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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 Nature of Operations-Ceres Environmental Services, Inc. ("the Company") provides a variety of services including emergency disaster response,wood waste recycling, construction, demolition, underground tank installation and removal, environmental consulting, and snow removal throughout the United States and Caribbean. The work is performed under both unit-priced and fixed-priced contracts primarily with public entities and governmental agencies. These contracts are undertaken by the Company alone or in partnership with other contractors through joint ventures. The length of the Company's construction contracts varies, but is typically less than two years. Revenue and Cost Recognition-Contract revenues are recognized on the percentage-of-completion method measured by the percentage of total costs incurred to date to estimated total costs to complete for each contract. This method is used because management considers total costs to be the best available measure of progress on these contracts. Because of the inherent uncertainties in estimating costs and earned revenues, it is at least reasonably possible that the estimates used will change within the near term, and that such changes in estimates may be material. Contract costs include all direct labor, materials, subcontract costs, and those indirect costs related to contract performance, such as indirect labor, depreciation, supplies, and equipment costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance,job conditions, estimated profitability, and final contract settlements may result in significant revisions to costs and income and are recognized in the accounting periods in which the revisions are determined. Claims are recorded in revenues when realization is probable and the amount can be reliably estimated. Included in general and administrative expenses in the accompanying statement of operations are costs associated with project manager and estimator salaries and related benefits, and other costs related to bids and proposals on contracts, totaling approximately$1,187,000. Management considers these costs to be general and administrative in nature. The Company previously recognized contract revenues under a claim on a certain completed contract, representing additional costs incurred by the Company on the contract which were deemed by the Company to have resulted from deficiencies in the original project specifications, design, and scope originally provided by the respective governmental agency, and where a legal claim has been submitted and is currently being negotiated for settlement. Due to material changes in facts which have occured subsequent to December 31, 2016 related to the Company's legal claim, management no longer considers the claim probable of collection, and therefore, has written off the claim as of December 31, 2016. This has resulted in a reduction of contract revenues for the year ended December 31, 2016 totaling $950,532. The effect of changes in management's estimates during 2016 related to 2 separate contracts, resulted in decreasing net income for the year ended December 31, 2016 by approximately$2,100,000 from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits for the year ended December 31, 2015. For certain of the contracts which the Company performs, the contracting entity has the right to audit the contract at its completion. The ultimate amount to which the Company is entitled to under the contract may be adjusted as a result of the audit. CONFIDENTIAL& PROPRIETARY Page 7