UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission File Number: 000-55159

 

CES Synergies, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada		46-0839941
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
39646 Fig Street  P.O. Box 1299 Crystal Springs, FL		33524
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant’s telephone number, including area code: 813-783-1688

 

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 ☒     No ☐

 

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 during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒     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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class		Outstanding as of November 9, 2015
Common Stock, $0.001 par value		46,880,500

 

 

 

CES SYNERGIES, INC.

 

TABLE OF CONTENTS 

 

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	32
Item 4. Controls and Procedures.	32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.	32
Item 1A. Risk Factors.	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	32
Item 3. Defaults Upon Senior Securities.	33
Item 4. Mine Safety Disclosures.	33
Item 5. Other Information.	33
Item 6. Exhibits.	33
SIGNATURES	34

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

CES SYNERGIES, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

		September 30, 2015				December 31, 2014
ASSETS
Current assets
Cash		$	606,408			$	149,455
Advances to Employees			14,407				14,006
Contracts Receivable (net of allowance for bad debt)			3,795,879				6,365,274
Inventory			170,685				152,772
Cost and Estimated Earnings in Excess of Billings on Uncompleted Contracts			866,963				229,437
Total current assets			5,454,342				6,910,944
Property and Equipment
Furniture, Fixtures, and Equipment			13,184,537				12,767,975
Less: accumulated depreciation			(11,031,582	)			(10,650,758	)
Net property & equipment			2,152,955				2,117,217
Other assets
Goodwill			1,446,855				1,446,855
Other assets			5,206				6,531
Total other assets			1,452,061				1,453,386
TOTAL ASSETS		$	9,059,358			$	10,481,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	2,586,988			$	2,570,259
Accrued payroll/expenses			687,566				82,391
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts			282,876				598,645
Notes payable			1,750,300				1,750,300
Current Portion Long-term Debt			595,757				595,757
Total current liabilities			5,903,487				5,597,352
Long-term liabilities
Long-term debt, net of current portion			3,779,518				3,337,166
Total long-term liabilities			3,779,518				3,337,166
Stockholders' equity
Common Stock, $0.001 par value, authorized 250,000,000 shares, September 30, 2015 and December 31, 2014
Issued: 46,880,500 shares at September 30, 2015; and 46,730,500 shares at December 31, 2014			46,881				46,730
Additional Paid in Capital			1,299,018				1,281,048
Retained earnings			(1,969,546	)			219,251
Total stockholders' equity			(623,647	)			1,547,029
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	9,059,358			$	10,481,547

 

 See accompanying Notes to Consolidated Financial Statements 

 

 

CES SYNERGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months ended								Nine Months ended
		September 30, 2015				September 30, 2014				September 30, 2015				September 30, 2014
Revenues		$	4,647,451			$	5,142,759			$	13,292,944			$	13,636,198
Cost of sales			4,287,086				4,164,660				11,400,234				10,678,535
Gross profit			360,365				978,099				1,892,710				2,957,663
General & administrative expenses			1,254,745				1,243,143				3,848,916				3,684,250
Net operating profit/(loss)			(894,380	)			(265,044	)			(1,956,206	)			(726,587	)
Other income/ (expenses), net			(75,047	)			(69,375	)			(232,591	)			(44,934	)
Income before income taxes			(969,427	)			(334,419	)			(2,188,797)				(771,521
Income taxes			-				(81,339	)			-				81,339
Net profit/(loss)		$	(969,427	)		$	(415,758	)		$	(2,188,797	)		$	(852,860	)
Earnings per share
Basic and diluted		$	(0.0207	)		$	(0.0089	)		$	(0.0467	)		$	(0.0183	)
Shares used in computing earnings per share
Basic and diluted			46,880,500				46,686,500				46,880,500				46,686,500
Cash distributions declared per common share		$	-			$	-			$	-			$	-

  

See accompanying Notes to Consolidated Financial Statements

 

 

CES SYNERGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Nine months ended
		September 30, 2015				September 30, 2014
Operating Activities
Net Loss		$	(2,188,797	)		$	(852,860	)
Adjustments to reconcile net loss to cash provided (used) by operating activities
Depreciation expense			380,824				415,005
Decrease (Increase) in:
Contracts receivable			2,569,395				(1,433,158	)
Other assets			924				27,818
Inventories			(17,913	)			41,991
Cost & estimated earnings in excess of billings on uncompleted contracts			(637,526	)			394,333
Increase (Decrease) in:
Accounts payable			16,729				600,132	)
Accrued liabilities			605,175				(103,564	)
Billings in excess of costs and estimated earnings			(315,769	)			449,679
Total Adjustments			2,601,839				392,236
Net cash provided (used) by operating activities		$	413,042			$	(460,624	)
Investing Activities:
Purchase of property and equipment			(416,562	)			(453,122	)
Proceeds from disposal of equipment			-				-
Net cash provided (used) by investing activities			(416,562	)			(453,122	)
Financing Activities:
New borrowings			1,101,562				5,485,066
Debt reduction			(659,209	)			(4,898,126	)
Capital contributed			18,120				282,150
Net cash provided (used) by financing activities			460,473				869,090
Net increase (decrease) in cash			456,953				(44,656	)
Cash at beginning of period			149,455				250,359
Cash at end of period		$	606,408			$	205,703
Supplemental Disclosures
Interest paid		$	224,484			$	189,682
Income taxes paid		$	-			$	81,339

 

See accompanying Notes to the Consolidated Financial Statements

 

 

CES SYNERGIES, INC. 

SEPTEMBER 30, 2015

(Unaudited)

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Company Background

 

CES Synergies, Inc. (unless otherwise indicated, together with its consolidated subsidiaries, the “Company”) is a Nevada corporation formed on April 26, 2010. The Company is the parent company of Cross Environmental Services, Inc. (“CES”) which was incorporated in 1988 in the state of Florida. The Company acquired CES in a reverse merger transaction that closed on November 1, 2013, and CES is deemed the accounting acquirer under accounting rules. The Company is an asbestos and lead abatement contracting firm specializing in the removal of asbestos and lead from buildings and other structures, and demolition of structures. The Company’s services include removal of asbestos and lead, construction, installation, and repair of ceilings and insulation systems and demolition. Most jobs are located within the state of Florida, but the Company accepts and performs jobs throughout the southeastern United States. 

 

Note 2 - Summary of Significant Accounting Policies

 

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements.

 

The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has adopted a year-end of December 31.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") 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.

 

Management further acknowledges that it is solely responsible for adopting sound accounting practices consistently applied, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. These include the accounts of Cross Environmental Services, Inc., and its wholly-owned subsidiaries, Cross Demolition, Inc., Cross Insulation, Inc., Cross Remediation, Inc., Cross FRP, Inc., Triple J Trucking, Inc., and Tenpoint Trucking, Inc. All significant intercompany account balances, transactions, profits and losses have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, 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.

 

 

Fair Value of Financial Instruments

 

For certain financial instruments, including accounts receivable, accounts payable, accrued expenses, interest payable, advances payable and notes payable, the carrying amounts approximate fair value due to their relatively short maturities.

 

The Company has adopted ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

	●	Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
	●	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	●	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company did not identify any non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC 815, “Derivatives and Hedging.”

 

In February 2007, the FASB issued ASC 825-10 “Financial Instruments.” ASC 825-10 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. ASC 825-10 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.

 

The carrying amounts of cash and current liabilities approximate fair value due to the short maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The Company does not hold or issue financial instruments for trading purposes, nor does it utilize derivative instruments in the management of foreign exchange, commodity price, or interest rate market risks.

 

Revenue and Cost Recognition

 

The Company follows ASC 605-35 "Revenue Recognition: Construction type contracts" and recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expenses as incurred. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income which are recognized in the period in which the revisions are determined.

 

The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed.

 

The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized.

 

Contract retentions are included in contracts receivable.

 

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, the Corporation considers cash and cash equivalents to be all highly liquid deposits with maturities of three months or less. Cash equivalents are carried at cost, which approximates market value.

 

Concentrations of Credit Risk

 

The company maintains cash balances at Centennial Bank located in Central Florida. The cash accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. At September 30, 2015 and 2014, the Company’s uninsured cash balances for those accounts were $356,407.

 

Special purpose entities

 

The Company does not have any off-balance sheet financing activities.

 

Contracts Receivable

 

Contracts receivable are recorded when invoices are issued and presented in the balance sheet net of the allowance for doubtful accounts. Contract receivables are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Company's historical average percentage of bad debts in relation to its revenue.

 

Inventory, Net

 

Inventories consist primarily of job materials and supplies and are priced at the lower of cost (first-in, first-out) or market.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements are capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized as operating expenses.

 

Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease, including renewal periods, if shorter. Estimated useful lives are as follows:

 

Equipment:

3-10 years

 

The Company reviews property, plant and equipment and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows. Measurement of the impairment loss, if any, is based on the difference between the carrying value and fair value.

 

Impairment of Long-Lived Assets and Amortizable Intangible Assets

 

The Company follows ASC 360-10, “Property, Plant, and Equipment,” which establishes a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. The date of our most recent goodwill impairment test was December 31, 2014 and, as of this date, all of our reporting units had a fair value that substantially exceeded their carrying value. Through September 30, 2015, the Company had not experienced impairment losses on its long-lived assets.

  

 

Intangible Assets - Goodwill

 

Cost of investment in purchased company assets (Simpson & Associates, Inc.) in excess of the underlying fair value of net assets at date of acquisition (March 2001) is recorded as goodwill on the balance sheet. The amount of $1,396,855 was acquired in 2001 and an additional $50,000 was reclassified as goodwill in 2002. Goodwill is not amortized, but instead is assessed for impairment at least annually and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. Measurement of the impairment loss, if any, is based on the difference between the carrying value and fair value of the reporting unit. The goodwill impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess. The date of our most recent goodwill impairment test was December 31, 2014 and, as of this date, all of our reporting units had a fair value that substantially exceeded their carrying value. There were no material impairments to the carrying value of long-lived assets and intangible assets subject to amortization during the quarters ended September 30, 2015 and 2014.

 

Business segments

 

ASC 280, “Segment Reporting” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has three operating segments as of September 30, 2015 and September 30, 2014.

 

Income Taxes

 

Tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that they relate to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. Deferred tax would be recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. No deferred tax is recognized since the difference in carrying amount is not significant.

 

Net Income (Loss) per Share

 

The Company computes net income (loss) per share in accordance with ASC 260-10, “Earnings Per Share.” The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per share gives effect to all dilutive potential common shares outstanding during the period using the “as if converted” basis. For the quarters ended September 30, 2015 and 2014 there were no potential dilutive securities.

 

Common Stock

 

There is currently only one class of common stock. Each share of common stock is entitled to one vote. The authorized number of shares of common stock of CES Synergies, Inc. at September 30, 2015 and 2014 was 250,000,000 shares with a nominal par value per share of $0.001. Authorized shares that have been issued and fully paid amounted to 46,880,500 at September 30, 2015 compared to 46,686,500 common shares at September 30, 2014.

 

 

Comprehensive Loss

 

Comprehensive loss represents net loss plus the change in equity of a business enterprise resulting from transactions and circumstances from non-owner sources. The Company’s comprehensive loss was equal to net loss for the periods ended September 30, 2015 and 2014.

 

Note 3 – Recent Accounting Pronouncements

 

Financial Accounting Standards Board (“FASB”) Update No. 2012-02, July 2012, Intangibles—Goodwill and Other (Topic 350): In accordance with the amendments in this update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30.

 

FASB Update No. 2012-06, October 2012, Business Combinations (Topic 805): When a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets).

 

FASB Update No. 2013-01, January 2013, Balance Sheet (Topic 210): The amendments in this update affect entities that have derivatives accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in FASB Update 2011-11.

 

Note 4 – Contracts Receivable

 

Contracts Receivable consist of at:

 

		September 30,
		2015				2014
Billed
Completed Contracts		$	1,743,177			$	2,032,204
Contracts in Progress			1,568,913				2,638,849
Retained			684,789				928,813
Allowance for Bad Debts			(201,000	)			(201,000	)
TOTAL		$	3,795,879			$	5,398,866

 

 

Note 5 – Property, Plant and Equipment

 

Property, plant and equipment and related accumulated depreciation consists of the following:

 

		September 30,
		2015				2014
Machinery and Equipment		$	4,137,045			$	3,769,084
Office furniture and Equipment			172,635				169,255
Transportation and Earth Moving Equipment			8,844,668				8,718,327
Leasehold Improvements			30,189				30,189
Property, Plant and Equipment Gross			13,184,537				12,686,855
Less: Accumulated Depreciation			(11,031,582	)			(10,487,920	)
Property, Plant and Equipment Net		$	2,152,955			$	2,198,935

 

Depreciation expense for the nine months ended September 30, 2015 and 2014 was $380,824 and $415,004 respectively.

 

Note 6 – Costs and Estimated Earnings on Contracts

 

For the nine months ended September 30, 2015:

 

		Revenues Earned				Cost of Revenues				Gross Profit (Loss)
Revenue on completed contracts		$	4,240,583			$	3,870,710			$	369,873
Revenue on uncompleted contracts			9,052,361				7,529,524				1,522,837
Total for nine months ended September 30, 2015		$	13,292,944			$	11,400,234			$	1,892,710

 

		As of September 30, 2015
Costs incurred on uncompleted contracts		$	7,529,524
Estimated earnings on uncompleted contracts			1,522,837
Revenues earned on uncompleted contracts			9,052,361
Billings to date			8,468,273
Total Net Amount		$	584,088
Amount shown as cost and estimated earnings in excess of billings on uncompleted contracts		$	866,963
Amount shown as billings in excess of costs and estimated earnings on uncompleted contracts			(282,875	)
Total Net Amount		$	584,088

 

For the nine months ended September 30, 2014:

 

		Revenues Earned				Cost of Revenues				Gross Profit (Loss)
Revenue on completed contracts		$	9,815,254			$	7,262,364			$	2,552,890
Revenue on uncompleted contracts			3,820,945				3,416,171				404,774
Total for nine months ended September 30, 2014		$	13,636,199			$	10,678,535			$	2,957,664

 

 

		As of September 30, 2014:
Costs incurred on uncompleted contracts		$	5,396,318
Estimated earnings on uncompleted contracts			1,224,964
Revenues earned on uncompleted contracts			6,621,282
Billings to date			7,174,358
Total Net Amount		$	(553,076	)
Amount shown as cost and estimated earnings in excess of billings on uncompleted contracts		$	415,215
Amount shown as billings in excess of costs and estimated earnings on uncompleted contracts			(968,291	)
Total Net Amount		$	(553,076	)

 

Note 7 – Long-Term Debt

 

Long-term debt consists of the following at September 30, 2015 and 2014:

 

		September 30, 2015				September 30, 2014
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in monthly payments of $4,632, interest rate of 4.25%.		$	242,515			$	-
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in quarterly payments of $1,908 commencing October 10, 2015, interest rate of 4.75%.			160,000				-
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in quarterly payments of $9,922 commencing January 10, 2016, interest rate of 4.75%.			175,000				-
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in quarterly payments of $9,881 commencing February 1, 2016, interest rate of 4.75%.			175,000				-
Line of credit, Centennial Bank, Dade City, FL variable interest of 1.25% over prime, current rate 3.25%, secured by land, improvements, and accounts receivable.  The line matures on May 28, 2016.			1,750,300				1,750,300
Installment loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston. Payable in monthly payments of $23,994, interest rate of 6.15%.			2,604,739				2,751,283
Various installment loans payable in monthly payments, interest rates ranging from 0% to 9.5%, secured by various equipment, vehicles, and property.			1,018,022				1,289,197
Total		$	6,125,576			$	5,790,780
Less: Current portion			(2,346,057	)			(2,416,856	)
Long-Term debt, less current portion		$	3,779,519			$	3,373,924

 

Note 8 – Commitments and Contingencies

 

Commitments

 

Principal payments on long-term debt are due as follows:

 

Year ending December 31,
2015		$	2,346,057
2016			562,242
2017			347,159
2018			303,009
2019+			2,565,109
		$	6,125,576

 

 

Contingencies

 

None.

 

Note 9 – Loss per Share

 

		For the nine months ended
		September 30, 2015				September 30, 2014
Net Loss		$	(2,188,797	)		$	(852,860	)
Weighted-average common shares outstanding
basic:			46,791,631				46,686,500
Weighted-average common stock
Equivalents			-				-
Stock Options			-				-
Warrants			-				-
Convertible Notes			-				-
Weighted-average common shares outstanding
Diluted			46,791,631				46,686,500
Loss per share outstanding
Basic and Diluted		$	(0.047	)		$	(0.018	)

 

Note 10 – Operating Lease Agreements

 

In the past, the Company rented certain equipment/office space under month to month operating lease agreements. Lease expenses incurred for the nine months ended September 30, 2015 and 2014 under such agreements were $138,474, and $207,143, respectively.

 

Note 11 – Related Party Transactions

  

For the purposes of these notes to consolidated financial statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

  

Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. Clyde A. Biston, the chairman of board of directors and former CEO of the Company, owns a majority of our shares, meaning he can exert significant influence over corporate decisions and strategy. Related party transactions for the period include the following:

 

Leased Facilities

 

The Company operates out of facilities owned by the majority shareholder of the Company. Between September 1995 and October 2013, the Company was allowed to use the facilities rent-free. As of November 1, 2013 the Company entered into a lease agreement with the shareholder for rental of the facilities. Rental expenses incurred for the nine months ended September 30, 2015 and 2014 under the lease agreement with the shareholder were $144,450 and 207,143, respectively.

 

 

Note 12 – 401K Salary Deferral Plan 

 

The Company has established a deferred benefit plan for office and managerial staff with one year or more of service. The plan allows employees to contribute through salary withholding. The Company may match the contribution up to 3% of the gross wages of the employee. Amounts contributed by the Company for the three months ended September 30, 2015 and 2014 are $0 and $0, respectively.

 

Note 13 – Income Tax Provisions

 

Management of the Company considers the likelihood of changes by tax authorities in its filed income tax returns and recognizes a liability for or discloses potential significant changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions in income tax returns filed that require recognition or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.

 

For financial reporting purposes, for the nine months ending September 30, 2015 and 2014, income before income taxes includes the following components:

 

		September 30, 2015				September 30, 2014
United States		$	(2,188,796	)		$	(852,860	)
Foreign			-				-
Total		$	(2,188,796	)		$	(852,860	)

 

The expense (benefit) for income taxes consist of: 

 

Current:		2015				2014
Federal		$	-			$	-
State		$	-			$	-
Foreign		$	-			$	-
Total		$	-			$	-
Deferred and other:
Federal		$	-			$	-
State		$	-			$	-
Foreign		$	-			$	-
		$	-			$	-
Total tax expense		$	-			$	-

  

Note 14 – Subsequent Events

 

On September 22, 2015, the Company filed a preliminary information statement announcing that on September 1, 2015, the board of directors of the Company approved, subject to stockholder approval, (1) an increase in the Company’s authorized capital stock from 250 million shares to 260 million shares; (2) the creation another class of securities called “Preferred Stock”; and (3) the issuance of up to 10 million shares of “Preferred Stock” with such rights, preferences and limitations as may be set from time to time by resolution of the Board. The Majority Stockholder (as defined in the preliminary information statement) approved the action by written consent in lieu of a meeting on September 1, 2015, in accordance with the Nevada Revised Statutes. The Company plans on filing and mailing a definitive information statement in November 2015. The actions of the Board and the Majority Stockholder will become effective at least 20 days after the mailing of definitive information statement at which point the Company will file an amendment to the Company’s Articles of Incorporation to amend and restate Article IV in its entirety.

 

 

On October 8, 2015, James Everett resigned as the Chief Operating Officer and Secretary of the Company. Mr. Everett did not resign as the result of any disagreement with the Company on any matter relating to its operation, policies (including accounting or financial policies), or practices.

 

On November 2, 2015, CES entered into a promissory note (the “Note”) with Clyde A. Biston, the Company’s President and the Chairman of the Company’s board of directors. Pursuant to the Note, Mr. Biston provided CES with a loan in the amount of $175,000. Interest on the loan accrues at a rate of 4.75% per annum, and, starting on February 1, 2016, CES is obligated to make quarterly principal and interest payments to Mr. Biston in the amount of $9,881.76. The final payment in the amount of $9,881.76 will be due on November 1, 2020.

 

The foregoing description of the Note is not complete and is qualified in its entirety by reference to the full text of the Note which is filed herewith as Exhibit 10.1 and incorporated herein by reference.

 

The Company has performed an evaluation of subsequent events through November 13, 2015, the date the accompanying financial statements were issued, and did not identify any material subsequent transactions that require disclosure other than noted above. 

 

Note 15 - Segment Information

 

The accounting standards for reporting information about operating segments define operating segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company is organized by line of business. While the Chief Executive Officer evaluates results in a number of different ways, the line of business management structure is the primary basis for which the allocation of resources and financial results are assessed. Under the aforementioned criteria, the Company operates in three operating and reporting segments: remediation, demolition and insulation.

 

Cross Remediation is one segment of the Company that derives its income from mold remediation and abatement services for a broad range of environments. Cross Demolition offers full scale commercial demolition and wrecking down to interior and selective demolition and strip down services. Our third segment, Cross Insulation, derives its revenue from re-insulation and insulation of new and remodeling projects.

 

The information provided below is obtained from internal information that is provided to the Company’s chief operating decision maker for the purpose of corporate management. The Company uses net operating loss to measure segment performance as recorded below:

 

		For the nine months ended
		September 30, 2015				September 30, 2014
Remediation Segment
Revenue		$	6,471,056			$	5,927,425
Cost of Revenues			6,571,949				4,503,718
Gross Profit			(100,893	)			1,423,707
General & Administrative Expense			1,197,379				1,031,201
Allocated CES Admin. Expenses			910,041				850,493
Other Expense			4,513				3,300
Net Loss from Segment		$	(2,212,826	)			(461,287	)

 

 

		For the nine months ended
		September 30, 2015				September 30, 2014
Demolition Segment
Revenue		$	6,495,963			$	7,322,606
Cost of Revenues			4,813,207				6,000,761
Gross Profit			1,682,756				1,321,845
General & Administrative Expense			678,117				604,857
Allocated CES Admin. Expenses			886,329				1,024,927
Other Expense			27,728				28,078
Net Loss from Segment		$	90,582			$	(335,747	)

 

		For the nine months ended
		September 30, 2015				September 30, 2014
Insulation Segment
Revenue		$	325,924			$	441,127
Cost of Revenues			269,622				366,629
Gross Profit			56,302				74,498
General & Administrative Expense			69,119				67,697
Allocated CES Admin. Expenses			53,606				63,663
Other Expense			130				1,035
Net Loss from Segment		$	(66,553	)		$	(55,827	)

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward-Looking Statements and Associated Risks

 

This section and other parts of this Form 10-Q contain forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements also can be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 25, 2015 (the “2014 Form 10-K”) under the heading “Risk Factors”.

 

The following discussion should be read in conjunction with the 2014 Form 10-K and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references in this Form 10-Q to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months, or periods of those fiscal years. Each of the terms the “Company”, “we”, “us” or “our” as used herein refers collectively to CES Synergies, Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Overview and Highlights

 

Since its formation in 1988, Cross Environmental Services, Inc. (“CES”), a wholly-owned subsidiary of the Company, has been providing asbestos abatement, demolition, and mold remediation services to city, state, and federal agencies. Our customers include general contractors, developers, project owners, and industrial and commercial clients. Much of our work has been founded on the removal of hazardous materials from structures ranging from residences to commercial and industrial applications, including secure defense contractor facilities, colleges, hospitals, and mid-rise and high-rise buildings and residential structures. Additionally, our experience working on federal projects, such as the Department of Interior, Bureau of Land Management Promiscuous Dump Clean Up, U.S. Fish and Wildlife Service Midway Atoll Asbestos and Lead Paint Cleanup, and Department of Defense Military Housing Privatization Initiative, gives us the expertise to provide the submittals and mandated government compliance documents for any size federal project.

 

CES removes regulated and hazardous materials from industrial, commercial and residential spaces. Specifically, we have developed a niche market for our services that was facilitated by the Environmental Protection Agency’s National Emission Standards for Hazardous Air Pollutants, or NESHAP, regulations. Under these regulations, if a building or structure is altered, modified or renovated in any way, an environmental survey of the building must be completed and regulated hazardous materials (asbestos) must be removed prior to the alteration or renovation. We provide such services to our clients.

 

We also provide services related to the asbestos removal process including interior demolition, lead-based paint removal, mold abatement, and full-scale structural demolition. We are also adept at materials handling and we have participated in emergency response activities for multiple hurricanes, including Katrina, Rita, Gene, Francis, Ivan, and many others. We have been able to develop niche markets by maintaining a high level of technical competence coupled with prudent management and an energetic staff. We are willing to go to remote or extreme places to complete projects. Examples of locations at which we perform this type of work include Midway Atoll, Curacao, Guatemala, and remote Bahamian Islands. We also developed niches providing services in connection with various set-asides under federal law, including Service Connected Disabled Veteran Owned Small Business, Economically Disadvantaged Woman Owned Business, HUBZone, Veteran Owned, and Total Small Business. We have strategic alliances relating to all of such set-asides and have utilized these alliances to generate projects.

 

 

We report results under ASC 280, Segment Reporting, for three segments: remediation, demolition and insulation. The Remediation segment derives its income from mold remediation and abatement services for a broad range of environments. The Demolition segment offers full scale commercial demolition and wrecking down to interior and selective demolition and strip down services. The Insulation segment derives its revenue from re-insulation and insulation of new and remodeling projects. After careful analysis of our operations following the business slowdown in 2011, management made the decision to scale down the less profitable demolition division and refocus efforts on more profitable businesses in asbestos, mold, and lead remediation, and interior demolition. We will continue to provide demolition services where they are a natural spinoff of our other work. The decision created an excess of machinery and heavy equipment that was not being used, which we sold in 2012.

 

Service Contracts

 

We offer services in the environmental contracting arena. Our core business includes hazardous material removal (lead and asbestos), interior demolition, full scale demolition, and mold remediation. Historically, our customers have come to us either through a low bid environment or through direct negotiations.

 

We believe set-aside government contracting is an additional growth opportunity for us. We have participated in this sector of the federal market by teaming with firms that have the various set-aside designations. Additionally, we created our own Service Connected Disabled Veteran Owned Small Business in an effort to capture a portion of the federal market that had been previously off-limits to CES. Success to date with this firm has been limited to two current contracts.

 

Effects of Seasonality and Economic Uncertainty

 

We may be subject to seasonal fluctuations and construction cycles at educational institutions, where large projects are typically carried out during summer months when their facilities are unoccupied. Government customers, many of which have fiscal years that do not coincide with ours, typically follow annual procurement cycles and appropriate funds on a fiscal-year basis even though contract performance may take more than one year. Further, government contracting cycles can be affected by the timing of, and delays in, the legislative process related to government programs and incentives that help drive demand for energy efficiency and renewable energy projects. As a result, our revenue and operating income in the third quarter are typically higher, and our revenue and operating income in the first quarter are typically lower, than in other quarters of the year. As a result of such fluctuations, we may occasionally experience declines in revenue or earnings as compared to the immediately preceding quarter, and comparisons of our operating results on a period-to-period basis may not be meaningful.

 

To manage uncertainties created by business seasonality, we have implemented business processes to give us flexibility to manage overhead and job costs. Those processes allow us to determine when it is most cost effective to use Company-owned assets or to contract out aspects of a project. For example, when the Company was awarded a sizeable post-Hurricane Katrina demolition contract in Louisiana, the processes led it to develop relationships with local subcontractors under Company management and supervision to perform the demolition work rather than moving Company heavy equipment and personnel to Louisiana, thereby preserving margins on the contract.

 

During the recession that started in 2008, the number of projects available to the Company in Florida fell. To allow the Company to maintain cash reserves necessary to execute the Louisiana contract, management agreed to a 10% reduction in salaries, and did so for a full year, until finances righted themselves in late 2009. No field supervisors or workers were laid off during this period. CES retained its skilled workforce, allowing the contracts in Louisiana to return a 41% gross profit.

 

 

Backlog and Awarded Projects

 

Our sales cycle begins with the initial contact with the customer and ends, when successful, with a signed contract, also referred to as fully-contracted backlog. Historically, our sales cycle typically has averaged 30 days. Awarded backlog is created when a potential customer awards a project to us following a request for proposal. Once a project is awarded but not yet contracted, we typically conduct a detailed review to determine the scope of the project. At this point, we also determine the sub-contractor, and what equipment will be used. Historically, awarded projects typically have taken 45 days to result in a signed contract and thus convert to fully-contracted backlog. This process may take longer, however, depending upon the size and complexity of the project. Further, at times in the past we have experienced periods during which the portion of the sales cycle for converting awarded project to signed contracts has lengthened. Recently, we have been experiencing an unusually sustained lengthening of conversion times. Continued U.S. federal fiscal uncertainty not only has contributed to a lengthening of our sales cycle for U.S. federal projects, but also has adversely affected both municipal and commercial customers across most geographic regions. We have observed among our existing and prospective customer base increased scrutiny of decisions about spending and about incurring debt to finance projects. For example, we have observed increased use of outside consultants and advisors, as well as adoption of additional approval steps, by many of our customers, which has resulted in a lengthening of the sales cycle. We expect this trend to continue for the balance of 2015. After the customer agrees to the terms of the contract and the contract is executed, the project moves to fully-contracted backlog. The contracts reflected in our fully-contracted backlog typically have a construction period of 30-45 days and we typically expect to recognize revenue for such contracts over the same period. Fully-contracted backlog begins converting into revenue generated from backlog on a percentage-of-completion basis once construction has commenced.

 

Financial Operations Overview

 

Revenue

 

We derive revenue from the provision of asbestos abatement, demolition, and mold remediation services to city, state, and federal agencies. We also sell services to general contractors, developers, project owners, and industrial and commercial clients. Much of our work has been founded on the removal of hazardous materials from structures ranging from residences to commercial and industrial applications.

 

While in any particular quarter a single customer may account for more than ten percent of revenue, for the quarter ended September 30, 2015, the Renu Asset Recovery, the general contractor for the DTE Energy power plant project in Michigan, and the Florida Department of Transportation (“FDOT”), accounted for 10% and 14% of our total revenue, respectively.

 

For the quarter ended September 30, 2014, Renu Asset Recovery, the general contractor for the DTE Energy power plant project in Michigan, and Barton Malow Co., the general contractor for the Daytona Grandstand project in Daytona Beach, Florida, each accounted for 14% of revenues.

 

Direct Expenses and Gross Margin

 

Direct expenses include the cost of labor, materials, equipment, subcontracting and outside engineering that are required for the execution our contracts, as well as preconstruction costs, sales incentives, associated travel, inventory obsolescence charges, and amortization of intangible assets related to customer contracts. A majority of our contracts have fixed price terms; however, in some cases we negotiate protections, such as a cost-plus structure, to mitigate the risk of rising prices for materials, services and equipment.

 

Gross margin, which is gross profit as a percent of revenue, is affected by a number of factors, including the type of services performed and the geographic region in which the sale is made. Geographic location impacts the cost of disposal, lodging, and fuel. We sometimes find ourselves bidding against local contractors. In these instances, we may be willing to accept a lower profit margin in order to establish ourselves with a new client, or in a new geographic location.

 

Changing fuel costs affect us in several ways. Fuel in our trucks and equipment has an immediate cost impact. Increases in petroleum prices increase the costs for remediation because petroleum products are used to make all poly, bags, etc. that we use for contaminated materials containment.

 

In addition, gross margin frequently varies across the period of a project. Our expected gross margin on, and expected revenue for, a project are based on budgeted costs. From time to time, a portion of the contingencies reflected in budgeted costs are not incurred due to strong execution performance. In that case, and generally at project completion, we recognize revenue for which there is no further corresponding direct expense. As a result, gross margin tends to be back-loaded for projects with strong execution performance; this explains the gross margin improvement that occurs from time to time at project closeout. We refer to this gross margin improvement at the time of project completion as a project closeout.

 

 

Operating Expenses

 

Operating expenses consist of salaries and benefits, project development costs, and general, administrative and other expenses.

 

Salaries and benefits. Salaries and benefits consist primarily of expenses for personnel not directly engaged in specific revenue generating activity. These expenses include the time of executive management, legal, finance, accounting, human resources, information technology and other staff not utilized in a particular project. We employ a comprehensive time card system which creates a contemporaneous record of the actual time by employees on project activity.

 

Project development costs. Project development costs consist primarily of sales, engineering, legal, finance and third-party expenses directly related to the development of a specific customer opportunity. This also includes associated travel and marketing expenses.

 

General, administrative and other expenses. These expenses consist primarily of rents and occupancy, professional services, insurance, unallocated travel expenses, telecommunications, and office expenses. Professional services consist principally of recruiting costs, external legal, audit, tax and other consulting services.

 

Other expenses, net. Other expenses, net consists primarily of interest income on cash balances, interest expense on borrowings, and gains and losses on the disposal of surplus assets. Interest expense will vary periodically depending on prevailing short-term interest rates.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The Company’s senior management has reviewed these critical accounting policies and related disclosures with the Company’s board of directors. The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Our preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates and such differences may be material.

 

Cash and Cash Equivalents

 

We consider all highly liquid debt instruments and other short-term investments with maturity of three months or less to be cash equivalents.

 

 

Contracts Receivable

 

Contracts receivable are stated at the amounts management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade contracts receivable. Management has determined that an allowance of $201,000 for doubtful accounts at September 30, 2015 and December 31, 2014 was required.

 

Contracts receivable will generally be due within 30 to 45 days and collateral is not required.

 

Cost and Estimated Earnings in Excess of Billings on Uncompleted Contracts

 

The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed.

 

The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized.

 

Recoverability of Long-Lived Assets

 

We review the recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on our ability to recover the carrying value of our long-lived assets from expected future cash flows from our operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale are carried at the lower of the then-current carrying value or fair value less estimated costs to sell.

 

Fair Value of Financial Instruments

 

The carrying amount reported in the balance sheets for cash and cash equivalents, contracts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. We do not utilize derivative instruments.

 

Revenue and Cost Recognition

 

The Company recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expenses as incurred.

 

Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined.

 

The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed.

 

The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized.

 

Contract retentions are included in contract receivables.

 

 

Net Loss Per Share of Common Stock

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per share gives effect to all dilutive potential common shares outstanding during the period using the “as if converted” basis.

 

Uncertainty in Income Taxes

 

Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.

 

We follow ASC 740-10, Accounting for Uncertainty in Income Taxes (“ASC 740-10”). This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 and evaluates our tax positions on an annual basis.

 

Prior to November 1, 2013, CES had elected by unanimous consent of its shareholders to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions, CES did not pay federal or state corporate income taxes on its taxable income. Instead, the shareholders of CES were liable for individual federal income taxes on their respective shares of CES’s taxable income. Since the closing of the merger between CES, the Company, and a subsidiary of the Company on November 1, 2013, the Company is responsible for paying corporate income tax.

 

Advertising (in thousands, except percentages)

 

Advertising costs are expensed when incurred. Advertising costs for the nine months ended September 30, 2015 and September 30, 2014 were $16 and $5, respectively. Historically, the Company has not relied on advertising and marketing to generate business. In the third quarter of 2015, however, the Company did increase advertising to support its marketing activities. We hired a marketing/sales manager in 2014 to expand our marketing activities.

 

Results of Operations (in thousands, except percentages)

 

Quarter Ended September 30, 2015 Compared to Quarter Ended September 30, 2014

 

Net sales fell 10%, or $493, during the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014. Revenues in the Demolition segment increased by $1,055 or 56%, during the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014. Revenues in the Remediation segment decreased by $1,521, or 49%, during the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014. The Insulation segment experienced a $27 decrease in revenue, or 19%, during the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014.

 

The increase in Demolition segment revenues was primarily attributable to five large contracts in progress at NAS Jacksonville, FSU, Eglin AFB, and FDOT Orange County. At September 30, 2015, five Demolition segment contracts valued in excess of $4,265 were in progress. Remediation segment sales decreased in the third quarter of 2015, primarily because of the near completion of remediation contracts in Florida and with the DTE Power Plant in Michigan. However, the Company commenced work on some other large scale Remediation projects in the third quarter of 2015 valued in excess of $1,739 in the aggregate in Florida, Georgia and Louisiana, which we believe will offset some of the drop off in Remediation revenues. The decline in Insulation segment revenue was due primarily to lower maintenance spending by a large supermarket chain in the southeastern United States.

 

Management continues to believe that the Company will grow revenues by expanding into new geographic areas in the southern and eastern U.S. in 2015. During the quarter ended September 30, 2015, the new sales staff that was hired early in 2014 in Florida and Louisiana continued to bring in new business in these regions. In the quarter ended September 30, 2015, approximately $152 of revenues were derived from contracts in Louisiana, $4,259 from contracts in Florida and $236 from contracts in Georgia (compared to $463, $4,678 and $0 respectively in the quarter ended September 30, 2014).

 

 

Sales Data

 

The following table shows net sales by operating segment and net sales by service during the quarters ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net Sales by Operating Segment:
Remediation		$	1,604				(49	)%		$	3,125
Demolition			2,928				56	%			1,873
Insulation			115				(19	)%			143
Total net sales		$	4,647				(10	)%		$	5,141

 

Segment Operating Performance (in thousands, except percentages)

 

The Company manages its business on a functional basis. Accordingly, the Company has determined its reportable operating segments, which are generally based on the types of services it provides, to be Remediation, Demolition and Insulation. Remediation derives its income from mold remediation and abatement services for a broad range of environments. Demolition offers full scale commercial demolition and wrecking. Insulation derives its revenue from re-insulation and insulation of new and remodeling projects.

 

Further information regarding the Company’s operating segments may be found in Note 15, “Segment Information.”

 

Remediation

 

Remediation segment services are comprised of asbestos abatement, lead removal, mold remediation, indoor air quality/duct cleaning, removal of contaminated soil, animal waste removal, manual selective and complete interior demolition including removal of floor covering, and adhesive removal. These services are primarily performed for commercial, retail, governmental, industrial, and military customers, as well as public and private schools.

 

The following table presents Remediation segment net sales information for the quarters ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net sales		$	1,604			$	(1,521	)		$	3,125
Percentage of total net sales			35	%			(26	)%			61	%

 

The decrease in the Remediation segment net sales during the quarter ended September 30, 2015 was caused by typical business fluctuations. Remediation is usually the first activity performed in a contract and therefore the first part to be completed. In larger projects it is not unusual to perform work in stages over the course of several months. The total number of Remediation segment jobs in progress at September 30, 2015 was 38 (valued at $8,646), compared to 33 (valued at $7,792) on the same date in 2014. The Company has no control over the amount of work available to bid from year to year. It is the nature of the Remediation business to experience broad fluctuations in results of operations.

 

 

Demolition

 

Demolition segment services are comprised of partial, phased and complete demolition of commercial, retail, private, governmental, industrial, and military sites, as well as public and private schools. Demolition activities include building separations, concrete breaking and saw-cutting, using the Company’s own man-lifts, bobcats, roll-off containers and roll-off trucks for hauling and disposal of construction debris. The Company also provides full-scale commercial demolition and wrecking, as well as underground and above ground storage tank removal, and full-scale site clearing including underground pipe removal and installation.

 

Hurricanes and natural disasters are the biggest factor in the creation of large scale demolition opportunities for the Company. As a result, the source of projects for the Demolition segment is unpredictable and can cause its results of operations to fluctuate broadly and seasonally. Demolition contracts range widely in price from $30 to $20,000. Demolition contracts last anywhere from two weeks (to demolish a one-story masonry commercial building such as a home improvement store) to two years or more to demolish concrete slabs left by a hurricane such as Katrina.

 

The following table presents Demolition segment net sales information for the quarters ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net sales		$	2,928			$	1,054			$	1,873
Percentage of total net sales			63	%			27	%			36	%

 

The increase in net sales for the Demolition segment during the quarter ended September 30, 2015 was caused primarily by the increased number of demolition contracts put out for bids in 2015 compared to 2014. The Company saw more demolition opportunities than renovation projects year over year. During the third quarter of 2015, the Company won 38 contracts in Florida valued at $1,384 that are expected to commence in the fourth quarter of 2015. Three of these contracts are worth $700. At the end of the third quarter of 2015, the Company had total Demolition segment contracts valued at $5,964 in backlog, including the 38 contracts in Florida.

 

Insulation

 

Our Insulation segment derives its revenue from re-insulation and insulation of new and remodeling projects. The segment typically does not typically experience large changes in revenues year over year. The amount of sales is typically driven by the amount of remodeling or maintenance work required by a large supermarket chain, with which the Company has an ongoing service contract.

 

The following table presents Insulation segment net sales information for the quarters ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net sales		$	115			$	(28	)		$	143
Percentage of total net sales			2	%			(1	)%			3	%

 

The decrease in the Insulation segment net sales between the quarters ended September 30, 2015 and 2014 was caused primarily by a reduction in work provided to the aforementioned supermarket chain.

 

Gross Margin

 

Gross margin for the quarters ended September 30, 2015 and 2014 are as follows (in thousands, except gross margin percentages). Differences between net sales and cost of sales in the table below, on one hand, and the Company’s Consolidated Statements of Operations, on the other, are caused by an adjustment to sales and billing that takes place within consolidated reports rather than within the applicable segments.

 

		2015				2014
Net sales		$	4,647			$	5,143
Cost of sales			4,287				4,165
Gross margin			360				978
Gross margin percentage			8	%			19	%

 

 

The increase in year-over-year cost of sales was caused primarily by a $305 increase in the cost of labor used to perform contracts in the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014. The increase in the cost of labor was caused by using more labor service workers rather than direct Company employees. This increase was offset by reductions materials ($6) and other costs ($176). The decline in gross margin percentage in the quarter ended September 30, 2015 by 11 percentage points over the quarter ended September 30, 2014 reflects the increase in labor costs

 

The Company anticipates that gross margin for the full-year 2015 will be between 15% and 18%. In general, gross margins and margins on services will remain under pressure due to a variety of factors, including continued industry-wide pricing pressures and increased competition. In response to competitive pressures, the Company may have to take service pricing actions, which could adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage costs effectively and to stimulate demand for certain of its products. To counteract the pressure on margins, the Company is working to improve its budget management processes for contracts, in particular to improve its ability to track and charge for change orders as they occur. The Company may also decline to bid on contracts where gross margins fall below acceptable levels.

 

Operating Expenses

 

Operating expenses for the quarters ended September 30, 2015 and 2014 are as follows (in thousands, except for percentages):

 

		2015				Change				2014
General and administrative		$	1,255			$	12			$	1,243
Percentage of total net sales			27	%			3	%			24	%

 

General and Administrative (“G&A”) Expense

 

The growth in G&A expense during the quarter ended September 30, 2015 was caused by a number of factors, including higher group health insurance costs, which rose due to a 53% higher employee participation ($64); increases in compensation costs (increased by $18); bank service charges, which rose by $19 or 204% due to higher loan closing costs; and increased advertising costs (up $8, reflecting increased advertising to win new business and the cost of press releases). These increases were offset by lower shop labor costs, which decreased by $23 or 19%, due to the outsourcing of major repair work rather than performing it in-house; lower rent expense due to a decrease in rent for the Crystal Springs office charged by our chairman and President, Clyde A. Biston; reduced costs for business licenses and permits (down by $11 or 25%), and reduced indirect administrative costs (a decrease of $25 or 28%, due to a decrease in insurance premiums unrelated to group health).

 

Compensation costs increased as a result of the hire of new sales staff, recruited in anticipation of expansion of sales efforts into new states (increased by $40) and an increase in office salaries ($8), offset by reductions in field labor ($12), officers’ salaries ($12) and training salaries ($6). The total number of employees at September 30, 2015 was 155 compared to 190 at September 30, 2014.

 

Rent expenses decreased year over year by $11 or 25% due to a decrease in rent for the Crystal Springs office charged by our chairman and President, Clyde A. Biston.

 

Other Expense

 

Other expense for the quarters ended September 30, 2015 and 2014 are as follows (in thousands, except percentages):

 

		2015				Change				2014
Other income/ (expense)		$	1			$	(2	)		$	3
Interest income/ (expense)			(76	)			4				(72	)
Total other income/ (expense), net			(75	)			(6	)			(69	)

 

The year-over-year increase in other expense during the quarter ended September 30, 2015 was due primarily to higher interest costs resulting from the restructuring of the Company’s bank line of credit.

 

 

Provision for Income Taxes

 

Prior to November 1, 2013, CES elected to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions, during and prior to 2013, CES did not pay federal or state corporate income taxes on its taxable income. Instead, its shareholders were liable for individual federal income taxes on their respective shares of CES’s taxable income. Therefore, no provision or liability for federal income taxes was included in our 2013 financial statements.

 

Provision for income taxes and effective tax rates for the quarters ended September 30, 2015 and 2014 was as follows (dollars in thousands):

 

		2015				2014
Provision for income taxes		$	-			$	-
Effective tax rate			0	%			0	%

 

The Company’s effective tax rate for the quarter ended September 30, 2015 was nil because of the loss in the quarter, together with the losses carried forward from prior periods.

 

Net losses are due primarily to the increases in our sales staff and purchases of more sophisticated IT equipment and software without the benefit of any investment funds. To further impact the loss in 2015, sales actually decreased during the first quarter of 2015.

 

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014 (in thousands, except percentages)

 

Net sales decreased 2%, or $343, during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. Revenues in the Demolition segment decreased by $826, or 11%, during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. Revenues in the Remediation segment increased by $544, or 9%, during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The Insulation segment experienced a $115 decrease in revenue, or 26%, during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

 

The decrease in Demolition segment revenues was primarily attributable to the near completion of the larger St Bernard Parish projects in Louisiana, and the completion of two major contracts in Florida. At September 30, 2015, 39 Demolition segment contracts valued in excess of $5,963 were in progress. Remediation segment sales increased in the first nine months of 2015, primarily because of the continuation of remediation contracts in Florida and with the DTE Power Plant in Michigan, and the commencement of other large scale projects valued in excess of $8,646 in the aggregate in Florida, Georgia and Louisiana. The decline in Insulation segment revenue was due primarily to lower maintenance spending by a large supermarket chain in the southeastern United States.

 

Management continues to believe that the Company will grow revenues by expanding into new geographic areas in the southern and eastern U.S. in 2015. During the nine months ended September 30, 2015, the new sales staff that was hired early in 2014 in Florida and Louisiana continued to bring in new business in these regions. In the nine months ended September 30, 2015, approximately $558 of revenues were derived from contracts in Louisiana, $12,562 from contracts in Florida and $173 from contracts in Georgia (compared to $1,091, $12,538 and $7 respectively in the nine months ended September 30, 2014).

 

 

Sales Data

 

The following table shows net sales by operating segment and net sales by service during the nine months ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net Sales by Operating Segment:
Remediation		$	6,471				9	%		$	5,927
Demolition			6,496				(11	)%			7,323
Insulation			326				(26	)%			441
Total net sales		$	13,293				(2	)%		$	13,691

 

Segment Operating Performance (in thousands, except percentages)

 

The Company manages its business on a functional basis. Accordingly, the Company has determined its reportable operating segments, which are generally based on the types of services it provides, to be Remediation, Demolition and Insulation. Remediation derives its income from mold remediation and abatement services for a broad range of environments. Demolition offers full scale commercial demolition and wrecking. Insulation derives its revenue from re-insulation and insulation of new and remodeling projects.

 

Further information regarding the Company’s operating segments may be found in Note 15, “Segment Information.”

 

Remediation

 

Remediation segment services are comprised of asbestos abatement, lead removal, mold remediation, indoor air quality/duct cleaning, removal of contaminated soil, animal waste removal, manual selective and complete interior demolition including removal of floor covering, and adhesive removal. These services are primarily performed for commercial, retail, governmental, industrial, and military customers, as well as public and private schools.

 

The following table presents Remediation segment net sales information for the nine months ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net sales		$	6,471			$	544			$	5,927
Percentage of total net sales			49	%			6	%			43	%

 

The increase in the Remediation segment net sales during the nine months ended September 30, 2015 was caused by typical business fluctuations. Remediation is usually the first activity performed in a contract and therefore the first part to be completed. In larger projects it is not unusual to perform work in stages over the course of several months. The Company has no control over the amount of work available to bid from year to year. It is the nature of the Remediation business to experience broad fluctuations in results of operations.

 

Demolition

 

Demolition segment services are comprised of partial, phased and complete demolition of commercial, retail, private, governmental, industrial, and military sites, as well as public and private schools. Demolition activities include building separations, concrete breaking and saw-cutting, using the Company’s own man-lifts, bobcats, roll-off containers and roll-off trucks for hauling and disposal of construction debris. The Company also provides full-scale commercial demolition and wrecking, as well as underground and above ground storage tank removal, and full-scale site clearing including underground pipe removal and installation.

 

Hurricanes and natural disasters are the biggest factor in the creation of large scale demolition opportunities for the Company. As a result, the source of projects for the Demolition segment is unpredictable and can cause its results of operations to fluctuate broadly and seasonally. Demolition contracts range widely in price from $30 to $20,000. Demolition contracts last anywhere from two weeks (to demolish a one-story masonry commercial building such as a home improvement store) to two years or more to demolish concrete slabs left by a hurricane such as Katrina.

 

 

The following table presents Demolition segment net sales information for the nine months ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net sales		$	6,496			$	(827	)		$	7,323
Percentage of total net sales			49	%			(5	)%			54	%

 

The decrease in net sales for the Demolition segment during the nine months ended September 30, 2015 was caused primarily by the lower number of demolition contracts put out for bids in 2015 compared to 2014. The Company saw more renovation opportunities than demolition projects year over year. During the third quarter of 2015, however, the Company did win 56 contracts in Florida valued at $2,236 that commenced in the third quarter of 2015. Two of these contracts are worth $1,324. At the end of the third quarter of 2015, the Company had total Demolition segment contracts valued at $5,964 in backlog, including the 38 contracts in Florida.

 

Insulation

 

Our Insulation segment derives its revenue from re-insulation and insulation of new and remodeling projects. The segment typically does not typically experience large changes in revenues year over year. The amount of sales is typically driven by the amount of remodeling or maintenance work required by a large supermarket chain, with which the Company has an ongoing service contract.

 

The following table presents Insulation segment net sales information for the nine months ended September 30, 2015 and 2014 (in thousands, except percentages):

 

		2015				Change				2014
Net sales		$	326			$	(115	)		$	441
Percentage of total net sales			2	%			(1	)%			3	%

 

The decrease in the Insulation segment net sales between the nine months ended September 30, 2015 and 2014 was caused primarily by a reduction in work provided to the aforementioned supermarket chain.

 

Gross Margin

 

Gross margin for the nine months ended September 30, 2015 and 2014 are as follows (in thousands, except gross margin percentages). Differences between net sales and cost of sales in the table below, on one hand, and the Company’s Consolidated Statements of Operations, on the other, are caused by an adjustment to sales and billing that takes place within consolidated reports rather than within the applicable segments.

 

		2015				2014
Net sales		$	13,293			$	13,636
Cost of sales			11,400				10,678
Gross margin			1,893				2,958
Gross margin percentage			14	%			22	%

 

The increase in year-over-year cost of sales was caused by increased use of materials, increased job site and other indirect costs, and increases in dump fees. The decline in gross margin percentage in the nine months ended September 30, 2015 by eight percentage points over the nine months ended September 30, 2014 was the result mainly of higher materials and labor costs in our contracts.

 

 

Operating Expenses

 

Operating expenses for the nine months ended September 30, 2015 and 2014 are as follows (in thousands, except percentages):

 

		2015				Change				2014
General and administrative		$	3,849			$	165			$	3,684
Percentage of total net sales			29	%			2	%			27	%

 

General and Administrative (“G&A”) Expense

 

The growth in G&A expense during the nine months ended September 30, 2015 was caused by a number of factors, including increases in compensation costs (increased by $141), due mainly to a $147 increase in salaries paid to sales employees, reflecting the hiring of new sales employees at the end of 2014; higher group health insurance costs, which rose due by 36% or $117 due to higher employee participation; a $61 increase in bank charges reflecting the costs incurred to extend bank debt; advertising costs, which increased by $13 or 181%, reflecting an increase in advertising to win new business; business taxes, which rose by $11 or 465%; bank service charges, which rose by $6 or 7% due to higher loan closing costs; and higher education/training costs, which were up by $13 or 28% due to the large amount of work on military bases, which requires badges, background checks, and specific health and worker certifications that are charged to education. These increases were offset by lower professional fees, which decreased by $66 or 38%, due to reduced expenses associated with being a publicly traded company; lower business license costs, down by $25 or 30%; a reduction in shop labor of $24 or 7%, due to the outsourcing of major repair work rather than performing it in-house; and a reduction in salaries paid to officers ($12 or 4%), due to the resignation of an officer.

 

Other Income/Expense

 

Other income/ (expense) for the nine months ended September 30, 2015 and 2014 are as follows (in thousands, except percentages):

 

		2015				Change				2014
Other income/ (expense)		$	(8	)		$	(153	)		$	145
Interest income/ (expense)			(225	)			(35	)			(190	)
Total other income/ (expense), net			(233	)			(188	)			(45	)

 

The year-over-year decrease in other income during the nine months ended September 30, 2015 was due primarily to a state-mandated insurance refund that was made in 2014. There was no refund in the corresponding period in 2015.

 

The year-over-year increase in interest expense during the nine months ended September 30, 2015 was due primarily to higher interest costs resulting from the higher levels of debt and the restructuring of the Company’s bank line of credit in 2015.

 

Provision for Income Taxes

 

Prior to November 1, 2013, CES elected to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions, during and prior to 2013, CES did not pay federal or state corporate income taxes on its taxable income. Instead, its shareholders were liable for individual federal income taxes on their respective shares of CES’s taxable income. Therefore, no provision or liability for federal income taxes was included in our 2013 financial statements.

 

Provision for income taxes and effective tax rates for the nine months ended September 30, 2015 and 2014 was as follows (dollars in thousands):

 

		2015				2014
Provision for income taxes		$	-			$	-
Effective tax rate			0	%			0	%

 

The Company’s effective tax rate for the nine months ended September 30, 2015 was nil because of the loss in the nine months, together with the losses carried forward from prior periods.

 

Net Loss

 

The net loss for the nine months ended September 30, 2015 reflects the combination of reduced sales, the decrease in gross margins, and the increase in general and administrative costs, for the reasons explained above.

 

 

Liquidity and Capital Resources (in thousands, except percentages)

 

The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments, and other liquidity requirements associated with its existing operations over the next 12 months. The Company will seek, however, to raise up to $5,000 in additional capital in 2015 and 2016 to support its expansion plans There can be no assurance that the Company will be able to raise such additional capital on terms that are acceptable to the Company or at all.

 

The Company’s cash, cash equivalents and marketable securities were generally held in bank accounts.

 

The following table presents selected financial information and statistics as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		September 30, 2015				December 31, 2014
Cash, cash equivalents and marketable securities		$	606			$	206
Property, plant and equipment, net		$	2,153			$	2,199
Long-term debt		$	3,780			$	3,374
Working capital		$	(449	)		$	881

 

The following table presents selected financial information and statistics about the Company’s sources and uses of cash during the first nine months of 2015 and 2014 (dollars in thousands):

 

		Nine months Ended
		September 30,				September 30,
		2015				2014
Cash generated by/ (used in) operating activities		$	413			$	(461	)
Cash generated by/ (used in) investing activities		$	(417	)		$	(453	)
Cash generated by/ (used in) financing activities		$	460			$	869

 

During the nine months ended September 30, 2015, the cash generated by operating activities of $413 was a result of ($2,189) of net loss, offset by non-cash adjustments to net loss of $381 and a net change in operating assets and liabilities of $2,221. The Company used ($417) of cash for investing activities during the nine months ended September 30, 2015 to purchase property and equipment. There were no disposals of equipment in the nine months ended September 30, 2015. The $460 of cash generated by financing activities during the nine months ended September 30, 2015 came primarily from new borrowing of $1,102, including $510 from the chairman of board of directors of the Company, Clyde A. Biston. No distributions were paid in the first nine months of 2015.

 

During the nine months ended September 30, 2014, the cash used in operating activities of ($461) was a result of ($853) of net loss, non-cash adjustments to net income of $415 and a net change in operating assets and liabilities of ($23). The Company used ($453) of cash for investing activities during the nine months ended September 30, 2014 to purchase property and equipment. There were no disposals of equipment in the nine months ended September 30, 2014. Cash generated by financing activities during the nine months ended September 30, 2014 ($869) came from the issuance of new debt ($5,485) and common stock ($282), some of which was used to repay debt ($4,898). No distributions were paid in the first nine months of 2014.

 

Capital Assets

 

The Company’s capital expenditures were $498 during the nine months ended September 30, 2015, consisting primarily of purchases of machinery ($368) and earth moving equipment ($126). The new equipment was acquired to replace aging equipment, and to add to our fleet of equipment to prepare for new Demolition segment projects at Florida State University and at military bases in Georgia and the Florida Panhandle.

 

 

The Company plans to raise up to $5,000 in new capital for capital expenditures in 2015 and 2016, a portion of which will be used to renovate office space in Zephyrhills and to open another satellite office in the south.

 

Long-Term Debt (in thousands, except percentages)

 

To date, the Company has financed its operations through internally generated revenue from operations, the sale of common stock, the issuance of notes, and loans from shareholders. The following debt was outstanding at September 30, 2015:

 

(i) Demand loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, payable in monthly payments of $4,632, interest rate of 4.25%. At September 30, 2015, $242,515 was outstanding under the loan, an increase of $5,588 over the amount outstanding at June 30, 2015.

 

(ii) Demand loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, payable in quarterly payments of $1,908 commencing October 10, 2015, interest rate of 4.75%. At September 30, 2015, $160,000 was outstanding under the loan. In the three months ended September 30, 2015, the Company made no repayments of principal under the loan.

 

(iii) Demand loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, payable in quarterly payments of $9,922 commencing January 1, 2016, interest rate of 4.75%. At September 30, 2015, $175,000 was outstanding under the loan. In the three months ended September 30, 2015, the Company made no repayments of principal under the loan.

 

(iv) Demand loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, payable in quarterly payments of $9,881 commencing February 1, 2016, interest rate of 4.75%. At September 30, 2015, $175,000 was outstanding under the loan. In the three months ended September 30, 2015, the Company made no repayments of principal under the loan.

 

(v) Installment loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, payable in monthly payments of $23,994, interest rate of 6.15%. At September 30, 2015, $2,604,739 was outstanding under the loan. In the three months ended September 30, 2015, the Company made payments of principal totaling $31,398 under the loan.

 

(vi) Line of credit, Centennial Bank, Dade City, FL variable interest of 1.25% over prime, current rate 3.25%, secured by land, improvements, and accounts receivable. This line of credit matures on May 28, 2016. At September 30, 2015, $1,750,000 was outstanding under the line of credit. In the three months ended September 30, 2015, the Company made no repayments of principal under the line, and borrowed no additional principal.

 

(vii) Various installment loans payable in monthly payments, with interest rates ranging from 0% to 9.5%, secured by equipment and property. At September 30, 2015, $1,018,022 was outstanding under the loans. In the three months ended September 30, 2015, the Company repaid $123,651 of principal under the loans.

 

At September 30, 2015, a total of $6,125,576 was outstanding under all loans and the line of credit. $1,750,300 of that amount is due and payable in the 12 months following that date.

Dividend Program

 

As a privately-owned company prior to November 1, 2013, CES was owned by Clyde A. Biston. Mr. Biston elected to receive part of his compensation in the form of distributions paid to himself as the sole shareholder. No dividends have been paid to Mr. Biston since 2013.

 

The Company does not expect to pay any dividends or make any distributions to shareholders in 2015.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off balance sheet arrangements.

 

 

Indemnification

 

On occasion, the Company indemnifies its customers against legal claims arising from services it provides. The Company has not been required to make any significant payments resulting from such services.

 

The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report such that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2015, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not party to any material legal proceedings.

 

ITEM 1A. RISK FACTORS.

 

There have been no changes that constitute material changes from the risk factors previously disclosed in our 2014 Form 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

On September 10, 2015 the Company sold and issued 20,000 shares of common stock at $.001 per share (par value) to a member of the board of directors.

 

In connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended for transactions not involving a public offering.

 

No purchases of common stock of the Company were made by the Company in the three months ended September 30, 2015.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

On November 2, 2015, CES entered into a promissory note (the “Note”) with Clyde A. Biston, the Company’s President and the Chairman of the Company’s board of directors. Pursuant to the Note, Mr. Biston provided CES with a loan in the amount of $175,000. Interest on the loan accrues at a rate of 4.75% per annum, and, starting on February 1, 2016, CES is obligated to make quarterly principal and interest payments to Mr. Biston in the amount of $9,881.76. The final payment in the amount of $9,881.76 will be due on November 1, 2020.

 

The foregoing description of the Note is not complete and is qualified in its entirety by reference to the full text of the Note which is filed herewith as Exhibit 10.1 and incorporated herein by reference.

 

ITEM 6. EXHIBITS

 

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:

 

EXHIBIT NUMBER		DESCRIPTION
10.1		Promissory Note, November 2, 2015.
31.1		Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)
31.2		Certification of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)
32.1		Certification of the Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2		Certification of the Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
EX-101.INS		XBRL INSTANCE DOCUMENT
EX-101.SCH		XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
EX-101.CAL		XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EX-101.DEF		XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EX-101.LAB		XBRL TAXONOMY EXTENSION LABELS LINKBASE
EX-101.PRE		XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

 

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.

 

	CES Synergies, Inc.
Date: November 13, 2015	By:	/s/ John Tostanoski
		John Tostanoski
		Chief Executive Officer (Principal Executive Officer)
Date: November 13, 2015	By:	/s/ Sharon Rosenbauer
		Sharon Rosenbauer
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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