UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2016

 

or

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 

 

Commission File Number: 000-55159

 

CES Synergies, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada   46-0839941

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

     

39646 Fig Street

 P.O. Box 1299

Crystal Springs, FL

 

 

 

33524

(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code: 813-783-1688

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     Accelerated filer
Non-accelerated filer  (Do not check if a smaller reporting company)  Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 Class  Outstanding as of May 16, 2016
Common Stock, $0.001 par value  46,900,500

 

 

 

 

 

 

CES SYNERGIES, INC.

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

  Page
Item 1. Financial Statements. 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 14
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 25
   
Item 4. Controls and Procedures. 25
   
PART II - OTHER INFORMATION
   
Item 1. Legal Proceedings. 26
   
Item 1A. Risk Factors. 26
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 26
   
Item 3. Defaults Upon Senior Securities. 26
   
Item 4. Mine Safety Disclosures. 26
   
Item 5. Other Information. 26
   
Item 6. Exhibits 26
   
SIGNATURES 27

 

 

 

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

   March 31,
2016
   December 31,
2015
 
ASSETS
Current assets        
Cash  $191,136   $229,882 
Advances to employees   12,754    13,770 
Contracts receivable (net of allow. for bad debt)   3,997,376    4,599,131 
Inventory   145,947    133,715 
Deferred tax asset- current   86,098    86,098 
Prepaids   55,145    - 
Cost and estimated earnings in excess of billings on uncompleted contracts   1,402,434    690,553 
Total current assets  $5,890,890   $5,753,149 
Property and equipment, net   1,856,577    1,998,158 
Goodwill   1,446,855    1,446,855 
Deferred tax asset- non-current   -    632,882 
Other assets   -    4,731 
TOTAL ASSETS  $9,831,935   $9,835,775 
           
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities          
Accounts payable  $2,921,296   $2,911,780 
Accrued payroll   40,456    47,819 
Billings in excess of costs and estimated earnings on uncompleted contracts   181,424    301,398 
Notes payable   1,750,300    1,750,300 
Current portion long-term debt          
  Related party   -    - 
  Non-related party   457,950    457,950 
Total current liabilities   5,351,426    5,469,247 
Long-term debt, net of current portion          
Related party   3,414,035    3,419,098 
Non-related party   333,464    446,066 
Total long-term liabilities        3,865,164 
Stockholders' equity          
Common stock, authorized: $0.001 par value, 250,000,000 shares, at March 31, 2016; issued: 46,890,500 shares, at March 31, 2016; 46,880,500 shares, at December 31, 2015   46,890    46,881 
Additional paid in capital   1,299,018    1,299,018 
Retained earnings   (612,898)   (844,535)
Total stockholders' equity   733,010    501,364 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $9,831,935   $9,835,775 

 

See accompanying Notes to Consolidated Financial Statements

 

 1 

 

 

CES SYNERGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

   Three months ended 
   March 31, 2016   March 31, 2015 
Revenues  $4,000,808   $3,523,357 
Cost of sales   2,686,036    2,850,038 
Gross profit   1,314,772    673,319 
General & administrative expenses   1,064,549    1,318,880 
Net operating profit/(loss)   250,223    (645,561)
Other expenses, net   (18,586)   (69,317)
Profit/(loss) before income taxes   231,637    (714,878)
Income taxes   -    - 
Net profit/(loss)  $231,637   $(714,878)
Profit/(loss) per share          
Basic and diluted  $0.01   $(0.02)
           
Shares used in computing profit/(loss) per share   46,883,687    46,730,500 
Cash distributions declared per common share   -    - 

 

See accompanying Notes to Consolidated Financial Statements

 

 2 

 

 

CES SYNERGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   Three months ended 
   March 31, 2016   March 31, 2015 
Operating Activities        
Net profit/(loss)  $231,635   $(714,878)
Adjustments to reconcile net loss to cash provided (used) by operating activities          
Depreciation expense   127,916    126,941 
(Gain)/loss on disposal of assets   (15,455)   - 
Decrease (Increase) in:          
    Contracts receivable   601,755    3,040,290 
Other assets   (54,129)   204 
Inventories   (12,232)   (20,411)
Cost and estimated earnings in excess of billings on uncompleted contracts   (711,881)   (396,861)
Increase (Decrease) in:          
Accounts payable   9,517    (1,587,149)
Accrued liabilities   (7,363)   (42,863)
Billings in excess of costs and estimated earnings   (119,974)   (127,136)
Total Adjustments   (181,846)   993,015 
Net cash provided (used) by operating activities  $49,789   $278,137 
           
Investing Activities:          
Purchase of property and equipment   (5,880)   (85,200)
Proceeds from disposal of equipment   35,000    - 
Net cash provided (used) by investing activities   29,120    (85,200)
           
Financing Activities:          
New borrowings   -    85,200 
Debt reduction   (117,665)   (200,242)
Proceeds from issuance of common stock   10    - 
Net cash provided (used) by financing activities   (117,655)   (115,042)
           
Net increase (decrease) in cash   (38,746)   77,895 
           
Cash at beginning of period   229,882    149,455 
           
Cash at end of period  $191,136   $227,350 
           
Supplemental Disclosures          
Interest paid  $35,964   $58,295 
Income taxes paid  $-   $- 

 

See accompanying Notes to the Consolidated Financial Statements

 

 3 

 

 

CES SYNERGIES, INC. 

MARCH 31, 2016

(Unaudited)

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Company Background

 

CES Synergies, Inc. (unless otherwise indicated, together with its consolidated subsidiaries, the “Company”) is a Nevada corporation formed on April 26, 2010. The Company is the parent company of Cross Environmental Services, Inc. (“CES”) which was incorporated in 1988 in the state of Florida. The Company acquired CES in a reverse merger transaction that closed on November 1, 2013, and CES is deemed the accounting acquirer under accounting rules (see Note 14). The Company is an asbestos and lead abatement contracting firm specializing in the removal of asbestos and lead from buildings and other structures, and demolition of structures. The Company’s services include removal of asbestos and lead, construction, installation, and repair of ceilings and insulation systems and demolition. Most jobs are located within the state of Florida, but the Company accepts and performs jobs throughout the southeastern United States. 

 

Note 2 – Summary of Significant Accounting Policies

 

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements.

 

The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has adopted a year-end of December 31.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Management further acknowledges that it is solely responsible for adopting sound accounting practices consistently applied, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. These include the accounts of Cross Environmental Services, Inc., and its wholly-owned subsidiaries, Cross Demolition, Inc., Cross Insulation, Inc., Cross Remediation, Inc., Cross FRP, Inc., Triple J Trucking, Inc., and Tenpoint Trucking, Inc. All significant intercompany account balances, transactions, profits and losses have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

 4 

 

 

Fair Value of Financial Instruments

 

For certain financial instruments, including accounts receivable, accounts payable, accrued expenses, interest payable, advances payable and notes payable, the carrying amounts approximate fair value due to their relatively short maturities.

 

The Company has adopted ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

  Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

  Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

  Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company did not identify any non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC 815, “Derivatives and Hedging.”

 

In February 2007, the FASB issued ASC 825-10 “Financial Instruments.” ASC 825-10 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. ASC 825-10 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.

 

The carrying amounts of cash and current liabilities approximate fair value due to the short maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The Company does not hold or issue financial instruments for trading purposes, nor does it utilize derivative instruments in the management of foreign exchange, commodity price, or interest rate market risks.

 

Revenue and Cost Recognition

 

The Company follows ASC 605-35 "Revenue Recognition: Construction type contracts" and recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expenses as incurred. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income which are recognized in the period in which the revisions are determined.

 

The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed.

 

The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized.

 

Contract retentions are included in contracts receivable.

 

 5 

 

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, the Corporation considers cash and cash equivalents to be all highly liquid deposits with maturities of three months or less. Cash equivalents are carried at cost, which approximates market value.

 

Concentrations of Credit Risk

 

The company maintains cash balances at Centennial Bank located in Central Florida. The cash accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. At March 31, 2016 and 2015, the Company’s uninsured cash balances for those accounts were $0.

 

Special purpose entities

 

The Company does not have any off-balance sheet financing activities.

 

Contracts Receivable

 

Contracts receivable are recorded when invoices are issued and presented in the balance sheet net of the allowance for doubtful accounts. Contract receivables are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Company's historical average percentage of bad debts in relation to its revenue.

 

Inventory, Net

 

Inventories consist primarily of job materials and supplies and are priced at the lower of cost (first-in, first-out) or market.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements are capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized as operating expenses.

 

Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease, including renewal periods, if shorter. Estimated useful lives are as follows:

 

Equipment:  3-10 years

 

The Company reviews property, plant and equipment and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows. Measurement of the impairment loss, if any, is based on the difference between the carrying value and fair value.

 

Impairment of Long-Lived Assets and Amortizable Intangible Assets

 

The Company follows ASC 360-10, “Property, Plant, and Equipment,” which establishes a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Through March 31, 2016, the Company had not experienced impairment losses on its long-lived assets.

 

 6 

 

 

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 periods ended March 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 March 31, 2016 and March 31, 2015.

 

Income Taxes

 

Tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that they relate to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. Deferred tax would be recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. No deferred tax is recognized since the difference in carrying amount is not significant.

 

Net Income (Loss) per Share

 

The Company computes net income (loss) per share in accordance with ASC 260-10, “Earnings Per Share.” The basic net 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 periods ended March 31, 2016 and 2015 there were no potential dilutive securities.

 

Common Stock

 

There is currently only one class of common stock. Each share of common stock is entitled to one vote. The authorized number of shares of common stock of CES Synergies, Inc. at March 31, 2016 and 2015 was 250,000,000 shares with a nominal par value per share of $0.001. Authorized shares that have been issued and fully paid amounted to 46,890,500 at March 31, 2016 compared to 46,730,500 common shares at March 31, 2015.

 

Comprehensive Income/(Loss)

 

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 March 31, 2016 and 2015.

 

 7 

 

 

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:

 

   For the three months ended 
   March 31, 2016   March 31, 2015 
Billed        
Completed Contracts  $3,006,904    1,800,522 
Contracts in Progress   629,722    1,068,624 
Retained   560,627    656,839 
Allowance for Bad Debts   (199,877)   (201,000)
TOTAL  $3,997,376   $3,324,985 

 

Note 5 – Property, Plant and Equipment

 

Property, plant and equipment and related accumulated depreciation consists of the following:

 

   For the three months ended 
   March 31, 2016   March 31, 2015 
Machinery and Equipment  $3,843,117   $3,847,408 
Office furniture and Equipment   172,636    172,635 
Transportation and Earth Moving Equipment   8,730,807    8,802,943 
Leasehold Improvements   30,189    30,189 
Property, Plant and Equipment Gross   12,776,749    12,853,175 
Less: Accumulated Depreciation   (10,920,172)   (10,777,699)
Property, Plant and Equipment Net  $1,856,577   $2,075,476 

 

 8 

 

 

Depreciation expense for the twelve months ended March 31, 2016 and 2015 was $127,916 and $126,941 respectively.

 

Note 6 – Costs and Estimated Earnings on Contracts

 

For the three months ended March 31, 2016:

 

   Revenues Earned   Cost of Revenues   Gross Profit (Loss) 
             
Revenue on completed contracts  $2,227,953   $1,548,072   $679,880 
Revenue on uncompleted contracts   1,772,856    1,137,964    634,892 
Total for 3 months ended 3/31/16  $4,000,808   $2,686,036   $1,314,772 

 

   As of March 31, 2016 
Costs incurred on uncompleted contracts  $2,737,277 
Estimated earnings on uncompleted contracts   1,418,255 
Revenues earned on uncompleted contracts   4,155,532 
Billings to date   2,934,518 
Total Net Amount  $1,221,014 
      
Amount shown as cost and estimated earnings in excess of billings on uncompleted contracts  $1,402,439 
Amount shown as billings in excess of costs and estimated earnings on uncompleted contracts   (181,425)
      
Total Net Amount  $1,221,014 

 

For the three months ended March 31, 2015:

 

   Revenues Earned   Cost of Revenues   Gross Profit (Loss) 
             
Revenue on completed contracts  $2,129,367   $1,662,064   $467,303 
Revenue on uncompleted contracts   1,393,989    1,187,975    206,014 
Total for 3 months ended 3/31/15  $3,523,356   $2,850,039   $673,317 

 

    As of March 31, 2015  
Costs incurred on uncompleted contracts   $ 5,289,580  
  Estimated earnings on uncompleted contracts     1,984,707  
       Revenues earned on uncompleted contracts     7,274,287  
Billings to date     7,119,498  
Total Net Amount   $ 154,789  
         
Amount shown as cost and estimated earnings in excess of billings on uncompleted contracts   $ 626,298  
Amount shown as billings in excess of costs and estimated earnings on uncompleted contracts     (471,509 )
         
Total Net Amount   $ 154,789  

 

 9 

 

 

Note 7 – Long-Term Debt

 

Long-term debt consists of the following at March 31, 2016 and 2015:

 

   March 31, 2016   March 31, 2015 
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in monthly payments of $4,632 deferred until January 2017, interest rate of 4.25%.  $236,900   $250,275 
           
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in monthly payments of $1,908 deferred until January 2017, interest rate of 4.75%.   158,092    - 
           
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in monthly payments of $9,922 deferred until January 2017, interest rate of 4.75%.   175,000    - 
           
Demand Loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston, in monthly payments of $9,881 deferred until January 2017, interest rate of 4.75%.   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.  On May 5, 2016, the maturity date of the line of credit was extended to May 5, 2018.   1,750,300    1,750,300 
           
Installment loan from a shareholder and the chairman of board of directors of the Company, Clyde A. Biston. Payable in monthly payments of $23,994, interest rate of 6.15%.   2,656,803    2,677,259 
           
Various installment loans payable in monthly payments, interest rates ranging from 0% to 9.5%, secured by various equipment, vehicles, and property.   803,654    890,347 
Total   5,955,749    5,568,181 
Less: Current portion   (2,208,250)   (2,346,057)
Long-Term debt, less current portion  $3,747,499   $3,222,124 

 

Note 8 – Commitments and Contingencies

 

Commitments

 

Principal payments on long-term debt are due as follows:

 

Year ending December 31,    
2016  $2,208,250 
2017   510,013 
2018   351,543 
2019   328,541 
2020+   2,557,402 
   $5,955,749 

 

 10 

 

 

Contingencies

 

None.

 

Note 9 – Profit/(loss) per Share

 

   For the three months ended 
   March 31, 2016   March 31, 2015 
         
Net Profit/(Loss)  $231,637   $(714,878)
Weighted-average common shares outstanding          
basic:   46,883,687    46,730,500 
           
Weighted-average common stock          
Equivalents   -    - 
Stock Options   -    - 
Warrants   -    - 
Convertible Notes   -    - 
           
Weighted-average common shares outstanding          
Diluted   46,883,687    46,530,500 
           
Profit/(Loss) per share outstanding          
Basic and Diluted  $0.005   $(0.015)

 

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 March 31, 2016 and 2015 under such agreements were $56,195, and $94,997, respectively.

 

Note 11 Related Party Transactions

  

For the purposes of these notes to consolidated financial statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

 

Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. Clyde A. Biston, the chairman of board of directors and former CEO of the Company, owns a majority of our shares, meaning he can exert significant influence over corporate decisions and strategy. Related party transactions for the period include the following:

 

Leased Facilities 

 

The Company is headquartered in Crystal Springs, Florida, where it currently occupy 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 our President, Clyde A. Biston.  Between June and October 2013, the Company was allowed to use the facilities rent-free. As of November 1, 2013, the Company entered into a lease agreement with Mr. Biston for rental of the facilities at an annual rent of $180,000 ($15,000 on a monthly basis). 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). The Company also pays the property taxes for use of the facilities, and has paid monthly rent of $16,050 since November 1, 2013, and $8,025 monthly since June 1, 2015, including sales taxes.

 

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The Company also leases satellite offices in Davie and Ft. Walton Beach, Florida as well as Chalmette, Louisiana from third parties. Monthly rent for these facilities the three months ended March 31, 2016 was $15,367, $9,555 and $7,200 respectively. We believe our facilities are adequate for their intended purposes and have capacities adequate for our current and anticipated needs.

 

Note 12 401K Salary Deferral Plan 

 

The Company has established a deferred benefit plan for office and managerial staff with one year or more of service. The plan allows employees to contribute through salary withholding. The Company may match the contribution up to 3% of the gross wages of the employee. Amounts contributed by the Company for the three months ended March 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 income tax returns filed that require recognition or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.

 

For financial reporting purposes, for the three months ending March 31, 2016 and 2015, income before income taxes includes the following components:

 

   March 31, 2016   March 31, 2015 
United States  $231,637   $(714,878)
Foreign   -    - 
Total  $231,637   $(714,878)

                 

The expense (benefit) for income taxes consist of:                

 

Current:    2016   2015 
Federal  $   -   $   - 
State  $-   $- 
Foreign  $-   $- 
Total  $-   $- 
Deferred and other:          
Federal  $-   $- 
State  $-   $- 
Foreign  $-   $- 
   $-   $- 
Total tax expense    $-   $- 

 

Note 14 – Reverse Acquisition

 

On November 1, 2013, CES entered into an Agreement and Plan of Merger (the “Merger Agreement”), with CES Acquisitions, Inc. (the “Subsidiary”) and the Company, which was 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, 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 the Company is the acquired company. Accordingly, CES’s subchapter S corporate status was terminated at the date of the Merger.

 

Note 15 – Subsequent Events

 

10,000 shares of common stock were issued by the Company in April, 2016 to a member of the Company’s board of directors for services under a contract that requires the issuance of 10,000 shares each quarter.  

 

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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.

 

Cross Remediation is one segment of the Company that derives its income from mold remediation and abatement services for a broad range of environments. Cross Demolition offers full scale commercial demolition and wrecking down to interior and selective demolition and strip down services. Our third segment, Cross Insulation, derives its revenue from re-insulation and insulation of new and remodeling projects.

 

The information provided below is obtained from internal information that is provided to the Company’s chief operating decision maker for the purpose of corporate management. The Company uses net operating profit/(loss) to measure segment performance as recorded below:

 

   For the three months ended 
   March 31, 2016   March 31, 2015 
Remediation Segment        
         
Revenue  $2,563,892   $2,033,840 
Cost of Revenues   1,479,190    1,932,641 
Gross Profit   1,084,702    101,199 
           
General & Administrative Expense   350,036    459,081 
Allocated CES Admin. Expenses   360,353    167,570 
Other Expense   (7,775)   1,343 
           
Net Profit/(Loss) from Segment  $382,088   $(526,795)

 

   For the three months ended 
   March 31, 2016   March 31, 2015 
Demolition Segment          
           
Revenue  $1,302,019   $1,400,338 
Cost of Revenues   1,080,935    1,127,159 
Gross Profit   221,084    273,179 
           
General & Administrative Expense   183,256    219,344 
Allocated CES Admin. Expenses   216,859    193,462 
Other Expense   (2,201)   18,061 
           
Net Loss from Segment  $(176,830)  $(157,688)

 

   For the three months ended 
   March 31, 2016   March 31, 2015 
Insulation Segment        
         
Revenue  $134,898   $89,179 
Cost of Revenues   79,858    84,654 
Gross Profit   55,040    4,525 
           
General & Administrative Expense   20,813    24,700 
Allocated CES Admin. Expenses   7,848    10,260 
Other Income   -    (39)
           
Net Profit/(Loss) from Segment  $26,379   $(30,396)

 

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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. 

 

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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.

 

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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.

 

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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.

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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.

 

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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).

 

Sales Data

 

The following table shows net sales by operating segment and net sales by service during the quarters ended March 31, 2016 and 2015 (in thousands, except percentages): 

 

   2016   Change   2015 
Net Sales by Operating Segment:            
Remediation  $2,564    26%  $2,034 
Demolition   1,302    (7)%   1,400 
Insulation   135    51%   89 
                
Total net sales  $4,001    14%  $3,523 

 

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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):

 

   2016   Change   2015 
Net sales  $2,564   $530   $2,034 
Percentage of total net sales   64%   6%   58%

 

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):

 

   2016   Change   2015 
Net sales  $1,302   $(98)  $1,400 
Percentage of total net sales   33%   (7)%   40%

 

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.

 

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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):

 

   2016   Change   2015 
Net sales  $135   $46   $89 
Percentage of total net sales   3%   1%   2%

 

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.

 

   2016   2015 
Net sales  $4,001   $3,523 
Cost of sales   2,686    2,850 
Gross margin   1,315    673 
Gross margin percentage   33%   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, 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.

 

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Operating Expenses 

 

Operating expenses for the quarters ended March 31, 2016 and 2015 are as follows (in thousands, except for percentages):

 

   2016   Change   2015 
General and administrative  $1,065   $(254)  $1,319 
Percentage of total net sales   27%   (10%)   37%

  

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.

 

Other Expense 

 

Other expense for the quarters ended March 31, 2016 and 2015 are as follows (in thousands, except percentages):

 

   2016   Change   2015 
Other income/(expense)  $2   $13   $(11)
Interest expense   (36)   22    (58)
Gain on asset sale   15    15    - 
Total other expense, net   (19)   50    (69)

  

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.

 

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Provision for income taxes and effective tax rates for the quarters ended March 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 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):

 

   March 31, 2016   December 31, 2015 
Cash, cash equivalents and marketable securities  $191   $230 
Property, plant and equipment, net  $1,857   $1,998 
Long-term debt  $3,747   $3,865 
Working capital  $539   $284 

 

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):

 

   Three months Ended 
   March 31,   March 31, 
   2016   2015 
Cash provided by operating activities  $50   $278 
Cash provided/(used) by investing activities  $29   $(85)
Cash used by financing activities  $(118)  $(115)

 

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.

  

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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.

 

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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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report such that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended March 31, 2016, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

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. 

 

ITEM 1A. RISK FACTORS.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

10,000 shares of common stock were issued by the Company in the quarter ended March 31, 2016 to a member of the Company’s board of directors for services under a contract that requires the issuance of 10,000 shares each quarter.

 

No purchases of common stock of the Company were made by the Company during the quarter ended March 31, 2016.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:

 

EXHIBIT

NUMBER

  DESCRIPTION
     
31.1   Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)
31.2   Certification of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)
32.1   Certification of the Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2   Certification of the Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

EX-101.INS   XBRL INSTANCE DOCUMENT
EX-101.SCH   XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
EX-101.CAL   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EX-101.DEF   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EX-101.LAB   XBRL TAXONOMY EXTENSION LABELS LINKBASE
EX-101.PRE   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

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SIGNATURES

 

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

 

  CES Synergies, Inc.
     
Date: May 16, 2016 By: /s/ John Tostanoski
  John Tostanoski
  Chief Executive Officer (Principal Executive Officer)
     
Date: May 16, 2016 By: /s/ Sharon Rosenbauer
  Sharon Rosenbauer
  Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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