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Advanced Roofing, Inc. and Affiliates Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant Accounting Policies Nature of business: Advanced Roofing, Inc. (ARI) is primarily engaged in the re -roofing of commercial and industrial buildings in Florida, as well as limited installations of air conditioning systems and solar roofs. The work is performed under fixed-price contracts, time and materials contracts and fixed-price contracts modified by incentive and penalty provisions. in connection with its normal construction activities, the Company may be required to acquire performance, bid and payment bonds. The surety issuing the bonds has recourse against certain of the Company's assets in the event the surety is required to honor the bonds. The length of the Company's contracts varies but is typically less than one year. Advanced Green Technologies, Inc. and its wholly-owned subsidiaries, 2224555 Ontario Limited, 2224556 Ontario Limited and its affiliates, AGT Canada, Inc. and AGT Solar Investments ULC, are involved in the sale and installation of solar panels in North America. Total sales outside of the United States of America were approximately $10,200,000 and $21,600,000 for the years ended December 31, 2015 and 2014, respectively. AGT Export, Inc. was formed to engage in international sales activity and solely does business with Advanced Green Technologies, Inc. AGT Canada, Inc., AGT Solar Investments ULC and AGT Export, Inc. are affiliates of Advanced Green Technologies, Inc. due to being variable interest entities. Kornahrens Group, LLC, 2100 N.W. 21 Avenue, LLC and Advanced Leasing, Inc. own land, buildings and equipment which are leased to Advanced Roofing, Inc. and Advanced Green Technologies, Inc. A summary of the Company's significant accounting policies follows: Principles of consolidation: The accompanying consolidated financial statements include the accounts of the above named entities, hereinafter collectively referred to as the "Company." All significant intercompany accounts and transactions have been eliminated in consolidation. Advanced Green Technologies, Inc. and subsidiaries and affiliates (AGT), Kornahrens Group, LLC, 2100 N.W. 21 Avenue, LLC and Advanced Leasing, Inc. are variable interest entities (VIEs). The Company has a variable interest in Kornahrens Group, LLC, 2100 N.W. 21 Avenue, LLC and Advanced Leasing, Inc. (leasing entities) because of leasing arrangements and because it provides financial support consisting of long- term guarantees. The Company has a variable interest in AGT because it provides additional financial support to these VIEs. The primary beneficiary of a VIE is the enterprise that has both: (1) the power to direct the activities of the VIE that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses or the right to receive residual returns that potentially could be significant to the VIE. The Company has determined ARI to be the primary beneficiary of these VIEs. See Note 13 for additional information regarding the Company's consolidated VIEs. Accounting 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. Revenue and cost recognition: Revenues from fixed-price and modified fixed-price construction contracts are recognized on the percentage -of -completion method, measured by the percentage that incurred costs to date bear to estimated total costs for each contract This method is used because management believes total incurred costs to be the best measure of progress on these contracts. Revenues from time and material contracts are recognized as the work is performed.