Item 1. Business.
General
GlenRose Instruments Inc., or GlenRose Instruments, the company, we, our, or us, and its subsidiaries, provides radiological services; operates a radiochemistry laboratory network; and provides radiological characterization and analysis; provides hazardous, radioactive and mixed waste management; and provides facility, environmental, safety, and health management.
We primarily provide the services described above to the federal government and its prime contractors. We do not treat, store, transport or dispose of hazardous waste as part of our business. As part of our ongoing business, our laboratories generate small volumes of wastes, and we employ commercial firms to transport, treat, and dispose of the wastes. We currently operate a network of laboratories in three locations in the United States, or U.S.
Although we intend to continue to grow our laboratory and radiological services business, our primary growth strategy is to develop, acquire and operate analytical instruments businesses. Analytical instruments use a variety of highly sophisticated measurement technologies and are used by the scientific community, the government and industry to perform basic research, applied research and development, process monitoring and control, and many other applications. Our management has extensive experience in acquiring and operating analytical instruments businesses. We have identified a number of companies with revenues of between $10.0-35.0 million as potential acquisition targets, although we have not yet purchased any such business and do not have any commitments to buy any businesses. Our initial strategy will be to acquire instrument companies, which may be in difficult business conditions but have well-established and proven technology. Our plan is to increase their operating margins and revenues using techniques developed by our management team during the course of their careers in the analytical instruments industry.
GlenRose Instruments was incorporated in Delaware in September 2005. The company operates through its wholly owned subsidiary, Eberline Services Inc., or Eberline Services, or ESI, and its subsidiaries. The subsidiaries of Eberline Services are Eberline Services Hanford, Inc., or ESHI, Eberline Analytical Corporation, or EAC, Benchmark Environmental Corp., and Lionville Laboratory Inc., or Lionville. At the beginning of 2007, all of our outstanding shares of common stock were held by an affiliated limited partnership, which distributed all of our shares to its partners on December 31, 2007. As of December 27, 2009, Eberline Services and its subsidiaries generated all of the revenues of the company.
Our principal operational headquarters is located in Albuquerque, New Mexico, and our principal executive offices are located in Waltham, Massachusetts. We plan to maintain a website at the following address: www.glenroseinstruments.com, but our website address included in this Annual Report on Form 10-K is a textual reference only and the information in the website is not incorporated by reference into this Annual Report on Form 10-K. Through a link on our website to the Securities and Exchange Commission, or SEC, website, www.sec.gov, we will provide free access to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, as soon as reasonably practicable after electronic filing with the SEC. The charters of our committees of the board of directors of the company, and our Code of Business Conduct and Ethics for our directors, officers and employees, will also be available on our proposed website, and we will post on our website any waivers of, or amendments to, such code of ethics.
Segment Reporting
As of December 27, 2009, we have three operating segments - the Environmental Services segment, the Analytical Laboratories segment and the Instruments segment. The first operating segment provides radiological and waste management services primarily to the federal government in connection with the clean-up of the former and present atomic weapons and energy sites operated by the federal government. The second operating segment provides radiological services and involves the operation of a radiochemistry laboratory network. The third operating segment involves the acquisition and operation of analytical instruments businesses. See our consolidated financial statements included in ‘‘Item 15. Exhibits and Financial Statement Schedules’’ of this Annual Report on Form 10-K for further financial information on our operating segments.
Background and Market
Environmental and Analytical Laboratory Services
The principal regulatory drivers of the hazardous waste management industry are the Resource Conservation and Recovery Act, or RCRA, enacted in 1976, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA. RCRA requires waste generators to distinguish between “hazardous” and “non-hazardous” wastes, and to treat, store and dispose of hazardous waste in accordance with specific regulations. The collection and disposal of solid and hazardous wastes are subject to local, state and federal laws and regulations, which regulate health, safety, the environment, zoning and land use. CERCLA holds generators and transporters of hazardous substances, as well as past and present owners and operators of sites where there has been a hazardous release, strictly, jointly and severally liable for environmental clean-up costs resulting from the release or threatened release of a hazardous substance. An integral part of this regulatory and compliance scheme is the need to detect and measure contaminants in order to ensure compliance.
Our present focus is on the detection and measurement of radioactive wastes and “mixed wastes” which consist of radioactive wastes and other hazardous materials. These wastes were primarily generated by the federal government during the development and production of nuclear weapons. The nuclear power industry is another source of radioactive wastes.
The Department of Defense, or DOD, and the Department of Energy, or DOE, have had annual budgets for environmental expenditures that include cleaning up military bases and restoring former nuclear weapons facilities. These budgets are detailed in the annual budget requests from these departments to Congress, congressional appropriations reports and bills, and congressional authorization reports and bills. The DOE’s fiscal year 2009 budget was approximately $6.0 billion for environmental management and will be approximately the same for 2010. In addition, the stimulus bill provided an additional $6.0 billion to be spent over the life of the stimulus funding in accelerating clean-up efforts. The DOD has stated that there is an urgent need to ensure that the hazardous wastes present at these sites, often located near population centers, do not pose a threat to the surrounding population, and, in connection with the closure of many military bases, there is an economic incentive to make sure that the environmental restoration enables these sites to be developed commercially by the private sector. The DOE has long recognized the need to stabilize and safely store nuclear weapons materials and to clean up areas contaminated with hazardous and radioactive waste.
Our radiological and waste management services are employed primarily by the federal government in connection with the clean-up of the former and present atomic weapons and energy sites operated by the federal government.
Analytical Instruments
According to published sources, in 2007, the analytical instrument market was approximately $36.1 billion in revenues1. Going forward, the global analytical instrument market is forecasted by industry reports to show solid growth, and assuming no macro-economic changes, should have sales in excess of $48.9 billion by 20122. We do not currently operate in the analytical instruments market, but we plan to do so in the future.
Currently, there are over 60 types of analytical instruments being sold into a variety of markets worldwide. Analytical instruments for life sciences represent the largest single segment with annual sales of approximately $9.4 billion; sales of separations are approximately $6.2 billion; and sales of molecular spectroscopy instrumentation are approximately $3.3 billion. Instrument companies within these segments currently have higher valuations due to higher growth rate expectations. Over time, the growth rates and valuations of individual segments tend to vary as new instrumentation areas develop, demand for older instruments levels off or new technology and regulations render older instruments obsolete.
Technologists, regulators and managers around the world rely on analytical and life science instrumentation in the pursuit of knowledge in all types of industries, from drug development and research, to polymers and plastics, to environmental monitoring. The number of different types of instruments and technologies employed is almost as large as the number of applications for which they are used. These life science and analytical instruments are based on various chemical separations as well as optical and other techniques each of which have strengths in analyzing specific materials and compounds.
Strategic Directions International, Inc., The Laboratory Analytical and Life Science Instrumentation Industry, Market Forecast: 2007-2012, SDi’s Global Assessment Report, 10th Edition, September 2008, page 21.
Strategic Directions International, Inc., The Laboratory Analytical and Life Science Instrumentation Industry, Market Forecast: 2007-2012, SDi’s Global Assessment Report, 10th Edition, September 2008, page 42.
Technological advancements and the search for production efficiency are driving the demand for application-specific laboratory analytical instruments and services globally. Market developments include a trend toward integrated instrumentation and software as well as extensive research in biochemistry, drug discovery, homeland security and environmental testing. Greater emphasis on quality control in manufacturing processes and economic prospects are also driving demand.
Improvements in instrument design, such as miniaturization, incorporation of software and unattended operation with automated sample handling, are aiding customers to maximize productivity and minimize costs. Vendors are focusing on compatibility of instruments with research facilities such as lab-on-a-chip and laboratory information management systems to enable complete interconnectivity. Application-specific equipment, such as surface analyzers for semiconductor chips and infrared spectrometers, are increasing the demand for these instruments as a whole.
Analytical instruments are found in over 200,000 laboratories around the world. Until recently, the major markets were the U.S., Western Europe and Japan. Recently, countries such as China, Taiwan and South Korea are becoming major purchasers of all types of analytical instruments.
The majority of the instrument purchases are by large commercial companies, universities and government laboratories. After the government, the pharmaceutical industry is the largest single purchaser of analytical instruments. Academia traditionally continues to have a strong demand for nearly every type of available instrument due to the complete range of scientific disciplines found at universities.
Analytical Laboratory Services
Services
We operate a network of laboratories in the U.S. In addition to two radiochemistry laboratories, we also operate a stable chemistry laboratory, which provides analyses for traditional samples and for radioactive mixed waste samples. Radiochemistry is an analysis technique to determine the presence and extent of radioactive materials. The company and its predecessors have served the nuclear industry since 1948 with the opening of a laboratory in Richmond, California. In addition to the Richmond laboratory, we have laboratories in Oak Ridge, Tennessee and Exton, Pennsylvania.
We provide a wide variety of sample analyses for government agencies, industry and nuclear utilities. The radionuclides or radioactive substances analyzed are in many chemical and physical forms, often in low concentrations and in a variety of matrices. These matrices include:
· Surface and potable water
· Aquatic and land animals
· Sea water
· Particulate fallout
· Rain water
· Urine and feces bioassay
· Air filters
· Reactor coolants and effluents
· Soils and sediments
· Irradiated reactor fuel
· Food stuffs
· Fissionable material
· Vegetation
· Low-level radioactive waste
We have extensive experience in the transuranic characterization of samples generated by the nuclear utility industry, by nuclear fuel processors, and by DOE and DOD facilities. Transuranic isotopes are those radioactive substances found in the atomic weapons and nuclear industries that must be isolated and disposed of in order to produce clean sites that can be returned to industrial use. We have specifically designed procedures to dissolve any refractory transuranic substances that may be present in samples from the nuclear fuel cycle. We can also perform radio-bioassays to detect and quantify radioactive substances in body fluids and excretions. Our laboratories use a broad range of analytical techniques and instrumentation. However, we work in the environmental range of analyses and do not undertake to perform high-level (hot laboratory) analyses.
Our stable chemistry analysis laboratory in Exton, Pennsylvania offers a full range of capabilities and a large capacity to support environmental laboratory programs. Water, soil, solid waste and air samples are analyzed for a wide variety of organic, inorganic and physical parameters using a variety of Environmental Protection Agency protocols and American Society for Testing and Materials methods. Routine service capabilities include organic chemicals, metals, wet chemistry and physical properties. Ancillary services include field sampling, field screening, data interpretation, method development and validation, onsite laboratories, mobile laboratories, analytical specifications preparation (quality assurance project plans, sampling and analysis plans) and data storage.
Regulation
While our business has benefited substantially from increased governmental regulation of hazardous wastes, the environmental services industry itself has become the subject of extensive and evolving regulation by federal, state and local authorities. Environmental testing laboratories like those we operate are subject to a variety of certifications. We believe that we have acquired all operating permits and approvals required for the current operation of our business. We make a continuing effort to anticipate regulatory, political and legal developments that might affect operations, but are not always able to do so. Compliance with federal state and local environmental provision has only a nominal effect on current or anticipated capital expenditures and has had no material effect on earnings or our competitive position. We cannot predict the extent to which any environmental legislation or regulation that may be enacted or enforced in the future may affect our operations.
Our laboratories hold the appropriate permits and licenses from the DOE, DOD, United States Corps of Engineers, Navy, Nuclear Regulatory Agency and from over 26 states.
Clients and Contracts
The largest component of our laboratory business is with the federal government and its prime contractors. We service more than 100 clients overall. We generally have long-standing relationships with our clients, averaging more than ten years with our top ten clients. Our clients include federal agencies, prime contractors to the federal government, state regulatory agencies and leading companies in the environmental marketplace.
Our strategy is to develop and maintain ongoing relationships with a diversified group of customers who have recurring needs for environmental services. We strive to be recognized as a reliable and high quality supplier of laboratory testing services based upon quality, responsiveness, customer service, information technologies, breadth of analytical techniques and cost effectiveness.
Laboratory pricing is based upon fixed unit pricing. In this process, clients are invoiced for each analysis based on a fixed price for each substance that is analyzed, the type of report and quality assurance desired, the turn-around time, and the total price is determined by the number of corresponding analyses. Discounts may be provided for large volumes. Premiums are added for faster turn-around times of analyses. The laboratories have no cost-plus-fixed-fee contracts.
We provide our services under contracts and purchase orders. We bill all of our laboratory clients as analyses are completed and data packages are submitted to the client. No billing is done periodically based on costs incurred, on either an hourly-fee basis or on a percentage of completion. Analyses are normally completed and invoiced within one month after sample receipt from the client.
Environmental Services
Services
Our environmental specialists provide a wide range of services for radiological characterization and analysis; hazardous, radioactive and mixed waste management; and environmental, safety and health management. These services include program development, implementation and assessment; regulatory analysis, strategy development, permitting and compliance; and environmental liabilities management through such techniques as pollution prevention and application of best management practices. Our field services personnel provide radiological and industrial hygiene control and monitoring.
Our major environment services client is the federal government, either directly or through its prime contractors. Our experience dates back to 1989 when we had our first contracts at the DOE’s Los Alamos and Waste Isolation Pilot Plant, or WIPP.
Our core competencies in environmental services are hazardous and radioactive waste characterization, waste management, and multimedia environmental regulatory compliance. Environmental regulatory compliance capabilities include multimedia environmental program development, implementation and assessment, including in the following areas:
·
Air quality;
·
Water quality (drinking water, storm water, wastewater, surface water and groundwater);
·
Waste management (sanitary, solid, hazardous, radioactive, mixed and toxic substances); and
·
Soil and subsurface quality (bioremediation strategies for petroleum-contaminated soils and characterization and investigation of subsurface contamination).
The current personnel of our environmental services operations consist of over 36 professionals, who include environmental scientists and engineers, health physicists and nuclear engineers. The staff members hold professional certifications and registrations such as Certified Environmental Trainer, Safe Drinking Water Act Compliance Sampler, Hazardous Waste Specialist, Hazardous Substances Professional, Registered Environmental Manager, Certified Hazardous Materials Manager, New Mexico Water Systems Operator Levels I through IV and New Mexico Wastewater Systems Operator Levels I through IV. Several of our employees have DOE security clearances.
As an outgrowth of its radiological characterization expertise, our staff developed, for its own use, a gamma spectral analysis software tool, or SNAP™, which we have used on projects at Los Alamos National Laboratory, or Los Alamos, Rocky Flats Environmental Technology Site, and Idaho National Engineering and Environmental Laboratory, or Idaho National Laboratory. This software tool allows an experienced gamma spectral analyst more flexibility in performing peak identification, source modeling, and assay calculations than other similar, commercially available software. SNAP is used by customers at Los Alamos, Sandia National Laboratories, and at the U.K. atomic agency in Aldermaston, England.
Clients and Contracts
We manage and perform certain contracts for clients at Los Alamos, Idaho National Laboratory, Oak Ridge National Laboratory, or Oak Ridge, and for the New Mexico Environment Department. At Los Alamos we have supported waste management and environmental protection programs since 1989. Our work includes task order contracts to provide radiological waste characterization services and waste management technical support services, as well as a subcontract to manage environmental protection programs for Los Alamos, for which the prime contractor is managed by Los Alamos National Security, LLC, or LANS. We have provided radiological characterization services in support of closure activities at various sites, and radiological characterization in support of waste retrieval operations at Idaho National Laboratory since 2003. We have provided on-call, statewide hazardous materials incident response services to the New Mexico Environment Department since 1997.
Our waste management expertise includes comprehensive waste certification and characterization support activities for transuranic wastes destined for WIPP. We have provided WIPP certification support at numerous DOE sites including Hanford (Washington State) Reservation Site (Hanford Reservation), Los Alamos, Idaho National Laboratory, Oak Ridge, Argonne National Laboratory-East and Lawrence Berkeley National Laboratory, and we have operated mobile transuranic waste characterization systems at Nevada Test Site and Argonne National/Laboratory-East. The environmental group has multiple-year basic ordering agreement contracts at Los Alamos. One contract is an environmental support contract to LANS, the prime contractor at Los Alamos, which generates a base of approximately $1.7 million per year. In addition to the base funding on this contract, we conduct other work for LANS on task order basis. Our Los Alamos contract with LANS was extended through September 2010, the end of the government fiscal year. Eberline Services has been contracted for this scope of work for the last ten years, as a subcontractor to LANS, and KSL Services JV, the predecessor of LANS.
Since 1994, ESHI has provided radiological and industrial hygiene support, quality assurance, and safety services as a pre-selected subcontractor to both, Bechtel Hanford, Inc., and Washington Closure Hanford, LLC, or WCH, at the Hanford Reservation. The Hanford Reservation is the largest complex within the DOE, and the clean-up program is anticipated to extend beyond 2035. From 1994-2009, ESHI generated over $160.0 million in revenue from subcontracting work between the two contractors.
Until September 2005, we performed the Hanford Reservation work under a subcontract agreement with Bechtel Hanford, Inc, or ERC. However, the ERC contract expired on August 30, 2005 and the DOE awarded the successor contract, the River Corridor Contract, or RCC, to WCH. WCH pre-selected ESHI as a subcontractor, and we continue to provide services to the site-wide clean-up effort. The scope of the work of the RCC contract has substantial incentives for the team to complete the project in seven years. ESHIs’ current contract relationship with WCH is on a year-to-year basis with extensions to the base contract through 2015. As with all contracts of this nature, our contract can be canceled on relatively short notice at the convenience of the federal government. Based in Richland, Washington, ESHI has approximately 173 employees. It has a contract with the Hanford Atomic Metal Trades Council labor bargaining unit and employs radiological control and industrial hygiene technicians to support Hanford Reservation projects. The Hanford Reservation contract with WCH is the largest held by us and accounts for approximately 62% of our total revenues.
At the Hanford Reservation site, we provide radiation protection services for the excavation, decontamination, and decommissioning of reactors, area surveillance maintenance and transition facilities, area remedial action and waste disposal sites, the Environmental Restoration Disposal Facility for the underground disposal of low-level wastes, the ground water project and the complex decontamination and decommissioning of the plutonium processing facility. The services provided by our radiological personnel include:
·
Maintaining adequate staffing of radiological control technicians and radiological control supervisors for the projects to detect and prevent the exposure of personnel to radiation;
·
Performing and document radiation, contamination and airborne surveys;
·
Writing and approve radiological work permits;
·
Writing and implementing procedures and work instructions to ensure compliance with federal regulations for conducting work in areas that cause exposure to radioactivity;
·
Providing program and inventory support for the radiological instrumentation and source control programs;
·
Maintaining and providing input for radiological worker and workplace monitoring metrics;
·
Providing radiation surveys of large contaminated open areas on the Hanford Reservation site using proprietary global positioning system, or GPS, and laser-assisted radiological mapping systems; and
·
Maintaining a cadre of certified instructors that provide radiological training.
We have established an excellent record for working safely in an environment consisting of radioactively contaminated condemned buildings and nuclear reactors, contaminated excavation sites with steep slopes and trenches, and in the vicinity of heavy equipment. In spite of the fact that approximately 173 technicians and supervisors are deployed daily to work in excavation sites, old buildings and facilities, we had only one lost-time injury in the 10-year ERC history and have passed a milestone of one million hours worked without lost-time injury on the RCC.
Government Contracts
We must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. government contracts. These laws and regulations, among other things:
·
Require certification and disclosure of all cost or pricing data in connection with certain contract negotiations;
·
Impose acquisition regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. government contracts; and
·
Restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
U.S. government contracts are conditioned upon the continuing availability of congressional appropriations. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, the contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract.
The U.S. government, and other governments, may terminate any of our government contracts and, in general, subcontracts, at their convenience, as well as for default based on performance. Upon termination for convenience of a cost reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation. A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders.
In addition, our U.S. government contracts (or those of the prime contractors) typically span one or more base years and multiple option years. The U.S. government generally has the right to not exercise option periods and may not exercise an option period if the agency is not satisfied with our performance of the contract. U.S. government contracts generally contain provisions that allow the U.S. government to unilaterally suspend us from receiving new contracts pending resolution of alleged violations of procurement laws or regulations, reduce the value of existing contracts, issue modifications to a contract and control and potentially prohibit the export of our services and associated materials.
For the previous two years ended December 27, 2009 and December 28, 2008, the federal government and its prime contractors accounted for more than 90% of our consolidated revenues. Only two contracts, the contract at Los Alamos for which the prime contractor is LANS, and the RCC, for which the prime contractor is WCH, accounted for approximately more than 74% of our consolidated revenues. Any disruption in government funding or in our relationship with the government could have a material adverse impact on our financial condition. In addition, the inability to win new government contracts would have a material adverse effect on our business and financial condition.
Competition
We believe that the principal competitive factors in all areas of our business are:
·
technical proficiency;
·
operational experience;
·
price;
·
breadth of services offered; and
·
local presence.
We compete with a diverse array of small and large organizations including the following:
·
national or regional environmental management firms;
·
national, regional and local architectural, engineering and construction firms;
·
environmental management divisions or subsidiaries of international firms;
·
engineering, construction and systems companies; and
·
hazardous waste generators that have developed in-house capabilities.
If and when we acquire an analytical instrument business and enter that market, we would expect competition from several firms. Currently, there are hundreds of analytical instrument companies worldwide. Sizes range from a few million dollars to over a billion dollars in analytical instrument revenues. The top ten analytical instrument companies represent approximately 38% of the overall market.
Proprietary Technology
We have developed substantial proprietary technology and have established and maintain an extensive knowledge of the leading commercially available technologies. We incorporate these technologies into the environmental services that we provide to our customers. We currently hold three patents and 15 trademarks in the U.S., and we license software and other intellectual property from various third parties. We enter into confidentiality agreements with certain of our employees, consultants and corporate partners, and control access to software documentation and other proprietary information. We believe that we hold adequate rights to all intellectual property used in our business and that we do not infringe upon any intellectual property rights held by other parties.
We have several proprietary technologies that we believe give us a competitive advantage by offering unique services that benefit our clients, including:
·
SNAP TM (Spectral Nondestructive Assay Platform);
·
SGS TM (Segmented Gate System);
·
GPERS TM (Global Positioning Environmental Radiological Surveyor); and
·
LARADS TM (Laser-Assisted Ranging and Data System).
SNAP: Spectral Nondestructive Assay Platform
Each transuranic analysis is comparatively expensive due to the rigorous accuracy and quality assurance requirements dictated by federal and state law. Another cost consideration to DOE is that the disposal of transuranic waste at the WIPP is significantly more expensive than the disposal of routine low-level radioactive waste. Therefore, we have identified a secondary opportunity to provide a less expensive onsite analysis of uncharacterized waste to distinguish these wastes at the generator’s site. SNAP is the technology we developed in response to this need. SNAP is an onsite and non-intrusive method to radiologically characterize the contents of a wide array of wastes at lower costs than other methods. The use of mathematical models allows the company to adequately characterize and quantify wastes in less than one-half the time typically required to achieve comparable results. SNAP makes it possible to accurately characterize wastes of unknown composition with minimal effort.
Defensible, cost-effective waste characterization capability is essential to the remediation of contaminated sites and waste management. SNAP yields the following benefits:
·
Cost savings over standard characterization techniques;
·
Small, light-weight, portable and battery-powered instrumentation that lends its use to remote deployment;
·
Digital storage of data on the locations and concentrations of contaminants and display of the data in near real-time;
·
Ability to assay all sizes and shapes of waste packages;
·
Portable non-destructive assay technology yielding excellent detection limits in addition to accurate radionuclide quantification; and
·
Data on isotopes, concentration levels and locations (rather than just activity levels).
Considering the high cost of transuranic waste management and disposal, reductions such as these have produced significant cost savings for our clients. We believe that the use of SNAP has reduced disposal costs at the WIPP site.
SGS: Segmented Gate System
The SGS is a technology that separates radioactively contaminated soil from clean soil. The SGS is a combination of sophisticated conveyor systems, radiation detectors and computer controls that remove contaminated soil from a moving feed supply on a conveyor belt. It significantly reduces the volume of contaminated soils requiring treatment and disposal, enabling large cost savings. The clean soil stream is diverted for return to the site or cheaper disposal options. The SGS has been successfully used to remediate over 200,000 cubic yards of plutonium-contaminated soil on Johnston Atoll, which is a large environmental restoration project, which involves a significant volume reduction of radioactively contaminated soil. The system has also processed over 15,000 cubic yards of soils contaminated with various radionuclides at many DOE and DOD sites across the U.S. The system was employed at a commercial site in Louisiana to remediate soil contaminated with radionuclides from oil field operations.
Radiological Mapping Systems
We offer two types of radiological mapping technologies, GPERS and LARADS.
Common features of the two radiological mapping systems are as follows:
·
Both systems collect and store in electronic files the positional coordinates and radiological readings on a point-per-second basis. These field files are then downloaded and processed with software to produce both a color-coded (based on radiological reading) map of the survey trace overlaid upon a computer-aided-design base map or digital photo of the site or area; and
·
Survey detectors can be hand-carried or mounted on a vehicle for large area surveys.
Use of the GPERS and LARADS systems offers several advantages over traditional radiological surveys, which involve manual collection and documentation of objective data and manual data archival, management, and assembly. These advantages include:
·
The GPERS system constantly updates position data from global positioning satellites accurate to within less than 0.5 meters. The LARADS system utilizes an auto tracking laser range finding system to provide the same positioning data accurate to less than inch for those situations where satellite data are unavailable (i.e., indoors or under trees next to buildings);
·
GPERS and LARADS automatically acquire and store radiation and positioning data as the technician moves from location to location providing a continuous record in retrievable format;
·
The radiation data is acquired every second and can be merged, averaged and evaluated without subjective operator interpretation;
·
The need for manual data entry is eliminated because data is collected and stored in database format. This eliminates transcription errors and position errors, and also allows the position data to be reported in any commonly used coordinates system;
·
Ability to report on data collected within 24 hours; and
·
Savings in accelerated performance.
GPERS: Global Positioning Environmental Radiological Surveyor is a lightweight survey platform used for performing radiological surveys in open land areas. GPERS reduces labor requirements to characterize large outside land areas for radiological contaminants, thereby significantly reducing project costs. This technology merges standard radiation monitoring equipment with satellite global positioning to accurately locate and quantify areas of elevated radioactive contamination. The accuracy of the sophisticated equipment automatically produces repeatable and verifiable coordinates, thus reducing requirements for extensive grid establishment. The GPERS is coupled with conventional radiation detectors for outdoor radiological surveys where positional accuracies of less than one meter are sufficient.
LARADS: Laser-Assisted Ranging and Data System is a radiological surveying instrument that automates the collection of indoor radiation measurement data. LARADS reduces labor costs to characterize the interior surfaces of buildings where GPS tracking is unavailable. This system integrates standard radiation monitoring equipment with a laser positioning total system to locate elevated levels of radioactive contamination. Both GPERS and LARADS databases can be overlaid on digital photographs, computer aided design drawings, and drawings generated by the system to visually depict the characterization data.
LARADS offers two advantages over the GPERS systems in that:
·
It can be used inside a building or facility, while the GPERS requires a view of the sky; and
·
Its positional accuracy, and hence detector velocity, are much more precise. This allows greater control of survey scan rates, and post-processed minimum detection analyses are much more accurate. The LARADS includes an alarm to alert the surveyor if the velocity user-set point is exceeded.
The resulting color-coded data maps are helpful tools for evaluating site conditions and providing pre-job briefings. This system is coupled with conventional radiation detectors for indoor surveys or surveys where higher positional accuracy is desired (less than two centimeters). The LARADS system can be (and has been successfully) mounted on automated platforms to allow surveys of walls and ceilings without the use of ladders and scaffolds, minimizing the risks to personnel accessing these types of equipment.
Research and Development
In 2008, we began limited research and development in nuclear instrumentation with the intent to develop a new line of instruments. The development budget for the first instrument is approximately $250,000. In 2009, the company spent approximately $25,000 towards the development of a prototype. The research and development effort should be completed in 2010.
Employees
As of December 27, 2009, the company and its subsidiaries employed approximately 307 active full-time employees and 17 part time employees. Included in this group are approximately 150 employees at the Hanford Reservation who are covered under a collective bargaining agreement. One of our subsidiaries has a contract with the Hanford Atomic Metal Trades Council. We have a good relationship with the union. In general, we believe that our relationship with our employees is satisfactory.
Item 1A.
Item 1A. Risk Factors.
Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks occurs, our business, financial condition or results of operations could suffer and the value of our securities could decline. Investors and prospective investors should consider the following risks and the information contained under the heading ‘‘Warning Concerning Forward-Looking Statements’’ before deciding whether to invest in our securities.
We have incurred losses, and these losses may continue in parts of our business.
For the years ended December 27, 2009 and December 28, 2008, we reported net losses. As DOE closes facilities, it may mean fewer projects and samples for analytical services and environmental services.
We are substantially dependent on contracts with the U.S. Government.
Over 90% of our revenue is derived, directly or indirectly, from contracts with the federal government. The environmental group has multiple-year basic ordering agreement contracts in two areas at Los Alamos. The first is a five-year ID/IQ contract for waste management which is nearing the end of its life. With the change in management at Los Alamos, the contract may not be renewed or fully utilized as the laboratory management determines the new direction of Los Alamos. The second is an environmental support contract to LANS, the prime contractor at Los Alamos, which generates approximately a base of $1.7 million per year.
Until September 2005, we performed the Hanford Reservation work under a subcontract agreement with Bechtel Hanford, Inc. However, the ERC contract expired on August 30, 2005, and the DOE awarded the successor contract, the RCC, to WCH. WCH pre-selected ESHI as a subcontractor, and we continue to provide services to the site-wide clean-up effort. ESHI’s current contract relationship with WCH is on a year-to-year basis with extensions to the base contract through 2015.
Any disruption in government funding or in our relationship with the government could have a material adverse impact on our financial condition. In addition, many of our contracts with federal government agencies require annual funding approval and may be terminated at their discretion. A reduction in spending by the applicable federal agencies could limit the continued funding of our existing contracts with them and could limit our ability to obtain additional contracts. The inability to win new government contracts would have a material adverse effect on our business and financial condition.
Fixed-price contracts expose us to losses in the event of unanticipated cost increases.
Our laboratories conduct a fixed-price sample business, which constitutes over 23% of our revenues. Fixed-price contracts may have unanticipated or unforeseeable cost increases that could have a material adverse impact on our financial condition if we underbid these contracts. Fixed-price contracts protect clients but expose us to a number of risks. These risks include:
·
underestimation of costs;
·
problems with the appropriate choice of technologies;
·
unforeseen costs or difficulties;
·
delays beyond our control; and
·
economic and other changes that may occur during the contract period.
It is possible that future federal audits performed by the Defense Contract Audit Agency, or DCAA, on cost-plus-fixed-fee and related types of government contracts may determine that there have been overpayments to us by the government. Any related settlement of that sort may create a liability for the company. In the past, settlements had the opposite effect with the company recouping additional funds. The possibility, however, does exist for overbilling due to incorrect provisional overhead rates in a given year.
We perform services under numerous subcontract agreements on cost-reimbursable contracts with the federal government. During the period from 1998 to 2003, the company was party to a subcontract agreement with Johnson Control Northern New Mexico, or JCNNM, to provide services to Los Alamos on a cost-reimbursable basis. On May 14, 2007, we received notification from IAP-Northern New Mexico, or IAPNNM, the successor corporation to JCNNM, that the results of a Los Alamos audit for the period ending in 2003 determined that certain costs previously claimed and billed by the company were subsequently deemed unallowable or otherwise not reimbursable. IAPNNM requested that we reimburse the amount of $321,836 that was paid to us during the subject time period. In January 2009, we protested the Los Alamos audit results claiming they were inaccurate and requested to resubmit a claim for the subject contract. The Los Alamos audit team agreed to review the audit results and adjust the claim as needed. In the event it is determined that we have to reimburse such amount in full, the resultant cost would materially affect our results of operations.
Our government contracts expose us to the possibility of substantial fines and penalties, governmental audits and investigations and suspension or debarment.
We face specific risks associated with government contracting, which include the risk of substantial civil and criminal fines and penalties for violations of applicable laws and regulations. Government contracting requirements are complex, highly technical and subject to varying interpretations. During the course of an audit, an agency may disallow costs if, for example, it determines that we improperly accounted for such costs in a manner inconsistent with government cost accounting standards. Under the typical “cost-reimbursable” government contracts that we perform, only those costs that are reasonable, allocable and allowable are recoverable in accordance with federal acquisition regulations and cost-accounting standards. In addition to damage to our business reputation, the failure to comply with the terms of one or more of our government contracts could also result in our suspension or debarment from government contract projects for a significant period of time. This would have a material adverse effect on our business.
Our nuclear waste management services subject us to potential environmental and other liabilities.
Our business of rendering services in connection with management of waste, including certain types of hazardous waste and low-level radioactive 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 or radioactive materials;
·
claims of employees, customers, or third parties for personal injury or property damage occurring in the course of our operations; and
·
claims alleging negligence or professional errors or omissions in the planning or performance of our services.
In addition, we are subject to potentially large civil and criminal liabilities. The government could suspend or disbar us as a government contractor or hold us liable for any failure to abide by environmental laws and regulations.
Our inability to successfully identify and complete acquisitions or successfully integrate any new or previous acquisitions could have a material adverse effect on our business.
Our primary growth strategy is to acquire and operate analytical instruments businesses. We may be unable to execute our primary growth strategy for the following reasons:
·
we may fail to identify suitable acquisition candidates or to acquire additional companies on favorable terms;
·
we may fail to obtain the necessary financing, on favorable terms or at all, for any of our potential acquisitions;
·
we may fail to successfully integrate or manage these acquired companies due to differences in business backgrounds or corporate cultures or inadequate internal systems or controls; and
·
these acquired companies may not perform as we expect.
·
we may need to pay back in cash the entire principal amount, including accrued interest, to the holders of our convertible debentures if we fail to successfully complete an acquisition.
Furthermore, identifying and pursuing future acquisition opportunities requires a significant amount of management time and skill.
Our acquisition strategy will require additional capital, and we may not be able to raise this capital on favorable terms, if at all.
We anticipate that we will need to raise additional capital to fund our acquisition strategy and our cash needs may vary significantly from our projected needs. If our estimates as to future cash needs are wrong, we may need to raise additional capital sooner than expected. We cannot assure you that our estimations regarding our cash needs will prove accurate, that we will be able to secure required additional financing if needed, or that additional financing, if obtained, will be on favorable or acceptable terms. We may raise additional funds through public or private equity offerings or debt financings. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution, and debt financing, if available, may involve restrictive covenants. If we are unable to obtain additional financing when needed, we would be required to significantly scale back development plans and, depending upon cash flow from our existing business, reduce the scope of our operations or cease operations entirely.
We are substantially dependent on current management, and if we fail to attract and keep senior management and key scientific and operating personnel, we may be unable to successfully pursue our growth strategy.
Our success depends on the contributions of our key management, especially our Chief Executive Officer, Arvin Smith, and our Chairman, John Hatsopoulos. Their respective ages are 80 and 75. We expect that our future market capitalization will be in significant part dependent on the reputation of these individuals. We do not have employment contracts with either of these individuals, and we do not maintain key person insurance on any of our employees, officers, or directors. The loss of the services of either of these individuals would likely have a material adverse effect on our business and prospects.
Our success also depends on our ability to retain and expand our staff of qualified managerial and technical personnel, particularly if we are successful in implementing our acquisition strategy. Qualified individuals are in high demand and are often subject to competing offers. We cannot be certain that we will be able to attract and retain the qualified personnel we need for our business. If we are unable to hire additional personnel as needed, it would likely have a material adverse effect on us.
Our operating results fluctuate across quarters due to the nature of our business.
Our quarterly revenues, expenses and operating results may fluctuate significantly due to a number of factors, including:
·
the seasonality of the spending cycle of our public sector clients, notably the federal government;
·
employee hiring and utilization rates;
·
the number and significance of client projects commenced and completed during a quarter;
·
delays incurred in connection with a project;
·
the ability of our clients to terminate projects without penalties; and
·
weather conditions.
Historically, we experience lower revenues in the first calendar quarter primarily due to weather conditions. Also, because we have a heavy concentration of federal government contracts, the federal appropriations process may significantly affect our operating results. However, variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter.
Our industry is subject to intense competition, and several of our competitors are larger than us.
In our radiological services business, we compete with many national environmental and consulting firms, and in our laboratory business we compete with many regional or niche firms. Some of our larger competitors benefit from economies of scale and have better access to bonding and insurance markets at a lower cost than we can achieve. The entry of large systems contractors and international engineering and construction firms into the environmental services industry has increased competition for major federal government contracts and programs.
The analytical instrument business is subject to intense competition. Competitors would include many other companies that offer products and services similar to ours. Many of our potential competitors have longer operating histories, large customer bases, greater brand recognition and significantly greater financial, marketing and other resources. Certain of our potential competitors may be able to devote greater resources to marketing, adopt more aggressive pricing policies and devote substantially more resources to developing their products. We may be unable to compete successfully against current and future competitors, and competitive pressures may have a material adverse effect on us.
If we are successful in acquiring analytical instrument businesses or products, that business will be subject to a variety of specific risks.
Our success in the analytical instrument business will depend in large part on our ability to engineer and improve or develop our products. The following circumstances, among others, may lead to a significant delay:
·
our inability to hire or retain skilled internal technical developers and technicians to develop, maintain and enhance our products;
·
unforeseen technical or development issues;
·
unanticipated product requirements requested by vendors, consumer or regulators; and
·
our inability to develop, in a cost-effective manner, unique products.
The analytical instrument business depends on the protection of proprietary rights, which is difficult and costly.
If we are successful in acquiring analytical businesses, we will need to protect our proprietary rights in our products. Intellectual property rights implementation and protection is complex and costly. We may be unable to obtain or maintain adequate protection, and we may be subject to infringement claims by our competitors. We may not have the financial resources to prosecute patent applications or defend our patents from infringement or claims of invalidity. In addition to patents, we expect to rely on trade secrets and proprietary knowledge, which we seek to protect, in part, through appropriate confidentiality and proprietary information agreements. Our proprietary information or confidentiality agreements with employees, consultants and others may be breached, or we may not have adequate remedies for any breach or our trade secrets may otherwise become known to or independently developed by competitors.
There is no public market for our outstanding common stock, and there will be restrictions on transferability.
There is presently no public market for our outstanding common stock, and we cannot assure you that a public market will ever develop. Moreover, even if a public market develops, any sale of our outstanding common stock may be made only pursuant to an effective registration statement under federal and applicable state securities laws or exemptions therefrom. Realization of any gains on an investment in us will be principally dependent upon our ability to effectuate one or more liquidity-providing transactions.
We anticipate that if and when our common stock becomes publicly traded, such trading in the stocks of smaller companies like us is often thin, sporadic and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects.
Our ability to access capital for the repayment of debts and for future growth is limited as the financial markets are currently in a period of disruption and recession and the company does not expect these conditions to improve in the near future.
Our ability to continue to access capital could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us.
Our business is affected by general economic conditions and related uncertainties affecting markets in which we operate. The current economic conditions including the global recession could adversely impact our business in 2010 and beyond.
The current economic conditions including the global recession could adversely impact our business in 2010 and beyond, resulting in reduced demand for our services, increased rate of order cancellations or delays, increased pressure on the prices for our samples; and greater difficulty in collecting accounts receivable.
Trading of our common stock may be restricted by the SEC’s “penny stock” regulations which may limit a stockholder’s ability to buy and sell our stock.
The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. If and when our common stock becomes publicly traded, it will likely be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and other quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statement showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure and suitability requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our capital stock. Trading of our capital stock may be restricted by the SEC’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.
We have no intention to pay dividends.
We currently intend to retain earnings, if any, to fund the development and growth of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, cash needs and growth plans.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
We own two properties and lease office space at four locations. Our operational headquarters are located on four acres in Albuquerque, New Mexico and consists of office and storage space, and our principal executive offices are located in Waltham, Massachusetts. Our Analytical Laboratories segment includes a facility in Richmond, California consisting of approximately 20,000 square feet. The company owns a facility in Albuquerque, New Mexico consisting of 14,449 square feet. The company leases facilities in Exton, Pennsylvania consisting of 11,256 square feet and Oak Ridge, Tennessee consisting of approximately 10,000 square feet. Our Environmental Services segment leases office space in Richland, Washington consisting of approximately 6,000 square feet. We believe that our facilities are appropriate and adequate for our current needs.
In 2009, the company entered into an agreement, subject to closing conditions, with a buyer to sell the property in Albuquerque, New Mexico for approximately $2.0 million. The property is classified as “Assets held for sale” on the company’s balance sheet as of December 27, 2009. The company expects to complete the sale in 2010.
Item 3.
Item 3. Legal Proceedings.
As of December 27, 2009, the company was a party to two lawsuits with former employees over their terminations.
The first lawsuit was with Wendling at the Superior Court in Benton County in the State of Washington and was dismissed with prejudice on March 17, 2010. The second lawsuit with Voss is at the 2nd Judicial Court in Bernalillo County in the State of New Mexico, where the case is still in the discovery phase. We anticipate that we will prevail in the Voss lawsuit and do not expect either litigation or any other legal activity will have a materially adverse affect on our business, operating results or financial condition.
Item 4.
Item 4. Reserved.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Our common stock is not currently traded on any stock exchange or electronic quotation system.
Holders
As of March 26, 2010, the number of holders of record of our common stock was 27.
Dividends
We currently intend to retain earnings, if any, to fund the development and growth of our business and, do not anticipate paying cash dividends in the foreseeable future. See “Note 8 - Related party transactions” to our consolidated financial statements regarding a one-time dividend that was declared in December 2007.
Recent Sales of Unregistered Securities
Set forth below is information regarding common stock issued, warrants issued and stock options granted by the company since fiscal year 2007. Also included is the consideration, if any, we received and information relating to the section of the Securities Act of 1933, as amended, or the Securities Act, or rule of the SEC, under which exemption from registration was claimed.
Common Stock
On August 31, 2007, the company raised $718,529 in a private placement of 102,647 shares of common stock, representing 3.4% of the total shares then outstanding, at a price of $7.00 per share. Prior to this transaction, the company had 3,000,000 shares of common stock outstanding. No underwriters were involved in the foregoing sales of securities; however, in connection with such transaction, R.F Lafferty & Co., Inc. received a cash commission of $31,112. All of the purchasers were accredited investors, and such transactions were exempt from registration under the Securities Act under Section 4(2) and/or Regulation D thereunder.
Restricted Stock Grants
On November 13, 2007, the company made restricted stock grants to its independent directors by permitting them to purchase an aggregate of 15,000 shares of common stock, representing 0.5% of the total shares then outstanding, at a price of $0.01 per share. Of those shares, 25% vest on the first anniversary of the grant date and then an additional 25% vest on each of the subsequent three anniversaries, provided that none of the shares will vest until 90 days after the company’s common stock becomes publicly-traded. Prior to this transaction, the company had 3,102,647 shares of common stock outstanding. Such transactions were exempt from registration under the Securities Act under Section 4(2), and/or Regulation D thereunder. No restricted stock awards were granted in 2008 or 2009.
Stock Options
On November 13, 2007, the company granted nonqualified stock options to purchase 230,000 shares of the company’s common stock to 44 employees at a price of $7.00 per share. Those shares vest in equal installments over a period of 5 years from the date of the grant and expire in 7 years. Such transactions were exempt from registration under the Securities Act under Section 4(2) and/or Regulation D thereunder. No stock option awards were granted in 2008 or 2009.
Rule
Pursuant to Rule 144 under the Securities Act, in general, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned shares of our common stock for more than six months but less than one year would be entitled to sell an unlimited number of shares. Sales under Rule 144 during this time period are still subject to the requirement that current public information is available about us for at least 90 days prior to the sale. After such person beneficially owns shares of our common stock for a period of one year or more, the person is entitled to sell an unlimited number of shares without complying with the public information requirement or any of the other provisions of Rule 144. As of March 26, 2010, all of our outstanding shares of common stock held by non-affiliates were eligible for resale under Rule 144.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review “Item 1A. Risk Factors” beginning on page 9 of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
During 2009, there has been a slowdown in the economy, a decline in the availability of financing from the capital markets, and a widening of credit spreads which has, or may in the future, adversely affect us to varying degrees. Such conditions may impact our ability to meet obligations to our suppliers and other third parties. These market conditions could also adversely affect the amount of revenue we report, require us to increase our allowances for losses, result in impairment charges and valuation allowances that increase our net losses and reduce our cash flows from operations. In addition, these conditions or events could impair our credit rating and our ability to raise additional capital.
General Overview
The company continues to review potential opportunities in the instrument business with the intent to make acquisitions that will build a base in the instrumentation market. As of December 27, 2009, we had not identified an opportunity that meets our financial requirements for an initial acquisition. For the year ended December 27, 2009, Eberline Services and its subsidiaries comprised 100% of the company’s sales. Eberline Services primarily provides services to the federal government contracting market for nuclear and environmental services. We believe the present level of government expenditures should remain relatively stable.
Business Overview
We provide radiological characterization and analysis; hazardous, radiological, and mixed (radiological and hazardous) waste management; and environmental, safety and health services, primarily to the federal government. We provide labor-based consulting, engineering, and technical services, as well as measurement and detection services; we are not in the business of creating, treating, storing, transporting or disposing of hazardous waste. Our network of radiochemistry laboratories is an experienced provider of radiological services. Radiochemistry is an analysis technique to determine the presence and extent of radioactive materials. Our laboratories are located in California, Pennsylvania and Tennessee. The laboratories generate a small amount of waste in the analytical processes. We dispose of all waste in accordance with specific guidelines. Sample volume and laboratory productivity has not improved sufficiently at all laboratories in recent years. As a result, the laboratory segment has not been profitable. We have taken steps to improve productivity but still have substantial work to meet profit goals. In recent months sample flow has moderately increased, and assuming continuing DOE spending, we anticipate that there should be further increases in laboratory work.
We derive the majority of our revenues directly or indirectly from contracts with the federal and state governments. Two contracts account for approximately 74% of Eberline Services’ total sales: the RCC in Richland, Washington, and the LANS at Los Alamos. At the Hanford Nuclear Reservation in Richland, Washington, we provide radiological support services to WCH, a prime contractor to the DOE. In Los Alamos, New Mexico, we provide technical services to LANS, a prime contractor to Los Alamos. Additionally, our laboratories derive the large majority of their revenues from the analysis of samples collected from government funded clean-up sites by the prime contractors or other subcontractors; a minor portion of our laboratory revenues is derived from other government agencies and commercial customers.
Our business base is primarily comprised of cost-plus fee contracts. Under these contracts, we recover our allowable costs plus either a fixed fee or an incentive fee. For cost-plus contracts, we recognize revenue based on the actual costs we incur, plus earned fees. We bill cost-plus fixed fee contracts at approved, predetermined provisional billing rates. We adjust billing rates as needed to minimize over-billed or under-billed variances at contract closeout.
Recent Accounting Pronouncements
For recent accounting pronouncements see “Note 1 - The organization and significant accounting policies” to our consolidated financial statements.
Critical Accounting Policies
For critical accounting policies see “Note 1 - The organization and significant accounting policies” to our consolidated financial statements.
Results of Operations for the Years Ended December 27, 2009, and December 28,
Fiscal 2009 Compared with Fiscal 2008
Revenues
Revenues in 2009 were $33,248,254 compared to $32,699,683 for the same period in 2008, an increase of $548,571 or 1.7%. The increase in revenues was in both operating segments of our business; our Environmental Services and our Analytical Laboratory segment. The increase in our Environmental Services revenues was primarily due to the conduct of various field service contracts and increased activity at Los Alamos. The increase in our Analytical Laboratory revenues was primarily due to increased sample volume at our Richmond facility where we analyzed samples from the Columbia River and due to increased sample volume from our commercial customers at our Oak Ridge facility. These increases were offset by a decrease in revenue at our Lionville facility as a result of lower sample flow while it was completing its relocation to a new facility.
Revenues from our Environmental Services in 2009 were $25,469,474 compared to $25,092,116 for the same period in 2008, an increase of $377,358 or 1.5%. Our Environmental Services contributed 76.6% to total revenues in 2009 versus 76.7% in 2008. The increase in our Environmental Services revenues was primarily due to the conduct of various field service contracts, the initiation of a new contract at Hanford, and a small decrease of revenue on the RCC contract at the Hanford site. The decrease at Hanford was primarily related to the timing of the payment and subsequent revenue recognition of allowable pension costs. In general, our revenues at Hanford were approximately at the same level as with previous year’s revenues.
Revenues from our Analytical Laboratories in 2009 were $7,778,780 compared to $7,607,567 for the same period in 2008, an increase of $171,213 or 2.3%. Our Analytical Labs contributed 23.4% to total revenues in 2009 versus 23.3% for the same period in 2008. The increase in our Analytical Laboratory revenues was primarily due to increased sample volume from our commercial customers at our Oak Ridge facility and due to substantially increased sample volume at our Richmond facility from special large projects at Hanford and the Central Plateau. These increases were offset by a decrease in revenue at our Lionville facility as a result of lower sample flow as it completed its relocation to a new facility and because of the timing of the relocation and sampling on the Columbia River project in which Lionville would have participated.
The company engages in an ongoing business development effort to obtain more contracts for both Environmental Services and Analytical Laboratories though existing government contacts or newly appropriated Federal stimulus funding. In addition, the company continues to evaluate potential acquisitions in the Instruments segment. As of the date of this report the company has not made any commitments, nor has it acquired any instrument businesses.
Cost of Sales
The cost of sales in 2009 was $31,264,449 compared to $30,628,195 for the same period in 2008, an increase of $636,254 or 2.1%. The increase in cost of sales was primarily due to the additional personnel, expenses and subcontracts on new and increased Environmental Services contracts and due to expenses related with the relocation of the Lionville laboratory.
The cost of sales from our Environmental Services in 2009 was $23,360,119 compared to $22,996,208 for the same period in 2008, an increase of $363,911 or 1.6%. The increase was due to additional personnel with its associated cost, subcontracts, material and travel costs that were necessary to conduct new contract work and increased efforts on existing contracts. The field group had several new projects; a new contract was initiated at Hanford and primary contract at Las Alamos saw a larger effort on new task orders than previously experienced.
The cost of sales from our Analytical Laboratories in 2009 was $7,904,330 compared to $7,631,987 for the same period in 2008, an increase of $272,343 or 3.6%. The increase in cost of sales was primarily at Lionville since costs of sales at our Richmond and our Oak Ridge laboratories were essentially unchanged. Included in cost of sales were non-recurring expenses of approximately $230,000, including additional rent, clean-up costs, write-off of leasehold improvements and other expenses associated with the relocation of Lionville. The majority of these costs were incurred during the first six months of the year and the company began recognizing the benefit of the relocation during the last half of 2009.
Gross Profit
Gross profit in 2009 was $1,983,805 compared to $2,071,488 for the same period in 2008, a decrease of $87,683 or 4.2%. The gross profit margin decreased to 6.0% in 2009 from 6.3% for the same period in 2008. The gross profit from our Environmental Services in 2009 was $2,109,355 compared to $2,095,908 for the same period in 2008, an increase of $13,447 or 0.6%. The increase was due to more efficient utilization of personnel on our field service contracts and due to a reduction in the overhead rate of our field service division. The gross profit from our Analytical Laboratories in 2009 was a loss of $125,550 in 2009 compared to a loss of $24,420 for the same period in 2008, a decrease of $101,130. The decrease was due to the costs associated with relocation of Lionville and the subsequent loss of revenues associated with the move.
Operating Expenses
General and administrative expenses in 2009 were $2,211,927 compared to $2,597,009 for the same period in 2008, a decrease of $385,082 or 14.8%. Our general and administrative costs decreased due to cost control measures, including reductions of expense at the Eberline Services and corporate level. These costs included indirect salaries, legal expense, travel expense, general insurance, and facilities.
Operating Income (Loss)
The operating loss in 2009 was $228,122 compared to an operating loss of $525,521 for the same period in 2008. The operating loss was the combination of the Environmental Services operating income of $717,463 offset by an operating loss at the Analytical Laboratories of $566,125 and corporate general and administrative expenses of $379,460.
Other Income (Expense)
Other expenses in 2009 were $658,479 compared to $341,649 for the same period in 2008, an increase of $316,830 or 92.7%. Interest and other miscellaneous income in 2009 was $48,338 compared to $146,724 for the same period in 2008. The decrease was primarily due to a lower cash balance of funds invested. Interest expense in 2009 was $706,817 compared to $488,373 for the same period in 2008, due to increased interest expense and the associated underwriting expenses associated with our related party convertible debentures that originated in July 2008 and the amortization of deferred financing costs.
Provision for Income Taxes
We recorded a tax provision in 2009 of $299,833 compared with a tax benefit of $123,531for the same period in 2008. The provision is a non cash expense associated with the write-off of certain deferred tax assets due to their uncertain realization.
Net Loss
We incurred a net loss in 2009 of $1,186,434 compared to a net loss of $743,639 for the same period in 2008.
Liquidity and Capital Resources
Consolidated working capital at December 27, 2009 was $13,207,568, compared to $13,129,425 at December 28, 2008. Included in working capital were cash, cash equivalents and short-term investments of $11,073,166 as of December 27, 2009, compared to $11,383,800 at December 28, 2008. The increase in working capital was primarily related to the payment of accrued interest, as well as a reduction in our trade accounts payable.
Cash used by operating activities in 2009 was $116,835, compared to cash provided by operating activities of $207,397 for the same period in 2008. Our net receivables balance increased to $3,087,987 in 2009, compared to $3,036,225 at December 28, 2008, resulting in a decrease in cash of $51,762. Our unbilled contract receivables decreased to $651,337 in 2009, compared to $776,988 at December 28, 2008, resulting in an increase in cash of $125,651 due to the timing of invoicing on cost reimbursable contracts. Our prepaid expenses decreased to $125,465 in 2009, compared to $250,324 at December 28, 2008, resulting in an increase in cash of $124,859. Other receivables decreased to $59,812 in 2009, compared to $183,658 at December 28, 2008, resulting in an increase in cash of $123,846 due to the receipt of certain employee related expenses that were due to the company by our prime contractor. Our deferred tax asset decreased to $0 in 2009, compared to $557,123 at December 28, 2008.
Accounts payable decreased to $734,644 in 2009, compared to $1,001,499 at December 28, 2008, resulting in a decrease in cash of $266,855. Other accrued liabilities, including accrued expenses, accrued employee-related costs, income taxes payable and other long-term liabilities, increased to $1,966,541 in 2009, compared to $1,835,665 at December 28, 2008, resulting in an increase in cash of $130,876 due to an increase in accrued employee related costs. Our accrued interest balance associated with the convertible debentures decreased to $262,722 in 2009, compared to $601,328 at December 28, 2008, resulting in a decrease in cash of $338,606, due to payments on the accrued interest on our convertible debentures.
The primary investing activities of the company’s operations included the purchase of equipment. The company continues to manage its capital expenditures very selectively and in 2009 we used $237,929 for purchases of equipment. The company’s proceeds from maturities of securities classified as available for sale were $10,792,991 in 2009. The company used $10,461,542 of the proceeds from the maturities of available for sale securities to purchase certificates of deposits and money market funds. The company’s financing activities used $12,937 of cash in 2009, primarily due to payments on capital lease obligations.
The company owns property in Albuquerque, New Mexico. In 2009, the company entered into an agreement, subject to closing conditions, with a buyer to sell the property in Albuquerque, New Mexico for approximately $2.0 million. The property is classified as “Assets held for sale” on the company’s balance sheet as of December 27, 2009. The assets held for sale of $911,970 include land of $507,700 and buildings and improvements with a net book value of $404,270. The company expects to complete the sale in 2010.
The company believes that its existing resources, including cash and cash equivalents and future cash flow from operations, are sufficient to meet the working capital requirements of its existing business for the foreseeable future, including the next 12 months. We believe that our cash and cash equivalents and our ability to control certain costs, including those related to general and administrative expenses will enable us to meet our anticipated cash expenditures through the end of 2010. The company’s long-term liabilities primarily include convertible debentures that bear interest of 4%, payable quarterly in cash and mature on July 25, 2013. The company believes that its existing resources, including cash and cash equivalents, future cash flow from operations, and potential future property sales in Albuquerque, New Mexico and Richmond California will be sufficient to meet those obligations. Our ability to continue to access capital, however, could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders. See the information contained under the heading “Warning Concerning Forward- Looking Statements” in this Annual Report on Form 10-K.
Seasonality
Our revenues may fluctuate significantly due to a number of factors, including:
·
the seasonality of the spending cycle of our public sector clients, notably the federal government;
·
employee hiring and utilization rates;
·
the number of client projects commenced and completed during a quarter;
·
delays incurred in connection with a project;
·
the ability of our clients to terminate projects without penalties; and
·
weather conditions at specific work sites.
Historically, we experience lower revenues in the first calendar quarter primarily due to weather conditions. Also, because we have a heavy concentration of federal government contracts the federal appropriations process may significantly affect our operating results. In the absence of appropriated budgets, the continuing resolution method of funding for departments such as DOE can result in restrictions on certain projects. Recent history indicates that government spending within DOE for our types of services is greater in our second and third fiscal quarters. Also, much of our effort in both Environmental Services and Analytical Laboratories are in support of decommissioning and remediation projects, which are easier to conduct in the warmer months. Since our services work is project based rather than production based, the award of a large contract for a limited time can cause fluctuations in the quarterly revenues. However, variations in any of the above factors could cause significant fluctuations in our operating results from quarter to quarter.
Inflation
We provide radiological services and operate a radiochemistry laboratory network. The major component of our costs is our personnel and associated fringes. Since the majority of our contracts are cost-plus based contracts, we are able to pass along the effects of inflation. In our laboratories, however, since our services are primarily priced on a fixed unit price basis we are less flexible to deal with the effects of inflation. Inflation may cause our cost of goods sold to increase, and therefore lower our return on investment and depress our gross margins. The Analytical Laboratory revenue in 2009 was approximately 23.4% of total revenue.
Off Balance Sheet Arrangements
The company has no off balance sheet arrangements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See Item 15. Exhibits and Financial Statement Schedules
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T).
Item 9A(T). Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K, or the Evaluation Date, have concluded that as of the Evaluation Date, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to our company and any consolidated subsidiaries is made known to management, including our Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting:
In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control over financial reporting that occurred during the year ended December 27, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting:
The management of the company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with the Exchange Act. Management conducted an evaluation of our internal control over financial reporting based on the framework and criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion of this evaluation. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of December 27, 2009.
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. 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. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or 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. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
This Annual Report on Form 10-K does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management’s report in this Annual Report on Form 10-K.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers and Directors
The following table lists the current members of our board of directors and our executive officers. The address for our directors and officers is c/o GlenRose Instruments Inc., 45 First Avenue, Waltham, Massachusetts 02451.
There are no family relationships among any of our directors or executive officers. Each executive officer is elected or appointed by, and serves at the discretion of, our board of directors.
John N. Hatsopoulos has been our Chairman of the Board since 2005. Mr. Hatsopoulos is one of the four founding members of GlenRose Partnership L.P., and was a General Partner of GlenRose Capital LLC, formed in 2000 as a leverage buyout firm focused on making acquisitions in the environmental services and instrumentation business areas. He is the Chief Executive Officer of American DG Energy Inc. (NYSE Amex: ADGE), a publicly traded company in the cogeneration business and he is the Chief Executive Officer of Tecogen Inc., a manufacturer of natural gas, engine-driven commercial and industrial cooling and cogeneration systems. He is also a Partner and Managing Director of Alexandros Partners LLC, a financial advisory firm providing consulting services to early stage entrepreneurial ventures. Mr. Hatsopoulos is a co-founder of Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), and the retired President and Vice Chairman of the board of directors of that company. He is a member of the board of directors of Antigenics Inc. (NASDAQ: AGEN), American CareSource Holdings, Inc. (NASDAQ: ANCI), TEI Biosciences Inc., Ilios Inc., and is a former “Member of the Corporation” for Northeastern University. Mr. Hatsopoulos graduated from Athens College in Greece, and holds a bachelor’s degree in history and mathematics from Northeastern University as well as honorary doctorates in business administration from Boston College and Northeastern University.
Our board of directors has determined that Mr. Hatsopoulos’s prior experience in senior finance positions at Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), where he demonstrated leadership capability and garnered extensive expertise involving complex financial matters, and his extensive knowledge of complex financial and operational issues qualify him to be a member of the board of directors.
Arvin H. Smith has been our President and Chief Executive Officer since 2005. Mr. Smith is one of the four founding members of GlenRose Partnership L.P., and was a General Partner of GlenRose Capital LLC, formed in 2000 as a leverage buyout firm focused on making acquisitions in the environmental services and instrumentation business areas. Mr. Smith was the Chairman of Thermo Instrument Systems Inc., a public subsidiary of Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), from 1997 until 2000, and was President and Chief Executive Officer of that company from 1986 until 1996. He was also an Executive Vice President and member of the operating committee of Thermo Electron. Mr. Smith joined Thermo Electron in 1970, where he held various senior management positions. Prior to joining Thermo Electron and during the early years of the space program from 1959 until 1970, he held positions at NASA headquarters in Washington, D.C, as chief of Solar and Chemical Power Systems in the office of Advanced Research & Technology and at the Jet Propulsion Laboratory. He was also employed by General Dynamics from early 1954 until 1959 as an electronic technician and test engineer in the Aircraft Nuclear Propulsion Programs and also served in the U.S. Navy from 1950 until 1954. Mr. Smith graduated with honors from Texas Christian University and holds bachelor’s degrees in physics and mathematics.
Our board of directors has determined that Mr. Smith’s prior experience in senior finance positions at Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), where he demonstrated leadership capability and garnered extensive expertise involving complex financial matters, and his extensive knowledge of complex financial and operational issues qualify him to be a member of the board of directors.
Dr. Richard Chapman has been our Executive Vice President and Chief Operating Officer since 2005. Dr. Chapman is one of the four founding members of GlenRose Partnership L.P., and was a General Partner of GlenRose Capital LLC, formed in 2000 as a leverage buyout firm focused on making acquisitions in the environmental services and instrumentation business areas. Dr. Chapman was President, Chief Executive Officer and a Director of ThermoQuest Corporation, a subsidiary of Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), from 1995 until 2000. He was also Senior Vice President of Thermo Instrument Systems, Inc. from 1995 to 2000, and served as Chairman of the Board of Thermo BioAnalysis Corporation from 1995 to 1997, and a Director of Thermo Cardio Systems, Inc., both publicly held subsidiaries of Thermo Electron. He is also a director of OI Corporation (NASDAQ: OICO) and founder and chairman of Axxiom Inc, and Harbinger Instrument Systems, Inc., and holds bachelor’s and master’s of science degrees from the University of North Texas, and a doctorate from Oregon State University.
Dr. Shelton Clark has been our Vice President, as well as the President of the Services Group since 2005. From 1990 to 2001, he served in a number of U.S. and international management positions with Thermo Instrument Systems Inc., a public subsidiary of Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO). Dr. Clark received a bachelor’s of science degree from the University of North Texas and holds a doctorate degree from the University of Texas.
Anthony S. Loumidis has been our Chief Financial Officer and Treasurer since 2005. Mr. Loumidis devotes a substantial part of his business time to the affairs of the company. Mr. Loumidis is also the Chief Financial Officer of American DG Energy Inc. (NYSE Amex: ADGE), a publicly traded company in the cogeneration business, and he is the Vice President and Treasurer of Tecogen Inc., a manufacturer of natural gas, engine-driven commercial and industrial cooling and cogeneration systems. He is also a Partner and President of Alexandros Partners LLC, a financial advisory firm providing consulting services to early stage entrepreneurial ventures and Treasurer of Ilios Inc. Mr. Loumidis was previously with Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), where he held various positions including National Sales Manager for Thermo Capital Financial Services, Manager of Investor Relations and Manager of Business Development of Tecomet, a subsidiary of Thermo Electron. Mr. Loumidis is a FINRA registered representative, holds a bachelor’s degree in business administration from the American College of Greece in Athens and a master’s degree in business administration from Northeastern University.
Robert Aghababian has been a member of our board of directors since 2005. Mr. Aghababian is a tax attorney and former employee of Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), where he served as the Director of Tax for seventeen years. Prior to Thermo Electron he served in a similar position for Pneumo-Abex Corporation. Mr. Aghababian received a bachelor’s degree in business administration from Northeastern University and is a graduate of Boston College Law School.
Our board of directors has determined that Mr. Aghababian’s prior experience in senior finance positions as the chief tax officer of Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), where he garnered extensive expertise involving complex financial matters including the understanding of complex corporate tax organizations and reporting, qualify him to be a member of the board of directors.
Theo Melas-Kyriazi has been a member of our board of directors since 2005. Mr. Melas-Kyriazi has been the Chief Financial Officer of Levitronix LLC since June 2006. He worked for Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), from 1986 to 2004, serving in a number of management roles, including Chief Financial Officer from 1999 to 2004. Prior to joining Thermo Electron, Mr. Melas-Kyriazi was a Manager in the private investment-banking firm of Bourgeois Fils & Co., Inc., located in Exeter, New Hampshire. He is a member of the board of directors of Valeant Pharmaceuticals International (NYSE: VRX) since 2003 and of Helicos BioSciences Corporation (NASDAQ: HLCS) since 2007. Mr. Melas-Kyriazi received a bachelor’s degree in economics from Harvard University, and a master’s degree in business administration from the Harvard Graduate School of Business Administration.
Our board of directors has determined that Mr. Melas-Kyriazi’s prior experience in senior finance positions at various companies, where he demonstrated leadership capability and garnered extensive expertise involving complex financial matters, and his extensive knowledge of complex financial and operational issues qualify him to be a member of the board of directors.
Barry S. Howe has been a member of our board of directors since 2006. Mr. Howe was the President, CEO and a director of Electronic Sensor Technology (OTC BB: ESNR) from 2007 to 2008. He was a Corporate Vice President of Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), from 2002 to 2004, in charge of the Measurement & Control Sector. Mr. Howe joined Thermo Electron Corporation in 1986 as an Assistant Corporate Controller and was named President of the Thermo Separation Products subsidiary of Thermo Instrument Systems Inc. in 1989. He served as President and Chief Executive Officer of Thermo BioAnalysis from 1995 to 1998 and President and Chief Executive Officer of Thermo Spectra from 1998 to 2000, and Thermo Optek from 1999 to 2000. In 2000, he became President of the Optical Technologies Sector of Thermo Electron, a sector with 20 business units and over $600.0 million in revenues. Prior to joining Thermo Electron, Mr. Howe was an audit manager with Arthur Andersen & Co. from 1977 to 1985. Mr. Howe received a bachelor’s degree in business administration from Boston University.
Our board of directors has determined that Mr. Howe’s prior experience in senior finance positions at various companies, where he demonstrated leadership capability and garnered extensive expertise involving complex financial matters, and his extensive knowledge of complex financial and operational issues qualify him to be a member of the board of directors.
Dr. William J. Zolner has been a member of our board of directors since 2007. He is President of Eagle Analytical Services, Inc., a subsidiary of Professional Compounding Centers of America. From 1993 to 2003, Dr. Zolner worked in various leadership capacities for Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO). From 1997 to 2001 he was President, CEO and Director of Onix Systems Inc., a Thermo Instruments public subsidiary. Prior to 1997, he was President of Thermo Instruments Controls, a wholly owned subsidiary of Thermo Instruments and predecessor of Onix Systems Inc. Dr. Zolner worked for Thermo Electron Corporation from 1971 to 1977 in the environmental instruments division. From 1978 to 1993, he held key management position with divisions of The Bendix Corporation, Combustion Engineering, JWP Inc., and Lear Siegler Measurement Controls. Dr. Zolner received a bachelor’s degree and doctorate in chemical engineering from Northeastern University.
Our board of directors has determined that Mr. Zolner’s prior experience in senior finance positions at various companies, where he demonstrated leadership capability and garnered extensive expertise involving complex financial matters, and his extensive knowledge of complex financial and operational issues qualify him to be a member of the board of directors.
John H. Park has been a member of our board of directors since 2008. He is a Partner and is co-head of the investment committee of Blum Capital since 2004. He currently serves on the board of directors for Avid Technology, Inc., a portfolio company. Prior to joining Blum Capital, Mr. Park spent 11 years at Columbia Wanger Asset Management where he was the Portfolio Manager of the Columbia Acorn Select Fund since inception and Co-Manager of the Columbia Acorn Fund (both of which received Morningstar 5 star ratings during his tenure). In addition, Mr. Park was a Partner at the firm and served as Director of Research as well. Prior to Columbia Wanger Asset Management, Mr. Park was a Summer Associate at Ariel Capital Management and a Financial Analyst at Kidder, Peabody. Mr. Park received his bachelor’s degree and his master’s degree in business administration, both with Honors, from the University of Chicago and is a Chartered Financial Analyst.
Our board of directors has determined that Mr. Park’s business acumen gained through extensive private equity and fund investment experience, and his experience on other public company boards of directors and participation in corporate turn-around efforts qualify him to be a member of the board of directors. Our board of directors also benefits from the perspective he lends as a general partner of Blum Capital Partners, L.P., which is a GlenRose investor.
Each executive officer is elected or appointed by, and serves at the discretion of, our board of directors. The elected officers of the company will hold office until the next meeting of the board of directors and until their successors are duly elected and qualified, or until their earlier resignation or removal.
Board of Directors
Our board of directors currently consists of seven directors. In addition, our amended and restated by-laws will provide that the authorized number of directors may be changed only by resolution of our board of directors. Each director shall serve for a term ending on the date of the first annual meeting following the annual meeting at which such director was elected; provided further, that the term of each director shall continue until the election and qualification of a successor and be subject to such director’s earlier death, resignation or removal.
Board Committees
Our board of directors has established an audit committee, established in accordance with Section 3(c)(58)(A) of the Exchange Act, and a compensation committee. All of the members of each of these standing committees are independent as defined under NASDAQ rules and, in the case of the audit committee, the independence requirements contemplated by Rule 10A-3 under the Exchange Act. The members of our audit committee are Messrs. Howe and Aghababian. The members of our compensation committee are Messrs. Melas-Kyriazi and Aghababian.
Audit Committee
The audit committee’s responsibilities include:
·
appointing, approving the compensation of, and assessing the independence of our independent auditor;
·
overseeing the work of our independent auditor, including through the receipt and consideration of reports from the independent auditor;
·
reviewing and discussing with management and our independent auditor our annual and quarterly financial statements and related disclosures;
·
monitoring our internal control over financial reporting, disclosure controls and procedures, and code of business conduct and ethics;
·
discussing our risk management policies;
·
establishing policies regarding hiring employees from our independent auditor and procedures for the receipt and retention of accounting related complaints and concerns;
·
meeting independently with our independent auditor and management; and
·
preparing the audit committee report required by SEC rules to be included in our proxy statements.
All audit services and all non-audit services, except de minimis non-audit services, must be approved in advance by the audit committee. Our board of directors has determined that at least one of our audit committee members is an audit committee financial expert. That person is Barry S. Howe who is also independent under NASDAQ rules.
Compensation Committee
The compensation committee’s responsibilities include:
·
annually reviewing and approving corporate goals and objectives relevant to compensation of our Chief Executive Officer;
·
determining the compensation of our Chief Executive Officer;
·
reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our other executive officers;
·
overseeing an evaluation of our senior executives;
·
overseeing and administering our cash and equity incentive plans; and
·
reviewing and making recommendations to our board of directors with respect to director compensation.
Corporate Governance
We believe that good corporate governance is important to ensure that, as a public company, we will manage for the long-term benefit of our stockholders. In that regard, we have established and adopted charters for the audit committee and compensation committee, as well as a Code of Business Conduct and Ethics applicable to all of our directors, officers and employees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the officers and directors of the company, and persons who own 10% or more of any class of equity interests in the company, to report their beneficial ownership of equity interests in the company to the SEC. Their initial reports are required to be filed using the SEC’s Form 3, and they are required to report subsequent purchases, sales and other changes using the SEC’s Form 4, which must be filed within two days of most transactions. Officers, directors and shareholders owning more than 10% of any class of equity interests in the company are required by SEC regulations to furnish us with copies of all reports they file pursuant to Section 16(a). Based solely on our review of the copies of these reports furnished to us or written representations that no such reports were required, we believe that, during 2009, all filing requirements under 16(a) of the Exchange Act applicable to our executive officers, directors and greater that 10% shareholders were timely met.
Item 11.
Item 11. Executive Compensation.
Before we became a public company, GlenRose Partnership L.P. made decisions on executive compensation for our executive officers. In January 2007, we established a Compensation Committee to be responsible for decisions regarding the company’s executive compensation. The company’s current compensation practices are highly unusual. As is shown in the Summary Compensation Table below, we did not pay our Chief Executive Officer, Arvin H. Smith any compensation in the last two years and do not plan to pay him any compensation in the current year.
The company’s business is in transition from its current operations providing radiological services to a focus on the acquisition and operation of analytical instruments businesses. Until we have begun to implement our new business strategy, we expect to continue to pay modest cash compensation to our executive officers. Once we have begun to implement our new business strategy, our Compensation Committee expects to make determinations with respect to executive compensation based on customary parameters, such as the following:
·
ensure that the interests of our executive officers are closely aligned with those of our investors and owners;
·
attract and retain highly qualified and motivated employees who can drive an enterprise to succeed in today’s competitive marketplace;
·
motivate our employees to deliver high business performance;
·
differentiate compensation so that it varies based on individual and team performance; and
·
balance rewards for these demanding roles between short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.
As is discussed under Item 12
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The GlenRose Partnership L.P., and the holder of 3,000,000 shares of common stock of the company, dissolved effective as of December 31, 2007. Upon dissolution, the GlenRose Partnership L.P. distributed all of the common stock of the company that it owned to its partners. The partners of the GlenRose Partnership L.P. included certain of the company’s officers and directors. The following table gives effect to such distribution and sets forth information with respect to the beneficial ownership of our common stock as of March 26, 2010, for:
•
each of our executive officers and directors;
•
all of our executive officers and directors as a group; and
•
any other person known by us to be a beneficial owner of more than 5% of our outstanding common stock.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days. Except as otherwise indicated, all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
The following table sets forth certain information with respect to the beneficial ownership of the company's voting securities by (i) any person (including any “group” as set forth in Section 13(d)(3) of the Exchange Act, known by us to be the beneficial owner of more than 5% of any class of our voting securities, (ii) each director, (iii) each of the named executive officers, and (iv) all of our current directors and executive officers as a group. The percentages in the following table are based on 3,117,647 shares of common stock issued and outstanding as of March 26, 2010.
(1)
The address of the officers and directors listed in the table above is: c/o GlenRose Instruments Inc., 45 First Avenue, Waltham, Massachusetts, 02451.
(2)
Includes 1,714,286 shares of common stock that it has the right to acquire pursuant to currently convertible 4% debentures. Based on a Schedule 13D filed with the SEC on August 4, 2008, Blum Strategic Partners IV, L.P’s address is 909 Montgomery Street, Suite 400, San Francisco, California 94133.
(3)
Includes: (a) 513,954 shares of common stock held by the Arvin Herley & Wynona Lowe Smith, TTEES F/T Smith Living Trust, a Texas trust whose trustees are Mr. Smith and his wife, Wynona Smith, each of whom share voting power and investment power, and beneficiaries of that trust are members of Mr. and Mrs. Smith’s family; and (b) 205,357 shares of common stock, held by Mr. and Mrs. Smith as joint tenants with rights of survivorship, each of whom share voting and investment power, that Mr. and Mrs. Smith have the right to acquire pursuant to currently convertible 4% debentures.
(4)
Includes: (a) 513,954 shares of common stock held by John Hatsopoulos and his wife, Patricia Hatsopoulos, as joint tenants with rights of survivorship, each of whom share voting and investment power; and (b) 133,928 shares of common stock, held by John and Patricia Hatsopoulos, each of whom share voting and investment power, that John Hatsopoulos and Patricia Hatsopoulos have the right to acquire pursuant to currently convertible 4% debentures.
(5)
Includes: (a) 500,106 shares of common stock held by Dr. Philip Frost; and (b) 71,429 shares of common stock that Dr. Frost has the right to acquire pursuant to currently convertible 4% debentures, with an address of 4400 Biscayne Boulevard, Miami, Florida 33137.
(6)
Includes: 513,954 shares of common stock held by George Hatsopoulos and his wife, Daphne Hatsopoulos, as joint tenants with rights of survivorship, each of whom share voting and investment power, with an address of 233 Tower Road, Lincoln, Massachusetts 02773.
(7)
Includes 235,756 shares beneficially owned by Kenmare Fund I, L.P. and 65,568 shares beneficially owned by Kenmare Offshore, Ltd. Based on a Schedule 13G filed with the SEC on February 14, 2008, the members of the group are Kenmare Fund I, L.P., Kenmare Offshore, Ltd., Kenmare Capital Partners, LLC, Kenmare Offshore Management, LLC, and Mark McGrath, each with an address of 712 Fifth Avenue, New York, New York 10019.
(8)
Includes 256,977 shares held by the Ralph Wanger Revocable Trust, an Illinois trust whose sole trustee is Ralph Wanger. Mr. Wanger has sole voting power and sole dispositive power with respect to the shares held by the Ralph Wanger Revocable Trust, with an address of 191 North Wacker Drive, Chicago, Illinois 60606.
(9)
Includes 250,053 shares directly held by WHI Private Equity Managers Fund LLC, whose sole manager is William Harris Investors, Inc., and who may therefore be deemed to have voting and/or dispositive power over the shares. Michael Resnick is the only officer of William Harris Investors, Inc. who has sole voting power and sole dispositive power (acting through William Harris Investors, Inc.) with respect to the shares held by WHI Private Equity Managers Fund LLC, with an address of 191 North Wacker Drive, Chicago, Illinois 60606.
(10)
Includes: (a) 12,503 shares of common stock; and (b) options to purchase 15,000 shares of common stock of which 6,000 are exercisable within 60 days of March 26, 2010.
(11)
Includes options to purchase 25,000 shares of common stock of which 10,000 are exercisable within 60 days of March 26, 2010.
(12)
Includes options to purchase 25,000 shares of common stock of which 10,000 are exercisable within 60 days of March 26, 2010.
Stock Option and Incentive Plan
The company’s 2005 Stock Option and Incentive Plan, or the Stock Plan, was adopted by the company in September 2005. The Stock Plan provides for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors to, the company and its subsidiaries. Under the Stock Plan, the company may grant options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code, options not intended to qualify as incentive stock options (non-statutory options), restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of the company. A total of 700,000 shares of common stock may be issued upon the exercise of options or other awards granted under the Stock Plan. The maximum number of shares with respect to which awards may be granted to any employee under the Stock Plan shall not exceed 25% of that number.
The Stock Plan is administered by our board of directors and our Compensation Committee. Subject to the provisions of the Stock Plan, our board of directors and our Compensation Committee each has the authority to select the persons to whom awards are granted and determine the terms of each award, including the number of shares of common stock subject to the award. Payment of the exercise price of an award may be made in cash, in a “cashless exercise” through a broker, or if the applicable stock option agreement permits, shares of common stock or by any other method approved by our board of directors or Compensation Committee. Unless otherwise permitted by the company, awards are not assignable or transferable except by will or the laws of descent and distribution.
Upon the consummation of an acquisition of the business of the company, by merger or otherwise, our board of directors shall, as to outstanding awards (on the same basis or on different bases as our board of directors shall specify), make appropriate provision for the continuation of such awards by the company or the assumption of such awards by the surviving or acquiring entity and by substituting on an equitable basis for the shares then subject to such awards either (a) the consideration payable with respect to the outstanding shares of common stock in connection with the acquisition, (b) shares of stock of the surviving or acquiring corporation or (c) such other securities or other consideration as our board of directors deems appropriate, the fair market value of which (as determined by our board of directors in its sole discretion) shall not materially differ from the fair market value of the shares of common stock subject to such awards immediately preceding the acquisition. In addition to or in lieu of the foregoing, with respect to outstanding stock options, our board of directors may, on the same basis or on different bases as our board of directors shall specify, upon written notice to the affected optionees, provide that one or more options then outstanding must be exercised, in whole or in part, within a specified number of days of the date of such notice, at the end of which period such options shall terminate, or provide that one or more options then outstanding, in whole or in part, shall be terminated in exchange for a cash payment equal to the excess of the fair market value (as determined by our board of directors in its sole discretion) for the shares subject to such options over the exercise price thereof. Unless otherwise determined by our board of directors (on the same basis or on different bases as our board of directors shall specify), any repurchase rights or other rights of the company that relate to a stock option or other award shall continue to apply to consideration, including cash, that has been substituted, assumed or amended for a stock option or other award pursuant to these provisions. The company may hold in escrow all or any portion of any such consideration in order to effectuate any continuing restrictions.
Our board of directors may at any time provide that any stock options shall become immediately exercisable in full or in part, that any restricted stock awards shall be free of some or all restrictions, or that any other stock-based awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.
Our board of directors or our Compensation Committee may, in its sole discretion, amend, modify or terminate any award granted or made under the Stock Plan, so long as such amendment, modification or termination would not materially and adversely affect the participant.
Option Grants
As discussed under the section entitled “2005 Stock Option and Incentive Plan,” our board of directors and stockholders have adopted the above Stock Plan and reserved 700,000 shares of our common stock for issuance thereunder. In 2007, the company granted nonqualified options to purchase 230,000 shares of the common stock to 44 employees at $7.00 per share that vest over 5 years. In addition, in 2007 the company made grants of restricted stock to three of its directors by permitting them to purchase an aggregate of 15,000 shares of common stock at a price of $0.01 per share. No stock options or restricted stock awards were issued in 2009 or 2008. The following table sets forth information with respect to our securities authorized for issuance under the Stock Plan:
(1)
Includes 15,000 shares of restricted common stock issued to the company’s directors at $0.01 per share and 186,000 shares of common stock issued upon exercise of stock options at an exercise price of $7.00 per share.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Person Transactions
On July 25, 2008, the company entered into subscription agreements with four investors for the sale of convertible debentures in the aggregate principal amount of $14,875,000. The primary investor was Blum Strategic Partners IV, L.P., who subscribed for $12,000,000 of the debentures. Additional investors included John N. Hatsopoulos, the company’s Chairman of the board, Arvin H. Smith, the company’s President and Chief Executive Officer, and Philip Frost M.D., a holder of more than 10% of the outstanding equity securities of the company immediately prior to the sale of the debentures, who subscribed for $2,875,000 of debentures by exchanging promissory notes of the company for the debentures. The debentures bear interest at 4%, payable quarterly in cash, and mature on July 25, 2013. The debentures will be convertible at the option of the holder at any time into shares of common stock at an initial conversion price equal to $7.00 per share. In connection with the transaction, the company appointed John H. Park to the company’s board of directors. Ladenburg Thalman & Co., Inc., a registered broker-dealer, acted as placement agent on a best efforts basis for the sale of the company’s debentures. In connection with the transaction, the company paid the placement agent a cash fee of $600,000.
On July 25, 2008 the company paid in cash the principal amount on its remaining subordinated promissory note due 2011. In connection with that transaction, the company made a payment of $500,000 to Richard Chapman, the company’s Executive Vice President and Chief Operating Officer.
Director Independence
The company requires a majority of its board of directors to be “independent” as defined by Item 407(a) of Regulation S-K under the Securities Act, including, in the judgment of our board of directors, the requirement that such directors have no material relationship with the company. Our board of directors has determined that Messrs. Aghababian, Howe, Melas-Kyriazi, Zolner and Park are “independent” in accordance with Item 407(a) of Regulation S-K under the Securities Act. Each of these directors has no relationship with the company, other than any relationship that is categorically not material under the company’s guidelines and other than compensation for services as a director as disclosed in this Annual Report on Form 10-K.
Item 14.
Item 14. Principal Accountant Fees and Services.
The following table summarizes fees billed to the company by Caturano and Company, P.C. for professional services rendered for the period ended December 27, 2009:
Audit Fees. The audit fees consist of aggregate fees billed for each of the last two fiscal years for professional services rendered by the audit of our annual consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports.
Audit-Related Fees. The audit-related fees consist of aggregate fees billed for assurance and related services reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”.
Tax Fees. Tax fees consist of aggregate fees billed for professional services for tax compliance, tax advice and tax planning. These services included assistance regarding federal and state tax compliance, and tax audit defense.
All Other Fees. Fees that are billed for professional services rendered in connection with this Annual Report on Form 10-K are included in all other fees.
Audit Pre-Approval of Policies and Procedures
The Audit Committee’s current policy is to pre-approve all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit related services, tax services and other services. The Audit Committee may also pre-approve particular services on a case-by-case basis.
Audit Committee Approval of Fees
Our Audit Committee approved all audit-related fees, tax fees and other fees listed above provided by Caturano and Company, P.C. to us during the year ended December 27, 2009.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a)
Index To Financial Statements and Financial Statements Schedules:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 27, 2009 and December 28, 2008
Consolidated Statements of Operations for the years ended December 27, 2009 and December 28,
Consolidated Statements of Stockholders’ Equity for the years ended December 27, 2009 and December 28, 2008
Consolidated Statements of Cash Flows for the years ended December 27, 2009 and December 28,
Notes to Consolidated Financial Statements
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
(b)
Exhibits:
Exhibit
Number
Description
3.1
Certificate of Incorporation (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
3.2
By-laws (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
4.1
Form of 4% Convertible Debenture due 2013 (incorporated by reference to the registrant’s Form 10-Q, filed with the Securities and Exchange Commission for the quarter ended June 29, 2008).
10.1
Form of Subscription Agreement (incorporated by reference to the registrant’s Form 8-K, filed with the Securities and Exchange Commission on July 29, 2008).
10.2
Form of Investor Rights Agreement (incorporated by reference to the registrant’s Form 10-Q, filed with the Securities and Exchange Commission for the quarter ended June 29, 2008).
10.3*
Promissory note of Eberline Services, Inc. issued to Arvin Smith dated as of January 1, 2005 (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
10.4*
Promissory note of Eberline Services, Inc. issued to John N. Hatsopoulos and Patricia Hatsopoulos dated as of January 1, 2005 (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
10.5*
Promissory note of Eberline Services, Inc. issued to Arvin Smith dated as of December 17, 2007 (incorporated by reference to the registrant’s Form 10-K, as amended, originally filed with the Securities and Exchange Commission on March 31, 2008 for the year ended December 28, 2008).
10.6*
GlenRose Instruments Inc. 2005 Stock Option and Incentive Plan (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
10.7
Lease Agreement between J.W. Gibson Construction Company and Eberline Analytical Corp. dated October 24, 2000 (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
10.8
Lease Agreement between G-C-T Corporation and Lionville Laboratories, Inc. dated September 23, 2004 (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
10.9
Lease Agreement between Eberline Services, Inc. and First Industrial Pennsylvania LP., dated June 1, 2008 (incorporated by reference to the registrant’s Form 10-Q, filed with the Securities and Exchange Commission for the quarter ended June 29, 2008).
10.10
Agreement between Washington Closure Hanford, LLC and Eberline Services Hanford, Inc. (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
10.11
Subcontract Agreement No. 69899-000-09 between Los Alamos National Security, LLC, and Eberline Services, Inc. dated November 4, 2008 (incorporated by reference to the registrant’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2009).
10.12*
Form of Restricted Stock Purchase Agreement (incorporated by reference to the registrant’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2009).
10.13*
Form of Stock Option Agreement Under 2005 Stock Option and Incentive Plan (incorporated by reference to the registrant’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2009).
14.1
Code of Business Conduct and Ethics (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
21.1
List of subsidiaries (incorporated by reference to the registrant’s Form 10, as amended, originally filed with the Securities and Exchange Commission on November 17, 2006).
23.1#
Consent of Caturano and Company, P.C.
31.1#
Rule 13a-14(a) Certification of Chief Executive Officer.
31.2#
Rule 13a-14(a) Certification of Chief Financial Officer.
32.1
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer (Furnished herewith).
#
Filed herewith.
*
Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
Signature
Title
Date
/s/ JOHN N. HATSOPOULOS
Chairman of the Board
March 26, 2010
John N. Hatsopoulos
/s/ ARVIN H. SMITH
President, Chief Executive Officer and
March 26, 2010
Arvin H. Smith
Director
/s/ ANTHONY S. LOUMIDIS
Chief Financial Officer
March 26, 2010
Anthony S. Loumidis
(Principal Financial & Accounting Officer)
/s/ ROBERT AGHABABIAN
Director
March 26, 2010
Robert Aghababian
/s/ BARRY S. HOWE
Director
March 26, 2010
Barry S. Howe
/s/ THEO MELAS-KYRIAZI
Director
March 26, 2010
Theo Melas-Kyriazi
/s/ WILLIAM J. ZOLNER
Director
March 26, 2010
William J. Zolner
/s/ JOHN H. PARK
Director
March 26, 2010
John H. Park
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GlenRose Instruments, Inc.
We have audited the accompanying consolidated balance sheets of GlenRose Instruments Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 27, 2009 and December 28, 2008 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 27, 2009 and December 28, 2008 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ CATURANO AND COMPANY, P.C.
Boston, Massachusetts
March 26, 2010
GLENROSE INSTRUMENTS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 2009 AND DECEMBER 28, 2008
The accompanying notes are integral part of these consolidated financial statements.
GLENROSE INSTRUMENTS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 2009 AND DECEMBER 28, 2008
The accompanying notes are integral part of these consolidated financial statements.
GLENROSE INSTRUMENTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 27, 2009 AND DECEMBER 28, 2008
The accompanying notes are integral part of these consolidated financial statements.
GLENROSE INSTRUMENTS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 27, 2009 AND DECEMBER 28, 2008
The accompanying notes are integral part of these consolidated financial statements.
GLENROSE INSTRUMENTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 27, 2009 AND DECEMBER 28, 2008
The accompanying notes are integral part of these consolidated financial statements.
GLENROSE INSTRUMENTS INC.
Note 1 - The organization and significant accounting policies:
Organization
GlenRose Instruments Inc., a Delaware corporation, or the company, we, our, or us, was incorporated in September 2005 by the GlenRose Partnership L.P., or the GlenRose Partnership, a private-equity partnership with its headquarters in Waltham, Massachusetts. The company was organized to serve as a holding company through which the GlenRose Partnership’s partners would hold the shares of Eberline Services, Inc. or Eberline Services or ESI) (all of which had previously been held by the GlenRose Partnership). In order to effect such change in structure, the GlenRose Partnership entered into a stock exchange agreement with the company in September 2005 pursuant to which all outstanding shares of Eberline Services owned by the GlenRose Partnership were exchanged for 3,000,000 shares of common stock of GlenRose Instruments. As a result of this exchange, the GlenRose Partnership owned all of the outstanding stock of the company, and the company owned all of the outstanding stock of its subsidiary, ESI.
On August 30, 2007, the company issued 102,647 shares to a limited number of accredited investors through a private placement of common stock at a price per share of $7.00. On December 31, 2007, the limited partners and the general partner of the GlenRose Partnership dissolved the partnership and distributed the 3,000,000 shares of common stock of GlenRose Instruments to its limited partners in accordance with the GlenRose Partnership plan of liquidation and distribution.
On July 25, 2008, the company entered into subscription agreements with four investors for the sale of convertible debentures in the aggregate principal amount of $14,875,000. The debentures bear interest at 4%, payable quarterly in cash, and mature on July 25, 2013. The debentures are convertible at the option of the holder at any time into shares of common stock at an initial conversion price equal to $7.00; see “Note 3 - Debt”.
GlenRose Instruments, through Eberline Services and its subsidiaries, provides radiological services and operates a radiochemistry laboratory network, as well as provides radiological characterization and analysis, hazardous, radioactive and mixed waste management, and facility, environmental, safety and health management. The subsidiaries of Eberline Services are Eberline Services Hanford, Inc. or ESHI, Eberline Analytical Corporation, Benchmark Environmental Corp., and Lionville Laboratory Inc., or Lionville.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the company and its subsidiaries. All significant intercompany transactions have been eliminated.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.
Fiscal Year
The company’s fiscal year-end is the last Sunday of each calendar year. Each quarter is comprised of two four-week and one five-week period to ensure consistency in prior-year comparative analysis. The company changed the fiscal year-end to the current format in 2006. The previous fiscal year-end was December 28, 2008.
Use of Estimates in Preparation of Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and underlying assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments, which potentially subject the company to concentrations of credit risk, consist of highly liquid cash equivalents and trade receivables. The company’s cash equivalents are placed with certain financial institutions and issuers. At December 27, 2009, the company had a balance of $10,817,784 in cash and cash equivalents and short-term investments that exceeded the Federal Deposit Insurance Corporation limit of $250,000.
GLENROSE INSTRUMENTS INC.
The company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The company provides for an allowance for doubtful accounts on receivable balances based upon the expected collectability of such receivables. Federal and state governments collectively account for more than 90% of environmental services and laboratory revenues for the years ended December 27, 2009 and December 28, 2008. Only two of the company’s customers account for more than 10% of revenue and trade accounts receivable. One customer represented approximately 73% and 70% of revenue and 41% and 51% of trade accounts receivable for the years ended December 27, 2009 and December 28, 2008, respectively. The other customer represented approximately 12% and 13% of revenue and 22% and 14% of trade accounts receivable for the years ended December 27, 2009 and December 28, 2008, respectively.
Fair Value of Financial Instruments
The company’s financial instruments are cash and cash equivalents, short-term investments, accounts receivable, accounts payable, convertible debentures and capital lease obligations. The recorded values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values based on their short-term nature. Short-term investments are recorded at fair value. The fair value of capital lease obligations is estimated at its carrying value based on current rates. The current value of the convertible debentures on the balance sheet at December 27, 2009 approximates fair value as the terms approximate those currently available for similar instruments. See Note 10 for discussion of fair value measurements.
Cash and Cash Equivalents
The company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The company has cash balances in certain financial institutions in amounts which occasionally exceed current federal deposit insurance limits. The financial stability of these institutions is continually reviewed by senior management. The company believes it is not exposed to any significant credit risk on cash and cash equivalents.
Restricted Cash
Restricted cash includes certificates of deposit set aside to meet statutory requirements in the event of decommissioning activities of certain laboratory operations and is not indicative of any real or contingent liability.
Investments
The company accounts for its investments in debt and equity securities in accordance with ASC 320 Investments-Debt and Equity Securities, that requires the classification of investments in debt and equity securities as “held-to-maturity”, “available-for-sale” or “trading.” Investments which are considered held-to-maturity are stated at amortized cost. Investments which are considered trading securities and available-for-sale securities are carried at fair market value. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Unrealized holding gains and losses on trading securities are included in current period earnings. Realized gains and losses, dividend and interest income, including amortization of the premium and discount arising at acquisition, for all three categories of investments are included in earnings.
At December 27, 2009 short term investments consisted of $10,060,916 in money market mutual funds and certificates of deposit. At December 28, 2008 short term investments consisted of money market mutual funds, corporate bonds, and U.S. Treasury bills with maturities of less than twelve months. At December 28, 2008, $7,042,853 of the short-term investments were classified as available-for-sale securities. An unrealized loss of $27,840 was recorded in accumulated other comprehensive loss in the available-for-sale securities for the year ended December 28, 2008.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Maintenance, repairs and minor renewals are expensed to operations as incurred. Major repairs and betterments, which substantially extend the useful life of the property, are capitalized. Depreciation is provided for principally on a straight-line basis in amounts sufficient to charge the cost of depreciable assets to operations over the estimated service lives of assets as follows:
GLENROSE INSTRUMENTS INC.
Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the term of the related leases.
Recovery of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the remaining estimated useful life of such assets might warrant revision or that the balances may not be recoverable. If undiscounted cash flows are insufficient to recover the net book value of long-term assets including amortizable intangible assets, further analysis is performed in order to determine the amount of the impairment. In such circumstances an impairment loss would be recorded equal to the amount by which the net book value of the assets exceeds fair value. Fair value is usually determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. No events occurred or circumstances changed at December 27, 2009 that would indicate that the remaining net book value of the company’s long-lived assets are not recoverable.
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to an impairment test annually. Goodwill is also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The company performs impairment testing at the reporting unit level. An impairment loss is recognized when the fair value of the discounted cash flows of the reporting unit including its tangible assets is less than the carrying value.
At December 27, 2009, and December 28, 2008, the company’s goodwill balance was related to the Environmental Services segment which includes Eberline Services, ESHI and Benchmark Environmental Corp. The Analytical Laboratories goodwill was written off in prior years. At December 27, 2009, the Environmental Services segment reported revenues of $25,469,474 and gross profit of $2,109,355. Those results were consistent with prior year’s results, and consistent with the contracts in effect for that segment. In preparing the discounted cash flow analysis, the company analyzed the prior years' results as well as the contracts in effect for the next five years. The company estimated future sales volume using a 3% increase in revenues, which is consistent with the contract type(s) in effect. As the majority of the contracts in the segment are government cost-reimbursable contracts, the company escalated the associated costs consistent with the revenue increase. The segment's largest cost is labor. The company further estimated capital expenditures consistent with prior years amounts, and included the effects of depreciation in determining its net free cash flow prior to discount. The company utilized a weighted average cost of capital discount rate of 12.7% and 9.7% for terminal value calculations. Total expected free cash flow from the segment is approximately$7.6 million before adjustments. The company further discounted the cash flow based on management’s internal assessment of achieving the forecast results. The company’s internal assessment factor was 95% for 2011 declining to 30% for the terminal value year. Based on the assumptions above, the company determined that goodwill for the Environmental Services segment in the amount of $2,740,913 was not considered to be impaired.
Revenue Recognition
Revenue for laboratory services is recognized upon completion of the services and the shipment of the related data packages to the company’s customers. Revenue for government service contracts is recognized as the services are performed. Revenues are recognized based upon actual costs incurred plus specified fees or actual time and materials as required. The company performs certain contracts that are audited by either the Defense Contract Audit Agency, or the DCAA, or Los Alamos National Laboratories Internal Audit. Such contracts may be subject to adjustment dependent upon such factors as provisional billing rates or other contract terminology. Calculations of allowable overhead and profit may also change after audits by the DCAA for cost reimbursable type contracts. Contracts are normally settled during the audit year the contract terminates performance and is submitted for closure. The company is currently audited and settled through December 2005 for all contracts subject to review by DCAA and audited through December 2002 for contracts subject to review by the Los Alamos Internal Audit. Contracts performed before either 2005 or 2002 respectively that are either active or have not been submitted for closure may be subject to adjustment during subsequent audits during the year they are closed and audited.
The company is engaged principally in three types of service contracts with the federal government and its contractors:
Cost Reimbursable Contracts. Revenue from “cost-plus-fixed-fee” contracts is recognized on the basis of reimbursable contract costs incurred during the period plus an earned fee. Costs incurred for services which have been authorized and performed, but may not have been billed, are allocated with operational fringe, overhead, general and administrative expenses and fees, and are presented as Unbilled Contract Receivables on the accompanying consolidated balance sheet contained herein.
GLENROSE INSTRUMENTS INC.
Time-and-Materials Contracts. Revenue from “time and material” contracts is recognized on the basis of man-hours utilized plus other reimbursable contract costs incurred during the period.
Fixed-Price Contracts. Revenue from “fixed-price” contracts is recognized on the percentage-of-completion method. For fixed-price contracts, the amount of revenues recognized is that portion of the total contract amount that the actual cost expended bears to the anticipated final total cost based on current estimates of cost to complete the project (cost-to-cost method). However, when it becomes known that the anticipated final total cost will exceed the contract amount, the excess of cost over the contract amount is immediately recognized as a loss on the contract. Recognition of profit commences on an individual project only when cost to complete the project can reasonably be estimated and after there has been some meaningful performance achieved on the project (greater than 10% complete). Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions (when applicable) and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Claims and change orders are not recorded and recognized until such time as they have been accepted.
Direct costs of contracts include direct labor, subcontractors and consultants, materials and travel. The balance of costs, including facilities costs, insurance, administrative costs, overhead labor and fringe costs, are classified as either indirect costs or general and administrative expense, and are allocated to jobs as a percentage of each division’s total cost base.
Accounts Receivable
Accounts receivable are carried at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded as a credit to bad debt expense when received.
Unbilled Contract Receivables
Costs related to work that has been completed and performed, for which revenue has been recognized but are not yet fully billed, are classified as “unbilled contract receivables.”
Supply Inventory
Inventories are stated at the lower of cost or market, valued on a first-in, first-out basis. Inventory is reviewed periodically for slow-moving and obsolete items. As of December 27, 2009 and December 28, 2008, there were no reserves or write-downs recorded against inventory.
Income Taxes
The company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The amount of such provisions is based on various factors, such as the amount of taxable income in the current and prior periods, and the likelihood of continued taxable income. Additionally, management is responsible for estimating the probability that certain tax assets or liabilities can and will be utilized in future periods. The company believes it records and/or discloses such potential tax liabilities as appropriate and has reasonably estimated its income tax liabilities and recoverable tax assets. At December 27, 2009, the Company recorded a tax provision of $299,833 in order to increase the valuation allowance for certain deferred tax assets due to their uncertain realization.
Loss per Common Share
The calculation of loss per common share is based on the weighted-average number of common shares outstanding during the applicable period.
GLENROSE INSTRUMENTS INC.
Stock Based Compensation
Stock based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense in the statement of operations over the requisite service period. The fair value of stock options granted is estimated using the Black-Scholes option pricing valuation model. The company recognizes compensation on a straight-line basis for each separately vesting portion of the option award. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the average volatility of 20 companies in the same industry as the company. The average expected life is estimated using the simplified method for “plain vanilla” options. The expected life in years is based on the “simplified” method. The simplified method determines the expected life in years based on the vesting period and contractual terms as set forth when the award is made. The company uses the simplified method for awards of stock-based compensation since it does not have the necessary historical exercise and forfeiture data to determine an expected life for stock options. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. When options are exercised the company normally issues new shares.
See “Note 6 - Stockholders’ equity” for a summary of the restricted stock and stock option activity under our stock-based employee compensation plan for the year ended December 27, 2009.
Recent Accounting Pronouncements
In December 2007, the FASB issued guidance on changes in the accounting and reporting of business acquisitions. The guidance requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in purchased entities, measured at their fair values at the date of acquisition based upon the definition of fair value. This guidance was effective for the company at the beginning of 2009. The guidance had no impact on the company’s consolidated financial statements and any future effect will depend on the extent that the company makes business acquisitions in the future.
In September, 2006, the FASB issued guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February, 2008, the FASB delayed the effective date of the fair value guidance for all non-financial assets and non-financial liabilities, except those that are measured on a recurring basis. Effective January 1, 2009, the company adopted fair value guidance with respect to non-financial assets and liabilities measured on a non-recurring basis. The company does not expect the guidance to have a material impact on its results of operations and financial condition.
In March 2008, the FASB issued a pronouncement pertaining to disclosures about derivative instruments and hedging activities. This guidance requires disclosures of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The rule was effective for the company beginning January 1, 2009. The company does not expect the guidance to have a material impact on its results of operations and financial condition.
In April 2009, the FASB issued guidance on providing interim disclosures about fair value of financial instruments. This new guidance requires the fair value disclosures that were previously disclosed only annually to be disclosed now on an interim basis. This guidance was effective for the company in the second quarter of 2009, and has resulted in additional disclosures in our interim financial statements, and therefore did not impact our financial position, results of operations or cash flows.
In May 2009, the FASB issued a pronouncement on subsequent event accounting. The guidance identifies the following: the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The pronouncement was effective for the company’s second quarter 2009, and did not have an impact on our financial position, results of operations, or cash flows.
In June 2009, the FASB issued guidance on the FASB Accounting Standards Codification and the hierarchy of generally accepted accounting principles. The FASB Accounting Standards Codification, or the Codification, is the single source of authoritative nongovernmental generally accepted accounting principles in the U.S. The Codification was effective for interim and annual periods ending after September 15, 2009. The adoption of the Codification had no impact on the company’s financial position, results of operations or cash flows.
GLENROSE INSTRUMENTS INC.
In September 2009, the Emerging Issues Task Force issued new rules pertaining to the accounting for revenue arrangements with multiple deliverables. The new rules provide an alternative method for establishing fair value of a deliverable when vendor specific objective evidence cannot be determined. The guidance provides for the determination of the best estimate of selling price to separate deliverables and allows the allocation of arrangement consideration using this relative selling price model. The guidance supersedes the prior multiple element revenue arrangement accounting rules that are currently used by the company. This guidance is effective for us January 1, 2011 and is not expected to have a material effect on our consolidated financial position or results of operations.
Note 2 - Property plant and equipment:
Property, plant and equipment consist of the following as of December 27, 2009 and December 28, 2008:
Depreciation expense for the years ended December 27, 2009 and December 28, 2008 was $625,202 and $596,432, respectively.
The company owns property in Albuquerque, New Mexico. In 2009, the company entered into an agreement, subject to closing conditions, with a buyer to sell the property for approximately $1.9 million. As a result the Company reclassified $507,700 in land, $2,265,764 in buildings and improvements, and 1,916,927 in accumulated depreciation as “Assets held for sale” on the company’s balance sheet as of December 27, 2009. The assets held for sale balance of $911,970 also includes selling costs incurred to date of $14,079 and an accrual of $41,354 towards decommissioning of the site. The company expects to complete the sale in 2010.
Note 3 - Debt:
On July 25, 2008, the company entered into subscription agreements with four investors for the sale of convertible debentures in the aggregate principal amount of $14,875,000. The primary investor was Blum Strategic Partners IV, L.P., who subscribed for $12,000,000 of the debentures. Additional investors included John N. Hatsopoulos, the company’s Chairman of the board, Arvin H. Smith, the company’s President and Chief Executive Officer, and Philip Frost M.D., a holder of more than 10% of the outstanding equity securities of the company immediately prior to the sale of the debentures, who subscribed for $2,875,000 of debentures by exchanging existing promissory notes of the company for the debentures. The debentures bear interest at 4%, payable quarterly in cash, and mature on July 25, 2013. The debentures will be convertible at the option of the holder at any time into shares of common stock at a conversion price equal to $7.00 per share. In connection with the transaction, the company appointed John H. Park to the company’s board of directors. Ladenburg Thalman & Co., Inc., a registered broker-dealer, acted as placement agent on a best efforts basis for the sale of the company’s debentures. In connection with the transaction, the company paid the placement agent a cash fee of $600,000.
On July 25, 2008, the company made a payment of $500,000 to Richard Chapman, the company’s Executive Vice President and Chief Operating Officer, for the principal amount on its remaining subordinated promissory note due 2011.
GLENROSE INSTRUMENTS INC.
Note 4 - Commitments and contingencies:
The company and its subsidiaries lease facilities and equipment under various operating leases. Future minimum rental commitments for long-term, non-cancelable operating leases at December 27, 2009 are as follows:
Summary of Lease Obligations:
For the years ended December 27, 2009 and December 28, 2008, rent expense was $383,494 and $666,548, respectively. On June 3, 2008, the company entered into a lease for a new facility for the Lionville business. From July 2008 to February 2009 the company paid rent for two facilities in Lionville, while in a transition period.
The company performs services under numerous subcontract agreements on cost-reimbursable contracts with the federal government. During the period from 1998 to 2003, the company was party to a subcontract agreement with Johnson Control Northern New Mexico, or JCNNM, to provide services to Los Alamos on a cost-reimbursable basis. On May 14, 2007, the company received notification from IAP-Northern New Mexico, or IAPNNM, the successor corporation to JCNNM, that the results of a Los Alamos audit for the period ending in 2003 determined that certain costs previously claimed and billed by the company were subsequently deemed unallowable or otherwise not reimbursable. IAPNNM requested that the company reimburse the amount of $321,836 that was paid to the company during the subject time period. In January 2009, the company protested the Los Alamos audit results claiming they were inaccurate and requested to resubmit a claim for the subject contract. The Los Alamos audit team agreed to review the audit results and adjust the claim as needed. In the event it is determined that the company has to reimburse such amount in full, the resultant cost could materially affect its results of operations.
In late 2008, the New Mexico Environmental Department notified the company of a proposed civil penalty for non-compliance with certain New Mexico administrative statutes. In July 2009 the company agreed to a resolution agreement in principle with the New Mexico Environmental Department. The company negotiated a settlement, without admitting fault, to expedite resolution and mitigate the costs associated with the claim. The settlement did not result in a material adverse affect on the company’s business, operating results or financial condition.
As of December 27, 2009, the company was a party to two lawsuits with former employees over their terminations.
The first lawsuit was dismissed with prejudice on March 17, 2010. The second lawsuit is still in the discovery phase. We do not expect either litigation or any other legal activity will have a materially adverse affect on our business, operating results or financial condition.
Note 5 - Capital leases:
In 2006, the company leased laboratory equipment under a capital lease agreement. The lease term is for three more years, with the company owning the equipment at completion of the lease. The assets are amortized over their normal useful lives. In October 2008 the company entered into a capital lease with Phoenix Leasing Systems for the purpose of financing equipment at Lionville. The lease terms are 60 months with a $1 purchase option at completion.
Assets under capital lease as of December 27, 2009 and December 28, 2008:
During the year ended December 27, 2009 the company paid a total of $12,937 in principal payments towards capital leases. The following is a schedule of future payments by years required under the lease(s) together with their present values:
GLENROSE INSTRUMENTS INC.
Note 6 - Stockholders’ equity:
Stock Based Compensation
In September 2005, the company adopted a stock option plan under which the board of directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants of the company.
The maximum number of shares of stock or underlying options allowable for issuance under the plan is 700,000 shares of common stock, including 15,000 restricted shares as of December 27, 2009. Stock options vest based upon the terms within the individual option grants, usually over a five-year period at 20% per year, with an acceleration of the unvested portion of such options upon a liquidity event, as defined in the company’s stock option agreement. The options are not transferable except by will or domestic relations order. The number of securities remaining available for future issuance under the plan was 499,000 at December 27, 2009.
The option price per share under the plan is not less than the fair market value of the shares on the date of the grant. The determination of the fair value of share-based payment awards is affected by our stock price. The company considered the sales price of common stock in private placements to unrelated third parties during the year as a measure of the fair value of its common stock. The company’s most recent private placement of common stock was in August of 2007 at a price of $7.00 per share. There were no stock options awards granted in 2009 or 2008. Stock option activity for the years ended December 27, 2009 and December 28, 2008 was as follows:
The aggregate intrinsic value of options outstanding as of December 27, 2009 is calculated as the difference between the exercise price of the underlying options and the price of the company’s common stock for options that were in-the-money as of that date.
GLENROSE INSTRUMENTS INC.
In 2007, the company made restricted stock grants to three of its directors by permitting them to purchase an aggregate of 15,000 shares of common stock at a price of $0.01 per share. Those shares begin to vest 90 days after the company’s initial listing on a securities exchange or an over-the-counter bulletin board at a rate of 25% per year. All of the shares become vested shares upon a change in control prior to a termination event. There were no restricted stock awards granted in 2009 or 2008. At December 27, 2009, there were 15,000 unvested shares of restricted stock outstanding. Restricted stock activity for the years ended December 27, 2009 and December 28, 2008 was as follows:
The company recognized employee non-cash stock based compensation expense of $134,428 and $269,671 related to the issuance of restricted stock and stock options during the years ended December 27, 2009 and December 28, 2008, respectively. The Company recorded $88,654 and $89,663 to cost of sales for the years ended December 27, 2009 and December 28, 2008, respectively, and $45,774 and $180,008 to general administrative expenses for the years ended December 27, 2009 and December 28, 2008, respectively. The total compensation cost related to unvested restricted stock awards and stock option awards not yet recognized is $149,238 at December 27, 2009. This amount is expected to be recognized over a weighted average period of 3.1 years.
Note 7 - Benefit plans:
The company currently maintains two defined contribution “401(k)” plans. Additionally, employees of ESHI are covered by a multi-employer, defined benefit plan that is not administered by the company.
Eberline Services’ employees are eligible to participate in the 401(k) plan immediately. Participants may elect to contribute up to 100% of their compensation to the 401(k) Plans, subject to Internal Revenue Service annual limitations. Eberline Services makes discretionary matching contributions of up to 4.5% of a participant’s compensation, depending on deferral amount. During 2008, the company merged the Lionville 401(k) plan into the Eberline Services plan. Contributions for Lionville employees are included in the Eberline Services contribution disclosure. For the years ended December 27, 2009 and December 28, 2008, Eberline Services contributed approximately $250,564 and $235,625, respectively.
Employees of ESHI are eligible to participate in a multi-employer defined benefit plan or the Plan. The Plan is administered by Fluor Hanford, Inc., on behalf of eligible, participating companies. The Plan is funded by participating companies on a payroll-by-payroll basis, in amounts actuarially computed by Fluor Hanford, Inc. The company expenses the computed expense amount annually. Under the terms and conditions of the Plan, individual companies assume no liability for future pension or benefit costs associated with the Plan. The government reimburses the company for all pension related costs as a direct project cost. Accordingly, no information with respect to the Plan is included herein. Annual expense amounts are based on the total labor base incurred at the Hanford Reservation site. For the years ended December 27, 2009, and December 28, 2008, the expense was $726,473 and $456,885, respectively.
Additionally, ESHI employees are eligible to participate in a traditional, employer-sponsored 401(k) plan also administered by Fluor Hanford, Inc. For the years ended December 27, 2009, and December 28, 2008, employer contributions were $545,364 and $525,913, respectively.
GLENROSE INSTRUMENTS INC.
Note 8 - Related party transactions:
On July 25, 2008, the company entered into subscription agreements with four investors for the sale of convertible debentures in the aggregate principal amount of $14,875,000. The primary investor was Blum Strategic Partners IV, L.P., who subscribed for $12,000,000 of the debentures. Additional investors included John N. Hatsopoulos, the company’s Chairman of the board, Arvin H. Smith, the company’s President and Chief Executive Officer, and Philip Frost M.D., a holder of more than 10% of the outstanding equity securities of the company immediately prior to the sale of the debentures, who subscribed for $2,875,000 of debentures by exchanging existing promissory notes of the company for the debentures. The debentures bear interest at 4%, payable quarterly in cash, and mature on July 25, 2013. The debentures will be convertible at the option of the holder at any time into shares of common stock at an initial conversion price equal to $7.00 per share. In connection with the transaction, the company appointed John H. Park to the company’s board of directors. Ladenburg Thalman & Co., Inc., a registered broker-dealer, acted as placement agent on a best efforts basis for the sale of the company’s debentures. In connection with the transaction, the company paid the placement agent a cash fee of $600,000.
On July 25, 2008 the company paid in cash the principal amount on its remaining subordinated promissory note due 2011. In connection with that transaction, the company made a payment of $500,000 to Richard Chapman, the company’s Executive Vice President and Chief Operating Officer.
The company’s Chief Financial Officer devotes part of his business time to the affairs of American DG Energy Inc., or American DG, that pays his salary and part of his salary is reimbursed by the company. Also, the company’s Chairman of the Board is the Chairman, Chief Executive Officer and a significant investor in American DG and did not receive a salary, bonus or any other compensation from American DG in 2008.
Note 9 - Loss per share:
Basic and diluted loss per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period to common stock. Because of the reported net losses, there are no dilutive securities as of December 27, 2009 and December 28, 2008. The following reconciles amounts reported in the financial statements:
Note 10 - Fair value measurements:
The fair value topic of the Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. We currently do not have any Level 3 financial assets or liabilities.
GLENROSE INSTRUMENTS INC.
At December 27, 2009, the company had short term investments of $10,060,916 that are comprised of money market funds of $8,626,490 and certificates of deposits of $1,434,426. Money market funds are categorized as level 1 and certificates of deposit are categorized as level 2. The company determines the fair value of certificates of deposits using information provided by the issuing bank which includes discounted expected cash flow estimates using current market rates offered for deposits with similar remaining maturities.
Note 11 - Investments:
In the year ended December 28, 2008, the company classified its marketable securities, included in short-term investments, as available-for-sale. Available-for-sale securities, which included certificates of deposit, were reported at fair value with unrealized gains and losses included in stockholders’ equity. The company had an unrealized loss of $27,840 recorded in accumulated other comprehensive loss in the available-for-sale securities for the year ended December 28, 2008. The following is a summary of marketable, available-for-sale securities as of December 28, 2008.
The available-for-sale securities held by the company as of December 28, 2008 matured during the first and second quarters of 2009. Proceeds from maturities of securities classified as available for sale were $7,108,876 for the year ending December 27, 2009 and gross gains of $38,181 were realized on these maturities. As of December 27, 2009 the Company’s short-term investments consist solely of certificates of deposits and money market funds which are reported at fair value with unrealized gains and losses included in earnings.
Note 12 - Income taxes:
Components of the provision for income taxes for the years ended December 27, 2009 and December 28, 2008 are as follows:
The income tax expense for the years ended December 27, 2009 and December 28, 2008 varied from the amount computed by applying the federal statutory income tax rate to income (loss) before taxes. Reconciliation between the federal statutory taxes and effective taxes follows:
GLENROSE INSTRUMENTS INC.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the company’s deferred taxes at December 27, 2009 and December 28, 2008, are as follows:
The company recorded a tax provision of $299,833 in 2009 compared to tax benefit of $123,531 in 2008. As of December 27, 2009, the company had a deferred tax asset balance of $440,493 a portion of which is related to the net operating losses of the company’s Lionville subsidiary. These Lionville losses are subject to separate return limitation year treatment and may only be utilized against income from Lionville. As of December 28, 2008, the company believed that it was more likely than not that it would not realize the balance of these Lionville assets, and therefore reduced the deferred tax asset by a valuation allowance in the amount of $563,519. During 2009, the company further reduced the net deferred tax asset to $0 by increasing the valuation allowance to $906,491 as the company believes it is more likely than not that it will not realize the balance of the deferred tax asset. For the year ended December 27, 2009, income taxes resulted in a tax provision of $299,833. As of December 27, 2009 the company had net operating losses carryforwards of $1,287,039 associated with Lionville which will expire by December 2016. Additional loss carryforwards of $1,182,277 are available on a consolidated basis and expire by December 2028 and 2029, respectively. Those loss carryforwards are fully reserved.
As of December 27, 2009, the company had no accrued liability for unrecognized tax benefits related to various federal and state income tax matters. The company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months. The company recognizes interest and penalties relating to uncategorized tax benefits in operating expenses. The company’s tax years from 2006 to 2009 remain subject to examination by major tax jurisdictions.
Note 13 - Segment data:
The company’s executive officers include Arvin Smith, Dr. Richard Chapman and Dr. Shelton Clark. Collectively, they are the Chief Operating Decision Maker, or CODM, as defined by Disclosures about Segments of an Enterprise and Related Information. The office of the CODM is responsible for assessing the performance of each segment, as well as the allocation of company resources. Other than general and administrative services incurred at GlenRose Instruments, ESI currently constitutes 100% of the activity of the company. Costs incurred by GlenRose Instruments are aggregated and reported separately from the Eberline Services activity.
The company currently operates three business segments: Environmental Services, Analytical Laboratories and Instruments. ESI maintains separate general and administrative functions consisting of all executive management, business development, accounting and finance, and human resource personnel that support the entire business. The Environmental Services segment provides engineering and technical support to Los Alamos, the Department of Energy’s Hanford Reservation Site, as well as other government and commercial agencies. The Analytical Laboratories consist of three separate laboratories serving a wide variety of federal, state and local governments. The laboratories are located in Richmond, California, Oak Ridge, Tennessee, and Exton, Pennsylvania. A dedicated laboratory manger is responsible for the operation of each laboratory. Management monitors the performance of each laboratory separately. Intercompany costs and sales are eliminated in the consolidated financial statements.
The Instruments segment was formed in 2006 with the intent to include the company’s future instrument related acquisitions. Analytical instruments use a variety of highly sophisticated measurement technologies and are used by the scientific community, the government and industry to perform basic research, applied research and development, process monitoring and control, and many other applications. The company’s strategy is to acquire instrument companies, which have well-established and proven technology and increase their operating margins and revenues using techniques developed by the company’s management team during the course of their careers in the analytical instruments industry. As of the date of this report the company has not made any commitments, nor has it acquired any instrument businesses.
GLENROSE INSTRUMENTS INC.
The company’s segment data show all general and administrative costs related to the instruments segment captured during the period. Segment general and administrative costs have been restated to reflect cost allocation based on total segment cost of sales. That segment allocation may differ from allowable government allocations per the terms of our contracts.
Segment data for the years ended December 27, 2009 and December 28, 2008 are included below:
GLENROSE INSTRUMENTS INC.
Note 14 - Subsequent events:
The company has evaluated all events or transactions through the date of this filing. During this period, the company did not have any material subsequent events that impacted its consolidated financial statements.