Notes to Condensed Consolidated Financial Statements
March 31, 2014 (Unaudited)
Note 1 – Nature of Operations and Basis of Presentation
Business Description
Green Endeavors, Inc., (“Green”) owns and operates two hair salons carrying the Aveda™ product line through its wholly-owned subsidiaries Landis Salons, Inc. (“Landis”) and Landis Salons II, Inc. (“Landis II”) in Salt Lake City, Utah. Green also owns and operates Landis Experience Center LLC (“LEC”), an Aveda retail store in Salt Lake City, Utah. Green is quoted on the "OTC Pink" marketplace segment under the symbol GRNE.
Organization
Green Endeavors, Inc. was incorporated under the laws of the State of Delaware on April 25, 2002 as Jasper Holdings.com, Inc. During the year ended December 2004, Green changed its name to Net2Auction, Inc. In July of 2007, Green changed its name to Green Endeavors, Ltd. On August 23, 2010, Green changed its name to Green Endeavors, Inc. and moved the corporate domicile from Delaware to Utah. Green has four classes of stock as follows: common with 10,000,000,000 shares authorized; preferred with 3,000,000 shares authorized; convertible preferred with 2,000,000 shares authorized; and, convertible supervoting preferred with 10,000,000 shares authorized. Green is quoted on the "OTC Pink" marketplace segment under the symbol GRNE.
Green is a more than 50% controlled subsidiary of Nexia Holdings, Inc. (“Nexia”). Nexia is quoted on the Pink Sheets under the symbol NXHD and is not currently a reporting company.
Landis Salons, Inc., a Utah corporation, was organized on May 4, 2005 for the purpose of operating an Aveda Lifestyle Salon. Landis Salons, Inc. is a wholly-owned subsidiary of Green.
Landis Salons II, Inc., a Utah corporation was organized on March 17, 2010 as a wholly-owned subsidiary of Green for the purpose of opening a second Aveda Lifestyle Salon.
Landis Experience Center, LLC (“LEC”), a liability company, was organized on January 23, 2012 as a wholly-owned subsidiary of Green for the purpose of operating an Aveda retail store in the City Creek Mall in Salt Lake City, Utah.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Green and its subsidiaries after elimination of intercompany accounts and transactions. All consolidated subsidiaries are wholly-owned by Green.
Use of Estimates in the Preparation of the Financial Statements
The consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the amounts of assets and liabilities at the reporting date and the amounts of revenue and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates actual results could differ from the original estimates, requiring adjustments to these balances in future periods.
Note 2 – Summary of Significant Accounting Policies
Cash and Cash Equivalents
Investments with original maturities of three months or less at the time of purchase are considered cash equivalents. As of March 31, 2014 and December 31, 2013, Green had no cash equivalents.
Inventory
Inventory consists of items held for resale and is carried at the lower of cost or market. Cost is determined using the first in, first out (“FIFO”) method.
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
Property, Plant, and Equipment
Property, plant, and equipment are stated at historical cost. Depreciation is generally provided over the estimated useful lives, using the straight-line method, as follows:
Leasehold improvements
|
Shorter of the lease term or the estimated useful life
|
Computer equipment and related software
|
3 years
|
Furniture and fixtures
|
3-10 years
|
Equipment
|
3-10 years
|
Vehicle
|
7 years
|
Signage
|
10 years
|
For the three month periods ended March 31, 2014 and 2013, Green recorded depreciation expense of $32,926 and $32,568, respectively.
Long-Lived Assets
We periodically review the carrying amount of our long-lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. There were no impairments of long-lived assets during the three month periods ended March 31, 2014 and 2013.
Fair Value Measurements
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Revenue Recognition
There are primary two types of revenue for the Company: 1) providing hair salon services, and 2) selling hair salon products. Revenue is recognized at the time the service is performed or the product is delivered. All revenue sources are domestic. In some cases, such as the sale of gift cards, revenue is deferred until the gift card is redeemed.
Deferred Revenue
Deferred revenue arises when customers pay for products and/or services in advance of revenue recognition. Green’s deferred revenue consists solely of unearned revenue associated with the purchase of gift certificates for which revenue is recognized only when the service is performed or the product is delivered. As of March 31, 2014 and December 31, 2013, deferred revenue was $55,346 and $63,830, respectively.
Advertising
The Company expenses advertising production costs as they are incurred and advertising communication costs the first time the advertising takes place. For the three month period ended March 31, 2014 and 2013, advertising costs amounted to $19,472 and $13,402, respectively.
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
Stock-Based Compensation
Green recognizes the cost of employee services received in exchange for awards of equity instruments as stock-based compensation expense. Stock-based compensation expense is measured at the grant date based on the fair value of the restricted stock award, option, or purchase right and is recognized as expense, less expected forfeitures, over the requisite service period, which typically equals the vesting period. Because the employee is expected to and has historically received shares of common stock on or about the date of the employee stock option grant date as part of the exercise process, the fair value of each stock issuance is determined using the fair value of Green’s common stock on the grant date.
Income Taxes
Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Also, Green's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Green is 100% consolidated into its parent company, Nexia, and therefore does not file an income tax return. Its financial amounts are consolidated into the Nexia income tax returns. As of March 31, 2014 and December 31, 2013, a 100% valuation allowance has been placed against the deferred tax asset and therefore is not reflected on the balance sheets.
Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the specified period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares and potential common shares during the specified period. For the three months ended March 31, 2014, potential common shares are not included in the diluted net loss per share calculation as their effect would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were approximately 2,003,350,604 such potentially dilutive shares excluded as of March 31, 2014.
Reclassification of Financial Statement Accounts
Certain amounts in the December 31, 2013 financial statements have been reclassified to conform to the presentation in the March 31, 2014 financial statements.
Recent Accounting Pronouncements
Management believes the impact of recently issued standards and updates, which are not yet effective, will not have a material impact on Green’s consolidated financial position, results of operations or cash flows upon adoption.
Note 3 – Inventory
Green’s inventory consists of items held for resale and product that is used in services by the Landis and Landis II salons, and all are considered finished goods. Inventory is carried at the lower of cost or market. As of March 31, 2014 and December 31, 2013, inventory amounted to $153,010 and $144,317, respectively.
Note 4 – Property, Plant, and Equipment
The following is a summary of Green’s Property, plant, and equipment by major category as of March 31, 2014:
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and related software
|
|
$
|
24,917
|
|
|
$
|
18,323
|
|
|
$
|
6,594
|
|
Leasehold improvements
|
|
|
625,004
|
|
|
|
354,498
|
|
|
|
270,506
|
|
Furniture and fixtures
|
|
|
27,201
|
|
|
|
25,574
|
|
|
|
1,627
|
|
Leased equipment
|
|
|
76,298
|
|
|
|
27,358
|
|
|
|
48,940
|
|
Equipment
|
|
|
247,494
|
|
|
|
164,920
|
|
|
|
82,574
|
|
Vehicle
|
|
|
48,193
|
|
|
|
27,539
|
|
|
|
20,654
|
|
Signage
|
|
|
25,154
|
|
|
|
9,000
|
|
|
|
16,154
|
|
Total
|
|
$
|
1,074,261
|
|
|
$
|
627,212
|
|
|
$
|
447,049
|
|
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
The following is a summary of Green’s Property, plant, and equipment by major category as of December 31, 2013:
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net
|
|
Computer equipment and related software
|
|
$
|
22,517
|
|
|
$
|
17,458
|
|
|
$
|
5,059
|
|
Leasehold improvements
|
|
|
625,004
|
|
|
|
336,023
|
|
|
|
288,981
|
|
Furniture and fixtures
|
|
|
25,347
|
|
|
|
24,605
|
|
|
|
742
|
|
Leased equipment
|
|
|
76,298
|
|
|
|
23,543
|
|
|
|
52,755
|
|
Equipment
|
|
|
232,275
|
|
|
|
158,528
|
|
|
|
73,747
|
|
Vehicle
|
|
|
48,193
|
|
|
|
25,818
|
|
|
|
22,375
|
|
Signage
|
|
|
25,154
|
|
|
|
8,310
|
|
|
|
16,844
|
|
Total
|
|
$
|
1,054,788
|
|
|
$
|
594,285
|
|
|
$
|
460,503
|
|
Note 5 – Other Assets
The following table shows other assets as of March 31, 2014 and December 31, 2013:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Lease and utility deposits
|
|
$
|
20,914
|
|
|
$
|
24,475
|
|
Certificate of deposit, restricted cash (1)
|
|
|
28,029
|
|
|
|
27,826
|
|
Other
|
|
|
30,397
|
|
|
|
11,058
|
|
Total other assets
|
|
$
|
79,340
|
|
|
$
|
63,359
|
|
(1)
|
The certificate of deposit ("CD") is considered long-term, restricted cash because it is collateral for the June 18, 2010, $100,000 note payable to the Division of Economic Development of Salt Lake City Corporation (see item 2 of Note 9 below). The initial value of the CD was $25,000. As of March 31, 2014 and December 31, 2013, the CD has $3,029 and $2,826 of accrued interest, respectively.
|
Note 6 – Fair Value Measurements
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of March 31, 2014 and December 31, 2013, consisted of the following:
|
|
Total fair
|
|
|
Quoted prices
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
value at
|
|
|
in active
|
|
|
observable
|
|
|
unobservable
|
|
|
|
March 31,
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
Description
|
|
2014
|
|
|
(Level)
|
|
|
(Level 2)
|
|
|
(Level)
|
|
Derivative liability (1)
|
|
$
|
47,333
|
|
|
$
|
-
|
|
|
$
|
47,333
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair
|
|
|
Quoted prices
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
value at
|
|
|
in active
|
|
|
observable
|
|
|
unobservable
|
|
|
|
December 31,
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
Description
|
|
|
2013
|
|
|
(Level)
|
|
|
(Level 2)
|
|
|
(Level)
|
|
Derivative liability (1)
|
|
$
|
55,099
|
|
|
$
|
-
|
|
|
$
|
55,099
|
|
|
$
|
-
|
|
(1)
|
Derivative liability amounts are due to the embedded derivatives of certain convertible notes payable issued by the Company and are calculated using the Black Scholes pricing model (see Note 7 - Derivative liability)
|
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
Note 7 – Derivative Liability
As of March 31, 2014, the Company had a $47,333 derivative liability balance on the balance sheet, and for the three months ended March 31. 2014, the Company recorded a $7,766 gain from derivative liability fair value adjustment. The derivative liability activity comes from convertible notes payable as follows:
Eastshore Enterprises, Inc.
As discussed in Note 9 – “Notes Payable”, on August 17, 2012, Green issued a $35,000 Convertible Promissory Note to Eastshore Enterprises, Inc. (“Eastshore Note”) that matures August 17, 2014. The Eastshore Note bears interest at a rate of 8% per annum and can be convertible into Green’s common shares, at the holder’s option, at the conversion rate of 54% of the market price (a 46% discount) of the lowest trading price of Green’s common shares during the ten-day period ending one trading day prior to the date of the conversion. Green analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.
The embedded derivative for the Eastshore Note is carried on Green’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. Green fair values the embedded derivative using the Black-Scholes option pricing model. The fair value of the derivative at the inception date of the Eastshore Note was $63,636. Of the total, $35,000 was recorded as a debt discount, which is up to but not more than the net proceeds of the note. $28,636 was charged to operations as non-cash interest expense. The fair value of $63,636 was recorded as a derivative liability on the balance sheet.
The debt discount for the Eastshore Note is amortized over the life of the note (approximately two years). On March 31, 2014, Green marked-to-market the fair value of the derivative liabilities related to the Eastshore Note and determined an aggregate fair value of $47,333 and recorded a $7,766 gain from change in fair value of derivative for the three month period ended March 31, 2014. The fair value of the embedded derivative for the note was determined using the Black-Scholes option pricing model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 299%, (3) risk-free interest rate of 0.07%, (4) expected life of .38 years, and (5) estimated fair value of Green’s common stock of $0.0038 per share.
Note 8 – Related Party Transactions
On April 30, 2008, Green entered into a stock transfer agreement with its parent company Nexia and Nexia’s wholly-owned subsidiary DHI whereby they would each sell their holdings in Landis and Newby in exchange for an 8% Series A Senior Subordinated Convertible Debenture with a face amount of $3,000,000. Interest on the debenture commenced on December 30, 2008. DHI has the option, at any time, to convert all or any amount over $10,000 of principal face amount and accrued interest into shares of Common stock, $0.0001 par value per share, at a conversion price equal to 95% of the average closing bid price of the Common stock three days prior to the date notice is received by Green. Green determined that there is a beneficial conversion feature for the debt and recorded a debt discount of $150,000 on April 30, 2008, which is being amortized for 10 years to the maturity date of the debenture. In December 2009, Nexia converted $125,000 of the debenture into common stock of Green and during 2010 Green paid $15,200 of principal on the debenture. During 2010, Nexia sold $500,000 of its holdings of the debenture to unrelated parties for cash thus leaving the related and unrelated party portions of the debenture at $2,359,800 and $500,000, respectively for a total amount of $2,859,800. As of March 31, 2014 and December 31, 2013, the entire amount is considered long-term. The following table shows the related and unrelated party amounts of the debenture and their respective amortized debt discount amounts:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Convertible Debenture - Related Party
|
|
|
|
|
|
|
Principal amount
|
|
$
|
2,213,591
|
|
|
$
|
2,251,986
|
|
Debt discount
|
|
|
(51,132
|
)
|
|
|
(54,263
|
)
|
Convertible debenture, net of debt discount
|
|
$
|
2,162,459
|
|
|
$
|
2,197,723
|
|
|
|
|
|
|
|
|
|
|
Convertible Debenture - Unrelated Party
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Debt discount
|
|
|
-
|
|
|
|
(10,852
|
)
|
Convertible debenture, net of debt discount
|
|
$
|
-
|
|
|
$
|
489,148
|
|
|
|
|
|
|
|
|
|
|
Convertible Debenture - Totals
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
2,213,591
|
|
|
$
|
2,751,986
|
|
Debt discount
|
|
|
(51,132
|
)
|
|
|
(65,115
|
)
|
Convertible debenture, net of debt discount
|
|
$
|
2,162,459
|
|
|
$
|
2,686,871
|
|
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
The following table summarizes the related party amounts of principal and accrued interest on the Convertible Debentures as of March 31, 2014 and December 31, 2013:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Principal balance
|
|
$
|
2,213,591
|
|
|
$
|
2,251,986
|
|
Accrued interest
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
2,213,591
|
|
|
$
|
2,251,986
|
|
As of March 31, 2014 and December 31, 2013, amounts due to related parties are $170,914 and $109,373, respectively. The $170,914 consists of $4,313 of accrued interest for the note payable to Richard Surber, and $166,601 from various amounts owed to Nexia and its subsidiaries. The $109,373 consists of $2,809 of accrued interest for the note payable to Richard Surber and $106,564 from various amounts owed to Nexia's subsidiaries.
On February 13, 2013, the Board of Directors approved a partial settlement of accrued interest represented by the $3,000,000 Debenture. Green agreed to issue 4,150,000 Convertible Supervoting shares to Nexia. The shares were valued based on the value of the conversion shares based upon the closing price of the common stock prior to the date of issuance.
On April 15, 2013, Green issued a Promissory Note in the amount of $37,400 payable to Nexia for cash advanced to Green. Interest on the note is 10% per annum, monthly payments are $1,725.82 and the note is due 24 months from signing. The Company made no payments of the note's principal during the three months ended March 31, 2014.
On May 16, 2013 the Board of Directors approved the issuance of 32,000 Convertible Series B Preferred Stock to two employees (16,000 shares each) for services performed on behalf of the Company pursuant to the 2008 Benefit Plan of the Company. The transaction was recorded at $160,000, which is the 32,000 shares multiplied by the conversion price of $5 multiplied per share. This $160,000 amount was offset against balances Green owed to a subsidiary of Nexia. The shares were issued with a restrictive legend.
On July 31, 2013, Nexia Holdings Inc., converted $169,434 of debt into 84,716,865 shares of common stock. The transaction was valued at $169,434 with a stated value per share of $0.002 for the common stock. There was a 50% discount provided and no loss was recorded because it was considered a capital transaction. The shares were issued with a restrictive legend to Nexia, the parent corporation of the Company.
Note 9 – Notes Payable
A summary of notes payable as of March 31, 2014 and December 31, 2013 is as follows:
|
|
Interest
|
|
Maturity
|
|
March 31,
|
|
|
December 31,
|
|
Creditor
|
|
Rate
|
|
Date
|
|
2014
|
|
|
2013
|
|
Xing Investment Corp. (1)
|
|
|
10.00
|
%
|
5/12/2008
|
|
$
|
171,000
|
|
|
$
|
171,000
|
|
Salt Lake City Corporation (2)
|
|
|
3.25
|
%
|
8/1/2015
|
|
|
28,273
|
|
|
|
33,439
|
|
William and Nina Wolfson (3)
|
|
|
11.00
|
%
|
2/27/2016
|
|
|
27,802
|
|
|
|
30,858
|
|
Cyprus Credit Union (4)
|
|
|
2.69
|
%
|
12/5/2014
|
|
|
8,314
|
|
|
|
10,920
|
|
Salt Lake City Corporation (5)
|
|
|
5.00
|
%
|
9/1/2017
|
|
|
36,287
|
|
|
|
38,644
|
|
Alliance Laundry Services LLC (6)
|
|
|
7.99
|
%
|
3/3/2019
|
|
|
12,021
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
283,697
|
|
|
|
284,861
|
|
Less: Current portion
|
|
|
|
|
|
|
|
(225,268
|
)
|
|
|
(225,191
|
)
|
Long-term portion
|
|
|
|
|
|
|
$
|
58,429
|
|
|
$
|
59,670
|
|
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
A summary of capital leases payable as of March 31, 2014 and December 31, 2013 is as follows:
|
|
Interest
|
|
Maturity
|
|
March 31,
|
|
|
December 31,
|
|
Creditor
|
|
Rate
|
|
Date
|
|
2014
|
|
|
2013
|
|
Castleton Equipment (7)
|
|
|
16.96
|
%
|
4/23/2016
|
|
$
|
32,136
|
|
|
$
|
35,289
|
|
Imaging Concepts (8)
|
|
|
10.90
|
%
|
2/25/2018
|
|
|
4,892
|
|
|
|
5,139
|
|
Time Payment Corp (9)
|
|
|
17.75
|
%
|
9/5/2016
|
|
|
11,679
|
|
|
|
12,589
|
|
Total
|
|
|
|
|
|
|
|
48,707
|
|
|
|
53,017
|
|
Less: Current portion
|
|
|
|
|
|
|
|
(19,148
|
)
|
|
|
(18,367
|
)
|
Long-term portion
|
|
|
|
|
|
|
$
|
29,559
|
|
|
$
|
34,650
|
|
A summary of convertible notes payable as of March 31, 2014 and December 31, 2013 is as follows:
|
|
Interest
|
|
Maturity
|
|
March 31,
|
|
|
December 31,
|
|
Creditor
|
|
Rate
|
|
Date
|
|
2014
|
|
|
2013
|
|
Southridge Partners II, LP (10)
|
|
|
0.00
|
%
|
2/28/2013
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
Eastshore Enterprises, Inc. (11)
|
|
|
8.00
|
%
|
8/17/2014
|
|
|
35,000
|
|
|
|
35,000
|
|
Debt discount - convertible notes, net
|
|
|
|
|
|
|
|
(6,664
|
)
|
|
|
(10,979
|
)
|
Total, net
|
|
|
|
|
|
|
|
103,336
|
|
|
|
99,021
|
|
Less: Current portion
|
|
|
|
|
|
|
|
(103,336
|
)
|
|
|
(99,021
|
)
|
Long-term portion
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A summary of the related party note payable as of March 31, 2014 and December 31, 2013 is as follows:
|
|
Interest
|
|
Maturity
|
|
March 31,
|
|
|
December 31,
|
|
Creditor
|
|
Rate
|
|
Date
|
|
2014
|
|
|
2013
|
|
Nexia Holdings, Inc. (12)
|
|
|
10.00
|
%
|
4/15/2015
|
|
$
|
27,250
|
|
|
$
|
27,250
|
|
Richard D. Surber (13)
|
|
|
20.00
|
%
|
11/6/2017
|
|
|
25,000
|
|
|
|
25,000
|
|
Total
|
|
|
|
|
|
|
|
52,250
|
|
|
|
52,250
|
|
Less: Current portion
|
|
|
|
|
|
|
|
(52,250
|
)
|
|
|
(45,488
|
)
|
Long-term portion
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
6,762
|
|
(1)
|
On May 12, 2006, Green borrowed $171,000 from Xing Investment Corp with a convertible promissory note. The note is interest bearing at 10% per annum with no interest due until the note maturity date of May 12, 2008. Both principal and accrued interest, at the option of the note holder, may be converted into Common stock of Green at $0.01 per share. The note was not liquidated at the maturity date and is currently in default. No payments have been made on the obligation because Green is unable to locate Xing Investment Corp. or its representatives. As of March 31, 2014 and December 31, 2013, accrued interest reported in accounts payable and accrued expenses was $34,200.
|
(2)
|
On June 18, 2010, Landis Salons, Inc. received a loan in the amount of $100,000 from the Division of Economic Development of Salt Lake City Corporation. The loan includes a 1% origination fee and bears interest at the rate of 3.25% per annum. Principal and interest payments are made monthly over a five year term commencing August 1, 2010. The loan is secured by a $25,000 certificate deposit held in the name of Landis Salons, Inc. and is personally guaranteed by Richard Surber, CEO of Green. The certificate of deposit is considered restricted because it is collateral for the loan. As of March 31, 2014, the note balance is $28,273. Principal payments made on the note during the three months ended March 31, 2014 amounted to $5,166.
|
(3)
|
On February 27, 2012, Green and Landis Experience Center, LLC issued an 11% note payable in the principal face amount of $50,000 to William and Nina Wolfson in exchange for a cash payment of the same amount. The note has a due date of February 27, 2016. The note provides for monthly payments in the amount of $1,292.28 of principal and interest. In addition to the Company’s guarantee to the note, Richard Surber has personally guaranteed the note. As of March 31, 2014, the note balance is $27,802. Principal payments made on the note during the three months ended March 31, 2014 amounted to $3,056.
|
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
(4)
|
On September 5, 2012, Landis Salons, Inc. received a loan in the amount of $22,959 from Cyprus Credit Union for the refinancing of a Company truck. The loan replaced the loan for the truck to Chase bank (see loan #3 above). The loan has a maturity date of December 5, 2014 and bears interest at the rate of 2.69% per annum. Principal and interest payments of $899 are made monthly over 27 months commencing October 5, 2012. The loan is secured by a lien on the vehicle in addition to the corporate guarantee for the loan. Richard Surber, CEO of the Company has personally guaranteed the loan. As of March 31, 2014, the note balance is $8,314. Principal payments made on the note during the three months ended March 31, 2014 amounted to $2,606.
|
(5)
|
On August 20, 2012, the Board of Directors of LEC approved that LEC enter into a loan agreement with Salt Lake City Corporation in the amount of $50,000. Pursuant to the board approval, a note in the amount of $50,000 was issued on August 21, 2012. The note bears interest at 5% per annum and requires 60 monthly installments of $943.56 commencing October 1, 2012. In addition to corporate guarantees and the personal guarantee by Richard Surber, President, CEO, and Director of LEC, a certificate of deposit is being held as collateral for the loan. As of March 31, 2014, the note balance was $36,287. Principal payments made on the note during the three months ended March 31, 2014 amounted to $2,357.
|
(6)
|
On March 3, 2014, Landis Salons, Inc. entered into a loan agreement with Alliance Laundry Services LLC in the amount of $12,021 for the financing of professional laundry equipment. The note bears interest at 7.99% and calls for monthly 60 monthly payments of $243.68 commencing when the equipment is delivered for installment. In addition to corporate guarantees, Richard Surber, President, CEO, and Director of Landis is a personal guarantor and the note is secured by the equipment. As of March 31, 2014, the equipment had not been delivered and therefore no payments have been made.
|
(7)
|
On April 23, 2012, Landis Salons, Inc. entered into a capital lease financing agreement in the principal amount of $53,230 with Castleton Capital Corporation. The lease agreement requires 48 monthly payments of principal and interest in the amount of $1,535. Interest is at the rate of 16.96% per year and the maturity date is April 23, 2016. Landis has the option to purchase the leased salon equipment at maturity for a $1 bargain purchase amount. The Company applied the guidance of ASC 840 in its determination of the lease being a capital lease. In addition to the Company’s guarantee for the debt, Richard Surber is personal guarantor to the lease. As of March 31, 2014, the note balance is $32,136. Principal payments made on the note during the three months ended March 31, 2014 amounted to $3,152.
|
(8)
|
On February 25, 2013, Landis Salons, Inc. entered into a capital lease financing agreement in the principal amount of $5,911 with Imaging Concepts. The lease agreement requires 60 monthly payments of principal and interest in the amount of $128.22. Interest is at the rate of 10.9% per year and the maturity date is February 25, 2018. Landis has the option to purchase the leased salon equipment at maturity for a $1 bargain purchase amount. The Company applied the guidance of ASC 840 in its determination of the lease being a capital lease. In addition to the Company’s guarantee for the debt, Richard Surber is personal guarantor to the lease. As of March 31, 2014, the note balance is $4,892. Principal payments made on the note during the three months ended March 31, 2014 amounted to $247.
|
(9)
|
On July 26, 2012, Landis Salons, Inc. entered into a capital lease financing agreement in the principal amount of $16,826 with Time Payment Corporation. The lease agreement requires 48 monthly payments of principal and interest in the amount of $485. Interest is at the rate of 17.75% per year and the maturity date is September 5, 2016. Landis has the option to purchase the leased salon equipment at maturity for $2,178 or less. The Company applied the guidance of ASC 840 in its determination of the lease being a capital lease. In addition to the Company’s guarantee for the debt, Richard Surber is personal guarantor to the lease. As of March 31, 2014, the note balance is $11,679. Principal payments made on the note during the three months ended March 31, 2014 amounted to $909.
|
(10)
|
On August 15, 2012, Green issued a $75,000 promissory convertible promissory note to Southridge Partners II, LP as a condition of Southridge entering into an Equity Purchase Agreement with the Company (see Note 11). The transaction has been handled as a private sale exempt from registration under Rule 506 of the Securities Act of 1933. The note bears no interest and matures on February 28, 2013 at which time a balloon payment of the entire principal amount is due. The holder of the note is entitled any time after the maturity date to convert the note into common stock of the Company at 70% of the average of the two lowest closing bid prices for the five day prior to the date of the conversion. The Company determined the note contained a beneficial conversion feature and therefore recorded a $32,143 debt discount. As of March 31, 2014, the balance of the note was $75,000 and the balance of the debt discount was $0. No payments were made on the note during the three months ended March 31, 2014.
|
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
(11)
|
On August 17, 2012, Green issued a $35,000 convertible promissory note to Eastshore Enterprises, Inc. Green converted $15,000 of accounts payable to Eastshore to the note and also received $20,000 in cash for the loan. The transaction has been handled as a private sale exempt from registration under Rule 506 of the Securities Act of 1933. The note matures on August 17, 2014 and bear interest at a rate of 8% per annum. After one year from issuance, the holder can be convertible into Green’s common shares at the conversion rate of 54% of the market price of the lowest price of Green’s common shares during the ten-day period ending one trading day prior to the date of the conversion. As of March 31, 2014, none of the note had been converted into shares of common stock. As of March 31, 2014, the balance of the note was $35,000 and the balance of the debt discount was $6,664. No payments have been made on the note as of March 31, 2014.
|
The exercise price of these convertible notes are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced. As a result, the Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability (see Note 7 - Derivative Liability).
(12)
|
On April 15, 2013, Green entered into a promissory note with its parent company, Nexia Holdings, Inc., in the amount of $37,400 for cash advanced to Green. Interest on the note is 10% per annum, monthly payments are $1,726 and the note is due 24 months from signing. As of March 31, 2014, the principal balance on the note was $27,250. No principal payments have been made on the note as of March 31, 2014.
|
(13)
|
On November 5, 2012, Landis Salons II, Inc. entered into a promissory note with Richard Surber, President, CEO and Director of Green, for the sum of $25,000 for funds loaned. The note bears interest at the rate of 20% per annum, with a term of five years and monthly payments of $662.35 and a demand feature by which the note can be called upon the demand of Mr. Surber. Landis Salons II as security for the note pledged all of its assets, stock in trade, inventory, furniture, fixtures, supplies, any intangible property and all tangible personal property of Landis Salons II and all and any other assets to which Landis Salons II holds title or claims ownership or that is hereafter acquired by Landis Salons II, subject only to purchase money liens held by sellers or grantors. As of March 31, 2014, the balance of the note was $25,000. No principal payments have been made on the note as of March 31, 2014. Mr. Surber is also providing his personal guaranty for several lines of credit and credit cards that are being utilized by the company and its operating subsidiaries. In addition to the above, Mr. Surber is a personal guarantor to notes payable by the Company with remaining principal balances of $176,615. Subsequent to March 31, 2014, Mr. Surber continues to provide his personal guaranty for several lines of credit, credit cards, and loans that are being utilized by the Company and its subsidiaries. The total amount of these credit obligations could exceed the amount of $300,000 from time to time.
|
As of March 31, 2014, Mr. Surber is a personal guarantor to various notes payable by the Company with remaining principal balances of $137,695. Subsequent to March 31, 2014, Mr. Surber continues to provide his personal guaranty for several lines of credit, credit cards, and loans that are being utilized by the Company and its subsidiaries. The total amount of these credit obligations could exceed the amount of $300,000 from time to time.
Note 10 – Lease Commitments
Operating Leases
Facilities are leased under operating leases expiring at various dates through September, 2020. Certain of these leases contain renewal options. For the three month periods ended March 31, 2014 and 2013, rent expense under operating leases was $52,738 and $58,714, respectively.
As of March 31, 2013, future minimum lease payments under non-cancelable operating leases were as follows:
|
|
Operating Leases
|
|
For the fiscal years ending December 31:
|
|
|
|
2014 - remainder
|
|
$
|
150,417
|
|
2015
|
|
|
188,415
|
|
2016
|
|
|
131,741
|
|
2017
|
|
|
137,801
|
|
2018
|
|
|
145,575
|
|
Thereafter
|
|
|
203,149
|
|
Total operating lease payments
|
|
$
|
957,098
|
|
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
Capital Leases
The Company entered into three non-cancelable capital leases for salon and office equipment during 2012 and 2013. The Company evaluated the leases at the time of purchase and determined that the lease agreements each contain a beneficial buy-out option wherein the Company has the option to buy the equipment for $1 at the end of the lease terms. Under the guidance in ASC 840, the Company has classified the leases as capital leases, accordingly, the salon equipment under the leases with a cost of $76,298 has been capitalized and included with the Company's property, plan, and equipment and is depreciated as such. The Company used the discounted value of future payments as the fair value of this asset and has recorded the discounted value of the remaining payments as a liability.
Capital leases payable outstanding were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Total
|
|
$
|
48,707
|
|
|
$
|
53,017
|
|
Less current portion
|
|
|
(19,148
|
)
|
|
|
(18,367
|
)
|
Long-term portion
|
|
$
|
29,559
|
|
|
$
|
34,650
|
|
As of March 31, 2014, future minimum lease payments under non-cancelable capital leases were as follows:
|
|
Capital Leases
|
|
For the fiscal years ending December 31:
|
|
|
|
2014 - remainder
|
|
$
|
19,332
|
|
2015
|
|
|
25,776
|
|
2016
|
|
|
12,042
|
|
2017
|
|
|
1,539
|
|
2018
|
|
|
259
|
|
Thereafter
|
|
|
-
|
|
Total operating lease payments
|
|
|
58,948
|
|
Less interest for the terms
|
|
|
(10,242
|
)
|
Total, net
|
|
$
|
48,706
|
|
Note 11 – Stockholders’ Deficit
Preferred Stock
Green is authorized to issue 15,000,000 shares of preferred stock (par value $.001 per share). Green’s preferred stock may be divided into such series as may be established by the Board of Directors. As of December 31, 2013, Green has designated 12,000,000 of the preferred stock into two series as follows: 2,000,000 shares of Convertible Series B Preferred and 10,000,000 shares of Convertible Supervoting Preferred.
The Preferred Stock is classified as equity as long as there are sufficient shares available to effect the conversion. In some instances certain contracts may pass the option to receive cash or common stock to the shareholder. In this case, it is assumed that a cash settlement will occur and balance sheet classification of the affected Preferred Stock and related preferred paid-in capital as a liability.
Convertible Supervoting Preferred Stock
Each share of the Convertible Supervoting Preferred Stock is convertible into 100 shares of Green’s Common stock and has the voting rights equal to 100 shares of common stock.
During the three month period ended March 31, 2014, there were no issuances or conversions of Convertible Supervoting Preferred shares.
As of March 31, 2014 and December 31, 2013, Green had 10,000,000 and 10,000,000 shares of Convertible Supervoting Preferred stock issued and outstanding, respectively.
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
Convertible Series B Preferred Stock
Each share of Green’s Convertible Series B Preferred Stock has one vote per share and is convertible into $5.00 worth of common stock. The number of common shares received is based on the average closing bid market price of Green's common stock for the five days before conversion notice date by the shareholder. Convertible Series B Preferred Stock shareholders, at the option of Green, can receive cash or common stock upon conversion.
During the three months ended March 31, 2014, the Board of Directors approved the conversions of 27,140 shares of Series B Preferred shares into 23,505,769 shares of Common Stock. The shares were converted at prices per share of approximately $0.00340 to $0.00646 based on the conversion provisions for the Convertible Series B Preferred Stock designation.
On March 28 2014, the Board of Directors approved the issuance of a total of 189,123 shares of the Company's Convertible Preferred Series B Stock in exchange for cancellation of the principal and accrued interest of the five, $100,000 each, 8% Series A Senior Subordinated Convertible Redeemable Debentures (the "Debentures"). The Debentures were held by two unrelated parties and amounted to $500,000 in principal and $161,929 of accrued interest for a total of $661,929. The Company recognized a gain of $6,994 on the transaction.
As of March 31, 2014 and December 31, 2013, Green had 743,687 and 561,704 shares of Convertible Series B Preferred stock issued and outstanding, respectively.
Common Stock
Green is authorized to issue 10,000,000,000 shares of common stock (par value $0.0001 per share).
On or about March 22, 2013, the Company received the consent of a majority of the voting rights of the shareholders of the Company to carry out a reverse stock split of the common stock of the Company on the basis of one share for each two hundred shares of outstanding common stock and to change the par value of the common stock to $0.0001. The action as proposed was approved by the Board of Directors and notice was provided through the filing of a Form 14C Information Statement with the SEC and the reverse stock split was effective as of April 10, 2013. All common stock share quantities, prices, and par values contained in these financial statements and accompanying footnotes that occurred before April 10, 2013, have been retroactively restated to reflect the occurrence of the split and par value change.
As of March 31, 2014 and December 31, 2013, Green had 190,077,904 and 166,572,135 shares of common stock issued and outstanding, respectively.
Note 12 – Stock-Based Compensation
On December 2, 2011, the Board of Directors approved a stock-based compensation program entitled The 2011 Benefit Plan of Green Endeavors, Inc. (the “Plan”) wherein common stock options are granted to employees. A total of 1,500,000 shares of the Green’s common stock (par value $0.0001) are authorized to be issued or granted to employees (“Employees”) under the Plan. Employees include actual employees or certain non-employee, consultants and advisors of Green, its subsidiaries, and parent company. The Plan is designed to attract and retain employees.
Under the Plan and during the year ended December 31, 2012, the company granted 730,000 stock options to five employees for services. For the year ended December 31, 2012, stock-based compensation expense of $71,775 was accounted for under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. The weighted average components used for the calculation of the fair value for the options granted were approximately: $0.08 – exercise price, one year term, 502% volatility, and a .18% risk free rate.
Under the Plan and during the year ended December 31, 2013, the Company did not grant any stock options. At March 31, 2014, the aggregate intrinsic value of all options outstanding and exercisable was $0. As of March 31, 2014, 1,030,000 shares under the grants had been exercised and there were no unexercised grants. For the three months ended March 31, 2014, there were no expired or cancelled grants. As of March 31, 2014, there were 470,000 shares available for future stock-based compensation grants.
Note 13 – Equity Purchase Agreement
On August 15, 2012, Green Endeavors Inc. (the “Company”) entered into an Equity Purchase Agreement (“Agreement”) with Southridge Partners II, LP (“Southridge”) wherein Southridge has committed to purchase up to $10,000,000 of the Company’s common stock over 36 months. The Company may draw on the facility from time to time in the form of puts, as and when it determines appropriate up to a maximum of less than 4.99% of the issued and outstanding shares of common stock of the Company per put notice. Southridge’s purchase price for each put is set at 91% of the lowest closing bid price of the common stock of the Company during the pricing period as defined in the Agreement as the period beginning on the Put Notice Date and ending on and including the date that is five Trading Days after such Put Notice Date. The option to draw down on the equity line is at the sole direction of the company. The Company is obligated to file one or more registration statements with the SEC to register the sale to Southridge of shares of common stock issued or issuable under the Agreement. The Company has agreed to file with the SEC an initial registration statement of From S-1 in order to carry out the terms of the Agreement. Upon the execution of the Agreement the Company issued to Southridge a $75,000 convertible promissory note as a condition to Southridge entering into the Agreement, which included preparation of the Agreement (see Note 9 - Notes Payable). As of March 31, 2014, there were no draws taken.
Green Endeavors, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2014 (Unaudited)
Note 14 – Concentration of Risk
Supplier Concentrations
The Company purchases most of its salon inventory that is used for service and product sales from Aveda. Aveda product purchases for the three months ended March 31, 2014 and for the year ended December 31, 2013 accounted for approximately 99% and 99%, respectively, of salon products purchased.
Note 15 – Going Concern
Generally accepted accounting principles in the United States of America contemplate the continuation of Green as a going concern. As of and for the three months ended March 31, 2013, Green had negative working capital of $911,070 and a net loss of $117,158, respectively, which raises substantial doubt about Green’s ability to continue as a going concern. Green’s ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and its ability to successfully fulfill its business plan. Management plans to attempt to raise additional funds to finance the operating and capital requirements of Green through a combination of equity and debt financings. While Green is making its best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be sufficient for operations.
Note 16 – Subsequent Events
On April 2, 2014, the Board of Directors approved the conversion of 6,532 shares of Series B Preferred Stock held by an investor into 5,336,601 shares of Common Stock. The shares were converted at $0.00612 per share based on the conversion provisions for the Series B Preferred Stock designation.
In accordance with ASC 855-10 Company management reviewed all material events through the date of this report and there are no additional material subsequent events to report.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in conjunction with our Form 10-K for the fiscal year ended December 31, 2013 and Form 10-Q for the quarter ended March 31, 2013. Certain of these statements, including, without limitation, statements regarding the extent and timing of future revenues and expenses, customer demand and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecast,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon management’s best judgment at the time they are made about future events that are not historical facts. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Results of Operations,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.
Overview
Green Endeavors, Inc. (“Green”) is a Utah corporation originally formed on April 25, 2002. Our fiscal year ends on December 31. We have never filed bankruptcy nor been through any similar financial reorganization.
As of March 31, 2014, we operate two high-quality hair care salons that feature Aveda™ products for retail sale. Landis Salons, Inc. (“Landis I”) operates its business within a 4,000 square foot space located in the Liberty Heights District of Salt Lake City, Utah as an Aveda Lifestyle Salon. Landis Salons II, Inc. (“Landis II”) operates within a 3,024 square foot space located in the Marmalade District of Salt Lake City, Utah under the Landis Lifestyle Salon brand as an Aveda Lifestyle Salon. A third location opened August 16, 2012, and operates as an Aveda Experience Center ("LEC") in the City Creek Mall in Salt lake City, Utah.
Aveda Lifestyle Salons can be distinguished from Aveda Concept Salons in that Aveda Lifestyle Salons are required to carry all of Aveda’s products and must meet a higher threshold for product sales than Aveda Concept Salons. An Aveda Lifestyle Salon is the highest level within the Aveda hierarchy of salons which is classified by higher purchasing volume, location, array of products carried and size of retail space.
Salon operations consist of three major components, an Aveda™ retail store, an advanced hair salon, and a training academy, which educates and prepares future staff about the culture, services, and products provided by the salon. The design of the salons is intended to look modern and feel comfortable, appealing to both genders, and all age groups.
Additional information on Landis can be found on its website at:
www.landissalons.com
Critical Accounting Estimates
In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates and make changes accordingly. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results.
Results of Operations
The following discussion examines our results of operations and financial condition based on our Condensed Consolidated Financial Statements for the three month periods ended March 31, 2014 and 2013.
For the three months ended March 31, 2014, we owned and operated two wholly owned subsidiaries. Two of the subsidiaries, Landis Salons, Inc. and Landis Salons II, Inc., operate as full-service hair and retail salons featuring the Aveda™ line of products. The third subsidiary, Landis Experience Center, LLC, is a retail Aveda experience center.
Revenue
We generate revenue through the sale of services and products in the hair salon industry. For the three month periods ended March 31, 2014 and 2013, we had net sales of $837,465 and $854,313, respectively. Our net sales decreased 16,848 or 2.0% for the three months ended March 31, 2014.
The following table shows the change in service revenue by salon for the three month periods ended March 31, 2014 and 2013:
|
|
Three Months Ended
|
|
|
Increase (Decrease)
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Over Prior Period
|
|
Salon
|
|
2014
|
|
|
2013
|
|
|
Dollar
|
|
|
Percentage
|
|
Liberty Heights
|
|
$
|
437,151
|
|
|
$
|
443,777
|
|
|
$
|
(6,626
|
)
|
|
|
-1.5
|
%
|
Marmalade
|
|
|
179,001
|
|
|
|
176,070
|
|
|
|
2,931
|
|
|
|
1.7
|
%
|
City Creek
|
|
|
415
|
|
|
|
1,635
|
|
|
|
(1,220
|
)
|
|
|
n/a
|
|
Total Service Revenue
|
|
$
|
616,567
|
|
|
$
|
621,482
|
|
|
$
|
(4,915
|
)
|
|
|
-0.8
|
%
|
As can be seen from the above table our three locations experienced an 0.8% decline of service revenues for the three month period ending March 31, 2014 over the comparable period of product sales for 2013. This minor decrease is mostly due to changes in staffing wherein several of the of the senior stylists who produce more revenue have been performing other non-revenue producing activities, such as training new artists in the Landis II salon as well as attrition and vacations.
The following table shows the change in product revenue by salon for the three month periods ended March 31, 2014 and 2013:
|
|
Three Months Ended
|
|
|
Increase (Decrease)
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Over Prior Period
|
|
Salon
|
|
2014
|
|
|
2013
|
|
|
Dollar
|
|
|
Percentage
|
|
Liberty Heights
|
|
$
|
123,388
|
|
|
$
|
133,985
|
|
|
$
|
(10,597
|
)
|
|
|
-7.9
|
%
|
Marmalade
|
|
|
49,200
|
|
|
|
52,837
|
|
|
|
(3,637
|
)
|
|
|
-6.9
|
%
|
City Creek
|
|
|
48,310
|
|
|
|
46,009
|
|
|
|
2,301
|
|
|
|
5.0%
|
|
Total Product Revenue
|
|
$
|
220,898
|
|
|
$
|
232,831
|
|
|
$
|
(11,933
|
)
|
|
|
-5.1
|
%
|
As can be seen from the above table our three locations experienced a 5.1% decline of product revenues for the three month period ended March 31, 2014 over the comparable period of product sales for 2013. This decline in product revenue growth is primarily due the Company's senior staff spending more time towards training programs for new artists. This reduces time available for sales of products.
Costs of Revenue
The following table shows cost of revenue by type as a percentage of related revenue for the three month periods ended March 31, 2014 and 2013:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Services
|
|
|
60.1
|
%
|
|
|
56.5
|
%
|
Product
|
|
|
58.3
|
%
|
|
|
58.9
|
%
|
The above table shows the cost of services revenue being 3.6% more for the three month period ended March 31, 2014 over the comparable period of service sales for 2013. This increase in service cost is primary due to the Company's senior staff spending more time towards training programs for new artists, which generates less revenue as compared to the continued payroll expenses. The 0.6% decrease in product costs for the same comparable period is primarily due to less inventory shrinkage.
Operating Expenses
The following table shows general and administrative expenses for the three months ended March 31, 2014 and 2013:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Salaries and wages
|
|
$
|
112,380
|
|
|
$
|
110,706
|
|
|
$
|
1,674
|
|
Rent
|
|
|
52,738
|
|
|
|
58,714
|
|
|
|
(5,976
|
)
|
Advertising
|
|
|
19,472
|
|
|
|
13,402
|
|
|
|
6,070
|
|
Credit card merchant fees
|
|
|
15,037
|
|
|
|
16,934
|
|
|
|
(1,897
|
)
|
Insurance
|
|
|
15,229
|
|
|
|
14,051
|
|
|
|
1,178
|
|
Utilities and telephone
|
|
|
15,149
|
|
|
|
15,320
|
|
|
|
(171
|
)
|
Professional services
|
|
|
78,609
|
|
|
|
72,171
|
|
|
|
6,438
|
|
Repairs and maintenance
|
|
|
9,910
|
|
|
|
8,086
|
|
|
|
1,824
|
|
Dues and subscriptions
|
|
|
6,634
|
|
|
|
5,373
|
|
|
|
1,261
|
|
Office expense
|
|
|
9,210
|
|
|
|
10,654
|
|
|
|
(1,444
|
)
|
Travel
|
|
|
3,914
|
|
|
|
4,097
|
|
|
|
(183
|
)
|
Investor relations and company promotion
|
|
|
8,265
|
|
|
|
494
|
|
|
|
7,771
|
|
Other
|
|
|
8,715
|
|
|
|
6,812
|
|
|
|
1,903
|
|
Total general and administrative expenses
|
|
$
|
355,262
|
|
|
$
|
336,814
|
|
|
$
|
18,448
|
|
The above table shows an $18,448 increase in general and administrative expenses. As can be seen above there are several increases and decreases in the various categories the most notable of which are those of advertising, professional services, and investor relations and company promotion for an aggregate increase of $20,279 in the three month period ended March 31, 2014 compared to the three month period ended March 31, 2013.
Depreciation expense for the three months ended March 31, 2014, was $32,926 compared to $32,568 for the comparable three months ended March 31, 2013. The relatively small increase of $358 is primarily due to an increase in equipment purchased during the three months ended March 31, 2014.
Other Expense
Other expense for the three months ended March 31, 2014, decreased to $67,158 from $90,644 for the comparable three months ended March 31, 2013, a decrease of $23,496. This decrease is primarily attributable to interest expense being $4,393 less, the derivative fair value adjustment change was $13,399 less, and there was a $6,994 gain on the settlement of debenture debt during the three month period ending March 31, 2014 that was not present in the comparable period 2013.
Liquidity and Capital Resources
Cash and Investments in marketable securities
As of March 31, 2014, our principal source of liquidity consisted of $135,081 of cash, compared to $105,984 as of December 31, 2013. Our primary sources of cash during the three month period ended March 31, 2014 were customer payments for salon services and products and proceeds from issuance of convertible series B preferred stock. Our primary uses of cash during the three month period ended March 31, 2014 were payments relating to salaries, rent, and other general operating expenses as well as payments of notes payable.
Working Capital
We had a working capital deficit of $911,070 as of March 31, 2014. Our current assets were $300,267, which consisted of $135,081 in cash, $12,176 in accounts receivable, and $153,010 in inventory. Our total assets were $826,656, which included $447,049 in property and equipment (net), and $79,340 in other assets. Our current liabilities were $1,211,337, including $425,549 in accounts payable and accrued expenses, $170,914 in amounts due to related parties, $400,002 in the current portion of convertible notes and notes payable and capital leases payable, $55,346 in deferred revenue, and a $47,333 derivative liability. Our long-term liabilities were $2,250,447. Our total stockholders’ deficit at March 31, 2014 was $2,635,128.
Working capital increased by $37,744 as of March 31, 2014, compared to December 31, 2013 primarily due to the various changes in current assets and current liabilities that net to the overall change in working capital for the three month period.
Cash Flows from Operating Activities
Cash flows from operating activities include net loss, adjusted for certain non-cash charges, as well as changes in the balances of certain assets and liabilities. Net cash provided by operating activities for the three month period ended March 31, 2014 was $52,439 compared to $59,903 provided by operating activities for the three months ended March 31, 2013. This small $7,464 change in cash is made up of several small changes in the operating activities of the Company the most significant of which $22,604 and $20,329 more cash used for accounts payable and accrued expenses and amounts due to related parties, respectively.
Cash Flows from Investing Activities
Cash flow used in investing activities for the three months ended March 31, 2014 was $19,473 compared to $915 for the three months ended March 31, 2013, a $18,558 difference. The change was due to purchases of property and equipment.
Cash Flows from Financing Activities
Cash flow used in financing activities for the three months ended March 31, 2014 was $3,869 compared to $9,653 provided by financing activities for the three months ended March 31, 2013, a change of $13,522. For the three months ended March 31, 2014 compared to the three months ended March 3, 2013, there was $27,383 more in payments made for debt obligations, $26,139 less in the proceeds of new debt issuances, and $40,000 more in the proceeds from issuance of convertible series B preferred stock.
Other Factors Affecting Liquidity and Capital Resources
We have insufficient current assets to meet our current liabilities due to negative working capital of $911,070 as of March 31, 2014. Historically, we have funded our cash needs from a combination of revenues, carried payables, sales of equity, and debt transactions. Since we are not currently realizing net cash flows from our business, we may need to seek financing to continue our operations. Prospective sources of funding could include shareholder loans, equity sales or loans from other sources though no assurance can be given that such sources would be available or that any commitment of support is forthcoming to date.
8% Series A Senior Subordinated Convertible Redeemable Debentures
On April 30, 2008, we entered into a stock transfer agreement with our parent company Nexia and Nexia’s wholly-owned subsidiary DHI whereby they would each sell their holdings in Landis and Newby in exchange for an 8% Series A Senior Subordinated Convertible Debenture with a face amount of $3,000,000. Interest on the debenture commenced on December 30, 2008. The debenture holder has the option, at any time, to convert all or any amount over $10,000 of principal face amount and accrued interest into shares of Common stock, $0.0001 par value per share, at a conversion price equal to 95% of the average closing bid price of the common stock three days prior to the date we receive notice. In February of 2011, DHI transferred the Debenture to Nexia in exchange for the release of debt obligations owed to Nexia by DHI and Nexia is the current holder of the Debenture.
We do not intend to pay cash dividends in the foreseeable future.
We expect to purchase property or equipment as part of our normal ongoing operations.
Going Concern
Our audit opinion for the year ended December 31, 2013 expressed substantial doubt as to our ability to continue as a going concern as a result of recurring losses and negative working capital. These conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans to address our ability to continue as a going concern include raising additional funds to finance the operating and capital requirements through a combination of equity and debt financings. While we are making our best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations.
Impact of Inflation
We compensate some of our salon employees with percentage commissions based on sales they generate. Accordingly, this provides us certain protection against inflationary increases, as payroll expense is a variable cost of sales. In addition, we may increase pricing in our salons to offset any significant increases in wages and cost of services provided. Therefore, we do not believe inflation has had a significant impact on the results of our operations.
Off-Balance Sheet Arrangements
As of March 31, 2014 and December 31, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.