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Form 10QSB for VERIDIUM CORP
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23-May-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly 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
OVERVIEW
Veridium Corporation ("we," "our," "us," "Veridium," or the "Company") is an environmental management company providing a variety of services to a broad client base in both the private and public sectors. We conduct business throughout the northeastern region of the United States and our services include:
* Environmental Services - we provide transportation, distribution, recycling and disposal services specific to the materials and processes of our clients, for a wide range of industrial wastes.
* Field Services - we provide remedial, industrial cleaning and other related services for our clients at their sites and facilities.
Our business is roughly 85 percent distribution and 15 percent field services.
COMPANY BACKGROUND
The Company was formed in 1984 as KBF Pollution Management, Inc. ("KPMI") and was merged with its wholly owned subsidiary, Veridium Corporation in 2003 after completing the acquisition of the former Environmental Services Division of R.M. Jones & Co., Inc. ("ESD"), Enviro-Safe, Corp. ("ESC"), and Metal Recovery Transportation, Corp., ("MRTC"). These acquisitions were completed to form a full service environmental company, operating throughout the New England, Northeast and Mid-Atlantic States.
As of March 31, 2006 we operated out of four service centers: our RCRA Part B permitted TSDF in Lowell, Massachusetts; our field service operations in Sandwich and Milford, Massachusetts; and our technical services center in Plainville, Connecticut.
Veridium conducts all commercial activities through its subsidiary, Veridium Environmental Corporation ("VEC"). VEC, in turn, is the sole owner of ESD, the sole owner of Jones Environmental Services (North East), Inc., our Massachusetts-based RCRA Part B Treatment, Storage and Disposal Facility ("TSDF") and Enviro-Safe Corporation ("ESC") our field services company. Until September 2005 an additional subsidiary, Veridium Recovery Systems, Inc. ("VRS"), carried on business through its two subsidiaries:
American Metals Recovery, Corp. ("AMRC"), our discontinued New Jersey recycling operation, and MRTC, our discontinued transportation company.
On January 22, 2006, Veridium Corporation (VRDM") acquired 100% of the stock of GreenShift Industrial Design Corporation and Tornado Trash Corporation ("TTC") from GreenShift Corporation ("GreenShift") in return for 10% of the fully diluted stock in Veridium. These acquisitions are part of the Veridium's plans to revitalize its industrial waste recycling business model following Veridium's discontinuance during 2005 of the AMRC and MRTC operations. GreenShift Industrial Design Corporation was subsequently renamed Veridium Industrial Design Corporation ("VIDC").
VIDC is a development stage company that focuses on the engineering and marketing of green innovations and processes that enhance manufacturing efficiencies improve resource utilization and minimize waste. VIDC's mission is to deliver consumer orientated Natural SolutionsTM based on an array of green technologies and applied engineering expertise that reduce waste at the source and make it easier for people and businesses to recycle and reuse resources. VIDC plans to initially focus on the acquisition, development and marketing of benchmark green technologies and products that accomplish the following key goals:
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* Reduce the volume of waste generated by residential and commercial consumers;
* Increase the convenience and decrease the cost of recycling by residential and commercial consumers; and,
* Increase the cost efficiency of processing certain types of industrial wastes.
VIDC expects to leverage its portfolio of powerful new green technologies to generate revenue starting in 2006 from the provision of customized engineering services to third party clients.
Tornado Trash Corporation ("TTC") is a development stage company formed to deploy commercial applications of GIDC's innovative green technologies with the specific goal of minimizing and eliminating the practice of landfill disposal by converting trash into valuable metals, chemicals, plastics, fuels and energy. TTC plans to focus on centralized applications of its technologies at, for example, landfills and transfer stations, and decentralized applications of its technologies in new green appliances positioned to residential and commercial consumers.
The table and below discussions should be read in conjunction with Item 1, Financial Statements, of this report.
Percentage of Total Revenues For the
Period Ended,
3/31/06 3/31/05
Revenue 100.0% 100.0%
Cost of revenue 75.7 77.0
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Gross profit 24.3 23.0
Selling expenses 8.8 6.8
General and administrative expenses 36.0 15.8
Stock based compensation 48.0 0.0
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Total operating expenses 92.8 22.6
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Income (loss) from operations (3.4) 0.5
Other Income and Expense 4.0 0.3
Change in derivative liabilites (53.7) --
Interest expense (4.6) (4.5)
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Total other income (expense) (54.3) (4.6)
Income (loss) before provision for income
taxes (122.0) (3.7)
Provision for income taxes 0.1 --
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Net (loss) (123.0) (3.7)
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BUSINESS RISK FACTORS
There are many important factors that have affected, and in the future could affect, Veridium's business, including, but not limited to the factors discussed below, which should be reviewed carefully together with other information contained in this report. Some of the factors are beyond our control and future trends are difficult to predict.
OUR EXTERNAL AUDITORS HAVE ISSUED A GOING CONCERN OPINION RAISING SUBSTANTIAL DOUBT AS TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN DUE TO THE COMPANY'S HISTORY OF LOSSES, WORKING CAPITAL DEFICIENCY AND CASH POSITION, WHICH CONDITIONS COULD IMPAIR THE VALUE OF THE COMPANY'S STOCK.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a loss of $3,908,547 for the three months ended March 31, 2006. As of March 31, 2006 the Company had $163,787 in cash, and current liabilities exceeded current assets by $7,220,363 including $3,225,629 in derivative liabilities. These matters raise substantial doubt about the Company's ability to continue as a going concern.
THE CONVERSION OF OUR CONVERTIBLE DEBENTURES, THE EXERCISE OF OUR OUTSTANDING WARRANTS AND OPTIONS AND THE COMPANY'S VARIOUS ANTI-DILUTION AND PRICE-PROTECTION AGREEMENTS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO FALL, AND MAY HAVE DILUTIVE AND OTHER EFFECTS ON OUR EXISTING STOCKHOLDERS.
As of May 22, 2006, the conversion of our outstanding convertible debentures, and the exercise of our outstanding warrants and options could result in the issuance of approximately 129 million shares of common stock, assuming all outstanding warrants and options are currently exercisable, and taken with the Company's various anti-dilution and price-protection agreements, are subject to adjustment pursuant to certain anti-dilution and price-protection
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provisions. Such issuances would reduce the percentage of ownership of our existing common stockholders and could, among other things, depress the price of our common stock. This result could detrimentally affect our ability to raise additional equity capital. In addition, the sale of these additional shares of common stock may cause the market price of our stock to decrease.
THE COMPANY RECEIVED A FEDERAL GRAND JURY SUBPOENA REQUESTING DOCUMENTS RELATING TO AN INCIDENT OCCURRING IN FEBRUARY OF 2004 RELATIVE TO THE COMPANY'S FORMER NEW JERSEY OPERATION; WHILE NO ADDITIONAL INFORMATION IS AVAILABLE AT THIS TIME ON THIS MATTER, IF THE REVIEW OF THESE DOCUMENTS LEADS TO A SUCCESSFUL LEGAL ACTION AGAINST THE COMPANY, SUBSTANTIAL PENALTIES MAY BE IMPOSED.
The Company has received a federal grand jury subpoena from the Middle District of Pennsylvania requiring the production of original records in regards to an incident that occurred in February of 2004, where a tanker truck of liquid wastes, shipped from the Company's New Jersey recycling facility by a private carrier to a destination in Pennsylvania, overheated on the highway, causing no injuries, but requiring emergency response services, including redirecting traffic. If this investigation leads to successful legal action against the Company, substantial penalties may be imposed.
OUR INDUSTRIAL WASTE MANAGEMENT SERVICES SUBJECT US TO POTENTIAL ENVIRONMENTAL LIABILITY.
Our business of rendering services in connection with management of waste, including certain types of hazardous waste, subjects us to risks of liability for damages. Such liability could involve, without limitation, claims for clean-up costs, personal injury or damage to the environment in cases in which we are held responsible for the release of hazardous materials; and claims of employees, customers, or third parties for personal injury or property damage occurring in the course of our operations.
We could also be deemed a responsible party for the cost of cleaning any property which may be contaminated by hazardous substances generated by us and disposed at such property or transported by us to a site selected by us, including properties we own or lease.
IF WE CANNOT MAINTAIN OUR GOVERNMENT PERMITS OR CANNOT OBTAIN ANY REQUIRED PERMITS, WE MAY NOT BE ABLE TO CONTINUE OR EXPAND OUR OPERATIONS.
Our business is subject to extensive, evolving, and increasingly stringent federal, state, and local environmental laws and regulations. Such federal, state, and local environmental laws and regulations govern our activities regarding the treatment, storage, recycling, disposal, and transportation of hazardous and non-hazardous waste. We must obtain and maintain permits, licenses and/or approvals to conduct these activities in compliance with such laws and regulations. Failure to obtain and maintain the required permits, licenses and/or approvals would result in an inability to operate certain of our assets and significantly impair our financial condition. If we are unable to maintain our currently held permits, licenses, and/or approvals or obtain any additional permits, licenses and/or approvals which may be required as we expand our operations, we may not be able to continue certain of our operations.
CHANGES IN ENVIRONMENTAL REGULATIONS AND ENFORCEMENT POLICIES COULD SUBJECT US TO ADDITIONAL LIABILITY WHICH COULD IMPAIR OUR ABILITY TO CONTINUE CERTAIN OPERATIONS DUE TO THE REGULATED NATURE OF OUR OPERATIONS.
Because the environmental industry continues to develop rapidly, we cannot predict the extent to which our operations may be affected by future enforcement policies as applied to existing laws, by changes to current environmental laws and regulations, or by the enactment of new environmental laws and regulations. Any predictions regarding possible liability under such laws are complicated further by current environmental laws which provide that we could be liable, jointly and severally, for certain activities of third parties over whom we have limited or no control.
AS OUR OPERATIONS EXPAND, WE MAY BE SUBJECT TO INCREASED LITIGATION WHICH COULD SIGNIFICANTLY IMPAIR OUR ABILITY TO OPERATE AND OUR FUTURE FINANCIAL RESULTS BY CAUSING THE COMPANY TO EXPEND SIGNIFICANT AMOUNTS OF TIME, EFFORT, MONEY AND FOCUS MATTERS NOT DIRECTLY RELATED TO OUR OPERATIONS AND EXPANSION.
Our operations are regulated by numerous laws regarding procedures for waste treatment, storage, recycling, transportation and disposal activities, all of which may provide the basis for litigation against us. In recent years, the waste treatment industry has experienced a significant increase in so-called "toxic-tort" litigation as those injured by contamination seek to recover for personal injuries or property damage. We believe that as our operations and activities expand, there will be a similar increase in the potential for litigation alleging that we are responsible for
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contamination or pollution caused by our normal operations, negligence or other misconduct, or for accidents which occur in the course of our business activities. Such litigation, if significant and not adequately insured against, could impair our ability to fund our operations. Protracted litigation would likely cause us to spend significant amounts of our time, effort and money. This could prevent our management from focusing on our operations and expansion.
IF WE CANNOT MAINTAIN ADEQUATE INSURANCE COVERAGE, WE WILL BE UNABLE TO CONTINUE CERTAIN OPERATIONS.
Our business exposes us to various risks, including claims for causing damage to property and injuries to persons who may involve allegations of negligence or professional errors or omissions in the performance of our services. Such claims could be substantial. We believe that our insurance coverage is presently adequate and similar to, or greater than, the coverage maintained by other companies in the industry of our size. If we are unable to obtain adequate or required insurance coverage in the future or, if our insurance is not available at affordable rates, we would violate our permit conditions and other requirements of the environmental laws, rules and regulations under which we operate. Such violations would render us unable to continue certain of our operations. These events would result in an inability to operate certain of our assets and significantly impair our financial condition.
OUR OPERATIONS WILL SUFFER IF WE ARE UNABLE TO MANAGE OUR RAPID GROWTH.
We are currently experiencing a period of rapid growth through internal expansion and strategic acquisitions. This growth has placed, and could continue to place, a significant strain on our management, personnel and other resources. Our ability to grow will require us to effectively manage our collaborative arrangements and to continue to improve our operational, management, and financial systems and controls, and to successfully train, motivate and manage our employees. If we are unable to effectively manage our growth, we may not realize the expected benefits of such growth, and such failure could result in lost sales opportunities, lost business, difficulties operating our assets and could therefore significantly impair our financial condition.
WE MAY HAVE DIFFICULTY INTEGRATING OUR RECENT ACQUISITIONS INTO OUR EXISTING OPERATIONS.
Acquisitions will involve the integration of companies that have previously operated independently from us, with focuses on different geographical areas. We may not be able to fully integrate the operations of these companies without encountering difficulties or experiencing the loss of key employees or customers of such companies. In addition, we may not realize the benefits expected from such integration.
KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN THEM.
Our success depends on the contributions of our key management, environmental and engineering personnel. The loss of these officers could result in lost sales opportunities, lost business, difficulties operating our assets, difficulties raising additional funds and could therefore significantly impair our financial condition. Our future success depends on our ability to retain and expand our staff of qualified personnel, including environmental technicians, sales personnel and engineers. Without qualified personnel, we may incur delays in rendering our services or be unable to render certain services. We may not be successful in our efforts to attract and retain qualified personnel as their availability is limited due to the demand of hazardous waste management services and the highly competitive nature of the hazardous waste management industry. We do not maintain key person insurance on any of our employees, officers or directors.
IF ENVIRONMENTAL REGULATION OR ENFORCEMENT IS RELAXED, THE DEMAND FOR OUR SERVICES WILL DECREASE.
The demand for our services is substantially dependent upon the public's concern with, the continuation and proliferation of, the laws and regulations governing the treatment, storage, recycling, and disposal of hazardous and non-hazardous waste. A decrease in the level of public concern, the repeal or modification of these laws, or any significant relaxation of regulations relating to the treatment, storage, recycling, and disposal of hazardous waste would significantly reduce the demand for our services which could result in lost sales opportunities and lost business, which could in turn significantly impair our ability to operate as well as our financial condition. We are not aware of any current federal or state government or agency efforts in which a moratorium or limitation has been, or will be, placed upon the creation of new hazardous waste regulations that would have an adverse effect on us.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE DECISIONS THAT FURTHER THE BEST INTERESTS OF ALL STOCKHOLDERS.
Our officers, directors and principal stockholders (greater that 5% stockholders) together control approximately 11% of our outstanding common stock, 33% of our outstanding Series A preferred stock, 49% of our outstanding Series B preferred stock and 100% of Series D preferred stock. Series A preferred stock votes on an as converted basis as
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five shares of common stock and Series B and D preferred stock vote on an as converted basis as twenty-five shares of common stock. As a result, these stockholders, if they act individually or together, may exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider.
OUR COMMON STOCK QUALIFIES AS A "PENNY STOCK" UNDER SEC RULES WHICH MAY MAKE IT MORE DIFFICULT FOR OUR STOCKHOLDERS TO RESELL THEIR SHARES OF OUR COMMON STOCK.
Our common stock trades on the OTC Bulletin Board. As a result, the holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it were listed on a stock exchange or quoted on the NASDAQ National Market or the NASDAQ Small-Cap Market. Because our common stock does not trade on a stock exchange or on the NASDAQ National Market or the NASDAQ Small-Cap Market, and the market price of the common stock is less than $5.00 per share, the common stock qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act of 1934 imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker- dealer must make a determination on the appropriateness of investments in penny stocks for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock affects the market liquidity of the shares, which in turn may affect the ability of holders of our common stock to resell the stock.
THE COMPANY IS SUBJECT TO VARIOUS LAWSUITS WHICH MAY AFFECT THE VALUE OF OUR STOCK
The Company is involved in a lawsuit with Kerns Manufacturing Corporation which could substantially dilute the value of the Veridium stock (see item, Note 7, commitments and contingencies).
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: allowances for doubtful accounts and legal matters. Prior to the filing of this Quarterly Report on Form 10QSB, the Company's Audit Committee reviewed these critical accounting policies and estimates and discussed them with our management.
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 Commitments and Contingencies, above, we are subject to legal proceedings which we have assumed in our consolidation process. Accruals are established for legal matters when, in our opinion, it is probable that a liabilities 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.
We attempt to make good faith realistic estimates in providing allowances for assets and recording liabilities. Our experience has been that overestimates in one area can occur but are often offset by underestimates in other areas. While it is probable in the future that unexpected events could materially affect the results of operations of a future period, we believe that our risk management protocols would prevent the occurrence of such an event from having a material impact on our financial condition.
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THREE MONTHS ENDED MARCH 31, 2006 VERSUS THE THREE MONTHS ENDED MARCH 31, 2005
REVENUES
Total revenues were $3.2 million for the three months ended March 31, 2006, corresponding to a decrease of $0.4 million, or 11.1% less than the three months ended March 31, 2005 revenues of $3.5 million. The decrease in revenues in the first quarter was due to major soil transportation and disposal project in the amount of $1,089,000 conducted in the first quarter of 2005. Revenues from discontinued operations of $0 and $438,771 for 2006 and 2005 respectively have been removed from the above figures.
COST OF REVENUES
Cost of revenues for the three months ended March 31, 2006 were $2.4 million, or 75.7% of revenue, as compared to $2.7 million, or 77.0% of revenue for the same period in 2005. The decrease in the cost of revenues during the first quarter 2006 was due to decreased sales. Cost of sales from discontinued operations of $1,811 and $422,952 for 2006 and 2005 respectively have been removed from the above figures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended March 31, 2006 were $2.9 million, or 92.8% of revenue, as compared to $0.8 million, or 22.5% of revenue for the same period in 2005. Included in the first quarter was $2,081,201 of stock based compensation or 65.6% of revenue. Selling, general and administrative expenses from discontinued operations of $5,079 and $111,556 for 2006 and 2005 respectively have been removed from the above figures.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the three months ended March 31, 2006 were $71,844, or 3.0% of revenue, as compared to $34,218 or 1.0% of revenue for the same period in 2005. Depreciation expense from discontinued operations of $97,195 for 2005 has been removed from these figures.
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THE THREE MONTHS ENDED MARCH 31, 2005
INTEREST EXPENSE
Interest expenses for the three months ended March 31, 2006 were $2.3 million, or 72.8% of revenue, as compared to $0.16 million, or 0.05% of revenue for the same period in 2005. Interest expense for the three months ended March 31, 2006 for derivatives in the amount of $2,163,713 has been included in these figures. Interest expense in the amount of $6,039 from discontinued operations in 2005 has been removed from the above figures.
NET INCOME OR LOSS
Net loss from continuing operations for the three months ended March 31, 2006, was $ 3.9 million, or 123.0% of revenue, as compared to a loss from continuing operations of $131,507, or 3.72 % of revenue from the same period in 2005. Net loss from discontinued operations of $3,324 and $101,776 for 2006 and 2005 respectively have been removed from the above. The net loss realized during the period was due primarily to additional costs for stock based employee compensation and interest on derivative instruments. We expect that net loss will be eliminated in future periods as we move out of the less productive first quarter.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Our primary sources of liquidity are cash provided by operating, investing and financing activities, and availability under our various credit facilities. For the three months ended March 31, 2006, net cash used by our operating activities was $0.45 million as compared to the net cash used by our operating activities of about $0.70 million as of the quarter ended March 31, 2005.
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