Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - GREENKRAFT, INC.Financial_Report.xls
EX-31.1 - CERTIFICATION - GREENKRAFT, INC.f10q0914ex31i_greenkraft.htm
EX-10.1 - LOAN MODIFICATION AGREEMENT - GREENKRAFT, INC.f10q0914ex10i_greenkraft.htm
EX-32.1 - CERTIFICATION - GREENKRAFT, INC.f10q0914ex32i_greenkraft.htm
EX-31.2 - CERTIFICATION - GREENKRAFT, INC.f10q0914ex31ii_greenkraft.htm
EX-10.2 - COMMERCIAL LEASE AGREEMENT - GREENKRAFT, INC.f10q0914ex10ii_greenkraft.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________ to _________________

 

Commission File No.: 000-53047

 

GREENKRAFT, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   20-8767728

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

2530 S. Birch Street

Santa Ana, CA 92707

(Address of principal executive offices)

 

Issuer’s telephone number: (714) 545-777

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of November 17, 2014, 88,882,718 shares of our common stock were outstanding.

 

 

 

 
 

GREENKRAFT, INC.

 

FORM 10-Q

 

September 30, 2014

 

TABLE OF CONTENTS

 

  Page
PART I --  FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4 Control and Procedures 14
     
PART II -- OTHER INFORMATION  
     
Item 1 Legal Proceedings 15
Item 1A Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Mine Safety Disclosures 15
Item 5. Other Information 15
Item 6. Exhibits 16
     
SIGNATURES 17

  

2
 

 

ITEM 1 –FINANCIAL INFORMATION

 

Greenkraft, Inc.
Balance Sheets

 

   September 30,
2014
   December 31,
2013
 
   Unaudited     
ASSETS        
Current assets:        
Cash and cash equivalents  $3,026,239    582,869 
Inventories   1,648,708    2,216,136 
Deposits on inventory   745,097    218,862 
           
Total current assets   5,420,044    3,017,867 
           
Property, plant and equipment, net   95,497    87,516 
           
Total assets  $5,515,541   $3,105,383 
LIABILITIES AND EQUITY          
Current liabilities:          
Accounts payable  $142,677    394,400 
Accounts payable - related party   285,389    302,889 
Accrued liabilities   72,319    59,108 
Deferred income   1,907,405    848,405 
Line of credit   1,999,558    1,605,558 
Related party debt   1,901,916    1,916,916 
Other current liabilities   75,000    - 
Total current liabilities   6,384,264    5,127,276 
Equity:          
Stockholders’ deficit:          
Common stock, 400,000,000 shares authorized, 88,882,718 and 85,115,660 shares issued and outstanding, respectively   88,883    85,116 
Additional paid-in capital   3,050,197    1,049,667 
Accumulated Deficit   (4,007,803)   (3,156,676)
Total stockholders’ deficit   (868,723)   (2,021,893)
Total liabilities and stockholders' deficit  $5,515,541   $3,105,383 

 

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

 

3
 

 

Greenkraft, Inc.
Statements of Operations
(Unaudited)

 

   3 months ended
September 30,
   3 months
ended
September 30,
   9 months
ended
September 30,
   9 months
ended
September 30,
 
   2014   2013   2014   2013 
Revenue  $439,871   $1,515,432   $1,788,282   $1,924,317 
                     
Costs and expenses:                    
Cost of revenue   273,721    969,591    1,169,604    1,189,644 
Research and development   17,864    85,996    24,634    248,965 
Selling, general and administrative   555,632    262,499    1,347,910    981,624 
Total costs and expenses   847,217    1,318,086    2,542,148    2,420,233 
Operating Income (Loss)   (407,346)   197,346    (753,866)   (495,916)
Interest expense   (55,473)   (15,961)   (97,792)   (41,411)
Interest income   528    4    531    144 
Net Loss  $(462,291)  $181,389   $(851,127)  $(537,183)
                     
Basic and diluted loss per common share  $(0.01)  $0.00   $(0.01)  $(0.01)
Basic and diluted weighted average common shares outstanding   88,869,240    83,000,000    87,559,984    83,000,000 

 

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

 

4
 

 

Greenkraft, Inc.
Statements of Cash Flows
(Unaudited)

 

   9 months
Ended
September 30,
   9 months
Ended
September 30,
 
   2014   2013 
Cash flows from operating activities:        
Net loss  $(851,127)  $(537,183)
Adjustments to net loss to reconcile net loss to net cash used in operating activities:          
Contributed payroll   120,768    106,216 
Contributed rent   -    1,800 
Stock based compensation   73,529    - 
Contributed research and development   -    168,750 
Depreciation expenses   7,573    - 
Changes in operating assets and liabilities:          
Inventory   567,428    (1,002,400)
Prepaid expenses and other current assets   (526,235)   (171,776)
Accounts payable   (251,723)   172,864 
Accounts Payable - related party   (17,500)   285,389 
Accrued liabilities   13,211    (367,000)
Deferred income   1,059,000    343,250 
           
Cash provided by (used in) operating activities   194,924    (1,000,090)
           
Cash flows from investing activities:          
Cash paid for purchase of equipment   (15,554)   (117,874)
           
Cash used in investing activities   (15,554)   (117,874)
           
Cash flows from financing activities:          
Borrowings under lines of credit   394,000    765,000 
Borrowing (repayments) on related party debt   (15,000)   (68,034)
Proceeds from sale of stock   1,810,000    - 
Proceeds received for potential future stock issuance   75,000    - 
           
Cash provided by financing activities   2,264,000    696,966 
           
Net change in cash   2,443,370    (420,998)
Cash at beginning of period   582,869    832,430 
Cash at end of period  $3,026,239   $411,432 
           
Supplemental cash flow information:          
Cash paid for income taxes  $-    - 
Cash paid for interest  $102,716   $24,037 
           
Non cash investing and financing activities:          
Deposit on inventory transferred to inventory  $-   $1,005,679 

 

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

 

5
 

 

Greenkraft, Inc.

Notes to Unaudited Financial Statements

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited interim financial statements of 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 – RELATED PARTY TRANSACTIONS

 

The Defiance Company, LLC is owned by our CEO. As of September 30, 2014 and December 31, 2013 accounts payable to Defiance is $285,389 and $302,889, respectively, for amounts paid by Defiance Company, LLC on behalf of Greenkraft.

 

As of September 30, 2014 and December 31, 2013 Greenkraft owed a total of $1,901,916 and $1,916,916, respectively, to our owner and his related entities. All amounts are due on demand, unsecured and do not bear interest. During the nine months ended September 30, 2014, the Company repaid $15,000 under these related party notes.

 

CEE, LLC performed testing for Greenkraft for engine certifications, provided storage spaces and also shared employees with Greenkraft. Our President is an owner of CEE, LLC. During the nine months ended September 30, 2014, and 2013, Greenkraft recognized $0 and $168,750, respectively, of contributed research and development expenses, $0 and $1,800, respectively, of contributed rent expenses, and $120,768 and $106,216, respectively, of contributed payroll expense related to the shared employees

 

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 April 1, 2013 to April 1, 2018, with a monthly rent of $17,500. A new lease agreement was signed. The term of the new lease agreement is from July 1, 2014 to June 30, 2019, with a monthly rent of $27,500. The total rent expense for the nine months ended September 30, 2014 and 2013 was $187,500, and $88,700, respectively.

 

NOTE 3 – 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, 2013and 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.

 

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.

 

6
 

 

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. In addition, under the Modification Agreement, Pacific Premier agreed to issue a standby letter of credit in favor 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.

 

The Company analyzed the modification 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 August 22, 2014 Loan Modification, 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 and (d) its covenant to maintain a Tangible Net Worth of not less than $350,000 (collectively the “Covenant Violations”). Pacific Premier agreed to forbear enforcement of its rights arising out of these Covenant Violations until receipt of the Company’s financial statements for the year ended December 31, 2014.  Pacific Premier reserved its rights to strictly enforce these covenants on our after their receipt of the Company’s December 31, 2014 financial statements.

 

During the nine months ended September 30, 2014, the Company made draws of $394,000 under the line of credit. The total amount borrowed under the line of credit was $1,999,558 as of September 30, 2014. As of September 30, 2014, 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 $400 as of September 30, 2014.

 

NOTE 4 – 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.

 

7
 

 

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 as a commitment fee. The Company estimated the fair value of the common stock issued to be $73,529.

 

NOTE 5 COMMON STOCK

 

During the nine months ended September 30, 2014 the company sold 3,620,000 shares at $0.50 per share for gross proceeds of $1,810,000.

 

As of September 30, 2014, the Company received $75,000 in deposits to be applied to the purchase of 150,000 shares pending successful completion of the subscription process.

 

8
 

  

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements and notes. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from Management's expectations. Factors that could cause differences include, but are not limited to, continued reliance on external sources on financing, development risks for new products and services, commercialization delays and customer acceptance risks when introducing new products and services, fluctuations in market demand, pricing for raw materials as well as general conditions of the energy and oilfield marketplace.

 

Corporate Overview And History

 

We were incorporated on September 27, 2006 in Nevada as Sunrise Global, Inc. Until closing of the Acquisition of Greenkraft, Inc. on December 6, 2013 (as described below), we were a recycled industrial waste resale company. On December 27, 2013, we changed our corporate name to Greenkraft, Inc. from Sunrise Global, Inc., which name change reflects our acquisition of Greenkraft resulting in us now conducting Greenkraft’s business. Concurrent with the name change, we effectuated a 2-for-1 forward split, also effective December 27, 2013. All share amounts have been adjusted to give effect to the 2-for-1 forward split.

 

We are a manufacturer and distributor of automotive products. We manufacture commercial forward trucks for vehicle classes 3, 4, 5, and 6 (GVW ranging from 10,001 lbs. to 26,000 lbs.) in alternative fuels. We also manufacture and sell alternative fuel systems to convert petroleum based vehicles to run on natural gas and propane fuels.

 

Our address is 2530 S. Birch Street, Santa Ana, CA and our telephone number is (714) 545-7777.

 

Acquisition of Greenkraft, Inc.

 

On December 5, 2013, we entered into a Share Exchange Agreement (the “Purchase Agreement”) with George Gemayel the sole stockholder (the “Stockholder”) of Greenkraft, Inc., a California corporation (“Greenkraft”), pursuant to which, on December 6, 2013 (the “Closing Date”), we issued 83,000,000 shares (as adjusted to give effect for the 2-for-1 forward split effectuated on December 27, 2013) of our common stock to the Stockholder in consideration of the Stockholder’s transfer of all of his Greenkraft shares (the “Greenkraft Shares”) to our wholly-owned acquisition subsidiary, Greenkraft, Inc, a Nevada corporation (the “Acquisition Subsidiary)., at which time Greenkraft became Acquisition Subsidiary’s wholly owned subsidiary (the “Acquisition”).

 

Prior to the Acquisition, Greenkraft was our controlling stockholder, owning approximately 68% of our common stock which it purchased in May 2013. In addition, George Gemayel, Greenkraft’s sole shareholder, president and director, was appointed as our president and sole director in connection with their purchase of the controlling interest in May 2013. The Greenkraft Shares exchanged for the Company shares were valued at $100,000,000 based on internal forecasts and EBITDA projections prepared by the common management of Greenkraft and the Company. Such internal forecasts and projections have not been independently verified by any financial advisor, are solely based on management beliefs and there can be no assurance that Greenkraft’s actual results will match the internal forecasts or projections. There was no third party independent valuation.

 

As a condition to the closing of the Acquisition, on the Closing Date, 4,600,000 shares (as adjusted to give effect for the 2-for-1 forward split effectuated on December 27, 2013) of our issued and outstanding common stock previously held by Greenkraft were cancelled pursuant to the terms of the Purchase Agreement (the “Cancelled Shares”).

 

Following the Acquisition, we now conduct the business of Greenkraft, as our sole business.

 

The Acquisition was accounted for as a reverse acquisition with Greenkraft being treated as the acquirer for accounting purposes. Accordingly, for all periods presented in this Report, the financial statements of Greenkraft have been adopted as the historical financial statements of the Company known as a change in reporting entity.

 

9
 

 

RESULTS OF OPERATIONS

 

Results of Operations for the Three Months Ended September 30, 2014 and 2013

 

Revenues. Our revenues decreased to $439,871 in the three months ended September 30, 2014 from $1,515,432 in comparable period in 2013. The primary reason attributable for the decrease is attributable to the decreased sale of our alternative fuel trucks during the three months ended September 30, 2014. Sales commenced in the third quarter of 2013 and continued in the three months ended September 30, 2014. However, our sales were limited in the three months ended September 30, 2014 as compared to the comparable 2013 period.

 

Cost of Revenue. Our cost of revenue decreased to $273,721 in the three months ended September 30, 2014 from $969,591 in the comparable period in 2013. The primary reason for the decrease is attributable to our reduced production and sale of our alternative fuel trucks in the period which reduced our costs significantly..

 

Research and Development. Our research and development expenses decreased to $17,864 in the three months ended September 30, 2014 from $85,996 in the comparable period in 2013. These expenses relate to our research and development activities in connection with developing our alternative fuel trucks.

 

Selling, general and administrative. Our selling, general and administrative expenses increased to $555,632 in the three months ended September 30, 2014 from $262,499 in the comparable period in 2013. Our primary selling, general and administrative expenses in the three months ended September 30, 2014 consisted of $187,032 in parts expenses related to production of our trucks (non-inventory), $82,500 in property lease costs, $40,501 in professional fees including legal and accounting costs.

 

Interest expense. Our interest expense increased to $55,473 in the three months ended September 30, 2014 from $15,961 in the comparable period in 2013. Our interest expense in the 2014 period was primarily related to interests expenses associated with advances under our line of credit facility. Our borrowings under such facility increased to $1,999,558 in the three months ended September 30, 2014 from $1,036,024 in the comparable 2013 period.

 

Net Income (Loss). We had net loss of $462,291 for the three months ended September 30, 2014 as compared to a net income of $181,389 in the comparable 2013 period. The reason for our net loss of the three months ended September 30, 2014 is directly related to our reduced sales of our alternative fuel vehicles in the period as compared to the comparable 2013 period.

 

Results of Operations for the Nine Months Ended September 30, 2014 and 2013

 

Revenues. Our revenues decreased to $1,788,282 in the nine months ended September 30, 2014 from $1,924,317 in comparable period in 2013. The primary reason attributable for the decrease is attributable to some delays in delivery of inventory parts. Sales commenced in the third quarter of 2013 and continued in the nine months ended September 30, 2014. However, we only had limited sales of alternative fuel trucks and vehicle conversions in the nine months ended September 30, 2014. Our sales in the comparable 2013 period were for a large batch of vehicles. During the 2013 period, we delivered a quantity of vehicles that attributed to increased revenues compared to September 30, 2014.

 

Cost of Revenue. Our cost of revenue decreased to $1,169,604 in the nine months ended September 30, 2014 from $1,189,644 in the comparable period in 2013. The primary reason for the decrease is attributable to our reduced production and sale of our alternative fuel trucks in the period which reduced our costs significantly.

 

Research and Development. Our research and development expenses decreased to $24,634 in the nine months ended September 30, 2014 from $248,965 in the comparable period in 2013. These expenses relate to our research and development activities in connection with developing our alternative fuel trucks.

 

Selling, general and administrative. Our selling, general and administrative expenses increased to $1,347,910 in the nine months ended September 30, 2014 from $981,624 in the comparable period in 2013. Our primary selling, general and administrative expenses in the nine months ended September 30, 2014 consisted of $398,702 in parts expenses related to production of our trucks (non-inventory), $187,500 in property lease costs, $103,288 in professional fees including legal and accounting costs, and $34,236 in subcontractor fees.

 

Interest expense. Our interest expense increased to $97,792 in the nine months ended September 30, 2014 from $41,411 in the comparable period in 2013. Our interest expense in the 2014 period was primarily related to interests expenses associated with advances under our line of credit facility, which borrowings were increased in the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.

 

10
 

 

Net Income (Loss). We had net loss of $851,127for the nine months ended September 30, 2014 as compared to a net loss of $537,183 in the comparable 2013 period. Our net loss in the nine months ended September 30, 2014 was higher than our net loss in the comparable 2013 period due to reduced revenues and increased selling general and administrative expenses during the period.

 

Liquidity And Capital Resources

 

Since inception, we have financed our operations loans from officer, our facility with Pacific Premier Bank and through the equity financings. We expect to finance future cash needs primarily through proceeds from equity or debt financings, loans, and/or collaborative agreements with corporate partners. Mr. George Gemayel, our president and controlling shareholder, has provided officer loans to us, from time to time, to pay for certain of our expenses. As of September 30, 2014, we owed a total of $1,901,916 to Mr. Gemayel and his related entities. All of these amounts are unsecured and due on demand and do not bear interest. During the nine months ended September 30, 2014, Greenkraft repaid Mr. Gemayel $15,000 for prior advances. We have used net proceeds from our officer loans, equity sales and financing facility for purchase of inventory and for general corporate purposes, which has been funding working capital needs. We do not have any written or oral agreement from Mr. Gemayel to provide such funding in the future and as such we have no assurance that Mr. Gemayel will continue to fund our operations.

 

We had cash of $3,026,239 and a working capital deficit of $964,220 as of September 30, 2014 as compared to cash of $582,869 and a working capital deficit of $2,109,409 as of December 31, 2013. We have operated over the past 2 years with negative working capital, which is now a known trend for our operations. We have been able to operate with a working capital deficit as the major contributing factor to such deficit is our related party loans to our president, Mr. George Gemayel. To date, Mr. Gemayel has not demanded repayment. It is typical for companies in our stage to operate with negative working capital and often requires 8-10 years before a company in the alternative fuel and trucking industry shows positive working capital.

 

Net cash provided by operating activities for the nine months ended September 30, 2014 was $194,924, primarily from our deferred income of $1,059,000, plus contributed payroll of $120,768, inventory of $567,428, $73,529 in stock issued as a commitment fee under an investment agreement and accrued expenses of $13,211 which amounts were offset by our net loss of $851,127 plus an decrease of $269,223 in accounts payable, and accounts payable due to related party. This compares to $1,000,090 of net cash used in operating activities for the nine months ended September 30, 2013 primarily from our net loss of $537,183, $1,002,400 in inventory, $171,776 in prepaid expenses as well as decreases of $367,000 in accrued expenses, which amounts were offset by non-cash expenses of $106,216 in contributed payroll, $168,750 in contributed research and development expenses, $458,253 in accounts payable and accounts payable due to related party, and $343,250 in deferred income.

 

We used $15,554 of cash in investing activities for the nine months ended September 30, 2014, which were related to the purchase of fixed assets. Our net cash flow used in investing activities was $117,874 for the nine months ended September 30, 2013.

 

Our net cash provided by financing activities for the nine months ended September 30, 2014 was $2,264,000 consisting of $1,810,000 in proceeds from the sale of our common stock, $75,000 in deposits received for the purchase of our stock, and $394,000 in borrowings under our line of credit which amount was offset by $15,000 in repayments on related party debt. Our net cash provided by financing activities was $696,966 in the nine months ended September 30, 2013 consisting of $765,000 in borrowings under our line of credit, which amount was offset by $68,034 in repayments of related party debt.

 

The net increase in cash for the nine months ended September 30, 2014 was $2,443,370 as compared to a net decrease in cash of $420,998 for the nine months ended September 30, 2013.

  

11
 

 

Pacific Premier Credit Facility

 

On March 13, 2012, our wholly owned subsidiary, Greenkraft, Inc., a California corporation entered into a $3.5 million revolving line of credit facility with Pacific Premier Bank, which line of credit is evidenced by a promissory note issued by Greenkraft in favor of Pacific Premier Bank. The note is subject to a variable interest rate bears interest at the prime rate for corporate loans plus one (1) percent, which equaled 4.25% on the date of issuance. The facility is secured by Greenkraft’s assets. 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 Bank entered into a loan modification agreement extending the maturity date to June 10, 2014. In connection with this loan modification, Greenkraft, Inc., a Nevada corporation provided a commercial guaranty in favor of Pacific Premier Bank. The table sets forth the covenants, we are required to maintain under our agreement with Pacific Premier and our compliance with such covenants at December 31, 2013

 

   Required 
Minimum Global Debt Coverage Ratio   1.25 to 1 
Minimum Business Debt Coverage Ratio   1.2 to 1 
Debt/Worth Ratio   3 to 1 
Tangible Net Worth  $350,000 

 

As of September 30, 2014, the total amount outstanding under this facility was $1,999,558. On July 24, 2014, Greenkraft entered into a Loan Modification Agreement with Pacific Premier Bank extending the maturity date to June 10, 2015. In connection with this loan modification, First Industrial Properties, LLC, an entity controlled by our president provided a commercial guaranty in favor of Pacific Premier Bank. In Greenkraft’s July 24, 2014 Loan Modification with Pacific Premier (and the August 22, 2014 Loan Modification discussed below), Greenkraft 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 and (d) its covenant to maintain a Tangible Net Worth of not less than $350,000 (collectively the “Covenant Violations”).  In connection with the July 24, 2014 Loan Modification Agreement (and the August 22 , 2014 Loan Modification discussed below), Pacific Premier agreed to forbear enforcement of its rights arising out of these Covenant Violations until receipt of Greenkraft’s financial statements for the year ended December 31, 2014.  Pacific Premier reserved its rights to strictly enforce these covenants on our after their receipt of Greenkraft’s December 31, 2014 financial statements. There can be no assurance that we will be in compliance with the financial covenants in future periods. Our failure to comply with the covenants included in the Pacific Premier loan agreements could result in an event of default, which, at Pacific Premier’s option, could trigger an acceleration of the related debt, which could place a strain on our financial resources and have an adverse effect on our operations.

 

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. In addition, under the Modification Agreement, Pacific Premier agreed to issue a standby letter of credit in favor 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.

 

Common Stock Financing

 

From February 14, 2014 through November 10, 2014, we have sold 3,620,000 shares our common stock at a purchase price of $0.50 per share to 12 accredited investors and 13 non-accredited investors for a total gross proceeds of $1,810,000. We have also received deposits of $75,000 to be applied to the purchase of 150,000 shares our common stock, which shares have not been issued. All of the shares purchased in this financing are subject to an 18-month lock-up. The proceeds have been and will be used for working capital and general corporate purposes. These issuances were exempt under Rule 505 and/or Rule 506 of the Securities Act of 1933, as amended, based on the following: (a) all of the investors confirmed to us that they were either “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act or had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) all of the investors had a substantial preexisting relationship with the our officers; (c) there was no public offering or general solicitation with respect to the offering; (d) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (e) the investors acknowledged that they had a reasonable opportunity to ask questions and receive answers concerning the offering and our business, financial condition, results of operations and prospects (f) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (g) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

 

12
 

 

Future Liquidity And Needs

 

Investment Agreement with Kodiak Capital Group

 

On February 11, 2014, we entered into an investment with the Kodiak Capital Group, LLC (“Kodiak”) to provide up to $5 million of additional equity capital. The proceeds from the agreement with Kodiak would primarily be for working capital and general corporate purposes. However, Kodiak is not required to provide funding until certain conditions are met, including the registration of the Company’s equity securities as defined in those agreements. The registration statement was declared effective on June 6, 2014. There can be no assurance that the Company will meet the conditions under which Kodiak will be required to provide the equity capital of that the capital available under such agreements will be sufficient to allow the Company to funds its ongoing activities. If the Company is unable to raise the additional equity capital from Kodiak, the Company will need to seek alternative sources of debt or equity capital. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to the Company. Our wholly-owned subsidiary Greenkraft entered into an investment with the Kodiak Capital Group, LLC (“Kodiak”) on January 17, 2013 to provide up to $5 million of additional equity capital. Concurrent with Greenkraft’s parent company entering into an Investment Agreement with Kodiak Capital on February 11, 2014, Greenkraft terminated its Investment Agreement with Kodiak on February 11, 2014.

 

We anticipate that our existing cash and cash equivalents, together with our cash from operating activities will be sufficient to fund operations and expected growth through at least the next twelve months. We anticipate requiring approximately $1 million to fund operations over the next twelve months, including labor, rent and parts for building trucks. As such, our monthly burn rate approximately $83,000 per month. At September 30, 2014, we had $3,026,239 in cash. Assuming we did not receive any additional capital from operations or otherwise, we would run out of cash in 36 months. We do expect to receive cash from operations as we are currently working on previously placed orders for our alternative fuel trucks. We expect to recognize approximately up to $4 million in revenues for truck sales in 2014 based on currently placed orders. However, the Company intends to continue to seek additional financing to fund the growth of the Company’s operations. There can be no assurance that the Company will be successful in raising this additional financing on acceptable terms, if at all. Failure of the Company to receive additional funds via its agreement with Kodiak Capital, its facility with Pacific Premier Bank or otherwise would inhibit its ability to take on additional orders for supplying new alternative fuel trucks to customers.

 

Off Balance Sheet Arrangements

 

None.

 

Summary of Significant Accounting Policies

 

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

 

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Actual results could differ from those estimates.

 

Revenue recognition - Greenkraft recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectibility 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.

 

Business Combination—The business combination between Greenkraft Inc. (f/k/a Sunrise Global, Inc.) and Geenkraft, Inc., a California corporation was accounted for as a reverse acquisition with Greenkraft (California) being treated as the acquirer for accounting purposes. Accordingly, for all periods presented in this Report, the financial statements of Greenkraft (California) have been adopted as the historical financial statements of the Company known as a change in reporting entity.

 

Cash and cash equivalents – Cash equivalents are highly liquid investments with an original maturity of three months or less.

 

Inventories – Inventories are stated at the lower of cost of market using the first-in, first-out (FIFO) cost method of accounting. Inventories consist of raw materials purchased for the purpose of expected truck engine conversions.

 

13
 

 

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. During the nine months ended September 30, 2014, and 2013, $24,634, and $248,965 respectively, were expensed as research and development costs.

 

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 carryforwards available to reduce future taxable income. Future tax benefits for these net operating loss carryforwards 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.

 

Recent Accounting Pronouncements

 

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Based on this evaluation, our chief executive officer and chief financial officer concluded that, as September 30, 2014, our disclosure controls and procedures are designed at a reasonable assurance level and were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting 

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

14
 

 

PART II: OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

None.

 

ITEM 1A – RISK FACTORS

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

 

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

 

See Item 2 under our Current Report on Form 10-Q for the period ended June 30, 2014.

 

ITEM 3 – DEFAULT UPON SENIOR SECURITIES

 

On March 13, 2012, our wholly owned subsidiary, Greenkraft, Inc., a California corporation entered into a $3.5 million revolving line of credit facility with Pacific Premier Bank, which line of credit is evidenced by a promissory note issued by Greenkraft in favor of Pacific Premier Bank. The note is subject to a variable interest rate bears interest at the prime rate for corporate loans plus one (1) percent, which equaled 4.25% on the date of issuance. The facility is secured by Greenkraft’s assets. 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 Bank entered into a loan modification agreement extending the maturity date to June 10, 2014. In connection with this loan modification, Greenkraft, Inc., a Nevada corporation provided a commercial guaranty in favor of Pacific Premier Bank. As of September 30, 2014, the total amount outstanding under this facility was $1,999,558.

 

On each of July 24, 2014 and August 22, 2014, Greenkraft entered into a Loan Modification Agreement with Pacific Premier Bank under which Greenkraft 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 and (d) its covenant to maintain a Tangible Net Worth of not less than $350,000 (collectively the Covenant Violations”).  In connection with the July 24, 2014 Loan Modification Agreement, Pacific Premier agreed to forbear enforcement of its rights arising out of these Covenant Violations until receipt of Greenkraft’s financial statements for the year ended December 31, 2014.  Pacific Premier reserved its rights to strictly enforce these covenants on our after their receipt of Greenkraft’s December 31, 2014 financial statements.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

In July 2014, we entered into a new lease for our assembly plant from First Warner Properties LLC. Our president is a member of First Warner. The term of the new lease agreement is from July 1, 2014 to June 30, 2019, with a monthly rent of $27,500. This new lease replaces our previous lease for our assembly plant with First Warner.

 

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. In addition, under the Modification Agreement, Pacific Premier agreed to issued a standby letter of credit in favor 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.

 

15
 

 

ITEM 6 - EXHIBITS

 

Item No.

 

Description
     
10.1   Loan Modification Agreement dated August 22, 2014 with Pacific Premier Bank.
     
10.2   California Commercial Lease Agreement dated July 1, 2014 between Greenkraft, Inc. and First Warner Properties, LLC.
     
31.1   Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
     
31.2   Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
     
32.1   Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Schema Linkbase Document
     
101.CAL   XBRL Taxonomy Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Labels Linkbase Document
     
101.PRE   XBRL Taxonomy Presentation Linkbase Document

 

16
 

  

SIGNATURES

 

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.

 

 

GREENKRAFT, INC.

   
Dated: November 18, 2014 By: /s/ George Gemayel.
    George Gemayel
   

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

     
Dated: November 18, 2014 By: /s/ Sosi Bardakjian
    Sosi Bardakjian
   

Chief Financial Officer and director

(Principal Financial Officer)

       

 

 

 

17