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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
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ANNUAL REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
COMMISSION FILE NO.: 0-50469
GREENSHIFT CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 59-3764931
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(State of other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
One Penn Plaza, Suite 1612, New York, New York 10119
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(Address of principal executive offices) (Zip Code)
(212) 994-5374
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(Registrant's telephone number including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 406 of the Securities Act. Yes __ No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer Accelerated filer _
Non-accelerated filer Small reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes __ No X
State issuer's revenues for its most recent fiscal year: $23,616,662
The number of outstanding shares of common stock and value of the voting stock
held by non-affiliates of the Registrant as of April 14, 2009 were 245,560,894
and $859,463, respectively.
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Amendment No. 1
This Amendment No.1 on Form 10-K/A, which amends and restates items identified
below with respect to the Form 10-K, filed by GreenShift Corporation ("we" or
"the Company") with the Securities and Exchange Commission (the "SEC") on April
14, 2009 (the "Original Filing"), is being filed to in order to:
o Include restated financial statements, as described in Note 29 to the
financial statements;
o Amend Item 6 ("Management's Discussion") to conform to the restated
financial statements;
o Amend Item 8A ("Controls and Procedures") to reflect the modification
to management's assessment of its disclosure controls and procedures
caused by the restatement and to provide further disclosures;
o The following under Item 7, ("Management's Discussion") was modified
as follows due to the restatement:
o the paragraph titled Expenses Associated with Change in
Convertible Liabilities was added;
o the paragraph titled Gain Associated with Derivative Instruments
was deleted;
o the description of financing activities was updated;
o the breakdown of working capital deficit was updated;
o the Contractual Commitments table was updated.
o The following under Item 8, ("Financial Statements and Supplementary
Schedules") was modified as follows due to the restatement:
o Report of Independent Registered Public Accounting Firm was
updated to reflect restatement;
o Note 2, Going Concern was updated;
o Under Note 3, Significant Accounting Policies, the Financial
Instruments section was modified as well as the New Accounting
Pronouncements section;
o Note 11, Line of Credit was modified by moving a paragraph to
Note 16, Debt and Purchase Obligations;
o Under Note 16, Debt and Purchase Obligations, the sections
explain the Acutus Debenture and the MIF Debenture were modified
due to the restatement;
o Note 17, Embedded Derivatives was deleted;
o Note 21, Minority Interest was renamed Liability Due to
Shareholders and was modified; o Note 28, Subsequent Events was
updated;
o Note 29, Restatements was added to outline the changes that were
made to the financial statements.
None of the other disclosures in this Report have been amended or updated. For
updated information about GreenShift Corporation, please refer to the more
recent filings made with the SEC.
2
GREENSHIFT CORPORATION
ANNUAL REPORT ON FORM 10K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
Page No
Part I
Item 1 Business ......................................................................................5
Item 1A Risk Factors..................................................................................20
Item 2 Description of Properties.....................................................................30
Item 3 Legal Proceedings.............................................................................30
Item 4 Submission of Matters to a Vote of Security Holders ..........................................30
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchase of Equity Securities .....................................................31
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis..........................................................32
Item 8 Financial Statements and Supplementary Data...................................................40
Item 9 Changes and Disagreements with Accountants on Accounting and Financial Disclosure ............88
Item 9A Controls and Procedures ......................................................................88
Item 9B Other Information.............................................................................88
Part III
Item 10 Directors, Executive Officers and Corporate Governance ......................................89
Item 11 Executive Compensation .......................................................................91
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ..........................................................................91
Item 13 Certain Relationships and Related Transactions and Director Independence .....................92
Item 14 Principal Accountant Fees and Services .......................................................94
Part IV
Item 15 Exhibits and Financial Statement Schedules ...................................................95
Signatures ..............................................................................................96
3
PART I
Basis of Presentation
In this Annual Report on Form 10-K, the terms "we," "our," "us," "GreenShift,"
or the "Company" refer to GreenShift Corporation, and its subsidiaries on a
consolidated basis. The term "GreenShift Corporation" refers to GreenShift
Corporation on a stand alone basis only, and not its subsidiaries.
Market and Industry Data Forecasts
This document includes data and forecasts that the Company has prepared based,
in part, upon information obtained from industry publications. Third-party
industry publications generally state that the information contained therein has
been obtained from sources believed to be reliable, but do not guarantee the
accuracy and completeness of such information. In particular, we have based much
of our discussion of the biodiesel and ethanol industries, including government
regulation relevant to the industry, on information published by the National
Biodiesel Board, the national trade association for the U.S. biodiesel industry,
and the Renewable Fuels Association, the national trade association for the U.S.
corn ethanol industry. Each is a trade organization for their respective
industry and they may present information in a manner that is more favorable
than would be presented by an independent source. Forecasts in particular are
subject to a high risk of inaccuracy, especially forecasts projected over long
periods of time.
Forward Looking Statements
We make certain forward-looking statements in this Annual Report on Form 10-K
and in the documents that are incorporated herein by reference. These
forward-looking statements relate to our outlook or expectations for earnings,
revenues, expenses, asset quality or other future financial or business
performance, strategies or expectations, or the impact of legal, regulatory or
supervisory matters on our business, results of operations or financial
condition. Specifically, forward-looking statements may include statements
preceded by, followed by or that include the words "estimate," "plan,"
"project," "forecast," "intend," "expect," "anticipate," "believe," "seek,"
"target" or similar expressions. These statements reflect our management's
judgment based on currently available information and involve a number of risks
and uncertainties that could cause actual results to differ materially from
those in the forward-looking statements. Future performance cannot be ensured.
Actual results may differ materially from those in the forward-looking
statements. Some factors that could cause our actual results to differ include:
>> the volatility and uncertainty of commodity prices;
>> operational disruptions at our facilities;
>> the costs and business risks associated with developing new products and
entering new markets;
>> our ability to locate and integrate future acquisitions;
>> our ability to develop our corn oil extraction and biodiesel production
facilities;
>> the effects of other mergers and consolidations in the biofuels industry
and unexpected announcements or developments from others in the biofuels
industry; >> the impact of new, emerging and competing technologies on our
business;
>> the possibility of one or more of the markets in which we compete being
impacted by political, legal and regulatory changes or other external
factors over which they have no control, including changes in or
elimination of governmental laws, tariffs, trade or other controls or
enforcement practices; >> our reliance on key management personnel;
>> limitations and restrictions contained in the instruments and agreements
governing our indebtedness;
>> our ability to raise additional capital and secure additional financing;
>> our ability to implement additional financial and management controls,
reporting systems and procedures and comply with Section 404 of the
Sarbanes-Oxley Act, as amended; and
>> other risks referenced from time to time in our filings with the SEC and
those factors listed in this Form 10K under Item 1A, Risks Factors,
beginning on page 20.
You are cautioned not to place undue reliance on any forward-looking statements,
which speak only as of the date of this Form 10-K, or in the case of a document
incorporated by reference, as of the date of that document. Except as required
by law, we undertake no obligation to publicly update or release any revisions
to these forward-looking statements to reflect any events or circumstances after
the date of this Form 10-K or to reflect the occurrence of unanticipated events.
4
ITEM 1 BUSINESS
OVERVIEW
GreenShift Corporation ("we," "our," "us," "GreenShift," or the "Company")
develops and commercializes clean technologies that facilitate the efficient use
of natural resources.
We do this today by developing and using innovative technologies to produce
biofuel and other biomass-derived products. Our strategy is to use our
technologies to become a leading producer of biomass-derived products, and to do
so at enhanced cost and risk profiles by extracting and refining raw materials
that other producers cannot access or process.
We have created a business model based on feedstock ownership and margin
protection that is unique among biofuel producers and that positions us in
historic times at the intersection of the corn ethanol and biodiesel industries.
There are no other technologies that have been developed, commercialized and
integrated into the corn ethanol industry today that have produced anything
approaching the yield improvement and energy savings demonstrated by our
patent-pending corn oil extraction technologies; and, our biodiesel refining
technologies have been shown to convert our extracted corn oil into biodiesel of
higher quality than most of the biodiesel currently produced in the U.S.
Our corn oil extraction offering is structured to provide 100% of the capital
needed to build and integrate turn-key, skid-mounted facilities based on our
extraction technologies into corn ethanol facilities in return for the long-term
right to purchase the extracted oil for a fair price that is indexed to diesel
fuel prices. We refine the corn oil that we extract into biodiesel, which is
then sold at rates that are also indexed to diesel fuel prices. This makes our
business model more comparable to traditional oil and gas models than it is to
other biofuel models since we own our own `wellheads' and we have hedged our
refining margins. We believe that this gives us the ability to remain profitable
(after achieving break-even production levels) when most biodiesel producers are
forced to shut down.
Our corn oil extraction technologies are widely considered to be the quickest
path for margin improvement for corn ethanol producers today. We have proven
that we can extract upwards of 6.5 million gallons of corn oil per year for
every 100 million gallons of ethanol produced. This corresponds to a 7% increase
in the gallons of biofuel produced per bushel of corn from 2.8 to 3.0 gallons
per bushel.
This extraction rate also translates to 680 million gallons per year of inedible
feedstock that we can make for conversion into advanced biofuel with the U.S.
corn ethanol fleet producing 10.5 billion gallons per year. We hold a 6% share
of this market opportunity today; we are currently under contract to install
more than 40 million gallons per year of shovel-ready corn oil extraction
facilities at ethanol facilities throughout the U.S. This corresponds to
annualized revenue and operating income of about $92 million and $27 million,
respectively, at current market prices. Our primary goal is to obtain the new
financing we will need to build and operate the extraction and refining
infrastructure necessary to achieve these results.
We currently own four corn oil extraction facilities that are located in
Oshkosh, Wisconsin, Medina, New York, Marion, Indiana, and Riga, Michigan. We
have also installed one facility in Albion, Michigan under a modified version of
our market offering where our client paid us to build the extraction facility.
We have the long-term right (10 years or more) to buy the oil extracted from the
Albion facility but the client retains ownership of the extraction assets and is
paid a higher price for the corn oil extracted than we pay to our other clients.
These facilities collectively have a nameplate capacity in excess of 6.5 million
gallons per year of corn oil.
We also own a 10 million gallon per year biodiesel refinery located in Adrian,
Michigan and an oilseed crushing facility in Culbertson, Montana. Both of these
facilities are currently idled pending the completion of additional working
capital financing, which we hope to obtain as soon as possible. Until this
occurs, the oil that we produce from our installed extraction facilities will be
sold as a feedstock to third party renewable fuel producers.
We believe that we have a financeable business model based on our technology and
market positioning, and we are currently focused on securing the capital
resources we need to operate our existing facilities and to build our contracted
backlog of corn oil extraction facilities.
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INDUSTRY OVERVIEW
The primary driver of our growth will be the use of our technologies and
know-how to extract corn oil and other feedstocks out of the co-products and
wastes of traditional agriproducts and other qualified facilities. Our strategy
in this regard makes two different industries relevant to our business model
today:
>> The Biodiesel Production Industry We sell our corn oil to third parties for biodiesel production and we directly
refine the corn oil we extract into biodiesel.
>> The Corn Ethanol Production Industry We extract our corn oil from corn ethanol production facilities with our
patented and patent-pending corn oil extraction technology. We believe that the
current dynamics of this industry translate to high levels of demand for
participation in our corn oil extraction program.
The Biodiesel Production Industry
Introduction
Biodiesel is a clean burning natural fuel composed of mono-alkyl esters of long
chain fatty acids. It is derived from renewable resources such as animal fats,
vegetable oils, and waste restaurant grease. Biodiesel contains no petroleum,
but can be blended at any level with petroleum diesel to create biodiesel
blends. In general, to produce biodiesel, vegetable oil or animal fat is
catalyzed with methanol to produce methyl esters in a process called
transesterification. Properly processed biodiesel can be effectively used as a
substitute for petroleum-based diesel fuel, because the viscosity of biodiesel
is close to that of petroleum diesel.
Burning biodiesel instead of petroleum diesel fuel in a diesel engine will
reduce greenhouse gas emissions by more than 20%. The most common
biodiesel-diesel blend, B20, consists of 80% petroleum diesel and 20% biodiesel.
B20 can be distributed through conventional channels, dispensed from standard
diesel fuel pumps, and burned in standard diesel engines. While most biodiesel
consumed in the U.S. is B20, a blend of 5% biodiesel and 95% petroleum diesel
called B5 is also used in the U.S.
Factors Contributing to Biodiesel Demand
The chief markets in the U.S. for biodiesel are diesel blending facilities and
distributors and governmental and commercial fleets. According to the National
Biodiesel Board, U.S. biodiesel production was approximately 15,000,000 gallons
in 2002 and U.S. production has grown to an estimated 700,000,000 gallons in
2008. The growth of the biodiesel market has been predominantly driven by the
following factors:
>> Ready Integration. Biodiesel, either B100 or petroleum blends, can be
readily distributed and used in the traditional markets for diesel fuel
with no modifications. Blended biodiesel is preferable to pure petroleum
diesel because it has the ability to extend engine life and thus decrease
operating expenses.
>> Lack of Production Capacity. While the number of operable U.S. petroleum
refineries decreased from 319 in 1980 to 149 in 2007 according to the
Energy Information Administration ("EIA"), domestic demand increased 17.7%
over the same period. Transportation and stationary consumers in the U.S.
consume in excess of about 60 billion and 48 billion gallons per year of
standard diesel fuel based on 2006 volumes reported by the EIA.
>> Environmental Benefits. Biodiesel is biodegradable, nontoxic, and contains
only traces of sulfur and aromatics. Biodiesel reduces tailpipe exhaust
emissions, greenhouse gas emissions and sulfur dioxide emissions (acid
rain) and minimizes black smoke and smog-causing particulate matter.
>> Geopolitical Concerns. Biodiesel can be produced from locally available
feedstocks and contribute to the reduction of dependence on imported oil.
>> Government Incentives. Government incentives and mandates include tax
incentives to lower the effective cost of biodiesel in order to make it
more price competitive with petroleum diesel, use mandates to increase the
use of biodiesel, and investment incentives to encourage investments in
production and distribution capacity, as well as technology to promote end
use of biodiesel.
>> Tax Incentives. The primary incentive intended to lower the effective
cost of biodiesel is the Biodiesel Blenders Tax Credit, which is
included in the Volumetric Ethanol Excise Tax Credit created under the
American Jobs Creation Act of 2006. This incentive is currently was
renewed by the Obama Administration. This incentive generally provides
for a $0.50 excise tax credit per gallon of recycled feedstock
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biodiesel blended into petroleum diesel and a $1.00 excise tax credit
per gallon of virgin feedstock biodiesel, including biodiesel derived
from animal fats blended into petroleum diesel. The Energy
Independence and Security Act of 2007 established a renewable fuels
standard for biodiesel use in the United States of one billion gallons
by 2012. In addition to the federal Biodiesel Blenders Tax Credit,
various states also provide for tax credits, rebates, deductions or
reduced state, excise or other taxes for the blending or sale of
biodiesel within their states.
>> Use Mandates. The Energy Policy Act established the Renewable Fuels
Standard ("RFS") in 2005. The RFS eliminated the mandated use of
oxygenates in reformulated gasoline and mandated annual use of 7.5
billion gallons per year of renewable fuels in the U.S. fuel supply by
the year 2012. The Energy Independence and Security Act (the "2007
Act") was passed in December 2007 and increased the mandated minimum
level of use of renewable fuels in the RFS to 9.0 billion gallons per
year in 2008 (from 5.4 billion gallons under the RFS enacted in 2005),
further increasing to 36 billion gallons per year in 2022. The RFS
requires motor fuels sold in the U.S. to contain in the aggregate the
following minimum volumes of renewable fuels in future years:
Total Corn Cellulosic Unspecified
Year Requirement Ethanol Ethanol Biodiesel Advanced
----------------------------------------------------------------------------------------------------
2008 9.0 9.0 -- -- --
2009 11.1 10.5 -- 0.5 --
2010 13.0 12.0 0.1 0.7 --
2011 14.0 12.6 0.3 0.8 --
2012 15.2 13.2 0.5 1.0 0.5
2013 16.6 13.8 1.0 -- 1.8
2014 18.2 14.4 1.8 -- 2.0
2015 20.5 15.0 3.0 -- 2.5
2016 22.3 15.0 4.3 -- 3.0
2017 24.0 15.0 5.5 -- 3.5
2018 26.0 15.0 7.0 -- 4.0
2019 28.0 15.0 8.5 -- 4.5
2020 30.0 15.0 10.5 -- 4.5
2021 33.0 15.0 13.5 -- 4.5
2022 36.0 15.0 16.0 -- 5.0
In addition to the federal government, a number of states have
mandated state-owned vehicles to reduce petroleum diesel usage through
the use of biodiesel blends.
>> Investment Incentives. Many governments have also passed laws
encouraging investments to support production, distribution and use of
biodiesel and other renewable fuels. For example, through 2010,
fueling stations are eligible for a 30% federal tax credit for the
cost of installing clean-fuel refueling equipment, including any B20
or greater biodiesel blend.
To facilitate a more efficient market, biodiesel product quality is measured in
the U.S. by ASTM Standard D6751. This standard specifies the required properties
of B100 biodiesel for use as a blend component with petroleum diesel fuel oils,
as well as maximum amounts of free glycerin, total glycerin, water and sediment
content, sulfated ash, total sulfur, copper corrosivity, carbon residue and,
magnesium, calcium, sodium and phosphorous. The standard also specifies minimum
flash point and cetane number. Compliance with these standards requires a
process that provides for complete transesterification and efficient and
thorough separation and purification processes.
Factors Contributing to Biodiesel Supply
The largest single cost of biodiesel production is feedstock cost, which
typically accounts for about 80% of the conventional finished product cost. To
produce biodiesel profitably, producers must have a process that can efficiently
convert a broad array of feedstocks into high quality fuel at high yields.
Feedstocks for biodiesel production include vegetable oils and animal fats as
well as waste cooking oils and greases. According to U.S. Department of
Agricultural statistics, 32.7 billion pounds of conventionally available
feedstocks were produced in the U.S. in 2007, including 23.2 billion pounds of
vegetable oils, 6.9 billion pounds of edible and inedible tallow, pork and
poultry fat and 2.6 billion pounds of yellow and other greases. While these are
the most commonly available feedstocks in the U.S., most of the edible
feedstocks would be used for human and animal consumption and, depending on
market conditions, could not be used economically for biodiesel production.
GreenShift's business model involves the extraction of an inedible crude corn
oil that is not included in these statistics because it historically has been
locked in distillers grain. Our extraction technologies enable us to unlock
these corn oil supplies for our own use, to the exclusion of the rest of the
biodiesel market.
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The costs of the various feedstocks depend largely on whether the feedstock may
be used in the food market. Over the last 15 years, soybean oil, inedible tallow
and yellow grease have traded at about $1.67, $1.22 and $1.00 per gallon,
respectively. Recent increased demand for soybean oil has increased prices to
over $5.30 per gallon in June 2008, and tallow and yellow grease recently peaked
at $3.76 and $3.03 per gallon, respectively. For comparison, the highest price
paid for our extracted corn oil during 2008 was about $2.00 per gallon.
An important distinction as compared specifically to soybean oil and other
conventional biodiesel feedstocks is the fact that our extracted oil is not fit
for human consumption. Its removal from distillers grain actually enhances the
nutritional qualities of the distillers grain and the use of the grain in the
human food chain. Conversely, soybean oil is the most widely consumed vegetable
oil in the human food chain. The demand for conventional feedstocks in the food
product markets has negatively impacted the profitability and risk profile of
conventional biodiesel producers.
Production Technology and Economics
Biodiesel is produced through a process called transesterification.
Transesterification involves reacting organically-derived fats, oils and greases
with an alcohol, typically methanol, in the presence of a base catalyst,
typically sodium or potassium hydroxide, to form methyl esters (biodiesel) and
glycerin.
The traditional process typically requires feedstock with a free fatty acid
content of less than 2% because the presence of higher free fatty acid content
during the transesterification process can produce soap, which can prevent the
separation of the biodiesel from the glycerin resulting in yield losses and
higher production costs. For this reason, using high free fatty acid feedstocks
requires a pretreatment step, consisting of either a stripping process to remove
the free fatty acids or an acid esterification process to reduce the feedstock's
free fatty acids through a chemical reaction that uses acids, such as
hydrochloric acid, which are later removed after transesterification using a
water wash process.
The process then incorporates a settling or centrifugation process to separate
the biodiesel from the glycerin. The biodiesel and the glycerin mixture each
undergo a separate process to remove methanol and to produce a crude glycerin of
less than 90% purity. While the normal feedstock to biodiesel input-output ratio
is about eight pounds of feedstock for every one gallon of biodiesel produced,
the use of greater than 2% free fatty acid feedstocks in the traditional method
reduces the amount of biodiesel yield considerably due to the increased
generation of soaps and other co-products.
GreenShift's patent-pending biodiesel production technology intensifies and
idealizes the conditions under which biodiesel reactions occur and we are
consequently able to refine high quality product and maximize yields in minutes
instead of hours under true continuous flow conditions - at a much smaller
scales and at reduced capital and operating costs as compared to traditional
processes. These benefits translate to reduced financial, operational and market
risk.
To the extent that the cost for biodiesel production exceeds the price of
petroleum diesel, government incentives would be necessary to maintain a
commercially feasible market for the production of biodiesel. The loss of the
current $1.00 per gallon excise tax credit would devastate most biodiesel
producers. GreenShift is largely insulated from this; our extraction contracts
include a provision that reduces our corn oil purchase price in the event that
the tax credit is reduced or eliminated.
Competition
According to the National Biodiesel Board, the U.S. had an installed biodiesel
production capacity of approximately 2.2 billion gallons per year, of which only
about 30%, or about 700,000,000 gallons, was in operation as of December 2008.
The biodiesel production market is very dynamic and it is ultimately constrained
the lack of conventionally available sustainable feedstocks. The convergence of
agricultural commodity risks driven by demand in the food and fuels markets, the
impact of the rapid rise and precipitous fall of crude oil, and the collapse of
the worldwide financial markets during 2008 crippled many biodiesel producers.
These forces are not expected to conspire in favor of biodiesel producers
dependant on conventional feedstocks in the future.
GreenShift is entirely insulated from these market forces. We invested heavily
in the development of an intellectual property portfolio based on feedstock
ownership and margin protection. The history of the biodiesel industry has
proven that our strategy was correct and that our investment in intangible
assets to secure feedstock in lieu of physical production assets without
feedstock was justified. Most of the existing U.S. biodiesel fleet is offline
and the refineries that are operating are doing so with low and volatile margins
8
that yield low enterprise valuations. This environment is far more of an
opportunity to us than a threat; our intellectual properties, feedstock
ownership and hedged high margins position us to acquire qualified biodiesel
production assets on favorable terms, which minimizes the capital intensity of
our future construction efforts.
Our extraction technologies give us the ability to recover more than 6.5 million
gallons of corn oil per year for every 100 million gallons of ethanol produced.
This corresponds to 680 million gallons per year of a proprietary new biodiesel
feedstock at the capacity of the U.S. corn ethanol fleet (10.5 billion gallons
per year). This amount of feedstock could incredibly fill the entire existing
operating U.S. biodiesel complex.
The Ethanol Production Industry
Introduction
Ethanol is a clean-burning, high-octane fuel that is produced from the
fermentation of carbohydrates such as grains, starches and sugars. Ethanol is
produced primarily from corn in the U.S. It is used primarily as a gasoline
additive to increase octane rating and to comply with air emissions regulations
by reducing emissions of carbon monoxide and nitrogen oxide. According to the
RFA, ethanol is blended into more than 50% of the gasoline sold in the U.S.
Fuel blended with up to 10% ethanol, also referred to as E10 fuel, is approved
for use by major motor vehicle manufacturers and is often recommended as a
result of ethanol's clean burning characteristics. Ethanol comprises up to 85%
of E85 fuel, which currently represents a relatively small portion of the U.S.
gasoline supply. Approximately six million vehicles out of more than 200 million
vehicles in the United States today are Flexible Fuel Vehicles, or FFVs, capable
of using E85 fuel.
Factors Contributing to Ethanol Demand
Increased demand for ethanol can be expected to translate to increased demand
for our corn oil extraction technology. We believe the ethanol market will grow
as a result of many of the same factors discussed above in Factors Contributing
to Biodiesel Demand. The following additional factors are relevant to the demand
for ethanol:
>> Government Incentives. We expect the RFS mandate to drive ethanol demand
subject to the availability of corn for the foreseeable future. Other
factors include
>> Federal Blenders' Credit. First implemented in 1979, the federal
excise tax incentive program allows gasoline distributors who blend
ethanol with gasoline to receive a federal excise tax rate reduction
of $0.51 per gallon of ethanol. The $0.51 per gallon incentive for
ethanol is scheduled to be reduced to $0.46 per gallon in 2009 and to
expire in 2010.
>> Federal Clean Air Act. The use of ethanol as an oxygenate is driven,
in part, by environmental regulations. The federal Clean Air Act
requires the use of oxygenated gasoline during winter months in areas
with unhealthy levels of carbon monoxide.
>> Federal Tariff on Imported Ethanol. In 1980, Congress imposed a tariff
on foreign produced ethanol to encourage the development of a
domestic, corn-derived ethanol supply. This tariff was designed to
prevent the federal tax incentive from benefiting non-U.S. producers
of ethanol. The $0.54 per gallon tariff is scheduled to expire on
January 1, 2009. Ethanol imports from 24 countries in Central America
and the Caribbean Islands are exempt from the tariff under the
Caribbean Basin Initiative, which provides that specified nations may
export an aggregate of 7.0% of U.S. ethanol production per year into
the U.S., with additional exemptions from ethanol produced from
feedstock in the Caribbean region over the 7.0% limit. As a result of
new plants under development in the Caribbean region, we believe
imports from there will continue, subject to the limited nature of the
exemption.
>> State and Local Incentives. These incentives include tax credits,
producer payments, loans, grants, tax exemptions and other programs.
Midwestern states have initiated most of the programs and policies to
promote ethanol production and development.
>> State Legislation Banning or Significantly Limiting the Use of MTBE.
In recent years, due to environmental concerns, 25 states, including
California, Connecticut and New York, have banned, or significantly
limited, the use of MTBE. Ethanol has served as a replacement for much
of the discontinued MTBE volumes and is expected to continue to serve
as a primary replacement product in the future for MTBE volumes that
are removed from the fuel supply.
>> Environmental Benefits. Ethanol, as an oxygenate, reduces tailpipe
emissions when added to gasoline. The additional oxygen in the ethanol
results in a more complete combustion of the fuel in the engine cylinder,
resulting in reduced carbon monoxide and nitrogen oxide emissions. Prior
9
federal programs that mandated the use of oxygenated gasoline in areas with
high levels of air pollution spurred widespread use of ethanol in the
United States.
>> Blending Benefits. Ethanol has an octane rating of 113, and is added to
gasoline to raise the octane level of gasoline. Unblended gasoline
typically has a base octane level of approximately 84. Typical gasoline and
ethanol blends (up to E10) have octane ratings ranging from 87 to 93.
Higher octane gasoline has the benefit of reducing engine knocking.
Gasoline with higher octane typically has been sold at a higher price per
gallon than lower octane gasoline.
>> Expansion of Gasoline Supplies. By blending ethanol with gasoline, refiners
can expand the volume of fuel available for sale. As a result, refiners can
produce more fuel from a barrel of oil and expand their ability to meet
consumer demand, especially when refinery capacity and octane sources are
limited. According to the Energy Information Administration, between 1980
and 2005, petroleum refining capacity in the United States decreased
approximately 5% while domestic demand increased approximately 21%. We
believe that increased pressure on domestic fuel refining capacity will
result in greater demand for ethanol.
Factors Contributing to Ethanol Supply
Production in the ethanol industry remains fragmented. According to the RFA,
domestic ethanol production capacity increased from 1.7 billion gallons in 1997
to more than 9.0 billion gallons in 2008. As of March 2008, the top five
producers accounted for approximately 41% of the ethanol production capacity in
the U.S according to the RFA. The remaining production was generated by many
smaller producers and farmer-owned cooperatives.
Production Technology and Economics
Corn is the principal raw material used to produce ethanol and dry and wet
distillers grains. As a result, changes in the price of corn can materially
affect ethanol production economics. Rising corn prices result in higher cost of
ethanol and distillers grains. Because ethanol competes with non-corn-based
fuels, producers generally are unable to pass along increased corn costs to
their customers. At certain levels, corn prices or supplies may make ethanol
uneconomical to use in fuel markets.
The profitability of an ethanol producer depends principally on the spread
between ethanol and corn prices. The price of corn is influenced by weather
conditions and other factors affecting crop yields, farmer planting decisions
and general economic, market and regulatory factors. These factors include
government policies and subsidies with respect to agriculture and international
trade, and global and local demand and supply. The significance and relative
effect of these factors on the price of corn is difficult to predict. Any event
that tends to negatively affect the supply of corn, such as adverse weather or
crop disease, could increase corn prices. Increasing domestic ethanol capacity
could boost the demand for corn and result in increased corn prices. In 2008,
U.S. farmers produced 12.1 billion bushels of corn. Many analysts predict that
the U.S. ethanol fleet will get approximately 3.3 billion bushels and produce
about 9.1 billion gallons. While this amount is less than the 2009 RFS, the RFS
can be expected to be satisfied through a mixture of 2009 production, imports
and trading of residual 2007 and 2008 Renewable Identification Numbers ("RINs").
A sustained narrow spread or any further reduction in the spread between ethanol
and corn prices, whether as a result of sustained high or increased corn prices
or sustained low or decreased ethanol prices, would adversely affect the
financial position of a corn ethanol producer. Further, it is possible that
ethanol prices could decline below production costs, which could cause ethanol
producers to suspend production.
Competition in the Corn Ethanol Industry
Competitive forces in the ethanol industry impact the supply, demand and price
of corn, ethanol and distillers grain. These forces induce ethanol producers to
innovate methods to decrease their variable costs or to increase their sales as
compared to the average producer. Competition in the U.S. ethanol industry thus
helps to drive demand for our corn oil extraction technologies.
Corn ethanol facilities that participate in our extraction program have the
ability to reduce their utility consumption costs and carbon emissions while
increasing their profitability and overall plant energy balance - all for no
investment. This translates to improved utilization of corn purchases and
enhanced competitive positioning for our clients.
It is possible that the dynamics of the U.S. ethanol industry could cause one or
more of our clients to suspend operations before installation of our
technologies or even after in extreme cases. We have designed our market
10
offering to minimize the impact of these risks; our standard extraction
agreements include terms that allow us to remove our skid-mounted extraction
facilities for redeployment at another client facility. Demobilization and
redeployment at another site can be achieved in less than two months for
marginal additional cost.
Competing Extraction Providers
Corn oil extraction technology did not exist before us. Our extraction
technologies have been overwhelmingly accepted by corn ethanol producers and
while competition has surfaced in our wake, we are consistently found by
prospective clients to be the established technology leader, years ahead of
competing providers. There are good reasons for this: we have invested more than
$40 million in technology development, we have a four-year head start, and we
have a strong vested interest in extracting and refining the extracted oil at
the highest yield at the highest quality for the least energy and least cost to
the host ethanol facility.
While each of the competing extraction providers has copied our patent-pending
extraction technologies, they have done it poorly; their average yield is about
25% of our proven yield. The competing installations that we have seen also
increase the host ethanol facility's use of fossil fuel, thereby reducing the
net value of the oil that they are able to extract. Conversely, we reduce the
utility costs of our ethanol clients by about 10%.
Moreover, each entity is primarily focused on selling equipment - an activity
that we have no interest in. We recognized at the start that the corn ethanol
industry was subject to commodity risks that would eventually conspire to
restrict ethanol producer access to the capital resources needed to build
extraction facilities, and that this would in turn constrain use of our
extraction technology and limit value creation for our shareholders. Elimination
of this constraint required us to construct a business model that absorbed the
capital costs of installing our extraction technologies in our client's
facilities. We achieve this by retaining the long-term ownership of our
extraction facilities (to collateralize the debt used to build those assets) and
the extracted oil (to generate the recurring cash flows needed to service that
debt) at rates that are indexed at a discount to diesel and protected with
patents (to eliminate financing risk and to induce debt and equity providers to
invest).
We have a substantial investment in the development of this model and we have
filed many novel patent applications with anticipated issuances beginning in
2009. Issued patents can be expected to have significant negative consequences
for unauthorized use of our technologies by third parties.
Entry of Cellulosic Ethanol Technologies
A number of companies are actively commercializing technologies that utilize new
feedstocks in addition to corn and other grains. These cellulosic feedstocks
include wood, grasses, corn stover and municipal solid waste, are found in
abundance and present valuable opportunities to increase domestic ethanol
production. While facilities based on fully commercialized cellulosic ethanol
technologies would produce ethanol that would compete with corn ethanol, the RFS
mandates use of 100 million gallons of cellulosic ethanol in 2010 in addition to
the 12 billion gallons of corn ethanol mandated that year. This amount increases
to 16 billion gallons of cellulosic ethanol per year by 2022, for a total of 31
billion gallons of ethanol when combined with the 15 billion gallon maximum corn
ethanol production required by the RFS.
11
[GRAPHIC]
COMPETITIVE STRENGTHS
Feedstock Ownership About 30% of the mass of each kernel of corn accepted by
corn ethanol producers is converted into ethanol in a process known as
fermentation. The output of fermentation contains ethanol, water, protein, fiber
and corn oil. This mixture is distilled to boil off the ethanol for purification
in a molecular sieve, leaving the remainder of the mixture in the bottom of the
distillation stage. The distillation bottom, or the whole stillage, is
conventionally subjected to centrifugation and evaporation to remove water prior
to drying in a rotary dryer.
GreenShift's patent-pending extraction technologies intercept the flow of the
whole stillage at various points downstream of the distillation equipment and
before the rotary dryer. We condition the stillage, extract the oil, and return
the flow back to the ethanol producer for drying and grain production. The
extracted oil is then stored and shipped to our designated biodiesel refinery.
We designed our technologies to extract oil in a way that decreases the ethanol
facility's utility costs by upwards of 10%. All interconnections are
plug-and-play and our skid-mounted extraction facilities are capable of rapid
installation or demobilization.
Our extraction facilities are fully automated and are designed to integrate into
our client's computer control systems. We do not maintain any employees at our
extraction facilities. Instead, routine maintenance and ongoing operations are
handled by our clients in coordination with our staff, which has the ability to
troubleshoot and operate each of our facilities remotely.
We have demonstrated that our oil extraction yields exceed 6.5 gallons for every
100 gallons of ethanol produced. Our yields, however, will vary slightly from
one ethanol producer to the next and are primarily dependent on the design and
operational efficiency of our clients' facilities. Our extraction technologies
are robust and are designed to cost-effectively absorb these variances after
installation by optimizing performance to the conditions of each client.
We own four extraction facilities in Oshkosh, Wisconsin, Medina, New York,
Marion, Indiana, and Riga, Michigan. We have also installed one facility in
Albion, Michigan under a modified version of our program where the client paid
us to build the extraction facility. We have the long-term right (10 years or
more) to buy the oil extracted from the Albion facility but the client retains
ownership of the extraction assets and is paid a higher price for the corn oil
extracted than we pay to our other clients.
Our extraction capabilities translate to 680 million gallons per year of corn
oil extraction potential with the U.S. corn ethanol fleet producing 10.5 billion
gallons per year. We hold a 6% share of this market opportunity today. We are
currently under contract to extract more than 40 million gallons per year of
corn oil from ethanol facilities throughout the U.S. This corresponds to
annualized revenue and operating income generating capability of about $92
million and $27 million, respectively, with diesel fuel at $1.49 per gallon and
crude oil at about $45 per barrel. The 680 million gallon market opportunity
translates to $1.56 billion in GDP creation and annualized operating income of
$430 million at the same diesel and crude oil prices noted above. The scale of
this opportunity can be expected to increase to 858 million gallons of corn oil,
$1.98 billion in GDP creation and $543 million per year in EBITDA at the maximum
production rate mandated by the RFS (15 billion gallons by 2015).
We created this opportunity and we believe that we can achieve substantial
increased market share with our intellectual properties and by obtaining the
financing we need to build as many extraction facilities as possible.
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Significant Demand for Our Corn Oil Extraction Technology
Unprecedented volatility in the commodity markets during 2008 increased the
strain on the liquidity of ethanol producers as conventional hedging strategies
and a rapid precipitous drop in commodity prices caused many producers to burn
cash and either scale-back or suspend production. Most industry analysts are
forecasting tight ethanol production margins for the balance of 2009 and 2010
and it is possible that more producers will suspend production.
While corn and ethanol prices have historically traded independently of one
another, recently increased demand for ethanol caused corn prices to closely
track ethanol prices. Industry-wide production decreased to match corn supplies
as inventories shifted from a surplus to a deficit in late 2007. The value of a
bushel of corn in a deficit environment is directly based on the value of the
ethanol and distillers grain co-product that bushel can produce, less refining
costs. There are only small differences in the production efficiency of most
plants since over 80% of the industry was built in the past 5 years. The
profitability of an individual ethanol producer is thus critically dependent on
and very sensitive to its relative variable cost position as compared to an
average plant.
Ethanol plants that use our extraction technologies have the ability to decrease
their variable costs and increase revenues derived from their existing supply of
corn. This desensitizes our clients to market risk and gives them the ability to
service debt and stay in production when less efficient plants breach covenants
or are forced to shut down.
There are currently no technologies available to corn ethanol producers that
give them anything approaching the degree of competitive advantage made possible
by our corn oil extraction technologies. Our technologies enhance the energy
balance of corn ethanol producers and deliver the following key benefits:
>> Increased Earnings. Ethanol producers that use our extraction technologies
in their facilities will generate additional earnings that are significant
and correspond to materially increased cash flows for participating
facilities.
>> Decreased Risk. Tightened spreads between ethanol and corn prices translate
to decreased operating cash flows. This, in turn, will negatively impact
the overall risk profile and ongoing debt service and fund-raising
capabilities of corn ethanol producers. By installing our extraction
technology for no cost, the structure of our market offering allows
participating ethanol producers to increase their operating cash flows and
offset their commodity risk without having to commit capital from existing
resources or available sources of debt or equity. This same benefit applies
for developers seeking to consolidate corn ethanol production facilities
such that participation in our program can favorably impact the risk and
return profiles of acquired ethanol assets.
>> Reduced Carbon. Removal of corn oil from the distillers grain improves
flowability and drying efficiency with reduced fossil fuel consumption and
carbon emissions.
>> Enhanced Feed. Corn oil removal improves distillers grain marketability and
protein inclusion rates by reducing fat content and enhancing
digestibility.
We believe that the prevailing conditions in the corn ethanol industry and the
benefits presented by our extraction technologies combine to establish high
levels of demand for our corn oil extraction technology.
Significant Cost and Risk Management Advantage
The price of refined biodiesel is primarily related to the price of petroleum
diesel and it typically sells at a premium to petroleum diesel due to
governmental mandates and incentives for use of biodiesel, as well as
environmental factors and other market drivers. The profitability of biodiesel
production is largely determined by the difference between the cost of
feedstocks, which are agricultural commodities that are not correlated to the
price of petroleum diesel and the price for refined biodiesel.
Our extraction technology provides us with access to corn oil supplies for our
own use in the production of biodiesel. Importantly, the price we pay for the
corn oil we extract equates to a substantial discount to the cost of comparable
vegetable oils, animal fats, cooking greases and the other feedstocks necessary
for biodiesel production.
13
The graphs below compare the historical market prices for the past four years
for biodiesel, soybean oil, choice white grease, and yellow grease with the
estimated and actual historical prices for the corn oil we extract at 50% of the
price of diesel ("GS Corn Oil") (all prices have been adjusted to account for a
7.5% yield loss on conversion of the feedstock into biodiesel).
The graph on the right assumes total refining costs of $1.00 per gallon and it
compares the estimated operating income that a biodiesel producer would generate
when refining soybean oil, choice white grease, yellow grease and GS Corn Oil
into biodiesel during February 2009.
GreenShift's operating income break-even point ("GS Break Even") is shown by the
black hashed line - note that there is always a positive spread between
GreenShift's biodiesel sales line and the GS Break Even line.
These graphs underscore the significance of the cost and risk management
advantage available exclusively to GreenShift by virtue of our corn oil
extraction technology and the structure of our corn oil program.
While the capital intensity of our business model is more than that of competing
biodiesel producers (about $3.00 per gallon of installed capacity including
extraction), we believe that our model is superior to conventional production
models on a risk adjusted basis. Note the following significant advantages from
the graphs below:
>> Lowest Cost Feedstock. The price we pay for the corn oil we extract equates
to a substantial discount to the cost of comparable animal fats, vegetable
oils and cooking greases ("FOGs") that are traditionally used for biodiesel
production. This can be seen in the left graph below on a pro forma
historical basis and on an estimated basis for February 2009.
>> Hedged Purchase Price. We have hedged our margins to our offtake market by
linking the purchase of our feedstock to diesel. We consequently have the
ability to remain profitable while the margins of competing producers
tighten or are subject to increased volatility in the commodity markets.
This is a dramatic advantage and can be seen on a pro forma historical
basis for the previous 4 years in the left graph below (operating income is
shown in the white area between the sold black line and the grey area
below). This and the fact that our extraction agreements include terms of
ten years or more form the basis of a production advantage that we believe
to be extremely significant.
[GRAPHIC]
15
While break even operating income is possible for efficient refiners using
choice white grease, the slightest increase in feedstock cost or decrease in
efficiency (increase in yield loss and/or operating expenses) will cause
refiners to burn cash. The top chart below shows the impact on the operating
income of a biodiesel refiner that exclusively uses choice white grease as its
feedstock with increases and decreases in crude oil and choice white grease
pricing at 10 million gallons per year and 7.5% yield loss. The intersection of
the shaded areas mark the operating income under current market conditions and
the diagonal line is the loss frontier of the refiner with movement in the
stated variables.
[GRAPHIC]
GreenShift's hedged model presents a stark contrast. The empty space in the
bottom chart is due to the fact that corn oil is indexed to diesel spot and the
cost cannot be more or less than a percentage of each diesel price. Not only are
the pro forma operating income for the GreenShift refinery much greater at a
throughout 10 million gallons per year, but refining losses are entirely
mitigated. The per gallon data at the bottom of the chart show GreenShift's pro
forma operating income per gallon for the stated crude oil prices. With our
extraction technology, process know-how, internalization of biodiesel refining
capability and an innovative market offering that allows ethanol producers to
extract oil for no investment, we have linked our costs to our sales and created
what remarkably appears to be the only sustainable biofuel model in existence
today.
Commercialization Expertise
Our management team has developed our corn oil extraction, biodiesel and related
technologies and is directly responsible for the methodical execution of our
go-to-market plans to date:
1. We invested heavily in the development of our extraction and refining
technologies and in the protection of our intellectual properties;
2. We sold equipment based on prototypes of our technologies to early adopters
(a) to stimulate cash flows, (b) to refine design parameters and
go-to-market assumptions, and (c) to eliminate technology risk while
proving our value proposition to prospective clients and financial
partners;
3. We used our technology positioning to execute long-term contracts for over
40 million gallons per year of hedged feedstock;
4. We raised the capital we needed to construct our first wave of extraction
facilities;
5. We acquired a strategically-compatible biodiesel refinery that was built
with our own technology from one of our early adopters (a) to maximize the
value of our extracted corn oil, (b) to avoid the credit and other risks
presented by third party biodiesel producers with cash flows dependent on
conventional feedstocks, and (c) to ensure our ability to generate
consistent returns for our investors; and,
15
6. We entered into agreements with a highly strategic investor with the
financial and other resources needed to accelerate, amplify and fully
capitalize our go-to-market activities.
Nearly every member of our management team, including our CEO, COO and CTO, as
well as all of our senior engineering and technical staff has significant
operational, chemical processing, extraction and refining experience involving
agricultural, municipal, industrial and hazardous materials. We believe that
this is a critical advantage in the new biofuels industry where qualified
operational talent is in great demand and producers often lack the processing
experience to manage their production facilities in a safe, compliant and
profitable manner.
CleanTech Portfolio
Our founding mission is to catalyze disruptive environmental gains by
streamlining the flow of natural resources through commerce to induce a great
many people and companies to make incremental environmental contributions that
are collectively very significant. We are working to make this a reality today
by enabling the increased production and use of biomass-derived fuels and other
carbon-neutral products.
Our corn oil extraction technologies are the prototypical example of our model.
Our extraction technologies help to decrease the use of diesel fuel, natural
gas, coal and other fossil fuels while increasing the economic viability and
sustainability of both biodiesel and corn ethanol.
While corn ethanol contributed over $65 billion to the GDP by offsetting 7% of
America's fossil fuel needs in 2008, many technologists have abandoned the corn
ethanol industry in favor of cellulosic ethanol development. We believe that
this is ill-advised; that the path to cellulosic ethanol is through the corn
ethanol industry; and that the established first generation corn ethanol
infrastructure is the only practical pathway in North America to
cost-effectively increase the production and use of carbon-neutral biofuels on
globally-meaningful scales. To accomplish this in a competitive and
environmentally superior way, the installed base of first generation corn
ethanol facilities will need to evolve to achieve significantly improved
production efficiencies. We intend to make a material positive contribution to
that evolution.
We have developed an entire portfolio of innovative biological, chemical and
physical technologies with a view towards shifting the U.S. corn ethanol complex
into increased financial and environmental sustainability. We intend to leverage
our existing extraction platform to drive the convergence of cellulosic and corn
ethanol. Our portfolio of Cellulosic Corn(TM) technologies include a number of
(a) feedstock conditioning, (b) oil production, extraction and refining, and (c)
energy and carbon mitigation technologies, all designed to facilitate the
following key goals:
>> Increase the net energy balance of biofuel derived from corn;
>> Increase profitability of corn ethanol;
>> Decrease amount of petroleum burned to make corn derived biofuel;
>> Increase nutritional content of corn ethanol co-products;
>> Convert the carbon dioxide emitted from corn ethanol production into liquid
fuels and other products;
>> Diversify the biomass mix accepted and produced by corn ethanol facilities;
>> Decrease the commodity and financial risk profile of corn ethanol;
>> Standardize corn-friendly cellulosic technology by building on the existing
corn ethanol complex; and,
>> Enhance the competitive positioning of corn ethanol in the domestic and
global markets.
GreenShift's patented and patent-pending feedstock conditioning technologies are
designed to increase the availability of fermentable sugars in whole corn and
enable corn ethanol producers to diversify their feedstock mix by accepting and
processing corn cobs, stover and cellulosic biomass into additional biofuels.
Key goals include increasing ethanol and extracted corn oil yields, decreasing
raw material and utility costs, and improving the value of distillers grain.
Achievement of these goals can be expected to enhance the profitability of first
generation corn ethanol producers while decreasing their sensitivity to
commodity and financial risk. These technologies have been demonstrated at the
bench and pilot scale.
Our oil production, extraction and refining technologies include our existing
commercialized corn oil extraction and refining technologies but also include
our new patent-pending Cellulosic Oil(TM) process, which has demonstrated (at
bench scales) the ability to increase oil extraction yields to more than 10
gallons for every 100 gallons of corn ethanol produced - an increase of more
than 50% over our current proven yield of 6.5 gallons for every 100 gallons of
ethanol produced. Cellulosic Oil(TM) technology has the potential to increase
oil yields even higher while favorably impacting the nutritional qualities of
distillers grain by conditioning and converting cellulosic and other biomass
into additional oil and feed products. We achieve this with a synergistic
combination of feedstock conditioning and low-energy bioreactor technologies
16
that are also designed to reduce the energy needs of the host ethanol producer
while using the full throughput capacity of our existing extraction facilities.
GreenShift's patent-pending biodiesel refining technologies intensify the
chemical reactions under which biodiesel refining occurs. We are consequently
able to complete the biodiesel refining process in minutes instead of hours
under true continuous flow conditions - at much smaller scales, and at reduced
capital and operating costs as compared to traditional processes. Our biodiesel
refining technologies are designed to integrate with our extraction technologies
at our client ethanol facilities for direct onsite refining of corn oil and
Cellulosic Oil(TM) into biodiesel.
Our patented and patent-pending energy and carbon mitigation technologies rely
on the balanced and synergistic application of several biological, chemical and
physical technologies to cost-effectively decarbonize ethanol production by
converting carbon dioxide emissions into liquid fuels and other value-added
products. These technologies have also been demonstrated at bench scales.
We have applied for grant financing to support the construction of pilot
facilities based on each of our Cellulosic Corn(TM) technologies. We are also in
discussions with targeted early-adopters involving the testing and commercial
demonstration of each technology.
BUSINESS STRATEGY
Capitalize Production and Construction Activities
Given the nature of our competitive advantages and the current and foreseeable
dynamics in the corn ethanol and biodiesel industries, the highest and best use
of our resources and our primary objective is to finance and build as many corn
oil extraction facilities as possible, as quickly as possible.
Our extraction technologies have a capital intensity of about $2.00 per gallon
of installed capacity. Building the capacity needed to refine the extracted oil
into biodiesel will cost an additional $1.00 per gallon installed capacity.
Thus, 40 million gallons per year of extraction and biodiesel refining capacity
will cost an estimated $120 million to build. We specifically designed our
extraction business model to facilitate the completion of financing of this
magnitude and more. 40 million gallons per year of corn oil derived biodiesel
would generate about $27.2 million in annualized EBITDA under current market
conditions. This amount of cash flow could service debt with a coverage ratio in
excess of 2.0, assuming a 70% debt to equity ratio, a 10 year amortization, and
crude oil at $45 per barrel for the entire term of the debt. Our coverage ratio
in this example would increase to more than 3.0 with crude oil at $65 per
barrel, and decrease to 1.0 with crude oil at about $25 per barrel.
We believe that our ability to insulate our financial partners by hedging
substantial refining margins for ten years and longer is unique in the renewable
fuels industry. In addition, we believe that our entire 40 million gallon per
year contracted extraction backlog is shovel-ready and is likely to be very
qualified for loan guarantees and other forms of public financing. President
Obama and his staff have clearly stated positive policy goals for the biofuels
industry. Secretary of Energy Chu has remarked that corn oil should be extracted
for conversion into biofuel, and Secretary Vilsack, the head of the U.S.
Department of Agriculture, has stated that increasing the corn ethanol blend
ratio in gasoline is likely to put more biofuel on the streets more quickly than
ethanol from non-corn sources. This concept, the speed in which the corn ethanol
industry can be leveraged to affect change, is a central theme of our
commercialization strategy.
Restructure
We have historically raised capital in the form of convertible debt that was
structured in ways that were favorable from a cash flow perspective and less
favorable from an equity perspective. Our ability to meet the debt service
requirements of this financing by issuing common stock allowed us to conserve
cash flows while we developed and refined our technological capabilities into
commercially-viable production capabilities. While the majority of this debt is
not due until December 31, 2011, the magnitude of this debt ($33 million) can be
expected to make raising additional equity capital difficult. We are
consequently exploring opportunities to restructure this debt as soon as
possible. We also have some inactive and non-strategic investments that we
intend to dispose or liquidate.
Maximize the Strategic Value of our Clean Technologies
We plan to use our market and technology positioning to acquire as much
extraction market share and strategic cash flows as we can, as quickly as we
can. We invested heavily in the development of an intellectual property
portfolio based on feedstock ownership and margin protection. The history of the
biodiesel industry has proven that our strategy was correct and that our
investment in intangible assets to secure feedstock in lieu of physical
production assets without feedstock was justified. Most of the existing U.S.
biodiesel fleet is offline and the refineries that are operating are doing so
with low and volatile margins that yield low enterprise valuations. We believe
17
that this environment presents us with compelling consolidation opportunities;
we believe that our intellectual properties, feedstock ownership and hedged
refining margins position us to acquire qualified biodiesel production assets on
favorable terms. This can minimize the capital intensity of our expansion and
accelerate our construction efforts. We are currently exploring a number of
opportunities in this regard.
HISTORY
The Company was formed to develop and use innovative technologies that
facilitate the efficient use of natural resources. In its original incarnation,
the Company's business model was based on developing and commercializing
technologies that made more efficient use of natural resources by extracting
metals from industrial hazardous wastes for sale to third party smelters and
refineries. These metal extraction technologies were ultimately successful and
the Company had constructed a proprietary metal extraction facility to implement
its technologies on a commercially-meaningful scale, but changes in the
manufacturing sector in the northeastern U.S. during the early 2000s resulted in
decreased concentrations of less valuable metals flowing through the industrial
wastes processed by this facility. The Company consequently discontinued its
metals extraction business and shifted its focus away from the extraction of
metal-bearing co-products to the extraction of co-products that create
value-added renewable energy production opportunities. The Company went on to
invest in a broad array of technologies, including advanced ultrasonic and
nanocatalytic reformation processes, novel separation, extraction and
preparation processes, and enhanced chemical, thermal and biological processes.
We also invested in strategic assets, including engineering support,
manufacturing and prototyping capabilities, and strategically compatible
production assets - all with a view towards development of a financeable
business model that downshifted the economic and environmental costs of energy
production.
During 2007, the Company completed development and initiated cash flows with two
of its new technologies - its patented and patent-pending corn oil extraction
and biodiesel refining technologies. The Company's broader development
activities were subsequently curtailed and the Company restructured its
operations based on the go-to-market requirements of these two technologies.
The following is a summary of the Company's corporate and operational history
since formation:
1979 Incorporation
1979 - 1984 Manufacturing and distribution of filtration media and equipment for metal finishing industry
Name of company during this time frame: Kreisler Bags and Filtration, Inc.
1984 - 1998 Development stage operations based on metal extraction technologies
Name of company during this time frame: KBF Pollution Management, Inc.
1998 - 2003 Pilot stage operations based on metal extraction technologies
Name of company during this time frame: KBF Pollution Management, Inc.
2003 - 2005 Commercial scale operations based on metal extraction technologies
Name of company during this time frame: Veridium Corporation
2005 - 2006 Discontinuance of operations based on metal extraction technologies
Transition to development stage operations targeting new platform technologies
Name of company during this time frame: Veridium Corporation
2006 - 2007 Pilot stage operations based on corn oil extraction and biodiesel technologies
Name of company during this time frame: GS CleanTech Corporation
2007 - Present Commercial scale operations based on corn oil extraction and biodiesel technologies
Name of company during this time frame: GreenShift Corporation
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ORGANIZATIONAL STRUCTURE
We conducted our operations during the fiscal year ended December 31, 2008 in
the following segments:
>> Equipment & Technology Sales
>> Culinary Oil Production & Sales
>> Biofuels Production & Sales
As of December 31, 2008, the Company administered its operations through three
tier 1 subsidiaries: GS CleanTech Corporation, GS Design Services, Inc. and GS
AgriFuels Corporation. The following is an outline of our organizational
structure as of December 31, 2008:
Company Status Nature
-------------------------------------------------------------------------------------------------------------------
GreenShift Corporation (OTC Bulletin Board: GERS) Active Holding
1. GS CleanTech Corporation (100%) Active Operating GS COES (Yorkville I),
LLC (100%) Active Operating
Biofuel Industries Group, LLC (d/b/a NextDiesel) (100%) Active Operating
2. GS Design, Inc. (100%) Active Operating
Bollheimer & Associates, Inc. (100%) Active Operating
GS Rentals, LLC (100%) Inactive Holding
3. GS AgriFuels Corporation (100%) Active Holding NextGen Acquisition, Inc.
(100%) Active Holding
NextGen Fuel, Inc. (100%) Active Holding
Sustainable Systems, Inc. (100%) Active Holding
Sustainable Systems, LLC (100%) Active Operating
ZeroPoint Clean Tech, Inc. (about 10%) Minority Investment
MINORITY INVESTMENTS
ZeroPoint Clean Tech, Inc.
ZeroPoint Clean Tech, Inc. is a renewable energy technology and project
development company. ZeroPoint believes that it has developed a highly efficient
biomass gasification process capable of converting biomass into renewable
synthesis gas to create carbon-neutral energy. Additional information on
ZeroPoint is available online at www.zeropointcleantech.com. In addition to
being an investor in ZeroPoint, we hold the exclusive rights to use or market
the ZeroPoint biomass gasification technology in the North American corn ethanol
industry, as well as the right to use this technology on a non-exclusive basis
in other fields of use.
INTELLECTUAL PROPERTIES
GreenShift Corporation holds a number of patent-applications, licenses and
trademarks. GreenShift, the GreenShift Logo, the Tornado Generator, Cellulosic
Oil, and Cellulosic Corn brand names, and the Natural Solutions and A Clear
Vision for a Better Environment taglines are all registered trademarks of
GreenShift Corporation.
We protect our intellectual properties through a combination of patents, patent
applications, license and distribution agreements, common law copyrights and
trade secrets. The first of our patents does not expire until 2019. All of our
technical employees enter into confidentiality, non-competition and invention
assignment agreements. We also require our vendors, customers and others to
enter into confidentiality agreements of varying scope and duration prior to
being given access to our proprietary information regarding our technology.
There can be no assurance that such measures will be adequate to protect our
technologies.
ENVIRONMENTAL MATTERS
Our planned new production facilities will be subject to various federal, state
and local environmental laws and regulations, including those relating to the
discharge of materials into the air, water and ground; the generation, storage,
handling, use, transportation and disposal of hazardous materials; and the
health and safety of our employees. These laws, regulations and permits also can
require expensive pollution control equipment or operational changes to limit
actual or potential impacts to the environment. A violation of these laws and
regulations or permit conditions can result in substantial fines, natural
resource damage, criminal sanctions, permit revocations and/or facility
shutdowns. We do not anticipate a material adverse effect on our business or
financial condition as a result of our efforts to comply with these
requirements. Operating expenses to meet regulatory requirements, including all
environmental permits, will be an integral part of operating costs. Costs for
compliance with environmental laws include safety and health protection
measures, controls limiting air emissions and effluent discharges, emergency
response capabilities, storm water management, recordkeeping and training.
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OTHER CONTINGENCIES
Under GreenShift's insurance programs, coverage is obtained for catastrophic
exposures, as well as those risks required to be insured by law or contract. The
deductible per occurrence for environmental impairments is $25,000.
Environmental liability insurance is carried with policy limits of $1,000,000
per occurrence and $2,000,000 aggregate with a $4,000,000 umbrella policy.
EMPLOYEES
GreenShift Corporation currently has 38 full-time employees as of April 15,
2008. In addition to its executive officers, GreenShift Corporation employs
sales personnel, staff engineers, process managers, maintenance managers,
administrative personnel and general facility technicians. There is no union
representation for any of our employees.
ITEM 1A RISK FACTORS
There are many important factors that have affected, and in the future could
affect, GreenShift's business, including, but not limited to the factors
discussed below, which should be reviewed carefully together with other
information contained in this report. Some of the factors are beyond our control
and future trends are difficult to predict.
RISKS RELATING TO ECONOMIC CONDITIONS AND THE FINANCIAL MARKETS
We have been unable to close on sufficient working capital financing replace
previously committed sources of working capital. We accordingly lack sufficient
liquidity to operate our biodiesel refining and oilseed crushing operations and
there can be no assurances that we will be able to sufficiently capitalize these
operations or that we will be able obtain the additional capital we require to
implement our business plan. These factors raise substantial doubt about our
ability to operate as a going concern.
We will require additional capital to continue to expand our business beyond our
current stage of operations. There is no assurance that we will be able to
obtain the capital required in a timely fashion, on favorable terms or at all.
If we are unable to obtain required additional financing, we may be forced to
restrain our growth plans or cut back existing operations. Future construction
and operation of our facilities, capital expenditures to build and operate our
facilities, hiring qualified management and key employees, complying with
licensing, registration and other requirements, maintaining compliance with
applicable laws, production and marketing activities, administrative
requirements, such as salaries, insurance expenses and general overhead
expenses, legal compliance costs and accounting expenses will all require a
substantial amount of additional capital and cash flow. There is no assurance
that we will successfully complete suitable financing in a timely fashion or at
all. Future financings through equity investments are possible, and these are
likely to be dilutive to the existing shareholders, as we issue additional
shares of common stock to investors in future financing transactions. Also, the
terms of securities we issue in future capital transactions may be more
favorable for our new investors. Newly issued securities may include
preferences, superior voting rights, the issuance of warrants or other
derivative securities, and the issuances of incentive awards under employee
equity incentive plans, which may have additional dilutive effects. Further, we
may incur substantial costs in pursuing future capital or financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which may adversely affect
our financial results. Our ability to obtain needed financing may be impaired by
such factors as the capital markets, both generally and specifically in the
biodiesel, ethanol and culinary oil industries, the fact that we are a new
company without a proven operating history, the location of our planned
biodiesel facilities in the United States, instead of Europe or other regions
where biodiesel is more widely accepted, and the price of biodiesel and oil on
the commodities market. Furthermore, if petroleum or biodiesel prices on the
commodities markets decrease, then our revenues will likely decrease and
decreased revenues may increase our requirements for capital. Some of the
contractual arrangements governing our operations may require us to maintain
minimum capital, and we may lose our contract rights if we do not have the
required minimum capital. If the amount of capital we are able to raise from
financing activities, together with our revenues from operations, is not
sufficient to satisfy our capital needs, even to the extent that we reduce our
operations accordingly, we may be required to cease operations.
Distressed industry conditions may severely constrain our ability to access new
debt financing.
The capital markets experienced volatility and disruption during late 2008 and
early 2009. As a result of these conditions, securing credit commitments from
lenders and refinancing existing credit facilities is difficult. Our operating
cash flow is dependent on our ability to profitably operate our businesses and
overall commodity and financial market conditions. In addition, we need to raise
additional debt financing to fund growth of our businesses. In this market
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environment, we have limited access to debt financing. This could cause us to
defer or cancel growth projects, reduce our business activity or, if we are
unable to meet our debt repayment schedules, cause a default in our existing
debt agreements. These events could have a materially adverse effect on our
operations and financial position.
We are exposed to credit risk resulting from the possibility that a loss may
occur from the failure of another party to perform according to the terms of a
contract with us.
We install our extraction facilities at corn ethanol facilities which are
subject to substantial market risk. This may result in concentrations of credit
risk insofar as our ability to produce corn oil from our extraction facilities
is dependent on the ability of the host ethanol facility to sustain its
operations. The inability of a third party ethanol producer to sustain
operations may cause us to experience losses and may adversely impact our
liquidity.
RISKS ATTENDANT TO OUR BUSINESS
Our external auditors have included an explanatory paragraph in their audit
report raising substantial doubt as to the Company's ability to continue as a
going concern due to the Company's history of losses, working capital deficiency
and cash position.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company incurred a loss
from continuing operations of $47,975,579 for the year ended December 31, 2008.
As of December 31, 2008 the Company had $288,495 in cash, and current
liabilities exceeded current assets by $59,951,697 which included convertible
debentures of $11,792,387, net of discounts, accrued interest payable of
$7,035,935, $3,979,437 in purchase obligations, $4,821,738 in amounts due to the
prior owners of our oilseed crush facility and $1,900,333 in related party debt.
None of these items are required to be serviced out of the Company's regular
cash flows and the Company's working capital deficit net of these amounts is
$30,421,868. These matters raise substantial doubt about the Company's ability
to continue as a going concern.
We are implementing new business plans which make the results of our business
uncertain.
A significant portion of our operations have been acquired or started in the
last 24 months. Therefore, our experience in operating the current business is
limited. Our limited operating history makes it difficult for potential
investors to evaluate our business. Therefore, our proposed operations are
subject to all of the risks inherent in the initial expenses, challenges,
complications and delays frequently encountered in connection with the formation
of any new business, as well as those risks that are specific to the biodiesel,
ethanol and culinary oils industry in general. Investors should evaluate an
investment in our company in light of the problems and uncertainties frequently
encountered by companies attempting to develop markets for new products,
services and technologies. Despite best efforts, we may never overcome these
obstacles to achieve financial success. Our business is speculative and
dependent upon the implementation of our business plan, as well as our ability
to enter into agreements with third parties for necessary financing, the
provision of necessary feedstock sources, engineering, procurement and
construction services and the sale and distribution of our biodiesel fuel on
terms that will be commercially viable for us. There can be no assurance that
our efforts will be successful or result in revenue or profit. There is no
assurance that we will earn significant revenues or that our investors will not
lose their entire investment.
Unanticipated problems or delays in building our facilities to the proper
specifications may harm our business and viability.
Our current operating cash flow depends on our ability to timely and
economically complete and operate our planned facilities. If our current
production facilities are disrupted or the economic integrity of these projects
is threatened for unexpected reasons, our business may experience a substantial
setback. Prolonged problems may threaten the commercial viability of these
facilities. Moreover, the occurrence of significant unforeseen conditions or
events in connection with these facilities may require us to reexamine our
business model. Any change to our business model or management's evaluation of
the viability of these projects may adversely affect our business. Our
construction costs for additional facilities may also increase to a level that
would make a new facility too expensive to complete or unprofitable to operate.
Contractors, engineering firms, construction firms and equipment suppliers also
receive requests and orders from other companies and, therefore, we may not be
able to secure their services or products on a timely basis or on acceptable
financial terms. We may suffer significant delays or cost overruns as a result
of a variety of factors, such as increases in the prices of raw materials,
shortages of workers or materials, transportation constraints, adverse weather,
equipment failures, fires, damage to or destruction of property and equipment,
environmental damage, unforeseen difficulties or labor issues, any of which
could prevent us from commencing operations as expected at our facilities.
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The results of operations, financial condition and business outlook of our
oilseed crush facility will be highly dependent on our access to working capital
and commodity prices, which are subject to significant volatility and
uncertainty, and the availability of supplies, so our results could fluctuate
substantially.
The results of operations of our oilseed crush facility are substantially
dependent on working capital and different commodity prices, especially prices
for oilseed and materials used in the construction of our expansion project. As
a result of the volatility of the prices for these items, our results may
fluctuate substantially and we may experience periods of declining prices for
our products and increasing costs for our raw materials, which could result in
operating losses. Although we may attempt to offset a portion of the effects of
fluctuations in prices by entering into forward contracts to supply biodiesel or
purchase feedstock or other items or by engaging in transactions involving
exchange-traded futures contracts, the amount and duration of these hedging and
other risk mitigation activities may vary substantially over time and these
activities also involve substantial risks.
The market for renewable energy sources is undetermined, and may not be adequate
to sustain prices at a profitable level.
We are involved in the development or production of renewable energy and we
provide products and services to companies involved in the production of
renewable energy. Their success will depend on the level of market acceptance of
renewable energy sources. The marketing of renewable energy sources on a
national scale is a phenomenon new to this decade. The portion of U.S. energy
represented by renewable energy sources is still small. It is not possible to
predict with assurance how large the market for renewable energy sources will
become. If it has not developed to a sufficient breadth when our subsidiaries
are ready to market their products and services, the price at which renewable
energy can be sold will be limited, which may make it impossible for one or more
of our subsidiaries to operate profitably.
The fiscal efficiencies of highly capitalized competitors in the renewable
energy field could defeat our efforts to capture a viable market share.
The business of producing renewable energy is a capital-intense business,
requiring substantial capital resources. The costs that we may incur in
obtaining capital are substantially greater per dollar than the cost incurred by
large scale enterprises in the industry. If competition reduces the prices
available for renewable energy sources, our dependence on expensive capital
sources may prevent us from lowering our prices to meet the competition. This
situation could cause to be unable to compete effectively.
Strategic relationships on which we may rely are subject to change.
Our ability to identify and enter into commercial arrangements with feedstock
suppliers, construction contractors, equipment fabricators, transportation,
logistics and marketing services providers and biodiesel customers will depend
on developing and maintaining close working relationships with industry
participants. Our success in this area will also depend on our ability to select
and evaluate suitable projects as well as to consummate transactions in a highly
competitive environment. These realities are subject to change and may impair
our ability to grow.
The U.S. biodiesel and ethanol industries are highly dependent upon myriad of
federal and state legislation and regulation and any changes in legislation or
regulation could materially and adversely affect our results of operations and
financial position.
Our corn oil extraction model relies on the ethanol market (to purchase corn
oil) and the biodiesel market (to sell the biodiesel we refine from our corn
oil). The production of biodiesel and ethanol is made significantly more
competitive by federal and state tax incentives. The federal excise tax
incentive program for biodiesel was originally enacted as part of the American
Jobs Creation Act of 2004, but is scheduled to expire on December 31, 2008. This
program provides fuel blenders, generally distributors, with a one-cent tax
credit for each percentage point of vegetable oil derived biodiesel blended with
petroleum diesel. For example, distributors that blend soybean-derived biodiesel
with petroleum diesel into a B20 blend would receive a twenty cent per gallon
excise tax credit. The program also provides blenders of recycled oils, such as
yellow grease from restaurants, with a one-half cent tax credit for each
percentage point of recycled oil derived biodiesel blended with petroleum
diesel. For example, distributors that blend recycled oil derived biodiesel with
petroleum diesel into a B20 blend would receive a ten cent per gallon excise tax
credit. In addition, approximately thirty-one states provide mandates, programs
and other incentives to increase biodiesel production and use, such as mandates
for fleet use or for overall use within the state, tax credits, financial
grants, tax deductions, financial assistance, tax exemptions and fuel rebate
programs. These incentives are meant to lower the cost of biodiesel in
comparison to petroleum diesel. The elimination or significant reduction in the
federal excise tax incentive program or state incentive programs benefiting
biodiesel may have a material and adverse effect on our results of operations
and financial condition.
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The cost of production of ethanol is made significantly more competitive with
regular gasoline by federal tax incentives. The federal excise tax incentive
program currently allows gasoline distributors who blend ethanol with gasoline
to receive a federal excise tax rate reduction for each blended gallon they
sell. If the fuel is blended with 10% ethanol, the refiner/marketer pays $0.051
per gallon less tax, which equates to an incentive of $0.51 per gallon of
ethanol. The $0.51 per gallon incentive for ethanol is scheduled to be reduced
to $0.46 per gallon in 2009 and to expire in 2010. The blenders' credits could
be eliminated or reduced at any time through an act of Congress and may not be
renewed in 2010 or may be renewed on different terms. In addition, the blenders'
credits, as well as other federal and state programs benefiting ethanol (such as
tariffs), generally are subject to U.S. government obligations under
international trade agreements, including those under the World Trade
Organization Agreement on Subsidies and Countervailing Measures, and might be
the subject of challenges thereunder, in whole or in part.
Ethanol can be imported into the U.S. duty-free from some countries, which may
undermine the ethanol industry in the U.S. Imported ethanol is generally subject
to a $0.54 per gallon tariff that was designed to offset the $0.51 per gallon
ethanol incentive that is available under the federal excise tax incentive
program for refineries that blend ethanol in their fuel. A special exemption
from the tariff exists for ethanol imported from 24 countries in Central America
and the Caribbean Islands, which is limited to a total of 7% of U.S. production
per year. Imports from the exempted countries may increase as a result of new
plants under development. Since production costs for ethanol in these countries
are estimated to be significantly less than what they are in the U.S., the
duty-free import of ethanol through the countries exempted from the tariff may
negatively affect the demand for domestic ethanol and the price at which we sell
ethanol. Although the $0.54 per gallon tariff has been extended through December
31, 2008, bills were previously introduced in both the U.S. House of
Representatives and U.S. Senate to repeal the tariff. We do not know the extent
to which the volume of imports would increase or the effect on U.S. prices for
ethanol if the tariff is not renewed beyond its current expiration. Any changes
in the tariff or exemption from the tariff could have a material adverse effect
on our results of operations and our financial position. In addition, the North
America Free Trade Agreement, or NAFTA, which entered into force on January 1,
1994, allows Canada and Mexico to export ethanol to the United States duty-free
or at a reduced rate. Canada is exempt from duty under the current NAFTA
guidelines, while Mexico's duty rate is $0.10 per gallon.
The effect of the renewable fuel standard ("RFS") program in the Energy
Independence and Security Act signed into law on December 19, 2007 (the "2007
Act") is uncertain. The mandated minimum level of use of renewable fuels in the
RFS under the 2007 Act increased to 9 billion gallons per year in 2008 (from 5.4
billion gallons under the RFS enacted in 2005), further increasing to 36 billion
gallons per year in 2022. The 2007 Act also requires the increased use of
"advanced" biofuels, which are alternative biofuels produced without using corn
starch such as cellulosic ethanol and biomass-based diesel, with 21 billion
gallons of the mandated 36 billion gallons of renewable fuel required to come
from advanced biofuels by 2022. Required RFS volumes for both general and
advanced renewable fuels in years to follow 2022 will be determined by a
governmental administrator, in coordination with the U.S. Department of Energy
and U.S. Department of Agriculture. Increased competition from other types of
biofuels could have a material adverse effect on our results of operations and
our financial position.
The RFS program and the 2007 Act also include provisions allowing "credits" to
be granted to fuel producers who blend in their fuel more than the required
percentage of renewable fuels in a given year. These credits may be used in
subsequent years to satisfy RFS production percentage and volume standards and
may be traded to other parties. The accumulation of excess credits could further
reduce the impact of the RFS mandate schedule and result in a lower ethanol
price or could result in greater fluctuations in demand for ethanol from year to
year, both of which could have a material adverse effect on the financial
condition of participants in our corn oil extraction program which could require
us to incur additional costs to relocate one or more corn oil extraction
facilities to other ethanol production facilities.
Waivers of the RFS minimum levels of renewable fuels included in gasoline could
have a material adverse affect on our results of operations. Under the RFS as
passed as part of the Energy Policy Act of 2005, the U.S. Environmental
Protection Agency, in consultation with the Secretary of Agriculture and the
Secretary of Energy, may waive the renewable fuels mandate with respect to one
or more states if the Administrator of the U.S. Environmental Protection Agency,
or "EPA", determines upon the petition of one or more states that implementing
the requirements would severely harm the economy or the environment of a state,
a region or the U.S., or that there is inadequate supply to meet the
requirement. In addition, the Energy Independence and Security Act of 2007
allows any other person subject to the requirements of the RFS or the EPA
Administrator to file a petition for such a waiver. Any waiver of the RFS with
respect to one or more states could adversely offset demand for ethanol and
could have a material adverse effect on our results of operations and our
financial condition
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Disruptions to infrastructure, or in the supply of fuel, natural gas or water,
could materially and adversely affect our business.
Our business depends on the continuing availability of rail, road, port, storage
and distribution infrastructure. Any disruptions in this infrastructure network,
whether caused by labor difficulties, earthquakes, storms, other natural
disasters, human error or malfeasance or other reasons, could have a material
adverse effect on our business. We rely upon third-parties to maintain the rail
lines from their plants to the national rail network, and any failure on these
third parties' part to maintain the lines could impede the delivery of products,
impose additional costs and could have a material adverse effect on our
business, results of operations and financial condition.
We also depend on the continuing availability of raw materials, including fuel
and natural gas, and the ability of ethanol producers that participate in our
corn oil programs to remain in production The production of ethanol, from the
planting of corn to the distribution of ethanol to refiners, is highly
energy-intensive. Significant amounts of fuel and natural gas are required for
the growing, fertilizing and harvesting of corn, as well as for the
fermentation, distillation and transportation of ethanol and the drying of
distillers grains. A serious disruption in supplies of fuel or natural gas,
including as a result of delivery curtailments to industrial customers due to
extremely cold weather, or significant increases in the prices of fuel or
natural gas, could significantly reduce the availability of raw materials at our
plants, increase production costs and could have a material adverse effect on
our business, results of operations and financial condition.
Ethanol plants also require a significant and uninterrupted supply of water of
suitable quality to operate. If there is an interruption in the supply of water
for any reason, one or more participating ethanol producer plants may be
required to halt production. If production is halted at one or more of these
plants for an extended period of time, it could have a material adverse effect
on our business, results of operations and financial condition
Our commercial success will depend in part on our ability to obtain and maintain
protection of our intellectual property.
Our success will depend in part on our ability to maintain or obtain and enforce
patent and other intellectual property protection for our technologies and to
preserve our trade secrets, and to operate without infringing upon the
proprietary rights of third parties. We have obtained or developed rights to
patents and patent applications in the United States and internationally, and
may, in the future, seek rights from third parties to other patent applications
or patented technology. Significant aspects of our technology are currently
protected as trade secrets, for which we intend to file patent applications when
appropriate. The description of the processes currently protected as trade
secrets is likely to be published at some point in the patent application
process with no assurance that the related patents will be issued. Further,
certain confidentiality agreements may expire prior to the issuance of the
relevant patent. There can be no assurance that patents will issue from the
patent applications filed or to be filed or that the scope of any claims granted
in any patent will provide us with proprietary protection or a competitive
advantage. There can be no assurance that our patents will be valid or will
afford us with protection against competitors with similar technology. The
failure to obtain or maintain patent or other intellectual property protection
on the technologies underlying our biodiesel process may have a material adverse
effect on our competitive position and business prospects. It is also possible
that our technologies may infringe on patents or other intellectual property
rights owned by others. We may have to alter our products or processes, pay
licensing fees, defend an infringement action or challenge the validity of the
patents in court, or cease activities altogether because of patent rights of
third parties, thereby causing additional unexpected costs and delays to us.
There can be no assurance that a license will be available to us, if at all,
upon terms and conditions acceptable to us or that we will prevail in any
intellectual property litigation. Intellectual property litigation is costly and
time consuming, and there can be no assurance that we will have sufficient
resources to pursue such litigation. If we do not obtain a license under such
intellectual property rights, are found liable for infringement or are not able
to have such patents declared invalid, we may be liable for significant money
damages and may encounter significant delays in bringing products and services
to market. There can be no assurance that we have identified United States and
foreign patents that pose a risk of infringement.
Competition may impair our success.
New technologies may be developed by others that could compete with our corn oil
extraction model. In addition, we face competition from other producers of
biodiesel equipment and related products. Such competition could be intense thus
driving down the price for our products. Competition will likely increase as
prices of energy in the commodities market, including petroleum and biodiesel,
rise, as they have in recent years. Additionally, new companies are constantly
entering the market, thus increasing the competition. Larger foreign owned and
domestic companies who have been engaged in this business for substantially
24
longer periods of time, such as vertically integrated agricultural and food
supply companies such as Cargill, Archer Daniels Midland and Bunge, or who
decide to enter into the biodiesel production industry, such as Tyson and Conoco
Phillips, may have access to greater resources. These companies may have greater
success in the recruitment and retention of qualified employees, as well as in
conducting their own refining and fuel marketing operations, and may have
greater access to feedstocks, market presence, economies of scale, financial
resources and engineering, technical and marketing capabilities, which may give
them a competitive advantage. In addition, actual or potential competitors may
be strengthened through the acquisition of additional assets and interests. If
we are unable to compete effectively or adequately respond to competitive
pressures, this may materially adversely affect our results of operation and
financial condition and could also have a negative impact on our ability to
obtain additional capital from investors.
We may be unable to employ and retain the qualified personnel that will be
necessary for our success.
As of December 31, 2008, we had approximately 75 full time equivalent employees.
The number of individuals with experience in biofuels production is considerably
smaller than the number of jobs available for such individuals. We will have to
offer substantial incentives in order to obtain the services of individuals with
useful experience in the production of biodiesel and ethanol. As a result, our
labor costs may be greater than they would be in a less dynamic industry. On the
other hand, if we are unable to employ the qualified individuals that we will
need, our business may fail.
Competition due to advances in renewable fuels may lessen the demand for
biodiesel and negatively impact our profitability.
Alternative fuels, gasoline oxygenates, ethanol and biodiesel production methods
are continually under development. A number of automotive, industrial and power
generation manufacturers are developing alternative clean power systems using
fuel cells or clean-burning gaseous fuels that, like biodiesel, may address
increasing worldwide energy costs, the long-term availability of petroleum
reserves and environmental concerns. Additionally, there is significant research
and development being undertaken regarding the production of ethanol from
cellulosic biomass, the production of methane from anaerobic digesters and the
production of electricity from wind and solar thermal energy systems, among
other potential sources of renewable energy. If these renewable fuels continue
to expand and gain broad acceptance such that the overall demand for diesel is
reduced, we may not be able to compete effectively.
We will rely on technology to conduct our business and our technology could
become ineffective or obsolete.
We will be required to continually enhance and update our technology to maintain
its efficacy and to avoid obsolescence. The costs of doing so may be substantial
and may be higher than the costs that we anticipate for technology maintenance
and development. If we are unable to maintain the efficacy of our technology,
our ability to manage our business and to compete may be impaired. Even if we
are able to maintain technical effectiveness, our technology may not be the most
efficient means of reaching our objectives, in which case we may incur higher
operating costs than we would if our technology was more effective. The impact
of technical shortcomings could have a material adverse effect on our prospects,
business, financial condition, and results of operations. In addition, our
biodiesel production plants, when constructed, will be single purpose entities
with no use other than the production of biodiesel and associated produces. So
if our facilities become technologically obsolete, we may be unable to
restructure our operations without a massive capital expense associated with
converting our facilities
Litigation or other proceedings relating to intellectual property rights could
result in substantial costs and liabilities and prevent us from selling our
biodiesel.
We must operate in a way that does not infringe the intellectual property rights
of others in the U.S. and foreign countries. Third parties may claim that our
production process or related technologies infringe their patents or other
intellectual property rights. Competitors may have filed patent applications or
have issued patents and may obtain additional patents and proprietary rights
related to production processes that are similar to ours. We may not be aware of
all of the patents potentially adverse to our interests. We may need to
participate in interference proceedings in the U.S. Patent and Trademark Office
or in similar agencies of foreign governments to determine the priority of
invention involving issued patents and pending applications of another entity.
The cost to us of any litigation or other proceeding relating to intellectual
property rights, even if resolved in our favor, may cause us to incur
significant expenses, divert the attention of our management and key personnel
from other business concerns and, in certain cases, result in substantial
additional expenses to license technologies from third parties. Some of our
competitors may be able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater resources or
engage legal counsel willing to advance the litigation costs. An unfavorable
outcome in an interference proceeding or patent infringement suit could require
25
us to pay substantial damages, cease using the technology or to license rights,
potentially at a substantial cost, from prevailing third parties. There is no
assurance that any prevailing party would offer us a license or that we could
acquire any license made available to us on commercially acceptable terms. Even
if we are able to obtain rights to a third party's intellectual property, those
rights may be non-exclusive and therefore our competitors may obtain access to
the same intellectual property. Ultimately, we may be unable to produce and sell
our biodiesel or may have to cease some of our business operations as a result
of infringement claims, which could severely harm our business. We cannot give
assurances that our biodiesel technologies will not conflict with the
intellectual property rights of others. Additionally, any involvement in
litigation in which we are accused of infringement may result in negative
publicity about us and injure our relations with any then-current or prospective
customers or vendors.
Our business is subject to local legal, political, and economic factors which
are beyond our control.
We believe that the current political environment for construction of our
planned future biodiesel facilities is sufficiently supportive to enable us to
plan and implement our operations. However, there are risks that conditions will
change in an adverse manner. These risks include, but are not limited to, laws
or policies affecting mandates or incentives to promote the use of biodiesel,
environmental issues, land use, air emissions, water use, zoning, workplace
safety, restrictions imposed on the biodiesel fuel industry such as restrictions
on production, substantial changes in product quality standards, restrictions on
feedstock supply, price controls and export controls. Any changes in biodiesel
fuel, financial incentives, investment regulations, policies or a shift in
political attitudes are beyond our control and may adversely affect our business
and future financial results.
Changes in industry specification standards for biodiesel may negatively impact
our ability to sell corn oil for the purposes of biodiesel production, increase
production costs or require more capital than we have planned to construct our
biodiesel production facilities.
The American Society of Testing and Materials, or ASTM, is the recognized
standard-setting body for fuels and additives in the U.S. ASTM's specification
for biodiesel as a blend stock, D6751, has been adopted by the EPA, and
compliance with such specification is required in order for our biodiesel to
qualify as a legal motor fuel for sale and distribution. In Europe, biodiesel
standard is EN 14214, which has been modified to a more stringent standard in
Germany. ASTM and the European standard setting bodies have modified the
biodiesel specifications in the past, and are expected to continue to modify the
specification in the future as the use of biodiesel expands. There is no
guarantee that our production facilities will be able to produce ASTM-compliant
biodiesel in the event of changes to the specifications. We may need to invest
significant capital resources to upgrade or modify our production facilities,
which might cause delays in construction or stoppages of production and the
resultant loss of revenue, or which might not be economically feasible at all.
Any modifications to our production facilities or to the biodiesel ASTM
specification or other specification with which we attempt to comply may entail
increased construction or production costs or reduced production capacity. These
consequences could result in a negative impact on our financial performance.
Changes in regulations and enforcement policies could subject us to additional
liability which could impair our ability to continue certain operations due to
the regulated nature of our operations.
Because the biodiesel industry continues to develop rapidly, we cannot predict
the extent to which our operations may be affected by future enforcement
policies as applied to existing laws, by changes to current environmental laws
and regulations, or by the enactment of new environmental laws and regulations.
Any predictions regarding possible liability under such laws are complicated
further by current environmental laws which provide that we could be liable,
jointly and severally, for certain activities of third parties over whom we have
limited or no control.
Environmental risks and regulations may adversely affect our business.
All phases of designing, constructing and operating biodiesel refineries present
environmental risks and hazards. We are subject to environmental regulation
implemented or imposed by a variety of federal, state and municipal laws and
regulations as well as international conventions. Among other things,
environmental legislation provides for restrictions and prohibitions on spills
and discharges, as well as emissions of various substances produced in
association with biodiesel fuel operations. Legislation also requires that
facility sites be operated, maintained, abandoned and reclaimed in such a way
that would satisfy applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties, some of which may be material. Environmental
legislation is evolving in a manner we expect may result in stricter standards
and enforcement, larger fines and liability, as well as potentially increased
capital expenditures and operating costs. The presence or discharge of
pollutants in or into the air, soil or water may give rise to liabilities to
governments and third parties and may require us to incur costs to remedy such
presence or discharge. If we are unable to remediate such conditions
economically or obtain reimbursement or indemnification from third parties, our
27
financial condition and results of operations could be adversely affected. We
cannot give assurance that the application of environmental laws to our business
will not cause us to limit our production, to significantly increase the costs
of our operations and activities, to reduce the market for our products or to
otherwise adversely affect our financial condition, results of operations or
prospects.
Penalties we may incur could impair our business.
Failure to comply with government regulations could subject us to civil and
criminal penalties require us to forfeit property rights and may affect the
value of our assets or our ability to conduct our business. We may also be
required to take corrective actions, including, but not limited to, installing
additional equipment, which could require us to make substantial capital
expenditures. We could also be required to indemnify our employees in connection
with any expenses or liabilities that they may incur individually in connection
with regulatory action against them. These could result in a material adverse
effect on our prospects, business, financial condition and our results of
operations.
Our business will suffer if we cannot obtain or maintain necessary permits or
licenses.
Our operations will require licenses, permits and in some cases renewals of
these licenses and permits from various governmental authorities. Our ability to
obtain, sustain, or renew such licenses and permits on acceptable, commercially
viable terms are subject to change, as, among other things, the regulations and
policies of applicable governmental authorities may change. Our inability to
obtain or extend a license or a loss of any of these licenses or permits may
have a material adverse effect on our operations and financial condition.
If we cannot maintain adequate insurance coverage, we will be unable to continue
certain operations.
Our business exposes us to various risks, including claims for causing damage to
property and injuries to persons who may involve allegations of negligence or
professional errors or omissions in the performance of our services. Such claims
could be substantial. We believe that our insurance coverage is presently
adequate and similar to, or greater than, the coverage maintained by other
companies in the industry of our size. If we are unable to obtain adequate or
required insurance coverage in the future or, if our insurance is not available
at affordable rates, we would violate our permit conditions and other
requirements of the environmental laws, rules and regulations under which we
operate. Such violations would render us unable to continue certain of our
operations. These events would result in an inability to operate certain of our
assets and significantly impair our financial condition.
Increases in energy costs will affect operating results and financial condition.
Our production costs will be dependent on the costs of the energy sources used
to run our facilities. These costs are subject to fluctuations and variations in
different locations where we intend to operate, and we may not be able to
predict or control these costs. If these costs exceed our expectations, this may
adversely affect our results of operations
If we cannot maintain our government permits or cannot obtain any required
permits, we may not be able to continue or expand our operations.
Our operations will require licenses, permits and in some cases renewals of
these licenses and permits from various governmental authorities. Our ability to
obtain, sustain, or renew such licenses and permits on acceptable, commercially
viable terms are subject to change, as, among other things, the regulations and
policies of applicable governmental authorities may change. Our inability to
obtain or extend a license or a loss of any of these licenses or permits may
have a material adverse effect on our operations and financial condition.
Our operations will suffer if we are unable to manage our rapid growth.
We are currently experiencing a period of rapid growth through internal
expansion and strategic acquisitions. This growth has placed, and could continue
to place, a significant strain on our management, personnel and other resources.
Our ability to grow will require us to effectively manage our collaborative
arrangements and to continue to improve our operational, management, and
financial systems and controls, and to successfully train, motivate and manage
our employees. If we are unable to effectively manage our growth, we may not
realize the expected benefits of such growth, and such failure could result in
lost sales opportunities, lost business, difficulties operating our assets and
could therefore significantly impair our financial condition.
RISKS ATTENDANT TO OUR CORPORATE STRUCTURE
We will be unable to service our debts if our subsidiaries default in settling
their obligations to us.
We have incurred substantial debt obligations and will continue to do so, in
order to fund the operations of our subsidiaries. Since we carry on no business
at the level of our parent corporation, our ability to service our own debts
will depend on the cash flow from our subsidiaries. If one or more of our
27
subsidiaries becomes unable to pay its debts to GreenShift, we may be forced to
default on our own debt obligations. Such a default could result in the
liquidation of a portion of our assets, most likely at less than their market
value.
We will be contingently liable for the debts of some of our subsidiaries.
We guaranteed $19 million in debt incurred by our subsidiary, GS AgriFuels
Corporation and it is likely that in the future we will provide guarantees of
other debts incurred by our subsidiaries. These guarantees will subject our
assets to the risk of the failure of a subsidiary whose debt we have guaranteed.
If, for example, we were forced to satisfy our guarantee of GS AgriFuels debt,
to do so we would have to liquidate our holding in our successful subsidiaries.
Such a result could eliminate the value of our shareholders' investments.
We are subject to financial reporting and other requirements for which our
accounting, internal audit and other management systems and resources may not be
adequately prepared.
We are subject to reporting and other obligations under the Securities Exchange
Act of 1934, including the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002. Section 404 will require us to conduct an annual management assessment
of the effectiveness of our internal controls over financial reporting, provide
a report on our assessment and obtain a report by our independent auditors
addressing our assessments. These reporting and other obligations will place
significant demands on our management, administrative, operational, internal
audit and accounting and financial resources.
Our business development could be hindered if we lost the services of our Chief
Executive Officer.
Kevin Kreisler is the Chief Executive Officer of GreenShift and serves in an
executive capacity with each of our primary subsidiaries. Mr. Kreisler is
responsible for strategizing not only our business plan but also the means of
financing it. If Mr. Kreisler were to leave us or become unable to fulfill his
responsibilities, our business would be imperiled. At the very least, there
would be a substantial delay in the development of our plans until a suitable
replacement for Mr. Kreisler could be retained.
The absence of independent directors on our board of directors may limit the
quality of management decision making.
Each of the four members of our Board of Directors is also an employee of
GreenShift Corporation. There is no audit committee of the board and no
compensation committee. This situation means that the Board will determine the
direction of our company without the benefit of an objective perspective and
without the contribution of insights from outside observers. This may limit the
quality of the decisions that are made. In addition, the absence of independent
directors in the determination of compensation may result in the payment of
inappropriate levels of compensation.
RISKS FACTORS ATTENDANT TO OWNERSHIP OF OUR COMMON STOCK
The resale of shares acquired by YA Global Investments from GreenShift may
reduce the market price of GreenShift's shares.
YA Global Investments owns convertible debentures issued by GreenShift, which
will permit it to acquire GreenShift common stock and resell it to the public.
At the current market price, YA Global Investments could convert its debentures
into over 50% of our outstanding common stock. It is possible that resale of
shares by YA Global Investments will significantly reduce the market price for
GreenShift common stock.
Existing shareholders may experience significant dilution from our issuance of
shares to YA Global Investments.
The issuance of shares on conversion of the convertible debentures held by YA
Global Investments will have a dilutive impact on our stockholders. As a result,
our net income per share could decrease in future periods, and the market price
of our common stock could decline. In addition, the lower our stock price is,
the more shares of common stock we will have to issue if the debentures are
converted on the basis of the contemporaneous market price. If our stock price
is lower, then our existing stockholders would experience greater dilution.
We may incur additional indebtedness in the future. Our current indebtedness and
any future indebtedness could adversely affect our business and may restrict our
operating flexibility.
As of December 31, 2008, we had approximately $55,795,000 in total debt. Our
ability to incur additional debt could adversely affect our business and
restrict our operating flexibility. We face several risks relating to our need
to complete additional financings in the future. We must satisfy the closing
28
conditions for each drawdown of our $10,000,000 construction credit facility. We
must also secure additional financing to build our planned corn oil extraction
and biodiesel production facilities. We anticipate that 50,000,000 gallons per
year of extraction and biodiesel production will cost approximately $150,000,000
to build. However, there can be no assurances that costs may not be greater
depending on site conditions, costs of materials, labor costs, engineering and
design changes and other potential cost and integration overruns. The financing
may consist of debt but may also consist of common or preferred equity, project
financing or a combination of these financing techniques. Additional debt will
increase our leverage and interest expense and will likely be secured by certain
of our assets; additional equity or equity-linked financings may have a dilutive
effect on our equity and equity-linked securities holders. It is likely that the
terms of any project financing would include customary financial and other
covenants on our project subsidiaries, including restrictions on the ability to
make distributions to the parent company, to guarantee the debts of the parent
company and to incur liens on the refineries of such project subsidiaries, among
others.
If our cash flow proves inadequate to service our debt and provide for our other
obligations, we may be required to refinance all or a portion of our existing
and future debt at terms unfavorable to us.
Our ability to make payments on and refinance our debt, and to fund our
operations and capital expenditures will depend on our ability to generate
substantial operating cash flow. If our cash flows prove inadequate to meet our
debt service obligations, in the future, we may be required to refinance all or
a portion of our existing or future debt, to sell assets or to obtain additional
financing. We cannot assure you that any such refinancing or that any such sale
of assets or additional financing would be possible on favorable terms, or at
all. If we raise additional equity or equity-related securities in the future,
it may be dilutive to holders of our common stock.
Future sales of shares of our common stock or the issuance of securities senior
to our common stock could adversely affect the trading price of our common
stock, the value of our debt securities and our ability to raise funds in new
equity offerings.
We may issue additional common stock, preferred stock or securities convertible
into or exchangeable for common stock, in the future. Future sales of
substantial amounts of our common stock or equity-related securities in the
public market or privately, or the perception that such sales could occur, could
adversely affect prevailing trading prices of our common stock and the value of
our debt securities and could impair our ability to raise capital through future
offerings of equity or equity-related securities. No prediction can be made as
to the effect, if any, that future sales of shares of common stock or the
availability of shares of common stock for future sale, will have on the trading
price of our common stock or the value of our debt securities.
Our common stock qualifies as a "penny stock" under SEC rules which may make it
more difficult for our stockholders to resell their shares of our common stock.
Our common stock trades on the OTC Bulletin Board. As a result, the holders of
our common stock may find it more difficult to obtain accurate quotations
concerning the market value of the stock. Stockholders also may experience
greater difficulties in attempting to sell the stock than if it were listed on a
stock exchange or quoted on the NASDAQ Global Market or the NASDAQ Capital
Market. Because our common stock does not trade on a stock exchange or on the
NASDAQ Global Market or the NASDAQ Capital Market, and the market price of the
common stock is less than $5.00 per share, the common stock qualifies as a
"penny stock." SEC Rule 15g-9 under the Securities Exchange Act of 1934 imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination on the
appropriateness of investments in penny stocks for the customer and must make
special disclosures to the customer concerning the risks of penny stocks.
Application of the penny stock rules to our common stock affects the market
liquidity of the shares, which in turn may affect the ability of holders of our
common stock to resell the stock.
We will be quoted on the OTC Bulletin Board for the immediate future.
We currently do not meet the eligibility requirements for listing on the NASDAQ
Stock Market. Until we meet those standards and are accepted into the NASDAQ
Stock Market, or unless we are successful in securing a listing on the American
Stock Exchange or some other exchange, our common stock will be quoted only on
the OTC Bulletin Board. Such a listing is considered less prestigious than a
NASDAQ Stock Market or an exchange listing, and many brokerage firms will not
recommend Bulletin Board stocks to their clients. This situation may limit the
liquidity of your shares.
29
Our common stock price may be volatile.
The trading price of our common stock may fluctuate substantially. The price of
the common stock may be higher or lower than the price you pay for your shares,
depending on many factors, some of which are beyond our control and may not be
directly related to our operating performance. These factors include, but are
not limited to, the following:
>> price and volume fluctuations in the overall stock market from time to
time;
>> significant volatility in the market price and trading volume of securities
traded on the OTC Bulletin Board companies;
>> actual or anticipated changes in our earnings or fluctuations in our
operating results.
As a result of these factors, you cannot be assured that when you are ready to
sell your shares, the market price will accurately reflect the value of your
shares or that you will be able to obtain a reasonable price for your shares.
ITEM 2 DESCRIPTION OF PROPERTIES
GreenShift's corporate headquarters is located in New York, New York. The New
York lease is a five year lease terminating in June 2011. The monthly lease
payment is $8,800. The Company maintains its engineering and manufacturing
services in Alpharetta, Georgia. The Alpharetta lease is a three year term
terminating in February 2011. The monthly lease payment is $1,480. The Company
maintains its manufacturing facilities in Ottoville and Van Wert, Ohio. The Van
Wert facility is on a month to month lease. The monthly lease payments are
$5,000 and $3,200, respectively. The Company maintains its oil seed crushing
facility, office space and warehouse in Missoula, Montana. The terms of the
leases are from month to month. The monthly lease payment is $421 and $650,
respectively. The Company maintains its biodiesel facility and office space in
Adrian, Michigan. The following table identifies all of the locations where the
Company carries on operations. Locations in which our property interest is
identified as "Operating Agreement" are third party ethanol plants where we have
located our corn oil extraction equipment under the terms of an operating
agreement where we retain title to our facility.
Location Nature of Operation Property Interest
------------------------------------------------------------------------------------------------------------------
New York, New York Corporate Headquarters Lease
Alpharetta, Georgia Engineering and Technology Sales Lease
Ottoville, Ohio Equipment Manufacturing Owned
Van Wert, Ohio Equipment Manufacturing Lease
Missoula, Montana Culinary Oilseed Marketing Lease
Culbertson, Montana Culinary Oilseed Production Owned
Adrian, Michigan Biodiesel production facility Owned
Oshkosh, Wisconsin Corn Oil Extraction Operating Agreement
Medina, New York Corn Oil Extraction Operating Agreement
Riga, Michigan Corn Oil Extraction Operating Agreement
Marion, Indiana Corn Oil Extraction Operating Agreement
ITEM 3 LEGAL PROCEEDINGS
The Company is party to the matter entitled O'Brien &Geree Limited, et al v.
NextGen Chemical Processors, Inc., et al., which action was filed in the Supreme
Court of the State of New York. The verified complaint had sought performance of
and damages relating to certain service and related agreements, plus attorney's
fees and costs. This matter relates to the provision by plaintiffs of certain
engineering services to NextGen Chemical Processors, Inc. ("NCP") during 2005
and 2006. NCP is owned by the former shareholders of NextGen Fuel, Inc.,
subsidiary. On September 19, 2007, the Supreme Court of the State of New York
dismissed a significant portion of O'Brien & Gere's complaint with prejudice.
Management does not believe that there is a reasonable probability that the
claims made against NextGen Fuel by the plaintiffs in this litigation indicate
that a material loss has occurred. Accordingly, an estimate of loss cannot be
made at this time and no accrual has been made in connection with those claims.
The Company's GS AgriFuels subsidiary is party to the matter entitled GS
AgriFuels Corporation v. Chaykin, et al. The action was filed in the Supreme
Court of the State of New York, County of New York, on February 2, 2009. The
Complaint seeks damages for defendants' fraudulent misrepresentations, tortious
interference, breach of acquisition agreements and related claims. GS AgriFuels
initiated this litigation and intends to prosecute the case vigorously. The
defendants filed a separate action entitled Max, et al. v. GS AgriFuels
Corporation, et al. in response to GS AgriFuels' Complaint. The case was only
recently commenced and Management is unable to evaluate the probability of an
unfavorable outcome at this time.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
30
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
GreenShift's Common Stock trades on the OTC Bulletin Board under the symbol
"GERS." The following table sets forth, for the periods indicated, the range of
high and low closing bid prices for GreenShift's Common Stock as reported by the
National Association of Securities Dealers composite. The reported bid
quotations reflect inter-dealer prices without retail markup, markdown or
commissions, and may not necessarily represent actual transactions.
Period High Low
----------------------------------------------------------------------------------------
2007 First Quarter 0.0044 0.0034
2007 Second Quarter 0.0145 0.0106
2007 Third Quarter 0.008 0.0075
2007 Fourth Quarter 0.300 0.1620
2008 First Quarter 0.130 0.100
2008 Second Quarter 0.095 0.070
2008 Third Quarter 0.060 0.040
2008 Fourth Quarter 0.035 0.023
Title of Class Approximate Number of Holders of Record as of April 15, 2008
Common Stock, 0.001 par 929
The number of holders does not give effect to beneficial ownership of shares
held in the street name by stock brokerage houses or clearing agents.
REVERSE SPLIT
On December 11, 2007, the Company completed a 1 for 50 reverse stock split. All
stock prices, share amounts, per share information, stock options and stock
warrants in this Report reflect the reverse stock split.
DIVIDENDS
We have no present intention of paying dividends in the foreseeable future. Our
policy for the time being is to retain earnings and utilize the funds for
operations and growth. The Board of Directors based on our earnings, financial
condition, capital requirements and other existing conditions will determine
future dividend policies.
SALE OF UNREGISTERED SECURITIES
The Company did not sell any unregistered securities during the 4th quarter of
2008.
REPURCHASE OF EQUITY SECURITIES
The Company did not repurchase any of its equity securities that were registered
under Section 12 of the Securities Act during the 4th quarter of 2008.
ITEM 6 SELECTED FINANCIAL DATA
Not applicable.
31
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
OVERVIEW
GreenShift Corporation ("we," "our," "us," "GreenShift," or the "Company")
develops and commercializes clean technologies that facilitate the efficient use
of natural resources.
We do this today by developing and using innovative technologies to produce
biofuel and other biomass-derived products. Our strategy is to use our
technologies to become a leading producer of biomass-derived products, and to do
so at enhanced cost and risk profiles by extracting and refining raw materials
that other producers cannot access or process.
We have created a business model based on feedstock ownership and margin
protection that is unique among biofuel producers and that positions us in
historic times at the intersection of the corn ethanol and biodiesel industries.
There are no other technologies that have been developed, commercialized and
integrated into the corn ethanol industry today that have produced anything
approaching the yield improvement and energy savings demonstrated by our
patent-pending corn oil extraction technologies; and, our biodiesel refining
technologies have been shown to convert our extracted corn oil into the highest
quality biodiesel currently produced in the U.S.
Our corn oil extraction offering is structured to provide 100% of the capital
needed to build and integrate turn-key, skid-mounted facilities based on our
extraction technologies into corn ethanol facilities in return for the long-term
right to purchase the extracted oil for a fair price that is indexed to diesel
fuel prices. We refine the corn oil that we extract into biodiesel, which is
then sold at rates that are also indexed to diesel fuel prices. This makes our
business model more comparable to traditional oil and gas models than it is to
other biofuel models since we own our own `wellheads' and we have hedged our
refining margins. We believe that this gives us the ability to remain profitable
(after achieving break-even production levels) when most biodiesel producers are
forced to shut down.
Our corn oil extraction technologies are widely considered to be the quickest
path for margin improvement for corn ethanol producers today. We have proven
that we can extract upwards of 6.5 million gallons of corn oil per year for
every 100 million gallons of ethanol produced. This corresponds to a 7% increase
in the gallons of biofuel produced per bushel of corn from 2.8 to 3.0 gallons
per bushel.
This extraction rate also translates to 680 million gallons per year of inedible
feedstock that we can make for conversion into advanced biofuel with the U.S.
corn ethanol fleet producing 10.5 billion gallons per year. We hold a 6% share
of this market opportunity today; we are currently under contract to install
more than 40 million gallons per year of shovel-ready corn oil extraction
facilities at ethanol facilities throughout the U.S. This corresponds to
annualized revenue and operating income of about $92 million and $27 million,
respectively, at current market prices. Our primary goal is to obtain the new
financing we will need to build and operate the extraction and refining
infrastructure necessary to achieve these results.
We currently own four corn oil extraction facilities that are located in
Oshkosh, Wisconsin, Medina, New York, Marion, Indiana, and Riga, Michigan. We
have also installed one facility in Albion, Michigan under a modified version of
our market offering where our client paid us to build the extraction facility.
We have the long-term right (10 years or more) to buy the oil extracted from the
Albion facility but the client retains ownership of the extraction assets and is
paid a higher price for the corn oil extracted than we pay to our other clients.
These facilities collectively have a nameplate capacity in excess of 6.5 million
gallons per year of corn oil.
We also own a 10 million gallon per year biodiesel refinery located in Adrian,
Michigan and an oilseed crushing facility in Culbertson, Montana. Both of these
facilities are currently idled pending the completion of additional working
capital financing, which we hope to obtain as soon as possible. Until this
occurs, the oil that we produce from our installed extraction facilities will be
sold as a feedstock to third party renewable fuel producers.
We believe that we have a financeable business model based on our technology and
market positioning, and we are currently focused on securing the capital
resources we need to operate our existing facilities and to build our contracted
backlog of corn oil extraction facilities.
32
Plan of Operations
During the year ended December 31, 2008, we produced and sold about 1,339,750
gallons of biodiesel, 1,223,562 gallons of crude corn, about 762,903 gallons of
culinary oils and about 6,464 tons of animal feed. We also manufactured and sold
biodiesel refining and other equipment for third party clients during 2008.
Our plans for 2008 originally involved the financing and construction of a
number of our corn oil extraction facilities, the construction or other
internalization of biodiesel refining capability, and the completion of
significant additional financing to build our contracted backlog of extraction
facilities.
We closed on a portion of the financing we needed to build our initial
extraction facilities in January 2008, we acquired our biodiesel refinery in May
2008, and we executed a term sheet in July 2008 and then definitive investment
agreements in December 2008 with GE Energy Financial Services for in excess of
$38 million in project equity financing to execute on our backlog.
Unfortunately, unprecedented volatility in the global financial and commodity
markets intervened before we were able to complete construction and initiate
production with the amount of corn oil extraction facilities we needed to
achieve break-even cash flow. The adverse conditions in the financial markets
during the third and fourth quarters of 2008 resulted in the loss of previously
committed sources of liquidity during the second half of 2008. We believe that
these market conditions were also responsible for the failure of our $38 million
project equity financing to close during the first quarter 2009 as called for by
the relevant December 2008 investment agreements.
As a result of these events, we halted all construction activities and idled our
biodiesel refining and oilseed crush operations. We also reduced overhead during
the latter half of 2008, we cut headcount down to 75 as of December 31, 2008 and
to 38 as of April 1, 2009, and we shut-down our equipment manufacturing
operations.
We have arranged for bridge financing to cover essential overhead needs and we
expect to be able to continue to rely on similar financing for the foreseeable
future pending the resurrection of our working capital resources and the
completion of sufficient construction financing. Until this occurs, the oil that
we produce from our installed base of extraction facilities will be sold as a
feedstock to third party renewable fuel producers.
Results of Operations
The following table sets forth, for the periods presented, revenues, expenses
and net income in our condensed consolidated statement of operations, as well as
other key financial and operating data:
12/31/08 12/31/07
----------------------------
Summary Statement of Operations:
Revenue .................................................. $ 23,616,662 $ 14,680,387
Cost of revenues ......................................... 20,251,865 13,087,788
------------ ------------
Gross profit ........................................... 3,364,797 1,592,599
Selling, general and administrative expenses ............. 41,260720 21,508,878
------------ ------------
Income (loss) from operations ......................... (37,895,923) (19,916,279)
Other income (expense), net .............................. (7,202,803) (5,971,568)
------------ ------------
Loss before minority interest and taxes ............... (45,098,726) (25,887,847)
Minority interest in net loss of consolidated subsidiaries 15,327 (1,265,762)
(Provision for) benefit from income taxes ............... (152,445) (51,545)
Income from discontinued operations ...................... (2,739,735) 2,533,309
------------ ------------
Net loss .............................................. $(47,975,579) $(24,671,845)
============ ============
Other financial data:
Net cash flows (used in) provided by operating activities 3,419,511 2,864,508
Net cash flows (used in) provided by investing activities (10,910,629) (4,276,647)
Net cash flow (used in) provided by financing activities . 7,292,620 273,545
------------ ------------
Net (decrease) increase in cash and cash equivalents .. (198,498) (1,138,594)
Operating data:
Corn oil extracted (gallons) ............................. 1,223,562 184,499
Biodiesel produced (gallons) ............................. 1,339,750 --
Average gross price of biodiesel sold per gallon ($) ..... $ 3.68 $ --
Culinary oils produced (gallons) ......................... 762,903 1,083,583
Animal feed produced (tons) .............................. 6,464 9,793
33
Components of Revenue
Our principal sources of revenue during the year ended December 31, 2008 derived
from the following activities:
>> Equipment & Technology Sales
>> Culinary Oil Production & Sales
>> Biofuel Production & Sales
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues
Total revenues for the twelve months ended December 31, 2008 were $23,616,662,
representing an increase of $8,936,275, or 60.9 %, over the twelve months ended
December 31, 2007 revenues of $14,680,387. Revenue for the year ended December
31, 2008 included
>> $6,871,541 in revenue from equipment and technology sales,
>> $8,362,534 million from culinary oil production and sales,
>> $8,382,587 from the sales of corn oil for biofuel production.
In the comparable period of the prior year, revenue totaled $14,680,387, of
which $5,308,241 was attributable to culinary oil sales and $9,101,281 from
equipment sales and $270,866 from the sales of corn oil for biofuel production.
The increase in revenue during 2008 was primarily due to sales of biodiesel
production equipment to third party clients, the acquisition of our biodiesel
production facility in May 2008, and the onset of operations at our Medina, New
York, Marion, Indiana and Riga, Michigan corn oil extraction facilities during
the first, third and fourth quarters of 2008.
Revenues in 2008 decreased to the extent that the Company sold its environmental
services business during January 2008 (in return for a $2,000,000 reduction of
the Company's debt to YA Global Investments, LP). Management believes that these
decreases will be offset by increases in our other business segments in the
future.
We commissioned our Medina, New York, Marion, Indiana and Riga, Michigan corn
oil extraction facilities during the first, third and fourth quarters of 2008,
respectively, and we partially completed several additional extraction
facilities during 2008. While we are currently producing and selling corn oil
from our installed extraction facilities, all biodiesel refining and
construction activities are currently suspended pending the completion of the
additional financing that we need to operate our biodiesel refinery and to
continue construction.
Cost of Revenues
Cost of revenues for the twelve months ended December 31, 2008 were $20,251,865,
or 85.8% of revenue as compared to $13,087,788, or 89.2% of revenue for the same
period in 2007.
Cost of revenues for the Company's oilseed crush facility, which was acquired in
March 2007, were $7,631,614 for the twelve months ended December 31, 2008 as
compared to $5,384,135 from the period of acquisition in March 2007 through
December 31, 2008, and were primarily attributable to oilseed purchases and
direct labor. Cost of revenue for our equipment and technology sales business
were $5,074,122 for the twelve months ended December 31, 2008 as compared to
$7,187,047 for the same period in 2007. This decrease was attributable to the
decreased costs associated with the biodiesel production equipment sold to third
party clients. During the twelve months ended December 31, 2008, the Company's
biofuel production costs of revenue were $7,416,709 as compared to $516,606 for
the same period in 2007, and were attributable to costs of corn oil,
transportation and maintenance for our four corn oil extraction facilities. Cost
of sales for the company's corporate reporting unit was $129,419 and $0 for the
twelve months ended December 31, 2008 and 2007 related to corn oil royalties.
Included within cost of revenue is depreciation and amortization expense of
$1,397,876 and $712,713 for the years ended December 31, 2008, and 2007,
respectively. Depreciation and amortization expense increased by $685,163 over
the same period in 2007.
Gross Profit
Gross profit for year ended December 31, 2008 was $3,364,797, representing a
gross margin of 14.2%. This compared to $1,592,599, 10.8%, in the comparable
period of the prior year. The increase in margin as a percentage of sales was
primarily due to the Company's changed business operations during 2008 as well
as the development and early stage nature of those operations during the first
half of 2008.
34
Operating Expenses
Operating expenses for the year ended December 31, 2008 were $41,260,720 or
174.7% of revenue compared to $21,508,878, or 146.5% of revenue for the same
period in 2007.
Included in our operating expenses for the year ended December 31, 2008 was
$7,252,883 in stock-based compensation (as compared to $2,683,548 for the year
ended December 31, 2007), $21,341,999 in accelerated amortization charges
associated with the impairment of our technology and equipment segment and our
culinary oil production segment, and $2,100,000 in other amortization charges.
The increase in operating expenses was primarily due to the Company's changed
business operations during 2008 and the development and early stage nature of
those operations during the first half of 2008, and included non-recurring
equity and other transactions relating to our restructuring.
Management believes that selling, general and administrative expenses over the
next reporting period will be reduced as a percent of revenue as we expand our
corn oil extraction and biodiesel refining capabilities.
Interest Expense
Interest expenses and financing costs for the year ended December 31, 2008 were
$8,428,804 and $4,983,949 for the year ended December 31, 2007. Included in the
year ended December 31, 2008 was $6,924,723 of interest expense, consisting of
$6,810,766 in accrued interest, $113,957 in accrued interest due to a related
party, and $1,504,081 in non-cash expenses associated with the conversion
features embedded in the convertible debentures issued by the Company during the
year ended December 31, 2008.
Expenses Associated with Change in Convertible Liabilities
As of December 31, 2008, the Company had several convertible debentures due to
YA Global Investments, LP. The Company accounted for the convertible debentures
in accordance with SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150), 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. We calculate the fair value of the conversion
feature at the time of issuance and record a conversion liability for the
calculated value. We recognize interest expense for the conversion liability
which is added to the principal of the debenture. We also recognize interest
expense for accretion of the conversion liability over the term of the note. The
additional value for the conversion features of $1,504,081 for the year ended
December 31, 2008 have been recognized within Other income (expense) as Changes
in conversion liabilities in the accompanying financial statements, including
$127,350 for related party debt.
Net Income or Loss
Net loss from continuing operations for the year ended December 31, 2008, was
$45,235,844 as compared to a loss from continuing operations of $27,205,154 from
the same period in 2007. Net loss from discontinued operations for twelve months
ended December 31, 2008 was $2,739,735 as compared to a net gain of $2,533,309
for the same period in 2007.
The Company's net loss during the twelve months ended December 31, 2008 was
$47,975,579, which is increased from the $24,823,720 loss recorded in the same
period of 2007. The primary reasons for the magnitude of this net loss were
expenses attributable to the transition from technology development to mature
market execution, our new product and service mix, and expenses attributable to
past financing and restructuring activities as well as charges relating to the
impairment of intangibles and goodwill. The loss also included the following
non-cash items: amortization and impairment charges relating to the Company's
NextGen Fuel, Inc. and Sustainable Systems, LLC subsidiaries of about
$21,000,000; amortization of debt discount and deferred financing fees of about
$3,400,000; the loss on the sale of the Company's investments in GS
EnviroServices and Sterling Planet was about $3,400,000; non-recurring equity
charges relating mostly to the issuance of the Company's Series B preferred
stock to its employees were about $7,250,000; accrued legal and other fees
relating to the Company's previously planned $38,000,000 financing with
CleanBioenergy Partners, LLC of about $2,000,000; depreciation expenses of about
$1,400,000; and, accrued interest of about $6,900,000.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Balances
As of December 31, 2008, we had a cash balance of $288,495, down from a balance
of $486,993 at December 31, 2007. This net cash is summarized below and
35
discussed in more detail in the subsequent sub-sections:
>> Operating Activities $3,419,511 of net cash provided by operating
activities primarily deriving from sales of equipment and technology as
well as corn oil for biofuel production.
>> Investing Activities $10,910,629 of net cash used in investing activities
mainly for purchase of equipment for and construction of our corn oil
extraction facilities and oilseed crush facility.
>> Financing Activities $7,292,620 of net cash provided by financing
activities primarily from credit line advances and an increase in related
party debt offset by the repayment of debt.
Current and Prior Year Activity
Our primary source of liquidity is cash provided by financing activities. For
the year ended December 31, 2008, net cash provided by our operating activities
was $3,419,511 as compared to the net cash provided by our operating activities
of $2,864,508 for the year ended December 31, 2007.
Our financial position and liquidity are, and will be, influenced by a variety
of factors, including our ability to generate cash flows from operations; the
level of our outstanding indebtedness and the interest we are obligated to pay
on this indebtedness; and, our capital expenditure requirements, which consist
primarily of facility construction and the purchase of equipment
The Company's capital requirements consist of general working capital needs,
scheduled principal and interest payments on debt, obligations and capital
leases and planned capital expenditures. The Company's capital resources consist
primarily of cash generated from operations and proceeds from issuance of debt
and common stock and are impacted by changes in accounts receivable as a result
of revenue fluctuations, economic trends, and collection activities.
At December 31, 2008, accounts receivable, net of allowance for doubtful
accounts, totaled $896,193, and inventories totaled $2,914,514. Accounts payable
and accrued expenses totaled $20,237,601.
For the year ended December 31, 2008, we used $10,910,629 from investing
activities as compared to $4,276,647 used in investing activities for the twelve
months ended December 31, 2007. For the twelve months ended December 31, 2008 we
provided cash from financing activities of $7,292,620 as compared to $273,545
provided by financing activities during December 31, 2007.
The Company had a working capital deficit of $59,951,696 at December 31, 2008,
which includes convertible debentures of $11,792,387, accrued interest payable
of $7,035,935, $3,979,437 in purchase obligations, $4,821,738 in amounts due to
the prior owners of our oilseed crush facility and $1,900,333 in related party
convertible debentures. Despite their classification as current liabilities
current convertible debentures and accrued interest ($20,728,655) are not
serviceable out of the Company's cash flows (the terms of the convertible debt
require repayment in shares of either GreenShift Corporation or GS AgriFuels
Corporation common stock); the $3,979,437 in purchase obligations, to the extent
due, are tied to the earnings of the Company's equipment sales business and can
only be serviced after the Company's senior secured debt has been serviced; and,
the notes payable to the prior owners of our oilseed crush facility ($4,821,738)
pursuant to the relevant acquisition agreements are in default due to the
failure by the selling shareholders to disclose that Sustainable did not hold
title to its now-owned Culbertson, Montana oilseed crushing facility at the time
of the acquisition by GS AgriFuels. The Company's working capital deficit net of
these amounts is $30,421,866.
The Company's liquidity plans during 2008 were frustrated by the inability of
previously committed sources of capital to provide funding. This occurred during
the third and fourth quarters of 2008 and again in the first quarter of 2009.
Management believes that the failure of these financings to close was
attributable to the globally stressed capital markets.
At the present time, the Company has no committed source of capital sufficient
to meet all of the Company's operating and construction needs. We are currently
investigating the availability of both equity and debt financing to provide
sufficient working capital financing for our currently-idled refining operations
and to complete the balance of the Company's construction projects. We are also
evaluating various opportunities to restructure our convertible debt. We do not
know at this time if the necessary funds can be obtained or on what terms they
may be available.
Our financial position and liquidity are, and will be, influenced by a variety
of factors, including our ability to generate cash flows from operations; the
level of our outstanding indebtedness and the interest we are obligated to pay
on this indebtedness; and, our capital expenditure requirements, which consist
primarily of facility construction and the purchase of equipment.
36
Expected Activity Moving Forward
We intend to fund our principal liquidity and capital resource requirements
through new financing activities. The Company has no committed source of capital
that is sufficient to meet all of its operational and other regular cash needs
during 2009 and beyond. Obtaining this capital is currently Management's top
priority.
Cash Flows Provided By Operating Activities
Among our current and known sources of operating cash flows are the cash flows
deriving from our four existing corn oil extraction facilities. We could be
generating additional cash flow with the oil we are extracting today if we had
access to the working capital resources we need to operate our biodiesel
refinery to convert our extracted oil into biodiesel. Until then, we will
continue to market the corn oil we extract as a feedstock to third party
renewable fuel producers.
Cash Flows Provided By Financing Activities
We require significant new equity and debt financing to accelerate the
completion of our contracted corn oil extraction, biodiesel production and
oilseed crush projects. We hope to complete additional financing for this
purpose during 2009. We are also evaluating various opportunities to restructure
our convertible debt. We do not know at this time if the necessary funds can be
obtained or on what terms they may be available.
37
Contractual Commitments
Our material contractual obligations are composed of construction commitments
for plants being built for our own use, construction commitments for plants
being built for outside parties, repayment of amounts borrowed through our
convertible debentures and other notes payable. The following schedule
summarizes our contractual obligations as of December 31, 2008. Our obligations
are likely to increase significantly as we enter into agreements in connection
with the construction of additional GreenShift-owned facilities:
2013 and
2009 2010 2011 2012 Thereafter Total
----------- ----------- ---------- ----------- ----------- -----------
Current convertible debt obligations (1) ...... $ 7,934,631 $ -- $ -- $ -- $ -- $ 7,934,631
Current convertible debt, related parties ..... 1,772,983 -- -- -- -- 1,772,983
Current note payable obligations (2) .......... 4,628,330 -- -- -- -- 4,628,330
Other current obligations ..................... 787,872 -- -- -- -- 787,872
Long term convertible debt obligations, net (3) -- -- 21,211,842 -- -- 21,211,842
Long term note payable obligations, net ....... -- 2,157,568 1,436,597 1,339,296 5,860,217 10,793,678
Convertible purchase obligations (4) .......... 3,804,287 -- -- -- -- 3,804,287
Other purchase obligations (5) ................ 4,996,888 -- -- -- -- 4,996,888
Other obligations ............................. -- -- -- -- 247,462 247,462
----------- ----------- ----------- ----------- ----------- -----------
Total obligations ............................. $23,924,991 $ 2,157,568 $22,648,439 $ 1,339,296 $ 6,107,679 $56,177,973
-----------
(1) Current convertible debt obligations represents amounts due to third
parties but that are payable in the form of either GreenShift Corporation
common stock or GS AgriFuels Corporation common stock. The terms of the
Company's convertible debt do not generally require regular principal or
interest payments in cash. The amount due at December 31, 2008 was
$7,934,631, including reductions of $554,657 from conversions for the year
ended December 31, 2008 and new debentures for $1,871,851 added during the
year ended December 31, 2008.
(2) Current note payable obligations of $4,628,330 included $2,071,886 at
December 31, 2008 due to Stillwater Asset Backed Fund, L.P., the proceeds
of which were used to complete the Company's 2006 acquisition of NextGen
Fuel, Inc. and the current portion of other notes payable of $2,556,444 The
Company primarily services these obligations out of its equipment and
technology sales cash flows.
(3) Long term convertible debt obligations include $8,351,842 and $12,860,000
due from GreenShift and GS AgriFuels, respectively, to YA Global
Investments, L.P. ("YAGI"). The amount due from GreenShift and GS AgriFuels
were reduced by $2,000,000 and $1,000,000, respectively, during the year
ended December 31, 2008 with the proceeds from GreenShift's sale of its
former environmental services division. The Company intends to refinance
the substantial majority of its convertible debt due to YAGI before its
maturity date of December 31, 2011.
(4) Purchase obligations pertain to the 2007 acquisition by GS AgriFuels of
Sustainable Systems, Inc., the holding company for our oilseed crush
facility. These amounts include $3,804,287 in GS AgriFuels current
convertible debentures payable to the prior owners of our oilseed crush
facility (see Note 16 to the Consolidated Financial Statements). The
Company expects to restructure the terms and conditions of the relevant
purchase agreements for its oilseed crush facility.
(5) Other purchase obligations at December 31, 2008 include $3,979,437 relating
to GS AgriFuels' 2006 acquisition of NextGen Fuel, Inc., which obligations
are potentially subject to adjustment by the terms of the relevant
acquisition agreements and, to the extent due, may only be serviced by the
Company after the Company has serviced and remains in continuing compliance
with its senior debt obligations and $1,017,451 in notes payable to the
prior owners of our oilseed crush facility (see Note 16 to the Consolidated
Financial Statements). The Company expects to restructure the terms and
conditions of the relevant purchase agreements for its oilseed crush
facility.
38
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
Page No
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm...................................................41
Consolidated Balance Sheet ...............................................................................42
Consolidated Statements of Operations ....................................................................43
Consolidated Statements of Stockholders' Equity...........................................................44
Consolidated Statements of Cash Flows.....................................................................46
Notes to Consolidated Financial Statements ...............................................................48
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of GreenShift Corporation,
We have audited the accompanying balance sheets of GreenShift Corporation and
Subsidiaries as of December 31, 2008 and 2007, and the related statements of
operations, stockholders' equity, and cash flows for each of the years then
ended. GreenShift Corporation's management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GreenShift Corporation and
Subsidiaries as of December 31, 2008 and 2007, and the results of its operations
and its cash flows for each of the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is in a working capital deficit position that raises
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in the notes to the financial statements entitled "RESTATEMENTS",
certain errors were discovered by management of the Company subsequent to the
date of the original filing. Accordingly, the 2007 and 2008 financial statements
have been restated and an adjustment has been made to accumulated deficit as of
January 1, 2007 due to corrections made for the years ended December 31, 2007
through 2008.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
April 14, 2009, except as to Note 29, as to which the
date is October 13, 2009.
40
GREENSHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2008
RESTATED RESTATED
12/31/2008 12/31/2007
------------------------------
ASSETS
Current assets:
Cash ........................................................................ $ 288,495 $ 486,993
Restricted cash ............................................................. 406,954 425,623
Accounts receivable, net of allowance of doubtful
accounts of $46,962 in both years .......................................... 896,193 1,049,671
Inventories ................................................................. 2,914,514 5,017,233
Cost and earnings in excess of billings ..................................... 175,592 140,592
Project development costs ................................................... 379,355 281,991
Prepaid expenses and other assets ........................................... 222,664 483,507
------------- -------------
Total current assets ...................................................... 5,283,767 7,885,610
------------- -------------
Other Assets:
Property and equipment, net ................................................. 25,312,706 4,105,348
Deposits .................................................................... 368,335 5,034
Construction in progress .................................................... 6,023,012 4,844,913
Intangible assets, net ...................................................... 50,478 12,286,883
Deferred financing costs, net ............................................... 508,773 1,444,701
Long term investments ....................................................... 2,501,324 4,186,657
Assets of discontinued operations, non-current .............................. -- 9,214,502
Goodwill .................................................................... 7,281,993 8,364,457
------------- -------------
Total other assets ........................................................ 42,046,621 44,452,495
------------- -------------
TOTAL ASSETS ................................................................... $ 47,330,388 $ 52,338,105
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Line of credit .............................................................. $ 11,790,073 $ 1,833,192
Accounts payable and accrued expenses ....................................... 20,237,601 8,703,067
Accrued interest payable .................................................... 6,856,224 3,887,662
Accrued interest payable - related party .................................... 179,711 196,832
Billings in excess of earnings .............................................. 13,576 1,222,807
Deferred tax liability ...................................................... -- 59,630
Deferred revenue, current portion ........................................... 107,325 1,582,500
Income tax payable .......................................................... 45,000 45,000
Current portion of long term debt ........................................... 10,413,090 10,541,390
Convertible debenture - related party debt, net of discount ................. 1,900,333 5,335,351
Current portion of convertible debentures, net of discount .................. 11,792,387 5,292,072
Other current liabilities ................................................... 604,587 --
Liabilities due to shareholders ............................................. 932,328 1,968,762
Liabilities of discontinued operations, current ............................. 363,228 3,925,236
------------- -------------
Total current liabilities ................................................. 65,235,463 44,593,501
------------- -------------
Long term debt, net of current .............................................. 10,793,678 2,376,906
Asset retirement obligation ................................................. 247,462 60,290
Deferred revenue, net of current portion .................................... 127,244 --
Mandatorily redeemable preferred equity ..................................... 10,440,000 --
Liabilities of discontinued operations, net of current ...................... -- 306,003
Convertible debentures, net of current ...................................... 21,188,196 30,614,629
------------- -------------
Total long term liabilities ............................................... 42,796,580 33,357,828
------------- -------------
Total liabilities .............................................................. 108,032,043 77,951,329
------------- -------------
Minority interest in subsidiary ................................................ 9,673 --
------------- -------------
Stockholders' deficit
Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized:
Series A: 0 and 1,254,244 shares issued and outstanding, respectively ..... -- 1,254
Series B: 2,519,219 and 151,250 shares issued and outstanding, respectively 2,519 151
Series C: 0 shares issued and outstanding .................................. -- --
Series D: 800,000 and 800,000 shares issued and outstanding, respectively.. 800 800
Series E : 20,000 and 0 shares issued and outstanding, respectively ....... 20 --
Common stock, $0.001 par value, 500,000,000 authorized;
95,144,983 and 30,693,083, shares issued and outstanding, respectively .... 95,144 30,693
Additional paid-in capital .................................................. 79,662,413 66,175,522
Accumulated deficit ......................................................... (140,472,224) (91,821,644)
------------- -------------
Total stockholders' equity (deficit) ...................................... (60,711,328) (25,613,224)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 47,330,388 $ 52,338,105
============= =============
The notes to the Consolidated Financial Statements are an
integral part of these statements.
41
GREENSHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
RESTATED RESTATED
12/31/08 12/31/07
------------------------------
Revenue ............................................. $ 23,616,662 $ 14,680,387
Cost of revenues .................................... 20,251,865 13,087,788
------------- -------------
Gross profit ...................................... 3,364,797 1,592,599
Operating expenses:
General and administrative expenses .............. 10,402,405 5,393,765
Selling expenses ............................... 182,201 82,506
Research and development ......................... 18,732 95,243
Impairment of goodwill ........................... 8,786,183 11,153,816
Loss on write-down of assets ........................ 12,555,816 --
Amortization of intangibles ...................... 2,100,000 2,100,000
Gain on equipment disposal ..................... (37,500) --
Stock based compensation ......................... 7,252,883 2,683,548
------------- -------------
Total operating expenses ....................... 41,260,720 21,508,878
------------- -------------
Net income (loss) from operations ................... (37,895,923) (19,916,279)
Other income (expense):
Loss on disposal and impairment of investments ... (685,333) (532,977)
Amortization of debt discount & deferred financing (3,410,901) (1,080,256)
Gain on extinguishment of debt ................... 5,013,439 --
Miscellaneous income ........................... 308,796 718,248
Other expense .................................... -- (92,634)
Conversion liabilities ........................... (1,376,731) --
Conversion liabilities - affiliate ............... (127,350) --
Interest expense - affiliate ..................... (113,957) (24,972)
Interest expense ................................. (6,810,766) (4,958,977)
------------- -------------
Total other income (expense), net .............. (7,202,803) (5,971,568)
------------- -------------
Income (loss) before provision for income taxes ..... (45,098,726) (25,887,847)
(Provision for)/benefit from income taxes ........... (152,445) (51,545)
------------- -------------
Income (loss) before minority interest .............. (45,251,171) (25,939,392)
------------- -------------
Minority interest ................................... 15,327 (1,265,762)
------------- -------------
Net income (loss) from continuing operations ........ $ (45,235,844) $ (27,205,154)
------------- -------------
Discontinued operations:
Gain (loss) from disposal of discontinued operations (2,739,735) 2,481,691
Gain (loss) from discontinued operations ............ -- 51,618
------------- -------------
Total discontinued operations .................... (2,739,735) 2,533,309
------------- -------------
Net loss ............................................ (47,975,579) (24,671,845)
Preferred dividends ................................. -- (151,875)
------------- -------------
Net income (loss) attributable to common shareholders $ (47,975,579) $ (24,823,720)
============= =============
Weighted average common shares outstanding
Basic and diluted .................................. 73,847,361 9,060,512
Earnings (loss) per share
Basic
Loss from continuing operations ..................... $ (0.61) $ (3.00)
Income (loss) from discontinued operations .......... (0.04) 0.28
------------- -------------
Net loss per share - basic and diluted .............. $ (0.65) $ (2.74)
============= =============
The notes to the Consolidated Financial Statements are an
integral part of these statements.
42
GREENSHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
Series C Series D Series E
Series A Series B Preferred Preferred Preferred
Preferred Stock Preferred Stock Stock Stock Stock
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------ --------- ------- ------- ------- ------- ------- --------- --------
Balance at 12/31/06, 1,254,244 $438,750 $ 439 -- -- 1,000,00 -- $ -- 1,254 1,000
Restated ========= ====== ========= ======= ======= ======= ======= ======= ========= ========
Settlement of debt -- -- -- -- -- -- -- -- -- --
Sale of subsidiary -- -- -- -- -- -- -- -- -- --
Shares issued for
conversion of -- -- -- -- -- -- -- -- -- --
debentures
Feature on
convertible preferred -- -- -- -- -- -- -- -- -- --
stock
Adjustment for
acquisition of entity -- -- -- -- -- -- -- -- -- --
under common control
Stock based -- -- -- -- -- -- -- -- -- --
compensation
Cancellation of debt -- -- -- -- -- -- -- -- -- --
- related party
Conversion of -- -- -- -- -- -- -- -- -- --
minority interest
Conversion of Series
B Preferred Stock to -- -- (287,500) (288) -- -- -- -- -- --
Common
Conversion of Series
D Preferred Stock to -- -- -- -- -- -- (200,000) (200) -- --
Common
Net loss -- -- -- -- -- -- -- -- -- --
--------- ------ --------- ------- ------- ------- ------- ------- --------- --------
Balance at 12/31/07, 1,254,244 $151,250 $ 151 -- -- 800,000 $ 800 -- -- 1,254
Restated ========= ====== ========= ======= ======= ======= ======= ======= ========= ========
Adjustment of -- -- -- -- -- -- -- -- -- --
conversion of
subsidiary minority
interest
Write-off of
derivative due to
debt restructure -- -- -- -- -- -- -- -- -- --
Shares issued for
conversion of -- -- -- -- -- -- -- -- -- --
debentures
Adjustment for
transfer of entity -- -- -- -- -- -- -- -- -- --
under common control
Stock based -- -- -- -- -- -- -- -- -- --
compensation
Cancellation of debt -- -- -- -- -- -- -- -- -- --
- related party
Conversion of (1,254,244)(1,254) -- -- -- -- -- -- -- --
minority interest
Repurchase of -- -- -- -- -- -- -- -- -- --
subsidiary stock
Cancellation of debt -- -- -- -- -- -- -- -- -- --
- related party
Conversion of Series
B Preferred Stock to -- -- (151,250) (151) -- -- -- -- -- --
Common
Issuance of Series B
Preferred Stock to -- -- 3,025,333 3,025 -- -- -- -- -- --
create Employee Pool
Partial Conversion of -- -- (506,114) (506) -- -- -- -- -- --
Series B to Common
Conversion of debt -- -- -- -- -- -- -- -- -- --
Common stock issued -- -- -- -- -- -- -- -- -- --
for financing fees
Acquisition of -- -- -- -- -- -- -- -- 20,000 20
subsidiary
Priority return on
subsidiary -- -- -- -- -- -- -- -- -- --
Capital
Net loss -- -- -- -- -- -- -- -- -- --
--------- ------ --------- ------- ------- ------- ------- ------- --------- --------
Balance at 12/31/08, -- -- 2,519,219 2,519 -- -- 800,000 $ 800 20,000 $ 20
Restated ========= ====== ========= ======= ======= ======= ======= ======= ========= ========
The notes to the Consolidated Financial Statements are an
integral part of these statements.
43
GREENSHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
Additional
Paid-in Accumulated Total
Common Stock Capital Deficit Equity
------------- ------------- -------------- ------------- -------------
Shares Amount Amount Amount Amount
------------- ------------- -------------- ------------- -------------
Balance at 12/31/06, Restated ....... 4,917,848 $ 4,918 $ 56,252,928 $ (66,997,924 $ (10,737,385)
============= ============= ============= ============= =============
Settlement of debt .................. 559,022 559 310,963 -- 311,522
Sale of subsidiary .................. -- -- 1,958,883 -- 1,958,883
Shares issued for conversion
of debentures ....................... 3,481,697 3,482 2,173,566 -- 2,177,048
Preferred dividend .................. -- -- 151,875 (151,875) --
Adjustment for acquisition of entity
under common control ................ -- -- 2,411,821 -- 2,411,821
Stock based compensation ............ 489,516 489 2,501,152 -- 2,501,641
Cancellation of debt - related party -- -- 363,091 -- 363,091
Conversion of minority interest ..... 200,000 200 71,800 -- 72,000
Conversion of Series B Preferred
Stock to Common ..................... 245,000 245 43 -- --
Conversion of Series D Preferred
Stock to Common .................... 20,800,000 20,800 (20,600) -- --
Net loss ............................ -- -- -- (24,671,845) (24,823,720)
------------- ------------- ------------- ------------- -------------
Balance at 12/31/07, Restated ....... 30,693,083 $ 30,693 $ 66,175,522 $ (91,821,644) $ (25,613,224)
============= ============= ============= ============= =============
Adjustment of conversion of
subsidiary minority interest ........ -- -- 183,373 -- 183,373
Shares issued for conversion
of debentures ....................... 11,000,597 11,000 543,657 -- 554,657
Adjustment for transfer of entity
under common control ................ -- -- (27,800) -- (27,800)
Stock based compensation ............ 850,000 850 50,550 -- 51,400
Cancellation of debt - related party -- -- 2,952,968 -- 2,952,968
Conversion of minority interest ..... 25,084 25 1,229 -- --
Repurchase of subsidiary stock ...... -- -- (1,950,000) -- (1,950,000)
Cancellation of debt - related party -- -- 293,085 -- 293,085
Conversion of Series B Preferred
Stock to Common .................... 6,797,634 6,798 (6,647) -- --
Issuance of Series B Preferred
Stock to create Employee Pool ...... -- -- 7,215,308 -- 7,218,333
Partial Conversion of Series B ...... 12,652,825 12,653 (12,147) -- --
Stock to Common
Conversion of debt .................. 6,875,000 6,875 1,093,125 -- 1,100,000
Common stock issued
for financing fees .................. 6,250,000 6,250 1,084,511 -- 1,090,761
Acquisition of subsidiary .......... 20,000,760 20,000 2,065,680 -- 2,085,700
Priority return on subsidiary capital -- -- -- (675,001) (675,001)
Net loss ............................ -- -- -- (47,975,579) (47,975,579)
------------- ------------- ------------- ------------- -------------
Balance at 12/31/08, Restated ....... 95,144,983 $ 95,144 $ 79,662,413 $(140,472,224) $ (60,711,328)
============= ============= ============= ============= =============
The notes to the Consolidated Financial Statements are an
integral part of these statements.
44
GREENSHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
RESTATED RESTATED
Twelve Months Ended Twelve Months Ended
December 31 December 31
2008 2007
------------------- -------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss from continuing operations ......................... $(47,975,579) $(24,671,845)
Net income from discontinued operations ..................... 2,739,735 (2,533,309)
Adjustments to reconcile net loss to net cash
Provided by (used in) used in operating activities
Gain on disposal of equipment ............................... (37,500) --
Depreciation and amortization ............................... 1,397,876 712,173
Amortization of intangibles ................................. 2,100,000 2,100,000
Amortization of debt discount and deferred financing costs .. 3,410,901 1,080,255
Change in allowance for doubtful accounts ................... -- --
Interest from conversion liabilities ........................ 1,504,081 --
Stock based compensation .................................... 7,252,883 3,060,756
Loss on disposal of investment .............................. 685,333 532,977
Impairment of goodwill ...................................... 8,786,183 11,153,816
Write-down of assets ........................................ 12,555,816 --
Accretion of asset retirement obligation .................... 4,156 --
Forgiveness of debt ......................................... (5,013,438) --
Minority interest ........................................... (15,327) 1,265,762
Change in assets and liabilities, net of acquisitions
Accounts receivable, net .................................... 540,955 (293,935)
Prepaid expenses ............................................ 828,800 62,240
Inventory ................................................... 3,338,438 (1,252,065)
Deposits .................................................... (348,301) --
Costs in excess of earnings ................................. (35,000) 63,670
Deferred financing costs .................................... (902,498) --
Income tax payable .......................................... -- 114,788
Accrued interest ............................................ 5,218,352 --
Accrued interest ............................................ 179,711 --
Billings in excess of cost .................................. (1,209,231) 1,138,452
Accounts payable and accrued expenses ....................... 9,371,296 10,350,789
Deferred taxes .............................................. (59,630) (20,017)
Deferred revenue ............................................ (990,368) --
Accrued warranty ............................................ 91,867 --
------------ ------------
Net cash provided by (used in) operating activities ...... 3,419,511 2,864,508
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for acquisition ................................... (80,000) (422,078)
Cash acquired from acquisition .............................. -- 185,092
Construction in progress .................................... (4,039,584) --
Project development costs ................................... (97,364) (11,518)
Proceeds from sales of investment ........................... 1,000,000 --
Proceeds/advances of cash under restriction ................. -- (1,211,601)
Restricted cash released from restriction ................... 18,669 785,978
Proceeds from sale of equipment ............................. 1,050,000 --
Additions to and acquisition of property, plant and equipment (8,762,350) (3,602,520)
------------ ------------
Net cash provided by (used in) investing activities ...... (10,910,629) (4,276,647)
------------ ------------
The notes to the Consolidated Financial Statements are an
integral part of these statements.
45
-GREENSHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
RESTATED RESTATED
Twelve Months Ended Twelve Months Ended
December 31 December 31
2008 2007
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt .............................................. 2,428,038 420,191
Repayment of debt ............................................... (2,138,878) (2,680,261)
Repayment of line of credit ..................................... (1,725,765) --
Proceeds from line of credit .................................... 9,987,808 1,503,881
Proceeds from related party debt ................................ -- 1,291,084
Repayment of related party debt ................................. (398,064) (261,350)
Repayment of notes payable - affiliate .......................... (2,686,574) --
Issuance of long term debt ...................................... -- --
Issuance of related parry debt .................................. (3,612) --
Issuance of convertible debentures .............................. 1,010,598 --
Cash paid to minority shareholders ............................. (843,388) --
Issuance of convertible debentures - related party .............. 1,662,457 --
----------- -----------
Net cash provided by (used in) financing activities .......... 7,292,620 273,545
----------- -----------
Net increase (decrease) in cash ................................. $ (198,498) $(1,138,594)
Cash at beginning of period ..................................... 486,993 1,625,587
----------- -----------
Cash at end of period ........................................... $ 288,495 $ 486,993
=========== ===========
The notes to the Consolidated Financial Statements are an
integral part of these statements.
46
GREENSHIFT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 NATURE OF OPERATIONS
GreenShift Corporation ("we," "our," "us," "GreenShift," or the "Company")
develops and commercializes clean technologies that facilitate the efficient use
of natural resources.
SEGMENT DESCRIPTIONS
The Company's operations during the fiscal year ended December 31, 2008 are
classified into three reportable business segments: Equipment & Technology
Sales, Culinary Oil Production & Sales and Biofuel Production & Sales. Each of
these segments is organized based upon the nature of products and services
offered. The Company's remaining operations are aggregated and classified herein
as Corporate.
2 GOING CONCERN
The Company had a working capital deficit of $59,951,696 at December 31, 2008,
which includes convertible debentures of $11,792,387, accrued interest payable
of $7,035,935, $3,979,437 in purchase obligations, $4,821,738 in amounts due to
the prior owners of our oilseed crush facility and $1,900,333 in related party
debt. Despite their classification as current liabilities current convertible
debentures and accrued interest ($20,728,655) are serviceable out of the
Company's cash flows (the terms of the convertible debt require repayment in
shares of either GreenShift Corporation or GS AgriFuels Corporation common
stock); the $3,979,437 in purchase obligations, to the extent due, are tied to
the earnings of the Company's equipment sales business and can only be serviced
after the Company's senior secured debt has been serviced; and, the notes
payable to the prior owners of our oilseed crush facility ($4,821,738) pursuant
to acquisition agreements that are now in default due to the failure by the
selling shareholders to disclose that Sustainable did not hold title to its
now-owned Culbertson, Montana oilseed crushing facility at the time of the
acquisition by GS AgriFuels. The Company's working capital deficit net of these
amounts is $30,421,866.
Management's plans include raising additional proceeds from debt and equity
transactions to fund operations, and to increase revenue and cut expenses to
reduce the loss from operations. There can be no assurances that the Company
will be able to eliminate both its working capital deficit and its operating
losses. The accompanying financial statements do not contain any adjustments
which may be required as a result of this uncertainty.
3 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
As of December 31, 2008, the Company administered its operations through three
tier 1 subsidiaries: GS CleanTech Corporation, GS Design Services, Inc. and GS
AgriFuels Corporation. The following is an outline of our organizational
structure as of December 31, 2008:
Company Status Nature
-------------------------------------------------------------------------------------------------------------------
GreenShift Corporation (OTC Bulletin Board: GERS) Active Holding
1. GS CleanTech Corporation (100%) Active Operating GS COES (Yorkville I),
LLC (100%) Active Operating
Biofuel Industries Group, LLC (d/b/a NextDiesel) (100%) Active Operating
2. GS Design, Inc. (100%) Active Operating
Bollheimer & Associates, Inc. (100%) Active Operating
GS Rentals, LLC (100%) Active Holding
3. GS AgriFuels Corporation (100%) Active Holding NextGen Acquisition, Inc.
(100%) Active Holding
NextGen Fuel, Inc. (100%) Active Holding
Sustainable Systems, Inc. (100%) Active Holding
Sustainable Systems, LLC (100%) Active Operating
ZeroPoint Clean Tech, Inc. (about 10%) Minority Investment
All significant intercompany balances and transactions were eliminated in
consolidation. The financial statements for the periods ended December 31, 2008
and 2007 have been consolidated to include the accounts of the Company and its
subsidiaries.
47
COST METHOD OF ACCOUNTING FOR UNCONSOLIDATED SUBSIDIARIES
The Company accounts for its 10% investment in ZeroPoint Clean Tech, Inc. under
the cost method. Application of this method requires the Company to periodically
review these investments in order to determine whether to maintain the current
carrying value or to write off some or all of the investments. While the Company
uses some objective measurements in its review, the review process involves a
number of judgments on the part of the Company's management. These judgments
include assessments of the likelihood of ZeroPoint to obtain additional
financing, to achieve future milestones, make sales and to compete effectively
in its markets. In making these judgments the Company must also attempt to
anticipate trends in ZeroPoint's industry as well as in the general economy.
GreenShift accounted for its 10% investment in Sterling Planet, Inc.
("Sterling") under the cost method. On September 10, 2008, the Company entered
into Stock Purchase Agreement with Sterling Planet Holdings, Inc. ("Sterling
Planet"). Under the Stock Purchase Agreement, the Company agreed to sell the
1,459,854 shares of Sterling Planet which encompassed the 10% investment the
Company had in Sterling Planet. During the twelve months ended December 31,
2008, GreenShift liquidated its holdings in Sterling Planet, Inc. for
$1,000,000. The Company recorded a net loss in the amount of $685,333 on the
disposal of this unconsolidated subsidiary.
During January 2008, GS EnviroServices redeemed the majority of the Company's
stock holdings in GS EnviroServices in return for the reduction of certain
Company convertible debts due to YA Global Investments, L.P. ("YAGI"). As of
January 25, 2008, the Company held only a minority stake in GS EnviroServices
(6,266,667 shares, or about 19%) and ceased consolidating the revenue and
earnings of GS EnviroServices effective January 1, 2008. The Company recorded a
net loss in the amount of $2,739,735 on the disposal of this unconsolidated
subsidiary. In June 2008, GS EnviroServices acquired the remaining 19% of the
Company's holdings in exchange for a $1,000,000 payment to YAGI in return for
the reduction of the Company's subsidiary's (GS AgriFuels Corporation)
convertible debt obligations to YAGI by $1,000,000. Upon YAGI's receipt of the
payment, the remaining 6,266,667 shares of GS EnviroServices owned by the
Company were returned to GS EnviroServices.
CAPITALIZATION PROCEDURES
The Company capitalizes certain expenditures related to development projects.
Overhead costs allocable to our biofuels construction projects are capitalized.
These costs are allocated as directs costs of the company's construction
projects. For the year ended December 31, 2008 and 2007, the Company capitalized
$2,199,252 and $0, respectively, of overhead costs. The Company capitalizes
direct expenses associated with the construction of its facilities. During the
period ended December 31, 2008, this included the following:
Labor $ 1,299,580
Travel and commissioning expenses 493,406
Insurance 266,131
Parts and supplies 140,135
-----------------
Total $ 2,199,252
REVENUE RECOGNITION
The Company 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.
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.
The liability "deferred revenue" represents amounts invoiced to customers for
deposits and partial payments on orders or projects not complete for delivery.
The revenue, along with the project costs, is recognized upon delivery or
completion of the project for the customer.
We recognize revenue from the sale of seed commodity when persuasive evidence of
an arrangement exists, title and risk of loss transfers to the customers, prices
are fixed and determinable, and it is reasonably assured the related accounts
receivable is collectible. Our sales terms primarily are FOB shipping point. The
oil seed crushing facility recognizes revenue when the product is shipped to the
48
customer via truck, railcar or customer pickup and the other criteria noted
above are met. During the twelve months ended December 31, 2007, the oilseed
crushing facility provided rebates to customers under a planting seed rebate
program. Of the $159,000 in total rebates recorded as a reduction in gross
revenues for the period ending December 31, 2007, $89,000 was provided to
customers located in Montana. Rebates given to these customers were reimbursed
to the company as part of training costs under the WIRED grant from the State of
Montana during the year. The Company accounted for the rebates under EITF-01-9,
which allows an exception to offsetting gross revenues for rebates when the
seller receives a benefit for providing the sales incentive and the seller can
reasonably estimate the benefit. As a result, the amount of rebates attributable
to Montana customers have been recorded as training expense and have not been
offset against revenue. No rebates were given in the year ended December 31,
2008.
We recognize revenue from the sale of biodiesel production systems under
contract accounting pursuant to Accounting Research Bulletin No. 45 (ARB No.
45), Long-Term Construction-Type Contracts, and the guidance under AICPA
Statement of Position 81-1 ("SOP 81-1"), Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Under the completed
contract method income is recognized only when a contract is completed or
substantially completed. During the period of performance, billings and costs
are accumulated on the balance sheet, but no profit or income is recorded before
completion or substantial completion of the work. SOP 81-1 requires that the
percentage of completion method 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. During the Company's initial construction projects,
reliable cost and revenue estimates were not available and as a result the
completed contract method was used to recognize revenue. A substantial portion
of our revenues for the sale of equipment in the current year was recognized
using the completed contract basis method of accounting. NextGen Fuel Inc.
recognized $5,464,473 in revenues under this method during the twelve months
ended December 31, 2008. Management believes that with the resulting experience
gained from the initial completed projects, reliable cost estimates are now
available and all four requirements under SOP81-1 can now be satisfied. As a
result, the balance of our revenues for the sale of equipment in the current
year was recognized using the percentage of completion method of accounting.
NextGen Fuel Inc. recognized $1,664,728 in revenues under this method during the
year ended December 31, 2008. This method of accounting results in the Company
recognizing revenue as work on a contract advances. Earnings are recognized
periodically based upon our estimate of contract revenues and costs in providing
the services required under the contract. Under this method, deferred
construction costs or work in progress ("WIP") is accumulated. At the end the
reporting period, if the billings to date under the contract exceed the amount
of the WIP plus a portion of the estimated gross profits, billings in excess of
costs and estimated earnings is recognized as a current liability. This
liability records the remaining obligation to complete the remaining work
required under the contract prior to recognizing the excess billing as revenue.
If the accumulated WIP and earned gross profit exceed the billings to date,
costs and estimated earnings in excess of billings is recorded as a current
asset. This asset represents the portion of the deferred costs incurred and
estimated earnings that have been earned but not yet billed. Each project is
reviewed on a separate basis. Any loss on a contract is recognized in full as
soon as we determine that it will occur. The Company has the contracts in place
which lists the price of the equipment as well as a list of add-ons if the
customer wants to upgrade. The Company usually requires a substantial deposit
when the contract is signed and work begins on the equipment. Notwithstanding
the above, we recognize revenue from the sale of these systems when persuasive
evidence of an arrangement exists, prices are fixed and determinable, and it is
reasonably assured that any related accounts receivable is collectible. In
addition, revenue under the completed contract method is recognized upon
delivery. Delivery related to the systems takes place when the title and risk of
loss transfers to the customers as defined in the agreement or by operation of
law.
The Company recognizes revenue from the sale of biodiesel when four basic
criteria have been met: (i) persuasive evidence of a customer arrangement
exists; (ii) the price is fixed or determinable; (iii) collectability is
reasonably assured, and (iv) product delivery has occurred, which is generally
upon delivery to the customer.
RECEIVABLES AND CREDIT CONCENTRATION
Accounts receivable are uncollateralized, non-interest-bearing customer
obligations due under normal trade terms requiring payment within 30 days from
the invoice date. Accounts receivable are stated at the amount billed to the
customer. Accounts receivable in excess of 90 days old are evaluated for
delinquency. In addition, we consider historical bad debts and current economic
trends in evaluating the allowance for bad debts. Payments of accounts
receivable are allocated to the specific invoices identified on the customer's
remittance advice or, if unspecified, are applied to the oldest unpaid invoices.
49
The carrying amount of accounts receivable has been reduced by a valuation
allowance that has been set up in the amount $46,962 and $46,953 as of December
31, 2008 and 2007, respectively. Management will continue to review the
valuation allowance on a quarterly basis.
CUSTOMERS
Sales during 2008 for our biofuels production segment were made to sixteen
customers, a national marketer of renewable fuels that purchases all of the
company's biodiesel production at market prices per a written agreement expiring
September 2010. Sales during 2008 for our culinary oils production segment were
to 124 customers.
INVENTORIES
Due to the long lead times to obtain some components, the Company's GS COES
(Yorkville I), LLC subsidiary maintains an inventory of centrifuges and related
parts. Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out (FIFO) method.
Equipment inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out (FIFO) method. These inventories consist
of equipment and component parts not yet assigned to projects in process in our
biodiesel production segment.
Inventories of raw materials consist of feedstock, methanol, and catalyst and
are valued at lower of cost using the average cost method or market. Inventories
of finished goods consist of fuel-grade biodiesel and the production by-product
glycerin and are valued at lower of cost using the average cost method or
market.
Inventory at the oilseed crush facility consists of seed commodity at the
various stages of manufacture and is stated at the lower of cost or market, with
cost being determined at average cost under a process-costing system. The
commodity is valued based on the standard contract signed by all the growers
plus the cost of crushing the seed.
Inventories at December 31, 2008 and 2007 consist of the following:
2008 2007
----------------------------------------
Separators and related parts $ 169,000 $ 169,000
Equipment inventories 479,167 765,415
Raw materials and supplies 1,322,962 3,089,679
Finished goods 943,385 993,139
------------- -------------
Total Inventory $ 2,914,514 $ 5,017,233
============ ============
ASSET RETIREMENT OBLIGATIONS
In accordance with SFAS 143, Accounting for Asset Retirement Obligations, the
Company recognizes the fair value of the liability for an asset retirement
obligation, which is recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The fair value of the liability is estimated using projected
discounted cash flows. In subsequent periods, the retirement obligation is
accreted to its future value, which is the estimate of the obligation at the
asset retirement date. The liability is accreted to its present value each
period, and the capitalized cost is depreciated or depleted over the useful
lives of the respective assets. If the liability is settled for an amount other
than the recorded amount, a gain or loss would be recognized at such time. The
Company's asset retirement obligations totaled $247,462 and $60,290 at December
31, 2008 and 2007, respectively.
CASH AND EQUIVALENTS
The Company considers cash and equivalents to be cash and short-term investments
with original maturities of three months or less from the date of acquisition.
CLASSIFICATION OF EXPENSES
The types of expenses that are included in the cost of sales for the oilseed
crushing facility include the cost of all seed commodity and direct labor needed
to take the seed through the various stages of manufacture. The types of
expenses that are included in selling and administrative expenses include
advertising, warehouse expenses, railcar costs, legal, accounting, salaries,
etc.
50
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged in 2008 and 2007 were
$18,732 and $95,243 respectively.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the life of the lease or their useful lives. Gains and losses on
depreciable assets retired or sold are recognized in the consolidated statement
of operations in the year of disposal, and repair and maintenance expenditures
are expensed as incurred. Property, plant and equipment are stated at cost.
Expenditures for major renewals and improvements which extend the life or
usefulness of the asset, are capitalized. Once an asset has been completed and
placed in service, it is transferred to the appropriate category and
depreciation commences.
The Company uses the straight line method for depreciation and depreciates its
vehicles over a five year period, equipment over a 3-18 year period and lease
hold improvements over a 15-20 year period. Gains and losses on depreciable
assets retired or sold are recognized in the statement of operations in the year
of disposal, and repair and maintenance expenditures are expensed as incurred.
Property and equipment are stated at cost and include amounts capitalized under
capital lease obligations.
GOODWILL AND INTANGIBLE ASSETS
The Company accounts for its goodwill and intangible assets pursuant to SFAS No.
142, "Goodwill and Other Intangible Assets". Under SFAS 142, intangibles with
definite lives continue to be amortized on a straight-line basis over the lesser
of their estimated useful lives or contractual terms. Goodwill and 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.
At December 31, 2008, the Company's balance sheet included intangible assets
with an aggregate carrying value of $7,332,472 representing approximately 15.5%
of total assets and including $7,281,993 in goodwill as compared to an aggregate
carrying value of $20,651,340 at December 31, 2007, representing approximately
48.0% of total assets and including $8,364,457 in goodwill. This goodwill was
recorded in connection with the series of acquisitions completed by the Company
since April 1, 2005. During the year ended December 31, 2008, $7,281,993 in
goodwill was recorded in relation to the acquisition of Biofuel Industries
Group, LLC ("BIG") and $421,727 in goodwill was recorded in relation to the
acquisition of Bollheimer & Associates. During the year ended December 31, 2007,
$13,158,877 in goodwill was recorded in relation to the acquisition of
Sustainable System, Inc. During the year ended December 31, 2006, $5,453,816 in
goodwill was recorded in relation to the acquisition of NextGen Fuel, Inc.
During the year ended December 31, 2005, $905,579 in goodwill was recorded in
relation to the acquisition of GS Design Services, Inc.
During the year ended December 31, 2008, the Company recorded an impairment of
goodwill in the amount of $8,786,183 related to the Sustainable System
acquisition, the Bollheimer acquisition and the GS Design acquisition. During
the year ended December 31, 2007, the Company recorded an impairment of goodwill
in the amount of $5,453,816 related to the NextGen Fuel acquisition as well as
an impairment of goodwill in the amount of $5,700,000 related to the Sustainable
System acquisition. Generally accepted accounting principles require that the
Company assess the fair values of intangible assets at least annually in order
to identify any impairment in the values. However, on a quarterly basis,
management is alert for events or circumstances that would indicate that, more
likely than not, the fair value of a reporting segment has been reduced below
its carrying amount. If there is a determination that the fair value of an
intangible asset is less than the corresponding net assets amount, including
goodwill, an impairment loss would be identified and recorded at that time.
LONG-LIVED ASSETS
The Company assesses the valuation of components of its property and equipment
and other long-lived assets whenever events or circumstances dictate that the
carrying value might not be recoverable. The Company bases its evaluation on
51
indicators such as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements and other external
market conditions or factors that may be present. If such factors indicate that
the carrying amount of an asset or asset group may not be recoverable, the
Company determines whether an impairment has occurred by analyzing an estimate
of undiscounted future cash flows at the lowest level for which identifiable
cash flows exist. If the estimate of undiscounted cash flows during the
estimated useful life of the asset is less than the carrying value of the asset,
the Company recognizes a loss for the difference between the carrying value of
the asset and its estimated fair value, generally measured by the present value
of the estimated cash flows.
INCOME TAXES
Income taxes are accounted for under the asset and liability method, whereby
deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized. All of the subsidiaries are consolidate
for state income tax purposes.
NET LOSS PER COMMON SHARE
The Company computes its net income or loss per common share under the
provisions of SFAS No. 128, "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.
Dilutive net loss per share excludes potential common shares if the effect is
anti-dilutive. For the years ended December 31, 2008 and 2007, common stock
equivalent shares arising from the assumed exercise of options, warrants and
debt conversions of convertible debt instruments were excluded from the
computation of diluted net loss per share. Potential future dilutive securities
include 996,279 outstanding options and warrants, and 407,115,928 shares
issuable for the conversion of convertible debentures and 62,800,925 shares
issuable after the conversion of the Series B Preferred stock under the employee
pool.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect (i) the reported
amounts of assets and liabilities, (ii) the disclosure of contingent assets and
liabilities at the date of the financial statements, and (iii) the reported
amounts of revenues and expenses during the reporting period. We use estimates
and assumptions in accounting for the following significant matters, among
others:
>> Allowances for doubtful accounts
>> Valuation of acquired assets
>> Inventory valuation and allowances
>> Fair value of derivative instruments and related hedged items
>> Useful lives of property and equipment and intangible assets
>> Asset retirement obligations
>> Long-lived asset impairments, including goodwill
>> Contingencies
>> Fair value of options and restricted stock granted under our stock-
based compensation plans
>> Tax related items
Actual results may differ from previously estimated amounts, and such
differences may be material to our condensed consolidated financial statements.
We periodically review estimates and assumptions, and the effects of revisions
are reflected in the period in which the revision is made. The revisions to
estimates or assumptions during the periods presented in the accompanying
condensed consolidated financial statements were not considered to be
significant
DEFERRED FINANCING CHARGES AND DEBT DISCOUNTS
Deferred finance costs represent costs paid to third parties in order to obtain
long-term financing and have been reflected as other assets. Costs incurred with
parties who are providing the actual long-term financing, which generally
include the value of warrants or the fair value of an embedded derivative
conversion feature are reflected as a debt discount. These costs and discounts
are amortized over the life of the related debt. Amortization expense related to
these costs and discounts were $3,410,901 and $1,080,255 for the years ended
December 31, 2008 and 2007, respectively and are included in other expense.
52
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.
The Company accounted for the convertible debentures in accordance with SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150), 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.
FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements. This Statement 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 applies to
other accounting pronouncements that require or permit fair value measurements.
On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2,
Effective Date of FASB Statement No. 157. This Staff Position delays the
effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years, except for those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The adoption
of SFAS No. 157 had no effect on the Company's consolidated financial position
or results of operations.
The Company partially adopted SFAS 157 on January 1, 2008, delaying application
for non-financial assets and non-financial liabilities as permitted. This
statement establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three levels as follows:
o 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.
o 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.
o 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.
Fair Value
---------------------------------------------------------------
As of December 31, 2008 Level 1 Level 2 Level 3 Total
-------------------------------------------------------------------------------------------------------------------
Embedded conversion liabilities $ -- $ -- $ 1,504,081 $ 1,504,081
The following table reconciles, for the period ended December 31, 2008, the
beginning and ending balances for financial instruments that are recognized at
fair value in the consolidated financial statements:
Balance of Embedded Conversion Liability at December 31, 2007 --
Present Value of beneficial conversion features of debentures 1,428,314
Accretion adjustments to fair value - beneficial conversion features 21,767
-----------------
Balance at December 31, 2008 $ 1,504,081
=================
The fair value of the conversion features are calculated at the time of issuance
and the Company records a conversion liability for the calculated value. The
Company recognizes interest expense for the conversion liability which is added
to the principal of the debenture. The Company also recognizes interest expense
for accretion of the conversion liability to fair value over the term of the
note.
STOCK BASED COMPENSATION
The Company accounts for stock, stock options and stock warrants issued for
services and compensation by employees under the fair value method. For
non-employees, the fair market value of the Company's stock is measured on the
date of stock issuance or the date an option/warrant is granted as appropriate
under EITF 96-18. The Company determined the fair market value of the
warrants/options issued under the Black-Scholes Pricing Model. Effective January
1, 2006, the Company adopted the provisions of SFAS 123(R), SHARE-BASED PAYMENT,
which establishes accounting for equity instruments exchanged for employee
services. Under the provisions of SFAS 123(R), share-based compensation cost is
measured at the grant date, based on the fair value of the award, and is
recognized as an expense over the employee's requisite service period (generally
the vesting period of the equity grant).
SHIPPING AND HANDLING COSTS
Shipping and handling costs are expensed as incurred and have been included in
costs of goods sold.
53
NEW ACCOUNTING PRONOUNCEMENTS
During December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(SFAS 141(R)) and SFAS No. 160, Accounting and Reporting of Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). SFAS 141(R) replaces SFAS 141, Business Combinations. SFAS 141(R) and SFAS
160 will change the financial accounting and reporting of business combination
transactions and noncontrolling (or minority) interests in consolidated
financial statements. SFAS 141(R) requires recognizing, with certain exceptions,
100 percent of the fair values of assets acquired, liabilities assumed, and
noncontrolling interests in acquisitions of less than a 100 percent controlling
interest when the acquisition constitutes a change in control of the acquired
entity; measuring acquirer shares issued and contingent consideration
arrangements in connection with a business combination at fair value on the
acquisition date with subsequent changes in fair value reflected in earnings;
and expensing as incurred acquisition-related transaction costs. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It also amends the
consolidation procedures of Accounting Research Bulletin No. 51, Consolidated
Financial Statements (ARB 51) for consistency with the requirements of SFAS
141(R). The Company will be required to adopt SFAS 141(R) for business
combination transactions for which the acquisition date is on or after July 1,
2009.
SFAS No. 141 (revised) is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Management does not expect the
implementation of this new standard to have a material impact on the Company's
financial position, results of operations and cash flows.
In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" including and amendment
of FASB Statement No. 115 with respect to improvement of financial reporting of
certain investments in debt and equity securities. This Statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the Board's long-term
measurement objectives for accounting for financial instruments.
SFAS No. 159 is effective as of the beginning of the Company's first fiscal year
that begins after November 15, 2007. Management does not expect the
implementation of this new standard to have a material impact on the Company's
financial position, results of operations and cash flows.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Management does not expect the implementation of this new standard to
have a material impact on the Company's financial position, results of
operations and cash flows.
In December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 160 Noncontrolling
Interest in Consolidated Financial Statements as an amendment to ARB No. 51.
This Statement is expected to improve the relevance, comparability and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Management does not expect the implementation
of this new standard to have a material impact on the Company's financial
position, results of operations and cash flows.
During May, 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1 addresses the
accounting for convertible debt securities that, upon conversion, may be settled
by the issuer fully or partially in cash. Currently, most forms of convertible
debt securities are treated solely as debt. Under the FSP, issuers of
convertible debt securities within its scope must separate these securities into
two accounting components; a debt component, representing the issuer's
contractual obligation to pay principal and interest; and an equity component,
representing the holder's option to convert the debt security into equity of the
54
issuer or, if the issuer so elects, an equivalent amount of cash. The Company
will be required to adopt FSP APB 14-1 on July 1, 2009 in connection with its
outstanding convertible debt and must apply it retrospectively to all past
periods presented, even if the instrument has matured, converted, or otherwise
been extinguished as of the FSP's effective date. The Company has not yet
assessed the impact of the adoption of this standard on its financial
statements.
RECLASSIFICATIONS
Certain items in the financial statements for 2007 have been reclassified to
conform with the current year presentation. Such reclassification had no effect
on net income.
4 CONCENTRATIONS
The Company maintains cash balances with financial institutions that at times
may exceed the limits insured by the Federal Deposit Insurance Corporation.
Accounts receivable are uncollateralized, non-interest-bearing customer
obligations due under normal trade terms requiring payment within 30 days from
the invoice date. Accounts receivable are stated at the amount billed to the
customer.
5 STOCKHOLDERS' EQUITY
The Company accounts for stock and stock options issued for services and
compensation by employees under the fair value method. For non-employees, the
fair market value of the Company's stock on the date of stock issuance or
option/grant is used. The Company determined the fair market value of the
options issued under the Black-Scholes Pricing Model. The Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) 123R
SHARE-BASED PAYMENT, which establishes accounting for equity instruments
exchanged for employee services. Under the provisions of SFAS 123(R),
share-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as an expense over the employee's
requisite service period (generally the vesting period of the equity grant).
STOCK OPTIONS
Activity under the Plan and issuances of options and/or warrants for the period
ended December 31, 2008 is as follows:
Number of Shares Weighted Average
Exercise Price
----------------------------------------
Outstanding at December 31, 2006 996,629 $ 5.00
Granted at fair value -- --
Forfeited (350) --
Exercised -- --
----------------- -------- ---------
Outstanding at December 31, 2007 996,279 $ 5.00
Granted at fair value -- --
Forfeited -- --
Exercised -- --
----------------- ----------------
Outstanding at December 31, 2008 $ 996,279 $ 5.00
================= ================
Exercisable $ 996,279 $ 5.00
================= ================
On March 6, 2007, the Company's subsidiary, GS AgriFuels Corporation, acquired
85% of the outstanding capital stock of Sustainable Systems, Inc. Under the
purchase agreement, GS AgriFuels issued options to certain employees of
Sustainable Systems, Inc. (the "Optionees"). None of the Optionees was
affiliated with GS AgriFuels or with any of its affiliates prior to the
acquisition, but each of them remained as an employee of Sustainable Systems
after it was acquired by GS AgriFuels. The options were issued in order to give
the Optionees an incentive to expand the operations of Sustainable Systems and
improve its profitability. The options were exercisable for five years from the
date of grant (i.e., March 6, 2007). The options permitted the Optionees to
purchase 534,500 shares of GS AgriFuels common stock at $3.50 per share, 267,250
shares of GS AgriFuels common stock at $7.00 per share, and 133,625 shares of GS
AgriFuels common stock at $10.50 per share. The fair value of the options was
determined to be $1,102,673, $527,017 and $255,090, respectively, and was
calculated using the Black-Scholes Option Pricing Model. The assumptions used
were the following: Volatility was 150%, the Risk Free Rate was 4.53% and the
term was five years. The fair value was expensed as compensation in accordance
with the principles set forth in EITF 95-8. Management expects that these
options will be cancelled during 2009.
55
INCREASE IN AUTHORIZATION OF COMMON STOCK
On February 27, 2007, an Amendment to the Certificate of Incorporation was filed
with the State of Delaware increasing the total number of shares of all classes
of stock which the Corporation shall have authority to issue to 505,000,000,
consisting of 5,000,000 shares of blank check Preferred Stock, par value $0.001
per shares (the "Preferred Stock"), and 500,000,000 shares of Common Stock, par
value $0.001 per share (the "Common Stock"). On December 11, 2007, the Company
affected a one-for-fifty reverse stock split. All stock prices, share amounts,
per share information, stock options and stock warrants in this Report reflect
the reverse split.
SERIES A PREFERRED STOCK
Each share of Series A Preferred Stock may be converted by the holder into 0.02
shares of common stock, and the holders have voting privileges of five votes to
every one common share issuable upon conversion. At December 31, 2008 and 2007,
there were no and 1,254,244 shares of Series A Preferred Stock, respectively,
issued and outstanding. These 1,254,244 shares were originally issued in 2003
and were converted into 25,084 shares of Company common stock during the first
quarter 2008.
SERIES B PREFERRED STOCK
Each share of Series B Preferred Stock may be converted by the holder into
twenty-five shares of common stock. The holders would be entitled to cumulative
dividend rights equal to that of twenty-five common shareholders upon the
declaration of dividends on common stock, and have voting privileges of one vote
to every one common share. At December 31, 2007, there were 151,250 shares of
Series B Preferred Stock issued and outstanding. These shares were originally
issued in 2003 and were converted into 6,797,634 shares of Company common stock
during the first quarter 2008, A total of 3,025,333 shares of Series B Preferred
Stock were issued during 2008 as compensation. Of those, 506,114 were converted
into 12,652,825 shares of common stock. At December 31, 2008 and 2007, there
were 2,512,219and 151,250 shares of Series B Preferred Stock, respectively,
issued and outstanding.
SERIES D PREFERRED STOCK
Shares of the Series D Preferred Stock (the "Series D Shares") may be converted
by the holder into Company common stock. The conversion ratio is such that the
full 1,000,000 Series D Shares originally issued convert into Company common
shares representing 80% of the fully diluted outstanding 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 D 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 D Shares are
convertible on the record date for the shareholder action. In the event the
Board of Directors declares a dividend payable to Company common shareholders,
the holders of Series D Shares will receive the dividend that would be payable
if the Series D Shares were converted into Company common shares prior to the
dividend. In the event of a liquidation of the Company, the holders of Series D
Shares will receive a preferential distribution of $0.001 per share, and will
share in the distribution as if the Series D Shares had been converted into
common shares. At December 31, 2008 and 2007, there were 800,000 and 0 shares of
Series D Preferred Stock, respectively, issued and outstanding.
SERIES E PREFERRED STOCK
On May 15, 2008, the Company issued 20,000 shares of the Company's new Series E
Preferred Stock (the "Series E Shares") to the BIG shareholders (See Note 28,
Acquisition, below), which shares are convertible at a fixed rate of 1 preferred
share to 1,000 common shares into a total of 20,000,000 shares of Company common
stock; provided, however, that the Series E Shares shall be convertible into
Company common shares in proportion to the Company's earnings before interest,
taxes, depreciation and amortization and non-cash and non-recurring items
("EBITDA") and will be fully convertible into 20,000,000 common shares on a pro
rated basis as the Company achieves $50,000,000 in EBITDA during one year
period. The holders would be entitled to cumulative dividend rights equal to
that of 1,000 common shareholders upon the declaration of dividends on common
stock, and have voting privileges of one vote to every one common share. At
December 31, 2008 and 2007, there were 20,000 and 0 shares of Series E Preferred
Stock, respectively, issued and outstanding.
STOCK COMPENSATION
On February 14, 2008, the Company voted for the creation of an employee pool of
certain shares of the Company's preferred stock to be issued to certain
employees and consultants. The pool consists of 2,765,333 shares of Company
Series B Preferred Stock (the "Series B Shares") (see above), which shares have
56
a fixed conversion ratio of 1 preferred share to 25 common shares. Of these
shares, 353,296 Series B Shares automatically converted upon execution of
certain employment and/or consulting agreements into 8,832,391 common shares.
The preferred shares were valued using the fair market value of the Company's
common stock at grant date based on the total potentially convertible common
shares at grant date. The grant date fair value was $6,913,333. The Company has
recognized a total of $7,252,883 in stock based compensation during the year
ended December 31, 2008 in relation to the Series B Shares.
The Company had originally issued the Series B Shares as part of an incentive
program for its employees, pursuant to which participating employees would earn
the right to convert the Series B Shares in connection with the Company's
realization of targeted EBITDA goals. The impact of the adverse general
financial and commodity market conditions during 2008 rendered this incentive
structure infeasible and uncompetitive, and the equity incentives ceased to have
the desired effect. The Company accordingly eliminated the EBITDA condition and
accelerated vesting of all preferred shares during 2008. Likewise, the Company
had previously entered into agreement with Kevin Kreisler, the Company's chief
executive officer, and Viridis Capital, LLC, the beneficial owner of 791,459
shares of the Company's Series D Preferred Shares, to amend the conversion
feature of the Series D Shares to include the same EBITDA standards used for the
Company's employees; this amendment was canceled and the new EBITDA standard was
eliminated during 2008 as well.
COMMON STOCK
During the fourth quarter of 2008, the Company issued 250,000 shares of common
stock to an employee of the Company and 600,000 shares to two outside
consultants for a total of $51,400 in stock compensation.
During the year ended December of common stock 31, 2008, YAGI converted
11,000,597 shares of stock for a total of $554,657 that was credited against the
YAGI convertible debentures.
During the first quarter of 2008, the Company issued 6,000,000 shares of common
stock to YAGI as payment for $1,080,000 of financing fees related to the line of
credit. The Company also issued 250,000 shares of common stock to Stillwater for
financing fees during 2008.
In January 2008, Kerns Manufacturing, Inc. (see Note 16, Debt and Purchase
Obligations) consented to an extension of the due date of the Kerns debenture in
return for additional interest of $100,000. During the first quarter 2008,
Minority Interest Fund (II), LLC ("MIF") acquired the Kerns $1,000,000
Debenture. The managing member of MIF is a relative of Kevin Kreisler, the
Company's chairman and chief executive officer. This debenture was due to be
paid by the Company in two payments $600,000 on January 15, 2008 and $500,000
(plus residual interest and costs of $100,000) on February 15, 2008. MIF
purchased the Kerns $1,000,000 Debenture and paid these sums in cash to Kerns on
the requisite due dates. In February 2008, MIF subsequently fully converted this
debenture at the rate of $0.16 per share into 6,875,000 shares of Company common
stock.
During the year ended December 31, 2008, 506,114 shares of Series B Preferred
Stock were converted into 12,652,825 shares of common stock. This included
160,000 shares of common stock issued to Ed Carroll, the Company's Chief
Financial Officer, 160,000 shares of common stock issued to Paul Miller, the
Company's President of Sustainable Systems and 100,000 shares of common stock
issued to Greg Barlage, the Company's Chief Operating Officer. During the fourth
quarter of 2008, an additional 3,485,217 shares of common stock were converted
from Series B Preferred Stock for employees of the Company. This included
1,000,000 shares issued to Mr. Carroll, 250,000 shares issued to David Winsness,
the Company's Chief Technology Officer, 250,000 shares issued to Mr. Barlage,
335,217 shares issued to Mr. Miller and the balance being issued to various
other employees of the Company.
CONTRIBUTION OF CAPITAL BY CARBONICS CAPITAL CORPORATION
On November 9, 2007 Carbonics Capital Corporation (which, prior to the
distribution of its stake in the Company to its shareholders, owned the majority
interest in the Company), contributed to the Company's capital 26,000,000 shares
of GS AgriFuels common stock representing about 91% of the outstanding fully
diluted capital stock of GS AgriFuels. On November 9, 2007, Carbonics also
contributed to the Company's capital 160,000,000 shares of common stock and
921,313 shares of the Series D preferred stock of EcoSystem Corporation (f/k/a
GS Energy Corporation) ("EcoSystem"), representing 75% of the outstanding
capital stock of EcoSystem. On November 9, 2007, Carbonics also contributed to
the Company's capital 1,000,000 shares of GS EnviroServices, Inc. common stock,
representing 3.8% of the outstanding capital stock of GS EnviroServices.
57
On December 31, 2007, the Company transferred its 160,000,000 shares of
EcoSystem common stock and 921,313 shares of Series D Preferred Stock to Viridis
Capital, LLC ("Viridis"), the Company's majority shareholder, in exchange for
the $500,000 reduction in the note payable by the Company to Viridis.
Effective December 31, 2007, EcoSystem transferred its stakes in GS Design, Inc.
and GS Rentals, LLC to the Company in return for the reduction in the Company's
note receivable from EcoSystem by $170,385 and the issuance to EcoSystem of a
term note in the amount of $432,932, which note bears interest at 6% per annum
and matures on December 31, 2008. During the year ended December 31, 2008, this
debenture was purchased by Minority Interest Fund (II), LLC ("MIF") in return
for the reduction in the total amount of the convertible debt payable by the
Company to MIF.
The only conditions in which the Company would be required to redeem its
convertible preferred stock for cash would be in the event of a liquidation of
the Company or in the event of a cash-out merger of the Company.
RESTRUCTURING
On November 9, 2007, the Company and Carbonics Capital Corporation (the
Company's former parent) initiated and completed a series of transactions to
restructure of the Company, including the transfer to the Company of Carbonics'
stakes in GS AgriFuels Corporation and EcoSystem Corporation. The Company
assumed all of Carbonics' intercompany, affiliate related party notes payable
and receivable, all trade payables, and all receivables, but did not assume
Carbonics debt to YA Global Investments, LP. In exchange, the Company issued to
Carbonics a promissory note in the aggregate net amount of $2,948,831 (the
"Carbonics Note"). During the year ended December 31, 2008, the Carbonics Note
was reduced by $2,000,000 as a result of the Company's realization during 2007
of impairment charges associated with the Company's NextGen Fuel and Sustainable
Systems subsidiaries. The balance owed on the Carbonics Note was $386,132 as of
the year ended December 31, 2008.
On December 12, 2007, Carbonics distributed all of what was then Carbonics' 80%
stake in the Company on a pro-rated basis to all of Carbonics' shareholders. To
accomplish the distribution, Carbonics converted 200,000 shares of Company
Series D Preferred Stock into 20,800,000 shares of Company common stock, which
it distributed to the minority shareholders of Carbonics, and distributed
800,000 shares of Company Series D Preferred Stock (see Note 5, Shareholders'
Equity, below) to Viridis Capital, LLC, the Company's majority shareholder.
Kevin Kreisler, the sole member of Viridis Capital, is the Chairman and Chief
Executive Officer of the Company.
On December 11, 2008, the Company entered into an Exchange Agreement with YAGI
whereby YAGI agreed to return the 3,329,630 GS AgriFuels Shares and the warrants
exercisable into 3,300,000 shares of GS AgriFuels common stock previously
acquired by YAGI to the Company in exchange for a convertible debenture in the
amount of $1,950,000. The debenture matures on December 31, 2011 and bears
interest at a rate of 10% per annum.
6 DISCONTINUED OPERATIONS
TRANSACTIONS RELATING TO GS ENVIROSERVICES
During January 2008, GS EnviroServices, the Company's environmental services
segment, redeemed the majority of the Company's stock holdings in GS
EnviroServices in return for the reduction of certain Company convertible debts
due to YA Global Investments, L.P. ("YAGI"). As of January 25, 2008, the Company
held only a minority stake in GS EnviroServices (6,266,667 shares, or about 19%)
and ceased consolidating the revenue and earnings of GS EnviroServices effective
January 1, 2008. These shares were subsequently liquidated in June 2008.
Subsequent to this transaction, Kevin Kreisler, the Company's chairman and chief
executive officer resigned from the position of chairman of the GS
EnviroServices board of directors. Additional information on these and other
subsequent events relevant to GS EnviroServices are provided here:
58
The components of discontinued operations are as follows:
2008 2007
------------ -----------
Net revenues ............................................ $ -- $ 15,286,064
Cost of revenues ........................................ -- 10,962,181
------------ ------------
Gross profit ....................................... -- 4,323,883
------------ ------------
Selling, general and administrative expense ............. -- 4,200,810
------------ ------------
(Loss) income from operations ...................... -- (4,200,810)
------------ ------------
Other income and expenses, net .......................... -- (76,395)
------------ ------------
Total other income and expense ..................... -- (76,395)
------------ ------------
(Loss) income before provision for income taxes .... -- 46,678
Total provision for tax ................................. -- 4,940
------------ ------------
Net income (loss) from discontinued operations ..... -- 51,618
Gain (loss) on disposal of discontinued operations (2,739,735) 2,481,691
------------ ------------
Total income (loss) - discontinued operations ...... $ (2,739,735)$ 2,533,309
============ ============
Liquidation of Majority Stake in GS EnviroServices
On January 25, 2008, the Company, which owned 15 million shares of the common
stock of GS EnviroServices, 53% of its outstanding shares, entered into a Stock
Purchase Agreement with GS EnviroServices. The Stock Purchase Agreement provided
that GS EnviroServices would repurchase 8,733,333 shares of GS EnviroServices
common stock from the Company in exchange for the issuance to YAGI of a
$2,000,000 convertible debenture, and the cancellation by YAGI of $2,000,000 of
indebtedness owed by the Company to YAGI.
The Stock Purchase Agreement, combined with a letter agreement between GS
EnviroServices and YAGI, further provided that if GS EnviroServices pays
$1,000,000 to YAGI on or before May 10, 2008, then the remaining 6,266,667
shares of GS EnviroServices owned by the Company will be transferred to GS
EnviroServices in return for the cancellation by YAGI of an additional
$1,000,000 of indebtedness owed by the Company.
This letter agreement was amended during the second quarter 2008 in connection
with the sale by GS EnviroServices of substantially all of its assets (see
below) to provide for the payment of $1,000,000 to redeem the remaining
6,266,667 shares of GS EnviroServices held by the Company. This payment was made
to YAGI in June 2008 in return for the reduction of the Company's subsidiary's
(GS AgriFuels Corporation) convertible debt obligations to YAGI by $1,000,000.
As a result of this total liquidation of our majority stake in GS
EnviroServices, we recognized a loss on disposal of discontinued operations in
the amount of $2,739,735 and the 2007 assets and liabilities of GS
EnviroServices have been presented as assets and liabilities of discontinued
operations.
7 DEPOSITS
The Company has security deposits on property leases in the amount of $63,634
and deposits on equipment of $304,701 as of the years ending December 31, 2008.
Deposits on property leases at December 31, 2007 was $5,034.
8 RESTRICTED CASH
As of December 31, 2008 and 2007, the Company had $406,954 and $426,623,
respectively, in restricted cash. According to the terms of the Line of Credit
with American State Bank & Trust Company, a lockbox is used for the collection
of payments on Sustainable Systems' accounts receivable. The balance in this
account as of December 31, 2008 and 2007 was $0 and $381,971, respectively, as
the Line of Credit with American State Bank & Trust Company was paid off in
October 2008 and the account was closed.
According to the terms of the new Line of Credit with Anchor Light, LP, an
account was set up in order to set aside funds to be used for interest on the
Line of Credit. The balance in this account as of December 31, 2008 was
$189,000.
In mid-2005, a significant wind storm caused damage to the plant that the
Company purchased in October 2005. The Company received insurance proceeds of
$82,893 during the year ended December 31, 2005 due to the property losses
incurred. The funds were deposited into the Company's account at First Community
Bank and are restricted for use in repair and replacement of the damaged
property. The Company had incurred $19,308 in expenditures during the year,
causing this amount of cash to be released from restrictions. Restricted cash at
First Community Bank was $18,184 and $43,652, respectively as of December 31,
2008 and 2007.
59
According to the Credit Agreement with YAGI, GS COES established a lockbox and
related blocked account under the credit line whereby collection of payments of
GS COES' accounts are remitted to this account. Accordingly, the funds are
restricted for use in the construction of the corn oil extraction systems and
for repayment of its debt obligation upon default demand by the lender or if
certain conditions are met (See Note 12, Financing Arrangements, below).
Restricted cash allocated for this purpose was $314 as of December 31, 2008.
Biofuel Industries Group, LLC is obligated to pay for certain road improvements
near its facility. These funds are restricted for use in the improvements to the
roads. Restricted cash allocated for this purpose was $199,456 as of December
31, 2008.
9 GOODWILL AND INTANGIBLE ASSETS
The Company reviews its goodwill annually for possible impairment and more
frequently if events or changes in circumstances indicate goodwill might be
impaired. The fair value of the Company's reporting units is analyzed using a
discounted cash flow valuation approach. The discounted cash flow calculation is
made utilizing various assumptions and estimates regarding future revenues and
expenses, cash flow and discount rates. The assumptions used are sometimes
significantly different than historical results due to the Company's current
business initiatives. If the Company fails to achieve results in line with the
assumptions used, intangible assets may be impaired. Possible impairment may
exist if the fair value computed using the discounted cash flow valuation
approach is lower than the carrying amount of the reporting unit (including
goodwill). Further analysis would be required if possible impairment exists by
comparing the implied fair value of the reporting unit, which is the excess of
the fair value of the reporting unit over amounts assigned to the reporting
unit's assets and liabilities, to the carrying amount of goodwill. If the
carrying amount of the reporting unit's goodwill is greater than the implied
fair value, an impairment loss equal to the difference would be recorded and
goodwill would be written down.
The Company tests goodwill and intangible assets annually for impairment at the
reporting level using a two step process. The Company's reporting units are:
>> Equipment & Technology Sales
>> Culinary Oil Production & Sales
>> Biofuel Production & Sales
The first step includes the following review criteria: (a) compare fair value of
reporting unit with its carrying amount (accounting value); (b) if fair value of
reporting unit is greater than its carrying amount (including recorded
goodwill), then no impairment and therefore there is no need to perform Step II;
and (c), if the reporting unit carrying amount (including recorded goodwill) is
greater than its fair value, then must complete Step II to measure the amount of
impairment, if any.
The second step includes the following review criteria: (a) measuring the amount
of impairment loss; (b) the implied fair market value of goodwill shall be
determined in the same manner as the amount of goodwill recognized in a business
combination is determined; (c) in order to determine the implied fair value of
the goodwill, we value all assets; (d) assets subject to testing under SFAS 144
must be tested before goodwill can be tested under SFAS 142; and (e) if the
carrying amount of a reporting unit goodwill exceed the implied fair value of
that goodwill, then an impairment loss is recognized for an amount equal to that
excess.
Segment information is presented in accordance with SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." This standard is based on a
management approach that designates the internal organization that is used by
management for making operating decisions and assessing performance as the
sources of the Company's reportable segments. Operating segments are defined as
components of an enterprise about which financial information is available that
is evaluated on a regular basis by the chief operating decision-maker, or
decision-making groups, in deciding how to allocate resources to an individual
segment and in assessing performance of the segment.
The Company used three methods of valuation to determine impairment. The first
method used is book value, the second methodology is Discounted Cash Flow
analysis and the third method is a combination of Discounted Cash Flow analysis
and Market Multiples.
60
The Company relied heavily on the Discounted Cash Flow Analysis and the Market
Multiple Approach. In the prior years the Company used the same methodology,
with heavy reliance on the Discounted Cash Flow analysis and the Market Multiple
Approach. The historical losses in our reporting units heavily influenced our
analysis and are what triggered Step I. Given the development stage nature of
our operations during the reporting period, we relied heavily on future sales
rather than historical sales to forecast our sales growth. Management recast its
projections in subsequent periods which, in turn, caused impairment.
The Company's weighting of valuation methods was similar for both Sustainable
and NextGen. Sustainable Systems' cash flow projections used to determine the
purchase price relied on the representation by the sellers that Sustainable
Systems held clear title to its Culbertson, Montana based oilseed crushing
facility, and the ability to obtain expansion capital that would have expanded
capacity to 600 tons per day from 100 tons per day. The Company learned in early
2008 that Sustainable Systems did not hold clear title to its crushing facility,
but rather merely the right to acquire the facility upon the payment of
additional capital. The Company was consequently not able to obtain that
financing on the time frame initially projected and subsequently initiated suit
against the selling shareholders in this regard. This affected our cash flow
projections and, since the asset and book value did not change, our analysis was
weighted towards a Discounted Cash Flow Approach as well as a Market Multiple
Approach.
NextGen's original purchase price was determined by assuming that NextGen would
be able to sell biodiesel equipment to a then-rapidly growing biodiesel market.
This market had increased dramatically in size during the 3 years prior to the
completion of the acquisition. About 6 months after the acquisition, commodity
prices increased to the point where making biodiesel for many potential clients
was no longer as profitable as it once was. This led to a significant reduction
in biodiesel plant construction activities. Therefore, our valuation analysis
put additional weight towards the Discounted Cash Flow Analysis and the Market
Multiple Approach since both were used in the original purchase price. Book
Value was felt to have little bearing on the impairment at the time.
The material assumptions used for Sustainable Systems assumed that the expansion
would not be completed we then forecast sales using the 2008 financials as a
base year and then increased sales by 6.5% per year thereafter and expenses by
3%. We assumed an operating margin and a net margin between 8 and 13%.
throughout the forecast period. For NextGen Fuel we assumed the sale of only one
10 million gallon per year system per year (versus three systems per year) for
the same projection period of 2009 to 2014, and we assumed the same sales
increase of 6.5% and the same 3% per year increase in expenses.
As a result of our annual assessment of goodwill and intangibles in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," the Company concludes that an impairment of its energy
technology intangibles existed. The Company's results for the year ended
December 31, 2008 includes a non-cash pre-tax write-down of intangible assets
impairment charge of $10,143,288. This impairment results from the Company's
year-end analysis of its energy technology intangibles for its Equipment and
Technology Reporting Unit.
As a result of our annual assessment of goodwill in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," the Company concluded that an impairment of its goodwill existed. The
Company's results for the year ended December 31, 2008 included a non-cash
pre-tax goodwill impairment charge of $8,786,183. This impairment results from
the Company's year-end analysis of goodwill for its Culinary Oil Production and
Sales and Equipment and Technology Sales Reporting Units, which demonstrated
goodwill impairment of $7,458,877 and $1,327,306, respectively.
As a result of our 2007 annual assessment of goodwill in accordance As a result
of our 2007 annual assessment of goodwill in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," the Company concluded that an impairment of its goodwill existed. The
Company's results for the year ended December 31, 2007 included a non-cash
pre-tax goodwill impairment charge of $11,153,816. This impairment results from
the Company's year-end analysis of goodwill for its Culinary Oil Production and
Sales and Equipment and Technology Sales Reporting Units, which demonstrated
goodwill impairment of $5,453,816 and $5,700,000, respectively.
On September 13, 2006, GS AgriFuels entered into a financing agreement with
Sustainable Systems, LLC whereby GS AgriFuels would invest a total of $3,000,000
into the company for a 15% stake in the company. As of March 6, 2007, we had
acquired an approximately 15% interest through advances of $2,000,000, accounted
for under the cost method. On March 6, 2007, GS AgriFuels completed the
acquisition of the remaining approximately 85% of the outstanding capital stock
of Sustainable Systems, Inc. The total negotiated purchase price was
61
$12,657,093, to be paid as follows: $100,000 in a short term note payable, notes
payable issued to the sellers for $1,900,000, two convertible debenture issued
to the sellers totaling $7,104,018, and $3,553,075 in GS AgriFuels' common stock
at an agreed upon fair value of $4.50 per share. The $1.9 million note were
agreed to be due upon the completion and commissioning of Sustainable's current
plant expansion. The two $3.55 million debentures were agreed to be due on the
first anniversary of the closing and the second anniversary of the closing,
respectively. The excess of the purchase price over the net liabilities acquired
had been recorded as goodwill in the amount of $13,158,877 as of December 31,
2007.
On October 31, 2006, the Company's subsidiary, GS AgriFuels completed the
acquisition of NextGen Fuel, Inc. Cash in the amount of $17,000,000 was paid for
the acquisition of NextGen Fuel with an additional $4,204,437 in seller
holdback. The fair value of the net assets acquired was $1,050,621 with the
excess purchase price of $20,153,816 to be allocated to intangible assets. GS
AgriFuels allocated $14,700,000 to energy technology intangibles, and recorded
$5,453,816 at the time of the NextGen closing. For the year ended December 31,
2008, the Company tested for impairment of the goodwill related to NextGen Fuel,
Inc. Based on management's evaluation, the carrying value related to NextGen
Fuel, Inc. exceeded the implied fair value. As of December 31, 2008, the Company
recorded a $10,143,288 write-off of the net book amount allocated to energy
technology.
Effective January 1, 2008, the Company acquired 100% of the stock of Bollheimer
& Associates, Inc. ("BA"). The total purchase price is $450,000 in cash plus
shares of performance based Series B Preferred Stock that are convertible into
500,000 shares of Company common stock. The cash portion of the acquisition
price is to be paid in five installments (the first of which was paid at
closing), with the last installment due on or before January 1, 2011 provided
that BA continues to generate at least $125,000 in gross sales per year for the
next three years. The excess of the purchase price over the net assets had been
recorded as Goodwill in the amount of $421,727.
Effective May 15, 2008, the Company and Biofuel Industries Group, LLC (d/b/a
NextDiesel(TM)) ("BIG") entered into an Exchange Agreement pursuant to which the
Company exchanged 20,000,000 common shares and 20,000 preferred shares in return
for 100% of the equity of BIG subject to the redemption by BIG of BIG's "Class A
Membership Units" for a total of $9 million preferred equity interest with a 12%
coupon commencing January 30, 2009 at a rate equal to 30% of BIG's net cash
flows (after all operating costs and regular debt payments have been paid) (the
"Class A Redemption"). The $9 million preferred equity interest is mandatorily
redeemable if it is not paid on or before the twentieth anniversary of closing
and is classified as a liability under the provisions of SFAS No. 150. The
excess of the purchase price over the net assets had been recorded in goodwill
in the amount of $7,281,993. The Company is in the process of obtaining a
third-party valuation of certain assets and liabilities, including acquired
intangible assets and finalizing its own internal assessment of the purchase
price allocation. Thus, the preliminary allocation of purchase price will
change, and such change could be material. The Company anticipates completing
the purchase price allocation and reporting in future filings as required by
SFAS 141 regarding business combinations.
The Company's intangible assets at December 31, 2008 and 2007, respectively. include the following:
Energy technology $ -- $14,700,000
Patent 50,000 50,000
Website 45,076 --
Software 13,535 --
Accumulated amortization (58,132) (2,463,117)
----------------------------
Intangible assets, net $ 50,478 $ 12,286,883
============================
Amortization of intangible assets was $2,100,000 and $2,100,000 for the twelve
months ended December 31, 2008 and 2007 respectively. Estimated amortization
expense for future years is as follows:
2009 $ 7,659
2010 5,093
2011 5,093
2012 5,054
2013 3,203
Thereafter 24,376
--------------
Total $ 50,478
==============
62
The changes in the carrying amount of goodwill during the twelve months ended
December 31, 2008 and 2007 are as follows:
Equipment and Culinary Oil Biofuel
Technology Sales Production Production Total
Balance at January 1, 2007 $ 905,579 $ -- $ -- $ 905,579
Goodwill Acquisition 5,453,816 13,158,877 -- 18,612,693
Impairment/Loss (5,453,816) (5,700,000) -- (11,153,816)
--------------- ---------------- --------------- ---------------
Balance at December 31, 2007 905,579 7,458,877 -- 8,364,456
Goodwill Acquisition 421,727 -- 7,281,993 7,703,720
Impairment/Loss (1,327,306) (7,458,877) -- (8,786,183)
--------------- ---------------- --------------- ---------------
Balance at December 31, 2008 $ -- $ -- $ 7,281,993 $ 7,281,993
=============== ================ =============== ===============
10 PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
2008 2007
---------------------------------
Land and building $ 6,900,313 $ 1,391,904
Furniture and fixtures 65,590 57,175
Machinery and equipment 9,576,731 1,698,079
Vehicles 40,920 36,336
Computer equipment 265,529 186,572
Processing equipment 10,966,199 1,285,584
Leasehold improvements 274,320 235,038
--------------- ----------------
Sub-total 28,089,603 4,890,688
Less accumulated depreciation (2,776,898) (785,340)
------------ ----------------
Total $ 25,312,706 $ 4,105,348
=============== ================
For the years ended December 31, 2008 and 2007, total construction in progress
was $6,023,012 and $4,541,554, respectively. Of this amount, $4,458,417 and
$1,900,864, respectively, was related to the Company's corn oil extraction
systems that are currently being installed and are not yet in service. The
remaining $1,481,459 and $2,944,049, respectively, is related to the expansion
in progress at Sustainable Systems' oilseed crush facility.
Depreciation charged to operations was $1,397,876 and $712,173 for the years
ended December 31, 2008 and 2007, respectively.
During the year ended December 31, 2008, the Company recorded a $2,412,528
write-down due the impairment of assets relating to property and equipment. GS
Design wrote off $412,528 on the construction in progress related to a feedstock
pre-treatment system. In addition, Sustainable Systems wrote off $2,000,000
including a $1,481,459 write-down related to the construction in progress on the
solvent plant, $194,456 related to the building and improvements and $324,086
related to equipment.
The estimated completion times for assets recorded in construction in progress
are as follows:
Location Current Status
--------------------------------------------------------------------------------
Oshkosh, Wisconsin Operational
Medina, New York Operational
Marion, Indiana Operational
Riga, Michigan Operational
Albion, Michigan 2009
Richardton, North Dakota 2009
Lakota, Iowa 2009
Milton, Wisconsin 2009
Fulton, New York 2009
Adams, Nebraska 2009
Culbertson, Montana (expansion of existing plant) 2010
11 LINES OF CREDIT
Inventory Line of Credit for Culinary Oil Production Facility
In October 2007, Sustainable Systems, LLC, which owns our oilseed crush
facility, entered into a Line of Credit with American State Bank. The total
amount available under the Line of Credit is $2,225,000. The Line bears interest
at a rate of 10.25% which is due monthly. The default rate is 3% over the note
rate. The Line matured on September 1, 2008. The funds will be advanced on a
borrowing base certificate as follows: (1) 75% of receivables less than 60 days;
(2) 55% of contracted seed price in the house; (3) 75% of oil price as
63
contracted for in the house; and (4) 75% of meal inventory value. The Line has
been guaranteed by Sustainable Systems, Inc. and GS AgriFuels. The balance as of
the year ended December 31, 2007 was $1,833,192.The line was paid off in full on
October 6, 2008.
Revolving Line of Credit for Construction of Corn Oil Extraction Facilities
On January 25, 2008, GS COES (Yorkville I), LLC, a subsidiary of the Company,
closed on the terms of a Credit Agreement with YA Global Investments, LP
("YAGI"). On July 1, 2008, the Credit Agreement was amended to extend the
commencement of payments to YAGI to October 1, 2008 and to extend all
performance timelines to December 31, 2008. On December 11, 2008, the Credit
Agreement was amended to extend the maturity date to January 31, 2011, to
increase the revolving availability to $13,750,000, and to restructure the
repayment provisions such that amounts advanced by YAGI would be repaid on the
closing of financing from CleanBioenergy Partners, LLC, an affiliate of GE
Energy Financial Services. The Credit Agreement was issued for the purpose of
constructing and installing corn oil extraction facilities based on the
Company's patented and patent-pending corn oil extraction technologies. While
the revolving availability under the line of credit was increased to $13,750,000
in the December 11, 2008 amendment, and the Company was otherwise in compliance
with the amended terms, the Company was unable to access the additional
availability. The principal balance on the line of credit was $10,000,000 as of
December 31, 2008, interest is accruing at the rate of 20% per annum, and the
line and accrued interest is payable at the maturity date. The December 11, 2008
amendment also added a term allowing YAGI to convert interest and principal into
common stock of the Company at a conversion price equal to the lesser of (a)
$1.25 or (b) 90% of the lowest daily volume weighted average price for the
twenty trading days preceding conversion. The Company is currently in
discussions with YAGI to restructure this line of credit since the
CleanBioenergy financing failed to close as expected (see Note 28, Subsequent
Events).
The Company accounted for the YAGI line of credit dated January 25, 2008 in
accordance with SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150), as the conversion
feature embedded in the YAGI line of credit could result in the principal being
converted to a variable number of the Company's common shares. The carrying
amount of the line of credit has been restated for the prior year (please see
Note 29 Restatements, below). The Company determined the value of the YAGI line
of credit at issuance to be $11,036,554 which represented the face value of the
principal plus the present value of the conversion feature. The liability for
the conversion feature shall increase from its present value of $1,036,554 at
issuance to its estimated settlement value of $1,111,111 at December 31, 2010.
An expense of $8,284 was been recorded as interest expense for the accretion of
the discount on the convertible note payable, thereby increasing the carrying
value of the YAGI line of credit to $11,044,838 at December 31, 2008.
To induce YAGI's entry into the Credit Agreement and in consideration of YAGI's
execution of the Restructuring Agreement described below, the Company issued six
million shares of its common stock to YAGI valued at $1,080,000. In conjunction
with the financing GS COES paid structuring fees of $210,000, legal fees of
$150,000, monitoring fees of $175,000, due diligence fees of $35,000 as well as
prepaid interest of $250,000. The balance of deferred financing fees was
$235,315 at December 31, 2008 after recording $340,378 in amortization of
financing fees for year ending December 31, 2008.
Revolving Line of Credit for Biodiesel Production Facility
On January 16, 2008, Biofuel Industries Group, LLC ("BIG"), a newly acquired
subsidiary of the Company, restructured its previous line of credit. The total
amount available under new revolving line of credit is $1,750,000. The Line
shall bear interest at a rate of LIBOR Rate plus two and twenty five hundredths
percent per annum and matures on January 11, 2009. The Company owed Citizens
Bank $9,128 in payments and the balance on the line was $745,235 as of December
31, 2008 and 2007.
12 FINANCING ARRANGEMENTS
The following is a summary of the Company's financing arrangements as of
December 31, 2008 and 2007:
Current portion of long term debt: 12/31/2008 12/31/2007
----------------------------
Note payable from GS AgriFuels to Stillwater .................................. $ 2,071,886 $ 3,800,000
Purchase obligations from GS AgriFuels to NextGen sellers ..................... 3,979,437 3,979,437
Purchase obligations from GS AgriFuels to Sustainable Systems sellers ......... 1,017,451 1,900,000
Asset retirement obligation, current .......................................... 277 256
Current portion of note payable to Sustainable Systems' creditors ............. 77,422 129,240
Current portion of installment debt payable from Sustainable Systems .......... 1,400,000 --
64
Note Payable to former employee ............................................... -- 138,558
Vehicle loans and other short term borrowings ................................. 60,769 --
Mortgages and other term notes ................................................ 29,404 92,374
Current portion of notes payable from GreenShift to Bollheimer ................ 320,000 --
Current portion of notes payable from GS CleanTech ............................ 150,000 --
Current portion of convertible notes payable from GS CleanTech ................ 1,156,444 --
Current portion of installment debt from GS AgriFuels to Sheridan ............. -- 253,301
Current portion of Notes payable from GS AgriFuels to Sheridan Electric ...... -- 248,224
Notes payable from Biofuel Industries Group ................................... 150,000 --
------------ ------------
$ 10,413,090 $ 10,541,390
============ ============
Long-term debt, net of current maturities:
Mortgages and other term notes ................................................ $ 9,146,746 41,260
Vehicle loans ................................................................. -- 306,003
Notes payable from GS AgriFuels to Montana Dept of Agriculture ................ 124,052
124,052
Convertible notes payable from GS CleanTech ................................... --
578,135
Note payable from GS AgriFuels to Sheridan .................................... 951,078
------------
Notes payable from GS AgriFuels to Great Northern Development ................. 944,745 954,513
------------ ------------
Total long term debt ..................................................... $ 10,793,678 $ 2,376,906
============ ============
Asset retirement obligation:
Asset retirement obligation ................................................... $ 247,462 $ 60,290
============ ============
Current portion of convertible debentures:
Convertible debenture payable from GS AgriFuels to YAGI issued February 2006 .. $ 1,949,631 $ --
Convertible debenture payable from GS AgriFuels to YAGI issued June 2006 ...... 5,500,000 --
Convertible debentures payable from GreenShift to Acutus Capital .............. 538,469 --
Convertible debenture payable from GS AgriFuels to Sustainable Systems sellers 1,902,140 3,552,005
Convertible debenture payable from GreenShift to YAGI assumed April 2006 ...... $ -- $ 740,067
Convertible debenture payable from GreenShift to YAGI issued February 2007 .... -- --
Kerns convertible debenture payable from GreenShift ........................... 1,000,000
------------
Convertible debenture payable from GS AgriFuels to Sustainable Systems sellers 1,902,147 --
------------ ------------
Total current portion of convertible debentures .......................... $ 11,792,387 $ 5,292,072
============ ============
Long-term convertible debenture:
Convertible debenture payable from GS AgriFuels to YAGI issued February 2006 .. $ -- $ 1,949,631
Convertible debenture payable from GS AgriFuels to YAGI issued June 2006 ...... -- 5,500,000
Convertible debenture payable from GreenShift to YAGI assumed April 2006 ...... $ 2,084,986 $ --
Convertible debenture payable from GreenShift to YAGI issued April 2006 ....... 303,515 1,900,000
Convertible debenture payable from GreenShift to YAGI issued February 2007 .... 1,224,063 1,125,000
Convertible debenture payable from GreenShift to YAGI issued April 2007 ....... 2,789,278 4,400,000
Convertible debenture payable from GS AgriFuels to YAGI issued October 2006 ... 12,860,000 12,860,000
Convertible debenture payable from GreenShift to YAGI issued December 11, 2008 1,950,000 --
Convertible debenture payable from GS AgriFuels to Sustainable Systems sellers -- 3,552,013
Conversion liabilities ........................................................ 278,474 --
Note discounts ................................................................ (302,070) (672,015)
------------ ------------
Total long term portion of convertible debentures ........................ $ 21,188,196 $ 30,614,629
============ ============
The following principal amounts of convertible debentures noted above are
convertible into the common stock of the following companies:
GreenShift Corporation $ 8,890,310
GS AgriFuels Corporation 24,113,918
--------------
Total $ 33,004,228
==============
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 December 31, 2008 and the Company's ability to meet such obligations:
Year Amount
---------------------------------------------- -------------------
2009 $ 26,249,122
2010 10,806,253
2011 2,357,036
2012 8,505,277
2013 and thereafter 6,571,731
---------------
Total minimum payments due under current and
long term obligations $ 54,489,420
===============
65
13 NOTES PAYABLE - RELATED PARTIES
On November 9, 2007, the Company and Carbonics Capital Corporation (the
Company's former parent) initiated and completed a series of transactions to
restructure the Company, including the transfer to the Company of Carbonics'
stakes in GS AgriFuels Corporation and EcoSystem Corporation. The Company
assumed all of Carbonics' intercompany, affiliate related party notes payable
and receivable, all trade payables, and all receivables, but did not assume
Carbonics debt to YA Global Investments, LP. In exchange, the Company issued to
Carbonics a promissory note in the aggregate net amount of $2,948,831 (the
"Carbonics Note"). During the year ended December 31, 2008, the Carbonics Note
was reduced by $2,000,000 as a result of the Company's realization during 2007
of impairment charges associated with the Company's NextGen Fuel and Sustainable
Systems subsidiaries. The balance owed on the Carbonics Note was $386,132 and
$2,948,831, respectively, as of the years ended December 31, 2008 and 2007.
During the twelve months ended December 31, 2007, the Company borrowed $30,000
from David Winsness, the Company's Chief Technology Officer. The note carried
interest at 5% per year and was payable upon demand. The Company repaid the loan
in full subsequent to the year ended December 31, 2007. The balance as of
December 31, 2008 was $0.
During the twelve months ended December 31, 2007, the Company borrowed $20,000
from Edward Carroll, the Company's Chief Financial Officer. The note carried
interest at 5% per year and was payable upon demand. The Company repaid the loan
in full subsequent to the year ended December 31, 2007. The balance as of
December 31, 2008 was $0.
During the year ended December 31, 2008, the $410,930 note payable the Company
owed to Viridis Capital, LLC was purchased by Minority Interest Fund (II), LLC
("MIF"). Kevin Kreisler, the sole member of Viridis Capital, is the Chairman and
Chief Executive Officer of the Company. In addition to the Viridis transaction
MIF also purchased the Candent convertible debenture and purchased new
convertible debt during December 2008 (see Note 16, Debt and Purchase
Obligations).
During the year ended December 31, 2007, a former employee loaned $138,558 to
the Company. This balance was written off during the twelve months ended
December 31, 2008.
14 VEHICLE LOANS
The Company had one vehicle loan with an interest rate of 10.79%. This loan
matured in April 20103. As of December 31, 2008 and 2007, the vehicle notes
totaled $24,052 and $0, respectively (See Note 28, Subsequent Events).
15 ASSET RETIREMENT OBLIGATION
Pursuant to SFAS 143, Accounting for Asset Retirement Obligations, the Company
has recognized the fair value of the asset retirement obligation for the removal
of its COES systems. The present value of the estimated asset retirement costs
has been capitalized as part of the carrying amount of the related long-lived
assets. The liability has been accreted to its present value as of December 31,
2008, and the capitalized cost approximated $10,966,000. The Company has
recognized $623 due to accretion from the acquisition dates. The Company has
determined a range of abandonment dates between December 2018 and December 2019
and a total salvage value of $250,000 per system. The following represents the
amount of the retirement obligation at the beginning and the year ended December
31, 2008:
2008 2007
------------- -------------
Beginning balance at January 1 $ -- --
Liabilities incurred during the period 246,840 60,290
Liabilities settled during the period -- --
Accretion of interest 623 --
------------- -------------
Ending balance at December 31 $ 247,462 $ 60,290
============= =============
66
16 DEBT AND PURCHASE OBLIGATIONS
CONVERTIBLE DEBENTURES
Restructuring Agreements with YA Global Investments, LP
Restructuring of Convertible Debentures Previously Issued by GreenShift
In connection with the GS COES (Yorkville I), LLC financing (see Note 10, Lines
of Credit, above), the Company and YAGI entered into a Restructuring Agreement.
The Restructuring Agreement provided for the exchange of all convertible
debentures and accrued interest in the amount of $891,432 issued by GreenShift
Corporation to YAGI for four amended and restated debentures. However, the
principal balance of one of the debentures was reduced by $2,000,000 and the
accrued interest was reduced by $1,000,000 pursuant to the stock purchase
transaction between the Company and GS EnviroServices, Inc. (see Note 6,
Discontinued Operations). The net aggregate principal amount of the restated
debentures was $6,401,841 as of December 31, 2008.
The terms of the amended and restated debentures are:
>> Principal and interest may be converted, at YAGI's option, into shares
of Company common stock, at a conversion price of $1.25 per share.
>> On the first business day of each month commencing February 1, 2008,
the Company must pay an aggregate $250,000 to YAGI. If the Company
fails to make the payment, YAGI shall be entitled to convert that
amount of accrued interest and principal into common stock of the
Company at a conversion price equal to the lesser of (a) $1.25 or (b)
90% of the lowest daily volume weighted average price for the twenty
trading days preceding conversion. If a monthly payment is not made
and YAGI does not opt to convert, then the unpaid amount will be added
to the amount due on the first day of the following month. The Company
has not made any of the monthly payments. As such, the embedded
conversion feature on the aggregate $2,750,000 due and not paid in
2008 was deemed to be a liability under SFAS 150 (see below).
>> All unpaid interest and principal will be due and payable on December
31, 2011.
>> The debentures bear interest at 10% per annum.
>> The Company does not have any ratios or covenants in conjunction with
the YAGI debt.
When the Company restructured the convertible debentures, the outstanding
balances owed on the debentures as well as all the accrued interest were rolled
into the new debentures. The restructuring does scope out of SFAS 15 "Accounting
by Debtors and Creditors for Troubled Restructuring" due to many factors: there
was no concession by the creditor; the face amount of the note was not reduced;
the Company did not transfer any receivables or other assets from third parties
to the creditor in order to fully or partially reduce the debt; the interest
rate of the debt was not modified nor was the accrued interest reduced. After we
considered if there was a significant modifications of terms under EITF 96-19
"Debtor's Accounting for a Modification or Exchange of Debt Instruments", based
on our analysis, no significant modification of terms occurred.
For the YAGI restated and amended debentures, the Company determined the fair
value of the initial obligations for the monthly stream of payments due under
the debentures to be $3,014,941 which represented the face value of the monthly
payments plus the present value of the underlying conversion feature. The
liability for the conversion feature shall increase from its initial present
value of $264,941 to its estimated settlement amount of $305,556 at December 31,
2010. As of December 31, 2008, an expense of $13,483 has been recorded as
interest expense for the accretion of the discount on the convertible note
payable, for the year ended December 31, 2008 thereby increasing the carrying
value of the stream of payments owed under the YAGI amended debentures to
$3,028,424 at December 31, 2008.
Amended Forbearance Agreement
In connection with the financing transactions described above, YAGI entered into
an Amended and Restated Forbearance Agreement with the Company, Carbonics
Capital Corporation (the Company's former parent), and Viridis Capital, LLC (the
Company's majority shareholder). The Forbearance Agreement recited that a
default previously existed under certain debentures issued to YAGI by the
Company and its subsidiaries, which were guaranteed by the Company and Viridis
Capital. In order to secure the defaulted debentures, the parties had, at the
time of issuance of the debentures, pledged to YAGI the following securities:
67
Pledge Pledged Shares Issuer
---------------------- --------------------------------------------------------------------- -------------------------
Viridis 800,000 shares of Series D Preferred Stock GreenShift Corporation
Viridis 1,000,000 shares of Series C Preferred Stock Carbonics Capital Corp
Viridis 1,000,000 shares of Series C Preferred Stock EcoSystem Corporation
The Amended and Restated Forbearance Agreement stipulates that YAGI may not at
any time own more than 4.99% of the outstanding common shares of any of the
issuers. Each time YAGI takes shares under the Agreement, 90% of the volume
weighted average market price for the five trading days preceding the delivery
will be applied against the principal amount of the Debentures. YAGI agreed
that, if no other defaults occur under the Debentures, it would waive all other
rights and penalties available to it as a result of the present defaults.
Restatement of Guarantees by GreenShift, Viridis Capital, LLC and Kevin Kreisler
Payment of all obligations with respect to the obligations noted above to YAGI
has been guaranteed by the Company, by its Chairman, Kevin Kreisler, by his
holding company, Viridis Capital, LLC, and by all of the subsidiaries of the
Company.
Consent to Short-Form Merger of GS AgriFuels
In connection with the foregoing financing transactions, the Company, its
subsidiary, GS AgriFuels Corporation, and YAGI entered into an Agreement
relating to the previously announced plan of the Company to effect a short-form
merger of GS AgriFuels so as to redeem for cash all shares of GS AgriFuels not
owned by the Company. YAGI's consent to the short-form merger was required. YAGI
gave its consent in the Agreement, subject to the following commitments by the
Company and GS AgriFuels:
>> GS AgriFuels was required to amend the Certificate of Designations for
its Series C Preferred Stock to provide that it would be convertible
at a fixed rate of 32 common shares for each share of Series C stock,
and to provide that no Series C shares may be issued while any portion
of the debt to YAGI is outstanding.
>> GS AgriFuels agreed to issue 3,329,630 common shares to YAGI after the
short-form merger is completed.
>> The parties agreed that no more than 36,650,630 shares of GS AgriFuels
may be issued, on a fully-diluted basis.
>> The Company agreed to obtain an independent appraisal of the value of
GS AgriFuels. The debentures issued by GS AgriFuels to YAGI will then
be modified to provide that the interest and principal are convertible
by YAGI into GS AgriFuels common stock at a price equal to the lesser
of (a) $0.255 or (b) 80% of the appraised value on a per share basis.
>> GS AgriFuels agreed to pay to YAGI, on account of its debentures, 10%
of its cash receipts and 50% of free cash flows after regular debt
service.
On December 11, 2008, the Company entered into an Exchange Agreement with YAGI
whereby YAGI agreed to return the 3,329,630 GS AgriFuels Shares and the warrants
exercisable into 3,300,000 shares of GS AgriFuels common stock previously
acquired by YAGI to the Company in exchange for a convertible debenture in the
amount of $1,950,000. The debenture matures on December 31, 2011 and bears
interest at a rate of 10% per annum.
Completion of GS AgriFuels Corporation Go-Private Transaction
On February 29, 2008, a wholly owned subsidiary of the Company filed a
Certificate of Ownership and Merger merging the subsidiary into GS AgriFuels
pursuant to the short-form merger provisions of Section 253 of the Delaware
General Corporation Law. As a result of that filing, the Company became the
owner of 100% of the outstanding shares of GS AgriFuels. The Certificate of
Ownership and Merger provided that shareholders of record of GS AgriFuels as of
the close of business on February 29, 2008 would be paid cash at the rate of
$0.50 per share on March 27, 2008, which payment was initiated on March 27,
2008. The common stock of GS AgriFuels continued to be listed for trading on the
OTC Bulletin Board through March 27, 2008. Effective March 28, 2008, the common
stock of GS AgriFuels was delisted from the OTC Bulletin Board and became
non-transferable. As of December 31, 2008, the subsidiary shareholders were owed
$932,328.
OTHER CONVERTIBLE DEBENTURES
On February 28, 2007, the Company entered into a Stipulation of Settlement to
settle the lawsuit titled Kerns Manufacturing Corp. v. KBF Pollution Management,
Inc., which was pending in the Supreme Court of the State of New York (County of
68
Queens, Index No. 19788/03). Pursuant to the Stipulation, GreenShift issued to
Kerns (a) a Convertible Debenture in the principal amount of $500,000 that was
paid on June 30, 2007 (the "Kerns $500,000 Debenture") and (b) a convertible
debenture in the principal amount of $1,000,000 that was due on June 30, 2007
(the "Kerns $1,000,000 Debenture") and paid in full in February 2008. In April
2007, the entire principal balance on the June 30, 2007 Kerns debenture was
converted into 590,268 shares of the common stock of the Company. As of December
31, 2007, the principal balance on the Kerns debenture was $1,000,000. In
January 2008, Kerns consented to an extension of the due date of the debenture
in return for additional interest of $100,000. During the first quarter 2008,
Minority Interest Fund (II), LLC ("MIF") acquired the Kerns $1,000,000
Debenture. The managing member of MIF is a relative of Kevin Kreisler, the
Company's chairman and chief executive officer. This debenture was due to be
paid by the Company in two payments $600,000 on January 15, 2008 and $500,000
(plus residual interest and costs of $100,000) on February 15, 2008. MIF
purchased the Kerns $1,000,000 Debenture and paid these sums in cash to Kerns on
the requisite due dates. In February 2008, MIF subsequently fully converted this
debenture at the rate of $0.16 per share into 6,875,000 shares of Company common
stock.
During the year ended December 31, 2008, the Candent Debenture, which had a
balance of $757,853 at the end of December 31, 2007, was acquired by MIF, at
which time its terms were amended to provide for conversion into Company common
stock at a conversion price equal to the lesser of (a) $1.25 per share or (b)
90% of the lowest daily volume weighted average price for the twenty trading
days preceding conversion. The former president of Candent is the wife of the
Company's chairman. All of the issued and outstanding capital stock held by
Candent is in trust for the benefit of its former president.
During the year ended December 31, 2008, the Company issued a convertible
debenture to Acutus Capital, LLC ("Acutus") in the amount of $500,000. The
convertible debenture to Acutus shall bear interest at a rate of 20% per year
and matured November 1, 2008. Acutus is entitled to convert the accrued interest
and principal of the convertible debenture into common stock of the Company at a
conversion price equal to $1.25 per share. During the year ended December 31,
2008, the convertible debenture the Company owed to Acutus Capital, LLC was
purchased by MIF. During the year ended December 31, 2008, the $500,000 Acutus
Debenture was acquired by MIF.
During the year ended December 31, 2008, the Company issued convertible
debentures to Acutus Capital, LLC ("Acutus") in the amounts of $250,000 and
$235,000, respectively. The convertible debentures to Acutus shall bear interest
at a rate of 20% per year and mature on December 31, 2008 and February 15, 2009,
respectively. Acutus is entitled to convert the accrued interest and principal
of the convertible debenture into common stock of the Company at a conversion
price equal to $1.25 per share. The Company accounted for the debentures in
accordance with SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150), as the conversion
feature embedded in the debentures could result in the note principal being
converted to a variable number of the Company's common shares. The carrying
amount of the debentures have been restated for the prior year (please see Note
29 Restatements, below). The Company determined the fair value of the Acutus
debentures at December 31, 2008 to be $538,575 which represented the face value
of the debentures plus the present value of the conversion feature. The
liability for the conversion feature shall increase from its present value of
$52,606 at December 31, 2008 to its estimated settlement amount of $53,889. As
of December 31, 2008, an expense of $753 has been recorded as interest expense
for the accretion of the discount on the convertible note payable. The carrying
value of the Acutus Debenture was 538,889 at December 31, 2008. As of December
31, 2008, the Company was in default on the Acutus debenture. For the year
ending December 31, 2008, interest expense of $15,780 for these obligations was
incurred.
During the year ended December 31, 2008, the Company entered into amended and
restated convertible debentures with MIF that total $1,819,783. This amount
includes the $410,930 in notes payable that MIF purchased from Viridis, $757,853
in convertible debt that were purchased from Candent, and $500,000 in
convertible debt that was purchased from Acutus Capital, as well as an
additional $151,000 in new convertible debt that MIF purchased during December
2008. The total convertible debentures due to MIF were reduced by $432,932
during the year ended December 31, 2008, after MIF purchased the debenture
payable to the Company from EcoSystem Corporation by reducing the amount of the
convertible debt the Company owed to MIF bringing the year-end balance to
$1,386,851. $500,000 of the convertible debt issued to MIF bears interest at a
rate of 20% and the balance of the convertible debentures shall bear interest at
12% per year and mature on December 31, 2010. MIF is entitled to convert the
69
accrued interest and principal of the MIF convertible debenture into common
stock of the Company at a conversion price equal to the lesser of (a) $1.25 per
share or (b) 90% of the lowest daily volume weighted average price for the
twenty trading days preceding conversion. The Company accounted for the MIF
Debenture in accordance with SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150), as
the conversion feature embedded in the MIF Debenture could result in the note
principal being converted to a variable number of the Company's common shares.
The carrying amount of the debenture has been restated for the prior year
(please see Note 29 Restatements, below). The Company determined the value of
the MIF Debenture at December 31, 2008 to be $1,514,201 which represented the
face value of the debenture plus the present value of the conversion feature.
The liability for the conversion feature shall increase from its present value
of $127,350 upon issuance to its estimated settlement amount of $154,094 at
December 31, 2010. As of December 31, 2008, an expense of $4,744 has been
recorded as interest expense for the accretion of the discount on the
convertible note payable. The carrying value of the MIF Debenture was $1,514,201
at December 31, 2008.
CONVERTIBLE NOTES
On September 4, 2008, the Company's subsidiary, GS CleanTech Corporation,
entered into a series of convertible notes totaling $1,734,579. The notes shall
bear interest at a rate 15% per annum and mature on December 31, 2010.
Commencing on February 1, 2009, payments are due at a rate equal to the greater
of the interest accrued on the unpaid principal or $100,000 times the principal
amount divided by $3,000,000. Beginning July 1, 2009, payments are due based on
an eighteen month amortization, with all principal and accrued interest paid on
or before December 31, 2010. The notes are convertible into shares of GS
CleanTech subsidiary preferred stock (par $0.001) at the closing by GS CleanTech
of a planned Preferred Stock Financing at a 15% discount to the final terms of
any such Preferred Stock Financing. If any portion of the note is prepaid in
cash, GS CleanTech shall pay a 10% redemption premium at the time of redemption.
If the Preferred Stock Financing does not close on or before January 1, 2009,
the interest and redemption premium will increase to 20%. For the year ending
December 31, 2008, interest expense of $78,231 for these obligations was
incurred. The balance of the loans was $1,734,579 as of December 31, 2008.
OTHER CONVERTIBLE SECURITIES
SFAS 133 sets forth the requirements for determination of whether a financial
instrument contains an embedded derivative that must be bifurcated from the host
contract, therefore the Company evaluated whether the conversion feature for
Series D Preferred Stock would require such treatment; one of the exceptions to
bifurcation of the embedded conversion feature is that the conversion feature as
a standalone instrument would be classified in stockholders' equity. Management
has determined that the conversion option would not be classified as a liability
as a standalone instrument, therefore it meets the exception for bifurcation of
the embedded derivative under SFAS 133. EITF 00-19 addresses whether an
instrument that is not under the scope of SFAS 150 would be classified as
liability or equity; one of the factors that would require liability
classification is if the Company does not have sufficient authorized shares to
effect the conversion. If a company could be required to obtain shareholder
approval to increase the company's authorized shares in order to net-share or
physically settle a contract, share settlement is not controlled by the company.
The Series D Preferred Stock is owned by an entity controlled by Kevin Kreisler,
the Chairman of GreenShift. If all the Series D shares were converted and
exceeded the number of authorized common shares, there would be no contingent
factors or events that a third party could bring up that would prevent Mr.
Kreisler from authorizing the additional shares. As Mr. Kreisler is the majority
shareholder, there would be no need to have to go to anyone outside the Company
for approval. As a result, the share settlement is controlled by the Company and
with EITF 00-19. The Company assessed all other factors in EITF 00-19 to
determine how the conversion feature would be classified.
NOTES PAYABLE
GS CleanTech Corporation
On November 17, 2008, GS CleanTech Corporation entered into a bridge loan with
GS EnviroServices in the amount of $100,000. The loan accrues interest at the
rate of 15% per annum. The principal amount of the loan and all accrued interest
is due on or before December 15, 2008. For the year ending December 31, 2008,
interest expense of $1,932 for this obligation was incurred. The principal
balance of this note at December 31, 2008 was $100,000.
Stillwater Asset Backed Fund, LP
On October 30, 2006, NextGen Acquisition, Inc., a subsidiary of GS AgriFuels
that was formed to facilitate the acquisition of NextGen Fuel Inc., sold to
Stillwater Asset-Based Fund, LP a Term Note in the principal amount of $6
million. In conjunction with the financing NextGen Acquisition paid an
70
origination fee of $75,000, prepaid interest of $300,000, legal fees of $35,225,
and received net proceeds of $5,589,775. NextGen Acquisition used $4,879,236 of
the proceeds to acquire NextGen Fuel, Inc., made a loan totaling $568,958 to GS
Design, Inc. (a subsidiary of the Company), and repaid the Company $141,580 for
amounts paid by the Company in connection with the NextGen Fuel, Inc.
acquisition. The Term Note accrues interest at a rate of 20% per annum. Monthly
payments of principal and interest were due beginning February 1, 2007, with a
monthly principal amount of at least $300,000 and additional principal payments
made as a percentage of cash receipts of NextGen Fuel, Inc. On July 31, 2007,
NextGen Acquisition, Inc. entered into Amendment 1 to the Credit Agreement with
Stillwater Asset-Based Fund, LP. According the Amendment, NextGen received an
additional principal amount of $555,600. In conjunction with the refinancing,
NextGen Acquisition paid a financing fee of $72,880 and legal fees of $24,245,
$13,125 of which was paid via $17,500 shares of GS AgriFuels common stock.
According to the amended terms, all amounts of principal and interest not
previously satisfied will be due on December 31, 2010. Monthly payments have
been adjusted as follows: interest only August 2007 payment; September and
October 2007 payments would be an amount equal to the applicable Biodiesel
Systems Net Revenue Repayment Percentage of 10% (the Biodiesel Systems Net
Revenue is a defined term in the relevant agreements and it is defined as gross
cash receipts received during the preceding month); November 2007 through
January 2008 payments would be an amount equal to the $200,000 plus the
applicable Biodiesel Systems Net Revenue Repayment Percentage; and, payments
from February 2008 until the Maturity Date would be an amount equal to $300,000
plus the applicable Biodiesel Systems Net Revenue Repayment Percentage with all
outstanding obligations due and payable on the final Maturity Date. The
obligations of NextGen Acquisition Inc. under the Term Note have been guaranteed
by the Company, GS AgriFuels, NextGen Fuel, Inc., and by the following
affiliates: Carbonics Capital Corporation, GreenShift Corporation, EcoSystem
Corporation, GS Design, Inc., GS Rentals, LLC and Viridis Capital, LLC (the
"Guarantors"). Each of the Guarantors has pledged its assets to secure its
guaranty. For the year ending December 31, 2008, interest expense of $211,793
for this obligation was incurred. The principal balance of this note at December
31, 2008 and 2007 was $2,071,886 and $3,800,000, respectively.
On September 30, 2008, NextGen Acquisition and GreenShift, in its capacity as a
Guarantor, entered into a forbearance agreement and amendment to the credit
agreement with Stillwater providing for the following amended terms: (a) the
issuance of 250,000 shares of GreenShift common stock; (b) the payment of about
$35,000 in interest on December 15, 2008; and (c) the payment of $600,000 on or
before January 15, 2009 upon closing on GreenShift's then-pending financing with
CleanBioenergy Partners, LLC (see Note 19, Commitments and Contingencies, Other
Agreements, below). The CleanBioenergy financing failed to close as expected
during the first quarter of 2009 (see Note 28, Subsequent Events, below).
NextGen Acquisition failed to make any of the agreed-upon payments and the
Stillwater loan is currently in default. The Company is currently exploring
opportunities to liquidate its interest in NextGen Acquisition under conditions
that would eliminate the Company's obligation to Stillwater.
Sustainable Systems
Installment Debt Refinancing
In October 2005, prior to becoming a subsidiary of GS AgriFuels, Sustainable
Systems and Sheridan Electric Co-op signed an Installment Sale and Purchase
Agreement on September 30, 2005 (the "IPSA"). Under the agreement, the Company
acquired $1,913,185 of property, plant and equipment by application of $192,286
in deposits paid and the assumption of the repayment obligations due to First
Community Bank from Sheridan in the amount of $1,720,899 (the "FCB Note"), which
amount was to have been fully paid off or refinanced by Sustainable by the end
of the primary term (through October 31, 2006 or the end of any additional
option periods) to remove Sheridan as the primary obligor of the amounts due to
First Community Bank under the FCB Note (the "IPSA Obligation"). The balance due
at December 31, 2007 was $1,204,379. From 2006 to present, and under the terms
of the IPSA, Sustainable exercised several letter agreements to extend the
refinance period to June 1, 2008. Under the terms of the extension agreement,
the Company paid $300,000 as of the March 31, 2008 extension due date. This
amount was applied to principal along with the usual monthly payment of the FCB
Note. The FCB Note was secured by an interest in all the assets of Sustainable
including the accounts receivable. The note accrued interest at a variable rate
of interest. Monthly payments consisted of principal and interest and a final
payment which was due on September 25, 2013. The note was paid in full on
December 8, 2008, from loan proceeds when Sustainable Systems and Anchor Light,
71
LP entered into a Secured Promissory Note in the amount of $1,400,000. Under the
agreement, the Anchor Light note accrues interest at a rate of 13.5% per annum.
Monthly payments consist of all accrued interest on the unpaid balance with a
final balloon payment plus any accrued unpaid interest due when the note matures
on December 4, 2009. This note is secured by an interest in all the assets of
Sustainable including the accounts receivable. For the year ended December 31,
2008, interest expense of $14,499 was accrued. As of December 31, 2008, the
total principal balance on this note was $1,400,000.
Term Notes
Sustainable Systems has various notes payable with two other lenders.
Sustainable has signed three notes payable with the Montana Department of
Agriculture totaling $124,052. These notes were issued by the Montana
Agriculture Development Council under Return On Investment Agreements, numbers
0250714, 0350764, and 0450785. A return on investment (ROI) pursuant to these
agreements is an award of money with the expectation that all or a part of the
money will be repaid after a deferral period. No payments are required, and no
interest is accrued during the initial time period. After the deferral period,
the award recipient repays the investment plus interest over a remaining period
(up to seven years). As of December 31, 2005, all three notes were in the
deferral period with expected deferral of interest and payments until February
2006. The deferral periods were subsequently extended and the notes were further
modified with regard to interest and subordination. ROI note number 0450785 is
secured by a lien on specific equipment including pumps, blending vessels,
storage bins and a solvent recovery system. All notes accrue interest at the
rate of 3.2% per annum with payments of principal and interest beginning March
6, 2011. The notes are secured by an interest in various equipment including
eleven pumps and a solvent recovery system. For the year ending December 31,
2008 and 2007, interest expense of $4,051 and $3,933, respectively, for these
obligations was incurred and accrued.
Sustainable has signed four notes with Great Northern Development. Three of the
notes totaling $401,487 and $419,591 at December 31, 2008 and 2007,
respectively, accrue interest at the rate of 6% per annum. The payment terms for
the notes are as follows: the $10,455 and $119,530 notes are to be paid off with
180 monthly payments beginning December 15, 2005 with a maturity date of
November 15, 2020 and the $271,502 note is to be paid off with 120 monthly
payments beginning March 15, 2006 with a maturity date of January 15, 2016; the
monthly payments on this note are $1,800 per month from April 2007 to March 2008
and then $3,300 thereafter. The fourth note for $620,680 (as of December 31,
2008) and $664,162 (as of December 31, 2007) accrues interest at the rate of 5%
per annum with payments of principal only through November 2007 and principal
and interest payments until the maturity date of November 15, 2010; the monthly
payments on this note are $7,500 during 2007, $10,000 during 2008; $5,000 during
2009 and $17,302 thereafter. For the year ending December 31, 2008, interest
expense of $54,586 for these obligations was incurred. The principal balance of
these notes at December 31, 2008 was $1,022,167.
On June 4, 2007, Sustainable issued an unsecured promissory note in the amount
of $250,000 with Sheridan Electric Co-Op, Inc. in exchange for the same amount
of pre-existing accounts payable to the holder (the "Sheridan Note"). The
Sheridan Note accrues interest at a rate of 6% per annum. Monthly payments were
due in the amount of $1,500 starting June 1, 2007and were scheduled to continue
until March 1, 2010 (the "Maturity Date"). The balance at December 31, 2007 was
$248,224. This note was paid in full on December 4, 2008 from loan proceeds from
the Anchor Light financing.
Biofuel Industries Group, LLC
Citizens Bank
On June 30, 2008, Biofuels Industries Group, LLC ("BIG") issued a permanent note
(the "Permanent Note") in the amount of $7,200,000 with Citizens Bank in
exchange for a construction note payable that was executed on January 11, 2007
and was due on June 30, 2008. The Permanent Note accrues interest at a rate
equal to LIBOR plus two and twenty five hundredths percent per annum. Monthly
payments are due in the amount of $60,000 starting July 31, 2008 and shall
72
continue until June 30, 2013. The Company owed Citizens Bank approximately
$105,968 as of December 31, 2008. Each payment shall first be applied against
costs and expenses required to be paid under the Permanent Note then to the
principal balance. For the year ending December 31, 2008, interest expense of
$373,903 for these obligations was incurred. The principal balance of the
Permanent Note at December 31, 2008 was $7,080,000.
On June 30, 2008, BIG issued a replacement promissory note in the amount of
$1,688,700 with Citizens Bank (the "Replacement Note") in exchange for a note
payable on January 11, 2009. The Replacement Note accrues interest at a rate
equal to the Applicable LIBOR Rate plus two and twenty five hundredths percent
per annum. Monthly payments of accrued interest and principal are due starting
September 1, 2008 and shall continue until July 31, 2015. Each payment shall
first be applied against costs and expenses required to be paid under the
Replacement Note then against accrued interest and then to the principal
balance. For the year ending December 31, 2008, interest expense of $61,704 for
these obligations was incurred. The principal balance of the Replacement Note at
December 31, 2008 was $1,671,250. BIG is currently out of compliance with the
EBITDA covenant contained in its agreements with Citizens Bank and is
consequently in default of this loan. BIG is currently in discussions with
Citizens Bank relative to amending the terms of this financing.
PURCHASE OBLIGATIONS
NextGen Selling Shareholders
On October 30, 2006, a wholly-owned subsidiary of GS AgriFuels purchased 100% of
the outstanding capital stock of NextGen Fuel, Inc. The purchase price was
$21,204,437, of which $17,000,000 was paid at closing leaving a holdback
obligation to the selling shareholders totaling $4,204,437. $3,204,437 of the
holdback would be due when NextGen Fuel realized revenue of $7,500,000
subsequent to the acquisition subject to certain working capital adjustments and
provided that there are no claims for indemnification or otherwise against the
selling shareholders. The remaining $1,000,000 holdback, with interest at 6% per
annum, is due to a former sales consultant to NextGen and a selling shareholder
subject to the payment by customers for biodiesel production systems totaling
forty million gallons per year of production capacity subject to certain working
capital adjustments and provided that there are no claims for indemnification.
To the extent due, and prior to accounting for any claims for indemnification,
the balance of the estimated holdback at December 31, 2008 was $3,979,437.
Sustainable Selling Shareholders
On March 26, 2007, GS AgriFuels purchased the remaining 85% of the outstanding
capital stock of Sustainable Systems, Inc. (GS AgriFuels had previously
purchased 15% of the capital stock of Sustainable). The purchase price was
approximately $12.6 million of which $100,000 was payable at closing, a note was
issued for approximately $1.9 million and two $3.55 million debentures were
issued to the selling shareholders totaling $9,004,018. The $1.9 million note
was to be due upon the completion and commissioning of Sustainable's current
plant expansion. The terms of the relevant acquisition agreements are in default
due to the failure by the selling shareholders to disclose that Sustainable did
not hold title to its now-owned Culbertson, Montana oilseed crushing facility at
the time of the acquisition by GS AgriFuels. The relevant acquisition agreements
are currently the subject of a litigation initiated by the Company against the
selling shareholders for damages relating to fraud, tortious interference and
breach of contract.
On September 30, 2008, the Company and Paul Miller, a former shareholder of
Sustainable and the current President of Sustainable, entered into a Mutual
Consent and Release Agreement in which Mr. Miller agreed to cancel all payment
obligations and waived all amounts that may have payable by GS AgriFuels under
the Sustainable acquisition agreements. As a result, the amounts due to the
selling shareholders under the convertible debentures were reduced by $3,299,731
from and the note payable was reduced by $882,549 by the reduction in amounts
due to Mr. Miller resulting in a $4,536,915 gain from the forgiveness of debt
which was recognized during the year ended December 31, 2008. For the twelve
months December 31, 2007, interest expense of $291,946 for these obligations was
incurred and accrued.
Bollheimer & Associates
As a result of its acquisition of 100% of the stock of Bollheimer & Associates,
Inc., the Company entered into a purchase obligation of $320,000. This amount
does not bear interest and is payable in the amount of $80,000 on or before July
1, October, 2008 and January 1, 2009 with the remaining $80,000 due on or before
January 1, 2011 subject to certain sales based hurdles. As of December 31, 2008,
the Company is in default of payments owed under the purchase agreement in the
amount of 240,000.
17 GOVERNMENT GRANTS
On September 28, 2006, Sustainable Systems, a subsidiary of GS AgriFuels, was
awarded a $700,000 Workforce Innovation in Regional Economic Development (WIRED)
grant from the Montana Department of Commerce (MDOC). This grant reimburses the
Company for expenses related to training employees in gaining skills and
competencies needed to obtain or upgrade employment skills in high growth
73
industries or economic sectors. The Company is required to provide to the MDOC
detailed documentation regarding the projected training costs, a hiring and
training plan as well as a commitment to provide the resources necessary for the
completion of the training project. Sustainable Systems will not obligate or
utilize funds for any activities provided for by the grant until the Company
submits evidence to MDOC showing evidence of the firm commitment of the other
resources necessary for the completion of the project per the WIRED application
that was approved by MDOC. All project funding had to be fully committed and
available and the project had to be ready to proceed within six months of the
award of the grant (in April 2007). Sustainable recognized $530,949 in grant
income under the above grants during the period from March 6, 2007 (date of
acquisition) to December 31, 2007 and $132,688 for the year ended December 31,
2008.
18 COMMITMENTS AND CONTINGENCIES
FACILITIES
GreenShift's corporate headquarters is located in New York, New York. The New
York lease is a five year lease terminating in June 2011. The monthly lease
payment is $8,800. The Company maintains its engineering and manufacturing
services in Alpharetta, Georgia. The Alpharetta lease is a three year term
terminating in February 2011. The monthly lease payment is $1,480. The Company
maintains its manufacturing facilities in Ottoville and Van Wert, Ohio. The Van
Wert facility is on a month to month lease. The monthly lease payments are
$5,000 and $3,200, respectively. The Company maintains its oil seed crushing
facility, office space and warehouse in Missoula, Montana. The terms of the
leases are from month to month. The monthly lease payment is $421 and $650,
respectively. The Company maintains its biodiesel facility and office space in
Adrian, Michigan.
OTHER CONTINGENCIES
The Company is subject to various regulatory requirements, including the
procurement of requisite licenses and permits at its facilities. These licenses
and permits without which the Company's operations would be adversely affected
are subject to periodic renewal. The Company anticipates that, once a license or
permit is issued with respect to a facility, the license or permit will be
renewed at the end of its term if the facility's operations are in compliance
with the applicable regulatory requirements.
The Company's subsidiaries, GS AgriFuels Corporation and NextGen Fuel, Inc. are
party to the matter entitled O'Brien & Gere Limited, et al v. NextGen Chemical
Processors, Inc., et al., which action was filed in the Supreme Court of the
State of New York. The verified complaint had sought performance of and damages
relating to certain service and related agreements, plus attorney's fees and
costs. This matter relates to the provision by plaintiffs of certain engineering
services to NextGen Chemical Processors, Inc. ("NCP") during 2005 and 2006. NCP
is owned by the former shareholders of the NextGen Fuel, Inc., subsidiary. On
September 19, 2007, the Supreme Court of the State of New York dismissed a
significant portion of O'Brien & Gere's complaint with prejudice. Management
does not believe that there is a reasonable possibility that the claims made
against NextGen Fuel by the plaintiffs in this litigation indicate that a
material loss has occurred. Accordingly, an estimate of loss cannot be
determined at this time and therefore, no accrual has been made in connection
with those claims.
The Company's GS AgriFuels subsidiary is party to the matter entitled GS
AgriFuels Corporation v. Chaykin, et al. The action was filed in the Supreme
Court of the State of New York, County of New York, on February 2, 2009. The
Complaint seeks damages for defendants' fraudulent misrepresentations, tortious
interference, breach of acquisition agreements and related claims. GS AgriFuels
initiated this litigation and intends to prosecute the case vigorously. The
defendants filed a separate action entitled Max, et al. v. GS AgriFuels
Corporation, et al. in response to GS AgriFuels' Complaint. The case was only
recently commenced and Management is unable to evaluate the probability of an
unfavorable outcome at this time. Accordingly, an estimate of loss cannot be
determined at this time and therefore, no accrual has been made in connection
with this contingency.
As of December 31, 2008, the Company was in default of its debt agreement with
Acutus Capital, LLC, and NextGen Acquisition, Inc, was in default of its
agreements with Stillwater Asset Backed Fund, LP.
As of December 31, 2008, the Company is in default of payments owed under the
purchase agreement with Bollheimer Associates in the amount of 240,000, and is
in discussions with the selling shareholder to restructure the terms of the
relevant agreement.
74
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.
Sustainable Systems, LLC is currently negotiating a settlement agreement with
the states of Montana and North Dakota pertaining to outstanding payments due
for purchase of oilseeds during 2008 that were contracted at rates far greater
than current oilseed values. Sustainable had previously negotiated with two
separate banks to receive working capital financing sufficient to service these
obligations. Neither bank was able to close due to strain in the prevailing
commodity and financial markets. Sustainable has accordingly idled its
operations and voluntarily surrendered its commodity license to the state of
Montana Department of Agriculture pending liquidation of Sustainable's
inventories to satisfy the oilseed payables. Sustainable is permitted to
reacquire its commodity license upon the completion of sufficient working
capital and equity financing to operate.
EMPLOYMENT AGREEMENTS
Effective March 20, 2008, the Company amended and restated its employment
agreements with Kevin Kreisler, the Company's Chief Executive Officer, David
Winsness, the Company's Chief Technology Officer, Greg Barlage, the Company's
Chief Operating Officer, and Ed Carroll, the Company's Chief Financial Officer.
These agreements call for a salary of $150,000 per year for each employee and
reduce and restrict the shares and other compensation due to each employee as
compared to earlier agreements between each employee and the Company. Each
agreement also included terms for reimbursement of expenses, periodic bonuses,
four weeks' vacation and participation in any employee benefits provided to all
employees of GreenShift Corporation.
CONSULTING AGREEMENTS
On November 12, 2008, GreenShift Corporation entered into a consulting services
agreement with James Green. Under the agreement, Mr. Green shall receive 100,000
shares of GreenShift common stock in exchange for his services.
OTHER AGREEMENTS
On December 11, 2008, GreenShift Corporation entered into a Membership Interest
Purchase and Equity Capital Contribution Agreement (the "ECAA Agreement"). The
parties to the agreement included GS COES (Adrian I), LLC, a newly formed
GreenShift subsidiary, BIG, GS (NextDiesel I), LLC, a newly formed GreenShift
subsidiary and CleanBioenergy Partners, LLC ("CleanBioenergy"), a newly formed
joint venture company owned by a subsidiary of GE Energy Financial Services, a
unit General Electric Company and a subsidiary of YA Global Investments, L.P.
Under the terms of the ECCA Agreement, CleanBioenergy agreed to invest up to $38
million in GS NextDiesel to help deploy twelve corn oil extraction facilities
and to double the capacity of GreenShift's 10 million gallon per year
Michigan-based NextDiesel biodiesel refinery to 20 million gallons per year. The
ECCA Agreement was terminated in the first quarter of 2009 despite the fact that
the Company was in compliance with its terms (see Note 28, Subsequent Events).
19 GUARANTY AGREEMENT
On October 31, 2006, the Company guaranteed the 14 month Term Note issued by
NextGen Acquisition, Inc., a wholly owned subsidiary of GS AgriFuels
Corporation, in the principal amount of $6,000,000 issued to Stillwater
Asset-Backed Fund, LP (see Note 16, Debt and Purchase Obligations, above). The
balance due to Stillwater at December 31, 2008 was 2,071,886.
Both Viridis Capital, LLC ("Viridis"), the majority shareholder of the Company,
and its sole member, Kevin Kreisler, the Company's chairman, have guaranteed
nearly all of the Company's senior debt (in the outstanding amount of about $45
million), and Viridis has pledged all of its assets, including its share of
Company Series D Preferred Stock (see Note 5, Shareholders Equity, above), to YA
Global Investments, LP ("YAGI"), to secure the repayment by the Company of its
obligations to YAGI.
20 SEGMENT INFORMATION
Segment information is presented in accordance with SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." This standard is based on a
management approach that designates the internal organization that is used by
75
management for making operating decisions and assessing performance as the
sources of the Company's reportable segments. Operating segments are defined as
components of an enterprise about which financial information is available that
is evaluated on a regular basis by the chief operating decision-maker, or
decision-making groups, in deciding how to allocate resources to an individual
segment and in assessing performance of the segment.
The Company's operations during the fiscal year ended December 31, 2008 are
classified into three reportable business segments: Equipment & Technology
Sales, Culinary Oil Production & Sales and Biofuel Production & Sales. Each of
these segments is organized based upon the nature of products and services
offered. Summarized financial information about each segment is provided below:
12 Months Equipment & Culinary Oil Biofuel
Ended 12/31/08 Corporate Technology SalesProduction & SalesProduction & Sales Total
------------------------------------------------------------------------------------------------------------------
Total assets $ 108,538 $ 4,144,253 $ 5,204,953 $ 37,872,645 $ 47,330,389
=============== ============= ============= ============ =============
Total revenue $ -- $ 6,871,541 $ 8,362,534 $ 8,382,587 $ 23,616,661
Cost of revenue 129,419 5,074,122 7,631,614 7,416,709 20,251,865
--------------- ------------- ------------- ------------ -------------
Operating expenses 10,431,317 14,167,539 10,880,284 5,781,580 41,260,720
--------------- ------------- ------------- ------------ -------------
Other income
(expense) (3,544,959) 315,710 (115,654) (3,857,900) (7,202,803)
--------------- ------------- ------------- ------------ -------------
Taxes (4,116) (146,137) -- (2,192) (152,445)
--------------- ------------- ------------- ------------ -------------
Minority interest -- 15,327 -- -- 15,327
--------------- ------------- ------------- ------------ -------------
Loss from disposal of
discontinued operations (2,739,735) -- -- -- (2,739,735)
--------------- ------------- ------------- ------------ -------------
Net loss attributable to
common shareholders $ (16,849,546) $(12,185,221) $(10,265,018) $ (8,675,795) $(47,975,579)
=============== ============= ============= ============= =============
12 Months Equipment & Culinary Oil Biofuel
Ended 12/31/07 Corporate Technology SalesProduction & SalesProduction & Sales Total
------------------------------------------------------------------------------------------------------------------
Total assets $ 14,683,426 $ 13,473,276 $ 17,410,612 $ 6,770,791 $ 52,338,105
=============== ============= ============= ============ =============
Total revenue $ -- $ 9,101,281 $ 5,308,241 $ 270,866 $ 14,680,387
Cost of revenue -- 7,187,047 5,384,135 516,606 13,087,788
--------------- ------------- ------------- ------------ -------------
Operating expenses 14,872,675 3,299,311 998,326 2,338,566 21,508,878
--------------- ------------- ------------- ------------ -------------
Other income
(expense) 2,741,382 (8,893,191) 340,722 (160,481) (5,971,568)
--------------- ------------- ------------- ------------ -------------
Taxes (2,491) (48,916) -- (138) (51,545)
--------------- ------------- ------------- ------------ -------------
Minority interest (1,265,762) -- -- -- (1,265,762)
Gain (loss) from
discontinued operations 2,533,309 -- -- -- 2,533,309
--------------- ------------- ------------- ------------ -------------
Net loss (10,866,237) (10,327,184) (733,498) (2,744,925) (26,671,845)
Preferred dividends (151,875) -- -- -- (151,875)
--------------- ------------- ------------- ------------ -------------
Net loss attributable to
common shareholders $ (11,018,112) $ 10,237,184) $ (733,498) $(2,744,925) $(24,823,720)
============== ============= ============= ============ =============
In January 2008 we sold our interest in GS EnviroServices, Inc., which carried
on our Diversified Environmental Services business (see Note 28 Subsequent
Events, below). The contribution of this business to our consolidated financial
results for the year ended December 31, 2008 is detailed below, and pro forma
financial statements for the year ended December 31, 2008 that show the
deconsolidation of the Diversified Environmental Services business from our
continuing business are provided in Note 26, Acquisitions, below.
21 LIABILITY DUE TO SHAREHOLDERS
In 2003, the Company's inactive subsidiary American Metals Recovery, Corp.
("AMRC") a discontinued entity issued the Subsidiary Preferred Equity, with a
par value of $0.001. Subsidiary Preferred Equity holders were to receive a
76
quarterly dividend ranging from 3% to 5% of AMRC's annualized revenue, limited
to 30% of AMRC's operating income. AMRC failed to generate operating income in
2006 and 2005; therefore no dividends were payable in December 2006 and 2005.
The shares could not be liquidated or transferred. In December 2004, $100,000 of
the obligation was converted into 10,000 shares of the Company's common stock
and a five-year option to purchase 5,000 shares of the Company's common stock at
$5.00 per share. In February 2006, $50,000 of the obligation was converted into
33,333 shares of the Company's common stock at $1.50 per share. In August 2007,
$72,000 of the obligation was converted into 200,000 shares of common stock. The
remaining balance of the obligation totaling $703,000 was convertible into the
Company's common stock on the basis of the average of the three lowest closing
market prices of the Company's common stock for the thirty days preceding
conversion.
In accordance with the completion of the GS AgriFuels Go-Private Transaction
(see Note 16, Convertible Debentures, above), the Company recorded the related
obligation to the former minority shareholders of GS AgriFuels of $1,265,762 at
December 31, 2007. During the year ended December 31, 2008, the Company made
payments against this obligation of $333,434, leaving a balance of $932,328 that
the Company expects to either cancel or satisfy during 2009.
22 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following is a summary of supplemental disclosures of cash flow information:
2008 2007
----------- -----------
Cash paid during the year for the following:
Interest ............................................................ $ 953,859 $ 47,090
Income taxes ........................................................ 34,256 12,660
----------- -----------
Total ........................................................ 119,445 59,750
=========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Contribution of capital from debt and accrued interest due to affiliate . $ 2,827,330 $ 1,146,536
Acquisition of equipment and/or vehicles with long-term debt ............ -- 231,797
Stock issued for debt conversions ....................................... -- 2,173,566
Acquisition of Bollheimer & Associates with debt ........................ 320,000 --
Reduction of convertible debentures from disposal of
investment in GS EnviroServices ........................................ 2,000,000 --
Acquisition of Biofuel Industries Group, LLC for
redeemable preferred equity in subsidiary .............................. 9,000,000 --
Common shares issued for deferred financing fees ........................ 1,080,000 --
Common shares issued in settlement of debenture ......................... 1,100,000 --
Debentures converted into common stock .................................. 496,558 --
Conversion of accrued interest into convertible debt .................... 891,432 --
Reclassification of derivative liability into equity .................... 6,385,002 --
Recognition of deferred compensation from issuance of preferred stock ... 6,910,568 --
Increase in construction in progress through amortization
of deferred compensation ............................................... 1,085,146 --
Issuance of debt and equity for net assets due to Sustainable acquisition -- 12,657,093
Contribution of capital from debt and accrued interest due to affiliate . -- 2,335,856
Issuance of Series C Preferred Stock upon conversion .................... -- 100
23 RETIREMENT PLAN
Sustainable Systems and GS Design Services maintain retirement plans pursuant to
Section 401(k) of the Internal Revenue Code for their employees. Contributions
during the years ended December 31, 2008 and 2007 were as follows: Sustainable
Systems $14,166 in 2008 and $14,720 in 2007 (Sustainable was acquired on March
6, 2007 so only financial data from that time forward is included) and GS Design
Services $0 and $0, respectively. GS Design currently does not provide a
matching contribution.
24 RELATED PARTY TRANSACTIONS
On November 9, 2007, the Company and Carbonics Capital Corporation (the
Company's former parent) completed a series of transfer of assets with an entity
under common control of Company, including the transfer to the Company of
Carbonics' stakes in GS AgriFuels Corporation and EcoSystem Corporation. The
Company assumed all of Carbonics' intercompany, affiliate related party notes
payable and receivable, all trade payables, and all receivables, but did not
assume Carbonics debt to YA Global Investments, LP. In exchange, the Company
issued to Carbonics a promissory note in the aggregate net amount of $2,948,831
(the "Carbonics Note"). During the year ended December 31, 2008, the Carbonics
Note was reduced by $2,000,000 as a result of the Company's realization during
2007 of impairment charges associated with the Company's NextGen Fuel and
Sustainable Systems subsidiaries. The balance owed on the Carbonics Note was
$386,132 as of the year ended December 31, 2008.
77
On November 9, 2007, in connection with the transfer to the Company of
Carbonics' stakes in GS AgriFuels and EcoSystem, the Company also assumed
liability for a term note issued by Carbonics to Viridis Capital, LLC with a
face amount of $1,339,704 (the "Viridis Note"), which amount is due upon demand
and bears interest at the rate of 8%. As of December 31, 2008, the balance due
on the Viridis Note was reduced by $500,000 to $949,704 in return for the
assignment to Viridis by the Company of 100% of its stake in EcoSystem
Corporation, which included 160,000,000 shares of EcoSystem common stock and
921,313 shares of EcoSystem Series D Preferred Stock. During the year ended
December 31, 2008, the Viridis note was purchased by Minority Interest Fund
(II), LLC.
On November 9, 2007, in connection with the transfer to the Company of
Carbonics' stakes in GS AgriFuels and EcoSystem, the Company also assumed
liability for a term note issued by Carbonics to Candent Corporation with a face
amount of $757,852 (the "Candent Note"). The Candent Note has a term of three
years and shall be payable in full on or before November 8, 2010. The note shall
bear interest at the rate of 10%. Further, during the year ended December 31,
2008, the Company borrowed an additional $100,000 from Candent. As of December
31, 2008, Candent forgave this debt and contributed the amount to additional
paid in capital. The former president of Candent is the wife of the Company's
chairman. All of the issued and outstanding capital stock held by Candent is in
trust for the benefit of its former president. During the year ended December
31, 2008, the Candent note was purchased by Minority Interest Fund (II), LLC.
Effective December 15, 2007, the Company executed an Amended and Restated
Technology Acquisition Agreement (the "TAA") with Mean Green Biodiesel of
Georgia, LLC (f/k/a Cantrell Winsness Technologies, LLC), David F. Cantrell,
David Winsness, Gregory P. Barlage and John W. Davis (the "Inventors"). The
amendment changed the method of calculating the purchase price for the Company's
corn oil extraction technology (the "Technology"). The TAA, as amended, provides
for the payment to the Inventors of a one-time license fee of $150,000 per
system (a "System") built and commissioned based on the Technology plus an
ongoing royalty of $0.10 per gallon of corn oil extracted with the Technology.
The Company is required to sell, market, deploy or in any way cause the
initiation of operations of a total of three Systems on or before December 31,
2008, a total of eight Systems on or before December 31, 2009, and an additional
five Systems per year up to a total of eighteen Systems, at which point the
Company has no continuing commercialization requirement. The ownership of the
Technology is subject to reversion in the event that the Company fails to
satisfy the commercialization requirements of the TAA or if the Company
otherwise initiates bankruptcy proceedings. In any event of reversion, the
Company shall retain the non-exclusive right to use the Technology for Systems
that have been installed prior to the occurrence of the reversion event. David
Winsness and Greg Barlage are both members of the Company's board of directors
and, respectively, the Company's Chief Technology Officer and Chief Operating
Officer. For the year ended December 31, 2008, the Company incurred license fees
and royalties related to corn oil sales totaling $297,832, including $49,589
payable to each of David Winsness and Greg Barlage, due at December 31, 2008.
Such fees have been included in the Company's costs of sales.
Effective December 31, 2008, EcoSystem transferred its stakes in GS Design, Inc.
and GS Rentals, LLC to the Company in return for the reduction in the Company's
note receivable from EcoSystem by $170,385 and the issuance to EcoSystem of a
term note in the amount of $319,517 which note bears interest at 6% per annum
and matures on December 31, 2008. During the year ended December 31, 2008, this
debenture was purchased by Minority Interest Fund (II), LLC ("MIF") in return
for the reduction in the total amount of the convertible debt payable by the
Company to MIF..
Minority Interest Fund (II), LLC ("MIF") is party to certain convertible
debentures issued by the Company (see Note 16, Convertible Debentures, above).
The managing member of MIF is a relative of the Company's chairman.
Transactions Relating to GS EnviroServices
During January 2008, GS EnviroServices redeemed the majority of the Company's
stock holdings in GS EnviroServices in return for the reduction of certain
Company convertible debts due to YA Global Investments, L.P. ("YAGI"). As of
January 25, 2008, the Company held only a minority stake in GS EnviroServices
(6,266,667 shares, or about 19%) and ceased consolidating the revenue and
earnings of GS EnviroServices effective January 1, 2008. These shares were
subsequently liquidated in June 2008. Subsequent to this transaction, Kevin
Kreisler, the Company's chairman and chief executive officer resigned from the
position of chairman of the GS EnviroServices board of directors. Additional
information on these and other subsequent events relevant to GS EnviroServices
are provided here:
78
Liquidation of Majority Stake in GS EnviroServices
On January 25, 2008, the Company, which owned 15 million shares of the common
stock of GS EnviroServices, 53% of its outstanding shares, entered into a Stock
Purchase Agreement with GS EnviroServices. The Stock Purchase Agreement provided
that GS EnviroServices would repurchase 8,733,333 shares of GS EnviroServices
common stock from the Company in exchange for the issuance to YAGI of a
$2,000,000 convertible debenture, and the cancellation by YAGI of $2,000,000 of
indebtedness owed by the Company to YAGI.
The Stock Purchase Agreement, combined with a letter agreement between GS
EnviroServices and YAGI, further provided that if GS EnviroServices pays
$1,000,000 to YAGI on or before May 10, 2008, then the remaining 6,266,667
shares of GS EnviroServices owned by the Company will be transferred to GS
EnviroServices in return for the cancellation by YAGI of an additional
$1,000,000 of indebtedness owed by the Company.
This letter agreement was amended during the second quarter 2008 in connection
with the sale by GS EnviroServices of substantially all of its assets (see
below) to provide for the payment of $1,000,000 to redeem the remaining
6,266,667 shares of GS EnviroServices held by the Company. This payment was made
to YAGI in June 2008 in return for the reduction of the Company's subsidiary's
(GS AgriFuels Corporation) convertible debt obligations to YAGI by $1,000,000.
25 INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("FIN 48"), on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized no material adjustment in the
liability for unrecognized income tax benefits. At the adoption date of January
1, 2007, and at December 31, 2008, there were no unrecognized tax benefits.
Interest and penalties related to uncertain tax positions will be recognized in
income tax expense. As of December 31, 2008, no interest related to uncertain
tax positions had been accrued
The Company provides for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
The provision for income taxes as of December 31, 2008 and December 31, 2007
consisted of the following:
Current provision: 2008 2007
--------------- ---------------
Federal $ -- $ --
State 152,435 126,251
--------------- ---------------
Total current provision $ 152,435 $ 126,251
=============== ===============
Deferred provision (benefit) for tax:
Federal $ -- $ --
State -- (79,646)
--------------- ---------------
Total deferred provision (benefit) for tax $ -- $ (79,646)
=============== ===============
Total provision for tax $ 152,435 $ 46,605
=============== ===============
The Company's total deferred taxes asset and valuation
allowance as of December 31, 2008 are as follows:
NOL carryforwards $ 10,179,210
Differences in financial statement and tax accounting for:
Deferred compensation --
Allowance for doubtful accounts receivable 14,000
Property, equipment and intangible assets 260,000
---------------
Net deferred tax asset 10,453,210
Less valuation allowance (10,453,210)
---------------
Total deferred tax asset, net of valuation allowance $ --
===============
In assessing whether the deferred tax assets are realizable, Management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
79
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
Management believes it is more likely than not that the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carry forward period are reduced.
26 ACQUISITIONS
The Company follows SFAS No. 141, "Business Combinations." Under this standard,
business acquisitions are accounted for under the purchase method and goodwill
represents the excess of the purchase price of a business acquisition over the
fair market value of the net assets acquired at the date of acquisition. The
statement also requires the recognition of acquired intangible assets apart from
goodwill if it arises from contractual and other legal rights. If an intangible
does not arise from contractual or other legal rights, it shall be recognized as
an asset apart from goodwill only if it is capable of being separated or divided
from the acquired entity and sold, transferred, licensed, rented, or exchanged.
ACQUISITION OF NEXTGEN FUEL, INC.
On October 30, 2006, a wholly-owned subsidiary of GS AgriFuels purchased 100% of
the outstanding capital stock of NextGen Fuel, Inc. The purchase price was
$21,204,437, of which $17,000,000 was paid at closing leaving a holdback
obligation to the selling shareholders totaling $4,204,437. $3,204,437 of the
holdback was due when NextGen Fuel has realized revenue of $7,500,000 subsequent
to the acquisition subject to certain working capital adjustments and provided
that there are no claims for indemnification or otherwise against the selling
shareholders. The remaining $1,000,000 holdback, with interest at 6% per annum,
is due to a former sales consultant to NextGen and a selling shareholders
subject to the payment by customers for biodiesel production systems totaling
forty million gallons per year of production capacity, provided that there are
no claims for indemnification. To the extent due, the balance of the estimated
holdback at December 31, 2008 was $3,979,437.
ACQUISITION OF SUSTAINABLE SYSTEMS, INC.
On September 13, 2006, GS AgriFuels entered into a financing agreement with
Sustainable Systems, Inc. pursuant to which GS AgriFuels agreed to purchase
certain capital stock of Sustainable for a total of $3,000,000. As of March 6,
2007, GS AgriFuels had acquired an approximately 15% interest through advances
of $2,000,000, which investment was accounted for under the cost method. On
March 26, 2007, GS AgriFuels purchased the remaining 85% of the outstanding
capital stock of Sustainable Systems, Inc. (GS AgriFuels had previously
purchased 15% of the capital stock of Sustainable). The purchase price was
approximately $12.6 million of which $100,000 was payable at closing, a note was
issued for approximately $1.9 million and two $3.55 million debentures were
issued to the selling shareholders totaling $9,004,018. The $1.9 million note
was to be due upon the completion and commissioning of Sustainable's current
plant expansion. The terms of the relevant acquisition agreements are in default
due to the failure by the selling shareholders to disclose that Sustainable did
not hold title to its now-owned Culbertson, Montana oilseed crushing facility at
the time of the acquisition by GS AgriFuels. The relevant acquisition agreements
are currently the subject of a litigation initiated by the Company against the
selling shareholders for damages relating to fraud, tortious interference and
breach of contract. On September 30, 2008, the Company and Paul Miller, a former
shareholder of Sustainable and the current President of Sustainable, entered
into a Mutual Consent and Release Agreement in which Mr. Miller agreed to cancel
all payment obligations and waived all amounts that may have payable by GS
AgriFuels under the Sustainable acquisition agreements. As a result, the amounts
due to the selling shareholders under the convertible debentures were reduced by
$3,299,731 and the note payable was reduced by $882,549 by the reduction in
amounts due to Mr. Miller. The excess of the purchase price paid by GS AgriFuels
to the selling shareholders over the net assets had been recorded in goodwill in
the amount of $13,428,565. An impairment to goodwill in the amount of $7,458,877
was recorded for the year ended December 2008. An impairment to goodwill in the
amount of $5,700,000 was recorded for the year ended December 2007.
ACQUISITION OF BOLLHEIMER & ASSOCIATES, INC.
Effective January 1, 2008, the Company acquired 100% of the stock of Bollheimer
& Associates, Inc. ("BA") in return for $450,000 in cash plus shares of
performance based Series B Preferred Stock that are convertible into 500,000
80
shares of Company common stock. The cash portion of the acquisition price is to
be paid in five installments (the first of which was paid at closing), with the
last installment due on or before January 1, 2011 provided that BA continues to
generate at least $125,000 in gross sales per year for the next three years. The
shares of performance based Series B Preferred Stock issued at closing are
convertible on a pro rated basis into 500,000 shares of Company common stock in
conjunction with the Company's realization of $50,000,000 in EBITDA. Of the
$450,000 total, $400,000 was allocated to the purchase; goodwill of $421,727 was
recorded which represents the excess of the purchase price of the net assets
acquired. Phil Bollheimer, the president of BA, entered into an employment
agreement with the Company in connection with this transaction. As of December
31, 2008, the Company is in default of payments owed under the purchase
agreement in the amount of 240,000. An impairment to goodwill in the amount of
$421,727 was recorded for the year ended December 2008.
ACQUISITION OF BIOFUEL INDUSTRIES GROUP, LLC
Effective May 15, 2008, the Company and Biofuel Industries Group, LLC (d/b/a
NextDiesel(TM)) ("BIG") entered into an Exchange Agreement pursuant to which the
Company exchanged 20,000,000 common shares and 20,000 preferred shares in return
for 100% of the equity of BIG subject to the redemption by BIG of BIG's "Class A
Membership Units". The Class A Membership Units may be redeemed in exchange for
a total of $9 million preferred equity interest with a 12% coupon commencing
January 30, 2009 at a rate equal to 30% of BIG's net cash flows (after all
operating costs and regular debt payments have been paid) (the "Class A
Redemption"). The $9 million preferred equity interest is mandatorily redeemable
if it is not paid on or before the twentieth anniversary of closing and is
classified as a liability under the provisions of SFAS No. 150. The excess of
the purchase price over the net assets has been recorded as excess purchase
price of net assets acquired in the amount of $13,159,626 until the identifiable
intangibles can be valued. In connection with the acquisition, the Company paid
an excess purchase price over net assets acquired of $6,516,992. The Company is
in the process of obtaining a third-party valuation of certain assets and
liabilities, including acquired intangible assets and finalizing its own
internal assessment of the purchase price allocation. Thus, the preliminary
allocation of purchase price will change, and such change could be material. The
Company anticipates completing the purchase price allocation and reporting such
in its Form 10K for the fiscal year ending December 31, 2008 as required by SFAS
141 regarding business combinations.
Other terms of the Exchange Agreement are summarized here:
>> Vested Company Shares. The issuance by the Company to the BIG
shareholders of 20,000,000 shares of Company common stock. These
shares were valued at $2,085,720 based on the average fair market
value of the Company's common stock for the three days before and
after the acquisition date.
>> Performance-based Company Shares. The issuance by the Company to the
BIG shareholders of 20,000 shares of the Company's new Series E
Preferred Stock (the "Series E Shares"), which shares are convertible
at a fixed rate of 1 preferred share to 1,000 common shares into a
total of 20,000,000 shares of Company common stock; provided, however,
that the Series E Shares shall be convertible into Company common
shares in proportion to the Company's earnings before interest, taxes,
depreciation and amortization and non-cash and non-recurring items
("EBITDA") and will be fully convertible into 20,000,000 common shares
on a pro rated basis as the Company achieves $50,000,000 in EBITDA
during one year period.
>> Performance-based Cash Hurdle. The payment by BIG to BIG's founding
shareholders of $1,000,000 in cash payable upon the realization by the
Company of $10,000,000 in annualized EBITDA.
>> Guaranty of BIG's Founding Shareholders. BIG's founding shareholders
have agreed to keep their personal guaranties of BIG's senior loans in
place (the "BIG Loans") in return for a guaranty fee equal to 5% of
the balance due under the BIG Loans (the "Guaranty Fee"). The Company
has agreed to use its best efforts to refinance the BIG Loans to
remove these guaranties on or before the first anniversary of the
81
effective date of the acquisition. If this condition is not satisfied,
then the Guaranty Fee shall increase to 7% and BIG shall accelerate
and prepay the principal amount of the BIG Loans at the rate of
$1,000,000 plus 25% of BIG's net cash flows until paid in full (the
"Guaranty Payments"). $298,339 has been accrued as of December 31,
2008.
>> Guaranty of the Company and its Founding Shareholder. The Company,
Viridis Capital, LLC and Kevin Kreisler (the "GreenShift Parties")
entered into a Contribution Agreement with NextFuels, LLC, the holding
company of the founding shareholders of BIG, relative to the agreement
of the GreenShift Parties to guaranty the guaranty of the BIG Loans by
BIG's founding shareholders. The obligations of the GreenShift Parties
under the Contribution Agreement are subordinated to the interests of
YA Global Investments, LP ("YAGI"), the Company's senior lender.
>> Potential Rescission. The Company's equity in BIG is subject to
rescission in the event that: (a) the BIG Loans are not timely
serviced and kept in good standing, (b) the Guaranty Payments, to the
extent due, are not timely made, and (c) if the Class A Redemption
payments are not made to the extent that they are due. This term
expires automatically upon the full payment and/or refinancing of the
BIG Loans without the guaranty of the BIG founding shareholders and
the full payment of the Class A Redemption. The Company is currently
in discussions with the selling shareholders of BIG to restructure the
transaction to eliminate these rescission conditions.
>> Consulting Agreement. BIG's chief executive officer and one of its
founding shareholders, Terry Nosan, entered into a consulting
agreement with BIG at closing pursuant to Mr. Nosan will provide
management services to BIG and the Company for a monthly fee of
$12,500. $93,750 has been accrued as of December 31, 2008.
>> Creditor Consent. BIG's agreements with its senior creditor, Citizens'
Bank, require Citizens' Bank to provide its written consent to change
of control transactions. While Citizens' bank has expressed, through
its loan officer, its willingness to issue consent, formal written
consent has not yet been issued. Citizens' Bank has the right to
declare default under its credit agreements with BIG in the absence of
its formal written consent. The Company is currently in discussions
with the selling shareholders of BIG to restructure the transaction to
eliminate this condition.
BIG owns and operates a biodiesel production facility in Adrian, Michigan based
on the Company's patent-pending biodiesel technology. This facility has a
current production capacity of 10 million gallons of biodiesel per year and it
already includes much of the equipment necessary to rapidly scale to 20 million
gallons per year. In addition, this facility has been specifically designed to
refine the Company's extracted corn oil supplies into biodiesel.
Prior to the acquisition, the Company had billed BIG for $126,882 in engineering
services, $1,540,037 for equipment, and $451,154 for corn oil. These amounts
were not eliminated in the consolidation as the activity occurred prior to
acquisition.
The Company is in the process of obtaining a third-party valuation of certain
assets and liabilities, including acquired intangible assets and finalizing its
own internal assessment of the purchase price allocation; thus, the preliminary
allocation of purchase price will change, and such change could be material. The
Company anticipates completing the purchase price allocation in the second
quarter of fiscal 2009.
Unaudited Pro Forma Consolidated Financial Information for Acquisition of BIG
The following unaudited pro forma consolidated financial information presents
the combined results of operations of the Company as if the BIG acquisition had
occurred on January 1, 2008. The unaudited pro forma consolidated financial
information is not intended to represent or be indicative of the consolidated
results of operations of the Company that would have been reported had the
acquisition been completed as of the dates presented, and should not be taken as
representative of the future consolidated results of operations of the Company.
Summarized unaudited pro forma consolidated results were as follows:
The Company's results of operations for the period include the results of
operations of Biofuel Industries Group, LLC from May 15, 2008 through December
31, 2008. The following tables show the pro forma effect on the historical
results of GreenShift if the acquisition had been completed on January 1, 2008.
GreenShift BIG Pro Forma
Historical Data for the Historical Data for the Balances for the
Year Ended 12/31/2008 1/1/2008 - 5/14/2008 Year Ended 12/31/2008
-------------------------------------------------------------------------------
Revenue $ 23,616,662 $ 1,744,739 $ 25,361,401
Income (loss) from continuing operations (43,747,090) (1,577,825) (45,324,915)
Net Income (loss) $ (46,471,498) $ (1,749,232) $ (48,220,729)
====================== ====================== ======================
Earnings (loss) Per Share $ (0.63) $ (0.65)
GreenShift BIG Pro Forma
Historical Data for the Historical Data for the Balances for the
Year Ended 12/31/2007 Year Ended 12/31/2007 Year Ended 12/31/2007
------------------------------------------------------------------------------
Revenue $ 14,680,387 $ 802,696 $ 15,483,083
Income (loss) from continuing operations (25,939,392) (1,852,051) (27,791,443)
Net Income $ (24,671,845) $ (1,986,552) $ (26,658,397)
====================== ====================== ======================
Earnings (loss) Per Share $ (2.72) $ (2.94)
82
On May 15, 2008 the balance sheet of Biofuel Industries Group, LLC was as
follows:
Condensed Balance Sheet
ASSETS as of May 15, 2008
------------------
Current assets:
Cash ..................................................... $ --
Accounts receivable, net of allowance of doubtful accounts 379,578
Inventories .............................................. 1,235,719
Other current assets ..................................... 542,819
------------
Total current assets ............................ 2,158,116
------------
Other assets:
Property and equipment, net .............................. 13,813,920
Other assets ............................................. 111,769
------------
Total other assets ..................................... 13,925,689
------------
TOTAL ASSETS ................................................ $ 16,083,805
============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Note payable ............................................. 1,800,000
Loan payable ............................................. 210,000
Line of credit ........................................... 650,000
Accounts payable ......................................... 2,054,406
------------
Total current liabilities .............................. 4,714,406
Deferred grant revenue ...................................... 142,437
Obligations under capital lease ............................. 13,105
Mandatorily redeemable preferred equity ..................... 9,765,000
Long term notes payable ..................................... 6,645,129
------------
Total long term liabilities .............................. 16,565,671
------------
TOTAL LIABILITIES ........................................... 21,280,077
------------
Members' Equity (deficit)
Members' equity (deficit) ................................... (5,196,272)
------------
Total Members' Equity ....................................... (5,196,272)
------------
TOTAL LIABILITIES AND MEMBERS' EQUITY ....................... $ 16,083,805
============
83
Consolidated BIG Pro Forma
12/31/07 12/31/07 12/31/07
-----------------------------------------------------
Sales ...................................... $ 14,680,387 $ 802,696 $ 15,483,083
Cost of sales .............................. 13,087,788 1,341,210 14,428,998
--------------- --------------- ---------------
Gross profit ............................ 1,592,599 (538,514) 1,054,085
--------------- --------------- ---------------
General and administrative ................. 5,393,765 1,321,913 6,715,678
Selling expense ............................ 82,506 36,372 118,878
Research and development ................... 95,243 -- 95,243
Impairment of goodwill ..................... 11,153,816 -- 11,153,816
Amortization of intangibles ................ 2,100,000 -- 2,100,000
Stock based compensation ................... 2,683,548 -- 2,683,548
--------------- --------------- ---------------
Total operating expenses ................ 21,508,878 1,358,285 22,867,163
--------------- --------------- ---------------
Loss from operations .................... (19,916,279) (1,896,799) (21,813,078)
--------------- --------------- ---------------
Loss on disposal of investments ............ (532,977) -- (532,977)
Amortization debt discount ................. (1,080,255) -- (1,080,255)
Miscellaneous income ....................... 718,248 98,567 816,815
Other expense .............................. (92,634) -- (92,634)
Interest expense-related party ............. (24,972) -- (24,972)
Interest expense ........................... (4,958,977) (188,320) (5,147,297)
--------------- --------------- ---------------
Total other income (expense), net ....... (5,971,568) (89,753) (6,061,321)
--------------- --------------- ---------------
Loss before provision for income taxes ..... (25,887,847) (1,986,552) (27,874,399)
Provision for income taxes ................. (51,545) -- (51,545)
--------------- --------------- ---------------
Income (loss) from continuing operations (25,9,9,392) (1,986,552) (27,925,944)
Discontinued operations:
Gain from disposal of discontinue operations 2,481,691 -- 2,481,691
Loss from discontinue operations ........... 51,618 -- 51,618
--------------- --------------- ---------------
Discontinue operations .................. 2,533,309 -- 2,533,309
Loss before minority interest .............. (23,406,083) (1,986,552) (25,392,635)
Minority interest .......................... (1,265,762) -- (1,265,762)
--------------- --------------- ---------------
Net income (loss) .......................... (24,671,845) (1,986,552) (26,658,397)
Preferred dividends ........................ (151,875) -- (151,875)
--------------- --------------- ---------------
Net loss applicable to common shareholders . $ (24,823,720) $ (1,986,552) $ (26,810,272)
=============== =============== ===============
Earnings per share
Weighted average shares outstanding ........ 9,060,512 9,060,512 9,060,512
Basic
Income from continuing operations .......... $ (2.86) $ (0.22) $ (3.08)
Income from discontinued operations ........ 0.28 -- 0.28
Net income per share - basic and diluted ... (2.74) (0.22) (2.96)
27 DISPOSAL OF MINORITY INVESTMENTS
On September 10, 2008, the Company entered into Stock Purchase Agreement with
Sterling Planet Holdings, Inc. ("Sterling Planet"). Under the Stock Purchase
Agreement, the Company agreed to sell the 1,459,854 shares of Sterling Planet
which encompassed the 10% investment the Company had in Sterling Planet. During
the twelve months ended December 31, 2008, GreenShift liquidated its holdings in
Sterling Planet, Inc. for $1,000,000. The Company recorded a net loss in the
amount of $685,333 on the disposal of this unconsolidated subsidiary.
84
During January 2008, GS EnviroServices redeemed the majority of the Company's
stock holdings in GS EnviroServices in return for the reduction of certain
Company convertible debts due to YA Global Investments, L.P. ("YAGI"). As of
January 25, 2008, the Company held only a minority stake in GS EnviroServices
(6,266,667 shares, or about 19%) and ceased consolidating the revenue and
earnings of GS EnviroServices effective January 1, 008. The Company recorded a
net loss in the amount of $2,739,735 on the disposal of this unconsolidated
subsidiary.
28 SUBSEQUENT EVENTS
On January 30, 2009, GreenShift Corporation entered into a First Amendment to
Membership Interest Purchase and Equity Capital Contribution Agreement with
CleanBioenergy Partners, LLC, an affiliate of GE Energy Financial Services, to
extent the time for closing under the ECCA Agreement to March 2, 2009 (see Note
19, Commitments and Contingencies, Other Agreements, above). The ECCA Agreement
was the subject of a Current Report on 8-K filed by GreenShift on December 16,
2008, and the amendment to the ECCA Agreement was the subject of a Current
Report on 8-K filed by GreenShift on February 3, 2009. The Amendment to the ECCA
Agreement extended the time for closing under the ECCA Agreement to March 2,
2009. On March 6, 2009, although the Company was otherwise in compliance with
the ECCA Agreement, the ECCA Agreement was terminated.
The YAGI debt defaulted as of March 6, 2009 because the Company was in technical
default of certain senior secured debt due to YA Global Investments, L.P.
("YAGI"), which default was due to the failure of the CleanBioenergy Partners,
LLC financing to close. The Company intends to cure this default and restructure
its debt due to YAGI during 2009.
29 RESTATEMENTS
The Company has restated its financial statements for the years ended December
31, 2007 and 2008. Subject to the filing of the original financial statements
for the years then ended, Management determined that the Company's prior
policies relating to accounting for the impact of conversion features embedded
in the Company's various derivative securities should have been changed to
conform with recent guidance under EITF 08-04, Transition Guidance for
Conforming Changes to Issue No. 98-5, involving application of conforming
changes from the issuance of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). Due
to the variable number of the Company's common shares issuable upon conversion
of certain of the company's derivative securities, such instruments should have
been accounted for as liabilities under SFAS 150 during 2008 based on
interpretive guidance in EITF 08-04. During 2008, the Company had accounted for
such instruments as derivative instruments under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, by bifurcating the conversion
features from the related host contracts and recognizing them at fair value,
amortizing the related debt discounts, and recognizing gain or loss for changes
in fair value of the conversion features. Management believes that accounting
for these conversion features as liabilities under SFAS 150 is the preferable
accounting treatment. In accordance with SFAS No. 154, Accounting Changes and
Error Corrections, the Company has restated the financial statements for the
year ended December 31, 2008 to reflect the adoption of this change in
accounting, and has restated the financial statements for the year ended
December 31, 2007 through retrospective application of this accounting
interpretation to prior periods in accordance with this standard. In addition,
the Company has reclassified certain obligations due to subsidiary shareholders
that were presented as "Minority Interest" in prior financial statements to more
properly classify these obligations as current liabilities, and has corrected
misstated Net Loss for 2007 and Retained Deficit at 12/31/06 in the Statements
of Stockholders' Equity due to duplicate recording of preferred dividends and
beginning balance erroneous offset in the amount of $151,875.
An offsetting adjustment of $1,855,253 has been made to the opening balance of
accumulated deficit (increasing the deficit) as of the beginning of the periods
presented due to these restatements (includes restatement of opening liability
balances of $2,007,128 offset by $151,875 presentation adjustment noted above).
85
The following shows the effect of the restatements on the financial statements:
12/31/08 12/31/08 12/31/07 12/31/07
Balance Sheets: As reported As restated As reported As restated
----------------------------------- --------------------------------
Line of credit ....................... $ 10,745,235 $ 11,790,073
Convertible debentures, current ...... 11,665,309 11,792,387
Convertible debentures, related party 1,512,325 1,900,333
Liability for derivative instruments . 3,869,771 -- 6,704,831 --
Liability due to shareholders ........ -- 932,328 -- 1,968,762
Convertible debentures, net of current 20,726,439 21,188,196 28,224,877 30,614,629
Minority interest .................... 942,001 9,673 1,968,762 --
Additional paid-in capital ........... 83,774,424 79,662,413 63,502,789 66,175,522
Accumulated deficit .................. (146,432,325) (140,472,224) (93,463,990) (91,821,644)
12/31/08 12/31/08 12/31/07 12/31/07
Statements of Operations: As reported As restated As reported As restated
--------------------------------- ----------------------------------
Change in fair value-derivatives . $ (1,372,204) $ -- $ 3,974,422 $ --
Amortization of debt discount .... (7,860,533) (3,410,901) (4,689,896) (1,080,256)
Conversion liabilities ........... -- (1,376,731)
Conversion liabilities - affiliate -- (127,350)
Loss from continuing operations .. (49,568,926) (45,235,844) (25,574,610) (27,205,154)
Net income (loss) ................ (52,293,334) (47,975,579) (24,307,063) (24,671,845)
Earnings (loss) per share:
Continuing operations ............ $ (0.67) $ (0.61)$ (2.82) $ (3.00)
Discontinued operations .......... $ (0.04) $ (0.65)$ 0.27 $ 0.28
Total, basic and diluted ......... $ (0.71) $ (0.65)$ (2.70) $ (2.74)
12/31/08 12/31/08 12/31/07 12/31/07
Statements of Stockholders' Equity: As reported As restated As reported As restated
----------------------------------- -------------------------------
Write-off of derivative due to
debt restructure ....................... 6,784,743 --
Adjustment for acquisition of
entity under common control -- -- (260,912) 2,411,821
Net loss .................................. (52,293,334) (47,975,579) (24,458,938) (24,671,845)
12/31/08 12/31/08 12/31/07 12/31/07
Statements of Cash Flows: ................. As reported As restated As reported As restated
------------------------------ --------------------------------
Net loss from continuing operations ....... (52,293,334) (47,975,579) (24,307,063) (24,671,845)
Amortization of debt discount
and deferred financing costs ............ 7,860,533 3,410,901 4,689,896 1,080,255
Change in fair value of derivatives ....... 1,372,204 -- (3,974,422) --
Interest from conversion liabilities ...... -- 1,504,081
86
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e))
refers to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is
recorded, processed, summarized and reported, within time periods specified in
the rules and forms of the Securities and Exchange Commission. "Disclosure
controls and procedures" include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
The Company's management, with the participation of the Chief Executive Officer
and the Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this annual report (the "Evaluation Date"). Management determined that, at
the Evaluation Date, the Company had a material weakness because it did not have
a sufficient number of personnel with an appropriate level of knowledge of and
experience in generally accepted accounting principles in the United States of
America (U.S. GAAP) that are appropriate to the Company's financial reporting
requirements. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that, as of the Evaluation Date, such
controls and procedures were ineffective.
(b) Changes in internal controls
The term "internal control over financial reporting" (defined in SEC Rule
13a-15(f)) refers to the process of a company that is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's management, with the
participation of the Chief Executive Officer and Chief Financial Officer, has
evaluated any changes in the Company's internal control over financial reporting
that occurred during the fourth quarter of the year covered by this annual
report, and they have concluded that there was no change to the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
(c) Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. We have assessed the effectiveness of
those internal controls as of December 31, 2008, using the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") Internal Control -
Integrated Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate. All internal control systems,
no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or
combination of control deficiencies, that adversely affects the Company's
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with accounting principles generally accepted in the
United States of America such that there is more than a remote likelihood that a
87
material misstatement of the Company's annual or interim financial statements
that is more than inconsequential will not be prevented or detected. In the
course of making our assessment of the effectiveness of internal controls over
financial reporting, we identified one material weakness related to the
Company's control environment, in that the Company did not have a sufficient
number of personnel with an appropriate level of U.S. GAAP knowledge and
experience appropriate to its financial reporting requirements. Accordingly,
management's assessment is that the Company's internal controls over financial
reporting were ineffective as of December 31, 2008.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
Subsequent to filing the Annual Report, management determined to change its
policies for accounting of the derivative securities that the Company has
issued. While the Company has restated the financial statements in this amended
Report to conform with this new policy, the use of the Company's long-standing
prior policy for accounting of the Company's derivative securities was not
itself due to any inadequacy in the Company's controls. However, and as
discussed in greater detail in Item 4 of this amended Report, the Company's
controls and procedures were ineffective as of December 31, 2008.
Management intends to strengthen its accounting and compliance procedures
further in 2009.
ITEM 9B OTHER INFORMATION
None.
88
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Name Age Position
--------------------------------------------------------------------------------
Kevin Kreisler 36 Chairman, President & Chief Executive Officer
David Winsness 41 Director, Chief Technology Officer
Greg Barlage 44 Director, Chief Operating Officer
Edward Carroll 42 Director, Chief Financial Officer
Richard Krablin 64 Director, Executive Vice President
Kevin Kreisler is the founder, chairman and chief executive officer of
GreenShift Corporation. Mr. Kreisler has been responsible for devising the
Company's business plans, hiring the Company's management and technologists,
directing the financing, acquisition, development and commercialization of the
Company's technologies, overseeing the financing, design, construction and
operation of facilities based on those technologies, and completing the
financing and acquisition of strategically compatible companies. Mr. Kreisler
served as the Company's vice president from 1998 to 2000, president from 2000 to
2002, chief executive officer from 2002 to 2005 and has served as the Company's
chairman from 2005 to the present. Mr. Kreisler is a graduate of Rutgers
University College of Engineering (B.S., Civil and Environmental Engineering,
1994), Rutgers University Graduate School of Management (M.B.A., 1995), and
Rutgers University School of Law (J.D., 1997). Mr. Kreisler is admitted to
practice law in New Jersey and the United States District Court for the District
of New Jersey.
David Winsness is GreenShift's chief technology officer and has led the
commercialization effort for technologies. Mr. Winsness has spearheaded the
addition of over a dozen patented and patent pending technologies to
GreenShift's portfolio, many of which were developed and authored directly by
Mr. Winsness, including GreenShift's Corn Oil Extraction Technology. Mr.
Winsness is a graduate of Clemson University (B.S., Mechanical Engineering) and
he has spent his professional career as a process engineer in the chemical,
food, pharmaceutical and power generation markets. Prior to accepting a position
with GreenShift, Mr. Winsness served as chief technology officer and eventually
chief executive officer of Vortex Dehydration Technology where he directed the
research, development and commercialization of a technology that is now
GreenShift's Tornado Generator(TM).
Greg Barlage is GreenShift's chief operating officer. His prior experience
includes 15 years of process engineering, manufacturing optimization,
maintenance and operations management with a leading food products company. For
the past 6 years Mr. Barlage worked for Alfa Laval, a global leader in heat
transfer, separation, and fluid handling solutions. There he was responsible for
all capital equipment sales to the meat processing and vegetable oil processors
in the U.S. In this position he effectively reformed the sales team to grow
sales and innovate with new products and systems for these industries. Notably,
Mr. Barlage lead the Alfa Laval team as it worked with GreenShift's management
in the commercialization of its proprietary corn oil extraction technology. Mr.
Barlage has also worked on the engineering and installation of a commercial
scale version of GreenShift's Tornado Generator(TM) technology located in
Joplin, Missouri, where it effectively processes and dehydrates poultry products
into highly nutritional and shelf stable products. This system operates 24 hours
per day, 5 days per week and also uses Alfa Laval heat transfer and centrifuge
components in conjunction with the Tornado Generator(TM) to produce high quality
animal fats, chicken broth and dehydrated poultry proteins. Mr. Barlage has a
B.S. in Electrical Engineering from the University of Toledo, Toledo, Ohio, and
an MBA from the University of St. Thomas, Minneapolis.
Edward Carroll serves as GreenShift's chief financial officer. Mr. Carroll has
over 13 years in investment banking and corporate finance. Mr. Carroll has
experience executing mergers & acquisitions and large scale transactions and has
managed the entire lifecycle of M&A transactions from negotiating financial
terms to financing the deals to implementing change across multiple business
units to increasing shareholder value. He has extensive experience in general
industrial and cross-border M&A/change of control transactions including
acquisitions, divestitures, recapitalizations and joint ventures. Mr. Carroll
has worked with both U.S., European and Japanese companies in acquiring U.S. and
overseas assets. Prior to joining Greenshift, Mr. Carroll worked at Daiwa
Securities where he was an officer in the Mergers & Acquisitions group. Through
this experience, he has developed an expertise in several industry sectors,
including alternative fuels, energy, consumer products and general
manufacturing. Mr. Carroll is a prior board member of the Westchester Venture
Group, and holds a Bachelor of Science in Finance with a Minor in Asian Studies
from Saint John's University, and an MBA in Finance from the American Graduate
School of International Management (Thunderbird). Mr. Carroll also has military
experience as a former infantry officer in the United States Army.
89
Richard Krablin is GreenShift's executive vice president in charge of special
projects. Dr. Krablin directs GreenShift's environmental, health and safety
programs and plays an integral role in GreenShift's research and development
activities and other special projects. Prior to joining GreenShift, Dr. Krablin
served as Senior Vice President of Environment, Health and Safety for Horsehead
Industries, Inc., a leading zinc recycler. Dr. Krablin administered Horsehead's
compliance as it extracted zinc from electric arc furnace dust, a hazardous
waste produced by the steel industry. Prior to joining Horsehead, Dr. Krablin
had a multi-tasked career with Atlantic Richfield Company (ARCO) where he
directed the worldwide environmental affairs of the mining and mineral
processing subsidiary and managed the legacies and Superfund sites of the former
Anaconda Co. Dr. Krablin started his industry career with The Anaconda Co. in
Montana. Dr. Krablin has a Ph.D. and M.S. in physics from Drexel University in
Philadelphia and a B.S. in physics from Lafayette College, and is a graduate of
the Stanford Executive Program for business leaders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on the Company's review of copies of such forms received by the
Company, the Company believes that during the year ended December 31, 2008, all
filing requirements applicable to all officers, directors, and greater than 10%
beneficial stockholders were complied with.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our certificate of incorporation provides that we shall indemnify to the fullest
extent permitted by, and in the manner permissible under the laws of the State
of Delaware, any person made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he is or was a director or officer, or served any other
enterprise as director, officer or employee at our request. The board of
directors, in its discretion, has the power on our behalf to indemnify any
person, other than a director or officer, made a party to any action, suit or
proceeding by reason of the fact that he/she is or was one of our employees.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act, and is therefore, unenforceable.
AUDIT COMMITTEE; COMPENSATION COMMITTEE; NOMINATING COMMITTEE
The Board of Directors does not have an audit, compensation committee or a
nominating committee, due to the small number of directors. If nominations to
the Board of Directors are proposed, all directors will be involved in the
determination. The Board of Directors has determined that Edward Carroll is an
audit committee financial expert, by reason of his experience in investment
banking.
CODE OF CONDUCT AND ETHICS
The Company has adopted a written code of conduct and ethics that applies to all
directors, and employees, including the Company's principal executive officer,
principal financial officer, principal accounting officer or controller and any
persons performing similar functions. The Company will provide a copy of its
code of ethics to any person without charge upon written request addressed to
GreenShift Corporation, One Penn Plaza, Suite 1612, and New York, NY 10119.
90
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid
by GreenShift Corporation and its subsidiaries (or by third parties as
compensation for services to GreenShift Corporation or its subsidiaries) to
Kevin Kreisler, the Company's Chief Executive Officer, Dave Winsness, the
Company's Chief Technology Officer, Greg Barlage, the Company's Chief Operating
Officer, Ed Carroll, the Company's Chief Financial Officer, and Dr. Richard
Krablin, the Company's Executive Vice President, Special Projects. There were no
other executive officers whose total salary and bonus for the fiscal year ended
December 31, 2008 exceeded $100,000. Mr. Kreisler and Mr. Winsness cancelled
their 2006 option awards in 2007.
Stock Option Other
Year Salary Bonus Awards Awards Compensation
--------------------------------------------------------------------------
Kevin Kreisler 2008 142,764 -- -- -- --
2007 81,346 -- 20,523 -- --
2006 -- -- 25,000 380,000* --
David Winsness 2008 162,744 -- 1,000 -- --
2007 150,000 -- 47,544 -- --
2006 -- -- 79,875 95,000* --
Greg Barlage 2008 156,988 -- 1,900 -- --
2007 125,000 50,000 136,750 -- --
2006 -- -- 79,875 -- --
Ed Carroll 2008 155,395 -- 1,600 -- --
2007 150,000 50,000 -- -- --
2006 -- -- -- -- --
Rich Krablin 2008 150,000 -- 585 -- --
2007 125,000 -- 113,500 -- --
2006 117,500 -- -- -- --
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements effective March 20, 2008 with
each of its officers. Each agreement provides for an annual salary of $150,000,
periodic bonuses, four weeks vacation and participation in any employee plans
made available to all Company employees. The agreements terminate on March 20,
2013.
COMPENSATION OF DIRECTORS
None.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the voting stock
beneficially owned by any person who, to our knowledge, owned beneficially more
than 5% of any class of voting stock as well as by the members of our Board of
Directors and by all officers and directors as a group.
Amount and Nature of Beneficial Ownership
Name and Address(1) Series B Series D Percentage of
Of Beneficial Owner Common % of Class Preferred % of Class Preferred % of Class Voting Power
---------- ----------- ------------ ----------- ----------- ----------- -------------
Kevin Kreisler(2) 1,486,391 1.56% -- -- 791,459 100% 63.32%
David Winsness(3) 976,667 1.03% 360,933 12.45% -- -- 2.77%
Greg Barlage(3) 1,088,043 1.14% 356,478 12.30% -- -- 2.77%
Ed Carroll(3) 1,670,435 1.76% 393,183 13.56% -- -- 3.19%
Richard Krablin (3) 585,217 0.62% 376,183 12.99% -- -- 2.77%
---------- ------- --------- -------- ------- ---- ------
Officers and Directors
as a Group (5 persons) 5,806,753 6.10% 1,487,186 51.30% 791,459 100% 74.82%
(1) The address of each shareholder is c/o GreenShift Corporation, One Penn
Plaza, Suite 1612, New York, NY 10119.
(2) All shares listed for Mr. Kreisler are owned of record by Viridis Capital,
LLC, of which Mr. Kreisler is the sole member.
(3) Shares of Company Series B Preferred Stock are convertible at the fixed
rate of 1 Series B Share to 25 Company common shares.
91
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 9, 2007, the Company and Carbonics Capital Corporation (the
Company's former parent) initiated and completed a series of transactions to
restructure of the Company, including the transfer to the Company of Carbonics'
stakes in GS AgriFuels Corporation and EcoSystem Corporation. The Company
assumed all of Carbonics' intercompany, affiliate related party notes payable
and receivable, all trade payables, and all receivables, but did not assume
Carbonics debt to YA Global Investments, LP. In exchange, the Company issued to
Carbonics a promissory note in the aggregate net amount of $2,948,831 (the
"Carbonics Note"). During the year ended December 31, 2008, the Carbonics Note
was reduced by $2,000,000 as a result of the Company's realization during 2007
of impairment charges associated with the Company's NextGen Fuel and Sustainable
Systems subsidiaries. The balance owed on the Carbonics Note was $386,132 as of
the year ended December 31, 2008.
On November 9, 2007, in connection with the transfer to the Company of
Carbonics' stakes in GS AgriFuels and EcoSystem, the Company also assumed
liability for a term note issued by Carbonics to Viridis Capital, LLC with a
face amount of $449,704 (the "Viridis Note"), which amount is due upon demand
and bears interest at the rate of 8%. During the year ended December 31, 2008,
the note was purchased by Minority Interest Fund (II), LLC.
On November 9, 2007, in connection with the transfer to the Company of
Carbonics' stakes in GS AgriFuels and EcoSystem, the Company also assumed
liability for a term note issued by Carbonics to Candent Corporation with a face
amount of $757,852 (the "Candent Note"). The Candent Note has a term of three
years and shall be payable in full on or before November 8, 2010. The note shall
bear interest at the rate of 10%. The former president of Candent is the wife of
the Company's chairman. All of the issued and outstanding capital stock held by
Candent is in trust for the benefit of its former president. During the year
ended December 31, 2008, the note was purchased by Minority Interest Fund (II),
LLC.
On December 12, 2007, Carbonics distributed all of what was then Carbonics' 80%
stake in the Company on a pro-rated basis to all of Carbonics' shareholders.
This was accomplished by Carbonics' conversion of 200,000 shares of Company
Series D Preferred Stock into 20,800,000 shares of Company common stock, which
were distributed to the minority shareholders of Carbonics, and the distribution
by Carbonics of 800,000 shares of Company Series D Preferred Stock to Viridis
Capital, LLC, the Company's majority shareholder. Kevin Kreisler, the sole
member of Viridis Capital, is the Chairman and Chief Executive Officer of the
Company.
Effective December 15, 2007, the Company executed an Amended and Restated
Technology Acquisition Agreement (the "TAA") with Mean Green Biodiesel of
Georgia, LLC (f/k/a Cantrell Winsness Technologies, LLC), David F. Cantrell,
David Winsness, Gregory P. Barlage and John W. Davis (the "Inventors"). The
amendment changed the method of calculating the purchase price for the Company's
corn oil extraction technology (the "Technology"). The TAA, as amended, provides
for the payment to the Inventors of a one-time license fee of $150,000 per
system (a "System") built and commissioned based on the Technology plus an
ongoing royalty of $0.10 per gallon of corn oil extracted with the Technology.
The Company is required to sell, market, deploy or in any way cause the
initiation of operations of a total of three Systems on or before December 31,
2008, a total of eight Systems on or before December 31, 2009, and an additional
five Systems per year up to a total of eighteen Systems, at which point the
Company has no continuing commercialization requirement. The ownership of the
Technology is subject to reversion in the event that the Company fails to
satisfy the commercialization requirements of the TAA or if the Company
otherwise initiates bankruptcy proceedings. In any event of reversion, the
Company shall retain the non-exclusive right to use the Technology for Systems
that have been installed prior to the occurrence of the reversion event. David
Winsness and Greg Barlage are both members of the Company's board of directors
and, respectively, the Company's Chief Technology Officer and Chief Operating
Officer. For the year ended December 31, 2008, the Company incurred license fees
and royalties related to corn oil sales totaling $297,832, including $49,589
payable to each of David Winsness and Greg Barlage, due at December 31, 2008.
Such fees have been included in the Company's costs of sales.
Effective December 31, 2007, EcoSystem transferred its stakes in GS Design, Inc.
and GS Rentals, LLC to the Company in return for the reduction in the Company's
note receivable from EcoSystem by $170,385 and the issuance to EcoSystem of a
term note in the amount of $319,517. During the year ended December 31, 2008,
this debenture was purchased by Minority Interest Fund (II), LLC ("MIF") in
return for the reduction in the total amount of the convertible debt payable by
the Company to MIF.
92
PART IV
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENT AUDITOR FEES
Fees for professional services provided by GreenShift's independent auditors,
Rosenberg, Rich, Baker Berman and Company for the years ended December 31, 2008
and 2007 are as follows:
Audit Fees
Rosenberg Rich Baker Berman & Co. billed $400,335 to the Company for
professional services rendered for the audit of fiscal 2008 financial statements
and review of the financial statements included in fiscal 2008 10-QSB filings.
Rosenberg Rich Baker Berman & Co. billed $283,035 to the Company for
professional services rendered for the audit of fiscal 2007 financial statements
and review of the financial statements included in fiscal 2007 10-QSB filings.
Audit-Related Fees
Rosenberg Rich Baker Berman & Co. billed $28,920 to the Company during fiscal
2008 for assurance and related services that are reasonably related to the
performance of the 2007 audit or review of the quarterly financial statements.
Rosenberg Rich Baker Berman & Co. billed $0 to the Company during fiscal 2007
for assurance and related services that are reasonably related to the
performance of the 2006 audit or review of the quarterly financial statements.
Tax Fees
Rosenberg Rich Baker Berman & Co. billed $49,241 to the Company during fiscal
2008 for professional services rendered for tax compliance, tax advice and tax
planning. Rosenberg Rich Baker Berman & Co. billed $12,560 to the Company during
fiscal 2007 for professional services rendered for tax compliance, tax advice
and tax planning All Other Fees
Rosenberg Rich Baker Berman & Co. billed $0 to the Company in fiscal 2008 and $0
in fiscal 2007 for services not described above.
It is the policy of the Company's Board of Directors that all services, other
than audit, review or attest services must be pre-approved by the Board of
Directors, acting in lieu of an audit committee. All of the services described
above were approved by the Board of Directors.
93
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following are exhibits filed as part of GreenShift's Form 10K for the year
ended December 31, 2008:
INDEX TO EXHIBITS
Exhibit
Number Description
-------------------------------------------------------------------------------
3-a Certificate of Incorporation (1)
3-a(1) Certificate of Amendment of Certificate of Incorporation - filed as an
Exhibit to the Current Report on Form 8-K filed on July 20, 2006, and
incorporated herein by reference.
3-a(2) Certificate of Amendment of Certificate of Incorporation - filed as an
Exhibit to the Current Report on Form 8-K filed on February 22, 2007, and
incorporated herein by reference.
3-a(3) Certificate of Amendment of Certificate of Incorporation filed as an
Exhibit to the Current Report on Form 8-K filed on December 11, 2007 and
incorporated herein by reference.
3-a(4) Certificate of Amendment of Certificate of Incorporation filed as an
Exhibit to the Current Report on Form 8-K filed on February 13, 2008 and
incorporated herein by reference.
3-b Bylaws (1)
10-a Credit Agreement dated January 11, 2008 between GS COES (Yorkville I) LLC
and YA Global Investments, LP (2)
10-b Stock Purchase Agreement between GS CleanTech Corporation and GS
EnviroServices, Inc. (2)
10-c Restructuring Agreement dated January 10, 2008 between GS CleanTech
Corporation and YA Global Investments, LP (2)
10-d Form of Amended and Restated Secured Convertible Debenture issued by GS
CleanTech Corporation to YA Global Investments, LP. as of January 10, 2008
(2)
10-e Amended and Restated Forbearance Agreement dated as of January 11, 2008
among GS CleanTech Corporation, GreenShift Corporation, Viridis Capital,
LLC and YA Global Investments, LP. (2).
10-f Global Guaranty Agreement dated January 11, 2008 among Viridis Capital LLC,
Kevin Kreisler, GreenShift Corporation, GS AgriFuels Corporation, GS
CleanTech Corporation, each of their subsidiaries, and YA Global
Investments, LP (2).
10-g Agreement dated as of January 10, 2008 among GS CleanTech Corporation, GS
AgriFuels Corporation, and YA Global Investments, LP. (2)
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the
Sarbanes-Oxley Act of 2002.
------------------------------
(1) Filed as an Exhibit to the Registration Statement on Form SB-2 (File No.
333-116946) filed on June 29, 2004, and incorporated herein by reference.
(2) Filed as an Exhibit to the Current Report on Form 8-K filed on January 31,
2008, and incorporated herein by reference.
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the date indicated.
GREENSHIFT CORPORATION
By
/S/ KEVIN KREISLER
------------------------------------
KEVIN KREISLER
Chief Executive Officer
Date: October 13, 2009
In accordance with the Exchange Act, this Report has been signed below on
October 13, 2009 by the following persons, on behalf of the Registrant and in
the capacities and on the dates indicated.
/S/ Kevin Kreisler
-------------------------------------------
Kevin Kreisler, Chairman
Chief Executive Officer
/S/ Ed Carroll
-------------------------------------------
Ed Carroll, Director
Chief Financial and Accounting Officer
/S/ David Winsness
-------------------------------------------
David Winsness
Director
/S/ Greg Barlage
-------------------------------------------
Greg Barlage
Director
9
