Attached files
file | filename |
---|---|
EX-4.1 - Pure Earth, Inc. | v166296_ex4-1.htm |
EX-32.1 - Pure Earth, Inc. | v166296_ex32-1.htm |
EX-10.2 - Pure Earth, Inc. | v166296_ex10-2.htm |
EX-10.1 - Pure Earth, Inc. | v166296_ex10-1.htm |
EX-32.2 - Pure Earth, Inc. | v166296_ex32-2.htm |
EX-31.2 - Pure Earth, Inc. | v166296_ex31-2.htm |
EX-31.1 - Pure Earth, Inc. | v166296_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009.
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from ___________________ to
___________________
|
Commission
File Number: 0-53287
Pure
Earth, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
84-1385335
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
One
Neshaminy Interplex, Suite 201, Trevose, Pennsylvania
19053
|
(Address
of principal executive offices) (Zip
Code)
|
(215) 639-8755
|
(Registrant’s
telephone number, including area code)
|
N/A
|
(Former
name, former address and former fiscal year, if
changed
since last report)
|
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
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(Do
not check if a
|
|||
smaller
reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 17,550,399 shares of Common
Stock, $.001 par value, as of November 14, 2009.
PURE
EARTH, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED September 30, 2009
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
|
2
|
|
Item
1.
|
Condensed
Consolidated Financial Statements.
|
2
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
28
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
59
|
Item
4.
|
Controls
and Procedures.
|
59
|
PART
II - OTHER INFORMATION
|
60
|
|
Item
1.
|
Legal
Proceedings.
|
60
|
Item
1A.
|
Risk
Factors.
|
60
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
63
|
Item
6.
|
Exhibits.
|
64
|
|
||
SIGNATURES
|
65
|
* * *
In
this quarterly report, unless otherwise specified or the context otherwise
requires, the terms “we” “us,” “our,” and the “Company” refer to Pure Earth,
Inc. and our consolidated subsidiaries taken together as a whole.
Pursuant
to Item 10(f) of Regulation S-K promulgated under the Securities Act of 1933, we
have elected to comply throughout this quarterly report with the scaled
disclosure requirements applicable to “smaller reporting
companies.” Except as specifically included in the quarterly report,
items not required by the scaled disclosure requirements have been
omitted.
i
PART
I - FINANCIAL INFORMATION
Item
1.
|
Financial
Statements.
|
PURE
EARTH, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 1,589,993 | $ | 900,744 | ||||
Accounts
receivable, less allowance for doubtful accounts of $444,413 and
$986,324
|
9,740,225 | 11,034,564 | ||||||
Restricted
cash
|
211,035 | 813,164 | ||||||
Due
from joint venture
|
121,175 | 342,552 | ||||||
Inventories
|
874,835 | 538,943 | ||||||
Prepaid
expenses
|
437,510 | 798,629 | ||||||
Other
current assets
|
1,494,065 | 1,069,892 | ||||||
Deferred
income tax asset
|
306,073 | 306,073 | ||||||
Total
Current Assets
|
14,774,911 | 15,804,561 | ||||||
PROPERTY
AND EQUIPMENT
|
||||||||
Land
|
1,085,940 | 1,085,940 | ||||||
Buildings
and improvements
|
7,125,309 | 7,125,309 | ||||||
Leasehold
improvements
|
211,875 | 211,875 | ||||||
Machinery
and equipment
|
10,023,940 | 8,078,035 | ||||||
Trucks
and automobiles
|
1,868,143 | 1,922,246 | ||||||
Office
furniture, fixtures and computer software
|
337,320 | 323,160 | ||||||
20,652,527 | 18,746,565 | |||||||
Less:
accumulated depreciation and amortization
|
(6,359,743 | ) | (4,435,569 | ) | ||||
Property
and Equipment, Net
|
14,292,784 | 14,310,996 | ||||||
OTHER
ASSETS
|
||||||||
Deposits
and other assets
|
1,575,224 | 923,335 | ||||||
Deferred
financing costs, net of accumulated amortization of $479,645 and
$199,663
|
543,007 | 747,989 | ||||||
Goodwill
|
759,694 | 759,694 | ||||||
Permits
|
2,200,000 | 2,200,000 | ||||||
Other
intangible assets, net of accumulated amortization
|
2,888,362 | 3,587,210 | ||||||
Idle
machinery
|
5,158,100 | 7,176,850 | ||||||
Total
Other Assets
|
13,124,387 | 15,395,078 | ||||||
TOTAL
ASSETS
|
$ | 42,192,082 | $ | 45,510,635 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
2
PURE
EARTH, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS’ EQUITY
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Line
of credit
|
$ | 3,739,676 | $ | 407,822 | ||||
Notes
payable
|
- | 25,068 | ||||||
Note
payable – related party
|
333,000 | 333,000 | ||||||
Current
portion of long-term debt
|
1,640,147 | 1,556,494 | ||||||
Accounts
payable
|
6,545,074 | 5,615,708 | ||||||
Accrued
expenses
|
835,244 | 907,428 | ||||||
Accrued
payroll and payroll taxes
|
396,090 | 297,039 | ||||||
Other
current liabilities
|
191,506 | 1,323,452 | ||||||
Accrued
disposal costs
|
110,319 | 262,815 | ||||||
Total
Current Liabilities
|
13,791,056 | 10,728,826 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Long-term
debt, net of current portion
|
7,161,254 | 8,426,740 | ||||||
Mandatorily
redeemable Series B preferred stock, $.001 par value; authorized 20,000
shares; issued and outstanding 6,300 and 6,300 shares
|
5,033,721 | 4,447,437 | ||||||
Note
payable — related party
|
678,348 | 650,296 | ||||||
Accrued
disposal costs
|
211,046 | 78,023 | ||||||
Contingent
consideration
|
2,383,991 | 2,683,991 | ||||||
Warrants
with contingent redemption provisions
|
383,168 | 1,112,164 | ||||||
Deferred
income taxes
|
2,199,958 | 4,047,236 | ||||||
Deferred
income taxes – permits
|
880,000 | 880,000 | ||||||
Total
Long-Term Liabilities
|
18,931,486 | 22,325,887 | ||||||
|
||||||||
TOTAL
LIABILITIES
|
32,722,542 | 33,054,713 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Common
stock, $.001 par value; authorized 25,000,000 shares; issued and
outstanding 17,218,465 and 15,368,972
|
||||||||
Common
stock, $.001 par value; authorized 25,000,000 shares; issued and
outstanding 17,525,549 and 17,626,799 shares
|
17,526 | 17,627 | ||||||
Additional
paid-in capital
|
13,692,951 | 13,803,474 | ||||||
Accumulated
deficit
|
(4,240,937 | ) | (1,365,179 | ) | ||||
TOTAL
STOCKHOLDERS’ EQUITY
|
9,469,540 | 12,455,922 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 42,192,082 | $ | 45,510,635 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
PURE
EARTH INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
September 30,
|
For the Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
REVENUES
|
$ | 11,451,474 | $ | 19,131,047 | $ | 35,517,970 | $ | 51,638,690 | ||||||||
COST
OF REVENUES (including depreciation and amortization expense of
$668,593 and $620,710 for the three months ended September 30, 2009
and 2008 and $1,911,580 and $1,893,089 for the nine months ended September
30, 2009 and 2008)
|
10,573,221 | 15,481,079 | 30,845,660 | 41,901,758 | ||||||||||||
GROSS
PROFIT
|
878,253 | 3,649,968 | 4,672,310 | 9,736,932 | ||||||||||||
OPERATING EXPENSES
|
||||||||||||||||
Salaries
and related expenses
|
1,229,976 | 1,590,422 | 4,082,553 | 4,616,856 | ||||||||||||
Occupancy
and other office expenses
|
206,056 | 225,349 | 707,956 | 790,502 | ||||||||||||
Professional
fees
|
456,880 | 359,354 | 1,480,522 | 1,424,856 | ||||||||||||
Other
operating expenses
|
259,983 | 565,769 | 1,227,537 | 1,297,266 | ||||||||||||
Insurance
|
226,659 | 356,916 | 667,605 | 956,106 | ||||||||||||
Depreciation
and amortization
|
162,565 | 145,351 | 482,857 | 399,570 | ||||||||||||
Impairment
of idle machinery
|
— | — | — | 412,500 | ||||||||||||
Gain
on sale of equipment
|
(14,732 | ) | (634 | ) | (26,148 | ) | (256,979 | ) | ||||||||
TOTAL
OPERATING EXPENSES
|
2,527,387 | 3,242,527 | 8,622,882 | 9,640,677 | ||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
(1,649,134 | ) | 407,441 | (3,950,572 | ) | 96,255 | ||||||||||
OTHER INCOME (EXPENSES)
|
||||||||||||||||
Interest
income
|
— | 29,482 | — | 92,292 | ||||||||||||
Interest
expense
|
(643,583 | ) | (522,131 | ) | (1,831,300 | ) | (1,388,536 | ) | ||||||||
Loss
from equity investment
|
(32,596 | ) | — | (140,526 | ) | — | ||||||||||
Other
income
|
375,126 | 48,908 | 1,199,362 | 161,661 | ||||||||||||
TOTAL
OTHER INCOME (EXPENSES)
|
(301,053 | ) | (443,741 | ) | (772,464 | ) | (1,134,583 | ) | ||||||||
LOSS
BEFORE INCOME TAXES
|
(1,950,187 | ) | (36,300 | ) | (4,723,036 | ) | (1,038,328 | ) | ||||||||
BENEFIT
FROM INCOME TAXES
|
(754,480 | ) | (47,081 | ) | (1,847,278 | ) | (462,923 | ) | ||||||||
NET
INCOME (LOSS)
|
(1,195,707 | ) | 10,781 | (2,875,758 | ) | (575,405 | ) | |||||||||
Less:
preferred stock dividends
|
— | — | — | 477,845 | ||||||||||||
NET
INCOME (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS
|
$ | (1,195,707 | ) | $ | 10,781 | $ | (2,875,758 | ) | $ | (1,053,250 | ) | |||||
NET LOSS PER COMMON SHARE
|
||||||||||||||||
Basic
|
$ | (0.07 | ) | $ | 0.00 | $ | (0.16 | ) | $ | (0.06 | ) | |||||
Diluted
|
$ | (0.07 | ) | $ | 0.00 | $ | (0.16 | ) | $ | (0.06 | ) | |||||
WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING
|
||||||||||||||||
Basic
|
17,507,003 | 17,621,799 | 17,551,298 | 17,360,519 | ||||||||||||
Diluted
|
17,507,003 | 18,388,914 | 17,551,298 | 17,360,519 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
4
PURE
EARTH INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For
the Nine Months Ended September 30, 2009
(Unaudited)
Common Stock
|
Additional
Paid-in
|
Retained
|
Total
Stockholders'
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings
|
Equity
|
||||||||||||||||
BALANCE
-
January 1, 2009
|
17,626,799 | $ | 17,627 | $ | 13,803,474 | $ | (1,365,179 | ) | $ | 12,455,922 | ||||||||||
Issuance
of common stock for legal settlement
|
30,000 | 30 | 29,970 | — | 30,000 | |||||||||||||||
Issuance
of common stock to consultants
|
68,750 | 69 | 59,307 | — | 59,376 | |||||||||||||||
Retirement
of common stock
|
(200,000 | ) | (200 | ) | (199,800 | ) | — | (200,000 | ) | |||||||||||
Net
loss
|
— | — | — | (2,875,758 | ) | (2,875,758 | ) | |||||||||||||
BALANCE
-
September 30, 2009
|
17,525,549 | $ | 17,526 | $ | 13,692,951 | $ | (4,240,937 | ) | $ | 9,469,540 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
PURE
EARTH INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
|
||||||||
September 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
CASH FLOWS FROM OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$ | (2,875,758 | ) | $ | (575,405 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Depreciation
and amortization
|
1,995,590 | 1,926,354 | ||||||
Other
intangible assets amortization
|
398,848 | 370,371 | ||||||
Deferred
financing cost amortization
|
279,982 | 82,195 | ||||||
Interest
expense for accretion of warrant and debt discount
|
222,983 | 135,420 | ||||||
Interest
expense for Series B preferred stock payment-in-kind
|
363,301 | 145,910 | ||||||
Impairment
of idle equipment
|
— | 412,500 | ||||||
Provision
for doubtful accounts
|
233,972 | (29,866 | ) | |||||
Gain
on sale of property and equipment
|
(26,147 | ) | (256,979 | ) | ||||
Change
in fair value of derivatives and other assets and
liabilities measured at fair value
|
4,813 | — | ||||||
Restricted
stock grant
|
89,376 | 74,500 | ||||||
Change
in fair value of warrants with contingent redemption
provisions
|
(728,996 | ) | — | |||||
Deferred
income taxes
|
(1,847,278 | ) | (54,040 | ) | ||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
60,367 | (3,632,762 | ) | |||||
Inventories
|
(335,892 | ) | (12,325 | ) | ||||
Prepaid
expenses and other current assets
|
936,947 | (259,703 | ) | |||||
Deposits
and other assets
|
(651,889 | ) | 16,444 | |||||
Restricted
cash
|
602,129 | — | ||||||
Accounts
payable
|
1,000,837 | 533,955 | ||||||
Accrued
expenses and other current liabilities
|
(1,055,443 | ) | (634,681 | ) | ||||
Accrued
disposal costs
|
(19,473 | ) | (1,290,472 | ) | ||||
Contingent
consideration
|
— | (176,345 | ) | |||||
Due
from affiliates
|
221,377 | 303,281 | ||||||
Income
taxes payable
|
— | (1,024,603 | ) | |||||
TOTAL
ADJUSTMENTS
|
1,745,404 | (3,370,846 | ) | |||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(1,130,354 | ) | (3,946,251 | ) | ||||
CASH FLOWS FROM INVESTING
ACTIVITIES
|
||||||||
Acquisitions
of businesses and assets
|
— | (44,803 | ) | |||||
Payments
for pending acquisitions
|
— | (149,016 | ) | |||||
Acquisitions
of property and equipment
|
(51,583 | ) | (732,298 | ) | ||||
Proceeds
from sale of equipment
|
47,994 | 590,901 | ||||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(3,589 | ) | (335,216 | ) | ||||
CASH FLOWS FROM FINANCING
ACTIVITIES
|
||||||||
Repayment
of (advances for) related party loans
|
28,052 | (41,641 | ) | |||||
Net
borrowings (repayments) on line of credit
|
3,331,854 | 1,908,611 | ||||||
Repayment
of notes payable
|
(25,068 | ) | (632,804 | ) | ||||
Repayment
of long-term debt
|
(1,186,646 | ) | (1,114,952 | ) | ||||
Proceeds
from equipment financing
|
— | 200,000 | ||||||
Financing
fees incurred
|
(75,000 | ) | (506,580 | ) | ||||
Retirement
of common stock
|
(200,000 | ) | — | |||||
Private
placements of common and preferred stock
|
— | 6,300,000 | ||||||
Dividends
paid on Series A preferred stock
|
(50,000 | ) | (75,000 | ) | ||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
1,823,192 | 6,037,634 | ||||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
689,249 | 1,756,167 | ||||||
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD
|
900,744 | 1,885,014 | ||||||
CASH AND CASH EQUIVALENTS - END OF
PERIOD
|
$ | 1,589,993 | $ | 3,641,181 | ||||
SUPPLEMENTARY INFORMATION
|
||||||||
Cash
paid during the periods for:
|
||||||||
Interest
|
$ | 1,310,218 | $ | 976,685 | ||||
Income
taxes
|
$ | 12,955 | $ | 1,112,743 | ||||
Non-cash
investing and financing activities:
|
||||||||
Debt
and other liabilities incurred in acquisition of businesses and asset
purchases
|
$ | — | $ | 3,543,991 | ||||
Acquisitions
of businesses and assets in exchange for shares of common
stock
|
$ | — | $ | 74,500 | ||||
Property
and equipment financed with debt
|
$ | — | $ | 472,900 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
PURE
EARTH, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -
Business Operations
and Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
Pure Earth, Inc. (“Pure Earth”) and its wholly owned subsidiaries, Pure Earth
Transportation & Disposal, Inc. (“PE Transportation and Disposal”); Juda
Construction, Ltd. (“Juda”); PEI Disposal Group, Inc. (“PEI Disposal Group”);
Pure Earth Treatment (NJ), Inc. (formerly Casie Ecology Oil Salvage, Inc.),
Rezultz, Incorporated (“Rezultz”), and Pure Earth Recycling (NJ), Inc. (formerly
MidAtlantic Recycling Technologies, Inc.), collectively referred to as “Pure
Earth Recycling”; Pure Earth Energy Resources, Inc. (“PEER”); Pure
Earth Environmental, Inc. (“PE Environmental”); Bio Methods LLC (“BioMethods”);
Geo Methods, LLC (“GeoMethods”); Echo Lake Brownfield, LLC (“Echo Lake”); HFH
Acquisition Corp. (“HFH”); Pure Earth Materials, Inc. (“PE Materials”); Pure
Earth Materials (NJ) Inc. (“PE Materials NJ”); and New Nycon, Inc. (“New
Nycon”). Pure Earth and its subsidiaries, taken together as a whole,
are collectively referred to as the “Company”. All significant
intercompany accounts and transactions have been eliminated.
The
Company’s reportable segments are strategic business units that offer
environmental services within the Company’s continuum of environmental
strategies. With respect to the three and nine months ended September 30, 2009
and 2008, the Company had five reportable segments: Transportation and Disposal,
Treatment and Recycling, Environmental Services, Materials and Concrete
Fibers. The Concrete Fibers segment was formed effective on April 1,
2008 with the acquisition of Nycon, Inc. (Note 3).
NOTE 2 –
Basis of Presentation
and Summary of
Significant Accounting Policies
Basis of
Presentation
These
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission (the “Commission”) for
presenting interim financial information. Accordingly, they do not
include all the information and footnotes necessary for a comprehensive
presentation of financial position and results of operations. Certain
prior period amounts have been reclassified to conform to the current
presentation.
These
statements include all adjustments (consisting only of normal recurring
adjustments) which management believes necessary for a fair presentation of the
condensed consolidated financial statements and to make them not misleading. The
interim operating results for the three and nine months ended September 30, 2009
and September 30, 2008 are not necessarily indicative of operating results
expected for the full year. For further information refer to the
Company’s consolidated financial statements and footnotes thereto as of December
31, 2008 and 2007 and for the years then ended contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the
Commission on March 31, 2009.
FASB Accounting Standards
Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) confirmed that the FASB
Accounting Standards Codification (“ASC”) would become the single official
source of authoritative U.S. generally accepted accounting principles (“GAAP”)
(other than guidance issued by the SEC), superseding all other accounting
literature except that issued by the SEC. The Codification does not change U.S.
GAAP. However, as a result, only one level of authoritative U.S. GAAP exists.
All other literature is considered non-authoritative. The FASB ASC is effective
for interim and annual periods ending on or after September 15, 2009. Therefore,
the Company has changed the way specific accounting standards are referenced in
its condensed consolidated financial statements.
7
Use of
Estimates
The
preparation of condensed consolidated 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 amounts
reported in the condensed consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. Critical
accounting policies requiring the use of estimates are allowance for doubtful
accounts, depreciation and amortization, impairment testing for intangible
assets, goodwill and idle machinery, accrued disposal costs, deferred revenue,
inventories, assets and liabilities accounted for at fair value, the valuation
of stock based compensation, the Company’s mandatorily redeemable Series B
preferred stock (the “Series B Preferred Stock”) and warrants to purchase common
stock.
Inventories
Inventories
are valued at the lower of cost or market by the weighted average cost method
and are comprised of crushed rock, recycled oil, and concrete fibers which are
considered finished products. The value of the inventories as of
September 30, 2009 and December 31, 2008 were as follows:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Recycled
oil
|
$ | 250,722 | $ | 248,151 | ||||
Crushed
rock
|
354,850 | 64,500 | ||||||
Concrete
fiber
|
269,263 | 226,292 | ||||||
Totals
|
$ | 874,835 | $ | 538,943 |
Earnings Per
Share
Basic
earnings per share (“EPS”) is calculated by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period and excludes any potentially dilutive
securities. Diluted EPS gives effect to all potentially
dilutive securities outstanding during each period that were outstanding during
the period but does not include such securities if their effect would be
anti-dilutive, in accordance with SFAS No. 128, “Earnings per Share” (Topic
260).
The
Company’s computation of diluted EPS excludes 20,000 shares of Series A
redeemable convertible preferred stock for the nine months ended September 30,
2008 (which shares were not outstanding at December 31, 2008) since its effect
was anti-dilutive due to the Company’s net loss. Additionally,
1,091,818 common stock purchase warrants were excluded from the determination of
diluted EPS for three and nine months ended September 30, 2009 and 2008, and
324,444 common stock purchase warrants were excluded for the three months ended
September 30, 2008 as their effect is also anti-dilutive.
Recently Issued Accounting
Pronouncements
Business
Combinations. In December 2007, the Financial Accounting
Standards Board (“FASB”) issued SFAS No. 141R, “Business Combinations”
(“SFAS 141R”), which replaces SFAS 141, “Business Combinations” and was
subsequently included in the Business Combinations Topic of the FASB ASC (Topic
805). SFAS 141R establishes principles and requirements for
determining how an enterprise recognizes and measures the fair value of certain
assets and liabilities acquired in a business combination, including
noncontrolling interests, contingent consideration, and certain acquired
contingencies. SFAS 141R also requires acquisition-related transaction expenses
and restructuring costs be expensed as incurred rather than capitalized as a
component of the business combination. SFAS 141R will be applicable
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of SFAS 141R will have an impact on accounting
for any businesses acquired after the effective date of this
pronouncement.
8
Noncontrolling Interests. In December 2007, the FASB
issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements - An Amendment of ARB No. 51” (“SFAS 160”), which was
subsequently included in the Consolidation Topic of the FASB ASC (Topic 810).
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. The
Company adopted SFAS 160 beginning on January 1, 2009. As a result, the Company
is required to report any noncontrolling interests as a separate component of
stockholders’ equity. The Company is also required to present any net income
allocable to noncontrolling interests and net income attributable to the
stockholders of the Company separately in its consolidated statements of income.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. SFAS 160 requires retroactive
adoption of the presentation and disclosure requirements for existing minority
interests. All other requirements of SFAS 160 shall be applied prospectively.
SFAS 160 will have an impact on the presentation and disclosure of the
noncontrolling interests of any non wholly-owned businesses acquired in the
future.
Derivative Instruments. In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133” (“SFAS 161”), which was subsequently included in the Derivatives
and Hedging Topic of the FASB ASC (Topic 815). SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance and cash flows. The
guidance in SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company has applied the additional disclosure
requirements to its derivative activities for periods beginning on or after
January 1, 2009.
Hierarchy of
GAAP. In May 2008, the FASB issued SFAS No. 162,
“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS
162 identifies the sources of accounting principles and the framework for
selecting the accounting principles used in preparing financial statements of
nongovernmental entities that are presented in conformity with GAAP (the
“GAAP Hierarchy”). Currently, the GAAP Hierarchy is provided in the
American Institute of Certified Public Accountants’ U.S. Auditing Standards
(“AU”) Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles” (“AU Section 411”). SFAS 162 is
effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board’s amendments to AU Section 411. The
adoption of SFAS 162 will not have an impact on the Company’s consolidated
financial position, results of operations, or cash flows.
Intangible
Assets. In April 2008, the FASB issued FASB Staff Position
(“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets”
(“FSP FAS 142-3”), which was subsequently included in the Intangibles –
Goodwill and Other Topic of the FASB ASC (Topic 350). FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS No. 142”) in order to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R) and other generally accepted accounting
principles (“GAAP”). FSP FAS 142-3 is effective for financial statements
issued for fiscal years and interim periods beginning after December 15,
2008 and is to be applied prospectively to intangible assets acquired after the
effective date. Disclosure requirements are to be applied to all intangible
assets recognized as of, and subsequent to, the effective date. The adoption of
FSP FAS 142-3 did not have an impact on the Company’s consolidated financial
position, results of operations, or cash flows.
9
Convertible Debt
Instruments. In May 2008, the FASB issued FSP Accounting
Principles Board Opinion (“APB”) 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion” (“FSP APB 14-1”), which
was subsequently included in the Distinguishing Liabilities from Equity Topic of
the FASB ASC (Topic 480) . FSP APB 14-1 requires the issuer of certain
convertible debt instruments that may be settled in cash or other assets upon
conversion to separately account for the liability and equity components of the
instrument in a manner that reflects the issuer’s nonconvertible debt borrowing
rate. FSP APB 14-1 is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008 and is to be applied
retrospectively to all periods presented, with certain exceptions. The Company
does not currently have any convertible debt outstanding and therefore the
adoption of FSP APB 14-1 did not have any impact on its consolidated financial
statements, however it may impact the accounting for future debt
issuances.
Instruments Indexed to
Stock. In June 2008, the FASB ratified the consensus reached
by the EITF on three issues discussed at its June 12, 2008 meeting
pertaining to EITF 07-5, “Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”), which was
subsequently included in the Distinguishing Liabilities from Equity Topic of the
FASB ASC (Topic 480). The issues include how an entity should evaluate whether
an instrument, or embedded feature, is indexed to its own stock, how the
currency in which the strike price of an equity-linked financial instrument, or
embedded equity-linked feature, is denominated affects the determination of
whether the instrument is indexed to an entity’s own stock and how the issuer
should account for market-based employee stock option valuation instruments.
EITF 07-5 is effective for financial instruments issued for fiscal years
and interim periods beginning after December 15, 2008 and is applicable to
outstanding instruments as of the beginning of the fiscal year it is initially
applied. The cumulative effect, if any, of the change in accounting principle
shall be recognized as an adjustment to the opening balance of retained
earnings. The adoption of EITF 07-5 did not have an impact on the Company’s
consolidated financial statements as it does not currently have any instruments
outstanding with these features, however it may impact the accounting for the
issuance of future warrants or other instruments indexed to the Company’s common
stock.
Conforming Changes to
EITF 98-5. In June 2008, the FASB ratified the consensus
reached on June 12, 2008 by the EITF on EITF 08-4, “Transition
Guidance for Conforming Changes to EITF Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios” (“EITF 08-4”). The conforming changes to
EITF 98-5 resulting from EITF 00-27, “Application of Issue
No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”) and
SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” are effective for financial
statements issued for fiscal years and interim periods ending after
December 15, 2008. The effect, if any, of applying the conforming changes
shall be presented retrospectively and the cumulative effect of the change in
accounting principle shall be recognized as an adjustment to the opening balance
of retained earnings of the first period presented. The adoption of
EITF 08-4 did not have any impact on the Company’s consolidated financial
statements as the Company’s application of EITF 00-27 is consistent with
the guidance of this issue. The guidance prescribed under EITF 08-4
was incorporated into the Distinguishing Liabilities from Equity Topic of the
FASB ASC (Topic 480).
Share Based
Payments. On June 16, 2008, the FASB issued FSP Emerging
Issues Task Force ("EITF") No. 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities, which
concluded that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of EPS
pursuant to the two-class method. FSP No. EITF 03-6-1 is effective
for fiscal years beginning after December 15, 2008, and interim periods within
those years. Upon adoption, a company is required to retrospectively adjust its
earnings per share data to conform with the provisions of FSP No. EITF 03-6-1.
FSP EITF 03-6-1 was subsequently incorporated into the Earnings Per Share Topic
of the FASB ASC (Topic 260). The adoption of FSP EITF 03-6-1 did not
have any impact on the Company’s consolidated financial statements as there were
no unvested share-based payment awards outstanding.
Postretirement
Plans. In December 2008, the FASB issued FSP No. FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP
132(R)-1), which was subsequently included in the Compensation – Retirement
Benefits Topic of the FASB ASC (Topic 715). FSP 132(R)-1 provides
guidance on a plan sponsor’s disclosures about plan assets of defined benefit
pension and postretirement plans. Required disclosures include information about
categories of plan assets, fair value measurements of plan assets, and
significant concentrations of risk, as well as investment policies and
strategies. FSP 132(R)-1 is effective for fiscal years ending after
December 15, 2009. The Company does not currently maintain a
defined benefit plan or postretirement plan and therefore the adoption of
FSP132(R)-1 is not expected to have an impact on the consolidated financial
statements.
10
Impairment. In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (FSP 115-2 and 124-2), which
was subsequently included in the Investments- Debt and Equity Securities Topic
of the FASB ASC (Topic 320). FSP 115-2 and 124-2 amends the guidance on
other-than-temporary impairment for debt securities and modifies the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This FSP is effective for interim
and annual periods ending after June 15, 2009. The Company does not
currently have any outstanding investments in debt or equity securities,
therefore the adoption of FSP 115-2 and 124-2 did not have an impact on the
consolidated financial statements.
Fair
Value. In February 2008, the FASB issued FSP 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements For Purposes of
Lease Classification or Measurement Under Statement 13” (“FSP 157-1”) and FSP
157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which,
respectively, remove leasing transactions from the scope of SFAS 157 and defer
its effective date for one year relative to certain nonfinancial assets and
liabilities. As a result, the application of the definition of fair value and
related disclosures of SFAS 157 (as impacted by FSP 157-1 and FSP 157-2) was
effective for the Company beginning January 1, 2008 on a prospective basis with
respect to fair value measurements of (a) nonfinancial assets and liabilities
that are recognized or disclosed at fair value in the Company’s financial
statements on a recurring basis (at least annually) and (b) all financial assets
and liabilities. This adoption did not have a material impact on the Company’s
consolidated financial position or results of operations. The
remaining aspects of SFAS 157 for which the effective date was deferred under
FSP 157-2 are currently being evaluated by the Company. Areas impacted by the
deferral relate to nonfinancial assets and liabilities that are measured at fair
value, but are recognized or disclosed at fair value on a nonrecurring basis.
This deferral applies to such items as nonfinancial assets and liabilities
initially measured at fair value in a business combination (but not measured at
fair value in subsequent periods) or nonfinancial long-lived assets groups
measured at fair value for an impairment assessment. The effects of
these remaining aspects of SFAS 157 have been applied to fair value measurements
prospectively beginning January 1, 2009, and did not have a material impact on
the Company’s consolidated financial position or results of
operations. The guidance prescribed under FSP 157-1 and FSP
157-2 has been included in the Fair Value Measurements and Disclosures Topic of
the FASB ASC (Topic 820).
In
October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”),
which clarifies the application of SFAS No. 157 in a market that is
not active. The guidance in FSP 157-3 was effective immediately including prior
periods for which financial statements had not been issued. The
implementation of this standard did not have a material impact on the Company’s
consolidated financial statements. The guidance prescribed under FSP 157-3 has
been included in the Fair Value Measurements and Disclosures Topic of the FASB
ASC (Topic 820).
In April 2009, the FASB
issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (FSP 157-4). FSP 157-4 provides additional
guidance for estimating fair value under Statement of Financial Accounting
Standard No. 157, “Fair Value Measurements” (“SFAS 157”) when there is an
inactive market or the market is not orderly. This FSP is effective for interim
and annual periods ending after June 15, 2009. The adoption of
FSP 157-4 did not have a material impact on the Company’s condensed consolidated
financial statements. The guidance prescribed under FSP 157-4 has
been included in the Fair Value Measurements and Disclosures Topic of the FASB
ASC (Topic 820).
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (FSP 107-1 and 28-1), which has been
subsequently included in the Fair Value Measurements and Disclosures Topic of
the FASB ASC (Topic 820). This FSP requires disclosure about fair value of
financial instruments in interim periods, as well as annual financial
statements. FSP 107-1 and 28-1 is effective for interim periods
ending after June 15, 2009. The Company adopted FSP 107-1 and
28-1 on June 15, 2009, and has included the additional interim disclosures as
required by this FSP within the notes to the condensed consolidated financial
statements as of September 30, 2009 and for the three and nine months then
ended. See Note 10 to the condensed consolidated financial statements
for more information.
11
In August
2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair
Value. This guidance provides clarification that in
circumstances in which a quoted market price in an active market for an
identical liability is not available, fair value should be measured using one or
more specific techniques outlined in the update. The guidance was
effective for the Company’s first reporting period after
issuance. The adoption of the guidance did not have a material impact
on the Company’s consolidated financial statements.
Subsequent
Events. In May 2009, the FASB issued SFAS No. 165,
“Subsequent Events,” which establishes general standards of and accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS
165 was effective for interim and annual periods ending after June 15,
2009. As required by SFAS 165, the Company has evaluated
subsequent events through November 16, 2009, which is the date its condensed
consolidated financial statements as of and for the three and nine months ended
September 30, 2009 were issued. SFAS 165 has been included in the
Subsequent Events Topic of the FASB ASC (Topic 855).
Transfers of Financial
Assets. In June 2009, the FASB issued SFAS No. 166,
“Accounting for Transfers of Financial Assets — an amendment of FASB Statement
No. 140,” to improve the reporting for the transfer of financial assets
resulting from 1) practices that have developed since the issuance of SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” that are not consistent with the original
intent and key requirements of that Statement and (2) concerns of financial
statement users that many of the financial assets (and related obligations) that
have been derecognized should continue to be reported in the financial
statements of transferors. SFAS 166 must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company does not
currently engage in the transfer of financial assets and therefore, does not
expect that the adoption of SFAS 166 will have a material impact on the
Company’s consolidated financial statements. SFAS 166 has been
included in the Transfers and Servicing Topic of the FASB ASC (Topic
860).
Consolidation. In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” to amend certain requirements of FASB
Interpretation No. 46 (revised December 2003), “Consolidation of
Variable Interest Entities,” to improve financial reporting by enterprises
involved with variable interest entities and to provide more relevant and
reliable information to users of financial statements. SFAS 167 is
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company
does not expect that the adoption of SFAS 167 will have a material impact on the
Company’s consolidated financial statements. SFAS 167 has been
included in the Consolidation Topic of the FASB ASC (Topic 810).
Standards
Codification. In June 2009, the FASB issued SFAS
No. 168, “The FASB Accounting Standards Codification TM and the
Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162.” Under SFAS 168, The FASB Accounting Standards
Codification (Codification) will become the source of authoritative U.S.
generally accepted accounting principles (GAAP) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. On the effective
date of SFAS 168, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. In the FASB’s
view, the issuance of SFAS 168 and the Codification will not change GAAP, except
as to certain nonpublic nongovernmental entities. The adoption of SFAS 168 did
not have a material impact on the Company’s consolidated financial
statements.
12
The FASB,
the EITF and the SEC have issued certain other accounting pronouncements and
regulations that will become effective in subsequent periods; however,
management of the Company does not believe that any of those pronouncements
would have significantly affected the Company’s financial accounting measures or
disclosures had they been in effect during the three and nine months ended
September 30, 2009 and the year ended December 31, 2008, and it does not believe
that any of those pronouncements will have a significant impact on the Company’s
condensed consolidated financial statements at the time they are
issued.
NOTE 3 -
Nycon Acquisition and
Pro Forma Results
Effective
April 1, 2008, New Nycon, a wholly owned subsidiary of the Company, completed
the purchase of specified assets from Nycon, Inc. (“Nycon”), a concrete
reinforcing fiber company headquartered in Westerly, Rhode
Island. Prior to this acquisition, Nycon was engaged in the business
of processing, packaging and selling reinforcing fibers used as a component of
concrete materials. Pursuant to the terms of the purchase agreement,
the Company acquired Nycon’s accounts receivable, equipment and all intangible
assets and intellectual property. In connection with the
purchase of Nycon and formation of New Nycon, the Company entered into an
exclusive licensing agreement with the holder of a patent covering the process
for making and using reinforcing fiber for concrete materials from post-consumer
carpet waste as a substitute for new fibers. During the term of the
license agreement, the Company will pay to the licensor an annual royalty fee
equal to 30% of New Nycon’s earnings before taxes, depreciation and
amortization, and the Company also paid the patent holder 15,000 shares of its
common stock, which shares were placed in escrow pending the satisfaction by New
Nycon of certain financial objectives. The license agreement terminates upon the
expiration of the last of the licensor’s patent rights covered by the agreement,
which with respect to the process patent is currently expected to be
2023. In June of 2009, the Company and the former owner of Nycon
amended the asset purchase agreement thereby reducing the purchase price to
$600,000 and the earn-out rate from 20% to 12.5%. This amendment
resulted in a pro-rata reduction of the intangible assets and a corresponding
reduction of the contingent consideration.
The
unaudited pro forma information presented below assumes that the acquisition of
Nycon was consummated as of January 1, 2008. These pro forma results are not
necessarily indicative of the results of operations that would have resulted had
the acquisitions actually been completed at the beginning of the applicable
periods presented, nor is it necessarily indicative of the results of operations
in future periods.
For the Nine Months ended
September 30, 2008
|
||||
(unaudited)
|
||||
Pro Forma
|
||||
Combined (a) (b) (c) (d)
|
||||
Revenue
|
$ | 51,904,803 | ||
Loss
from operations
|
$ | (100,066 | ) | |
Loss
before income tax benefit
|
$ | (1,204,725 | ) | |
Net
loss
|
$ | (672,747 | ) | |
Per
common share data
|
||||
Net
loss from operations – Basic and Diluted
|
$ | (0.04 | ) | |
Weighted
Average Shares
|
||||
Basic
and Diluted
|
17,374,977 |
|
(a)
|
Historical
information includes the operating results of Pure Earth for the nine
months ended September 30, 2008.
|
|
(b)
|
Pro
forma information and the pro forma adjustments include the operating
results of Nycon for the nine months ended September 30, 2008, including
the operating results and pro forma adjustments from January 1, 2008
through the date of acquisition on April 1,
2008.
|
|
(c)
|
There
were no pro forma adjustments to be presented for the three months ended
September 30, 2008 or for the three and nine months ended September 30,
2009, as the historical information includes the operating results of
Nycon for this period.
|
|
(d)
|
The
pro forma adjustments consist of additional depreciation and amortization
expense in relation to the step-up in basis of the property and equipment
and intangible assets of Nycon and the corresponding adjustments to the
income tax benefit.
|
13
NOTE 4 -
Concentrations of
Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade
accounts receivable. The Company maintains cash and cash equivalent
balances at several financial institutions throughout its operating area of
which, at times, may exceed deposit insurance limits and expose the Company to
credit risk. As part of its cash management process, the Company periodically
reviews the relative credit standing of these financial
institutions.
Credit
risk with respects to accounts receivable was concentrated with four customers
at September 30, 2009. These customers accounted for
approximately $2,253,869 (23%) of the accounts receivable at September 30, 2009.
The Company performs ongoing credit evaluations of its customers’ financial
condition and if necessary would require collateral to mitigate its credit risk.
Five customers accounted for $9,946,181 (28%) of the Company’s revenue during
the nine months ended September 30, 2009 and $2,901,888 (25%) of its revenue
during the three months ended September 30, 2009. These revenues were
reported as components of the Treatment and Recycling and Transportation and
Disposal segment revenues. During the three and nine months
ended September 30, 2009, no single customer accounted for 10% or greater of the
Company’s consolidated revenues.
Three
customers accounted for $4,858,903 (26%) and $11,601,861 (23%) of its revenue
during the three and nine months ended September 30, 2008,
respectively. These revenues were reported as components of the
Treatment and Recycling and Transportation and Disposal segment
revenues. During the three months ended September 30, 2008, one
customer contributed $2,779,479 or 15% of the Company’s revenues, which were
reported as a component of the Transportation and Disposal segment
revenues. The revenues derived from two of these customers were
subject to subsequent litigation and a settlement that resulted in a loss of
approximately $0.8 million as described in Note 14- Litigation. The
deterioration of the financial condition of one or more of its major customers
could adversely impact the Company’s operations.
NOTE 5 -
Intangible
Assets
Below is
a summary of intangible assets at September 30, 2009 and December 31,
2008:
Balance as of September 30, 2009 (Unaudited)
|
Balance as of December 31, 2008
|
|||||||||||||||||||||||
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||
Finite
Lives:
|
||||||||||||||||||||||||
Customer
lists
|
$ | 2,000,002 | $ | (666,999 | ) | $ | 1,333,003 | $ | 2,117,552 | $ | (490,683 | ) | $ | 1,626,869 | ||||||||||
Other
intangible assets
|
2,090,551 | (535,192 | ) | 1,555,359 | 2,273,001 | (312,660 | ) | 1,960,341 | ||||||||||||||||
4,090,553 | (1,202,191 | ) | 2,888,362 | 4,390,553 | (803,343 | ) | 3,587,210 | |||||||||||||||||
Indefinite
Lives:
|
||||||||||||||||||||||||
Permits
|
2,200,000 | — | 2,200,000 | 2,200,000 | — | 2,200,000 | ||||||||||||||||||
Total
|
$ | 6,290,553 | $ | (1,202,191 | ) | $ | 5,088,362 | $ | 6,590,553 | $ | (803,343 | ) | $ | 5,787,210 |
Amortization
expense of intangible assets was $398,848 and $370,371 for the nine months ended
September 30, 2009 and 2008, respectively, and $132,949 and $130,932 for the
three months ended September 30, 2009 and 2008, respectively.
14
Expected
future amortization expense for amortizable intangible assets with finite lives
is as follows for periods subsequent to September 30, 2009:
Twelve
months ending September 30,
|
||||
2010
|
$ | 531,797 | ||
2011
|
531,797 | |||
2012
|
531,797 | |||
2013
|
358,587 | |||
2014
|
294,463 | |||
Thereafter
|
639,921 | |||
$ | 2,888,362 |
NOTE 6 –
Idle
Machinery
Included
in the acquisition of Pure Earth Recycling on March 30, 2007, was equipment
having a fair value of $8,450,000, which had not been placed into use at that
time. During the nine months ended September 30, 2008, the Company
recorded approximately $0.4 million of impairment charges relating to this idle
machinery as a result of the overall softening of the overall
economy. Effective April 30, 2009, the Company placed into service
approximately $2.0 million of this equipment that was previously classified as
idle.
NOTE 7 -
Line of
Credit
At
September 30, 2009, the Company had a $4,700,000 revolving line of credit with a
bank that was due to expire on October 23, 2009. On October 23, 2009,
the Company entered into an amendment of this revolving line of credit which
extended the expiration date until April 23, 2010, and reduced the maximum line
amount to $3,300,000, with subsequent reductions to $3,150,000 on December 15,
2009 and $3,000,000 on February 15, 2010. The line of credit is used
to fund working capital needs. The line of credit bears interest at
the bank’s prime rate, subject to a minimum of 5%, plus 5.75% (10.75% at
September 30, 2009) and outstanding borrowings are collateralized by accounts
receivable and inventories as defined in the agreement. Outstanding
borrowings on the line were $3,739,676 at September 30, 2009 and $407,822 at
December 31, 2008. These borrowings were collateralized by $4,061,186
and $3,349,812 of eligible trade accounts receivable as of September 30, 2009
and December 31, 2008, respectively.
During
the nine months ended September 30, 2009 the Company completed the following
amendments of this revolving line of credit:
|
·
|
On
March 13, 2009, the Company amended this revolving line of credit
agreement to add Pure Earth Recycling and the Company’s other subsidiaries
as borrowers and the accounts receivable and inventory of these entities
have become collateral and, to the extent eligible, part of the available
borrowing base. As a result, as of March 13, 2009, $2.2 million
of borrowing availability was added to the revolving line of
credit. This amendment also added certain financial covenants
including minimum adjusted net income and debt service coverage ratio and
amended the tangible net worth
requirements.
|
|
·
|
As
of June 30, 2009, the Company was not in compliance with the minimum
adjusted net income and debt service coverage ratio covenants and as a
result, under the revolving line of credit agreement, events of default
were deemed to have occurred. On August 18, 2009, the Company
entered into an amendment of this revolving line of credit
agreement. This amendment included the following
provisions:
|
|
a.
|
The
existing events of default were waived by the lender, retroactively
effective as of June 30, 2009.
|
15
|
b.
|
The
maximum line of credit amount was reduced from $7,500,000 to $4,700,000
and lender-imposed loan reserves and letters of credit totaling $1,890,000
were removed, including the requirement to maintain minimum availability
of $500,000.
|
|
c.
|
The
interest rate under this line of credit was increased from 7.75% to the
bank’s prime rate, subject to a minimum of 5%, plus 5.75%, or 10.75% as of
August 18, 2009. This increase was retroactively applied as of
June 1, 2009.
|
|
d.
|
The
first $1,000,000 of otherwise eligible accounts receivable shall be deemed
ineligible for the purpose of serving as available borrowing
collateral.
|
|
e.
|
The
lender prohibited the Company from making any cash payments to the holder
of its Series B Preferred Stock during the remainder of the loan
term.
|
The
additional terms and provisions of this amendment were intended to reduce the
lender’s maximum potential exposure under this agreement, and did not have a
material impact on the Company’s borrowing availability, which was approximately
$1.5 million, both prior and subsequent to the execution of this
amendment.
The
amendment entered into on October 23, 2009 removed the existing financial
covenants and replaced them with the following financial covenants:
|
·
|
Minimum
Debt Service Coverage Ratio- Beginning on the month ending January 31,
2010, the Company must maintain a debt service coverage ratio (as defined
in the revolving line of credit agreement) of 1.0 to
1.0.
|
|
·
|
Capital
Expenditures- The Company may not incur unfinanced capital expenditures in
excess of $50,000 from November 1, 2009 through the maturity
date.
|
|
·
|
Account
Aging Limits- Beginning on November 30, 2009, the Company’s accounts
receivable older than 90 days past the invoice date must not exceed the
greater of 13% of all accounts receivable or $1.25 million. As
of October 31, 2009, the Company’s accounts receivable older than 90
days past the invoice date was approximately 18% of all accounts
receivable or $1.6 million. The Company is using its best
efforts to collect the past due receivables in order to comply with this
covenant by November 30, 2009.
|
This
amendment also continued the lender-imposed prohibition on the cash payment of
dividends to the Company’s Series B Preferred stockholder, which would have
constituted an event of noncompliance under the Series B Preferred Stock
investment agreement and related agreements for amounts due and
payable. The Company is in the process of obtaining a waiver from the
holder of the Series B Preferred Stock in advance of this event of
noncompliance.
Additionally
under this amendment, the Company must obtain additional capital in the form of
equity or subordinated debt of no less than $0.8 million by November 30, 2009,
and an additional $1.0 million of equity or subordinated debt by February 15,
2010. The Company believes that it will be able to raise additional
capital on acceptable terms as needed to satisfy these covenants under the
revolving line of credit agreement and otherwise to support
operations. In addition, the Company continues to pursue additional
sources of financing to replace the revolving line of credit and is engaged in
discussions with several potential new lenders. However, if the
Company is not successful in obtaining the necessary amount of debt or equity
financing by November 30, 2009 or February 15, 2010, such circumstance would
constitute an event of default under the revolving line of credit agreement,
which in turn would trigger a default under the Pure Earth Recycling term loan
(see Note 8).
16
NOTE 8 -
Long-Term Debt and
Notes Payable
At
September 30, 2009 and December 31, 2008, long-term debt consisted of the
following:
September
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
||||||||
Pure
Earth Recycling term loan
|
$ | 7,226,279 | $ | 7,927,349 | ||||
Equipment
term loan
|
1,205,396 | 1,603,204 | ||||||
Various
equipment notes payable
|
35,368 | 50,062 | ||||||
Pure
Earth Recycling notes payable
|
259,358 | 327,619 | ||||||
Nycon
assumed liabilities
|
75,000 | 75,000 | ||||||
Total
|
8,801,401 | 9,983,234 | ||||||
Less
current portion
|
(1,640,147 | ) | (1,556,494 | ) | ||||
Long-term
portion
|
$ | 7,161,254 | $ | 8,426,740 |
Future
maturities of long-term debt at September 30, 2009 are as follows:
Twelve
months ending September 30,
|
||||
2010
|
$ | 1,640,147 | ||
2011
|
1,826,913 | |||
2012
|
1,285,978 | |||
2013
|
1,194,488 | |||
2014
|
1,270,110 | |||
Thereafter
|
1,583,765 | |||
$ | 8,801,401 |
NOTE 9 -
Officer Loans and
Related Party Transactions
As of
September 30, 2009, the Company had a note payable to a former owner of Pure
Earth Recycling in the principal amount of $1,011,348. The note
payable bears interest at 6.77% per annum and is subject to repayment, including
accrued interest, based upon the following schedule:
Twelve
Months Ending September 30,
|
||||
2010
|
333,000 | |||
2011
|
678,348 | |||
$ | 1,011,348 |
Under the
stock purchase agreement, the Company must repay $333,000 of the principal on
December 31, 2009, with the remainder of principal and all accrued but unpaid
interest due and payable on December 31, 2010, subject to approval by its
lender. On June 17, 2009, the Company issued a notice of setoff to
the former owner of Pure Earth Recycling notifying him of the Company’s intent
to set-off post-closing claims in the amount of $1,144,984 against this note
payable and shares of Pure Earth common stock that may otherwise be due to the
former owner as permitted under the stock purchase
agreement. Effective on June 27, 2009, the Company offset the amounts
due to the former owner under this note payable against the post-closing
claims. The former owner of Pure Earth Recycling has denied the
validity of these post-closing claims. In September 2009, the Company
filed a complaint in the United States District Court for the Eastern District
of Pennsylvania against the former owner, alleging unspecified damages resulting
from the former owner’s alleged breach of contract, and seeking from the Court a
declaratory judgment as to the Company’s right of setoff as to these
post-closing claims (see Note 14). The ultimate outcome of this
litigation and these post-closing claims remains uncertain, and therefore the
note payable will remain outstanding on the Company’s consolidated financial
statements until either a settlement with the former owner is reached or the
Company is legally released from this obligation.
As of
September 30, 2009, the Company had approximately $0.1 million in due from
affiliates, which consists of amounts due from Pure Earth Recycling to a joint
venture, Advanced Catalyst Recycling LLC (“ACR”), in which it owns a
non-controlling 50% interest. The $0.1 million reflects the value of
goods and services performed and provided by Pure Earth Recycling to the joint
venture, for which Pure Earth Recycling has not yet been
compensated.
17
NOTE 10 –
Fair Value
Measurements
Effective
January 1, 2008, the Company adopted SFAS 157 (Topic 820), which establishes a
framework for measuring fair value under GAAP and enhances disclosures about
fair value measurements. As defined in SFAS 157 (Topic 820), fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the principal
or most advantageous market for the asset or liability at the measurement date
(exit price). SFAS 157 (Topic 820) establishes a three-level
hierarchy for disclosure of fair value measurements based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement
date. The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or liabilities (Level
1) and the lowest priority to unobservable inputs (Level 3). The
level in the fair value hierarchy within which the fair value measurement in its
entirety falls is determined based upon the lowest level input that is
significant to the measurement in its entirety.
The three
levels are defined as follows:
|
·
|
Level
1 — Inputs to the valuation are unadjusted quoted prices in active markets
for identical assets or
liabilities.
|
|
·
|
Level
2 — Inputs to the valuation may include quoted prices for similar assets
and liabilities in active or inactive markets, and inputs other than
quoted prices, such as interest rates and yield curves, that are
observable for the asset or liability for substantially the full term of
the financial instrument.
|
|
·
|
Level
3 — Inputs to the valuation are unobservable and significant to the fair
value measurement. Level 3 inputs shall be used to measure fair value only
to the extent that observable inputs are not
available.
|
The
Company uses a derivative financial instrument in the form of an interest-rate
swap to manage its exposure to the effects of changes in market interest rates
as they relate to the Pure Earth Recycling term loan which has an adjustable
rate of interest based upon the LIBOR. The Company entered into this
interest-rate swap under which we pay a fixed annual rate of interest of 6.10%
and receive payments from the counterparty based upon the substantially the same
LIBOR terms as the Pure Earth Recycling term loan, thereby effectively
converting our adjustable rate payments into a fixed rate
instrument.
The
outstanding derivative is recorded on the consolidated balance sheets at its
fair value as a liability at September 30, 2009. Because the Company’s
derivative is not listed on an exchange, the Company values this instrument
using a valuation model with pricing inputs that are observable in the market or
that can be derived principally from or corroborated by observable market
data. The Company’s methodology also incorporates the impact of both
the Company’s and the counterparty’s credit standing.
In
connection with the term loan refinancing and entering into the interest-rate
swap described above, the Company elected to measure the Pure Earth Recycling
term loan at fair value, pursuant to SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” (Topic 820) which was adopted concurrently with this
transaction. SFAS No. 159 (Topic 820) permits entities to measure
many financial instruments and certain other items at fair value. The Company’s
election was made specifically for this liability and was not elected for the
Company’s other debt instruments or liabilities. The Company’s fair
value election for the Pure Earth Recycling term loan is intended to better
reflect the underlying economics of the term loan and its relationship to the
corresponding interest-rate swap and allows the Company to record any change in
fair value of this liability as a gain or loss within the Company’s consolidated
statement of operations, along with gains or losses resulting from changes in
fair value of the interest rate swap. Because the Pure Earth
Recycling term loan is not listed on a public exchange, the Company values this
liability using an internal valuation model with significant pricing inputs that
are not fully observable in the marketplace.
18
Assets
and liabilities measured at fair value on a recurring basis or elected to be
measured at fair value under SFAS 157 (Topic 820) include the following as of
September 30, 2009:
Fair
Value Measurements Using:
|
Assets
/ Liabilities
|
|||||||||||||||
Level
1
|
Level
2
|
Level
3
|
at
Fair Value
|
|||||||||||||
Assets:
|
||||||||||||||||
— | — | — | — | |||||||||||||
Liabilities:
|
||||||||||||||||
Interest-rate
swaps
|
— | $ | 328,229 | — | $ | 328,229 | ||||||||||
Susquehanna
term loan
|
— | — | $ | 8,801,401 | $ | 8,801,401 |
During
the three and nine months ended September 30, 2009, the Company recorded net
losses of $10,591 and $4,813 respectively, as a result of changes in the fair
value its outstanding interest-rate swap and the Pure Earth Recycling term
loan. These gains and losses were recorded as components of other
income within the Condensed Consolidated Statements of Operations.
NOTE 11 –
Income
Taxes
For the
three and nine months ended September 30, 2009, the Company recognized an income
tax benefit of $754,480 and $1,847,278, respectively, based upon effective tax
rates of 39% and 40%. The Company’s deferred income tax liabilities
decreased by $1.9 million from December 31, 2008 to September 30, 2009 as a
result of the additional net operating losses, which will offset these future
income tax liabilities. The Company recognized an income tax benefit of $47,081
and $462,923 for the three and nine months ended September 30, 2008,
respectively, which was based upon an effective tax rate of approximately
38%.
NOTE 12-
Stockholders’ Equity
Common
Stock
On April
20, 2009, the Company retired 200,000 shares of its outstanding common stock,
which were previously pledged as collateral for reimbursement of the $200,000
payment made by the Company on behalf of the former owners of Juda for the
settlement of the pension liability lawsuit for union
truckers. Subsequent to the retirement of these shares the
Company has 75,000 shares of its common stock remaining as collateral from the
former owners of Juda which were pledged against any future remaining
liabilities. See Note 14 to the condensed consolidated financial
statements for more information.
During
the nine months ended September 30, 2009, the Company’s common stock issuances
were as follows:
|
·
|
On
May 26, 2009, the Company issued 30,000 shares of common stock valued at
$1.00 per share to an individual in exchange for the settlement of
outstanding litigation against the
Company.
|
|
·
|
On
May 29, 2009, the Company issued a total of 50,000 shares of common stock
valued at $1.00 per share to two consultants for marketing services
received.
|
|
·
|
On
September 29, 2009, the Company issued a total of 18,750 shares of common
stock valued at $0.50 per share to two consultants for marketing services
received.
|
19
Series B Preferred Stock and
Warrants
On March
4, 2008, the Company sold and issued to Fidus Mezzanine Capital, L.P. (“Fidus”),
a Delaware limited partnership, 6,300 shares of its Series B Preferred Stock and
a Warrant to purchase 767,375 shares of the Company’s common stock for an
aggregate purchase price of $6,300,000. The Company accounts for its
preferred stock based upon the guidance enumerated in SFAS 150 and EITF Topic
D-98 (Topic 480). The Series B Preferred Stock is mandatorily
redeemable on March 3, 2013 and therefore is classified as a liability
instrument on the date of issuance. The Warrants issued in connection
with the Series B Preferred Stock provide the holders with a put option that is
exercisable upon the occurrence of certain specified events and at the
discretion of the holder. The Company evaluated the Warrants and the
put option pursuant to EITF Issue No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and potentially settled in a Company’s Own Stock” (“EITF
00-19”) (Topic 480) and determined that the Warrants should be classified as
assets or liabilities because they contain redemption rights that are not solely
within the Company’s control as of the date of issuance and at December 31,
2008. Accordingly, the Company recorded the Warrants at their
estimated fair value of $2,263,223 on the date of issuance. The
remainder of the $6,300,000 in proceeds received, or $4,036,777, was allocated
to the mandatorily redeemable Series B Preferred Stock. As of
September 30, 2009, the carrying value of the mandatorily redeemable preferred
stock was $5,033,721, including accrued interest.
The
Company calculated the fair value of the warrants at the date of issuance and in
subsequent reporting periods, using the Black-Scholes option pricing model with
market based assumptions. The change in fair value of the Warrants
issued in connection with the Series B Preferred Stock from December 31, 2008 to
September 30, 2009, was a decrease of approximately $0.7 million from $1.1
million as of December 31, 2008 to $0.4 million as of September 30,
2009. This change in fair value of the Warrants was reflected as a
component of other income within the condensed consolidated statements of
operations for the three and nine months ended September 30, 2009.
NOTE 13 -
Commitments and
Contingencies
Leases
The
Company leases facilities, vehicles, and operating equipment under certain
non-cancelable operating leases that expire beginning in October 2009 through
December 2013.
Minimum
future lease payments are as follows:
Twelve months ending September
30,
|
||||
2010
|
$ | 1,366,577 | ||
2011
|
592,038 | |||
2012
|
440,029 | |||
2013
|
330,415 | |||
2014
|
55,069 | |||
Thereafter
|
- | |||
$ | 2,784,128 |
The
Company incurred rent expense of approximately $1,128,000 and $968,000 for the
nine months ended September 30, 2009 and 2008, respectively, and $377,000 and
$275,000 for the three months ended September 30, 2009 and 2008,
respectively.
Government Regulation, State
and Local Compliance
The
Company is subject to extensive and evolving federal, state and local
environmental, health, safety and transportation laws and
regulation. These laws and regulations are administered by the
Environmental Protection Agency and various other federal, state and local
environmental, zoning, transportation, land use, health and safety agencies.
Many of these agencies regularly examine our operations to monitor compliance
with these laws and regulations and have the power to enforce compliance, obtain
injunctions or impose civil or criminal penalties in case of
violations. The Company maintains various licenses and permits with
these agencies that are subject to periodic renewal, and without these licenses
and permits, the Company’s operations would be materially
affected. In June of 2009, Pure Earth Recycling settled outstanding
fines and compliance issues with various state and local authorities for
approximately $228,000 and for which a $624,300 liability was previously
recorded as part of Pure Earth Recycling’s opening balance sheet. The
settlement of these compliance issues and fines resulted in a reduction of the
liability of approximately $396,000, which was recorded as a component of other
income for the three and nine months ended September 30, 2009. As of
September 30, 2009, the Company believes it has substantially remediated all
prior deficiencies with respect to the matters described
above..
20
Employment
Agreements
The
Company has entered into employment agreements with several of its key
executives, officers, and employees, as well as consulting agreements with third
parties. These agreements provide for approximately $1.7 million in
aggregate annual compensation and various additional bonuses based upon specific
criteria payable in both cash and shares of common stock. The term of the
employment agreements vary depending on the individual, the longest of which
expire in June of 2014. These agreements include employment contracts
with the Company’s chief executive officer and chief financial officer for
five-year terms, which were entered into on June 1, 2008. Effective June 1,
2009, our executive officers and other employees subject to employment
agreements agreed to voluntarily reduce their salaries in an effort to reduce
the Company’s operating expenses. These reductions were to be in effect for
90 days after
which time the executive officers and the Company will review the Company’s
operating results to determine whether the salary reductions will continue
beyond the 90 day period. As of September 30, 2009, these salary reductions
remained in effect for the Company’s executive officers. All other
terms and conditions in the executive officers’ and other employees’ employment
contracts remain in effect. Payments under certain of these employment
agreements are subject to acceleration clauses and termination provisions in the
event of a change in control of the Company or termination without cause as
defined by the agreements.
Remaining
minimum future payments to key executives, officers, and employees are as
follows:
Twelve
Months Ending September 30,
|
||||
2010
|
1,714,672 | |||
2011
|
882,691 | |||
2012
|
551,255 | |||
2013
|
428,753 | |||
$ | 3,577,371 |
NOTE 14 -
Litigation
The
Company is party to various claims and legal proceedings from time-to-time
related to contract disputes and other commercial, employment, tax or regulatory
matters. Except as disclosed below, the Company is not aware of any
pending legal proceedings that it believes could individually, or in the
aggregate, have a material adverse effect on its consolidated financial
position, results of operations or cash flows.
Subsequent
to the asset purchase of Soil Disposal Group, Inc. (“Soil Disposal”) in November
of 2007, the former employer of the Soil Disposal sales representatives and
certain of its affiliates (the “Plaintiff”) filed a complaint against Pure
Earth, PEI Disposal Group, Soil Disposal, the Soil Disposal sales
representatives individually, the chief financial officer of Pure Earth
personally, and other named parties (collectively the
“Defendants”). The complaint alleges, among other things, that the
Defendants breached certain covenants not to compete and a non-solicitation
covenant with respect to customers and employees of the
Plaintiff. The complaint also claims that Pure Earth interfered with
contractual relations of the Plaintiff and aided and abetted the Soil Disposal
sales representatives’ breach of certain fiduciary duties to the Plaintiff,
unfair competition by the Defendants, and misappropriation of trade secrets and
confidential information. The Plaintiff also applied for a temporary
restraining order (“TRO”) to prevent the consummation of the transaction and
restrict the subsequent business activities of the Defendants, which was
dismissed.
In
September 2008, the Plaintiff amended its claim and also moved to compel the
Company and the other Defendants to produce additional documents. The
Defendants opposed these motions and cross-moved for summary judgment dismissing
the case. On April 15, 2009, the court referred the case to an
alternative dispute resolution program for a 45-day period during which time the
parties were unable to resolve the case. In the meantime the court, at the
Defendants’ request, ordered a stay of all further discovery. On July
6, 2009, the court initially denied the Defendants’ motion for summary judgment,
but later on October 22, 2009, granted re-argument on the motion ordered a stay
of all further discovery, and ordered the Plaintiff to produce proof of
damages. The Defendants have also sought dismissal of the case on the
grounds that the Plaintiff has failed to produce documents relevant to its
claims and as of November 14, 2009, no hearings are scheduled while the parties
await the court’s decision on re-argument of the summary judgment
motion. The Company and the other Defendants deny liability and are
vigorously defending all claims.
21
On April
17, 2006, a lawsuit was filed in the state of New Jersey, whereby Whitney
Contracting, Inc. (“Whitney”), a company from whom the Company acquired certain
assets in January 2006, was named as the defendant relating to an alleged breach
of a lease agreement. Juda and the former owners of Whitney and Juda
were named in the suit as co-defendants. The plaintiff alleged that
Juda misrepresented Whitney’s credit worthiness and was unjustly enriched by its
use of the leased premises. The plaintiff had sought damages in
excess of $1 million dollars for unpaid rent and other claims. In
March 2009, without defendants admitting any liability or wrongdoing or
acknowledging the validity of any of plaintiff’s allegations, the parties
settled this lawsuit for $350,000, of which Juda paid $50,000 and all other
defendants but one paid the remaining $300,000.
On
January 10, 2008, a lawsuit was filed in the state of New Jersey, whereby the
plaintiffs alleged that Pure Earth and certain former employees and current
officers of Pure Earth spread false rumors and defamed the plaintiffs in
connection with carrying out a waste disposal contract. The
plaintiffs are seeking compensatory damages for costs incurred, lost business,
punitive damages and attorney’s fees. On March 16, 2009, the Company
agreed to settle this matter for 30,000 shares of Pure Earth common stock and
entered into an agreement with the plaintiff whereby Pure Earth Recycling will
accept a specified quantity of soils from the plaintiff at a stated
price. The Company issued the 30,000 shares of Pure Earth common
stock to the plaintiff in settlement of this case on May 28, 2009.
In
September of 2007, PE Disposal began transportation and disposal work on a large
construction job in New York City to redevelop several city
blocks. Beginning in September 2007 and through September 30, 2008,
PE Disposal billed a total of $9.2 million to this customer for which it
received payments totaling $7.3 million, leaving an outstanding receivable
balance of $1.9 million. In addition, PE Disposal also billed an
additional $0.9 million in September of 2008 relating to this same job through
another one of its major customers, which is also outstanding as of September
30, 2009 and for which PE Disposal has a payment bond in the amount of $0.9
million in place. In August of 2008, the Company was notified by the
customers that they were stopping payment due to a dispute over the tonnage of
material removed from the construction site. PE Disposal promptly
ceased work on the job and filed a mechanics’ lien on the properties in
September of 2008. In December of 2008, PE Disposal filed three
lawsuits in the Supreme Court for the State of New York, County of New York,
against these customers and other lien holders, alleging that approximately $2.8
million in amounts owed to us for transportation and disposal fees, plus
applicable interest, have not been paid. PE Disposal sought to
foreclose on a mechanics’ lien and alleged breach of contract, unjust enrichment
and account stated claims. Certain of the defendants have filed
counterclaims against PE Disposal for breach of contract, fraud and willful lien
exaggeration, and seek at least $2.0 million in damages in each of the three
cases, plus punitive damages and attorneys’ fees in an amount to be proven at
trial. On May 29, 2009, the Company agreed to a settlement whereby it
will receive a total of $2.0 million in satisfaction of the $2.8 million of
outstanding accounts receivable and dismissal of the
counterclaims. Of this settlement amount, $1.0 million was to be
received within 15 days of the final settlement and the remaining $1.0 million
is scheduled to be repaid in 18 monthly installments of $55,556 beginning on
September 1, 2009. On July 1, 2009, the Company received the first
installment of $1.0 million, and has received subsequent monthly payments
totaling $166,665 for the months of September, October and November
2009. The remaining note receivable is secured by approximately
$888,000 in payment bonds held by the Company in the event of nonpayment by the
customers.
In
September 2009, Pure Earth filed a complaint in the United States District Court
for the Eastern District of Pennsylvania against a former owner of Pure Earth
Recycling, claiming that the former owner breached the terms of a stock purchase
agreement by which Pure Earth acquired Pure Earth Recycling. Under
the terms of the stock purchase agreement, the former owner is legally obligated
to indemnify and hold harmless Pure Earth from and against all liabilities,
losses, damages, costs and expenses arising from the former owner’s breach of
any representation or warranty in the stock purchase agreement. Pure
Earth has alleged that the former owner has breached numerous representations
and warranties in the stock purchase agreement and thereby has triggered the
former owner’s obligation to indemnify Pure Earth, which the former owner has
disputed. In the complaint, Pure Earth alleges that the former
owner’s failure to indemnify Pure Earth has breached the terms of the stock
purchase agreement. Pure Earth seeks from the Court an unspecified
amount of monetary damages (as well as attorney’s fees and expenses) and a
declaratory judgment as to Pure Earth’s right to set off its damages under the
stock purchase agreement against any amounts the Company may owe the former
owner thereunder.
22
In
November 2009, the former owner filed an answer to this complaint, generally
denying Pure Earth’s claims and asserting a number of affirmative
defenses. In his answer, the former owner also asserted counterclaims
and third-party claims against Pure Earth and its chief executive officer and
chief financial officer (collectively, the “Counterclaim Defendants”) for
fraudulent inducement, violations of specified antifraud provisions of the
federal securities laws, breach of contract, breach of fiduciary duty, unjust
enrichment, civil conspiracy and breach of an implied covenant of good faith and
fair dealing. The former owner seeks against the Counterclaim
Defendants an unspecified amount of compensatory and punitive damages, as well
as attorney’s fees and costs of suit, and any other relief that the Court deems
equitable and just. The Company denies any liability to the former
owner, believes that the former owner’s defenses and counterclaims are without
merit and will seek to vigorously defend itself against these
counterclaims.
Due to
the inherent uncertainties of litigation, and because the pending actions
described above are at a preliminary stage, the Company cannot accurately
predict the outcome of these matters at this time. The Company
intends to respond appropriately in defending against the alleged claims in each
of these matters. The ultimate resolution of these pending matters
could have a material adverse effect on the Company’s business, consolidated
financial position, results of operations, or cash flows.
Other Legal
Matters
During
the year ended December 31, 2007, the Company, Juda and the former owners of
Juda were named as co-defendants in a lawsuit relating to the pension liability
of union truckers from Whitney Trucking. On January 10, 2008, this
case was settled in the US District Court for $650,000, plus 10% annual
interest, payable over a two year period. All defendants are jointly
and severally liable for payment of the suit amount. The former owners of Juda
(the “Indemnitors”) have agreed to reimburse Pure Earth for any costs and
liabilities incurred as a result of this litigation as well as agreeing to
indemnify and hold harmless Pure Earth from and against any claims, suits,
causes of action or losses. The Company and the former owners of Juda agreed to
settle this liability as follows: i) $250,000 payable upon execution of the
settlement agreement, and ii) two consecutive payments of $200,000 each, plus
accrued interest, due on or before December 10, 2008 and 2009,
respectively. To facilitate this settlement, Pure Earth posted a
$400,000 letter of credit to serve as a credit
enhancement. Pursuant to a Reimbursement and Indemnity
Agreement with the Indemnitors, Pure Earth has the right to offset any amounts
owed from the Indemnitors against salary compensation or annual bonuses, which
they would otherwise be due from the Company. Pure Earth also
required that the Indemnitors pledge 150,000 shares of Pure Earth common stock
as collateral for the letter of credit. The pledged shares were
deposited into an escrow account that is jointly held by Pure Earth and the
Indemnitors. On December 10, 2008, the Company made the payment of
$200,000 due on that date, on behalf of the former owners of Juda, and at which
time the outstanding letter of credit was reduced to $200,000. The
Company also required the Indemnitors to post an additional 125,000 shares of
Pure Earth common stock as additional collateral as a result of this
payment.
On April
20, 2009, the Company retired 200,000 shares of its outstanding common stock,
which were previously pledged as collateral for reimbursement of the $200,000
payment made by the Company on behalf of the former owners of Juda for the
settlement of the pension liability lawsuit for union truckers, as described
above. Subsequent to the retirement of these shares the Company
has 75,000 shares of its common stock remaining as collateral from the former
owners of Juda which were pledged against any future remaining
liabilities.
23
NOTE 15 -
Segment
Reporting
During
the three and nine months ended September 30, 2009 and 2008, the Company and
management have organized its operations into five reportable business segments:
Transportation and Disposal, Materials, Environmental Services, Treatment and
Recycling and Concrete Fibers. Prior to the acquisition of Nycon, Inc. effective
April 1, 2008, the Company and management organized its operations into four
reportable business segments: Transportation and Disposal, Materials,
Environmental Services, and Treatment and Recycling. Certain income
and expenses not allocated to the five reportable segments and intersegment
eliminations are reported under the heading “Corporate and
Other”. The performance of the segments is evaluated on several
factors, of which the primary financial measure is operating income before
interest, taxes, depreciation, and amortization (“Adjusted
EBITDA”).
Summarized
financial information concerning our reportable segments for the three and nine
months ended September 30, 2009 is shown in the following table:
Three
Months Ended
September
30, 2009
|
Transportation
and
Disposal
|
Materials
|
Environmental
Services
|
Treatment
and
Recycling
|
Concrete
Fibers
|
Corporate
and
Other
(a), (b)
|
Total
(d)
|
|||||||||||||||||||||
Third
Party Revenues
|
$ | 5,926,184 | $ | 628,690 | $ | 144,985 | $ | 4,306,933 | $ | 444,682 | $ | — | $ | 11,451,474 | ||||||||||||||
Intercompany
Revenues (b)
|
— | 63,009 |
3,434
|
558,174 | - | (624,617 | ) | - | ||||||||||||||||||||
Total
Revenues
|
5,926,184 | 691,699 | 148,419 | 4,865,107 | 444,682 | (624,617 | ) | 11,451,474 | ||||||||||||||||||||
Third
Party Cost of Revenues
|
4,475,876 | 798,158 | 145,232 | 4,853,218 | 300,737 | — | 10,573,221 | |||||||||||||||||||||
Intercompany
Cost of Revenues
|
510,554 | — |
3,433
|
110,630 | — |
(624,617)
|
- | |||||||||||||||||||||
Total
Cost of Revenues
|
4,986,430 |
798,158
|
148,665
|
4,963,848 | 300,737 |
(624,617)
|
10,573,221 | |||||||||||||||||||||
Gross
Profit Margin
|
939,754 | (106,459 | ) | (246 | ) | (98,741 | ) | 143,945 | — | 878,253 | ||||||||||||||||||
Operating
Expenses
|
597,072 |
115,413
|
200,420 | 671,989 | 193,772 | 748,721 | 2,527,387 | |||||||||||||||||||||
Income
(Loss) from Operations
|
$ | 342,682 | $ | (221,872 | ) | $ | (200,666 | ) | $ | (770,730 | ) | $ | (49,827 | ) | $ | (748,721 | ) | $ | (1,649,134 | ) | ||||||||
Adjusted
EBITDA
|
$ | 512,080 | $ | (176,537 | ) | $ | (180,607 | ) | $ | (275,799 | ) | $ | (3,228 | ) | $ | (351,354 | ) | $ | (475,445 | ) | ||||||||
Reconciliation
to Consolidated Statement of Operations:
|
||||||||||||||||||||||||||||
Depreciation
and Amortization (c)
|
169,398 | 45,335 | 20,060 | 538,119 | 46,599 | 11,648 | 831,159 | |||||||||||||||||||||
Interest
Expense
|
- | - | 793 | 116,882 | 1,244 | 524,664 | 643,583 | |||||||||||||||||||||
Income
(Loss) before Provision for Income Taxes
|
342,682 | (221,872 | ) | (201,460 | ) |
(930,800)
|
(51,071 | ) | (887,666 | ) | (1,950,187 | ) |
24
Nine
Months Ended
September
30, 2009
|
Transportation
and
Disposal
|
Materials
|
Environmental
Services
|
Treatment
and
Recycling
|
Concrete
Fibers
|
Corporate
and Other
(f),
(g)
|
Total
(i)
|
|||||||||||||||||||||
Third
Party Revenues
|
$ | 16,348,986 | $ | 2,054,647 | $ | 504,185 | $ | 15,417,829 | $ | 1,192,323 | $ | — | $ | 35,517,970 | ||||||||||||||
Intercompany
Revenues (f)
|
261,885 | 319,555 | 5,089 | 1,206,674 | - - | (1,793,203 | ) | — | ||||||||||||||||||||
Total
Revenues
|
16,610,871 | 2,374,202 | 509,274 | 16,624,503 | 1,192,323 | (1,793,203 | ) | 35,517,970 | ||||||||||||||||||||
Third
Party Cost of Revenues
|
12,367,084 | 2,261,741 | 456,618 | 14,880,117 | 880,100 | — | 30,845,660 | |||||||||||||||||||||
Intercompany
Cost of Revenues
|
1,658,119 | — | 5,089 | 129,995 | - - | (1,793,203 | ) | — | ||||||||||||||||||||
Total
Cost of Revenues
|
14,025,203 | 2,261,741 | 461,707 | 15,010,112 | 880,100 | (1,793,203 | ) | 30,845,660 | ||||||||||||||||||||
Gross
Profit Margin
|
2,585,668 | 112,461 | 47,567 | 1,614,391 | 312,223 | — | 4,672,310 | |||||||||||||||||||||
Operating
Expenses
|
2,368,757 | 391,166 | 411,635 | 2,524,231 | 636,332 | 2,290,761 | 8,622,882 | |||||||||||||||||||||
Income
(Loss) from Operations
|
$ | 216,911 | $ | (278,705 | ) | $ | (364,068 | ) | $ | (909,840 | ) | $ | (324,109 | ) | $ | (2,290,761 | ) | $ | (3,950,572 | ) | ||||||||
Adjusted
EBITDA
|
$ | 725,104 | $ | (144,372 | ) | $ | (308,998 | ) | $ | 862,655 | $ | (183,695 | ) | $ | (1,447,993 | ) | $ | (497,299 | ) | |||||||||
Reconciliation
to Consolidated Statement of Operations:
|
||||||||||||||||||||||||||||
Depreciation
and Amortization (h)
|
508,193 | 134,333 | 55,070 | 1,521,484 | 140,414 | 34,943 | 2,394,437 | |||||||||||||||||||||
Interest
Expense
|
— | — | 2,758 | 383,760 | 2,263 | 1,442,519 | 1,831,300 | |||||||||||||||||||||
Income
(Loss) before Provision for Income Taxes
|
$ | 216,911 | $ | (278,705 | ) | $ | (366,826 | ) | $ | (1,042,589 | ) | $ | (326,372 | ) | $ | (2,925,454 | ) | $ | (4,723,036 | ) | ||||||||
Capital
Expenditures (e)
|
$ | - | $ | 35,326 | $ | - | $ | - | $ | 16,257 | $ | - | $ | 51,583 | ||||||||||||||
Total
Assets
|
$ | 9,378,322 | $ | 1,512,914 | $ | 1,560,777 | $ | 25,232,853 | $ | 1632,590 | $ | 2,874,626 | $ | 42,192,082 | ||||||||||||||
Goodwill
|
$ | - | $ | - | $ | 759,694 | $ | - | $ | - | $ | - | $ | 759,694 |
(a)
|
Corporate
operating results reflect the costs incurred for various support services
that are not allocated to our five operating segments. These support
services include, among other things, treasury, legal, information
technology, tax, insurance, and other administrative
functions. It also includes eliminations of intersegment
revenues and costs of
sales.
|
(b)
|
Intercompany
operating revenues reflect each segment’s total intercompany sales,
including intercompany sales within a segment and between segments.
Transactions within and between segments are generally made on a basis
intended to reflect the market value of the
service.
|
(c)
|
Includes
depreciation and amortization expense classified above as a component of
cost of sales and operating
expenses.
|
(d)
|
The
“Consolidated Total Assets” above reflects the elimination of $5,130,186
of the Company’s investment in subsidiaries and intersegment
receivables.
|
(e)
|
Includes
non-cash items and assets acquired through acquisition. Capital
expenditures are reported in the Company’s operating segments at the time
they are recorded within the segments’ property, plant and equipment
balances and, therefore, may include amounts that have been accrued but
not yet paid.
|
25
Summarized
financial information concerning our reportable segments for the three and nine
months ended September 30, 2008 is shown in the following tables:
Three
months ended
September
30, 2008
|
Transportation
and
Disposal
|
Materials
|
Environmental
Services
|
Treatment
and
Recycling
|
Concrete
Fibers
|
Corporate
and
Other
(a), (b)
|
Total
(d)
|
|||||||||||||||||||||
Third
Party Revenues
|
$ | 11,124,348 | $ | 424,462 | $ | 538,157 | $ | 6,504,446 | $ | 539,634 | $ | — | $ | 19,131,047 | ||||||||||||||
Intercompany
Revenues (b)
|
— | 228,414 | — | 461,206 | - | (689,620 | ) | - | ||||||||||||||||||||
Total
Revenues
|
11,124,348 | 652,876 | 538,157 | 6,965,652 | 539,634 | (689,620 | ) | 19,131,047 | ||||||||||||||||||||
Third
Party Cost of Revenues
|
8,003,636 | 966,404 | 478,474 | 5,659,401 | 373,164 | — | 15,481,079 | |||||||||||||||||||||
Intercompany
Cost of Revenues
|
664,178 | — | 25,581 | — | — | (689,759 | ) | - | ||||||||||||||||||||
Total
Cost of Revenues
|
8,667,814 | 966,404 | 504,055 | 5,659,401 | 373,164 | (689,759 | ) | 15,481,079 | ||||||||||||||||||||
Gross
Profit (Loss) Margin
|
2,456,534 | (313,528 | ) | 34,102 | 1,306,251 | 166,470 | 139 | 3,649,968 | ||||||||||||||||||||
Operating
Expenses
|
1,012,326 | 149,364 | 116,661 | 1,018,052 | 200,653 | 745,471 | 3,242,527 | |||||||||||||||||||||
Income
(loss) from Operations
|
1,444,208 | (462,892 | ) | (82,559 | ) | 288,199 | (34,183 | ) | (745,332 | ) | 407,441 | |||||||||||||||||
Adjusted
EBITDA
|
1,614,056 | (375,531 | ) | (63,741 | ) | 777,624 | 3,821 | (733,819 | ) | 1,222,410 | ||||||||||||||||||
Reconciliation
to Consolidated Statement of Operations:
|
||||||||||||||||||||||||||||
Depreciation,
Amortization and Impairment (c)
|
169,848 | 87,226 | 18,818 | 440,517 | 38,004 | 11,648 | 766,061 | |||||||||||||||||||||
Interest
Expense
|
- | - | 1,074 | 98,565 | 3,328 | 389,682 | 492,649 | |||||||||||||||||||||
Income
before provision for income taxes
|
1,444,208 | (462,757 | ) | (83,633 | ) | 238,542 | (37,511 | ) | (1,135,149 | ) | (36,300 | ) |
26
Nine
months ended
September
30, 2008
|
Transportation
and
Disposal
|
Materials
|
Environmental
Services
|
Treatment
and
Recycling
|
Concrete
Fibers
|
Corporate
and
Other
(a), (b)
|
Total
(d)
|
|||||||||||||||||||||
Third
Party Revenues
|
$ | 28,007,758 | $ | 1,215,041 | $ | 1,798,650 | $ | 19,425,781 | $ | 1,191,461 | $ | — | $ | 51,638,690 | ||||||||||||||
Intercompany
Revenues (b)
|
305,242 | 1,029,456 | 5,239 | 1,344,312 | - | (2,684,249 | ) | - | ||||||||||||||||||||
Total
Revenues
|
28,313,000 | 2,244,497 | 1,803,888 | 20,770,093 | 1,191,461 | (2,684,249 | ) | 51,638,690 | ||||||||||||||||||||
Third
Party Cost of Revenues
|
19,367,703 | 3,044,330 | 1,483,349 | 17,072,459 | 933,917 | — | 41,901,758 | |||||||||||||||||||||
Intercompany
Cost of Revenues
|
2,489,307 | 11,159 | 130,433 | 53,350 | — | (2,684,249 | ) | - | ||||||||||||||||||||
Total
Cost of Revenues
|
21,857,010 | 3,055,489 | 1,613,782 | 17,125,809 | 933,917 | (2,684,249 | ) | 41,901,758 | ||||||||||||||||||||
Gross
Profit (Loss) Margin
|
6,455,990 | (810,992 | ) | 190,107 | 3,644,283 | 257,544 | — | 9,736,932 | ||||||||||||||||||||
Operating
Expenses
|
2,451,521 | 488,249 | 341,787 | 3,340,510 | 394,294 | 2,624,316 | 9,640,677 | |||||||||||||||||||||
Income
(Loss) from Operations
|
4,004,469 | (1,299,241 | ) | (151,680 | ) | 303,773 | (136,750 | ) | (2,624,316 | ) | 96,255 | |||||||||||||||||
Adjusted
EBITDA
|
4,538,850 | (1,036,794 | ) | (97,786 | ) | 1,773,720 | (36,364 | ) | (2,591,051 | ) | 2,550,575 | |||||||||||||||||
Reconciliation
to Consolidated Statement of Operations:
|
||||||||||||||||||||||||||||
Depreciation,
Amortization and Impairment (c)
|
534,381 | 262,447 | 53,894 | 1,308,286 | 100,386 | 33,265 | 2,292,659 | |||||||||||||||||||||
Interest
Expense
|
- | - | 4,560 | 314,423 | 5,716 | 971,545 | 1,296,244 | |||||||||||||||||||||
Income
before provision for income taxes
|
4,004,469 | (1,299,241 | ) | (156,240 | ) | 151,011 | (142,466 | ) | (3,595,861 | ) | (1,038,328 | ) | ||||||||||||||||
Capital
Expenditures (e)
|
$ | 3,294 | $ | 94,649 | $ | 349,123 | $ | 654,422 | $ | 52,353 | $ | 51,360 | $ | 1,205,200 | ||||||||||||||
Total
Assets (d)
|
$ | 15,194,920 | $ | 1,166,896 | $ | 2,032,549 | $ | 29,604,224 | $ | 2,431,013 | $ | 4,455,103 | $ | 54,884,705 | ||||||||||||||
Goodwill
|
$ | — | $ | - | $ | 759,964 | $ | — | $ | - | $ | — | $ | 759,964 |
(f)
|
Corporate
operating results reflect the costs incurred for various support services
that are not allocated to our four operating Groups. These support
services include, among other things, treasury, legal, information
technology, tax, insurance, and other administrative
functions. It also includes eliminations of intersegment
revenues and costs of sales.
|
(g)
|
Intercompany
operating revenues reflect each segment’s total intercompany sales,
including intercompany sales within a segment and between segments.
Transactions within and between segments are generally made on a basis
intended to reflect the market value of the
service.
|
(h)
|
Includes
depreciation and amortization expense classified above as a component of
cost of sales and operating
expenses.
|
(i)
|
The
“Consolidated Total Assets” above reflects the elimination of $5,185,376
of the Parent’s investment in subsidiaries and intersegment
receivables.
|
(j)
|
Includes
non-cash items and assets acquired through acquisition. Capital
expenditures are reported in the Company’s operating segments at the time
they are recorded within the segments’ property, plant and equipment
balances and, therefore, may include amounts that have been accrued but
not yet paid.
|
For the
nine months ended September 30, 2009, the Company derived approximately $168,000
of its revenue (all within the Concrete Fibers segment) from customers located
outside of the United States. For the nine months ended September 30,
2008, the Company derived approximately $212,000 of its revenue (all within the
Concrete Fibers segment) from customers located outside of the United
States. In addition at September 30, 2009 and December 31, 2008, all
of the Company’s operations and long-lived assets were located in the United
States.
NOTE 16 -
Subsequent
Event
On November 16, 2009, the Company and
the lender for the Pure Earth Recycling term loan entered into an amendment of
the term loan agreement and the related interest rate swap agreement, whereby
the lender agreed to a three month interest-only period beginning on November
15, 2009 and ending on February 15, 2009. During this time the
Company will continue to make interest payments in accordance with the term loan
and interest rate swap agreement. Subsequent to the interest-only
period, the Company’s monthly principal and interest payment will increase by
approximately $4,000 to $121,761 per month, with an effective interest rate of
6.10% through the termination date on November 15, 2015.
27
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
The
following discussion and analysis of our results of operations and financial
condition should be read together with our condensed consolidated financial
statements and the notes thereto included elsewhere in this quarterly
report.
Information
contained in this section and expressed in dollars has generally been presented
in round numbers. Percentages contained in this section have been
calculated, where possible, using the information from our consolidated and
condensed consolidated financial statements, and not the rounded information
provided in this section. As a result, these percentages may differ
slightly from calculations obtained based upon the rounded figures provided in
this section and totals contained in this section may be affected by
rounding.
Statements
included in this quarterly report that do not relate to present or historical
conditions are called “forward-looking statements.” Such
forward-looking statements involve known and unknown risks and uncertainties and
other factors that could cause actual results or outcomes to differ materially
from those expressed in, or implied by, the forward-looking
statements. Forward-looking statements may include, without
limitation, statements relating to our plans, strategies, objectives,
expectations and intentions. Words such as “believes,” “forecasts,”
“intends,” “possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,”
“could,” “will,” and similar expressions are intended to identify
forward-looking statements. Our ability to predict or project future results or
the effect of events on our operating results is inherently uncertain.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be
achieved.
Important
factors that could cause actual performance or results to differ materially from
those expressed in or implied by, forward-looking statements include, but are
not limited to:
|
·
|
industry
competition, conditions, performance and
consolidation;
|
|
·
|
our
ability to grow our business through the formation and acquisition of
complementary businesses;
|
|
·
|
our
ability to integrate the companies, assets and operations we have
previously acquired;
|
|
·
|
our
ability to raise capital required by our revolving line of credit
agreement or otherwise to support our
operations;
|
|
·
|
our
ability to satisfactorily extend or replace our revolving line of credit
by its maturity date on April 23, 2010 and to continue to comply with the
financial and other covenants
thereunder;
|
|
·
|
legislative
and regulatory developments;
|
|
·
|
weather
conditions, including extremely harsh weather or natural disasters which
may cause us to temporarily cease some or all of
operations;
|
|
·
|
the
effects of adverse general economic conditions, both within the United
States and globally; and
|
|
·
|
other
factors described in “Item 1A. Risk Factors” of our Annual
Report on Form 10-K (File No. 0-53287) for the fiscal year ended December
31, 2008, as filed with the SEC on March 31, 2009, in this Quarterly
Report on Form 10-Q, or in our other filings made with the
SEC.
|
Forward-looking
statements speak only as of the date the statements are made. We
assume no obligation to update forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting
forward-looking information except to the extent required by applicable
securities laws. If we update one or more forward-looking statements, no
inference should be drawn that we will make additional updates with respect
thereto or with respect to other forward-looking statements.
28
Overview
and Strategy
We are a
diversified environmental company that specializes in delivering innovative
solutions for the health and well-being of the planet. We
are a provider of integrated environmental transportation, disposal, recycling,
consulting, engineering and related services, enabling the beneficial reuse of
soils and industrial waste streams into approved disposal facilities and
Brownfield sites.
We were
originally formed as a Delaware corporation on February 13, 1997 under the name
Info Investors, Inc. with the original purpose of engaging in infomercial
marketing, but this business never actively developed and was abandoned in
2006. On January 17, 2006, in connection with our acquisition of
South Jersey Development, Inc., we changed our name to Pure Earth, Inc. and
began to focus our efforts on the acquisition and operation of companies that
serve our objectives.
As we are
a relatively new company, a key element of our formation and growth to date has
been our ability to identify potential complementary environmental services and
beneficial reuse companies or specific assets of such companies as acquisition
targets, to negotiate and successfully close those acquisitions, and to
integrate the acquired businesses and assets into our operations. By
combining these existing and new technologies into a single organization, we
believe we can be the leading provider of a wide array of soil reclamation,
waste recycling, alternative fuels and other environmental
services. We also intend to utilize these services internally to
develop and rehabilitate Brownfield properties that we own for development, and,
ultimately, sale, as commercial real estate opportunities.
We
operate in the following five reportable business segments, which serve as
strategic business units through which our operations are generally
organized:
|
·
|
Transportation and Disposal –
We provide transportation and disposal services for excavated clean
and contaminated soils from urban construction projects in the
mid-Atlantic region and the New York metropolitan
area.
|
|
·
|
Treatment and Recycling
– We remove,
process, treat, recycle and dispose of residual waste from a variety of
different industrial and commercial sources, targeting customers along the
U.S. eastern seaboard. We also plan to recycle waste products
with high BTU value into alternative fuels for consumers and other end
users.
|
|
·
|
Environmental Services – We provide a
wide range of environmental consulting and related specialty services,
including:
|
|
o
|
environmental
investigation, consulting and engineering services to commercial and
residential customers; and
|
|
o
|
locating
and acquiring Brownfield sites for subsequent development, restoration and
potential resale, using capping material from our existing facilities or
directly from our customer base.
|
|
·
|
Materials – We produce
and sell recycled construction materials for a variety of construction and
other applications, including crushed stone and recycled
aggregate. Our construction materials are produced to meet all
prevailing specifications for their
use.
|
|
·
|
Concrete Fibers
– Concrete Fibers is our newest segment, which was
created with our acquisition of Nycon effective April 2008. We
recycle used carpet fibers into environmentally sustainable, or “green,”
fiber material. We also repack and distribute various other
fibers as additives to concrete
products.
|
29
We are
leveraging our integrated environmental, transportation and disposal services to
invest in and reclaim Brownfield properties. Brownfields are parcels
of real property that generally have been used for industrial or commercial
purposes and whose redevelopment may be complicated by the presence or potential
presence of a hazardous substance, pollutant or contaminant. Cleaning
up and reinvesting in these properties takes development pressures off
undeveloped and open land, revitalizes an otherwise blighted or potentially
blighted property for productive use, improves and protects the environment,
improves the local tax base and facilitates job growth. We believe
that our investments in Brownfield properties, together with our environmental
recycling, engineering, consulting and related services, support our primary
mission to act as a steward of the environment.
We
generate revenues and cash in each of our segments as follows:
|
·
|
Transportation and Disposal –
Revenues and cash are derived generally from fees charged to our
customers for the collection, transportation and disposal of contaminated
and clean soils from urban construction projects in the mid-Atlantic
region and the New York metropolitan
area.
|
|
·
|
Treatment and Recycling
– Our revenues
and cash are earned primarily through the following
channels:
|
|
o
|
fees
earned as a disposal facility for treatment by thermal desorption of
contaminated soils; and
|
|
o
|
performing
recycling services, such as oil recycling, decontamination, wastewater
cleanup, and laboratory analysis.
|
|
·
|
Environmental Services – We generate
revenues from fees charged for our environmental consulting and related
specialty services,
including well-drilling and the disposal of medical waste. We have
recently acquired our first Brownfield site and plan to take steps to cap
this property with soils from our Transportation and Disposal
segment. We estimate that we will begin generating revenues
from our Brownfield operations in the second quarter of
2010.
|
|
·
|
Materials – Revenues
and cash are generated by charging fees to customers for the removal of
construction materials, such as rock and aggregate, from
jobsites. These fees are based upon the quantity and weight of
material removed and the distance of the jobsite from our rock crushing
facility. We then process the material at our rock crushing
facility into various crushed stone products, which are then resold to
customers for use in other construction projects. We sell our
crushed stone products by weight and at a unit price that varies depending
on the product type. Our Materials revenues are primarily
dependent upon the level of construction services in and around New York
City and the New York-New Jersey-Connecticut tri-state area, as well as
the demand for crushed stone products used in those construction
projects.
|
|
·
|
Concrete Fibers – We
generate revenues and cash through the sale of packaged concrete fibers to
construction companies, concrete manufacturers and wholesalers in the
domestic and foreign marketplace. The price at which we sell
these fibers is determined based upon the type of fiber, the quantity of
the order and the pricing of our competitors for similar
products. Our Concrete Fibers revenues are largely dependent
upon the demand from the commercial and residential construction
industries and prices set by the large companies that purchase our
concrete fiber output. Also, this segment’s ability to generate
revenue depends upon our ability to negotiate favorable sales agreements
with these companies and our ability to manage the costs of obtaining raw
materials and selling our concrete fiber
products.
|
Overall,
we generally enter into customer and materials contracts on a purchase order or
similar basis. We do not generally enter into long-term supply or
service contracts or arrangements with our customers. As a result,
our revenues tend to be less regular than if we provided services or materials
under long-term or requirements contracts, and thus our revenues may fluctuate
significantly from period to period and between the same periods in different
fiscal years. Thus, it may be hard for an investor to project our
results of operations for any given future period.
We
believe that the environmental services industry, especially in the eastern
United States, is generally poised to expand in the near future for several
reasons. First, support for environmentally sustainable construction
methods and materials has increased over the past few years, and we predict that
this trend will continue in light of growing concerns regarding fuel
availability and consumption, and the environmental impacts of industry and
development
30
Second,
the operation of commercial and industrial concerns in the northeastern United
States over the last 50 to 100 years has created a large number of properties
with environmental evaluation and waste disposal
needs. Cost-effective restoration of these properties will be viewed
as a solution to the limited availability and high value of real estate in the
northeastern United States. Since 1995, federal and state support of
Brownfield programs have served to promote and fund activities designed to
efficiently clean up these properties and restore them to productive and
revenue-generating use. Finally, the increasing cost and declining
capacity of landfills support the development of alternative technologies for
the beneficial recycling and reuse of hazardous and other wastes, including
soils, fuels, metals and wastewater.
We
believe that we are well-positioned to capitalize upon these industry
opportunities. We have commenced operations in strategically selected
geographic locations near major cities and industrial centers, such as the New
York-New Jersey-Connecticut tri-state area and the mid-Atlantic
region. Despite a recent market downturn due to challenges posed by
the current economic environment, these regions have historically supported
strong construction growth and have driven the need for the recycling and reuse
of a variety of waste streams, which we believe will continue to be true in the
long-term. We seek to improve and expand our existing operations to
take advantage of these opportunities while also improving our overall operating
efficiency to enhance profitability.
We are
also focusing on integrating a wide array of related environmental services
operations into a single platform to offer our customers a single source for
customizable transportation, disposal and treatment and recycling services, all
at a lower cost. Our Materials segment also produces beneficially
reused construction materials at a significant discount to the cost of original
materials, which supports sales to construction sites as well as our internal
needs for Brownfield redevelopment. Our services integration strategy
is being developed for us to capitalize on the Brownfield redevelopment industry
through the management of a diverse range of contaminated materials and
environmental services which we believe will allows us to seek Brownfield sites
for efficient and cost-sensitive development of these properties.
Critical
Accounting Policies and Estimates
In
preparing our condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States, we make estimates
and assumptions that affect the accounting, recognition and disclosure of our
assets, liabilities, stockholders’ equity, revenues and expenses. We
make these estimates and assumptions because certain information that we use is
dependent upon future events, cannot be calculated with a high degree of
precision from data available or cannot be readily calculated based upon
generally accepted methodologies. In some cases, these estimates are
particularly difficult and therefore require a significant amount of
judgment. Actual results could differ from the estimates and
assumptions that we use in the preparation of our consolidated and condensed
consolidated financial statements. There have not been any
significant changes to our critical accounting policies discussed under “Item
2. Financial Information –Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008, as filed with the Securities and
Exchange Commission on March 31, 2009.
31
Results
of Operations – Three Months Ended September 30, 2009 Compared to Three Months
Ended September 30, 2008
The
following table presents, for the periods indicated, a summary of our condensed
consolidated statement of operations information.
Three
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands, except share and per share data)
|
(unaudited)
|
(unaudited)
|
||||||
Revenues
|
$ | 11,451 | $ | 19,131 | ||||
Cost
of revenues
|
10,573 | 15,481 | ||||||
Gross
profit
|
878 | 3,650 | ||||||
Operating
expenses:
|
||||||||
Salaries
and related expenses
|
1,230 | 1,591 | ||||||
Occupancy
and other office expenses
|
206 | 226 | ||||||
Professional
fees
|
457 | 359 | ||||||
Other
operating expenses
|
260 | 566 | ||||||
Insurance
|
227 | 357 | ||||||
Depreciation
and amortization
|
162 | 145 | ||||||
(Gain)
on sale of equipment
|
(15 | ) | (1 | ) | ||||
Total
operating expenses
|
2,527 | 3,243 | ||||||
Income
(loss) from operations
|
(1,649 | ) | 407 | |||||
Interest
expense, net
|
(643 | ) | (492 | ) | ||||
Loss
from equity investment
|
(33 | ) | — | |||||
Other
income
|
375 | 49 | ||||||
Loss
before benefit from income taxes
|
(1,950 | ) | (36 | ) | ||||
Benefit
from income taxes
|
(754 | ) | (47 | ) | ||||
Net
income (loss)
|
(1,196 | ) | 11 | |||||
Less
preferred stock dividends
|
— | — | ||||||
Income
(loss) available for common stockholders
|
$ | (1,196 | ) | $ | 11 | |||
Income
(loss) available for common stockholders per share (basic)
|
$ | (0.07 | ) | $ | 0.00 | |||
Income
(loss) available for common stockholders per share
(diluted)
|
$ | (0.07 | ) | $ | 0.00 | |||
Weighted
average shares of common stock outstanding during the period
(basic)
|
17,507,033 | 17,621,799 | ||||||
Weighted
average shares of common stock outstanding during the period
(basic)
|
17,507,033 | 18,388,914 | ||||||
Earnings
(loss) before interest, taxes, depreciation and amortization
(EBITDA)
|
$ | (475 | ) | $ | 1,223 |
We define
EBITDA, as used in the table above, to mean our net loss before interest,
benefit from income taxes, depreciation and amortization. We rely on
EBITDA, which is a non-GAAP financial measure:
|
·
|
to
review and assess the operating performance of our company and our
reporting segments, as permitted by SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information”(Topic 280 of the
Accounting Standards Codification or ASC or the Financial Accounting
Standards Board, or FASB;
|
|
·
|
to
compare our current operating results with corresponding periods and with
the operating results of other companies in our
industry;
|
|
·
|
as
a basis for allocating resources to various segments or
projects;
|
|
·
|
as
a measure to evaluate potential economic outcomes of acquisitions,
operational alternatives and strategic decisions;
and
|
|
·
|
to
evaluate internally the performance of our
personnel.
|
32
In
addition, we also utilize EBITDA as a measure of our liquidity and our ability
to meet our debt service obligations and satisfy our debt covenants, which are
partially based on EBITDA. See “ – Liquidity and Capital Resources –
Summary of Cash Flows – Net Cash Used in Operating Activities.”
We have
presented EBITDA above because we believe it conveys useful information to
investors regarding our operating results. We believe it provides an
additional way for investors to view our operations, when considered with both
our GAAP results and the reconciliation to net loss, and that by including this
information we can provide investors with a more complete understanding of our
business. Specifically, we present EBITDA as supplemental disclosure
because:
|
·
|
we
believe EBITDA is a useful tool for investors to assess the operating
performance of our business without the effect of interest and income
taxes, which are non-operating expenses, and depreciation and
amortization, which are non-cash
expenses;
|
|
·
|
we
believe that it is useful to provide to investors with a standard
operating metric used by management to evaluate our operating
performance;
|
|
·
|
we
believe that the use of EBITDA is helpful to compare our results to other
companies by eliminating non-cash depreciation and amortization charges
and the effects of differences in intangible asset valuation, which are
often incurred with significant acquisitions of operations;
and
|
|
·
|
EBITDA
is commonly used by companies in the waste management and environmental
industries as a performance measure, and we believe that providing this
information allows investors to compare our operating performance to that
of our competitors in these
industries.
|
Even
though we believe EBITDA is useful for investors, it does have limitations as an
analytical tool. Thus, we strongly urge investors not to consider
this metric in isolation or as a substitute for net loss and the other
consolidated statement of operations data prepared in accordance with
GAAP. Some of these limitations include the fact that:
|
·
|
EBITDA
does not reflect our cash expenditures or future requirements for capital
expenditures or contractual
commitments;
|
|
·
|
EBITDA
does not reflect changes in, or cash requirements for, our working capital
needs;
|
|
·
|
EBITDA
does not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debt;
|
|
·
|
although
depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future,
and EBITDA does not reflect any cash requirements for such
replacements;
|
|
·
|
EBITDA
does not reflect income or other taxes or the cash requirements to make
any tax payments; and
|
|
·
|
other
companies in our industry may calculate EBITDA differently than we do,
thereby potentially limiting its usefulness as a comparative
measure.
|
Because
of these limitations, EBITDA should not be considered a measure of discretionary
cash available to us to invest in the growth of our business or as a measure of
performance in compliance with GAAP. We compensate for these
limitations by relying primarily on our GAAP results and providing EBITDA only
supplementally.
The following table presents a
reconciliation of net loss, which is our most directly comparable GAAP operating
performance measure, to EBITDA for the three months ended September 30, 2009 and
September 30, 2008:
33
Three
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
(unaudited)
|
(unaudited)
|
||||||
EBITDA
|
$ | (475 | ) | $ | 1,223 | |||
Depreciation
and amortization, including $669 and $621 of depreciation and amortization
classified as a component of cost of revenues
|
832 | 766 | ||||||
Interest
expense, net
|
643 | 493 | ||||||
Benefit
from income taxes
|
(754 | ) | (47 | ) | ||||
Net
income (loss)
|
$ | (1,196 | ) | $ | 11 |
Revenues
The
following table sets forth information regarding our revenues, excluding
intercompany revenues, by segment for the three months ended September 30, 2009
and 2008.
Three
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
(unaudited)
(in
thousands, except percentages)
|
Amount
|
%
of
Revenues
|
Amount
|
%
of
Revenues
|
||||||||||||
Transportation
and Disposal
|
$ | 5,925 | 52 | % | $ | 11,124 | 58 | % | ||||||||
Treatment
and Recycling
|
4,307 | 38 | % | 6,504 | 34 | % | ||||||||||
Environmental
Services
|
145 | 1 | % | 538 | 3 | % | ||||||||||
Materials
|
629 | 5 | % | 425 | 2 | % | ||||||||||
Concrete
Fibers
|
445 | 4 | % | 540 | 3 | % | ||||||||||
Total
|
$ | 11,451 | 100 | % | $ | 19,131 | 100 | % |
Revenues
decreased by $7.7 million, or 40%, from $19.1 million for the three months ended
September 30, 2008 to $11.4 million for the three months ended September
30, 2009. The revenue decrease in the third quarter of 2009 is
primarily attributable to a $5.2 million decrease in revenues from the
Transportation and Disposal segment and a decrease of $2.2 million in revenues
from the Treatment and Recycling segment. The Environmental Services
and Concrete Fibers segments decreased by $0.4 million and $0.1 million,
respectively, for the three months ended September 30, 2009. These
decreases were offset by an increase of $0.2 million in revenue from the
Materials segment.
Revenues
from our Transportation and Disposal segment decreased by $5.2 million, or 47%,
for the three months ended September 30, 2009 as compared to the three months
ended September 30, 2008. Revenues in both periods were driven
largely by the demand for our Transportation and Disposal services in the New
York metropolitan area. We derived 14% and 44% of our Transportation
and Disposal revenues for the three months ended September 30, 2009 and
2008, from five and three large customers, respectively. Revenues from
the Transportation and Disposal segment are highly dependent upon the market for
construction and rehabilitation projects in the New York City metropolitan area,
which experienced a significant downturn during the fourth quarter of 2008,
which has continued into 2009 due to uncertain market and economic
conditions. This resulted in many large construction and
rehabilitation projects being delayed or put on hold, which has resulted in a
decrease in revenues from this segment during the third quarter of 2009 as
compared to the third quarter of 2008.
Revenues
from the Treatment and Recycling segment for the three months ended September
30, 2009, decreased by $2.2 million, or 34%, as compared to the three months
ended September 30, 2008. The decrease in revenues reflects an
increase in competition within the marketplace for fewer large soil treatment
and recycling jobs. We are currently in the process of
obtaining additional permits and modifying existing permits to allow us to
increase the capacity and volume of clean and contaminated soils that can be
processed and treated. Our Treatment and Recycling revenues for the
three months ended September 30, 2009, also include approximately $0.4 million
in revenues from PE Energy for brokering the disposal of various alternative
waste streams.
34
Revenues
from the Environmental Services segment decreased by $0.4 million, or 73%, from
$0.5 million for the three months ended September 30, 2008 to $0.1 million for
the three months ended September 30, 2009. In 2008, we expanded our
consulting services by offering the brokering of the disposal of waste, which
contributed approximately $0.2 million in revenues for the three months ended
September 30, 2008, which did not recur during the three months ended September
30, 2009. In January of 2008, we purchased a Brownfield location in
central Connecticut which will provide a disposal site for excavated soils from
the Connecticut and New England marketplace over the next three to four
years. We anticipate that this site will begin generating revenues in
of the second quarter of 2010.
Revenues
from the Materials segment also increased by approximately $0.2 million for the
three months ended September 30, 2009 as compared to the three months ended
September 30, 2008. The Materials segment results overall were
positively affected by consolidation of two rock crushing facilities into one
facility during the fourth quarter of 2008. In October of 2008, we
terminated our lease and operating agreement for the North Bergen rock crushing
facility, which has had a positive impact on our Material segment results as we
are no longer required to first offer the owner of the facility a fixed price
for our rock and aggregate products. We believe that we will be able
to continue to sell these products at higher prices to other customers, which
will result in higher revenues on a per ton basis. The loss of
production from this rock crushing facility has been offset and absorbed by
increased production at our Lyndhurst site which can now handle higher
quantities of material with the new $1.8 million of equipment leased in
2008.
Revenues
from the Concrete Fibers segment decreased by approximately $0.1 million, or
18%, for the three months ended September 30, 2009 as compared to the three
months ended September 30, 2008. We commenced operations in our
Concrete Fibers segment on April 1, 2008 with the acquisition of Nycon,
Inc. In the second and third quarters of 2009 we implemented a
revised sales strategy that will utilize regional sales managers located in five
strategic locations across the United States in an effort to broaden our
customer base, which we believe will result in additional
revenues. In connection with the Nycon acquisition, we introduced the
Nycon-G™ fiber, an eco-friendly reinforcing fiber manufactured from
post-consumer carpet waste and developed under the patented process covered by
the licensing agreement with the patent holder. We believe that
Nycon-G™ is the only concrete reinforcing fiber currently on the market that has
minimal or no negative impact on the environment and that offering this product
to the marketplace will allow us to establish or enhance existing relationships
with large concrete manufacturers.
The table
above does not reflect intercompany revenues of approximately $0.6 million and
$0.7 million for the three months ended September 30, 2009 and 2008,
respectively, which revenues were eliminated from our condensed consolidated
statements of operations. Our intercompany revenues largely reflect
our use of Transportation and Disposal services internally for our Materials
processing activities and the shipment of wastes to our Treatment and Recycling
segment facilities. We generally reflect these services at their
current market value when rendered. An important part of the
strategic alignment of our segments is the synergies and cost savings that these
segments can provide to each other, which benefits us as a
whole.
35
Cost
of Revenues
The
following table sets forth information regarding our cost of revenues, excluding
intercompany costs, by segment for the three months ended September 30, 2009 and
2008.
Cost
of Revenues – By Segment
|
||||||||||||||||
Three
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
(unaudited)
(in thousands)
|
Amount
|
%
of
Revenues
|
Amount
|
%
of
Revenues
|
||||||||||||
Transportation
and Disposal
|
$ | 4,476 | 39 | % | $ | 8,004 | 42 | % | ||||||||
Treatment
and Recycling
|
4,853 | 42 | % | 5,659 | 30 | % | ||||||||||
Environmental
Services
|
145 | 1 | % | 479 | 2 | % | ||||||||||
Materials
|
798 | 7 | % | 966 | 5 | % | ||||||||||
Concrete
Fibers
|
301 | 3 | % | 373 | 2 | % | ||||||||||
Total
|
$ | 10,573 | 92 | % | $ | 15,481 | 81 | % |
Cost of
revenues decreased by approximately $4.9 million, from $15.5 million for the
three months ended September 30, 2008 to $10.6 million for the three months
ended September 30, 2009. This decrease results primarily from a
decrease in the total volume of sales from the Transportation and Disposal
segment combined with a decrease in costs within the Treatment and Recycling and
Materials segments from period to period. Our overall cost of
revenues as a percentage of sales increased from 81% for the three months ended
September 30, 2008, to 92% for the three months ended September 30, 2009, which
is reflective of increased competition in the marketplace for less overall
volume of business. Our gross profit margin for the Transportation
and Disposal segment and the Treatment and Recycling segment decreased by 4% and
26%, respectively, for the three months ended September 30, 2009 as compared to
the three months ended September 30, 2008. Our gross margin for the
Materials segment increased by $0.4 million for the three months ended September
30, 2009 as compared to the corresponding prior year period, as a result of the
consolidation of our operating sites into one facility and increased production
capability and efficiency from the new rock crushing equipment leased in June of
2008.
For the
remainder of 2009, we expect to continue to operate at gross margins ranging
from 12% to 15% on a consolidated basis. These estimates are based on
our current expectation of costs of labor and transportation
costs. Our ability to achieve our estimated gross margins in future
periods may be impacted by, among other things, the overall economic conditions,
fuel prices that rise faster than anticipated, increases in disposal costs
arising from a reduction in the disposal facilities’ capacity or additional
restrictions that may be placed on the types or amounts of waste they may be
able to accept, and our ability to successfully implement initiatives to reduce
operating expenses.
Operating
Expenses
Our
operating expenses include:
|
·
|
salaries
and related expenses (other than direct labor costs and union benefits
described above);
|
|
·
|
occupancy
and other office expenses;
|
|
·
|
professional
fees;
|
|
·
|
insurance;
|
|
·
|
depreciation
and amortization (other than amounts included as a component of cost of
revenues as described above);
|
|
·
|
impairment
charges for idle machinery;
|
|
·
|
gains
or losses recognized on our sale of certain equipment;
and
|
|
·
|
other
miscellaneous operating
expenses.
|
36
The
following table summarizes the primary components of our operating expenses for
the three months ended September 30, 2009 and 2008.
Three
Months Ended September 30,
|
Period
to Period Change
|
|||||||||||||||
(unaudited)
(in thousands, except percentages)
|
2009
|
2008
|
Amount
|
Percentage
|
||||||||||||
Salaries
and related expenses
|
$ | 1,230 | $ | 1,591 | $ | (361 | ) | (23 | )% | |||||||
Occupancy
and other office expenses
|
206 | 226 | (20 | ) | (9 | )% | ||||||||||
Professional
fees
|
457 | 359 | 98 | 27 | % | |||||||||||
Other
operating expenses
|
260 | 566 | (306 | ) | (54 | )% | ||||||||||
Insurance
|
227 | 357 | (130 | ) | (36 | )% | ||||||||||
Depreciation
and amortization
|
163 | 145 | 18 | 12 | % | |||||||||||
Gain
on sale of equipment
|
(15 | ) | $ | (1 | ) | (14 | ) | (1,400 | )% | |||||||
Total
operating expenses
|
$ | 2,528 | $ | 3,243 | $ | (715 | ) | (22 | )% |
Salaries
and related expenses represented approximately 49% of our total operating
expenses for the three months ended September 30, 2009 and were driven primarily
by our overall headcount and compensation structure. Our costs
associated with salaries and related expenses decreased from period to period by
$0.4 million, or 23%, which is due to reductions in headcount which took place
during the first and second quarters of 2009 and voluntary reductions in
management’s salaries which went into effect on June 1,
2009. These decreases are also the result of lower bonus and
commission accruals during the three months ended September 30, 2009 due to
lower sales.
We
maintain employment agreements with many of our officers and key employees, many
of which provide for fixed salaries, annual increases in base salary, bonuses
based upon performance and other forms of compensation. In June 2008,
we entered into employment agreements with two of our executive officers, which
will provide them with increases in base salary and other benefits from year to
year. A
number of our employment arrangements include compensation tied to metrics of
our operating performance, such as revenues, gross profits or EBITDA. Furthermore,
in the second quarter of 2007, our board of directors adopted our incentive
plan, which allows us to issue awards of options and shares of restricted stock
to our employees, non-employee directors and certain consultants and advisors,
for which we will be required to recognize as compensation expense the fair
value of these awards over the associated service period. We also pay
monthly commission expenses to our sales representatives operating in our
Transportation and Disposal and Materials segments, based upon a percentage of
overall sales volume and or gross profits, with additional incentives if certain
sales thresholds are crossed. As a result, we anticipate that, over
time as our revenues and gross profits increase, our salaries and related
expenses will increase in terms of absolute dollars and, likely, as a percentage
of total operating expenses.
Occupancy
and other office expenses represent our costs associated with the rental of our
office space and other facilities, temporary labor, dues and subscriptions,
postage and other office expenses. Rent includes the cost of leasing
our principal executive offices in Trevose, Pennsylvania and additional
properties and facilities in New York, New Jersey, and Connecticut to support
our operations. Occupancy and other office expenses decreased by
$20,000, or 9%, from the three months ended September 30, 2008 as compared to
the three months ended September 30, 2009, which is primarily attributable to
the consolidation of our Materials segment facilities into one operating
location, consolidation of the Bronx, New York office into the Lyndhurst site,
and the implementation of cost cutting initiatives and lower office expenses at
Corporate and Pure Earth Recycling.
For the
three months ended September 30, 2009 and 2008, our professional fees consisted
primarily of:
|
·
|
consulting
fees paid for sales;
|
|
·
|
audit
and accounting fees related to the audit of our consolidated financial
statements;
|
|
·
|
legal
costs associated with litigation;
|
|
·
|
legal
and other related costs associated with the preparation and filing of our
quarterly, annual and periodic reports and other SEC
filings;
|
|
·
|
legal
and other fees incurred in connection with our acquisitions and other
matters; and
|
37
|
·
|
fees
paid to third parties and regulatory agencies to monitor safety and
compliance with respect to certain of our
operations.
|
Our
professional fees increased by $98,000, or 27%, for the quarter ended September
30, 2009 as compared to the quarter ended September 30, 2008, which is result of
additional legal fees relating to ongoing litigation and amendments to our
revolving line of credit agreement and additional consulting fees paid to
salesman and independent contractors. For the remainder of 2009, we
anticipate that our legal, auditing, accounting and other professional fees will
be consistent with our 2008 costs. We will incur additional
accounting and professional fees in order to comply with the Sarbanes-Oxley Act
of 2002, or SOX, including the requirement to implement and maintain internal
control over financial reporting and prepare an assessment by management
thereof, which will be required beginning with our fiscal year ended December
31, 2009. Beginning with our fiscal year ending December 31, 2010 we
will also be required and to have our auditors issue an audit report on our
assessment of our internal control over financial reporting. As we
continue to grow, whether through internal growth or by acquisition, the amount
of legal and other professional fees for any future transaction will increase as
a result of our status as an SEC reporting company subject to SOX.
We
maintain various policies for workers’ compensation, health, disability,
umbrella, pollution, product liability, general commercial liability, title and
director’s and officer’s liability insurance. Our insurance costs
decreased by approximately $130,000, or 36%, for the three months ended
September 30, 2009 as compared to the corresponding period in 2008, primarily as
a result of reduced policy premiums due to a lower number or insured vehicles
and the timing of insurance refunds realized in 2009. We renegotiated
our insurance coverage company-wide in August 2009, which we expect will result
in slight increase in our future insurance premiums over the next twelve
months.
Other
operating expenses consist of general and administrative costs such as travel
and entertainment, bank service fees, advertising and other office and
miscellaneous expenses. Other operating expenses decreased by
approximately $0.3 million, or 54%, in the three months ended September 30, 2009
as compared to the three months ended September 30, 2008. This
decrease was primarily attributable various cost cutting initiatives enacted in
the second and third quarters of 2009.
Income
(Loss) from Operations
The
following table sets forth our income (loss) from operations by reportable
segment for the three months ended September 30, 2009 and 2008.
Three
Months Ended September 30,
|
Period
to Period Change
|
|||||||||||||||
(unaudited)
(in thousands, except percentages)
|
2009
|
2008
|
Amount
|
Percentage
|
||||||||||||
Transportation
and Disposal
|
$ | 343 | $ | 1,444 | $ | (1,101 | ) | (76 | )% | |||||||
Treatment
and Recycling
|
(771 | ) | 288 | (1,059 | ) | (368 | )% | |||||||||
Environmental
Services
|
(200 | ) | (83 | ) | (117 | ) | (141 | )% | ||||||||
Materials
|
(222 | ) | (463 | ) | 241 | 52 | % | |||||||||
Concrete
Fibers
|
(50 | ) | (34 | ) | (16 | ) | (47 | )% | ||||||||
Corporate
and Other
|
(749 | ) | (745 | ) | (4 | ) | (1 | )% | ||||||||
Total
|
$ | (1,649 | ) | $ | 407 | $ | (2,056 | ) | (505 | )% |
The
decrease in income from operations within the Transportation and Disposal
segment is due in large part to a decrease in the overall Transportation and
Disposal revenues of approximately $5.2 million with a decrease in the gross
profit margin from 28% for the three months ended September 30, 2008, to 24% for
the three months ended September 30, 2009. This decrease in gross
profit margin is due primarily to increased competition for fewer jobs in the
marketplace, resulting in tighter margins. The decline in revenues
during the three months ended September 30, 2009 is attributable to the decline
in the overall economy and the construction industry in the New York
metropolitan area.
38
For the
three months ended September 30, 2009, the Treatment and Recycling segment had a
loss from operations of approximately $0.7 million as compared to income from
operations of approximately $0.3 million for the three months ended September
30, 2008. The decrease in this segment’s operating results is
primarily due to lower volumes of incoming soils for treatment, coupled with
gross profit margins (not including intercompany revenues) which declined from
13% for the three months ended September 30, 2008 to (13)% for the three months
ended September 30, 2009. The decrease in revenues and tightening of
margins is the result of fewer large soil disposal and remediation jobs in the
overall marketplace which creates increased competition and price
compression. We expect that when the volume of incoming materials
increases, our income from operations and gross profit margins attributable to
the Treatment and Recycling segment will begin to improve.
Loss from
operations within the Environmental Services segment was approximately $0.2
million for the three months ended September 30, 2009 as compared to a loss of
approximately $0.1 million for the three months ended September 30,
2008. The losses from operations during the three months ended
September 30, 2009 and 2008 were primarily attributable to a lack of new
business from our environmental consulting services and brokerage
operations. We expect to commence operations at our initial
Brownfield property in the second quarter of 2010, from which we should
experience an increase in revenues and income from operations for the
Environmental Services segment.
The loss
from operations attributed to the Materials segment decreased by approximately
$0.2 million for the three months ended September 30, 2009 as compared to the
three months ended September 30, 2008, from a loss of approximately $0.4 million
in 2008 to a loss of $0.2 million in 2009. The improvement in our
operating results for this segment is due to the consolidation of our rock
crushing facilities from two locations into one and the termination of the North
Bergen lease and operating agreement. As a result, we are no
longer required to first offer the owner of the North Bergen facility a fixed
price for our rock and aggregate products. We have been able to sell
these products at higher prices to other customers, which contributed to higher
revenues and better margins on a per ton basis in the third quarter of
2009.
Interest
Income and Expense
Interest
expense, net of interest income earned on our short-term deposits of excess
operating cash, was $0.6 million and approximately $0.5 million for the three
months ended September 30, 2009 and 2008, respectively. The increase
in interest expense is due to:
|
·
|
approximately
a $15,000 increase in interest expense within the Treatment and Recycling
segment as a result of the Pure Earth Recycling term loan refinancing
completed in November of 2008; and
|
|
·
|
an
increase in the interest rate on our revolving line of credit from 0.25%
below our lender’s prime rate or 4.75% at September 30, 2008,
to 10.75% at September 30,
2009.
|
We anticipate that the annual interest
cost associated with our Series B preferred stock will be approximately $1.3
million (including amortization of the deferred financing costs and accretion of
the debt discount). The interest expense incurred in relation to our
revolving line of credit will fluctuate based upon our working capital
requirements from our operating segments, as well as changes in the prevailing
interest rates.
On March 13, 2009, we completed
an amendment of our revolving line of credit, which added Pure Earth Recycling
and our other subsidiaries as borrowers, and the accounts receivable and
inventory of these entities have become collateral and, to the extent eligible,
part of the available borrowing base. As a result of covenant
defaults under our revolving line of credit agreement in June of 2009, the
interest rate on our revolving line of credit was increased to the default
interest rate of 10.75% effective retroactively to June 1, 2009 and through the
extended maturity date on April 23, 2010.
On
November 12, 2008, we refinanced our existing long-term debt and revolving line
of credit at Pure Earth Recycling into a consolidated $8.0 million, seven-year
term loan with an adjustable rate of interest. In connection with
this refinancing, we also entered into an interest rate swap agreement, which
effectively converted this adjustable-rate loan into a fixed-rate loan with an
annual interest rate of 6.10%. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Debt
Obligations – Long-Term Debt” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008. We anticipate that our annual interest
expense for 2009 under this term loan will be approximately $0.5
million.
39
Other
Income
During
the three months ended September 30, 2009, we recognized other income of $0.4
million, primarily as a result of the change in fair value of warrants with
contingent redemption provisions. This amount represents gains
relating to the warrants issued with our Series B preferred stock which occurred
as a result of the warrants being revalued as of September 30, 2009, as required
under EITF 00-19 (Topic 480). The decrease in the estimated fair
value of these warrants was the result of a decline in the fair value of our
common stock underlying these warrants.
In
connection with the refinancing of the Pure Earth Recycling revolving line of
credit on November 12, 2008, we also entered into an interest rate swap
agreement, which essentially converts our adjustable rate term loan to a
fixed-rate loan bearing interest at an annual rate of 6.10%. We
account for this interest rate swap as a derivative contract pursuant to SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Topic
815), and therefore we recorded a fair value adjustment decrease of
approximately $60,000 for the three months ended September 30,
2009. The fair value adjustment on the interest rate swap was offset
in large part by a mark-to-market adjustment increase of $49,000 for the three
months ended September 30, 2009 on the Pure Earth Recycling term loan, for which
we have elected to apply the fair value option under SFAS No. 159 (Topic
820).
Other income for the three months ended
September 30, 2008 was approximately $49,000 due primarily to income derived
from the operations of our joint venture, ACR, within the Treatment and
Recycling segment. ACR is engaged in the exploration of opportunities in the
market for recycling spent metal catalysts.
Benefit
From Income Taxes
For the
three months ended September 30, 2009, we recognized a benefit from income taxes
of approximately $0.8 million, and a benefit from income taxes of $0.1 million
for the three months ended September 30, 2008. The recognition of
these income tax benefits is the result of pre-tax losses incurred during both
periods. Our effective tax rates were 39% and 37.5% for the three
months ended September 30, 2009 and 2008, respectively. The decrease
in the our effective tax rate is primarily the result of an estimated pre-tax
loss for the 2009 reporting year, as compared to estimated pre-tax income for
the 2008 reporting year. We anticipate that our effective income tax rate
for the full calendar year of 2009 will be approximately 40%.
40
Results
of Operations – Nine Months Ended September 30, 2009 Compared to Nine Months
Ended September 30, 2008
The
following table presents, for the periods indicated, a summary of our condensed
consolidated statement of operations information.
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands, except share and per share data)
|
(unaudited)
|
(unaudited)
|
||||||
Revenues
|
$ | 35,518 | $ | 51,369 | ||||
Cost
of revenues
|
30,846 | 41,902 | ||||||
Gross
profit
|
4,672 | 9,737 | ||||||
Operating
expenses:
|
||||||||
Salaries
and related expenses
|
4,083 | 4,617 | ||||||
Occupancy
and other office expenses
|
708 | 791 | ||||||
Professional
fees
|
1,480 | 1,425 | ||||||
Other
operating expenses
|
1,227 | 1,297 | ||||||
Insurance
|
668 | 956 | ||||||
Depreciation
and amortization
|
483 | 400 | ||||||
Impairment
of idle machinery
|
— | 412 | ||||||
(Gain)
on sale of equipment
|
(26 | ) | (257 | ) | ||||
Total
operating expenses
|
8,623 | 9,641 | ||||||
Income
(loss) from operations
|
(3,951 | ) | 96 | |||||
Interest
expense, net
|
(1,831 | ) | (1,296 | ) | ||||
Loss
from equity investment
|
(140 | ) | — | |||||
Other
income
|
1,199 | 162 | ||||||
Loss
before benefit from income taxes
|
(4,723 | ) | (1,038 | ) | ||||
Benefit
from income taxes
|
(1,847 | ) | (463 | ) | ||||
Net
loss
|
(2,876 | ) | (575 | ) | ||||
Less
preferred stock dividends
|
— | (478 | ) | |||||
Loss
available for common stockholders
|
$ | (2,876 | ) | $ | (1,053 | ) | ||
Loss
available for common stockholders per
share (basic and diluted)
|
$ | (0.16 | ) | $ | (0.06 | ) | ||
Weighted
average shares of common stock outstanding during the period (basic and
diluted)
|
17,551,298 | 17,360,519 | ||||||
Earnings
(loss) before interest, taxes, depreciation and amortization
(EBITDA)
|
$ | (497 | ) | $ | 2,551 |
For a discussion of our used of EBITDA,
a non-GAAP financial measure, in the table above, see “Results of Operations –
Three Months Ended September 30, 2009 Compared to Three Months Ended September
30, 2008.” The use of EBITDA as a measure of our operating
performance has limitations and should not be considered in isolation from or as
an alternative to GAAP operating measures such as net income (loss) and income
from operations, or as a measure of profitability. The following
table sets for the reconciliation of EBITDA to net income (loss), our most
directly comparable operating performance measure presented in accordance with
GAAP, for each of the nine months ended September 30, 2009 and
2008.
41
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
(unaudited)
|
(unaudited)
|
||||||
EBITDA
|
$ | (497 | ) | $ | 2,551 | |||
Depreciation
and amortization, including $1,912 and $1,893 of depreciation and
amortization classified as a component of cost of revenues
|
2,394 | 2,293 | ||||||
Interest
expense, net
|
1,831 | 1,296 | ||||||
Benefit
from income taxes
|
(1,847 | ) | (463 | ) | ||||
Net
loss
|
$ | (2,875 | ) | $ | (575 | ) |
Revenues
The
following table sets forth information regarding our revenues, excluding
intercompany revenues, by segment for the nine months ended September 30, 2009
and 2008.
Nine
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
(unaudited)
(in
thousands, except percentages)
|
Amount
|
%
of
Revenues
|
Amount
|
%
of
Revenues
|
||||||||||||
Transportation
and Disposal
|
$ | 16,349 | 46 | % | $ | 28,008 | 54 | % | ||||||||
Treatment
and Recycling
|
15,418 | 43 | % | 19,426 | 38 | % | ||||||||||
Environmental
Services
|
504 | 1 | % | 1,799 | 3 | % | ||||||||||
Materials
|
2,055 | 6 | % | 1,215 | 2 | % | ||||||||||
Concrete
Fibers
|
1,192 | 3 | % | 1,191 | 2 | % | ||||||||||
Total
|
$ | 35,518 | 100 | % | $ | 51,639 | 100 | % |
Revenues
decreased by $16.1 million, or 32%, from $51.6 million for the nine months ended
September 30, 2008 to $35.5 million for the nine months ended September 30,
2009. The revenue decrease in 2009 is primarily attributable to a
$11.7 million decrease in revenues from the Transportation and Disposal segment
and a decrease of $4.0 million in revenues from the Treatment and recycling
segment. The Environmental Services segment also decreased by $1.3
million for the nine months ended September 30, 2009. These decreases
were offset by an increase of $0.8 million in revenue from the Materials segment
for the nine months ended September 30, 2009 as compared to the nine months
ended September 30, 2008.
Revenues
in both periods were driven largely by the demand for our Transportation and
Disposal services in the New York metropolitan area. We derived 28%
and 41% of our Transportation and Disposal revenues for the nine months ended
September 30, 2009 and 2008 from five and three large customers,
respectively. Revenues from the Transportation and Disposal segment
are highly dependent upon the market for construction and rehabilitation
projects in the New York City metropolitan area, which experienced a significant
downturn during the fourth quarter of 2008 and into 2009 due to uncertain market
and economic conditions. This resulted in many large construction and
rehabilitation projects being delayed or put on hold, which has resulted in a
decrease in revenues from this segment during the nine months ended September
30, 2009 as compared to the same period in the prior year.
Revenues
from the Treatment and Recycling segment for the nine months ended September 30,
2009 decreased by $4.0 million, or 21%, as compared to the nine months ended
September 30, 2008. The decrease in revenues reflects the increased
competition in the marketplace for fewer large treatment and recycling jobs as
well as lower overall pricing for our services. We are currently in
the process of obtaining additional permits and modifying existing permits to
allow us to increase the capacity and volume of clean and contaminated soils
that can be processed and treated. Our Treatment and Recycling
revenues for the nine months ended September 30, 2009, also include
approximately $0.9 million in revenues from PE Energy for brokering the disposal
of various alternative waste streams.
42
Revenues
from the Environmental Services segment decreased by $1.3 million, or 72%, from
$1.8 million for the nine months ended September 30, 2008 to $0.5 million for
the nine months ended September 30, 2009. In 2008, we expanded our
consulting services by offering the brokering of the disposal of waste, which
contributed approximately $0.6 million in revenues for the nine months ended
September 30, 2008, which did not recur during the nine months ended September
30, 2009. In January of 2008, we purchased a Brownfield location in
central Connecticut which will provide a disposal site for excavated soils from
the Connecticut and New England marketplace over the next three to four
years. We anticipate that this site will begin generating revenues in
second quarter of 2010.
Revenues
from the Materials segment increased by approximately $0.8 million for the nine
months ended September 30, 2009 as compared to the nine months ended September
30, 2008. The Materials segment results overall were positively
affected by consolidation of two rock crushing facilities into one facility
during the fourth quarter of 2008. In October of 2008, we terminated
our lease and operating agreement for the North Bergen rock crushing facility,
which has had a positive impact on our Material segment results as we are no
longer required to first offer the owner of the facility a fixed price for our
rock and aggregate products. We believe that we will be able to
continue to sell these products at higher prices to other customers, which will
result in higher revenues on a per ton basis. The loss of production
from this rock crushing facility has been offset and absorbed by increased
production at our Lyndhurst site which can now handle higher quantities of
material with the new $1.8 million of equipment leased in 2008.
Revenues
from the Concrete Fibers segment were $1.2 million for both the nine months
ended September 30, 2008 and September 30, 2009. We commenced
operations in our Concrete Fibers segment on April 1, 2008 with the acquisition
of Nycon, Inc., and therefore the results for the nine months ended September
30, 2008 included the operating results for only six months as compared to nine
months in 2009. In the second and third quarters of 2009 we
implemented a revised sales strategy that will utilize regional sales managers
located in five strategic locations across the United States in an effort to
broaden our customer base, which we believe will result in additional
revenues. In connection with the Nycon acquisition, we introduced the
Nycon-G™ fiber, an eco-friendly reinforcing fiber manufactured from
post-consumer carpet waste and developed under the patented process covered by
the licensing agreement with the patent holder. We believe that
Nycon-G™ is the only concrete reinforcing fiber currently on the market that has
minimal or no negative impact on the environment and that offering this product
to the marketplace will allow us to establish or enhance existing relationships
with large concrete manufacturers.
The table
above does not reflect intercompany revenues of approximately $1.8 million and
$2.7 million for the nine months ended September 30, 2009 and 2008,
respectively, which revenues were eliminated from our condensed consolidated
statements of operations. Our intercompany revenues largely reflect
our use of Transportation and Disposal services internally for our Materials
processing activities and the shipment of wastes to our Treatment and Recycling
segment facilities. We generally reflect these services at their
current market value when rendered. An important part of the
strategic alignment of our segments is the synergies and cost savings that these
segments can provide to each other, which benefits us as a
whole.
43
Cost
of Revenues
The
following table sets forth information regarding our cost of revenues, excluding
intercompany costs, by segment for the nine months ended September 30, 2009 and
2008.
Cost
of Revenues – By Segment
|
||||||||||||||||
Nine
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
(unaudited)
(in thousands)
|
Amount
|
%
of
Revenues
|
Amount
|
%
of
Revenues
|
||||||||||||
Transportation
and Disposal
|
$ | 12,367 | 35 | % | $ | 19,368 | 37 | % | ||||||||
Treatment
and Recycling
|
14,880 | 42 | % | 17,073 | 33 | % | ||||||||||
Environmental
Services
|
457 | 1 | % | 1,483 | 3 | % | ||||||||||
Materials
|
2,262 | 6 | % | 3,044 | 6 | % | ||||||||||
Concrete
Fibers
|
880 | 3 | % | 934 | 2 | % | ||||||||||
Total
|
$ | 30,846 | 87 | % | 41,902 | 81 | % |
Cost of
revenues decreased by approximately $11.1 million, from $41.9 million for the
nine months ended September 30, 2008 to $30.8 million for the nine months ended
September 30, 2009. This decrease results primarily from a decrease
in the total volume of sales from the Transportation and Disposal segment
combined with a decrease in costs within the Treatment and Recycling and
Materials segments from period to period. Our overall cost of
revenues as a percentage of sales increased from 81% for the nine months ended
September 30, 2008, to 87% for the nine months ended September 30, 2009, which
is reflective of increased competition in the marketplace for less overall
volume of business. Our gross profit margin for the Transportation
and Disposal segment decreased by 7% for the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008 and our gross
profit margin for the Treatment and Recycling segment decreased by 9% for the
nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008. Our gross margin for the Materials segment
(excluding intercompany transactions) increased by $1.6 million to for the nine
months ended September 30, 2009 as compared to the corresponding prior year
period, as a result of the consolidation of our operating sites into one
facility and increased production capability and efficiency from the new rock
crushing equipment leased in June of 2008.
For the
remainder of 2009, we expect to continue to operate at gross margins ranging
from 12% to 15% on a consolidated basis. These estimates are based on
our current expectation of costs of labor and transportation
costs. Our ability to achieve our estimated gross margins in future
periods may be impacted by, among other things, the overall economic conditions,
fuel prices that rise faster than anticipated, increases in disposal costs
arising from a reduction in the disposal facilities’ capacity or additional
restrictions that may be placed on the types or amounts of waste they may be
able to accept, and our ability to successfully implement initiatives to reduce
operating expenses.
Operating
Expenses
Our
operating expenses include:
|
·
|
salaries
and related expenses (other than direct labor costs and union benefits
described above);
|
|
·
|
occupancy
and other office expenses;
|
|
·
|
professional
fees;
|
|
·
|
insurance;
|
|
·
|
depreciation
and amortization (other than amounts included as a component of cost of
revenues as described above);
|
|
·
|
impairment
of idle machinery;
|
|
·
|
gain
or loss recognized on our sale of certain equipment;
and
|
44
|
·
|
other
miscellaneous operating expenses.
|
The
following table summarizes the primary components of our operating expenses for
the nine months ended September 30, 2009 and 2008.
Nine
Months Ended September 30,
|
Period
to Period Change
|
|||||||||||||||
(unaudited)
(in thousands, except percentages)
|
2009
|
2008
|
Amount
|
Percentage
|
||||||||||||
Salaries
and related expenses
|
$ | 4,083 | $ | 4,617 | $ | (534 | ) | (12 | )% | |||||||
Occupancy
and other office expenses
|
708 | 791 | (83 | ) | (10 | )% | ||||||||||
Professional
fees
|
1,480 | 1,425 | 55 | 4 | % | |||||||||||
Other
operating expenses
|
1,227 | 1,297 | (70 | ) | (5 | )% | ||||||||||
Insurance
|
668 | 956 | (288 | ) | (30 | )% | ||||||||||
Depreciation
and amortization
|
483 | 400 | 83 | 21 | % | |||||||||||
Impairment
of idle machinery
|
— | 412 | (412 | ) | 100 | % | ||||||||||
Gain
on sale of equipment
|
(26 | ) | (257 | ) | 231 | (90 | )% | |||||||||
Total
operating expenses
|
$ | 8,623 | $ | 9,641 | $ | (1,018 | ) | (11 | )% |
Salaries
and related expenses represented approximately 47% of our total operating
expenses for the nine months ended September 30, 2009 and were driven primarily
by our overall headcount and compensation structure. Our costs
associated with salaries and related expenses decreased by $0.5 million, or 12%,
which is due to reductions in headcount which took place during the first and
second quarters of 2009 and voluntary reductions in management’s salaries which
went into effect on June 1, 2009. These decreases are also the
result of lower bonus and commission accruals during the nine months ended
September 30, 2009 as a result of lower sales.
We
maintain employment agreements with many of our officers and key employees, many
of which provide for fixed salaries, annual increases in base salary, bonuses
based upon performance and other forms of compensation. In June 2008,
we entered into employment agreements with two of our executive officers, which
will provide them with increases in base salary and other benefits from year to
year. A
number of our employment arrangements include compensation tied to metrics of
our operating performance, such as revenues, gross profits or EBITDA. Furthermore,
in the second quarter of 2007, our board of directors adopted our incentive
plan, which allows us to issue awards of options and shares of restricted stock
to our employees, non-employee directors and certain consultants and advisors,
for which we will be required to recognize as compensation expense the fair
value of these awards over the associated service period. We also pay
monthly commission expenses to our sales representatives operating in our
Transportation and Disposal and Materials segments, based upon a percentage of
overall sales volume and or gross profits, with additional incentives if certain
sales thresholds are crossed. As a result, we anticipate that, over
time as our revenues and gross profits increase, our salaries and related
expenses will increase in terms of absolute dollars and, likely, as a percentage
of total operating expenses.
Occupancy
and other office expenses represent our costs associated with the rental of our
office space and other facilities, temporary labor, dues and subscriptions,
postage and other office expenses. Rent includes the cost of leasing
our principal executive offices in Trevose, Pennsylvania and additional
properties and facilities in New York, New Jersey, and Connecticut to support
our operations. Occupancy and other office expenses decreased by $0.1
million, or 10%, from the nine months ended September 30, 2008 as compared to
the nine months ended September 30, 2009, which is primarily attributable to the
consolidation of our Materials segment facilities into one operating location,
consolidation of the Bronx, New York office into the Lyndhurst site, and the
implementation of cost cutting initiatives and lower office expenses at
Corporate and Pure Earth Recycling.
For the
nine months ended September 30, 2009 and 2008, our professional fees consisted
primarily of:
|
·
|
consulting
fees paid for sales;
|
|
·
|
audit
and accounting fees related to the audit of our consolidated financial
statements;
|
|
·
|
legal
costs associated with
litigation;
|
45
|
·
|
legal
and other related costs associated with the preparation and filing of our
quarterly, annual and periodic reports and other SEC
filings;
|
|
·
|
legal
and other fees incurred in connection with our acquisitions and other
matters; and
|
|
·
|
fees
paid to third parties and regulatory agencies to monitor safety and
compliance with respect to certain of our
operations.
|
Our
professional fees increased by $55,000, or 4%, for the nine months ended
September 30, 2009 as compared to the nine months ended September 30, 2008,
which is result of additional legal costs incurred in 2009 in relation to
amendments of our revolving line of credit agreement and other ongoing
litigation. For the remainder of 2009, we anticipate that our legal,
auditing, accounting and other professional fees will be consistent with our
2008 costs. We will incur additional accounting and professional fees
in order to comply with the Sarbanes-Oxley Act of 2002, or SOX, including the
requirement to implement and maintain internal control over financial reporting
and prepare an assessment by management thereof, which will be required
beginning with our fiscal year ended December 31, 2009. Beginning
with our fiscal year ending December 31, 2010 we will also be required and to
have our auditors issue an audit report on our assessment of our internal
control over financial reporting. As we continue to grow, whether
through internal growth or by acquisition, the amount of legal and other
professional fees for any future transaction will increase as a result of our
status as an SEC reporting company subject to SOX.
We
maintain various policies for workers’ compensation, health, disability,
umbrella, pollution, product liability, general commercial liability, title and
director’s and officer’s liability insurance. Our insurance costs
decreased by approximately $0.3 million, or 30%, for the nine months ended
September 30, 2009 as compared to the corresponding period in 2008, primarily as
a result of reduced policy premiums due to a lower number of insured vehicles
and the timing of insurance refunds realized in 2009. We renegotiated
our insurance coverage company-wide in August 2009, which we expect to result in
a slight increase of our future insurance premiums through the policy expiration
date in August of 2010.
Other
operating expenses consist of general and administrative costs such as travel
and entertainment, bank service fees, advertising and other office and
miscellaneous expenses. Other operating expenses decreased by
approximately $0.1 million, or 5%, in the nine months ended September 30, 2009
as compared to the nine months ended September 30, 2008. Our
operating expenses for the nine months ended September 30, 2009, also include
approximately $350,000 of additional expenses relating to bad debts that were
written off. The remainder of the decrease in other operating
expenses was primarily attributable cost cutting initiatives and the
consolidation of some of our operating locations.
Depreciation
and amortization for the nine months ended September 30, 2009 was approximately
$0.5 million as compared to approximately $0.4 million for the nine months ended
September 30, 2008. This increase is the result of the Concrete
Fibers operations being present for a full nine months in 2009 versus only six
months in 2008, and additional depreciation expense within the Treatment and
Recycling segment as a result of placing $2.0 million of machinery into service
in April of 2009, which was previously classified as idle.
For the
nine months ended September 30, 2008, we incurred approximately $0.4 million in
impairment charges relating to idle machinery held at Pure Earth Recycling. In
July 2008, we determined that, due to the softening of the overall economy, the
value of the idle machinery had declined by approximately $0.4 million. The
impairment charge was accompanied by a corresponding reversal of approximately
$0.2 million of the deferred tax liability associated with the idle machinery.
At September 30, 2009, we had approximately $1.9 million of remaining deferred
tax liabilities recorded in relation to the idle machinery. In April
of 2009, we placed $2.0 million of this idle machinery into service at Pure
Earth Recycling.
For the
nine months ended September 30, 2008, we had approximately $0.3 million of gain
from the disposal of certain fixed assets at Juda and PE Materials. In January
2008, we sold trucks and equipment having a net carrying value of approximately
$0.3 million prior to disposition for approximately $0.6 million. This equipment
was no longer needed as a result of the strategic initiative at Juda, whereby we
have begun to outsource its trucking operations instead of using our owned
vehicles. For the nine months ended September 30, 2009, we had
approximately $26,000 of gain primarily from the sale of well drilling equipment
within our Environmental Services segment and the proceeds from an insurance
settlement.
46
Loss
from Operations
The
following table sets forth our loss from operations by reportable segment for
the nine months ended September 30, 2009 and 2008.
Nine
Months Ended September 30,
|
Period
to Period Change
|
|||||||||||||||
(unaudited)
(in thousands, except percentages)
|
2009
|
2008
|
Amount
|
Percentage
|
||||||||||||
Transportation
and Disposal
|
$ | 217 | $ | 4,004 | $ | (3,787 | ) | (95 | )% | |||||||
Treatment
and Recycling
|
(910 | ) | 304 | (1,214 | ) | (399 | )% | |||||||||
Environmental
Services
|
(364 | ) | (152 | ) | (212 | ) | (139 | )% | ||||||||
Materials
|
(279 | ) | (1,299 | ) | 1,020 | 79 | % | |||||||||
Concrete
Fibers
|
(324 | ) | (137 | ) | (187 | ) | (136 | )% | ||||||||
Corporate
and Other
|
(2,291 | ) | (2,624 | ) | 333 | 13 | % | |||||||||
Total
|
$ | (3,951 | ) | $ | 96 | $ | (4,047 | ) | * |
* Not meaningful.
The
decrease in income from operations within the Transportation and Disposal
segment is due in large part to a decrease in the overall Transportation and
Disposal revenues of approximately $11.7 million coupled with a decrease in the
gross profit margin from 31% for the nine months ended September 30, 2008, to
24% for the nine months ended September 30, 2009. This decrease in
gross profit margin is due primarily to increased competition for fewer jobs in
the marketplace, resulting in tighter margins. The decline in
revenues during the nine months ended September 30, 2009 is attributable to the
decline in the overall economy and the construction industry in the New York
metropolitan area. In addition, we also incurred approximately $0.3
million of bad debt expense due to the settlement of a large aged accounts
receivable during the nine months ended September 30, 2009.
For the
nine months ended September 30, 2009, the Treatment and Recycling segment had a
loss from operations of approximately $0.9 million as compared to income from
operations of approximately $0.3 million for the nine months ended September 30,
2008. The decrease in this segment’s operating results is primarily
due to lower gross profit margins and revenues, offset by reduced operating
expenses for the nine months ended September 30, 2009 as compared to the nine
months ended September 30, 2008. The decrease in operating expenses
is the result of a reduction in overall headcount and management salary
reductions which were implemented in June 2009. We expect that when
the volume of incoming materials increases, our income from operations and gross
profit margins attributable to the Treatment and Recycling segment will begin to
improve. During the nine months ended September 30, 2009, PE Energy
contributed an operating loss of approximately $0.1 million due in large part to
being a startup operation with certain fixed overhead costs, such as
salaries.
Loss from
operations within the Environmental Services segment was approximately $0.4
million for the nine months ended September 30, 2009 as compared to a loss of
approximately $0.2 million for the nine months ended September 30,
2008. The losses from operations during the nine months ended
September 30, 2009 and 2008 were primarily attributable to a lack of new
business from our environmental consulting services and brokerage
operations. We expect to commence operations at our initial
Brownfield property in the second quarter of 2010, from which we should
experience an increase in revenues and income from operations for the
Environmental Services segment.
The loss
from operations attributed to the Materials segment decreased by approximately
$1.0 million for the nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008, from a loss of approximately $1.3 million
in 2008 to a loss of $0.3 million in 2009. The improvement in our
operating results for this segment is due to the consolidation of our rock
crushing facilities from two locations into one and the termination of the North
Bergen lease and operating agreement. As a result, we are no
longer required to first offer the owner of the North Bergen facility a fixed
price for our rock and aggregate products. We have been able to sell
these products at higher prices to other customers, which contributed to higher
revenues and better margins on a per ton basis in the second quarter of
2009.
47
Interest
Income and Expense
Interest
expense, net of interest income earned on our short-term deposits of excess
operating cash, was approximately $1.8 million and $1.3 million for the nine
months ended September 30, 2009 and 2008, respectively. The increase
in interest expense is due to:
|
·
|
approximately
$0.3 million of additional interest expense incurred in relation to our
Series B preferred stock offering and related amortization of deferred
financing costs;
|
|
·
|
approximately
$50,000 increase in interest expense within the Treatment and Recycling
segment as a result of the Pure Earth Recycling term loan refinancing
completed in November of 2008; and
|
|
·
|
an
increase of approximately $0.1 million in interest expense relating to our
revolving line of credit, equipment term loan and insurance financing; and
a
|
|
·
|
a
decrease in interest income of approximately $0.1
million.
|
We anticipate that the annual interest
cost associated with our Series B preferred stock will be approximately $1.3
million (including amortization of the deferred financing costs and accretion of
the debt discount). The interest expense incurred in relation to our
revolving line of credit will fluctuate based upon our working capital
requirements from our operating segments, as well as changes in the prevailing
interest rates.
On October 21, 2008, the interest
rate on our revolving line of credit increased to the bank’s prime rate, subject
to a minimum of 5.00%, plus 2.75%, from the bank’s prime rate, minus 0.25%;
however, we also significantly decreased our outstanding borrowing amounts at
the same time, which lessened the impact of the increase in rates. On
March 13, 2009, we completed an amendment of this revolving line of credit,
which added Pure Earth Recycling and our other subsidiaries as borrowers, and
the accounts receivable and inventory of these entities have become collateral
and, to the extent eligible, part of the available borrowing base. We
expect that as a result of this, our average outstanding borrowings will
increase resulting in increased interest expense. As a result of the
covenant defaults under our revolving line of credit agreement, the interest
rate on our revolving line of credit was increased to the default interest rate
of 10.75% effective retroactively to June 1, 2009 and through the extended
maturity date on April 23, 2010.
On
November 12, 2008, we refinanced our existing long-term debt and revolving line
of credit at Pure Earth Recycling into a consolidated $8.0 million, seven-year
term loan with an adjustable rate of interest. In connection with
this refinancing, we also entered into an interest rate swap agreement, which
effectively converted this adjustable-rate loan into a fixed-rate loan with an
annual interest rate of 6.10%. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Debt
Obligations – Long-Term Debt” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008. We anticipate that our annual interest
expense for 2009 under this term loan will be approximately $0.5
million.
Other
Income
During
the nine months ended September 30, 2009, we recognized other income of $0.8
million as a result of the change in fair value of warrants with contingent
redemption provisions. This amount represents gains relating to the
warrants issued with our Series B preferred stock which occurred as a result of
the warrants being revalued as of September 30, 2009, as required under EITF
00-19 (Topic 480). The decrease in the estimated fair value of these
warrants was the result of a decline in the fair value of our common stock
underlying these warrants.
In June
of 2009, Pure Earth Recycling settled outstanding fines and compliance issues
with various state and local authorities for approximately $0.2 million and for
which a $0.6 million liability was previously recorded as part of the opening
balance sheet at the date of acquisition on March 30, 2007. The
settlement of these compliance issues and fines at a reduced amount resulted in
a gain of approximately $0.4 million, which was recorded as a component of other
income for the nine months ended September 30, 2009.
48
In
connection with the refinancing of Pure Earth Recycling’s revolving line of
credit on November 12, 2008, we also entered into an interest rate swap
agreement, which essentially converts our adjustable rate term loan to a
fixed-rate loan bearing interest at an annual rate of 6.10%. We
account for this interest rate swap as a derivative contract pursuant to SFAS
No. 133 (Topic 815), and therefore we recorded a fair value adjustment increase
of approximately $139,000 for the nine months ended September 30,
2009. The fair value adjustment on the interest rate swap was offset
in large part by a mark-to-market adjustment decrease of approximately $144,000
for the nine months ended September 30, 2009 on Pure Earth Recycling’s term
loan, for which we have elected to apply the fair value option under SFAS No.
159 (Topic 820).
Other
income for the nine months ended September 30, 2008 was approximately
$162,000. The Company and Pure Earth Recycling underwent a sales and
use tax audit in the State of New Jersey, which was settled as of June 30, 2008
for approximately $265,000. The Company had previously recorded an
accrued liability of $502,078 as part of the opening balance sheet of Pure Earth
Recycling on March 30, 2007. Pursuant to the Pure Earth Recycling
purchase agreement and related amendments, a portion of the reduction in this
liability from $502,078 to $265,000 is due back to the former owner in the form
of shares of the Company’s common stock. Accordingly, the Company has
recorded a liability of approximately $140,000, which will be resolved upon
issuance of additional shares and the completion of the reconciliation of the
purchase price adjustments which is expected to be completed in November of
2008. The settlement of this matter resulted in Pure Earth Recycling
and the Company recognizing a gain of approximately $98,000 for the nine months
ended September 30, 2008. The remainder of other income for the nine
months ended September 30, 2008 is due primarily to income derived from the
operations of our joint venture, ACR, within the Treatment and Recycling
segment.
Benefit
From Income Taxes
For the
nine months ended September 30, 2009, we recognized a benefit from income taxes
of approximately $1.9 million, and a benefit from income taxes of $0.5 million
for the nine months ended September 30, 2008. The recognition of
these income tax benefits is the result of pre-tax losses incurred during both
periods. Our effective tax rates were 39% and 37.5% for the nine
months ended September 30, 2009 and 2008, respectively. The increase
in our effective tax rate is primarily the result of an estimated pre-tax loss
for the 2009 reporting year, as compared to estimated pre-tax income for the
2008 reporting year. We anticipate that our effective income tax rate for
the full calendar year of 2009 will be approximately 40%.
49
Liquidity
and Capital Resources
Cash
and Cash Equivalents
Cash and
cash equivalents consist primarily of cash on deposit and money market
accounts. We had approximately $1.6 million and $0.9 million of cash
and cash equivalents on hand at September 30, 2009 and December 31, 2008,
respectively. We require cash for working capital, capital
expenditures, repayment of debt, salaries, commissions and related benefits and
other operating expenses, preferred stock dividends and income
taxes. In the past, we also have needed cash to pay sellers in
connection with some of our acquisitions and to fund working capital associated
with these acquisitions. We expect that our working capital needs
will remain consistent with historical levels in the near future, however, these
needs may increase as new lines of business are introduced or new acquisitions
occur.
Summary
of Cash Flows
The
following table summarizes our cash flows for the nine months ended September
30, 2009 and 2008:
For
the Nine Months Ended
September
30,
|
||||||||
(in
thousands)
|
2009
|
2008
|
||||||
Net
cash used in operating activities
|
$ | (1,130 | ) | $ | (3,946 | ) | ||
Net
cash used in investing activities
|
$ | (4 | ) | $ | (335 | ) | ||
Net
cash provided by financing activities
|
$ | 1,823 | $ | 6,038 |
Net
Cash Used in Operating Activities
The most
significant items affecting the comparison of our operating cash flows for the
nine months ended September 30, 2009 and 2008 are summarized below:
|
·
|
Decrease in income from
operations – Our income from operations, excluding depreciation,
amortization and impairment, decreased by $3.8 million, or 136%, on a
period-to-period basis, which negatively impacted our cash flows from
operations for the nine months ended September 30,
2009.
|
|
·
|
Decrease in accounts
receivable – Sources (uses) of cash from changes in accounts
receivable were approximately $0.1 million and $(3.6) million for the nine
months ended September 30, 2009 and 2008, respectively. The
decrease in accounts receivable at September 30, 2009 is the result of the
collection of aged receivables coupled with a decline in revenue during
the period. The decrease in accounts receivable as of September
30, 2008, is the result of the timing of collections from two large
Transportation and Disposal segment
projects.
|
|
·
|
Increase in
inventories– Uses of cash from changes in inventories were
approximately $(0.3) million and $(12,000) for the nine months ended
September 30, 2009 and 2008, respectively. The increase in
inventories during the nine months ended September 30, 2009 is the result
of increased volumes of incoming rock products within our Materials
segment, in particular during the third quarter of 2009. The
increase for the nine months ended September 30, 2008 is the result of
timing of sales of our crushed rock products from the Materials segment
and our recycled oil inventory from the Treatment and recycling
segment.
|
|
·
|
Decrease in prepaid expenses
and other current assets- Sources (uses) of cash from changes in
prepaid expenses and other current assets were approximately $1.0 million
for the nine months ended September 30, 2009, and $(0.3) million for the
nine months ended September 30, 2008. The increase in other
current assets in 2009, is the result of the reclassification of the
receipt of $0.3 million in income tax refunds and a decrease in prepaid
expenses resulting from the amortization of these prepaid
accounts. The decrease in prepaid expenses and other current
assets for the nine months ended September 30, 2008, is the result of the
amortization of the prepaid
expenses.
|
50
|
·
|
Decrease in restricted
cash- Sources of cash from the decrease in restricted cash were
$0.6 million for the nine months ended September 30, 2009. This
represents the use of restricted cash for the payment of principal and
interest payments for the Susquehanna term loan as required by the term
loan requirements.
|
|
·
|
Increase in accounts payable
–Sources of cash for accounts payable were $0.9 million and $0.5
million for the nine months ending September 30, 2009 and 2008,
respectively. The increase in accounts payable during the nine
months ending September 30, 2009 is the result of a large amount of sales
occurring towards the end of the second quarter of 2009 and the timing of
payments to our vendors. The increase in accounts payable
during the nine months ending September 30, 2008, is the result of
additional payables relating to New Nycon and an increase in accounts
payable within the Transportation and Disposal segment as a result of
increased production.
|
|
·
|
Decrease in accrued expenses
and other current liabilities – Uses of cash for accrued expenses
and other current liabilities were $(1.1) million and $(0.6) million for
the nine months ended September 30, 2009 and 2008,
respectively. The decrease in accrued expenses and other
liabilities during the nine months ended September 30, 2009, is primarily
the result of the settlement of fines and penalties at Pure Earth
Recycling and the timing of the payments for insurance, and other accrued
liabilities including payroll and accruals for certain operating expenses
for which we were not yet invoiced. The decrease in accrued
expenses and other liabilities during the nine months ended September 30,
2008, is primarily the result of the timing of the payment for corporate
insurance, settlement of the New Jersey sales and use tax audit at Pure
Earth Recycling and a decrease in accrued liabilities at Juda as a result
of having only one union employee.
|
|
·
|
Decrease in accrued disposal
costs – During the nine months ended September 30, 2009, our
accrued disposal costs decreased by approximately $0.1 million as a result
of the timing of incoming and outgoing materials within our Treatment and
Recycling segment. During the nine months ended September 30,
2008, we spent approximately $1.3 million on reducing our accrued disposal
costs, which resulted from transporting processed material from our
Treatment and Recycling operations.
|
|
·
|
Decrease in income taxes
payable –Uses of cash relating to income taxes payable were $(0.1)
million for the nine months ended September 30, 2009 as compared to $(1.0)
million for the nine months ended September 30, 2009. The
decrease in cash used to pay income taxes was the result of having earned
taxable income for the year ended December 31, 2007, as compared to being
in a net loss position for the year ended December 31,
2008.
|
Our
overall liquidity and the availability of capital resources has historically
been highly dependent on revenue derived from several large customers within the
Transportation and Disposal segment, which comprised approximately 8% and 22% of
our consolidated revenues for the nine months ended September 30, 2009 and 2008,
respectively. The revenues derived from these customers are a key
component of the operations within the Transportation and Disposal segment, and
therefore are integral to providing liquidity to not only that operating
segment, but also to our overall operations as a whole. During the
nine months ended September 30, 2009, our revenues derived from these large
customers decreased as a result of the overall downturn in the construction
industry in the New York metropolitan area. The continued slowdown or loss of
one or more of these customers could negatively impact our liquidity and ability
to provide adequate capital resources to meet all of our ongoing capital
requirements. We are currently in the process of attempting to
broaden our capital resources and sources of revenue through the addition of new
customers within the Transportation and Disposal segment in order to minimize
the dependence on our revenues from these significant
customers.
51
We use
EBITDA, a non-GAAP financial measure, as a liquidity measure to assess our
ability to meet our debt service obligations and satisfy our debt covenants,
some of which are based on our EBITDA. We believe the use of EBITDA
as a liquidity measure and in required financial ratios is a common practice
among asset- and receivables-based lenders. In providing EBITDA as a
liquidity measure, we believe EBITDA is useful from an economic perspective as a
measurement of our ability to generate cash, exclusive of cash used to service
existing debt, by eliminating the effects of depreciation, financing and tax
rates on our ability to finance our ongoing operations Furthermore,
because EBITDA is used as a standard measure of liquidity by other similar
companies within our industry, we believe it provides a reasonable method for
investors to compare us to our competitors. However, the use of
EBITDA as a measure of our liquidity has limitations and should not be
considered in isolation from or as an alternative to GAAP measures, such as net
cash provided by operating activities. See “ – Results of Operations
– Three Months Ended September 30, 2009 Compared to Three Months Ended September
30, 2008.”
The
following table presents a reconciliation from net cash used in operating
activities, which is the most directly comparable GAAP liquidity measure, to
EBITDA for the nine months ended September 30, 2009 and 2008:
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
(unaudited)
|
(unaudited)
|
||||||
EBITDA
|
$ | (497 | ) | $ | 2,551 | |||
Adjustments
to reconcile EBITDA to net cash used in operating
activities:
|
||||||||
Interest
expense, net
|
(1,549 | ) | (1,214 | ) | ||||
Benefit
from income taxes
|
1,847 | 463 | ||||||
Interest
expense for accretion of warrant discount and Series B paid-in-kind
interest
|
586 | 281 | ||||||
Impairment
of idle equipment
|
— | 412 | ||||||
Provision
for doubtful accounts
|
234 | (30 | ) | |||||
(Gain)
on sale of property and equipment
|
(26 | ) | (257 | ) | ||||
Change
in fair value of derivatives and other assets and liabilities measured at
fair value
|
(724 | ) | — | |||||
Restricted
stock grant
|
89 | 74 | ||||||
Deferred
income taxes
|
(1,847 | ) | (54 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
60 | (3,633 | ) | |||||
Inventories
|
(336 | ) | (12 | ) | ||||
Prepaid
expenses and other current assets
|
1,028 | (259 | ) | |||||
Deposits
and other assets
|
(652 | ) | 16 | |||||
Restricted
cash
|
602 | — | ||||||
Accounts
payable
|
1,000 | 534 | ||||||
Accrued
expenses and other current liabilities
|
(1,056 | ) | (630 | ) | ||||
Accrued
disposal costs
|
(19 | ) | (1,290 | ) | ||||
Contingent
consideration
|
— | (176 | ) | |||||
Due
to affiliates
|
221 | 303 | ||||||
Income
taxes payable
|
— | (1,025 | ) | |||||
Total
adjustments
|
(633 | ) | (6,497 | ) | ||||
Net
cash used in operating activities
|
$ | (1,130 | ) | $ | (3,946 | ) |
Net
Cash Used in Investing Activities
Our
investing activities for the nine months ended September 30, 2009 and 2008
primarily resulted from our strategy of growing our operations by acquiring
complementary companies in the environmental services sector and the purchase
and sale of property and equipment. During the nine months ended
September 30, 2009, we spent approximately $52,000 on the purchase of property
and equipment and we also received proceeds of approximately $48,000 from the
sale of equipment not in use.
52
On April
1, 2008, we completed the acquisition of Nycon, Inc. and began the operations of
our Concrete Fibers segment, which used approximately $45,000 in cash. We also
spent $149,000 in payments for pending acquisitions during the nine months ended
September 30, 2008, which relate primarily to the startup of PE Energy and costs
to seek to acquire a second Brownfield site. For the nine months ended September
30, 2008, we also received proceeds of $0.6 million from the sale of trucks and
equipment that were previously utilized at Juda within our Transportation and
Disposal segment.
Net
Cash Provided by Financing Activities
The most
significant items affecting the comparison of our cash flows provided by
financing activities for the nine months ended September 30, 2009 and 2008 are
summarized below:
|
·
|
Retirement of common
stock- On April 20, 2009, the Company retired 200,000 shares of its
outstanding common stock valued at $1.00 per share, which were previously
pledged as collateral for reimbursement of the $200,000 payment made by
the Company on behalf of the former owners of Juda for the settlement of
the pension liability lawsuit for union
truckers.
|
|
·
|
Private placements of
securities – For the nine months ended September 30, 2008, we
received approximately $5.8 million in proceeds, net of financing fees and
offering expenses of approximately $0.5 million, from the private
placement of 6,300 shares of our Series B preferred stock and a related
warrant, at a purchase price of $1,000 per
share.
|
|
·
|
Dividends - We paid
$25,000 and $75,000 in dividends relating to our then outstanding Series A
preferred stock for the nine months ended September 30, 2009 and 2008,
respectively.
|
|
·
|
Other indebtedness –
During the nine months ended September 30, 2009, we had net borrowings of
approximately $3.3 million under our revolving line of credit as compared
to net borrowings of $1.9 million for the nine months ended September 30,
2008. We also had repayments of approximately $1.2 million of
long-term debt and notes payable during the nine months ended September
30, 2009 and 2008. We also incurred $0.1 million in financing
fees during the nine months ended September 30, 2009 in relation to the
amendment of our revolving line of credit and $0.5 million in financing
fees during the nine months ended September 30, 2008 in relation to the
Series B preferred stock offering. In June of 2008, we also
received an additional $200,000 in financing provided for by the lender of
an existing term loan.
|
Capital
Resources
We had
working capital of $1.0 million and $5.1 million as of September 30, 2009 and
December 31, 2008, respectively. Our working capital requirements
during the first nine months of 2009 and 2008 have been funded primarily by the
borrowings under our revolving line of credit, the collection of aged accounts
receivable and, with respect to 2008, the refinancing of other long-term debt
and the net proceeds from our securities offerings. The decrease in
working capital is primarily due to the growth of our accounts payable and
revolving line of credit and decrease in accounts receivable for the nine months
ended September 30, 2009 due to the timing of cash collections on our
outstanding receivables as compared to the timing of payments to our
vendors.
Our
capital resources and working capital needs for the remainder of 2009 will be
largely dependent upon our ability to generate new sales and increase our
operating margins, our ability to collect aged accounts receivable existing as
of September 30, 2009, our ability to refinance our existing Pure Earth
revolving line of credit, and our ability to raise additional capital through
debt or equity financing. Due to the overall economic downturn during
the fourth quarter of 2008, several of our large customer receivable balances
have been outstanding in excess of 120 days. In particular, we had
approximately $2.8 million in outstanding receivables related to one large
construction project in New York City, which was the subject of ongoing
litigation. See “Part II, Item 1. Legal Proceedings – Accounts
Receivable Litigation.” On May 29, 2009 we reached a settlement with
these customers whereby we agreed to $2.0 million in satisfaction of these
receivables. $1.0 million of this settlement was received on July 1,
2009, and the remaining amount is to be repaid in eighteen monthly installments
of $55,000 beginning on September 1, 2009. Our capital resources as
of September 30, 2009 and December 31, 2008 were also negatively impacted by our
operating losses of $3.9 million and $3.5 million,
respectively.
53
On March 13, 2009, we completed an
amendment of our revolving line of credit which allowed Pure Earth Recycling and
certain of our other subsidiaries to become borrowers under our revolving line
of credit thereby increasing our available borrowing collateral by approximately
$2.2 million when the additional collateral was added into the borrowing
base. The additional borrowing collateral was used to provide
additional funds to finance our ongoing operations and was essential in allowing
us access to additional funding from Pure Earth Recycling’s receivables, which
were previously encumbered under other outstanding debt
obligations.
As of
June 30, 2009, we were not in compliance with the minimum adjusted net income
and debt service coverage ratio covenants under our revolving line of
credit. As a result, under the revolving line of credit agreement,
events of default occurred since June 30, 2009, but were waived on August 18,
2009 retroactive to June 30, 2009 by the lender under this line of
credit. One of the conditions to obtaining this waiver was that we
are prohibited from making any payments to the holder of our Series B preferred
stock while the line of credit is outstanding. On August 18, 2009,
our Series B preferred stockholder agreed to prospectively waive this potential
event of noncompliance. See “-Revolving Line of Credit.”
On October 23, 2009, we entered into an
amendment of our revolving line of credit agreement which extended the maturity
date for an additional six months, or until April 23, 2010. Among
other things, this amendment reduced our maximum amount of outstanding
borrowings from $4.7 million to $3.3 million as of October 23, 2009, which will
be further reduced to $3.15 million on December 15, 2009, and to $3.0 million on
February 15, 2010. This reduction in the maximum amount of
outstanding borrowings places an additional emphasis on us to collect our
outstanding receivables in order to effectively manage our ongoing
liquidity. In addition this amendment also contains certain financial
covenants and conditions as outlined below under “Revolving Line of
Credit”. The Company is actively seeking alternative sources of
financing to the revolving line of credit and is engaged in discussions with
several potential new lenders. Under this amendment, we are
prohibited from declaring or paying any cash dividends on our Series B preferred
stock through the maturity date of the revolving line of credit, and we are
currently in discussions with the holder of the Series B preferred stock
regarding a potential waiver of the next interest payment under the Series B
preferred stock, which is presently required to be made on November 30,
2009. In addition, this amendment to the revolving line of credit
agreement also added a financial covenant whereby beginning with the month
ending November 30, 2009, our accounts receivable older than 90 days past the
invoice date must not exceed the greater of 13% of all accounts receivable or
$1.25 million. As of September 30, 2009, our accounts receivable
older than 90 days past the invoice date was approximately 18% of all accounts
receivable or $1.7 million. We are using our best efforts to collect
the past due receivables in order to comply with this covenant by November 30,
2009, however if we are unable to do so this would result in an event of default
under the revolving line of credit agreement which could have a material adverse
effect on our liquidity and capital resources.
In the
past, as noted above, we have been successful in obtaining funding by issuing
our common and preferred stock, convertible debentures and related
warrants. We also have funding available through our revolving lines
of credit and other debt facilities. See “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Debt Obligations” in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2008. We have also used our common
stock as currency to complete several of our acquisitions, and we intend to
continue to do so where possible and appropriate in order to preserve our cash
for future operations and to meet our working capital needs.
We are a
holding company with no significant revenue-generating operations of our own,
and thus any cash flows from operations are and will be generated by our
subsidiaries and investments. Our ability to service our debt and
fund ongoing operations is dependent on the results of operations derived from
our subsidiaries and their ability to provide us with cash. Our
subsidiaries are prohibited from making loans or paying dividends to us pursuant
to the terms of our revolving line of credit and term loans. Our
corporate subsidiaries could also be prevented from effecting any distribution
or dividend under applicable corporate law, and subsidiaries formed as limited
liability companies would need to comply with all of the restrictions and
limitations of applicable law and those contained in their respective operating
agreements and other governing instruments. Although we do not
believe that these restrictions and limitations presently have a material
adverse effect on our operations or access to liquidity, there can be no
assurance that they will not have such an effect upon us in the
future.
54
We are
also required by the State of New Jersey to maintain escrow accounts in which we
deposit funds in the event of closure and post-closure events involving waste
management facilities within our Treatment and Recycling segment. The
balance of this escrow account was $276,538 and $273,623 as of September 30,
2009 and December 31, 2008, respectively. We do not expect the
requirement to maintain this escrow account to significantly impact our capital
resources.
We are
currently seeking to refinance this line of credit with the current lender
or a new lender, however, if we were unable to do so we would need to locate
additional sources of financing. As a result of the October 23, 2009
amendment of the revolving line of credit agreement, we are required to raise
new equity or subordinated debt of no less than $0.8 million by November 30,
2009, and additional equity or subordinated debt of no less than $1.0 million by
February 15, 2010, each on terms acceptable to the lender. While we
believe that we will be able to raise additional capital on acceptable terms as
needed to satisfy these covenants under the revolving line of credit agreement,
if we are not successful in obtaining the necessary amount of debt or equity
financing by November 30, 2009 or February 15, 2010 (as the case may be), if the
lender does not find the terms of such capital to be acceptable in its
discretion, or if we are not permitted to obtain such financing by the terms of
our existing agreements and financial instruments, an event of default under the
revolving line of credit agreement would occur, which in turn would trigger a
default under the Pure Earth Recycling term loan. Furthermore, the
terms of the revolving line of credit agreement and the Series B Preferred
Stock, and the terms of certain of our prior equity financing instruments and
agreements, also significantly limit our ability to sell equity or incur debt,
and we may not be able to repay, refinance or terminate these obligations or
obtain the consent of the debt or equity holders, if necessary, to obtain
additional capital should we need or desire to do so.
Based
upon the cash we have on hand, anticipated cash to be received from our
operations, the expected availability of funds under our revolving line of
credit, and the anticipated proceeds expected to be derived from the equity
raises described above, we believe that our sources of liquidity will be
sufficient to meet our cash needs until April 23, 2010, when the Pure Earth
revolving line of credit is currently set to expire.
Our
principal projected cash needs for the remainder of 2009 include the following
components:
|
·
|
approximately
$0.6 million in principal and interest payments relating to our
outstanding debt, revolving line of credit, term loans and notes
payable;
|
|
·
|
approximately
$0.2 million of committed capital expenditures within our Treatment and
Recycling segment for additional equipment and or site
improvements;
|
|
·
|
general
operating and administrative expenses of $3.0
million.
|
On
November 16, 2009, we entered into an amendment of the Pure Earth Recycling term
loan agreement and the related interest rate swap agreement, whereby the lender
granted us a three month interest-only period beginning on November 15, 2009 and
ending on February 15, 2009. During this time the Company will
continue to make interest payments in accordance with the term loan and interest
rate swap agreement. Subsequent to the interest-only period, the
Company’s monthly principal and interest payment will increase by approximately
$4,000 to $121,761 per month, with an effective interest rate of 6.10% for the
remainder of the loan term. We are also in the process of working
with our other term loan lender, equipment lenders, and landlords to obtain
payment moratoriums, payment reductions, or interest-only periods ranging from
three to six months in length. We expect that these
reductions and the prohibition on the Series B Preferred stock dividend will
result in cash savings of approximately $0.2 million per month, during the
period of the payment reductions.
Existing or future environmental
regulations could require us to make significant additional capital expenditures
and adversely affect our results of operations and cash flow, although, at this
time, we are not aware of any present or potential material adverse effects on
our results of operations and cash flow arising from environmental laws or
proposed legislation.
We
continually monitor our actual and forecasted cash position, as well as our
liquidity and capital resources, in order to plan for our current cash operating
needs and to fund business activities or new opportunities that may arise as a
result of changing business conditions. We intend to use our existing
cash and cash flows from operations to continue to grow our business, fund
potential acquisitions and pay existing obligations and any recurring capital
expenditures. Nonetheless, our liquidity and capital position could
be adversely affected by:
|
·
|
the
acceleration by our lender of amounts due and payable under our revolving
line of credit as a result of an event of
default;
|
|
·
|
delayed
payment or non-payment of receivables on certain material
accounts;
|
|
·
|
the
loss of any of our major
customers;
|
55
|
·
|
our
inability to comply with any of the covenants or restrictions on our
indebtedness or the Series B preferred
stock;
|
|
·
|
the
enactment of new regulatory or environmental
laws;
|
|
·
|
our
inability to grow our business as we anticipate whether internal growth,
by acquisition, through joint ventures or by forming new
subsidiaries;
|
|
·
|
any
other changes in the cost structure of our underlying business model;
and
|
|
·
|
any
of the other risks and uncertainties described in “Item
1A. Risk Factors” of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, filed with the Commission on March
31, 2009, and in this Quarterly Report on Form 10-Q and our other filings
with the SEC.
|
Also,
there can be no assurance that our existing liquidity and capital resources
(including changes in these resources that may result from the expiration of the
Pure Earth revolving line of credit in April 2010) will be sufficient for our
existing and proposed future operations and business plans. In such
case, we would need to seek additional debt or equity financings or to arrange
for alternative sources of temporary or permanent financing to meet our
liquidity and capital requirements. Our ability to obtain new
financing could be adversely impacted by, among other things, negative changes
in our profitability and restricted access to liquidity in the capital markets
resulting from overall economic conditions, especially given the current
difficulties facing the banking, lending and capital markets
sectors. While we may be able to raise additional debt or equity
capital as the need arises, there can be no assurance that we will be able to do
so at a time when it is needed or at all, or that the net proceeds from any such
transactions will be sufficient to support our operations or on terms that are
favorable or acceptable to us. Any inability to obtain future capital
could materially and adversely affect our business and growth plans, our results
of operations and our liquidity and financial condition.
Revolving
Line of Credit
The table
below summarizes the credit capacity, maturity and other information regarding
our outstanding revolving line of credit as of September 30, 2009.
Revolving
Line of Credit
|
Maximum
Outstanding
|
Balance
Outstanding
|
Interest
Rate
|
Maturity/
Termination Date
|
||||||||||
(in
thousands)
|
||||||||||||||
Pure
Earth, Inc.
|
$ | 4,700 | (1) | $ | 3,740 | 10.75 | % (2) |
October
23, 2010
|
(3) |
(1)
|
Subject
to reduction for (i) outstanding letters of credit; and (ii) other loan
reserves. As of September 30, 2009, we had an outstanding
letter of credit for $0.2 million for which we maintained a cash deposit
and a loan reserve of $1.0 million. On October 23, 2009, the maximum line
of credit amount was subsequently reduced to $3.3 million, with further
reductions on December 15, 2009 to $3.15, and $3.0 million as of February
15, 2010.
|
(2)
|
As
of September 30, 2009, this line of credit bore interest at the lender’s
prime rate, subject to a minimum of 5.0%, plus
5.75%.
|
(3)
|
On
October 23, 2009, we entered into an amendment of our revolving line of
credit, which extended the maturity date for an additional six months
until April 23, 2010.
|
Our
revolving line of credit is used to fund our working capital
needs. The repayment of outstanding borrowings under our revolving
line of credit is secured by our accounts receivable and
inventories.
During
the nine months ended September 30, 2009 we entered into the following
amendments of our revolving line of credit:
|
·
|
On
March 13, 2009, we amended this revolving line of credit agreement to add
Pure Earth Recycling and our other subsidiaries as borrowers and the
accounts receivable and inventory of these entities have become collateral
and, to the extent eligible, part of the available borrowing
base. As a result, as of March 13, 2009, $2.2 million of
borrowing availability was added to the revolving line of
credit. This amendment also added certain financial covenants
including minimum adjusted net income, debt service coverage ratio and
tangible net worth
requirements.
|
56
|
·
|
As
of June 30, 2009, we were not in compliance with the minimum adjusted net
income and debt service coverage ratio covenants and as a result, under
the revolving line of credit agreement, events of default were deemed to
have occurred. On August 18, 2009, we entered into another
amendment of this revolving line of credit agreement. This
amendment included the following
provisions:
|
|
a.
|
The
existing events of default were waived by the lender, retroactively
effective as of June 30, 2009.
|
|
b.
|
The
maximum line of credit amount was reduced from $7,500,000 to $4,700,000
and lender-imposed loan reserves and letters of credit totaling $1,890,000
were removed, including the requirement to maintain minimum availability
of $500,000.
|
|
c.
|
The
interest rate under this line of credit was increased from 7.75% to the
bank’s prime rate, subject to a minimum of 5%, plus 5.75%, or 10.75% as of
August 18, 2009. This increase will be retroactively applied to
June 1, 2009.
|
|
d.
|
The
first $1,000,000 of otherwise eligible accounts receivable shall be deemed
ineligible for the purpose of serving as available borrowing
collateral.
|
|
e.
|
The
lender prohibited us from making any cash payments to the holder of the
Series B Preferred Stock during the remainder of the loan
term.
|
The
additional terms and provisions of this amendment were intended to reduce the
lenders maximum potential exposure under this agreement, and did not have a
material impact on our borrowing availability, which was approximately $1.5
million, both prior to and subsequent to the execution of this
amendment.
On
October 23, 2009, we entered into another amendment of the revolving line of
credit agreement whereby the maturity date of the credit agreement was extended
to April 23, 2010 and the maximum amount of outstanding borrowings was reduced
from $4.7 million to $3.3 million on October 23, 2009, which will be further
reduced to $3.15 million on December 15, 2009 and $3.0 million on February 15,
2010. This amendment also removed the existing financial covenants
and replaced them with the following financial covenants:
|
·
|
Minimum
Debt Service Coverage Ratio- Beginning on the month ending January 31,
2010, we must maintain a debt service coverage ratio (as defined in the
revolving line of credit agreement) of 1.0 to
1.0.
|
|
·
|
Capital
Expenditures- We may not incur unfinanced capital expenditures in excess
of $50,000 from November 1, 2009 through the maturity
date.
|
|
·
|
Account
Aging Limits- Beginning on November 30, 2009, our accounts receivable
older than 90 days past the invoice date must not exceed the greater of
13% of all accounts receivable or $1.25 million. As of October
31, 2009, our accounts receivable older than 90 days past the invoice date
was approximately 18% of all accounts receivable or $1.6
million. We are using our best efforts to collect the past due
receivables in order to comply with this covenant by November 30,
2009.
|
The
August and October 2009 amendments also prohibited us from declaring or paying
any cash dividends, including to the holder of our Series B Preferred, which
would constitute an event of noncompliance under the Series B Preferred Stock
investment agreement and related agreements for amounts due and payable. On
August 19, 2009, we prospectively agreed with the holder of the Series B
preferred stock that in lieu of making the coupon payment otherwise due on
September 30, 2009, we will instead pay the holder of the Series B preferred
stock the coupon payment, plus 14% interest thereon, either:
|
a)
|
in
one lump sum representing the full coupon payment plus accrued interest on
November 30, 2009; or
|
|
b)
|
if
we refinance our outstanding revolving line of credit with an alternative
lender prior to such dates, then any unpaid portion of the coupon payment,
plus accrued interest, shall be paid on the date such refinancing is
consummated.
|
57
We are
currently engaged in discussions with the holder of the Series B Preferred Stock
to obtain an additional waiver as a result of the continuing prohibition on cash
dividends through the maturity date of the revolving line of credit
Additionally
under this amendment, we must obtain additional capital in the form of equity or
subordinated debt of no less than $0.8 million by November 30, 2009, and an
additional $1.0 million of equity or subordinated debt by February 15,
2010. We are currently in the process of working to obtain the
additional capital required by this amendment. See “- Liquidity and Capital
Resources – Capital Resources.” In addition, we continue to pursue
additional sources of financing and are engaged in discussions with several
potential new lenders.
Off-Balance
Sheet Arrangements
Our most
significant off-balance sheet financing arrangements as of September 30, 2009
are non-cancelable operating lease agreements, primarily for office and
equipment rentals, and future performance obligations incurred in connection
with our acquisitions where we have assessed that the payment of the obligation
is not presently probable. As of September 30, 2009, future minimum
obligations under our operating lease agreements are $2.8 million. As
of September 30, 2009, the potential maximum cash and non-cash future
off-balance sheet performance obligations associated with our acquisitions were
$150,000 in the aggregate, based upon an estimate of $0.50 per share for our
common stock. Also, at September 30, 2009, we had a letter of credit
for $200,000 outstanding in connection with a settlement of union-related
litigation.
We do not
otherwise participate in any off-balance sheet arrangements involving
unconsolidated subsidiaries that provide financing or potentially expose us to
unrecorded financial obligations.
Related
Party Transactions
As part
of the Pure Earth Recycling acquisition, we issued a note payable to a former
stockholder in the principal amount of $1.0 million. The note payable
accrues interest at 6.77% per year and is payable in the following two
installments: $333,000 due December 31, 2009 and the remaining
principal balance plus any accrued and unpaid interest on December 31,
2010. This note payable had an outstanding balance of approximately
$1.0 million at September 30, 2009. The note is subordinated in right
of payment to our existing revolving lines of credit. On June 17,
2009, we issued a notice of setoff to the former owner of Pure Earth Recycling,
notifying him of our intent to setoff post-closing claims against this note
payable and shares of Pure Earth common stock that may otherwise be due to the
former owner as permitted under the stock purchase
agreement. Effective on June 27, 2009, we offset the amounts due to
the former owner under this note payable against the post-closing
claims. The former owner of Pure Earth Recycling has formally denied
the validity of these post-closing claims and on September 14, 2009, we filed a
complaint against the former owner to seek legal redress for these
claims. See “Part II, Item 1 – Legal Proceedings – Pure Earth
Recycling Litigation.” The ultimate outcome of these post-closing
claims and this litigation remains uncertain, and therefore the note payable
will remain on our consolidated financial statements until either a settlement
with the former owner is reached or we are legally released of this
obligation.
As of
September 30, 2009, we had approximately $0.1million in due from affiliates,
which consists of amounts due from ACR, a joint venture operation, to Pure Earth
Recycling. The $0.1 million reflects the value of goods and
services performed and provided by Pure Earth Recycling to the joint venture,
for which Pure Earth Recycling has not yet been compensated.
Seasonality
and Inflation
Our
operating revenues tend to be generally higher in the summer months, primarily
due to the higher volume of construction and demolition waste. The
volumes of industrial and residential waste in certain regions where we operate
also tend to increase during the summer months. Our second and third
quarter revenues and results of operations typically reflect these seasonal
trends. Typically, during the first quarter of each calendar year we
experience less demand for environmental consulting and engineering due to the
cold weather in the Northeast region. In addition, facility closings
for the year-end holidays reduce the volume of industrial waste generated,
resulting in lower volumes of waste that we process during the first quarter of
each year. Certain weather conditions
may result in the temporary suspension of our operations, which can
significantly affect our operating results.
58
While
inflationary increases in costs have affected our operating margins in recent
periods, we believe that inflation generally has not had, and in the near future
is not expected to have, any material adverse effect on our results of
operations.
Recently
Issued Accounting Pronouncements
Refer to
Note 2 of Notes to condensed Consolidated Financial Statements for a description
of recent accounting pronouncements including anticipated dates of adoption and
affects on the Company’s consolidated financial position and results of
operations.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Not
applicable to smaller reporting companies.
Item
4. Controls and Procedures.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended, as of September 30,
2009. Based upon the September 30, 2009 disclosure controls
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to provide a
reasonable level of assurance that information required to be disclosed in the
reports we file, furnish or submit under the Exchange Act is recorded,
processed, summarized and reported within the specified time periods in the
rules and forms of the Securities and Exchange Commission. These
officers have concluded that our disclosure controls and procedures were also
effective to provide a reasonable level of assurance that information required
to be disclosed in the reports that we file, furnish or submit under the
Exchange Act is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure, all in accordance with Exchange Act Rule
13a-15(e). Our disclosure controls and procedures are designed to
provide reasonable assurance of achieving these objectives.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of our internal control over
financial reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f), to
determine whether any changes occurred during the quarter ended September 30,
2009, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Based on that
evaluation, there were no such changes during the quarter ended September 30,
2009.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and internal controls will prevent
all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control 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
and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the controls.
59
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
We may be
involved in litigation and other legal proceedings from time to time in the
ordinary course of our business. Except as set forth below, there
have been no material changes with respect to the previously reported litigation
and legal proceedings. Except as otherwise set forth in this
quarterly report, we believe the ultimate resolution of these matters will not
have a material effect on our financial position, results of operations or cash
flows.
Soil
Disposal Litigation
On
December 12, 2007, subsequent to our asset purchase of Soil Disposal in November
of 2007, Clean Earth, Inc., which was the former employer of the Soil Disposal
sales representatives and certain of its affiliates filed a complaint against
us, PEI Disposal Group, Soil Disposal, the Soil Disposal sales representatives
individually, one of our officers and other named parties. The
complaint alleges, among other things, that the defendants breached certain
covenants not to compete and a non-solicitation covenant with respect to
customers and employees of the plaintiff. The complaint also claims
that we interfered with contractual relations of the plaintiff and aided and
abetted the Soil Disposal sales representatives’ breach of certain fiduciary
duties to the plaintiff, unfair competition by the defendants, and
misappropriation of trade secrets and confidential information. The
plaintiffs are seeking injunctive relief, unspecified compensatory,
consequential and punitive damages and attorneys’ fees against all
defendants.
With the
filing of this complaint, the plaintiffs applied for a temporary restraining
order, a preliminary injunction and expedited discovery against all defendants,
which were denied by the court on December 20, 2007. In September
2008, the plaintiff amended its claim and also moved to compel us and the other
defendants to produce additional documents. The defendants opposed
these motions and cross-moved for summary judgment dismissing the
case. On April 15, 2009, the court referred the case to an
alternative dispute resolution program for a 45-day period during which time the
parties were unable to resolve the case. In the meantime the court, at the
defendants’ request, ordered a stay of all further discovery. On July
6, 2009, the court initially denied the defendants’ motion for summary judgment,
but later granted re-argument on the motion on October 22, 2009, ordered a stay
of all further discovery and ordered the plaintiff to produce proof of
damages. The Defendants have also sought dismissal of the case on the
grounds that the plaintiff has failed to produce documents relevant to its
claims and as of November 16, 2009, no hearings are scheduled while the parties
await the court’s decision on re-argument of the summary judgment
motion. The defendants have denied all material
claims, believe the plaintiffs’ claims are without merit and intend
to continue to contest this lawsuit vigorously.
Pure
Earth Recycling Litigation
On
September 14, 2009, we filed a complaint in the United States District Court for
the Eastern District of Pennsylvania against a former owner of Pure Earth
Recycling, claiming that the former owner breached the terms of a stock purchase
agreement by which we acquired Pure Earth Recycling. Under the terms
of the stock purchase agreement, the former owner is legally obligated to
indemnify us and hold us harmless against all liabilities, losses, damages,
costs and expenses arising from the former owner’s breach of any representation
or warranty in the stock purchase agreement. We have alleged that the
former owner has breached numerous representations and warranties in the stock
purchase agreement and thereby has triggered the former owner’s obligation to
indemnify us, which the former owner has disputed. In the complaint,
we allege that the former owner’s failure to indemnify us has breached the terms
of the stock purchase agreement. We seek an unspecified amount of
monetary damages (as well as attorney’s fees and expenses) and a declaratory
judgment as to our right to set off our damages under the stock purchase
agreement against any amounts we may owe the former owner
thereunder.
On
November 5, 2009, the former owner filed an answer to this complaint, generally
denying our claims and asserting a number of affirmative defenses. In
his answer, the former owner also asserted counterclaims and third-party claims
against us and our chief executive officer and chief financial officer for
fraudulent inducement, violations of specified antifraud provisions of the
federal securities laws, breach of contract, breach of fiduciary duty, unjust
enrichment, civil conspiracy and breach of an implied covenant of good faith and
fair dealing. The former owner seeks against the counterclaim
defendants an unspecified amount of compensatory and punitive damages, as well
as attorney’s fees and costs of suit, and any other relief deemed equitable and
just. We deny any liability to the former owner, we believe that the
former owner’s defenses and counterclaims are without merit and we will seek to
vigorously defend ourself against these counterclaims.
Other
than as set forth above, material developments have occurred in any legal
proceedings reported in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008. Further, except as set forth in our 2008 Form
10-K, there has not been (i) any additional material legal proceeding to which
we are a party or (ii) any material proceeding to which any of our directors,
officers or affiliates, any of our owner of record or beneficially of more than
5% of any class of our common stock, or any associate of any such director,
officer, affiliate or security holder, is a party adverse to us or has a
material interest adverse to us.
Item
1A. Risk Factors.
Events of default have occurred under
our revolving line of credit, which may increase the likelihood
that in the future our lenders may be permitted to accelerate repayment of
our outstanding obligations under the line of credit and our other indebtedness and
obligations.
Certain
events of default have occurred under our revolving line of
credit. The occurrence of an event of default permits the lender
under the revolving line of credit to accelerate repayment of all amounts due,
to terminate commitments thereunder, and to require us to provide cash
collateral equal to the face amount of all outstanding letters of
credit. The provisions of our Pure Earth Recycling term loan include
as an event of default any failure to comply with a covenant or obligation under
other obligations of the borrower of $500,000 or more. Thus, any
other default under our revolving line of credit may trigger a default under the
term loan. Once in default, these lenders may accelerate our
obligations thereunder if we do not cure the default within certain time
periods. We would not have sufficient cash resources to repay these
obligations should the lender accelerate these
obligations. Acceleration of the amounts outstanding under the
revolving line of credit would have a material adverse impact on our liquidity,
financial condition and operations.
60
Further
defaults under this indebtedness may negatively affect our ability to
declare or pay dividends or other distributions to our stockholders,
including our Series B preferred stockholder. The nonpayment of
dividends to the Series B preferred stockholder would constitute an event of
noncompliance under that investment agreement and related agreements if it is
not remedied prior to the dividend payment date. Any failure to pay
these dividends could permit the Series B preferred stockholder to redeem its
shares of Series B preferred stock and related warrants at stated repurchase
prices, which would have a material adverse effect on us.
The
October 2009 amendment to our revolving line of credit agreement imposes upon us
new covenants and other requirements that would materially and negatively affect
us if we cannot comply with them.
We entered into an amendment of our
revolving line of credit agreement in October 2009 to extend the maturity date
of our revolving line of credit until April 2010. However, this
amendment also imposes upon us new covenants and other
requirements. For example, as a result of these amendments, we
must:
|
·
|
raise
not less than $800,000 of equity or subordinated debt by November 30,
2010, and an additional $1.0 million of equity or subordinated debt by
February 15, 2010, on terms acceptable to the
lender;
|
|
·
|
not
incur any expenditure of over $50,000 that is (i) not financed with
borrowed funds and (ii) capitalized on our balance
sheet;
|
|
·
|
maintain
a specified minimum debt service coverage
ratio;
|
|
·
|
by
November 30, 2009, cause our accounts receivable aged more than 90 days to
not exceed the greater of 13% of all accounts receivable or $1.25 million;
and
|
|
·
|
not
declare or pay any cash dividends on any class of our stock, or make any
payment on account of the purchase, redemption or other retirement of any
shares of such stock, or other securities or evidence of our indebtedness
or make any distribution in respect thereof, either directly or
indirectly.
|
We may
not be able to comply with all of these covenants and other
requirements. Furthermore, our ability to comply with some of these
provisions, such as the requirement to raise specific amounts of equity and to
reduce our aged accounts receivable, is not entirely in our control and may
require us to obtain specific approvals or consents from various third
parties. Any inability to comply with these provisions would result
in an event of default under the revolving line of credit agreement, which would
also trigger an event of default under our Pure Earth Recycling term
loan. Once in default, the lenders under these loans would have the
right to accelerate the payment of those obligations. In addition,
our inability to pay dividends to the holder of the Series B preferred stock
would be an event of noncompliance under various Series B preferred stock
agreements, which would give the holder of the Series B preferred stock the
right to require us to redeem its stock and related warrants at stated
prices. The occurrence of any of the foregoing would have a
substantial negative effect upon our business, financial condition and results
of operations, as well as upon the value or market price of our common stock and
other securities.
To
service our indebtedness, we may require a significant amount of cash, and our
ability to generate cash depends on many factors beyond our
control.
Our
ability to make cash payments, if required, to service our indebtedness will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. We believe our cash flows from
operating activities, the liquidity provided by our existing indebtedness, and
expected proceeds to be derived from additional equity or debt financing will be
sufficient to fund our operations and commitments until at least April 2009. We
cannot assure you, however, that our business will continue to generate
sufficient cash flows from operations or that future or expected sources of
funds will be available to us in an amount sufficient to enable us to pay our
indebtedness, or to fund our other liquidity needs. To do so, we may need to
refinance all or a portion of our indebtedness on or before maturity, sell
assets, or seek additional equity financing. We cannot assure you that we will
be able to refinance any of our indebtedness on commercially reasonable terms or
at all.
61
The
agreements and instruments that govern our and our subsidiaries’ indebtedness
and our Series B preferred stock contain various covenants that limit our
discretion in the operation of our business.
Covenants
related to our and our subsidiaries’ indebtedness and our Series B preferred
stock require us to, among other things, comply with certain financial tests and
restrictions, including:
· maintenance
of minimum adjusted net income and tangible net worth;
· account
aging limits;
· maintenance
of a specific leverage and debt service coverage ratios;
· maintenance
of a specified minimum ratio of debt to EBITDA; and
· limits
on the amount of our unfinanced capital expenditures.
Furthermore,
these instruments restrict our and our subsidiaries’ ability to:
· incur
more debt;
· create
liens;
· make
certain investments and payments;
· enter
into transactions with affiliates;
· merge
or consolidate with, or acquire all or substantially all of the assets of,
another company;
· amend
our and their constituent governing documents;
· pay
dividends or make other distributions on our or their common or preferred
stock;
· redeem or
repurchase any preferred stock, common stock or common stock equivalents, even
if we may be
· required
under the terms of those securities to do so; and
· make
any loans, advances or guarantees.
Our
ability to comply with these covenants is subject to various risks and
uncertainties. In addition, events beyond our control could affect our ability
to comply with and satisfy the financial tests required by our and our
subsidiaries’ indebtedness and our Series B preferred stock. Any failure by us
to comply with all applicable covenants could result in an event of default with
respect to, and the acceleration of the maturity of, a substantial portion of
our debt, and would require us to redeem our Series B preferred stock. Even if
we are able to comply with all applicable covenants, the restrictions on our
ability to operate our business in our sole discretion could harm our business
by, among other things, limiting our ability to take advantage of financing,
mergers, acquisitions and other corporate opportunities.
Except as
described above, there have not been any material changes to the risk factors
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2008.
62
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Unregistered
Sales of Equity Securities
We have
listed below sales and issuances of our unregistered securities made during the
third quarter of 2009 that were not otherwise reported in a Form 10-Q or Form
8-K.
|
·
|
On
September 29, 2009, we issued a total of 18,750 shares of common stock to
two consultants, each of whom we reasonably believed to be an accredited
investor at the time of issuance, for marketing services rendered to
us. We valued these services at the time of issuance to be
$9,375.
|
We
believe that the offers and sales indicated above were exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof,
for, among other things, the following reasons:
|
·
|
the
subject securities were sold to a limited group of
persons;
|
|
·
|
we
reasonably believed that each investor was purchasing our securities for
investment without a view to resale or further distribution, except in
compliance with the Securities Act;
|
|
·
|
each
investor was reasonably believed to possess one or more of the following
characteristics:
|
|
o
|
the
investor was a sophisticated investor at the time of the
sale;
|
|
o
|
the
investor had a pre-existing business or personal relationship with us, our
management or a placement agent engaged by us;
or
|
|
o
|
the
investor received all material information about us and our business, or
was given reasonable access to such information a reasonable period of
time prior to any sale of our
securities;
|
|
·
|
restrictive
legends stating that the securities may not be offered and sold in the
United States absent registration under the Securities Act or an
applicable exemption therefrom were placed on certificates evidencing the
securities or agreements relating thereto;
and
|
|
·
|
no
form of general solicitation or general advertising was made by us in
connection with the offer or sale of these
securities.
|
Working
Capital Restrictions and Limitations on Our Payment of Dividends
From
November 1, 2009 until April 23, 2010, the October 2009 amendment to our
revolving line of credit agreement prohibits us from incurring or contracting to
incur any capital expenditures for the purchase or construction of assets, or
for improvements or additions to such assets, in an amount over $50,000, if such
capital expenditures are not financed with borrowed money.
We have
not paid dividends on our common stock in the past and do not anticipate paying
dividends on our common stock in the foreseeable future. We anticipate that we
will retain future earnings, if any, to fund the development and growth of our
business. While they are outstanding, the terms of our Series B
preferred stock do not permit us to pay any cash dividends on our common
stock. Furthermore, as a result of our October 23, 2090 amendment to
our revolving line of credit, the lender is currently prohibiting us from making
dividend payments on any of our shares of capital stock, including on our
outstanding shares of Series B preferred stock, until April 23, 2010, the
maturity date of the revolving line of credit agreement. We are
currently discussing this matter with the holder of our Series B preferred
stock. See “Part I, Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources – Revolving Line of Credit.” In the future, we may
be a party to other agreements that limit or restrict our ability to pay
dividends.
In
addition, the General Corporation Law of the State of Delaware prohibits us from
declaring and paying a dividend on our capital stock at a time when we do not
have either (as defined under that law):
|
·
|
a
surplus, or, if we do not have a
surplus;
|
|
·
|
net
profit for the year in which the dividend is declared and for the
immediately preceding year.
|
63
Item
6. Exhibits.
The warranties, representations and
covenants contained in any of the agreements included herein or which appear as
exhibits hereto should not be relied upon by buyers, sellers or holders of the
Company’s securities and are not intended as warranties, representations or
covenants to any individual or entity except as specifically set forth in such
agreement.
Exhibit
No.
|
Description
|
|
2.10*
|
Asset
Purchase Agreement, dated April 1, 2008, by and among Nycon, Inc., Robert
Cruso, Frank Gencarelli, New Nycon, Inc. and Paul Bracegirdle
(1)
|
|
3.1
|
Second
Amended and Restated Certificate of Incorporation of Pure Earth, Inc. (2)
(3)
|
|
3.2
|
Second
Amended and Restated Bylaws of Pure Earth, Inc. (2) (3)
|
|
4.1
|
Letter
dated August 18, 2009, from Pure Earth, Inc. to Fidus Mezzanine Capital,
L.P.
|
|
10.1
|
Sixth
Amendment to Credit and Security Agreement, dated August 18, 2009, by and
among Pure Earth, Inc., each of its subsidiaries and Wells Fargo Bank,
National Association.
|
|
10.2
|
Seventh
Amendment to Credit and Security Agreement, dated October 23, 2009, by and
among Pure Earth, Inc., each of its subsidiaries and Wells Fargo Bank,
National Association.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
*
|
The
schedules to this agreement have been omitted in accordance with the rules
of the SEC. A list of omitted schedules has been included in
this exhibit and will be provided supplementally to the SEC upon
request.
|
(1)
|
Previously
filed as an exhibit to our registration statement on Form 10 (File No.
0-53287), as filed with the SEC on June 20,
2008.
|
(2)
|
Included
is the revised version of this exhibit, redlined to show the new
amendments. The redlined version is being provided pursuant to
SEC staff Compliance & Disclosure Interpretation
246.01.
|
(3)
|
Previously
filed as an exhibit to Pre-Effective Amendment No. 1 to our registration
statement on Form 10/A (File No. 0-53287), as filed with the SEC on August
8, 2008.
|
64
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.
PURE
EARTH, INC.
|
||
Date:
November 16, 2009
|
By:
|
/s/ Mark Alsentzer
|
Mark
Alsentzer
|
||
President
and Chief Executive Officer
|
||
Date: November 16,
2009
|
By:
|
/s/ Brent Kopenhaver
|
Brent
Kopenhaver
|
||
Chairman,
Executive Vice President, Chief Financial
Officer
and Treasurer
|
65
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
2.10*
|
Asset
Purchase Agreement, dated April 1, 2008, by and among Nycon, Inc., Robert
Cruso, Frank Gencarelli, New Nycon, Inc. and Paul Bracegirdle
(1)
|
|
3.1
|
Second
Amended and Restated Certificate of Incorporation of Pure Earth, Inc. (2)
(3)
|
|
3.2
|
Second
Amended and Restated Bylaws of Pure Earth, Inc. (2) (3)
|
|
4.1
|
Letter
dated August 18, 2009, from Pure Earth, Inc. to Fidus Mezzanine Capital,
L.P.
|
|
10.1
|
Sixth
Amendment to Credit and Security Agreement, dated August 18, 2009, by and
among Pure Earth, Inc., each of its subsidiaries and Wells Fargo Bank,
National Association.
|
|
10.2
|
Seventh
Amendment to Credit and Security Agreement, dated October 23, 2009, by and
among Pure Earth, Inc., each of its subsidiaries and Wells Fargo Bank,
National Association.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
*
|
The
schedules to this agreement have been omitted in accordance with the rules
of the SEC. A list of omitted schedules has been included in
this exhibit and will be provided supplementally to the SEC upon
request.
|
(1)
|
Previously
filed as an exhibit to our registration statement on Form 10 (File No.
0-53287), as filed with the SEC on June 20,
2008.
|
(2)
|
Included
is the revised version of this exhibit, redlined to show the new
amendments. The redlined version is being provided pursuant to
SEC staff Compliance & Disclosure Interpretation
246.01.
|
(3)
|
Previously
filed as an exhibit to Pre-Effective Amendment No. 1 to our registration
statement on Form 10/A (File No. 0-53287), as filed with the SEC on August
8, 2008.
|
66