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, 2017

 

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 15, 2017
Common Stock, $0.001 par value   47,300,500

 

 

 

 

 

 

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. 13
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 22
   
Item 4. Controls and Procedures. 22
   
PART II - OTHER INFORMATION
   
Item 1. Legal Proceedings. 23
   
Item 1A. Risk Factors. 23
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
 
Item 3. Defaults Upon Senior Securities. 23
   
Item 4. Mine Safety Disclosures. 23
   
Item 5. Other Information. 23
   
Item 6. Exhibits 24
   
SIGNATURES 25

 

 

 

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

   March 31,
2017
   December 31,
2016
 
ASSETS
Current assets        
Cash  $5,652   $46,812 
Advances to employees   13,540    13,449 
Contracts receivable (net of allow. for bad debt)   3,808,450    4,710,569 
Inventory   84,517    85,614 
Deferred Tax Asset - Current   -    86,098 
Prepaid expenses   122,462    27,659 
Cost and estimated earnings in excess of billings on uncompleted contracts   980,887    687,791 
Total current assets  $5,015,508   $5,657,992 
Property and equipment, net   1,571,834    1,677,682 
Goodwill   1,446,855    1,446,855 
Deferred tax asset- non-current   718,980    632,882 
Other assets   4,731    4,731 
TOTAL ASSETS  $8,757,908   $9,420,142 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $2,348,713   $2,354,189 
Accrued payroll   30,699    30,967 
Accrued job costs   22,192    128,355 
Billings in excess of costs and estimated earnings on uncompleted contracts   429,886    218,864 
Notes payable   -    - 
Current portion long-term debt          
Related party   212,268    229,011 
Non-related party   601,043    602,630 
Total current liabilities   3,644,801    3,563,996 
Long-term debt, net of current portion          
Related party   3,063,002    3,218,790 
Non-related party   2,166,984    2,350,471 
Total long-term liabilities   5,229,986    5,569,261 
Stockholders' equity          
Common stock, authorized: $0.001 par value, 250,000,000 shares, at March 31, 2017; issued: 47,300,500 shares, at March 31, 2017; 47,300,500 shares, at December 31, 2016   47,300    47,300 
Additional paid in capital   1,471,158    1,471,158 
Accumulated surplus   (1,635,337)   (1,231,573)
Total stockholders' equity   (116,879)   286,885 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $8,757,908   $9,420,142 

 

See accompanying Notes to Consolidated Financial Statements

 

1 

 

 

CES SYNERGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

   Three months ended 
   March 31, 2017   March 31, 2016 
Revenues  $3,172,088   $4,000,808 
Cost of sales   2,349,466    2,686,036 
Gross profit   822,622    1,314,772 
General & administrative expenses   1,139,729    1,064,549 
Net operating profit/(loss)   (317,107)   250,223 
Other expenses, net   (86,657)   (18,586)
Profit/(loss) before income taxes   (403,764)   231,637 
Income taxes   -    - 
Net profit/(loss)  $(403,764)  $231,637 
Profit/(loss) per share          
Basic and diluted  $(0.01)  $0.01 
           
Shares used in computing profit/(loss) per share   47,300,500    46,883,687 
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, 2017   March 31, 2016 
Operating Activities        
Net profit/(loss)  $(403,764)  $231,635 
Adjustments to reconcile net loss to cash provided (used) by operating activities          
Depreciation expense   105,848    127,916 
(Gain)/loss on disposal of assets   -    (15,455)
Decrease (Increase) in:          
Contracts receivable   902,119    601,755 
Other assets   (94,929)   (54,129)
Inventories   1,097    (12,232)
Cost and estimated earnings in excess of billings on uncompleted contracts   (293,096)   (711,881)
Increase (Decrease) in:          
Accounts payable   (5,476)   9,517 
Accrued liabilities   (106,376)   (7,363)
Billings in excess of costs and estimated earnings   211,022    (119,974)
Total Adjustments   720,209    (181,846)
Net cash provided (used) by operating activities  $316,445   $49,789 
           
Investing Activities:          
Purchase of property and equipment   -    (5,880)
Proceeds from disposal of equipment   -    35,000 
Net cash provided (used) by investing activities   -    29,120 
           
Financing Activities:          
New borrowings   -    - 
Debt reduction          
Non-related party   (185,074)   (112,601)
Related-party   (172,531)   (5,064)
Proceeds from issuance of common stock   -    10 
Net cash provided (used) by financing activities   (357,605)   (117,655)
           
Net increase (decrease) in cash   (41,160)   (38,746)
           
Cash at beginning of period   46,812    229,882 
           
Cash at end of period  $5,652   $191,136 
           
Supplemental Disclosures          
Interest paid  $88,289   $35,964 
Income taxes paid  $-   $- 

 

See accompanying Notes to the Consolidated Financial Statements

 

3 

 

 

CES SYNERGIES, INC. 

MARCH 31, 2017

(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.

 

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, 2017 and 2016, 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.

 

5 

 

 

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, 2017, 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 periods ended March 31, 2017 and 2016.

 

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, 2017 and March 31, 2016.

 

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.

 

6 

 

 

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, 2017 and 2016 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, 2017 and 2016 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 47,300,500 at March 31, 2017 compared to 46,890,500 common shares at March 31, 2016.

 

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, 2017 and 2016.

 

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.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the timing of adoption and the potential impact of this standard on its financial position, but does not expect the standard to have a material impact on results of operations.

 

7 

 

 

Note 4 – Contracts Receivable

 

Contracts Receivable consist of at:

 

   March 31, 2017   December 31, 2016 
Billed        
Completed Contracts  $2,349,836    3,417,716 
Contracts in Progress   848,772    582,614 
Retained   809,842    910,239 
Allowance for Bad Debts   (200,000)   (200,000)
TOTAL  $3,808,450   $4,710,569 

 

Note 5 – Property, Plant and Equipment

 

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

 

   March 31, 2017   December 31, 2016 
Machinery and Equipment  $3,866,298   $3,866,298 
Office furniture and Equipment   172,636    172,635 
Transportation and Earth Moving Equipment   8,074,720    8,074,721 
Leasehold Improvements   30,189    30,189 
Property, Plant and Equipment Gross   12,143,843    12,143,843 
Less: Accumulated Depreciation   (10,572,009)   (10,466,161)
Property, Plant and Equipment Net  $1,571,834   $1,677,682 

 

Depreciation expense for the twelve months ended March 31, 2017 and 2016 was $105,848 and $127,916 respectively.

 

Note 6 – Costs and Estimated Earnings on Contracts

 

For the three months ended March 31, 2017:

 

   Revenues Earned   Cost of Revenues   Gross Profit (Loss) 
             
Revenue on completed contracts  $1,475,084   $1,083,890   $391,194 
Revenue on uncompleted contracts   1,697,004    1,265,576    431,428 
Total for 3 months ended 3/31/17  $3,172,088   $2,349,466   $822,622 

 

   As of March 31, 2017 
Costs incurred on uncompleted contracts  $3,589,945 
Estimated earnings on uncompleted contracts   1,040,048 
Revenues earned on uncompleted contracts   4,629,993 
Billings to date   4,078,991 
Total Net Amount  $551,002 
      
Amount shown as cost and estimated earnings in excess of billings on uncompleted contracts  $980,887 
Amount shown as billings in excess of costs and estimated earnings on uncompleted contracts   (429,885)
      
Total Net Amount  $551,002 

 

8 

 

 

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 

 

Note 7 – Long-Term Debt

 

Long-term debt consists of the following at March 31, 2017 and 2016:

 

   March 31, 2017   December 31, 2016 
         
Installment loan from shareholder, Clyde Biston, payable in monthly interest-only payments of $529; interest rate of 4.25% p.a.  $52,530   $155,746 
           
Installment loan from shareholder, Clyde Biston, payable in monthly interest-only payments of $626; interest rate of 4.75% p.a.   167,630    167,630 
           
Installment loan from shareholder, Clyde Biston, payable in monthly interest-only payments of $693; interest rate of 4.75% p.a.   182,749    182,749 
           
Installment loan from shareholder, Clyde Biston, payable in monthly interest-only payments of $693; interest rate of 4.75% p.a.   182,752    182,752 
           
Line of credit, Centennial Bank, Dade City, FL variable interest of 1.25% over prime, current rate 3.25% p.a., secured by land, improvements, and accounts receivable. Line of credit matures May 5, 2018.   1,744,076    1,750,300 
           
Installment loan from shareholder, Clyde Biston. Payable in monthly payments of $31,355, interest rate of 6.15%. Deferred until January 2017.   2,689,609    2,758,924 
           
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%.   308,138    363,447 
           
Installment loan, Gerard Chimney Co, St. Louis, Missouri monthly payments of $5,000, annual interest of 3.75%.   170,465    190,465 
           
Various installment loans payable in monthly payments, interest rates ranging from 0% to 9.5% p.a., secured by various equipment, vehicles, and property.   545,348    648,889 
           
Total   6,043,297    6,400,902 
Less: Current portion   (813,310)   (831,641)
Long-term debt, less current portion  $5,229,987    5,569,261 

 

9 

 

  

At March 31, 2017, the Company owed Mr. Biston $3,275,270 under to his loans ($3,401,795 at March 31, 2016). Commencing January 1, 2017, the Company is paying 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, commencing January 1, 2017, on the remaining outstanding loans, the Company is paying Mr. Biston approximately $2,540 per month in interest only.

 

Note 8 – Commitments and Contingencies

 

Commitments

 

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

 

Year ending December 31,     
2017  $813,310 
2018   2,338,948 
2019   398,265 
2020   987,645 
2021+   1,505,129 
   $6,043,297 

 

Contingencies

 

None.

 

Note 9 – Profit/(loss) per Share 

 

   For the three months ended 
   March 31, 2017   March 31, 2016 
         
Net Profit/(Loss)  $(403,764)  $231,637 
Weighted-average common shares outstanding          
basic:   47,300,500    46,883,687 
           
Weighted-average common stock          
Equivalents   -    - 
Stock Options   -    - 
Warrants   -    - 
Convertible Notes   -    - 
           
Weighted-average common shares outstanding          
Diluted   47,300,500    46,883,687 
           
Profit/(Loss) per share outstanding          
Basic and Diluted  $(0.009)  $0.005 

 

Note 10 Operating Lease Agreements

 

In the past, the Company rented certain equipment/office space under month to month operating lease agreements. Lease expenses, including amounts listed in Note 11 below regarding Related Party, incurred as of March 31, 2017 and 2016 under such agreements were $48,410, and $71,511, 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. 

 

10 

 

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 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 our President and Chairman of the Board, Clyde A. Biston.   Effective as of January 1, 2017, the Company ceased to pay monthly rent to Mr. Biston. The Company is instead 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 from third parties. Monthly rent for these facilities for the three months ended March 31, 2017 was $15,867 and $9,840 respectively ($15,367 and $9,555 respectively for the period March 31, 2016).

 

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, 2017 and 2016 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, 2017 and 2016, income before income taxes includes the following components:

 

   March 31, 2017   March 31, 2016 
United States  $(403,764)  $231,637 
Foreign   -    - 
Total  $(403,764)  $231,637 

                 

The expense (benefit) for income taxes consist of:

 

Current:  2017   2016 
Federal  $-   $- 
State  $-   $- 
Foreign  $-   $- 
Total  $-   $- 
Deferred and other:          
Federal  $-   $- 
State  $-   $- 
Foreign  $-   $- 
   $-   $- 
Total tax expense  $-   $- 

 

The Company had 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. (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. 

11 

 

 

Note 15 – Subsequent Events

 

None.

 

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, 2017   March 31, 2016 
Remediation Segment        
           
Revenue  $1,537,577   $2,563,892 
Cost of Revenues   1,178,172    1,479,190 
Gross Profit   359,405    1,084,702 
           
General & Administrative Expense   393,302    350,036 
Allocated CES Admin. Expenses   273,732    360,353 
Other Expense   (3,472)   (7,775)
           
Net Profit/(Loss) from Segment  $(311,101)  $382,088 

 

   For the three months ended 
   March 31, 2017   March 31, 2016 
Demolition Segment        
           
Revenue  $1,552,511   $1,302,019 
Cost of Revenues   1,090,459    1,080,935 
Gross Profit   462,052    221,084 
           
General & Administrative Expense   205,689    183,256 
Allocated CES Admin. Expenses   302,378    216,859 
Other Expense   1,307    (2,201)
           
Net Loss from Segment  $(47,322)  $(176,830)

 

   For the three months ended 
   March 31, 2017   March 31, 2016 
Insulation Segment        
           
Revenue  $82,000   $134,898 
Cost of Revenues   81,926    79,858 
Gross Profit   74    55,040 
           
General & Administrative Expense   29,413    20,813 
Allocated CES Admin. Expenses   15,971    7,848 
Other Income   31    - 
           
Net Profit/(Loss) from Segment  $(45,341)  $26,379 

 

12 

 

 

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, 2016 filed with the Securities and Exchange Commission on March 30, 2017 (the “2016 Form 10-K”) under the heading “Risk Factors”.

 

The following discussion should be read in conjunction with the 2016 Form 10-K and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references in this Form 10-Q to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months, or periods of those fiscal years. Each of the terms the “Company”, “we”, “us” or “our” as used herein refers collectively to CES Synergies, Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Overview and Highlights

 

Since its formation in 1988, Cross Environmental Services, Inc. (“CES”), a wholly-owned subsidiary of the Company, has been providing asbestos abatement, demolition, and mold remediation services to city, state, and federal agencies. Our customers include general contractors, developers, project owners, and industrial and commercial clients. Much of our work has been founded on the removal of hazardous materials from structures ranging from residences to commercial and industrial applications, including secure defense contractor facilities, colleges, hospitals, and mid-rise and high-rise buildings and residential structures. Additionally, our experience working on federal projects, such as the Department of Interior, Bureau of Land Management Promiscuous Dump Clean Up, U.S. Fish and Wildlife Service Midway Atoll Asbestos and Lead Paint Cleanup, and Department of Defense Military Housing Privatization Initiative, gives us the expertise to provide the submittals and mandated government compliance documents for any size federal project.

 

CES removes regulated and hazardous materials from industrial, commercial and residential spaces. Specifically, we have developed a niche market for our services that was facilitated by the Environmental Protection Agency’s National Emission Standards for Hazardous Air Pollutants, or NESHAP, regulations. Under these regulations, if a building or structure is altered, modified or renovated in any way, an environmental survey of the building must be completed and regulated hazardous materials (asbestos) must be removed prior to the alteration or renovation. We provide such services to our clients.

 

We also provide services related to the asbestos removal process including interior demolition, lead-based paint removal, mold abatement, and full-scale structural demolition. We are also adept at materials handling and we have participated in emergency response activities for multiple hurricanes, including Katrina, Rita, Gene, Francis, Ivan, and many others. We have been able to develop niche markets by maintaining a high level of technical competence coupled with prudent management and an energetic staff. We are willing to go to remote or extreme places to complete projects. Examples of locations at which we perform this type of work include Midway Atoll, Curacao, Guatemala, and remote Bahamian Islands. We also developed niches providing services in connection with various set-asides under federal law, including Service Connected Disabled Veteran Owned Small Business, Economically Disadvantaged Woman Owned Business, HUBZone, Veteran Owned, and Total Small Business. We have strategic alliances relating to all of such set-asides and have utilized these alliances to generate projects. 

 

We have an established operating infrastructure, with numerous long-term contracts, blanket purchase orders, and ongoing relationships with a robust customer base.

 

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

 

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

 

13 

 

  

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.

 

Effects of Seasonality and Economic Uncertainty

 

We may be subject to seasonal fluctuations and construction cycles at educational institutions, where large projects are typically carried out during summer months when their facilities are unoccupied. Government customers, many of which have fiscal years that do not coincide with ours, typically follow annual procurement cycles and appropriate funds on a fiscal-year basis even though contract performance may take more than one year. Further, government contracting cycles can be affected by the timing of, and delays in, the legislative process related to government programs and incentives that help drive demand for energy efficiency and renewable energy projects. As a result, our revenue and operating income in the third quarter are typically higher, and our revenue and operating income in the first quarter are typically lower, than in other quarters of the year. As a result of such fluctuations, we may occasionally experience declines in revenue or earnings as compared to the immediately preceding quarter, and comparisons of our operating results on a period-to-period basis may not be meaningful.

 

To manage uncertainties created by business seasonality, we have implemented business processes to give us flexibility to manage overhead and job costs.  Those processes allow us to determine when it is most cost effective to use Company-owned assets or to contract out aspects of a project.  For example, when the Company was awarded a sizeable post-Hurricane Katrina demolition contract in Louisiana, the processes led it to develop relationships with local subcontractors under Company management and supervision to perform the demolition work rather than moving Company heavy equipment and personnel to Louisiana, thereby preserving margins on the contract.

 

During the recession that started in 2008, the number of projects available to the Company in Florida fell.  To allow the Company to maintain cash reserves necessary to execute the Louisiana contract, management agreed to a 10% reduction in salaries, and did so for a full year, until finances righted themselves in late 2009.  No field supervisors or workers were laid off during this period.  CES retained its skilled workforce, allowing the contracts in Louisiana to return a 41% gross profit.

 

Backlog and Awarded Projects

 

Our sales cycle begins with the initial contact with the customer and ends, when successful, with a signed contract, also referred to as fully-contracted backlog. Historically, our sales cycle typically has averaged 30 days. Awarded backlog is created when a potential customer awards a project to us following a request for proposal. Once a project is awarded but not yet contracted, we typically conduct a detailed review to determine the scope of the project. At this point, we also determine the sub-contractor, and what equipment will be used. Historically, awarded projects typically have taken 45 days to result in a signed contract and thus convert to fully-contracted backlog. This process may take longer, however, depending upon the size and complexity of the project. Further, at times in the past we have experienced periods during which the portion of the sales cycle for converting awarded project to signed contracts has lengthened. Recently, we have been experiencing an unusually sustained lengthening of conversion times. Continued U.S. federal fiscal uncertainty not only has contributed to a lengthening of our sales cycle for U.S. federal projects, but also has adversely affected both municipal and commercial customers across most geographic regions. We have observed among our existing and prospective customer base increased scrutiny of decisions about spending and about incurring debt to finance projects. For example, we have observed increased use of outside consultants and advisors, as well as adoption of additional approval steps, by many of our customers, which has resulted in a lengthening of the sales cycle. We expect this trend to continue throughout 2017. 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.

 

14 

 

  

While in any particular quarter a single customer may account for more than ten percent of revenue, for the quarter ended March 31, 2017, Corvias Military Living, Eglin AFB, Florida, Marco Bay Construction, Florida and the Florida Department of Transportation (FDOT) accounted for 12.7% and 12.0% and 15.7% of our total revenue, respectively. For the quarter ended March 31, 2016, US Army- Fort Benning, Georgia and FDOT, accounted for 20.9% and 23.8% of our total revenue, respectively. 

 

Direct Expenses and Gross Margin

 

Direct expenses include the cost of labor, materials, equipment, subcontracting and outside engineering that are required for the execution our contracts, as well as preconstruction costs, sales incentives, associated travel, inventory obsolescence charges, and amortization of intangible assets related to customer contracts. A majority of our contracts have fixed price terms; however, in some cases we negotiate protections, such as a cost-plus structure, to mitigate the risk of rising prices for materials, services and equipment.

 

Gross margin, which is gross profit as a percent of revenue, is affected by a number of factors, including the type of services performed and the geographic region in which the sale is made.  Geographic location impacts the cost of disposal, lodging, and fuel.  We sometimes find ourselves bidding against local contractors.  In these instances, we may be willing to accept a lower profit margin in order to establish ourselves with a new client, or in a new geographic location.

 

Rising fuel costs affect us in several ways.  Fuel in our trucks and equipment has an immediate cost impact.  Increases in petroleum prices increase the costs for remediation due because petroleum products are used to make all poly, bags, etc. that we use for contaminated materials containment.

 

In addition, gross margin frequently varies across the period of a project. Our expected gross margin on, and expected revenue for, a project are based on budgeted costs. From time to time, a portion of the contingencies reflected in budgeted costs are not incurred due to strong execution performance. In that case, and generally at project completion, we recognize revenue for which there is no further corresponding direct expense. As a result, gross margin tends to be back-loaded for projects with strong execution performance; this explains the gross margin improvement that occurs from time to time at project closeout. We refer to this gross margin improvement at the time of project completion as a project closeout.

 

Operating Expenses

  

Operating expenses consist of salaries and benefits, project development costs, and general, administrative and other expenses.

 

Salaries and benefits. Salaries and benefits consist primarily of expenses for personnel not directly engaged in specific revenue generating activity. These expenses include the time of executive management, legal, finance, accounting, human resources, information technology and other staff not utilized in a particular project. We employ a comprehensive time card system which creates a contemporaneous record of the actual time by employees on project activity.

 

Project development costs. Project development costs consist primarily of sales, engineering, legal, finance and third-party expenses directly related to the development of a specific customer opportunity. This also includes associated travel and marketing expenses.

 

General, administrative and other expenses. These expenses consist primarily of rents and occupancy, professional services, insurance, unallocated travel expenses, telecommunications, and office expenses. Professional services consist principally of recruiting costs, external legal, audit, tax and other consulting services.

 

Other expenses, net. Other expenses, net consists primarily of interest income on cash balances, interest expense on borrowings, and gains and losses on the disposal of surplus assets. Interest expense will vary periodically depending on prevailing short-term interest rates.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the 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.

 

15 

 

 

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 March 31, 2017 and $199,877 at March 31, 2016 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.

 

16 

 

 

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 the quarters ended March 31, 2017 and March 31, 2016 were $4 and $3, respectively. Historically, the Company has not relied on advertising and marketing to generate business.

 

Results of Operations (in thousands, except percentages)

 

Quarter Ended March 31, 2017 Compared to Quarter Ended March 31, 2016

 

Net sales decreased 21%, or $829, during the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016. Revenue in the Demolition segment increased by $250, or 19%, during the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016. Revenue in the Remediation segment decreased by $1,026, or 40%, during the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016. The Insulation segment experienced a $53 decrease in revenue, or 39%, during the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016.

 

The increase in Demolition segment revenue was primarily attributable to the near-completion of the Lowe’s Davie Plaza project in the first quarter. At March 31, 2017, Demolition segment contracts valued in excess of $2,167were in progress. Remediation segment sales were down year over year for the first quarter, primarily because of the completion of remediation contracts in Florida and with Ft. Benning and Ft. Stewart DTE. At March 31, 2017, Remediation segment contracts valued in excess of $4,702 were in progress. The decrease in Insulation segment revenue was due primarily to lower maintenance spending by a large supermarket chain in the southeastern United States.

 

During the quarter ended March 31, 2017, approximately $18 of revenues were derived from contracts in Louisiana, $3,154 from contracts in Florida and $0 from contracts in Georgia (compared to approximately $169 of revenues derived from contracts in Louisiana, $2,453 from contracts in Florida and $1,378 from contracts in Georgia, in the first quarter of 2016).

 

Sales Data

 

The following table shows net sales by operating segment and net sales by service during the quarters ended March 31, 2017 and 2016 (in thousands, except percentages): 

 

   2017   Change   2016 
Net Sales by Operating Segment:            
Remediation  $1,537    19%  $2,564 
Demolition   1,553    (40)%   1,302 
Insulation   82    (39)%   135 
                
Total net sales  $3,172    (21)%  $4,001 

 

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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, 2017 and 2016 (dollars in thousands):

 

   2017   Change   2016 
Net sales  $1,537   $(1,026)  $2,564 
Percentage of total net sales   48%   (16)%   64%

 

The decrease in the Remediation segment net sales during the quarter ended March 31, 2017 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, 2017 was 23 (valued at $ $4,702), compared to 48 (valued at $6,269) on March 31, 2016. 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, 2017 and 2016 (in thousands, except percentages):

 

   2017   Change   2016 
Net sales  $1,553   $251   $1,302 
Percentage of total net sales   49%   16%   33%

 

The increase in net sales for the Demolition segment during the quarter ended March 31, 2017 was caused primarily by the higher number of demolition contracts put out for bids in 2017 compared to 2016, 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 2017, however, the Company won 17 contracts in Florida valued at $732 that will commence in the second quarter 2017. At the end of the first quarter 2017, the Company had 25 Demolition segment contracts valued at $3,065 in backlog, of which more than $732 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, 2017 and 2016 (in thousands, except percentages):

 

   2017   Change   2016 
Net sales  $82   $53   $135 
Percentage of total net sales   3%   0%   3%

 

The decrease in the Insulation segment net sales between the quarters ended March 31, 2017 and 2016 was caused primarily by a reduction in work provided to the aforementioned supermarket chain.

 

Gross Margin

 

Gross margin for the quarters ended March 31, 2017 and 2016 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.

 

   2017   2016 
Net sales  $3,172   $4,001 
Cost of sales   2,349    2,686 
Gross margin   823    1,315 
Gross margin percentage   26%   33%

 

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 26% increase in labor costs. The reduction in gross margin percentage in the quarter ended March 31, 2017 by seven percentage points over the quarter ended March 31, 2016 reflects the fact that the Company had a lower percentage of Remediation jobs, which have higher 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 2017 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.

 

Operating Expenses 

 

Operating expenses for the quarters ended March 31, 2017 and 2016 are as follows (in thousands, except for percentages):

 

   2017   Change   2016 
General and administrative  $1,140   $75   $1,065 
Percentage of total net sales   36%   9%   27%

  

General and Administrative (“G&A”) Expense

 

The increase in G&A expense during the quarter ended March 31, 2017 over the quarter ended March 31, 2016 was caused by a number of factors, including an increase of $37 or 32% over 2016 in group health insurance costs arising from increased enrollment under the Affordable Care Act; a payment of $34 for business taxes ($0 in 2016, reflecting the fact that business taxes were paid in April 2016); increases in salaries totaling $39 paid to sales, field labor and office personnel, to compensate project managers and some office personnel for increased duties due to a reduction in staffing; an increase in office expense of $14 or 42% over 2016 for the purchase of computer software and hardware for our network servers; and an increase of $10 or 9% over 2016 for indirect administration costs (reflecting higher insurance premiums allocated to this category).

 

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These increases were offset by reductions totaling $31 over 2016 for salaries paid to officers (mostly due to a reduction of salary paid to Clyde A. Biston, President and Chairman of the Board; a reduction of $16 or 93% over 2016 for office supplies (reflecting budget constraints imposed on office spending); lower telephone costs (down by $9 or 46% over 2016 due to a change in the provider plan on Company cell phones; and a reduction of $8 or 14% over 2016 in rent expense reflecting lower rents charged by Mr. Biston on the Crystal Springs leases.

 

The total number of employees at March 31, 2017 was 128, compared to 148 at March 31, 2016.

 

The Company continues to evaluate ways to reduce costs, including further reductions in headcount, to enable it to return to profitability.

 

Other Expense 

 

Other expense for the quarters ended March 31, 2017 and 2016 are as follows (in thousands, except percentages):

 

   2017   Change   2016 
Other income  $1   $(1)  $2 
Interest expense   (88)   (52)   (36)
Gain on asset sale   -    (15)   15 
Total other expense, net   (87)   (68)   (19)

  

The year-over-year increase in other expense during the quarter ended March 31, 2017 was due primarily to higher interest costs resulting from the restructuring at the end of 2016 of the Company’s debt owed to the Company’s President, and to a gain recorded in the first quarter of 2016 arising from the disposal of skid steer loaders, excavators, a mini excavator, and a dump truck.

 

Provision for Income Taxes 

 

Prior to November 1, 2013, CES elected to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions, during and prior to 2013, CES did not pay federal or state corporate income taxes on its taxable income. Instead, its shareholders were liable for individual federal income taxes on their respective shares of CES’s taxable income. Therefore, no provision or liability for federal income taxes was included in our 2014 financial statements.

 

Provision for income taxes and effective tax rates for the quarters ended March 31, 2017 and 2016 was as follows (dollars in thousands): 

 

   2017   2016 
Provision for income taxes  $-   $- 
Effective tax rate   -    - 

 

The Company’s effective tax rate for the quarter ended March 31, 2017 was nil because of the losses carried forward from prior periods.

 

Net operating losses (“NOLs”) generated from 2014 and 2016 will be added to the loss reported for the quarter ended March 31, 2017. 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, 2017.

 

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 $2,000 in additional capital in 2017 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, 2017 and December 31, 2016 (dollars in thousands):

 

   March 31, 2017   December 31, 2016 
Cash, cash equivalents and marketable securities  $6   $191 
Property, plant and equipment, net  $1,572   $1,857 
Long-term debt  $5,230   $3,747 
Working capital  $1,371   $539 

 

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The following table presents selected financial information and statistics about the Company’s sources and uses of cash during the first three months of 2017 and 2016 (in $ thousands):

 

   Three months Ended 
   March 31,   March 31, 
   2017   2016 
Cash provided by operating activities  $316   $50 
Cash provided/(used) by investing activities  $-   $29 
Cash used by financing activities  $(358)  $(118)

 

During the three months ended March 31, 2017, the cash generated by operating activities of $316 was a result of a net loss of $(404), offset by non-cash adjustments to net income of $106, and a net change in operating assets and liabilities of $614. No cash was generated by the Company from investing activities during the three months ended March 31, 2017. Cash of $(358) was used by financing activities during the three months ended March 31, 2017 to repay debt ($173 to a related party, $185 to other lenders). There were no new borrowings or payments of distributions in the first three months of 2017.

 

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.

  

Capital Assets

 

The Company made no capital expenditures during the three months ended March 31, 2017, ($6 during the three months ended March 31, 2016, consisting of primarily of purchases of earth moving equipment).

 

The Company will seek to raise up to $2,000 in additional capital in 2017 to support its 2017 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, 2017:

 

(i) Demand loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly interest payment of $0.5, bearing annual interest at 4.25%. At March 31, 2017, $53 was outstanding under the loan. In the three months ended March 31, 2017, the Company repaid $103 of principal under the loan.

 

(ii) Demand loan from shareholder and the chairman of our board of directors, Clyde A. Biston, with a monthly interest payment of $0.6, bearing annual interest at 4.75%. At March 31, 2017, $168 was outstanding under the loan. In the three months ended March 31, 2017, 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 interest payment of $0.7, bearing annual interest at 4.75%. At March 31, 2017, $183 was outstanding under the loan. In the three months ended March 31, 2017, 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 interest payment of $0.7, bearing annual interest at 4.75%. At March 31, 2017, $183 was outstanding under the loan. In the three months ended March 31, 2017, 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 $31, bearing annual interest at 6.15%. At March 31, 2017, $2,690 was outstanding under the loan. In the three months ended March 31, 2017, the Company repaid $69 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, 2017, $1,744 was outstanding under the line. In the three months ended March 31, 2017, the Company made repaid $6 of principal under the line.

 

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(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, 2017, $545 was outstanding under the loans. In the three months ended March 31, 2017, the Company repaid $104 of principal under the loans.

 

(viii) Installment loan from Aramsco Inc., with a monthly payment of $14 for 12 months starting October 2016 and then 8 monthly payments of $31, bearing annual interest at 3.74%. At March 31, 2017, $308 was outstanding under the loan. In the three months ended March 31, 2017, the Company the Company repaid $55 of principal under the loan.

 

(ix) Installment loan from Gerard Chimney Co., with a monthly payment of $5, bearing annual interest at 3.75%. At March 31, 2017, $170 was outstanding under the loan. In the three months ended March 31, 2017, the Company the Company repaid $20 of principal under the loan.

 

At March 31, 2017, a total of $6,043 was outstanding under all loans and the line of credit. $813 of that amount is due and payable in the 12 months following that date.

 

Dividend Program

 

As a privately-owned company prior to November 1, 2013, CES was owned by Clyde A. Biston. Mr. Biston elected to receive part of his compensation in the form of distributions paid to himself as the sole shareholder. No dividends have been paid to Mr. Biston since 2013.

 

The Company does not expect to pay any dividends or make any distributions to shareholders in 2017.

  

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, 2017, 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, 2017, 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.

 

No purchases or sales of common stock of the Company were made by the Company during the quarter ended March 31, 2017.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

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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 15, 2017 By: /s/ John Tostanoski
  John Tostanoski
  Chief Executive Officer
(Principal Executive Officer)
     
Date: May 15, 2017 By: /s/ Sharon Rosenbauer
  Sharon Rosenbauer
  Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

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