Business Context and Reporting Period
Company: General Environmental Management, Inc. (GEM)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: GEM is a fully integrated environmental service firm providing field services, transportation, off-site and on-site treatment, and environmental health and safety (EHS) compliance services. The company operates a Treatment Storage Disposal Facility (TSDF) in Rancho Cordova, CA, and utilizes proprietary software (GEMWare) for waste tracking. On August 31, 2008, the company acquired Island Environmental Services, Inc.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 | Three Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Revenues | $24,989,210 | $21,415,043 | $8,630,972 | $8,555,831 |
| Gross Profit | $4,661,221 | $4,391,796 | $1,770,697 | $1,677,596 |
| Gross Margin | 18.7% | 20.5% | 20.5% | 19.6% |
| Operating Loss | $(989,885) | $(6,390,285) | $(74,482) | $(1,356,443) |
| Net Loss | $(4,687,810) | $(14,819,205) | $(2,137,593) | $(5,085,197) |
| Net Loss Per Share (Basic/Diluted) | $(0.37) | $(1.53) | $(0.17) | $(0.43) |
| Cash and Cash Equivalents (Sep 30, 2008) | $604,526 | - | - | - |
| Total Debt (Current + Long Term) | $20,316,702 | - | - | - |
| Working Capital Deficit | $(1,108,837) | $(1,644,048) | - | - |
Note: Total Debt calculated as sum of Current Liabilities (excluding AP/Accrued/Related Party) and Long-Term Liabilities from Balance Sheet.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 16.7% for the nine months ended September 30, 2008, driven by organic growth and the acquisition of Island Environmental Services. The three-month revenue increase was minimal at 0.9%.
- Operating Expenses: Operating expenses decreased significantly by 47.6% for the nine-month period (from $10.8M to $5.7M), primarily due to a reduction in non-cash consulting and advisory fees ($2.3M decrease) and general cost-cutting measures.
- Interest Expense: Interest and financing costs more than doubled for the nine-month period (from $1.8M to $3.7M). This increase is attributed to the amortization of valuation discounts and deferred fees associated with a major refinancing in August 2008.
- Debt Restructuring: The company refinanced its obligations with Laurus Master Fund (paid in full in September 2008) and entered into a new secured financing agreement with CVC California, LLC, totaling $13.5M ($6.5M term note + $7.0M revolving credit).
- Acquisition: Acquired Island Environmental Services for $2.25M cash and $1.25M in promissory notes, increasing property and equipment assets.
Guidance, Outlook, Risks, and Contingencies
- Going Concern: The filing explicitly states that the company's ability to continue as a going concern is in substantial doubt. This is due to a net loss of $4.7M for the nine months, cash used in operations of $1.0M, and a working capital deficit of $1.1M.
- Liquidity Strategy: Management plans to raise capital through the issuance of debt and equity. They believe profitability will be achieved through increased size and cost reductions, though no assurances are provided.
- Debt Covenants and Obligations: The new CVC financing includes a revolving note secured by all company assets and a borrowing base of 90% of eligible receivables. The term note is convertible at $3.00 per share.
- Related Party Transactions: Significant transactions occurred with General Pacific Partners (GPP), including debt extensions secured by stock and warrants, and financing fees. GPP owns 7% of the company's common stock.
- Customer Concentration: One customer accounted for 13% of revenues in the nine months ended September 30, 2008, and 6% of accounts receivable.
Investor Verification Checklist
- Debt Service Capacity: Verify the company's ability to meet monthly principal payments of $135,416 on the CVC term note starting April 2009, given the current operating loss.
- Working Capital Deficit: Confirm the sustainability of operations with a current liability excess of $1.1M and cash balance of only $604k.
- Non-Cash Interest Charges: Review the impact of the $3.7M interest expense, a significant portion of which is non-cash amortization of valuation discounts, on future cash flow projections.
- Acquisition Integration: Assess the performance of the newly acquired Island Environmental Services and the accuracy of the preliminary purchase price allocation.
- Related Party Dependencies: Evaluate the terms and risks associated with the debt extensions and financing arrangements with General Pacific Partners (GPP).