UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-55159
CES Synergies, Inc.
(Exact Name of Registrant as Specified in its
Charter)
Nevada |
|
46-0839941 |
(State or Other
Jurisdiction of
Incorporation or Organization) |
|
(I.R.S. Employer
Identification
No.) |
|
|
|
39646 Fig Street
P.O. Box 1299
Crystal Springs, FL |
|
33524 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
Registrant’s telephone number, including
area code: 813-783-1688
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter
period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ☐ |
|
Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
|
Smaller reporting company ☒ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of
each of the issuer’s classes of common stock, as of the latest practicable date:
Class |
|
Outstanding
as of August 03, 2015 |
Common
Stock, $0.001 par value |
|
46,860,500 |
CES
SYNERGIES, INC.
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
|
Page |
Item
1. Financial Statements. |
3 |
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
16 |
|
|
Item
3. Quantitative and Qualitative Disclosures About Market Risk. |
30 |
|
|
Item
4. Controls and Procedures. |
31 |
|
|
PART II - OTHER INFORMATION |
|
|
Item
1. Legal Proceedings. |
31 |
|
|
Item
1A. Risk Factors. |
31 |
|
|
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds. |
31 |
|
|
Item
3. Defaults Upon Senior Securities. |
31 |
|
|
Item
4. Mine Safety Disclosures. |
31 |
|
|
Item
5. Other Information. |
31 |
|
|
Item
6. Exhibits. |
32 |
|
|
SIGNATURES |
33 |
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
CES
SYNERGIES, INC.
CONSOLIDATED
BALANCE SHEETS (Unaudited)
| |
June
30,
2015 | | |
December 31,
2014 | |
| |
| | |
| |
ASSETS | |
| | |
| |
| |
| | |
| |
Current assets | |
| | |
| |
Cash | |
$ | 193,276 | | |
$ | 149,455 | |
Advances
to Employees | |
| 14,136 | | |
| 14,006 | |
Contracts
Receivable (net of allowance for bad debt) | |
| 3,408,232 | | |
| 6,365,274 | |
Inventory | |
| 163,987 | | |
| 152,772 | |
Cost
and Estimated Earnings in Excess of Billings on Uncompleted Contracts | |
| 1,165,328 | | |
| 229,437 | |
Total
current assets | |
| 4,944,959 | | |
| 6,910,944 | |
| |
| | | |
| | |
Property
and Equipment | |
| | | |
| | |
Furniture,
Fixtures, and Equipment | |
| 13,184,537 | | |
| 12,767,975 | |
Less:
accumulated depreciation | |
| (10,904,641 | ) | |
| (10,650,758 | ) |
Net
property & equipment | |
| 2,279,896 | | |
| 2,117,217 | |
| |
| | | |
| | |
Other
assets | |
| | | |
| | |
Goodwill | |
| 1,446,855 | | |
| 1,446,855 | |
Other
assets | |
| 5,648 | | |
| 6,531 | |
Total
other assets | |
| 1,452,503 | | |
| 1,453,386 | |
TOTAL
ASSETS | |
$ | 8,677,358 | | |
$ | 10,481,547 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Current
liabilities | |
| | | |
| | |
Accounts
payable | |
$ | 2,095,870 | | |
$ | 2,570,259 | |
Accrued
payroll/expenses | |
| 27,329 | | |
| 82,391 | |
Billings
in Excess of Costs and Estimated Earnings on Uncompleted Contracts | |
| 268,362 | | |
| 598,645 | |
Notes
payable | |
| 1,925,300 | | |
| 1,750,300 | |
Current
Portion Long-term Debt | |
| 595,757 | | |
| 595,757 | |
Total
current liabilities | |
| 4,912,618 | | |
| 5,597,352 | |
Long-term liabilities | |
| | | |
| | |
Long-term
debt, net of current portion | |
| 3,418,980 | | |
| 3,337,166 | |
Total
long-term liabilities | |
| 3,418,980 | | |
| 3,337,166 | |
| |
| | | |
| | |
Stockholders'
equity | |
| | | |
| | |
Common
Stock, $0.001 par value, authorized 250,000,000 shares, June 30, 2015 and December 31, 2014 | |
| | | |
| | |
Issued:
46,860,500 shares at June 30, 2015; and 46,730,500 shares at December 31, 2014 | |
| 46,861 | | |
| 46,730 | |
Additional
Paid in Capital | |
| 1,299,018 | | |
| 1,281,048 | |
Retained
earnings | |
| (1,000,119 | ) | |
| 219,251 | |
Total
stockholders' equity | |
| 345,760 | | |
| 1,547,029 | |
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY | |
$ | 8,677,358 | | |
$ | 10,481,547 | |
See
accompanying Notes to Consolidated Financial Statements
CES
SYNERGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
| |
Three
Months ended | | |
Six
Months ended | |
| |
June
30, 2015 | | |
June
30, 2014 | | |
June
30, 2015 | | |
June
30, 2014 | |
Revenues | |
$ | 5,122,135 | | |
$ | 4,680,854 | | |
$ | 8,645,492 | | |
$ | 8,493,439 | |
Cost of sales | |
| 4,263,110 | | |
| 3,353,800 | | |
| 7,113,149 | | |
| 6,513,875 | |
Gross profit | |
| 859,025 | | |
| 1,327,054 | | |
| 1,532,343 | | |
| 1,979,564 | |
General &
administrative expenses | |
| 1,275,290 | | |
| 1,265,463 | | |
| 2,594,169 | | |
| 2,441,107 | |
Net operating profit/(loss) | |
| (416,265 | ) | |
| (61,591 | ) | |
| (1,061,826 | ) | |
| (461,543 | ) |
Other income/
(expenses), net | |
| (88,227 | ) | |
| (76,563 | ) | |
| (157,544 | ) | |
| (24,441 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net profit/(loss) | |
$ | (504,492 | ) | |
$ | (138,154 | ) | |
$ | (1,219,370 | ) | |
$ | (437,102 | ) |
Earnings per share | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.011 | ) | |
$ | (0.003 | ) | |
$ | (0.026 | ) | |
$ | (0.009 | ) |
Shares used in computing earnings per share | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 46,755,170 | | |
| 46,549,000 | | |
| 46,755,170 | | |
| 46,549,000 | |
Cash distributions declared per common
share | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
See
accompanying Notes to Consolidated Financial Statements
CES
SYNERGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
| |
Six
months ended | |
| |
June
30,
2015 | | |
June
30,
2014 | |
Operating Activities | |
| | |
| |
Net
Loss | |
$ | (1,219,370 | ) | |
$ | (437,102 | ) |
Adjustments
to reconcile net loss to cash provided (used) by operating activities | |
| | | |
| | |
Depreciation
expense | |
| 253,883 | | |
| 276,667 | |
Decrease
(Increase) in: | |
| | | |
| | |
Contracts
receivable | |
| 2,957,042 | | |
| 192,440 | |
Other
assets | |
| 753 | | |
| 29,227 | |
Inventories | |
| (11,215 | ) | |
| 41,120 | |
Cost
& estimated earnings in excess of billings on uncompleted contracts | |
| (935,891 | ) | |
| 113,099 | |
Increase
(Decrease) in: | |
| | | |
| | |
Accounts
payable | |
| (474,389 | ) | |
| (226,824 | ) |
Accrued
liabilities | |
| (55,062 | ) | |
| (98,410 | ) |
Billings
in excess of costs and estimated earnings | |
| (330,283 | ) | |
| (230,995 | ) |
Total
Adjustments | |
| 1,404,838 | | |
| 96,324 | |
Net
cash provided (used) by operating activities | |
$ | 185,468 | | |
$ | (340,778 | ) |
| |
| | | |
| | |
Investing
Activities: | |
| | | |
| | |
Purchase
of property and equipment | |
| (416,562 | ) | |
| (361,943 | ) |
Proceeds
from disposal of equipment | |
| - | | |
| - | |
Net
cash provided (used) by investing activities | |
| (416,562 | ) | |
| (361,943 | ) |
| |
| | | |
| | |
Financing
Activities: | |
| | | |
| | |
New
borrowings | |
| 591,562 | | |
| 5,206,356 | |
Debt
reduction | |
| (334,747 | ) | |
| (4,721,054 | ) |
Capital
contributed | |
| 18,100 | | |
| 282,150 | |
Net
cash provided (used) by financing activities | |
| 274,915 | | |
| 767,452 | |
| |
| | | |
| | |
Net
increase (decrease) in cash | |
| 43,821 | | |
| 64,731 | |
| |
| | | |
| | |
Cash
at beginning of period | |
| 149,455 | | |
| 250,359 | |
| |
| | | |
| | |
Cash
at end of period | |
$ | 193,276 | | |
$ | 315,090 | |
| |
| | | |
| | |
Supplemental
Disclosures | |
| | | |
| | |
Interest
paid | |
$ | 148,307 | | |
$ | 117,120 | |
Income
taxes paid | |
$ | - | | |
$ | - | |
See
accompanying Notes to the Consolidated Financial Statements
CES
SYNERGIES, INC.
JUNE
30, 2015
(Unaudited)
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Company Background
CES
Synergies, Inc. (unless otherwise indicated, together
with its consolidated subsidiaries, the “Company”) is a Nevada corporation formed on April 26, 2010. The Company is
the parent company of Cross Environmental Services, Inc. (“CES”) which was incorporated in 1988 in the state of Florida.
The Company acquired CES in a reverse merger transaction that closed on November 1, 2013, and CES is deemed the accounting acquirer
under accounting rules. The Company is
an asbestos and
lead abatement contracting
firm specializing in the removal
of asbestos and
lead from buildings
and other structures,
and demolition of structures. The
Company’s services include removal
of asbestos and lead,
construction, installation, and repair of ceilings and insulation
systems and demolition. Most jobs are located
within the state
of Florida, but the Company accepts and
performs jobs throughout the southeastern
United States.
Note
2 - Summary of Significant Accounting Policies
This
summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial
statements.
The
Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States
of America and has adopted a year-end of December 31.
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Management
further acknowledges that it is solely responsible for adopting sound accounting practices consistently applied, establishing
and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal
accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are
recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present
fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
Basis
of Presentation
The
Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. These
include the accounts
of Cross Environmental
Services, Inc., and
its wholly-owned subsidiaries,
Cross Demolition, Inc.,
Cross Insulation, Inc.,
Cross Remediation, Inc., Cross
FRP, Inc., Triple
J Trucking, Inc., and
Tenpoint Trucking, Inc. All significant intercompany account balances, transactions,
profits and losses have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those
estimates.
Fair
Value of Financial Instruments
For
certain financial instruments, including accounts receivable, accounts payable, accrued expenses, interest payable, advances payable
and notes payable, the carrying amounts approximate fair value due to their relatively short maturities.
The
Company has adopted ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and
establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements
for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities
each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between
the origination of such instruments and their expected realization and their current market rate of interest. The three levels
of valuation hierarchy are defined as follows:
|
● |
Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. |
|
● |
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument. |
|
● |
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The
Company did not identify any non-recurring assets and liabilities that are required to be presented in the balance sheets at fair
value in accordance with ASC 815, “Derivatives and Hedging.”
In
February 2007, the FASB issued ASC 825-10 “Financial Instruments.” ASC 825-10 permits entities to choose to
measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings. ASC 825-10 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007.
The
carrying amounts of cash and current liabilities approximate fair value due to the short maturity of these items. These fair value
estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect these estimates. The Company does not hold or issue financial
instruments for trading purposes, nor does it utilize derivative instruments in the management of foreign exchange, commodity
price, or interest rate market risks.
Revenue
and Cost Recognition
The
Company follows ASC 605-35 "Revenue Recognition: Construction type contracts"
and recognizes revenues from
fixed-price and modified
fixed-price construction contracts
on the percentage-of-completion method,
measured by the
percentage of cost
incurred to date to estimated total cost
for each contract.
This method is used
because management considers total cost to
be the best available measure of
progress on the contracts.
Contract
costs include all
direct material and
labor costs and
those indirect costs
related to contract performance,
such as indirect labor, supplies, tools,
repairs, and depreciation. Selling, general,
and administrative costs are charged to
expenses as incurred. Provisions for estimated losses on uncompleted contracts, if
any, are made in the period in
which such losses are determined.
Changes in job performance, job conditions, and
estimated profitability may
result in revisions to costs and
income which are recognized in the period in which
the revisions are
determined.
The
asset, "Costs and estimated
earnings in excess
of billings on
uncompleted contracts," represents
revenues recognized in excess
of amounts billed.
The
liability, "Billings in
excess of costs
and estimated earnings
on uncompleted contracts,"
represents billings in excess
of revenues recognized.
Contract
retentions are included
in contracts receivable.
Cash
and Cash Equivalents
For
purposes of reporting
cash flows, the
Corporation considers cash
and cash equivalents
to be all highly
liquid deposits with
maturities of three months or less.
Cash equivalents are carried at cost, which approximates market value.
Concentrations
of Credit Risk
The
company maintains cash
balances at Centennial Bank located
in Central Florida. The
cash accounts are insured
by the Federal
Deposit Insurance Corporation up to
$250,000. At June 30, 2015 and 2014, the Company’s uninsured cash balances for those accounts were
$0.
Special
purpose entities
The Company
does not have any off-balance sheet financing activities.
Contracts
Receivable
Contracts
receivable are recorded
when invoices are
issued and presented
in the balance
sheet net of
the allowance for doubtful
accounts. Contract receivables are written off when
they are determined to be uncollectible. The allowance for doubtful
accounts is estimated based on the
Company's historical average percentage of bad debts
in relation to
its revenue.
Inventory,
Net
Inventories
consist primarily of
job materials and
supplies and are
priced at the
lower of cost
(first-in, first-out) or market.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements are
capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss thereon is recognized as operating expenses.
Depreciation
is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term
of the related lease, including renewal periods, if shorter. Estimated useful lives are as follows:
The
Company reviews property, plant and equipment and all amortizable intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated
undiscounted cash flows. Measurement of the impairment loss, if any, is based on the difference between the carrying value and
fair value.
Impairment
of Long-Lived Assets and Amortizable Intangible Assets
The
Company follows ASC 360-10, “Property, Plant, and Equipment,” which establishes a “primary asset”
approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting
for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived
asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition
of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
Through June 30, 2015, the Company had not experienced impairment losses on its long-lived assets.
Intangible
Assets - Goodwill
Cost
of investment in
purchased company assets
(Simpson & Associates,
Inc.) in excess
of the underlying fair value
of net assets at date of acquisition
(March 2001) is recorded as goodwill on the balance sheet. The amount of $1,396,855 was acquired
in 2001 and an additional $50,000 was reclassified
as goodwill in 2002. Goodwill is not amortized, but instead is assessed for impairment
at least annually and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that
the fair value of goodwill may be impaired. Measurement of the impairment loss, if any, is based on the difference between the
carrying value and fair value of the reporting unit. The goodwill impairment test follows a two-step process. In the first step,
the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair
value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair
value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill
value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment
loss will be recognized in an amount equal to that excess. There were no material impairments to the carrying value of long-lived
assets and intangible assets subject to amortization during the quarters ended June 30, 2015 and 2014.
Business
segments
ASC
280, “Segment Reporting” requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the company for making
operating decisions and assessing performance. The Company determined it has three operating segments as of June 30, 2015 and
June 30, 2014.
Income
Taxes
Tax
expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent
that they relate to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax
is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes
any tax liability arising from the declaration of dividends. Deferred tax would be recognized in respect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
No deferred tax is recognized since the difference in carrying amount is not significant.
Net
Income (Loss) per Share
The
Company computes net income (loss) per share in accordance with ASC 260-10, “Earnings Per Share.” The basic
net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted
net loss per share gives effect to all dilutive potential common shares outstanding during the period using the “as if
converted” basis. For the quarters ended June 30, 2015 and 2014 there were no potential dilutive securities.
Common
Stock
There
is currently only one class of common stock. Each share of common stock is entitled to one vote. The authorized number of shares
of common stock of CES Synergies, Inc. at June 30, 2015 and 2014 was 250,000,000 shares
with a nominal par value per share of $0.001. Authorized shares that have been issued and fully paid amounted to 46,860,500 at
June 30, 2015 compared to 46,686,500 common shares at June 30, 2014.
Comprehensive
Loss
Comprehensive
loss represents net loss plus the change in equity of a business enterprise resulting from transactions and circumstances from
non-owner sources. The Company’s comprehensive loss was equal to net loss for the periods ended June 30, 2015 and 2014.
Note
3 – Recent Accounting Pronouncements
Financial
Accounting Standards Board (“FASB”) Update No. 2012-02, July 2012, Intangibles—Goodwill and Other (Topic 350):
In accordance with the amendments in this update, an entity has the option first to assess qualitative factors to determine whether
the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset
is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than
not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if
an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform
the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30.
FASB
Update No. 2012-06, October 2012, Business Combinations (Topic 805): When a reporting entity recognizes an indemnification asset
(in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently
a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows
expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change
in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any
amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser
of the term of the indemnification agreement and the remaining life of the indemnified assets).
FASB
Update No. 2013-01, January 2013, Balance Sheet (Topic 210): The amendments in this update affect entities that have derivatives
accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase
agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45
or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of
financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because
these amendments make them no longer subject to the disclosure requirements in FASB Update 2011-11.
Note
4 – Contracts Receivable
Contracts
Receivable consist of at:
| |
June
30, | |
| |
2015 | | |
2014 | |
Billed | |
| | |
| |
Completed Contracts | |
$ | 2,289,087 | | |
$ | 2,463,729 | |
Contracts in Progress | |
| 662,870 | | |
| 727,790 | |
Retained | |
| 657,275 | | |
| 782,750 | |
Allowance for
Bad Debts | |
| (201,000 | ) | |
| (201,000 | ) |
TOTAL | |
$ | 3,408,232 | | |
$ | 3,773,269 | |
Note
5 – Property, Plant and Equipment
Property,
plant and equipment and related accumulated depreciation consists of the following:
| |
June
30, | |
| |
2015 | | |
2014 | |
Machinery
and Equipment | |
$ | 4,137,045 | | |
$ | 3,729,922 | |
Office
furniture and Equipment | |
| 172,635 | | |
| 169,255 | |
Transportation
and Earth Moving Equipment | |
| 8,844,668 | | |
| 8,671,000 | |
Leasehold
Improvements | |
| 30,189 | | |
| 25,500 | |
Property,
Plant and Equipment Gross | |
| 13,184,537 | | |
| 12,595,677 | |
Less:
Accumulated Depreciation | |
| (10,904,641 | ) | |
| (10,349,583 | ) |
Property,
Plant and Equipment Net | |
$ | 2,279,896 | | |
$ | 2,246,094 | |
Depreciation
expense for the six months ended June 30, 2015 and 2014 was $253,883 and $276,667 respectively.
Note
6 –
Costs and Estimated Earnings on
Contracts
For the
six months ended June 30, 2015:
| |
Revenues
Earned | | |
Cost
of Revenues | | |
Gross
Profit (Loss) | |
| |
| | |
| | |
| |
Revenue on completed contracts | |
$ | 5,265,707 | | |
$ | 3,863,499 | | |
$ | 1,402,208 | |
Revenue on uncompleted
contracts | |
| 3,379,785 | | |
| 3,249,649 | | |
| 130,136 | |
Total
for six months ended June 30, 2015 | |
$ | 8,645,492 | | |
$ | 7,113,148 | | |
$ | 1,532,344 | |
| |
As
of
June 30,
2015 | |
Costs
incurred on uncompleted contracts | |
$ | 6,950,916 | |
Estimated
earnings on uncompleted contracts | |
| 1,770,479 | |
Revenues
earned on uncompleted contracts | |
| 8,721,395 | |
Billings
to date | |
| 7,824,426 | |
Total
Net Amount | |
$ | 896,969 | |
| |
| | |
Amount
shown as cost and estimated earnings in excess of billings on uncompleted contracts | |
$ | 1,165,329 | |
Amount
shown as billings in excess of costs and estimated earnings on uncompleted contracts | |
| (268,360 | ) |
| |
| | |
Total
Net Amount | |
$ | 896,969 | |
For
the six months ended June 30, 2014:
| |
Revenues
Earned | | |
Cost
of Revenues | | |
Gross
Profit (Loss) | |
| |
| | |
| | |
| |
Revenue on completed contracts | |
$ | 5,711,986 | | |
$ | 3,851,114 | | |
$ | 1,860,872 | |
Revenue on uncompleted
contracts | |
| 2,781,453 | | |
| 2,662,761 | | |
| 118,692 | |
Total
for six months ended June 30, 2014 | |
$ | 8,493,439 | | |
$ | 6,513,875 | | |
$ | 1,979,564 | |
| |
As
of
June 30,
2014 | |
Costs incurred on uncompleted
contracts | |
$ | 4,657,779 | |
Estimated earnings on uncompleted
contracts | |
| 945,590 | |
Revenues
earned on uncompleted contracts | |
| 5,603,369 | |
Billings
to date | |
| 5,194,537 | |
Total Net Amount | |
$ | 408,832 | |
| |
| | |
Amount shown as cost and estimated earnings
in excess of billings on uncompleted contracts | |
$ | 696,449 | |
Amount shown
as billings in excess of costs and estimated earnings on uncompleted contracts | |
| (287,617 | ) |
Total Net Amount | |
$ | 408,832 | |
Note
7 –
Long-Term Debt
Long-term
debt consists of the following at June 30, 2015 and 2014:
| |
June
30,
2015 | | |
June
30,
2014 | |
Demand
Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in monthly payments of $4,632,
interest rate of 4.25%. | |
$ | 236,927 | | |
$ | - | |
| |
| | | |
| | |
Line
of credit, Centennial Bank, Dade City, FL variable interest of 1.25% over prime, current rate 3.25%, secured by land, improvements,
and accounts receivable. This line of credit matured on April 30, 2015. | |
$ | 1,750,300 | | |
$ | 1,750,300 | |
| |
| | | |
| | |
Installment
loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston. Payable in monthly payments
of $23,994, interest rate of 6.15%. | |
$ | 2,636,137 | | |
$ | 2,780,663 | |
| |
| | | |
| | |
Line
of credit, Centennial Bank, Dade City, FL, variable interest of 1.25% over prime, year-end rate 3.25%, secured by land, improvements,
and accounts receivable. This line of credit matured on April 30, 2014. | |
$ | 175,000 | | |
$ | - | |
| |
| | | |
| | |
Various
installment loans payable in monthly payments, interest rates ranging from 0% to 9.5%, secured by various equipment, vehicles,
and property. | |
$ | 1,141,673 | | |
$ | 1,158,178 | |
Total | |
| 5,940,037 | | |
| 5,689,141 | |
Less:
Current portion | |
| (2,521,057 | ) | |
| (2,416,856 | ) |
Long-Term
debt, less current portion | |
$ | 3,418,980 | | |
$ | 3,272,285 | |
Note 8
– Commitments and Contingencies
Commitments
Principal
payments on long-term debt are due as follows:
Year ending December 31, | |
| |
2015 | |
$ | 2,521,057 | |
2016 | |
| 618,799 | |
2017 | |
| 409,264 | |
2018 | |
| 304,587 | |
2019+ | |
| 2,086,330 | |
| |
$ | 5,940,037 | |
Contingencies
None.
Note
9 – Loss per Share
| |
For
the six months ended | |
| |
June
30,
2015 | | |
June
30,
2014 | |
| |
| | |
| |
Net
Loss | |
$ | (1,219,370 | ) | |
$ | (437,102 | ) |
Weighted-average common shares outstanding | |
| | | |
| | |
basic: | |
| 46,755,170 | | |
| 46,686,500 | |
| |
| | | |
| | |
Weighted-average common stock | |
| | | |
| | |
Equivalents | |
| - | | |
| - | |
Stock Options | |
| - | | |
| - | |
Warrants | |
| - | | |
| - | |
Convertible Notes | |
| - | | |
| - | |
| |
| | | |
| | |
Weighted-average common shares outstanding | |
| | | |
| | |
Diluted | |
| 46,755,170 | | |
| 46,686,500 | |
| |
| | | |
| | |
Loss per share outstanding | |
| | | |
| | |
Basic and Diluted | |
$ | (0.026 | ) | |
$ | (0.0094 | ) |
Note
10 – Operating
Lease Agreements
In
the past, the
Company rented certain
equipment/office space under
month to month
operating lease agreements. Lease expenses
incurred for the six months ended June 30, 2015 and
2014 under such
agreements were $203,394,
and $194,620, respectively.
Note
11 – Related
Party Transactions
For
the purposes of these notes to consolidated financial statements, parties are considered to be related if one party has the ability
to control the other party or exercise significant influence over the other party in making financial or operational decisions.
In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely
the legal form.
Related
parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected
on the same terms, conditions and amounts as transactions between unrelated parties. Clyde A. Biston, the chairman of board of
directors and former CEO of the Company, owns a majority of our shares, meaning he can exert significant influence over corporate
decisions and strategy. Related party transactions for the period include the following:
Leased
Facilities
The
Company operates out
of facilities owned by
the majority shareholder
of the Company. Between June 1995
and October 2013, the Company
was allowed to use the facilities
rent-free. As of November 1, 2013 the Company entered into a lease agreement with the shareholder for rental of the facilities.
Rental expenses incurred for the six months ended June 30, 2015 and 2014 under the lease agreement were $96,300 and 144,195, respectively.
Note
12 – 401K
Salary Deferral Plan
The
Company has established
a deferred benefit
plan for office
and managerial staff
with one year
or more of service.
The plan allows
employees to contribute through
salary withholding. The Company may match the
contribution up to 3%
of the gross wages of the employee. Amounts
contributed by the Company for the three months ended June 30, 2015 and 2014 are $0
and $0, respectively.
Note
13 – Income Tax Provisions
Management
of the Company considers the likelihood of changes by tax authorities in its filed income tax returns and recognizes a liability
for or discloses potential significant changes that management believes are more likely than not to occur upon examination by
tax authorities. Management has not identified any uncertain tax positions in income tax returns filed that require recognition
or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject
to examination by tax authorities, and may change upon examination.
For
financial reporting purposes, for the six months ending June 30, 2015 and 2014, income before income taxes includes the following
components:
| |
June
30,
2015 | | |
June
30,
2014 | |
United States | |
$ | (1,219,370 | ) | |
$ | (437,102 | ) |
Foreign | |
| - | | |
| - | |
Total | |
$ | (1,219,370 | ) | |
$ | (437,102 | ) |
The
expense (benefit) for income taxes consist of: |
|
|
|
|
|
|
|
|
Current:
| |
| 2015 | | |
| 2014 | |
Federal | |
$ | - | | |
$ | - | |
State | |
$ | - | | |
$ | - | |
Foreign | |
$ | - | | |
$ | - | |
Total | |
$ | - | | |
$ | - | |
Deferred
and other: | |
| | | |
| | |
Federal | |
$ | - | | |
$ | - | |
State | |
$ | - | | |
$ | - | |
Foreign | |
$ | - | | |
$ | - | |
| |
$ | - | | |
$ | - | |
Total
tax expense | |
$ | - | | |
$ | - | |
Note
14 – Subsequent Events
In
July 2015, a majority shareholder made a loan to the corporation for $160,000. The loan will be payable quarterly in interest
only payments of $1,907.53 starting in October of 2015, with a maturity date of July 2020.
The
Company has performed an evaluation of subsequent events through August 03, 2015, the date the accompanying financial statements
were issued, and did not identify any material subsequent transactions that require disclosure other than noted above.
Note
15 - Segment Information
The
accounting standards for reporting information about operating segments define operating segments as components of an enterprise
for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive
Officer. The Company is organized by line of business. While the Chief Executive Officer evaluates results in a number of different
ways, the line of business management structure is the primary basis for which the allocation of resources and financial results
are assessed. Under the aforementioned criteria, the Company operates in three operating and reporting segments: remediation,
demolition and insulation.
Cross
Remediation is one segment of the Company that derives its income from mold remediation and abatement services for a broad range
of environments. Cross Demolition offers full scale commercial demolition and wrecking down to interior and selective demolition
and strip down services. Our third segment, Cross Insulation, derives its revenue from re-insulation and insulation of new and
remodeling projects.
The
information provided below is obtained from internal information that is provided to the Company’s chief operating decision
maker for the purpose of corporate management. The Company uses net operating loss to measure segment performance as recorded
below:
| |
For
the six months ended | |
| |
June
30,
2015 | | |
June
30,
2014 | |
Remediation Segment
| |
| | |
| |
| |
| | |
| |
Revenue | |
$ | 4,866,699 | | |
$ | 2,802,351 | |
Cost
of Revenues | |
| 4,488,735 | | |
| 2,030,704 | |
Gross
Profit | |
| 377,964 | | |
| 771,647 | |
| |
| | | |
| | |
General
& Administrative Expense | |
| 797,110 | | |
| 667,934 | |
Allocated
CES Admin. Expenses | |
| 601,137 | | |
| 393,167 | |
Other
Expense | |
| 3,002 | | |
| 3,343 | |
| |
| | | |
| | |
Net
Loss from Segment | |
$ | (1,023,285 | ) | |
| (292,797 | ) |
| |
For
the six months ended | |
| |
June
30,
2015 | | |
June
30,
2014 | |
Demolition Segment | |
| | |
| |
| |
| | |
| |
Revenue | |
$ | 3,568,362 | | |
$ | 5,449,460 | |
Cost of Revenues | |
| 2,737,227 | | |
| 4,401,713 | |
Gross Profit | |
| 831,135 | | |
| 1,047,747 | |
| |
| | | |
| | |
General & Administrative Expense | |
| 426,521 | | |
| 383,501 | |
Allocated CES Admin. Expenses | |
| 528,600 | | |
| 764,555 | |
Other Expense | |
| 23,811 | | |
| 13,854 | |
| |
| | | |
| | |
Net Loss from Segment | |
$ | (147,797 | ) | |
$ | (114,163 | ) |
| |
For
the six months ended | |
| |
June
30,
2015 | | |
June
30,
2014 | |
Insulation Segment | |
| | |
| |
| |
| | |
| |
Revenue | |
$ | 210,431 | | |
$ | 298,380 | |
Cost of Revenues | |
| 181,601 | | |
| 242,232 | |
Gross Profit | |
| 28,830 | | |
| 56,148 | |
| |
| | | |
| | |
General & Administrative Expense | |
| 44,878 | | |
| 44,691 | |
Allocated CES Admin. Expenses | |
| 32,367 | | |
| 41,862 | |
Other Income | |
| (127 | ) | |
| (263 | ) |
| |
| | | |
| | |
Net Loss from Segment | |
$ | (48,288 | ) | |
$ | (30,142 | ) |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking
Statements and Associated Risks
This
section and other parts of this Form 10-Q contain forward-looking statements. Forward-looking statements provide current expectations
of future events based on certain assumptions and include any statement that does not directly relate to any historical or current
fact. Forward-looking statements also can be identified by words such as “future,” “anticipates,” “believes,”
“estimates,” “expects,” “intends,” “will,” “would,” “could,”
“can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and
the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors
that might cause such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year
ended December 31, 2014 filed with the Securities and Exchange Commission on March 25, 2015 (the “2014 Form 10-K”)
under the heading “Risk Factors”.
The
following discussion should be read in conjunction with the 2014 Form 10-K and the consolidated financial statements and notes
thereto included elsewhere in this Form 10-Q. All information presented herein is based on the Company’s fiscal calendar.
Unless otherwise stated, references in this Form 10-Q to particular years, quarters, months or periods refer to the Company’s
fiscal years ended in December and the associated quarters, months, or periods of those fiscal years. Each of the terms the “Company”,
“we”, “us” or “our” as used herein refers collectively to CES Synergies, Inc. and its wholly-owned
subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for
any reason, except as required by law.
Overview
and Highlights
Since
its formation in 1988, Cross Environmental Services, Inc. (“CES”), a wholly-owned subsidiary of the Company, has been
providing asbestos abatement, demolition, and mold remediation services to city, state, and federal agencies. Our customers include
general contractors, developers, project owners, and industrial and commercial clients. Much of our work has been founded on the
removal of hazardous materials from structures ranging from residences to commercial and industrial applications, including secure
defense contractor facilities, colleges, hospitals, and mid-rise and high-rise buildings and residential structures. Additionally,
our experience working on federal projects, such as the Department of Interior, Bureau of Land Management Promiscuous Dump Clean
Up, U.S. Fish and Wildlife Service Midway Atoll Asbestos and Lead Paint Cleanup, and Department of Defense Military Housing Privatization
Initiative, gives us the expertise to provide the submittals and mandated government compliance documents for any size federal
project.
CES
removes regulated and hazardous materials from industrial, commercial and residential spaces. Specifically, we have developed
a niche market for our services that was facilitated by the Environmental Protection Agency’s National Emission Standards
for Hazardous Air Pollutants, or NESHAP, regulations. Under these regulations, if a building or structure is altered, modified
or renovated in any way, an environmental survey of the building must be completed and regulated hazardous materials (asbestos)
must be removed prior to the alteration or renovation. We provide such services to our clients.
We
also provide services related to the asbestos removal process including interior demolition, lead-based paint removal, mold abatement,
and full-scale structural demolition. We are also adept at materials handling and we have participated in emergency response activities
for multiple hurricanes, including Katrina, Rita, Gene, Francis, Ivan, and many others. We have been able to develop niche markets
by maintaining a high level of technical competence coupled with prudent management and an energetic staff. We are willing to
go to remote or extreme places to complete projects. Examples of locations at which we perform this type of work include Midway
Atoll, Curacao, Guatemala, and remote Bahamian Islands. We also developed niches providing services in connection with various
set-asides under federal law, including Service Connected Disabled Veteran Owned Small Business, Economically Disadvantaged Woman
Owned Business, HUBZone, Veteran Owned, and Total Small Business. We have strategic alliances relating to all of such set-asides
and have utilized these alliances to generate projects.
We
report results under ASC 280, Segment Reporting, for three segments: remediation, demolition and insulation. The Remediation segment
derives its income from mold remediation and abatement services for a broad range of environments. The Demolition segment offers
full scale commercial demolition and wrecking down to interior and selective demolition and strip down services. The Insulation
segment derives its revenue from re-insulation and insulation of new and remodeling projects. After careful analysis of our operations
following the business slowdown in 2011, management made the decision to scale down the less profitable demolition division and
refocus efforts on more profitable businesses in asbestos, mold, and lead remediation, and interior demolition. We will continue
to provide demolition services where they are a natural spinoff of our other work. The decision created an excess of machinery
and heavy equipment that was not being used, which we sold in 2012.
Service
Contracts
We
offer services in the environmental contracting arena. Our core business includes hazardous material removal (lead and asbestos),
interior demolition, full scale demolition, and mold remediation. Historically, our customers have come to us either through a
low bid environment or through direct negotiations.
We
believe set-aside government contracting is an additional growth opportunity for us. We have participated in this sector of the
federal market by teaming with firms that have the various set-aside designations. Additionally, we created our own Service Connected
Disabled Veteran Owned Small Business in an effort to capture a portion of the federal market that had been previously off-limits
to CES. Success to date with this firm has been limited to two current contracts.
Effects
of Seasonality and Economic Uncertainty
We
may be subject to seasonal fluctuations and construction cycles at educational institutions, where large projects are typically
carried out during summer months when their facilities are unoccupied. Government customers, many of which have fiscal years that
do not coincide with ours, typically follow annual procurement cycles and appropriate funds on a fiscal-year basis even though
contract performance may take more than one year. Further, government contracting cycles can be affected by the timing of, and
delays in, the legislative process related to government programs and incentives that help drive demand for energy efficiency
and renewable energy projects. As a result, our revenue and operating income in the third quarter are typically higher, and our
revenue and operating income in the first quarter are typically lower, than in other quarters of the year. As a result of such
fluctuations, we may occasionally experience declines in revenue or earnings as compared to the immediately preceding quarter,
and comparisons of our operating results on a period-to-period basis may not be meaningful.
To
manage uncertainties created by business seasonality, we have implemented business processes to give us flexibility to manage
overhead and job costs. Those processes allow us to determine when it is most cost effective to use Company-owned assets or to
contract out aspects of a project. For example, when the Company was awarded a sizeable post-Hurricane Katrina demolition contract
in Louisiana, the processes led it to develop relationships with local subcontractors under Company management and supervision
to perform the demolition work rather than moving Company heavy equipment and personnel to Louisiana, thereby preserving margins
on the contract.
During
the recession that started in 2008, the number of projects available to the Company in Florida fell. To allow the Company to maintain
cash reserves necessary to execute the Louisiana contract, management agreed to a 10% reduction in salaries, and did so for a
full year, until finances righted themselves in late 2009. No field supervisors or workers were laid off during this period. CES
retained its skilled workforce, allowing the contracts in Louisiana to return a 41% gross profit.
Backlog
and Awarded Projects
Our
sales cycle begins with the initial contact with the customer and ends, when successful, with a signed contract, also referred
to as fully-contracted backlog. Historically, our sales cycle typically has averaged 30 days. Awarded backlog is created when
a potential customer awards a project to us following a request for proposal. Once a project is awarded but not yet contracted,
we typically conduct a detailed review to determine the scope of the project. At this point, we also determine the sub-contractor,
and what equipment will be used. Historically, awarded projects typically have taken 45 days to result in a signed contract and
thus convert to fully-contracted backlog. This process may take longer, however, depending upon the size and complexity of the
project. Further, at times in the past we have experienced periods during which the portion of the sales cycle for converting
awarded project to signed contracts has lengthened. Recently, we have been experiencing an unusually sustained lengthening of
conversion times. Continued U.S. federal fiscal uncertainty not only has contributed to a lengthening of our sales cycle for U.S.
federal projects, but also has adversely affected both municipal and commercial customers across most geographic regions. We have
observed among our existing and prospective customer base increased scrutiny of decisions about spending and about incurring debt
to finance projects. For example, we have observed increased use of outside consultants and advisors, as well as adoption of additional
approval steps, by many of our customers, which has resulted in a lengthening of the sales cycle. We expect this trend to continue
in 2015. After the customer agrees to the terms of the contract and the contract is executed, the project moves to fully-contracted
backlog. The contracts reflected in our fully-contracted backlog typically have a construction period of 30-45 days and we typically
expect to recognize revenue for such contracts over the same period. Fully-contracted backlog begins converting into revenue generated
from backlog on a percentage-of-completion basis once construction has commenced.
Financial
Operations Overview
Revenue
We
derive revenue from the provision of asbestos abatement, demolition, and mold remediation services to city, state, and federal
agencies. We also sell services to general contractors, developers, project owners, and industrial and commercial clients. Much
of our work has been founded on the removal of hazardous materials from structures ranging from residences to commercial and industrial
applications.
While
in any particular quarter a single customer may account for more than ten percent of revenue, for the quarter ended June 30, 2015,
the Renu Asset Recovery, the general contractor for the DTE Energy power plant project in Michigan, and the Florida Department
of Transportation (“FDOT”), accounted for 44% and 11% of our total revenue, respectively. For the quarter ended June
30, 2014, Hunt Construction, the general contractor for the Company’s Southeastern University project, accounted for
11% of revenues.
Direct
Expenses and Gross Margin
Direct
expenses include the cost of labor, materials, equipment, subcontracting and outside engineering that are required for the execution
our contracts, as well as preconstruction costs, sales incentives, associated travel, inventory obsolescence charges, and amortization
of intangible assets related to customer contracts. A majority of our contracts have fixed price terms; however, in some cases
we negotiate protections, such as a cost-plus structure, to mitigate the risk of rising prices for materials, services and equipment.
Gross
margin, which is gross profit as a percent of revenue, is affected by a number of factors, including the type of services performed
and the geographic region in which the sale is made. Geographic location impacts the cost of disposal, lodging, and
fuel. We sometimes find ourselves bidding against local contractors. In these instances, we may be willing
to accept a lower profit margin in order to establish ourselves with a new client, or in a new geographic location.
Rising
fuel costs affect us in several ways. Fuel in our trucks and equipment has an immediate cost impact. Increases
in petroleum prices increase the costs for remediation because petroleum products are used to make all poly, bags, etc. that we
use for contaminated materials containment.
In
addition, gross margin frequently varies across the period of a project. Our expected gross margin on, and expected revenue for,
a project are based on budgeted costs. From time to time, a portion of the contingencies reflected in budgeted costs are not incurred
due to strong execution performance. In that case, and generally at project completion, we recognize revenue for which there is
no further corresponding direct expense. As a result, gross margin tends to be back-loaded for projects with strong execution
performance; this explains the gross margin improvement that occurs from time to time at project closeout. We refer to this gross
margin improvement at the time of project completion as a project closeout.
Operating
Expenses
Operating
expenses consist of salaries and benefits, project development costs, and general, administrative and other expenses.
Salaries
and benefits. Salaries and benefits consist primarily of expenses for personnel not directly engaged in specific revenue generating
activity. These expenses include the time of executive management, legal, finance, accounting, human resources, information technology
and other staff not utilized in a particular project. We employ a comprehensive time card system which creates a contemporaneous
record of the actual time by employees on project activity.
Project
development costs. Project development costs consist primarily of sales, engineering, legal, finance and third-party expenses
directly related to the development of a specific customer opportunity. This also includes associated travel and marketing expenses.
General,
administrative and other expenses. These expenses consist primarily of rents and occupancy, professional services, insurance,
unallocated travel expenses, telecommunications, and office expenses. Professional services consist principally of recruiting
costs, external legal, audit, tax and other consulting services.
Other
expenses, net. Other expenses, net consists primarily of interest income on cash balances, interest expense on borrowings,
and gains and losses on the disposal of surplus assets. Interest expense will vary periodically depending on prevailing short-term
interest rates.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”)
and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management
to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying
notes. Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part
II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 describes the significant
accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases
its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities.
We
have identified the policies below as critical to our business operations and the understanding of our results of operations.
The Company’s senior management has reviewed these critical accounting policies and related disclosures with the Company’s
Board of Directors. The impact and any associated risks related to these policies on our business operations are discussed throughout
this section where such policies affect our reported and expected financial results. Our preparation of financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting
period. There can be no assurance that actual results will not differ from those estimates and such differences may be material.
Cash
and Cash Equivalents
We
consider all highly liquid debt instruments and other short-term investments with maturity of three months or less to be cash
equivalents.
Contracts
Receivable
Contracts
receivable are stated at the amounts management expects to collect from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current
status of individual accounts. Balances outstanding after management has used reasonable collection efforts are written off through
a charge to the valuation allowance and a credit to trade contracts receivable. Management has determined that an allowance
of $201,000 for doubtful accounts at June 30, 2015 and December 31, 2014 was required.
Contracts
receivable will generally be due within 30 to 45 days and collateral is not required.
Cost
and Estimated Earnings in Excess of Billings on Uncompleted Contracts
The
asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized
in excess of amounts billed.
The
liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess
of revenues recognized.
Recoverability
of Long-Lived Assets
We
review the recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred
which may indicate a possible impairment. The assessment for potential impairment is based primarily on our ability
to recover the carrying value of our long-lived assets from expected future cash flows from our operations on an undiscounted
basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale are carried at the
lower of the then-current carrying value or fair value less estimated costs to sell.
Fair
Value of Financial Instruments
The
carrying amount reported in the balance sheets for cash and cash equivalents, contracts receivable, accounts payable, and accrued
expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. We do not utilize
derivative instruments.
Revenue
and Cost Recognition
The
Company recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method,
measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because management
considers total cost to be the best available measure of progress on the contracts.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expenses as incurred.
Provisions
for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized
in the period in which the revisions are determined.
The
asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized
in excess of amounts billed.
The
liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess
of revenues recognized.
Contract
retentions are included in contract receivables.
Net
Loss Per Share of Common Stock
The
basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.
Diluted net loss per share gives effect to all dilutive potential common shares outstanding during the period using the “as
if converted” basis.
Uncertainty
in Income Taxes
Management
considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses
potential changes that management believes are more likely than not to occur upon examination by tax authorities. Management
has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure. The Company’s
income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.
We
follow ASC 740-10, Accounting for Uncertainty in Income Taxes (“ASC 740-10”). This interpretation requires recognition
and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective
for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 and evaluates our tax positions on an annual
basis.
Prior
to November 1, 2013, CES had elected by unanimous consent of its shareholders to be taxed under the provisions of subchapter S
of the Internal Revenue Code. Under those provisions, CES did not pay federal or state corporate income taxes on its
taxable income. Instead, the shareholders of CES were liable for individual federal income taxes on their respective
shares of CES’s taxable income. Since the closing of the merger between CES, the Company, and a subsidiary of the Company
on November 1, 2013 (the “Merger”), the Company is responsible for paying corporate income tax.
Advertising
(in thousands, except percentages)
Advertising
costs are expensed when incurred. Advertising costs for the six months ended June 30, 2015 and June 30, 2014 were $8 and $2, respectively.
Historically, the Company has not relied on advertising and marketing to generate business. We hired a marketing/sales manager
in 2014 to expand our marketing activities.
Results
of Operations (in thousands, except percentages)
Quarter
Ended June 30, 2015 Compared to Quarter Ended June 30, 2014
Net
sales grew 9.4%, or $441, during the quarter ended June 30, 2015 compared to the quarter ended June 30, 2014. Revenues in the
Demolition segment decreased by $806, or 27%, during the quarter ended June 30, 2015 compared to the quarter ended June 30, 2014.
Revenues in the Remediation segment increased by $1,274, or 82%, during the quarter ended June 30, 2015 compared to the quarter
ended June 30, 2014. The Insulation segment experienced a $27 decrease in revenue, or 18%, during the quarter ended June 30, 2015
compared to the quarter ended June 30, 2014.
The
decrease in Demolition segment revenues was primarily attributable to the near completion of the larger St Bernard Parish projects
in Louisiana, and the completion of two major contracts in Florida. At June 30, 2015, five Demolition segment contracts valued
in excess of $300 were in progress. Remediation segment sales increased in the second quarter of 2015, primarily because of the
continuation of remediation contracts in Florida and with the DTE Power Plant in Michigan, and the commencement of other large
scale projects valued in excess of $2,000 in the aggregate in Florida, Georgia and Louisiana. The decline in Insulation segment
revenue was due primarily to lower maintenance spending by a large supermarket chain in the southeastern United States.
Management
continues to believe that the Company will grow revenues by expanding into new geographic areas in the southern and eastern U.S.
in 2015. During the quarter ended June 30, 2015, the new sales staff that was hired early in 2014 in Florida and Louisiana continued
to bring in new business in these regions. In the quarter ended June 30, 2015, approximately $450 of revenues were derived from
contracts in Louisiana, $4,640 from contracts in Florida and $30 from contracts in Georgia (compared to $1,000, $3,914 and $0
respectively in the quarter ended June 30, 2014).
Sales
Data
The
following table shows net sales by operating segment and net sales by service during the quarters ended June 30, 2015 and 2014
(in thousands, except percentages):
| |
2015 | | |
Change | | |
2014 | |
Net Sales by Operating
Segment: | |
| | |
| | |
| |
Remediation | |
$ | 2,833 | | |
| 82 | % | |
$ | 1,559 | |
Demolition | |
| 2,168 | | |
| (27 | )% | |
| 2,974 | |
Insulation | |
| 121 | | |
| (18 | )% | |
| 148 | |
| |
| | | |
| | | |
| | |
Total
net sales | |
$ | 5,122 | | |
| 9 | | |
$ | 4,681 | |
Segment
Operating Performance (in thousands, except percentages)
The
Company manages its business on a functional basis. Accordingly, the Company has determined its reportable operating segments,
which are generally based on the types of services it provides, to be Remediation, Demolition and Insulation. Remediation derives
its income from mold remediation and abatement services for a broad range of environments. Demolition offers full scale commercial
demolition and wrecking. Insulation derives its revenue from re-insulation and insulation of new and remodeling projects.
Further
information regarding the Company’s operating segments may be found in Note 15, “Segment Information.”
Remediation
Remediation
segment services are comprised of asbestos abatement, lead removal, mold remediation, indoor air quality/duct cleaning, removal
of contaminated soil, animal waste removal, manual selective and complete interior demolition including removal of floor covering,
and adhesive removal. These services are primarily performed for commercial, retail, governmental, industrial, and military customers,
as well as public and private schools.
The
following table presents Remediation segment net sales information for the quarters ended June 30, 2015 and 2014 (dollars in thousands):
| |
2015 | | |
Change | | |
2014 | |
Net
sales | |
$ | 2,833 | | |
$ | 1,274 | | |
$ | 1,559 | |
Percentage
of total net sales | |
| 55 | % | |
| 22 | % | |
| 33 | % |
The
increase in the Remediation segment net sales during the quarter ended June 30, 2015 was caused by typical business fluctuations.
Remediation is usually the first activity performed in a contract and therefore the first part to be completed. In larger projects
it is not unusual to perform work in stages over the course of several months. The total number of Remediation segment jobs in
progress at June 30, 2015 was 54 (valued at $9,569), compared to 33 (valued at $7,792) on the same date in 2014. The Company has
no control over the amount of work available to bid from year to year. It is the nature of the Remediation business to experience
broad fluctuations in results of operations.
Demolition
Demolition
segment services are comprised of partial, phased and complete demolition of commercial, retail, private, governmental, industrial,
and military sites, as well as public and private schools. Demolition activities include building separations, concrete breaking
and saw-cutting, using the Company’s own man-lifts, bobcats, roll-off containers and roll-off trucks for hauling and disposal
of construction debris. The Company also provides full-scale commercial demolition and wrecking, as well as underground and above
ground storage tank removal, and full-scale site clearing including underground pipe removal and installation.
Hurricanes
and natural disasters are the biggest factor in the creation of large scale demolition opportunities for the Company. As a result,
the source of projects for the Demolition segment is unpredictable and can cause its results of operations to fluctuate broadly
and seasonally. Demolition contracts range widely in price from $30 to $20,000. Demolition contracts last anywhere from two weeks
(to demolish a one-story masonry commercial building such as a home improvement store) to two years or more to demolish concrete
slabs left by a hurricane such as Katrina.
The
following table presents Demolition segment net sales information for the quarters ended June 30, 2015 and 2014 (in thousands,
except percentages):
| |
2015 | | |
Change | | |
2014 | |
Net sales | |
$ | 2,168 | | |
$ | (806 | ) | |
$ | 2,974 | |
Percentage of total net sales | |
| 42 | % | |
| (22 | )% | |
| 64 | % |
The
decrease in net sales for the Demolition segment during the quarter ended June 30, 2015 was caused primarily by the lower number
of demolition contracts put out for bids in 2015 compared to 2014. The Company saw more renovation opportunities than demolition
projects year over year. During the second quarter of 2015, however, the Company did win 25 contracts in Florida valued at $1,905
that are expected to commence in the third quarter of 2015. Two of these contracts are worth $1,628. At the end of the second
quarter of 2015, the Company had total Demolition segment contracts valued at $4,101 in backlog, including the 25 contracts in
Florida.
Insulation
Our
Insulation segment derives its revenue from re-insulation and insulation of new and remodeling projects. The segment typically
does not typically experience large changes in revenues year over year. The amount of sales is typically driven by the amount
of remodeling or maintenance work required by a large supermarket chain, with which the Company has an ongoing service contract.
The
following table presents Insulation segment net sales information for the quarters ended June 30, 2015 and 2014 (in thousands,
except percentages):
| |
2015 | | |
Change | | |
2014 | |
Net sales | |
$ | 121 | | |
$ | (27 | ) | |
$ | 148 | |
Percentage of total net sales | |
| 3 | % | |
| 0 | % | |
| 3 | % |
The
decrease in the Insulation segment net sales between the quarters ended June 30, 2015 and 2014 was caused primarily by a reduction
in work provided to the aforementioned supermarket chain.
Gross
Margin
Gross
margin for the quarters ended June 30, 2015 and 2014 are as follows (in thousands, except gross margin percentages). Differences
between net sales and cost of sales in the table below, on one hand, and the Company’s Consolidated Statements of Operations,
on the other, are caused by an adjustment to sales and billing that takes place within consolidated reports rather than within
the applicable segments.
| |
2015 | | |
2014 | |
Net
sales | |
$ | 5,122 | | |
$ | 4,681 | |
Cost
of sales | |
| 4,263 | | |
| 3,384 | |
Gross
margin | |
| 859 | | |
| 1,297 | |
Gross
margin percentage | |
| 17 | % | |
| 28 | % |
The
increase in year-over-year cost of sales was caused by increased use of materials, increased job site and other indirect costs,
and increases in dump fees and fuel costs, all the result of the increase in net sales. The decline in gross margin percentage
in the quarter ended June 30, 2015 by eleven percentage points over the quarter ended June 30, 2014 was the result mainly of higher
materials and labor costs in our contracts. We believe our profit margin will increase as we continue to bid larger projects with
an increased margin. We are also encountering fewer bidders qualified to bid these types of jobs.
The
Company anticipates that gross margin for the full-year 2015 will be between 23% and 26%. In general, gross margins and margins
on services will remain under pressure due to a variety of factors, including continued industry-wide pricing pressures and increased
competition. In response to competitive pressures, the Company may have to take service pricing actions, which could adversely
affect gross margins. Gross margins could also be affected by the Company’s ability to manage costs effectively and to stimulate
demand for certain of its products. To counteract the pressure on margins, the Company is working to improve its budget management
processes for contracts, in particular to improve its ability to track and charge for change orders as they occur. The Company
may also decline to bid on contracts where gross margins fall below acceptable levels.
Operating
Expenses
Operating
expenses for the quarters ended June 30, 2015 and 2014 are as follows (in thousands, except for percentages):
| |
2015 | | |
Change | | |
2014 | |
General and administrative | |
$ | 1,275 | | |
$ | 10 | | |
$ | 1,265 | |
Percentage of total net sales | |
| 25 | % | |
| (2 | )% | |
| 27 | % |
General
and Administrative (“G&A”) Expense
The
growth in G&A expense during the quarter ended June 30, 2015 was caused by a number of factors, including increases in compensation
costs (increased by $78), higher rents associated with the leases of the Company’s headquarter building in Crystal Springs,
Florida, a building in Zephyrhills, Florida and an office in Miami, Florida (increased by $10), higher group health insurance
costs, which rose due to a 66% increase in premiums and higher employee participation ($66), bank service charges, which rose
by $25 or 235% due to higher loan closing costs, and higher education/training costs, which were up by $23 or 209% due to the
large amount of work on military bases, which requires badges, background checks, and specific health and worker certifications
that are charged to education. These increases were offset by lower professional fees, which decreased by $76 or 71%, due to reduced
expenses associated with being a publicly traded company in comparison to last year when the Merger had recently occurred, lower
costs for business licenses and permits (down by $9 or 45%), and reduced indirect administrative costs (a decrease of $25 or 29%,
due to a decrease in insurance premiums unrelated to group health).
Compensation
costs increased as a result of the hire of new sales staff, recruited in anticipation of expansion of sales efforts into new states
(increased by $48), an increase in office salaries ($3), field labor ($7), and training salaries ($20). The total number of employees
at June 30, 2015 was 117compared to 137 at June 30, 2014.
Rent
expenses increased as the Company now pays rent on its headquarters in Crystal Springs, Florida, which is owned by the chairman
of our board of directors, Clyde A. Biston. Prior to becoming a public company in November 2013, the Company was permitted to
use the building at no cost. The Company also leased new premises in Zephyrhills, Florida in anticipation of needing more space
in connection with its plans to expand its marketing and bidding activities.
Other
Expense
Other
expense for the quarters ended June 30, 2015 and 2014 are as follows (in thousands, except percentages):
| |
2015 | | |
Change | | |
2014 | |
Other income/ (expense) | |
$ | 2 | | |
$ | (141 | ) | |
$ | 143 | |
Interest income/
(expense) | |
| (90 | ) | |
| (24 | ) | |
| (66 | ) |
Total other income/
(expense), net | |
| (88 | ) | |
| (165 | ) | |
| 77 | |
The
year-over-year increase in other expense during the quarter ended June 30, 2015 was due primarily to higher interest costs resulting
from the partial restructuring of the Company’s bank line of credit.
Provision
for Income Taxes
Prior
to November 1, 2013, CES elected to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions,
during and prior to 2013, CES did not pay federal or state corporate income taxes on its taxable income. Instead, its shareholders
were liable for individual federal income taxes on their respective shares of CES’s taxable income. Therefore, no provision
or liability for federal income taxes was included in our 2013 financial statements.
Provision
for income taxes and effective tax rates for the quarters ended June 30, 2015 and 2014 was as follows (dollars in thousands):
|
|
2015 |
|
|
2014 |
|
Provision
for income taxes |
|
$ |
- |
|
|
$ |
- |
|
Effective
tax rate |
|
|
- |
|
|
|
- |
|
The
Company’s effective tax rate for the quarter ended June 30, 2015 was nil because of the loss in the quarter, together with
the losses carried forward from prior periods.
Net
losses are due primarily to the increases in our sales staff and purchases of more sophisticated IT equipment and software without
the benefit of any investment funds. To further impact the loss in 2015, sales actually decreased during the first quarter of
2015.
Six
Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014 (in thousands, except percentages)
Net
sales increased 2%, or $152, during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. Revenues
in the Demolition segment decreased by $1,881, or 35%, during the six months ended June 30, 2015 compared to the six months ended
June 30, 2014. Revenues in the Remediation segment increased by $2,064, or 74%, during the six months ended June 30, 2015 compared
to the six months ended June 30, 2014. The Insulation segment experienced a $88 decrease in revenue, or 30%, during the six months
ended June 30, 2015 compared to the six months ended June 30, 2014.
The
decrease in Demolition segment revenues was primarily attributable to the near completion of the larger St Bernard Parish projects
in Louisiana, and the completion of two major contracts in Florida. At June 30, 2015, five Demolition segment contracts valued
in excess of $300 were in progress. Remediation segment sales increased in the first six months of 2015, primarily because of
the continuation of remediation contracts in Florida and with the DTE Power Plant in Michigan, and the commencement of other large
scale projects valued in excess of $2,000 in the aggregate in Florida, Georgia and Louisiana. The decline in Insulation segment
revenue was due primarily to lower maintenance spending by a large supermarket chain in the southeastern United States.
Management
continues to believe that the Company will grow revenues by expanding into new geographic areas in the southern and eastern U.S.
in 2015. During the six months ended June 30, 2015, the new sales staff that was hired early in 2014 in Florida and Louisiana
continued to bring in new business in these regions. In the six months ended June 30, 2015, approximately $986of revenues were
derived from contracts in Louisiana, $7,645 from contracts in Florida and $14 from contracts in Georgia (compared to $1,213, $7,279
and $0 respectively in the six months ended June 30, 2014).
Sales
Data
The
following table shows net sales by operating segment and net sales by service during the six months ended June 30, 2015 and 2014
(in thousands, except percentages):
| |
2015 | | |
Change | | |
2014 | |
Net Sales by Operating Segment: | |
| | |
| | |
| |
Remediation | |
$ | 4,867 | | |
| 77 | % | |
$ | 2,745 | |
Demolition | |
| 3,568 | | |
| (35 | )% | |
| 5,450 | |
Insulation | |
| 210 | | |
| (30 | )% | |
| 298 | |
| |
| | | |
| | | |
| | |
Total net sales | |
$ | 8,645 | | |
| 2 | % | |
$ | 8,493 | |
Segment
Operating Performance (in thousands, except percentages)
The
Company manages its business on a functional basis. Accordingly, the Company has determined its reportable operating segments,
which are generally based on the types of services it provides, to be Remediation, Demolition and Insulation. Remediation derives
its income from mold remediation and abatement services for a broad range of environments. Demolition offers full scale commercial
demolition and wrecking. Insulation derives its revenue from re-insulation and insulation of new and remodeling projects.
Further
information regarding the Company’s operating segments may be found in Note 15, “Segment Information.”
Remediation
Remediation
segment services are comprised of asbestos abatement, lead removal, mold remediation, indoor air quality/duct cleaning, removal
of contaminated soil, animal waste removal, manual selective and complete interior demolition including removal of floor covering,
and adhesive removal. These services are primarily performed for commercial, retail, governmental, industrial, and military customers,
as well as public and private schools.
The
following table presents Remediation segment net sales information for the six months ended June 30, 2015 and 2014 (dollars in
thousands):
| |
2015 | | |
Change | | |
2014 | |
Net sales | |
$ | 4,867 | | |
$ | 2,122 | | |
$ | 2,745 | |
Percentage of total net sales | |
| 56 | % | |
| 24 | % | |
| 32 | % |
The
increase in the Remediation segment net sales during the six months ended June 30, 2015 was caused by typical business fluctuations.
Remediation is usually the first activity performed in a contract and therefore the first part to be completed. In larger projects
it is not unusual to perform work in stages over the course of several months. The Company has no control over the amount of work
available to bid from year to year. It is the nature of the Remediation business to experience broad fluctuations in results of
operations.
Demolition
Demolition
segment services are comprised of partial, phased and complete demolition of commercial, retail, private, governmental, industrial,
and military sites, as well as public and private schools. Demolition activities include building separations, concrete breaking
and saw-cutting, using the Company’s own man-lifts, bobcats, roll-off containers and roll-off trucks for hauling and disposal
of construction debris. The Company also provides full-scale commercial demolition and wrecking, as well as underground and above
ground storage tank removal, and full-scale site clearing including underground pipe removal and installation.
Hurricanes
and natural disasters are the biggest factor in the creation of large scale demolition opportunities for the Company. As a result,
the source of projects for the Demolition segment is unpredictable and can cause its results of operations to fluctuate broadly
and seasonally. Demolition contracts range widely in price from $30 to $20,000. Demolition contracts last anywhere from two weeks
(to demolish a one-story masonry commercial building such as a home improvement store) to two years or more to demolish concrete
slabs left by a hurricane such as Katrina.
The
following table presents Demolition segment net sales information for the six months ended June 30, 2015 and 2014 (in thousands,
except percentages):
| |
2015 | | |
Change | | |
2014 | |
Net sales | |
$ | 3,568 | | |
$ | (1,882 | ) | |
$ | 5,450 | |
Percentage of total net sales | |
| 41 | % | |
| -23 | % | |
| 64 | % |
The
decrease in net sales for the Demolition segment during the six months ended June 30, 2015 was caused primarily by the lower number
of demolition contracts put out for bids in 2015 compared to 2014. The Company saw more renovation opportunities than demolition
projects year over year. During the second quarter of 2015, however, the Company did win 25 contracts in Florida valued at $1,905
that are expected to commence in the third quarter of 2015. Two of these contracts are worth $1,628. At the end of the second
quarter of 2015, the Company had total Demolition segment contracts valued at $4,101 in backlog, including the 25 contracts in
Florida.
Insulation
Our
Insulation segment derives its revenue from re-insulation and insulation of new and remodeling projects. The segment typically
does not typically experience large changes in revenues year over year. The amount of sales is typically driven by the amount
of remodeling or maintenance work required by a large supermarket chain, with which the Company has an ongoing service contract.
The
following table presents Insulation segment net sales information for the six months ended June 30, 2015 and 2014 (in thousands,
except percentages):
| |
2015 | | |
Change | | |
2014 | |
Net sales | |
$ | 210 | | |
$ | (88 | ) | |
$ | 298 | |
Percentage of total net sales | |
| 3 | % | |
| -1 | % | |
| 4 | % |
The
decrease in the Insulation segment net sales between the six months ended June 30, 2015 and 2014 was caused primarily by a reduction
in work provided to the aforementioned supermarket chain.
Gross
Margin
Gross
margin for the six months ended June 30, 2015 and 2014 are as follows (in thousands, except gross margin percentages). Differences
between net sales and cost of sales in the table below, on one hand, and the Company’s Consolidated Statements of Operations,
on the other, are caused by an adjustment to sales and billing that takes place within consolidated reports rather than within
the applicable segments.
| |
2015 | | |
2014 | |
Net sales | |
$ | 8,645 | | |
$ | 8,493 | |
Cost of sales | |
| 7,113 | | |
| 6,514 | |
Gross margin | |
| 1,532 | | |
| 1,980 | |
Gross margin percentage | |
| 18 | % | |
| 23 | % |
The
increase in year-over-year cost of sales was caused by increased use of materials, increased job site and other indirect costs,
and increases in dump fees and fuel costs, all the result of the increase in net sales. The decline in gross margin percentage
in the six months ended June 30, 2015 by five percentage points over the six months ended June 30, 2014 was the result mainly
of higher materials and labor costs in our contracts. We believe our profit margin will increase as we continue to bid larger
projects with an increased margin. We are also encountering fewer bidders qualified to bid these types of jobs.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2015 and 2014 are as follows (in thousands, except for percentages):
| |
2015 | | |
Change | | |
2014 | |
General and administrative | |
$ | 2,594 | | |
$ | 153 | | |
$ | 2,441 | |
Percentage of total net sales | |
| 30 | % | |
| 1 | % | |
| 29 | % |
General
and Administrative (“G&A”) Expense
The
growth in G&A expense during the six months ended June 30, 2015 was caused by a number of factors, including increases in
compensation costs (increased by $126), higher group health insurance costs, which rose due to a 26% increase in premiums and
higher employee participation ($53), bank service charges, which rose by $42 or 175% due to higher loan closing costs, and higher
education/training costs, which were up by $17 or 65% due to the large amount of work on military bases, which requires badges,
background checks, and specific health and worker certifications that are charged to education. These increases were offset by
lower professional fees, which decreased by $65 or 45%, due to reduced expenses associated with being a publicly traded company
in comparison to last year when the Merger had recently occurred, lower vehicle and equipment loan costs, which were down by $55
or 100% (new loans in 2015 had no costs), lower costs for business licenses and permits (down by $13 or 385%), and reduced indirect
administrative costs (a decrease of $40 or 21%, due to a decrease in insurance premiums unrelated to group health).
Compensation
costs increased as a result of the hire of new sales staff, recruited in anticipation of expansion of sales efforts into new states
(increased by $107), an increase in office salaries ($2), field labor ($7), and training salaries ($8).
Rent
expenses increased by $9, as the Company now pays rent on its headquarters in Crystal Springs, Florida, which is owned by the
chairman of our board of directors, Clyde A. Biston. Prior to becoming a public company in November 2013, the Company was permitted
to use the building at no cost. The Company also leased new premises in Zephyrhills, Florida in anticipation of needing more space
in connection with its plans to expand its marketing and bidding activities.
Other
Income/Expense
Other
income/ (expense) for the six months ended June 30, 2015 and 2014 are as follows (in thousands, except percentages):
| |
2015 | | |
Change | | |
2014 | |
Other income/ (expense) | |
$ | (9 | ) | |
$ | (7 | ) | |
$ | (2 | ) |
Interest income/
(expense) | |
| (149 | ) | |
| (99 | ) | |
| (50 | ) |
Total other income/
(expense), net | |
| (158 | ) | |
| (106 | ) | |
| (52 | ) |
The
year-over-year increase in other expense during the six months ended June 30, 2015 was due primarily to higher interest costs
resulting from the higher levels of debt and the restructuring of the Company’s bank line of credit in 2015.
Provision
for Income Taxes
Prior
to November 1, 2013, CES elected to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions,
during and prior to 2013, CES did not pay federal or state corporate income taxes on its taxable income. Instead, its shareholders
were liable for individual federal income taxes on their respective shares of CES’s taxable income. Therefore, no provision
or liability for federal income taxes was included in our 2013 financial statements.
Provision
for income taxes and effective tax rates for the six months ended June 30, 2015 and 2014 was as follows (dollars in thousands):
| |
| 2015 | | |
| 2014 | |
Provision
for income taxes | |
$ | - | | |
$ | - | |
Effective
tax rate | |
| - | | |
| - | |
The
Company’s effective tax rate for the six months ended June 30, 2015 was nil because of the loss in the six months, together
with the losses carried forward from prior periods.
Net
losses are due primarily to the increases in our sales staff and purchases of more sophisticated IT equipment and software without
the benefit of any investment funds. To further impact the loss in 2015, sales actually decreased during the first quarter of
2015.
Liquidity
and Capital Resources (in thousands, except percentages)
The
Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working
capital needs, capital asset purchases, outstanding commitments, and other liquidity requirements associated with its existing
operations over the next 12 months. The Company will seek, however, to raise up to $8,200 in additional capital in 2015 to support
its expansion plans There can be no assurance that the Company will be able to raise such additional capital on terms that are
acceptable to the Company or at all.
The
Company’s cash, cash equivalents and marketable securities were generally held in bank accounts.
The
following table presents selected financial information and statistics as of June 30, 2015 and December 31, 2014 (dollars in thousands):
| |
June
30,
2015 | | |
December 31,
2014 | |
Cash, cash equivalents and
marketable securities | |
$ | 193 | | |
$ | 149 | |
Property, plant and equipment, net | |
$ | 2,280 | | |
$ | 2,117 | |
Long-term debt | |
$ | 3,419 | | |
$ | 3,337 | |
Working capital | |
$ | 33 | | |
$ | 1,314 | |
The
following table presents selected financial information and statistics about the Company’s sources and uses of cash during
the first six months of 2015 and 2014 (in $ thousands):
| |
Six
months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | |
Cash generated by/ (used
in) operating activities | |
$ | 185 | | |
$ | (341 | ) |
Cash generated by/ (used in) investing
activities | |
$ | (417 | ) | |
$ | (362 | ) |
Cash generated by/ (used in) financing
activities | |
$ | 275 | | |
$ | 767 | |
During
the six months ended June 30, 2015, the cash generated by operating activities of $185 was a result of $(1,219) of net loss, non-cash
adjustments to net loss of $254 and a net change in operating assets and liabilities of $1,151. The Company used $(417) of cash
for investing activities during the six months ended June 30, 2015 to purchase property and equipment. There were no disposals
of equipment in the six months ended June 30, 2015. The $275 of cash generated by financing activities during the six months ended
June 30, 2015 came primarily from new borrowing from the chairman of board of directors of the Company, Clyde A. Biston, and Centennial
Bank. No distributions were paid in the first six months of 2015.
During
the six months ended June 30, 2014, the cash used in operating activities of $(341) was a result of $(437) of net loss, non-cash
adjustments to net income of $276 and a net change in operating assets and liabilities of $(180). The Company used
$(362) of cash for investing activities during the six months, to purchase property and equipment. There were no disposals
of equipment in the six months. Cash generated by financing activities during the six months ($767) came from the issuance
of new debt ($5,206) and common stock ($282), some of which was used to repay debt ($4,721). No distributions were
paid in the first six months of 2014.
Capital
Assets
The
Company’s capital expenditures were $589 during the six months ended June 30, 2015, consisting primarily of purchases of
machinery ($407) and earth moving equipment ($174). The new equipment was acquired to replace aging equipment, and to add to our
fleet of equipment to prepare for new Demolition segment projects at Florida State University and at military bases in Georgia
and the Florida Panhandle.
The
Company plans to raise up to $5,000 in new capital for capital expenditures in 2015, a portion of which will be used to renovate
office space in Zephyrhills and to open another satellite office in the south.
Long-Term
Debt (in thousands, except percentages)
To
date, the Company has financed its operations through internally generated revenue from operations, the sale of common stock,
the issuance of notes, and loans from shareholders. The following debt was outstanding at June 30, 2015:
(i) Demand
loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly payment of $5, bearing annual
interest at 4.25%. At June 30, 2015, $237 was outstanding under the loan. In the three months ended June 30, 2015, the Company
repaid $13 of principal under the loan.
(ii) Installment
loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly payment of $24, bearing annual
interest at 6.15%. At June 30, 2015, $2,636 was outstanding under the loan. In the three months ended June 30, 2015, the Company
repaid $41 of principal under the loan.
(iii)
A line of credit from Centennial Bank, Dade City, Florida, bearing variable interest of 1.25% over prime, secured by land, improvements,
and accounts receivable. The line of credit matured on April 30, 2015. At June 30, 2015, $1,750 was outstanding under the line.
In the three months ended June 30, 2015, the Company made no repayments of principal under the line, and borrowed no additional
principal.
(iv)
Various installment loans payable in monthly payments, with interest rates ranging from 0% to 9.5%, secured by equipment and property.
At June 30, 2015, $890 was outstanding under the loans. In the three months ended June 30, 2015, the Company borrowed $251 of
principal under the loans.
At
June 30, 2015, a total of $5,940 was outstanding under all loans and the line of credit. $2,521 of that amount is due and payable
in the 12 months following that date.
Dividend
Program
As
a privately-owned company prior to November 1, 2013, CES was owned by Clyde A. Biston. Mr. Biston elected to receive part of his
compensation in the form of distributions paid to himself as the sole shareholder. No dividends have been paid to Mr. Biston since
2013.
The
Company does not expect to pay any dividends or make any distributions to shareholders in 2015.
Off-Balance
Sheet Arrangements
The
Company does not have any off balance sheet arrangements.
Indemnification
On
occasion, the Company indemnifies its customers against legal claims arising from services it provides. The Company has not been
required to make any significant payments resulting from such services.
The
Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company
has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their
status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings.
It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements
due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We
are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required
under this item.
ITEM
4. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report
such that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms.
Changes
in Internal Control over Financial Reporting
During
the quarter ended June 30, 2015, there has been no change in our internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
We
are not party to any material legal proceedings.
ITEM
1A. RISK FACTORS.
There
have been no changes that constitute material changes from the risk factors previously disclosed in our 2014 Form 10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
No
shares of common stock were issued by the Company in the quarter ended June 30, 2015. No purchases of common stock of the Company
were made by the Company during the quarter ended June 30, 2015.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
ITEM
5. OTHER INFORMATION.
None.
ITEM
6. EXHIBITS
The
following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
EXHIBIT
NUMBER |
|
DESCRIPTION |
|
|
|
31.1 |
|
Certification
of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
31.2 |
|
Certification
of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
32.1 |
|
Certification
of the Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act
of 2002 |
32.2 |
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act
of 2002 |
EX-101.INS |
|
XBRL
INSTANCE DOCUMENT |
EX-101.SCH |
|
XBRL
TAXONOMY EXTENSION SCHEMA DOCUMENT |
EX-101.CAL |
|
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE |
EX-101.DEF |
|
XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE |
EX-101.LAB |
|
XBRL
TAXONOMY EXTENSION LABELS LINKBASE |
EX-101.PRE |
|
XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
CES
Synergies, Inc. |
|
|
|
Date:
August 13, 2015 |
By: |
/s/
John Tostanoski |
|
John
Tostanoski |
|
Chief
Executive Officer (Principal Executive Officer) |
|
|
|
Date:
August 13, 2015 |
By: |
/s/
Sharon Rosenbauer |
|
Sharon
Rosenbauer |
|
Chief
Financial Officer (Principal Financial and Accounting Officer) |
33
Exhibit 31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, John Tostanoski,
certify that:
1. I have reviewed
this Quarterly Report on Form 10-Q of CES Synergies, Inc.;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
|
|
|
Dated: August 13, 2015 |
By: |
/s/ John Tostanoski |
|
|
|
John Tostanoski |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Sharon Rosenbauer,
certify that:
1. I have reviewed
this Quarterly Report on Form 10-Q of CES Synergies, Inc.;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: August 13, 2015 |
By: |
/s/ Sharon Rosenbauer |
|
|
|
Sharon Rosenbauer |
|
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with
the Quarterly Report of CES Synergies, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Tostanoski, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
|
|
|
Date: August 13, 2015 |
By: |
/s/ John Tostanoski |
|
|
|
John Tostanoski |
|
|
|
Chief Executive Officer |
|
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with
the Quarterly Report of CES Synergies, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sharon Rosenbauer, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
|
|
|
Date: August 13, 2015 |
By: |
/s/ Sharon Rosenbauer |
|
|
|
Sharon Rosenbauer |
|
|
|
Chief Financial Officer |
|
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