NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 Basis of Presentation and Accounting Policies
The
unaudited interim consolidated financial statements include our wholly owned subsidiary, GETH CFP, Inc. (“CFP”). CFP
is a Delaware Corporation formed on February 9, 2017 for the purpose of handling and upgrading both third party carbon black and
the carbon black produced by our GEN 1 End of Life Tire Processing Plants. We acquired a Carbon Black Finishing System in 2016
for installation in our Centralized Carbon Black Finishing Plant located in Ohio. The equipment is currently being refurbished
and when completed will be relocated and installed with the assistance of GETH’s strategic partners, under a master services
agreement that covers all of the GETH plants. The Ohio site is being provided by the Lawrence County Economic Development Corporation
as part of its mission to bring jobs back to that part of Ohio. All significant inter-company balances and transactions have been
eliminated in the consolidation as of and for the nine months ended September 30, 2018.
The
unaudited interim consolidated financial statements presented herein have been prepared by us in accordance with the accounting
policies described in our December 31, 2017 and 2016 audited financial statements included in our Form 10-K and should be read
in conjunction with the notes to the financial statements which appear in that report.
The
preparation of these unaudited interim consolidated financial statements in conformity with accounting principles generally accepted
in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including
related intangible assets, income taxes, insurance obligations and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources.
Actual results may differ from these estimates under different assumptions or conditions.
In
the opinion of management, the information furnished in these unaudited interim consolidated financial statements reflect all
adjustments necessary for a fair statement of the financial position and results of operations and cash flows as of and for the
nine months ended September 30, 2018 and 2017. All such adjustments are of a normal recurring nature. The results of operations
for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited
interim consolidated financial statements which would substantially duplicate the disclosures contained in the audited financial
statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation.
Recently
Issued Accounting Standards
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity
(Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round
Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Non-Controlling Interests with a Scope Exception”. The ASU was
issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain
financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to
consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a
result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as
a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for
fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including
adoption in an interim period. The Company is currently evaluating the implementation date and the impact of this amendment
on its consolidated financial statements.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
April 2016, the FASB issued ASU 2016–10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments
in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation
guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts
with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise
to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied
at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments
in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement
necessary to comply with Topic 606. The Company adopted these standards at the beginning of the first quarter of fiscal 2018 using
the modified retrospective method. The adoption of these standards did not have an impact on the Company’s consolidated
statements of operations for any periods presented.
Note
2 Going Concern
These
unaudited interim consolidated financial statements have been prepared on a going concern basis which assumes we will be able
to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. For the nine
months ended September 30, 2018, we had a net loss. We also have a working capital deficit and an accumulated deficit since inception.
These factors raise substantial doubt about our ability to continue as a going concern.
These
unaudited interim consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts, or amounts and classification of liabilities that might result from a future uncertainty. The Company
plans to continue funding itself through the generation of revenues and raising capital through loans and new equity.
Note
3 Loan Payable – Related Party and Convertible
On
March 3, 2017, we approved a new working capital line of credit loan with our CEO, Chris Bowers in the amount up to $150,000 with
interest at 8% which matured on December 31, 2017. The maturity date was extended to December 31, 2018. The note has conversion
rights for our common shares at $0.10 per share. As of September 30, 2018, this note had a balance of $54,100 and accrued interest
in the amount of $11,131. In the nine months ended September 30, 2018, the Company borrowed $75,100 on the LOC and repaid $111,000.
$61,000 in cash and $50,000 was reassigned. There was no BCF on the additions during the nine months ended September 30, 2018.
The Company evaluated this convertible LOC for Beneficial Conversion Features (BCF) and concluded that the LOC incurred a Beneficial
Conversion Features (BCF) when it was issued. The BCF resulted in a debt discount in the amount of $35,300 of which the full amount
was amortized in 2017.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
August 15, 2016, we accepted a Line of Credit (LOC) in the amount of $500,000 from our CEO Chris Bowers. On November 14,
2016, we accepted a second Line of Credit (LOC) in the amount of $500,000 from our CEO. As of September 30, 2018, these two
LOCs had an outstanding balance in the amount of $1,000,000 with $30,000 in accrued interest. These LOCs accrue interest at
the rate of 1% per month based upon $1,000,000 total balance. We have been paying $10,000 per month in interest on the two
LOCs for a total of $60,000 for the nine months ended September 30, 2018. The due dates of the two loans were extended to
December 31, 2018. The funds were used for working capital in the Company. The first LOC has two Addendums attached to it.
Addendum A clarifies debt conversion rights attached to the LOC at $0.20 per share of common stock. Addendum B clarifies
other rights attached to the LOC. There was no BCF on the balance of the LOC2. These other rights, referred to above, are
numbered below. (The second LOC has the same rights as that of the first LOC). These certain other rights in Addendum B
provide for the following:
|
|
1.
|
LOC
has Repayment rights: The LOC has priority principal and interest repayment rights from other sources of capital received
by the Company.
|
|
|
2.
|
LOC
has Warrant rights: Bowers has the right to receive 500,000 (five hundred thousand) $0.10 warrants for providing the LOC and
250,000 (two hundred fifty thousand) $0.10 warrants per $100,000 drawn against the $500,000 LOC. This would be a total of
1,750,000 $0.10 warrants to be issued to Bowers and/or Assigns for providing the funding and the Company using all $500,000
LOC. These warrants will be accounted for once the term of the warrants is known.
|
|
|
3.
|
LOC
has Additional Stock Conversion rights: At any time while the LOC is outstanding, Bowers has the right to convert per $100,000
of the LOC for 500,000 shares of duly paid and non-assessable common stock of the Company at a conversion price of $0.20 per
share (subject to adjustment in the event of stock splits or stock dividends) by providing a notice of conversion in a form
reasonably acceptable to the Company. The full conversion of the LOC would be 2,500,000 shares of the Company common stock.
|
The
Company evaluated these convertible LOCs for Beneficial Conversion Features (BCF) and concluded that the second LOC incurred a
Beneficial Conversion Features (BCF) when it was issued on November 14, 2016. The BCF resulted in a debt discount in the amount
of $105,600 of which $8,800 was amortized for the year ended December 31, 2016 and the balance was amortized during the year ended
December 31, 2017.
The
Company also has an outstanding note payable to our CEO Chris Bowers for $134,000. The note is subject to annual interest of eight
percent (8%), convertible at $0.50 per share and matured on December 31, 2017. The maturity date was extended to December 31,
2018. As of September 30, 2018, the accrued interest on this note was $23,342.
We
have an unsecured line of credit with H. E. Capital, S. A., a related party. The line of credit accrues interest at the rate of
8% per annum. The maturity date of the line of credit was extended to December 31, 2018. This line of credit has a $0.10 per common
share conversion rate. Balance of the line of credit at September 30, 2018 was $246,537 with accrued interest in the amount of
$76,011. For the nine months ended September 30, 2018, the Company borrowed $6,000 from the LOC and paid back $6,000. H.E. Capital
converted $40,000 of the LOC for 1,000,000 shares of our common stock.
Note
4 Secured Debentures
On
January 24, 2011, we entered into a series of securities purchase agreements with accredited investors pursuant to which we sold
an aggregate of $380,000 in 12% secured debentures. The Debentures are secured by the assets of the Company pursuant to security
agreements entered into between us and the investors. As of September 30, 2018, these secured debentures have an outstanding balance
of $305,000 and accrued interest in the amount of $302,083. These debentures are in default.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
5 Loan Payable – Other and Convertible
On
May 16, 2016, we approved H.E. Capital S.A.’s (HEC) request to assign to a private company $200,000 of its Line of Credit
Note. We approved the request and reduced HEC’s Line of Credit Note for that amount and recorded a new note. On July 19,
2016, the private company converted $100,000 of its note into 1,000,000 common shares of the Company’s stock. In January
2018, the maturity date of the Line of Credit was extended to December 31, 2018. As of September 30, 2018, the note balance is
$100,000 with accrued interest in the amount of $20,405.
On
July 1, 2016, we issued a note to a private individual in the amount of $49,295. This new note has $0.50 conversion rights attached
to it and accrues interest at 8%. In January 2018, the maturity date was extended to June 30, 2018. This note is presently in
default. As of September 30, 2018, this note had accrued interest in the amount of $8,881.
On
July 20, 2017, we entered into an equity purchase agreement for up to $5,000,000 of our common stock with Peak One Opportunity
Fund, LP (Peak One). In connection with that same agreement, we also entered into a related registration rights agreement. We
issued a non-interest bearing convertible debenture on July 20, 2017 in the amount of $75,000 to Peak One. This debenture matures
on July 20, 2020 and was issued as a commitment fee in connection with the agreement, as well as agreed to issue 300,000 shares
of our common stock as commitment shares. On July 25, 2017, we issued these shares valued at $27,000. Both the commitment debenture
and commitment shares were charged to other current assets until such time the registration statement is filed after which the
amount will be amortized over the life of the offering. Conversion price is 90% of the lowest closing bid price of the last 20
days prior to the conversion date. The note has a derivative discount in the amount of $75,000 at issue and at September 30, 2018
has a remaining balance to amortize in the amount of $61,950. On September 17, 2018, there was a conversion of $9,000 of the principal
into 2,459,016 of the Company’s common shares. Amortization of debt discount for the nine months ended September 30, 2018
amounted to $6,611.
On
July 27, 2017, we received the first of three installments in connection with Peak One Opportunity LP (Peak One) purchase
agreement for certain Company Convertible Debentures totaling $425,000. We issued to Peak One a three year $75,000
non-interest bearing debenture maturing on July 26, 2020. We received the 2
nd
installment on November 28, 2017 and
issued a non-interest bearing debenture for $50,000 which will mature on November 28, 2020. The debentures had an OID
(original issue discount) and derivative discounts totaling $61,200 which are amortized over the term of the debentures. The
debentures are convertible into common shares of the Company with certain terms and conditions as set forth in the agreement.
The Holder is entitled to, at any time or from time to time, to convert the Conversion Amount into Conversion Shares, at a
conversion price for each share of Common Stock equal to the lesser of (a) $0.15 or (b) Sixty Five percent (65%) of the
lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) Trading Days immediately
preceding the date of the date of conversion of the Debentures subject in each case to equitable adjustments resulting from
any stock splits, stock dividends, recapitalizations or similar events. During the first nine months ended September 30,
2018, Peak One converted a total of $75,000 of debt and $4,000 fee for 7,232,569 shares of the Company’s common stock.
As of September 30, 2018, the notes have an outstanding balance of $50,000. Amortization of debt discounts amounted to
$40,338 for the nine months ended September 30, 2018. Unamortized debt discount as of September 30, 2018 amounted to
$17,256.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
May 22, 2018, we entered into a 12% interest bearing note agreement with JSJ Investments, Inc. in the amount of $75,000, the Note
has a $5,500 original issue discount. It was also determined at issue date, the Note had $69,500 in derivative discount and a
day one loss in the amount of $40,354. Amortization of debt discounts amounted to $6,574 for the nine months ended September 30,
2018. Unamortized debt discount as of September 30, 2018 amounted to $68,426. The note has a maturity date of May 22, 2019. The
Company may pay this Note in full, together with any and all accrued and unpaid interest, plus any applicable pre-payment premium
set forth in the agreement and subject to the terms of the agreement at any time on or prior to the date which occurs 180 days
after the date of issue (Prepay Date). In the event the Note is not prepaid in full on or before the Prepay Date, the Note will
incur a prepayment premium of 135% for the first 90 days, 140% from 91 days to 120 days, 145% from 121 days to 180 days and 150%
until maturity date. The Note has conversion rights at any time after the Prepay Date for its holder at a 40% discount to the
lowest trading price during the previous twenty trading days to the date of a conversion notice. This note had a balance of $75,000
and accrued interest in the amount of $2,750 as of September 30, 2018.
On May 31, 2018, we entered into a
12% interest bearing note agreement with Coolidge Capital LLC in the amount of $75,000, the Note has a $4,500 original issue discount.
It was also determined on the date of issue, the Note had $40,366 in derivative discount. Amortization of debt discounts amounted
to $15,155 for the nine months ended September 30, 2018. Unamortized debt discount as of September 30, 2018 amounted to $29,711.
The note has a maturity date of February 28, 2019. The Company may pay this Note in full, together with any and all accrued and
unpaid interest, plus any applicable pre-payment premium set forth in the agreement and subject to the terms of the agreement
at any time on or prior to the date which occurs 180 days after the date of issue. The prepayment schedule of payments would be
115% for the first 30 days, 120% for the first 60 days, 125% for the first 90 days, 130% for the first 120 days, 135% for the
first 150 days and 140% for the first 180 days. After 180 days from date of issue, there is no prepayment until maturity date
when the Note is due with interest. The Note has conversion rights at any time after 180 days after the date of issue for its
holder at a 40% discount to the lowest trading price during the previous twenty trading days to the date of conversion. This note
had a balance of $75,000 and accrued interest in the amount of $2,300 as of September 30, 2018.
Note
6 Loan Payable – Other and Non-Convertible
On
November 16, 2012, we issued a note to a private individual in the amount of $170,000 with interest accruing at 8% per annum.
This note was extended to June 30, 2018. This note is presently in default. As of September 30, 2018, the accrued interest was
$30,702.
On
March 29, 2017, we entered into a lease and working capital credit facility with Caliber Capital & Leasing LLC and its assignee,
Real Estate Acquisition Development Sales, LLC (“READS”). Under the agreements, READS is providing an initial commitment
of up to $2.5 million for the construction of our first processing line in our centralized Carbon Finishing Plant in Ohio. We
received our first advance on the commitment on October 6, 2017. As of September 30, 2018, we have an outstanding balance in the
amount of $543,000 with accrued interest in the amount of $45,975. There was an increase of $50,000 in the note which resulted
as a transfer from the Chris Bowers credit line. The interest accrues at 9.5% and is allocated to construction in progress. This
is a revolving working capital line which is due in one year and has the option for two one-year extensions. During the nine months
ended September 30, 2018, the working capital credit facility was cancelled.
Note
7 Commitments and Contingencies
On
March 29, 2017, we entered into a lease and working capital credit facility with Caliber Capital & Leasing LLC and its assignee,
Real Estate Acquisition Development Sales, LLC (“READS”). Under the agreements, READS is providing an initial commitment
of up to $2.5 million for the construction of our first processing line in our centralized Carbon Finishing Plant in Ohio. The
loan is dated for April 4, 2017 and to date we have drawn $543,000 from READS which has been used in part to refurbish used equipment.
During the nine months ended September 30, 2018, the working capital credit facility was cancelled.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
March 29, 2017, we also signed the Master Equipment and Building Related Lease Agreement for $100 Million. The lease covers land,
buildings and equipment. The equipment will have an initial term of seven years; after which we will have the option to purchase
the facility from READS or renew the lease under the same terms. The commencement date was scheduled for April 4, 2017 and never
happened. During the nine months ended September 30, 2018, the Master Equipment and Building Related Lease Agreement was cancelled.
On
April 11, 2017, our wholly owned subsidiary GETH CFP, Inc. signed a 10-year lease with the Lawrence Economic Development Corporation
of Lawrence County, Ohio for the lease of 11,200 sq. ft. of manufacturing space for our carbon finishing plant in Ohio. The lease
had a start date of June 1, 2017, which has been extended to the opening of the Carbon Plant and runs to June 1, 2027. The lease
has three, five year extensions. The lease is $4.00 per sq. ft. with initial payments in the amount of $3,733 per month. The first
extension is at $4.50 per sq. ft. with payments in the amount of $4,200 per month. The Company is currently in negotiations to
sign a new lease since the property covered by the existing lease is no longer available. No new lease has been negotiated presently.
On
July 20, 2017, we entered into an equity purchase agreement for up to $5,000,000 of our common stock with Peak One Opportunity
Fund, LP (Peak One). In connection with that same agreement, we also entered into a related registration rights agreement. We
issued a convertible debenture in the amount of $75,000 to Peak One as a commitment fee in connection with the agreement, as well
as agreed to issue 300,000 shares of our common stock as commitment shares. On July 25, 2017, we issued these shares valued at
$27,000. Both the commitment debenture and commitment shares were charged to other current assets until such time the registration
statement is filed. To date, the registration statement has not been filed.
On
January 19, 2018, we signed an agreement with Steven Bredy Consulting LLC (SBC) wherein we will pay SBC 3.5% of the net profit
of GETH CFP Inc. carbon finishing plant to be located in Ironton, Ohio. Upon receiving funding through SBC to build and complete
the plant to operational, this agreement will be enforced.
During
2013, the Company entered into an agreement with Black Lion Oil Limited (Black Lion) whose primary focus is on emerging energy
technology with broad applications. Under the agreement, the Company granted to Black Lion exclusive rights to the “waste
to oil” process in specific territories outside of the United States. In return Black Lion paid $100,000 in cash to the
Company as a fee. The agreement provides for us to receive a 5% royalty on gross revenues with any plant associated with Black
Lion. The Company used the fee for working capital. As of September 30, 2018, Black Lion has not opened its first plant.
On
September 6, 2018, the Company approved the issuance of the Proxy Statement requesting shareholders’ approval to
extend the authorized common shares of the Company from 250,000,000 common shares authorized to 750,000,000 common shares
authorized. On October 10, 2018, the proxy was approved by the majority shareholders and a Certificate of Amendment was filed
with the state of Delaware.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
8 – Fair value of Financial Instruments and Derivative Liabilities
The
carrying value of cash, accounts payable and accrued expenses, and debt approximate their fair values because of the short-term
nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from
these financial instruments. The Carrying amount of the Company’s long-term debt approximates fair value based upon its
determined derivative discounts. These notes at September 30, 2018 totaled $116,000 with net discounts in the amount of $79,205.
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use
of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are
considered observable and the last unobservable.
|
●
|
Level
1 -
|
Quoted
prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions
in active exchange markets involving identical assets.
|
|
●
|
Level
2 -
|
Quoted
prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities
that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.
|
|
●
|
Level
3 -
|
Unobservable
inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s
own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best
information available in the circumstances.
|
The
following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded
at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy
as of September 30, 2018:
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Embedded conversion derivative liability
|
|
$
|
187,368
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
187,368
|
|
|
Warrant derivative liabilities
|
|
$
|
805
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
805
|
|
|
Total
|
|
$
|
188,173
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
188,173
|
|
The
following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded
at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy
as of December 31, 2017:
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Embedded conversion derivative liability
|
|
$
|
378,221
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
378,221
|
|
|
Warrant derivative liabilities
|
|
$
|
133,016
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
133,016
|
|
|
Total
|
|
$
|
511,237
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
511,237
|
|
The
embedded conversion feature in the convertible debt instruments that the Company issued (See Note 5), that became convertible
during the third quarter of 2017 as well as the mandatorily redeemable Series B convertible preferred stock issued during the
nine months ended September 30, 2018 (see Note 9), qualified these as derivative instruments since the number of shares issuable
under the notes and preferred shares are indeterminate based on guidance in FASB ASC 815, Derivatives and Hedging. As a result,
all other equity linked instruments including outstanding warrants and fixed rate convertible debt were tainted and also required
derivative accounting treatment.
The
valuation of the derivative liability of the warrants was determined through the use of a Multinomial Lattice model that values
the liability of the warrants based on a risk-neutral valuation where the price of the option is its discounted expected value.
The technique applied generates a large number of possible (but random) price paths for the underlying common stock via simulation,
and then calculates the associated exercise value (i.e. “payoff”) of the option for each path. These payoffs are then
averaged and discounted to a current valuation date resulting in the fair value of the option.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
valuation of the derivative liability attached to the convertible debt and the preferred shares was arrived at through the use
of a Multinomial Lattice model that values the derivative liability within the notes. The technique applied generates a large
number of possible (but random) price paths for the underlying (or underlyings) via simulation, and then calculates the associated
payment value (cash, stock, or warrants) of the derivative features. The price of the underlying common stock is modeled such
that it follows a geometric Brownian motion with constant drift, and elastic volatility (increasing as stock price decreases).
The stock price is determined by a random sampling from a normal distribution. Since the underlying random process is the same,
for enough price paths, the value of the derivative is derived from path dependent scenarios and outcomes. The features in the
notes that were analyzed and incorporated into the model included the conversion features with the reset provisions, the call/redemption/prepayment
options, and the default provisions. Based on these features, there are six primary events that can occur; payments are made in
cash; payments are made with stock; the note holder converts upon receiving a redemption notice; the note holder converts the
note; the issuer redeems the note; or the Company defaults on the note. The model simulates the underlying economic factors that
influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at
the time (i.e. stock price, conversion price, etc.). Probabilities were assigned to each variable such as redemption likelihood,
default likelihood, and timing and pricing of reset events over the remaining term of the notes based on management projections.
This led to a cash flow simulation over the life of the note. A discounted cash flow for each simulation was completed, and it
was compared to the discounted cash flow of the note without the embedded features, thus determining a value for the derivative
liability.
The
following assumptions were used for the valuation of the derivative liability related to the Notes, Preferred Shares and subset
to the Warrants as of September 30, 2018:
|
|
●
|
The
stock price of $
0.0200
to
$0.0060
in these periods (variable conversion price; reset provisions; and upon redemption
or default penalties) would fluctuate with the Company’s projected volatility;
|
|
|
●
|
An
event of default adjusting the interest rate would occur
0%
of the time for all notes except the Peak 1 Note which
increases
0.50%
per month to a maximum of
5%
with the corresponding penalty;
|
|
|
●
|
The
projected volatility curve from an annualized analysis for each valuation period was based on the historical volatility of
comparable companies and the term remaining for each note was from
232
% through
286
% at issuance, conversion,
and quarters ends;
|
|
|
●
|
The
company would redeem the notes (with the corresponding penalty) projected initially at
0%
of the time for all notes
except the EMA and Auctus Notes which increase monthly by
1.0%
to a maximum of
5.0%
(from alternative financing
being available for a redemption event to occur); and
|
|
|
●
|
For
the variable rate (some notes include conversion rate ceilings – the lessor of variable rates and a fixed rate) and
fixed rate Notes, the Holder would convert (after 0 days) at maturity based on ownership and trading volume limits; and
|
|
|
●
|
The
Holder would automatically convert the note or exercise early at a multiple of the conversion/exercise or the stock price
if the registration was effective (after 0 days) and the Company was not in default.
|
Using
the results from the model, the Company recorded additional paid in capital of $117,308 from the conversion of $124,000 of principal
and $4,000 of penalty interest. The derivative liability recorded for the convertible feature created a debt discount of $109,866
which is being amortized over the remaining term of the instrument using the effective interest rate method, and is classified
as convertible debt on the balance sheet. The Company also issued 144,100 shares of our Series B Convertible Preferred Stock during
the nine months ended September 30, 2018 for $125,000. These shares are shown in current liability section of the Consolidated
Balance Sheet net of their discounted value of $55,245 and conversion amount of $18,500. These shares created a derivative discount
and OID in the amount of $96,641. The Company recorded the change in the fair value of the derivative liability as a gain of $455,638
to reflect the value of the derivative liability for warrants and convertible instruments as $188,173 as of September 30, 2018.
The Company also recorded a reclassification from derivative liability to equity of $96,004 for the conversions of a portion of
the Company’s convertible notes.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs:
|
Balance at December 31, 2017
|
|
$
|
511,237
|
|
|
Fair value of derivative liability at issuance charged to debt discount
and interest expense
|
|
|
228,578
|
|
|
Settlement of derivative liability due to conversion
|
|
|
(96,004
|
)
|
|
Unrealized derivative gain included in other expense
|
|
|
(455,638
|
)
|
|
Balance at September 30, 2018
|
|
$
|
188,173
|
|
Note
9 Mandatorily Redeemable Series B Preferred Stock
Preferred
Stock
On
March 8, 2018, we filed with the state of Delaware, Division of Corporations, a Certificate of Designations of Preferences, Rights
and Limitations for 300,000 shares of a Series B Convertible Preferred Stock. The Certificate of Designations was approved by
the Division of Corporations. These Series B Convertible Preferred shares are senior to Common Shareholders in reference to liquidation
dividends and are junior to the Series A Convertible Preferred shares. The Series B Convertible Preferred Shares have an annual
12% dividend with a stated value of $1.00 and have no voting rights. The redemption options for these shares are 105% for the
first 30 days, 110% for the first 60 days, 115% for the first 90 days, 120% for the first 120 days, 125% for the first 150 days
and 130% for the first 180 days, then after no redemption rights. Twelve months from the issue date, the Company has a “mandatory
redemption date” to redeem the outstanding shares not converted. The shares have conversion rights to convert at 75% of
the average of the two lowest common stock prices ten days before the date of conversion.
On
March 13, 2018, the Company issued 85,800 shares of our new Series B Convertible Preferred Stock for $75,000. These shares are
shown in the Liability section of the Balance Sheet as $44,213, net of their discounted value of $23,087. The Company evaluated
the classification of the Series B Convertible Preferred Stock under ASC 480-10-25 and determined that due to their mandatory
redemption features, the preferred shares were required to be classified as a liability. The embedded conversion option of the
preferred shares was also required to be bifurcated and accounted for as derivative liabilities (see Note 8). When issued, the
Company recorded an OID and derivative discount of $53,090. For the nine months ended September 30, 2018, the Company amortized
$30,003 of the derivative discount. During the quarter, there was a conversion of $19,610 consisting of $1,110 in accrued dividend
and 18,500 preferred shares into 3,835,417 of the Company’s common shares. Unamortized discount as of September 30, 2018
amounted to $23,087. See Note 10.
On
May 1, 2018, the Company issued 58,300 shares of our Series B Convertible Preferred Stock for $50,000. These shares are shown
in the Liability section of the Balance Sheet as $26,142 net of their discounted value of $32,158. The Company evaluated the classification
of the Series B Convertible Preferred Stock under ASC 480-10-25 and determined that due to their mandatory redemption features,
the preferred shares were required to be classified as a liability. The embedded conversion option of the preferred shares was
also required to be bifurcated and accounted for as derivative liabilities (see Note 8). During the nine months ended September
30, 2018, the Company recorded an OID and derivative discount of $43,551 and amortization expense of $11,393 which was
charged to interest. Unamortized discount as of September 30, 2018 amounted to $32,158.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
10 Equity
Common
Stock
On
March 20, 2018, we issued 250,000 shares of common stock to settle $5,000 of vendor debt.
During
the quarter ended March 31, 2018, Peak One exercised its right to convert a total of $45,000 of its $75,000 debenture into 1,826,646
shares of the Company’s common stock.
On
May 22, 2018, we issued 1,000,000 shares of common stock to settle $40,000 of our Line of Credit with H. E Capital S.A.
On
May 31, 2018, Peak One exercised its right to convert a total of $15,000 of its $75,000 debenture into 974,025 shares of the Company’s
common stock.
During
the quarter ended September 30, 2018, Peak One exercised its right to convert a total of $15,000 and $4,000 interest to complete
the payment of the $75,000 debenture for 4,431,898 shares of the Company’s common stock.
On
September 17, 2018, Peak One exercised its right to convert a total of $9,000 of its $75,000 ELOC debenture into 2,459,016 shares
of the Company’s common stock.
During
the quarter ended September 30, 2018, Geneva Roth exercised its right to convert $19,610 represented by a total of 18,500 of principal
of the 85,800 shares of Series B Convertible Preferred Stock of the Company it purchased on March 13, 2018 and $1,110 in accrued
dividend for 3,835,417 shares of the Company’s common stock.
Additional
Paid-In Capital
On
March 27, 2018, certain officer and directors of the Company forgave $1,684,711 of accrued salaries which were recorded as a capital
contribution.
Warrants
As
of September 30, 2018, we had 24,358,342 common stock warrants outstanding which have a weighted average exercise price of $0.10
and weighted average remaining years of 2.21 years.
Note
11 Related Party Transactions
We
owed our CEO $6,545 in accounts payable for the nine months ended September 30, 2018. On December 31, 2017 we owed our CEO $25,720
in accounts payable and the Company repaid $19,175 during the nine months ended September 30, 2018.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
12 Subsequent Events
On
October 1, 2018, Geneva Roth Remark Holdings, Inc. converted $576 of accrued dividend and 9,600 of our Series B Convertible Preferred
Stock it was holding for 2,422,857 shares of our common stock.
On
October 8, 2018, Geneva Roth Remark Holdings, Inc. converted $480 of accrued dividend and 8,000 of our Series B Convertible Preferred
Stock it was holding for 2,422,857 shares of our common stock.
On
October 10, 2018, the Company held its meeting with shareholders concerning its Proxy Statement requesting shareholders’
approval to extend the authorized common shares of the Company from 250,000,000 common shares authorized to 750,000,000 common
shares authorized. The Proxy Statement was approved by the shareholders and the Certificate of Amendment was stamped approved
by the state of Delaware on October 12, 2018.
On
October 26, 2018, the Company issued 47,300 shares of our Series B Convertible Preferred Stock for $40,000 and an OID in the amount
of $7,300. Please refer to the first paragraph of Note 9 for the terms of these Preferred shares.
On
October 29, 2018, Geneva Roth Remark Holdings, Inc. converted $468 of accrued dividend and 7,800 of our Series B Convertible Preferred
Stock it was holding for 2,851,034 shares of our common stock.
On
November 7, 2018, Geneva Roth Remark Holdings, Inc. converted $477 of accrued dividend and 7,950 of our Series B Convertible Preferred
Stock it was holding for 3,121,111 shares of our common stock.