Attached files
file | filename |
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EX-31.2 - GREEN EARTH TECHNOLOGIES, INC | v185012_ex31-2.htm |
EX-32.1 - GREEN EARTH TECHNOLOGIES, INC | v185012_ex32-1.htm |
EX-31.1 - GREEN EARTH TECHNOLOGIES, INC | v185012_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED: MARCH 31, 2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE TRANSITION PERIOD FROM
TO
Commission
File Number: 000-53797
GREEN
EARTH TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
26-0755102
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
3
Stamford Landing, Suite 200, Stamford, Connecticut 06902
(Address
of principal executive offices)
(877)
438-4761
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
þ
As of May
14, 2010, the issuer had a total of 134,262,153 shares of common stock, $0.001
par value, outstanding.
TABLE
OF CONTENTS
PAGE
|
|||||
PART
I. FINANCIAL INFORMATION
|
|||||
Item
1.
|
Financial
Statements
|
||||
Condensed
Consolidated Balance Sheets at June 30, 2009 and March 31, 2010
(unaudited)
|
3 | ||||
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended March 31, 2009 and 2010
(unaudited)
|
4 | ||||
Condensed
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2009 and 2010
(unaudited)
|
5 | ||||
Condensed
Consolidated Statement of Stockholders’ Equity for the Year Ended June 30,
2009 and the Nine Months Ended March 31, 2010
(unaudited)
|
6 | ||||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7 | ||||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
17 | |||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
25 | |||
Item
4.
|
Controls
and Procedures
|
25 | |||
PART
II. OTHER INFORMATION
|
|||||
Item
1.
|
Legal
Proceedings
|
27 | |||
Item
1A.
|
Risk
Factors
|
28 | |||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28 | |||
Item
6.
|
Exhibits
|
29 | |||
SIGNATURES
|
30
|
i
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share data)
June 30, 2009
|
March 31, 2010
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 697 | $ | 2,186 | ||||
Trade
receivables, less allowance of $68 and $13
|
278 | 253 | ||||||
Inventories,
net
|
2,276 | 2,067 | ||||||
Prepaid
expenses and current assets
|
459 | 143 | ||||||
Total
current assets
|
3,710 | 4,649 | ||||||
Property
and equipment, net
|
352 | 53 | ||||||
Intangibles,
net
|
2,695 | 1,761 | ||||||
$ | 6,757 | $ | 6,463 | |||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 2,282 | $ | 1,641 | ||||
Accrued
expenses
|
2,467 | 1,101 | ||||||
Deferred
revenue, related party
|
674 | 407 | ||||||
Notes
payable, related party
|
638 | 224 | ||||||
Total
current liabilities
|
6,061 | 3,373 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock, $0.001 par value, 200,000,000 shares
authorized, 85,745,486 and 134,262,153 shares issued and
outstanding, as of June 30, 2009 and March 31, 2010
|
86 | 134 | ||||||
Additional
paid-in capital
|
30,964 | 44,667 | ||||||
Common
Stock Subscription
|
2,000 | - | ||||||
Accumulated
deficit
|
(32,354 | ) | (41,711 | ) | ||||
Total
stockholders' equity
|
696 | 3,090 | ||||||
$ | 6,757 | $ | 6,463 |
See notes
to condensed consolidated financial statements.
3
GREEN
EARTH TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except share data)
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March
|
March
|
March
|
March
|
|||||||||||||
31, 2009
|
31, 2010
|
31, 2009
|
31, 2010
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Net
sales
|
$ | 1,175 | $ | 646 | $ | 2,130 | $ | 1,512 | ||||||||
Operating
expense:
|
||||||||||||||||
Cost
of sales (exclusive of depreciation and amortization)
|
933 | 541 | 1,798 | 1,269 | ||||||||||||
Selling,
general and administrative expenses, including stock-based
compensation of $2,811 $923, $4,776 and $2,743,
respectively
|
4,137 | 3,027 | 9,790 | 7,681 | ||||||||||||
Impairment
of supplier assets
|
- | 243 | - | 1,546 | ||||||||||||
Depreciation
and amortization
|
124 | 96 | 377 | 338 | ||||||||||||
5,194 | 3,907 | 11,965 | 10,834 | |||||||||||||
Loss
from operations
|
(4,019 | ) | (3,261 | ) | (9,835 | ) | (9,322 | ) | ||||||||
Interest
expense, net
|
(154 | ) | (23 | ) | (236 | ) | (35 | ) | ||||||||
Net
loss
|
$ | (4,173 | ) | $ | (3,284 | ) | $ | (10,071 | ) | $ | (9,357 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.05 | ) | $ | (0.03 | ) | $ | (0.13 | ) | $ | (0.09 | ) | ||||
Basic
and diluted weighted average common shares outstanding
|
80,488,751 | 127,246,671 | 76,489,105 | 107,965,523 |
See notes
to condensed consolidated financial statements
4
GREEN
EARTH TECHNOLOGIES, INC AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
Nine Months
|
Nine Months
|
|||||||
Ended
|
Ended
|
|||||||
March 31, 2009
|
March 31, 2010
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (10,071 | ) | $ | (9,357 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Depreciation
and amortization
|
377 | 338 | ||||||
Amortization
of financing costs
|
143 | - | ||||||
Stock-based
compensation expense
|
4,776 | 2,743 | ||||||
Impairment
of intangibles
|
- | 20 | ||||||
Impairment
of supplier assets
|
- | 1,546 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(648 | ) | 25 | |||||
Inventories
|
(1,038 | ) | (173 | ) | ||||
Prepaid
expenses and other current assets
|
3 | 29 | ||||||
Accounts
payable
|
563 | (623 | ) | |||||
Accrued
expenses
|
(246 | ) | 236 | |||||
Deferred
revenue
|
1,171 | (268 | ) | |||||
Net
Cash Used in Operating Activities
|
(4,970 | ) | (5,484 | ) | ||||
Cash
flows from investing activities
|
||||||||
Acquisition
of equipment
|
(32 | ) | (21 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from issuance of common stock, net of issuance costs
|
4,913 | 7,408 | ||||||
Proceeds
from notes payable, related party
|
145 | 10 | ||||||
Repayment
of notes payable
|
- | (424 | ) | |||||
Net
Cash Provided by Financing Activities
|
5,058 | 6,994 | ||||||
Net
increase in cash
|
56 | 1,489 | ||||||
Cash
|
||||||||
Beginning
of period
|
2,015 | 697 | ||||||
End
of period
|
$ | 2,071 | $ | 2,186 | ||||
Supplemental
information from non-cash investing and financing
activities
|
||||||||
Conversion
of debt to equity
|
$ | 259 | $ | 1,600 | ||||
Common
Shares issued for extension of debt
|
$ | 143 | $ | - | ||||
Conversion
of vendor payables to notes payable
|
$ | 288 | $ | - |
See notes
to condensed consolidated financial statements.
5
GREEN
EARTH TECHNOLOGIES, INC AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in
thousands)
Common Stock
|
Additional
|
Common
|
||||||||||||||||||||||
Paid
|
Stock
|
Accumulated
|
||||||||||||||||||||||
Shares
|
Amount
|
In Capital
|
Subscription
|
Deficit
|
Total
|
|||||||||||||||||||
Balance
at June 30, 2008 (audited)
|
69,801 | $ | 70 | $ | 21,301 | $ | - | $ | (17,022 | ) | $ | 4,349 | ||||||||||||
Private
placement of common stock and warrants (including 600,000 warrants and
96,429 shares issued for placement fees)
|
5,864 | 6 | 3,333 | - | - | 3,339 | ||||||||||||||||||
Common
Stock Subscription
|
2,000 | 2,000 | ||||||||||||||||||||||
Stock-based
compensation expense
|
9,010 | 9 | 5,840 | - | - | 5,849 | ||||||||||||||||||
Issuance
of common stock upon exercise of convertible debt
|
670 | 1 | 273 | - | - | 274 | ||||||||||||||||||
Issuance
of common stock for extension/inducement of debt
|
400 | - | 217 | - | - | 217 | ||||||||||||||||||
Net
loss
|
- | - | - | - | (15,332 | ) | (15,332 | ) | ||||||||||||||||
Balance
at June 30, 2009 (audited)
|
85,745 | $ | 86 | $ | 30,964 | $ | 2,000 | $ | (32,354 | ) | $ | 696 | ||||||||||||
Private
placement of common stock (including 325,000 shares
issued for placement fees) – to accredited investors
|
17,850 | 18 | 4,990 | - | - | 5,008 | ||||||||||||||||||
Private
placement of common stock from TTI
|
14,667 | 14 | 3,186 | (2,000 | ) | - | 1,200 | |||||||||||||||||
Product
liability settlement
|
8,000 | 8 | 1,592 | - | - | 1,600 | ||||||||||||||||||
Warrant
exercised - TTI
|
8,000 | 8 | 1,192 | - | - | 1,200 | ||||||||||||||||||
Stock-based
compensation expense
|
- | - | 2,743 | - | - | 2,743 | ||||||||||||||||||
Net
loss (unaudited)
|
- | - | - | - | (9,357 | ) | (9,357 | ) | ||||||||||||||||
Balance
at March 31, 2010 (unaudited)
|
134,262 | $ | 134 | $ | 44,667 | $ | - | $ | (41,711 | ) | $ | 3,090 |
See notes
to condensed consolidated financial statements.
6
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
1.
|
SUMMARY
OF BUSINESS AND BASIS FOR
PRESENTATION
|
Organization and
Business
Green
Earth Technologies, Inc. and subsidiary, a Delaware corporation (the “Company”),
was formed on August 7, 2007. The Company, directly and through its
wholly–owned subsidiary, markets, sells and distributes bio-degradable
performance and appearance products. The Company’s product line
crosses multiple industries including the automotive aftermarket, marine and
outdoor power equipment markets. The Company sells to home centers, mass retail
outlets, automotive stores, equipment manufacturers and over the
Internet.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, GET Manufacturing,
Inc. All significant intercompany balances and transactions have been
eliminated in consolidation. The condensed consolidated financial statements
have been prepared by the Company, without audit (except where noted), pursuant
to the rules and regulations of the Securities and Exchange Commission (the
“SEC”), and reflect all adjustments (consisting of normal recurring adjustments
unless otherwise indicated) which, in the opinion of management, are necessary
for a fair presentation of the results for the interim periods
presented.
Certain
information in footnote disclosures normally included in financial statements
prepared in conformity with accounting principles generally accepted in the
United States of America has been condensed or omitted pursuant to such
principles and the financial results for the periods presented may not be
indicative of the full year’s results, although the Company believes the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the Company’s audited
financial statements and the notes thereto for the fiscal year ended June 30,
2009 included in the Company’s Form 10, as amended, originally filed on October
6, 2009.
Liquidity
and Going Concern
Due to
the Company’s limited capital, recurring losses and negative cash flows from
operations, the Company’s auditors, in their report for the fiscal year ended
June 30, 2009, stated that there is substantial doubt about the Company’s
ability to continue as a going concern.
As
reflected in the accompanying condensed consolidated financial statements, the
Company had a net loss of $9,357 and net cash used in operations of $5,484 for
the nine months ended March 31, 2010 and has working capital of $1,276 and
stockholders’ equity of $3,090. The Company has relied upon cash from financing
activities to fund its ongoing operations as it has not been able to generate
sufficient cash from operating activities in the past and there is no
assurance that it will be able to do so in the future.
Due to
this history of losses and operating cash consumption, the Company cannot
predict how long it will continue to incur further losses or whether it will
ever become profitable, or if its business will improve. The
financial statements do not include any adjustments to reflect the possible
future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
7
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
The
Company must increase revenues in order to reduce, or eliminate, its operating
losses. Additionally, the Company needs additional capital in order
to enable it to continue to meet its financial obligations until it achieves
profitability. There can be no assurance that the Company will be
able to raise additional capital, whether from the sale of equity, debt or
convertible securities or otherwise, on favorable terms, or at all. Failure
to obtain sufficient financing would have substantial negative ramifications to
the Company.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Revenue Recognition -
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the fee is fixed and
determinable and collectability is reasonably assured. The risk of loss
transfers to the customer on the date the product is shipped. The Company’s
revenue is comprised of the sale of its products to retailers and
distributors.
Impairment of Long-Lived
Assets – Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Determination of recoverability is generally
based on an estimate of undiscounted future cash flows resulting from the use of
the asset and its eventual disposition, as well as specific appraisal in certain
instances. Measurement of an impairment loss for long-lived assets is
based on the fair value of the asset as estimated using a discounted cash flow
model. Long-lived assets to be disposed of are reported at the lower
of carrying amount or fair value less costs to sell.
Shipping Costs –
Shipping costs are included in selling, general and administrative
expenses. During the quarters ended March 31, 2009 and 2010 shipping
costs totaled $56 and $80, respectively. During the nine months ended March 31,
2009 and 2010, shipping cost totaled $273 and $295, respectively.
Net Loss Per Share -
Basic net loss per share is based upon the weighted average number of common
shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options, warrants and restricted stock are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. Since the
Company has incurred losses from all periods presented, the dilutive per share
calculation is the same as the basic calculation. Anti-dilutive
securities not included in net loss per share calculation for the quarters
include:
|
Three Months Ended
March 31,
|
Nine Months Ended
March 31,
|
||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Potentially
dilutive securities:
|
||||||||||||||||
Outstanding
time-based stock options
|
7,225 | 8,436 | 7,225 | 8,436 | ||||||||||||
Outstanding
time-based restricted stock
|
5,600 | 4,000 | 5,600 | 4,000 | ||||||||||||
Warrants
|
2,222 | 6,070 | 2,222 | 6,070 |
8
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
Depreciation and
Amortization – Depreciation and amortization are recorded using the
straight line method over the estimated useful lives of the various classes of
depreciable and amortizable property. The Company records
depreciation and amortization as a separate component of operating
expenses.
3.
|
IMPAIRMENT
OF SUPPLIER ASSETS
|
An
impairment of $1,546 was recorded as a result of this, which included $610
related to the exclusivity rights held, $596 of inventory, $286 of net fixed
assets held at Bio Tec’s location and $54 of prepaid and other current
assets.
During
the quarter ended March 31, 2010, the Company recorded an additional charge of
$243 relating to Bio Tec terminating its agreement with the
Company. Though the Company believes that Bio Tec has breached the
agreement, amounts owed to the Company may not be collectable and the carrying
amounts of assets related to Bio Tec may not be recoverable. As such, the
Company recorded an impairment loss of $243 for inventory.
The
Company is currently in negotiations with replacement vendors to fill its future
needs related to its branded performance products.
4.
|
INVENTORIES,
NET
|
Inventories consist of the
following:
June 30,
2009
|
March 31,
2010
|
|||||||
(Unaudited)
|
||||||||
Raw materials
|
$ | 1,954 | $ | 1,772 | ||||
Finished
goods
|
322 | 295 | ||||||
$ | 2,276 | $ | 2,067 |
Inventories
are presented net of a related valuation allowance of $348 and $283 at
June 30, 2009 and March 31, 2010, respectively
9
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
5.
|
INTANGIBLE
ASSETS
|
Intangible assets consist of the
following:
June 30,
2009
|
March 31,
2010
|
Estimated
Useful Lives
|
||||||||||
(Unaudited)
|
||||||||||||
Purchased
technology and exclusivity rights
|
$ | 3,350 | $ | 2,550 | 7 | |||||||
Patents
|
20 | - | ||||||||||
3,370 | 2,550 | |||||||||||
Less:
accumulated amortization
|
675 | 789 | ||||||||||
$ | 2,695 | $ | 1,761 |
Expected amortization of intangible
assets is as follows:
June
30
|
||||
2010
|
$ | 91 | ||
2011
|
364 | |||
2012
|
364 | |||
2013
|
364 | |||
2014
|
364 | |||
Thereafter
|
214 | |||
$ | 1,761 |
On
December 4, 2009 the Company recorded an impairment loss of $610 relating to its
exclusivity rights under its agreement with Bio Tec. The impairment loss is
included in the caption “impairment of supplier assets” in the statements of
operations. During the quarter ending March 31, 2010, the Company
also recorded an impairment loss of $20 relating to its patents. Such
impairment loss is reflected in selling, general and administrative expense in
the statements of operations. The expense is excluded from cost of
sales. Amortization expenses included in the caption “depreciation
and amortization” totaled $118 and $91 for three months ended March 31, 2009 and
2010, respectively, and $359 and $304 for the nine months ended March 31, 2009
and 2010, respectively.
10
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
6.
|
ACCRUED
EXPENSES
|
Accrued
liabilities consist of the following:
June 30,
2009
|
March 31,
2010
|
|||||||
(Unaudited)
|
||||||||
Accrued
payroll and taxes
|
$ | 492 | $ | 663 | ||||
Product
liability
|
1,600 | - | ||||||
Accrued
interest
|
203 | 217 | ||||||
Other
|
172 | 221 | ||||||
$ | 2,467 | $ | 1,101 |
Included
in accrued expenses at June 30, 2009 is a $1,600 charge for a liability relating
to damages incurred by the Company’s largest customer Techtronics Industries
North America, Inc (“TTI”) and its affiliates in connection with defects in a
shipment of bio-based engine oil. In October 2009, the Company obtained a
release from TTI for the product liability in exchange for 8,000,000 shares of
the Company’s common stock.
7.
|
NOTES
PAYABLE, RELATED PARTY
|
Notes payable consists of the
following:
June 30,
2009
|
March 31,
2010
|
|||||||
(Unaudited)
|
||||||||
Secured
note dated December 28, 2007 held by the Company’s President and Chief
Operating Officer. Interest accrues at a rate of 6% per annum
and is due on July 4, 2010.
|
$ | 320 | $ | 200 | ||||
Unsecured
note held by the Company’s Chairman and Chief Executive
Officer. Interest accrued at a rate of 6% per
annum. The note was paid during the 2010 third
quarter.
|
125 | - | ||||||
Unsecured
notes held by vendors of the Company. These notes will mature
by June 30, 2010.
|
193 | 24 | ||||||
$ | 638 | $ | 224 |
In
January 2010, the secured note totaling $330 that was due to the Company’s
President, Chief Operating Officer and director was extended to July 4,
2010. The holder also agreed to waive his right to collect a stock
issuance of 250,000 shares which was due if the note was extended.
Instead, the Company agreed to have $20 added on to the principal balance of the
note resulting in the aggregate note to be $350. During February
2010, the Company paid $150 to the holder reducing the outstanding balance on
the note to $200. Additionally, in February 2010, the unsecured note
totaling $125 that was due to the Company’s Chairman and Chief Executive Officer
was paid.
11
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
8.
|
STOCKHOLDERS
EQUITY
|
Restricted
Stock
During
the fiscal year ended June 30, 2009, the Company issued restricted stock awards
in return for services and compensation to various parties, including employees
and non-employees. The shares were issued at various prices under
several different agreements with each of the respective parties. The
Company did not issue any restricted stock for the nine months ended March 31,
2010.
Restricted
stock expense for the nine months ended March 31, 2010 was $510.
As of
March 31, 2010, there were 4,000,000 shares of unvested restricted stock
outstanding and $567 of unrecognized compensation costs. The Company
expects to recognize these costs over the next ten months.
Stock
Options
The 2008
Employee Stock Award and Incentive Plan, as amended (the “2008 Plan”) made
20,000,000 shares of common stock available for future equity awards. Under the
2008 Plan, stock option grants may be exercised for a period up to ten years
from the date of grant. Option awards are granted with an exercise price equal
to the market price of the Company’s stock on the date of grant and generally
vest over three years
Option activity for the nine months
ended March 31, 2010 is as follows:
Weighted
|
|||||||||||||
Weighted
|
Average
|
||||||||||||
Number
|
Average
|
Remaining
|
|||||||||||
of
|
Exercise
|
Contractual
|
Aggregate
|
||||||||||
Options
|
Price
|
Term
|
Intrinsic Value
|
||||||||||
Outstanding
at June 30, 2009
|
6,603,750 | $ | 0.49 | ||||||||||
Granted
|
2,172,500 | $ | 0.25 | ||||||||||
Exercised
|
-0- | ||||||||||||
Forfeited
and Cancelled
|
(340,000 | ) | |||||||||||
Outstanding
at March 31, 2010
|
8,436,250 | $ | 0.43 |
9.3
years
|
$ | 224 | |||||||
Exercisable
at March 31, 2010
|
-0- |
In March
2010, the Company’s board of directors approved option grants to the Company’s
employees and independent directors. The total numbers of shares
granted were 2,000,000 and have an exercise price of $0.25 equal to the closing
price per share of the Company’s common stock on March 17, 2010.
The
aggregate intrinsic value represents the difference between the exercise price
of the underlying awards and the market price of the Company’s common stock for
those awards that have an exercise price below the market price at March 31,
2010.
12
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
The fair
value of each time-based option award is estimated on the date of grant using a
Black-Scholes option pricing model with the following assumptions:
For the Period Ended
March 31, 2010
|
||||
Average
expected life (years)
|
6.0 | |||
Average
risk free interest rate
|
3.29 | % | ||
Expected
volatility
|
201 | % | ||
Expected
dividend rate
|
0 | % | ||
Expected
forfeiture rate
|
5 | % |
Stock
option expense for the nine months ended March 31, 2010 was $2,233.
As of
March 31, 2010, there was $6,573 of unrecognized compensation cost. The Company
expects to recognize these costs over the next 2.3 years.
At March
31, 2010, 11,563,750 shares are available for grant under the 2008
Plan.
Warrants
Warrant activity for the nine months
ended March 31, 2010 is as follows:
Number of
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
at June 30, 2009
|
600,000 | $ | 0.05 | ||||||||||
Granted
|
13,469,722 | $ | 0.20 | ||||||||||
Exercised
|
(8,000,000 | ) | $ | 0.15 | |||||||||
Outstanding
and exercisable at March 31, 2010
|
6,069,722 | $ | 0.25 |
2.6
years
|
$ | 677 |
9.
|
COMMITMENTS AND
CONTINGENCIES
|
Bio
Tec Litigation
The
Company received a notice from Bio Tec, the Company’s former supplier of
performance products, that they were terminating its supply agreement with the
Company, effective December 4, 2009. The Company does not believe that the
termination of the Bio Tec agreement will have a long term material adverse
impact on the Company’s business. Although the Company has not
concluded any definitive agreements with new suppliers, and may never do so, it
has already identified alternative sources to supply certain performance
products and is in the process of reviewing pricing, production capacity and
product quality with a number of these potential suppliers. In addition, the
Company has developed its own formulations for 2-cycle oil, 4-cycle oil and bar
and chain lubricants, and is working with bio-solvent suppliers, additive
companies, formulators and blending facilities to produce these products and
others on a contract basis using the Company’s proprietary
formulations.
13
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
The
Company hopes to have at least one agreement with a contract manufacturer before
the end of current fiscal year—June 30, 2010. Whether the Company purchases
lubricant products from new suppliers or it contract manufactures using its own
formulations, the Company believes the quality and the performance standard of
our performance products will not be compromised.
On
December 21, 2009, the Company commenced an action in the United States District
Court for the Southern District of New York against Bio Tec to enforce the
Company’s rights under the agreement with Bio Tec, including the Company’s
rights to Bio Tec’s intellectual property, to recover certain amounts that the
Company advanced to or on behalf of Bio Tec and to recover damages that the
Company incurred as a result of Bio Tec’s breach of the agreement. At
this time, the Company is unable to assess the outcome of the litigation.
.
Mathew
Zuckerman Litigation
On
November 20, 2009, Mathew Zuckerman, the Company’s founder and its former
president and chief operating officer, and other entities that Zuckerman
controls or in which he claims a beneficial interest commenced an action against
the Company in the Superior Court of California, County of Los Angeles.
The plaintiffs allege that they have suffered damages of not less than $6
million as a result of the Company’s refusal to allow them to transfer the
shares they allegedly own or control. In addition, Zuckerman seeks
declaratory relief that he did not violate the terms of the non-compete covenant
contained in his employment agreement as a result of his affiliation with and
employment by Alkane, Inc., a company that markets a bio-diesel fuel
additive. On March 31, 2010, the Company’s motion to have the case removed
to the U.S. District Court for the Central District of California was granted
and on April 30, 2010, the Company’s motion to have the case transferred to the
U.S. District Court of Connecticut was denied but its motion to dismiss
Zuckerman’s request for declaratory relief was granted.
On May 3,
2010 the Company filed its Answer and Counterclaims against Zuckerman alleging
various claims sounding in breach of fiduciary duty, unjust enrichment,
breach of contract and fraud, for damages to be determined at trial.
Although we believe that the Company has meritorious defenses to
Plaintiffs' claims and will prevail against those claims and succeed
on its Counterclaims against Zuckerman, this matter is at a
preliminary stage and the Company is not in a position to predict or assess
the likely outcome of these proceedings. Accordingly, the Company has
not reserved for any future loss that may arise as a result of an adverse
outcome in this litigation.
14
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
10.
|
RELATED PARTY
TRANSACTIONS
|
In
February 2008, the Company entered into an agreement with Inventek under which
Inventek granted the Company a royalty-free license and exclusivity rights to
market, sell and distribute appearance products. Inventek is owned by Yasmin
Andrecola, whose husband Paul Andrecola, beneficially owns approximately 6.8% of
the Company’s stock as of March 31, 2010. Under the terms of the
agreement, Inventek and the Company agreed to combine resources and work
together collectively to formulate and manufacture products to be sold under the
company’s brand names. The Company purchased inventory from Inventek
totaling $367 and $369 for the three months ended March 31, 2009 and 2010,
respectively and a total of $367 and $562 for the nine months ended March 31,
2009 and 2010, respectively. As of June 30, 2009 and March 31, 2010,
amounts due to Inventek were $325 and $344, respectively
In
September 2008, the Company entered into a services agreement, as amended, with
Marketiquette which is owned and operated by Jeffrey Loch, one of the Company’s
directors, and Carol Loch, his wife. KeysKwest, LLC, beneficially owns
approximately 6.0% of the Company’s outstanding shares as of March 31, 2010.
Carol Loch is the sole member of KeysKwest. Under the terms of the
services agreement the Company pays Marketiquette a monthly retainer of $36 as
well as commissions from 5%-10% based on net sales it generates. The
commission depends on the customer’s class of trade with a declining maximum
scale based on volume. The Company paid Marketiquette a total of $249 and
$122 for the three months ended March 31, 2009 and 2010, respectively and a
total of $612 and $399 for the nine months ended March 31, 2009 and 2010,
respectively, which are included in selling, general and administrative
expenses. As of June 30 and March 31, 2010, amounts due to Marketiquette
were $300 and $59, respectively.
In
December 2008, the Company entered into a five-year worldwide distribution
agreement for G-branded products with TTI. TTI beneficially owns
approximately 24.1% of the Company’s outstanding shares as of March 31,
2010. For the three months ended March 31, 2009 and 2010,
approximately 69% and 85% of the Company’s revenues, respectively, were earned
from TTI and for the nine months ending March 31, 2009 and 2010, approximately
75% and 83% of the Company’s revenues, respectively, were earned from
TTI. As of June 30, 2009 and March 31, 2010 amounts due from TTI were
$54 and $128, respectively. As of June 30, 2009 and March 31, 2010 advances
received from TTI for future sales of appearance and performance products were
$674 and $407, respectively.
11.
|
CONCENTRATIONS OF
RISK
|
Cash
The
Company maintains cash balances at financial institutions that are insured by
the Federal Deposit Insurance Corporation subject to certain
limitations.
Accounts
Receivable
For the
three months ended March 31, 2009, TTI and ACE Hardware accounted for
approximately 69% and 19%, respectively, of the Company’s sales. For
the three months ended March 31, 2010, TTI accounted for approximately 85% of
the Company’s net sales. For the nine months ended March 31, 2009,
TTI and ACE Hardware accounted for approximately 75% and 12%, respectively, of
the Company’s sales. For the nine months ended March 31, 2010, TTI
accounted for approximately 83% of the Company’s net sales. As of
June 30, 2009 and March 31, 2010, TTI accounted for approximately 19% and 51% of
the Company’s trade receivables, respectively.
15
GREEN
EARTH TECHNOLOGIES, INC.AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in
thousands, except share and per share data)
Inventory
and Accounts Payable
The
Company purchases a significant amount of its inventories from Bio Tec and
Inventek, a related- party. The Company’s inventory on hand purchased
from Bio Tec and Inventek and accounts payable relative to Bio Tec and Inventek
are as follows:
June 30, 2009
|
March 31, 2010
|
|||||||
Inventory on hand
|
||||||||
Bio
Tec
|
406 | 181 | ||||||
Inventek
|
1,009 | 959 | ||||||
Accounts Payable
|
||||||||
Bio
Tec
|
4 | % | - | |||||
Inventek
|
14 | % | 21 | % | ||||
Inventory purchased
|
||||||||
Inventek
|
704 | 562 |
See note 3 for discussion of vendor
impairment.
16
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Special
Note About Forward-Looking Statements
Certain
statements in Management’s Discussion and Analysis (“MD&A”), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results, and
the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933,as amended and
Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements generally are identified by
the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results to differ materially from
the forward-looking statements. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Overview
of our Business
We market, sell and distribute an array
of branded, environmentally-friendly, bio-based automotive, marine and outdoor
power equipment performance and appearance products. These products
are produced for us under supply and requirements contracts with domestic
manufacturers. The “green” base of our performance products is
comprised of animal fats, while our appearance products use plant
oils. This biodegradable green base replaces traditional petroleum
and chemical derived bases typically used to make motor oils, cleaning solutions
and other consumer products without compromising performance or
value. We believe our products deliver comparable or superior
performance at competitive prices, thus giving consumers the ability to “do
their part” in protecting the environment. With our products
consumers can “SAVE THE EARTH – SACRIFICE NOTHING®.”
Our
G-brand family of products includes G-OIL®,
G-FUELTM,
G-CLEAN™, G-GLASS™, and G-MARINE™. These products are offered in a
wide range of automotive, marine and outdoor power equipment categories
including performance and appearance chemicals. We sell the majority of our
products through master distribution agreements with wholesalers and contractual
arrangements with independent sales professionals. Our products are now
available at a number of national retail outlets and chain stores.
We
are actively pursuing relationships with other wholesalers and retailers to
include additional major national consumer purchase locations in the household
goods, automotive aftermarket, outdoor power equipment market and marine
market.
We
received a notice from Bio Tec, our former supplier of performance products,
terminating its supply agreement with us, effective December 4, 2009. We
do not believe that the termination of the Bio Tec agreement will have a long
term material adverse impact on our business. Although we have not concluded any
definitive agreements with new suppliers, and may never do so, we have already
identified alternative sources to supply certain performance products and are in
the process of reviewing pricing, production capacity and product quality with a
number of these potential suppliers. In addition, we have developed our own
formulations for 2-cycle oil, 4-cycle oil and bar and chain lubricants, and are
working with bio-solvent suppliers, additive companies, formulators and blending
facilities to produce these products and others on a contract basis using our
proprietary formulations.
17
We hope
to have at least one agreement with a contract manufacturer of performance
products before the end of current fiscal year—June 30, 2010. Whether we
purchase lubricant products from new suppliers or contract manufactures using
our own formulations, we believe the quality and the performance standard of our
performance products will not be compromised.
On
December 21, 2009, we commenced an action in the United States District Court
for the Southern District of New York against Bio Tec to enforce our rights
under our agreement with Bio Tec, including our rights to Bio Tec’s intellectual
property, and to recover certain amounts that we advanced to or on behalf of Bio
Tec and to recover damages that we incurred as a result of Bio Tec’s breach of
the agreement. It is too early to predict the outcome of this
litigation.
Three
Months Ended March 31, 2009 and 2010
Our
activities for the three months ended March 31, 2009 and 2010 included capital
origination, product development, marketing and sales of our bio-degradable
appearance and performance products and development of an infrastructure to
support the planned business.
Our
results of operations for the three months ended March 31, 2009 and 2010 were as
follows:
Three Months Ended
|
||||||||
March 31,
|
||||||||
2009
|
2010
|
|||||||
($000’s)
|
||||||||
Net
sales
|
$ | 1,175 | $ | 646 | ||||
Loss
from operations
|
$ | (4,019 | ) | $ | (3,261 | ) | ||
Other
expense
|
$ | (154 | ) | $ | (23 | ) | ||
Net
Loss
|
$ | (4,173 | ) | $ | (3,284 | ) |
Net
Sales
Net sales
for the three months ended March 31, 2009 consist primarily of shipments of
G-CLEAN™ appearance products: pressure washer cleaners, tire shine and wheel
cleaner and G-OIL®
performance products: 2-cycle oil, 4-cycle oil, and bar and chain
lubricants. Net sales for the three months ended March 31, 2010
consist primarily of G-CLEAN™ appearance products: including pressure washer
cleaners, grill cleaner and foam blaster; G-OIL®
performance products: including 4-cycle oil, bar and chain lubricants and
5W-30 motor oil and G-FUELTM fuel
stabilizer and charcoal starter fluid. The decrease in net sales is
primarily due to production delays of the 2-cycle oil sales during the three
months ended March 31, 2010 offset by sales of fuel stabilizer, grill &
surface cleaners, the initial sale of foam blaster and charcoal starter fluid.
Two customers, TTI and Ace Hardware, accounted for 69% and 19% of our net sales
in the three months ended March 31, 2009, respectively. One customer,
TTI, accounted for 85% of our net sales in the three months ended March 31,
2010. Net sales are comprised as follows:
18
Three Months Ended
|
||||||||
March 31,
|
||||||||
2009
|
2010
|
|||||||
($000’s)
|
||||||||
Performance
products
|
$ | 592 | $ | 294 | ||||
Appearance
products
|
583 | 352 | ||||||
Total
|
$ | 1,175 | $ | 646 |
Cost
of Sales (exclusive of depreciation and amortization)
Cost of
sales (exclusive of depreciation and amortization) primarily consists of
the cost of obtaining bio solvent animal fats, plant oils, additives, packaging
components and fees paid to our affiliates for the costs of operations
employees. Cost of sales (exclusive of depreciation and
amortization) for the three months ended March 31, 2009 and 2010 was
approximately $933,000 and $541,000 respectively. The decrease in cost of sales
(exclusive of depreciation and amortization) is primarily due to the
decrease in net sales.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of salaries and benefits,
product development and testing fees, advertising and marketing expenses, public
relations, insurance, fees for professional services and non-cash charges for
stock compensation. Selling, general and administrative expenses, for the
three months ended March 31, 2009 and 2010 include the following:
Three Months Ended March 31,
|
||||||||
2009
|
2010
|
|||||||
($000’s)
|
||||||||
Salaries
|
$ | 389 | $ | 407 | ||||
Stock-based
compensation
|
2,811 | 923 | ||||||
Selling,
marketing, public relations and related
|
457 | 682 | ||||||
Development,
product release and testing
|
50 | 118 | ||||||
Management
and operating fees
|
180 | 234 | ||||||
Legal
and professional
|
45 | 497 | ||||||
Occupancy,
communications and all other, net
|
205 | 166 | ||||||
Total
selling, general and administrative expenses
|
$ | 4,137 | $ | 3,027 |
The
decrease in stock-based compensation is primarily due to restricted shares
granted during the third quarter of fiscal 2009 for recruiting executive
management. The increase in sales and marketing was due to the first ever G-OIL™
television commercial which aired on the Speed Channel and sponsorship of the
racing team “Green Earth Team Gunnar” and the American Le Mans
Series. The increase in development, product release and testing is
due to the development of our own formulations for 2-cycle oil, 4-cycle oil and
bar and chain lubricants. The increase in legal and professional fees
is primarily due to legal fees in connection with the Zuckerman and Bio Tec
litigations.
19
Impairment
of Supplier Assets
During
the quarter ended March 31, 2010, we recorded an additional charge of $243,000
relating to Bio Tec terminating its agreement with us. Though we
believe that Bio Tec has breached the agreement, amounts owed to us may not be
collectable and the carrying amounts of assets related to Bio Tec may not be
recoverable. As such, we recorded an impairment loss of $243,000 for
inventory.
Depreciation
and amortization
Depreciation and amortization expense
for the three months ended March 31, 2009 and 2010 was approximately $124,000
and $96,000, respectively. Depreciation charges totaled $6,000 and $5,000
for the three months ended March 31, 2009 and 2010, respectively.
Amortization expense for intangible assets totaled $118,000 and $91,000 for the
three months ended March 31, 2009 and 2010, respectively. The decrease in
amortization expense is primarily due to the write off of intangible
assets relating to the Bio Tec intellectual property rights. The
expense is excluded from cost of sales.
Interest
expense, net
Net
interest expense for the three months ended March 31, 2009 and 2010 was
approximately $154,000 and $23,000, respectively. Interest expense
primarily consists of interest due on notes payable to related parties. The
decrease in interest expense is due to a reduction in the interest rate from 12%
to 6% on the secured notes and the reduction of the principal
balance. Interest income consists of interest earned on bank deposits
and deposits in an institutional money market fund.
Nine
months Ended March 31, 2009 and 2010
Our
activities for the nine months ended March 31, 2009 and 2010 included capital
origination, product development, marketing and sales of our bio-degradable
appearance and performance products, development of mass market product
distribution networks for the intended distribution of our products, development
of an infrastructure to support the planned business and commencement of
revenues.
Our
results of operations for the nine months ended March 31, 2009 and 2010 are as
follows:
Nine months Ended March 31,
|
||||||||
2009
|
2010
|
|||||||
($000’s)
|
||||||||
Net
sales
|
$ | 2,130 | $ | 1,512 | ||||
Loss
from operations
|
$ | (9,835 | ) | $ | (9,322 | ) | ||
Other
expense
|
$ | (236 | ) | $ | (35 | ) | ||
Net
loss
|
$ | (10,071 | ) | $ | (9,357 | ) |
20
Net
Sales
Net sales
for the nine months ended March 31, 2009 consist primarily of shipments of
G-OIL®
performance products; 2-cycle oil, bar and chain lubricants and 4-cycle
oil and G-CLEAN™ appearance products; pressure washer cleaners, wheel cleaner
and tire shine. Net sales for the nine months ended March 31, 2010
consist primarily of G-OIL®
performance products; including 4-cycle oil, bar and chain lubricants and
5W-30 motor oil; G-CLEAN™ appearance products; including pressure washer
cleaners, grill cleaner and foam blaster; and G-FUELTM
products; including charcoal starter fluid and fuel stabilizer. The
decrease in net sales is primarily due to production delays of 2-cycle oil sales
during the nine months ended March 31, 2010 offset by initial sales of charcoal
starter fluid, fuel stabilizer, grill & surface cleaners and foam
blaster. Two customers, TTI and Ace Hardware, accounted for 75% and
12% of our net sales in the nine months ended March 31, 2009,
respectively. One customer, TTI, accounted for 83% of our net sales
in the nine months ended March 31, 2010. Net sales are comprised as
follows:
Nine months Ended March 31,
|
||||||||
2009
|
2010
|
|||||||
($000’s)
|
||||||||
Performance
products
|
$ | 1,474 | $ | 980 | ||||
Appearance
products
|
656 | 532 | ||||||
Total
|
$ | 2,130 | $ | 1,512 |
Cost
of Sales (exclusive of depreciation and amortization)
Cost of
sales (exclusive of depreciation and amortization) primarily consists of
the cost of obtaining bio solvent animal fats, plant oils, additives, packaging
components and fees paid to our affiliates for the costs
of operations employees. Cost of sales (exclusive of
depreciation and amortization) for the nine months ended March 31, 2009 and
2010 were approximately $1,798,000 and $1,269,000 respectively. The decrease in
cost of sales (exclusive of depreciation and amortization) is primarily due
to the decrease in net sales.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of salaries and benefits,
product development and testing fees, advertising and marketing expenses, public
relations, insurance, fees for professional services and non-cash charges for
stock compensation. Selling, general and administrative expenses for the
nine months ended March 31, 2009 and 2010 include the following:
Nine months Ended March 31,
|
||||||||
2009
|
2010
|
|||||||
($000’s)
|
||||||||
Salaries
|
$ | 1,078 | $ | 919 | ||||
Stock-based
compensation
|
4,776 | 2,743 | ||||||
Selling,
marketing, public relations and related
|
1,880 | 1,695 | ||||||
Development,
product release and testing
|
421 | 225 | ||||||
Management
and operating fees
|
592 | 627 | ||||||
Legal
and professional
|
534 | 892 | ||||||
Occupancy,
communications and all other, net
|
509 | 580 | ||||||
Total
selling, general and administrative expenses
|
$ | 9,790 | $ | 7,681 |
21
The
decrease in salaries is primarily due to the resignation of our former president
and chief operating officer and a reduction of salary paid to our chief
executive officer. The decrease in stock-based compensation is due to restricted
shares granted during fiscal 2008 for recruiting executive management offset by
stock option grants to employees. The decrease in sales and marketing is
primarily due to decreased shipping costs, public relation fees and last year’s
advertising campaigns, partially offset by the first ever G-OIL™ television
commercial which aired on the Speed Channel and sponsorship of the racing team
“Green Earth Team Gunnar” and the American Le Mans Series. The
decrease in development, product release and testing is primarily due to the
2008 independent testing fees for obtaining the SM rating from the American
Petroleum Institute (API) for our 5W-30 motor oil, partially offset by the
development of our own formulations for 2-cycle oil, 4-cycle oil and bar and
chain lubricants. The increase in legal and professional fees is
primarily due to higher legal fees in connection with the Zuckerman and Bio Tec
litigations, partially offset by prior year organization costs. The
increase in occupancy, communications and all other is primarily due to higher
office, travel, rent and insurance fees.
Impairment
of Supplier Assets
On
December 4, 2009 we received a notice from Bio Tec, one of our suppliers of
performance products, that it was terminating its agreement with
us. As a result, we recorded charges of $1,546,000. Though
we believe that Bio Tec has breached the agreement, amounts owed to us may not
be collectable and the carrying amounts of assets related to Bio Tec may not be
recoverable. As such, we recorded an impairment loss of $610,000 related to Bio
Tec exclusivity rights, wrote off $596,000 for inventory, recorded a charge of
$286,000 for fixed assets at the Bio Tec facility, and expensed other Bio Tec
related charges totaling $54,000.
We have
identified alternative sources for performance related products and we are
conducting product performance and specification testing with such
sources.
Depreciation
and amortization
Depreciation and amortization expense
for the nine months ended March 31, 2009 and 2010 was approximately $377,000 and
$338,000, respectively. Depreciation charges totaled $18,000 and $34,000
for the nine months ended March 31, 2009 and 2010, respectively. The
increase in depreciation expense is primarily due to a full nine months of
expense. Amortization expense for intangible assets totaled $359,000 and
$304,000 for the nine months ended March 31, 2009 and 2010, respectively.
The decrease in amortization expense is primarily due to the write off of
intangible assets relating to the Bio Tec intellectual property
rights. The expense is excluded from cost of sales.
Interest
expense, net
Net
interest expense for the nine months ended March 31, 2009 and 2010 was
approximately $236,000 and $35,000, respectively. Interest expense consists of
interest due on notes payable to related parties. The decrease in
interest expense is due to a reduction in the interest rate from 12% to 6% on
the secured notes and the reduction of the principal
balance. Interest expense is currently accruing at approximately
$3,000 per quarter. Interest income consists of interest earned on
bank deposits and deposits in an institutional money market fund.
Impact
of Inflation
Inflation
has not had a material effect on our results of operations. We expect
the cost of our bio-based performance products to track the increase and
decrease in the worldwide oil prices.
22
Seasonality
Although
our various product lines are sold on a year-round basis, the appearance
chemicals and outdoor power equipment markets are inherently seasonal.
Seasonality impacts liquidity in that we generally record the majority of our
annual sales in the quarters ending March and June. This requires us to maintain
higher inventory levels during the quarters ending September and December,
therefore increasing the working capital needs during these
periods.
Liquidity
and Capital Resources
At June
30, 2009 and March 31, 2010, we had $697,000 and $2,186,000, respectively, in
cash and an accumulated deficit of $32,354,000 and $41,711,000,
respectively. As June 30, 2009 we had a working capital deficit of
$2,351,000 and as of March 31, 2010, we had working capital of
$1,276,000.
Net cash
used by operating activities was $4,970,000 and $5,484,000 for the nine
months ended March 31, 2009 and 2010, respectively. The increase was primarily
due to payments made to vendors and decrease in accounts payable in the nine
months ended March 31, 2010.
Net cash
provided in financing activities was $5,059,000 and $6,994,000 for
the nine months ended March 31, 2009 and 2010, respectively. The net
proceeds from our financing activities will be used to support our
expansion, including purchases from suppliers, and increased infrastructure
costs. We cannot estimate at this time the cost of capital necessary to
integrate a new supplier for our performance related products. Nor
have we determined if the funding will involve cash, debt or equity as
negotiations are ongoing.
Our
capital requirements are not significant as the majority of our performance and
appearance products are outsourced to third party suppliers. During
nine months ended March 31, 2009 and 2010, our cash used for investing
activities (capital requirements) was $32,000 and $21,000,
respectively. In the foreseeable future, we will require capital for
the growth of our business, including increases in personnel, sales and
marketing, purchasing raw materials and packaging finished goods to fulfill
orders.
We
currently have no material commitments for capital expenditures.
Further,
losses from operations are continuing subsequent to March 31, 2010 and we
anticipate that we will continue to generate losses from operations in the near
future. As a result, in their report for the fiscal year ended June
30, 2009, our auditors raised substantial doubt about our ability to continue as
a going concern.
Since
inception, we have financed our operations by issuing securities (common stock
and debt instruments) in various private placement transactions and from revenue
generated by sales of our products.
Equity
From July
1, 2009 through March 31, 2010, we issued 17,850,000 shares of common stock for
gross proceeds of $5,100,000 in private placement transactions. Included
in those shares are 325,000 shares, having a value of $92,000 issued to a
placement agent in connection with those transactions. In addition, there was
$75,000 in cash payments in connection with these private placement
transactions.
On March
31 2009, TTI subscribed for 6,666,667 shares of common stock and warrants to
purchase 2,222,222 shares of common stock at $0.20 per share at any time on or
before March 31, 2012. The aggregate purchase price for the stock and
warrants was $2,000,000. The securities were issued in October
2009.
23
In
October 2009, we entered into an investment agreement with TTI under which TTI
agreed to purchase 8,000,000 shares of our common stock for an aggregate
purchase price of $1,200,000. In addition, we granted TTI warrants to
purchase another 8,000,000 shares of our common stock at a price of $0.15 per
share, or $1,200,000 in the aggregate. In October 2009, TTI exercised
half its warrants and we issued 4,000,000 shares. In January 2010, TTI exercised
the other half of the warrants and we issued the remaining 4,000,000 shares for
proceeds of $600,000. Under the agreement, we also agreed to issue
8,000,000 shares of our common stock in satisfaction of all claims, except for
product liability claims or any claims that cannot be released as a matter of
law, relating to liabilities and/or damages incurred by TTI and its affiliates
in connection with a shipment of defective engine oil. After taking into account
the exercise of outstanding warrants and options, TTI beneficially owned 24.1%
of our issued and outstanding shares as of May 14, 2010.
Debt
From
August 2007 through June 30, 2009, we issued notes with an aggregate original
principal amount of $1,320,000, of which $170,000 remains outstanding at March
31, 2010. From July 1, 2009 through March 31, 2010 we issued a note
with an aggregate principal amount of $30,000, all of which remains
outstanding. These amounts do not include $24,000 of trade payables
evidenced by notes.
Going
Concern Consideration
Due to
our limited amount of committed capital, recurring losses, negative cash flows
from operations and our inability to pay outstanding liabilities, in their
report for the fiscal year ended June 30, 2009, out independent auditors stated
that there is substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles, assuming that we will
continue as a going concern.
Since
inception, we have incurred operating losses and negative cash flows from
operations. As of March 31, 2010, we had an accumulated deficit of
$41,711,000, with total stockholders’ equity of $3,090,000. We had
working capital of $1,276,000 at March 31, 2010. However, we believe
the $407,000 recorded as deferred revenue from TTI and the note payable to our
chief operating officer for $200,000, if needed, we could request both TTI and
our officer to forego the short term nature of these amounts owed. This
would provide us with an adjusted working capital of approximately $1,883,000 at
March 31, 2010
Since
March 31, 2010, we have had discussions with existing and potential new
investors regarding one or more financing transactions. We have not
received any firm commitments from any of these sources. However, the
discussions are continuing. Additionally, we believe net sales will
increase as consumers learn of and experience the efficacy of our
products. Increased revenues will reduce, or eliminate our operating
losses and enable us to meet our financial obligations. However, there can be no
assurances that we can attract new investment or increase net
sales. Failure to obtain sufficient equity financing would have
substantial negative ramifications to us.
Between
our available cash balance at March 31, 2010 of $2,186,000 and our adjusted
working capital of $1,883,000, we have estimated, we may require approximately
$2.5 – $3.5 million of additional cash for calendar year ending December 31,
2010.
Contractual
Arrangements
Significant
contractual obligations as of March 31, 2010 are as follows:
Amount Due in
|
||||||||
Type of Obligation
|
Total Obligation
|
Less than 1 year
|
||||||
Facility
Lease
|
$ | 111,000 | $ | 80,000 |
24
Under our
agreement with Bio Tec, we were obligated to purchase a minimum quantity of
three tanker loads, or 18,750 gallons in the aggregate, of performance products
per month, provided that Bio Tec (i) can produce the quantity and type of
products we require on a timely basis and (ii) the products satisfy our quality
standards. If we failed to take delivery of the minimum quantity, we
were obligated to pay Bio Tec $10,000 per tanker load (6,250 gallons) up to
$30,000 per month. We believed we were in compliance with the terms
of our agreement with Bio Tec. We received a notice from Bio Tec that
it was terminating its agreement with us, effective December 4,
2009. On December 21, 2009, we commenced an action in the United
States District Court for the Southern District of New York against Bio Tec to
enforce our rights under its agreement with Bio Tec, including our rights to Bio
Tec’s intellectual property, and to recover certain amounts that we advanced to
or on behalf of Bio Tec and to recover damages that we incurred as a result of
Bio Tec’s breach of the agreement. It is too soon to determine the
likely outcome of this matter.
Off
Balance Sheet Arrangements
We have
no material off balance sheet arrangements that are likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital resources or
capital expenditures.
Critical
Accounting Policies
There
have been no material changes in our critical accounting policies and estimates
from those disclosed in Item 15 of our Registration Statement on Form 10
for the fiscal year ended June 30, 2009 and nine months ended March 31,
2010.
Summary
of Significant Accounting Policies and new Accounting
Pronouncements
See note
2, “Summary of Significant Accounting Policies” to our consolidated financial
statements for a full description of recently issued accounting pronouncements,
including date of adoption and effects on results of operations.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
As a
smaller reporting company, we are not required to provide the information
required by this item.
Item
4.
|
Controls
and Procedures.
|
Management
has conducted, with the participation of our Chief Executive Officer and our
Chief Financial Officer, an assessment of our internal control over
financial reporting as of March 31, 2010. Management’s assessment of internal
control over financial reporting was conducted using the criteria in Internal Control over Financial
Reporting - Guidance for Smaller Public Companies issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. In connection with our assessment
of our internal control over financial reporting as required under Section 404
of the Sarbanes-Oxley Act of 2002, we identified the following material
weaknesses in our internal control over financial reporting as of March 31,
2010:
25
·
|
We have concluded that there were
not effective financial reporting controls in the following areas that
could lead to inaccurate financial
reporting:
|
·
|
We
have difficulty in accounting for complex accounting transactions
particularly as it relates to valuation of share based payments, the
valuation of warrants, fair value measurements and other complex debt
/equity transactions.
|
·
|
Documented processes do not
exist at our
Stamford, CT headquarters and Detroit, MI facility for several key processes such
as a closing checklist, budget-to-actual analyses, standard monthly reporting
process, pro forma
financial statements, and the usage of key
spreadsheets.
|
·
|
We have identified weaknesses in
our inventory
controls:
|
|
·
|
Documented
processes do not exist for several key inventory control processes
including inventory adjustments, reserves for excess, defective and
obsolete inventory, product shipments and the tracking and recording of
in-transit inventory.
|
|
·
|
We
have not effectively monitored third-party warehouse operations to ensure
the acquisition, tracking and disposition of inventory is appropriate. In
addition we do not have the proper reconciliation controls regarding the
safeguarding of inventory at third-party
warehouses.
|
·
|
Documented inventory valuation
processes are lacking or do not exist including costs to be expensed
versus inventoried, standard cost changes, actual versus standard cost
analysis and the accurate accumulation of total production
costs.
|
Because
of the material weaknesses noted above, we have concluded that we did not
maintain effective internal control over financial reporting as of March 31,
2010, based on Internal
Control over Financial Reporting - Guidance for Smaller Public Companies
issued by COSO.
Remediation
of Material Weaknesses in Internal Control over Financial Reporting
We are in
the process of implementing remediation efforts with respect to the material
weaknesses noted above as follows:
·
|
We are improving our financial
reporting controls by:
|
o
|
Implementing a process to review
all journal entries prior to entry into the General
Ledger.
|
o
|
Documenting all key financial
reporting processes.
|
o
|
Establishing an effective
document control and retention
procedure.
|
o
|
Establishing
budgets and examining on a month to month basis budget versus actual
variances.
|
·
|
We are improving the effectiveness of the
accounting group by continuing to augment our existing resources with
additional consultants or employees to assist in the analysis and
recording of complex
accounting transactions.
|
26
·
|
During our second fiscal quarter
of 2010 we implemented a new Enterprise Resource
Planning (ERP) system and are documenting along with the
implementation of our ERP system all key inventory control processes,
bills of materials, measurement and valuation processes, purchasing and
production forecasts and inventory
management.
|
We
believe the foregoing efforts will enable us to improve our internal control
over financial reporting. Management is committed to continuing efforts aimed at
improving the design adequacy and operational effectiveness of its system of
internal controls.
(b)
Changes in Internal Control Over Financial Reporting
During
our second fiscal quarter of 2010, we implemented a new accounting system which
allows us to develop better internal controls around issuing purchase orders,
processing accounts payable, accounts receivable, inventory, manufacturing and
reporting. We believe the new ERP system has and will continue to
improve our internal control framework.
PART
II - OTHER INFORMATION
Item 1.
|
Legal
Proceedings
|
On
November 20, 2009, Mathew Zuckerman, our founder and former president and chief
operating officer, and other entities that he controls or in which he claims a
beneficial interest commenced an action against us in the Superior Court of
California, County of Los Angeles. The plaintiffs allege that they have
suffered damages of not less than $6 million as a result of our refusal to allow
them to transfer the shares they allegedly own or control. In addition,
Zuckerman seeks declaratory relief that he did not violate the terms of the
non-compete covenant contained in his employment agreement with us as a result
of his affiliation with and employment by Alkane, Inc., a company that markets a
bio-diesel fuel additive. On April 1, 2010, our motion to have the case
removed to the U.S. District Court for the Central District of California was
granted and on April 30, 2010 the U.S. District Court Central District of
California dismissed our motion to have the case transferred to the U.S.
District Court of Connecticut but granted our motion to dismiss Zuckerman’s
request for declaratory relief.
On May 3,
2010 we filed our Answer and Counterclaims against Zuckerman alleging various
claims sounding in breach of fiduciary duty, unjust enrichment, breach of
contract and fraud, for damages to be determined at trial. Although we
believe that we have meritorious defenses
to Plaintiffs' claims and will prevail against those claims and
succeed on its Counterclaims against Zuckerman, this matter is at
a preliminary stage and we are not in a position to predict or assess
the likely outcome of these proceedings. Accordingly, we have not
reserved for any future loss that may arise as a result of an adverse outcome in
this litigation.
We
received a notice from Bio Tec that Bio Tec was terminating its agreement with
us, effective December 4, 2009. In the termination notice, Bio Tec
claimed that we had breached our agreement with Bio Tec by failing to purchase
and market the minimum amount of Bio Tec’s products as required by the
agreement. As a result, Bio Tec claims that we are required to pay
one of Bio Tec’s principals $300,000 per year and also demanded that we “cease
immediately any representations that [we have] an exclusive right to market,
sell and distribute products utilizing technology proprietary to Bio Tec” and
that we “cease advertising that [we] may have a right to use Bio Tec’s
technology to produce products.” We believe, however, that we have
complied with all of the terms of the agreement and that Bio Tec is not entitled
to any termination penalties. In fact, we believe that Bio Tec has
breached the agreement. On December 21, 2009, we commenced an action
in the United States District Court for the Southern District of New York
against Bio Tec to enforce our rights under the agreement with Bio Tec,
including our rights to Bio Tec’s intellectual property, to recover amounts that
we advanced to or on behalf of Bio Tec and to recover damages that we incurred
as a result of Bio Tec’s breach of the agreement. It is too soon to
determine the likely outcome of this matter.
27
Item 1A.
|
Risk
Factors
|
The
following risk factors have been updated with respect to results from the period
covered by this report. Other than those below, there were no other material
changes from the risk factors previously reported in our Registration Statement
on Form 10 for the fiscal year ended June 30, 2009 and three months ended March
31, 2010. Please refer to Item 1A of our Form 10 for disclosures regarding other
risks and uncertainties related to our business.
We
have determined that there is a material weakness in our internal controls over
financial reporting, which may be insufficient to detect in a timely manner
misstatements that could occur in our financial statements in amounts that may
be material.
As set forth in Item 4 of this report,
in connection with our assessment of internal control over financial reporting
for the period ended March 31, 2010, we concluded that we did not maintain
effective internal control over financial reporting as of March 31, 2010 due to
material weaknesses in our financial reporting controls and our inventory
controls. A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected on a timely basis. We are in the process of implementing
remediation efforts with respect to the material weaknesses noted. However, despite these
steps, we may experience reportable conditions
and material weaknesses in the future, which may render us unable to detect in a
timely manner misstatements that could occur in our financial statements in
amounts that may be material. We cannot assure you that we will determine that
our material weakness have been remedied by the end of our next reporting
period.
Future
sales or the potential for sale of a substantial number of shares of our common
stock could cause the trading price of our common stock to decline and could
impair our ability to raise capital through subsequent equity
offerings.
Sales of a substantial number of shares
of our common stock in the public markets, or the perception that these sales
may occur, could cause the market price of our stock to decline and could
materially impair our ability to raise capital through the sale of additional
equity securities. As of May 14, 2010, we had 134,262,153 shares of
common stock issued and outstanding. In addition, as of May 14, 2010,
we had reserved an additional 30,069,722 shares for issuance as
follows:
|
·
|
20,000,000
shares reserved for issuance under our stock option plan, of which
8,436,250 underlie outstanding options at March 31,
2010;
|
|
·
|
4,000,000
shares issuable to our chief executive officer under his employment
agreement;
|
|
·
|
3,847,500 shares
underlying outstanding warrants;
and
|
|
·
|
2,222,222
shares underlying the warrants issuable to TTI under the TTI Investment
Agreement.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
In
August, 2009, we issued 625,000 shares of our common stock and warrants to
purchase 187,500 shares at an exercise price of $0.05 per share for gross
proceeds of $250,000. The warrants have a three year term and are
exercisable at anytime. There were no cash payments in connection with these
private placement transactions.
In
November 2009, we issued 1,800,000 shares of common stock and warrants to
purchase 900,000 shares of common stock at $0.23 per share for gross proceeds of
$500,000 in a private placement transaction. There were no cash
payments in connection with this private placement transaction.
28
In
November 2009, we issued 3,600,000 shares of common stock for gross proceeds of
$1,000,000 in a private placement transaction. We paid $25,000 in
cash and agreed to issue 100,000 shares of common stock, having a value of
$25,000, to a placement agent in connection with this private placement
transaction.
In
December 2010, we agreed to issue 700,000 shares of common stock for gross
proceeds of $350,000 in a private placement transaction. There were
no cash payments in connection with these private placement
transactions.
In
January 2010, we issued 7,200,000 shares of common stock and warrants to
purchase 1,080,000 shares of common stock at $0.38 per share for gross proceeds
of $2,000,000. We paid $25,000 in cash and agreed to issue 100,000
shares of common stock, having a value of $25,000, to a placement agent in
connection with this private placement transaction.
In
February 2010, we issued 3,600,000 shares of common stock and warrants to
purchase 1,080,000 shares of common stock at $0.38 per share for gross proceeds
of $1,000,000. We paid $25,000 in cash and agreed to issue 100,000
shares of common stock, having a value of $25,000, to a placement agent in
connection with this private placement transaction.
Exhibit Numbers
|
Description
|
|
31.1
|
Certification
of Chairman and Chief Executive Officer pursuant to Section 302 of
the Sarbanes Oxley Act of 2002 *
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 *
|
|
32.1
|
Certification
of Chairman and Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002*
|
* filed
herewith
29
SIGNATURES
Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
GREEN EARTH TECHNOLOGIES,
INC.
|
||
Date:
May 14, 2010
|
By: |
/s/ William J. Marshall
|
Name:
William J. Marshall
|
||
Title:
Chairman and Chief Executive Officer
|
||
(Principal
Executive Officer)
|
||
By: |
/s/ Greg D.
Adams
|
|
Name:
Greg D. Adams
|
||
Title:
Chief Financial Officer
|
||
(Principal
Executive
Officer)
|
30