CESX CES Synergies Inc (CE)

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, 2015 filed with the Securities and Exchange Commission on March 30, 2016 (the “2015 Form 10-K”) under the heading “Risk Factors”.

The following discussion should be read in conjunction with the 2015 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 have an established operating infrastructure, with numerous long-term contracts, blanket purchase orders, and ongoing relationships with a robust customer base.

Our management and employees are very experienced and expert in their trades. We have nine project managers who have over 100 combined years of experience. All are skilled in project set-up, permitting, submittals, scheduling, and project close-out.

In addition to the tools made available to our project managers, we have a highly skilled staff of field personnel. We have multiple field superintendents and supervisors who have fifteen to twenty years’ experience. Many of these people have been with CES since its inception. Our field supervisory staff has, in the aggregate, over 200 man-years of experience. We believe that almost as important as the project personnel and related experience, is having modern late model equipment to work with. We have an extensive late model fleet of service trucks, box trucks, vans, excavators, loaders, dump trucks, semi tractors, and roll off trucks that can be deployed to any project. In addition to the large rolling stock and excavators, we have an extensive inventory of specialty equipment designed to provide demolition and abatement services inside a structure. This equipment includes but is not limited to skid steer loaders equipped with exhaust scrubbers, mini excavators equipped with hydraulic hammers, automated tile removing machines, airless sprayers, and various handheld power tools designed for material removal.

Services Strategy

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 2016. 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 March 31, 2016, US Army- Fort Benning, Georgia and the Florida Department of Transportation (“FDOT”), accounted for 20.9% and 23.8% of our total revenue, respectively. For the quarter ended March 31, 2015, the Renu Asset Recovery, the general contractor for the DTE Energy power plant project in Michigan, and the Florida Department of Transportation (“FDOT”), accounted for 10% and 21% of our total revenue, respectively. 

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 due 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, 2015 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 $199,877 for doubtful accounts was required at March 31, 2016 ($201,000 at March 31, 2015).

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 Earnings (Loss) Per Share of Common Stock

The basic net earnings (loss) per common share is computed by dividing the net earnings (loss) by the weighted average number of common shares outstanding. Diluted net earnings (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 on November 1, 2013, the Company is responsible for paying corporate income tax.  

Advertising (in thousands, except percentages)

Advertising costs are expensed when incurred. Advertising costs for the quarters ended March 31, 2016 and March 31, 2015 were $3 and $8, respectively. Historically, the Company has not relied on advertising and marketing to generate business. We recently hired a marketing/sales manager to expand our marketing activities.

Results of Operations (in thousands, except percentages)

Quarter Ended March 31, 2016 Compared to Quarter Ended March 31, 2015

Net sales increased 13.6%, or $477, during the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015. Revenues in the Demolition segment decreased by $98, or 7%, during the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015. Revenues in the Remediation segment increased by $530, or 26%, during the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015. The Insulation segment experienced a $46 increase in revenue, or 51%, during the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015.

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 March 31, 2016, 29 Demolition segment contracts valued in excess of $2,477 were in progress. Remediation segment sales increased in the first quarter of 2016, primarily because of the continuation of remediation contracts in Florida and Georgia, and the commencement of other large scale projects valued in excess of $6,269 in the aggregate in Florida, Georgia and Louisiana. The increase in Insulation segment revenue was due primarily to increased maintenance spending by a large supermarket chain in the southeastern United States.

During the quarter ended March 31, 2016, 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 March 31, 2016, approximately $169 of revenues were derived from contracts in Louisiana, $2,453 from contracts in Florida and $1,378 from contracts in Georgia (compared to $426, $3,097 and $0 respectively in the quarter ended March 31, 2015).

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 16, “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 March 31, 2016 and 2015 (dollars in thousands):

The increase in the Remediation segment net sales during the quarter ended March 31, 2016 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 March 31, 2016 was 48 (valued at $6,269), compared to 165 (valued at $9,793) on the same date in 2015. 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 focuses on asbestos, mold and lead remediation and interior demolition. 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 March 31, 2016 and 2015 (in thousands, except percentages):

The decrease in net sales for the Demolition segment during the quarter ended March 31, 2016 was caused primarily by the lower number of demolition contracts put out for bids in 2016 compared to 2015, as well as more selective bidding process utilizing higher margins The Company saw more renovation opportunities than demolition projects year over year. During the first quarter 2016, however, the Company did win 17 contracts in Florida valued at $302 that will commence in the second quarter 2016. At the end of the first quarter 2016, the Company had Demolition segment contracts valued at $1,768 in backlog, of which more than $302 are expected to start in the second quarter.

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 March 31, 2016 and 2015 (in thousands, except percentages):

The decrease in the Insulation segment net sales between the quarters ended March 31, 2016 and 2015 was caused primarily by a reduction in work provided to the aforementioned supermarket chain.

Gross Margin

Gross margin for the quarters ended March 31, 2016 and 2015 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.

The decrease in year-over-year cost of sales was caused by decreased use of materials, decreased job site and other indirect costs, and decreases in dump fees and fuel costs, offset by a 38% increase in labor costs. The improvement in gross margin percentage in the quarter ended March 31, 2016 by 14 percentage points over the quarter ended March 31, 2015 reflects the fact that the Company had a higher percentage of Remediation jobs, which have lower materials and non-labor costs. Remediation contracts are typically self-performed, without the need for subcontractors or expensive rental equipment. We believe our profit margin will continue to benefit from the fact that we are bidding on 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 2016 will be between 28% and 30%. 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.

General and Administrative (“G&A”) Expense

The decrease in G&A expense during the quarter ended March 31, 2016 was caused by a number of factors, including a reduction in compensation costs (lower by $190, due to a $100 reduction of his annual salary by Clyde A. Biston President, and a reduction in overall headcount in the first quarter of 2016), lower rents associated with a reduction in rent charged by Mr. Biston on the Crystal Springs leases (decreased by $48), lower group health insurance costs, which fell 31% ($51. Health insurance costs in the first quarter of 2015 were over-paid by one month), lower office expenses (down by $13 or 29%, reflecting budget constraints imposed on office spending), lower business taxes (down by $13 or 100%, due to the fact that some 2016 taxes were paid in April 2016), reduced bank service charges, which fell by $5 or 13% due to lower loan closing costs, and lower professional fees (down by $4 or 14%, reflecting the elimination of the use of a public relations firm and reduced borrowing activity in 2016). These decreases were offset by higher administrative indirect costs (up $55 or 91%, reflecting higher insurance premiums allocated to this category), increased costs for licenses and permits (up by $9 or 84%, reflecting the increased number of permits required for Florida DOT contracts), and higher costs of insurance (up by $9 or 277%), reflecting increases in premiums charged to the Company for our Directors and Officer’s policy, which we did not have in first quarter of 2015.

The total number of employees at March 31, 2016 was 148, compared to 152 at March 31, 2015.

The year-over-year decrease in other expense during the quarter ended March 31, 2016 was due primarily to lower interest costs resulting from the partial restructuring of the Company’s debt owed to the Company’s President, and to a gain recorded from the disposal of skid steer loaders, excavators, a mini excavator, and a dump truck. All these items were old, in need of repair, and were not being utilized.

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 2014 financial statements.

Provision for income taxes and effective tax rates for the quarters ended March 31, 2016 and 2015 was as follows (dollars in thousands): 

The Company’s effective tax rate for the quarter ended March 31, 2016 was nil because of the losses carried forward from prior periods.

Net operating losses (“NOLs”) generated from 2014 and 2015 will offset the income reported for the quarter ended March 31, 2016. The Company has taken a full valuation allowance against the NOLs, as a result of which there are no tax assets or liabilities reported at March 31, 2016.

Liquidity and Capital Resources (in thousands, except percentages)

The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments, and other liquidity requirements associated with its existing operations over the next 12 months. The Company will seek, however, to raise up to $5,000 in additional capital in 2016 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 March 31, 2016 and December 31, 2015 (dollars in thousands):

The following table presents selected financial information and statistics about the Company’s sources and uses of cash during the first three months of 2016 and 2015 (in $ thousands):

During the three months ended March 31, 2016, the cash generated by operating activities of $50 was a result of $231 of net income, non-cash adjustments to net income of $112, and a net change in operating assets and liabilities of $(294). The Company generated $29 of cash for investing activities during the three months ended March 31, 2016, $35 from disposals of property and equipment, which was offset by $(6) used to purchase equipment. Cash of $(118) was used by financing activities during the three months ended March 31, 2016 to repay debt. There were no new borrowings or payments of distributions in the first three months of 2016.

During the three months ended March 31, 2015, the cash generated by operating activities of $278 was a result of $(715) of net loss, non-cash adjustments to net loss of $127 and a net change in operating assets and liabilities of $506. The Company used $(85) of cash for investing activities during the three months ended March 31, 2015 to purchase property and equipment. There were no disposals of equipment in the three months ended March 31, 2015. Cash generated by financing activities during the three months ended March 31, 2016 ($85) came from the issuance of new debt, some of which was used to repay debt ($200). No distributions were paid in the first three months of 2015.

Capital Assets

The Company’s capital expenditures were $6 during the three months ended March 31, 2016, consisting of primarily of purchases of earth moving equipment. 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.

The Company will seek to raise up to $5,000 in additional capital in 2016 to support its 2016 plan of operations. 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.

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 March 31, 2016:

(i) Demand loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly payment of $5 which has been deferred to January 2017, bearing annual interest at 4.25%. At March 31, 2016, $237 was outstanding under the loan. In the three months ended March 31, 2016, the Company repaid $17 of principal under the loan.

(ii) Demand loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly payment of $2 which has been deferred to January 2017, bearing annual interest at 4.75%. At March 31, 2016, $158 was outstanding under the loan. In the three months ended March 31, 2016, the Company made no repayments of principal under the loan.

(iii) Demand loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly payment of $10 which has been deferred to January 2017, bearing annual interest at 4.75%. At March 31, 2016, $175 was outstanding under the loan. In the three months ended March 31, 2016, the Company made no repayments of principal under the loan.

(iv) Demand loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly payment of $10 which has been deferred to January 2017, bearing annual interest at 4.75%. At March 31, 2016, $175 was outstanding under the loan. In the three months ended March 31, 2016, the Company made no repayments of principal under the loan.

(v) 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 March 31, 2016, $2,656 was outstanding under the loan. In the three months ended March 31, 2016, the Company the Company made no repayments of principal under the loan.

(vi) 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 matures on May 5, 2018. At March 31, 2016, $1,750 was outstanding under the line. In the three months ended March 31, 2016, the Company made no repayments of principal under the line, and borrowed no additional principal.

(vii) Various installment loans payable in monthly payments, with interest rates ranging from 0% to 9.5%, secured by equipment and property. At March 31, 2016, $804 was outstanding under the loans. In the three months ended March 31, 2016, the Company repaid $100 of principal under the loans.

At March 31, 2016, a total of $5,956 was outstanding under all loans and the line of credit. $2,208 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 2016.

Off-Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements.

Indemnification

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

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