Attached files
file | filename |
---|---|
EX-4.1 - Pure Earth, Inc. | v185813_ex4-1.htm |
EX-2.1 - Pure Earth, Inc. | v185813_ex2-1.htm |
EX-10.1 - Pure Earth, Inc. | v185813_ex10-1.htm |
EX-31.2 - Pure Earth, Inc. | v185813_ex31-2.htm |
EX-10.9 - Pure Earth, Inc. | v185813_ex10-9.htm |
EX-10.2 - Pure Earth, Inc. | v185813_ex10-2.htm |
EX-10.7 - Pure Earth, Inc. | v185813_ex10-7.htm |
EX-10.3 - Pure Earth, Inc. | v185813_ex10-3.htm |
EX-32.1 - Pure Earth, Inc. | v185813_ex32-1.htm |
EX-10.6 - Pure Earth, Inc. | v185813_ex10-6.htm |
EX-32.2 - Pure Earth, Inc. | v185813_ex32-2.htm |
EX-10.4 - Pure Earth, Inc. | v185813_ex10-4.htm |
EX-10.8 - Pure Earth, Inc. | v185813_ex10-8.htm |
EX-10.5 - Pure Earth, Inc. | v185813_ex10-5.htm |
EX-31.1 - Pure Earth, Inc. | v185813_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 March 31, 2010.
or
o
|
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 o
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 o No o
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 o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
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 o No x
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date: 17,572,899 shares of Common Stock, $.001 par value,
as of May 5, 2010.
PURE
EARTH, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED MARCH 31, 2010
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
|
2
|
|||
Item
1.
|
Financial
Statements.
|
2
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
22
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
44
|
||
Item
4.
|
Controls
and Procedures.
|
44
|
||
PART
II - OTHER INFORMATION
|
46
|
|||
Item
1.
|
Legal
Proceedings.
|
46
|
||
Item
1A.
|
Risk
Factors.
|
46
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
46
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
48
|
||
Item
4.
|
[Reserved.]
|
48
|
||
Item
6.
|
Exhibits.
|
48
|
||
SIGNATURES
|
50
|
* * *
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
March 31, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 210,556 | $ | 796,553 | ||||
Restricted
cash
|
— | 211,122 | ||||||
Accounts
receivable, less allowance for doubtful accounts of
$427,179 and $410,105
|
6,908,789 | 6,588,321 | ||||||
Due
from affiliates
|
108,191 | 118,270 | ||||||
Inventories
|
505,025 | 392,562 | ||||||
Prepaid
expenses
|
1,090,934 | 765,220 | ||||||
Other
current assets
|
1,736,845 | 1,487,667 | ||||||
Deferred
income tax asset
|
209,568 | 209,568 | ||||||
Assets
of discontinued operations
|
184,977 | 1,383,593 | ||||||
Total
Current Assets
|
10,954,885 | 11,952,876 | ||||||
PROPERTY
AND EQUIPMENT
|
||||||||
Land
|
1,085,940 | 1,085,940 | ||||||
Buildings
and improvements
|
7,114,752 | 7,114,752 | ||||||
Leasehold
improvements
|
220,560 | 220,560 | ||||||
Machinery
and equipment
|
10,081,248 | 10,081,248 | ||||||
Trucks
and automobiles
|
1,136,619 | 1,136,619 | ||||||
Office
furniture, fixtures and computer software
|
324,439 | 324,439 | ||||||
19,963,558 | 19,963,558 | |||||||
Less:
accumulated depreciation and amortization
|
(6,625,455 | ) | (5,987.934 | ) | ||||
Property
and Equipment, Net
|
13,338,103 | 13,975,624 | ||||||
OTHER
ASSETS
|
||||||||
Deposits
and other assets
|
1,300,505 | 1,417,117 | ||||||
Deferred
financing costs, net of accumulated amortization of $192,196 and
$553,407
|
515,682 | 544,245 | ||||||
Goodwill
|
565,484 | 565,484 | ||||||
Permits
|
2,200,000 | 2,200,000 | ||||||
Other
intangible assets, net of accumulated amortization
|
1,554,495 | 1,647,191 | ||||||
Idle
machinery
|
4,158,100 | 4,158,100 | ||||||
Total
Other Assets
|
10,294,266 | 10,532,137 | ||||||
TOTAL
ASSETS
|
$ | 34,587,254 | $ | 36,460,637 |
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
March 31, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Line
of credit
|
$ | 3,162,863 | $ | 1,884,529 | ||||
Notes
payable- related party
|
1,011,348 | 1,011,348 | ||||||
Current
portion of long-term debt
|
1,841,048 | 1,445,576 | ||||||
Accounts
payable
|
5,313,659 | 4,992,431 | ||||||
Accrued
expenses
|
1,022,114 | 1,025,883 | ||||||
Accrued
payroll and payroll taxes
|
259,725 | 151,408 | ||||||
Other
current liabilities
|
595,601 | 541,736 | ||||||
Accrued
disposal costs
|
485,453 | 468,942 | ||||||
Liabilities
from discontinued operations
|
94,093 | 850,594 | ||||||
Total
Current Liabilities
|
13,785.904 | 12,372,447 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Long-term
debt, net of current portion
|
6,709,048 | 7,188,931 | ||||||
Mandatorily
redeemable Series B preferred stock, $.001 par value; authorized 20,000
shares; issued and outstanding 6,300 and 6,300 shares
|
5,529,793 | 5,359,206 | ||||||
Accrued
disposal costs
|
364,436 | 282,172 | ||||||
Contingent
consideration
|
1,176,235 | 1,176,235 | ||||||
Warrants
with contingent redemption provisions
|
383,168 | 383,168 | ||||||
Deferred
income taxes
|
1,734,011 | 2,272,043 | ||||||
Deferred
income taxes – permits
|
880,000 | 880,000 | ||||||
Total
Long-Term Liabilities
|
16,776,691 | 17,541,755 | ||||||
TOTAL
LIABILITIES
|
30,562,595 | 29,914,202 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Preferred
Stock, $.001 par value, authorized 500,000 shares;
Series
C Convertible Preferred Stock $.001 par value, authorized 260,000 shares;
issued and outstanding 105,350 and 105,350 shares, liquidation preference
$1,088,616
|
105 | 105 | ||||||
Common
stock, $.001 par value; authorized 25,000,000 shares; issued and
outstanding 17,587,899 and 17,575,399 shares,
respectively
|
17,588 | 17,576 | ||||||
Additional
paid-in capital
|
15,040,834 | 15,034,596 | ||||||
Accumulated
deficit
|
(11,033,868 | ) | (8,505,842 | ) | ||||
TOTAL
STOCKHOLDERS’ EQUITY
|
4,024,659 | 6,546,435 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 34,587,254 | $ | 36,460,637 |
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
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
REVENUES
|
$ | 7,017,726 | $ | 11,641,981 | ||||
COST
OF REVENUES (including depreciation and amortization expense of
$615,882 and $483,181 for the three months ended March 31, 2010
and 2009)
|
7,007,291 | 9,392,783 | ||||||
GROSS
PROFIT
|
10,435 | 2,249,198 | ||||||
OPERATING
EXPENSES
|
||||||||
Salaries
and related expenses
|
878,434 | 1,342,786 | ||||||
Occupancy
and other office expenses
|
172,088 | 235,860 | ||||||
Professional
fees
|
617,002 | 534,594 | ||||||
Other
operating expenses
|
242,194 | 331,801 | ||||||
Insurance
|
259,169 | 241,369 | ||||||
Depreciation
and amortization
|
114,334 | 117,196 | ||||||
TOTAL
OPERATING EXPENSES
|
2,283,221 | 2,803,606 | ||||||
LOSS
FROM OPERATIONS
|
(2,272,786 | ) | (554,408 | ) | ||||
OTHER
INCOME (EXPENSES)
|
||||||||
Interest
income
|
— | 6,707 | ||||||
Interest
expense
|
(645,054 | ) | (575,197 | ) | ||||
Loss
from equity investment
|
(10,079 | ) | (103,597 | ) | ||||
Other
income (expense)
|
91,021 | (16,254 | ) | |||||
TOTAL
OTHER INCOME (EXPENSES)
|
(564,112 | ) | (688,341 | ) | ||||
LOSS
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
(2,836,898 | ) | (1,242,749 | ) | ||||
BENEFIT
FROM INCOME TAXES
|
(537,982 | ) | (656,043 | ) | ||||
NET
LOSS FROM CONTINUING OPERATIONS
|
(2,298,916 | ) | (586,706 | ) | ||||
DISCONTINUED
OPERATIONS
|
||||||||
Loss
from discontinued operations
|
(301,134 | ) | (221,634 | ) | ||||
Benefit
from income taxes
|
— | — | ||||||
Net
loss from discontinued operations
|
(301,134 | ) | (221,634 | ) | ||||
Gain
on sale of assets and liabilities from discontinued
operations
|
98,362 | — | ||||||
TOTAL
LOSS FROM DISCONTINUED OPERATIONS
|
(202,772 | ) | (221,634 | ) | ||||
NET
LOSS
|
(2,501,688 | ) | (808,340 | ) | ||||
Less:
Series C Convertible Preferred Stock dividends
|
26,338 | — | ||||||
NET
LOSS AVAILABLE FOR COMMON STOCKHOLDERS
|
$ | (2,528,026 | ) | $ | (808,340 | ) | ||
NET
LOSS PER COMMON SHARE FROM CONTINUING
OPERATIONS
|
||||||||
Basic
and Diluted
|
$ | (0.13 | ) | $ | (0.04 | ) | ||
NET
LOSS PER COMMON SHARE FROM DISCONTINUED
OPERATIONS
|
||||||||
Basic
and Diluted
|
$ | (0.02 | ) | $ | (0.01 | ) | ||
NET
LOSS PER COMMON SHARE FROM SALE OF DISCONTINUED
OPERATIONS
|
||||||||
Basic
and Diluted
|
$ | 0.01 | — | |||||
TOTAL
LOSS PER COMMON SHARE FROM DISCONTINUED
OPERATIONS
|
||||||||
Basic
and Diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
NET
LOSS PER COMMON SHARE
|
||||||||
Basic
and Diluted
|
$ | (0.14 | ) | $ | (0.05 | ) | ||
WEIGHTED
AVERAGE SHARES OF COMMON STOCK OUTSTANDING
|
||||||||
Basic
and Diluted
|
17,582,899 | 17,223,021 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
4
PURE
EARTH INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
CASH FLOWS FROM OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$ | (2,501,688 | ) | $ | (808,338 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Depreciation
and amortization
|
728,231 | 598,761 | ||||||
Other
intangible assets amortization
|
107,747 | 132,949 | ||||||
Deferred
financing cost amortization
|
89,691 | 84,445 | ||||||
Interest
expense for accretion of warrant and debt discount
|
90,817 | 69,386 | ||||||
Interest
expense for Series B preferred stock payment-in-kind
|
79,770 | 65,104 | ||||||
Impairment
of goodwill
|
194,210 | — | ||||||
Provision
for doubtful accounts
|
(26,135 | ) | 11,321 | |||||
Gain
on disposal of assets and liabilities of discontinued
operations
|
(98,362 | ) | — | |||||
Change
in fair value of derivatives and other assets and liabilities measured at
fair value
|
7,407 | 16,254 | ||||||
Restricted
stock grant
|
6,250 | — | ||||||
Deferred
income taxes
|
(538,032 | ) | (656,043 | ) | ||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
(272,601 | ) | 115,745 | |||||
Inventories
|
(119,804 | ) | (95,539 | ) | ||||
Prepaid
expenses and other current assets
|
(560,387 | ) | (41,822 | ) | ||||
Deposits
and other assets
|
114,762 | 84,035 | ||||||
Restricted
cash
|
211,122 | 352,061 | ||||||
Accounts
payable
|
346,236 | (605,945 | ) | |||||
Accrued
expenses and other current liabilities
|
133,457 | 219,534 | ||||||
Accrued
disposal costs
|
98,775 | 49,809 | ||||||
Due
from affiliates
|
10,079 | (130,743 | ) | |||||
TOTAL
ADJUSTMENTS
|
603,233 | 269,312 | ||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(1,898,455 | ) | (539,026 | ) | ||||
CASH FLOWS FROM INVESTING
ACTIVITIES
|
||||||||
Acquisitions
of property and equipment
|
— | (34,111 | ) | |||||
Proceeds
from sale of assets and liabilities of discontinued
operations
|
217,282 | — | ||||||
NET
CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES
|
217,282 | (34,111 | ) | |||||
CASH FLOWS FROM FINANCING
ACTIVITIES
|
||||||||
Repayment
of related party loans
|
— | 16,737 | ||||||
Payoff
of line of credit from refinancing
|
(1,292,980 | ) | — | |||||
Net
borrowings on line of credit
|
2.571,314 | 673,254 | ||||||
Repayment
of notes payable
|
— | (25,068 | ) | |||||
Repayment
of long-term debt
|
(95,692 | ) | (388,756 | ) | ||||
Financing
fees incurred
|
(61,128 | ) | (75,000 | ) | ||||
Accrued
dividends on Series C preferred stock
|
(26,338 | ) | — | |||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
1,095,176 | 201,167 | ||||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(585,997 | ) | (371,970 | ) | ||||
CASH AND CASH
EQUIVALENTS -
BEGINNING OF PERIOD
|
796,553 | 900,744 | ||||||
CASH AND CASH
EQUIVALENTS - END OF PERIOD
|
$ | 210,556 | $ | 528,774 | ||||
SUPPLEMENTARY INFORMATION
|
||||||||
Cash
paid (received) during the periods for:
|
||||||||
Interest
|
$ | 395,738 | $ | 351,377 | ||||
Income
taxes
|
$ | (16,468 | ) | $ | 11,900 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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., Rezultz, Incorporated (“Rezultz”), and Pure
Earth Recycling (NJ), Inc., collectively referred to as “PE
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. For the three months ended March 31, 2010 and 2009, the Company had
four reportable segments: Transportation and Disposal, Treatment and Recycling,
Environmental Services and Materials. Prior to December 2009, the
Company had an additional reportable segment, the Concrete Fibers
segment. The Concrete Fibers segment and the operations of New Nycon,
Inc. have been reclassified and presented as discontinued operations as of March
31, 2010 and December 31, 2009 and for the three months ended March 31, 2010 and
March 31, 2009. Refer to Note 4- Discontinued
Operations.
NOTE 2–
Liquidity and
Financial Condition
The
Company incurred a net loss of approximately $2.5 million and used approximately
$1.9 million of cash in its operating activities for the three months ending
March 31, 2010. For the year ended December 31, 2010 the Company had
a net loss of approximately $7.1 million and used approximately $0.6 million of
cash in its operating activities. At March 31, 2010, the accumulated deficit was
approximately $11.0 million. The Company had cash of approximately
$0.2 million and working capital deficit of approximately $2.8 million at March
31, 2010.
The
Company has traditionally financed its working capital needs with cash flows
from operations and borrowings under a revolving line of credit. Capital
project needs have been traditionally financed with bank term loans, private
placements of preferred or common stock and cash flows from
operations.
On
February 11, 2010, the Company refinanced its existing revolving line of credit
(Note 8) by entering into a Commercial Financing Agreement with a new
lender. Under the Commercial Financing Agreement with the new lender,
the Company has an available line of credit in the principal amount of up to the
lesser of $5.0 million, or 85% of all eligible accounts receivable (as defined
under the financing agreement) that have not been paid. This
refinancing increased the maximum line of credit amount from $3.1 million under
the previous lender to $5.0 million, which will provide for additional liquidity
in 2010 to fund the projected growth in accounts receivable. This
refinancing provided for approximately $1.4 million of initial borrowing
availability as a result of a higher advance rate and less stringent accounts
receivable eligibility requirements.
6
On March
31, 2010, the Company completed the sale of substantially all of the assets and
liabilities of New Nycon in exchange for $217,282 in cash received at closing,
with an additional $50,000 in cash to be paid 90 days subsequent to the closing
date (Note 5). The additional $50,000 payment is subject to reduction
for accounts receivable not collected during that time period. The
proceeds received from this sale were used to fund the ongoing working capital
requirements of the Company. During the three months ended March 31,
2010, the Company also made the decision to discontinue the operations of Juda
Construction, Ltd., Geo Methods LLC and Bio Methods LLC as an additional measure
to cut costs and streamline its operations. It has also entered into
an agreement to sell approximately $0.5 million of trucks and idle rock crushing
equipment through an auction in June 2010, which is expected to provide
additional cash proceeds for its operations. The proceeds from this
sale will also be used to pay down the existing $1.2 million equipment term loan
and reduce the future principal and interest payments.
Management
believes cash balances on hand, borrowings under the line of credit agreement
and cash flows from operations will be sufficient to fund the Company’s net cash
requirements at least until December 31, 2010, based on several large committed
jobs within the Transportation and Disposal segment which began in April and May
of 2010 and are expected to continue throughout the remainder of the
year. If the Company experiences significant delays associated with
these jobs or is unable to begin this work as scheduled due to unforeseen
circumstances, it may need to seek additional sources of
financing. In an effort to mitigate our potential working
capital deficiencies, the Company is engaged in the following additional
activities:
|
·
|
The
Company is currently the holder of a note receivable in the principal
amount of $0.7 million as of December 31, 2009. This note is
the result of the settlement of accounts receivable litigation from July
2009 and is being repaid in eighteen monthly installments of
$55,555. The Company is seeking to obtain financing for this
note receivable to the existing revolving line of credit lender in
exchange for 50% of the outstanding principal balance, which would provide
for approximately $0.3 million as of May 15,
2010.
|
|
·
|
The
Company is working with the revolving line of credit lender to increase
the maximum line amount from $5.0 million to $8.0 million. The
Company is also in the process of adding an additional subsidiary’s
accounts receivable as collateral to this revolving line of credit, which
would provided for approximately $0.4 million of additional borrowing
availability.
|
NOTE 3 –
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 months ended March 31, 2010 and March
31, 2009 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, 2009
and 2008 and for the years then ended contained in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, filed with the
Commission on April 15, 2010.
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, assets and
liabilities accounted for at fair value, and the valuation of stock-based
compensation, the Company’s mandatorily redeemable Series B preferred stock (the
“Series B Preferred Stock”), the Company’s Series C convertible preferred stock
(the “Series C Preferred Stock”) and warrants to purchase common
stock.
7
Inventories
Inventories
are valued at the lower of cost or market by the weighted average cost method
and are comprised of crushed rock and recycled oil, which are considered
finished products. The value of the inventories as of March 31, 2010
and December 31, 2009 were as follows:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Recycled
oil
|
$ | 240,871 | $ | 255,358 | ||||
Crushed
rock
|
264,154 | 137,204 | ||||||
Totals
|
$ | 505,025 | $ | 392,562 |
Earnings Per
Share
Basic
earnings (loss) 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 but
does not include such securities if their effect would be anti-dilutive, in
accordance with ASC 260, “Earnings Per Share” (“ASC 260”).
The
Company’s computation of diluted EPS excludes 1,091,818 of common stock purchase
warrants outstanding as of March 31, 2010 and March 31, 2009, since their effect
was anti-dilutive. Additionally, 105,350 and -0- shares of
the Company’s Series C Preferred Stock at March 31, 2010 and March 31, 2009,
respectively, were also excluded from the determination of diluted EPS as their
effect was anti-dilutive.
Recently Issued Accounting
Pronouncements
Fair Value. In
January 2010, the FASB updated ASC 820 to add disclosures for transfers in and
out of level 1 and level 2 of the valuation hierarchy and to present separately
information about purchases, sales, issuances and settlements in the
reconciliation for assets and liabilities classified within level three of the
valuation hierarchy. The updates to ASC 820 also clarify existing disclosure
requirements about the level of disaggregation and about inputs and valuation
techniques used to measure fair value. The updates to ASC 820 are effective for
fiscal years and interim periods beginning after December 15, 2009, except
for the disclosures about activity in the reconciliation of level 3
activity, which are effective for fiscal years and interim periods beginning
after December 15, 2010. The updates to ASC 820 enhance disclosure
requirements and will not impact the Company’s financial position, results of
operations or cash flows.
Subsequent
Events. In May 2009, the FASB issued FASB Statement
No. 165, Subsequent Events, which was subsequently incorporated in the
Subsequent Events Topic of the FASB ASC (Topic 855). The new guidance
established general standards of 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. The circumstances under which these events or
transactions should be recognized or disclosed in financial statements were also
defined.
The new
guidance was effective for interim or annual reporting periods ending after
June 15, 2009. In February 2010, the FASB issued Accounting Standards
Update (“ASU”) 2010-09 to further amend the Subsequent Events Topic of the FASB
ASC (Topic 855). ASU 2010-09 removed the requirement for an entity that is an
SEC filer to disclose the date through which subsequent events have been
evaluated. Although the Company has evaluated events and transactions that
occurred after the balance sheet date through the issuance date of these
financial statements to determine if financial statement recognition or
additional disclosure is required, it has discontinued the separate evaluation
date disclosure in its Notes to Condensed Consolidated Financial
Statements.
8
Transfers of Financial
Assets. In June 2009, the FASB issued two standards changing
the accounting for securitizations. SFAS No. 166, Accounting for Transfers of
Financial Assets (“SFAS 166”), is a revision to SFAS
No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(“SFAS 140”), and will require more information about transfers of
financial assets, including securitization transactions, and where entities have
continuing exposure to the risks related to transferred financial assets. It
also changes the requirements for derecognizing financial assets, and requires
additional disclosures. The Company does not currently engage in the transfer of
financial assets and therefore, it does not expect the adoption of SFAS 166 to
have a material impact on its condensed consolidated financial
statements. These changes have been incorporated 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)” (“SFAS 167”) 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 adoption of SFAS
167 did not have a material impact on the Company’s condensed consolidated
financial statements. SFAS 167 has been included in the Consolidation
Topic of the FASB ASC (Topic 810).
Revenue
Recognition. In October 2009, the FASB issued ASU
No. 2009-13, “Multiple Deliverable Arrangements” (“ASU No. 2009-13”),
an update to ASC 605, “Revenue Recognition” (“ASC 605”). ASU No. 2009-13
amends ASC 605 for how to determine whether an arrangement involving multiple
deliverables (i) contains more than one unit of accounting and
(ii) how the arrangement consideration should be (a) measured and
(b) allocated to the separate units of accounting. ASU No. 2009-13 is
effective prospectively for arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The Company is currently evaluating the impact of adopting ASU
No. 2009-13 on its Consolidated Financial Statements.
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 months ended March 31, 2010
and as of March 31, 2010, and the year ended December 31, 2009, 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 4
–Discontinued
Operations
In
December 2009, the Company made a decision to discontinue the operations of New
Nycon, Inc. and the Concrete Fibers segment. Accordingly New Nycon’s
financial position as of March 31, 2010 and December 31, 2009 and its results of
operations for the three months ended March 31, 2010 and 2009 are presented as
discontinued operations in the accompanying condensed consolidated financial
statements.
During
the three months ended March 31, 2010, the Company made a decision to
discontinue the operations of Juda Construction, Ltd., Bio Methods LLC and Geo
Methods LLC. Juda and GeoMethods did not have significant operating
activities for the year ended December 31, 2009, and during this time the
Company was evaluating whether or not to continue with these
operations. As a result of ongoing operating losses during the year
ending December 31, 2009 and the three months ending March 31, 2010, the Company
made the decision to discontinue these operations as part of its overall efforts
to reorganize its operations and reduce overhead costs. Accordingly
the financial position of these companies as of March 31, 2010 and December 31,
2009 and their results of operations for the three months ended March 31, 2010
and 2009 are presented as discontinued operations in the accompanying condensed
consolidated financial statements.
9
In
conjunction with the discontinuance of operations, the Company recognized losses
of $301,134 and $221,634 for the three months ended March 31, 2010 and 2009,
respectively. The loss for the three months ended March 31, 2010,
include approximately $195,000 of expense relating to the write off of goodwill
resulting from the discontinuance of the operations of Bio Methods LLC and Geo
Methods LLC. The assets and liabilities of the discontinued
operations are presented separately under the captions “Assets of discontinued
operations” and “Liabilities of discontinued operations,” respectively in the
accompanying consolidated balance sheets as of March 31, 2010 and December 31,
2009. Effective March 31, 2010, the Company completed the sale of
substantially all of New Nycon’s assets and liabilities. In
conjunction with this sale, the exclusive licensing agreement for using recycled
carpet waste as a substitute for new fibers was also terminated along with the
contingent earn-out. See Note 5- Sale of New Nycon Assets and
Liabilities.
The
assets and liabilities of the discontinued operations as of March 31, 2010 and
December 31, 2009, were as follows:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS:
|
||||||||
Accounts
receivable, less allowance for doubtful accounts
|
$ | 43,405 | $ | 168,586 | ||||
Inventory
|
— | 231,036 | ||||||
Prepaid
expenses and other current assets
|
1,136 | 14,942 | ||||||
Property,
plant and equipment, net of accumulated depreciation
|
140,436 | 250,374 | ||||||
Intangible
assets
|
— | 718,655 | ||||||
Assets
of Discontinued Operations
|
$ | 184,977 | $ | 1,383,593 | ||||
Liabilities:
|
||||||||
Accounts
payable
|
$ | 44,218 | $ | 152,124 | ||||
Accrued
expenses and other liabilities
|
21,185 | 59,142 | ||||||
Notes
payable
|
28,690 | 31,572 | ||||||
Contingent
consideration
|
— | 607,756 | ||||||
Liabilities
of Discontinued Operations
|
$ | 94,093 | $ | 850,594 |
The
results of discontinued operations for the three months ended March 31, 2010 and
2009 are as follows:
For the Three Months Ended
March 31,
|
||||||||
(Unaudited)
|
2010
|
2009
|
||||||
Revenue
|
$ | 368,803 | $ | 425,164 | ||||
Costs
of Revenues
|
310,949 | 398,275 | ||||||
Gross
profits
|
$ | 57,854 | $ | 26,889 | ||||
Operating
expenses
|
358,988 | 247,042 | ||||||
Loss
from operations
|
(301,134 | ) | (220,153 | ) | ||||
Other
income
|
— | (1,481 | ) | |||||
Loss
from Discontinued Operations
|
$ | (301,134 | ) | $ | (221,634 | ) |
10
NOTE 5 -
Sale of New Nycon
Assets and Liabilities
On March
31, 2010, the Company and New Nycon completed the sale of substantially all of
the assets and liabilities of New Nycon in exchange for $217,282 in cash
received at closing, with an additional $50,000 in cash to be paid 90 days
subsequent to the closing date. The additional $50,000 payment is
subject to reduction for accounts receivable not collected during that time
period.
The
Company and New Nycon agreed to indemnify and hold the buyer harmless from and
against certain liabilities and claims arising out of the operation of the
former New Nycon business and under the Asset Purchase Agreement. The
indemnification obligation of the Company and New Nycon is limited to a cap of
$300,000 and subject to a $10,000 deductible. Also, the Company
and New Nycon entered into separate non-compete agreements with the buyer,
pursuant to which they agreed not to compete with the buyer with respect to the
sold business or solicit its employees or customers until the first to occur of
six years after the closing date or the discontinuance of the acquired
business.
In
connection with this sale, New Nycon and the licensor of a patent associated
with the sold business agreed to terminate and extinguish for no additional fee
an exclusive License Agreement. Under the License Agreement, 15,000
shares of the Company’s common stock had been paid to the Licensor and held in
escrow pending the satisfaction by New Nycon of certain financial
objectives. As a result of entering into the Termination Agreement,
all such shares were deemed forfeited as of March 31, 2010 as the financial
objectives were not satisfied prior to the termination of the License
Agreement.
Pursuant
to the Asset Purchase Agreement, the Company retained certain assets and
liabilities including accounts receivable aged over 90 days from invoice date,
certain fixed assets and approximately $36,000 of accounts payable and accrued
liabilities. These assets and liabilities are classified as Assets
and Liabilities from Discontinued Operations in the condensed consolidated
financial statements as of March 31, 2010. As a result of the sale
transaction, the Company recognized a gain of $0.1 million during the quarter
ended March 31, 2010.
NOTE 6 -
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 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 March 31, 2010. These customers accounted for approximately
$1,821,363 (25%) of the accounts receivable at March 31, 2010. 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 $2,314,490 (33%) of the Company’s revenue during the three months
ended March 31, 2010. These revenues were reported as components of
the Treatment and Recycling and Transportation and Disposal segment
revenues. During the three months ended March 31, 2010, no
single customer accounted for 10% or greater of the Company’s consolidated
revenues.
Two
customers accounted for $3,559,156 (30%) of its revenue during the three months
ended March 31, 2009. These revenues were reported as a component of
the Treatment and Recycling segment revenues. The deterioration of the financial
condition of one or more of its major customers could adversely impact the
Company’s operations.
NOTE 7 -
Intangible
Assets
Below is
a summary of intangible assets at March 31, 2010 and December 31,
2009:
Balance as of March 31, 2010 (Unaudited)
|
Balance as of December 31, 2009
|
|||||||||||||||||||||||
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||
Finite Lives:
|
||||||||||||||||||||||||
Customer
lists
|
$ | 1,417,552 | $ | (597,877 | ) | $ | 819,675 | $ | 1,417,552 | $ | (562,438 | ) | $ | 855,114 | ||||||||||
Other
intangible assets
|
1,283,001 | (548,181 | ) | 734,820 | 1,283,001 | (490,924 | ) | 792,077 | ||||||||||||||||
2,700,553 | (1,146,058 | ) | 1,554,495 | 2,700,553 | (1,053,362 | ) | 1,647,191 | |||||||||||||||||
Indefinite
Lives:
|
||||||||||||||||||||||||
Permits
|
2,200,000 | — | 2,200,000 | 2,200,000 | — | 2,200,000 | ||||||||||||||||||
Total
|
$ | 4,900,553 | $ | (1,146,058 | ) | $ | 3,754,495 | $ | 4,900,553 | $ | (1,053,362 | ) | $ | 3,847,191 |
11
Amortization
expense of intangible assets was $92,695 and $92,695 for the three months ended
March 31, 2010 and 2009, respectively.
Expected
future amortization expense for amortizable intangible assets with finite lives
is as follows for periods subsequent to March 31, 2010:
Twelve months ending March
31,
|
||||
2011
|
$ | 370,781 | ||
2012
|
370,781 | |||
2013
|
303,361 | |||
2014
|
169,330 | |||
2015
|
169,330 | |||
Thereafter
|
170,912 | |||
$ | 1,554,495 |
NOTE 8-
Line of
Credit
On
February 11, 2010, the Company refinanced its existing revolving line of credit,
having an outstanding balance of $1,884,529 at December 31, 2009, with a new
lender in order to provide additional availability to fund the growth of its
accounts receivable. The new commercial financing agreement provides
a line of credit in a principal amount of up to the lesser of (i) $5.0 million,
or (ii) 85% of all eligible accounts receivable (as defined under the agreement)
that have not been paid. The lender also has the right to reduce the
85% advance percentage with respect to a particular account in its reasonable
discretion. Eligible accounts receivable will also be reduced by,
among other things, (i) the amount of any account that at the time exceeds 20%
of all accounts receivable, but only to the extent of such excess, and (ii) the
amount of any account that is the subject to a claim or disagreement by a
customer against the Company or its subsidiaries. This new commercial
financing agreement expires on July 31, 2010, and will be automatically renewed
for successive six-month periods unless the Company delivers written notice of
cancellation to the lender not earlier than 90 days and not later than 30 days
prior to the expiration date of the initial term or any succeeding renewal
term.
The
Company is required to pay the lender an invoice service fee equal to 0.95%
charged monthly on the daily outstanding principal balance under the line of
credit. Interest is charged by the lender on the daily outstanding
principal balance of the line of credit at the prime rate plus 2.5% on an
annualized basis charged daily, collected at the end of each
month. The prime rate is the greater of the prime rate as published
in the Wall Street
Journal as the “Prime Rate” (equal to the base rate on corporate loans
posted by at least 75% of the nation’s 30 largest banks) or 5% per year (5% as
of March 31, 2010). The Company incurred an origination fee of 0.5%
of the maximum line of credit amount, or $25,000 and was also required to pay
the lender’s legal fees and expenses and other customary closing costs in
connection with the revolving line of credit agreement. As of March
31, 2010, the Company was in compliance with all of the terms of this line of
credit.
12
At March
31, 2010, the Company had a balance of $3,162,863 outstanding under this
revolving line of credit bearing interest at 7.5%, plus the 0.95% monthly
service fee calculated on the outstanding loan balance, which is classified as
interest expense in the Company’s condensed consolidated statement of
operations.
On
November 30, 2009, the Company agreed with the holder of the Series B preferred
stock that in lieu of making the coupon payments otherwise due on September 30,
2009 and December 31, 2009, it would instead pay the holder of the Series B
preferred stock the coupon payment, plus 14% interest thereon,
either:
|
a)
|
on
March 15, 2010; or
|
|
b)
|
on
the date upon which the Company either i) refinanced its outstanding
obligations under its former revolving line of credit with an alternative
lender or ii) renews such obligations for an extended maturity
date.
|
Upon
refinancing the revolving line of credit on February 11, 2010, the Company was
not able to make the coupon payments otherwise due per the agreement terms
above. On March 26, 2010, the Company obtained a forbearance from the
holder of the Series B Preferred Stock agreeing to delay until June 15, 2010 the
Company’s obligation to make the September 30, 2009, December 31, 2009 and March
31, 2010 dividend payments plus 14% accrued interest.
NOTE 9-
Long-Term Debt and
Notes Payable
At March
31, 2010 and December 31, 2009, long-term debt consisted of the
following:
March 31,
|
December 31
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
PE
Recycling term loan
|
$ | 7,071,721 | $ | 7,145,285 | ||||
Equipment
term loan
|
1,205,396 | 1,205,396 | ||||||
Various
equipment notes payable
|
272,979 | 283,826 | ||||||
Total
|
8,550,096 | 8,634,507 | ||||||
Less
current portion
|
(1,841,048 | ) | (1,445,576 | ) | ||||
Long-term
portion
|
$ | 6,709,048 | $ | 7,188,931 |
Future
maturities of long-term debt at March 31, 2010 are as follows:
Twelve months ending March
31,
|
||||
2011
|
$ | 1,841,048 | ||
2012
|
1,751,376 | |||
2013
|
1,243,843 | |||
2014
|
1,237,590 | |||
2015
|
1,314,520 | |||
Thereafter
|
1,161,718 | |||
$ | 8,550,095 |
NOTE 10 -
Officer Loans and
Related Party Transactions
At March
31, 2010 and December 31, 2009, the Company had a note payable to Gregory Call
(“Call”), a former officer of PE Recycling in the amount of
$1,011,348. Call was a former owner of PE Recycling prior to the
acquisition on March 30, 2007. The note payable bears interest at
6.77% per annum and was subject to repayment, including accrued interest, based
upon the following schedule:
13
Twelve Months Ending December
31,
|
||||
2009
|
333,000 | |||
2010
|
678,348 | |||
$ | 1,011,348 |
Under the
stock purchase agreement, the Company was to 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
Call 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 him as permitted under the stock purchase
agreement. Effective on June 27, 2009, the Company offset the amounts
due to Call under this note payable against the post-closing
claims. Call 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
Call, 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
15). 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 Call is reached or the Company is legally released from
this obligation.
As of
March 31, 2010 and December 31, 2009, the Company had approximately $108,000 and
$118,000 in due from affiliates, respectively, which consists of amounts due to
PE Recycling from a joint venture, Advanced Catalyst Recycling LLC (“ACR”), in
which it owns a non-controlling 50% interest. The balances
principally reflect the value of goods and services performed and provided by PE
Recycling to the joint venture, for which PE Recycling has not yet been
compensated.
NOTE 11 –
Fair Value
Measurements
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 Susquehanna term loan which has an adjustable rate of
interest based upon the LIBOR. The Company entered into an
interest-rate swap under which it pays 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 Susquehanna term loan, thereby 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 March 31, 2010 and December 31, 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 Susquehanna refinancing and entering into the interest-rate
swap described above, the Company elected to measure the Susquehanna term loan
at fair value, pursuant to ASC 820, which was adopted concurrently with this
transaction. This 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 Susquehanna
term loan is intended to better reflect the underlying economics of the term
loan and its relationship to the corresponding interest-rate
swap. The Company’s fair value election for the Susquehanna term loan
allows us to record any change in fair value of this liability as a gain or loss
through the Consolidated Statement of Operations, along with the changes in fair
value of the interest rate swap. Because the Company’s debt 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.
14
Assets
and liabilities measured at fair value on a recurring basis or elected to be
measured at fair value include the following as of March 31, 2010:
Fair Value Measurements Using:
|
Assets / Liabilities
|
|||||||||||||||
Level 1
|
Level 2
|
Level 3
|
at Fair Value
|
|||||||||||||
Assets:
|
||||||||||||||||
— | — | — | — | |||||||||||||
Liabilities:
|
||||||||||||||||
Interest-rate
swaps
|
$ | — | $ | 326,754 | $ | — | $ | 326,754 | ||||||||
Susquehanna
term loan
|
— | — | 6,744,967 | 6,744,967 |
During
the three months ended March 31, 2010, the Company recorded a loss of $52,002 as
a result of changes in the fair value its outstanding interest-rate swap, and a
gain of $44,595 as a result of changes in the fair value of the Susquehanna term
loan. These gains and losses were recorded as components of other
income within the condensed Consolidated Statement of Operations.
NOTE 12 –
Income
Taxes
For the
three months ended March 31, 2010, the Company recognized an income tax benefit
of $537,982, based upon an effective tax rate of approximately 20%. The
Company’s net deferred income tax liabilities decreased by $0.5 million from
December 31, 2009 to March 31, 2010 as a result of the additional net operating
losses, which will offset these future income tax liabilities. For the three
months ended March 31, 2009 the Company recognized an income tax benefit of
$656,043 based upon an effective tax rate of approximately 45%. The
decrease in the Company’s effective tax rate from 45% for the three months
ending March 31, 2009 to 20% for the three months ending March 31, 2010, is
primarily the result of an increase of approximately $320,000 to the Company’s
valuation allowance against certain portions of its net operating loss
carryforwards because it is more likely than not that a portion of the net
operating loss carryforwards will not be realized and a decrease in the
Company’s estimated pre-tax accounting income for the annual reporting
periods.
NOTE 13-
Stockholders’
Equity
Common
Stock
During
the three months ended March 31, 2010, the Company issued 12,500 shares of
common stock valued at $0.50 per share to an employee under the 2007 Stock
Incentive Plan.
NOTE 14 -
Commitments and
Contingencies
Leases
The
Company leases facilities, vehicles, and operating equipment under certain
non-cancelable operating leases that expire beginning in April 2010 through
December 2013.
Minimum
future lease payments are as follows:
Twelve months ending March 31,
|
||||
2011
|
$ | 989,028 | ||
2012
|
464,788 | |||
2013
|
391,487 | |||
2014
|
356,416 | |||
$ | 2,201,719 |
The
Company incurred rent expense of approximately $313,751 and $383,000 for the
three months ended March 31, 2010 and 2009, respectively.
15
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 $1.2 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 2013. 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 March 31, 2010, 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 March 31,
|
||||
2011
|
$ | 1,233,099 | ||
2012
|
571,696 | |||
2013
|
564,866 | |||
2014
|
142,918 | |||
Total
|
$ | 2,512,579 |
NOTE 15 -
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.
Soil Disposal
Litigation
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. On July 6, 2009, the court initially denied the Defendants’
motion for summary judgment, but later granted re-argument on the motion. The
Defendants have also sought dismissal of the case on the grounds that the
Plaintiff has failed to produce documents relevant to its claims.
16
On April
26, 2010, the court ruled in favor of the Defendant, dismissing all claims
against the Company and the Soil Disposal sales representatives. The
court also stated that the action against Pure Earth, the Soil Disposal sales
representatives and Pure Earth’s chief financial officer appeared to be “an
attempt to utilize the costs of litigation as a tool to retaliate against its
former employees and stifle competition.” The court further dismissed
all but two of the Plaintiff’s claims against the Company’s chief financial
officer, and permitted such remaining two claims to proceed only on the
condition that Plaintiff agree in writing within 30 days of the court’s order to
bear the costs of discovery and pay the Company’s chief financial officer’s
attorney fees and costs if further discovery does not turn up evidence of a
violation. On May 3, 2010, the Plaintiffs filed a motion to appeal
this decision. On May 10, 2010, the judge further ordered a special referee
clerk to set an inquest date for the earliest possible date (currently set for
June 8, 2010) to determine the unpaid commissions due to the Soil Disposal sales
representatives from the Plaintiff, which will include double damages and
reimbursement of attorney’s fees, court costs and disbursements. The
Company and the other Defendants will continue to deny liability and will
continue to defend all claims vigorously.
PE Recycling
Litigation
In
September 2009, Pure Earth filed a complaint in the United States District Court
for the Eastern District of Pennsylvania against Gregory Call, a former owner of
PE Recycling, claiming that Call breached the terms of a stock purchase
agreement by which Pure Earth acquired PE Recycling. Under the terms of the
stock purchase agreement, Call is legally obligated to indemnify and hold
harmless Pure Earth from and against all liabilities, losses, damages, costs and
expenses arising from Call’s breach of any representation or warranty in the
stock purchase agreement. Pure Earth has alleged that Call has breached numerous
representations and warranties in the stock purchase agreement and thereby has
triggered Call’s obligation to indemnify Pure Earth, which Call has disputed. In
the complaint, Pure Earth alleges that the Call’s failure to indemnify Pure
Earth has breached the terms of the stock purchase agreement. Pure Earth seeks
from the Court post closure claims in excess of $4.0 million (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 Call thereunder.
In
November 2009, Call filed an answer to this complaint, generally denying Pure
Earth’s claims and asserting a number of affirmative defenses. In his answer,
Call 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. Call 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 Call, believes that his
defenses and counterclaims are without merit and will seek to vigorously defend
itself against these counterclaims.
On
February 12, 2010, Call commenced an action against PE Recycling, the Company’s
chief executive officer, and the Company’s chief financial officer in the
Superior Court of New Jersey in Cumberland County. Call alleges the Company’s
chief executive officer and chief financial officer made material
misrepresentations and omissions to induce him to enter into an employment
agreement on March 30, 2007, and that the employment agreement was breached when
he was terminated in July 2009. Call also asserts a claim under the New Jersey
Conscientious Employee Protection Act, alleging that he was terminated in
retaliation for disclosing to a governmental agency alleged acts of his employer
that he reasonably believed violated the law. Call also seeks a declaratory
judgment that the non-compete provisions contained in the employment agreement
are void. PE Recycling and the Company’s chief executive officer and chief
financial officer have responded to this complaint denying any liability to Call
and the Company believes that his claims are without merit and will seek to
vigorously contest these claims.
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.
17
Environmental
Matters
On
September 28, 2007, the EPA brought an administrative complaint against PE
Recycling, alleging that it failed to submit a response plan under the Clean
Water Act with respect to its facility in Millville, New Jersey. The complaint
proposes to assess a civil penalty in the amount of $103,000. On or about
December 11, 2009, PE Recycling submitted a detailed technical response to the
EPA summarizing the reasons why it is not subject to the facility response plan
requirements. That submission is under review by the EPA, which has advised PE
Recycling that no further action is required until the EPA completes its review.
PE Recycling intends to vigorously defend this matter, as the technical review
confirms that it has not been and is not now subject to the facility response
plan requirements. Any potential penalties arising from this matter
have been included in the post-closure claims against Call.
In
October 2007, PE Recycling received a notice of violation from the EPA under
RCRA, asserting that its facility, since at least 2003, has been improperly
processing used oil, alleged to be a hazardous waste, for distribution into
commerce. The EPA has alleged that PE Recycling over a three year period from
2006 to 2009 processed and sold at least 2 million gallons of used oil for fuel
that should have been processed as a hazardous waste. The Company believes that
the quantity of oil subject to these allegations is approximately 200,000
gallons. The EPA has requested under RCRA specific information with
regard to this notice of violation. PE Recycling has been cooperating with the
EPA’s information requests, following Call’s termination in July 2009. The
Company believes that it can assert valid defenses to the EPA’s allegations;
however, in an effort to resolve this matter amicably, in August 2009 the
Company initiated settlement discussions with the EPA. The EPA responded that it
would need to receive additional information from the Company before it could
properly consider a settlement offer. To support the settlement efforts, the
Company intends to comply with the EPA’s requests for information. However,
should these settlement efforts be unsuccessful, the Company intends to contest
the EPA’s allegations in the notice of violation vigorously. Any
potential penalties arising from this matter have been included in the
post-closure claims against Call.
Teamsters Local Union 282
Benefit Fund Litigation
On March
8, 2010, Juda, PE Materials, PE Transportation and Disposal and PEI Disposal
Group (collectively, the “Subsidiary Defendants”), and Pure Earth, were sued in
the U.S. District Court for the Southern District of New York. The plaintiffs
are the trustees of several boards of trustees of employee benefit funds
(collectively, “Plaintiffs”) which are associated with the Teamsters Local Union
282 (“Local 282”). The funds are the Local 282 Welfare Fund, the Local 282
Pension Fund, the Local 282 Annuity Fund, the Local 282 Job Training Fund, and
the Local 282 Vacation and Sick Leave Trust Fund (collectively, the “Funds”).
All of the funds are multi-employer benefit funds governed by the Taft-Hartley
Act and by ERISA. Other named defendants are Whitney Trucking, Inc. (“Whitney
Trucking”), and three individuals who are alleged to have owned and/or
controlled Whitney Trucking and Juda and caused an under-reporting and failure
to make payments of contributions to the Local 282 Union funds.
The
Plaintiffs are seeking collection of moneys allegedly due for delinquent
contributions to them in accordance with the terms of various collective
bargaining agreements which existed between Local 282 and either Whitney
Trucking or Juda. The plaintiffs allege that these companies owe contributions
to the Funds for the period from 2000 to 2004 and from January 19, 2006 to the
present.
The Funds
have calculated that the amounts due from 2000 to 2004 consist of $1,355,378 in
unpaid contributions, $1,483,933 in interest calculated through the dates of the
audits conducted by the Funds’ auditors and $97,535 in audit fees. In the
aggregate the amount sought for the period 2000 to 2004 is
$2,936,847.
18
The
Plaintiffs have also asserted pursuant to Pure Earth’s January 19, 2006
acquisition of certain assets of Whitney Contracting, Inc. and the January 19,
2006 purchase of 100% of the stock of Juda that Pure Earth and the Subsidiary
Defendants became liable for the obligations of Juda which included the
delinquent contributions owed to the Funds for the period from 2000 to 2004. The
Funds acknowledge that they have not conducted audits nor have reviewed the
books and records of Pure Earth and the Subsidiary Defendants to determine the
amount of delinquent contributions being sought for the period from January 19,
2006 to present. Rather, Plaintiffs assert until such audit is completed that
the Funds are permitted in accordance with the language of the respective trust
agreements to “estimate” the amount of contributions due in their sole
discretion. In this regard, Plaintiffs have noted that they are seeking
$6,000,000 for allegedly unpaid contributions for the period from December 1,
2007 to September 30, 2009, plus any additional contributions which the auditors
might determine are owing for the periods from January 20, 2006 through November
2007 and from October 1, 2009 to the present. Notably, the Funds have failed to
disclose any information about the methodology or basis used in their
“estimation” exercise for the period from December 1, 2007 to September 30,
2009, and have otherwise failed to justify the $6,000,000
“estimate”.
Additionally,
the Funds are claiming that Pure Earth and the Subsidiary Defendants became
bound to the terms of the collective bargaining agreements which had been
executed between Juda and Local 282 for the period from 2004 to 2012 and to the
terms of the 2006-2009 Metropolitan Truckers’ Association and Independent
Trucker’s Agreement (“MTA”). Moreover, Plaintiffs assert that Pure Earth and the
Subsidiary Defendants have failed to comply with the terms of the collective
bargaining agreements with Local 282 and with the MTA Agreement for the period
commencing on January 20, 2006. As a result the Funds are seeking to conduct an
audit of those companies’ books and records by the Funds’ auditors to determine
the amount of contributions due to the Funds from that date. The Funds are
seeking the remedies permitted by ERISA which include payments of contributions,
interest, liquidated damages, costs and disbursements and reimbursement of
reasonable counsel fees.
The
litigation was only filed very recently. As a result, Pure Earth is still
evaluating the merits of the lawsuit as well as the potential impact of the
allegations in the complaint and is in the early stage of preparing defenses and
responses to those allegations. Pure Earth, however, intends to contest
Plaintiffs’ claims in this lawsuit and to vigorously assert its
defenses.
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 withdrawal
liability owed to the Local 282 pension trust fund. 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 agreed to be 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 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 December 10, 2009, the
remaining $200,000 letter of credit was drawn down upon by the Local 282 pension
trust fund in satisfaction of the payment amount due on that date on behalf of
the former owners of Juda.
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 had 75,000
shares of its common stock remaining as collateral from the former owners of
Juda which were pledged against any future remaining liabilities. On December
14, 2009, at the Company’s request, the Indemnitors posted an additional 150,000
shares of Pure Earth common stock as collateral for the Indemnitors’ obligation
to repay the second $200,000 payment made by the Company in December 2009. In
January of 2010, the Company notified the Indemnitors of its intention to offset
the $200,000 receivable due and owing to the Company against salaries and other
compensation amounts due to these individuals over the remaining term of their
employment agreements.
19
NOTE 16 -
Segment
Reporting
The
Company and management have organized its operations into the four reportable
business segments for the three months ended March 31, 2010 and 2009:
Transportation and Disposal, Materials, Environmental Services and Treatment and
Recycling. The operating results of the Concrete Fibers segment have been
presented as discontinued operations as of and for the years ended December 31,
2009 and 2008 (Note 3- Discontinued Operations). Certain income and
expenses not allocated to the four 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 net income before interest,
taxes, depreciation, and amortization (“Adjusted EBITDA”).
Summarized
financial information concerning the Company’s reportable segments as of and for
the years ended March 31, 2010 and 2009 is shown in the following
tables:
Three Months Ended
March 31, 2010
|
Transportation
and Disposal
|
Materials
|
Environmental
Services
|
Treatment and
Recycling
|
Corporate and
Other (a), (b)
|
Total (d)
|
||||||||||||||||||
Third
Party Revenues
|
$ | 3,499,784 | $ | 471,741 | $ | 23,377 | $ | 3,022,824 | $ | — | $ | 7,017,726 | ||||||||||||
Intercompany
Revenues (b)
|
4,284 | 75,668 | — | 297,479 | (377,431 | ) | - | |||||||||||||||||
Total
Revenues
|
3,504,068 | 547,409 | 23,377 | 3,320,303 | (377,431 | ) | 7,017,726 | |||||||||||||||||
Third
Party Cost of Revenues
|
2,822,129 | 583,976 | 43,627 | 3,557,558 | — | 7,007,291 | ||||||||||||||||||
Intercompany
Cost of Revenues
|
200,810 | — | — | 176,621 | (377,431 | ) | - | |||||||||||||||||
Total
Cost of Revenues
|
3,022,939 | 583,976 | 43,627 | 3,734,179 | (377,431 | ) | 7,007,291 | |||||||||||||||||
Gross
Profit Margin
|
481,129 | (36,567 | ) | (20,250 | ) | (413,876 | ) | — | 10,435 | |||||||||||||||
Operating
Expenses
|
710,077 | 148,651 | 50,111 | 685,445 | 688,937 | 2,283,221 | ||||||||||||||||||
Loss
from Operations
|
$ | (228,948 | ) | $ | (185,218 | ) | $ | (70,361 | ) | $ | (1,099,321 | ) | $ | (688,937 | ) | $ | (2,272,786 | ) | ||||||
Adjusted
EBITDA
|
$ | (133,199 | ) | $ | (139,883 | ) | $ | (67,530 | ) | $ | (541,522 | ) | $ | (579,493 | ) | $ | (1,461,627 | ) | ||||||
Reconciliation
to Consolidated Statement of Operations:
|
||||||||||||||||||||||||
Depreciation
and Amortization (c)
|
95,749 | 45,335 | 2,831 | 575,284 | 11,017 | 730,216 | ||||||||||||||||||
Interest
Expense
|
- | - | 0 | 122,650 | 522,404 | 645,054 | ||||||||||||||||||
Loss
before Provision for Income Taxes
|
(228,948 | ) | (185,218 | ) | (70,361 | ) | (1,239,456 | ) | (1,112,914 | ) | (2,836,897 | ) | ||||||||||||
Capital
Expenditures (e)
|
$ | - | $ | — | $ | — | $ | — | $ | — | $ | - | ||||||||||||
Total
Assets (f)
|
$ | 7,100,677 | $ | 1,091,126 | $ | 1,040,981 | $ | 23,434,191 | $ | 1,665,601 | $ | 34,332,576 |
Three Months Ended
March 31, 2009
|
Transportation
and Disposal
|
Materials
|
Environmental
Services
|
Treatment and
Recycling
|
Corporate and
Other (a), (b)
|
Total (d)
|
||||||||||||||||||
Third
Party Revenues
|
$ | 4,450,679 | $ | 605,918 | $ | 219,384 | $ | 6,366,000 | $ | — | $ | 11,641,981 | ||||||||||||
Intercompany
Revenues (b)
|
— | 204,579 | — | 263,294 | (467,873 | ) | - | |||||||||||||||||
Total
Revenues
|
4,450,679 | 810,497 | 219,384 | 6,629,294 | (467,873 | ) | 11,641,981 | |||||||||||||||||
Third
Party Cost of Revenues
|
3,159,085 | 672,469 | 174,790 | 5,386,440 | — | 9,392,783 | ||||||||||||||||||
Intercompany
Cost of Revenues
|
466,742 | — | 1,131 | — | (467,873 | ) | - | |||||||||||||||||
Total
Cost of Revenues
|
3,625,827 | 672,469 | 175,921 | 5,386,440 | (467,873 | ) | 9,392,783 | |||||||||||||||||
Gross
Profit Margin
|
824,852 | 138,028 | 43,462 | 1,242,854 | — | 2,249,198 | ||||||||||||||||||
Operating
Expenses
|
724,205 | 113,968 | 116,304 | 982,850 | 866,279 | 2,803,606 | ||||||||||||||||||
Income
(Loss) from Operations
|
$ | 100,647 | $ | 24,060 | $ | (75,842 | ) | $ | 260,004 | $ | (866,279 | ) | $ | (554,408 | ) | |||||||||
Adjusted
EBITDA
|
$ | 196,396 | $ | 67,723 | $ | (68,387 | ) | $ | 585,017 | $ | (854,630 | ) | $ | (73,881 | ) | |||||||||
Reconciliation
to Consolidated Statement of Operations:
|
||||||||||||||||||||||||
Depreciation
and Amortization (c)
|
95,749 | 43,663 | 4,455 | 444,862 | 11,648 | 600,378 | ||||||||||||||||||
Interest
Expense (Income)
|
- | - | — | 137,590 | 430,898 | 568,489 | ||||||||||||||||||
Income
(Loss) before Provision for Income Taxes
|
100,647 | 24,060 | (72,842 | ) | 2,565 | (1,297,177 | ) | (1,242,747 | ) | |||||||||||||||
Capital
Expenditures (e)
|
$ | - | $ | 22,891 | $ | - | $ | - | $ | - | $ | 22,891 | ||||||||||||
Total
Assets
|
$ | 8,783,393 | $ | 1,461,406 | $ | 1,254,327 | $ | 27,034,343 | $ | 2,407,631 | $ | 40,941,100 |
20
(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
“Total Assets” above reflects the elimination of $7,152,529 and $5,029,775
of the Company’s investment in subsidiaries and intersegment receivables
as of March 31, 2010 and March 31, 2009,
respectively.
|
(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.
|
(f)
|
Excludes
assets from discontinued
operations.
|
For the
three months ended March 31, 2010, the Company derived approximately $0.1
million of its revenues from customers located outside of the United States,
which was reflected as a component of discontinued operations. For
the three months ended March 31, 2009, the Company derived all of its revenues
from customers located in the United States. In addition at March 31,
2010 and December 31, 2009, all of the Company’s operations and long-lived
assets were located in the United States.
21
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 as needed to support our
operations;
|
|
·
|
our
ability to satisfactorily manage our liquidity and working capital
position;
|
|
·
|
our
ability to retain existing customers and job contracts, and obtain new
customers and job contracts;
|
|
·
|
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 for the fiscal year ended December 31, 2009, as filed
with the SEC on April 15, 2010, 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.
22
Overview
and Strategy
We are a
diversified environmental company that specializes in delivering innovative,
unique and sustainable solutions to alternate energy and recovery services in
the United States. Our corporate objective is the management of
complex projects to maximize the beneficial energy, land resource reuse and
recycling potential of various materials throughout the United States. .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 or
Brownfield sites. We operate in the following four reportable business segments,
which serve as strategic business units through which our environmental products
and services 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.
|
|
·
|
Environmental Services – We provide a
wide range of environmental consulting and related specialty services,
including:
|
|
o
|
environmental
investigation and engineering services to commercial and residential
customers; and
|
|
o
|
locating
and acquiring Brownfield sites for subsequent development, restoration and
potential resale with 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.
|
Prior to
December 2009, we also maintained a Concrete Fibers operating
segment. The Concrete Fibers business was acquired on April 1, 2008
and served to recycle used carpet fibers into environmentally sustainable, or
“green,” fiber material used to reinforce concrete. In this segment,
we also repackaged and distributed various other fibers as additives to concrete
products. In December 2009, we decided to seek a buyer for this
business segment. For this reason, the operating results and assets
and liabilities previously presented within this segment have been reclassified
as discontinued operations in our unaudited financial statements as of and for
the three months March 31, 2010 and 2009. We sold substantially all
of the assets of our Concrete Fibers operating segment on March 31,
2010. See “Results of Operations – Three Months Ended March 31, 2010
Compared to Three Months Ended March 31, 2009 – Discontinued
Operations.”
Our
overall business strategy consists of the following key elements:
|
·
|
Continue to Focus on Our Core
Transportation and Disposal Business. We intend to expand and grow
this segment, which involves the management, transportation and disposal
of excavated clean and contaminated soils from urban construction projects
throughout the mid-Atlantic and New England regions. Since beginning our
operations in this marketplace in 2006, we have expanded our sales force
and sought to broaden and diversify customer base in an attempt to
penetrate further the transportation and disposal market. We seek to
market our transportation and disposal services to Fortune 500 companies,
which we believe will present a significant source of large customer
accounts.
|
|
·
|
Develop and Grow Revenues from
“Green” Construction Materials and Related Products. We will seek
to sell a growing variety of construction materials produced by reusing
materials transported from construction job sites. We seek to identify new
construction sites strategically located in the New York City metropolitan
area. These new sources of reusable material, when coupled with the
operation of our higher-capacity rock crushing unit, will serve to
generate additional revenues for our Materials
segment.
|
23
|
·
|
Strive to Be a Leading
Provider of Treatment and Recycling Services. Waste disposal and
recycling can be a costly problem for owners and developers of various
real estate projects and properties. Our Treatment and Recycling segment
maintains a permitted facility to process hazardous and non-hazardous
waste for beneficial reuse, which costs the customer on average 50% less
than incineration. We also intend to leverage our geographic breadth and
services portfolio to offer our customers a single source for treatment
and recycling services, thereby simultaneously expanding the options
available to our customers and reducing the cost of providing those
services. We plan to expand our permits to accept higher levels of
contaminated wastes as well as increased volumes of
waste.
|
|
·
|
Recycle Waste Products into
Alternate Fuels. We plan to develop and process high BTU
waste products into a form of fuel that can be used in place of or
together with fossil fuels such as coal, natural gas and oil. We are
currently investigating potential sites in the northeastern United States
to commence operations.
|
We are
also exploring various initiatives to process selected energy materials and
provide technical support for the use of alternative fuels in an effort to
reduce costs, conserve fossil fuels and reduce the carbon footprint of the
energy consumer. Specifically, we are seeking to provide alternative
fuel and raw materials services and solutions to the cement industry and other
industrial users of fossil fuels, produce alternative fuels from a variety of
recyclable materials, including bio-solids, and to provide engineering and
environmental support for our products and services.
We
believe that these alternative fuels can serve, in part, as replacements for
conventional fossil fuels and can be recycled from post-industrial and
post-consumer byproducts. A significant degree of processing is
typically required in order to use these materials as an alternative fuel source
in the conventional combustion process. We seek to partner with the
end users of these alternative fuels to provide the procurement of the raw
materials, processing and engineering of the material into alternative fuels,
and delivery of the alternative fuels to the end user.
|
·
|
Expand Geographic Reach and
Capacity of Environmental Recycling Facilities. We will generate
additional revenues through the growth and expansion of our existing PE
Recycling soil treatment and processing facilities. We intend to seek
opportunities to grow our existing refinery waste treatment and processing
business through increased capacity and by providing the ability to treat
or recycle additional waste
streams.
|
|
·
|
Leverage Brownfield Sites to
Drive Environmental Services Revenue. We intend to increase, over
the long-term, the number of Brownfield sites that we own, control,
operate or develop. We believe that, by obtaining access to new disposal
sites closer to the markets for our transportation and disposal business,
these properties will provide us with potential sources of revenue and
lower operating costs, as well as promote additional opportunities for our
environmental consulting and engineering
services.
|
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
|
24
|
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. We acquired our first Brownfield site in
January 2008 and are working through the permitting process that is
required in order 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 fourth 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.
|
Overall,
we generally enter into customer and materials contracts on a purchase order or
similar basis. These purchase orders may generally be canceled by the
customer or us at any time and for any reason. Furthermore, our
customers have the ability to change the scope of work to be performed or
payment to be received under these contracts at any time. 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 the recognition of our revenues under pending work orders may be more
uncertain and our recognized 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
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.
25
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. In
addition, we have also identified a process of recycling of waste that had
originally been destined for landfills to be treated and transformed into a
reusable, alternative fuel that can be sold back to various industries. A
specific and targeted application can be used with cement kilns. This process
has been successfully developed and utilized in Europe and we believe it can
successfully bring this process to the US markets. We currently have one
facility under agreement to begin installation of this process in
2010. Our business strategy to recycle high BTU waste streams into
alternative fuels is driven by our efforts to provide lower cost recycling
outlets and “green” recycling alternatives to customers seeking price
differentiation or demanding 100% recycling of their waste products, as well as
by the significantly higher cost of fossil fuels.
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
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Critical Accounting Policies and Estimates” in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed
with the Securities and Exchange Commission on April 15, 2010.
26
Results
of Operations – Three Months Ended March 31, 2010 Compared to Three Months Ended
March 31, 2009
The
following table presents, for the periods indicated, a summary of our condensed
consolidated statement of operations information.
For the Three Months Ended March 31,
|
||||||||
(in thousands, except share and per share data)
|
2010
|
2009
|
||||||
Revenues
|
$ | 7,018 | $ | 11,642 | ||||
Cost
of revenues
|
7,008 | 9,393 | ||||||
Gross
profit
|
10 | 2,249 | ||||||
Operating
expenses:
|
||||||||
Salaries
and related expenses
|
879 | 1,343 | ||||||
Occupancy
and other office expenses
|
172 | 236 | ||||||
Professional
fees
|
617 | 535 | ||||||
Other
operating expenses
|
242 | 332 | ||||||
Insurance
|
259 | 241 | ||||||
Depreciation
and amortization
|
114 | 117 | ||||||
Total
operating expenses
|
2,283 | 2,804 | ||||||
Loss
from continuing operations
|
(2,273 | ) | (555 | ) | ||||
Interest
expense, net
|
(645 | ) | (568 | ) | ||||
Loss
from equity investment
|
(10 | ) | (104 | ) | ||||
Other
income (expense)
|
91 | (16 | ) | |||||
Loss
from continuing operations before benefit from income
taxes
|
(2,837 | ) | (1,243 | ) | ||||
Benefit
from income taxes
|
(538 | ) | (656 | ) | ||||
Net
loss from continuing operations
|
(2,299 | ) | (587 | ) | ||||
Discontinued
operations:
|
||||||||
Loss
from discontinued operations
|
(301 | ) | (222 | ) | ||||
Benefit
from income taxes
|
— | — | ||||||
Net
loss from discontinued operations
|
(301 | ) | (222 | ) | ||||
Gain
on sale of assets and liabilities from discontinued
operations
|
98 | — | ||||||
Total
loss from discontinued operations
|
(203 | ) | (222 | ) | ||||
Net
loss
|
(2,502 | ) | (808 | ) | ||||
Less
Series C preferred stock dividends
|
26 | — | ||||||
Net
loss available for common stockholders
|
$ | (2,528 | ) | $ | (808 | ) | ||
Net
loss per share from continuing operations (basic and
diluted)
|
$ | (0.13 | ) | $ | (0.04 | ) | ||
Net
loss per share from discontinued operations (basic and
diluted)
|
$ | (0.02 | ) | $ | (0.01 | ) | ||
Net
loss per share from sale of discontinued operations (basic and
diluted)
|
$ | 0.01 | $ | 0.00 | ||||
Total
loss per share from discontinued operations (basic and
diluted
|
$ | (0.01 | ) | $ | 0.00 | |||
Net
loss per share
|
$ | (0.14 | ) | $ | (0.05 | ) | ||
Weighted
average shares of common stock outstanding during the period (basic and
diluted)
|
17,582,899 | 17,223,021 | ||||||
Loss
from continuing operations before interest, taxes, depreciation, and
amortization (EBITDA)
|
$ | (1,462 | ) | $ | (75 | ) |
27
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.
|
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;
|
28
|
·
|
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 March 31, 2010 and
March 31, 2009:
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(in thousands)
|
(unaudited)
|
(unaudited)
|
||||||
EBITDA
|
$ | (1,462 | ) | $ | (75 | ) | ||
Depreciation
and amortization, including $616 and $483 of depreciation and amortization
classified as a component of cost of revenues
|
730 | 600 | ||||||
Interest
expense, net
|
645 | 568 | ||||||
Benefit
from income taxes
|
(538 | ) | (656 | ) | ||||
Net
loss from continuing operations
|
$ | (2,299 | ) | $ | (587 | ) |
Revenues
The
following table sets forth information regarding our revenues, excluding
intercompany revenues, by segment for the three months ended March 31, 2010 and
2009.
Three Months Ended March 31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(unaudited) (dollars in thousands)
|
Amount
|
% of
Revenues
|
Amount
|
% of
Revenues
|
||||||||||||
Transportation
and Disposal
|
$ | 3,500 | 50 | % | $ | 4,451 | 38 | % | ||||||||
Treatment
and Recycling
|
3,023 | 43 | % | 6,366 | 55 | % | ||||||||||
Environmental
Services
|
23 | 0 | % | 219 | 2 | % | ||||||||||
Materials
|
472 | 7 | % | 606 | 5 | % | ||||||||||
Total
|
$ | 7,018 | 100 | % | $ | 11,642 | 100 | % |
Revenues
decreased by $4.6 million, or 40%, from $11.6 million for the three months
ended March 31, 2009 to $7.0 million for the three months ended March 31,
2010. The revenue decrease in the first quarter of 2010 is primarily
attributable to a $3.3 million decrease in revenues from the Treatment and
Recycling segment and a decrease of $1.0 million in revenues from the
Transportation and Disposal segment, which were negatively impacted by the
severe weather conditions and record snowfalls in the northeastern United
States during the three months ending March 31, 2010. Revenue for the
Environmental Services and Materials segments decreased by $0.2 million and $0.1
million, respectively, for the three months ended March 31, 2010 as compared to
the year-prior period.
Revenues
from our Transportation and Disposal segment decreased by $1.0 million, or 21%,
for the three months ended March 31, 2010 as compared to the three months ended
March 31, 2009. Revenues in both periods were driven largely by the
demand for our Transportation and Disposal services in the New York metropolitan
area. We derived 27% and 35% of our Transportation and Disposal
revenues for the three months ended March 31, 2010 and 2009, from five
large customers during each period. 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 2009, and continued into 2010 due to
uncertain market and economic conditions. The decrease in revenues
was also attributable to several large construction and rehabilitation projects
being delayed or put on hold as a result of the severe weather conditions
experienced in the northeastern United States. Based upon our current
existing backlog for 2010 and continued bidding in the marketplace, we believe
that in 2010 the Transportation and Disposal segment will begin to recover from
the downturn and revenues will start returning to historical sales levels
experienced during 2007 and the first half of 2008.
29
Revenues
from the Treatment and Recycling segment for the three months ended March 31,
2010, decreased by $3.3 million, or 53%, as compared to the three months ended
March 31, 2009. The decrease in revenues is largely attributable to a decrease
in the volume of incoming clean and contaminated soils for processing in 2010
resulting from the lack of marketplace activity for projects of this nature. The
lower revenues during the three months ending March 31, 2010 can also be
attributed to the severe winter weather conditions which resulted in delays in
our customers moving material into our facility. The revenues for the three
months ended March 31, 2010 reflect an extremely competitive market in which we
are competing with other recycling and disposal service companies for fewer
overall jobs, causing lower pricing on a per ton basis. We also had a large
hazardous waste job in the first quarter of 2009, which revenues did not recur
during the first quarter of 2010. Our Treatment and Recycling revenues for the
three months ended March 31, 2009, also include approximately $0.7 million in
revenues from PE Energy for brokering the disposal of various alternative waste
streams, which we have continued to grow since beginning its operations in the
fourth quarter of 2008.
Revenues
from the Environmental Services segment decreased by $0.2 million, or 89%, from
$0.2 million for the three months ended March 31, 2009 to approximately $23,000
for the three months ended March 31, 2010. The decrease in revenues during the
first quarter of 2010 is due in part to the discontinuation of our medical waste
disposal and environmental well drilling businesses. We have also reduced the
amount of environmental consulting projects that we are currently undertaking in
an effort to focus on our other larger business segments. We continue to work on
the permitting, site analysis and testing required to begin accepting material
into our Brownfield site in Connecticut. We anticipate that this site will begin
generating revenues in the fourth quarter of 2010.
Revenues
from the Materials segment decreased by approximately $0.1 million for the three
months ended March 31, 2010 as compared to the three months ended March 31,
2009. The Materials segment results overall were negatively impacted during the
first quarter of 2010 by the poor weather conditions and extraordinary snowfalls
which delayed certain projects.
The table
above does not reflect intercompany revenues of approximately $0.4 million and
$0.5 million for the three months ended March 31, 2010 and 2009, 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.
Cost
of Revenues
The
following table sets forth information regarding our cost of revenues, excluding
intercompany costs, by segment for the three months ended March 31, 2010 and
2009.
30
Cost of Revenues – By Segment
|
||||||||||||||||
Three Months Ended March 31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(unaudited)
(dollars in thousands)
|
Amount
|
%
of
Revenues
|
Amount
|
%
of
Revenues
|
||||||||||||
Transportation
and Disposal
|
$ | 2,822 | 40 | % | $ | 3,159 | 27 | % | ||||||||
Treatment
and Recycling
|
3,558 | 51 | % | 5,386 | 46 | % | ||||||||||
Environmental
Services
|
44 | 1 | % | 176 | 2 | % | ||||||||||
Materials
|
584 | 8 | % | 672 | 6 | % | ||||||||||
Total
|
$ | 7,008 | 99 | % | $ | 9,393 | 81 | % |
Cost of
revenues decreased by approximately $2.4 million, from $9.4 million for the
three months ended March 31, 2009 to $7.0 million for the three months ended
March 31, 2010. This decrease results primarily from a decrease in the total
volume of sales from the Transportation and Disposal and Treatment and Recycling
segments. Our overall cost of revenues as a percentage of sales increased from
81% for the three months ended March 31, 2009, to 100% for the three months
ended March 31, 2010, which is reflective of increased competition in the
marketplace for less overall volume of business, as well as our fixed costs from
our facilities within the Treatment and Recycling and Materials segments
representing a larger overall portion of the costs of revenues. Our gross profit
margin for the Transportation and Disposal segment and the Treatment and
Recycling segment decreased by 48% and 155%, respectively, for the three months
ended March 31, 2010 as compared to the three months ended March 31, 2009. This decrease is primarily
attributable to an overall lack of large construction projects in the New York
metropolitan area, which have historically provided for higher margins as
compared to smaller projects, as well as downward pricing pressure resulting
from increased competition from competitors.
We plan
to decrease our cost of revenues to improve our gross margins by increasing the
number of disposal outlets accessible to us that are located closer to customer
job sites, which would decrease our transportation costs and provide alternative
disposal options to landfills. Additionally, we plan to decrease transportation
and disposal costs by adding new transportation providers, negotiating long-term
contracts at more favorable prices, and using Brownfield properties that we own
or operate as additional disposal outlets.
For 2010,
we expect to operate at gross margins ranging from 12% to 15% on a consolidated
basis. This anticipated increase from the year ended December 31, 2009 is due in
large part to several large Transportation and Disposal jobs which we expect to
provide increased gross margins and the treatment of higher priced materials
within the Treatment and Recycling segment coupled with decreased operating
costs. 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;
|
|
·
|
other
miscellaneous operating expenses.
|
|
·
|
depreciation
and amortization (other than amounts included as a component of cost of
revenues as described above);
|
31
The
following table summarizes the primary components of our operating expenses for
the three months ended March 31, 2010 and 2009.
Three Months Ended March 31,
|
Period to Period Change
|
|||||||||||||||
(unaudited) (dollars in thousands)
|
2010
|
2009
|
Amount
|
Percentage
|
||||||||||||
Salaries
and related expenses
|
$ | 879 | $ | 1,343 | $ | (464 | ) | (35 | )% | |||||||
Occupancy
and other office expenses
|
172 | 236 | (64 | ) | (27 | )% | ||||||||||
Professional
fees
|
617 | 535 | 82 | 15 | % | |||||||||||
Other
operating expenses
|
242 | 332 | (90 | ) | (27 | )% | ||||||||||
Insurance
|
259 | 241 | 18 | 7 | % | |||||||||||
Depreciation
and amortization
|
114 | 117 | (3 | ) | (3 | )% | ||||||||||
Total
operating expenses
|
$ | 2,283 | $ | 2,804 | $ | (521 | ) | (19 | )% |
Salaries
and related expenses represented approximately 40% of our total operating
expenses for the three months ended March 31, 2010 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 $0.5 million,
or 35%, which is due to reductions in headcount which took place during 2009 and
voluntary reductions in management’s salaries which went into effect on June 1,
2009.
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 $64,000, or 27%,
from the three months ended March 31, 2009 as compared to the three months ended
March 31, 2010, which is primarily attributable to the 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 PE
Recycling.
For the
three months ended March 31, 2010 and 2009, 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
|
|
·
|
fees
paid to third parties and regulatory agencies to monitor safety and
compliance with respect to certain of our
operations.
|
32
Our
professional fees increased by $82,000, or 15%, for the quarter ended March 31,
2010 as compared to the quarter ended March 31, 2009, which is result of
additional legal fees relating to ongoing litigation for the Pure Earth
Recycling litigation and other outstanding litigation issues. For the
remainder of 2010, we anticipate that our legal, auditing, accounting and other
professional fees will increase as compared to 2009, as a result of additional
costs relating to these outstanding lawsuits and litigation. We expect to incur
additional accounting and professional fees in order to comply with the
Sarbanes-Oxley Act of 2002, or SOX, which will require our auditors to issue an
audit report on our assessment of our internal control over financial reporting
beginning with our fiscal year ending December 31, 2010. 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 increased by
approximately $18,000, or 7%, for the three months ended March 31, 2010 as
compared to the corresponding period in 2009, primarily as a result of increased
policy premiums due to accidents and claims from prior years. We renegotiated
our insurance coverage company-wide in February of 2010, which we expect will
result in a slight increase in our future insurance premiums over the next 12
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 $0.1
million, or 27%, in the three months ended March 31, 2010 as compared to the
three months ended March 31, 2009. This decrease was primarily attributable to
various cost cutting initiatives enacted in the second and third quarters of
2009.
Loss
from Operations
The
following table sets forth our loss from operations by reportable segment for
the three months ended March 31, 2010 and 2009.
Three Months Ended March 31,
|
Period to Period Change
|
|||||||||||||||
(unaudited) (in thousands, except percentages)
|
2010
|
2009
|
Amount
|
Percentage
|
||||||||||||
Transportation and Disposal
|
$ | (229 | ) | $ | 101 | $ | (330 | ) | (327 | )% | ||||||
Treatment
and Recycling
|
(1,099 | ) | 260 | (1,359 | ) | (523 | )% | |||||||||
Environmental
Services
|
(70 | ) | (73 | ) | 3 | 4 | % | |||||||||
Materials
|
(185 | ) | 24 | (209 | ) | (871 |
)%
|
|||||||||
Corporate
and Other
|
(690 | ) | (866 | ) | 176 | 20 | % | |||||||||
Total
|
$ | (2,273 | ) | $ | (554 | ) | $ | (1,719 | ) | (310 | )% |
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 $1.0 million with a decrease in the gross
profit margin from 19% for the three months ended March 31, 2009, to 14% for the
three months ended March 31, 2010. This decrease in gross profit margin is due
primarily to increased competition for fewer jobs in the marketplace, resulting
in tighter margins.
For the
three months ended March 31, 2010, the Treatment and Recycling segment had a
loss from operations of approximately $1.1 million as compared to income from
operations of approximately $0.3 million for the three months ended March 31,
2009. The decrease in operating results for the three months ended March 31,
2010 is primarily due to a decrease in revenues of $3.3 million, lower revenue
per ton pricing, coupled with increased disposal and transportation costs and
operating expenses. 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
15% for the three months ended March 31, 2009 to (18)% for the three months
ended March 31, 2010. 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. During the three months ended March 31, 2010, PE Energy
contributed operating income of $24,000 as compared to an operating loss of $0.2
million for the three months ended March 31, 2009, due in large part to being a
startup operation with certain fixed overhead costs, such as
salaries.
33
Loss from
operations within the Environmental Services segment was approximately $0.1
million for the three months ended March 31, 2010 and March 31, 2009.
These losses were primarily attributable to a lack of new business from our
environmental consulting services and brokerage operations combined with costs
incurred for legal and permitting issues associated with our Brownfield property
in Connecticut. We expect to commence operations at our initial Brownfield
property in the fourth quarter of 2010, from which we believe we will 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 March 31, 2010 as compared to the three
months ended March 31, 2009, from income of approximately $24,000 for the three
months ended March 31, 2009 as compared to a loss of $0.2 million for the three
months ended March 31, 2010. The decline in our operating results for this
segment is due to lower volumes of incoming rock materials combined with poor
weather conditions which further hindered sales volumes and operating
efficiency.
Interest
Income and Expense
Interest
expense, net of interest income earned on our short-term deposits of excess
operating cash, was $0.6 million for the three months ended March 31, 2010, and
2009, respectively. Our interest expense for the three months ending March 31,
2010 consisted of the following components:
|
·
|
approximately
$125,000 in interest expense relating to our revolving line of credit
agreement
|
|
·
|
approximately
$237,000 in interest expense relating to our Series B Preferred
Stock;
|
|
·
|
Approximately
$138,000 in amortization of deferred financing costs classified as
interest expense associated with our revolving line of credit, Series B
Preferred Stock;
|
|
·
|
approximately
$122,000 in interest expense relating to our consolidated term loan and
other equipment loans at PE Recycling;
and
|
|
·
|
approximately
$30,000 in interest expense relating to other equipment loans, auto
financings and insurance financing.
|
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
February 11, 2010, we refinanced our existing revolving line of credit agreement
with a new lender. Under this new revolving line of credit agreement, we will
pay the lender an invoice service fee equal to 0.95% charged monthly on the
daily outstanding principal balance under the line of credit (11.4% on annual
basis), plus interest on the daily outstanding principal balance of the line of
credit at the prime rate plus 2.5% on an annualized basis charged daily,
collected at the end of each month. The prime rate is the greater of the prime
rate as published in the Wall
Street Journal as the “Prime Rate” (equal to the base rate on corporate
loans posted by at least 75% of the nation’s 30 largest banks), or 5.0% per year
as of March 31, 2010. As a result of this refinancing, we anticipate that our
interest expense relating to the revolving line of credit will increase in 2010
as compared to 2009; however, this increase will be offset in part by lower
interest expense from the amortization of deferred financing
charges.
Other
Income
During
the three months ended March 31, 2010, we recognized other income of $0.1
million, primarily as a result of adjusting the value of accrued liabilities for
shares of our common stock potentially due to the former owner of PE Recycling
as a result of the settlement of certain post-closing contingencies. The value
of this liability was decreased as a result in the change of fair value of the
Company’s common stock.
34
In
connection with the refinancing of PE 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 ASC 815, and therefore we recorded a fair value
adjustment increase of approximately $0.1 million for the year ended December
31, 2009. The fair value adjustment on the interest rate swap was offset in
large part by a mark-to-market adjustment decrease of approximately $0.1 million
for the year ended December 31, 2009 on Pure Earth Recycling’s term loan, for
which we have elected to apply the fair value option under ASC 820.
Loss
from Equity Investment
On April
30, 2007, we acquired a 50% interest in a joint venture formed to identify and
enter into recycling opportunities for spent metal catalysts. We account for
this investment under the equity method of accounting. As a result, for the
three months ended March 31, 2010, we recognized a loss of $10,079, which
represents 50% of the joint venture’s loss for the year. For the three months
ended March 31, 2009, we recognized a loss of $103,597, which represented 50% of
the joint venture’s loss for the year. These losses relate primarily to the
write-off of costs incurred on developmental projects, write-down of inventory
values and significant downturn in the metals market.
Benefit
from Income Taxes
For the
three months ended March 31, 2010, we recognized a benefit from income taxes of
approximately $0.5 million, and a benefit from income taxes of $0.7 million for
the three months ended March 31, 2009. The recognition of these income tax
benefits is the result of pre-tax losses incurred during both periods. Our
effective tax rates were 20% and 45% for the three months ended March 31, 2010
and 2009, respectively. The decrease in the our effective tax rate is primarily
the result of an estimated pre-tax loss for the 2010 reporting year and the
recording of a valuation allowance. We anticipate that our effective income tax
rate for the full calendar year of 2010 will be approximately 20%. The decrease
in our effective tax rate from 45% for the three months ending March 31, 2009 to
20% for the three months ending March 31, 2010, is primarily the result of an
increase of approximately $320,000 to our valuation allowance against certain
portions of our net operating loss carryforwards because it is more likely than
not that a portion of the net operating loss carryforwards will not be realized
and a decrease in our estimated pre-tax accounting income for the annual
reporting periods.
Losses
from Discontinued Operations
During
the three months ended March 31, 2010 and 2009, we had losses of $0.3 million
and $0.2 million, respectively, relating to the discontinued operations of New
Nycon, Inc., Geo Methods LLC, Bio Methods LLC and Juda Construction, Ltd. These
losses were largely the result of lower than expected revenues due to an overall
lack of marketplace demand for these services and products, combined with the
effects of shutting down these operations.
Gain
on Sale of Assets and Liabilities from Discontinued Operations
For the
three months ending March 31, 2010, we recognized a gain of approximately $0.1
million from the sale of the assets and liabilities of New Nycon, Inc., which
was completed on March 31, 2010. We received approximately $0.2 million for the
sale of approximately $0.1 million in net assets and liabilities, resulting in
the gain of $0.1 million. In connection with this transaction we also retained
certain specified assets and liabilities which are classified as assets and
liabilities from discontinued operations as of March 31, 2010, consisting of
certain accounts receivable, accounts payable and fixed assets. We anticipate
collection of these receivables and payment of the accounts payable during the
second quarter of 2010. We expect to transfer the fixed assets into our other
existing operations.
35
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 $0.2 million and $0.8 million of cash and cash equivalents
on hand at March 31, 2010 and December 31, 2009, 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 three months ended March 31,
2010 and 2009:
For the Three Months
Ended March 31,
|
||||||||
(unaudited) (in thousands)
|
2010
|
2009
|
||||||
Net
cash used in operating activities
|
$ | (1,898 | ) | $ | (539 | ) | ||
Net
cash provided by (used in) investing activities
|
$ | 217 | $ | (34 | ) | |||
Net
cash provided by financing activities
|
$ | 1,095 | $ | 201 |
Net
Cash Used in Operating Activities
The most
significant items affecting the comparison of our operating cash flows for the
three months ended March 31, 2010 and 2009, are summarized below:
|
·
|
Decrease in income from
operations – Our income from operations, excluding depreciation,
amortization and impairment, decreased by $1.0 million, or 311%, on a
period-to-period basis, which negatively impacted our cash flows from
operations for the three months ended March 31,
2010.
|
|
·
|
Change in accounts
receivable –
Sources (uses) of cash from changes in accounts receivable were
approximately $(0.3) million and $0.1 million for the three months ended
March 31, 2010 and 2009, respectively. The increase in accounts receivable
at March 31, 2010 is the result of timing in the collection of aged
receivables coupled with a decline in revenue during the period. The
decrease in accounts receivable at March 31, 2009 is the result of the
timing in collections of cash from our larger customers within the
Transportation and Disposal segment coupled with a decline in revenues
during that period.
|
|
·
|
Change in inventories–
Uses of cash from changes in inventories were approximately $(0.1) million
and $(0.1) million for the three months ended March 31, 2010 and 2009,
respectively. The increase in inventories during the three months ended
March 31, 2010 and March 31, 2009 is the result of increased volumes of
incoming rock products from the Materials segment and lower sales during
that period.
|
|
·
|
Increase in prepaid expenses
and other current assets- Uses of cash from increases in prepaid
expenses and other current assets were approximately $(0.6) million for
the three months ended March 31, 2010, and $(0.1) million for the three
months ended March 31, 2009. The increase in prepaid expenses and other
current assets in 2010, is the result of refinancing our insurance
coverage in February of 2010, which resulted in an increase to the prepaid
expenses.
|
|
·
|
Decrease in restricted
cash- Sources of cash from the decrease in restricted cash were
$0.2 million for the three months ended March 31, 2010 and $0.4 million
for the three months ended March 31, 2009. The decrease in restricted cash
for the three months ended March 31, 2010 is the result of the use of cash
to satisfy an outstanding union obligation for which that cash was
previously restricted as collateral for a letter of credit. The decrease
in restricted cash for the three months ended March 31, 2009 is
attributable to 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.
|
36
|
·
|
Change in accounts
payable –Sources (uses) of cash
for accounts payable were $0.3 million and $0.6 million for the three
months ending March 31, 2010 and 2009, respectively. The increase in
accounts payable during the three months ending March 31, 2010 is the
result of an overall increase in the aging of our accounts payable due to
operating losses. The decrease in accounts payable during the three months
ending March 31, 2009 is the result of a decline in the sales and related
cost of sales from the Transportation and Disposal segment and the payment
of aged payables from the addition of PE Recycling and other borrowers
into the borrowing base under our revolving line of credit during the
first quarter of 2009.
|
|
·
|
Increase in
accrued expenses and other current liabilities – Sources of cash from accrued
expenses and other current liabilities were $0.1 million and $0.2 million
for the three months ending March 31, 2010 and 2009, respectively. The
increase in accrued expenses and other liabilities during the three months
ended March 31, 2010 and 2009, is primarily the result of the timing of
the payment for corporate insurance, and other accrued
liabilities including payroll and accruals for certain operating expenses
for which we were not yet
invoiced.
|
Our
overall liquidity and the availability of capital resources have historically
been highly dependent on revenue derived from several large customers within the
Transportation and Disposal segment. 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
three months ended March 31, 2010, our revenues derived from these large
customers decreased as a result of the continued downturn in the construction
industry in the New York metropolitan area, however based upon our current
backlog we anticipate that these concentrations will increase in the second and
third quarters of 2010. 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 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 March 31, 2010
Compared to Three Months Ended March 31, 2009.”
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 three months March 31, 2010 and 2009:
37
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(unaudited) (in thousands)
|
(unaudited)
|
(unaudited)
|
||||||
EBITDA
|
$ | (1,462 | ) | $ | (75 | ) | ||
Adjustments
to reconcile EBITDA to net cash used in operating
activities:
|
||||||||
EBITDA
attributed to discontinued operations
|
(96 | ) | (88 | ) | ||||
Interest
expense, net
|
(645 | ) | (568 | ) | ||||
Provision
for income taxes
|
538 | 656 | ||||||
Interest
expense for accretion of warrant discount and Series B paid-in-kind
interest
|
181 | 153 | ||||||
Amortization
of deferred financing costs
|
80 | 65 | ||||||
Impairment
of goodwill
|
194 | — | ||||||
Provision
for doubtful accounts
|
(26 | ) | 11 | |||||
(Gain)
on sale of assets and liabilities from discontinued
operations
|
(98 | ) | — | |||||
Change
in fair value of derivatives and other assets and liabilities measured at
fair value
|
7 | 16 | ||||||
Restricted
stock grant
|
6 | — | ||||||
Deferred
income taxes
|
(538 | ) | (656 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(273 | ) | 116 | |||||
Inventories
|
(120 | ) | (96 | ) | ||||
Prepaid
expenses and other current assets
|
(560 | ) | (42 | ) | ||||
Deposits
and other assets
|
115 | 84 | ||||||
Restricted
cash
|
211 | 352 | ||||||
Accounts
payable
|
346 | (606 | ) | |||||
Accrued
expenses and other current liabilities
|
133 | 220 | ||||||
Accrued
disposal costs
|
99 | 50 | ||||||
Due
to affiliates
|
10 | (131 | ) | |||||
Total
adjustments
|
(436 | ) | (464 | ) | ||||
Net
cash used in operating activities
|
$ | (1,898 | ) | $ | (539 | ) |
Net
Cash Provided by (Used in) Investing Activities
Our
investing activities for the three months ended March 31, 2010 and 2009
primarily resulted from the sales of assets and liabilities from the
discontinued operations of the Concrete Fibers segment and additional purchases
of equipment within the Treatment and Recycling segment during the first quarter
of 2009. During the three months ended March 31, 2010, we received approximately
$0.2 million from the sale of substantially all of the assets and liabilities of
New Nycon, Inc. For the three months ended March 31, 2009 we spent approximately
$0.1 million on the purchase of equipment and computer software primarily for
use in our operations within the Materials and the discontinued Concrete Fibers
segment.
Net
Cash Provided by Financing Activities
The most
significant items affecting the comparison of our cash flows provided by
financing activities for the three months ending March 31, 2010 and 2009 are
summarized below:
|
·
|
Net borrowing on line of
credit- For the three months ended March 31, 2010 and 2009 we
borrowed approximately $1.3 million and $0.7 million, respectively. The
refinancing of our revolving line of credit in February 2010 provided for
additional borrowing availability and an increase in the maximum line
amount from $3.0 million to $5.0 million. For the three months ended March
31, 2009, the $0.7 million in borrowings under the line of credit was the
result of the addition of PE Recycling and its receivables into the
borrowing base.
|
|
·
|
Repayment of long-term
debt- For the three months ending March 31, 2010 and 2009, we had
repayments on our long-term debt of $0.1 million and $0.4 million,
respectively. The decrease in the repayments for the period ending March
31, 2010 is the result of amendments and forbearance agreements entered
into with our lenders which provided for interest only periods. See “ —
Long-Term Debt.”
|
|
·
|
Financing fees – For
the three months ended March 31, 2010 we incurred $0.1 million in
financing fees in relation to the refinancing of our revolving line of
credit in February 2010. For the three months ended March 31, 2009, we
incurred $0.1 million in financing fees in relation to the amendment of
our previous revolving line of credit and the addition of PE Recycling and
other borrowers into the borrowing
base.
|
38
|
·
|
Dividends - We had
$26,338 in accrued dividends relating to our Series C Convertible
Preferred Stock during the three months ending March 31,
2010.
|
Capital
Resources
We had
working capital deficiencies of $2.8 million and $0.4 million as of March 31,
2010 and December 31, 2009, respectively. Our working capital requirements
during the first three months of 2010 were funded primarily by the borrowings
under our new revolving line of credit and the collection of aged accounts
receivable. The decrease in working capital is primarily due to the additional
operating losses incurred during the first quarter of 2010.
Our
capital resources and working capital needs for the remainder of 2010 will be
largely dependent upon our ability to generate new sales and manage our
operating margins and collections during 2010. On February 11, 2010, we
refinanced our existing revolving line of credit with a new lender, which
provided additional borrowing availability to fund the projected growth of our
accounts receivable. The refinancing of our previous revolving line of credit
resulted in an initial increase in availability of approximately $1.4 million
due to a higher advance rate and less stringent eligibility criteria. The new
line of credit also provides for maximum borrowing capacity up to $5.0 million
as compared to the $3.1 million of borrowing capacity that existed at December
31, 2009. We are currently working with our lender to increase the maximum line
amount from $5.0 million to $8.0 million.
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 line of credit, our PE Recycling term
loan and other debt facilities described in more detail below. We have also in
the past 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 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.
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 $278,775 and $278,305 as of March 31, 2010 and December
31, 2009, respectively. We do not expect the requirement to maintain this escrow
account to significantly impact our capital resources.
Based
upon the cash we have on hand, anticipated cash to be received from our
operations and the expected availability of funds under our revolving lines of
credit, we believe that our sources of liquidity will be sufficient to enable us
to meet our cash needs at least until December 31, 2010, provided that several
large committed jobs within the Transportation and Disposal segment which began
in April and May 2010 and are expected to continue throughout the remainder of
the year. If we (i) experience delays associated with these jobs, (ii) are
unable to begin this work as scheduled, or (iii) are required to materially
renegotiate the scope of our work or anticipated contract price, our revenues
and cash flow from operations may be less than we anticipate and we may need to
seek additional sources of financing.
39
To
address our working capital deficit and our short- and long-term liquidity
needs, we are currently seeking additional financing from existing
investors, new sources of public or private debt and equity and potentially from
the strategic sales of certain of our assets. For example, during the three
months ended March 31, 2010, we received approximately $0.2 million in cash
proceeds from the sale of certain assets and liabilities of New Nycon, which
were used to fund working capital needs. In addition, during 2010 we are seeking
to obtain approximately $0.7 million of additional working capital through the
following transactions:
|
·
|
We
are seeking to finance the remaining balance of the note receivable
arising from the settlement of the accounts receivable litigation in June
2009. The remaining balance on this note as of March 31, 2010, was
approximately $0.6 million, from which we expect to obtain $0.3 million in
cash through financing with an existing
lender.
|
|
·
|
We
are in the process of increasing our revolving line of credit limit from
$5.0 million to $8.0 million and adding the accounts receivable collateral
from PE Energy into our revolving line of credit facility, which we
anticipate will provide an additional $0.4 million of borrowing
availability.
|
Our
principal projected cash needs for the remainder of 2010 include the following
components:
|
·
|
approximately
$1.0 million in cash dividend payments relating to the outstanding Series
B preferred stock, including $0.5 million of accrued and unpaid amounts
relating to the quarters ended September 30, 2009, December 31, 2009 and
March 31, 2010;
|
|
·
|
approximately
$2.3 million in principal and interest payments relating to our
outstanding debt, revolving line of credit, term loans and notes
payable;
|
|
·
|
approximately
$0.5 million of uncommitted but planned capital expenditures within our
Treatment and Recycling segment for additional equipment and or site
improvements;
|
|
·
|
approximately
$0.6 million for permitting, legal costs and bonding required in relation
to the expected start-up of operations for our Brownfield operations in
September 2010;
|
|
·
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general
operating and administrative expenses of $6.8 million, including legal
costs.
|
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 grow our business, fund potential acquisitions or
projects, and pay existing obligations and any recurring capital expenditures.
Nonetheless, our liquidity and capital position could be adversely affected by
any of the other risks and uncertainties described in “Part I, Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009.
Also,
there can be no assurance that our existing liquidity and capital resources 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,
strategic asset sales, or 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 or sell assets 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.
40
Line
of Credit
On
February 11, 2010, we refinanced our previous revolving line of credit by
entering into line of credit under the terms of a commercial financing agreement
with a new lender. The borrowers under this line of credit are PE
Materials, PEI Disposal Group, PE Disposal and PE Recycling. This line of credit
has a maximum borrowing of the lesser of $5.0 million or 85% of all eligible
accounts receivable (as defined under the financing agreement) that have not
been paid. As of March 31, 2010, $3.2 million was outstanding under this line of
credit. The line of credit bears interest at an annual rate equal to (i) the
lender’s prime rate (5.0% as of March 31, 2010), plus (ii) 2.5%, plus (iii) a
monthly service fee of 0.95% (11.4% annually). This line of credit expires on
July 31, 2010, and will be automatically renewed for successive six-month
periods unless we deliver written notice of cancellation to the lender not
earlier than 90 days and not later than 30 days prior to the expiration date of
the initial term or any succeeding renewal term. A fee of 0.5% of the line of
credit shall be paid at the beginning of each succeeding term. If the line of
credit is terminated prior to July 31, 2010, we will be required to pay a
prepayment penalty equal to 0.95% of the difference between $15.0 million and
the aggregate amount of invoices actually tendered to the lender during the
initial term.
All of
the accounts receivable of the borrowers are tendered to the lender for
purchase, and the lender will purchase from the borrowers such accounts
receivable as it determines for a purchase price equal to the face value of each
such accepted invoice, less trade and cash discounts allowable or taken by the
customer. Proceeds from the collection of the accounts receivable sold to the
lender will be used to reduce the amount of the obligations outstanding under
the line of credit. In the event of a customer dispute with respect to any
purchased receivables, the lender may immediately reduce the amount available
for borrowing by the borrowers under the line of credit by an amount up to the
full amount of the receivable subject to the dispute, to the extent and as
provided in the financing agreement. The lender also has the right to reduce the
85% advance percentage with respect to a particular account in its reasonable
discretion. Eligible accounts receivable will also be reduced by, among other
things, (i) the amount of any account that at the time exceeds 20% of all
accounts receivable of the borrowers, but only to the extent of such excess, and
(ii) the amount of any account that is the subject to a claim or disagreement by
a customer against a borrower. We and our wholly owned subsidiaries have also
entered into a Security Agreement, dated February 11, 2010, with the lender,
pursuant to which any and all amounts due under the line of credit shall be
secured by an assignment of their accounts receivable. The obligations of the
borrowers under the financing agreement have also been unconditionally
guaranteed by us and each of our wholly owned subsidiaries, on a joint and
several basis.
In the
event of a default under the line of credit, the lender may, unless the default
is cured within 15 days after notice to the borrowers, declare all indebtedness
thereunder to be immediately due and payable, and may exercise any or all of its
other rights under the financing agreement. The financing agreement defines a
“default” to include, among other things:
|
·
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default
in the payment of any indebtedness or any obligation when
due;
|
|
·
|
the
borrowers’ breach of any material term, provision, warranty, or
representation under the financing agreement, or under any other
agreement, contract or obligation between the borrowers’ and the
lender;
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|
·
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the
lender reasonably believes that the borrowers are failing to tender all of
their accounts receivable to the lender for
purchase;
|
|
·
|
the
borrowers have failed to tender accounts receivable equal to 20% of the
annual base purchase amount (being the base purchase amount multiplied by
12) during any calendar quarter;
|
|
·
|
the
borrowers have failed to tender accounts receivable to the lender for
purchase for a period of 30 or more consecutive
days;
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41
|
·
|
the
appointment of any receiver or trustee for all or a substantial portion of
the borrowers’ assets, the filing of a general assignment for the benefit
of creditors by the borrowers or a voluntary or involuntary filing under
any bankruptcy or similar law which is not dismissed with prejudice within
90 days;
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·
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the
borrowers’ failure to pay all taxes to every government agency in a timely
manner, except to the extent that such taxes are the subject of a bona
fide dispute being pursued in accordance with applicable governmental
rules and regulations, and as to which such borrowers have established
adequate reserves;
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·
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notwithstanding
the 15 day notice period, the borrowers’ failure to timely deliver to the
lender any misdirected payment remittance received by us on a purchased
account within three business days;
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·
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notwithstanding
the 15 day notice period, failure of the borrowers to cure a default under
certain ancillary agreements within three business days after receipt of
written notice from the lender; and
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·
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the
representations and warranties of the borrowers under the finance
agreement or any ancillary agreement being false or materially
misleading.
|
As of
March 31, 2010, we were not in default under the terms of our line of
credit.
Long-Term
Debt
Long-term
debt at March 31, 2010 and December 31, 2009 was approximately $8.5 million and
$8.6 million, respectively, and consisted of the following items:
March 31,
|
December 31,
|
|||||||
(in thousands)
|
2010
|
2009
|
||||||
PE
Recycling term loan
|
$ | 7,072 | 7,145 | |||||
Equipment
term loan
|
1,205 | $ | 1,205 | |||||
Various
equipment notes payable
|
273 | 284 | ||||||
Total
|
$ | 8,550 | $ | 8,634 |
Future
maturities of our long-term debt at March 31, 2010 were as follows:
12 Months ending March 31,
|
Amount Due
(in thousands)
|
|||
2011
|
$ | 1,841 | ||
2012
|
1,751 | |||
2013
|
1,244 | |||
2014
|
1,238 | |||
2015
|
1,315 | |||
Thereafter
|
1,161 | |||
Total
|
$ | 8,550 |
On
November 16, 2009, we entered into an amendment of the PE 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, we continued to make interest
payments in accordance with the term loan and interest rate swap agreement. On
February 15, 2010, our monthly principal and interest payment increased by
approximately $4,000 to $121,761 per month, with an effective interest rate of
6.10%. In April 2010, we entered into a second amendment of the PE Recycling
term loan providing for an additional three-month interest only period for the
months of March, April and May.
On
December 7, 2009, we entered into a loan restructure agreement with the lender
for our $1.2 million equipment term loan whereby beginning on November 1, 2009
and ending April 1, 2010, we agreed to make revised monthly payment amounts of
$10,029, representing the interest portion of the previous payment amount.
Beginning May 1, 2010 and through the end of the original maturities in December
2011 and June 2012, we will begin making revised principal and interest payments
of totaling approximately $65,000 per month.
42
Off-Balance
Sheet Arrangements
Our most
significant off-balance sheet financing arrangements as of March 31, 2010 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 March 31, 2010, future minimum obligations
under our operating lease agreements are $2.5 million.
At March
31, 2010, we had obligations as a result of our acquisitions to pay contingent
consideration to the sellers of companies we acquired in 2007 and
2008.
|
·
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PE
Recycling
|
|
o
|
We
are obligated us to issue an additional 400,000 shares of our common stock
to a former owner of PE Recycling if the former owner was successful in
obtaining additional permits, implementing certain equipment by May 29,
2009 to increase facility capacity, and resolving specified insurance
claims. As of March 31, 2010, we believe the former owner has
not met the performance requirements necessary to earn these additional
shares of common stock and consequently we have not issued any of these
contingent shares. The ultimate resolution of these
contingencies is subject to the outcome of the ongoing litigation between
us and the former owner.
|
|
o
|
We
are also required to issue up to 435,044 shares of our common stock to the
former PE Recycling owners based upon the resolution of certain
liabilities that existed as of March 30, 2007. The measurement
dates for these contingencies range from June 30, 2008 to September 30,
2008. As of March 31, 2010 we have not issued any of these
shares to the former owners of PE Recycling. The ultimate
resolution of this contingent liability is subject to the outcome of
ongoing litigation between us and the former
owner.
|
|
·
|
Soil
Disposal Group
|
|
o
|
The
owners of Soil Disposal Group are entitled to receive a maximum of 300,000
additional shares of our common stock contingent upon the net sales of PEI
Disposal Group attaining certain thresholds during the 36-month period
ending November 20, 2010. For the three months ended March 31,
2010 and 2009, we did not issue any additional shares to the owners of
Soil Disposal Group due to the offset of any amounts due under this
agreement against commissions paid to the owners of Soil Disposal Group
during these periods.
|
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
In
connection with our acquisition of PE Recycling in March 2007, we also agreed to
assume approximately $3.6 million of subordinated indebtedness in the form of a
note payable to Gregory Call, one of the former owners, and former officer and
employee, of PE Recycling. As of November 15, 2007, this subordinated
debt was reduced to $1.0 million as a result of acquisition purchase price
adjustments and the conversion of approximately $1.2 million of the outstanding
principal into 373,615 shares of our common stock. As of March 31,
2010, this subordinated debt had an outstanding principal balance of
approximately $1,011,348 and bore interest at a rate of 6.77% per
year. Under the stock purchase agreement, we were to repay $333,333
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 our lender.
43
On June
17, 2009, we issued a notice of setoff to the holder of the note payable,
notifying him of our intent to setoff post-closing claims in excess of $4.0
million against amounts due under this note payable and shares of Pure Earth
common stock that may otherwise be due to Mr. Call 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. Mr. Call has formally denied the validity of these
post-closing claims and on September 14, 2009, we filed a complaint against him
to seek legal redress for these claims. See “Part I, Item
3. Legal Proceedings – PE Recycling Litigation” in our Annual Report
on Form 10-K for the year ended December 31, 2009 filed on April 15,
2010. 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 from this obligation.
As of
March 31, 2010, we had approximately $0.1 million in due from affiliates, which
consists of amounts due from ACR, a joint venture operation, to PE
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 PE 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.
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
effects on our 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 March 31,
2010. Based upon the March 31, 2010 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.
44
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 March 31, 2010,
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 March 31,
2010.
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.
45
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 plaintiffs and aided and
abetted the Soil Disposal sales representatives’ breach of certain fiduciary
duties to the plaintiffs, 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.
On April
26, 2010, the court ruled in favor of the Company and the other defendants,
dismissing all claims against the Company and the Soil Disposal sales
representatives. The court also dismissed all but two claims against
our officer, and permitted those two claims to proceed only on the condition
that the plaintiffs agree in writing to bear the costs of discovery and pay our
officer’s attorney fees and costs if further discovery does not turn up evidence
of a violation. On May 3, 2010, the plaintiffs filed a motion to
appeal this decision. We and the other defendants continue to deny liability and
will continue to contest and defend against all claims.
Other
than as set forth above, no material developments have occurred in any legal
proceedings that were originally reported in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009. Further, except as set forth
in our 2009 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.
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,
2009.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Unregistered
Sales of Equity Securities
Except as set forth in this subsection,
there were no sales and issuances of our unregistered securities made during the
first quarter of 2010 that were not otherwise reported in a Form 10-Q or Form
8-K. On February 5, 2010, we issued a total of 12,500 shares of
common stock valued at $0.50 per share to an employee under the 2007 Stock
Incentive Plan. The total value of the issuance was
$6,250.
46
We
believe that the offer and sale indicated above was 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 our
securities were acquired for investment without a view to resale or
further distribution, except in compliance with the Securities
Act;
|
·
|
the acquiror was reasonably
believed to:
|
o
|
be sophisticated;
and
|
o
|
to have received all material
information about us and our business, or have been 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.
|
Limitations
on Our Payment of Dividends
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. Under the terms of our Series C Convertible Preferred Stock,
no dividends (other than dividends payable solely in shares of Series C
Convertible Preferred Stock, common stock or other junior securities) shall be
paid, or declared and set apart for payment unless and until all accrued and
unpaid dividends on all senior securities shall have been paid or declared and
set apart for payment and unless such payment is permitted by the terms of the
senior securities. No dividends shall be paid or declared and set
apart for payment on any class or series of our preferred stock ranking, as to
dividends, on a parity with the Series C Convertible Preferred Stock for any
period unless cumulative dividends have been, or contemporaneously are, paid or
declared and set apart for payment on the Series C Convertible Preferred Stock
for all dividend payment periods terminating on or prior to the date of payment
of such dividends. No dividends shall be paid or declared and set
apart for payment on the Series C Convertible Preferred Stock for any period
unless cumulative dividends have been, or contemporaneously are, paid or
declared and set apart for payment on our preferred stock ranking, as to
dividends, on a parity with the Series C Convertible Preferred Stock for all
dividend periods terminating on or prior to the date of payment of such
dividends.
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.
|
Issuer
Repurchases of Equity Securities
During
the quarter ended March 31, 2010, we repurchased shares of our common stock as
follows:
47
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Per
Share
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
|
Maximum
Number (or
Approximate
Dollar
Value)
of Shares that May
Yet
Be Purchased Under
the
Plans or Programs
|
||||||||||||
January
1, 2010 to January 31, 2010
|
–– | –– | –– | –– | ||||||||||||
February
1, 2010 to February 28, 2010
|
–– | –– | –– | –– | ||||||||||||
March
1, 2010 to March 31, 2010
|
15,000 | (1 | ) | –– | –– |
(1)
|
On
March 31, 2010, we completed the sale of substantially all of the assets
and liabilities of New Nycon in exchange for (i) $217,282 in cash received
at closing, and (ii) an additional $50,000 in cash to be paid 90 days
subsequent to the closing date, subject to reduction for accounts
receivable not collected during that time period. We and New
Nycon also agreed to indemnify the buyer for certain liabilities and
entered into non-competition agreements with the buyer. In
connection with this sale, New Nycon and the licensor of a patent
associated with the sold business agreed to terminate and extinguish for
no additional fee an exclusive license agreement. Under the
license agreement, 15,000 shares of our common stock had been paid to the
licensor and held in escrow pending the satisfaction by New Nycon of
certain financial objectives. As a result of entering into the
termination agreement, all such shares were forfeited as of March 31, 2010
as the financial objectives were not satisfied prior to the termination of
the license agreement.
|
Item
3. Defaults Upon Senior Securities
With the
consent of the holder of our Series B preferred stock, we have not paid
quarterly dividends thereunder since the September 30, 2009 dividend payment
date. This arrearage has not resulted in an event of noncompliance
under the terms of the Series B preferred stock or the investment agreement
related thereto. On November 30, 2009, we agreed with the holder of
our Series B preferred stock that in lieu of making the coupon payments
otherwise due on September 30, 2009 and December 31, 2009, we would instead pay
the holder of the Series B preferred stock the coupon payment, plus 14% interest
thereon, either on March 15, 2010 or on the date upon which we either refinance
our outstanding obligations with our former senior lender with an alternative
lender or renew such obligations for an extended maturity date with our senior
lender. Upon refinancing the revolving line of credit on February 11,
2010, we were not able to make the coupon payments otherwise due under the
revised agreement terms. On March 26, 2010, we obtained a forbearance
from the holder of the Series B preferred stock, agreeing to delay until June
15, 2010 our obligation to make such dividend payments in cash for the coupon
amount plus 14% accrued interest.
Item
4. [Reserved.]
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
|
|
2.1*
|
Asset
Purchase Agreement, dated March 31, 2010, by and among New Nycon, Inc.,
the Company, Nycon Corporation and Paul Bracegirdle
|
|
3.1
|
Second
Amended and Restated Certificate of Incorporation of Pure Earth, Inc. (1)
(2)
|
|
3.2
|
Second
Amended and Restated Bylaws of Pure Earth, Inc. (1) (2)
|
|
4.1
|
Letter
dated March 26, 2010, to Pure Earth, Inc. from Fidus Mezzanine Capital,
L.P.
|
|
10.1
|
Commercial
Financing Agreement, dated February 11, 2010, by and among Pure Earth
Materials, Inc., PEI Disposal Group, Inc., Pure Earth Transportation &
Disposal, Inc., Pure Earth Recycling (NJ), Inc. and Porter Capital
Corporation
|
48
Exhibit
No.
|
Description
|
|
10.2
|
New
Nycon, Inc. Non-Compete Agreement, dated March 31, 2010, by and between
New Nycon, Inc. and Nycon Corporation
|
|
10.3
|
Selling
Shareholders Non-Compete Agreement, dated March 31, 2010, by and between
the Company and Nycon Corporation
|
|
10.4
|
License
Termination and Extinguishing Agreement, dated March 31, 2010, by and
between New Nycon, Inc. and Paul E. Bracegirdle
|
|
10.5
|
Second
Amendment to Term Loan Agreement Dated March 15, 2010, by and among Pure
Earth Treatment (NJ), Inc. (f/k/a Casie Ecology Oil Salvage, Inc.), Pure
Earth Recycling (NJ), Inc. (f/k/a MidAtlantic Recycling Technologies,
Inc.), Rezultz Incorporated and Susquehanna Bank
|
|
10.6
|
Second
Amendment to Guaranty Agreement, dated March 15,2010, of Pure Earth, Inc.,
in favor of Susquehanna Bank
|
|
10.7
|
Second
Amendment to Term Loan Note, dated March 15, 2010, issued by Pure Earth
Treatment (NJ), Inc. (f/k/a Casie Ecology Oil Salvage, Inc.), Pure Earth
Recycling (NJ), Inc. (f/k/a MidAtlantic Recycling Technologies, Inc.),
Rezultz Incorporated, as borrowers, in favor of Susquehanna Bank, as
payee
|
|
10.8
|
Second
Amendment to ISDA® Master Agreement, dated April 14, 2010, by and among
Susquehanna Bank, Pure Earth Treatment (NJ), Inc. (f/k/a Casie Ecology Oil
Salvage, Inc.), Pure Earth Recycling (NJ), Inc. (f/k/a MidAtlantic
Recycling Technologies, Inc.) and Rezultz, Incorporated
|
|
10.9
|
Amended
and Restated Confirmation, dated April 14, 2010, by and among Susquehanna
Bank, Casie Ecology Oil Salvage, Inc., MidAtlantic Recycling Technologies,
Inc. (n/k/a Pure Earth Recycling (NJ), Inc.) and Rezultz,
Incorporated
|
|
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)
|
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.
|
(2)
|
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.
|
49
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:
May 20, 2010
|
By:
|
/s/ Mark Alsentzer
|
Mark
Alsentzer
|
||
President
and Chief Executive Officer
|
||
Date: May 20,
2010
|
By:
|
/s/ Brent Kopenhaver
|
Brent
Kopenhaver
|
||
Chairman,
Executive Vice President, Chief Financial
Officer
and Treasurer
|
50
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
2.1*
|
Asset
Purchase Agreement, dated March 31, 2010, by and among New Nycon, Inc.,
the Company, Nycon Corporation and Paul Bracegirdle
|
|
3.1
|
Second
Amended and Restated Certificate of Incorporation of Pure Earth, Inc. (1)
(2)
|
|
3.2
|
Second
Amended and Restated Bylaws of Pure Earth, Inc. (1) (2)
|
|
4.1
|
Letter
dated March 26, 2010, to Pure Earth, Inc. from Fidus Mezzanine Capital,
L.P.
|
|
10.1
|
Commercial
Financing Agreement, dated February 11, 2010, by and among Pure Earth
Materials, Inc., PEI Disposal Group, Inc., Pure Earth Transportation &
Disposal, Inc., Pure Earth Recycling (NJ), Inc. and Porter Capital
Corporation
|
|
10.2
|
New
Nycon, Inc. Non-Compete Agreement, dated March 31, 2010, by and between
New Nycon, Inc. and Nycon Corporation
|
|
10.3
|
Selling
Shareholders Non-Compete Agreement, dated March 31, 2010, by and between
the Company and Nycon Corporation
|
|
10.4
|
License
Termination and Extinguishing Agreement, dated March 31, 2010, by and
between New Nycon, Inc. and Paul E. Bracegirdle
|
|
10.5
|
Second
Amendment to Term Loan Agreement Dated March 15, 2010, by and among Pure
Earth Treatment (NJ), Inc. (f/k/a Casie Ecology Oil Salvage, Inc.), Pure
Earth Recycling (NJ), Inc. (f/k/a MidAtlantic Recycling Technologies,
Inc.), Rezultz Incorporated and Susquehanna Bank
|
|
10.6
|
Second
Amendment to Guaranty Agreement, dated March 15,2010, of Pure Earth, Inc.,
in favor of Susquehanna Bank
|
|
10.7
|
Second
Amendment to Term Loan Note, dated March 15, 2010, issued by Pure Earth
Treatment (NJ), Inc. (f/k/a Casie Ecology Oil Salvage, Inc.), Pure Earth
Recycling (NJ), Inc. (f/k/a MidAtlantic Recycling Technologies, Inc.),
Rezultz Incorporated, as borrowers, in favor of Susquehanna Bank, as
payee
|
|
10.8
|
Second
Amendment to ISDA® Master Agreement, dated April 14, 2010, by and among
Susquehanna Bank, Pure Earth Treatment (NJ), Inc. (f/k/a Casie Ecology Oil
Salvage, Inc.), Pure Earth Recycling (NJ), Inc. (f/k/a MidAtlantic
Recycling Technologies, Inc.) and Rezultz, Incorporated
|
|
10.9
|
Amended
and Restated Confirmation, dated April 14, 2010, by and among Susquehanna
Bank, Casie Ecology Oil Salvage, Inc., MidAtlantic Recycling Technologies,
Inc. (n/k/a Pure Earth Recycling (NJ), Inc.) and Rezultz,
Incorporated
|
|
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)
|
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.
|
(2)
|
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.
|