Form 10KSB for VERIDIUM CORP
17-Apr-2006 Annual Report
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS In addition to historical information, this Annual Report contains forward-looking statements, which are generally identifiable by use of the words believes," "expects," "intends," "anticipates," "plans to," "estimates," "projects," or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Description of Business - Business Risk Factors". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in other documents Veridium files from time to time with the Securities and Exchange Commission (the "SEC"), including the Quarterly Reports on Form 10QSB to be filed by us in the fiscal year 2006. OVERVIEW Veridium is an environmental management company providing a variety of services to a broad client base in both the private and public sectors. Our services include collection and transportation of industrial wastes and site remediation. Our focus is to provide our clients with value-added, environmentally conscious and cost-effective hazardous waste management services based on our efficient management of wastes. Our efforts in 2005 were focused on the growth of our environmental management business and the discontinuation of our former industrial waste recycling facility. Our ambition moving forward is to restructure and revitalize Veridium's industrial waste recycling services on the basis of our planned provision of industrial design and technology transfer services based on the use of environmentally friendly technologies and applied engineering expertise to reduce waste at its source and to make it easier for people and businesses to recycle and reuse resources. As part of this plan, we are exploring options relative to the restructuring and recapitalization of our environmental management business. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses. The following are the areas that we believe require the greatest amount of estimates in the preparation of our financial statements: impairment testing, allowances for doubtful accounts and accruals for legal matters. Prior to the filing of this Annual Report on Form 10KSB, the Audit Committee of our Board of Directors reviewed these critical accounting policies and estimates and discussed them with our management. On an annual basis Veridium retains the services of an independent contractor, to value its intangible assets including the value of the Patents and Goodwill. For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value We establish an allowance for doubtful accounts to cover accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, we analyze the collectibility of accounts that are large or past due. In addition, we consider historical bad debts and current economic trends in evaluating the allowance for doubtful accounts. Accounts receivable written off in subsequent periods can differ materially from the allowance for doubtful accounts provided. As described more fully in Item 3, Legal Proceedings, above, we are subject to legal proceedings. Accruals are established for legal matters when, in our opinion, it is probable that a liability exists and the liability can be reasonably estimated. Estimates of the costs associated with dispute settlement are adjusted as facts emerge. Actual expenses incurred in future periods can differ materially from accruals established. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2004 REVENUES Total revenues were $14.0 million for the year ended December 31, 2005, corresponding to an increase of $3.3 million, or 32.0%, over 2004 revenues of $10.6 million. The increase in revenues realized during 2005 was due to the addition of operating activities of a company acquired during May of 2005 (see part 6, acquisitions) increasing revenue in our field service operations by $1.3 million, a major soil transportation and disposal project with our TSDF facility of $1.6 million, and growth in base business ($0.4 million). Increased revenues from the addition of operating activities and increase in base business are expected to continue in 2006. Revenues from the discontinued operations at the New Jersey facility of $1.3 million and $2.6 million for 2005 and 2004 respectively have been removed from the above figures. COST OF REVENUES Cost of revenues for the year ended December 31, 2005 were $10.5 million, or 75.5% of revenue, as compared to $7.8 million, or 73.3% of revenue in 2004. The change in cost of revenues is primarily attributable to the major soil transportation and disposal project noted above. This project was done at margins considerably lower than our base business. Cost of revenue without this project was 73.0% in 2005. Cost of sales from the discontinued operations at the New Jersey facility of $1.9 million and $2.4 million for 2005 and 2004 respectively have been removed from the above figures. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the year ended December 31, 2005 were $4.6 million or 33.2% of revenue, as compared to $5.5 million, or 51.7% of revenue in 2004. The primary reason this decrease is due to the reduction in impairment of goodwill. Goodwill was impaired by $0.5 million and $2.3 million in 2005 and 2004 respectively. Net of impairment of goodwill, selling, general and administrative expenses overall have increased by $0.8 million in 2005 due to the acquisition of the field service operation acquired in May 2005. We expect that the percentage of these costs will decrease as a percentage of revenue in future periods. Selling, general and administrative expenses from the discontinued operations at the New Jersey facility of $0.4 million and $1.0 million for 2005 and 2004 respectively have been removed from the above figures. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses for the year ended December 31, 2005 were $0.2 million, or 1.2% of revenue, as compared to $0.4 million, or 0.4% of revenue in 2004. Depreciation and amortization expenses from the discontinued of operations at the New Jersey facility of $0.3 million and $0.4 million in 2005 and 2004 respectively have been removed from the above figures. INTEREST EXPENSE Interest expenses for the year ended December 31, 2005 were $0.8 million, or 6.0% of revenue, as compared to $0.9 million, or 9.0% of revenue in 2004. Decrease in interest is attributable to Veridium's various financings completed during 2005 and the elimination of Veridium's factoring facility with Prestige Capital Corporation and a nine month decrease in the interest rate charged by GCS Investments. The Prestige facility was paid off entirely in March 2004 upon closing of the Laurus Financing. Interest expense from the discontinued operations at the New Jersey facility of $0.04 million in 2004 has been removed from the above figures. LOSS ON IMPAIRMENT OF ASSETS - PATENTS During 2005, Veridium identified a number of long lived assets that have been impaired by the closure of the recycling facility in Paterson, New Jersey. Based on the closure of this facility, an impairment charge to the value of the patents of $1.7 million along with an additional $0.1 million for permits related to the facility were realized. This compares with an impairment charge to the patents of $1.3 million which was recorded in 2004. The 2005 charge represents a complete write down of the patent values. LOSS ON IMPAIRMENT OF ASSETS - EQUIPMENT Due to the closure of the recycling facility in Paterson, New Jersey a charge of $1.1 million was recorded in 2005. This represents a write down of all equipment associated with the recycling facility to zero. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LOSS ON IMPAIRMENT OF ASSETS - GOODWILL During 2005, Veridium realized an impairment to goodwill in the amount of $0.5 million. This impairment is due to the closure of the recycling facility in Paterson, New Jersey. This compares to an impairment to Goodwill of $2.3 million in 2004 which was associated with the environmental services operations. FORGIVENESS OF ACCRUED INTEREST There was no forgiveness of interest recorded in 2005. Forgiveness of accrued interest was recorded in 2004 for $408,207. This was related to the CCS Debenture and Jones purchase. NET LOSS Our total net loss from continuing operations the year ended December 31, 2005, was $1.9 million or 13.4% of revenue, as compared to a loss of $3.1 million, or 29.0% of revenue in 2004. The majority of the loss in 2004 was attributable to a write off of $2.2 million of goodwill associated with the environmental services operations. Losses of $3.8 million and $3.4 million incurred in 2005 and 2004 respectively from the discontinued operations at the New Jersey facility have been removed from the above figures. LIQUIDITY AND CAPITAL RESOURCES Veridium's operating activities used $700,569 of cash in 2005 as compared to a $197,578 use of cash in 2004. Veridium's capital requirements consist of general working capital needs, scheduled principal and interest payments on debt and capital leases and planned capital expenditures. Veridium's capital resources consist primarily of cash generated from operations and proceeds from issuance of debt and common stock. At December 31, 2005 Veridium had cash of $334,128. This cash represents a decrease of $0.8 million from the cash available as of December 31, 2004. CASH FLOWS FOR 2005 Operating activities in 2005 used approximately $700,569 in cash flows. Non-cash expenses recorded for the year ended December 31, 2005 totaled $4.4 million and consisted primarily of $3.4 million in impairment charges, $0.5 million in depreciation and amortization, and about $0.5 million in interest expense. Accounts receivable at December 31, 2005, net of allowance for doubtful accounts, totaled $2.2 million, an increase of $0.1 million from the December 31, 2004 balance of $2.1 million. Net accounts receivable from the discontinued operations at the New Jersey facility of $0.03 million and $0.3 million in 2005 and 2004 respectively have been removed from the previous figures. Accounts payable at December 31, 2005 totaled $2.0 million, an increase of $0.1 million from the December 31, 2004 balance of $1.9 million. Accounts payables from discontinued operations at the New Jersey facility of $0.5 million and $0.4 million in 2005 and 2004 respectively have been removed from the above figures. Accrued expenses at December 31, 2005 totaled $1.6 million, an increase of $0.1 million over the December 31, 2004 balance of $0.6 million. Accrued expenses from the discontinued operations at the New Jersey facility of $0.4 million and $0.7 million in 2005 and 2004 respectively have been removed from the above figures. For the year ended December 31, 2005, we obtained net cash from financing of $1.0 million verses $3.9 million for 2004. We used these funds to complete our recapitalization process and to provide working capital for operations. Veridium had a negative working capital position of $6.6 million as of December 31, 2005 as compared to a negative working capital position of $2.1 million as of December 31, 2004. The current liabilities that contribute to the negative position include $1.9 million and $1.7 million, respectively, of the Laurus financing arrangement. This convertible debenture is currently in default due to the fact that the registration of the stock for the benefit of the Laurus Master Fund has not been completed. | ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCASH FLOWS FOR 2005The following is a summary of the Company's significant contractual cashobligations for the periods indicated that existed as of December 31, 2005.Information regarding these obligations is more fully disclosed in the Notes tothe Consolidated Financial Statements (see Notes 8 and 10 to the Notes to theConsolidated Financial Statements). Years Ended December 31, 2006 2007 2008 2009 2010 Total --------------------------------------------------Long and short term debt and capital lease obligations $ 4,279,192 $ 1,677,688 $ 1,238,330 $ 84,394 $ 29,500 $ 7,309,104Operating leases 44,080 18,900 18,900 6,300 -- 88,180 ------------ ------------ ----------- ----------- ------------ -------------Total contractual cash obligations $ 4,323,272 $ 1,696,588 $ 1,257,230 $ 90,694 $ 29,500 $ 7,397,284 |
GOING CONCERN Veridium incurred a loss of approximately $5.7 million during the year ended December 31, 2005. Also as of December 31, 2005, Veridium had current liabilities exceeding its current assets by $ 5.1 million. These matters caused the Company's auditors to add an explanatory paragraph in their auditors report which raises substantial doubt about Veridium's ability to continue as a going concern. Management's plans include raising additional proceeds from debt and equity transactions to fund operations and to increase revenue and cut expenses to reduce the loss from operations. The closure of the recycling facility in Paterson, New Jersey should help achieve these objectives. However, there can be no assurances that Veridium will be successful in this regard or will be able to eliminate both its working capital deficit and its operating losses. The accompanying financial statements do not contain any adjustments which may be required as a result of this uncertainty. STOCKHOLDER MATTERS Stockholders' equity was ($4.3) million at December 31, 2005 as compared to $1.3 million at December 31, 2004. OFF BALANCE SHEET ARRANGEMENTS Viridis Capital, LLC an affiliate of Kevin Kreisler, Chairman of the Board, purchased a $58,821 debt payable to Lakeland Bank and assigned this to GreenShift, another affiliate of Kevin Kreisler. Lakeland Bank has not released Veridium of the debt obligation. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and also requires that the allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of adopting this statement. In December 2004, the FASB issued FASB statement No. 153 ("SFAS 153"). SFAS 153 addresses accounting for non-monetary transactions. In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R "Share Based Payment." This statement is a revision to SFAS 123 and supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and amends FASB Statement No. 95, "Statement of Cash Flows". This statement requires a public entity to expense the cost of employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements. This statement is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The revised SFAS No. 123 may have a material effect on the Company's results of operations but not on the Company's financial position. |
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