including OBO) and to proactively manage contract execution for its customers.

To minimize overhead costs and maintain a worldwide capacity to handle complex projects, we have adopted a strategy of affiliating ourselves with highly capable subcontractors and business partners strategically located around the world.  By collaborating with “best in class” subcontractors and partners, Pernix Group is able to provide the best fit to fulfill our customers’ project requirements. In a recent award from the U.S. Government, for example, we brought forward a team of companies that boasted 140 offices worldwide, over 60,000 employees, working on five continents.  Our various joint venture partners, affiliates and business partners, combined with our own teams and internal resources, provide Pernix Group the ability to offer its customers a best in class solution to their construction needs, worldwide.  These arrangements not only assist Pernix Group in winning larger projects, but also mitigate cost, design and other risks, provide experience managing larger projects, expand relations with more subcontractors and vendors, and enhance the number and type of contract opportunities that Pernix can consider, qualify for, bid on and win.

The Company has established a highly effective joint venture with Serka Insaat ve Ticaret, A.S. (Serka). The joint venture, PS JV, is 52% owned by Pernix and 48% by Serka. In early 2011, PS JV was awarded a multi-billion dollar Indefinite Delivery Indefinite Quantity (IDIQ) contract with the U.S. Department of State — Overseas Buildings Operations (OBO). This contract will provide PS JV with the opportunity to bid on a significant number of task orders for Containerized Housing Units (CHU) to be built internationally. The size of each task order is dependent upon the scope of work and there is no guarantee that PS JV will win any particular task order, but the overall IDIQ program is for five years and totals $12.0 billion. The amount of the awards to any one contractor cannot exceed $500 million in one base year or option year and $2.5 billion over the life of the contract should all four option years be awarded. PS JV has actively responded to several requests to bid under this IDIQ contract and has been awarded two contracts as described below with revenue totaling approximately $200 million under this program during the twelve months from April 2011 through March 2012.

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On January 13, 2012 the U.S. Department of State (DOS) awarded PS JV, with a re-procurement contract having an estimated value of between $95 and $115 million for design and construction services work related to the former Sather Air Base in Iraq (n.k.a. the Baghdad Diplomatic Support Center). Significant design and construction work is expected to commence during the first half of 2012. As of March 30, 2012, Pernix has received award notices and modifications totaling $50.2 million on this project.

On April 14, 2011, PS JV was awarded a $92.7 million project to be constructed in Baghdad, Iraq under the IDIQ contract. This Project was originally known as the Shield project and more recently was renamed the Baghdad Police Academy Annex. As of December 31, 2011 the contract was approximately  51% complete. Since the original award, PS JV has received modifications amounting to $10.4 million bringing the adjusted total contract value to $103.1 million before the March 2012 scope reduction. Approximately 71% of the base contract amount was already complete at the time of the scope reduction notification. OBO continues to be pleased with PS JV work and the scope reduction is not related to the execution of the contract. Conditions in Iraq are such that changes are naturally part of the experience and we are managing that process closely with the Department of State to work toward a fair resolution as it pertains to the Baghdad Police Academy Annex project.

On September 30, 2011, the PS JV was awarded an additional contract for an $80.3 million project to be completed in Baghdad, Iraq for the construction of an embassy and other structures. On October 21, 2011, the Company received a “Suspension of Work” notice from the U.S. Department of State. Ultimately, the contract was “Terminated for Convenience” because the government decided to “re-scope” the project. In March, 2012, the OBO released a task order proposal request as the project will be rebid as “re-scoped” with anticipated contract pricing in the $85 million to $95 million range. PS JV has been requested to and plans to rebid.  The breadth and depth of experience in embassy construction is significant to Pernix and is expected to be a key strategic component that the Company will utilize to bid on and win additional work with the Department of State as they intend to build or rehabilitate up to 32 embassies in the 2012 through 2017 timeframe.

In addition to the aforementioned IDIQ program awards, in the second quarter of 2011, the Company received an award notification from the OBO for an $18.1 million project to construct a rehabilitation facility in Niger, Africa. On August 3, 2011 we received a Limited Notice to Proceed on the procurement and shipping of items that will be required for the project. On August 16, 2011 Pernix received a $6.4 million change order to construct an additional building, bringing the total contract value for the Niger rehabilitation project to $24.5 million. Management anticipates substantial construction on the project to begin in the second quarter of 2012. In the fourth quarter of 2011, Pernix set up a limited liability company in Niger in connection with this contract.

In connection with our recent experiences with the OBO, the Company has strategically strengthened our technical and management expertise and developed relationships that enable us to provide our clients with a broad spectrum of services that leverage the expertise and the construction resumes of the partners and of Pernix to the mutual benefit of all involved. In addition to PS JV, Pernix has also formed two additional joint ventures with partners who possess niche capabilities in restoration work as well as critical mass that enables Pernix to be part of a consortium of contractors with the intention of bidding and working together on large scale projects which Pernix may not be able to access on a stand-alone basis.

In 2006, the Company entered into a joint venture with SHBC, called Pernix/SHBC JV, (formerly Telesource International, Inc./Sayed Hamid Behbehani & Sons Co., Joint Venture, L.P.). This joint venture operates out of the Company’s Lombard, Illinois office and is a limited partnership with an equity split of 51% for the Company and 49% for SHBC. The joint venture was created for the purpose of bidding on US Government construction and infrastructure development projects.

In January 2007, the Pernix/SHBC JV received a final award and notice to proceed with a $42.5 million contract with subsequent change orders of $4.3 million to design and build a new embassy compound for the United States Department of State in Suva, Fiji. To execute this project, the Pernix / SHBC joint venture formed a wholly owned subsidiary in Fiji called Telesource SHBC (Fiji), Ltd. (TSF).  In April of 2010 the Company was awarded a second contract of $8.1 million on the embassy compound in Fiji.  We intend to leverage our experience in Fiji to bid on and obtain additional embassy and/or US Government projects. The Department of State intends to build up to 32 new embassies in the 2012 — 2017 timeframe and Pernix Group, together with our  partners will continue to bid for this work.

Design Build

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

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

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Construction Management

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

Construction Segment Outlook

According to Global Construction 2020, construction today is a $7.5 trillion market accounting for 13.4% of world economic output.  By 2020, it is estimated construction economic output will have grown by 70% to $12.7 trillion and will account for 14.6% of world economic output. U.S. forecasts show the most dynamic growth for construction over the next decade is expected to come from emerging markets.  Construction in emerging markets is forecast to more than double in size over the next decade, growing by an estimated 110% to become a $7 trillion market, representing 17.2% of  emerging market GDP by 2020.  Conversely, developed countries will only grow by 35% from $4.2 trillion today to an estimated $5.7 trillion.  As a result of this divergence, emerging markets will make up more than half of the global construction market by the end of this decade.  Developed countries accounted for an estimated 65% of global construction in 2005 but by 2020 this is expected to fall to 45%, with emerging markets accounting for an estimated 55%. In light of its experience, Pernix is uniquely qualified to perform in emerging markets which can be more remote and logistically challenging environments.

Power

Although virtually everyone in the world relies on it, the needs and resources required to generate power can vary widely from location to location. From the types of fuels used to the plethora of regulations governing the development and operation of power generation plants, Pernix Group understands the unique needs and requirements of different projects in diverse geographic locations.  Pernix focuses on construction and facilities O&M for small to mid-size power plants and has the experience to build, operate, and maintain power plants as well as transmission and distribution grids. We manage and operate many of the plants that we build.  Due to our years of experience, we have developed strong relationships with engine manufacturers, suppliers of parts for power plants and distribution/ transmission systems,  software developers and suppliers for control systems, Customer Information Systems (CIS), and Geographic Information Systems ( GIS).

Pernix focuses on operating efficiency and reliability while never compromising safety, security or environmental stewardship. We accomplish this by partnering with our customers throughout all project phases to understand and recognize the unique requirements of each customer and each project phase, and leverage our ability to align and manage the best resources for all aspects of each particular project. The Pernix Group power segment prides itself in being a steward of the environment and the assets entrusted to us by the communities in which our operators work and live.  Pernix Group power segment employees are not absentee operators but ones who live and work and depend upon the same power being provided to our customers.

Our power business segment includes construction and facilities O&M services. Specifically, Pernix Group provides plant engineering, design, procurement, construction, and operations & maintenance services from the power source through the distribution network on a worldwide basis. We have the capability to address a variety of power generating requirements from initial conceptual design to construction, through operating and maintaining diesel, hydro, and solar power facilities. Pernix is unique within the power industry as we can scale to various size projects, ranging from small to mid-sized projects on a stand-alone project basis and large projects in association with our strategic partners. This flexibility in the scale of projects on which we work reflects the well thought out design, agility and efficiency in our operations. Pernix also has a wealth of experience in the upgrade of existing facilities to achieve additional capacity and operational efficiencies by upgrading and replacing outdated or worn out equipment while  endeavoring to use existing equipment when possible. These upgrade projects typically produce significant cost savings to our customers and can often be carried out while the power plant continues to operate, resulting in even greater cost savings to our customers.

Power Plant Construction

Pernix Group’s general construction segment is complementary with our power plant construction offerings. We rely on our construction capability and strong affiliation with world-class design firms and subcontractors to provide comprehensive design-build and global power solutions. We have the resources to properly fit technology with our customers’ special requirements, budget and environmental considerations and restraints. Power plants are a significant investment and become a crucial part of a community’s survival, hence we take great care to understand what our customer requires, and ensure that the end product exceeds their expectations for today and contemplates their needs for the future. As noted in the construction segment discussion above, our state-

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of-the-art construction management services provide a systematic project review, including a comprehensive construction and start-up schedule. Our power plant construction methodology is not limited to building a facility; we also provide start up and commissioning services to ensure that the equipment is fully integrated with all other operating systems as well the transmission/distribution system and power grid. Furthermore, we provide the appropriate training for startup as well as future operations and maintenance.

In this segment we have also developed significant working relationships and joint-venture partners in order to expand our offerings, bring efficiencies to our project and reduce costs to our customers.  Pernix has strong relationships with many of the world’s leading engine and turbine manufacturers and relies on these relationships to ensure that product is delivered on time and within budget.  The Company has also formed a joint-venture with UEI Holdings, LLC.  The joint venture is called Pernix Universal Energy JV.  Pernix owns 70% and UEI Holdings owns 30% of the joint venture.  This arrangement enables Pernix to expand its offerings and adds significant capabilities. UEI Holdings has experience with diverse power sources and technologies and over the past 15 years has managed, commissioned, designed, or helped build over 50,000MW of power generation facilities.  The Pernix Universal Energy JV brings this capability to the world market, and coupled with our own internal resources, we feel confident that our customers and partners will greatly benefit from this alliance with UEI Holdings.

Operations and Maintenance

Pernix Group’s Power Operations and Management Services (O&M) provides an integrated scope of services to effectively maintain and manage all aspects of power operations. We partner closely with public and private entities to improve plant process, performance, reliability and customer service. Our focus is on reducing costs and ensuring a safe and efficient working environment for all involved.

Pernix’s O&M services include maintenance & operations, engineering, on-going reliability studies, construction management, recovery/rebuild, specialty services and rehabilitation.  We perform an audit of a customer’s operations and provide a comprehensive plan, including timelines for assuming responsibility of the operation as well as initial and long-term maintenance requirements. Our intense focus on machine performance and OEM maintenance requirements ensures efficient and long term operation of equipment.  In all cases Pernix tries to make every effort to hire and train local staff.  This is part of our commitment to bring jobs and add value to the communities where we work and serve.

Transmission and Distribution Systems

Pernix Group has comprehensive experience building Transmission & Distribution (T&D) systems as well as maintaining and upgrading them to ensure efficient operation throughout the Power infrastructure. Our experience includes working in climates that experience extreme weather conditions such as cyclones and monsoons. We have developed our own unique methods and systems for working under such conditions and our safety record is excellent.  Safety is a major concern of any T&D maintenance program, and all projects start with proper training on equipment usage, communication and teamwork. Our safety records are receiving recognition from governments and we continually monitor and retrain our team to ensure the continued safety of all. Our staff includes engineers with many years of experience designing, implementing and maintaining these systems. We can maintain an existing system or we can upgrade a system to the most current T&D technologies.

Build, Own, Operate, Transfer (BOOT)

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

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

Current Power Operations

We invest in power projects as an independent power producer (IPP) or using the BOOT model. Our power projects to date have been in the North and South Pacific.  Our Power Generation Services segment currently operates in three countries and contributed $7.8 million, or 11.2% of our fiscal 2011 revenue.  We currently operate power plants in the Republic of the Fiji Islands (Fiji), the Commonwealth of the Northern Mariana Islands (CNMI) and the Republic of Vanuatu (Vanuatu).

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Telesource (Fiji), Limited (TFL)

TFL, a wholly-owned subsidiary of Pernix conducts our power generation activities in Fiji. TFL has a 20 year contract with the Fiji Electricity Authority (FEA) to operate and maintain two separate diesel fired power generation plants and to sell electrical power produced, on a wholesale level, at a contractually determined rate, without risk of fuel price fluctuation. The contract for this project expires in 2023 and includes management of a total of 74MW of diesel power generation capacity in Fiji.

The Kinoya Power Plant, situated near Suva, the capital of Fiji, is part of the FEA grid and is the largest diesel based power plant in Fiji. In 1999, FEA awarded TFL the contract to expand the power plant to 12 MW. During the coup in 2000 disturbances at the hydro power generation facility led to rolling power cuts on the main island of Viti Levu. At that time, FEA modified the contract to move the 12MW machines to Vuda Power Plant, which is the second largest diesel-based power plant in Fiji, and added 20MW for the Kinoya Power Plant. As a testament to FEA’s satisfaction with TFL, TFL was awarded a 20 year Operation & Maintenance (O&M) contract for both the Kinoya and Vuda Power Plants in 2003.

As a further testament to FEA’s satisfaction with TFL, in late 2005, FEA awarded TFL another O&M contract for a 30MW extension to the Kinoya Plant. The expansion of the Kinoya Power Plant was carried out in close coordination with FEA, Caterpillar, Inc. and the existing plant personnel, all the while ensuring the safety of employees and equipment and without interruptions to its regular operations. The Kinoya Power Plant is fully compliant with the environmental regulations of Fiji, World Bank Guidelines, and good engineering practice recommendations for ground level exhaust emissions.

Demonstrative of TFL’s outstanding O&M performance record, FEA, rated the TFL managed Vuda and Kinoya power stations first and second out of five power stations in Fiji and the FEA report stated that “it is no coincidence that the two Telesource (Pernix) stations are ranked first and second. They have a dedicated technically based health, safety and environmental officer who is actively involved in carrying out frequent and regular in house risk management checks”. FEA is the regulatory agency that is charged with protecting the long-term interests of consumers with regard to the price, quality, safety, and reliability of regulated services in Fiji and TFL takes pride in the positive recognition from FEA.

Telesource CNMI, Inc.

Pernix Group also has a wholly owned subsidiary in the CNMI named Telesource CNMI, Inc. (TCNMI).  The subsidiary has a history of significant construction and power projects. Through our TCNMI subsidiary, we built and currently operate and maintain, on a 20 year contract, a 20MW diesel fuel power plant on the Island of Tinian in CNMI.  TCNMI is located on the Island of Saipan with operations on the Island of Tinian; both islands being part of CNMI, which is a U.S. Commonwealth.  Since its incorporation in 1997, TCNMI has executed over $80 million of construction work in CNMI.  TCNMI financed, designed and built the 20MW diesel fuel 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 a contractually determined rate, without risk of fuel cost fluctuation.  The contract for this project expires in 2020, however, a 2001 change order provides the customer with an early termination fee of $6 million if they choose to exercise the early termination option. As of our filing date, we have not received a notice of early termination from CUC. The change order also prohibits the customer from purchasing power from any other source than TCNMI for the first 30MW of power requirements. The expanded agreement does not require additional performance by the Company with respect to building additional power generation capacity.

In August 2010, Modification 5 to the 20 year contract was signed by CUC and Pernix Group. This modification provides for an adjustment in fixed and variable fees under the contract which was necessary due to lower than anticipated growth and development on the island of Tinian. However, the modification requires the approval of the CNMI Public Utilities Commission (PUC) before it will take effect. As of March 30, 2012, there are no active members appointed to the PUC in CNMI and the Company awaits re-establishment of the PUC.

Vanuatu Utilities and Infrastructure Limited

Pernix Group set up a wholly-owned subsidiary in 2010 named Vanuatu Utilities and Infrastructure Limited (VUI) operating under the laws of Vanuatu. On January 1, 2011, VUI assumed responsibility for operating and maintaining a diesel power plant, hydro dam, and the entire T&D system for the city of Luganville and a15 kilometer land locked radius from the boundaries of the city of Luganville on the island of Espiritu Santo. Our scope includes all service connections, metering, billings, collections and customer service.  In short, this is a turn-key utility operation. VUI operates under a short term Memorandum of Understanding (MOU) that became effective on January 1, 2011 and was scheduled to terminate on August 31, 2011. The MOU was extended by the Government of Vanuatu indefinitely on August 31, 2011 until a permanent concessionaire is selected. VUI has performed an assessment of the operations to determine the financial and operational metrics which will be the basis for negotiating a longer term 20 year concession deed and contract with the government of Vanuatu. Under the MOU, the Company receives various expense reimbursements and fees

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during this period for assuming the operations from the prior service provider. Such reimbursements and fees are, to a certain extent, dependent upon the Company’s assessment of collectability, power usage and operational costs. The costs associated with earning the management fee are included in salaries and employee benefits and also in general and administrative expenses in the Statement of Operations. As of the date of this report, VUI continues to operate and maintain the system under the MOU and awaits a decision from the government of Vanuatu on the longer term concession deed.

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

Power Segment Outlook

Industry experts predict that global power demand will be about 30 percent higher in 2040 compared to 2010, as economic output more than doubles and prosperity expands across a world whose population will grow to nearly 9 billion people. Power demand growth will slow as economies mature, efficiency gains accelerate and population growth moderates.  In the countries belonging to the Organization for Economic Cooperation and Development (OECD) - including countries in North America and Europe - power usage is expected to remain essentially flat, even as these countries achieve economic growth and even higher living standards. In contrast, non-OECD power demand will grow by close to 60 percent. Billions of people will be working to advance their living standards, thus requiring more power.  The need for power to make electricity is expected to remain the single biggest driver of demand. By 2040, electricity generation is expected to account for more than 40 percent of global power consumption.

Meanwhile, there is a growing demand to supplement or replace aging power generation equipment, and to improve efficiency by replacing government operators with private sector providers. In the U.S., two-thirds of the country’s installed plants are 25 or more years old and need to be replaced and re-powered, principally with new combustion turbines.

As mentioned above, Pernix is unique within the power industry as we have constructed and operated power plants in some of the most remote locations in the world and we can readily  scale to various size projects ranging from small to mid-sized projects, on a stand-alone project basis and large projects in association with our strategic partners. This flexibility in the scale of projects on which we serve reflects the well thought out design, agility and efficiency in our operations. Pernix also has a wealth of experience in the upgrade of existing facilities to achieve additional capacity and operational efficiencies by upgrading and replacing outdated or worn out equipment while being mindful to use existing equipment when possible. These upgrade projects can be carried out while the power plant continues to operate. These customer-focused transition efforts often produce significant cost savings to our customers. As noted above, TFL and TCNMI provide facility O&M services for diesel power plants under long term contracts until 2023 and 2020, respectively. After the expiration of these contracts, the contract between the CUC and TCNMI prohibits other plants from providing power unless and until there is absolutely no need for any diesel power in the regions TCNMI operates. The Company does not anticipate that CNMI will be independent of diesel power needs at the end of the contract term. The Company does have the capability to provide renewable fuel options including power design, construction and facility O&M services for hydro, solar and other green energy sources and is actively pursuing those opportunities in CNMI, Fiji and other locations.

RF Transmitter Design, Installation and Service

In late 2009, we acquired a controlling interest in TransRadio SenderSysteme, Berlin, AG (TransRadio), a company engaged in the design, manufacture, distribution and installation of RF transmitter systems and related services to customers worldwide. In 2010, the Company purchased incremental interests in TransRadio, bringing the Company’s total ownership of the subsidiary to 82%. TransRadio offers products and customized solutions and services for VHF/FM Broadcast transmitters, long wave communication, AM — long and medium wave broadcast, Digital Radio Mondial (DRM) systems and turnkey solutions including design, pre-construction, construction management and commissioning.  TransRadio’s RF transmitters have been produced since 1918 and the name TransRadio is an internationally recognized brand name with countless broadcast equipment installations throughout the world. TransRadio transmitters are sold internationally with their primary markets in Europe, Africa and Asia.  Our Transmitter Systems Design, Installation and Service segment contributed $10.2 million, or 14.6% of our fiscal 2011 revenue.

TransRadio was acquired to serve as a global platform for cross-selling construction segment services. The acquired company was a supplier to Pernix Group in connection with a broadcast station construction project that was previously completed on the remote island of Tinian. This acquisition was complementary to the Company’s core operations and augmented revenue. However, due to the violence and political instability of the “Arab Spring” in the Middle East coupled with the poor economic conditions in Europe, orders for transmitters and antennae have deteriorated and although the radio transmitter segment did win two contracts in March 2012, the Company does not know when historical levels of sales volumes will resume.  In March 2012, the Pernix Group management team requested and received approval from the Pernix Board of Director’s to pursue an expedited divestiture of the 82% interest in TransRadio. This

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divestiture  is intended to curtail losses that have been generated by the radio transmitter segment and will allow the Pernix management team to focus its efforts on the  Construction and Power Generation Services segments which it intends to grow organically and through acquisitions. The Company executed a stock sale and transfer agreement for its equity interest in TransRadio on March 26, 2012 and closed the transaction on March 28, 2012. Management is in the process of determining the loss on the sale of TransRadio which it anticipates to be in the range of $1.5 million to $2.0 million.

Our Business Strategy

Our business strategy as a diversified contractor focuses on expanding our government-funded / sponsored as well as private general construction, power construction and facilities O&M service segments. Key elements of our strategy include:

Capitalize on opportunities in other geographic locations

Pernix has built its reputation on completing difficult projects in the most remote areas of the globe.  For example, the Company’s resume’ includes constructing a broadcasting station on the remote island of Tinian; managing the global logistics necessary to construct the US Embassy in Suva, Fiji and the Containerized Housing Projects in Iraq, and finding and training a local workforce to bring electricity to regions in Vanuatu that had never had electric service before. Pernix possesses the ability to help our clients understand, define and complete extraordinary projects of varying scale. Pernix Group understands what is required to execute and complete the most challenging projects regardless of whether the challenge is geographical, political, mechanical, or any combination of the above.  While many of our competitors are not equipped nor experienced to manage technically challenging projects in remote geographic locations; Pernix Group specializes in and thrives on such challenges.

We intend to leverage our leading positions in the general construction, power construction and facilities operations and management capabilities to continue to expand our services and revenue. We believe that the need for infrastructure upgrades, governmental facilities as well as diesel-fired, hydro and solar power will result in continued opportunities in our core markets. All of our business segments have unique integration opportunities particularly in the construction and O&M markets. With our ability to manage projects internationally, successful track record and our global resources, we believe we are well-positioned to compete for projects in these global markets.

Utilize our long-standing relationships with industry specialists

We have long-standing relationships with a number of industry specialists worldwide. These relationships have been established to enhance our ability to satisfy our clients and deliver comprehensive solutions for customer needs. By collaboratively consolidating knowledge bases, skill sets, resources and contacts, we believe we have the ability to efficiently export our leading edge technical skills to any region in the world in which our clients may need them. We also continually develop new relationships that provide us with the necessary agility and expertise to meet needs of new and existing customers as their needs evolve.

Expand and foster positive relationships with governments, public agencies and private entities worldwide

We will continue to focus on maintaining and expanding our relationships with governments, public agencies and private entities worldwide. We believe that the best way to develop new contacts and opportunities is to consistently exceed existing customer expectations; something we strive to do with every opportunity to serve. We will find new opportunities through promoting our Company’s resume and our reputation in the marketplace to targeted customers. These efforts will be supplemented by market intelligence gathering and providing customized solutions based upon an understanding of the specific needs of each governmental agency and each private customer.  Upon identifying these opportunities we will continue to expand our network of international contacts and communicate our capabilities which in turn, will further expand our client base.

Continue to pursue our acquisition strategy

We intend to consider acquisitions to grow our general construction, power construction, and facilities O&M businesses. The Pernix Group management team has defined what it considers to be desired potential target characteristics including: companies of a scale and scope that will provide manageable growth that can be readily integrated, will be accretive to earnings, and will facilitate new client relationships. Ideal targets will also expand Pernix Group’s domestic presence and diversify and balance the Company’s profile, credit risk and provide more consistency to Pernix Group’s revenue and earnings streams. We will search for other successful companies whose growth can be enhanced through a synergistic combination of respective resources. This approach will expand, strengthen and diversify our market leadership positions geographically and technically across end markets. We believe that the trend towards consolidation in the industries in which we operate will produce candidates that align with our acquisition strategy.

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Strengthen and support human capital

Our experienced employees and management are our most valuable resources. Attracting and retaining key personnel has been and will remain critical to our success. Pernix Group’s CEO and V.P. of Construction each bring over 25 years of significant institutional and industry experience to the Company. In addition, our customers benefit from the extensive experience of the Pernix team members; we have engineers at Pernix with project experience in 50 different countries.  Recent management team hires in the Finance and Administration areas have brought Pernix Group approximately 75 years of experience in investment banking, “Big 4” public accounting, and Fortune 250 finance departments. In addition, the Company is actively pursuing additional business development and operations managers in the construction and power segments. A large percentage of our employees have technical and professional backgrounds and undergraduate and/or advanced degrees. We believe that we attract and retain talented employees by offering them the opportunity to work on highly visible and technically challenging projects in a stable work environment. Our non-engineering level employees are hourly workers, while our engineering and supervisory staffs are full-time employees with monthly salaries.  All of our employees are non-union workers, although we may employ union subcontractors from time to time. As of December 31, 2011, we employed 175 people.

We will continue to focus on providing our personnel with training and other personal and professional growth opportunities, performance-based incentives, opportunities for stock ownership and other competitive benefits in order to strengthen and support our human capital base. In late 2011, the Pernix Board of Directors approved an incentive stock option plan, with the first options granted in January 2012. Management intends to broaden participation in the incentive stock option plan as specified by the management team based on performance.

Our Business Segments

The following table sets forth the revenue attributable to our business segments for the periods indicated (1):

(1)  For additional financial information including net income by segment, see Note 21 in the notes to our consolidated financial statements.

Our Clients

The General Construction segment has one customer, the U.S. Department of State.  The loss of this customer would have a material adverse impact on the Company’s consolidated financial performance.  This customer represents 74.2% of the consolidated total revenues of $69.8 million.

The Power Generation Services segment has three primary customers: the CUC, the FEA and the Government of Vanuatu.  In 2011, none of these customers individually account for more than 10% of the consolidated total revenues. In 2010, the loss of either CUC or FEA would have had a material adverse impact on the Company’s consolidated financial performance because CUC and FEA represented 24.0% of the consolidated total revenues of $26.2 million including revenues from CUC of $1.8 million or 28.6% of the power generation revenues, whereas, FEA totaled $4.5 million or 71.4% of the power generation revenues. On August 2, 2011, a diesel engine at one of our sites in Fiji was significantly damaged by a component failure resulting in an interruption of 10MW of power production at a diesel power plant operated and maintained by TFL under the FEA contract. In 2011, TFL recorded the expense associated with the deductible and other engine related failure expense items in the amount $0.6 million. In addition, TFL accelerated certain maintenance activities into 2011 from 2012. Meanwhile, the insurance proceeds from the insurer were recorded in early 2012 as they were not received by TFL nor confirmed by the insurer until that time. The incident reduced pretax income in 2011 by $1.5 million including insurance deductibles and maintenance expenses, and is expected to enhance 2012 results by the amount of the insurance proceeds currently estimated as $0.5 million plus the benefit of the reduced maintenance load that was accelerated into 2011. As of March 30, $0.3 million in insurance proceeds have been received and recorded as income during the first quarter of 2012.

The RF Transmitter Design, Installation and Service segment has various major customers, none of which individually account for more than 10% of the consolidated total revenues in 2011.

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Total RF transmitter revenues represent 14.6% of the consolidated total revenues of $69.8 million. The Company executed a stock sale and transfer agreement for its equity interest in TransRadio on March 26, 2012 and closed the transaction on March 28, 2012. Management is in the process of determining the loss on the sale of TransRadio which it anticipates to be in the range of $1.5 million to $2.0 million.

Engineering and Product Development

Our engineering and product development programs are focused on product improvements, innovations, and cost reductions. As a diversified contractor, we have been focused on further development of our design, construction methods and facilities management practices for our existing types of projects (government buildings, fossil fuel based power plants, and broadcasting projects) as well as developing our ability to provide construction and facility O&M services for renewable power projects and services including hydro and solar powered plants.

Our efforts with respect to the engineering and product development for the RF transmitter system business have been primarily focused on the launch of digital AM transmitter, and development activities are aimed at turning Digital Radio Mondiale™ (DRM) into an official transmitter standard and at achieving market acceptance for the standard while providing transmitters, programs and receivers. DRM is the universal, standardized, digital radio system for short-wave, medium-wave and long-wave digital radio for the radio frequencies below 30MHz. In the VHF sector, the Company recently completed its new high performance transmitter. The business also strives to design its products in a manner that increases the efficiency and the cost of operating the transmitters for its customers. Our engineering and product development expenditures were $1.8 million in 2011 compared to $1.6 million in 2010.

Joint Ventures

Some of our larger contracts may operate under joint ventures or other arrangements under which we team with other reputable companies, typically companies with which we have worked for many years. This is often done where the scale of the project dictates such an arrangement or when we want to strengthen either our market position or our technical skills. One example of such an arrangement is PS JV, our joint venture with Serka. During 2011 and early 2012, several such joint venture and strategic alliances were established.

Competition

The professional, technical and management support services markets we serve are highly fragmented and we compete with a large number of regional, national and international companies. Certain of these competitors have greater financial and other resources than we do. Others are smaller, more specialized, and concentrate their resources in particular areas of expertise. The extent of our competition varies according to the particular markets and geographic area. The degree and type of competition we face is also influenced by the type and scope of a particular project. Our clients make competitive determinations based upon qualifications, experience, performance, reputation, technology, customer relationships and ability to provide the relevant services in a timely, safe and cost-efficient manner. Pernix Group utilizes partnerships and other key strategic relationships to obtain an advantage with regard to niche specialization, scale and scope of projects it may be involved with and enhancing the combined resumes of Pernix and its partners.  Pernix Group will continue to focus on providing the “best in class” procurement and contract execution processes as well as world class customer service.

Insurance and Risk Management

We maintain insurance covering professional liability and claims involving bodily injury and property damage. We consider our present limits of coverage, deductibles, and reserves to be adequate. Wherever possible, we endeavor to eliminate or reduce the risk of loss on a project through the use of quality assurance/control, risk management, workplace safety and similar methods. Risk management is an integral part of our project management approach and our project execution process.

Regulation

We are regulated in a number of fields in which we operate. In the United States, we primarily deal with the United States Department of State to bid and execute on the construction of U.S. embassies. When working with this agency, we must comply with laws and regulations relating to the formation, administration and performance of contracts. These laws and regulations, among other things:

·      require certification and disclosure of all cost or pricing data in connection with various contract negotiations;

·      impose procurement regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-based U.S. government contracts; and

·      restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

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We are also subject to various government laws, regulations and/or applicable laws pertaining to the protection of the environment, primarily in the areas of water and air pollution, i.e. Department of Environmental Quality (DEQ), the Environmental Protection Agency (EPA) and FEA.  These laws and regulations in many cases require a lengthy and complex process of obtaining and maintaining licenses, permits and approvals from local agencies. As regulations are enacted or adopted in any of these jurisdictions, we cannot predict the effect of compliance therewith on our business. Our failure to comply with any applicable requirements could result in delays in proceeding with any projects under development or require modifications to operating facilities. During periods of non-compliance, our operating facilities also may be forced to shut down until the instances of non-compliance are corrected and/or be subject to fines or penalties. We are responsible for ensuring compliance of facilities with applicable requirements and, accordingly, we attempt to minimize these risks by dealing with reputable contractors and using appropriate technology to measure compliance with the applicable standards.

Presently, neither the Customer Choice Act nor other similar proposed legislation dealing with U.S. power policies directly impact us because the legislation and restructuring plan pertain to the retail market or new contracts in wholesale markets. However, we could be impacted in the future by, among other things, increases in competition as a result of deregulation. Compliance with federal, state, local and foreign laws enacted for the protection of the environment have had no significant effect on our capital expenditures, earnings, or competitive position to date. We are actively monitoring these developments in power proceedings in order to evaluate the impact on existing projects, and also to evaluate new business opportunities created by the restructuring of the electric utility industry.

Contract Backlog

Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted construction contracts in progress at December 31, 2011, and from construction contractual agreements on which work has not yet begun. The following summarizes changes in backlog on construction contracts during the fiscal year ended December 31, 2011:

Management anticipates that $11.5 million of the $71.0 million backlog as of December 31, 2011, will be recognized as revenue after 2012. On September 30, 2011, PS JV was awarded the Embassy West contract for an $80.3 million project to be completed in Baghdad, Iraq under the IDIQ contract. On October 21, 2011, the Company received a stop work order from the U.S. Department of State as a result of notification that the award has been contested by another bidder. On November 3, 2011, the OBO solicited revised technical and price proposals. On November 7, 2011, the Company filed a protest of the November 3, 2011 action by the OBO. The protest was dropped by the Company and in early 2012, OBO revised the scope of the project, retendered the contract for bid and requested Pernix to bid on the revised scope of the project. Therefore, the table above does not include any amounts related to Embassy West. The table also does not include the sole source award (Sather) received by Pernix on January 13, 2012 for a re-procurement contract having an estimated value of between $95 million and $115 million for design and construction services work related to the former Sather Air Base in Iraq (n.k.a. the Baghdad Diplomatic Support Center). Thus far PS JV has received an award and a change order totaling $50.2 million on the Sather project and is anticipating the remaining award amount to be defined in the second quarter of 2012. The majority of the Sather contract revenue is expected to be recognized in 2012 and to a lesser degree in 2013. Finally, the table does not include radio transmitter segment backlog (approximately $1.4 million at December 31, 2011) or construction segment stipend income of $0.1 million year to date as the stipend income is related to contracts that were not ultimately awarded to the Company as they are not directly related to core construction work and TransRadio backlog is not reflective of future anticipated Pernix activity as TransRadio was sold in late March, 2012. As previously noted, the Company received a notice of scope reduction on the Shield (n.k.a. Baghdad Police Academy Annex) contract and we are working with OBO to determine the extent of work that remains to be done on this contract which was over 70% complete prior to receipt of the notice of scope reduction.

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ITEM 2.    PROPERTIES

Our corporate offices are located in Lombard, Illinois, and we have leased space through April 30, 2016. In order to support our relationship with the U.S. Department of State and OBO, as well as to facilitate contract execution that exceeds our customers’ expectations, PS JV has leased space in Vienna, Virginia. The lease term is for a period of 48 months beginning in January of 2012. TCNMI’s head office in the Commonwealth of the Northern Mariana Islands was leased for a term that expired in December 2004 and is currently on a month-to-month renewal. In Fiji, our power generation subsidiary is leasing office space for an additional two-year term ending June 30, 2013. We lease office and factory space in Berlin, Germany under non-cancelable operating leases that expire in late 2012. However, the German subsidiary was sold in late March, 2012, thereby alleviating Pernix of the related lease obligation. We believe our current properties are adequate for our business operations and are not currently underutilized. We may add additional facilities from time to time in the future as the need arises. In addition to corporate offices, we provide housing for several employees located in remote locations for construction and power facilities operations and maintenance work. These leases are not individually significant and are generally living expenses that are considered in the cost and pricing of the related contracts and in some cases are billed to the joint venture under which the related contract work is being performed.

ITEM 3.    LEGAL PROCEEDINGS

As a government contractor, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. Intense government scrutiny of contractors’ compliance with those laws and regulations through audits and investigations is inherent in government contracting, and, from time to time, we receive inquiries, subpoenas, and similar demands related to our ongoing business with government entities. Violations can result in civil or criminal liability as well as suspension or debarment from eligibility for awards of new government contracts or option renewals.

We are involved in various investigations, claims and lawsuits in the normal conduct of our business. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, except for the matter discussed below, in the opinion of our management, based upon current information and discussions with counsel, none of the investigations, claims and lawsuits in which we are involved is expected to have a material adverse effect on our consolidated financial position, results of operations, cash flows, or our ability to conduct business. From time to time, we establish reserves for litigation when we consider it probable that a loss will occur.

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 counterclaims and cross-claims.   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 2010 or 2009.  In the third and fourth quarters of 2011, a $75,000 reduction of the accrual was recorded upon payment of a fee for a civil engineer to conduct a design inspection of the subject houses. The study is complete and no additional such expenditures are anticipated at this time. During the third quarter of 2011, a summary judgment was reached that may allow for the plaintiff to recover certain attorney fees related to code violations and workmanship claims. As of December 31, 2011 the Company estimates that, if the claims against it are successful, the Company may have an estimated liability in the range of $800,000 to $2,500,000. The Company has denied any liability and will aggressively defend itself to mitigate and / or dismiss the claims against it and believes the remaining accrual of $802,183 as of December 31, 2011 is adequate to provide for the amount of the settlement offered by Pernix Group of $800,000 that is contingent upon Pernix Group being indemnified from contributory liability in the event any other defendant is found to be liable. As the plaintiffs are not accepting of the indemnification provision, no settlement has occurred to date. In efforts to resolve the case, Pernix Group has filed in court for relief from any potential future contributory liability. In the event this relief is obtained, Pernix Group may consider settlement without requiring indemnification from the plaintiffs. To date, the plaintiff has not accepted the settlement offer. If a settlement is not reached, the case may go to trial in mid to late 2012.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES

Our common stock is traded in the Over-the-Counter Bulletin Board (OTCBB) under the symbol “PRXG.” As of December 31, 2011, there were 187 shareholders of record. The following table sets forth the low and high closing sales prices of a share of our common stock during each of the fiscal quarters presented, based upon quotations on the OTCBB reporting system as restated on a post-reverse stock split basis. The reverse stock split became effective on September 30, 2011.

There were no stock transactions on the OTCBB during the third and fourth quarters of 2011. We have not paid a cash dividend since our inception and we currently have no plans to pay cash dividends in the foreseeable future.

In August, 2010, the 2000 Non-Employee Director’s Stock Option Plan expired.  This plan provided certain Directors of the Board to exercise up to a total of 180,000 shares of common stock.  The Company implemented a new incentive stock option plan for employees in December 2011. As of December 31, 2011, there were no option awards granted under this plan.

Unregistered Sales of Equity Securities and Use of Proceeds

We issued unregistered securities to Ernil Continental, S.A., BVI., Halbarad Group, Ltd., BVI and Affiliates in the following transactions during 2010. No unregistered securities were issued subsequent to 2010. Previously issued unregistered securities were disclosed in prior periodic filings on Form 10-Q and 10-K.

·      On March 12, 2010 we issued 87,111 shares of common stock (post reverse stock split basis) pursuant to an exemption under Regulation S of the Securities Act for $980,001.

·      On August 2, 2010 we issued 100,000 shares of Series B Preferred Stock pursuant to an exemption under Regulation S of the Securities Act for $500,000.

·      On September 15, 2010 we issued 100,000 shares of Series B Preferred Stock pursuant to an exemption under Regulation S of the Securities Act for $500,000.

·      On October 4, 2010 we issued 189,250 shares of Series B Preferred Stock pursuant to an exemption under Regulation S of the Securities Act for $946,250.

ITEM 6.   SELECTED FINANCIAL DATA

Not applicable.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A) is designed to provide information that is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes included in this report.  In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) our consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year, (iii) the primary factors that contributed to those changes, (iv) any changes in known trends or uncertainties that we are aware of and that may have a material effect on our future performance, and (v) how certain accounting principles affect our consolidated financial statements. In addition, MD&A provides information about our business segments and how the results of those segments impact our results of operations and financial condition as a whole. In this report, we use the terms “Pernix Group”, “Pernix,” “the Company”, ‘we”, “us”, and “our” to refer to Pernix Group, Inc. and its consolidated subsidiaries. Unless otherwise noted, references to years are for fiscal years. We refer to the fiscal year ended December 31, 2011 and 2010 as “fiscal 2011” and “fiscal 2010”, respectively.

Executive Summary

For 2011, we recognized net income attributable to Pernix Group, Inc. of $1.8 million, or $0.19 of basic earnings per share compared to a $3.9 million loss, or ($0.42) of loss per share for 2010. Included in the 2011 results is the $5.3 million benefit from the release of a portion of the Company’s income tax valuation allowance against its deferred tax assets arising principally from net operating loss carryforwards. The valuation allowance release was based on our assessment that it is more likely than not that we will realize our domestic deferred tax assets and a portion of deferred tax assets associated with our operations in the Commonwealth of the Northern Mariana Islands and is reflective of our positive outlook of the Company’s future operations.

The net income summary by segment provided below demonstrates the significant negative impact that TransRadio losses have on 2011 results. In order to curtail the negative impact of these losses on Pernix and to allow the Pernix management team to focus its efforts on the strategic plan initiatives to grow the core construction and power businesses, Pernix completed the sale of TransRadio in the late March, 2012. Management is in the process of determining the loss on the sale of TransRadio which it anticipates to be in the range of $1.5 million to $2.0 million.

Adjusting to exclude the net impact of the release of the income tax valuation and the losses of TransRadio, the radio transmitter segment sold in March, 2012, we recognized a net income attributable to Pernix Group of $0.1 million, ($0.01 basic and $0.03 diluted) earnings per share for 2011, as explained and reconciled in the table below.

Net income and basic earnings per share attributable to Pernix Group, Inc. reconciliation:

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During 2011, we delivered strong performance. Our construction backlog grew to $71.0 million at December 31, 2011 from $2.2 million as of the prior year end, reflecting new contract awards totaling $120.5 million net of completed work totaling $51.7 million. Our Power segment facilities operation and management service expansion into Vanuatu also contributed significant pretax income to the power segment.  Our construction segment benefitted from an increased need to provide secure facilities for U.S. Government personnel caused by instability in certain foreign countries. Our new Power segment subsidiary, Vanuatu Utilities and Infrastructure (VUI), benefitted from managing the power facilities on Vanuatu under a Memorandum of Understanding (MOU) in 2011. VUI is currently awaiting a decision by the Government of Vanuatu regarding the concessionaire under a long term concession deed. We anticipate VUI being awarded the concession based on the tenuous relationship between the previous concessionaire and the Government of Vanuatu coupled with the positive reviews VUI has received from the Utilities Regulatory Authority of Vanuatu for work performed under the MOU. The positive performance of VUI tempered the financial impact of the August 2011 engine failure at one of our power plants in Fiji. The expenses and lost revenue associated with the failure and related accelerated maintenance expenses ($1.5 million) were recorded in the third and fourth quarters of 2011 while the related insurance proceeds and the majority of the revenue from rebuilding the engine were not recorded until earned and received in early 2012. These 2012 insurance proceeds coupled with the engine rebuild revenue more than offset the related 2011 expenses.

In light of these recent and notable successes in the construction and power segments coupled with the March, 2012 sale of the radio transmitter segment, management believes it is more likely than not that it will produce taxable income for the foreseeable future and that it is reasonably assured the Company has “turned the corner” to profitability. Consequently, the Company has reduced the valuation allowance on its net operating loss carry forwards and expects to implement “fresh start” accounting through a quasi-reorganization in the near future.

As the U.S. and global markets recover from the recession, industry experts predict that construction in emerging markets will more than double to $7 trillion over the next decade, representing 17.2% of global GDP by 2020, while developed country construction is expected to grow 35% to $5.7 trillion by 2020. Meanwhile, power demand will be about 30 percent higher in 2040 compared to 2010, as economic output more than doubles and prosperity expands across a world whose population is expected to grow to nearly 9 billion people. Power demand growth should slow as economies mature, efficiency gains accelerate and population growth moderates.  In the countries belonging to the Organization for Economic Cooperation and Development (OECD) - including countries in North America and Europe - power use is expected to remain essentially flat, even as these countries achieve economic growth and even higher living standards. In contrast, Non-OECD power demand will grow by close to 60 percent. Billions of people are expected to be working to advance their living standards, thus requiring more power.  The need for power to make electricity will remain the single biggest driver of demand. By 2040, electricity generation is expected to account for more than 40 percent of global power consumption.  In light of our experience and expertise, Pernix is uniquely qualified to design, construct and operate in these high growth emerging markets which can be more remote and logistically challenging environments than those of developed countries. In addition, Pernix and its partners have the expertise and scale to construct, operate and manage environmentally friendly power sources including diesel, hydro and solar power projects.

Our revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, align with strategic partners, secure new contracts and renew existing client agreements. Moreover, as a professional services company, maintaining the high quality of the work generated by our employees is integral to our revenue generation.

Our costs consist primarily of the compensation we pay to our employees, including salaries, fringe benefits, the costs of hiring subcontractors and other project-related expenses, the costs associated with maintaining and operating diesel power plants (fuel related costs) and sales, general and administrative costs.

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Critical Accounting Policies

Our financial statements are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). Highlighted below are the accounting policies that management considers significant to understanding the operations of our business.

Revenue Recognition

General Construction. Revenue from construction contracts is 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/bid/build contracts with a fixed contract price. These projects include 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 claim will be found in the favor of the Company. The Company will record a provision for losses when estimated costs exceed estimated revenues. To mitigate risks associated with cost overruns, the Company consistently employs fixed price contracts with our subcontractors and no “provisional pricing” subcontracts are allowed. In addition, our subcontractors generally manage procurement and as such are liable for procurement related risk including price risk.

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.

Power Generation Services. The Company receives a combination of 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.

RF Transmitter Design, Installation and Service. 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.

Claims Recognition

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Company records contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such cases, the Company records revenue only to the extent that contract costs relating to the claim have been incurred. The amounts recorded, if material, are disclosed in the notes to the financial statements. Costs attributable to claims are treated as costs of contract performance as incurred.

Unbilled Accounts Receivable and Billings in Excess of Costs on Uncompleted Contracts

Unbilled accounts receivable represents the contract revenue recognized to date using the percentage-of-completion accounting method but not yet invoiced to the client due to contract terms or the timing of the accounting invoicing cycle.

Billings in excess of costs on uncompleted contracts represent the billings to date, as allowed under the terms of a contract, but not yet recognized as contract revenue using the percentage-of-completion accounting method.

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Allowance for Doubtful Accounts

The Company records its accounts receivable net of an allowance for doubtful accounts. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its clients. The factors the Company considers in its contract evaluations include, but are not limited to:

·      Client type—foreign and domestic federal, state and local government or commercial client;

·      Historical contract performance;

·      Historical collection and delinquency trends;

·      Client credit worthiness; and

·      General economic conditions.

Income Taxes

Valuation Allowance. Deferred income taxes are provided on the liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment of such changes to laws and rates.

Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Whether a deferred tax asset may be realized requires considerable judgment by us. In considering the need for a valuation allowance, we consider a number of factors including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry-back years if carry-back is permitted under tax law, and prudent and feasible tax planning strategies that would normally be taken by management, in the absence of the desire to realize the deferred tax asset. Whether a deferred tax asset will ultimately be realized is also dependent on varying factors, including, but not limited to, changes in tax laws and audits by tax jurisdictions in which we operate.

We review the need for a valuation allowance at least quarterly. If we determine we will not realize all or part of our deferred tax asset in the future, we will record an additional valuation allowance. Conversely, if a valuation allowance exists and we determine that the ultimate realizability of all or part of the net deferred tax asset is more likely than not to be realized, then the amount of the valuation allowance will be reduced. This adjustment will increase or decrease income tax expense in the period of such determination. As noted above, the valuation allowance was partially released during the fourth quarter of 2011 based on our assessment that it is more likely than not that we will realize our domestic deferred tax assets and a portion of deferred tax assets associated with our operations in the Commonwealth of the Northern Mariana Islands and is reflective of our positive outlook of the Company’s future operations. Included in the 2011 results is the $5.3 million benefit from the release of a portion of the Company’s income tax valuation allowance.

Undistributed Non-U.S. Earnings. The results of our operations outside of the United States are consolidated for financial reporting; however, earnings from investments in non-U.S. operations are included in domestic U.S. taxable income only when actually or constructively received. No deferred taxes have been provided on the undistributed earnings of non-U.S. operations of approximately $1.4 million in 2010 because we plan to permanently reinvest these earnings overseas. There were no such earnings in 2011 due to the unusual engine failure in Fiji and the radio transmitter segment losses. If we were to repatriate these earnings, additional taxes would be due at that time. However, these additional U.S. taxes may be offset in part by the use of foreign tax credits. U.S. Tax liabilities are recorded from our earnings due to operations in Vanuatu as there are no income taxes in Vanuatu and Pernix Group periodically repatriates these earnings.

Intangible Assets

Intangible assets often result from a merger or acquisition, which typically include backlog and customer relationships. The Company performs an assessment to determine whether identifiable intangible assets exist, and if so, the value of the acquired company’s tangible and identifiable intangible assets and liabilities.

The Company performs an impairment test of its intangible assets at least annually for each reporting unit of the Company. We have multiple reporting units. A reporting unit is defined as an operating segment or one level below an operating segment. Our impairment tests are performed at the operating segment level as they represent our reporting units. See also Note 2.

The impairment test is a two-step process. During the first step, we estimate the fair value of the reporting unit and compare that amount to the carrying value of that reporting unit. In the event the fair value of the reporting unit is determined to be less

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than the carrying value, a second step is required. The second step requires us to perform a hypothetical purchase allocation for that reporting unit and to compare the resulting current implied fair value of the intangible assets to the current carrying value of the assets for that reporting unit. In the event that the current implied fair value of the asset is less than the carrying value, an impairment charge is recognized.

During the fourth quarter of fiscal 2011, we conducted our quarterly impairment test. As a result of the impairment analysis, the Company determined that the intangible assets were impaired as of December 31, 2011. The $1.3 million customer relationship intangible asset was written off and the tradename intangible asset was written down by $0.4 million to $0.5 million from $0.9 million. The impairment evaluation process was based on the income approach and utilized discounted cash flows to determine the fair values of reporting units. Material assumptions used in the impairment analysis included the weighted average cost of capital (WACC) of 19 percent for the business entity valuation, 21% for the individual intangible asset valuation, and a terminal growth rate of 3% based on global GDP projections. The resulting impairment was recorded as an operating expense in the fourth quarter of 2011.

Foreign Currency Translation

The Company’s functional currency is the U.S. dollar. Results of operations for foreign entities are translated to US dollars using the average exchange rates during the period. Assets and liabilities for foreign entities are translated using the exchange rates in effect as of the date of the balance sheet. Resulting translation adjustments are recorded as a foreign currency translation adjustment into other accumulated comprehensive income/(loss) in stockholders’ equity.

The Company uses forward exchange contracts from time to time to mitigate foreign currency risk. The Company limits exposure to foreign currency fluctuations in most of its contracts through provisions that require client payments in currencies corresponding to the currency in which costs are incurred. At December 31, 2011 and 2010, the Company did not apply hedge accounting treatment to its forward exchange contracts. Accordingly the change in fair value of these contracts was recorded in other income.

Results of Operations

Results of Operations for the fiscal year ended December 31, 2011 compared to the fiscal year ended December 31, 2010

Revenues

Total revenues more than doubled, increasing $43.7 million for the fiscal year ended December 31, 2011 compared to the prior year. This increase is attributable to the $44.5 million increase in construction revenue reflecting the Company’s significant strides in the past several years in business development efforts and leveraging its significant experience in bidding, winning and executing government contracts with its strategic partners.

General Construction - Specifically, the revenue is largely attributable to the Containerized Housing Units (CHU) project in Iraq, the IDIQ program, which began in 2011 and was 51% complete as of December 31, 2011. In addition, 1% of the Niamey, Niger rehabilitation project was completed during 2011 resulting in $0.3 million of construction revenue. The Niger contract is expected to be completed in early 2014 with steady progression of work in 2012 and 2013. The work on the Sather contract awarded in January 2012 commenced in early 2012 and as such, no revenue has been recorded on this contract in 2011.The increases in construction revenue driven by the CHU program and Niger project were partially offset by the $3.3 million decrease in revenue from the U.S. Embassy project in Fiji as the first and second contracts for this project reached substantial completion, 99.4% and 97% completion as of December 31, 2011, respectively. The first Fiji embassy contract, awarded in November 2006, was for approximately $42.6 million, while the second contract (notice to proceed given on April 6, 2010) was for an estimated $8.1 million. Only approximately 1.0% ($0.3 million) of the total project revenue related to the first U.S. Embassy contract was recognized during 2011 and approximately $3.6 million of revenue was recognized on the second contract. 20% of the second contract was completed during 2011 as work on the interior fit out, commissioning, closeout, and warranty progressed. During the prior year, 0.8% and 77.1% of the work was completed and $1.0 million and $6.3 million of revenue were recognized on the first and second Fiji Embassy contracts respectively.

Transmitter design, manufacture, installation and service— This revenue relates to the TransRadio subsidiary and was $10.2 million in 2011 or $2.4 million lower than the prior year. TransRadio revenues are recognized pursuant to the terms of the contracts with the client, which require customer approval of the operation of the equipment prior to invoicing. Thus, revenues of this segment are by nature dependent on the size and number of contracts completed and accepted by customers during a period. Revenues of this segment are also cyclical and due to the economic decline, especially in Europe, coupled with violence and the “Arab Spring” in the Middle East, our revenues in this segment were negatively impacted. The 2011 revenue reflects the completion and acceptance of one large contract, the Luxembourg contract, that generated revenue of approximately $3.5 million coupled with revenue contracts completed and accepted in 2011in Switzerland, Germany, Israel, Spain, Russia, France, and other countries that totaled $6.7 million. In 2010 there were three large contracts in Ethiopia and Qatar that were completed and accepted totaling $6.7 million, combined with other smaller contracts in Yemen, Switzerland, Germany and other countries that totaled $5.9 million in 2010. As noted above, the

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Company intends to sell TransRadio during early 2012 to curtail losses of the segment and to allow management to focus on core targeted strategic initiatives in its core competency of diversified contracting through the construction and power segments.

Service Fees — Power Generation Plant. Service fees (Including Other Revenue)— Total Power Generation revenue increased $1.5 million in 2011 compared to 2010. The increase reflects the $2.0 million Vanuatu management fee for the operation of the Vanuatu power plant under the Memo of Understanding (MOU) which is new in 2011. The positive impact of the MOU more than offset the decreases in power generation revenue attributable to the Fiji and TCNMI operations. — Power generation plant service fees decreased $0.5 million or (or 7.9%) to $5.8 million for 2011, from $6.3 million for 2010. The decrease was primarily due to lower revenues from the Kinoya power generation as Fiji’s Electric Authority maximized their use of hydro power due to significantly higher levels of rain fall in 2011 versus 2010, and due to the G8 engine failure and G9 maintenance. In addition, CNMI revenues also decreased by $0.2 million due to a combination of the impact of a power saving device installed at a feeder location and conservation efforts of private consumers.

Costs and Expenses

General Construction Costs —( including Construction Costs — Related Party). Total construction costs, including construction costs — related party, increased $41.9 million to $48.0 million for 2011 compared to 2010, reflecting the costs on the Iraq CHU contract and related modifications that are all new in 2011 ($45.4 million) The gross margin on the CHU contract to date is in line with expectations. This increase is offset by a $2.1 million decrease in costs related to the Fiji Embassy contracts as the first contract was 99.4% complete as of December 31, 2010 and only 20% of the work on the second contract was completed in 2011; the second contract is 97% complete at December 31, 2011.

Transmitter design, manufacture, installation and service cost — These costs are associated with TransRadio, and they decreased approximately $2.5 million or 25% to $7.4 million for 2011, compared to$9.8 million for the prior year. Transmitter costs were 72% of revenue compared to 78 % for the prior year period, reflecting the high margin on a large contract completed in 2011 .

Operations and Maintenance Costs — Power Generation Plant. Operations and maintenance costs — power generation plant increased $1.9 million (60%) to $5.0 million for 2011 from $3.1 million for 2010, reflecting the increase in planned maintenance expense resulting from planned maintenance  carried out on the G9 engine at Kinoya during the third quarter of 2011 (approximately $1.0 million) and on the G4 engine at Vuda ($0.3 million) coupled with accrued G8 engine restoration costs totaling approximately $0.6 million primarily related to insurance deductibles.

Gross Profit

Gross profit increased by $2.3 million (32%) to $9.5 million for 2011 as compared to $7.2 million for the prior year even in light of a the occurrence the infrequent engine failure that significantly impacted costs in the power generation segment and the difficult economic environment faced by the transmitter segment. The $2.3 million gross profit increase is primarily comprised of a $2.6 million increase in the construction segment gross profit that was partially offset by the $0.4 million decreases in gross profit for the power generation segment. The radio transmitter segment gross profit was relatively flat year over year. The negative impact of the engine failure and hydro utilization on revenue ($0.4 million), coupled with the insurance deductible expenses ($0.5 million) and higher  maintenance expenditures  ($1.0 million decrease in gross margin) was largely offset by the positive impact of the VUI MOU. This improved margin, even in light of the engine failure, reflects the Company’s continued efforts related to business development and strategic partner formation initiatives that are positioning Pernix for future growth and enhanced performance. We anticipate that the power generation segment will be well positioned to improve performance given the significant maintenance completed during the last half of 2011, while the anticipated insurance claim receipts will be recorded in 2012 as the insurance claim funds are received. In addition, power production is expected to be enhanced as the segment accelerated into 2011 significant maintenance activities originally scheduled for 2012.

Operating Expenses

Salaries and Employee Benefits. Salaries and employee benefits increased $1.3 million (22.2%) to $7.3 million for 2011 from $6.0 million for 2010. This increase was due primarily to the additional personnel hired to support estimating and construction development activities coupled with the impact of higher bonuses, and for performance in 2011 and health care insurance costs as the Company improved its health care coverage for employees.

General and Administrative Expenses. General and administrative expenses decreased $1.6 million (33%) to $2.6 million for 2011 from $4.5 million for the prior year. The decrease reflects reductions of a broad array of expense categories including cost savings on professional fees incurred by Pernix associated with the acquisition of TransRadio (early 2010 but none in 2011),  certain foreign

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currency losses, advertising expense, travel expenses, depreciation, insurance, and miscellaneous taxes and licenses that are primarily attributable to cost cutting measures successfully implemented by TransRadio.

Other Income (Expense)

Other expense decreased by $0.4 million during 2011 compared to 2010 reflecting lower foreign exchange transaction losses as the Fiji embassy construction expenses decreased coupled with the income generated by the engine rebuild work performed by TFL and other individually small decreases.

Income Tax Benefit (Expense)

Included in the 2011 results is the $6.1 million benefit from the release of a portion of the Company’s income tax valuation allowance against its net operating loss (NOL) carry forward (CF) deferred tax assets (DTA). Of this $6.1 million, $0.8 million reflects the benefit of the utilization of the NOL CF DTA to offset 2011 income tax expense with the remaining $5.3 million impact reflecting the release of the valuation allowance release based on our assessment that it is more likely than not that we will utilize our domestic NOL CF deferred tax assets and a portion of NOL CF deferred tax assets associated with our operations in the Commonwealth of the Northern Mariana Islands to offset future taxable income. This benefit is reflective of our positive outlook of the Company’s future operations.

Consolidated Net Income Attributable to Common Shareholders

The Company experienced a $5.7 million improvement in the consolidated net income attributable to common shareholders of $1.8 million net income for 2011 compared to a consolidated net loss of $3.9 million for the comparable prior year period. The improved performance is driven by the recognition of the $5.3 million deferred tax benefit associated with the future utilization of the NOL CF DTA, coupled with income generated by PS JV ($2.6 million increase) and the VUI MOU income, that more than offset the impact of the engine failure and maintenance expenses in the Fiji power production operations ($1.5 million) and the increase in losses attributable to TransRadio ($1.0 million).

The Company is well positioned for the remainder of 2012 and beyond as it sold its equity interest in TransRadio in March,  2012 and anticipates benefits from the significant strides in the past several years in the general construction segment, through business development efforts and leveraging its significant experience in bidding, winning, and executing government contracts with its strategic partners, as well as the positive position of the power generation segment heading into 2012, given the significant maintenance completed during the last half of 2011, and the $0.6 million of anticipated insurance claim proceeds that we expect to record in early 2012. As of March 30, 2012, TFL has received and recorded in income $337,000 of insurance proceeds.

Liquidity and Capital Resources

Cash Requirements

We generate cash flow primarily from serving as the general contractor on construction projects for the U.S. Government, through the operation and maintenance of power generation plants, from the design, installation and service of transmitters and from financing obtained from third party banks, affiliated parties and through sales of common and preferred stock. In addition, during 2011 and early 2012, the Company is in the process of filing a Registration Statement with the SEC to register 5,000,000 shares of previously unissued stock in a primary fixed price offering and 6,245,585 shares on behalf of selling stockholders under a secondary offering. The Company anticipates this registration process as it relates to the primary fixed price offering will augment our current sources of capital after the Registration Statement becomes effective, which is expected to occur  during the second quarter of 2012. Beyond the cash expected to be generated by operations and from third party banks and issuance of additional shares after the effective date of the pending registration statement, the Company expects to seek debt financing or equity based support from its principal stockholders,

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Ernil Continental and Halbarad Group Ltd., on an as-needed basis only. The Company also sold the radio transmitter segment in early 2012 to curtail losses related to the downturn in the European and Middle Eastern economies and to allow Pernix management to focus on the general construction and power segment operations that it intends to grow.

It is our opinion that, in the absence of significant unanticipated cash demands, current and forecasted cash flow from our operations, combined with equity and debt financing capacity, will provide sufficient funds to meet anticipated operating requirements, capital expenditures, equity investments, and strategic acquisitions. We also believe that collections on the outstanding receivables which are primarily U.S. Government receivables with a timely payment history as well as funds available from various funding sources will permit the construction operations to meet the payment obligations to vendors and subcontractors.

As of December 31, 2011, the Company’s total assets exceeded total liabilities by $11.5 million. This was a $2.7 million increase from December 31, 2010. As of December 31, 2011, the Company had $0.9 million outstanding on the line of credit and short term borrowings of $2.3 million, As of December 31, 2011, the Company had an accumulated deficit of $68.1 million and total stockholders’ equity of $11.5 million.

The Company had operating losses of $2.9 million and $3.2 million for 2011 and 2010, respectively. The Company earned net income attributable to Pernix Group common shareholders of $1.8 million during 2011 and incurred net losses attributable to Pernix Group to common shareholders of $3.9 million in 2010.

Cash used by operating activities was $3.4 million compared to cash generated of $0.4 million for 2011 and 2010, respectively. Funds used in investing activities for 2011 and 2010 were $0.3 million and $2.2 million, respectively. Funds provided by financing activities and representing either increases in debt, common stock issuances or capital contributions amounted to $2.0 million and $2.7 million for 2011 and 2010, respectively.

The decrease in our cash position largely reflects the significant 2011 use of cash by the radio transmitter segment which the Company sold in March, 2012 and the acceleration of $1.1 million of certain 2012 maintenance work on various engines into 2011 in connection with the engine failure at TFL. The Transmitter design, manufacture, installation and service segment has incurred significant operating losses in the past two years and has successfully implemented cost savings measures. However, the segment continues to operate at a loss until additional revenue sources can be secured through award of new contracts. During March 2012, the segment did receive contract work from Egypt totaling $3.1 million.  The segment has approximately $1.4 million unsecured financing that is renewable annually, with $0.5 million still available as of  December 31, 2011. To supplement the operating cash flow of TransRadio, Pernix Group provided the necessary operating liquidity required by TransRadio until the segment was sold in March, 2012. The total loan outstanding to TransRadio from Pernix at the time of the sale was $0.7 million. The Company anticipates repayment during April, 2012.

The Company does not currently have material commitments for capital expenditures as of December 31, 2011.

Recently Issued Accounting Pronouncements

In December 2011, the FASB issued an ASU that require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. This ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods and an entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently evaluating this guidance but as there is no goodwill on our balance sheet, the guidance is not expected to have a material impact on our financial statements or disclosures.

In September 2011, the FASB issued an ASU which affects the impairment testing of goodwill. Under the amendments in this Update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20- 35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9.

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Under the amendments referenced in the preceding paragraph, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company is currently evaluating this guidance but as there is no goodwill on our balance sheet, the guidance is not expected to have a material impact on our financial statements or disclosures.

In May 2011, the FASB issued new guidance to clarify the application of existing fair value measurement requirements and to change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, applied prospectively. Our effective date is March 31, 2012. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. When effective, we will comply with the disclosure provisions of this guidance.

Off-Balance Sheet Arrangements

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 non-cancelable operating leases with a remaining term of more than one year are primarily related to property, vehicles, and construction equipment, in effect at December 31, 2011 and 2010 and total $1.7 million and $1.3 million, respectively. The Company does not guarantee residual value of any leased assets. There were no off balance sheet purchase commitments as of December 31, 2011 and 2010.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PERNIX GROUP, INC.
Index to Consolidated Financial Statements
December 31, 2011 and 2010

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Pernix Group, Inc.

We have audited the accompanying consolidated balance sheets of Pernix Group, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2011. Pernix Group, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engage to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pernix Group, Inc. as of December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

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PERNIX GROUP, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2011 and 2010

See accompanying notes to consolidated financial statements.

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PERNIX GROUP, INC.

AND SUBSIDIARIES

Consolidated Statements of Operations

For years ended December 31, 2011 and 2010

See accompanying notes to consolidated financial statements.

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PERNIX GROUP, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For years ended December 31, 2011 and 2010

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PERNIX GROUP, INC.

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

Years ended December 31, 2011 and 2010

See accompanying notes to consolidated financial statements.

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PERNIX GROUP, INC.

Consolidated Statements of Cash Flows

For years ended December 31, 2011 and December 31, 2010