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PRXG > SEC Filings for PRXG > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for PERNIX GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PERNIX GROUP, INC.


15-May-2013

Quarterly Report


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 2012 annual consolidated financial statements and notes thereto included in the Company's Form 10-K Annual Report filed with the Securities and Exchange Commission.

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


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In this report, we use the terms "Pernix Group", "PGI", "the Company", 'we", "us", and "our" to refer to Pernix Group, Inc. and its condensed consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years. We refer to the three months ended March 31, 2013 and 2012 as the "first quarter of 2013" and the "first quarter of 2012", respectively.

Results of Operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2012

Revenues

Total revenues decreased $19.4 million to $17.2 million for the quarter ended March 31, 2013 compared to $36.6 million for the prior year's quarter. This decrease is primarily attributable to the $30.4 million decrease in construction revenue reflecting the reduction related to the 2012 substantial completion of the Baghdad Police Academy Annex ("Shield") project that more than offset a $9.4 million increase in revenue on the contract awarded in January 2012 ("Sather) and a $1.8 million increase on the Niger rehabilitation contract. Sather revenue increased as completion advanced even in light of a temporary first quarter 2013 delay in progress due to customer driven site logistics. The Company does anticipate the Sather project progress to resume at a normal pace during the second quarter of 2013. Power revenues were relatively stable for the quarter ended March 31, 2013 compared to the prior year period.

General Construction - Construction revenues are generally recorded using the Percentage of Completion method and in 2013 relate to a contract 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 a Department of State project in Niger. The decrease as compared to 2012 is primarily attributed to the substantial completion of the Shield Project, which was one of the two Iraq task orders to construct containerized housing that were awarded to Pernix-Serka Joint Venture (PS JV). This decrease was partially offset by higher revenue on the task order awarded to PS JV in January 2012 ("Sather"), even though it construction activity at Sather was delayed in the first quarter of 2013 due to an on-site logistics matter that was beyond the control and scope of responsibility of PS JV. Revenue for the Sather contract was $13.4 million for the quarter ended March 31, 2013. The Sather contract was awarded during the first quarter of 2012 and was 8% complete as of March 31, 2012 and is 60.8% complete as of March 31, 2013. In addition, 24% and 4% of the Niamey, Niger embassy rehabilitation project was completed as of the end of the first quarter of 2013 and 2012, respectively. $2.3 million and $0.6 million of construction revenues were recorded on this contract in the first quarters of 2013 and 2012, respectively. The Niger contract is expected to be completed in late 2014 with steady progression throughout 2013 and 2014. Construction revenue also reflects the $0.3 million decline in revenue on the U.S. Embassy project in Fiji that was complete by the end of the first quarter of 2012.

Service Fees - Power Generation Plant. Service fees - power generation plant were relatively stable at $1.1 million for the three months ended March 31, 2013 and March 31, 2012.

Costs and Expenses

General Construction Costs - ( including Construction Costs - Related Party). Total construction costs, including construction costs - related party, decreased $19.3 million to $14.5 million for the first quarter of 2013 compared to the comparable quarter of 2012, primarily reflecting the costs in light of the aforementioned activity changes on the Iraq CHU IDIQ Task Order Program awards and related modifications. This decrease is slightly offset by an increase in costs associated with the embassy rehabilitation project in Niger.

Operations and Maintenance Costs - Power Generation Plant. Operations and maintenance costs - power generation plant decreased $0.6 million to $0.5 million for the first quarter of 2012 from $1.1 million for the comparable prior year quarter, primarily reflecting the increase in planned maintenance expense resulting from the first quarter 2012 completion of the 60,000 hour planned maintenance carried out on the G8 engine at Kinoya, Fiji. The G8 engine was re-commissioned on March 19, 2012 has been fully operational since that date. Maintenance cost was less than $0.1 million for the comparable current year quarter.


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Gross Profit

Gross profit increased by $0.5 million to $2.2 million for the three months ended March 31, 2013 as compared to $1.7 million in the comparable 2012 quarter, due primarily to improved results in the power generation segment. The increase in the power generation segment reflects relatively stable revenues coupled with lower maintenance costs. Several unusual events contributed to the higher 2013 power gross profit as the 2012 time and costs associated with repairing and bringing the G8 engine in Fiji back on line were not present in 2013. The negative impact of the G8 engine outage on gross profit in the first quarter of 2012 was more than offset by the recording of business interruption insurance proceeds and engine rebuild revenues totaling $0.7 million and presented in 2012 Other Income as discussed below. The Construction segment gross profit decreased $0.2 million as lower revenues were primarily offset by lower costs.

Operating Expenses

Salaries and Employee Benefits. Salaries and employee benefits increased $0.3 million quarter over quarter reflecting the higher expenses associated with hiring a VP of Power as well as Construction estimators and support staff to facilitate the Company's new business generation initiatives. This rate of increase is not expected to continue as the Power segment is staffed as planned at this time and some Construction segment attrition has occurred early in the second quarter of 2013.

General and Administrative Expenses. General and administrative expenses increased $0.1 million in the first quarter of 2013 to approximately $0.8 million for the first quarter of 2012 primarily due to the increase in recruiting fees related to the aforementioned new employees.

Other Income (Expense)

Other income (expense) decreased by $0.7 million during the first three months of 2013 compared to the comparable period ended March 31, 2012, 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 2013.

Pretax Income

Consolidated pretax income decreased $0.6 million for the quarter ended March 31, 2013 compared to a pretax income of approximately $0.9 million for the prior year period, due to lower income from construction activities under the IDIQ containerized housing program coupled with higher operating costs. The power segment income was relatively stable.

Loss from Discontinued Operations

RF Transmitter Design, Installation and Service - During the first quarter of 2012, revenues related to TransRadio contracts totaled $1.0 million and are included in the "loss from discontinued operations, net" 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 varied depending upon the size and number of contracts completed and accepted during a period. No individually significant large contracts were completed in the first quarter of 2012. The related costs associated with TransRadio were $0.6 million for the first quarter of 2012. These costs are included in the "loss from discontinued operations, net" in our condensed consolidated statement of operations for the quarter ended March 31, 2012. There are no operations for TransRadio in the 2013 condensed consolidated statement of operations.


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Telesource CNMI (TCNMI)- During the first quarter of 2012, revenues and costs of power generation related to TCNMI were $0.4 million and $0.3 million respectively. Operating expenses were $0.3 million resulting in a loss of $0.2 million for such quarter. These results are presented within "loss from discontinued operations, net" in our condensed consolidated statement of operations. There are no operations for TCNMI in the 2013 condensed consolidated statement of operations.

Consolidated Net Income / (Loss)

Consolidated net income (loss) was $0.2 million and ($0.3) million for the three months ended March 31, 2013 and 2012, respectively. The loss per share from discontinued operations was ($0.12) per share for the quarter ended March 31, 2012; there was no activity from discontinued operations in the current year quarter. The consolidated net income (loss) after non-controlling interest was ($0.5) million and ($1.0) million for the quarters ended March 31, 2013 and 2012, respectively, reflecting relatively stable net income from the PS JV that resulted in higher income attributable to non-controlling interests in the first quarter of 2013 compared to the comparable prior year quarter.

Liquidity and Capital Resources


                                                March 31,      March 31,
                                                   2013           2012
          Cash and cash equivalents          $   18,150,818  $  7,608,687


                                                                Quarter
                                                 Quarter         Ending
                                               Ending March    March 31,
                                                 31, 2013         2012
          Cash provided by operating
          activities                         $      330,332  $  1,563,245
          Cash (used in) provided by
          investing activities                    (677,608)     1,051,293
          Cash provided by (used in)
          financing activities                  (2,902,102)     1,652,885
          Effect of exchange rates on cash          (6,702)       407,370
          Increase (decrease) in cash and
          cash equivalents                   $  (3,256,080)  $  4,674,793

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 and TCNMI in 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.


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During the first quarter of 2013, the $3.3 million decrease in our cash position largely reflects first quarter 2013 distribution of 2012 profits attributable to Serka, our PS JV partner, amounting to $2.9 million. In addition, the company paid $0.6 million for half of the cost of the corporate office building in Lombard coupled with closing costs during the first quarter of 2013. These decreases were partially offset by cash from operations and financing totaling $0.2 million.

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 March 31, 2013, the Company's total assets exceeded total liabilities by $13.3 million. This was a $2.7 million decrease from December 31, 2012, due primarily to the aforementioned distribution of 2012 earnings to PS JV partner Serka. As of March 31, 2013, the Company had total stockholders' equity of $13.3 million, a $2.7 million reduction from December 31, 2012, primarily reflecting the distribution to the PS JV minority partner of a portion of PS JV prior earnings coupled with the first quarter 2013 net loss.


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