Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview of Our Business
Green EnviroTech Holdings Corp. (the Company) is a pre revenue-stage technology company that has developed a patent pending oil conversion process utilizing a mixture of plastic and tires. The "GETH Process" revolutionizes the disposal of plastic waste and tires and cleans up our landfills. The Company will produce a high grade of oil from the tires and plastic. We have received a contract through Ebbros Energy LLC for sale of oil to Conoco .
The Company has estimated that its capital needs will be $6.5 million to fully execute the two phases of its business model. Phase-One involves the purchase and infrastructure of the building, working capital and the purchase and installation of one reactor with one secondary distillation and filtration process. Phase-One will enable the Company to become operational with projected profits for the plant. Phase-Two will start within three months after the completion of phase-one. Phase-Two involves the installation of one reactor and one complete system which is comprised of two reactors and one secondary distillation and filtration process.
The Company has applied for a portion of the permits needed to operate and construct the plant and does not anticipate any complications with its applications. The plants operating systems are considered a closed system with zero emissions. The estimated time to close funding is 60 days with an estimated seven months after the close of funding to complete upgrades to the infrastructure and installation of the equipment. The Company is in negotiations with three financial institutions located in California and New York for a $3 million investment in a combination of debt and equity that will be secured by the equipment. There is no assurance such funding will be available on terms acceptable to the Company, or at all.
The Company, formerly known as Wolfe Creek Mining, Inc., was incorporated in the State of Delaware on June 26, 2007. On November 20, 2009, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Green EnviroTech Acquisition Corp., a Nevada corporation, and Green EnviroTech Corp. (Green EnviroTech), a plastics recovery, separation, cleaning, and recycling company. Green EnviroTech is a Nevada corporation formed on October 6, 2008 under the name EnviroPlastics Corporation. On October 21, 2009, Enviroplastics Corporation changed its name to Green EnviroTech Corp. and on July 20, 2010, the Company changed its name to Green EnviroTech Holdings Corp.
Pursuant to the Merger Agreement, on November 20, 2009 (the Closing Date), Green EnviroTech Acquisition Corp. merged with and into Green EnviroTech, resulting in Green EnviroTech becoming a wholly-owned subsidiary of the Company (the Merger). As a result of the consummation of the Merger Agreement, the Company issued approximately 450,000 shares of its common stock to the shareholders of Green EnviroTech, representing approximately 45% of the issued and outstanding common stock of the Company following the closing of the Merger. Further, the outstanding shares of common stock of Green EnviroTech were cancelled. The acquisition of Green EnviroTech is treated as a reverse acquisition, and the business of Green EnviroTech became the business of the Company. Immediately prior to the reverse acquisition, Wolfe Creek was not engaged in any active business.
Recent Developments
On June 26, 2013, the Company entered into a letter agreement with Petrosonics, LLC which amended the terms of the funding schedule under the joint venture agreement between the parties, such that the $2,000,000 which the Company agreed to contribute within 30 days of execution of the Joint Venture Agreement will be due within 45 days of June 26, 2013. As of September 30, 2013, the Company has invested cash into this agreement in the amount of $268,000. Due to various delays in due diligence production that resulted in funding deferments, the parties have agreed to terminate the initial Joint Venture Agreement, effective as of September 3, 2013, with the understanding that a new Joint Venture Agreement may be entered into at a later date. The parties have also agreed verbally to enter into a termination agreement wherein the Company will be reimbursed the funds raised in exchange for a release of the IP that was assigned in advance to the entity formed for the Joint Venture. A Form 8-K was filed on September 6, 2013. The patents currently reside in Black Lion Oil Limited, formed and located in Ireland. The reimbursed portion of the investment in exchange for the patents is still in negotiations.
On March 27, 2013, the Company completed a 1 for 100 reverse split of its common stock. Share amounts in this report and previous reports subsequent to the reverse split have been retroactively adjusted where needed.
On May 8, 2014, the Company signed an agreement with Cenco Leasing LLC (Cenco) The agreement calls for a joint venture to be formed between the Company and Cenco for the purpose of funding a GETH facility in Stockton, CA with Cenco funding the project. The Company will own 30% (thirty percent) of the joint venture and Cenco will own 70%. The agreement also calls for Cenco to provide two one year 8% loans to the Company with stock conversion rights. Funding for the first loan will be $50,000 and provided when the definitive joint venture agreement is signed and funding for the second loan for the amount of $40,000 shall be provided on June 2, 2014.
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Critical Accounting Policy and Estimates
Our Managements Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.
The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements for the year ended December 31, 2013, together with notes thereto as previously filed with our Annual Report on Form 10-K. In addition, these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in our Quarterly Reports on Form 10-Q for prior quarter filings.
Results of Operations
Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013.
Revenues and Cost of Revenues
The Company is a pre revenue-stage technology company that has developed a patent pending oil conversion process utilizing a mixture of plastic and tires. The Company will produce a high grade of oil from the tires and plastic. As a result, tThe Company had no operating revenues or cost of revenues for the three months ended March 31, 2014 and 2013.
Operating Expenses
The salaries and professional fees for the three months ended March 31, 2014 were $349,382 as compared to $350,424 for the three months ended March 31, 2013. The salaries and professional fees for the three months ended March 31, 2014 included $130,382 in professional fees and $219,000 in salaries.
The general and administrative expenses for the three months ended March 31, 2014 were $121,078 as compared to $285,070 for the three months ended March 31, 2013, a decrease of approximately 57.5%. This decrease of $163,992 was the result of a decrease in advertising and marketing concerning the promotion of the company and travel expenses.
Non-Operating Expenses
Non operating expenses for the three months ended March 31, 2014 were $794,342 as compared to $27,010 for the three months ended March 31, 2013. This change in 2014 was primarily the result of the Company incurring a loss of $766,916 in a debt conversion transaction pursuant to which the Company issued shares of common stock to pay off $517,254 in notes payable and accrued interest. The interest expense on the outstanding notes was $27,426 for the three months ended March 31, 2014 as compared to $27,010 in interest expense for the three months ended March 31, 2013.
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Net Loss
As a result of the above, the Company had a net loss of $1,264,802 for the three months ended March 31, 2014 as compared to a loss of $662,504 for the three months ended March 31, 2013.
Liquidity and Capital Resources
On March 31, 2014, the Company had a balance of cash in the bank in the amount of $31,349. The Company had no accounts receivable and no inventory on March 31, 2014. The Company had other current assets in the amount of $10,369. The Company had accounts payable to vendors and accrued expenses in the amount of $4,091,904.
The Company has an unsecured, loan payable in the form of a line of credit with its CEO. The CEO had provided a line of credit up to $1,000,000 at 4% interest per annum to the Company to cover various expenses and working capital infusions. The term of this line of credit has been extended to December 31, 2014. The CEO has advanced $1,246,456 from inception through March 31, 2014 and the Company has repaid $1,234,169 of these advances. The Company converted $754,377 of these advances into shares of common stock on May 11, 2010 at $1.00 per share and converted $200,000 into shares of common stock on December 1, 2011 at $0.50 per share. The remaining principal balance on this loan on March 31, 2014 was $12,287 with accrued interest in the amount of $30,584.
The Company has an outstanding unsecured line of credit from H. E. Capital, S. A. This loan accrues interest at the rate of 8% per annum. The maturity date of the line of credit has been extended to December 31, 2014. The balance of the advances at March 31, 2014 was $414,272 with accrued interest in the amount of $60,380. The use of proceeds for the H. E. Capital loans are as follows:
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March 31, 2014
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December 31, 2013
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Beginning Balance
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$616,772
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$663,250
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Cash Proceeds
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145,000
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317,000
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Consulting Fees
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15,000
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60,000
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Accounts Payable assigned to note
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-
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182,342
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Joint Venture Investment paid direct
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165,000
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Company liabilities paid direct
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5,930
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Allocation Green Power Energy
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(100,000)
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Assignments
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(115,000)
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-
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Non-cash conversions
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(247,500)
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(676,750)
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Ending Balance
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$414,272
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$616,772
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The Company also received a loan payable from an individual in the amount of $20,000 at 10% due on demand. The Company has made payments on this loan and repaid $10,000 of this note on August 10, 2010. As of March 31, 2014 the loan has an outstanding balance of $7,500. Interest expense for each three month period ended March 31, 2014 and 2013, was $222. The interest expense is now calculated at 12%. Accrued interest as of March 31, 2014 was $4,279.
On January 24, 2011, the Company entered into a series of securities purchase agreements with accredited investors (the Investors), pursuant to which the Company sold an aggregate of $380,000 in 12% secured debentures (the Debentures). Legend Securities, Inc. a broker dealer which is a member of FINRA, received a commission of $45,600 and 1,900 warrants at an exercise price of $0.40 in connection with the sale of the Debentures. The Debentures were initially due at the earlier of 6 months from the date of issuance or upon the Company receiving gross proceeds from subsequent financings in the aggregate amount of $1,000,000. The Company raised $380,000 from the investors. The Company agreed to issue to the Investors five-year warrants to purchase an aggregate of 1,900 shares of common stock at an exercise price of $0.40, which may be exercised on a cashless basis. The Debentures bear interest at the rate of 12% per annum, payable upon maturity. The Debentures are secured by the assets of the Company pursuant to security agreements entered into between the Company and the Investors.
The $380,000 in proceeds from the financing transaction was allocated to the debt features and the warrants based upon their fair values. The value of the warrants ($123,120) was recorded as a debt discount on the secured debentures. This discount was amortized over the nine-month term of the secured debentures. The estimated fair value of the 1,900 warrants to the investors at issuance on January 24, 2011 was $141,362 and has been classified in Additional Paid In Capital on the Companys condensed consolidated balance sheet. The estimated fair value of the warrants was determined using the Black-Scholes option-pricing model.
The maturity date of these debentures was extended to September 24, 2012. The Company issued shares of common stock and warrants to the debenture holders for prior extensions. The Company issued 10,000 shares of common stock with a value of $30,000 and 1,000 five year warrants exercisable at $0.10 per share valued at $2,999. The remaining balance on the Debentures on March 31, 2014 was $305,000. Interest incurred for the three months ended March 31, 2014 and 2013 were $9,150 and $9,150 respectively. Interest accrued through March 31, 2014 was $134,943. The Company is presently negotiating an extension on the debentures.
On March 19, 2013, the Company issued a promissory note in the amount of $150,000 at 8% to a private investor. The note had no accrued interest for the first six months. The note has been extended to December 31, 2014. The Company used the proceeds from the note for working capital. As of March 31, 2014 this loan had an outstanding balance of $150,000 and accrued interest in the amount of $8,055.
In June 2013, the Company sold 63,000 shares of common stock in a private placement to accredited investors for gross proceeds of $63,000.
Cash provided by financing activities for the three months ended March 31, 2014 was $145,000 as compared to $159,200 for the nine months ended September 30, 2012.
We will seek to raise additional funds to meet our working capital needs principally through the additional sales of our securities. However, we cannot guaranty that we will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to us.
We had cash of $31,349 as of March 31, 2014. In the opinion of management, our available funds will not satisfy our working capital requirements for the next twelve months. Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could fail as a result of a number of factors. We will need to raise additional capital to expand our operations to the point at which we are able to generate revenues and operate profitably. The Company at the present has no operations to generate revenue. As outlined above under Overview of Our Business, the Company needs to complete raising $4,000,000 in equity in order to complete the balance of $16,000,000 in financial resources to start construction of its first plant. The Company expects increases in the legal and accounting costs and costs to obtain funding.
We intend to pursue capital through public or private financing as well as borrowings and other sources, such as our officers, directors and principal shareholders. We cannot guaranty that additional funding will be available on favorable terms, if at all. If adequate funds are not available, then our ability to expand our operations may be significantly hindered. If adequate funds are not available, we believe that our officers, directors and principal shareholders will contribute funds to pay for our expenses to achieve our objectives over the next twelve months. However, our officers, directors and principal shareholders are not committed to contribute funds to pay for our expenses.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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