Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended September
30, 2008
OR
¨ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from __________ to __________
Commission
File Number 0-2000
Entrx
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
|
95-2368719
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
800
Nicollet Mall, Suite 2690, Minneapolis, MN
|
|
55402
|
(Address
of Principal Executive Office)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code (612)
333-0614
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
past 12 months (or for such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. Yes x
No ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No x
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.
Large
accelerated filer ¨
|
Accelerated
filer
¨
|
Non-accelerated
filer ¨
|
Smaller
reporting Company x
|
As
of
November 3, 2008, the registrant had 7,656,147 shares outstanding of its Common
Stock, $.10 par value.
ENTRX
CORPORATION AND SUBSIDIARIES
TABLE
OF CONTENTS
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Page
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PART
I. FINANCIAL INFORMATION
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Item
1.
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Financial
Statements.
|
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Consolidated
Balance Sheets at September 30, 2008 (unaudited) and December 31,
2007
(audited)
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1
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|
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Consolidated
Statements of Operations and Comprehensive Income for the three and
nine
months ended September 30, 2008 and 2007 (unaudited)
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2
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|
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Consolidated
Statements of Cash Flows for the nine months ended September 30,
2008 and
2007 (unaudited)
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3
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Notes
to Consolidated Financial Statements (unaudited)
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4
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Item
2.
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Management's
Discussion of Financial Condition and Results of
Operations
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11
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Item
4T.
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Controls
and Procedures
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18
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PART
II. OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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18
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Item
6.
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Exhibits
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22
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SIGNATURES
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22
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References
to “we”, “us”, “our”, “the registrant” and “the Company” in this quarterly
report on Form 10-Q shall mean or refer to Entrx Corporation and its
consolidated subsidiary, Metalclad Insulation Corporation, unless the context
in
which those words are used would indicate a different
meaning.
PART
I
FINANCIAL
INFORMATION
Item
1. Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,116,560
|
|
$
|
1,444,883
|
|
Restricted
cash
|
|
|
800,000
|
|
|
-
|
|
Available-for-sale
securities
|
|
|
479,633
|
|
|
559,436
|
|
Accounts
receivable, less allowance for doubtful accounts of $80,000 as of
September 30, 2008 and December 31, 2007
|
|
|
6,016,349
|
|
|
5,466,889
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
1,244,036
|
|
|
631,625
|
|
Inventories
|
|
|
248,614
|
|
|
107,118
|
|
Prepaid
expenses and other current assets
|
|
|
399,830
|
|
|
273,156
|
|
Insurance
claims receivable
|
|
|
5,500,000
|
|
|
7,000,000
|
|
Shareholder
note receivable, net of allowance of $1,367,000 and $1,356,000 as
of
September 30, 2008 and December 31, 2007, respectively
|
|
|
14,500
|
|
|
25,000
|
|
Other
receivables
|
|
|
107,000
|
|
|
180,015
|
|
Total
current assets
|
|
|
15,926,522
|
|
|
15,688,122
|
|
|
|
|
|
|
|
|
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Property,
plant and equipment, net
|
|
|
425,140
|
|
|
366,954
|
|
Investments
in available-for-sale securities
|
|
|
300,000
|
|
|
450,000
|
|
Insurance
claims receivable
|
|
|
25,250,000
|
|
|
29,000,000
|
|
Other
assets
|
|
|
46,620
|
|
|
193,540
|
|
|
|
$
|
41,948,282
|
|
$
|
45,698,616
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
155,190
|
|
$
|
113,000
|
|
Accounts
payable
|
|
|
1,520,299
|
|
|
1,251,423
|
|
Accrued
expenses
|
|
|
2,129,939
|
|
|
1,859,048
|
|
Reserve
for asbestos liability claims
|
|
|
5,500,000
|
|
|
7,000,000
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
348,127
|
|
|
62,394
|
|
Total
current liabilities
|
|
|
9,653,555
|
|
|
10,285,865
|
|
|
|
|
|
|
|
|
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Long-term
debt, less current portion
|
|
|
175,756
|
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|
132,470
|
|
Reserve
for asbestos liability claims
|
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25,250,000
|
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|
29,000,000
|
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Total
liabilities
|
|
|
35,079,311
|
|
|
39,418,335
|
|
|
|
|
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Commitments
and contingencies
|
|
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Shareholders’
equity:
|
|
|
|
|
|
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|
Preferred
stock, par value $1; 5,000,000 shares authorized; none
issued
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $0.10; 80,000,000 shares authorized; 7,656,147 issued
and
outstanding at September 30, 2008 and 7,616,147 issued and outstanding
at
December 31, 2007
|
|
|
811,095
|
|
|
807,095
|
|
Additional
paid-in capital
|
|
|
69,831,881
|
|
|
69,821,881
|
|
Accumulated
deficit
|
|
|
(63,778,388
|
)
|
|
(64,132,186
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
4,383
|
|
|
(216,509
|
)
|
Total
shareholders’ equity
|
|
|
6,868,971
|
|
|
6,280,281
|
|
|
|
$
|
41,948,282
|
|
$
|
45,698,616
|
|
See
Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
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Contract
revenues
|
|
$
|
6,735,790
|
|
$
|
4,823,053
|
|
$
|
20,495,888
|
|
$
|
14,856,994
|
|
|
|
|
|
|
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|
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Contract
costs and expenses
|
|
|
5,660,508
|
|
|
3,816,745
|
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|
16,984,168
|
|
|
12,220,758
|
|
|
|
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|
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|
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|
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Gross
margin
|
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|
1,075,282
|
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1,006,308
|
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3,511,720
|
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|
2,636,236
|
|
|
|
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|
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|
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Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
924,537
|
|
|
821,651
|
|
|
2,736,572
|
|
|
2,157,773
|
|
Change
in allowance on shareholder note receivable
|
|
|
(5,750
|
)
|
|
20,000
|
|
|
10,500
|
|
|
20,000
|
|
Gain
on disposal of property, plant and equipment
|
|
|
(2,500
|
)
|
|
(4,036
|
)
|
|
(17,050
|
)
|
|
(6,957
|
)
|
Total
operating expenses
|
|
|
916,287
|
|
|
837,615
|
|
|
2,730,022
|
|
|
2,170,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
158,995
|
|
|
168,693
|
|
|
781,698
|
|
|
465,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
6,843
|
|
|
16,520
|
|
|
27,954
|
|
|
46,209
|
|
Interest
expense
|
|
|
(1,509
|
)
|
|
(935
|
)
|
|
(5,159
|
)
|
|
(9,409
|
)
|
Impairment
charge on available-for-sale securities
|
|
|
(265,486
|
)
|
|
-
|
|
|
(450,695
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(101,157
|
)
|
|
184,278
|
|
|
353,798
|
|
|
502,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on available-for-sale securities
|
|
|
4,383
|
|
|
(14,851
|
)
|
|
4,383
|
|
|
164,489
|
|
Reclassification
adjustment for unrealized losses on available-for-sale securities
recognized in net income
|
|
|
72,918
|
|
|
-
|
|
|
216,509
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(23,856
|
)
|
$
|
169,427
|
|
$
|
574,690
|
|
$
|
666,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares — basic and diluted
|
|
|
7,656,147
|
|
|
7,616,147
|
|
|
7,652,205
|
|
|
7,756,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share of common stock — basic and
diluted
|
|
$
|
(0.01
|
)
|
$
|
0.02
|
|
$
|
0.05
|
|
$
|
0.06
|
|
See
Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
353,798
|
|
$
|
502,220
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
153,474
|
|
|
146,927
|
|
Gain
on disposal of property, plant and equipment
|
|
|
(17,050
|
)
|
|
(6,957
|
)
|
Change
in allowance for doubtful accounts
|
|
|
-
|
|
|
59,632
|
|
Impairment
charge on investments
|
|
|
450,695
|
|
|
-
|
|
Common
stock issued for services
|
|
|
14,000
|
|
|
18,400
|
|
Allowance
on shareholder note receivable
|
|
|
10,500
|
|
|
20,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(549,460
|
)
|
|
(402,083
|
)
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
(612,411
|
)
|
|
42,461
|
|
Inventories
|
|
|
(141,496
|
)
|
|
(134,436
|
)
|
Prepaid
expenses and other current assets
|
|
|
(126,674
|
)
|
|
(198,753
|
)
|
Other
receivables
|
|
|
73,015
|
|
|
93,606
|
|
Other
assets
|
|
|
146,920
|
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
539,767
|
|
|
(177,555
|
)
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
285,733
|
|
|
193,446
|
|
Net
cash provided by operating activities
|
|
|
580,811
|
|
|
156,908
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Restricted
cash used to secure bonding
|
|
|
(800,000
|
)
|
|
-
|
|
Capital
expenditures
|
|
|
-
|
|
|
(211,105
|
)
|
Proceeds
from sale of property, plant and equipment, net of
expenses
|
|
|
-
|
|
|
38,800
|
|
Net
cash used in investing activities
|
|
|
(800,000
|
)
|
|
(172,305
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
-
|
|
|
157,524
|
|
Payments
on long-term debt
|
|
|
(109,134
|
)
|
|
(88,875
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(109,134
|
)
|
|
68,649
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(328,323
|
)
|
|
53,252
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,444,883
|
|
|
1,607,580
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,116,560
|
|
$
|
1,660,832
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment in exchange for notes
payable
|
|
$
|
205,618
|
|
$
|
-
|
|
See
Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Nine Months Ended September 30, 2008 and
2007
(Unaudited)
1. The
accompanying unaudited consolidated financial statements of Entrx Corporation
and its subsidiaries (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America. In the opinion
of
management all adjustments, consisting of normal recurring items, necessary
for
a fair presentation have been included. Operating results for the three and
nine
months ended September 30, 2008 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2008. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2007.
2. The
income per share amounts for the three and nine months ended September 30,
2008
and 2007, were computed by dividing the net income by the weighted average
shares outstanding during the applicable period. Dilutive common equivalent
shares have not been included in the computation of diluted income per share
because their inclusion would be antidilutive.
All
stock
options and warrants were anti-dilutive for the three and nine months ended
September 30, 2008 and 2007 because their respective exercise prices were
greater than the average market price of the common stock.
3. On
July
11, 2008, the Company obtained from a bank an irrevocable standby letter of
credit in the amount of $800,000 for the benefit of one of our customers in
connection with a contract for the customer. The letter of credit expires on
the
earlier of (a) December 31, 2008, or (b) the date on which the amount of the
letter of credit is reduced to zero by the customer’s draws, or (c) the date on
which the letter of credit has been returned to the bank. Should the completion
of the underlying project require an extension, the Company may need to extend
the term of the letter of credit. In obtaining the letter of credit, the Company
purchased a $800,000 six-month certificate of deposit and pledged it as
collateral to the issuer of the letter of credit.
4. Investments
held by the Company are classified as available-for-sale securities.
Available-for-sale securities are reported at fair value with all unrealized
gains or losses included in other comprehensive income (loss). The fair value
of
the securities was determined by quoted market prices of the underlying
security. For purposes of determining gross realized gains (losses), the cost
of
available-for-sale securities is based on specific identification.
|
|
Aggregate fair
value
|
|
Gross unrealized
gains
|
|
Gross unrealized
losses
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities – September 30, 2008
|
|
$
|
779,633
|
|
$
|
4,383
|
|
$
|
-
|
|
$
|
775,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities – December 31, 2007
|
|
$
|
559,436
|
|
$
|
-
|
|
$
|
(216,509
|
)
|
$
|
775,945
|
|
The
Company's net unrealized holding gain (loss) was $4,383 and $(14,851) for the
three months ended September 30, 2008 and 2007, respectively and $4,383 and
$164,489 for the nine months ended September 30, 2008 and 2007,
respectively.
On
an
ongoing basis, the Company evaluates its investments in available-for-sale
securities to determine if a decline in fair value is other-than-temporary
such
that the change should be reflected in the Company’s financial statements. When
a decline in fair value is determined to be other-than-temporary, an impairment
charge is recorded and a new cost basis in the investment is established.
Considering
the severity and duration of the decline in fair value and the financial
condition and near-term prospects of our investment, we recognized other than
temporary impairment charge in the amount of $12,056 on our investment in
VioQuest Pharmaceuticals, Inc. during the nine months ended September 30, 2008.
We
previously recognized an impairment charge on our Clearwire Corporation
investment of $173,153 during the three months ended March 31, 2008. Our
determination that the impairment with respect to Entrx’s investment in the
common stock of Clearwire Corporation was other-than-temporary, was based upon
both the length of time that the market value of that stock was below Entrx’s
carrying value of $19.20 per share, and the severity of the decline in that
market value. Since November 8, 2007, through early May, when Entrx filed its
Form 10-Q for the period ended March 31, 2008, the market value of Entrx’s
investment in the common stock of Clearwire Corporation was less than its cost.
In addition, as of March 31, 2008, the market value of Entrx’s investment was
approximately 23% below its carrying value. As a result of those conditions,
Entrx recorded an impairment charge of $173,153, which represented the
difference between the market value on March 31, 2008 and Entrx’s carrying
value. We also recognized an impairment charge on our Clearwire Corporation
investment of $115,486 during the three months ended September 30, 2008. Our
determination that the impairment with respect to Entrx’s investment in the
common stock of Clearwire Corporation was other-than-temporary, was based upon
both the length of time that the market value of that stock was below Entrx’s
previous carrying value of $14.81 per share, and the severity of the decline
in
that market value. Since May 8, 2008, through early November, when Entrx filed
its Form 10-Q for the period ended September 30, 2008, the market value of
Entrx’s investment in the common stock of Clearwire Corporation was less than
its cost. In addition, as of September 30, 2008, the market value of Entrx’s
investment was approximately 20% below its previous carrying value. As a result
of those conditions, Entrx recorded an impairment charge of $115,486, which
represented the difference between the market value on September 30, 2008 and
Entrx’s carrying value.
The
Company also has a minority investment in the common stock of Catalytic
Solutions, Inc. which is traded on the
London Stock Exchange’s Alternative International Market for smaller companies
(the “AIM” market). Prior to the third quarter of 2008, this
investment was included in investments in unconsolidated affiliates on the
Consolidated Balance Sheets and was carried at cost based upon our assessment
that the AIM market was not of a comparable breadth and scope to a U.S. market.
During the third quarter of 2008, the Company changed its method of accounting
for its investment in the common stock of Catalytic Solutions, Inc. to
reclassify this investment to a investment in available-for-sale security,
based
on the continued expansion of the breadth and scope of the AIM market and the
Company’s related interpretations of SFAS 115.
We
recognized an impairment charge on our Catalytic Solutions, Inc. investment
of
$150,000 during the three months ended September 30, 2008, which represented
the
difference between the market value quoted on the AIM market on September 30,
2008 and Entrx’s carrying value. Our
determination that there was an impairment with respect to Entrx’s investment in
the common stock of Catalytic Solutions was based upon the severity of the
decline in the quoted market price below our carrying value and our belief
that
there had been impairment indicators as discussed in EITF 03-1, including
factors that raise significant concerns about Catalytic Solution’s ability to
continue as a going concern. We previously had been carrying our Catalytic
investment at $1.17 per share. Based upon the last trade on the AIM market
on
September 26, 2008, the value would be $.7965 per share (after conversion to
US
dollars). As
a
result of these conditions, Entrx recorded an impairment charge of $150,000,
corresponding to a remaining carried value of $0.78 per share.
5. Inventories,
which consist principally of insulation products and related materials, are
stated at the lower of cost (determined on the first-in, first-out method)
or
market.
6. Blake
Capital Partners, LLC was current in the payment of interest on the shareholder
note receivable through the payment due March 1, 2006. The payment due September
1, 2006, however, was not made, and we have been informed by Mr. Mills, the
principal of Blake Capital Partners and guarantor on the note, that no payment
can be expected in the foreseeable future. For the year ended December 31,
2006,
we increased our reserve against the note receivable from Blake Capital
Partners, LLC (“Blake”) by $1,083,885 as a result of the non-payment of
interest, bringing the net of the note receivable less the reserve down to
$210,000, the approximate value of the collateral securing the note. In April
2007, the Company canceled 500,000 shares of the Company’s common stock that
were pledged as collateral on the note and applied the $115,000 value of the
stock against the outstanding note balance. The note was not repaid on the
October 31, 2007 due date. As of December 31, 2007 the Company adjusted the
net
book value of the note to $25,000, the approximate value of the remaining
collateral securing the note. The Company is also exploring its opportunities
to
obtain proceeds from the sale of the 25,000 shares (250,000 shares before a
one
for ten share reverse stock split on April 30, 2008) of VioQuest
Pharmaceuticals, Inc. common stock pledged as collateral on the note. During
the
three and nine months ended September 30, 2008, the Company recorded an
additional provision to adjust the carrying value of the note receivable to
the
approximate value of the collateral securing the note at September 30,
2008.
7. Accrued
expenses consist of the following:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Wages,
bonuses and payroll taxes
|
|
$
|
1,059,203
|
|
$
|
677,096
|
|
Union
dues
|
|
|
339,355
|
|
|
462,483
|
|
Accounting
and legal fees
|
|
|
30,000
|
|
|
42,000
|
|
Insurance
|
|
|
123,922
|
|
|
61,147
|
|
Insurance
settlement reserve
|
|
|
375,000
|
|
|
375,000
|
|
Inventory
purchases
|
|
|
-
|
|
|
44,871
|
|
Taxes
|
|
|
37,871
|
|
|
-
|
|
Other
|
|
|
164,588
|
|
|
196,451
|
|
|
|
$
|
2,129,939
|
|
$
|
1,859,048
|
|
8. As
more
fully described in our Annual Report on Form 10-KSB for the year ended December
31, 2007, the Company has granted stock options over the years to employees
and
directors under various stockholder approved stock option plans. At September
30, 2008, 2,108,900 stock options are outstanding. No stock options were granted
during the first nine months of 2008 or 2007. Stock options expiring during
the
first nine months of 2008 and 2007 were 82,730 and 4,080, respectively. Stock
warrants expiring in the first nine months of 2008 were 50,000.
9. Sales
to
significant customers were as follows:
|
|
Three Months Ended
September 30, 2008
|
|
Three Months Ended
September 30, 2007
|
|
|
|
Revenue
|
|
% of Total
Revenue
|
|
Revenue
|
|
% of Total
Revenue
|
|
Jacobs
Field Services North America, Inc.
|
|
$
|
1,209,000
|
|
|
18.0
|
%
|
$
|
1,091,000
|
|
|
22.6
|
%
|
Black
& Veatch
|
|
$
|
1,638,000
|
|
|
24.3
|
%
|
$
|
0
|
|
|
0.0
|
%
|
ARB,
Inc.
|
|
$
|
0
|
|
|
0.0
|
%
|
$
|
1,137,000
|
|
|
23.6
|
%
|
Matrix
Service, Inc.
|
|
$
|
907,000
|
|
|
13.5
|
%
|
$
|
0
|
|
|
0.0
|
%
|
CSA
Construction
|
|
$
|
0
|
|
|
0.0
|
%
|
$
|
618,000
|
|
|
12.8
|
%
|
|
|
Nine Months Ended
September 30, 2008
|
|
Nine Months Ended
September 30, 2007
|
|
|
|
Revenue
|
|
% of Total
Revenue
|
|
Revenue
|
|
% of Total
Revenue
|
|
Jacobs
Field Services North America, Inc.
|
|
$
|
3,573,000
|
|
|
17.4
|
%
|
$
|
2,503,000
|
|
|
16.8
|
%
|
BP
West Coast Products LLC
|
|
$
|
2,872,000
|
|
|
14.0
|
%
|
$
|
858,000
|
|
|
5.8
|
%
|
ARB,
Inc.
|
|
$
|
1,922,000
|
|
|
9.4
|
%
|
$
|
1,854,000
|
|
|
12.5
|
%
|
Matrix
Service, Inc.
|
|
$
|
1,451,000
|
|
|
7.1
|
%
|
$
|
2,021,000
|
|
|
13.6
|
%
|
Significant
accounts receivable were as follows:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
Accounts
Receivable
|
|
% of Total
Accounts
Receivable
|
|
Accounts
Receivable
|
|
% of Total
Accounts
Receivable
|
|
Southern
California Edison
|
|
$
|
253,000
|
|
|
4.2
|
%
|
$
|
694,000
|
|
|
20.0
|
%
|
Black
& Veatch
|
|
$
|
1,736,000
|
|
|
28.5
|
%
|
$
|
0
|
|
|
0.0
|
%
|
ARB,
Inc.
|
|
$
|
0
|
|
|
0.0
|
%
|
$
|
1,516,000
|
|
|
43.7
|
%
|
Matrix
Service, Inc.
|
|
$
|
814,000
|
|
|
13.4
|
%
|
$
|
0
|
|
|
0.0
|
%
|
Jacobs
Field Services North America, Inc.
|
|
$
|
860,000
|
|
|
14.1
|
%
|
$
|
992,000
|
|
|
28.6
|
%
|
Since
many of the projects we undertake are relatively large, it is normal that
various customers will represent a significant portion of our sales and/or
accounts receivable in a given period. It is also the nature of the Company’s
business that a significant customer in one year may not be a significant
customer in a succeeding year.
10. In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No.
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. SFAS No. 157 became effective for most fair value
measurements, other than leases and certain nonfinancial assets and liabilities,
beginning January 1, 2008. SFAS No. 157 establishes a three-level fair value
hierarchy and requires fair value disclosures based on this hierarchy. The
method used to measure the fair value of our available for sale securities
and
collateral held on a shareholder note receivable is quoted prices in active
markets for identical assets or liabilities (Level 1).
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial
Liabilities". SFAS 159 permits entities to choose to measure certain financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are reported in
earnings. SFAS 159 is effective for fiscal years beginning after November 15,
2007. The Company adopted SFAS 159 on January 1, 2008 and did not elect to
apply
SFAS 159 to its financial assets and liabilities. Therefore, the adoption of
SFAS 159 had no impact on the Company's financial position and results of
operations.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
141(R) requires the acquiring entity in a business combination to record all
assets acquired and liabilities assumed at their respective acquisition-date
fair values and changes other practices under SFAS No. 141, Business
Combinations, some of which could have a material impact on how an entity
accounts for its business combinations. SFAS 141(R) also requires additional
disclosure of information surrounding a business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008, and is to be
applied prospectively to business combinations for which the acquisition date
is
on or after December 15, 2008. The provisions of SFAS 141(R) will only impact
the Company if it is party to a business combination after the pronouncement
has
been adopted.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements – an amendment of ARB No. 51. SFAS 160
requires entities to report non-controlling minority interests in subsidiaries
as equity in consolidated financial statements. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008. The Company does not believe
that
SFAS 160 will have any impact on its financial position or results of operations
since none of its subsidiaries are owned by minority interests.
In
March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures
about Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133.
SFAS
No. 161 amends and expands upon the disclosure requirements for derivative
financial instruments and for hedging activities required under FASB Statement
No. 133 to provide users of financial statements with an enhanced understanding
of how and why an entity uses derivative financial instruments, how derivative
financial instruments are accounted for under Statement 133 and it related
interpretations, and how derivative financial instruments affect an entity’s
financial position, financial performance, and results of operations. SFAS
No.
161 is effective for financial statement and interim periods beginning after
November 15, 2008. The Company does not currently hold any derivative financial
instruments, and therefore, the Company does not expect that the adoption of
SFAS No. 161 will have a material effect on its financial statements and
disclosures.
In
May
2008, the FASB issued Statement of Financial Accounting Standards No. 162,
The
Hierarchy of Generally Accepted Accounting Principles.
This
standard is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with generally
accepted accounting principles in the United States for non-governmental
entities. SFAS No. 162 is effective 60 days following approval by the SEC of
the
Public Company Accounting Oversight Board’s amendments to AU Section 411,
The
Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles.
The
Company does not expect that the adoption of SFAS No. 162 will have a material
impact its consolidated financial statements.
11. The
number of asbestos-related cases which have been initiated naming us (primarily
our subsidiary, Metalclad Insulation Corporation) as a defendant decreased
from
232 in 2006 to 163 in 2007. At December 31, 2006 and 2007, there were,
respectively, approximately 404 and 222 cases pending. There were 134 new claims
made in the first nine months of 2008, compared to 126 in the first nine months
of 2007. There were 248 cases pending at September 30, 2008. All asbestos
related claims are currently defended and covered by insurance.
The
number of asbestos-related claims made against Entrx has reflected a general
downward trend. We believe that it is probable that this general trend will
continue, although such continuance cannot be assured. From 2001 and through
2006, the annual average indemnity paid on over 2,550 resolved cases has
fluctuated significantly, between a low of $14,504 in 2006 and a high of $26,520
in 2001, with an overall average over that period of approximately $19,131.
During this period, there has been no discernible upward or downward trend
in
indemnity payments. However, the indemnity paid on the 44 cases resolved in
the
three months ended March 31, 2008 averaged $107,308, as a result of one case
in
which the plaintiff received a jury award of $1,659,000 and three other cases
which settled for approximately $1,000,000 each. The average indemnity paid
on
resolved claims in the second and third quarters of 2008 was $1,304 and $9,500,
respectively, with an average per settled claim indemnity of approximately
$48,000 for the nine-month period ended September 30, 2008.
While
we
estimate that the average indemnity paid on all claims resolved in 2008 could
be
over $40,000, we believe that the results of the first quarter represent an
anomaly in relation to the past history of settled claims. Our methodology
for
estimating current and projected liability for asbestos-related claims,
including estimates of our future per resolved claim liability, has consistently
involved the observation of trailing multiple-year claims and expense history.
In evaluating the adequacy of our recorded liability at the end of the third
quarter, we considered the impact of the unfavorable first quarter 2008 claims
experience in our trailing, multiple-year claims and expense calculation
methodology, and concluded that the impact of the potential increase in the
projected per resolved claim liability was not sufficiently material to result
in revision of Entrx’s recorded liability. Accordingly, Entrx believes that the
unfavorable short term impact of the resolution of these four claims in the
first quarter of 2008 neither provides a better estimate nor is indicative
of a
reasonable range of the liability that might be required to resolve all
remaining known and incurred but not reported claims. Rather, we have
consistently recorded as our best estimate of liability the amount indicated
by
the trailing multiple-year claims and expense history. Accordingly, we intend
to
continue to use the $19,131 historical average indemnity payment in estimating
our aggregate asbestos-related personal injury liability until we are able
to
take into consideration the results of resolved cases during the remainder
of
2008.
We
believe that the sympathies of juries, the aggressiveness of the plaintiffs’ bar
and the declining base of potential defendants as the result of business
failures, have tended to increase payments on resolved cases. This tendency,
we
believe, has been mitigated by the declining pool of claimants resulting from
death, and the likelihood that the most meritorious claims have been ferreted
out by plaintiffs’ attorneys and that the newer cases being brought are not as
meritorious nor do they have as high a potential for damages as do cases which
were brought earlier. We have no reason to believe, therefore, that the average
future indemnity payments will increase materially in the future.
In
addition, direct defense costs per resolved claim have been approximately
$13,500 per claim.
Based
on
the general trend of reducing asbestos-related injury claims made against the
Company we projected in our Form 10-KSB filed with the Securities and Exchange
Commission for the year ended December 31, 2006 that there would be 924
asbestos-related injury claims made against the Company after December 31,
2006.
The 924, in addition to the 404 claims existing as of December 31, 2006, totaled
1,328 current and future claims. Multiplying the average indemnity per resolved
claim of $19,131, times 1,328, we projected the probable future indemnity to
be
paid on those claims after December 31, 2006 to be equal to approximately $25
million. In addition, multiplying an estimated cost of defense per resolved
claim of approximately $13,500 times 1,328, we projected the probable future
defense costs to equal approximately $18 million. Accordingly, our total
estimated future asbestos-related liability at December 31, 2006 was $43
million.
As
of
December 31, 2006, we projected that approximately 186 new asbestos-related
claims would be commenced, and approximately 237 cases would be resolved, in
2007, resulting in an estimated 353 cases pending at December 31, 2007. Although
the actual number of claims made in 2007 was 163 and the number of cases pending
as of December 31, 2007 was 222, less than we anticipated, we did not believe
the differences were significant enough to re-evaluate our estimate. In
addition, our future defense costs and average indemnity per resolved case
could
be greater than projected, and such increase could partially offset any lower
projection of liability which would result from such re-evaluation. Since we
projected that an aggregate of 738 new cases would be commenced after December
31, 2007, and that 148 of these cases would be commenced in 2008, we estimated
that an aggregate of 590 new cases would be commenced after December 31, 2008.
Accordingly, we have projected the cases pending and projected to be commenced
in the future at December 31, 2008, would be 897 cases. Multiplying 897 claims
times the approximate average indemnity paid and defense costs incurred per
resolved claim of $32,600, we estimated our liability for current and future
asbestos-related claims at December 31, 2008 to be approximately $29,000,000.
This amounts to a $7,000,000 reduction from the $36,000,000 liability we
estimated as of December 31, 2007, or a $1,750,000 reduction per quarter in
2008.
We
intend
to re-evaluate our estimate of future liability for asbestos claims at the
end
of each fiscal year, or whenever actual results are materially different from
our estimates, integrating our actual experience in that fiscal year with that
of prior fiscal years. We estimate that the effects of economic inflation on
either the average indemnity payment or the projected direct legal expenses
will
be approximately equal to a discount rate applied to our future liability based
upon the time value of money. It is probable that we have adequate insurance
to
cover current and future asbestos-related claims, although such coverage cannot
be assured.
Although
defense costs are included in our insurance coverage, we expended $15,000 and
$118,000 during the three and nine months ended September 30, 2008 and $49,000
and $222,000 during the three and nine months ended September 30, 2007 to
administer the asbestos claims and defend the ACE Lawsuit discussed below.
These
amounts were primarily fees paid to attorneys to monitor the activities of
the
insurers, and their selected defense counsel, and to look after our rights
under
the various insurance policies.
There
are
numerous insurance carriers which have issued a number of policies to us over
a
period extending from approximately 1967 through approximately 1985 that still
provide coverage for asbestos-related injury claims. After approximately 1985
the policies were issued with provisions which purport to exclude coverage
for
asbestos related claims. The terms of our insurance policies are complex, and
coverage for many types of claims is limited as to the nature of the claim
and
the amount of coverage available. It is clear, however, under California law,
where the substantial majority of the asbestos-related injury claims are
litigated, that all of those policies cover any asbestos-related injury
occurring during the 1967 through 1985 period when these policies were in
force.
We
have
determined that the minimum probable insurance coverage available to satisfy
asbestos-related injury claims significantly exceeds our estimated future
liability for such claims of $30,750,000 and $36,000,000 as of September 30,
2008 and December 31, 2007, respectively. Accordingly, we have included
$30,750,000 and $36,000,000 of such insurance coverage receivable as an asset
on
our September 30, 2008 and December 31, 2007 balance sheets, respectively.
Our
determination assumes that the current trend of reducing asbestos-related injury
claims will continue and that the average indemnity and direct legal costs
of
each resolved claim will not materially increase. The determination also assumes
that the insurance companies live up to what we believe is their obligation
to
continue to cover our exposure with regards to these claims. Several affiliated
insurance companies have brought a declaratory relief action against our
subsidiary, Metalclad, as well as a number of other insurers, to resolve certain
coverage issues as discussed below. Regardless
of our best estimates of liability for current and future asbestos-related
claims, the liability for these claims could be higher or lower than estimated
by amounts which are not predictable. We, of course, cannot give any assurance
that our liability for such claims will not ultimately exceed our available
insurance coverage. We believe, however, that our current insurance is adequate
to satisfy additional liability that is reasonably possible in the event actual
losses exceed our estimates. We will update our estimates of liability and
insurance coverage in future filings with the Securities and Exchange
Commission, as events occur which would cause us to believe that those estimates
need revision, based upon the subsequent claim experience, using the methodology
we have employed.
On
February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
Insurance Company of Omaha ("Central National") and Industrial Underwriters
Insurance Company ("Industrial"), which are all related entities, filed a
declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
in the Superior Court of the State of California, County of Los Angeles. ACE,
Central National and Industrial issued umbrella and excess policies to
Metalclad, which has sought and obtained from the plaintiffs both defense and
indemnity under these policies for the asbestos lawsuits brought against
Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
regarding a variety of coverage issues, but is centrally focused on issues
involving whether historical and currently pending asbestos lawsuits brought
against Metalclad are subject to either an "aggregate" limits of liability
or
separate "per occurrence" limits of liability. Whether any particular asbestos
lawsuit is properly classified as being subject to an aggregate limit of
liability depends upon whether or not the suit falls within the "products"
or
"completed operations" hazards found in most of the liability policies issued
to
Metalclad. Resolution of these classification issues will determine if, as
ACE
and Central National allege, their policies are nearing exhaustion of their
aggregate limits and whether or not other Metalclad insurers who previously
asserted they no longer owed any coverage obligations to Metalclad because
of
the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
additional coverage obligations. The ACE Lawsuit also seeks to determine the
effect of the settlement agreement between the Company and Allstate Insurance
Company on the insurance obligations of various other insurers of Metalclad,
and
the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
does not seek any monetary recovery from Metalclad. The
ACE
Lawsuit is principally about coverage responsibility among the several insurers,
as well as total coverage. Regardless of the outcome of this litigation, Entrx
does not believe that the ACE Lawsuit will result in materially diminishing
Entrx’s insurance coverage for asbestos-related claims.
Nonetheless, we anticipate that we will incur attorneys fees and other
associated litigation costs in defending the lawsuit and any counter claims
made
against us by any other insurers, and in prosecuting any claims we may seek
to
have adjudicated regarding our insurance coverage. In addition, the ACE Lawsuit
may result in our incurring costs in connection with obligations we may have
to
indemnify Allstate under the settlement agreement. Allstate, in a
cross-complaint filed against Metalclad Insulation Corporation in October,
2005,
asked the court to determine the Company’s obligation to assume and pay for the
defense of Allstate in the ACE Lawsuit under the Company’s indemnification
obligations in the settlement agreement. The Company does not believe that
it
has any legal obligation to assume or pay for such defense, but has accrued
$375,000 to cover potential indemnification obligations. Based upon information
known to date, the Company is unable to predict to what extent its
indemnification obligations are reasonably possible to vary from the amounts
accrued.
In
June
2004, Metalclad Insulation Corporation, our wholly owned subsidiary, and Entrx
Corporation, entered into a Settlement Agreement and Full Policy Release (the
“Agreement”) releasing Allstate Insurance Company from its policy obligations
for a broad range of claims arising from injury or damage which may have
occurred during the period March 15, 1980 to March 15, 1981, under an umbrella
liability policy (the “Policy”). The Policy provided limits of $5,000,000 in the
aggregate and per occurrence. Allstate claimed that liability under the Policy
had not attached, and that regardless of that fact, an exclusion in the Policy
barred coverage for virtually all claims of bodily injury from exposure to
asbestos, which is of primary concern to Metalclad Insulation Corporation.
Metalclad Insulation Corporation took the position that such asbestos coverage
existed. The parties to the Agreement reached a compromise, whereby Metalclad
Insulation Corporation received $2,500,000 in cash, and Metalclad Insulation
Corporation and Entrx Corporation agreed to indemnify and hold harmless the
insurer from all claims which could be alleged against the insurer respecting
the policy, limited to $2,500,000 in amount. Based on past experience related
to
asbestos insurance coverage, we believe that the Agreement we entered into
in
June 2004, will result in a probable loss contingency for future insurance
claims based on the indemnification provision in the Agreement. Although we
are
unable to estimate the exact amount of the loss, we believe at this time the
reasonable estimate of the loss will not be less than $375,000 or more than
$2,500,000 (the $2,500,000 represents the maximum loss we would have based
on
the indemnification provision in the Agreement). Based on the information
available to us, no amount in this range appears at this time to be a better
estimate than any other amount. The $375,000 estimated loss contingency noted
in
the above range represents 15% of the $2,500,000 we received and is based upon
our attorney’s informal and general inquiries to an insurance company of the
cost for us to purchase an insurance policy to cover the indemnification
provision we entered into. The ACE Lawsuit may result in our incurring costs
in
connection with obligations we may have to indemnify Allstate under the
Settlement Agreement. Allstate, in a cross-complaint filed against Metalclad
Insulation Corporation in October, 2005, asked the court to determine the
Company’s obligation to assume and pay for the defense of Allstate in the ACE
Lawsuit under the Company’s indemnification obligations in the Settlement
Agreement. The Company is taking the position that it has no legal obligation
to
assume or pay for such defense. If
Allstate is required to provide indemnity for Entrx’s asbestos-related lawsuits,
it is likely that Entrx would have to indemnify Allstate for asbestos-related
claims that it defends up to $2,500,000 in the aggregate. If Allstate is not
required to provide indemnity, Entrx would have no liability to Allstate. Entrx
has accrued $375,000 as a potential loss in connection with the Allstate matter
and nothing has come to our attention that would require us to record a
different estimate at September 30, 2008.
12. Supplemental
disclosures of cash flow information:
Cash
paid
for interest was $5,159 and $9,409 for the nine months ended September 30,
2008
and 2007, respectively.
13. Subsequent
event
The
Company’s subsidiary, Metalclad Insulation Corporation, is one of a group of
employers with a collective bargaining agreement with Local No. 5 -
International Association of Heat and Frost Insulators and Asbestos Workers
("Local No. 5"). The term of the current contract with Local No. 5 expired
in
September 2008. Metalclad Insulation Corporation and the other employers have
agreed with the negotiating representatives of Local No. 5 for an extension
of
the expired contract while the parties continue their efforts to establish
a new
agreement. Such extension is subject to termination upon 72 hour
notice.
Item
2. Management’s
Discussion and Analysis of
Financial Condition and Results of Operations
All
statements, other than statements of historical fact, included in this Form
10-Q, including without limitation the statements under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Description
of Business” are, or may be deemed to be, “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements involve assumptions, known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements
of
Entrx Corporation (the “Company”) to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements contained in this Form 10-Q. Such potential risks
and
uncertainties include, without limitation; the outcome of existing litigation;
competitive pricing and other pressures from other businesses in the Company’s
markets; the accuracy of the Company’s estimate of future liability for
asbestos-related injury claims; the adequacy of insurance, including the
adequacy of insurance to cover current and future asbestos-related injury
claims; the valuation of the Company’s investments; collectibility of a loan due
from an affiliate of, and guaranteed by, a principal shareholder; economic
conditions generally and in the Company’s primary markets; availability of
capital; the adequacy of the Company’s cash and cash equivalents; the cost of
labor; the accuracy of the Company’s cost analysis for fixed price contracts;
and other risk factors detailed herein and in other of the Company’s filings
with the Securities and Exchange Commission. The forward-looking statements
are
made as of the date of this Form 10-Q and the Company assumes no obligation
to
update the forward-looking statements or to update the reasons actual results
could differ from those projected in such forward-looking statements. Therefore,
readers are cautioned not to place undue reliance on these forward-looking
statements. You
can
identify these forward-looking statements by forward-looking words such as
“may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,”
“continue,” and similar words.
General.
The
Company provides insulation installation and removal services, including
asbestos abatement services, primarily on the West Coast. We also enter into
contracts to repair and maintain existing insulation systems. These maintenance
contracts are generally awarded on a year to year basis, but are often renewed
from year to year. Through our wholly-owned subsidiary Metalclad Insulation
Corporation, we provide these services to a wide range of industrial, commercial
and public agency clients. Insulation installation services include the
installation of high- and low-temperature insulation on pipe, ducts, furnaces,
boilers, and other types of industrial equipment and commercial applications.
Insulation removal services involve the removal of old insulation prior to
the
installation of new insulation or system demolition, including the removal
and
disposal of asbestos-containing products. We fabricate specialty items for
the
insulation industry, and sell insulation material and accessories incidental
to
our services business to our customers as well as to other contractors. A
diverse list of clientele includes refineries, utilities, chemical/petrochemical
plants, manufacturing facilities, commercial properties, office buildings and
various governmental facilities.
Results
of Operations: Three and Nine Months Ended September 30, 2008 and
2007
Revenue
Revenue
for the three months ended September 30, 2008 was $6,736,000, an increase of
39.7% as compared to $4,823,000 for the three months ended September 30, 2007.
Revenue for the nine months ended September 30, 2008 was $20,496,000, an
increase of 38.0% as compared to $14,857,000 for the nine months ended September
30, 2007. Revenues increased during the three and nine months ended September
30, 2008 as compared with the nine months ended September 30, 2007 primarily
as
result of the Company obtaining new maintenance contracts, and hiring additional
project managers which has allowed the Company to bid on more projects in 2008
and ultimately increased the number of jobs in which we were the winning
bidder.
Approximately
50% and 63% of the revenues for the three and nine months ended September 30,
2008, respectively, were from insulation maintenance contracts, which often
continue from year to year. This compares with 42% and 63% of our revenues
being derived from insulation maintenance contracts in the three and nine months
ended September 30, 2007, respectively. Approximately 49% and 35% of
revenues in the three and nine months ended September 30, 2008, respectively,
were derived from insulation installation and removal projects, which are not
normally continuing, but can go on for a year or more. This compares with
58% and 37% of our revenues being derived from insulation installation and
removal projects in the three and nine months ended September 30, 2007,
respectively. These percentages are approximate because some installation and
removal projects involve maintenance arrangements, and visa versa. The Company
bids on hundreds of projects during any given year. These projects range in
value from a few hundred dollars to multi-million dollar projects, and the
projects can last from a few hours up to over a year in duration. The
Company cannot predict what projects will be coming up for bid in any particular
period, or whether it will be the winning bidder. Accordingly, the Company
is unable to determine if the revenue trends, or the allocation between
maintenance contracts and installation and removal contracts, will
continue.
Cost
of Revenue and Gross Margin
Cost
of
revenue was $5,661,000 for the three months ended September 30, 2008, as
compared to $3,817,000 for the three months ended September 30, 2007. Cost
of
revenue was $16,984,000 for the nine months ended September 30, 2008, as
compared to $12,221,000 for the nine months ended September 30, 2007. The gross
margin percentage was approximately 16.0% for the three months ended September
30, 2008 as compared to 20.9% for the three months ended September 30, 2007.
The
gross margin percentage was approximately 17.1% for the nine months ended
September 30, 2008 as compared to 17.7% for the nine months ended September
30,
2007. The decrease in the gross margin percentage during the three and nine
months ended September 30, 2008 as compared with the three and nine months
ended
September 30, 2007 is primarily the result of low margins on one major fixed-bid
project, partially offset by lower rates on our workers compensation insurance
and the Company’s expansion into commercial insulation and abatement, which
generally allows for higher gross margins than industrial insulation and
abatement. While the gross margin percentage varies from job to job, insulation
maintenance contracts generally have a lower gross margin percentage than
insulation installation and removal contracts.
Selling,
General and Administrative
Selling,
general and administrative expenses for the three months ended September 30,
2008 were $925,000 as compared to $822,000 for the comparable period ended
September 30, 2007, an increase of 12.5%. Selling, general and administrative
expenses for the nine months ended September 30, 2008 were $2,737,000 as
compared to $2,158,000 for the comparable period ended September 30, 2007,
an
increase of 26.8%. The increase for the three and nine months ended September
30, 2008 as compared to the three and nine months ended September 30, 2007
was
primarily due to increases in payroll, the accrual for bonuses, auto expense,
and entertainment expense. The increase in payroll expense was primarily due
to
an increase in the number of project managers at the Company which allows the
Company to bid on more projects. For the three and nine months ended September
30, 2008, the overall increase in selling, general and administrative costs
was
partially offset by a decrease in legal expenses.
Change
in Allowance on Shareholder Note Receivable
Blake
Capital Partners, LLC was current in the payment of interest on the shareholder
note receivable through the payment due March 1, 2006. The payment due September
1, 2006, however, was not made, and we have been informed by Mr. Mills, the
principal of Blake Capital Partners and guarantor on the note, that no payment
can be expected in the foreseeable future. For the year ended December 31,
2006,
we increased our reserve against the note receivable from Blake Capital
Partners, LLC (“Blake”) by $1,083,885 as a result of the non-payment of
interest, bringing the net of the note receivable less the reserve down to
$210,000, the approximate value of the collateral securing the note. In April
2007, the Company canceled 500,000 shares of the Company’s common stock that
were pledged as collateral on the note and applied the $115,000 value of the
stock against the outstanding note balance. The note was not repaid on the
October 31, 2007 due date. As of December 31, 2007 the Company adjusted the
net
book value of the note to $25,000, the approximate value of the collateral
securing the note. The Company is exploring its opportunities to obtain proceeds
from the sale of the 25,000 shares (250,000 shares before a one for ten share
reverse stock split on April 30, 2008) of VioQuest Pharmaceuticals, Inc. common
stock pledged as collateral on the note. As such, the Company adjusted the
carrying value of the note receivable to the approximate value of the collateral
securing the note at September 30, 2008. The Company decreased the allowance
on
the shareholder note receivable $5,750 for the three months ended September
30,
2008 and increased the allowance on the shareholder note receivable $11,000
for
the nine months ended September 30, 2008, and increased the reserve $20,000
for
both the three and nine months ended September 30, 2007.
Gain
on Disposal of Property, Plant and Equipment
Gain
on
the disposal of property plant and equipment was $3,000 and $4,000 for the
three
months ended September 30, 2008 and 2007, respectively. Gain on the disposal
of
property plant and equipment was $17,000 and $7,000 for the nine months ended
September 30, 2008 and 2007, respectively.
Interest
Income and Expense
Interest
income for the three months ended September 30, 2008 was $7,000 as compared
to
interest income of $17,000 for the three months ended September 30, 2007.
Interest income for the nine months ended September 30, 2008 was $28,000 as
compared to interest income of $46,000 for the nine months ended September
30,
2007. Interest expense for the three months ended September 30, 2008 was $2,000
as compared to interest expense of $1,000 for the three months ended September
30, 2007. Interest expense for the nine months ended September 30, 2008 was
$5,000 as compared to interest expense of $9,000 for the nine months ended
September 30, 2007.
Impairment
Charge on Available-for-Sale Securities
The
Company recognized impairment charges of $265,000 and $451,000 on its available
for sale securities during the three and nine months ended September 30, 2008,
respectively. The Company recognized impairment charges of $115,000 and $289,000
on its investment in Clearwire Corporation for the three and nine months ended
September 30, 2008, respectively. The Company also recognized an impairment
charge of $150,000 on its investment in Catalytic Solutions, Inc. during the
three and nine months ended September 30, 2008, respectively and an impairment
charge of $12,000 on its investment in VioQuest Pharmaceuticals, Inc. during
the
nine months ended September 30, 2008.
Net
Income
We
had a
net loss of $101,000 for the three months ended September 30, 2008 as compared
to net income of $184,000 for the three months ended September 30, 2007. We
had
net income of $354,000 for the nine months ended September 30, 2008 as compared
to net income of $502,000 for the nine months ended September 30,
2007.
Liquidity
and Capital Resources
As
of
September 30, 2008, we had $1,117,000 in cash and cash equivalents and $780,000
in available-for-sale securities. The Company also had $800,000 of restricted
cash related to issuing a $800,000 irrevocable standby letter of credit for
the
benefit of one of our customers in connection with a contract for the customer.
The letter of credit expires on the earlier of (a) December 31, 2008, or (b)
the
date on which the amount of the letter of credit is reduced to zero by the
customer’s draws, or (c) the date on which the letter of credit has been
returned to the bank. Should the completion of the underlying project require
an
extension, the Company may need to extend the term of the letter of credit.
The
Company purchased a $800,000 six-month certificate of deposit and pledged it
as
collateral to the issuer of the irrevocable standby letter of credit. The
Company had working capital of $6,273,000 as of September 30, 2008. We own
19,057 shares (190,566 shares before a one for ten share reverse stock split
on
April 30, 2008) of the common stock of VioQuest Pharmaceuticals, Inc., the
common stock of which is publicly traded on the OTC Bulletin Board under the
symbol “VOQP”. Of the 19,057 shares, 7,500 shares are subject to options
exercisable by one current and two former members of our Board of Directors
at
$12.50 per share. We also own 39,415 shares of Clearwire Corporation’s common
stock (NASDAQ: CLWR) and 384,084 shares of Catalytic Solutions, Inc. common
stock (AIM: CTSU).
In
an
effort to increase shareholder value and to diversify from our insulation
services business, we have made an equity investment in Catalytic Solutions,
Inc., that is not in the insulation services business and which we believed
had
the ability to provide acceptable return on our investment. The Company
determined that there had been an impairment with respect to Entrx’s investment
in the common stock of Catalytic Solutions based upon the severity of declines
in the market price of the common stock below our carrying value and our belief
that there had been impairment indicators as discussed in EITF 03-1, including
factors that raise significant concerns about Catalytic Solution’s ability to
continue as a going concern. The shares in Catalytic Solutions are traded on
the
London Stock Exchange’s Alternative International Market for smaller company’s
(the “AIM”). We therefore recognized a $150,000 impairment on this investment
during the three months ended September 30, 2008, representing the difference
between our carrying value and the quoted market price on September 30, 2008.
Catalytic Solutions, Inc. manufactures and delivers proprietary technology
that
improves the performance and reduces the cost of catalytic
converters.
Blake
Capital Partners, LLC was current in the payment of interest on the shareholder
note receivable through the payment due March 1, 2006. The payment due September
1, 2006, however, was not made, and we have been informed by Mr. Mills, the
principal of Blake Capital Partners and guarantor on the note, that no payment
can be expected in the foreseeable future. For the year ended December 31,
2006,
we increased our reserve against the note receivable from Blake Capital
Partners, LLC (“Blake”) by $1,083,885 as a result of the non-payment of
interest, bringing the net of the note receivable less the reserve down to
$210,000, the approximate value of the collateral securing the note. In April
2007, the Company canceled 500,000 shares of the Company’s common stock that
were pledged as collateral on the note and applied the $115,000 value of the
stock against the outstanding note balance. The note was not repaid on the
October 31, 2007 due date. As of December 31, 2007 the Company adjusted the
net
book value of the note to $25,000, the approximate value of the remaining
collateral securing the note. The Company is exploring its opportunities to
obtain proceeds from the sale of the 25,000 shares of VioQuest Pharmaceuticals,
Inc. common stock pledged as collateral on the note. As such, the Company
adjusted the carrying value of the note receivable to the approximate value
of
the collateral securing the note at September 30, 2008. The Company decreased
the allowance on the shareholder note receivable $5,750 for the three months
ended September 30, 2008 and increased the allowance on the shareholder note
receivable $11,000 for the nine months ended September 30, 2008, and increased
the allowance $20,000 for the three and nine months ended September 30,
2007.
Cash
provided by operations was $581,000 for the nine months ended September 30,
2008
compared with cash provided by operations of $157,000 for the nine months ended
September 30, 2007. For the nine months ended September 30, 2008 the positive
cash flow from operations was primarily the result of our $354,000 of net
income, the impact of non-cash impairment charges on available-for-sale
securities totaling $451,000, an increase in accounts payable and accrued
expenses of $540,000 and an increase of $286,000 in billings in excess of costs
and estimated earnings on uncompleted contracts. This positive cash flow was
partially offset by a increase in accounts receivable of $549,000 and an
increase in costs and estimated earnings in excess of billings on uncompleted
contracts of $612,000. For the nine months ended September 30, 2007 the positive
cash flow from operations was primarily the result of our $502,000 net income
and a $193,000 increase in billings in excess of costs and estimated earnings
on
uncompleted contracts, partially offset by an increase in accounts receivable
of
$402,000, a $199,000 increase in prepaid expenses and a $178,000 decrease in
accounts payable and accrued expenses.
Net
investing activities used $800,000 and $172,000 of cash in the nine months
ended
September 30, 2008 and 2007, respectively. For the nine months ended September
30, 2007, we used cash of $211,000, for capital expenditures, primarily at
our
subsidiary, Metalclad Insulation Corporation. During the nine months ended
September 30, 2007, cash of $39,000 was provided by proceeds from sales of
assets. During the nine months ended September 30, 2008, we used cash of
$800,000 to secure a letter of credit in lieu of a performance
bond.
Cash
used
in financing activities totaled $109,000 for the nine months ended September
30,
2008 compared with cash provided by financing activities of $69,000 for the
comparable period in 2007. Proceeds from long-term debt provided $0 and $158,000
of cash during the nine months ended September 30, 2008 and 2007, respectively.
Payments on long-term borrowings used $109,000 and $89,000 of cash in the nine
months ended September 30, 2008 and 2007, respectively.
As
of
September 30, 2008, our subsidiary, Metalclad Insulation Corporation, employed
approximately 220 hourly employees for insulation and asbestos/lead abatement
contracting services, nearly all of whom are members of Local No. 5 -
International Association of Heat and Frost Insulators and Asbestos Workers
("Local No. 5") or Laborers Local Union 300, which makes hourly employees
available to us under collective bargaining agreements. The number of hourly
employees employed by us fluctuates depending upon the number and size of
projects that we have under construction at any particular time. It has been
our
experience that hourly employees are generally available for our projects,
and
we have continuously employed a number of hourly employees on various projects
over an extended period of time. We consider our relations with our hourly
employees and the unions representing them to be good, and have not experienced
any recent work stoppages due to strikes by such employees. The term of the
current contract with Local No. 5 expired in September 2008. Metalclad
Insulation Corporation and the other employers with similar expired contracts
have agreed with the negotiating representatives of Local No. 5 for an extension
of the expired contracts while the parties continue their efforts to establish
a
new agreement to be entered into by each of the employers and Local No. 5.
Such
extension is subject to termination upon 72 hour notice.
The
number of asbestos-related cases which have been initiated naming us (primarily
our subsidiary, Metalclad Insulation Corporation) as a defendant decreased
to
265 in 2004 and to 199 in 2005, but increased in 2006 to 232. The number
decreased to 163 in 2007. At December 31, 2004, 2005, 2006 and 2007, there
were,
respectively, approximately 710, 507, 404 and 222 cases pending. These claims
are currently defended and covered by insurance. There were 134 new claims
made
in the first nine months of 2008, compared to 126 in the first nine months
of
2007, and 108 cases resolved in the first nine months of 2008, compared to
290
cases resolved in the first nine months of 2007. There were 248 cases pending
at
September 30, 2008. These claims are currently defended and covered by
insurance.
The
number of asbestos-related claims made against Entrx has reflected a general
downward trend. We believe that it is probable that this general trend will
continue, although such continuance cannot be assured. From 2001 and through
2006, the annual average indemnity paid on over 2,550 resolved cases has
fluctuated significantly, between a low of $14,504 in 2006 and a high of $26,520
in 2001, with an overall average over that period of approximately $19,131.
During this period, there has been no discernible upward or downward trend
in
indemnity payments. However, the indemnity paid on the 44 cases resolved in
the
three months ended March 31, 2008 averaged $107,308, as a result of one case
in
which the plaintiff received a jury award of $1,659,000 and three other cases
which settled for approximately $1,000,000 each. The average indemnity paid
on
resolved claims in the second and third quarters of 2008 was $1,304 and $9,500,
respectively, with an average per settled claim indemnity of approximately
$48,000 for the nine-month period ended September 30, 2008.
While
we
estimate that the average indemnity paid on all claims resolved in 2008 could
be
over $40,000, we believe that the results of the first quarter represent an
anomaly in relation to the past history of settled claims. Our methodology
for
estimating current and projected liability for asbestos-related claims,
including estimates of our future per resolved claim liability, has consistently
involved the observation of trailing multiple-year claims and expense history.
In evaluating the adequacy of our recorded liability at the end of the third
quarter, we considered the impact of the unfavorable first quarter 2008 claims
experience in our trailing, multiple-year claims and expense calculation
methodology, and concluded that the impact of the potential increase in the
projected per resolved claim liability was not sufficiently material to result
in revision of Entrx’s recorded liability. Accordingly, Entrx believes that the
unfavorable short term impact of the resolution of these four claims in the
first quarter of 2008 neither provides a better estimate nor is indicative
of a
reasonable range of the liability that might be required to resolve all
remaining known and incurred but not reported claims. Rather, we have
consistently recorded as our best estimate of liability the amount indicated
by
the trailing multiple-year claims and expense history. Accordingly, we intend
to
continue to use the $19,131 historical average indemnity payment in estimating
our aggregate asbestos-related personal injury liability until we are able
to
take into consideration the results of resolved cases during the remainder
of
2008.
We
believe that the sympathies of juries, the aggressiveness of the plaintiffs’ bar
and the declining base of potential defendants as the result of business
failures, have tended to increase payments on resolved cases. This tendency,
we
believe, has been mitigated by the declining pool of claimants resulting from
death, and the likelihood that the most meritorious claims have been ferreted
out by plaintiffs’ attorneys and that the newer cases being brought are not as
meritorious nor do they have as high a potential for damages as do cases which
were brought earlier. We have no reason to believe, therefore, that the average
future indemnity payments will increase materially in the future.
In
addition, direct defense costs per resolved claim increased from $8,514 in
2003
to $16,700 in 2007. We believe that these defense costs increased as a result
of
a change in legal counsel in 2004, and the more aggressive defense posture
taken
by new legal counsel since that change. We do not believe that the defense
costs
will increase materially in the future, and are projecting those costs to be
approximately $13,500 per claim.
Based
on
the general trend of reducing asbestos-related injury claims made against the
Company over the prior six calendar years, we projected in our Form 10-KSB
filed
with the Securities and Exchange Commission for the year ended December 31,
2006
that there would be 924 asbestos-related injury claims made against the Company
after December 31, 2006. The 924, in addition to the 404 claims existing as
of
December 31, 2006, totaled 1,328 current and future claims. Multiplying the
average indemnity per resolved claim of $19,131, times 1,328, we projected
the
probable future indemnity to be paid on those claims after December 31, 2006
to
be equal to approximately $25 million. In addition, multiplying an estimated
cost of defense per resolved claim of approximately $13,500 times 1,328, we
projected the probable future defense costs to equal approximately $18 million.
Accordingly, our total estimated future asbestos-related liability at December
31, 2006 was $43 million.
As
of
December 31, 2006, we projected that approximately 186 new asbestos-related
claims would be commenced, and approximately 237 cases would be resolved, in
2007, resulting in an estimated 353 cases pending at December 31, 2007. Although
the actual number of claims made in 2007 was 163, and the number of cases
pending as of December 31, 2007 was 222, less than we anticipated, we do not
believe the differences are significant enough to re-evaluate our estimate.
In
addition, our future defense costs and average indemnity per resolved case
could
be greater than projected, and such increase could partially offset any lower
projection of liability which would result from such re-evaluation. Since we
projected that an aggregate of 738 new cases would be commenced after December
31, 2007, and that 148 of these cases would be commenced in 2008, we estimated
that an aggregate of 590 new cases would be commenced after December 31, 2008.
Accordingly, we have projected the cases pending and projected to be commenced
in the future at December 31, 2008, would be 897 cases. Multiplying 897 claims
times the approximate average indemnity paid and defense costs incurred per
resolved claim from 2002 through 2006 of $32,600, we estimated our liability
for
current and future asbestos-related claims at December 31, 2008 to be
approximately $29,000,000. This amounts to a $7,000,000 reduction from the
$36,000,000 liability we estimated as of December 31, 2007, or a $1,750,000
reduction per quarter in 2008.
We
intend
to re-evaluate our estimate of future liability for asbestos claims at the
end
of each fiscal year, or whenever actual results are materially different from
our estimates, integrating our actual experience in that fiscal year with that
of prior fiscal years since 2002. We estimate that the effects of economic
inflation on either the average indemnity payment or the projected direct legal
expenses will be approximately equal to a discount rate applied to our future
liability based upon the time value of money. It is probable that we have
adequate insurance to cover current and future asbestos-related claims, although
such coverage cannot be assured.
Although
defense costs are included in our insurance coverage, we expended $174,000,
$304,000, $188,000, $215,000 and $296,000 in 2003, 2004, 2005, 2006 and 2007,
respectively, and $118,000 in the nine months ended September 30, 2008 to
administer the asbestos claims and defend the ACE Lawsuit discussed below.
These
amounts were primarily fees paid to attorneys to monitor the activities of
the
insurers, and their selected defense counsel, and to look after our rights
under
the various insurance policies.
There
are
numerous insurance carriers which have issued a number of policies to us over
a
period extending from approximately 1967 through approximately 1985 that still
provide coverage for asbestos-related injury claims. After approximately 1985
the policies were issued with provisions which purport to exclude coverage
for
asbestos related claims. The terms of our insurance policies are complex, and
coverage for many types of claims is limited as to the nature of the claim
and
the amount of coverage available. It is clear, however, under California law,
where the substantial majority of the asbestos-related injury claims are
litigated, that all of those policies cover any asbestos-related injury
occurring during the 1967 through 1985 period when these policies were in
force.
We
have
determined that the minimum probable insurance coverage available to satisfy
asbestos-related injury claims significantly exceeds our estimated future
liability for such claims of $30,750,000 and $36,000,000 as of September 30,
2008 and December 31, 2007, respectively. Accordingly, we have included
$30,750,000 and $36,000,000 of such insurance coverage receivable as an asset
on
our September 30, 2008 and December 31, 2007 balance sheets, respectively.
Our
determination assumes that the current trend of reducing asbestos-related injury
claims will continue and that the average indemnity and direct legal costs
of
each resolved claim will not materially increase. The determination also assumes
that the insurance companies live up to what we believe is their obligation
to
continue to cover our exposure with regards to these claims. Several affiliated
insurance companies have brought a declaratory relief action against our
subsidiary, Metalclad, as well as a number of other insurers, to resolve certain
coverage issues, as discussed below in Part II, Item 1, “Legal Proceedings –
Insurance Coverage Litigation.” Regardless
of our best estimates of liability for current and future asbestos-related
claims, the liability for these claims could be higher or lower than estimated
by amounts which are not predictable. We, of course, cannot give any assurance
that our liability for such claims will not ultimately exceed our available
insurance coverage. We believe, however, that our current insurance is adequate
to satisfy additional liability that is reasonably possible in the event actual
losses exceed our estimates. We will update our estimates of liability and
insurance coverage in future filings with the Securities and Exchange
Commission, as events occur which would cause us to believe that those estimates
need revision, based upon the subsequent claim experience, using the methodology
we have employed.
On
February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
Insurance Company of Omaha ("Central National") and Industrial Underwriters
Insurance Company ("Industrial"), which are all related entities, filed a
declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
in the Superior Court of the State of California, County of Los Angeles. ACE,
Central National and Industrial issued umbrella and excess policies to
Metalclad, which has sought and obtained from the plaintiffs both defense and
indemnity under these policies for the asbestos lawsuits brought against
Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
regarding a variety of coverage issues, but is centrally focused on issues
involving whether historical and currently pending asbestos lawsuits brought
against Metalclad are subject to either an "aggregate" limits of liability
or
separate "per occurrence" limits of liability. Whether any particular asbestos
lawsuit is properly classified as being subject to an aggregate limit of
liability depends upon whether or not the suit falls within the "products"
or
"completed operations" hazards found in most of the liability policies issued
to
Metalclad. Resolution of these classification issues will determine if, as
ACE
and Central National allege, their policies are nearing exhaustion of their
aggregate limits and whether or not other Metalclad insurers who previously
asserted they no longer owed any coverage obligations to Metalclad because
of
the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
additional coverage obligations. The ACE Lawsuit also seeks to determine the
effect of the settlement agreement between the Company and Allstate Insurance
Company on the insurance obligations of various other insurers of Metalclad,
and
the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
does not seek any monetary recovery from Metalclad. The
ACE
Lawsuit is principally about coverage responsibility among the several insurers,
as well as total coverage. Regardless of the outcome of this litigation, Entrx
does not believe that the ACE Lawsuit will result in materially diminishing
Entrx’s insurance coverage for asbestos-related claims.
Nonetheless, we anticipate that we will incur attorneys fees and other
associated litigation costs in defending the lawsuit and any counter claims
made
against us by any other insurers, and in prosecuting any claims we may seek
to
have adjudicated regarding our insurance coverage. In addition, the ACE Lawsuit
may result in our incurring costs in connection with obligations we may have
to
indemnify Allstate under a settlement agreement. Allstate, in a cross-complaint
filed against Metalclad Insulation Corporation in October, 2005, asked the
court
to determine the Company’s obligation to assume and pay for the defense of
Allstate in the ACE Lawsuit under the Company’s indemnification obligations in
the settlement agreement. The Company does not believe that it has any legal
obligation to assume or pay for such defense. If
Allstate is required to provide indemnity for Entrx’s asbestos-related lawsuits,
it is likely that Entrx would have to indemnify Allstate for asbestos-related
claims that it defends up to $2,500,000 in the aggregate. If Allstate is not
required to provide indemnity, Entrx would have no liability to Allstate. Entrx
has accrued $375,000 as a potential loss in connection with the Allstate matter.
Based
upon information known to date, the Company is unable to predict to what extent
its indemnification obligations are reasonably possible to vary from the amounts
accrued.
The
Company projects that cash flow generated through the operation of its
subsidiary, Metalclad Insulation Corporation, and the Company’s net cash assets
as of September 30, 2008 will be sufficient to meet the Company’s cash
requirements for at least the next twelve months.
Significant
Accounting Policies
Our
significant accounting policies are described in Note 1 to the consolidated
financial statements included in our annual report for the year ended December
31, 2007. The accounting policies used in preparing our interim 2008
consolidated condensed financial statements are the same as those described
in
our annual report.
Our
critical accounting policies are those both having the most impact to the
reporting of our financial condition and results, and requiring significant
judgments and estimates. Our critical accounting policies include those related
to (a) revenue recognition, (b) valuation of investments, (c) allowances for
uncollectible notes and accounts receivable, (d) judgments and estimates used
in
determining the need for an accrual, and the amount, of our asbestos liability,
and (e) evaluation and estimates of our probable insurance coverage for
asbestos-related claims. Revenue recognition for fixed price insulation
installation and asbestos abatement contracts are accounted for by the
percentage-of-completion method, wherein costs and estimated earnings are
included in revenues as the work is performed. If a loss on a fixed price
contract is indicated, the entire amount of the estimated loss is accrued when
known. Revenue recognition on time and material contracts is recognized based
upon the amount of work performed. We have made investments in companies which
can still be considered to be in the startup or development stages. We monitor
these investments for impairment considering factors such as the severity and
duration of any decline in fair value, our ability and intent to retain our
investment for a period of time sufficient to allow for a recovery of market
value and based on the financial condition and near-term prospects of these
companies. We make appropriate reductions in carrying values if we determine
an
impairment charge is required. These investments are inherently risky, as the
markets for the technologies or products these companies are developing are
typically in the early stages and may never materialize. Notes and accounts
receivable are reduced by an allowance for amounts that may become uncollectible
in the future. The estimated allowance for uncollectible amounts is based
primarily on our evaluation of the financial condition of the noteholder or
customer. Future changes in the financial condition of a note payee or customer
may require an adjustment to the allowance for uncollectible notes and accounts
receivable. We have estimated the probable amount of future claims related
to
our asbestos liability and the probable amount of insurance coverage related
to
those claims. We offset proceeds received from our insurance carriers resulting
from claims of personal injury allegedly related to asbestos exposure against
the payment issued to the plaintiff. The cash from the insurance company goes
directly to the plaintiff, so we never have access to this cash. We never have
control over any of the funds the insurance company issues to the plaintiff.
Once a claim is settled, payment of the claim is normally made by the insurance
carrier or carriers within 30 to 60 days. Changes in any of the judgments and
estimates could have a material impact on our financial condition and results
of
operations.
Recent
Accounting Pronouncements
See
footnote 10 of the financial statements.
Item
4T.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
have
established disclosure controls and procedures to ensure that material
information relating to the Company is made known to the officers who certify
the financial statements and to other members of senior management and the
Audit
Committee of the Board.
We
conducted an evaluation, under the supervision and with the participation of
our
chief executive officer and chief financial officer of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934). Based on this evaluation our chief
executive officer and chief financial officer have concluded that, as of
September 30, 2008, our disclosure controls and procedures are
effective.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal controls over financial reporting for
the
three-months ended September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II
OTHER
INFORMATION
Item
1. Legal
Proceedings
Asbestos-related
Claims
Prior
to
1975, we were engaged in the sale and installation of asbestos-related
insulation materials, which has resulted in numerous claims of personal injury
allegedly related to asbestos exposure. Many of these claims are now being
brought by the children and close relatives of persons who have died, allegedly
as a result of the direct or indirect exposure to asbestos. To date all of
our
asbestos-related injury claims have been paid and defended by our insurance
carriers.
The
number of asbestos-related cases which have been initiated naming us (primarily
our subsidiary, Metalclad Insulation Corporation) as a defendant decreased
from
265 in 2004 and to 199 in 2005, but increased in 2006 to 232. The number
decreased to 163 in 2007 and was 134 for the nine months ended September 30,
2008. At December 31, 2004, 2005, 2006 and 2007, there were, respectively,
approximately 710, 507, 404 and 222 cases pending. As of September 30, 2008,
there were 248 cases pending. These claims are currently defended and covered
by
insurance.
Set
forth
below is a table for the years ended December 31, 2004, 2005, 2006, 2007 and
the
nine months ended September 30, 2008, which sets forth for each such period
the
approximate number of asbestos-related cases filed, the number of such cases
resolved by dismissal or by trial, the number of such cases resolved by
settlement, the total number of resolved cases, the number of filed cases
pending at the end of such period, the total indemnity paid on all resolved
cases, the average indemnity paid on all settled cases and the average indemnity
paid on all resolved cases:
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Nine Months
Ended
September 30,
2008
|
|
New
cases filed
|
|
|
265
|
|
|
199
|
|
|
232
|
|
|
163
|
|
|
134
|
|
Defense
judgments and dismissals
|
|
|
311
|
|
|
294
|
(3)
|
|
253
|
|
|
292
|
(3)
|
|
89
|
|
Plaintiff
judgments and Settled cases
|
|
|
97
|
|
|
108
|
|
|
82
|
|
|
53
|
|
|
19
|
|
Total
resolved cases (1)
|
|
|
408
|
|
|
402
|
(3)
|
|
335
|
|
|
345
|
(3)
|
|
108
|
|
Pending
cases (1)
|
|
|
710
|
|
|
507
|
(2,3)
|
|
404
|
|
|
222
|
(3)
|
|
248
|
|
Total
indemnity payments
|
|
$
|
6,366,750
|
|
$
|
8,513,750
|
|
$
|
4,858,750
|
|
$
|
7,974,500
|
|
$
|
5,140,050
|
|
Average
indemnity paid on plaintiff judgments and settled cases
|
|
$
|
65,637
|
|
$
|
78,831
|
|
$
|
59,253
|
|
$
|
150,462
|
|
$
|
270,529
|
|
Average
indemnity paid on all resolved cases
|
|
$
|
15,605
|
|
$
|
21,178
|
(2)
|
$
|
14,504
|
|
$
|
23,114
|
|
$
|
47,593
|
|
(1) |
Total
resolved cases includes, and the number of pending cases excludes,
cases
which have been settled but which have not been closed for lack of
final
documentation or payment.
|
(2) |
The
average indemnity paid on resolved cases does not include, and the
number
of pending cases includes, a jury award rendered on March 22, 2005
and a
judgment on that award rendered on April 4, 2005, finding Metalclad
Insulation Corporation liable for $1,117,000 in damages, which is
covered
by insurance. The judgment is being appealed by our
insurer.
|
(3) |
Of
the decrease from 710 cases pending at December 31, 2004 to 507 cases
pending at December 31, 2005, were 80 cases which had been previously
counted in error and are included in “Defense judgments and dismissals”
and “Total resolved cases”, so that the actual decrease over the year
ended December 31, 2005 was 123 cases. Included in the decrease from
404
cases pending at December 31, 2006 to 222 cases pending at December
31,
2007, were 53 cases which had been previously counted in error and
are
included in “Defense judgments and dismissals” and “Total resolved cases”,
so that the actual decrease for the year ended December 31, 2007
was 129
cases.
|
The
number of asbestos-related claims made against Entrx has reflected a general
downward trend. We believe that it is probable that this general trend will
continue, although such continuance cannot be assured. From 2001 and through
2006, the annual average indemnity paid on over 2,550 resolved cases has
fluctuated significantly, between a low of $14,504 in 2006 and a high of $26,520
in 2001, with an overall average over that period of approximately $19,131.
During this period, there has been no discernible upward or downward trend
in
indemnity payments. However, the indemnity paid on the 44 cases resolved in
the
three months ended March 31, 2008 averaged $107,308, as a result of one case
in
which the plaintiff received a jury award of $1,659,000 and three other cases
which settled for approximately $1,000,000 each. The average indemnity paid
on
resolved claims in the second and third quarters was $1,304 and $9,500,
respectively, with an average per settled claim indemnity of approximately
$48,000 for the nine-month period ended September 30, 2008.
While
we
estimate that the average indemnity paid on all claims resolved in 2008 could
be
over $40,000, we believe that the results of the first quarter represent an
anomaly in relation to the past history of settled claims. Our methodology
for
estimating current and projected liability for asbestos-related claims,
including estimates of our future per resolved claim liability, has consistently
involved the observation of trailing multiple-year claims and expense history.
In evaluating the adequacy of our recorded liability at the end of the third
quarter, we considered the impact of the unfavorable first quarter 2008 claims
experience in our trailing, multiple-year claims and expense calculation
methodology, and concluded that the impact of the potential increase in the
projected per resolved claim liability was not sufficiently material to result
in revision of Entrx’s recorded liability. Accordingly, Entrx believes that the
unfavorable short term impact of the resolution of these four claims in the
first quarter of 2008 neither provides a better estimate nor is indicative
of a
reasonable range of the liability that might be required to resolve all
remaining known and incurred but not reported claims. Rather, we have
consistently recorded as our best estimate of liability the amount indicated
by
the trailing multiple-year claims and expense history. Accordingly, we intend
to
continue to use the $19,131 historical average indemnity payment in estimating
our aggregate asbestos-related personal injury liability until we are able
to
take into consideration the results of resolved cases during the remainder
of
2008.
We
believe that the sympathies of juries, the aggressiveness of the plaintiffs’ bar
and the declining base of potential defendants as the result of business
failures, have tended to increase payments on resolved cases. This tendency,
we
believe, has been mitigated by the declining pool of claimants resulting from
death, and the likelihood that the most meritorious claims have been ferreted
out by plaintiffs’ attorneys and that the newer cases being brought are not as
meritorious nor do they have as high a potential for damages as do cases which
were brought earlier. We have no reason to believe, therefore, that the average
future indemnity payments will increase materially in the future.
In
addition, direct defense costs per resolved claim increased from $8,514 in
2003
to $16,700 in 2007. We believe that these defense costs increased as a result
of
a change in legal counsel in 2004, and the more aggressive defense posture
taken
by new legal counsel since that change. We do not believe that the defense
costs
will increase materially in the future, and are projecting those costs to be
approximately $13,500 per claim.
Based
on
the general trend of reducing asbestos-related injury claims made against the
Company over the prior six calendar years, we projected in our Form 10-KSB
filed
with the Securities and Exchange Commission for the year ended December 31,
2006
that there would be 924 asbestos-related injury claims made against the Company
after December 31, 2006. The 924, in addition to the 404 claims existing as
of
December 31, 2006, totaled 1,328 current and future claims. Multiplying the
average indemnity per resolved claim over the past six years of $19,131, times
1,328, we projected the probable future indemnity to be paid on those claims
after December 31, 2006 to be equal to approximately $25 million. In addition,
multiplying an estimated cost of defense per resolved claim of approximately
$13,500 times 1,328, we projected the probable future defense costs to equal
approximately $18 million. Accordingly, our total estimated future
asbestos-related liability at December 31, 2006 was $43 million.
As
of
December 31, 2006, we projected that approximately 186 new asbestos-related
claims would be commenced, and approximately 237 cases would be resolved, in
2007, resulting in an estimated 353 cases pending at December 31, 2007. Although
the actual number of claims made in 2007 was 163 and the number of cases pending
as of December 31, 2007 was 222, slightly less than we anticipated, we do not
believe the differences are significant enough to re-evaluate our estimate.
In
addition, our future defense costs and average indemnity per resolved case
could
be greater than projected, and such increase could partially offset any lower
projection of liability which would result from such re-evaluation. Since we
projected that an aggregate of 738 new cases would be commenced after December
31, 2007, and that 148 of these cases would be commenced in 2008, we estimated
that an aggregate of 590 new cases would be commenced after December 31, 2008.
Accordingly, we have projected the cases pending and projected to be commenced
in the future at December 31, 2008, would be 897 cases. Multiplying 897 claims
times the approximate average indemnity paid and defense costs incurred per
resolved claim from 2002 through 2006 of $32,600, we estimated our liability
for
current and future asbestos-related claims at December 31, 2008 to be
approximately $29,000,000. This amounts to a $7,000,000 reduction from the
$36,000,000 liability we estimated as of December 31, 2007, or a $1,750,000
reduction per quarter in 2008.
We
have
determined that it is probable that we have sufficient insurance to provide
coverage for both current and future projected asbestos-related injury claims.
This determination assumes that the current trend of reducing asbestos-related
injury claims will continue and that the average indemnity and direct legal
costs of each resolved claim will not materially increase. The determination
also assumes that the insurance companies live up to what we believe is their
obligation to continue to cover our exposure with regards to these claims.
Several affiliated insurance companies have brought a declaratory relief action
against our subsidiary, Metalclad, as well as a number of other insurers, to
resolve certain coverage issues, as discussed under “Insurance Coverage
Litigation” below.
Regardless of our best estimates of liability for current and future
asbestos-related claims, the liability for these claims could be higher or
lower
than estimated by amounts which are not predictable. We, of course, cannot
give
any assurance that our liability for such claims will not ultimately exceed
our
available insurance coverage. We believe, however, that our current insurance
is
adequate to satisfy additional liability that is reasonably possible in the
event actual losses exceed our estimates. We will update our estimates of
liability and insurance coverage in future filings with the Securities and
Exchange Commission, as events occur which would cause us to believe that those
estimates need revision, based upon the subsequent claim experience, using
the
methodology we have employed.
We
intend
to re-evaluate our estimate of future liability for asbestos claims at the
end
of each fiscal year, or whenever actual results are materially different from
our estimates, integrating our actual experience in that fiscal year with that
of prior fiscal years since 2002. We estimate that the effects of economic
inflation on either the average indemnity payment or the projected direct legal
expenses will be approximately equal to a discount rate applied to our future
liability based upon the time value of money. It is probable that we have
adequate insurance to cover current and future asbestos-related claims, although
such coverage cannot be assured.
Although
defense costs are included in our insurance coverage, we expended $174,000,
$304,000, $188,000, $215,000 and $296,000 in 2003, 2004, 2005, 2006 and 2007,
respectively, and $118,000 for the nine months ended September 30, 2008 to
administer the asbestos claims and defend the ACE Lawsuit discussed below.
These
amounts were primarily fees paid to attorneys to monitor the activities of
the
insurers, and their selected defense counsel, and to look after our rights
under
the various insurance policies.
Insurance
Coverage Litigation
On
February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
Insurance Company of Omaha ("Central National") and Industrial Underwriters
Insurance Company ("Industrial"), which are all related entities, filed a
declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
in the Superior Court of the State of California, County of Los Angeles. ACE,
Central National and Industrial issued umbrella and excess policies to
Metalclad, which has sought and obtained from the plaintiffs both defense and
indemnity under these policies for the asbestos lawsuits brought against
Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
regarding a variety of coverage issues, but is centrally focused on issues
involving whether historical and currently pending asbestos lawsuits brought
against Metalclad are subject to either an "aggregate" limits of liability
or
separate "per occurrence" limits of liability. Whether any particular asbestos
lawsuit is properly classified as being subject to an aggregate limit of
liability depends upon whether or not the suit falls within the "products"
or
"completed operations" hazards found in most of the liability policies issued
to
Metalclad. Resolution of these classification issues will determine if, as
ACE
and Central National allege, their policies are nearing exhaustion of their
aggregate limits and whether or not other Metalclad insurers who previously
asserted they no longer owed any coverage obligations to Metalclad because
of
the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
additional coverage obligations. The ACE Lawsuit also seeks to determine the
effect of the settlement agreement between the Company and Allstate Insurance
Company on the insurance obligations of various other insurers of Metalclad,
and
the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
does not seek any monetary recovery from Metalclad. The
ACE
Lawsuit is principally about coverage responsibility among the several insurers,
as well as total coverage. Regardless of the outcome of this litigation, Entrx
does not believe that the ACE Lawsuit will result in materially diminishing
Entrx’s insurance coverage for asbestos-related claims.
Nonetheless, we anticipate that we will incur attorney’s fees and other
associated litigation costs in defending the lawsuit and any counter claims
made
against us by any other insurers, and in prosecuting any claims we may seek
to
have adjudicated regarding our insurance coverage. In addition, the ACE Lawsuit
may result in our incurring costs in connection with obligations we may have
to
indemnify Allstate under a settlement agreement. Allstate, in a cross-complaint
filed against Metalclad Insulation Corporation in October, 2005, asked the
court
to determine the Company’s obligation to assume and pay for the defense of
Allstate in the ACE Lawsuit under the Company’s indemnification obligations in
the settlement agreement. The Company does not believe that it has any legal
obligation to assume or pay for such defense.
If
Allstate is required to provide indemnity for Entrx’s asbestos-related lawsuits,
it is likely that Entrx would have to indemnify Allstate for asbestos-related
claims that it defends up to $2,500,000 in the aggregate. If Allstate is not
required to provide indemnity, Entrx would have no liability to Allstate. Entrx
has accrued $375,000 as a potential loss in connection with the Allstate
matter.
Proposed
Legislation
In
2003
and 2004 the Judiciary Committee of the United States Senate considered
legislation to create a privately funded, publicly administered fund to provide
the necessary resources for an asbestos injury claims resolution program, and
is
commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
approved by the Judiciary Committee, but the bill was rejected by the full
Senate in February 2006, when a cloture motion on the bill was withdrawn. An
amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
May 2006, but has not been scheduled for a vote. A similar bill was introduced
in the House (HR 1360) in March 2005, but was referred to a subcommittee in
May
2005. The latest draft of the “FAIR” Act calls for the fund to be funded
partially by asbestos defendant companies, of which the Company is one, and
partially by insurance companies. While we do not believe that the proposed
Fair
Act will be passed into law, the bill could be voted on by the Senate or the
House at any time in the future. The impact, if any, the “FAIR” Act will have on
us if passed cannot be determined at this time although the latest draft of
the
legislation did not appear favorable to us.
Claim
Against Former Employee, Etc.
In
October 1999, we completed the sale of our operating businesses and development
project located in Aguascalientes, Mexico. That sale specifically excluded
those
Mexican assets involved in the Company’s NAFTA claim which was settled in 2001.
Under the terms of the sale we received an initial cash payment of $125,000
and
recorded a receivable for $779,000, which has been fully reserved. On November
13, 2000, the Company filed a complaint in the Superior Court of California
against a former employee, the U.S. parent of the buyer and its representative
for breach of contract, fraud, collusion and other causes of action in
connection with this sale seeking damages in the form of a monetary award.
An
arbitration hearing was held in September, 2002 in Mexico City, as requested
by
one of the defendants. This arbitration hearing was solely to determine the
validity of the assignment of the purchase and sale agreement by the buyer
to a
company formed by the former employee defendant. The Superior Court action
against the U.S. parent was stayed pending the Mexican arbitration. On April
8,
2003, the arbitrator ruled that the assignment was inexistent, due to the
absence of our consent. In June 2003, the Court of Appeal for the State of
California ruled that the U.S. parent was also entitled to compel a Mexican
arbitration of the claims raised in our complaint. We are now prepared to pursue
our claim in an arbitration proceeding for the aforementioned damages. No
assurances can be given on the outcome.
In
a
related action, a default was entered against us in December, 2002, in favor
of
the same former employee referred to in the foregoing paragraph by the Mexican
Federal Labor Arbitration Board, for an unspecified amount. The former employee
was seeking in excess of $9,000,000 in damages as a result of his termination
as
an employee. The default was obtained without the proper notice being given
to
us, and was set aside in the quarter ended June 30, 2003. The Mexican Federal
Labor Arbitration Board rendered a recommendation on December 13, 2004, to
the
effect that the former employee was entitled to an award of $350,000 from Entrx
in connection with the termination of his employment. The award is in the form
of a recommendation which has been affirmed by the Mexican Federal Court, but
is
only exercisable against assets of the Company located in Mexico. The Company
has no material assets in Mexico. The award does not represent a collectible
judgment against the Company in the United States. Since the Company has no
material assets in Mexico, the likelihood of any obligation to satisfy this
award is remote, and we therefore believe that there is no potential liability
to the Company which needs to be recorded in our financial statements. The
Company intends to continue to pursue its claims against the same employee
for
breach of contract, fraud, collusion and other causes of action in connection
with the 1999 sale of one of the Company’s operating businesses in
Mexico.
On
May
31, 2006, we entered into a Settlement Agreement with Ventana Global
Environmental Organizational Partnership, L.P. and North America Environmental
Fund, L.P. (collectively referred to as “Ventana”) whereby Ventana agreed to pay
Entrx Corporation $1,250,000 in exchange for the dismissal with prejudice by
Entrx Corporation of the law suit (the “Ventana Action”) filed by Entrx
Corporation against Ventana and others in Orange County, California Superior
Court in November 2000. Entrx Corporation and Ventana also entered into a mutual
release of all claims each may have had against the other. In addition, Entrx
Corporation released Carlos Alberto de Rivas Oest and Geologic de Mexico S.A.
de
C.V., which were parties related to Ventana, and against whom Entrx Corporation
had claims pending in Mexico. The Settlement Agreement does not limit claims
that Entrx had or currently has against Javier Guerra Cisneros and Promotora
Industrial Galeana, S.A. de C.V., which Entrx Corporation continues to pursue
in
Mexico. Javier Guerra Cisneros and Promotora Industrial Galeana, S.A. de C.V.
were involved with the transactions which were the subject of the Ventana
Action. Entrx Corporation received approximately $925,000 net after payment
of
legal fees and expenses associated with the Ventana Action and the Settlement
Agreement.
Since
the
May 2006 Settlement Agreement, the remaining action against Javier Guerra
Cisneros and Promotora Industrial Galeana, S.A. de C.V has experienced repeated
and extended delays in the State Court in Mexico City. In the fourth quarter
of
2007, the Company filed an amparo
(injunction) application
with the Mexican federal court in Mexico City, requesting that the State Court
take affirmative action in the Company's pending case.
That
amparo
was
denied during the first quarter of 2008 and an appeal has been presented to
the
federal appellate court. The appeal was denied during the second quarter
of 2008. The Company is investigating its options with regard to pursuing the
lawsuit.
Item
6. Exhibits
Exhibits
31.1
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Rule
13a-14(a) Certification of Chief Executive Officer.
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31.2
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Rule
13a-14(a) Certification of Chief Financial Officer.
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32
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Section
1350 Certification.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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ENTRX
CORPORATION
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Date:
November 12, 2008
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By:
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/s/Peter
L. Hauser
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Peter
L. Hauser
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Chief
Executive Officer
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Date:
November 12, 2008
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By:
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/s/Brian
D. Niebur
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Brian
D. Niebur
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Chief
Financial Officer
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(Principal
Accounting Officer)
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