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KAST CONSTRUCTION COMPANY LLC AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended December 31, 2013 and 2012 NOTE 1 -- NATURE OF OPERATIONS KAST CONSTRUCTION COMPANY, LLC was formed under the laws of the State of Delaware in May 2005. KAST CONSTRUCTION III LLC was formed under the laws of the State of Florida in April 2006. Both companies were formed for the purpose of performing commercial building and condominium high rise projects. All projects are located in the states of Florida and South Carolina. NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue and Cost Recognition Contract revenue is recognized using the percentage -of -completion method. Under this method, the percentage of contract revenue to be recognized currently is computed as that percentage of estimated total revenue that incurred costs to date bear to total estimated costs, after giving effect to the most recent estimates of cost to complete. It is reasonably possible that changes in estimates may occur in the near term. Revisions in cost and revenue estimates are reflected in the period in which the facts which require the revision become known. When the revised cost estimates indicate a loss on an individual contract, the total estimated loss is provided for currently in its entirety without regard to the percentage of completion. Contract costs include all direct material and labor, equipment and subcontractor cost and those indirect costs related to contract performance, such as indirect labor, supplies and insurance. Selling, general, and administrative expenses are charged to operations as incurred. 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. Typically, the company enters into fixed-price contracts and does not perform additional work unless approved change orders are in place. If the company believes that costs incurred performing a change order will not be recovered, such costs are expensed and the total estimate of the individual project is increased by the same amount. If the company believes that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are classified as "costs incurred on unapproved change orders" in the balance sheets and are deferred until the parties have agreed upon the change of the contract price. Use of Estimates Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used. 7