Securities and Exchange Commission


Washington, DC 20549





FORM 10-K





[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended  December 31, 2009





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 No.  000-19761





OP-TECH Environmental Services, Inc.


(Exact name of registrant as specified in its charter)






Delaware
91-1528142(State or other jurisdiction of organization)
(I.R.S. Employer incorporation Identification No.)







One Adler Drive, East Syracuse, NY         13057


(Address of principal executive office)          (Zip Code)





(315) 437-2065


(Registrant's telephone number, including area code)








Securities registered pursuant to Section 12(b) of the Act:


None





Securities registered pursuant to Section 12(g) of the Act:


Common Stock, $.01 par value


(Title of Class)





Indicate by check mark if the registrant is a well known seasoned issuer as defined in Rule 405 of the Securities Act:


Yes [  ] or No [X]





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:


Yes[  ]or No[X]





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[X]or No[  ]





Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X].





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act:


Large accelerated filer [   ]   Accelerated filer [   ] Non-accelerated filer [  ] Smaller Reporting Company [X]





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes[  ]or No[X]





State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was as of the last business day of the registrant’s most recently completed second fiscal quarter: $4,776,149





Indicate the number of shares outstanding of each of the Company’s classes of common stock, as of May 7, 2010.  Common stock, $.01 par value: 11,940,372













PART I





SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS





The Company is including the following cautionary statement in this Form 10-K to make applicable and take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company.  This 10-K, press releases issued by the Company, and certain information provided periodically in writing and orally by the Company’s designated officers and agents contain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  The words expect, believe, goal, plan, intend, estimate, and similar expressions and variations thereof used are intended to specifically identify forward-looking statements.  Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending on the circumstances.  Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished.











































































































2








ITEM 1. BUSINESS





General





OP-TECH Environmental Services, Inc. and Subsidiaries (the “Company”), a Delaware corporation headquartered in Syracuse, New York, provides comprehensive environmental and industrial cleaning and decontamination services predominately in New York, New England, Pennsylvania, New Jersey, and Ohio.  The Company provides environmental remediation services for sites contaminated by hazardous and non-hazardous materials.  The Company also performs industrial cleaning of hazardous and non-hazardous materials and provides varying services relating to plant facility closure, including interior and exterior demolition and asbestos removal.  OP-TECH also provides 24-hour emergency spill response services.  The Company’s revenues are derived from state agencies, industrial companies, engineering firms and municipalities facing complex environmental clean-up problems associated with hazardous and non-hazardous materials as required by various governmental agencies.  The Company’s services include assessing the regulatory, technical, and construction aspects of the environmental issue, and performing the necessary remediation activities.  The Company seeks to provide its clients with remedial solutions which integrate the various aspects of a project and are well-documented, practical, cost effective, and acceptable to regulatory agencies and the public.








Services





Excavation & Site Remediation Services





OP-TECH provides soil excavation, management, and transportation and disposal for complex projects that require handling large volumes of materials.  Excavation and removal is a fundamental, remediation method involving the removal of contaminated soil, which typically are transported off-site for treatment or disposal.





“Specialized Excavation”





When conventional excavation techniques are not feasible or are impractical, OP-TECH employs “specialized excavation” techniques that safely provide a non-destructive and precise excavation practice in areas such as building basements, backyards, or other confined areas.  Specialized excavation techniques are used to locate/identify underground utilities, tanks, structures, or excavation near buildings, retaining walls or foundations and for excavation of buried drums, cylinders and unknown materials.





Buried Drums and Cylinders





OP-TECH has vast experience handling complex buried drum, cylinders and unknown material excavation projects.  OP-TECH applies “specialized excavation” techniques to excavate drums from the most challenging environments.  We provide complete drum management services including, screening, sampling, profiling, manifesting and transportation and disposal of hazardous or non-hazardous waste.  These projects require careful investigation due to a large number of anomalies and the complexity of coordinating heavy equipment operations, drum handling and final site closure.





In-Situ & Ex-Situ Treatment





OP-TECH has demonstrated experience in providing in-situ and ex-situ treatment systems.  Utilizing chemical oxidation, stabilization and solidification and mobile treatment systems, we provide solutions in the most challenging environments.





Chemical Oxidation





OP-TECH provides chemical oxidation applications using peroxide (Fenton’s Reagent) and permanganate products, which cause the rapid and complete chemical destruction of many





3





toxic organic chemicals.  The Company’s experience includes direct in-situ injection application, ex-situ or off site for successful remediation of soil and groundwater.





Stabilization and Solidification





OP-TECH provides soil solidification and stabilization applications, which reduce the mobility of hazardous substances and contaminants in the environment through both physical and chemical means.  Solidification and stabilization techniques are used alone or combined with other treatment and disposal methods to yield a product or material suitable for land disposal or in other cases that can be applied to beneficial use.  These techniques have been used as both final and interim remedial measures.





Wetlands Mitigation





OP-TECH has exceptional experience with wetlands remediation and restoration projects.  Project experience has included removal of sediments from many active water courses ranging from creeks and marshes to large scale marinas.





Mobile Treatment Applications





OP-TECH provides mobile treatment systems for routine, scheduled service applications or dispatches them on an emergency basis.  The Company’s capacities range from 10 to approximately 500 gallons per minute and are available in a number of sizes and configurations.  All systems are pre-assembled, self-contained, requiring minimal setup time upon mobilization, and are available as trailer-mount, skid-mount or containerized.





Site Closure Services





OP-TECH provides complete RCRA and Non-RCRA Site Closure Services in support of property transfer, facility closure, disaster recovery, development/redevelopment, and Brownfield transactions. The Company’s services include comprehensive decontamination, decommissioning, demolition and material/soil remediation.





Decontamination





OP-TECH offers a wide range of decontamination services. In emergency and scheduled situations, we evaluate the circumstances and develop a safe, comprehensive and cost efficient plan.





OP-TECH has preformed thousands of decontaminations and facility closures for small single buildings to multi-building expansive facilities.





Decommissioning and Demolition Services





OP-TECH provides Demolition and Dismantling Services in both emergency and scheduled situations. Applications may include building demolition and dismantling of partial or total building or plant structure.





Upgrading equipment or renovating production areas may require the removal of existing process equipment. Welded piping, stainless alloys, reactors, concrete structures, structural steel, pressure vessels and limited space requires the skillful selection of demolition techniques such as cold and hot cutting including plasma arc cutting, mechanical disassembly and/or rigging.





OP-TECH provides contamination identification, sampling, segregation and disposal. The Company implements efficient methodologies to reduce site emissions during demolition activities and cost-efficient disposal technologies.





Remedial Systems





OP-TECH fabricates and constructs integrated remediation systems configured to meet site-specific cleanup criteria while satisfying air and/or water quality discharge standards. The Company’s





4





integrated remedial systems address all aspects of surface and subsurface contamination as it exists in groundwater and soil.





Operations and Maintenance Service





OP-TECH provides operation services and routine mechanical inspection and service of remediation systems and components.





Transportation and Disposal Services





The Company provides transportation of bulk and containerized hazardous and non-hazardous wastes from customer sites to customer-designated landfills and disposal facilities.  OP-TECH also provides liquid tank truck transports equipped with vacuum pumps.





Asbestos Abatement





OP-TECH provides asbestos abatement contracting services to both the public and private sectors.  OP-TECH has expertise in all types of asbestos abatement including removal, disposal and enclosure, and encapsulation.  Asbestos removal is performed in commercial buildings, industrial facilities, and governmental buildings.





Interior Demolition/Structural Dismantling





OP-TECH provides interior demolition services such as removing walls, ceilings, and flooring.  In addition, OP-TECH offers structural dismantling services and has experience in razing concrete, wood and steel structures, concrete and brick chimneys, and concrete piers and foundations.





On-Site Industrial and Waste Management Services





OP-TECH provides on-site industrial cleaning and waste management services.  Specialized services for the handling, processing and disposal of hazardous wastes are performed by vacuuming, soda blasting, hydroblasting, dredging, dewatering and sludge processing, sludge pumping, chemical cleaning, and tank cleaning.





OP-TECH provides line cleaning, installation of petroleum piping and process piping.  Water, storm, sewer and product piping as well as treatment systems.





24-Hour Emergency Spill Response





Many of the OP-TECH’s decontamination and mitigation activities result from a response to an emergency situation by one of its response teams.  These incidents can result from transportation accidents involving chemical or petroleum substances, fires at chemical facilities or hazardous waste sites, transformer fires or explosions involving PCBs, and other unanticipated events.  The substances involved may pose an immediate threat to public health or the environment, such as possible groundwater contamination.  The steps performed by OP-TECH include rapid response, containment and control procedures, sampling for analytical testing and assessment, neutralization and treatment, and collection and transportation of the substance to an appropriate treatment or disposal facility.  OP-TECH derives a material portion of its revenues from an agreement with the New York State Department of Environmental Conservation (NYSDEC) to provide emergency response services in certain areas of New York State, payment of which is guaranteed by the NYSDEC.





Non-Hazardous Waste Transfer and Storage Facility





OP-TECH operates a New York State permitted non-hazardous waste treatment, storage and transfer facility in its Waverly, New York office.  The Company accepts non-hazardous waste in bulk or containerized form, consolidates the waste and then transfers it to a landfill or recycling facility.








5







Technologies Employed





OP-TECH utilizes a wide variety of physical and chemical treatment technologies in performing its remediation activities.  Physical treatment technologies generally involve filtration and aeration techniques and are used to separate contaminants from soils, slurries, or water.  Chemical treatment technologies generally involve flocculation, clarification, precipitation, polymer addition, chemical oxidation, chemical absorption, and stabilization.  Depending on the contaminants present and the site characteristics, these technologies are combined into integrated treatment systems which reduce contaminant concentrations to levels consistent with prescribed regulatory standards.





Regulation





The business of the Company and its clients is subject to extensive, stringent, and evolving regulation by the EPA and various other federal, state, and local environmental authorities.  These regulations directly impact the demand for the services offered by the Company.  In addition, the Company is subject to the Federal Occupational Safety and Health Act, which imposes requirements for employee safety and health.  The Company believes it is in material compliance with all federal, state, and local regulations governing its business.





RCRA.  The Resources Conservation and Recovery Act of 1976 (“RCRA”) is the principal federal statute governing hazardous waste generation, treatment, storage, and disposal.  RCRA or EPA-approved state programs may govern any waste handling activities of substances classified as “hazardous.”  The 1984 amendments to RCRA substantially expanded its scope by, among other things, providing for the listing of additional wastes as “hazardous” and providing for the regulation of hazardous wastes generated in lower quantities than previously had been regulated.  Additionally, the amendments impose restrictions on land disposal of certain hazardous wastes, prescribe more stringent standards for hazardous waste land disposal sites, set standards for underground storage tanks and provide for “corrective” action at or near sites of waste management units.  Under RCRA, liability and stringent operating requirements may be imposed on a person who is either a “generator” or a “transporter” of hazardous waste, or an “owner” or “operator” of a waste treatment, storage, or disposal facility.





Regulation of underground storage tanks legislation, in particular Subtitle I of RCRA, focuses on the regulation of underground tanks in which liquid petroleum or hazardous substances are stored and provides for the regulatory setting for a portion of the Company’s work.  Subtitle I of RCRA requires owners of all existing underground tanks to list the age, size, type, location, and use of each tank with a designated state agency.  The EPA has published performance standards and financial responsibility requirements for storage tanks over a five year period.  These regulations also require all new tanks which are installed to have protection against spills, overflows, and corrosion.  Subtitle I of RCRA provides civil penalties of up to $15,000 per violation for each day of non-compliance with tank requirements and $10,000 for each tank for which notification was not given or was falsified.  RCRA also imposes substantial monitoring obligations on parties which generate, transport, treat, store, or dispose of hazardous waste.





Superfund Act.  The Comprehensive Environmental Response Compensation and Liability Act of 1980 (“Superfund Act”) generally addresses clean-up of inactive sites at which hazardous waste treatment, storage, or disposal took place.  The Superfund Act assigns joint and several liability for cost of clean-up and damages to natural resources to any person who, currently, or at the time of disposal of a hazardous substance who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport of hazardous substances owned or possessed by such person for disposal or treatment;  and to any person who accepts hazardous substances for transport to disposal or treatment facilities or sites from which there is a release or threatened release.  Among other things, the Superfund Act authorized the federal government either to clean up these sites itself or to order persons responsible for the situation to do so.  The Superfund Act created a fund, financed primarily from taxes on oil and certain chemicals, to be used by the federal government to pay for the clean-up efforts.  Where the federal government expends money for remedial activities, it may seek reimbursement from the potentially responsible parties.








6





The liabilities provided by the Superfund Act could, under certain factual circumstances, apply to a broad range of possible activities by the Company, including generation of hazardous substances, releases of hazardous substances during transportation, failure to properly design a clean-up, removal or remedial plan and failure to achieve required clean-up standards, leakage of removed wastes in transit or at the final storage site, and remedial operations on ground water.  Such liabilities can be joint and several where other parties are involved.





Other.  The Company’s operations are subject to other federal laws protecting the environment, including the Clean Water Act and the Toxic Substances Control Act.





Many states have also enacted statutes regulating the handling of hazardous substances, some of which are broader and more stringent than the federal laws and regulations.





Competitive Conditions





The markets for environmental remediation, as well as demolition and asbestos removal, continue to be very competitive.  The Company competes with many different firms ranging from small local firms to large national firms, many of which have greater financial and marketing resources than the Company.  Competition in environmental services is based largely on competitive pricing and quality of service provided.  Other competitive factors include geographic location as well as reputation.  Management believes the Company is one of the few firms based in its market area that offers a high quality combination of environmental services at the most competitive prices.  In addition, through its wide range of environmental services, good reputation, and competitive pricing, the Company hopes to maintain a competitive edge in the environmental services business.





The Company operates field offices in Syracuse, Massena, Rochester, Albany, Plattsburgh, Waverly and Buffalo, New York, as well as Edison, New Jersey, Baltimore, Maryland and Cleveland, Ohio.





Seasonality





Typically, during the first quarter of each calendar year there is less demand for environmental remediation due to the cold weather, particularly in the Northeast and Midwest regions.  In addition, factory closings for the year-end holidays reduce the volume of industrial waste generated, which results in lower volumes of waste handled by the Company during the first quarter of the following year.





Customers





The Company’s client base includes state agencies, industrial companies, railroads, real estate developers, auto parts manufacturers, aluminum producers, utility companies, waste disposal firms, municipalities, and engineering firms.  During 2009, the Company performed services for approximately 900 clients.  These projects were substantially all short-term (six months or less) in nature.  The largest business segment for the each of the years ended December 31, 2009, 2008, and 2007 was Environmental Remediation services.  Environmental Remediation  services accounted for 38%, 44%, and 38% of the Company’s revenues for the years ended December 31, 2009, 2008, and 2007, respectively.  For the past three fiscal years, all of the Company’s revenues were generated from customers in the United States.





During 2009, the Company had project revenue of approximately $6,552,000 related to several contracts with the New York State Department of Environmental Conservation, which totaled approximately 18% of the Company’s revenues.  A portion of that revenue is related to the spill response and remediation contracts with the New York State Department of Environmental Conservation which expires January 31, 2014.











Insurance





The Company maintains commercial general liability, asbestos liability and pollution liability insurance which provides aggregate coverage limits of $15 million.  In addition, the Company also maintains





7





workers compensation, comprehensive automobile, and Directors and Officers liability insurance.  The Company’s insurance coverage is consistent with the insurance requirements found in the environmental remediation industry.





Employees





As of May 7, 2010, the Company had a total of approximately 218 full-time employees.  The Company’s ability to retain and expand its staff will be an important factor in determining the Company’s future success.  The Company considers its relations with its employees to be good, and the Company has never had a work stoppage or threat of a work stoppage.





Available Information





The Company’s internet address is www.op-tech.us.  The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after the Company electronically files such material with the Securities and Exchange Commission (SEC) is available there.  The information found on the Web site is not part of this or any other report the Company files or furnishes to the SEC.





The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains electronic versions of the reports on its website at www.sec.gov.














ITEM 2. PROPERTIES





The Company leases its corporate headquarters in East Syracuse, NY and its branch office locations in Syracuse, Buffalo, Rochester, Massena, Waverly, Albany, and Plattsburgh, NY, Baltimore, MD, and Edison, NJ.  The Company leases an aggregate of approximately 114,007 square feet of office, shop and warehouse space at those locations.  The leases expire at various times through September 30, 2014.  The current aggregate monthly lease payment is $53,842 plus utilities.





Equipment





The Company’s owned equipment consists primarily of construction equipment such as vacuum trucks, dump trucks, tankers, excavation equipment, utility vehicles, pumps, generators, and compressors, some of which have been specially modified for the Company’s use.














ITEM 3. LEGAL PROCEEDINGS





The Company had an accrued liability of $450,000 at December 31, 2008.  The liability has been paid in 2009.


















ITEM 4. REMOVED AND RESERVED











PART II





ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED


STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURTIES





(a)
The shares of the Company’s common stock are listed on the Over the Counter Bulletin Board under the symbol OTES.





The high and low closing bid prices for the shares of the Company’s common stock were as follows:






Quarter Ended
High
LowMarch 31, 2008
$0.25
$0.20June 30, 2008
$0.20
$0.10September 30, 2008
$0.30
$0.17December 31, 2008
$0.29
$0.14March 31, 2009
$0.55
$0.14June 30, 2009
$0.50
$0.30September 30, 2009
$0.50
$0.50December 31, 2009
$0.50
$0.21March 31, 2010
$0.45
$0.20Second quarter throughMay 7, 2010
$0.20
$0.14







8





The aforementioned prices reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.





(b)
At May 7, 2010, there were approximately 135 holders of record of the Company’s common stock.





(c)
The Company has never paid any dividends.





Equity Compensation Plan Information




Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights



(a)


Weighted-average exercise price of outstanding options, warrants and rights





(b)


Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))



(c)Equity compensation plans approved by security holders


285,341


$
0.28



282,003Equity compensation plans not approved by security holders


-



-



-Total


285,341


$
0.28



282,003





9








ITEM 6. SELECTED FINANCIAL DATA








Statement of Operations Data




Year Ended December 31,2009


2008


2007


2006


2005Project Billings and Services

$
36,023,902


$
36,632,276


$
32,483,687


$
35,069,989


$
21,784,096Net Income (loss)

$
(1,884,890
)

$
654,927


$
(405,574
)

$
207,973


$
(145,744
)Net Income (loss) per Share-Basic

$
(.16
)

$
.05


$
(.03
)

$
.02


$
(.01
)-Diluted

$
(.16
)

$
.05


$
(.03
)

$
.02


$
(.01
)

















Balance Sheet Data





As of December 31,2009


2008


2007


2006


2005Total Assets

$
18,113,208


$
17,149,598


$
16,254,072


$
18,470,167


$
13,185,755Long-Term Obligations


-


$
6,249,748


$
6,733,952


$
7,859,741


$
6,024,691Total Liabilities

$
16,536,095


$
13,702,400


$
13,439,236


$
15,305,884


$
10,303,758Shareholders’ Equity

$
1,577,113


$
3,447,198


$
2,814,836


$
3,164,283


$
2,881,997














10




ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL


CONDITION AND RESULTS OF OPERATIONS





EXECUTIVE LEVEL OVERVIEW





OP-TECH is a leading provider of environmental and industrial services throughout the Northeastern and Mid-Atlantic regions of the United States. The Company serves over 1,100 customers, including a significant number of Top 500 engineering firms, thousands of smaller private entities and numerous federal, state and local government agencies.  A significant customer is New York State’s Department of Environmental Conservation.





The Company’s strategy is to apply its expertise in the environmental remediation industry to increase market share, increase profitability and enhance shareholder value.





In 2009, the Company experienced significant losses related to four primary issues.





1.
Regular, recurring, and legacy revenue work experienced a dramatic decline as its industrial and governmental clients significantly reduced the volume of work for that portion of the Company’s anticipated revenue.   This reduction, based on an average of the preceding two years, represented a reduction in gross profit of just over $1,000,000.





2.
Two bankruptcies filed by larger clients accounted for approximately $407,000 in losses.





3.
Although the Company experienced a significant amount of success in acquiring new projects, there was a substantial slide of the project start dates.  The Company originally anticipated starting these projects in 2009 which were delayed into 2010.





4.
The Company bid many projects at competitive gross margins.  Several larger projects actual results in 2009 were at lower than anticipated gross margin due to project overruns and unanticipated costs.





The Company believes the losses incurred in 2009 are isolated to that year and the future prospects are strong.  At December 31, 2009, the Company had in excess of $22,000,000 of contracted backlog work to be performed in 2010.  This backlog coupled with our ongoing bidding activity and our recurring service business should make 2010 a successful year.




LIQUIDITY AND CAPITAL RESOURCES





At December 31, 2009, the Company had cash and cash equivalents of $26,845 as compared to $80,003 at December 31, 2008.  Cash in the Company’s operating account is electronically transferred nightly to pay down the Company’s revolving line of credit in order to minimize interest expense.





At December 31, 2009, the Company had negative working capital of ($2,580,894) compared to working capital of $5,740,747 at December 31, 2008.  The Company had a current ratio of approximately .89 to 1 and 1.77 to 1 at the end of 2009 and at the end of 2008, respectively.





Cash provided by operating activities during 2009 was $579,479 compared to $597,790 during 2008.  The cash provided by operating activities in 2009 was mainly attributable to a net increase in accounts receivable offset by an increase in accounts payable.





The Company’s net cash used in investing activities of $405,878 during 2009 was attributable to the purchase of various field and office equipment.





Cash used in financing activities of $405,978 in 2009 was primarily due to the pay downs of long-term debt.








11





As of December 31, 2009, the Company had a loan agreement which provided for borrowings up to $7,500,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later to be used to provide working capital and was to expire on July 1, 2011.  Interest was charged at LIBOR plus 4.0%.  Under the terms of the agreement in place, the line available decreased to $6,000,000 at January 1, 2010; however, the Company’s borrowings have exceeded this cap subsequent to year end.





The Company was not in compliance with the financial covenants of its loan agreement as of December 31, 2009 and received a waiver.  As a result of financial covenant violations, the Company and the financial institution negotiated to revise the terms of their financing agreement.  The line expiration was changed from July 1, 2011 to August 31, 2010, and the interest rate was increased from LIBOR plus 4% to LIBOR plus 7%, is subject to certain restrictive financial covenants, and is subject to default if there is a material adverse change in the financial or economic condition of the Company.  Additionally, the bank assessed a $120,000 fee, is requiring the use of a consultant to monitor cash flow, is requiring a $500,000 equity infusion by July 31, 2010, and is requiring the Company seek replacement financing.  The loss of the availability of this line of credit after August 31, 2010 could have an adverse effect on the Company if alternate financing sources are not available.





As of December 31, 2009, borrowing against the revolving loan aggregated $5,073,196. During 2009, all principal payments on the Company’s debt were made within payment terms.





The Company has an interest rate swap agreement that has been designated as a hedge.  The swap will be evaluated for effectiveness on a quarterly basis and any ineffective portion will be charged to earnings.  The effect of the swap is to fix the rate being paid on the term loan at 7.80%.





The Company expects, based on budgeted operating results and the continued availability of its line of credit, that it will be able to meet obligations as they come due.




RESULTS OF OPERATIONS





This financial review should be read in conjunction with the accompanying Consolidated Financial Statements and accompanying notes.




FACTORS THAT MAY AFFECT FUTURE RESULTS





The Company’s future operating results may be affected by a number of factors, including the Company’s ability to successfully increase market share in its existing service territory while expanding its services into other markets, realize benefits from cost reduction programs, and utilize its facilities and work force profitably in the face of intense price competition.





The Company’s ability to secure replacement financing and obtain adequate bonding may affect future operating results.




EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





The following is a list of accounting pronouncements either adopted by the Company for fiscal 2009 or pronouncements that could have a significant impact on future financial statements or disclosures upon adoption:





In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, now referred to as ASC 105, “Generally Accepted Accounting Principles” (“ASC 105”). ASC 105 established the Codification as the single source of authoritative U.S. GAAP superseding all prior guidance and eliminating the GAAP hierarchy and establishing one level of authoritative GAAP. All





12





other literature is considered non-authoritative. ASC 105 is effective for annual periods ending after September 15, 2009 and as such has been adopted as of December 31, 2009.  The adoption of this standard has significantly changed the Company’s U.S. GAAP references, however it did not have an impact on the Company’s financial statements.





The Company has adopted the disclosure requirements of ASC 815, “Derivatives and Hedging”, effective January 1, 2009, which amends and expands the disclosure related to accounting for derivative instruments and hedging activities, and also began applying the provisions of ASC 820, “Fair Value Measurements and Disclosures”, to non-financial assets and liabilities, as permitted by FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157”.  Neither of these adopted pronouncements had an impact on the Company’s balance sheet or results of operations for 2009.





ASC 855, “Subsequent Events”, establishes principles and requirements for reviewing and reporting subsequent events.  This requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements are available for issuance or were issued. This accounting guidance was adopted for the second quarter of fiscal 2009. However, in February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements" (“ASU 2010-09”). ASU 2010-09 requires a Securities and Exchange Commission (“SEC”) filer to evaluate subsequent events through the date that the financial statements are issued. SEC filers are no longer required to disclose the date through which subsequent events have been evaluated. This amendment is effective as of the date of issuance of ASU 2010-09, and as such the Company has changed its disclosure accordingly.





ASC 820-10-65, “Fair Value Measurements and Disclosures”(ASC 820-10-65”) clarifies the approach to and provides additional factors to consider in, measuring fair value when there has been a significant decrease in market activity for an asset or liability and quoted prices associated with transactions are not orderly.  The requirements of ASC 820-10-65 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company elected to adopt the guidance of ASC 820-10-65, effective June 30, 2009. This adoption did not have an effect on the Company’s consolidated balance sheets or results of operations.





In August 2009, the FASB issued Accounting Standards Update 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends Topic 820-10, “Fair Value Measurements and Disclosures – Overall”. This update clarifies techniques that may be used to determine the fair value of a liability if an active market for an identical liability does not exist.  This new guidance was effective for the third quarter of fiscal 2009 for the Company. The adoption of this update did not have an impact on the Company’s consolidated financial condition or results of operations.





In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements" (“ASU 2010-06”). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. This update will only have an impact on the Company’s disclosures beginning January 1, 2010 and will not have a material impact on the Company’s consolidated balance sheets or results of operations.








OFF BALANCE SHEET ARRANGEMENTS





The Company had no off balance sheet arrangements at December 31, 2009 or December 31, 2008 that require disclosure under this item.

















13





CRITICAL ACCOUNTING POLICIES AND ESTIMATES





Management has identified the following critical accounting policies that affect the Company's more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.  The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an on-going basis, management evaluates those estimates, including those related to assets held for sale, valuation allowances on deferred tax assets, revenue recognition, allowance for doubtful accounts and contingencies and litigation. The Company states these accounting policies in the notes to the consolidated financial statements and in relevant sections in this discussion and analysis. These estimates are based on the information that is currently available to the Company and on various other assumptions that management believes to be reasonable under the circumstances.  Actual results could vary from those estimates.





The Company believes that the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements:





Contracts are predominately short-term in nature (less than six months) and revenue is recognized as costs are incurred.  Project costs are generally billed in the month they are incurred and are shown as current assets.  Revenues recognized in excess of amounts billed are recorded as an asset.  In the event interim billings exceed costs and estimated profit, the net amount of deferred revenue is shown as a current liability.  Estimated losses are recorded in full when identified.




The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense.  Management determines the adequacy of this allowance by continually evaluating individual customer receivables, considering the customer's financial condition, credit history and current economic conditions.  If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  Additionally, management estimates a general allowance based on historical charge offs covering other amounts that may not be collectible.





The Company maintains a valuation allowance on its deferred tax asset based on the amount of net operating losses that management believes it will not utilize prior to the expiration dates of these losses.  Management determines the adequacy of this allowance by continually evaluating its ongoing profitability and its ability to generate taxable income in the future sufficient to utilize the net operating losses.  If the profitability of the Company were to change, it could affect the amount of net operating losses that could be utilized and require an adjustment to the valuation allowance.





The Company establishes accruals for loss contingencies related to litigation and claims.  These estimates are prepared using information available to management at the time of the accrual and at each reporting period.  Events and circumstances could change requiring management to revise or adjust amounts accrued for loss contingencies.








2009 COMPARED TO 2008





Revenues





During the year ended December 31, 2009, the Company’s revenues decreased 1.7% to $36,023,902 as compared to $36,632,276 for the year ended December 31, 2008.





When comparing 2009 to 2008, the decrease in project revenue was attributed to the extremely competitive environment in 2009 and many large project awards start dates were delayed to 2010.





Project Costs and Gross Margin





Project costs for the year ended December 31, 2009 increased 8.5% to $30,450,031 from $28,059,580 for the year ended December 31, 2008.  Project costs as a percentage of revenues were 84.5% for the year ended December 31, 2009, compared to 76.6% for the year ended December 31, 2008.  The





14





gross profit margin for the year ended December 31, 2009 was 15.5% compared to 23.4% for the year ended December 31, 2008.  Gross profit in dollars decreased 35% to $5,573,871 from $8,572,696 in 2008.  Project costs paid to St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $1,301,000 in 2009 and $1,037,000 in 2008.





The decrease in the gross margin percentage was due to the competitive bidding environment in 2009 and the performance of several large projects with unanticipated costs.





Selling, General, and Administrative Expenses





During the year ended December 31, 2009, selling, general, and administrative (“SG&A”) expenses increased 0.7% to $7,551,503 compared to $7,501,126 for the previous year.





SG&A expenses as a percentage of revenue increased to 21% for the year ended December 31, 2009 from 20.5% for the year ended December 31, 2008.





When comparing 2009 to 2008, the increase in 2009 operating expenses is primarily attributed to the following:


·
Payroll and related expenses decreased 10.9% to $2,937,534 from $3,298,646 in 2008.  The decrease is related to an improvement in efficiencies and reductions of employee benefit costs and non-billable labor.


·
Professional services increased 22.2% to $949,844 from $777,313 in 2008.  The increase is primarily due to additional costs incurred for the monitoring the Company’s solid waste management facility.


·
Equipment expenses decreased 16.3% to $503,018 from $600,940 in 2008 primarily as a result of the decrease in fuel costs.


·
Other expense increased 95.8% to $957,769 from $489,143 primarily as a result of the increase in bad debt expense.





Operating Income





As a result of the factors discussed above, for the year ended December 31, 2009, the Company reported an operating loss of ($1,977,632) compared to operating income of $1,071,570 for the previous year.





Interest Expense





Interest expense decreased 31% to $309,442 in 2009 compared to $449,785 in 2008.  The decrease in interest expense is due to the reduction in interest rates in 2009 coupled with the repayment of long-term debt.





Net Income (Loss) Before Income Taxes





Net loss before income taxes amounted to ($2,262,685) in 2009 compared to net income before income taxes of $633,653 in 2008.








Income Tax Expense





The Company recorded a net income tax benefit of $377,795 in 2009 compared to an income tax benefit of $21,271 in 2008.





Net Income (Loss)





Net loss for the year ended December 31, 2009 was ($1,844,890) or ($.16) per share basic and diluted compared to net income of $654,927 or $.05 per share basic and diluted for the year ended December 31, 2008.














15





Key Performance Indicators





Management measures equipment utilization and labor efficiency on a monthly basis in addition to project revenue and gross margin discussed above.  Equipment utilization remained consistent year to year, and billable labor increased slightly from 62% to 63%.








2008 COMPARED TO 2007





Revenues





During the year ended December 31, 2008, the Company’s revenues increased 12.8% to $36,632,276 as compared to $32,475,379 for the year ended December 31, 2007.





When comparing 2008 to 2007, the overall increase in project revenue is due to an increase in larger projects performed by the Company during the year.  The Company has made a planned effort to bid on larger projects based on overall increases in service capabilities.








Project Costs and Gross Margin





Project costs for the year ended December 31, 2008 increased 14.5% to $28,059,580 from $24,499,589 for the year ended December 31, 2007.  Project costs as a percentage of revenues were 76.6% for the year ended December 31, 2008, compared to 75.4% for the year ended December 31, 2007.  The gross profit margin for the year ended December 31, 2008 was 23.4% compared to 24.6% for the year ended December 31, 2007.  Gross profit in dollars increased 7.4% to $8,572,696 from $7,984,098 in 2007.  Project costs paid to St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $1,037,000  in 2008 and $917,000 in 2007.





The decrease in the gross margin percentage was due to the performance of several larger projects.








Selling, General, and Administrative Expenses





During the year ended December 31, 2008, selling, general, and administrative (“SG&A”) expenses decreased 3.4% to $7,501,126 compared to $7,765,466 reported for the previous year.





SG&A expenses as a percentage of revenue decreased to 21% for the year ended December 31, 2008 from 24% for the year ended December 31, 2007.





When comparing 2008 to 2007, the reduction in 2008 operating expenses is primarily attributed to the following:


·
Payroll and related expenses decreased 10.2% to $3,298,646 from $3,674,586 in 2007.  The decrease is related to an improvement in efficiencies and reductions of employee benefit costs and non-billable labor.


·
Business insurance decreased 20.4% to $506,123 from $636,180 in 2007 primarily as a result of the Company’s ability to mitigate risk and reduce claims.


·
Professional services increased 24.4% to $777,313 from $624,620 due to legal fees incurred and professional fees to comply with Sarbanes-Oxley.


·
Equipment expenses, net of usage credit decreased 24.2% to $600,940 from $792,429 primarily due to an increase in equipment utilization based on an increase in revenue.








Operating Income





As a result of the factors discussed above, for the year ended December 31, 2008, the Company reported operating income of $1,071,570 compared to operating income of $210,324 for the previous year.








16











Interest Expense





Interest expense decreased 33% to $449,785 in 2008 compared to $669,379 in 2007.  The decrease in interest expense was primarily due to a decrease in the rates paid on the Company’s floating rate debt that is tied to changes in the prime rate.  The prime rate decreased from 7.25% at December 31, 2007 to 3.25% at December 31, 2008.











Net Income Before Income Taxes





Net income before income taxes amounted to $633,653 in 2008 compared to net loss before income taxes of $451,619 in 2007.








Income Tax Expense





The Company recorded a net income tax benefit of $21,271 in 2008 compared to an income tax benefit of $46,045 in 2007.








Net Income





Net income for the year ended December 31, 2008 was $654,927 or $.05 per share basic and diluted compared to net loss of $405,574 or $.03 per share basic and diluted for the year ended December 31, 2007.





Key Performance Indicators





Management measures equipment utilization and labor efficiency on a monthly basis in addition to project revenue and gross margin discussed above.





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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES


ABOUT MARKET RISK





The Company is exposed to market risk, including changes in interest rates because of its variable rate debt.  To manage the potential exposure, the Company enters into various derivative transactions, mainly interest rate swaps.  The financial impact of these hedging instruments are offset in part or in whole by corresponding changes in the underlying exposures being hedged.  The Company does not hold or issue derivative financial instruments for trading purposes.  Note 8 to the consolidated financial statements includes a discussion of the Company’s accounting policies for financial instruments.





Interest rate swaps are used to hedge a term debt obligation.  Based on the Company’s overall interest rate exposure as of and during the year ended December 31, 2009, including derivative and other rate sensitive instruments, a one percent change in interest rates would increase or decrease interest expense by approximately $70,000 annually.





The Company is aware that as the economy slows down, the Company’s business could be affected by client companies closing operations or reducing production, which could reduce the amount of waste generated, industrial cleaning projects, and environmental remediation projects available.  In order to try to mitigate this market risk, the Company continues to make every effort to secure more emergency spill response contracts and long-term environmental remediation and industrial cleaning projects.





For more information regarding market risk, see the audited financial statements submitted under Item 15 of this report.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The consolidated financial statements and related financial schedule of the Company and the report of Dannible & McKee LLP are submitted under Item 15 of this report.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS


ON ACCOUNTING AND FINANCIAL DISCLOSURE





None







18








ITEM 9a.  CONTROLS AND PROCEDURES




Responsibility For Financial Information — We are responsible for the preparation, accuracy, integrity and objectivity of the Consolidated Financial Statements and the other financial information included in this report.  Such information has been prepared in conformity with accounting principles generally accepted in the United States of America and accordingly, includes certain amounts that represent management’s best estimates and judgments. Actual amounts could differ from those estimates.





Responsibility for Internal Controls — We are also responsible for establishing and maintaining adequate internal controls over financial reporting. These internal controls consist of policies and procedures that are designed to assess and monitor the effectiveness of the control environment including: risk identification, governance structure, delegations of authority, information flow, communications and control activities.  While no system of internal controls can ensure elimination of all errors and irregularities, OP-TECH’s internal controls, which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed, transactions are properly executed and reported, and appropriate disclosures are made. The concept of reasonable assurance is based on the recognition that there are limitations in all systems of internal control and that the costs of such systems should be balanced with their benefits. The Audit Committee of the Board of Directors, which is comprised solely of independent directors, meets regularly with OP-TECH’s senior financial management, and independent registered public accounting firm to review audit plans and results, as well as the actions taken by management in discharging its responsibilities for accounting, financial reporting and internal controls. The Audit Committee is responsible for the selection and compensation of the independent registered public accounting firm. OP-TECH’s financial management, internal auditors and independent registered public accounting firm have direct and confidential access to the Audit Committee at all times.





Report On Internal Control Over Financial Reporting — We have evaluated OP-TECH’s internal control over financial reporting as of December 31, 2009. This evaluation was based on criteria for effective internal control over financial reporting set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
 Based on the evaluation performed, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2009.  A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.


We did not maintain effective controls over reconciliation of costs and standard gross margins on uncompleted projects.  Specifically, several in-process projects had unearned revenue recorded in excess of the actual expected.  We did not maintain effective controls over the evaluation of the valuation of accounts receivable.  Specifically, an agreement with a customer was not properly accounted for and accounts receivable was overstated.
 
 As a result of these control deficiencies uncovered in the year-end reporting process, the Company restated quarterly results for the periods ending June 30, 2009 and September 30, 2009.
 
 These control deficiencies could result in a misstatement to accounts and disclosures that would result in a material misstatement to the annual or interim financial statements that may not be prevented or detected.





Because of the above described material weaknesses in internal control over financial reporting, management concluded that our internal control over financial reporting was not effective as of December 31, 2009 based on the criteria set forth in Internal Control — Integrated Frameworkissued by the COSO.  This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of





19





the Securities and Exchange Commission that permit the company to provide only management's report in this annual report





Report On Disclosure Controls And Procedures — As of December 31, 2009, we carried out an evaluation of the effectiveness of the design and operation of OP-TECH’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based on that evaluation and as described above under “Report On Internal Control Over Financial Reporting”, we have identified a material weakness in our internal control over financial reporting.  As a result of this material weakness and as a result of our failure to identify this material weakness in our internal control over financial reporting as a material weakness in our disclosure controls and procedures, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2009.




ITEM 9b.  OTHER INFORMATION


None








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PART III




ITEM 10. DIRECTORS, EXECUTIVES, OFFICERS AND CORPORATE GOVERNMENT




The following table sets forth certain information about the directors of the Company, all of whom were unanimously elected at the Annual Meeting of Stockholders of the registrant on August 13, 2009 for a term of one year.





Each director has served continuously since he was first elected.





The Board of Directors held four meetings during the last calendar year.  All of the directors attended more than 75% of the total number of meetings held by the Board of Directors.




Name, Age

Principal Occupation
Year First

Elected
Certain Other InformationRobert J. Berger (63)

Director and Co-Chairman of the Board
1998
Mr. Berger has served in his present position as Director since November 1998, and as Chairman of the Board since February 2000 and as Co-Chairman of the Board since January 2007.  Mr. Berger was employed in various positions for ONBANCORP, Inc. from 1978 through March 31, 1998, his last position being Senior Vice President, Treasurer, and Chief Financial Officer.  Mr. Berger is also Chairman, President, and Chief Executive Officer of St. Lawrence Industrial Services, Inc. and also serves as Vice Chairman of Beacon Federal Bancorp, Inc.Richard Messina (47)

Director and Co-Chairman of the Board
2005
Mr. Messina was elected to the Board in November 2005 and elected Co-Chairman of the Board in January 2007.  Mr. Messina founded The Benchmark Company, LLC, a securities broker-dealer, in 1988.  Benchmark is primarily engaged in equity research, sales, and trading on behalf of institutional clients.  Mr. Messina currently serves as Co-Chief Executive Officer of Benchmark.Cornelius B. Murphy, Jr. (65)

Director
1991
Dr. Murphy resigned from the Board on April 29, 2010.  Dr. Murphy served as a director since December 1991.  Dr. Murphy has been a director of O’Brien & Gere Limited since 1985.  Dr. Murphy also served as President of O’Brien & Gere Limited from December 1997 to May 1999 and Chairman of the Board of O’Brien & Gere Engineers from January 1993 to December 1998.  Dr. Murphy currently serves as President of the State University of New York College of Environmental Science and Forestry, which is located in Syracuse, New York.





21








Richard L. Elander (68)

Director
1991
Mr. Elander has served in his present position as a Director since November of 1991. Mr. Elander previously served as the Commissioner of the Onondaga County Department of Water Environment Protection prior to retirement.Steven A. Sanders (64)

Director
1991
Mr. Sanders has served in his present position as a Director since December 1991.  Mr. Sanders is currently Senior Partner of Sanders Ortoli Vaughn-Flam Rosenstadt LLP.  From January 1, 2004 until June 30, 2007, he was of counsel to the law firm of Rubin, Bailin, Ortoli, LLP.  From January 1, 2001 to December 31, 2003, he was counsel to the law firm of Spitzer & Feldman PC.  .  Mr. Sanders also serves as a Director of Helijet International, Inc., and NaiKun Wind Development, Inc.  Additionally, he is a Director of the Roundabout Theatre (the largest not-for-profit theatre in North America), Town Hall New York City, and the New York Theatre BalletGeorge W. Lee, Jr. (61)

Director
2002
Mr. Lee was elected to the Board in December 2002.  Mr. Lee co-founded Blasland, Bouck and Lee, Inc., an Engineering News Record top 100 worldwide engineering and scientific services company in 1984.  He served in various capacities in this firm, including Executive VP, Director of Marketing and Director of Health and Safety from 1984 to 1994.  Mr. Lee served on the Board of Directors of Blasland, Bouck and Lee, Inc. from 1984 to 2005.  Since 1984 Mr. Lee has been active as a consultant to new business ventures involved in professional development and wastewater treatment.  In October 2005 Mr. Lee joined Pyramid Brokerage of Central New York as a commercial real estate sales agent.Richard Jacobson (46)

Director
2006
Mr. Jacobson was elected to the Board in February 2006.  Mr. Jacobson is currently a Partner at Tricap Partners & Co., an investment banking boutique specializing in advising companies, institutions, family offices and individuals in complex financial strategies and investment decisions.From 2005 to 2009, he was a Senior Managing Director with Stern Capital.  From 1999 to 2003 he was Managing Director and Co-Group Head in the merchant banking group of Indosuez Capital.  From 1997 to 1999, he was a Vice President in the leveraged finance group of SG Cowen.  From 1994 to 1997 he was an associate in the leveraged finance group of Chemical Securities, Inc.  Mr. Jacobson began his career as an attorney for the law firm of Jacobs, Persinger and Parker.




22




INDEPENDENCE





The Board recognizes the importance of director independence.  Under the rules of the New York Stock Exchange, to be considered independent, the Board must determine that a director does not have a direct or indirect material relationship with the Company.  Moreover, a director will not be independent if, within the preceding three (3) years: (i) the director was employed by the Company or receives $25,000 per year in direct compensation from the Company, other than director and committee fees or other forms of deferred compensation for prior service, (ii) the director was  partner of or employed by the Company’s independent auditor, (iii) the director is part of an interlocking directorate in which an executive officer of the Company serves on the compensation committee of another Company that employs the director, (iv) the director is an executive officer or employee of another Company that makes payments to, or receives payments from, the Company for property or services in an amount which, in any single fiscal year, exceeds the greater of  $100,000 or 2% of such other Company’s consolidated gross revenues, (v) or the immediate family member in any of the categories in (i) – (iv) above.





The Board has determined that six (6) of the Company’s seven (7) directors are independent under these standards.  As a result of Director Berger’s ownership of St. Lawrence Industrial Services Corp., he is not considered to have independent status.  Mr. Berger does serve on the Compensation committee based upon his prior business experience and the fact that he is a holder of approximately eleven percent (11%) of the outstanding shares of the Company’s stock.




RELATED PARTY TRANSACTION REVIEW





The Board has adopted a policy concerning the review, approval and monitoring of transactions involving the Company and “related persons” (directors and executive officers or their immediate family members, or shareholders owning five percent (5%) or greater of the Company’s outstanding shares).  The policy covers any transaction exceeding $1,000 in which the related person has a direct or indirect material interest.  Related person transactions must be approved in advance by the Co-chairmen and reported to the Board at the next meeting following the transaction.  The policy is intended to restrict transactions to only those which are in the best interests of the Company.




AUDIT COMMITTEE





The members of the Committee are Messrs. Cornelius Murphy, Richard Elander, and George Lee. The Committee operates under a written charter adopted by the Board of Directors.  Cornelius Murphy resigned from the Committee on April 29, 2010.  The Committee held three meetings during the year ended December 31, 2009.  Its duties and responsibilities include:


·
Oversight of the financial reporting process and management’s responsibility for the integrity, accuracy and objectivity of financial reports, and accounting and financial reporting practices.


·
Recommending to the Board the appointment of the Company’s independent registered accounting firm.


·
Oversight of the adequacy of the Company’s system of internal controls.


·
Oversight of management practices relating to ethical considerations and business conduct, including compliance with laws and regulations.





The Committee has met and held discussions with the Chief Financial Officer and the Company’s independent accountants, Dannible & McKee, LLP, regarding audit activities. Management has the primary responsibility for the Company’s systems of internal controls and the overall financial reporting process.  The independent accountants are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), and to issue a report thereon.  The Committee’s responsibility is to monitor and oversee these processes.  However, the members of the Committee are not certified public accountants, professional auditors or experts in the fields of accounting and auditing and rely, without independent verification, on the information provided to them and on the representations made by management and the independent accountants.





23





The Committee recommended to the Board of Directors the appointment of Dannible & McKee, LLP as the Company’s independent accountants for the year 2009, as ratified by shareholders.  The Company’s independent accountants provided to the Committee the written disclosure required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee discussed with the independent accountants that firm’s independence.





Management represented to the Committee that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles.  The Committee has reviewed and discussed the consolidated financial statements with management and the independent accountants.  The Committee discussed with the independent accountants matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees) as currently in effect.  Based on these discussions and reviews, the Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for filing with the Securities and Exchange Commission.





The Committee does not have a financial expert.  Due to the small size of the Company and lack of financial complexity, the Committee does not anticipate adding a financial expert.




REPORT OF AUDIT COMMITTEE





The Audit Committee reviews the Company’s financial reporting process on behalf of the Board.  Management has the primary responsibility for establishing and maintaining adequate internal financial controllership, for preparing the financial statements and for the public reporting process.  Dannible & McKee, LLP, our Company’s independent auditor for 2009, is responsible for expressing an opinion on the conformity of the Company’s audited financial statements with generally accepted accounting principles.





In this context, the committee has reviewed and discussed with management and Dannible & McKee, LLP the audited financial statements for the year ended December 31, 2009.  The committee has discussed with Dannible & McKee, LLP the matters that are required to be discussed by Statement on auditing Standards No. 61 (Communication with Audit committees).  Dannible & McKee, LLP has provided to the committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the committee has discussed with Dannible & McKee, LLP that firm’s independence.  The committee has concluded that Dannible & McKee, LLP’s provision of audit and non-audit services to the Company is compatible with Dannible & McKee, LLP’s independence.





Based on the considerations and discussions referred to above, the committee recommended to the Board of Directors that the audited financial statements for the year ended December 31, 2009 be included in the Annual Report on form 10-K for 2009.  This report is provided by the following independent directors, who comprise the committee:





George W. Lee, Jr. (Acting Chairman)


Richard L. Elander




24




EXECUTIVE OFFICERS OF THE COMPANY





Charles Morgan (56)

Chief Executive Officer

Mr. Morgan was named Chief Executive Officer (“CEO”) in November 2006.  He has been with the Company since January of 2002 and has previously served as Executive Vice President and Chief Operating Officer.  Prior to joining the Company, Mr. Morgan served as a Vice President with the firm of Camp, Dresser and McKee, an Engineering News Record Top 20, Boston, MA based consulting, engineering, construction and operations firm.  Mr. Morgan has 34 years of experience as a senior executive and corporate director of environmental, engineering, construction and energy companies.  Mr. Morgan has experience with all aspects of senior level company management including marketing and sales, strategic planning, financial management, product and service development, project management and mergers and acquisitions.  Mr. Morgan has also managed a variety of large scale projects domestically and internationally for a broad spectrum of private sector industrial clients.




Jon Verbeck (49)

Chief Financial Officer & Treasurer

Mr. Verbeck was named Chief Financial Officer (“CFO”) and Treasurer in May 2007.  Prior to joining the Company, Mr. Verbeck was the Managing Director of a business consulting firm.  From 1991 to 2005, he was the CFO for a manufacturing and distributor company.  Prior to 1991, he worked as an auditor for a public accounting firm from 1985 to 1991.  Mr. Verbeck is a Certified Public Accountant in New York State.




CODE OF ETHICS FOR SENIOR OFFICERS





The Company has adopted a code of ethics that applies to its senior executive and financial officers.  The Code of Ethics for senior officers is included in Exhibit 14.




BENEFICIAL OWNERSHIP AND REPORTING COMPANIES




Section 16(a) of the Exchange Act requires our directors, officers (including a person performing a principal policy-making function) and persons who own more than 10% of a registered class of our equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities of ours. Directors, officers and 10% holders are required by Commission regulations to send us copies of all of the Section 16(a) reports they file. Based solely upon a review of the copies of the forms sent to us and the representations made by the reporting persons to us, we believe that during the fiscal year ended December 31, 2009, our directors, officers and 10% holders complied with the filing requirements under Section 16(a) of the Exchange Act.











25








ITEM 11. EXECUTIVE COMPENSATION




A. Compensation Committee




The Compensation Committee of the Board of Directors reviews and administers the Company’s compensation policies and practices for the executive officers of the Company. The Compensation Committee is currently comprised of Dr. Murphy, Mr. Messina and Mr. Berger, all of whom are nonemployee directors.  The Company’s financial accounting group supports the Compensation Committee’s work by providing information reports to the Compensation Committee when requested.  The Committee’s authority is not set out in a charter.  The Committee has not delegated authority and has not hired compensation consultants.




B. Compensation Discussion and Analysis




Compensation Philosophy




The Compensation Committee has adopted an executive compensation policy that rewards executives if the Company achieves its operational, financial and strategic goals and for building shareholder value.  The material elements of the total compensation which is considered for executives each year under the Company’s policy are (i) base salary, (ii) annual cash bonus, (iii) stock-based awards, and (iv) retirement, health and welfare and other benefits.




The Compensation Committee intends for the compensation earned by executive officers to be commensurate with performance and competitive with the compensation paid to executives at comparable companies.   The Compensation Committee has not engaged in any benchmarking of total compensation or any material element thereof.  The named executive officers do not play a role in the compensation setting process other than negotiating employment agreements on their own behalf.




Base Salaries




Base salaries provide a baseline level of compensation to executive officers. Base salaries are not linked to the performance of the Company, because they are intended to compensate executives for carrying out the day-to-day duties and responsibilities of their positions.




The Compensation Committee reviews and adjusts base salary levels in January each year. During the review and adjustment process, the Compensation Committee considers:




·
individual performance;




·
the duties and responsibilities of each executive officer position;




·
the relationship of executive officer pay to the base salaries of other employees of the Company; and




·
whether the base salary levels are competitive when compared to compensation paid to executives at comparable companies.




Annual Cash Bonus Awards




The Compensation Committee also considers bonus awards to the named executives at its January meeting each year. In general, the Committee does not award bonuses to executive officers under a pre-established plan or formula. Instead, the Committee makes bonus awards based on its review of the individual performance of the executives and the financial performance of the Company during the preceding year. The Committee believes that awarding bonuses in this manner keeps executives focused on making decisions that are in the long-term best interests of the Company and its shareholders and not for the purpose of achieving a pre-established performance level over a shorter term.












26




Stock-Based Awards




The Compensation Committee follows procedures that are substantially similar to the bonus award procedures for making stock-based awards to executive officers.  The 2002 Omnibus Plan (“Omnibus Plan”) maintained by the Company is intended to promote the growth and general prosperity of the Company by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees.  Awards granted under the Omnibus Plan may be (a) Stock Options which may be designated as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options (“NQSO’s) not intended to so qualify; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; or (e) other forms of stock-based incentive awards. The shares of stock with respect to which the Awards may be granted shall be the common stock, par value at $0.01, of the Company (“Common Stock").




All stock-based awards are made under the Company’s Omnibus Plan.  The number of shares included in stock-based awards is not determined under a pre-established formula. Instead, as is the case with bonus awards, all stock-based awards are discretionary based on the Committee’s review of the individual performance of the executives and the financial performance of the Company during the preceding year.




Retirement and Other Benefits




The Company sponsors the OP-TECH Environmental Services 401(k) Plan (the “Plan”), a tax-qualified Code Section 401(k) retirement savings plan, for the benefit of all of its employees, including the named executives. The Plan encourages saving for retirement by enabling participants to save on a pre-tax basis and by providing Company matching contributions equal to 25% of the first 6% that each employee contributes to the Savings Plan.




None of the named executives receive perquisites whose aggregate value exceeds $10,000 annually.




Post Termination of Employment Benefits –




The Company has not entered into employment agreements with any executive officers that provide severance or other benefits following their resignation, termination, retirement, death or disability




Mr. Morgan has signed a new employment agreement on March 28, 2008 that runs through March 31, 2011.  Under the Agreement, if seventy-five percent (75%) of the common stock or assets of the Company is sold, Mr. Morgan shall be entitled to a sale fee.  The sale fee shall be based on the total common stock value or total asset value in the case of an asset sale.  The value, which shall be finally determined by the Board of Directors, shall not include debt, holdbacks, escrow funds, earn-outs or similar items.




D. Conclusion




The Compensation Committee has read the compensation discussion and analysis and has reviewed all components of the named executives’ compensation, including salary, bonus, long-term incentive compensation, accumulated realized and unrealized stock option and restricted stock gains, the dollar value of all perquisites and other personal benefits.  Based on this review, the Compensation Committee is of the view that the compensation payable under the new employment agreement with Mr. Morgan is reasonable and appropriate.




27





E. Executive Officer Compensation Disclosure Tables









Summary Compensation Table




Name and Principal

Position(s)

(a)
Year

(b)

Salary

($)

(c)


Bonus

($)

(d)


Stock Awards

($)

(e)


Option Awards

($) (1)

(f)


Change in

Pension value

and Nonqualified

Deferred

Compensation

Earnings

(h)


All Other

Compensation

($) (1)

(i)


Total

($)

(j)Charles B. Morgan
2009

$
197,000


$
35,000


$
0


$
0


$
0


$
41,422


$
273,422Chief Executive Officer
2008

$
179,000


$
17,500


$
0


$
0


$
0


$
18,700


$
215,200Harold C. Piger
2009

$
112,796


$
25,000


$
0


$
0


$
0


$
0


$
137,796Senior Vice President
2008

$
98,264


$
5,000


$
0


$
0


$
0


$
0


$
103,264Jon S. Verbeck
2009

$
120,000


$
15,000


$
0


$
0


$
0


$
0


$
135,000Chief Financial Officer
2008

$
120,000


$
5,000


$
0


$
0


$
0


$
0


$
125,000  (1) Mr. Morgan was paid $27,911 and $18,700 for unused vacation in 2009 and 2008, respectively, and $13,511 as other compensation in 2009.




Column g, Non-Equity Incentive Plan Compensation, is not applicable and is omitted.




Outstanding Equity Awards at Fiscal Year-End Table




Option AwardsName

(a)

Number of

Securities

Underlying

Unexercised

Options

(#) Exercisable

(b)

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

(c)

Option

Exercise Price

($)

(e)

Option

Expiration

Date

(f)Mr. Morgan


16,667



0



$0.06



05/21/1233,333



0



$0.15



11/19/1350,000



0



$0.40



01/26/15




Columns d, i and j related to Equity Incentive Plan Awards are not applicable and are omitted.






28





Director Compensation Table




The following table summarizes the compensation paid to the Chairman and each nonemployee director for his or her service to the Board and its committees during 2009:




Name

(a)



Fees

Earned or

Paid in

Cash ($)

(b) (1)

Option Awards

($)

(d)

All Other

Compensation

($)

(g)

Total ($)

(h)Robert J. Berger


$
16,500



$
0


$
0


$
16,500Richard Messina


$
24,500



$
0


$
0


$
24,500Richard L. Elander


$
9,000



$
0


$
0


$
9,000Cornelius B. Murphy, Jr.


$
10,000



$
0


$
0


$
10,000Steven A. Sanders


$
8,000



$
0


$
0


$
8,000George W. Lee, Jr.


$
9,500



$
0


$

0


$
9,500Richard Jacobson


$
8,000



$
0


$
0


$
8,000





(1)     In 2009 Directors of the Company were paid $2,000 for each Board meeting attended and $500 for each sub-committee meeting attended.  In addition, Messer’s Messina and Berger were paid additional fees as chairman fees of $16,000 and $8,000, respectively.




Column c (Stock Awards), column e (Non-Equity Incentive Plan Compensation), and column f (Change in Pension Value and Nonqualified Deferred Compensation Earnings) are not applicable and are omitted.







29




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL


OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


The following table sets forth certain information regarding the beneficial ownership of the Company’s common stock at May 1, 2010 by persons who, to the knowledge of the Board of Directors, beneficially own more than five percent of the outstanding shares of common stock of the Corporation.





All voting power of the Corporation is vested in its common stock.  As of the close of business on May 1, 2010, 11,940,372 shares of common stock par value $.01 per share were outstanding.  Each share of common stock is entitled to one vote.




Name and Address of Beneficial Owner

Amount and Nature ofBeneficial

Ownership (1)(2)


Percentage of

Class (1)Richard Messina

40 Fulton Street, 19th Floor

New York, NY 10038


4,208,451
(2) (3)


35
%Robert Berger

121 Shirley Rd.

Syracuse, NY 13224


1,271,667
(4)


11
%Jurg Walker

3 Avenue De La Costa

Monaco 98000


1,000,000



8
%Kevin Eldred

1007 Overlook Terrace

Cazenovia, NY 13035


835,000



7
%




(1)
Based upon the sum of (a) 11,940,372 shares of common stock outstanding, and (b) underlying options and warrants that have vested and not been exercised and underlying options and warrants that will vest within the next 60 days relating to a particular shareholder.





(2)
All shareholder’s directly or beneficially own all shares except for Mr. Messina who owns 1,343,933 shares directly and 2,864,518 shares indirectly.





(3)
Includes 480,000 shares issuable upon the exercise of warrants to purchase common stock issued to Summit Capital Associates, Inc., an affiliate of Mr. Messina.





(4)
Includes options to purchase 13,333 shares of Common Stock.







30





The following table sets forth certain information furnished to the Company regarding the beneficial ownership of the Company’s common stock at May 1, 2010 by each director and nominee for election as director and each executive officer. Unless otherwise indicated, the beneficial owner has sole voting and investment power with respect to such shares of common stock.




Name of Beneficial Owner

number of Shares of Common Stock Beneficially Owned (3)


Percantage of Class (4)Richard Messina (1)


4,208,451
(5)


35
%Robert J. Berger (1)


1,271,667



11
%Richard L. Elander (1)


21,624


<1
%Steven A. Sanders (1)


45,352


<1
%George W. Lee, Jr. (1)


236,666



2
%Richard Jacobson (1)


-0-



0
%Charles Morgan (2)


220,000



2
%Jon S. Verbeck (2)


5,000


<1
%All Directors as a Group (7 persons)


5,783,760



48
%








(1)
Director


(2)
Officer


(3)
Includes unexercised options to purchase shares of common stock:


·
Mr. Berger
13,333


·
Mr. Elander
10,000


·
Mr. Sanders
13,333


·
Mr. Lee
16,667


·
Mr. Morgan
100,000


(4)
Based upon the sum of (a) 11,940,372 shares of common stock outstanding, and (b) shares underlying options and warrants that have vested and not been exercised and shares underlying options and warrants that will vest within the next 60 days relating to a particular shareholder.


(5)
Includes 480,000 shares issuable upon the exercise of warrants to purchase common stock issued to Summit Capital Associates, Inc., an affiliate of Mr. Messina.







31




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE








Steven A. Sanders, one of our directors, is a partner at the law firm of Sanders Ortoli Vaughn-Flam Rosenstadt LLP, and formerly of counsel at the law firm of Rubin, Bailin, Ortoli, LLP which provides professional services to the Company, and it is anticipated that it will continue to do so.  The cost of these services in 2009 was approximately $25,000.





We purchase subcontract labor services from St. Lawrence Industrial Services, Inc., which is owned by Robert J. Berger, one of our directors.  Pricing for these services are based on cost plus an agreed upon mark-up of 3%.  The costs for these services amounted to approximately $1,558,000 in 2009, which includes $120,000 paid for services of the CFO.  Services are provided as needed with no long-term commitment.







ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES








Fees billed by Dannible & McKee, LLP, the Company’s principal accountants, in the aggregate for each of the last two years were as follows:








2009                                   2008





Audit Fees                                $ 61,260                      $ 60,720





Audit Related Fees                 $         0                        $          0





Tax Fees                                    $ 33,202                      $ 26,750











There were no other fees billed for services other than those noted above.





The fees for tax services represent fees for compliance related to Federal and state tax return preparation and filing.





The fees for audit and tax services for 2009 were proposed to the audit committee and approved by that committee in an engagement letter.  No other services were provided by the accountants that would require approval by the audit committee.










32





PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,








Page(a)
Financial StatementsReport of Independent Accountants
F-2Consolidated Balance Sheets at December 31, 2009 and 2008
F-3Consolidated Statement of Operations for the years ended December 31, 2009, 2008, and 2007
F-4Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008, and 2007
F-5Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007
F-6Notes to Consolidated Financial Statements
F-7(b)
Exhibits


10.1
Stock Option Plan - Incorporated herein by reference to the


Company’s Information Statement filed November 6, 2002*


14              Code of Ethics*


21              Subsidiaries of the Registrant*


31.1           CEO Certification


31.2           Acting PAO Certifications


32.1           Section 1350 CEO Certifications


32.2           Section 1350 Acting PAO Certifications




* Incorporated by reference to previous filings






33




OP-TECH Environmental
  Services, Inc. and Subsidiaries
  Consolidated Financial Statements
  December 31, 2009 and 2008
   Independent Registered Accounting Firm
 
 
 To the Shareholders and Board of Directors of
 OP-TECH Environmental Services, Inc. and Subsidiaries
  
 We have audited the accompanying consolidated balance sheets of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
 
 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company experienced a net loss for the year ended December 31, 2009, that resulted in negative working capital at December 31, 2009, and caused violations of the Company’s financing agreements.  A new financing agreement was signed on March 30, 2010, that provided a waiver for the 2009 covenant violations but also imposed other restrictive terms and this financing agreement expires on August 31, 2010. The Company has developed a business plan that considers the reduced level of available working capital, provides for a reduction in operating costs and projects a level of profitability that would result in compliance with covenants specified in the new financing agreement.  The Company’s ability to achieve the elements of its business plan and obtain continued financing is uncertain. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 
 
 /s/ Dannible & McKee, LLP
 Syracuse, New York
 
 May 14, 2010
  F-2
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 December 31, 2009 and 2008
  2009


2008AssetsCurrent assets:Cash (Note 4)

$
26,845


$
80,003Accounts receivable, net (Notes 1 and 5)


10,251,155



8,914,131Costs on uncompleted projects applicable to future billings (Note 1)


2,567,053



2,824,799Inventory


343,047



426,412Current portion of deferred tax asset (Note 10)


319,100



559,400Prepaid expenses and other current assets


448,001



388,654Total current assets


13,955,201



13,193,399Property and equipment, net (Note 6)


2,602,007



3,031,899Deferred tax asset (Note 10)


1,556,000



924,300Total Assets

$
18,113,208


$
17,149,598Liabilities and Shareholders' EquityCurrent liabilities:Accounts payable

$
6,461,236


$
3,543,822Outstanding checks in excess of bank balance (Note 1)


1,045,720



1,026,126Billings in excess of costs and estimatedprofit on uncompleted contracts (Note 1)


1,101,406



479,237Accrued expenses and other current liabilities


1,328,178



1,153,383Accrued litigation reserve (Note 7)


-



450,000Note payable to bank under line of credit (Note 8)


5,073,196



-Obligation under interest rate swap agreement (Note 8 and 12)


23,861



-Current portion of long-term debt (Note 8)


1,502,498



800,084Total current liabilities


16,536,095



7,452,652Obligation under interest rate swap agreement (Note 8 and 12)


-



48,665Long-term debt, net of current portion (Note 8)


-



1,335,986Note payable to bank under line of credit (Note 8)


-



4,865,097Total liabilities


16,536,095



13,702,400Shareholders' equity:Common stock, par value $.01 per share; authorized20,000,000 shares; 11,940,372 shares issued and outstandingas of December 31, 2009 and 2008


119,404



119,404Additional paid-in capital


7,005,891



7,005,891Accumulated deficit (Note 14)


(5,534,022
)


(3,649,132
)Accumulated other comprehensive loss


(14,160
)


(28,965
)Shareholders' equity, net


1,577,113



3,447,198Total Liabilities and Shareholders' Equity

$
18,113,208


$
17,149,598
  F-3
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
 Years Ended December 31, 2009, 2008 and 2007
  
 2009



2008
*


2007
*Project billings and services

$
36,023,902


$
36,632,276


$
32,475,379Project costs


30,450,031



28,059,580



24,499,589Gross margin


5,573,871



8,572,696



7,975,790Payroll and related payroll taxes and benefits


2,937,534



3,298,646



3,674,586Office expense


829,264



875,107



772,885Occupancy expense


902,857



849,499



769,327Business insurance expense


471,217



506,123



636,180Professional services


949,844



777,313



624,620Equipment expenses, net of usage credit


503,018



600,940



792,429Other expenses


957,769



489,143



495,439Litigation reserve (Note 7)


-



104,355



-7,551,503



7,501,126



7,765,466Operating income (loss)


(1,977,632
)


1,071,570



210,324Other income (expense):Interest expense


(309,442
)


(449,785
)


(669,379
)Other, net


24,389



11,871



7,436(285,053
)


(437,914
)


(661,943
)Net income (loss) before income taxes


(2,262,685
)


633,656



(451,619
)Income tax benefit (expense) (Note 10):Current


(23,605
)


(17,829
)


(7,455
)Deferred


401,400



39,100



53,500377,795



21,271



46,045Net income (loss)

$
(1,884,890
)

$
654,927


$
(405,574
)Earnings (loss) per common share:Basic

$
(0.16
)

$
0.05


$
(0.03
)Diluted

$
(0.16
)

$
0.05


$
(0.03
)Weighted average shares outstanding:Basic


11,940,372



11,938,706



11,858,706Diluted


11,940,372



12,292,286



11,858,706
 
 * Reclassified, see Note 1
  F-4
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Consolidated Statements of Shareholders’ Equity and Comprehensive Income
 Years Ended December 31, 2009, 2008 and 2007
  AccumulatedAdditional





OtherCommon


Common


Paid-In


Accumulated


ComprehensiveShares


Stock


Capital


Deficit


Income


TotalBalance at December 31, 2006


11,748,704


$
117,487


$
6,925,581


$
(3,898,485
)

$
19,700


$
3,164,283Issuance of  188,334 Shares


188,334



1,884



22,916



-



-



24,800Recognition of Stock Compensation Expense


-



-



57,227



-



-



57,227Other Comprehensive Income:Change in Fair Value of Cash Flow Hedgenet of tax effect of $17,300


-



-



-



-



(25,900
)


(25,900
)Net Loss


-



-



-



(405,574
)


-



(405,574
)Total Comprehensive Loss


-



-



-



-



-



(431,474
)Balance at December 31, 2007


11,937,038


$
119,371


$
7,005,724


$
(4,304,059
)

$
(6,200
)

$
2,814,836Issuance of  3,334 Shares


3,334



33



167



-



-



200Other Comprehensive Income:Change in Fair Value of Cash Flow Hedgenet of tax effect of $15,000


-



-



-



-



(22,765
)


(22,765
)Net Income


-



-



-



654,927



-



654,927Total Comprehensive Income


-



-



-



-



-



632,162Balance at December 31, 2008


11,940,372


$
119,404


$
7,005,891


$
(3,649,132
)

$
(28,965
)

$
3,447,198Other Comprehensive Income:Change in Fair Value of Cash Flow Hedgenet of tax effect of $(10,000)


-



-



-



-



14,805



14,805Net Loss


-



-



-



(1,884,890
)


-



(1,884,890
)Total Comprehensive Loss


-



-



-



-



-



(1,870,085
)Balance at December 31, 2009


11,940,372


$
119,404


$
7,005,891


$
(5,534,022
)

$
(14,160
)

$
1,577,113
  F-5
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 Years Ended December 31, 2009, 2008 and 2007
  2009


2008


2007Operating activities:Net income (loss)

$
(1,884,890
)

$
654,927


$
(405,574
)Adjustments to reconcile net income (loss) tonet cash provided by operating activities:Bad debt expense


727,958



264,516



258,253Depreciation and amortization


656,651



717,478



716,467Benefit from deferred income taxes


(401,400
)


(39,100
)


(53,500
)Provision for stock compensation expense


-



-



57,227(Increase) decrease in operating assets andincrease (decrease) in operating liabilities:Accounts receivable


(2,064,982
)


(823,367
)


1,394,653Costs on uncompleted projectsapplicable to future billings


257,746



(636,285
)


795,809Prepaid expenses, inventory and other assets, net


24,018



105,104



(49,074
)Billings in excess of costs and estimated profiton uncompleted contracts


622,169



(890,662
)


573,461Accrued litigation defense reserve


(450,000
)


104,355



(54,355
)Accounts payable and other accrued expenses


3,092,209



1,140,824



(1,772,238
)Net cash provided by operating activities


579,479



597,790



1,461,129Investing activities:Purchases of property and equipment


(226,759
)


(482,404
)


(766,659
)Net cash used in investing activities


(226,759
)


(482,404
)


(766,659
)Financing activities:Proceeds from issuance of common stock


-



200



24,800Increase in outstanding checks in excess ofbank balance


19,594



433,369



443,016Proceeds from notes payable to banks andlong-term borrowings, net of financing costs


16,753,768



15,500,078



16,057,390Principal payments on currentand long-term borrowings


(17,179,240
)


(16,062,565
)


(17,157,122
)Net cash used in financing activities


(405,878
)


(128,918
)


(631,916
)Increase (decrease) in cash and cash equivalents


(53,158
)


(13,532
)


62,554Cash and cash equivalents at beginning of year


80,003



93,535



30,981Cash and cash equivalents at end of year

$
26,845


$
80,003


$
93,535Non-cash items:Non-cash financing of insurance

$
538,397


$
566,043


$
623,431
  F-6
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  1.
Summary of Significant Accounting Policies
  Basis of Presentation
  OP-TECH Environmental Services, Inc. and Subsidiaries (the “Company”), a Delaware corporation headquartered in Syracuse, New York, provides comprehensive environmental and industrial services predominately in New York, New England, Pennsylvania, and New Jersey.  The Company performs industrial cleaning of hazardous and non-hazardous materials and provides varying services relating to plant facility closure, including interior and exterior demolition and asbestos removal.  In addition, the Company provides remediation services for sites contaminated by hazardous and non-hazardous materials and provides 24-hour emergency spill response services.  The Company’s revenues are derived from state agencies, industrial companies and municipalities facing complex environmental clean-up problems associated with hazardous and non-hazardous materials as required by various governmental agencies.  The Company’s services include assessing the regulatory, technical, and construction aspects of the environmental issue, and performing the necessary remediation activities.  The Company seeks to provide its clients with remedial solutions which integrate the various aspects of a project and are well-documented, practical, cost effective, and acceptable to regulatory agencies and the public.
 
 OP-TECH AVIX, Inc. (AVIX) is a subsidiary of OP-TECH Environmental Services, Inc. formed in January 2002 to pursue and engage in diversified lines of business.  In the fourth quarter of 2004, this subsidiary became inactive, and the Company is no longer pursuing the lines of business that AVIX performed.  Therefore, separate segment information is no longer presented in the Financial Statements.
  OP-TECH Environmental Services, Ltd. is an inactive Canadian subsidiary of OP-TECH Environmental Services, Inc.
  J.O. Technologies is a partnership that is owned 50% by the Company.  The partnership activities are not material to the operations of the Company.  The partnership was discontinued in 2009.
  Principles of Consolidation
  The accompanying consolidated financial statements include the accounts of OP-TECH Environmental Services, Inc. and its two wholly-owned subsidiaries (collectively, the “Company”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
  Use of Estimates
  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.  Estimates also affect the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
  Cash and Cash Equivalents
  For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
 
 Project Income Recognition
  Contracts are predominately short-term in nature (less than six months), and revenue is recognized as costs are incurred based on the percentage of completion method utilizing estimated gross margins anticipated for each specific project.  Project costs include all direct material, equipment, and labor costs and those indirect costs related to contract performance.
   F-7
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  Revenues recognized in excess of amounts billed are recorded as a current asset.  Deferred revenue resulting from billings that exceed costs and estimated profit is reflected as a current liability.
  Provisions for estimated losses are made in the period in which such losses are determined.Due to the nature of the Company’s operations, the estimated revenues could change materially in the near term.
  Normal delays relating to receipt of job-related vendor invoices, payroll processing, and billing compilation typically cause customer invoices relating to revenue earned in a certain month to be mailed in the first two weeks of the following month.  Such invoices mailed after year-end that are included in December 31, 2009 and 2008 accounts receivable are approximately $4,944,000 and $2,825,000, respectively.
  Certain states impose a sales tax on the Company’s sales to nonexempt customers.  The Company collects the required sales tax from customers and remits the entire amount to the respective state.  The Company’s policy is to exclude the tax collected and remitted from revenues and expenses.
  The Company underwent a sales tax audit for the period March 1, 2005 to November 30, 2008.  The Company estimated the liability at $203,000 in 2008.  The audit was settled in 2009 and the company recorded a reduction in operated expenses of $75,000.
  Concentration of Business Risk - Significant Customers
  Sales to one customer amounted to approximately $6,552,000, $7,071,000, and $7,212,000 in 2009, 2008, and 2007, respectively.  Accounts receivable at December 31, 2009 and 2008, include $2,477,000 and $1,835,000 respectively, from this customer.
  Receivables and Credit Policies
  Accounts receivable are unsecured customer obligations due under normal trade terms requiring payment within 30 days from the invoice date.  Interest is not accrued on past-due invoices.  Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice.
  The carrying amount of accounts receivable is reduced by a valuation allowance that represents management’s best estimate of the amounts that will not be collected.  Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.  Additionally, management estimates a general allowance based on historical chargeoffs covering other amounts that may not be collectible.
  Inventory
  Inventory, consisting of spill response and remediation supplies and materials, are stated at the lower of cost or market value.  Cost is determined using the first-in, first-out method.
  Property and Equipment
  Property and equipment are stated at cost.  Expenditures for repairs and maintenance are charged to expense as incurred.  Depreciation of assets is provided for using the straight-line method over useful lives typically ranging from 3 to 15 years.
  Financial Instruments
  The Company maintains various financial instruments in the ordinary course of business, which consist of cash, accounts receivable and payable, notes payable, long-term debt, a line of credit and interest rate swap transaction.  The carrying value of the Company’s financial instruments
   F-8
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  approximates their fair value at December 31, 2009 and 2008.  The fair values of fixed rate notes payable and long-term debt are determined using incremental borrowing rates available to the Company for similar types of borrowings.  The fair value of the interest rate swap agreement is fully discussed in Note 12.  All other financial instruments are short-term in nature and their fair values are based on the amounts that they have been or will be settled for subsequent to the balance sheet date.
  Cash overdraft liability
  At December 31, 2009 and 2008, the Company had outstanding checks in excess of its operating bank account balance, as funds are only transferred to the operating account as necessary to cover checks that are presented for payment.  The Company’s bank accounts maintained a positive cash balance.
  Income Taxes
  The Company provides for income taxes in accordance with the liability method.  Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect in the years in which the differences are expected to reverse.
  In accordance with the FASB’s guidance on accounting for uncertainty in income taxes, the Company reviewed its tax provision for uncertain tax positions and believes there are no significant exposures.  The Company will include interest on income tax liabilities in interest expense and penalties in operations if such amounts arise.  The Company is no longer subject to Federal and New York State examinations by tax authorities for the closed tax years before 2006.
 
 Reclassifications
 
 Certain amounts in the 2008 and 2007 statements of operations have been reclassified to conform with the presentation used in 2009.
 
 Going Concern
  The Company has substantial doubt about its ability to continue as a going concern due to the working capital deficit and changes in the bank financing agreement.  At December 31, 2009, the Company has negative working capital with current liabilities exceeding current assets by $2,580,894.  Additionally, the bank changed the line expiration from July 31, 2011 to August 31, 2010 and increased pricing.  The bank is also requiring the Company seek replacement financing and requiring an equity infusion of $500,000 by July 31, 2010.  See Note 8 for further discussion.
 
 The Company has made significant workforce reductions and has reduced variable monthly operating expenses.  The Company believes that based on the significant project backlog, changes in the project mix, and the revisions to their business plan, they will be able to operate profitably.  The Company believes they can seek replacement financing and will be able to classify the line of credit balance as long-term to significantly enhance working capital.  Therefore, the Company has accounted for the financial statements assuming that they will continue as a going concern.
 
 Recently Adopted Accounting Guidance
 
 The following is a list of accounting pronouncements either adopted by the Company for fiscal 2009 or pronouncements that could have a significant impact on future financial statements or disclosures upon adoption:
 
  F-9
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, now referred to as ASC 105, “Generally Accepted Accounting Principles” (“ASC 105”). ASC 105 established the Codification as the single source of authoritative U.S. GAAP superseding all prior guidance and eliminating the GAAP hierarchy and establishing one level of authoritative GAAP. All other literature is considered non-authoritative. ASC 105 is effective for annual periods ending after September 15, 2009 and as such has been adopted for the third quarter of 2009.  The adoption of this standard has significantly changed the Company’s U.S. GAAP references, however it did not have an impact on the Company’s financial statements.
 
 The Company has adopted the disclosure requirements of ASC 815, “Derivatives and Hedging”, effective January 1, 2009, which amends and expands the disclosure related to accounting for derivative instruments and hedging activities, and also began applying the provisions of ASC 820, “Fair Value Measurements and Disclosures”, to non-financial assets and liabilities, as permitted by FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157”.  Neither of these adopted pronouncements had an impact on the Company’s balance sheet or results of operations for 2009.
 
 ASC 855, “Subsequent Events”, establishes principles and requirements for reviewing and reporting subsequent events.  This requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements are available for issuance or were issued. This accounting guidance was adopted for the second quarter of fiscal 2009. However, in February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements" (“ASU 2010-09”). ASU 2010-09 requires a Securities and Exchange Commission (“SEC”) filer to evaluate subsequent events through the date that the financial statements are issued. SEC filers are no longer required to disclose the date through which subsequent events have been evaluated. This amendment is effective as of the date of issuance of ASU 2010-09, and as such the Company has changed its disclosure accordingly.
 
 ASC 820-10-65, “Fair Value Measurements and Disclosures”(ASC 820-10-65”) clarifies the approach to and provides additional factors to consider in, measuring fair value when there has been a significant decrease in market activity for an asset or liability and quoted prices associated with transactions are not orderly.  The requirements of ASC 820-10-65 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company elected to adopt the guidance of ASC 820-10-65, effective June 30, 2009. This adoption did not have an effect on the Company’s consolidated balance sheets or results of operations.
 
 In August 2009, the FASB issued Accounting Standards Update 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends Topic 820-10, “Fair Value Measurements and Disclosures – Overall”. This update clarifies techniques that may be used to determine the fair value of a liability if an active market for an identical liability does not exist.  This new guidance was effective for the third quarter of fiscal 2009 for the Company. The adoption of this update did not have an impact on the Company’s consolidated financial condition or results of operations.
 
 In January 2010, the FASB issued ASU 2010-02, "Consolidation (Topic 810) - Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification" (“ASU 2010-02”). ASU 2010-02 clarifies that the scope of the decrease in ownership provisions of Topic 810 and how it applies to a subsidiary or group of assets that is a business, a subsidiary that is a business that is transferred to an equity method investee or a joint venture or an exchange of a group of assets that
  F-10
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  constitutes a business for a noncontrolling interest in an entity and does not apply to sales in substance of real estate. ASU 2010-02 should be applied on the first interim or annual period ending on or after December 15, 2009, and applied retrospectively to the first period that the entity adopted SFAS No. 160. The adoption of ASU 2010-02 did not have an impact on the Company’s consolidated balance sheets or results of operations.
 
 In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements" (“ASU 2010-06”). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. This update will only have an impact on the Company’s disclosures beginning January 1, 2010 and will not have a material impact on the Company’s consolidated balance sheets or results of operations.
 
 
  2.
Stock Based Compensation and Earnings Per Share
  The Company maintains an equity incentive plan under which it may grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, performance awards, or other forms of stock-based compensation to employees. Stock-based compensation is accounted for based on guidance issued by the Financial Accounting Standards Board (“FASB”) on Share-Based Payment. Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally three years) using the straight-line method. See Note 13 for additional details.
 
 Basic earnings per share is computed by dividing net income (loss) by the weighted average shares outstanding for the period, which were 11,940,372, 11,938,706, and 11,858,706, for the years ended December 31, 2009, 2008, and 2007, respectively.  Diluted earnings per share includes the potentially dilutive effect of common stock issuable upon conversion of stock options or warrants, using the treasury stock method.  For the years ended December 31, 2009, 2008, and 2007, 765,341, 177,000, and 815,343 shares of unexercised stock options and warrants, respectively, are excluded from the diluted calculation due to their anti-dilutive effect.
 
 There are warrants outstanding to purchase 480,000 shares of the Company’s common stock at a price of $0.066 per share. The warrants are exercisable at the holder’s option at any time and from time to time, in whole or in part, until expiration in May 2010.
 
  3.
Related Party Transactions
  The Company purchases subcontract labor services from St. Lawrence Industrial Services, Inc. which is owned by a director of the Company.  The cost for these services amounted to approximately $1,558,000, $1,216,000, and $1,042,000, in 2009, 2008, and 2007, respectively.  St Lawrence charges the Company 3% above its cost for these services.  Amounts were payable to this related party of approximately $292,000 and $104,000 at December 31, 2009 and 2008, respectively and are included in accrued expenses on the consolidated balance sheets.
 
  F-11
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  A director of the Company is a partner in or has been of counsel for law firms that provided professional services to the Company.  The cost for these services amounted to approximately $25,000, $24,000, and $15,000 in 2009, 2008 and 2007, respectively.
 
 4.      Cash
 
 Using a zero balance account, the Company voluntarily applies all available cash in the Company’s operating account to pay down the Company’s note payable to bank under the line of credit (Note 9) nightly.  From time to time cash balances held at the financial institution may exceed the Federal Deposit Insurance Corporation limits and are therefore subject to normal credit risk.
 
 5.         Accounts Receivable
 
 Accounts receivable at December 31, 2009 and 2008 consists of:
 2009


2008Accounts receivable, gross

$
10,134,953


$
8,800,338Retainage receivable


791,834


$
512,952Allowance for uncollectible receivables


(625,632
)


(399,159
)Allowance for sales credits


(50,000
)


-Accounts receivable, net

$
10,251,155


$
8,914,131
 All customer accounts receivable collateralize the Company’s outstanding loans with its primary lender (see Note 8).
 
 
 6.
Property and Equipment
  Property and equipment at December 31, 2009 and 2008 consist of:
  2009


2008Furniture and fixtures

$
53,386


$
50,693Leasehold improvements


203,449



200,594Office machines


283,419



262,203Field equipment


7,323,995



7,163,5067,864,249



7,676,996Less: Accumulated depreciation


(5,262,242
)


(4,645,097
)$
2,602,007


$
3,031,899
   Depreciation expense approximated $657,000, $717,000, and $716,000 for years ended December 31, 2009, 2008, and 2007 respectively and was included in operating expenses in the consolidated statement of operations.
   F-12
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  7.
Accrued Litigation Reserve
  The Company had accrued a liability of $450,000 at December 31, 2008.  The liability was recorded to cover management’s estimate of any potential legal indemnity settlement or other payments necessary to dispose of a particular claim against the Company.  The Company paid $450,000 to settle the claim in 2009.
 
  8.
Line of Credit and Long-Term Debt Obligations
  Line of credit obligations and long-term debt at December 31, 2009 and 2008 consists of:
 2009


2008Note payable to bank under line of credit. Due August 31, 2010. (a)

$
5,073,196


$
4,865,097Term Loan due in monthly installment payments of $24,848though January 2012 plus interest at prime plus .75%, hedgedby an interest rate swap. (a)


609,542



907,719Term Loans due in monthly installment payments throughAugust 2013 aggregating $19,443 plus interest rate atprime plus .75%. (a)


631,255



864,576Insurance Financing Notes, due in monthly installment paymentsof $55,356 and $58,307 including interest at 6.1% and 6.5% atDecember 31, 2009 and 2008, respectively collateralized byassignment of unearned premiums.


164,395



173,035Equipment Notes, due in monthly installment payments throughJune 2010 aggregating $2,597 and $9,598 at December 31, 2009and 2008, including interest at rates ranging from 6.5% to 8.9%,collateralized by equipment with a carrying value of approximately$189,000  and $230,000 at December 31, 2009 and 2008, respectively.


16,521



88,881Equipment Note, due in monthly installment payments of $1,756through October 2013 plus interest at prime plus .75%, collateralizedby equipment with a carrying value of approximately $67,400and $85,000 at December 31, 2009 and 2008, respectively.


80,785



101,8591,502,498



2,136,070Current portion


(1,502,498
)


(800,084
)$
-


$
1,335,986
   (a)
The Company has entered into financing agreements (the “Agreements”) with a lender (“Primary Lender”).
  As of December 31, 2008, the Agreements include a Line of Credit note which provided for borrowings up to $6,000,000 to be used to provide working capital and expired on January 5, 2010.  Interest was charged at prime plus .50%.
  The Line of Credit note was modified on September 22, 2009 to increase the availability to $7,500,000, extend the expiration date to July 1, 2011, and change the interest rate to LIBOR plus 4%.
  F-13
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
   As of December 31, 2009, the Agreements include a Line of Credit note which provided for borrowings up to $7,500,000 to be used to provide working capital and was to expire on July 1, 2011.  Interest was charged at LIBOR plus 4.0%.  Under the terms of the agreement in place, the line available decreased to $6,000,000 at January 1, 2010; however, the Company’s borrowings exceeded this cap. This agreement was revised subsequent to year end; see below and Note 16.
 
 The Agreements also include certain financial covenants including a minimum fixed charge coverage ratio, a tangible net worth ratio, a debt to net worth ratio, and a consecutive quarterly net loss provision; cross-collateralization provisions; and a material adverse change clause which permits the financial institution to call its obligation if the Company fails to comply with covenants, as defined, or in the event of a material adverse change in the Company’s business.  Management does not anticipate any adverse changes in the next twelve months, however, there can be no assurances.
 
 The Company was not in compliance with the financial covenants as of December 31, 2009 and received a waiver.  Subsequent to year-end, the Company renegotiated the terms of its credit agreement with the bank.  The line expiration was changed from July 1, 2011 to August 31, 2010, and the interest rate was increased from LIBOR plus 4% to LIBOR plus 7%.  The availability was increased from $6,000,000 to $6,500,000.  Additionally, the bank assessed a $120,000 fee, is requiring the use of a consultant to monitor cash flow, and is requiring a $500,000 equity infusion by July 31, 2010.  The bank established new covenants for March 2010 and June 2010, and is requiring the Company seek replacement financing.
 
 The Company was not in compliance with the capital expenditure limit financial covenant and received a waiver at December 31, 2008.
 
 The Company has chosen to show the long-term debt as current based on the revised expiration date with the lender and the requirement to seek replacement financing.
  The Agreements are collateralized by all present and future right, title and interest in all of the personal property of the Company including, but not limited to, all accounts receivable, inventory and equipment.  This collateral has a carrying value at December 31, 2009 as follows:
  Accounts Receivable, net of Allowance for Doubtful Accounts


10,251,155Inventory


343,047Equipment, net of Accumulated Depreciation


2,602,00713,196,209
  The Agreements also include a Term Loan agreement which is due in monthly principal installment payments of $24,848 plus interest at a rate of prime plus .75%, hedged by an Interest Rate Swap Transaction.
  In January 2005, the Company entered into the Interest Rate Swap with its Primary Lender to hedge against rising interest rates on the floating rate Term Loan debt.  The liability being hedged is the variability in cash flows related to fluctuations in interest payments made.  The fluctuation in interest rates exposes the Company to the risk of higher interest expense.  The purpose of the Swap Agreement is to limit the Company’s exposure to rising interest rates during the term of the floating rate Term Loan noted above.  The swap has been designated as a cash flow hedge.
 
  F-14
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  The interest rate swap hedge instrument fixes the interest rate on the Term Loan at 7.8%, matures on February 1, 2012, and has a notional amount that remains equal to the principal balance on the Term Loan. The Term Loan bears interest at prime plus 0.75%, and the swap agreement trades the floating rate portion of the Term Loan for a fixed 7.05% rate. The difference between the prime rate, as periodically adjusted, and the interest rate swap rate are settled monthly as outlined in the agreement. This derivative instrument effectively changed the Company’s interest rate exposure on this variable rate debt from 4.0% to 7.8% in 2009, and 6.4% to 7.8% in 2008. The Mark to Market valuation, representing the net present value of the expected cash flow from the Interest Rate Swap, is a liability of $23,861 and $48,665 at December 31, 2009 and 2008, respectively. The Company made additional payments to settle the Interest Rate SWAP of $30,828 and $17,828 for the years ended December 31, 2009 and 2008, respectively, which were recorded as a component of interest expense. Additionally, the Company expects to reclassify approximately $12,000 of deferred net losses on the swap arrangement to interest expense in the next twelve months. See further disclosures with respect to the fair value of this arrangement in Note 12.
 
 Interest paid amounted to approximately $309,000, $450,000, and $670,000 in the years ended December 31, 2009, 2008 and 2007, respectively.
 
 All scheduled principal payments on long-term debt for the next five years have been classified as current based on the revised expiration date with the lender discussed above.
 
 At December 31, 2009, the Company has outstanding commitments in the form of standby letters of credit in the amount of approximately $150,000 securing various agreements.
 
  9.    Operating Lease Obligations
  Office facilities and various field equipment are leased under noncancelable operating leases expiring at various dates through 2014.  Rent expense incurred under operating leases amounted to approximately $1,033,000, $1,056,000, and $875,000 in 2009, 2008, and 2007, respectively.
  The Company entered into a sublease agreement in 2009 for one of their facilities on a month to month basis at $1,437 per month.  The total amount received under the sublease agreement was approximately $4,600 in 2009, including utility charges.
  Future minimum lease payments under noncancelable operating leases are as follows:
  
 2010

$
672,4212011


526,9552012


343,6782013


209,2652014


121,900$
1,874,219
  The Company is currently evaluating purchasing a building to replace a rented facility.
  
  F-15
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  10.
Income Taxes
  The following summarizes the income tax (benefit) expense at December 31, 2009, 2008 and 2007:
  2009


2008


2007Current:Federal

$
11,605


$
1,210


$
-State


12,000



16,619



7,45523,605



17,829



7,455Deferred


(401,400
)


(39,100
)


(53,500
)$
(377,795
)

$
(21,271
)

$
(46,045
)
 
  The deferred tax expense (benefit) recognized in 2009, 2008 and 2007 represents the effect of changes in temporary differences and net operating loss carryforwards.
 
 The deferred tax expense (benefit) resulting from the utilization of net operating loss carrryfowards was $(993,100), $558,249, and $(317,415) for the years ended December 31, 2009, 2008 and 2007, respectively.
  A reconciliation of the statutory federal income tax rate with the Company’s effective income tax rate was as follows:
 
 Year ended December 31,2009


2008


2007Amount


Percent


Amount


Percent


Amount


PercentTaxes at Federal  Statutory Rate

$
(769,313
)


34.0
%

$
215,442



34.0
%

$
(153,550
)


34.0
%State Taxes Net of Federal Tax Expense


(119,922
)


5.3
%


33,457



5.3
%


(23,845
)


5.3
%Increase (decrease) in Valuation Allowance


500,000



-22.1
%


(350,000
)


-55.2
%


150,000



-33.2
%Non-deductible Expenses


13,939



-0.6
%


17,883



2.8
%


12,249



-2.7
%Tax Stock Option Expense


-



0.0
%


-



0.0
%


(42,010
)


9.3
%Other


(2,499
)


0.1
%


61,947



9.8
%


11,112



-2.5
%$
(377,795
)


16.7
%

$
(21,271
)


-3.4
%

$
(46,045
)


10.2
%
 
 Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
 
  F-16
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2009 and 2008 are as follows:
  2009


2008Deferred tax liabilities:Property and equipment

$
(389,900
)

$
(510,500
)Deferred tax assets:Net operating loss carryforward


2,716,400



1,723,300Accounts receivable reserves


263,500



155,700Accrued expenses


75,400



395,500Interest rate swap liability


9,700



19,7003,065,000



2,294,200Net Deferred tax asset


2,675,100



1,783,700Valuation allowance for deferred assets


(800,000
)


(300,000
)Net deferred tax asset, net of valuation allowance

$
1,875,100


$
1,483,700
 
 As of December 31, 2009, the Company has federal net operating loss (“NOL”) carryforwards of approximately $7,000,000, which expire at various times beginning in 2011 and through the year ending December 31, 2029 as follows:
 2011
$     1,149,4002012
1,148,6002018
1,482,900Post 2020
3,184,100$     6,965,000
 
 The Company will establish a valuation allowance if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessments of realizable deferred tax assets. The valuation allowance as of December 31, 2009 and December 31, 2008 was related to the portion of the net operating losses that based on taxable income projections may expire before being utilized. The net change in the total valuation allowance for the years ended December 31, 2009 and December 31, 2008, was an increase of $500,000 and a decrease of $350,000, respectively. The valuation allowance was increased during the year ended December 31, 2009 as the Company did not utilize a portion of the NOL as planned during the year and future income projections were reduced, resulting in additional projected expiration of amounts expiring through 2012.  The valuation allowance was decreased during the year ended December 31, 2008 as a result of taxable income for the year that utilized a large portion of the NOL due to expire in upcoming years.  Management believes that it is more likely than not that the Company will return to profitability and make use of the net operating loss carryforwards expiring through 2018 and post 2020
 
 Income taxes and franchise taxes paid were approximately $12,000, $14,000, and $7,000 in the year ended December 31, 2009, 2008, and 2007, respectively. There are no taxes currently payable at December 31, 2009.  The Company received refunds for certain tax credits of $0, $16,790, and $1,385 in 2009, 2008, and 2007 respectively.  Interest expense and penalties on tax payments are included in income tax expense in the period recognized.
 
 
 
 
  F-17
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  11.
Employee Benefit Plan
  The Company maintains a defined contribution employee retirement plan (“Retirement Plan”) which covers substantially all employees.  The Retirement Plan is funded by voluntary employee contributions which are matched by the Company at a designated percentage, and additional contributions by the Company at the discretion of the Board of Directors.  Matching contributions made by the Company to the Retirement Plan were approximately $30,000, $28,000, and $33,000 in the years ended December 31, 2009, 2008, and 2007 respectively.  The Company did not make discretionary contributions to the Retirement Plan in the years ended December 31, 2009, 2008 and 2007.
  
  12.
Fair Values of Assets and Liabilities
   On January 1, 2009, we adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on Fair Value Measurements which defines fair value as the exchange price that would be received for an asset or the exit price to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. This guidance also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.
  The Company has recorded its interest rate swap transaction at fair value, resulting in a liability of $23,861 and $48,665 as of December 31, 2009 and December 31, 2008, respectively.  The interest rate swap arrangement is not exchange traded and quoted market prices are not readily available. The fair value of the arrangement is derived by the issuing entity using pricing models that use primarily market observable inputs, such as interest rate yield curves and credit curves. The Company classifies this within Level 3 of the valuation hierarchy.  The impact on the derivative liabilities for the Company and the counterparties’ non-performance risk to the derivative trades is considered when measuring the fair value of derivative liabilities.
  During 2009, the Company re-evaluated the observability of the inputs for the fair value of the interest rate swap it found that the inputs are not observable and as such, they have moved the classification of their liability from Level 2 to Level 3.  The following table provides a summary of changes in fair value of the Company's Level 3 liability, as well as the portion of gains and losses included in income attributable to unrealized gains or losses that relate to those assets held at December 31, 2009:
  Interest Rate SWAP ObligationBalance, beginning of year

$
-Transfer into level 3 from level 2


(48,665
)Unrealized holding gain (loss) on future value of the interest rate swapagreement, a derivative financial instrument, arising during the period


(6,024
)Reclassification adjustment for realized (gains) losses on an interestrate swap, included in net income during the period


30,828Balance, end of year

$
(23,861
)
 
  F-18
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  13.    Stock Option Plan
   The 2002 Omnibus Plan (“Omnibus Plan”) maintained by the Company is intended to promote the growth and general prosperity of the Company by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees.  Awards granted under the Omnibus Plan may be (a) Stock Options which may be designated as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options (“NQSO’s) not intended to so qualify; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; or (e) other forms of stock-based incentive awards. The shares of stock with respect to which the Awards may be granted shall be the common stock, par value at $0.01, of the Company (“Common Stock").  Shares delivered upon exercise of the Awards, at the election of the Board of Directors of the Company, may be stock that is authorized but previously unissued or stock reacquired by the Company, or both. The maximum number of shares with respect to which the Awards may be granted under the Omnibus Plan shall not exceed 1,000,000 shares of Common Stock; provided, however, that such number of shares of Common Stock may also be subject to adjustment, from time to time, at the discretion of the Board of Directors of the Company.These Awards generally vest over a three-year period, and have contractual terms of 10 years. The Company did not issue any grants during the year ended December 31, 2007, 2008 or 2009.
 
 Stock options are granted at the fair market value of the stock on the date of grant. The Company uses the Black-Scholes-Merton option pricing model to value its grants, which requires the input of various assumptions. These assumptions include expected term of the options, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that will be forfeited prior to exercise. Compensation cost is measured based on the grant-date fair value of the award, and is recorded over the vesting period for those options expected to vest.
  The Company did not issue any awards during the periods ended December 31, 2009 and December 31, 2008.  All compensation cost related to vesting option awards have been recognized; accordingly, no compensation cost was recorded for 2009 or 2008. The Company recorded compensation cost of $68,613 for the periods ended December 31, 2007. The tax benefit for these costs was approximately $27,000 for the periods ended December 31, 2007.
 
 The following table summarizes changes in the status of outstanding options:
 
 Shares


Weighted Average Exercise PriceOutstanding at January 1, 2009


316,008


$
0.28Forfeited


(30,667
)

$
0.26Outstanding at December 31, 2009


285,341


$
0.28Exercisable at December 31, 2009


285,341


$
0.28
  
 The Company received $200 during 2008 for exercise of stock options, and realized a $267 tax benefit for the exercise. The intrinsic value of the exercised options was $667.
 
  F-19
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  The remaining weighted average contractual life of options outstanding at December 31, 2009 is approximately 4.3 years, and the aggregate intrinsic value of options outstanding at December 31, 2009 is approximately $11,400.
 
 14.
Commitment and Contingencies
  The Company is subject to various federal, state and local regulations relating to environmental matters, including laws which require the investigation and, in some cases, remediation of environmental contamination.  The Company's policy is to accrue and charge to operations environmental investigation and remediation expenses when it is probable that a liability has been incurred and an amount is reasonably estimable.
  The Company received a $155,000 payment from a customer who subsequently filed bankruptcy.  The customer is seeking repayment claiming the payment was made during the 90 days prior to filing bankruptcy as a preferential payment.  The Company maintains the payment was received in the ordinary course of business and it should not be consider a preference item.  Accordingly, the Company has not recorded a liability for this matter at December 31, 2009.
  The Company is a party to various proceedings arising from the normal course of business.  Based on information currently available, management believes adverse decisions relating to litigation and contingencies in the aggregate would not materially affect the Company's results of operations, cash flows or financial condition.
 
 15.    Two-Year Selected Quarterly Financial Data (Unaudited)
  Year Ended December 31, 2009Quarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31


June 30


September 30


December 31Project billings

$
5,737,630


$
8,887,741


$
9,606,999


$
11,791,532Gross margin


1,234,758



2,099,488



1,294,078


$
945,547Net income (loss)


(393,445
)


(81,143
)


(360,434
)

$
(1,049,868
)Net income (loss) per sharebasic

$
(0.03
)

$
(0.01
)

$
(0.03
)

$
(0.09
)diluted

$
(0.03
)

$
(0.01
)

$
(0.03
)

$
(0.09
)
  The Company recorded a fourth quarter adjustment based on a worker’s compensation audit reducing selling general and administrative expense by $112,000.
  The Company reduced the sales & use tax accrual in the fourth quarter by $75,000 to adjust the liability based on the settlement of a sales tax audit.  This is recorded in project costs.
  The Company made adjustments to several projects in the fourth quarter reducing earned revenue by approximately $1,032,000.  This is recorded in as a reduction of project billings.
  The Company recorded an adjustment of approximately $200,000 of bad debt expense in the fourth quarter to provide sufficient allowance for doubtful accounts.
  The Company increased the valuation allowance for the NOL carryforward in the fourth quarter resulting in $500,000 reduction in deferred tax benefit.
  The Company restated the quarter ended June 30, 2009 to correct an overstatement of accounts receivable of $287,000 and to correct errors in the calculation of earned revenue on one
   F-20
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
  uncompleted projects resulting in a reduction of project billing of $60,000.  The Company also restated the quarter ended September 30, 2009 to correct an overstatement of accounts receivable of $287,000 and to correct errors in the calculation of earned revenue on four uncompleted projects resulting in a reduction of project billing of $218,000.  The deferred tax asset was increased by $136,000 and $220,000 for the quarter ended June 30, 2009 and September 30, 2009, respectively.
  Year Ended December 31, 2008Quarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31


June 30


September 30


December 31Project billings

$
7,326,263


$
7,422,275


$
10,606,146


$
11,277,592Gross margin


2,106,095



2,263,707



2,502,806


$
1,700,088Net income (loss)


(52,070
)


200,453



223,343


$
283,201Net income (loss) per sharebasic

$
-


$
0.02


$
0.02


$
0.02diluted

$
-


$
0.02


$
0.02


$
0.02
  Year Ended December 31, 2007Quarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31


June 30


September 30


December 31Project billings

$
7,455,990


$
8,994,960


$
8,109,003


$
7,915,426Gross margin


1,608,760



1,782,642



2,312,940


$
2,271,448Net income (loss)


(175,626
)


(252,507
)


147,205


$
(124,646
)Net income (loss) per sharebasic

$
(0.02
)

$
(0.02
)

$
0.01


$
(0.01
)diluted

$
(0.01
)

$
(0.02
)

$
0.01


$
(0.01
)
  16.  Subsequent Events
  Subsequent to year end as a result of financial covenant violations at December 31, 2009, the bank revised the terms of their financing agreement.  The line expiration was changed from July 1, 2011 to August 31, 2010, and the interest rate was increased from LIBOR plus 4% to LIBOR plus 7%.  Additionally, the bank assessed a $120,000 fee, is requiring the use of a consultant to monitor cash flow, and is requiring a $500,000 equity infusion by July 31, 2010.  The bank established new covenants for March 2010 and June 2010, and is requiring the Company seek replacement financing.
  On April 30, 2010, the Company determined that based on an agreement with a customer that was not properly accounted for, the accounts receivable recorded at June 30, and September 30, 2009 were overstated by $287,000.  Additionally, costs on uncompleted projects applicable to future billings were overstated by approximately $60,000 and $245,000 at June 30, 2009 and September 30, 2009.  Billings in excess of costs and estimated profit on uncompleted projects was understated by approximately $34,000 at September 30, 2009.  As a result, the Company restated these quarterly financial statements.


F-21











SIGNATURES








Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





OP-TECH Environmental Services, Inc.


(Registrant)





By:/s/ Charles B. Morgan


Charles B. Morgan


Chief Executive Officer





May 14, 2010





Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 14th day of May 2010.





/s/ Robert J. Berger
Director and Co-Chairman of the BoardRobert J. Berger/s/ Richard Messina
Director and Co-Chairman of the BoardRichard Messina/s/ Richard L. Elander
DirectorRichard L. Elander/s/ Richard Jacobson
DirectorRichard Jacobson/s/ Steven A. Sanders
DirectorSteven A. Sanders/s/ George W. Lee, Jr
DirectorGeorge W. Lee Jr./s/ Charles B. Morgan
Chief Executive OfficerCharles B. Morgan/s/ Jon S. Verbeck
Chief Financial Officer and TreasurerJon S. Verbeck