-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ChLlcjHsYdeuq/2S7cvZxLFcAv183Xkl0rHklFhex8vhIfAE46u9XbFX4BApFl+W 72lODYoBEbSzKqosWlGM7Q== 0001269127-08-000167.txt : 20081119 0001269127-08-000167.hdr.sgml : 20081119 20081119172410 ACCESSION NUMBER: 0001269127-08-000167 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081119 DATE AS OF CHANGE: 20081119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREENSHIFT CORP CENTRAL INDEX KEY: 0001269127 STANDARD INDUSTRIAL CLASSIFICATION: SANITARY SERVICES [4950] IRS NUMBER: 593764931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1208 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-50469 FILM NUMBER: 081201834 BUSINESS ADDRESS: STREET 1: ONE PENN PLAZA STREET 2: SUITE 1612 CITY: NEW YORK STATE: NY ZIP: 10119 BUSINESS PHONE: 212-994-5374 MAIL ADDRESS: STREET 1: ONE PENN PLAZA STREET 2: SUITE 1612 CITY: NEW YORK STATE: NY ZIP: 10119 FORMER COMPANY: FORMER CONFORMED NAME: GS Cleantech Corp DATE OF NAME CHANGE: 20060719 FORMER COMPANY: FORMER CONFORMED NAME: VERIDIUM CORP DATE OF NAME CHANGE: 20031104 10-Q 1 gersq308.txt GREENSHIFT 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-Q ------------------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008 COMMISSION FILE NO.: 0-50469 GREENSHIFT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 59-3764931 - -------------------------------------------------------------------------------- (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 __ No X. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One) Large accelerated filer Accelerated filer ---- ---- Non-accelerated filer Small reporting company X ---- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No X The number of outstanding shares of common stock as of November 19, 2008 was 89,809,764. GREENSHIFT CORPORATION QUARTERLY REPORT ON FORM 10Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2008 TABLE OF CONTENTS
Page No Part I - Financial Information Item 1 Financial Statements (unaudited) ...................................................................4 Condensed Consolidated Balance Sheet as of September 30, 2008 (unaudited) and December 31, 2007..............................................................................5 Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2008 and 2007 (unaudited).....................................................6 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)...........................................................7 Notes to Condensed Consolidated Financial Statements................................................8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ...........28 Item 3 Quantitative and Qualitative Disclosures about Market Risk.......................................39 Item 4 Controls and Procedures .........................................................................39 Part II - Other Information Item 1 Legal Proceedings ...............................................................................40 Item 1A Risk Factors ......................................................................................40 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds .....................................51 Item 3 Defaults upon Senior Securities .................................................................51 Item 4 Submission of Matters to a Vote of Security Holders..............................................51 Item 5 Other Information ...............................................................................51 Item 6 Exhibits.........................................................................................51 Signatures
2 Basis of Presentation In this Quarterly Report on Form 10-Q, the terms "we," "our," "us," "GreenShift," or the "Company" refer to GreenShift Corporation, and its subsidiaries on a consolidated basis. The term "GreenShift Corporation" refers to GreenShift Corporation on a stand alone basis only, and not its subsidiaries. Market and Industry Data Forecasts This document includes industry data and forecasts that the Company has prepared based, in part, upon data and forecasts obtained from industry publications. Third-party industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. In particular, we have based much of our discussion of the biodiesel and ethanol industries, including government regulation relevant to the industry and forecasted growth in demand, on information published by the National Biodiesel Board, the national trade association for the U.S. biodiesel industry, and the Renewable Fuels Association, the national trade association for the U.S. corn ethanol industry. Because the National Biodiesel Board and Renewable Fuels Association are trade organizations for the U.S. biodiesel and ethanol industries, they may present information in a manner that is more favorable than would be presented by an independent source. Forecasts in particular are subject to a high risk of inaccuracy, especially forecasts projected over long periods of time. Forward Looking Statements We make certain forward-looking statements in this Quarterly Report on Form 10-Q and in the documents that are incorporated herein by reference. These forward-looking statements relate to our outlook or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition. Specifically, forward-looking statements may include statements preceded by, followed by or that include the words "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions. These statements reflect our management's judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause our actual results to differ include: >> the volatility and uncertainty of commodity prices; >> operational disruptions at our facilities; >> the costs and business risks associated with developing new products and entering new markets; >> our ability to locate and integrate future acquisitions; >> our ability to develop our corn oil extraction and biodiesel production facilities; >> the effects of other mergers and consolidations in the biofuels industry and unexpected announcements or developments from others in the biofuels industry; >> the impact of new, emerging and competing technologies on our business; >> the possibility of one or more of the markets in which we compete being impacted by political, legal and regulatory changes or other external factors over which they have no control; >> changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices; >> our reliance on key management personnel; >> limitations and restrictions contained in the instruments and agreements governing our indebtedness; >> our ability to raise additional capital and secure additional financing; >> our ability to implement additional financial and management controls, reporting systems and procedures and comply with Section 404 of the Sarbanes-Oxley Act, as amended; and >> other risks referenced from time to time in our filings with the SEC and those factors listed in this Form 10Q under Item 1A, Risks Factors, beginning on page 39. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-Q, or in the case of a document incorporated by reference, as of the date of that document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. 3 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS (UNAUDITED) 4 GREENSHIFT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
9/30/2008 12/31/2007 ------------------------------- ASSETS Current assets: Cash ........................................................................ $ 541,183 $ 486,993 Restricted cash ............................................................. 49,492 425,623 Accounts receivable, net of allowance of doubtful accounts of $47,011 ....... 705,200 1,049,671 Inventories ................................................................. 2,314,498 5,017,233 Cost and earnings in excess of billings ..................................... 1,832,395 140,592 Project development costs ................................................... 372,892 281,991 Prepaid expenses and other assets ........................................... 158,777 483,507 ------------- ------------- Total current assets ...................................................... 5,974,437 7,885,610 ------------- ------------- Other Assets: Property and equipment, net ................................................. 23,531,239 4,105,348 Deposits .................................................................... 275,134 12,534 Restricted cash, long term .................................................. 254,352 -- Construction in progress .................................................... 10,792,901 4,844,913 Intangible assets, net ...................................................... 10,725,578 12,286,883 Deferred financing costs, net ............................................... 1,799,281 1,444,701 Long term investments ....................................................... 2,501,324 4,186,657 Excess purchase price of net assets acquired ................................ 6,516,992 -- Assets of discontinued operations, non-current .............................. 7,500 9,207,002 Goodwill .................................................................... 8,756,559 8,364,457 ------------- ------------- Total other assets ........................................................ 65,160,860 44,452,495 ------------- ------------- TOTAL ASSETS ................................................................... $ 71,135,297 $ 52,338,105 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): Current liabilities: Line of credit .............................................................. $ 10,834,235 $ 1,833,192 Accounts payable and accrued expenses ....................................... 13,851,985 8,703,067 Accrued interest payable .................................................... 5,376,465 3,887,662 Accrued interest payable - related party .................................... 83,332 196,832 Billings in excess of earnings .............................................. 335,136 1,222,807 Deferred tax liability ...................................................... -- 59,630 Deferred revenue, current portion ........................................... 45,173 1,582,500 Income tax payable .......................................................... 45,000 45,000 Current portion of long term debt ........................................... 10,049,390 10,541,390 Liability for derivative instruments ........................................ -- 6,704,831 Related party debt .......................................................... 1,572,068 5,335,351 Current portion of convertible debentures ................................... 18,303,649 5,292,072 Current portion of convertible notes ........................................ 778,193 -- Other current liabilities ................................................... 636,435 -- Liabilities of discontinued operations, current ............................. 363,228 4,221,059 ------------- ------------- Total current liabilities ................................................. 62,274,289 49,625,393 ------------- ------------- Long term debt, net of current .............................................. 9,687,723 2,437,195 Convertible notes, net of current ........................................... 956,386 -- Asset retirement obligation ................................................. 184,195 -- Deferred revenue, net of current portion .................................... 142,437 -- Mandatorily redeemable preferred equity ..................................... 9,000,000 -- Convertible debentures, net of current ...................................... 15,086,810 28,224,877 ------------- ------------- Total long term liabilities ............................................... 35,057,551 30,662,072 Total liabilities .............................................................. 97,331,840 80,287,465 ------------- ------------- Minority interest .............................................................. 1,127,935 1,968,762 ------------- ------------- Stockholders' deficit Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized: Series A: 0 and 1,254,244 shares issued and outstanding, respectively ..... -- 1,254 Series B: 2,512,037 and 151,250 shares issued and outstanding, respectively 2,512 151 Series C: 0 shares issued and outstanding ................................. -- -- Series D: 800,000 and 800,000 shares issued and outstanding, respectively 800 800 Series E : 20,000 and 0 shares issued and outstanding, respectively ..... 20 -- Common stock, $0.001 par value, 500,000,000 authorized; 85,891,214 and 30,693,083, shares issued and outstanding, respectively .... 85,891 30,693 Additional paid-in capital .................................................. 84,492,423 63,512,970 Performance based compensation .............................................. (5,579,873) -- Accumulated deficit ......................................................... (106,326,250) (93,463,990) ------------- ------------- Total stockholders' equity (deficit) ...................................... (27,324,478) (29,918,122) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 71,135,297 $ 52,338,105 ============= ============= The notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
5 GREENSHIFT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)
Three Months Ended Nine Months Ended 9/30/08 9/30/07 9/30/08 9/30/07 ----------------------------------------------------------- Revenue .................................................. $ 6,088,754 $ 10,815,623 $ 24,126,662 $ 13,946,236 Cost of revenues ......................................... 6,347,635 9,140,180 19,194,414 11,739,467 ------------ ------------ ------------ ------------ Gross profit ........................................... (258,881) 1,675,443 4,932,248 2,206,769 ------------ ------------ ------------ ------------ Operating expenses: General and administrative expenses ................... 1,917,500 793,715 4,812,733 3,667,954 Selling expenses .................................... 98,247 -- 160,788 -- Research and development .............................. (13,476) 1,467 18,732 1,467 Amortization of intangibles ........................... 525,000 523,399 1,575,000 1,575,000 Stock based compensation .............................. 33,176 226,593 370,009 2,314,655 ------------ ------------ ------------ ------------ Total operating expenses ............................ 2,560,448 1,545,174 6,937,261 7,559,076 ------------ ------------ ------------ ------------ Income (loss) from operations ............................ (2,819,329) 130,269 (2,005,013) (5,352,307) ------------ ------------ ------------ ------------ Other income (expense): Change in fair value of derivative instruments ........ -- 526,389 319,829 3,405,607 Loss on disposal and impairment of investments ........ (685,333) (23,373) (3,425,068) (388,150) Amortization of debt discount & deferred financing .... (1,042,257) (650,828) (3,157,312) (3,564,105) Grant revenue ......................................... 107,417 127,303 107,417 515,242 Other income (expense) ................................ (10,674) 34,515 45,076 116,910 Gain on sale of equipment ............................. 164,382 -- 164,382 -- Interest expense - affiliate .......................... (35,871) (599,643) (91,547) (873,625) Interest expense ...................................... (1,831,224) (981,682) (4,820,702) (3,040,310) ------------ ------------ ------------ ------------ Total other income (expense), net ................... (3,333,560) (1,567,319) (10,857,925) (3,828,431) ------------ ------------ ------------ ------------ Loss before minority interest and income taxes ........... (6,152,889) (1,437,050) (12,862,938) (9,180,738) Minority interest in net loss of consolidated subsidiaries 2,489 8,908 8,908 8,908 ------------ ------------ ------------ ------------ Loss before provision for income taxes ................... (6,150,399) (1,428,142) (12,854,030) (9,171,830) (Provision for)/benefit from income taxes ................ (8,229) (254,410) (8,229) (254,410) ------------ ------------ ------------ ------------ Loss from continuing operations .......................... (6,158,628) (1,682,552) (12,862,259) (9,426,240) ------------ ------------ ------------ ------------ Income from discontinued operations ...................... -- 120,772 -- 2,781,869 ------------ ------------ ------------ ------------ Net loss ................................................. (6,158,628) (1,561,780) (12,862,259) (6,644,371) ------------ ------------ ------------ ------------ Preferred dividends ...................................... -- -- -- (151,875) ------------ ------------ ------------ ------------ Net loss attributable to common shareholders ............. $ (6,158,628) $(1,561,780) $(12,862,259) $ (6,796,246) ============ ============ ============ ============ Weighted average common shares outstanding Basic and diluted 84,870,755 5,470,350 67,982,782 9,289,850 Earnings (loss) per share Loss from continuing operations ........................ $ (0.07) $ (0.01) $ (0.19) $ (1.01) Income (loss) from discontinued operations ............... -- -- -- 0.30 ------------ ------------ ------------ ------------ Net loss per share - basic and diluted ................... $ (0.07) $ (0.01) $ (0.19) $ (0.73) ============ ============ ============ ============ The notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
6 GREENSHIFT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007 (UNAUDITED)
Nine Months Ended Nine Months Ended September 30, 2008 September 30, 2007 ------------------------------------ CASH FLOW FROM OPERATING ACTIVITIES Net loss from continuing operations ......................... $(12,862,259) $ (9,426,240) Net income from discontinued operations ..................... -- 2,781,869 Adjustments to reconcile net loss to net cash provided by (used in) used in operating activities Depreciation and amortization ............................... 855,378 (44,857) Amortization of intangibles ................................. 1,561,305 1,575,000 Amortization of debt discount and deferred financing costs .. 2,791,256 3,564,105 Change in fair value of derivatives ......................... (319,829) (3,405,607) Stock based compensation .................................... 370,009 2,314,655 Beneficial conversion feature on stock ...................... -- 151,875 Gain on sale of discontinued operations ..................... -- (2,494,946) Loss on disposal of investments ............................. 3,425,068 388,150 Income from discontinued operations ......................... -- (289,992) Accretion of asset retirement obligation .................... -- -- Change in minority interest ................................. (20,000) (8,908) Change in assets and liabilities, net of acquisitions Accounts receivable ...................................... 731,947 (79,636) Restricted cash .......................................... 121,779 -- Prepaid expenses ......................................... 871,230 299,769 Deposits ................................................. (262,600) (116,475) Inventory ................................................ 3,938,502 3,698,349 Costs in excess of earnings .............................. (1,691,851) (1,040,307) Deferred financing fees .................................. (99,830) (84,252) Accrued interest ......................................... 3,383,958 2,140,681 Accrued interest - related party ......................... 83,332 417,773 Billings in excess of cost ............................... (887,671) 338,635 Accounts payable and accrued expenses .................... 3,091,326 718,865 Other current liabilities ................................ 136,435 -- Deferred income taxes .................................... (59,630) -- Deferred revenue ......................................... (1,037,327) (844,526) Assets and liabilities of discontinued operations ........ -- (311,192) ------------ ------------ Net cash provided by (used in) operating activities ......... 4,120,528 90,914 ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES Cash paid for acquisition ................................... (80,000) -- Cash acquired from acquisition .............................. -- 250,000 Proceeds from the sale of long term investment ........... 1,000,000 -- Construction in progress .................................... (4,862,842) (131,930) Investment in unconsolidated subsidiaries ................... -- 1,685,333 Project development costs ................................... (90,901) (58,654) Additions to and acquisition of property, plant and equipment (6,346,132) (3,857,484) ------------ ------------ Net cash provided by (used in) investing activities ......... (10,379,875) (2,112,735) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Repayment of line of credit ................................. (1,636,765) -- Proceeds (repayment) of convertible debentures .............. 2,484,579 (1,673,603) Repayment of note payable - affiliate ....................... -- 783,576 Issuance of note payable - affiliate ........................ -- 130,000 Issuance of short term borrowings - affiliate ............... -- 1,820,905 Repayment of short term borrowings - affiliate .............. (1,530,849) (1,069,061) Issuance of short term borrowings ........................... -- 5,708,250 Repayment of short term borrowings .......................... -- (4,939,947) Loan due to an affiliate .................................... -- (360,400) Proceeds from line of credit ................................ 9,987,808 -- Loans to related parties ................................. (3,681) -- Cash paid to minority shareholders ............................. (820,827) -- Proceeds from long term debt ................................ 713,582 -- Repayment of long term debt ................................. (2,880,310) -- Repayment of convertible debentures ......................... -- -- ------------ ------------ Net cash provided by (used in) financing activities ......... 6,313,537 1,120,521 ------------ ------------ Net increase (decrease) in cash ............................. $ 54,190 $ (901,299) Cash at beginning of period ................................. 486,993 1,638,600 ------------ ------------ Cash at end of period ....................................... $ 541,183 $ 737,300 ============ ============ The notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
7 GREENSHIFT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1 BASIS OF PRESENTATION The consolidated interim financial statements included herein have been prepared by GreenShift Corporation ("we," "our," "us," "GreenShift," or the "Company"), pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments which, except as described elsewhere herein, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in connection with the financial statements included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007. Effective January 1, 2008, we sold the majority of our interest in GS EnviroServices, Inc. (see Note 7, Discontinued Operations, below). For comparative purposes, the financial results of this business have been deconsolidated from our consolidated financial results for the nine months ended September 30, 2007. The balance sheet has been reclassified to reflect GS EnviroServices as discontinued. 2 NATURE OF OPERATIONS GreenShift Corporation ("we," "our," "us," "GreenShift," or the "Company") develops and commercializes clean technologies that facilitate the efficient use of natural resources. We do this today by developing and integrating new technologies into existing agricultural production facilities, by selling equipment and services based on those technologies, and by using those technologies to directly produce and sell biomass-derived oils and fuels. Our strategy is to use our proprietary extraction and production technologies to become a leading producer of biofuels, and to do so at enhanced cost and risk profiles by extracting and refining raw materials that other producers cannot access or process. We currently own and operate six production facilities - four corn oil extraction facilities based on our patented and patent-pending corn oil extraction technologies, one biodiesel production facility based on our patent-pending biodiesel production technologies, and one vegetable oilseed crushing facility based on conventional process technology. Our corn oil extraction facilities are located at existing corn ethanol production facilities, where we extract corn oil from an ethanol co-product called distillers grain. We install our extraction facility, at our expense, at participating host facilities in return for the long-term right (10 years or more) to purchase the extracted corn oil for about 50% of the spot price of diesel fuel. This arrangement benefits both the host and GreenShift. The host benefits because the contract price we pay substantially exceeds the market price for distillers grain. GreenShift benefits because the contract price is substantially lower than the cost of comparable feedstocks for biodiesel production and because indexing our feedstock costs to our offtake markets allows us to hedge our biodiesel production margins. We believe that our ability to obtain large quantities of low cost feedstocks (i.e., raw materials for biodiesel production), at prices indexed to the diesel markets in which our biodiesel end-product will compete, and the fact that we have the right to do so for over a decade, enables us to finance, build and operate facilities that will produce biodiesel at enhanced cost and risk profiles as compared to competing producers. We are currently operating and building facilities that correspond to 20 million gallons per year of corn oil extraction and 10 million gallons per year of biodiesel production capacity, and we are under contract to later expand existing and build new corn oil extraction facilities to extract more than an additional 20 million gallons per year of corn oil, and to increase our oilseed crush capacity to about 16 million gallons per year. SEGMENT DESCRIPTIONS The Company's operations during the fiscal quarter ended September 30, 2008 are classified into three reportable business segments: Biofuels Production & Sales, Culinary Oil Production & Sales, and Equipment & Technology Sales. Each of these segments is organized based upon the nature of products and services offered. The Company's remaining operations are aggregated and classified herein as Corporate. During the year ended December 31, 2007 our discontinued Diversified Environmental Services business was administered by GS EnviroServices, Inc., which company provides a variety of transportation, distribution, recycling, disposal, engineering and remediation services to producers of industrial wastes throughout the northeastern region of the U.S. Effective January 1, 2008, we sold the majority of our interest in GS EnviroServices, Inc. (see Note 6, Discontinued Operations, below). For comparative purposes, the financial results of this business have been deconsolidated from our consolidated financial results for the nine months ended September 30, 2007. 8 3 GOING CONCERN The Company had a working capital deficit of $56,299,852 at September 30, 2008, which includes $3,979,437 in purchase obligations, $9,004,018 in amounts due to the prior owners of our oilseed crush facility, $11,977,824 in convertible debt, and $1,572,068 in related party debt. These matters raise substantial doubt about the Company's ability to continue as a going concern. Despite their classification as current liabilities, purchase obligations ($3,979,437), to the extent due, are tied to the earnings of the Company's equipment sales business and can only be serviced after the Company's senior secured debt has been serviced; and, the current amounts due to the prior owners of our oilseed crush facility ($9,004,018) have been restructured in the fourth quarter 2008 (See Note 22, Subsequent Events, below) partly into a form of subsidiary stock that will service these amounts exclusively out of the net cash flows (after regular debt service) of our oilseed crush facility. The Company's working capital deficit net of all of the above amounts is $29,766,505. 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 SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION As of September 30, 2008, the Company administered its operations through three tier 1 subsidiaries: GS CleanTech Corporation, GS Design, Inc., and GS AgriFuels Corporation. The following is an outline of our organizational structure as of September 30, 2008:
Company Status Nature - -------------------------------------------------------------------------------------------------------------------- GreenShift Corporation (OTC Bulletin Board: GERS) Active Holding 1. GS CleanTech Corporation (100%) Active Operating GS COES (Yorkville I), LLC (100%) Active Operating Biofuel Industries Group, LLC (d/b/a NextDiesel) (100%) Active Operating GS Global Biodiesel, LLC (90%) Active Operating 2. GS Design, Inc. (100%) Active Operating Bollheimer & Associates, Inc. (100%) Active Operating GS Rentals, LLC (100%) Active Holding 3. GS AgriFuels Corporation (100%) Active Holding NextGen Acquisition, Inc. (100%) Active Holding NextGen Fuel, Inc. (100%) Active Holding Sustainable Systems, Inc. (100%) Active Holding Sustainable Systems, LLC (100%) Active Operating ZeroPoint Clean Tech, Inc. (about 10%) Active Minority Investment
All significant intercompany balances and transactions were eliminated in consolidation. The financial statements for the periods ended September 30, 2008 and 2007 have been consolidated to include the accounts of the Company and its subsidiaries. COST METHOD OF ACCOUNTING FOR UNCONSOLIDATED SUBSIDIARIES GreenShift accounted for its 10% investment in Sterling Planet, Inc. ("Sterling") under the cost method. On September 10, 2008, the Company entered into Stock Purchase Agreement with Sterling Planet Holdings, Inc. ("Sterling Planet"). Under the Stock Purchase Agreement, the Company agreed to sell the 1,459,854 shares of Sterling Planet which encompassed the 10% investment the Company had in Sterling Planet. The Company accounts for its 10% investment in ZeroPoint Clean Tech, Inc. under the cost method. Application of this method requires the Company to periodically review these investments in order to determine whether to maintain the current carrying value or to write off some or all of the investments. While the Company uses some objective measurements in its review, the review process involves a number of judgments on the part of the Company's management. These judgments include assessments of the likelihood of ZeroPoint to obtain additional 9 financing, to achieve future milestones, make sales and to compete effectively in its markets. In making these judgments the Company must also attempt to anticipate trends in ZeroPoint's industry as well as in the general economy. CAPITALIZATION PROCEDURES The Company capitalizes certain expenditures related to development projects. Overhead costs allocable to our biofuels construction projects are capitalized. For the nine months ended September 30, 2008, the Company capitalized $3,482,852 of overhead costs of which $1,088,451 was from stock based compensation. GOODWILL AND INTANGIBLE ASSETS The Company accounts for its goodwill and intangible assets pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS 142, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Goodwill and intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset's estimated fair value with its carrying value, based on cash flow methodology. Intangibles with definite lives consist primarily of energy technology which have useful lives and are subject to impairment testing in the event of certain indicators. Impairment in the carrying value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value. Effective January 1, 2008, the Company acquired 100% of the stock of Bollheimer & Associates, Inc. ("BA"). The total purchase price is $450,000 in cash plus shares of performance based Series B Preferred Stock that are convertible into 500,000 shares of Company common stock. The cash portion of the acquisition price is to be paid in five installments (the first of which was paid at closing), with the last installment due on or before January 1, 2011 provided that BA continues to generate at least $125,000 in gross sales per year for the next three years. The excess of the purchase price over the net assets has been recorded as Goodwill in the amount of $392,103. ASSET RETIREMENT OBLIGATIONS In accordance with SFAS 143, Accounting for Asset Retirement Obligations, the Company recognizes the fair value of the liability for an asset retirement obligation, which is recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated or depleted over the useful lives of the respective assets. If the liability is settled for an amount other than the recorded amount, a gain or loss would be recognized at such time. NET LOSS PER COMMON SHARE The Company computes its net income or loss per common share under the provisions of SFAS No. 128, "Earnings per Share", whereby basic net income or loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Dilutive net loss per share excludes potential common shares if the effect is anti-dilutive. For the years ended September 30, 2008 and 2007, common stock equivalent shares arising from the assumed exercise of options, warrants and debt conversions of convertible debt instruments were excluded from the computation of diluted net loss per share. Potential future dilutive securities include 996,279 outstanding options and warrants, and 37,865,871 shares issuable for the conversion of convertible debentures and 62,800,925 shares issuable after the conversion of the Series B Preferred stock under the employee pool. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. We use estimates and assumptions in accounting for the following significant matters, among others: >> Allowances for doubtful accounts >> Valuation of acquired assets 10 >> Inventory valuation and allowances >> Fair value of derivative instruments and related hedged items >> Useful lives of property and equipment and intangible assets >> Asset retirement obligations >> Long-lived asset impairments, including goodwill >> Contingencies >> Fair value of options and restricted stock granted under our stock- based compensation plans >> Tax related items Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements. We periodically review estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. The revisions to estimates or assumptions during the periods presented in the accompanying condensed consolidated financial statements were not considered to be significant DEFERRED FINANCING CHARGES AND DEBT DISCOUNTS Deferred finance costs represent costs paid to third parties in order to obtain long-term financing and have been reflected as other assets. Costs incurred with parties who are providing the actual long-term financing, which generally include the value of warrants or the fair value of an embedded derivative conversion feature are reflected as a debt discount. These costs and discounts are amortized over the life of the related debt. Amortization expense related to these costs and discounts were $3,157,312 and $3,564,105 for the nine months ended September 30, 2008 and 2007, respectively. DERIVATIVE FINANCIAL INSTRUMENTS Certain of the Company's debt and equity instruments include embedded derivatives that require bifurcation from the host contract under the provisions of 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". Under the provisions of these statements, the Company records the related derivative liabilities at fair value and records the accounting gain or loss resulting from the change in fair values at the end of each reporting period. Change in the derivatives instruments resulted in gain of $319,829 and a gain of $3,405,607 for the nine months ended September 30, 2008 and 2007, respectively. STOCK BASED COMPENSATION The Company accounts for stock, stock options and stock warrants issued for services and compensation by employees under the fair value method. For non-employees, the fair market value of the Company's stock is measured on the date of stock issuance or the date an option/warrant is granted as appropriate under EITF 96-18. The Company determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), SHARE-BASED PAYMENT, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant). 5 STOCKHOLDERS' EQUITY SERIES A PREFERRED STOCK Each share of Series A Preferred Stock may be converted by the holder into 0.02 shares of common stock, and the holders have voting privileges of five votes to every one common share issuable upon conversion. At September 30, 2008, there were 0 shares of Series A Preferred Stock issued and outstanding. These shares were originally issued in 2003 and were converted into 25,085 shares of Company common stock during the first quarter 2008. 11 SERIES B PREFERRED STOCK Each share of Series B Preferred Stock may be converted by the holder into twenty-five shares of common stock. The holders would be entitled to cumulative dividend rights equal to that of twenty-five common shareholders upon the declaration of dividends on common stock, and have voting privileges of one vote to every one common share. At December 31, 2007, there were 151,250 shares of Series B Preferred Stock issued and outstanding. These shares were originally issued in 2003 and were converted into 6,797,633 shares of Company common stock during the first quarter 2008. At September 30, 2008, there were 2,512,037 shares of Series B Preferred Stock issued and outstanding. In connection with the reduction and restriction of the shares issuable upon conversion of the Series D Shares held by Viridis Capital, LLC (see below), the Company entered into amended and restated employment agreements in March 2008 with all senior management and technical staff and certain consultants. These agreements called for the issuance of 2,765,333 shares of Company Series B Preferred Stock (the "Series B Shares") shares of Company common stock; provided, however, that the conversion of the Series B Shares shall be restricted such that the Series B Shares shall only be convertible into Company common shares on a pro-rated basis in conjunction with the Company's realization of $50,000,000 in annualized earnings before interest, taxes, depreciation and amortization and non-cash and non-recurring items ("EBITDA"). SERIES D PREFERRED STOCK Shares of the Series D Preferred Stock (the "Series D Shares") may be converted by the holder into Company common stock. The conversion ratio is such that the full 1,000,000 Series D Shares originally issued convert into Company common shares representing 80% of the fully diluted outstanding common shares outstanding after the conversion (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder). The holder of Series D Shares may cast the number of votes at a shareholders meeting or by written consent that equals the number of common shares into which the Series D Shares are convertible on the record date for the shareholder action. In the event the Board of Directors declares a dividend payable to Company common shareholders, the holders of Series D Shares will receive the dividend that would be payable if the Series D Shares were converted into Company common shares prior to the dividend. In the event of a liquidation of the Company, the holders of Series D Shares will receive a preferential distribution of $0.001 per share, and will share in the distribution as if the Series D Shares had been converted into common shares. Reduction and Restriction of Founder Shares Effective March 20, 2008, the Company entered into an amended and restated employment agreement with its chairman and chief executive officer, Kevin Kreisler, and Viridis Capital, LLC, pursuant to which Viridis agreed to reduce and restrict the shares of Company common stock issuable upon conversion of Viridis' founder shares - its 800,000 shares of Company Series D Preferred Stock (the "Series D Shares"). The Series D Certificate of Designations (the "Series D CD") currently provides for the conversion of the Series D Shares into 64% of GreenShift's fully-diluted common stock (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by Viridis). Viridis' Series D Shares are the primary collateral securing the Company's repayment obligations to YA Global Investments, LP ("YAGI"), the Company's senior creditor. The Company's agreements with YAGI accordingly require the Company to receive YAGI's consent to the amendment of the Series D CD. Subject to the receipt of YAGI's consent, the Company, Viridis and Mr. Kreisler have agreed to amend the Series D CD as soon as practicable to provide as follows: (a) the Conversion Ratio shall be reduced and amended such that each one share of Series D Preferred Stock shall be convertible into no more than 156 shares of Company common stock; and (b), the conversion of the Series D Shares shall be restricted such that the Series D Shares shall only be convertible into Company common shares at the new conversion ratio on a pro-rated basis in conjunction with the Company's realization of $75,000,000 in EBITDA. STOCK COMPENSATION On February 14, 2008, the Company voted for the creation of an employee pool of certain shares of the Company's preferred stock to be issued to certain employees and consultants. The pool consists of 2,765,333 shares of Company Series B Shares (see above), which shares have a fixed conversion ratio of 1 preferred share to 25 common shares. Of these shares, 353,296 Series B Shares 12 automatically converted upon execution of certain employment and/or consulting agreements into 8,832,391 common shares. The remaining shares will be convertible by the holders on a pro-rated basis in conjunction with the Company's realization of $50,000,000 in EBITDA. The preferred shares were valued using the fair market value of the Company's common stock at grant date based on the total potentially convertible common shares at grant date. The grant date fair value was $6,913,333. Pursuant to the agreements, $883,239 was for prior services of which the Company capitalized $582,050 as overhead related to its projects and recognized $304,017 in stock based compensation. The Company recorded $6,027,266 in deferred stock compensation related to the EBITDA conditions mentioned above that will be amortized over the life of the relevant agreements. The Company has recognized $370,009 in stock based compensation during the nine months ended September 30, 2008. SERIES E PREFERRED STOCK On May 15, 2008, the Company issued 20,000 shares of the Company's new Series E Preferred Stock (the "Series E Shares") to the BIG shareholders (See Note 22, Acquisition below), which shares are convertible at a fixed rate of 1 preferred share to 1,000 common shares into a total of 20,000,000 shares of Company common stock; provided, however, that the Series E Shares shall be convertible into Company common shares in proportion to the Company's earnings before interest, taxes, depreciation and amortization and non-cash and non-recurring items ("EBITDA") and will be fully convertible into 20,000,000 common shares on a pro rated basis as the Company achieves $50,000,000 in EBITDA during one year period. The holders would be entitled to cumulative dividend rights equal to that of 1,000 common shareholders upon the declaration of dividends on common stock, and have voting privileges of one vote to every one common share. 6 DISCONTINUED OPERATIONS TRANSACTIONS RELATING TO GS ENVIROSERVICES During January 2008, GS EnviroServices redeemed the majority of the Company's stock holdings in GS EnviroServices in return for the reduction of certain Company convertible debts due to YA Global Investments, L.P. ("YAGI"). As of January 25, 2008, the Company held only a minority stake in GS EnviroServices (6,266,667 shares, or about 19%) and ceased consolidating the revenue and earnings of GS EnviroServices effective January 1, 2008. These shares were subsequently liquidated in June 2008. Subsequent to this transaction, Kevin Kreisler, the Company's chairman and chief executive officer resigned from the position of chairman of the GS EnviroServices board of directors. Additional information on these and other subsequent events relevant to GS EnviroServices are provided here: Liquidation of Majority Stake in GS EnviroServices On January 25, 2008, the Company, which owned 15 million shares of the common stock of GS EnviroServices, 53% of its outstanding shares, entered into a Stock Purchase Agreement with GS EnviroServices. The Stock Purchase Agreement provided that GS EnviroServices would repurchase 8,733,333 shares of GS EnviroServices common stock from the Company in exchange for the issuance to YAGI of a $2,000,000 convertible debenture, and the cancellation by YAGI of $2,000,000 of indebtedness owed by the Company to YAGI. The Stock Purchase Agreement, combined with a letter agreement between GS EnviroServices and YAGI, further provided that if GS EnviroServices pays $1,000,000 to YAGI on or before May 10, 2008, then the remaining 6,266,667 shares of GS EnviroServices owned by the Company will be transferred to GS EnviroServices in return for the cancellation by YAGI of an additional $1,000,000 of indebtedness owed by the Company. This letter agreement was amended during the second quarter 2008 in connection with the sale by GS EnviroServices of substantially all of its assets (see below) to provide for the payment of $1,000,000 to redeem the remaining 6,266,667 shares of GS EnviroServices held by the Company. This payment was made to YAGI in June 2008 in return for the reduction of the Company's subsidiary's (GS AgriFuels Corporation) convertible debt obligations to YAGI by $1,000,000. 7 DEPOSITS The Company has security deposits on property leases in the amount of $56,134 and deposits on equipment of $219,000 as of the nine months ended September 30, 2008. 13 8 RESTRICTED CASH As of September 30, 2008, the Company had $303,844 in restricted cash. According to the terms of the Line of Credit with American State Bank & Trust Company, a lockbox is used for the collection of payments on Sustainable Systems' accounts receivable. The balance in this account as of September 30, 2008 was $49,223. In mid-2005, a significant wind storm caused damage to the plant that the Company purchased in October 2005. The Company received insurance proceeds of $82,893 during the year ended December 31, 2005 due to the property losses incurred. The funds were deposited into the Company's account at First Community Bank and are restricted for use in repair and replacement of the damaged property. Restricted cash at First Community Bank was $18,174 as of September 30, 2008. According to the Credit Agreement with YA Global, GS COES established a lockbox and related blocked account under the credit line whereby collection of payments of GS COES' accounts are remitted to this account. Accordingly, the funds are restricted for use in the construction of the corn oil extraction systems and for repayment of its debt obligation upon default demand by the lender or if certain conditions are met (See Note 11, Financing Arrangements, below). Restricted cash allocated for this purpose was $269 as of September 30, 2008. Biofuel Industries Group, LLC is obligated to pay for certain road improvements near its facility. These funds are restricted for use in the improvements to the roads. Restricted cash allocated for this purpose was $236,178 as of September 30, 2008. 9 LINES OF CREDIT Inventory Line of Credit for Culinary Oil Production Facility In October 2007, Sustainable Systems, LLC, which owns our oilseed crush facility, entered into a Line of Credit with American State Bank. The total amount available under the Line of Credit is $2,225,000. The Line shall bear interest at a rate of 10.25% which is due monthly. The default rate shall be 3% over the note rate. The Line matured on September 1, 2008. The funds will be advanced on a borrowing base certificate as follows: (1) 75% of receivables less than 60 days; (2) 55% of contracted seed price in the house; (3) 75% of oil price as contracted for in the house; and (4) 75% of meal inventory value. The Line has been guaranteed by Sustainable Systems, Inc. and GS AgriFuels. The balance on the line was $89,000 as of September 30, 2008. The line was past due and in default as of September 30, 2008 but was paid off in full on October 6, 2008. Revolving Line of Credit for Construction of Corn Oil Extraction Facilities On January 25, 2008, GS COES (Yorkville I), LLC, a subsidiary of the Company, closed on the terms of a Credit Agreement with YA Global Investments, LP ("YAGI"). The Credit Agreement will make funds available to GS COES (Yorkville I) for the purpose of constructing and installing corn oil extraction facilities based on the Company's patented and patent-pending corn oil extraction technology. The current availability under this line of credit is $10,000,000. The balance on the line of credit was $10,000,000 as of September 30, 2008. Amounts advanced by YAGI to GS COES (Yorkville I), LLC (the "Loans") will be repayable on the following terms: >> All Loans must be repaid on or prior to August 31, 2009. >> Commencing on October 1, 2008, GS COES must pay to YAGI on account of the principal amount of the Loans an amount equal to the greater of (a) $100,000 and (b) 30% of its EBITDA for the month. >> GS COES may prepay the Loans without penalty. GS COES (Yorkville I) is also required to pay to YAGI: >> Interest on the Loans at a rate of 20% per annum. >> Unused line fees equal to 5% per year of the unused portion of the line. >> A fee equal to $0.10 per gallon of corn oil extracted at the GS COES installations until the later of (a) the date on which the Credit Agreement is terminated or (b) the date on which YAGI has received the fee with respect to 20 million gallons. 14 Effective July 1, 2008, the Credit Agreement was amended to extend the commencement of payments to YAGI to October 1, 2008 and to extend all performance timelines to December 31, 2008. To induce YAGI's entry into the Credit Agreement and in consideration of YAGI's execution of the Restructuring Agreement described below, the Company issued six million shares of its common stock to YAGI valued at $1,080,000. In conjunction with the financing GS COES paid structuring fees of $210,000, legal fees of $150,000, monitoring fees of $175,000, due diligence fees of $35,000 as well as prepaid interest of $250,000. The balance of deferred financing fees was $325,315 at September 30, 2008 after recording $244,685 in amortization of financing fees for the nine months ended September 30, 2008. Revolving Line of Credit for Biodiesel Production Facility On January 16, 2008, Biofuel Industries Group, LLC ("BIG"), a newly acquired subsidiary of the Company, restructured its previous line of credit. The total amount available under new revolving line of credit is $1,750,000. The Line shall bear interest at a rate of LIBOR Rate plus two and twenty five hundredths percent per annum and matures on January 11, 2009. The Company owed Citizens Bank $3,043 in payments and the balance on the line was $745,235 as of September 30, 2008. 10 CONVERTIBLE NOTES On September 4, 2008, the Company's subsidiary, GS CleanTech Corporation, entered into a series of convertible notes totaling $1,734,579. The notes shall bear interest at a rate 15% per annum and mature on December 31, 2010. On February 1, 2009, payments are due at a rate equal to the greater of the interest accrued on the unpaid principal or $100,000 times the principal amount divided by $3,000,000. Beginning July 1, 2009, payments are due based on an eighteen month amortization, with all principal and accrued interest paid on or before December 31, 2010. The notes are convertible into shares of GS CleanTech subsidiary preferred stock (par $0.001) at the closing by GS CleanTech of a planned Preferred Stock Financing at a 15% discount to the final terms of any such Preferred Stock Financing. If any portion of the note is prepaid in cash, GS CleanTech shall pay a 10% redemption premium at the time of redemption. If the Preferred Stock Financing does not close on or before January 1, 2009, the interest and redemption premium will increase to 20%. The balance of the loans was $1,734,579 as of September 30, 2008. 11 FINANCING ARRANGEMENTS
The following is a summary of the Company's financing arrangements as of September 30, 2008: Current portion of long term debt: Note payable from GS AgriFuels to Stillwater ...................................... $ 2,071,886 Purchase obligations from GS AgriFuels to NextGen sellers ......................... 3,979,437 Purchase obligations from GS AgriFuels to Sustainable Systems sellers ............. 1,900,000 Asset retirement obligation, current .............................................. 277 Note payable to former employee ................................................... 103,684 Current portion of note payable from GS AgriFuels to Sustainable Systems' creditors 126,275 Current portion of installment debt payable from GS AgriFuels ..................... 302,079 Vehicle loans and other short term borrowings ..................................... 101,863 Mortgages and other term notes .................................................... 968,035 Current portion of notes payable from GreenShift to Bollheimer .................... 240,000 Current portion of convertible notes payable from GS CleanTech .................... 778,193 Unsecured notes payable from GS AgriFuels to Sheridan Electric due March 2010 ..... 245,855 ----------- Total notes payable and short term borrowings ................................ $10,827,584 =========== Long-term debt, net of current maturities: Mortgages and other term notes .................................................... $ 8,207,412 Notes payable from GreenShift to Bollheimer ....................................... 80,000 Notes payable from GS AgriFuels to Montana Dept of Agriculture .................... 124,052 Asset retirement obligation ....................................................... 184,196 Convertible notes payable from GS CleanTech ....................................... 956,386 Installment debt payable from GS AgriFuels to First Community Bank ................ 379,724 Notes payable from GS AgriFuels to Great Northern Development ..................... 896,532 ----------- Total long term debt ......................................................... $10,828,302 ===========
15
Current portion of convertible debentures: Convertible debentures payable from GS AgriFuels to YAGI, current portion ...................... $ 3,000,000 Convertible debenture payable from GS AgriFuels to YAGI issued February 2006 ................... 1,949,631 Convertible debenture payable from GS AgriFuels to YAGI issued June 2006 ....................... 5,500,000 Convertible debentures payable from GreenShift to Acutus Capital ............................... 750,000 Convertible debenture payable from GS AgriFuels to Sustainable Systems sellers issued March 2007 3,552,005 Convertible debenture payable from GS AgriFuels to Sustainable Systems sellers issued March 2007 3,552,013 ------------ Total current portion of convertible debentures ........................................... $ 18,303,649 ============ Long-term convertible debenture: Convertible debenture payable from GreenShift to YAGI assumed April 2006 (as amended) .......... $ 2,084,986 Convertible debenture payable from GreenShift to YAGI issued April 2006 (as amended) ........... 336,015 Convertible debenture payable from GreenShift to YAGI issued February 2007 (as amended) ........ 1,224,063 Convertible debenture payable from GreenShift to YAGI issued April 2007 (as amended) ........... 2,789,278 Convertible debenture payable from GS AgriFuels to YAGI issued October 2006 (as amended) ....... 12,860,000 Less: current portion - convertible debenture payable from GS AgriFuels to YAGI ................ (3,000,000) Note discounts ................................................................................. (1,207,531) ------------ Total current portion of convertible debentures ........................................... $ 15,086,810 ============ The convertible debentures noted above are convertible into the common stock of the following companies: GreenShift Corporation ......................................................................... $ 7,184,341 GS AgriFuels Corporation ....................................................................... 27,413,649 ------------ Total ..................................................................................... $ 34,597,990 ============
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 September 30, 2008 and the Company's ability to meet such obligations: Year Amount - -------------------------------------------------------------------- 2008 $ 19,995,247 2009 22,625,529 2010 2,676,575 2011 4,569,987 2012 and thereafter 6,386,538 ------------------ Total minimum payments due under current and $ 56,253,876 ================== long term obligations 12 NOTES PAYABLE - RELATED PARTIES On November 9, 2007, the Company and Carbonics Capital Corporation (the Company's former parent) completed a series of transactions that resulted in the assumption by the Company of all of Carbonics' intercompany, affiliate related party notes payable and receivable, all trade payables, and all receivables, but not including all amounts owed by Carbonics to YA Global Investments, LP. In exchange the Company issued to Carbonics a promissory note in the aggregate amount of $2,948,831 (the "Carbonics Note"). The principal and interest on the Carbonics Note, which accrues at the per annum rate of 8%, are due and payable in full on December 31, 2009. During the nine months ended September 30, 2008, the Carbonics Note was reduced by $2,000,000 as a result of the Company's realization during 2007 of impairment charges associated with the Company's NextGen Fuel and Sustainable Systems subsidiaries. The balance owed on the Carbonics Note was $391,123 as of the nine months ended September 30, 2008. As of September 30, 2008, the Company owed Viridis Capital, LLC $418,592 (the "Viridis Note"). Kevin Kreisler, the sole member of Viridis Capital, is the Chairman and Chief Executive Officer of the Company. The note payable to Viridis shall bear interest at a rate of 10% per year and matures November 8, 2010. 16 13 DEBT AND PURCHASE OBLIGATIONS CONVERTIBLE DEBENTURES Restructuring Agreements with YA Global Investments, LP Restructuring of Convertible Debentures Previously Issued by GreenShift In connection with the GS COES (Yorkville I), LLC financing (see Note 10, Lines of Credit, above), the Company and YAGI entered into a Restructuring Agreement. The Restructuring Agreement provided for the exchange of all convertible debentures issued by the Company to YAGI for four amended and restated debentures. However, the principal balance of one of the debentures was reduced by $2,000,000 and the accrued interest was reduced by $1,000,000 pursuant to the stock purchase transaction between the Company and GS EnviroServices, Inc. (see Note 7, Discontinued Operations). The net aggregate principal amount of the restated debentures was $6,434,341 as of September 30, 2008. The terms of the amended and restated debentures are: >> Principal and interest may be converted, at YAGI's option, into shares of Company common stock, at a conversion price of $1.25 per share. >> On the first business day of each month, the Company must pay $250,000 to YAGI. If the Company fails to make the payment, YAGI shall be entitled to convert that amount of accrued interest and principal into common stock of the Company at a conversion price equal to the lesser of (a) $1.25 or (b) 90% of the lowest daily volume weighted average price for the twenty trading days preceding conversion. If a monthly payment is not made and YAGI does not opt to convert, then the unpaid amount will be added to the amount due on the first day of the following month. >> All unpaid interest and principal will be due and payable on December 31, 2011. >> The debentures bear interest at 10% per annum. Guarantees by GreenShift, Viridis Capital, LLC and Kevin Kreisler Payment of all obligations with respect to the Loans and the Debentures noted above has been guaranteed by the Company, by its Chairman, Kevin Kreisler, by his holding company, Viridis Capital, LLC, and by all of the subsidiaries of the Company. GS COES (Yorkville I), LLC and each guarantor has pledged all of its assets to secure repayment of the Loans and the Debentures. Consent to Short-Form Merger of GS AgriFuels In connection with the foregoing financing transactions, the Company, its subsidiary, GS AgriFuels Corporation, and YAGI entered into an Agreement relating to the previously announced plan of the Company to effect a short-form merger of GS AgriFuels so as to redeem for cash all shares of GS AgriFuels not owned by the Company. YAGI's consent to the short-form merger was required. YAGI gave its consent in the Agreement, subject to the following commitments by the Company and GS AgriFuels: >> GS AgriFuels was required to amend the Certificate of Designations for its Series C Preferred Stock to provide that it would be convertible at a fixed rate of 32 common shares for each share of Series C stock, and to provide that no Series C shares may be issued while any portion of the debt to YAGI is outstanding. >> GS AgriFuels agreed to issue 3,329,630 common shares to YAGI after the short-form merger is completed. >> The parties agreed that no more than 36,650,630 shares of GS AgriFuels may be issued, on a fully-diluted basis. >> The Company agreed to obtain an independent appraisal of the value of GS AgriFuels. The debentures issued by GS AgriFuels to YAGI will then be modified to provide that the interest and principal are convertible by YAGI into GS AgriFuels common stock at a price equal to the lesser of (a) $0.255 or (b) 80% of the appraised value on a per share basis. >> GS AgriFuels agreed to pay to YAGI, on account of its debentures, 10% of its cash receipts and 50% of free cash flows after regular debt service. 17 Completion of GS AgriFuels Corporation Go-Private Transaction On February 29, 2008, a wholly owned subsidiary of the Company filed a Certificate of Ownership and Merger merging the subsidiary into GS AgriFuels pursuant to the short-form merger provisions of Section 253 of the Delaware General Corporation Law. As a result of that filing, the Company became the owner of 100% of the outstanding shares of GS AgriFuels. The Certificate of Ownership and Merger provided that shareholders of record of GS AgriFuels as of the close of business on February 29, 2008 would be paid cash at the rate of $0.50 per share on March 27, 2008, which payment was initiated on March 27, 2008. The common stock of GS AgriFuels continued to be listed for trading on the OTC Bulletin Board through March 27, 2008. Effective March 28, 2008, the common stock of GS AgriFuels was delisted from the OTC Bulletin Board and became non-transferable. Reduction of Debt Payable to Related Parties Effective March 31, 2008, Carbonics Capital Corporation, an entity that is 80% owned by Viridis Capital, LLC, waived $2,000,000 of notes payable to Carbonics by the Company. OTHER CONVERTIBLE DEBENTURES On February 28, 2007, the Company entered into a Stipulation of Settlement to settle the lawsuit titled Kerns Manufacturing Corp. v. KBF Pollution Management, Inc., which was pending in the Supreme Court of the State of New York (County of Queens, Index No. 19788/03). Pursuant to the Stipulation, GreenShift issued to Kerns (a) a Convertible Debenture in the principal amount of $500,000 that was paid on June 30, 2007 (the "Kerns $500,000 Debenture") and (b) a convertible debenture in the principal amount of $1,000,000 that was due on June 30, 2007 (the "Kerns $1,000,000 Debenture") and paid in full in February 2008. In April 2007, the entire principal balance on the June 30, 2007 Kerns debenture was converted into 590,268 shares of the common stock of the Company. As of December 31, 2007, the principal balance on the Kerns debenture was $1,000,000. In January 2008, Kerns consented to an extension of the due date of the debenture in return for additional interest of $100,000. During the first quarter 2008, Minority Interest Fund (II), LLC ("MIF") acquired the Kerns $1,000,000 Debenture. This debenture was due to be paid by the Company in two payments $600,000 on January 15, 2008 and $500,000 (plus residual interest and costs of $100,000) on February 15, 2008. MIF purchased the Kerns $1,000,000 Debenture and paid these sums in cash to Kerns on the requisite due dates. In February 2008, MIF subsequently fully converted this debenture at the rate of $0.16 per share into 6,875,000 shares of Company common stock. The managing member of MIF is a relative of Kevin Kreisler, the Company's chairman and chief executive officer. As of September 30, 2008, the Company owed Candent Corporation $757,853 (the "Candent Note"). The former president of Candent is the wife of the Company's chairman. All of the issued and outstanding capital stock held by Candent is in trust for the benefit of its former president. The note payable to Candent shall bear interest at a rate of 10% per year and matures November 8, 2010. Candent is entitled to convert the accrued interest and principal of the Candent Note into common stock of the Company at a conversion price equal to the lesser of (a) $1.25 per share or (b) 90% of the lowest daily volume weighted average price for the twenty trading days preceding conversion. NOTES PAYABLE Stillwater Asset Backed Fund, LP On October 30, 2006, NextGen Acquisition, Inc., a subsidiary of GS AgriFuels that was formed to facilitate the acquisition of NextGen Fuel Inc., sold to Stillwater Asset-Based Fund, LP a Term Note in the principal amount of $6 million. In conjunction with the financing NextGen Acquisition paid an origination fee of $75,000, prepaid interest of $300,000, legal fees of $35,225, and received net proceeds of $5,589,775. NextGen Acquisition used $4,879,236 of the proceeds to acquire NextGen Fuel, Inc., made a loan totaling $568,958 to GS Design, Inc. (a subsidiary of the Company), and repaid the Company $141,580 for amounts paid by the Company in connection with the NextGen Fuel, Inc. acquisition. The Term Note accrues interest at a rate of 20% per annum. Monthly payments of principal and interest were due beginning February 1, 2007, with a monthly principal amount of at least $300,000 and additional principal payments made as a percentage of cash receipts of NextGen Fuel, Inc. On July 31, 2007, NextGen Acquisition, Inc. entered into Amendment 1 to the Credit Agreement with 18 Stillwater Asset-Based Fund, LP. According the Amendment, NextGen received an additional principal amount of $555,600. In conjunction with the refinancing, NextGen Acquisition paid a financing fee of $72,880 and legal fees of $24,245, $13,125 of which was paid via $17,500 shares of GS AgriFuels common stock. According to the amended terms, all amounts of principal and interest not previously satisfied will be due on September 30, 2008. Monthly payments have been adjusted as follows: interest only August 2007 payment; September and October 2007 payments would be an amount equal to the applicable Biodiesel Systems Net Revenue Repayment Percentage of 10% (the Biodiesel Systems Net Revenue is a defined term in the relevant agreements and it is defined as gross cash receipts received during the preceding month); November 2007 through January 2008 payments would be an amount equal to the $200,000 plus the applicable Biodiesel Systems Net Revenue Repayment Percentage; and, payments from February 2008 until the Maturity Date would be an amount equal to $300,000 plus the applicable Biodiesel Systems Net Revenue Repayment Percentage with all outstanding obligations due and payable on the final Maturity Date. The obligations of NextGen Acquisition Inc. under the Term Note have been guaranteed by the Company, GS AgriFuels, NextGen Fuel, Inc., and by the following affiliates: Carbonics Capital Corporation, GreenShift Corporation, EcoSystem Corporation, GS Design, Inc., GS Rentals, LLC and Viridis Capital, LLC (the "Guarantors"). Each of the Guarantors has pledged its assets to secure its guaranty. For the nine months September 30, 2008, interest expense of $325,203 for this obligation was incurred. The principal balance of this note at September 30, 2008 was $2,071,886. Sustainable Systems Installment Debt Refinancing In October 2005, prior to becoming a subsidiary of GS AgriFuels, Sustainable Systems and Sheridan Electric Co-op signed an Installment Sale and Purchase Agreement on September 30, 2005 (the "IPSA"). Under the agreement, the Company acquired $1,913,185 of property, plant and equipment by application of $192,286 in deposits paid and the assumption of the repayment obligations due to First Community Bank from Sheridan in the amount of $1,720,899 (the "FCB Note"), which amount was to have been fully paid off or refinanced by Sustainable by the end of the primary term (through October 31, 2006 or the end of any additional option periods) to remove Sheridan as the primary obligor of the amounts due to First Community Bank under the FCB Note (the "IPSA Obligation"). To ensure that Sustainable either pays off or refinances the FCB Note, Sheridan shall continue to hold title to the premises and the real property upon which the Sustainable facility is located. From 2006 to present, and under the terms of the IPSA, Sustainable exercised several letter agreements to extend the refinance period to June 1, 2008. Under the terms of the extension agreement, the Company paid $300,000 as of the March 31, 2008 extension due date. This amount was applied to principal along with the usual monthly payment of the FCB Note. All the terms and conditions under the IPSA remain applicable under the extended refinance periods. The FCB Note is secured by an interest in all the assets of Sustainable including the accounts receivable. The note accrues interest at a variable rate of interest, currently 6.50% per annum. Monthly payments consist of principal and interest and a final payment will be due on September 25, 2013. For the nine months ended September 30, 2008, interest expense of $51,648 for these obligations was incurred. As of September 30, 2008, the total principal balance on FCB Note was $681,806 but the IPSA Obligation had not been fulfilled - that is, while Sustainable's payments to First Community Bank under the FCB Note were current, Sustainable has not paid off or refinanced the FCB Note to remove Sheridan as the primary obligor of the FCB Note. Sheridan issued a notice to this effect and has commenced efforts to enforce its rights under the IPSA. Sustainable has begun to pay First Community Bank off at an increased rate as provided for by the terms of the IPSA. The Company's plan to accelerate Sustainable's compliance with the IPSA Obligation is to facilitate the refinancing of the FCB Note coincident with the completion of the expansion financing for the Sustainable facility. Term Notes Sustainable Systems has various notes payable with two other lenders. Sustainable has signed three notes payable with the Montana Department of Agriculture totaling $124,052. These notes were issued by the Montana Agriculture Development Council under Return On Investment Agreements, numbers 0250714, 0350764, and 0450785. A return on investment (ROI) pursuant to these agreements is an award of money with the expectation that all or a part of the money will be repaid after a deferral period. No payments are required, and no interest is accrued during the initial time period. After the deferral period, the award recipient repays the investment plus interest over a remaining period (up to seven years). As of December 31, 2005, all three notes were in the deferral period with expected deferral of interest and payments until February 2006. The deferral periods were subsequently extended and the notes were further modified with regard to interest and subordination (see Note 10). ROI note number 0450785 is secured by a lien on specific equipment including pumps, blending vessels, storage bins and a solvent recovery system. All notes accrue interest at the rate of 3.2% per annum with payments of principal and interest beginning March 6, 2011. The notes are secured by an interest in various equipment including eleven pumps and a solvent recovery system. For the nine months ended September 30, 2008, interest expense of $3,031 for these obligations was incurred and accrued. 20 Sustainable has signed four notes with Great Northern Development. Three of the notes totaling $402,127 at September 30, 2008 accrue interest at the rate of 6% per annum. The payment terms for the notes are as follows: the $10,504 and $120,121 notes are to be paid off with 180 monthly payments beginning December 15, 2005 with a maturity date of November 15, 2020 and the $271,502 note is to be paid off with 120 monthly payments beginning March 15, 2006 with a maturity date of January 15, 2016; the monthly payments on this note are $1,800 per month from April 2007 to March 2008 and then $3,300 thereafter. The fourth note for $620,680 (as of September 30, 2008) accrues interest at the rate of 5% per annum with payments of principal only through November 2007 and principal and interests payments until the maturity date of November 15, 2010; the monthly payments on this note are $7,500 during 2007, $10,000 during 2008 and $17,302 thereafter. For the nine months ended September 30, 2008, interest expense of $42,734 for these obligations was incurred. The principal balance of these notes at September 30, 2008 was $1,022,807. On June 4, 2007, Sustainable issued an unsecured promissory note in the amount of $250,000 with Sheridan Electric Co-Op, Inc. in exchange for the same amount of pre-existing accounts payable to the holder (the "Sheridan Note"). The Sheridan Note accrues interest at a rate of 6% per annum. Monthly payments were due in the amount of $1,500 starting June 1, 2007 and shall continue until March 1, 2010 (the "Maturity Date"). Each payment shall first be applied to the accrued interest and then to the principal balance. For the nine months ending September 30, 2008, interest expense of $8,426 for these obligations was incurred. The principal balance of this note at September 30, 2008 was $245,854. Despite the fact that Sustainable was current in all of its payment obligations under the Sheridan Note as of September 30, 2008, Sheridan issued a notice of default and filed suit in an attempt to accelerate payment of the Sheridan Note. The Company intends to facilitate Sustainable's ongoing compliance with the terms of the Sheridan Note and may consider accelerating full payment of the Sheridan Note prior to the stated Maturity Date coincident with the completion of the expansion financing for the Sustainable facility. Biofuel Industries Group, LLC Citizens Bank On September 30, 2008, Biofuels Industries Group, LLC ("BIG") issued a permanent note (the "Permanent Note") in the amount of $7,200,000 with Citizens Bank in exchange for a construction note payable that was executed on January 11, 2007 and was due on September 30, 2008. The Permanent Note accrues interest at a rate equal to LIBOR plus two and twenty five hundredths percent per annum. Monthly payments are due in the amount of $60,000 starting July 31, 2008 and shall continue until September 30, 2013. The Company owed Citizens Bank approximately $114,644 as of September 30, 2008. Each payment shall first be applied against costs and expenses required to be paid under the Permanent Note then to the principal balance. For the nine months ending September 30, 2008, interest expense of $280,672 for these obligations was incurred. The principal balance of the Permanent Note at September 30, 2008 was $7,080,000. On September 30, 2008, BIG issued a replacement promissory note in the amount of $1,688,700 with Citizens Bank (the "Replacement Note") in exchange for a note payable on January 11, 2009. The Replacement Note accrues interest at a rate equal to the Applicable LIBOR Rate plus two and twenty five hundredths percent per annum. Monthly payments of accrued interest and principal are due starting September 1, 2008 and shall continue until August 31, 2015. Each payment shall first be applied against costs and expenses required to be paid under the Replacement Note then against accrued interest and then to the principal balance. For the nine months ending September 30, 2008, interest expense of $41,863 for these obligations was incurred. The principal balance of the Replacement Note at September 30, 2008 was $1,671,250. PURCHASE OBLIGATIONS NextGen Selling Shareholders On October 30, 2006, a wholly-owned subsidiary of GS AgriFuels purchased 100% of the outstanding capital stock of NextGen Fuel, Inc. The purchase price was $21,204,437, of which $17,000,000 was paid at closing leaving a holdback obligation to the selling shareholders totaling $4,204,437. $3,204,437 of the holdback would be due when NextGen Fuel realized revenue of $7,500,000 subsequent to the acquisition subject to certain working capital adjustments and provided that there are no claims for indemnification or otherwise against the selling shareholders. The remaining $1,000,000 holdback, with interest at 6% per annum, is due to a former sales consultant to NextGen and a selling shareholder subject to the payment by customers for biodiesel production systems totaling forty million gallons per year of production capacity subject to certain working 20 capital adjustments and provided that there are no claims for indemnification. To the extent due, and prior to accounting for any claims for indemnification, the balance of the estimated holdback at September 30, 2008 was $3,979,437. Sustainable Selling Shareholders On March 26, 2007, GS AgriFuels purchased the remaining 85% of the outstanding capital stock of Sustainable Systems, Inc. (GS AgriFuels had previously purchased 15% of the capital stock of Sustainable). The purchase price was approximately $12.6 million of which $100,000 was payable at closing, a note was issued for approximately $1.9 million and two $3.55 million debentures were issued to the selling shareholders totaling $9,004,018. The $1.9 million note was to be due upon the completion and commissioning of Sustainable's current plant expansion. The terms of the relevant acquisition agreements are in default and the Company intends to restructure the acquisition agreements given recent events and the impact of the IPSA Obligation. The payment terms of the relevant acquisition agreements are expected to be restructured in the fourth quarter 2008 to provide for payment a form of subsidiary stock that will service any amounts due exclusively out of the net cash flows of the Company's oilseed crush facility after its expansion has been completed. During the fourth quarter of 2008, GS AgriFuels entered into a restructuring agreement with a shareholder of Sustainable (see Note 22, Subsequent Events, below). Bollheimer & Associates As a result of its acquisition of 100% of the stock of Bollheimer & Associates, Inc., the Company entered into a purchase obligation of $320,000. This amount does not bear interest and is payable in the amount of $80,000 on or before July 1, October, 2008 and January 1, 2009 with the remaining $80,000 due on or before January 1, 2011 subject to certain sales based hurdles. 14 ASSET RETIREMENT OBLIGATION Pursuant to SFAS 143, Accounting for Asset Retirement Obligations, the Company has recognized the fair value of the asset retirement obligation for the removal of its COES systems. The present value of the estimated asset retirement costs has been capitalized as part of the carrying amount of the related long-lived assets. The liability has been accreted to its present value as of September 30, 2008, and the capitalized cost approximated $9184,000. The Company has recognized $334 due to accretion from the acquisition dates. The Company has determined a range of abandonment dates between December 2018 and December 2019 and a total salvage value of $250,000 per system. The following represents the amount of the retirement obligation at the beginning and the nine months ending September 30, 2008: 2008 Beginning balance at January 1 $ -- Liabilities incurred during the period 183,861 Liabilities settled during the period -- Accretion of interest 334 ------------- Ending balance at September 30, 2008 $ 184,195 15 EMBEDDED 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 held by YA Global Investments, LP ("YAGI") are variable and contained an embedded derivative that required bifurcation from their host contracts. The Company recognized the embedded derivatives as a liability at the date the debentures related to YAGI were issued. During the nine months ended September 30, 2008 and 2007, the change in the fair value of the derivative resulted in a non-cash gain of $319,829 and loss of $3,405,607, respectively. Amortization of the debt discount totaled $1,750,873 for the nine months ended September 30, 2008. As of September 30, 2008, the fair value of the derivative liabilities was $0 since the derivatives were eliminated due to the restructuring of the YAGI debt resulted in the embedded conversion option no longer meeting the bifurcation criteria of SFAS 133. The derivatives were marked to fair market value as of the date of the restructure, January 11, 2008. The change in value was recorded as income and the fair value of the derivative was reclassified against additional paid in capital. 21 16 COMMITMENTS AND CONTINGENCIES The Company's subsidiaries, GS AgriFuels Corporation and NextGen Fuel, Inc. are party to the matter entitled O'Brien & Gere Limited, et al v. NextGen Chemical Processors, Inc., et al., which action was filed in the Supreme Court of the State of New York. The verified complaint had sought performance of and damages relating to certain service and related agreements, plus attorney's fees and costs. This matter relates to the provision by plaintiffs of certain engineering services to NextGen Chemical Processors, Inc. ("NCP") during 2005 and 2006. NCP is owned by the former shareholders of the NextGen Fuel, Inc., subsidiary. On September 19, 2007, the Supreme Court of the State of New York dismissed a significant portion of O'Brien & Gere's complaint with prejudice. Management does not believe that there is a reasonable possibility that the claims made against NextGen Fuel by the plaintiffs in this litigation indicate that a material loss has occurred. Accordingly, no accrual has been made in connection with those claims. The Company's Sustainable Systems subsidiary is party to the matter entitled Sheridan Electric Co-Op., Inc., v. Sustainable Systems, LLC, which action was filed in the District Court of Montana. The verified complaint seeks to accelerate repayment of an unsecured note due March 1, 2010 (the "Sheridan Note"), as well as attorney's fees and costs. All payments due on the Sheridan Note were current at the time Sheridan filed this action. Sustainable otherwise has been and remains in compliance with the terms of Sheridan Note. Sustainable has responded to the verified complaint and denies any liability. 17 GUARANTY AGREEMENT On October 31, 2006, the Company guaranteed the 14 month Term Note issued by NextGen Acquisition, Inc., a wholly owned subsidiary of GS AgriFuels Corporation, in the principal amount of $6,000,000 issued to Stillwater Asset-Backed Fund, LP (see Note 13, Debt and Purchase Obligations, above). The balance due to Stillwater at September 30, 2008 was 2,071,886. Both Viridis Capital, LLC ("Viridis"), the majority shareholder of the Company, and its sole member, Kevin Kreisler, the Company's chairman, have guaranteed nearly all of the Company's senior debt (in the outstanding amount of about $45 million), and Viridis has pledged all of its assets, including its share of Company Series D Preferred Stock (see Note 6, Shareholders Equity, above), to YA Global Investments, LP ("YAGI"), to secure the repayment by the Company of its obligations to YAGI. 18 SEGMENT INFORMATION Segment information is presented in accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This standard is based on a management approach that designates the internal organization that is used by management for making operating decisions and assessing performance as the sources of the Company's reportable segments. Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision-making groups, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company's operations during the fiscal quarter ended September 30, 2008 are classified into three reportable business segments: Biofuel Production & Sales, Culinary Oil Production & Sales, and Equipment & Technology Sales. Each of these segments is organized based upon the nature of products and services offered. The Company's remaining operations are aggregated and classified herein as Corporate. 22
Summarized financial information about each segment is provided below: Nine months Equipment & Culinary Oil Biofuel Ended 9/30/08 Corporate Technology Sales Production & Sales Production & Sales Total - ------------------------------------------------------------------------------------------------------------------ Total revenue $ -- $ 10,065,613 $ 7,742,630 $ 6,318,419 $ 24,126,661 Cost of revenue 88,968 5,097,031 6,950,383 7,058,033 19,194,414 ------------- ------------------ ------------------ ----------------- ------------- Gross profit (88,968) 4,968,582 792,248 (739,614) 4,932,248 Operating expenses 1,718,446 2,260,748 945,842 2,012,225 6,937,261 ------------- ------------------ ------------------ ----------------- ------------- Income (loss) from operations (1,807,414) 2,707,834 (153,594) (2,751,839) (2,005,013) Other income (expense) (6,055,928) (2,754,245) (137,402) (1,910,350) (10,857,925) ------------- ------------------ ------------------ ----------------- ------------- Income (loss) before taxes (7,863,342) (46,411) (290,996) (4,662,189) (12,862,938) Minority interest -- 8,908 -- -- 8,908 ------------- ------------------ ------------------ ----------------- ------------- Taxes (4,094) (1,944) -- (2,192) (8,229) ------------- ------------------ ------------------ ----------------- ------------- Net loss from continuing operations $ (7,867,436) $ (39,447) $ (290,996) $ (4,664,381) $(12,862,259) ------------- ------------------ ------------------ ----------------- ------------- Gain (loss) from, discontinued operations -- -- -- -- -- Preferred dividends -- -- -- -- -- Net loss $ (7,867,436) $ (39,447) $ (290,996) $ (4,664,381) $(12,862,259) ============= ================== ================== ================= ============= Nine months Equipment & Culinary Oil Biofuel Ended 9/30/07 Corporate Technology Sales Production & Sales Production & Sales Total - ------------------------------------------------------------------------------------------------------------------ Total revenue $ -- $ 9,238,804 $ 4,206,338 $ 501,094 $ 13,946,236 Cost of revenue -- 7,179,694 4,125,491 434,282 11,739,467 ------------- ------------------ ------------------ ----------------- ------------- Gross profit -- 2,059,110 80,847 66,812 2,206,769 Operating expenses 176,005 5,245,974 759,138 1,377,959 7,559,076 ------------- ------------------ ------------------ ----------------- ------------- Income (loss) from operations (176,005) (3,186,864) (678,291) (1,311,147) (5,352,307) Other income (expense) (558,038) (3,556,337) 358,663 (72,719) (3,828,431) ------------- ------------------ ------------------ ----------------- ------------- Income (loss) before taxes (734,043) (6,743,201) (319,628) (1,383,867) (9,180,738) Minority interest -- 8,908 -- -- 8,908 ------------- ------------------ ------------------ ----------------- ------------- Taxes (1,079) (253,331) -- -- (254,410) ------------- ------------------ ------------------ ----------------- ------------- Net loss from continuing operations $ (735,122) $ (6,987,623) $ (319,628) $ (1,383,867) $ (9,426,239) ------------- ------------------ ------------------ ----------------- ------------- Gain (loss) from, discontinued operations 2,781,869 -- -- -- 2,781,869 Preferred dividends (151,875) -- -- -- (151,875) Net loss $ 1,894,872 $ (6,987,623) $ (319,628) $ (1,383,867) $ (6,796,246) ============= ================== ================== ================= =============
23
Three Months Equipment & Culinary Oil Biofuel Ended 9/30/08 Corporate Technology Sales Production & Sales Production & Sales Total - ------------------------------------------------------------------------------------------------------------------ Total revenue $ -- $ 2,313,312 $ 1,559,187 $ 2,216,255 $ 6,088,754 Cost of revenue 45,308 1,729,355 1,348,654 3,224,318 6,347,635 ------------- ------------------ ------------------ ----------------- ------------- Gross profit (45,308) 583,957 210,533 (1,008,063) (258,881) Operating expenses 456.931 705,411 363,528 1,034,578 2,560,448 ------------- ------------------ ------------------ ----------------- ------------- Income (loss) from operations (502,239) (121,454) (152,995) (2,042,641) (2,819,329) Other income (expense) (1,537,846) (806,710) 64,232 (1,053,236) (3,333,560) ------------- ------------------ ------------------ ----------------- ------------- Income (loss) before taxes (2,040,085) (928,164) (88,763) (3,095,877) (6,152,889) Minority interest -- 2,489 -- -- 2,489 ------------- ------------------ ------------------ ----------------- ------------- Taxes (4,094) (1,943) -- (2,192) (8,229) ------------- ------------------ ------------------ ----------------- ------------- Net loss from continuing operations $ (2,044,179) $ (927,618) $ (88,763) $ (3,098,069) $ (6,158,629) ------------- ------------------ ------------------ ----------------- ------------- Gain (loss) from, discontinued operations -- -- -- -- -- Preferred dividends -- -- -- -- -- Net loss $ (2,044,179) $ (927,618) $ (88,763) $ (3,098,069) $ (6,158,629) ============= ================== ================== ================= ============= Three Months Equipment & Culinary Oil Biofuel Ended 9/30/07 Corporate Technology Sales Production & Sales Production & Sales Total - ------------------------------------------------------------------------------------------------------------------ Total revenue $ -- $ 8,527,219 $ 1,925,249 $ 363,156 $ 10,815,624 Cost of revenue -- 6,998,138 1,816,612 325,430 9,140,180 ------------- ------------------ ------------------ ----------------- ------------- Gross profit -- 1,529,081 108,637 37,726 1,675,444 Operating expenses 40,196 557,117 292,363 132,100 1,545,174 ------------- ------------------ ------------------ ----------------- ------------- Income (loss) from operations (40,196) 971,964 (183,726) (94,374) 130,269 Other income (expense) (332,040) (1,727,683) 49,673 (80,668) (1,567,319) ------------- ------------------ ------------------ ----------------- ------------- Income (loss) before taxes (372,236) (755,719) (134,053) (175,043) (1,437,050) Minority interest -- 8,908 -- -- 8,908 ------------- ------------------ ------------------ ----------------- ------------- Taxes (1,079) (253,331) -- -- (254,410) ------------- ------------------ ------------------ ----------------- ------------- Net loss from continuing operations $ (373,315) $ (1,000,141) $ (134,053) $ (175,043) $ (1,682,551) ------------- ------------------ ------------------ ----------------- ------------- Gain (loss) from, discontinued operations 120,772 -- -- -- 120,772 Preferred dividends -- -- -- -- -- Net loss $ (252,543) $ (1,000,141) $ (134,053) $ (175,043) $ (1,561,780) ============= ================== ================== ================= =============
19 MINORITY INTEREST In 2003, the Company's inactive subsidiary American Metals Recovery, Corp. ("AMRC") a discontinued entity issued the Subsidiary Preferred Equity, with a par value of $0.001. Subsidiary Preferred Equity holders were to receive a quarterly dividend ranging from 3% to 5% of AMRC's annualized revenue, limited to 30% of AMRC's operating income. AMRC failed to generate operating income in 2006 and 2005; therefore no dividends were payable in December 2006 and 2005. The shares could not be liquidated or transferred. In December 2004, $100,000 of the Minority Interest was converted into 10,000 shares of the Company's common stock and a five-year option to purchase 5,000 shares of the Company's common stock at $5.00 per share. In February 2006, $50,000 of the Minority Interest was converted into 33,333 shares of the Company's common stock at $1.50 per share. In August 2007, $72,000 of the Minority Interest debt was converted into 200,000 shares of common stock. In accordance with the completion of the GS AgriFuels Go-Private Transaction (see Note 13, Convertible Debentures), the Company recorded the related obligation to the former minority shareholders of GS AgriFuels of $1,265,762 at December 31, 2007. During the nine months ended September 30, 2008, the Company made payments against this obligation of $833,061, leaving a balance of $432,701 that the Company expects to either cancel or satisfy during 2008. 24 20 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following is a summary of supplemental disclosures of cash flow information:
2008 2007 ------------ -------------- Cash paid during the year for the following: Interest $ 1,345,277 $ 187,686 Income taxes 34,256 12,660 ------------ -------------- Total $ 2,086,924 $ 59,750 ============ ============== Acquisition of Bollheimer & Associates with debt 320,000 -- Reduction of convertible debentures from disposal of investment in GS EnviroServices 2,000,000 -- Reduction of related party debt and accrued interest from forgiveness 2,827,330 -- Acquisition of Biofuel Industries Group, LLC for redeemable preferred equity in subsidiary 9,000,000 -- Common shares issued for deferred financing fees 1,080,000 -- Common shares issued in settlement of debenture 1,100,000 -- Debentures converted into common stock 496,558 -- Conversion of accrued interest into convertible debt 891,432 -- Reclassification of derivative liability into equity 6,385,002 -- Recognition of deferred compensation from issuance of preferred stock 6,910,568 -- Increase in construction in progress through amortization of deferred compensation 1,085,146 -- Issuance of debt and equity for net assets due to Sustainable acquisition -- 12,657,093 Contribution of capital from debt and accrued interest due to affiliate -- 2,335,856 Acquisition of equipment and/or vehicles with long-term debt -- 231,797 Issuance of Series C Preferred Stock upon conversion -- 100
21 RELATED PARTY TRANSACTIONS In January 2008, the Company issued 25,085 and 6,797,633 shares of Company common stock to relatives of Kevin Kreisler upon conversion of 1,254,244 shares of Company Series A Preferred Stock and 151,250 shares of Company Series B Preferred Stock, respectively, which Series A and Series B preferred shares were originally issued in 2003 in connection with financial accommodations provided to the Company by the holders. On September 10, 2008, the Company entered into Stock Purchase Agreement with Sterling Planet Holdings, Inc. ("Sterling Planet"). Under the Stock Purchase Agreement, the Company agreed to sell the 1,459,854 shares of Sterling Planet which encompassed the 10% investment the Company had in Sterling Planet. The total purchase price for the stock was $1,000,000. The Company had accounted for its investment in Sterling Planet under the cost method. Under this method, the value of the stock was valued on its books at $1,685,333. As a result of the sale, the Company recognized a $685,333 loss on the sale of the stock. 21 ACQUISITION The Company follows SFAS No. 141, "Business Combinations." Under this standard, business acquisitions are accounted for under the purchase method and goodwill represents the excess of the purchase price of a business acquisition over the fair market value of the net assets acquired at the date of acquisition. The statement also requires the recognition of acquired intangible assets apart from goodwill if it arises from contractual and other legal rights. If an intangible does not arise from contractual or other legal rights, it shall be recognized as an asset apart from goodwill only if it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged. ACQUISITION OF BOLLHEIMER & ASSOCIATES, INC. Effective January 1, 2008, the Company acquired 100% of the stock of Bollheimer & Associates, Inc. ("BA") in return for $450,000 in cash plus shares of performance based Series B Preferred Stock that are convertible into 500,000 shares of Company common stock. The cash portion of the acquisition price is to be paid in five installments (the first of which was paid at closing), with the last installment due on or before January 1, 2011 provided that BA continues to generate at least $125,000 in gross sales per year for the next three years. The shares of performance based Series B Preferred Stock issued at closing are convertible on a pro rated basis into 500,000 shares of Company common stock in conjunction with the Company's realization of $50,000,000 in EBITDA. Of the $450,000 total, $400,000 was allocated to the purchase; goodwill of $392,102 was recorded which represents the excess of the purchase price of the net assets acquired. Phil Bollheimer, the president of BA, entered into an employment agreement with the Company in connection with this transaction. 25 ACQUISITION OF BIOFUEL INDUSTRIES GROUP, LLC Effective May 15, 2008, the Company and Biofuel Industries Group, LLC (d/b/a NextDiesel(TM)) ("BIG") entered into an Exchange Agreement pursuant to which the Company exchanged 20,000,000 common shares and 20,000 preferred shares in return for 100% of the equity of BIG subject to the redemption by BIG of BIG's "Class A Membership Units" for a total of $9 million preferred equity interest with a 12% coupon commencing January 30, 2009 at a rate equal to 30% of BIG's net cash flows (after all operating costs and regular debt payments have been paid) (the "Class A Redemption"). The $9 million preferred equity interest is mandatorily redeemable if it is not paid on or before the twentieth anniversary of closing and is classified as a liability under the provisions of SFAS No. 150. Other terms of the Exchange Agreement are summarized here: >> Vested Company Shares. The issuance by the Company to the BIG shareholders of 20,000,000 shares of Company common stock. These shares were valued at $2,085,000 based on the average fair market value of the Company's common stock for the three days before and after the acquisition date. >> Performance-based Company Shares. The issuance by the Company to the BIG shareholders of 20,000 shares of the Company's new Series E Preferred Stock (the "Series E Shares"), which shares are convertible at a fixed rate of 1 preferred share to 1,000 common shares into a total of 20,000,000 shares of Company common stock; provided, however, that the Series E Shares shall be convertible into Company common shares in proportion to the Company's earnings before interest, taxes, depreciation and amortization and non-cash and non-recurring items ("EBITDA") and will be fully convertible into 20,000,000 common shares on a pro rated basis as the Company achieves $50,000,000 in EBITDA during one year period. >> Performance-based Cash Hurdle. The payment by BIG to BIG's founding shareholders of $1,000,000 in cash payable upon the realization by the Company of $10,000,000 in annualized EBITDA. >> Guaranty of BIG's Founding Shareholders. BIG's founding shareholders have agreed to keep their personal guaranties of BIG's senior loans in place (the "BIG Loans") in return for a guaranty fee equal to 5% of the balance due under the BIG Loans (the "Guaranty Fee"). The Company has agreed to use its best efforts to refinance the BIG Loans to remove these guaranties on or before the first anniversary of the effective date of the acquisition. If this condition is not satisfied, then the Guaranty Fee shall increase to 7% and BIG shall accelerate and prepay the principal amount of the BIG Loans at the rate of $1,000,000 plus 25% of BIG's net cash flows until paid in full (the "Guaranty Payments"). $58,561 has been accrued as of September 30, 2008. >> Guaranty of the Company and its Founding Shareholder. The Company, Viridis Capital, LLC and Kevin Kreisler (the "GreenShift Parties") entered into a Contribution Agreement with NextFuels, LLC, the holding company of the founding shareholders of BIG, relative to the agreement of the GreenShift Parties to guaranty the guaranty of the BIG Loans by BIG's founding shareholders. The obligations of the GreenShift Parties under the Contribution Agreement are subordinated to the interests of YA Global Investments, LP ("YAGI"), the Company's senior lender. >> Potential Rescission. The Company's equity in BIG is subject to rescission in the event that: (a) the BIG Loans are not timely serviced and kept in good standing, (b) the Guaranty Payments, to the extent due, are not timely made, and (c) if the Class A Redemption payments are not made to the extent that they are due. This term expires automatically upon the full payment and/or refinancing of the BIG Loans without the guaranty of the BIG founding shareholders and the full payment of the Class A Redemption. >> Consulting Agreement. BIG's chief executive officer and one of its founding shareholders, Terry Nosan, entered into a consulting agreement with BIG at closing pursuant to Mr. Nosan will provide management services to BIG and the Company for a monthly fee of $12,500. $18,750 has been accrued as of September 30, 2008. Mr. Nosan was also appointed to the Company's board of directors. >> Creditor Consent. BIG's agreements with its senior creditor, Citizens' Bank, require Citizens' Bank to provide its written consent to change of control transactions. While Citizens' Bank has expressed, through its loan officer, its willingness to issue consent, formal written consent has not yet been issued. Citizens' Bank has the right to declare default under its credit agreements with BIG in the absence of its formal written consent. Based on recent discussions, the Company believes that formal written 26 consent will be provided during the fourth quarter 2008. If Citizens' Bank does not issue its formal written consent as contemplated and instead issues a written objection to the change of control, then the Company may deposit its BIG membership units into an escrow account pending either issuance by Citizens' Bank of formal written consent or the refinancing of the amounts due to Citizens' Bank. BIG owns and operates a biodiesel production facility in Adrian, Michigan based on the Company's patent-pending biodiesel technology. This facility has a current production capacity of 10 million gallons of biodiesel per year and it already includes much of the equipment necessary to rapidly scale to 20 million gallons per year. In addition, this facility has been specifically designed to refine the Company's extracted corn oil supplies into biodiesel. The Company is in the process of obtaining a third-party valuation of certain assets and liabilities, including acquired intangible assets and finalizing its own internal assessment of the purchase price allocation; thus, the preliminary allocation of purchase price will change, and such change could be material. The Company anticipates completing the purchase price allocation in the third quarter of fiscal 2008. Revenue Recognition The Company recognizes revenue from its biodiesel production activities when four basic criteria have been met: (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured, and (iv) product delivery has occurred, which is generally upon delivery to the customer. Unaudited Pro Forma Consolidated Financial Information for Acquisition of BIG The following unaudited pro forma consolidated financial information presents the combined results of operations of the Company as if the BIG acquisition had occurred on January 1, 2008. The unaudited pro forma consolidated financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations of the Company. Summarized unaudited pro forma consolidated results were as follows: Nine months Ended September 30 2008 2007 ------------------------------ Revenue $ 26,114,841 $ 13,946,236 Net income (loss) from operations (3,672,676) (6,060,735) Net income (loss) applicable to shareholders (14,592,741) (7,447,276) ------------- --------------- Basic income (loss) per share $ (0.21) $ (0.80) 22 SUBSEQUENT EVENTS PURCHASE OBLIGATIONS Sustainable Selling Shareholders On March 26, 2007, GS AgriFuels entered into an agreement to purchase certain capital stock of Sustainable Systems, Inc. from Paul Miller, a founding shareholder of Sustainable (the "Miller Purchase Agreement"). The Miller Purchase Agreement called for $46,448 to be paid at closing, a note for approximately $882,000 and two $1.6 million debentures, totaling $4,228,729. In November 2008, the Company and Miller entered a restructuring agreement (the "Miller Restructuring Agreement") pursuant to which Miller waived all amounts due to him pursuant to the Miller Purchase Agreement totalling 44,511,134 including accrued interest. The Miller Restructuring Agreement also included a term that called for the Company and Miller to use their respective best efforts to restructure GS AgriFuels' March 26, 2007 purchase agreements with the former unaffiliated minority shareholders of Sustainable Systems, Inc., on an equitable basis to facilitate a return on their respective investments out of the cash flows of Sustainable's Culbertson, Montana oilseed crush plant after its expansion has been completed. 27 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW GreenShift Corporation ("we," "our," "us," "GreenShift," or the "Company") develops and commercializes clean technologies that facilitate the efficient use of natural resources. We do this today by developing and integrating new technologies into existing agricultural production facilities, by selling equipment and services based on those technologies, and by using those technologies to directly produce and sell biomass-derived oils and fuels. Our strategy is to use our proprietary extraction and production technologies to become a leading producer of biofuels, and to do so at enhanced cost and risk profiles by extracting and refining raw materials that other producers cannot access or process. We currently own and operate six production facilities - four corn oil extraction facilities based on our patented and patent-pending corn oil extraction technologies, one biodiesel production facility based on our patent-pending biodiesel production technologies, and one vegetable oilseed crushing facility based on conventional process technology. Our corn oil extraction facilities are located at existing corn ethanol production facilities, where we extract corn oil from an ethanol co-product called distillers grain. We install our extraction facility, at our expense, at participating host facilities in return for the long-term right (10 years or more) to purchase the extracted corn oil for about 53% of the spot price of diesel fuel. This arrangement benefits both the host and GreenShift. The host benefits because the contract price we pay substantially exceeds the market price for distillers grain. GreenShift benefits because the contract price is substantially lower than the cost of comparable feedstocks for biodiesel production and because indexing our feedstock costs to our offtake markets allows us to hedge our biodiesel production margins. We believe that our ability to obtain large quantities of low cost feedstocks (i.e., raw materials for biodiesel production), at prices indexed to the diesel markets in which our biodiesel end-product will compete, and the fact that we have the right to do so for over a decade, enables us to finance, build and operate facilities that will produce biodiesel at enhanced cost and risk profiles as compared to competing producers. We are currently operating and building facilities that correspond to 20 million gallons per year of corn oil extraction and 10 million gallons per year of biodiesel production capacity, and we are under contract to later expand existing and build new corn oil extraction facilities to extract more than an additional 20 million gallons per year of corn oil, and to increase our oilseed crush capacity to about 16 million gallons per year.
Location Technology Production Capacity Current Status - ------------------------------------------------------------------------------------------------------------------ Adrian, Michigan Biodiesel Production 10.0 million gallons per year Operational Culbertson, Montana Culinary Oil Production 1.3 million gallons per year Operational Oshkosh, Wisconsin Corn Oil Extraction 1.3 million gallons per year Operational Medina, New York Corn Oil Extraction 1.5 million gallons per year Operational Marion, Indiana Corn Oil Extraction 1.5 million gallons per year Operational Riga, Michigan Corn Oil Extraction 1.5 million gallons per year Operational Albion, Michigan Corn Oil Extraction 1.5 million gallons per year 12/08 Commissioning Richardton, North Dakota Corn Oil Extraction 1.5 million gallons per year Construction Lakota, Iowa Corn Oil Extraction 3.0 million gallons per year Construction Fulton, New York Corn Oil Extraction 3.0 million gallons per year Construction Milton, Wisconsin Corn Oil Extraction 1.5 million gallons per year Construction Adams, Nebraska Corn Oil Extraction 1.5 million gallons per year Construction Concordia, Kansas Corn Oil Extraction 3.0 million gallons per year Pending Financing
Executive Summary During the nine months ended September 30, 2008, we produced and sold about 1,054,000 gallons of corn oil and waste animal fat derived biodiesel to clients for use instead of diesel fuel, about 273,000 gallons of corn oil, about 688,477 gallons of culinary oils and about 5,750 tons of animal feed. We also manufactured biodiesel refining and other custom equipment for third party clients during the nine months ended September 30, 2008. Highlights for the nine months ended September 30, 2008 are as follows: >> Our total revenues were $24,126,662 as compared to $13,946,236 in revenues for 2007; >> Our operating loss was $(2,005,013) as compared to an operating loss of $(5,352,307) for the same period in 2007; 28 >> Our EBITDA was $1,096,289 as compared to EBITDA of $(965,121) for the same period in 2007; and, >> We reduced debt by $6,603,334. Plan of Operations Biofuel Production Activities We commenced production at our Adrian, Michigan-based biodiesel refinery on May 15, 2008 with a fuel mix refined from corn oil extracted from our off-site extraction facilities and conventionally available waste fats, oils and greases. In the first quarter 2008 and the first half of the second quarter 2008, we sold corn oil to third parties for use as a feedstock in biodiesel production. By internalizing biodiesel production capacity in the second half of the second quarter, we were able to directly refine the corn oil we produced into biodiesel which we then sold for increased rates and at enhanced margins as compared to corn oil alone. We also purchased and refined choice white grease (pork fat) into biodiesel during the second half of the second quarter and the first third of the third quarter, an activity made possible only by the fact that our current annualized biodiesel production capacity is greater than our current corn oil extraction capacity. While this practice can allow us to generate incremental additional cash flows on significantly increased sales, the contribution of conventionally available waste fats, oils and greases to cash and earnings is subject to the volatility inherent in the relevant commodities markets. During the latter half of the second quarter 2008, conventionally available animal fat constituted about 70% of our feedstock mix but the associated gross margins deteriorated rapidly in June and July 2008 due to record spikes in the associated commodity prices. This dynamic reduced the positive contribution of choice white grease to our cash flows during June and July 2008. Despite the strain on our liquidity, we continued to purchase choice white grease during this time frame to satisfy pre-existing contractual commitments for biodiesel. We thereafter ceased this activity in August 2008 and we scaled our biodiesel production operations back to match the rate of our corn oil production, which is currently a fraction of our biodiesel production capacity. This rate of production is sub-optimal and less than the minimum required for our biodiesel refinery to generate positive operating income. GreenShift's business model is designed to avoid commodity risk by obtaining large quantities of hedged feedstock initially through the use of its corn oil extraction technologies. Given this and the negative movement of the commodity markets during the third quarter, we elected not to use our capital to purchase sufficient quantities of conventional feedstocks to operate our biodiesel refinery at capacity, and we committed all of our available resources to the construction and commissioning of our third, fourth and fifth corn oil extraction facilities. We are operating four corn oil extraction facilities today and our current construction schedule calls for the installation of another facility prior to year end, and another nine extraction facilities and a 10 million gallon per year expansion to our biodiesel refinery during 2009. Culinary Oil Production Activities Revenues from our culinary oil segment during the second quarter decreased to historical levels from the abnormal levels realized during the first quarter 2008 made possible by opportunistic sales of whole seed into higher end culinary markets. Revenues are expected to remain at historical levels for the foreseeable future as we have scaled back production until we complete our plant expansion project. We will not be able to recover all of the available oil in the seed and operate at efficient economies of scale until we complete this expansion project. While revenues in this segment can be expected to rise significantly after we complete the expansion, the financing for the expansion project has been delayed. We are currently awaiting final approval of a government-backed loan guaranty for the financing we have sourced for the completion of the expansion. While there can be no assurances in this regard, we expect to receive this approval this year. The expansion can be expected to be completed within approximately nine months after the successful completion of a cost-effective financing for this project. 29 Equipment & Technology Sales Revenues from our equipment sales activities decreased during the third quarter 2008 as compared to the second quarter 2008. Equipment sales are expected to decrease during the fourth quarter 2008 and will thereafter remain episodic and dependent on our clients' ability to obtain financing. While we are party to a number of agreements to design, build and commission biofuels production equipment and facilities for several domestic third party clients, the volatility in the commodity markets has made financing very difficult to obtain for clients that lack a robust feedstock and risk management strategy. Results of Operations The following table sets forth, for the periods presented, revenues, expenses and net income in our condensed consolidated statement of operations, as well as other key financial and operating data:
Three Months Ended September 30 Nine months Ended September 30 ------------------------------- ------------------------------ 2008 2007 2008 2007 ------------ ----------- ------------ ------------ Summary Statement of Operations: Revenue .................................................. $ 6,088,754 $ 10,815,623 $ 24,126,662 $ 13,946,236 Cost of revenues ......................................... 6,347,635 9,140,180 19,194,414 11,739,467 ------------ ------------ ------------ ------------ Gross profit ........................................... (258,881) 1,675,443 4,932,248 2,206,769 Selling, general and administrative expenses ............. 2,560,448 1,545,174 6,937,261 7,559,076 ------------ ------------ ------------ ------------ Income (loss) from operations ......................... (2,819,329) 130,269 (2,005,013) (5,352,307) Other income (expense), net .............................. (3,333,560) (1,567,319) (10,857,925) (3,828,431) ------------ ------------ ------------ ------------ Lossbefore minority interest and taxes ................ (6,152,889) (1,437,050) (12,862,938) (9,180,738) Minority interest in net loss of consolidated subsidiaries 2,489 8,908 8,908 8,908 (Provision for) benefit from income taxes ................ (8,229) (254,410) (8,229) (254,410) Income from discontinued operations ...................... -- 120,772 -- 2,781,869 Preferred dividends ...................................... -- -- -- 151,875 ------------ ------------ ------------ ------------ Net loss .............................................. $ (6,158,628) $ (1,561,780) $ (12,862,259) $ (6,796,246) ============ ============ ============ ============ Other financial data: Net cash flows (used in) provided by operating activities 4,120,528 90,914 Net cash flows (used in) provided by investing activities (10,379,875) (2,112,735) Net cash flow (used in) provided by financing activities . 6,313,537 1,120,521 Net (decrease) increase in cash and cash equivalents .. (54,190) (901,299) Other non-GAAP financial performance data: EBITDA ................................................... $(1,532,404) $ 4,175,173$ 1,096,289 $ (965,121) Operating data: Corn oil extracted (gallons) ............................. 461,282 -- 934,142 -- Biodiesel produced (gallons) ............................. 511,935 -- 1,605,693 -- Average gross price of biodiesel sold per gallon ($) ..... $ 4.55 $ -- $ 4.38 $ -- Culinary oils produced (gallons) ......................... 71,393 103,609 688,477 809,342 Animal feed produced (tons) .............................. 543 730 5,750 7,222
Non-GAAP Financial Measures It should be noted, in connection with review of the preceding table, that EBITDA is not a financial measure employed in the application of generally accepted accounting principles. Nevertheless, we believe that earnings before interest expense, income tax provision (benefit), depreciation and amortization, or EBITDA is useful to investors and management in evaluating our operating performance in relation to other companies in our industry. the calculation of EBITDA generally eliminates the effects of financings and income taxes, which items may vary for different companies for reasons unrelated to overall operating performance. In addition, we have calculated the effect of eliminating non-recurring items, so as to enable meaningful comparison between years. EBITDA is a non-GAAP financial measure and has limitations as an analytical tool, and should not be considered in isolation or as a substitute for net income or any other measure of performance under GAAP, or to cash flows from operating, investing or financing activities as a measure of liquidity. We compensate for these limitations by relying on our GAAP results, as well as on our EBITDA. The Company produced an adjusted EBITDA of $1,096 289 during the nine months ended September 30, 2008. To clarify the effect of these one-time charges and financing charges on the Company's results, the following table reconciles the Company's net loss on an unconsolidated basis with adjusted EBITDA (a non-GAAP measure of performance): 30
Three Months Ended Nine Months Ended 9/30/08 9/30/07 9/30/08 9/30/07 ------------------------------------------------------------ Net income (loss) ..................................... $ (6,158,628) $ (1,561,780) $(12,862,259) $ (6,796,246) Adjustments to net income (loss) from operations: Interest expense ................................... 1,867,095 1,589,051 4,912,249 3,913,935 Depreciation ....................................... 473,362 60,894 838,740 78,959 Amortization of intangibles ........................... 525,000 523,399 1,575,000 1,575,000 Amortization of debt discount and deferred financing 1,042,257 3,564,105 3,157,312 3,564,105 EBITDA before non-recurring items ..................... (2,250,914) 4,175,670 (2,378,959) 2,335,753 Gain/loss on fair market value of derivatives ..... -- (526,389) (319,829) (3,405,607) Stock based compensation ........................... 33,176 226,592 370,009 2,314,655 Loss on disposal of investment ..................... 685,333 420,072 3,425,068 420,072 Preferred dividends ................................ -- -- -- 151,875 Gain from discontinued operations .................. -- -- -- (2,494,946) Taxes 8,229 254,410 8,229 254,410 Other non-recurring equity, restructuring and consolidation (income) expense, net .......... -- (120,772) -- (286,923) ------------ ------------ ------------ ------------ Adjusted EBITDA ....................................... $ (1,524,175) $ 4,429,583 $ 1,104,518 $ (710,711) ============ ============ ============ ============
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007 Revenues Total revenues for the three months ended September 30, 2008 were $6,088,754 representing a decrease of $4,726,869, or 43.7%, over the three months ended September 30, 2007 revenues of $10,815,623. Revenue for the three months ended September 30, 2008 included: >> $2,216,255 in biofuel sales; >> $1,559,187 in culinary oil sales; and, >> $2,313,311 in equipment and technology sales. In the comparable period of last year, our revenues were comprised of $363,156 from the sales of biofuels, $1,925,249 from sales of culinary oils, and $8,527,219 from sales of equipment and technology. Cost of Revenues Cost of revenues for the three months ended September 30, 2008 were $6,347,635, or 104 % of revenue compared to $9,140,180 or 85% of revenue for the same period in 2007. During the three months ended September 30, 2008, the Company's biofuel production costs of revenue were $3,224,318 as compared to $325,430 for the same period in 2007, and were attributable to costs associated with feedstock and other raw material purchases, transportation and maintenance. Cost of revenues for the Company's oilseed crush facility, which was acquired in March 2007, were $1,348,654 for the three months ended September 30, 2007 as compared to $1,816,612 for the three months ended September 30, 2007 and were primarily attributable to oilseed purchases and direct labor. Cost of revenue for our equipment and technology sales business were $1,729,356 for the three months ended September 30, 2008 as compared to $6,998,138 for the same period in 2007. This increase was attributable to the increased costs associated with increased sales of equipment to third party clients. Cost of revenues for the Company's corporate office was $45,308 as compared to $0 for the same period in 2007 and were attributable to corn oil royalties. Included within cost of revenue is depreciation and amortization expense of $473,362 and $60,894 for the three months ended September 30, 2008, and 2007, respectively. Depreciation and amortization expense increased by $412,468 over the same period in 2007. Gross Profit Gross profit for three months ended September 30, 2008 was $(258,881), representing a gross margin of 4.3%. This compared to $1,675,443, or 15.0%, in the comparable period of the prior year. The decrease in margin as a percentage of sales was primarily due to the Company's increased equipment and technology sales realized during the prior period. Operating Expenses Operating expenses for the three months ended September 30, 2008 were $2,560,448 compared to $1,545,174 for the same period in 2007. Included in the three months 31 ended September 30, 2008 was $33,176 in stock-based compensation as compared to $226,592 for the three months ended September 30, 2007. The increase in operating expenses was primarily due to the Company's changed business operations during 2008 as compared to 2007. Management believes that selling, general and administrative expenses over the next reporting period will be reduced as a percent of revenue as our biofuels and culinary oil production segments continue to grow. Interest Expense Interest expense for the three months ended September 30, 2008 was $1,867,095 representing an increase of $278,043 from $1,589,051 for the same period in 2007. This increase was mostly due to the debt service of the debt financing associated with the construction of the Company's various extraction facilities. Expenses Associated with Derivative Instruments Gain from the change in the fair market value of derivative liabilities was $0 for the three months ended September 30, 2008 compared with a gain of $526,389 for the three months ended September 30, 2007. Amortization of deferred financing costs and debt discounts was $1,042,257 and $650,828, respectively. Net Income or Loss Net loss from continuing operations for the three months ended September 30, 2008, was $6,150,399 as compared to a loss of $1,428,142 from the same period in 2007. Income for discontinued operations was $0 for the three months ended September 30, 2008 as compared to $120,772 for the three months ended September 30, 2007. Net loss for the three months ended September 30, 2008, was $6,158,628 as compared to a loss of $1,561,780 from the same period in 2007. Nine months Ended September 30, 2008 Compared to Nine months Ended September 30, 2007 Revenues Total revenues for the nine months ended September 30, 2008 were $24,126,662, representing an increase of $10,180,426, or 73%, over the nine months ended September 30, 2007 revenues of $13,946,236. Revenue for the nine months ended September 30, 2008 included: >> $6,318,419 in biofuel sales; >> $7,742,630 in culinary oil sales; and, >> $10,065,613 in equipment and technology sales. In the comparable period of last year, our revenues were comprised of $501,094 from the sales of biofuels, $4,206,338 from sales of culinary oils, and $9,238,804 from sales of equipment and technology. Cost of Revenues Cost of revenues for the nine months ended September 30, 2008 were $19,194,414, 79.6% of revenue compared to $11,739,467, or 84.2% of revenue for the same period in 2007. During the nine months ended September 30, 2008, the Company's biofuel production costs of revenue were $7,058,033 as compared to $434,282 for the same period in 2007, and were attributable to costs associated with feedstock and other raw material purchases, transportation and maintenance. Cost of revenues for the Company's oilseed crush facility, which was acquired in March 2007, were $6,950,383 for the nine months ended September 30, 2007 as compared to $4,125,491 for the nine months ended September 30, 2007 and were primarily attributable to oilseed purchases and direct labor. Cost of revenue for our equipment and technology sales business were $5,097,031 for the nine months ended September 30, 2008 as compared to $7,179,694 for the same period in 2007. This increase was attributable to the increased costs associated with increased sales of equipment to third party clients. Cost of revenues for the Company's corporate office was $88,968 as compared to $0 for the same period in 2007 and were attributable to corn oil royalties. Included within cost of revenue is depreciation and amortization expense of $838,740 and $78,959 for the nine months ended September 30, 2008, and 2007, respectively. Depreciation and amortization expense increased by $759,781 over the same period in 2007. 32 Gross Profit Gross profit for nine months ended September 30, 2008 was $4,932,248, representing a gross margin of 20.4%. This compared to $2,206,769, or 15.8%, in the comparable period of the prior year. The increase in margin as a percentage of sales was primarily due to the Company's increased equipment and technology sales realized during the quarter. Operating Expenses Operating expenses for the nine months ended September 30, 2008 were $4,812,733 compared to $7,559,076 for the same period in 2007. Included in the nine months ended September 30, 2008 was $370,009 in stock-based compensation as compared to $2,314,655 for the nine months ended September 30, 2007. The decrease in operating expenses was primarily due to the Company's changed business operations during 2008 as compared to 2007. Management believes that selling, general and administrative expenses over the next reporting period will be reduced as a percent of revenue as our biofuels and culinary oil production segments continue to grow. Interest Expense Interest expense for the nine months ended September 30, 2008 was $4,912,249 representing an increase of $998,314 from $3,913,935 for the same period in 2007. This increase was mostly due to the debt service of the debt financing associated with the construction of the Company's various extraction facilities. Expenses Associated with Derivative Instruments Gain from the change in the fair market value of derivative liabilities was $319,829 for the nine months ended September 30, 2008 compared with a gain of $3,405,607 for the nine months ended September 30, 2007. Amortization of deferred financing costs and debt discounts was $3,157,312 and $3,564,105, respectively. Net Income or Loss Net loss from continuing operations for the nine months ended September 30, 2008, was $12,854,030 as compared to a loss of $9,171,380 from the same period in 2007. Income for discontinued operations was $0 for the nine months ended September 30, 2008 as compared to $2,781,869 for the nine months ended September 30, 2007. There were no preferred dividends for the nine months ended September 30, 2008 as compared to preferred dividends of $151,875 for the nine months ended September 30, 2007. Net loss attributable to common shareholders for the nine months ended September 30, 2008, was $12,862,259 as compared to a loss of $6,796,246 from the same period in 2007. Profitability After accounting for the non-recurring loss realized on disposal of the Company's investment in Sterling Planet, our Other Income (Expense) for the three months ended September 30, 2008 was about $2,648,000, or about $10,592,000 on an annualized basis. Most of this amount is attributable to recurring non-cash items such as amortization (about $6,270,000 per year) and interest accruals (about $19,650 per year), and about $1,381,108 per year corresponds to interest payable on an ongoing current basis in cash. We are focused on the elimination of our net losses and transitioning to profitability and we plan to achieve this goal by commissioning as many corn oil extraction facilities as possible as soon as possible. Combined, seven corn oil extraction facilities will produce more than 10 million gallons per year of corn oil. At current market prices, extracting and refining 10 million gallons per year of corn oil into biodiesel will produce about $1.00 per gallon, or about $10,000,000 per year, in operating income. Achieving break-even profitability at current market prices will require us to successfully commission eight corn oil extraction facilities. Our plan is to maximize profitability through realization of the following key goals: >> Financing, Construction and Operation of Corn Oil Extraction Facilities The highest and best use of our resources and our primary objective is to get as many corn oil extraction systems installed in as many corn ethanol facilities as possible, as quickly as possible. Moreover, we have seen increased activity in our sales pipelines for additional corn oil extraction contracts and we plan to add significantly to our backlog during 2009. 33 >> Financing, Construction and Operation of Biodiesel Production Facilities We must cost-effectively internalize biodiesel production capability as we increase our corn oil extraction backlog. In addition to expanding our existing 10 million gallon per year biodiesel production facility in Adrian, Michigan to 20 million gallons per year over the next three quarters, we have executed agreements to build GreenShift-owned biodiesel facilities at Global Ethanol's Lakota, Iowa ethanol facility and Northeast Biofuels' Fulton, New York ethanol facility. Each new facility is designed to commence production at the rate of 10 million gallons per year and to scale to higher capacities as warranted by the availability of our corn oil supplies as our extraction facilities are brought online. Our development plan for these new facilities is to phase them into construction in a staggered fashion that follows after the construction of our extraction facilities. >> Financing and Expansion of Our Oilseed Crush Expansion We have entered into construction agreements to expand the capacity of our oilseed crush facility from 1.3 million gallons per year to more than 16 million gallons per year of crush capacity. Once completed, we intend to reinvest the net cash after debt service produced by this facility into the continued growth of this division, the execution of our corn oil extraction model, and the development of additional feedstock options for our biodiesel production facilities. Our longer term expectations for this facility involve the integration of new technologies to produce additional food and biofuel products. >> Completion of Financing We must complete additional financing to achieve all of the above goals on the stated time frames. Based on financing closed this year and our ongoing financing efforts, we expect to be able to rely on the strength and hedged nature of our corn oil extraction and biodiesel production cash flows to finance the construction costs of our corn oil extraction and biodiesel production facilities with project equity. The same strategy applies for the financing of our oilseed crush expansion, which will cost an estimated $9.8 million to complete - that is, we expect to be able to finance the expansion primarily out of the cash flows this facility is planned to produce after commissioning of its expansion. >> Pay Off and Refinance Convertible Debt We have historically raised capital in the form of convertible debt that was structured in ways that were favorable from a cash flow perspective and less favorable from an equity perspective. Our ability to meet the debt service requirements of this financing by issuing common stock allowed us to conserve cash flows while we developed and refined our technological capabilities into commercially-viable production capabilities. Now that our technologies have started to produce reliable cash flows, we have the ability to raise capital at more cost-effective rates from an equity perspective. We must reduce debt and rationalize our debt service requirements as we transition to profitability. Our plan here is to leverage our current and projected cash flows to payoff and refinance all of our convertible debt as soon as possible. DERIVATIVE LIABILITIES As of September 30, 2008, the Company and its subsidiaries had several convertible debentures due. The conversion feature on these debentures was variable based on trailing market prices and therefore contained an embedded derivative. We valued the conversion feature at the time of issuance using the Black-Scholes Model and recorded 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 was $34,597,990 as of September 30, 2008 and the unamortized note discount was $1,207,531. For the nine months ended September 30, 2008, we recognized interest expense for accretion of the debt discount of $1,750,873 and a gain for the change in fair value of the derivative of $319,829 for these debentures. The total derivative liability as of September 30, 2008 was $0 as the derivative feature was eliminated when the YA Global debentures were restructured and a fixed conversion price was put in place. 34 LIQUIDITY AND CAPITAL RESOURCES Consolidated Cash Balances As of September 30, 2008, we had a cash balance of $541,183, down from a balance of $737,301 at September 30, 2007. This net cash is summarized below and discussed in more detail in the subsequent sub-sections: >> Operating Activities $4,120,528 of net cash provided by operating activities primarily deriving from sales of equipment and technology and from biofuel sales. >> Investing Activities $10,379,875 of net cash used in investing activities mainly for the construction of our corn oil extraction facilities and the purchase of equipment for our biodiesel facility. >> Financing Activities $6,313,537 of net cash provided by financing activities. Current and Prior Year Activity Our primary source of liquidity is cash generated from operations and proceeds from issuance of debt and common stock. For the nine months ended September 30, 2008, net cash provided by our operating activities was $4,120,528 as compared to the net cash provided by our operating activities of $90,914 for the nine months ended September 30, 2007. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our ability to generate cash flows from operations; the level of our outstanding indebtedness and the interest we are obligated to pay on this indebtedness; and, our capital expenditure requirements, which consist primarily of facility construction and the purchase of equipment. The Company's capital resources are impacted by changes in accounts receivable as a result of revenue fluctuations, economic trends, and collection activities. At September 30, 2008, accounts receivable, net of allowance for doubtful accounts, totaled $705,200 and inventories totaled $2,314,498. Accounts payable and accrued expenses totaled $13,851,984. For the nine months ended September 30, 2008, we used $10,379,875 in investing activities as compared to $2,112,735 used in investing activities for the nine months ended September 30, 2007, and financing activities provided $6,313,537 in cash as compared to $1,120,521 in cash used by financing activities during September 30, 2007. The Company had a working capital deficit of $56,299,852 at September 30, 2008, which includes $3,979,437 in purchase obligations, $9,004,018 in amounts due to the prior owners of our oilseed crush facility, including $7,104,018 convertible into common stock, $11,977,824 in other convertible debt, and $1,572,068 in related party debt. Despite their classification as current liabilities the $3,979,437 in purchase obligations, to the extent due, are tied to the earnings of the Company's equipment sales business and can only be serviced after the Company's senior secured debt has been serviced; and, the notes payable to the prior owners of our oilseed crush facility ($9,004,018) are expected to be restructured in the fourth quarter 2008 to service these amounts exclusively out of the net cash flows (after regular debt service) of our oilseed crush facility. The Company's working capital deficit net of all of these amounts would be $29,766,505. Expected Activity Moving Forward We intend to fund our principal liquidity and capital resource requirements through cash provided by operations, borrowings under our current credit agreement, and new financing activities. Notably, but for the cash needs associated with our construction projects, Management expects that its current and currently committed sources of revenue will be sufficient to meet the Company's debt service, operational and other regular cash needs during 2008 and beyond. Cash Flows Provided By Operating Activities Among our current and known sources of operating cash flows are our four existing corn oil extraction facilities and our biodiesel facility in Adrian, Michigan. Notwithstanding any contributions to our cash flows from our equipment or culinary oil sales, or from refining and selling conventional waste fat derived biodiesel, refining the oil extracted by five extraction facilities into biodiesel is expected to provide sufficient cash to cover all of our regular debt service and operational needs for the foreseeable future. 35 Cash Flows Provided By Financing Activities At the present time, the Company's existing sources of financing include its $10 million revolving credit facility, the proceeds of which were used for the construction of the Company's corn oil extraction facilities and general working capital purposes related to those efforts, its $1,750,000 working capital line of credit, the proceeds of which are to be used for the purchase of raw materials for the Company's biodiesel production facility, and its $1,688,500 term loan, the proceeds of which are to be used for the purchase and installation of equipment at the Company's biodiesel production facility. We require significant new equity and debt financing to accelerate the completion of our contracted corn oil extraction, biodiesel production and oilseed crush projects. We expect to complete additional financing for this purpose during the fourth quarter 2008. We are also evaluating various opportunities to restructure our convertible debt in favor of traditional, non-convertible long term debt. We do not know at this time if the necessary funds can be obtained or on what terms they may be available. Cash Flows Used In Investment Activities We intend to use our available sources of cash from operations and financing for the balance of 2008 and all of 2009 to execute on our plan to build as many corn oil extraction facilities as possible, as quickly as possible, to expand our oilseed crushing and biodiesel production facilities, and to build new biofuels production facilities. 36 Contractual Commitments Our material contractual obligations are composed of construction commitments for plants being built for our own use, construction commitments for plants being built for outside parties, repayment of amounts borrowed through our convertible debentures and other notes payable. The following schedule summarizes our contractual obligations as of September 30, 2008. Our obligations are likely to increase significantly as we enter into agreements in connection with the construction of additional corn oil extraction facilities, GreenShift-owned biodiesel facilities, and or oilseed crush expansion project:
2012 and 2008 2009 2010 2011 Thereafter Total ---------- ----------- ----------- ---------- ----------- ----------- Current convertible debt obligations (1)(3) ... $ 3,750,000 $ 7,449,631 -- $ -- $ -- $11,199,631 Current note payable obligations (2) .......... 3,077,319 552,758 -- -- -- 3,630,077 Other current obligations ..................... 277 18,420 -- -- -- 18,697 Long term convertible debt obligations, net (3) -- 12,860,000 -- 3,434,341 -- 16,294,341 Long term note payable obligations, net ....... -- 1,744,721 1,501,769 1,117,226 6,257,602 10,621,317 Convertible purchase obligations (4) .......... 7,104,018 -- -- -- -- 7,104,018 Other purchase obligations (5) ................ 5,879,437 -- -- -- -- 5,879,437 Other obligations ............................. 184,196 -- 1,174,806 18,420 128,936 1,506,358 Total obligations ............................. $19,995,247 $22,625,529 $ 2,676,575 $ 4,569,987 $ 6,386,538 $56,503,876 - ----------- (1) Current convertible debt obligations represents amounts due to third parties but that are payable in the form of either GreenShift Corporation common stock or GS AgriFuels Corporation common stock. The terms of the Company's convertible debt do not generally require regular principal or interest payments in cash. The amount due at September 30, 2008 was $7,184,341, and was reduced by $116,000 from conversions for the three months ended September 30, 2008 and a new debenture for $250,000 was added during the nine months ended September 30, 2008. (2) Current note payable obligations included $2,071,886 at September 30, 2008 due to Stillwater Asset Backed Fund, L.P., the proceeds of which were used to complete the Company's 2006 acquisition of NextGen Fuel, Inc. The Company primarily services this obligation out of its equipment and technology sales cash flows and it has been reduced to $2,071,886 as of September 30, 2008. The Company expects this obligation to be paid in full during 2008. (3) Current and long term convertible debt obligations include $6,434,341 and $20,309,631 due from GreenShift and GS AgriFuels, respectively, to YA Global Investments, L.P. ("YAGI"). These amounts are collectively reduced by applicable debt discounts of $1,207,530. Debt discounts are applied under U.S. GAAP and represent additional value given to the holders of the debentures (in excess of the face value of the debentures) due to embedded derivative securities contained within the conversion feature of the debt. The amount due from GreenShift and GS AgriFuels were reduced by $2,000,000 and $1,000,000, respectively, during the nine months ended September 30, 2008. The Company intends to payoff and refinance the substantial majority of its convertible debt due to YAGI during 2008 and 2009 in conjunction with expected increases in the Company's cash flows from its biofuel production and other operations. (4) Purchase obligations pertain to the 2007 acquisition by GS AgriFuels of Sustainable Systems, Inc., the holding company for our oilseed crush facility. These amounts include $7,104,018 in GS AgriFuels current convertible debentures payable and $1,900,000 in notes payable to the prior owners of our oilseed crush facility (see Note 5 to the Condensed Consolidated Financial Statements). The Company expects to restructure the terms and conditions of the relevant purchase agreements for its oilseed crush facility to provide for the payment of the purchase price exclusively out of this facility's cash flows after its expansion project is complete. (5) Other purchase obligations at September 30, 2008 include $3,979,437 relating to GS AgriFuels' 2006 acquisition of NextGen Fuel, Inc., which obligations are potentially subject to adjustment by the terms of the relevant acquisition agreements and, to the extent due, may only be serviced by the Company after the Company has serviced and remains in continuing compliance with its senior debt obligations (See Note 4 to the Condensed Consolidated Financial Statements).
37 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 4 CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer carried out an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. The Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in its reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. The Company's disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. The Company's internal controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its consolidated financial statements in conformity with GAAP. Management determined that at September 30, 2008, the Company had a material weakness because it did not have a sufficient number of personnel with an appropriate level of knowledge and experience of generally accepted accounting principles in the United States of America (U.S. GAAP) that are commensurate with the Company's financial reporting requirements. Contributing to this lack of sufficient resources was the large number of non-recurring transactions completed during the fourth quarter of 2007 and first quarter of 2008. This caused the Company to take the following actions. These actions included (i) appointing a new Chief Financial Officer with substantial public company business management, governance and financial experience, (ii) supplementing existing resources with technically qualified third party consultants and (iii) performing additional procedures and reviews. Management intends to strengthen its accounting and compliance procedures further in 2008 by hiring additional accounting staff to help ensure that the Company is following best practices with respect to regulatory and compliance matters by: >> appointing a new controller, who is primarily responsible for keeping the Company apprised of contemporary accounting issues; >> enhancing the Company's internal audit function by increasing the number of accounting staff and recruiting additional seasoned audit professionals where required; >> developing written procedures for, among other items, reviewing unusual financial statement adjustments and allocating costs to the Company's segments; >> adopting process improvements concerning the Company's financial statement close process; >> developing additional training programs for the Company's finance and accounting personnel; and, >> developing enhanced educational programs for personnel at all levels in ethics, corporate compliance, disclosure, procedures for anonymous reporting of concerns and mechanisms for enforcing Company policies. Implementation of those additional procedures is ongoing. Nevertheless, management concluded that at the end of the period covered by this report, for the reason set forth above, the Company's disclosure controls and procedures were not effective. Change in Internal Control Over Financial Reporting Other than described above, there have been no changes in the company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, the company's internal control over financial reporting. 38 PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS The Company's subsidiaries, GS AgriFuels Corporation and NextGen Fuel, Inc. are party to the matter entitled O'Brien & Gere Limited, et al v. NextGen Chemical Processors, Inc., et al., which action was filed in the Supreme Court of the State of New York. The verified complaint had sought performance of and damages relating to certain service and related agreements, plus attorney's fees and costs. This matter relates to the provision by plaintiffs of certain engineering services to NextGen Chemical Processors, Inc. ("NCP") during 2005 and 2006. NCP is owned by the former shareholders of NextGen Fuel, Inc., subsidiary. On September 19, 2007, the Supreme Court of the State of New York dismissed a significant portion of O'Brien & Gere's complaint with prejudice. Management does not believe that there is a reasonable possibility that the claims made against NextGen Fuel by the plaintiffs in this litigation indicate that a material loss has occurred. Accordingly, no accrual has been made in connection with those claims. The Company's Sustainable Systems subsidiary is party to the matter entitled Sheridan Electric Co-Op., Inc., v. Sustainable Systems, LLC, which action was filed in the District Court of Montana. The verified complaint seeks to accelerate repayment of an unsecured note due March 1, 2010 (the "Sheridan Note"), as well as attorney's fees and costs. All payments due on the Sheridan Note were current at the time Sheridan filed this action. Sustainable otherwise has been and remains in compliance with the terms of Sheridan Note. Sustainable has responded to the verified complaint and denies any liability. ITEM 1A RISK FACTORS There are many important factors that have affected, and in the future could affect, GreenShift's business, including, but not limited to the factors discussed below, which should be reviewed carefully together with other information contained in this report. Some of the factors are beyond our control and future trends are difficult to predict. RISKS ATTENDANT TO OUR BUSINESS Our external auditors have included an explanatory paragraph in their audit report raising substantial doubt as to the Company's ability to continue as a going concern due to the Company's history of losses, working capital deficiency and cash position. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a loss of $12,862,259 for the nine months ended September 30, 2008. As of September 30, 2008 the Company had $541,183 in cash, and current liabilities exceeded current assets by $56,299,852 which included $3,979,437 in purchase obligations, $9,004,018 in amounts due to the prior owners of our oilseed crush facility (including $7,104,018 in convertible debt), $11,977,824 in other convertible debt and $1,572,068 in related party debt. None of these items are required to be serviced out of the Company's regular cash flows and the Company's working capital deficit net of these amounts is $29,766,505. These matters raise substantial doubt about the Company's ability to continue as a going concern. We are implementing new business plans which make the results of our business uncertain. A significant portion of our operations have been acquired or started in the last 24 months. Therefore, our experience in operating the current business is limited. Our limited operating history makes it difficult for potential investors to evaluate our business. Therefore, our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business, as well as those risks that are specific to the biodiesel, ethanol and culinary oils industry in general. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to enter into agreements with third parties for necessary financing, the provision of necessary feedstock sources, engineering, procurement and construction services and the sale and distribution of our biodiesel fuel on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment. Unanticipated problems or delays in building our facilities to the proper specifications may harm our business and viability. Our current operating cash flow depends on our ability to timely and economically complete and operate our planned facilities. If our current production facilities are disrupted or the economic integrity of these projects is threatened for unexpected reasons, our business may experience a substantial setback. Prolonged problems may threaten the commercial viability of these facilities. Moreover, the occurrence of significant unforeseen conditions or events in connection with these facilities may require us to reexamine our business model. Any change to our business model or management's evaluation of the viability of these projects may adversely affect our business. Our construction costs for additional facilities may also increase to a level that would make a new facility too expensive to complete or unprofitable to operate. Contractors, engineering firms, construction firms and equipment suppliers also receive requests and orders from other companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial terms. We may suffer significant delays or cost overruns as a result of a variety of factors, such as increases in the prices of raw materials, shortages of workers or materials, transportation constraints, adverse weather, equipment failures, fires, damage to or destruction of property and equipment, environmental damage, unforeseen difficulties or labor issues, any of which could prevent us from commencing operations as expected at our facilities. The results of operations, financial condition and business outlook of our oilseed crush facility will be highly dependent on commodity prices, which are subject to significant volatility and uncertainty, and the availability of supplies, so our results could fluctuate substantially. The results of operations of our oilseed crush facility are substantially dependent on different commodity prices, especially prices for oilseed and materials used in the construction of our expansion project. As a result of the volatility of the prices for these items, our results may fluctuate substantially and we may experience periods of declining prices for our products and increasing costs for our raw materials, which could result in operating losses. Although we may attempt to offset a portion of the effects of fluctuations in prices by entering into forward contracts to supply biodiesel or purchase feedstock or other items or by engaging in transactions involving exchange-traded futures contracts, the amount and duration of these hedging and other risk mitigation activities may vary substantially over time and these activities also involve substantial risks. Biodiesel fuel is a commodity whose price is determined based on the price of petroleum diesel, world demand, supply and other factors, all of which are beyond our control. World prices for biodiesel fuel have fluctuated widely in recent years. We expect that prices will continue to fluctuate in the future. Price fluctuations will have a significant impact upon our revenue, the return on our investment in biodiesel refineries and on our general financial condition. Price fluctuations for biodiesel fuel may also affect the investment market, and our ability to raise investor capital. Although market prices for biodiesel fuel rose to near-record levels during 2005 and have remained near those levels since then, there is no assurance that these prices will remain at high levels. Future decreases in the prices of biodiesel or petroleum diesel fuel may have a material adverse effect on our financial condition and future results of operations. The market for renewable energy sources is undetermined, and may not be adequate to sustain prices at a profitable level. We are involved in the development or production of renewable energy and we provide products and services to companies involved in the production of renewable energy. Their success will depend on the level of market acceptance of renewable energy sources. The marketing of renewable energy sources on a national scale is a phenomenon new to this decade. The portion of U.S. energy represented by renewable energy sources is still small. It is not possible to predict with assurance how large the market for renewable energy sources will become. If it has not developed to a sufficient breadth when our subsidiaries are ready to market their products and services, the price at which renewable energy can be sold will be limited, which may make it impossible for one or more of our subsidiaries to operate profitably. The fiscal efficiencies of highly capitalized competitors in the renewable energy field could defeat our efforts to capture a viable market share. The business of producing renewable energy is a capital-intense business, requiring substantial capital resources. The costs that we may incur in obtaining capital are substantially greater per dollar than the cost incurred by 40 large scale enterprises in the industry. If competition reduces the prices available for renewable energy sources, our dependence on expensive capital sources may prevent us from lowering our prices to meet the competition. This situation could cause to be unable to compete effectively. We may be unable to obtain the additional capital required to implement our business plan. We expect that current capital and other existing resources will be sufficient to provide only a limited amount of capital to operate and build our plants. The revenues generated from designing and building biodiesel facilities for third parties will not be sufficient to cover the anticipated total costs of construction. We will require additional capital to continue to expand our business beyond our current stage of operations. There is no assurance that we will be able to obtain the capital required in a timely fashion, on favorable terms or at all. If we are unable to obtain required additional financing, we may be forced to restrain our growth plans or cut back existing operations. Future construction and operation of our facilities, capital expenditures to build and operate our facilities, hiring qualified management and key employees, complying with licensing, registration and other requirements, maintaining compliance with applicable laws, production and marketing activities, administrative requirements, such as salaries, insurance expenses and general overhead expenses, legal compliance costs and accounting expenses will all require a substantial amount of additional capital and cash flow. There is no assurance that we will successfully complete suitable financing in a timely fashion or at all. Future financings through equity investments are possible, and these are likely to be dilutive to the existing shareholders, as we issue additional shares of common stock to investors in future financing transactions. Also, the terms of securities we issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under employee equity incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital or financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely affect our financial results. Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the biodiesel, ethanol and culinary oil industries, the fact that we are a new company without a proven operating history, the location of our planned biodiesel facilities in the United States, instead of Europe or other regions where biodiesel is more widely accepted, and the price of biodiesel and oil on the commodities market. Furthermore, if petroleum or biodiesel prices on the commodities markets decrease, then our revenues will likely decrease and decreased revenues may increase our requirements for capital. Some of the contractual arrangements governing our operations may require us to maintain minimum capital, and we may lose our contract rights if we do not have the required minimum capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations. Strategic relationships on which we may rely are subject to change. Our ability to identify and enter into commercial arrangements with feedstock suppliers, construction contractors, equipment fabricators, transportation, logistics and marketing services providers and biodiesel customers will depend on developing and maintaining close working relationships with industry participants. Our success in this area will also depend on our ability to select and evaluate suitable projects as well as to consummate transactions in a highly competitive environment. These realities are subject to change and may impair our ability to grow. 41 The U.S. biodiesel and ethanol industries are highly dependent upon a myriad of federal and state legislation and regulation and any changes in legislation or regulation could materially and adversely affect our results of operations and financial position. Our corn oil extraction model relies on the ethanol market (to purchase corn oil) and the biodiesel market (to sell our corn oil). The production of biodiesel and ethanol is made significantly more competitive by federal and state tax incentives. The federal excise tax incentive program for biodiesel was originally enacted as part of the American Jobs Creation Act of 2004, but is scheduled to expire on December 31, 2008. This program provides fuel blenders, generally distributors, with a one-cent tax credit for each percentage point of vegetable oil derived biodiesel blended with petroleum diesel. For example, distributors that blend soybean-derived biodiesel with petroleum diesel into a B20 blend would receive a twenty cent per gallon excise tax credit. The program also provides blenders of recycled oils, such as yellow grease from restaurants, with a one-half cent tax credit for each percentage point of recycled oil derived biodiesel blended with petroleum diesel. For example, distributors that blend recycled oil derived biodiesel with petroleum diesel into a B20 blend would receive a ten cent per gallon excise tax credit. In addition, approximately thirty-one states provide mandates, programs and other incentives to increase biodiesel production and use, such as mandates for fleet use or for overall use within the state, tax credits, financial grants, tax deductions, financial assistance, tax exemptions and fuel rebate programs. These incentives are meant to lower the cost of biodiesel in comparison to petroleum diesel. The elimination or significant reduction in the federal excise tax incentive program or state incentive programs benefiting biodiesel may have a material and adverse effect on our results of operations and financial condition. The cost of production of ethanol is made significantly more competitive with regular gasoline by federal tax incentives. The federal excise tax incentive program currently allows gasoline distributors who blend ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sell. If the fuel is blended with 10% ethanol, the refiner/marketer pays $0.051 per gallon less tax, which equates to an incentive of $0.51 per gallon of ethanol. The $0.51 per gallon incentive for ethanol is scheduled to be reduced to $0.46 per gallon in 2009 and to expire in 2010. The blenders' credits could be eliminated or reduced at any time through an act of Congress and may not be renewed in 2010 or may be renewed on different terms. In addition, the blenders' credits, as well as other federal and state programs benefiting ethanol (such as tariffs), generally are subject to U.S. government obligations under international trade agreements, including those under the World Trade Organization Agreement on Subsidies and Countervailing Measures, and might be the subject of challenges thereunder, in whole or in part. Ethanol can be imported into the U.S. duty-free from some countries, which may undermine the ethanol industry in the U.S. Imported ethanol is generally subject to a $0.54 per gallon tariff that was designed to offset the $0.51 per gallon ethanol incentive that is available under the federal excise tax incentive program for refineries that blend ethanol in their fuel. A special exemption from the tariff exists for ethanol imported from 24 countries in Central America and the Caribbean Islands, which is limited to a total of 7% of U.S. production per year. Imports from the exempted countries may increase as a result of new plants under development. Since production costs for ethanol in these countries are estimated to be significantly less than what they are in the U.S., the duty-free import of ethanol through the countries exempted from the tariff may negatively affect the demand for domestic ethanol and the price at which we sell ethanol. Although the $0.54 per gallon tariff has been extended through December 31, 2008, bills were previously introduced in both the U.S. House of Representatives and U.S. Senate to repeal the tariff. We do not know the extent to which the volume of imports would increase or the effect on U.S. prices for ethanol if the tariff is not renewed beyond its current expiration. Any changes in the tariff or exemption from the tariff could have a material adverse effect on our results of operations and our financial position. In addition, the North America Free Trade Agreement, or NAFTA, which entered into force on January 1, 1994, allows Canada and Mexico to export ethanol to the United States duty-free or at a reduced rate. Canada is exempt from duty under the current NAFTA guidelines, while Mexico's duty rate is $0.10 per gallon. The effect of the renewable fuel standard ("RFS") program in the Energy Independence and Security Act signed into law on December 19, 2007 (the "2007 Act") is uncertain. The mandated minimum level of use of renewable fuels in the RFS under the 2007 Act increased to 9 billion gallons per year in 2008 (from 5.4 billion gallons under the RFS enacted in 2005), further increasing to 36 billion gallons per year in 2022. The 2007 Act also requires the increased use of "advanced" biofuels, which are alternative biofuels produced without using corn starch such as cellulosic ethanol and biomass-based diesel, with 21 billion 42 gallons of the mandated 36 billion gallons of renewable fuel required to come from advanced biofuels by 2022. Required RFS volumes for both general and advanced renewable fuels in years to follow 2022 will be determined by a governmental administrator, in coordination with the U.S. Department of Energy and U.S. Department of Agriculture. Increased competition from other types of biofuels could have a material adverse effect on our results of operations and our financial position. The RFS program and the 2007 Act also include provisions allowing "credits" to be granted to fuel producers who blend in their fuel more than the required percentage of renewable fuels in a given year. These credits may be used in subsequent years to satisfy RFS production percentage and volume standards and may be traded to other parties. The accumulation of excess credits could further reduce the impact of the RFS mandate schedule and result in a lower ethanol price or could result in greater fluctuations in demand for ethanol from year to year, both of which could have a material adverse effect on the financial condition of participants in our corn oil extraction program which could require us to incur additional costs to relocate one or more corn oil extraction facilities to other ethanol production facilities. Waivers of the RFS minimum levels of renewable fuels included in gasoline could have a material adverse affect on our results of operations. Under the RFS as passed as part of the Energy Policy Act of 2005, the U.S. Environmental Protection Agency, in consultation with the Secretary of Agriculture and the Secretary of Energy, may waive the renewable fuels mandate with respect to one or more states if the Administrator of the U.S. Environmental Protection Agency, or "EPA", determines upon the petition of one or more states that implementing the requirements would severely harm the economy or the environment of a state, a region or the U.S., or that there is inadequate supply to meet the requirement. In addition, the Energy Independence and Security Act of 2007 allows any other person subject to the requirements of the RFS or the EPA Administrator to file a petition for such a waiver. Any waiver of the RFS with respect to one or more states could adversely offset demand for ethanol and could have a material adverse effect on our results of operations and our financial condition Disruptions to infrastructure, or in the supply of fuel, natural gas or water, could materially and adversely affect our business. Our business depends on the continuing availability of rail, road, port, storage and distribution infrastructure. Any disruptions in this infrastructure network, whether caused by labor difficulties, earthquakes, storms, other natural disasters, human error or malfeasance or other reasons, could have a material adverse effect on our business. We rely upon third-parties to maintain the rail lines from their plants to the national rail network, and any failure on these third parties' part to maintain the lines could impede the delivery of products, impose additional costs and could have a material adverse effect on our business, results of operations and financial condition. We also depend on the continuing availability of raw materials, including fuel and natural gas, and the ability of ethanol producers that participate in our corn oil programs to remain in production The production of ethanol, from the planting of corn to the distribution of ethanol to refiners, is highly energy-intensive. Significant amounts of fuel and natural gas are required for the growing, fertilizing and harvesting of corn, as well as for the fermentation, distillation and transportation of ethanol and the drying of distillers grains. A serious disruption in supplies of fuel or natural gas, including as a result of delivery curtailments to industrial customers due to extremely cold weather, or significant increases in the prices of fuel or natural gas, could significantly reduce the availability of raw materials at our plants, increase production costs and could have a material adverse effect on our business, results of operations and financial condition. Ethanol plants also require a significant and uninterrupted supply of water of suitable quality to operate. If there is an interruption in the supply of water for any reason, one or more participating ethanol producer plants may be required to halt production. If production is halted at one or more of these plants for an extended period of time, it could have a material adverse effect on our business, results of operations and financial condition Our commercial success will depend in part on our ability to obtain and maintain protection of our intellectual property. Our success will depend in part on our ability to maintain or obtain and enforce patent and other intellectual property protection for our technologies and to preserve our trade secrets, and to operate without infringing upon the proprietary rights of third parties. We have obtained or developed rights to patents and patent applications in the United States and internationally, and may, in the future, seek rights from third parties to other patent applications or patented technology. Significant aspects of our technology are currently 43 protected as trade secrets, for which we intend to file patent applications when appropriate. The description of the processes currently protected as trade secrets is likely to be published at some point in the patent application process with no assurance that the related patents will be issued. Further, certain confidentiality agreements may expire prior to the issuance of the relevant patent. There can be no assurance that patents will issue from the patent applications filed or to be filed or that the scope of any claims granted in any patent will provide us with proprietary protection or a competitive advantage. There can be no assurance that our patents will be valid or will afford us with protection against competitors with similar technology. The failure to obtain or maintain patent or other intellectual property protection on the technologies underlying our biodiesel process may have a material adverse effect on our competitive position and business prospects. It is also possible that our technologies may infringe on patents or other intellectual property rights owned by others. We may have to alter our products or processes, pay licensing fees, defend an infringement action or challenge the validity of the patents in court, or cease activities altogether because of patent rights of third parties, thereby causing additional unexpected costs and delays to us. There can be no assurance that a license will be available to us, if at all, upon terms and conditions acceptable to us or that we will prevail in any intellectual property litigation. Intellectual property litigation is costly and time consuming, and there can be no assurance that we will have sufficient resources to pursue such litigation. If we do not obtain a license under such intellectual property rights, are found liable for infringement or are not able to have such patents declared invalid, we may be liable for significant money damages and may encounter significant delays in bringing products and services to market. There can be no assurance that we have identified United States and foreign patents that pose a risk of infringement. Competition may impair our success. New technologies may be developed by others that could compete with our corn oil extraction model. In addition, we face competition from other producers of biodiesel equipment and related products. Such competition could be intense thus driving down the price for our products. Competition will likely increase as prices of energy in the commodities market, including petroleum and biodiesel, rise, as they have in recent years. Additionally, new companies are constantly entering the market, thus increasing the competition. Larger foreign owned and domestic companies who have been engaged in this business for substantially longer periods of time, such as vertically integrated agricultural and food supply companies such as Cargill, Archer Daniels Midland and Bunge, or who decide to enter into the biodiesel production industry, such as Tyson and Conoco Phillips, may have access to greater resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own refining and fuel marketing operations, and may have greater access to feedstocks, market presence, economies of scale, financial resources and engineering, technical and marketing capabilities, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition and could also have a negative impact on our ability to obtain additional capital from investors. We may be unable to employ and retain the qualified personnel that will be necessary for our success. As of September 30, 2008, we had approximately 124 full time equivalent employees. The number of individuals with experience in biofuels production is considerably smaller than the number of jobs available for such individuals. We will have to offer substantial incentives in order to obtain the services of individuals with useful experience in the production of biodiesel and ethanol. As a result, our labor costs may be greater than they would be in a less dynamic industry. On the other hand, if we are unable to employ the qualified individuals that we will need, our business may fail. Competition due to advances in renewable fuels may lessen the demand for biodiesel and negatively impact our profitability. Alternative fuels, gasoline oxygenates, ethanol and biodiesel production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean-burning gaseous fuels that, like biodiesel, may address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Additionally, there is significant research and development being undertaken regarding the production of ethanol from cellulosic biomass, the production of methane from anaerobic digesters and the production of electricity from wind and solar thermal energy systems, among other potential sources of renewable energy. If these renewable fuels continue to expand and gain broad acceptance such that the overall demand for diesel is reduced, we may not be able to compete effectively. We will rely on technology to conduct our business and our technology could become ineffective or obsolete. We will be required to continually enhance and update our technology to maintain its efficacy and to avoid obsolescence. The costs of doing so may be substantial 44 and may be higher than the costs that we anticipate for technology maintenance and development. If we are unable to maintain the efficacy of our technology, our ability to manage our business and to compete may be impaired. Even if we are able to maintain technical effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs than we would if our technology was more effective. The impact of technical shortcomings could have a material adverse effect on our prospects, business, financial condition, and results of operations. In addition, our biodiesel production plants, when constructed, will be single purpose entities with no use other than the production of biodiesel and associated produces. So if our facilities become technologically obsolete, we may be unable to restructure our operations without a massive capital expense associated with converting our facilities Litigation or other proceedings relating to intellectual property rights could result in substantial costs and liabilities and prevent us from selling our biodiesel. We must operate in a way that does not infringe the intellectual property rights of others in the U.S. and foreign countries. Third parties may claim that our production process or related technologies infringe their patents or other intellectual property rights. Competitors may have filed patent applications or have issued patents and may obtain additional patents and proprietary rights related to production processes that are similar to ours. We may not be aware of all of the patents potentially adverse to our interests. We may need to participate in interference proceedings in the U.S. Patent and Trademark Office or in similar agencies of foreign governments to determine the priority of invention involving issued patents and pending applications of another entity. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, in certain cases, result in substantial additional expenses to license technologies from third parties. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources or engage legal counsel willing to advance the litigation costs. An unfavorable outcome in an interference proceeding or patent infringement suit could require us to pay substantial damages, cease using the technology or to license rights, potentially at a substantial cost, from prevailing third parties. There is no assurance that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. Even if we are able to obtain rights to a third party's intellectual property, those rights may be non-exclusive and therefore our competitors may obtain access to the same intellectual property. Ultimately, we may be unable to produce and sell our biodiesel or may have to cease some of our business operations as a result of infringement claims, which could severely harm our business. We cannot give assurances that our biodiesel technologies will not conflict with the intellectual property rights of others. Additionally, any involvement in litigation in which we are accused of infringement may result in negative publicity about us and injure our relations with any then-current or prospective customers or vendors. Our business is subject to local legal, political, and economic factors which are beyond our control. We believe that the current political environment for construction of our planned future biodiesel facilities is sufficiently supportive to enable us to plan and implement our operations. However, there are risks that conditions will change in an adverse manner. These risks include, but are not limited to, laws or policies affecting mandates or incentives to promote the use of biodiesel, environmental issues, land use, air emissions, water use, zoning, workplace safety, restrictions imposed on the biodiesel fuel industry such as restrictions on production, substantial changes in product quality standards, restrictions on feedstock supply, price controls and export controls. Any changes in biodiesel fuel, financial incentives, investment regulations, policies or a shift in political attitudes are beyond our control and may adversely affect our business and future financial results. Changes in industry specification standards for biodiesel may negatively impact our ability to sell corn oil for the purposes of biodiesel production, increase production costs or require more capital than we have planned to construct our biodiesel production facilities. The American Society of Testing and Materials, or ASTM, is the recognized standard-setting body for fuels and additives in the U.S. ASTM's specification for biodiesel as a blend stock, D6751, has been adopted by the EPA, and compliance with such specification is required in order for our biodiesel to qualify as a legal motor fuel for sale and distribution. In Europe, biodiesel standard is EN 14214, which has been modified to a more stringent standard in Germany. ASTM and the European standard setting bodies have modified the biodiesel specifications in the past, and are expected to continue to modify the specification in the future as the use of biodiesel expands. There is no guarantee that our production facilities will be able to produce ASTM-compliant biodiesel in the event of changes to the specifications. We may need to invest 45 significant capital resources to upgrade or modify our production facilities, which might cause delays in construction or stoppages of production and the resultant loss of revenue, or which might not be economically feasible at all. Any modifications to our production facilities or to the biodiesel ASTM specification or other specification with which we attempt to comply may entail increased construction or production costs or reduced production capacity. These consequences could result in a negative impact on our financial performance. Changes in regulations and enforcement policies could subject us to additional liability which could impair our ability to continue certain operations due to the regulated nature of our operations. Because the biodiesel industry continues to develop rapidly, we cannot predict the extent to which our operations may be affected by future enforcement policies as applied to existing laws, by changes to current environmental laws and regulations, or by the enactment of new environmental laws and regulations. Any predictions regarding possible liability under such laws are complicated further by current environmental laws which provide that we could be liable, jointly and severally, for certain activities of third parties over whom we have limited or no control. Environmental risks and regulations may adversely affect our business. All phases of designing, constructing and operating biodiesel refineries present environmental risks and hazards. We are subject to environmental regulation implemented or imposed by a variety of federal, state and municipal laws and regulations as well as international conventions. Among other things, environmental legislation provides for restrictions and prohibitions on spills and discharges, as well as emissions of various substances produced in association with biodiesel fuel operations. Legislation also requires that facility sites be operated, maintained, abandoned and reclaimed in such a way that would satisfy applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner we expect may result in stricter standards and enforcement, larger fines and liability, as well as potentially increased capital expenditures and operating costs. The presence or discharge of pollutants in or into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such presence or discharge. If we are unable to remediate such conditions economically or obtain reimbursement or indemnification from third parties, our financial condition and results of operations could be adversely affected. We cannot give assurance that the application of environmental laws to our business will not cause us to limit our production, to significantly increase the costs of our operations and activities, to reduce the market for our products or to otherwise adversely affect our financial condition, results of operations or prospects. Penalties we may incur could impair our business. Failure to comply with government regulations could subject us to civil and criminal penalties require us to forfeit property rights and may affect the value of our assets or our ability to conduct our business. We may also be required to take corrective actions, including, but not limited to, installing additional equipment, which could require us to make substantial capital expenditures. We could also be required to indemnify our employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. These could result in a material adverse effect on our prospects, business, financial condition and our results of operations. Our business will suffer if we cannot obtain or maintain necessary permits or licenses. Our operations will require licenses, permits and in some cases renewals of these licenses and permits from various governmental authorities. Our ability to obtain, sustain, or renew such licenses and permits on acceptable, commercially viable terms are subject to change, as, among other things, the regulations and policies of applicable governmental authorities may change. Our inability to obtain or extend a license or a loss of any of these licenses or permits may have a material adverse effect on our operations and financial condition. If we cannot maintain adequate insurance coverage, we will be unable to continue certain operations. Our business exposes us to various risks, including claims for causing damage to property and injuries to persons who may involve allegations of negligence or professional errors or omissions in the performance of our services. Such claims could be substantial. We believe that our insurance coverage is presently adequate and similar to, or greater than, the coverage maintained by other companies in the industry of our size. If we are unable to obtain adequate or required insurance coverage in the future or, if our insurance is not available at affordable rates, we would violate our permit conditions and other requirements of the environmental laws, rules and regulations under which we operate. Such violations would render us unable to continue certain of our operations. These events would result in an inability to operate certain of our assets and significantly impair our financial condition. Increases in energy costs will affect operating results and financial condition. Our production costs will be dependent on the costs of the energy sources used to run our facilities. These costs are subject to fluctuations and variations in different locations where we intend to operate, and we may not be able to predict or control these costs. If these costs exceed our expectations, this may adversely affect our results of operations If we cannot maintain our government permits or cannot obtain any required permits, we may not be able to continue or expand our operations. Our operations will require licenses, permits and in some cases renewals of these licenses and permits from various governmental authorities. Our ability to obtain, sustain, or renew such licenses and permits on acceptable, commercially viable terms are subject to change, as, among other things, the regulations and policies of applicable governmental authorities may change. Our inability to obtain or extend a license or a loss of any of these licenses or permits may have a material adverse effect on our operations and financial condition. 46 Our operations will suffer if we are unable to manage our rapid growth. We are currently experiencing a period of rapid growth through internal expansion and strategic acquisitions. This growth has placed, and could continue to place, a significant strain on our management, personnel and other resources. Our ability to grow will require us to effectively manage our collaborative arrangements and to continue to improve our operational, management, and financial systems and controls, and to successfully train, motivate and manage our employees. If we are unable to effectively manage our growth, we may not realize the expected benefits of such growth, and such failure could result in lost sales opportunities, lost business, difficulties operating our assets and could therefore significantly impair our financial condition. RISKS ATTENDANT TO OUR CORPORATE STRUCTURE We will be unable to service our debts if our subsidiaries default in settling their obligations to us. We have incurred substantial debt obligations and will continue to do so, in order to fund the operations of our subsidiaries. Since we carry on no business at the level of our parent corporation, our ability to service our own debts will depend on the cash flow from our subsidiaries. If one or more of our 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 GS AgriFuels to obtain the capital and it is likely that in the future we will provide guarantees of other debts incurred by our subsidiaries. These guarantees will subject our assets to the risk of the failure of a subsidiary whose debt we have guaranteed. If, for example, we were forced to satisfy our guarantee of GS AgriFuels debt, to do so we would have to liquidate our holdings in our successful subsidiaries. Such a result could eliminate the value of our shareholders' investments. We are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared. We are subject to reporting and other obligations under the Securities Exchange Act of 1934, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 will require us to conduct an annual management assessment of the effectiveness of our internal controls over financial reporting, provide a report on our assessment and obtain a report by our independent auditors addressing our assessments. These reporting and other obligations will place significant demands on our management, administrative, operational, internal audit and accounting and financial resources. 47 Our business development could be hindered if we lost the services of our Chief Executive Officer. Kevin Kreisler is the Chief Executive Officer of GreenShift and serves in an executive capacity with each of our primary subsidiaries. Mr. Kreisler is responsible for strategizing not only our business plan but also the means of financing it. If Mr. Kreisler were to leave us or become unable to fulfill his responsibilities, our business would be imperiled. At the very least, there would be a substantial delay in the development of our plans until a suitable replacement for Mr. Kreisler could be retained. The absence of independent directors on our board of directors may limit the quality of management decision making. Each of the four members of our Board of Directors is also an employee of GreenShift Corporation. There is no audit committee of the board and no compensation committee. This situation means that the Board will determine the direction of our company without the benefit of an objective perspective and without the contribution of insights from outside observers. This may limit the quality of the decisions that are made. In addition, the absence of independent directors in the determination of compensation may result in the payment of inappropriate levels of compensation. RISKS FACTORS ATTENDANT TO OWNERSHIP OF OUR COMMON STOCK The resale of shares acquired by YA Global Investments from GreenShift may reduce the market price of GreenShift's shares. YA Global Investments owns convertible debentures issued by GreenShift, which will permit it to acquire GreenShift common stock and resell it to the public. At the current market price, YA Global Investments could convert its debentures into over 50% of our outstanding common stock. It is possible that resale of shares by YA Global Investments will significantly reduce the market price for GreenShift common stock. Existing shareholders may experience significant dilution from our issuance of shares to YA Global Investments. The issuance of shares on conversion of the convertible debentures held by YA Global Investments will have a dilutive impact on our stockholders. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline. In addition, the lower our stock price is, the more shares of common stock we will have to issue if the debentures are converted on the basis of the contemporaneous market price. If our stock price is lower, then our existing stockholders would experience greater dilution. We may incur additional indebtedness in the future. Our current indebtedness and any future indebtedness could adversely affect our business and may restrict our operating flexibility. As of September 30, 2008, we had approximately $56,000,000 in total debt. Our ability to incur additional debt could adversely affect our business and restrict our operating flexibility. We face several risks relating to our need to complete additional financings in the future. We must satisfy the closing conditions for each drawdown of our $10,000,000 construction credit facility. We must also secure additional financing to build our planned corn oil extraction and biodiesel production facilities. We anticipate that 50,000,000 gallons per year of extraction and biodiesel production will cost approximately $150,000,000 to build. However, there can be no assurances that costs may not be greater depending on site conditions, costs of materials, labor costs, engineering and design changes and other potential cost and integration overruns. The financing may consist of debt but may also consist of common or preferred equity, project financing or a combination of these financing techniques. Additional debt will increase our leverage and interest expense and will likely be secured by certain of our assets; additional equity or equity-linked financings may have a dilutive effect on our equity and equity-linked securities holders. It is likely that the terms of any project financing would include customary financial and other covenants on our project subsidiaries, including restrictions on the ability to make distributions to the parent company, to guarantee the debts of the parent company and to incur liens on the refineries of such project subsidiaries, among others. If our cash flow proves inadequate to service our debt and provide for our other obligations, we may be required to refinance all or a portion of our existing and future debt at terms unfavorable to us. Our ability to make payments on and refinance our debt and to fund our operations and capital expenditures will depend on our ability to generate substantial operating cash flow. If our cash flows prove inadequate to meet our debt service obligations, in the future, we may be required to refinance all or 48 a portion of our existing or future debt, to sell assets or to obtain additional financing. We cannot assure you that any such refinancing or that any such sale of assets or additional financing would be possible on favorable terms, or at all. If we raise additional equity or equity-related securities in the future, it may be dilutive to holders of our common stock. Future sales of shares of our common stock or the issuance of securities senior to our common stock could adversely affect the trading price of our common stock, the value of our debt securities and our ability to raise funds in new equity offerings. We may issue additional common stock, preferred stock or securities convertible into or exchangeable for common stock, in the future. Future sales of substantial amounts of our common stock or equity-related securities in the public market or privately, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and the value of our debt securities and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of common stock or the availability of shares of common stock for future sale will have on the trading price of our common stock or the value of our debt securities. Our common stock qualifies as a "penny stock" under SEC rules which may make it more difficult for our stockholders to resell their shares of our common stock. Our common stock trades on the OTC Bulletin Board. As a result, the holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it were listed on a stock exchange or quoted on the NASDAQ Global Market or the NASDAQ Capital Market. Because our common stock does not trade on a stock exchange or on the NASDAQ Global Market or the NASDAQ Capital Market, and the market price of the common stock is less than $5.00 per share, the common stock qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act of 1934 imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination on the appropriateness of investments in penny stocks for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock affects the market liquidity of the shares, which in turn may affect the ability of holders of our common stock to resell the stock. We will be quoted on the OTC Bulletin Board for the immediate future. We currently do not meet the eligibility requirements for listing on the NASDAQ Stock Market. Until we meet those standards and are accepted into the NASDAQ Stock Market, or unless we are successful in securing a listing on the American Stock Exchange or some other exchange, our common stock will be quoted only on the OTC Bulletin Board. Such a listing is considered less prestigious than a NASDAQ Stock Market or an exchange listing, and many brokerage firms will not recommend Bulletin Board stocks to their clients. This situation may limit the liquidity of your shares. Our common stock price may be volatile. The trading price of our common stock may fluctuate substantially. The price of the common stock may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following: >> price and volume fluctuations in the overall stock market from time to time; >> significant volatility in the market price and trading volume of securities traded on the OTC Bulletin Board companies; >> actual or anticipated changes in our earnings or fluctuations in our operating results. As a result of these factors, you cannot be assured that when you are ready to sell your shares, the market price will accurately reflect the value of your shares or that you will be able to obtain a reasonable price for your shares. 49 ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS From time to time during the nine months ended September 30, 2008 the Company issued a total of 6,168,833 shares to YA Global Investments, LP upon its partial conversion of a convertible debenture in the aggregate amount of $399,600. The sales were exempt pursuant to Section 4(2) of the Securities Act since the sales were not made in a public offering and were made to an entity whose principals had access to detailed information about the Company and were acquiring the shares for the entity's own account. There were no underwriters. 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 GreenShift's Form 10QSB for the quarter ended September 30, 2008: INDEX TO EXHIBITS 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. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated. GREENSHIFT CORPORATION By: /S/ KEVIN KREISLER ----------------------------- KEVIN KREISLER Chief Executive Officer /S/ EDWARD R. CARROLL ------------------------------ EDWARD R. CARROLL Chief Financial and Accounting Officer Date: November 19, 2008 51 EX-31 2 gersq3ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF QUARTERLY REPORT I, KEVIN KREISLER, certify that: 1. I have reviewed this Annual Report on Form 10Q of GreenShift Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and, d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Company's Board of Directors of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and, b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ KEVIN KREISLER --------------------------------------- KEVIN KREISLER Chief Executive Officer Date: November 19, 2008 EX-31 3 gersq308ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION OF QUARTERLY REPORT I, EDWARD CARROLL, certify that: 1. I have reviewed this Annual Report on Form 10Q of GreenShift Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and, d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Company's Board of Directors of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and, b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ EDWARD R. CARROLL ----------------------------------- EDWARD R. CARROLL Chief Financial Officer Date: November 19, 2008 EX-32 4 gersq308ex32.txt EXHIBIT 32 Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of GreenShift Corporation (the "Company"), certifies that: 1. The Quarterly Report on Form 10Q of the Company for the period ended September 30, 2008 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated : November 19, 2008 /S/ KEVIN KREISLER ---------------------------- KEVIN KREISLER Chief Executive Officer /S/ EDWARD R. CARROLL -------------------------------- EDWARD R. CARROLL Chief Financial Officer This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. -----END PRIVACY-ENHANCED MESSAGE-----