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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of OP-TECH Environmental Services, Inc. and its two wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Project Income Recognition

Contracts are predominately short-term in nature (less than six months), and revenue is recognized as costs are incurred based on either the percentage of completion method utilizing estimated gross margins anticipated for each specific project or as incurred for time and material contracts. Project costs include all direct material, equipment, and labor costs and those indirect costs related to contract performance.

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, 2011 and 2010 accounts receivable are approximately $2,793,000 and $2,357,000, 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.

Change in Accounting Estimates

The calculation of earned revenue for in-process jobs requires the use of estimates to determine the estimated total revenue and project profitability. The Company revised the estimated job cost on one job that was in-process at December 31, 2010. The change in estimate resulted in additional losses incurred in 2011 of approximately $2,000,000.

Concentration of Business Risk - Significant Customers

Sales to one customer amounted to approximately $2,550,000, $8,536,000, and $6,552,000, in 2011, 2010, and 2009, respectively. Accounts receivable at December 31, 2011 and 2010, include $400,000 and $101,000 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 and significant overhead requirements.

Sales to another customer amounted to approximately $1,196,000, $3,876,000, and $241,000, in 2011, 2010, and 2009, respectively. Accounts receivable at December 31, 2011 and 2010, include $1,318,000 and $1,995,000 respectively, from this customer.

Sales to another customer amounted to approximately $3,166,000 in 2011 and accounts receivable at December 31, 2011 include $875,000 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 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, is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of assets is provided for using the straight-line method over useful lives typically ranging from 3 to 15 years.

Other Long-Term Assets

The Company classifies all deposits which are not expected to be refunded within a year as 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 agreement. The carrying value of the Company’s financial instruments approximates their fair value at December 31, 2011 and 2010. 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 13. 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.

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 2008.

Liquidity

At December 31, 2011, the Company has negative working capital with current liabilities exceeding current assets by $6,538,513. In addition, the company violated a bank covenant during 2012 and did not receive a waiver.

The Company has made significant workforce reductions and has reduced variable monthly operating expenses. The Company believes that based on the significant project backlog, changes in the project mix, and the revisions to their business plan, they will be able to operate profitably. Therefore, the Company has accounted for the financial statements assuming that they will continue as a going concern.

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.