NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1
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BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
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REFERENCES TO THE COMPANY
References to “
we
,” “
our
,” “
us
,” “
GreenShift
” or the “
Company
” in the consolidated financial statements and in these notes to the consolidated financial statements refer to GreenShift Corporation, a Delaware corporation, and its subsidiaries.
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities which we control. All significant intercompany balances and transactions have been eliminated on a consolidated basis for reporting purposes.
DESCRIPTION OF THE BUSINESS
We develop and commercialize clean technologies that facilitate the more efficient use of natural resources. We are focused on doing so today in the U.S. and international ethanol industry, where we innovate and offer technologies that improve the profitability of licensed ethanol producers.
We generate revenue by licensing our technologies to ethanol producers in exchange for ongoing royalty and other license fees. During 2012, several plants were licensed to use our technologies. During the year ended December 31, 2013 three customers each provided over 10% of our revenue; during the year ended December 31, 2012, three customers each provided over 10% of our revenue.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). The revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a "qualitative" assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.
In February 2013, the FASB issued ASU 2013-04, Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The amendments in ASU 2013-04 to Topic 405, Liabilities, provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the update is fixed at the reporting date, except for obligations addressed with existing U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations. The amendment is effective retrospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In April 2013 the FASB issued ASU 2013-07, Liquidation Basis of Accounting. The amendments in ASU 2013-07 to Topic 205, Presentation of Financial Statements, clarify when an entity should apply the liquidation basis of accounting and provide principles for the recognition and measurement of associated assets and liabilities. In accordance with the amendments, the liquidation basis is used when liquidation is imminent. Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces. The amendments in ASU 2013-07 are effective prospectively for entities that determine liquidation is imminent for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In July 2013 the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU 2013-11 to Topic 740, Income Taxes , clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company is currently evaluating the possible impact of ASU 2013-11, but does not anticipate that it will have a material impact on the Company's consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of December 31, 2013, the Company had $3,896,312 in cash, and current liabilities exceeded current assets by $41,879,085. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Our ability to satisfy our obligations will depend on our success in obtaining or restructuring financing, our success in developing revenue sources, and our success in negotiating with the creditors. Management’s plans to resolve the Company’s working capital deficit include increasing revenue. There can be no assurances that the Company will be able to eliminate its working capital deficit and that the Company’s historical operating losses will not recur. The accompanying financial statements do not contain any adjustments which may be required as a result of this uncertainty.
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NOTE 3
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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PRINCIPLES OF CONSOLIDATION
All significant intercompany balances and transactions were eliminated in consolidation. The financial statements for the periods ended December 31, 2013 and 2012 have been consolidated to include the accounts of the Company and its subsidiaries.
COST METHOD OF ACCOUNTING FOR UNCONSOLIDATED SUBSIDIARIES
The Company accounts for its minority investment in ZeroPoint Clean Tech, Inc. under the cost method. Application of this method requires the Company to periodically review these investments in order to determine whether to maintain the current carrying value or to write off some or all of the investments. While the Company uses some objective measurements in its review, the review process involves a number of judgments on the part of the Company’s management. These judgments include assessments of the likelihood of ZeroPoint to obtain additional financing, to achieve future milestones, make sales and to compete effectively in its markets. In making these judgments the Company must also attempt to anticipate trends in ZeroPoint’s industry as well as in the general economy. During its yearly review process, the Company recognized an impairment loss of the $2,501,324 investment in ZeroPoint as the impairment was deemed other than temporary. As a result, the investment has been written down to fair value and the impairment of cost method of investment loss has been recorded during the year ended December 31, 2013.
SEGMENT INFORMATION
We determined our reporting units in accordance with FASB ASC 280, “
Segment Reporting
” (“ASC 280”). We evaluate a reporting unit by first identifying its operating segments under ASC 280. We then evaluate each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, we evaluate those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, we determine if the segments are economically similar and, if so, the operating segments are aggregated. We have one operating segment and reporting unit. We operate in one reportable business segment; we provide technologies and related products and services to U.S.-based ethanol producers. We are organized and operated as one business. We exclusively sell our technologies, products and services to ethanol producers that have entered into license agreements with the Company. No sales of any kind occur, and no costs of sales of any kind are incurred, in the absence of a license agreement. A single management team that reports to the chief operating decision maker comprehensively manages the entire business. We do not operate any material separate lines of business or separate business entities with respect to our technologies, products and services. The Company does not accumulate discrete financial information according to the nature or structure of any specific technology, product and/or service provided to the Company’s licensees. Instead, management reviews its business as a single operating segment, using financial and other information rendered meaningful only by the fact that such information is presented and reviewed in the aggregate. Discrete financial information is not available by more than one operating segment, and disaggregation of our operating results would be impracticable.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is reasonably assured. The Company recognizes revenue from licensing of the Company’s corn oil extraction technologies when corn oil sales occur. Licensing royalties are recognized as earned by calculating the royalty as a percentage of gross corn oil sales by the ethanol plants. For the purposes of assessing royalties, the sale of corn oil is deemed to occur when shipped, which is when four basic criteria have been met: (i) persuasive evidence of a customer arrangement; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured, and (iv) product delivery has occurred, which is generally upon shipment to the buyer of the corn oil. Deposits from customers are not recognized as revenues, but as liabilities, until the following conditions are met: revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services, or when assets received in such exchange are readily convertible to cash or claim to cash, or when such goods or services are transferred. When an income item is earned, the related revenue item is recognized and any deferred revenue is reduced. To the extent revenues are generated from the Company’s licensing support services, the Company recognizes such revenues when the services are completed and billed. The Company provides process engineering services on fixed price contracts. These services are generally provided over a short period of less than three months. Revenue from fixed price contracts is recognized on a pro rata basis over the life of the contract as they are generally performed evenly over the contract period. The Company additionally performs under fixed-price contracts involving design, engineering, procurement, installation, and start-up of oil recovery and other production systems. Revenues and fees on these contracts are recognized using the percentage-of-completion method of accounting, and specifically the efforts-expended percentage-of-completion method using measures such as task duration and completion. The efforts-expended approach is used in situations where it is more representative of progress on a contract than the cost-to-cost or the labor-hours methods. The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.
FINANCIAL INSTRUMENTS
The carrying values of accounts receivable, other receivables, accounts payable and accrued expenses approximate their fair values due to their short term maturities. The carrying values of the Company’s long-term debt approximate their fair values based upon a comparison of the interest rate and terms of such debt to the rates and terms of debt currently available to the Company. It was not practical to estimate the fair value of the convertible debt. In order to do so, it would be necessary to obtain an independent valuation of these unique instruments. The cost of that valuation would not be justified in light of the materiality of the instruments to the Company.
RECEIVABLES AND CREDIT CONCENTRATION
Accounts receivable are uncollateralized, non-interest-bearing customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Accounts receivable in excess of 90 days old are evaluated for delinquency. In addition, we consider historical bad debts and current economic trends in evaluating the allowance for bad debts. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the oldest unpaid invoices. The carrying amount of accounts receivable has been reduced by a valuation allowance that has been set up in the amount $10,000 and $222,015 as of December 31, 2013 and 2012, respectively. The Company recognized $200,015 in bad debt recoveries due to a change in the estimated valuation allowance. Management will continue to review the valuation allowance on a quarterly basis.
INVENTORIES
The Company maintains an inventory of equipment and components used in systems designed to extract corn oil from licensed ethanol production facilities. The inventory, which consists of equipment and component parts, is held for sale to the Company’s licensees on an as needed basis. Inventories are stated at the lower of cost or market, with cost being determined by the specific identification method. Inventories at December 31, 2013 and 2012 consist of the following:
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2013
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2012
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Equipment inventory
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$
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1,145,533
|
|
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$
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1,837,646
|
|
During both the year ended December 31, 2013 and the year ended December 31, 2012, the Company evaluated the inventory on its books and determined that a write-down to market was necessary. As a result, the Company wrote down inventory by $309,263 in 2013 and by $319,900 in 2012, which was expensed under cost of goods sold as a loss on inventory valuation.
CASH AND EQUIVALENTS
The Company considers cash and equivalents to be cash and short-term investments with original maturities of three months or less from the date of acquisition.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the lease or their useful lives. Gains and losses on depreciable assets retired or sold are recognized in the consolidated statement of operations in the year of disposal, and repair and maintenance expenditures are expensed as incurred. Property, plant and equipment are stated at cost. Expenditures for major renewals and improvements which extend the life or usefulness of the asset are capitalized. Once an asset has been completed and placed in service, it is transferred to the appropriate category and depreciation commences. The Company uses the straight line method for depreciation and depreciates equipment over the estimated useful life of the assets: office and computer equipment over 3-5 years and corn oil extraction systems over a 10 year period. Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal, and repair and maintenance expenditures are expensed as incurred. Property and equipment are stated at cost and include amounts capitalized under capital lease obligations.
INTANGIBLE ASSETS
The Company accounts for its intangible assets pursuant to ASC 350-20-55-24, “
Intangibles – Goodwill and Other”
. Under ASC 350, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset’s estimated fair value with its carrying value, based on cash flow methodology. Intangibles with definite lives are subject to impairment testing in the event of certain indicators. Impairment in the carrying value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value. At December 31, 2013, the Company’s balance sheet included intangible assets with an aggregate carrying value of $24,381 as compared to $27,584 at December 31, 2012.
LONG-LIVED ASSETS
The Company assesses the valuation of components of its property and equipment and other long-lived assets whenever events or circumstances dictate that the carrying value might not be recoverable. The Company bases its evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group may not be recoverable, the Company determines whether an impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If the estimate of undiscounted cash flows during the estimated useful life of the asset is less than the carrying value of the asset, the Company recognizes a loss for the difference between the carrying value of the asset and its estimated fair value, generally measured by the present value of the estimated cash flows.
INCOME TAXES
Income taxes are accounted for under the asset and liability method, whereby deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.
All of the subsidiaries are consolidated for state income tax purposes.
BASIC AND DILUTED INCOME (LOSS) PER SHARE
The Company computes its net income or loss per common share under the provisions of ASC 260, “
Earnings per Share
,” whereby basic net income or loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Dilutive net loss per share excludes potential common shares issuable upon conversion of all derivative securities if the effect is anti-dilutive. Thus, common stock issuable upon exercise or conversion of options, warrants, convertible preferred stock, or convertible debentures are excluded from computation of diluted net loss per share, but are included in computation of diluted net income per share. During the year ended December 31, 2013, we reported net losses and, in accordance with ASC 260, dilutive instruments were excluded from the net loss per share calculation for such periods. During the year ended 2012, we reported net income and accordingly included potentially dilutive instruments in the fully diluted net income per share calculation and the dilutive effect of convertible instruments were determined by application of the if-converted method.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. We use estimates and assumptions in accounting for the following significant matters, among others:
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Allowances for doubtful accounts;
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-
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Valuation of acquired assets;
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-
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Inventory valuation and allowances;
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-
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Fair value of derivative instruments and related hedged items;
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-
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Useful lives of property and equipment and intangible assets;
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-
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Asset retirement obligations;
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-
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Long lived asset impairments, including goodwill;
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-
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Contingencies;
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-
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Fair value of options and restricted stock granted under our stock-based compensation plans; and,
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-
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Tax related items
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Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements. We periodically review estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. The revisions to estimates or assumptions during the periods presented in the accompanying consolidated financial statements were not considered to be significant.
DEFERRED REVENUE
Deposits from customers are not recognized as revenues, but as liabilities, until the following conditions are met: revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services or when assets received in such exchange are readily convertible to cash or claim to cash or when such goods/services are transferred. When such income item is earned, the related revenue item is recognized, and the deferred revenue is reduced. To the extent revenues are generated from the Company’s licensing support services, the Company recognizes such revenues when services are completed and billed. The Company has received deposits from its various clients that have been recorded as deferred revenue in the amount of $70,000 and $113,750 as of the years ended December 31, 2013 and 2012, respectively.
DEFERRED FINANCING CHARGES AND DEBT DISCOUNTS
Deferred finance costs represent costs paid to third parties in order to obtain long-term financing and have been reflected as other assets. Costs incurred with parties who are providing the actual long-term financing, which generally include the value of warrants or the fair value of an embedded derivative conversion feature are reflected as a debt discount. These costs and discounts are amortized over the life of the related debt. Amortization expense related to these costs and discounts were $0 and $374,953 for the years ended December 31, 2013 and 2012, respectively and are included in other expense.
FINANCIAL INSTRUMENTS
The carrying values of accounts receivable, other receivables, accounts payable, and accrued expenses approximate their fair values due to their short term maturities. The carrying values of the Company’s long-term debt approximate their fair values based upon a comparison of the interest rate and terms of such debt to the rates and terms of debt currently available to the Company. It was not practical to estimate the fair value of the convertible debt. In order to do so, it would be necessary to obtain an independent valuation of these unique instruments. The cost of that valuation would not be justified in light of the materiality of the instruments to the Company.
FAIR VALUE INSTRUMENTS
Effective July 1 2009, the Company adopted ASC 820,
Fair Value Measurements and Disclosures
. This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that require or permit fair value measurements. The Company accounted for the convertible debentures in accordance with ASC 480,
Distinguishing Liabilities from Equity
, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.
Effective July 1 2009, the Company adopted ASC 820-10-55-23A,
Scope Application to Certain Non-Financial Assets and Certain Non-Financial Liabilities
, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In January 2010, the FASB issued an update to ASC 820, which requires additional disclosures about inputs into valuation techniques, disclosures about significant transfers into or out of Levels 1 and 2, and disaggregation of purchases, sales, issuances, and settlements in the Level 3 rollforward disclosure.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
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Level 1
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quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives
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Level 2
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inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges
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Level 3
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unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models
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The following table presents the embedded derivative, the Company’s only financial assets measured and recorded at fair value on the Company’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy during the years ended December 31, 2013:
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Embedded conversion liabilities as of December 31, 2013:
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Level 1
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$
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--
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Level 2
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--
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Level 3
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2,646,118
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Total
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$
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2,646,118
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The following table reconciles, for the period ended December 31, 2013, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:
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Balance of embedded derivative as of December 31, 2011
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$
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3,079,447
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Present value of beneficial conversion features of new debentures
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4,334
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Accretion adjustments to fair value – beneficial conversion features
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269,604
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Reductions in fair value due to repayments/redemptions
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(334,656
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)
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Reductions in fair value due to conversion of principal
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(78,041
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)
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Balance of embedded derivatives at December 31, 2012
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2,940,688
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Present value of beneficial conversion features of new debentures
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122,265
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Accretion adjustments to fair value – beneficial conversion features
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84,844
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Reductions in fair value due to repayments/redemptions
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(449,195
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)
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Reductions in fair value due to principal conversions
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(52,484
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)
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Balance at December 31, 2013
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$
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2,646,118
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The fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for the calculated value. The Company recognizes the initial expense for the conversion liability which is added to the carrying value of the debenture or the liability for preferred stock. The Company also recognizes expense for accretion of the conversion liability to fair value over the term of the note. The Company has adopted ASC 480,
Distinguishing Liabilities from Equity
, as the conversion feature embedded in each debenture and/or convertible preferred share could result in the note principal and/or preferred shares being converted to a variable number of the Company’s common shares.
STOCK BASED COMPENSATION
The Company accounts for stock, stock options and stock warrants issued for services and compensation by employees under the fair value method. For non-employees, the fair market value of the Company’s stock is measured on the date of stock issuance or the date an option/warrant is granted as appropriate under ASC 718 “Compensation – Stock Compensation”. The Company determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. Effective July 1, 2006, the Company adopted the provisions of ASC 718, which establishes accounting for equity instruments exchanged for employee services. Under the provisions ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
The Company maintains cash balances with financial institutions that at times may exceed the limits insured by the Federal Deposit Insurance Corporation. Accounts receivable are uncollateralized, non-interest-bearing customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. One customer balance represents 29% of accounts receivable; one customer's revenue represented 26% of total revenue
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NOTE 5
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STOCKHOLDERS’ EQUITY
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SERIES B PREFERRED STOCK
Each share of Series B Preferred Stock may be converted by the holder into 0.025 shares of common stock. Upon the declaration of dividends on common stock, the holders would be entitled to cumulative dividend rights equal to that of the holders of the number of shares into which the Series B Preferred Shares are convertible, and have voting privileges of one vote to every one common share. At December 31, 2013 and 2012, there were 2,480,544 shares of Series B Preferred Stock issued and outstanding.
SERIES D PREFERRED STOCK
Shares of the Series D Preferred Stock (the “Series D Shares”) may be converted by the holder into Company common stock. The conversion ratio is such that the full 1,000,000 Series D Shares originally issued convert into Company common shares representing 80% of the fully diluted outstanding common shares outstanding after the conversion (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder). The holder of Series D Shares may cast the number of votes at a shareholders meeting or by written consent that equals the number of common shares into which the Series D Shares are convertible on the record date for the shareholder action. In the event the Board of Directors declares a dividend payable to Company common shareholders, the holders of Series D Shares will receive the dividend that would be payable if the Series D Shares were converted into Company common shares prior to the dividend. In the event of a liquidation of the Company, the holders of Series D Shares will receive a preferential distribution of $0.001 per share, and will share in the distribution as if the Series D Shares had been converted into common shares. The Company has issued 800,000 Series D Shares to Viridis Capital, LLC, and 62,500 Series D Shares to Minority Interest Fund (II), LLC. However, Viridis and the Company are subject to an additional agreements which, if performed, provide for additional (but currently unissued) shares of the Company’s Series D Preferred Stock to be beneficially owned by Edward Carroll (187,500 shares), Acutus Capital, LLC (124,875 shares) and Minority Interest Fund (II), LLC (41,034 additional shares).
ASC 480,
Distinguishing Liabilities from Equity
, sets forth the requirements for determination of whether a financial instrument contains an embedded derivative that must be bifurcated from the host contract, therefore the Company evaluated whether the conversion feature for Series D Preferred Stock would require such treatment; one of the exceptions to bifurcation of the embedded conversion feature is that the conversion feature as a standalone instrument would be classified in stockholders’ equity. Management has determined that the conversion option would not be classified as a liability as a standalone instrument, therefore it meets the exception for bifurcation of the embedded derivative under ASC 815,
Derivatives and Hedging
. ASC 815 addresses whether an instrument that is not under the scope of ASC 480 would be classified as liability or equity; one of the factors that would require liability classification is if the Company does not have sufficient authorized shares to effect the conversion. If a company could be required to obtain shareholder approval to increase the company's authorized shares in order to net-share or physically settle a contract, share settlement is not controlled by the company. The majority of the Company’s outstanding shares of Series D Preferred Stock are owned by Viridis Capital, LLC, an entity controlled by Kevin Kreisler, the chairman of the Company. If all the Series D shares held by Viridis Capital were converted and exceeded the number of authorized common shares, there would be no contingent factors or events that a third party could bring up that would prevent Mr. Kreisler from authorizing the additional shares. There would be no need to have to go to anyone outside the Company for approval since Mr. Kreisler, through Viridis Capital, is the Company’s majority shareholder. As a result, the share settlement is controlled by the Company and with ASC 815. The Company assessed all other factors in ASC 815 to determine how the conversion feature would be classified.
SERIES F PREFERRED STOCK
Effective January 1, 2010, GS CleanTech Corporation, a wholly-owned subsidiary of the Company, executed an Amended and Restated Technology Acquisition Agreement (“TAA”) with Cantrell Winsness Technologies, LLC (“CWT”), David F. Cantrell, David Winsness, Gregory P. Barlage and John W. Davis (the “Sellers”) pursuant to which the parties amended and restated the method of calculating the purchase price for the Company’s corn oil extraction technology (the “Technology”). The TAA provides for the payment by the Company of royalties in connection with the Company’s corn oil extraction technologies, the reduction of those royalties as the Sellers receive payment, and a mechanism for conversion of accrued or prepaid royalties into Company common stock. To achieve this latter mechanism, the Company agreed to issue to the Sellers a one-time prepayment in the form of 1,000,000 shares of redeemable Series F Preferred Stock with a face value of $10 per preferred share. The Series F preferred shares are redeemable at face value and a rate equal to the amount royalties paid or prepaid under the TAA. In addition, the Sellers have the right to convert the Series F preferred shares to pay or prepay royalties at a rate equal to the cash proceeds received by the Sellers upon sale of the common shares issued upon conversion Series F preferred shares. The TAA provides for the payment to the Sellers of an initial royalty fee equal to the lesser of $0.10 per gallon or a percentage of net cash flows, both of which are reduced ratably to $0.025 per gallon upon payment, prepayment or conversion as described above. The Company’s obligations under the TAA are guaranteed by Viridis Capital, LLC, which guarantee was subordinated by the Sellers to the rights of YA Global under its guaranty agreement with Viridis Capital (see Note 13,
Guaranty Agreements
, below). The Company accounted for the Series F preferred shares in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible Series F preferred shares could result in the preferred shares being converted to a variable number of the Company’s common shares. The Company determined the value of the Series F preferred shares at the grant date to be $925,926 which represented the estimated value of the preferred shares based on common shares into which they could be converted at the grant date, which included the present value of the conversion feature, which was determined to be $428,381. During the year ended December 31, 2013, the Company recognized a reduction in conversion liability at present value of $101,103 for royalties paid under the agreement, and recorded an expense of $58,253 for the accretion to fair value at December 31, 2013, including the grant date value plus the accretion less redemptions of the conversion liability during the year. The liability for the conversion feature shall increase from its present value of $266,711 at December 31, 2013 to its estimated settlement value of $627,193 at June 10, 2020.
The only conditions under which the Company would be required to redeem its convertible preferred stock for cash would be in the event of a liquidation of the Company or in the event of a cash-out merger of the Company.
STOCK OPTIONS
The Company accounts for stock and stock options issued for services and compensation by employees under the fair value method. For non-employees, the fair market value of the Company’s stock on the date of stock issuance or option/grant is used. The Company determined the fair market value of the options issued under the Black-Scholes Pricing Model. The Company adopted the provisions of ASC 505, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of ASC 505, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Activity under the plan and issuances of options and/or warrants for the years ended December 31, 2013 and 2012 is as follows:
|
|
|
Number of
Shares
|
|
|
Wt. Avg.
Exercise Price
|
|
|
Outstanding at December 31, 2011
|
|
|
99,663
|
|
|
$
|
49.19
|
|
|
Granted at fair value
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited
|
|
|
--
|
|
|
|
--
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
Outstanding at December 31, 2012
|
|
|
99,663
|
|
|
|
49.19
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at fair value
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited
|
|
|
(62,540
|
)
|
|
|
20.28
|
|
|
Expired
|
|
|
(16,123
|
)
|
|
|
191.97
|
|
|
Outstanding at December 31, 2013
|
|
|
21,000
|
|
|
$
|
20.00
|
|
The weighted average remaining life of the outstanding options at December 31, 2013, all of which are exercisable, is 2.24 years.
COMMON STOCK
During the year ended December 31, 2013 and 2012, the Company issued a total of 867,938,932 shares and 45,867,143 shares of common stock, respectively, upon conversion in period of $1,193,860 and $1,157,218, respectively, of principal and accrued interest due pursuant to the Company’s various convertible debentures (see Note 11,
Debt Obligations
, below).
|
NOTE 6
|
DISCONTINUED OPERATIONS
|
The Company recorded $0 and $137,000 in income during the years ended December 31, 2013 and 2012, respectively, in connection with a gain on extinguishment of obligations previously due in regards to discontinued operations.
The Company has total deposits in the amount of $69,730 and $70,634 as of the years ending December 31, 2013 and 2012.
|
NOTE 8
|
GOODWILL AND INTANGIBLE ASSETS
|
The Company accounts for its intangible assets pursuant to ASC 350-20-55-24, “
Intangibles – Goodwill and Other”
. Under ASC 350, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset’s estimated fair value with its carrying value, based on cash flow methodology. Intangibles with definite lives are subject to impairment testing in the event of certain indicators. Impairment in the carrying value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value.
The Company’s intangible assets at December 31, 2013 and 2012, respectively, include the following:
|
|
|
|
2013
|
|
|
|
2012
|
|
|
License fees
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
Patent
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Website
|
|
|
45,076
|
|
|
|
45,076
|
|
|
Accumulated amortization
|
|
|
(220,695)
|
|
|
|
(217,492)
|
|
|
Intangible assets, net
|
|
$
|
24,381
|
|
|
$
|
27,584
|
|
Amortization of intangible assets was $3,202 and $24,631 for the twelve months ended December 31, 2013 and 2012 respectively. During its yearly review process for the year ended December 31, 2012, the Company wrote off $75,000 in licensing fees related to its formerly owned corn oil extraction systems that was deemed fully impaired. Estimated amortization expense for future years is as follows:
|
2014
|
|
$
|
3,202
|
|
|
2015
|
|
|
3,202
|
|
|
2016
|
|
|
3,202
|
|
|
2017
|
|
|
3,202
|
|
|
2018
|
|
|
3,202
|
|
|
Thereafter
|
|
|
8,371
|
|
|
Total
|
|
$
|
24,381
|
|
|
NOTE 9
|
PROPERTY AND EQUIPMENT
|
Property, plant and equipment consisted of the following:
|
|
|
|
2013
|
|
|
|
2012
|
|
|
Furniture and fixtures
|
|
$
|
9,311
|
|
|
$
|
46,223
|
|
|
Machinery and equipment
|
|
|
9,855
|
|
|
|
75,634
|
|
|
Computer equipment
|
|
|
35,584
|
|
|
|
35,584
|
|
|
Processing equipment
|
|
|
--
|
|
|
|
--
|
|
|
Sub-total
|
|
|
54,750
|
|
|
|
157,441
|
|
|
Less accumulated depreciation
|
|
|
(54,750
|
)
|
|
|
(157,441
|
)
|
|
Total
|
|
$
|
--
|
|
|
$
|
--
|
|
The property, plant and equipment has been fully depreciated. When the office in New York was closed, the furniture and other property were sold for $5,000.
Deposits from customers are not recognized as revenues, but as liabilities, until the following conditions are met: revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services or when assets received in such exchange are readily convertible to cash or claim to cash or when such goods/services are transferred. When such income item is earned, the related revenue item is recognized, and the deferred revenue is reduced. To the extent revenues are generated from the Company’s licensing support services, the Company recognizes such revenues when services are completed and billed. The Company has received deposits from its various clients that have been recorded as deferred revenue in the amount of $70,000 and $113,750 as of the years ended December 31, 2013 and 2012, respectively.
The following is a summary of the Company’s financing arrangements as of December 31, 2013 and 2012:
|
|
|
|
2013
|
|
|
|
2012
|
|
|
Current portion of long term debt:
|
|
|
|
|
|
|
|
|
|
Mortgages and other term notes
|
|
$
|
21,743
|
|
|
$
|
21,743
|
|
|
Current portion of notes payable
|
|
|
1,345,302
|
|
|
|
1,345,302
|
|
|
Total current portion of long term debt
|
|
|
1,367,045
|
|
|
|
1,367,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of convertible debentures:
|
|
|
|
|
|
|
|
|
|
YA Global Investments, L.P., 6% interest, conversion at 90% of market
|
|
|
17,908,037
|
|
|
|
20,256,311
|
|
|
Andypolo, LP, 6% interest, conversion at 90% of market
|
|
|
3,618,109
|
|
|
|
4,280,025
|
|
|
Barry Liben, 6% interest, conversion at 90% of market
|
|
|
--
|
|
|
|
80,000
|
|
|
Better Half Bloodstock, Inc., 0% interest, conversion at 90% of market
|
|
|
50,000
|
|
|
|
15,000
|
|
|
Circle Strategic Allocation Fund, LP, 6% interest, conversion at 90% of market
|
|
|
161,370
|
|
|
|
270,656
|
|
|
Dakota Capital, 6% interest, conversion at 90% of market
|
|
|
115.447
|
|
|
|
---
|
|
|
EFG Bank, 6% interest, conversion at 90% of market
|
|
|
160,748
|
|
|
|
190,000
|
|
|
Epelbaum Revocable Trust, 6% interest, conversion at 90% of market
|
|
|
124,365
|
|
|
|
227,352
|
|
|
JMC Holdings, LP, 6% interest, conversion at 90% of market
|
|
|
191,319
|
|
|
|
226,137
|
|
|
Dr. Michael Kesselbrenner, 6% interest, conversions at 90% of market
|
|
|
15,652
|
|
|
|
18,500
|
|
|
David Moran & Siobhan Hughes, 6% interest, conversion at 90% of market
|
|
|
3,269
|
|
|
|
4,000
|
|
|
Morano, LLC, 6% interest, no conversion discount
|
|
|
109,066
|
|
|
|
--
|
|
|
Park Place Capital, 6% interest, conversions at 90% of market
|
|
|
2,500
|
|
|
|
--
|
|
|
Susan Schneider, 6% interest, conversions at 90% of market
|
|
|
14,324
|
|
|
|
17,000
|
|
|
Stuttgart, LP, 6% interest, conversion at 90% of market
|
|
|
117,410
|
|
|
|
201,993
|
|
|
Westmount International Holdings Limited, 6% interest, conversion at 90% of market
|
|
|
60,000
|
|
|
|
--
|
|
|
Yorkville Advisors (GP), LLC, 6% interest, conversion at 90% of market
|
|
|
--
|
|
|
|
70,718
|
|
|
Acutus Capital, LLC, 6% interest, no conversion discount
|
|
|
--
|
|
|
|
540,000
|
|
|
Minority Interest Fund (II), LLC, 6% interest, no conversion discount
|
|
|
2,440,119
|
|
|
|
2,833,731
|
|
|
Viridis Capital, LLC, 6% interest, conversion at 50% of market
|
|
|
100,000
|
|
|
|
--
|
|
|
Related Party Debenture, 6% interest, no conversion discount
|
|
|
156,750
|
|
|
|
273,550
|
|
|
Conversion liabilities
|
|
|
2,379,406
|
|
|
|
2,652,100
|
|
|
Total current portion of convertible debentures
|
|
|
27,727,891
|
|
|
|
32,261,099
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term convertible debentures:
|
|
|
|
|
|
|
|
|
|
Gerova Asset Backed Holdings, LP, 2% interest, no conversion discount
|
|
|
175,000
|
|
|
|
175,000
|
|
|
Kubera Management, LLC, 0% interest, no conversion discount
|
|
|
--
|
|
|
|
17,500
|
|
|
Related Party Debenture, 6% interest, no conversion discount
|
|
|
--
|
|
|
|
--
|
|
|
Total long term convertible debentures
|
|
|
175,000
|
|
|
|
192,500
|
|
A total of $25,523,485 in principal from the convertible debt noted above is convertible into the common stock of the Company. The following chart is presented to assist the reader in analyzing the Company’s ability to fulfill its fixed debt service requirements as of December 31, 2013 and the Company’s ability to meet such obligations:
|
Year
|
|
Amount
|
|
|
2014
|
|
$
|
26,715,530
|
|
|
2015
|
|
|
--
|
|
|
2016
|
|
|
--
|
|
|
2017
|
|
|
--
|
|
|
2018
|
|
|
175.000
|
|
|
Thereafter
|
|
|
--
|
|
|
Total minimum payments due under current and long term obligations
|
|
$
|
26,890,530
|
|
YA GLOBAL INVESTMENTS, L.P.
On June 17, 2010, the Company and its subsidiaries signed a series of agreements with YA Global Investments, L.P. (“YA Global”) to reduce convertible debt due from the Company to YA Global (the “YACO Agreements”). Certain indemnification events subsequently occurred, resulting in the Company recording an accrued expense of about $1.2 million during the year ended December 31, 2012. The Company entered into an Amended and Restated Management Agreement with YA Corn Oil on January 17, 2012, pursuant to which the foregoing amounts were reconciled, resulting in the payment to YA Global of such expense in the form of convertible debt. The Company's accrual is evaluated at the completion of each reporting period, and additional expense or income will be recognized in the future should an event come to pass which either justifies reduction or removal of the liquidated damages accrual, or otherwise gives rise to an actual or a potential, but determinable, expense. An estimate of this amount cannot be made at this time.
In connection with the completion of the YA Corn Oil Transaction, the Company issued YA Global an amended and restated convertible debenture in the amount of $33,308,023, inclusive of previously accrued interest (the “A&R Debenture”). During the year ended December 31, 2011, YA Global subdivided the A&R Debenture and assigned to a total of sixteen of its equity-holders portions of the A&R Debenture totaling $6,281,394 in principal, which assignments reduced the balance due to YA Global alone under the A&R Debenture as of December 31, 2011. $6,177,028 of the portion of the A&R Debenture assigned by YA Global remained outstanding at December 31, 2011. During the year ended December 31, 2011, YA Global subdivided the A&R Debenture and assigned to a total of sixteen of its equity-holders portions of the A&R Debenture totaling $ 6,350,287 in principal, which assignments reduced the balance due to YA Global alone under the A&R Debenture as of December 31, 2012. In total, $5,726,381 of the portion of the A&R Debenture assigned by YA Global remained outstanding at December 31, 2012. On March 29, 2013, the Company and YA Global entered into an amended forbearance agreement pursuant to which the maturity date of the Company's outstanding debt to YA Global and its assignees was extended to December 31, 2013. The amendment further provided for cash payments by the Company of $200,000 per month and the reimbursement of certain legal costs and expenses. The A&R Debenture bears interest at the rate of 6% per annum and provides the holder with the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. A holder of the A&R Debenture will not be permitted, however, to convert into a number of shares that would cause it to own more than 4.99% of the Company’s outstanding common shares. The A&R Debenture is additionally subject to ongoing compliance conditions, including the absence of change of control events and timely issuance of common shares upon conversion.
On November 12, 2013, the Company and YA Global Investments, L.P., entered into an amended forbearance agreement pursuant in which the maturity date of the Company's outstanding debt to YA Global and its assignees was extended to December 31, 2014. The amendment further provided for a mandatory prepayment of $500,000 on or before December 15, 2013, cash payments by the Company of $250,000 per month for the first six months of 2014, $300,000 per month for the second six months of 2014 and the reimbursement of certain legal costs and expenses. The Company will also be required to pay an amount equal to twenty percent (20%) of all gross proceeds received from any defendant in any patent infringement litigation, whether now existing or hereafter arising, within one (1) Business Day of receipt.
The Company accounted for the A&R Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the A&R Debenture could result in the note principal being converted to a variable number of the Company’s common shares. During the year ended December 31, 2013, the Company paid $2,119,800 in cash towards the principal balance of the A&R Debenture. During the year ended December 31, 2013, YA Global assigned $280,447 of its accrued interest due on the A&R Debenture to four of its equity-holders, which assignment reduced the accrued interest balance due to YA Global alone under the A&R Debenture as of December 31, 2013. The Company had determined the fair value of the A&R Debenture at December 31, 2012 to be $22,263,896 which represented the face value of the debenture plus the present value of the conversion feature. During the year ended December 31, 2013, the Company recognized a decrease in the in conversion liability relating to the A&R Debenture of $254,252 for assignments and/or repayments during the period and recorded an expense of $20,169 for the accretion of the present value of the conversion liability for the period. The carrying value of the A&R Debenture was $19,675,780 at December 31, 2013, including principal of $17,908,037 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $1,767,561 as of December 31, 2013. Interest expense of $1,153,897 for the A&R Debenture was accrued for the year ended December 31, 2013.
RELATED PARTY OBLIGATIONS
As of December 31, 2010, the Company had convertible debentures payable to Minority Interest Fund (II), LLC (“MIF”) in an aggregate principal amount of $3,988,326 (the “MIF Debenture”) and convertible debentures payable to Viridis Capital, LLC in an aggregate principal amount of $518,308 (the “Viridis 2010 Debenture”). As discussed more fully in Note 17,
Related Party Transactions
, below, the Company entered into agreements with MIF and Viridis to amend and restate the terms of the MIF Debenture and Viridis 2010 Debenture effective September 30, 2011 to extend the maturity date to September 30, 2013; to eliminate and contribute $502,086 in accrued interest and $1,065,308 of principal; to reduce the applicable interest rate to 6% per annum; to eliminate MIF’s and Viridis’ right to convert amounts due at a discount to the market price of the Company’s common stock; and to reverse various non-cash assignments of debt involving related parties. The restated balances due to MIF and Viridis at September 30, 2011, were $3,017,061 and $237,939, respectively. No interest was payable to either MIF or Viridis after these amendments. MIF received 62,500 shares of Series D Preferred Stock in partial consideration of the contribution of principal and accrued interest and the various other modified terms of MIF’s agreements with the Company. On September 30, 2011, the Company issued $1,090,000 and $351,000 in convertible debt to Acutus Capital, LLC (“Acutus”) and family members of the Company’s chairman, respectively, for cash investments previously provided to the Company. The terms of these debentures provide for interest at 6% per annum, a maturity date of September 30, 2013, and the right to convert amounts due into Company common stock at 100% of the market price for the Company’s common stock at the time of conversion. The foregoing debentures are subject to conditions which limit the transfer of shares issued upon conversion to 5% of the average monthly volume for the Company’s common stock. During year ended December 31, 2013, Minority Interest Fund (II), LLC assigned $150,000 of its convertible debt to Continental Equities and $200,000 of its convertible debt to Nicholas J. Morano, LLC.
As of April 1, 2013, the Company issued a $250,000 debenture to Viridis Capital, LLC (“Viridis” and the “Viridis Debenture”) in exchange for full satisfaction of expenses and costs that were incurred by Viridis in connection with its guaranty of the Company’s obligations (see Note 17
, Related Party Transactions
, below). Viridis shall have the right, but not the obligation, to convert any portion of the Viridis Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 50% of the 20 day volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. $150,000 of the Viridis Debenture was paid during the year ended December 31, 2013. The Company accounted for the Viridis Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Viridis Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Viridis Debenture upon issuance to be $477,273 which represented the face value of the debenture of $250,000 plus the present value of the conversion feature. A $150,000 portion of the Viridis Debenture was assigned to a related party resulting in a $136,364 reduction of the fair value of the conversion liability for the period and accretion of $6,061 was recognized during the period. The carrying value of the Viridis Debenture was $196,970 at December 31, 2013, including principal of $100,000 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $96,970 at December 31, 2013 to its estimated settlement value of $100,000 at June 30, 2014. Interest expense of $4,208 for these obligations was accrued for the year ended December 31, 2013
OTHER CONVERTIBLE DEBENTURES
During the year ended December 31, 2011, YA Global assigned $4,391,643 in convertible debt to Andypolo, LP (“Andypolo” and the “Andypolo Debenture”). Andypolo shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Andypolo Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Andypolo Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Andypolo Debenture at December 31, 2012 to be $4,755,583 which represented the face value of the debenture of $4,280,025 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Andypolo Debenture which resulted in a $73,546 reduction of the fair value of the conversion liability for the period. The carrying value of the Andypolo Debenture was $4,020,121 at December 31, 2013, including principal of $3,618,109 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $402,012 as of December 31, 2013. Interest expense of $235,375 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $321,237 in convertible debt to Stuttgart, LP (“Stuttgart” and the “Stuttgart Debenture”). Stuttgart shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Stuttgart Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Stuttgart Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Stuttgart Debenture at December 31, 2012 to be $224,435 which represented the face value of the debenture of $201,993 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Stuttgart Debenture which resulted in a $2,873 reduction of the fair value of the conversion liability for the period. During the year ended December 31, 2013, $59,400 in principal was converted into common stock, and the Company recognized a reduction in conversion liability at present value of $6,600 for the conversions. The carrying value of the Stuttgart Debenture was $130,379 at December 30, 2013, including principal of $117,410 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $12,969 at December 31, 2013. Interest expense of $7,750 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $263,498 in convertible debt to JMC Holdings, LP (“JMC” and the “JMC Debenture”). JMC shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the JMC Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the JMC Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the JMC Debenture at December 31, 2012 to be $205,986 which represented the face value of the debenture of $185,387 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the JMC Debenture which resulted in a $3,172 reduction of the fair value of the conversion liability for the period. The carrying value of the JMC Debenture was $174,270 at December 31, 2013, including principal of $156,843 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $17,427 at December 31, 2013. Interest expense of $10,204 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $70,266 in convertible debt to David Moran & Siobhan Hughes (“Moran-Hughes” and the “Moran-Hughes Debenture”). Moran-Hughes shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Moran-Hughes Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Moran-Hughes Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Moran-Hughes Debenture at December 31, 2012 to be $4,444 which represented the face value of the debenture of $4,000 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Moran-Hughes Debenture which resulted in an $81 reduction of the fair value of the conversion liability for the period. The carrying value of the Moran-Hughes Debenture was $3,632 at December 31, 2013, including principal of $3,269 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $363 at December 31, 2013. Interest expense of $214 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $111,000 in convertible debt to Barry Liben (“Liben” and the “Liben Debenture”). Liben shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Liben Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Liben Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Liben Debenture at December 31, 2012 to be $90,055 which represented the face value of the debenture of $80,000 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Liben Debenture which resulted in a $1,967 reduction of the fair value of the conversion liability for the period. During the year ended December 31, 2013, $74,000 in principal was converted into common stock, and the Company recognized a reduction in conversion liability at present value of $8,088 for the conversions. The balance of the Liben Debenture has been paid in full as of December 31, 2013. Interest expense of $1,493 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $341,550 in convertible debt to Circle Strategic Allocation Fund, LP (“Circle Strategic” and the “Circle Strategic Debenture”). Circle Strategic shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Circle Strategic Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Circle Strategic Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Circle Strategic Debenture at December 31, 2012 to be $300,729, which represents the face value of the debenture of $270,656 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Circle Strategic Debenture which resulted in a $4,239 reduction of the fair value of the conversion liability for the period. During the year ended December 31, 2013, $71,256 in principal was converted into common stock, and the Company recognized a reduction in conversion liability at present value of $7,917 for the conversions. The carrying value of the Circle Strategic Debenture was $179,286 at December 31, 2013, including principal of $161,370 and the value of the conversion feature of $17,917 at December 31, 2013. Interest expense of $13,635 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $75,000 in convertible debt to EFG Bank (“EFG” and the “EFG Debenture”). EFG shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the EFG Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the EFG Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the EFG Debenture at December 31, 2012 to be $83,333 which represented the face value of the debenture of $75,000 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the EFG Debenture which resulted in a $1,282 reduction of the fair value of the conversion liability for the period. The carrying value of the EFG Debenture was $70,504 at September 30, 2013, including principal of $63,453 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $7,051 at December 31, 2013. Interest expense of $4,127 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned an additional $115,000 in convertible debt to EFG Bank (“EFG” and the “EFG Debenture”). EFG shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the EFG Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the EFG Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the EFG Debenture at December 31, 2012 to be $127,778 which represented the face value of the debenture of $115,000 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the EFG Debenture which resulted in a $1,968 reduction of the fair value of the conversion liability for the period. The carrying value of the EFG Debenture was $108,105 at December 31, 2013, including principal of $97,295 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $10,810 at December 31, 2013. Interest expense of $6,329 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $385,000 in convertible debt to Epelbaum Revocable Trust (“Epelbaum” and the “Epelbaum Debenture”). Epelbaum shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Epelbaum Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Epelbaum Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Epelbaum Debenture at December 31, 2012 to be $252,613 which represented the face value of the debenture of $227,352 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Epelbaum Debenture which resulted in a $3,238 reduction of the fair value of the conversion liability for the period. During the year ended December 31, 2013, $74,691 in principal was converted into common stock. During the year ended December 31, 2013, the Company recognized a reduction in conversion liability at present value of $8,299 for the conversions. The carrying value of the Epelbaum Debenture was $138,089 at December 31, 2013, including principal of $124,365 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $13,724 at December 31, 2013. Interest expense of $8,489 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned an additional $40,750 in convertible debt to JMC Holdings, LP (“JMC” and the “JMC Debenture”). JMC shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the JMC Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the JMC Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the JMC Debenture at December 31, 2012 to be $45,278 which represented the face value of the debenture of $40,750 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the JMC Debenture which resulted in a $697 reduction of the fair value of the conversion liability for the period. The carrying value of the JMC Debenture was $38,307 at December 31, 2013, including principal of $34,476 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $3,831 at December 31, 2013. Interest expense of $2,243for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $18,500 in convertible debt to Dr. Michael Kesselbrenner TTEE Money Purchase Plan (“Kesselbrenner” and the “Kesselbrenner Debenture”). Kesselbrenner shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Kesselbrenner Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Kesselbrenner Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Kesselbrenner Debenture at December 31, 2012 to be $20,556 which represented the face value of the debenture of $18,500 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Kesselbrenner Debenture which resulted in a $317 reduction of the fair value of the conversion liability for the period. The carrying value of the Kesselbrenner Debenture was $17,391 at December 31, 2013, including principal of $15,652 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $1,739 at December 31, 2013. Interest expense of $1,018 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, YA Global assigned $20,500 in convertible debt to Susan Schneider (“Schneider” and the “Schneider Debenture”). Schneider shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Schneider Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Schneider Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Schneider Debenture at December 31, 2012 to be $18,889 which represented the face value of the debenture of $17,000 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company made payments against the Schneider Debenture which resulted in a $298 reduction of the fair value of the conversion liability for the period. The carrying value of the Schneider Debenture was $15,915 at December 31, 2013 including principal of $14,324 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $1,591 at December 31, 2013. Interest expense of $932 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2011, Cascade assigned $70,718 in convertible debt to Yorkville Advisors, LLC (“Yorkville” and the “Yorkville Debenture”). Yorkville shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Yorkville Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Yorkville Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Yorkville Debenture at December 31, 2012 to be $78,576 which represented the face value of the debenture of $70,718 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company recognized a reduction in conversion liability at present value of $7,765 for the conversions. During the year ended December 31, 2013, the Company made payments against the Yorkville Debenture which resulted in a $93 reduction of the fair value of the conversion liability for the period. The Yorkville Debenture has been paid in full as of December 10, 2013. Interest expense of $527 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2012, YA Global assigned $15,000 in accrued interest to Better Half Bloodstock, Inc. (“Better Half” and the “Better Half Debenture”) and an additional $50,000 in accrued interest during the year ended December 31, 2013. Better Half shall have the right, but not the obligation, to convert any portion of the accrued interest into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Better Half Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Better Half Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Better Half Debenture at December 31, 2012 to be $16,667, including principal of $15,000 and the value of the conversion liability. During the year ended December 31, 2013, YA Global assigned an additional $50,000 in accrued interest to Better Half Bloodstock, Inc which resulted in an additional $5,493 in conversion liability at present value. During the year ended December 31, 2013, the Company recorded an expense of $63 for the accretion to fair value of the conversion liability for the period and recognized a reduction in conversion liability at present value of $1,667 for the conversions related to the first assignment. The carrying value of the Better Half Debenture was $55,556 at December 31, 2013, including principal of $50,000 and the value of the conversion liability. The present value of the liability for the conversion feature for the new assignment has reached its estimated settlement value of $5,556 at December 31, 2013. Interest expense is not being incurred for this obligation.
During the year ended December 31, 2013, YA Global assigned $60,000 in accrued interest to Park Place Capital, LLC (“Park Place” and the “Park Place Debenture”). Park Place shall have the right, but not the obligation, to convert any portion of the accrued interest into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Park Place Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Park Place Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The assignment resulted in recognition of a $6,591 conversion liability at present value. During the year ended December 31, 2013, the Company recorded an expense of $76 for the accretion to fair value of the conversion liability for the period and recognized a reduction in conversion liability at present value of $6,591 for the conversions. During the year ended December 31, 2013, $55,000 in interest was converted into common stock. The carrying value of the Park Place Debenture was $2,709 at December 31, 2013, including principal of $2,500 and the value of the conversion liability. Interest expense is not being incurred for this obligation.
During the year ended December 31, 2013 YA Global assigned $115,447 in convertible debt and $115,447 in accrued interest to Dakota Capital Pty Limited atf Dakota SP Master Fund (“Dakota Capital” and the “Dakota Capital Debenture”). Dakota Capital shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Dakota Capital Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Dakota Capital Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Dakota Capital Debenture upon assignment to be $128,128 which represented the face value of the debenture of $115,447 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company recorded an expense of $76 for the accretion to fair value of the conversion liability for the period. The carrying value of the Dakota Capital Debenture was $128,274 at December 31, 2013, including principal of $115,447 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $12,827 at December 31, 2013. Interest expense of $6,908 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2013 YA Global assigned $60,000 in convertible debt and $40,000 in accrued interest to Westmount International Holdings Limited (“Westmount” and the “Westmount Debenture”). Westmount shall have the right, but not the obligation, to convert any portion of the A&R Debenture into the Company’s common stock at a rate equal to the lesser of (a) $1.00 or (b) 90% of the lowest daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The Company accounted for the Westmount Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Westmount Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Westmount Debenture upon assignment to be $66,591 which represented the face value of the debenture of $60,000 plus the present value of the conversion feature. During the year ended December 31, 2013, the Company recorded an expense of $76 for the accretion to fair value of the conversion liability for the period. The carrying value of the Westmount Debenture was $66,667 at December 31, 2013, including principal of $60,000 and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated settlement value of $6,667 at December 31, 2013. Interest expense of $2,101 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2012, the Company issued a convertible debenture in the principal amount of $17,500 (the “Consultant Debenture”) in payment for fees incurred to a consultant (“Consultant”). Consultant shall have the right, but not the obligation, to convert any portion of the convertible debt into the Company’s common stock at a rate equal to 100% of the closing market price for the Company’s common stock for the day preceding the conversion date. The Company accounted for the Consultant Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Consultant Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The balance of the Consultant Debenture was $17,500 at December 31, 2012. As of December 31, 2013, the balance on the Consultant Debenture had been paid in full. Interest expense of $43 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2012, the Company issued a convertible debenture in the principal amount of $175,000 to Gerova Asset Back Holdings, LP (“Gerova” and the “Gerova Debenture”) with a maturity date of December 31, 2018. In consideration if the debenture, Gerova delivered a release in favor of the Company in respect of any and all amounts that may have been due under the Company’s former guaranty agreement with Gerova. Gerova shall have the right, but not the obligation, to convert any portion of the convertible debenture into the Company’s common stock at a rate equal to 100% of the closing market price for the Company’s common stock for the day preceding the conversion date. The balance of the Gerova Debenture was $175,000 at December 31, 2013. Interest expense of $3,500 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2012, Minority Interest Fund (II), LLC assigned $150,000 of its convertible debt to Magna Group, LLC (“Magna” and the “Magna Debenture”). Magna shall have the right, but not the obligation, to convert any portion of the accrued interest into the Company’s common stock at 100% of the market price for the Company’s common stock at the time of conversion. The balance of the Magna Debenture was $125,000 at December 31, 2012. As of December 31, 2013, the balance on the Consultant Debenture had been paid in full. Interest expense of $1,207 for these obligations was accrued for the year ended December 31, 2013.
During the year ended December 31, 2013, Minority Interest Fund (II), LLC assigned $200,000 of its convertible debt to Nicholas J. Morano, LLC (“Morano” and the “Morano Debenture”). Morano shall have the right, but not the obligation, to convert any portion of the accrued interest into the Company’s common stock at 100% of the market price for the Company’s common stock at the time of conversion. During the year ended December 31, 2013, $150,000 in principal was converted into common stock. The balance of the Morano Debenture was $109,066 at December 31, 2013. Interest expense of $8,287 for these obligations was accrued for the year ended December 31, 2013.
ASC 480,
Distinguishing Liabilities from Equity
, sets forth the requirements for determination of whether a financial instrument contains an embedded derivative that must be bifurcated from the host contract, therefore the Company evaluated whether the conversion feature for Series D Preferred Stock would require such treatment; one of the exceptions to bifurcation of the embedded conversion feature is that the conversion feature as a standalone instrument would be classified in stockholders’ equity. Management has determined that the conversion option would not be classified as a liability as a standalone instrument, therefore it meets the exception for bifurcation of the embedded derivative under ASC 815,
Derivatives and Hedging
. ASC 815,
Derivatives and Hedging
, addresses whether an instrument that is not under the scope of ASC 480,
Distinguishing Liabilities from Equity
, would be classified as liability or equity; one of the factors that would require liability classification is if the Company does not have sufficient authorized shares to effect the conversion. If a company could be required to obtain shareholder approval to increase the company's authorized shares in order to net-share or physically settle a contract, share settlement is not controlled by the company. The majority of the Company’s outstanding shares of Series D Preferred Stock are owned by Viridis Capital, LLC, an entity controlled by Kevin Kreisler, the chairman of the Company. If all the Series D shares held by Viridis Capital were converted and exceeded the number of authorized common shares, there would be no contingent factors or events that a third party could bring up that would prevent Mr. Kreisler from authorizing the additional shares. There would be no need to have to go to anyone outside the Company for approval since Mr. Kreisler, through Viridis Capital, is the Company’s majority shareholder. As a result, the share settlement is controlled by the Company and with ASC 815,
Derivatives and Hedging
. The Company assessed all other factors in ASC 815,
Derivatives and Hedging
, to determine how the conversion feature would be classified.
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NOTE 12
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COMMITMENTS AND CONTINGENCIES
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FACILITIES
The Company’s corporate headquarters are located in Alpharetta, Georgia. The Alpharetta lease is a one year term that terminated on January 31, 2014, at which time the lease was extended by another year. The monthly lease payment is $1,600.
INFRINGEMENT
On October 13, 2009, the U.S. Patent and Trademark Office (“PTO”) issued U.S. Patent No. 7,601,858, titled "Method of Processing Ethanol Byproducts and Related Subsystems” (the ’858 Patent) to GS CleanTech Corporation, a wholly-owned subsidiary of GreenShift Corporation. On October 27, 2009, the PTO issued U.S. Patent No. 7,608,729, titled "Method of Freeing the Bound Oil Present in Whole Stillage and Thin Stillage” (the ’729 Patent) to GS CleanTech. Both the ‘858 Patent and the ‘729 Patent relate to the Company’s corn oil extraction technologies.
On October 13, 2009, GS CleanTech filed a legal action in the United States District Court, Southern District of New York captioned GS CleanTech Corporation v. GEA Westfalia Separator, Inc.; and DOES 1-20, alleging infringement of the ‘858 Patent ("New York I Action"). On October 13, 2009, GS CleanTech filed a Motion to Dismiss with the same court relative to a separate complaint filed previously by Westfalia captioned GEA Westfalia Separator, Inc. v. GreenShift Corporation that alleged (1) false advertising in violation of the Lanham Act § 43(a); (2) deceptive trade practices and false advertising in violation of New York General Business Law §§ 349, 350 and 350-a; and (3) common law unfair competition ("New York II Action"). On October 13, 2009, Westfalia filed its First Amended Complaint in the New York II Action to include as a plaintiff, ethanol production company Ace Ethanol, LLC , and to add claims seeking a declaratory judgment of invalidity and non-infringement of the ‘858 Patent. On October 13, 2009, ICM, Inc. filed a complaint in the United States District Court, District of Kansas in the matter captioned ICM, Inc. v. GS CleanTech Corporation and GreenShift Corporation, alleging unfair competition, interference with existing and prospective business and contractual relationships, and deceptive trade practices and also seeking a declaratory judgment of invalidity and non-infringement of the ‘858 Patent.
On October 15, 2009, in the New York I Action, GS CleanTech filed a Notice of Filing First Amended Complaint for infringement of the ‘858 Patent, along with a copy of the First Amended Complaint, which added ICM, Ace Ethanol, Lifeline Foods LLC and ten additional DOES as defendants in the New York I Action. On October 23, 2009, GS CleanTech's First Amended Complaint in the New York I Action was entered by the court. On November 5, 2009, in ICM’s Kansas lawsuit, GS CleanTech filed a motion to dismiss or, in the alternative, to transfer the Kansas case to New York for inclusion in the New York I Action. Also on November 5, 2009, in ICM’s Kansas lawsuit, ICM filed a motion to enjoin CleanTech and GreenShift from prosecuting the claims against ICM in the New York I Action.
During February 2010, GS CleanTech commenced a legal action in the United States District Court, Southern District of Indiana captioned GS CleanTech Corporation v. Cardinal Ethanol, LLC, and a separate legal action in the United States District Court, Northern District of Illinois captioned GS CleanTech Corporation v. Big River Resources Galva, LLC and Big River Resources West Burlington, LLC. ICM sold Cardinal and Big River the equipment that each of Cardinal and Big River have used and are using to infringe the ‘858 Patent as alleged by GS CleanTech. ICM has assumed the defense of each of the above matters.
During May 2010, GS CleanTech commenced the following additional actions: GS CleanTech Corporation v. Lincolnland Agri-Energy, LLC, in the United States District Court, Northern District of Illinois; GS CleanTech Corporation v. Al-Corn Clean Fuel, LLC; Chippewa Valley Ethanol Company, LLLP; Heartland Corn Products, LLC and Bushmills Ethanol, Inc., in the United States District Court, District of Minnesota; GS CleanTech Corporation v. United Wisconsin Grain Producers, LLC, in the United States District Court, Western District of Wisconsin; GS CleanTech Corporation v. Iroquois BioEnergy Company, LLC, in the United States District Court, Northern District of Indiana; GS CleanTech Corporation v. Blue Flint Ethanol, LLC, in the United States District Court, District of North Dakota; and, GS CleanTech Corporation v. Lincolnway Energy, LLC, in the United States District Court, Northern District of Iowa.
On May 6, 2010, GreenShift submitted a "Motion to Transfer Pursuant to 28 U.S.C. § 1407 for Consolidated Pretrial Proceedings" to the United States Judicial Panel on Multidistrict Litigation (the "Panel") located in Washington, D.C. In this motion, GreenShift moved the Panel to transfer and consolidate all pending suits involving infringement of GreenShift’s patents to one federal court for orderly and efficient review of all pre-trial matters. On August 6, 2010, the Panel ordered the consolidation and transfer of all pending suits in the U.S. District Court, Southern District of Indiana for pretrial proceedings (the "MDL Case").
On July 14, 2010, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Adkins Energy, LLC, in the United States District Court, Northern District of Illinois alleging infringement of the ‘858 Patent. On August 4, 2010, Adkins filed an answer to the complaint and included counterclaims seeking a declaratory judgment that Adkins does not infringe the '858 Patent and that the '858 Patent is invalid, and also alleging breach of contract. On November 30, 2010, the Adkins action was transferred to the MDL Case.
On October 14, 2010, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Flottweg Separation Technology, Inc. and Flottweg AG, in the United States District Court, District of Connecticut alleging infringement of the ‘858 Patent. On November 15, 2010, GS CleanTech filed an amended complaint alleging that Flottweg Separation Technology, Inc., has infringed the ‘858 Patent. On November 15, 2010, the Flottweg action was transferred to the MDL Case.
As part of the MDL Case, on November 15, 2010, GS CleanTech amended its complaint filed in the New York I Action to include a claim of patent infringement personally against the founder, CEO and President of ICM, and ICM amended its complaint filed in the Kansas action to include a claim seeking a declaratory judgment that the '858 Patent is unenforceable. On November 30, 2010, in the MDL Case, GS CleanTech filed a motion to dismiss ICM's amended complaint (including its claim seeking a declaratory judgment that the '858 Patent is unenforceable) or, in the alternative, to transfer the Kansas case to New York for inclusion in the New York I Action. ICM has opposed the motion to dismiss. On December 10, 2010, in the MDL Case, GS CleanTech filed motions to strike the affirmative defenses that the '858 Patent is unenforceable asserted by Cardinal Ethanol, LLC; Big River Resources Galva, LLC; and Big River Resources West Burlington, LLC; and Lincolnland Agri-Energy, LLC. Each defendant has opposed the respective motion to strike. On February 14, 2011, GS CleanTech notified the court in the MDL Case that it will not be proceeding with a motion for preliminary injunction. On February 24, 2011, in the MDL Case, in connection with its breach of contract counterclaim against GreenShift Corporation, Adkins Ethanol, LLC filed a motion for judgment on the pleadings or in the alternative partial summary judgment on the issue of liability on the issue of breach of contract and partial summary judgment on the issue of damages. On March 24, 2011, GreenShift filed an opposition to Adkins’ motion.
All of the parties in the MDL Action filed their respective briefs with the Court in connection with proposed claim construction for certain claim limitations in the '858 Patent. A hearing on the claim construction matter was then held by the Court in the MDL Action on August 22, 2011. On September 29, 2011, the Court issued its ruling with respect to claim construction.
On December 2, 2011, the Court clarified its earlier claim construction order. On February 6, 2012, the Court granted the Company’s motion to amend its various complaints to include the recently issued U.S. Pat. No. 8,008,516 (the “‘516 Patent”). On February 27, 2012, the Company filed amended complaints alleging that the Defendants infringed the ‘516 Patent.
On May 23, 2012, several defendants filed motions for summary judgment of noninfringement. The Company filed oppositions against the defendants’ motions for summary judgment of noninfringement on July 25, 2012, and July 30, 2012, and filed its own motions for summary judgment of infringement on September 14, 2012. On June 20, 2012, the Company dismissed with prejudice all claims asserted against Amaizing Energy Atlantic, LLC; Amaizing Energy Cooperative; Amaizing Energy Denison, LLC Amaizing Energy Holding Company pursuant to a settlement agreement. The Court approved this dismissal on August 1, 2012.
On August 6, 2012, the Court granted the Company’s motion to amend its various complaints to include the recently issued U.S. Pat. No. 8,168,037 (the “‘037 Patent”). On August 31 2012, the Company filed amended complaints alleging that certain Defendants infringed the ‘037 Patent. On November 7, 2012, the Court granted the Company’s motion to amend its various complaints to include other patents directed to similar technology. On November 9, 2012, the Company filed amended complaints alleging that the Defendants infringed U.S. Pat. No. 8,008,517 (the “‘517 Patent”) and U.S. Pat. No.8,283,484 (the “‘484 patent).
On November 19, 2012, the Court denied Adkins Energy, LLC’s Motion for judgment on the pleadings or, in the alternative, for partial summary judgment on the issue of liability for breach of contract, and for partial summary judgment on one part of Adkins’ damages. The Court found that Adkins had not established its substantial performance under the contract or that the Company breached its terms with Adkins.
On January 29, 2013, the Court issued a supplemental order on claim construction. Because this order modified the Court’s earlier claim construction, the Court stayed all briefing in the pending summary judgment motions regarding infringement.
On February 12, 2013, the Company filed a motion for summary judgment against Adkins’ counterclaims of breach of contract (and related defenses). Adkins filed its opposition on March 22, 2013. On May 21, 2013, the Court denied the Company’s motion for summary judgment against Adkins’ counterclaims of breach of contract (and related defenses).
On February 27, 2013, the Court dismissed a number of unfair competition claims asserted by ICM against the Company, but the Court allowed ICM to proceed with a federal Lanham Act claim against the Company.
On May 8, 2013, the Court issued an order on claim construction for the ‘037 Patent.
On May 24, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Pacific Ethanol, Inc., in the United States District Court, Eastern District of California alleging infringement of the ‘858 Patent. On July 18, 2013, Pacific filed an answer to the complaint and included counterclaims seeking a declaratory judgment that Pacific does not infringe the '858 Patent and that the '858 Patent is invalid and unenforceable. On August 8, 2013, GS CleanTech answered Pacific’s counterclaims.
On June 7, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Guardian Energy, LLC, in the United States District Court, District of Minnesota alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents.
On July 12, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Western New York Energy, LLC, in the United States District Court, Western District of New York alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents.
On July 19, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Little Sioux Corn Processors, LLLP, in the United States District Court, Northern District of Iowa alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents.
On August 5, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Southwest Iowa Renewable Energy, LLC, in the United States District Court, Southern District of Iowa alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents.
On August 10, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Homeland Energy Solutions, LLC, in the United States District Court, Northern District of Iowa alleging infringement of the ‘858, ‘516, ‘517, ‘484 and ‘037 Patents.
On September 10, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Aemetis, Inc. and Aemetis Advanced Fuels Keyes, Inc., in the United States District Court, Southern District of Indiana alleging infringement of the ‘858 Patent. On September 13, 2013, Aemetis filed an answer to the complaint and included counterclaims seeking a declaratory judgment that Aemetis does not infringe the '858 Patent and that the '858 Patent is invalid and unenforceable.
These cases with Defendants Pacific Ethanol, Inc.; Guardian Energy, LLC; Western New York Energy, LLC; Little Sioux Corn Processors, LLLP; Southwest Iowa Renewable Energy, LLC; Aemetis, Inc.; and Aemetis Advanced Fuels Keyes, Inc. have all been consolidated as “Tag-Along” cases for pre-trial proceedings in the current MDL in the United States District Court, Southern District of Indiana. On January 21, 2014, the Tag-Along Defendants Guardian Energy, LLC; Western New York Energy, LLC; Little Sioux Corn Processors, LLLP; Southwest Iowa Renewable Energy, LLC filed their Answers denying infringement.
On March 14, 2014, the Tag-Along Defendants stipulated that they adopted the claim construction arguments regarding the patents-in-suit made by the earlier MDL Defendants. Discovery is ongoing with the Tag-Along Defendants.
On July 23, 2013, GS CleanTech filed motions for summary judgment of infringement of the ‘858, ‘516, ‘517, and ‘484 Patents against the following defendants: Ace Ethanol, LLC, Adkins Energy, LLC, Al-Corn Clean Fuel, Big River Resources Galva, LLC, Big River Resources West Burlington, LLC, Blue Flint Ethanol, LLC, Bushmills Ethanol, Inc., Cardinal Ethanol, LLC, Chippewa Valley Ethanol Company, LLLP, Heartland Corn Products, Iroquois Bio-Energy Company, LLC, Lincolnland Agri-Energy, LLC, Lincolnway Energy LLC, and United Wisconsin Grain Producers, LLC.
On September 23, 2013, the above Defendants filed their oppositions (and cross-motions) asserting their non-infringement and invalidity positions regarding the ‘858, ‘516, ‘517, and ‘484 Patents. On November 22, 2013, GS CleanTech filed its reply in support of infringement and opposition (and cross-motions) regarding invalidity of the ‘858, ‘516, ‘517, and ‘484 Patents. On January 17, 2014, the above Defendants filed their reply in support of their motions for invalidity and their opposition to GS CleanTech’s motion for summary judgment of infringement. On January 16, 2014, Defendants Iroquois, GEA Mechanical, Adkins, and Lincolnway filed separate replies in support of their various motions and oppositions regarding noninfringement and invalidity. On January 16, 2014, Defendant Al-Corn filed its separate reply in support of its motion and opposition regarding noninfringement. On February 18, 2014, GS CleanTech filed a surreply opposing Defendants’ Joint Motion
for Summary Judgment of Invalidity and to Dismiss Plaintiff's Claim for Provisional Remedies and Damages for Willful Infringement. On February 18, 2014, GS CleanTech also filed a surreply in support of its motions for summary judgment of infringement against Heartland Corn Products, Chippewa Valley Ethanol Company, LLLP, Lincolnway Energy LLC, Cardinal Ethanol, LLC, Blue Flint Ethanol, LLC, Big River Resources West Burlington, LLC, Big River Resources Galva, LLC, Al-Corn Clean Fuel, Lincolnland Agri-Energy, LLC, Adkins Energy, LLC, Ace Ethanol, LLC, Iroquois Bio-Energy Company, LLC, Bushmills Ethanol, Inc., and United Wisconsin Grain Producers, LLC. Finally on February 18, 2014, GS CleanTech also filed its reply in support of its cross-motions of no invalidity under 35 U.S.C. § 112.
On October 23, 2013, GS CleanTech filed a motion for summary judgment of infringement of the ‘037 Patent against Defendants Big River Resources Galva, LLC, Big River Resources West Burlington, LLC, Blue Flint Ethanol, LLC, Cardinal Ethanol, LLC, Lincolnland Agri-Energy, LLC, and Lincolnway Energy LLC. On December 31, 2013, Defendants Big River Resources Galva, LLC, Big River Resources West Burlington, LLC, Blue Flint Ethanol, LLC, Cardinal Ethanol, LLC, Flottweg Separation Tech., Inc., ICM, Inc., Lincolnland Agri-Energy, LLC, and Lincolnway Energy LLC filed a joint motion for summary judgment of invalidity and noninfringement of the ‘037 Patent. On February 28, 2014, GS CleanTech filed its reply in support of its motion for summary judgment of infringement of the ‘037 Patent, its opposition to the ‘037 Defendants’ motion for summary judgment of invalidity of the ‘037 Patent, and its cross-motions for summary judgment of no invalidity under 35 U.S.C. § 112 and § 102(e).
There have been no other substantive rulings on the merits on any of the actions included in the MDL Case and Management is unable to characterize or evaluate the probability of any outcome at this time. The Company intends to take all necessary steps to bring infringement of its patents to an end, including filing additional lawsuits involving any and all infringing use of the Company’s patents. The Company further plans to seek additional relief for instances of willful infringement. The Company’s position is that any infringing ethanol producer is liable for any infringing use of the Company’s patented technologies beginning on the publication date of the application that led to the ‘858 Patent.
OTHER MATTERS
The Company’s subsidiary, GS COES (Yorkville I), LLC, is a party to an action entitled Nosan, et at v. GS COES (Yorkville I), LLC, et. al., previously pending in Lenawee County, Michigan Circuit Court Case No. 11-4069-CK, an action by nineteen plaintiffs to recover on a guarantee by the subsidiary secured by a pledge of Net Cash Flow from corn oil production at two Michigan facilities, as credit support for a bridge loan arrangement under which a variety of lenders claim to be owed the aggregate principal amount of $1,734,579, plus interest for claimed breach of their subordinated loan to GS CleanTech Corporation. GreenShift Corporation and GS CleanTech Corporation are not parties to this action. On February 27, 2012, the Court issued an oral ruling that (a) Plaintiffs did not have a security interest, (b) the senior secured lender to GS COES has superior priority over Plaintiffs, and (c) no “net cash flow” exists and no future “net cash flow” will be produced as a result of the sale. A motion to dismiss the case was granted on April 16, 2012 and, after reconsideration was denied, Plaintiffs filed an appeal with the Michigan Court of Appeals. The parties have briefed the issues on appeal and oral argument is scheduled for April 2, 2014. GS COES intends to continue to vigorously defend this action. In the event of the reversal of the trial court’s ruling on appeal, we cannot evaluate the likelihood of an unfavorable outcome at this time. In the event of an adverse judgment, damages could range from $2,500,000 to $3,500,000.
GreenShift Corporation, GS CleanTech Corporation, and (non-party) GS COES are parties to n Nosan, et al. v. GS CleanTech, GreenShift Corporation, YA Global Investments, LP, and Green Plains Commodities LLC, previously pending in the Lenawee County, Michigan Circuit Court as Case No. 11-4292-CK, a case filed by the same nineteen plaintiffs as a companion case to Case No. 11-4069-CK. The Plaintiffs filed this action after the Court denied their request to file an Amended Complaint against GS CleanTech Corporation, GreenShift Corporation, YA Global Investments, and Green Plains Commodities, LLC in Case No. 11-4069-CK. The Complaint alleges that GS CleanTech Corporation breached its obligation to repay the same $1,734,579 loan. The Complaint also alleges that the Defendants violated the Plaintiffs' claimed security interest and improperly sold the corn oil extraction equipment. In addition to the claims for breach of the notes, the Complaint includes claims for civil conspiracy, specific performance and declaratory judgment, contract implied in law/unjust enrichment, and conversion. Pursuant to the Asset Purchase Agreement entered into between GS COES and Green Plains Commodities, LLC, GS COES has agreed to assume the defense of Green Plains Commodities, LLC in this action. This case was dismissed by the trial court on July 2, 2012 based on the principles of res judicata and collateral estoppel, in light of the Court's ruling in case No. 11-4069-CK, and Plaintiffs filed an appeal with the Michigan Court of Appeals. The parties have briefed the issues on appeal and oral argument is scheduled for April 2, 2014. GS COES intends to continue to vigorously defend this action. At this stage, we cannot evaluate the likelihood of an unfavorable outcome. In the event of an adverse judgment, damages could range from $2,500,000 to $3,500,000.
GreenShift Corporation, GS CleanTech Corporation and GS COES (Yorkville I), LLC, are party to the matter captioned
Dynalectric of Michigan II, Inc. v. Biofuels Industries Group, et al
, Lenawee County, Michigan Circuit Court Case No. 09-3584-CK. This action was originally filed as a lien foreclosure and unjust enrichment claim by Dynalectric of Michigan II, Inc., which claims were resolved. GreenShift, as assignee of GS CleanTech, filed a counterclaim, cross-claim and third party complaint against various parties asserting a claim for money due in the amount of $1,442,082, plus interest, attorney fees and costs, and for foreclosure of its construction lien. Biofuels Industries Group then asserted counterclaims, cross-claims and third party complaints against GreenShift, GS CleanTech, GS COES, Kevin Kreisler and Viridis Capital, LLC claiming breach of contract for payment of legal fees of $239,000, plus interest, attorney fees, and costs; breach of corn oil supply contract for 10,000,000 gallons/year; breach of the Operating Agreement; gross negligence; and fraud; alleging damages in the amount of $239,000, plus an amount in excess of $25,000, plus attorney fees, interest and cost. In response, the Company and its subsidiaries has asserted additional claims against Biofuels Industries Group and third party complaints against three of the bridge lenders claiming lender liability and various other claims in excess of $25,000. On June 6, 2011 Biofuels Industries Group filed for Chapter 11 bankruptcy protection in the Southern District of Michigan, Eastern Division resulting in a stay of this litigation. Following the bankruptcy sale of substantially all of BIG’s assets (excluding the causes of action against GreenShift, GS COES, Kreisler, Viridis, and GS CleanTech), a settlement agreement was reached regarding distribution of the proceeds in which GS CleanTech received $351,211.81 of the $2,000,000 sales proceeds, and the case was converted to a Chapter 7 bankruptcy. After an agreement had been reached with the Chapter 7 Trustee to sell the estate’s claims against GreenShift, GS COES, Kreisler, Viridis, and GS CleanTech, the Chapter 7 Trustee instead claimed that a dispute exists concerning the scope of a security interest granted by BIG to Citizens Republic Bank (“CRB”), and that the security interest may attach to BIG’s claims against the Company and its affiliates. CRB thereafter assigned its rights in the security interest to First Financial Group, LLC, which had agreed to advance the litigation fees and expenses of the Chapter 7 Trustee to pursue the counterclaims, cross-claims, and third party complaints against the Company and its affiliates. The parties entered into a settlement agreement covering all the pending claims on December 17, 2013, pursuant to which the GreenShift entities agreed to pay the BIG bankruptcy trustee the sum of $125,000 in exchange for a release of all claims, subject to bankruptcy court approval. The bankruptcy court approved the settlement on March 4, 2014, and the parties are in the process of concluding the settlement.
The Company’s former subsidiary GS Agrifuels Corp. is party to
Max v. GS Agrifuels Corp., et al.
now pending in the Supreme Court, New York County, in which the plaintiffs are asserting claims to money damages against the Company and other defendants, arising from a series of “Share Purchase Agreements” dated March 6, 2007, under which the individual plaintiffs sold their shares in a company called “Sustainable Systems, Inc” to GS Agrifuels Corporation. In their Amended Complaint, plaintiffs asserted claims for breach of contract, fraud and negligent misrepresentation, and sought money damages on the amount of $6 million. In a Decision and Order dated March 19, 2013, the Court granted in part the defendants’ motion to dismiss the Amended Complaint, and dismissed all but the breach of contract claims asserted against the Company and certain other corporate defendants. The plaintiffs have filed a Notice of Appeal from the Decision and Order, and have indicated that they intend to perfect their appeal. On October 30, 2013, the defendants filed a motion for summary judgment dismissing the plaintiffs’ remaining claims for breach of contract. The plaintiffs have opposed the motion for summary judgment, and the motion is scheduled for oral argument in May 2014. There is no way to predict whether the motion for summary judgment will be granted and, if it is, whether the plaintiffs will take an appeal and be successful in the appellate court. If the motion for summary judgment is denied, the case is likely to proceed to trial. If the case proceeds to trial, we cannot offer any opinion as to the likelihood of a favorable outcome or, if the outcome is unfavorable, the amount or range of potential loss. It is, however, our understanding that management intends to continue to vigorously defend and litigate the matter.
On June 28, 2010 JMJ Financials commenced an action entitled
JMJ Financial v. GreenShift et. al.
, in the Circuit Court of the 11
th
Judicial Circuit in and for Miami-Dade County, State of Florida, alleging breach of contract and other causes of action for which the plaintiff seeks damages of about $300,000 plus costs. In January 2013 judgment in the amount of $600,026 was entered by default against GreenShift and its co-defendants. The Company has agreed to pay $350,000 in full settlement and release of any obligations. The Company made payments totaling $189,583 during 2013, with eleven monthly remaining payments of $14,583 due through November 2014. The settlement and release will be effective as long as the required payments are made timely or defaults due to late payment are cured within five days of the written notice of default has been sent. The Company is permitted two events of default under the terms of the settlement.
On September 10, 2012, Long Side Ventures commenced an action entitled
Long Side Ventures and Sunny Isles Ventures, LLC, LLC v. GreenShift et. al.
, in the United States District Court for the Southern District of New York, alleging breach of contract and other causes of action for which the plaintiff seeks damages of about $250,000 plus costs. The Company intends to vigorously defend this action. At this stage of the proceedings, we cannot evaluate the likelihood of an unfavorable outcome in excess of the amounts previously accrued.
On October 10, 2013, Golden Technology Management, LLC, and other plaintiffs commenced an action entitled
Golden Technology Management, LLC, et al. v. NextGen Acquisition, Inc. et al.
in the Supreme Court of the State of New York, County of New York, alleging breach of contract and other causes of action against the Company in connection with the acquisition of NextGen Fuel, Inc. by a former indirect subsidiary. Plaintiffs seek damages in excess of $5,200,000 plus prejudgment interest and costs. The Company intends to vigorously defend this action. At this stage of the proceedings, we cannot evaluate the likelihood of an unfavorable outcome in excess of the amounts previously accrued.
On November 11, 2013, GreenShift paid $125,000 for full settlement of
Overhead Door Company, et al v. Biofuel Industries Group dba Next Diesel Biodiesel
.
The Company is also involved in various collection matters for which vendors are seeking payment for services rendered and goods provided. The Company and its subsidiaries are party to numerous matters pertaining to outstanding amounts alleged to be due. Management is unable to characterize or evaluate the probability of any outcome at this time.
Under the Company’s insurance programs, coverage is obtained for catastrophic exposures, as well as those risks required to be insured by law or contract. There is a $2,500 deductible per occurrence for environmental impairments. Environmental liability insurance is carried with policy limits of $1,000,000 per occurrence and $2,000,000 aggregate.
The Company is party to employment agreements with Kevin Kreisler, the Company’s Chairman, Ed Carroll, the Company’s Chief Executive Officer and Chief Financial Officer, David Winsness, the Company’s Chief Technology Officer, Greg Barlage, the Company’s Chief Operating Officer, and Richard Krablin, the Company’s Vice President. Each agreement also included terms for reimbursement of expenses, periodic bonuses, four weeks’ vacation and participation in any employee benefits provided to all employees of GreenShift Corporation.
The Company’s Articles of Incorporation provide that the Company shall indemnify its officers, directors, employees and agents to the full extent permitted by Delaware law. The Company’s Bylaws include provisions to indemnify its officers and directors and other persons against expenses (including attorney’s fees, judgments, fines and amounts paid for settlement) incurred in connection with actions or proceedings brought against them by reason of their serving or having served as officers, directors or in other capacities. The Company does not, however, indemnify them in actions in which it is determined that they have not acted in good faith or have acted unlawfully. The Company is further subject to various indemnification agreements with various parties pursuant to which the Company has agreed to indemnify and hold such parties harmless from and against expenses and costs incurred (including attorney’s fees, judgments, fines and amounts paid for settlement) in connection with the provision by such parties of certain financial accommodations to the Company. Such parties indemnified by the Company include YA Global Investments, L.P., YA Corn Oil Systems, LLC, Viridis Capital, LLC, Minority Interest Fund (II), LLC, Acutus Capital, LLC, and various family members of the Company’s chairman that have provided the Company with cash investments.
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NOTE 13
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GUARANTY AGREEMENT
|
Viridis Capital, LLC (“Viridis”) is the majority shareholder of the Company and is solely owned by Kevin Kreisler, the Company’s founder, chairman and chief executive officer. Viridis has guaranteed all of the Company’s senior debt and has pledged all of its assets, including its shares of Company Series D Preferred Stock, to YA Global to secure the repayment by the Company of its obligations to YA Global (see Note 5,
Stockholders’ Equity
, above). Viridis has also guaranteed all amounts due to Cantrell Winsness Technologies, LLC in connection with the acquisition by the Company’s subsidiary of its patented and patent-pending extraction technologies (see Note 17,
Related Party Transactions
, below). The Company has separately agreed to indemnify and hold Viridis harmless from any and all losses, costs and expenses incurred by Viridis in connection with its guaranty of the Company’s obligations.
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NOTE 14
|
SEGMENT INFORMATION
|
We determined our reporting units in accordance with FASB ASC 280, “
Segment Reporting
” (“ASC 280”). We evaluate a reporting unit by first identifying its operating segments under ASC 280. We then evaluate each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, we evaluate those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, we determine if the segments are economically similar and, if so, the operating segments are aggregated. We have one operating segment and reporting unit. We operate in one reportable business segment; we provide technologies and related products and services to U.S.-based ethanol producers. We are organized and operated as one business. We exclusively sell our technologies, products and services to ethanol producers that have entered into license agreements with the Company. No sales of any kind occur, and no costs of sales of any kind are incurred, in the absence of a license agreement. A single management team that reports to the chief operating decision maker comprehensively manages the entire business. We do not operate any material separate lines of business or separate business entities with respect to our technologies, products and services. The Company does not accumulate discrete financial information according to the nature or structure of any specific technology, product and/or service provided to the Company’s licensees. Instead, management reviews its business as a single operating segment, using financial and other information rendered meaningful only by the fact that such information is presented and reviewed in the aggregate. Discrete financial information is not available by more than one operating segment, and disaggregation of our operating results would be impracticable.
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NOTE 15
|
MINORITY SHAREHOLDER OBLIGATIONS
|
The Company had accrued $204,630 as of December 31, 2011 in connection with the merger completed by its former subsidiary, GS AgriFuels, during 2008, and another $543,801 in connection with the conversion right of certain minority shareholders of an inactive subsidiary. During the year ended December 31, 2012, the Company recorded a gain of $204,630 upon extinguishment of that amount of this accrual leaving a balance of $543,801 at December 31, 2013.
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NOTE 16
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
The following is a summary of supplemental disclosures of cash flow information:
|
|
|
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2013
|
|
|
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2012
|
|
|
Cash paid during the year for the following:
|
|
|
|
|
|
|
|
|
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Interest
|
|
$
|
4,105
|
|
|
$
|
11,201
|
|
|
Income taxes
|
|
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59,139
|
|
|
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--
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|
|
|
|
|
|
|
|
|
|
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Supplemental schedule of non-cash investing and financing activities:
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|
|
|
|
|
|
|
|
|
Debentures converted into common stock
|
|
|
1,193,860
|
|
|
|
1,324,907
|
|
|
Reduction in value of conversion features of convertible debt from conversions
|
|
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52,484
|
|
|
|
97,119
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|
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Forgiveness of affiliate receivable charged against paid-in capital
|
|
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50,228
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|
|
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187,500
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|
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NOTE 17
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RELATED PARTY TRANSACTIONS
|
Minority Interest Fund (II), LLC (“MIF”) is party to certain convertible debentures issued by the Company (see Note 11,
Debt Obligations
, above). The managing member of MIF is a relative of the Company’s chairman.
Viridis Capital LLC (“Viridis”) is party to certain convertible debentures issued by the Company (see Note 11,
Debt Obligations
, above). The managing member of Viridis is the Company’s chairman, Kevin Kreisler.
The Company entered into agreements with MIF and Viridis to amend and restate the terms of the MIF Debenture and Viridis Debenture effective September 30, 2011 to extend the maturity date to June 30, 2013; to eliminate and contribute $502,086 in accrued interest and $1,065,308 of principal; to reduce the applicable interest rate to 6% per annum; to eliminate MIF’s and Viridis’ right to convert amounts due at a discount to the market price of the Company’s common stock; and to reverse various non-cash assignments of debt involving related parties (see Note 11,
Debt Obligations
, above). The restated balances due to MIF and Viridis at September 30, 2011, were $3,017,061 and $237,939, respectively. No interest was payable to either MIF or Viridis after these amendments. In addition, the balances of convertible debt due to Acutus Capital, LLC (“Acutus”) and family members of the Company’s chairman were amended and restated at September 30, 2011, to $1,090,000 and $351,000, respectively, in connection with cash investments previously provided to the Company. The terms of these debentures provide for interest at 6% per annum, a maturity date of June 30, 2013, and the right to convert amounts due into Company common stock at 100% of the market price for the Company’s common stock at the time of conversion. MIF received 62,500 shares of Series D Preferred Stock in partial consideration of the contribution of principal and accrued interest and the various other modified terms of MIF’s agreements with the Company. The foregoing debentures are subject to conditions which limit the transfer of shares issued upon conversion to 5% of the average monthly volume for the Company’s common stock.
During the year ended December 31, 2013, MIF forgave $5,793 of the amount due from the Company for no additional consideration. During the year ended December 31, 2012, MIF forgave $187,500 of the amount due from the Company for no additional consideration. Also during the year ended December 31, 2012, the Company’s chairman transferred approximately $146,000 in deferred salaries owed to him by the Company to Viridis Capital, LLC in the form of additional principal under a debenture held by Viridis. On the same date, all principal and interest owed to Viridis by the Company were assigned to MIF. During the year ended December 31, 2012, various other related party employees waived an aggregate of $637,111 in deferred compensation from prior years.
Between January 1, 2008 and December 31, 2010, Viridis, MIF, Acutus, and management personnel provided the Company with the cash resources we needed for our overhead needs, including all legal expenses incurred in the prosecution of infringing use of our patented technologies. Viridis is owned by our chairman, MIF is owned by a family member of our chairman, and Acutus is owned by our chairman's attorney. In addition, Viridis has guaranteed all of the Company’s debt due to YA Global and all amounts due to Cantrell Winsness Technologies, LLC, in connection with the acquisition by the Company’s subsidiary of its patented and patent-pending extraction technologies (see Note 13,
Guaranty Agreements
, above). The Company has separately agreed to indemnify and hold Viridis and its affiliates harmless from any and all losses, costs and expenses incurred by Viridis and its affiliates in connection with its and their various investments with the Company as well as Viridis’ guarantees of Company’s obligations. During the year ended December 31, 2013, the Company paid an indemnification obligation to Viridis of $450,000, $250,000 of which was paid in the form of a debenture (see Note 11,
Debt Obligations
, above). These amounts are shown as other expense in the accompanying financial statements. The Company has agreed to indemnify and hold Viridis harmless from any and all losses, costs and expenses incurred by Viridis in connection with its guaranty of the Company’s obligations and its investments with the Company.
Effective January 1, 2010, GS CleanTech Corporation, a wholly-owned subsidiary of the Company, executed an Amended and Restated Technology Acquisition Agreement (“TAA”) with Cantrell Winsness Technologies, LLC (“CWT”), David F. Cantrell, David Winsness, Gregory P. Barlage and John W. Davis (the “Sellers”) pursuant to which the parties amended and restated the method of calculating the purchase price for the Company’s corn oil extraction technology (the “Technology”). The TAA provides for the payment by the Company of royalties in connection with the Company’s corn oil extraction technologies, the reduction of those royalties as the Sellers receive payment, and a mechanism for conversion of accrued or prepaid royalties into Company common stock. To achieve this latter mechanism, the Company agreed to issue to the Sellers a one-time prepayment in the form of 1,000,000 shares of redeemable Series F Preferred Stock (“CWT Preferred Shares”) with a face value of $10 per preferred share (see Note 5, Shareholders’ Equity, above). The CWT Preferred Shares are redeemable at face value and a rate equal to the amount royalties paid or prepaid under the TAA. In addition, the Sellers have the right to convert the CWT Preferred Shares to pay or prepay royalties at a rate equal to the cash proceeds received by the Sellers upon sale of the common shares issued upon conversion CWT Preferred Shares. The TAA provides for the payment to the Sellers of an initial royalty fee equal to the lesser of $0.10 per gallon or a percentage of net cash flows, both of which are reduced ratably to $0.025 per gallon upon payment, prepayment or conversion as described above. The Company’s obligations under the TAA are guaranteed by Viridis Capital, LLC, which guarantee was subordinated by the Sellers to the rights of YA Global under its guaranty agreement with Viridis Capital (see Note 13, Guaranty Agreement, above).
The Company adopted the provisions of ASC 740
Income Taxes
. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, and at December 31, 2008, there were no unrecognized tax benefits. Interest and penalties related to uncertain tax positions will be recognized in income tax expense. As of December 31, 2013, no interest related to uncertain tax positions had been accrued. The Company provides for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The provision for income taxes for the years ended December 31, 2013 and December 31, 2012 consisted of the following:
|
|
|
2013
|
|
|
2012
|
|
|
Current provision:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
43,948
|
|
|
$
|
70,795
|
|
|
State
|
|
|
--
|
|
|
|
--
|
|
|
Total current provision
|
|
|
43,948
|
|
|
|
70,795
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit) for tax:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
--
|
|
|
|
--
|
|
|
State
|
|
|
--
|
|
|
|
--
|
|
|
Total deferred provision (benefit) for tax
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for tax
|
|
$
|
43,948
|
|
|
$
|
70,795
|
|
The Company’s total deferred taxes asset and valuation allowance as of December 31, 2013 and 2012 are as follows:
|
|
|
|
2013
|
|
|
|
2012
|
|
|
NOL carryforwards
|
|
|
13,419,356
|
|
|
$
|
12,494,171
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences in financial statement and tax accounting for:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable
|
|
|
(70,650
|
)
|
|
|
(235,500
|
)
|
|
Property, equipment and intangible assets
|
|
|
--
|
|
|
|
--
|
|
|
Net deferred tax asset
|
|
|
13,348,706
|
|
|
|
12,258,671
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowances
|
|
|
(13,348,706
|
)
|
|
|
(12,258,671
|
)
|
|
Total deferred tax asset, net of valuation allowance
|
|
$
|
--
|
|
|
$
|
--
|
|
In assessing whether the deferred tax assets are realizable, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, Management believes it is more likely than not that the Company will not realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. The increase in valuation allowance for 2013 was $1,090,035.
|
NOTE 19
|
SUBSEQUENT EVENTS
|
On March 7, 2014, the Company filed a Preliminary Schedule 14C notifying its shareholders that the Board of Directors and the majority shareholder had adopted a resolution to amend the articles of incorporation so as to effect a reverse split of the Company’s common stock in a ratio of 1-for-100. The Company anticipates that the reverse split will become effective in April 2014 when the amendment of the articles of incorporation will be filed with the Delaware Secretary of State.