GREENKRAFT, INC. - Quarter Report: 2015 September (Form 10-Q)

The accompanying notes are an integral part of these unaudited financial statements

GREENKRAFT, INC.

STATEMENTS OF OPERATIONS

Unaudited

The accompanying notes are an integral part of these unaudited financial statements

GREENKRAFT, INC.

STATEMENTS OF CASH FLOWS

Unaudited

The accompanying notes are an integral part of these unaudited financial statements

GREENKRAFT, INC.

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

September 30, 2015

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Greenkraft, Inc. a Nevada corporation (“we”, “our,”, “Greenkraft” or the “Company”) 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, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC. 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 period presented have been reflected herein. 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 financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period have been omitted.

NOTE 2 – Inventory

The $2,155,246 Inventory balance as of September 30, 2015 consist 100% of raw materials. Inventories are valued at the lower of, cost as determined on a first-in-first-out (FIFO) basis, or market. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required. Costs of raw material inventories include purchase and related costs incurred in bringing the products to their present location and condition.

NOTE 3 – RELATED PARTY TRANSACTIONS

The Defiance Company, LLC is owned by our President and controlling stockholder.   As of September 30, 2015 accounts payable to Defiance is $285,389 for amounts paid by Defiance Company, LLC on behalf of Greenkraft, which is the same amount as of December 31, 2014.

As of September 30, 2015, and December 31, 2014, Greenkraft has notes payable for a total of $1,901,916, to its President and his related entities.  All amounts are due on demand, unsecured and do not bear interest.  

CEE, LLC performed testing for Greenkraft for engine certifications and also shared employees with Greenkraft in the past. Our President is an owner of CEE, LLC. During the nine months ended September 30, 2015, Greenkraft did not have any services performed by CEE, LLC and as of September 30, 2015 and December 31, 2014, Greenkraft owes CEE the amount of $5,945 for insurance.  

G&K Automotive Conversion Inc. is an automotive safety compliance company that can provide services to Greenkraft as necessary.  Our President is also the president and controlling shareholder of G&K.  No Services were provided by G&K for Greenkraft during the nine months ended September 30, 2015.

First Warner Properties LLC is the owner of 2215 S. Standard Ave Santa Ana Ca 92707. Our 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. The total rent expense for the nine months ended September 30, 2015 and 2014 was $247,500 and $187,500, respectively. As of September 30, 2015 and December 31, 2014, $385,000 and $137,500, respectively, was owed to First Warner.

Our CEO does not charge us a salary and therefore we have recognized $54,000 for the nine months ended September 30, 2015 of contributed salary expense.

NOTE 4 – LINE OF CREDIT

In March 2012, Greenkraft entered into an agreement with Pacific Premier Bank for a $3,500,000 line of credit.  The line of credit was due on April 10, 2013 and bears interest at the prime rate plus 1%.  The line of credit is secured by certain real property owned by the majority shareholder and inventory.   

A condition to the line of credit is a full banking relationship. If the conditions are not met or should cease to be met, then interest rate and interest ceiling provided under the note shall immediately increase by 5.000 percentage points.

On July 15, 2013, the maturity date of the facility was extended to December 10, 2013 and the maximum amount available under such facility was reduced to $2 million.  On December 26, 2013, Greenkraft and Pacific Premier entered into a loan modification agreement extending the maturity date to June 10, 2014 and recently the facility was extended on September 22, 2015 to December 10, 2015.

On August 22, 2014, Greenkraft entered into a Loan Modification Agreement with Pacific Premier Bank under which it extended the Maturity Date until August 22, 2015.  The cost to modify the loan for 2014 was $4,052.50.  In addition, under the Modification Agreement, Pacific Premier agreed to issue a $3,000,000 standby letter of credit in favor of a supplier from whom Greenkraft purchases products in connection with its production of alternative fuel trucks.  In connection with this letter of credit, Greenkraft authorized Pacific Premier to draw an additional $1,500,000 under its note for any funds paid or required to be paid by Pacific Premier under the letter of credit.  Thus the current maximum amount available under the line of credit is $3,500,000.  There was a fee of $30,000 in connection with the letter of credit.  In addition Greenkraft has a restricted deposit of $1,500,000 with pacific premier that is being used as collateral for letter of credit.  The letter of credit will expire in August 2015.  The $30,000 fee is classified as deferred financing cost on balance sheet, and it is amortized over the term of the letter of credit.

On September 21, 2015, the Maturity Date was further extended to December 10, 2015. The expiration date for the standby letter of credit is also extended to December 10, 2015. No cost was incurred for the extension.

The Company analyzed the modifications of the term under ASC 470-60 “Trouble Debt Restructurings” and ASC 470-50 “Extinguishment of Debt”.  The Company determined the modification is not substantial and did not result in an extinguishment.

Along with the September 21, 2015 Loan Extension, the Company acknowledged that it was in breach of (a) its covenant to maintain a ratio of Global Debt Coverage in excess of 1.250 to 1.0; (b) its covenant to maintain a ratio of Business Debt Coverage Ratio in excess of 1.25 to 1; (c) its covenant to maintain a ratio of Debt/Worth not in excess of 3.0 to 1.0; (d) its covenant to maintain a Tangible Net Worth of not less than $350,000 and e) a Current Ratio in excess of 1.200 to 1.000 (collectively the “Covenant Violations”).  Pacific Premier agreed to forbear enforcement of its rights arising out of these Covenant Violations until the receipt of the Company’s financial statements for the year ended  December 31, 2015.   The Company is not in compliance with the debt covenants as of September 30, 2015.

During the nine months ended September 30, 2015, Greenkraft did not make any draws on the line.  The Company made a repayment of $708 on the line. As of September 30, 2015 and December 31, 2014, the total amount outstanding is $1,998,850 and $1,999,558, respectively. Deferred financing cost amortized during the nine months ended September 30, 2015 is $19,233. As of September 30, 2015, the available amount under the letter of credit had not been used. However the total unused available amount under the line of credit is about $1,150 as of September 30, 2015.

NOTE 5 - CONTINGENT EQUITY LINE OF CREDIT

On February 11, 2014, the Company entered into an Investment Agreement with Kodiak Capital LLC.  The agreement provides the Company with financing whereby the Company can issue and sell to Kodiak, from time to time, shares of the Company’s common stock up to an aggregate purchase price of $5.0 million (put shares) during a defined period of time.  The Company the right to deliver from time to time a put notice to Kodiak stating the dollar amount of put shares the Company intends to sell to Kodiak with the price per share based on the following formula: eighty three percent (83%) of the lowest volume-weighted average price of the Company’s common stock during the period beginning on the date of the put notice and ending five (5) days thereafter.  

Under the Investment Agreement, the Company may not deliver the put notice until after the resale of the put shares has been registered pursuant to a registration statement filed with the Securities and Exchange Commission. Additionally, provided that the Investment Agreement does not terminate earlier, during the period beginning on the trading day immediately following the effectiveness of the registration statement and ending eighteen months after effectiveness of the registration statement covering the securities registered the resale of the put shares, the Company may deliver the put notice or Notices to Kodiak.  On each put notice submitted to the Investor by the Company, the Company shall have the option to specify a suspension price for that Put. In the event the common stock price falls below the suspension price, the Put shall be temporarily suspended. The Put shall resume at such time as the common stock trading price is above the suspension price, provided the dates for the pricing period for that particular Put are still valid. In the event the pricing period has been completed, any shares above the suspension price due to Kodiak shall be sold to Kodiak by the Company at the suspension price. The suspension price for a Put may not be changed by the Company once submitted to Kodiak. In addition, the Company cannot submit a new put notice until the closing of the previous put notice, and in no event shall Kodiak be entitled to purchase that number of put shares which when added to the sum of the number already beneficially owned by Kodiak would exceed 4.99% of the number of shares outstanding on the applicable closing date.

The Investment Agreement also provides that the Company shall not be entitled to deliver a put notice and Kodiak shall not be obligated to purchase any put shares unless each of the following conditions are satisfied: (i) a registration statement has been declared effective and remains effective for the resale of the put shares until the closing with respect to the subject put notice; (ii) at all times during the period beginning on the date of the put notice and ending on the date of the related closing, the Company’s common stock has been listed on the Principal Market as defined in the Investment Agreement (which includes, among others, the Over-the-Counter Bulletin Board and the OTC Market Group’s OTC Link quotation system) and shall not have been suspended from trading thereon for a period of two (2) consecutive trading days during the Open Period; (iii) the Company has complied with its obligations and is otherwise not in breach of or in default under the Investment Agreement, the Registration Rights Agreement or any other agreement executed in connection therewith; (iv) no injunction has been issued and remains in force, and no action has been commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the put shares; and (v) the issuance of the put shares will not violate any shareholder approval requirements of the market or exchange on which the Company’s common stock are principally listed.

The Investment Agreement will terminate when any of the following events occur: (i) Kodiak has purchased an aggregate of $5.0 million of the Company’s common stock, (ii) on the date which is eighteen months following the Effective Date, or (iii) upon written notice from the Company to Kodiak.  Similarly, the Investment Agreement, may, at the option of the non-breaching party, terminate if Kodiak or the Company commits a material breach, or becomes insolvent or enters bankruptcy proceedings.

In connection with the Investment Agreement, on February 12, 2014, we issued Kodiak 147,058 shares of our common stock as a commitment fee.  The Company estimated the fair value of the common stock issued to be $73,529.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement

This report on Form 10-Q contains certain forward-looking statements.  All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues.  Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors.  These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements.  The following discusses our financial condition and results of operations based upon our financial statements which have been prepared in conformity with accounting principles generally accepted in the United States.  It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.

The following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q.  The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.

Results of Operation

Liquidity and Capital Resources

As of September 30, 2015, we had cash and cash equivalents of $1,497,023 and a working capital deficit of $1,554,223.  As of September 30, 2015 our accumulated deficit was $4,734,750.  

We used net cash of $612,728 from operating activities for the nine months ended September 30, 2015 compared to receiving net cash of $194,924 in operating activities for the same period in 2014.  We used net cash of $3,373 in investing activities for the nine months ended September 30, 2015 compared to using net cash of $15,554 in investing activities for the same period of 2014.  We used net cash of $708 in financing activities for the nine months ended September 30, 2015 compared to receiving net cash of $2,264,000 for the same period in 2014.  

Results of Operations for the three months ended September 30, 2015 compared to the three months ended September 30, 2014

Revenues

We earned revenues of $4,111,700 during the three months ended September 30, 2015 compared to earning revenues of $439,871 during the same period in 2014.

Net Income/Loss

We had a net loss of $328,109 for the three months ended September 30, 2015, compared to a net loss of $462,291 for the same period in 2014.  Our basic and diluted loss per share was $(0.00) for the three months ended September 30, 2015, and ($0.01) for the same period in 2014.  

Expenses

Our total operating expenses increased from $573,496 to $586,072 for the three months ended September 30, 2015 compared to the same period in 2014.  This increase in expenses is mostly due to higher selling and general and administrative fees.  

Results of Operations for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014

Revenues

We earned revenues of $10,982,351 during the nine months ended September 30, 2015 compared to earning revenues of $1,788,282 during the same period in 2014.

Net Income/Loss

We had a net loss of $468,783 for the nine months ended September 30, 2015, compared to a net loss of $851,127 for the same period in 2014.  Our basic and diluted loss per share was $(0.01) for the nine months ended September 30, 2015, and ($0.01) for the same period in 2014.  

Expenses

Our total operating expenses decreased from $1,372,544 to $1,117,537 for the nine months ended September 30, 2015 compared to the same period in 2014.  This decrease in expenses is mostly due to lower selling and general and administrative fees.  

Our plan of operation for the next twelve months is to grow our business.  We are a manufacturer and distributor of automotive products.  We manufacture commercial forward trucks for vehicle classes 3, 4, 5, 6, and 7 (GVW ranging from 10,001 lbs. to 33,000 lbs.) in alternative fuels.  We also manufacture and sell alternative fuel systems to convert petroleum based fuels to natural gas and propane fuels.

Inflation

The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position.  The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.

Off-Balance Sheet Arrangements

As of September 30, 2015, we had no off-balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.  CONTROLS AND PROCEDURES

Management's Report on Internal Control over Financial Reporting.

Our Internal control over financial reporting is a process that, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, was designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our trustees; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that our controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As management, it is our responsibility to establish and maintain adequate internal control over financial reporting.  As of September 30, 2015, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting using criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our evaluation, we concluded that the Company maintained ineffective internal control over financial reporting as of September 30, 2015, based on criteria established in the Internal Control Integrated Framework issued by the COSO.

This quarterly report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this quarterly report.

Evaluation of disclosure controls and procedures.  

As of September 30, 2015, the Company's Chief Executive Officer and Chief Financial Officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act.  Based upon the evaluation of these controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of the date of filing this annual report applicable for the period covered by this report.

Changes in internal controls.  

During the period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

As of November 16, 2015 there are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any of our properties is the subject.  Also, our management is not aware of any legal proceedings contemplated by any governmental authority against us.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.            

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.