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ERNEST ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 13 Note 2 - Summary of Significant Accounting Policies (cont'd.) Revenue and Cost Recognition (cont’d.) Cost Recognition (cont’d.) Costs incurred that do not contribute to satisfying performance obligations are excluded from the cost input calculation as these amounts are not reflective of transferring control to the customer. Costs are generally recognized as incurred. Under certain circumstances, costs incurred in the period related to future activity of the contract or costs that benefit the entire performance obligation (fulfillment costs) may be capitalized. Changes in Contract Performance Changes in job performance, job conditions and estimated profitability, including those arising from settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. Because of the inherent uncertainty in estimating the costs to complete on contracts in process, it is at least reasonably possible that the estimates used will change in the near term. Economic Factors • Type of customers - The Company works with various public agencies, private agencies, and municipalities. • Geographical location of customers - The Company’s customers are located within the State of Florida. • Type of contracts - The Company operates under fixed-price contracts. The length of the Company’s contracts is expected to be 6 to 18 months. In addition, the Company provides maintenance services. Ernest Energy recognizes revenues under the accrual basis of accounting. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the preparation of the consolidated financial statements relate to the recoverability and useful lives of long-lived assets. Actual results could differ from those estimates.