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CERES ENVIRONMENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS As of and for the Year Ended December 31, 2016 NOTE 1 -Summary of Significant Accounting Policies(cont.) Depreciation expense was$2,108,179 (net of amortization of government grants-Note 10)for the year ended December 31, 2016. Included in property and equipment is land in Louisiana acquired for the purpose of extracting materials to be used on specific construction contracts. The cost of land is being amortized on a units-of- consumption basis, applying expense as a rate per cubic yard. Land is recorded at cost less accumulated depletion. Depletion expense for the year ended December 31, 2016, and accumulated depletion as of December 31, 2016 was$15,524 and $887,872, respectively. Upon completion of the Company's use of the land for the various contracts, the previous owners have the option to repurchase certain land parcels from the Company for a total price of$24,480. Accounts Receivable-In the normal course of business, the Company extends limited unsecured credit to its customers. Accounts receivable include trade receivables for mulch sales, rents, snow, emergency disaster response, and construction contracts, are based on the terms of the contract and are carried at the original invoice amount less an estimate made for doubtful accounts. The Company provides an allowance for doubtful accounts when appropriate, which is based upon review of outstanding receivables on a monthly basis, historical collection information, credit history, and existing economic conditions, on a per customer basis. Accounts receivable are written off when deemed uncollectible. The recovery of any amounts previously written off are recorded as a reduction of bad debt expense . when received. Normal accounts receivable are due 30 days after the issuance of the invoice. Retained receivables are due after completion or settlement of the contract and acceptance by the owner. Accounts receivable are considered past due after 60 days. Management has recorded an allowance for doubtful accounts on these receivables of$229,692 as of December 31, 2016. The Company typically does not charge interest on outstanding balances; however, certain governmental agencies pay interest if balances are not collected in a certain period of time. In accordance with industry practice, accounts receivable include retentions, a portion of which may not be realizable within one year. Advertising-Advertising costs are charged to expense as incurred. Advertising expense was$4,819 for the year ended December 31, 2016. Income Taxes-The Company filed an election to be treated as an S corporation under the Internal Revenue Code and related state statutes. Earnings and losses are included in the personal income tax returns of the stockholder. Accordingly, no provision has been made for federal and state income taxes in these financial statements. The Company's policy of accounting for uncertain tax positions is to recognize the tax effects from an uncertain tax position in the financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. The company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company is not currently under examination by any taxing jurisdiction. In the event of any future tax assessments, the Company has elected to record any income taxes and penalties as general and administrative expense in the Company's statement of operations, and any related interest as interest expense. CONFIDENTIAL& PROPRIETARY Page 9