ITEM 1. Description of Business
Company Background
General Environmental Management, Inc. formerly, Ultronics Corporation (the "Company") was incorporated under the laws of Nevada on March 14, 1990. The Company did not have operations from its inception until February 2005, as it was formed for the primary purpose of seeking an appropriate merger candidate.
On February 14, 2005, we acquired all the outstanding shares of General Environmental Management, Inc., a Delaware corporation (“GEM.DE”) in exchange for 630,481 shares of our class A common stock and as a result, GEM.DE became a wholly owned subsidiary of Ultronics. The acquisition has been treated as a reverse merger (recapitalization) with GEM deemed to be the accounting acquirer, and Ultronics the legal acquirer. We then changed our parent name to General Environmental Management, Inc. on March 16, 2005.
Prior to the merger, GEM.DE acquired:
·
Hazpak Environmental Services, Inc. (HES),
·
the assets of EnVectra, Inc. (EnV),
·
the assets of Firestone Environmental Services Company (dba Prime Environmental Services Company), and Firestone Associates, Inc. (dba Firestone Energy Company), and
·
100% of the membership interest in Pollution Control Industries of California, LLC.
Hazpak (HES) was organized as a partnership in February of 1991 specializing in packaging hazardous waste for other hazardous waste management companies. In July of 1992, HES incorporated under the laws of California as Hazpak, Inc. On August 7, 2002 Hazpak, Inc. changed is name to Hazpak Environmental Services, Inc. In March 2003, GEM.DE acquired HES.
On June 23, 2004, we acquired all of the membership interest in Pollution Control Industries of California, LLC. The primary asset of Pollution Control Industries of California, LLC was the real property on which a fully permitted, Part B treatment, storage, disposal facility (TSDF) in Rancho Cordova, California was located. The facility provides service for other environmental service companies and allows us to consolidate waste for more cost effective outbound treatment. Pollution Control Industries of California, LLC changed its name to General Environmental Management of Rancho Cordova, LLC on June 25, 2004.
On July 18, 2003, we acquired the assets of EnVectra, Inc., which included internet-based integrated environmental management software now marketed by us as GEMWare.
On August 1, 2004, we acquired the assets of Prime Environmental Services, Inc. of El Monte, California which resulted in a significant increase in our revenues and a presence in the states of Washington and Alaska through Prime’s Seattle office along with additional clients and revenue in California. All Prime services are now offered under the “General Environmental Management, Inc.” name.
Prior to the acquisition of GEM.DE by the Company, GEM.DE focused its efforts in the second half of 2004 on integration of the above noted purchases and on continued internal growth. During the first quarter of 2005, we adjusted our operations to achieve greater efficiencies at the TSDF and at our field service locations.
On March 10, 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 registrant 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. In consideration of the acquisition of the issued and outstanding common stock of K2M registrant paid $1.5 million in cash to the stockholders of K2M. As a result of the agreement, K2M became a wholly-owned subsidiary of the registrant. For purposes of accounting for the acquisition of the business of K2M, the effective date of the agreement was March 1, 2006. On August 8, 2006 K2M changed its name to GEM Mobile Treatment Services, Inc.
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”).
Our principal office is in Pomona, California with field service locations in Rancho Cordova, CA, Pomona, CA, Santee, CA, Hayward, CA, Signal Hill, CA, Kent, WA, and La Porte, TX with our TSDF in Rancho Cordova, CA.
Business Strategy
We intend to build a fully integrated environmental services company. We intend to do this through internal growth, by providing targeted, integrated solutions to the private and public sectors and by making strategic acquisitions of solutions orientated companies that have a proven customer base and a highly skilled workforce.
Governmental Regulation
Resource Conservation and Recovery Act. The origin of the hazardous waste industry began with the passage of the Resource Conservation and Recovery Act (RCRA) in 1976. RCRA requires waste generators to distinguish between hazardous and non-hazardous wastes and to treat, store, and dispose of those wastes in accordance with specific regulations. RCRA is the principal federal statute governing hazardous waste generation, treatment, transportation, storage and disposal. Pursuant to RCRA, the Environmental Protection Agency (the "EPA") has established a comprehensive, "cradle-to-grave" system for the management of a wide range of materials identified as hazardous or solid waste. States that have adopted hazardous waste management programs with standards at least as stringent as those promulgated by the EPA have been delegated authority by the EPA to administer their facility permitting programs in lieu of the EPA's program.
Every facility that treats, stores or disposes of hazardous waste must obtain a RCRA permit from the EPA or an authorized state agency, unless a specific exemption exists, and must comply with certain operating requirements. Under RCRA, hazardous waste management facilities in existence on November 19, 1980 were required to submit a preliminary permit application to the EPA, the so-called Part A Application. By virtue of this filing, a facility obtained interim status, allowing it to operate until licensing proceedings are instituted pursuant to more comprehensive and exacting regulations (the Part B permitting process).
RCRA requires that Part B permits contain provisions for required on-site study and cleanup activities, known as "corrective action," including detailed compliance schedules and provisions for assurance of financial responsibility.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, (“CERCLA”), also known as “Superfund”, was enacted by Congress in December of 1980. CERCLA imposed a tax on the chemical and petroleum industries and gave the EPA the funds and the authority to respond directly to releases of hazardous substances that could endanger public health or the environment. During the ensuing five year period, $1.6 billion was collected and the money was placed into a trust fund for cleaning up abandoned or uncontrolled hazardous waste sites. CERCLA designates those persons responsible for releases of hazardous waste at the sites, generators and facility owners and operators, as strictly, jointly and severally liable for environmental cleanup costs. CERCLA was amended in 1986 to create the Superfund Amendments and Reauthorization Act (SARA). SARA stresses the importance of innovative technology and permanent remedies in cleaning up hazardous waste sites, increased state involvement, encouraged greater citizen participation, and increased the size of the trust fund to $8.5 billion.
The Superfund Act. The Superfund Act is the primary federal statute regulating the cleanup of inactive hazardous substance sites and imposing liability for cleanup on the responsible parties. It also provides for immediate response and removal actions coordinated by the EPA to releases of hazardous substances into the environment, and authorizes the government to respond to the release or threatened release of hazardous substances or to order responsible persons to perform any necessary cleanup. The statute provides for strict, and in certain cases, joint and several liabilities for these responses and other related costs, and for liability with the cost of damages to natural resources to the parties involved in the generation, transportation and disposal of such hazardous substances.
The Clean Air Act. The Clean Air Act was passed by Congress to control the emissions of pollutants into the air and requires permits to be obtained for certain sources of toxic air pollutants such as vinyl chloride, or criteria pollutants, such as carbon monoxide. In 1990, Congress amended the Clean Air Act to require further reductions of air pollutants with specific targets for non-attainment areas in order to meet certain ambient air quality standards. These amendments also require the EPA to promulgate regulations which, (i) control emissions of 189 hazardous air pollutants; (ii) create uniform operating permits for major industrial facilities similar to RCRA operating permits; (iii) mandate the phase-out of ozone depleting chemicals; and (iv) provide for enhanced enforcement.
The Clean Air Act requires the EPA, working with the states, to develop and implement regulations, which result in the reduction of volatile organic compound ("VOC") emissions and emissions of nitrogen oxides ("NOx") in order to meet certain ozone air quality standards specified by the Clean Air Act.
The Interim Standards of the Hazardous Waste Combustor Maximum Achievable Control Technology (the "HWC MACT") rule of certain Clean Air Act Amendments were promulgated on February 13, 2002. This rule established new emission limits and operational controls on all new and existing incinerators, cement kilns, industrial boilers and light-weight aggregate kilns that burn hazardous waste-derived fuel.
Other Federal Laws. In addition to regulations specifically directed at the transportation, storage, and disposal facilities, there are a number of regulations that may "pass-through" to the facilities based on the acceptance of regulated waste from affected client facilities. Each facility that accepts affected waste must comply with the regulations for that waste, facility or industry. Examples of this type of regulation are National Emission Standards for Benzene Waste Operations and National Emissions Standards for Pharmaceuticals Production. Each of our facilities addresses these regulations on a case-by-case basis determined by its ability to comply with the pass-through regulations.
In our transportation operations, we are regulated by the U.S. Department of Transportation, the Federal Railroad Administration, the Federal Aviation Administration and the U.S. Coast Guard, as well as by the regulatory agencies of each state in which we operate or through which our vehicles pass. Health and safety standards under the Occupational Safety and Health Act, or OSHA, are applicable to all of our operations. This includes both the Technical Services and Site Services operations.
State and Local Regulations
Pursuant to the EPA's authorization of its RCRA equivalent programs, a number of states have regulatory programs governing the operations and permitting of hazardous waste facilities. Accordingly, the hazardous waste treatment, storage and disposal activities of a number of our facilities are regulated by the relevant state agencies in addition to federal EPA regulation.
Some states may classify as hazardous certain wastes that are not regulated under RCRA. For example, California considers used oil as "hazardous wastes" while RCRA does not. Accordingly, we must comply with state requirements for handling state regulated wastes, and, when necessary, obtain state licenses for treating, storing, and disposing of such wastes at our facilities.
We believe that each of our facilities is in substantial compliance with the applicable requirements of federal and state laws, the regulations thereunder and the licenses which we have obtained pursuant thereto. Once issued, such licenses have maximum fixed terms of a given number of years, which differ from state to state, ranging from one year to ten years. The issuing state agency may review or modify a license at any time during its term. We anticipate that once a license is issued with respect to a facility, the license will be renewed at the end of its term if the facility's operations are in compliance with applicable requirements. However, there can be no assurance that regulations governing future licensing will remain static, or that we will be able to comply with such requirements.
Our facilities are regulated pursuant to state statutes, including those addressing clean water, clean air, and local sewer discharge. Our facilities are also subject to local siting, zoning and land use restrictions. Although our facilities could be cited for regulatory violations, we believe we are in substantial compliance with all federal, state and local laws regulating our business.
Industry
The environmental services sector includes the following range of services:
·
Transportation, Logistics Management, and Collection - specialized handling, packaging, transportation and disposal of industrial waste, laboratory quantities of hazardous chemicals, household hazardous wastes, and pesticides;
·
Incineration - the preferred method for treatment of organic hazardous waste because it effectively destroys the contaminants;
·
Landfill Disposal - used primarily for the disposal of inorganic wastes;
·
Physical Waste Treatment - used to reduce the volume or toxicity of waste to make it suitable for further treatment, reuse, or disposal;
·
Reuse/Recycle and Fuels Blending - removes impurities to restore suitability for an intended purpose and to reduce the volume of waste;
·
Wastewater Treatment - separates wastes including industrial liquid wastes containing heavy metals, organics and suspended solids through physical and chemical treatment so that the treated water can be discharged to local sewer systems under permits;
·
Remediation and Site Services - includes the maintenance of industrial facilities and equipment such as recurring cleaning in order to continue operations, maintain and improve operating efficiencies, and satisfy safety requirements; the planned cleanup of hazardous wastes sites and the cleanup of accidental spills and discharges, such as those resulting from transportation accidents; and the cleanup and restoration of buildings, equipment, and other sites and facilities that have been contaminated.
For many years, most chemical wastes generated in the United States by industrial processes have been handled on-site at the generators’ facilities. Over the past 30 years, increased public awareness of the harmful effects of unregulated disposal of hazardous wastes on the environment and health has led to federal, state and local regulation of waste management activities. Environmental laws and regulations impose stringent standards for the management of hazardous wastes and provide penalties for violators. Based on these laws and regulations, waste generators and others are subject to continuing liability for past disposal and environmental degradation. As a result of (1) the increased liability exposure associated with chemical waste management activities, (2) a corresponding decrease in the availability of insurance and significant cost increases in administering compliance, and (3) the need for facility capital improvements, many generators of hazardous wastes have found it uneconomical to maintain their own treatment and disposal facilities or to develop and maintain their own technical expertise necessary to assure regulatory compliance. Accordingly, many generators have sought to have their hazardous wastes managed by firms that possess or have access to the appropriate treatment and disposal facilities, as well as the expertise and financial resources necessary to attain and maintain compliance with applicable environmental regulatory requirements.
At the same time, governmental regulation has resulted in a reduction of the number of facilities available for hazardous waste treatment, storage, or disposal. Many facilities have been unable to meet the strict standards imposed by the environmental laws and regulations. It is in this market we are offering the marketplace a new approach to environmental and waste management issues with targeted, integrated solutions.
Products and Services
We currently provide the following products and services:
Field Services
·
On-Site Services - the provision of professional and fully trained staff to manage clients’ environmental needs on location.
·
Lab Packing - the proper combination and packaging of hazardous waste in approved containers to eliminate the potential for reactions among chemical components.
·
Bulk Waste - the managing and transportation of waste in bulk quantities, either as liquids in vacuum tankers or as solids in dumpster type roll off containers.
·
LTL Program - the managing and transportation of containerized waste in Department of Transportation/United Nations approved drums and containers.
·
Transportation - the transportation of clients’ waste streams in fully permitted and environmentally outfitted vehicles
·
Emergency Response - the immediate response to hazardous materials or waste incidents for government and industry, including providing quick and appropriate response for potential homeland security incidents.
·
Remediation - project work to clean up contaminated sites facing environmental issues.
Technical Services
·
Provide application software to profile, track any waste streams, and routinely process all compliance reporting requirements with various regulatory agencies.
·
All services may be provided electronically through our software offering.
·
Assist clients with Environmental Health and Safety (“EHS”) compliance.
·
Provide necessary and mandated training on environmental issues.
·
Provide report generation for documentation to agencies overseeing environmental issues.
·
Provide digital and hard copy waste tracking of all waste activity.
·
Provide permit writing and management for the acquisition and tracking of necessary permits for clients.
·
Write manuals and plans required by all companies with hazardous materials and waste.
·
Provide legislative and regulatory analysis pertaining to current and proposed legislation as it pertains to the hazardous waste industry and how that affects our clients.
·
Provide electronic record keeping of all EHS documents and information.
·
Provide outsource staffing for all EHS requirements eliminating the need for clients to hire in house personnel.
Recycle/Reuse Services
·
Provide alternative solutions to clients where certain chemicals or waste streams can be recycled or reused in another capacity thereby eliminating the disposal expense and exposure for our clients.
·
Develop a program where clients look to us as the leader in providing fully integrated solutions to limit their liability on waste streams and chemicals.
Government Services
·
Provide on-site services for government installations meeting all the requirements to manage, transport, and track waste streams from government contracts.
Treatment Services
·
The Rancho Cordova Facility enables us to offer more efficient and cost-effective recycling/disposal options while enhancing our corporate profitability.
·
Ground Water treatment on-site - treatment of ground water contaminated with toxic chemicals, particularly perchlorate.
·
Waste Water treatment on-site - treatment of non-hazardous waste water.
·
On-site treatment option for clients - treatment of waste at large volume waste clients.
·
Permanent treatment facility provides cost savings for clients and enhanced margin for us in the managing and treatment of waste streams.
·
Vapor control and mobile tank degassing - treatment of organic vapors from tanks and pipelines, prior to cleaning or refilling
Business Operations
Fully Integrated Services
We are 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. We can fully supplant the functions of a client’s EHS department.
We have expanded our services by building upon its foundation of field services. Merely packaging hazardous waste and transporting that waste to a licensed TSDF represents only a part of the requirements to properly manage generated waste. Prior to generating hazardous waste, hazardous materials are acquired. Clients with hazardous materials above established quantity limits are required to submit hazardous material contingency plans, establish a hazard communication program and adhere to other requirements. Our online EHS compliance program is designed to assist the client in not only meeting pre-generation of hazardous waste requirements but also post-hazardous waste generation requirements, such as the development of a myriad of agency reports, tracking and record keeping requirements.
The most basic service performed by the EHS compliance program is providing the client with a waste and permit tracking system. The data retrieved from uniform hazardous waste manifests and waste profiles are used to produce required state and Federal agency reports as well as operational management reports for the waste generator.
Field Services
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. This technique is known as lab-pack. Packaged waste is profiled for acceptance at a client’s selected treatment, storage and disposal facility (TSDF) and tracked electronically through the proprietary GEMWare software. Once approved by the TSDF, we provide for the transportation of the waste utilizing tractor-trailers or bobtail trucks. We have partnered with a number of TSDFs to provide the client with economic pricing and management options from recycling or recovery to landfill.
Our field staff performs numerous services, including but not limited to:
·
managing waste streams and chemicals;
·
supervising and managing the handling, paperwork, tracking, and transportation of waste streams and chemicals on a client’s location;
·
labeling, collecting, and transporting containerized wastes;
·
bulk waste pick ups and transportation;
·
emergency response to spill incidents;
·
industrial cleaning of equipment or processes, tank cleaning;
·
parts washer fluid removal and replenishment;
·
chemical process dismantling;
·
mobile waste water treatment; and
·
mobile degassing and vapor control services.
Our field staff is experienced and trained to accomplish a myriad of industrial cleaning tasks involving hazardous materials and/or wastes.
Further, we are a licensed hazardous waste and medical waste hauler with a fleet consisting of vacuum trucks, tractor-trailers, bobtails, roll-off trailers, roll-off bins, emergency response units, and pick-up trucks. We are a party to numerous Department of Transportation exemptions that authorizes the transportation in commerce of certain hazardous materials in lab-packs, certain hazard classes in the same transport vehicle, and aerosol cans in strong outer packages. We have shipped a variety of hazardous waste chemicals from water with residual oil to concentrated solutions of sulfuric acid.
Technical Services
Compliance services provided through our Technical Services Division are the foundation for all of our integrated environmental solutions. The proprietary GEMWare application software enables waste generators and GEM to profile, track, and routinely process all compliance reporting requirements with various regulatory agencies. The EHS coordinator program can serve clients with staff to perform functions at the client’s facility such as inspections, permit acquisitions, environmental technical support, hazardous materials management, hazardous waste management, compliance policies, chemical inventory, product evaluation, process evaluation, and emergency preparedness.
The EHS coordinator program is supported by us by conducting the following functions:
·
enterprise software for worldwide integration of environmental management and tracking requirements;
·
regulatory/legislative analysis;
·
development and maintenance of an EHS procedure manual;
·
participation in regulatory rulemaking process;
·
maintaining a waste and permit database;
·
report preparation and submittal of permits;
·
developing required environmental plans and updates;
·
regulatory agency interaction;
·
training and development of client personnel;
·
research and reduction of regulatory requirements; and
·
engineering plan review assistance with respect to EHS impacts.
The EHS coordinator is designed to provide the client with a dedicated and reliable environmental resource. The EHS coordinator can be stationed at the client’s location. The client’s facility manager will be viewed as our primary client and will be asked to take part in completing EHS coordinator performance review and service evaluations.
At the present time, we provide the services discussed in this section but do not, as yet, have EHS coordinators located on site at client facility locations.
Recycle/Reuse Services
Legislation has demanded that an increasing amount of waste be recycled or reused and not sent for disposal. Most waste streams do not fall into categories that allow for such disposition. However, there are chemicals and waste streams that can be managed for the client’s benefit that do not end in a disposal facility. We have innovated this position by providing services that help a client either recycle or send for reuse certain chemicals and waste streams.
Government Services
Government installations must manage their waste as any other entity, but have much stricter requirements on paperwork and tracking of their waste streams. The GEMWare application software allows us to more efficiently provide those tracking requirements on government contracts. The Company currently is performing on multiple government contracts and plans to enlarge the government services division. These contracts provide a recurring revenue stream for multiple years. We have technically proficient personnel who manage the business on government installations under high security clearances.
Treatment Services
Treatment is the final step for managing waste. With the addition of the Rancho Cordova Facility, we are in a position to internalize our customers’ waste which enables us to offer more efficient and cost-effective recycling/disposal options while enhancing our corporate profitability.
Marketing
Strategic
The integrated solution we provide offers a strategic platform to market and sell our products and services. The full scope of paperwork, documentation, tracking, handling, managing, transporting, treatment, and disposal of waste is an enormous task for any company. We are a single source to meet all of the environmental needs of a client, thereby providing a strategic and highly advantageous marketing opportunity.
We will use our application software delivering EHS compliance solutions as our initial approach for acquiring clients. These solutions are needed globally and provide the greatest opportunity for sales as they meet the needs of the broadest cross section of clients and at a relatively low entry cost for the client.
Sales & Marketing
Once clients are in our system we will employ both push and pull marketing. EHS compliance clients will be referred or pushed to our field services where the hands on work is done for everyone with waste or materials that need our products and services. Field service personnel will also mine the EHS pool of clients and pull through clients from the client list once they are in our internal system. Field services provide the next step in the process for clients in managing, handling and transporting their waste. The Company will transport waste to the appropriate disposal facility, with the Company continuing the full range of services to manage the waste for its clients.
On-site treatment will provide certain clients treatment options at their location. These customers desire to lower their ongoing treatment costs, but add a higher margin for the Company than off-site waste management. These opportunities also provide long-term maintenance contracts for recurring revenue.
International business and Brownfield development offer the potential for high margin business because of our core competencies.
All marketing efforts will be a combination of several functions. First, we will employ targeted direct mail, followed up with telephone contact. Finally, we will set appointments with our existing clients to increase the business we currently provide for them and with potential clients to sell them our integrated service and management.
We can target clients with specific waste streams that we’re interested in through databases available to us. These databases can be defined by waste generated, location of generator, transporter of the waste, waste received at TSDFs, and the EPA number of a potential client.
The environmental business is dependent on face-to-face selling because of the technical nature of the business. Therefore all marketing efforts will be designed for an appointment to follow up the initial marketing contact.
Customers
Our principal customers are utility, chemical, petroleum, petrochemical, pharmaceutical, transportation and industrial firms, educational institutions, other environmental service companies and government agencies. Our sales efforts are directed toward establishing and maintaining relationships with businesses that have ongoing requirements for one or more of our services. A majority of our revenues are derived from previously served customers with recurring needs for our services. For the fiscal year ended December 31, 2008, one single customer accounted for 14 % of our revenues. For the fiscal year ended December 31, 2007, one single customer accounted for 17% of our revenues. We believe the loss of any single customer would not have a material adverse effect on our financial condition or results of operations.
Competition
The hazardous and industrial waste management industry, in which we compete, is highly competitive. The sources of competition vary by locality and by type of service rendered, with competition coming from the other major waste services companies and hundreds of privately owned firms that offer waste services. We compete against national companies, including Philip Services Corp., Waste Management, Inc. and Clean Harbors, Inc. We also compete against regional waste management companies and numerous small companies. Each of these competitors is able to provide one or more of the environmental services offered by us. In addition, we compete with many firms engaged in the transportation, brokerage and disposal of hazardous wastes through recycling, waste-derived fuels programs, thermal treatment or landfill. The principal methods of competition for all our services are price, quality, reliability of service rendered and technical proficiency in handling industrial and hazardous wastes properly. We believe that we offer a more comprehensive range of environmental services than our competitors in major portions of our service territory and that our ability to provide comprehensive services supported by unique information technologies capable of managing the customers' overall environmental program constitutes a significant competitive advantage. Local entrepreneurial approach keeps GEM in touch with customer needs.
Treatment and disposal operations are conducted by a number of national and regional environmental services firms. We believe that our ability to collect and transport waste products efficiently, quality of service, safety, and pricing are the most significant factors in the market for treatment and disposal services.
For our services and onsite services, competitors include several major national and regional environmental services firms, as well as numerous smaller local firms. We believe that availability of skilled technical professional personnel, quality of performance, diversity of services and price are the key competitive factors in this service industry.
In the United States, the original generators of hazardous waste remain liable under federal and state environmental laws for improper disposal of such wastes. Accordingly, waste generators are interested in the reputation and financial strength of properly licensed and permitted companies they use for management of their hazardous waste. Even if waste generators employ companies that have proper permits and licenses, knowledgeable customers are interested in the reputation and financial strength of the companies they use for management of their hazardous wastes. We believe that our technical proficiency and reputation are important considerations to our customers in selecting and continuing to utilize our services.
Insurance and Financial Assurance
Our insurance programs cover the potential risks associated with our multifaceted operations from two primary exposures: direct physical damage and third party liability. Our insurance programs are subject to customary exclusions.
We maintain a casualty insurance program providing coverage for Automobile coverage, and commercial general liability in the amount of $21,000,000 per occurrence, $22,000,000 aggregate per year, subject to a $2,500 per occurrence deductible.
As part of this Liability program, Pollution Liability and Professional Liability insurance coverage’s are included to protect GEM for potential risks in three areas: as a contractor performing services at customer sites, as a transporter of waste and for waste processing at our facilities. This coverage is also maintained at a $21,000,000 per occurrence, $22,000,000 aggregate limit, covering third party bodily injury, property damage, remedial activities and associated liabilities for all operations performed by or on behalf of the company.
We also maintain Workers' Compensation insurance whose limits are established by state statutes; with Employers Liability coverage subject to a $21,000,000 limit per accident.
Auto Liability insurance written by a member of the AIG Group which covers third structure party bodily injury, property damage while also including pollution liability coverage for waste in-transit exposures with combined single limit (i.e. bodily injury and property damage) of $1,000,000 on a “per accident” basis. This is subject to, an additional limit of coverage of $20,000,000, as provided by a commercial Umbrella policy.
Federal and state regulations require liability insurance coverage for all facilities that treat, store or dispose of hazardous waste. RCRA and the Toxic Substances Control Act and comparable state hazardous waste regulations typically require hazardous waste handling facilities to maintain pollution liability insurance in the amount of $1,000,000 per occurrence and $2,000,000 in the aggregate for both gradual and sudden occurrences. We have a policy from American International Specialty Lines Insurance Company (AIG) insuring our treatment, storage and disposal activities that meets the regulatory requirements.
Under our insurance programs, coverage is obtained for catastrophic exposures, as well as those risks required to be insured by law or contract. It is our policy to retain a significant portion of certain expected losses related primarily to employee benefit, workers' compensation, commercial general and vehicle liability. Provisions for losses expected under these programs are recorded based upon our estimates of the aggregate liability for claims. We believe that policy cancellation terms are similar to those of other companies in other industries.
Employees
As of December 31, 2008, we had 169 full-time employees. Of these employees, 18 were engaged in sales and marketing, 93 were engaged in professional services/project management and 58 were engaged in finance and administration. None of our employees is represented by a labor union or a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.
ITEM 1A.
ITEM 1A. Risk Factors
An investor in our securities should carefully consider the risks and uncertainties described below and the other information in this Annual Report on Form 10-K. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down.
Business Risk Factors
The company has a history of losses and may need additional financing to continue its operations, and such financing may not be available upon favorable terms, if at all.
The Company experienced net operating losses of $7,149,709 and $16,086,037 for the fiscal years ended December 31, 2008 and December 31, 2007, respectively. There can be no assurances that the Company will be able to operate profitably in the future. In the event that the Company is not successful in implementing its business plan, the Company will require additional financing in order to succeed. There can be no assurance that additional financing will be available now or in the future on terms that are acceptable to the Company. If adequate funds are not available or are not available on acceptable terms, the Company may be unable to develop or enhance its products and services, take advantage of future opportunities or respond to competitive pressures, all of which could have a material adverse effect on the Company’s business, financial condition or operating results.
We have a limited operating history on which to evaluate our potential for future success. This makes it difficult to evaluate our future prospects and the risk of success or failure of our business.
Our short operating history and results of operations may not give you an accurate indication of our future results of operations or prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a highly competitive market. We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results.
Investors may lose their entire investment if we fail to reach profitability.
The Company was incorporated in September 1991 but did not engage in meaningful business operations until February 2005 when we acquired GEM Delaware. Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development. We cannot guarantee that we will be successful in accomplishing our objectives. To date, we have incurred only losses and may continue to incur losses in the foreseeable future. Our short operating history and results of operations may not give you an accurate indication of our future results of operations or prospects. Our business and prospects, in light of the risks and difficulties we will encounter as an early-stage company in a highly competitive market. We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results.
We are dependent upon a limited number of customers for a substantial percentage of our revenues. If we fail to retain these customer relationships, our revenues could decline.
We derive a significant portion of our revenues from a relatively small number of customers. Our largest customer during the year ended December 31, 2008 accounted for approximately 14% of total revenues; for the year ended December 31, 2007 one customer accounted for approximately 17% of total revenues. We anticipate that we will continue to rely on a limited number of customers for a substantial portion of our future revenues and we must obtain additional large orders from customers on an ongoing basis to increase our revenues and grow our business. In addition, the loss of any significant or well-known customer could harm our operating results or our reputation.
The assets of the Company are now pledged under the recent agreements with Secured Lenders and may prevent the Company from obtaining any additional asset based financing.
In conjunction with a secured convertible term note and a secured revolving note, all unsubordinated assets of the Company and its subsidiaries are secured under agreements with CVC California, LLC, a subsidiary of the Comvest Group. (Sometimes referred to as the “Secured Lenders”). Without any unsecured assets, the Company could be unable to obtain any future asset based financing.
The agreements with Secured Lenders contain terms that could place the Company in default related to the outstanding borrowings.
The agreements with the Secured Lenders include terms of default related to the funds borrowed. These include default due to non-payment, failure to pay taxes, failure to perform under the agreements, failure to disclose items of a material nature under certain representations and warranties, attachments to any secured assets or the indictment of the Company or its executive officers for any criminal acts. This default could result in the loss of the business.
The agreements with the Secured Lenders contain terms where the Secured Lenders can convert their notes to common shares and exercise warrants for common shares which could have an adverse affect upon the price of our common shares.
Secured Lenders' conversions of indebtedness to common shares and exercise of warrants at fixed conversion and exercise prices, would: i) dilute the current shareholders' equity in the Company; ii) limit the Company’s ability to raise additional equity capital; and iii) depress the price of our common shares in the market.
We depend heavily on our management team and the loss of any or all of the members of such management team could materially adversely affect our business, results of operations and our financial condition.
Our success depends, to a significant extent, upon the efforts, the abilities and the business experience of Timothy J. Koziol, our chief executive officer, as well as on these same attributes of our other officers and management team. Loss of the services of any or all of our management team could materially adversely affect our business, results of operations and financial condition, and could cause us to fail to successfully implement our business plan.
There is intense competition for qualified technical professionals and sales and marketing personnel, and our failure to attract and retain these people could affect our ability to respond to rapid technological changes and to increase our revenues.
Our future success depends upon our ability to attract and retain qualified technical professionals and sales and marketing personnel. Competition for talented personnel, particularly technical professionals, is intense. This competition could increase the costs of hiring and retaining personnel. We may not be able to attract, retain, and adequately motivate our personnel or to integrate new personnel into our operations successfully.
Our industrial waste management services subject us to potential environmental liability.
Our business of rendering services in connection with management of waste, including certain types of hazardous waste, subjects us to risks of liability for damages. Such liability could involve, without limitation, claims for clean-up costs, personal injury or damage to the environment in cases in which we are held responsible for the release of hazardous materials, and claims of employees, customers, or third parties for personal injury or property damage occurring in the course of our operations. We could also be deemed a responsible party for the cost of cleaning any property which may be contaminated by hazardous substances generated by us and disposed at such property or transported by us to a site selected by us, including properties we own or lease.
If we cannot maintain our government permits or cannot obtain any required permits, we may not be able to continue or expand our operations.
Our business is subject to extensive, evolving, and increasingly stringent federal, state, and local environmental laws and regulations. Such federal, state, and local environmental laws and regulations govern our activities regarding the treatment, storage, recycling, disposal, and transportation of hazardous and non-hazardous waste. We must obtain and maintain permits, licenses and/or approvals to conduct these activities in compliance with such laws and regulations. Failure to obtain and maintain the required permits, licenses and/or approvals would have a material adverse effect on our operations and financial condition. If we are unable to maintain our currently held permits, licenses, and/or approvals or obtain any additional permits, licenses and/or approvals which may be required as we expand our operations, we may not be able to continue certain of our operations.
Changes in environmental regulations and enforcement policies could subject us to additional liability which could impair our ability to continue certain operations due to the regulated nature of our operations.
Because the environmental industry continues to develop rapidly, we cannot predict the extent to which our operations may be affected by future enforcement policies as applied to existing laws, by changes to current environmental laws and regulations, or by the enactment of new environmental laws and regulations. Any predictions regarding possible liability under such laws are complicated further by current environmental laws which provide that we could be liable, jointly and severally, for certain activities of third parties over whom we have limited or no control.
Environmental regulation significantly impacts our business.
While our business has benefited substantially from increased governmental regulation of hazardous waste transportation, storage and disposal, the environmental services industry itself has become the subject of extensive and evolving regulation by federal, state, provincial and local authorities. We are required to obtain federal, state, provincial and local permits or approvals for each of our hazardous waste facilities. Such permits are difficult to obtain and, in many instances, extensive studies, tests, and public hearings are required before the approvals can be issued. We have acquired all operating permits and approvals now required for the current operation of our business, and have applied for, or are in the process of applying for, all permits and approvals needed in connection with continued operation and planned expansion or modifications of our operations.
The most significant federal environmental laws affecting us are the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the Superfund Act, the Clean Air Act, the Clean Water Act and the Toxic Substances Control Act ("TSCA").
We make a continuing effort to anticipate regulatory, political and legal developments that might affect operations, but are not always able to do so. We cannot predict the extent to which any environmental legislation or regulation that may be enacted or enforced in the future may affect our operations.
As our operations expand, we may be subject to increased litigation which could have a negative impact on our future financial results.
Our operations are regulated by numerous laws regarding procedures for waste treatment, storage, recycling, transportation and disposal activities, all of which may provide the basis for litigation against us. In recent years, the waste treatment industry has experienced a significant increase in so-called "toxic-tort" litigation as those injured by contamination seek to recover for personal injuries or property damage. We believe that as our operations and activities expand, there will be a similar increase in the potential for litigation alleging that we are responsible for contamination or pollution caused by our normal operations, negligence or other misconduct, or for accidents which occur in the course of our business activities. Such litigation, if significant and not adequately insured against, could impair our ability to fund our operations. Protracted litigation would likely cause us to spend significant amounts of our time, effort and money. This could prevent our management from focusing on our operations and expansion.
If we cannot maintain adequate insurance coverage, we will be unable to continue certain operations.
Our business exposes us to various risks, including claims for causing damage to property and injuries to persons that may involve allegations of negligence or professional errors or omissions in the performance of our services. Such claims could be substantial. We believe that our insurance coverage is presently adequate and similar or higher than the coverage maintained by other companies in the industry of our size. However, if we are unable to obtain adequate or required insurance coverage in the future or, if our insurance is not available at affordable rates, we would violate our permit conditions and other requirements of the environmental laws, rules and regulations under which we operate. Such violations would render us unable to continue certain of our operations. These events would have a material adverse effect on our financial condition.
Our operations will suffer if we are unable to manage our rapid growth.
We are currently experiencing a period of rapid growth through internal expansion and strategic acquisitions. This growth has placed, and could continue to place, a significant strain on our management, personnel and other resources. Our ability to grow will require us to effectively manage our collaborative arrangements and to continue to improve our operational, management, and financial systems and controls, and to successfully train, motivate and manage our employees. If we are unable to effectively manage our growth, we may not realize the expected benefits of such growth, and such failure could have a material adverse effect on our operations and financial condition.
Our success is connected to our ability to maintain our proprietary technologies.
The steps taken by us to protect our proprietary technologies may not be adequate to prevent misappropriation of these technologies by third parties. Misappropriation of our proprietary technology could have an adverse effect on our operations and financial condition. Changes to current environmental laws and regulations also could limit the use of our proprietary technology.
We may have difficulty integrating future acquisitions into our existing operations.
Our intentions are to acquire existing businesses in our industry. To the extent that we make such acquisitions, of which there can be no assurance, the acquisitions will involve the integration of companies that have previously operated independently from us. We cannot assure that we will be able to fully integrate the operations of these companies without encountering difficulties or experiencing the loss of key employees or customers of such companies. In addition, we cannot assure that the benefits expected from such integration will be realized.
If environmental regulation or enforcement is relaxed, the demand for our services will decrease.
The demand for our services is substantially dependent upon the public's concern with, the continuation and proliferation of, the laws and regulations governing the treatment, storage, recycling, and disposal of hazardous and non-hazardous waste. A decrease in the level of public concern, the repeal or modification of these laws, or any significant relaxation of regulations relating to the treatment, storage, recycling, and disposal of hazardous waste would significantly reduce the demand for our services and could have a material adverse effect on our operations and financial condition. We are not aware of any current federal or state government or agency efforts in which a moratorium or limitation has been, or will be, placed upon the creation of new hazardous waste regulations that would have a material adverse effect on us.
Impairment of goodwill and other intangible assets would result in a decrease in earnings.
Current accounting rules require that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally estimated, the amortization period is reduced or extended and, accordingly, the quarterly amortization expense is increased or decreased.
We have substantial goodwill and other intangible assets, and we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.
An economic downturn could affect our business in a negative manner, more so than other businesses generally causing our business prospects to suffer.
Although environmental compliance cannot be short circuited in any economic environment, waste, generally, is viewed as trash and considered low on the priority list when economic conditions bring cut backs in operational spending. Accordingly, our services may be in less demand during a time of economic downturn and our business may suffer. The current economic downturn has had effect on the business but not substantially since customers are still required by law to dispose of generated waste.
We face substantial competition from better established companies that may have significantly greater resources which could lead to reduced sales of our products.
The market for our services is competitive and is likely to become even more competitive in the future. Increased competition could result in pricing pressures, reduced sales, reduced margins or the failure of our services to achieve or maintain market acceptance, any of which would have a material adverse effect on our business, results of operations and financial condition. Many of our current and potential competitors enjoy substantial competitive advantages, such as:
·
greater name recognition and larger marketing budgets and resources;
·
established marketing relationships and access to larger customer bases;
·
substantially greater financial, technical and other resources; and
·
larger technical and support staffs.
As a result, they may be able to garner more clients than we can. For the foregoing reason, we may not be able to compete successfully against our current and future competitors.
The conversion of our convertible debt, the exercise of our outstanding warrants and options and the Company's various anti-dilution and price-protection agreements could cause the market price of our common stock to fall, and may have dilutive and other effects on our existing stockholders.
The conversion of our outstanding convertible debentures and the exercise of our outstanding warrants and options could result in the issuance of up to an additional 16,497,553 shares of common stock, assuming all outstanding warrants and options are currently exercisable, and taken with the Company's various anti-dilution and price-protection agreements, are subject to adjustment pursuant to certain anti-dilution and price-protection provisions. Such issuances would reduce the percentage of ownership of our existing common stockholders and could, among other things, depress the price of our common stock. This result could detrimentally affect our ability to raise additional equity capital. In addition, the sale of these additional shares of common stock may cause the market price of our stock to decrease.
There are potential liabilities arising out of environmental laws and regulations.
Although the Company believes that it generally benefits from increased environmental regulations and from enforcement of those regulations, increased regulation and enforcement also create significant risks for the Company. The assessment, analysis, remediation, transportation, handling and management of hazardous substances necessarily involve significant risks, including the possibility of damages or personal injuries caused by the escape of hazardous materials into the environment, and the possibility of fines, penalties or other regulatory action. These risks include potentially large civil and criminal liabilities to customers and to third parties for damages arising from performing services for customers. See "Environmental Regulation."
All facets of the Company's business are conducted in the context of a rapidly developing and changing statutory and regulatory framework. The Company's operations and services are affected by and subject to regulation by a number of federal agencies including the Environmental Protection Agency (the "EPA") and the Occupational Safety and Health Administration, as well as applicable state and local regulatory agencies.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (the "Superfund Act"), addresses the cleanup of sites at which there has been a release or threatened release of hazardous substances into the environment. Increasingly, there are efforts to expand the reach of the Superfund Act to make hazardous waste management companies responsible for cleanup costs of Superfund sites not owned or operated by such management companies by claiming that such management companies are "owners" or "operators" (as those terms are defined in the Superfund Act) of such sites or that such management companies arranged for "treatment, transportation or disposal" (as those terms are defined in the Superfund Act) of hazardous substances to or in such sites. Several recent court decisions have accepted such claims. Should the Company be held responsible under the Superfund Act for cleanup costs as a result of performing services or otherwise, it might be forced to bear significantly more than its proportional share of such cleanup costs if other responsible parties do not pay their share. See "Business--Legal Proceedings."
The Resource Conservation and Recovery Act of 1976, as amended in 1984 ("RCRA"), is the principal federal statute governing hazardous waste generation, treatment, transportation, storage and disposal. RCRA or EPA approved state programs at least as stringent govern waste handling activities involving wastes classified as "hazardous." See "Environmental Regulation-- Federal Regulation of Hazardous Wastes." Substantial fees and penalties may be imposed under RCRA and similar state statutes for any violation of such statutes and regulations thereunder.
There are potential liabilities involving customers and third parties.
In performing services for its customers, the Company potentially could be liable for breach of contract, personal injury, property damage (including environmental impairment), and negligence, including claims for lack of timely performance or for failure to deliver the service promised (including improper or negligent performance or design, failure to meet specifications, and breaches of express or implied warranties). The damages available to a client, should it prevail in its claims, are potentially large and could include consequential damages.
Industrial waste management companies, in connection with work performed for customers, also potentially face liabilities to third parties from various claims including claims for property damage or personal injury stemming from a release of hazardous substances or otherwise. Claims for damage to third parties could arise in a number of ways, including: through a sudden and accidental release or discharge of contaminants or pollutants during transportation of wastes or the performance of services; through the inability, despite reasonable care, of a remedial plan to contain or correct an ongoing seepage or release of pollutants; through the inadvertent exacerbation of an existing contamination problem; or through reliance on reports prepared by such waste management companies. Personal injury claims could arise contemporaneously with performance of the work or long after completion of projects as a result of alleged exposure to toxic or hazardous substances. In addition, increasing numbers of claimants assert that companies performing environmental remediation should be adjudged strictly liable for damages even though their services were performed using reasonable care, on the grounds that such services involved "abnormally dangerous activities."
Customers of industrial waste management companies frequently attempt to shift various of the liabilities arising out of disposal of their wastes or remediation of their environmental problems to contractors through contractual indemnities. Such provisions seek to require the contractors to assume liabilities for damage or personal injury to third parties and property and for environmental fines and penalties (including potential liabilities for cleanup costs arising under the Superfund Act). Moreover, the EPA has increasingly constricted the circumstances under which it will indemnify its contractors against liabilities incurred in connection with cleanup of Superfund sites. There are other proposals both in Congress and at the regulatory agencies to further restrict indemnification of contractors from third party claims.
Although the Company attempts to investigate thoroughly each other company that it acquires, there may be liabilities that the Company fails or is unable to discover, including liabilities arising from non-compliance with environmental laws by prior owners, and for which the Company, as a successor owner, might be responsible. The Company seeks to minimize the impact of these liabilities by obtaining indemnities and warranties from sellers of companies which may be supported by deferring payment of or by escrowing a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to their limited scope, amounts, or duration, the financial limitations of the indemnitors or warrantors or other reasons.
General Risk Factors
Risks Relating To Our Common Stock:
We do not anticipate paying dividends in the foreseeable future.
We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business and we do not intend to declare or pay any cash dividends in the foreseeable future. Future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements. Corporations that pay dividends may be viewed as a better investment than corporations that do not.
Rules, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect our business and our ability to maintain the listing of our common stock on the OTC Bulletin Board.
We may be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of the recent and currently proposed changes in the rules and regulations which govern publicly-held companies, including, but not limited to, certifications from executive officers and requirements for financial experts on boards of directors. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting these roles. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a series of new rules and regulations and the strengthening of existing rules and regulations by the Securities and Exchange Commission, as well as the adoption of new and more stringent rules by the Nasdaq Stock Market.
Further, certain of these recent and proposed changes heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, our business and our ability to maintain the listing of our shares of Common stock on a national market could be adversely affected.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud, which could harm our brand and operating results.
Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the new internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404 under the Sarbanes-Oxley Act of 2002 requires that we assess and our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for our first fiscal year will depend on the effectiveness of our financial reporting and data systems and controls across our operating subsidiaries. We expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. To effectively manage this growth, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. We cannot be certain that these measures will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or operation, could harm our operating results or cause us to fail to meet our financial reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.
Our stock could be the subject of short selling and, if this occurs, the market price of our stock could be adversely affected and, in turn, adversely effect our ability raise additional capital through the sale of our common stock.
It is conceivable that our stock could be subject to the practice of short owned directly by the seller; rather, the stock is "loaned" for the sale by a broker-dealer to someone who "shorts" the stock. In most situations, this is a short-term strategy by a seller, and based upon volume, may at times drive stock values down. If such shorting occurs in our common stock, there could be a negative effect on the trading price of our stock. If the trading price of our common stock decreases, this may negatively impact our ability to raise additional capital through the sale of our common stock.
If we fail to remain current on our reporting requirements, we could be removed from the OTC bulletin board, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Our common stock is subject to the "penny stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
·
that a broker or dealer approve a person's account for transactions in penny stocks; and
·
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person; and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of valuating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
·
sets forth the basis on which the broker or dealer made the suitability determination; and
·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Anti-takeover actions and/or provision could prevent or delay a change in control.
Provisions of our certificate of incorporation and bylaws and Nevada law may make it more difficult for a third party to acquire us, even if so doing would be beneficial to our stockholders. These include the following:
·
Our board of directors are authorized to issue of up to 100,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions of those shares without any further vote or action by the stockholders, which may be used by the board to create voting impediments or otherwise delay or prevent a change in control or to modify the rights of holders of our common stock; and
·
Limitations on who may call annual and special meetings of stockholders.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
Not Applicable
ITEM 2.
ITEM 2. Description of Property
Facilities
We own an EPA permitted Part B TSDF in Rancho Cordova, California on 4.5 acres of land. The real estate is collateral for a secured convertible term note with CVC California, LLC in the principal amount of $6.5 million; and a Secured Non-Convertible Revolving Note of up to $7.0 million. (See Liquidity)
We also lease space for a waste transfer facility in Rancho Cucamonga, California comprising approximately 9,014 square feet. This lease expires on May 31, 2010 and grants the Company the option to renew the lease for an additional one-year period. The lease was terminated in January 2009 and the Cucamonga operation was moved to the Island Environmental facility in Pomona. An early termination agreement was executed providing payments through September 2009.
We lease space in Kent, Washington for a waste transfer facility, comprising approximately 12,500 square feet. This lease expires June 30, 2013. Of the 12,500 square feet leased, we sublease approximately 4,000 square feet on a six month lease which may be renewed for an additional six months.
In Northern California, we lease a waste transfer facility in Benicia. The lease for the 5,000 square feet of office and warehouse space expires in April, 2011. In January 2009 the company moved our facility to Hayward, California and executed a lease for approximately 13,500 square feet of industrial / warehouse space. The lease expires on December 31, 2012. We are in negotiations to sublease the facility in Benecia for the remainder of the lease.
We lease office space in Santee, California of approximately 800 square feet on a month-to-month basis.
We currently lease approximately 4,557 square feet of office space in one building located in Pomona, California. The lease terminates on December 31, 2010 and grants the Company the option to renew the lease for two additional one-year terms.
The Company also leases office and warehouse space for its mobile waste water treatment and degassing operation. We currently lease approximately 11,912 square feet of office and warehouse space in Signal Hill, CA. This lease expires on June 30, 2011. As of December 31, 2006 the lease in Baytown, TX covered approximately 1,000 square feet of office space on a month-to-month basis. This space has subsequently been expanded to approximately 5,000 square feet under a one year lease which expires on February 28, 2009.
On August 31, 2008 the Company acquired Island Environmental Services, Inc.. Subsequent to the acquisition the Company executed a lease with the former owners for approximately 3,645 square feet of office space and additional yard space. The lease expires on August 31, 2018.
ITEM 3.
ITEM 3. Legal Proceedings
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 who 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.
The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have material adverse effect on its financial position, results of operations or liquidity.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of the Security Holders
On January 29, 2007 a special meeting of the shareholders of the Company was held in Pomona, CA. The shareholders approved the amendment and restatement of the Company’s Articles of Incorporation. The restated articles included the increase of the authorized number of shares of common stock to one billion; the increase of the authorized number of shares of preferred stock to 100,000,000; and the effect of a one for thirty reverse stock split.
PART II
ITEM 5.
ITEM 5. Market for Common Equity and Restated Stockholder Matters
On February 14, 2007, the Company completed the reverse split of the outstanding common stock, par value $.001 per share, by a ratio of 1-for-30. All share and per share calculations and disclosures in this report have been retro-actively adjusted to reflect this reverse split as if it occurred at the beginning of the earliest period presented. GEM’s Common Stock, 0.001 par value, trades on the over the counter bulletin board maintained by the FINRA under the symbol “GEVI.OB" The following table sets forth, for the periods indicated, the range of high and low closing bid prices for GEM’s Common Stock as reported by the FINRA composite feed or other qualified inter-dealer quotation medium and obtained from the National Quotation Bureau, LLC. The reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
NUMBER OF HOLDERS OF COMMON STOCK
As of December 31, 2008, we had approximately 765 holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Colonial Stock Transfer Company, Inc., 66 Exchange Place, Salt Lake City, Utah 84111.
Dividends
We have never paid any dividends, and we have no present intention of paying dividends in the foreseeable future. Our policy for the time being is to retain earnings and utilize the funds for operations and growth. The Board of Directors based on our earnings, financial condition, capital requirements and other existing conditions will determine future dividend policies.
Equity Compensation Plan Information
For information with reference to equity compensation arrangements, reference is made to Note 12 of the Notes to Financial Statements contained elsewhere in this report.
ITEM 6.
ITEM 6. Selected Financial Data
None
ITEM 7.
ITEM 7. Management’s Discussion and Analysis or Plan of Operation
Forward Looking Statements
In addition to historical information, this Annual 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." 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 GEM files from time to time with the Securities and Exchange Commission (the "SEC").
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., a Delaware corporation (“GEM.DE”) through a reverse merger between Ultronics Acquisition Corp., a wholly owned subsidiary of Ultronics and GEM.DE whereby GEM.DE was the surviving entity.
The acquisition was accounted for as a reverse merger (recapitalization) with GEM.DE 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.DE 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.DE, 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”).
GEM is a fully integrated environmental service firm structured to provide environmental health & safety 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 internally and through acquisitions.
During 2003 and 2004 GEM.DE 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 changed its name to GEM Mobile Treatment Services, Inc. and 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.
The accompanying consolidated statements have been prepared assuming that the Company will continue as a going concern. The company realized a net loss of $7,149,709 and utilized cash in operating activities of $1,586,386 during the year ended December 31, 2008. The Company currently has a working capital deficit; the amount current liabilities exceed current assets, of $11,751,760 as of December 31, 2008. There can be no assurances that the Company will be successful in eliminating the deficit, as such, there is doubt about the Company’s ability to continue as a going concern.
Plan of Operation
The Company’s plan over the next twelve months is to continue to grow the business internally, make acquisitions that add profitability to the current structure and solicit debt and equity capital to fund acquisitions and fund the current working capital deficit. The Company intends to continue its aggressive cost containment process at all levels of the business and bring additional cost efficiencies to new businesses acquired.
The Company is continuing to evaluate other potential acquisitions and expand its current operations. In our Northern California operation, we have moved into a larger leased facility in Hayward, CA which is closer to our main customer base. In Southern California, we have merged our operations in Rancho Cucamonga with our operations at Island Environmental Services, Inc. in Pomona, California. We do not have any significant plans for any internally funded research and development efforts but continue to pursue innovative and cost effective solutions to process and handle hazardous waste. Along with our continued acquisition strategy, we expect to acquire additional capital assets. We are also in the planning stages of designing and contracting for the development of additional equipment related to our water treatment and degassing operations. We expect the number of employees in our Company to increase in the coming year due to the proposed acquisition strategy.
Year Ended December 31, 2008 as Compared to the Year Ended December 31,
Revenues
Total revenues were $34,864,714 for the twelve months ended December 31, 2008 as compared to $30,445,608 for the twelve months ended December 31, 2007, representing an increase of $4,419,106 or 15% compared to the twelve months ended December 31, 2007. The increase in revenue can be attributed to an increase in revenues attributable to GEM’s mobile treatment services and revenues from Island Environmental Services, Inc.
Cost of Revenues
Cost of revenues for the year ended December 31, 2008 were $28,981,325 or 83% of revenue, as compared to $23,756,677 or 78% of revenue for the year ended December 31, 2007. The cost of revenue 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 higher volumes at GEM Mobile Treatment Services and the inclusion of Island Environmental Services, Inc.
Operating Expenses
Operating expenses for the twelve months ended December 31, 2008 were $8,397,355 or 24% of revenue as compared to $13,617,277 or 45% of revenue for the same period in 2007. Operating expenses include sales and administrative salaries and benefits, insurance, rent, legal and accounting and other professional fees. The decrease in operation expenses is primarily attributable to general expense reductions made in late 2007 and a decrease in non-cash charges for consulting and advisory fees of $2,294,104.
Depreciation and amortization expenses are included in operating expenses, and for the twelve months ended December 31, 2008 were $1,226,178 or 3.5% of revenue, as compared to $769,227 or 2.5% of revenue for the same period in 2007. The increase in expenses is related to the increase in property, plant and equipment from the acquisitions made in 2008 and additional acquisitions of capitalized lease equipment.
Interest and Financing Costs
Interest and financing costs for the year ended December 31, 2008 was $4,695,041, or 13% of revenue, as compared to $2,548,609 or 8.3% of revenue for the same period in 2007. Interest and financing costs 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 and financing costs is due to additional costs of amortization of valuation discounts and deferred fees related to the August 31, 2008 refinancing with CVC California, LLC. For 2008, interest expense on financings and debt was $1,455,303 and interest expense related to valuation discounts was $2,833,866. For 2007, interest expense on financings and debt was $1,103,233, and interest expense related to valuation discounts was $1,335,760.
Costs to induce conversion of related party debt
From December 2006 through October 2007, assignable notes were converted to common stock at a value of $1.20 per share. During the year ended December 31, 2007, $3,933,861 of these notes and accrued interest were converted into 3,278,250 shares of common stock. The fair value of the shares at the time of conversion was $8,679,689, resulting in a cost to induce conversion of debt of $4,745,828. As a further inducement to convert, the holders were issued 974,503 two year warrants to purchase a number of shares equal to 30% of the number of shares they will receive upon conversion of the principal note amount due to them at an exercise price of $0.60. The Company valued the warrants at $2,051,811 using a Black - Scholes option pricing model.
The aggregate value of common stock and warrants issued of $10,731,500 in excess of the notes payable and accrued interest exchanged of $3,933,861 was $6,797,639 and was reflected as costs to induce conversion of debt.
Other Non-operating Income
The Company had other non-operating income for the year ended December 31, 2008 of $41,729 or 0.1% of revenue as compared to $148,890 or 0.5% of revenue for the same period in 2007. Non-Operating income for the twelve months consisted of continuing rental income from the sublease of warehouse space in Kent, Washington. The lease in Rancho Cordova which accounted for the majority of the 2007 non- operating income was terminated in July 2007.
Net Loss
The net loss for the twelve months ended December 31, 2008 was $7,149,709 or 21% of revenue as compared to a loss of $16,086,037, or 53% of revenue for the same period in 2007. The reduced loss is attributable to reductions in operating expenses over the twelve months and less non-cash charges related to the costs to induce conversion of related party debt in 2008 versus 2007.
Liquidity and Capital Resources
Cash
Our primary source of liquidity is cash provided by operating, investing, and financing activities. Net cash used in operations for the year ended December 31, 2008 was $1,586,386 as compared to $3,747,615 for the same period in 2007.
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 $7,149,709 and utilized cash in operating activities of $1,586,386 during the year ended December 31, 2008. As of December 31, 2008 the Company had current liabilities exceeding current assets by $11,751,760. 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 in the coming year due to improved operational results, cost cutting practices, and the completion of the integration of acquisitions made by the Company during 2008. 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 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. At December 31, 2008 the Company had cash of approximately $376,000.
During the period 2006 through 2008, the Company entered into a series of financings with Laurus Master Fund (“Laurus”) and CVC California, LLC (“CVC).
(a) Agreements with Laurus Master Fund and affiliated entities.
On March 3, 2006, General Environmental Management, Inc. entered into an agreement with Laurus Master Fund, Ltd. dated as of February 28, 2006, whereby the Company issued to Laurus a secured convertible term note ("Note") in the principal amount of $2.0 million and a Secured Non-Convertible Revolving Note (“Revolving Note”) of up to $5.0 million. On October 31, 2007, General Environmental Management, Inc entered into an agreement with Laurus Master Fund, Ltd. ("Laurus"), LV Administrative Services, Inc. (“LV Admin”), Valens U.S. SPV I, LLC (“Valens US”) and Valens Offshore SPV II, Corp. (“Valens”), whereby the Company issued to these companies secured convertible term notes ("Valens Notes") in the principal amount of $1.25 million.
(i). Under terms of the initial agreement, the principal amount of the Note carried an interest rate of prime plus three and one half percent, subject to adjustment, and such interest was payable monthly. The Company also was required to make monthly principal payments in the amount of $60,606, commencing June 1, 2006, until its maturity on February 28, 2009, as well as monthly interest payments in the amount of prime plus 3.5%, but in no event less than 8% per annum. On October 31, 2007, the Company entered into an Amendment of, and Joinder to, Existing Financing Documents with Laurus Master Fund Ltd., wherein the Company’s principal payment for the convertible term loan under Secured Convertible Term Loan agreement was changed as follows (i) Monthly principal payment was reduced from $60,606 to $30,303 (from February 2008 to February 2009), (ii) 4-months grace period for principal payment (monthly payment started in March 2008), (iii) Interest is to be paid monthly (based on prime +3.5%), and; (iv) Balloon payment in February 2009 for the remaining balance of the loan.
(ii). The revolving note allowed the Company to borrow a maximum amount of $5,000,000, based on a borrowing base of 90% of all eligible receivables, which were primarily accounts receivables under 90 days. The interest rate on this line of credit was in the amount of prime plus 3.5%, but in no event less than 8% per annum.
(iii). The principal amount of the $1,250,000 Valens Notes and accrued interest thereon was convertible into shares of its common stock at a price of $2.78 per share, subject to anti-dilution adjustments. Under the terms of the Note, monthly principal payment amount of approximately $30,303, plus the monthly interest payment (together, the "Monthly Payment"), was payable in either cash or, if certain criteria were met, including the effectiveness of a current registration statement covering the shares of its common stock into which the Note is convertible, through the issuance of its common stock. Valens and Valens US had the option to convert the entire principal amount of the Note, together with interest thereon, into shares of its common stock, provided that such conversion did not result in Valens and Valens US beneficially owning at any one time more than 9.99% of its outstanding shares of common stock.
The Notes were secured by all of the Company’s assets and the assets of its direct subsidiary, General Environmental Management, Inc. (Delaware) and its direct subsidiary, 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), as well as by a pledge of the equity interests of General Environmental Management, Inc. (Delaware), GEM Mobile Treatment Services, Inc. (California) and General Environmental Management of Rancho Cordova LLC.
On September 4, 2008 the entire amount due on these notes was paid in full with the proceeds of CVC notes described below.
In connection with the above financings, the Company paid to Laurus closing fees of $326,193, and issued to Laurus 1,099,994 warrants initially valued in the aggregate at $2,000,243, and determined the aggregate benefical conversion feature of the convertible notes to be $1,368,397. The closing fees, the value of the warrants and the calculated beneficial conversion feature was reflected by the Company as a valuation discount and offset to the face amount of the Notes, and was being amortized to interest expense over the life of the loan based upon the effective interest method. The remaining balance of the valuation discount was fully amortized in September 2008 as part of the new financing agreement with CVC California described below.
In conjunction with the above financings, the Company also incurred fees to various investment advisors that facilitated the transaction, including the issuance of shares of our common stock and issuance of warrants. The fees paid to the finders and the value of the warrants issued to the finders were reflected as deferred financing costs in the accompanying consolidated balance sheet and were amortized over the life of the loan. The remaining balance of deferred financing fees was fully amortized in September 2008 as part of the new financing agreement with CVC California described below.
(b) 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. 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.
(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 in (a) above. The note is due August 31, 2011.
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 $1,674,035, 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 relative value of the warrants of $1,674,035 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. The Valuation discount is being amortized to interest expense over the life of the loan based upon the effective interest method.
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.
As of April 13, 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.
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. Part of the proceeds of the new $13.5 million revolving and term debt facility with CVC California, LLC was used to fund this acquisition.
Cash Flows for the Year Ended December 31, 2008
Operating activities for the year ended December 31, 2008 used $1,586,386 in cash. Accounts receivable, net of allowances for bad debts, totaled $6,729,743 as of December 31, 2008 as compared to the December 31, 2007 balance of $6,495,736. The increase in accounts receivable is directly related to the increase in sales over the same period for 2008 as noted above. Accounts payable totaled $3,499,178 as of December 31, 2008 as compared to an accounts payable balance of $4,314,515 for December 31, 2007. The decrease in accounts payable over the prior year was due to a large enviroconstruction project in the fourth quarter of 2007. The invoices were subsequently paid in January and February 2008.
The Company used cash for investment in plant, property and equipment; and for the acquisition of Island Environmental Services, Inc. totaling $2,697,142 for the twelve months ended December 31, 2008. The company used $343,254 in cash for investment purposes during the same period in 2007.
The Company raised $3,704,930 cash from financing activities net of repayments of debt, through the issuance of debt, and issuance of notes to related parties.
Stockholder Matters
The Company held its annual meeting of shareholders on June 13, 2008 to elect the directors and approve Weinberg & Co. P.A. as the independent certified public accountants of the Company.
At a special meeting of stockholders held on January 29, 2007, the Board of Directors was given the authority to amend the Certificate of Incorporation to increase the number of authorized common shares $.001 par value, from 200,000,000 to one billion, to combine shares of the Company’s common stock to affect a one for 30 reverse stock split of the common stock and to increase the number of authorized preferred stock, $.001 par value, from 50,000,000 to 100,000,000. On February 14, 2007, the Company completed the reverse split of the outstanding common stock, par value $0.001 per share, by a ratio of 1-for-30.
Critical Accounting Policies
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, accruals for disposal costs for waste received at our TSDF, and the assumptions used in our option pricing models. Prior to the filing of this Annual Report on Form 10-K, the Audit Committee of our Board of Directors reviewed these critical accounting policies and estimates and discussed them with our management.
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.
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
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. Revenue is recognized on contracts with retainage when services have been rendered and collectability is reasonably assured.
Recent Accounting Pronouncements
References to the “FASB”, “SFAS” and “SAB” herein refer to the “Financial Accounting Standards Board”, “Statement of Financial Accounting Standards”, and the “SEC Staff Accounting Bulletin”, respectively.
In December 2007, the FASB issued FASB Statement No. 141 (R), “Business Combinations” (FAS 141(R)), which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business. Statement 141 (R) 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. Earlier adoption is prohibited.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements are applied retrospectively for all periods presented.
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB") No. 110 to permit entities, under certain circumstances, to continue to use the “simplified” method, in developing estimates of expected term of “plain-vanilla” share options in accordance with SFAS No. 123 (R) Share-Based Payment. SAB No. 110 amended SAB No. 107 to permit the use of the “simplified” method beyond December 31, 2007. The Company continues to use the “simplified” method and will do so until more detailed relevant information about exercise behavior becomes readily available.
In April 2008, the FASB issued Staff Position No. FAS 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 FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles (GAAP). The Company is in the process of evaluating the effect of FAS No. 142-3 on the Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The FASB does not believe this Statement will result in a change in current practice. SFAS 162 is effective November 15, 2008.
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.
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.
Contractual Obligations
The following summarizes our contractual obligations at December 31, 2008 and the effects such obligations are expected to have on liquidity and cashflow in future periods:
On November 1, 2005, we entered into an Employment Agreement with John Brunkow, a former director of the Company. Pursuant to the terms of Mr. Brunkow’s employment agreement Mr. Brunkow was engaged by us as “counsel to the CEO” for a term of 25 months commencing on November 1, 2005 and terminating on December 1, 2007. Mr. Brunkow will receive a monthly salary of $2,500 per month.
ITEM 8.
ITEM 8. Financial Statements (See)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
The Board of Directors
General Environmental Management Inc.
We have audited the accompanying consolidated balance sheets of General Environmental Management Inc. and Subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Environmental Management Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses from operations since its inception and has a stockholders’ deficiency at December 31, 2008. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Weinberg & Company, P.A.
Weinberg & Company, P.A.
Los Angeles, California
March 17,
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
See accompanying notes to consolidated financial statements.
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the consolidated financial statements
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(continued)
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIENCY) (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
See accompanying notes to the consolidated financial statements
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
GENERAL ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
See accompanying notes to the consolidated financial statements
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Ultronics Corporation (a development stage company) ( “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. The Company’s fiscal year end is December 31.
On February 14, 2005 the Company acquired all of the outstanding shares of General Environmental Management, Inc (“GEM”), a Delaware Corporation in exchange for 630,481 shares of its class A common stock and as a result GEM became a wholly owned subsidiary of Ultronics 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.
At a special meeting of stockholders held on January 29, 2007, the Board of Directors was given the authority to amend the Certificate of Incorporation to increase the number of authorized common shares, $.001 par value, from 200,000,000 to one billion, to combine shares of the Company’s common stock to effect a one for 30 reverse stock split of the common stock and to increase the number of authorized preferred stock, $.001 par value, from 50,000,000 to 100,000,000. On February 14, 2007, the Company completed the reverse split of the outstanding common stock, par value $0.001 per share, by a ratio of 1-for-30. All share and per share calculations and disclosures in this report have been retro-actively adjusted to reflect this reverse split as if it occurred at the beginning of the earliest period presented.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net loss of $7,149,709 and utilized cash in operating activities of $1,586,386 during the year ended December 31, 2008, and as of December 31, 2008 the Company had current liabilities exceeding current assets by $11,751,760 and a stockholders’ deficiency of $2,930,380. 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 improved operational results, cost cutting practices, and the completion of the integration of an acquisition made by the Company during 2008. 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 consolidated financial statements do not contain any adjustments which may be required as a result of this uncertainty.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
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.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(d) Concentration of Credit Risk
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 year ended December 31, 2008, two customers accounted for approximately 14% and 7% of revenues, respectively. During the year ended December 31, 2007, two customers accounted for approximately 17% and 10% of revenues. As of December 31, 2008, one customer accounted for 24% of accounts receivable. As of December 31,2007, two customers accounted for 25% and 11% of accounts receivable.
(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.
(f) Cash
Cash in bank and short term investments with maturities fewer than thirty days are recorded as cash balances.
(g) Trade Receivables
Trade receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed.
The Company uses the allowance method to account for uncollectible trade receivable balances. Under the allowance method, if needed, an estimate of uncollectible customer balances is made based upon specific account balances that are considered uncollectible. Factors used to establish an allowance include the credit quality of the customer and whether the balance is significant. At December 31, 2008, trade receivables had a net balance in the amount of $6,729,743 net of an allowance of $174,834. At December 31, 2007, trade receivables had a net balance in the amount of $6,495,736 net of an allowance of $236,781.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(h) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight line method based on the estimated useful lives of the assets, generally as follows:
Leasehold improvements are amortized over the shorter of the useful lives of the related assets, or the lease term. In accordance with the Company’s operating permit for the fully permitted Treatment, Storage, and Disposal Facility in Rancho Cordova, California , the Company is liable for certain costs involving the ultimate closure of the facility. These expenses include costs of decommissioning, remediation, and incremental direct administration costs to close the facility. The Company accounts for these costs based on SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. When a liability is initially recorded, the Company capitalizes the cost by increasing the carrying value of the related facility (long-lived asset). Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the facility. Upon settlement of the liability, a gain or loss will be recorded. The Company recorded asset retirement liabilities of $2,013 in 2008 and $2,013 in 2007.
(i) Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill represents the excess of the purchase price of an acquired company over the fair value of the identifiable assets acquired and liabilities assumed. 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. If any losses are determined to exist they are recorded in the period when such impairment is determined.
The provisions of SFAS No. 142 state that goodwill of a reporting unit must be tested for impairment on an annual basis or at any other time during the year if events occur or circumstances change that would indicate that it is more likely than not that the fair value of the reporting unit has been reduced below its carrying amount. Circumstances that could trigger an impairment test include; a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; the results of testing for recoverability of a significant asset group within a reporting unit, and the recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. Based upon management’s assessment, there are no indicators of impairment of its goodwill or intangibles at December 31, 2008 or 2007.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(j) 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. Based upon management’s assessment, there are no indicators of impairment of its long lived assets at December 31, 2008 or 2007.
(k) Deferred Rent
Certain of the Company’s operating leases contain predetermined fixed increases in the minimum rental rate during the initial lease term and/or rent holiday periods. For these leases, the Company recognizes the related rental expense on a straight-line basis beginning on the date the property is delivered. The difference between the amount charged to expense and the rent paid is recorded as deferred rent, and included in current liabilities.
(l) Income Taxes
The Company accounts for income taxes using the asset and liability method whereby deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences by applying statutory tax rates applicable to future years to the difference between the financial statement carrying amounts and the tax bases of certain assets and liabilities. Changes in deferred tax assets and liabilities include the impact of any tax rate changes enacted during the year.
(m) 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.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
(n) 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 years ended December 31, 2008 and 2007 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 years ended December 31, 2008 and 2007.
At December 31, 2008 and 2007, potentially dilutive securities consisted of convertible preferred stock, outstanding common stock purchase warrants, convertible debt and stock options to acquire an aggregate of 16,497,553 shares and 11,779,969 shares, respectively.
(o) Recent Accounting Pronouncements
References to the “FASB”, “SFAS” and “SAB” herein refer to the “Financial Accounting Standards Board”, “Statement of Financial Accounting Standards”, and the “SEC Staff Accounting Bulletin”, respectively.
In December 2007, the FASB issued FASB Statement No. 141 (R), “Business Combinations” (FAS 141(R)), which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business. Statement 141 (R) 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. Earlier adoption is prohibited.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements are applied retrospectively for all periods presented.
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB") No. 110 to permit entities, under certain circumstances, to continue to use the “simplified” method, in developing estimates of expected term of “plain-vanilla” share options in accordance with SFAS No. 123 (R) Share-Based Payment. SAB No. 110 amended SAB No. 107 to permit the use of the “simplified” method beyond December 31, 2007. The Company continues to use the “simplified” method and will do so until more detailed relevant information about exercise behavior becomes readily available.
In April 2008, the FASB issued Staff Position No. FAS 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 FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles (GAAP).
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The FASB does not believe this Statement will result in a change in current practice. SFAS 162 is effective November 15, 2008.
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.
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.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
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 became 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.
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.
There is also 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. A contingent earn-out of up to $3,750,000 could be made to the sellers if the EBITDA is greater than $1,100,000 and up to a maximum EBITDA of $2,500,000 is achieved. 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.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
The following sets out the pro forma operating results for the year ended December 31, 2008 and 2007 for the Company had the acquisition occurred as of January 1, 2007:
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
4. PROPERTY AND EQUIPMENT
Property and Equipment consists of the following as of December 31, 2008 and 2007:
Property and equipment includes assets under capital lease with a cost of $3,248,546 and $1,590,480 and accumulated depreciation of $805,912 and $248,678 as of December 31, 2008 and 2007, respectively.
Depreciation expense was $1,062,960 and $606,054 for the years ended December 31, 2008 and 2007 respectively.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
5. GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2008 and 2007:
Amortization expense was $163,218 and $163,173 for the years ended December 31, 2008 and 2007 respectively
Permit costs arising from the Rancho Cordova acquisition have been capitalized and are being amortized over 35.5 years, the life of the permit, including expected renewal periods.
On August 1, 2004, the Company entered into a Purchase Agreement to acquire certain assets and liabilities of Firestone Environmental Services, Inc. dba Prime Environmental Services, Inc. and Firestone Associates Inc. dba Firestone Energy Company (Prime), a privately held company. Customer relationships resulting from the Prime acquisition have been capitalized and are being amortized over five years, its expected actual life.
In March 2006, the Company acquired all of the issued and outstanding common stock of K2M Mobile Treatment Services, Inc. of Long Beach, California ("K2M"), a privately held company. The Company allocated the excess of net assets acquired to customer relationships and permits and is amortizing these amounts over five years.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Future annual amortization under these intangible assets at December 31, 2008 is as follows:
Goodwill consists of the following at December 31, 2008 and 2007:
6. RELATED PARTY TRANSACTIONS
The Company 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 approximately 5% of the Company’s common stock at December 31, 2008. The following summarizes the transactions with GPP during the years ended December 31, 2008 and 2007.
Advances to Related Parties
Advances to related parties consists of the following at December 31, 2008 and 2007:
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
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. As of December 31, 2008, $472,500 remained outstanding. 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 year ending December 31, 2008 includes $333,176 for amortization of this discount, and the unamortized valuation discount was $109,324 at December 31, 2008.
During the year ended December 31, 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 and issue to them a warrant to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $.60 for a period of six years valued at $179,982 using 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 6 years. The value of the warrant and the cash paid has been reflected as part of deferred financing fees on the accompanying balance sheet at 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.
During the year ended December 31, 2008 the Company accrued $19,945 in fees and issued to GPP a warrant to purchase 64,500 shares of the Company’s common stock related to a letter of credit issued and released during the year. The Company valued the warrants at $57,405 using a Black - Scholes option pricing model and reflected such cost as a financing cost. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 87.87 % and an expected term for the warrants of 7 years.
Software Support
During the year ended December 31, 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 December 31, 2008, $92,555 of the fees had been prepaid to Lapis. As additional consideration for the support and development services agreement, the Company issued Lapis a seven year warrant to purchase 35,000 shares of the Company’s common stock at $1.05 per share. These warrants were valued at $29,050 using the Black - Scholes valuation model and such cost was recognized as an expense. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 87.87 % and an expected term for the warrants of 7 years.
Advisory fees
During the year ended December 31, 2007 the Company incurred $90,500 in fees for advisory services provided by General Pacific Partners (“GPP”). As of December 31, 2007 all amounts owed to General Pacific Partners for fees related to advisory services had been paid.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
On February 1, 2007, the Company entered into a twelve month advisory agreement with GPP. The fees under the agreement consisted of an initial cash fee of $55,500, expenses of $35,000, the issuance of 426,500 shares of its common stock, valued at $507,535, and a seven year warrant to purchase 450,000 shares of the Company’s common stock at $0.60 per share. The Company valued the warrants at $357,750 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 33.17 % and an expected term for the warrants of 7 years. The Company also agreed to modify certain terms of two sets of warrants issued during 2006 including the modification of the exercise price (from $1.20 per share to $0.60 per share) and the life of the warrants (from 5.5 years to 6.5 years). The second set of warrants included the modification of the life of the warrants (from 1.75 years to 6.75 years). The Company valued the modification of these warrants as $136,082 which was based on the difference of the warrant before and after the modification. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 33.17% and an expected term for the warrants of 6.5 and 6.75 years. The Company reflected an aggregate charge of $1,091,867 during the year ended December 31, 2007 relating to these transactions.
On March 31, 2007 General Pacific Partners agreed to convert $220,000 of accrued advisory fees and expenses into 184,874 shares of common stock based upon the existing fair value of the Company’s common stock. As an inducement to convert, the Company issued GPP a seven year warrant to purchase 55,462 shares of the Company’s common stock at $0.60 per share. These warrants were valued at $44,092 using the Black - Scholes valuation model and such cost was recognized as an expense. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 33.17 % and an expected term for the warrants of 7 years.
Issuance and conversion of assignable notes
From December 2006 through October 2007 General Pacific Partners made several unsecured advances to the Company utilizing assignable notes totaling $3,897,984. With the approval of the Board of Directors, the Company offered holders of the assignable notes the ability to convert the notes to common stock at a value of $1.20 per share, and during the year ended December 31, 2007, $3,933,861 of these notes and accrued interest were converted into 3,278,250 shares of common stock. The fair value of the shares at the time of conversion was $8,679,689 resulting in a cost to induce conversion of debt of $4,745,828. As a further inducement to convert, the holders were issued 974,503 two year warrants to purchase a number of shares equal to 30% of the number of shares they will receive upon conversion of the principal note amount due to them at an exercise price of $0.60. The Company valued the warrants at $2,051,811 using a Black - Scholes option pricing model.
The aggregate value of common stock and warrants issued of $10,731,500 in excess of the notes payable and accrued interest exchanged of $3,933,861 was $6,797,639 and was reflected as costs to induce conversion of debt in the accompanying statement of operations for the year ended December 31, 2007.
As of December 31, 2007, all of these unsecured advances have been converted to common stock and no further amounts were due.
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 9) 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.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
7. SECURED FINANCING AGREEMENTS
During the period 2006 through 2008, the Company entered into a series of financings with Laurus Master Fund (“Laurus”) and CVC California, LLC (“CVC”). The amounts due under these financings at December 31, 2008 and December 31, 2007 are as follows:
(a) Secured notes from Laurus Master Fund and affiliated entities.
On March 3, 2006, General Environmental Management, Inc. entered into an agreement with Laurus Master Fund, Ltd. dated as of February 28, 2006, whereby the Company issued to Laurus a secured convertible term note ("Note") in the principal amount of $2.0 million and a Secured Non-Convertible Revolving Note (“Revolving Note”) of up to $5.0 million. On October 31, 2007, General Environmental Management, Inc entered into an agreement with Laurus Master Fund, Ltd. ("Laurus"), LV Administrative Services, Inc. (“LV Admin”), Valens U.S. SPV I, LLC (“Valens US”) and Valens Offshore SPV II, Corp. (“Valens”), whereby the Company issued to these companies secured convertible term notes ("Valens Notes") in the principal amount of $1.25 million.
(i). Under terms of the initial agreement, the principal amount of the Note carried an interest rate of prime plus three and one half percent, subject to adjustment, and such interest was payable monthly. The Company also was required to make monthly principal payments in the amount of $60,606, commencing June 1, 2006, until its maturity on February 28, 2009, as well as monthly interest payments in the amount of prime plus 3.5%, but in no event less than 8% per annum. On October 31, 2007, the Company entered into an Amendment of, and Joinder to, Existing Financing Documents with Laurus Master Fund Ltd., wherein the Company’s principal payment for the convertible term loan under Secured Convertible Term Loan agreement was changed as follows (i) Monthly principal payment was reduced from $60,606 to $30,303 (from February 2008 to February 2009), (ii) 4-months grace period for principal payment (monthly payment started in March 2008), (iii) Interest is to be paid monthly (based on prime +3.5%), and; (iv) Balloon payment in February 2009 for the remaining balance of the loan. As of December 31, 2007, the Company had outstanding borrowings of $973,623 against the note.
(ii). The revolving note allowed the Company to borrow a maximum amount of $5,000,000, based on a borrowing base of 90% of all eligible receivables, which were primarily accounts receivables under 90 days. The interest rate on this line of credit was in the amount of prime plus 3.5%, but in no event less than 8% per annum. As of December 31, 2007, the Company had outstanding borrowings of $4,194,771 against the Revolving Note.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(iii). The principal amount of the $1,250,000 Valens Notes and accrued interest thereon was convertible into shares of its common stock at a price of $2.78 per share, subject to anti-dilution adjustments. Under the terms of the Note, monthly principal payment amount of approximately $30,303, plus the monthly interest payment (together, the "Monthly Payment"), was payable in either cash or, if certain criteria were met, including the effectiveness of a current registration statement covering the shares of its common stock into which the Note is convertible, through the issuance of its common stock. Valens and Valens US had the option to convert the entire principal amount of the Note, together with interest thereon, into shares of its common stock, provided that such conversion did not result in Valens and Valens US beneficially owning at any one time more than 9.99% of its outstanding shares of common stock. The balance outstanding under these notes at December 31, 2007 was $1,245,210.
The Notes were secured by all of the Company’s assets and the assets of its direct subsidiary, General Environmental Management, Inc. (Delaware) and its direct subsidiary, 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), as well as by a pledge of the equity interests of General Environmental Management, Inc. (Delaware), GEM Mobile Treatment Services, Inc. (California) and General Environmental Management of Rancho Cordova LLC.
The aggregate amount due under these notes at December 31, 2007 was $6,413,605. On September 4, 2008 the entire amount due on these notes was paid in full with the proceeds of CVC notes described below.
In connection with the above financings, the Company paid to Laurus closing fees of $326,193, and issued to Laurus 1,099,994 warrants initially valued in the aggregate at $2,000,243, and determined the aggregate beneficial conversion feature of the convertible notes to be $1,368,397. The closing fees, the value of the warrants and the calculated beneficial conversion feature was reflected by the Company as a valuation discount and offset to the face amount of the Notes, and was being amortized to interest expense over the life of the loan based upon the effective interest method. Unamortized valuation discount was $2,042,192 as of December 31, 2007. The remaining balance of the valuation discount was fully amortized in 2008 as part of the new financing agreement with CVC California described below.
In conjunction with the above financings, the Company also incurred fees to various investment advisors that facilitated the transaction, including the issuance of shares of our common stock and issuance of warrants. The fees paid to the finders and the value of the warrants issued to the finders were reflected as deferred financing costs in the accompanying balance sheet and were amortized over the life of the loan. Unamortized deferred financing fees were $394,082 as of December 31, 2007. The remaining balance of deferred financing fees was fully amortized in 2008 as part of the new financing agreement with CVC California described below.
(b) 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.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(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 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 December 31, 2008 the Company had an outstanding balance of $7,047,909 (including accrued interest) under the revolving note. We project that the Company will maintain a minimum balance of $6,500,000 under the revolving note.
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. 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 year ended December 31, 2008 includes amortization of $397,671 relating to the discount, and unamortized valuation discount was $3,181,365 at December 31, 2008.
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.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
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.
As of April 13, 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.
Future annual maturities under these notes payable at December 31, 2008 are as follows:
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
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 December 31, 2007, notes payable of $500,000 plus accrued interest of $20,208 were outstanding. During the year ended December 31, 2007 accrued interest of $148,750 was converted to 125,000 shares of common stock.
9. LONG TERM OBLIGATIONS
Long term debt consists of the following at December 31, 2008 and December 2007:
(a) Vehicle note payable is due in monthly installments of $815 including interest at 1.9% per annum, through April 2010. The note is secured by a vehicle.
(b) On September 12, 2005, our wholly owned subsidiary, General Environmental Management of Rancho Cordova, LLC, (“GEM LLC”) entered into a $1.25 million secured, long-term financing arrangement with The Alliance Portfolio (the “2005 Loan”). The loan was secured by real estate.
The terms of the loan provided that GEM LLC will pay monthly payments of interest only from November 1, 2005 through October 1, 2008, with the principal balance due on October 1, 2008. The 2005 Loan may be prepaid without premium or penalty after the twelfth month. If the 2005 Loan was prepaid prior to the twelfth month, then the prepayment penalty was 6 months interest on any principal prepaid in excess of 20% of the principal. Subject to the terms and conditions of the loan documentation, interest was due on the unpaid principal balance of the 2005 Loan at a rate of 12.99% per annum until June 1, 2007, at which time the interest rate may rise based upon a formula set forth in the loan documentation. The interest rate reset to 14.07% on June 1, 2007. In no event will the interest rate be less than 12.99% per annum. In connection with obtaining the loan, the Company paid a $62,500 loan origination fee which was being amortized over the term of the loan. The balance of the loan was paid off in September 2008 as part of the new financing agreement with CVC California, LLC (see note 7).
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(c) The equipment note is for equipment utilized by GEM Mobile Treatment Services. The note 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.
(d) On August 31, 2008, the Company entered into a stock purchase agreement with Island Environmental as detailed in Note 3. 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 shall 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 NCT.
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.
Future annual maturities under these notes payable at December 31, 2008 are as follows:
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
10. OBLIGATIONS UNDER CAPITAL LEASES
The Company has entered into various capital leases for equipment with monthly payments ranging from $598 to $26,560 per month, including interest, at interest rates ranging from 8.5% to 19.7% per annum. At December 31, 2008, monthly payments under these leases aggregated $51,573. The leases expire at various dates through 2013. The amounts outstanding under the capital lease obligations were $2,374,861 and $1,233,935 as of December 31, 2008 and 2007, respectively.
Minimum future payments under capital lease obligations are as follows:
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
11. STOCKHOLDERS’ EQUITY
Common Stock for Services
On October 9, 2008, a consultant to the Company agreed to convert $13,150 in fees into 12,524 shares of common stock based upon the fair value of the stock at the date of the agreement.
During the year ended December 31, 2007, Ascendiant Securities LLC, an advisor to the Company, agreed to convert $312,768 in advisory fees and expenses into 260,641 shares of common stock based upon the fair value of the stock at the date of the agreement. In addition, a consultant to the Company agreed to convert $138,834 of accrued services performed in conjunction with acquisitions and advisory services performed during 2006 into 116,667 shares of common stock based upon the fair value of the stock at the date of the agreement.
During the year ended December 31, 2007, a consultant to the Company agreed to convert $22,690 in expenses into 8,251 shares of common stock based upon the fair value of the stock at the date of the agreement. On December 31, 2007, Patrick Lund, legal counsel for the Company, agreed to convert $76,250 in legal fees into 44,853 shares of the company’s common stock based upon the fair market value of the stock at the date of the agreement.
Issuance of Common Stock on Exercise of Stock Options
On July 27, 2007 one employee exercised 100 options granted under the Company’s 2007 Employee Stock Option Plan resulting in net proceeds to the Company of $119.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Issuance of Common Stock on Conversion of Interest
During the year ended December 31, 2007, holders of convertible notes issued during 2004 and 2006, agreed to convert $196,772 of accrued interest into 165,083 shares of common stock based upon the fair value of the stock at the date of the conversion.
Issuance of Warrants for Services
In March 2007, the Board of Directors awarded 2,085,000 fully vested warrants to purchase common stock of the Company to various individuals and consultants. These awards included 650,000 warrants to the Chairman of the Board, 500,000 warrants to the Chief Financial Officer, 35,000 warrants to the Chairman of the Audit committee, 400,000 warrants to Revete Capital Partners, LLC, a consultant to the Company and 500,000 shares to Extend Services Pty Ltd., also a consultant to the Company. The warrants are exercisable at $1.19 per share and have a 7 year life as noted per the Company’s board approval. The value of these warrants was calculated at $1,248,645 and included in the statement of operations for the year ending December 31, 2007. For the Black Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 % and expected volatility of 33.17 % based on valuation report dated March 1, 2007.
On December 31, 2008 the Board of Directors awarded 187,500 fully vested warrants to purchase common stock of the Company to a former Vice President. A portion of the warrants are exercisable at $1.19 per share with the balance exercisable at $1.70 per share. All warrants have a five (5) year term. The value of these warrants was calculated at $70,625 and included in the statement of operations for the year ending December 31, 2008. For the Black Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 % and expected volatility of 78.66 %.
Preferred Stock
Series B Preferred Stock
During the period September 1, 2006 to December 5, 2006, the Company raised $2,308,171 (net of offering costs of $147,330) through the issuance of 2,455,500 units of Series B convertible preferred stock. Each unit consists of one share of Series B Convertible Preferred Stock convertible into .67 shares of common stock.
On January 31, 2007 the Board of Directors authorized the conversion of the Series B Convertible Preferred Stock into 2,067,106 shares of the Company’s common stock.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
12. STOCK OPTIONS AND WARRANTS
Stock Options
Prior to acquisition by the Company, General Environmental Management, Inc. of Delaware’s Board of Directors approved and implemented the 2005 Stock Option Plan (the “2005 Plan”). The plan authorized option grants to employees and other persons closely associated with the Company for the purchase of up to 88,117 shares.
On March 28, 2007 the Board of Directors approved and implemented the 2007 Stock Option Plan (the “2007 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 Company issues stock options to employees, directors and consultants under the 2007 Stock Option Plan. Employee and Non-employee options vest according to the terms of the specific grant and expire 8 years from date of grant. Stock option activity for the years ended December 31, 2008 and 2007 was as follows:
The options had no intrinsic value at December 31, 2008.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Options outstanding at December 31, 2008 and the related weighted average exercise price and remaining life information is as follows:
The total stock based compensation expense for the years ended December 31, 2008 and 2007 was $835,557 and $1,199,301, respectively. As of December 31, 2008, there were options valued at $1,136,996 that will be amortized as compensation expense over the next 66 months as the options vest.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Warrants
Prior to the acquisition by the Company, General Environmental Management, Inc. of Delaware had issued warrants through the sale of common stock, the issuance of convertible notes, and for services. Under the terms of the agreement and plan of merger these warrants became exercisable into the same number of shares in the Company’s stock on the same terms as issued. As of December 31, 2008 there were 9,527,894 warrants outstanding with exercise prices ranging from $0.60 to $37.50 per share of common stock, and expiration dates through September 30, 2015.
Previously issued warrants to acquire 242,137 shares of our common stock at $.060 per share were set to expire on December 31, 2008. On December 31, 2008, the company extended the life of these warrants an additional 6.75 years. These warrants were valued at $128,333 using the Black - Scholes valuation model, and such cost was recognized as an additional finance cost during the year ended December 31, 2008. 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 warrants of 6.75 years.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Warrants outstanding at December 31, 2008 and the related weighted average exercise price and remaining life information is as follows:
The aggregate intrinsic value of the 9,527,894 warrants outstanding as of December 31, 2008 was $451,813. The aggregate intrinsic value for the warrants is calculated as the difference between the price of the underlying shares and quoted price of the Company's common shares for the warrants that were in-the-money as of December 31, 2008.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its warehouse and office facility and certain equipment under separate non-cancelable operating lease agreements. Under terms of each of the leases, the Company pays the cost of repairs and maintenance.
Future minimum lease commitments under these leases at December 31, 2008 are as follows:
Rent expense for the years ending December 31, 2008 and 2007 was $1,239,875 and $855,764 respectively.
ENVIRONMENTAL
The Company is regulated as a hazardous waste transporter and TSDF operator and is subject to various stringent federal, state, and local environmental laws and regulations relating to pollution, protection of public health and the environment, and occupational safety and health. The Company is subject to periodic inspection by the Department of Toxic Substance Control, DOT, and EPA. The Company has not been subject to any contingencies pursuant to any environmental law or regulation. Although compliance with these laws and regulations may affect the costs of the Company’s operations, compliance costs to date have not been material.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
ASSET RETIREMENT COSTS AND OBLIGATIONS
In accordance with its Part B operating permit, the Company is liable for certain costs involving the ultimate closure of its facilities. These expenses include costs of decommissioning, remediation, and incremental direct administration costs of closing the facilities.
Upon acquisition of General Environmental Management of Rancho Cordova, LLC in June 2004, the Company continued that subsidiary’s implementation of SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. The statement which became effective January 1, 2003, requires that a fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long lived asset. When a liability is initially recorded, the entity capitalizes the cost by increasing the carrying value of the related long lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. On an annual basis the liability to fulfill the retirement obligation is required to be reviewed and adjusted if necessary. Management’s review of the liability in 2007 determined no adjustment was necessary.
The Company determined the estimated obligation, based on current requirements and proposed regulatory changes and is intended to approximate fair value. The estimate of fair value is based on the best available information, including the results of present value techniques. Once the retirement costs were determined, the Company inflated those costs to the expected time of payments and discounts the expected future costs back to present value. The costs have been inflated in current dollars until the expected time of payment using an inflation rate of 2.5 percent and have discounted these costs to present value using a credit-adjusted risk-free interest rate of 5.5 percent. The accretion of the liability, based on the effective interest method, and amortization of the property and equipment, recognized over the estimated life of the location, will be included in the operating costs and expenses. The discount rate, which is based on the rates for the United States Treasury bonds, and the inflation rate is reviewed by the Company on an annual basis.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Upon acquisition of the Part B permit and facility, the Company’s share of obligation, was a present value liability of $35,846 and a net increase to plant and equipment of $35,846.
In the State of California, the environmental regulatory agencies overseeing the Company’s operations require the Company to provide assurance that funds will be available for these costs. The Company has a cash deposit of $899,784 to cover the ultimate cost of closure at its facility and is reflected as restricted cash in the accompanying balance sheet.
LEGAL PROCEEDINGS
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.
OTHER CONTINGENCIES
The Company is subject to various regulatory requirements, including the procurement of requisite licenses and permits at its facilities and for its vehicles and drivers. These licenses and permits, without which the Company’s operations would be adversely affected, are subject to periodic renewal. The Company anticipates that, once a license or permit is issued with respect to a facility, the license or permit will be renewed at the end of its term if the facility’s operations are in compliance with the applicable regulatory requirements.
Under the Company’s insurance programs, coverage is obtained for catastrophic exposures, as well as those risks required to be insured by law or contract. The Company retains a certain amount of risk through per occurrence deductibles on its insurance policies.
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
14. INCOME TAXES
The Company's net deferred tax assets (using a federal corporate income rate of 34%) consisted of the following at December 31;
As of December 31, 2008 and December 31, 2007, the Company had federal net operating loss carry forwards of approximately $41,719,590 and $34,346,755, respectively, 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 consolidated financial statements due to the uncertainty as to their realizability in future periods.
SFAS No. 109 requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carry-forwards, the utilization of the Company’s net operating loss carry-forwards will likely be limited as a result of cumulative changes in stock ownership. The company has not recognized a deferred tax asset and, as a result, the change in stock ownership has not resulted in any changes to valuation allowances.
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 December 31, 2008 and 2007.
Reconciliation of the effective income tax rate to the United States statutory income tax rate for the years ended December 31, 2008 and 2007 is as follows:
GENERAL ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
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, the Company 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 December 31, 2008, the Company does not have a liability for unrecognized tax benefits.
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 five 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 December 31, 2008, the Company has no accrued interest or penalties related to uncertain tax positions.
15. SUBSEQUENT EVENTS
On January 9, 2009, the Company converted notes, expenses and fees owed to GPP into common stock. Expenses were converted into 15,825 shares of common stock. Notes totaling $72,500 were converted into 97,000 shares of common stock. Fees totaling $150,000 were converted into 250,000 shares of common stock.
For his services as a non-employee director and Chairman of the Audit Committee, James Stapleton was awarded 70,000 warrants to purchase the Company’s common stock at $0.75 per share. These warrants vest immediately.
The Company also approved the issuance of 35,000 seven year warrants to Lapis Solutions, LLC at an exercise price of $1.05 for services provided related to the maintenance the Company’s software platform, GEMWARE.
On January 7, 2009 the Company granted to certain employees options to acquire 604,500 shares of the company stock at $.75 per share.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
ITEM 9A
ITEM 9A (T). 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.
Management’s Annual Report on Internal Control over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2008.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.
There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. Triggering Events That Accelerate or Increase a Direct Financial Obligation
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.
As of April 13, 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.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers, and Corporate Governance
Our directors serve until the next annual meeting and until their successors are elected and qualified. Our officers are appointed to serve for one year until the meeting of the board of directors following the annual meeting of stockholders and until their successors have been elected and qualified. There are no family relationships between any of our directors or officers.
Timothy J. Koziol. Mr. Koziol joined GEM in January 2002 and now serves as the Chief Executive Officer of the Company. Mr. Koziol implemented accounting controls and systems to monitor the day-to-day financial position of GEM, changed operational policies to improve efficiencies, and implemented new sales and marketing programs to increase revenue. Prior to joining GEM, Mr. Koziol was a principal of Fortress Funding, Inc., an asset based lending company, where he was responsible for business development and underwriting. Mr. Koziol was also a principal in Global Vantage, Ltd., an investment banking firm located in Newport Beach, CA. Prior to his work in the financial services industry, Mr. Koziol managed a marketing consulting firm for national and regional clients. He has a Bachelor of Arts from Wheaton College in Speech Communications and a Masters of Arts (Magma Cum Laude) from the Wheaton Graduate School in Mass Communications.
James P. Stapleton is currently a consultant and advisor to small public companies. From May 2004 through July 2007 Mr. Stapleton was the Chief Financial Officer of Bionovo (NASDAQ BNVI). Mr. Stapleton served as GEM.DE's Chief Financial Officer from November 2003 through April 2004, and is no longer employed by GEM.DE or the Company. He serves on GEM's Board of Directors. From 1996 through 2002 Mr. Stapleton was employed in a variety of positions for Auxilio, Inc. (OTC BB AUXO) and Prosoft Training (NASDAQ POSO), including Corporate Secretary, Vice President Investor relations, Chief Financial Officer, and other positions. Mr. Stapleton was Chief Financial Officer of BioTek Solutions, Inc. from 1995 through February 1996.
Brett M. Clark. Mr. Clark joined GEM in June 2005 as the Chief Financial Officer. From January 2005 to June 2005, he provided consulting services to the Company related to financial and accounting matters. From June 2005 to December 2006, Mr. Clark served the Company as Vice President Finance and Chief Financial Officer. In December 2006 and continuing to the present, he was promoted to Executive Vice President of Finance and Chief Financial Officer. From January 2003 through November of 2004 Mr. Clark was the Vice President, Treasurer and Chief Financial Officer for Day Runner, Inc., a privately held consumer products distribution company where he was responsible for the restructuring of the finance, information technology, and accounting functions in the company’s turnaround. Mr. Clark has been the Chief Financial Officer for Tru Circle Corporation (2000 - 2002), Adams Rite Aerospace, Inc. (1997 - 2000) and Chapman University. Prior to these companies, Mr. Clark was Group Controller for Fleetwood Enterprises, a publicly traded Fortune 500 manufacturing company and Corporate Controller and Assistant Secretary for Air Cal, Inc., a publicly traded airline. Prior to work in publicly traded firms and private enterprises, Mr. Clark worked for Deloitte & Touche, a “Big 4” CPA firm. He has a Bachelor of Science in Accounting from the University of Southern California and became a CPA in the State of California in 1975.
Clyde E. Rhodes, Jr. Mr. Rhodes serves as Chief Compliance Officer, Executive Vice President of Technical Services, Secretary and a Director of the Company. Mr. Rhodes joined GEM’s predecessor, HazPak Environmental Services, Inc. (“HES”), in 2000. Before joining HES, he was the Hazardous Waste Program Manager for the Metropolitan Water District of Southern California for more than nine years. Mr. Rhodes has been in the environmental industry for a total of more than 15 years developing environmental management programs, performing environmental audits and assisting public and private entities in meeting the myriad of state and federal environment control laws and regulations. Mr. Rhodes is a founding member of the Joint Utilities Vendor Audit Consortium established by west coast utilities (Edison, LA Department of Water and Power, Southern California Gas, PG&E, Salt River Project, and the Arizona Public Service Utility) to audit hazardous waste facilities throughout the country. Mr. Rhodes possesses a Bachelor of Science Degree in Chemical Engineering from Louisiana Tech University. Mr. Rhodes has the certificate of Engineer-In-Training and received registration as a Registered Environmental Assessor in the State of California in 1994.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethics by filing a Current Report on Form 8-K with the SEC, disclosing such information.
AUDIT COMMITTEE
The Audit Committee, which held 3 meetings during fiscal year 2008, recommends the selection of independent public accountants, reviews the scope of approach to audit work, meets with and reviews the activities of the Company's internal accountants and the independent public accountants, makes recommendations to management or to the Board of Directors as to any changes to such practices and procedures deemed necessary from time to time to comply with applicable auditing rules, regulations and practices, and reviews all Form 10-K Annual and 10-Q interim reports.
The Audit Committee consists of James Stapleton and is an "Audit Committee" for the purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. The Audit Committee has one "audit committee financial expert" as defined by Item 401(e) of Regulation S-B under the Securities Exchange Act of 1934, James Stapleton, is "independent" as that term is defined in the rules of the NASDAQ stock market.
ITEM 11.
ITEM 11. Executive Compensation
The following table summarizes the compensation earned by or paid to our principal executive officer, principal financial officer, a highly compensated executive officer, other highly compensated individuals who are not executive officers and a Director; all who served during the fiscal year ended December 31, 2008.
The total compensation for the three fiscal years ended December 31, 2008 of Timothy J. Koziol, our Chief Executive Officer, Brett M. Clark, our Chief Financial Officer, Clyde E. Rhodes, Jr., our Secretary, Michael Gortner, our General Manager, Paul Anderson, our Vice President and James Stapleton, our Director is set forth below in the following Summary Compensation Table.
There were no option exercises by our executive officers during fiscal 2008.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITY OWNERSHIP
The following table sets forth those stockholders who beneficially own 5% or more of the common stock of the Company, the common stock ownership of the directors and executive officers, and the stock ownership of the directors and executive officers as a group:
(1)
Based upon 12,691,409 shares outstanding.
(2)
Kevin P. O’Connell is the Managing Member of Billington Brown Acceptance, LLC, Revet MAK, LLC, Revete Capital Partners LLC, Lapis Solutions, LLC and General Pacific Partners, LLC.
(3)
Includes 1,140,525 warrants to purchase common stock at $0.60, 168,250 warrants to purchase common stock at $1.19, 26,250 warrants to purchase common stock at $1.05 and 9,180 warrants to purchase common stock at $30.00
(4)
Includes 515,625 options to purchase common stock at $1.19 per share, 12,498 options to purchase common stock at $1.70 per share and 6,667 options to purchase common stock at $30.00 per share. Includes 650,000 warrants to purchase common stock at $1.19
(5)
Includes 268,125 options to purchase common stock at $1.19 per share and 37,498 options to purchase common stock at $1.70 per share.
(6)
Includes 35,000 warrants to purchase common stock at $1.19 per share.
(7)
Includes 412,500 options to purchase common stock at $1.19 per share, 37,498 options to purchase common stock at $1.70 per share, and 5,667 options to purchase common stock at $39.00 per share. Includes 500,000 warrants to purchase common stock at $1.19
(8)
Laurus Capital Management, LLC, a Delaware limited liability company (“Laurus Capital”), serves as the investment manager of Laurus Master Fund, LTD., Valens U.S. SPV I, LLC and Valens Offshore SPV I, LTD (together, the “Laurus Funds”) and possesses the sole power to vote and the sole power to direct the disposition of all securities of the Company held by the Laurus Funds, which, as of the date hereof, constitute an aggregate of 1,099,994 shares upon exercise of warrants. Mr. Eugene Grin and Mr. David Grin, through other entities, are the controlling principals of Laurus Capital. Laurus Capital, Mr. Eugene Grin and Mr. David Grin each disclaim beneficial ownership of such shares, except to the extent of its of his pecuniary interest therein, if any.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information with respect to the equity securities that are authorized for issuance under our compensation plans as of December 31, 2008:
On February 14, 2007, the Company completed the reverse split of the outstanding common stock, par value $0.001 per share, by a ratio of 1-for-30. All share and per share calculations and option shares have been retro-actively adjusted to reflect this reverse split as if it occurred at the beginning of the earliest period presented.
Prior to acquisition by the Company, General Environmental Management, Inc. of Delaware’s Board of Directors approved and implemented the 2005 Stock Option Plan (“The 2005 Plan”). The Plan authorized option grants to employees and other persons closely associated with the Company for the purchase of up to 88,117 shares.
During 2006, the Board of Directors of General Environmental Management, Inc. granted to employees a total of 12,587 options and cancelled 1,537 options. The exercise price for the options was the market value of the stock at the date of the grant.
During 2008 and 2007, the Board of Directors cancelled 1,852 and 10,854 options respectively.
On March 28, 2007 the Board of Directors approved and implemented the 2007 Stock Option Plan (the “2007 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. During 2007 the Stock Option Committee granted a total of 5,233,268 options, had exercises of 100 options, and cancelled 289,188. The exercise price of the options was the market value of the stock at the date of the grant.
During the year ended December 31, 2008 the Stock Option Committee granted a total of 173,000 options and cancelled 384,001 options.
The weighted average exercise price of the options at December 31, 2008 was $1.65 per share.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
Advances to Related Parties
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. As of December 31, 2008, $472,500 remained outstanding. 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 year ending December 31, 2008 includes $333,176 for amortization of this discount, and the unamortized valuation discount was $109,324 at December 31, 2008.
During the year ended December 31, 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 and issue to them a warrant to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $.60 for a period of six years valued at $179,982 using 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 6 years. The value of the warrant and the cash paid has been reflected as part of deferred financing fees on the accompanying balance sheet at 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.
During the year ended December 31, 2008 the Company accrued $19,945 in fees and issued to GPP a warrant to purchase 64,500 shares of the Company’s common stock related to a letter of credit issued and released during the year. The Company valued the warrants at $57,405 using a Black - Scholes option pricing model and reflected such cost as a financing cost. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 87.87 % and an expected term for the warrants of 7 years.
Software Support
During the year ended December 31, 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 December 31, 2008, $92,555 of the fees had been prepaid to Lapis. As additional consideration for the support and development services agreement, the Company issued Lapis a seven year warrant to purchase 35,000 shares of the Company’s common stock at $1.05 per share. These warrants were valued at $29,050 using the Black - Scholes valuation model and such cost was recognized as an expense. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 87.87 % and an expected term for the warrants of 7 years.
Advisory fees
During the year ended December 31, 2007 the Company incurred $90,500 respectively in fees for advisory services provided by General Pacific Partners (“GPP”). As of December 31, 2007 all amounts owed to General Pacific Partners for fees related to advisory services had been paid.
On February 1, 2007, the Company entered into a twelve month advisory agreement with GPP. The fees under the agreement consisted of an initial cash fee of $55,500, expenses of $35,000, the issuance of 426,500 shares of its common stock, valued at $507,535, and a seven year warrant to purchase 450,000 shares of the Company’s common stock at $0.60 per share. The Company valued the warrants at $357,750 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 33.17 % and an expected term for the warrants of 7 years. The Company also agreed to modify certain terms of two sets of warrants issued during 2006 including the modification of the exercise price (from $1.20 per share to $0.60 per share) and the life of the warrants (from 5.5 years to 6.5 years). The second set of warrants included the modification of the life of the warrants (from 1.75 years to 6.75 years). The Company valued the modification of these warrants as $136,082 which was based on the difference of the warrant before and after the modification. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 33.17% and an expected term for the warrants of 6.5 and 6.75 years. The Company reflected an aggregate charge of $1,091,867 during the year ended December 31, 2007 relating to these transactions.
On March 31, 2007 General Pacific Partners agreed to convert $220,000 of accrued advisory fees and expenses into 184,874 shares of common stock based upon the existing fair value of the Company’s common stock. As an inducement to convert, the Company issued GPP a seven year warrant to purchase 55,462 shares of the Company’s common stock at $0.60 per share. These warrants were valued at $44,092 using the Black - Scholes valuation model and such cost was recognized as an expense. For the Black - Scholes calculation, the Company assumed no dividend yield, a risk free interest rate of 4.78 %, expected volatility of 33.17 % and an expected term for the warrants of 7 years.
Issuance and conversion of assignable notes
From December 2006 through October 2007 General Pacific Partners made several unsecured advances to the Company utilizing assignable notes totaling $3,897,984. With the approval of the Board of Directors, the Company offered holders of the assignable notes the ability to convert the notes to common stock at a value of $1.20 per share, and during the year ended December 31, 2007, $3,933,861 of these notes and accrued interest were converted into 3,278,250 shares of common stock. The fair value of the shares at the time of conversion was $8,679,689 resulting in a cost to induce conversion of debt of $4,745,828. As a further inducement to convert, the holders were issued 974,503 two year warrants to purchase a number of shares equal to 30% of the number of shares they will receive upon conversion of the principal note amount due to them at an exercise price of $0.60. The Company valued the warrants at $2,051,811 using a Black - Scholes option pricing model.
The aggregate value of common stock and warrants issued of $10,731,500 in excess of the notes payable and accrued interest exchanged of $3,933,861 was $6,797,639 and was reflected as costs to induce conversion of debt in the accompanying consolidated statement of operations for the year ended December 31, 2007.
As of December 31, 2007, all of these unsecured advances have been converted to common stock and no further amounts were due.
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 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.
Corporate Governance
The Board of Directors includes James Stapleton who is defined as "independent" by the rules of the NASDAQ stock market.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
Independent Auditor Fees
Fees for professional services provided by GEM’s independent auditors, Weinberg & Company, for the years ended December 31, 2008 and 2007 are as follows:
Audit fees consist of fees related to GEM’s year end financial statements and review of GEM’s quarterly reports on Form 10-Q. Audit related fees principally include audits in connection with the acquisition completed during 2008.
It is the policy of GEM’s audit committee to approve all engagements of GEM’s independent auditors to render audit or non-audit services prior to the initiation of such services.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statements Schedules
The following are exhibits filed as part of GEM's Form 10-K for the year ended December 31, 2008:
* Previously Filed
** Filed Herewith
Reports on Form 8-K
(1) As filed with the commission on Form 8K dated January 3, 2007
(2) As filed with the commission on Form 8K dated July 17, 2007
(3) As filed with the commission on Form 8K dated November 6, 2007
(4) As filed with the commission on Form 8K dated September 24, 2008
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.