NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
|
BASIS
OF PRESENTATION
|
REFERENCES
TO THE COMPANY
In
this Quarterly Report on Form 10-Q, the terms “
we
,” “
our
,” “
us
,” “
Bitzio
,”
or the “
Company
” refer to Bitzio, Inc., and its subsidiaries on a consolidated basis. The term “
Bitzio,
Inc.
” refers to Bitzio, Inc. on a standalone basis only, and not its subsidiaries. References to
“GreenShift
Corporation” or “GreenShift”
in the consolidated financial statements and in these notes to the consolidated
financial statements refer to GreenShift Corporation and its subsidiaries.
The
balance sheet at December 31, 2015 was derived from audited financial statements(see Note 4,
Significant Accounting Policies,
below) but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The other information in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary
for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed
otherwise. These financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities
and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction
with the financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended December
31, 2015.
CONSOLIDATED
FINANCIAL STATEMENTS
The
consolidated financial statements include all accounts of the Company, including its wholly-owned subsidiaries, its 51% interest
in Cleo VII, Inc. and its 80% interest in GreenShift Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated on a consolidated basis for reporting purposes.
USE
OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The
preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires
management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
NOTE
2
|
DESCRIPTION
OF BUSINESS
|
The
Company develops and commercializes clean technologies that facilitate the more efficient use of natural resources. We are focused
on doing so primarily in three sectors: agriculture, energy and lifestyle, of which we were only active in our agriculture and
lifestyle segments during 2015 and 2016.
The
Company’s portfolio of patented and patent-pending technologies covers oil extraction and refining, renewable fuels and
chemicals, solar energy and fuels, energy and chemical detection, wearables and consumer products, among others. Our plan to bring
our technologies to market involves utilization of strategically-relevant infrastructure in targeted channels.
We
generate revenue today from our efforts in agriculture, where we license commercially-available technologies to U.S. ethanol producers,
and provide our licensees with success-driven, value-added services and other solutions based upon our expertise, know-how, technologies,
and patent position. We also generate sales in our lifestyle group by producing and selling activewear and other apparel for women
and children, an important early-adopter market for wearable technologies that we are developing. During the three months ended
March 31, 2016, four customers each provided over 10% of our revenue and 48% of total revenue in the aggregate; during the three
months ended March 31, 2015, four customers each provided over 10% of our revenue, including two customers that accounted for
more than 50% of sales (See Note 3,
Significant Accounting Policies
for Revenue Recognition policies, below). In addition,
we are evaluating a number of investments and acquisitions in each of our targeted sectors, each with a view toward internalizing
additional revenue, management, and infrastructure that we can leverage to bring our technologies to market.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The Company recorded a loss from operations of $282,043 for the three months ended March 31, 2016. As of March 31, 2016, the Company
had $1.2 million in cash, and current liabilities exceeded current assets by about $18.1 million, which included derivative liabilities
of $13.0 million and $2.5 million in convertible debentures and notes. None of these items are required to be serviced out of
the Company’s regular cash flows.
Pursuant
to a Senior Secured Revolving Credit Facility Agreement (the “Credit Agreement”), under which TCA Global Credit Master
Fund, LP (“TCA”) may lend to Bitzio up to $5.0 million, GreenShift and each of its subsidiaries, as well as each of
the other subsidiaries of Bitzio, has executed a Guaranty Agreement dated December 31, 2015, in favor of TCA. In the Guaranty
Agreement, GreenShift and each of its subsidiaries as well as each of the other subsidiaries of Bitzio, guaranteed payment of
all amounts due to TCA under the Credit Agreement. By separate agreements, GreenShift and each subsidiary pledged all of its assets
to secure the guaranty to TCA.
These
matters raise substantial doubt about the Company’s ability to continue as a going concern. Our ability to satisfy our obligations
will depend on our success in obtaining financing, our success in preserving current revenue sources and developing new revenue
sources, and our success in negotiating with the creditors. Management’s plans to resolve the Company’s working capital
deficit by increasing revenue, reducing debt and exploring new financing options. There can be no assurances that the Company
will be able to eliminate its working capital deficit and that the Company’s historical operating losses will not recur.
The accompanying financial statements do not contain any adjustments which may be required as a result of this uncertainty.
NOTE
4
|
SIGNIFICANT
ACCOUNTING POLICIES
|
SEGMENT
INFORMATION
We
determined our reporting units in accordance with FASB ASC 280, “
Segment Reporting
” (“ASC 280”).
We evaluate a reporting unit by first identifying its operating segments under ASC 280. We then evaluate each operating segment
to determine if it includes one or more components that constitute a business. If there are components within an operating segment
that meet the definition of a business, we evaluate those components to determine if they must be aggregated into one or more
reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, we determine
if the segments are economically similar and, if so, the operating segments are aggregated. We currently have two separate operating
segments and reporting units. In our agriculture segment, we generate revenue by licensing commercially-available technologies
to U.S. ethanol producers, and providing our licensees with success-driven, value-added services and other solutions based upon
our expertise, know-how, technologies, and patent position. We also generate sales in our lifestyle segment by producing and selling
activewear and other apparel for women and children, an important early-adopter market for wearable technologies that we are developing.
No sales of any kind occur, and no costs of sales of any kind are incurred, in the absence of a license agreement in our agriculture
segment. A single management team that reports to the chief operating decision maker comprehensively manages the entire business
in each segment. With the exception of the segment classifications noted above, we do not operate any material separate lines
of business or separate business entities with respect to our technologies, products and services; nor do we accumulate discrete
financial information according to the nature or structure of any specific technology, product and/or service. Instead, management
reviews the agriculture and lifestyle segments as distinct operating segments, using financial and other information rendered
meaningful only by the fact that such information is presented and reviewed in the aggregate.
REVENUE
RECOGNITION
In
our lifestyle segment, we recognize revenue when the following conditions are satisfied: (i) delivery of the product has occurred
and (ii) collection is reasonably assured. Under each our lifestyle segment, orders are received via national sales representatives,
in house wholesale sales departments and various retail platforms. Once the order is received, they are either automatically or
manually inputted into our production system. Our production system generates production orders which our production team takes
and produces based on the purchase order terms. Revenue is recognized only when the orders have been shipped. Generally, all orders
are paid upon shipment via credit card or wire transfer. For a small percentage, the orders are shipped on terms of less than
30 days. Revenue is recognized at the time of shipment and a related receivable is booked. We experience less than 2% of annual
sales in returns. For orders where goods are considered damaged, these items are swapped with new merchandise. Under our agriculture
segment, GreenShift recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have
been rendered, the price is fixed or determinable, and collection is reasonably assured. GreenShift recognizes revenue from licensing
of GreenShift’s corn oil extraction technologies when corn oil sales occur. Licensing royalties are recognized as earned
by calculating the royalty as a percentage of gross corn oil sales by the ethanol plants. For the purposes of assessing royalties,
the sale of corn oil is deemed to occur when shipped, which is when four basic criteria have been met: (i) persuasive evidence
of a customer arrangement; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured, and (iv) product
delivery has occurred, which is generally upon shipment to the buyer of the corn oil. To the extent revenues are generated from
GreenShift’s licensing support services, GreenShift recognizes such revenues when the services are completed and billed.
GreenShift provides process engineering services on fixed price contracts. These services are generally provided over a short
period of less than three months. Revenue from fixed price contracts is recognized on a pro rata basis over the life of the contract
as they are generally performed evenly over the contract period. GreenShift additionally performs under fixed-price contracts
involving design, engineering, procurement, installation, and start-up of oil recovery and other production systems. Revenues
and fees on these contracts are recognized using the percentage-of-completion method of accounting. During 2015 and 2016, our
percentage-of-completion methods included the efforts-expended percentage-of-completion method and the cost-to-cost method. The
efforts-expended method utilizes using measures such as task duration and completion. The efforts-expended approach is used in
situations where it is more representative of progress on a contract than the cost-to-cost or the labor-hours method (see below).
GreenShift also used the cost-to-cost method which is used to determine the percentage of completion of a project based on the
actual costs incurred. Earnings are recognized periodically based upon our estimate of contract revenues and costs in providing
the services required under the contract. The percentage of completion method must be used in lieu of the completed contract method
when all of the following are present: reasonably reliable estimates can be made of revenue and costs; the construction contract
specifies the parties’ rights as to the goods, consideration to be paid and received, and the resulting terms of payment
or settlement; the contract purchaser has the ability and expectation to perform all contractual duties; and the contract contractor
has the same ability and expectation to perform. Under the completed contract method income is recognized only when a contract
is completed or substantially completed. The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,”
represents revenues recognized in excess of amounts billed. The liability, “billings in excess of costs and estimated earnings
on uncompleted contracts,” represents billings in excess of revenues recognized.
BASIC
AND DILUTED INCOME (LOSS) PER SHARE
The
Company computes its net income or loss per common share under the provisions of ASC 260, “
Earnings per Share
,”
whereby basic net income or loss per share is computed by dividing the net loss for the period by the weighted-average number
of shares of common stock outstanding during the period. Our potentially dilutive shares, which include outstanding common stock
options, common stock warrants, convertible preferred stock and convertible debentures, have not been included in the computation
of diluted net income (oss) per share attributable to common stockholders for all periods presented, as the results would be antidilutive.
Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 368,386,157,947
and 109,631,652,924 such potentially dilutive shares excluded for the three months ended March 31, 2016 and 2015. During the three
months ended March 31, 2016, we reported a net loss, and accordingly dilutive instruments were excluded from the net loss per
share calculation for such periods. For the three months ended March 31, 2015, the application of the if-converted method resulted
in an adjusted loss in the numerator and accordingly we excluded potentially dilutive instruments in the fully diluted income
per share calculation.
The
following is a reconciliation of weighted common shares outstanding used in the calculation of basic and diluted net income per
common share:
|
|
Three Months
Ended
3/31/2016
|
|
|
Three Months
Ended
3/31/2015
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
(2,573,344
|
)
|
|
$
|
6,633
|
|
Adjustments for dilutive shares:
|
|
|
|
|
|
|
|
|
Interest savings
|
|
|
153,365
|
|
|
|
352,458
|
|
Reversal of derivative gains
|
|
|
(1,367,950
|
)
|
|
|
(2,821,725
|
)
|
Net income (loss) - adjusted
|
|
|
(2,593,269
|
)
|
|
|
(2,462,634
|
)
|
Weighted average shares used for basic net income
per common share
|
|
|
7,577,897,074
|
|
|
|
3,718,144,025
|
|
Incremental diluted shares
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares used for diluted net income per common share
|
|
|
7,577,897,074
|
|
|
|
3,718,144,025
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
FINANCIAL
INSTRUMENTS
The
carrying values of accounts receivable, other receivables, accounts payable and accrued expenses approximate their fair values
due to their short term maturities. The carrying values of the Company’s long-term debt approximate their fair values based
upon a comparison of the interest rate and terms of such debt to the rates and terms of debt currently available to the Company.
It was not practical to estimate the fair value of the convertible debt. In order to do so, it would be necessary to obtain an
independent valuation of these unique instruments. The cost of that valuation would not be justified in light of the materiality
of the instruments to the Company.
EQUITY
INVESTMENTS
Equity
investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted
for using the equity method. The Company’s share of its equity method investee’s earnings or losses is included in
other income in the accompanying Consolidated Statements of Operations.
RECENT
ACCOUNTING PRONOUNCEMENTS
Management
does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers which modifies how all entities recognize revenue
and various other revenue accounting standards for specialized transactions and industries. This update is a comprehensive new
revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the possible impact of ASU 2014-15,
but does not anticipate that it will have a material impact on the Company’s consolidated financial statements.
In
February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, or ASU No.
2015-02. The amendments of ASU No. 2015-02 were issued in an effort to minimize situations under previously existing guidance
in which a reporting entity was required to consolidate another legal entity in which that reporting entity did not have: (1)
the ability through contractual rights to act primarily on its own behalf; (2) ownership of the majority of the legal entity’s
voting rights; or (3) the exposure to a majority of the legal entity’s economic benefits. ASU No. 2015-02 affects reporting
entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject
to reevaluation under the revised consolidation model. The guidance in ASU No. 2015-02 is effective for periods beginning after
December 15, 2015. Early adoption is permitted. The Company is currently evaluating the possible impact of ASU 2014-15, but does
not anticipate that it will have a material impact on the Company’s consolidated financial statements.
ASU
2015-03 and ASU 2015-15 — In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs, or ASU No. 2015-03. The amendments of ASU No. 2015-03 were issued to reduce
complexity in the balance sheet presentation of debt issuance costs. ASU No. 2015-03 requires that debt issuance costs be presented
in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums.
The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this standard. Additionally,
in August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, or ASU No. 2015-15, as ASU No. 2015-03 did not
specifically address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU
No. 2015-15 allows an entity to continue to defer and present debt issuance costs ratably over the term of the line-of-credit
arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance in ASU
No. 2015-03 and ASU No. 2015-15 is effective for financial statements issued for fiscal years beginning after December 15, 2015,
and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously
issued. The Company adopted this standard at January 1, 2016, as required by the guidance. In accordance with the guidance, $2,890,282
of unamortized debt issuance costs, associated with the Company’s debt, were reclassified from other assets, as previously
reported on the Consolidated Balance Sheet as of December 31, 2015, to convertible notes. Debt issuance costs in excess of the
note principal in the amount of $646,975 were reclassified from other assets, as previously reported on the Consolidated Balance
Sheet as of December 31, 2015, to accumulated deficit due to the retrospective application of the accounting change. The table
below summarizes the impact of the retrospective application described above on financial information previously reported on the
Company’s Form 10-K for the annual period ended December 31, 2015:
|
|
Original
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
Statement for of Operations for the Year Ended 12/31/15:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense – financing cost
|
|
$
|
—
|
|
|
$
|
(646,975
|
)
|
|
$
|
(646,975
|
)
|
Total other income (expense), net
|
|
|
18,215,015
|
|
|
|
(646,975
|
)
|
|
|
17,568,040
|
|
Income (loss) before provision for income taxes
|
|
|
16,533,004
|
|
|
|
(646,975
|
)
|
|
|
15,886,029
|
|
Net income (loss)
|
|
|
16,386,527
|
|
|
|
(646,975
|
)
|
|
|
15,739,552
|
|
Net income (loss) attributable to Company
|
|
|
13,254,268
|
|
|
|
(646,975
|
)
|
|
|
12,607,293
|
|
Net income (loss) attributable to common shareholders
|
|
|
13,009,764
|
|
|
|
(646,975
|
)
|
|
|
12,362,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per Share – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Net income (loss) per share – basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per Share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Net income (loss) per share – diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
In
July 2015, the FASB issued ASU-2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments of ASU
NO. 2015-11 were issued in an effort to change the measurement principle for inventory from the lower of cost or market to lower
of cost and the net realizable value. The guidance in ASU NO. 2015-11 is effective for periods beginning after December 15, 2016.
Early adoption is permitted. The Company is currently evaluating the possible impact of ASU 2015-11, but does not anticipate that
it will have a material impact on the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance establishes the principles to report transparent
and economically neutral information about the assets and liabilities that arise from leases. The guidance is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The
Company is currently evaluating the possible impact of ASU 2016-02, but does not anticipate that it will have a material impact
on the Company’s consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-07 (Topic 323), Investments – Equity Method and Joint Ventures. The new guidance eliminates
the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership
interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively
on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.
The guidance is effective for fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently
evaluating the possible impact of ASU 2016-07, but does not anticipate that it will have a material impact on the Company’s
consolidated financial statements.
NOTE
5
|
FAIR
VALUE DISCLOSURES
|
Effective
July 1 2009, the Company adopted ASC 820,
Fair Value Measurements and Disclosures
. This topic defines fair value for certain
financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that
require or permit fair value measurements. The Company accounted for the convertible debentures in accordance with ASC 480,
Distinguishing
Liabilities from Equity
, as the conversion feature embedded in the convertible debentures could result in the note principal
and related accrued interest being converted to a variable number of the Company’s common shares.
Effective
July 1 2009, the Company adopted ASC 820-10-55-23A,
Scope Application to Certain Non-Financial Assets and Certain Non-Financial
Liabilities
, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes
a framework for measuring fair value, and expands disclosures about fair value measurements. In January 2010, the FASB issued
an update to ASC 820, which requires additional disclosures about inputs into valuation techniques, disclosures about significant
transfers into or out of Levels 1 and 2, and disaggregation of purchases, sales, issuances, and settlements in the Level 3 roll
forward disclosure. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three levels as follows:
Level
1
|
quoted
prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of
the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities
and exchange-based derivatives
|
|
|
Level
2
|
inputs
other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable
through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed
income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges
|
|
|
Level
3
|
unobservable
inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the
measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
|
The
fair value of certain of the embedded conversion liabilities was determined using the present value model calculating fair value
based on the conversion discount as well as the present value based on term and bond rate. During the three months ended March
31, 2015, following assumptions were used: (1) conversion discounts of 10%; (2) term of less than one year to 7 years and (3)
bond rate of 10%. Fluctuations in the conversion discount percentage have the greatest effect on the value of the conversion liabilities
valuations during each reporting period. During the three months ended March 31, 2016, the following assumptions were used: (1)
conversion discounts of 10%; (2) term of less than one year to 6 years and (3) bond rate of 10%. Fluctuations in the conversion
discount percentage have the greatest effect on the value of the conversion liabilities valuations during each reporting period.
As the conversion discount percentage increases for each of the related conversion liabilities instruments, the change in the
value of the conversion liabilities increases, therefore increasing the liabilities on the Company’s balance sheet. The
higher the conversion discount percentage, the higher the liability. A 10% change in the conversion discount percentage would
result in more than a $755,462 change in our Level 3 fair value.
The
fair value of embedded conversion feature of 320,000 shares of Series E Preferred Stock determined using a Black-Scholes Simulation.
This model requires the input of highly subjective assumptions, including the expected price volatility, which is based on the
historical volatility of a peer group of publicly traded companies. Changes in the subjective input assumptions can materially
affect the estimate of fair value of the warrants and the Company’s results of operations could be impacted.
The
following assumptions were used in calculations of the Black-Scholes model for the three months ended March 31, 2016 and 2015:
|
|
For the Three
Months Ended
March 31, 2016
|
|
|
For the Three
Months Ended
March 31, 2015
|
|
Annual dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected life (years)
|
|
|
1.00
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
0.65
|
%
|
|
|
-
|
%
|
Expected volatility
|
|
|
334
|
%
|
|
|
-
|
%
|
The
following table presents the embedded derivative, the Company’s only financial assets measured and recorded at fair value
on the Company’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy during
the three months ended March 31, 2016:
Embedded derivative liabilities as of March 31, 2016
|
|
|
|
|
Level 1
|
|
|
$
|
—
|
|
Level 2
|
|
|
|
—
|
|
Level 3
|
|
|
|
13,012,330
|
|
Total
|
|
|
$
|
13,012,330
|
|
The
following table reconciles, for the period ended March 31, 2016, the beginning and ending balances for financial instruments that
are recognized at fair value in the consolidated financial statements:
Balance of embedded derivative as of December 31, 2015
|
|
$
|
11,185,625
|
|
Additions related to embedded conversion features of convertible debt issued
|
|
|
—
|
|
Change in fair value of conversion features
|
|
|
2,082,507
|
|
Gain on extinguishment related to conversion features
|
|
|
(252,531
|
)
|
Reductions in fair value due to principal conversions
|
|
|
(3,271
|
)
|
Balance at December 31, 2015
|
|
$
|
13,012,330
|
|
Under
our agriculture segment, GreenShift maintains an inventory of equipment and components used in systems designed to extract corn
oil from licensed ethanol production facilities. The inventory, which consists of equipment and component parts, is held for sale
to GreenShift’s licensees on an as needed basis. Inventories are stated at the lower of cost or market, with cost being
determined by the specific identification method. Inventories at March 31, 2016 and December 31, 2015 were $455,000.
Under
our lifestyle segment, the Company’s inventory is stated at the lower of cost or estimated realizable value, with cost primarily
determined on a weighted-average cost basis on the first-in, first-out (“FIFO”) method. The Company continuously evaluates
the composition of its inventory, assessing slow-turning product. Estimated realizable value of inventory is determined based
on an analysis of historical sales trends of our individual products and a forecast of future demand, giving consideration to
the value of current orders in-house relating to the future sales of inventory. Estimates may differ from actual results due to
quantity, quality, and mix of products in inventory, customer demand, and market conditions. The Company’s historical estimates
of these costs and any provisions have not differed materially from actual results. As of March 31, 2016 and December 31, 2015,
inventory consisted of $171,086 and $154,688 in finished goods, $16,801and $7,515 in work in process, and $1,484 and $18,279 in
raw materials.
NOTE
7
|
GOODWILL
AND INTANGIBLE ASSETS
|
In
November 2013, the Company entered into a Distribution Agreement with E-motion Apparel, Inc., which designs women’s apparel
and accessories. The agreement grants Bitzio the exclusive worldwide right to distribute E-motion Apparel’s products using
the E-motion Apparel trademarks, copyrights and trade dress. The agreement also provides that Bitzio will make a five year non-interest-bearing
$75,000 working capital loan to E-motion Apparel, and will pay a license fee of $300,000 to E-motion Apparel. The Distribution
Agreement was replaced by the acquisition agreement on July 18, 2014.
On
July 16, 2014, the Company acquired 100% of the stock of Lexi Luu Designs, Inc. (“LL”), in exchange for 500,000,000
shares of Company common stock, plus a subordinate term note in the amount of $300,000 payable from LL on or before December 31,
2017, subject to compliance with applicable provisions of the Company’s senior loan agreements. We accounted for the transaction
as an equity purchase. $183,629 of the purchase price paid was allocated among the assets and liabilities and the difference was
allocated to intangible assets in the amount of $690,629. As of March 31, 2016 and December 31, 2015, the net carrying amount
is $100,284 and $186,376, respectively. The associated intangible asset is being amortized over a life of 2 years.
On
July 18, 2014, the Company acquired 100% of the stock of E-motion Apparel, Inc. (“EA”), in exchange for 350,000,000
shares of Company common stock, plus a subordinate term note in the amount of $300,000 payable from EA on or before December 31,
2017, subject to compliance with applicable provisions of the Company’s senior loan agreements. We accounted for the transaction
as an equity purchase. $26,235 of the purchase price paid was allocated among the assets and liabilities and the difference was
allocated to intangible assets in amount of $74,235. As of March 31, 2016 and December 31, 2015, the net carrying amount is $10,982
and $20,236. The associated intangible asset is being amortized over a life of 2 years.
Under
our agriculture segment, GreenShift accounts for its intangible assets pursuant to ASC 350-20-55-24, “
Intangibles –
Goodwill and Other”
. Under ASC 350, intangibles with definite lives continue to be amortized on a straight-line basis
over the lesser of their estimated useful lives or contractual terms. Intangibles with indefinite lives are evaluated at least
annually for impairment by comparing the asset’s estimated fair value with its carrying value, based on cash flow methodology.
Intangibles with definite lives are subject to impairment testing in the event of certain indicators. Impairment in the carrying
value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than
its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its
fair value.
The
Company’s intangible assets at March 31, 2016 and December 31, 2015, respectively, include the following:
|
|
3/31/2016
|
|
|
12/31/2015
|
|
License fees
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Patent
|
|
|
50,000
|
|
|
|
50,000
|
|
Website
|
|
|
45,076
|
|
|
|
45,076
|
|
Customer relation
|
|
|
764,864
|
|
|
|
764,864
|
|
Accumulated amortization
|
|
|
(881,498
|
)
|
|
|
(785,351
|
|
Intangible assets, net
|
|
$
|
128,442
|
|
|
$
|
224,589
|
|
Amortization
of intangible assets is computed using the straight-line method and is recognized over the estimated useful lives of the intangible
assets. Amortization of intangible assets was $95,346 and $94,298 for the three months ended March 31, 2016 and 2015, respectively.
Estimated amortization expense for future years is as follows:
2016
|
|
|
$
|
113,667
|
|
2017
|
|
|
|
3,202
|
|
2018
|
|
|
|
3,202
|
|
2019
|
|
|
|
3,202
|
|
2020
|
|
|
|
3,202
|
|
Thereafter
|
|
|
|
1,967
|
|
Total
|
|
|
$
|
128,442
|
|
NOTE
8
|
PROPERTY
AND EQUIPMENT
|
Depreciation
expense for the three months ended March 31, 2016 and 2015 was $833 and $2,725, respectively. Property, plant and equipment consisted
of the following:
|
|
3/31/16
|
|
|
12/31/15
|
|
Furniture and fixtures
|
|
$
|
1,404
|
|
|
$
|
1,404
|
|
Machinery and equipment
|
|
|
27,967
|
|
|
|
27,967
|
|
Computer equipment
|
|
|
1,504
|
|
|
|
1,504
|
|
Sub-total
|
|
|
30,875
|
|
|
|
30,875
|
|
Less accumulated depreciation
|
|
|
(8,285
|
)
|
|
|
(7,542
|
)
|
Total
|
|
$
|
22,500
|
|
|
$
|
23,333
|
|
The
following is a summary of the Company’s financing arrangements as of March 31, 2016:
|
|
3/31/2016
|
|
Current portion of long term debt:
|
|
|
|
|
Current portion of notes payable
|
|
|
410,129
|
|
Current portion of notes payable – related party
|
|
|
310,100
|
|
Note discounts
|
|
|
(36,762
|
)
|
Total current portion of long term debt
|
|
$
|
683,467
|
|
|
|
|
|
|
Current portion of convertible debt:
|
|
|
|
|
TCA Global Credit Master Fund, L.P., 11% interest, conversion at 85% of market
|
|
$
|
2,828,184
|
|
David Moran & Siobhan Hughes, 6% interest, conversion at 90% of market
|
|
|
2,399
|
|
Susan Schneider, 6% interest, conversions at 90% of market
|
|
|
10,510
|
|
TRK Management LLC, 6% interest, no conversion discount
|
|
|
100,000
|
|
Minority Interest Fund (II), LLC, 6% interest, conversion at 90% of market
|
|
|
1,489,283
|
|
Long Side Ventures, 6% interest, conversion at 90% of market
|
|
|
85,000
|
|
Related Party Debenture, 6% interest, no conversion discount
|
|
|
42,264
|
|
Abrams, 8% interest, no conversion discount
|
|
|
40,000
|
|
FLUX Carbon Starter Fund LLC, 6% interest, no conversion discount
|
|
|
255,000
|
|
Five Nine Group LLC, 6% interest, no conversion discount
|
|
|
250,000
|
|
Cantrell Winsness Technologies, LLC, 2% interest, conversion at 100% of market
|
|
|
125,000
|
|
Settlement Contingency Debentures
|
|
|
200,000
|
|
Note discount
|
|
|
(2,803,646
|
)
|
Total current portion of convertible debt
|
|
$
|
2,623,994
|
|
|
|
|
|
|
Long term convertible debt:
|
|
|
|
|
Gerova Asset Backed Holdings, LP, 2% interest, no conversion discount
|
|
$
|
175,000
|
|
Cantrell Winsness Technologies, LLC, 2% interest, conversion at 100% of market
|
|
|
200,000
|
|
Long Side Ventures, 6% interest, conversion at 90% of market
|
|
|
220,977
|
|
EXO Opportunity Fund, LLC, 6% interest, conversion at 90% of market
|
|
|
4,500,000
|
|
Note discount
|
|
|
(3,939,809
|
)
|
Total long term convertible debt
|
|
$
|
1,156,168
|
|
A
total of $10,523,617 in principal from the convertible debt noted above is convertible into the common stock of the Company. The
following chart is presented to assist the reader in analyzing the Company’s ability to fulfill its fixed debt service requirements
(net of note discounts) as of March 31, 2016 and the Company’s ability to meet such obligations:
Year
|
|
|
Amount
|
|
2016
|
|
|
$
|
6,022,869
|
|
2017
|
|
|
|
125,000
|
|
2018
|
|
|
|
5,095,977
|
|
2019
|
|
|
|
—
|
|
2020
|
|
|
|
—
|
|
Thereafter
|
|
|
|
—
|
|
Total
minimum payments due under current and long term obligations
|
|
|
$
|
11,243,846
|
|
TCA
CREDIT LINE
On
December 31, 2015, Bitzio and each of its subsidiaries entered into a Senior Secured Revolving Credit Facility Agreement (the
“Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”). Pursuant to the Credit Agreement,
TCA loaned $2,900,000 to Bitzio on December 31, 2015. The Credit Agreement contemplates that the lending limit may be increased
to $5,000,000, on Bitzio’s request and at TCA’s discretion, provided that amount of loans outstanding under the Credit
Agreement will be capped based upon lending ratios specified in the Credit Agreement. A total of $2,500,000 from the amount loaned
on December 31, 2015 was used by Bitzio to purchase the Series G shares from GreenShift, as described above (see Note 11, Shareholder’s
Equity, below).
The
$2.9 million loan made on December 31, 2015 is, and any future loan will be, reflected in a Senior Secured Revolving Convertible
Promissory Note (the “TCA Note”), which has a maturity date of December 31, 2016. The TCA Note bears interest at 11%
per annum. In the event of a default under the TCA Note or with the consent of Bitzio, TCA may convert portions of principal and
interest due under the TCA Note into shares of Bitzio common stock at a conversion price equal to 85% of the lowest daily volume
weighted average price of Bitzio common stock during the five trading days preceding conversion; provided, however, that no conversion
is permitted that will result in the Note-holder becoming the beneficial owner of more than 4.99% of Bitzio’s outstanding
common stock. The Credit Agreement required that Bitzio pay an advisory fee to TCA in the amount of $3,200,000. Payment was made
on December 31, 2015 by the issuance of 320,000 shares of Series E Preferred Stock to TCA. To secure its obligations under the
Note and Credit Agreement, Bitzio pledged to TCA all of its assets, as did each of Bitzio’s subsidiaries. As of March 31,
2016, the balance of unamortized debt discount is $2,803,464. During three months ended March 31, 2016, the Company recorded amortization
of debt discount of $86,636. During Q1 2016, Bitzio paid down $71,816 in principal on TCA Note and $85,258 in interest. During
the same period Bitzio accrued $123,155 in interest and fees.
FACTOR
FUND DEBENTURE
On
August 5, 2014, the Company issued a $650,000 convertible debenture to 112359 Factor Fund LLC (“Factor Fund”) for
$325,000 in cash, paid between August 2014 and May 2015. The debenture carried interest at 8% per annum, and converted into Company
common stock at a conversion price equal to 100% of the average of the five (5) lowest closing market prices for the common stock
for the sixty trading days preceding conversion, but may not convert into a number of shares that would result in the holder owning
beneficially more than 9.99% of the Company’s outstanding shares. On February 26, 2015, Factor Fund assigned the balance
due under the foregoing debenture in two equal $325,000 portions to its members, Five Nine Group LLC (“Five Nine”)
and FLUX Carbon Starter Fund LLC (“FCSF”). On the same date, the Company additionally issued convertible debentures
with a principal balance of $534,888 to Factor Fund in exchange for debentures issued to Factor Fund in prior periods. The issued
amount was then assigned in two equal portions to Factor Fund’s members, Five Nine and FCSF. A total of $592,444 was due
as of February 26, 2015, to each Five Nine and FCSF as a result of the foregoing transactions. Of the amount assigned to FCSF,
$108,560 of principal plus $16,440 of interest was transferred to Long Side Ventures LLC (“LSV”). The holder of each
debenture may convert the principal and interest accrued on the A&R Debentures into common stock at a conversion price equal
to 100% of the average of the five (5) lowest closing market prices for the common stock for the sixty trading days preceding
conversion, but may not convert into a number of shares that would result in the holder owning beneficially more than 4.99% of
the Registrant’s outstanding shares. The Company accounted for the foregoing transfers as an extinguishment of debt and
recorded a loss on extinguishment of $938,489 during the three months ended March 31, 2015.
YA
GLOBAL INVESTMENTS, L.P.
On
December 31, 2015, YA Global Investments, LP (“YA Global”) and GreenShift entered into a Settlement Agreement pursuant
to which YAGI split its outstanding debt into two debentures, a $14,196,897 debenture and a $5,000,000 debenture; and then accepted,
in satisfaction of $14,196,897 of principal and interest accrued on debentures previously issued by GreenShift, a cash payment
of $2,000,000, and the execution of a participation agreement by GreenShift and its affiliates. The $5 million debenture was assigned
to EXO Opportunity Fund LLC (“EXO”) on the same date. The participation agreement provides that, for an indefinite
term, GreenShift and its subsidiaries will pay to YA Global an amount equal to 15% of all payments received by the Company from
any new licensees issued in connection with its intellectual properties, including any amounts awarded in the Company’s
pending and future infringement matters, net of any legal fees and expenses incurred in obtaining the settlement or award. The
balance due to YA Global, including all convertible debt, was paid and satisfied in full as a result of the foregoing transactions.
On
the same date, GreenShift deposited $400,000 in cash into escrow in anticipation of settling an additional $2,939,000 in principal
and interest due from GreenShift to various assignees of YAGI (“YAGI Assignees”). The relevant agreement provided
that the YAGI Assignees had until March 31, 2016, to accept their respective share of the settlement amount. As of March 31, 2016,
the Company paid a total of $379,574 to all but three of the YAGI Assignees, in settlement of about $2,914,000 in debt elimination,
and a gain on extinguishment of debt of $2,551,613.
The
terms of the $5 million debenture assigned to EXO and the $25,000 balance due to the YA Global assignees noted above are nearly
identical. Each debenture bears interest at 6% per annum, and each holder has the right, but not the obligation, to convert any
portion of the debenture into GreenShift’s common stock at a rate equal to 90% of the lowest daily volume weighted average
price of GreenShift’s common stock during the 20 consecutive trading days immediately preceding the conversion date. The
debentures mature on December 31, 2017. The debentures also contain a “buy-in” provision in regards to potential cash-settled
portion of any conversion.
GreenShift
accounted for the foregoing debentures in accordance with ASC 815,
Derivatives and Hedging
, as the conversion feature embedded
in each debenture could result in the note principal being converted to a variable number of GreenShift’s common shares.
GreenShift
determined the aggregate value of the YAGI Assignee debentures at December 31, 2015, to be $2,518,167 which represented the aggregate
face value of the debentures of $1,445,266 plus the present value of the conversion feature. During the three months ended March
31, 2016, GreenShift negotiated settlements with ten of the YAGI Assignee debentures which resulted in a $252,531 reduction of
the fair value of the conversion liability for the period. In addition, the value was reduced $3,271 due to conversions during
the period. The carrying value of the YAGI Assignee debentures was $14,341 as of March 31, 2016, including principal of $12,909
and the value of the conversion liability. The present value of the liability for the conversion feature has reached its estimated
settlement value of $1,432 as of March 31, 2016. Interest expense of $193 for these obligations was accrued for the three months
ended March 31, 2016.
The
Company is prohibited under its loan agreements from issuing common shares at prices lower than those afforded to EXO in the absence
of EXO’s prior consent. The EXO Debenture provides for adjustments to the conversion price to the extent that the Company
issues equity at a lower price in the future. As a result, in any such event, EXO would have the right to receive common shares
upon conversion of the EXO Debenture at rates equal to the relevant lower rates. A note discount of $5,000,000 and a derivative
liability of $7,484,632 were recorded at the time of the assignment. The Company accounted for the EXO Debenture in accordance
with 815-40,
Derivatives and Hedging
, as the conversion feature embedded in the EXO Debenture could result in the note
principal being converted to a variable number of the Company’s common shares. The balance of the EXO Debenture (net of
the $3,939,809 related note discount) was $560,191 at March 31, 2016. At March 31, 2016, the Company valued the conversion features
using a Black-Scholes model with a weighted probability calculation of the conversion price reset feature and the following assumptions:
dividend yield of zero, years to maturity of 1.75 years, discount rate of 0.14 percent, and annualized volatility of 323%. During
the three months ended March 31, 2016, the change in the fair value of the derivative resulted in an accounting loss of $3,450,457.
As of March 31, 2016, the fair value of the derivative liability was $10,186,626.
OTHER
DEBENTURES
As
of December 31, 2010, the Company had convertible debentures payable to Minority Interest Fund (II), LLC (“MIF”) in
an aggregate principal amount of $3,988,326 (the “MIF Debentures”). Effective October 1, 2015, MIF assigned $557,500
of its convertible debt to EXO (the “EXO Debenture”). As of December 31, 2015, MIF assigned $100,000 of its balance
to TRK Management LLC. During the three months ended March 31, 2016, $18,546 in principal was converted into common stock. As
of March 31, 2016, the balances of the TRK, and MIF Debentures were $100,000 and $1,489,283, respectively.
During
the year ended December 31, 2015, the Company issued a $400,000 convertible debt to Cantrell Winsness Technologies, LLC (“CWT”
and the “CWT Debenture”) in exchange for all amounts accrued under the technology agreement and CWT’s interest
in the Series F Preferred Stock. CWT shall have the right, but not the obligation, to convert any portion of the convertible debenture
into the Company’s common stock at $0.001 per share. The CWT Debenture matures December 31, 2018. During the three months
ended March 31, 2016, the Company paid CWT a total of $75,000. The balance of the CWT Debenture was $325,000 at March 31, 2016.
During
the year ended December 31, 2012, the Company incurred $175,000 in convertible debt to Gerova Asset Back Holdings, LP (“Gerova”
and the “Gerova Debenture”). Gerova shall have the right, but not the obligation, to convert any portion of the convertible
debenture into the Company’s common stock at a rate equal to 100% of the closing market price for the Company’s common
stock for the day preceding the conversion date. The Gerova Debenture matures December 31, 2018. Gerova delivered a release in
favor of the Company in respect of any and all amounts that may have been due under the Company’s former guaranty agreement
with Gerova. The balance of the Gerova Debenture was $175,000 at March 31, 2016. Interest expense of $873 for these obligations
was accrued for the three months ended March 31, 2016.
Effective
December 31, 2015, Minority Interest Fund (II), LLC assigned $100,000 of its convertible debt to TRK Management, LLC (“TRK”
and the “TRK Debenture”). TRK shall have the right, but not the obligation, to convert any portion of the accrued
interest into the Company’s common stock at 100% of the market price for the Company’s common stock at the time of
conversion. The balance of the TRK Debenture was $100,000 at March 31, 2016. Interest expense of $1,496 for these obligations
was accrued for the three months ended March 31, 2016.
NOTE
10
|
GUARANTY
AGREEMENT
|
On
December 31, 2015, Bitzio entered into a $2.9 million loan transaction with TCA Global Credit Master Fund, LP (“TCA”),
pursuant to which Bitzio drew $2.5 million for use in its acquisition of 100,000 shares of the Company’s Series G Preferred
Stock (see Note 11,
Shareholders’ Equity
, below). The TCA loan was made pursuant to a Senior Secured Revolving Credit
Facility Agreement (the “Credit Agreement”), under which TCA may lend to Bitzio up to $5.0 million. The Company and
each of its subsidiaries, as well as each of the other subsidiaries of Bitzio, has executed a Guaranty Agreement in favor of TCA
on December 31, 2015. FCC, the Company, and each of its subsidiaries, as well as each of the other subsidiaries of Bitzio, has
executed a Guaranty Agreement dated December 31, 2015, in favor of TCA, pursuant to which the Company and its subsidiaries guaranteed
payment of all amounts due to TCA under the Credit Agreement. By separate agreements, the Company and each subsidiary pledged
all of its assets to secure the guaranty to TCA.
NOTE
11
|
STOCKHOLDERS’
EQUITY
|
PREFERRED
STOCK
The
Company is authorized to issue 25,000,000 shares of preferred stock, of which 2,500,000 shares are designated as Series A Convertible
Preferred Stock, 1,000,000 shares are designated as Series B Convertible Preferred Stock, 999 shares are designated as Series
C Preferred Stock, 520,000 shares of Series E Preferred Stock, and 800,000 shares of Series F Preferred Stock, par value of $0.001.
SERIES
B PREFERRED STOCK
As
of the three months ended March 31, 2016 and 2015, there were 0 and 1,000,000 shares of Series B Preferred Stock issued and outstanding.
Each holder of the Series B Shares will participate in any dividend payable to the holders of the common stock on an as-converted
basis. The holders of the Series B Shares have voting rights equivalent to the number of shares of common stock into which the
Series B Shares are convertible, or 19.8% (in the aggregate) of the Company’s common stock outstanding after the conversion,
measured on the date of conversion. In the event of liquidation, following the sale or disposition of all or substantially all
of the Company’s assets, holders of Series B Shares shall be entitled to receive $1.50 per preferred share. The Series B
Shares are also redeemable at the rate of $1.50 per share. On November 18, 2013 the Company sold 500,000 shares of Series B Preferred
Stock to 112359 Factor Fund, LLC (“Factor Fund”) for a total of $250,000. During the year ended December 31, 2014,
Factor Fund purchased 500,000 additional shares of Series B Preferred Stock for $250,000. In February 2015, Factor Fund assigned
its interest in the Series B Shares to its former members, FLUX Carbon Starter Fund LLC (“FCSF”) and Five Nine Group
LLC (“59G”). FCSF and 59G later surrendered their respective interests in the Series B Shares on December 31, 2015
(see Note 9,
Debt Obligations
, above).
SERIES
C PREFERRED STOCK
As
of December 31, 2014 there were 999 shares of Series C Preferred Stock issued and outstanding. Holders of the Series C Shares
will not participate in any dividend payable to the holders of the common stock, but have voting rights equivalent to the product
obtained by dividing (a) the number of votes that the holders of all voting securities other than Series C Shares outstanding
on the record date for the stockholder action are entitled to cast by (b) nine hundred ninety-eight (998), with the result that
all 999 shares of Series C Shares together will have 50.1% of the voting power of the Company. In the event of liquidation, following
the sale or disposition of all or substantially all of the Company’s assets, holders of Series B Shares shall be entitled
to receive $0.01 per preferred share. The Series C Shares were deemed to have been automatically redeemed as of November 29, 2015,
for no additional consideration.
SERIES
E PREFERRED STOCK
On
December 31, 2015, the Company filed with the Nevada Secretary of State a Certificate of Designation designating 520,000 shares
of preferred stock as Series E Preferred Stock. Each outstanding share of Series E Preferred Stock will have a preference on liquidation
of Ten Dollars ($10). The holder of a share of Series E Preferred Stock will have the right to convert the Ten Dollar value of
the share into common stock at a conversion price equal to 85% of the average closing bid price for Bitzio common stock during
the five trading days preceding conversion, except that no conversion is permitted that will result in the holder becoming the
beneficial owner of more than 4.99% of Bitzio’s outstanding common stock. Holders of Series E Preferred Stock have no voting
rights by reason of those shares, nor do they have any right to participate in any dividends paid by Bitzio. On December 31, 2015,
the Company issued EXO Opportunity Fund LLC (“EXO”) 200,000 shares of Series E Preferred Stock in exchange for beneficial
rights to 187,029 shares of GreenShift Series D Preferred Stock as part of the transactions related to the GreenShift merger.
On December 31, 2015 the Company issued TCA Global Credit Master Fund, LP, for advisory fees, 320,000 shares of Series E Preferred
Stock with a stated value at $3,200,000, for which the underlying conversion feature was valued as a derivative liability at a
value greater than this amount of $3,435,737, with the excess treated as preferred dividends. The discount on this redeemable
preferred stock of approximately $3.2 million will be amortized using the interest method through December 31, 2016, the earliest
redemption date. In the event that TCA does not realize net proceeds from the sale of these Series E preferred shares or the common
shares upon conversion of the preferred shares (the “Advisory Fee shares”) equal to the $3,200,000 fee value by the
maturity date of the credit facility, these Advisory fee shares will become subject to mandatory redemption by TCA. TCA may convert
portions of principal and interest due under the TCA Note into shares of Bitzio common stock at a conversion price equal to 85%
of the lowest daily volume weighted average price of Bitzio common stock during the five trading days preceding conversion provided,
however, that no conversion is permitted that will result in the Note-holder becoming the beneficial owner of more than 4.99%
of Bitzio’s outstanding common stock.
The
$2.9 million loan made on December 31, 2015 is, and any future loan will be, reflected in a Senior Secured Revolving Convertible
Promissory Note (the “TCA Note”), which has a maturity date of December 31, 2016. The TCA Note bears interest at 11%
per annum. The Credit Agreement required that Bitzio pay an advisory fee to TCA in the amount of $3,200,000. Payment was made
on December 31, 2015 by the issuance of 320,000 shares of Series E Preferred Stock to TCA. On December 31, 2015, the Company filed
with the Nevada Secretary of State a Certificate of Designation designating 520,000 shares of preferred stock as Series E Preferred
Stock. Each outstanding share of Series E Preferred Stock will have a preference on liquidation of Ten Dollars ($10). The holder
of a share of Series E Preferred Stock will have the right to convert the Ten Dollar value of the share into common stock at a
conversion price equal to 85% of the average closing bid price for Bitzio common stock during the five trading days preceding
conversion, except that no conversion is permitted that will result in the holder becoming the beneficial owner of more than 4.99%
of Bitzio’s outstanding common stock. Holders of Series E Preferred Stock have no voting rights by reason of those shares,
nor do they have any right to participate in any dividends paid by Bitzio. On December 31, 2015, the Company issued EXO Opportunity
Fund LLC (“EXO”) 200,000 shares of Series E Preferred Stock in exchange for beneficial rights to 187,029 shares of
GreenShift Series D Preferred Stock. On December 31, 2015 the Company issued TCA Global Credit Master Fund, LP, 320,000 shares
of Series E Preferred Stock with a stated value at $3,200,000, for which the underlying conversion feature was valued as a derivative
liability at a value greater that this amount of $3,435,737 with the excess treated as preferred dividends. The discount on this
redeemable preferred stock of approximately $3.2 million will be amortized through December 31, 2016, the earliest redemption
date. A Preferred Dividend of $235,737 was immediately recognized at the time of the transaction. To secure its obligations under
the Note and Credit Agreement, Bitzio pledged to TCA all of its assets, as did each of Bitzio’s subsidiaries. The agreements
with TCA provide TCA with the right to seek redemption of its Series E shares by the Company in the event of default. In the event
of a default under the TCA Note or with the consent of Bitzio, TCA may convert portions of principal and interest due under the
TCA Note into shares of Bitzio common stock at a conversion price equal to 85% of the lowest daily volume weighted average price
of Bitzio common stock during the five trading days preceding conversion; provided, however, that no conversion is permitted that
will result in the Note-holder becoming the beneficial owner of more than 4.99% of Bitzio’s outstanding common stock.
The
fair value of the embedded conversion features of 320,000 shares of Series E Preferred Stock was determined using a Black-Scholes
Simulation. This model requires the input of highly subjective assumptions, including the expected price volatility, which is
based on the historical volatility of a peer group of publicly traded companies. Changes in the subjective input assumptions can
materially affect the estimate of fair value of the warrants and the Company’s results of operations could be impacted.
The
following assumptions were used in calculations of the Black Scholes model for the three months ended March 31, 2016 and 2015:
|
|
For the Three
Months Ended
March 31, 2016
|
|
|
For the Three
Months Ended
March 31, 2015
|
|
Annual dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected life (years)
|
|
|
0.75
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
0.59
|
%
|
|
|
-
|
%
|
Expected volatility
|
|
|
162
|
%
|
|
|
-
|
%
|
SERIES
F PREFERRED STOCK
On
December 31, 2015, the Company filed with the Nevada Secretary of State a Certificate of Designation designating 800,000 shares
of preferred stock as Series F Preferred Stock. Each outstanding share of Series F Preferred Stock may be converted by the holder
into shares of Bitzio common stock. The conversion ratio is such that the full 800,000 Series F shares convert into common shares
representing 80% of the fully diluted common shares outstanding after the conversion (which includes all common shares outstanding
plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder). The holder
of Series F shares may cast the number of votes at a shareholders meeting or by written consent that equals the number of common
shares into which the Series F shares are convertible on the record date for the shareholder action. In the event the Board of
Directors declares a dividend payable to Bitzio common shareholders, the holders of Series F shares will receive the dividend
that would be payable if the Series F shares were converted into Bitzio common shares prior to the dividend. In the event of a
liquidation of Bitzio, the holders of 800,000 Series F shares will receive a preferential distribution equal to 80% of the net
assets available for distribution to the shareholders.
COMMON
STOCK
During
the three months ended March 31, 2016, the Company issued 300,000,000 common shares for salaries. During the three months ended
March 31, 2015, the Company issued 1,351,750,001 shares upon conversion of $114,106 in debt payable, and cancelled 157,500,000
shares for 175,500 shares of preferred stock series D. During the three months ended March 31, 2016 and 2015, an additional 625,000
and 19,375,000 shares common stock to be issued for services provided in amounts of $63 and $1,938, respectively, were included
in additional paid in capital in the financial statements. During the three months ended March 31, 2016 and 2015, the Company
agreed to issue a third party 1,800,000 and 1,800,000 shares of common stock for service rendered in amount of $9,000 and $9,000
and accrued 4,375,000 and 51,875,000 shares of common stock based on employment agreement in amount of $313 and $22,875 As of
March 31, 2016 and December 31, 2015, the Company recorded common stock to be issued of $183,251 and $204,188, representing 30,220,812
and 327,795,812 shares of common stock issuable for services, which is included in additional paid in capital.
NOTE
12
|
COMMITMENTS
AND CONTINGENCIES
|
INFRINGEMENT
On
October 13, 2009, the U.S. Patent and Trademark Office (“PTO”) issued U.S. Patent No. 7,601,858, titled “Method
of Processing Ethanol Byproducts and Related Subsystems” (the ’858 Patent) to GS CleanTech Corporation, a wholly-owned
subsidiary of GreenShift Corporation. On October 27, 2009, the PTO issued U.S. Patent No. 7,608,729, titled “Method of Freeing
the Bound Oil Present in Whole Stillage and Thin Stillage” (the ’729 Patent) to GS CleanTech. Both the ’858
Patent and the ’729 Patent relate to the Company’s corn oil extraction technologies. GS CleanTech Corporation, our
wholly-owned subsidiary, subsequently filed legal actions in multiple jurisdictions alleging infringement by various persons and
entities. Multiple additional related suits and countersuits were filed. On May 6, 2010, we submitted a “Motion to Transfer
Pursuant to 28 U.S.C. § 1407 for Consolidated Pretrial Proceedings” to the United States Judicial Panel on Multidistrict
Litigation (the “Panel”) located in Washington, D.C. In this motion, we moved the Panel to transfer and consolidate
all pending suits involving infringement of our patents to one federal court for orderly and efficient review of all pre-trial
matters. On August 6, 2010, the Panel ordered the consolidation and transfer of all pending suits in the U.S. District Court,
Southern District of Indiana for pretrial proceedings (the “MDL Case”). In October 2014, the District Court in Indiana
ruled in favor of the defendants in our pending patent infringement matter on their motions for summary judgment alleging that
our corn oil extraction patents were invalid, including US Pat. Nos. 7,601,858 and 8,168,037. The summary judgment ruling is not
a final judgment. We disagree with the court’s ruling and intend to mount a vigorous appeal at the appropriate time. In
addition, a trial on the Defendants’ claims of inequitable conduct in connection with several of the asserted patents was
conducted in October, 2015. We are awaiting a decision from the Court, which we expect to issue in 2016.
OTHER
MATTERS
The
Company is party to an action entitled Max v. GS AgriFuels Corp., et al. in the Supreme Court, New York County, in which the plaintiffs
are asserting claims to money damages against the Company and other defendants, arising from a series of Share Purchase Agreements
dated March 6, 2007, under which the individual plaintiffs sold their shares in Sustainable Systems, Inc., to GS AgriFuels Corporation,
a former subsidiary of the Company. In their Amended Complaint, plaintiffs asserted claims for breach of contract, fraud and negligent
misrepresentation, and sought money damages in the amount of $6 million. On March 19, 2013, the Court granted in part the defendants’
motion to dismiss the Amended Complaint, and dismissed all but the breach of contract claims asserted against the Company and
certain other corporate defendants. On April 1, 2015, the Company entered into a settlement agreement pursuant to which the plaintiffs
are to receive $25,000 in cash and a convertible debenture in the amount of $300,000. In the event that the plaintiffs have not
converted the debenture in full at the expiration of three years, the plaintiffs may request the remaining amount be paid in full
at that time. While the settlement agreement has not yet been implemented by the payment of the specified cash and the issuance
of the specified debenture, the action has been marked “disposed” by the court.
On
September 10, 2012, Long Side Ventures commenced an action entitled Long Side Ventures and Sunny Isles Ventures, LLC, LLC v. GreenShift
et. al., in the United States District Court for the Southern District of New York, alleging breach of contract and other causes
of action for which the plaintiff seeks damages of about $250,000 plus costs. On February 24, 2015, the Company entered into a
settlement agreement pursuant to which the plaintiff is to receive $150,000 in cash and securities in the amount of $250,000.
The Company accrued the entire $400,000 judgment on its books as of the year ended December 31, 2014. During the six months ended
June 30, 2014, the Company issued a debenture to Long Side Ventures in the amount of $250,000 (see Note 9,
Debt Obligations
,
above). The Company has already paid the $150,000 due in cash under the settlement agreement. Nevertheless, there is a current
dispute with the plaintiffs as to whether the Company and the other defendants have performed their obligations under the settlement
agreement, and whether the plaintiffs have the right to declare a default under the settlement agreement. The Company has taken
the position that it has fully performed and intends to vigorously contest any alleged default. Upon the performance of the terms
of the Settlement Agreement, the Action will be dismissed against the Company and the other defendants.
On
October 10, 2013, Golden Technology Management, LLC, and other plaintiffs commenced an action entitled Golden Technology Management,
LLC, et al. v. NextGen Acquisition, Inc. et al. in the Supreme Court of the State of New York, County of New York, alleging breach
of contract and other causes of action against the Company in connection with the acquisition of NextGen Fuel, Inc. by a former
subsidiary. Plaintiffs seek damages in excess of $5,200,000 plus prejudgment interest and costs. On December 22, 2014, the court
granted summary judgment as to the former subsidiary’s liability for payment of the sum of $3.2 million, plus prejudgment
interest and costs. The plaintiffs’ have asserted a claim for alter ego liability for that amount against the Company and
the other defendants. The litigation is proceeding and the Company intends to vigorously defend this action. At this stage of
the proceedings, we cannot evaluate the likelihood of an unfavorable outcome in excess of the amounts previously accrued.
Effective
as of December 31, 2015, the Company entered into a series of agreements providing for contingent participation payments involving
use of the Company’s extraction technologies. Collectively, these agreements resulted in an aggregate of $26,720,059 in
debt extinguishment for amounts that had been due, payable and accrued as of December 31, 2015, as well as a reduction in the
Company’s continuing costs of sales, legal expenses and interest expense moving forward. First, the Company and YA Global
Investments, L.P. (“YA Global”) entered into an agreement pursuant to which the Company agreed to pay 15% of all payments
received by the Company from any new licensees issued in connection with its intellectual properties, including any amounts awarded
in the Company’s pending and future infringement matters, net of any legal fees and expenses incurred in obtaining the settlement
or award (see Note 9,
Debt Obligations
, above). Next, Cantor Colburn LLP (“Cantor”) and the Company entered
into an amended agreement pursuant to which Cantor agreed to accept 15% of any recoveries from the Company’s pending patent
litigation in excess of $3.6 million per year in exchange for all services rendered to date and moving forward. The Company recognized
an $8,433,388 gain on extinguishment of debt upon the write-off of all accrued legal fees. T Finally, CWT and the Company entered
into an amended agreement pursuant to which CWT agreed to accept 20% of the Company’s net cash receipts deriving from use
of the Company’s extraction technologies, after payment in full of all litigation costs and expenses (including attorneys’
fees and expenses). Under the amended CWT agreement, no amount shall accrue or be due and payable to CWT until the earlier to
occur of the date on which all such litigation costs and expenses have been paid on a current basis, the date on which the Company
has successfully appealed the October 2014 summary judgment ruling in the Company’s pending infringement litigation, and
all applicable appeal periods in connection therewith have expired, or the date on which the Company has entered into new license
agreements corresponding to an additional $1,000,000 in annualized revenue.
On
December 31, 2015, Bitzio entered into a $2.9 million loan transaction with TCA Global Credit Master Fund, LP (“TCA”),
pursuant to which Bitzio drew $2.5 million for use in its acquisition of 100,000 shares of the Company’s Series G Preferred
Stock (see Note 11,
Shareholders’ Equity
, above). The TCA loan was made pursuant to a Senior Secured Revolving Credit
Facility Agreement (the “Credit Agreement”), under which TCA may lend to Bitzio up to $5.0 million. The Company and
each of its subsidiaries, as well as each of the other subsidiaries of Bitzio, has executed a Guaranty Agreement in favor of TCA
on December 31, 2015. FCC, the Company, and each of its subsidiaries, as well as each of the other subsidiaries of Bitzio, has
executed a Guaranty Agreement dated December 31, 2015, in favor of TCA, pursuant to which the Company and its subsidiaries guaranteed
payment of all amounts due to TCA under the Credit Agreement. By separate agreements, the Company and each subsidiary pledged
all of its assets to secure the guaranty to TCA.
The
Company is also involved in various collection matters for which vendors are seeking payment for services rendered and goods provided.
The Company and its subsidiaries are party to numerous matters pertaining to outstanding amounts alleged to be due. Management
is unable to characterize or evaluate the probability of any outcome at this time.
Under
the Company’s insurance programs, coverage is obtained for catastrophic exposures, as well as those risks required to be
insured by law or contract. There is a $2,500 deductible per occurrence for environmental impairments. Environmental liability
insurance is carried with policy limits of $1,000,000 per occurrence and $2,000,000 aggregate.
The
Company is party to an employment agreement with Kevin Kreisler, the Company’s Chairman and Chief Executive Officer, which
agreement includes terms for reimbursement of expenses, periodic bonuses, four weeks’ vacation and participation in any
employee benefits provided to all employees of GreenShift Corporation.
The
Company’s Articles of Incorporation provide that the Company shall indemnify its officers, directors, employees and agents
to the full extent permitted by Delaware law. The Company’s Bylaws include provisions to indemnify its officers and directors
and other persons against expenses (including attorney’s fees, judgments, fines and amounts paid for settlement) incurred
in connection with actions or proceedings brought against them by reason of their serving or having served as officers, directors
or in other capacities. The Company does not, however, indemnify them in actions in which it is determined that they have not
acted in good faith or have acted unlawfully. The Company is further subject to various indemnification agreements with various
parties pursuant to which the Company has agreed to indemnify and hold such parties harmless from and against expenses and costs
incurred (including attorney’s fees, judgments, fines and amounts paid for settlement) in connection with the provision
by such parties of certain financial accommodations to the Company. Such parties indemnified by the Company include YA Global
Investments, L.P., YA Corn Oil Systems, LLC, Viridis Capital LLC, Minority Interest Fund (II) LLC, Acutus Capital LLC, and various
family members of the Company’s chairman that have provided the Company with cash investments.
NOTE
13
|
RELATED
PARTY TRANSACTIONS
|
Minority
Interest Fund (II), LLC (“MIF”) is party to certain convertible debentures issued by the Company (see Note 9,
Debt
Obligations
, above). The managing member of MIF is a relative of the Company’s chairman. On December 31, 2015, MIF and
Acutus Capital LLC (“AC”) assigned their respective beneficial ownership interests in the Series D Shares to EXO Opportunity
Fund LLC (“EXO”) (see Note 11,
Shareholders’ Equity
, above). EXO, in turn, assigned the corresponding
beneficial interests to Bitzio in exchange for 200,000 shares of Bitzio Series E Preferred Stock. On the same date, FLUX Carbon
Corporation (“FCC”), an entity owned by Kevin Kreisler, the Company’s chairman, transferred its ownership interest
in Viridis Capital LLC (“Viridis”) to Bitzio. As a result of the foregoing transactions, on December 31, 2015, Bitzio
was the beneficial owner of 862,500 Series D Shares, as well as AC’s 2011 contractual right to receive an additional 124,875
Series D Shares, all of which was exchanged for 700,000 shares of the Company’s Series G Preferred Stock. The Company filed
a Certificate of Elimination for its Series D Preferred Stock after completing that transfer. On December 31, 2015, Bitzio entered
into a $2.9 million loan transaction with TCA Global Credit Master Fund, LP (“TCA”), pursuant to which Bitzio drew
$2.5 million for use in its acquisition of 100,000 shares of the Company’s Series G Preferred Stock (see Note 11,
Shareholders’
Equity
, above). FCC, the Company, and each of its subsidiaries, as well as each of the other subsidiaries of Bitzio, executed
a Guaranty Agreement in favor of TCA on December 31, 2015, pursuant to which the Company and its subsidiaries guaranteed payment
of all amounts due to TCA under the Credit Agreement (see Note 10,
Guaranty Agreement
, above). As a result of all of the
foregoing transactions, since December 31, 2015, FCC has been the beneficial owner of 80% of Bitzio’s equity, and Bitzio
has been the beneficial owner of 80% of GreenShift’s equity. Bitzio develops and commercializes clean technologies that
facilitate the more efficient use of natural resources, and is focused on doing so primarily in three sectors: agriculture, energy
and lifestyle. Kevin Kreisler, the Company’s chairman and chief executive officer, was appointed to the posts of chairman
and chief executive officer upon completion of the foregoing transactions.
During
the year ended December 31, 2015, the Company issued a $400,000 convertible debt to Cantrell Winsness Technologies, LLC (“CWT”
and the “CWT Debenture”) in exchange for all amounts accrued under the TAA and CWT’s interest in the Series
F Preferred Stock. CWT shall have the right, but not the obligation, to convert any portion of the convertible debenture into
the Company’s common stock at $0.001 per share. The CWT Debenture matures December 31, 2018. CWT delivered a release in
favor of the Company in respect of any and all amounts that may have been due under the Company’s Amended and Restated Technology
Acquisition Agreement with CWT. The balance of the CWT Debenture was $325,000 at March 31, 2016.
During
the year ended December 31, 2015, and further to the Company’s stated diversification plans, the Company invested in the
development of technologies and businesses that are strategically-relevant to the Company’s existing operations. The Company’s
wholly-owned subsidiary, GS CleanTech Corporation, is the owner of 100% of the issued and outstanding membership units of Genarex
LLC (“GX”), an entity that in turn holds 36.75% of the issued and outstanding membership units of Genarex FD LLC (“LLC”).
LLC was formed in 2015 for the purpose of continuing the development and commercialization of an intellectual property portfolio
involving production of carbon-neutral alternatives for fossil fuel derived products (“Bioproducts Portfolio”), which
had previously been developed by GX in concert with various third parties. Under the associated agreements, an unaffiliated member
of LLC has agreed to provide LLC up to $3 million to fund the continuing development of the Bioproducts Portfolio. As of December
31, 2015, the Company extended and had about $72,000 in receivables due from GFD, which amount has since been paid.
As
of the three months ended March 31, 2016, GreenShift had loaned about $30,000 to Plaid Canary Corporation (“PCC”),
for use in the development of agricultural technology; about $200,000 to FLUX Carbon Mitigation Fund LLC (“FCMF”),
for use in the development of energy technology and businesses; and about $403,000 to Bitzio, Inc. (“Bitzio”), for
use in the development of lifestyle technology and businesses. The Company additionally incurred about $233,000 in research and
development costs involving its efforts with PCC and agricultural technology. FLUX Carbon Corporation (“FCC”) is the
beneficial owner of an 80% equity interest in Bitzio, and of the majority of the stock of the companies which own PCC and FCMF.
FCC is owned by Kevin Kreisler, our chairman and chief executive officer.
NOTE
14
|
SEGMENT
INFORMATION
|
We
determined our reporting units in accordance with ASC 280, “
Segment Reporting
” (“ASC 280”). We
evaluate a reporting unit by first identifying its operating segments under ASC 280. We then evaluate each operating segment to
determine if it includes one or more components that constitute a business. If there are components within an operating segment
that meet the definition of a business, we evaluate those components to determine if they must be aggregated into one or more
reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, we determine
if the segments are economically similar and, if so, the operating segments are aggregated.
The
Company’s operations during the three months ended March 31, 2016 and 2015 are classified into two reportable business segments:
Lifestyle and Agriculture. Each of these segments is organized based upon the nature of products and services offered. Summarized
financial information about each segment is provided below:
Three Months Ended March 31, 2016
|
|
Corporate
|
|
|
Lifestyle
|
|
|
Agriculture
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
713,111
|
|
|
$
|
236,862
|
|
|
$
|
5,317,726
|
|
|
$
|
6,267,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
55,563
|
|
|
$
|
894,239
|
|
|
$
|
949,802
|
|
Costs of sales
|
|
|
—
|
|
|
|
34,684
|
|
|
|
71,701
|
|
|
|
106,385
|
|
Depreciation/amortization expense
|
|
|
833
|
|
|
|
—
|
|
|
|
801
|
|
|
|
1,634
|
|
Operating expenses - other
|
|
|
714,894
|
|
|
|
43,790
|
|
|
|
365,142
|
|
|
|
1,123,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
2,551,613
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,551,613
|
|
Amortization of note discount
|
|
|
(646,827
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(646,827
|
)
|
Interest expense
|
|
|
(260,127
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(260,127
|
)
|
Change in fair value of derivatives
|
|
|
(1,829,976
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,829,976
|
)
|
Foreign currency transaction loss
|
|
|
(7,806
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,806
|
)
|
Equity loss from investee
|
|
|
—
|
|
|
|
—
|
|
|
|
(140,479
|
)
|
|
|
(140,479
|
)
|
Other expense
|
|
|
(75,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(75,000
|
)
|
Income (loss) before taxes
|
|
|
(983,850
|
)
|
|
|
(22,911
|
)
|
|
|
316,116
|
|
|
|
(690,645
|
)
|
Taxes
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
(2,510
|
)
|
|
|
(2,520
|
)
|
Net income (loss)
|
|
$
|
(983,860
|
)
|
|
$
|
(22,911
|
)
|
|
$
|
313,606
|
|
|
$
|
(693,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,589,950
|
|
|
$
|
545,478
|
|
|
$
|
1,147,427
|
|
|
$
|
3,282,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
125,449
|
|
|
$
|
912,804
|
|
|
$
|
1,038,253
|
|
Costs of sales
|
|
|
—
|
|
|
|
63,519
|
|
|
|
277,663
|
|
|
|
341,182
|
|
Depreciation/amortization expense
|
|
|
2,725
|
|
|
|
—
|
|
|
|
801
|
|
|
|
3,526
|
|
Operating expenses - other
|
|
|
638,898
|
|
|
|
110,387
|
|
|
|
1,180,073
|
|
|
|
1,929,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives
|
|
|
2,820,002
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,820,002
|
|
Foreign currency transaction gain
|
|
|
19,992
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,992
|
|
Interest expense
|
|
|
(618,530
|
)
|
|
|
—
|
|
|
|
(348,260
|
)
|
|
|
(966,790
|
)
|
Gain (loss) on extinguishment of debt
|
|
|
(931,434
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(931,434
|
)
|
Income (loss) before taxes
|
|
|
648,407
|
|
|
|
(48,457
|
)
|
|
|
(893,993
|
)
|
|
|
(294,043
|
)
|
Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
648,407
|
|
|
$
|
(48,457
|
)
|
|
$
|
(893,993
|
)
|
|
$
|
(294,043
|
)
|
During
the three months ended March 31, 2016, for our agriculture segment, four customers each provided over 10% of our revenue and 48%
of total revenue in the aggregate; during the three months ended March 31, 2015, four customers each provided over 10% of our
revenue, including two customers that accounted for more than 50% of sales.
NOTE
15
|
INVESTMENT
IN JOINT VENTURE UNDER THE EQUITY METHOD
|
The
Company’s wholly-owned subsidiary, GS CleanTech Corporation, is the owner of 100% of the issued and outstanding membership
units of Genarex LLC (“GX”), an entity that in turn holds 36.75% of the issued and outstanding membership units of
Genarex FD LLC (“LLC”). LLC was formed in 2015 for the purpose of continuing the development and commercialization
of an intellectual property portfolio involving production of carbon-neutral alternatives for fossil fuel derived products (“Bioproducts
Portfolio”), which had previously been developed by GX in concert with various third parties. ASC 810 requires the Company
to evaluate non-consolidated entities periodically and as circumstances change to determine if an implied controlling interest
exists. The Company has evaluated this equity investment and concluded that LLC is a variable interest entity and the Company
is not the primary beneficiary. LLC’s fiscal year end is December 31. Under the associated agreements, an unaffiliated member
of LLC has agreed to provide LLC up to $3 million to fund the continuing development of the Bioproducts Portfolio. The members
also assigned their respective interests in the Bioproducts Portfolio to LLC. GX’s contribution was valued at $4 million,
however, the relevant agreements provide for GX to receive a preferential distribution until it receives approximately $3 million,
at which point GX’s interest will decrease from 36.75% to 24.50%. The Company engaged two separate third party valuation
firms, the first to complete a fairness opinion in respect of the foregoing, and the second to perform a valuation of GX’s
interest in LLC using the fair value method as defined by FASB ASC 805-10-20. Under this method, fair value is defined as “the
price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at
the measurement date.” Using the income approach, the valuation company used the discounted cash flow method to develop
low, mid and high cash projections for LLC’s potential business model by estimating the expected cash flows derived from
production of LLC’s products on a commercial scale. As of March 31, 2016, the Company had funded $1,150,335 towards operations
and research and development of LLC, of which $1,028,860 has been reimbursed under the relevant joint venture agreements. The
following presents unaudited summary financial information for LLC. Such summary financial information has been provided herein
based upon the individual significance of this unconsolidated equity investment to the consolidated financial information of the
Company. The investment balance carried on the Company’s balance sheet amounts to $3,219,876 as of March 31, 2016. The Company’s
share of the net loss from LLC for the three months ended March 31, 2016 was $140,479.
SUMMARIZED
FINANCIAL DATA FOR LLC (unaudited):
|
|
3/31/2016
|
|
Current assets
|
|
$
|
2,188
|
|
Intangible assets, net
|
|
|
3,476,190
|
|
Current liabilities
|
|
|
170,391
|
|
Members’ equity
|
|
|
3,009,900
|
|
|
|
Three Months
Ended
3/31/2016
|
|
Net sales
|
|
$
|
--
|
|
|
|
|
|
|
Operating expenses
|
|
|
239,399
|
|
Amortization expense
|
|
|
142,857
|
|
Net (loss)
|
|
|
(382,256
|
)
|
NOTE
16
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
The
following is a summary of supplemental disclosures of cash flow information for the three months ended March 31, 2016 and 2015:
|
|
3/31/2016
|
|
|
3/31/2015
|
|
Cash paid for the following:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
--
|
|
|
$
|
--
|
|
Total interest paid in cash
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities::
|
|
|
|
|
|
|
|
|
Debentures converted into common stock
|
|
$
|
30,332
|
|
|
$
|
1,480,070
|
|
Reduction in value of conversion features of convertible debt from conversions
|
|
|
3,271
|
|
|
|
15,793
|
|
Accretion of preferred stock dividends
|
|
|
16,382
|
|
|
|
--
|
|
Debt discount on convertible notes payable
|
|
|
--
|
|
|
|
150,000
|
|
Common stock converted to preferred stock
|
|
|
--
|
|
|
|
157,500
|
|
The
Company has restated its results for the three months ended March 31, 2015, to correct erroneously capitalized share-based payments
to our former CFO and CEO related to the business combination between Bitzio Inc., Lexi Luu Designs and E-motion Apparel (see
Note 18,
Acquisitions,
below), and combine common stock to be issued in the amount of $131,376 into additional paid in
capital. The table below summarizes the impact of the restatement described above on financial information previously reported
on the Company’s Form 10-Q for the period ended March 31, 2015:
|
|
Original
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet for Three Months Ended 3/31/15:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense
|
|
$
|
456,203
|
|
|
$
|
(416,628
|
)
|
|
$
|
39,575
|
|
Total current assets
|
|
|
708,266
|
|
|
|
(416,628
|
)
|
|
|
291,638
|
|
Total assets
|
|
|
1,504,481
|
|
|
|
(416,628
|
)
|
|
|
1,379,491
|
|
Additional paid in capital
|
|
|
18368,569
|
|
|
|
(285,252
|
)
|
|
|
18,083,317
|
|
Stock to be issued
|
|
|
131,376
|
|
|
|
(131,376
|
)
|
|
|
--
|
|
Total stockholders’ deficit, Bitzio
|
|
|
(3,019,231
|
)
|
|
|
(416,628
|
)
|
|
|
(3,435,859
|
)
|
Total stockholders’ deficit
|
|
|
(3,028,100
|
)
|
|
|
(416,628
|
)
|
|
|
(3,444,728
|
)
|
Total liabilities and stockholders’ deficit
|
|
|
1,504,481
|
|
|
|
(416,628
|
)
|
|
|
1,087,853
|
|
On
July 16, 2014, we entered into a sales purchase agreement to acquire 100% of the outstanding shares of Lexi Luu Designs, Inc.
(“LL”). Bitzio paid 500,000,000 restricted common shares for this acquisition. 300,000,000 shares valued $0.0014,
the market price of the Company’s stock on the day of acquisition, or $420,000, was the consideration given. The other 200,000,000
shares were recorded as compensation for the continuing employment for Mr. Blanchette and will be expensed over the service period
of 20 months. The value of the shares will be amortized over the service period of approximately 20 months. LL shareholders are
able to earn an additional $300,000 in restricted common shares over the course of three years in an earn-out upon hitting certain
revenue benchmarks. The Company recorded an earn-out contingent liability of $87,000 as part of the acquisition. We accounted
for the transaction as a business combination. Of the purchase price paid as of July 16, 2014 ($183,629) was allocated among the
assets and liabilities and the difference was assigned to intangible assets. As of March 31, 2016 and December 31, 2015, the revenue
of LL was below the earn-out revenue benchmark, we wrote off $0 and $27,000 in contingent liability, respectively. Per ASC 805-10-50-4,
if the acquirer is a public entity, if comparative financial statements are presented, the revenues and earnings of the combined
entity for the current reporting period as though the acquisition date as of the beginning of the annual reporting period.
The
following table summarizes our consolidated results of operations for the year ended December 31, 2014, as well as unaudited pro
forma consolidated results of operations as though the Lexi Luu Designs and E-motion Apparel acquisitions had occurred on January
1, 2014:
|
|
As Reported 12/31/14
|
|
|
Pro Forma 12/31/14
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
394,511
|
|
|
$
|
767,310
|
|
Net income (loss)
|
|
|
(1,187,360
|
)
|
|
|
(1,174,919
|
)
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The
unaudited pro forma information set forth above is for informational purposes only. The pro forma information should not be considered
indicative of actual results that would have been achieved if the Lexi Luu Designs and E-motion Apparel acquisitions had occurred
on January 1, 2014.
On
July 18, 2014, we entered into a sales purchase agreement to acquire 100% of the outstanding shares of E-motion Apparel, Inc.
(“EA”). Bitzio paid 350,000,000 restricted commons shares for this acquisition. All 350,000,000 shares were recorded
as compensation for the continuing employment for Ms. Brassington and Ms. Cunningham and will be expensed over the service period
of 20 months. E-motion Apparel shareholders are able to earn an additional $300,000 in restricted common shares over the course
of years in an earn-out upon hitting certain revenue benchmarks. The Company recorded an earn-out contingent liability of $48,000
as part of the acquisition. We accounted for the transaction as a business combination. Of the purchase price paid as of July
18, 2014 ($26,235) was allocated among the assets and liabilities and the difference was assigned to intangible assets. This License
Agreement between Bitzio and E-motion Apparel was cancelled on July 18, 2014 and was replaced with the sales purchase agreement.
As of March 31, 2016 and December 31, 2015, as the revenue of EA was below the earn-out revenue benchmark, we wrote off $0 and
$33,000 in contingent liability, respectively.
The
total purchase price for the LL acquisition was allocated as follows:
Assets
|
|
|
|
|
Cash
|
|
$
|
170
|
|
Accounts receivable
|
|
|
794
|
|
Inventories
|
|
|
64,883
|
|
Property and equipment
|
|
|
2,724
|
|
Other assets
|
|
|
19,503
|
|
Intangible assets-Customer relationships
|
|
|
690,629
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(256,030
|
)
|
Due to shareholder
|
|
|
(15,673
|
)
|
Earn-out contingent liability
|
|
|
(87,000
|
)
|
Net assets acquired
|
|
$
|
420,000
|
|
The
total purchase price for the EA acquisition was allocated as follows:
Assets
|
|
|
|
|
Inventories
|
|
$
|
165,807
|
|
Other assets
|
|
|
5,050
|
|
Intangible assets-Customer relationships
|
|
|
74,235
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(197,092
|
)
|
Earn-out contingent liability
|
|
|
(48,000
|
)
|
Net assets acquired
|
|
$
|
-
|
|
The
customer relationships are being amortized over their estimated useful lives of 2 years.
NOTE
19
|
SUBSEQUENT
EVENTS
|
During
the three months ended June 30, 2016, the Company entered into two release agreements pursuant to which the Company and the associated
creditors agreed to fully satisfy $413,252 in obligations plus related accrued interest in exchange for $15,000 in cash and 200,000,000
shares of the Company’s common stock.