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 are a specialty energy conservation chemical company that produces and supplies technologies to the global transportation, industrial and consumer markets. These technologies include gasoline, oil and diesel additives for engines and other transportation-related fluids and industrial lubricants. We also operate an industrial staffing and employment business by providing employees to the light industrial, medical and IT industries on a national basis.
Acquisition and Merger
Lumea, Inc. - Effective March 1, 2009, the Company through its wholly owned subsidiary Lumea, Inc, formerly ATME Acquisitions, Inc., acquired certain assets and assumed certain liabilities of Easy Staffing Solutions, Inc. and its subsidiaries. With these acquisitions Lumea became a supplier of the staffing needs for light industrial and other companies in 18 states.
The aggregate purchase price is $12,464,752, to be paid in by the assumption of debt, issuance of long term notes and the Company’s common stock to the seller. The Company assumed $2,505,694 of the seller’s liabilities and issued two notes to the seller in the amounts of $5,750,000 and $3,000,000, at interest rates of 3.25% per annum each, the first loan requires monthly principal and interest payments of $100,000 through March 2014 and the second note requires the payment of principal and interest at maturity, March 1, 2014. The Company also issued 21,699,661 shares of common stock with a fair value at the time of purchase of $1,084,983, and 2,500,000 stock options valued at $124,075. 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. If the Company prepays the underlying notes, the vesting will cease and the unvested options will become unexercisable.
The purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows:
| Property and equipment | | $ | 191,910 | |
| Customer relationships | | | 3,293,020 | |
| Goodwill | | | 8,979,822 | |
| Total assets acquired | | | 12,464,752 | |
| Total liabilities assumed | | | 11,255,694 | |
| Net assets acquired | | $ | 1,209,058 | |
Continuance of Operations
These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The general business strategy of the Company is to develop products, operate its sales force and to acquire additional businesses. The Company has negative working capital, has incurred operating losses and requires additional capital to fund development activities, meet its obligations and maintain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. During the year ended March 31, 2010 the Company received $120,000 for the issuance of 4,380,000 shares of common stock. The Company is in negotiations to obtain additional necessary capital to complete its regulatory approvals, expand production and sales and generally meet its business objectives. The Company forecasts that the equity and additional borrowing capacity that it is working to obtain will provide sufficient funds to complete its primary development activities and achieve profitable operations although the Company can provide no assurance that additional equity or additional borrowing capacity will be obtained. As a result, the Company’s independent registered public accounting firm has issued a going concern opinion on the Company’s consolidated financial statements for the year ended March 31, 2010. Accordingly, these financial statements do not include any adjustments that might result from this uncertainty.
Note 2 - Significant Accounting Policies
Consolidation - The consolidated financial statements include the accounts of Green Planet Group, Inc. and its consolidated subsidiaries and wholly-owned limited liability company. The financial statements for the year ended March 31, 2009 only include the operations of Lumea, Inc. and its subsidiaries since March 1, 2009. 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 $2,034,760 and $806,846 at March 31, 2010 and 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 no longer viable sales products.
Property, Plant, and Equipment - 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 its plant and equipment and computers on a straight line basis. Estimated useful life of the plant is 31 years and the equipment ranges from 3 to 10 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 5 years for the customer relationships. Costs incurred by the Company 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 an estimated economic life of the asset, generally seven years, commencing on the acquisition date. Costs subsequent to the acquisition date are expensed as incurred.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired by Lumea. 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. During the year ended March 31, 2010 the Company recognized an impairment loss of $4,355,151 in conjunction with goodwill valuation for the period. There were no impairment charges during the year ended March 31, 2009.
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.
Derivative Financial Instruments - The Company accounts for derivative instruments and debt instruments in accordance with the interpretative guidance of ASC 815 which codified SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF 98-5”), and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”), and associated pronouncements related to the classification and measurement of warrants and instruments with conversion features. It is necessary for the Company to make certain assumptions and estimates to value derivatives and debt instruments.
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.
Components of Cost of Sales - Cost of sales is comprised of raw material costs including freight and duty, inbound handling costs associated with the receipt of raw materials, contract manufacturing costs, third party bottling and packaging, maintenance and storage costs, plant and engineering overhead allocation, terminals and other warehousing costs, and handling costs. The components of cost of sales of the staffing business are primarily the personnel costs of labor, payroll taxes, and other direct costs of maintaining employees.
Selling Expenses - Included in selling and general administrative expenses are the commission expenses for both employees and outside sales representatives ranging from 1.5% to 11.5% per dollar of sales. Our staffing sales representatives are paid a commission on new sales. The Company expends significant amounts to advertise and distinguish its products from those of its competitors through the use of in-store advertising, printed media, internet and broadcast media. Advertising expenses for 2010 and 2009 were $16,402 and $66,967, respectively.
Research, Testing and Development - Research, testing and development costs are expensed as incurred. Research and development expenses, including testing, were $13,743 and $0 for the years ended March 31, 2010 and 2009, respectively. Costs to acquire in-process research and development (IPR&D) projects that have no alternative future use and that have not yet reached technological feasibility at the date of acquisition are expensed upon acquisition.
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 March 31, 2010 and 2009.
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. With respect to accounts receivable, such receivables are primarily from customers located in the United States. 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 March 31, 2010 and 2009, the amounts due from foreign distributors were $1,363,756 and $1,363,756, which represent 0% and 15.7% of net accounts receivable, respectively, after the Company recognized an allowance for doubtful accounts at March 31, 2010 and 2009 of $1,363,756 and $681,000, respectively. The staffing business had three customers that accounted for approximately 13%, 13%, and 11% of gross sales. We have collected all amounts due from these customers but we no longer provide services to the 11% customer. In the staffing business, customer volume fluctuates with the seasons, the customers’ lines of business and other factors.
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 standard establishes 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.
Loss per share
Basic loss per share is calculated using the weighted average number of shares outstanding during the year. The Company has adopted ASC 260-10, Earnings per Share - Overall, and uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method, the dilutive effect on loss per share is recognized on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. As the Company has incurred net losses since its inception, the stock options and warrants as disclosed in note 15 were not included in the computation of loss per share as their inclusion would be anti-dilutive.
On April 1, 2009, the Company adopted ASC 260-10-45, Earnings per Share - Overall - Other Presentation Matters, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and affects entities that accrue cash dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the awards. ASC 260-10-45 states that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The adoption of ASC 260-10-45 does not have a material impact on the Company’s financial statements.
Segment Information
We operate in two industry segments, the development, manufacture and sale of private and commercial vehicle energy efficient enhancement products and employee staffing services. The enhancement products are designed to extend engine life, promote fuel efficiency and reduce emissions. These products are being marketed by the Company and sales were predominantly in the United States of America, Canada, Mexico and Nigeria. The staffing segment was added on March 1, 2009 and provides staffing services primarily to the light industrial segment of the economy. During the year ended March 31, 2010, the states of AZ, CA, FL and IL accounted for 80% of gross sales.
Litigation - The Company is and may become a party in routine legal actions or proceedings in the ordinary course of its business. Management does not believe that the outcome of these routine matters will have a material adverse effect on the Company’s consolidated financial position or results of operations.
Environmental - The Company’s enhancement products and related operations are subject to extensive federal, state and local laws, regulations and ordinances in the United States relating to the generation, storage, handling, emission, transportation and discharge of certain materials, substances and waste into the environment, and various other health and safety matters. Governmental authorities have the power to enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company must devote substantial financial resources to ensure compliance, and it believes that it is in substantial compliance with all the applicable laws and regulations.
New accounting pronouncements:
GAAP Hierarchy
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS No. 162 amends AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The new accounting standard was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of this standard during the quarter ended September 30, 2009 and subsequent periods did not have a material impact on our statements of operations or financial position.
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). 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.
Convertible Debt
In May 2008, the FASB issued a new accounting standard which provides guidance relating to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). This new standard requires recognition of both the liability and equity components of convertible debt instruments with cash settlement features. The debt component is required to be recognized at the fair value of a similar instrument that does not have an associated equity component. The equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The standard also requires an accretion of the resulting debt discount over the expected life of the debt. Retrospective application to all periods presented is required and a cumulative-effect adjustment is recognized as of the beginning of the first period presented. This standard was effective for us in the first quarter of fiscal year 2010. The adoption of this standard did not have a material impact on our 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.
Interim disclosures about fair value
In April 2009, the FASB issued an amendment to an existing standard which provides guidance relating to interim disclosures about fair value of financial instruments. This new standard requires the disclosure of the carrying amount and the fair value of all financial instruments for interim reporting periods and annual financial statements of publicly traded companies (even if the financial instrument is not recognized in the balance sheet), including the methods and significant assumptions used to estimate the fair values and any changes in such methods and assumptions. This new standard is effective for interim reporting periods ending after June 15, 2009. We adopted this pronouncement during the quarter ended June 30, 2009 without material impact to our 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 amended ASC 860-10 by the codification of SFAS No. 166, “Accounting for Transfers of Financial Assets,” which was codified on December 23, 2009 in ASU No. 2009-16. This 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. ASC 860-10 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)
Also in June 2009, the FASB amended ASC 810-10 by the codification of SFAS No. 167, “Amendments to FASB interpretation No. 46(R),” 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. ASC 810-10 was effective after November 15, 2009. This statement is effective for the Company beginning January 1, 2010 and had 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 made 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.
Improving Disclosures About Fair Value Measurements
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements.” This update will require (1) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (2) information about purchases, sales, issuances and settlements to be presented separately (i.e., present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs.
The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements related to the purchases, sales, issuances and settlements in the roll forward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. The Company is still assessing the impact of this guidance and do not believe the adoption of this guidance will have a material impact on our financial statements.
Subsequent Events
In February 2010, the FASB issued new accounting guidance, under ASC 855 on Subsequent Events, which requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirements that an SEC filer disclose the date through which subsequent events have been evaluated. The guidance was effective upon issuance. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.
Consolidation
In February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU 2010-10), “Consolidation (ASC 810).” The amendments to the consolidation requirements of ASC 810 resulting from the issuance of Statement 167 are deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. The deferral is effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period, which coincides with the effective date of Statement 167. Early application is not permitted. At this time, management is evaluating the potential implications of this pronouncement and has not yet determined its impact on the Company’s consolidated financial statements.
Derivatives and Hedging - Scope Exception Related to Embedded Credit Derivatives
In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging (ASC 815) – Scope Exception Related to Embedded Credit Derivatives. This ASU removes a scope exception, and an entity that has a beneficial interest in securitized financial assets that includes a credit derivative feature must evaluate that feature for bifurcation from the host financial asset in accordance with the guidance at ASC 815. ASU 2010-11 is effective at the beginning of a reporting entity's first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of an entity's first fiscal quarter beginning after March 5, 2010. The Company does not expect that the adoption of ASU 2010-11 will have a material impact on its financial position, results of operations, or cash flows.
Compensation - Stock Compensation
ASU No. 2010-13 was issued in April 2010, and amends and clarifies ASC 718 with respect to the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades. This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.
Note 3 - Inventories
Inventory consists of finished goods and raw material as follows:
| | | March 31, 2010 | | | March 31, 2009 | |
| | | | | | | | | |
| Finished goods | | $ | 68,257 | | | $ | 173,523 | |
| Raw material | | | 211,865 | | | | 195,880 | |
| | | $ | 280,122 | | | $ | 369,403 | |
Note 4 - Property, Plant and Equipment
At March 31, 2010 and 2009, equipment and computers consisted of the following:
| | | March 31, 2010 | | | March 31, 2009 | |
| | | | | | | | | |
| Property and plant | | $ | 1,452,146 | | | $ | 1,452,146 | |
| Equipment and computers | | | 858,328 | | | | 746,611 | |
| Less accumulated depreciation | | | (562,829 | ) | | | (297,923 | ) |
| Net equipment and Computers | | $ | 1,747,645 | | | $ | 1,900,834 | |
During the years ended March 31, 2010 and 2009, depreciation and amortization expense was $264,906 and $127,227, 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 intends to market the related products as soon as production and marketing strategies can be completed. The Company is amortizing this investment over its estimated useful life of seven years on a straight line basis. For the years ended March 31, 2010 and March 31, 2009, amortization was $126,723 in each year. 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 and the addition during 2010 of $283,371 in conjunction with two staffing acquisitions. The carrying value of this intangible is being amortized over 5 years and for the years ended March 31, 2010 and March 31, 2009 the amortization was $677,149 and $54,884, respectively. At March 31, 2010, the Company evaluated its goodwill relative to its staffing business and recognized an impairment of $4,355,151 and reduction of the goodwill by a like amount. The adjustment to the valuation was based on the calculation of the net realizable value of the assets.
Intangible assets subject to amortization:
| | Weighted | | March 31, 2010 | |
| | Average | | Gross Carrying | | | Accumulated | | | Net Carrying | |
| | Useful Life | | Amount | | | Amortization | | | Amount | |
| | | | | | | | | | | |
| Intangible assets subject to amortization: | | | | | | | | | | |
| EPA licenses | 7 years | | $ | 887,055 | | | $ | 506,889 | | | $ | 380,166 | |
| Customer relationships | 5 years | | | 3,576,391 | | | | 732,033 | | | | 2,844,358 | |
| | | | $ | 4,463,446 | | | $ | 1,238,922 | | | $ | 3,224,524 | |
| | | | | | | | | | | | | | |
| Goodwill not subject to amortization: | | | | | | | | | | | | | |
| Goodwill: | | | | | | | | | | | | | |
| Goodwill | | | $ | 8,979,822 | | | $ | 4,355,151 | (1) | | $ | 4,624,671 | |
| | | | $ | 8,979,822 | | | $ | 4,355,151 | | | $ | 4,624,671 | |
(1) Impairment valuation | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 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:
| 2011 | | $ | 842,000 |
| 2012 | | $ | 842,000 |
| 2013 | | $ | 842,000 |
| 2014 | | $ | 698,524 |
Note 6 - Accrued Liabilities
Accrued liabilities consist of the following as of March 31, 2010 and 2009:
| | | March 31, 2010 | | | March 31, 2009 | |
| | | | | | | | | |
| Accrued contingent liabilities | | $ | 1,278,151 | | | $ | 1,278,151 | |
| Accrued interest | | | 2,629,271 | | | | 804,717 | |
| Other accrued expenses and workmen’s compensation claims | | | 955,515 | | | | 235,229 | |
| | | $ | 4,862,937 | | | $ | 2,318,097 | |
As part of our testing of products and new applications the Company agreed to reimburse one of our testing partners for the costs incurred in such testing.
Note 7 – Accrued Payroll, Taxes and Benefits
Accrued payroll, taxes and benefits was $9,400,058 and $2,446,929 at March 31, 2010 and 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 March 31, 2010, unpaid payroll taxes total $8,114,368. The Company has estimated the related penalties and interest at approximately $1,227,283 through March 31, 2010, which are included in accrued liabilities at March 31, 2010. The estimated penalties and interest liability could be subject to material revision in the future. The Company expects to pay these delinquent payroll tax liabilities in installments as soon as possible subject to negotiations with the Internal Revenue Service and various state and local municipalities.
Note 8 - Notes and Contracts Payable
| | | March 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | | | |
| Revolving line of credit against factored Lumea receivables (2) | | $ | 2,011,018 | | | $ | 2,055,015 | |
| Bank loans, payable in installments | | | 340,657 | | | | 359,803 | |
| Mortgage loan payable, monthly payments of principal and interest at 3 month LIBOR plus 4.7% (1) | | | 790,683 | | | | 806,853 | |
| Payments due seller of XenTx Lubricants | | | 254,240 | | | | 254,240 | |
| Loan from Dyson | | | 60,000 | | | | 60,000 | |
| Notes payable | | | 1,336,692 | | | | 1,479,650 | |
| Loans from individuals, due within one year | | | 778,656 | | | | 471,356 | |
| Purchase note payable | | | 1,574,555 | | | | 1,575,139 | |
| Purchase note 1 | | | 4,805,568 | | | | 5,650,000 | |
| Purchase note 2 | | | 2,025,367 | | | | 2,888,796 | |
| | | | | | | | | |
| Total | | | 13,977,436 | | | | 15,597,852 | |
| Less current portion | | | 11,014,332 | | | | 6,536,202 | |
| | | | | | | | | |
| Long-term debt | | $ | 2,963,104 | | | $ | 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 $7 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 is due on March 31, 2011.
Substantially all of the staffing receivables are pledged as collateral for the revolving line of credit. At March 31, 2010, the Company had pledged receivables of $2,488,760. This line of credit has been renewed through March 31, 2011.
Notes payable include amounts due in one year consists of the loan from Shelter Island Opportunity Fund with interest at 12.25% per annum and secured by the plant and equipment in Durant, Oklahoma. Subsequent to the end of the year, the lender and the Company have negotiated a modified payment schedule to bring this loan current. In conjunction with this settlement, substantial portions of this note will subsequently be reflected as long-term. Purchase Notes 1 and 2 are secured by all of the business assets of Lumea. Maturities for the remainder of the loans are as follows:
| For the Years Ending March 31, | | | Amount |
| | | | |
| 2012 | | $ | 127,874 |
| 2013 | | $ | 126,552 |
| 2014 | | $ | 2,122,284 |
| 2015 | | $ | 37,731 |
| Thereafter | | $ | 589,647 |
The balance of the notes payable consist of commercial loans of a vehicles and equipment in the normal course of business.
The Loans from individuals includes four loans which are all due within one year and bear interest from 9% to 12%.
Substantially all of the Company’s assets are pledged as collateral for our debt obligations at March 31, 2010.
The Company was in default on $1,574,555 under the Purchase Note Payable, litigation has commenced and the parties are in negotiations to settle this obligation for a reduced amount payable over the next several years. Subsequent to the end of the year, the Company has commenced litigation against the sellers of the staffing business to the Company in March, 2009. The litigation seeks to rescind the purchase and other equitable relief and the Company has stopped making scheduled payments on the Purchase note 1 ($4,805,568) and Purchase note 2 ($2,025,367) and does not intend to make future payments on these notes. The Company has included the Purchase note 1 note in the due within one year pursuant to generally accepted accounting principles (GAAP). The Company has received a garnishment from the ACE with respect to the payments on the Purchase note 1 seeking payment of the amounts due under the note for obligations of the seller. The Company has resisted these claims and is pursuing its rights through the courts. Substantially all of Purchase note 2 represents potential payments to third party taxing authorities under the successor liability statutes of various states and the Company may be forced to make these payments thereon to maintain its licenses in those states. The litigation is seeking restitution of any such amounts paid under these obligations. Other notes have been modified during the year changing the maturity date and restructuring the payment structure.
Note 9 - Income Taxes
Through March 31, 2010, we recorded a valuation allowance of $11,236,467 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.
We have net operating loss carry forwards of approximately $26,672,547. Our net operating loss carry forwards will expire between 2025 and 2030.
Significant components of our deferred tax assets and liabilities at the balance sheet dates were as follows:
| | | March 31, | |
| | | 2010 | | 2009 | |
| | | | | | |
| Deferred Tax Assets and Liabilities | | | | | |
| Deferred tax assets: | | | | | |
| Net operating loss carryforwards | | $ | 10,273,127 | | | $ | 5,480,393 | |
| Allowance for doubtful accounts | | | 963,340 | | | | 390,822 | |
| Total | | | 11,236,467 | | | | 5,871,215 | |
| Less: Valuation allowance | | | (11,236,467 | ) | | | (5,871,215 | ) |
| Total deferred tax assets | | | – | | | | – | |
| Total deferred tax liabilities | | | – | | | | – | |
| Net deferred tax liabilities | | $ | – | | | $ | – | |
A reconciliation of the federal statutory rate to the effective tax rate is as follows:
| | | Fiscal Years Ended March 31, | |
| | | 2010 | | 2009 | |
| | | | | | |
| Reconciliation | | | | | |
| Income tax credit at statutory rate | | $ | (4,221,701 | ) | | $ | (780,303 | ) |
| Effect of state income taxes | | | (571,032 | ) | | | (105,545 | ) |
| Valuation allowance | | | 4,792,733 | | | | 885,848 | |
| Income taxes (credit) | | $ | – | | | $ | – | |
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 net operating losses expire as follows:
| | | Amount |
| | | | |
| 2025 | | $ | 1,524,541 |
| 2026 | | | 5,132,298 |
| 2027 | | | 3,052,902 |
| 2028 | | | 2,251,030 |
| 2029 | | | 2,295,008 |
| 2030 | | | 12,416,768 |
| Total net operating loss available | | $ | 26,672,547 |
The Company is subject to various state income tax laws. The carryover of net operating losses in the various states range from five (5) years to fifteen (15) years based on the actual business activities within each state.
Note 10 - 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. ASC 820-10 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 derivative liability (See Note 11 – Derivative Financial Instruments) and the cashless warrant liability, both consisting of warrants and options outstanding, at their fair market values as provided by ASC 820-10. The Company used the binomial method to determine the fair value of each derivative.
The following table provides fair market measurements of the derivative liability and cashless warrant liability as of March 31, 2010:
| | | Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3) |
| | | | |
| Derivative liability | | $ | 251,715 |
| Cashless warrant liability | | | 10,496 |
| | | $ | 262,211 |
The change in fair market value of the derivative liability and cashless warrant liability 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 derivative liability and cashless warrant liability as of March 31, 2010:
| | | 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 | | | (540,017 | ) | | | (47,380 | ) | | | (587,397 | ) |
| Ending balance March 31, 2010 | | $ | 251,715 | | | $ | 10,496 | | | $ | 262,211 | |
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 11 – 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 March 31, 2010 and 2009, the value of the 6% Convertible Notes, with interest quarterly, was as follows:
| Maturity | | Face Amount | | | Conversion Derivative | | | Balance |
| | | | | | | | | |
| April 28, 2009 | | $ | 327,050 | | | $ | 327,050 | | | $ | 654,100 |
| August 17, 2009 | | | 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 year ended March 31, 2010 and 2009 was $271,124 and $154,507, respectively.
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 March 31, 2010, 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 815-10, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, 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, net of expirations, to purchase 8,725,000 shares of the Company’s common stock at exercise prices between $0.75 and $2.50 per share. 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. 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 March 31, 2010, there were 18,225,000 shares subject to warrants and options at a weighted average exercise price of $1.95.
| | | | Number of Shares | | | Weighted Average |
| | | | Subject to Outstanding | | | Remaining |
| | | | Warrants and Options | | | Contractual Life |
| Exercise Price | | | and Exercisable | | | (years) |
| | | | | | | |
| $ 0.75 | | | 5,775,000 | | | 2.25 |
| $ 2.50 | | | 12,450,000 | | | 3.26 |
| | | | 18,225,000 | | | |
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 March 31, 2010 were the volatility of 227.1%, risk free rate of between 0.41% and 2.55% 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 20 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 March 31, 2010 under all non-cancelable leases for fiscal years ending March 31:
| | | Amount |
| | | |
| 2011 | | $ | 247,039 |
| 2012 | | | 186,781 |
| 2013 | | | 99,018 |
| 2014 | | | 60,000 |
| 2015 | | | 60,000 |
| Thereafter | | | 50,000 |
| | | $ | 702,838 |
Lease expense for the years ended March 31, 2010 and 2009 were $527,098 and $99,431, respectively. The total of all scheduled lease payments, assuming all locations are continued at the same rates, is $320,037 per year.
Workmens’ Compensation Claims
In conjunction with our staffing business, in states other than those that require participation in state funded programs, we maintain a workmens’ compensation policy to cover claims by employees. The Company retains the first portion of each such claims and the funds the amount to the insurance carrier on a current basis. Should our claims experience increase in frequency and/or severity our claims losses would increase substantially.
General Liabilities
The Company is subject to normal recurring litigation as a result of its normal business lines. The Company attempts to provide for all losses as known. There may be losses or claims that the Company is not currently aware of or has not been provided information as to the claims or the nature of the claim as of the financial statement review date.
Note 14 - Related Party Transactions
In conjunction with the acquisition of the assets of Lumea, a company owned by the President/CEO of the Company had a prior placement agreement with the Sellers of the assets and as such was entitled to receive compensation for such placement with any entity. As part of the closing that company was paid a fee of $168,333 which was paid by the issuance of 3,366,667 shares of Green Planet’s restricted common stock. The executives of the Company were issued a total of 1.5 million restricted shares of common stock during 2009 as part of their compensation. The Company recognized expense of $60,000 in conjunction with these issuances.
Note 15 - Company Stock
Preferred Stock
At March 31, 2010 and 2009, the Company had 1,000,000 shares of $0.001 par value authorized and no outstanding or issued shares. If and when issued, such shares will have the rights, preferences, privileges and restrictions as determined by the Board of Directors.
Common Stock
At March 31, 2010 and 2009, the Company had 250,000,000 shares authorized of $0.001 par value common stock, of which issued and outstanding shares were 147,330,292 and 117,440,764, respectively.
Warrants
In conjunction with four fundings during the year ended March 31, 2007, the Company issued 7,000,000 warrants at an exercise price of $2.50 per share and 5,000,000 warrants to cure a default caused by late filing of the registration statement with the Securities and Exchange Commission and 700,000 cashless warrants to the broker that brought the loan packages to the Company. All of these warrants expire seven years from issue.
Also, the Company issued 1,400,000 cashless warrants to the seller in conjunction with the acquisition of Dyson Properties, Inc. that expired March 26, 2010.
During the year ended March 31, 2008, the Company issued 5,775,000 warrants at an exercise price of $0.75 per share and 519,750 cashless warrants at an exercise price of $0.75 for a period of 5 years in conjunction with a loan funding in June of 2007. The Company also issued warrants to purchase 500,000 shares at an exercise price of $0.75 for a term of two years in conjunction with the investor’s purchase of common stock that expire on May 21, 2009.
At March 31, 2010, the status of 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 9 - November 10, 2015 |
| Cashless July 1, 2007 | | 519,750 | | $ | .75 | | June 30, 2012 |
The warrants have no intrinsic value at March 31, 2010.
Stock Options
At March 31, 2010, 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, 2010, 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 Company’s stock option activity during the year ended March 31, 2010:
| | Shares Underlying Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| | | | | | | | | |
| Outstanding at March 31, 2008 | 5,415,000 | | $ | .20 | | 3.0 | | – |
| Granted | – | | | – | | – | | – |
| Exercised | – | | | – | | – | | – |
| Canceled | 450,000 | | | .20 | | – | | – |
| | | | | | | | | |
| Outstanding at March 31, 2009 | 4,965,000 | | | .20 | | 2.0 | | – |
| Granted | – | | | – | | – | | – |
| Exercised | – | | | – | | – | | – |
| Canceled | – | | | – | | – | | – |
| | | | | | | | | |
| Outstanding at March 31, 2010 | 4,965,000 | | $ | .20 | | 1.0 | | – |
The following table sets forth the status of the Company’s stock options as of March 31, 2010:
| | | 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 March 31, 2010 | | | – | | | $ | – |
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 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. During the years ended March 31, 2010 and 2009 the Company recognized expense of $201,299 and $358,362, respectively.
The original unrecognized stock-based compensation expense related to the unvested options was approximately $610,548 and was recognized as expense over the vesting period 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. These options have no intrinsic value at March 31, 2010 or March 31, 2009.
The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates.
The Company based its expected volatility on the historical volatility of similar companies with consideration given to the expected life of the award. The Company continued to consistently use this method until March 31, 2009 when it appeared that sufficient market acceptance of its stock and volume has reached a stable level.
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 per share weighted average fair value of stock options granted for the fiscal year ended March 31, 2008 was $0.11.
Note 16 - Earnings (Loss) Per Share
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 March 31, 2010 or 2009. The diluted income (loss) per common share excludes the dilutive effect of approximately 24,409,750 and 25,690,000 warrants and options at March 31, 2010 and 2009, respectively, since such warrants and options have an exercise price in excess of the average market value of the Company’s common stock during the respective periods.
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 year ended March 31, 2010 and March 31, 2009 are presented below.
| | | Additives & | | | | | | Corporate | | | | |
| 2009 | | Green Energy | | | Staffing | | | & Eliminations | | | Consolidated | |
| | | | | | | | | | | | | |
| Income statement information: | | | | | | | | | | | | |
| United States sales | | $ | 2,348,053 | | | $ | 5,784,408 | | | $ | – | | | $ | 8,132,461 | |
| Foreign sales | | | 1,038,333 | | | | – | | | | – | | | | 1,038,333 | |
| Gross sales | | | 3,386,386 | | | | 5,784,408 | | | | – | | | | 9,170,794 | |
| Net sales | | | 3,386,386 | | | | 5,784,408 | | | | – | | | | 9,170,794 | |
| Depreciation and amortization | | | 244,259 | | | | 64,574 | | | | – | | | | 308,833 | |
| Interest (expense)/income | | | (218,519 | ) | | | (67,317 | ) | | | 526,029 | | | | 240,193 | |
| Loss before income taxes | | | (1,263,515 | ) | | | (362,912 | ) | | | (1,069,850 | ) | | | (2,696,277 | ) |
| Net loss | | | (1,263,515 | ) | | | (362,912 | ) | | | (1,069,850 | ) | | | (2,696,277 | ) |
| | | | | | | | | | | | | | | | | |
| Balance sheet information: | | | | | | | | | | | | | | | | |
| Total net intangibles | | | 506,889 | | | | 3,238,136 | | | | – | | | | 3,745,025 | |
| Total goodwill | | | – | | | | 8,979,822 | | | | – | | | | 8,979,822 | |
| Total assets | | | 4,146,987 | | | | 13,729,688 | | | | 3,888,367 | | | | 21,765,042 | |
| | | Additives & | | | | | | Corporate | | | | |
| 2010 | | Green Energy | | | Staffing | | | & Eliminations | | | Consolidated | |
| | | | | | | | | | | | | |
| Income statement information: | | | | | | | | | | | | |
| United States sales | | $ | 1,165,747 | | | $ | 56,214,920 | | | $ | – | | | $ | 57,380,667 | |
| Gross sales | | | 1,165,747 | | | | 56,214,920 | | | | – | | | | 57,380,667 | |
| Net sales | | | 1,165,747 | | | | 56,214,920 | | | | – | | | | 57,380,667 | |
| Depreciation and amortization | | | 358,581 | | | | 710,197 | | | | – | | | | 1,068,778 | |
| Allowance for doubtful accounts | | | 758,726 | | | | 724,524 | | | | – | | | | 1,483,250 | |
| Impairment of goodwill | | | – | | | | 4,355,151 | | | | – | | | | 4,355,151 | |
| Interest (expense)/income | | | (72,420 | ) | | | (1,811,864 | ) | | | (196,599) | | | | (2,080,833 | ) |
| Loss before income taxes | | | (1,312,941 | ) | | | (10,745,049 | ) | | | (3,616,966 | ) | | | (15,674,956 | ) |
| Net loss | | | (1,312,941 | ) | | | (10,745,049 | ) | | | (3,616,966 | ) | | | (15,674,956 | ) |
| | | | | | | | | | | | | | | | | |
| Balance sheet information: | | | | | | | | | | | | | | | | |
| Total net intangibles | | | 380,166 | | | | 2,844,358 | | | | – | | | | 3,224,358 | |
| Total goodwill | | | – | | | | 4,624,671 | | | | – | | | | 4,624,671 | |
| Total assets | | | 2,341,217 | | | | 8,905,518 | | | | 3,888,367 | | | | 15,135,102 | |
Note 18 – Subsequent Events
Subsequent to March 31, 2010, the Company issued 1,578,947 shares of common stock in payment of interest and principal and 1,765,000 shares of common stock for consultant and employee compensation. These transactions were valued at $31,579 and $25,300, respectively.
