10-Q 1 form10-q.htm form10-q.htm
 



United States Securities and Exchange Commission
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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  0-19761

OP-TECH Environmental Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
91-1528142
(I.R.S. Employer  Identification No.)
 
1 Adler Drive, E Syracuse, NY 13057
(Address of principal executive offices)  (Zip Code)

(315) 437-2065
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   X   or No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large Accelerated filer ___   Accelerated filer___ Non-accelerated filer ___  Small Reporting Company ­­X

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files

Yes X or No ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   or No _X_

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (October 31, 2011)  11,940,372

 
 

 

OP-TECH Environmental Services, Inc. and Wholly-Owned Subsidiaries

INDEX

 
PART I. FINANCIAL INFORMATION Page No.
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets  
  -September 30, 2011 (Unaudited) and December 31, 2010 (Audited) 2
     
  Consolidated Statements of Operations  
  -Three months ended September 30, 2011 and September 30, 2010 (Unaudited)  
  -Nine months ended September 30, 2011 and September 30, 2010 (Unaudited) 3
     
  Consolidated Statements of Cash Flows  
  -Nine months ended September 30, 2011 and September 30, 2010 (Unaudited) 4
     
  Notes to Consolidated Financial Statements (Unaudited)
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
     
Item 4. Controls and Procedures 13
     
PART II. OTHER INFORMATION 15
     
  SIGNATURES 16
     

 
 
 
 
1

 
 
 
             
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
           
CONSOLIDATED BALANCE SHEETS
           
             
             
             
   
(UNAUDITED)
       
   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
ASSETS
           
             
Current Assets:
           
   Cash
  $ 13,269     $ 646,560  
   Accounts receivable (net of allowance for doubtful accounts of
               
      approximately $360,000 in 2011 and $553,000 in 2010)
    9,937,035       10,292,907  
   Costs on uncompleted projects applicable to future billings
    2,842,957       1,098,455  
   Inventory
    368,112       358,394  
   Current portion of deferred tax asset
    225,400       488,800  
   Prepaid expenses and other current assets, net
    836,853       510,519  
      -          
           Total Current Assets
    14,223,626       13,395,635  
                 
Property and equipment, net
    1,615,687       2,047,479  
Deferred tax asset
    2,573,800       1,774,900  
Other long term assets
    144,438       93,304  
                 
           Total Assets
  $ 18,557,551     $ 17,311,318  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
                 
Current Liabilities:
               
   Accounts payable
  $ 6,696,245     $ 7,172,208  
   Outstanding checks in excess of bank balance
    49,501       -  
   Billings in excess of costs and estimated profit
               
      on uncompleted projects
    804,156       342,152  
   Accrued expenses and other current liabilities
    754,314       588,314  
   Note payable to bank under line of credit
    4,304,207       3,242,205  
   Income taxes payable
    9,027       14,925  
   Obligation under interest rate swap agreement
    -       8,345  
   Current portion of long-term debt
    996,379       598,469  
                 
           Total Current Liabilities
    13,613,829       11,966,618  
                 
   Convertible notes payable
    1,828,945       1,384,500  
   Long-term debt
    2,121,130       1,300,000  
                 
           Total Liabilities
    17,563,904       14,651,118  
                 
Shareholders' Equity:
               
   Common stock, par value $.01 per share; authorized 50,000,000
               
      shares; 11,940,372 shares issued and outstanding
    119,404       119,404  
   Additional paid-in capital
    7,360,558       7,293,391  
   Accumulated deficit
    (6,486,315 )     (4,747,751 )
   Accumulated other comprehensive loss
  $ -     $ (4,844 )
                 
      993,647       2,660,200  
                 
           Total Liabilities and Shareholders' Equity
  $ 18,557,551     $ 17,311,318  
                 
                 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
 
2

 
 
 
                         
                         
  OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES              
  CONSOLIDATED STATEMENTS OF OPERATIONS              
  (UNAUDITED)              
                         
                         
   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Project revenue
  $ 9,282,640     $ 10,679,502     $ 21,983,810     $ 36,584,963  
                                 
Project costs
    8,458,968       8,288,038       17,748,117       29,108,749  
                                 
Gross margin
    823,672       2,391,464       4,235,693       7,476,214  
                                 
Operating expenses:
                               
    Payroll expense and related payroll taxes and benefits
    1,125,082       1,079,348       3,635,051       3,336,140  
    Office Expense
    168,736       194,929       487,701       604,626  
    Occupancy
    218,634       233,774       666,580       705,436  
    Business Insurance
    123,095       134,930       383,619       363,819  
    Professional Services
    136,005       154,637       452,807       626,755  
    Equipment Expenses, net of usage credit
    114,482       43,402       416,697       284,120  
    Other expenses
    92,644       40,713       146,329       255,073  
      1,978,678       1,881,733       6,188,784       6,175,969  
                                 
Operating income (loss)
    (1,155,006 )     509,731       (1,953,091 )     1,300,245  
                                 
Other income and (expense):
                               
   Interest expense
    (147,113 )     (180,752 )     (448,197 )     (432,895 )
   Other, net
    44,076       14,287       125,724       26,391  
      (103,037 )     (166,465 )     (322,473 )     (406,504 )
                                 
Net income (loss) before income taxes
    (1,258,043 )     343,266       (2,275,564 )     893,741  
                                 
Income tax benefit (expense)
    140,000       215,000       537,000       -  
                                 
Net income (loss)
  $ (1,118,043 )   $ 558,266     $ (1,738,564 )   $ 893,741  
                                 
                                 
Earnings (loss) per common share:
                               
    Basic
  $ (0.09 )   $ 0.05     $ (0.15 )   $ 0.07  
    Diluted
  $ (0.10 )   $ 0.02     $ (0.14 )   $ 0.05  
                                 
Weighted average shares outstanding:
                               
    Basic
    11,940,372       11,940,372       11,940,372       11,940,372  
    Diluted
    11,940,372       19,762,538       11,940,372       14,826,252  
                                 
                                 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
3

 
 
 
             
             
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
             
             
             
   
NINE MONTHS ENDED
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
             
Operating activities:
           
   Net income (loss)
  $ (1,738,564 )   $ 893,741  
   Adjustments to reconcile net income (loss) to net cash
               
      provided by operating activities:
               
         Gain on sale of equipment
    -       (13,320 )
         Bad debt expense (recovery)
    (2,032 )     135,580  
         Depreciation and amortization
    475,730       504,443  
         Warrant modification expense
    -       18,000  
         Amortization of discount on convertible notes
    125,417       -  
         (Benefit) expense from deferred income taxes
    (539,000 )     -  
         (Increase) decrease in operating assets and
               
            increase (decrease) in operating liabilities:
               
               Accounts receivable
    357,904       11,458  
               Costs on uncompleted projects applicable to
               
                   future billings
    (1,744,502 )     412,519  
               Billings and estimated profit in excess of costs
               
                  on uncompleted contracts
    462,004       (355,303 )
               Prepaid expenses, inventory and other assets
    (336,052 )     (192,832 )
               Other long term assets
    (40,381 )     -  
               Accounts payable and accrued expenses
    (315,861 )     381,091  
                       Net cash provided by (used in) operating activities
    (3,295,337 )     1,795,377  
                 
Investing activities:
               
   Purchase of property and equipment
    (43,938 )     (113,145 )
   Deposit on purchase of building
    (10,753 )        
   Proceeds from sale of equipment
    -       16,995  
                      Net cash used in investing activities
    (54,691 )     (96,150 )
                 
Financing activities:
               
   Increase (decrease) in outstanding checks in excess of bank balance
    49,501       (1,045,720 )
   Proceeds from issuance of convertible notes payable
    403,000       1,332,000  
   Redemption of convertible note payable
    (20,000 )        
   Proceeds from note payable to bank and current
               
      and long-term borrowings, net of financing costs
    3,147,297       7,200,682  
   Principal payments on current and long-term borrowings
    (863,061 )     (8,316,523 )
                     Net cash provided by (used in) financing activities
    2,716,737       (829,561 )
                 
Increase (decrease) in cash
    (633,291 )     869,666  
                 
Cash at beginning of period
    646,560       26,845  
                 
Cash at end of period
  $ 13,269     $ 896,511  
                 
Non-cash item
               
   Non-cash debt refinancing
  $ 4,794,335     $ -  
   Non-cash refinancing of insurance
  $ 554,009     $ 528,207  
                 
                 
The accompanying notes are an integral part of the consolidated financial statements.
 

 

 
4

 
 
 
PART I - FINANCIAL INFORMATION

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company.  This 10-Q, press releases issued by the Company, and certain information provided periodically in writing and orally by the Company’s designated officers and agents contain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  The words “expect”, “believe”, “goal”, “plan”, “intend”, “estimate”, and similar expressions and variations thereof used are intended to specifically identify forward-looking statements. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending on the circumstances.  Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished.
 






















 
5

 

OP-TECH ENVIRONMENTAL SERVICES, INC.
AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, quarterly results include all adjustments (consisting of only normal recurring adjustments) that the Company considers necessary for a fair presentation of such information for interim periods.

The unaudited financial statements include the accounts of the Company and its two wholly-owned subsidiaries; OP-TECH Environmental Services, Ltd, an inactive Canadian company, and OP-TECH AVIX, Inc.  All material intercompany transactions and balances have been eliminated in consolidation.

The balance sheet at December 31, 2010 has been derived from the audited balance sheet included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

2. Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:
   
Nine months ended
   
Three months ended
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
Net income (loss)
    (1,738,564 )     893,741       (1,118,043 )   $ 558,266  
Other comprehensive (loss):
   Change in fair value of cash flow hedge
   net of income tax expense of $3,500
   and $0 in 2011 and $4,700 and $1,600 in 2010, respectively. 
           4,844               6,973              0              2,486  
Comprehensive income (loss)
  $ (1,733,720 )   $ 900,714     $ (1,118,043 )   $ 560,752  

3. Revenue Recognition

The timing of revenues is dependent on the Company's backlog, contract awards, and the performance requirements of each contract.  The Company's revenues are also affected by the timing of its clients planned remediation work as well as the timing of unplanned emergency spills.  Historically, planned remediation work generally increases during the third and fourth quarters.  Although the Company believes that the historical trend in quarterly revenues for the third and fourth quarters of each year are generally higher than the first and second quarters, there can be no assurance that this will occur in future periods.  Revenues during the first quarter of 2010 were unusually high due to backlog carried over from jobs delayed from the prior year and is not reflective of normal seasonal trends.  Accordingly, quarterly or other interim results should not be considered indicative of results to be expected for any quarter or for the full year.



 
6

 

4. Related Party Transactions

The Company utilizes subcontract labor purchased from St. Lawrence Industrial Services, Inc., which is owned by a director of the Company.  The costs for these services amounted to approximately $1,760,000 and $2,330,000 for the nine months ended September 30, 2011 and 2010, respectively, and $886,000 and $1,228,000 for the three months ended September 30, 2011 and 2010 respectively.  At September 30, 2011, the Company has a payable to St. Lawrence of approximately $49,000 which is included in accounts payable.  At December 31, 2010, the Company had an advance to St. Lawrence of approximately $102,000 which is recorded in prepaid expenses and other current assets.

Additionally, the Company has entered into Secured Loan Agreements with members of management as discussed in Note 6 below.

5.  Earnings per Share

Basic earnings per share are computed by dividing net income by the weighted average shares outstanding.  There are outstanding options under the Company’s Stock Option Plan and warrants expiring May 2013 that were issued to a financial advisor in May 2002 to purchase 480,000 shares of common stock at $0.066 per share. The convertible notes payable with a face value of $2,000,000 are convertible into shares of common stock at the election of the holders of the Convertible Notes at $0.06 per share as more fully explained in Note 6.  These items were not included in the calculation of diluted earnings per share for 2011 as they would be anti-dilutive due to the net loss.

6.  Sale of Convertible Notes

During January 2011, the Company entered into a series of Secured Loan Agreements with several individuals for the sale of secured convertible notes (the “Convertible Notes”) totaling $403,000.  These are in addition to the $1,617,000 convertible notes issued during the year ending December 31, 2010.  These individuals represent members of executive management, members of the board of directors, and significant shareholders.  The Convertible Notes are for a term of two years, carry interest of 6% and are convertible into shares of common stock at the election of the holders of the Convertible Notes at $0.06 per share and, as long as the average share price of the Company’s common stock on the Over-the-Counter Bulletin Board remains above $0.06, at the election of the Company at $0.06 per share.  The issuance of the Convertible Notes in the first quarter of 2011 does not represent a change of control as approximately 94% of the Convertible Notes were issued to shareholders of the Company that currently own approximately 34% of the Company’s outstanding share capital.

The Company recorded $67,167 in additional debt discount in 2011 related to the issuance of these convertible notes due to the beneficial conversion feature, which is shown as Additional Paid in Capital and reduction in the convertible notes payable.  These discounts will be amortized over two years.  The discount is based on the market value of the stock at the date of the note agreements which was $.07 per share.
 
 
In January 2011, the Company redeemed $20,000 of Convertible Notes.


 
7

 

The Convertible Notes may be converted into 33,333,334 shares of common stock, or approximately 279% of current outstanding shares of common stock.
The Company also entered into a Security Agreement to secure payment and performance of its obligations under the Convertible Notes pursuant to which it granted the holders of the Convertible Notes a security interest in all of its assets.  The security granted is subordinated to a security interest granted to the Senior Debt. The Company’s sole active subsidiary also guaranteed all amounts owed by the Company under the Convertible Notes.

Amortization expense related to the Convertible Note discounts was $125,417 for the nine months ending September 30, 2011 and is included in interest expense.

The remaining amortization period for the discount is 11 months for the first tranche of $1,332,000, 15 months for second tranche of $285,000, and 15 months for the third tranche of $383,000, net of redemptions.

Interest expense recorded on these notes amounted to $215,000 for 2011 yielding an effective interest rate of 14.3%.  The unamortized discount was approximately $171,000 at September 30, 2011.

7.  Unapproved Change Orders

The Company enters into cost-reimbursable arrangements in which the final outcome or overall estimate at completion may be materially different than the original contract value. While the terms of such contracts indicate costs are to be reimbursed by our clients, the Company typically processes change notice requests to document agreement as to scope and price. Due to the nature of these items, we have not classified and disclosed the amounts as unapproved change orders.

While the Company is generally able to obtain the requested change orders on cost-reimbursable contracts, potential exposure exists relative to costs incurred in excess of agreed upon contract value.

At September 30, 2011, the Company has unapproved change orders recorded on a two large projects of approximately $881,000.  The Company also has smaller unapproved change orders on smaller projects in the ordinary course of business.  These amounts are recorded at cost in cost on uncompleted contracts applicable to future billing and the applicable profit will be recorded when change orders are approved.  Timing of claim collections are uncertain and depends on negotiated settlements pursuant to the contracts. As a result, the Company may not collect unapproved change orders within the next twelve months.

8.  Long-Term Debt

The loan agreement requires a financial covenant to be measured at December 31, 2011.  Based on the losses incurred during 2011, a violation of that debt covenant is probable.  Default on the financing loan agreement can also cause a default on the convertible note agreements.  The Company will request waivers from the bank and the convertible note holders for any covenant violations or events of default.

 
8

 

 
If waivers are not obtained at December 31, 2011, possible adverse consequences may occur including the reclassification of long-term debt to current liabilities and a reduction in working capital.  Additionally, if the line of credit was no longer available or the bank demanded repayment of the debt, the Company may not have sufficient capital to operate and there would be substantial doubt about its ability to continue as a going concern.

9.  Income Taxes

During the three months ended September 30, 2011, the Company re-evaluated its valuation allowance for deferred tax assets due to the cumulative three quarters of losses in 2011.  As a result, the valuation allowance was increased by $350,000 to reflect the Company’s inability to utilize net operating losses expiring in 2011 and 2012.  Management has assessed the potential utilization of other net operating loss carryforwards including those that will be generated in 2012 and determined that it is more likely than not that the Company will be able to generate taxable income to utilize net operating losses with expiration dates of 2018 through 2031.


 
9

 



PART I – FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.


LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2011, the Company had cash of $13,269 compared to $646,560 at December 31, 2010.  The decrease in the cash balance is attributed to the loss from operations and the increase in costs on uncompleted projects applicable to future billings offset by the increase in notes payable to bank and long-term debt.

At September 30, 2011, the Company had working capital of $609,797 compared to $1,429,017 at December 31, 2010, with a current ratio of 1.04 to 1 at September 30, 2011 and 1.12 to 1 at December 31, 2010.  The decrease in the current ratio is primarily a result of the loss incurred and the increase of note payable to bank.  The decrease in working capital is offset by additional long-term debt and convertible notes.

For the nine months ended September 30, 2011, the Company’s net cash used in operations was $3,295,337 compared to net cash provided by operations of $1,795,377 during the nine months ended September 30, 2010.  The cash used in operations for the nine months ended September 30, 2011 was primarily a result of the net loss coupled with the increase in costs on uncompleted projects applicable to future billings.

The Company’s net cash used in investing activities of $54,691 during the first nine months of the year was attributable to the purchase of vehicles and a deposit on a building.  The net cash used in investing activities for the nine months ended September 30, 2010 was $96,150.

For the nine months ended September 30, 2011, the Company’s net cash provided by financing activities was $2,716,737 compared to net cash used in financing activities of $829,561 during the nine months ended September 30, 2010.  The net cash provided by financing activities for the nine months ended September 30, 2011 was primarily due to proceeds from convertible notes and the refinancing of long-term debt.

The Company refinanced the senior debt on April 22, 2011.  The new loan agreement provides for short-term borrowings up to $5,000,000 on a revolving basis at LIBOR plus 3.5%, and a term loan of $3,000,000 due in monthly principal installments of $50,000 plus interest at LIBOR plus 3.5% through 2016.

During the third quarter of 2011, all principal payments on the Company’s debt were made within payment terms.

The loan agreement requires a financial covenant to be measured at December 31, 2011.  As more fully discussed in Note 8, based on the losses incurred during 2011, a violation of that debt covenant is probable.   Default on the financing loan agreement can also cause a default on the convertible note agreements.  The Company will request waivers from the bank and the convertible note holders for any covenant violations or events of default.  If a waiver is not obtained, possible material adverse consequences may occur.  See Note 8.




 
10

 

RESULTS OF OPERATIONS

PROJECT REVENUE

The Company's project revenue for the third quarter of 2011 decreased 13% to $9,282,640 from $10,679,502 for the third quarter of 2010.  For the nine-month period ended September 30, 2011 the Company’s project revenue has decreased 40% to $21,983,810 from $36,584,963 for the same period in 2010.  The decrease in revenue is attributed to lower project volume in 2011 in the first two quarters of the year and a strong backlog at the beginning of 2010.  Backlog at September 30, 2011 was approximately $16,100,000.

PROJECT COSTS AND GROSS MARGIN

Project costs for the third quarter of 2011 increased 2% to $8,458,968 from $8,288,038 for the same period in 2010.  Project costs as a percentage of revenues were91.1% and 77.6% for the three months ended September 30, 2011 and 2010, respectively.  Gross margin for the third quarter of 2011 decreased to 8.9% from 22.4% for the same period in 2010.  The decrease in gross margin is primarily attributed to the costs on three large projects being significantly higher than anticipated with gross margin on these contracts reduced to approximately 0%.

For the nine-month period ended September 30, 2011, project costs decreased 39% to $17,748,117 from $29,108,749 for the nine months ended September 30, 2010.  Project costs as a percentage of revenues were 80.7% for the nine months ended September 30, 2011 and 79.6% for the same period in 2010.  Gross margin for the nine months ended September 30, 2011 decreased to 19.3% from 20.4% for the same period in 2010.  The decrease in gross margin is reflective of the higher than anticipated job cost on three large projects discussed above.
 
OPERATING EXPENSES

Operating expenses for the quarter ended September 30, 2011 increased 5% to $1,978,678 from $1,881,733 for the same period in 2010.  For the nine-month period ended September 30, 2011, operating expenses increased slightly to $6,188,784 from $6,175,969 for the same period in 2010.  Operating expenses as a percentage of revenues increased to 28.2% for the nine months ended September 30, 2011 compared to 16.9% for the comparable period in 2010.

When comparing the third quarter of 2011 to 2010, the increase in operating expenses was a combination of the following:

 
·
Payroll and payroll related expense increased 4% to $1,125,082 from $1,079,348 due to increases in medical benefit costs in 2011.

 
·
Equipment expenses, net of usage credit increased 164% to $114,482 from $43,402 due to necessary equipment maintenance expenses incurred in the third quarter of 2011.


 
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INTEREST EXPENSE

Interest expense for the quarter ended September 30, 2011 decreased 19% to $147,113 from $180,752 for the same period in 2010.  Interest expense for the nine months ended September 30, 2011 increased 4% to $448,197 from $432,895 for the same period in 2010.  This increase is due to the convertible notes payable discussed about and the additional debt needed to finance large projects.

NET INCOME (LOSS) BEFORE INCOME TAXES

Net loss before income taxes for the quarter ended September 30, 2011 was $(1,258,043) compared to a net income before income taxes of $343,266 for same period in 2010.  Net loss before income taxes for the nine months ended September 30, 2011 was $(2,275,564) compared to a net income before income taxes of $893,741 for the nine months ended September 30, 2010.  The net loss before income taxes is primarily a result of lower project volume and higher than anticipated project costs on three large projects discussed above with consistent operating costs.

INCOME TAX (EXPENSE) BENEFIT

The Company recorded income tax benefit of $140,000 for the quarter ended September 30, 2011 compared to an income tax benefit of $215,000 for same period in 2010.  The Company recorded an income tax benefit of $537,000 for the nine months September 30, 2011 compared to an income tax benefit of $0 for the same period in 2010.  The Company increased the deferred tax valuation allowance by $350,000 to reflect the inability to utilize net operating losses expiring in 2011 and 2012.

NET INCOME (LOSS)

Net loss for the quarter ended September 30, 2011 was $(1,118,043) or $(.09) per share basic and $(.10) per share diluted compared to net income of $558,266 or $.05 per share basic and $.02 per share diluted for same period in 2010.  Net loss for the nine months ended September 30, 2011 was $(1,738,564) or $(.15) per share basic and $(.14) per share diluted compared to net income of $893,741 or $.07 per share basic and $.05 per share diluted for same period in 2010.



 
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management has identified the following critical accounting policies that affect the Company's more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.  The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an on-going basis, management evaluates those estimates, including those related to assets held for sale, revenue recognition, issuance of stock options and related compensation expense, valuation allowances on deferred tax assets, allowance for doubtful accounts and contingencies and litigation. The Company states these accounting policies in the notes to the consolidated financial statements and in relevant sections in this discussion and analysis. These estimates are based on the information that is currently available to the Company and on various other assumptions that management believes to be reasonable under the circumstances.  Actual results could vary from those estimates.

The Company believes that the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements:

 
·
Contracts are predominately short-term in nature (less than six months) and revenue is recognized as costs are incurred and billed.  Revenues recognized in excess of amounts billed are recorded as an asset.  In the event interim billings exceed costs and estimated profit, the net amount of deferred revenue is shown as a current liability.  Estimated losses are recorded in full when identified.  Unapproved change orders are recorded at cost in cost on uncompleted contracts applicable to future billings.

 
·
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense.  Management determines the adequacy of this allowance by continually evaluating individual customer receivables, considering the customer's financial condition, credit history and current economic conditions.  If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 
·
The Company maintains a valuation allowance for deferred tax assets to reduce these assets to their realizable amounts.  Recognition of these amounts and the adjustment of the corresponding allowance is dependent on the generation of taxable income in current and future years.  As circumstances change with respect to management’s expectations of future taxable income, the valuation allowance is adjusted.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

Not applicable

Item 4. – Controls and Procedures

(a)
Disclosure Controls and Procedures.
As of the end of the period covering this Form 10-Q, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures”. OP-TECH conducted this evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.

 
13

 


(i) Definition of Disclosure Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed with the objective of ensuring that information required to be disclosed in our periodic reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As defined by the SEC, such disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in such a manner as to allow timely disclosure decisions.

(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Controls.
OP-TECH recognizes that a system of disclosure controls and procedures (as well as a system of internal controls), no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the system are met. Further, the design of such a system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented in a number of ways. Because of the inherent limitations in a cost-effective control system, system failures may occur and not be detected.

(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and Procedures.
The Company’s controls and procedures are designed to provide reasonable assurance of achieving their objectives.   The Company's Chief Executive Officer and Chief Financial Officer determined that, as of the end of the period covered by this report, the controls and procedures are adequate and effective in alerting them in a timely manner to material information relating to the Company required to be included in the Company's periodic SEC filings.

During the preparation of our annual report, we concluded that we did not maintain effective controls over reconciliation of costs and standard gross margins on uncompleted projects.  Specifically, several in-process projects had unearned revenue recorded in excess of the actual expected.  
 
The Company improved disclosure controls and procedures to make the disclosure controls and procedures effective.

(b) Changes in Internal Controls.
The Company enacted changes to internal controls since the report containing a material weakness identified for the year ended December 31, 2010 regarding unearned revenue.  The Company improved the controls for the unearned revenue review process including a more in-depth cost and standard gross margin analysis, review with field personnel, and a comparison to subsequent billings.




 
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PART II - OTHER INFORMATION

 
 
Item 1.  Legal Proceedings.

The Company settled a lawsuit for $450,000 in 2009.  There are two pending litigations arising from that suit.  The Company entered into an agreement to contribute 15% to any settlement of the actions, providing the Company deems the total proposed settlement reasonable.  The Company has not been notified of any potential settlements on this matter.  The Company has not recorded any liability at September 30, 2011 as the ultimate outcome is not estimable at this time.
 
The Company was notified by the State of New York that the Company may be responsible for costs incurred to address a petroleum spill.  The Company is rigorously defending this matter and the outcome cannot be reasonably determined at this time.
 

 
Item 1A. Risk Factors.

 
Not applicable

 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 
None

 
Item 3.  Defaults Upon Senior Securities.

 
None

 
Item 4.  Submission of Matters to a Vote of Security Holders.

 
None

 
Item 5.  Other Information.
 
 
None
 
 
Item 6. Exhibits.
 
31.1
Certification of Chief Executive Officer
31.2
Certification of Chief Financial Officer and Acting Principal Accounting Officer
31.2
Section 1350 Certification of Chief Executive Officer
32.2
Section 1350 Certification of Chief Financial Officer and Acting Principal Accounting Officer
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 

 
15

 
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OP-TECH Environmental Services, Inc.
(Registrant)
 
 


Date: November 16, 2011   
 
s/ Charles B. Morgan
Charles B. Morgan
Chief Executive Officer

 
/s/ Jon S. Verbeck
Jon S. Verbeck
Chief Financial Officer and Treasurer


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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