SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d )
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2013
COMMISSION FILE NO.: 0-33513
| GS ENVIROSERVICES, INC. | ||
| Exact name of registrant as specified in its charter) | ||
| Delaware | 20-8563731 | |
| (State of other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) | |
| 411 Hackensack Ave., Hackensack, NJ | 07601 | |
| (Address of principal executive offices) | (Zip Code) | |
| (201) 646-1000 | ||
(Registrant’s telephone number including area code ) | ||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | X | No | ||
| Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the prior 12 months (or for such shorter period that the registrant was required to submit and post such files). | Yes | X | No | ||
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. | |||||
| Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer[ ] Smaller reporting company [ X ] | |||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | No | X | ||
| As of November 19, 2013 there were 377,326,779 shares of common stock outstanding. |
GS ENVIROSERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2013
TABLE OF CONTENTS
| Page No. | ||
| Part I | Financial Information | |
| Item 1. | Financial Statements (unaudited) | 2 |
| Condensed Balance Sheets – September 30, 2013 (unaudited) and December 31, 2012 | 2 | |
| Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2013 (unaudited) and 2012 (unaudited) | 3 | |
| Statements of Cash Flows for the Nine Months Ended September 30, 2013 (unaudited) and 2012 (unaudited) | 4 | |
| Notes to Condensed Financial Statements | 5 | |
| Item 2. | Management’s Discussion and Analysis | 11 |
| Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 12 |
| Item 4. | Controls and Procedures | 12 |
| Part II | Other Information | |
| Item 1. | Legal Proceedings | 13 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 13 |
| Item 3. | Defaults Upon Senior Securities | 14 |
| Item 4. | Mine Safety Disclosures | 14 |
| Item 5. | Other Information | 14 |
| Item 6. | Exhibits | 14 |
1
PART I – FINANCIAL INFORMATION
GS ENVIROSERVICES, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2013 (UNAUDITED)
AND DECEMBER 31, 2012
| ASSETS: | 9/30/2013 | 12/31/2012 | ||||||
| Current assets: | ||||||||
| Cash | $ | -- | $ | 2.048 | ||||
| Interest receivable - affiliate | 9,718 | -- | ||||||
| Total current assets | 9,718 | 2,048 | ||||||
| Intangible asset, net of accumulated amortization of $1,194 and $694, respectively | 1,556 | 2,306 | ||||||
| TOTAL ASSETS | 11,274 | 4,354 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| Current liabilities: | ||||||||
| Cash overdraft | 8,802 | -- | ||||||
| Convertible debenture, net of discount of $0 and $136,535, respectively | 159,000 | 22,465 | ||||||
| Accounts payable | 79,606 | 18,243 | ||||||
| Accrued expenses | 338,202 | 149,159 | ||||||
| Convertible note, net of discount of $14,444 and $0, respectively | 18,056 | -- | ||||||
| Liability to be settled in stock | 10,000 | 10,000 | ||||||
| Liability for derivative conversion feature – convertible debenture | 559,635 | 497,111 | ||||||
| Liability for derivative conversion feature – convertible note | 33,415 | -- | ||||||
| Due to affiliates | 25,261 | 76,138 | ||||||
| Total current liabilities | 1,231,977 | 773,116 | ||||||
| Total liabilities | 1,231,977 | 773,116 | ||||||
| Stockholders’ equity (deficit): | ||||||||
| Common stock, $.0001 par value, 10,000,000,000 shares authorized,110,926,954 and 72,605,054 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively | 20,236 | 16,404 | ||||||
| Treasury stock, 99,394,946 shares at cost | (578,008 | ) | (578,008 | ) | ||||
| Additional paid-in capital | 6,523,511 | 6,214,134 | ||||||
| Common stock subscribed | 10,000 | -- | ||||||
| Note receivable – shareholder | (228,573 | ) | (129,000 | ) | ||||
| Retained deficit | (6,967,869 | ) | (6,292,292 | ) | ||||
| Total stockholders’ equity (deficit) | (1,220,703 | ) | (768,762 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 11,274 | $ | 4,354 | ||||
The notes to the Condensed Financial Statements are an integral part of these statements.
2
GS ENVIROSERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 9/30/2013 | 9/30/2012 | 9/30/2013 | 9/30/2012 | |||||||||||||
| Revenues | $ | 100 | $ | -- | $ | 100 | $ | -- | ||||||||
| Cost of revenues | -- | -- | -- | -- | ||||||||||||
| Gross profit- | 100 | -- | 100 | -- | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 185,687 | 68,788 | 358,012 | 123,987 | ||||||||||||
| Research and development | 26,423 | -- | 80,318 | -- | ||||||||||||
| Total operating expenses | 212,110 | 68,788 | 438,330 | 123,987 | ||||||||||||
| Operating loss | (212,010 | ) | (68,788 | ) | (438,230 | ) | (123,987 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Gain on extinguishment of debt | -- | -- | 18,000 | 75,000 | ||||||||||||
| Cost of conversion feature on convertible note | 9,638 | -- | (6,987 | ) | -- | |||||||||||
| Income (loss) from change in value of conversion feature – convertible debenture | (164,665 | ) | 24,833 | (62,524 | ) | 24,833 | ||||||||||
| Income (loss) from change in value of conversion feature – convertible note | (10,459 | ) | -- | 6,071 | -- | |||||||||||
| Amortization of debt discount | (10,833 | ) | -- | (154,591 | ) | -- | ||||||||||
| Interest income – affiliate | 1,935 | -- | 9,718 | -- | ||||||||||||
| Interest expense | (30,891 | ) | -- | (47,035 | ) | (5,967 | ) | |||||||||
| Total other income (expense), net | (205,275 | ) | 24,833 | (237,347 | ) | 96,866 | ||||||||||
| Loss before provision for income taxes | (417,285 | ) | (43,955 | ) | (675,577 | ) | (30,121 | ) | ||||||||
| Provision for income taxes | -- | -- | -- | -- | ||||||||||||
| Net loss | $ | (417,285 | ) | $ | (43,955 | ) | $ | (675,577 | ) | $ | (30,121 | ) | ||||
| Income (loss) per share | ||||||||||||||||
| Basic income (loss) per share | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Diluted income (loss) per share | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Weighted average shares of common stock outstanding | ||||||||||||||||
| Basic | 107,843,885 | 87,361,300 | 84,617,774 | 63,047,194 | ||||||||||||
| Diluted | 107,843,885 | 87,361,300 | 84,617,774 | 63,047,194 | ||||||||||||
The notes to the Condensed Financial Statements are an integral part of these statements.
3
GS ENVIROSERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 (UNAUDITED)
AND SEPTEMBER 30, 2012 (UNAUDITED)
| 9/30/2013 | 9/30/2012 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (675,577 | ) | $ | (30,121) | |||
| Adjustment to reconcile net income (loss) to net cash used in (provided by) operating activities: | ||||||||
| Gain on extinguishment of debt | (18,000) | (75,000) | ||||||
| Amortization | 155,341 | -- | ||||||
| Loss (income) from conversion features | 56,453 | (24,833) | ||||||
| Cost of conversion feature | 6,987 | -- | ||||||
| Expenses paid directly by shareholder | 31,450 | -- | ||||||
| Stock-based compensation | 85,000 | -- | ||||||
| Interest incurred – affiliate debt exchange | 22,219 | -- | ||||||
| Changes in assets and liabilities: | ||||||||
| Interest receivable - affiliate | (9,718 | ) | -- | |||||
| Bank overdraft | 8,802 | -- | ||||||
| Accounts payable and accrued expenses | 268,405 | 85,399 | ||||||
| Net cash flows used in continuing operations | (68,638 | ) | (44,555 | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from convertible note | 32,500 | (111,015) | ||||||
| Related party advances (repayments) | (5,900) | 44,955 | ||||||
| Proceeds from stock issuances | 39,990 | 111,015 | ||||||
| Net cash provided by financing activities | 66,590 | 44,955 | ||||||
| Increase (decrease) in cash | (2,048 | ) | 400 | |||||
| Cash at beginning of period | 2,048 | -- | ||||||
| Cash at end of period | $ | -- | $ | 400 | ||||
| SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Forgiveness of related party debt | $ | -- | $ | 472,595 | ||||
| Settlement of affiliate balance with common stock and/or warrants | 98,646 | 26,000 | ||||||
| Forgiveness of accrued compensation | -- | 112,500 | ||||||
| Issuance of subscription note receivable for common stock and/or warrants | 99,573 | 225,000 | ||||||
| Repurchase of common stock with convertible debentures/derivate | -- | 338,008 | ||||||
The notes to the Condensed Financial Statements are an integral part of these statements.
4
GS ENVIROSERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| NOTE 1 | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
The Company is a clean energy & sustainability technology, technology project development and media company. Our operations consist of research and development activities involving proprietary technology that we have licensed, as well as green technology acquisition and development and online news & directory publishing in the industry. Our technology development model involves the early-stage development and intellectual property protection of our technologies with a view towards generating revenue through technology licensing of successfully developed clean energy technologies. Our online news business involves publishing research and editorial content relevant to regional green issues, and a directory of green businesses that sell into the target market. Content categories include technology, products, services, politics, etc.
The balance sheet at December 31, 2012 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended December 31, 2012.
GOING CONCERN
The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern. The Company has no established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to raise capital will depend on our success in obtaining financing and our success in developing revenue sources.
| NOTE 2 | CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
BASIC AND DILUTED EARNINGS PER SHARE (“EPS”)
Basic (loss) earnings per share is computed by dividing net income by the weighted average common shares outstanding during a period. Diluted (loss) earnings per share is based on the treasury stock method and includes the effect from potential issuance of common stock assuming the exercise of all stock options. Common share equivalents have been excluded where their inclusion would be anti-dilutive. Potentially future dilutive shares at September 30, 2013 are 41,743,800 shares from the conversions of outstanding common stock warrants, 1,590,000,000 shares (based on conversion price at September 30, 2013) from conversion of the convertible debenture (see Note 3, Convertible Debenture, below), and 1,625,000 shares (based on conversion price at September 30, 2013) from conversions of the convertible promissory note issued on April 29, 2013 (see Note 4, Convertible Promissory Note, below).
EVALUATION OF LONG LIVED ASSETS
Long-lived assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated undiscounted future net cash flows of the related long-lived asset. Acquired intangible assets with finite lives are amortized over the life of the underlying asset.
5
GS ENVIROSERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| NOTE 2 | CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued) |
In October 2012, the Company acquired intangible assets from an individual, including the sandiegolovesgreen.com and americalovesgreen.com domain names, archived website content, and leads and sponsor lists. As consideration for the purchase of these assets, the Company paid $3,000 in cash and 500,000 shares of its common stock. The shares of stock were valued at $0.02 per share, which was the market price of its common stock on the commitment date, and had not been issued as of September 30, 2013. As additional contingent consideration for the assets, the Company shall pay 7% of the gross profit earned from the operation of the website under the domain name sandiegolovesgreen.com within 30 days of each calendar quarter. The Company allocated value to the domain names at $3,000 and to the software content at $10,000. During 2012, the Company determined that the website content would require substantial modification and upgrade to be operational, and therefore recognized an impairment of $10,000 in operating expenses on the Statement of Operations for the year ended 2012. The domain names were estimated to have a three year life, and are being amortized over that period.
The Company’s intangible asset consisted of the following:
September 30, 2013 | ||||
| Domain names | $ | 3,000 | ||
| Less accumulated amortization | (1,444 | ) | ||
| Total | $ | 1,556 | ||
Amortization expense was $250 and $0 for the three months ended September 30, 2013 and 2012, respectively, and $750 and $0 for the nine months ended September 30, 2013 and 2012, respectively.
FAIR VALUE MEASUREMENTS AND DISCLOSURES
The Company adopted ASC 820, Fair Value Measurements and Disclosures. This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In January 2010, the FASB issued an update to ASC 820, which requires additional disclosures about inputs into valuation techniques, disclosures about significant transfers into or out of Levels 1 and 2, and disaggregation of purchases, sales, issuances, and settlements in the Level 3 rollforward disclosure. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
| Level 1 | quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives |
| Level 2 | inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges |
| Level 3 | unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models |
The following table presents the embedded derivative liabilities, the Company’s only financial asset or liability measured and recorded at fair value on the Company’s Balance Sheet on a recurring basis and its level within the fair value hierarchy during the three months ended September 30, 2013:
| Embedded conversion liabilities as of September 30, 2013: | ||||
| Level 1 | $ | -- | ||
| Level 2 | -- | |||
| Level 3 | 593,050 | |||
| Total | $ | 593,050 | ||
6
GS ENVIROSERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| NOTE 2 | CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued) |
The following table reconciles, for the nine months ended September 30, 2013, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:
| Balance of embedded derivatives at December 31, 2012 | 497,111 | |||
| Recognition of new conversion feature at fair value | 39,486 | |||
| Changes in fair value during period | 56,453 | |||
| Balance at September 30, 2013 | $ | 593,050 |
| NOTE 3 | CONVERTIBLE DEBENTURE |
During the year ended December 31, 2011, the Company was party to a 2009 convertible debenture (the “Exchange Debenture”) with a former chief executive officer in the original principal amount of $240,000. Interest was payable under the Exchange Debenture at 12% per annum in cash or in shares of Company common stock. The holder could convert the principal amount and accrued interest due under the Exchange Debenture into common stock at a conversion price equal to 90% of the lowest closing market price during the 20 trading days preceding conversion. The Company determined that the conversion feature of the Exchange Debenture met the criteria of Financial Accounting Standards Codification (“ASC”) 480-10-25-14 to be recorded as a liability as it could result in the note being converted into a variable number of shares. At the commitment date, the Company determined the value of the Exchange Debenture to be an aggregate $264,827, which represented the face value of $240,000 plus the present value of the liability for the conversion features of $24,827. The Company recorded the $24,827 to interest expense at the commitment dates of the Exchange Debenture. The difference between the fair value of the conversion feature and the present value was accreted through interest expense. Effective April 14, 2012, the Company issued 7,968,540 restricted shares of Company common stock to the holder of the 2009 convertible debenture in full satisfaction of any and all amounts due from the Company to the holder.
Effective July 31, 2012, Viridis Capital, LLC (“Viridis”), an entity owned by the individual who was our chief executive officer at that time, entered into an agreement with 11235 Factor Fund, LLC (“Factor”) pursuant to which Factor purchased 91,426,406 shares of Company common stock. Factor then assigned 100% of its interest in those shares to the Company in exchange for $275,000 in convertible debentures (the “Factor Debenture”). Factor was 100% owned by Viridis at the time of this transaction but was beneficially owned by an unaffiliated third party at September 30, 2013.
The Factor Debenture bears interest at the rate of 20% per annum and permitted conversion into the Company’s common stock. The Company determined that the conversion feature of the Factor Debenture met the criteria of ASC 480-10-25-14 to be recorded as a liability as it could result in the note being converted into a variable number of shares. At the commitment date, the Company determined the value of the Factor Debenture to be an aggregate of $338,008, which represented the face value of $275,000 plus the present value of the liability for the conversion features of $63,008. On December 15, 2012, the terms for the conversion price underlying the Factor Debenture were automatically modified due to the fact that the Factor Debenture was not fully paid on or before that date. The modified conversion price equals the lesser of (1) $0.01 per share, (2) the lowest price per share paid by any purchaser of Company securities, or (3) 50% of the lowest volume weighted average closing bid price (“VWAP”) for the Company common stock for the 90 trading days preceding conversion; provided, however, that Factor cannot convert the Factor Debenture into shares that would result in the holder or its affiliates owning in excess of 4.99% of the Company’s outstanding common shares. The Company determined that the modified conversion feature of the Factor Debenture met the criteria for recognition under ASC 815-15, Embedded Derivatives, whereby the fair value of the embedded derivative was bifurcated from the host contract. The fair value of the derivative liability was determined utilizing a probability-weighted Black-Scholes valuation model and the following assumptions: expected life – six months; volatility (669%); risk-free rate (0.9%); dividends (none). The Company estimated the probability of the lowest conversion price to be at 85% for the first alternative conversion price above, 10% for second alternative conversion price, and 5% for third alternative conversion price, and determined the initial fair value of the derivative liability to be $514,283, with $159,000 recognized as a debt discount. In the event of default that is not cured, the conversion price of the Factor Debenture would be automatically reduced to $0.0001 per share. The maturity date of the Factor Debenture was June 30, 2013 (refer to Item 3 below for further discussion). If the debenture is not fully paid by the maturity date, the conversion price would be automatically and permanently amended to the lesser of $0.0001 per share or 50% of the VWAP for the 90 days preceding conversion. The Company and the Company’s majority shareholder, GreenSource Corporation, have granted Factor a first priority security interest in and to all of the Company’s and GreenSource’s assets, including 65,000,000 Company common shares beneficially owned by GreenSource, to secure the Company’s repayment and other obligations under the Factor Debenture and the documents executed in connection therewith. The Company and Factor entered into a forbearance agreement in December 2012 in respect of a stated event of default under the Factor Debenture, and pursuant to which the Company agreed to issue Factor 7,283,787 common shares at $0.0001 per share.
7
GS ENVIROSERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| NOTE 3 | CONVERTIBLE DEBENTURE (continued) |
On April 14, 2013, the Company and Factor entered into an amended forbearance agreement in respect of a stated event of default under certain debentures issued by the Company to Factor, and pursuant to which the Company and Factor agreed (a) to amend the securities purchase agreement executed by the Company in connection with the debentures issued to Factor to eliminate a requirement to issue shares to the Company's former chief executive officer; (b) to extend the time for the Company to comply with its December 2012 forbearance agreement with Factor until April 30, 2013; and (c), to give Factor the right to convert an $1,800 portion of the interest due to Factor at a fixed rate of $0.0001 in accordance with the default provisions of the debentures issued to Factor. The April 14, 2013 amended forbearance agreement also provided for the forfeiture and waiver of the Company's former chief executive officer's right to receive any and all compensation for services rendered prior to December 31, 2012. On May 14, 2013, the Company and Factor entered into a letter agreement pursuant to which Factor agreed to extend the time for the Company to comply with its December 2012 forbearance agreement with Factor until May 31, 2013.
Under the terms of the Factor Debenture, since the debenture was not fully paid by the maturity date, the conversion price was automatically and permanently amended to the lesser of $0.0001 per share or 50% of the VWAP for the 90 days preceding conversion. On September 9, 2013 Factor declared the Company in default under the terms of the Factor Debenture. The Company recognized a loss of $164,665 and $62,524, respectively, from the increase in value of the underlying conversion feature for the three and nine months ended September 30, 2013. The increase in value was derived through an estimate of the probability that the Factor Debenture may be converted at par value, pursuant to the terms of the Factor Debenture, and was capped at an estimated maximum valuation based on the then current market capitalization assuming an estimated value per common share of $0.005.
The value of the Factor Debenture at September 30, 2013 was $718,635, which represented the face value of $159,000 plus the present value of the liability for the conversion features of $559,635.
On October 29, 2013 the Company, Factor and GreenSource Corporation entered into a forbearance agreement pursuant to which Factor converted $25,000 of accrued interest into 250,000,000 shares of common stock. In connection with the October 2013 forbearance agreement, the Company’s board of directors resigned and were replaced by a nominee of Factor, who also now serves as the sole officer of the Company.
| NOTE 4 | CONVERTIBLE PROMISSORY NOTE |
On April 29, 2013, the Company entered into a convertible promissory note (the “Note”) with Asher Enterprises (“Holder”) for $32,500 due on January 31, 2014 (“maturity date”). The Note accrues interest of 8% per annum through the maturity date. If the Note is not paid in full by the maturity date, the interest rate will increase to 22% per annum from the maturity date. The Holder of the Note shall have the right, at any time during the period beginning on the date which is one hundred eighty days from the date of the Note, to convert all or any part of the outstanding and unpaid principal amount into fully paid and non-assessable shares of Common Stock at a conversion price defined as 50% of the average of the lowest three trading prices for the Common Stock during the fifteen trading day period ending on the trading day prior to the conversion date. In the event the Company (a) makes a public announcement that it intends to consolidate or merge with any other corporation or sell or transfer all or substantially all of the assets of the Company or (b) any person, group or entity publicly announces a tender offer to purchase 50% or more of the Company’s Common Stock, then the conversion price shall be equal to the lower of the conversion price which would have been applicable for a conversion occurring on the announcement date and the conversion price that would otherwise be in effect. The conversion feature has been accounted for at fair value as a derivative in accordance with ASC 815 which requires it to be accounted for a liability. The fair value of the derivative liability was determined utilizing a Black-Scholes valuation model and the following assumptions: expected life – ten months; volatility (184%); risk-free rate (0.12%); dividends (none). The debt discount of $32,500 was recorded as of the agreement date and is being amortized over the life of the agreement. The amortization expense recorded for the three and nine months ended September 30, 2013 relating to this convertible note was $10,834 and $18,056, respectively.
8
GS ENVIROSERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| NOTE 5 | COMMITMENTS AND CONTINGENCIES |
Effective September 30, 2012, the Company entered into a license agreement with FLUX Photon Corporation (“Licensor”), pursuant to which Licensor granted the Company a non-exclusive license to use and practice the Licensor’s technologies in residential and commercial roof-top applications in North America. The license agreement requires the Company to build a commercial prototype based on the licensed technologies on or before June 30, 2014, and to commence commercial sales with the licensed technologies on or before December 31, 2015. The license agreement further provides for a royalty fee of 10% of the Company’s gross sales involving the licensed technologies, and requires the Company to pay Licensor a minimum of $25,000 in cash per calendar quarter commencing January 1, 2013 for research and development services conducted by Licensor’s staff (which amount is payable to Licensor, at its sole option, in the form of Company common stock or other securities). The Company accrued $25,000 and $75,000, respectively, in research costs due to the Licensor for the three and nine months ended September 30, 2013. The Company and Licensor have entered into discussions regarding execution of an amended license agreement to provide for exclusivity and an expansion of the licensed rights.
In October 2012, the Company acquired intangible assets from an individual, including the sandiegolovesgreen.com and americalovesgreen.com domain names, archived website content, and leads and sponsor lists. As consideration for the purchase of these assets, the Company paid $3,000 in cash and 500,000 shares of its common stock. The shares of stock were valued at $0.02 per share, which was the market price of its common stock on the commitment date. As additional contingent consideration for the assets, the Company shall pay 7% of the gross profit earned from the operation of the website under the domain name sandiegolovesgreen.com within 30 days of each calendar quarter. The Company allocated value to the domain names at $3,000 and to the software content at $10,000. During 2012, the Company determined that the website content would require substantial modification and upgrade to be operational, and therefore recognized an impairment of $10,000 in operating expenses on the Statement of Operations for the year ended 2012. The domain names were estimated to have a three year life, and are being amortized over that period. As a part of this transaction, the Company entered into a consulting agreement with the former owner of the websites acquired. The agreement is for $2,000 per month, has no set term and may be cancelled by either party with three weeks’ notice. The consulting agreement was cancelled by the Company in August 2013.
| NOTE 6 | RELATED PARTY TRANSACTIONS |
On April 13, 2012, the Company’s former chairman, Kevin Kreisler, provided $26,000 in cash to the Company for working capital purposes. Effective April 16, 2012, the Company and Mr. Kreisler entered into an agreement pursuant to which Mr. Kreisler agreed to eliminate and waive his right to receive 194,118 shares of the Company’s Series A Preferred Stock (“Series A Shares”); to waive $112,500 in accrued compensation payable for services rendered as of April 16, 2012; and, to contribute 1,000,000 Series A Shares beneficially owned by Mr. Kreisler and the $26,000 provided to the Company by Mr. Kreisler on April 13, 2012 in exchange for 83,457,866 restricted Company common shares. Effective April 16, 2012, the Company and its former Controller entered into an agreement pursuant to which the controller agreed to waive all accrued compensation due from the Company in excess of $12,500, which amount shall remain due and payable by the Company.
Effective July 31, 2012, Viridis Capital, LLC (“Viridis”), an entity owned by our former chief executive officer, entered into an agreement with 11235 Factor Fund, LLC (“Factor”) pursuant to which Factor agreed to purchase 91,426,406 shares of Company common stock in exchange for securities held in an unaffiliated entity. Factor then assigned 100% of its interest in those shares to the Company in exchange for $275,000 in convertible debentures (see Note 3, Convertible Debenture, above). Factor was 100% owned by Viridis at the time of this transaction but was beneficially owned by an unaffiliated third party at December 31, 2012. On July 31, 2012, Kevin Kreisler, the then-current sole member of our Board of Directors, elected Tad Simmons, the chief executive officer and majority shareholder of GreenSource Corporation (“GreenSource”), to also serve as a member of the Board. The Board then elected Mr. Simmons to serve as the chief executive officer and chief financial officer for the Company effective as of August 17, 2012. Mr. Kreisler simultaneously submitted his resignation from the Board.
On August 17, 2012, the Company entered into a securities purchase agreement with GreenSource pursuant to which the Company agreed to sell 65,000,000 restricted shares of its common stock to GreenSource in exchange for $250,000, payable in the form of $25,000 in cash and a $225,000 promissory note. The promissory note is due in full on or before December 15, 2012 and bears interest at six percent (6%) per annum. Had the note been paid in full on or before September 30, 2012, interest charges would have been waived. GreenSource had the option to prepay the note in full for $200,000 if paid in full on or before October 30, 2012.
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GS ENVIROSERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| NOTE 6 | RELATED PARTY TRANSACTIONS (continued) |
On April 14, 2013, the Company and Factor entered into an amended forbearance agreement in respect of a stated event of default under certain debentures issued by the Company to Factor, and pursuant to which the Company and Factor agreed (a) to amend the securities purchase agreement executed by the Company in connection with the debentures issued to Factor to eliminate a requirement to issue shares to the Company’s former chief executive officer; (b) to extend the time for the Company to comply with its December 2012 forbearance agreement with Factor until April 30, 2013; and (c), to give Factor the right to convert an $1,800 portion of the interest due to Factor at a fixed rate of $0.0001 in accordance with the default provisions of the debentures issued to Factor. The April 14, 2013, amended forbearance agreement also provided for the forfeiture and waiver of the Company’s former chief executive officer’s right to receive any and all compensation for services rendered prior to December 31, 2012. In connection with the amended forbearance agreement, the company shall file and make effective a registration statement for 5,000,000 common shares on or before September 30, 2013 which shares shall be issued to James Sonageri c/o Sonageri & Fallon, LLC, for services rendered prior to August 17, 2012. On May 14, 2013, the Company and Factor entered into a letter agreement pursuant to which Factor agreed to extend the time for the Company to comply with its December 2012 forbearance agreement with Factor until May 31, 2013.
On August 12, 2013 the Company issued a total of 11,000,000 shares of common stock to the five members of its board of directors. The shares were valued at $.005 per share (a total of $55,000) which was determined to be the fair value of the common stock on that date.
On September 6, 2013 the Company sold 19,821,900 shares of common stock to GreenSource Corporation, which was its majority shareholder at that time. The shares were issued in satisfaction of $198,219 owed by the Company to GreenSource Corporation.
On October 29, 2013 the Company and Factor entered into a letter agreement pursuant to which Factor agreed to forbear from exercising its rights arising as a result of continuing defaults under the prior agreements. Pursuant to the forbearance agreement, Factor converted $25,000 of accrued interest into 250,000,000 shares of common stock. In addition, the Company’s board of directors resigned and were replaced by Jeff Hickman, a nominee of Factor, who also now serves as the sole officer of the Company.
| NOTE 7 | COMMON STOCK ISSUANCES |
During May and June 2013 the Company sold a total of 1,000,000 shares of common stock and 1,000,000 common stock purchase warrants to three unrelated individuals in a private offering. The purchase price for each share with accompanying warrant was $0.02. The warrants are exercisable at $0.12 per common share and shall become effective six months after, and shall remain effective three years after the date of each subscription agreement.
In July 2013, the Company received a subscription for 500,000 shares of common stock and 500,000 common stock purchase warrants from an individual. The proceeds of this subscription of $10,000 have been classified as common stock subscribed as of September 30, 2013, as the shares have not yet been issued.
During August 2013 the Company sold a total of 500,000 shares of common stock and 500,000 common stock purchase warrants to one individual in a private offering. The purchase price for each share with accompanying warrant was $0.02, i.e. a total purchase price of $10,000. The warrants are exercisable at $0.12 per common share and shall become effective six months after, and shall remain effective three years after the date of each subscription agreement.
On August 12, 2013 the Company issued a total of 11,000,000 shares of common stock to the five members of its board of directors. The shares were valued at $.005 per share (a total of $55,000) which the Board estimated to be the fair value of the common stock on that date.
On September 6, 2013, under certain subscription and exchange agreements between the Company, GreenSource Corporation, and third party subscribers, the Company sold 19,821,900 units at $0.01 per unit, with each unit consisting of one share of common stock and one each of Series A and Series B warrants. The Series A warrants may be exercised by the third party subscribers at $0.02 per share for three years from date of issuance, and the Series B warrants may be exercised by the third party subscribers at $0.04 per share for the three years from date of issuance. GreenSource Corporation was the Company’s majority shareholder at that time. The shares and warrants were issued in satisfaction of $98,646 owed by the Company to GreenSource Corporation, with the remaining subscription proceeds receivable of $99,573 added to the Note Receivable-Shareholder due from GreenSource Corporation.
On September 6, 2013 the Company issued a total of 6,000,000 shares of common stock to three individuals who were serving as advisors to the board of directors. The shares were valued at $.005 per share (a total of $30,000) which the Board estimated to be the fair value of the common stock on that date.
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| ITEM 2 | MANAGEMENT'S DISCUSSION AND ANALYSIS |
FORWARD LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking statements, which are generally identifiable by use of the words "believes," "expects," "intends," "anticipates," "plans to," "estimates," "projects," or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Section 1A: “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in other documents GS EnviroServices, Inc. files from time to time with the Securities and Exchange Commission (the "SEC").
GS EnviroServices, Inc. (“we”, “our”, “us”, “EnviroServices”, or the “Company”) is a clean energy technology and sustainable project development company. Our operations consist of research and development activities involving proprietary technology that we have licensed, as well as sustainable project acquisition and development. Our technology development model involves the early-stage development and intellectual property protection of our technologies with a view towards generating revenue through technology licensing of successfully developed clean energy technologies.
Our research and development activities primarily involved novel nanomaterials for use in renewable energy production applications, including catalytic reduction of carbon dioxide. In such an application, our technology is intended to emulate photosynthesis to convert the energy in sunlight, along with water and carbon dioxide, into stored energy in the form of methane or synthesis gas. This application was successfully demonstrated at low efficiencies in prior bench testing. Our focus during 2012 and 2013 has been to develop this technology further to increase conversion efficiencies for use in existing industrial processes that simultaneously generate waste heat, carbon dioxide and by-products containing hydrogen. However, this technology has additionally recently demonstrated strong potential for use in photovoltaic applications. We believe that, in either application (catalytic or photovoltaic), this technology has the capability of achieving commercially attractive efficiencies based on the development work completed to date. We believe that the technology can be cost-effectively scaled for use in residential and commercial photovoltaic applications if we can demonstrate a photoconversion efficiency of 10% or greater. Our primary research objective for 2013 is to demonstrate the capabilities of this technology in selected applications.
Our project development activities during 2012 and 2013 include evaluation of several projects that meet our sustainability objectives, including projects that recycle tires and other waste products into carbon-neutral products and energy, projects involving the production of agriproducts from organic waste, industrial efficiency and enhanced green construction projects, and projects which capitalize on the favorable carbon credits and other attributes including renewable energy credits (RECs) and energy efficiency credits (EECs). Our sustainability objectives additionally involve improving outreach and education, including through our recently acquired www.sandiegolovesgreen.com sustainability news and information portal.
During 2013, the Company plans to seek capital, management and other resources for further development of its technologies and planned future projects, with a primary goal of completing pilot-scale trials involving the Company’s technology, either alone or with a suitable early-adopter technology partner. The Company also plans to continue to develop its online media business and will seek possible acquisition targets and agreements that bring strategic assets, cash flows or management to the Company in ways that defray the Company’s financial and technology risk.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The financial statements included herein have been prepared by the Company, in accordance with Generally Accepted Accounting Principles. This requires the Company’s management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amounts of certain revenues and expenses during the reporting period. In the opinion of management, all adjustments which, except as described elsewhere herein are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Actual results could differ materially based on any changes in the estimates and assumptions that the Company uses in the preparation of its financial statements and any changes in the Company’s future operational plans.
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RESULTS OF OPERATIONS
General and administrative (“G&A”) expenses for the nine months ended September 30, 2013 were $358,012 as compared to $123,987 for the corresponding period in 2012. The Company also incurred $80,318 in research and development costs during the nine months ended September 30, 2013. These costs were incurred in connection with the Company’s ongoing technology development efforts. Our net loss for the nine months ended September 30, 2013 was $675,577 compared with net loss of $30,121 for the nine months ended September 30, 2012.
The Company’s general and administrative expenses mostly included salaries for our two executive officers and costs incurred in connection with the Company’s newly-acquired sustainability news and information portal (www.sandiegolovesgreen.com). Certain expenses were incurred under the support provisions of the Company’s license agreement with the licensor of the Company’s technology; and pursuant to which the Company has the ability to utilize the licensor’s research staff, laboratory supplies and infrastructure, and testing equipment on a time and materials basis. The costs incurred during the nine months ended September 30, 2013 would have been higher were it not for the support provisions of our license agreement, which allow the Company to avoid having to incur the additional general and administrative costs required to operate and maintain a development laboratory and full-time technical staff. These costs can be expected to increase during 2013 as qualified samples are fabricated for efficiency testing, additional equipment needed for such testing is acquired, and efficiency trials are conducted.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s operating activities have been subsidized partially by equity-based compensation commitments as well as working capital advances received from related parties from time to time. Accounts payable and accrued expenses totaled $417,808 and $167,402 at September 30, 2013 and December 31, 2012, respectively. The Company had a negative working capital position of $1,222,259 as of September 30, 2013 as compared to a negative working capital position of $771,068 as of December 31, 2012.
The Company will not be able to implement its business plan unless it obtains capital. For our primary energy technology effort, we estimate that our ongoing research and development activities will require investments of at least $250,000 during 2013 for performance trials using existing prototypes, and as much as $1,000,000 to construct a commercial pilot prototype if we can demonstrate a photoconversion efficiency of 10% or greater. We believe that the $250,000 budget for performance trials is realistic given the research arrangement with the licensor of the Company's technologies, and since the licensor either owns or has access to all of the fabrication and testing equipment necessary to determine if we are able to achieve a photoconversion efficiency of 10% or greater. We additionally estimate that we will need a minimum of an additional $100,000 for marketing and advertising costs to support the growth and development of our newly-acquired sustainability news and information portal (www.sandiegolovesgreen.com). The Company currently has no commitment for financing.
The accompanying financial statements referred to above have been prepared assuming that the company will continue as a going concern. The Company has no established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to raise capital will depend on our success in obtaining financing and our success in developing revenue sources.
| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
| ITEM 4 | CONTROLS AND PROCEDURES |
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer participated in and supervised the evaluation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer, to allow timely decisions regarding required disclosure.
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In the course of making our assessment of the effectiveness of our disclosure controls and procedures, we identified a material weakness. This material weakness consisted of inadequate staffing and supervision within the bookkeeping and accounting operations of our company. The lack of employees prevents us from segregating disclosure duties. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. Based on the results of this assessment, our management concluded that because of the above condition, our disclosure controls and procedures were not effective as of the end of the period covered by this report.
There have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
| ITEM 1 | LEGAL PROCEEDINGS |
None.
| ITEM 1A | RISK FACTORS |
There has been no material change in the risk factors affecting the Company that were set forth in Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2012.
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| (a) | Unregistered sales of equity securities |
During August 2013 the Company sold 500,000 shares of common stock and 500,000 common stock purchase warrants to one individual in a private offering. The purchase price for each share with accompanying warrant was $0.02. The shares were sold to an individual who is an accredited investor and was purchasing for his own account. The offering, therefore, was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) and Section 4(5) of the Securities Act. There was no underwriter.
On August 12, 2013 the Company issued a total of 11,000,000 shares of common stock to the five members of its board of directors. The shares were valued at $.005 per share (a total of $55,000) which was determined to be the fair value of the common stock on that date.
On September 6, 2013 the Company sold 19,821,900 shares of common stock (with warrants) to GreenSource Corporation, which was its majority shareholder at that time. The shares were sold under subscription and exchange agreements at $0.01 per unit, with $98,646 offset against amounts due to GreenSource Corporation and the balance of $99,573 added to Notes Receivable – Shareholder.
On September 6, 2013 the Company issued a total of 6,000,000 shares of common stock to three individuals who were serving as advisors to the board of directors. The shares were valued at $.005 per share (a total of $30,000) which was determined to be the fair value of the common stock on that date.
In each of the foregoing transactions, the shares were issued to individuals who were accredited investors and were acquiring the shares for their own accounts. The offerings, therefore, were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) and Section 4(5) of the Securities Act. There was no underwriter.
(c) Purchases of equity securities
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the third quarter of fiscal 2013.
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| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4 | MINE SAFETY DISCLOSURES |
Not Applicable.
| ITEM 5 | OTHER INFORMATION |
None.
| ITEM 6 | EXHIBITS |
The following are exhibits filed as part of the Company’s Form 10-Q for the quarter ended September 30, 2013:
INDEX TO EXHIBITS
| Exhibit Number | Description |
| 31.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as incorporated herein by reference |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002 as incorporated herein by reference |
| 101.INS | XBRL Instance* |
| 101.SCH | XBRL Schema* |
| 101.CAL | XBRL Calculation* |
| 101.DEF | XBRL Definition* |
| 101.LAB | XBRL Label* |
| 101.PRE | XBRL Presentation* |
* The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated.
GS ENVIROSERVICES, INC.
| By: | /s/ | JEFFREY HICKMAN |
| JEFFREY HICKMAN | ||
| Chief Executive Officer, Chief Financial and Accounting Officer | ||
| Date: | December 19, 2013 |
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