Commitments and Contingencies

12 Months Ended

Dec. 31, 2013

Commitments and Contingencies [Abstract]

Commitments and Contingencies

Note 13. Commitments and Contingencies

Legal Matters

From time to time, we may become involved in litigation relating to claims arising out of our operations in the normal course of business.  Other than as set forth below, no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve us which, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business or financial condition.

On September 8, 2011, an action entitled Cooper Electric Supply Co. v. Southside Electric, Inc. was filed in the Superior Court of New Jersey.  GEM succeeded to the business of Southside Electric, Inc. (“Southside”) pursuant to a share exchange between Southside and the Company in May of 2010.  We were served in October 2011.  The plaintiff asserts damages in the amount of approximately $23,700 for non-payment for goods supplied by the plaintiff to Southside.  Our management believes the resolution of this matter will not materially affect our financial position, results of operations or liquidity.  As of December 31, 2013, we have paid $9,000 towards the amount of damages claimed by the plaintiff and the remainder is reflected in accounts payable.

On September 26, 2011, the landlord for our former Teaneck, New Jersey office filed a complaint for unpaid rent and legal fees of $15,179 in Superior Court of New Jersey.  A judgment was granted in his favor in such amount.  This amount was accrued in accounts payable at December 31, 2012 and December 31, 2013.

The PMP Agreement

On September 29, 2010, GEM entered into a technology license agreement (the “PMP Agreement”) with PMP and Juan Carlos Bocos, the inventor of the water management technology.  Effective as of February 23, 2012, we entered into a technology assignment agreement with PMP and Mr. Bocos, pursuant to which we acquired the rights to a patent application utilized in certain water valves used in our Energy Efficiency solutions.  Pursuant to the technology assignment agreement, GEM was to pay Mr. Bocos a monthly consulting fee of $8,000; however the parties continue their discussions and an agreement resolving all disputes between the parties has not yet been entered into.  Therefore, our title to the intellectual property covering the water valves may be subject to future claims challenging our ownership.

Operating leases

In October 2011, we moved our corporate office to Baton Rouge, Louisiana.  At the time we were utilizing office space, at no charge, from our former CFO.  Rent expense for 2011 totaled $90,437.  Of that amount, $0 is included in accrued expenses at December 31, 2013. In connection with the appointment of our new CFO effective as of October 11, 2013, we moved our corporate office to New York, NY.  We are utilizing office space, at no charge, from our current CFO. 

Warranty

We provide a limited product warranty against defects in materials and workmanship for water valves installed by us.  We accrue for estimated warranty costs at the time of revenue recognition and record the expense of such accrued liabilities as a component of cost of sales.  Estimated warranty costs are based on historical product data and anticipated future costs.  Should actual failure rates differ significantly from estimates, the impact of these unforeseen costs would be recorded as a change in estimate in the period identified.  The changes in the carrying amount of accrued warranty reserves, for the year ended December 31, 2013 is as follows:

Warranty liability at December 31, 2013	-
Additional warranty liability accrued	274,806
Warranty costs incurred	-
Balance at December 31, 2013	274,806

No warranty costs were incurred during 2012.

Issuance of the Option to Financial Partners Funding, LLC

On March 3, 2011 (the “Effective Date”), GEM entered into a Commitment Letter (the “Commitment Letter”) with Financial Partners Funding, LLC, a Florida limited liability company (“FPF”). Pursuant to the Commitment Letter, FPF agreed to commit up to $200,000,000 in equipment leases to finance third-party purchases of GEM’s lighting and Airlock products, subject to certain funding conditions, including FPF’s due diligence and approval of the third party lessees. FPF had an exclusive right to finance such third-party purchases of GEM’s products, however, GEM has the right to hold discussions with third-party financing entities. As required under the Commitment Letter, on June 27, 2011, we issued to FPF an option, dated as of March 3, 2011, which upon exercise, entitled FPF to purchase up to 15% of our then outstanding common stock (the “Option”) at an aggregate exercise price of $10,949,490 (the “Option Price”). The Option Price of $0.165 per share is equal to 110% of the closing price of our common stock on March 2, 2011 (notwithstanding the language of the Agreement, the parties agreed to use the closing price on such date).

As of December 31, 2012, FPF had the right to exercise the Option to purchase 7,834,896 shares of our common stock, assuming 100% of the Option was exercised.  At December 31, 2013, FPF had the right to exercise the Option to purchase an additional 2,884,470 shares of our common stock, assuming 100% of the Option was exercised. These additional shares had an aggregate fair value of $197,482 and were valued using the Black-Scholes method.

In August 2013, we entered into an agreement with Jay Ennis, FPF and their affiliates (collectively, the “Ennis Affiliates”) pursuant to which the Ennis Affiliates agreed to (i) settle and waive any and all outstanding claims and liabilities against us, including any outstanding Company payables to the Ennis Affiliates, in consideration for us paying Mr. Ennis a sum of $1, and (ii) terminate the Commitment Letter and the Option and any other agreement among us and the Ennis Affiliates (with the exception of the Sales Agency Agreement, dated as of February 2011) in consideration for us issuing to FPF 1,000,000 shares of our common stock with piggy back registration rights. The shares were granted specifically in consideration of cancelling the Option and the Commitment Letter, and not for cancellation of the debts due to the Ennis Affiliates. We paid Mr. Ennis the sum of $1 during the third quarter of 2013 and pursuant to the agreement all such outstanding claims and liabilities in the amount of $770,000 on our books were written off and recorded as a gain on settlement of debt on our financial statements.  As of December 31, 2013, the 1,000,000 shares due to FPF for cancellation of the Option had not yet been issued by the transfer agent. The shares were subsequent issued in March 2014 and the Commitment Letter and the Option and any other agreement among us and the Ennis Affiliates (with the exception of the Sales Agency Agreement, dated as of February 2011) were terminated.

ESS Sales Agency Agreement

Effective as of March 3, 2011, GEM entered into a Sales Agency Agreement (the “Sales Agreement”) with Energy Sales Solutions, LLC, a Florida limited liability company (“ESS”) and an affiliate of FPF.  Pursuant to the Sales Agreement, ESS agreed to serve, on a non-exclusive basis, as GEM’s sales representative for the solicitation and acceptance of orders for GEM’s entire line of energy-efficient, lighting products and other products and services offered by GEM (the “Products”), in the United States, Canada, and the Caribbean.  GEM agreed to pay ESS a commission of 10% of the gross sales of the Products generated by or on behalf of ESS.  GEM and ESS can each terminate the Sales Agreement immediately for “cause” (as defined in the Sales Agreement).

Watz Consulting Agreement

On April 26, 2011, we entered into a one-year consulting agreement (the “Watz Agreement”) with Watz Enterprises LLC (“Watz”). Watz is a greater than 5% stockholder of our Company. Under the Watz Agreement, Watz agreed to advise us on business development and marketing matters in exchange for (i) a one-time payment of $65,000 and (ii) a monthly management fee of $25,000 payable from June 16, 2011 to May 15, 2012.  Included in accrued expenses as of December 31, 2013 are 14 payments of $25,000, totaling $350,000.  Included in accrued expenses as of December 31, 2012 are 8 payments of $25,000, totaling $200,000. In April 2012 the Company gave notice of termination of the Watz Agreement effective as of May 15, 2012.  The managing member of Watz is the brother-in-law of Michael Samuel, our former Chairman, President, CEO and director.

Patterson Consulting Agreement

On October 1, 2013, we entered into a Consulting Agreement (the “Consulting Agreement”) with an affiliate of former Governor Patterson (the “Consultant”), pursuant to which the Consultant agreed to provide to us certain marketing and sales advisory services and other consulting services.  The effective date of the Consulting Agreement was September 1, 2013.  The Consulting Agreement will continue unless terminated by either party with prior written notice.  Under the terms of the Consulting Agreement, we agreed to pay the Consultant (i) $2,500 for the month of September 2013 and a quarterly cash payment of $15,000, in arrears, for each calendar quarter in which the Consultant provides such services to us, and (ii) a commission of 10% of the gross sales of the products generated by or on behalf of leads provided by the Consultant.  We also agreed to issue to the Consultant 100,000 shares of our restricted common stock for each of the 4 calendar quarters (or pro-rata thereof for a shorter period) in which the Consultant provides such services to us.  As of March 31, 2014, 200,000 shares have been accrued and will be issued to the Consultant in the immediate future.

Joint Referral Partner Agreement

In connection with the sale of 12 Units (as defined below) of our securities to the Investor, effective as of November 20, 2013, we and the Investor entered into an Exclusive Joint Referral Partner Agreement (the “JRP Agreement”).  Pursuant to the JRP Agreement, we granted to the Investor an exclusive right to perform construction management services for us in the states of New York, New Jersey and Connecticut, and the Investor agreed to provide to us certain construction management services (including marketing expertise, introduction to business opportunities and energy efficiency programs, analysis of our industry and competitors, assistance in developing corporate partnerships relationships and development of a collaborative joint marketing program, and such other assistance and advise with respect to the services that the Investor is currently providing or may provide in the future as we may request (collectively, the “Services”).  As compensation for the Services, we agreed to pay the Investor a consulting fee in the amount of up to 10% of the Net Revenue (as defined in the JRP Agreement) we receive from the projects that we are directly introduced to by the Investor (excluding opportunities currently available to us).  In lieu of such fee, we may offer to the Investor the option, at our sole discretion, to receive the fee in the form of shares of our common stock for up to 20% of the fee.  The price per share of common stock shall be valued based on a 20% discount to the volume weighted average price during the 30 days preceding such payment date.  The Investor also agreed to pay us a sales fee not to exceed 10% of the net amount of revenues (as provided in the JRP Agreement) that the Investor receives from renovation, construction, development, construction management or other construction agreements that are entered into by the Investor as a result of a direct introduction by us (excluding opportunities currently available to the Investor).

Other Commitments, Agreements and Extinguishment of Liabilities

During the fiscal year ended December 31, 2013, we recognized a total of $1,397,217 in gains on settlement of debt related to settlements of liabilities with former vendors and consultants, as more fully discussed below.

In August 2013, we entered into an agreement with Watz, Mark Deleonardis and their affiliates (collectively, the “Watz Affiliates”) pursuant to which the Watz Affiliates agreed to (i) settle and waive any and all outstanding claims and liabilities against us, including any outstanding Company payables to the Watz Affiliates, and (ii) return 1,000,000 shares of our common stock, in consideration for us paying the Watz Affiliates a sum of $42,000 in the fourth quarter of 2013.  As of December 31, 2013, approximately $23,000 has been paid to the Watz Affiliates.  Pursuant to the agreement outstanding claims and liabilities in the amount of $396,000 on our books have been written off and recorded as a gain on settlement of debt in the amount of $396,600 for the fiscal year ended December 31, 2013.

In August 2013, we entered into a Settlement and Release Agreement with John Morra and his affiliates (collectively, the “Morra Affiliates”) pursuant to which the Morra Affiliates agreed to settle and waive any and all outstanding claims and liabilities against us, including any outstanding Company payables to the Morra Affiliates in return for us paying the Morra Affiliates a sum of $1 and granting Morra piggy back registration rights for the balance of its shares acquired by the Morra Affiliates in connection with the merger of our Company and GEM in August 2010 (the “Merger”).  We paid the Morra Affiliates a sum of $1 during the third quarter of 2013 and pursuant to the agreement all such outstanding claims and liabilities in the amount of approximately $272,396 on our books have been written off and recorded as a gain on settlement of debt in the amount of $272,396 for the fiscal year ended December 31, 2013.

In August 2013, we entered into a Settlement and Release Agreement (the “FPF Agreement”) with Jay Ennis, Financial Partners Funding, LLC (“FPF”) and their affiliates (collectively, the “Ennis Affiliates”) pursuant to which the Ennis Affiliates agreed to (i) settle and waive any and all outstanding claims and liabilities against us, including any outstanding Company payables to the Ennis Affiliates, in consideration for us paying Mr. Ennis a sum of $1, and (ii) terminate the Commitment Letter and the Option (agreements that we entered into with FPF and their affiliates effective as of March 3, 2011 and any other agreement among the Company and the Ennis Affiliates in consideration of us issuing to FPF 1,000,000 shares of our common stock with piggy back registration rights. We issued 451,133 shares with a fair value of $41,479 as part of the settlement of debt, and 548,867 shares as part of the cancellation of warrants.  We paid Mr. Ennis the sum of $1 during the third quarter of 2013 and pursuant to the agreement all such outstanding claims and liabilities in the amount of $770,000 on our have been written off. Approximately $742,500 was recorded as a gain on settlement of debt. The remaining $41,000 was extinguished with the issuance of common shares. The shares were subsequent issued in March 2014 and the Commitment Letter and the Option and any other agreement among us and the Ennis Affiliates (with the exception of the Sales Agency Agreement, dated as of February 2011) were terminated.