The Annual Repot 2007

The Skunk is in his spring quarters. I am enjoying the warmer weather - but should be back above Kornfield Kounty by next weekend. In the meantime I'm working off a single laptop - not quite what I'm used to.

Well it surprised most of us. Not issued on 30 March, not issued at the end of the 15 day extension. Issued Monday after the bell, the first impression was man - this thing is an Encyclopedia! I skimmed through it once, read through most of it again and I am reading it cover to cover now. I have read a lot of good, some bad; and while some questions were answered, new ones come to light - such is life.

I have written a lot about what to look for in the annual and so I will first structure my comments on how the results measured up to what I was looking for. What I asked for in the 29 March blog is in parenthesis - the results I found so far are in blue.

"I would like to see a positive cash flow into ebitda from both of these and also from Bio-diesel construction. We should have real money in the net income section" Stripping away some non-recurring items we got a positive EBITDA. With the Consolidation of debt we saw no black in net income.

"The forward looking section will hopefully provide detail on the COE construction and how we are meeting the terms with YAGI." No real, specific word on how we are doing on this front.

"The Skunk would like to be ahead of schedule but would be happy with a smooth working plan. We have some previously announced 31 total COEs awaiting construction. I would like to see more names than the seven and a total number bigger than 31 would show momentum." We did get the name of the eighth COE that is required to be constructed by 30 Sept 08 to meet the YAGI debt terms. The Eighth COEs is in Richardton, North Dakota with a 1.5M gal plate capacity. All I could find about the additional unnamed facilities is this: "We are under contract to build many more corn oil extraction facilities corresponding to more than an additional 25 million gallons per year of corn oil." At 1.5M a pop - that accounts for about 17 unnamed units. Added to the 8 named units - that makes 25. That leaves 6 units either gone or covered in the "more than".

"The Skunk wants some news on the financing front. We were working with another company to try and get a 150M financing deal with decent rates closer to the 10% level. This would change the company instantly into a legitimate player and we could shake off the YAGI debt. With the YAGI deal we are paying 20% plus/10c/gal and with some free shares it’s around 30%. On the positive side - if we can show we can pay the 30% - others should feel safe giving us a loan at decent rates." I have seen the name Fieldstone Private Capital Group in other information and that is the company I referred to above. I think Northland Networks (for the oil seed expansion) is a new find. As I will painfully explain later - legitimate financing is critical to the success of this company. It needs to be done quickly. Yet nothing can be gleamed from the lack of information - unless they are on the verge of signing - we should hear nothing. Interesting note on the importance of financing: "In Mr. Carroll's case . . . 1M common shares. . . additional restriction that requires the completion by the Company of certain financing." Seems they all know this HAS to get done - and his bonus is to make sure it will get done!

"The Skunk also wants to see a minor problem that is being dealt with." Well they found a problem and are dealing with it. Called "Remediation of Material Weakness in Internal Control over Financial Reporting" the board is hiring a new corporate controller, have reassigned duties, are adding adding more people with GAAP tax accounting experience. Not sure what this means -but apparently some bean counter missed some beans and we are making sure it doesn’t happen again. This is what I was looking for.

Now for a simple? question: How many shares are outstanding? The answer is 66,200,526. In the annual report - the sentence BEFORE the start of the Table of contents reads: "The number of outstanding shares of common stock and value of the voting stock held by non-affiliates of the Registrant as of April 4, 2008 were 66,200,526 and 7,944,063 , respectively."To find how we come to those numbers is a little more complex. First the Skunk did a document search of 66,200,526 and discovered how we got that number. On page 94 of the Annual we find a breakout of 55,546,526 of Outstanding, 9,167,609 to the employee pool and 1,486,391 to Viridis Capital, LCC. As you may remember, the 9 Nov 2007 shareholder letter put aside 10M shares as an employee reserve and this is where these came from. The new annual announced a new employee reward plan that is tied to EBITDA. The awards are described on page 101. A notable amount goes to employees outside of the 4 on the board - this is good for corporate morale and a sign of corporate maturity. If we run a search on the 83,200,000 we found in the same November shareholder letter we found it in two places - pages 93 and 94. On the top of page 93 we see that this amount was set aside for Viridus Capital but is now only payable on a sliding scale - but not until after we reach 50M EBITDA. On page 94 we see the same thing - but so far only 1,486,391 shares were awarded and represent only a portion of that 83,200,000. What we have left to explain is how the 30.8M shares held by the GERS shareholders in the shareholder letter has become 55,546,526 held now. The only part accounted for in the breakout in the November shareholder letter and is yet unexplained is the 16M set aside for Pending Issuances-Derivative Securities. So we have the difference - 24,746,526 shares - sold to meet debt requirements of our senior creditor YAGI. The Skunk likes a little confirmation and here goes: If one looks at the 2nd paragraph of notes below the breakout in the November shareholder letter we see this: "If all of GS Tech's convertible securities were converted . . . the actual number (instead of 16m) of potentially issuable shares would increase to about 28,250,000 . . ."So it appears that all (or about 88%) of the GS Cleantech's convertible Legacy debt tied to Derivative Securities was converted and paid off between 9 November and 4 April 2008.

Now with that out of the way I need to talk about the need for new financing. Our present construction loan with YAGI is just a bridge loan and we must find long range legitimate financing. I have rewritten this part and have made it so simple I think even I understand it. First of all we have a Corn Oil Extraction System (COEs). This is the widget we need to make money. After much trying to find and guessing on my own - Mr. Kreisler told us in this report how much they cost. In numerous places the extraction process costs are put at $1.50 for every gallon of extraction capacity. The extraction capacity of a COEs is listed at 1.5M gallons per year. One and a half dollars times one and a half million gallons equals two and a quarter million dollars. (See I did the math without the numbers.) That is 2.25M dollars apiece. Remember that.Now let’s talk about revenues tied to production. In the November 2007 letter we were basically told that our EBITDA per gallon of production was .75* for the corn oil. If we take the .75 a gallon times the 1.5M capacity - we get $1.125M of EBITDA per machine. SO - We have to produce the $1.125M for two years to exactly pay off the principal cost of the $2.5M COEs. Now in most cases this is great. To pay off a piece of capital intensive machinery like this in two +years would produce a tremendous cash cow. But with the terms of the YAGI deal - all loans must be repaid by 31 August 2009. The deal was signed on 25 Jan 2008. The terms of the loan were for less than 20 month payback on machinery that can only self finance themselves in 24 months (more with interest and fees). So all we have now is a bridge loan - but only half way across the river. We have to get as many COEs up as quickly as possible - and get real financing soon.

Now the Skunk could be wrong if one of the following is wrong: The production capacity is more than 1.5Mgallons /year. The COEs cost is less than $1.50/gallon per year capacity. Our EBITDA is more than .75/gallon. Other than that this is just 3rd grade math. (Mrs. Anderson, my third grade teach would be proud.)

The Skunk looked to see if the planned revenues can be made up by converting the corn oil into Biodiesel in our own plants. (We plan to have 20M gallon capacity by the end of the year.) Since the gross margin doubles with the conversion and the capital expenditures are about the same for the biodiesel per gallon of production - then they have the same payoff time as the COEs.. *The .10/gallon that goes to YAGI as a fee or the .10/gallon that goes to Dave Winsness (inventor)as part of a renegotiated licensing fee- but we can safely throw those out since they are covered by the increased price of spot diesel over the last six months.

The North Dakota Plant - RED TRAIL ENERGY, LLC - also recently released its annual Report - Skunk found this on page 20 of their 10-K:

"Corn Oil Extraction — we have entered into an agreement to add corn oil extraction equipment to our facility. We do not believe the equipment will be operational during 2008 but project that it will be operational during the first quarter of 2009. At current prices and anticipated volumes, we expect that corn oil sales will add approximately $1,000,000 to our gross margin and net income on an annual basis."

and on page F-18 of the ND Plant's Annual we see more detail:

"In an effort to diversify its revenue stream, the Company entered into an agreement in March 2008 to operate third party corn oil extraction equipment that will be added to its facility. The agreement has a term of 10 years commencing from the date when the equipment installation is complete. The Company expects the equipment to be operating in 2009. In return for operating the equipment, the Company will receive a negotiated price per pound for the oil. The agreement contains guaranteed minimum pricing and yield provisions. If at any time the production or yield falls below these levels, the Company can terminate the agreement with no cost to the Plant. Corn oil can be extracted from the Plant’s process and marketed as a separate commodity. This process may have the effect of lowering the fat content of the Company’s distillers grains. "
http://www.sec.gov/Archives/edgar/data/1359687/000095013708005304/c25165e10vk.htm#104
Grading Last weeks forecast: Actual in BLUE
Forecast details for April 7-11:
Best buys? (11-12)Actual(11-12) Hit it right on the head. A+
Range for week? (11-16) Actual (11-14) Pretty Damn Close B+
Closes over .20? - not this week (Actual=None over .20) A+
Fridays close - .15 Actual (.13) Not too bad C+
Overall Grade=A This is my most accurate prediction so far. All in a days work.

What I see for next week is at least one PR . In fact I see about three PRs between now and the 1st quarter release. The Skunk will be looking for some information on financing and another COE completion. Technically we have been in a flat trading range. We have just recently closed above the 20 day moving average. I see the Bollinger Bands have started to compress. This week -in the second half - we should see a move. I see we can move north to tag (.16) and then punch through the northern band to .21 - to meet the 100 day moving average - then resting for a Friday close of .19. The last two run ups we had - Dec07 and Feb08 - we pushed through the 100 day MA. We will see what happens this time. I am going to say we rest on the lower side of the 100 day MA for this week - but I have not read the PR's yet. Surprise me GERS.

Next Weeks Forecast: April 14-18th

Best Buys- 12-13

Range for the week: 12-.21

Closes over .20 -one

Fridays close.19

Long Range Forecast:$12.50 Share Price in FEB 2010**That's right - that is over 90 times today's price. Skunk has no stinking reason to change his long range prediction. Expect the number to be further refined as information is gleamed from the before mentioned, upcoming annual and 1st quarter reports.
**Note: I am a shareholder - I do not work for, nor do I receive any direct or indirect payment from GERS or anyone associated with them. (But it would be Kapitalist Kool if I did) I will not intentionally mislead - but I can be wrong (ask Mrs. Skunk for specific frequencies) - so do your own due diligence - and take responsibility for your own financial decisions - good or bad. And some good garage logic luck to ya.