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EX-32.1 - CERTIFICATION - Green Energy Management Services Holdings, Inc.f10q0914ex32i_greenenergy.htm
EX-31.1 - CERTIFICATION - Green Energy Management Services Holdings, Inc.f10q0914ex31i_greenenergy.htm
EX-32.2 - CERTIFICATION - Green Energy Management Services Holdings, Inc.f10q0914ex32ii_greenenergy.htm
EX-31.2 - CERTIFICATION - Green Energy Management Services Holdings, Inc.f10q0914ex31ii_greenenergy.htm
EX-10.19 - EMPLOYMENT AGREEMENT - Green Energy Management Services Holdings, Inc.f10q0914ex10xix_greenenergy.htm
EXCEL - IDEA: XBRL DOCUMENT - Green Energy Management Services Holdings, Inc.Financial_Report.xls

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

S  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the quarterly period ended September 30, 2014

 

or

 

£  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 000-33491

 

Green Energy Management Services Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   75-2873882

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     
380 Lexington Ave, 17th Floor    
New York, New York   10168
(Address of principal executive offices)   (Zip Code)

 

(212) 319-8400

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. S   Yes    £ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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). S  Yes    £  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an 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 £ Accelerated filer £ Non-accelerated filer £ Smaller reporting company
   

(Do not check if a smaller

reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £   Yes     S   No

 

There were 65,518,448 shares of the registrant’s common stock, $0.0001 par value, outstanding as of December 29, 2014.

 

 

 

 
 

GREEN ENERGY MANAGEMENT SERVICES HOLDINGS, INC.

 

TABLE OF CONTENTS

 

        Page
PART I. FINANCIAL INFORMATION    
         
Item 1.   Financial Statements   3
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   14
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   17
         
Item 4.   Controls and Procedures   17
         
PART II. OTHER INFORMATION    
         
Item 1.   Legal Proceedings   18
         
Item 1A.   Risk Factors   18
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   18
         
Item 3.   Defaults Upon Senior Securities   19
         
Item 4.   Mine Safety Disclosures   19
         
Item 5.   Other Information   19
         
Item 6.   Exhibits   19

 

2
 

 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GREEN ENERGY MANAGEMENT SERVICES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30, 2014   December 31, 2013 
ASSETS        
Current assets:        
Cash  406   15,102 
Accounts receivable   16,330    - 
Prepaid expenses   -    46,515 
Deferred project costs - current   -    33,431 
Other current assets   6,000    6,000 
Total current assets   22,736    101,048 
           
Property and equipment-net   5,184    8,242 
Deferred project costs   -    247,646 
Total non-current assets   5,184    255,888 
Total assets   27,920    356,936 
           
LIABILITIES AND STOCKHOLDERS' (DEFICIT)          
Current liabilities:          
Advances - related parties   28,500    28,500 
Notes payable   4,110    41,786 
Bridge loan payable - related parties, net of discount of $0 and $310,000, respectively   932,087    979,157 
Derivative liability   267,467    163,299 
Accounts payable - trade   780,105    714,884 
Other accrued liabilities   2,560,250    2,479,384 
Total current liabilities   4,572,519    4,407,010 
           
Long-term liabilities:          
Promissory notes   170,000    120,000 
Total long-term liabilities   170,000    120,000 
           
Total liabilities   4,742,519    4,527,010 
           
Stockholders' deficit          
Series A convertible preferred stock, $0.0001 par value, 50,000 shares authorized, 1,700 and 1,200 shares issued and outstanding on September 30, 2014 and December 31, 2013, respectively   -    - 
Common stock, $0.0001 par value, 500,000,000 shares authorized; 65,618,448 and 65,418,448 shares issued and outstanding on September 30, 2014 and December 31, 2013, respectively   6,562    6,542 
           
Additional paid in capital   20,864,100    20,856,120 
Accumulated deficit   (25,585,261)   (25,032,736)
Total stockholders' deficit   (4,714,599)   (4,170,074)
Total liabilities and stockholders' deficit   27,920    356,936 

 

See accompanying notes to unaudited consolidated financial statements

 

3
 

 

GREEN ENERGY MANAGEMENT SERVICES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Income:                
Revenue earned   16,330    200,000    351,191    835,440 
                     
Cost of revenue earned   -    60,000    309,465    457,687 
Selling, general and administrative expenses   35,524    304,644    423,507    876,328 
Depreciation and amortization expense   1,020    1,020    3,059    3,057 
Operating loss   (20,214)   (165,664)   (384,840)   (501,632)
Other income (expense)                    
Other income   -    -    8,049    - 
Interest expense, net   (24,522)   (7,622)   (71,566)   (350,065)
Gain on forgiveness of debt   -    1,435,104    -    1,435,104 
Gain / (Loss) on derivative liability   7,900    (257,086)   (104,168)   (1,442,561)
Total other expenses   (16,622)   1,170,396    (167,685)   (357,522)
                     
Net Income / (loss)   (36,836)   1,004,732    (552,525)   (859,154)
                     
Net loss per common share - basic and diluted   (0.00)   0.02    (0.01)   (0.02)
                     
Weighted average number of common shares outstanding   65,518,448    47,103,068    65,463,869    45,861,150 

 

See accompanying notes to unaudited consolidated financial statements

 

4
 

 

GREEN ENERGY MANAGEMENT SERVICES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended
September 30,
 
   2014   2013 
Cash flows from operating activities:        
Net loss for the period   (552,525)   (859,154)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   3,059    3,057 
Amortization of debt discount   -    310,000 
Loss on derivative liability   104,168    1,442,560 
Gain on settlement of debt   -    (1,435,104)
Stock-based compensation   8,000    63,997 
Net change in assets and liabilities:          
(Increase) decrease in contract receivables   (16,330)   58,800 
(Increase) Decrease in prepaid expenses   46,515    (1,729)
Decrease in deferred project costs   281,077    354,010 
(Increase)  in other current assets   -    6,000 
Increase (decrease) in accounts payable - trade   65,221    (47,500)
Increase in accrued liabilities   80,865    378,797 
Net cash provided by (used in) operating activities   20,050    273,734 
           
Cash flows from financing activities:          
Borrowings under bridge loans from related parties   105,430    83,500 
Borrowings from third parties   50,000    58,796 
Repayment of notes payable   (37,676)   (59,746)
Repayment of bridge loans from related parties   (152,500)   (301,278)
           
Net cash provided by (used in) financing activities   (34,746)   (218,728)
           
Net decrease in cash   (14,696)   55,006 
Cash - beginning of period   15,102    49,147 
           
Cash - end of period   406    104,153 
           
Supplemental disclosure of cash flow information:          
Warrants cashless exercise   -    18,790 
Extinguishment of derivative liability   -    1,332,360 

 

See accompanying notes to unaudited consolidated financial statements

5
 

 

GREEN ENERGY MANAGEMENT SERVICES HOLDINGS, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Basis of Presentation

 

The unaudited consolidated financial statements included herein have been prepared by Green Energy Management Services Holdings, Inc. (which, together with its consolidated subsidiary, Green Energy Management Services, Inc. (“GEM”), is referred to herein as the “Company”, “we”, “us” or “our”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).  The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information.  All such adjustments are of a normal recurring nature.  Certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.  The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  These interim financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “Annual Report”), which was filed with the SEC on May 13, 2014.  The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ended December 31, 2014.

 

Note 2. Organization of the Company and Going Concern

 

Organization of the Company

 

We were incorporated pursuant to the laws of the State of Delaware in December 1996.  GEM was incorporated pursuant to the laws of the State of Delaware in March 2010.  We are a full service energy management company based in New York, New York engaged in the business of Energy Efficiency products and system (as discussed below) through GEM, our operating subsidiary.   We currently use independent contractors to market our products and services.  Our two functional businesses are energy saving lighting products utilizing LED’s (Light Emitting Diodes) and the GEM Water Management System which utilizes water conservation technology (collectively, “Energy Efficiency”). We have successfully deployed these savings measures at Co-op City in the Bronx, New York, one of the world’s largest cooperative housing developments spread out among 15,000 residential units and 35 high rise buildings. Going forward, we intend to primarily focus on our Water Management System business.

 

We offer our clients all forms of solutions to maximize the level of Energy Efficiency which can be achieved given the current technologies available to us mainly based in two functional areas: (i) energy efficient lighting upgrades and (ii) water management system solutions.  For the energy saving lighting products market, we provide energy efficient lighting units and services to end users who utilize substantial quantities of electricity.  Our energy managing products and services are primarily sold to municipal and commercial customers.   For the water conservation technology market, we provide our clients with water conservation solutions, primarily under long-term, fixed-price contracts, offering them water valve technology, which has the ability to reduce residential and commercial water usage.  We generally install all of our clean technology at our cost and our revenues are derived from the shared savings with the owner of the project.  We purchase products from outside suppliers and utilize outside contractors to complete customer projects.  Industry participants focus on assisting clients to effectively maximize Energy Efficiency.  

 

In the Energy Efficiency arena, we concentrate our marketing efforts within geographic regions exhibiting higher than average per kilowatt hour utility rates and water utilization rates and having energy customers who consume higher than average quantities of energy and water.  We develop an Energy Efficiency/energy management program which, potentially, provides end-users alternatives to decrease their energy consumption.  Additionally, in many instances, we assume the management and maintenance of our clients’ lighting needs which affords our clients greater labor efficiencies.  Our water conservation solutions typically do not require further maintenance during the life of the contract.

 

6
 

 

Going Concern

 

The accompanying unaudited consolidated financial statements included herein have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying unaudited consolidated financial statements, we have generated a net loss of $552,525 in the first nine months of the fiscal year ended December 30, 2014 and we have a working capital deficit of $4,549,783 as of September 30, 2014. These factors raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue our existence and business operations is dependent upon our continuing efforts to implement our new business strategy, management’s ability to achieve meaningful profitable operations and/or upon our ability to obtain additional financing to carry out our business plan.  We intend to fund our operations through equity and/or debt financing arrangements, any revenues generated in the future and any loan arrangements that may be provided to us by our affiliates.  However, there can be no assurance that these arrangements, if any, will be sufficient to fund our ongoing capital expenditures, working capital, and other cash requirements.  The outcome of these matters cannot be predicted at this time.

 

The accompanying unaudited consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should we be unable to continue as a going concern.

 

Note 3. 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 September 30, 2014 we have paid $9,000 towards the amount of damages claimed by the plaintiff and the remainder is reflected in accounts payable at September 30, 2014 and December 31, 2013.

 

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 September 30, 2014 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.

 

7
 

 

Operating leases

 

In connection with the appointment of our former CFO effective as of October 11, 2013, we moved our corporate office to New York, NY.  Currently, our corporate office continues to be located in New York, NY; however, in connection with the appointment of Mr. Barry Korn as our new CEO, we moved our corporate office to 575 Lexington Avenue, 4th Floor, New York, New York 10022. We share the office space with Mr. Korn’s other business. We are utilizing the office space, at no charge, and expect to continue utilizing this office space at no charge, except for a monthly charge by the landlord of $75 for mailing address privileges. 

 

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 warranty reserve at December 31, 2013 and September 30, 2014 is $274,806.

 

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).

 

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.  For the nine months ended September 30, 2014, 200,000 shares of common stock valued at $8,000 ($0.04 per share) were due to the Consultant. We have taken the position that the Consulting Agreement has been terminated as of December 2014 as the Consultant never provided any services to us from inception of the agreement. Accordingly, we do not believe that the Consultant is entitled to any shares or cash compensation.

 

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).

 

8
 

 

Note 4. Prepayment Under the Water Management Agreement

 

In February 2014, Riverbay Corporation (“Riverbay”) approved Change Order #2 to the water management agreement. Pursuant to the terms of Change Order #2, we agreed to settle with Riverbay such that we would receive a discounted amount of $280,000 in lieu of a series of annual payments due to us as of such date under the water management agreement (amounting to $355,000). In addition, under the terms of Change Order #2, installed water valves used in the Project (with the exception of the water valve installed at 120 Elgar Place (the “Elgar Valve”)) became property of Riverbay.  Such settlement with Riverbay did not affect the ownership of the Elgar Valve, which we continue to own, and we continue to generate ongoing revenues with respect to the shared savings arrangement from such valve and any future valves that we install pursuant to the water management agreement. The $280,000 payment was made to us in February 2014. As a result of this settlement, we recognized during the first quarter in full the amount of $281,077 as cost of revenue earned.

 

Note 5. Debt and Preferred Stock Issuance

 

Debt Financings

 

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. This balance was outstanding at September 30, 2014 and December 31, 2013.

 

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, there was a balance owed of $171,300.

 

During the year ended December 31, 2012, we borrowed $310,000 from a director of our 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.

 

During the nine months ended September 30, 2014 we repaid $152,500 of previously borrowed funds from related parties. See footnote 8.

 

As of September 30, 2014, the balance of notes payable to related parties, including advances, was $960,587.  We are currently engaged in negotiations to extend the term of notes payable to certain related parties.

 

During the nine months ended September 30, 2014, we borrowed an aggregate of $155,430, of which $50,000 was from a third party and $105,430 was from a related party and repaid an additional $152,500 of loans outstanding.  The loans were not evidenced by promissory notes and the parties have yet to formalize the terms of the loans, such as the interest rate or maturity date. We are currently negotiating with the lender to formalize the terms of the loans.

 

9
 

 

Debt and Preferred Stock Financing

 

On February 8, 2014, we sold to a certain accredited investor 5 units of our securities (the “Units”) at a purchase price of $10,000 per Unit, for aggregate gross proceeds of $50,000.  Each Unit consisted of (i) a promissory note in the principal amount of $10,000 (collectively the “Note”), and (ii) 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 agreed to issue to the investor a Note in the principal amount of $50,000 and 500 shares of our Series A Preferred Stock (as described below).  The debt discount of $50,000 will be fully amortized to interest expense during the year ended December 31, 2014.  

 

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.

 

Prior to 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:

 

  we 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 our Certificate of Incorporation, on any matter presented to our stockholders for their action or consideration at any meeting of our stockholders (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 our 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 the Annual Report.  The disclosure contained in this Note 5 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.

 

As a result of subsequent review of the transaction, even though we received the $50,000 of funding from this investor, we believe that no written agreement was formally executed between the parties for this financing and therefore, we intend to negotiate the terms of the financing with the investor.

 

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Note 6. Derivative Liability

 

As described in Note 7, Debt, Warrants and Preferred Stock Issuance of our Annual Report, we issued a total of 23,711,052 warrants on December 31, 2012.  Pursuant to ASC 815, the reset provision contained in the warrants qualifies the warrants for derivative accounting.  In addition, the derivative liability must be marked-to-market each reporting period and the change in its fair value will be recorded in our statement of income. On the date of the issuance, the fair value of the derivative liability was $474,203, which was calculated using the Black-Scholes model based upon the following assumptions: expected volatility of 419.44%, discount rate of 0.36%, expected term of three years and no dividends.

 

$427,450 of the fair value was attributable to warrants issued to Water Tech as additional consideration for the $310,000 note discussed above.  As the fair value of the warrants was higher than the face value of the note, a debt discount of $310,000 was recorded on the note with the additional $117,450 of fair value recorded as a loss on derivative liability during the year ended December 31, 2012.  The entire debt discount was amortized during the first quarter of 2013.  The remaining $46,753 of the fair value of the warrants was attributable to warrants issued to the Investor as additional consideration for the $50,000 note discussed above.  The fair value was recorded as a debt discount on the note and was fully amortized during the year ended December 31, 2012.

 

During the year ended December 31, 2013, Water Tech exercised 19,035,638 warrants on a cashless basis, which had a fair value of $1,332,360 on the date of exercise, and received 18,790,174 restricted shares of our common stock as a result. The fair value was extinguished to additional paid-in capital on our consolidated balance sheets. At September 30, 2014 and December 31, 2013, the total fair value of the remaining outstanding warrants was $267,467 and $163,299.  The total change in fair value was $104,168, which was recognized as a loss on our consolidated statements of operations.

 

We measure fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 Measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

 

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;

 

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The following table sets forth our financial assets and liabilities measured at fair value by level within the fair value hierarchy as of December 31, 2013 and September 30, 2014, respectively. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

   Level 1   Level 2   Level 3   Total 
                     
Derivative liabilities as of December 31, 2013  $-   $-   $163,299   $163,299 

 

   Level 1   Level 2   Level 3   Total 
                     
Derivative liabilities as of September 30, 2014  $-   $-   $267,467   $267,467 

 

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The following table presents a roll-forward of the derivative liability measured at fair value by level within the fair value hierarchy as of December 31, 2013 and September 30, 2014, respectively.  Derivative liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

Beginning derivative liability at December 31, 2013  $163,299 
Mark-to-market loss   104,168 
Ending derivative liability at September 30, 2014  $267,467 

 

As described in Note 5. Debt and Preferred Stock Issuance, on February 8, 2014 we issued to a certain investor 500 shares of our Series A Preferred Stock as part of the sale of the Units.  Even though we identified conversion features embedded within Series A Preferred Stock, we have determined that the features associated with the embedded conversion option should not be accounted for at fair value as a derivative liability. As a result of a subsequent review of the transaction, we believe that no written agreement was formally executed between the parties for this financing and therefore, we intend to negotiate the terms of the financing with the investor.

 

Note 7. Common Stock and Preferred Stock

 

Stock-Based Compensation

 

We periodically grant restricted equity or equity awards to our employees, directors and consultants.  We are required to make estimates of the fair value of the related instruments when granted and recognize expense over the period benefited, usually the vesting period. During the nine months ended September 30, 2014, we did not issue any shares of our common stock for services to our employees, directors and consultants.

 

Preferred Stock

 

As described above in Note 5. Debt and Preferred Stock Issuance, on February 8, 2014 we issued to a certain investor Units at a purchase price of $10,000 per Unit, for aggregate gross proceeds of $50,000.  Each Unit consisted of (i) a Note in the principal amount of $10,000 and (ii) 100 shares of our Series A Preferred Stock.  As a result, we issued to the investor a Note in the principal amount of $50,000 and 500 shares of our Series A Convertible Preferred Stock

 

A summary of our preferred stock issuances for the nine months ended September 30, 2014 is set forth below:

 

   Shares   Conversion
Price
 
Outstanding at December 31, 2013   1,200   $0.20 
Granted   500    0.20 
Converted   -    - 
Forfeited as a result of Note prepayment   -    - 
Outstanding at September  30, 2014   1,700   $0.20 

 

On April 28, 2014 we entered into a Separation and Release of Claims Agreement with a former executive (the “Former Executive”). We agreed to issue the former executive up to 2,000,0000 warrants with and exercise price of $0.05 per share once certain performance criteria have been meet as described below.

 

  In the event the Former Executive is able to provide us by December 31, 2014 a non-binding letter of intent (the “LoI”) evidencing a potential opportunity for us to acquire, merge or otherwise combine with a target engaged in the business (and industry) of the type which we and the Former Executive were examining at the time that the agreement was entered into (the “Opportunity”), the first 1,000,000 warrants shall fully vest and be released to the Former Executive; provided further that any such target must have a dual license to lawfully conduct all of the business activities of the type that we and the Former Executive were then considering for such Opportunity (i.e., the target must have secured all necessary licenses, permits and consents to continue to conduct its business in the manner that it is being currently conducted).

 

  In the event we consummate the Opportunity pursuant to the LoI within 6 months of the date of the LoI, the second 1,000,000 warrants shall fully vest and be released to the Former Executive.

 

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  If another opportunity that we and the Executive have discussed (as more fully discussed in the agreement) (the “2nd Opportunity”) closes by the end of the third quarter 2014, resulting in us receiving a net profit of at least $35,000 from such opportunity, the second 1,000,000 warrants shall fully vest and be released to the Former Executive when such profit is received by us.

 

  If 2nd Opportunity does not close by the end the third quarter 2014, then the Former Executive may present to us a lighting or a SP1000 opportunity resulting in us receiving a net profit of at least $35,000 from such opportunity by the end of the third quarter 2014. If and when we receive such net profit of at least $35,000 from such opportunity, the second 1,000,000 warrants shall fully vest and be released to the Former Executive.

 

As of September 30, 2014 and through the date of this report, we believe that it is unlikely that any of the milestones described above will be meet and accordingly, we have not recorded any expense for these warrants.

 

Note 8. Related Party Transactions and Debt Repayment

 

During the nine months ended September 30, 2014 we repaid $152,500 of previously borrowed funds from related parties.  Please also see Note 5. Debt and Preferred Stock Issuance.

 

As of September 30, 2014, the balance of notes payable to related parties (due to current Interim CEO and to a former director), including advances, is $932,087.

 

During the nine months ended September 30, 2014, we borrowed an aggregate of $105,430 from related parties.  The loans were not evidenced by promissory notes and the parties have yet to formalize the terms of the loans, such as the interest rate or maturity date. We are currently negotiating with the lender to formalize the terms of the loans.

 

On August 22, 2014, Ron Ulfers, Jr., a director of our Company, informed us of his intention to resign from the Board of Directors, effective immediately, as a result of him no longer being able to devote the level of commitment necessary to carry out his duties as a director of our Company.

 

On September 15, 2014 Barry P. Korn was appointed as our new Chief Executive Officer. Effective as of the same date, Dr. Robert Thomson resigned from his positions of President and Chief Executive Officer of our Company, but will remain our Acting Chief Financial Officer and Chairman of the Board of Directors.

 

We entered into an employment agreement with Mr. Korn on August 27, 2014 and it became effective on September 15, 2014. The Employment Agreement provides that Mr. Korn will receive an annual salary of $150,000, which salary will be increased annually, on January 1, based upon the percentage increase in the Consumer Price Index for the immediately preceding year. Mr. Korn will also receive a sign-on bonus in the form of warrants to purchase 15,000,000 shares of the Company's common stock, $0.0001 par value per share (the "Common Stock"), exercisable for a period of 3 years from the date of issuance at $0.03 per share; provided that none of such warrants shall vest until the Loan (as defined herein) is made to the Company within the provided time period. In consideration of Mr. Korn arranging for his specialty finance company, Barrett Capital Corporation (“BCC”), to provide the Company within 30 days of the effective date of his appointment as the Chief Executive Officer a loan of $100,000 (the "Loan") for the purposes outlined in the Employment Agreement, and an additional $150,000, if Mr. Korn deems it appropriate, to pay for the Company's corporate expenses, Mr. Korn shall receive warrants to purchase 50,000,000 shares of Common Stock, exercisable for a period of 3 years from the date of issuance at $0.03 per share; provided that none of such warrants shall vest until the Loan (as defined herein) is made to the Company within the provided time period. Mr. Korn and BCC did not fund the loan within the provided time period and therefore we will not be issued any of the warrants to Mr. Korn.

 

Note 9. Subsequent Events

 

In October 2014, BCC began advancing funds to us to enable us to install additional water valves pursuant to the water management agreement. The amount due to Mr. Korn and BCC from September through December 31, 2014 (including Mr. Korn’s accrued and unpaid salary and BCC’s advances) is approximately $65,500.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Quarterly Report”) may contain certain “forward-looking statements” as such term is defined by the U.S. Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, which represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, growth and acquisition strategies, investments and future operational plans, such as those disclosed under the caption “Risk Factors” appearing in the section captioned “Risk Factors” of Green Energy Management Services Holdings, Inc.’s (which, together with Green Energy Management Services, Inc. (“GEM”), its consolidated subsidiary, is referred to herein as the “Company”, “we”, “us” or “our”) Annual Report on Form 10-K filed with the SEC on May 13, 2014 (our “Annual Report”).  For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements.  Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “might,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements.  These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions, governmental regulation and any other factors discussed in our filings with the SEC.  Except as required by law, we undertake no responsibility or obligation to update publicly these forward-looking statements, but may do so in the future in written or oral statements.  Investors should take note of any future statements made by us or on our behalf.  This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section should be read in conjunction with our unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this Quarterly Report and our other filings with the SEC.

 

Company Overview

 

We are a full service energy management company based in New York, New York engaged in the business of Energy Efficiency products and system (as discussed below).  We currently use independent contractors to market our products and services.  Our two businesses are energy saving lighting products utilizing LED’s (Light Emitting Diodes) and the GEM Water Management System which utilizes water conservation technology (collectively, “Energy Efficiency”).  We have successfully deployed these savings measures at Co-Op City in the Bronx, New York, one of the world’s largest cooperative housing developments spread out among 15,000 residential units and 35 high rise buildings.  We hope to install additional water valves at the Co-Op City project and/or for different partners in the 2015 fiscal year, subject to the availability of sufficient financial resources.  However, there can be no assurance that we will be able to accomplish this or that any shared savings terms will be favorable to us.

 

We offer our clients all forms of solutions to maximize the level of Energy Efficiency which can be achieved given the current technologies available to us mainly based in two functional areas: (i) energy efficient lighting upgrades and (ii) water management system solutions (the “Water Management Technology”).  For the energy saving lighting products market, we provide energy efficient lighting units and services to end users who utilize substantial quantities of electricity.  Our energy managing products and services are primarily sold to municipal and commercial customers.   For the water conservation technology market, we provide our clients with water conservation solutions, primarily under long-term, fixed-price contracts, offering them water valve technology, which has the ability to reduce residential and commercial water usage.  We generally install all of our clean technology at our cost and our revenues are derived from the shared savings with the owner of the project.  We purchase products from outside suppliers and utilize outside contractors to complete customer projects.  Industry participants focus on assisting clients to effectively maximize Energy Efficiency.

 

In the Energy Efficiency arena, we concentrate our marketing efforts within geographic regions exhibiting higher than average per kilowatt hour utility rates and water utilization rates and having energy customers who consume higher than average quantities of energy and water.  We develop an Energy Efficiency/energy management program which, potentially, provides end-users alternatives to decrease their energy consumption.  Additionally, in many instances, we assume the management and maintenance of our clients’ lighting needs which affords our clients greater labor efficiencies.  Our water conservation solutions typically do not require further maintenance during the life of the contract.  Our technology reduces electricity usage by as much as 50% - 70% depending on the lighting replacement product, while the water management system can effectively reduce consumption and sewage by as much as 20%.  We generally install all of our clean technology at our cost and share the savings with the owner of the project.  The savings revenues vary from product to product but we generally expect to receive at least 50% of the savings.

 

Going forward, we intend to primarily focus on the installation of our Water Management Technology business.

 

Recent Developments - Operations

  

Effective as of September 15, 2014, we appointed Barry P. Korn as our new Chief Executive Officer. Effective as of the same date, Dr. Robert Thomson resigned from the positions of President and Chief Executive Officer of our Company, but remains our Acting Chief Financial Officer and Chairman of the Board of Directors. In connection with Mr. Korn’s appointment, we entered into an employment agreement with Mr. Korn. For a summary of the terms of the employment agreement, please see our Current Report on Form 8-K filed with the SEC on September 19, 2014.

 

In connection with Mr. Korn’s appointment, in September 2014 we moved our principal executive office to 575 Lexington Avenue, 4th Floor, New York, New York 10022.

 

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Recent Developments - Financings

 

During the nine months ended September 30, 2014, we borrowed an aggregate of $155,430, of which $50,000 was from a third party and $105,430 was from a related party and repaid in the first quarter of 2014 $152,500 of funds previously borrowed from certain related parties. The loans were not evidenced by promissory notes and the parties have yet to formalize the terms of the loans, such as the interest rate or maturity date. We are currently negotiating with the lenders to formalize the terms of the loans.

 

Results of Operations

 

Three and nine months ended September 30, 2014 as compared with the three and nine months ended September 30, 2013

 

Revenue earned for the three and nine months ended September 30, 2014 was $16,330 and $351,191, respectively, as compared to revenue earned of $200,000 and $835,440 for the three and nine months ended September 30, 2013. The decrease in revenue of $183,670 for the three months ended September 30, 2014, as compared to the same period in 2013, was primarily due to the reduced number of water valves from which we generated shared water savings during such period. The decrease in revenue of $484,249 for the nine months ended September 30, 2014, as compared to the same period in 2013, was also primarily due to the reduced number of water valves from which we generated shared water savings during such period.

 

Cost of revenue earned was $0 and $309,465, or 0% and 88.1%, respectively, of our revenue earned for the three and nine months ended September 30, 2014, respectively, as compared to $60,000 and $457,687, or 3.0% and 54.8%, respectively, of our revenue earned for the three and nine months ended September 30, 2013.  Cost of revenue earned for the three and nine months ended September 30, 2014 and 2013 was related to our Energy Efficiency and water management businesses, as well as recognition of all deferred project costs on the monetization of the annual amounts due to us as of such date under the water management agreement as a result of a settlement with Riverbay Corporation (“Riverbay”), which occurred during the first quarter of 2014. Gross profit for the three and nine months ended September 30, 2014 was $16,330 and $41,726, as compared to $140,000 and $377,753 for the three and nine months ended September 30, 2013, respectively.  The decrease in gross profit in the three and nine months ended September 30, 2014 is attributable to lower revenue earned during such period, as compared to the same period in 2013. Cost of revenue for the 2013 periods included amortization of project costs and installation.

 

Selling, general and administrative expenses for the three and nine months ended September 30, 2014 were $35,524 and $423,507, respectively, as compared to the selling, general and administrative expenses of $304,644 and $876,328 for the same periods in 2013.  The decrease of $269,120 for the three months ended September 30, 2014, as compared to the same period in 2013 is primarily attributable to a reduction in insurance expenses of $92,473, lower marketing expenses of $33,700 and a decrease of $55,881 in professional fees. The decrease of $452,821 for the nine months ended September 30, 2014, as compared to the same period in 2013 is primarily attributable to a decrease of $211,968 in professional fees, reduced salaries and compensation expenses of $100,375 and reduced insurance expenses of $81,156.

 

Our operating loss for the three and nine months ended September 30, 2014 was $20,214 and $384,840, respectively, as compared to an operating loss of $165,664 and $501,632 for the three and nine months ended September 30, 2013, respectively.  The decrease in the operating loss for the three and nine months ended September 30, 2014 is primarily attributable to smaller cost of revenue and reduced selling, general and administrative expenses during such period.

 

Interest expense, net, for the three and nine months ended September 30, 2014 was $24,522 and $71,566, respectively, as compared to $7,622 and $350,065, for the same periods in 2013, respectively.  Interest expense, net, for the three months ended September 30, 2014 increased as a result of us borrowing more in the three period ended September 30, 2014 as compared to the same period in 2013. Interest expense, net, for the nine months ended September 30, 2014 decreased as a result of us borrowing less in the nine month period ended September 30, 2014 as compared to the same period in 2013. In addition, interest expense for the nine months ended September 30, 2013 included interest awarded as part of an arbitration award to our former chief financial officer, in addition to the amortization of a $310,000 debt discount during the nine months ended September 30, 2013.

 

Gain (loss) on derivative liability for the three and nine months ended September 30, 2014 was $7,900 and $(104,168), respectively, as compared to losses of $(257,086) and $(1,442,561), respectively, for the same periods in 2013.  The substantial decrease in gain (loss) on derivative liability of $264,986 and $1,338,393, respectively, is due to fluctuations in share price which impact the fair value of the derivative liabilities associated with the warrants issued as additional consideration to the notes payable to related parties, which warrants were partially exercised in the second quarter of 2013.  See Note 6 to our condensed consolidated financial statements included herein for further information.

 

We incurred a net (loss) of $(36,836) and $(552,525) for the three and nine months ended September 30, 2014, respectively, as compared to a net income (loss) of $1,004,732 and $(859,154) for the three and nine months ended September 30, 2013, respectively.  The increase in our net (loss) of $1,041,568 for the three months ended September 30, 2014 and a decrease in our net (loss) of $306,629 for the nine months ended September 30, 2014, respectively, was attributable to the factors discussed above.  The net (loss) per share, basic and diluted, was $(0.00) per share for the three months ended September 30, 2014, as compared to a net income of $0.02 per share for the three months ended September 30, 2013. The net loss per share, basic and diluted, was $(0.01) per share for the nine months ended September 30, 2014, as compared to a net loss of $(0.02) per share for the nine months ended September 30, 2013.

 

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Liquidity and Capital Resources

 

As of September 30, 2014, we had a working capital deficit of $4,549,783 as of September 30, 2014, as compared to a working capital deficit of $4,305,962 at December 31, 2013.  The increase in the working capital deficit is primarily due to the amounts spent on water valve installation and project costs associated as noted above, a decrease in bridge loans from related parties of $47,070 as a result of repayments, offset by increases in the derivative liability of $104,168, as well as recognition in full of all deferred project costs of $281,077 on monetization of the Riverbay water management contract. We had less than $500 in cash at September 30, 2014, as compared to $15,102 at December 31, 2013.  The decrease in cash is attributable to the repayment of our debt, including debt held by related parties, and increased cost of revenue, offset by higher gross profit of the installations completed in the first quarter of 2014.

 

On February 8, 2014, we sold to a certain accredited investor 5 Units at a purchase price of $10,000 per Unit, for aggregate gross proceeds of $50,000.  Each unit (collectively, the “Units”) consisted of (i) a promissory note in the principal amount of $10,000 (collectively the “Note”), and (ii) 100 shares of our preferred stock, $0.0001 par value per share (the “Preferred Stock”), 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. As a result, we issued to the investor a Note in the principal amount of $50,000 and 500 shares of Series A Convertible Preferred Stock.  We used the net proceeds from the sale of the Units as general working capital. As a result of subsequent review of the transaction, we believe that no written agreement was formally executed between the parties for this financing and therefore, we intend to negotiate the terms of the financing with the investor.

 

In February 2014, Riverbay approved Change Order #2 to the water management agreement. Pursuant to the terms of Change Order #2, we agreed to settle with Riverbay such that we would receive a discounted amount of $280,000 in lieu of a series of annual payments due to us as of such date under the water management agreement (amounting to $355,000). In addition, under the terms of Change Order #2, installed water valves used in the Project (with the exception of the water valve installed at 120 Elgar Place (the "Elgar Valve")) became property of Riverbay. Such settlement with Riverbay did not affect the ownership of the Elgar Valve, which we continue to own, and we continue to generate ongoing revenues with respect to the shared savings arrangement from such valve and any future valves that we install pursuant to the water management agreement. The $280,000 payment was made to us in February 2014. As a result of this settlement, we recognized in full all deferred project costs associated with the contract, in the amount of $281,077.

 

During the nine months ended September 30, 2014, we borrowed an aggregate of approximately of $155,430, of which $50,000 was from a third party and $105,430 was from a related party and repaid in the first quarter of 2014 $152,500 of funds previously borrowed from certain related parties. The loans were not evidenced by promissory notes and the parties have yet to formalize the terms of the loans, such as the interest rate or maturity date. We are currently negotiating with the lenders to formalize the terms of the loans.

 

As of September 5, 2014, we have cash of approximately $200.  If and when we are able to secure additional funds, we will continue to install water valves and be eligible for shared savings with respect to future work that we expect to perform on the Project.  We believe that we will be able to sustain our current level of operations for approximately the next twelve months, if we are able to complete the remaining water valve installations under our water management agreement with Riverbay and are able to timely collect monthly payments from Riverbay due from the shared water savings.  However, these funds will be insufficient to fully implement our business plan and satisfy our current and prior outstanding obligations, including our expenses.  Accordingly and to fully execute our business plan and reach the planned amount of revenues, we will require additional capital to meet our financial commitments and to continue to execute our business plan, build our operations and become profitable. As a result, our auditors have issued a going concern opinion in conjunction with their audit of our December 31, 2013 consolidated financial statements.

  

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying condensed consolidated financial statements, we generated a small amount of revenue in the nine months of 2014 and we have a working capital deficit of $4,549,783 as of September 30, 2014.  These factors raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue existence is dependent upon our continuing efforts to implement our new business strategy, management’s ability to achieve profitable operations and/or upon our ability to obtain additional financing to carry out our business plan.  We intend to fund our operations through equity and/or debt financing arrangements and any revenues generated in the future.  However, there can be no assurance that these arrangements, if any, will be sufficient to fund our ongoing capital expenditures, working capital, and other cash requirements.  The outcome of these matters cannot be predicted at this time.

 

The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should we be unable to continue as a going concern.

 

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Recent Accounting Pronouncements

 

For the three months ended September 30, 2014, there were no accounting standards, pronouncements or interpretations issued by the FASB or the SEC that are expected to have a material impact on our financial position, operations or cash flows or present or future consolidated financial statements.

 

Summary of Significant Accounting Policies and Estimates

 

There are no material changes from the significant accounting policies or estimates set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our December 31, 2013 financial statements included in our Annual Report.  Please refer to our Annual Report for disclosures regarding the critical accounting policies related to our business.

 

Off-Balance Sheet Arrangements

 

None.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation was performed under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report.  Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of September 30, 2014, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and outsourced accounting professionals.

 

As discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2012, in the first quarter of 2012 we implemented certain measures to address the material weaknesses in our internal control over financial reporting and weaknesses related to our documentation and a lack of segregation of duties due to our limited size.  Such material weaknesses continue as of the date of this Quarterly Report.  If and when our financial position improves, we intend to hire additional personnel to further remedy former deficiencies.  As we progress with our business operations, and subject to receiving additional funding, we expect to increase our number of employees, which, we believe, will enable us to implement adequate segregation of duties within the internal control framework.

 

Limitations on Effectiveness of Controls and Procedures

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Our control systems are designed to provide such reasonable assurance of achieving their objectives.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.  These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control Over Financial Reporting

 

An evaluation was performed under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, of whether any change in our internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the quarter ended September 30, 2014.  Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that there were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The information set forth under “Note 3. Commitments and Contingencies - Legal Matters” contained in the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report is incorporated by reference in response to this Item.

 

Item 1A. Risk Factors

 

In addition to other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I. Item 1A, “Risk Factors,” in our Annual Report, which could materially affect our business, financial condition or results of operations.  Except as set forth below, there have been no material changes to our risk factors from those described in the Annual Report.

 

Risks Relating to Our Business

 

Because we have a limited operating history, have yet to attain profitable operations and will need additional financing to fund our businesses, there is substantial doubt about our ability to continue as a going concern, and our ultimate success may depend upon our ability to raise additional capital.

 

Our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2014 have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.  As of September 30, 2014, we had a working capital deficit of $4,549,783 and for the nine months ended September 30, 2014, we incurred a net loss of $(552,525).   Notwithstanding us raising $50,000 in the first quarter of 2014, receiving in the first quarter of 2014 a discounted amount of $280,000 from Riverbay in lieu of a series of annual payments due to us as of such date under the water management agreement (amounting to $355,000), and borrowing approximately $65,500 from an entity affiliated with our CEO since September 30, 2014, due to the critical need of cash, we may not be able to execute our current business plan and fund business operations long enough to achieve profitability.  Our future is dependent upon our ability to obtain additional financing and upon the future success of our business.  The unaudited financial statements included in this Quarterly Report do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence.  In addition, the report of our independent registered public accounting firm on our December 31, 2013 consolidated financial statements includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to recurring losses.

 

Our ability to continue as a going concern will be determined by our ability to achieve meaningful revenues and profitability and/or ability to obtain additional funding to cover our operating expenses.  We may be required to pursue sources of additional capital through various means, including joint venture projects and substantially dilutive debt or equity financings.  Future financings through equity investments are likely to be dilutive to existing stockholders.  Also, the terms of securities we may issue in future capital transactions may be substantially more favorable for our new investors.  Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects.  Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs.  We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and results of operations.  There can be no assurance that any additional financings will be available to us on satisfactory terms and conditions, if at all.  In addition, our ability to obtain needed financing may be impaired by such factors as the condition of the economy and capital markets, both generally and specifically in our industry, and the fact that we are not profitable and have no material revenues, which could impact the availability or cost of future financings.

 

As a consequence, our ability to continue as a going concern is dependent on a number of factors.  The outcome of these matters is dependent on factors outside of our control and cannot be predicted at this time.  If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuance of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

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Item 3. Defaults Upon Senior Securities

 

GEM continues to be in default under the terms of the unsecured promissory notes issued under the $500,000 Line of Credit Agreement entered into with a related-party lender.  As of June 30, 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, GEM 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 notes was due on March 31, 2012 and June 30, 2012, respectively. The notes were not extended and are currently in default. This balance was outstanding at September 30, 2014 and December 31, 2013.  As of September 30, 2014, the balance of notes payable to related parties, including advances, was $932,087.  Upon an event of default, the holder of the notes may require GEM to redeem all or a portion of the notes.  We intend to pay off the notes, including all accrued interest due thereon, as and when funding or revenues permit.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

In reviewing the agreements included as exhibits to this Quarterly Report, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about our Company or the other parties to the agreements.  The agreements may contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:

 

·should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

 

·have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

 

·may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

 

·were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about our Company may be found elsewhere in this Quarterly Report and our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

 

The following exhibits are included as part of this report:

 

Exhibit

Number

 

 

Description of Exhibits

  Incorporated by Reference to the Following Documents  

2.1

 

  Merger Agreement, dated as of April 29, 2010, by and among CDSS Wind Down, Inc., CDSS Merger Corporation and Green Energy Management Services, Inc.   Current Report on Form 8-K (File No. 000-33491), filed March 31, 2010, Exhibit 10.1  
2.2   Amendment No. 1 to the Merger Agreement, dated as of April 30, 2010, by and among CDSS Wind Down, Inc., CDSS Merger Corporation and Green Energy Management Services, Inc.   Current Report on Form 8-K (File No. 000-33491), filed April 30, 2010, Exhibit 10.1  
2.3   Amendment No. 2 to the Merger Agreement, dated as of June 16, 2010, by and among CDSS Wind Down, Inc., CDSS Merger Corporation and Green Energy Management Services, Inc.   Current Report on Form 8-K (File No. 000-33491), filed June 18, 2010, Exhibit 10.1  
2.4   Amendment No. 3 to the Merger Agreement, effective as of July 22, 2010, by and among CDSS Wind Down, Inc., CDSS Merger Corporation and Green Energy Management Services, Inc.   Supplement to Definitive Information Statement on Schedule 14C (No. 000-33491), filed July 26, 2010, Annex 1  
2.5   Certificate of Merger filed with the Secretary of State of the State of Delaware on August 20, 2010, effecting the merger of CDSS Merger Corporation and Green Energy Management Services, Inc.   Current Report on Form 8-K (File No. 000-33491), filed August 28, 2010 Exhibit 2.5  

  

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3.1   Amended and Restated Certificate of Incorporation of CDSS Wind Down, Inc.   Registration Statement on Form 10-SB (File No. 000-33491), filed January 11, 2002, Exhibit 3.1  
3.2   Certificate of Amendment to the Certificate of Incorporation of CDSS Wind Down, Inc., effecting the 1 for 3 reverse stock split of all of CDSS Wind Down, Inc.’s common stock   Current Report on Form 8-K (File No. 000-33491), filed August 28, 2010 Exhibit 3.2  
3.3   Certificate of Amendment to the Certificate of Incorporation of CDSS Wind Down, Inc. increasing the number of authorized shares of common stock from 100,000,000 to 500,000,000 and reducing the par value per share from $0.01 to $0.0001 per share.   Current Report on Form 8-K (File No. 000-33491), filed August 28, 2010 Exhibit 3.3  
3.4   Amended and Restated Bylaws of CDSS Wind Down, Inc.   Registration Statement on Form 10-SB (File No. 000-33491), filed January 11, 2002, Exhibit 3.2  
3.5   Certificate of Amendment to the Certificate of Incorporation of CDSS Wind Down, Inc., changing the name of the Company to Green Energy Management Services Holdings, Inc.   Registration Statement on Form S-1 (File No. 333-169496) filed September 20, 2010, Exhibit 10.9  
3.6   Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Green Energy Management Services Holdings, Inc., effecting the 1-for-10 reverse stock split of all of Green Energy Management Services Holdings, Inc.’s common stock.   Current Report on Form 8-K (File No. 000-33491), filed October 25, 2012, Exhibit 3(i)1  
3.7   Certificate of Designation of Series A Convertible Preferred Stock.   Annual Report on Form 10-K (File No. 000-33491), filed May 13, 2014, Exhibit 3.7  
4.1   Common Stock Purchase Warrant (2nd Warrant), dated December 31, 2012, issued to Water Tech World Wide, LLC   Schedule 13D (File No. 005-380257), filed February 27, 2013, Exhibit C  
10.1   Technology License Agreement by and between PMP Pool Maintenance Protection, Inc., Juan Carlos Bocos and Green Energy Management Services, Inc. dated September 29, 2010   Registration Statement on Form S-1/A ((File No. 333-169496) filed October 28, 2010, Exhibit 10.9  
10.2   Sales and User Agreement, dated as of November 2, 2010, by and between The Riverbay Fund, Inc. and Green Energy Management Services, Inc.   Registration Statement on Form S-1 (File No. 333-169496) filed November 24, 2010, Exhibit 10.15  
10.3   Technology Assignment by and between PMP Pool Maintenance Protection, Juan Carlos Bocos and Green Energy Management Services, Inc. dated February 23, 2011   Annual Report on Form 10-K (File No.000-33491), filed April 16, 2012, Exhibit 10.20  
 10.5   Consulting Services Agreement, effective as of March 3, 2011, by and between SE Management Consultants, Inc. and Green Energy Management Services, Inc.   Annual Report on Form 10-K (File No. 000-33491), filed March 31, 2011, Exhibit 10.21  
10.6   Sales Agency Agreement, effective as of March 3, 2011, by and between Energy Sales Solutions, LLC and Green Energy Management Services, Inc.   Annual Report on Form 10-K (File No. 000-33491), filed March 31, 2011, Exhibit 10.22  
 10.9   Water Management Agreement, dated as of May 3, 2011, by and between Green Energy Management Services, Inc. and Riverbay Corporation   Quarterly Report on Form 10-Q (File No. 000-33491), filed August 15, 2011, Exhibit 10.24
10.10   8% Secured Promissory Note, dated December 31, 2012, issued to Water Tech World Wide, LLC   Schedule 13D (File No. 005-380257), filed February 27, 2013, Exhibit A
10.11   Settlement and Release Agreement, dated as of August 26, 2013, by and among the Company and Mark Deleonardis, Watz Enterprises, L.L.C. and their affiliates   Quarterly Report on Form 10-Q (File No. 000-33491), filed November 19, 2013, Exhibit 10.13
10.12   Settlement and Release Agreement, dated as of August 26, 2013, by and among the Company and Jay Ennis, Financial Partners Funding, LLC and their affiliates   Quarterly Report on Form 10-Q (File No. 000-33491), filed November 19, 2013, Exhibit 10.14
10.13   Settlement and Release Agreement, dated as of August 26, 2013, by and among the Company and John Morra and his affiliates   Quarterly Report on Form 10-Q (File No. 000-33491), filed November 19, 2013, Exhibit 10.15

 

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10.14   Form of Subscription Agreement to purchase the Company’s Units consisting of a 16.5% Promissory Note and Shares of Preferred Stock   Annual Report on Form 10-K (File No. 000-33491), filed May 13, 2014, Exhibit 10.14
10.15   Form of the Company’s 16.5% Promissory Note issued as part of the Units   Annual Report on Form 10-K (File No. 000-33491), filed May 13, 2014, Exhibit 10.15
10.16   Consulting Agreement with Selig & Associates, dated as of September 19, 2013   Annual Report on Form 10-K (File No. 000-33491), filed May 13, 2014, Exhibit 10.16
10.17   Separation and Release of Claims Agreement, dated as of April 28, 2014, as amended, by and among the Company and John Tabacco and his affiliates   Quarterly Report on Form 10-Q (File No. 000-33491), filed September 15, 2014, Exhibit 10.17
10.18   Consulting Agreement with John Tabacco, dated as of May 28, 2014   Quarterly Report on Form 10-Q (File No. 000-33491), filed September 15, 2014, Exhibit 10.18
10.19   Employment Agreement with Barry P. Korn, dated as of August 27, 2014   *
21.1   Subsidiaries of the Company   Annual Report on Form 10-K (File No. 000-33491), filed April 16, 2012, Exhibit 21.1
31.1   Certification of CEO Pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   *
31.2   Certification of CFO Pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   *
32.1   Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   **
32.2   Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   **
101.INS   XBRL Instance Document.   **
101.INS   XBRL Taxonomy Extension Schema Document   **
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   **
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document   **
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   **
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document   **

 

 † Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 15(a)(3) of Form 10-K.
* Filed herewith.  
**

Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GREEN ENERGY MANAGEMENT SERVICES HOLDINGS, INC.
     
Dated: January 5, 2015 By: /s/ Barry P. Korn
  Name: Barry P. Korn
  Title:

Chief Executive Officer

 

     
Dated: January 5, 2015 By: /s/ Dr. Robert Thomson
  Name: Dr. Robert Thomson
  Title: Acting Chief Financial Officer and Chairman (Principal Accounting Officer)  

 

 

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