ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts
of this Annual Report on Form 10-K 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 can also be identified by words such as “future,” “anticipates,” “believes,”
“estimates,” “expects,” “intends,” “plans,” “predicts,” “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 Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” The following discussion should
be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Annual
Report on Form 10-K. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated,
references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the
associated quarters, months and periods of those fiscal years. The Company assumes no obligation to revise or update any forward-looking
statements for any reason, except as required by law.
Overview
and Highlights
The
Company provides asbestos abatement and removal, demolition, and mold remediation services primarily in the USA. The
services we provide include the removal of asbestos, lead and other 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. The Company provides demolition and wrecking services, including the removal of
storage tanks; mechanical insulation; duct/mold and indoor air quality services; land clearing; and on-site crushing and recycling. In
the public sector, our customers include city, state, and federal agencies. Our private-sector customers include general contractors,
developers, project owners, and industrial and commercial clients.
We
report results under ASC 280, Segment Reporting, for three segments: 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 down to interior and selective demolition and strip down services. Insulation 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
For
our asbestos abatement, demolition, and mold remediation contracts, we typically agree to provide all labor, supervision, material
and equipment required to perform hazardous material abatement and disposal work as required. Our interior demolition
and certain exterior demolition contracts do not contain “hazardous material abatement” provisions. In the absence
of such provisions, the Company is not contractually responsible for the elimination or reduction of polluting or hazardous substances
such as asbestos, lead paint, polychlorinated biphenyls (PCB) in building materials, mold, fluorescent and high intensity discharge
(HID) lamps, mercury, PCB ballasts, lead-acid battery electrolytes, fluorocarbons, equipment coolant, hydraulic fluids, and petroleum
products. Our demolition contracts generally require us to provide all labor, supervision, material and equipment required for
demolition and clearance on specified properties.
We
operate primarily through a bid submission and award process to various public and government entities. Bids specify
terms and conditions of contracting. We do not write our contracts. Our customers dictate contract language,
payment terms, and in most cases the timing of and forms used for billing. When we bid on a project, we agree to these
terms which are included in the bid specifications. Since the inception of CES in 1988, we have not been required to
make any penalty payments to our customers or incurred post-contractual costs under contractual commitments. Many of our equipment
supply, local design, and installation subcontracts contain provisions that enable us to seek recourse against our vendors or
subcontractors if there is a deficiency in their commitments.
Payments
to us by the federal government are based on the services provided and the products installed, calculated in accordance with federal
regulatory guidelines and the specific contract’s terms.
To
mitigate contractual performance risks, we have created and invested in processes and systems to ensure that our project managers
bid in compliance with project specifications, perform site inspections, and participate in pre-bid meetings. Our bidding
process takes into account a specified list of variables, which we have developed and fine-tuned over 25 years of doing business,
to ensure that we achieve our performance and financial goals for each contract. Project managers are trained in our bidding process,
and bids greater than $200,000 are reviewed and approved by a senior management team before submission.
Tracking
of job costs to manage financial risk is paramount at CES. Through a Company-developed cost accounting system, jobs
are tracked not only by phase (i.e., type of work) but also according to fifteen separate job cost codes that the Company has
identified as essential for effective project management. These cost codes are mapped to our bidding system, thereby
allowing us to track the financial performance of all contract phases and to ensure that potential cost overruns can be identified
and mitigated.
Job
costing is fully integrated between all modules of our accounting system, which include accounts payable, accounts receivable,
payroll, and inventory. Direct job costs include: labor (not drivers), driver labor, materials, subcontractors,
labor service, job site costs (e.g., permits and rental equipment), dump fees (landfill), travel expenses, temporary lodgings,
jobsite fuel, bonding costs, inspection fees (Department of Environmental Protection, etc.), testing/lab fees, workers’
compensation (by workers’ compensation classification), and indirect costs (which include costs indirectly incurred such
as vehicle insurance, repairs and maintenance, fuel and oil).
We
review job costs twice each month while contracts are in progress, and calculate and review final job cost at the completion of
each job. Problems are reviewed at these meetings. Project managers regularly check on their jobs to monitor
progress and man-hours. This process has now been enhanced with the addition of a cloud based project management system that has
been implemented throughout all Company locations.
To
maintain control of contract bids and implementation, senior management holds routine reviews with project managers, covering
job bidding, job awards, upcoming bids and contracts, etc. Regular accounts receivable and collections reviews are
also held as part of the management process.
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 year ended December 31,
2016, Corvias and FDOT accounted for 12.1% and 10.5% of our total revenue, respectively. For the year ended December 31, 2015,
the Renu Asset Recovery, the general contractor for the DTE Energy power plant project in Michigan, and the FDOT accounted for
13.9% and 15.2% of our total revenue, respectively.
In
2016, approximately $136,430 of revenues were derived from contracts in Louisiana, $16,030,347 from contracts in Florida and nil
from contracts in Georgia (compared to $1,186,421, $15,795,199 and $1,746,528 respectively in 2015).
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 this Annual Report on Form 10-K 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 Board.
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 $200,000 for doubtful accounts at December 31, 2016 and $199,877 at December 31, 2015 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
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.
Advertising
(in thousands, except percentages)
Advertising
costs are expensed when incurred. Advertising costs for 2016 and 2015 were $10 and $25, respectively. Historically, the Company
has not relied on advertising and marketing to generate business.
Results
of Operations
(in thousands, except percentages)
Year
Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net
sales fell 14%, or $2,561, during the year ended December 31, 2016 compared to the year ended December 31, 2015. Revenues in the
Demolition segment fell by $2,626, or 28%, during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Revenues in the Remediation segment decreased by $110, or 1%, during the year ended December 31, 2016 compared to the year ended
December 31, 2015. The Insulation segment experienced a $175 increase in revenue, or 37%, during the year ended December 31, 2016
compared to the year ended December 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 three major contracts in Florida. At December 31, 2016, Demolition segment contracts valued
in excess of $3,983 were in progress. Remediation segment sales were almost unchanged in 2016, primarily because of the continuation
of remediation contracts in Florida and with Ft. Benning and Ft. Stewart DTE and the commencement of other large scale projects
valued in excess of $4,007 in the aggregate in Florida, Georgia and Louisiana. The increase in Insulation segment revenue was
due primarily to higher maintenance spending by a large supermarket chain in the southeastern United States.
During
the year ended December 31, 2016, approximately $136 of revenues were derived from contracts in Louisiana, $16,030 from contracts
in Florida and nil from contracts in Georgia (compared to $1,186, $15,795 and $1,746 respectively in the year ended December 31,
2015).
Sales
Data
The
following table shows net sales by operating segment and net sales by service for the years ended December 31, 2016 and 2015 (in
thousands, except percentages):
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
Net Sales by Operating Segment:
|
|
|
|
|
|
|
|
|
|
|
Remediation
|
|
$
|
8,911
|
|
|
|
(1
|
)%
|
|
$
|
9,021
|
|
|
Demolition
|
|
|
6,611
|
|
|
|
(28
|
)%
|
|
|
9,237
|
|
|
Insulation
|
|
|
645
|
|
|
|
60
|
%
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
16,167
|
|
|
|
(14
|
)%
|
|
$
|
18,728
|
|
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 year ended December 31, 2016 and 2015 (dollars in thousands):
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
Net sales
|
|
$
|
8,911
|
|
|
$
|
(110
|
)
|
|
$
|
9,021
|
|
|
Percentage of total net sales
|
|
|
55
|
%
|
|
|
7
|
%
|
|
|
48
|
%
|
The
small decrease in the Remediation segment net sales during the year ended December 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 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.
During
the fourth quarter of 2016, the Company won 15 Remediation contracts in Florida valued at $594 that will continue into 2017. The
largest of these contracts is worth $185. At the end of 2016, the Company had total Remediation segment contracts valued at $4,007
in backlog.
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 year ended December 31, 2016 and 2015 (in thousands,
except percentages):
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
Net sales
|
|
$
|
6,611
|
|
|
$
|
(2,626
|
)
|
|
$
|
9,237
|
|
|
Percentage of total net sales
|
|
|
41
|
%
|
|
|
(8
|
)%
|
|
|
49
|
%
|
The
decrease in net sales for the Demolition segment during the year ended December 31, 2016 was caused primarily by the lower number
of demolition contracts put out for bids in 2016 compared to 2015. The Company saw more renovation opportunities than demolition
projects year over year. During the fourth quarter of 2016, the Company won 35 Demolition contracts in Florida valued at $1,766
that will continue into 2017. The largest of these contracts is worth $487. At the end of 2016, the Company had total Demolition
segment contracts valued at 3,983 in backlog.
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 year ended December 31, 2016 and 2015 (in thousands,
except percentages):
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
Net sales
|
|
$
|
645
|
|
|
$
|
175
|
|
|
$
|
470
|
|
|
Percentage of total net sales
|
|
|
4
|
%
|
|
|
1
|
|
|
|
3
|
%
|
The
increase in the Insulation segment net sales between the year ended December 31, 2016 and 2015 was caused primarily by a reduction
in work provided to the aforementioned supermarket chain.
Management
intends to address the 2016 decline in revenues with a plan of operations for 2017 that includes an expansion of regional presence
through organic growth and acquisitions (should funding become available), growth of government business through state and federal
IDIQ opportunities, the acquisition of complementary businesses targeted to enhance CES’s in-house capabilities, and a renewed
focus on revenue growth targeting project work with increasing revenues and margins in our core business lines.
Gross
Margin
Gross
margin for the years ended December 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.
|
|
|
2016
|
|
|
2015
|
|
|
Net sales
|
|
$
|
16,167
|
|
|
$
|
18,728
|
|
|
Cost of sales
|
|
|
11,895
|
|
|
|
15,168
|
|
|
Gross margin
|
|
|
4,272
|
|
|
|
3,560
|
|
|
Gross margin percentage
|
|
|
26
|
%
|
|
|
19
|
%
|
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, all the result of the decrease in net sales. The increase in gross margin percentage
in 2016 by 7 percentage points over 2015 was the result of both bidding with higher margins and lower 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 years ended December 31, 2016 and 2015 are as follows (in thousands, except for percentages):
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
General and administrative
|
|
$
|
4,609
|
|
|
$
|
(544
|
)
|
|
$
|
5,153
|
|
|
Percentage of total net sales
|
|
|
29
|
%
|
|
|
1
|
%
|
|
|
28
|
%
|
General
and Administrative (“G&A”) Expense
The
decrease in G&A expense during 2016 when compared to 2015 was caused by a number of factors, including: lower overall salary
expenses (down by $212 or 9%, reflecting $389 of salary reductions for sales staff, officers, field labor and training, offset
by an increase of $177 in office salaries); reduced professional fees (down by $144 or 87% due to lower costs for IR and the resignation
of one board member; lower group health insurance costs, which fell 18% ($102) due to a reduction in the number of employees covered
by insurance as well as receiving past due credits; lower office expenses and supplies (down by $84 or 41%, reflecting budget
constraints imposed on office spending); lower rents associated with a reduction in rent charged by Mr. Biston on the Crystal
Springs leases (decreased by $71 or 21%); reduced shop labor costs, down by 14% ($59) due to a reduction in shop head count from
four to three; reduced licensing and permit costs (decreased by $50 or 54%, due to engineering fees paid in 2015 for DEP surveys
that were reimbursed in 2016; and lower advertising expenses (decreased by $15 or 59%).
These
decreases were offset by higher bad debt expense(up by $104 or 100%), other insurance costs (up by $69 or 184%), reflecting increases
in premiums charged to the Company for its Director’s and Officer’s policy); increased outside payroll service costs
(up by $29 or 63%, reflecting the need to hire contract labor services due to the large volume of work starting at the same time);
higher telephone costs (up by $27 or 37%) due to increased use of hot spots and wi-fi cards for project managers and supervisors,
and an increased number of cell phones issued; higher depreciation charges (increased by $6 or 57%, due to due to new capital
purchases; and higher bank service charges, which rose by $5 or 4% due to fees for late payments on notes.
Other
Income and Expense
Other
income/ (expense) for the years ended December 31, 2016 and 2015 are as follows (in thousands, except percentages):
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
Other income/ (expense)
|
|
$
|
17
|
|
|
$
|
25
|
|
|
$
|
(8
|
)
|
|
Gain/(loss) on asset sales
|
|
|
386
|
|
|
|
386
|
|
|
|
-
|
|
|
Interest income/ (expense)
|
|
|
(453
|
)
|
|
|
(270
|
)
|
|
|
(183
|
)
|
|
Total other income/ (expense), net
|
|
|
(50
|
)
|
|
|
141
|
|
|
|
(191
|
)
|
The
year-over-year increase in other income during 2016 was due primarily to the gains recorded on sales of assets (a crushing machine,
a shredding plant, six trailers, and two late model box trucks that are no longer being utilized), offset by higher interest costs
resulting from the deferment in 2016 of principal payments on debt owed to a shareholder.
Provision
for Income Taxes
Provision
for income taxes and effective tax rates for the years ended December 31, 2016 and 2015 was as follows (dollars in thousands):
|
|
|
2016
|
|
|
2015
|
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Effective tax rate
|
|
|
-
|
|
|
|
-
|
|
The
Company’s effective tax rate for the year ended December 31, 2016 was nil because of the loss in 2016 and the losses carried
forward from prior periods. The Company has net operating loss carryforwards of $2,025,295 available at December 31, 2016 and
has recorded a deferred tax asset of $716,974 reflecting the benefit of the loss carryforwards. These deferred tax assets will
expire in years 2034 through 2035.
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’s cash, cash equivalents and marketable securities were generally held in bank accounts.
The
following table presents selected financial information and statistics as of December 31, 2016 and December 31, 2015 (dollars
in thousands):
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
47
|
|
|
$
|
230
|
|
|
Property, plant and equipment, net
|
|
$
|
1,678
|
|
|
$
|
1,998
|
|
|
Long-term debt
|
|
$
|
5,569
|
|
|
$
|
3,865
|
|
|
Working capital
|
|
$
|
2,094
|
|
|
$
|
284
|
|
The
following table presents selected financial information and statistics about the Company’s sources and uses of cash during
the first nine months of 2016 and 2015 (dollars in thousands):
|
|
|
Year Ended December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cash generated by/ (used in) operating activities
|
|
$
|
(882
|
)
|
|
$
|
89
|
|
|
Cash generated by/ (used in) investing activities
|
|
$
|
198
|
|
|
$
|
(417
|
)
|
|
Cash generated by/ (used in) financing activities
|
|
$
|
500
|
|
|
$
|
408
|
|
During
the year ended December 31, 2016, the cash used in operating activities of $(882) was a result of $(387) of net loss, increased
by non-cash adjustments to net income of $122, and reduced by a net change in operating assets and liabilities of $(616). The
Company generated $198 of cash for investing activities in 2016, the net of sales of excess property and equipment reduced by
purchases of new equipment. The $500 of cash generated by financing activities during 2016 came from capital contributions of
$173 and new borrowing of $1,115, offset by $(788) of loan repayments. No distributions were paid in 2016.
During
the year ended December 31, 2015, the cash generated by operating activities of $89 was a result of $(1,064) of net loss, offset
by non-cash adjustments to net loss of $536 and a net change in operating assets and liabilities of $617. The Company used $(417)
of cash for investing activities in 2015 to purchase property and equipment. There were no disposals of equipment in 2015. The
$408 of cash generated by financing activities during 2015 came from capital contributions of $18 and new borrowing of $1,127,
which included $535 from our President and the Chairman of the Board, Clyde A. Biston, offset by $(736) of loan repayments. No
distributions were paid in 2015.
Long-Term
Debt (dollars in thousands)
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 December 31, 2016:
(i) Installment
loan from Mr. Biston, bearing annual interest at 4.25%, and with a monthly payment of $5, which was deferred to January 2017.
At December 31, 2016, $156 was outstanding under the loan. In 2016, the Company repaid $106 of principal under the loan.
(ii) Installment
loan from Mr. Biston, with a quarterly payment of $2 which was deferred to January 2017, bearing annual interest at 4.75%. At
December 31, 2016, $168 was outstanding under the loan. In 2016, the Company made no repayments of principal under the loan.
(iii) Installment
loan from Mr. Biston, with a monthly payment of $10 which was deferred to January 2017, bearing annual interest at 4.75%. At December
31, 2016, $183 was outstanding under the loan. In 2016, the Company made no repayments of principal under the loan.
(iv) Installment
loan from Mr. Biston, with a monthly payment of $10 which was deferred to January 2017, bearing annual interest at 4.75%. At December
31, 2016, $183 was outstanding under the loan. In 2016, the Company made no repayments of principal under the loan.
(v) Installment
loan from shareholder and the chairman of our Board, Clyde A. Biston, with a monthly payment of $24, bearing annual interest at
6.15%. At December 31, 2016, $2,759 was outstanding under the loan. In 2016, the Company made repayments of principal totaling
$163 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 December 31, 2016, $1,750 was outstanding under the line.
In 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 December 31, 2016, $1,203 was outstanding under the loans. In 2016, the Company borrowed $108 of principal under the loans.
At
December 31, 2016, a total of $6,401 was outstanding under all loans and the line of credit. $832 of that amount is due and payable
in the 12 months following that date.
At
December 31, 2016, principal totaling $3,448 was owing to Mr. Biston on five notes. For the year ended December 31, 2016, the
Company paid Mr. Biston approximately $283 in principal and interest on the notes. Effective as of January 1, 2017, the Company
will pay Mr. Biston approximately $32 per month over the next eight and a half (8.5) years until the loan on which the principal
amount of $2,494 is owing has been repaid. In addition, effective as of January 1, 2017, on the remaining outstanding notes the
Company will pay Mr. Biston approximately $2.5 per month in interest only.
Dividend
Program
As
a privately-owned company prior to November 1, 2013, CES was owned by Mr. Biston. Mr. Biston elected to receive part
of his compensation in 2013 the form of distributions paid to himself as the sole shareholder. No distributions were
paid in 2015 or 2016 by the Company or CES.
The
Company does not expect to pay any dividends or make any distributions to shareholders in 2017.
Further
details about compensation paid to Mr. Biston can be found under Item 10, “Directors, Executive Officers and Corporate Governance
”
below.
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated
retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks,
contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk, or credit risk support to the Company.
Lease
Commitments (dollars in thousands)
The
Company is headquartered at 39646 Fig Street, Crystal Springs, Florida, where it currently occupies 6,000 square feet of office
space as well as 6,000 square feet for a mechanic shop and a 12,000 square foot warehouse. The facilities are owned
by Mr. Biston. On June 1, 2015 Mr. Biston reduced the rent on the Crystal Springs facilities to an annual rent of $90,000
($7,500 on a monthly basis). Expenses incurred in 2016 under these lease agreements were approximately $128,400 in rent (approximately
$10,700 per month), in addition to property taxes in the amount of $25,294 and property insurance in the amount of $10,109. Effective
as of January 1, 2017, the Company will no longer pay monthly rent to Mr. Biston. The Company will instead be responsible for
all property taxes, sales tax, and maintenance costs associated with 39646 Fig Street. The Company estimates these expenses will
be $5,500 per month.
The
Company also leases satellite offices in Davie and Ft. Walton Beach, Florida as well as Chalmette, Louisiana.. Monthly rent for
these facilities is $5, $3, and $0.8 respectively. Effective September 1, 2016, the Company terminated its lease in Chalmette,
Louisiana and all operations of that office were relocated to the existing Ft. Walton Beach, Florida office.
Leases
are for terms ranging from month-to-month to one year to 48 months. As of December 31, 2016, the Company’s total future
minimum lease payments under non-cancelable operating leases were $19.2 per month, or $229.9 in the aggregate for the full term
of all such leases, all of which are leases for office, warehouse and mechanic space.
Other
Obligations
In
addition to the contractual obligations mentioned above, the Company had outstanding commitments to lease copiers totaling $ 12.42
in the aggregate for the full term of all such leases as of December 31, 2016.
Indemnification
The
Company generally does not indemnify its customers against legal claims arising from services it provides. The Company has not
been required to make any significant payments resulting from such services.
The
Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company
has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their
status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings.
It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements
due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However,
the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations, and payments
made under these agreements historically have not been material.
ITEM
8. FINANCIAL STATEMENTS
DLL
CPAs, LLC
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors of
CES
Synergies, Inc.
We
have audited the accompanying balance sheet of CES Synergies, Inc. and its subsidiaries (“the Company”) as of December
31, 2016 and 2015, and the related statements of operations, stockholders’ equity, and cash flows for the years ended. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In
our opinion based on our audit, the financial statements referred to above present fairly, in all material respects, the financial
position of CES Synergies, Inc. and its subsidiaries as of December 31, 2016 and 2015, and the results of its operations, stockholders’
equity, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States.
/s/
DLL CPAs, LLC
Savannah
GA
March
30, 2017
CONSOLIDATED
BALANCE SHEET
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
ASSETS
|
|
Current assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
46,812
|
|
|
$
|
229,882
|
|
|
Advances to employees
|
|
|
13,449
|
|
|
|
13,770
|
|
|
Contracts receivable (net of allow. for bad debt)
|
|
|
4,710,569
|
|
|
|
4,599,131
|
|
|
Inventory
|
|
|
85,614
|
|
|
|
133,715
|
|
|
Deferred Tax Asset - Current
|
|
|
86,098
|
|
|
|
86,098
|
|
|
Prepaid expenses
|
|
|
27,659
|
|
|
|
-
|
|
|
Cost and estimated earnings in excess of billings on uncompleted contracts
|
|
|
687,791
|
|
|
|
690,553
|
|
|
Total current assets
|
|
$
|
5,657,992
|
|
|
$
|
5,753,149
|
|
|
Property and equipment, net
|
|
|
1,677,682
|
|
|
|
1,998,158
|
|
|
Goodwill
|
|
|
1,446,855
|
|
|
|
1,446,855
|
|
|
Deferred tax asset- non-current
|
|
|
632,882
|
|
|
|
632,882
|
|
|
Other assets
|
|
|
4,731
|
|
|
|
4,731
|
|
|
TOTAL ASSETS
|
|
$
|
9,420,142
|
|
|
$
|
9,835,775
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,354,189
|
|
|
$
|
2,911,780
|
|
|
Accrued payroll
|
|
|
30,967
|
|
|
|
47,819
|
|
|
Accrued job costs
|
|
|
128,355
|
|
|
|
-
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
218,864
|
|
|
|
301,398
|
|
|
Notes payable
|
|
|
-
|
|
|
|
1,750,300
|
|
|
Current portion long-term debt
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
229,011
|
|
|
|
-
|
|
|
Non-related party
|
|
|
602,630
|
|
|
|
457,950
|
|
|
Total current liabilities
|
|
|
3,563,996
|
|
|
|
5,469,247
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
3,218,790
|
|
|
|
3,419,098
|
|
|
Non-related party
|
|
|
2,350,471
|
|
|
|
446,066
|
|
|
Total long-term liabilities
|
|
|
5,569,261
|
|
|
|
3,865,164
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
Common stock, authorized: $0.001 par value, 250,000,000 shares, at December 31, 2016; issued: 47,300,500 shares, at December 31, 2016; 46,880,500 shares, at December 31, 2015
|
|
|
47,300
|
|
|
|
46,881
|
|
|
Additional paid in capital
|
|
|
1,471,158
|
|
|
|
1,299,018
|
|
|
Accumulated surplus
|
|
|
(1,231,573
|
)
|
|
|
(844,535
|
)
|
|
Total stockholders' equity
|
|
|
286,885
|
|
|
|
501,364
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
9,420,142
|
|
|
$
|
9,835,775
|
|
See
accompanying Notes to Consolidated Financial Statements
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
Years ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenues
|
|
$
|
16,166,777
|
|
|
$
|
18,728,148
|
|
|
Cost of sales
|
|
|
11,894,961
|
|
|
|
15,167,887
|
|
|
Gross profit
|
|
|
4,271,816
|
|
|
|
3,560,261
|
|
|
General & administrative expenses
|
|
|
4,608,749
|
|
|
|
5,152,941
|
|
|
Net operating profit/(loss)
|
|
|
(336,933
|
)
|
|
|
(1,592,680
|
|
|
Other income/(expenses), net
|
|
|
(50,105
|
)
|
|
|
(190,086
|
)
|
|
Net profit/(loss) before income taxes
|
|
$
|
13,377
|
|
|
$
|
(1,782,766
|
)
|
|
Income taxes
|
|
|
-
|
|
|
|
718,980
|
|
|
Net profit/(loss) after income taxes
|
|
$
|
(387,038
|
)
|
|
|
(1,063,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.008
|
)
|
|
$
|
(0.023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
47,113,130
|
|
|
|
46,843,514
|
|
|
Cash distributions declared per common share
|
|
$
|
-
|
|
|
$
|
-
|
|
See
accompanying Notes to Consolidated Financial Statements
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Additional
paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
surplus
|
|
|
Total
|
|
|
Balance at December 31, 2011
|
|
|
160
|
|
|
|
160
|
|
|
|
80
|
|
|
|
(129,356
|
)
|
|
|
1,130,424
|
|
|
|
2,560,467
|
|
|
|
3,561,695
|
|
|
Distributions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,136,877
|
)
|
|
|
(1,136,877
|
)
|
|
Net income for the year ended December 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
389,083
|
|
|
|
389,083
|
|
|
Balance at December 31, 2012
|
|
|
160
|
|
|
|
160
|
|
|
|
80
|
|
|
|
(129,356
|
)
|
|
|
1,130,424
|
|
|
|
1,812,673
|
|
|
|
2,813,901
|
|
|
Distributions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(929,663
|
)
|
|
|
(929,663
|
)
|
|
Adjustments to common stock and additional paid-in capital
|
|
|
39,524,840
|
|
|
|
39,365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,365
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Issuance of common stock for employment and services
|
|
|
7,000,000
|
|
|
|
7,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
7,000
|
|
|
Net income/(loss) for the year ended December 31, 2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(160,744
|
)
|
|
|
(160,744
|
)
|
|
Balance at December 31, 2013
|
|
|
46,525,000
|
|
|
$
|
46,525
|
|
|
|
80
|
|
|
$
|
(129,356
|
)
|
|
$
|
1,091,058
|
|
|
$
|
722,262
|
|
|
$
|
1,730,490
|
|
|
Adjustments to common stock and additional paid-in capital
|
|
|
-
|
|
|
|
-
|
|
|
|
(80
|
)
|
|
|
129,356
|
|
|
|
(129,356
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Issuance of common stock for employment and services
|
|
|
93,000
|
|
|
|
93
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94,457
|
|
|
|
-
|
|
|
|
94,550
|
|
|
Issuance of common stock (sold)
|
|
|
112,500
|
|
|
|
112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
224,888
|
|
|
|
-
|
|
|
|
225,000
|
|
|
Net income/(loss) for the year ended December 31, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(503,011
|
)
|
|
|
(503,011
|
)
|
|
Balance at December 31, 2014
|
|
|
46,730,500
|
|
|
$
|
46,730
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
1,281,048
|
|
|
$
|
219,251
|
|
|
$
|
1,547,029
|
|
|
Issuance of common stock (sold)
|
|
|
30,000
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,970
|
|
|
|
-
|
|
|
|
18,000
|
|
|
Issuance of common stock for employment and services
|
|
|
120,000
|
|
|
|
120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
|
Net income/(loss) for the year ended December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,063,786
|
)
|
|
|
(1,063,786
|
)
|
|
Balance at December 31, 2015
|
|
|
46,880,500
|
|
|
$
|
46,880
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,299,018
|
|
|
$
|
(844,535
|
)
|
|
$
|
501,364
|
|
|
Issuance of common stock for services
|
|
|
420,000
|
|
|
|
420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172,140
|
|
|
|
-
|
|
|
|
172,560
|
|
|
Net income/(loss) for the year ended December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(387,038
|
)
|
|
|
(387,038
|
)
|
|
Balance at December 31, 2016
|
|
|
47,300,500
|
|
|
|
47,300
|
|
|
|
-
|
|
|
$
|
|
|
|
$
|
1,471,158
|
|
|
$
|
(1,231,573
|
)
|
|
$
|
(286,885
|
)
|
See
accompanying Notes to Consolidated Financial Statements
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
Years ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(387,038
|
)
|
|
$
|
(1,063,786
|
)
|
|
Adjustments to reconcile net loss to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
508,002
|
|
|
|
535,620
|
|
|
(Gain) Loss on Asset Disposal
|
|
|
(386,000
|
)
|
|
|
-
|
|
|
(Increase) decrease in contracts receivable
|
|
|
(111,438
|
)
|
|
|
1,766,143
|
|
|
(Increase) decrease in inventory
|
|
|
48,101
|
|
|
|
19,057
|
|
|
(Increase) decrease in other assets
|
|
|
(27,337
|
)
|
|
|
(716,944
|
)
|
|
(Increase) decrease in estimated earnings in excess of billings
|
|
|
2,762
|
|
|
|
(461,116
|
)
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
(446,110
|
)
|
|
|
306,949
|
|
|
Increase (decrease) in billings in excess of costs and estimated earnings
|
|
|
(82,534
|
)
|
|
|
(297,247
|
)
|
|
Net cash provided by (used in) operating activities
|
|
|
(881,592
|
)
|
|
|
88,676
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchase property and equipment
|
|
|
(213,525
|
)
|
|
|
(416,561
|
)
|
|
Proceeds from disposal of equipment
|
|
|
412,000
|
|
|
|
-
|
|
|
Net cash provided by (used in) investing activities
|
|
|
198,475
|
|
|
|
(416,561
|
)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(787,939
|
)
|
|
|
(736,371
|
)
|
|
Net proceeds from borrowings
|
|
|
1,115,427
|
|
|
|
1,126,562
|
|
|
Adjustments to common stock and additional paid-in capital
|
|
|
172,559
|
|
|
|
18,121
|
|
|
Net cash provided by (used in) financing activities
|
|
|
500,047
|
|
|
|
408,312
|
|
|
Net increase (decrease) in cash
|
|
|
(183,070
|
)
|
|
|
80,427
|
|
|
Cash, beginning of period
|
|
|
229,882
|
|
|
|
149,455
|
|
|
Cash, end of period
|
|
$
|
46,812
|
|
|
$
|
229,882
|
|
See
accompanying Notes to 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 (“US GAAP”) and has adopted a year-end of December 31.
The
preparation of financial statements in conformity with 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 CES, and its wholly owned subsidiaries, Cross Demolition, Inc., Cross Insulation, Inc., Cross Remediation, Inc., Cross FRP,
Inc., Triple J Trucking, Inc., and Tenpoint Trucking, Inc. All significant intercompany account balances, transactions, profits
and losses have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair
Value of Financial Instruments
For
certain financial instruments, including accounts receivable, accounts payable, accrued expenses, interest payable, advances payable
and notes payable, the carrying amounts approximate fair value due to their relatively short maturities.
The
Company has adopted ASC 820-10,
“Fair Value Measurements and Disclosures.”
ASC 820-10 defines fair value, and
establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements
for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities
each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between
the origination of such instruments and their expected realization and their current market rate of interest. The three levels
of valuation hierarchy are defined as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
|
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The
Company did not identify any non-recurring assets and liabilities that are required to be presented in the balance sheets at fair
value in accordance with ASC 815.
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.
While in any particular quarter a single
customer may account for more than ten percent of revenue, for the year ended December 31, 2016, Corvias and FDOT accounted for
12.1% and 10.5% of our total revenue, respectively. For the year ended December 31, 2015, the Renu Asset Recovery, the general
contractor for the DTE Energy power plant project in Michigan, and the FDOT accounted for 13.9% and 15.2% of our total revenue,
respectively.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, the Company 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. No single account had a balance greater than $250,000 at December 31, 2016. Accordingly,
at that date, the Company’s uninsured cash balances for those accounts was nil.
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 established 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 December 31, 2016, 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 years ended December 31, 2016 and 2015.
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 December 31, 2016
and December 31, 2015.
Income
Taxes
Tax
expense comprises current and deferred tax. Current tax and deferred tax is recognized in profit or loss except to the extent
that it relates 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 income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares
outstanding. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during the period
using the
“as if converted”
basis. For the years ended December 31, 2016 and 2015, there were no potential
dilutive securities.
Common
Stock
The
Company currently has 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 the Company at December 31, 2016 was 250,000,000 and at December 31, 2015 was 250,000,000 shares,
in each case with a nominal par value per share of $0.001. Authorized shares that have been issued and fully paid amounted to
47,300,500 common shares at December 31, 2016 compared to 46,880,500 common shares at December 31, 2015.
Comprehensive
Income
Comprehensive
income/(loss) represents net income/(loss) plus the change in equity of a business enterprise resulting from transactions and
circumstances from non-owner sources. The Company’s comprehensive income/(loss) was equal to net income/(loss) for the periods
ended December 31, 2016 and 2015.
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. 2014-01, January 2014, 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:
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
Billed
|
|
|
|
|
|
|
|
Completed Contracts
|
|
$
|
3,417,716
|
|
|
$
|
2,766,670
|
|
|
Contracts in Progress
|
|
|
582,614
|
|
|
|
1,368,742
|
|
|
Retained
|
|
|
910,239
|
|
|
|
663,596
|
|
|
Allowance for Bad Debts
|
|
|
(200,000
|
)
|
|
|
(199,877
|
)
|
|
Total
|
|
$
|
4,710,569
|
|
|
$
|
4,599,131
|
|
NOTE
5 - Property, Plant and Equipment
Property,
plant and equipment and related accumulated depreciation consist of the following:
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Machinery and Equipment
|
|
$
|
3,866,298
|
|
|
$
|
4,137,045
|
|
|
Office Furniture and Equipment
|
|
|
172,635
|
|
|
|
172,636
|
|
|
Transportation and Earth Moving Equipment
|
|
|
8,074,721
|
|
|
|
8,844,666
|
|
|
Leasehold Improvements
|
|
|
30,189
|
|
|
|
30,189
|
|
|
Property, Plant and Equipment Gross
|
|
|
12,143,843
|
|
|
|
13,184,536
|
|
|
Less: Accumulated Depreciation
|
|
|
(10,466,161
|
)
|
|
|
(11,186,378
|
)
|
|
Property, Plant and Equipment Net
|
|
$
|
1,677,682
|
|
|
$
|
1,998,158
|
|
Depreciation
expense for the twelve months ended December 31, 2016 and 2015 was $508,002 and $535,620, respectively.
NOTE
6 - Costs and Estimated Earnings on Contracts
For
the year ended December 31, 2016:
|
|
|
Revenues Earned
|
|
|
Cost of Revenues
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue on completed contracts
|
|
$
|
12,077,096
|
|
|
$
|
8,689,920
|
|
|
$
|
3,387,176
|
|
|
Revenue on uncompleted contracts
|
|
|
4,089,681
|
|
|
|
3,205,041
|
|
|
|
884,640
|
|
|
Total for 12 months ended 12/31/16
|
|
$
|
16,166,777
|
|
|
$
|
11,894,961
|
|
|
$
|
4,271,816
|
|
|
|
|
As of Dec 31,
2016:
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
3,205,041
|
|
|
Estimated earnings on uncompleted contracts
|
|
|
884,640
|
|
|
Revenues earned on uncompleted contracts
|
|
|
4,089,681
|
|
|
Billings to date
|
|
|
3,620,754
|
|
|
Total Net Amount
|
|
$
|
468,927
|
|
|
|
|
|
|
|
|
Amount shown as cost and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
687,791
|
|
|
Amount shown as billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(218,864
|
)
|
|
|
|
|
|
|
|
Total Net Amount
|
|
$
|
468,927
|
|
For
the year ended December 31, 2015:
|
|
|
Revenues Earned
|
|
|
Cost of Revenues
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue on completed contracts
|
|
$
|
14,800,227
|
|
|
$
|
12,573,012
|
|
|
$
|
2,227,215
|
|
|
Revenue on uncompleted contracts
|
|
|
3,927,920
|
|
|
|
2,594,875
|
|
|
|
1,333,045
|
|
|
Total for 12 months ended 12/31/15
|
|
$
|
18,728,147
|
|
|
$
|
15,167,887
|
|
|
$
|
3,560,260
|
|
|
|
|
As of Dec 31,
2015:
|
|
|
Costs incurred on uncompleted contracts
|
|
|
2,739,744
|
|
|
Estimated earnings on uncompleted contracts
|
|
|
1,374,893
|
|
|
Revenues earned on uncompleted contracts
|
|
|
4,114,637
|
|
|
Billings to date
|
|
|
3,725,485
|
|
|
Total Net Amount
|
|
$
|
389,152
|
|
|
|
|
|
|
|
|
Amount shown as cost and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
690,550
|
|
|
Amount shown as billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(301,398
|
)
|
|
|
|
|
|
|
|
Total Net Amount
|
|
$
|
389,152
|
|
NOTE
7 - Long-Term Debt
Long-term
debt consists of the following at December 31, 2016 and 2015:
|
|
|
12/31/2016
|
|
|
12/31/2015
|
|
|
|
|
|
|
|
|
|
|
Installment loan from shareholder, Clyde Biston, payable in monthly payments of $4,632 deferred until January 2017, interest rate of 4.25%.
|
|
$
|
155,746
|
|
|
$
|
254,203
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan from shareholder, Clyde Biston, quarterly payments of $1,908 deferred until Jan. 2017; interest rate of 4.75%
|
|
|
167,630
|
|
|
|
158,092
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan from shareholder, Clyde Biston, quarterly payments of $9,922 deferred until Jan. 2017; interest rate of 4.75%
|
|
|
182,749
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan from shareholder, Clyde Biston, quarterly payments of $9,881 deferred until Jan. 2017; interest rate of 4.75%
|
|
|
182,752
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit, Centennial Bank, Dade City, FL variable interest of 1.25% over prime, current rate 3.25%, secured by land,
improvements, and accounts receivable. Line of credit matures May 5, 2018
|
|
|
1,750,300
|
|
|
|
1,750,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan from shareholder, Clyde Biston. Payable in monthly payments of $23,994, interest rate of 6.15%. Deferred until January 2017
|
|
|
2,758,924
|
|
|
|
2,656,803
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan, Aramsco Inc, Paulsboro, New Jersey, monthly payments of $14,144 for 12 months starting October 2016, and then 8 monthly payments of $31,335, annual interest 3.74%
|
|
|
363,447
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan, Gerard Chimney Co, St. Louis, Missouri monthly payments of $5,000, annual interest of 3.75%
|
|
|
190,465
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Various installment loans payable in monthly payments, interest rates ranging from 0% to 9.5%, secured by various equipment, vehicles, and property
|
|
|
648,889
|
|
|
|
904,016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,400,902
|
|
|
|
6,073,414
|
|
|
Less: Current portion
|
|
|
(831,641
|
)
|
|
|
(2,208,250
|
)
|
|
Long-term debt, less current portion
|
|
$
|
5,569,261
|
|
|
$
|
3,865,164
|
|
On
December 30, 2015, CES and Mr. Biston agreed that Mr. Biston would defer principal and interest payments due under notes held
by Mr. Biston, as described above. On March 1, 2016, Mr. Biston and CES, signed a Loan Deferral Agreement to confirm this understanding.
Under this agreement, Mr. Biston agreed to defer, through December 31, 2016, principal and interest payments due under the notes.
For
the year ended December 31, 2016, the Company paid Mr. Biston approximately $283,000 in principal and interest owed on loans made
by Mr. Biston to the Company (approximately $23,595 per month). As of December 31, 2016, the Company still owed Mr. Biston approximately
$3,447,801 pursuant to these loans. Effective as of January 1, 2017, the Company will pay Mr. Biston approximately $32,000 per
month over the next eight and a half (8.5) years until the loan in the original principal amount of $2,800,000 has been repaid.
In addition, on the remaining outstanding loans, the Company will pay Mr. Biston approximately $2,540 per month in interest only
on those obligations effective as of January 1, 2017.
NOTE
8 - Commitments and Contingencies
Principal
payments on long-term debt are due as follows:
|
Year ending December 31,
|
|
|
|
|
2017
|
|
$
|
831,641
|
|
|
2018
|
|
|
2,361,388
|
|
|
2019
|
|
|
417,193
|
|
|
2020
|
|
|
1,007,771
|
|
|
2021+
|
|
|
1,782,909
|
|
|
|
|
$
|
6,400,902
|
|
Contingencies
On or about March 16, 2016, SiteTech,
Inc., filed suit against CES. In this suit, SiteTech alleges negligence by CES for failing to remove asbestos-containing materials
in a timely manner alleging damages in excess of $75,000. CES denies any liability and has countersued for amounts due it on the
project. The Company cannot predict the outcome of this litigation.
NOTE
9 - Loss per Share
|
|
|
12/31/2016
|
|
|
12/31/2015
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(387,038
|
)
|
|
$
|
(1,063,786
|
)
|
|
Weighted-average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
47,113,130
|
|
|
|
46,942,227
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock
|
|
|
|
|
|
|
|
|
|
Equivalents
|
|
|
-
|
|
|
|
-
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
47,113,130
|
|
|
|
46,942,227
|
|
|
Loss per common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.008
|
)
|
|
$
|
(0.023
|
)
|
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
as of December 31, 2016 and 2015 under such agreements were $ 269,840, and $340,965, respectively.
Effective
as of January 1, 2017, the Company will no longer pay monthly rent on its headquarter premises at 39646 Fig Street, Crystal Springs,
Florida, where it currently occupies 6,000 square feet of office space as well as 6,000 square feet for a mechanic shop and a
12,000 square foot warehouse. The facilities are owned by the Company’s President, Clyde A. Biston. The Company
will instead be responsible for all property taxes, sales tax, and maintenance costs associated with 39646 Fig Street. The Company
estimates these expenses will be $5,500 per month.
NOTE
11 - Related Party Transactions
For
the purposes of these 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. Our President and Chief Executive Officer
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 primarily out of facilities owned by the majority shareholder of the Company. Beginning in June 1995, 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 twelve months ended December 31, 2016 and 2015 under the lease
agreement were $128,400 and $163,025, respectively. As of June 1, 2015 the shareholder reduced the rent payable on the Crystal
Springs facility by 50%. Rental expenses incurred for the 12 months ended December 31, 2016 under the lease agreement for the
shareholder-owned facilities were $72,225.
Notes Payable
The Company has entered into a number
of installment loan agreements with Mr. Biston, the majority shareholder of the Company. At December 31, 2016, the Company owed
Mr. Biston $3,447,801 in total under the loans ($3,419,098 at December 31, 2015). On December 30, 2015, CES and Mr. Biston agreed
that Mr. Biston would defer principal and interest payments due under notes held by Mr. Biston. On March 1, 2016, Mr. Biston and
CES, signed a Loan Deferral Agreement to confirm this understanding. Under this agreement, Mr. Biston agreed to defer, through
December 31, 2016, principal and interest payments due under the notes.
For the year ended December 31, 2016,
the Company paid Mr. Biston approximately $283,000 in principal and interest owed on loans made by Mr. Biston to the Company (approximately
$23,595 per month). Effective as of January 1, 2017, the Company will pay Mr. Biston approximately $32,000 per month over the next
eight and a half (8.5) years until the loan in the original principal amount of $2,800,000 has been repaid. In addition, on the
remaining outstanding loans, the Company will pay Mr. Biston approximately $2,540 per month in interest only on those obligations
effective as of January 1, 2017.
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 twelve months ended December 31, 2016 and 2015 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 filed income tax returns 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, income before income taxes includes the following components:
|
|
|
2016
|
|
|
2015
|
|
|
United States
|
|
$
|
(387,038
|
)
|
|
$
|
(1,063,786
|
)
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
(387,038
|
)
|
|
$
|
(1,063,786
|
)
|
|
The expense(benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
2016
|
|
|
2015
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(607,589
|
)
|
|
State
|
|
|
-
|
|
|
|
(111,391
|
)
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(718,980
|
)
|
|
Deferred and other:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
-
|
|
|
$
|
(718,980
|
)
|
The
Company has net operating loss carryforwards of $2,025,295 available at December 31, 2016 and has recorded a deferred tax asset
of $718,980 reflecting the benefit of the loss carryforwards. Such deferred tax assets will expire in years 2034 through 2035.
NOTE
14 - Reverse Acquisition
On
November 1, 2013, CES entered into an Agreement and Plan of Merger (the “Merger Agreement”), with CES Acquisitions,
Inc. (“Subsidiary”), and CES Synergies, Inc., a shell company that traded on the OTC bulletin board. Pursuant to the
Merger Agreement, the Subsidiary merged into CES, such that CES became a wholly-owned subsidiary of the Company (the “Merger”);
and the Company issued 35,000,000 shares of the Company’s common stock to the shareholders of CES (the “Acquisition
Shares”), representing approximately 75.2% of the Company’s aggregate issued and outstanding common stock following
the closing of the Merger Agreement. The share exchange is being accounted for as a recapitalization, and not as a business combination
under the scope of FASB ASC Topic 805. CES is the acquirer for accounting purposes and CES Synergies, Inc., is the acquired company.
Accordingly, CES’s subchapter S corporate status was terminated on November 1, 2013.
NOTE
15 - Subsequent Events
The
Company has performed an evaluation of subsequent events through March 30, 2017, the date the accompanying financial statements
were issued, and did not identify any material subsequent transactions that require disclosure.
NOTE
16 - 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.
Remediation
is one segment of the Company that derives its income from mold remediation and abatement services for a broad range of environments.
Demolition offers full scale commercial demolition and wrecking down to interior and selective demolition and strip down services.
Our third segment, 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 operating income (loss) to measure segment performance as recorded
below:
|
|
|
Years ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Remediation Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,911,167
|
|
|
$
|
9,020,978
|
|
|
Cost of Revenues
|
|
|
6,700,805
|
|
|
|
8,142,979
|
|
|
Gross Profit
|
|
|
2,210,362
|
|
|
|
877,999
|
|
|
|
|
|
|
|
|
|
|
|
|
General & Administrative Expense
|
|
|
2,949,645
|
|
|
|
2,469,926
|
|
|
Other (Income)/Expense
|
|
|
(6,606
|
)
|
|
|
7,434
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) from Segment
|
|
$
|
(745,889
|
)
|
|
$
|
(1,599,261
|
)
|
|
|
|
Years ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Demolition Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,610,624
|
|
|
$
|
9,236,717
|
|
|
Cost of Revenues
|
|
|
4,786,685
|
|
|
|
6,921,317
|
|
|
Gross Profit
|
|
|
1,823,939
|
|
|
|
2,315,400
|
|
|
|
|
|
|
|
|
|
|
|
|
General & Administrative Expense
|
|
|
1,713,474
|
|
|
|
1,706,876
|
|
|
Other (Income)/Expense
|
|
|
(277,233
|
)
|
|
|
32,470
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) from Segment
|
|
$
|
387,698
|
|
|
$
|
576,054
|
|
|
|
|
Years ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Insulation Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
644,986
|
|
|
$
|
470,453
|
|
|
Cost of Revenues
|
|
|
492,171
|
|
|
|
369,003
|
|
|
Gross Profit
|
|
|
152,815
|
|
|
|
101,450
|
|
|
|
|
|
|
|
|
|
|
|
|
General & Administrative Expense
|
|
|
181,674
|
|
|
|
141,799
|
|
|
Other (Income)/Expense
|
|
|
(12
|
)
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Segment
|
|
$
|
(28,847
|
)
|
|
$
|
(40,479
|
)
|