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GETG > SEC Filings for GETG > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for GREEN EARTH TECHNOLOGIES, INC

Form 10-Q for GREEN EARTH TECHNOLOGIES, INC


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

Special Note About Forward-Looking Statements

Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933,as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act".) These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview of our Business

We create, develop, market, sell and distribute an array of G-branded, environmentally-friendly, bio-based performance and cleaning products. Our products, including our G-OIL® and G-CLEAN® brands, are used primarily in the automotive aftermarket, and the outdoor power equipment, well service and marine markets. Our technology platform for manufacturing proprietary and innovative high performing "green" products is the end result of company created or sourced intellectual property. Our ultimate biodegradable "green-base" replaces traditional petroleum and chemical derived bases typically associated with motor oils and other lubricants as well as cleaning solutions without compromising performance or value. We believe our products deliver comparable or superior performance at competitive prices, thus giving consumers the ability to "do their part" in protecting the environment without paying more.

We sell the majority of our products directly to retailers and installers as well as through master distribution agreements with wholesalers and contractual arrangements with independent sales and marketing professionals. Our products are available at a number of national retail outlets and chain stores including Walmart, The Home Depot, Menards, ACE Hardware and Canadian Tire Corporation. We are actively pursuing relationships with other wholesalers and retailers to include additional major national consumer purchase locations in the household goods, automotive aftermarket, outdoor power equipment market, oil and gas market and marine market. Manufactured domestically under supply and requirement contracts, our proprietary environmentally preferred base oils are comprised of fatty acids procured from either plant and vegetable oils or animal fats.

We believe there are very few "green" lubricant products available at retailers for consumers who are willing to "do their part" and those products that purport to be "green" are not "green", too expensive or are not effective. Our goal since 2007 has been to provide a superior green product at prices comparable to traditional products within the same category designation and to validate the proposition that by eliminating price and performance discrepancies, consumers will usually go "green". We trademarked the phrase "SAVE THE EARTH - SACRIFICE NOTHING®", meaning that consumers and customers alike should not have to give up value or performance when choosing to go "green". We believe we succeeded in validating this proposition as we have gained and maintained distribution at some of the United States largest retailers.


Results of Operations
(All dollar amounts referred to herein are in thousands, except as otherwise
indicated.)

Three Months Ended September 30, 2013 and 2012

Our activities for the three months September 30, 2013 and 2012 essentially
included capital origination, product development, manufacturing, marketing and
sales of our bio-degradable performance and cleaning products and development of
mass market product distribution networks for the intended distribution of our
products.

Our results of operations are as follows:

                                        Three Months Ended
                                          September 30,
                                          2013         2012

Net sales                               $  1,140     $  2,081
Loss from operations                    $ (1,322 )   $ (1,845 )
Change in revaluation of derivatives         587        1,455
Interest expense, net                     (1,090 )       (238 )
Net loss                                $ (1,825 )   $   (628 )

Net Sales

Net sales for the three months ended September 30, 2013 were $1,140, primarily attributed to sales of G-OIL® outdoor power equipment 4-cycle engine oils and G-CLEAN® pressure washing products. Net sales for the three months ended September 30, 2012 were $2,081, primarily attributed to sales of G-CLEAN® oil and gas well service products, G-OIL® outdoor power equipment 4-cycle engine oils, G-OIL® 5W-30 motor oil and G-CLEAN® pressure washing products. The decrease in net sales from 2012 to 2013 is due to prior year sales of G-CLEAN® oil and gas well service products compared to no sales for the months ended September 30, 2013.

For the three months ended September 30, 2013, approximately 80% of our sales were from two customers, TTI (The Home Depot) and Menards. For the three months ended September 30, 2012, approximately 90% of our sales were from four customers, entities owned or controlled by Francesco Galesi ("Galesi Entities"), TTI, Menards, Inc, and Walmart.

Net sales are comprised as follows:

                                  Three Months Ended September 30,
                                    2013                     2012
Performance products (oils)   $            732         $            776
Cleaning products             $            408         $          1,305
Total                         $          1,140         $          2,081


Cost of Sales (exclusive of depreciation and amortization)

Cost of sales (exclusive of depreciation and amortization) primarily consists of the cost of obtaining bio solvents, plant oils, additives, packaging components and fees paid to our affiliates for the costs of bottling and blending our products. Cost of sales (exclusive of depreciation and amortization) for the three months ended September 30, 2013 and 2012 were $1,132, and $1,763, respectively. The decrease in cost of sales from 2013 to 2012 is primarily due to the decrease in net sales.

We will continue to evaluate other opportunities to improve gross margins on our existing product line. We intend to further increase profitability of our product base through various measures which may include changing product formulations, reducing components cost by increasing volume and reducing expenses by improving operations.

        Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and
benefits, product development and testing fees, advertising and marketing
expenses, public relations, insurance and fees for professional
services. Selling, general and administrative expenses include the following:


                                                               Three Months Ended September 30,
                                                                   2013                2012
Salaries                                                       $        208         $       246
Selling, marketing, public relations and related                        323                 949
Development, product release and testing                                 82                 141
Management and operating fees                                           129                 229
Legal and professional                                                  128                 164
Occupancy, communications and all other, net                            128                 135
Total selling, general and administrative expenses             $        998         $     1,864

The decrease in salaries is due to the employee's agreement to reduce their salary in exchange for restricted stock and a decrease in headcount. The decrease in selling, marketing and public relations expenses is due to decreased sponsorship fees, advertising spending and promotional spending. The decrease in development, product release and testing is due to a reduction of third party testing. The decrease in management and operating fees is due to lower shipping fees.

Stock-based compensation

Stock-based compensation expense for the three months ended September 30, 2013 and 2012 was approximately $281 and $247, respectively.

Depreciation and amortization

Depreciation and amortization expense totaled $51 and $52 for the three months ended September 30, 2013 and 2012, respectively. Depreciation charges totaled $4 and $5 for the three months ended September 30, 2013 and 2012, respectively, and amortization expense for intangible assets totaled $47 for the three months ended September 30, 2013 and 2012, respectively. Depreciation and amortization expense is excluded from cost of sales.


Change in revaluation of derivatives

The change in fair value of our derivative liabilities resulted in a favorable adjustment of $587 and $1,455 for three months ended September 30, 2013 and 2012, respectively. The value of the derivative liabilities was determined using the Black-Scholes method. See note 7 to our financial statements for inputs used to calculate the fair value of our derivatives liabilities.

Interest expense, net

Net interest expense for the three months ended September 30, 2013 and 2012 was approximately $1,090 and $238, respectively. Interest expense consists of $729 in connection with the amortization of the debt discount on our outstanding secured convertible debentures, $186 in connection with the cancellation of the commitment shares included in the Lincoln Park Capital agreement, $115 in connection with the accrued interest on the outstanding secured convertible debentures, $52 for accrued interest on notes payable to related parties and $8 in connection with the deferred financing costs relating to the outstanding secured convertible debentures. Interest income, which was not significant, consists of interest earned on bank deposits and an institutional money market fund.

Seasonality

Although our various product lines are sold on a year-round basis, the appearance chemicals and outdoor power equipment markets are inherently seasonal. Seasonality impacts liquidity in that we generally record the majority of our annual retail sales in the quarters ending March and June.

Liquidity and Capital Resources

At September 30, 2013 and June 30, 2013, we had $163 and $189 in cash and an accumulated deficit of $77,128 and $75,303, respectively. At September 30, 2013 and June 30, 2013, we had a working capital deficit of $12,741 and 12,110, respectively.

Net cash used in operating activities was $826 and $1,616 for the three months ended September 30, 2013 and 2012, respectively. The decrease from 2012 to 2013 was primarily due to the decrease in funding and sales which generated less cash to spend on operations.

Net cash provided by financing activities was $800 and $1,880 for the three months ended September 30, 2013 and 2012, respectively. The decrease in financing activities is primarily due to proceeds from the issuance of a note payable in the amount of $1,900 in 2012 compared to $800 in 2013. The net proceeds from our financing activities were used to support purchases from suppliers and advertising costs.

We currently have no material commitments for capital expenditures. Our capital requirements are not significant as the majority of our performance and cleaning products are outsourced to third party suppliers. In the foreseeable future, we will require capital for the growth of our business, including increases in personnel, sales and marketing, and purchasing finished goods to fulfill orders.

Losses from operations are continuing subsequent to September 30, 2013 and we anticipate that we will continue to generate losses from operations in the near future. Since inception, we have financed our operations by issuing securities (common stock and debt instruments) in various private placement transactions and from revenue generated by sales of our products.


Debentures and Warrants

We realized gross proceeds of $6,250 ($2,250 in December 2011 and $4,000 in October 2012) from the sale of our 6.0% Secured Convertible Debentures due December 31, 2014 in the aggregate original principal amount of $6,250 and warrants to purchase 18,382,000 shares of our common stock at any time on or before December 31, 2016 to eight accredited investors. In addition, in March 2013 we realized an additional $1,250 of gross proceeds from the sale of our 6.0% Secured Convertible Debentures, due March 31, 2016 in the aggregate original principal amount of $1,250 and warrants to purchase 3,677,000 shares of our common stock on or before March 31, 2018 to two accredited investors. (The $7,500 aggregate principal amount of 6.0% Secured Convertible Debentures due December 31, 2014 and March 31, 2016 are herein referred to collectively as the "Debentures"; and the warrants issued together with the Debentures to purchase an aggregate of 22,059,000 shares of our common stock are referred to herein as the "Warrants" and the eight accredited investors who purchased the Debentures and the Warrants are herein referred to as the "Investors"). Interest on the outstanding principal balance of the Debentures is payable quarterly in arrears in cash or shares of our common stock at our discretion. The Debentures and the accrued but unpaid interest thereon are due upon the earlier of (i) the occurrence of an "event of default" (as defined in the Debentures) and (ii) their respective maturity dates. The outstanding principal balance of the Debentures and all accrued but unpaid interest thereon may be converted at any time at the option of each Investor into shares of our common stock at a price of $0.17 per share (the "Conversion Price"). We may prepay the Debentures at any time without penalty upon ten business days prior written notice to the Investors provided there is, at that time, an effective registration statement covering the resale of the shares issuable upon conversion of the Debentures and exercise of the Warrants.

The Warrants have an exercise price is $0.21. The number of shares issuable upon exercise of the Warrants equals 50% of the number of shares issuable upon conversion of the Debentures.

The Debentures and Warrants also provide for weighted average anti-dilution protection in the event that any shares of our common stock, or securities convertible into shares of our common stock, are issued at less than the conversion or exercise price of the Debentures and Warrants, respectively, except in connection with the following issuances of our common stock, or securities convertible into shares of our common stock: (i) shares issuable under currently outstanding securities, including those authorized under stock plans, (ii) securities issuable upon the exchange or exercise of the Debenture or Warrants, or (iii) securities issued pursuant to acquisitions or strategic transactions.

Going Concern Consideration

Due to our limited amount of additional committed capital, recurring losses, negative cash flows from operations and our ability to pay outstanding liabilities, in their report for the fiscal year ended June 30, 2013, our independent auditors stated that there is substantial doubt about our ability to continue as a going concern. These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, assuming that we will continue as a going concern.

Since inception, we have incurred operating losses and negative cash flows from operations. As of September 30, 2013, we had an accumulated deficit of $77,128, with total stockholders' deficit of $14,867. We had a working capital deficit of $12,741 at September 30, 2013 and are currently in default of the related party notes payable disclosed in note 6. These notes matured on September 30, 2013 and June 30, 2013, respectively, and has not been extended and is payable upon demand.

We have undertaken, and will continue to implement, various measures to address our financial condition, including:

? Continue discussions with existing and potential new investors to invest in us.
? Seek debt, equity and other forms of financing, including funding through strategic partnerships.
? Attempt to increase revenues in order to reduce or eliminate our operating losses and enable us to meet our financial obligations. ? Reduce expenses to conserve cash. ? Defer certain marketing activities.
? Investigate and pursue transactions with third parties, including strategic transactions and relationships.

There can be no assurance that we will be able to secure the additional funding we need. If our efforts to do so are unsuccessful, we will be required to further reduce or eliminate our operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.


Contractual Arrangements

Significant contractual obligations as of September 30, 2013 are as follows:

                                                            Amount Due in
            Type of Obligation      Total Obligation       Less than 1 year
          Sponsorship Agreements   $            2,050     $              525
              Facility Lease       $               44     $               44

Off Balance Sheet Arrangements

We have no material off balance sheet arrangements that are likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.

Summary of Significant Accounting Policies and new Accounting Pronouncements

For the three months ended September 30, 2013, there have been no new significant accounting policies or accounting pronouncements from those disclosed in our Annual Report on Form 10-K for the year ended June 30, 2013.

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