NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
Note
1
|
Basis
of Presentation and Accounting Policies:
|
The
unaudited interim consolidated financial statements include the accounts of our Company and our former subsidiary, Smart Fuel
Solutions, Inc. which was merged into the Company on June 30, 2017. On September 28, 2016, the Company acquired a controlling
interest in Smart Fuel Solutions, Inc., (Smart Fuel) a Florida Corporation, established and staffed as a service company. Smart
Fuel undertook and assisted with the operational responsibilities of the Company. Smart Fuel was a private company, majority owned
by us. Effective June 30, 2017, we acquired the remaining minority interest in Smart Fuel and integrated its operations into the
Company. The former ownership interest in Smart Fuel, held by third parties, are presented in the consolidated balance sheet within
the equity section as a line item identified as “non-controlling interest”, separate from the parent’s equity.
All significant inter-company balances and transactions have been eliminated in the consolidation as of and for the nine
months ended September 30, 2017. There was not a strategic shift nor were there any discontinued operations from the collapse.
The
unaudited interim consolidated financial statements also include our new wholly owned subsidiary, GETH CFP, Inc. (CFP). CFP is
a Delaware Corporation formed on February 9, 2017 for the purpose of handling and upgrading both third party carbon black and
the carbon black produced by our GEN 1 End of Life Tire Processing Plants. We acquired a Carbon Black Finishing System last year
for installation in our Centralized Carbon Black Finishing Plant located in Ohio. The equipment is being relocated and installed
with the assistance of GETH’s strategic partners, under a master services agreement that covers all of the GETH plants.
The Ohio site is being provided by the Lawrence County Economic Development Corporation as part of its mission to bring jobs back
to that part of Ohio.
The
unaudited interim consolidated financial Statements presented herein have been prepared by us in accordance with the accounting
policies described in our December 31, 2016 and 2015 audited financial statements included in Form 10-K and should be read in
conjunction with the notes to the financial statements which appear in that report.
The
preparation of these unaudited interim consolidated financial statements in conformity with accounting principles generally accepted
in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including
related intangible assets, income taxes, insurance obligations and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources.
Actual results may differ from these estimates under different assumptions or conditions.
In
the opinion of management, the information furnished in these unaudited interim consolidated financial statements reflect all
adjustments necessary for a fair statement of the financial position and results of operations and cash flows as of and for the
nine months ended September 30, 2017 and 2016. All such adjustments are of a normal recurring nature. The results of operations
for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited
interim consolidated financial statements which would substantially duplicate the disclosures contained in the audited financial
statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain
prior year amounts have been reclassified to conform with the current year presentation.
Recent
accounting pronouncements
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Non-Controlling Interests with a Scope Exception”. The ASU was issued to address the complexity
associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics
of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when
analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument
(or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence
of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied
retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the
implementation date and the impact of this amendment on its consolidated financial statements.
These
unaudited interim consolidated financial statements have been prepared on a going concern basis which assumes we will be able
to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. For the nine
months ended September 30, 2017, we had a net loss. We also have a working capital deficit and an accumulated deficit since
inception. These factors raise substantial doubt about our ability to continue as a going concern
.
These
unaudited interim consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts, or amounts and classification of liabilities that might result from a future uncertainty. The Company
plans to continue funding itself through the generation of revenues and raising capital through loans and new equity.
|
Note
3
|
Acquisition
of Minority Interest in Smart Fuel
|
Effective
June 30, 2017, we merged Smart Fuel into the Company by acquiring the remaining 17.5% minority interest of 3,600,000 shares in
exchange for a similar number of the Company’s common shares. The minority interest was valued at $360,000 based on the
closing price of the Company’s stock at June 30, 2017 of $0.10 per share. We issued 3,000,000 shares valued at $300,000
to a minority shareholder of Smart Fuel as of September 30, 2017 and the remaining 600,000 shares to be issued, remain as a liability
on our consolidated balance sheet. The difference in the fair value of the consideration and the carrying amount of the
non-controlling interest of $466,128 was charged to additional paid in capital. As a result of the acquisition, Smart Fuel became
a wholly-owned subsidiary of the Company. As of September 30, 2017, the Company has issued 3,000,000 of the 3,600,000 shares exchanged.
The fair value of the remaining 600,000 shares is $60,000 and is carried on the consolidated balance sheet as stock payable.
The Company also recognize Smart Fuel’s 3,143,000 outstanding warrants as if they had been issued by the Company.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
Note
4
|
Property,
Plant, and Equipment
|
During
the nine months ended September 30, 2017, we added $800,501 in construction in progress when we started development of our Ohio
carbon finishing plant. Of the $800,501, there was $459,935 in carbon equipment that was moved to construction in progress due
to the carbon equipment being refurbished for use in the plant. We have incurred to date $340,566 in engineering and design work
in relation to our pyrolysis plant to be located in Texas. This brings the total construction in progress to $1,063,481 for the
nine months ended September 30, 2017.
|
Note
5
|
Loan
Payable – Related Party and Convertible
|
On
March 3, 2017, we approved a new working capital line of credit loan with our CEO, Chris Bowers in the amount up to $150,000 at
8% due December 31, 2017. The note has conversion rights into our common shares at $0.10 per share. On March 8, 2017, we received
$100,000 of this loan. To date the remaining balance of $50,000 has not been received. For the nine months ended September 30,
2017, this note had accrued interest in the amount of $4,537. The Company evaluated this convertible LOC for Beneficial Conversion
Features (BCF) and concluded that the LOC incurred a BCF when it was issued on March 3, 2017. The BCF resulted in a debt discount
in the amount of $35,300 of which $24,284 has been amortized for the nine months ended September 30, 2017 leaving a balance of
$11,016 to be amortized going forward.
On
August 15, 2016, we accepted a Line of Credit (LOC) in the amount of $500,000 from our CEO Chris Bowers. On November 14, 2016,
we accepted a second Line of Credit (LOC) in the amount of $500,000 from our CEO. As of the September 30, 2017, these two LOCs
had an outstanding balance in the amount of $1,000,000 with $20,000 in accrued interest on September 30, 2017. These LOCs accrue
interest at the rate of 1% per month based upon $1,000,000 total balance. We have been paying $10,000 per month in interest on
the two LOCs. The due date of the two loans is December 31, 2017. The funds were used for working capital in the Company. The
first LOC has two Addendums attached to it. Addendum A clarifies debt conversion rights attached to the LOC at $0.20 per share
of common stock. Addendum B clarifies other rights attached to the LOC. The Company received $100,000 on January 31, 2017 which
represented the balance of the LOC2. There was no BCF on the balance of the LOC2. These other rights, referred to above, are numbered
below. (The second LOC has the same rights as that of the first LOC). These certain other rights in Addendum B provide for the
following:
|
|
1.
|
LOC
has Repayment rights: The LOC has priority principal and interest repayment rights from other sources of capital received
by the Company.
|
|
|
|
|
|
|
2.
|
LOC
has Warrant rights: Bowers has the right to receive 500,000 (five hundred thousand) $0.10 warrants for providing the LOC and
250,000 (two hundred fifty thousand) $0.10 warrants per $100,000 drawn against the $500,000 LOC. This would be a total of
1,750,000 $0.10 warrants to be issued to Bowers and/or Assigns for providing the funding and the Company using all $500,000
LOC. These warrants will be accounted for once the term of the warrants is known.
|
|
|
|
|
|
|
3.
|
LOC
has Additional Stock Conversion rights: At any time while the LOC is outstanding, Bowers has the right to convert per $100,000
of the LOC for 500,000 shares of duly paid and non-assessable common stock of the Company at a conversion price of $0.20 per
share (subject to adjustment in the event of stock splits or stock dividends) by providing a notice of conversion in a form
reasonably acceptable to the Company. The full conversion of the LOC would be 2,500,000 shares of the Company common stock.
|
The
Company evaluated these convertible LOCs for a BCF and concluded that the second LOC incurred a BCF when it was issued
on November 14, 2016. The BCF resulted in a debt discount in the amount of $105,600 of which $8,800 was amortized for the year
ended December 31, 2016. $79,200 has been amortized to interest expense for the nine months ended September 30, 2017 leaving a
balance of $17,600 to be amortized going forward.
On
February 1, 2016, we issued an 8%, $134,000 Note Payable to our CEO Chris Bowers for funds received. These funds were issued to
Smart Fuel for a promissory note for the same amount at eight percent (8%). The funds were intended for the working capital needs
of Smart Fuel Solutions. On September 28, 2016, we acquired controlling interest in SFS; we assumed the note. The note is convertible
at $0.50 per share and matures December 31, 2017. As of September 30, 2017, the accrued interest on this note was $12,622.
We
have an unsecured line of credit with H. E. Capital, S. A., a related party. The line of credit accrues interest at the rate of
8% per annum. The due date of the line of credit has been extended to December 31, 2017. Balance of the line of credit at September
30, 2017 was $456,537 with accrued interest in the amount of $52,620. We previously had an agreement with H.E. Capital wherein
we paid $5,000 monthly for financial services. As of December 31, 2016, this agreement is no longer in effect. H. E. Capital’s
activity for the nine months ended September 30, 2017, included advancing $35,000 to the Company and receipt of $45,200
in payment from the Company. H. E. Capital converted $30,000 of the line of credit and $100,000 in accrued interest into
1,300,000 shares of our common stock on April 3, 2017 at a $0.10 conversion rate. A schedule of the H. E. Capital loan activity,
principal only, with us for the nine months ended September 30, 2017 and for the year ended December 31, 2016 is as follows:
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
H.
E. Capital S.A. transactions for 2017
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
496,737
|
|
|
$
|
241,582
|
|
|
Proceeds
|
|
|
35,000
|
|
|
|
352,000
|
|
|
Reclassification
from accounts payable & accruals
|
|
|
-
|
|
|
|
76,060
|
|
|
Consulting
fees
|
|
|
-
|
|
|
|
60,000
|
|
|
Assignments
|
|
|
-
|
|
|
|
(190,000
|
)
|
|
Non-cash
conversions to stock
|
|
|
(30,000
|
)
|
|
|
(42,905
|
)
|
|
Cash
paid to H. E. Capital
|
|
|
(45,200
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance
|
|
$
|
456,537
|
|
|
$
|
496,737
|
|
|
Note
6
|
Secured
Debentures
|
On
January 24, 2011, we entered into a series of securities purchase agreements with accredited investors pursuant to which we sold
an aggregate of $380,000 in 12% secured debentures. The Debentures are secured by the assets of the Company pursuant to security
agreements entered into between us and the investors. As of September 30, 2017 these secured debentures have an outstanding balance
of $305,000 and accrued interest in the amount of $264,975. These debentures are in default and the Company is in negotiations
with the holders for extensions.
|
Note
7
|
Loan
Payable – Other and Convertible
|
On
May 16, 2016, we approved H.E. Capital S.A.’s (HEC) request to assign to a private company $200,000 of its Line of Credit
Note. We approved the request and reduced HEC’s Line of Credit Note for that amount and record a new note. On July 19, 2016,
the private company converted $100,000 of its note into 1,000,000 common shares of the Company’s stock. As of September
30, 2017, the note balance is $100,000 with accrued interest in the amount of $12,405.
On
July 1, 2016, we issued a note to a private individual in the amount of $49,295. This new note has $0.50 conversion rights attached
to it and accrues interest at 8%. As of September 30, 2017, this note had accrued interest in the amount of $4,938.
On
April 12, 2017, we received working capital funds in the amount of $100,000 from a private company. The note has an interest rate
of 8% and is due on April 11, 2018. The note has a variable conversion price feature per the agreement, in which, if the stock
price is below $0.20 per share at conversion, the lender can convert at a 15% discount on the stock price. On July 21,
2017, the private company holding this $100,000 note with its accrued interest in the amount of $2,192 exercised their right to
convert in exchange for 1,481,040 shares of our common stock. The conversion price was the price of the stock at the time with
a 15% discount to the market price. On the date of conversion, it was determined this note had derivative discount in the amount
of $28,130 which was amortized in full. See Note 10.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
May 5, 2017, we received working capital funds in the amount of $77,500 from Auctus Fund LLC (“Auctus”). The note
has an interest rate of 10% and is due February 5, 2018. The note has prepayment conditions. The note can be prepaid any time
during the period beginning on the issue date and ending on the date which is ninety (90) days following the issue date at 125%
of the unpaid principal balance including interest. The note can be prepaid at any time during the period beginning the day which
is ninety- one (91) days following the issue date and ending on the date which is one hundred eighty (180) days following the
issue date at 135% of the unpaid principal balance plus interest. After the expiration of one hundred eighty (180) days following
the date of the note, the Company shall have no right of prepayment. The note has a variable conversion price feature per the
agreement. The conversion feature starts on August 5, 2017. The conversion price shall equal the lesser of (i) the average of
the two (2) lowest trading prices during the previous twenty-five (25) trading day period ending on the latest complete trading
day prior to the date of this note and (ii) the variable conversion price. The variable conversion price shall mean 55% multiplied
by the market price, representing a discount rate of 45%. Market price means the average of the two (2) lowest trading prices
for the common stock during the twenty-five (25) trading day period ending on the latest complete trading day prior to the conversion
date. As of September 30, 2017, the note had accrued interest in the amount of $1,980. During the third quarter, it was determined
this note had derivative discount in the amount of $40,538 of which $9,450 was amortized leaving a balance of $31,088. See
Note 10. Subsequent to September 30, 2017, this note was paid in full.
On
May 16, 2017, we received working capital funds in the amount of $74,650 from EMA Financial LLC (“EMA”). The note
is in the amount of $77,500 with an original issue discount (OID) in the amount of $2,850 and has an interest rate of 10% and
is due May 1, 2018, date of the note. The note has prepayment conditions. The note can be prepaid any time during the period beginning
on the issue date and ending on the date which is six months following the issue date. If paid within 90 days from the issue date,
the payment is at 125% of the unpaid principal balance including interest. If the note is prepaid at any time during the period
beginning the day which is ninety- one (91) days following the issue date and ending on the date which is one hundred eighty (180)
days following the issue date, the payment is at 135% of the unpaid principal balance plus interest. After the expiration of one
hundred eighty (180) days following the date of the note, the Company shall have no right of prepayment. The note has a variable
conversion price feature per the agreement. The conversion feature starts on July 15, 2017. The conversion price is equal to the
lower of: (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the
closing date, and (ii) 55% of either the lowest sale price for the common stock on the principal market during the twenty-five
(25) consecutive trading days immediately preceding the conversion date or the closing bid price, whichever is lower. As of September
30, 2017, the note had accrued interest in the amount of $1,981. The note also had an OID balance in the amount of $1,663 after
amortizing $1,187 to interest expense. During the third quarter, it was determined this note had derivative discount in the amount
of $48,630 of which $10,047 was amortized leaving a balance of $38,583. See Note 10. Subsequent to September 30, 2017,
this note was paid in full.
On
July 20, 2017, we entered into an equity purchase agreement for up to $5,000,000 of our common stock with Peak One Opportunity
Fund, LP (Peak One). In connection with that same agreement, we also entered into a related registration rights agreement. We
issued a non-interest bearing convertible debenture maturing on July 20, 2020 in the amount of $75,000 to Peak One as a
commitment fee in connection with the agreement, as well as agreed to issue 300,000 shares of our common stock as commitment shares.
On July 25, 2017, we issued these shares valued at $27,000. Both the commitment debenture and commitment shares were charged to
other current assets until such time the registration statement is filed after which the amount will be offset against the
proceeds of the offering. The note is convertible after 180 days from issuance at a conversion price equal to 90% of the lowest
closing bid price of the last 20 days prior to the conversion date.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
July 27, 2017, we received the first of three installments in connection with Peak One Opportunity LP (Peak One) purchase agreement
for certain Company convertible debentures totaling $425,000. We issued to Peak One a three year $75,000
non-interest bearing debenture maturing on July 26, 2020. The debenture had an OID (original issue discount) in the amount of
$12,500. As of September 30, 2017, there was a remaining OID in the amount of $12,083. The debentures when issued are convertible
into common shares of the Company with certain terms and conditions as set forth in the agreement. The Holder is entitled to,
at any time or from time to time, to convert the conversion amount into conversion shares, at a conversion
price for each share of common stock equal to the lesser of (a) $0.15 or (b) sixty five percent (65%)
of the lowest closing bid price (as reported by Bloomberg LP) of the common stock for the twenty (20) trading
days immediately preceding the date of the date of conversion of the debentures subject in each case to equitable
adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events. During the third quarter, it
was determined this note had derivative discount in the amount of $62,500 of which $976 was amortized leaving a balance of $61,524.
See Note 10.
|
Note
8
|
Loan
Payable – Other and Non-Convertible
|
On
November 16, 2012, we issued a note to a private individual in the amount of $170,000 with interest accruing at 8% per annum.
This note has been extended to December 31, 2017. As of September 30, 2017, the accrued interest was $17,102.
|
Note
9
|
Commitments
and Contingencies
|
On
March 29, 2017, we entered into a lease and working capital credit facility with Caliber Capital & Leasing LLC and its assignee,
Real Estate Acquisition Development Sales, LLC (“READS”). Under the agreements, READS is providing an initial commitment
of up to $2.5 million for the construction of our first processing line in our centralized Carbon Finishing Plant in Ohio. The
loan is dated for April 4, 2017. We have received $450,000 from READS subsequent to September 30, 2017, please see subsequent
events note 13.
On
March 29, 2017, we also signed the Master Equipment and Building Related Lease Agreement for $100 Million. The lease covers land,
buildings and equipment. The equipment will have an initial term of seven years; after which we will have the option to purchase
the facility from READS or renew the lease under the same terms. The commencement date was scheduled for April 4, 2017. We have
received $450,000 from READS subsequent to September 30, 2017; please see subsequent events note 13.
On
April 11, 2017, our wholly owned subsidiary GETH CFP, Inc. signed a 10-year lease with the Lawrence Economic Development Corporation
of Lawrence County, Ohio for the lease of 11,200 sq. ft. of manufacturing space for our carbon finishing plant in Ohio. The lease
had a start date of June 1, 2017, which has been extended to the opening of the Carbon Plant and runs to June 1, 2027. The lease
has three, five year extensions. The lease is $4.00 per sq. ft. with initial payments in the amount of $3,733 per month. The first
extension is at $4.50 per sq. ft. with payments in the amount of $4,200 per month.
On
July 20, 2017, we entered into an equity purchase agreement for up to $5,000,000 of our common stock with Peak One Opportunity
Fund, LP (“Peak One”). In connection with that same agreement, we also entered into a related registration
rights agreement. We issued a convertible debenture in the amount of $75,000 to Peak One as a commitment fee in connection with
the agreement, as well as agreed to issue 300,000 shares of our common stock as commitment shares. On July 25, 2017, we issued
these shares valued at $27,000. Both the commitment debenture and commitment shares were charged to other current assets until
such time the registration statement is filed after which the amount will be offset against the proceeds of the offering.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
Note
10
|
Fair
value of Financial Instruments and Derivative Liabilities
|
The
carrying value of cash, accounts payable and accrued expenses, and debt approximate their fair values because of the short-term
nature of these instruments and approximate market interest rates of these instruments. Management believes the Company
is not exposed to significant interest or credit risks arising from these financial instruments. The notes totaled $150,000 with
net discounts in the amount of $73,607.
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use
of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are
considered observable and the last unobservable.
|
|
●
|
Level
1 -
|
Quoted
prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions
in active exchange markets involving identical assets.
|
|
|
|
|
|
|
|
●
|
Level
2 -
|
Quoted
prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities
that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.
|
|
|
|
|
|
|
|
●
|
Level
3 -
|
Unobservable
inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s
own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best
information available in the circumstances.
|
The
following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded
at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of
September 30, 2017:
The
following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded
at fair value on the Company’s consolidated balance sheet on a recurring basis, and their level within the fair value hierarchy
as of September 30, 2017:
|
|
|
Amount
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Embedded
conversion derivative liability
|
|
$
|
297,160
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
297,160
|
|
|
Warrant
derivative liabilities
|
|
$
|
71,317
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
71,317
|
|
|
Total
|
|
$
|
368,477
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
368,477
|
|
The
embedded conversion feature in the convertible debt instruments that the Company issued (See Note 7), that became convertible
during the third quarter ended September 30, 2017, qualified them as derivative instruments since the number of shares
issuable under the notes are indeterminate based on guidance in FASB ASC 815, Derivatives and Hedging. These convertible
notes tainted all other equity linked instruments including outstanding warrants and fixed rate convertible debt on the
date that the instrument became convertible.
The
valuation of the derivative liability of the warrants was determined through the use of a Multinomial Lattice model that values
the liability of the warrants based on a risk-neutral valuation where the price of the option is its discounted expected value.
The technique applied generates a large number of possible (but random) price paths for the underlying common stock via simulation,
and then calculates the associated exercise value (i.e. “payoff”) of the option for each path. These payoffs are then
averaged and discounted to a current valuation date resulting in the fair value of the option.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
valuation of the derivative liability attached to the convertible debt was arrived at through the use of a Multinomial Lattice
model that values the derivative liability within the notes. The technique applied generates a large number of possible (but random)
price paths for the underlying (or underlyings) via simulation, and then calculates the associated payment value (cash, stock,
or warrants) of the derivative features. The price of the underlying common stock is modeled such that it follows a geometric
Brownian motion with constant drift, and elastic volatility (increasing as stock price decreases). The stock price is determined
by a random sampling from a normal distribution. Since the underlying random process is the same, for enough price paths, the
value of the derivative is derived from path dependent scenarios and outcomes. The features in the notes that were analyzed and
incorporated into the model included the conversion features with the reset provisions, the call/redemption/prepayment options,
and the default provisions. Based on these features, there are six primary events that can occur; payments are made in cash; payments
are made with stock; the note holder converts upon receiving a redemption notice; the note holder converts the note; the issuer
redeems the note; or the Company defaults on the note. The model simulates the underlying economic factors that influenced which
of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e.
stock price, conversion price, etc.). Probabilities were assigned to each variable such as redemption likelihood, default likelihood,
and timing and pricing of reset events over the remaining term of the notes based on management projections. This led to a cash
flow simulation over the life of the note. A discounted cash flow for each simulation was completed, and it was compared to the
discounted cash flow of the note without the embedded features, thus determining a value for the derivative liability.
Key
inputs and assumptions used to value the convertible notes and warrants upon issuance or tainting and also as of September 30,
2017.
|
|
●
|
The stock price
of 0.100 to $0.0721 in these periods (variable conversion price; reset provisions; and upon redemption or default penalties)
would fluctuate with the Company projected volatility;
|
|
|
|
|
|
|
●
|
An event of default
adjusting the interest rate would occur 0% of the time for all notes except the Peak 1 Note which increases 0.50% per month
to a maximum of 5% with the corresponding penalty;
|
|
|
|
|
|
|
●
|
The projected volatility
curve from an annualized analysis for each valuation period was based on the historical volatility of comparable companies
and the term remaining for each note was from 204% through 313% at issuance, conversion, and quarters ends;
|
|
|
|
|
|
|
●
|
The Company
would redeem the notes (with the corresponding penalty) projected initially at 0% of the time for all notes except the EMA
and Auctus notes which increase monthly by 1.0% to a maximum of 5.0% (from alternative financing being available for
a redemption event to occur); and
|
|
|
|
|
|
|
●
|
For the variable
rate (some notes include conversion rate ceilings – the lessor of variable rates and a fixed rate) and fixed rate notes,
the holder would convert (after 0 days) at maturity based on ownership and trading volume limits; and
|
|
|
|
|
|
|
●
|
The holder
would automatically convert the note or exercise early at a multiple of the conversion/exercise or the stock price if the
registration was effective (after 0 days) and the Company was not in default.
|
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Using
the results from the model, the Company recorded a derivative liability of $127,660 for newly granted warrants (see note 11) and
a derivative liability of $441,120 for the fair value of the convertible feature included in the Company’s convertible debt
instruments with a corresponding charge to debt discount of $179,798, a “day 1” derivative of $8,464 and additional
paid in capital of $380,518 for the tainted equity linked convertible notes and warrants. The debt discount on the convertible
notes of $179,798 is being amortized over the remaining term of the notes using the effective interest rate method.
Interest expense related to the amortization of this debt discount for the nine months ended September 30, 2017, was $48,603.
The remaining unamortized debt discount related to the derivative liability was $131,195 as of September 30, 2017. The Company
also recorded a reclassification from derivative liability to equity of $27,582 for the conversion of a portion of the Company’s
convertible notes.
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs:
|
Balance
at December 31, 2016
|
|
$
|
-
|
|
|
Fair
value of derivative liability at issuance charged to debt discount
|
|
|
179,798
|
|
|
Fair
value of derivative liability at issuance charged to derivative loss
|
|
|
8,464
|
|
|
Fair
value of derivative liability at issuance reclassified from additional paid in capital
|
|
|
380,518
|
|
|
Settlement
of derivative liability due to conversion
|
|
|
(27,582
|
)
|
|
Unrealized
derivative gain included in other expense
|
|
|
(172,721
|
)
|
|
Balance
at September 30, 2017
|
|
$
|
368,477
|
|
Common
Stock
We
have 250,000,000 common shares of $0.001 par value stock authorized. On December 31, 2016, we had 28,517,597 common shares outstanding.
As of September 30, 2017, we had 35,073,637 common shares outstanding.
On
January 15, 2017, we issued 100,000 common shares for consulting services valued at $20,000.
On
April 3, 2017, H. E. Capital converted $30,000 of its line of credit and $100,000 of its accrued interest into 1,300,000 shares
of our common stock at a $0.10 conversion rate.
On
May 15, 2017, we issued 125,000 common shares for consulting services valued at $26,250.
On
May 25, 2017, we issued 250,000 common shares for consulting services valued at $37,500
On
July 21, 2017, a private company holding a note in the amount of $100,000 with its accrued interest in the amount of $2,192 exercised
their right to convert in exchange for 1,481,040 shares of our common stock. The conversion price was the price of the stock at
the time with a 15% discount to the market price. On the date of conversion, it was determined this note had derivative liability
in the amount of $27,582 which was credited to additional paid in capital. See Note 10.
On
July 25, 2017, we issued 300,000 common shares as a commitment fee in relation with the Peak One Opportunity Fund, LP equity stock
purchase agreement signed on July 20, 2017. The stock was valued at $27,000 and charged to other current assets after which the
amount will be amortized over the proceeds of the offering.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
September 26, 2017, we issued 3,000,000 common shares to Black Lion Oil Ltd in connection with the acquisition of the minority
interest in Smart Fuel. See Note 3.
On
March 3, 2017, the Company evaluated a convertible LOC to its CEO for BCF and concluded that the LOC incurred a BCF when it was
issued on March 3, 2017. The BCF resulted in a debt discount in the amount of $35,300 credited to additional paid in capital of
which $24,284 has been amortized for the nine months ended September 30, 2017 leaving a balance of $11,016 to be amortized going
forward.
Warrants
As
of September 30, 2017, we had 19,708,341 common stock warrants outstanding
On
January 9, 2017 our subsidiary, Smart Fuel, issued 150,000 warrants to each of its four directors. These warrants were valued
at $142,857 using the Black-Sholes model. The grant date fair value calculation included the three year US Treasury
note interest rate of 1.48%, dividend yield of 0, expected volatility of 289% and the expected term of three years. These warrants
were fully vested and have an exercise price of $0.10 per share, and expire on December 31, 2019.
On
February 8, 2017, we had 1,000 common stock warrants expire. These were five year warrants issued on February 9, 2012. These warrants
had a conversion rate of $10 per warrant
On
May 25, 2017, we issued 100,000 common stock warrants for services rendered valued at $14,688 by the Black Scholes method. The
grant date fair value calculation included the three year US Treasury note interest rate of 1.04%, dividend yield of 0, expected
volatility of 290% and the expected term of three years. These warrants were fully vested when issued and have a conversion
price of $0.50 per share. These warrants expire on May 25, 2020.
On
June 8, 2017 we issued 50,000 warrants to our president, CEO and board member, Chris Bowers. These warrants were
valued at $4,999 using the Black-Scholes model. The grant date fair value calculation included the three year US Treasury note
interest rate of 1.04%, dividend yield of 0, expected volatility of 289% and the expected term of three years. These warrants
were fully vested and have an exercise price of $0.10 per share, and expire on December 31, 2019.
During
the nine months ended September 30, 2017, the Company recorded a derivative liability for its outstanding warrants in the amount
of $127,660 due to the variable convertible notes becoming convertible during the third quarter. There was no derivative liability
for the nine months ended September 30, 2016. The Company recognized a fair market change in the recorded derivative in the amount
of $56,343 which was recorded on the consolidated statement of operations in the category listed as other income and expenses.
The balance of the derivative liability-warrants on September 30, 2017 was $71,317.
|
Note
12
|
Related
Party Transactions
|
On
January 9, 2017 our subsidiary, Smart Fuel, issued 150,000 warrants to each of its four directors. These warrants were valued
at $142,857 by the Black-Sholes method. The grant date fair value calculation included the three year US Treasury note interest
rate of 1.48%, dividend yield of 0, expected volatility of 289% and the expected term of three years. These warrants were fully
vested and have an exercise price of $0.10 per share of the Company’s common stock, and expire on December 31, 2019.
GREEN
ENVIROTECH HOLDINGS CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
June 8, 2017 we issued 50,000 warrants to our president, CEO and board member, Chris Bowers. These warrants were valued at $4,999
using the Black-Scholes model. The grant date fair value calculation included the three year US Treasury note interest rate of
1.04%, dividend yield of 0, expected volatility of 289% and the expected term of three years.
These
warrants were fully vested and have an exercise price of $0.10 per share, and expire on December 31, 2019.
On
September 26, 2017, we issued 3,000,000 common shares to Black Lion Oil Ltd, one of the minority interest shareholder, in connection
with the acquisition of the minority interest in Smart Fuel. A member of our board of directors, Chris Smith, is also a director
of Black Lion Oil.
At
September 30, 2017, we owed our CEO, Chris Bowers, for expenses paid on behalf of the Company in the amount of $31,480. This amount
is classified as Due to Related Party in the consolidated balance sheet, is unsecured, non-interest bearing and due on
demand.
|
Note
13
|
Subsequent
Events
|
Subsequent
to September 30, 2017, we received a total of $450,000 from READS in connection with their initial commitment to fund up to $2.5
million of the construction of the Company’s first processing line in our centralized Carbon Finishing Plant in Ohio. See
Note 9
On
November 1, 2017, the Company issued an eight percent (8%) convertible note in the amount of $75,000. The note is convertible
to the Company’s common stock at $0.05 per share. On November 7, 2017, the noteholder converted the note and the Company
issued 1,500,000 shares as full settlement of the loan.
On
November 2, 2017, H. E. Capital converted $200,000 of its line of credit into 2,000,000 shares of our common stock at a $0.10
conversion price.
In
November 2017, we paid in full the EMA and Auctus notes.