SEC Filing Summary: General Environmental Management, Inc. (10-Q)
Business Context and Reporting Period
Company: General Environmental Management, Inc. (GEM)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: GEM is a fully integrated environmental service firm providing EHS compliance, field services, transportation, and waste treatment. The company operates as a smaller reporting company and is currently executing a strategy to divest business units to satisfy senior lender obligations.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Revenues | $12,589,161 | $17,217,566 |
| Cost of Revenues | $12,906,589 | $15,548,592 |
| Gross Profit (Loss) | $(317,428) | $1,668,974 |
| Operating Loss | $(6,925,085) | $(3,435,125) |
| Net Loss | $(12,510,521) | $(4,687,810) |
| Cash from Operating Activities | $382,805 | $(1,046,595) |
| Cash Balance (End of Period) | $39,676 | $604,526 |
| Total Assets | $12,171,303 | $19,241,543 |
| Total Liabilities | $25,788,093 | $22,171,923 |
| Stockholders' Deficiency | $(13,616,790) | $(2,930,380) |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 27% year-over-year, primarily due to the loss of competitive bid contracts for field service work in Alaska and a reduction in field service work due to the economic environment. This was partially offset by the inclusion of Island Environmental Services.
- Margin Compression: The company moved from a gross profit of $1.67M in 2008 to a gross loss of $317K in 2009. Cost of revenues exceeded revenues (102% of revenue) due to the loss of profitable Alaska contracts and increased rent/depreciation.
- Debt Restructuring and Extinguishment: The company incurred significant non-cash charges related to the extinguishment of debt totaling approximately $4.04M for the nine-month period. This resulted from substantial modifications to financing agreements with senior lender CVC California, LLC.
- Derivative Liabilities: A gain of $988,342 was recorded on derivative financial instruments due to changes in fair value. Total derivative liabilities stood at $4.93M as of September 30, 2009.
- Discontinued Operations: The company sold GEM Mobile Treatment Services (GEM MTS) in August 2009. The transaction resulted in a gain from discontinued operations of $1.08M for the nine months ended September 30, 2009.
Outlook, Risks, and Management Commentary
- Going Concern: Management has raised substantial doubt about the company's ability to continue as a going concern. Current liabilities exceed current assets by approximately $14.1M, and the company has a stockholders' deficiency of $13.6M.
- Liquidity Strategy: The primary source of cash is a revolving line of credit secured by accounts receivable. Management is executing a plan to divest revenue-generating business units to satisfy senior lender obligations. Proceeds from the sale of GEM MTS were assigned directly to the senior lender to reduce indebtedness.
- Subsequent Event: On November 13, 2009, the company entered into an agreement to acquire California Living Waters, Inc. (CLW) for approximately $9M in promissory notes and warrants. This agreement is subject to rescission if the company fails to pay certain indebtedness to its senior lender by March 12, 2010.
- Legal Proceedings: The company is defending a lawsuit filed by Romic Environmental Technologies Corp. alleging violation of non-disclosure agreements and trade secrets. While damages were originally alleged at $15M, settlement discussions have produced offers substantially less.
- Covenants: The amended financing agreement requires the company to maintain EBITDA of not less than $1.00 for any fiscal quarter ending on or after December 31, 2009.
Investor Verification Checklist
- Debt Covenants: Verify the company's ability to meet the EBITDA covenant of $1.00 per quarter starting Q4 2009 to avoid default.
- Senior Lender Status: Confirm the status of the $13.6M secured debt with CVC California, LLC and the impact of the GEM MTS sale proceeds on the total indebtedness.
- Subsequent Acquisition: Assess the financial viability of the November 2009 acquisition of CLW, which is contingent on paying off senior debt by March 2010.
- Derivative Valuation: Review the volatility assumptions used in the Black-Scholes model for the $4.93M derivative liability, as fluctuations significantly impact net income.
- Cash Runway: Evaluate the sufficiency of the $39,676 cash balance against the $14M working capital deficit and upcoming debt service obligations.