Attached files
United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q/A
(Amendment No. 2)
[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
OR
[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number 0-19761
OP-TECH Environmental Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 91-1528142 |
(State or other jurisdiction of organization) | (I.R.S. Employer incorporation Identification No.) |
1 Adler Drive, E Syracuse, NY 13057
(Address of principal executive offices) (Zip Code)
(315) 437-2065
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X or No __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
Large Accelerated filer ___ Accelerated filer___ Non-accelerated filer ___ Small Reporting Company X
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files
Yes or No ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes or No _X_
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (June 15, 2010) 11,940,372
EXPLANATORY NOTE
RESTATEMENT OF FINANCIAL STATEMENTS
This Amendment No. 2 on Form 10-Q/A, which amends and restates items identified below with respect to the Form 10-Q, filed by Op-Tech Environmental Services, Inc. ("we" or "the Company") with the Securities and Exchange Commission (the "SEC") on November 17, 2009 (the "Original Filing") and the related Form 10-Q/A that the Company filed on May 17, 2010, is being filed to label the applicable financial statements and disclosure as “restated” and to address certain questions presented to us by the U.S. Securities and Exchange Commission in connection with the Company’s disclosure controls and procedures and the Company’s internal control over financial reporting.
This Form 10-Q/A only amends and restates certain information in Item 1 (Financial Statements and Notes to Consolidated Financial Statements), Item 2 (Management's Discussion And Analysis Of Financial Condition And Results Of Operations), and Item 4 (Controls and Procedures). Except for the foregoing amended and restated information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that have occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events, results or developments that have occurred or facts that have become known to us after the date of the Original Filing (other than the restatement), and such forward-looking statements should be read in their historical context. This Form 10-Q/A should be read in conjunction with the Company's filings made with the SEC subsequent to the Original Filing, including any amendments to those filings.
2
OP-TECH Environmental Services, Inc. and Wholly-Owned Subsidiaries
INDEX
PART I.
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FINANCIAL INFORMATION
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Page
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No. | ||
Item 1.
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Financial Statements
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Consolidated Balance Sheets
-September 30, 2009 (Unaudited) (Restated) and December 31, 2008 (Audited)
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5
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Consolidated Statements of Operations
-Three months ended September 30, 2009 (Unaudited and restated) and September 30, 2008 (Unaudited)
-Nine months ended September 30, 2009 (Unaudited and restated) and September 30, 2008 (Unaudited)
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6
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Consolidated Statements of Cash Flows
-Nine months ended September 30, 2009 (Unaudited and restated) and September 30, 2008 (Unaudited)
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7
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Notes to Consolidated Financial Statements Unaudited)
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8-9
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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10-13
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Item 3.
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Quantitative and Qualitative Disclosure About Market Risk
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13
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Item 4/4T.
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Controls and Procedures
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14
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PART II.
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OTHER INFORMATION
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15
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SIGNATURES
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16
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3
PART I - FINANCIAL INFORMATION
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-Q/A to make applicable and take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. This 10-Q/A, press releases issued by the Company, and certain information provided periodically in writing and orally by the Company’s designated officers and agents contain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “expect”, “believe”, “goal”, “plan”, “intend”, “estimate”, and similar expressions and variations thereof used are intended to specifically identify forward-looking statements. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished
4
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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Restated
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(UNAUDITED)
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September 30,
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December 31,
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2009
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2008
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ASSETS
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Current Assets:
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Cash
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$ | 130,544 | $ | 80,003 | ||||
Accounts receivable (net of allowance for doubtful accounts of
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approximately $357,000 in 2009 and $399,000 in 2008, respectively)
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8,754,839 | 8,914,131 | ||||||
Costs on uncompleted projects applicable to future billings
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2,333,527 | 2,824,799 | ||||||
Inventory
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529,379 | 426,412 | ||||||
Current portion of deferred tax asset
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559,400 | 559,400 | ||||||
Prepaid expenses and other current assets, net
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590,879 | 388,654 | ||||||
Total Current Assets
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12,898,568 | 13,193,399 | ||||||
Property and equipment, net
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2,791,184 | 3,031,899 | ||||||
Deferred tax asset
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1,452,445 | 924,300 | ||||||
Total Assets
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$ | 17,142,197 | $ | 17,149,598 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities:
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Accounts payable
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$ | 5,733,607 | $ | 3,543,822 | ||||
Outstanding checks in excess of bank balance
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- | 1,026,126 | ||||||
Billings in excess of costs and estimated profit
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on uncompleted projects
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706,710 | 479,237 | ||||||
Accrued expenses and other current liabilities
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804,785 | 1,153,383 | ||||||
Accrued litigation defense reserve
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150,000 | 450,000 | ||||||
Note payable to bank under line of credit
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5,278,177 | - | ||||||
Current portion of long-term debt
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908,625 | 800,084 | ||||||
Total Current Liabilities
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13,581,904 | 7,452,652 | ||||||
Long-term debt, net of current portion
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936,654 | 1,384,651 | ||||||
Note payable to bank under line of credit
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- | 4,865,097 | ||||||
Total Liabilities
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14,518,558 | 13,702,400 | ||||||
Shareholders' Equity:
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Common stock, par value $.01 per share; authorized 20,000,000
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shares; 11,940,372 shares issued and outstanding
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as of September 30, 2009 and December 31, 2008
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119,404 | 119,404 | ||||||
Additional paid-in capital
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7,005,891 | 7,005,891 | ||||||
Accumulated deficit
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(4,484,154 | ) | (3,649,132 | ) | ||||
Accumulated other comprehensive income
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(17,502 | ) | (28,965 | ) | ||||
Total Shareholders' Equity
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2,623,639 | 3,447,198 | ||||||
Total Liabilities and Shareholders' Equity
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$ | 17,142,197 | $ | 17,149,598 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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5
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES | ||||||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(UNAUDITED) | ||||||||||||||||
THREE MONTHS ENDED SEPTEMBER 30,
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NINE MONTHS ENDED SEPTEMBER 30,
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Restated
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Restated
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2009
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2008
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2009
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2008
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Project revenue
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$ | 9,606,999 | $ | 10,606,146 | $ | 24,232,370 | $ | 25,354,684 | ||||||||
Project costs
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8,312,921 | 8,103,340 | 19,604,046 | 18,482,076 | ||||||||||||
Gross margin
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1,294,078 | 2,502,806 | 4,628,324 | 6,872,608 | ||||||||||||
Operating expenses:
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Payroll expense and related payroll taxes and benefits
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788,661 | 838,795 | 2,348,704 | 2,625,364 | ||||||||||||
Office Expense
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215,509 | 212,459 | 630,335 | 644,019 | ||||||||||||
Occupancy
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215,975 | 182,656 | 660,510 | 608,782 | ||||||||||||
Business Insurance
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124,555 | 121,362 | 368,205 | 376,085 | ||||||||||||
Professional Services
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265,808 | 194,687 | 752,842 | 533,685 | ||||||||||||
Equipment Expenses, net of usage credit
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103,398 | 264,045 | 338,243 | 770,935 | ||||||||||||
Other expenses
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87,470 | 200,179 | 652,509 | 339,733 | ||||||||||||
1,801,376 | 2,014,183 | 5,751,348 | 5,898,603 | |||||||||||||
Operating income (loss)
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(507,298 | ) | 488,623 | (1,123,024 | ) | 974,005 | ||||||||||
Other income and (expense):
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Interest expense
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(80,792 | ) | (114,233 | ) | (234,865 | ) | (358,430 | ) | ||||||||
Other, net
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(2,344 | ) | 1,798 | (12,133 | ) | 12,210 | ||||||||||
(83,136 | ) | (112,435 | ) | (246,998 | ) | (346,220 | ) | |||||||||
Net income (loss) before income taxes
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(590,434 | ) | 376,188 | (1,370,022 | ) | 627,785 | ||||||||||
Income tax benefit (expense)
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230,000 | (152,845 | ) | 535,000 | (256,059 | ) | ||||||||||
Net income (loss)
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$ | (360,434 | ) | $ | 223,343 | $ | (835,022 | ) | $ | 371,726 | ||||||
Earnings per common share:
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Basic
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$ | (0.03 | ) | $ | 0.02 | $ | (0.07 | ) | $ | 0.03 | ||||||
Diluted
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$ | (0.03 | ) | $ | 0.02 | $ | (0.07 | ) | $ | 0.03 | ||||||
Weighted average shares outstanding:
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Basic
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11,940,372 | 11,937,595 | 11,940,372 | 11,938,150 | ||||||||||||
Diluted
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11,940,372 | 12,294,199 | 11,940,372 | 12,290,907 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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6
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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NINE MONTHS ENDED SEPTEMBER
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Restated
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2009
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2008
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Operating activities:
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Net income (loss)
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$ | (835,022 | ) | $ | 371,726 | |||
Adjustments to reconcile net loss to net cash
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provided by operating activities:
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Bad debt expense
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459,917 | 158,181 | ||||||
Depreciation and amortization
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448,348 | 531,523 | ||||||
Stock Compensation
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- | 167 | ||||||
Deferred income tax (benefit) expense
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(529,745 | ) | 249,800 | |||||
(Increase) decrease in operating assets and
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increase (decrease) in operating liabilities:
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Accounts receivable
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(300,625 | ) | (2,015,365 | ) | ||||
Costs on uncompleted projects applicable to
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future billings
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491,272 | 1,273,564 | ||||||
Billings and estimated profit in excess of costs
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on uncompleted contracts
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227,473 | (781,544 | ) | |||||
Prepaid expenses, inventory and other assets
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246,549 | (107,731 | ) | |||||
Accrued litigation defense reserve
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(300,000 | ) | (43,958 | ) | ||||
Accounts payable and accrued expenses
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1,841,187 | 1,144,016 | ||||||
Net cash provided by operating activities
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1,749,354 | 780,379 | ||||||
Investing activities:
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Purchase of property and equipment
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(207,633 | ) | (358,068 | ) | ||||
Net cash used in investing activities
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(207,633 | ) | (358,068 | ) | ||||
Financing activities:
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Proceeds from issuance of common stock
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- | 33 | ||||||
Decrease in outstanding checks in excess of bank balance
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(1,026,126 | ) | (54,457 | ) | ||||
Proceeds from note payable to bank and current
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and long-term borrowings, net of financing costs
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11,520,195 | 10,327,462 | ||||||
Principal payments on current and long-term borrowings
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(11,985,249 | ) | (10,758,950 | ) | ||||
Net cash used in financing activities
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(1,491,180 | ) | (485,912 | ) | ||||
Increase (decrease) in cash
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50,541 | (63,601 | ) | |||||
Cash at beginning of period
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80,003 | 93,535 | ||||||
Cash at end of period
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$ | 130,544 | $ | 29,934 | ||||
Non-cash item
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Non-cash financing of insurance
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$ | 538,397 | $ | 566,043 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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7
OP-TECH ENVIRONMENTAL SERVICES, INC.
AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, quarterly results include all adjustments (consisting of only normal recurring adjustments) that the Company considers necessary for a fair presentation of such information for interim periods.
The unaudited financial statements include the accounts of the Company and its two wholly-owned subsidiaries; OP-TECH Environmental Services, Ltd, an inactive Canadian company, and OP-TECH AVIX, Inc. All material intercompany transactions and balances have been eliminated in consolidation.
The balance sheet at December 31, 2008 has been derived from the audited balance sheet included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2008.
2. Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
Nine months ended
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Three months ended
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Sept. 30, 2009
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Sept. 30, 2008
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Sept. 30, 2009
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Sept. 30, 2008
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Net income (loss)
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$ | (835,022 | ) | $ | 371,726 | $ | (360,434 | ) | $ | 223,343 | ||||||
Other comprehensive (loss):
Change in fair value of cash flow hedge
Net of income tax expense (benefit) of
$7,700 and $1,600 in 2009 and ($6,300)
and ($3,400) in 2008, respectively
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11,463 | (9,425 | ) | 2,323 | (5,125 | ) | ||||||||||
Comprehensive income (loss)
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$ | (823,559 | ) | $ | 362,301 | $ | (358,111 | ) | $ | 218,218 |
3. Revenue Recognition
The timing of revenues is dependent on the Company's backlog, contract awards, and the performance requirements of each contract. The Company's revenues are also affected by the timing of its clients planned remediation work as well as the timing of unplanned emergency spills. Historically, planned remediation work generally increases during the third and fourth quarters. Although the Company believes that the historical trend in quarterly revenues for the third and fourth quarters of each year are generally higher than the first and second quarters, there can be no assurance that this will occur in future periods. Accordingly, quarterly or other interim results should not be considered indicative of results to be expected for any quarter or for the full year.
8
4. Related Party Transactions
The Company utilizes subcontract labor purchased from St. Lawrence Industrial Services, Inc., which is owned by a director of the Company. The costs for these services amounted to approximately $1,145,000 and $905,000 for the nine months ended September 30, 2009 and 2008, respectively, and $522,000 and $315,000 for the three months ended September 30, 2009 and 2008 respectively. Amounts owed to St. Lawrence Industrial Services, Inc. which are included in Accrued Expenses and Other Liabilities were $0 and $57,790 at September 30, 2009 and 2008, respectively.
5. Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted average shares outstanding. In 2008, diluted earnings per share includes the potentially dilutive effect of common stock equivalents, which include outstanding options under the Company’s Stock Option Plan and warrants that were issued to a financial advisor in May 2002 to purchase 480,000 shares of common stock at $0.066 per share, expiring in May 2010. These are excluded for the diluted share calculation for the three month and the nine month periods due to the net loss.
6. Reclassifications
Certain reclassifications have been made to the September 30, 2008 financial statements to conform with the 2009 presentation.
7. Restatement
On April 30, 2010, the Company determined that an agreement with a customer was not properly accounted for and long-term receivable from customer and accounts receivable recorded at September 30, 2009 were overstated by $287,010. The Company also concluded based on an error that costs on uncompleted projects applicable to future billings was overstated by $244,865 and billings in excess of cost were understated by $33,950. As a result, the Company restated the quarterly financial statements.
The impact of these adjustments on the Company’s financial results as originally reported for the nine months ending September 30, 2009 are summarized below:
As Reported
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As Restated
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Current assets
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$13,068,433
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$ 12,898,568
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Total assets
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$17,454,072
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$ 17,142,197
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Current liabilities
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$13,548,314
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$ 13,581,904
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Total liabilities
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$14,484,968
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$ 14,518,558
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Accumulated deficit
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$ (4,138,689)
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$ (4,484,154)
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Net income
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$ (489,557)
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$ (835,022)
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Basic earning per share
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$ (0.04)
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$ (0.07)
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Diluted earning per share
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$ (0.04)
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$ (0.07)
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9
PART I – FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, the Company had cash of $130,544 compared to $80,003 at December 31, 2008. The Company voluntarily applies all available cash in the Company’s operating account to pay down the Company’s note payable to bank under the line of credit.
At September 30, 2009, the Company had working capital of ($683,336) compared to $5,740,747 at December 31, 2008, and a current ratio of .95 to 1 at September 30, 2009 and 1.77 to 1 at December 31, 2008. The fluctuation was primarily attributed to the note payable to the bank classified as a current liability at September 30, 2009. It was classified as a long-term liability at September 30, 2008.
For the nine months ended September 30, 2009, the Company’s net cash provided by operations was $1,749,354 compared to $780,379 during the nine months ended September 30, 2008. The cash provided by operations for the nine months ended September 30, 2009 was primarily a result of an increase in accounts payable.
The Company’s net cash used in investing activities of $207,633 during the first nine months of the year was attributable to the purchase of field equipment. The net cash used in investing activities during the nine months ended September 30, 2008 was $358,068.
For the nine months ended September 30, 2009, the Company’s net cash used in financing activities was $1,491,180 compared to $485,912 during the nine months ended September 30, 2008. The net cash used in financing activities for the nine months ended September 30, 2009 was primarily due to the reduction in outstanding checks in excess of bank balance.
The Company had a loan agreement that provided for borrowings on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later. The Company projected a short-term additional financing need based on the size of several large projects planned in the third and fourth quarters of the year and negotiated an increase in the loan agreement from $6,000,000 to $7,500,000 as of September 30, 2009. The loan was payable on July 1, 2011, bears interest at a rate of LIBOR plus 4.00 percent, was subject to certain restrictive financial covenants, and was subject to default if there is a material adverse change in the financial or economic condition of the Company. As of September 30, 2009, borrowings against the revolving loan aggregated $5,278,177.
During the third quarter of 2009, all principal payments on the Company’s debt were made within payment terms. As of September 30, 2009, the Company was not in compliance with financial covenants and received a waiver at September 30, 2009. The waiver modified the agreement maturity date to December 31, 2009. In addition, the available line was reduced to $6,000,000 as the additional amount was not necessary. The Company was in the process of negotiating an extension to its financing agreement. The Company was dependent on obtaining continued financing from its current financial institution or from another source.
The Company expects, based on its operating results and the continued availability of its line of credit, that it will be able to meet obligations as they come due.
10
RESULTS OF OPERATIONS
PROJECT REVENUE
The Company's project revenue for the third quarter of 2009 decreased 9% to $9,606,999 from $10,606,146 for the third quarter of 2008. For the nine-month period ended September 30, 2009 the Company’s project revenue has decreased 4% to $24,232,370 from $25,354,684 for the same period in 2008.
PROJECT COSTS AND GROSS MARGIN
Project costs for the third quarter of 2009 decreased 3% to $8,312,921 from $8,103,340 for the same period in 2008. Project costs as a percentage of revenues were86.5% and 76.4% for the three months ended September 30, 2009 and 2008, respectively. Gross margin for the third quarter of 2009 decreased to 13.5% from 23.6% for the same period in 2008. The decrease in gross margin is attributed to work performed in the quarter in lower margin segments.
For the nine-month period ended September 30, 2009, project costs increased 6% to $19,604,046 from $18,482,076 for the nine months ended September 30, 2008. Project costs as a percentage of revenues were 80.9% for the nine months ended September 30, 2009 and 72.9% for the same period in 2008. Gross margin for the nine months ended September 30, 2009 decreased to 19.1% from 27.1% for the same period in 2008 attributed to the economic climate, industry competiveness, and job mix.
OPERATING EXPENSES
Operating expenses for the quarter ended September 30, 2009 decreased 11% to $1,801,376 from $2,014,183 for the same period in 2008. For the nine-month period ended September 30, 2009, operating expenses decreased 2% to $5,751,348 from $5,898,603 for the same period in 2008. Operating expenses as a percentage of revenues were 24% and 23% for the nine months ended September 30, 2009 and 2008, respectively.
When comparing the third quarter of 2009 to 2008, the decrease in operating expenses is primarily due to:
·
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Payroll and payroll related expense decreasing 6% to $788,661 from $838,795 is primarily a result of reductions in variable compensation accruals for key employees which are related to profitability.
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·
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Professional fees increased 37% to $265,808 from $194,687 as a result of professional fees for the settlement of the legal proceeding discussed in Part II.
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·
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Equipment expenses, net of usage credit decreased 61% to $103,398 from $264,045 attributed to an improvement in equipment utilization and more equipment cost being included in project costs.
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·
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Other expenses decreasing 56% to $87,470 from $200,179 attributed to the decrease in the bad debt expense. In the third quarter of 2008, the Company increased the allowance for doubtful accounts for a specific account.
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11
INTEREST EXPENSE
Interest expense for the quarter ended September 30, 2009 decreased 29% to $80,792 from $114,233 for the same period in 2008. Interest expense for the nine months ended September 30, 2009 decreased 34% to $234,865 from $358,430 for the same period in 2008. This decrease is due to both a decrease in the interest rates paid on the Company’s floating-rate debt as well as a decrease in the principal balances owed.
NET INCOME (LOSS) BEFORE INCOME TAXES
Net loss before income taxes for the quarter ended September 30, 2009 was $(590,434) compared to net income before income taxes of $376,188 for same period in 2008. Net loss before income taxes for the nine months ended September 30, 2009 was $(1,370,022) compared to net income before income taxes of $627,785 for the nine months ended September 30, 2008. The net loss before income taxes is primarily a result of the reduction in the gross margin percentage on project billings.
INCOME TAX (EXPENSE) BENEFIT
The Company recorded income tax benefit of $230,000 for the quarter ended September 30, 2009 compared to an income tax expense of $(152,845) for same period in 2008. The Company recorded income tax benefit of $535,000 for the nine months September 30, 2009 compared to an income tax expense of ($256,059) for the same period in 2008.
NET INCOME (LOSS)
Net loss before for the quarter ended September 30, 2009 was $(360,434) or ($.03) per share basic and diluted compared to net income before income taxes of $223,343 or $.02 per share basic and diluted for same period in 2008. Net income (loss) for the nine months ended September 30, 2009 and 2008 was $(835,022) or $.07 per share basic and diluted, and $371,726 or $.03 per share basic and diluted, respectively.
12
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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Management has identified the following critical accounting policies that affect the Company's more significant judgments and estimates used in the preparation of the Company's consolidated financial statements. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates those estimates, including those related to assets held for sale, revenue recognition, issuance of stock options and related compensation expense, valuation allowances on deferred tax assets, allowance for doubtful accounts and contingencies and litigation. The Company states these accounting policies in the notes to the consolidated financial statements and in relevant sections in this discussion and analysis. These estimates are based on the information that is currently available to the Company and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates.
The Company believes that the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements:
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Contracts are predominately short-term in nature (less than six months) and revenue is recognized as costs are incurred and billed. Revenues recognized in excess of amounts billed are recorded as an asset. In the event interim billings exceed costs and estimated profit, the net amount of deferred revenue is shown as a current liability. Estimated losses are recorded in full when identified.
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The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management determines the adequacy of this allowance by continually evaluating individual customer receivables, considering the customer's financial condition, credit history and current economic conditions. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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The Company maintains a valuation allowance for deferred tax assets to reduce these assets to their realizable amounts. Recognition of these amounts and the adjustment of the corresponding allowance is dependent on the generation of taxable income in current and future years. As circumstances change with respect to management’s expectations of future taxable income, the valuation allowance is adjusted.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable
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Item 4/4T. – Controls and Procedures
(a)
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Disclosure Controls and Procedures.
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As of the end of the period covering this Form 10-Q/A, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures”. OP-TECH conducted this evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.
(i) Definition of Disclosure Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed with the objective of ensuring that information required to be disclosed in our periodic reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As defined by the SEC, such disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in such a manner as to allow timely disclosure decisions.
(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Controls.
OP-TECH recognizes that a system of disclosure controls and procedures (as well as a system of internal controls), no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the system are met. Further, the design of such a system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented in a number of ways. Because of the inherent limitations in a cost-effective control system, system failures may occur and not be detected.
(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer determined that, as of the end of the period covered by this report, a material weakness existed over the controls to evaluate revenue on uncompleted projects and the controls to evaluate the adequacy of the allowance for doubtful accounts
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
Specifically, due to an error, four in-process projects had unearned revenue recorded in excess of the actual expected. Additionally, an agreement with a customer was not properly accounted for causing an overstatement of accounts receivable.
The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of September 30, 2009.
The Company plans to revise controls with respect to the evaluation of unearned revenue to include a more in-depth cost and standard gross margin analysis, review with field personnel, and a comparison to subsequent billing by job.
The Company plans to revise controls over the evaluation of the adequacy of the allowance for doubtful accounts to include a review with sales and collection personnel to ensure all agreements with customers are considered.
The Company will also monitor our disclosure controls and procedures on a continuing basis to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In the future as such controls change in relation to developments in the our business and financial reporting requirements, our evaluation and monitoring measures will also address any additional corrective actions that may be required.
(b) Changes in Internal Controls.
The Company assessed internal controls as of December 31, 2008, and concluded that they were operating effectively and no material weaknesses existed as reported in the 2008 10-K. The Company’s control procedures did not change significantly in 2009. However, these control procedures were not operating effectively in certain areas as the Company identified material weaknesses over financial reporting for the period ending September 30, 2009, related to the restatement of results for the period ending September 30, 2009.
Because of these material weaknesses in internal control over financial reporting, our management, including our CEO and CFO, concluded that our internal control over financial reporting was not effective as of June 30, 2009 based on the criteria set forth in Internal Control - Integrated Framework issued by the COSO.
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
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The Company recorded an accrued liability of $150,000 at September 30, 2009. The liability has been recorded to cover management’s estimate of any potential legal indemnity settlement or other payments necessary to dispose of a particular claim against the Company. The Company made payments of $250,000 during the quarter ended September 30, 2009.
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Item 1A. Risk Factors.
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No material changes
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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None
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Item 3. Defaults Upon Senior Securities.
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None
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Item 4. Submission of Matters to a Vote of Security Holders.
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None
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Item 5. Other Information.
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None
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Item 6. Exhibits.
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Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer and Acting Principal Accounting Officer
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer and Acting Principal Accounting Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OP-TECH Environmental Services, Inc.
(Registrant)
Date: June 15, 2010 /s/ Charles B. Morgan
Charles B. Morgan
Chief Executive Officer
/s/ Jon S. Verbeck
Jon S. Verbeck
Chief Financial Officer and Treasurer