See the accompanying notes to the consolidated financial statements.
XTREME GREEN ELECTRIC VEHICLES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2014
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and Rule 8.03 of Regulation SX. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements of the Company as of and for the year ended December 31, 2013, on Form 10-K, including notes thereto.
Chapter 11 Proceedings
On August 22, 2013 (the Petition Date), Xtreme Green Products, Inc. (the Company) filed a voluntary petition (the Chapter 11 Case) for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Nevada (the Bankruptcy Court). The Chapter 11 Case was administered under Case No. BK-S-13-17266-MKN.
On January 29, 2014 (the Confirmation Date), the Bankruptcy court entered an Order Confirming the companys First Amended Plan of reorganization (the Plan) under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court ordered the Chapter 11 closed as of February 28, 2014.
Earnings per Share
The Company calculates net income (loss) per share as required by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 260, "Earnings per Share." Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding.
Basis of Reporting
The Companys financial statements have been prepared in accordance with Financial Accounting Standards Board (FASB), Accounting standards codification (ASC) Topic 852, Reorganizations, which requires that financial statements for periods subsequent to the Chapter 11 bankruptcy proceedings distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the companys business. Accordingly, certain income, expenses, realized gains and losses and provisions for losses that were realized or incurred in the Chapter 11 bankruptcy are recorded as reorganization items on our statement of operations.
On February 28, 2014, the effective date of the emergence from bankruptcy, we did not meet the requirements under ASC Topic 852 to adopt fresh start accounting. Fresh start accounting requires the debtor to use current fair values in its balance sheet for both assets and liabilities and to eliminate all prior earnings or deficits. The two requirements to fresh start accounting are:
The organization value of the debtors assets immediately before the date of confirmation of the plan or reorganization is less than the total of all post-petition liabilities and allowed claims; and
The holders of existing voting shares immediately before confirmation of the plan of reorganization receive less than 50% of the voting shares upon emergence.
These requirements are referred to as the fresh start applicability test. At February 28, 2014, our fresh start calculation indicated that we did not meet the requirements to adopt fresh start accounting because the reorganization value of the companys assets exceeded the total of post-petition liabilities and allowed claims and the holders of existing voting shares immediately before confirmation of the plan of reorganization received more than 50% of the voting shares upon emergence.
The Company incurred net losses from inception through March 31, 2014; aggregating $11,237,725 and has working capital and stockholder earnings of $789,656 and $1,025,692 at March 31, 2014.
The Companys ability to continue as a going concern is contingent upon its ability to secure additional financing, increase ownership equity and develop profitable operations. In addition, the Companys ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established markets and the competitive environment in which the Company operates.
The Company is actively pursuing financing for its operations and seeking additional private investments. In addition, the Company is seeking to expand its revenue base and product distribution. Failure to secure such financing or to raise additional equity capital and to expand its revenue base may result in the Company depleting its available funds and not being able pay its obligations.
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 possible inability of the Company to continue as a going concern.
Inventory is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of finished vehicles, vehicles in process, and parts. The Companys management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required. The Company incurred an expense against cost of sales of $18,695 as a result of inventory obsolescence.
Other Current Assets
Other prepaid expenses
Stock Holder Loans
Under the terms of the Plan, all stockholder loans and other unsecured debt obligations that were previously reported on the Companys financial statements were converted into equity on the Confirmation Date. As a result, no such loans remained outstanding on March 31, 2014.
The following table summarizes the components of liabilities subject to compromise. The Bankruptcy Court ordered the Chapter 11 closed as of February 28, 2014 and all liabilities subject to compromise were extinguished.
Accounts payable & accrued liabilities
Accrued expenses - related party
Accrued interest related party
Convertible debt & shareholder loans
Total liabilities subject to compromise
Liabilities subject to compromise refers to prepetition obligations which were impacted by the Chapter 11 reorganization process. These amounts represent the debtors prepetition obligations that were resolved in connection with the Chapter 11 Bankruptcy Case. Substantially nearly all of the companys debt has been classified as liabilities subject to compromise.
Line of Credit
On April 21, 2012 the Companys line of credit with a financial institution for $150,000 was converted to a term loan bearing interest at 6% per annum, maturing April 21, 2016. The line is secured by certain assets of a related party. The balance of the loan at March 31, 2014 was $84,670.
The Companys 2008 Incentive Stock Option Plan was terminated on February 28, 2014 under the terms of the chapter 11 Plan. All options outstanding there under the plan were terminated as of that date.
On April 14, 2014 a Director of the Company purchased 10,000 shares of the Companys common stock at a price of $1.00 per share, paying $10,000.
On April 24, 2014 the Company sold 100,000 shares of its Common Stock to a private investor at a purchase price of $1.00 per share. A total of $100,000 was received on April 24, 2014.
On April 29, 2014 the Company sold 20,000 shares of its Common Stock to a private investor at a purchase price of $1.00 per share. A total of $20,000 was received on April 29, 2014.
On May 1, 2014, the Company changed its name from Xtreme Green Products, Inc. to Xtreme Green Electric Vehicles Inc (refer to Form 8-K filed on May 1, 2014 with the U S Securities and Exchange Commission.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The information herein contains forward-looking statements. All statements other than statements of historical fact made herein are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as believes, estimates, could, possibly, probably, anticipates, projects, expects, may, will, or should or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect managements current expectations and are inherently uncertain. Our actual results may differ significantly from managements expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
As previously discussed, on August 22, 2013 (the Petition date), the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Nevada. The Chapter 11 Case was administered under Case No. BK-S-13-17266-MKN. The Companys plan of reorganization was confirmed by the Bankruptcy Court on January 29, 2014. The terms of the plan as confirmed were detailed in the Companys Current Report on Form 8-K that was filed on February 4, 2014.
On January 29, 2014 (the Confirmation Date), the Bankruptcy court entered an Order Confirming the companys First Amended Plan Of Reorganization under Chapter 11 of the Bankruptcy Code. The Bankruptcy court ordered the Chapter 11 case closed on February 28, 2014.
Results of Operations
As a result of the Chapter 11 Case, no meaningful comparison is possible between the results for the quarter ended March 31, 2014 that occurred following the confirmation of the Plan and prior periods.
Comparison of three months ended March 31, 2014 to the three months ended March 31, 2013
Revenue - Sales for the three months ended March 31, 2013 were $342,731 compared to $31,709 for the three months ended March 31, 2013. The increase in sales is a result of the Companys ability to restructure its financial condition and secure additional equity funding.
Cost of Sales - Cost of sales for the three months ended March 31, 2014 was $355,412 which resulted in a loss of $12,681 compared to cost of sales of $5,167 and a gross profit of $26,542 for the comparable prior year period. Gross profit at March 31, 2014 was impacted by additional warranty cost of $41,191 and a write off of scrapped inventory of $18,695.
General and administrative General and administrative expenses were $387,496 for the three months ended March 31, 2014 compared to $138,703 for the three months ended March 31, 2013. Our general and administrative expenses for the three months ended March 31, 2014 consist primarily of (i) salaries, insurance expense, legal and professional fees, and general operating costs. We had -23- full-time employees during the three months ended March 31, 2014.
Sales & marketing The cost of sales and marketing for the three months ended March 31, 2014 was $73,184.
There were no sales and marketing costs for the same comparable period in 2013. The increase in sales and marketing is a result of our emergence from chapter 11 bankruptcy and regenerating our marking program.
Interest expense - Interest expense for three months ended March 31, 2014 was $13,398 compared to interest of $73,683 for the comparable prior year period. Interest expense consists primarily of amounts due under various notes payable to shareholders. The reduction of interest expense is due to the extinguished notes payable as a result of the Chapter 11 Reorganization.
Loss from operations We incurred a loss from operations of $486,759 for the three months ended March 31, 2014 compared to a loss of $185,844 for the comparable prior year period.
Liquidity and Capital Resources
Since our inception on May 21, 2007, we have financed the costs associated with our operational and investing activities through (i) the sale of shares of our common stock pursuant to private placements, and (ii) loans from certain of our stockholders. From inception through March 31, 2013, we have incurred a cumulative net loss of $11,162,528. The notes to our financial statements include language that raises doubt about our ability to continue as a going concern.
On August 22, 2013, following the filing of our voluntary petition for relief under Chapter 11 of the Bankruptcy Code, a shareholder provided the Company with up to $2,000,000 in post-petition court approved financing. The Debtor in Possession (DIP) loan is (a) secured by all of the Companys assets and (b) has priority over any and all administrative expenses of the kind specified in the Bankruptcy Code. The DIP Financing Creditor will receive 19,600,000 shares of in Non-Locked Up Stock.
Prior to January 29, 2014, the Confirmation date of the Companys Reorganization Plan under Chapter 11 Bankruptcy Code, the Company had issued and outstanding 48,463,370 shares of common stock. Following the cancellations and issuances pursuant to the Plan, there will be issued and outstanding approximately 40,000,000 shares of common stock. The number of shares of the Company is authorized to issue remains unchanged.
On March 14, 2014 the Company agreed in a private offering to sell 500,000 shares of common stock, par value $.001 per share to a private investor at a purchase price of $1.00 per share. In addition the company issue warrants to purchase an additional 750,000 shares of common stock at a purchase price of $1.00 per share. The aggregate investment was $500,000 for 500,000 shares of Common Stock and 750,000 Warrants. The total amount received as of March 31, 2014 was $250,000.
On March 14, 2014 the Company privately sold 250,000 shares of common stock, par value $.001 per share to a private investor at a purchase price of $1.00 per share. The total amount received as of March 31, 2014 was $250,000. An additional option was granted to invest $250,000 for 250,000 shares of common stock on or before December, 31, 2014. If exercised, on or before the expiration date, the investor shall be issued in addition to the Option Shares, Warrants to purchase 750,000 shares of Common Stock.
We are currently investigating various opportunities to raising additional capital through the sale of debt, equity securities and from additional loans from our stockholders. There can be no assurances that we will be able to continue to sell shares of our common stock or borrow additional funds from any of our stockholders or third parties to finance the costs associated with our future operating and investing activities.
If we are successful at raising additional equity capital, it may be on terms which would result in substantial dilution to existing shareholders. If our costs and expenses prove to be greater than we currently anticipate, or if we change our current business plan in a manner that will increase our costs, we may be forced to curtail or cease operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. Actual results may differ from these estimates.
We have identified the following critical accounting policies, described below, that are the most important to the portrayal of our current financial condition and results of operations.
We account for stock based compensation in accordance with ASC 718 Stock Compensation. This Statement requires that the cost resulting from all share-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.
There was no stock-based compensation during this period.
In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for our various revenues streams:
Revenue is recognized at the time the product is delivered or the service is performed. Provision for sales returns is estimated based on our historical return experience.
Deferred revenue is recorded for amounts received in advance of the time at which services are performed and included in revenue at the completion of the related services.
Our ability to operate profitably will depend on increasing our revenue, lowering our costs, reducing our liabilities and obtaining sufficient financing or other capital to operate successfully.
Our condensed consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
We have experienced a significant loss from operations as a result of its investment necessary to achieve its operating plan, which is long-term in nature. From inception to March 31, 2013 we have incurred a cumulative net loss totaling $11,237,725 and have working capital and stockholder deficits of $789,656 and $1,025,692 at March 31, 2014. Our ability to continue as a going concern is contingent upon our ability to attain profitable operations and secure financing. In addition, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established markets and the competitive environment in which we operate.
We are actively pursuing financing for our operations and we are seeking additional private investments. In addition, we are seeking to grow our revenue base. Failure to secure such financing, raise additional equity capital and establish our revenue base may result in the depletion of available funds and as a result, we may not be able pay our obligations.
Our 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 inability to continue as a going concern.
Recent Accounting Pronouncements
The Company does not believe that any recent accounting pronouncements will have a material effect on its financial statements.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Companys management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2014. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in Internal Controls.
There was no change in our internal controls over financial reporting that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting during the quarter covered by this Report.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as described below, we are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)
Certifications of 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
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Xtreme Green Products Inc.
Date: May 20, 2014
/s/ Sanford Leavitt
Chief Executive Officer
(Principal Executive Officer)
Date: May 20, 2014
/s/ Ken Sprenkle
Chief Financial Officer
(Principal Financial and Accounting Officer)