GKIT Greenkraft Inc New (PK)

Notes to the Unaudited Financial Statements

GREENKRAFT, INC.

Notes to the Unaudited Financial Statements

NOTE 1 – BASIS OF PRESENTATION 

The included (a) condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and (b) the unaudited condensed consolidated financial statements as of September 30, 2017 and 2016, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s December 31, 2016 Form 10-K on May 3, 2017. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year. Notes to the condensed consolidated financial statements which substantially duplicate the disclosure contained in the financial statements as reported in the Annual Report on Form 10-K for the year ended December 31, 2016 as filed on May 3, 2017, have been omitted.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.

The Company currently operates in one business segment. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business. The Company does not currently operate any separate lines of businesses or separate business entities.

Recently issued accounting pronouncements 

Leases

In February 2016, the FASB issued guidance that requires a lessee to recognize assets and liabilities arising from leases on the balance sheet. Previous GAAP did not require lease assets and liabilities to be recognized for most leases. Additionally, companies are permitted to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the remaining contractual lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. This new guidance is effective for us as of the first quarter of fiscal year 2020. The Company is evaluating the effect that this ASU will have on its financial statements and related disclosures.

Revenue from Contracts with Customers

In May 2014, the FASB issued No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a one-year deferral of the effective date of the new revenue recognition standard. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow Scope Improvements and Practical Expedients. These ASUs clarify the implementation guidance on a few narrow areas and adds some practical expedients to the guidance Topic 606. The Company is evaluating the effect that these ASUs will have on its financial statements and related disclosures.

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Compensation – Stock Compensation

In May 2017, the FASB issued Accounting Standards Update No. 2017-09 (ASU 2017-09), Compensation — Stock Compensation (Topic 718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09 which will become effective for annual periods beginning after December 15, 2017 and for interim periods within those annual periods.  is not expected to have any impact on the Company’s unaudited condensed financial statement presentation or disclosures.

Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-15 on its financial statements and related disclosures.

Income Tax

In October 2016, the FASB issued ASU No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a significant impact on its financial statements.

The Company believes that other recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.

NOTE 2 - SIGNIFICIANT ACCOUNTING POLICIES AND PRACTICE

Accounts Receivable  – Trade accounts receivable consist of amounts due from the sale of trucks. Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 90 days of receipt of the invoice. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. At September 30, 2017 and December 31, 2016, the Company characterized $0 and $0 as uncollectible, respectively. At September 30, 2017, the accounts receivable, $3,600 represents one customer from the sale of parts.

Property and equipment  – Property and equipment are carried at the cost of acquisition and depreciated over the estimated useful lives of the assets. Costs associated with repair and maintenance are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency of the property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are ten years for all the equipment’s held by the Company. For the three months ended September 30, 2017 and 2016, depreciation expense was $2,735 and $2,735, respectively. For the nine months ended September 30, 2017 and 2016, depreciation expense was $5,472 and $8,205, respectively.

Research and development  – Costs incurred in connection with the development of new products and manufacturing methods are charged to selling, general and administrative expenses as incurred. For the three months ended September 30, 2017 and 2016, research and development expense was $0 and $485, respectively. For the nine months ended September 30, 2017 and 2016, research and development was $162 and $17,060, respectively

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Long Lived Assets  -   In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360, Property, Plant and   Equipment, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicated that their   carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the   market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the   amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of   losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold   or disposed significantly before the end of its estimated useful life.

Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.  Management determined that no impairment indication of its long lived assets as of September 30, 2017.

Revenue recognition  - Greenkraft recognizes revenue when persuasive evidence of an arrangement exists, products and/or services have been delivered, the sales price is fixed or determinable, and collectability is reasonably assured. This typically occurs when the product is shipped or delivered to the customer. Cash payments received prior to delivery of products are deferred until the products are delivered. Also, there was funding for the incremental cost of the vehicles was provided by the California Energy Commission (CEC). The CEC provides up to (i) $20,000 per vehicle that are up to 26,000 LBS GVWR and (ii) $26,000 per vehicle that are over 26,000 LBS GVWR. These funds are paid directly to the Company and taken in as deposits until actual delivery of the vehicles at which time it is deemed revenue. The Company has received previously $1.284 million and $1.140 million from the CEC related to the sale of CNG and propane trucks as of September 30, 2017 and December 31, 2016.  Because of the age of the incentives received, the previously received $1.284 million from CEC will be returned in order to be replaced with new current incentives that buyers can apply for.  Therefore, company has converted the deferred income of $1.224 million to debt as of September 30, 2017. This incentive amount will be returned at a rate of $20,000 per month for 62 months.  The company has already returned in $60,000. The new current incentives are available at a rate of $11,000 per vehicle for over 14,000 lbs that buyers can apply to for Greenkraft CNG truck purchases.  There are also other new incentives available for Greenkraft trucks through other agencies from $25,000 to $100,000. The amount of short term debt is $180,000 and long term debt is $1,044,000 as of September 30, 2017 .

The Company has received certain payment upfront provided by various vendors for trucks and records theses advance payments to perform future services as deferred revenue and decreases deferred revenue and invoiced upon the completion of work and delivery of the product.

Gem Works LLC is a related party to Greenkraft, Inc due to the owner of Gem Works LLC is related to the Company’ CEO (see Note4).  Pursuant to ASC 605 Company acted as an agent and recognized commission on sales of products as a net basis instead of gross basis the total transaction was 2.1 million of which we recognized $180,152.  As a result, the Company recognized the total net sales amount $180,152 in three and nine months ended September 30, 2017

Deferred Liability - In the past company received incentives for Alternative Fuel vehicles from the CEC, and recognized these as deferred revenue. These amounts were to be used per truck.  Several incentives were received and revenues were recognized.  From the amounts received $1.284 million was in company’s books as deferred income.  In 3 ^rd quarter 2017, the Company agree to return the total amount of $1.284 million.

Company agreed to return these amounts because of the age of the incentives and apply for new ones.  Therefore company has converted this amount from deferred income to debt and once new incentives are received company will apply the new incentives as income per vehicle once the vehicles are sold.  Company will return the funds to the CEC at a rate of $20,000 per month for approximately 64 months or until paid up to $1.284 million.  Company has also received deposits on vehicles that can be ordered from current dealers.

Income taxes -  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.

We have net operating loss carry forwards available to reduce future taxable income. Future tax benefits for these net operating losses carry forwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that we will not realize a future tax benefit, a valuation allowance is established.

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Earning or Loss per Share  - The Company accounts for earnings per share pursuant to ASC 260, Earnings per Share, which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year. For the three months ended September 30, 2017, the weighted average diluted shares includes all potentially dilutive common stock equivalents. For the three and nine months ended September 30,2016 and nine months ended September 30,2017 , we excluded 750,000 common stock equivalents of convertible notes from the weighted average diluted shares outstanding as the effect of including such shares would be anti-dilutive

Related Parties  - A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

At the end of each reporting period, management has estimated that portion of inventory not expected to be converted to cash within one year and reflected that amount as “Inventory, long term” in the accompanying balance sheets.

NOTE 4 – RELATED PARTY TRANSACTIONS 

The Defiance Company, LLC is a distribution company owned by the Company’s president and controlling stockholder. As of September 30, 2017 and December 31, 2016, accounts payable to the Defiance was $285,389 and $285,389, respectively.  The amount of $285,389 was reclassified to long term accounts payable related party in first quarter 2017.  This debt does not require interest and there is no maturity date at this time.

As of September 30, 2017 and December 31, 2016, the Company has note payable for the amount of $1,901,916 and $1,901,916, to its President and his related entities.  All amounts are due, are unsecured and do not bear interest.   This amount was to reclassified to long term related party debt because the company’s president does not expect repayment during the next 12 months.

The Company’s president is a member of CEE, LLC which performs emission testing services. During the three and nine months ended September 30, 2017, Greenkraft did not have any services performed by CEE, LLC.  Greenkraft does owes $ 5,944.91, to CEE,LLC as of September 30, 2017 and December 31, 2016, for previous service services provided by CEE, LLC however this amount was also reclassified to long term related party debt in 2017.  This debt does not require interest and there is no maturity date at this time.

G&K Automotive Conversion Inc. is an automotive safety compliance company that can provide services to Greenkraft as necessary.  The president of the company is also the president and controlling shareholder of G&K.  No amount due to G&K for Greenkraft as of September 30, 2017 and December 31, 2016.

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First Warner Properties LLC is the owner of 2215 S. Standard Ave Santa Ana Ca 92707. The company’s president is a member of First Warner. Greenkraft leased the property as assembly plant from First Warner. The term of the lease agreement is from July 2014 to July 2019, with a monthly rent of $27,500. As of December 31, 2016, Greenkraft owed $525,000 to First Warner Properties LLC.  Greenkraft terminated the lease agreement with First Warner Properties LLC at the end of August 2016.  As of September 30, 2017 and December 31, 2016, Greenkraft owed First Warner Properties $525,000 and $525,000, respectively. This debt does not require interest and there is no maturity date at this time.

First Standard Real Estate LLC is the owner of 2530 South Birch Street, Santa Ana, CA 92707. Greenkraft president is a member of First Standard Real Estate LLC. Greenkraft leased a portion of the building designated as 20,000 square feet garage area. The term of the lease agreement is from September 1, 2016 to September 30, 2021, with a monthly rent of $10,000. As of September 30, 2017 and December 31, 2016, Greenkraft owes rent expense of $110,000 and $30,000 to First Standard Real Estate LLC, respectively. For the three and nine months ended September 30, 2017, the rent expense was $30,000 and $90,000, respectively. This debt does not require interest and there is no maturity date at this time.

Gem Works LLC is a separate company in the automotive business for vehicles and its owner is related to our Company’s CEO.  Greenkraft charged Gem Work, LLC $180, 152 net sales of e-vehicle acting as agent after gross and net revenue analysis Instead of recognizing 2.1 million gross revenue.  During the three and nine months ended September 30, 2017, the Company recognized the amount of net sales of e-vehicle was $180,152.

The Company reclassified accounts payable- related parties of $816,334 and related parties’ debt of $1,901,916 as non- current liabilities as of March 31, 2017. This amount was to reclassified to long term related party debt because the company’s president does not expect repayment through 2017. This debt does not require interest and there is no maturity date at this time.

The CEO contributed his payroll to the company about $0 and $36,000 as the three and nine months September 30, 2016. The CEO does not charge the Company salary for three and nine months as of September 30, 2017

NOTE 5 – LINE OF CREDIT 

In March 2016, the Company cancelled the line of credit of $3,500,000 and paid off the line of credit balance of $2,000,000 with Pacific Premier Bank. Due to the cancellation of line of credit, the Company is no longer require a restricted cash balance.

NOTE 6 – CONVERTIBLE NOTES

Convertible promissory notes were issued in the aggregate amount of $15,000 in October 2015 for the marketing and advertising services received in 2015. The term of the notes is due on demand. Simple interest of 1% is payable upon demand. Prior to maturity the notes may be converted for common stock at a conversion price of $0.001.

The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815-40 and determined embedded conversion feature does not meet the definition of a liability. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $15,000 was recorded.  $150,000 was recorded, directly to interest expense at inception.

As of September 30, 2017 and December 31, 2016, convertible note has a balance of $7,500 net of $0 unamortized debt discount.

On April 22, 2016, the holder of convertible note converted $7,500 of convertible note payable to 7,500,000 common shares.

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NOTE 7 - LONG TERM DEBT

Company has long term debt of $1,044,500 from amounts converted from deferred income of $1.284 million to long term debt which consist of incentives received by the CEC that were converted to debt due to age of incentives and for the company to apply to new incentives available by the CEC. The payment terms require $20,000 per month for approximately 62 months and the terms do not require interest.

NOTE 8 -  SHORT TERM DEBT

Company has short term debt of $180,000 which is 12 months of amounts to be paid for incentives from the 1.284 million company received in the past.

NOTE 9 – COMMITMENT AND CONTINGENCIES

The Company leases space for its offices and warehouse under lease expiring 5 years after September 1, 2016. Rent expense was $120,000 per year, payable in installments of $10,000 per month. The company has an agreement with landlord and first month rent is free. The future minimum lease payments under these operating leases are as follows below, with the balance of deferred rent was de minimis.

NOTE 10 - STOCK ISSUANCE

On May 27, 2017, the Company issued 6,670,000 shares of its common stock pursuant to a Board Resolution that provided for the stock issuance to officers, employees, and directors of the Company. There is no vesting period, restricted to sell in 12 months. As a result the Company recorded the stock based compensation expense $867,100 based on the closed price on the date of grand date.