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HomeMy WebLinkAboutCERES CONFIDENTIAL CERES ENVIRONMENTAL SERVICES, INC. Brooklyn Park, Minnesota FINANCIAL STATEMENTS Including Independent Auditors' Report As of and for the Year Ended December 31, 2016 CONFIDENTIAL & PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. TABLE OF CONTENTS As of and for the Year Ended December 31, 2016 Independent Auditors' Report 1 -2 Financial Statements Balance Sheet 3 Statement of Operations 4 Statement of Changes in Stockholder's Equity 5 Statement of Cash Flows 6 Notes to Financial Statements 7-14 CONFIDENTIAL& PROPRIETARY BAKER TILLY INDEPENDENT AUDITORS' REPORT To the Stockholder Ceres Environmental Services, Inc. Brooklyn Park, MN We have audited the accompanying financial statements of Ceres Environmental Services, Inc.,which comprise the balance sheet as of December 31, 2016, and the related statements of operations, changes in stockholder's equity, and cash flows for the year then ended,and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America;this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors'Responsibility Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.The procedures selected depend on the auditors'judgment, including the assessment of the risks of material misstatement of the financial statements,whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.Accordingly,we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management,as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Page 1 BAKER TILLY INTERNATIONAL CONFIDENTIAL& PROPRIETARY Opinion In our opinion,the financial statements referred to above present fairly,in all material respects, the financial position of Ceres Environmental Services, Inc. as of December 31, 2016 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Avail. -aggidotivfrittae) 4‘40 Minneapolis, Minnesota April 28, 2017 Page 2 CONFIDENTIAL& PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. BALANCE SHEET As of December 31, 2016 ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,486,940 Short-term investments 219,177 Accounts receivable, net Current contract billings and other receivables 34,323,483 Retained percentage 4,264,215 Due from related parties 2,631,111 Inventories 208,738 Other current assets 91,270 Prepaid expenses 257,338 Costs and estimated earnings in excess of billings on uncompleted contracts 5,295.851 Total Current Assets 50,778.123 PROPERTY AND EQUIPMENT-at cost Land 966,811 Construction equipment 30,254,621 Office furniture and equipment 330,663 Leasehold improvements 177,862 31,729,957 Less:Accumulated depreciation, depletion and amortization 16,543.655 Net Property and Equipment 15,186,302 TOTAL ASSETS $ 65,964,425 LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current maturities of equipment notes payable $ 3,012,873 Line of credit 3,000,000 Accounts payable, including retainage of$4,046,988 15,357,461 Accrued payroll and related taxes 653,385 Accrued loss on uncompleted contracts 909,122 Accrued liabilities 949,736 Note payable-stockholder 3,100,000 Billings in excess of costs and estimated earnings on uncompleted contracts 949,874 Total Current Liabilities 27,932,451 LONG-TERM LIABILITIES Equipment notes payable, less current maturities 4,618,087 Related party notes payable 18,020,000 Total Long-Term Liabilities 22,638,087 Total Liabilities 50,570,538 STOCKHOLDER'S EQUITY Common stock,$.01 par value; 1,000,000 shares authorized • 100,000 shares issued and outstanding 1,000 Additional paid-in capital 23,328,456 Accumulated deficit (7,935,569) Total Stockholder's Equity 15,393,887 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $, 65,964,425 See accompanying notes to financial statements. Page 3 CONFIDENTIAL& PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. STATEMENT OF OPERATIONS For the Year Ended December 31, 2016 REVENUES Contract revenues $ 99,647,841 Mulch sales, snow removal, and equipment rental revenues 3.540.189 Total Revenues 103.188,030 COSTS OF REVENUES Costs of revenues 89,761,067 Provision for loss on uncompleted contracts 477,145 Total Costs of Revenues 90,238,212 Gross Profit 12,949,818 GENERAL AND ADMINISTRATIVE EXPENSES 7.111,784 Operating Income 5,838.034 OTHER INCOME (EXPENSE) Interest income 32,558 Interest expense (1,021,504) Other income 436.099 Total Other Expense (552,847) NET INCOME $ 5,285,187 See accompanying notes to financial statements. Page 4 CONFIDENTIAL& PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY For the Year Ended December 31, 2016 Common Stock Total Additional Retained Stockholder's Shares Amount Paid-in Capital Earnings Equity Balances-December 31,2015 100,000 $ 1,000 $ 23,328,456 $ (13,220,756) $ 10,108,700 Net income - - - 5,285,187 5,285,187 Balances-December 31,2016 100.000 $ 1,000 $, 23,328,456 $ (7,935,569) $ 15,393,887 See accompanying notes to financial statements. Page 5 CONFIDENTIAL& PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. STATEMENT OF CASH FLOWS • For the Year Ended December 31, 2016 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,285,187 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation, depletion and amortization 2,123,704 Provision for bad debt, net of recoveries (144,807) Write-off of contract claim receivable 950,532 Loss on sale and disposal of property and equipment 25,762 . Changes in operating assets and liabilities: Accounts receivable (33,179,577) Inventories (106,577) Prepaid expenses and other assets (338,041) Costs and estimated earnings in excess of billings on uncompleted contracts (192,867) Accounts payable 11,029,621 Accrued liabilities 907,526 Billings in excess of costs and estimated earnings on uncompleted contracts 874,345 Accrued loss on uncompleted contracts (1,047,695) Net Cash Flows from Operating Activities (13,812,887) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and,equipment (1,819,534) Proceeds from sale of property and equipment 157,490 Net advances to related parties (637,396) Purchases of short-term investments (219,177) Proceeds from maturity of short-term investments 267.364 Net Cash Flows from Investing Activities (2,251,253) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on line of credit • 3,000,000 Proceeds from issuance of equipment notes payable 707,692 Principal payments on equipment notes payable (2,671,445) Proceeds from stockholder note payable 3,100,000 Proceeds from related party notes payable 14,720,000 Net Cash Flows from Financing Activities 18,856,247 Net Change in Cash and Cash Equivalents 2,792,107 CASH AND CASH EQUIVALENTS-Beginning of Year 694,833 CASH AND CASH EQUIVALENTS-END OF YEAR $, ry3,486,940 Supplemental cash flow disclosures: Cash paid for interest $ 450,865 Noncash investing and financing activities: Purchases of property and equipment financed with equipment notes payable $ 911,406 Purchases of property and equipment included in accounts payable 470,222 See accompanying notes to financial statements. Page 6 CONFIDENTIAL& PROPRIETARY 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 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.) • The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts,"represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. Revenues from sales of mulch, rents, and snow removal services are recognized from these activities when sales are made or as services are performed. Use of Estimates-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See the"revenue and cost recognition"accounting policy for the estimationprocess relating to construction contracts. Cash Equivalents-The Company defines cash equivalents as short-term, highly liquid, interest bearing investments that have a maturity at the date of acquisition of three months or less. Short-Term Investments-Short-term investments consist of a certificate of deposit which is held to maturity and recorded at amortized cost. The cost approximates market value on this short-term investment. Maturities of short-term investments are longer than three months but less than one year. Inventories-Inventories consist of mulch and other landscaping finished goods, as well as fuel, and is accounted for at the lower of cost, using the first-in, first-out(FIFO) method, or market. Exchanges of Nonmonetary Assets-The accounting for nonmonetary transactions is based on the fair values of the assets or services involved in the exchange. The Company did not recognize any gains or losses related to the trade-in of property and equipment during the year ended December 31, 2016. Long-Lived Assets-Long-lived assets to be held and used are tested for recoverability whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.When required, impairment losses on assets to be held and used are recognized based on the excess of the asset's carrying amount over the fair value of the asset. The Company did not recognize any impairment losses during the year ended December 31, 2016. Property and Equipment-Property and equipment items are recorded at cost less depreciation to date. Construction equipment(net of salvage values), office furniture and equipment, and buildings are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over their estimated useful lives using the straight-line method, and amortization is included as a component of depreciation expense. Repairs and maintenance costs are charged to expense as incurred; improvements and additions are capitalized. Property and equipment sold, retired, or otherwise disposed of is removed from the asset and accumulated depreciation accounts, and any gains or losses thereon are reflected'in operations. Estimated useful lives are summarized as follows: Years Construction equipment 3-.10 Office furniture and equipment 3-15 Leasehold improvements 10 CONFIDENTIAL& PROPRIETARY Page 8 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 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.) Classification of Current Assets and Liabilities-The Company includes in current assets and liabilities amounts realizable and payable under contracts which extend beyond one year. Other assets and liabilities are classified as current or noncurrent on the basis of expected realization of payment within or beyond one year. New Accounting Pronouncements-During May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers." ASU No. 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. During August 2015, the FASB issued ASU No. 2015-14,which defers the effective date of ASU No. 2014-09. ASU No. 2014-09 is effective for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company may elect to apply the guidance earlier, but no earlier than fiscal years beginning after December 15, 2016. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently assessing the effect that ASU No. 2014-09 will have on its results of operations,financial position and cash flows. In February 2016, the FASB issued ASU No. 2016-02, Leases(Topic 842). The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with terms in excess of 12 months). The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for the Company beginning on January 1, 2020 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently assessing the effect that ASU No. 2016-02 will have on its results of operations, financial position and cash flows. NOTE 2-Costs and Estimated Earnings on Uncompleted Contracts Costs and estimated earnings on uncompleted contracts as of December 31, 2016 are summarized as follows: Costs incurred on uncompleted contracts $ 90,811,267 Estimated earnings 10.700,829 • 101,512,096 • Less: billings to date 97,166,119 $, 4345,977 The above data is presented in the accompanying balance sheet as follows: Costs and estimated earnings in excess of billings on uncompleted contracts $ 5,295,851 Billings in excess of costs and estimated earnings on uncompleted contracts (949,874) $, 4,345,977 The Company had under contract uncompleted work at bid prices totaling approximately$64,791,000 as of December 31, 2016. Page 10 CONFIDENTIAL& PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS As of and for the Year Ended December 31, 2016 NOTE 3 -Related Party Transactions The Company has annual management fee agreements with various related entities owned 100% by the sole stockholder of the Company. Under these agreements, the Company provides the following services: accounting, finance, information technology, operational, human resources, and risk management services. Revenues from these management fee agreements totaling $384,000 for the year ended December 31, 2016 are included in other income in the statement of operations. During the year ended December 31, 2016, the Company rented construction equipment to, and made equipment repairs for, a related entity wholly-owned by the sole stockholder of the Company. Equipment rental and repair income from this related entity totaled $1,743,142 for the year ended December 31, 2016. During the year ended December 31, 2016, the Companymade advances, provided management services and project labor, rented construction equipment, and paid for various expenses on behalf of certain entities that are wholly-owned by the sole stockholder of the Company. Amounts due from these entities as of December 31, 2016 totaled$2,481,403 and are included in due from related parties in the accompanying balance sheet. These balances are unsecured, non-interest bearing, and due on demand. Included in the amounts due from related parties as of December 31, 2016 discussed above, is an amount due from a certain wholly-owned entity of the sole stockholder of the Company totaling $632,367. This related entity is primarily involved in contracting operations in New Zealand, and was previously financed through capital contributions from the Company's sole stockholder. The Company has determined that this related entity or other entities wholly-owned by the Company's sole stockholder, have the power to direct the activities that most significantly impact this related entity's economic performance. As such, the Company is not considered to be the primary beneficiary of this related entity, and therefore is not required to consolidate this related entity. The Company's maximum exposure to loss is limited to the outstanding balance due from this related entity. The Company leases office and yard facilities in Minnesota from a related entity wholly-owned by the sole stockholder of the Company under a long-term operating lease agreement which require aggregate monthly payments of$8,222 (increasing 2% per year)through December 2017. The Company is also responsible for all insurance, tax, and operating costs of the properties. Total rent expense was$98,669 for the year ended December 31, 2016 under the related party lease agreement. Included in accounts payable as of December 31, 2016 was$49,335 due to the related party. Future annual minimum lease payments due under the long-term operating lease agreement for the year ending December 31, 2017 totals$100,637. The Company had 19 note payable agreements(original balance of$18,220,000) due to a related entity wholly- owned by the sole stockholder of the Company,with a remaining outstanding balance of$18,020,000 as of December 31, 2016. Interest on the notes accrues at the greater of 5.25% or the Prime Rate plus 2.50% (effective rate of 6.25% as of December 31, 2016). The notes payable are due June 1, 2050. Interest expense recognized on the notes payable during the year ended December 31, 2016 totaled $508,766. Accrued interest due on the notes payable as of December 31, 2016 totaled $834,597. The Company had advances due to the sole stockholder of the Company, totaling $3,100,000 as of December 31, 2016. Interest on the advances accrues at the greater of 5.25%or the Prime Rate plus 2.50% (effective rate of 6.25%as of December 31, 2016), and are due on demand. Interest expense recognized on the advances during the year ended December 31, 2016 totaled $61,873. Accrued interest due on the advances as of December 31, 2016 totaled$61,873. Subsequent to December 31, 2016, the advances were repaid in full. As of December 31, 2016, the Company has an advance due from the sole stockholder of the Company totaling $149,708,which is included in due from related parties. The amount is unsecured, non-interest bearing, and due on demand. Page 11 CONFIDENTIAL& PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS As of and for the Year Ended December 31, 2016 NOTE 4-Line of Credit The Company has a$3,000,000 line of credit agreement with Venture Bank, due February 2017. The line of credit bears interest at the Prime Rate plus 1.25% (effective rate was 5.00%as of December 31, 2016), is secured by all assets of the Company, and is guaranteed by the sole stockholder of the Company. Outstanding borrowings totaled $3,000,000 as of December 31, 2016. Subsequent to December 31, 2016, the line of credit was paid in full and terminated. NOTE 5-Equipment Notes Payable The Company was indebted on various equipment notes payable as of December 31, 2016: 1st Source Bank Seven notes payable which require monthly payments ranging from $3,191 to$76,736, including interest ranging from 4.30%to 4.95%. The notes are secured by specific construction equipment identified in the agreements, and guaranteed by the sole stockholder of the Company. The notes mature April 2019 through October 2020. $ 4,833,987 Ford Credit Five notes payable which require monthly payments ranging from $441 to$975, including interest at rates ranging from 5.99%to 9.74%. The notes are secured by related vehicles.The notes mature March 2018 through November 2019. 75,886 John Deere Financial Two notes payable which require monthly payments of$1,792 and $6,902, including interest at rates of 3.75% and 7.25%. The notes are secured by related equipment. The notes mature May 2019 and August 2019. 242,528 CAT Financial Five notes payable which require monthly payments ranging from $6,199 to$23,980, including interest at rates ranging from 0% to 5.2%. The notes are secured by related equipment. The notes mature October 2017 to June 2019. 1,631,942 Bank of the West Two notes payable requiring monthly payments of$4,411 and $1,024, '< and are non-interest bearing. Secured by related equipment. Notes mature September 2018 and November 2019. 126,429 Page 12 CONFIDENTIAL& PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS As of and for the Year Ended December 31, 2016 NOTE 5-Equipment Notes Payable(cont.) De Lage Landen Two notes payable requiring monthly payments of$5,213 and $19,159, including interest at.9%and 1.50%. Secured by related $ 684,435 equipment and guaranteed by the sole stockholder of the Company. Notes mature February 2017 and December 2019. Balboa Capital Note payable requiring monthly payments of$1,881, including interest at 5.9%. Secured by related equipment. Note matures September 35,753 2019. Total Equipment Notes Payable $, 7,630,960 Future maturities of the equipment notes payable are as follows for years ending December 31: 2017 $ 3,012,873 2018 2,713,161 2019 1,516,563 2020 388.363 Total $ 7,630,960 NOTE 6-Retirement Plan The Company maintains a profit sharing plan, including a 401(k)feature, covering all full-time permanent employees, age 21 or older,with one year of service. The plan provides for annual profit sharing contributions as determined by management. Ceres also matches a certain portion of the employee 401(k) deferral. Ceres did not make any profit sharing contributions to the plan during the year ended December 31, 2016. Total 401(k) matching contributions made by Ceres to the plan totaled $216,242 during the year ended December 31, 2016. NOTE 7-Commitments The Company leases office space and various pieces of equipment under month-to-month and short-term lease agreements from unrelated and related parties(see Note 3). Rent expense under all month-to-month and short- term lease agreements, including equipment, amounted to approximately$3,280,000 for the year ended December 31, 2016. Page 13 CONFIDENTIAL & PROPRIETARY CERES ENVIRONMENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS As of and for the Year Ended December 31, 2016 NOTE 8 -Concentrations Financial instruments consist principally of cash and cash equivalents, short-term investments, and accounts receivable. Cash and cash equivalents are mainly placed with large banks in bank deposit and money market accounts; however, balances typically exceed federally insured limits. The Company has not experienced any losses in such accounts.Accounts receivable represent amounts primarily due directly from contracts with public entities and governmental agencies that are located throughout the United States. As of December 31, 2016, two customers represented approximately 58% of outstanding accounts receivable. As of December 31, 2016, two customers represented approximately 81% of costs and estimated earnings in excess of billings on uncompleted contracts. For the year ended December 31, 2016,four customers represented approximately 69%of contract revenues. NOTE 9-Contingencies The Company has litigation arising from the normal course of business. Due to uncertainties present in any settlement negotiations, management's view of possible outcomes could change. In management's opinion, the outcome of any such litigation will not materially affect the Company's financial condition. The Company, as a condition for entering into some of its construction contracts, had outstanding surety bonds as of December 31, 2016. If the Company fails to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for any expenses or outlays it incurs. To date,the Company is not aware of any material losses to its sureties in connection with bonds the sureties have posted on its behalf. NOTE 10-Government Grants Received During 2009, the Company received$306,674 from the Texas Commission on Environmental Quality for the purchase of certain emission reducing equipment. The grant agreements stipulate that the equipment must be used for a minimum number of hours over a minimum number of years, as defined in the agreements, or the funds are subject to repayment.The grant monies have been recorded as a reduction of the equipment cost and are being amortized against depreciation expense over the estimated useful lives of the related assets. Amortization for the year ended December 31, 2016 totaled $10,546. NOTE 11 -Subsequent Events The Company has evaluated subsequent events through April 28, 2017, the date on which the financial statements were available to be issued. Page 14 CONFIDENTIAL& PROPRIETARY