UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2009 |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _____ to _____ |
Commission File No. 33-55254-38
General Environmental Management, Inc.
(Exact name of Small Business Issuer as specified in its charter)
NEVADA | 87-0485313 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
3191 Temple Ave., Suite 250, Pomona CA, 91768
(Address of principal executive offices, Zip Code)
(909) 444-9500
Issuer’s telephone number, including area code
Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T ($232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, a non- accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company ( as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date. As of May 14, 2009, there were 12,691,659 shares of the issuer’s $.001 par value common stock issued and outstanding.Indicate by check mark whether the registrant is a shell company ( as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
1
GENERAL ENVIRONMENTAL MANAGEMENT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2009
TABLE OF CONTENTS
Page | ||
Part 1 | Financial Information | |
Item 1 | Financial Statements (Unaudited) | 3 |
Condensed Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008 | 3 | |
Condensed Unaudited Consolidated Statements of Operations for the Three Months ended March 31, 2009 and 2008 | 5 | |
Condensed Unaudited Consolidated Statement of Stockholders' Deficiency for the Three Months Ended March 31, 2009 | 6 | |
Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 | 7 | |
Notes to the Unaudited Condensed Consolidated Financial Statements | 9 | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 27 |
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 34 |
Item 4 | Controls and Procedures | 34 |
Part II | Other Information | |
Item 1 | Legal Proceedings | 35 |
Item 1A | Risk Factors | 35 |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 35 |
Item 3 | Defaults Upon Senior Securities | 35 |
Item 4 | Submission of Matters to a Vote of Security Holders | 35 |
Item 5 | Other Information | 36 |
Item 6 | Exhibits and Reports on Form 8K | 36 |
Signatures | 37 | |
CEO Certification | Attached | |
CFO Certification | Attached |
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 356,467 | $ | 375,983 | ||||
Accounts receivable, net of allowance for doubtful accounts | ||||||||
of $172,896 and $174,834, respectively | 5,354,596 | 6,729,743 | ||||||
Prepaid expenses and other current assets | 411,520 | 537,289 | ||||||
Total Current Assets | 6,122,583 | 7,643,015 | ||||||
Property and Equipment – net of accumulated depreciation | ||||||||
$3,288,015 and $2,917,056, respectively | 7,663,405 | 7,783,208 | ||||||
Restricted cash | 1,200,019 | 1,199,784 | ||||||
Intangible assets, net | 823,976 | 864,781 | ||||||
Deferred financing fees | 465,280 | 513,412 | ||||||
Deposits | 439,132 | 291,224 | ||||||
Goodwill | 946,119 | 946,119 | ||||||
TOTAL ASSETS | $ | 17,660,514 | $ | 19,241,543 |
(Continued)
3
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 4,194,477 | $ | 3,499,178 | ||||
Accrued expenses | 2,734,696 | 2,620,224 | ||||||
Accrued disposal costs | 529,267 | 743,474 | ||||||
Payable to related party | 827,842 | 706,868 | ||||||
Deferred rent | 44,185 | 41,202 | ||||||
Derivative liabilities | 1,574,078 | - | ||||||
Current portion of financing agreement | 8,621,253 | 10,366,544 | ||||||
Current portion of long term obligations | 792,514 | 794,278 | ||||||
Current portion of capital lease obligations | 606,788 | 623,007 | ||||||
Total Current Liabilities | 19,925,100 | 19,394,775 | ||||||
LONG-TERM LIABILITIES : | ||||||||
Long term obligations, net of current portion | 526,767 | 535,689 | ||||||
Capital lease obligations, net of current portion | 1,620,710 | 1,751,854 | ||||||
Convertible notes payable, net of current portion | 467,651 | 489,605 | ||||||
Total Long-Term Liabilities | 2,615,128 | 2,777,148 | ||||||
STOCKHOLDERS’ DEFICIENCY | ||||||||
Common stock, $.001 par value, 1,000,000,000 shares authorized, | ||||||||
12,691,659 and 12,691,409 shares issued and outstanding | 12,692 | 12,692 | ||||||
Additional paid in capital | 52,210,663 | 53,585,035 | ||||||
Accumulated deficit | (57,103,069 | ) | (56,528,107 | ) | ||||
Total Stockholders' Deficiency | (4,879,714 | ) | (2,930,380 | ) | ||||
TOTAL LIABILITIES & STOCKHOLDERS’ DEFICIENCY | $ | 17,660,514 | $ | 19,241,543 | ||||
See accompanying notes to the condensed consolidated financial statements.
4
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended | ||||||||
March 31, 2009 | March 31, 2008 | |||||||
REVENUES | $ | 8,201,870 | $ | 6,951,653 | ||||
COST OF REVENUES | 7,196,715 | 5,645,344 | ||||||
GROSS PROFIT | 1,005,155 | 1,306,309 | ||||||
OPERATING EXPENSES | 2,103,598 | 1,849,614 | ||||||
OPERATING LOSS | (1,098,443 | ) | (543,305 | ) | ||||
OTHER INCOME (EXPENSE): | ||||||||
Interest income | 467 | 7,017 | ||||||
Interest and financing costs | (994,188 | ) | (816,608 | ) | ||||
Other non-operating income | 8,417 | 7,663 | ||||||
Gain on derivative financial instruments | 552,512 | - | ||||||
Net Loss | $ | (1,531,235 | ) | $ | (1,345,233 | ) | ||
Net loss per common share, basic and diluted | $ | (.12 | ) | $ | (.11 | ) | ||
Weighted average shares of common stock | ||||||||
outstanding, basic and diluted | 12,691,420 | 12,473,885 |
See accompanying notes to the condensed consolidated financial statements
5
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance, December 31, 2008 | 12,691,409 | $ | 12,692 | $ | 53,585,035 | $ | (56,528,107 | ) | $ | (2,930,380 | ) | |||||||||
Cumulative effect of change in accounting principle | ||||||||||||||||||||
January 1, 2009 reclassification of embedded feature of equity | ||||||||||||||||||||
linked financial instruments to derivative liabilities | (1,674,036 | ) | 956,273 | (717,763 | ) | |||||||||||||||
Issuance of warrants | 37,743 | 37,743 | ||||||||||||||||||
Stock compensation cost for value of vested options | 261,734 | 261,734 | ||||||||||||||||||
Issuance of shares on exercise options | 250 | 187 | 187 | |||||||||||||||||
Net loss for the three months ended March 31, 2009 | (1,531,235 | ) | (1,531,235 | ) | ||||||||||||||||
Balance, March 31, 2009 | 12,691,659 | $ | 12,692 | $ | 52,210,663 | $ | (57,103,069 | ) | $ | (4,879,714 | ) |
See accompanying notes to the consolidated financial statements
6
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Loss | $ | (1,531,235 | ) | $ | (1,345,233 | ) | ||
Adjustments to reconcile net loss to cash provided by | ||||||||
(used in) operating activities | ||||||||
Depreciation and amortization | 411,764 | 226,795 | ||||||
Amortization of discount on financing agreement | 430,331 | 437,612 | ||||||
Fair value of vested options | 261,734 | 216,716 | ||||||
Issuance of warrants for services | 37,743 | - | ||||||
Amortization of discount on notes | 118,680 | - | ||||||
Amortization of deferred financing fees | 48,132 | 84,450 | ||||||
Gain on derivative instrument | (552,512 | ) | - | |||||
Changes in assets and liabilities: | ||||||||
Accounts Receivable | 1,375,147 | 1,523,529 | ||||||
Inventory | 8,272 | 6,474 | ||||||
Prepaid and other current assets | 117,496 | (513,113 | ) | |||||
Deposits and restricted cash | (148,142 | ) | (6,654 | ) | ||||
Accounts Payable | 695,299 | (1,961,128 | ) | |||||
Accrued interest on related party advances | 11,651 | - | ||||||
Accrued interest on convertible notes | 8,045 | 9,642 | ||||||
Accrued expenses and other liabilities | (96,752 | ) | 814,094 | |||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 1,195,653 | (506,816 | ) | |||||
INVESTING ACTIVITIES | ||||||||
Additions to property and equipment | (251,156 | ) | (95,300 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES | (251,156 | ) | (95,300 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net advances from notes payable- financing agreement | (766,795 | ) | (536,403 | ) | ||||
Advances from related parties | - | 472,500 | ||||||
Proceeds from exercise of options | 187 | - | ||||||
Payment of notes payable | (40,686 | ) | (4,215 | ) | ||||
Repayment of convertible notes | - | (15,000 | ) | |||||
Payment on capital leases | (156,719 | ) | (68,868 | ) | ||||
NET CASH USED IN FINANCING ACTIVITIES | (964,013 | ) | (151,986 | ) | ||||
DECREASE IN CASH AND CASH EQUIVALENTS | (19,516 | ) | (754,102 | ) | ||||
Cash at beginning of period | 375,983 | 954,581 | ||||||
CASH AT END OF PERIOD | $ | 356,467 | $ | 200,479 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for: | ||||||||
Interest Expense | $ | 399,400 | $ | 275,827 |
(Continued)
7
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
SUPPLEMENTAL DISCLOSURE OF NON – CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Acquisition of leased equipment and capital lease obligations | $ | - | $ | 848,856 | ||||
Cumulative effect of adoption of | - | |||||||
accounting principle and establishment of derivative liability on: | ||||||||
Notes payable | 1,408,828 | |||||||
Stockholders deficiency | 717,763 |
See accompanying notes to the condensed consolidated financial statements
8
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Ultronics Corporation ( “the Company”) was incorporated in the state of Nevada on March 14, 1990 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination with a domestic or foreign private business. On February 14, 2005 the Company acquired all of the outstanding shares of General Environmental Management, Inc (“GEM”), a Delaware Corporation. The acquisition was accounted for as a reverse merger (recapitalization) with GEM deemed to be the accounting acquirer, and Ultronics Corporation the legal acquirer. Subsequent to the acquisition, the Company changed its name to General Environmental Management, Inc.
GEM is a fully integrated environmental service firm structured to provide EHS compliance services, field services, transportation, off-site treatment, and on-site treatment services. Through its services GEM assists clients in meeting regulatory requirements for the disposal of hazardous and non-hazardous waste
BASIS OF PRESENTATION
The condensed consolidated interim financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission, in the opinion of management, include all adjustments which, except, as described elsewhere herein, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the period presented. The financial statements presented herein should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.
The results for the interim periods are not necessarily indicative of results for the entire year.
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net loss of $1,531,235 during the three months ended March 31, 2009, and as of March 31, 2009 the Company had current liabilities exceeding current assets by $13,802,517 and had a stockholders’ deficiency of $4,879,714. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
Management is continuing to raise capital through the issuance of debt and equity. In addition, management believes that the Company will begin to operate profitably due to increased size, improved operational results and cost cutting practices. However, there can be no assurances that the Company will be successful in this regard or will be able to eliminate its working capital deficit or operating losses. The accompanying condensed consolidated financial statements do not contain any adjustments which may be required as a result of this uncertainty.
9
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of General Environmental Management, Inc., a Nevada corporation, and it’s wholly owned subsidiaries, General Environmental Management, Inc., a Delaware corporation, GEM Mobile Treatment Services, Inc., a California corporation, Island Environmental Services, Inc., a California corporation and General Environmental Management of Rancho Cordova, LLC. Inter-company accounts and transactions have been eliminated.
(b) Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ materially based on any changes in the estimates and assumptions that the Company uses in the preparation of its financial statements that are reviewed no less than annually. Actual results could differ materially from these estimates and assumptions due to changes in environmental-related regulations or future operational plans, and the inherent imprecision associated with estimating such future matters.
(c) Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is reasonably assured.
The Company is a fully integrated environmental service firm structured to provide field services, technical services, transportation, off-site treatment, on-site treatment services, and environmental health and safety (“EHS”) compliance services. Through our services, we assist clients in meeting regulatory requirements from the designing stage to the waste disposition stage. The technicians who provide these services are billed at negotiated rates, or the service is bundled into a service package. These services are billed and revenue recognized when the service is performed and completed. When the service is billed, client costs are accumulated and accrued.
Our field services consist primarily of handling, packaging, and transporting a wide variety of liquid and solid wastes of varying amounts. We provide the fully trained labor and materials to properly package hazardous and non-hazardous waste according to requirements of the Environmental Protection Agency and the Department of Transportation. Small quantities of laboratory chemicals are segregated according to hazard class and packaged into appropriate containers or drums. Packaged waste is profiled for acceptance at a client’s selected treatment, storage and disposal facility (TSDF) and tracked electronically through our systems. Once approved by the TSDF, we provide for the transportation of the waste utilizing tractor-trailers or bobtail trucks. The time between picking up the waste and transfer to an approved TSDF is usually less than 10 days. The Company recognizes revenue for waste picked up and received waste at the time pick up or receipt occurs and recognizes the estimated cost of disposal in the same period. For the Company’s TSDF located in Rancho Cordova, CA, costs to dispose of waste materials located at the Company’s facilities are included in accrued disposal costs. Due to the limited size of the facility, waste is held for only a short time before transfer to a final treatment, disposal or recycling facility.
10
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
(d) Concentrations of Credit Risks
The Company’s financial instruments that are exposed to concentrations of credit risk consist principally of cash and trade receivables. The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances have exceeded FDIC insured levels at various times. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk in cash.
The Company’s trade receivables result primarily from removal or transportation of waste, and the concentration of credit risk is limited to a broad customer base located throughout the Western United States.
During the three months ended March 31, 2009 and 2008, one customer accounted for 9% and 9% of revenues, respectively. As of March 31, 2009 and December 31, 2008 there was one customer that accounted for 11% and 24% of accounts receivable, respectively.
(e) Fair Value of Financial Instruments
Fair Value Measurements are determined by the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157") as of January 6, 2008, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of SFAS 157 did not have a material impact on the Company's fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1- Quoted prices in active markets for identical assets or liabilities.
Level 2- Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3- Unobservable inputs based on the Company's assumptions.
SFAS 157 requires the use of observable market data if such data is available without undue cost and effort.
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2009 (unaudited):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Fair value of warrants and embedded derivatives | - | - | $ | 1,574,078 | $ | 1,574,078 |
See Notes 7 and 11 for more information on these financial instruments.
(f) Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
11
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
(g) Stock Compensation Costs
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R effective January 1, 2006, and is using the modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remained unvested on the effective date. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with EITF No. 96-18: "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF No. 00-18: “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.
(h) Net Loss per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share", requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period.
These potentially dilutive securities were not included in the calculation of loss per share for the three months ended March 31, 2009 and 2008 because the Company incurred a loss during such periods and thus their effect would have been anti-dilutive. Accordingly, basic and diluted loss per share is the same for the three months ended March 31, 2009 and 2008.
At March 31, 2009 and 2008, potentially dilutive securities consisted of convertible securities, outstanding common stock purchase warrants and stock options to acquire an aggregate of 16,686,288 shares and 11,736,700 shares, respectively.
(i) Recent Accounting Pronouncements
In December 2007, Financial Accounting Standards Board (FASB) Statement 141R, “Business Combinations (revised 2007)” (SFAS 141R”) was issued. SFAS 141R replaces SFAS 141 “Business Combinations”. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transactions costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effective date, as well as the adoption date for the Company was January 1, 2009. Although SFAS 141R may impact our reporting in future financial periods, we have determined that the standard did not have any impact on our historical consolidated financial statements at the time of adoption.
In April 2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. This pronouncement requires enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a recognized intangible asset. FST 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The effective date, as well as the adoption date for the Company was January 1, 2009. Although FSP 142-3 may impact our reporting in future financial periods, we have determined that the standard did not have any impact on our historical consolidated financial statements at the time of adoption.
12
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP No. FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), to address application issues raised on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is effective for the first annual reporting period on or after December 31, 2008. The impact of FSP No. FAS 141(R)-1 on the Company’s consolidated financial statements will depend on the number and size of acquisition transactions, if any, engaged in by the company.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FSP FAS 157-4 requires comparative disclosures only for periods ending after initial adoption. The Company does not expect the changes associated with adoption of FSP FAS 157-4 will have a material effect on the on its financial statements and disclosures.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
13
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
3. ACQUISITION
On August 31, 2008, the Company entered into a stock purchase agreement with Island Environmental Services, Inc. of Pomona, California ("Island"), a privately held company, pursuant to which the Company acquired all of the issued and outstanding common stock of Island, a California-based provider of hazardous and non-hazardous waste removal and remediation services to a variety of private and public sector establishments. In consideration of the acquisition of the issued and outstanding common stock of Island, the Company paid $2.25 million in cash to the stockholders of Island and issued $1.25 million in three year promissory notes (“Notes”, see note 9). Other consideration is payable based on the performance of the acquired entity. The Notes bear interest at 8%, payable quarterly, and the entire principal is due 36 months after closing. As a result of the agreement, Island becomes a wholly-owned subsidiary of the Company.
The acquisition of Island has been accounted for as a purchase in accordance with SFAS No. 141, “Business Combinations,” and the operations of the company have been consolidated since September 1, 2008, the effective date of the acquisition. The $3.5 million purchase price was allocated as follows based upon the fair value of the acquired assets, as determined by management with the assistance of an independent valuation firm to determine the components of the acquired business.
Current assets and liabilities | $ | 809,339 | ||
Property and Equipment | 2,759,220 | |||
Total | $ | 3,568,559 |
The Company allocated the excess of net assets acquired to property and equipment based upon a preliminary valuation. The Company has not yet finalized the purchase price allocation which may change upon the completion of a final analysis of assets and liabilities.
The terms of purchase agreement include an accelerated note payment and a contingent earn-out which could be payable to the sellers upon the recapture by Island of EBITDA in excess of $1,100,000 during the twelve month period following the acquisition. If the EBITDA in excess of $1,100,000 is achieved, additional payments could be made to the sellers. If the EBITDA is not achieved, the current note payable of $1,250,000 will have an accelerated payment due of $750,000 in September, 2009 and no contingent earn-out will be made. As the Company does not presently expect it will reach the first twelve months milestone, the $750,000 note has been reflected as current (see Note 9).
14
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
The following sets out the pro forma operating results for the three months ended March 31, 2008 for the Company had the acquisition occurred as of January 1, 2008:
Pro Forma (Unaudited)Three months ended March 31, 2008 | ||||
Net sales | $ | 8,352,961 | ||
Cost of sales | 6,514,632 | |||
Gross profit | 1,838,329 | |||
Operating expenses | 2,536,747 | |||
Operating loss | (698,418 | ) | ||
Other income (expense): | ||||
Interest income | 17,720 | |||
Interest expense and amortization of deferred financing costs | (816,608 | ) | ||
Gain on derivative financial instruments | - | |||
Other non-operating income | 7,794 | |||
Net Loss | $ | (1,489,512 | ) | |
Loss per weighted average share, basic and diluted | $ | (.12 | ) |
15
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and Equipment consists of the following at:
March 31, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
Land | $ | 905,000 | $ | 905,000 | ||||
Building and improvements | 1,085,656 | 1,140,656 | ||||||
Vehicles | 2,687,128 | 2,687,128 | ||||||
Equipment and furniture | 435,755 | 411,064 | ||||||
Warehouse equipment | 5,531,203 | 5,277,892 | ||||||
Leasehold improvements | 270,832 | 242,678 | ||||||
Asset retirement obligations | 35,846 | 35,846 | ||||||
10,951,420 | 10,700,264 | |||||||
Less accumulated depreciation and amortization | 3,288,015 | 2,917,056 | ||||||
Property and equipment net of accumulated depreciation and amortization | $ | 7,663,405 | $ | 7,783,208 |
Property and equipment includes assets under capital lease with a cost of $3,248,546 and $3,248,546 and accumulated amortization of $954,745 and $805,912 as of March 31, 2009 and December 31, 2008, respectively.
Depreciation and amortization expense was $370,960 and $185,945 for the three months ended March 31, 2009 and 2008 respectively.
16
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
5. GOODWILL AND INTANGIBLE ASSETS
The Company accounts for goodwill and intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS 142, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Goodwill and intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset’s estimated fair values with its carrying value, based on cash flow methodology.
Intangible assets consist of the following at:
March 31, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
Rancho Cordova acquisition – permit | $ | 475,614 | $ | 475,614 | ||||
Prime acquisition – customers | 400,422 | 400,422 | ||||||
GMTS acquisition – customers | 438,904 | 438,904 | ||||||
GMTS acquisition – permits | 27,090 | 27,090 | ||||||
Accumulated amortization | (518,054 | ) | (477,249 | ) | ||||
$ | 823,976 | $ | 864,781 |
Permit costs have been capitalized and are being amortized over the life of the permit, including expected renewal periods. Customer Lists acquired are being amortized over their useful life.
6. RELATED PARTY TRANSACTIONS
The Company has entered into several transactions with General Pacific Partners (“GPP”), a company operated by a prior member of the Board of Directors of the Company’s wholly owned subsidiary, General Environmental Management, Inc. of Delaware. GPP owns 6% of the Company’s common stock at March 31, 2009. The following summarizes the transactions with GPP during the three months ended March 31, 2009 and December 31, 2008.
Advances from Related Party
March 31, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
Notes from GPP | $ | 472,500 | $ | 472,500 | ||||
Financing Fees | 250,000 | 250,000 | ||||||
Accrued Interest and LC Fees | 105,342 | 93,692 | ||||||
Valuation discount | - | (109,324 | ) | |||||
$ | 827,842 | $ | 706,868 |
17
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
During February and March 2008, General Pacific Partners made two unsecured advances to the Company totaling $472,500. The proceeds were used for working capital purposes. The rate of interest on the advances is 10% per annum. The funds were originally due six months from the date of issuance. On June 30, 2008, the maturity date was extended an additional six months to February 14, 2009 and March 19, 2009. In connection with the note extension the Company issued (i) 200,000 shares of its common stock valued at $220,000 and, (ii) a warrant to purchase up to 225,000 shares of its common stock at a price of $0.60 for a period of seven (7) years. The Company valued the warrants at $222,500 using a Black - Scholes option pricing model. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 75.88 % and an expected term for the warrants of 7 years. The value of the common shares of $220,000 and value of the warrants of $222,500 has been reflected by the Company as a valuation discount at issuance and offset to the face amount of the Notes. The Valuation discount is being amortized to interest expense over the life of the loan based upon the effective interest method. Finance costs for the three months ended March 31,2009 includes $109,324 for amortization of this discount. The valuation discount was fully amortized at March 31, 2009. On February 13, 2009 the maturity date was extended until March 31, 2010. As of March 31, 2009, $472,500 remained outstanding.
In 2008, GPP provided services related to the financing completed with CVC California, LLC. Pursuant to these services the Company agreed to pay GPP $250,000. The cash paid has been reflected as part of deferred financing fees on the accompanying balance sheet at March 31, 2009 and December 31, 2008.
Letter of Credit Services
On July 1, 2008 the Company entered into an agreement with GPP wherein GPP would provide letters of credit to support projects contracted to GEM. The fees under the agreement consisted of (i) a commitment fee of 2% of the value of the letter of credit, (ii) interest at a rate to be negotiated, and (iii) a seven year warrant to purchase shares of the Company’s common stock at $0.60 per share. Accrued fees amounted to $19,945 at March 31, 2009 and December 31, 2008 and are included in accrued interest and LC fees in the accompanying table.
Software Support
In 2008, the Company entered into a three year agreement with Lapis Solutions, LLC, (Lapis) a company managed by a prior member of the Board of Directors of the Company’s wholly owned subsidiary, General Environmental Management, Inc. of Delaware, wherein Lapis would provide support and development services for the Company’s proprietary software GEMWARE. Services costs related to the agreement total $10,800 per month. As of March 31, 2009 and December 31, 2008, $150,055 and $92,555 respectively, of the fees had been prepaid to Lapis and included in the accompanying condensed balance sheets as part of prepaid expenses.
Related Party Lease Agreement
During the third quarter ended September 30, 2007, the Company entered into a lease for $180,846 of equipment with current investors of the Company. The lease transaction was organized by General Pacific Partners, a related party, with these investors. The lease has been classified as a capital lease and included in property and equipment (See note 10) and requires payments of $4,000 per month beginning August 1, 2007 through 2012. As an inducement to enter into the lease, the Company issued the leasing entity 100,000 two year warrants to purchase common stock at $1.20. These warrants were valued at $187,128 using the Black - Scholes valuation model and such cost will be amortized to expense over the life of the lease. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 56.60 % and an expected term for the warrants of 2 years.
18
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
7. SECURED FINANCING AGREEMENTS
During the period 2008 through 2009, the Company entered into a series of financings with CVC California, LLC (“CVC”).
The amounts due under these financings at March 31, 2009 and December 31, 2008 are as follows:
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
(a) Secured Notes from CVC California | $ | 12,781,114 | $ | 13,547,909 | ||||
Valuation Discount | (4,159,861 | ) | (3,181,365 | ) | ||||
8,621,253 | 10,366,544 | |||||||
Less current portion | (8,621,253 | ) | (10,366,544 | ) | ||||
Financing agreement, net of current portion | $ | - | $ | - |
(a) Note Agreements with CVC California
On September 4, 2008 General Environmental Management, Inc. (the “Company”) entered into a series of agreements with CVC California, LLC, a Delaware limited liability company (“CVC”), each dated as of August 31, 2008, whereby the Company issued to CVC (i) a secured convertible term note ("Note") in the principal amount of $6.5 million and (ii) a secured non-convertible revolving credit note ("Revolving Note") of up to $7.0 million; (iii) 6 year warrants to purchase 1,350,000 shares of our common stock at a price of $0.60 per share; (iv) 6 year warrants to purchase 1,350,000 shares of our common stock at a price of $1.19 per share; and, (v) 6 year warrants to purchase 300,000 shares of our common stock at a price of $2.25 per share. The principal amount of the Note carries an interest rate of nine and one half percent, subject to adjustment, with interest payable monthly commencing October 1, 2008. The Note further provides that commencing on April 1, 2009, the Company will make monthly principal payments in the amount of $135,416 through August 31, 2011. Although the stated principal amount of the Term Loan was $6,500,000, the Lender was only required to fund $5,000,000, with the difference being treated as a discount to the note.
(i). The principal amount of the Note and accrued interest thereon is convertible into shares of our common stock at a price of $3.00 per share, subject to anti-dilution adjustments. Under the terms of the Note, the monthly principal payment amount of approximately $135,416 plus the monthly interest payment (together, the "Monthly Payment"), is payable in either cash or, if certain criteria are met, including the effectiveness of a current registration statement covering the shares of our common stock into which the Note is convertible, through the issuance of our common stock. The Company has agreed to register all of the shares that are issuable upon conversion of the Note and exercise of warrants. As of March 31, 2009 and December 31, 2008 the Company had an outstanding balance of $6,500,000 under the note.
(ii). The revolving note allows the Company to borrow a maximum amount of $7,000,000, based on a borrowing base of 90% of all eligible receivables, which are primarily accounts receivables under 90 days. The interest rate on this line of credit is in the amount of prime plus 2.0%, but in no event less than 7% per annum. The Revolving Note is secured by all assets of the Company and is subject to the same security agreement as discussed below. The note is due August 31, 2011. As of March 31, 2009 and December 31, 2008 the Company had an outstanding balance of $6,281,114 and $7,047,909 (including accrued interest) under the revolving note. We project that the Company will maintain a minimum balance of $6,000,000 under the revolving note.
19
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
The Notes are secured by all of our assets and the assets of our direct subsidiary, General Environmental Management, Inc. (Delaware) and its direct subsidiaries, General Environmental Management of Rancho Cordova LLC, a California Limited Liability Company (including the real property owned by General Environmental Management of Rancho Cordova LLC), GEM Mobile Treatment Services Inc., Island Environmental Services, Inc. as well as by a pledge of the equity interests of General Environmental Management, Inc. (Delaware), General Environmental Management of Rancho Cordova LLC, GEM Mobile Treatment Services Inc. and Island Environmental Services, Inc.
In connection with the CVC financing, the Company paid closing fees of $405,000 and issued warrants to acquire an aggregate of 3,000,000 shares of our common stock as described above to CVC. The Company calculated that the fair value of the warrants issued was $1,674,036, based upon the relative value of the Black Scholes valuation of the warrants and the underlying debt amount. For the Black Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78%, expected volatility of 78.57% and an expected term for the warrants of 7 years. The closing fees of $405,000 paid to CVC, the relative value of the warrants of $1,674,036 and the $1,500,000 discount on issuance has been reflected by the Company as a valuation discount at issuance and offset to the face amount of the Notes. Concurrent with the cumulative adjustment related to the adoption of EITF 07-05 as discussed below, the Company further recorded valuation discount of $1,408,828 at January 1, 2009. The Valuation discount is being amortized to interest expense over the life of the loan based upon the effective interest method. Financing costs for the three months ended March 31, 2009 includes amortization of $430,131 relating to the discount, and unamortized valuation discount was $4,159,861 at March 31, 2009.
The Company is subject to various negative covenants with respect to the Revolving Credit and Term Loan Agreement (the "Agreement") with CVC California, LLC (the "Lender"). The Company is in compliance with all the covenants in the Agreement, except under Section 6.18 of the Agreement. Section 6.18 requires that EBITDA of the Company not be less than (a) $1,000,000 for the fiscal quarter ending September 30, 2008, (b) $2,000,000 for the two (2) consecutive fiscal quarters ending December 31, 2008, (c) $3,000,000 for the three (3) consecutive fiscal quarters ending March 31, 2009, or (d) $4,000,000 in any four (4) consecutive fiscal quarters ending on or after June 30, 2009; provided, however, that it shall not be an Event of Default if actual EBITDA in any measuring period is within 10% of the required minimum EBITDA for such measuring period as set forth in this Section 6.18, so long as actual EBITDA for the next succeeding measuring period hereunder is equal to or greater than the required EBITDA for such.
For the fiscal quarter ending March 31, 2009, the Company was not able to achieve the EBITDA required in the next succeeding measuring period.
The Agreement provides that upon the occurrence of any Event of Default, and at all times thereafter during the continuance thereof: (a) the Notes, and any and all other Obligations, shall, at the Lender’s option become immediately due and payable, both as to principal, interest and other charges, (b) all outstanding Obligations under the Notes, and all other outstanding Obligations, shall bear interest at the default rates of interest provided in certain promissory Notes (the "Notes"), (c) the Lender may file suit against the Company on the Notes and against the Company and the Subsidiaries under the other Loan Documents and/or seek specific performance or injunctive relief thereunder (whether or not a remedy exists at law or is adequate), (d) the Lender shall have the right, in accordance with the Security Documents, to exercise any and all remedies in respect of such or all of the Collateral as the Lender may determine in its discretion (without any requirement of marshalling of assets or other such requirement, all of which are hereby waived by the Borrower), and (e) the Revolving Credit Commitment shall, at the Lender’s option, be immediately terminated or reduced, and the Lender shall be under no further obligation to consider making any further Advances.
20
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
As of May 15, 2009, the Lender has not taken any action with regard to the default under Section 6.18 of the Agreement. The Company is in discussions with the Lender to obtain a waiver of the Default and continues to operate in the normal course of business and receive advances under the Revolving Credit Commitment.
Based on the technical nature of the default, the Company has reclassified the outstanding debt to CVC California, LLC to current liabilities on the balance sheet.
As further described in Note 11, EITF 07-05 became effective January 1, 2009. In connection with its implementation, the Company was required to classify the conversion feature of the Note and the related warrants as derivative liabilities. The cumulative effect of adopting EITF 07-05 resulted in a decrease in the carrying value of the notes as of January 1, 2009 of $1,408,828, which the Company recorded as additional valuation discount to the Note balance.
8. CONVERTIBLE NOTES PAYABLE
During the period March 4, 2004 through June 22, 2004, the Company entered into a Loan and Security Agreement with several investors to provide the funding necessary for the purchase of the Transfer Storage Disposal Facility (TSDF) located in Rancho Cordova, California. The notes are secured by the TSDF, carry an interest rate of eight percent (8%) per annum, and principal and interest are convertible at $30.00 per share into common stock. In addition, the note holders were issued warrants to purchase common stock. The notes were initially due June 30, 2009, but have been extended to September 30, 2011. As of December 31, 2008, notes payable of $422,500 plus accrued interest of $67,105 remain outstanding. As of March 31, 2009, notes payable of $392,500 plus accrued interest of $75,151 remain outstanding.
9. LONG TERM OBLIGATIONS
Long term debt consists of the following at March 31, 2009 and December 2008:
March 31, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
(a) Vehicle notes | $ | 10,478 | $ | 12,865 | ||||
(b) Equipment notes | 58,803 | 67,102 | ||||||
(c) Notes Payable, Island Acquisition | 1,250,000 | 1,250,000 | ||||||
1,319,281 | 1,329,967 | |||||||
Less current portion | 792,514 | 794,278 | ||||||
Notes payable, net of current portion | $ | 526,767 | $ | 535,689 |
21
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
(a) Note payable in monthly installments of $815 including interest at 1.9% per annum, through April 2010. The note is secured by a vehicle.
(b) The equipment note is for equipment utilized by GEM Mobile Treatment Services. It requires monthly payments of $3,417 with an interest rate of 12.35% and matures in October 2010. The note is secured by the equipment.
(c) On August 31, 2008, the Company entered into a stock purchase agreement with Island Environmental. As part of the consideration for the purchase, the Company issued two three year promissory notes totaling $1.25 million.
The first note is payable to the former owners in the amount of $1,062,500. The second note is payable to NCF Charitable Trust in the amount of $187,500. The notes bear interest at eight percent (8%) with interest only payments payable quarterly and the entire balance of interest and principal payable August 31, 2011. The notes provide that there shall be a partial principal payment at the end of August 31, 2009 of up to $637,500 with respect to the note in favor of the sellers and $112,500 with respect to the note in favor of NCF.
The current note payable of $1,250,000 could have an accelerated payment due of $750,000 in September 2009. The accelerated note payment could be payable to the sellers if EBITDA in excess of $1,100,000 during the twelve month period following the acquisition is not achieved. Based on the Company’s current assessment, it is likely that the target EBITDA will not be achieved and the accelerated payment has been classified as current in the financial statements.
10. OBLIGATIONS UNDER CAPITAL LEASES
The Company has entered into various capital leases for equipment with monthly payments ranging from $598 to $26,500 per month, including interest, at interest rates ranging from 9.8% to 19.7% per annum. At March 31, 2009, monthly payments under these leases aggregated $89,079. The leases expire at various dates through 2014. The amounts outstanding under the capital lease obligations were $2,227,498 and $2,374,861 as of March 31, 2009 and December 31, 2008, respectively.
Minimum future payments under capital lease obligations are as follows:
Years Ending December 31, | ||||
2009 | 710,523 | |||
2010 | 693,378 | |||
2011 | 643,334 | |||
2012 | 538,403 | |||
2013 | 183,504 | |||
Thereafter | 53,299 | |||
Total payments | 2,822,441 | |||
Less: amount representing interest | (594,943 | ) | ||
Present value of minimum lease payments | 2,227,498 | |||
Less: current portion | (606,788 | ) | ||
Non-current portion | $ | 1,620,710 |
22
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
11. DERIVATIVE LIABILITIES
In June 2008, the FASB finalized Emerging Issues Task Force (“EITF”) 07-05, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.” Under EITF 07-05, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of the Company’s Secured Financing Agreements (described in Note 7), and the related warrants, do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the note holders from the potential dilution associated with future financings. In accordance with EITF 07-05, the conversion feature of the notes was separated from the host contract (i.e., the notes) and recognized as an embedded derivative instrument. Both the conversion feature of the notes and the warrants have be re-characterized as derivative liabilities. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“FAS 133”) requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
The derivative liabilities were valued using a probability weighted Black-Scholes-Merton valuation technique with the following weighted average assumptions:
March 31, 2009 | December 31, 2008 | August 31, 2008 | ||||||||||
Conversion feature: | ||||||||||||
Risk-free interest rate | 1.66 | % | 1.66 | % | 1.66 | % | ||||||
Expected volatility | 81.93 | % | 78.66 | % | 78.57 | % | ||||||
Expected life (in years) | 2.42 | 2.67 | 3.00 | |||||||||
Expected dividend yield | 0.0 | % | 0.00 | % | 0.0 | % | ||||||
Warrants: | ||||||||||||
Risk-free interest rate | 1.66 | % | 4.78 | % | 4.78 | % | ||||||
Expected volatility | 81.93 | % | 78.66 | % | 78.57 | % | ||||||
Expected life (in years) | 5.42 | 5.67 | 6.00 | |||||||||
Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
Fair Value: | ||||||||||||
Conversion feature | 417,519 | 624,385 | 1,145,544 | |||||||||
Warrants | 1,156,559 | 1,502,205 | 2,113,423 | |||||||||
1,574,078 | 2,126,590 | 3,258,967 |
The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility is based on the Company’s historical volatility for its common stock. The expected life of the conversion feature of the notes was based on the term of the notes and the expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future.
23
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
EITF 07-05 implemented in the first quarter of 2009 and is reported as a cumulative change in accounting principles. The cumulative effect on the accounting for the conversion feature of the note and the warrants on January 1, 2009 is as follows:
Additional | Accumulated | Derivative | Convertible | |||||||||||||
Derivative Instrument: | Paid-in Capital | Deficit | Liability | Note | ||||||||||||
Conversion feature | $ | - | $ | 393,875 | $ | 624,385 | $ | (1,018,261 | ) | |||||||
Warrants | $ | (1,674,036 | ) | $ | 562,398 | $ | 1,502,205 | $ | (390,567 | ) | ||||||
$ | (1,674,036 | ) | $ | 956,273 | $ | 2,126,590 | $ | (1,408,828 | ) |
The warrants were originally recorded at their relative fair value as an increase in additional paid-in capital. The change in the accumulated deficit includes gains resulting from decreases in the fair value of the derivative liabilities and amortization of the additional note discount through December 31, 2008. The derivative liability amounts reflect the fair value of each derivative instrument as of the January 1, 2009 date of implementation. The convertible note amount represent the discount recorded upon adoption of EITF 07-05. This discount will be recognized on a monthly basis through the maturity date of the notes.
12. STOCK OPTIONS AND WARRANTS
Options
On March 28, 2007 the Board of Directors approved and implemented the 2007 Stock Option Plan (the “Plan”). The plan authorized option grants to employees and other persons closely associated with the Company for the purchase of up to 5,500,000 shares. The Board of Directors granted a total of 4,397,500 options to 102 employees and one consultant. The exercise price of the options was $1.19.
On January 2, 2009 the Stock Option Committee approved the issuance of 34,500 options to twenty eight employees. The exercise price for the options was $0.75 per share and was based on the closing market price on the date of issuance. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 78.66 % and an expected term for the options of 8 years.
On January 7, 2009 the Stock Option Committee approved the issuance of 570,000 options to thirteen employees. The exercise price for the options was $0.75 per share and was based on the closing market price on the date of issuance. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 78.66 % and an expected term for the options of 8 years.
24
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
A summary of the option activity during the period is as follows:
Weighted Avg. | Weighted Avg. | Weighted Avg. | ||||||||||
Options | Exercise Price | Life in Years | ||||||||||
Options outstanding, January 1, 2009 | 4,787,340 | 1.64 | 8.36 | |||||||||
Options granted | 604,500 | 0.75 | 9.83 | |||||||||
Options exercised | (250 | ) | 0.75 | - | ||||||||
Options cancelled | (293,508 | ) | 2.08 | - | ||||||||
Options outstanding, March 31, 2009 | 5,098,082 | 1.52 | 8.31 | |||||||||
Options exercisable, March 31, 2009 | 3,387,359 | 1.64 | 8.13 |
The options had no intrinsic value at March 31, 2009.
For the three months ended March 31, 2009 and 2008, the fair value of options vesting during the period was $261,734 and $216,716 respectively, and has been reflected as compensation cost. As of March 31, 2009, the Company has unvested options valued at $1,146,584 which will be reflected as compensation cost over the estimated remaining vesting period of 3 years.
Warrants
A summary of the warrant activity during the period is as follows:
Range of exercise prices | Weighted Avg. in Years | |||||||||||
Warrants outstanding, January 1, 2009 | 9,527,894 | $0.60-$37.50 | 4.86 | |||||||||
Warrants granted | 70,000 | $0.75 | 6.83 | |||||||||
Warrants exercised | - | - | - | |||||||||
Warrants expired | (191,943 | ) | $0.60-$30.00 | - | ||||||||
Warrants outstanding, March 31, 2009 | 9,405,951 | $0.60-$37.50 | 4.77 |
The warrants had no intrinsic value at March 31, 2009.
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GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
13. INCOME TAXES
The Company's net deferred tax assets consisted of the following at March 31, 2009 and December 31, 2008:
March 31, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
Deferred tax asset, net operating loss | $ | 14,694,862 | $ | 14,184,661 | ||||
Less valuation allowance | (14,694,862 | ) | (14,184,661 | ) | ||||
Net deferred tax asset | $ | - | $ | - |
As of March 31, 2009, the Company had federal net operating loss carry forwards of approximately $43,220,183 expiring in various years through 2025, which can be used to offset future taxable income, if any. No deferred asset benefit for these operating losses has been recognized in the financial statements due to the uncertainty as to their realizability in future periods.
As a result of the Company's significant operating loss carryforward and the corresponding valuation allowance, no income tax expense (benefit) has been recorded at March 31, 2009 or December 31, 2008.
Reconciliation of the effective income tax rate to the United States statutory income tax rate for the three months ended March 31, 2009 and 2008 is as follows:
Three months endedMarch 31, | |||
2009 | 2008 | ||
Tax expense at U.S. statutory income tax rate | (34.0) % | (34.0) % | |
Increase in the valuation allowance | 34.0 | 34.0 | |
Effective rate | - | - |
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109, Accounting for Income Taxes.” The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of September 30, 2008, the Company does not have a liability for unrecognized tax uncertainties.
The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is subject to U.S. federal or state income tax examinations by tax authorities for years after 2002. During the periods open to examination, the Company has net operating loss and tax credit carry forwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs and tax credit carry forwards may be utilized in future periods, they remain subject to examination.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of March 31, 2009 the Company has no accrued interest or penalties related to uncertain tax positions.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains forward-looking statements, which are generally identifiable by use of the words “believes”, “expects”, “intends”, “anticipates”, “plans to”, “estimates”, “ projects”, or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in other documents the company files from time to time with the Securities and Exchange Commission ( the “SEC”), including the Quarterly Reports on form 10-Q filed by us in the fiscal year 2008.
Statements made in this Form 10-Q (the “Quarterly Report”) that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.
The words “we,” “us,” “our,” and the “Company,” refer to General Environmental Management, Inc. The words or phrases “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate,” or “continue,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative thereof, are intended to identify “forward-looking statements.” Actual results could differ materially from those projected in the forward looking statements as a result of a number of risks and uncertainties, including but not limited to: (a) our failure to implement our business plan within the time period we originally planned to accomplish; and (b) other risks that are discussed in this Quarterly Report or included in our previous filings with the Securities and Exchange Commission (“SEC”).
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OVERVIEW
Ultronics Corporation (Ultronics) was a non-operating company formed for the purpose of evaluating opportunities to acquire an operating company. On February 14, 2005 Ultronics acquired General Environmental Management, Inc. through a reverse merger between Ultronics Acquisition Corp., a wholly owned subsidiary of Ultronics and General Environmental Management, Inc., whereby General Environmental Management, Inc. (GEM) was the surviving entity.
The acquisition was accounted for as a reverse merger (recapitalization) with GEM deemed to be the accounting acquirer, and Ultronics Corporation the legal acquirer. Accordingly, the historical financial information presented in the financial statements is that of GEM as adjusted to give effect to any difference in the par value of the issuer’s and the accounting acquirer stock with an offset to capital in excess of par value. The basis of the assets, liabilities and retained earnings of GEM, the accounting acquirer, have been carried over in the recapitalization. Subsequent to the acquisition, the Company changed its name to General Environmental Management, Inc. GEM is a fully integrated environmental service firm structured to provide EHS compliance services, field services, transportation, off-site treatment, and on-site treatment services. Through its services GEM assists clients in meeting regulatory requirements for the disposal of hazardous and non-hazardous waste. GEM provides its clients with access to GEMWare, an internet based software program that allows clients to maintain oversight of their waste from the time it leaves their physical control until final disposition by recycling, destruction, or landfill. The GEM business model is to grow both organically and through acquisitions.
During 2003 and 2004 GEM acquired the assets of Envectra, Inc., Prime Environmental Services, Inc. (Prime) and 100% of the membership interest in Pollution Control Industries of California, LLC, now named General Environmental Management of Rancho Cordova, LLC. The assets of Envectra, Inc. included an internet based integrated environmental management software now marketed by the Company as GEMWare. The acquisition of the assets of Prime resulted in a significant increase in the revenue stream of the company and a presence in the Washington State and Alaska markets through Prime’s Seattle office. All Prime services are now offered under the GEM name. The primary asset of Pollution Control Industries of California, LLC was a fully permitted Part B Treatment Storage Disposal Facility (TSDF) in Rancho Cordova, California. The facility provides waste management services to field service companies and allows the Company to bulk and consolidate waste into larger more cost effective containers for outbound disposal.
During 2006, the Company entered into a stock purchase agreement with K2M Mobile Treatment Services, Inc. of Long Beach, California ("K2M"), a privately held company, pursuant to which the Company acquired all of the issued and outstanding common stock of K2M. K2M is a California-based provider of mobile wastewater treatment and vapor recovery services. Subsequent to the acquisition in March 2006, the Company opened a vapor recovery service division in Houston, Texas and will be looking to expand its operations in the Gulf coast area.
On August 31, 2008, the Company entered into a stock purchase agreement with Island Environmental Services, Inc. of Pomona, California ("Island"), a privately held company, pursuant to which the Company acquired all of the issued and outstanding common stock of Island, a California-based provider of hazardous and non-hazardous waste removal and remediation services to a variety of private and public sector establishments.
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Revenues
Total revenues were $8,201,870 for the three months ended March 31, 2009, representing an increase of $1,250,217 or 18% compared to the three months ended March 31, 2008. The increase in revenue can be attributed to increased revenue for GEM’s mobile treatment business and acquisition of Island Environmental Services which was offset by a decrease in revenues in the Enviroconstruction market sector.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2009 were $7,196,715 or 88% of revenue, as compared to $5,645,344 or 81% of revenue for the three months ended March 31, 2008. The cost of revenues includes disposal costs, transportation, fuel, outside labor and operating supplies. The change in the cost of revenue in comparison to the prior year is primarily due to negative margins at Island Environmental Services.
Operating Expenses
Operating expenses for the three months ended March 31, 2009 were $2,103,598 or 26% of revenue as compared to $1,849,614 or 27% of revenue for the same period in 2008. Operating expenses include sales and administrative salaries and benefits, insurance, rent, legal, accounting and other professional fees. The increase in operating expenses is primarily attributable to increase in rent and insurance.
Depreciation and Amortization
Depreciation and amortization expenses for the three months ended March 31, 2009 were $411,764 or 5% of revenue, as compared to $226,795 or 3.2% of revenue for the same period in 2008. The increase in expense is due to additions to property, plant and equipment and increase of assets acquired under capitalized leases.
Interest and financing costs
Interest and financing costs for the three months ended March 31, 2009 were $994,188 or 12% of revenue, as compared to $816,608 or 12% of revenue for the same period in 2008. Interest expense consists of interest on the line of credit, short and long term borrowings, and advances to related parties. It also includes amortization of deferred finance fees and amortization of valuation discounts generated from beneficial conversion features related to the fair value of warrants and conversion features of long term debt. The increase in interest expense is due to additional interest incurred on higher balances on the line of credit.
Other Non-Operating Income
The Company had other non-operating income for the three months ended March 31, 2009 of $8,417 or 0.1 % of revenue, and $7,663 or .01% of revenue for the same period in 2008. Non-Operating income for the three months ended March 31, 2009 and March 31, 2008 consisted of continuing rental income from the lease of warehouse space in Kent, Washington.
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Gain on derivative financial instruments
In accordance with EITF 07-05 (See Note 11) which is effective at the end of 2008, the conversion feature of our convertible notes was recognized as an embedded derivative instrument. Both the conversion feature of the notes and the warrants have been re-characterized as derivative liabilities. SFAS No. 133 requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations. For the period ending March 31, 2009, the Company recorded a gain on derivative financial instruments of $552,512.
Net Loss
The net loss for the three months ended March 31, 2009 was $1,531,235 or 19% of revenue as compared to a loss of $1,345,233, or 19% of revenue for the same period in 2008. The higher loss is attributable to reductions in operating margins over the three months ended March 31, 2009 and losses incurred at Island Environmental Services.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Our primary sources of liquidity are cash provided by operating, investing, and financing activities. Net cash provided by operations for the three months ended March 31, 2009 was $1,195,653 as compared to net cash used in operations of $506,816 for the same period in 2008.
Liquidity
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. The Company incurred a net loss of $1,531,235 during the three months ended March 31, 2009. As of March 31, 2009 the Company had current liabilities exceeding current assets by $13,802,517, primarily because of the reclassification of long term debt to current resulting from covenant provisions under the ComVest notes and had a stokholders’ deficiency of $4,879,714. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
Management is continuing to raise capital through the issuance of debt and equity and believes it will be able to raise sufficient capital over the next twelve months to finance operations. In addition, management believes that the company will begin to operate profitably due to improved operational results and cost reductions made in late 2008. However, there can be no assurances that the Company will be successful in this regard or will be able to maintain its working capital surplus or eliminate operating losses. The accompanying financial statements do not contain any adjustments which may be required as a result of this uncertainty.
The Company’s capital requirements consist of general working capital needs, scheduled principal and interest payments on debt, obligations, and capital expenditures. The Company’s capital resources consist primarily of cash generated from operations and proceeds from issuances of debt and common stock. The Company’s capital resources are impacted by changes in accounts receivable as a result of revenue fluctuations, economic trends and collection activities.
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Cash Flows for the Three Months Ended March 31, 2009
Operating activities for the three months ended March 31, 2009 produced $1,195,653 in cash. Accounts receivable, net of allowances for bad debts, were reduced by $1,375,147 as of March 31, 2009 and accounts payable were increased by $695,299. Depreciation and amortization for the three months ended March 31, 2009 totaled $411,764. The net loss of $1,531,235 included a number of non-cash items incurred by the Company including expenses of $261,734 representing the fair value of vested options, $430,331 representing amortization of discount on financing agreements, $37,743 representing warrants issued for services, $118,680 representing amortization of note discounts, $48,132 representing amortization of deferred financing fees and a derivative gain of $552,512. Prepaid expenses decreased by $117,496 and accrued expenses decreased by $96,752.
The Company used cash for investment in plant, property and equipment and deposits totaling approximately $251,156 for the three months ended March 31, 2009. Capital expenditures increased due to the acquisition of equipment at GEM Mobile Treatment Services. Financing activities used $964,013 for the three months ended March 31, 2009 to reduce notes payable and make payments on capital leases.
These activities resulted in a $19,516 reduction in cash balances from year end December 31, 2008 to the end of the quarter March 31, 2009.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses. The following are the areas that we believe require the greatest amount of estimates in the preparation of our financial statements: allowances for doubtful accounts, impairment testing and accruals for disposal costs for waste received at our TSDF.
(a) Allowance for doubtful accounts
We establish an allowance for doubtful accounts to provide for accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, we analyze specific past due accounts and analyze historical trends in bad debts. In addition, we take into account current economic conditions. Actual accounts receivable written off in subsequent periods can differ materially from the allowance for doubtful accounts provided.
(b) Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured. This statement also provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. The Company periodically reviews, at least annually, such assets for possible impairment and expected losses. If any losses are determined to exist they are recorded in the period when such impairment is determined.
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(c) Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is reasonably assured.
The Company is a fully integrated environmental service firm structured to provide field services, technical services, transportation, off-site treatment, on-site treatment services, and environmental health and safety (“EHS”) compliance services. Through our services, we assist clients in meeting regulatory requirements from the designing stage to the waste disposition stage. The technicians who provide these services are billed at negotiated rates, or the service is bundled into a service package. These services are billed and revenue recognized when the service is performed and completed. When the service is billed, expected costs are accumulated and accrued.
Our field services consist primarily of handling, packaging, and transporting a wide variety of liquid and solid wastes of varying amounts. We provide the fully trained labor and materials to properly package hazardous and non-hazardous waste according to requirements of the Environmental Protection Agency and the Department of Transportation. Small quantities of laboratory chemicals are segregated according to hazard class and packaged into appropriate containers or drums. Packaged waste is profiled for acceptance at a client’s selected treatment, storage and disposal facility (TSDF) and tracked electronically through our systems. Once approved by the TSDF, we provide for the transportation of the waste utilizing tractor-trailers or bobtail trucks. The time between picking up the waste and transfer to an approved TSDF is usually less than 10 days. The Company recognizes revenue for waste picked up and received waste at the time pick up or receipt occurs and recognizes the estimated cost of disposal in the same period. For the Company’s TSDF located in Rancho Cordova, CA, costs to dispose of waste materials located at the Company’s facilities are included in accrued disposal costs. Due to the limited size of the facility, waste is held for only a short time before transfer to a final treatment, disposal or recycling facility. Revenue is recognized on contracts with retainage when services have been rendered and collectability is reasonably assured.
(d) Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
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Recent Accounting Pronouncements
In December 2007, Financial Accounting Standards Board (FASB) Statement 141R, “Business Combinations (revised 2007)” (SFAS 141R”) was issued. SFAS 141R replaces SFAS 141 “Business Combinations”. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transactions costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effective date, as well as the adoption date for the Company was January 1, 2009. Although SFAS 141R may impact our reporting in future financial periods, we have determined that the standard did not have any impact on our historical consolidated financial statements at the time of adoption.
In April 2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. This pronouncement requires enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a recognized intangible asset. FST 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The effective date, as well as the adoption date for the Company was January 1, 2009. Although FSP 142-3 may impact our reporting in future financial periods, we have determined that the standard did not have any impact on our historical consolidated financial statements at the time of adoption.
In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP No. FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), to address application issues raised on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is effective for the first annual reporting period on or after December 31, 2008. The impact of FSP No. FAS 141(R)-1 on the Company’s consolidated financial statements will depend on the number and size of acquisition transactions, if any, engaged in by the company.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FSP FAS 157-4 requires comparative disclosures only for periods ending after initial adoption. The Company does not expect the changes associated with adoption of FSP FAS 157-4 will have a material effect on the on its financial statements and disclosures.
The Company does not believe that the adoption of the above recent pronouncements will have a material effect on the Company’s consolidated results of operations, financial position, or cash flows.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not required
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
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PART II - OTHER INFORMATION
Item 1. Legal Proceeding
On July 5, 2007, a lawsuit was instituted by Romic Environmental Technologies Corp. (“RET”) against the Company and four of its senior executives, Namki Yi, the Vice President of Corporate Development, Betty McKee, the Director of Systems & Financial Analysis, Mindy Rath, the Director of Sales and Gary Bowling, the Regional General Manager for Southern CA, all of whom were formerly employed by RET. The lawsuit was brought in the Superior Court of the State of California, County of Los Angeles. In the lawsuit, RET alleges that the Company and the four executives are liable to RET for among other things, Violation of Non-Disclosure Agreements and Termination Protection Agreements, Intentional Interference with contracts, and Violation of Trade Secrets and Unfair Competition. RET alleges damages of Fifteen Million Dollars and requests certain injunctive relief. The Company believes that the lawsuit has no merit, and intends to vigorously defend the action. However, an adverse outcome of this lawsuit would have a material adverse affect on our business and financial condition.
Item 1A. Risk Factors
No material changes from risk factor as previously disclose.
Item 2. Unregistered Sales of Securities and Use of Proceeds – S-1/A Registration Statement
None
Item 3. Defaults upon Senior Securities
The Company is subject to various negative covenants with respect to the Revolving Credit and Term Loan Agreement (the "Agreement") with CVC California, LLC (the "Lender"). The Company is in compliance with all the covenants in the Agreement, except under Sections 6.18 of the Agreement. Section 6.18 requires that EBITDA of the Company not be less than (a) $1,000,000 for the fiscal quarter ending September 30, 2008, (b) $2,000,000 for the two (2) consecutive fiscal quarters ending December 31, 2008, (c) $3,000,000 for the three (3) consecutive fiscal quarters ending March 31, 2009, or (d) $4,000,000 in any four (4) consecutive fiscal quarters ending on or after June 30, 2009; provided, however, that it shall not be an Event of Default if actual EBITDA in any measuring period is within 10% of the required minimum EBITDA for such measuring period as set forth in this Section 6.18, so long as actual EBITDA for the next succeeding measuring period hereunder is equal to or greater than the required EBITDA for such.
For the fiscal quarter ending September 30, 2008, the Company had EBITDA that was within 10% of the required minimum EBITDA for such measuring period but was not able to achieve the EBITDA required in the next succeeding measuring period.
The Agreement provides that upon the occurrence of any Event of Default, and at all times thereafter during the continuance thereof: (a) the Notes, and any and all other Obligations, shall, at the Lender’s option become immediately due and payable, both as to principal, interest and other charges, (b) all outstanding Obligations under the Notes, and all other outstanding Obligations, shall bear interest at the default rates of interest provided in certain promissory Notes (the "Notes"), (c) the Lender may file suit against the Company on the Notes and against the Company and the Subsidiaries under the other Loan Documents and/or seek specific performance or injunctive relief thereunder (whether or not a remedy exists at law or is adequate), (d) the Lender shall have the right, in accordance with the Security Documents, to exercise any and all remedies in respect of such or all of the Collateral as the Lender may determine in its discretion (without any requirement of marshalling of assets or other such requirement, all of which are hereby waived by the Borrower), and (e) the Revolving Credit Commitment shall, at the Lender’s option, be immediately terminated or reduced, and the Lender shall be under no further obligation to consider making any further Advances.
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As of May 15, 2009, the Lender has not taken any action with regard to the defaults under Section 6.18 of the Agreement. The Company is in discussions with the Lender to obtain a waiver of the Default and continues to operate in the normal course of business and receive advances under the Revolving Credit Commitment.
Based on the technical nature of the default, the Company has reclassified the outstanding debt to CVC California, LLC to current liabilities on the balance sheet.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
(a) | Exhibits |
(b) | Reports on Form 8-K | |
1. Stock Purchase agreement Island Environmental Svcs.; filed with the Commission on 9/24/08 | ||
2. Material definitive agreement and Sales of Equity; filed with the Commission on 9/24/08 |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENERAL ENVIRONMENTAL MANAGEMENT, INC | |||
Date: May 14, 2009 | By: | /s/ Timothy J. Koziol | |
Timothy J. Koziol, CEO and Chairman of the Board of Directors |
Date: May 14, 2009 | By: | /s/ Brett M. Clark | |
Brett M. Clark, Executive Vice President of Finance, Chief Financial Officer |
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