Debt, Warrants and Preferred Stock Issuance

12 Months Ended

Dec. 31, 2013

Debt, Warrants and Preferred Stock Issuance [Abstract]

Debt, Warrants and Preferred Stock Issuance

Note 7. Debt, Warrants and Preferred Stock Issuance

Debt and Warrants Financing

During the second half of 2012, Water Tech World Wide, LLC (“Water Tech”) loaned $110,000 to the Company for working capital. In the fourth quarter 2012, Water Tech loaned an additional $200,000 to provide additional working capital and to partially pay down the obligation with our former CFO (as discussed below).

On December 31, 2012 (the “Effective Date”), we issued to (a) Water Tech (i) an 8% secured promissory note (the “1st Note”), (ii) a warrant (the “First Warrant”) and (iii) a second warrant (the “Second Warrant”), to formally document loans in aggregate amount of $310,000 that we received from Water Tech, and (b) a certain unaffiliated investor (the “Investor”) (i) an 8% promissory note (the “2nd Note” and together with the 1st Note, the “Notes”) and (ii) a warrant (the “Third Warrant” and collectively with the First Warrant and the Second Warrant, the “Warrants”), to formally document a loan in the amount of $50,000 that we received from the Investor during the fourth quarter of 2012 (collectively, the “Offering”).  Dr. Thomson, a member of our Board of Directors, is the sole managing member of Water Tech and has the sole voting and dispositive power over the shares of our common stock underlying the Warrants owned by Water Tech.  As such, the 1st Note is classified as a related party note in our consolidated balance sheet as of December 31, 2013.

The Notes matured on the earlier of (i) February 28, 2013 and (ii) the date when we consummate a debt and/or equity financing (the “Financing”) resulting in gross proceeds to us of at least $310,000, with respect to the 1st Note, and $50,000 with respect to the 2nd Note (such date, the “Initial Maturity Date”), and maybe prepaid in whole or in part by us at any time without premium or penalty. We did not repay Water Tech and the Investor the Notes in full on or before the respective Initial Maturity Date, so the respective Initial Maturity Date was extended until the date when we consummate a Financing resulting in gross proceeds to us of at least $310,000, with respect to the 1st Note, and $50,000, with respect to the 2nd Note, and repay the unpaid principal amount and interest due under the Notes. We further agreed to make mandatory payments to Water Tech and the Investor (each a “Payment” or collectively, the “Payments”) as funds are paid to and received by us under the Riverbay Agreement. The Notes are secured by all of our rights, title and interests in any Riverbay Payments and any other accounts receivable due to us from Riverbay under the Riverbay Agreement. The Notes contain customary events of default upon the occurrence of which, subject to any cure period, the full principal amount of the Notes, together with any other amounts owing in respect thereof, shall become immediately due and payable without any action on the part of Water Tech or the Investor. We used the net proceeds from the sale of these securities as general working capital.

The First Warrant entitles Water Tech to purchase 19,035,638 shares of our common stock at an exercise price of $0.001 per share. The Second Warrant entitles Water Tech to purchase 2,337,707 shares of our common stock at an exercise price of $0.01 per share. The Third Warrant entitles the Investor to purchase 2,337,707 shares of our common stock at an exercise price of $0.01 per share. The Warrants will be exercisable from issuance until 3 years after the Effective Date. The number of shares of our common stock issuable upon exercise of the Warrants is subject to adjustment in the event of any change in the common stock, including changes by reason of stock dividends, stock splits, reclassifications, mergers, consolidations or other changes in the capitalization of common stock. The Warrants will be exercisable on a cashless basis any time after the issuance date and contain weighted average anti-dilution price protection. In addition, the First Warrant contains an anti-dilution provision (the “Dilution Protection Term”), in that as long as the First Warrant remains outstanding, Water Tech will have the right to convert the First Warrant into such number of shares of our common stock as will equal, when converted, 30% of the aggregate number of common shares outstanding upon conversion. With the exception of their exercise price, the Second Warrant and the Third Warrant are identical to the First Warrant and contain the Dilution Protection Term but with respect to 5% of the aggregate number of shares of our common stock deemed outstanding on the conversion date, including upon the exercise of such warrant.

In addition to the terms above, the Warrants all contain reset provisions, meaning that if we subsequently issue any common stock or securities convertible into common stock prior to the complete exercise of the Warrants, for a consideration per share that is less than the exercise price in effect for the Warrants at the time of issuance, the exercise price of the Warrants shall be reduced to the lower exercise price of the subsequent issuance. This reset provision was evaluated under ASC 815.  As a result of this provision, the Warrants now qualify for derivative accounting pursuant to ASC 815 (see Note 9).

During the fourth quarter 2012, Water Tech loaned $27,500 to us for working capital. The advance does not bear interest and is due on demand. An additional $1,000 was loaned to us for working capital purposes during 2013. At December 31, 2013, we owed a total of $28,500 to Water Tech as advances from related parties.

In August 2012, we entered into a financing agreement with AFCO to finance a portion of our professional board of directors insurance.  The amount financed was $48,013, bore interest at 5.94% and was to be paid over 5 monthly payments of principal and interest of $9,746.   At December 31, 2013, the note was completely paid off.

As of March 31, 2011, GEM entered into the $500,000 Line of Credit Agreement pursuant to the LOC Agreement with a related party lender, pursuant to which the lender initially advanced to GEM $100,000, evidenced by a promissory note of the same amount dated as of equal date. During the second quarter ended June 30, 2011, we borrowed the balance of $400,000 available under the LOC Agreement.  The note bears interest at a rate of 12% per year, with interest on the note paid monthly in arrears.  The repayment of the note was originally due on March 31, 2012.  The parties are in discussions to extend the maturity date of the loan. See Note 15 for more detail.  This balance was outstanding at December 31, 2013 and 2012.

During the year ended December 31, 2012, certain of our affiliates, a consultant of our Company and a related party provided us with short-term bridge loans in aggregate amount of $280,000 (the “Loans”).  The Loans were not evidenced by promissory notes and do not bear interest.   At December 31, 2013 and 2012, there was a balance owed of $171,300 and 239,900.  We borrowed an additional $40,000 from one of these affiliates during the year ended December 31, 2012, which was repaid as of December 31, 2012.

During the year ended December 31, 2013, we borrowed an additional $23,500 from related parties related to invoices that were paid by the former CFO, and repaid $45,000 of amounts previously borrowed from related parties.

During the year ended December 31, 2012, we borrowed $310,000 from a director of the Company and issued a promissory note to such party dated December 31, 2012.  The note initially matured on February 28, 2013; however, per the terms of the note, it automatically was extended until the date when we consummate a debt and/or equity financing resulting in gross proceeds to us of at least $310,000.  The related debt discount of $310,000 was fully amortized to interest expense during the year ended December 31, 2013.  During the year ended December 31, 2013, we borrowed an additional $288,857 from the director, including the $1,000 advance above and repaid $340,000 of the aggregate outstanding amount and $13,722 of accrued interest on the loans.

As of December 31, 2013, the balance of notes payable to related parties, including advances, was $979,157.  We are currently engaged in negotiations to extend the term of notes payable to certain related parties.

Debt and Preferred Stock Financing

Effective as of November 20, 2013 (the “Effective Date”), we sold to Titanium Construction Services, Inc. (the “Investor”) 12 units of our securities (the “Units”) at a purchase price of $10,000 per Unit (the “Purchase Price”), for aggregate gross proceeds of $120,000.  Each Unit consisted of (i) a Promissory Note in the principal amount of $10,000 (collectively the “Note”), and (ii) one hundred (100) shares of our preferred stock, $0.0001 par value per share (the “Preferred Stock”, and together with the Notes, the “Securities”), with each share of Preferred Stock convertible at any time prior to the 2nd anniversary of their issuance date, in whole or in part, at the Investor’s option, into 500 shares of our common stock without the payment of any additional consideration (the “Conversion Shares”).  As a result, we issued to the Investor a Note in the principal amount of $120,000 and 1,200 shares of our Series A Convertible Preferred Stock (as describe below).  We used the net proceeds of the sale of the Securities for general working capital.

The Note bears a 16.5% interest rate and matures 2 years from the date of issuance, provided that for each share of Preferred Stock that is converted by the Investor pursuant to its terms, the outstanding principal amount of the Note shall be automatically reduced by an amount equal to (x) $100 for (y) each one (1) converted share of Preferred Stock.  The interest payable on the Note will accrue until the earlier of payment or conversion of the corresponding part of the shares of Preferred Stock and will be payable in cash, or at the discretion of the Investor, in shares of our common stock (the “Interest Shares”) at a conversion price of $0.20 per share (subject to adjustment as provided in the Note).  We may prepay at any time any portion of the principal amount of the Note.  The Note contains customary events of default upon the occurrence of which, subject to any cure period, the full principal amount of the Note, together with any other amounts owing in respect thereof, to the date of such event of default, shall become immediately due and payable without any action on the part of the Investor.  The Conversion Shares and the Interest Shares have piggyback registration rights.

In connection with the sale of the Preferred Stock to the Investor, on November 26, 2013, we filed a Certificate of Designation of Series A Convertible Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware.  Pursuant to the terms of the Certificate of Designation, among other things:

· the Company designated a series of its Preferred Stock as Series A Convertible Preferred Stock, $0.0001 par value per share (the “Series A Preferred Stock”) and the number of shares so designated was 50,000;

· the holders of Series A Convertible Preferred Stock are not entitled to any preferential payments by reason of their ownership thereof;

· except as provided by law or by the other provisions of the Company’s Certificate of Incorporation, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), the holders of Series A Preferred Stock are not entitled to vote on such matters (until their Series A Preferred Stock is converted into Common Stock);

· the holders of Series A Convertible Preferred Stock have conversion rights as summarized above; and

· the number of shares of Common Stock issuable upon the conversion of the Series A Convertible Preferred Stock is subject to adjustment in the event of any change in the Common Stock, including changes by reason of stock dividends, stock splits, reclassifications, mergers, consolidations or other changes in the capitalization of Common Stock.

A copy of the Certificate of Designations, as filed with the Secretary of State of the State of Delaware, is incorporated by reference as an exhibit to this Annual Report.  The disclosure contained in this Note 8 does not purport to be a complete description of the Certificate of Designation and is qualified in its entirety by reference to the Certificate of Designation, which is incorporated herein by reference.