Disclosure Regarding Forward-Looking Statements

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

The Company may, from time to time, post financial or other information on its Internet website, www.pernixgroup.com.  The internet address is for informational purposes only and is not intended for use as a hyperlink.  The Company is not incorporating any material on its website into this report.

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In this report, we use the terms “Pernix Group,” “Pernix,” “the Company,” “we,” “us” and “our” to refer to Pernix Group, Inc. (formerly known as Telesource International, Inc.) and its consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years. We refer to the calendar year ended December 31, 2014 as “2014” and the calendar year ended December 31, 2013, as “2013.”

Overview

Pernix Group is a global company managed from Lombard, Illinois and was originally formed in 1995 as Telesource International, Inc.  In 2001, the Company was incorporated in Delaware and became an SEC registrant. As of December 31, 2014, Pernix Group employs 148 people and is 96.6% owned by Ernil Continental, S.A., BVI, Halbarad Group, Ltd., BVI, and Affiliates. The Company conducts its operations through the parent and its fifteen subsidiaries. The Company’s two primary operating business segments are general construction and power generation services. In addition to these two operating segments, the corporate operations are a separately reported segment that provides administrative support to the operating segments and manages the Corporate headquarters building operations.

Pernix has full-scale construction and management capabilities, with subsidiaries in the South Pacific islands of Fiji and Vanuatu, Africa, Azerbaijan, Kurdistan, United Arab Emirates and in the United States. We provide our services in a broad range of end markets, including construction, construction management, power and facility operations and maintenance (O&M) services.

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 O&M 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 twenty years of experience providing the majority of our services in international locations. We believe that these attributes are the foundation of Pernix’s success.

We believe the unique collection of resources, experience, operational and financial attributes that Pernix possess properly position the Company for future growth, diversification and financial success.  The Company has transformed over the past several years noting the following achievements:

• Earned four consecutive years of pretax income from continuing operations before non-controlling interest allocations

• Significant reduction in leverage, being debt free as of December 31, 2014 and 2013

• Expansion of its customer base including our first domestic project awarded in early 2014

• The Company has reached an inflection point from which growth should be increasingly profitable

• Enhanced ability to form strategic relationships with vendors, subcontractors and project partners

• The Company has $70.4 million of net operating and capital loss carryforwards that may be used to offset future taxable earnings.

Pernix Group provides its customers with solutions that meet their time and budget constraints. In doing so, Pernix Group developed strong partner and customer relationships, which are the drivers behind contracts and sole source awards and related change orders the Company received in 2014 and 2013 totaling over $100 million.

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Our recent experiences with the OBO have 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 our staff and our partners to the mutual benefit of all involved. In addition to PSJV, Pernix has also formed several 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.

We believe our experience and track record in Fiji and ongoing experience in Niger, Freetown and Baku demonstrate our ability to bid on, obtain and successfully complete additional embassy and/or US Government projects as the Department of State intends to build, rehab or upgrade more than 33 embassy and consulate facilities in the 2015 — 2018 timeframe.

Pernix LTC JV (PLTC) is a joint venture with LTC Corp (LTC) in which Pernix is the majority owner. PLTC was formed to pursue a project on the campus of Texas A&M University in early 2014. PLTC was awarded a project totaling $23.4 million. LTC filed for Chapter 7 bankruptcy protection on May 2, 2014. The LTC bankruptcy filing has not negatively impacted Pernix, the venture or the project, which is approximately 78% complete with anticipated completion to be in early 2015.

During the third quarter of 2012, the Company established an office in Dubai (United Arab Emirates) to secure new and existing customers in light of significant anticipated demand for construction services forecasted in the region over the next decade. In connection with this effort, the Company organized Pernix Technical Works LLC (PTW), a limited liability company which is consolidated by Pernix Group, Inc. as the primary beneficiary of this variable interest entity.

Pernix Fiji Limited (PFL) was awarded a $1.6 million contract to design, procure and install underground cable in the Solomon Islands between Lungga Power Station and Ranadi Sub-station for the Solomon Islands Electricity Authority (SIEA) in late 2012. In early 2014, PFL was awarded a $30.1 million project to build a 36MW expansion to the Kinoya diesel plant in Fiji. The project scope includes expansion design, procurement and installation. PFL also received a FJD 8.4 million ($4.2 million) award in February 2015 for construction of the substation to support the newly expanded diesel power station previously awarded to PFL.

Design Build

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

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Construction Management

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

Construction Segment Outlook

According to Global Construction 2025, construction in 2013 was an $8.7 trillion market and by 2025, it is estimated construction economic output will have grown by 70% to $15 trillion. Globally, construction in 2025 is forecasted to rise to over 13.5% of world GDP, as growth in construction continues to rise more strongly than GDP.  Forecasts show the most dynamic growth for construction over the next decade is expected to come from emerging markets. Population growth will help drive this growth along with cyclical factors. Conversely, construction in most developed countries will be constrained by large public deficits, austerity programs, muted population growth and limited economic expansion.

Construction is expected to outpace world economic growth in the next decade as Asia and India markets continue to develop rapidly and the US / North America will experience the highest developed region growth by registering an upturn in residential and non-residential construction. Qatar is forecasted to have average double-digit growth of 10% per year through 2025. Qatar will benefit from the country’s hosting of the FIFA 2022 World Cup and continuing diversification within its economy. Growth in construction volumes in Qatar is set to slow significantly after 2020. Sub-Saharan Africa is also expected to be a high growth region for construction globally, driven by rising populations, rapid urbanization and much needed development of infrastructure.

As a result of the aforementioned divergence between developed and developing market economies, emerging markets are expected to make up more than half of the global construction market by the end of this decade. In light of its experience, Pernix is uniquely qualified to perform in emerging markets which can be more remote and logistically challenging environments. Furthermore, Pernix has a Middle East presence through PTW in Dubai and is already present and operating in Africa in connection with its embassy upgrade project in Niger and the rainwater recapture project in Sierra Leone.

Power Generation Segment

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

Pernix focuses on operating efficiency and reliability while maintaining safety, security and 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 transient operators but ones who live and work in the community and depend upon the same power being provided to our customers.

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Operations and Maintenance (O&M)

Pernix Group’s Power O&M services provide 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 processes, performance, reliability and customer service. Our focus is on ensuring a safe and efficient working environment while reducing costs as circumstances allow.

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 Group makes 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.

Build, Own, Operate, Transfer (BOOT)

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

Organizations such as the World Bank, 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.

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

PFL is a subsidiary of Pernix that conducts power generation activities in Fiji. PFL 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 O&M contracts for these plants expire in May 2023 and include management of a total of 74.3 MW of diesel power generation installed capacity in Fiji. In November 2014, Fijian Holdings Limited (FHL), an unrelated third party, acquired a 25% interest or 249,999 common shares of PFL for $2.3 million. Prior to this transaction, PFL was a wholly-owned subsidiary of Pernix.

The Company operates two power plants in Fiji.  The Kinoya Power Plant, situated near Suva, the capital of Fiji, is part of the FEA grid and is the largest diesel fueled power plant in Fiji with an installed capacity of 50.1 MW.  The Vuda Power Plant, situated between Nadi and Lautoka is the second largest diesel fueled power plant in Fiji with an installed capacity of 24.2 MW for a total combined installed capacity of 74.3 MW. The Kinoya and Vuda Power Plants are fully compliant with the applicable laws of Fiji relevant to power plant operations such as Labor Industrial Act and Environmental Act, and complies with manufacturers guidelines by applying prudent engineering practice in the operation and maintenance of the power plant in both locations.

In early 2014, PFL was awarded a $30.1 million contract to design, supply, install and commission 36 MW of auxiliary power equipment at the Kinoya Power Station. The contract price being denominated in 11.9 million Fijian Dollars for the onshore work and 16.6 million Euro for offshore work. On March 14, 2014, PFL entered into a 15.8 million Euro supply contract with Wartsila Finland Oy, and Wartsila Australia Pty Ltd, collectively referred to as the supplier, to supply and deliver 4 engines and related equipment (the offshore work) and to provide technical assistance during installation and commissioning of the engines at the Kinoya power station.

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

Vanuatu Utilities and Infrastructure Limited (VUI)

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

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

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Capitalize on opportunities in challenging geographic locations

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

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

Utilize our long-standing relationships with industry specialists

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

Continue to pursue our acquisition strategy

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

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The Corporate revenue consists of rental income received from third parties for space leased in the corporate office headquarters in Lombard, Illinois. The Corporate segment does not have any major customers in 2014.  

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ITEM 1A. RISK FACTORS

Not applicable.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our corporate offices are located in Lombard, Illinois. We leased the office space until March 4, 2013, when we purchased the office building in which our corporate offices are located. In order to support our relationship with the U.S. Department of State and OBO, as well as to facilitate contract execution that exceeds our customers’ expectations, PSJV has leased space in Vienna, Virginia. The lease term is for a period of 48 months beginning in January of 2012. In Fiji, our power generation subsidiary leased office space for a two year term that ended on June 30, 2014 and has continued on a month to month basis. In December 2013, we entered into a one year non-cancelable lease agreement effective beginning in February 2014 in Colorado to house a regional administrative office. During October 2014, we renewed a non-cancelable lease agreement effective on November 15, 2014 which includes a term of twelve months to house our United Arab Emirates regional office in Dubai. We believe our current properties are adequate for our business operations and are not currently underutilized. We may add additional facilities from time to time in the future as the need arises. In addition to corporate offices, we provide housing for several employees located in remote locations for construction and power facilities O&M work. These leases are not individually significant and are generally living expenses that are considered in the cost and pricing of the related contracts and in some cases are billed to the joint venture under which the related contract work is being performed.

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In late 2010, VUI was selected by the Government of the Republic of Vanuatu to provide O&M services for a power plant in Vanuatu. In 2011, UNELCO, the former concessionaire, brought a case against the Republic of Vanuatu seeking judicial review in relation to the awarding of the electricity concession to VUI. This matter is described as Case No. 101 of 2011. The Republic of Vanuatu is the first defendant and VUI elected to join the suit as a second defendant in order to best preserve its interests. There are currently no claims in relation to damages or otherwise directed at VUI in the proceedings. Therefore, as of December 31, 2014 there are no potential VUI losses that are probable and no accrual is deemed necessary.

In February 2014, during hearings in the Supreme Court of the Republic of Vanuatu (the Court), the Government of Vanuatu proposed a settlement with UNELCO that would leave VUI without a claim to defend pertaining to the concession and would effectively end the litigation in UNELCO’s favor.  The proposed settlement called for a re-tender of the concession and required that any company who participates in the retender must waive any outstanding claims against the Government of Vanuatu. VUI in response presented its position to the court arguing that VUI should have an opportunity to be heard and that the Court should not accept the proposed settlement. On October 16, 2014 the Court issued its decision in favor of UNELCO and the government has issued a new agreement to VUI to continue to operate the plant under the MOU terms until the retender process is completed. As of the date of this report, VUI continues to operate and maintain the Luganville plant under the same terms and conditions.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

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Our common stock is traded in the Over-the-Counter Quotation Board (OTCQB) under the symbol “PRXG.” As of December 31, 2014, there were approximately 197 shareholders of record in which four own over 96% of the outstanding shares. The following table sets forth the low and high closing sales prices of a share of our common stock during each of the fiscal quarters presented, based upon quotations on the OTCQB reporting system.

We have not paid a cash dividend on common stock since our inception and we currently have no plans to pay cash dividends on common stock in the foreseeable future.

The Company implemented an incentive stock option plan for employees (ISOP) in December 2011, a long term incentive plan (LTIP) for non-employee directors and consultants in late 2012 and an equity incentive plan (EIP) for employees and directors in late 2013. As of December 31, 2014 and 2013, there were 283,500 and 379,000 option awards outstanding under the ISOP, respectively. There were 78,500 option awards outstanding as of December 31, 2014 and 2013 under the LTIP plan. There were 1,395,000 and zero option awards outstanding as of December 31, 2014 and 2013, respectively, under the EIP plan.

Unregistered Sales of Equity Securities and Use of Proceeds

In December 2013, the Company entered into Preferred Stock Purchase Agreements (SPAs) with each of Ernil Continental S.A., BVI (“Ernil”) and Halbarad, Ltd., BVI (“Halbarad”).  Pursuant to the terms of the SPAs, Ernil and Halbarad made investments of $2,750,000 and $2,250,000, respectively, in the Company in the form of 550,000 shares and 450,000 shares, respectively, of Series A Cumulative Convertible Preferred Stock. The SPA transactions were closed on December 30, 2013 at which time the preferred stock certificates were issued and cash was received by the Company. No other unregistered securities have been issued since 2010. Previously issued unregistered securities were disclosed in prior periodic filings on Forms 10-Q and 10-K for those periods.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

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You are cautioned that this Annual Report on Form 10-K and, in particular, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements concerning future operations and performance of the Company within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue influence on these forward-looking statements. 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.

In this report, we use the terms “Pernix Group”, “Pernix”, “PGI”, “the Company”, ‘we”, “us”, and “our” to refer to Pernix Group, Inc. and its consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years.

Executive Summary

The Executive Summary in this section is intended to highlight significant information and to provide context within which to consider the Company’s results of operations. During 2014 and 2013, the Company earned revenues of $85.3 million and $73.8 million, representing a revenue growth of 16%.  This growth reflects the commitment to win new projects and grow the overall business.

Total Consolidated Revenue by year for 2010 through 2014 (in millions):

Management believes the 2014 revenue increase is due to the overall growth of our construction business through new business additions.  During 2014 the Company had 10 ongoing construction projects as compared to 6 during 2013. In early 2015, the Company won contracts totaling over $15.8 million, resulting from the Company’s Pernix-Kaseman JV award in South Korea and PFL for the substation construction project.

The Company’s consolidated pretax (loss) income from operations attributable to Pernix shareholders was $(1.4) million and $0.4 million during 2014 and 2013, respectively. The decrease in pretax income attributable to Pernix shareholders in 2014 from 2013 was most significantly caused by the increase in non-controlling interest share of project operations.  Through the Company’s various joint ventures the Company has successfully created new opportunities and allowed the Company to carry out its construction projects in a timely and efficient manner.   

Net (loss) attributable to Pernix common shareholders was ($1.8) million and ($4.7) million in 2014 and 2013, respectively. This decrease in net losses for the year were driven by the increased margin on its construction project activities for the year as well as decreased income tax expense which were offset partially by increased earnings attributable to non-controlling interests.  Included in the 2013 net loss results is a $4.9 million deferred income tax expense related to an increase in the valuation allowance on deferred tax assets. This expense is a non-cash expense and has no impact on the Company’s liquidity, cash flows, or on its ability to execute projects or conduct ongoing operations.

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Management is keenly focused on bidding on and winning new contracts on a stand-alone basis as well as with our strategic partners. In early 2015, the Company has entered into new contract awards totaling over $15.8 million thereby restoring the backlog that existed as of December 31, 2013. Pernix will also continue to explore acquisition and co-investment opportunities in both business segments to obtain additional backlog, expand our customer base and optimize the use of our tax loss carryforwards.

Although the revenue from our Power generation segment represents just 7.7% and 7.9% of consolidated revenue, in 2014 and 2013, respectively, it consistently accounts for a significant portion of the Company’s pretax income from continuing operations.

There are three significant recent developments in the power segment that significantly impact its future performance. First, as noted above, the partial sale of a 25% interest in PFL to FHL. Second, PFL received a FJD 8.3 million ($4.2 million) award in December 2014 for construction of the substation to support the expanded diesel power station currently in execution. PFL has accounted for $1.1 million and $0.8 million of Pernix consolidated pretax income during 2014 and 2013, respectively.

Lastly, VUI has received a decision by the Vanuatu judiciary regarding a retender of the long term concession deed to operate and maintain the diesel and hydro power operations in Vanuatu. The government has issued a new agreement to VUI to continue to operate the plant under the MOU terms until the retender process is completed. As of the date of this report, VUI continues to operate and maintain the system. Once a retender is completed and if VUI is not awarded the concession deed or if the VUI is unable to sufficiently reduce operating costs under the new tariff ruling, it could have a material and negative impact on the Company’s income, cash flows and financial condition.

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Critical Accounting Policies and Estimates

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

Basis of Presentation

The consolidated financial statements include the accounts of all majority-owned subsidiaries in which control does not rest with other entities, as well as joint ventures which are determined to be variable interest entities and in which the Company is the primary beneficiary. During 2014 and 2013, the variable interest entities and related financial results are not material. All inter-company accounts have been eliminated in consolidation. The Company effected an elective accounting quasi-reorganization as of September 30, 2012, which eliminated its accumulated deficit in retained earnings and accumulated other comprehensive income (loss) against additional paid-in-capital. The consolidated financial statements as of December 31, 2014 and 2013 reflect the adjustments to fair value of assets and liabilities that were recorded in connection with the implementation of the quasi-reorganization and subsequent amortization thereof. See Note 2 in our notes to our consolidated financial statements.

Revenue Recognition

We offer our services through two operating business segments: General Construction and Power Generation Services which are supported by the Corporate 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 and design/bid/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.  Contracts on our domestic projects can vary depending on the customer’s need. Currently on our domestic work we have active contracts on the lump sum and the cost plus fee basis.  

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 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

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Claims Recognition

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

Stock Based Compensation

We recognize the expense associated with stock option awards over the period during which an employee, director or consultant is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The related option awards for employees and directors are classified as equity and as such are valued at the grant date and are not subject to remeasurement thereafter. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. The option valuations are performed using a fair value Black Scholes model. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions can materially affect fair value estimates.

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Income Taxes

Valuation Allowance. Deferred income taxes are recorded using the asset and liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment of such changes to laws and rates. In accordance with the quasi-reorganization requirements tax benefits that existed at the date of the quasi-reorganization but that were not recognized at the date of the quasi-reorganization will be recorded directly to equity.

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

We review the need for a valuation allowance at least quarterly. If we determine we will not realize all or part of our deferred tax asset in the future, we will record an additional valuation allowance. Conversely, if a valuation allowance exists and we determine that all or part of the net deferred tax asset is more likely than not to be realized, then the amount of the valuation allowance will be reduced. This adjustment will increase or decrease income tax expense in the period of such determination.

Undistributed Non-U.S. Earnings. The results of our operations outside of the United States are consolidated for financial reporting; however, earnings from investments in non-U.S. operations are included in domestic U.S. taxable income only when actually or constructively received. No U.S. Federal or State deferred taxes have been provided on the undistributed earnings of non-U.S. operations of approximately $3.6 million and $3.2 million for the period January 1, 2014 through September 30, 2014 and for the year ended December 31, 2013, respectively because we made the election to permanently reinvest these earnings overseas to fund growth and operations. The Company determined that we will no longer permanently reinvest its PFL earnings overseas effective October 1, 2014 in conjunction with its partial sale of PFL to Fijian Holdings Limited (FHL) for a 25% interest. Upon repatriation of these earnings, those earnings would be included in taxable income at that time. However, these additional U.S. income taxes may be offset in part by the use of foreign tax credits. U.S. income tax liabilities are recorded from our earnings due to operations in Vanuatu as there are no income taxes in Vanuatu and Pernix Group repatriates these earnings on a monthly basis.

Foreign Currency Translation

The functional currency of the Company’s foreign operations is the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet asset and liability accounts using current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the fiscal year. The translation adjustments are reflected as a separate component of stockholders’ equity captioned accumulated other comprehensive income (loss). The assets and liabilities of the entity that are denominated in currencies other than the Company’s functional currency, are re-measured into the Company’s functional currency using end of period or historical exchange rates.  Gains and (losses) associated to these re-measurements are included in other income (expense), net in the consolidated statement of operations.

From time to time, the Company is exposed to foreign currency exchange risk on various foreign transactions and the Company attempts to reduce this risk and manage cash flow exposure of certain payables and anticipated transactions by entering into forward exchange contracts. At December 31, 2014 and 2013, the foreign currency risk is not material and there were no foreign exchange contracts outstanding. The Company historically has not applied hedge accounting treatment to its forward exchange contracts.

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Costs and Expenses

General Construction Costs — including Construction Costs — Related Party. Total construction costs increased $4.1 million from 2013 to $68.0 million for 2014, primarily reflecting the additional costs associated with three additional projects.  These additional costs of approximately $46.0 million were offset by the $44.0 million decrease in costs associated with the substantial completion of the CHU project in 2013.   

Operations and Maintenance Costs — Power Generation Plant. Operations and maintenance costs — power generation plant increased $0.7 million (27.1%) to $3.4 million in 2014 from $2.7 million in 2013, primarily reflecting higher major planned maintenance at Kinoya versus the comparable prior year period when no major planned maintenance occurred.

Gross Profit

Gross profit increased by $6.7 million (93.3%) to $13.9 million for 2014 as compared to $7.2 million for the prior year, due primarily to improved results through project cost savings in the construction segment. The increase in the construction segment gross profit reflects the substantial completion of the Sather and Baku projects which are 99% and 89.5% complete, coupled with higher margin projects that were awarded at the end of 2013. Power segment margin was slightly lower reflecting higher planned maintenance expenses that more than offset higher power generation fees for 2014 compared to 2013.

Operating Expenses

Salaries and Employee Benefits. Salaries and employee benefits increased $3.0 million (107%) to $5.9 million for 2014 from $2.9 million for 2013. The increase was partially due to salaries and benefits for key hires into new positions including the construction business development and estimating, power business development, procurement and accounting personnel necessary to continue growing our power and construction businesses. Additionally, there were no indirect project management office (PMO) and Lombard office project support cost allocation to projects in 2014 as compared to $1.6 million allocated to projects in 2013.  

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Total Other Income (Expense)

Total other expense, net was stable at less than $0.1 million for the years ended December 31, 2014 and 2013.

Income Tax Benefit (Expense)

The income tax expense decreased by $4.5 million during 2014 to $0.5 million, from a 2013 income tax expense of $5.0 million.  The decrease primarily reflects the deferred income tax expense of $4.9 million for 2013, which consists of $4.1 million of federal deferred expense and $0.8 million of deferred state expense resulting from an increase in the valuation allowance on deferred tax assets. This expense was a non-cash expense and had no impact on the Company's liquidity, cash flows, or its ability to execute projects or conduct ongoing operations. As a result of the increase in the valuation allowance, the deferred tax assets were fully reserved as of December 31, 2013, and remain fully reserved at December 31, 2014. U.S. net operating and capital loss carryforwards totaling approximately $70.4 million are available to Pernix Group, Inc. as of December 31, 2014.

Consolidated Net Loss Attributable to Common Shareholders

Net loss attributable to Pernix common shareholders was ($1.8) million and ($4.7) million in 2014 and 2013, respectively. The decrease in net loss most significantly relates to the $4.9 million deferred income tax expense related to management’s third quarter 2013 decision to record an increase in the valuation allowance on deferred tax assets. In 2014 the increase in gross profit as discussed above was offset by the increase in operating expenses due to the Company trying to grow and expand its business operations through new contract awards and potential acquisitions.  

Liquidity and Capital Resources

Cash Requirements

We generate cash flows primarily from serving as the general contractor on construction projects for the U.S. Government and various domestic customers, through the operation and maintenance of power generation plants, from financing obtained from third party banks and affiliated parties and through sales of common and preferred stock. In November 2014, PGI and Pernix RE, LLC entered into a loan and security agreement with Barrington Bank & Trust Company to establish a revolving line of credit facility and a letter of credit facility.  The revolving credit facility provides a borrowing capacity of $5 million and the letter of credit facility provides up to $10 million in aggregate standby or trade letters of credit.  The facilities require the Company to comply with various covenants including, among others, to maintain minimum liquidity of up to the amount outstanding on the borrowing capacity.  The Company’s primary uses of the revolving credit facility are to fund potential working capital needs.

In December 2013, the Company repaid the remaining $2.3 million of debt to a related party resulting in a debt free balance sheet as of December 31, 2013. The Company also sold Series A Preferred Stock to its majority shareholders in late December 2013, resulting in an inflow of $5.0 million of proceeds available to the Company for

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We also believe that collections on the outstanding receivables which are primarily U.S. Government or a major public university based 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. Distribution of the PSJV accumulated earnings are made on a quarterly basis and all such distributions have been made to Serka as of December 31, 2014. 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.

The Company has significant operating loss carryforwards that it may utilize in the future that could be used to offset future taxable income.

As of December 31, 2014, the Company’s total assets exceeded total liabilities by $12.0 million. This remained fairly consistent between 2014 and 2013.  The biggest driver of the excess in 2014 was the cost in excess of project billings incurred on the Niger and Kinoya Expansion projects.  These costs will be recaptured in 2015 which will also increase the cash and cash equivalents balance.

The $8.3 million decrease in cash during 2014 includes cash used in operating activities of $4.7 million which is a result of costs in excess of billings of $7.7 million as of December 31, 2014. Management believes these negative cash flows will be short term as the costs incurred on projects will be recaptured in the short term once billings to customers are made.  Additionally, the decrease in total cash was a result of cash used in financing activities of $2.2 million which was primarily a result of non-controlling interest payments to JV partners of $4.1 million.  These payments were partially offset by $2.3 million of cash proceeds received on the sale of a partial interest in PFL.

The Company does not currently have material commitments for capital expenditures as of December 31, 2014.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-05, ‘‘Service Concession Arrangements.’’ This ASU clarifies that, unless certain circumstances are met, operating entities should not account for certain concession arrangements with public-sector entities as leases and should not recognize the related infrastructure as property, plant and equipment. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. For the year ended December 31, 2014, Management has elected to early adopt the standard making it effect for the full year 2014. The Company has completed its evaluation of this pronouncement and has determined that the Company’s current accounting method for its concession agreements is proper and should not account for them as leases.

In May 2014, the FASB issued ASU 2014-09, ‘‘Revenue from Contracts with Customers.’’ The amendments in this update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries.  The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services.  It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.  To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU is effective for annual reporting periods beginning after December 15, 2016 for publicly traded companies. Management is in the process of determining the impact, if any, on the Company’s financial position, results of operations and cash flows.

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Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements as defined by Regulation S-K 303. However, we enter into various arrangements not recognized in our consolidated balance sheets that have or could have an effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

From time to time, the Company is required to utilize standby letters of credit or similar financial guarantees in the normal course of its business, and this is a typical practice for the industry segments in which the Company operates. The amount, duration, and structure of such standby letters of credit or similar financial instruments varies depending on the nature and scope of the project involved. As of December 31, 2014 the Company had a FJD 4.0 million ($2.0 million USD) financial guarantee of PFL’s line of credit with ANZ. No amounts are drawn under the

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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PERNIX GROUP, INC.
Index to Consolidated Financial Statements
December 31, 2014 and 2013

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See accompanying notes to consolidated financial statements.

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See accompanying notes to consolidated financial statements.

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1. Background

Pernix Group, Inc. (the “Company”, “Pernix Group” or “Pernix”) is a global company managed from Lombard, Illinois and was originally formed in 1995 as Telesource International, Inc.  In 2001, the Company was incorporated in Delaware and became an SEC registrant. As of December 31, 2014 and 2013, Pernix Group is over 96.0% owned by Ernil Continental, S.A., BVI. (Ernil), Halbarad Group, Ltd., BVI, (Halbarad) and Affiliates. The Company conducts its operations through the parent and its fifteen subsidiaries.

Pernix 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 South Pacific islands of Fiji and Vanuatu, in Niger, in United Arab Emirates, in Azerbaijan, in Sierra Leone 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 a separately reported segment.

The Company’s subsidiaries and consolidated joint ventures, which include Pernix-Serka Joint Venture (PSJV), Pernix/SHBC Joint Venture (SHBC), Pernix Niger LLC (Niger), Pernix Kurdistan, LLC, Pernix –Serka Azerbaijan, LLC, Pernix-Serka LLC, Sierra Leone, Pernix LTC JV (PLTC), Pernix Fiji, Ltd. (PFL), Vanuatu Utilities and Infrastructure (VUI), Pernix Guam LLC, Pernix Real Estate, LLC, Pernix DCK, LLC (inactive), Pernix Solomon Island Limited, Pernix Tishman LLC, (inactive) and Pernix Technical Works Co., LLC (PTW) located in Dubai, also bid on and /or execute construction projects with support from the Pernix corporate office. PTW is a variable interest entity for which the Company is the primary beneficiary.  The related financial results of PTW are not material.

PSJV has been awarded four significant projects from its primary customer and has funded its operations since its inception. Cash of PSJV is not available for other purposes unless distributions are made to the partners. As of December 31, 2014 and 2013, PSJV has $4.0 million and $10.1 million in cash, $0.6 million and $6.5 million in other assets, $3.1 million and $8.3 million billings in excess of cost and $0.7 million and $8.8 million of other liabilities, respectively.

Pernix has two power segment subsidiaries that manage the construction and facilities operations and management activities in Fiji and Vanuatu, respectively. VUI is wholly-owned and PFL is majority-owned since November 25, 2014, when PFL sold 249,999 of its common shares to Fijian Holdings Limited (Fijian Holdings a.k.a. FHL) for a 25% non-controlling interest for FJD 4.35 million ($2.3 million USD). The transaction resulted in approximately $0.1 million and $1.6 million recorded in non-controlling interest and additional paid-in capital as of December 31, 2014. Prior to November 25, 2014, PFL was wholly-owned.

The Company generates cash flows primarily from serving as the general contractor on construction projects for the United States of America (U.S.) Government and various domestic customers, through the operation and maintenance of power generation plants, from financing obtained from third party banks and affiliated parties and through sales of common and preferred stock. The Company anticipates its open registration statements, as it relates to primary fixed price offerings, will augment our current sources of capital. Beyond the cash expected to be generated by operations, from third party banks, and the issuance of additional shares, the Company may seek debt financing or equity based support from its principal stockholders, Ernil and Halbarad, on an as-needed basis only.

2. Quasi-Reorganization

In accordance with quasi-reorganization requirements, the Company elected to effect a quasi-reorganization after assessing as of September 30, 2012, that it had reached a turning point in its operations and future profitable operations were reasonably assured. The management team transformed the Company through the 2012 disposition

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3. Significant Accounting Policies

Principles of Consolidation and Presentation—The consolidated financial statements include the accounts of all majority-owned subsidiaries over which the Company exercises control and joint ventures when determined to be variable interest entities in which the Company is the primary beneficiary. During 2014 and 2013, the variable interest entities and related financial results are not material. All inter-company accounts have been eliminated in consolidation. The 2014 and 2013 consolidated financial statements of the Company reflect the impact of quasi-reorganization accounting. See Notes 1 and 2 in the notes to our consolidated financial statements for more information regarding joint ventures and the quasi-reorganization.

Reclassification— Certain reclassifications were made to prior years’ amounts to conform to the 2014 presentation.

Revenue Recognition— Pernix offers our services through two operating business segments: General Construction and Power Generation Services which are supported by the Corporate 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 U.S. Government are design/build and design/bid/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. Our design/build capacity expansion project for Fiji Electricity Authority (FEA) and our greenhouse project at the Texas A&M University are also fixed price contracts while our design / build contract pertaining to the nanotechnology lab at Texas A&M University is a cost plus fee contract.

The Company only uses approved contract changes in its revenue recognition calculation. This method of revenue recognition requires that the Company estimate future costs to complete a project based upon the knowledge and experience of the Company’s engineers, project managers and finance professionals. Estimating future costs requires

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Allowance for Doubtful Accounts—The Company records its accounts receivable net of an allowance for doubtful accounts. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its clients. The factors considered by the Company in its contract evaluations include, but are not limited to; client type—domestic and foreign federal, state and local government or commercial client, historical contract performance, historical collection and delinquency trends, client credit worthiness and

general economic conditions.

During 2014 and 2013, there were no bad debt write-offs of accounts receivable. As of December, 31, 2014 and 2013, there was no allowance for doubtful accounts deemed necessary.

Fair Value of Financial Instruments—The Company determines the fair values of its financial instruments, including short-term investments, debt instruments and derivative instruments based on inputs or assumptions that market participants would use in pricing an asset or a liability. The Company categorizes its instruments using a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and the debt agreements approximate fair value because of the short maturities of these instruments.

The Company’s fair value measurement methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methodologies or assumptions to determine fair value could result in a different fair value measurement at the reporting date.

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From time to time, the Company is exposed to foreign currency exchange risk on various foreign transactions and the Company attempts to reduce this risk and manage cash flow exposure of certain payables and anticipated transactions by entering into forward exchange contracts. At December 31, 2014 and 2013, the foreign currency risk is not material and there were no foreign exchange contracts outstanding. The Company historically has not applied hedge accounting treatment to its forward exchange contracts.

Stock-Based Compensation—Principle awards issued under the Company’s stock-based compensation plans include qualified stock options to employees, non-qualified stock options and awards, restricted stock units and other types of awards.

The Company recognizes the expense associated with stock option awards over the period during which an employee, director or consultant is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

Stock option awards for employees and directors are classified as equity instruments and are valued at the grant date and are not subject to remeasurement. The option valuation is performed using a fair value Black Scholes model. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions can materially affect fair value estimates. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. During 2014 and 2013 the compensation expense related to the stock options was approximately $0.2 million each year.

4. Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-05, ‘‘Service Concession Arrangements.’’ This ASU clarifies that, unless certain circumstances are met, operating entities should not account for certain concession arrangements with public-sector entities as leases and should not recognize the related infrastructure as property, plant and equipment. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. For the year ended December 31, 2014, Management has elected to early adopt the standard making it effect for the full year 2014. The Company has completed its evaluation of this pronouncement and has determined that the Company’s current accounting method for its concession agreements is proper and should not account for them as leases.

In May 2014, the FASB issued ASU 2014-09, ‘‘Revenue from Contracts with Customers.’’ The amendments in this update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries.  The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services.  It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.  To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU is effective for annual reporting periods beginning after December 15, 2016 for publicly traded companies. Management is in the process of determining the impact, if any, on the Company’s financial position, results of operations and cash flows.

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In January 2015, the FASB issued ASU 2015-01, "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items." Under this ASU, an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. ASU 2015-01 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. Upon adoption, the company may elect prospective or retrospective application. Management does not expect the adoption of ASU 2015-01 to have a material impact on the company's financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation — Amendments to the Consolidation Analysis.” ASU No. 2015-02 eliminates the deferral of the requirements of ASU No. 2009-17, “Consolidations — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” for certain interests in investment funds and provides a scope exception from Topic 810 for certain investments in money market funds. The ASU also makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management does not expect the adoption of ASU 2015-02 to have a material impact on the company's financial position, results of operations or cash flows.

Other pronouncements issued recently are not expected to have a material impact on the company’s financial position, results of operations or cash flows.

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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 December 31, 2014 and 2013 and from construction contractual agreements on which work has not yet begun. The following summarizes changes in backlog on construction contracts during the years ended December 31, 2014 and 2013:

Contract Backlog Schedule