Attached files
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EX-32.1 - OP TECH ENVIRONMENTAL SERVICES INC | exhibit32-1.htm |
EX-32.2 - OP TECH ENVIRONMENTAL SERVICES INC | exhibit32-2.htm |
EX-31.1 - OP TECH ENVIRONMENTAL SERVICES INC | exhibit31-1.htm |
EX-31.2 - OP TECH ENVIRONMENTAL SERVICES INC | exhibit31-2.htm |
United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
[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 June 30, 2011
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
(State or other jurisdiction of incorporation or organization)
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91-1528142
(I.R.S. Employer Identification No.)
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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 X 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 (August 5, 2011) 11,940,372
OP-TECH Environmental Services, Inc. and Wholly-Owned Subsidiaries
INDEX
PART I. | FINANCIAL INFORMATION | Page No. |
Item 1. | Financial Statements | |
Consolidated Balance Sheets | ||
-June 30, 2011 (Unaudited) and December 31, 2010 (Audited) | 2 | |
Consolidated Statements of Operations | ||
-Three months ended June 30, 2011 and June 30, 2010 (Unaudited) | 3 | |
-Six months ended June 30, 2011 and June 30, 2010 (Unaudited) | ||
Consolidated Statements of Cash Flows | ||
-Six months ended June 30, 2011 and June 30, 2010 (Unaudited) | 4 | |
Notes to Consolidated Financial Statements (Unaudited) | 5 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 8 |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 11 |
Item 4. | Controls and Procedures | 12 |
PART II. | OTHER INFORMATION | 13 |
SIGNATURES | 14 | |
PART I - FINANCIAL INFORMATION
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-Q 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, 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.
1
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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(UNAUDITED)
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June 30,
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December 31,
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2011
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2010
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ASSETS
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Current Assets:
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Cash
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$ | 653,559 | $ | 646,560 | ||||
Accounts receivable (net of allowance for doubtful accounts of
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approximately $301,000 in 2011 and $553,000 in 2010)
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7,525,867 | 10,292,907 | ||||||
Costs on uncompleted projects applicable to future billings
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2,565,349 | 1,098,455 | ||||||
Inventory
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358,685 | 358,394 | ||||||
Current portion of deferred tax asset
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373,800 | 488,800 | ||||||
Prepaid expenses and other current assets, net
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1,194,534 | 510,519 | ||||||
Total Current Assets
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12,671,794 | 13,395,635 | ||||||
Property and equipment, net
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1,744,107 | 2,047,479 | ||||||
Deferred tax asset
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2,285,400 | 1,774,900 | ||||||
Other long term assets
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163,058 | 93,304 | ||||||
Total Assets
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$ | 16,864,359 | $ | 17,311,318 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities:
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Accounts payable
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$ | 5,478,007 | $ | 7,172,208 | ||||
Billings in excess of costs and estimated profit
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on uncompleted projects
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442,045 | 342,152 | ||||||
Accrued expenses and other current liabilities
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416,947 | 588,314 | ||||||
Note payable to bank under line of credit
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3,204,207 | 3,442,205 | ||||||
Income taxes payable
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9,027 | 14,925 | ||||||
Obligation under interest rate swap agreement
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- | 8,345 | ||||||
Current portion of long-term debt
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1,154,005 | 598,469 | ||||||
Total Current Liabilities
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10,704,238 | 12,166,618 | ||||||
Convertible notes payable
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1,786,801 | 1,384,500 | ||||||
Long-term debt
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2,261,629 | 1,300,000 | ||||||
Total Liabilities
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14,752,668 | 14,851,118 | ||||||
Shareholders' Equity:
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Common stock, par value $.01 per share; authorized 50,000,000
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shares; 11,940,372 shares issued and outstanding
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119,404 | 119,404 | ||||||
Additional paid-in capital
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7,360,558 | 7,293,391 | ||||||
Accumulated deficit
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(5,368,271 | ) | (4,747,751 | ) | ||||
Accumulated other comprehensive loss
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- | (4,844 | ) | |||||
Total Shareholders' Equity
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2,111,691 | 2,660,200 | ||||||
Total Liabilities and Shareholders' Equity
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$ | 16,864,359 | $ | 17,311,318 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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2
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
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THREE MONTHS ENDED
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SIX MONTHS ENDED
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June 30,
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June 30,
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June 30,
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June 30,
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2011
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2010
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2011
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2010
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Project revenue
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$ | 7,793,768 | $ | 12,058,774 | $ | 12,701,170 | $ | 25,905,461 | ||||||||
Project costs
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5,728,968 | 9,268,873 | 9,289,149 | 20,873,849 | ||||||||||||
Gross margin
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2,064,800 | 2,789,901 | 3,412,021 | 5,031,612 | ||||||||||||
Operating expenses:
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Payroll expense and related payroll taxes and benefits
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1,276,241 | 1,174,211 | 2,509,969 | 2,256,792 | ||||||||||||
Office Expense
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126,429 | 177,182 | 318,965 | 356,559 | ||||||||||||
Occupancy
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222,892 | 209,889 | 447,946 | 471,662 | ||||||||||||
Business Insurance
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125,165 | 116,581 | 260,524 | 228,889 | ||||||||||||
Professional Services
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116,509 | 319,503 | 316,802 | 472,118 | ||||||||||||
Equipment Expenses, net of usage credit
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147,847 | 129,447 | 302,215 | 240,718 | ||||||||||||
Other expenses
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(5,947 | ) | 100,882 | 53,685 | 214,360 | |||||||||||
2,009,136 | 2,227,695 | 4,210,106 | 4,241,098 | |||||||||||||
Operating income (loss)
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55,664 | 562,206 | (798,085 | ) | 790,514 | |||||||||||
Other income and (expense):
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Interest expense
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(139,472 | ) | (164,900 | ) | (301,084 | ) | (252,143 | ) | ||||||||
Other, net
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44,808 | (1,046 | ) | 81,649 | 12,104 | |||||||||||
(94,664 | ) | (165,946 | ) | (219,435 | ) | (240,039 | ) | |||||||||
Net income (loss) before income taxes
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(39,000 | ) | 396,260 | (1,017,520 | ) | 550,475 | ||||||||||
Income tax benefit (expense)
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17,000 | (153,000 | ) | 397,000 | (215,000 | ) | ||||||||||
Net income (loss)
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$ | (22,000 | ) | $ | 243,260 | $ | (620,520 | ) | $ | 335,475 | ||||||
Earnings (loss) per common share:
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Basic
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$ | (0.002 | ) | $ | 0.020 | $ | (0.052 | ) | $ | 0.028 | ||||||
Diluted
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$ | (0.002 | ) | $ | 0.020 | $ | (0.052 | ) | $ | 0.027 | ||||||
Weighted average shares outstanding:
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Basic
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11,940,372 | 11,940,372 | 11,940,372 | 11,940,372 | ||||||||||||
Diluted
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11,940,372 | 12,344,938 | 11,940,372 | 12,358,109 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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3
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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SIX MONTHS ENDED
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June 30,
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June 30,
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2011
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2010
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Operating activities:
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Net income (loss)
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$ | (620,520 | ) | $ | 335,475 | |||
Adjustments to reconcile net income (loss) to net cash
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provided by (used in) operating activities:
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Gain on sale of equipment
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- | (13,320 | ) | |||||
Bad debt expense (recovery)
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(35,582 | ) | 131,300 | |||||
Depreciation and amortization
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325,517 | 339,682 | ||||||
Warrant modification expense
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- | 18,000 | ||||||
Amortization of discount on convertible notes
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83,333 | - | ||||||
(Benefit) expense from deferred income taxes
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(397,000 | ) | 216,600 | |||||
(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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2,802,622 | (1,325,073 | ) | |||||
Costs on uncompleted projects applicable to
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future billings
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(1,466,894 | ) | 243,868 | |||||
Billings and estimated profit in excess of costs
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on uncompleted contracts
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99,893 | (407,753 | ) | |||||
Prepaid expenses, inventory and other assets
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(684,306 | ) | 230,127 | |||||
Other long term assets
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(2,671 | ) | - | |||||
Accounts payable and accrued expenses
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(1,807,153 | ) | 3,303,500 | |||||
Net cash provided by (used in) operating activities
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(1,702,761 | ) | 3,072,406 | |||||
Investing activities:
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Purchase of property and equipment
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(22,144 | ) | (88,145 | ) | ||||
Deposit on purchase of building
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(10,753 | ) | - | |||||
Proceeds from sale of equipment
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- | 16,995 | ||||||
Net cash used in investing activities
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(32,897 | ) | (71,150 | ) | ||||
Financing activities:
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Decrease in outstanding checks in excess of bank balance
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- | (1,045,720 | ) | |||||
Proceeds from issuance of convertible notes payable
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403,000 | - | ||||||
Redemption of convertible note payable
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(20,000 | ) | - | |||||
Proceeds from note payable to bank and current
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and long-term borrowings, net of financing costs
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1,907,962 | 6,637,535 | ||||||
Principal payments on current and long-term borrowings
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(548,305 | ) | (7,952,243 | ) | ||||
Net cash provided by (used in) financing activities
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1,742,657 | (2,360,428 | ) | |||||
Increase in cash
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6,999 | 640,828 | ||||||
Cash at beginning of period
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646,560 | 26,845 | ||||||
Cash at end of period
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$ | 653,559 | $ | 667,673 | ||||
Non-cash item
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Non-cash debt refinancing
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$ | 4,794,335 | $ | - | ||||
Non-cash financing of insurance
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$ | 554,005 | $ | 526,207 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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4
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, 2010 has been derived from the audited balance sheet included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.
2. Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
Six months ended
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Three months ended
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June 30, 2011
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June 30, 2010
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June 30, 2011
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June 30, 2010
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Net income (loss)
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(620,520 | ) | 335,475 | (22,000 | ) | $ | 243,260 | |||||||||
Other comprehensive (loss):
Change in fair value of cash flow hedge
net of income tax expense of $3,500
and $2,000 in 2011 and $3,000 and $1,600 in 2010, respectively.
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4,844 | 4,587 | 2,691 | 2,338 | ||||||||||||
Comprehensive income (loss)
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$ | (615,676 | ) | $ | 340,062 | $ | (19,309 | ) | $ | 245,598 |
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. Revenues during the first quarter of 2010 were unusually high due to backlog carried over from jobs delayed from the prior year and is not reflective of normal seasonal trends. Accordingly, quarterly or other interim results should not be considered indicative of results to be expected for any quarter or for the full year.
5
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 $910,000 and $1,102,000 for the six months ended June 30, 2011 and 2010, respectively, and $472,000 and $528,000 for the three months ended June 30, 2011 and 2010 respectively. The Company had a payable to St. Lawrence for these services of $327,000 at June 30, 2010, which was included in accrued expenses at June 30, 2010. At June 30, 2011, the Company has a receivable from St. Lawrence of approximately $187,000 as a result of advances made prior to the performance of services.
Additionally, the Company has entered into Secured Loan Agreements with members of management as discussed in Note 7 below.
5. Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted average shares outstanding. There are outstanding options under the Company’s Stock Option Plan and warrants expiring May 2013 that were issued to a financial advisor in May 2002 to purchase 480,000 shares of common stock at $0.066 per share. The convertible notes payable with a face value of $2,000,000 are convertible into shares of common stock at the election of the holders of the Convertible Notes at $0.06 per share as more fully explained in Note 7. These items were not included in the calculation of diluted earnings per share for 2011 as they would be anti-dilutive due to the net loss.
6. Reclassifications
Certain reclassifications have been made to the June 30, 2010 statement of operations to conform to the 2011 presentation.
7. Sale of Convertible Notes
During January 2011, the Company entered into a series of Secured Loan Agreements with several individuals for the sale of secured convertible notes (the “Convertible Notes”) totaling $403,000. These are in addition to the $1,617,000 convertible notes issued during the year ending December 31, 2010. These individuals represent members of executive management, members of the board of directors, and significant shareholders. The Convertible Notes are for a term of two years, carry interest of 6% and are convertible into shares of common stock at the election of the holders of the Convertible Notes at $0.06 per share and, as long as the average share price of the Company’s common stock on the Over-the-Counter Bulletin Board remains above $0.06, at the election of the Company at $0.06 per share. The issuance of the Convertible Notes in the first quarter of 2011 does not represent a change of control as approximately 94% of the Convertible Notes were issued to shareholders of the Company that currently own approximately 34% of the Company’s outstanding share capital.
The Company recorded $67,167 in additional debt discount in 2011 related to the issuance of these convertible notes due to the beneficial conversion feature, which is shown as Additional Paid in Capital and reduction in the convertible notes payable. These discounts will be amortized over two years. The discount is based on the market value of the stock at the date of the note agreements which was $.07 per share.
6
In January 2011, the Company redeemed $20,000 of Convertible Notes.
The Convertible Notes may be converted into 33,333,334 shares of common stock, or approximately 279% of current outstanding shares of common stock.
The Company also entered into a Security Agreement to secure payment and performance of its obligations under the Convertible Notes pursuant to which it granted the holders of the Convertible Notes a security interest in all of its assets. The security granted is subordinated to a security interest granted to the Senior Debt. The Company’s sole active subsidiary also guaranteed all amounts owed by the Company under the Convertible Notes.
Amortization expense related to the Convertible Note discounts was $83,333 for the six months ending June 30, 2011 and is included in interest expense.
The remaining amortization period for the discount is 14 months for the first tranche of $1,332,000, 18 months for second tranche of $285,000, and 18 months for the third tranche of $383,000, net of redemptions.
Interest expense recorded on these notes amounted to $143,333 for 2011 yielding an effective interest rate of 14.3%. The unamortized discount was approximately $213,000 at June 30, 2011.
8. Debt Refinancing
The Company refinanced its existing debt with a new lender on April 22, 2011. The new loan agreement provides for short-term borrowings up to $5,000,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment. Interest is charged at LIBOR plus 3.5% and the agreement is renewable annually. The agreement also provides a term loan of $3,000,000 due in monthly principal installments of $50,000 plus interest at LIBOR plus 3.5% through 2016. The loan is collateralized by all accounts receivable, inventory and equipment.
7
PART I – FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2011, the Company had cash of $653,559 compared to $646,560 at December 31, 2010. The consistent cash balance is attributed to the proceeds from the issuance of convertible notes payable offset by the loss from operations.
At June 30, 2011, the Company had working capital of $1,967,556 compared to $1,229,017 at December 31, 2010, with a current ratio of 1.18 to 1 at June 30, 2011 and 1.10 to 1 at December 31, 2010. The increase in the current ratio is primarily a result of the refinancing which provided additional long-term financing in April 2011 and improved the Company’s working capital.
For the six months ended June 30, 2011, the Company’s net cash used in operations was $1,702,761 compared to net cash provided by operations of $3,072,406 during the six months ended June 30, 2010. The cash used in operations for the six months ended June 30, 2011 was primarily a result of the net loss coupled with the increase in costs on uncompleted projects applicable to future billings and the decrease in accounts payable partially offset by an increase in accounts receivable.
The Company’s net cash used in investing activities of $32,897 during the first six months of the year was attributable to the purchase of a vehicle and a deposit on a building. The net cash used in investing activities for the six months ended June 30, 2010 was $71,150.
For the six months ended June 30, 2011, the Company’s net cash provided by financing activities was $1,742,657 compared to net cash used in financing activities of $2,360,428 during the six months ended June 30, 2010. The net cash provided by financing activities for the six months ended June 30, 2011 was primarily due to proceeds from convertible notes and the refinancing of long-term debt.
The Company refinanced the senior debt on April 22, 2011 as fully discussed in Note 8. The new loan agreement provides for short-term borrowings up to $5,000,000 on a revolving basis at LIBOR plus 3.5%, and a term loan of $3,000,000 due in monthly principal installments of $50,000 plus interest at LIBOR plus 3.5% through 2016.
During the second quarter of 2011, all principal payments on the Company’s debt were made within payment terms.
RESULTS OF OPERATIONS
PROJECT REVENUE
The Company's project billings for the second quarter of 2011 decreased 35% to $7,793,768 from $12,058,774 for the second quarter of 2010. For the six-month period ended June 30, 2011 the Company’s revenues have decreased 51% to $12,701,170 from $25,905,461 for the same period in 2010.
8
When comparing the six months ending June 30, 2011 to the same period in 2010, the decrease in project revenue is due primarily to several large projects that were underway in early 2010 increasing the 2010 revenue. Additionally, project revenue under the remediation contract with the New York State Department of Environmental Conservation through the second quarter of 2011 decreased to $66,000 from approximately $6,829,000 for the same period in 2010. The Company relinquished its prime position in the remediation contract on October1, 2010 due to poor return on projects with significant overhead requirements and overall reduced spending by New York State on remediation contracts.
PROJECT COSTS AND GROSS MARGIN
Project costs for the second quarter of 2011 decreased 38% to $5,728,968 from $9,268,873 for the same period in 2010. Project costs as a percentage of revenues were 74% and 77% for the six months ended June 30, 2011 and 2010, respectively. Gross margin as a percentage of revenue for the second quarter of 2011 increased to 26% from 23% for the same period in 2010. The gross margin increase is attributed to a significant number of higher margin recurring revenue projects in 2011 compared to 2010 larger projects with lower gross margins.
For the six-month period ended June 30, 2011, project costs decreased 55% to $9,289,149 from $20,873,849 for the six months ended June 30, 2010. Project costs as a percentage of revenues were 73% and 81% for the six months ended June 30, 2011 and 2010, respectively. Gross margin for the six months ended June 30, 2011 increased to 27% from 19% for the same period in 2010 as a result project mix with many recurring projects yielding higher blended margins.
OPERATING EXPENSES
Operating expenses for the quarter ended June 30, 2011 decreased 10% to $2,009,136 from $2,227,695 for the same period in 2010. For the six-month period ended June 30, 2011, operating expenses decreased 1% to $4,210,106 from $4,241,098 for the same period in 2010. Operating expenses as a percentage of revenues increased to 33% for the six months ended June 30, 2011 compared to 16% for the comparable period in 2010. This increase is attributed to lower than anticipated project revenue and many operating expenses being fixed in nature.
When comparing the second quarter of 2011 to 2010, the decrease in operating expenses was primarily related to a 61% reduction in professional services to $124,058 from $319,503. Professional services in 2010 included additional legal and consulting services related to the Company’s financing agreement.
INTEREST EXPENSE
Interest expense for the quarter ended June 30, 2011 decreased 15% to $139,472 from $164,900 for the same period in 2010. The decrease is attributed to 2010 interest expense including approximately $71,000 for the amortization of a bank fee. Interest costs for the six months ended June 30, 2011 increased 19% to $301,084 from $252,143 for the same period in 2010. The increase for the six months is attributed to the interest expense accrued for the convertible notes payable issued in the fourth quarter of 2010 and the first quarter of 2011. Additionally, interest expense in 2011 includes amortization related to the convertible note discounts.
9
NET INCOME (LOSS) BEFORE INCOME TAXES
Net loss before income taxes for the quarter ended June 30, 2011 was $(39,000) compared to net income before income taxes of $396,260 for same period in 2010. Net loss before income taxes for the six months ended June 30, 2011 was $(1,017,520) compared to net income of $550,475 for the six months ended June 30, 2010. Net loss before income taxes is primarily a result of the decrease in project billings and gross margin.
INCOME TAX (EXPENSE) BENEFIT
The Company recorded income tax benefit of $17,000 for the quarter ended June 30, 2011 compared to income tax expense of $(153,000) for same period in 2010. The Company recorded income tax benefit of $397,000 for the six months June 30, 2011 compared to income tax expense of $(215,000) for the same period in 2010. This is primarily a function of the Company’s change in profitability over the periods.
NET INCOME (LOSS)
Net loss for the quarter ended June 30, 2011 was $(22,000) or $(.002) per share basic and diluted compared to net income of $243,260 or $.020 per share basic and diluted for same period in 2010. Net income (loss) for the six months ended June 30, 2011 and 2010 was $(620,520) or $(.052) per share basic and diluted, and $335,475 or $.028 and $.027 per share basic and diluted, respectively.
10
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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
Item 4.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, 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 a 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.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on the evaluation of these controls and procedures, that our disclosure controls and procedures are not effective in timely alerting them to material information relating to OP-TECH required to be included in OP-TECH’s periodic SEC filings.
During the preparation of our annual report, we concluded that we did not maintain effective controls over reconciliation of costs and standard gross margins on uncompleted projects. Specifically, several in-process projects had unearned revenue recorded in excess of the actual expected.
We are reviewing our disclosure controls and procedures to determine the best steps for the Company to take to make the disclosure controls and procedures effective.
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(b) Changes in Internal Controls.
The Company enacted no changes to internal controls since the report containing a material weakness identified for the year ended December 31, 2010 regarding unearned revenue. The Company plans to continue to improve the controls for the unearned revenue review process including a more in-depth cost and standard gross margin analysis, review with field personnel, and a comparison to subsequent billings.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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The Company settled a lawsuit for $450,000 in 2009. There are two pending litigations arising from that suit. The Company entered into an agreement to contribute 15% to any settlement of the actions, providing the Company deems the total proposed settlement reasonable. The Company has not been notified of any potential settlements on this matter. The Company has not recorded any liability at June 30, 2011 as the ultimate outcome is not estimable as this time.
The Company was notified by the State of New York that the Company may be responsible for costs incurred to address a petroleum spill. The Company is rigorously defending this matter and the outcome cannot be reasonably determined at this time.
Item 1A. Risk Factors.
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Not applicable
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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
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: August 15, 2011
/s/ Charles B. Morgan
Charles B. Morgan
Chief Executive Officer
/s/ Jon S. Verbeck
Jon S. Verbeck
Chief Financial Officer and Treasurer
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