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, 2010





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 or 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: $4,059,726





Indicate the number of shares outstanding of each of the Company’s classes of common stock, as of March 21, 2011.  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.





































































































1


ITEM 1. BUSINESS


General





OP-TECH Environmental Services, Inc. and Subsidiaries (the “Company”), a Delaware corporation headquartered in East 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 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.





2








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





3





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 substantial 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.








4








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.





5








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 2010, 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, 2010, 2009, and 2008, was Environmental Remediation services.  Environmental Remediation services accounted for 39%, 38%, and 44% of the Company’s revenues for the years ended December 31, 2010, 2009, and 2008, respectively.  For the past three fiscal years, all of the Company’s revenues were generated from customers in the United States.





During 2010, the Company had project revenue of approximately $8,536,000 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.  While the Company maintains its position on the spill response contract, it relinquished its prime position in the remediation contract on October 1, 2010.  This position on the remediation contract was relinquished due to a poor return on investment with significant overhead requirements and reduced overall spending by the New York State Department of Environmental Conservation.





6




Insurance and Bonding





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 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.





In connection with the business, the Company may be required to provide various types of surety bonds that provide an additional measure of security for the Companies performance under certain public and private sector contracts. The Company’s ability to obtain surety bonds depends upon capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our contract backlog that we have currently bonded and their current underwriting standards, which may change from time to time. The capacity of the surety market is subject to market-based fluctuations driven primarily by the level of surety industry losses and the degree of surety market consolidation. When the surety market capacity shrinks it results in higher premiums and increased difficulty obtaining bonding, in particular for larger, more complex projects throughout the market. In order to help mitigate this risk, the Company employs a co-surety structure involving three sureties. Although the Company does not believe that fluctuations in surety market capacity have significantly affected the ability to grow the business, there is no assurance that it will not significantly affect the ability to obtain new contracts in the future.




Employees





As of March 21, 2011, the Company had a total of approximately 142 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 $52,496 plus utilities.  The Company has a purchase option on a building and made deposits of approximately $49,000 toward this potential purchase.





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.  The Company also leases and rents equipment as needed.




ITEM 3. LEGAL PROCEEDINGS




The Company had an accrued liability of $450,000 at December 31, 2008.  The liability was 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


Low31-Mar-09

$
0.55


$
0.1430-Jun-09

$
0.50


$
0.3030-Sep-09

$
0.50


$
0.5031-Dec-09

$
0.50


$
0.2131-Mar-10

$
0.45


$
0.2030-Jun-10

$
0.50


$
0.1830-Sep-10

$
0.15


$
0.0731-Dec-10

$
0.09


$
0.07First quarter through March 21, 2011

$
0.15


$
0.07





7




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





(b)
At March 21, 2011, 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


275,340


$
0.27



292,004Equity compensation plans not approved by security holders


-



-



-Total


275,340


$
0.27



292,004





8




ITEM 6. SELECTED FINANCIAL DATA





Statement of Operations Data


Year Ended December 31,





2010


2009


2008


2007


2006Project Billings and Services

$
46,186,043


$
36,023,901


$
36,632,276


$
32,483,687


$
35,069,989Net Income (loss)


786,271


$
(1,884,890
)

$
654,927


$
(405,574
)

$
207,973Net Income (loss) per Share-Basic

$
.07


$
(.16
)

$
.05


$
(.03
)

$
.02-Diluted

$
.03


$
(.16
)

$
.05


$
(.03
)

$
.02







Balance Sheet Data


As of December 31,





2010


2009


2008


2007


2006Total Assets

$
17,311,318


$
18,113,208


$
17,149,598


$
16,254,072


$
18,470,167Long-Term Obligations

$
2,684,500



-


$
6,249,748


$
6,733,952


$
7,859,741Total Liabilities

$
14,651,118


$
16,536,095


$
13,702,400


$
13,439,236


$
15,305,884Shareholders’ Equity

$
2,660,200


$
1,577,113


$
3,447,198


$
2,814,836


$
3,164,283




















9





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS


EXECUTIVE LEVEL OVERVIEW





The Company 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, hundreds of smaller private entities and numerous federal, state and local government agencies.





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 2010, the Company experienced the excellent results that we had forecast, while addressing the difficulties from the previous year.





1.
Regular, recurring, and legacy work returned to improved revenue levels as our industrial clients moved forward from the recession and the Company’s volume associated with this work improved as a portion of the Company’s revenue.





2.
The Company continues to experience significant success in acquiring new projects and clients.  This progress, however, was suppressed in 2010 by significant constraints presented by our present banking relationship.  In addition to bank lending restrictions, the Company’s progress was restricted by the Company’s project surety bonding capacity.





Management believes the successes realized in 2010, while significantly improved from 2009, are still less than what can be achieved.  The Company recently executed a commitment letter with a new lender to replace our existing lender.  Management believes an improved financing package coupled with the Company’s surety bonding program will yield very successful results for 2011.














LIQUIDITY AND CAPITAL RESOURCES





At December 31, 2010, the Company had cash and cash equivalents of $646,560 as compared to $26,845 at December 31, 2009.





At December 31, 2010, the Company had working capital of $1,429,017 compared to negative working capital of $2,642,966 at December 31, 2009.  The Company had a current ratio of approximately 1.12 to 1 and .84 to 1 at the end of 2010 and at the end of 2009, respectively.





Cash provided by operating activities during 2010 was $1,654,988 compared to $594,479during 2009.  The cash provided by operating activities in 2010 was mainly attributable to the net income for the year and a decrease in cost on uncompleted projects applicable to future billing offset partially by a decrease in billings in excess of costs and profit on uncompleted projects.





The Company’s net cash used in investing activities of $171,531 during 2010 was attributable to the purchase of various field and office equipment and a deposit made on the purchase of a building compared to $241,759 of equipment purchases made during 2009.





Cash used in financing activities of $863,742in 2010 was primarily due to the pay downs of debt.  The Company also issued convertible notes of $1,617,000 during 2010.  The proceeds were used to reduce debt and current liabilities.





10








The Company’s bank agreement expired on August 31, 2010 and was not renewed.  The Company executed a commitment letter with a new lender on March 31, 2011  The new loan agreement will provide for borrowings up to $5,000,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later to be used to provide working capital.  The agreement will be renewed annually with interest charged at LIBOR plus 3.5%.  The agreement will also provide a term loan of $3,000,000 due in monthly installments of $50,000 plus interest at LIBOR plus 3.5%





The working capital above is based on the expected refinancing.  See further discussion in Note 8 of the consolidated financial statements.





As of December 31, 2010, borrowing against the revolving loan aggregated $4,140,987.During 2010, 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 7.92%.







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 close on the commitment letter with the new lender may affect future operating results.





Fluctuations in surety market capacity can significantly affect the ability to grow the business and there are no assurances that it will not significantly affect the ability to obtain new contracts in the future.








EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





In the normal course of business, Management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting body to determine the potential impact they may have on our Consolidated Financial Statements. Based upon this review, Management does not expect any of the recently issued accounting pronouncements, which have not already been adopted by the Company, to have a material impact on our Consolidated Financial Statements.








OFF BALANCE SHEET ARRANGEMENTS





The Company had no off balance sheet arrangements at December 31, 2010 or December 31, 2009 that require disclosure under this item.





11








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.








2010 COMPARED TO 2009





Revenues





During the year ended December 31, 2010, the Company’s revenues increased 27.8% to $46,036,043 as compared to $36,023,901 for the year ended December 31, 2009.





When comparing 2010 to 2009, the increase in project revenue was attributed to many large project awards in 2009 with start dates in 2010 and the successful award of several larger projects completed in 2010.





12








Project Costs and Gross Margin





Project costs for the year ended December 31, 2010 increased 29.2% to $37,075,811 from $28,690,082 for the year ended December 31, 2009.  Project costs as a percentage of revenues were 80.5% for the year ended December 31, 2010, compared to 79.6% for the year ended December 31, 2009.  The gross profit margin for the year ended December 31, 2010 was 19.5% compared to 20.4% for the year ended December 31, 2009.  Gross profit in dollars increased 22.2% to $8,960,811 from $7,333,819 in 2009.  The decrease in gross profit margin is attributed to several larger projects bid at lower margins decreasing the average gross profit margin 0.9%.





Project costs from St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $2,316,000 in 2010 and $1,301,000 in 2009.








Selling, General, and Administrative Expenses





During the year ended December 31, 2010, selling, general, and administrative (“SG&A”) expenses decreased 13.0% to $8,110,128 compared to $9,311,450 for the previous year.





SG&A expenses as a percentage of revenue decreased to 17.6% for the year ended December 31, 2010 from 25.8% for the year ended December 31, 2009.





When comparing 2010 to 2009, the decrease in 2010 operating expenses is primarily attributed to the following:


·
Payroll and related expenses decreased 7.8% to $4,406,783 from $4,779,125 in 2009.  The decrease is related to reductions in staff and related employee benefit costs.


·
Professional services decreased 14.2% to $814,689 from $949,844 in 2009.  The decrease is primarily due to a reduction in contracted human resources services and accounts receivable collections services.


·
Other expense decreased 63.1% to $352,956 from $957,768 primarily as a result of the decrease in bad debt expense of approximately $546,000.








Operating Income





As a result of the factors discussed above, for the year ended December 31, 2010, the Company reported operating income of $860,104 compared to operating loss of ($1,977,631) for the previous year.





Interest Expense





Interest expense increased 76.3% to $545,549 in 2010 compared to $309,442 in 2009.  The increase in interest expense is due to the increase in interest rates in 2010 related to the extension agreement, the $120,000 extension fee assessed, and the interest expense and discount amortization related to the convertible notes issued during the year.





Net Income (Loss) Before Income Taxes





Net income before income taxes amounted to $410,842 in 2010 compared to a net loss before income taxes of ($2,262,685) in 2009.








Income Tax Expense





The Company recorded a net income tax benefit of $375,429 in 2010 compared to an income tax benefit of $377,795 in 2009.  The benefit in 2010 is due to a $550,000 reduction in the valuation allowance for deferred tax assets.





13








Net Income (Loss)





Net income for the year ended December 31, 2010 was $786,271 or $0.07 per share basic and $0.03 per share diluted compared to a net loss or ($1,844,890) or ($0.16) per share basic and diluted for the year ended December 31, 2009.








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 hours remained consistent at 63%.











2009 COMPARED TO 2008





Revenues





During the year ended December 31, 2009, the Company’s revenues decreased 1.7% to $36,023,901 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 7.0% to $28,690,082 from $26,805,462 for the year ended December 31, 2008.  Project costs as a percentage of revenues were 79.6% for the year ended December 31, 2009, compared to 73.2% for the year ended December 31, 2008.  The gross profit margin for the year ended December 31, 2009 was 20.4% compared to 26.8% for the year ended December 31, 2008.  Gross profit in dollars decreased 25% to $7,333,819 from $9,826,814 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 6.2% to $9,311,450 compared to $8,768,931 for the previous year.





SG&A expenses as a percentage of revenue increased to 25.8% for the year ended December 31, 2009 from 23.8% for the year ended December 31, 2008.





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


·
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 $489,160 primarily as a result of the increase in bad debt expense.





14











Operating Income





As a result of the factors discussed above, for the year ended December 31, 2009, the Company reported an operating loss of ($1,977,631) compared to operating income of $1,057,883 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.











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%.





15





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, 2010, including derivative and other rate sensitive instruments, a one percent change in interest rates would increase or decrease interest expense by approximately $50,000 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.

















16




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, 2010. 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 weakness in our internal control over financial reporting as of December 31, 2010.  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.
 
 This control deficiency 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, 2010 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 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, 2010, 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 upon that evaluation, we concluded that OP-TECH’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in OP-TECH’s periodic filings under the Exchange Act is accumulated and communicated to us to allow timely decisions regarding required disclosures, and such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.








ITEM 9b.  OTHER INFORMATION





None.








17





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 19, 2010 for a term of one year.





Each director has served continuously since he was first elected.





The Board of Directors held three 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 (64)

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 served as Vice Chairman of Beacon Federal Bancorp, Inc. through July 2010.Richard Messina (48)

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.Richard L. Elander (69)

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 (65)

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 T/c Power Management, 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 he is a director at Trustee, American Academy of Dramatic Arts.





George W. Lee, Jr. (62)

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 (47)

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.








18








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 five (5) of the Company’s six (6) 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 twenty one percent (21%) 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. George Lee and Richard Elander. The Committee operates under a written charter adopted by the Board of Directors.  The Committee held three meetings during the year ended December 31, 2010.  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.





19








The Committee recommended to the Board of Directors the appointment of Dannible & McKee, LLP as the Company’s independent accountants for the year 2010, 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, 2010 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 2010, 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, 2010.  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, 2010 be included in the Annual Report on form 10-K for 2010.  This report is provided by the following independent directors, who comprise the committee:





George W. Lee, Jr. Chairman


Richard L. Elander











20








EXECUTIVE OFFICERS OF THE COMPANY





Charles Morgan (57)

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 (50)

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, 2010, our directors, officers and 10% holders complied with the filing requirements under Section 16(a) of the Exchange Act.











21








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 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.







22




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 December 31, 2012.




The Company established a bonus pool in 2010 for Mr. Morgan, Mr. Piger, the Vice President and other management employees of 6.25% of the aggregate consideration if seventy-five percent (75%) of the common stock or assets of the Company is sold.




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 and the compensation of the other executives is reasonable and appropriate.





23








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
2010

$
197,000


$
0


$
0


$
0


$
0


$
35,458


$
232,458Chief Executive Officer
2009

$
197,000


$
35,000


$
0


$
0


$
0


$
41,422


$
273,422Harold C. Piger
2010

$
112,006


$
0


$
0


$
0


$
0


$
2,154


$
114,160Senior Vice President
2009

$
112,796


$
25,000


$
0


$
0


$
0


$
0


$
137,796Jon S. Verbeck
2010

$
120,000


$
0


$
0


$
0


$
0


$
0


$
120,000Chief Financial Officer
2009

$
120,000


$
15,000


$
0


$
0


$
0


$
0


$
135,000




(1) Mr. Morgan was paid $21,688 and $27,911 for unused vacation in 2010 and 2009, and $13,770 and $13,511 as other compensation in 2010 and 2009, respectively.  Mr. Piger was paid $2,154 for unused vacation in 2010.




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.





























24










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 2010:









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

$

9,000Steven 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 2010 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.







25














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 March 21, 2011 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 March 21, 2011, 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 of Beneficial Ownership(1)(2)


Percantange of Class (1)Richard Messina

40 Fulton Street, 19th Floor

New York, NY 10038


18,772,658
(2) (3) (5)


41
%Robert Berger

121 Shirley Rd.

Syracuse, NY 13224


9,604,999
(4)(5)


21
%Charles Morgan

Manlius, NY  13104


5,220,000
(5)


11
%Kevin Eldred

1007 Overlook Terrace

Cazenovia, NY 13035


2,495,000
(5)


5
%





(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 shareholders directly or beneficially own all shares except for Mr. Messina who owns 1,822,721 shares directly and 1,766,771 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.





(5)
Includes shares available upon conversion of notes payable as follow:



































26








The following table sets forth certain information furnished to the Company regarding the beneficial ownership of the Company’s common stock at March 21, 2011 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) (6)


Percentage of Class (4)Richard Messina (1)


18,772,658
(5)


41
%Robert J. Berger (1)


9,604,999



21
%Richard L. Elander (1)


21,624


<1%Steven A. Sanders (1)


578,552



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


1,903,333



4
%Richard Jacobson (1)


-0-



0
%Charles Morgan (2)


5,220,000



11
%Jon S. Verbeck (2)


5,000


<1%All Directors as a Group (6 persons)


30,881,166



67
%


(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, (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, (c) shares available upon conversion of notes payable.


(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.


(6)
Includes shares available upon conversion of notes payable:
































27








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 2010 was approximately $55,000.





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 $2,973,000 in 2010, which includes $120,000 paid for services of the CFO.  Services are provided as needed with no long-term commitment.  At December 31, 2010, the Company has an advance to St. Lawrence of approximately $102,000 which is recorded in prepaid expenses and other current assets.











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:




2010


2009Audit Fees

$
122,366


$
61,260Audit Related Fees

$
0


$
0Tax Fees

$
20,609


$
33,202




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 2010 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.  The audit committee pre-approves all audited and non-audit services in advance of service being provided.
































28








PART IV





ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,


(a)
Financial Statements





PageReport of Independent Accountants



F-2Consolidated Balance Sheets at December 31, 2010 and 2009

F-3Consolidated Statement of Operations for the years endedDecember 31, 2010, 2009, an 2008




F-4Consolidated Statements of Shareholders’ Equity and Comprehensive
F-5Consolidated Statements of Cash Flows for the years ended

December 31, 2010, 2009, and 2008

F-6Notes to Consolidated Financial Statements



F-7(b)
Exhibits10.1
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 Certification31.2
Acting PAO Certifications32.1
Section 1350 CEO Certifications32.2
Section 1350 Acting PAO Certifications* Incorporated by reference to previous filings


29
























OP-TECH Environmental




Services, Inc. and Subsidiaries




Consolidated Financial Statements




December 31, 2010 and 2009







































































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, 2010 and 2009, 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, 2010.  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, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.























/s/ Dannible & McKee, LLP


Syracuse, New York





April 1, 2011





F-2
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 December 31, 2010 and 2009




2010


2009AssetsCurrent assets:Cash (Note 4)

$
646,560


$
26,845Accounts receivable, net (Notes 1 and 5)


10,292,907



10,251,155Costs on uncompleted projects applicable to future billings (Note 1)


1,098,455



2,567,053Inventory (Note 1)


358,394



343,047Deferred tax asset (Note 11)


488,800



319,100Prepaid expenses and other current assets


510,519



385,929Total current assets


13,395,635



13,893,129Property and equipment, net (Note 6)


2,047,479



2,602,007Other long-term assets (Note 1)


93,304



62,072Deferred tax asset (Note 11)


1,774,900



1,556,000Total Assets

$
17,311,318


$
18,113,208Liabilities and Shareholders' EquityCurrent liabilities:Accounts payable

$
7,172,208


$
6,461,236Outstanding checks in excess of bank balance (Note 1)


-



1,045,720Billings in excess of costs and estimatedprofit on uncompleted contracts (Note 1)


342,152



1,101,406Accrued expenses and other current liabilities


588,314



1,319,753Income taxes payable (Note 11)


14,925



8,425Note payable to bank (Note 8)


3,242,205



5,073,196Obligation under interest rate swap agreement (Note 8 and 13)


8,345



23,861Current portion of long-term debt (Note 8)


598,469



1,502,498Total current liabilities


11,966,618



16,536,095Convertible notes payable (Note 9)


1,384,500



-Long-term debt (Note 8)


1,300,000



-Total liabilities


14,651,118



16,536,095Shareholders' equity:Common stock, par value $.01 per share; authorized 50,000,000 and20,000,000 shares; 11,940,372 shares issued and outstandingas of December 31, 2010 and 2009


119,404



119,404Additional paid-in capital


7,293,391



7,005,891Accumulated deficit (Note 15)


(4,747,751
)


(5,534,022
)Accumulated other comprehensive loss


(4,844
)


(14,160
)Shareholders' equity, net


2,660,200



1,577,113Total Liabilities and Shareholders' Equity

$
17,311,318


$
18,113,208




* Reclassified, see Note 1





The accompanying notes are an integral part of the consolidated financial statements.
 F-3
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
 Years Ended December 31, 2010, 2009 and 2008





2010



2009
*


2008
*Project billings and services

$
46,036,043


$
36,023,901


$
36,632,276Project costs


37,075,811



28,690,082



26,826,734Gross margin


8,960,232



7,333,819



9,805,542Payroll and related payroll taxes and benefits


4,406,783



4,779,125



4,645,164Office expense


692,733



747,621



761,435Occupancy expense


923,826



902,857



849,499Business insurance expense


498,577



471,217



506,123Professional services


814,689



949,844



777,313Equipment expenses, net of usage credit


410,564



503,018



600,940Other expenses


352,956



957,768



489,143Litigation reserve (Note 7)


-



-



104,3558,100,128



9,311,450



8,733,972Operating income (loss)


860,104



(1,977,631
)


1,071,570Other income (expense):Interest expense


(545,546
)


(309,442
)


(449,785
)Other, net


96,284



24,388



11,871(449,262
)


(285,054
)


(437,914
)Net income (loss) before income taxes


410,842



(2,262,685
)


633,656Income tax benefit (expense) (Note 11):Current


(19,371
)


(23,605
)


(17,829
)Deferred


394,800



401,400



39,100375,429



377,795



21,271Net income (loss)

$
786,271


$
(1,884,890
)

$
654,927Earnings (loss) per common share:Basic

$
0.07


$
(0.16
)

$
0.05Diluted

$
0.03


$
(0.16
)

$
0.05Weighted average shares outstanding:Basic


11,940,372



11,940,372



11,938,706Diluted


19,734,874



11,940,372



12,292,286





* Reclassified, see Note 1





The accompanying notes are an integral part of the consolidated financial statements.
 F-4
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Consolidated Statements of Shareholders’ Equity and Comprehensive Income
 Years Ended December 31, 2010, 2009 and 2008




AccumulatedAdditional





OtherCommon


Common


Paid-In


Accumulated


ComprehensiveShares


Stock


Capital


Deficit


Income


TotalBalance 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
)

$
1,577,113Warrants Extension










18,000











18,000Discount on Convertible Notes










269,500











269,500Other Comprehensive Income:Change in Fair Value of Cash Flow Hedgenet of tax effect of $(6,200)


-



-



-



-



9,316



9,316Net Income


-



-



-



786,271



-



786,271Total Comprehensive Income


-



-



-



-



-



795,587Balance at December 31, 2010


11,940,372


$
119,404


$
7,293,391


$
(4,747,751
)

$
(4,844
)

$
2,660,200


The accompanying notes are an integral part of the consolidated financial statements.
 F-5
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements




2010


2009


2008Operating activities:Net income (loss)

$
786,271


$
(1,884,890
)

$
654,927Adjustments to reconcile net income (loss) tonet cash provided by operating activities:Bad debt expense


181,786



727,958



264,516Depreciation and amortization


690,134



656,651



717,478Gain on sale of equipment


(13,320
)


-



-Warrant modification expense


18,000



-



-Amortization of discount on convertible notes


37,000



-



-Benefit from deferred income taxes


(394,800
)


(401,400
)


(39,100
)(Increase) decrease in operating assets andincrease (decrease) in operating liabilities:Accounts receivable


(223,538
)


(2,064,982
)


(823,367
)Costs on uncompleted projectsapplicable to future billings


1,468,598



257,746



(636,285
)Prepaid expenses, inventory and other assets, net


(139,937
)


(3,147
)


107,197Other long-term assets


18,015



42,165



(2,093
)Billings in excess of costs and estimated profiton uncompleted contracts


(759,254
)


622,169



(890,662
)Accrued litigation defense reserve


-



(450,000
)


104,355Accounts payable and other accrued expenses


(13,967
)


3,092,209



1,140,824Net cash provided by operating activities


1,654,988



594,479



597,790Investing activities:Purchases of property and equipment


(139,279
)


(226,759
)


(482,404
)Deposit on purchase of building


(49,247
)


(15,000
)


-Proceeds from the sale of equipment


16,995



-



-Net cash used in investing activities


(171,531
)


(241,759
)


(482,404
)Financing activities:Proceeds from issuance of common stock


-



-



200Increase (decrease) in outstanding checks in excess ofbank balance


(1,045,720
)


19,594



433,369Proeceeds from the issuance of convertible notes payable


1,617,000



-



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


7,195,835



16,753,768



15,500,078Principal payments on currentand long-term borrowings


(8,630,857
)


(17,179,240
)


(16,062,565
)Net cash used in financing activities


(863,742
)


(405,878
)


(128,918
)Increase (decrease) in cash and cash equivalents


619,715



(53,158
)


(13,532
)Cash and cash equivalents at beginning of year


26,845



80,003



93,535Cash and cash equivalents at end of year

$
646,560


$
26,845


$
80,003Non-cash items:Non-cash financing of insurance

$
562,628


$
538,397


$
566,043




The accompanying notes are an integral part of the consolidated financial statements.
 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 Consolidated 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 were 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 incurredbased 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, 2010 and 2009 accounts receivable are approximately $2,357,000 and $4,944,000, 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 for $128,000, and the company recorded a reduction in operating expenses of $75,000.




Concentration of Business Risk - Significant Customers




Sales to one customer amounted to approximately $8,536,000, $6,552,000, and $7,071,000, in 2010, 2009, and 2008, respectively.  Accounts receivable at December 31, 2010 and 2009, include $101,000 and $2,477,000 respectively, from this customer.The Company relinquished its prime position on a portion of this customer’s business during 2010 due to poor return on investment with a significant overhead requirement.




Sales to another customer amounted to approximately $3,876,000, $241,000, and $467,000in 2010, 2009, and 2008, respectively.  Accounts receivable at December 31, 2010 and 2009, include $1,995,000 and $23,000 respectively, from this customer.




Receivables and Credit Policies




Accounts receivable are unsecured customer obligations due under normal trade terms requiring payment generally within 30 days from the invoice date.  Larger projects contracts may have longer payment terms.  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.  The Company performs ongoing credit evaluations of customers and generally does not require collateral, although the law provides us the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers. 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.












F-8
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements





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.




Other Long-Term Assets




The Company classifies all deposits which are not expected to be refunded within a year a long-term assets.




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 approximates their fair value at December 31, 2010 and 2009.  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, 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 line of credit agreement expired on August 31, 2010.  The Company, therefore, needed to maintain an adequate cash balance to cover ordinary business cash needs and, as a result, there is no cash overdraft liability at December 31, 2010.




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.




The Company has reviewed its operations 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 2007.





Reclassifications





Certain amounts in the 2009 and 2008 statements of operations have been reclassified to conform with the presentation used in 2010.





Recently Adopted Accounting Guidance





In the normal course of business, Management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting body to determine the potential impact they may have on our Consolidated Financial Statements. Based upon this review, Management does not expect any of the recently issued accounting pronouncements, which have not already been adopted by the Company, to have a material impact on our Consolidated Financial Statements.





F-9
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements








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”) onShare-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 14 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, 11,940,372, and 11,938,706, for the years ended December 31, 2010, 2009, and 2008, respectively.  Diluted earnings per share includes the potentially dilutive effect of common stock issuable upon conversion of stock options, convertible notes, and warrants, using the treasury stock method.  For the years ended December 31, 2010, 2009, and 2008, 235,336, 765,341, and 177,000, 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 2013.





The convertible notes payable are for a term of two years, carry interest of 6% and are convertible into shares of common stock at the election of the holders at $0.06 per share and, as long as the average share price of the Company’s common stock on the Over-the-Counter Bulletin Board remains above $0.06, at the election of the Company at $0.06 per share.  Subsequent to year-end, there were convertible notes issued that would materially affect diluted earnings per share.  See further discussion at Note 9.




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 $2,668,000, $1,558,000, and $1,216,000, in 2010, 2009, and 2008, respectively.  St. Lawrence charges the Company 3% above its cost for these services.  The Company had a receivable from this related party of approximately $102,000 at December 31, 2010 and a payable to this related party of $292,000 at December 31, 2009 which are included in prepaid expense and other assets and other accrued expenses at December 31, 2010 and 2009, respectively in the consolidated balance sheets.





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 $55,000, $25,000, and $24,000, in 2010, 2009, and 2008, respectively.  The Company has a payable due to this related party of approximately $16,000 and $7,000 recorded in accounts payable at December 31, 2010 and 2009, respectively.





During 2010, the Company utilized personal credit cards for several senior executives and board members to finance company expenses on a temporary basis.  Amounts reimbursed to these individuals amounted to approximately $197,000 for the year ended December 31, 2010.








F-10
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements





4.      Cash





The Company’s line of credit agreement (Note 8) terminated on August 31, 2010 and, therefore, the Company needs to maintain adequate cash balances to cover ordinary business cash needs.   Prior to the expiration of the line of credit, the Company utilized a zero balance account and voluntarily applied all available cash in the operating account to pay down the line of credit each night.  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, 2010 and 2009 consists of:




2010


2009Accounts receivable, gross

$
9,166,882


$
10,134,953Retainage receivable


1,728,817



791,834Allowance for uncollectible receivables


(552,792
)


(625,632
)Allowance for sales credits


(50,000
)


(50,000
)Accounts receivable, net

$
10,292,907


$
10,251,155





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, 2010 and 2009 consist of:




2010


2009Furniture and fixtures

$
53,386


$
53,386Leasehold improvements


203,450



203,449Office machines


341,698



283,419Field equipment


7,362,709



7,323,9957,961,243



7,864,249Less: Accumulated depreciation


(5,913,764
)


(5,262,242
)$
2,047,479


$
2,602,007




Field equipment depreciation included in equipment expenses amounted to approximately $603,000, $596,000, and $675,000, for years endedDecember 31, 2010, 2009, and 2008, respectively. A portion of equipment expenses are allocated to project costs based on equipment use.  Depreciation expense for other property and equipment approximated $87,000, $61,000, and $42,000 for years endedDecember 31, 2010, 2009, and 2008, respectively and was included in operating expenses in the consolidated statement of operations.







F-11
 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 particularclaim 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, 2010 and 2009 consist of:




2010


2009Note payable to bank under line of credit, to be refinanced in 2011as explained below.

$
4,140,987


$
5,073,196Term Loan due in monthly installment payments of $24,848though January 2012 plus interest at prime plus .75%, hedgedby an interest rate swap, to be refinanced in 2011 as explainedbelow.


311,365



609,542Term Loans due in monthly installment payments throughAugust 2013 aggregating $19,443 plus interest rate atprime plus .75%, to be refinanced in 2011 as explained below.


397,935



631,255Equipment 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 $49,400and $67,400 at December 31, 2010 and 2009, respectively to berefinanced in 2011 as explained below.


59,710



80,785Insurance Financing Notes, due in monthly installment paymentsof $58,086 and $55,356 including interest at 3.47% and 6.1% atDecember 31, 2010 and 2009, respectively collateralized byassignment of unearned premiums.


230,677



164,395Equipment Notes, due in monthly installment payments throughJune 2010 aggregating $2,597 at December 31, 2009, includinginterest at rates ranging from 6.5% to 8.9%, collateralizedby equipment with a carrying value of approximately$189,000  at December 31, 2009.


-



16,521999,687



1,502,498Payment currently due on above debt


(772,416
)


(1,502,498
)$
227,271


$
-


As discussed below, the Company is in the final stages of refinancing its existing debt with a new financial institution.  Accordingly, the debt balances presented above have been reclassified to reflect the anticipated refinancing in April 2011 as permitted in accordance with Generally Accepted Accounting Principles.  See below for detail of the presentation changes.


F-12
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements




Total existing bank debt to be refinanced:Note payable to bank - current


4,140,987Term debt


769,010Balance to be refinanced


4,909,997Expected 2011 payments on new term debt


200,000Payments on existing debt through April 2011


167,792Expected 2011 payments of term debt


367,792Current note payable to bank


3,242,205Long-term debt based on refinancing


1,300,0004,909,997Expected 2011 payments of term debt


367,792Current payments on insurance financing notes


230,667Current portion of debt at December 31, 2010


598,459




The Company’s financing agreements (the “Agreements”) with a lender (“Primary Lender”) expired on August 31, 2010.  The Company expects to refinance the Agreements with another lender (“New Lender”) during 2011.





The expired agreement included a Line of Credit note that provided for borrowings up to $6,500,000 to be used to provide working capital.  Interest was charged at LIBOR plus 7.0%.  The line available decreased to $6,000,000 at January 1, 2010 and decreased to $4,140,987 in September 2010.  The average borrowings under the Line of Credit calculated using month-end balances were $4,636,133 and $5,248,733 for 2010 and 2000, respectively.  The weighted average interest rate was approximately 6.52% and 3.87% during 2010 and 2009, respectively.





The Company was not in compliance with the financial covenants as of December 31, 2009 and received a waiver.  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%.  Additionally, the bank assessed a $120,000 fee, is requiring the use of a consultant to monitor cash flow, and required $500,000 equity infusion by August 20, 2010.  The Company raised $1,617,000 as more fully explained in Note 9.  The extension fee is included in accrued expenses at December 31, 2010.  The bank established new covenants for March 2010 and June 2010, and  required the Company seek replacement financing.





The expired agreements were 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 had a carrying value at December 31, 2010 as follows:




Accounts Receivable, net of Allowance for Doubtful Accounts


10,292,907Inventory


358,394Equipment, net of Accumulated Depreciation


2,047,47912,698,780





F-13
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements







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.  See Note 13 for further disclosure pertaining to this Swap Agreement.





Interest paid amounted to approximately $335,000, $309,000, and $450,000, in the years ended December 31, 2010, 2009, and 2008, respectively.





At December 31, 2010, the Company has outstanding commitments in the form of standby letters of credit in the amount of approximately $50,000 securing various agreements.




The Company executed a commitment letter with New Lender on March 31, 2011.  The terms include a Line of Credit note which will provide for borrowings up to $5,000,000 based on eligible collateral to be used to provide working capital and is expected to be payable on demand.  Interest is expected to be LIBOR plus 3.5%.




The new terms also include a $3,000,000 term loan due in monthly installment payments of $50,000 plus interest at LIBOR plus 3.5%.  Of the total $3,000,000 term loan, only $1,500,000 has been considered in the debt presentation explained above as there will be participation from another bank from the remaining $1,500,000.  The terms of this participation are currently being negotiated and no commitment has been made.  Accordingly, the Company has reflected the long-term portion of the $1,500,000 committed term debt.  The Company fully expects to comply with all the requirements of the commitment and anticipates that the refinancing to close by April 15, 2010.





The commitment terms include certain financial covenants including a minimum fixed charge coverage ratio to be measured beginning in the fourth quarter 2011; subordination of the convertible notes payable; 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.




9.  Convertible Notes Payable




During the year, the Company entered into a series of Secured Loan Agreements with several individuals for the sale of secured convertible notes (the “Convertible Notes”) for an aggregate of $1,617,000 for proceeds of this amount.  These individuals represent members of executive management, members of the board of directors, and significant shareholders.  The Convertible Notes are for a term of two years, carry interest of 6% and are convertible into shares of common stock at the election of the holders of the Convertible Notes at $0.06 per share and, as long as the average share price of the Company’s common stock on the Over-the-Counter Bulletin Board remains above $0.06, at the election of the Company at $0.06 per share.  The Convertible Notes may be converted into 26,950,000 shares of common stock, or approximately 226% of current outstanding shares of common stock.  The issuance of the Convertible Notes does not represent a change of control as approximately 70% of the Convertible Notes were issued to shareholders of the Company that currently own approximately 46% of the Company’s outstanding share capital.
 
 Additionally, the Company amended the Articles of Incorporation to increase the authorized common shares from 20,000,000 to 50,000,000 shares to allow for the conversion of these securities.





F-14
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements





The Company also entered into a Security Agreement to secure payment and performance of its obligations under the Convertible Notes pursuant to which it granted the holders of the Convertible Notes a security interest in all of its assets.  The security granted will be subordinated to a security interest granted to the New Lender in connection with the loan commitment described in Note 8 (including any security interest that may be granted in connection with funds borrowed to pay amounts due under such loan) and any obligations to repay surety bonds issued in connection with services provided in the Company’s core business where the Company is the principal under the surety bond.The Company’s sole active subsidiary also guaranteed all amounts owed by the Company under the Convertible Notes.





The Company recorded $269,500 in debt discount related to the issuance of these convertible notes due to the beneficial conversion feature, which is shown as Additional Paid in Capital and reduction in the convertible notes payable.  The discount is based on the market value of the stock at the date of the note agreements which was $.07 per share.  Amortization expense related to these discounts was $37,000 for the year ended December 31, 2010 and is included in interest expense.  The remaining amortization period for the discount is 20 months for the first tranche of $1,332,000 and 24 months for second tranche of $285,000.  Interest expense recorded on these notes amounted to $63,640 for 2010 yielding an effective interest rate of 14.3%.  The unamortized discount was $232,500 at December 31, 2010.





In January 2011, the Company redeemed $20,000 of Convertible Notes and issued additional Convertible Notes of $403,000.  These additional Convertible Notes may be converted into 6,716,667 shares of common stock.  The Company recorded $67,167 in debt discounts in 2011 that will be amortized over two years.




10.    Operating Lease Obligations




Office facilities and various pieces of field equipment are leased under noncancelable operating leases expiring at various dates through 2014.  These leases do not include any contingent lease provision, concessions or other restrictions.  Rent expense incurred under these operating leases as well as other month to month rentals amounted to approximately $762,000, $1,033,000, and $1,056,000 in 2010, 2009, and 2008, 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 $27,000 in 2010 and $4,500 in 2009, including utility charges.




Future minimum lease payments under noncancelable operating leases are as follows:







The Company is currently evaluating purchasing a building to replace a rented facility and has made approximately $49,000 in deposits toward this potential purchase which are included as other long-term assets.




2011

$
568,7752012


385,4972013


230,1752014


121,900$
1,306,347





F-15
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements







11.
Income Taxes




The following summarizes the income tax (benefit) expense at December 31, 2010, 2009, and 2008:




2010


2009


2008Current:Federal

$
6,500


$
11,605


$
1,210State


12,871



12,000



16,61919,371



23,605



17,829Deferred


(394,800
)


(401,400
)


(39,100
)$
(375,429
)

$
(377,795
)

$
(21,271
)




The deferred tax expense (benefit) recognized in 2010, 2009, and 2008 represents the effect of changes in temporary differences and net operating loss carryforwards, along with related changes in the valuation allowance for deferred tax assets.





The deferred tax expense (benefit) resulting from the utilization of net operating loss carryfowards was $222,400, $(993,100), and $558,249 for the years ended December 31, 2010, 2009, and 2008, respectively.




A reconciliation of the statutory federal income tax rate with the Company’s effective income tax rate was as follows:
  Year ended December 31,2010


2009


2008Amount


Percent


Amount


Percent


Amount


PercentTaxes at Federal  Statutory Rate

$
139,686



34.0
%

$
(769,313
)


34.0
%

$
215,442



34.0
%State Taxes Net of Federal Tax Expense


21,775



5.3
%


(119,922
)


5.3
%


33,584



5.3
%Increase (Decrease) in Valuation Allowance


(550,000
)


-133.9
%


500,000



-22.1
%


(350,000
)


-55.2
%Non-deductible Expenses


18,614



4.5
%


13,939



-0.6
%


17,892



2.8
%Other


(5,504
)


-1.3
%


(2,499
)


0.1
%


61,947



9.8
%$
(375,429
)


-91.4
%

$
(377,795
)


16.7
%

$
(21,135
)


-3.3
%











F-16
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements





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.





Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2010 and 2009 are as follows:




2010


2009Deferred tax liabilities:Property and equipment

$
(296,800
)

$
(389,900
)Deferred tax assets:Net operating loss carryforward


2,494,100



2,716,400Accounts receivable reserves


235,100



263,500Accrued expenses


77,800



75,400Interest rate swap liability


3,500



9,7002,810,500



3,065,000Net deferred tax asset


2,513,700



2,675,100Valuation allowance for deferred tax assets


(250,000
)


(800,000
)Net deferred tax asset, net of valuation allowance

$
2,263,700


$
1,875,100


As of December 31, 2010, the Company has federal net operating loss (“NOL”) carryforwards of approximately $6,986,300, of which approximately $667,000 will be used to offset 2010 taxable income.  These 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


3,205,400$
6,986,300








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, 2010 and December 31, 2009 is 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, 2010 and December 31, 2009, was a decrease of $550,000 and an increase of $500,000, respectively. The valuation allowance was decreased during the year ended December 31, 2010 as a result of taxable income for the year that will utilized a large portion of the NOL due to expire in upcoming years.  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.  Management believes that it is more likely than not that the Company will continue profitability and make use of the net operating loss carryforwards expiring through 2018 and post 2020, however, has reserved approximately $250,000 due to amounts expiring in 2011 and 2012.





F-17
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements





Income taxes and franchise taxes paid were approximately $13,000, $12,000, and $14,000 in the year ended December 31, 2010, 2009, and 2008, respectively.  Taxes currently payable were approximately $15,000 at December 31, 2010.  The Company received refunds for certain tax credits of $16,790 in 2008.  Interest expense and penalties on tax payments are included in income tax expense in the period recognized.








12.
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 $42,000, $30,000, and $28,000 in the years ended December 31, 2010, 2009, and 2008 respectively.  The Company did not make discretionary contributions to the Retirement Plan in the years ended December 31, 2010, 2009, and 2008.









13.
Fair Values of Assets and Liabilities






On January 1, 2009, the Company adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) onFair 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 $8,345 and $23,861 as of December 31, 2010 and December 31, 2009, 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.





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 4.2% to 7.8% in 2010, and 4.0% to 7.8% in 2009. The Mark to Market valuation, representing the net present value of the expected cash flow from the Interest Rate Swap, is a liability of $8,345 and $23,861 at December 31, 2010 and 2009, respectively. The Company made additional payments to settle the Interest Rate SWAP of $19,635 and $30,828 for the years ended December 31, 2010 and 2009, respectively, which were recorded as a component of interest expense. Additionally, the Company expects to reclassify approximately $8,000 of deferred net losses on the swap arrangement to interest expense in the next twelve months.





F-18
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements







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, 2010:




Interest Rate Swap Obligation2010


2009Balance, beginning of year

$
(23,861
)

$
0Transfer into level 3 from level 2


-



(48,665
)Unrealized holding gain (loss) on future value of the interestrate swap agreement, a derivative financial instrument,arising during the period


(4,119
)


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


19,635



30,828Balance, end of year

$
(8,345
)

$
(23,861
)





14.    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 years ended December 31, 2008, 2009 or 2010.





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, 2010, 2009 and 2008.  All compensation cost related to vesting option awards have been recognized and no compensation cost was recorded for 2010, 2009, and 2008.  The Company extended warrants in May 2010 and recorded $18,000 compensation expense in 2010.





F-19
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements








The following table summarizes changes in the status of outstanding options:




Shares


Weighted Average Exercise PriceOutstanding at January 1, 2010


285,341


$
0.28Forfeited


(10,001
)

$
0.40Outstanding at December 31, 2010


275,340


$
0.27Exercisable at December 31, 2010


275,340


$
0.27





The remaining weighted average contractual life of options outstanding at December 31, 2010 is approximately 3.3 years, and the aggregate intrinsic value of options outstanding at December 31, 2010 is approximately $400.





15.
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 settled a lawsuit for $450,000 in 2009.  There are two pending litigations arising from that suit.  The Company entered into an agreement to contribute 15% to any settlement of the actions, providing the Company deems the total proposed settlement reasonable.  The Company has not been notified of any potential settlements on this matter.  The Company has not recorded any liability at December 31, 2010 and 2009 as the ultimate outcome is not estimable as this time.




The Company was notified by the State of New York that the Company may be responsible for costs incurred to address a petroleum spill.  The Company is rigorously defending this matter and the outcome cannot be reasonably determined at this time.




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, 2010 or 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.  It is reasonably possible, however, that a change in estimate could occur within one year which may affect the Company's results of operations, cash flows or financial condition.





F-20
 OP-TECH Environmental Services, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements








16.    Three-Year Selected Quarterly Financial Data (Unaudited)




Year Ended December 31, 2010Quarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31


June 30


September 30


December 31Project billings

$
13,846,687


$
12,058,774


$
10,679,502


$
9,451,080Gross margin


2,294,849



2,789,901



2,391,464


$
1,484,018Net income (loss)


92,215



243,260



558,266


$
(107,470
)Net income (loss) per sharebasic

$
0.01


$
0.02


$
0.05


$
(0.01
)diluted

$
0.01


$
0.02


$
0.02


$
(0.01
)




The Company made adjustments to several projects in the fourth quarter reducing earned revenue by approximately $268,000.  This is recorded as a reduction of project billings and gross margin.




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


$
11,768,236Gross margin


1,234,758



2,099,488



1,294,078


$
2,763,841Net 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
)




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


17.    Subsequent Events






Subsequent to year end, the Company redeemed $20,000 in convertible notes and issued $403,000 of convertible notes.  See Note 9.  Also, subsequent to year end, the Company executed a commitment letter with a new lender to refinance the outstanding debt.  See Note 8.







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





April 1, 2011





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 April 1, 2011.





/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