SEC Filing Summary: General Environmental Management, Inc. (10-K)
Business Context and Reporting Period
Company: General Environmental Management, Inc. (GEM)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: GEM is a fully integrated environmental services firm providing field services, technical services, transportation, off-site treatment, on-site treatment, and environmental health and safety (EHS) compliance services. The company operates a permitted Treatment, Storage, and Disposal Facility (TSDF) in Rancho Cordova, California, and maintains field service locations across California, Washington, and Texas. In August 2008, GEM acquired Island Environmental Services, Inc., expanding its hazardous and non-hazardous waste removal capabilities.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $34,864,714 | $30,445,608 |
| Cost of Revenues | $28,981,325 (83% of Rev) | $23,756,677 (78% of Rev) |
| Gross Profit | $5,883,389 | $6,688,931 |
| Operating Expenses | $8,397,355 (24% of Rev) | $13,617,277 (45% of Rev) |
| Operating Loss | $(2,513,966) | $(6,928,346) |
| Interest & Financing Costs | $(4,695,041) | $(2,548,609) |
| Net Loss | $(7,149,709) | $(16,086,037) |
| Cash Used in Operating Activities | $(1,586,386) | $(3,747,615) |
| Cash and Cash Equivalents (End of Period) | $375,983 | $954,581 |
| Working Capital Deficit | $(11,751,760) | $(1,644,048) |
| Total Debt (Current + Long Term) | ~$13.5M (CVC) + $2.4M (Capital Leases) | ~$6.4M (Laurus) + $1.2M (Capital Leases) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased by 15% ($4.4M) driven by higher volumes in mobile treatment services and the inclusion of Island Environmental Services, Inc. following its August 2008 acquisition.
- Cost Structure: Cost of revenues increased to 83% of revenue (from 78%) due to higher volumes and the inclusion of the new acquisition. However, operating expenses decreased significantly by 38% ($5.2M), primarily due to expense reductions and a decrease in non-cash charges for consulting fees.
- Financing Costs: Interest and financing costs nearly doubled to $4.7M (13% of revenue) due to the amortization of valuation discounts and deferred fees associated with a new refinancing agreement with CVC California, LLC in September 2008.
- Net Loss Reduction: The net loss improved significantly from $16.1M in 2007 to $7.1M in 2008. This improvement was largely due to the absence of a $6.8M non-cash charge in 2008 related to the "cost to induce conversion of related party debt" which occurred in 2007.
- Liquidity Position: The company moved from a positive working capital position in 2007 to a significant deficit of $11.8M in 2008. Cash on hand dropped from $954k to $376k.
Guidance, Outlook, Risks, and Contingencies
Going Concern Uncertainty: The financial statements include a "substantial doubt" regarding the company's ability to continue as a going concern due to recurring losses, a working capital deficit, and a stockholders' deficiency of $2.9M. Management plans to raise capital through debt and equity issuances and expects to achieve profitability through cost-cutting and integration of recent acquisitions.
Debt Covenants and Default: The company entered into a $13.5M financing facility with CVC California, LLC. The company is currently in technical default of an EBITDA covenant (Section 6.18) for the quarter ending December 31, 2008. As of the filing date, the lender has not taken action, and the company is seeking a waiver. Consequently, the entire debt has been reclassified as current liabilities.
Legal Proceedings: A lawsuit filed in July 2007 by Romic Environmental Technologies Corp. (RET) alleges violation of non-disclosure agreements, trade secrets, and unfair competition, seeking $15M in damages. The company intends to vigorously defend the action but notes an adverse outcome could be material.
Acquisition Contingencies: The acquisition of Island Environmental Services includes a contingent earn-out of up to $3.75M based on EBITDA performance. If EBITDA targets are not met, an accelerated payment of $750k on the acquisition notes is due in September 2009.
Investor Verification Checklist
- Debt Covenant Status: Verify the outcome of discussions with CVC California, LLC regarding the EBITDA covenant default and whether a waiver has been granted to prevent immediate acceleration of debt.
- Capital Raising: Confirm the company's ability to secure additional debt or equity financing to cover the $11.8M working capital deficit and fund operations.
- Legal Exposure: Monitor the status of the Romic Environmental Technologies Corp. lawsuit and any potential settlement or judgment impacts.
- Acquisition Performance: Assess whether Island Environmental Services, Inc. is meeting the EBITDA targets required to avoid the accelerated $750k note payment and to trigger the earn-out.
- Customer Concentration: Note that one customer accounted for 14% of 2008 revenues; verify the stability of this relationship.