10-K 1 form10-k.htm form10-k.htm
 
 


Securities and Exchange Commission
Washington, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2012

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 No. 000-19761

OP-TECH Environmental Services, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware                                                                            91-1528142
(State or other jurisdiction ofor organization)       (I.R.S. Employer incorporation   Identification No.)

One Adler Drive, East Syracuse, NY 13057
(Address of principal executive office)(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)

Indicate by check mark if the registrant is a well known seasoned issuer as defined in Rule 405 of the Securities Act:
Yes [ ] or No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:
Yes [ ] or No [X]

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 [ ] or No [X]

Indicate by check mark whether registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data file the required to be submitted and posted pursuant to rule 405 off Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit and post said files: Yes [ ] or No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X].

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.   See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act:
Large accelerated filer [  ]  Accelerated filer [  ] Non-accelerated filer [ ] Smaller Reporting Company [X]

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]
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was as of the last business day of the registrant’s most recently completed second fiscal quarter:
$52,000
 
Indicate the number of shares outstanding of each of the Company’s classes of common stock, as of April 30, 2013.  Common stock, $.01 par value: 11,940,373.

 
 
 
 
 
PART I

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

The Company is including the following cautionary statement in this Form 10-K 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-K, 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, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending on the circumstances.  Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
1
 

ITEM 1. BUSINESS

General

OP-TECH Environmental Services, Inc. and Subsidiaries (the “Company” of “OP-TECH”), a Delaware corporation headquartered in East Syracuse, New York, provides comprehensive environmental and industrial cleaning and decontamination services predominately in New York, New England, Pennsylvania, New Jersey, and Ohio.  The Company provides environmental remediation services for sites contaminated by hazardous and non-hazardous materials.    The Company also performs industrial cleaning of hazardous and non-hazardous materials and provides varying services relating to plant facility closure, including interior and exterior demolition and asbestos removal.  OP-TECH also provides 24-hour emergency spill response services.  The Company’s revenues are derived from state agencies, industrial companies, engineering firms and municipalities facing complex environmental clean-up problems associated with hazardous and non-hazardous materials as required by various governmental agencies.   The Company’s services include assessing the regulatory, technical, and construction aspects of the environmental issue, and performing the necessary remediation activities. The Company seeks to provide its clients with remedial solutions which integrate the various aspects of a project and are well-documented, practical, cost effective, and acceptable to regulatory agencies and the public.

Services
Excavation & Site Remediation Services

OP-TECH  provides  soil  excavation,  management,  and  transportation  and  disposal  for  complex projects that require handling large volumes of materials.  Excavation and removal is a fundamental remediation method involving the removal of contaminated soil, which is typically transported off-site for treatment or disposal.

“Specialized Excavation”

When conventional excavation techniques are not feasible or are impractical, OP-TECH employs “specialized excavation” techniques that safely provide a non-destructive and precise excavation practice in areas such as building basements, backyards, or other confined areas. Specialized excavation techniques are used to locate/identify underground utilities, tanks, structures, or excavation near buildings, retaining walls or foundations and for excavation of buried drums, cylinders and unknown materials.

Buried Drums and Cylinders

OP-TECH has vast experience handling complex buried drum, cylinder and unknown material excavation projects. OP-TECH applies “specialized excavation” techniques to excavate drums from the most challenging environments.  We provide complete drum management services including screening, sampling, profiling, manifesting and transportation and disposal of hazardous or non-hazardous waste.   These projects require careful investigation due to a large number of anomalies and the complexity of coordinating heavy equipment operations, drum handling and final site closure.

In-Situ & Ex-Situ Treatment

OP-TECH has demonstrated experience in providing in-situ and ex-situ treatment systems.  Utilizing chemical oxidation, stabilization and solidification and mobile treatment systems, we provide solutions in the most challenging environments.

 
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Chemical Oxidation

OP-TECH provides chemical oxidation applications using peroxide (Fenton’s Reagent) and permanganate products, which cause the rapid and complete chemical destruction of many toxic organic chemicals. The Company’s experience includes direct in-situ injection application and ex-situ for successful remediation of soil and groundwater.

Stabilization and Solidification

OP-TECH provides soil solidification and stabilization applications, which reduce the mobility of hazardous substances and contaminants in the environment through both physical and chemical means.  Solidification and stabilization techniques are used alone or combined with other treatment and disposal methods to yield a product or material suitable for land disposal or in other cases that can be applied to beneficial use.  These techniques have been used as both final and interim remedial measures.

Wetlands Mitigation

OP-TECH has exceptional experience with wetlands remediation and restoration projects.   Project experience has included removal of sediments from many active water courses ranging from creeks and marshes to large scale marinas.

Mobile Treatment Applications

OP-TECH provides mobile treatment systems for routine, scheduled service applications or dispatches them on an emergency basis.  The Company’s capacities range from 10 to approximately 500 gallons per minute and are available in a number of sizes and configurations. All systems are pre-assembled, self-contained, require minimal setup time upon mobilization, and are available as trailer-mount, skid- mount or containerized.

Site Closure Services

OP-TECH provides complete RCRA and Non-RCRA Site Closure Services in support of property transfer, facility closure, disaster recovery, development/redevelopment, and Brownfield transactions. The Company’s services include comprehensive decontamination, decommissioning, demolition and material/soil remediation.

Decontamination

OP-TECH offers a wide range of decontamination services. In emergency and scheduled situations, we evaluate the circumstances and develop a safe, comprehensive and cost efficient plan.

OP-TECH has performed thousands of decontaminations and facility closures ranging from small single buildings to multi-building expansive facilities.

Decommissioning and Demolition Services

OP-TECH provides Demolition and Dismantling Services in both emergency and scheduled situations. Applications may include building demolition and dismantling of partial or total building or plant structure.

Upgrading equipment or renovating production areas may require the removal of existing process equipment. Welded piping, stainless alloys, reactors, concrete structures, structural steel, pressure vessels and limited space requires the skillful selection of demolition techniques such as cold and hot cutting including plasma arc cutting, mechanical disassembly and/or rigging.

OP-TECH provides contamination identification, sampling, segregation and disposal. The Company implements efficient methodologies to reduce site emissions during demolition activities and cost- efficient disposal technologies.

 
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Remedial Systems

OP-TECH fabricates and constructs integrated remediation systems configured to meet site-specific cleanup criteria while satisfying air and/or water quality discharge standards.  The Company’s integrated remedial systems address all aspects of surface and subsurface contamination as it exists in groundwater and soil.

Operations and Maintenance Service

OP-TECH provides operation services and routine mechanical inspection and service of remediation systems and components.

Transportation and Disposal Services

The Company provides transportation of bulk and containerized hazardous and non-hazardous wastes from customer sites to customer-designated landfills and disposal facilities.  OP-TECH also provides liquid tank truck transports equipped with vacuum pumps.

Asbestos Abatement

OP-TECH provides asbestos abatement contracting services to both the public and private sectors. OP-TECH has expertise in all types of asbestos abatement including removal, disposal and enclosure, and encapsulation.  Asbestos removal is performed in commercial buildings, industrial facilities, and governmental buildings.

Interior Demolition/Structural Dismantling

OP-TECH provides interior demolition services such as removing walls, ceilings, and flooring.  In addition, OP-TECH offers structural dismantling services and has experience in razing concrete, wood and steel structures, concrete and brick chimneys, and concrete piers and foundations.

On-Site Industrial and Waste Management Services

OP-TECH provides on-site industrial cleaning and waste management services.  Specialized services for the handling, processing and disposal of hazardous wastes are performed by vacuuming, soda blasting, hydroblasting, dredging, dewatering and sludge processing, sludge pumping, chemical cleaning, and tank cleaning.

OP-TECH provides line cleaning, installation of petroleum piping and process piping.  The Company additionally provides water, storm, sewer and other product piping as well as treatment systems.

24-Hour Emergency Spill Response

Many of OP-TECH’s decontamination and mitigation activities result from a response to an emergency situation by one of its response teams.  These incidents can result from transportation accidents involving chemical or petroleum substances, fires at chemical facilities or hazardous waste sites, transformer fires or explosions involving PCBs, and other unanticipated events.  The substances involved may pose an immediate threat to public health or the environment, such as possible groundwater contamination.  The steps performed by OP-TECH include rapid response, containment and control procedures, sampling for analytical testing and assessment, neutralization and treatment, and collection and transportation of the substance to an appropriate treatment or disposal facility.  OP- TECH derives a substantial portion of its revenues from an agreement with the New York State Department of Environmental Conservation (NYSDEC) to provide emergency response services in certain areas of New York State, payment of which is guaranteed by the NYSDEC.

Non-Hazardous Waste Transfer and Storage Facility

OP-TECH operates a New York State permitted non-hazardous waste treatment, storage and transfer facility in its Waverly, New York office.   The Company accepts non-hazardous waste in bulk or containerized form, consolidates the waste and then transfers it to a landfill or recycling facility.

 
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Technologies Employed

OP-TECH utilizes a wide variety of physical and chemical treatment technologies in performing its remediation activities.   Physical treatment technologies generally involve filtration and aeration techniques and are used to separate contaminants from soils, slurries, or water.  Chemical treatment technologies generally involve flocculation, clarification, precipitation, polymer addition, chemical oxidation, chemical absorption, and stabilization. Depending on the contaminants present and the site characteristics, these technologies are combined into integrated treatment systems which reduce contaminant concentrations to levels consistent with prescribed regulatory standards.

Regulation

The business of the Company and its clients is subject to extensive, stringent, and evolving regulation by the EPA and various other federal, state, and local environmental authorities.  These regulations directly impact the demand for the services offered by the Company.   In addition, the Company is subject to the Federal Occupational Safety and Health Act, which imposes requirements for employee safety and health.  The Company believes it is in material compliance with all federal, state, and local regulations governing its business.

RCRA.   The Resources Conservation and Recovery Act of 1976 (“RCRA”) is the principal federal statute governing hazardous waste generation, treatment, storage, and disposal.  RCRA or EPA- approved state programs may govern any waste handling activities of substances classified as “hazardous.”   The 1984 amendments to RCRA substantially expanded its scope by, among other things, providing for the listing of additional wastes as “hazardous” and providing for the regulation of hazardous wastes generated in lower quantities than previously had been regulated.  Additionally, the amendments impose restrictions on land disposal of certain hazardous wastes, prescribe more stringent standards for hazardous waste land disposal sites, set standards for underground storage tanks and provide for “corrective” action at or near sites of waste management units.  Under RCRA, liability and stringent operating requirements may be imposed on a person who is either a “generator” or a “transporter” of hazardous waste, or an “owner” or “operator” of a waste treatment, storage, or disposal facility.

Regulation of underground storage tanks legislation, in particular Subtitle I of RCRA, focuses on the regulation of underground tanks in which liquid petroleum or hazardous substances are stored and provides for the regulatory setting for a portion of the Company’s work.  Subtitle I of RCRA requires owners of all existing underground tanks to list the age, size, type, location, and use of each tank with a designated state agency. The EPA has published performance standards and financial responsibility requirements for storage tanks over a five year period.  These regulations also require all new tanks which are installed to have protection against spills, overflows, and corrosion.   Subtitle I of RCRA provides civil penalties of up to $15,000 per violation for each day of non-compliance with tank requirements and $10,000 for each tank for which notification was not given or was falsified.  RCRA also imposes substantial monitoring obligations on parties which generate, transport, treat, store, or dispose of hazardous waste.

Superfund Act. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (“Superfund Act”) generally addresses clean-up of inactive sites at which hazardous waste treatment, storage, or disposal took place. The Superfund Act assigns joint and several liability for cost of clean-up and damages to natural resources to any person who, currently, or at the time of disposal of a hazardous substance who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport of hazardous substances owned or possessed by such person for disposal or treatment; and to any person who accepts hazardous substances for transport to disposal or treatment facilities or sites from which there is a release or threatened release. Among other things, the Superfund Act authorized the federal government either to clean up these sites itself or to order persons responsible for the situation to do so. The Superfund Act created a fund, financed primarily from taxes on oil and certain chemicals, to be used by the federal government to pay for the clean-up efforts. Where the federal government expends money for remedial activities, it may seek reimbursement from the potentially responsible parties.

 
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The liabilities provided by the Superfund Act could, under certain factual circumstances, apply to a broad range of possible activities by the Company, including generation of hazardous substances, releases of hazardous substances during transportation, failure to properly design a clean-up, removal or remedial plan and failure to achieve required clean-up standards, leakage of removed wastes in transit or at the final storage site, and remedial operations on ground water.  Such liabilities can be joint and several where other parties are involved.

Other.  The Company’s operations are subject to other federal laws protecting the environment, including the Clean Water Act and the Toxic Substances Control Act.

Many states have also enacted statutes regulating the handling of hazardous substances, some of which are broader and more stringent than the federal laws and regulations.

Competitive Conditions

The markets for environmental remediation, as well as demolition and asbestos removal, continue to be very competitive.  The Company competes with many different firms ranging from small local firms to large national firms, many of which have greater financial and marketing resources than the Company. Competition in environmental services is based largely on competitive pricing and quality of service provided.   Other competitive factors include geographic location as well as reputation. Management believes the Company is one of the few firms based in its market area that offers a high quality combination of environmental services at the most competitive prices.  In addition, through its wide range of environmental services, good reputation, and competitive pricing, the Company hopes to maintain a competitive edge in the environmental services business.

The Company operates field offices in Syracuse, Massena, Rochester, Albany, Waverly and Buffalo, New York, as well as Philadelphia and Pennsylvania.

Seasonality

Typically, during the first quarter of each calendar year there is less demand for environmental remediation due to the cold weather, particularly in the Northeast and Midwest regions.  In addition, factory closings for the year-end holidays reduce the volume of industrial waste generated, which results in lower volumes of waste handled by the Company during the first quarter of the following year.

Customers

The Company’s client base includes state agencies, industrial companies, railroads, real estate developers, auto parts manufacturers, aluminum producers, utility companies, waste disposal firms, municipalities, and engineering firms.    During 2012, the Company performed services for approximately 500 clients.   These projects were substantially all short-term (six months or less) in nature.  The largest business segment for the each of the years ended December 31, 2012, 2011, and 2010, was Environmental Remediation services.  Environmental Remediation services accounted for 18%, 30%, and 39% of the Company’s revenues for the years ended December 31, 2012, 2011, and 2010, respectively.  For the past three fiscal years, all of the Company’s revenues were generated from customers in the United States.

During 2012, the Company had project revenue of approximately $7,235,190 related to several contracts with the New York State Department of Environmental Conservation, which totaled approximately 22% of the Company’s revenues.   A portion of that revenue is related to the spill response and remediation contracts with the New York State Department of Environmental Conservation. While the Company maintains its position on the spill response contract, it relinquished its prime position in the remediation contract on October 1, 2010.  This position on the remediation contract was relinquished due to a poor return on investment with significant overhead requirements and reduced overall spending by the New York State Department of Environmental Conservation.

 
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During 2012, the Company had project revenue of approximately $3,990,000 related to many service and remediation contracts with National Grid, a large utility company, which totaled approximately 12% of the Company’s revenues.

During 2012, the Company had sales of approximately $3,381,000 to ALCOA, which totaled approximately 10% of the Company’s revenues.

Insurance and Bonding

The Company maintains commercial general liability, asbestos liability and pollution liability insurance which provides an aggregate coverage limit of $15 million.   In addition, the Company maintains workers’ compensation, comprehensive automobile, and Directors and Officers liability insurance. We believe that the Company’s insurance coverage is consistent with the insurance requirements found in the environmental remediation industry.

In connection with its business, the Company may be required to provide various types of surety bonds that provide an additional measure of security for the Company’s performance under certain public and private sector contracts. The Company’s ability to obtain surety bonds depends upon capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our contract backlog that we have currently bonded and their current underwriting standards, which may change from time to time. The capacity of the surety market is subject to market-based fluctuations driven primarily by the level of surety industry losses and the degree of surety market consolidation. When  the  surety market  capacity shrinks  it  results  in  higher  premiums  and  increased  difficulty obtaining bonding, in particular for larger, more complex projects throughout the market. In addition, the Company’s negative working capital and retained deficit may impact the Company’s ability to obtain bonds.  In order to help mitigate this risk, the Company employs a co-surety structure involving two sureties. Although the Company does not believe that fluctuations in surety market capacity have significantly affected the ability to grow the business or that the Company’s 2011 results will affect the Company’s ability to obtain bonds, there is no assurance that these factors will not significantly affect the ability to obtain new contracts in the future.

Employees
 
As of April 12, 2013, the Company had a total of approximately 137 full-time employees. The Company’s ability to retain and expand its staff will be an important factor in determining the Company’s future success. The Company considers its relations with its employees to be good, and the Company has never had a work stoppage or threat of a work stoppage.

Available Information

The Company’s internet address is www.op-tech.us.  The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available on the Company’s website as soon as reasonably practicable after the Company electronically files such material with the Securities and Exchange Commission (SEC).  The information found on the Web site is not part of this or any other report the Company files or furnishes to the SEC.

The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549.   The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the reports on its website at www.sec.gov.

 
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ITEM 2. PROPERTIES

The Company leases its corporate headquarters in East Syracuse, NY and its branch office locations in Syracuse, Buffalo, Rochester, Massena, Waverly, Albany, and Norristown, PA.  The Company leases an aggregate of approximately 116,933 square feet of office, shop and warehouse space at those locations.  The leases expire at various times through November 30, 2016.  The current aggregate monthly lease payment is $57,183 plus utilities.  The Company has prepaid rent on a building of approximately $60,000.

Equipment

The Company’s owned equipment consists primarily of construction equipment such as vacuum trucks, dump trucks, tankers, excavation equipment, utility vehicles, pumps, generators, and compressors, some of which have been specially modified for the Company’s use.  The Company also leases and rents equipment as needed.

ITEM 3. LEGAL PROCEEDINGS

In 2012, the Company settled two lawsuits for $48,000 and $1,050 respectively.  The Company has an accrued liability of $49,050 recorded at December 31, 2011 related to this settlement.

In 2012, the Company made a settlement for $100,000 with the New York State Department of Labor related to asbestos operations.  The Company’s asbestos handling license is current and in compliance.


ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 
(a)
The shares of the Company’s common stock are listed on the over-the-Counter market maintained by OTC Link LLC, commonly known as the Pinksheets, under the symbol OTES.
 
The high and low closing bid prices for the shares of the Company’s common stock were as follows:
 
Quarter Ended
  
High
    
Low
  
March 31, 2010
   $  0.45     $  0.20  
June 30, 2010
   $ 0.50     $ 0.18  
September 30, 2010
   $ 0.15     $ 0.07  
December 31, 2010
   $ 0.09     $ 0.07  
March 31, 2011
   $ 0.15     $ 0.07  
June 30, 2011
   $ 0.15     $ 0.07  
September 30, 2011
   $ 0.07     $ 0.07  
December 31, 2011
   $ 0.07     $ 0.07  
March 31, 2012
   $ 0.01     $ 0.01  
June 30, 2012
   $ 0.01     $ 0.002  
September 30, 2012
   $ 0.01     $ 0.002  
December 31, 2012
   $ 0.01     $ 0.005  
March 31, 2013
   $ 0.005     $ 0.005  
The aforementioned prices reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

 
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(b)
At April 30, 2013, there were approximately 134 holders of record of the Company’s common stock.
 
(c)
 The Company has never paid any dividends.
 
Equity Compensation Plan Information
 
The information shown below is as of December 31, 2012.
Plan Category
  
Number of securities
to be issued upon exercise of outstanding options, warrants and rights
(a)
    
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
    
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
  
Equity
compensation plans approved by security holders
       259,673     $ 0.28         307,371  
Equity
compensation
plans not approved by security holders
       -         -         -  
 
Total
     259,673     $ 0.28       307,371  


 
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ITEM 6. SELECTED FINANCIAL DATA


Statement of Operations Data

 
   
Year Ended  December 31,
  
                               
    2012     2011     2010     2009     2008  
Project Billings and Services
   $ 30,665,334     $ 46,036,043     $ 36,023,901     $ 36,632,276     $ 32,483,687  
Net Income (loss)
     (7,481,702 )     786,271       (1,884,890 )     654,927       (405,574 )
Net Income (loss) per Share
                                        
-     Basic
   $ (0.63 )   $ 0.07     $ (0.16 )   $ 0.05     $ (0.03 )
-     Diluted
   $ (0.63 )   $ 0.03     $ (0.16 )   $ 0.05     $ (0.03 )
 
Balance Sheet Data

 
     As of December 31,  
                               
    2012     2011     2010     2009     2008  
Total Assets
   $ 12,626,715     $ 15,397,086     $ 17,311,318     $ 18,113,208     $ 17,149,598  
Long-Term Obligations
     -       -       2,684,500       -       6,249,748  
Total Liabilities
     16,371,001       20,146,577       14,651,118       16,536,095        13,702,400  
Shareholders’ Equity (Deficit)
     (3,744,286 )     (4,749,491 )   $ 2,660,200       1,577,113       3,447,198  

 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE LEVEL OVERVIEW

The Company is a leading provider of environmental and industrial services throughout the Northeastern and Mid-Atlantic regions of the United States.    The Company serves over 600 customers, including a significant number of the top 500 engineering firms, hundreds of smaller private entities and numerous federal, state and local government agencies.

The Company’s strategy is to apply its expertise in the environmental remediation industry to increase market share, increase profitability and enhance shareholder value.

In 2012, the Company was able to be highly profitable primarily due to healthy margins on projects combined with a reduction of overhead costs.  The Company was also able to successfully negotiate contracts that had favorable pay terms, which alleviated pressure related to financing operations.  Projects that the company performed were also executed timely, so that a high productivity contributed to better margins.  During the year the Company re-enforced the importance of increasing billability for operation managers and making necessary reductions in staff which resulted in lower overhead costs.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2012, the Company had cash and cash equivalents of $1,241,052 as compared to $412,141 at December 31, 2011.

At December 31, 2012, the Company had negative working capital of $5,182,135 compared to negative working capital of $6,538,513 at December 31, 2011. The Company had a current ratio of approximately .68 to 1 at the end of 2012 compared to .68 to 1 at the end of 2011.  The improvement in working capital is attributed to the Company having a profitable year in 2012.

Cash provided by operating activities during 2012 was $2,610,719 compared to cash used by operating activities of $3,261,534 during 2011. The cash provided by operating activities in 2012 was due to the billing and improved collection of accounts receivable.  The cash used by operating activities in 2011 was mainly attributable to the net loss for the year offset by the increase in the deferred tax asset valuation allowance.

The Company’s net cash used in investing activities of $132,341 during 2012 was due to the purchase of equipment.  During 2011 the Company had net cashed used in investing of $54,888 which was primarily attributable to the purchase of various field and office equipment.

Cash used in financing activities of $1,649,467 in 2012 was related to principal payment on financing agreements for insurance and term loans.  Cash provided by financing activities of $3,082,003 in 2011 was primarily due to the new debt financing.  The Company also issued convertible notes of $403,000 during 2011.  The proceeds were used to reduce debt and current liabilities.

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 2012, all principal payments on the Company’s debt were made within payment terms. The Company was not in compliance with the financial covenants as of December 31, 2012 and December 31, 2011.  The Company received a waiver for December 31, 2011.  Based on violations during the first quarter of 2012, the Company has classified the debt as current.

As of December 31, 2012, borrowing against the revolving loan aggregated $5,000,000.

 
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RESULTS OF OPERATIONS

This financial review should be read in conjunction with the accompanying Consolidated Financial Statements and accompanying notes.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company’s future operating results may be affected by a number of factors, including the Company’s ability to successfully increase market share in its existing service territory while expanding its services into other markets, realize benefits from cost reduction programs, and utilize its facilities and work force profitably in the face of intense price competition.

The Company’s 2012 negative working capital and retained deficit at December 31, 2012 may make it difficult to finance projects in the future.  This factor is considered prior to agreeing to perform projects.

Fluctuations in surety market capacity can significantly affect the ability to grow the business and there are no assurances that it will not significantly affect the ability to obtain new contracts in the future.

EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In the normal course of business, Management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting body to determine the potential impact they may have on our Consolidated Financial Statements. Based upon this review, Management does not expect any of the recently issued accounting pronouncements, which have not already been adopted by the Company, to have a material impact on our Consolidated Financial Statements.
OFF BALANCE SHEET ARRANGEMENTS

The Company had no off balance sheet arrangements at December 31, 2012 or December 31, 2011 that require disclosure under this item.

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, valuation allowances on deferred tax assets, revenue recognition, 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.

Contracts are predominately short-term in nature (less than six months) and revenue is recognized as costs are incurred.  Project costs are generally billed in the month they are incurred and are shown as current assets.  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.

 
12
 
 
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.  Additionally, management estimates a general allowance based on historical charge offs covering other amounts that may not be collectible.

The Company maintains a valuation allowance on its deferred tax assets based on the amount of net operating losses that management believes it will not utilize prior to the expiration dates of these losses.  Management determines the adequacy of this allowance by continually evaluating its ongoing profitability, and its ability to generate taxable income in the future sufficient to utilize the net operating losses.  If the profitability of the Company were to change, it could affect the amount of net operating losses that could be utilized and require an adjustment to the valuation allowance.

The Company establishes accruals for loss contingencies related to litigation and claims.  These estimates are prepared using information available to management at the time of the accrual and at each reporting period.  Events and circumstances could change requiring management to revise or adjust amounts accrued for loss contingencies.

2012 COMPARED TO 2011
 
Revenues

During the year ended December 31, 2012, the Company’s revenues increased 5.1% to $32,264,051 as compared to $30,665,334 for the year ended December 31, 2011.

When comparing 2012 to 2011, project revenue remained consistent.  Revenue in 2012 was derived from securing work that could be financed in the company’s current financial condition.  The Company’s ability to increase revenue is expected to remain constrained until such time, if any, as the Company is able to improve its financial condition and access to working capital.

Project Costs and Gross Margin

Project  costs  for  the  year  ended  December  31,  2012  decreased  17.6% to $22,989,815 from $27,887,648 for the year ended December 31, 2011.  Project costs as a percentage of revenues were 71.3% for the year ended December 31, 2012, compared to 90.9% for the year ended December 31, 2011.  The gross profit margin for the year ended December 31, 2012 was 28.7% compared to 9.1% for the year ended December 31, 2012.  Gross profit in dollars increased 233.9% to $9,274,236 from $2,777,686 in 2011.  The increase in gross profit margin is attributed to the company securing high margin work with recurring customers in 2012.  Also, the margin in 2011 was unusually low due to additional costs caused by changes in conditions, shortfalls in the bidding process and lower than anticipated production levels.

Project costs from St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $2,510,000 in 2012 and $3,135,000 in 2011.

Selling, General, and Administrative Expenses

During the year ended December 31, 2012, selling, general, and administrative (“SG&A”) expenses decreased 16.4% to $6,938,017 compared to $8,295,795 for the previous year.

SG&A expenses as a percentage of revenue decreased to 21.5% for the year ended December 31, 2012 from 27.1% for the year ended December 31, 2011.

When comparing 2012 to 2011, the decrease in 2012 operating expenses is primarily attributed to the following:

 
13
 

 
·
Payroll and related expenses decreased 21.5% to $3,805,995 from $4,848,138 in 2011.  The decrease is related to the improved utilization of project management labor and reduction in overhead staff levels.
 
·
Office expense decreased 25.1% to $405,162 from $540,890.  The decrease is due to a decline in IT and telephone expenditures.  Certain office assets also became fully amortized during 2011.

Operating Income

As a result of the factors discussed above, for the year ended December 31, 2012, the Company reported an operating income of $2,336,219 compared to operating loss of ($5,518,109) for the previous year.

Interest Expense

Interest expense increased 26.7% to $829,347 in 2012 compared to $654,319 in 2011.  The increase in interest expense is due to the default on the convertible notes at December 31, 2011, which increased the interest rate from 6% to 20%.  This interest is accrued and has not been paid out.

Net Income (Loss) Before Income Taxes

Net income before income taxes amounted to $1,621,414 in 2012 compared to a net loss before income taxes of ($6,060,102) in 2011.

Income Tax Expense

The Company recorded a net income tax expense of $616,209 in 2012 compared to an income tax expense of $1,421,600 in 2011. The decrease is due to the increase of the deferred tax valuation allowance in 2011.

Net Income (Loss)

Net income for the year ended December 31, 2012 was $1,005,205 or $0.08 per share basic and $0.03 per share diluted compared to net loss of ($7,481,702) or ($0.63) per share basic and diluted for the year ended December 31, 2011.

Key Performance Indicators

Management measures labor efficiency and underbilling on a weekly basis in addition to project revenue and gross margin discussed above.  Equipment utilization remained consistent year to year, and billable labor hours increased to 68% for the year ended December 31, 2012 from 63% for the year ended December 31, 2011.




 
14
 


2011 COMPARED TO 2010

Revenues

During the year ended December 31, 2011, the Company’s revenues decreased 33.4% to $30,665,334 as compared to $46,036,043 for the year ended December 31, 2010.

When comparing 2011 to 2010, the decrease in project revenue was primarily attributed to 2010 being an unusual year with significant backlog carried over from 2009.  See discussion in 2010 revenue comparison below.

Project Costs and Gross Margin

Project  costs  for  the  year  ended  December  31,  2011  decreased  24.8%  to  $27,887,648 from $37,075,811 for the year ended December 31, 2010.  Project costs as a percentage of revenues were 90.9% for the year ended December 31, 2011, compared to 80.5% for the year ended December 31, 2010.  The gross profit margin for the year ended December 31, 2011 was 9.1% compared to 19.5% for the year ended December 31, 2010.  Gross profit in dollars decreased 69.0% to $2,777,686 from $8,960,232 in 2010.  The decrease in gross profit margin is attributed to three large project losses due to additional costs caused by changes in conditions, shortfalls in the bidding process and lower than anticipated production levels.

Project costs from St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $3,135,000 in 2011 and $2,668,000 in 2010.

Selling, General, and Administrative Expenses

During the year ended December 31, 2011, selling, general, and administrative (“SG&A”) expenses increased 2.4% to $8,295,795 compared to $8,110,128 for the previous year.

SG&A expenses as a percentage of revenue increased to 27.1% for the year ended December 31, 2011 from 17.6% for the year ended December 31, 2010.

When comparing 2011 to 2010, the increase in 2011 operating expenses is primarily attributed to the following:
 
 
·
Payroll and related expenses increased 10.0% to $4,848,138 from $4,406,783 in 2010.  The increase is related to the underutilization of project management labor.
 
·
Professional services decreased 10.9% to $726,162 from $814,689 in 2010.  In 2010 the Company incurred consulting costs related to bank relations.  During 2011 the Company refinanced and as a result did not incur similar professional services.
 
·
Equipment expense, net of usage credit increased 21.8% to $501,429 from $411,628 primarily as a result of a reduction in equipment utilization in 2011.

Operating Income

As a result of the factors discussed above, for the year ended December 31, 2011, the Company reported an operating loss of ($5,518,109) compared to operating income of $860,104 for the previous year.

Interest Expense

Interest expense increased 19.9% to $654,319 in 2011 compared to $545,546 in 2010.  The increase in interest expense is due to the increase in bank debt in 2011 and the interest expense and discount amortization related to the convertible notes issued during the year.

 
15
 
 
Net Income (Loss) Before Income Taxes

Net loss before income taxes amounted to ($6,060,102) in 2011 compared to a net income before income taxes of $410,842 in 2010.

Income Tax Expense

The Company recorded a net income tax expense of $1,421,600 in 2011 compared to an income tax benefit of $375,429 in 2010. The decrease is due to the change in deferred tax valuation allowance.

Net Income (Loss)

Net loss for the year ended December 31, 2011 was ($7,481,702) or ($.63) per share basic and diluted compared to net income of $786,271 or $.07 per share basic and $.03 per share diluted for the year ended December 31, 2010.

Key Performance Indicators

Management measures labor efficiency and underbilling on a weekly basis in addition to project revenue and gross margin discussed above.  Equipment utilization was lower during 2011 compared to 2010 and billable labor hours remained consistent at 63%.
 
 
 
 
 
 
 
 

 

 
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The Company is exposed to market risk, including changes in interest rates because of its variable rate debt. To manage the potential exposure, the Company may enter into various derivative transactions, mainly interest rate swaps.  The financial impact of these hedging instruments are offset in part or in whole by corresponding changes in the underlying exposures being hedged.  The Company does not hold or issue derivative financial instruments for trading purposes. Note 8 to the consolidated financial statements includes a discussion of the Company’s accounting policies for financial instruments.

Based on the Company’s overall interest rate exposure as of and during the year ended December 31, 2012, including rate sensitive instruments, a one percent change in interest rates would increase or decrease interest expense by approximately $80,000 annually.

The Company is aware that as the economy slows down, the Company’s business could be affected by client companies closing operations or reducing production, which could reduce the amount of waste generated, industrial cleaning projects, and environmental remediation projects available.   In order to try to mitigate this market risk, the Company continues to make every effort to secure more emergency spill response contracts and long-term environmental remediation and industrial cleaning projects.

For more information regarding market risk, see the audited financial statements submitted under Item 15 of this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related financial schedule of the Company and the report of Dannible & McKee LLP are submitted under Item 15 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

 
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ITEM 9a. CONTROLS AND PROCEDURES

Responsibility For Financial Information — We are responsible for the preparation, accuracy, integrity and objectivity of the Consolidated Financial Statements and the other financial information included in this report.  Such information has been prepared in conformity with accounting principles generally accepted in the United States of America and accordingly, includes certain amounts that represent management’s best estimates and judgments. Actual amounts could differ from those estimates.

Responsibility for Internal Controls — We are also responsible for establishing and maintaining adequate internal controls over financial reporting. These internal controls consist of policies and procedures that are designed to assess and monitor the effectiveness of the control environment including: risk identification, governance structure, delegations of authority, information flow, communications and control activities.  While no system of internal controls can ensure elimination of all errors and irregularities, OP-TECH’s internal controls, which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed, transactions are properly executed and reported, and appropriate disclosures are made. The concept of reasonable assurance is based on the recognition that there are limitations in all systems of internal control and that the costs of such systems should be balanced with their benefits. The Audit Committee of the Board of Directors, which is comprised solely of independent directors, meets regularly with OP-TECH’s senior financial management and independent registered public accounting firm to review audit plans and results, as well as the actions taken by management in discharging its responsibilities for accounting, financial reporting and internal controls. The Audit Committee is responsible for the selection and compensation of the independent registered public accounting firm. OP-TECH’s financial management, internal auditors and independent registered public accounting firm have direct and confidential access to the Audit Committee at all times.

Report On Internal Control Over Financial Reporting — We have evaluated OP-TECH’s internal control over financial reporting as of December 31, 2012. This evaluation was based on criteria for effective internal control over financial reporting set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on the evaluation performed, we believe that our system of disclosure controls and procedures effectively achieve their objectives.

Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only Management's report in this annual report.

Report On Disclosure Controls And Procedures — As of December 31, 2012, we carried out an evaluation of the effectiveness of the design and operation of OP-TECH’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange  Act”).   Based upon that evaluation we concluded that OP-TECH’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in OP-TECH’s periodic filings under the Exchange Act is accumulated and communicated to us to allow timely decisions regarding required disclosures, and such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

ITEM 9b. OTHER INFORMATION

None.

 
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PART III

ITEM 10. DIRECTORS, EXECUTIVES, OFFICERS AND CORPORATE GOVERNMENT

The following table sets forth certain information about the directors of the Company, all of whom were re-appointed by unanimous consent in October 2011 for a term until a subsequent election of directors occurs.

Each director has served continuously since he was first elected.

The Board of Directors held two meetings during the last calendar year.  All of the directors attended 50% or more of the total number of meetings held by the Board of Directors.
 
Name, Age
Principal Occupation
Year First
Elected
 
Certain Other Information
Robert J. Berger (66)
Director and Co-Chairman of the Board
 
1998
Mr. Berger has served in his present position as Director since November 1998, and as Chairman of the Board since February 2000 and as Co-Chairman of the Board since January 2007. Mr.  Berger was employed in various positions for ONBANCORP, Inc. from 1978 through March 31, 1998, his last position being Senior Vice President, Treasurer, and Chief Financial Officer. Mr. Berger is also Chairman, President, and Chief Executive Officer of St. Lawrence Industrial Services, Inc. and also served as Vice Chairman of Beacon Federal Bancorp, Inc. through July 2010.
 
Richard Messina (50)
Director and Co-Chairman of the Board
 
2005
Mr. Messina was elected to the Board in November 2005 and elected Co-Chairman of the Board in January 2007.  Mr. Messina founded The Benchmark Company, LLC, a securities broker-dealer, in 1988.  Benchmark is primarily engaged in equity research, sales, and trading on behalf of institutional clients.  Mr. Messina currently serves as Co-Chief Executive Officer of Benchmark.
 
Richard L. Elander (71)
Director
 
1991
Mr.  Elander has served in his present position as a Director since November of 1991.  Mr.  Elander previously served as the Commissioner of the Onondaga County Department of Water Environment Protection prior to retirement.
Steven A. Sanders (67)
Director
 
1991
Mr. Sanders has served in his present position as a Director since December 1991.  Mr. Sanders is currently Senior Partner of Sanders Ortoli Vaughn-Flam Rosenstadt LLP. From January 1, 2004 until June 30, 2007, he was of counsel to the law firm of Rubin, Bailin, Ortoli, LLP.  From January 1, 2001 to December 31, 2003, he was counsel to the law firm of Spitzer & Feldman PC.  Mr. Sanders also serves as a Director of Helijet International, Inc.  Additionally, he is a Director of the Roundabout Theatre (the largest not-for-profit theatre in North America), Town Hall New York City, and he is a director at Trustee, American Academy of Dramatic Arts.
 
George W. Lee, Jr. (64)
Director
2002
Mr. Lee was elected to the Board in December 2002.  Mr. Lee co-founded Blasland, Bouck and Lee, Inc., an Engineering News Record top 100 worldwide engineering and scientific services company in 1984.  He served in various capacities in this firm, including Executive VP, Director of Marketing and Director of Health and Safety from 1984 to 1994.  Mr. Lee served on the Board of Directors of Blasland, Bouck and Lee, Inc. from 1984 to 2005.  Since 1984 Mr. Lee has been active as a consultant to new business ventures involved in professional development and wastewater treatment.  In October 2005 Mr. Lee joined Pyramid Brokerage of Central New York as a commercial real estate sales agent.
 
Richard Jacobson (49)
Director
 
2006
 
Mr.  Jacobson was elected to the Board  in  February 2006. Mr. Jacobson is currently a Partner at Tricap Partners & Co., an investment banking boutique specializing in advising companies, institutions, family offices and individuals in complex financial strategies and investment decisions. From 2005 to 2009, he was a  Senior  Managing  Director  with  Stern  Capital. From 1999 to 2003 he was Managing Director and Co- Group Head in the merchant banking group of Indosuez Capital.  From 1997 to 1999, he was a Vice President in the leveraged finance group of SG Cowen.  From 1994 to 1997 he was an associate in the leveraged finance group of Chemical Securities, Inc.  Mr. Jacobson began his career as an attorney for the law firm of Jacobs, Persinger and Parker.
 

 
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INDEPENDENCE

The Board recognizes the importance of director independence.  Under the rules of the New York Stock Exchange, to be considered independent, the Board must determine that a director does not have a direct or indirect material relationship with the Company.  Moreover, a director will not be independent if, within the preceding three (3) years: (i) the director was employed by the Company or receives $25,000 per year in direct compensation from the Company, other than director and Committee fees or other forms of deferred compensation for prior service, (ii) the director was  partner of or employed by the Company’s independent auditor, (iii) the director is part of an interlocking directorate in which an executive officer of the Company serves on the compensation Committee of another Company that employs the director, (iv) the director is an executive officer or employee of another Company that makes payments to, or receives payments from, the Company for property or services in an amount which, in any single fiscal year, exceeds the greater of  $100,000 or 2% of such other Company’s consolidated gross revenues, (v) or the immediate family member in any of the categories in (i) – (iv) above.

The Board has determined that five (5) of the Company’s six (6) directors are independent under these standards.  As a result of Director Berger’s ownership of St. Lawrence Industrial Services Corp., he is not considered to have independent status.  Mr. Berger does serve on the Compensation Committee based upon his prior business experience and the fact that he is a holder of approximately twenty one percent (21%) of the outstanding shares of the Company’s stock.

RELATED PARTY TRANSACTION REVIEW

The Board has adopted a policy concerning the review, approval and monitoring of transactions involving the Company and “related persons” (directors and executive officers or their immediate family members, or shareholders owning five percent (5%) or greater of the Company’s outstanding shares). The policy covers any transaction exceeding $1,000 in which the related person has a direct or indirect material interest.  Related person transactions must be approved in advance by the Co-chairmen and reported to the Board at the next meeting following the transaction.  The policy is intended to restrict transactions to only those which are in the best interests of the Company.

AUDIT COMMITTEE

The members of the Committee are Messrs. George Lee and Richard Elander. The Committee operates under a written charter adopted by the Board of Directors.  The Committee held one meeting during the year ended December 31, 2012. Its duties and responsibilities include:
 
 
·
Oversight of the financial reporting process and management’s responsibility for the integrity, accuracy and objectivity of financial reports, and accounting and financial reporting practices.
 
·
·
Recommending to the Board the appointment of the Company’s independent registered accounting firm.
Oversight of the adequacy of the Company's system of internal controls.
 
·
Oversight of management practices relating to ethical considerations and business conduct, including compliance with laws and regulations.

The Committee has met and held discussions with the Chief Financial Officer and the Company’s independent accountants, Dannible & McKee, LLP, regarding audit activities. Management has the primary responsibility for the Company’s systems of internal controls and the overall financial reporting process.  The independent accountants are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with auditing standards of the Public Company  Accounting  Oversight  Board  (United  States),  and  to  issue  a  report  thereon.    The Committee’s responsibility is to monitor and oversee these processes.  However, the members of the Committee are not certified public accountants, professional auditors or experts in the fields of accounting and auditing and rely, without independent verification, on the information provided to them and on the representations made by management and the independent accountants.

 
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The Committee recommended to the Board of Directors the appointment of Dannible & McKee, LLP as the Company’s independent accountants for the year 2012.  The Company’s independent accountants provided to the Committee the written disclosure required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee discussed with the independent accountants that firm’s independence.

Management represented to the Committee that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles.  The Committee has reviewed and discussed the consolidated financial statements with management and the independent accountants.  The Committee discussed with the independent accountants matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees) as currently in effect.  Based on these discussions and reviews, the Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form  10-K for the  year ended December 31, 2012 for filing with the Securities and Exchange Commission.

The Committee does not have a financial expert.  Due to the small size of the Company and lack of financial complexity, the Committee does not anticipate adding a financial expert.

REPORT OF AUDIT COMMITTEE

The Audit Committee reviews the Company’s financial reporting process on behalf of the Board. Management has the primary responsibility for establishing and maintaining adequate internal financial controllership, for preparing the financial statements and for the public reporting process.  Dannible & McKee, LLP, our Company’s independent auditor for 2011, is responsible for expressing an opinion on the conformity of the Company’s audited financial statements with generally accepted accounting principles.

In this context, the Committee has reviewed and discussed with management and Dannible & McKee, LLP the audited financial statements for the year ended December 31, 2012.   The Committee has discussed with Dannible & McKee, LLP the matters that are required to be discussed by Statement on auditing Standards No. 61 (Communication with Audit Committees).  Dannible & McKee, LLP has provided to the Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee has discussed with Dannible & McKee, LLP that firm’s independence.  The Committee has concluded that Dannible & McKee, LLP’s provision of audit and non-audit services to the Company is compatible with Dannible & McKee, LLP’s independence.

Based on the considerations and discussions referred to above, the Committee recommended to the Board of Directors that the audited financial statements for the year ended December 31, 2012 be included in the Annual Report on form 10-K for 2012.  This report is provided by the following independent directors, who comprise the Committee:

George W. Lee, Jr. Chairman
Richard L. Elander

 
21
 

EXECUTIVE OFFICERS OF THE COMPANY

Charles Morgan (59) Chief Executive Officer

Mr. Morgan was named Chief Executive Officer (“CEO”) in November 2006.  He has been with the Company since January of 2002 and has previously served as Executive Vice President and Chief Operating Officer. Prior to joining the Company, Mr. Morgan served as a Vice President with the firm of Camp, Dresser and McKee, an Engineering News Record Top 20, Boston, MA based consulting, engineering, construction and operations firm.  Mr. Morgan has 35 years of experience as a senior executive and corporate director of environmental, engineering, construction and energy companies. Mr. Morgan has experience with all aspects of senior level company management including marketing and sales, strategic planning, financial management, product and service development, project management and mergers and acquisitions. Mr. Morgan has also managed a variety of large scale projects domestically and internationally for a broad spectrum of private sector industrial clients.

Michael McCall (30)
Controller and Treasurer

Mr. McCall joined the Company as the Controller in June 2011 and was named Treasurer in February 2013.   Prior to joining the Company, Mr. McCall previously served in the accounting department of large government manufacturer. Prior to 2009, he worked as an auditor for a public accounting firm from 2005 to 2009.   Mr. McCall is a Certified Public Accountant in New York State.

CODE OF ETHICS FOR SENIOR OFFICERS

The Company has adopted a code of ethics that applies to its senior executive and financial officers. The Code of Ethics for senior officers is included in Exhibit 14.

BENEFICIAL OWNERSHIP AND REPORTING COMPANIES

Section 16(a) of the Exchange Act requires our directors, officers (including a person performing a principal policy-making function) and persons who own more than 10% of a registered class of our equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities of ours. Directors, officers and 10% holders are required by Commission regulations to send us copies of all of the Section 16(a) reports they file. Based solely upon a review of the copies of the forms sent to us and the representations made by the reporting persons to us, we believe that during the fiscal year ended December 31, 2010, our directors, officers and 10% holders complied with the filing requirements under Section 16(a) of the Exchange Act.

 
22
 

ITEM 11. EXECUTIVE COMPENSATION

A. Compensation Committee

The Compensation Committee of the Board of Directors reviews and administers the Company’s compensation policies and practices for the executive officers of the Company. The Compensation Committee is currently comprised of Mr. Messina and Mr. Berger, both of whom are nonemployee directors.  The Company’s financial accounting group supports the Compensation Committee’s work by providing information reports to the Compensation Committee when requested.  The Committee’s authority is not set out in a charter.  The Committee has not delegated authority and has not hired compensation consultants.

B. Compensation Discussion and Analysis

Compensation Philosophy

The Compensation Committee has adopted an executive compensation policy that rewards executives if the Company achieves its operational, financial and strategic goals and for building shareholder value.  The material elements of the total compensation, which is considered for executives each year under the Company’s policy are (i) base salary, (ii) annual cash bonus, (iii) stock-based awards, and (iv) retirement, health and welfare and other benefits.

The Compensation Committee intends for the compensation earned by executive officers to be commensurate with performance and competitive with the compensation paid to executives at comparable companies.    The Compensation Committee has not engaged in any benchmarking of total compensation or any material element thereof. The named executive officers do not play a role in the compensation setting process other than negotiating employment agreements on their own behalf.

Base Salaries

Base salaries provide a baseline level of compensation to executive officers. Base salaries are not linked to the performance of the Company, because they are intended to compensate executives for carrying out the day-to-day duties and responsibilities of their positions.

The Compensation Committee reviews and adjusts base salary levels in January each year. During the review and adjustment process, the Compensation Committee considers:

·      individual performance;
·      the duties and responsibilities of each executive officer position;
·      the relationship of executive officer pay to the base salaries of other employees of the Company; and
·      whether the base salary levels are competitive when compared to compensation paid to executives at comparable companies.
 
Annual Cash Bonus Awards

The Compensation Committee also considers bonus awards to the named executives at its January meeting each year. In general, the Committee does not award bonuses to executive officers under a pre-established plan or formula. Instead, the Committee makes bonus awards based on its review of the individual performance of the executives and the financial performance of the Company during the preceding year. The Committee believes that awarding bonuses in this manner keeps executives focused on making decisions that are in the long-term best interests of the Company and its shareholders and not for the purpose of achieving a pre-established performance level over a shorter term.

 
23
 

Stock-Based Awards

The Compensation Committee follows procedures that are substantially similar to the bonus award procedures for making stock-based awards to executive officers.  The 2002 Omnibus Plan (“Omnibus Plan”) maintained by the Company is intended to promote the growth and general prosperity of the Company by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees.  Awards granted under the Omnibus Plan may be (a) Stock Options which may be designated as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options (“NQSO’s) not intended to so qualify; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; or (e) other forms of stock-based incentive awards. The shares of stock with respect to which the  Awards  may be  granted shall  be  the  common stock,  par  value  at  $0.01,  of  the  Company (“Common Stock").

All stock-based awards are made under the Company’s Omnibus Plan.   The number of shares included in stock-based awards is not determined under a pre-established formula. Instead, as is the case with bonus awards, all stock-based awards are discretionary based on the Committee’s review of the individual performance of the executives and the financial performance of the Company during the preceding year.

Retirement and Other Benefits

The Company sponsors the OP-TECH Environmental Services 401(k) Plan (the “Plan”), a tax-qualified Code Section 401(k) retirement savings plan, for the benefit of all of its employees, including the named executives. The Plan encourages saving for retirement by enabling participants to save on a pre-tax basis and by providing Company matching contributions equal to 25% of the first 6% that each employee contributes to the Savings Plan.

None of the named executives receive perquisites whose aggregate value exceeds $10,000 annually.

Post Termination of Employment Benefits

The Company has not entered into employment agreements with any executive officers that provide severance or other benefits following their resignation, termination, retirement, death or disability

Mr. Morgan has signed an employment agreement on March 28, 2008 that expired December 31, 2012.

The Company established a bonus pool in 2010 for Mr. Morgan, Mr. Piger, the Vice President and other management employees of 6.25% of the aggregate consideration if seventy-five percent (75%) of the common stock or assets of the Company is sold.

D. Conclusion
The Compensation Committee has read the compensation discussion and analysis and has reviewed all components of the named executives’ compensation, including salary, bonus, long-term incentive compensation, accumulated realized and unrealized stock option and restricted stock gains, the dollar value of all perquisites and other personal benefits.   Based on this review, the Compensation Committee is of the view that the compensation payable under the new employment agreement with Mr. Morgan and the compensation of the other executives is reasonable and appropriate.

 
24
 

E. Executive Officer Compensation Disclosure Tables
 
Summary Compensation Table

Name and Principal
      
Salary
    
Bonus
    
Stock Awards
    
Option Awards
    
Change in Pension value and Nonqualified Deffered Compensation
    
All Other
 Compensation
    
Total
  
Position(s)
  
Year
  
($)
    
($)
    
($)
    
($) (1)
    
Earnings
    
($) (1)
    
($)
  
(a)
  
(b)
  
(c)
    
(d)
    
(e)
    
(f)
    
(h)
    
(i)
    
(j)
  
Charles B. Morgan
  
2012
  
$
197,000
    
$
0
    
$
0
    
$
0
    
$
0
    
$
32,879
    
$
229,879
  
Chief Executive Officer
                                                            
   
2011
  
$
197,000
    
$
0
    
$
0
    
$
0
    
$
0
    
$
24,513
    
$
221,513
  
 
Harold C. Piger
  
2012
  
$
112,006
    
$
0
    
$
0
    
$
0
    
$
0
    
$
0
    
$
112,006
  
Senior Vice President
                                                            
   
2011
  
$
112,006
    
$
0
    
$
0
    
$
0
    
$
0
    
$
0
    
$
112,006
  
 
Jon S. Verbeck (2)
  
2012
  
$
80,000
    
$
0
    
$
0
    
$
0
    
$
0
    
$
0
    
$
80,000
  
Chief Financial Officer
                                                            
   
2011
  
$
120,000
    
$
0
    
$
0
    
$
0
    
$
0
    
$
0
    
$
120,000
  
 
Michael D. McCall
  
2012
  
$
81,000
    
$
0
    
$
0
    
$
0
    
$
0
    
$
0
    
$
81,000
  
Controller (3)
                                                            
   
2011
  
$
40,000
    
$
0
    
$
0
    
$
0
    
$
0
    
$
0
    
$
40,000
  
 
 
(1)
Mr. Morgan was paid $18,590 and $11,002 for unused vacation in 2012 and 2011, and $14,289 and $13,551 as other compensation in 2012 and 2011, respectively.

 
(2)
Compensation shown for Mr. Verbeck is through October 2012.  Mr. Verbeck left the company in October 2012.

 
(3)
Mr. McCall joined the Company in June 2011.
 
Column “(g)”, Non-Equity Incentive Plan Compensation, is not applicable and is omitted.
 

Outstanding Equity Awards at Fiscal Year-End Table
 
Name
(a)
  
Number of Securities Underlying
Unexercised
Options
(#) Exercisable
(b)
    
Number of Securities Underlying Unexercised Options (#) Unexercisable
(c)
    
Option Exercise Price
($)
(e)
  
 
Option Expiration Date
(f)
Mr. Morgan    
33,333
      
0
    
$
0.15
  
11/19/13
     
50,000
      
0
    
$
0.40
  
01/26/15
 
Columns “(d)”, “(i)”, and “(j)” related to Equity Incentive Plan Awards are not applicable and are omitted.

 
25
 

Director Compensation Table

The following table summarizes the compensation paid to the Chairman and each nonemployee director for his or her service to the Board and its Committees during 2012:
 
Name (a)
  
Fees Earned or Paid in Cash ($)
 (b) (1)
    
Option Awards
($) (d)
    
All Other Compensation ($)
(g)
    
Total
($)
 (h)
  
                         
Robert J. Berger
  
$
16,000
    
$
0
    
$
0
    
$
16,000
  
Richard Messina
  
$
30,000
    
$
0
    
$
0
    
$
30,000
  
Richard L. Elander
  
$
2,500
    
$
0
    
$
0
    
$
2,500
  
Steven A. Sanders
  
$
2,500
    
$
0
    
$
0
    
$
2,000
  
George W. Lee, Jr.
  
$
2,500
    
$
0
    
$
0
    
$
2,500
  
Richard Jacobson
  
$
2,500
    
$
0
    
$
0
    
$
2,000
  
 
(1)
In 2012 Directors of the Company were paid $2,000 for each Board meeting attended and $500 for each sub-Committee meeting attended. In addition, Messer’s Messina and Berger were paid additional fees as chairman fees of $26,000 and $16,000, respectively.
 
Column “(c)” (Stock Awards), column “(e)” (Non-Equity Incentive Plan Compensation), and column “(f)” (Change in Pension Value and Nonqualified Deferred Compensation Earnings) are not applicable and are omitted.

 
26
 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


The following table sets forth certain information regarding the beneficial ownership of the Company’s common stock at April 30, 2013 by persons who, to the knowledge of the Board of Directors, beneficially own more than five percent of the outstanding shares of common stock of the Corporation.

All voting power of the Corporation is vested in its common stock.  As of the close of business on April 30, 2013, 11,940,373 shares of common stock par value $.01 per share were outstanding. Each share of common stock is entitled to one vote.
 
Name and Address of Beneficial Owner
  
Amount and Nature of Beneficial Ownership (1)(2)
  
 
Percentage of Class (1)
  
 
Richard Messina
40 Fulton Street, 19th Floor
    
 
24,589,190 (2) (3) (5)
    
 
75
 
%
New York, NY 10038
              
 
Robert Berger
    
12,738,454 (4) (5)
    
54
%
121 Shirley Rd.
              
Syracuse, NY 13224
              
 
Charles Morgan
    
7,141,185 (5)
    
38
%
8450 Number 2 Road East
              
Manlius, NY 13104
              
               
Kevin Eldred
    1007 Overlook Terrace
    Cazenovia, NY 13035
 
    
3,037,267 (5)
    
22
%
George Lee
    204 Barnstable Court
    Camillus, NY 13031
    
3,108,774 (5)
    
21
%
 
Steven Sanders
Sanders Ortoli Vaughn-Flam Rosenstadt LLP
    501 Madison Ave, 14th Floor
    New York, NY 10022
    
 
867,273 (5)
    
 
7
 
%
 
(1)   Based upon the sum of (a) 11,940,373 shares of common stock outstanding, and (b) underlying options and warrants that have vested and not been exercised and underlying options and warrants that will vest within the next 60 days relating to a particular shareholder.
(2)   All shareholders directly or beneficially own all shares except for Mr. Messina who owns 1,822,721 shares directly and 1,766,771 shares indirectly. 
(3)   Includes 480,000 shares issuable upon the exercise of warrants to purchase common stock issued to Summit Capital Associates, Inc., an affiliate of Mr. Messina. 
(4)   Includes options to purchase 13,333 shares of Common Stock.
(5)   Includes shares available upon conversion of notes payable as follows:
 
Mr. Messina
    
20,519,698
  
Mr. Berger
    
11,466,788
  
Mr. Morgan
    
6,937,854
  
Mr. Eldred
    
2,202,267
  
Mr. Lee
    
2,872,108
  
Mr. Sanders     802,055  

 
 
27
 

The following table sets forth certain information furnished to the Company regarding the beneficial ownership of the Company’s common stock at April 30, 2013 by each director and nominee for election as director, each executive officer and each other person owning more than 5% of our common stock.  Unless otherwise indicated, the beneficial owner has sole voting and investment power with respect to such shares of common stock.

Name of Beneficial Owner
  
Number of Shares of Common
Stock Beneficially Owned (3) (6)
    
Percentage of Class (4)
  
Richard Messina (1)
    
24,589,190
(5)
    
75
%
Robert J. Berger (1)
    
12,738,454
      
54
%
Richard L. Elander (1)
    
21,624
    
<1
%
Steven A. Sanders (1)
    
867,273
      
7
%
George W. Lee, Jr. (1)
    
3,108,774
      
21
%
Richard Jacobson (1)
    
-0-
      
0
%
Charles Morgan (2)
    
7,141,185
      
38
%
All Directors as a Group (6 persons)
    
41,325,116
      
88
%

 
(1)
Director
 
(2)
Officer
 
(3)
Includes unexercised options to purchase shares of common stock:
 
·
Mr. Berger
13,333
·
Mr. Elander
10,000
·
Mr. Sanders
13,333
·
Mr. Lee
16,667
·
Mr. Morgan
83,333
 
 
(4)
Based  upon  the  sum  of  (a)  11,940,373  shares  of  common  stock  outstanding,  (b)  shares underlying  options  and  warrants  that  have  vested  and  not  been  exercised  and  shares underlying options and warrants that will vest within the next 60 days relating to a particular shareholder, (c) shares available upon conversion of notes payable.
 
(5)
Includes 480,000 shares issuable upon the exercise of warrants to purchase common stock issued to Summit Capital Associates, Inc., an affiliate of Mr. Messina.
 
(6)
Includes shares available upon conversion of notes payable:

·
Mr. Messina   
20,519,698
·
Mr. Berger     
11,466,788
·
Mr. Lee     
2,872,108
·
Mr. Sanders
802,055
 
 
28
 
 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE


Steven A. Sanders, one of our directors, is a partner at the law firm of Sanders Ortoli Vaughn-Flam Rosenstadt LLP, and formerly of counsel at the law firm of Rubin, Bailin, Ortoli, LLP which provides professional services to the Company, and it is anticipated that it will continue to do so.  The cost of these services in 2012 was approximately $6,700.

OP-TECH purchases subcontract labor services from St. Lawrence Industrial Services, Inc., which is owned by Robert J. Berger, one of our directors. Pricing for these services is based on cost plus an agreed upon $2,500 monthly fee.   The costs for these services amounted to approximately $2,510,000 in 2012. Services are provided as needed with no long term commitment.   At December 31, 2012, the Company has a payable to St. Lawrence of $36,379 which is recorded in accounts payable.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees billed by Dannible & McKee, LLP, the Company’s principal accountants, in the aggregate for each of the last two years were as follows:

   
2012
    
2011
  
             
Audit Fees
  
$
38,250
    
$
131,978
  
                 
Audit Related Fees
  
$
3,367
    
$
0
  
                 
Tax Fees
  
$
16,640
    
$
18,497
  
 
There were no other fees billed for services other than those noted above.

The fees for tax services represent fees for compliance related to Federal and state tax return preparation and filing.

The fees for audit and tax services for 2012 were proposed to the audit Committee and approved by that Committee in an engagement letter.   No other services were provided by the accountants that would require approval by the audit Committee.   The audit Committee pre-approves all audited and non-audit services in advance of service being provided.

 
29
 

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
 
(a)
Financial Statements
  
Page
  
         
 
Report of Independent Accountants
    
F-2
  
 
Consolidated Balance Sheets at December 31, 2012 and 2011
    
F-3
  
 
Consolidated Statement of Operations for the years ended December 31, 2012, 2011, and 2010
    
F-4
  
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011, and 2010
     F-5  
 
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2012, 2011, and 2010
    
F-6
  
 
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010
     F-7  
  Notes to Consolidated Financial Statements     
F-8
  
           
(b)
Exhibits
        
           
 
10.1 Stock Option Plan - Incorporated herein by reference to theCompany’s Information Statement filed November 6, 2002*
  
 
14    Code of Ethics*
        
 
21    Subsidiaries of the Registrant*
        
 
31.1 CEO Certification
        
 
31.2 Acting PAO Certifications
        
 
32.1 Section 1350 CEO Certifications
        
 
32.2 Section 1350 Acting PAO Certifications
        
           
  * Incorporated by reference to previous filings        
 
 

 
30
 

OP-TECH Environmental
 
Services, Inc. and Subsidiaries
 
Consolidated Financial Statements
 
December 31, 2012 and 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
F-1
 


Report of Independent Registered Accounting Firm

May 14, 2013
To the Shareholders and Board of Directors of OP-TECH Environmental Services, Inc. and Subsidiaries
 
We have audited the accompanying consolidated balance sheets of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2012.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has negative working capital and a stockholders’ deficit at December 31, 2012, and caused violations of the Company’s financing agreements.  The Company has developed a business plan that considers the reduced level of available working capital, provides for reductions in operating costs and projects a level of profitability.  These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Dannible & McKee, LLP
Dannible & McKee, LLP




 
 
F-2
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Consolidated Balance Sheets
December 31, 2012 and 2011



   
December 31,
    
December 31,
  
   
2012
    
2011
  
             
ASSETS
            
             
Current Assets:
            
   Cash (Note 4)
   $ 1,241,052     $ 412,141  
   Accounts receivable, net (Notes 1 and 5)
     8,790,610       9,556,251  
   Costs on uncompleted projects applicable to future billings (Note 1)
     334,179       2,123,033  
   Inventory (Note 1)
     440,514       356,243  
   Current portion of deferred tax asset (Note 11)
     -       620,000  
   Prepaid expenses and other current assets
     382,511       540,396  
      -          
           Total Current Assets
     11,188,866       13,608,064  
                 
Property and equipment, net (Note 6)
     1,121,117       1,467,357  
Deferred tax asset (Note 11)
     200,000       200,000  
Other long term assets (Note 1)
     116,732       121,665  
                 
           Total Assets
   $ 12,626,715     $ 15,397,086  
                 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                
                 
                 
Current Liabilities:
                
   Accounts payable
   $ 4,587,827     $ 6,858,504  
   Billings in excess of costs and estimated profit
                
      on uncompleted projects
     888,912       1,256,395  
   Accrued future losses (Note 7)
     16,312       1,253,147  
   Accrued expenses and other current liabilities
     1,752,764       1,080,899  
   Note payable to bank under line of credit (Note 8)
     5,000,000       5,000,000  
   Convertible notes payable (Note 9)
     2,000,000       1,870,333  
   Current portion of long-term debt (Note 8)
     2,125,186       2,827,299  
                 
           Total Liabilities
     16,371,001       20,146,577  
                 
Stockholders' Deficit:
                
   Common stock, par value $.01 per share; authorized 120,000,000
                
      shares; 11,940,373 shares issued and outstanding
     119,404       119,404  
   Additional paid-in capital
     7,360,558       7,360,558  
   Accumulated deficit
     (11,224,248 )     (12,229,453 )
                 
      (3,744,286 )     (4,749,491 )
                 
           Total Liabilities and Stockholders' Deficit
   $ 12,626,715     $ 15,397,086  
                 


The accompanying notes are an integral part of the consolidated financial statements.
 
F-3
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Consolidated Statements of Operations
December 31, 2012, 2011 and 2010

   
December 31,
    
December 31,
    
December 31,
  
   
2012
    
2011
    
2010
  
                   
Project billings and services
   $ 32,264,051     $ 30,665,334     $ 46,036,043  
                         
Project costs
     22,989,815       27,887,648       37,075,811  
                         
Gross margin
     9,274,236       2,777,686       8,960,232  
      28.7 %     9.1 %     19.5 %
Operating expenses:
                        
    Payroll expense and related payroll taxes and benefits
     3,805,995       4,848,138       4,406,783  
    Office Expense
     405,162       540,890       692,733  
    Occupancy
     769,964       850,395       922,762  
    Business Insurance
     485,551       510,192       498,577  
    Professional Services
     669,762       726,162       814,689  
    Equipment Expenses, net of usage credit
     467,344       501,429       411,628  
    Other expenses
     334,239       318,589       352,956  
      6,938,017       8,295,795       8,100,128  
                         
Operating income (loss)
     2,336,219       (5,518,109 )     860,104  
                         
Other income and (expense):
                        
   Interest expense
     (829,347 )     (654,319 )     (545,546 )
   Other, net
     114,542       112,326       96,284  
      (714,805 )     (541,993 )     (449,262 )
                         
Net income (loss) before income taxes
     1,621,414       (6,060,102 )     410,842  
                         
Income tax (expense) benefit
                        
   Current
     3,791       (2,100 )     (19,371 )
   Deferred
     (620,000 )     (1,419,500 )     394,800  
                         
      (616,209 )     (1,421,600 )     375,429  
                         
Net income (loss)
   $ 1,005,205     $ (7,481,702 )   $ 786,271  
                         
                         
Earnings (loss) per common share:
                        
    Basic
   $ 0.08     $ (0.63 )   $ 0.07  
    Diluted
   $ 0.03     $ (0.63 )   $ 0.03  
                         
Weighted average shares outstanding:
                        
    Basic
     11,940,373       11,940,373       11,940,373  
    Diluted
     48,729,743       11,940,373       19,734,874  

The accompanying notes are an integral part of the consolidated financial statements
 
F-4
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income
December 31, 2012, 2011 and 2010



   
December 31,
    
December 31,
    
December 31,
  
   
2012
    
2011
    
2010
  
                   
Net income (loss)
   $ 1,005,205     $ (7,481,702 )   $ 786,271  
  Other comprehensive income:
                        
                         
      Change in Fair Value of Cash Flow Hedge
                        
         net of tax effect
     -       4,844       9,316  
                         
Other comprehensive income
     -       4,844       9,316  
                         
Comprehensive income (loss)
   $ 1,005,205     $ (7,476,858 )   $ 795,587  
                         



The accompanying notes are an integral part of the consolidated financial statements.
 
F-5
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)
Years Ended December 31, 2012, 2011 and 2010


   
Common Shares
    
Common Stock
    
Additional Paid-In Capital
    
Accumulated Deficit
    
Accumulated Other Comprehensive Income
    
Total
  
                                     
Balance at December 31, 2009
     11,940,373     $ 119,404     $ 7,005,891     $ (5,534,022 )   $ (14,160 )   $ 1,577,113  
                                                 
Warrants Extension
                     18,000                       18,000  
Discount on Convertible Notes
                     269,500                       269,500  
                                                 
Other Comprehensive Income:
                                                
Change in Fair Value of Cash Flow Hedge
                                          
         net of tax effect of $(6,200)
     -       -       -       -       9,316       9,316  
                                                 
Net Income
                             786,271               786,271  
                                                 
Balance at December 31, 2010
     11,940,373     $ 119,404     $ 7,293,391     $ (4,747,751 )   $ (4,844 )   $ 2,660,200  
                                                 
Discount on Convertible Notes
                     67,167                       67,167  
                                                 
Other Comprehensive Income:
                                                
Change in Fair Value of Cash Flow Hedge
                                          
         net of tax effect of $(3,300)
     -       -       -       -       4,844       4,844  
                                                 
Net Loss
                             (7,481,702 )             (7,481,702 )
                                                 
Balance at December 31, 2011
     11,940,373     $ 119,404     $ 7,360,558     $ (12,229,453 )   $ -     $ (4,749,491 )
                                                 
                                                 
Net Income
                             1,005,205               1,005,205  
                                                 
Balance at December 31, 2012
     11,940,373     $ 119,404     $ 7,360,558     $ (11,224,248 )   $ -     $ (3,744,286 )
                                                 

 
 

The accompanying notes are an integral part of the consolidated financial statements.
 
F-6
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Consolidated Statement of Cash Flow
Years Ended December 31, 2012, 2011 and 2010

 
   
December 31,
    
December 31,
    
December 31,
  
   
2012
    
2011
    
2010
  
                   
Operating activities:
                  
   Net income (loss)
   $ 1,005,205     $ (7,481,702 )   $ 786,271  
   Adjustments to reconcile net income (loss) to net cash
                        
      provided by operating activities:
                        
         Gain on sale of equipment
     -       (9,151 )     (13,320 )
         Bad debt expense
     56,653       7,230       181,786  
         Depreciation and amortization
     478,581       624,363       690,134  
         Warrant modification expense
     -       -       18,000  
         Amortization of discount on convertible notes
     129,667       166,667       37,000  
         Tax Expense (benefit) from deferred income taxes
     620,000       1,440,199       (394,800 )
         (Increase) decrease in operating assets and
                        
            increase (decrease) in operating liabilities:
                        
               Accounts receivable
     708,988       729,426       (223,538 )
               Costs on uncompleted projects applicable to
                        
                   future billings
     1,788,854       (1,024,578 )     1,468,598  
               Billings and estimated profit in excess of costs
                        
                  on uncompleted contracts
     (367,483 )     914,243       (759,254 )
               Accrued litigation reserve
     -       149,050       -  
               Prepaid expenses, inventory and other assets
     1,020,968       (27,726 )     (139,937 )
               Other long term assets
     4,933       (17,608 )     18,015  
               Accounts payable and accrued expenses
     (1,598,812 )     14,906       (13,967 )
               Accrued future project losses
     (1,236,835 )     1,253,147       -  
                       Net cash provided by (used in) operating activities
     2,610,719       (3,261,534 )     1,654,988  
                         
Investing activities:
                        
   Purchase of property and equipment
     (132,341 )     (51,391 )     (139,279 )
   Prepaid rent payments
     -       (10,753 )     (49,247 )
   Proceeds from sale of equipment
     -       7,256       16,995  
                      Net cash used in investing activities
     (132,341 )     (54,888 )     (171,531 )
                         
Financing activities:
                        
   Decrease in outstanding checks in excess of bank balance
     -       -       (1,045,720 )
   Proceeds from issuance of convertible notes payable
     -       403,000       1,617,000  
   Redemption of convertible note payable
     -       (20,000 )     -  
   Proceeds from note payable to bank and current
                        
      and long-term borrowings, net of financing costs
     -       3,800,562       7,195,835  
   Principal payments on current and long-term borrowings
     (1,649,467 )     (1,101,559 )     (8,630,857 )
                     Net cash provided by (used in) financing activities
     (1,649,467 )     3,082,003       (863,742 )
                         
Increase (decrease) in cash
     828,911       (234,419 )     619,715  
                         
Cash at beginning of period
     412,141       646,560       26,845  
                         
Cash at end of period
   $ 1,241,052     $ 412,141     $ 646,560  
                         
Non-cash items:
                        
   Non-cash debt refinancing
   $ -     $ 4,794,335     $ -  
   Non-cash refinancing of insurance
   $ 947,354     $ 580,917     $ 562,628  

The accompanying notes are an integral part of the consolidated financial statements.
 
F-7
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


1.         Summary of Significant Accounting Policies
Basis of Presentation
 
OP-TECH Environmental Services, Inc. and Subsidiaries (the “Company”), a Delaware corporation headquartered in Syracuse, New York, provides comprehensive environmental and industrial services predominately in New York, New England, Pennsylvania, and New Jersey.  The Company performs industrial cleaning of hazardous and non-hazardous materials and provides varying services relating to plant facility closure, including interior and exterior demolition and asbestos removal.  In addition, the Company provides remediation services for sites contaminated by hazardous and non-hazardous materials and provides 24-hour emergency spill response services.  The Company’s revenues are derived from state agencies, industrial companies and municipalities facing complex environmental clean-up problems associated with hazardous and non-hazardous materials as required by various governmental agencies.  The Company’s services include assessing the regulatory, technical, and construction aspects of the environmental issue, and performing the necessary remediation activities.  The Company seeks to provide its clients with remedial solutions which integrate the various aspects of a project and are well-documented, practical, cost effective, and acceptable to regulatory agencies and the public.

OP-TECH AVIX, Inc. (AVIX) is a subsidiary of OP-TECH Environmental Services, Inc. formed in January 2002 to pursue and engage in diversified lines of business.  In the fourth quarter of 2004, this subsidiary became inactive, and the Company is no longer pursuing the lines of business that AVIX performed.  Therefore, separate segment information is no longer presented in the Consolidated Financial Statements.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of OP-TECH Environmental Services, Inc. and its two wholly-owned subsidiaries (collectively, the “Company”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  Estimates also affect the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Cash and Cash Equivalents
 
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Project Income Recognition
 
Contracts are predominately short-term in nature (less than six months), and revenue is recognized as costs are incurred based on either the percentage of completion method utilizing estimated gross margins anticipated for each specific project or as incurred for time and material contracts.  Project costs include all direct material, equipment, and labor costs and those indirect costs related to contract performance.
 
Revenues recognized in excess of amounts billed are recorded as a current asset.  Deferred revenue resulting from billings that exceed costs and estimated profit is reflected as a current liability.
 

 
 
F-8
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


Provisions for estimated losses are made in the period in which such losses are determined.  Due to the nature of the Company’s operations, the estimated revenues could change materially in the near term.
 
Normal delays relating to receipt of job-related vendor invoices, payroll processing, and billing compilation typically cause customer invoices relating to revenue earned in a certain month to be mailed in the first two weeks of the following month.  Such invoices mailed after year-end that are included in December 31, 2012 and 2011 accounts receivable are approximately $3,236,000 and $2,793,000, respectively.
 
Certain states impose a sales tax on the Company’s sales to nonexempt customers.  The Company collects the required sales tax from customers and remits the entire amount to the respective state.  The Company’s policy is to exclude the tax collected and remitted from revenues and expenses.
 
Concentration of Business Risk - Significant Customers
 
Sales to one customer amounted to approximately $7,235,000, $2,550,000, and $8,536,000 in 2012, 2011, and 2010, respectively.  Accounts receivable at December 31, 2012 and 2011, include $3,719,000 and $400,000 respectively, from this customer.  The Company relinquished its prime position on a portion of this customer’s business during 2010 due to poor return on investment and significant overhead requirements.
 
Sales to another customer amounted to approximately $422,000, $1,196,000, and $3,876,000 in 2012, 2011, and 2010, respectively.  Accounts receivable at December 31, 2012 and 2011, include $258,000 and $1,318,000 respectively, from this customer.
 
Sales to another customer amounted to approximately $3,381,000, $1,258,000, and $2,665,000 in 2012, 2011, and 2010, respectively.  Accounts receivable at December 31, 2012 and 2011, include $246,000 and $327,000 respectively, from this customer.
 
Sales to another customer amounted to approximately $3,990,000 and $3,319,000 in 2012 and 2011 respectively.  Accounts receivable at December 31, 2012 and 2011 include $739,000 and $511,000 from this customer.
 
Sales to another customer amounted to approximately $1,065,000 and $3,166,000 in 2012 and 2011 and accounts receivable at December 31, 2012 and 2011 include $262,000 and $875,000 from this customer.
 
Receivables and Credit Policies
 
Accounts receivable are unsecured customer obligations due under normal trade terms requiring payment generally within 30 days from the invoice date.  Larger contracts may have longer payment terms.  Interest is not accrued on past-due invoices.  Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice.
 
The carrying amount of accounts receivable is reduced by a valuation allowance that represents management’s best estimate of the amounts that will not be collected.  See further discussion at Note 5.  The Company performs ongoing credit evaluations of customers and generally does not require collateral, although the law provides us the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers. Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.  Additionally, management estimates a general allowance based on historical charge offs covering other amounts that may not be collectible.
 

 
 
F-9
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


Inventory
 
Inventory, consisting of spill response and remediation supplies and materials, is stated at the lower of cost or market value.  Cost is determined using the first-in, first-out method.
 
Property and Equipment
 
Property and equipment are stated at cost.  Expenditures for repairs and maintenance are charged to expense as incurred.  Depreciation of assets is provided for using the straight-line method over useful lives typically ranging from 3 to 15 years.
 
Other Long-Term Assets
 
The Company classifies all deposits which are not expected to be refunded within a year a long-term assets.
 
Financial Instruments
 
The Company maintains various financial instruments in the ordinary course of business, which consist of cash, accounts receivable and payable, notes payable, long-term debt, a line of credit and interest rate swap agreement.  The carrying value of the Company’s financial instruments approximates their fair value at December 31, 2012 and 2011.  The fair values of fixed rate notes payable and long-term debt are determined using incremental borrowing rates available to the Company for similar types of borrowings.  The fair value of the interest rate swap agreement is fully discussed in Note 13.  All other financial instruments are short-term in nature and their fair values are based on the amounts that they have been or will be settled for subsequent to the balance sheet date.
 
Income Taxes
 
The Company provides for income taxes in accordance with the liability method.  Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect in the years in which the differences are expected to reverse.
 
The Company has reviewed its operations for uncertain tax positions and believes there are no significant exposures.  The Company will include interest on income tax liabilities in interest expense and penalties in operations if such amounts arise.  The Company is no longer subject to Federal and New York State examinations by tax authorities for the closed tax years before 2009.
 
Going Concern
 
The Company has substantial doubt about its ability to continue as a going concern due to the working capital deficit and the bank financing agreement.  At December 31, 2012, the Company has negative working capital with current liabilities exceeding current assets by $5,182,135.  In addition, the company violated a bank covenant during 2012 and did not receive a waiver from the bank.

The Company has made significant workforce reductions and has reduced variable monthly operating expenses.  The Company believes that based on the significant project backlog, changes in the project mix, and the revisions to their business plan, they will be able to operate profitably.  These financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result should the company be unable to continue as a going concern.

 
 
F-10
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 
Subsequent events
 
Management has evaluated subsequent events through date that the consolidated financial statements were issued.

Common Stock
In 2012, the Company increased its authorized shares of common stock to 120,000,000.

Recently Adopted Accounting Guidance
In the normal course of business, Management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting body to determine the potential impact they may have on our Consolidated Financial Statements. Based upon this review, Management does not expect any of the recently issued accounting pronouncements which have not already been adopted by the Company to have a material impact on our Consolidated Financial Statements.

2.
Stock Based Compensation and Earnings Per Share
 
The Company maintains an equity incentive plan under which it may grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, performance awards, or other forms of stock-based compensation to employees. Stock-based compensation is accounted for based on guidance issued by the Financial Accounting Standards Board (“FASB”) on Share-Based Payment. Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally three years) using the straight-line method. See Note 14 for additional details.

Basic earnings per share is computed by dividing net income (loss) by the weighted average shares outstanding for the period, which were 11,940,373 for the years ended December 31, 2012, 2011, and 2010, respectively.  Diluted earnings per share includes the potentially dilutive effect of common stock issuable upon conversion of stock options, convertible notes, and warrants, using the treasury stock method.  For the years ended December 31, 2012, 2011, and 2010, 259,673, 259,673, and 235,336, shares of unexercised stock options and warrants, respectively, are excluded from the diluted calculation due to their anti-dilutive effect.

There are warrants outstanding to purchase 480,000 shares of the Company’s common stock at a price of $0.066 per share. The warrants are exercisable at the holder’s option at any time and from time to time, in whole or in part, until expiration in May 2013.  These warrants have been excluded from the diluted calculation due to their anti-dilutive effect.

The convertible notes payable 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 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 principle balance of the notes are convertible into 33,333,334 shares of common stock plus any accrued interest at $0.06 per share.  In 2012, 48,729,743 shares were included in the weighted average shares outstanding for purpose of company diluted earnings per share.  In 2012, for purposes of computing diluted earnings per share, net income was increased by interest expense on the convertible notes of approximately $529,000 net of tax effect of approximately $200,000.  See further discussion at Note 9.

 
 
F-11
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



3.
Related Party Transactions
 
The Company purchases subcontract labor services from St. Lawrence Industrial Services, Inc., which is owned by a director of the Company.  The cost for these services amounted to approximately $2,510,000, $3,135,000 and $2,668,000, in the years ended December 31, 2012, 2011, and 2010, respectively.  St. Lawrence currently charges the Company cost for these services plus a $2,500 monthly management fee.  The Company has a payable to this related party of approximately $36,000 and $152,000 at December 31, 2012 and 2011, respectively, which are included in accounts payable in the consolidated balance sheets.

A director of the Company is a partner in or has been of counsel for law firms that provided professional services to the Company.  The cost for these services amounted to approximately $8,000, $30,000, and $55,000 in the years ended December 31, 2012, 2011, and 2010, respectively.  The Company has a payable to this related party of approximately $11,700 and $4,900 at December 31, 2012 and 2011, respectively, which are included in accounts payable in the consolidated balance sheets.

During 2012 and 2011, the Company utilized personal credit cards for several senior executives and board members to finance company expenses on a temporary basis.  Amounts reimbursed to these individuals amounted to approximately $276,000 and $272,000 for the years ended December 31, 2012 and 2011.

4.
Cash
 
From time to time cash balances held at the financial institution may exceed the Federal Deposit Insurance Corporation limits and are therefore subject to normal credit risk.

5.
Accounts Receivable
 
Accounts receivable at December 31, 2012 and 2011 consists of:
 
   
2012
    
2011
  
             
Accounts receivable, gross
   $ 8,873,559     $ 8,602,531  
Retainage receivable
     409,820       1,353,258  
Allowance for uncollectible receivables
     (442,769 )     (349,538 )
Allowance for sales credits
     (50,000 )     (50,000 )
Accounts receivable, net
   $ 8,790,610     $ 9,556,251  
 
All customer accounts receivable collateralize the Company’s outstanding loans with its primary lender (see Note 8).

 
 
F-12
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Allowance for uncollectible receivables at December 31, 2012, 2011 and 2010 consists of the following:
 
   
2012
    
2011
    
2010
  
                   
Beginning allowance for uncollectible receivables
   $ (349,538 )   $ (552,793 )   $ (625,632 )
Write off of uncollectible receivables
     50,975       216,535       254,625  
Allowance adjustment for uncollectible receivables
     (56,653 )     (7,230 )     (181,786 )
Collection of previously written-off receivables
     (87,553 )     (6,050 )     -  
Ending allowance for uncollectible receivables
   $ (442,769 )   $ (349,538 )   $ (552,793 )

6.
Property and Equipment
 
Property and equipment at December 31, 2012 and 2011 consist of:
 
   
2012
    
2011
  
             
Furniture and fixtures
   $ 60,900     $ 53,386  
Leasehold improvements
     203,450       203,450  
Office machines
     341,698       341,698  
Field equipment
     7,493,531       7,368,704  
      8,099,579       7,967,238  
Less: Accumulated depreciation
     (6,978,462 )     (6,499,881 )
    $ 1,121,117     $ 1,467,357  
 
Field equipment depreciation included in equipment expenses amounted to approximately $433,000, $556,000, and $603,000, for years ended December 31, 2012, 2011, and 2010, respectively. A portion of equipment expenses are allocated to project costs based on equipment use.  Depreciation expense for other property and equipment approximated $45,000, $69,000, and $87,000 for years ended December 31, 2012, 2011, and 2010, respectively and was included in operating expenses in the consolidated statement of operations.
 
7.
Accrued Future Loss Contracts
 
In accordance with the Company’s revenue recognition policy, certain contracts are accounted for using the percentage of completion accounting method. Revenue is recognized based on a measurement of completion comparing the ratio of costs incurred to date with total estimated costs multiplied by the contract value.  Inherent in these estimates are uncertainties about the total cost to complete the project.  If the estimate to complete results in a loss on the contract, the Company will record the amount of the estimated loss in the period the determination is made. Changes to the estimate may result in a charge or benefit to operations.  As of December 31, 2012 and 2011, the Company estimated and recorded a future loss of $16,312 and $1,253,147, respectively.
 

 
 
F-13
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



8.
Line of Credit and Debt Obligations
 
Line of credit obligations and debt at December 31, 2012 and 2011 consist of:
 
   
2012
    
2011
  
             
Note payable to bank under line of credit
   $ 5,000,000     $ 5,000,000  
                 
Term Loan due in monthly installment payments of $50,000
                
through May 2016 plus interest at LIBOR plus 3.5% collateralized
                
substantially all assets
   $ 1,964,260     $ 2,564,260  
                 
Term Loan due in monthly installment payments of $606 through
                
September 2013 plus interest at 3.71% collateralized by equipment
                
with a carrying value of approximately $12,833 at December 31, 2011
     5,927       12,870  
                 
Insurance Financing Notes, due in monthly installment payments
                
of $51,756 and $62,932 including interest at 3.08% and 2.99% at
                
December 31, 2012 and 2011, respectively collateralized by
                
assignment of unearned premiums
     154,999       250,169  
                 
      2,125,186       2,827,299  
Payment currently due on above debt
     (2,125,186 )     (2,827,299 )
    $ -     $ -  
 
The Company entered into financing agreements (the “Agreements”) with a lender (“Primary Lender”) on April 22, 2011.
 
As of December 31, 2012 and 2011, the Agreements include a Line of Credit note which provides for borrowings up to $5,000,000 based on eligible collateral to be used to provide working capital and is payable on demand.  Interest was charged at LIBOR plus 3.5%.
 
The average borrowings under the Line of Credit calculated using month-end balances were $5,000,000 and $3,628,697 for 2012 and 2011, respectively.  The weighted average interest rate was approximately 3.80% and 4.68% during 2012 and 2011, respectively.
 
The Agreements also include a $3,000,000 term loan due in monthly principal installment payments of $50,000 plus interest at LIBOR plus 3.5%.
 

 
 
F-14
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 
The Agreements include certain financial covenants measured at December 31, 2012 and 2011, including a minimum fixed charge coverage ratio and a material adverse change clause which permits the financial institution to call its obligation if the Company fails to comply with covenants, as defined, or in the event of a material adverse change in the Company’s business.
 
The Company was not in compliance with the financial covenants as of December 31, 2012 and 2011.  The Company received a waiver for December 31, 2011.  Based on violations during the first quarter of 2012, the Company has classified the debt as current.  The Company has not received a waiver for the violations in 2012.
 
In January 2005, the Company entered into the Interest Rate Swap to hedge against rising interest rates on the floating rate Term Loan debt.  The Swap agreement was terminated April 22, 2011.  The swap had been designated as a cash flow hedge.  See Note 13 for further disclosure pertaining to this Swap Agreement.
 
Interest paid amounted to approximately $304,000, $306,000 and $335,000, in the years ended December 31, 2012, 2011, and 2010.

9.
Convertible Notes Payable
 
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.
 
The principle balance of 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 Lender in connection with the loans described in Note 8 (including any security interest that may be granted in connection with funds borrowed to pay amounts due under such loan) and any obligations to repay surety bonds issued in connection with services provided in the Company’s core business where the Company is the principal under the surety bond.  The Company’s sole subsidiary also guaranteed all amounts owed by the Company under the Convertible Notes.
 
The Company recorded $336,667 in debt discount 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.  The discount is based on the market value of the stock at the date of the note agreements which was $.07 per share.  Amortization expense related to these discounts was $129,667 and $166,667 for the years ended December 31, 2012 and 2011, respectively, and is included in interest expense.  Interest expense recorded on these notes amounted to $400,000 and $120,000 in 2012 and 2011 yielding an effective interest rate of 20.0%.  The unamortized discount was fully amortized as of December 31, 2012 and was $129,667 at December 31, 2011.
 
The Company was not in compliance with the default conditions as of December 31, 2012 and December 31, 2011.  The annual interest rate is to increase to 20% for any period of default.  As of December 31, 2011, the interest began to accrue at 20%.  The redemption of shares is available to the lenders through the maturity dates set in the agreements.
 
As of April 22, 2013, the Convertible Notes were amended to provide the Lenders with the option to call a portion or all of the Principal Sum and/or Interest for payment at any time while the Convertible Notes remain outstanding.  The maturity date has been extended to August 30, 2013.  The annual interest will continue to accrue on each Note at the rate of 6% per annum through and including the applicable Original Designated Date, and at the rate of 20% per annum thereafter.
 
Due to the default on the Convertible Notes and the Lender’s option to call Convertible Notes these are classified as current as of December 31, 2012 and December 31, 2011.
 
10. 
Operating Lease Obligations
 
Office facilities and various pieces of field equipment are leased under noncancelable operating leases expiring at various dates through 2019.  These leases do not include any contingent lease provision, concessions or other restrictions.  Rent expense incurred under these operating leases as well as other month to month rentals amounted to approximately $1,002,000, $809,000, and $762,000 in 2012, 2011, and 2010, respectively.
 
The Company entered into a sublease agreement in 2009 for one of their facilities on a month to month basis at $1,437 per month.  The total amount received under the sublease agreement was approximately $6,900 in 2011 and $27,000 and 2010, including utility charges.
 
Future minimum lease payments under noncancelable operating leases are as follows:

2013
   $ 547,689  
2014
     467,421  
2015
     354,360  
2016
     321,009  
2017
     218,184  
2018 and thereafter
     377,184  
    $ 2,285,847  
         
 
The Company has made $60,000 in prepaid rent payments which are included as other long-term assets.
 
 
F-15
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 
11.       Income Taxes
 
The following summarizes the income tax (benefit) expense for the years ended December 31, 2012, 2011, and 2010:
 
   
2012
    
2011
    
2010
  
Current:
                  
Federal
   $ -     $ -     $ 6,500  
State
     (3,791 )     2,100       12,871  
      (3,791 )     2,100       19,371  
Deferred
     620,000       1,419,500       (394,800 )
    $ 616,209     $ 1,421,600     $ (375,429 )
 
The deferred tax expense (benefit) recognized for the years ended December 31, 2012, 2011 and 2010 represents the effect of changes in temporary differences and net operating loss carryforwards, along with related changes in the valuation allowance for deferred tax assets.
 
The deferred tax expense (benefit) resulting from the utilization of net operating loss carryfowards was $620,000, $(4,157,419), and $222,400 for the years ended December 31, 2012, 2011, and 2010, respectively.
 
A reconciliation of the statutory federal income tax rate with the Company’s effective income tax rate was as follows:
 
   
Year ended December 31,
  
   
2012
    
2011
    
2010
  
                                     
   
Amount
    
Percent
    
Amount
    
Percent
    
Amount
    
Percent
  
Taxes at Federal
                                    
Statutory Rate
   $ 551,281       34.0 %   $ (2,060,435 )     34.0 %   $ 139,686       34.0 %
                                                 
State Taxes Net of
                                                
Federal Tax Expense
     85,935       5.3 %     (321,185 )     5.3 %     21,775       5.3 %
                                                 
Increase (Decrease)
                                                
in Valuation Allowance
     -       0.0 %     3,523,000       -58.1 %     (550,000 )     -133.9 %
                                                 
Non-deductible
                                                
Expenses
     30,000       1.9 %     20,377       -0.3 %     18,614       4.5 %
                                                 
Other
     (51,007 )     -3.1 %     259,843       -4.3 %     (5,504 )     -1.3 %
                                                 
    $ 616,209       38.0 %   $ 1,421,600       -23.4 %   $ (375,429 )     -91.4 %
 
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.


 
 
F-16
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2012 and 2011 are as follows:

   
2012
    
2011
  
Deferred tax liabilities:
            
Property and equipment
   $ (84,800 )   $ (179,100 )
Deferred tax assets:
                
Net operating loss carryforward
     3,600,000       4,047,000  
Accounts receivables reserves
     192,180       155,800  
Accrued expenses
     64,800       81,400  
Interest rate swap liability
     -       -  
Accrued future project losses
     6,300       487,900  
      3,863,280       4,772,100  
                 
Net deferred tax asset
     3,778,480       4,593,000  
Valuation allowance for deferred tax assets
     (3,578,480 )     (3,773,000 )
Net deferred tax asset, net of valuation allowance
   $ 200,000     $ 820,000  
                 
 
As of December 31, 2012, the Company has federal net operating loss (“NOL”) carryforwards of approximately $9,228,615.  These expire at various times beginning in 2012 and through the year ending December 31, 2031 as follows:
 
2012
     648,582  
2018
     1,482,900  
Post 2020
     7,097,133  
    $ 9,228,615  
         
 
 

 
 
F-17
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


The Company will establish a valuation allowance if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessments of realizable deferred tax assets. The valuation allowance as of December 31, 2012 and 2011 is related to the portion of the net operating losses that based on taxable income projections may expire before being utilized. The net change in the total valuation allowance for the years ended December 31, 2012, 2011 and 2010, was $0, an increase of $3,523,000 and a decrease of $550,000, respectively.

Management believes that it is more likely than not that the Company will not be able to use a significant portion of the net operating loss carryforwards expiring through 2018 and post 2020.  As a result, the valuation allowance was maintained for the year ended December 31, 2012 to offset deferred tax assets.  A current deferred tax asset has not been recorded at December 31, 2012 since management is unable to determine that the Company will have income for the year ended December 31, 2013.  A long-term deferred tax asset has been recorded at December 31, 2012 based on the reasonable anticipation of income during the years 2014 through 2018.

Income taxes and franchise taxes paid were approximately $7,000, $4,400, and $13,000 in the years ended December 31, 2012, 2011, and 2010, respectively.  There were no taxes currently payable at December 31, 2012.

12.
Employee Benefit Plan
 
The Company maintains a defined contribution employee retirement plan (“Retirement Plan”) which covers substantially all employees.  The Retirement Plan is funded by voluntary employee contributions which are matched by the Company at a designated percentage, and additional contributions by the Company at the discretion of the Board of Directors.  Matching contributions made by the Company to the Retirement Plan were approximately $53,000, $48,000, and $42,000 in the years ended December 31, 2012, 2011, and 2010, respectively.  The Company did not make discretionary contributions to the Retirement Plan in the years ended December 31, 2012, 2011, and 2010.
 
13.
Fair Values of Assets and Liabilities
 
On January 1, 2009, the Company adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on Fair Value Measurements which defines fair value as the exchange price that would be received for an asset or the exit price to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. This guidance also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.
 
The Company had recorded its interest rate swap transaction at fair value, resulting in a liability of $8,345 as of December 31, 2010.  The agreement was terminated as part of the senior debt refinancing on April 22, 2011.

 
 
F-18
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

14. 
Stock Option Plan
 
The 2002 Omnibus Plan (“Omnibus Plan”) maintained by the Company is intended to promote the growth and general prosperity of the Company by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees.  Awards granted under the Omnibus Plan may be (a) Stock Options which may be designated as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options (“NQSO’s) not intended to so qualify; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; or (e) other forms of stock-based incentive awards. The shares of stock with respect to which the Awards may be granted shall be the common stock, par value at $0.01, of the Company (“Common Stock").  Shares delivered upon exercise of the Awards, at the election of the Board of Directors of the Company, may be stock that is authorized but previously unissued or stock reacquired by the Company, or both. The maximum number of shares with respect to which the Awards may be granted under the Omnibus Plan shall not exceed 1,000,000 shares of Common Stock; provided, however, that such number of shares of Common Stock may also be subject to adjustment, from time to time, at the discretion of the Board of Directors of the Company.  These Awards generally vest over a three-year period, and have contractual terms of 10 years. The Company did not issue any grants during the years ended December 31, 2012, 2011 or 2010.

Stock options are granted at the fair market value of the stock on the date of grant. The Company uses the Black-Scholes-Merton option pricing model to value its grants, which requires the input of various assumptions. These assumptions include expected term of the options, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that will be forfeited prior to exercise. Compensation cost is measured based on the grant-date fair value of the award, and is recorded over the vesting period for those options expected to vest.
 
The Company did not issue any awards during the years ended December 31, 2012, 2011, and 2010.  All compensation cost related to vesting option awards have been recognized and no compensation cost was recorded in the years ended December 31, 2012, 2011, and 2010.  The Company extended warrants in May 2010 and recorded $18,000 of compensation expense in 2010.

The following table summarizes changes in the status of outstanding options:

   
Shares
    
Weighted Average Exercise Price
  
Outstanding at January 1, 2012
     259,673     $ 0.28  
Forfeited
     -     $ -  
Outstanding at December 31, 2012
     259,673     $ 0.28  
Exercisable at December 31, 2012
     259,673     $ 0.28  
                 


The remaining weighted average contractual life of options outstanding at December 31, 2012 is approximately 1.3 years, and the aggregate intrinsic value of options outstanding at December 31, 2012 is zero dollars.

 
 
F-19
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



15.
Commitment and Contingencies

The Company is subject to various federal, state and local regulations relating to environmental matters, including laws which require the investigation and, in some cases, remediation of environmental contamination.  The Company's policy is to accrue and charge to operations environmental investigation and remediation expenses when it is probable that a liability has been incurred and an amount is reasonably estimable.

The Company settled a lawsuit for $450,000 in 2009.  There are two litigations that arose from that suit.  The Company entered into an agreement to contribute 15% to any settlement of the actions, proving the Company deems the total proposed settlement reasonable.  The Company settled both litigations in 2012 for $1,050 and $48,000, respectively.  The Company had accrued a liability of $49,050 at December 31, 2011 for these settlements.
 
In 2012, the Company paid a settlement for $100,000 with the New York State Department of Labor related to asbestos operations.  The Company had accrued a liability of $100,000 at December 31, 2011 for this settlement.  The Company’s asbestos handling license is current and in compliance.
 
The Company is a party to various proceedings arising from the normal course of business.  Based on information currently available, management believes adverse decisions relating to litigation and contingencies in the aggregate would not materially affect the Company's results of operations, cash flows or financial condition.  It is reasonably possible, however, that a change in estimate could occur within one year which may affect the Company's results of operations, cash flows or financial condition.

The State of New York (NYS) began an examination of the Company’s sales and use tax returns for December 2008 through May 2011 in the third quarter of 2011 that is estimated to be completed during the second quarter of 2013. As of December 5, 2012, NYS has proposed adjustments of approximately $140,000 to the Company’s sales and use tax positions. Management is currently evaluating those proposed adjustments.  During 2012, the Company applied sales tax credits with New York State of approximately $400,000 which are still under review by the state of New York.  The Company has accrued an obligation sufficient enough to cover these proposed adjustments as of December 31, 2012.

 
 
F-20
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



16.       Three-Year Selected Quarterly Financial Data (Unaudited)
 
   
Year Ended December 31, 2012
  
   
Quarter
    
Quarter
    
Quarter
    
Quarter
  
   
Ended
    
Ended
    
Ended
    
Ended
  
   
March 31
    
June 30
    
September 30
    
December 31
  
Project Billings
     5,512,591       8,911,076       8,497,189       9,343,195  
Gross Margin
     1,533,258       2,444,855       2,934,137       2,361,986  
Net income (loss)
     (324,048 )     417,316       684,030       227,907  
Net income (loss) per share
                          
    basic
   $ (0.03 )   $ 0.03     $ 0.06     $ 0.02  
    diluted
   $ (0.03 )   $ 0.01     $ 0.01     $ 0.01  
 
   
Year Ended December 31, 2011
  
   
Quarter
    
Quarter
    
Quarter
    
Quarter
  
   
Ended
    
Ended
    
Ended
    
Ended
  
   
March 31
    
June 30
    
September 30
    
December 31
  
Project Billings
   $ 4,907,402     $ 7,793,768     $ 9,282,640     $ 8,681,524  
Gross Margin
     1,347,221       2,064,800       823,672       (1,458,007 )
Net loss
     (598,520 )     (22,000 )     (1,118,043 )     (5,743,139 )
Net loss per share
                                
    basic
   $ (0.05 )   $ (0.002 )   $ (0.09 )   $ (0.49 )
     diluted
   $ (0.05 )   $ (0.002 )   $ (0.09 )   $ (0.49 )

 

 
 
F-21
 
OP-TECH Environmental Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 
   
Year Ended December 31, 2010
  
   
Quarter
    
Quarter
    
Quarter
    
Quarter
  
   
Ended
    
Ended
    
Ended
    
Ended
  
   
March 31
    
June 30
    
September 30
    
December 31
  
Project Billings
   $ 13,846,687     $ 12,058,774     $ 10,679,502     $ 9,451,080  
Gross Margin
     2,294,849       2,789,901       2,391,464       1,484,018  
Net income (loss)
     92,215       243,260       558,266       (107,470 )
Net income (loss) per share
                          
    basic
   $ 0.01     $ 0.02     $ 0.05     $ (0.01 )
     diluted
   $ 0.01     $ 0.02     $ 0.02     $ (0.01 )

 
 
F-22
 

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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)

By:/s/ Charles B. Morgan 
Charles B. Morgan
Chief Executive Officer

May 28, 2013

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 28th day of May 2013.

/s/ Robert J. Berger                                                               
Robert J. Berger
Director and Co-Chairman of the Board
 
/s/ Richard Messina                                                             
Richard Messina
Director and Co-Chairman of the Board
 
/s/ Richard L. Elander 
Richard L. Elander
Director

/s/ Richard Jacobson                                                               
Richard Jacobson
Director

/s/ Steven A. Sanders                                                               
Steven A. Sanders
Director

/s/ George W. Lee Jr.                                                               
George W. Lee Jr.
Director

/s/ Charles B. Morgan                                                               
Charles B. Morgan
Chief Executive Officer
 
/s/ Michael D. McCall                                                               
Michael D. McCall
Treasurer and Controller


 
31