UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
 FORM10-Q
 
 (Mark
One)
 [X]
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period  ended:  March
      31, 2009
 
  [  
      ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 For
      the Transition period from _____ to
_____
  
  Commission
File No. 33-55254-38
 
 General
Environmental Management, Inc.
 (Exact
name of Small Business Issuer as specified in its charter)
 
 NEVADA
              
              87-0485313(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification Number)
  3191
Temple Ave., Suite 250, Pomona CA, 91768
 (Address
of principal executive offices, Zip
Code)
 (909)
444-9500
 Issuer’s
telephone number, including area code
   Indicate
by check mark whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. [X]
Yes  [  ] No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
it corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T ($232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). [  ]
Yes [X] No
  Indicate
by check mark whether the registrant is a large accelerated filer, a non-
accelerated filer, or a smaller reporting company.  See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer      o
                    Accelerated
      filer                         
      oNon-accelerated
      filer        o(Do
      not check if a smaller reporting company)
                    Smaller
      reporting company       x
 Indicate
by check mark whether the registrant is a shell company ( as defined in Rule
12b-2 of the Exchange Act).  [  ] Yes [X] No
  APPLICABLE
ONLY TO CORPORATE ISSUERS
  State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practical date.  As of May 14, 2009, there were
12,691,659 shares of the issuer’s $.001 par value common stock issued and
outstanding. Indicate
by check mark whether the registrant is a shell company ( as defined in Rule
12b-2 of the Exchange Act).  [  ] Yes [X] No
  1
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC.
 QUARTERLY
REPORT ON FORM 10-Q
 FOR
THE THREE MONTHS ENDED MARCH  31, 2009
 
 TABLE
OF CONTENTS
  PagePart
      1
              Financial
      InformationItem
      1
              Financial
      Statements (Unaudited)
              3Condensed
      Consolidated Balance Sheets  as of  March 31, 2009
      (Unaudited)and
      December 31, 2008
              3Condensed
      Unaudited Consolidated Statements of Operations for the Three Months ended
      March 31, 2009 and 2008
              5Condensed
      Unaudited Consolidated Statement of Stockholders'
      Deficiencyfor the Three Months Ended March 31,
      2009
              6Condensed
      Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
      March 31, 2009 and 2008
              7Notes
      to the Unaudited Condensed Consolidated Financial
    Statements
              9Item
      2
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
              27Item
      3
              Quantitative
      and Qualitative Disclosures About Market Risk
              34Item
      4
              Controls
      and Procedures
              34Part
      II
              Other
      InformationItem
      1
              Legal
      Proceedings
              35Item
      1A
              Risk
      Factors
              35Item
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              35Item
      3
              Defaults
      Upon Senior Securities
              35Item
      4
              Submission
      of Matters to a Vote of Security Holders
              35Item
      5
              Other
      Information
              36Item
      6
              Exhibits
      and Reports on Form 8K
              36Signatures
              37CEO
      Certification
              AttachedCFO
      Certification
              Attached
  2
  PART
1 - FINANCIAL INFORMATION
 
 Item
1.  Financial Statements.
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 
 March
      31,
                
                
                December
      31,2009
                
                
                2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                
                $
                356,467
                
                
                $
                375,983Accounts
      receivable, net of allowance for doubtful accountsof
      $172,896 and $174,834, respectively
                
                
                5,354,596
                
                
                
                6,729,743Prepaid
      expenses and other current assets
                
                
                411,520
                
                
                
                537,289Total
      Current Assets
                
                
                6,122,583
                
                
                
                7,643,015Property
      and Equipment – net of accumulated depreciation$3,288,015
      and $2,917,056,  respectively
                
                
                7,663,405
                
                
                
                7,783,208Restricted
      cash
                
                
                1,200,019
                
                
                
                1,199,784Intangible
      assets, net
                
                
                823,976
                
                
                
                864,781Deferred
      financing fees
                
                
                465,280
                
                
                
                513,412Deposits
                
                
                439,132
                
                
                
                291,224Goodwill
                
                
                946,119
                
                
                
                946,119TOTAL
      ASSETS
                
                $
                17,660,514
                
                
                $
                19,241,543
 (Continued)
  3
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)
   March
      31,
                
                
                December
      31,2009
                
                
                2008(Unaudited)LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCURRENT
      LIABILITIES:Accounts
      payable
                
                $
                4,194,477
                
                
                $
                3,499,178Accrued
      expenses
                
                
                2,734,696
                
                
                
                2,620,224Accrued
      disposal costs
                
                
                529,267
                
                
                
                743,474Payable
      to related party
                
                
                827,842
                
                
                
                706,868Deferred
      rent
                
                
                44,185
                
                
                
                41,202Derivative
      liabilities
                
                
                1,574,078
                
                
                
                -Current
      portion of financing agreement
                
                
                8,621,253
                
                
                
                10,366,544Current
      portion of long term obligations
                
                
                792,514
                
                
                
                794,278Current
      portion of capital lease obligations
                
                
                606,788
                
                
                
                623,007Total
      Current Liabilities
                
                
                19,925,100
                
                
                
                19,394,775LONG-TERM
      LIABILITIES :Long
      term obligations, net of current portion
                
                
                526,767
                
                
                
                535,689Capital
      lease obligations, net of current portion
                
                
                1,620,710
                
                
                
                1,751,854Convertible
      notes payable, net of current portion
                
                
                467,651
                
                
                
                489,605Total
      Long-Term  Liabilities
                
                
                2,615,128
                
                
                
                2,777,148STOCKHOLDERS’
      DEFICIENCYCommon
      stock, $.001 par value, 1,000,000,000 shares authorized,12,691,659
      and 12,691,409 shares issued and outstanding
                
                
                12,692
                
                
                
                12,692Additional
      paid in capital
                
                
                52,210,663
                
                
                
                53,585,035Accumulated
      deficit
                
                
                (57,103,069
                )
                
                
                (56,528,107
                )Total
      Stockholders' Deficiency
                
                
                (4,879,714
                )
                
                
                (2,930,380
                )TOTAL
      LIABILITIES & STOCKHOLDERS’ DEFICIENCY
                
                $
                17,660,514
                
                
                $
                19,241,543
   See
accompanying notes to the condensed consolidated financial
statements.
  4
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
  
 Three
      months endedMarch
      31,
                  2009
                
                
                March
      31,
                  2008REVENUES
                
                $
                8,201,870
                
                
                $
                6,951,653COST
      OF REVENUES
                
                
                7,196,715
                
                
                
                5,645,344GROSS
      PROFIT
                
                
                1,005,155
                
                
                
                1,306,309OPERATING
      EXPENSES
                
                
                2,103,598
                
                
                
                1,849,614OPERATING
      LOSS
                
                
                (1,098,443
                )
                
                
                (543,305
                )OTHER
      INCOME (EXPENSE):Interest
      income
                
                
                467
                
                
                
                7,017Interest
      and financing costs
                
                
                (994,188
                )
                
                
                (816,608
                )Other
      non-operating income
                
                
                8,417
                
                
                
                7,663Gain
      on derivative financial instruments
                
                
                552,512
                
                
                
                -Net
      Loss
                
                $
                (1,531,235
                )
                
                $
                (1,345,233
                )Net
      loss per common  share, basic and diluted
                
                $
                (.12
                )
                
                $
                (.11
                )Weighted
      average shares of common stockoutstanding,
      basic and diluted
                
                
                12,691,420
                
                
                
                12,473,885
 
 See
accompanying notes to the condensed consolidated financial
statements
  5
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (UNAUDITED)
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009
   AdditionalCommon
      Stock
                
                
                Paid-in
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                TotalBalance,
      December  31, 2008
                
                
                12,691,409
                
                
                $
                12,692
                
                
                $
                53,585,035
                
                
                $
                (56,528,107
                )
                
                $
                (2,930,380
                )Cumulative
      effect of change in accounting principleJanuary 1,
      2009 reclassification of embedded feature of equitylinked
      financial instruments to derivative liabilities
                
                
                
                
                
                
                
                
                
                
                (1,674,036
                )
                
                
                956,273
                
                
                
                (717,763
                )Issuance
      of warrants
                
                
                
                
                
                
                
                
                
                
                37,743
                
                
                
                
                
                
                
                37,743Stock
      compensation cost for value of vested options
                
                
                
                
                
                
                
                
                
                
                261,734
                
                
                
                
                
                
                
                261,734Issuance
      of shares on exercise options
                
                
                250
                
                
                
                
                
                
                
                187
                
                
                
                
                
                
                
                187Net
      loss for  the three  months ended March 31, 
      2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,531,235
                )
                
                
                (1,531,235
                )Balance,
      March 31,  2009
                
                
                12,691,659
                
                
                $
                12,692
                
                
                $
                52,210,663
                
                
                $
                (57,103,069
                )
                
                $
                (4,879,714
                )
   See
accompanying notes to the consolidated financial statements
  6
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 
 Three Months
      EndedMarch
       31,2009
                
                
                2008OPERATING
      ACTIVITIESNet
      Loss
                
                $
                (1,531,235
                )
                
                $
                (1,345,233
                )Adjustments
      to reconcile net loss to cash provided by(used
      in) operating activitiesDepreciation
      and amortization
                
                
                411,764
                
                
                
                226,795Amortization
      of discount on financing agreement
                
                
                430,331
                
                
                
                437,612Fair
      value of vested options
                
                
                261,734
                
                
                
                216,716Issuance
      of warrants for services
                
                
                37,743
                
                
                
                -Amortization
      of discount on notes
                
                
                118,680
                
                
                
                -Amortization
      of deferred financing fees
                
                
                48,132
                
                
                
                84,450Gain
      on derivative instrument
                
                
                (552,512
                )
                
                
                -Changes
      in assets and liabilities:Accounts
      Receivable
                
                
                1,375,147
                
                
                
                1,523,529Inventory
                
                
                8,272
                
                
                
                6,474Prepaid
      and other current assets
                
                
                117,496
                
                
                
                (513,113
                )Deposits
      and restricted cash
                
                
                (148,142
                )
                
                
                (6,654
                )Accounts
      Payable
                
                
                695,299
                
                
                
                (1,961,128
                )Accrued
      interest on related party advances
                
                
                11,651
                
                
                
                -Accrued
      interest on convertible notes
                
                
                8,045
                
                
                
                9,642Accrued
      expenses and other liabilities
                
                
                (96,752
                )
                
                
                814,094NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                
                
                1,195,653
                
                
                
                (506,816
                )INVESTING
      ACTIVITIESAdditions
      to property and equipment
                
                
                (251,156
                )
                
                
                (95,300
                )NET
      CASH USED IN INVESTING ACTIVITIES
                
                
                (251,156
                )
                
                
                (95,300
                )FINANCING
      ACTIVITIESNet
      advances from notes payable- financing agreement
                
                
                (766,795
                )
                
                
                (536,403
                )Advances
      from related parties
                
                
                -
                
                
                
                472,500Proceeds
      from exercise of options
                
                
                187
                
                
                
                -Payment
      of notes payable
                
                
                (40,686
                )
                
                
                (4,215
                )Repayment
      of convertible notes
                
                
                -
                
                
                
                (15,000
                )Payment
      on capital leases
                
                
                (156,719
                )
                
                
                (68,868
                )NET
      CASH USED IN FINANCING ACTIVITIES
                
                
                (964,013
                )
                
                
                (151,986
                )DECREASE 
      IN CASH AND CASH EQUIVALENTS
                
                
                (19,516
                )
                
                
                (754,102
                )Cash
      at beginning of period
                
                
                375,983
                
                
                
                954,581CASH
      AT END OF PERIOD
                
                $
                356,467
                
                
                $
                200,479SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for:Interest
      Expense
                
                $
                399,400
                
                
                $
                275,827
   (Continued)
  7
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
   Three Months
      EndedMarch 31,2009
                  
                  
                  2008SUPPLEMENTAL
      DISCLOSURE OF NON – CASH INVESTING AND FINANCING
    ACTIVITIES:Acquisition
      of leased equipment and capital lease obligations
                  
                  $
                  -
                  
                  
                  $
                  848,856Cumulative
      effect of adoption of
                  
                  
                  
                  
                  
                  
                  -accounting
      principle and establishment of derivative liability on:Notes
      payable
                  
                  
                  1,408,828Stockholders
      deficiency
                  
                  
                  717,763
 See
accompanying notes to the condensed consolidated financial
statements
  8
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   1. ORGANIZATION
AND PRINCIPAL ACTIVITIES
 
 ORGANIZATION
AND DESCRIPTION OF BUSINESS
  Ultronics
Corporation  ( “the Company”)  was incorporated in the state
of Nevada on March 14, 1990 to serve as a vehicle to effect a merger, exchange
of capital stock, asset acquisition or other business combination with a
domestic or foreign private business.  On February 14, 2005 the
Company acquired all of the outstanding shares of General Environmental
Management, Inc (“GEM”), a Delaware Corporation.  The acquisition was
accounted for as a reverse merger (recapitalization) with GEM deemed to be the
accounting acquirer, and Ultronics Corporation the legal
acquirer.  Subsequent to the acquisition, the Company changed its name
to General Environmental Management, Inc.
  GEM is a
fully integrated environmental service firm structured to provide EHS compliance
services, field services, transportation, off-site treatment, and on-site
treatment services.  Through its services GEM assists clients in
meeting regulatory requirements for the disposal of hazardous and non-hazardous
waste
 BASIS OF
PRESENTATION
 
 The
condensed consolidated interim financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission, in the opinion of management, include all adjustments
which, except, as described elsewhere herein, are of a normal recurring nature,
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the period presented. The
financial statements presented herein should be read in conjunction with
the financial statements included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008 filed with the Securities and Exchange
Commission.
 
 The
results for the interim periods are not necessarily indicative of results for
the entire year.
  GOING
CONCERN
 
 The 
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company incurred a
net loss of $1,531,235 during the three  months  ended
March 31, 2009, and as of March 31, 2009  the Company
had current liabilities exceeding current assets by $13,802,517 and had a
stockholders’ deficiency of $4,879,714. These matters raise substantial doubt
about the Company’s ability to continue as a going concern.
  Management
is continuing to raise capital through the issuance of debt and equity. In
addition, management believes that the Company will begin to operate profitably
due to increased size, improved operational results and cost cutting practices.
However, there can be no assurances that the Company will be successful in this
regard or will be able to eliminate its working capital deficit or operating
losses. The accompanying condensed consolidated financial statements do not
contain any adjustments which may be required as a result of this
uncertainty.
  9
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
  (a)  Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of General Environmental
Management, Inc., a Nevada corporation, and it’s wholly owned subsidiaries,
General Environmental Management, Inc., a Delaware corporation, GEM Mobile
Treatment Services, Inc., a California corporation, Island Environmental
Services, Inc., a California corporation and General Environmental Management of
Rancho Cordova, LLC. Inter-company accounts and transactions have been
eliminated.
 
 (b)  Use
of estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company’s
management to make certain estimates and assumptions.  These estimates
and assumptions affect the reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the financial
statements.  These estimates and assumptions will also affect the
reported amounts of certain revenues and expenses during the reporting
period.  Actual results could differ materially based on any changes
in the estimates and assumptions that the Company uses in the preparation of its
financial statements that are reviewed no less than annually.  Actual
results could differ materially from these estimates and assumptions due to
changes in environmental-related regulations or future operational plans, and
the inherent imprecision associated with estimating such future
matters.
 
 (c)
Revenue Recognition
 
 The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable, and collection is reasonably assured.
 
 The
Company is a fully integrated environmental service firm structured to provide
field services, technical services, transportation, off-site treatment, on-site
treatment services, and environmental health and safety (“EHS”) compliance
services.  Through our services, we assist clients in meeting
regulatory requirements from the designing stage to the waste disposition stage.
The technicians who provide these services are billed at negotiated rates, or
the service is bundled into a service package.  These services are
billed and revenue recognized when the service is performed and completed. When
the service is billed, client costs are accumulated and accrued.
 
 Our field
services consist primarily of handling, packaging, and transporting a wide
variety of liquid and solid wastes of varying amounts. We provide the fully
trained labor and materials to properly package hazardous and non-hazardous
waste according to requirements of the Environmental Protection Agency and the
Department of Transportation. Small quantities of laboratory chemicals are
segregated according to hazard class and packaged into appropriate containers or
drums. Packaged waste is profiled for acceptance at a client’s selected
treatment, storage and disposal facility (TSDF) and tracked electronically
through our systems. Once approved by the TSDF, we provide for the
transportation of the waste utilizing tractor-trailers or bobtail trucks. The
time between picking up the waste and transfer to an approved TSDF is usually
less than 10 days.  The Company recognizes revenue for waste picked up
and received waste at the time pick up or receipt occurs and recognizes the
estimated cost of disposal in the same period. For the Company’s TSDF located in
Rancho Cordova, CA, costs to dispose of waste materials located at the Company’s
facilities are included in accrued disposal costs.  Due to the limited
size of the facility, waste is held for only a short time before transfer to a
final treatment, disposal or recycling facility.
  10
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 (d)
Concentrations of Credit Risks
 
 The
Company’s financial instruments that are exposed to concentrations of credit
risk consist principally of cash and trade receivables.  The Company
places its cash in what it believes to be credit-worthy financial
institutions.  However, cash balances have exceeded FDIC insured
levels at various times.  The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant risk in
cash.
 
 The
Company’s trade receivables result primarily from removal or transportation of
waste, and the concentration of credit risk is limited to a broad customer base
located throughout the Western United States.
 
 During
the three months ended March 31, 2009 and 2008, one customer accounted for 9%
and 9% of revenues, respectively. As of  March 31, 2009 and December
31, 2008 there was one customer that accounted for 11% and 24% of accounts
receivable, respectively.
 
 (e) Fair
Value of Financial Instruments
 
 Fair
Value Measurements are determined by the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS
157") as of January 6, 2008, with the exception of the application of the
statement to non-recurring, non-financial assets and liabilities as permitted.
The adoption of SFAS 157 did not have a material impact on the Company's fair
value measurements. SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. SFAS 157 establishes a fair
value hierarchy, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
 
 Level 1-
Quoted prices in active markets for identical assets or
liabilities.
 Level 2-
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly.
 Level 3-
Unobservable inputs based on the Company's assumptions.
 
 SFAS 157
requires the use of observable market data if such data is available without
undue cost and effort.
  The
following table presents certain investments and liabilities of the Company’s
financial assets measured and recorded at fair value on the Company’s condensed
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of March 31, 2009 (unaudited):
 
 Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalFair
      value of warrants and embedded derivatives
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  1,574,078
                  
                  
                  $
                  1,574,078
  See
Notes 7 and 11 for more information on these financial
instruments.
 
 (f)  Derivative
Financial Instruments
 The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the condensed consolidated statements of
operations.  For stock-based derivative financial instruments, the
Company uses the Black-Scholes option pricing model to value the derivative
instruments at inception and on subsequent valuation dates.  The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period.  Derivative instrument liabilities are classified in
the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
  11
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   (g) Stock
Compensation Costs
 
 The
Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123R effective January 1, 2006, and is using the modified prospective method
in which compensation cost is recognized beginning with the effective date (a)
based on the requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No. 123R for
all awards granted to employees prior to the effective date of SFAS No. 123R
that remained unvested on the effective date. The Company accounts for stock
option and warrant grants issued and vesting to non-employees in accordance with
EITF No. 96-18: "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF No. 00-18: “Accounting Recognition for Certain Transactions involving
Equity Instruments Granted to Other Than Employees” whereas the value of the
stock compensation is based upon the measurement date as determined at either a)
the date at which a performance commitment is reached, or b) at the date at
which the necessary performance to earn the equity instruments is
complete.
  (h) Net
Loss per Share
 
 Statement
of Financial Accounting Standards No. 128, "Earnings per Share", requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS").  Basic income (loss) per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period.  Diluted
earnings per share gives effect to all dilutive potential common shares
outstanding during the period.
  These
potentially dilutive securities were not included in the calculation of loss per
share for the three months ended March 31, 2009 and 2008 because the Company
incurred a loss during such periods and thus their effect would have been
anti-dilutive.  Accordingly, basic and diluted loss per share is the
same for the three months ended March 31, 2009 and 2008.
 
 At March
31, 2009 and 2008, potentially dilutive securities consisted of convertible
securities, outstanding common stock purchase warrants and stock options to
acquire an aggregate of 16,686,288 shares and 11,736,700 shares,
respectively.
 
 (i)
Recent Accounting Pronouncements
 
 In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued.  SFAS
141R replaces SFAS 141 “Business Combinations”.  SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The effective date, as well as the adoption date
for the Company was January 1, 2009.  Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical consolidated financial statements at
the time of adoption.
 
 In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142.  This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.  The
effective date, as well as the adoption date for the Company was January 1,
2009.  Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical consolidated financial statements at the time of
adoption.
  12
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.”
FSP No. FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), to
address application issues raised on initial recognition and measurement,
subsequent measurement and accounting and disclosure of assets and liabilities
arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is
effective for the first annual reporting period on or after December 31,
2008. The impact of FSP No. FAS 141(R)-1 on the
Company’s  consolidated financial statements will depend on the number
and size of acquisition transactions, if any, engaged in by the
company.
  In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value Measurements, when the volume and level of activity for the
asset or liability have significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. FSP FAS 157-4 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. In periods after
initial adoption, FSP FAS 157-4 requires comparative disclosures only for
periods ending after initial adoption. The Company does not expect the changes
associated with adoption of FSP FAS 157-4 will have a material effect on the on
its financial statements and disclosures.
  Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.
 13
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 3.
ACQUISITION
  On August
31, 2008, the Company entered into a stock purchase agreement with Island
Environmental Services, Inc. of Pomona, California ("Island"), a privately held
company, pursuant to which the Company acquired all of the issued and
outstanding common stock of Island, a California-based provider of hazardous and
non-hazardous waste removal and remediation services to a variety of private and
public sector establishments. In consideration of the acquisition of the issued
and outstanding common stock of Island, the Company paid $2.25 million in cash
to the stockholders of Island and issued $1.25 million in three year promissory
notes (“Notes”, see note 9).  Other consideration is payable based on
the performance of the acquired entity.  The Notes bear interest at
8%, payable quarterly, and the entire principal is due 36 months after closing.
As a result of the agreement, Island becomes a wholly-owned subsidiary of the
Company.
 
 The
acquisition of Island has been accounted for as a purchase in accordance with
SFAS No. 141, “Business Combinations,” and the operations of the company have
been consolidated since September 1, 2008, the effective date of the
acquisition. The $3.5 million purchase price was allocated as follows based upon
the fair value of the acquired assets, as determined by management with the
assistance of an independent valuation firm to determine the components of the
acquired business.
  Current
      assets and liabilities
                  
                  $
                  809,339Property
      and Equipment
                  
                  
                  2,759,220Total
                  
                  $
                  3,568,559
 The
Company allocated the excess of net assets acquired to property and equipment
based upon a preliminary valuation. The Company has not yet finalized the
purchase price allocation which may change upon the completion of a final
analysis of assets and liabilities.
 
 The terms
of purchase agreement include an accelerated note payment and a contingent
earn-out which could be payable to the sellers upon the recapture by Island of
EBITDA in excess of $1,100,000 during the twelve month period following the
acquisition.  If the EBITDA in excess of $1,100,000 is achieved,
additional payments could be made to the sellers.  If the EBITDA is
not achieved, the current note payable of $1,250,000 will have an accelerated
payment due of $750,000 in September, 2009 and no contingent earn-out will be
made. As the Company does not presently expect it will reach the first
twelve months milestone, the $750,000 note has been reflected as current (see
Note 9).
  14
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 The
following sets out the pro forma operating results for the three months ended
March 31, 2008  for the Company had the acquisition occurred as of
January 1, 2008:
  Pro
      Forma
                  (Unaudited)Three
      months ended March 31, 2008Net
      sales
                
                $
                8,352,961Cost
      of sales
                
                
                6,514,632Gross
      profit
                
                
                1,838,329Operating
      expenses
                
                
                2,536,747Operating
      loss
                
                
                (698,418
                )Other
      income (expense):Interest
      income
                
                
                17,720Interest
      expense and amortization of deferred financing costs
                
                
                (816,608
                )Gain
      on derivative financial instruments
                
                
                -Other
      non-operating income
                
                
                7,794Net
      Loss
                
                $
                (1,489,512
                )Loss
      per weighted average share, basic and diluted
                
                $
                (.12
                )
  15
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 4.
PROPERTY AND EQUIPMENT
 
 Property
and Equipment consists of the following at:
  March
      31,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Land
                
                $
                905,000
                
                
                $
                905,000Building
      and improvements
                
                
                1,085,656
                
                
                
                1,140,656Vehicles
                
                
                2,687,128
                
                
                
                2,687,128Equipment
      and furniture
                
                
                435,755
                
                
                
                411,064Warehouse
      equipment
                
                
                5,531,203
                
                
                
                5,277,892Leasehold
      improvements
                
                
                270,832
                
                
                
                242,678Asset
      retirement obligations
                
                
                35,846
                
                
                
                35,84610,951,420
                
                
                
                10,700,264Less
      accumulated depreciation and amortization
                
                
                3,288,015
                
                
                
                2,917,056Property
      and equipment net of accumulated depreciation and
    amortization
                
                $
                7,663,405
                
                
                $
                7,783,208
  Property
and equipment includes assets under capital lease with a cost of $3,248,546 and
$3,248,546 and accumulated amortization of $954,745 and $805,912 as of March 31,
2009 and December 31, 2008, respectively.
 
 Depreciation
and amortization expense was $370,960 and $185,945 for the three months ended
March 31, 2009 and 2008 respectively.
  16
 
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 5. GOODWILL
AND INTANGIBLE ASSETS
 
 The
Company accounts for goodwill and intangible assets pursuant to SFAS No. 142,
Goodwill and Other Intangible Assets.  Under SFAS 142, intangibles
with definite lives continue to be amortized on a straight-line basis over the
lesser of their estimated useful lives or contractual terms.  Goodwill
and intangibles with indefinite lives are evaluated at least annually for
impairment by comparing the asset’s estimated fair values with its carrying
value, based on cash flow methodology.
  Intangible
assets consist of the following at:
 
 March 31,
                  2009
                
                
                December
      31, 2008(Unaudited)Rancho
      Cordova acquisition – permit
                
                $
                475,614
                
                
                $
                475,614Prime
      acquisition – customers
                
                
                400,422
                
                
                
                400,422GMTS  acquisition
      – customers
                
                
                438,904
                
                
                
                438,904GMTS  acquisition
      – permits
                
                
                27,090
                
                
                
                27,090Accumulated
      amortization
                
                
                (518,054
                )
                
                
                (477,249
                )$
                823,976
                
                
                $
                864,781
 
 Permit
costs have been capitalized and are being amortized over the life of the permit,
including expected renewal periods.  Customer Lists acquired are being
amortized over their useful life.
  6.
RELATED PARTY TRANSACTIONS
 
 The
Company has entered into several transactions with General Pacific Partners
(“GPP”), a company operated by a prior member of the Board of Directors of the
Company’s wholly owned subsidiary, General Environmental Management, Inc. of
Delaware.  GPP owns 6% of the Company’s common stock at March 31,
2009.  The following summarizes the transactions with GPP during the
three months ended March 31, 2009 and December 31,
2008.
  Advances from Related
Party
  March
      31,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Notes
      from GPP
                
                $
                472,500
                
                
                $
                472,500Financing
      Fees
                
                
                250,000
                
                
                
                250,000Accrued
      Interest and LC Fees
                
                
                105,342
                
                
                
                93,692Valuation
      discount
                
                
                -
                
                
                
                (109,324
                )$
                827,842
                
                
                $
                706,868
  17
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 During
February and March 2008, General Pacific Partners made two unsecured advances to
the Company totaling $472,500. The proceeds were used for working capital
purposes. The rate of interest on the advances is 10% per annum. The funds were
originally due six months from the date of issuance. On June 30, 2008, the
maturity date was extended an additional six months to February 14, 2009 and
March 19, 2009. In connection with the note extension the Company issued (i)
200,000 shares of its common stock valued at $220,000 and, (ii) a warrant to
purchase up to 225,000 shares of its common stock at a price of $0.60 for a
period of seven (7) years. The Company valued the warrants at $222,500 using a
Black - Scholes option pricing model.  For the Black - Scholes
calculation, the Company assumed no dividend yield, a risk free interest rate of
4.78 %, expected volatility of 75.88 % and an expected term for the warrants of
7 years.  The value of the common shares of $220,000 and value of the
warrants of $222,500 has been reflected by the Company as a valuation discount
at issuance and offset to the face amount of the Notes.  The Valuation
discount is being amortized to interest expense over the life of the loan based
upon the effective interest method. Finance costs for the three months ended
March 31,2009 includes $109,324 for amortization of this discount. The valuation
discount was fully amortized at March 31, 2009.  On February 13, 2009
the maturity date was extended until March 31, 2010. As of March 31, 2009,
$472,500 remained
outstanding .
 In 2008,
GPP provided services related to the financing completed with CVC California,
LLC. Pursuant to these services the Company agreed to pay GPP $250,000. The cash
paid has been reflected as part of deferred financing fees on the accompanying
balance sheet at March 31, 2009 and December 31, 2008.
  Letter
of Credit Services
  On July
1, 2008 the Company entered into an agreement with GPP wherein GPP would provide
letters of credit to support projects contracted to GEM. The fees under the
agreement consisted of (i) a commitment fee of 2% of the value of the letter of
credit, (ii) interest at a rate to be negotiated, and (iii) a seven year warrant
to purchase shares of the Company’s common stock at $0.60 per
share.  Accrued fees amounted to $19,945 at March 31, 2009 and
December 31, 2008 and are included in accrued interest and LC fees in the
accompanying table.
  Software
Support
  In 2008,
the Company entered into a three year agreement with Lapis Solutions, LLC,
(Lapis) a company managed by a prior member of the Board of Directors of the
Company’s wholly owned subsidiary, General Environmental Management, Inc. of
Delaware, wherein Lapis would provide support and development services for the
Company’s proprietary software GEMWARE. Services costs related to the agreement
total $10,800 per month. As of March 31, 2009 and December 31, 2008, $150,055
and $92,555 respectively, of the fees had been prepaid to Lapis and included in
the accompanying condensed balance sheets as part of prepaid
expenses.
 Related
Party Lease Agreement
  During the third quarterended September 30, 2007, the Company entered into a lease for $180,846
of equipment with current investors of the Company.  The lease
transaction was organized by General Pacific Partners, a related party, with
these investors.  The lease has been classified as a capital lease and
included in property and equipment (See note 10) and requires payments of $4,000
per month beginning August 1, 2007 through 2012.  As an inducement to
enter into the lease, the Company issued the leasing entity 100,000 two year
warrants to purchase common stock at $1.20. These warrants were valued at
$187,128 using the Black - Scholes valuation model and such cost will be
amortized to expense over the life of the lease.  For the Black -
Scholes calculation, the Company assumed no dividend yield, a risk free interest
rate of 4.78 %, expected volatility of 56.60 % and an expected term for the
warrants of 2 years.
  18
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 7. SECURED
FINANCING AGREEMENTS
 
 During
the period 2008 through 2009, the Company entered into a series of financings
with CVC California,
LLC (“CVC”).
 
 The
amounts due under these financings at March 31, 2009 and December 31, 2008 are
as follows:
 
 March
      31,
                
                
                December
      31,2009
                
                
                2008(Unaudited)(a)
      Secured Notes from CVC California
                
                $
                12,781,114
                
                
                $
                13,547,909Valuation
      Discount
                
                
                (4,159,861
                )
                
                
                (3,181,365
                )8,621,253
                
                
                
                10,366,544Less
      current portion
                
                
                (8,621,253
                )
                
                
                (10,366,544
                )Financing
      agreement, net of current portion
                
                $
                -
                
                
                $
                -
  (a) Note Agreements with CVC
California
 
 On
September 4, 2008 General Environmental Management, Inc. (the “Company”) entered
into a series of agreements with CVC California, LLC, a Delaware limited
liability company (“CVC”), each dated as of August 31, 2008, whereby the Company
issued to CVC (i) a secured convertible term note ("Note") in the principal
amount of $6.5 million and (ii) a secured non-convertible revolving credit note
("Revolving Note") of up to $7.0 million; (iii) 6 year warrants  to
purchase 1,350,000 shares of our common stock at a price of $0.60 per share;
(iv) 6 year warrants to purchase 1,350,000 shares of our common stock at a price
of $1.19 per share; and, (v) 6 year warrants to purchase 300,000 shares of our
common stock at a price of $2.25 per share.   The principal
amount of the Note carries an interest rate of nine and one half percent,
subject to adjustment, with interest payable monthly commencing October 1, 2008.
The Note further provides that commencing on April 1, 2009, the Company will
make monthly principal payments in the amount of $135,416 through August 31,
2011. Although the stated principal amount of the Term Loan was $6,500,000, the
Lender was only required to fund $5,000,000, with the difference being treated
as a discount to the note.
 
 (i). The
principal amount of the Note and accrued interest thereon is convertible into
shares of our common stock  at a price of $3.00 per share, subject to
anti-dilution adjustments. Under the terms of the Note, the monthly principal
payment amount of approximately $135,416 plus the monthly interest
payment  (together, the "Monthly Payment"), is payable in either cash
or, if certain criteria are met, including the effectiveness of a current
registration statement covering the shares of our common stock into which the
Note is convertible, through the issuance of our common stock. The Company has
agreed to register all of the shares that are issuable upon conversion of the
Note and exercise of warrants. As of  March 31, 2009 and December 31,
2008 the Company had an outstanding balance of $6,500,000 under the
note.
 
 (ii). The
revolving note allows the Company to borrow a maximum amount of $7,000,000,
based on a borrowing base of 90% of all eligible receivables, which are
primarily accounts receivables under 90 days. The interest rate on this line of
credit is in the amount of prime plus 2.0%, but in no event less than 7% per
annum. The Revolving Note is secured by all assets of the Company and is subject
to the same security agreement as discussed below. The note is due August 31,
2011. As of March 31, 2009 and December 31, 2008 the Company had an outstanding
balance of $6,281,114 and $7,047,909 (including accrued interest) under the
revolving note.  We project that the Company will maintain a minimum
balance of $6,000,000 under the revolving note.
  19
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 The Notes
are secured by all of our assets and the assets of our direct subsidiary,
General Environmental Management, Inc. (Delaware) and its direct subsidiaries,
General Environmental Management of Rancho Cordova LLC, a California Limited
Liability Company (including the real property owned by General Environmental
Management of Rancho Cordova LLC), GEM Mobile Treatment Services Inc., Island
Environmental Services, Inc. as well as by a pledge of the equity interests of
General Environmental Management, Inc. (Delaware), General Environmental
Management of Rancho Cordova LLC, GEM Mobile Treatment Services Inc. and Island
Environmental Services, Inc.
  In
connection with the CVC financing, the Company paid closing fees of $405,000 and
issued warrants to acquire an aggregate of 3,000,000 shares of our common stock
as described above to CVC. The Company calculated that the fair value of the
warrants issued was $1,674,036, based upon the relative value of the Black
Scholes valuation of the warrants and the underlying debt amount.  For
the Black Scholes calculation, the Company assumed no dividend yield, a risk
free interest rate of 4.78%, expected volatility of 78.57% and an expected term
for the warrants of 7 years. The closing fees of $405,000 paid to CVC, the
relative value of the warrants of $1,674,036 and the $1,500,000 discount on
issuance has been reflected by the Company as a valuation discount at issuance
and offset to the face amount of the Notes.  Concurrent with the
cumulative adjustment related to the adoption of EITF 07-05 as discussed below,
the Company further recorded valuation discount of $1,408,828 at January 1,
2009. The Valuation discount is being amortized to interest expense over the
life of the loan based upon the effective interest method.  Financing
costs for the three months ended March 31, 2009 includes amortization of
$430,131 relating to the discount, and unamortized valuation discount was
$4,159,861 at March 31, 2009.
 The
Company is subject to various negative covenants with respect to the Revolving
Credit and Term Loan Agreement (the "Agreement") with CVC California, LLC (the
"Lender").  The Company is in compliance with all the covenants in the
Agreement, except under Section 6.18 of the Agreement.  Section 6.18
requires that EBITDA of the Company not be less than (a) $1,000,000 for the
fiscal quarter ending September 30, 2008, (b) $2,000,000 for the two (2)
consecutive fiscal quarters ending December 31, 2008, (c) $3,000,000 for the
three (3) consecutive fiscal quarters ending March 31, 2009, or (d) $4,000,000
in any four (4) consecutive fiscal quarters ending on or after June 30, 2009;
provided, however, that it shall not be an Event of Default if actual EBITDA in
any measuring period is within 10% of the required minimum EBITDA for such
measuring period as set forth in this Section 6.18, so long as actual EBITDA for
the next succeeding measuring period hereunder is equal to or greater than the
required EBITDA for such.
  For the
fiscal quarter ending March 31, 2009, the Company was not able to achieve the
EBITDA required in the next succeeding measuring period.
  The
Agreement provides that upon the occurrence of any Event of Default, and at all
times thereafter during the continuance thereof: (a) the Notes, and any and all
other Obligations, shall, at the Lender’s option become immediately due and
payable, both as to principal, interest and other charges, (b) all outstanding
Obligations under the Notes, and all other outstanding Obligations, shall bear
interest at the default rates of interest provided in certain promissory Notes
(the "Notes"), (c) the Lender may file suit against the Company on the Notes and
against the Company and the Subsidiaries under the other Loan Documents and/or
seek specific performance or injunctive relief thereunder (whether or not a
remedy exists at law or is adequate), (d) the Lender shall have the right, in
accordance with the Security Documents, to exercise any and all remedies in
respect of such or all of the Collateral as the Lender may determine in its
discretion (without any requirement of marshalling of assets or other such
requirement, all of which are hereby waived by the Borrower), and (e) the
Revolving Credit Commitment shall, at the Lender’s option, be immediately
terminated or reduced, and the Lender shall be under no further obligation to
consider making any further Advances.
  20
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 As of May
15, 2009, the Lender has not taken any action with regard to the default under
Section 6.18 of the Agreement. The Company is in discussions with the
Lender to obtain a waiver of the Default and continues to operate in the normal
course of business and receive advances under the Revolving Credit
Commitment.
  Based on
the technical nature of the default, the Company has reclassified the
outstanding debt to CVC California, LLC to current liabilities on the balance
sheet.
  As
further described in Note 11, EITF 07-05 became effective January 1,
2009.  In connection with its implementation, the Company was required
to classify the conversion feature of the Note and the related warrants as
derivative liabilities.  The cumulative effect of adopting EITF 07-05
resulted in a decrease in the carrying value of the notes as of January 1, 2009
of $1,408,828, which the Company recorded as additional valuation discount to
the Note balance.
 8.
CONVERTIBLE NOTES PAYABLE
 
 During
the period March 4, 2004 through June 22, 2004, the Company entered into a Loan
and Security Agreement with several investors to provide the funding necessary
for the purchase of the Transfer Storage Disposal Facility (TSDF) located in
Rancho Cordova, California.  The notes are secured by the TSDF, carry
an interest rate of eight percent (8%) per annum, and principal and interest are
convertible at $30.00 per share into common stock.  In addition, the
note holders were issued warrants to purchase common stock.  The notes
were initially due June 30, 2009, but have been extended to September 30, 2011.
 As of December 31, 2008, notes payable of $422,500 plus accrued interest
of $67,105 remain outstanding. As of March 31, 2009, notes payable of $392,500
plus accrued interest of $75,151 remain outstanding.
  9.
LONG TERM OBLIGATIONS
  Long term
debt consists of the following at March 31, 2009 and December 2008:
 
 March
      31,
                  2009
                
                
                December
      31,
                  2008(Unaudited)(a)
      Vehicle notes
                
                $
                10,478
                
                
                $
                12,865(b)
      Equipment notes
                
                
                58,803
                
                
                
                67,102(c)
      Notes Payable, Island Acquisition
                
                
                1,250,000
                
                
                
                1,250,0001,319,281
                
                
                
                1,329,967Less
      current portion
                
                
                792,514
                
                
                
                794,278Notes
      payable, net of current portion
                
                $
                526,767
                
                
                $
                535,689
  21
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   (a) Note
payable in monthly installments of $815 including interest at 1.9% per annum,
through April 2010. The note is secured by a vehicle.
 
 (b) The
equipment note is for equipment utilized by GEM Mobile Treatment Services. It
requires monthly payments of $3,417 with an interest rate of 12.35% and matures
in October 2010. The note is secured by the equipment.
 
 (c) On
August 31, 2008, the Company entered into a stock purchase agreement with Island
Environmental. As part of the consideration for the purchase, the Company issued
two three year promissory notes totaling $1.25 million.
 
 The first
note is payable to the former owners in the amount of $1,062,500.  The
second note is payable to NCF Charitable Trust in the amount of
$187,500.  The notes bear interest at eight percent (8%) with interest
only payments payable quarterly and the entire balance of interest and principal
payable August
31, 2011.  The notes provide that there shall be a partial principal
payment at the end of August 31, 2009 of up to $637,500 with respect to the note
in favor of the sellers and $112,500 with respect to the note in favor of
NCF.
 
 The
current note payable of $1,250,000 could have an accelerated payment due of
$750,000 in September 2009.  The accelerated note payment could be
payable to the sellers if EBITDA in excess of $1,100,000 during the twelve month
period following the acquisition is not achieved.  Based on the
Company’s current assessment, it is likely that the target EBITDA will not be
achieved and the accelerated payment has been classified as current in the
financial statements.
  10.
OBLIGATIONS UNDER CAPITAL LEASES
  The
Company has entered into various capital leases for equipment with monthly
payments ranging from $598 to $26,500 per month, including interest, at interest
rates ranging from 9.8% to 19.7% per annum. At March 31, 2009, monthly payments
under these leases aggregated $89,079. The leases expire at various dates
through 2014. The amounts outstanding under the capital lease obligations were
$2,227,498 and $2,374,861 as of March 31, 2009 and December 31, 2008,
respectively.
 
 Minimum
future payments under capital lease obligations are as follows:
  Years Ending
      December
      31,2009
                
                
                710,5232010
                
                
                693,3782011
                
                
                643,3342012
                
                
                538,4032013
                
                
                183,504Thereafter
                
                
                53,299Total
      payments
                
                
                2,822,441Less:
      amount representing interest
                
                
                (594,943
                )Present
      value of minimum lease payments
                
                
                2,227,498Less:
      current
      portion
                
                
                (606,788
                )Non-current
      portion
                
                $
                1,620,710
  22
  GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 11.
DERIVATIVE LIABILITIES
  In June
2008, the FASB finalized Emerging Issues Task Force (“EITF”) 07-05, “Determining
Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own
Stock.” Under EITF 07-05, instruments which do not have fixed settlement
provisions are deemed to be derivative instruments.  The conversion
feature of the Company’s Secured Financing Agreements (described in Note 7), and
the related warrants, do not have fixed settlement provisions because their
conversion and exercise prices, respectively, may be lowered if the Company
issues securities at lower prices in the future.  The Company was
required to include the reset provisions in order to protect the note holders
from the potential dilution associated with future financings.  In
accordance with EITF 07-05, the conversion feature of the notes was separated
from the host contract (i.e., the notes) and recognized as an embedded
derivative instrument.  Both the conversion feature of the notes and
the warrants have be re-characterized as derivative liabilities.  SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“FAS
133”) requires that the fair value of these liabilities be re-measured at the
end of every reporting period with the change in value reported in the statement
of operations.
  The
derivative liabilities were valued using a probability weighted
Black-Scholes-Merton valuation technique with the following weighted average
assumptions:
  March
      31,
                  2009
                
                
                December
      31, 2008
                
                
                August
      31,
                  2008Conversion
      feature:Risk-free
      interest rate
                
                
                1.66
                %
                
                
                1.66
                %
                
                
                1.66
                %Expected
      volatility
                
                
                81.93
                %
                
                
                78.66
                %
                
                
                78.57
                %Expected
      life (in years)
                
                
                2.42
                
                
                
                2.67
                
                
                
                3.00Expected
      dividend yield
                
                
                0.0
                %
                
                
                0.00
                %
                
                
                0.0
                %Warrants:Risk-free
      interest rate
                
                
                1.66
                %
                
                
                4.78
                %
                
                
                4.78
                %Expected
      volatility
                
                
                81.93
                %
                
                
                78.66
                %
                
                
                78.57
                %Expected
      life (in years)
                
                
                5.42
                
                
                
                5.67
                
                
                
                6.00Expected
      dividend yield
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %Fair
      Value:Conversion
      feature
                
                
                417,519
                
                
                
                624,385
                
                
                
                1,145,544Warrants
                
                
                1,156,559
                
                
                
                1,502,205
                
                
                
                2,113,4231,574,078
                
                
                
                2,126,590
                
                
                
                3,258,967
  The
risk-free interest rate was based on rates established by the Federal
Reserve.  The expected volatility is based on the Company’s historical
volatility for its common stock.  The expected life of the conversion
feature of the notes was based on the term of the notes and the expected life of
the warrants was determined by the expiration date of the
warrants.  The expected dividend yield was based on the fact that the
Company has not paid dividends to common shareholders in the past and does not
expect to pay dividends to common shareholders in the future.
  23
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   EITF
07-05 implemented in the first quarter of 2009 and is reported as a cumulative
change in accounting principles.  The cumulative effect on the
accounting for the conversion feature of the note and the warrants on January 1,
2009 is as follows:
  Additional
                    
                    
                    Accumulated
                    
                    
                    Derivative
                    
                    
                    ConvertibleDerivative
      Instrument:
                    
                    Paid-in
      Capital
                    
                    
                    Deficit
                    
                    
                    Liability
                    
                    
                    NoteConversion
      feature
                    
                    $
                    -
                    
                    
                    $
                    393,875
                    
                    
                    $
                    624,385
                    
                    
                    $
                    (1,018,261
                    )Warrants
                    
                    $
                    (1,674,036
                    )
                    
                    $
                    562,398
                    
                    
                    $
                    1,502,205
                    
                    
                    $
                    (390,567
                    )$
                    (1,674,036
                    )
                    
                    $
                    956,273
                    
                    
                    $
                    2,126,590
                    
                    
                    $
                    (1,408,828
                    )
 The warrants were
originally recorded at their relative fair value as an increase in additionalpaid-in capital. The change in the accumulated deficit includes gains
resulting from decreases in the fair value of the derivative liabilities and
amortization of the additional note discount through December 31,
2008.  The derivative liability amounts reflect the fair value of each
derivative instrument as of the January 1, 2009 date of
implementation.  The convertible note amount represent the discount
recorded upon adoption of EITF 07-05.  This discount will be
recognized on a monthly basis through the maturity date of the
notes.
  12.
STOCK OPTIONS AND WARRANTS
  Options
 
 On March
28, 2007 the Board of Directors approved and implemented the 2007 Stock Option
Plan (the “Plan”).  The plan authorized option grants to employees and
other persons closely associated with the Company for the purchase of up to
5,500,000 shares.  The Board of Directors granted a total of 4,397,500
options to 102 employees and one consultant.  The exercise price of
the options was $1.19.
 
 On
January 2, 2009 the Stock Option Committee approved the issuance of 34,500
options to twenty eight employees. The exercise price for the options was $0.75
per share and was based on the closing market price on the date of issuance. For
the Black - Scholes calculation, the Company assumed no dividend yield, a risk
free interest rate of 4.78 %, expected volatility of 78.66 % and an expected
term for the options of 8 years.
 
 On
January 7, 2009 the Stock Option Committee approved the issuance of 570,000
options to thirteen employees. The exercise price for the options was $0.75 per
share and was based on the closing market price on the date of issuance. For the
Black - Scholes calculation, the Company assumed no dividend yield, a risk free
interest rate of 4.78 %, expected volatility of 78.66 % and an expected term for
the options of 8 years.
  24
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 A summary
of the option activity during the period is as follows:
 
 Weighted
      Avg.
                
                
                Weighted
      Avg.
                
                
                Weighted
      Avg.Options
                
                
                Exercise
      Price
                
                
                Life
      in YearsOptions
      outstanding, January 1, 2009
                
                
                4,787,340
                
                
                
                1.64
                
                
                
                8.36Options
      granted
                
                
                604,500
                
                
                
                0.75
                
                
                
                9.83Options
      exercised
                
                
                (250
                )
                
                
                0.75
                
                
                
                -Options
      cancelled
                
                
                (293,508
                )
                
                
                2.08
                
                
                
                -Options
      outstanding, March 31, 2009
                
                
                5,098,082
                
                
                
                1.52
                
                
                
                8.31Options
      exercisable, March 31, 2009
                
                
                3,387,359
                
                
                
                1.64
                
                
                
                8.13
  The
options had no intrinsic value at March 31, 2009.
 
 For the
three months ended March 31, 2009 and 2008, the fair value of options vesting
during the period was $261,734 and $216,716 respectively, and has been reflected
as compensation cost. As of March 31, 2009, the Company has unvested options
valued at $1,146,584 which will be reflected as compensation cost over the
estimated remaining vesting period of 3 years.
  Warrants
  A summary
of the warrant activity during the period is as follows:
 
 Range
      of
                  exercise
      prices
                
                
                Weighted
      Avg.
                  in
      YearsWarrants
      outstanding, January 1, 2009
                
                
                9,527,894
                
                
                
                $0.60-$37.50
                
                
                
                4.86Warrants
      granted
                
                
                70,000
                
                
                
                $0.75
                
                
                
                6.83Warrants
      exercised
                
                
                -
                
                
                
                -
                
                
                
                -Warrants
      expired
                
                
                (191,943
                )
                
                
                $0.60-$30.00
                
                
                
                -Warrants
      outstanding, March 31, 2009
                
                
                9,405,951
                
                
                
                $0.60-$37.50
                
                
                
                4.77
 
 The
warrants had no intrinsic value at March 31, 2009.
  25
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 13.
INCOME TAXES
 
 The
Company's net deferred tax assets consisted of the following at March 31, 2009
and December 31, 2008:
 
 March
      31,
                  2009
                
                
                December 31, 2008(Unaudited)Deferred
      tax asset, net operating loss
                
                $
                14,694,862
                
                
                $
                14,184,661Less
      valuation allowance
                
                
                (14,694,862
                )
                
                
                (14,184,661
                )Net
      deferred tax asset
                
                $
                -
                
                
                $
                -
 
 As of
March 31, 2009, the Company had federal net operating loss carry forwards of
approximately $43,220,183 expiring in various years through 2025, which can be
used to offset future taxable income, if any. No deferred asset benefit for
these operating losses has been recognized in the financial statements
due  to the uncertainty as to their realizability in future
periods.
 
 As a
result of the Company's significant operating loss carryforward and the
corresponding valuation allowance, no income tax expense (benefit) has been
recorded at March 31, 2009 or December 31, 2008.
 
 Reconciliation
of the effective income tax rate to the United States statutory income tax rate
for the three months ended March 31, 2009 and 2008 is as follows:
  Three
      months
                  endedMarch
      31,2009
                
                2008Tax
      expense at U.S. statutory income tax rate
                (34.0)
      %
                
                (34.0)
      %Increase
      in the valuation allowance
                34.0
                
                34.0Effective
      rate
                -
                
                -
  Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN
48”) an interpretation of FASB Statement No. 109, Accounting for Income Taxes.”
The Interpretation addresses the determination of whether tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. At the date of adoption, and as of September 30,
2008, the Company does not have a liability for unrecognized tax
uncertainties.
 
 The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for years after 2002. During the periods open to examination,
the Company has net operating loss and tax credit carry forwards for U.S.
federal and state tax purposes that have attributes from closed periods. Since
these NOLs and tax credit carry forwards may be utilized
in future periods, they remain subject to examination.
 
 The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of March 31, 2009 the Company has no accrued interest
or penalties related to uncertain tax positions.
  26
 
 ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
 
 FORWARD
LOOKING STATEMENTS
 
 In
addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use
of  the words “believes”, “expects”, “intends”, “anticipates”, “plans
to”, “estimates”, “ projects”, or similar expressions.  These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements.  Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Factors That May Affect Future
Results”.  Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s opinions only as of the
date hereof.  We undertake no obligation to revise or publicly release
the results of any revision to these forward-looking
statements.  Readers should carefully review the risk factors
described in other documents the company files from time to time with the
Securities and Exchange Commission  ( the “SEC”), including the
Quarterly Reports on form 10-Q filed by us in the fiscal year 2008.
  Statements
made in this Form 10-Q (the “Quarterly Report”) that are not historical or
current facts are “forward-looking statements” made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).  We intend that such forward-looking statements be
subject to the safe harbors for such statements.  We wish to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.  Any forward-looking statements
represent management’s best judgment as to what may occur in the
future.  The forward-looking statements included herein are based on
current expectations that involve numerous risks and uncertainties.
 Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control.  Although we
believe that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Quarterly
Report will prove to be accurate.  In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be
achieved.  We disclaim any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.
 
 The
words “we,” “us,” “our,” and the “Company,” refer to General Environmental
Management, Inc.  The words or phrases “may,” “will,” “expect,”
“believe,” “anticipate,” “estimate,” “approximate,” or “continue,” “would be,”
“will allow,” “intends to,” “will likely result,” “are expected to,” “will
continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or
the negative thereof, are intended to identify “forward-looking
statements.”  Actual results could differ materially from those
projected in the forward looking statements as a result of a number of risks and
uncertainties, including but not limited to:  (a) our failure to
implement our business plan within the time period we originally planned to
accomplish; and (b) other risks that are discussed in this Quarterly Report or
included in our previous filings with the Securities and Exchange Commission
(“SEC”).
  27
 
 OVERVIEW
 
 Ultronics
Corporation (Ultronics) was a non-operating company formed for the purpose of
evaluating opportunities to acquire an operating company.  On February
14, 2005 Ultronics acquired General Environmental Management, Inc. through a
reverse merger between Ultronics Acquisition Corp., a wholly owned subsidiary of
Ultronics and General Environmental Management, Inc., whereby General
Environmental Management, Inc. (GEM) was the surviving entity.
 
 The
acquisition was accounted for as a reverse merger (recapitalization) with GEM
deemed to be the accounting acquirer, and Ultronics Corporation the legal
acquirer.  Accordingly, the historical financial information presented
in the financial statements is that of GEM as adjusted to give effect to any
difference in the par value of the issuer’s and the accounting acquirer stock
with an offset to capital in excess of par value.  The basis of the
assets, liabilities and retained earnings of GEM, the accounting acquirer, have
been carried over in the recapitalization.  Subsequent to the
acquisition, the Company changed its name to General Environmental Management,
Inc. GEM is a fully integrated environmental service firm structured to provide
EHS compliance services, field services, transportation, off-site treatment, and
on-site treatment services.  Through its services GEM assists clients
in meeting regulatory requirements for the disposal of hazardous and
non-hazardous waste.  GEM provides its clients with access to GEMWare,
an internet based software program that allows clients to maintain oversight of
their waste from the time it leaves their physical control until final
disposition by recycling, destruction, or landfill.  The GEM business
model is to grow both organically and through acquisitions.
 
 During
2003 and 2004 GEM acquired the assets of Envectra, Inc., Prime Environmental
Services, Inc. (Prime) and 100% of the membership interest in Pollution Control
Industries of California, LLC, now named General Environmental Management of
Rancho Cordova, LLC.  The assets of Envectra, Inc. included an
internet based integrated environmental management software now marketed by the
Company as GEMWare.  The acquisition of the assets of Prime resulted
in a significant increase in the revenue stream of the company and a presence in
the Washington State and Alaska markets through Prime’s Seattle
office.  All Prime services are now offered under the GEM
name.  The primary asset of Pollution Control Industries of
California, LLC was a fully permitted Part B Treatment Storage Disposal Facility
(TSDF) in Rancho Cordova, California.  The facility provides waste
management services to field service companies and allows the Company to bulk
and consolidate waste into larger more cost effective containers for outbound
disposal.
 
 During
2006, the Company entered into a stock purchase agreement with K2M Mobile
Treatment Services, Inc. of Long Beach, California ("K2M"), a privately held
company, pursuant to which the Company  acquired all of the issued and
outstanding common stock of K2M. K2M is a California-based provider of mobile
wastewater treatment and vapor recovery services. Subsequent to the acquisition
in March 2006, the Company opened a vapor recovery service division in Houston,
Texas and will be looking to expand its operations in the Gulf coast
area.
 
 On August
31, 2008, the Company entered into a stock purchase agreement with Island
Environmental Services, Inc. of Pomona, California ("Island"), a privately held
company, pursuant to which the Company acquired all of the issued and
outstanding common stock of Island, a California-based provider of hazardous and
non-hazardous waste removal and remediation services to a variety of private and
public sector establishments.
  28
  COMPARISON OF
THREE  MONTHS ENDED MARCH  31, 2009 AND
2008
 
 Revenues
 
 Total
revenues were $8,201,870 for the three months ended March 31, 2009, representing
an increase of $1,250,217 or 18% compared to the three months ended March 31,
2008.  The increase in revenue can be attributed to increased revenue
for GEM’s mobile treatment business and acquisition of Island Environmental
Services which was offset by a decrease in revenues in the Enviroconstruction
market sector.
 
 Cost of
Revenues
 
 Cost of
revenues for the three months ended March 31, 2009 were $7,196,715 or 88% of
revenue, as compared to $5,645,344 or 81% of revenue for the three months ended
March 31, 2008.  The cost of revenues includes disposal costs,
transportation, fuel, outside labor and operating supplies. The change in the
cost of revenue in comparison to the prior year is primarily due to negative
margins at Island Environmental Services.
 
 Operating
Expenses
 
 Operating
expenses for the three months ended March 31, 2009 were $2,103,598 or 26% of
revenue as compared to $1,849,614 or 27% of revenue for the same period in 2008.
Operating expenses include sales and administrative salaries and benefits,
insurance, rent, legal, accounting and other professional fees. The increase in
operating expenses is primarily attributable to increase in rent and
insurance.
 
 Depreciation
and Amortization
 
 Depreciation
and amortization expenses for the three months ended March 31, 2009 were
$411,764 or 5% of revenue, as compared to $226,795 or 3.2% of revenue for the
same period in 2008. The increase in expense is due to additions to property,
plant and equipment and increase of assets acquired under capitalized
leases.
 
 Interest
and financing costs
 
 Interest
and financing costs for the three months ended March 31, 2009 were $994,188 or
12% of revenue, as compared to $816,608 or 12% of revenue for the same
period in 2008.  Interest expense consists of interest on the line of
credit, short and long term borrowings, and advances to related
parties.  It also includes amortization of deferred finance fees and
amortization of valuation discounts generated from beneficial conversion
features related to the fair value of warrants and conversion features of long
term debt.  The increase in interest expense is due to additional
interest incurred on higher balances on the line of credit.
 
 Other
Non-Operating Income
 
 The
Company had other non-operating income for the three months ended March 31, 2009
of $8,417 or 0.1 %
of  revenue, and $7,663  or .01% of revenue for the same
period in 2008.  Non-Operating income  for the three months
ended March 31, 2009  and March 31, 2008 consisted of continuing
rental income from the lease of warehouse space in Kent,
Washington.
  29
 
 Gain on
derivative financial instruments
 
 In
accordance with EITF 07-05 (See Note 11) which is effective at the end of 2008,
the conversion feature of our convertible notes was recognized as an embedded
derivative instrument.  Both the conversion feature of the notes and
the warrants have been  re-characterized as derivative
liabilities.  SFAS No. 133 requires that the fair value of these
liabilities be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.  For the period
ending March 31, 2009, the Company recorded a gain on derivative financial
instruments of $552,512.
 
 Net
Loss
 
 The net
loss for the three months ended March 31, 2009 was $1,531,235 or 19% of revenue
as compared to a loss of $1,345,233, or 19% of revenue for the same period in
2008.  The higher loss is attributable to reductions in operating
margins over the three months ended March 31, 2009 and losses incurred at Island
Environmental Services.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Cash
 
 Our
primary sources of liquidity are cash provided by operating, investing, and
financing activities.  Net cash provided by operations for the three
months ended March 31, 2009 was $1,195,653 as compared to net cash used in
operations of $506,816 for the same period in 2008.
 
 Liquidity
 
 The
accompanying consolidated financial statements have been prepared assuming that
the company will continue as a going concern.  The Company incurred a
net loss of $1,531,235 during the three months ended March 31, 2009. As of March
31, 2009 the Company had current liabilities exceeding current assets by
$13,802,517, primarily because of the reclassification of long term debt to
current resulting from covenant provisions under the ComVest notes and had a
stokholders’ deficiency of $4,879,714. These matters raise substantial doubt
about the Company’s ability to continue as a going concern.
 
 Management
is continuing to raise capital through the issuance of debt and equity and
believes it will be able to raise sufficient capital over the next twelve months
to finance operations. In addition, management believes that the company will
begin to operate profitably due to improved operational results and cost
reductions   made in late 2008.  However, there can be
no assurances that the Company will be successful in this regard or will be able
to maintain its working capital surplus or eliminate operating
losses.  The accompanying financial statements do not contain any
adjustments which may be required as a result of this uncertainty.
  The
Company’s capital requirements consist of general working capital needs,
scheduled principal and interest payments on debt, obligations, and capital
expenditures.  The Company’s capital resources consist primarily of
cash generated from operations and proceeds from issuances of debt and common
stock.  The Company’s capital resources are impacted by changes in
accounts receivable as a result of revenue fluctuations, economic trends and
collection activities.
  30
 
 Cash
Flows for the Three Months Ended March 31, 2009
  Operating
activities for the three months ended March 31, 2009 produced $1,195,653 in
cash. Accounts receivable, net of allowances for bad debts, were reduced by
$1,375,147 as of March 31, 2009 and accounts payable were increased
by $695,299.  Depreciation and amortization for the three months
ended March 31, 2009 totaled $411,764. The net loss of $1,531,235 included
a number of non-cash items incurred by the Company including expenses of
$261,734 representing the fair value of vestedoptions, $430,331
representingamortization of discount on financing agreements, $37,743
representing warrants issued for services, $118,680 representing amortization of
note discounts, $48,132 representing amortization of deferred financing
fees  and a derivative gain of $552,512. Prepaid expenses decreased by
$117,496 and accrued expenses decreased by $96,752.
 The
Company used cash for investment in plant, property and equipment and deposits
totaling approximately $251,156 for the three months ended March 31, 2009.
Capital expenditures increased due to the acquisition of equipment at GEM Mobile
Treatment Services. Financing activities used $964,013 for the three months
ended March 31, 2009 to reduce notes payable and make payments on capital
leases.
 
 These
activities resulted in a $19,516 reduction in cash balances from year end
December 31, 2008 to the end of the quarter March 31, 2009.
  CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 The
preparation of our consolidated financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses.  The following are the areas that we believe require the
greatest amount of estimates in the preparation of our financial statements:
allowances for doubtful accounts, impairment testing and accruals for disposal
costs for waste received at our TSDF.
 
 (a)
Allowance for doubtful accounts
 
 We
establish an allowance for doubtful accounts to provide for accounts receivable
that may not be collectible. In establishing the allowance for doubtful
accounts, we analyze specific past due accounts and analyze historical trends in
bad debts.  In addition, we take into account current economic
conditions.  Actual accounts receivable written off in subsequent
periods can differ materially from the allowance for doubtful accounts
provided.
 
 (b)
Impairment of Long-Lived Assets
 
 Statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, established guidelines regarding when impairment
losses on long-lived assets, which include property and equipment, should be
recognized and how impairment losses should be measured.  This
statement also provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale.  The Company periodically reviews,
at least annually, such assets for possible impairment and expected losses. If
any losses are determined to exist they are recorded in the period when such
impairment is determined.
  31
 
 (c)
Revenue Recognition
 
 The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable, and collection is reasonably assured.
 
 The
Company is a fully integrated environmental service firm structured to provide
field services, technical services, transportation, off-site treatment, on-site
treatment services, and environmental health and safety (“EHS”) compliance
services.  Through our services, we assist clients in meeting
regulatory requirements from the designing stage to the waste disposition stage.
The technicians who provide these services are billed at negotiated rates, or
the service is bundled into a service package.  These services are
billed and revenue recognized when the service is performed and completed. When
the service is billed, expected costs are accumulated and accrued.
 
 Our field
services consist primarily of handling, packaging, and transporting a wide
variety of liquid and solid wastes of varying amounts. We provide the fully
trained labor and materials to properly package hazardous  and
non-hazardous waste according to requirements of the Environmental Protection
Agency and the Department of Transportation. Small quantities of laboratory
chemicals are segregated according to hazard class and packaged into appropriate
containers or drums. Packaged waste is profiled for acceptance at a client’s
selected treatment, storage and disposal facility (TSDF) and tracked
electronically through our systems. Once approved by the TSDF, we provide for
the transportation of the waste utilizing tractor-trailers or bobtail trucks.
The time between picking up the waste and transfer to an approved TSDF is
usually less than 10 days.  The Company recognizes revenue for waste
picked up and received waste at the time pick up or receipt occurs and
recognizes the estimated cost of disposal in the same period. For the Company’s
TSDF located in Rancho Cordova, CA, costs to dispose of waste materials located
at the Company’s facilities are included in accrued disposal
costs.  Due to the limited size of the facility, waste is held for
only a short time before transfer to a final treatment, disposal or recycling
facility. Revenue is recognized on contracts with retainage when services have
been rendered and collectability is reasonably assured.
  (d)
Derivative Financial Instruments
 The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the condensed consolidated statements of
operations.  For stock-based derivative financial instruments, the
Company uses the Black-Scholes option pricing model to value the derivative
instruments at inception and on subsequent valuation dates.  The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period.  Derivative instrument liabilities are classified in
the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
  32
 
  Recent
Accounting Pronouncements
 
 In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued.  SFAS
141R replaces SFAS 141 “Business Combinations”.  SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The effective date, as well as the adoption date
for the Company was January 1, 2009.  Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical consolidated financial statements at
the time of adoption.
 
 In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142.  This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.  The
effective date, as well as the adoption date for the Company was January 1,
2009.  Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical consolidated financial statements at the time of
adoption.
 
 In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.”
FSP No. FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), to
address application issues raised on initial recognition and measurement,
subsequent measurement and accounting and disclosure of assets and liabilities
arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is
effective for the first annual reporting period on or after December 31,
2008. The impact of FSP No. FAS 141(R)-1 on the
Company’s  consolidated financial statements will depend on the number
and size of acquisition transactions, if any, engaged in by the
company.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value Measurements, when the volume and level of activity for the
asset or liability have significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. FSP FAS 157-4 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. In periods after
initial adoption, FSP FAS 157-4 requires comparative disclosures only for
periods ending after initial adoption. The Company does not expect the changes
associated with adoption of FSP FAS 157-4 will have a material effect on the on
its financial statements and disclosures.
 
 The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.
  33
 
 ITEM
3.  Quantitative and Qualitative Disclosures About Market
Risk
 
 Not
required
 ITEM
4. Controls and Procedures
 
 Evaluation of Disclosure Controls and
Procedures
  We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our disclosure controls and procedures were
designed to provide reasonable assurance that the controls and procedures would
meet their objectives.
 
 As required by SEC Rule 13a-15(b),
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level.
  34
  PART
II - OTHER INFORMATION
 
 Item
1. Legal Proceeding
 
 On July
5, 2007, a lawsuit was instituted by Romic Environmental Technologies Corp.
(“RET”) against the Company and four of its senior executives, Namki Yi, the
Vice President of Corporate Development, Betty McKee, the Director of Systems
& Financial Analysis, Mindy Rath, the Director of Sales and Gary
Bowling, the Regional General Manager for Southern CA, all of whom were formerly
employed by RET.  The lawsuit was brought in the Superior Court of the
State of California, County of Los Angeles.  In the lawsuit, RET alleges
that the Company and the four executives are liable to RET for among other
things, Violation of Non-Disclosure Agreements and Termination Protection
Agreements, Intentional Interference with contracts, and Violation of Trade
Secrets and Unfair Competition. RET alleges damages of Fifteen Million Dollars
and requests certain injunctive relief. The Company believes that the
lawsuit has no merit, and intends to vigorously defend the action. However, an
adverse outcome of this lawsuit would have a material adverse affect on our
business and financial condition.
 
 Item
1A. Risk Factors
 
 No
material changes from risk factor as previously disclose.
 
 Item
2. Unregistered
Sales of Securities and Use of Proceeds – S-1/A  Registration
Statement
  None
 
 Item
3. Defaults
upon Senior Securities
  The
Company is subject to various negative covenants with respect to the Revolving
Credit and Term Loan Agreement (the "Agreement") with CVC California, LLC (the
"Lender").  The Company is in compliance with all the covenants in the
Agreement, except under Sections 6.18 of the Agreement.  Section 6.18
requires that EBITDA of the Company not be less than (a) $1,000,000 for the
fiscal quarter ending September 30, 2008, (b) $2,000,000 for the two (2)
consecutive fiscal quarters ending December 31, 2008, (c) $3,000,000 for the
three (3) consecutive fiscal quarters ending March 31, 2009, or (d) $4,000,000
in any four (4) consecutive fiscal quarters ending on or after June 30, 2009;
provided, however, that it shall not be an Event of Default if actual EBITDA in
any measuring period is within 10% of the required minimum EBITDA for such
measuring period as set forth in this Section 6.18, so long as actual EBITDA for
the next succeeding measuring period hereunder is equal to or greater than the
required EBITDA for such.
  For the
fiscal quarter ending September 30, 2008, the Company had EBITDA that was within
10% of the required minimum EBITDA for such measuring period but was not able to
achieve the EBITDA required in the next succeeding measuring
period.
  The
Agreement provides that upon the occurrence of any Event of Default, and at all
times thereafter during the continuance thereof: (a) the Notes, and any and all
other Obligations, shall, at the Lender’s option become immediately due and
payable, both as to principal, interest and other charges, (b) all outstanding
Obligations under the Notes, and all other outstanding Obligations, shall bear
interest at the default rates of interest provided in certain promissory Notes
(the "Notes"), (c) the Lender may file suit against the Company on the Notes and
against the Company and the Subsidiaries under the other Loan Documents and/or
seek specific performance or injunctive relief thereunder (whether or not a
remedy exists at law or is adequate), (d) the Lender shall have the right, in
accordance with the Security Documents, to exercise any and all remedies in
respect of such or all of the Collateral as the Lender may determine in its
discretion (without any requirement of marshalling of assets or other such
requirement, all of which are hereby waived by the Borrower), and (e) the
Revolving Credit Commitment shall, at the Lender’s option, be immediately
terminated or reduced, and the Lender shall be under no further obligation to
consider making any further Advances.
  35
  As of May
15, 2009, the Lender has not taken any action with regard to the defaults under
Section 6.18 of the Agreement. The Company is in discussions with the
Lender to obtain a waiver of the Default and continues to operate in the normal
course of business and receive advances under the Revolving Credit
Commitment.
  Based on
the technical nature of the default, the Company has reclassified the
outstanding debt to CVC California, LLC to current liabilities on the balance
sheet.
  Item 4. Submission of Matters to a Vote of
Security Holders
  None
 
 Item 5. Other Information
  None
  Item
6. Exhibits and Reports
  (a)
                  Exhibits
  (b)
                  Reports
      on Form 8-K1.
      Stock Purchase agreement Island Environmental Svcs.; filed with the
      Commission
      on                      9/24/082.
      Material definitive agreement and Sales of Equity; filed with the
      Commission
      on                               9/24/08
 36
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 GENERAL
      ENVIRONMENTAL MANAGEMENT, INCDate:
      May
      14, 2009
                By:
                /s/ Timothy
      J. KoziolTimothy
      J. Koziol,
                  CEO and Chairman of the Board of
    Directors
  Date:
      May
      14, 2009
                By:
                /s/ Brett
      M. ClarkBrett
      M. Clark,
                  Executive
      Vice President of Finance, Chief Financial Officer
 
 37