10QSB/A 1 gs10qa101207.txt GREENSHIFT 10QSB/A OCTOBER 12, 2007 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-QSB/A Amendment No. 1 ------------------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED MARCH 31, 2007 COMMISSION FILE NO.: 0-28887 GREENSHIFT CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-3328734 -------------------------------------------------------------------------------- (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Penn Plaza, Suite 1612, New York, New York 10119 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 994-5374 -------------------------------------------------------------------------------- (Registrant's telephone number including area code) Check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant as 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 whether the registrant is a shell company as defined in rule 12-b-2 of the Exchange Act) Yes ___ No ___ The number of outstanding shares of common stock as of May 18, 2007 was 184,965,265. Transitional Small Business Disclosure Format: Yes___ No _X__ EXPLANATORY NOTE RESTATEMENT OF FINANCIAL STATEMENTS This Amendment No. 1 on Form 10-QSB/A, which amends and restates items identified below with respect to the Form 10-QSB, filed by GreenShift Corporation ("we" or "the Company") with the Securities and Exchange Commission (the "SEC") on May 21, 2007 (the "Original Filing"), is being filed to reflect the restatement of our financial statements for the three months ended March 31, 2007. As previously announced, our management, on July 26, 2007, concluded that the Company's previously filed financial statements as of and for the three months ended March 31, 2007, should no longer be relied upon as a result of the Company's determination that it's wholly-owned subsidiary GS Carbon was liable for approximately $498,000 of convertible debt along with approximately $59,000 of related derivative liabilities at October 9, 2006, the date GS Carbon went through a reverse merger, December 31, 2006 and March 31, 2007. In addition, management reviewed and revised its conclusions regarding its derivative instruments at December 31, 2006 and March 31, 2007. These conclusions were based upon conversations between the Company and its independent auditors (Rosenberg Rich Baker Berman, CPA). During this process, management and the Board of Directors of the Company were alerted to the facts and circumstances related to the Company's liability for these debts and the revisions to the derivative calculations. Authorized officers of the Company discussed this matter with the Company's independent public accounting firm who agreed that the Company's previously issued financial statements described above could not be relied upon and needed to be restated. See "Note 17 - Restatement" in the Notes to Financial Statements for further details. This Form 10-QSB/A also amends the disclosure under "Item 3. Controls and Procedures" in the Original Filing. This Form 10-QSB/A only amends and restates certain information in Item 1 (Financial Statements), Item 2 (Management's Discussion and Analysis or Plan of Operation), Item 3 (Controls and Procedures) and Item 6 (Exhibits), and such amendment and restatement with respect to Items 1 and 2 only reflect the restatement of the financial statements as described above. Except for the foregoing amended and restated information, this Form 10-QSB/A continues to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that have occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events, results or developments that have occurred or facts that have become known to us after the date of the Original Filing (other than the restatement), and such forward-looking statements should be read in their historical context. This Form 10-QSB/A should be read in conjunction with the Company's filings made with the SEC subsequent to the Original Filing, including any amendments to those filings 2 GREENSHIFT CORPORATION QUARTERLY REPORT ON FORM 10QSB/A FOR THE FISCAL QUARTER ENDED MARCH 31, 2007 TABLE OF CONTENTS
Page No Part I Financial Information Item 1. Financial Statements (unaudited)................................................................ Consolidated Balance Sheet - March 31, 2007 (unaudited)........................................7 Consolidated Statements of Operations - for the Three Months Ended March 31, 2007 (unaudited) and 2006 (unaudited).............................................9 Consolidated Statements of Cash Flows - for the Three Months Ended March 31, 2007 (unaudited) and 2006 (unaudited)............................................10 Notes to Consolidated Financial Statements....................................................13 Item 2. Management's Discussion and Analysis or Plan of Operation.....................................44 Item 3. Controls and Procedures.......................................................................45 Part II Other Information Item 1. Legal Proceedings.............................................................................46 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................46 Item 3. Defaults upon Senior Securities...............................................................46 Item 4. Submission of Matters to a Vote of Security Holders...........................................46 Item 5. Other Information ............................................................................46 Item 6. Exhibits and Reports on Form 8K...............................................................46 Signatures
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED FOR MARCH 31, 2007) 4
GREENSHIFT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2007 (UNAUDITED) (As Restated, See Note 17) ASSETS Current Assets: Cash ...................................................................... $ 2,066,808 Accounts Receivable, net .................................................. 3,298,374 Notes Receivable .......................................................... 1,298 Accrued Interest, Dividends, and Fees Receivable .......................... 43,145 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts 150,090 Inventory ................................................................. 5,460,557 Prepaid Expenses and Other Current Assets ................................. 527,172 ----------- Total Current Assets .................................................... 11,547,444 Net Fixed Assets ............................................................. 8,502,403 Other Assets: Investment in Unconsolidated Subsidiary at Cost ........................... 5,937,382 Investment in Unconsolidated Subsidiary - Equity Method ................... 303,078 Project Development Costs ................................................. 276,664 Deferred Financing Fees ................................................... 2,266,055 Intangible Assets and License Agreements .................................. 14,465,080 Other Assets .............................................................. 25,025 Net Noncurrent Assets of Discontinued Operations .......................... 7,500 Deposits .................................................................. 414,130 Goodwill .................................................................. 23,913,180 ----------- Total Other Assets ...................................................... 47,608,094 ----------- TOTAL ASSETS ................................................................. $67,657,941 ===========
5 GREENSHIFT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2007 (UNAUDITED) (CONTINUED) (As Restated, See Note 17)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts Payable ......................................................... $ 5,712,653 Accrued Expenses ......................................................... 3,243,516 Due to Related Party ..................................................... 521,100 Current portion of Convertible Debentures ................................ 4,926,577 Convertible Debentures - Related Party, Net of Discount .................. 2,259,896 Derivative Liability ..................................................... 11,404,901 Notes payable and short term borrowings .................................. 11,069,331 Short-Term Borrowings - Related Party .................................... 378,475 Current Maturities of Long Term Debt ..................................... 217,071 Current Portion of Liabilities Under Capital Lease ....................... 5,116 Billings in Excess of Cost and Estimated Earnings on Uncompleted Contracts 48,794 Customer deposits ........................................................ 3,997,000 Liabilities of Discontinued Operations ................................... 433,692 ------------ Total Current Liabilities .............................................. 44,218,122 Loans Payable - Related Parties .......................................... 260,082 Long Term Convertible Debenture, Net of Discount ......................... 29,076,040 Long term convertible debenture, related party ........................... 280,077 Long Term Leases Payable ................................................. 38,691 Long Term Debt, Net of Current Maturities ................................ 5,211,912 Other long term liability ................................................ 202,601 ------------ Total Long Term Liabilities ............................................ 35,069,403 ------------ TOTAL LIABILITIES ........................................................... 79,287,525 Minority Interest in Consolidated Subsidiary ................................ 1,124,187 STOCKHOLDERS' DEFICIENCY Preferred Stock, Series C, par $0.001, 1,000,000 authorized, 990,875 issued and outstanding ............................................ 991 Common Stock, Par $0.001, 200,000,000 authorized, 140,507,851 issued and outstanding ........................................ 140,507 Additional Paid-in-Capital .................................................. 68,850,829 Accumulated Deficit ......................................................... (81,746,098) ------------ Total Stockholders' Deficiency .............................................. (12,753,771) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY .............................. $ 67,657,941 ============
6 GREENSHIFT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED)
March 31, 2007 March 31, 2006 ------------------------------ (As Restated, See Note 17) Revenue .................................................. $ 4,039,941 $ 4,178,668 Cost of Revenues ......................................... 3,171,828 3,274,839 ------------- ------------- Gross Profit .......................................... 868,113 903,829 Operating Expenses: Selling Expenses .................................... 1,305,892 972,943 General and Administrative Expenses ................. 1,566,794 823,958 Stock Based Compensation ............................ 4,682,325 2,616,201 ------------- ------------- Total Operating Expenses .............................. 7,555,011 4,413,102 ------------- ------------- Operating Loss ........................................... (6,686,898) (3,509,273) Other Income (Expense): Fees and other income ............................... (157,141) -- Other Expense (Income) from Settlements ............. 2,279 19,260 Change in Fair Value of Derivative Instruments ...... (2,825,315) 900,564 Interest Expense .................................... (1,439,854) (376,407) Amortization Expense, Intangible Assets ............. (518,288) (135,806) Amortization of Debt Discount ....................... (1,534,038) (2,361,476) Miscellaneous Income (Expense) ...................... -- 1,000 Forgiveness of Interest and Finance Charges ......... -- 119,240 Gain/(loss) on equipment disposal ................... (600) 18,607 ------------- ------------- Total Other Expense, Net ....................... (6,472,957) (1,815,018) ------------- ------------- Loss before Provision for Income Taxes ................... (13,159,855) (5,324,291) Provision for Income Taxes ............................... (37,972) (4,309) ------------- ------------- Loss from Continuing Operations .......................... (13,197,827) (5,328,600) Discontinued Operations: Gain from discontinued operations ........................ -- 100,053 Gain on disposal of discontinued operations .............. 2,494,946 6,000 ------------- ------------- Total discontinued operations ......................... 2,494,946 106,053 Net Loss before Minority Interest ........................ (10,702,881) (5,222,547) ------------- ------------- Minority Interest ................................... (355) 328,833 ------------- ------------- Net Loss ................................................. $ (10,703,236) $ (4,893,714) ============= ============= Net Loss per Common Share, Basic and Diluted ............. $ (0.08) $ (0.04) ============= ============= Weighted Average Shares of Common Stock Outstanding, Basic 128,480,300 108,785,938 and Diluted ============= =============
7 GREENSHIFT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED)
Three months Three months Ending Ending March 31, 2007 March 31, 2006 --------------------------------- CASH FLOW FROM OPERATING ACTIVITIES (As Restated, See Note 17) Net Loss .......................................................... $(10,703,236) $ (4,893,714) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization ..................................... 126,246 99,233 Stock based compensation .......................................... 4,682,325 2,616,201 Change in fair value of derivative instruments .................... 2,825,315 (900,564) Amortization of debt discount ..................................... 1,534,038 2,361,476 Amortization of intangible assets ................................. 518,288 135,806 Gain on sale of discontinued operations ........................... (2,494,946) -- Income from equity method of accounting ........................... -- (5,724) Change in allowance for doubtful debt ............................. (52,448) -- Gain on exstinguishment of debt ................................... -- (46,573) Change in assets/liabilities of discontinued operations ........... (10,600) (138,068) Gain on forgiveness of debt ....................................... -- (119,240) Deferred income tax ............................................... 17,831 -- Amortization of beneficial conversion feature ..................... 113,080 -- Amortization of note payable discount ............................. 91,219 -- Gain on equipment disposal ........................................ 600 -- Minority interest ................................................. 355 (328,833) Changes in assets and liabilities: Restricted cash ................................................... -- 1,887 Accounts receivable ............................................... 921,757 (605,180) Accrued interest, dividends and fees receivable ................... (67,119) -- Costs and estimated earnings in excess of billings on uncompleted contracts ......................................................... 466,591 (20,870) Billings in excess of cost and estimated earnings on uncompleted contracts ......................................................... (396,272) 459,930 Inventories ....................................................... (872,333) (315,365) Deposits .......................................................... 599,061 -- Prepaid expenses and other current assets ......................... 99,014 (119,316) Estimated losses on contracts on progress ......................... -- (18,302) Accounts payable .................................................. (1,089,667) 552,375 Accrued expenses and other current liabilities .................... 716,462 (494,516) Deferred revenue .................................................. -- 148,584 Short-Term Borrowings - Related Party ............................. 83,656 -- Customer deposits ................................................. 2,370,222 -- Net cash used in operating activities ............................. (520,561) (1,630,773) CASH FLOW FROM INVESTING ACTIVITIES Change in investments ................................................ $ (16,600) $ (1,931,104) Long term investment ................................................. 282,671 -- Construction in progress ............................................. (685,240) -- Project development costs ............................................ (6,191) -- Issuance of note receivable .......................................... (73,877) (1,810,450) Additions to and acquisition of PPE .................................. (655,486) (25,491) Investment of intangible assets ...................................... -- (7,777) Net cash acquired from purchase of subsidiaries ....................... 1,109,490 Acquisition of technology license .................................... -- ------------ ------------ Net cash used in investing activities ............................. $ (45,233) $ (3,774,822)
8 GREENSHIFT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED) CONTINUED
Three months Three months Ending Ending March 31, 2007 March 31, 2006 ------------------------------ (As Restated See Note 17) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short term borrowings ................................. $ (3,500) $ (90,999) Loan due to affiliate .............................................. 703,890 -- Loan due from affiliate ............................................ (294,317) -- Advances from related parties, net ................................. (607,949) Convertible debenture .............................................. -- Proceeds from convertible debenture, net of financing costs ........ 1,000,000 -- Net proceeds from short term borrowings - related party ............ 65,261 Short term borrowings, related party ............................... -- 723,810 Loan due from related party ........................................ 130,000 426,054 Issuance of (repayment of) long term debt .......................... (30,764) (62,538) Issuance of notes payable .......................................... (965,250) -- Proceeds from (repayment of) convertible debentures ................ 224,577 (353,707) Proceeds from related party convertible debentures ................. 250,000 -- Repayments of lease payable ........................................ (2,235) -- Repayment of notes payable ......................................... (5,275) 2,162,611 Repayment of term financing ........................................ -- (25,000) Repayment of investment payable .................................... -- (440,000) Redemption of preferred stock ...................................... (9) -- Issuance of convertible debentures-related party ................... (151,653) 27,020 Deferred financing fees ............................................ -- (113,646) Proceeds from issuance of common stock ............................. 313,695 2,989,083 ----------- ----------- Net cash provided by financing activities ..................... $ 626,471 $ 5,242,688 ----------- ----------- Net increase (decrease) in cash ...................................... $ 60,677 $ (162,907) Cash at beginning of period ......................................... 2,006,131 921,960 ----------- ----------- Cash at end of period ............................................... $ 2,066,808 $ 759,053 =========== =========== Cash paid during the year for interest ................................... $ 9,746 $ 10,739 Supplemental statement of non-cash investing and and financing activities: Acquisition of equipment and/or vehicles with long term debt ........ 32,829 43,527 Acquisition of technology license ................................... 191,427 -- Discounts on convertible debt ....................................... 954,603 -- Beneficial conversion on convertible debt ........................... 221,208 -- Issuance of common stock for acquisition in subsidiaries ............ -- 2,192,016 Acquisition of technology license ................................... -- 211,328 Issuance of stock subscription ...................................... -- 75,000 Issuance of stock options for services .............................. -- 300,000 Conversion of debenture and accrued interest into common stock ...... -- 404,122 Issuance of common stock for services ............................... -- 160,000 Conversion of Series A Preferred stock to common stock .............. -- 3,000,000 Cancellation of Series B Preferred stock ............................ -- 252 -- 1,150,369 9
GREENSHIFT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB of Rule 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair statement of the results of operations have been included. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results of operations for the full year. When reading the financial information contained in this Quarterly Report, reference should be made to the financial statements, schedule and notes contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2006. 2 - NATURE OF OPERATIONS GreenShift Corporation (the "Company") began operations as a closed-end management investment company on April 1, 2005 after the Company acquired majority equity stakes in the predecessors to the Company's GS CleanTech and GS Energy subsidiaries and filed an election on Form N54A pursuant to Section 54 of the Investment Company Act of 1940 (the "40 Act") to be regulated as a business development company ("BDC"). The Company conducted operations as a BDC from April 1, 2005 through July 1, 2006. During this time, the Company acquired its initial technology portfolio, purchased majority equity stakes in the development stage and operating companies that would eventually become the Company's platform companies, and the Company completed a number of minority equity investments in companies that were believed to be strategic to the Company's mission. On July 1, 2006, the Company filed Form N54C pursuant to Section 54 of the 40 Act to withdraw its election to be regulated as a BDC. This decision was in part prompted by the fact that the majority of the Company's resources were allocated to managing the operating activities of its majority-owned holdings. The de-election changed the nature of the Company's business from an investment and business development company to an active operating company. The Company commenced efforts to restructure its holdings and investments at the time of this de-election. The primary purpose of this restructuring was to organize the Company's holdings according to a sector-specific approach, within `pure-play' platform companies with investment theses that are both distinct and consistent with GreenShift's overall mission. During the quarter ended March 31, 2007 the Company's operations were administered through the following companies:
Company Business Model ----------------------------------------------------------------- ------------------------------------------- GS CleanTech Corporation (OTC Bulletin Board: GSCT) Clean Technology and Process Engineering ----------------------------------------------------------------- ------------------------------------------- GS Agrifuels Corporation (OTC Bulletin Board: GSGF) Clean Fuels Production and Sales ----------------------------------------------------------------- ------------------------------------------- GS Energy Corporation (OTC Bulletin Board: GSEG) Clean Energy Equipment Production and Sales ----------------------------------------------------------------- ------------------------------------------- GS Carbon Corporation (OTC Bulletin Board: GSCR) Decarbonization Research and Development ----------------------------------------------------------------- --------------------------------------------
10 3 - GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a loss of $10,703,236 for the three months ended March 31, 2007. As of March 31, 2007 the Company's current liabilities exceeded current assets by $32,670,678 and it used cash in operations of $593,904. These matters raise substantial doubt about the Company's ability to continue as a going concern. 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. 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION For the three month period ended March 31, 2007, the accompanying consolidated financial statements include all accounts of the Company and its subsidiaries. All significant intercompany balances and transactions were eliminated in consolidation. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosures of contingencies during the reporting period. Actual results could differ from management's estimates. RECLASSIFICATION Certain reclassifications were made to March 31, 2006 financial statements to confirm to the March 31, 2007 presentation. 5 - FINANCING ARRANGEMENTS The following is a summary of the Company's financing arrangements as of March 31, 2007:
Notes payable and short-term borrowings: Note payable - Stillwater $ 5,094,000 Note payable - NextGen sellers 4,029,437 Note payable - American State Bank 1,800,000 Vendor composition plans 7,015 Loan payable-overdraft line 1,300 Loan payable - Lakeland Bank 37,579 Note payable - Sustainable Sellers 100,000 ------- Total notes payable and short term borrowings $ 11,069,331 Current maturities of long-term debt: Vehicle loans and other installment loans $ 156,806 Mortgages and other term notes 60,265 Total current maturities of long-term debt $ 217,071 ========= 11 Current portion of convertible debentures: Cornell Capital convertible debenture (July 2005) $ 465,000 Cornell Capital convertible debenture (October 2005) 1,010,000 Cornell Capital convertible debenture (February 2006) 1,150,369 Cornell Capital convertible debenture (April 2006) 1,900,000 Cornell Capital convertible debenture (April 2006) 1,668,444 Convertible debenture - Candent Corporation 2,259,896 Convertible debenture - Kerns Manufacturing Corp 500,000 Convertible debenture - Kerns Manufacturing Corp 1,000,000 Note discounts (2,767,236) ----------- Total current portion of convertible debentures $ 7,186,473 =========== Long-term debt: Vehicle loan, net of current $ 263,811 Note payable - Sustainable sellers 1,900,000 Note payable - MT Dept of Agriculture 124,052 Note payable - First Community Bank 1,381,733 Note payable - Great Northern Development 300,000 Note payable - Great Northern Development 724,162 Note payable - Great Northern Development 140,857 Mortgages payable and other term notes, net of current portion 377,297 ---------- Total long term debt $ 5,211,912 =========== Convertible debentures, non-current: Cornell Capital convertible debenture (April 2006) $ 4,400,000 Cornell Capital convertible debenture (February 2006) 1,949,631 Cornell Capital convertible debenture (March 2006) 1,145,719 Cornell Capital convertible debenture (February 2007) 1,125,000 Cornell Capital convertible debenture (June 2006) 5,500,000 Cornell Capital convertible debenture (October 2006) 13,000,000 Candent Corporation convertible debenture 280,077 Cornell Capital convertible debenture (February 2007) 217,997 Sustainable Systems, Inc. convertible debenture (March 2007) 3,552,005 Sustainable Systems, Inc. convertible debenture (March 2007) 3,552,013 Note Discounts (5,366,325) ----------- Total convertible debentures, non-current $29,356,117 ===========
The convertible debentures noted above are convertible into the common stock of the following companies at December 31, 2006: Greenshift 4,885,265 =========== GS Cleantech 9,468,444 =========== GS Agrifuels 27,553,649 =========== GS Carbon 141,746,117 =========== 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) of as of March 31, 2007 and the Company's ability to meet such obligations: 12 ---------------------------------------- ------------------- Year Amount 2007 $19,388,695 2008 8,039,835 2009 30,782,323 2010 809,653 2011 and thereafter 2,258,066 --------- Total minimum payments due under current and long-term obligations $61,278,572 ------------------------------------------------------------ SERENITY CAPITAL In February 2006 GS CleanTech issued a $500,000 convertible debenture to Serenity Capital, LLC ("Serenity") in exchange for Serenity's assumption of $500,000 in debt. The debenture is convertible at the lesser of $0.02 or 80% of the average closing market price of GS CleanTech common stock prior to the date of conversion. A note discount of $500,000 and a derivative liability of $1,672,500 were recorded at the assumption date. During the year 2006 Serenity effected conversions totaling $288,477 into a total of 14,423,880 shares of GS CleanTech common stock. During the year ended 2006 interest expense from accretion of the debt discount was $464,465 and the gain on the fair market value of the derivative liability was $1,401,372. As of December 31, 2006, the principal amount due on the debenture was $211,523. During the three months ended March 31, 2007, interest expense from accretion of the debt discount was $35,535 and gain on the fair market value of the derivative liability was $271,128. In March 2007, the remaining principal on the debenture was converted into 10,576,120 shares of Common Stock. CYRUS CAPITAL In February 2006 GS CleanTech issued a $500,000 convertible debenture to Cyrus Capital, LLC ("Cyrus") in exchange for Cyrus's assumption of $500,000 in debt. The debenture is convertible at the lesser of $0.02 or 80% of the average closing market price of GS CleanTech common stock prior to the date of conversion A note discount of $500,000 and a derivative liability of $1,672,000 were recorded at the assumption date. During the year 2006, Cyrus effected conversions totaling $400,000 into a total of 20,000,000 shares of GS CleanTech common stock. As of December 31, 2006, principal amount due on the debenture was $100,000. Interest is accrued at a rate of 5% on the principal balance. As of December 31, 2006, $4,644 of interest is accrued on this debenture. During the three months ended March 31, 2007, interest expense from accretion of the debt discount was $31,350 and gain on the fair market value of the derivative liability was $128,188. In March 2007, the remaining principal on the debenture was converted into 5,000,000 shares of Common Stock. Cyrus is owned by a family member of the Company's chairman. TRANSACTIONS WITH KERNS MANUFACTURING On February 28, 2007 GS CleanTech entered into a Stipulation of Settlement to settle the lawsuit titled "Kerns Manufacturing Corp. v. Veridium Corporation and KBF Pollution Management, Inc., which was pending in the Supreme Court of the State of New York (County of Queens, Index No. 19788/03). Pursuant to the Stipulation, GS CleanTech issued to Kerns Manufacturing Corp. (a) a Convertible Debenture in the principal amount of $500,000 that is due on March 31, 2007 and (b) a Convertible Debenture in the principal amount of $1,000,000 that is due on June 30, 2007. Each Debenture may be converted by its holder into common stock of GS CleanTech at a price equal to 90% of the average of the last trade prices for the common stock during the five days preceding conversion. The total shares issued upon conversion, however, may not, when added to other GS CleanTech shares beneficially owned by the holder, total more that 4.99% of the outstanding GS CleanTech common stock. The Stipulation provides that upon satisfaction of all obligations under the Stipulation, the parties will exchange mutual general releases. If, however, GS CleanTech defaults in satisfying the $500,000 Debenture, then Kerns Manufacturing Corp. may cause the action to be restored to the trial calendar of the New York Supreme Court. Kerns $0.5 Million Convertible Debenture A note discount of $290,347 and a derivative liability of $290,347 were recorded at the assumption date. During the three months ended March 31, 2007, interest expense from accretion of the debt discount was $290,347 and loss on the fair market value of the derivative liability was $300,253. As of March 31, 2007, the principal balance on this debenture was $500,000. Kerns $1.0 Million Convertible Debenture 13 A note discount of $580,694 and a derivative liability of $580,694 were recorded at the assumption date. During the three months ended March 31, 2007, interest expense from accretion of the debt discount was $145,173 and loss on the fair market value of the derivative liability was $600,469. As of March 31, 2007, the principal balance on this debenture was $1,000,000. CONVERTIBLE DEBENTURE - SEAWAY VALLEY FUND On December 28, 2006, GS Agrifuels issued to Seaway Valley Fund, LLC, a Convertible Debenture due December 28, 2008 with a face amount of $250,000 for monies ultimately received in January 2007 by GS Agrifuels from Seaway Valley in the amount of $250,000. The terms of the Convertible Debenture are the following: (i) an interest rate of eight percent (8%) payable, at the option of Seaway Valley, in cash or registered common stock in GS AgriFuels Corporation or any combination thereof; (ii) shall become due and be payable monthly commencing March 31, 2007, unless otherwise waived or deferred by Seaway Valley; (iii) payment in full or in part of principal plus accrued but unpaid interest shall be made only upon demand by Seaway Valley commencing April 31, 2007; (iv) any unpaid balance, at the option of Seaway Valley, shall become immediately due and payable without notice or demand in the event of default, and (v) any accrued and unpaid interest shall be convertible upon demand of Seaway Valley into registered shares of common stock equal to the lower of: (a) $3.00 per share; or (b) the lowest convertible debenture conversion price, preferred, common or any other class of stock or convertible security issuance price, or warrant or option issuance price, issued from December 28, 2006 until the time of conversion(s); or (c) 100% of the closing market price as of the date hereof provided that any such conversion price shall not trigger a lowering of the conversion price of any convertible debenture(s) outstanding at December 28, 2006. As of the date of this filing, Seaway Valley has received neither cash re-payments of principal or cash payments of interest, nor has it exercised his right to convert any obligations in GS AgriFuels common stock. For the three months ending March 31, 2007, interest expense of $3,616 for this obligation was incurred and accrued. The controlling member of Seaway Valley is the President and CEO of GS AgriFuels. DEMAND NOTE: STILLWATER ASSET-BASED FUND, LP On October 30, 2006, NextGen Acquisition, Inc., a subsidiary of GS AgriFuels which was formed to facilitate the acquisition of NextGen Fuel Inc., completed a sale of securities to Stillwater Asset-Based Fund, LP pursuant to a Securities Purchase Agreement dated as of October 27, 2006. The Agreement called for Stillwater to purchase a Term Note in the principal amount of $6 million. The Term Note was purchased by Stillwater on October 31, 2006, and in conjunction with the financing NextGen Acquisition paid an 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 Warnecke Design Service, Inc. (a subsidiary of GS Energy, who is also owned by the Company's parent, GreenShift Corporation), and repaid GreenShift $141,580 for amounts paid by GreenShift 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 are 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. All amounts of principal and interest not previously satisfied will be due on December 31, 2007. The obligations of NextGen Acquisition Inc. under the Term Note have been guaranteed by GS AgriFuels and by the following affiliates: GreenShift Corporation, GS Energy Corporation, GS CleanTech Corporation, NextGen Fuel Inc., Warnecke Design Services, Inc. and Warnecke Rentals, LLC (the "Guarantors"). Each of the Guarantors has pledged its assets to secure its guaranty. For the three months ending March 31, 2007, interest expense of $290,225 for this obligation was incurred of which $89,012 was accrued. DEMAND NOTE - NEXTGEN SELLERS On October 30, 2006, a wholly-owned subsidiary of GS AgriFuels purchased 100% of the outstanding capital stock of NextGen Fuel, Inc. NextGen Fuel is engaged in the business of developing and distributing esterification and transesterification biodiesel process technologies. The purchase price was $21,204,437, of which $17,000,000 was paid at closing and demand notes were issued to the selling shareholders totaling $4,204,437. $3,204,437 of the demand notes are due on October 31, 2007 or sooner if NextGen Fuel has realized revenue of $7,500,000 subsequent to the acquisition and there are not claims for indemnification by GS AgriFuels. The remaining $1,000,000 demand note, with interest at 6% per annum, is due to a sales consultant and is payable along with accrued interest upon the payment by customers for biodiesel production systems totaling forty million gallons per year of production capacity, paid on a pro-rated basis such that the consultant shall receive payments of $250,000 with each ten million gallon per year system on a pro-rated basis with NextGen Fuel's receipt of cash payments for such system. 14 NOTE PAYABLE - SUSTAINABLE SYSTEMS SELLERS On March 6, 2007, GS AgriFuels purchased the remaining 85% of the outstanding capital stock of Sustainable Systems, Inc. Sustainable owns an oilseed crushing facility in Culbertson, Montana, and is in the business of producing and selling high oleic safflower, sunflower, and canola and other high value vegetable oils. The purchase price was $12.6 million of which $100,000 was payable at closing, a note was issued for $1.9 million and two $3.55 million debentures were issued to the selling shareholders totaling $9,004,018. The $1.9 million note is due upon the completion and commissioning of Sustainable's current plant expansion which is expected to be completed in the first quarter of 2008 and accrues interest at 5% per annum to be paid on a pro-rated basis at maturity. For the three months ending March 31, 2007, interest expense of $6,506 for this obligation was incurred and accrued. CONVERTIBLE DEBENTURES - SUSTAINABLE SYSTEMS SELLERS On March 26, 2007, GS AgriFuels acquired about 85% of the outstanding capital stock of Sustainable Systems, Inc. for a total purchase price of $12.6 million. Sustainable owns an oilseed crushing facility in Culbertson, Montana, and is in the business of producing and selling high oleic safflower, sunflower, and canola and other high value vegetable oils. The Company issued convertible debentures at the closing for $3.55 million due on the first anniversary of the closing and another $3.55 million due on the second anniversary of the closing. The debentures accrue interest at 5% per annum and are to be paid on a pro-rated basis on each relevant maturity date. The convertible debentures are convertible into the Company's common stock at the option of the holder any time after each of their respective maturity dates at a rate equal to the volume weighted average price of the common stock for the 20 trading days prior to any such date of conversion with a minimum conversion price of $4.50. If at the time of conversion the market price for GS AgriFuels common stock is less than $4.50, an additional amount will be due equal to a) $4.50 minus the stock price multiplied by b) the number of shares due on conversion. The convertible debentures may be redeemed with cash by the Company at any time prior to conversion by the holder without penalty. The Company's obligations under the Note and the convertible debentures are secured by the Company's Sustainable common stock holdings. For the three months ending March 31, 2007, interest expense of $24,329 for these obligations was incurred and accrued. INVENTORY FINANCING - SUSTAINABLE SYSTEMS On February 5, 2007, Sustainable Systems, Inc., prior to becoming a subsidiary of GS Agrifuels, entered into an inventory financing agreement for $1,800,000 with American State Bank. The Agreement allows American State Bank a security interest in all inventory and any accounts acquired after the agreement was signed. The Agreement accrues interest at a rate of 10% per annum. Monthly payments consist only of interest as of March 31, 2007 and Sustainable will start making payments toward the principal in May 2007. All amounts of principal and interest remaining will be due on September 1, 2007. For the three months ending March 31, 2007, interest expense of $22,764 for these obligations was incurred of which $15,288 was accrued. NOTE PAYABLE - SUSTAINABLE SYSTEMS On September 25, 1998, Sustainable Systems, Inc., prior to becoming a subsidiary of GS Agrifuels, signed a note payable for $1,381,733 with First Community Bank. The note is secured by an interest in all the assets of Sustainable including the accounts receivable. The note accrues interest at a rate of 7.68% per annum. Monthly payments consist of principal and interest and a final payment will be due on September 25, 2013. NOTES PAYABLE - SUSTAINABLE SYSTEMS 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. All notes accrue interest at the rate of 3% 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 three months ending March 31, 2007, interest expense of $918 for these obligations was incurred and accrued Sustainable has signed four notes with Great Northern Development totaling $1,165,019. Three of the notes totaling $440,857 accrue interest at the rate of 6% per annum. The payment terms for the notes are as follows: the $11,301 and $129,556 notes are to be paid off with 180 monthly payments beginning December 15, 2005 with a maturity date of November 15, 2020 and the $300,000 note is to be paid off with 120 monthly payments beginning March 15, 2006 with a maturity date of February 15, 2016. The fourth note for $724,162 accrues interest at the rate of 5% per annum with payments of principal only thru November 2007 and principal and interests payments until the maturity date of November 15 15, 2010. For the three months ending March 31, 2007, interest expense of $29,364 for these obligations was incurred and accrued. CORNELL CAPITAL CONVERTIBLE DEBENTURES - GS CARBON On March 23, 2006, DirectView entered into a Securities Purchase Agreement (the "Agreement"), with Cornell Capital Partners, LP, ("Cornell"), and Highgate (Cornell and Highgate collectively, "Buyers"). In connection with this Agreement, Highgate converted old debentures for conversion into new 10% Secured Convertible Debentures amounting to $1,062,329 (including accrued interest of $62,329) and Cornell purchased additional secured convertible debentures amounting to $150,000 for the total purchase price of $1,212,329 (the "Purchase Price"). The debentures are due on March 23, 2009. In connection with the Agreement, DirectView paid Yorkville Advisors LLC a fee equal to $15,000 and a structuring fee to Yorkville Advisors LLC of $5,000 from the proceeds of the Closing. Accordingly, DirectView received net proceeds of $130,000. Each of the 10% Secured Convertible Debentures provides for interest in the amount of 10% per annum and are convertible at the lesser of $0.015 or 85% of the lowest closing bid price of DirectView's common stock during the 10 trading days immediately preceding the conversion date. GS Carbon at its option shall have the right, with three (3) business days advance written notice (the "Redemption Notice"), to redeem a portion or all amounts outstanding under the 10% Secured Debenture prior to the Maturity Date provided that the Closing Bid Price of the Company's common stock, as reported by Bloomberg, LP, is less than the Fixed Conversion Price at the time of the Redemption Notice. GS Carbon shall pay an amount equal to the principal amount being redeemed plus a redemption premium ("Redemption Premium") equal to twenty percent (20%) of the principal amount being redeemed, and accrued interest, (collectively referred to as the "Redemption Amount"). In connection with this Agreement,f GS Carbon issued to the Buyer warrants to purchase 1,636,000 shares of GS Carbon's Common Stock (the "Warrants") in such amounts as set forth on below. Exercise price Number of warrants per share -------------------------------------------------------------- 400,000 $ 2.50 660,000 $ 0.875 576,000 $ 1.00 -------------------------------------------------------------- 1,636,000 ========= In order to secure its obligations under the secured convertible debenture and related documents, GS Carbon has granted the debenture holders a security interest in all of its assets and property, and GS Carbon has pledged 1,000,000 shares of its common stock. A certificate representing the pledged shares together with a stock power has been deposited in escrow with a third party. If GS Carbon should default under the Securities Purchase Agreement, 10% convertible secured debentures or the related transactional documents, Highgate is entitled to voting, dividend and other rights over these pledged shares, and may take possession of and sell the pledged shares to satisfy GS Carbon's obligations to the debenture holders. A foreclosure by Highgate of the pledged shares could result in a change of control of GS Carbon. Upon the satisfaction or conversion of the secured convertible debentures, the pledged shares will be returned to GS Carbon for cancellation and return to its treasury. Under the terms of the Securities Purchase Agreement, secured convertible debentures and warrants, no conversion of the debentures or exercise of the warrants may occur if a conversion or exercise would result in Highgate and any of its affiliates beneficially owning more than 4.99% of GS Carbon's outstanding common shares following such conversion or exercise. Highgate may waive this provision upon 65 days prior notice to GS Carbon. GS Carbon determined that the conversion feature of the convertible debentures represents an embedded derivative since the debentures are convertible into a variable number of shares upon conversion. Accordingly, the convertible debentures are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. GS Carbon believes that the aforementioned embedded derivatives meets the criteria of SFAS 133 and EITF 00-19, and should be accounted for as separate 16 derivatives with a corresponding value recorded as liability. Accordingly, the fair value of these derivative instruments has been recorded as a liability on the consolidated balance sheet. The change in the fair value of the liability for derivative contracts will be credited to other income/ (expense) in the consolidated statements of operations. The $1,212,329 face amount of the debentures were stripped of their conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds method, whereby any remaining proceeds after allocating the proceeds to the warrants and conversion option would be attributed to the debt. The beneficial conversion feature (an embedded derivative) included in this debenture resulted in an initial debt discount of $1,192,329 and an initial loss on the valuation of derivative liabilities of $262,219. At March 31, 2007 the conversion derivative liability on the Highgate debt calculated using the Black-Scholes model was $1,514,428. For the three months ended March 31, 2007 the unrealized loss on the conversion derivative on the Highgate date was $983,095. On February 26, 2007, GS Carbon entered into a Securities Purchase Agreement (the "February 2007 CCP Agreement"), with Cornell Capital Partners, LP. ("Cornell"). In connection with the February 2007 CCP Agreement, Cornell purchased secured convertible debentures amounting to $1,125,000 due on February 26, 2009. The February 26, 2007 Cornell debentures provide for interest in the amount of 10% per annum and are convertible at the lesser of $0.05 or 90% of the lowest closing bid price of GS Carbon's common stock during the 30 trading days immediately preceding the conversion date. Cornell will be entitled to convert the February 26, 2007 debenture on the basis of the conversion price into GS Carbon's common stock, provided that Cornell cannot convert into shares that would cause Cornell to own more 4.9% of GS Carbon's outstanding common stock. GS Carbon at its option shall have the right, with three (3) business days advance written notice (the "Redemption Notice"), to redeem a portion or all amounts outstanding under the 10% Secured Debenture prior to the Maturity Date provided that the Closing Bid Price of GS Carbon's common stock, as reported by Bloomberg, LP, is less than the Fixed Conversion Price at the time of the Redemption Notice. GS Carbon shall pay an amount equal to the principal amount being redeemed plus a redemption premium ("Redemption Premium") equal to twenty percent (20%) of the principal amount being redeemed, and accrued interest, (collectively referred to as the "Redemption Amount"). In connection with the February 2007 CCP Agreement, GS Carbon paid Yorkville Advisors, LLP a fee equal to $100,000 and a structuring fee of $25,000 from the proceeds of the closing. Accordingly, GS Carbon received net proceeds of $1,000,000. These fees were treated as a deferred financing fees and beginning on February 27, 2007 are being amortized over the term of the loan. GS Carbon used $900,000 of the proceeds from the Cornell Debenture to repay loans payable to GreenShift Corporation and GS Ethanol Technologies. In addition GS Carbon issued to Cornell a warrant to purchase 50,000,000 shares of GS Carbon's common stock at $0.03 a share. The value of the warrant was calculated to be $712,125 at the time of the issuance using the guidance found in APB Opinion 14, "Accounting for Convertible Debt and Debt issued with Detachable Stock Purchase Warrants" and was recorded as a discount. The discount is amortized to interest expense using the effective interest method of amortization. GS Carbon determined that the conversion feature of the convertible debenture represents an embedded derivative since the debenture is convertible into a variable number of shares upon conversion. Accordingly, the convertible debenture is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The embedded derivative feature created by the variable conversion meets the criteria of SFAS 133 and EITF 00-19, and should be accounted for as a separate derivative. At March 31, 2007 the fair value of the conversion derivative liability created by this debenture calculated using the Black-Scholes model was $1,406,250. For the three months ended March 31, 2007 the unrealized gain on the derivative instrument created by this debenture was $1,406,250. On August 30, 2006, Candent Corporation ("Candent") purchased $255,077 of convertible debt previously issued by the GS Carbon to an unaffiliated third party. The Convertible Debenture provides for no interest and is convertible into the GS Carbon's common stock at the lesser of (a) 0.001 per share or (b) 17 the amount of this debenture to be converted divided by 90% of the closing market price of the Maker's common stock for the day prior to the date of the exercise of such conversion right. Candent will be entitled to convert the debenture on the basis of the conversion price into the GS Carbon's common stock, provided that Candent cannot convert into shares that would cause Candent to own more 4.9% of the Company's outstanding common stock. The Candent debenture matured on December 31, 2006. As of March 31, 2007 GS Carbon has not been notified by Candent to demand payment of the convertible debenture. The former president of Candent is the wife of GS Carbon's former Chief Executive Officer. On August 30, 2006, Candent purchased $85,049 of convertible debt previously issued by the GS Carbon to a former officer of GS Carbon, the principal balance of which debt was originally $242,997. These convertible debentures provide for no interest and conversion into GS Carbon's common stock at a rate equal to 90% of the closing market price of GS Carbon's common stock for the day prior to the date of the exercise of such conversion right. Each holder will be entitled to convert their debenture on the basis of the conversion price into the GS Carbon's common stock, provided that each holder cannot convert into shares that would cause that holder to own more than 4.9% of the GS Carbon's outstanding common stock. Each debenture matured on December 31, 2006. During February 2007, Candent purchased $25,000 of the former officer debenture and Cornell purchased the Candent debenture of $85,049 and the $132,948 remaining on the former officer's debenture. The terms of the purchased debentures were not changed. As of March 31, 2007 GS Carbon has not been notified by any party to demand payment of the convertible debentures. GS Carbon determined that the conversion feature of the assumed convertible debentures represent an embedded derivative since the debentures are convertible into a variable number of shares upon conversion. Accordingly, the assumed convertible debentures are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The embedded derivative feature created by the variable conversion meets the criteria of SFAS 133 and EITF 00-19, and should be accounted for as a separate derivative. At March 31, 2007 the fair value of the conversion derivative liability created by the assumed debentures calculated using the Black-Scholes model was $59,391. For three months ended March 31, 2007 the unrealized loss on the derivative instrument created by this debenture was $360. CORNELL CAPITAL CONVERTIBLE DEBENTURES - GS AGRIFUELS On June 7, 2006, GS AgriFuels entered into a Securities Purchase Agreement with Cornell Capital Partners LP ("Cornell") under which Cornell committed to purchase $22,000,000 in Secured Convertible Debentures. The first Debenture, in the principal amount of $5,500,000 was purchased by Cornell on June 7, 2006, for which the company paid $600,000 in financing and structuring fees and received cash proceeds of $4,900,000. The Securities Purchase Agreement was amended on October 30, 2006 to provide for only the one $5,500,000 debenture, with certain modifications (see below) Under the terms of the Securities Purchase Agreement (as amended on October 30, 2006), the Debenture carries an interest rate of 10%, and principal and interest on the Debenture, which are due at the maturity date of June 7, 2009, may be converted into common stock by Cornell Capital Partners at a conversion price equal to $3.00 per common share. However, the conversion price will be reduced to equal any price at which GS AgriFuels hereafter issues common stock or derivative securities. The maximum number of shares that Cornell may acquire at any time is 4.99% of the outstanding common shares. If the bid price of company stock falls below the conversion price, GS AgriFuels has the right to satisfy the redemption obligation by paying cash equal to 120% of the principal redeemed, The Debentures are secured by a pledge of all of GS AgriFuels' assets, including the capital stock of its subsidiaries: Mean Green BioFuels, Inc., Mean Green Biodiesel #1, Inc., Mean Green Biodiesel #2, Inc., and Mean Green Biodiesel #3, Inc. GS AgriFuels has agreed to file a registration statement with the Securities and Exchange Commission to enable Cornell to resell to the public any shares of GS AgriFuels common stock it acquires on conversion of the Debenture or exercise of the Warrant. The registration rights agreement with Cornell Capital entitles Cornell to liquidated damages for failure to register, and Cornell has waived any liquidated damages due for failure to register. This is a one time waiver and Cornell retains its rights under the agreement for future periods. For the three months ended March 31, 2007, interest expense of $135,616 for this obligation was incurred and accrued. 18 Pursuant to the terms of the agreement, GS AgriFuels issued 1,125,000 five year warrants to purchase GS AgriFuels common stock that are exercisable at $.001 per share to Cornell Capital Partners. The options were issued to Cornell Capital Partners in conjunction with the Company's June 7, 2006 issuance of convertible debentures. The fair value of the warrants was calculated using the Black-Scholes Option Pricing Model and the Company recorded the $30,375 value of the warrants as a discount to the note, and the note discount is being amortized over the term of the debenture. Interest expense from the amortization of the note discount was $2,497 for the three months ended March 31, 2007. In conjunction with the May 2006 Share Purchase Agreement with GreenShift, GS AgriFuels assumed GreenShift's obligations under a Secured Convertible Debenture due to Cornell Capital Partners in the principal amount of $1,949,631. The Debenture carries an annual interest rate of 10%, and principal and interest on the Debenture, which are due at the maturity date of June 7, 2009, may be converted into common stock by Cornell Capital Partners at a conversion price equal to $3.00 per common share. However, the conversion price will be reduced to equal any price at which GS AgriFuels hereafter issues common stock or derivative securities. The maximum number of shares that Cornell may acquire at any time is 4.99% of the outstanding common shares. For the three months ended March 31, 2007, interest expense of $48,073 for this obligation was incurred and accrued. On October 30, 2006 GS AgriFuels completed a sale of securities to Cornell Capital Partners, LP pursuant to a Securities Purchase Agreement dated as of October 30, 2006. The Agreement called for Cornell to purchase a Secured Convertible Debenture in the principal amount of $13 million. In conjunction with this financing, the Company paid a financing fee of $1,300,000, a structuring fee of $50,000, legal fees of $15,000, and received net proceeds of $11,635,000 that were used for the acquisition of NextGen Fuel, Inc. The Secured Convertible Debenture will mature on October 30, 2009. Interest will accrue on the Debenture at the rate of 10% per annum and will be payable on the maturity date. If the market price of GS AgriFuels common stock is less than the conversion price, GS AgriFuels can redeem the Debenture for 120% of its principal amount. Cornell will be entitled to convert the accrued interest and principal amount of the Debenture into GS AgriFuels common stock at a conversion price of $3.00 (or any lower price at which GS AgriFuels hereafter issues common stock to any third party). The maximum number of shares that Cornell may acquire at any time is 4.99% of the outstanding common shares. In consideration of Cornell's investment in the October 30, 2006 Debenture, GS AgriFuels issued to Cornell a five year Warrant to purchase 540,000 common shares. The exercise price is $.001 or any lower price at which GS AgriFuels hereafter issues common stock to any third party. GS AgriFuels has also agreed to file a registration statement with the Securities and Exchange Commission to enable Cornell to resell to the public any shares of GS AgriFuels common stock it acquires on conversion of the Debentures or exercise of the Warrant. The fair value of the warrants was calculated using the Black-Scholes Option Pricing Model and the Company recorded the $1,079,460 value of the warrants as a discount to the note, and the note discount is being amortized over the term of the debenture. For the three months March 31, 2007, interest expense from the amortization of the note discount was $88,723. For the three months ended March 31, 2007, interest expense of $320,548 for this obligation was incurred and accrued. Commencing on February 1, 2007, Cornell was entitled to convert into common stock up to $500,000 of the principal amount of the Debentures (including the $5,500,000 Debenture sold to Cornell on June 6, 2006) during any calendar month at a conversion price equal to 90% of the lowest daily Volume Weighted Average Price during the thirty trading days preceding conversion. However, GS AgriFuels may opt to redeem the portion of the Debentures offered for conversion in this manner by paying 120% of the amount converted. Cornell has not converted any portion of the Debentures into stock as of March 31, 2007. 19 The Debentures are secured by a pledge of all of GS AgriFuels's assets, including the capital stock of its subsidiaries: Mean Green BioFuels, Inc., Mean Green Biodiesel #1, Inc., Mean Green Biodiesel #2, Inc. and Mean Green Biodiesel #3, Inc. The subsidiaries of GS AgriFuels have pledged their assets to secure the Debentures. GreenShift Corporation, the parent of GS AgriFuels, and certain subsidiaries of GreenShift Corporation (including GS CleanTech Corporation, GS Energy Corporation and Viridis Capital) have also pledged their assets to secure the Debentures and have guaranteed the Debentures due to Cornell. 6 - DERIVATIVES In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the conversion features associated with the convertible debentures are variable and contain an embedded derivative that requires bifurcation from their hosts contacts. The company has recognized the embedded derivatives as a liability at the date the debentures were issued. As of March 31, 2007 the change in the fair value of the derivative resulted in an accounting loss of $2,825,315. Amortization of the debt discount totaled $1,534,038 for the three months ended March 31, 2007. The unamortized portion of the debt discount related to the derivatives was $4,534,914 at March 31, 2007. As of March 31, 2007, the fair value of the derivative liabilities was $11,404,901. 7 - TECHNOLOGY LICENSES On January 14, 2006, GS Carbon's subsidiary, General Ultrasonics Corporation, acquired 70% of H2 Energy Solutions, Inc. H2 Energy owned the rights to certain patented ultrasonics technologies used in the reformation of synthetic fuels. The purchase price of $261,328 was paid $50,000 in cash and current liabilities of $211,328 were assumed. H2 Energy subsequently ceased operations. The technology is under development by General Ultrasonics and the entire purchase price of $261,328 was assigned to technology license. The technology use agreement between H2 energy and the technology owner is for a term of ten years and requires certain minimum royalties for the Company to maintain its exclusive use. On February 26, 2007, GCC acquired patent-pending technologies involving carbon aerogel composites (United States Patent Application Nos. 10/327,300, 10/695,214, 10/800,993, 10/840,544, and 10/198,095) (the "GCC Technologies") and several executory contracts pertaining to the GCC Technologies in return for $191,427 in debt. Among these contracts is a contract with United Technologies Corporation for work to be performed in cooperation with the U.S. Department of Energy. Technology licenses included with intangible assets, consist of the following at March 31, 2007: Technology licenses $452,755 Less: Accumulated amortization 34,261 ------ Technology licenses, net $418,494 ======== Amortization expense related to the technology license was $8,128 and $6,533 for the three months ended March 31, 2007 and the period of inception (January 14, 2006) to March 31, 2006, respectively. The estimated aggregate amortization expense for the next five years is estimated to be approximately $45,000 for each year. 20 8 - INVESTMENTS INVESTMENT IN SUSTAINABLE SYSTEMS UNDER FINANCING AGREEMENT On September 13, 2006, GS AgriFuels, Inc. entered into a financing agreement with Sustainable Systems, LLC whereby 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 acquired the remaining additional 85% of the outstanding capital stock for $12.6 million making Sustainable a wholly-owned subsidiary of the Company. INVESTMENT IN ZEROPOINT CLEAN TECHNOLOGIES, INC. In August 2006, GS Agrifuels entered into a Series A Preferred Stock Purchase Agreement with ZeroPoint Clean Tech, Inc. under which GS Agrifuels agreed to purchase 113,800 shares of Series A Preferred Stock, representing approximately 10% of the capital stock of ZeroPoint, at a purchase price of $21.98 per share. In conjunction with the Agreement, ZeroPoint Clean Tech, Inc. also issued to GS Agrifuels 56,900 five year warrants to purchase ZeroPoint Clean Tech, Inc. common stock that are exercisable at $32.97 per share. 9 - GOVERNMENT GRANTS On September 28, 2006, Sustainable Systems, prior to becoming a subsidiary of GS Agrifuels, was awarded a $700,000 a 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 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 received $76,960 in grant income during the three months ending March 31, 2007. The grant is contingent upon the Company submitting evidence of the commitment to the project within six months of the award, providing periodic project progress reports detailing the status of the project, percentage completion, costs incurred, as well as an evaluation by the MDOC a year from the contract date. 10 - INCOME TAXES The Company currently files an income tax return in the U.S. federal jurisdiction as well as in the State of New York. Tax returns for the year 2006 remain open for examination in various tax jurisdictions in which it operates or operated. 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 March 31, 2007, there were no unrecognized tax benefits. Interest and penalties related to uncertain tax positions will be recognized in income tax expense. As of March 31, 2007, no interest related to uncertain tax positions had been accrued. 11 - SEGMENT INFORMATION GreenShift currently operates five business segments: Corporate, Clean Technology Services, Clean Fuel Production and Sales, Clean Energy Manufacturing and Sales, and Other Segments. The basis of organization of each segment is based upon the Company's business models, which include clean technology and process engineering, clean fuel production and sales and clean energy productions and sales. Summarized financial information about each segment is as follows: 21 For the three months ended 3/31/2007:
Corporate CleanTech (1) Clean Fuels CleanEnergy Other Total (2) ---------------------------------------------------------------------------------------------- Revenue from external customers - 3,263,206 418,138 358,597 - 4,039,941 (3) (3) Inter-segment revenues - 27,972 1,446,568 - - 1,474,540 Interest revenue - - - - - - Interest expense 63,180 435,439 934,131 7,104 - 1,439,854 Depreciation and amortization - 85,810 526,822 31,902 644,534 Segment loss (1,453,128) (5,038,858) (4,053,768) (157,482) - (10,703,236) Other significant non cash items: Shares based compensation 898,332 1,899,212 1,884,781 - - 4,682,325 Derivative instruments gain/(loss) 570 (2,825,885) - - - (2,825,315) Amortization of debt discount 81,724 1,229,339 222,975 1,534,038 Segment assets 301,537 17,843,809 47,328,442 2,750,481 (566,328) 67,657,941 For the three months ended 3/31/2006: Corporate CleanTech (1) CleanFuels CleanEnergy Other Total (2) ----------------------------------------------------------------------------------------- Revenue - 3,174,925 - 1,003,743 - 4,178,668 Inter-segment revenues - - - - - Interest revenue - - - - - - Interest expense 158,614 2,318,376 29,734 231,159 - 2,737,883 Depreciation and amortization - 56,934 - 178,105 - 235,039 Segment loss (283,851) (3,864,955) (39,754) (705,154) - (4,893,714) Other significant non cash items: Shares based compensation 2,081,201 - - 535,000 - 2,616,201 Derivative instruments gain 441,414 459,150 - - - 900,564 Amortization of debt discount - 2,073,379 26,164 261,933 - 2,361,476 (1) The amounts include of GS CleanTech Corporation, GreenWorks Engineering Corporation and GS Carbon Corporation. (2) The amounts include of GS Energy Corporation and TDS (Telemedicine), Inc. (3) Amount includes revenue earned by GS Energy Corporation through sales to GS Agrifuels Corporation and GS Cleantech Corporation. The inter-segment revenue recorded per accrual basis of accounting.
12 - 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. For transfers of assets under common control, the Company follows provisions of Appendix D of SFAS No. 141. 22 GS AGRIFUELS CORPORATION (F/K/A HUGO INTERNATIONAL TELECOM, INC.) On January 16, 2007, GS Agrifuels executed an agreement with Fulton Biodiesel, LLC, a subsidiary of Homeland Energy Biofuels, LLC ("Homeland Energy") to form GS Fulton Biodiesel LLC ("GS Fulton Biodiesel"). The agreement calls for GS Agrifuels to own 80% of this company and the construction of a ten million gallon per year biodiesel plant in Fulton, New York which will be the first commercial-scale facility in New York. GS Fulton Biodiesel and NextGen Fuel, Inc. are party to a settlement and services agreement that requires the payment of $660,000 to an engineering and design firm for technical services to be provided for the construction of the facility. As of December 31, 2006 NextGen Fuel, Inc. deposited $220,000 into an escrow account under the terms of this agreement. The engineering and design firm subsequently refused to accept payment and disputes certain provisions of the settlement and services agreement and the escrow was returned. On March 6, 2007, GS Agrifuels completed the acquisition of the remaining approximately 85% of the outstanding capital stock of Sustainable Systems, Inc (prior to the acquisition, the Company had invested $2,000,000 in Sustainable Systems which had been accounted for under the cost method and represented approximately 15% of the outstanding stock). The total negotiated purchase price of $12,657,093 paid $100,000 in cash and notes payable issued to the sellers for $1,900,000, convertible debenture issued to the sellers for $7,104,018 as well as $3,553,075 in GS Agrifuels' common stock at an agreed upon fair value of $4.50 per share. The $1.9 million note is due upon the completion and commissioning of Sustainable's current plant expansion. The two $3.55 million debentures are due on the first anniversary of the closing and the second anniversary of the closing, respectively. GS Agrifuels has engaged a third party valuation expert who is in the process of determining the purchase price allocation. The excess of the purchase price over the net assets has been recorded in Goodwill in the amount of $13,159,626 until the identifiable intangibles can be valued. GS Agrifuels' results of operations for the period include the results of operations of Sustainable Systems from March 6, 2007 through March 31, 2007. GS Agrifuels is party to a Development Services Agreement with Mean Green Biodiesel of Georgia, LLC (f/k/a Cantrell Winsness Technologies, LLC) that includes assignment of rights in and to GS Agrifuels's planned biodiesel project in Memphis, Tennessee. The terms of this agreement include reimbursement by Mean Green Biodiesel of Georgia, LLC of expenses incurred by GS Agrifuels both prior and subsequent to the execution of the Development Services Agreement, the retention of 9% equity ownership stake by GS Agrifuels in first ten million gallon per year facility developed for Mean Green Biodiesel of Tennessee, LLC at the site, and the purchase of one ten million gallon per year biodiesel system from NextGen Fuel, Inc. Mean Green Biodiesel of Georgia, LLC is owned by a former consultant to GS Agrifuels. GS Agrifuels may decide to co-locate a wholly- or majority-owned biodiesel production facility at the Memphis site. On March 19, 2007, GS EnviroServices, Inc. and its wholly owned subsidiaries, Enviro-Safe Corporation and Enviro-Safe Corporation (NE) (f/k/a/ Jones Environmental Services (NE) Inc.) entered into an Agreement and Plan of Merger and Reorganization ("Merger") with TDS (Telemedicine), a publicly held corporation. 19,000,000 shares the Company's common stock was issued to GS CleanTech in exchange for the purchase of the GS EnviroServices and its subsidiaries. Prior to the merger, the shareholders of TDS (Telemedicine), Inc. retained 4,000,000 shares of common stock in the public company. The above transaction has been accounted for as a reverse merger (recapitalization) with GS EnviroServices, Inc. being deemed the accounting acquirer and TDS (Telemedicine) Inc. being deemed the legal acquirer. Accordingly, the historical financial information presented in the financial statements is that of GS EnviroServices, Inc. (March 19, 2007, its date of inception) as adjusted to give effect to any difference in the par value of the issuer's and the accounting acquirer's stock with an offset to additional paid in capital. The basis of the assets and liabilities of GS EnviroServices, Inc. and subsidiaries, the accounting acquirer, has been carried over in the recapitalization. 23 MERGER AND REINCORPORATION The Board has approved the reincorporation of tds (Telemedicine) Inc. by changing its state of incorporation from New York to Delaware, which will be effected pursuant to the Merger Agreement. Under the Merger Agreement, the Corporation will be merged with and into its subsidiary, GS EnviroServices, Inc., a Delaware Corporation. GS EnviroServices was recently acquired by tds (Telemedicine), Inc., and is the holding company for all of the business operations of tds (Telemedicine). Upon the effectiveness of the Reincorporation, the New York Corporation will cease to exist and Delaware Corporation will continue to operate the New York Corporation's business under the name "GS EnviroServices, Inc." (see ITEM 4. Submission of Matters to a Vote of Security Holders). 13 - RELATED PARTY TRANSACTIONS LOAN TO GS AGRIFUELS FROM SEAWAY VALLEY FUND On December 28, 2006, GS Agrifuels issued to Seaway Valley Fund, LLC, a Convertible Debenture due December 28, 2008 with a face amount of $250,000 for monies ultimately received by GS Agrifuels in January 2007 from Seaway Valley in the amount of $250,000. The terms of the Convertible Debenture are the following: (i) an interest rate of eight percent (8%) payable, at the option of Seaway Valley, in cash or registered common stock in GS Agrifuels Corporation or any combination thereof; (ii) shall become due and be payable monthly commencing March 31, 2007, unless otherwise waived or deferred by Seaway Valley; (iii) payment in full or in part of principal plus accrued but unpaid interest shall be made only upon demand by Seaway Valley commencing April 30, 2007; (iv) any unpaid balance, at the option of Seaway Valley, shall become immediately due and payable without notice or demand in the event of default, and (v) any accrued and unpaid interest shall be convertible upon demand of Seaway Valley into registered shares of common stock equal to the lower of: (a) $3.00 per share; or (b) the lowest convertible debenture conversion price, preferred, common or any other class of stock or convertible security issuance price, or warrant or option issuance price, issued from December 28, 2006 until the time of conversion(s); or (c) 100% of the closing market price as of the date hereof provided that any such conversion price shall not trigger a lowering of the conversion price of any convertible debenture(s) outstanding at December 28, 2006. As of the date of this filing, Seaway Valley has not exercised its right to convert any obligations in GS Agrifuels common stock. For the three months ended March 31, 2007, interest expense of $3,616 has been accrued for this obligation. The controlling member of Seaway Valley is the President and CEO of GS AgriFuels. OTHER RELATED PARTY TRANSACTIONS In August 2006 GS Agrifuels paid a $200,000 deposit to Warnecke Design Service, Inc. for the purchase of a NextGen Fuel 10 million gallon per year biodiesel system. The total purchase price for this system is $3,200,000, and it is expected that GS Agrifuels will take delivery of the system in the first quarter of 2007. NextGen Fuel, Inc., has an exclusive manufacturing agreement with Warnecke Design Service, Inc., for the design, fabrication, assembly, testing, and commissioning of NextGen Fuel's biodiesel production systems. During the three months ended March 31, 2007, the Company paid deposits under the manufacturing agreement totaling approximately $126, 000 to Warnecke during the year ended December 31, 2006, and had work in process inventory of $888,073, other deposits of $475,936, and accounts payable and accrued expenses of $147,707 due to Warnecke at March1, 2007. GreenShift Corporation, the Company's majority shareholder, is also the majority shareholder of GS Energy Corporation. Warnecke Design Service, Inc. is a wholly owned subsidiary of GS Energy Corporation. GS Agrifuels is party to a Development Services Agreement with Mean Green Biodiesel of Georgia, LLC (f/k/a Cantrell Winsness Technologies, LLC) that includes assignment of rights in and to GS Agrifuels' planned biodiesel project in Memphis, Tennessee. The terms of this agreement include reimbursement by Mean Green Biodiesel of Georgia, LLC of expenses incurred by GS Agrifuels both prior and subsequent to the execution of the Development Services Agreement, the retention of 9% equity ownership stake by GS Agrifuels in first ten million gallon per year facility developed for Mean Green Biodiesel of Tennessee, LLC at the site, and the purchase of one ten million gallon per year biodiesel system from 24 NextGen Fuel, Inc. Mean Green Biodiesel of Georgia, LLC is owned by a former consultant to GS Agrifuels. GS Agrifuels may decide to co-locate a wholly- or majority-owned biodiesel production facility at the Memphis site. 14 - DISCONTINUED OPERATIONS During the year ended December 31, 2006, the GS CleanTech Board of Directors adopted a plan for the sale of the Company's environmental consulting business located in Mount Arlington, New Jersey operated by EnviroSciences Inc. The assets and liabilities of this operation are presented as discontinued operations in the accompanying financial statements. On May 4, 2007, the Company executed a Share Purchase Agreement with the former owners (the seller) of EnviroServices with an effective date of January 1, 2007. In exchange for the acquisition shares, the seller agreed the pay $250,000 to the Company. As of March 31, 2007, this cash is included in prepaid expenses. The Company recognized a gain of $2,494,946 from the sale. A breakdown of this sale is as follows: Cash received on purchase .................... $ 250,000 Assets disposed of ........................... 1,298,382 Liabilities disposed of ...................... (3,543,328) ----------- Net gain on disposal of assets and liabilities 2,244,946 ----------- Total gain on sales of discontinued operation $ 2,494,946 =========== On October 24, 2005, the GS CleanTech Corporation Board of Directors adopted a plan to close the Paterson, New Jersey recycling facility operated by American Metal Recovery Corporation ("AMRC"). The plan included the discontinuation of the operations of Metal Recovery Transportation Corporation ("MRTC") during 2005, as well. The decision to terminate operations at the Paterson facility was made due to overall economic factors, in particular the decreasing volume of inorganic, metal bearing wastes suitable for recycling. AMRC has ceased accepting waste and has removed all hazardous waste from the facility. AMRC has disposed of all of the equipment and cleaned the facility as required by regulation and surrendered the premises on December 31, 2005. The results of the recycling business are recorded as discontinued operations. The components of discontinued operations are as follows:
2007 2006 ---- ---- Net revenues ........................................................ $ -- $ 1,072,226 Cost of revenues .................................................... -- 601,451 ----------- ----------- Gross profit ............................................. -- 470,775 ----------- ----------- Selling, general and administrative expense ......................... -- 314,632 ----------- ----------- Income from operations ................................... -- 156,143 ----------- ----------- Other income and expenses, net ...................................... -- (26,552) ----------- ----------- Total other income and expense ........................... -- (26,552) ----------- ----------- Income before provision for income taxes ................. -- (127,591) Total provision for tax ............................................. -- (27,538) ----------- ----------- Net income (loss) from discontinued operations ........... -- 100,053 Gain (loss) on disposal of discontinued operations -- 6,000 ----------- ----------- Total income (loss) - discontinued operations .... $ -- $ 106,053 =========== ===========
The results presented above for 2007 and 2006 include the operating activity for the discontinued operations for the 3 month period. Assets and liabilities of the discontinued businesses were reported as net assets and net liabilities (current and net of current) of discontinued operations at March 31, 2007. 25 Assets and liabilities of discontinued operations as of March 31, 2007 are as follows: Non-current assets of discontinued operations Other assets ..................................... $ 7,500 ========= Total assets of discontinued operations .... 7,500 ========= Current liabilities of discontinued operations: Accounts payable ................................. 254,958 Accrued Expenses ................................. 178,733 --------- Total liabilities of discontinued operations 433,691 --------- Net assets of discontinued operations ................. $(426,191) ========= 15 - COMMITMENTS AND CONTINGENCIES LEGAL MATTERS GS Carbon's General Ultrasonics subsidiary is party to the matter entitled LeBlanc v. Tomoiu., et. al., which action was filed in the Superior Court of Connecticut. The verified complaint, which also names GreenShift and certain of its affiliates, seeks damages relating to the acquisition by General Ultrasonics of the stock of H2 Energy Solutions, Inc. from substantially all of its shareholders, as well as attorney's fees and costs. General Ultrasonics has responded to the verified complaint and denies any liability. OTHER CONTINGENCIES GS CleanTech Corporation is subject to various regulatory requirements, including the procurement of requisite licenses and permits at its facilities. These licenses and permits without which GS CleanTech's operations would be adversely affected are subject to periodic renewal. GS CleanTech Corporation 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. GS Cleantech Corporation owns property in Lowell, Massachusetts, the location of their RCRA permitted Treatment, Storage and Disposal Facility (TSDF). Per the requirements of the permit associated with the operation of this facility, a third party evaluation is conducted on a yearly basis to evaluate the costs associated with the retirement of this asset. Per the outcome of this evaluation, $90,000 has been placed in a trust with the Massachusetts Department of Environmental Protection listed as beneficiary. GS Cleantech included the $90,000 in this trust as part of deposits in other assets. Under GS Cleantech'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. EMPLOYMENT AGREEMENT In February 2007 GS Carbon entered into a three-year employment agreement with the President of its newly formed wholly owned subsidiary. The annual salary stipulated in the agreement is $125,000 but could increase to $150,000 based on the subsidiary's achievement of pre-tax operating profits for two consecutive calendar quarters. 16 - SUBSEQUENT EVENTS GREENSHIFT MERGER AGREEMENT On April 3, 2007, GreenShift Corporation, GS CleanTech Corporation and GS Carbon Corporation executed an Agreement and Plan of Merger. Pursuant to the terms and conditions of the Merger Agreement, GS CleanTech will merge with and into GS CleanTech Acquisition, Inc., a newly formed special purpose subsidiary of GreenShift, and GS CArbon will merge into GS Carbon Acquisition, Inc., another newly formed special purpose subsidiary of GreenShift. 26 An additional pending merger involves GreenShift's majority owned GS Agrifuels Corporation and GS Energy Corporation. Once all mergers are complete, GreenShift will have two majority owned public subsidiaries, GS Agrifuels Corporation and GS EnviroServices Corporation (f/k/a TDS (Telemedicine), Inc.). GreenShift will include the subsidiaries of GS CleanTech, GS Carbon, and a number of minorities held investments. GreenShift currently owns 80% of the capital stock of GS CleanTech and about 85% of the capital stock of GS Carbon. GreenShift believes that both of the above mergers will be strategic for several reasons, including: >> the reduction of operational overlap and redundancies, >> the promotion of a unified vision among our employees, >> the reduction of confusion to third parties such as customers, vendors, creditors, shareholders and other stakeholders, >> the reduction of the focus, capital, and other resources required to administer multiple public entities as a result of the decreased complexity, and >> increasing the ability of our management to focus on enhancing earnings, strengthening the Company's balance sheet, and creating value for our shareholders. The foregoing descriptions of the transactions planned to be completed by GreenShift, GS CleanTech, GS Agrifuels, GS Energy and GS Carbon are only a summary and are qualified in their entirety by reference to the documents and exhibits filed on Form 8-K. In April 2007, GS Carbon entered into an amended employment with the Chief Science Officer of General Ultrasonics. The agreement is for a term of five years calls for an annual salary of $150,000, a minimum annual bonus of $250,000, a signing bonus of $62,500, and requires GS Carbon to Issue Series B Preferred Stock corresponding to 5% of the Company's fully diluted capital stock to the Chief Science Officer. In April 2007, GreenShift converted 12,500 shares of GS Carbon's Series B Preferred Stock into 200,832,521 shares of common stock. On May 4, 2007, General Carbonics Corporation amended the February 26, 2007 Technology Acquisition Agreement. The amendment provided for the replacement of the GS Carbon preferred stock with 400,000 shares of common stock in General Carbonics Corporation equal to 40% of GCC. On May 14, 2007, the Company executed an agreement to sell its majority stake in the company to Seaway Capital, Inc. Seaway Capital, Inc. has agreed to assume up to 4500,000 of GS Carbon's legacy debt and GreenShift Corporation will retain GS Carbon's current operating subsidiaries by transferring the stock of the subsidiaries to GS CleanTech Corporation. EMPLOYMENT AGREEMENT In April 2007, GS Carbon entered into an amended employment with the Chief Science Officer of General Ultrasonics. The agreement is for a term of five years calls for an annual salary of $150,000, a minimum annual bonus of $250,000, and requires GS Carbon to Issue Series B Preferred Stock corresponding to 5% of GS Carbon's fully diluted capital stock to the Chief Science Officer. SHARE PURCHASE AGREEMENT Subsequent to March 31, 2007, the Company entered into a Share Purchase Agreement to purchase the assets of GS Carbon Corporation. In exchange for the Acquisition Shares, the Company has agreed to assume the repayment obligation of a convertible debenture due to Cornell Capital Partners, LP in the amount of $1,125,000 plus any other convertible debt outstanding as of June 30, 2007, with the exception of a maximum of $500,000 of CS Carbon Corporation's convertible debentures which will remain the responsibility of GS Carbon Corporation. 27 NOTE 17 - RESTATEMENT The Company has restated its financial statements for the three months ended March 31, 2007 and year ended December 31, 2006. On July 26, 2007, GS Carbon determined that it was liable for approximately $498,000 of convertible debt along with approximately $59,000 of related derivative liabilities at October 9, 2006, the date GS Carbon went through a reverse merger, and at December 31, 2006 and March 31, 2007. The following outlines the changes: 1. A subsidiary of the GS Carbon that was spun-off in 2006 issued convertible debt in the principal amount of $498,074 several years ago. Management was presented with evidence that the convertible debentures along with the related derivative liability of $58,884 for the conversion features related to these debentures were liabilities of the GS Carbon on the October 9, 2006, the date GS Carbon went through a reverse merger. GS Carbon calculated the derivative liability to be $59,031 on the conversion feature related to these debentures at March 31, 2007 and December 31, 2006, respectively and incurred an unrealized loss of $360 and $147 for the three months ended March 31, 2007 and for the year ended December 31, 2006. The Company originally did not booked the long-term convertible debentures and related derivative liability at the reverse merger date and did book the unrealized loss on these derivative instruments for the three months ended March 31, 2007 and for the year ended December 31, 2006. In addition GS Carbon reviewed and revised its conclusions regarding its derivative instruments at December 31, 2006. The following outlines the changes: 1. The expected term used in the Black-Scholes model used to calculate derivative liability of $1,514,428 and $531,333 at March 31, 2007 and December 31, 2006, respectively, related to conversion feature on the Highgate/Cornell convertible debenture was ten days. The unrealized gain/(loss) on derivative instruments related to the conversion feature on the Highgate/Cornell debenture was $(983,095) and $801,367 for the three months ended March 31, 2007 and the year ended December 31, 2006, respectively. The Company originally used an expected term of 2.0 and 2.25 years in the original Black-Scholes model used to calculate the original derivative liability of $2,536,931 and $1,474,827 at March 31, 2007 and December 31, 2006, respectively. The Company originally recorded an unrealized loss of derivative instruments of $1,062,104 and $142,127 for three months ended March 31, 2007 and for the year ended December 31, 2006, respectively. 2. The 1,652,000 warrants attached to the Highgate/Cornell convertible debenture were determined not to be a derivative instrument under accounting principles generally accepted in the United States of America. GS Carbon originally recorded a derivative liability of $1,230,330 and $198,193 at October 9, 2006 (reverse merger date) and December 31, 2006, respectively, and an unrealized gain on derivative instruments of $1,032,137 for the year ended December 31, 2006. In addition GS Carbon originally recorded a derivative liability of $50,396 and an unrealized gain on derivative instruments of $147,797 as of and for the three months ended March 31, 2007. 3. GS Carbon determined that a beneficial conversion did not exist when the February 26, 2007 Cornell convertible debenture was issued. The Company originally recorded $221,208 in interest expense for the three months ended March 31, 2007 related to the beneficial conversion. 4. GS Carbon determined the offset to the discount of $712,125 created by the detachable warrants granted in conjunction with the issuance of the Cornell Convertible debenture on February 26, 2007 was additional paid in capital. GS Carbon originally recorded the offset to derivative liability. GS Carbon also determined that the detachable warrants issued with the Cornell Convertible debenture were not derivative instruments. GS Carbon originally recorded an unrealized loss on the derivative instruments of $1,227,875 for the three months ended March 31, 2007. 28 5. GS Carbon determined that the conversion feature on the February 26, 2007 Cornell debenture was not an embedded derivative and a further discount on the debt did not exist. GS Carbon originally recorded the transaction as follows; a. The fair value of the embedded derivative of $242,478 as a derivative liability with a corresponding amount recorded as a discount on the debenture on February 26, 2007. b. A derivative liability created by this debenture of $76,423 and an unrealized gain on derivative instruments of $166,055 for the three months ended March 31, 2007. c. $10,103 in interest expense for the three months ended March 31, 2007 based on the amortization of the original debt discount recorded. The impact of these adjustments on the Company's financial results as originally reported as of and for the three months ended March 31, 2007 is summarized below: As Reported As Restated Current liabilities .......... $ 45,841,803 $ 44,218,122 Total liabilities ............ $ 80,180,757 $ 79,287,525 Total Stockholders' Deficiency $(13,647,003) $(12,753,771) Net loss ..................... $ 10,520,959 $ 10,703,236 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FORWARD LOOKING STATEMENTS In addition to historical information, this amended Quarterly Report contains forward-looking statements, which are generally identifiable by use of the words "believes," "expects," "intends," "anticipates," "plans to," "estimates," "projects," or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Description of Business - Business Risk Factors". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements OVERVIEW GreenShift Corporation ("we," "our," "us," "GreenShift," or the "Company") develops and supports clean technologies and companies that facilitate the efficient use of natural resources. We face environmental challenges today that are the collective by-product of several generations of industrial development. These challenges do not originate because of this development but rather because of how we, as an economy, consume natural resources and manage the by-products of those resources. The resolution to the challenges we currently face is not likely to come from compulsory changes to how we consume things, but rather from the cost-savings and increased profits that flow from consuming things more efficiently by virtue of innovation and the intelligent use of technology. Take standard corn derived ethanol production as an example; corn is harvested, milled, mashed, fermented and distilled into 200 proof fuel-grade ethanol. From a fuel production standpoint, this process is 67% inefficient. In other words, only one third of each bushel of corn is converted into ethanol. Another third is exhausted out of the fermentation stage of the process in the form of carbon dioxide and the final third ends up in a cellulosic material called distillers grain which is sold as an animal feed. Increasing corn to fuel conversion efficiencies, even incrementally, at any point in this process will increase fuel production, reduce costs, reduce plant emissions and enable more consumers to use less fossil fuels and more ethanol - a clean, green burning carbon-neutral fuel. GreenShift acquires, develops and commercializes technologies that reduce these types of inefficiencies. Our approach for ethanol producers exemplifies the prototypical GreenShift solution: we focus on the distillers grain and carbon dioxide by-products and we seek to increase fuel yields by implementing robust, scalable and cost-effective "plug-and-play" technologies directly on-site at the ethanol producer's facility to increase the value of these by-products. Our current commercial offerings, which extract corn oil out of the grain and convert it into biodiesel, increase fuel clean fuel yields to 3 gallons per bushel from 2.8 gallons per bushel. We also are supporting the commercialization of technologies to convert the remainder of the distillers grain biomass (and other locally available biomass such as corn stover) into carbon-neutral synthetic fuels (which can increase yields to more than 4.2 gallons per bushel), and the research and development of a process to capture and convert the exhaust carbon dioxide into an algal biomass for conversion into additional clean fuels (which can increase fuel yields even higher). We believe that tremendous environmental gains can be realized simply by making it easy and cost-effective to use renewable sources of energy, to burn cleaner fuels, and to reduce waste just by consuming natural resources more efficiently. Our ambition is to catalyze the rapid realization of disruptive environmental gains by creating valuable opportunities for a great many people and companies to use resources more efficiently and to be more profitable. To accomplish this, we target and reduce or eliminate consumption inefficiencies by >> developing and implementing incremental advances in technologies and business practices >> that leverage established infrastructure and distribution channels to enable increased and sustainable profits >> by decreasing the consumption of natural resources and the generation of wastes and emissions. These incremental shifts forward in both economic and environmental gain - these green shifts - are at the core of our philosophy and they are the basis for our primary operations: GS CleanTech, GS AgriFuels, GS Energy, GS Carbon and GS EnviroServices (see Item I, Description of Business - Operations, below). 30 OPERATIONS AND BUSINESS STRATEGY Our technology and business development efforts to date have been focused on the following activities: (a) technology acquisition, development and commercialization (GS CleanTech), (b) provision of engineering (GS CleanTech) and manufacturing (GS Energy) services incidental to our technologies, (c) the formation and capitalization of a commercialization entity to implement a go-to-market strategy for the first wave of our technologies (GS AgriFuels), and (d) clean technology research and development. In addition, we provide manufacturing (GS Energy) and diversified environmental engineering management services (GS EnviroServices) to third party clients. These activities constituted the majority of our sales for 2006 but are expected to decreases as a percentage of our overall sales as we continue to implement our technology commercialization plans. Technology Acquisition We acquired and currently own or otherwise hold certain rights to a number of important clean technologies through our various platform operating companies, some of which are listed here:
Technology Status IP Rights Owned By --------------------------------------------------------------------------------------------------------------------- Corn Oil Extraction Patent-Pending Owned GS CleanTech Flash Desiccation/Homogenization Patented Exclusive License GS CleanTech Carbon Dioxide Bioreactor Patented/Patent-Pending Exclusive License/Owned GS CleanTech Integrated Multi-Fuels Production Patent-Pending Owned GS CleanTech Biodiesel Production Patent-Pending Owned GS AgriFuels Biomass Gasification Patent-Pending Limited Exclusive Rights(*) GS AgriFuels Ultrasonic Reformation Patent-Pending Owned GS Carbon Carbon Nanostructure Composites Patent-Pending Owned GS Carbon (*) GS AgriFuels holds the exclusive distribution rights to this technology in the North American Ethanol Production Industry. This technology was developed by GS AgriFuels' portfolio company, ZeroPoint Clean Tech, Inc.
Technology Development and Early-Stage Commercialization Our technology development and early-stage commercialization activities during 2006 were implemented by GS CleanTech and focused on implementing a go-to-market strategy for the commercialization of GS CleanTech's corn oil extraction technology ("COES"). These activities included: >> securing agreements for the sale of early adopter installations of COES at targeted qualified clients; >> the installation of COES at these early adopter clients; >> the roll-out of GS CleanTech's current technology usage program where GS CleanTech's clients can use our technology for no up-front cost; >> the execution of term sheets and letters of intent with GS CleanTech's prospective usage clients to validate the offering and to facilitate early-stage financing for GS CleanTech's commercialization program; >> the conversion of GS CleanTech's letters of intent into executed agreements for deployments of COES under our usage program; and >> the installation of our technology at GS CleanTech's clients' facilities under the usage program. During 2006, GS CleanTech commissioned operations of its first two early-adopter COES installations at two dry mill ethanol production facilities where the technology currently extracts corn oil at the combined rate of more than 2.5 million gallons per year. In total, GS CleanTech's current executed contracts in its usage program will produce more than 25 million gallons of corn oil for conversion into biodiesel fuel as the relevant extraction systems are fully installed during 2007 and 2008. GS CleanTech is currently deploying several of these extraction systems and expects to commission the first of these new systems in April 2007. GS CleanTech is currently servicing an extensive sales pipeline for additional deployments of the COES technology and Management expects that GS CleanTech will execute agreements corresponding to significant additional volumes of corn oil during 2007. During 2006, GS AgriFuels completed the acquisition of biodiesel technology provider, NextGen Fuel, Inc., which had developed and began commercialization of a proprietary, patent-pending continuous flow biodiesel system. The NextGen systems, which include both direct and transesterification, are skid mounted and can produce five (5) million or ten (10) million gallons per year. NextGen is currently servicing a substantial sales pipeline for the NextGen technology and has executed contracts to sell NextGen's biodiesel production systems to a number of clients. 31 In August 2006, GS AgriFuels made a strategic investment in the development-stage company ZeroPoint Clean Tech, Inc., which is developing and commercializing a range of technologies related to biomass gasification, fuel reforming, gas-to-liquid, and water evaporation. In conjunction with the investment in ZeroPoint, GS AgriFuels entered into a reciprocal sales and marketing agreement whereby ZeroPoint acquired the non-exclusive rights to market and sell certain of our technologies in international markets, and GS AgriFuels acquired the exclusive use and marketing rights for ZeroPoint's patent pending gasification, fuel reforming and gas-to-liquids technology in the North American ethanol industry. ZeroPoint is currently developing a commercial-scale pilot facility to demonstrate the capabilities of this technology. GS CleanTech's focus for much of 2007 will remain resolved on delivering its technologies to the ethanol production industry. As GS CleanTech achieves budgeted milestones in our ethanol program we intend to shift our focus towards the extraction, beneficiation and refining of other co-products and waste products in other agriproducts based industries, the municipal waste processing industry and the power generation industry. Technology-Driven Engineering and Manufacturing Services GS CleanTech's management and staff possesses significant process engineering expertise across multiple engineering and process technology disciplines, including civil, chemical, mechanical, environmental and electrical engineering, vegetable oil processing and refining, waste processing, power generation and production of various agriproducts. GS CleanTech's business model is based on the provision of process engineering, equipment sales and plant development services incidental to GS CleanTech's technology transfer activities. GS CleanTech relies on GS Energy's specialty metal manufacturing capabilities relative to these efforts. GS Energy's manufacturing group, Warnecke Design Services, Inc., is run by a team of seasoned custom equipment manufacturers and engineers. Warnecke provides custom equipment manufacturing services for its clients including machine design, machine building, control system electronics and programming, and maintenance support services. Warnecke currently services clients in the biofuels, automotive, electronics, lighting, plastics, rubber and food products industries In addition to providing GreenShift's various platform companies with advanced prototyping and pilot equipment manufacturing services, Warnecke fabricates GS CleanTech's COES and other technology deployments (including GS CleanTech's flash desiccation and bioreactor technologies), GS AgriFuels' NextGen biodiesel production systems, and has provided significant services to ZeroPoint in the fabrication and commissioning of its current pilot facility. Management expects that Warnecke will provide all of GS CleanTech's and GS AgriFuels' fabrication needs for the foreseeable future. GS AgriFuels has initiated development for and intends to build a commercial-scale NextGen biodiesel production facility at a site proximate to Warnecke's manufacturing operations. When complete, this facility will be used to showcase the NextGen technology for prospective third-party clients and to generate revenues from the production and sale of biodiesel. Formation of Commercialization Platform and Implementation of Go-to-Market Strategy We believe that the impact of our technologies becomes more significant as we move through early stage commercialization and into maturity with each technology, and that GreenShift can maximize the value of several of the above technologies by facilitating its direct use of those technologies to produce clean fuels and energy from biomass. In an effort to accomplish this, GreenShift formed GS AgriFuels during 2006 specifically to implement a coordinated go-to-market strategy to achieve this. GS AgriFuels' development plans are based on the use of several classes of technology, including innovative extraction, desiccation, homogenization, process intensification, biodiesel production, biomass gasification, reformation, and catalytic technologies to: >> Sell equipment at high margins into selected market segments; >> Acquire long term rights to high-quality sources of biomass with low-risk and at low-cost; >> Produce biomass-derived energy and fuels out of non-traditional feedstocks such as corn oil and cellulosic biomass; >> Acquire production assets in mature agribusinesses - such as traditional corn ethanol, oilseed crushing and other agriproducts processing facilities - and synergistically upgrade these locations into integrated multi-feedstock, multi-fuel ("IMF") biorefineries. We believe that combined applications of these technologies may have wide and disruptive application potential throughout the landscape of the agriproducts sector. Our technologies are robust, scalable, energy efficient, modular 32 and, importantly, capable of rapid and cost-effective "plug-and-play" integration into the existing agribusiness infrastructure. These advantages converge to potentially enable the refining of many different alternative feedstocks into clean and renewable energy and a number of different clean fuels cost-effectively at small scales. This provides us with, what we believe to be, highly valuable opportunities to reduce commodity risk by creating opportunities to manage production assets in response to fluctuating commodity market conditions. No single conventional or new technology or group of technologies that we are aware of can currently achieve this. GS AgriFuels' production plans are based on leveraging technology and/or geography to establish a feedstock procurement advantage. GS AgriFuels intends to accomplish this by: (i) co-locating agrifuels production assets directly at or in proximity to its sources of biomass feedstock, such as an animal processing facility or an oil seed crushing facility; and/or (ii) by taking advantage of technologies that enable GS AgriFuels to obtain and process feedstocks that other producers cannot process, such as the corn ethanol co-product known as distillers dried grain. GS AgriFuels has completed preliminary engineering and permitting activities for biodiesel production sites in New York, Tennessee, and Ohio, and GS AgriFuels is currently in various stages of negotiations to deploy a number of majority-owned corn oil biodiesel production facilities on-site at several existing ethanol facilities in the Mid-Western U.S. Most of GS AgriFuels' planned facilities will have an initial nameplate capacity of five (5) or ten (10) million gallons of biodiesel production and potentially five (5) million gallons of ethanol, methanol and/or synthetic diesel production derived from biomass gasification and gas-to-liquid technologies. GS AgriFuels long-term production plans are to build a large number of smaller, strategically placed or "distributed" production facilities at or in proximity to the plants' source of feedstocks such as GS AgriFuels recently acquired Sustainable Systems, Inc., subsidiary. Sustainable is a developer of oilseed crush facilities with one plant currently in operation in Culbertson, Montana. Sustainable is currently expanding its oilseed extraction and vegetable oil refining capability from 300 tons per day to 600 tons per day at this plant and GS AgriFuels intends to layer in biodiesel production and other biomass-derived energy and fuels production capability on-site at Sustainable in conjunction with the completion of this expansion. Clean Technology Research and Development In addition to the above, we were also involved in technology research and development activities during 2006. These were predominantly focused on developing our early-stage pilot carbon dioxide bioreactor (GS CleanTech) and ultrasonic reformation (GS Carbon) technologies. GS CleanTech's patented bioreactor technology was developed at Ohio University's Ohio Coal Research Center with funding from the U.S. Department of Energy. The bioreactor uses algae to consume exhaust carbon dioxide emissions, sunlight and water to grow new algae, giving off pure oxygen and water vapor in the process. If properly cultivated, the algae doubles in mass daily and are harvested for conversion into clean fuels as they grow to maturity. The resultant algal biomass can either be routed for biodiesel production (for high fat strains) or gasification (for either high starch or high cellulose strains). GS CleanTech is currently developing its first commercial scale pilot bioreactor system and is ultimately seeking to cost effectively commercialize its use at ethanol facilities to further enhance corn to clean fuel conversion efficiencies. GS Carbon's patent-pending ultrasonic reformation process uses water, carbon-based materials and high intensity ultrasonic energies to synthesize clean burning fuels and other materials. Testing and development of this technology at GS Carbon's testing laboratory initiated after acquiring the technology during 2006. In 2007, we anticipate extensive further testing as well as an analysis of the economic viability of the technology. Our plans for the commercialization of both of these technologies, as well as others in our portfolio, are very similar to how we have implemented the commercialization process for the COES technology and the go-to-market strategy for GS AgriFuels. In addition, a key aspect of our go-to-market strategy for these technologies is to forge strategic partnerships with qualified companies. Environmental Engineering and Management Services GS EnviroServices is a diversified environmental services company that provides industrial and hazardous waste management services, environmental engineering 33 services, and site remediation services. GS EnviroServices' focus is to provide its clients with value-added, environmentally conscious and cost-effective hazardous waste management services based on its efficient management of wastes. GS EnviroServices' growth strategy is to expand its geographic base, both through increased sales activities and acquisitions, and to add new services in the area of technology implementation utilizing unique technologies developed by affiliated GreenShift companies. We believe that our technologies will enable GS EnviroServices to differentiate itself from standard environmental service providers. GS EnviroServices' ambition is to provide its services across the full range of needs of its industrial and government clients with particular emphasis on technology-driven energy and water resource conservation. Minority Investments We recently acquired stakes in ZeroPoint Clean Tech, Inc. (10%; owned by GS AgriFuels), Sterling Planet, Inc. (10%; owned by GS Carbon), TerraPass, Inc. (10%; owned by GS Carbon), General Hydrogen Corporation (3%; owned by GS CleanTech), Ovation Products Corporation (12%; owned by GS CleanTech) and Air Cycle Corporation (30%; owned by GS Carbon). ZeroPoint Clean Tech, Inc. is commercializing patent pending and proprietary gasification, gas to liquids and fuel reforming technology that ZeroPoint management believes is the most effective technology available for use in gasifying a wider range of various biomass materials to create carbon-neutral energy (gas, electricity, ethanol, diesel substitutes and hydrogen), clean water and other valuable products. ZeroPoint's technology is well suited for distributed deployments, making it highly applicable to the localized nature of many global sources of biomass feedstock. Sterling Planet, Inc. has established a strong reputation as the premier market maker for renewable energy certificates. Sterling has sold over 4 billion kilowatt hours of renewable energy certificates since its inception. The energy underlying those certificates represents enough energy to power 350,000 homes for a full year and offset 2.6 million tons of carbon dioxide. Sterling Planet currently services an impressive array of clients including Alcoa, The Coca-Cola Company, DuPont, Delphi Corporation, Duke University, University of Utah, Nike, Pitney Bowes, U.S. Environmental Protection Agency, the U.S. General Services Administration, the Homeland Security Department, Western Area Power Administration, New York State Energy Research and Development Authority (NYSERDA), the U.S. Army, Staples, Whirlpool Corporation, the World Resources Institute and over 150 other companies. GS Carbon holds a 10% stake in Sterling. By issuing a "TerraPass" to its members, TerraPass utilizes its members' voluntary contributions to promote global energy efficiency and greenhouse gas reduction through targeted projects. It is through these clean energy projects that TerraPass counterbalances pollution from its members' vehicles. TerraPass recently partnered with Ford Motor Company in a program called "Greener Miles," which allows consumers to calculate the amount of carbon dioxide produced by their car in one year of driving, and then to purchase a TerraPass linked to the cost of producing an amount of clean energy equivalent to the carbon dioxide produced. Individual purchases range from $29.95 to $79.95 annually, depending on the type of vehicle, amount of carbon dioxide emitted and miles traveled, and the funds are used to invest in U.S. based renewable energy projects. GS Carbon holds a 10% stake in TerraPass. General Hydrogen Corporation is a leading developer of hydrogen fuel cell-based power systems for electric forklifts, industrial vehicles and other off-road equipment. General Hydrogen has right-sized fuel cell technology to a scale that enables their commercially viable today. Their business model is based on replacing lead-acid batteries in centralized industrial applications with high-performance power packs that contain a Ballard fuel cell. They capitalize effectively on existing plant infrastructure while creating a realizable economic return on an impressively short payback period for their clients. Ovation Products Corporation is a development-stage company with patented and proprietary technologies involving new implementations of vapor compression distillation. Ovation has invested over $9 million developing technology that offers dramatic price and performance advantages over competing clean water technologies. Ovation is finalizing the development of its initial product, the Clean Water Appliance - a fire-hydrant sized appliance that can generate 25 gallons of pure water per hour from a variety of dirty water input sources at a cost of approximately $0.004 per gallon, or about 1.2% of the cost of traditional home distillation methods. GS Carbon holds a 30% stake in Air Cycle, a lamp, ballast, battery and e-waste recycling company. Air Cycle's Bulb Eater(R) product line crushes spent fluorescent lamps into small fragments and compacts them into 55-gallon containers which are then shipped for recycling. Air Cycle's EasyPak(TM) Recycling Program is offered as an alternative for customers who generate spent lamps, batteries, and/or ballasts and cannot meet Air Cycle's quantity minimums for bulk pick-ups. Small shipments are instead shipped through pre-paid FedEx transportation services. 34 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Risk Factors That May Affect Future Results You should carefully consider the risks described below before buying our common stock. If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment. I. Risks Attendant to our Business We Have Lost Money Historically Which Means That We May Not Be Able to Maintain Profitability. We have historically lost money and future losses may occur. Accordingly, we may experience liquidity and cash flow problems if we are not able to improve our operating performance or raise additional capital as needed and on acceptable terms. Most of our Subsidiaries are Implementing New Business Plans, Which Make the Results of their Business Uncertain. Some of our subsidiaries, such as GS AgriFuels or General Ultrasonics, are development stage enterprises that are only now implementing the first stages of their business plans. Others among our subsidiaries, such as GS CleanTech or GS Energy, have been in business for several years, but have recently substantially revised their business plans. Most of our subsidiaries will be engaged in businesses in the coming year that are substantially different from their business operations in prior years. This revolution in the focus of our operations means that the success of our several enterprises will be speculative. Our subsidiaries will face the uncertainty that accompanies any new business venture. If we have not planned adequately for contingencies, one or more of our subsidiaries could fail, which would have a negative effect on our overall financial results. We Have Limited Experience Running Our Businesses Which May Hamper Our Ability to Make Effective Management Decisions. 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. Further, we intend to pursue additional acquisitions to further the development of our clean technology, agrifuels, and environmental services businesses. Most of our senior executives are recently hired and consequently, internal communication and business-decision making processes are evolving. We may react too slowly or incorrectly to trends that may emerge and affect our business. Our future success depends on the ability of the senior executives to establish an effective organizational structure and to make effective management decisions despite their limited experience. Some of Our Businesses Are Based on Unproven Revenue Generation Models Which Means That We May Not Achieve Anticipated Revenues Our revenue models, especially for our clean technology and agrifuels businesses, are new and evolving. Our ability to generate revenue depends, among other things, on our ability to provide quality products, effectively install equipment, and secure suppliers and customers. Because some of our businesses are either newly formed or acquired, based on emerging opportunities and technologies, we have limited experience with our revenue models. There can be no assurance that the projects will be successfully completed or that the completed projects will provide the anticipated revenues. Accordingly, there can be no assurance that our business revenue models will be successful or that we can sustain revenue growth or maintain profitability. The Market for Alternative Energy Sources is Undetermined, and May Not Be Adequate for Sustain Prices at a Profitable Level. Most of our subsidiaries are involved in the development or production of alternative energy, or are providing services to companies involved in the production of alternative. Their success will depend on the level of market acceptance of alternative energy sources. The marketing of alternative energy sources on a national scale is a phenomenon new to this decade. The portion of U.S. energy represented by alternative energy sources is still quite small. It is not possible to predict with assurance how large the market for alternative energy sources will become. If it has not developed to a 35 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION sufficient breadth when our subsidiaries are ready to market their products and services, the price at which alternative energy can be sold will be limited, which may make it impossible for our or more of our subsidiaries to operate profitably. The Fiscal Efficiencies of Highly Capitalized Competitors in the Alternative Energy Field Could Defeat the Efforts of Our Subsidiaries to Capture a Viable Market Share. The business of producing alternative energy is a capital-intense business, requiring substantial capital resources. Relative to many of the participants in this industry, our capital resources are miniscule. The costs that our subsidiaries 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 alternative energy sources, our dependence on expensive capital sources may prevent us from lowering our prices to meet the competition. This situation could cause one or more of our subsidiaries to be unable to compete effectively. The Business Plans of most of our Subsidiaries Will Fail if They are Unable to Obtain Substantial Additional Capital on Acceptable Terms. Most of our subsidiaries have developed business plans that will require significant amounts of capital for development of research and production facilities and/or marketing. The availability of that capital on acceptable terms will depend on many factors, such the flux of the U.S. and global economies, global energy prices, the success of investors in other alternative energy ventures, and the success of our other enterprises. If GreenShift and/or our subsidiaries are not able to obtain the capital necessary to implement their business plans, or cannot obtain capital on terms that make the business plans viable, the under-funded subsidiaries will fail. We may be unable to employ and retain the qualified personnel that will be necessary for our success. The alternative fuels industry is growing rapidly. As a result, the number of individuals with experience in the industry 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. II. Risks Attendant to our Corporation 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 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 recently guaranteed $19 million in debt incurred by our subsidiary, GS AgriFuels Corporation. In order for our subsidiaries to obtain the capital that will be required for their growth, 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 holdings in our successful subsidiaries. Such a result could eliminate the value of our shareholders' investments. 36 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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 of each of its 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. Viridis Capital LLC has the ability to determine all matters submitted for stockholder approval, and its interests may differ from other stockholders. Viridis Capital, LLC is owned by Kevin Kreisler, our chief executive officer. Viridis Capital owns capital stock in GreenShift that gives it the power to cast 80% of the votes at any meeting of our shareholders. Accordingly, Viridis can determine the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, acquisitions, consolidations and the sale of all or substantially all of our assets. Viridis also has the power to prevent or cause a change in control. The interests of Viridis may differ from the interests of the other stockholders, which could prevent actions from being taken that might be in the best interests of GreenShift. III. Risks Factors Attendant to Ownership of our Common Stock The resale of shares acquired by Cornell Capital Partners from GreenShift may reduce the market price of GreenShift' shares. Cornell Capital Partners 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, Cornell Capital Partners could convert its debentures into over 50% of our outstanding common stock. It is possible that resale of shares by Cornell Capital Partners will significantly reduce the market price for GreenShift common stock. Existing shareholders may experience significant dilution from our issuance of shares to Cornell Capital Partners. The issuance of shares on conversion of the convertible debentures held by Cornell Capital Partners 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 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. 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: o price and volume fluctuations in the overall stock market from time to time; o significant volatility in the market price and trading volume of securities traded on the OTC Bulletin Board companies; o 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. 37 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THE THREE MONTHS ENDED MARCH 31, 2007 VERSUS THE THREE MONTHS ENDED MARCH 31, 2006 Revenues
Corporate CleanTech (1) CleanFuels CleanEnergy (2) Other Total ----------------------------------------------------------------------------- 2007 Revenue from external customers -- 3,263,206(3) 418,138 358,597 -- 4,039,941 Inter-segment revenues ........ 27,972 -- 1,446,568- 1,474,540 Total ......................... -- 3,291,178 418,138 1,805,165 -- 5,514,481 ------------------------------- ========= ========= ========= ========= ========== ========= 2006 Total Revenue ................. -- 3,174,925 -- 1,003,743 -- 4,178,668 (1) The amounts include of GS CleanTech Corporation, GreenWorks Engineering Corporation and GS Carbon Corporation. (2) The amounts include of GS Energy Corporation and TDS (Telemedicine), Inc. (3) Amount includes revenue earned by GS Energy Corporation through sales to GS Agrifuels Corporation and GS Cleantech Corporation.
CleanTech GS CleanTech Total revenues were $3.3 million for the three months ended March 31, 2007, an increase of $0.1 million, or 0.4% over 2006 revenues of $3.2 million. Revenues for the transportation and disposal division were $50,000 less in 2007 as compared to the same period in 2006, however the field service division experienced a $135,000 increase in revenues. Revenues for our process engineering division remains consistent with the prior year. GS Carbon Total revenues were $0 for the three months ended March 31, 2007. CleanFuels Total revenues related to the oilseed crushing facility were $418,138 for the three months ended March 31, 2007. CleanEnergy Total revenues were $1,805,165 for the quarter ended March 31, 2007, and $1,003,743 for the quarter ended March 31, 2006. All revenues realized during the quarter ended March 31, 2007 were due to the operating activities of our subsidiary, Warnecke Design Services, Inc. ("WDS"). WDS has traditionally engaged in the engineering and fabrication of manufacturing equipment for large domestic and international manufacturers, and revenues for the quarter ended March 31, 200 related primarily to orders from that customer base. WDS is currently executing a growth plan targeted at designing and fabricating processing equipment for the biofuels industry. This plan includes engineering and fabrication services for both nonaffiliated companies and GS AgriFuels and its wholly owned subsidiary NextGen Fuels, and GS CleanTech Corporation. Both of these companies are controlled through an 80% or greater ownership by GS Energy's parent company, Greenshift Corporation. Although the company expects increases in revenue from these areas of expansion, there can be no assurance that the growth plan can be successfully implemented. 38 Cost of Revenues Cost of revenues for the three months ended March 31, 2007 were $3.2 million, or 78.5% of revenue compared to $3.3 million, or 78.4% of revenue for the same period in 2006. Costs of revenues from discontinued operations of $0.0 million and $0.6 million for the three months ended March 31, 2007 and March 31, 2006, respectively, were excluded from these figures. The breakdown of Cost of Revenue by each segment is as below: CleanTech GS CleanTech Cost of revenues for the three months ended March 31, 2007 were $2.3 million or 71.2% of revenue, as compared to $2.4 million, or 75.1% of revenue in 2006. The decrease in cost of revenues is primarily attributable to management's efforts to streamline costs and increased utilization of our resources. GS Carbon Total cost of revenues were $0 for the three months ended March 31, 2007. CleanFuels Cost of revenues for the three months ended March 31, 2007 were $456,888. of this amount, $452,463 were related to the oilseed crushing facility, the remaining expenses of $4,425 were related to NextGen. CleanEnergy Cost of revenues for the three months ended March 31, 2007 was $1,666,763 of which $1,288,265 related to inter-company sales and all were related to WDS. Cost of revenues included direct labor costs of $308,328, purchased components and other direct costs of $1,200,125, and indirect labor and manufacturing overhead of $158,310. Cost of revenues for the three months ended March 31, 2006 was $870,750. Operating Expenses Operating expenses for the three months ended March 31, 2007 were $7.6 million, or 187% of revenue compared to $4.4 million, or 106% of revenue for the same period in 2006. Included in the three months ended March 31, 2007 was $4.7million in stock based compensation as compared to $2.6 million for the three months ended March 31, 2006. The increase in operating expenses is due primarily to increases in personnel and other overhead related to the Company's clean technology and renewable fuels segments. Selling, general and administrative expense from discontinued operations of $0.3 million for 2006 was excluded from the above figures. The breakdown of Operating Expenses by each segment is as below: Corporate Selling, general and administrative expenses for the three months ended March 31, 2007 were $883,218 and are related to payroll and general overhead expenses. Share based compensation of $492,696 includes certain common stocks grants to employees. CleanTech GS CleanTech Selling, general and administrative (SG&A) expenses for the three months ended March 31, 2007 were $1.5 million or 45.4% of revenue, as compared to $3.1 million, or 97.9% of revenue in 2006. SG&A expenses for the three months ended March 31, 2007 and 2006 include $88,558 and $2,081,201 of stock based compensation respectively. In addition, during the three months ended March 2006, general and administrative expenses include $146,000 in non-recurring costs associated with management fees due to an affiliate of GS Cleantech. 39 GS Carbon Selling, general and administrative expenses for the period ended March 31, 2007 were $356,929 which amount was primarily attributable to the operating activities of our research and development unit, General Ultransonics Corporation. Share based compensation of $1,810,654 was incurred in conjunction with the issuance of common stock to certain employees. CleanFuels During the three months ended March 31, 2007, GS AgriFuels' operating expenses consisted of $523,384 in selling, general and administrative costs, consisting primarily of legal, consulting and accounting expenses as well as other expenses related to the development of the GS Agrifuel's biofuels initiatives, $1,884,781 in stock-based compensation resulting from the issuance of performance-based options to employees and management of Sustainable Systems in connection with the acquisition of that subsidiary, and amortization of energy technology intangibles of $518,288. CleanEnergy Selling, general and administrative expenses for the three months ended March 31, 2007 and March 31, 2006 were $131,800 and $692,086, respectively. Selling, general and administrative expenses are expected to remain high as a percentage of sales until such time that GS Energy can achieve enough revenue growth and obtain the economies of scale necessary to support these expenses. Interest Expense Interest expense for the three months ended March 31, 2007 was $1.4 million, representing a increase of $1.0 million from $0.4 million for the same period in 2006. The breakdown of Interest Expenses by each segment is as below: CleanTech GS CleanTech Interest expense for the three months ended March 31, 2007 was $329,301, or 10.0% of revenue, as compared to $111,910, or 0.5% of revenue in 2006. For the periods ended March 31, 2007 and 2006, interest expense included $45,075 and $32,977 due to an affiliate of the Company. Net of the interest due to an affiliate, interest expense has increased $205,293 over the periods presented. GS Carbon Interest expenses and financing costs for the period ended March 31, 2007 were $169,015 and were primarily attributable to our existing financing agreements with Candent, Cornell Capital Partners, LLP and Highgate House Funds, Ltd. CleanFuels Interest expenses for the three months period ended March 31, 2007 was $916,491 and was attributable to our existing convertible debenture financing agreements. CleanEnergy Interest expense and financing cost for the three months ended March 31, 2007 and March 31, 2006 was $7,104 and $231,159, respectively. We incurred $231,159 in amortization of financing costs during the three months ended March 31, 2006. These expenses represent the costs incurred in connection with the Highgate and Cornell Debentures and the fees we paid to compensate the parties associated with these financing transactions. The Interest expenses and financing costs decreased significantly due to the fact the Cornell Debentures were converted into common stock and the Highgate Debentures were assumed by GreenShift. Interest expense and financing costs could increase in future periods if the Company obtains new debt or equity financing. 40 Expenses Associated with Derivative Instruments Loss from the change in the fair market value of derivative liabilities was $2.8 million for the three months ended March 31, 2007. Amortization of deferred financing costs and debt discounts was $0.5 million and $1.5 million, respectively. Net Income or Loss Net loss from continuing operations for the three months ended March 31, 2007, was $13.2 million as compared to a loss from continuing operations of $5.3 million from the same period in 2006. Net gain from discontinued operations of $2.5 and $.1 million for three months ended March 31, 2007 and March 31, 2006, respectively, was excluded from the above figures. Net loss of $10.7 million for the three months ended March 31, 2007 was due primarily to increased operating expenses for new business initiatives, adjustments to the fair market value of the derivative liability instruments, interest and amortization charges associated with financing, and issuance of stock based compensation.
Corporate CleanTech (1) CleanFuels CleanEnergy (2) Other Total ----------------------------------------------------------------------------------- Segment loss - 2007 (1,453,128) (5,038,858) (4,053,768) (157,482) -- (10,703,236) Segment loss - 2006 (283,851) (3,864,955) (39,754) (705,154) -- (4,893,714) (1) The amounts include of GS CleanTech Corporation, GreenWorks Engineering Corporation and GS Carbon Corporation. (2) The amounts include of GS Energy Corporation and TDS (Telemedicine), Inc.
CleanTech GS Cleantech The total net loss from operations before provision for tax for the three months ended March 31, 2007, was $547,363 (include $245,000 inter-company transactions) or (16.6%) of revenue, as compared to a loss of $2,321,551, or (73.0) % of revenue in 2006. GS Carbon The net loss for the period ended March 31, 2007was $4,726,303. The net loss incurred was due to the expenses and other factors described above. CleanFuels The net loss for the three months ended March 31, 2006 was $4,053,768. The net loss incurred was due to the expenses and other factors described above. CleanEnergy The net loss for the three months ended March 31, 2007, was $157,482, and our net loss for the three months ended March 31, 2006 was $705,154. The net loss incurred was due to the expenses and other factors described above. 41 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION DERIVATIVE LIABILITIES As of March 31, 2007 we had several convertible debentures due to Cornell Capital. The conversion feature on these debentures is variable based on trailing market prices and therefore contains an embedded derivative. We value the conversion feature at the time of issuance using the Black-Scholes Model and record a note discount and derivative liability for the calculated value. We recognize interest expense for accretion of the note discount over the term of the note. The derivative liability is valued at the end of each reporting period and results in a gain or loss for the change in fair value. Due to the volatile nature of our stock, as well as the stock of our subsidiaries, the change in the derivative liability and the resulting gain or loss is usually material to our results. The principal amount on our convertible debentures due to Cornell Capital was $33.3 million as of March 31, 2007 and the unamortized note discount was $8.2 million. For the quarter ended March 31, 2007, we recognized interest expense for accretion of the debt discount of $1.4 million and a loss for the change in fair value of the derivative of $2.8 million for these debentures. The derivative liability as of March 31, 2007 was $11.4 million for debentures due to Cornell Capital. LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity is cash provided by operating, investing and financing activities. For the three months ended March 31, 2007, net cash used by our operating activities was $.6 million as compared to the net cash used by our operating activities of $2 million for the three months ended March 31, 2006. 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. The Company's capital resources are impacted by changes in accounts receivable as a result of revenue fluctuations, economic trends, and collection activities. At March 31, 2007 the Company had cash of $2.1 million. Cash Flows for the Three Months Ended March 31, 2007 Our operating activities during the first three months of 2007 used $.5 million in cash. At March 31, 2007, Accounts receivable, net of allowance for doubtful accounts, totaled $3.3 million and inventories totaled $5.5 million. Accounts payable and accrued expenses totaled $9 million. For the three months ended March 31, 2007, we used $.05 million for investing activities, and we obtained cash from financing activities of $.7 million. We used these funds to further provide working capital for operations and to invest in our subsidiaries. The Company had a working capital deficit of $32.7 million at March 31, 2007, which includes derivative liabilities of $11.4 million and convertible debentures of $7.2 million, net of discounts. At the present time, GreenShift has no source of committed capital. We are currently investigating the availability of both equity and debt financing necessary to complete the Company's current projects. We do not know at this time if the necessary funds can be obtained nor on what terms they may be available. 42 ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our principal executive officer and principal financial officer participated in and supervised the evaluation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed by us in the reports that we file is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer, to allow timely decisions regarding required disclosure. In connection with that evaluation, the Company's chief executive officer and chief financial officer determined that: o The recently discovered debts of GS Carbon Corporation that are the reason for the restatement in this amended filing were incurred prior to the 2006 acquisition of a controlling interest in GS Carbon by GreenShift Corporation o In connection with the acquisition of control by GreenShift, a complete change in management occurred. No person who had knowledge of those debts remained associated with GS Carbon on March 31, 2007. o As soon as management became aware of the debts, it disclosed its awareness of the debts in the Annual Report on Form 10-KSB for 2006 and commenced an investigation of the debts. In addition the Company reviewed and revised its conclusions regarding its derivative instruments at December 31, 2006 and March 31, 2007 based on subsequent review of the facts and circumstances that existed at December 31, 2006 and March 31, 2007. Based on the foregoing analyses, the Company's chief executive officer and chief financial officer concluded that there was a flaw in the Company's disclosure controls and procedures as of March 31, 2007 to the extent that the books and records of GS Carbon Corporation for the periods prior to the acquisition of control by GreenShift were incomplete and there was no employee remaining from the period prior to the acquisition who could provide information to the chief executive officer and chief financial officer regarding the missing information. Except as set for above, the Company's chief executive officer and chief financial officer determined that, as of the end of the period covered by this report, these controls and procedures are adequate and effective in alerting them in a timely manner to material information relating to the Company required to be included in the Company's periodic SEC filings. CHANGES IN INTERNAL CONTROLS There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934) identified in connection with the evaluation described in the preceding paragraph that occurred during the Company's first fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. 43 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS The following are exhibits filed as part of the Company's Form 10-QSB for the period ended March 31, 2007: Exhibit Number Description 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 Chief 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. 44 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 Chairman of the Board and Chief Executive Officer Date: October 11, 2007 45