Attached files

file filename
EX-32.2 - EX-32.2 - Pernix Group, Inc.a12-13930_1ex32d2.htm
EX-32.1 - EX-32.1 - Pernix Group, Inc.a12-13930_1ex32d1.htm
EX-31.2 - EX-31.2 - Pernix Group, Inc.a12-13930_1ex31d2.htm
EX-31.1 - EX-31.1 - Pernix Group, Inc.a12-13930_1ex31d1.htm

Table of Contents

 

 

 

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2012

 

OR

 

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

 

For the transition period from            to           

 

Commission file number — 333-92445

 

PERNIX GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-4025775

(State or other jurisdiction of

 

(IRS employer identification no.)

Incorporation or organization)

 

 

 

151 E. 22nd Street, Lombard, Illinois

 

60148

(Address of principal executive offices)

 

(Zip code)

 

(630) 620-4787

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

On August 10, 2012, 9,403,697 shares of our common stock were outstanding.

 

 

 



Table of Contents

 

PERNIX GROUP, INC.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. Financial Information

 

 

 

Item 1.

Financial Statements:

3

 

Condensed Consolidated Balance Sheets— June 30, 2012 (unaudited) and December 31, 2011

3

 

Condensed Consolidated Statements of Operations (unaudited) —six months ended June 30, 2012 and 2011

4

 

Condensed Consolidated Statements of Operations (unaudited) — three months ended June 30, 2012 and 2011

5

 

Condensed Consolidated Statements of Comprehensive Income / (Loss) (unaudited) — six months ended June 30, 2012 and 2011

6

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)— six months ended June 30, 2012 and 2011

7

 

Condensed Consolidated Statements of Cash Flows (unaudited) — six months ended June 30, 2012 and 2011

8

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

Item 2.

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

32

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

38

Item 4.

Controls and Procedures

38

 

 

 

PART II. Other Information

 

 

 

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

39

 

Signatures

40

 

2



Table of Contents

 

ITEM 1: FINANCIAL STATEMENTS

 

PERNIX GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

As of June 30, 2012 and December 31, 2011

 

 

 

Unaudited

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

8,765,139

 

$

2,933,894

 

Accounts receivable less allowance for doubtful accounts of $0 at June 30, 2012 and $142,235 at December 31, 2011

 

17,446,664

 

28,855,763

 

Accounts receivable - related party

 

9,803

 

 

Other receivables

 

261,293

 

10,150

 

Inventories

 

1,449,700

 

4,459,596

 

Work in process

 

 

753,776

 

Restricted cash

 

 

544,017

 

Deferred tax asset

 

1,588,953

 

1,650,715

 

Prepaid expenses and other current assets

 

394,697

 

3,605,366

 

Total current assets

 

29,916,249

 

42,813,277

 

Plant, and equipment, net of accumulated depreciation of $1,041,671 and $2,375,041 as of June 30, 2012 and December 31, 2011, respectively

 

408,567

 

716,010

 

Deferred tax asset, (net of valuation allowance of $15,926,895 and $15,053,181 as of June 30, 2012 and December 31, 2011, respectively)

 

3,729,878

 

3,883,213

 

Other assets

 

47,533

 

205,165

 

Intangible assets:

 

 

 

 

 

Trademark

 

 

488,541

 

Total assets

 

$

34,102,227

 

$

48,106,206

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

4,979,538

 

$

24,403,671

 

Accounts payable — related party

 

35,088

 

24,555

 

State income tax payable

 

 

152,041

 

Federal income tax payable

 

 

41,655

 

Accrued expenses

 

10,575,840

 

2,085,992

 

Interest payable — related party

 

452,412

 

390,514

 

Other current liabilities

 

31,701

 

834,007

 

Outstanding credit lines

 

 

891,709

 

Short term debt

 

17,292

 

558,985

 

Short term debt - related party

 

1,000,000

 

1,738,500

 

Prepayments received on orders

 

 

802,345

 

Billings in excess of costs and estimated earnings

 

6,064,490

 

4,354,491

 

Dividend payable

 

103,109

 

164,821

 

Total current liabilities

 

23,259,470

 

36,443,286

 

Other non-current liabilities

 

 

175,010

 

Long-term debt - related party

 

1,274,301

 

 

Long-term debt

 

30,471

 

 

Total liabilities

 

24,564,242

 

36,618,296

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Pernix Group, Inc. and Subsidiaries Stockholders’ equity

 

 

 

 

 

Convertible senior preferred stock, $0.01 par value. Authorized 50 million shares $170,000 and $389,250 involuntary liquidation preference, 170,000 and 389,250 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

1,700

 

3,893

 

Common stock, $0.01 par value. Authorized 200,000,000 shares, 9,403,697 issued and outstanding at June 30, 2012 and December 31, 2011

 

94,037

 

94,037

 

Additional paid-in capital

 

76,844,750

 

77,921,831

 

Accumulated deficit

 

(69,840,310

)

(68,109,729

)

Accumulated comprehensive (loss)

 

(231,562

)

(538,451

)

Total Pernix Group, Inc. and Subsidiaries Stockholders’ equity

 

6,868,615

 

9,371,581

 

Non-controlling interest

 

2,669,370

 

2,116,329

 

Total Stockholders’ equity

 

9,537,985

 

11,487,910

 

Total liabilities and Stockholders’ equity

 

$

34,102,227

 

$

48,106,206

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

PERNIX GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

Six Months Ended June 30, 2012 and 2011

 

 

 

June 30, 2012

 

June 30, 2011

 

Revenues:

 

 

 

 

 

Construction revenues

 

$

58,237,652

 

$

6,162,006

 

Service fees — power generation plant

 

3,077,683

 

4,157,820

 

Other revenue

 

9,620

 

 

Gross revenues

 

61,324,955

 

10,319,826

 

Costs and expenses:

 

 

 

 

 

Construction costs

 

54,000,353

 

4,779,846

 

Operation and maintenance costs - power generation plant

 

2,110,984

 

1,355,842

 

Cost of revenues

 

56,111,337

 

6,135,688

 

Gross profit

 

5,213,618

 

4,184,138

 

Operating expenses:

 

 

 

 

 

Salaries and employee benefits

 

1,587,312

 

1,278,621

 

Occupancy - related party

 

52,445

 

38,481

 

General and administrative

 

1,765,019

 

1,247,018

 

Total operating expenses

 

3,404,776

 

2,564,120

 

Operating income

 

1,808,842

 

1,620,018

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest (expense) / income, net

 

(11,756

)

309

 

Interest (expense) - related party

 

(89,293

)

(40,935

)

Foreign currency exchange (loss)

 

(18,403

)

(145,267

)

Other income, net

 

763,857

 

21,563

 

Total other income / (expense)

 

644,405

 

(164,330

)

 

 

 

 

 

 

Consolidated income before income taxes

 

2,453,247

 

1,455,688

 

 

 

 

 

 

 

Income tax (expense)

 

(1,160,540

)

(267,052

)

 

 

 

 

 

 

Consolidated net income from continuing operations

 

1,292,707

 

1,188,636

 

 

 

 

 

 

 

(Loss) from discontinued operations, net of income taxes

 

(1,117,525

)

(760,688

)

 

 

 

 

 

 

Consolidated net income

 

175,182

 

427,948

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interest

 

1,860,180

 

105,163

 

 

 

 

 

 

 

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

 

(1,684,998

)

322,785

 

 

 

 

 

 

 

Less: Preferred stock dividends

 

45,583

 

62,729

 

 

 

 

 

 

 

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

 

$

(1,730,581

)

$

260,056

 

 

 

 

 

 

 

EPS attributable to the stockholders of Pernix Group, Inc. and Subsidiaries:

 

 

 

 

 

Basic net (loss) / income per share from continuing operations

 

$

(0.07

)

$

0.11

 

Diluted net (loss) / income per share from continuing operations

 

$

(0.07

)

$

0.11

 

Basic net (loss) per share from discontinued operations

 

$

(0.12

)

$

(0.08

)

Weighted average shares outstanding - basic

 

9,403,697

 

9,403,697

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

9,403,697

 

9,429,647

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

PERNIX GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

Three Months Ended June 30, 2012 and 2011

 

 

 

June 30, 2012

 

June 30, 2011

 

Revenues:

 

 

 

 

 

Construction revenues

 

$

22,739,721

 

$

4,882,000

 

Service fees — power generation plant

 

1,594,979

 

2,193,985

 

Other revenue

 

 

 

Gross revenues

 

24,334,700

 

7,075,985

 

Costs and expenses:

 

 

 

 

 

Construction costs

 

20,231,661

 

3,661,247

 

Operation and maintenance costs - power generation plant

 

682,620

 

721,895

 

Cost of revenues

 

20,914,281

 

4,383,142

 

Gross profit

 

3,420,419

 

2,692,843

 

Operating expenses:

 

 

 

 

 

Salaries and employee benefits

 

770,331

 

770,955

 

Occupancy - related party

 

26,038

 

11,315

 

General and administrative

 

875,905

 

628,990

 

Total operating expenses

 

1,672,274

 

1,411,260

 

Operating income

 

1,748,145

 

1,281,583

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest (expense) / income, net

 

(1,174

)

171

 

Interest (expense) - related party

 

(48,053

)

(21,633

)

Foreign currency exchange gain / (loss)

 

75,631

 

(83,658

)

Other income, net

 

1,754

 

13,428

 

Total other income / (expense)

 

28,158

 

(91,692

)

 

 

 

 

 

 

Consolidated income before income taxes

 

1,776,303

 

1,189,891

 

 

 

 

 

 

 

Income tax (expense)

 

(1,270,279

)

(203,600

)

 

 

 

 

 

 

Consolidated net income from continuing operations

 

506,024

 

986,291

 

 

 

 

 

 

 

Income from discontinued operations, net of income taxes

 

 

119,725

 

 

 

 

 

 

 

Consolidated net income

 

506,024

 

1,106,016

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interest

 

1,174,284

 

114,581

 

 

 

 

 

 

 

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

 

(668,260

)

991,435

 

 

 

 

 

 

 

Less: Preferred stock dividends

 

14,127

 

31,539

 

 

 

 

 

 

 

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

 

$

(682,387

)

$

959,896

 

 

 

 

 

 

 

EPS attributable to the stockholders of Pernix Group, Inc. and Subsidiaries:

 

 

 

 

 

Basic net (loss) / income per share from continuing operations

 

$

(0.07

)

$

0.09

 

Diluted net (loss) / income per share from continuing operations

 

$

(0.07

)

$

0.09

 

Basic net income per share from discontinued operations

 

$

N/A

 

$

0.01

 

Weighted average shares outstanding - basic

 

9,403,697

 

9,403,697

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

9,403,697

 

9,429,647

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

PERNIX GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income / (Loss) (unaudited)

Six Months Ended June 30, 2012 and 2011

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

175,182

 

$

427,948

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustment

 

370,311

 

561,059

 

 

 

 

 

 

 

Total comprehensive income

 

$

545,493

 

$

989,007

 

 

 

 

 

 

 

Net income attributable to Non-controlling interests

 

$

1,860,180

 

$

105,163

 

Foreign currency translation attributable to Non-controlling interests

 

63,422

 

63,952

 

Total Comprehensive (loss) / income attributable to the stockholders of Pernix Group, Inc.

 

$

(1,378,109

)

$

819,892

 

 

PERNIX GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income / (Loss) (unaudited)

Three Months Ended June 30, 2012 and 2011

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

506,024

 

$

1,106,016

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustment

 

(126,316

)

251,796

 

 

 

 

 

 

 

Total comprehensive income

 

$

379,708

 

$

1,357,812

 

 

 

 

 

 

 

Net income attributable to Non-controlling interests

 

$

1,174,284

 

$

114,581

 

Foreign currency translation attributable to Non-controlling interests

 

693

 

19,775

 

Total Comprehensive (loss) / income attributable to the stockholders of Pernix Group, Inc.

 

$

(795,269

)

$

1,223,456

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

PERNIX GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

Six Months Ended June 30, 2012 and 2011

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Accumulated

 

Comprehensive

 

Common

 

Preferred

 

paid-in

 

Non-controlling

 

 

 

Total

 

deficit

 

(loss)

 

Stock

 

Stock

 

capital

 

Interest

 

Balance at December 31, 2011

 

$

11,487,910

 

$

(68,109,729

)

$

(538,451

)

$

94,037

 

$

3,893

 

$

77,921,831

 

$

2,116,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

175,182

 

$

(1,684,998

)

$

 

$

 

$

 

$

 

$

1,860,180

 

Foreign currency translation adjustment

 

370,311

 

 

306,889

 

 

 

 

63,422

 

Comprehensive income:

 

545,493

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock dividends

 

(45,583

)

(45,583

)

 

 

 

 

 

Preferred Stock repurchased

 

(1,096,250

)

 

 

 

(2,193

)

(1,094,057

)

 

Additional paid in capital from Incentive Stock Option Plan award

 

22,212

 

 

 

 

 

22,212

 

 

Distribution to Non-controlling Interest Holders

 

(1,404,474

)

 

 

 

 

 

 

 

 

 

 

(1,404,474

)

Change as a result of TransRadio disposition

 

28,677

 

 

 

 

 

(5,236

)

33,913

 

Balance at June 30, 2012

 

$

9,537,985

 

$

(69,840,310

)

$

(231,562

)

$

94,037

 

$

1,700

 

$

76,844,750

 

$

2,669,370

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Accumulated

 

Comprehensive

 

Common

 

Preferred

 

paid-in

 

Non-controlling

 

 

 

Total

 

deficit

 

(loss)

 

Stock

 

Stock

 

capital

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

$

8,810,126

 

$

(69,932,707

)

$

(629,349

)

$

94,037

 

$

3,893

 

$

77,921,831

 

$

1,352,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

427,948

 

$

322,785

 

$

 

$

 

$

 

$

 

$

105,163

 

Foreign currency translation adjustment

 

561,059

 

 

497,107

 

 

 

 

63,952

 

Comprehensive income

 

989,007

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock dividends

 

(62,729

)

(62,729

)

 

 

 

 

 

Change as a result of TransRadio disposition

 

(166,980

)

 

 

 

 

 

(166,980

)

Contributions from non-controlling interest

 

48,000

 

 

 

 

 

 

48,000

 

Balance at June 30, 2011

 

$

9,617,424

 

$

(69,672,651

)

$

(132,242

)

$

94,037

 

$

3,893

 

$

77,921,831

 

$

1,402,556

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

PERNIX GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30, 2012 and 2011

 

 

 

June 30, 2012

 

June 30, 2011

 

Cash flows from operating activities:

 

 

 

 

 

Consolidated net income

 

$

175,182

 

$

260,968

 

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

 

 

 

 

 

Depreciation

 

95,304

 

102,567

 

Amortization of Intangibles

 

 

78,154

 

Loss from discontinued operations

 

1,081,568

 

 

Incentive Stock Option Plan amortization expense

 

22,212

 

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

10,261,503

 

(5,648,875

)

Retainage Receivable

 

 

(405,599

)

Accounts receivable - related party

 

(2,742

)

(4,006

)

Notes receivable - related party

 

692,098

 

 

Other receivables

 

(191,772

)

 

Inventories and work in process

 

89,121

 

2,487,101

 

Prepaid expenses and other current assets

 

2,726,910

 

944,918

 

Other assets

 

35,193

 

876,232

 

Deferred income tax assets (net of valuation allowance)

 

1,001,363

 

 

Accounts payable

 

(19,550,096

)

(1,717,288

)

Accounts payable - related party

 

96,075

 

37,041

 

Income Taxes Payable

 

(193,696

)

(24,228

)

Accrued expenses

 

8,759,264

 

2,014,218

 

Billings in excess of cost and estimated earnings

 

1,709,999

 

(2,765,912

)

Other liabilities

 

34,643

 

(1,115,707

)

Net cash provided / (used in) operating activities

 

6,842,129

 

(4,880,416

)

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of discontinued operations

 

1,200,000

 

 

Disposals/Transfers of Assets

 

80

 

1,362

 

Capital expenditures

 

(187,450

)

(76,420

)

Net cash provided / (used in) investing activities

 

1,012,630

 

(75,058

)

Cash flows from financing activities:

 

 

 

 

 

Earnings distribution to non-controlling interest

 

(1,404,474

)

 

Repurchase of Preferred Stock

 

(1,203,545

)

 

Increase in Indebtedness

 

 

905,378

 

Capital contributions from minority interest holders

 

 

48,000

 

Proceeds from borrowings - bank vehicle loan

 

47,762

 

 

Proceeds from borrowings - related party

 

900,000

 

1,000,000

 

Payments on borrowings - related party

 

(700,000

)

 

Net cash (used) / provided by financing activities

 

(2,360,257

)

1,953,378

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

336,742

 

(93,306

)

Net increase/(decrease) in cash and cash equivalents

 

5,831,244

 

(3,095,402

)

Cash and cash equivalents at beginning of period

 

2,933,894

 

4,287,593

 

Cash and cash equivalents at end of period

 

$

8,765,139

 

$

1,192,191

 

Cash paid during the period for interest

 

$

12,185

 

$

47,140

 

Cash paid during the period for interest - related party

 

$

12,897

 

7,500

 

Cash paid during the period for income taxes

 

$

242,296

 

$

541,284

 

Supplemental disclosure of noncash transactions:

 

 

 

 

 

Preferred stock dividends payable

 

$

45,583

 

$

62,729

 

 

See accompanying notes to condensed consolidated financial statements.

 

8



Table of Contents

 

PERNIX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Description of Business

 

In this report, we use the terms “Pernix Group,” “Pernix,” “PGI,” “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 calendar years.

 

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 June 30, 2012, Pernix Group employs 138 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 two primary operating business segments: Construction Services as a Design-Build General Contractor in the public and private markets and Power Generation Services as a builder, manager and investor in Power Projects as an Independent Power Producer and as a General Contractor. 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 Niger, Africa and in the U.S. We provide our services in a broad range of end markets, including construction, construction management, power and facility operations and maintenance services. In addition to these two operating segments, the Corporate operations are separately reported as its own segment.

 

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.

 

Until March 2012, we also operated a RF Transmitter Design, Manufacture and Installation segment through TransRadio SenderSysteme, Berlin, A.G. (TransRadio). TransRadio was acquired in 2009 to serve as a global platform for cross-selling construction segment services. 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 and the 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 deteriorated and although the radio transmitter segment did win two contracts in March 2012, prior to the disposition, the Company did not know when historical levels of sales volumes would resume. On March 26, 2012, the Company executed an agreement to sell its 82% interest in TransRadio to Bevita Commercial Corporation, a related party for $1.2 million settled in cash on the effective closing date, March 28, 2012. For the period from January 1, 2012 through March 28, 2012, the effective date of the sale, the loss on the discontinued operations and sale of TransRadio was $1.1 million, net of the $0.8 million tax benefit. TransRadio accounted for $3.6 million and $2.7 million of 2011 and 2010 consolidated net losses, respectively. If not for these losses, Pernix would have had net income of $5.4 million in 2011 and would have reduced its net loss in 2010 to $1.2 million. The purpose of the sale was to curtail future losses attributable to TransRadio and to allow the Pernix management team to focus on the strategic initiatives pertaining to the Construction, Power and Corporate segments.

 

9



Table of Contents

 

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.

 

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 included 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 strategic partnerships 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.

 

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 anticipates will provide revenue in the $98 million to $112 million range to Pernix via Pernix-Serka Joint Venture (PS JV). PS JV is a highly effective joint venture with Serka Insaat ve Ticaret, A.S. (Serka) that is 52% owned by Pernix and 48% by Serka. Thus far PS JV has received an award and change orders totaling $50.2 million on the Sather project and is anticipating the remaining award amount to be defined in the third quarter of 2012. PS JV has an office in Vienna, Virginia, in close proximity to U.S. Government agencies to closely manage its customer relationships (including OBO) and to provide effective contract execution and oversight for its customers on its mission critical, fast-track work efforts in Iraq.

 

In early 2011, PS JV was awarded a multi-billion dollar Indefinite Delivery Indefinite Quantity (IDIQ) contract with OBO. This contract provides 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 exercised. PS JV has actively responded to several Task Order Proposal Requests to bid under this IDIQ contract and has been

 

10



Table of Contents

 

awarded two contracts with revenue totaling over $153.5 million under this program during the fifteen months from April 2011 through June 2012.

 

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 OBO exercised a bid alternate for this project valued at $6.4 million to renovate additional office spaces, bringing the total contract value for the Niger rehabilitation project to $24.5 million. In the fourth quarter of 2011, Pernix established a limited liability company in Niger in connection with this contract. In early July, 2012, Pernix Group, Inc. received the Notice to Proceed (NTP) and Company representatives joined OBO representatives in Niger for a kick-off meeting that introduced the beginning of substantial construction on the project. The Company anticipates the project construction will continue into the third quarter of 2014.

 

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 strategic alliances with companies 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. These projects have reached substantial completion on time and 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.

 

Power Generation Services

 

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

 

11



Table of Contents

 

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-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.

 

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

 

12



Table of Contents

 

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 energy projects as an independent power producer (IPP) or using the BOOT model. Our energy projects to date have been in the North and South Pacific. Our Power Generation Services segment currently operates in three countries and contributed $3.1 million, or 5.0% of our year to date 2012 revenue compared to $4.2 million or 40.3% for the comparable prior year period. We currently operate power plants in the Republic of the Fiji Islands (Fiji) and the Commonwealth of the Northern Mariana Islands (CNMI). In addition we are currently managing the power structure on an island in Vanuatu.

 

Telesource (Fiji), Limited

 

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.

 

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. As yet another testament to FEA’s satisfaction with TFL, in June, 2012, TFL submitted a bid to FEA to add 20MW of additional capacity to the Vuda Power Plant. The Company anticipates that FEA will announce the successful bidder during the third quarter of 2012.

 

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

 

13



Table of Contents

 

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 must pay 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 source other 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 early August, 2012, there are three active members appointed to the PUC in CNMI, which would provide an adequate quorum for approval of Modification 5 if the PUC was inclined to approve it at this time. CNMI is under significant financial pressure and the Company does not know when or if the PUC will approve this modification.

 

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 a 15 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 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 anticipates that it will continue 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 government of Vanuatu may not render a decision regarding the longer term concession deed until the trial brought by the previous concessionaire is concluded. This may take up to two years depending on the complexity of the case and the schedule of the court.

 

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.

 

14



Table of Contents

 

RF Transmitter Design, Installation and Service (Discontinued Segment)

 

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.

 

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, prior to the disposition, the Company did not know when historical levels of sales volumes would 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. The loss on the operations and sale of the discontinued TransRadio operation before consideration of the income tax benefit are $0.7 million and $1.2 million, respectively, for the year to date period ending March 28, 2012, for a total loss of $1.9 million before the tax benefit of $0.8 million for the January 1, 2012 through the date of the sale. To be consistent with the 2012 presentation, the Company reclassified the $0.8 million net loss from TransRadio operations for the comparable six months ended June 30, 2011 to be presented as loss from discontinued operations, net in the 2011 statement of operations. See the note regarding Discontinued Operations for additional information.

 

2. Significant Accounting Policies

 

Basis of Presentation— The interim condensed consolidated financial statements and notes thereto of Pernix Group have been prepared by management without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, the Company believes that the disclosures are adequate to make the information presented not misleading. The statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal and recurring nature. These condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in the Company’s 2011 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2012.

 

Principles of Consolidation and Presentation— The condensed consolidated financial statements include the accounts of all majority-owned subsidiaries and material joint ventures in which the Company is the primary beneficiary. All inter-company accounts have been eliminated in consolidation. Also see Note 1 regarding joint ventures.

 

Reclassification— Certain reclassifications were made to prior years’ amounts to conform to the 2012 presentation, including the retroactive reclassification of 2011 results of TransRadio operations to discontinued operations presentation in the condensed consolidated statement of operations as described above.

 

15



Table of Contents

 

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates affecting amounts reported in the condensed consolidated financial statements relate to revenues under long-term contracts and self-insurance accruals. Actual results could differ from those estimates.

 

Revenue Recognition— We offer our services through two operating business segments: General Construction and Power Generation Services which are supported by the Corporate segment. Prior to March 28, 2012, the Company also operated the RF Transmitter Design, Installation and Service segment. Revenue recognition for each of the non-corporate segments is described by segment below.

 

General Construction Revenue. Revenue from construction contracts is recognized using the percentage-of-completion method of accounting based upon costs incurred and estimated total projected costs. Our current projects with the United States Government are design/build contracts with fixed contract prices and 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.

 

The Company only uses approved contract changes in its revenue recognition calculation. This method of revenue recognition requires that we estimate future costs to complete a project. Estimating future costs requires judgment of the value and timing of material, labor, scheduling, product deliveries, contractual performance standards, liability claims, impact of change orders, contract disputes as well as productivity. In addition, sometimes clients, vendors and subcontractors will present claims against us for recovery of costs they incurred in excess of what they expected to incur, or for which they believe they are not contractually responsible. In turn, we may also present claims to our clients, vendors and subcontractors for costs that we believe were not our responsibility or may be beyond our scope of work. The Company will include costs associated with these claims in its 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. Costs and estimated earnings in excess of amounts billed to customers are recognized as an asset. Amounts billed in excess of costs and estimated earnings are recognized as a liability. The Company will record a provision for losses when estimated costs exceed estimated revenues.

 

Cost of revenue consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs, equipment expense (primarily depreciation, maintenance, and repairs), interest associated with construction projects, and insurance costs. The Company records a portion of depreciation in cost of revenue. Contracts frequently extend over a period of more than one year. Revisions in cost and profit estimates during construction are recognized in the accounting period in which the facts that require the revision become known. Losses on contracts are provided for in total when determined, regardless of the degree of project completion. Claims for additional contract revenue are recognized in the period when it is probable that the claim will result in additional revenue and the amount can be reasonably estimated.

 

Power Generation Services Revenue. The Company receives variable monthly payments as compensation for its production of power. The variable payments are recognized based upon power produced and billed to the customer as earned during each accounting period.

 

RF Transmitter Design, Installation and Service Revenue. Any revenues associated with TransRadio contracts are included in the loss from discontinued operations, net of tax benefits for the six month periods ended June 30, 2012 and 2011. See the note regarding Discontinued Operations. 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.

 

16



Table of Contents

 

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

 

Contract Claims—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.

 

3. Recently Adopted Accounting Pronouncements

 

In December 2011, the FASB issued an ASU that requires 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 adopted this guidance as of January 1, 2012 and it did not have a material impact on our financial statements or disclosures as the Company does not have significant offsetting arrangements.

 

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. 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. The Company has adopted this guidance as of January 1, 2012. There is no goodwill on our balance sheet and the guidance impacts testing steps only and therefore did not 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. As of January 1, 2012, we adopted new guidance regarding disclosures about fair value measurements. The guidance requires new disclosures related to activity in Level 3 fair value measurements. This guidance requires purchases, sales, issuances, and settlements to be presented separately in the roll forward of activity in Level 3 fair value measurements. The only Level 3 activity during the six months ended June 30, 2012 was the write down of the $0.5 million trade name in connection with the sale of TransRadio. There were no other remaining Level 3 assets or liabilities as of June 30, 2012 or December 31, 2011.

 

Effective June 30, 2011, the Company adopted the guidance issued by the FASB in June 2011, regarding the presentation of other comprehensive income (OCI). For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The ASU amends FASB Codification Topic 220 on comprehensive income (1) to eliminate the current option to present the components of other comprehensive income in the statement of changes in equity, and (2) to require presentation of net income and other comprehensive income (and their respective components) either in a single continuous statement or in two separate but consecutive statements. Note that the amendments do not alter any current recognition or measurement requirements in respect of items of other comprehensive income. The amended guidance did not have a material impact on our financial statements or disclosures.

 

During 2010 the Company adopted certain provisions of the ASU guidance issued by the FASB in January 2010 regarding “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements”. This ASU amended earlier guidance, by requiring additional disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring fair value measurement disclosures for each class of assets and liabilities in addition to disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The adoption of these provisions did not have a material impact on the Company’s financial statements or disclosures, as the Company did not have any transfers between Level 1 and Level 2 fair value measurements. Certain provisions of this ASU were

 

17



Table of Contents

 

not required to be adopted by the Company until January 1, 2011. These provisions require the Company to present separately information on all purchases, sales, issuances, and settlements of financial instruments valued using significant unobservable inputs (Level 3) in the reconciliation of fair value measurements. The adoption of these provisions did not have a material impact on the Company’s financial statements or disclosures, as the only Level 3 assets or liabilities that the Company had upon adoption were the customer relationship and trademark intangible assets acquired in connection with the TransRadio acquisition that occurred in late 2009. As of June 30, 2012, no intangible assets remain on the condensed consolidated balance sheet. See the note regarding Discontinued Operations of TransRadio.

 

4. Recently Issued Accounting Pronouncements

 

There are no recently issued accounting standards for which the Company expects a material impact on our consolidated financial statements or disclosures upon adoption.

 

5. Contract Backlog

 

Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted construction contracts in progress at June 30, 2012 and from construction contractual agreements on which work has not yet begun. The following summarizes changes in backlog on construction contracts during the period ended June 30, 2012:

 

Contract Backlog Schedule

 

Balance at December 31, 2011

 

$

70,996,164

 

New Construction Contracts / amendments to contracts in 2012

 

59,675,806

 

Less: Construction revenue earned as of June 30, 2012

 

58,237,652

 

Balance at June 30, 2012

 

$

72,434,318

 

 

Management anticipates that approximately $14.8 million of the $72.4 million backlog as of June 30, 2012, will be recognized as revenue after 2012. On September 30, 2011, PS JV was awarded the Embassy West Task Order 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 had been protested 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 subsequently dropped by the Company and in early 2012, OBO revised the scope of the project, retendered the contract for bid and Pernix rebid the contract on May 3, 2012. OBO requested repricing from several providers, including Pernix Group, Inc. We submitted the repricing in the early third quarter of 2012. We anticipate that OBO will announce an award in the third quarter of 2012. Therefore, the table does not include any amounts related to Embassy West.

 

The table includes the sole source Task Order award (Sather) received by Pernix on January 13, 2012 for a re-procurement contract having a total estimated value of between $98 million and $112 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 change orders totaling $50.2 million on the Sather project and is anticipating the remaining award amount to be defined in the third quarter of 2012. The majority of the Sather contract revenue is expected to be recognized in 2012 and to a lesser degree in 2013. 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. Approximately $18.8 million of the Shield contract

 

18



Table of Contents

 

is in the backlog as of June 30, 2012 and management is unsure as to how much of this remaining Shield backlog will be attainable as the Company continues to work amicably with OBO toward a fair and reasonable negotiated final settlement on the project. On May 3, 2012 a “Certificate of Substantial Completion” was received related to the list of construction activities under the scope reduction notice on the Baghdad Police Academy Annex (f.k.a. Shield) project.

 

6. Discontinued Operations

 

A controlling interest in TransRadio was acquired by the Company in late 2009. The interest in TransRadio was acquired to serve as a global platform for cross-selling construction segment services, 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 deteriorated. Reflecting the impact of this deterioration on the fair value of the related intangible assets during 2011, the Company recognized impairment of the full amount of the customer relationship intangible asset and a portion of the trade name intangible asset in the amounts of $1.3 million and $0.4 million, respectively. Although the radio transmitter segment did win two contracts in March 2012, the Company did not know when historical levels of sales volumes would 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 was intended to curtail losses that had 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 operating 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 for $1.2 million plus assumption of the liabilities of TransRadio by Bevita Commercial Corp. (buyer and a related party); thereby recognizing a pre-tax loss of $1.9 million. The $0.7 million loss and $0.8 million loss from TransRadio discontinued operations during the first six months ending on June 30, 2012 and the six months ended June 30, 2011, respectively, have been included in the loss from discontinued operations, net of the tax benefit in the consolidated statement of operations. TransRadio was sold effective March 28, 2012 so operations through that date are included in the loss on sale of discontinued operations in the quarter and six month periods ended March 31 and June 30, 2012, respectively. Following is a summary of loss from the operations and sale of TransRadio for the six month periods ended June 30, 2012 and 2011 (in millions):

 

Loss from discontinued operations and sale of TransRadio for the six months ended June 30, 2012 and 2011 (in millions)

 

 

 

2012

 

2011

 

Revenues

 

$

1.0

 

$

7.1

 

Cost of Goods Sold

 

0.6

 

5.2

 

Operating expense and other

 

1.1

 

2.8

 

Operating (loss) before income tax benefit of $0.3 and $0.0 respectively

 

(0.7

)

(0.9

)

Income tax benefit on disposal

 

0.5

 

0.0

 

(Loss) on sale of discontinued operations, net

 

(0.7

)

 

(Loss) on discontinued operations and sale of TransRadio, net

 

$

(1.1

)

$

(0.8

)

 

Net assets from discontinued operations for TransRadio included in the consolidated balance sheet as of December 31, 2011 are as follows:

 

19



Table of Contents

 

Net Assets Related to Discontinued Operations (In thousands)

 

December 31, 2011

 

Cash and cash equivalents

 

$

19

 

Accounts receivable

 

1,098

 

Work in Process

 

754

 

Inventory

 

2,926

 

Restricted Cash - current

 

544

 

Prepaid and other current assets

 

483

 

Total current assets

 

5,824

 

Property, Plant and Equipment

 

400

 

Trademark

 

489

 

Other assets

 

125

 

Accounts payable

 

(451

)

Accrued expenses

 

(277

)

Accounts payable - other

 

(211

)

Other current liabilities

 

(43

)

Short term debt

 

(947

)

Outstanding credit line

 

(892

)

Billings in excess of costs and estimated earnings

 

(802

)

Deferred tax liability

 

(175

)

Net assets related to discontinued operations

 

$

3,040

 

 

7. Short-Term and Long-Term borrowings

 

As of June 30, 2012 and December 31, 2011, the Company has $2.25 million and $1.35 million of outstanding debt under agreements with related parties. The interest rate on the borrowings is 5% per annum. The interest expense during the six month periods ending June 30, 2012 and 2011 amounted to $60,548 and $2,083, respectively.

 

Included in the debt outstanding as of June 30, 2012 is a short-term debt agreement with Bent Marketing Ltd., a related party that was entered into during May of 2011. Pursuant to the terms of the agreement, Pernix Group, Inc. drew $2.0 million in $500,000 monthly installments beginning May 31 through August 31, 2011 and repaid $1.0 million of this amount in October 2011. The remaining $1.0 million outstanding debt under this agreement, and related accrued interest, is to be repaid no later than August 31, 2012. Also included in the outstanding debt as of June 30, 2012 is a $1,250,000 long-term debt agreement with Bent Marketing that was entered into in February 2012 and is due on or before June 9, 2014.

 

On November 28, 2011 the Company received an additional short-term loan from Bent Marketing, Ltd. in the amount of $350,000 that was repaid in May, 2012 along with accrued interest.

 

During the fourth quarter of 2011 and the first quarter of 2012, the Company extended short term loans to TransRadio. The interest rate on both loans was 5% and the loans were due on June 30, 2012 and March 14, 2013, respectively.  As of December 31, 2011, the first loan was an intercompany loan that eliminated in consolidation and the second loan had not yet been extended to TransRadio. On March 28, 2012, the Company sold its interest in TransRadio and the buyer, Bevita Commercial Corp. (a related party) assumed the loans. During May 2012, the loans of $350,000 and 325,000, respectively, for a total of 675,000 plus accrued interest of $13,052 were repaid. TransRadio, has a €1.1 million (approximately $1.5 million at December 31, 2011) bank credit agreement with three German banks Interest is charged at the rate of 8.5% per annum on the Berliner and HypoVereinsbank lines (€0.5 million each) 7.25% per annum on the Commerzbank line (€0.1 million). As of December 31, 2011, $891,709 was drawn under the credit line. The Company sold its equity interest in TransRadio in March 2012, therefore, the loans are no longer reported in the Company’s Consolidated Balance Sheet as of June 30, 2012.

 

TransRadio has outstanding short term debt at December 31, 2011 with Bent Marketing Ltd and Fedor Commercial Corporate Loans amounting to $0.4 million and $0.6 million respectively. These loans were due in full at June 30, 2012 and have an interest rate of 5%. The Company sold its equity interest in TransRadio in March 2012, therefore,

 

20



Table of Contents

 

the loans are no longer reported in the Company’s Condensed Consolidated Balance Sheet as of June 30, 2012. See the note regarding Discontinued Operations.

 

8. Cost and Estimated Earnings on Uncompleted Contracts

 

Long-term construction contracts in progress are accounted for using the percentage-of-completion method. Billings, costs incurred, and estimated earnings on uncompleted contracts as of June 30, 2012 and December 31, 2011 were as follows:

 

Cost and Estimated Earnings on Uncompleted Contracts as of

 

 

 

June 30, 2012

 

December 31, 2011

 

Costs incurred on uncompleted contracts

 

$

107,152,976

 

$

53,145,213

 

Estimated earnings

 

8,725,460

 

4,495,572

 

Total cost and estimated earnings

 

115,878,436

 

57,640,785

 

Less: Billings to date

 

121,942,926

 

61,995,276

 

Total costs and estimated earnings in excess of billings on uncompleted contracts

 

$

(6,064,490

)

$

(4,354,491

)

 

These amounts are included in accompanying consolidated balance sheets under the following captions:

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

6,064,490

 

4,354,491

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

$

6,064,490

 

$

4,354,491

 

 

9. Equity

 

Preferred Stock—The Company has 50 million shares of authorized Preferred Stock. Ten million of these shares have been designated as Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) and during 2010, 2,000,000 shares were designated as Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”). As of June 30, 2012 and December 31, 2011, 38 million shares were undesignated.

 

Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at the annual rate of 6.5%, have no voting rights and rank senior to common stock. As of June 30, 2012 and December 31, 2011, no Series A Preferred Stock is issued or outstanding.

 

Holders of Series B Preferred Stock are entitled to receive cumulative dividends at an annual rate of $0.325 per share, have no voting rights, and rank senior to common stock and are on parity with Series A Preferred Stock with respect to dividends and upon liquidation. During 2010, the Company issued 389,250 shares of Series B Preferred Stock. Each share of Series B Preferred Stock is convertible into common stock using the conversion rate as defined in each Series B Preferred Stock Purchase Agreement. During 2011, the Series B Preferred Stock conversion rate was amended to allow for conversion at a rate of 1:1 on a pre-reverse stock split basis (15:1 preferred into common shares on a post reverse stock split basis). On April 2, 2012 the Company repurchased 219,250 Series B Cumulative Convertible Preferred Shares (Series B Preferred Shares) from its majority shareholders, Ernil Continental, S.A.,

 

21



Table of Contents

 

BVI and Halbarad Group, Ltd., BVI. As of June 30, 2012 and December 31, 2011, 170,000 and 389,250 shares of the Series B Preferred Stock were issued and outstanding, respectively and would have converted into 11,334 and 25,950 shares of common stock, respectively, if converted. As of June 30, 2012 and December 31, 2011, preferred share dividends of $103,109 and $164,821, respectively, were accrued. The dividend expense for the six months ended June 30, 2012 and 2011 was $45,583 and $62,729, respectively. The Series B preferred stockholders may negotiate in good faith for redemption of the preferred stock for cash upon 20 days written notice by the holders.

 

Common Stock—As of June 30, 2012 and December 31, 2011, 9,403,697 shares of the Company’s common stock were issued and outstanding. During the first six months of 2012 and 2011 Pernix Group issued no common shares.

 

10. Computation of Net Earnings / (Loss) Per Share

 

Basic and diluted net earnings / (loss) per common share is presented in accordance with the Statement of Financial Accounting Standards Earnings Per Share disclosure requirements, for all periods presented. In accordance with the pronouncement, basic and diluted net income from continuing operations per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. 162,513 and 25,950 shares associated with stock options and convertible preferred stock are excluded for the six month periods ended June 30, 2012 and 2011, respectively. 172,561 shares associated with stock options and convertible preferred stock are excluded for the three month period ended June 30, 2012. In accordance with the earnings per share presentation and disclosure requirements pertaining to discontinued operations, the Company also presented on the face of the Condensed Consolidated Statement of Operations the basic loss per share from discontinued operations for the six month periods ended June 30, 2012 and 2011, and the basic gain per share from discontinued operations for the three month periods ended June 30, 2011. The dilutive impact of the options and preferred stock were not included in the loss per share from discontinued operations for the six month periods ended June 30, 2012 and 2011 as the inclusion would be anti-dilutive (i.e., reduce the net loss per share from discontinued operations).

 

11. Stock-based compensation plans

 

In December 2011, the Company’s board of directors adopted the 2012 Incentive Stock Option Plan that provides for the issuance of qualified stock options to employees. Under the terms of this plan, 1.5 million shares have been reserved for issuance. Options to purchase common stock are granted at not less than fair market value and vest ratably on the anniversary of each award grant date as defined by the individual award agreements. The options expire 10 years from the grant date. 175,000 options to buy shares yet to be registered were awarded on January 26, 2012 with a strike price equal to the fair market value of the Company’s common stock and a vesting schedule of 5 years. This plan will expire in December 2021.

 

The plan provides for the granting of stock-based compensation to certain employees. For transactions in which we obtain employee services in exchange for an award of equity instruments, we measure the cost of the services based on the grant date fair value of the award. We recognize the cost over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Cash flows resulting from the exercise of related options are included in financing cash flows. There were no options exercised during the six month period ended June 30, 2012.

 

The related option awards are classified as equity and as such are valued at the grant date and are not subject to remeasurement. The options vest at a rate of 20% annually on the anniversary of the grant date and over a five year period. The option valuation was performed by an independent certified valuation firm using a fair value Black Scholes model. The fair value is net of any amount that an employee pays (or becomes obligated to pay) for that instrument when it is granted.

 

The following summarizes stock option activity for the six month periods ended June 30:

 

22



Table of Contents

 

 

 

2012

 

2011

 

 

 

in thousands
except share data

 

Weighted
Average
Exercise
Price

 

in thousands
except share data

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

Options outstanding, at beginning of year

 

0

 

$

0

 

0

 

$

N/A

 

Granted

 

175,000

 

2.09

 

0

 

N/A

 

Exercised

 

0

 

N/A

 

0

 

N/A

 

Forfeited/expired

 

22,500

 

N/A

 

0

 

N/A

 

Options outstanding, at June 30

 

152,500

 

2.09

 

0

 

N/A

 

Options exercisable, at June 30

 

0

 

$

2.09

 

0

 

$

N/A

 

 

The following table summarizes information about stock options outstanding at June 30, 2012:

 

Options Outstanding

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

Weighted

 

 

 

 

 

Remaining

 

Average

 

 

 

Number

 

Contractual

 

Exercise

 

Aggregate

 

Outstanding

 

Life

 

Price

 

Intrinsic Value

 

(in thousands)

 

(in years)

 

 

 

(in millions)

 

152,500

 

9.6

 

$

2.09

 

$

0

 

 

No such options were exercisable as of December 31, 2011.

 

The weighted average grant date fair value of options granted during the quarter ended June 30, 2012 was $1.04. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

Key assumptions:

 

Risk-free interest rate

 

1.2

%

Dividend yield

 

0.0

%

Expected volatility

 

50

%

Expected life in years

 

6.5

 

 

The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on the Company’s history of not paying a dividend to any common class of stock. Expected volatility is based on volatilities of publicly traded competitors and companies from our peer group. The weighted average expected life in years for all grants as a group is then calculated for each year. The forfeiture rate utilized is currently zero as the plan is new and no significant and reliable history regarding share option exercise and employee termination patterns to estimate forfeiture rates exists as of June 30, 2012. As history is developed that is robust enough to be considered reliable, the forfeiture rate will be adjusted to reflect it.

 

23



Table of Contents

 

Total share-based compensation expense for the six month periods ended June 30, 2012 and 2011 was $22,212 and zero, respectively. As of June 30, 2012 and December 31, 2011, there was $0.1 million and zero, respectively of total unrecognized compensation expense related to non-vested share-based awards. The compensation expense is expected to be recognized over a weighted average period of 5 years, equivalent to the vesting period.

 

The Company received no cash during the quarter ended June 30, 2012 and 2011, respectively, related to stock awards exercised as no options were exercised during the periods. The Company used no cash and did not realize any tax benefit from stock awards exercised for the quarters ended June 30, 2012 and 2011. 22,500 options were forfeited or cancelled during the period ended, June 30, 2012.

 

12. Commitments and Contingencies

 

The Company is involved in various lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial position or liquidity, however, the impact of such disposition on the results of operations is not certain as of June 30, 2012.

 

In 1999, Telesource CNMI was awarded a contract to build 45 housing units for the Northern Marinas Housing Agency, a government unit. The houses were built and subsequently occupied. The Northern Marianas Housing Corporation (NMHC) has filed a lawsuit against Telesource CNMI and two other parties for $3.0 million in damages related to this project. These claims involve an allegation of various construction, design and other defects. Subsequently, homeowners in the project filed their own lawsuit and/or joined into this action. The consolidated matter is Case No. 06-0123, filed in the Superior Court for the Commonwealth of the Northern Mariana Islands. The Company and other defendants also have filed counter- and cross-claims.

 

The Company accrued estimated losses totaling $1.3 million during the 2004 through 2012 timeframe with respect to these claims. In 2007, the Company paid $139,000 to claimants resulting in an accrual of $970,000 at December 31, 2007. In 2008, the Company paid $92,817 to claimants reducing the accrual to $877,183 at December 31, 2008. No incremental accruals or payments were made during 2009 or 2010. 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. The Company has denied any liability and has aggressively defended itself to mitigate and/or dismiss the claims against it. In light of its plans to defend its position, during the first quarter of 2012 the Company accrued an additional $176,000 related to legal fees incurred and likely to be incurred in the event the case goes to trial in mid-2012 as disclosed above. During the second quarter of 2012, the parties agreed to enter into one week of “binding mediation” rather than go to trial. However, the mediation between the parties failed and the judge overseeing the mediation issued a binding, non-appealable decision on July 23, 2012 which resulted in a judgment of $4.45 million against the three defendants. However, the judge failed to apportion the liability among the three defendants.  Due to the lack of an apportionment, the Company has not adjusted the related accrual as of June 30, 2012, subsequent to receiving the July 23, 2012 ruling. The remaining accrual is $1.1 million as of June 30, 2012, reflecting an increase of $0.2 million since December 31, 2011 due to accruals for additional legal fees related to the Koblerville case. On August 6, 2012, TCNMI filed a motion to request apportionment in order to obtain definition of the amount of liability that is attributable to TCNMI.  The Company also requested in the motion the ruling pertaining to the award of a portion of the liability as well as certain attorney costs awarded to NMHC be vacated. The judge did indicate in his July 23 decision that the plaintiffs were awarded reasonable attorney fees and requested the fees be submitted within ten days. On August 3, 2012, the plaintiffs filed a request for attorney fees for $2.0 million and asked the court to multiply that award by 7 times to total $14.0 million. TCNMI intends to oppose this request and views it to be excessive. No ruling has yet been issued on this request.

 

As of the date of the filing of this Form 10-Q, no apportionment or other ruling requested in the motion filed by TCNMI has been issued.  The accrual will be adjusted, if necessary, as determined based on any future ruling when and if such a ruling is received. The Company’s strategy with regard to the TCNMI operations is yet to be determined as it is somewhat dependent on the resolution of the issues in the legal motion filed on August 6, 2012. The Company estimates that, depending on the outcome of the motion filed by TCNMI on August 6, 2012, the Company may have an estimated liability in the range of $800,000 to $4,450,000. The Company has denied any liability and will aggressively defend itself to mitigate and/or dismiss the claims against it. This range of liability does not include any amounts that may ultimately be attributable to TCNMI related to the August 3 filing by homeowners of the request for legal fees because the judge has not yet ruled on the amount or apportionment of legal fees pursuant to the homeowners request.

 

Pernix Group’s power generation activities involve significant risks of environmental damage, equipment damage and failures, personal injury and fines and costs imposed by regulatory agencies. Though management believes its insurance programs are adequate, if a liability claim is made against it, or if there is an extended outage or

 

24



Table of Contents

 

equipment failure or damage at one of the Company’s power plants for which it is inadequately insured or subject to a coverage exclusion, and the Company is unable to defend against these claims successfully or obtain indemnification or warranty recoveries, the Company may be required to pay substantial amounts, which could have a materially adverse effect on its financial condition. In Fiji, the Company is liable for a deductible of FJD 1,250,000 (or approx. $684,000USD as of June 30, 2012) if found to be negligent or 750,000 FJD (or approx. $410,000 USD as of June 30, 2012) if not found to be negligent in accordance with its agreement with the Fiji Electric Authority. In Vanuatu, during the MOU period, the insurance deductible is 10 million Vatu (or approx. $106,000 USD) as of June 30, 2012.

 

On August 2, 2011, a diesel engine was damaged by a component failure resulting in an interruption of 10MW of power production at a diesel power plant operated and maintained by TFL. TFL is insured for property damage and lost revenue due to business interruption under a policy carried by Fiji Electricity Authority. TFL has not been found to be negligent in connection with this incident. Therefore, under the policy, TFL had a deductible in the amount of 750,000 Fijian Dollars (FJD) related to the property damage and a deductible related to the business interruption coverage of 250,000 FJD . All deductibles were accrued in the third quarter of 2011. In addition, ancillary costs including service engineer, overtime and other expenses totaling $300,237 FJD ($168,463 USD) were recorded as of December 31, 2011. In May 2012, TFL paid a deductible of FJD 950,000 (or approx. $537,700 USD) related to the August 2011 engine failure and related business interruption in accordance with its agreement with the Fiji Electric Authority. This deductible settlement was approximately $0.1 million less than what had been accrued in 2011 and that $0.1 million adjustment to the estimate was recorded as a reduction in operating expenses in the second quarter of 2012.

 

A $1.1 million FJD ($602,000 USD as of June 30, 2012) business interruption claim before time deductible was filed with the insurer. The total business interruption claim after time deductible was 902,097 FJD ($494,000 USD as of June 30, 2012). During the six months ended June 30, 2012, these business interruption insurance proceeds have been received or accepted in writing by the insurer and were recorded as income. TFL performed certain restoration work in relation to the G8 engine that generated $342,304 FJD (approximately $191,690 USD for the six months and quarter ended June 30, 2012). The costs of the services TFL incurred in relation to the restoration work during the year to date and second quarter periods were 41,167FJD and 117,060 FJD, (approximately $23,000 USD and $65,000 USD for the six and three months ended June 30, 2012). The G8 engine was re-commissioned on March 19, 2012 and is operational. TFL will file an additional business interruption claim for FJD 715,202 ($395,000 USD) pertaining to the engine failure during the last half of 2012. The Company has not recorded any proceeds of this additional claim and will not do so until the proceeds are confirmed and / or paid by the insurer. The Company anticipates resolution of outstanding and planned claims during the late 2012 or early 2013.

 

The Company offers warranties on its construction services and power generating plants. The Company does not maintain any material warranty reserves because these warranties are usually backed by warranties from its vendors. Should the Company be required to cover the cost of repairs not covered by the warranties of the Company’s vendors or should one of the Company’s major vendors be unable to cover future warranty claims, the Company could be required to expend substantial funds, which could harm its financial condition.

 

The Company has an agreement with the Commonwealth of the Northern Mariana Islands to manage a power plant in Tinian. In accordance with Change Order No. 3 of this agreement, the Company is required to upgrade the power distribution system in certain areas of the island of Tinian. The Company is responsible for the costs of the upgrade which include labor and material. The Company has incurred approximately $1.3 million in costs associated with this upgrade as of June 30, 2012. The Company will be seeking a final certification for the upgrade from the client. Such certification includes certain negotiating issues that may have a minor effect on the remaining cost to complete the upgrade. TCNMI has been diligent in completing work outlined in the specifications on a line-by-line basis and has received acceptance from CUC for on-going work in the same manner. Although the Company believes it sufficiently completed the upgrade in 2007, some minor additional costs ranging from zero up to $125,000 may still be incurred.

 

25



Table of Contents

 

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

 

Minimum rental commitments under all non-cancelable operating leases having an initial or remaining lease term in excess of 1 year are primarily related to property, vehicles, and construction equipment. There was no significant rental income from subleases during these periods. Commitments under such leases, in effect at June 30, 2012 are:

 

Year

 

Total Lease
Payments

 

2012

 

$

164,600

 

2013

 

290,316

 

2014

 

238,883

 

2015

 

233,038

 

2016

 

37,367

 

Thereafter

 

0

 

Total

 

$

964,204

 

 

The Company and its subsidiaries are lessees in non-cancelable leasing agreements for office buildings and equipment which expire at various dates. The related lease payments are expensed on a straight-line basis over the lease term, including, as applicable, any free-rent period during which the Company has the right to use the asset. For leases with renewal options where the renewal is reasonably assured, the lease term, including the renewal period is used to determine the appropriate lease classification and to compute periodic rental expense. None of the Company’s current lease agreements have been determined to be capital leasing agreements. Lease expense was approximately $0.2 and $0.4 million for the six month periods ended June 30, 2012 and 2011, respectively, including the lease expense associated with TransRadio discontinued operations as disclosed below.

 

On March 28, 2012, the Company sold its interest in TransRadio thereby significantly reducing Pernix Group, Inc. minimum lease commitments compared to December 31, 2011, at which time minimum lease commitments totaled $1.7 million. TransRadio’s expense included in the Company’s lease commitments for the six months ended June 30, 2012 and 2011 was $0.1 million and $0.3 million, respectively and was included in the loss from discontinued operations in the Condensed Consolidated Statement of Operations for both periods.

 

During the fourth quarter of 2011, the Company’s joint venture, Pernix-Serka Joint Venture, entered into a lease agreement with ICS Serka LLC, for a term of four years from January 15, 2012 through January 14, 2016. The lease calls for a base rental payment of $10,748 per month in the first year with a 2.5% escalation, in the monthly rate, in each of the three subsequent years, resulting in an average monthly rent expense of $10,968. The base monthly amount excludes operating charges. Pernix-Serka Joint Venture will be responsible for prorated operating charges during each calendar year. The total rent expense accrued during the six month periods ended June 30, 2012 and 2011 under the new lease was $64,486 and zero, respectively.

 

Pernix Group corporate headquarters moved from 860 Parkview Boulevard in Lombard, Illinois to 151 E. 22nd Street in Lombard, Illinois in April 2011. The lease on the prior location expired in early May, 2011. The lease for the new corporate headquarters began May 1, 2011 and runs for five years through April 30, 2016 with Baron Real Estate Holdings, a related party. The lease calls for a base rental payment of $7,015 per month in the first year with a 3.0% escalation in the monthly rate in each of the four subsequent years. The average monthly rent expense for the new corporate headquarters will be approximately $7,330 per month and are included in the future minimum lease payments at June 30, 2012, as presented above. Total rent expense accrued under the old and new lease agreements approximated $42,509 and $36,696 during the six month periods ended June 30, 2012 and 2011, respectively.

 

13. Work in Process and Inventories

 

As of June 30, 2012 and December 31, 2011 the components of inventories are as follows:

 

 

 

2012

 

2011

 

Work in process

 

$

0

 

$

753,776

 

Raw materials

 

$

0

 

$

2,926,188

 

Supplies

 

1,449,700

 

1,533,408

 

Inventories

 

$

1,449,700

 

$

5,213,372

 

 

Work in process inventory represented the costs associated with manufacturing the TransRadio transmitter equipment for signed contracts with customers and potential customers. Included in these costs were material, labor and charges associated with certain subassemblies manufactured by third parties. Raw materials consisted of various components that were sold as spare parts or are incorporated in the manufacture of transmitter equipment. There

 

26



Table of Contents

 

are no work in process or raw material inventories as of June 30, 2012 as TransRadio was sold during the first quarter of 2012. The supplies inventory represents the value of spare parts maintained by the Company for use in the diesel power generators.

 

14. Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk

 

We enter into various arrangements not recognized in our condensed 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.

 

15. Fair Value Disclosures

 

In May of 2011, Pernix Group entered into a short-term debt agreement with Bent Marketing Ltd., a related party. Pursuant to the terms of the agreement, Pernix Group, Inc. drew $2.0 million in $500,000 monthly installments beginning May 31 through August 31, 2011 and repaid $1.0 million of this amount in October 2011. On November 28, 2011 the Company received an additional short-term loan from Bent Marketing, Ltd. in the amount of $350,000. As of June 30, 2012 and December 31, 2011, the Company has $1.0 million and $1.35 million of outstanding debt under these agreements. The interest rate on the borrowings is 5% per annum. The remaining $1.0 million outstanding, and related accrued interest is to be repaid no later than August 31, 2012. The interest expense during the six month period ending June 30, 2012 and 2011 amounted to $60,548 and $2,083, respectively.

 

Also included in the outstanding debt as of June 30, 2012 is a $1.25 million long-term debt agreement with Bent Marketing that was entered into in February 2012 and is due on or before June 9, 2014. The interest rate on the borrowings is 5% per annum.

 

The fair value of these financial instruments approximates carrying value as the impact of any reasonable shock to interest or credit risk would be minimal in light of the remaining terms and amounts outstanding as of June 30, 2012.

 

During the fourth quarter of 2011 and the first quarter of 2012, the Company extended short-term loans to TransRadio in amounts that remained outstanding as of March 31, 2012 of $350,000 and $675,000, respectively. The interest rate on both loans was 5% and both loans have been repaid as of June 30, 2012. On March 28, 2012, the Company sold its interest in TransRadio.

 

Prior to its sale of TransRadio, the Company held fixed rate short term-debt and had outstanding short term borrowings under a fixed rate line of credit through its TransRadio subsidiary. Short-term outstanding borrowings totaled $947,485 as of December 31, 2011 and the outstanding borrowings under the fixed rate line of credit were $891,709 as of December 31, 2011. These amounts are no longer the liability of the Company as Bevita Commercial Corp., a related party and the buyer of TransRadio, assumed these liabilities in connection with the purchase of TransRadio on March 28, 2012.

 

From time to time, the Company holds financial instruments, receivables related to sales-type lease, and foreign currency contracts. As of June 30, 2012 and December 31, 2011, the Company did not hold such financial instruments.

 

16. Fair Value Measurements

 

Effective October 1, 2009, the Company adopted the fair value measurement guidance for all nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. These assets and liabilities include items such as customer relationships and trademarks and long lived assets that are measured at fair value resulting from impairment, if deemed necessary. Management reviews the recoverability of the assessed value of the intangibles, for impairment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When the recovery is reviewed, if the carrying amounts of the assets are determined to be unrecoverable, an impairment loss would be recorded. As of June 30, 2012, the Company holds no intangible assets.

 

27



Table of Contents

 

17. Related Party Transactions — Not Described Elsewhere

 

The Company’s shareholders include SHBC, which holds less than 6% of Pernix Group’s stock at June 30, 2012 and December 31, 2011. SHBC is a civil, electrical and mechanical engineering firm and construction contractor with 1,750 employees and over 50 years’ experience.

 

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

 

The Company accrued $39,791 and $38,852 of interest payable to SHBC for unreturned capital during the six month periods ending June 30, 2012 and 2011, respectively. No other services were provided by SHBC.

 

Until May 2011, the Company shared office space with a related company named Computhink, which is owned by a company related to SHBC. The Computhink charges include rent and utilities for office space the Company occupies, computer hardware and software services that Computhink provides, and other outside services. Computhink charges to the Company were $51,768 for the six months ended June 30, 2011. The charges for computer hardware and software services charged by Computhink during the six months ended June 30, 2012 were $36,739.Total related party accounts receivable as of June 30, 2012 and as of December 31, 2011 from Computhink are $7,902 and $7,252, respectively.

 

18. Bank Deposits in Excess of FDIC

 

The Company maintains its cash accounts at numerous financial institutions. Certain of these financial institutions are located in foreign countries which do not have Federal Deposit Insurance Corporation (“FDIC”) insurance. Those accounts covered by the FDIC are insured up to $250,000 per institution through December 31, 2013. As of June 30, 2012 and December 31, 2011, the amount of bank deposits that exceeded or are not covered by the FDIC insurance was approximately $7.9 million and $2.8 million, respectively. As of December 31, 2011, $0.5 million of this uninsured amount was restricted cash in Germany, related to TransRadio. The Company sold its interest in TransRadio on March 28, 2012 and has no restricted cash as of June 30, 2012.

 

19. Business Segment Information

 

Pernix Group has elected to organize its segment information around its products and services. Pernix Group has three segments: General Construction, Power Generation Services and Corporate. The Company sold its interest in TransRadio which constituted the RF Transmitter Design, Installation and Service segment on March 28, 2012 and the financial results associated with that discontinued segment are presented in the Condensed Consolidated Statement of Operations as Discontinued Operations.

 

There were no material amounts of transfers between segments. Any inter-segment revenues have been eliminated.

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

 

28



Table of Contents

 

Schedule of Segment Reporting, Information by Segment

 

For the six months ended June 30, 2012

 

 

 

 

 

RF Transmitter

 

 

 

 

 

 

 

 

 

 

 

Design, Installation

 

Power Generation

 

 

 

 

 

 

 

General Construction

 

and Service

 

Services

 

Corporate

 

Total

 

Revenue

 

$

58,247,272

 

$

 

$

3,077,683

 

$

 

$

61,324,955

 

Interest (expense)

 

(41

)

 

(698,780

)

 

(698,821

)

Interest (expense) - related party

 

(39,791

)

 

 

(49,502

)

(89,293

)

Interest income

 

7

 

 

99

 

686,959

 

687,065

 

Depreciation and amortization

 

1,833

 

 

80,305

 

13,405

 

95,543

 

Income tax benefit / (expense)

 

525,200

 

 

 

(1,308,710

)

(377,030

)

(1,160,540

)

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

 

2,413,816

 

 

(1,355,333

)

(1,671,539

)

(613,056

)

Income tax benefit / (expense) from discontinued operations

 

 

 

 

 

 

(812,179

)

(812,179

)

Gain (loss) from discontinued operations (net)

 

 

 

(1,117,525

)

 

 

 

(1,117,525

)

Total capital expenditures

 

34,470

 

 

103,551

 

49,304

 

187,325

 

Total assets from continuing operations

 

27,787,393

 

 

3,746,581

 

2,568,253

 

34,102,227

 

 

For the six months ended June 30, 2011

 

 

 

 

 

RF Transmitter

 

 

 

 

 

 

 

 

 

 

 

Design, Installation

 

Power Generation

 

 

 

 

 

 

 

General Construction

 

and Service

 

Services

 

Corporate

 

Total

 

Revenue

 

$

6,162,006

 

$

 

$

4,157,820

 

$

 

$

10,319,826

 

Interest (expense)

 

(174

)

 

(688,604

)

 

(688,778

)

Interest (expense) - related party

 

(38,852

)

 

 

(2,083

)

(40,935

)

Interest income

 

169

 

 

 

688,918

 

689,087

 

Depreciation and amortization

 

224

 

 

38,183

 

4,181

 

42,588

 

Income tax benefit / (expense)

 

 

 

(267,052

)

 

(267,052

)

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

 

457,537

 

 

1,315,979

 

(752,773

)

1,020,743

 

Gain (loss) from discontinued operations (net)

 

 

 

(760,687

)

 

 

 

 

(760,687

)

Total capital expenditures

 

 

 

10,166

 

57,292

 

67,458

 

Total capital expenditures from disc. operations

 

 

 

 

 

 

9,542

 

9,542

 

Total assets from continuing operations

 

3,256,712

 

 

5,345,195

 

2,753,379

 

11,355,286

 

Total assets from discontinued operations

 

 

 

10,364,166

 

 

 

 

 

10,364,166

 

 

For the three months ended June 30, 2012

 

 

 

 

 

RF Transmitter

 

 

 

 

 

 

 

 

 

 

 

Design, Installation

 

Power Generation

 

 

 

 

 

 

 

General Construction

 

and Service

 

Services

 

Corporate

 

Total

 

Revenue

 

$

22,739,721

 

$

 

$

1,594,979

 

$

 

$

24,334,700

 

Interest (expense)

 

(25

)

 

(344,303

)

 

(344,328

)

Interest (expense) - related party

 

1,449

 

 

 

(49,502

)

(48,053

)

Interest income

 

 

 

67

 

343,085

 

343,152

 

Depreciation and amortization

 

870

 

 

(14,178

)

7,386

 

(5,922

)

Income tax benefit / (expense)

 

211,012

 

 

(1,393,671

)

(87,620

)

(1,270,279

)

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

 

1,125,036

 

 

(1,351,584

)

(455,839

)

(682,387

)

Income tax benefit / (expense) from disc. operations

 

 

 

 

 

 

Gain (loss) from discontinued operations (net)

 

 

 

 

 

 

Total capital expenditures

 

 

 

7,309

 

31,229

 

38,538

 

Total assets from continuing operations

 

27,787,393

 

 

3,746,581

 

2,568,253

 

34,102,227

 

 

For the three months ended June 30, 2011

 

 

 

 

 

RF Transmitter

 

 

 

 

 

 

 

 

 

 

 

Design, Installation

 

Power Generation

 

 

 

 

 

 

 

General Construction

 

and Service

 

Services

 

Corporate

 

Total

 

Revenue

 

$

4,882,000

 

$

 

$

2,193,985

 

$

 

$

7,075,985

 

Interest (expense)

 

(174

)

 

(345,811

)

 

(345,985

)

Interest (expense) - related party

 

(19,550

)

 

 

(2,083

)

(21,633

)

Interest income

 

31

 

 

 

346,125

 

346,156

 

Depreciation and amortization

 

3

 

 

18,692

 

2,498

 

21,193

 

Income tax benefit / (expense)

 

 

 

(203,600

)

 

(203,600

)

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

 

596,804

 

 

324,329

 

(80,963

)

840,170

 

Gain (loss) from discontinued operations (net)

 

 

119,726

 

 

 

119,726

 

Total capital expenditures

 

 

 

5,891

 

57,292

 

63,183

 

Total capital expenditures from disc. operations

 

 

 

 

2,542

 

2,542

 

Total assets from continuing operations

 

3,256,712

 

 

5,345,195

 

2,753,379

 

11,355,286

 

Total assets from discontinued operations

 

 

10,364,166

 

 

 

10,364,166

 

 

Geographical Information

 

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

 

Fixed assets located at TFL in Fiji were $220,965 and $230,957 as of June 30, 2012 and December 31, 2011, respectively.

 

 

 

Total Revenue

 

Fixed Assets - Net

 

Location

 

Jun 30, 2012

 

Jun 30, 2011

 

Jun 30, 2012

 

Dec 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Revenue and net fixed assets from continuing operations

 

 

 

 

 

 

 

 

 

United States

 

$

58,247,272

 

$

6,162,006

 

$

135,734

 

$

65,365

 

Comm. of Northern Mariana Islands

 

809,350

 

795,279

 

8,482

 

9,568

 

Fiji

 

1,536,328

 

2,015,497

 

220,965

 

230,957

 

Vanuatu

 

732,005

 

1,347,044

 

35,548

 

 

Niger

 

 

 

7,838

 

10,083

 

Total Revenue and net fixed assets from continuing operations

 

$

61,324,955

 

$

10,319,826

 

$

408,567

 

$

315,973

 

 

Major Customers

 

The first major customer relates to the General Construction segment. On April 14, 2011, PS JV was awarded a $92.7 million Task Order for design and construction services in Baghdad, Iraq under the IDIQ contract. This Task Order provided PS JV with the opportunity to build Containerized Housing Units (CHU) in Iraq. Construction under this Task Order began in June, 2011. In March 2012, we received a partial Termination for Convenience notice from OBO. The partial termination was due to OBO’s internal program changes and not the result of any performance issues by PS JV. The Task Order was over 70% complete upon receipt of the partial Termination for Convenience notice and the company is in the process of proposing and negotiating a fair and reasonable final settlement with

 

29



Table of Contents

 

OBO. On May 3, 2012 a “Certificate of Substantial Completion” was received related to the list of construction activities under the partial Termination for Convenience on the Baghdad Police Academy Annex Task Order. The Company continues to work with OBO toward a final settlement on the project. OBO remains a major customer vis-à-vis the award of the Sather contract to PS JV under the IDIQ contract during the first six months of 2012. Revenue on these Task Orders was $56.9 million and $2.9 for the six month periods ended June 30, 2012 and 2011, respectively, accounting for 93% and 27% of total revenue from continuing operations for the periods. In January 2012, the OBO exercised Option Year 1 under our base CHU IDIQ contract, extending the period within which additional Task Orders can be awarded to PS JV to January 6, 2013.

 

The second major customer relates to the Power Generation segment. The Company signed a 20-year operations and maintenance agreement with the Fiji Electric Authority (FEA) in April 2003 and recognized revenues under the contract of $1.5 million and $2.0 million in the six month periods ended June 30, 2012 and 2011, respectively. Revenues from FEA were 2.5 % and 19.5% of the Company’s total revenues from continuing operations in the six month periods ended June 30, 2012 and 2011, respectively.

 

The third major customer relates to the Power Generation services segment. Pernix Group, under a Memo of Understanding (MOU) is performing 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 and contract with the Government of Vanuatu. VUI entered into a short term Memorandum of Understanding (MOU) that became effective on January 1, 2011 and was extended on August 31, 2011 until a long term concessionaire is named. The Company receives expense reimbursements and management fees during this period for assuming the operations from the prior service provider. Revenue from the Vanuatu operations was $0.7 million or 1.2% and $1.3 million or 13.1% of the Company’s revenue from continuing operations for the six month periods ended June 30, 2012 and 2011, respectively.

 

As noted earlier, the Company was awarded a $42.6 million contract with subsequent change orders of $4.2 million to build a United States Embassy in Suva, Fiji. This project began in 2007. The Company was awarded a second contract of $8.1 million in April of 2010 and work began in May of 2010. Revenue from this customer totaled $0.3 million or 0.6% of consolidated total revenues from continuing operations in the first six months of 2012 and $3.2 million or 31.3% of consolidated total revenues in the first six months of 2011.

 

The RF Transmitter Design, Installation and Service segment has various major customers that resulted in additional contract revenue representing $1.0 and $7.1 million for the first six months of 2012 and 2011, respectively. Revenue from the RF Transmitter sales is presented in the loss from discontinued operations for the six month periods ended June 30, 2012 and 2011.

 

20. Prepayments Related to Sales Contracts

 

Revenue on TransRadio contracts was generally recorded when the customer acceptance provisions of the agreements are met. Certain contracts required the customer to make advance payments to TransRadio to cover costs related to the design and / or procurement of the equipment. As December 31, 2011, the amount recorded as advanced payments received on account of orders is 0.8 million. TransRadio was sold during the first quarter of 2012; therefore no such prepayments are included in the Condensed Consolidated Balance Sheet as of June 30, 2012.

 

21. Income taxes

 

We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. Certain foreign results in 2012 and 2011 are excluded from ordinary income due to ordinary losses for which no benefit can be recognized. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which it occurs. Items included in income tax expense in the periods in which they occur include the tax effects of material restructuring and impairments, cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and

 

30



Table of Contents

 

adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.

 

We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. During the quarter ended June 30, 2012 the Company increased its valuation allowance on its CNMI deferred tax assets by $1.4 million, as management no longer considers it more likely than not that the company will utilize the net operating losses generated in CNMI to offset CNMI taxable income, reflecting the uncertainty arising partially from the potential liability and legal costs incurred and anticipated related to the Koblerville lawsuit. The CNMI deferred tax assets are fully reserved for as of June 30, 2012. As of June 30, 2012 and December 31, 2011, no valuation allowance remained on federal U.S. net operating loss carry forward deferred tax assets as management believed at that time and continues to believe that it is more likely than not that the Company will generate future U.S. taxable income at a sufficient level to utilize all of the U.S. NOL carry forwards.

 

During the quarter ended June 30, 2012, the Company reduced by $0.5 million to $0.7 million the valuation allowance against the state of Illinois deferred tax assets, reflecting the expiration of the prohibition or limitation of utilization of net operating losses to offset taxable income for tax periods beginning after December 31, 2013.

 

We continue to maintain a valuation allowance on certain state and foreign deferred tax assets that we believe, on a more-likely-than-not basis, will not be realizable based on current forecasted results. However, it is reasonably possible within the next twelve months that the Company may release a portion of its existing valuation allowance based on the results of business strategies that would indicate deferred tax assets more likely than not will be realized.

 

The $1.2 million tax expense for the six month period ending June 30, 2012 excludes $0.8 million of federal tax benefit that is presented within the loss on the sale of discontinued operations, net in the Condensed Consolidated Statement of Operations. There were no material interest expenses or penalties for the quarter. The Company has analyzed filing positions in all of the federal, foreign and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s U.S. tax returns are the 2005 through 2011 tax years. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. The Company had income tax expense of $0.3 million from continuing operations in the first six months of 2011. The TransRadio income tax benefit of $23,074 is presented as part of the loss on sale of discontinued operations in the Condensed Consolidated Statement of Operations for the first six months of 2011.

 

22. Subsequent Events

 

On July 23, 2012, the Company received a ruling pertaining to the Koblerville litigation. Please see the Commitments and Contingencies note for further information.

 

31



Table of Contents

 

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

 

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

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report and the 2011 annual condensed consolidated financial statements and notes thereto included in the Company’s Form 10-K Annual Report filed with the Securities and Exchange Commission.

 

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

 

Construction revenues are determined by applying the Percentage of Completion method, which requires the use of estimates on the future revenues and costs of a construction project. Our current projects are design/build contracts with a fixed contract price. These contracts are with the United States Government and 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 and recovery of all related settlement expenses in accordance with applicable Federal Acquisition Regulations. 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, warranty expense, as well as productivity. In addition, sometimes clients, vendors and subcontractors will present claims against us for recovery of costs they incurred in excess of what they expected to incur, or for which they believe they are not contractually responsible. In turn, 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 the financial information when such costs can be reliably identified and estimated. Similarly, the Company will include in revenue amounts equal to costs for claims, where the outcome is probable that the claim will be found in the favor of the Company. The Company will record a provision for losses when estimated costs exceed estimated revenues.

 

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

 

In this report, we use the terms “Pernix Group”, “PGI”, “the Company”, ‘we”, “us”, and “our” to refer to Pernix Group, Inc. and its condensed consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years. We refer to the six months ended June 30, 2012 and 2011 as the “six month periods ended June 30, 2012 and 2011”, respectively or as the “first six months of 2012 and 2011”, respectively.

 

32



Table of Contents

 

Results of Operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011

 

Revenues

 

Total revenues increased $51.0 million to $61.3 million for the six month period ended June 30, 2012 compared to $10.3 million for the prior year period. This increase is primarily attributable to the $52.1 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 - Construction revenues are generally recorded using the Percentage of Completion method and in 2012 relate to four contracts with the U.S. Department of State pertaining to the CHU IDIQ Contract for embassy building and rehabilitation Task Orders in Iraq, as well as Department of State projects in Fiji and Niger. The increase as compared to 2011 is primarily attributed to two Iraq contracts to construct containerized housing that were awarded to Pernix-Serka Joint Venture (PS JV), in April 2011 (“Baghdad Police Academy Annex” f.k.a. “Shield”) and January 2012 (“Sather”). Revenue for the Baghdad Police Academy Annex and Sather contracts increased $33.7 million to $36.5 million for the six months ended June 30, 2012. Revenue for the Sather project was $20.4 million and $0 for the six months ended June 30, 2012 and 2011, respectively. Significant work progressed on the Shield contract during the current year to date period as the project is essentially complete at June 30, 2012 based on the scope as amended by the partial termination for convenience notice received in March 2012. The Sather contract was awarded during the first quarter of 2012 and it is 41% complete as of June 30, 2012. Only $2.8 million of revenue was recorded on these contracts in the first six months of 2011 as the Shield contract construction had just begun in April, 2011 and the Sather contract had not yet been awarded to PS JV. On May 3, 2012 a “Certificate of Substantial Completion” was received related to the Baghdad Police Academy Annex Task Order. The Company continues to work with OBO toward a fair and reasonable final settlement on the Task Order.

 

In addition, approximately 5% of the Niamey, Niger embassy rehabilitation project was completed during the first six months of 2012, resulting in $1.0 million of construction revenue compared to no revenue recorded on this contract in the first six months of 2011 as it was not awarded to Pernix until August of 2011. The Niger contract is expected to be completed in mid-2014 with steady progression of significant work expected beginning in July 2012 and continuing until completion in mid-2014.

 

The increase in construction revenue driven by the CHU IDIQ program and Niger project was partially offset by the $2.9 million decrease in revenue, from $3.2 million in the first six months of 2011 to $0.3 million in the first six months of 2012, related to the U.S. Embassy projects in Fiji which were complete or substantially complete as of December 31, 2011.

 

RF Transmitter Design, Installation and Service — During the first six months of 2012 and 2011, revenues related to TransRadio contracts totaled $1.0 million and $7.1 million, respectively and are included in the “Loss from discontinued operations, net of income taxes” in our condensed consolidated statement of operations as the business was sold on March 28, 2012. These revenues relate to the TransRadio subsidiary which was purchased in December 2009 and are generally recognized when customer approval and release are received by TransRadio. Revenues vary depending upon the size and number of contracts completed and accepted during a period. No individually significant large contracts were completed in 2012 prior to the sale of TransRadio. The revenue for the six months ended June 30, 2011 that is included in the “Loss from discontinued operations, net of income taxes” reflects the second quarter 2011 completion and acceptance of the Luxembourg contract that generated revenue of approximately $3.5 million coupled with revenue from contracts completed and accepted in the first six months of 2011 in Switzerland, Germany, Israel and Spain that totaled $2.5 million along with other revenue.

 

Service Fees — Power Generation Plant. Service fees — power generation plant decreased $1.1 million (or 26%) to $3.1 million for the six months ended June 30, 2012, from $4.2 million for the six months ended June 30, 2011. The decrease was due primarily to a lower management fee from the Vanuatu power generation facility ($0.6 million decrease). During 2012, the facility is operating at steady state and earned a lower fee compared to the comparable 2011 quarter when significantly higher facility safety, maintenance and other operations activities were occurring as VUI transitioned into the facility replacing the prior concessionaire. In addition, there were lower revenues from TFL reflecting the impact of higher Fijian hydro power utilization and the engine failure that occurred in August 2011 triggering lower power generation in Kinoya until the engine was fully recommissioned in March 2012. This decrease in revenue from the engine failure was more than offset by the insurance proceeds and engine rebuild revenues included in “other income” totaling $0.6 million for the six months ended June 30, 2012.

 

Costs and Expenses

 

General Construction Costs — (including Construction Costs — Related Party). Total construction costs, including construction costs — related party, increased $49.2 million to $54.0 million for the first six months of 2012 compared to the comparable period of 2011, primarily reflecting the costs on the Iraq CHU IDIQ Task Order awards and related modifications that were not awarded to the PS JV until after the first quarter of 2011 coupled with the impact of the costs related to the Niger embassy project. This increase is slightly offset

 

33



Table of Contents

 

by a decrease in potential warranty-related costs related to the Fiji Embassy contracts as both of the contracts were substantially complete at December 31, 2011.

 

Transmitter design, manufacture, installation and service cost — These costs are associated with TransRadio, and were $0.6 million for the 2012 period prior to the sale of TransRadio and $5.2 million for the first six months of 2011. These costs are included in the “loss from discontinued operations, net” in our condensed consolidated statement of operations for both periods.

 

Operations and Maintenance Costs — Power Generation Plant. Operations and maintenance costs — power generation plant increased $0.8 million to $2.1 million for the first six months of 2012 from $1.4 million for the comparable prior year period, primarily reflecting the increase in planned maintenance expense resulting from the first quarter 2012 completion of the 60,000 hour planned maintenance and partial completion of 48,000 hour planned maintenance on two Fijian engines. The maintenance costs for the prior year period were approximately $0.1 million.

 

Gross Profit

 

Gross profit increased by $1.0 million to $5.2 million for the six months ended June 30, 2012 as compared to $4.2 million in the comparable 2011 period. The increase was due primarily to the higher gross profit from the construction segment year over year reflecting the Company’s significant strides in the past several years in business development efforts and this increase more than offset the decrease in the power generation segment. Several unusual events contributed to the lower than anticipated power segment gross profit for the period including longer than anticipated time to bring the G8 engine in Fiji back on line, higher maintenance expenses on engines and greater utilization of hydro power in Fiji.  We do not expect these conditions to persist in the remainder of 2012. Furthermore, the negative impact of the G8 engine outage in the first six months of 2012 was more than offset by the recording of business interruption insurance proceeds and engine rebuild revenues totaling $0.6 million and presented in Other Income as discussed below.

 

Operating Expenses

 

Salaries and Employee Benefits — Salaries and employee benefits increased $0.3 million for the six months ended June 30, 2012 compared to the prior year period reflecting the higher expenses associated with expanding our management team and supporting professional staff to meet the needs of our growing business.

 

General and Administrative Expenses — General and administrative expenses increased $0.5 million in the first six months of 2012 from approximately $1.2 million for the first six months of 2011 primarily due to the legal costs accrued in connection with the pending TCNMI litigation and higher travel expenses also associated with our growing business which more than offset lower corporate professional fees.

 

Other Income (Expense)

 

Other income increased by $0.8 million during the first six months of 2012 compared to the comparable period ended June 30, 2011, reflecting business interruption insurance proceeds received from insurers or claims accepted by insurers in connection with the G8 engine failure that occurred in August 2011, coupled with miscellaneous income from ancillary engine rebuild services provided to an engine manufacturer in Fiji. There was no such income during the first quarter of 2011.

 

Pretax Income

 

Consolidated pretax income increased 69% or $1.0 million from 1.5 million to $2.5 million for the six months ended June 30, 2012 compared to the prior year six month period as the higher income from construction activities under the IDIQ containerized housing program coupled with other income was partially offset by lower operating income from the power generation segment and higher corporate expenses incurred to support our growing business.

 

34



Table of Contents

 

Consolidated Net Loss

 

Consolidated net losses were $1.7 million for the six months ended June 30, 2012 compared to net income of $0.3 million for the six months ended June 30, 2011. This loss includes the loss from discontinued operations in both periods. In addition to the variances in pretax income cited above, the loss from TransRadio discontinued operations was $1.1 million, net of tax benefit of $0.8 million, during the 2012 period and $0.8 million, net of tax benefit of approximately $24,000 during the 2011 period. The tax expense from continuing operations increased by $0.8 million reflecting the tax effect of higher current taxable income and the net increase in the valuation allowance against deferred tax assets. The decrease in the valuation allowance on state deferred tax assets ($0.5 million) was more than offset by the increase in the TCNMI deferred tax asset valuation allowance ($1.4 million) reflecting the uncertainty arising partially from the potential liability and legal costs incurred and anticipated related to the Koblerville case. The loss per share from discontinued operations was ($0.12) per share and ($0.08) per share for the six months ended June 30, 2012 and 2011, respectively.

 

Results of Operations for the three months ended June 30, 2012 compared to the three months ended June 30, 2011

 

Total revenues increased $17.2 million to $24.3 million for the quarter ended June 30, 2012 compared to $7.1 million for the prior year quarter. This increase is primarily attributable to the $17.9 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 - Construction revenues are generally recorded using the Percentage of Completion method and in 2012 relate to four contracts with the U.S. Department of State pertaining to the CHU IDIQ Contract for embassy building and rehabilitation Task Orders in Iraq, as well as Department of State projects in Fiji and Niger. The increase as compared to 2011 is primarily attributed to two Iraq contracts to construct containerized housing that were awarded to Pernix-Serka Joint Venture (PS JV), in April 2011 (“Baghdad Police Academy Annex” f.k.a. “Shield”) and January 2012 (“Sather”). Revenue for the Baghdad Police Academy Annex and Sather contracts totalled $22.4 million and $2.8 million, respectively, for the quarter ended June 30, 2012. Significant work progressed on the Shield contract (substantially complete at June 30, 2012 as determined under the partial Termination for Convenience received in March 2012). The Sather contract was awarded during the first quarter of 2012 and during the second quarter of 2012 the completion of the project progressed from 8.5% complete as of March 31, 2012 to 40.5% as of June 30, 2012. No revenue was recorded on the Sather contract in the second quarter of 2011 as it had not yet been awarded to PS JV. On May 3, 2012 a “Certificate of Substantial Completion” was received related to the Baghdad Police Academy Annex Task Order. The Company continues to work with OBO toward a fair and reasonable final settlement on the Task Order.

 

In addition, 1.6% of the Niamey, Niger embassy rehabilitation project was completed during the second quarter of 2012, resulting in $0.4 million of construction revenue compared to no revenue recorded on this contract in the second quarter of 2011 as it was not awarded to Pernix until August of 2011. The Niger contract is expected to be completed in early 2014 with steady progression of significant work beginning in July 2012 and continuing until early 2014.

 

The increases in construction revenue driven by the CHU IDIQ program and Niger project was partially offset by the $2.8million decrease in revenue from second quarter of related to the U.S. Embassy projects in Fiji which were complete or substantially complete as of December 31, 2011.

 

RF Transmitter Design, Installation and Service — During the second quarter of 2012 and 2011, revenues related to TransRadio contracts totaled $0 and $6.0 million, respectively and are included in the “loss from discontinued operations, net of income taxes” in our condensed consolidated statement of operations as the business was sold on March 28, 2012. These revenues relate to the TransRadio subsidiary which was purchased in December 2009 and are generally recognized when customer approval and release are received by TransRadio. Revenues vary depending upon the size and number of contracts completed and accepted during a period. The Luxemborg contract was completed in the second quarter of 2011 generating revenue of $3.5 million for that quarter along with revenue from smaller contracts. No revenue was generated in the second quarter of 2012 as TransRadio was sold during the first quarter.

 

Service Fees — Power Generation Plant. Service fees — power generation plant decreased $0.6 million (or 27%) to $1.6 million for the three months ended June 30, 2012, from $2.2 million for the three months ended June 30, 2011. The decrease was due primarily to a lower management fee from the Vanuatu power generation facility. During 2012, the facility is operating at steady state and earned a lower fee compared to the comparable 2011 quarter when significantly higher facility safety, maintenance and other operations activities were occurring as VUI transitioned into the facility replacing the prior concessionaire.

 

Costs and Expenses

 

General Construction Costs — ( including Construction Costs — Related Party). Total construction costs, including construction costs — related party, increased $16.6 million to $20.2 million for the second quarter of 2012 compared to the comparable quarter of 2011, primarily reflecting the costs on the Iraq CHU IDIQ Task Order awards and related modifications. The Sather contract was not awarded to the PS JV until after the first quarter of 2011 and significant progress on the Shield contract did not begin until the second quarter of 2011. This increase is slightly offset

 

35



Table of Contents

 

by a decrease in potential warranty-related costs related to the Fiji Embassy contracts as both of the contracts were substantially complete at December 31, 2011.

 

Transmitter design, manufacture, installation and service cost — These costs are associated with TransRadio, and were $0.0 million and $4.4 million for the second quarters of 2012 and 2011, respectively. These costs are included in the “loss from discontinued operations, net of income taxes” in our condensed consolidated statement of operations for the quarter ended June 30, 2012.

 

Operations and Maintenance Costs — Power Generation Plant. Operations and maintenance costs — power generation plant were relatively stable quarter over quarter at $0.7 million.

 

Gross Profit

 

Gross profit increased by $0.7 million to $3.4 million for the three months ended June 30, 2012 as compared to $2.7 million in the comparable 2011 quarter. The increase was due primarily to the increased construction margin due to the substantial level of progress made during the quarter that more than offset quarter over quarter the reduction in the power generation segment reflecting the operation of the VUI project at steady state rather than in a start-up phase, coupled with the lack of 2012 revenue related to the US embassy in Fiji which was substantially completed during 2011.

 

Operating Expenses

 

General and Administrative ExpensesGeneral and administrative expenses increased $0.2 million to $0.9 million for the three months ended June 30, 2012 compared to the prior year quarter, as TCNMI incurred legal fees in connection with the Koblerville litigation.

 

Other Income (Expense)

 

Other income increased by $0.1 million during the three months ended June 30, 2012, reflecting lower Fijian foreign exchange losses as the result of the completion of the U.S. embassy project in Fiji during 2011.

 

Pretax Income

 

Consolidated pretax income increased 49% or $0.6 million to $1.8 million for the quarter ended June 30, 2012 compared to a pretax income of approximately $1.2 million for the prior year period as the higher income from construction activities under the IDIQ containerized housing program was partially offset by lower income from Fiji construction projects and lower income from the power generation segment as it incurred legal expenses and reached steady state operations in Vanuatu.

 

36



Table of Contents

 

Consolidated Net Loss

 

Consolidated net loss was $0.7 million for the three months ended June 30, 2012 compared to $1.0 million net income for the three months ended June 30, 2011. This loss includes the income from discontinued operations in the 2011 second quarter amounting to $0.1 million, net of tax. The tax expense from continuing operations increased by $1.0 million reflecting the tax effect of higher current taxable income and the net increase in the valuation allowance against deferred tax assets. The income per share from discontinued operations was ($0.01) per share for the quarter ended June 30, 2011.

 

Liquidity and Capital Resources

 

 

 

June 30, 2012

 

December 31, 2011

 

Cash and cash equivalents

 

$

8,765,139

 

$

2,933,894

 

 

 

 

Six Months

 

Six Months

 

 

 

Ending

 

Ending

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

Cash provided by / (used in) operating activities

 

$

6,842,129

 

$

(4,880,416

)

Cash (used for) investing activities

 

1,012,630

 

(75,058

)

Cash (used for) / provided by financing activities

 

(2,360,257

)

1,953,378

 

Effect of exchange rates on cash

 

336,742

 

(93,306

)

Increase / (decrease) in cash and cash equivalents

 

$

5,831,244

 

$

(3,095,402

)

 

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, and from financing obtained from third party banks, affiliated parties and through sales of common and preferred stock. Until March 28, 2012, when we sold our interest in TransRadio, we also generally used cash related to the design, manufacture, installation and service associated with that business. In addition, the Company filed a registration statement with the SEC that became effective May 14, 2012 and registered 5,000,000 shares of previously unissued stock in a primary fixed price $5.00 per share 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. Beyond the cash expected to be generated by operations and from third party banks and issuance of additional shares in connection with the registration statement, the Company may seek debt financing or equity based support from its principal stockholders, 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. On July 23, 2012, the Company received a ruling on the Koblerville litigation which resulted in a judgment of $4.45 million against the three defendants. However, the judge failed to apportion the liability among the three defendants.  On August 6, 2012, TCNMI filed a request for apportionment in order to obtain definition of the amount of liability that is attributable to TCNMI and to request that a portion of the ruling be vacated. As of the date of the filing of this Form 10-Q, no apportionment or other ruling has been issued and the Company does not know how much of the liability will be apportioned to it or the other defendants. Finally, the Company has significant net operating loss carryforward deferred tax assets that it anticipates utilizing over the next several years that will negate any current federal income tax cash payments other than those required under the alternative minimum tax which generally are 2% of taxable income.

 

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 June 30, 2012, the Company’s total assets exceeded total liabilities by $9.5 million. This was a $1.9 million decrease from December 31, 2011. As of June 30, 2012, the Company had $1.0 million of short term borrowings and $1.3 million of long term borrowings from related parties. As of June 30, 2012, the Company had an accumulated deficit of $69.8 million and total stockholders’ equity of $9.5 million.

 

37



Table of Contents

 

The $5.8 million increase in cash primarily consists of $6.8 million of cash provided by operating activities, $1.2 million provided by the sale of TransRadio, $0.9 million of new borrowings that more than offset the impact of $1.9 million used to repurchase preferred stock and pay down debt to Bent Marketing and $1.4 million distribution to minority interests.

 

The Company does not currently have material commitments for capital expenditures as of June 30, 2012. Management believes that the sale of TransRadio will help to improved cash flow in the future as that segment used significant cash in operating activities during 2010, 2011 and the first quarter of 2012. See the Discontinued Operations Note to the Condensed Consolidated Financial Statements for further detail.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

Under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2012. Based on this evaluation, its CEO and CFO concluded the Company’s disclosure controls and procedures are effective to ensure that information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures and that such information is recorded, processed, summarized and reported within the time periods required by the Exchange Act.

 

(b) Changes in internal controls over financial reporting.

 

The following represent either changes to internal controls or other factors that could materially affect internal controls during the quarter ended June 30, 2012:

 

There were no changes in our internal controls in the second quarter of 2012.

 

Inherent Limitations on Effectiveness of Controls.

 

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

 

38



Table of Contents

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not Applicable

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES NOT APPLICABLE

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(a) Exhibits.

 

Exhibit 31.1

 

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

Exhibit 31.2

 

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

Exhibit 32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2004.

Exhibit 32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2004.

(101.INS)*

 

XBRL Instance Document

 

N/A

(101.SCH)*

 

XBRL Taxonomy Extension Schema Document

 

N/A

(101.CAL)*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

N/A

(101.LAB)*

 

XBRL Taxonomy Extension Label Linkbase Document

 

N/A

(101.PRE)*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

N/A

(101.DEF)*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

N/A

 

39



Table of Contents

 

SIGNATURES

 

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

 

 

Pernix Group, Inc.

 

(Registrant)

 

 

Dated: August 14, 2012

/s/ Nidal Zayed

 

Nidal Z. Zayed

 

President and Chief Executive Officer

 

 

 

/s/ Gregg Pollack

 

Greg Pollack

 

Vice President Administration and Chief Financial Officer

 

 

 

/s/ Carol Groeber

 

Carol Groeber

 

Controller and Principal Accounting Officer

 

40