OP TECH ENVIRONMENTAL SERVICES INC - FORM 10-Q

Attached files

file	filename
EX-31.1 - OP TECH ENVIRONMENTAL SERVICES INC	exhibit31-1.htm
EX-31.1 - OP TECH ENVIRONMENTAL SERVICES INC	exhibit32-1.htm
EX-32.2 - OP TECH ENVIRONMENTAL SERVICES INC	exhibit32-2.htm
EX-31.2 - OP TECH ENVIRONMENTAL SERVICES INC	exhibit31-2.htm

United States Securities and Exchange Commission

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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

For the transition period from to

Commission file number 0-19761

OP-TECH Environmental Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

91-1528142

(I.R.S. Employer Identification No.)

1 Adler Drive, E Syracuse, NY 13057

(Address of principal executive offices) (Zip Code)

(315) 437-2065

(Registrant's telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large Accelerated filer ___ Accelerated filer___ Non-accelerated filer ___ Small Reporting Company X

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files

Yes X or No ___

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (May 13, 2011) 11,940,372

OP-TECH Environmental Services, Inc. and Wholly-Owned Subsidiaries

INDEX

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements

	Consolidated Balance Sheets
	-March 31, 2011 (Unaudited) and December 31, 2010 (Audited)	2

	Consolidated Statements of Operations
	-Three months ended March 31, 2011 and March 31, 2010 (Unaudited)	3

	Consolidated Statements of Cash Flows
	-Three months ended March 31, 2011 and March 31, 2010 (Unaudited)	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	11

Item 4.	Controls and Procedures	11

PART II.	OTHER INFORMATION	12

	SIGNATURES	14

PART I - FINANCIAL INFORMATION

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

The Company is including the following cautionary statement in this Form 10-Q 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-Q, 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 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.



OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS



	(UNAUDITED)
	March 31,			December 31,
	2011			2010

ASSETS

Current Assets:
Cash	$	164,887		$	646,560
Accounts receivable (net of allowance for doubtful accounts of
approximately $569,000 in 2011 and $553,000 in 2010)		6,203,789			10,292,907
Costs on uncompleted projects applicable to future billings		1,603,864			1,098,455
Inventory		357,461			358,394
Current portion of deferred tax asset		488,800			488,800
Prepaid expenses and other current assets, net		458,955			510,519

Total Current Assets		9,277,756			13,395,635

Property and equipment, net		1,901,284			2,047,479
Deferred tax asset		2,153,400			1,774,900
Other long term assets		101,050			93,304

Total Assets	$	13,433,490		$	17,311,318


LIABILITIES AND SHAREHOLDERS' EQUITY


Current Liabilities:
Accounts payable	$	3,907,956		$	7,172,208
Billings in excess of costs and estimated profit
on uncompleted projects		299,159			342,152
Accrued expenses and other current liabilities		510,841			588,314
Note payable to bank under line of credit		1,726,839			3,442,205
Income taxes payable		9,027			14,925
Obligation under interest rate swap agreement		4,692			8,345
Current portion of long-term debt		599,199			598,469

Total Current Liabilities		7,057,713			12,166,618

Convertible notes payable		1,744,777			1,384,500
Long-term debt		2,500,000			1,300,000

Total Liabilities		11,302,490			14,851,118

Shareholders' Equity:
Common stock, par value $.01 per share; authorized 50,000,000
shares; 11,940,372 shares issued and outstanding		119,404			119,404
Additional paid-in capital		7,360,558			7,293,391
Accumulated deficit		(5,346,271	)		(4,747,751	)
Accumulated other comprehensive loss		(2,691	)		(4,844	)

Total Shareholders' Equity		2,131,000			2,660,200

Total Liabilities and Shareholders' Equity	$	13,433,490		$	17,311,318


The accompanying notes are an integral part of the consolidated financial statements.



OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)




	THREE MONTHS ENDED
	March 31,			March 31,
	2011			2010

Project revenue	$	4,907,402		$	13,846,687

Project costs		3,560,181			11,590,581

Gross margin		1,347,221			2,256,106

Operating expenses:
Payroll expense and related payroll taxes and benefits		1,233,728			1,082,581
Office Expense		192,536			193,772
Occupancy		225,054			261,773
Business Insurance		135,359			112,308
Professional Services		200,293			152,615
Equipment Expenses, net of usage credit		154,368			111,271
Other expenses		59,632			113,478
		2,200,970			2,027,798

Operating income (loss)		(853,749	)		228,308

Other income and (expense):
Interest expense		(161,612	)		(87,243	)
Other, net		36,841			13,150
		(124,771	)		(74,093	)

Net income (loss) before income taxes		(978,520	)		154,215

Income tax (expense) benefit		380,000			(62,000	)

Net income (loss)	$	(598,520	)	$	92,215


Earnings (loss) per common share:
Basic	$	(0.05	)	$	0.01
Diluted	$	(0.05	)	$	0.01

Weighted average shares outstanding:
Basic		11,940,372			11,940,372
Diluted		11,940,372			12,371,281


The accompanying notes are an integral part of the consolidated financial statements.



OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)



	THREE MONTHS ENDED
	March 31,			March 31,
	2011			2010

Operating activities:
Net income (loss)	$	(598,520	)	$	92,215
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of equipment		-			(13,320	)
Bad debt expense		16,538			65,600
Depreciation and amortization		161,195			170,615
Amortization of discount on convertible notes		44,444			-
(Benefit) expense from deferred income taxes		(380,000	)		60,500
(Increase) decrease in operating assets and
increase (decrease) in operating liabilities:
Accounts receivable		4,072,580			(1,753,564	)
Costs on uncompleted projects applicable to
future billings		(505,409	)		(1,180,500	)
Billings and estimated profit in excess of costs
on uncompleted contracts		(42,993	)		(551,362	)
Prepaid expenses, inventory and other assets		52,497			206,261
Other long term assets		3,007			-
Accounts payable and accrued expenses		(3,347,625	)		3,397,630
Net cash provided by (used in) operating activities		(524,286	)		494,075

Investing activities:
Purchase of property and equipment		(15,000	)		(47,000	)
Deposit on purchase of building		(10,753	)		-
Proceeds from sale of equipment		-			16,995
Net cash used in investing activities		(25,753	)		(30,005	)

Financing activities:
Decrease in outstanding checks in excess of bank balance		-			(969,343	)
Proceeds from issuance of convertible notes payable		403,000			-
Redemption of convertible note payable		(20,000	)		-
Proceeds from note payable to bank and current
and long-term borrowings, net of financing costs		-			5,019,938
Principal payments on current and long-term borrowings		(314,634	)		(4,531,710	)
Net cash provided by (used in) financing activities		68,366			(481,115	)

Decrease in cash		(481,673	)		(17,045	)

Cash at beginning of period		646,560			26,845

Cash at end of period	$	164,887		$	9,800




The accompanying notes are an integral part of the consolidated financial statements.

OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, quarterly results include all adjustments (consisting of only normal recurring adjustments) that the Company considers necessary for a fair presentation of such information for interim periods.

The unaudited financial statements include the accounts of the Company and its two wholly-owned subsidiaries; OP-TECH Environmental Services, Ltd, an inactive Canadian company, and OP-TECH AVIX, Inc. All material intercompany transactions and balances have been eliminated in consolidation.

The balance sheet at December 31, 2010 has been derived from the audited balance sheet included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

2. Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

	Three months ended
	March 31, 2011			March 31, 2010
Net income (loss)	$	(598,520	)	$	92,215
Other comprehensive income (loss): Change in fair value of cash flow hedge from interest rate swap agreement, net of income tax expense of $1,500 in 2011 and $1,500 in 2010.		2,153			2,149
Comprehensive income (loss)	$	(596,367	)	$	94,364

3. Revenue Recognition

The timing of revenues is dependent on the Company's backlog, contract awards, and the performance requirements of each contract. The Company's revenues are also affected by the timing of its clients planned remediation work as well as the timing of unplanned emergency spills. Historically, planned remediation work generally increases during the third and fourth quarters. Although the Company believes that the historical trend in quarterly revenues for the third and fourth quarters of each year are generally higher than the first and second quarters, there can be no assurance that this will occur in future periods. Revenues during the first quarter of 2010 were unusually high due to backlog carried over from jobs delayed from the prior year and is not reflective of normal seasonal trends. Accordingly, quarterly or other interim results should not be considered indicative of results to be expected for any quarter or for the full year.

4. 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 costs for these services amounted to approximately $438,000 and $574,000 for the three months ended March 31, 2011 and 2010, respectively. The Company had payable to St. Lawrence for these services of $357,000 at March 31, 2010 which was included in other accrued expenses at March 31, 2010. At March 31, 2011, the Company has a receivable from St. Lawrence of approximately $69,000 as a result of advances made prior to the performance of services.

5. Earnings per Share

Basic earnings per share are computed by dividing net income by the weighted average shares outstanding. There are outstanding options under the Company’s Stock Option Plan and warrants expiring May 2003 that were issued to a financial advisor in May 2002 to purchase 480,000 shares of common stock at $0.066 per share. The convertible notes payable with a face value of $2,000,000 are convertible into shares of common stock at the election of the holders of the Convertible Notes at $0.06 per share as more fully explained in Note 7. These were not included in the calculation of diluted earnings per share at March 31, 2011 as they would be anti-dilutive due to the net loss.

6. Reclassifications

Certain reclassifications have been made to the March 31, 2010 statement of operations to conform to the 2011 presentation.

7. Sale of Convertible Notes

During the three months ended March 31, 2011, the Company entered into a series of Secured Loan Agreements with several individuals for the sale of secured convertible notes (the “Convertible Notes”) totaling $403,000. These are in addition to the $1,617,000 convertible notes issued during the year ending 2010. 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 issuance of the Convertible Notes in the first quarter of 2011 does not represent a change of control as approximately 94% of the Convertible Notes were issued to shareholders of the Company that currently own approximately 34% of the Company’s outstanding share capital.

The Company recorded $67,167 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. These discounts will be amortized over two years. The discount is based on the market value of the stock at the date of the note agreements which was $.07 per share.

In January 2011, the Company redeemed $20,000 of Convertible Notes.

The Convertible Notes may be converted into 33,333,334 shares of common stock, or approximately 279% of current outstanding shares of common stock.

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 is subordinated to a security interest granted to the Senior Debt. The Company’s sole active subsidiary also guaranteed all amounts owed by the Company under the Convertible Notes.

Amortization expense related to the Convertible Note discounts was $41,667 for the quarter ended March 31, 2011 and is included in interest expense.

The remaining amortization period for the discount is 17 months for the first tranche of $1,332,000, 21 months for second tranche of $285,000, and 21 months for the third tranche of $383,000, net of redemptions.

Interest expense recorded on these notes amounted to $71,667 for 2011 yielding an effective interest rate of 14.3%. The unamortized discount was approximately $255,500 at March 31, 2011.

8. Debt Refinancing

The Company refinanced its existing debt with a new lender on April 22, 2011. The new loan agreement provides for short-term 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 also provides a term loan of $3,000,000 due in monthly installments of $50,000 plus interest at LIBOR plus 3.5%.

The Company presented note payable to bank under line of credit, current portion of long-term debt, and long-term debt at March 31, 2011 based on the terms of the new debt agreement.

PART I – FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2011, the Company had cash of $164,887 compared to $646,560 at December 31, 2010. The decrease in cash is a primarily attributed to the loss from operations offset by proceeds from the issuance of convertible notes payable.

At March 31, 2011, the Company had working capital of $2,220,041 compared to $1,229,017 at December 31, 2010, with a current ratio of 1.31 to 1 at March 31, 2011 and 1.10 to 1 at December 31, 2010. The increase in the current ratio is primarily a result of the refinancing increasing the long-term portion of the Company debt.

For the three months ended March 31, 2011, the Company’s net cash used in operations was $524,286 compared to net cash provided by operations of $494,075 during the three months ended March 31, 2010. The cash used by operations for the three months ended March 31, 2011 was primarily a result of the net loss coupled with the decrease in accounts payable partially offset by an increase in accounts receivable.

The Company’s net cash used in investing activities of $25,753 during the first three months of the year was attributable to the purchase of a vehicle and a deposit on a building. The net cash used in investing activities for the three months ended March 31, 2010 was $30,005.

For the three months ended March 31, 2011, the Company’s net cash provided by financing activities was $68,366 compared to net cash used in financing activities of $481,115 during the three months ended March 31, 2010. The net cash provided by financing activities for the three months ended March 31, 2011 was primarily due to proceeds from convertible notes.

The Company refinanced the senior debt on April 22, 2011. The new loan agreement provides for short-term 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 also provides a term loan of $3,000,000 due in monthly installments of $50,000 plus interest at LIBOR plus 3.5%.

During the first quarter of 2011, all principal payments on the Company’s debt were made within payment terms.

RESULTS OF OPERATIONS

PROJECT REVENUE

The Company's project revenue for the first quarter of 2011 decreased 65% to $4,907,402 from $13,846,687 for the first quarter of 2010.

When comparing the first three months of 2011 to the same period in 2010, the decrease in project revenue is due primarily to several large projects were that underway in early 2010 increasing the first quarter 2010 revenue. Additionally, project revenue under the remediation contract with the New York State Department of Environmental Conservation for the first quarter 2011 decreased to $0 from approximately $5,225,000 for the same period in 2010 due limited spending by New York State on remediation contracts during the first quarter of 2011.

PROJECT COSTS AND GROSS MARGIN

Project costs for the first quarter of 2011 decreased 69% to $3,560,181 from $11,590,581 for the same period in 2010. Project costs as a percentage of revenues were 73% and 83% for the three months ended March 31, 2011 and 2010, respectively. Gross margin as a percentage of revenue for the first quarter of 2011 increased to 27% from 17% for the same period in 2010.

Project costs decreased primarily as a result of the decrease in project revenue. The increase in the gross margin percentage was a result of the mix of projects as several of the larger projects in 2010 had lower than average gross margins.

OPERATING EXPENSES

Operating expenses for the quarter ended March 31, 2011 increased 9% to $2,200,970 from $2,027,798 for the same period in 2010. Operating expenses as a percentage of revenues increased to 45% for the quarter ended March 31, 2011 from 15% in the same period in 2010 due to the fixed nature of many of the expenses and the decrease in revenue.

When comparing the first quarter of 2011 to 2010, the increase in operating expenses is due to several items:

Payroll expense and related payroll taxes and benefits increased 14% to $1,233,728 from $1,082,581 in 2010. The increase is primarily a result of lower than anticipated project revenue and project billability lower than anticipated in the first quarter of 2011.

Professional services increased 31% to $200,293 from $152,615 in 2010. The increase is related to legal and audit expenses attributed to the debt refinancing.

Other expense decreased 47% to $59,632 from $113,478 due to the decrease in bad debt expense for the quarter.

INTEREST EXPENSE

Interest expense for the three months ended March 31, 2011 increased 85% to $161,612 from $87,243 for the same period in 2010. This increase is due to an increase in interest rates paid on the Company’s floating-rate debt and the interest incurred on the convertible note agreements.

NET INCOME (LOSS) BEFORE INCOME TAXES

Due to the factors discussed above, net income (loss) before income taxes amounted to $(978,520) for the three months ended March 31, 2011 compared to net income before income taxes of $154,215 for the same period in 2010. Primarily, this change is due to decreased revenues and an increase in operating expenses during 2011, offset by the decreased project costs.

INCOME TAX EXPENSE (BENEFIT)

The Company recorded income tax benefit of $380,000 for the quarter ended March 31, 2011 compared to an income tax expense of $62,000 for the same quarter in 2010. The change is due to a loss during 2011 compared to net income in 2010.

NET INCOME (LOSS)

Net income (loss) for the quarters ended March 31, 2011 and 2010 was $(598,520), or $(.05) per share basic and diluted, and $92,215, or $.01 per share basic and diluted, respectively.

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, revenue recognition, issuance of stock options and related compensation expense, valuation allowances on deferred tax assets, 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 and billed. 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.

The Company maintains a valuation allowance for deferred tax assets to reduce these assets to their realizable amounts. Recognition of these amounts and the adjustment of the corresponding allowance is dependent on the generation of taxable income in current and future years. As circumstances change with respect to management’s expectations of future taxable income, the valuation allowance is adjusted.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

Not applicable

Item 4. – Controls and Procedures

(a)	Disclosure Controls and Procedures.

As of the end of the period covering this Form 10-Q, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures”. OP-TECH conducted this evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.

(i) Definition of Disclosure Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are designed with the objective of ensuring that information required to be disclosed in our periodic reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As defined by the SEC, such disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in such a manner as to allow timely disclosure decisions.

(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Controls.

OP-TECH recognizes that a system of disclosure controls and procedures (as well as a system of internal controls), no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the system are met. Further, the design of such a system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented in a number of ways. Because of the inherent limitations in a cost-effective control system, system failures may occur and not be detected.

(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on the evaluation of these controls and procedures, that our disclosure controls and procedures are not effective in timely alerting them to material information relating to OP-TECH required to be included in OP-TECH’s periodic SEC filings.

During the preparation of our annual report, we concluded that we did not maintain effective controls over reconciliation of costs and standard gross margins on uncompleted projects. Specifically, several in-process projects had unearned revenue recorded in excess of the actual expected.

We are reviewing our disclosure controls and procedures to determine the best steps for the Company to take to make the disclosure controls and procedures effective.

(b) Changes in Internal Controls.

The Company enacted no changes to internal controls since the report containing a material weakness identified for the year ended December 31, 2010 regarding unearned revenue. The Company plans to continue to improve the controls for the unearned revenue review process including a more in-depth cost and standard gross margin analysis, review with field personnel, and a comparison to subsequent billings.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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 March 31, 2011.

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 March 31, 2011 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.

Item 1A. Risk Factors.

Not applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

Item 6. Exhibits.

Exhibit 31.1 Certification of Chief Executive Officer

Exhibit 31.2 Certification of Chief Financial Officer and Acting Principal Accounting Officer

Exhibit 32.1 Section 1350 Certification of Chief Executive Officer

Exhibit 32.2 Section 1350 Certification of Chief Financial Officer and Acting Principal Accounting Officer

SIGNATURES

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

OP-TECH Environmental Services, Inc.

(Registrant)

Date: May 16, 2011 /s/ Charles B. Morgan

Charles B. Morgan

Chief Executive Officer

/s/ Jon S. Verbeck

Jon S. Verbeck

Chief Financial Officer and Treasurer

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