Note 1 – The Company
The Company – Green Planet Group, Inc. (which is referred to herein together with its subsidiaries as “Green Planet,” “GPG,” “the Company,” “we”, “us” or “our”), formerly EMTA Holdings, Inc. and before that Omni Alliance Group, Inc., was organized and incorporated in the state of Nevada. On March 31, 2006, we changed our name from Omni Alliance Group, Inc. to EMTA Holdings, Inc., and on May 22, 2009 we changed the name through merger with a wholly owned subsidiary to Green Planet Group, Inc. Our common stock now trades on the OTC-Bulletin Board market under the trading symbol “GNPG”.
Nature of the Business – We operate in two industry segments: 1) a specialty energy conservation chemical company that produces and supplies technologies to the global transportation, industrial and consumer markets and 2) an employee staffing business which primarily provides staffing to the light industrial market. The energy technologies include gasoline, oil and diesel additives for engines and other transportation-related fluids and industrial lubricants.
Presentation of Interim Statements – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q for small business filers. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Form 10-K/A for the years ended March 31, 2009 and 2008. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
Restatement of Prior Financial Statements – See Note 18 - Restatement of Prior Financial Statements.
Going Concern Uncertainty
The Company’s continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis.
The Company anticipates that future sales of equity and debt securities to fully implement its business objectives and to raise working capital to support and preserve the integrity of the corporate entity will be necessary. There is no assurance that the Company will be able to obtain additional funding through the sales of additional equity or debt securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
In addition, the Company has $6,636,881 of outstanding payroll tax liabilities due the Internal Revenue Service and various states. The Company anticipates negotiating a payment plan with these agencies, but there is no assurance that the Company will be successful. In the event that the Company is unable to negotiate acceptable payment plans, the Company’s operations could be negatively impacted including ceasing operations in certain states and jurisdictions.
If no additional capital is received to successfully implement the Company’s business plan, the Company will be forced to rely on existing cash in the bank and upon additional funds which may or may not be loaned by management and/or significant stockholders to preserve the integrity of the corporate entity at this time. In the event, the Company is unable to acquire sufficient capital, the Company’s ongoing operations would be negatively impacted.
It is the intent of management and significant stockholders to provide sufficient working capital necessary to support and preserve the integrity of the corporate entity. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such advances or loans exist. There is no legal obligation for either management or significant stockholders to provide additional future funding.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach our goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement its objectives.
Note 2 – Significant Accounting Policies
Over the years, the Financial Accounting Standards Board (“FASB”) and other designated GAAP-setting bodies, have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of Position, etc. The FASB finalized the Codification for periods ending after September 15, 2009. Prior FASB standards are no longer being issued in the previous format and are included herein for the convenience of the reader. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification , sometimes referred to as the “Codification” or “ASC”.
Consolidation – The consolidated financial statements include the accounts of Green Planet Group, Inc. and its consolidated subsidiaries and wholly-owned limited liability company. All significant intercompany transactions and profits have been eliminated.
Use of Estimates – The preparation of financial statements in conformity with United States generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.
Cash Equivalents – The Company invests its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the Company and are comprised of investments having maturities of three months or less when purchased.
Allowance for Doubtful Accounts – The Company provides an allowance for doubtful accounts when management estimates collectibility to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience. The allowance for doubtful accounts was $1,553,916 and $806,846 at December 31, 2009 and March 31, 2009, respectively.
Inventories – Inventories are stated at the lower of cost or market value. Cost of inventories is determined by the first-in, first-out (FIFO) method. Obsolete or abandoned inventories are charged to operations in the period that it is determined that the items are not longer viable sales products.
Property, Plant and Equipment – Property, plant and equipment are carried at cost. Repair and maintenance costs are charged against operations while renewals and betterments are capitalized as additions to the related assets. The Company depreciates it assets on a straight line basis. Estimated useful lives for the equipment range from 3 to 10 years and the buildings are being depreciated over 31 years.
Intangible Assets – Intangible assets consist of patents, trademarks, government approvals and customer relationships (including client contracts). For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the estimated useful lives of seven years for the EPA license and five years for the customer relationships. Costs incurred in connection with patent, trademark applications and approvals from governmental agencies such as the Environmental Protection Agency, including legal fees, patent and trademark fees and specific testing costs, are expensed as incurred. Purchased intangible costs of completed developments are capitalized and amortized over the estimated economic life of the asset, generally seven years, commencing on the acquisition date. Costs subsequent to grant date are expensed as incurred.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement purposes. The Company performs an annual impairment test each year and in the event that facts and circumstances indicate that goodwill and other identifiable intangible assets may be impaired, an interim impairment test would be required. The Company’s testing approach will utilize a discounted cash flow analysis to determine the fair value of its reporting units for comparison to their corresponding book values. If the book value exceeds the estimated fair value for a reporting unit, a potential impairment is indicated ASC 350-10 and ASC 360-10 prescribes the approach for determining the impairment amount, if any.
Impairment of Long-Lived Assets – In accordance with ASC 360-10 (formerly the Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”) the Company reviews long-lived assets, including, but not limited to, property and equipment, patents and other assets, for impairment annually or whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets. If the sum of the expected future cash flows of an asset is less than its carrying value, an impairment measurement is required. Impairment charges are recorded to the extent that an asset’s carrying value exceeds fair value. Accordingly, actual results could vary significantly from such estimates. There were no impairment charges during the periods presented.
Fair Value Disclosures – The carrying values of cash, accounts receivable, deposits, prepaid expenses, accounts payable and accrued expenses generally approximate the respective fair values of these instruments due to their current nature.
The fair values of debt instruments for disclosure purposes only are estimated based upon the present value of the estimated cash flows at interest rates applicable to similar instruments.
The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
Revenue Recognition – Revenues are recognized at the time of shipment of products to customers, or at the time of transfer of title, if later, and when collection is reasonably assured. All amounts in a sales transaction billed to a customer related to shipping and handling are reported as revenues. Staffing revenue is recognized at the completion of each billing cycle to the customer after completion of the work. The billing cycle is generally weekly.
Provisions for sales discounts and rebates to customers are recorded, based upon the terms of sales contracts, in the same period the related sales are recorded, as a deduction to the sale. Sales discounts and rebates are offered to certain customers to promote customer loyalty and encourage greater product sales. As a general rule, the Company does not charge interest on its accounts receivables.
Income Taxes – We provide for income taxes in accordance with ASC 740-10 (formerly SFAS No. 109, “Accounting for Income Taxes.”) that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of the assets and liabilities.
The recording of a net deferred tax asset assumes the realization of such asset in the future; otherwise a valuation allowance must be recorded to reduce this asset to its net realizable value. The Company considers future pretax income and, if necessary, ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event that the Company determines that it may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged against income in the period such determination is made. The Company has recorded full valuation allowances as of December 31, 2009 and 2008.
Stock-Based Compensation
We account for stock-based awards to employees and non-employees using the accounting provisions of ASC 718-10 (formerly the Statement of Financial Accounting Standards (“SFAS”) No. 123 — Accounting for Stock-Based Compensation and SFAS No. 123(R which revised SFAS No. 123) which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Shares of common issued in connection with acquisitions are also recorded at their estimated fair values based on the Hull-White “enhanced US ASC 718-10 standard. The standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The statement also requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which the employee is required to provide service in exchange for the award.
Concentrations of Credit Risks – Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Although the amount of credit exposure to any one institution may exceed federally insured amounts, the Company limits its cash investments to high-quality financial institutions in order to minimize its credit risk. The Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral. Exposure to losses on receivables is dependent on each customer’s financial condition. At December 31, 2009 and 2008 the Company had a receivable from one foreign customer in the amount of $1,363,756 and at December 31, 2009 the Company had a reserve for bad debts of $1,014,000 against this account. The balance of the accounts receivable are primarily from clients, retailers and distributors located in the United States. For the nine months ended December 31, 2009 three clients accounted for 11.1%, 12.4% and 13.0% of gross sales for the period.
Recent Accounting Pronouncements
Fair Value Measurement and Fair Value of a Financial Asset When the Market is Not Active
ASC 820-10 (formerly SFAS No. 157, Fair Value Measurements (“SFAS 157”), as amended by FSP FAS 157-2, Effective Date of FASB Statement No. 157, and further amended by FSP FAS 157-3, Fair Value of a Financial Asset When the Market for that Asset is Not Active. Portions of the provisions of ASC 820-10 became effective for the Company as of April 1, 2008 while other provisions deferred the effective date for all nonfinancial assets and liabilities, except those recognized or disclosed at fair value on an annual or more frequent basis, until April 1, 2009 and a further revision which clarifies the application in a market that is not active became effective upon issuance. ASC 820-10 defines fair value, creates a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements and additional guidance is provided regarding how the reporting entity’s own assumptions should be considered when relevant observable inputs do not exist, how available observable inputs in a market that is not active should be considered when measuring fair value, and how the use of market quotes should be considered when assessing the relevance of inputs available to measure fair value. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements for the current period.
Fair Value When the Volume and Level of Activity Significantly Decreased
ASC 820-10 was amended in April 2009 by what was formerly FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which clarifies the application of ASC 820-10 when there is no active market or where the price inputs being used represent distressed sales. Additional guidance is provided regarding estimating the fair value of an asset or liability (financial and nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The Company adopted the standard as of June 30, 2009, which was the required effective date. Its adoption did not have a material impact on the Company’s consolidated financial statements.
Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock (ASC 815-10)
In June 2008, the FASB amended ASC 815-10 by what was formerly EITF 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock . ASC 815-10 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of this pronouncement effective April 1, 2009, required the Company to perform additional analyses on both its freestanding equity derivatives and embedded equity derivative features. The adoption of these amendments to ASC 815-10 did not have a material effect on the Company’s consolidated financial statements at December 31, 2009.
Fair Value Option
In February 2007, ASC 825-10 was amended by the FASB in what was formerly SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 which permits all entities to choose to measure eligible items at fair value on specified election dates. The associated unrealized gains and losses on the items for which the fair value option has been elected shall be reported in earnings. The ASC 825-10 became effective for the Company as of April 1, 2008; however, the Company has not elected to utilize the fair value option on any of its financial assets or liabilities under the scope of this ASC.
Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB further amended ASC 825-10 with the issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments . The amendments ASC 825-10 to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption of this amendment did not have an impact on the Company’s financial statements.
Business Combinations
In December 2007, the FASB amended ASC 805-10 by issuing SFAS No. 141(R), Business Combinations. The objective of this ASC is to improve the information provided in financial reports about a business combination and its effects. ASC 805-10 states that all business combinations (whether full, partial or step acquisitions) must apply the “acquisition method.” In applying the acquisition method, the acquirer must determine the fair value of the acquired business as of the acquisition date and recognize the fair value of the acquired assets and liabilities assumed. As a result, it will require that certain forms of contingent consideration and certain acquired contingencies be recorded at fair value at the acquisition date. This ASC also states acquisition costs will generally be expensed as incurred and restructuring costs will be expensed in periods after the acquisition date. This amendment is effective for business combination transactions for which the acquisition date is on or after April 1, 2009, and earlier application is prohibited. The Company adopted this statement on April 1, 2009. The impact of the adoption of amendment on the Company’s financial statements will largely be dependent on the size and nature of the business combinations completed after the adoption of this ASC. While this amendment to ASC 805-10 generally applies only to transactions that close after its effective date, the amendment to ASC 740-10 are applied prospectively as of the adoption date and will apply to business combinations with acquisition dates before the effective date of this amendment. Adoption of this amendment did not have a material effect on the results of operations or statement of position for the period ended December 31, 2009.
Contingencies in Business Combinations
In April 2009, the FASB further amended ASC 805-10 by the issuance of FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies . This amendment requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC 450-10 and ASC 450-20. Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from ASC 805-10. The requirements of this amendment carry forward without significant revision the other guidance on contingencies of ASC 805-10, which was superseded by SFAS No. 141(R) (see previous paragraph). The amendment also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by ASC 450-10. This amendment was adopted effective April 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB amended ASC 815-10 by issuing SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133. This amendment changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815-10 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this amendment on April 1, 2009, the beginning of the Company’s first fiscal 2010 quarter and its adoption did not have a material effect on the results of operations or statement of position in the subsequent periods.
Codification and the Hierarchy of Generally Accepted Accounting Principles
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which replaces SFAS No. 162 and establishes the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. On the effective date for financial statements issued for interim and annual periods ending after September 15, 2009, the Codification will supersede all then–existing non-SEC accounting and reporting standards and is codified as ASC 105-10. The Company has determined that the adoption of the Codification will not have a material impact on the financial statements.
Convertible Debt
In May 2008, ASC 470-20 was amended by the FASB issuance of Financial Statement Position (FSP) Accounting Principles Board (APB) 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This amendment requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20 became effective for fiscal years beginning after December 15, 2008 on a retroactive basis and has been adopted by the Company in the first quarter of fiscal 2010.
Useful Life of Intangible Assets
In April 2008, the FASB amended ASC 350-30 by issuing FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. The amendment states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This ASC is to be applied to intangible assets acquired after January 1, 2009. The adoption of this ASC did not have an impact on the Company’s financial statements.
Other Than Temporary Impairments
In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amending ASC 320-10 to determine whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings (such as securities classified as held-to-maturity or available-for-sale) should recognize a loss in earnings when the investment is impaired. ASC 320-10 improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The effective date for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. The adoption of this amendment did not have an impact on the Company’s financial statements.
Subsequent Events
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which amends ASC 855-10 and requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. The statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10 as amended is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
Transfers of Financial Assets
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,” which was codified on December 23, 2009 in ASU No. 2009-16 and which is an amendment of ASC 860-10 (formerly SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets. This amendment will improve the relevance, representation faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets. It will also take into account the effects of a transfer on its financial position, financial performance, and cash flows, and a transferor’s continuing involvement. SFAS No. 166 is effective for annual periods beginning after November 15, 2009. This statement is effective for the Company beginning April 1, 2010 and is not expected to have a material impact on the financial statements.
Amendments to FASB interpretation No. 46(R)
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB interpretation No. 46(R),” which will amend ASC 810-10 and was codified on December 23, 2009 in ASU No. 2009-17. It establishes how a company determines when an entity that is insufficiently capitalized or not controlled through voting should be consolidated. This statement improves financial reporting by enterprises involved with variable interest entities, which addresses the effects on certain provisions of ASC 810-10 as a result of the elimination of the qualifying special-purpose entity concept in FASB No. 166, “Accounting for Transfers of Financial Assets,” which also has not be codified yet, and clarifies constituent concerns about the application of certain key provisions of ASC 810-10. SFAS No. 167 is effective after November 15, 2009. This statement is effective for the Company beginning January 1, 2010 and is expected to have no material impact on the financial statements.
Amendments to Fair Value Measurement
In August 2009, the FASB issued Accounting Standard Update (“ASU”) No. 2009-05, Fair Value Measure and Disclosure topic 820 – Measuring Liabilities at Fair Value, which provides amendments to ASC 820-10, Fair Value Measurement and Disclosures – Overall, for the fair measure of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1. a valuation technique that uses: a. the quoted price of the identical when traded as an asset, b. quoted prices of similar liabilities or similar liabilities when traded as assets, 2. another valuation technique that is consistent with the principles of ASC 820; two examples would be an income approach, such as a present value technique, or a market approach , such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in this ASC update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendment also clarifies that both a quoted price in an active market for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
Amendment of Earnings Per Share Computations
In September 2009, the FASB issued ASU No. 2009-08, Earnings Per Share – Amendments to ASC 260-10-S99, which represents technical corrections to ASC 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock . The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
Amendment to Investments-Equity Method, Joint Ventures and Accounting for Equity Based Payments
In September 2009, the FASB issued ASU No. 2009-09, Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity Based Payments to Non-Employees. This Update represents a correction to ASC 323-10-S99-4, Accounting by an Investor for Stock Based Compensation Granted to Employees of an Equity Method Investee. Additionally, it adds observer comment Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees to the Codification. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.
Amendments to Fair Value Measurement that Calculate Net Asset Value Per Share
In September 2009, the FASB issued ASU No. 2009-12, Fair Value Measurements and Disclosures Topic 820 – Investment in Certain Entities That Calculate Net Assets Value Per Share (or Its Equivalent) , which provides amendments to ASC 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendment permits, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of these amendments on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of ASC 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with ASC 820. These amendments also require disclosures by major category of investment about the attributes of investments within the scope of these amendments such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be make by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in U.S. GAAP on investments in debt and equity securities in paragraph 320-10-50-1B. The disclosures are required for all investments within the scope of the amendments regardless of the method of fair value measurement used. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.
Amendment of the Treatment of Own-Share Lending Arrangements
On October 13, 2009, the FASB issued ASU No. 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. The amendments to ASC 470-70, Debt with Conversion or Other Options, require companies to mark stock loan arrangements at fair value and recognize the cost of the arrangements by reducing the amount of additional paid-in capital on their financial statements. The requirement applies to offerings of convertible debt that are accompanied by a simultaneous share-lending agreement that is intended to help the underwriters and the purchasers of the bonds hedge their investments. In addition, the ASU also amends several other paragraphs of ASC 470-20. The changes will be effective for fiscal years that start on or after December 15, 2009. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.
Management does not believe that any other recently issued or not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
Note 3 – Inventories
Inventory consists of finished goods and raw material as follows:
| | | December 31, 2009 | | | March 31, 2009 | |
| | | (Unaudited) | | | (Restated) | |
| | | | | | | |
| Finished goods | | $ | 283,146 | | | $ | 173,523 | |
| Raw material | | | 69,619 | | | | 195,880 | |
| | | $ | 352,765 | | | $ | 369,403 | |
Note 4 – Property, Plant and Equipment
At December 31, 2009 and March 31, 2009 property, plant and equipment and computers consisted of the following:
| | | December 31, 2009 | | | March 31, 2009 | |
| | | (Unaudited) | | | (Restated) | |
| | | | | | | |
| Property and plant | | $ | 1,452,146 | | | $ | 1,452,146 | |
| Equipment and computers | | | 746,661 | | | | 746,611 | |
| Less accumulated depreciation | | | (427,467 | ) | | | (297,923 | ) |
| Net property, plant and equipment | | $ | 1,771,290 | | | $ | 1,900,834 | |
During the nine months ended December 31, 2009 and 2008 depreciation expense was $129,544 and $91,586, respectively.
Note 5 – Intangible Assets and Goodwill
Intangible assets consist of technology of production and license rights under the Environmental Protection Agency to market one of the products acquired in the acquisition of White Sands, L.L.C. on March 31, 2006. The Company is amortizing this asset over its estimated useful life of seven years on a straight line basis. For the nine months ended December 31 2009 and 2008 amortization was $95,042 in each period. The customer relationships are the value of the purchased business relationships acquired as part of the purchase by Lumea of the staffing business on March 1, 2009. The amortization period of this intangible is 5 years. For the nine months ended December 31, 2009 the amortization expense was $493,952.
Intangible assets subject to amortization:
| | | Weighted | | December 31, 2009 (Unaudited) | |
| | | Average | | Gross Carrying | | | Accumulated | | | Net Carrying | |
| | | Useful Life | | Amount | | | Amortization | | | Amount | |
| | | | | | | | | | | | |
| Intangible assets subject to amortization: | | | | | | | | | | | |
| EPA licenses | | 7 years | | | 887,055 | | | | 475,208 | | | | 411,847 | |
| Customer relationships | | 5 years | | | 3,293,020 | | | | 548,838 | | | | 2,744,182 | |
| | | | | $ | 4,180,075 | | | $ | 1,024,046 | | | $ | 3,156,029 | |
| | | | | | | | | | | | | | | |
| Goodwill not subject to amortization: | | | | | | | | | | | | | | |
| Goodwill: | | | | | | | | | | | | | | |
| Goodwill | | | | $ | 8,979,822 | | | $ | – | | | $ | 8,979,822 | |
| | | | | $ | 8,979,822 | | | $ | – | | | $ | 8,979,822 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Weighted | | March 31, 2009 | |
| | | Average | | Gross Carrying | | | Accumulated | | | Net Carrying | |
| | | Useful Life | | Amount | | | Amortization | | | Amount | |
| | | | | | | | | | | | |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | |
| EPA licenses | | 7 years | | $ | 887,055 | | | $ | 380,166 | | | $ | 506,889 | |
| Customer Relationships | | 5 years | | | 3,293,020 | | | | 54,884 | | | | 3,238,136 | |
| | | | | $ | 4,180,075 | | | $ | 435,050 | | | $ | 3,745,025 | |
| | | | | | | | | | | | | | | |
| Goodwill not subject to amortization: | | | | | | | | | | | | | | |
| Goodwill: | | | | | | | | | | | | | | |
| Goodwill | | | | $ | 8,979,822 | | | $ | – | | | $ | 8,979,822 | |
| | | | | $ | 8,979,822 | | | $ | – | | | $ | 8,979,822 | |
The scheduled amortization to be recognized over the next five years is as follows:
| December 31, 2010 | | $ | 785,326 | |
| December 31, 2011 | | $ | 785,326 | |
| December 31, 2012 | | $ | 785,326 | |
| December 31, 2013 | | $ | 690,284 | |
| December 31, 2014 | | $ | 109,767 | |
Note 6 – Accrued Liabilities
Accrued liabilities consist of the following as of December 31, 2009 and March 31, 2009:
| | | December 31, 2009 | | | March 31, 2009 | |
| | | (Unaudited) | | | (Restated) | |
| | | | | | | |
| Accrued marketing and advertising | | $ | 300,000 | | | $ | 300,000 | |
| Accrued reimbursement to product testing partner | | | 978,151 | | | | 978,151 | |
| Accrued interest | | | 2,013,413 | | | | 804,717 | |
| Accrued workmen’s compensation | | | 534,567 | | | | – | |
| Other | | | 184,578 | | | | 235,229 | |
| | | $ | 4,010,709 | | | $ | 2,318,097 | |
Note 7 – Accrued Payroll, Taxes and Benefits
Accrued payroll, taxes and benefits was $7,171,534 and $2,446,929 at December 31, 2009 and March 31, 2009, respectively.
Subsidiaries of the Company are delinquent in the payment of their payroll tax liabilities with the Internal Revenue Service and various states. As of December 31, 2009, unpaid payroll taxes total $6,636,881. The Company has estimated the related penalties and interest at approximately $781,200 through December 31, 2009, which are included in accrued liabilities at December 31, 2009. The Company expects to pay these delinquent payroll tax liabilities in installments and as soon as possible subject to negotiations with the Internal Revenue Service.
Note 8 – Notes and Contracts Payable
As of December 31, 2009 and March 31, 2009 notes and contracts payable consist of the following:
| | | December 31, | | | March 31, | |
| | | 2009 | | | 2009 | |
| | | (Unaudited) | | | | | |
| | | | | | | | | |
| Revolving line of credit against factored Lumea receivables (2) | | $ | 2,328,760 | | | $ | 2,055,015 | |
| Bank loans, payable in installments | | | 296,243 | | | | 359,803 | |
| Mortgage loan payable, monthly payments of principal and interest at 3 month LIBOR plus 4.7% (1) | | | 806,853 | | | | 806,853 | |
| Payments due seller of XenTx Lubricants | | | 254,240 | | | | 254,240 | |
| Loan from Dyson | | | 60,000 | | | | 60,000 | |
| Notes payable | | | 1,336,692 | | | | 1,476,650 | |
| Loans from individuals, due within one year | | | 255,000 | | | | 271,356 | |
| Houtz Loan | | | 213,800 | | | | 200,000 | |
| Purchase note payable | | | 1,575,139 | | | | 1,575,139 | |
| Purchase note 1 | | | 4,892,304 | | | | 5,650,000 | |
| Purchase note 2 | | | 2,619,645 | | | | 2,888,796 | |
| | | | | | | | | |
| Total | | | 14,638,676 | | | | 15,597,852 | |
| Less current portion | | | 8,066,866 | | | | 6,536,202 | |
| | | | | | | | | |
| Long-term debt | | $ | 6,571,810 | | | $ | 9,061,650 | |
____________
| (1) | In conjunction with the acquisition of Dyson, the mortgage became payable as a result of the change of control of that company. The Company is in the process of refinancing the property. |
| (2) | The Company maintains a $5 million line of credit relating to its factored accounts receivable. |
Bank Loans consist of two loans that became due in the first quarter of 2009; these loans are secured by receivables, inventory and equipment in Durant, Oklahoma. The Company is working to replace these loans and has arranged a payment schedule to retire these loans. The Mortgage Loan Payable has matured as a result of the change in control of the operations in Durant. The Company continues to make principal and interest payments while the Company obtains a replacement loan on the property. Interest is reset quarterly at Libor plus 4.7%.
The amounts due sellers bear interest at a rate of 8.0% and are due March 31, 2010.
Substantially all of the staffing receivables are pledged as collateral for the revolving line of credit. At December 31, 2009 and March 31, 2009, the Company had pledged receivables of $3,507,473 and $2,532,926, respectively.
The balance of the notes payable consist of commercial loans of vehicles and equipment in the normal course of business.
The Loans from individuals includes three loans which are all due within one year and bear interest from 9% to 12%.
Notes payable include amounts due after one year consists of the loan from Purchase Notes 1 and 2, all of which are secured by all of the business assets of Lumea, and the unsecured Houtz Loan. Maturities for the remainder of the loans are as follows:
| 2011 | | $ | 1,208,013 | |
| 2012 | | $ | 1,127,512 | |
| 2013 | | $ | 1,164,707 | |
| 2014 | | $ | 3,071,578 | |
Note 9 – Fair Value Measurements
The Company adopted the amendments to ASC 820-10 that apply to certain assets and liabilities that are being measured and reported on a fair value basis. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements. This ASC enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. It also requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The Company records liabilities related to its warrants (See Note 12 – Derivative Financial Instruments) and the beneficial conversion feature of its convertible debentures (See Note 10 – Convertible Debt) at their fair market values as provided by ASC 820-10.
The following table provides fair market measurements of the warrant and beneficial conversion feature liabilities as of December 31, 2009:
| | | Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3) | |
| | | (Unaudited) | |
| | | | | |
| Derivative liability | | $ | 1,219,155 | |
| Cashless warrant liability | | | 56,021 | |
| | | $ | 1,275,176 | |
The change in fair market value of the warrant and beneficial conversion feature liabilities is included in interest expense in the Consolidated Statements of Operations.
The following table provides a reconciliation of the beginning and ending balances of the warrant and beneficial conversion feature liabilities as of December 31, 2009:
| | | Derivative liability | | | Cashless warrant liability | | | Total | |
| | | | | | | | | | | | | |
| Beginning balance April 1, 2009 | | $ | 791,732 | | | $ | 57,876 | | | $ | 849,608 | |
| Change in fair market value of derivative liability and cashless warrant liability | | | 427,423, | | | | (1,855) | | | | 425,568 | |
| Ending balance December 31, 2009 | | $ | 1,219,155 | | | $ | 56,021 | | | $ | 1,275,176 | |
Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, other short-term liabilities, and capital lease obligations.
Note 10 – Convertible Debt
The Company entered into a Convertible Loan Agreement which also entitled the lenders to warrants and to convert the loans, at their option, to common stock of the Company. The debt is convertible at a rate of 50% of the then current market price at the time of conversion. At December 31, 2009, the value of the 6% Convertible Notes, with interest quarterly, was as follows:
| Maturity | | Face Amount | | | Conversion Derivative | | | Balance | |
| | | | | | | | | | |
| April 28, 2009 (Matured) | | $ | 327,050 | | | $ | 327,050 | | | $ | 654,100 | |
| August 17, 2009 (Matured) | | | 700,000 | | | | 700,000 | | | | 1,400,000 | |
| October 28, 2009 | | | 300,000 | | | | 300,000 | | | | 600,000 | |
| November 10, 2009 | | | 1,200,000 | | | | 1,200,000 | | | | 2,400,000 | |
| Total | | $ | 2,527,050 | | | $ | 2,527,050 | | | $ | 5,054,100 | |
Interest expense for the quarter ended December 31, 2009 and 2008 was $177,655 and $115,410, respectively.
Note 11 – Income Taxes
Provision/benefit for income taxes for the periods ended December 31, 2009 and 2008 consisted of the follows:
| | | For the nine months ended December 31, | |
| | | 2009 | | | 2008 | |
| | | (Unaudited) | | | (Unaudited/ Restated) | |
| | | | | | | | | |
| Federal income taxes/(benefit) | | $ | (2,278,158 | ) | | $ | (344,026) | |
| State income taxes | | | (501,858 | ) | | | (75,786) | |
| Total | | | (2,780,016 | ) | | | (419,812) | |
| Valuation allowance | | | 2,780,016 | | | | 419,812 | |
| Net tax provision/benefit | | $ | – | | | $ | – | |
Through December 31, 2009, we recorded a valuation allowance of $8,987,048 against deferred income tax assets primarily associated with tax loss carry forwards. Our significant operating losses experienced in prior years establishes a presumption that realization of these income tax benefits does not meet a “more likely than not” standard. For the nine months ended December 31, 2009 and 2008 we recognized $2,780,016 and $419,812 respective of the valuation allowance to offset the provision for income taxes for these periods.
We have net operating loss carry forwards of $21,458,099. Our net operating loss carry forwards will expire between 2025 and 2030.
Future realization of the net operating losses is dependent on generating sufficient taxable income prior to their expiration. Tax effects are based on a 34% Federal income tax rate. The Federal net operating losses expire as follows:
| Expiration | | Amount | |
| | | | | |
| 2025 | | $ | 1,524,541 | |
| 2026 | | | 5,132,298 | |
| 2027 | | | 3,052,902 | |
| 2028 | | | 2,251,029 | |
| 2029 | | | 2,295,008 | |
| 2030 | | | 7,202,321 | |
| Total | | $ | 21,458,099 | |
Note 12 – Derivative Financial Instruments
In connection with various financings through November 10, 2006, the Company has issued warrants to purchase shares of common stock in conjunction with the convertible notes to purchase 12,000,000 shares of common stock at an exercise price of $2.50 per share. The Company also issued warrants to a broker in the transaction for the exercise of 70,000 shares of common stock at an exercise price of $2.50. These warrants expire if not exercised at various dates in 2013 through November 10, 2013. At December 31, 2009, all of the 12,000,000 warrants have been issued entitling the lender to one share for each warrant at an exercise price of $2.50 per share.
The agreements include registration rights and certain other terms and conditions related to share settlement of the embedded conversion features and the warrants. In this instance, ASC 815-40 requires allocation of the proceeds between the various instruments and the derivative elements carried at fair values.
In addition, in conjunction with financings, purchases and consulting transactions between April 1, 2007 and March 31, 2009 the Company issued additional warrants and options, net of expirations, to purchase 8,725,000 shares of the Company’s common stock at exercise prices between $0.05 and $2.50 per share. At December 31, 2009, 2,050,000 options were not exercisable. The options granted vest at a rate of 150,000 shares per quarter as a guarantee fee until the notes due the seller are paid in full and become exercisable at $0.046 per share. The scheduled maturity of those notes is March 2014, by which time all of the options will have vested. To date, 450,000 of these options have vested. If the Company prepays the underlying notes, the vesting will cease and the unvested options will become unexercisable. No warrants or options have been exercised.
At December 31, 2009 there were 20,725,000 shares subject to warrants at a weighted average exercise price of $1.95.
| | | Number of Shares | | Weighted Average |
| | | Subject to Outstanding | | Remaining |
| Exercise | | Warrants | | Contractual Life |
| Price | | and Options | | (years) |
| | | | | | |
| $ | 0.05 | | | 450,000 | | 9.15 |
| $ | 0.75 | | | 5,775,000 | | 2.25 |
| $ | 2.50 | | | 12,450,000 | | 3.26 |
| | | | | | | |
| | | | | 18,675,000 | | |
| Not exercisable | | | 2,050,000 | | |
| | | | | 20,725,000 | | |
In addition to the spot price of the stock and remaining term of the warrant, other factors used in the binomial model included in the analysis at December 31, 2009 were the volatility of 227.22%, risk free rate of between 0.47% and 3.39% and a dividend rate of $0 per period.
Note 13 – Commitments and contingencies
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash. The Company periodically evaluates the credit worthiness of financial institutions, and maintains cash accounts only in large high quality financial institutions, thereby minimizing exposure for deposits in excess of federally insured amounts.
Lease Commitments
The Company has lease agreements for office space in Scottsdale, Arizona and for 26 offices throughout the United States. The remaining lease commitment for the two Scottsdale offices are 3 and 5 years and the other offices are year to year or month-to-month. The following table sets forth the aggregate minimum future annual lease commitments at December 31, 2009 under all non-cancelable leases:
| 2010 | | $ | 309,527 | |
| 2011 | | | 234,759 | |
| 2012 | | | 147,800 | |
| 2013 | | | 65,294 | |
| 2014 | | | 60,286 | |
| Thereafter | | | 60,000 | |
| | | $ | 877,666 | |
Lease expense for the nine months ended December 31, 2009 and 2008 were $481,448 and $45,838, respectively. The total of all scheduled lease payments, assuming all locations are continued at the same rates, is $379,274 per year.
Note 14 – Company Stock
Preferred Stock
At December 31, 2009, the Company had 1,000,000 shares of $0.001 par value authorized and no outstanding or issued shares.
Common Stock
At December 31, 2009, the Company had 250,000,000 shares authorized of $0.001 par value common stock, of which issued and outstanding shares were 136,941,290.
During the nine months ended December 31, 2009, the Company issued 4,380,000 par value $0.001 common shares of stock for net proceeds of $120,000. Also during the period, the Company issued an aggregate of 10,656,182 common shares for services to consultants recognizing an aggregate addition to stockholders’ equity of $621,950 based on the market price of the stock at the date of the agreements. Included in this amount is the fair value of stock issued to directors of 1,000,000 shares. Some of the services of consultants will be recognized over the next one year and the related expense is being recognized over the service period. Also during this period, the Company issued 4,068,230 shares of common stock for an acquisition and payment of accounts payable and 396,114 shares for interest expense. The Company recorded these accounts at $212,208 and $26,500, respectively.
Warrants
No warrants have been exercised.
At December 31, 2009, the status of the outstanding warrants is as follows:
| Issue Date | | Shares Exercisable | | Weighted Average Exercise Price | | Expiration Date |
| | | | | | | | |
| September 27, 2005 | | 450,000 | | $ | 2.50 | | September 26, 2010 |
| April 29, 2006 | | 1,866,667 | | $ | 2.50 | | April 28, 2013 |
| June 28, 2006 | | 5,000,000 | | $ | 2.50 | | August 10, 2013 |
| August 17, 2006 | | 1,633,333 | | $ | 2.50 | | August 17, 2013 |
| October 28, 2006 | | 700,000 | | $ | 2.50 | | October 28, 2013 |
| November 10, 2006 | | 2,800,000 | | $ | 2.50 | | November 10, 2013 |
| July 1, 2007 | | 5,775,000 | | $ | .75 | | June 30, 2012 |
| Cashless April 20-November 10, 2006 | | 700,000 | | $ | 2.50 | | April 29 - November 10, 2015 |
| Cashless March 26, 2007 | | 1,400,000 | | $ | .75 | | March 26, 2010 |
| Cashless July 1, 2007 | | 519,750 | | $ | .75 | | June 30, 2012 |
The warrants have no intrinsic value at December 31, 2009 or 2008.
Stock Options
At December 31, 2009, the Company had one stock option plan under which grants were outstanding. The stock options outstanding are for grants issued under the Company’s 2007 Stock Incentive Plan.
The 2007 Stock Incentive Plan
During the fiscal year ended March 31, 2008, the Company adopted a stock option plan, entitled the “2007 Incentive Plan” (the “2007 Plan”), under which the Company may grant options to purchase up to 20,000,000 shares of common stock.
The 2007 Plan is administered by the Board of Directors or a Committee of the Board of Directors which has the authority to determine the persons to whom the options may be granted, the number of shares of common stock to be covered by each option grant, and the terms and provisions of each option grant. Options granted under the 2007 Plan may be incentive stock options or non-qualified options, and may be issued to employees, consultants, advisors and directors of the Company and its subsidiaries. The exercise price of options granted under the 2007 Plan may not be less than the fair market value of the shares of common stock on the date of grant, and may not be granted more than ten years from the date of adoption of the plan or exercised more than ten years from the date of grant.
The following table sets forth the status of the Company’s non-vested stock options under the 2007 Plan as of December 31, 2009:
| | | Number of Options | | | Weighted-Average Grant-Date Fair Value | |
| | | | | | | |
| Non-vested as of March 31, 2008 | | | 5,415,000 | | | $ | .11 | |
| Granted | | | | | | | | |
| Forfeited | | | (450,000 | ) | | | – | |
| Vested | | | (3,310,000 | ) | | | – | |
| | | | | | | | | |
| Non-vested as of March 31, 2009 | | | 1,655,000 | | | $ | .11 | |
| Granted | | | – | | | | – | |
| Forfeited | | | – | | | | – | |
| Vested | | | (1,655,000 | ) | | | .11 | |
| | | | | | | | | |
| Non-vested as of December 31, 2009 | | | – | | | $ | – | |
During the year ended March 31, 2008, the Company granted options to purchase an aggregate of 5,415,000 shares of common stock to employees, directors and consultants for services to be provided. These options are exercisable at $0.20 per share, and vest one third on October 1, 2008, April 1, 2009 and October 1, 2009 with an expiration of three years from the date of grant, March 26, 2011, for all options. The Company has valued these at their fair value on the date of grant using the Hull-White enhanced option-pricing model.
Unrecognized stock-based compensation expense related to the unvested options at the issue date was approximately $525,165 which is being recognized over the vesting periods of 18 months. This estimate is based on the number of unvested options currently outstanding and could change based on the number of options granted or forfeited in the future. During the nine months ended December 31, 2009 and 2008 the Company recognized expense of $201,299 and $264,366, respectively. These options had no intrinsic value at December 31, 2009 and all options had been fully vested at December 31, 2009.
The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates.
The risk-free interest rate used for each grant is equal to the U.S. Treasury yield in effect at the time of grant for instruments with a similar expected life.
The expected term of options granted was determined based on the historical exercise behavior of similar peer groups.
The Company has never declared or paid a cash dividend, and has no current plans to pay a cash dividend in the future.
ASC 718-10 also requires that the Company recognize compensation expense for only the portions that are expected to vest. Therefore, the Company has estimated expected forfeitures of stock options with the adoption of ASC 718-10. In developing a forfeiture rate estimate, the Company considered its historical experience. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
The fair value of options were estimated at the date of grant with the following weighted-average assumptions for the fiscal years ended March 31, 2008:
| | 2008 |
| | |
| Risk Free Interest Rate | 1.79% |
| Expected Life | 3.0 years |
| Expected Volatility | 116% |
| Expected Dividend Yield | 0% |
The per share weighted average fair value of stock options granted for the fiscal year ended March 31, 2008 was $0.11.
Note 15 – Earnings (Loss) Per Share
Basic income/(loss) per common share is computed by dividing the results of operations by the weighted average number of shares outstanding during the period. For purposes of the determining the number of shares outstanding the shares received by the acquirer in the reverse acquisition are treated as outstanding for all periods prior to the transaction.
Diluted income/(loss) earnings per common share adjusts basic income/(loss) per common share for the effects of convertible securities, stock options, warrants and other potentially dilutive financial instruments only in periods in which such effect is dilutive. No instruments were dilutive at December 31, 2009 or 2008. These potential shares of common stock were not included as they were anti-dilutive.
Note 16 – Subsequent Events
Management performed an evaluation of Company activity through February 19, 2010, the date the unaudited consolidated financial statements were issued. The Company concluded that there are no other significant subsequent events requiring disclosure.
Note 17 – Segment Reporting
Green Planet Group, Inc. has two reportable segments: the engine, fuel additives and green energy products and the industrial staffing segments. The first segment is comprised of the XenTx Lubricants, EMTA Corp. and White Sands entities and the staffing segment is comprised of Lumea, Inc. and its operating subsidiaries. Prior to March 1, 2009 Green Planet Group, Inc. only had the first reporting segment of business.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Interest expense related to the individual entities is paid by or charged to those entities and the related debt is included as that entity’s liability. Green Planet management evaluates performance based on profit or loss before income taxes not including nonrecurring gains and losses.
There have been no significant intersegment sales or costs.
Green Planet’s business is conducted through separate legal entities that are wholly owned subsidiaries. Each entity has a specific set of business objectives and line of business.
The Company analyzes the result of the operations of the individual entities and the segments. Green Planet does not allocate income taxes and unusual items to the segments. The segment information for the three and nine months ended December 31, 2009 is presented below.
| | | Additives & | | | | | | Corporate | | | | |
| For the three months ended December 31, 2009 | | Green Energy | | | Staffing | | | & Eliminations | | | Consolidated | |
| | | | | | | | | | | | | |
| Income statement information: | | | | | | | | | | | | |
| Sales | | $ | 229,478 | | | $ | 15,491,731 | | | $ | – | | | $ | 15,721,209 | |
| Depreciation and amortization | | | 64,351 | | | | 172,314 | | | | 2,701 | | | | 239,365 | |
| Interest expense | | | 20,312 | | | | 376,058 | | | | 500,736 | | | | 897,106 | |
| Income (Loss) before income taxes | | | (539,449 | ) | | | (896,131 | ) | | | (1,286,822 | ) | | | (2,722,402 | ) |
| Net income (loss) | | | (539,449 | ) | | | (896,131 | ) | | | (1,286,822 | ) | | | (2,722,402 | ) |
| | | Additives & | | | | | | Corporate | | | | |
| For the nine months ended December 31, 2009 | | Green Energy | | | Staffing | | | & Eliminations | | | Consolidated | |
| | | | | | | | | | | | | |
| Income statement information: | | | | | | | | | | | | |
| Sales | | $ | 916,783 | | | $ | 47,909,140 | | | $ | – | | | $ | 48,825,923 | |
| Depreciation and amortization | | | 193,050 | | | | 517,387 | | | | 8,101 | | | | 718,538 | |
| Interest expense | | | 369,782 | | | | 1,097,346 | | | | 752,336 | | | | 2,219,464 | |
| Loss before income taxes | | | (836,765 | ) | | | (3,744,467 | ) | | | (3,802,735 | ) | | | (8,383,967 | ) |
| Net loss | | | (836,765 | ) | | | (3,744,467 | ) | | | (3,802,735 | ) | | | (8,383,967 | ) |
| | | | | | | | | | | | | | | | | |
| Balance sheet information: | | | | | | | | | | | | | | | | |
| Total assets | | $ | 2,855,800 | | | $ | 16,769,024 | | | $ | 589,635 | | | $ | 20,214,459 | |
Note 18 – Restatement of Prior Financial Statements
On July 31, 2009, the board of directors (the “Board”) of Green Planet Group, Inc. (the “Company”) concluded that the Company’s previously filed consolidated financial statements for the fiscal year ends March 31, 2007, 2008 and 2009 on Form 10-K and the quarterly statements from September 30, 2006 (the first required filing date) through December 31, 2008 on Form 10-Q should no longer be relied upon. The Board with the recommendation of management came to this conclusion based on comments received the Accounting Staff of the Division of Corporate Finance of the Securities and Exchange Commission (the “SEC”) in its review of the Company’s financial statements for the year ended March 31, 2009 and interim filings through December 31, 2008. The Company has filed Form 10-K/A for the year ended March 31, 2009 and Forms 10-Q/A for the periods ended June 30, 2009 and September 30, 2009 to reflect the results of this evaluation. After discussion, review and analysis of our accounting and disclosures, the Company identified the following issues:
| | 1) | The Company treated the convertible debt and related warrants under ASC 470-20 under which such converted or exercised instruments are recognized as equity and under the ASC 815-40 and owing to the unlimited nature of the potential issuances, the instruments are to be treated as liabilities or assets and revalued each reporting period. |
| | 2) | Under ASC 480-10 and (ASC 815-10) state in part that convertible instruments should be valued at their fair value at date of issuance and derivatives, such as warrants, should be valued at their fair value at issuance and each subsequent reporting date. |
| | 3) | Accordingly, the Company has restated the financial statements referred to above by the filing of an amended Form 10-K/A for March 31, 2009, that incorporated those changes. In summary, in conjunction with the aggregate face amount of the convertible loans of $3,000,000 with net proceeds of $2,512,500, the Company estimates that at the closing of the various convertible loans in the year ended March 31, 2007 the Company will book an additional $3,000,000 of loan balance representing the 50% conversion feature of the instruments to common stock of the Company and a derivative liability of $39,207,874 for the then fair value of the warrants issued and outstanding. At the end of the reporting period credits of $13,960,334 to adjust for the “default warrants” issued and valued under ASC 470-20 in error and a valuation allowance of $38,685,527 to adjust to the year end valuation resulting in a net decrease of $10,437,986 in the net loss for March 31, 2007. At March 31, 2008, the year end valuation resulted in additional interest expense of $1,272,447 and a increase in the net loss for the period of a like amount and at March 31, 2009 the Company has a reduction of interest expense by $1,151,045 and a decrease in the net loss for the period of the same amount. For the nine months ended December 31, 2008 the Company is reporting a reduction in interest expense of $1,240,182 and a reduction change in the net loss for the period from $1,240,182 to a loss of $(338,939). The results of these changes are reflected in the following balance sheets and statements of operations for the year ended March 31, 2009 and the nine months ended December 31, 2008. |
| | 4) | In addition to the above changes, the Company also changed the presentation of its prepaid loan expenses from being netted against the loan amount to prepaid expenses and other assets depending on the scheduled maturity of the underlying debts. This had the effect of increasing current and long term assets and increasing the loan amounts for each period being restated. The results of these changes are reflected in the following balance sheets and statements of operations for the years ended March 31, 2009 and the quarterly period ended December 31, 2008. |
Consolidated Balance Sheets
| | | March 31, 2009 | |
| | | As Originally | | | | | | | | | After | |
| ASSETS | | Reported | | | Adjustments | | | | | | Restatement | |
| | | | | | | | | | | | | |
| Current Assets: | | | | | | | | | | | | |
| Cash | | $ | 470,288 | | | $ | – | | | | | | $ | 470,288 | |
| Accounts receivable | | | 4,349,866 | | | | – | | | | | | | 4,349,866 | |
| Inventory | | | 369,403 | | | | – | | | | | | | 369,403 | |
| Prepaid expenses | | | 1,495,461 | | | | 158,971 | | | A | | | | 1,654,432 | |
| Total Current Assets | | | 6,685,018 | | | | 158,971 | | | | | | | 6,843,989 | |
| Plant and equipment, net of accumulated depreciation | | | 1,900,834 | | | | – | | | | | | | 1,900,834 | |
| Other Assets: | | | | | | | | | | | | | | | |
| Other assets | | | 189,164 | | | | 106,208 | | | A | | | | 295,372 | |
| Intangible assets | | | 3,745,025 | | | | – | | | | | | | 3,745,025 | |
| Goodwill | | | 8,979,822 | | | | – | | | | | | | 8,979,822 | |
| Total Other Assets | | | 12,914,011 | | | | 106,208 | | | | | | | 13,020,219 | |
| Total Assets | | $ | 21,499,863 | | | $ | 265,179 | | | | | | $ | 21,765,042 | |
| | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 1,210,127 | | | $ | – | | | | | | $ | 1,210,127 | |
| Accounts payable - affiliates | | | 165,565 | | | | – | | | | | | | 165,565 | |
| Accrued liabilities | | | 4,765,026 | | | | – | | | | | | | 4,765,026 | |
| Cashless warrant liability | | | 57,876 | | | | – | | | | | | | 57,876 | |
| Notes payable and amounts due within one year | | | 6,429,994 | | | | 106,208 | | | A | | | | 6,536,202 | |
| Derivative liability | | | – | | | | 791,732 | | | B+F | | | | 791,732 | |
| Convertible notes payable | | | 2,474,287 | | | | 2,579,813 | | | C | | | | 5,054,100 | |
| Total Current Liabilities | | | 15,102,875 | | | | 3,477,753 | | | | | | | 18,580,628 | |
| | | | | | | | | | | | | | | | |
| Notes payable due after one year | | | 8,955,442 | | | | 106,208 | | | A | | | | 9,061,650 | |
| Total Liabilities | | | 24,058,317 | | | | 3,583,961 | | | | | | | 27,642,278 | |
| | | | | | | | | | | | | | | | |
| Stockholders’ Equity | | | | | | | | | | | | | | | |
| Preferred Stock, $0.001 par value, 1,000,000 Authorized; no shares issued and outstanding | | | – | | | | – | | | | | | | – | |
| Common Stock, $0.001 par value, 250,000,000 authorized, issued and outstanding 117,440,103 at March 31, 2009 | | | 117,441 | | | | – | | | | | | | 117,441 | |
| Additional paid-in capital | | | 28,201,532 | | | | (13,611,459 | ) | | D | | | | 14,590,073 | |
| Accumulated deficit | | | (30,877,427 | ) | | | 10,292,677 | | | E+F | | | | (20,584,750 | ) |
| Total Stockholders’ Equity/Deficit | | | (2,558,454 | ) | | | (3,318,782 | ) | | | | | | (5,877,236 | ) |
| Total Liabilities and Stockholders’ Equity/(Deficit) | | $ | 21,499,863 | | | $ | 265,179 | | | | | | $ | 21,765,042 | |
(Continued)
Consolidated Statements of Operations
| | | For the Year Ended March 31, 2009 | |
| | | As Originally | | | | | | | | | After | |
| | | Reported | | | Adjustments | | | | | | Restatement | |
| Revenue: | | | | | | | | | | | | |
| Sales, net of returns and allowances | | $ | 9,170,794 | | | $ | – | | | | | | $ | 9,170,794 | |
| Cost of sales | | | 7,030,015 | | | | – | | | | | | | 7,030,015 | |
| | | | | | | | | | | | | | | | |
| Gross Profit | | | 2,140,779 | | | | – | | | | | | | 2,140,779 | |
| | | | | | | | | | | | | | | | |
| Operating Expenses: | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 3,798,290 | | | | – | | | | | | | 3,798,290 | |
| Depreciation and amortization | | | 308,833 | | | | – | | | | | | | 308,833 | |
| Allowance for bad debts | | | 970,542 | | | | – | | | | | | | 970,542 | |
| Total Operating Expenses | | | 5,077,665 | | | | – | | | | | | | 5,077,665 | |
| Loss From Operations | | | (2,936,886 | ) | | | – | | | | | | | (2,936,886 | ) |
| | | | | | | | | | | | | | | | |
| Other Income and (Expense): | | | | | | | | | | | | | | | |
| Other income | | | 416 | | | | – | | | | | | | 416 | |
| Interest expense | | | (886,945 | ) | | | 1,127,138 | | | B+F | | | | 240,193 | |
| Loss before provision for income taxes | | | (3,823,415 | ) | | | 1,127,138 | | | | | | | (2,696,277 | ) |
| | | | | | | | | | | | | | | | |
| Provision for/(Benefit of) income taxes | | | – | | | | – | | | | | | | – | |
| | | | | | | | | | | | | | | | |
| Net Loss | | $ | (3,823,415 | ) | | $ | 1,127,138 | | | | | | $ | (2,696,277 | ) |
| | | | | | | | | | | | | | | | |
| Loss per share: | | | | | | | | | | | | | | | |
| Basic and diluted earnings per share | | $ | (0.05 | ) | | $ | 0.01 | | | | | | $ | (0.04 | ) |
| Weighted average shares outstanding | | | 73,612,313 | | | | 73,612,313 | | | | | | | 73,612,313 | |
(Continued)
Consolidated Balance Sheets
| | | December 31, 2008 | |
| | | As Originally | | | | | | | | After | |
| ASSETS | | Reported | | | Adjustments | | | | | Restatement | |
| Current Assets: | | | | | | | | | | | |
| Cash | | $ | 69,560 | | | $ | – | | | | | $ | 69,560 | |
| Accounts receivable | | | 1,787,143 | | | | – | | | | | | 1,787,143 | |
| Inventory | | | 406,163 | | | | – | | | | | | 406,163 | |
| Prepaid expenses | | | 161,693 | | | | 201,409 | | | A | | | 363,102 | |
| Total Current Assets | | | 2,424,559 | | | | 201,409 | | | | | | 2,625,968 | |
| Property, plant and equipment, net of accumulated depreciation | | | 1,718,543 | | | | – | | | | | | 1,718,543 | |
| Other Assets: | | | | | | | | | | | | | | |
| Other assets | | | 59,696 | | | | 125,518 | | | A | | | 185,214 | |
| Intangible assets | | | 536,569 | | | | – | | | | | | 536,569 | |
| Total Other Assets | | | 596,265 | | | | 125,518 | | | | | | 721,783 | |
| Total Assets | | $ | 4,739,367 | | | $ | 326,927 | | | | | $ | 5,066,294 | |
| | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS EQUITY/(DEFICIT) | | | | | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | | | | | |
| Accounts payable | | $ | 891,213 | | | $ | – | | | | | $ | 891,213 | |
| Accrued liabilities | | | 1,985,460 | | | | – | | | | | | 1,985,460 | |
| Cashless warrant liability | | | 30,251 | | | | – | | | | | | 30,251 | |
| Notes payable and amounts due within one year | | | 1,939,541 | | | | 115,863 | | | A | | | 2,055,404 | |
| Derivative liability | | | – | | | | 554,612 | | | B | | | 554,612 | |
| Convertible notes payable | | | 2,453,243 | | | | 2,600,857 | | | C | | | 5,054,100 | |
| Total Current Liabilities | | | 7,299,708 | | | | 3,271,332 | | | | | | 10,571,040 | |
| | | | | | | | | | | | | | | |
| Notes payable due after one year | | | 779,918 | | | | 137,255 | | | A | | | 917,173 | |
| Total Liabilities | | | 8,079,626 | | | | 3,408,587 | | | | | | 11,488,213 | |
| Stockholders' Equity | | | | | | | | | | | | | | |
| Preferred Stock, $0.001 par value, 1,000,000 Authorized; no shares issued and outstanding | | | – | | | | – | | | | | | – | |
| Common Stock, $0.001 par value, 250,000,000 authorized, issued and outstanding 73,816,103 at December 31, 2008 | | | 73,816 | | | | – | | | | | | 73,816 | |
| Additional paid-in capital | | | 25,219,058 | | | | (13,487,384 | ) | | D | | | 11,731,674 | |
| Accumulated deficit | | | (28,633,133 | ) | | | 10,405,724 | | | E | | | (18,227,409 | ) |
| Total Stockholders' Equity/(Deficit) | | | (3,340,259 | ) | | | (3,081,660 | ) | | | | | (6,421,919 | ) |
| Total Liabilities and Stockholders' Equity/Deficit) | | $ | 4,739,367 | | | $ | 326,927 | | | | | $ | 5,066,294 | |
(Continued)
Consolidated Statements of Operations
(Unaudited)
| | | For the three months ended December 31, 2008 | | | For the nine months ended December 31, 2008 | |
| | | As Originally | | | | | | | After | | | As Originally | | | | | | | After | |
| | | Reported | | | Adjustments | | | | Restatement | | | Reported | | | Adjustments | | | | Restatement | |
| Revenue: | | | | | | | | | | | | | | | | | | | | |
| Sales, net of returns and allowances | | $ | 674,657 | | | $ | – | | | | $ | 674,657 | | | $ | 3,040,728 | | | $ | – | | | | $ | 3,040,728 | |
| Cost of sales | | | 368,255 | | | | – | | | | | 368,255 | | | | 1,419,514 | | | | – | | | | | 1,419,514 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | | 306,402 | | | | – | | | | | 306,402 | | | | 1,621,214 | | | | – | | | | | 1,621,214 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 699,356 | | | | – | | | | | 699,356 | | | | 2,631,776 | | | | – | | | | | 2,631,776 | |
| Depreciation and amortization | | | 62,695 | | | | – | | | | | 62,695 | | | | 186,628 | | | | – | | | | | 186,628 | |
| Research and development | | | (250 | ) | | | – | | | | | (250 | ) | | | – | | | | – | | | | | – | |
| Total Operating Expenses | | | 761,801 | | | | – | | | | | 761,801 | | | | 2,818,404 | | | | – | | | | | 2,818,404 | |
| Loss From Operations | | | (455,399 | ) | | | – | | | | | (455,399 | ) | | | (1,197,190 | ) | | | – | | | | | (1,197,190 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Income and (Expense): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other income | | | – | | | | – | | | | | – | | | | 416 | | | | – | | | | | 416 | |
| Interest expense | | | (156,482 | ) | | | 399,189 | | B | | | 242,707 | | | | (382,347 | ) | | | 1,240,182 | | B | | | 857,835 | |
| Loss before provision for income taxes | | | (611,881 | ) | | | 399,189 | | | | | (212,692 | ) | | | (1,579,121 | ) | | | 1,240,182 | | | | | (338,939 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for/(Benefit of) income taxes | | | – | | | | – | | | | | – | | | | – | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income/(Loss) | | $ | (611,881 | ) | | $ | 399,189 | | | | $ | (212,692 | ) | | $ | (1,579,121 | ) | | $ | 1,240,182 | | | | $ | (338,939 | ) |
| Earnings/(Loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings/(loss) per share | | $ | (0.01 | ) | | $ | 0.01 | | | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.02 | | | | $ | 0.00 | |
| Weighted average shares outstanding | | | 70,897,625 | | | | 70,897,625 | | | | | 70,897,625 | | | | 68,345,747 | | | | 68,345,747 | | | | | 68,345,747 | |
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