First Quarter Report

SKUNK NEWS FLASH:

Finally some news on the planned 4th and 5th COES from the Global Ethanol Update Newsletter, May 2008:

"The installation of the first corn oil extraction systems are progressing for both Lakota and Riga. Process tie-ins are occurring during shutdowns at both plants. The skid mounted equipment is expected to be delivered in June with an August start-up in Riga and a September start-up in Lakota."

And also this interesting comment:

"Projects continue to gather momentum and as you will see in this newsletter both CO2 and corn oil extraction have made progress. In particular the relationship with Greenshift is an important one for the company that will provide opportunities to Global in the future."

(Through Global we could access some BIG players who might open some doors for GERS)
http://www.globalethanolservices.com/MGP%20NEWSLETER%202%20Quarter%202008.pdf

Note: Comments about the Riga expansion and their problems accessing credit markets are tied to Global's ethanol expansion at the Riga MI plant and are not GERS related.

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The Quarterly is out and we saw a few surprises. Was it overall good news or bad? Skunk always has an opinion, but . . . .
Here comes the Judge! . . . You be the Judge!

Skunk Predicted 1.27M Culinary Oil sales: Actual $3,659,954


Of course these numbers are great! Selling oil into the culinary market has higher margins and makes good business sense. Selling this much is fantastic. But even better, could the plant expansion project be finally on its way??? Is financing being locked up? Would we slow down a very profitable part of the business to expand without financing in place? You read this and decide.

Explanation from the Quarterly for these huge sales comes on page 32:

"Culinary oil sales were higher than expected during the first quarter of 2008 due to opportunistic sales of whole seed into higher end culinary markets. Quarterly revenues from this segment for the second and third quarters of this year can be expected to decrease to historical levels due to the fact that we have scaled back production until we complete our plant expansion project. We will not operate at efficient economies of scale until we complete this project. We will not be able to recover all of the available oil in the seed we process until then. Revenues in this segment can be expected to rise significantly after we complete this plant expansion (which is targeted for the fourth quarter of this year)."

This obviously also means we will see a significantly smaller number in this segment until the 4th quarter. And then a HUGE jump in the first quarter of next year if the expansion goes by this schedule above.

Skunk Predicted 3.43M Equipment and Technology (3.34M+.1M) sales : Actual $2,564,428

As the Skunk has mentioned before, this third party bio-diesel is a tough nut to predict on the quarterly. They used to take credit for the construction only at the completion (hence the big 4th quarter numbers last year.). Since they have done a few and have good estimates of milestones, good accounting practices dictated they now switch over to methods that account for a percentage of construction revenues as they build. Since they cannot switch between procedures on an ongoing project, this quarter and last they were still in the process of switching over. Unless they start and finish construction in the same quarter - this will be hard to predict how far along they are in any single construction. However, they already have given a hint for next quarter: "The majority of the revenue and margin for this additional system (another 10 million gallon per year facility near completion) will be realized during the second quarter 2008." Since these come in at about 5M apiece - we can expect even better numbers here next quarter.
Skunk Predicted $838,125 Bio-diesel production: Actual $331,371



This news is disappointing. The numbers are less than half of what the Skunk figured they should be. So far the only answers I can gleam from the filings that excuse these numbers are two things: First of all the Medina, NY facility was commissioned with only 5 weeks left in the quarter. The PR announcing that start up said that much of the infrastructure, including the tanks were not yet present. So the Skunk guesstimating 50% of nameplate was too optimistic.

The second reason was apparently the COES plant at Utica went through a scheduled upgrade which would have caused the system to be off line for a while. This from the quarterly - bottom of page 32.

"We commenced commissioning of our Medina, New York corn oil extraction facility and a scheduled upgrade of our Oshkosh, Wisconsin corn oil extraction facility during the first quarter."

Now there are other answers that I can gleam from outside the filings as well. Here is a reminder of what I wrote two weeks ago (and restate today):

"At Skunks estimate revenues of $2.25/gallon (based on the 19 Feb Shareholder letter) that provides us with $838,125 total dollars of Revenue from the COES for the First Quarter. (If we see significantly less here this will add doubt as to the maturity of our technology and/or GERS will have some serious x'plaining to do. With the Utica Plant now over one year old - we would expect it to be running at near showcase capacity.)"

Here is one reported telephone answer to this mystery as posted by dwkrl on the Yahoo message board Thursday evening in a reported Q & A with Dave Winsness. Mr. Winsness is the inventor of the COES system - Is the Chief Technology Officer and sits on the Board of Directors.

Q: Mr. Winsness, the recent 10Q shows that the revenue generated from COES is only $330,000. The number is about a half of what we expected. Is because your COES not as efficient as it was claimed?

A: The number that you gave me does sound kind low. However, I am not the one who figure(s) out those number(s). As far as I know, Our COES is one of the best in the market. We had made some comparison analysis with six other COES competitors, none of them even come close to our capability. Currently, we have two COES systems in production; one COES running in full capacity and the other one is coming close to its full capacity. Moreover, we have a big backlogs of COES are waiting to be built between now and end of 2008.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=77822&tid=2872&mid=2872&tof=24&frt=2

Here is another answer posted by one who does not believe the COES work as planned:

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=77822&tid=2828&mid=2840&tof=14&frt=2

The COES are the Key. How they turn out will determine the success or failure of this company. Contrary to what many think - this blog isn't about getting you to buy, buy, buy this stock. I have simply allowed you to look over my DD and listen to me react and try to prioritize and make sense of what I found. I am positive on this stock - and that's why I remain a shareholder, and I am sure most of you understand that's where I am coming from. But I understand everyone has different goals, asset allocations, risk tolerances, ol'ladies etc, etc. So what you need to determine is - do you think these things will work? 'Cause if you think in the long run they will not - this company will fail. No if ands or buts.

You would be better off investing in a tank of gas. However, if they can be made to work at or near plate capacity - a very good chance exists that we will see a BIG turnaround at some point- likely late this year - based on earnings - the earnings of the COES. For instance: If we see good numbers showing both COES running at or near plate capacity for a good part of the second quarter - combined with more COES coming on line - and that corn oil being made into our bio-diesel - then, and only then would I expect to see the start of a sustained movement up in share price. I think that when and if that happens - the refinancing will happen as well. Heck, if the ol' Skunk is asking these questions - What do you think them bankers are ASKING??? When they come aboard - I will know we are going places.

The Good NEWS!

First
Acquiring NextDiesel and bringing it under the Greenshift Corporation may turnout to be a masterstroke. First we built it to our specifications and technologies with the sole purpose of converting our Extracted Corn Oil to Bio-Diesel. So we were actually able to build it for a customer, with all the benefits of their financing and at their risk. Our labor and equipment was paid for at full retail, with their cash. Next we were able to buy it back with little cash. Something we are a little short of. Since we were in the process of adding another 10M gallons of capacity at the site - we have much of the necessary equipment on site and are now ready to assemble another line. With two separate modular 10M gallon production lines - they could insure a steady, continuous revenue stream. GERS could task one line with corn oil and the other with waste fats and other low cost feedstock. This would minimize downtime for cleaning and maximise the use of on site labor for planned and corrective maintenance.

So we have already met half our goal of 20M gallons of bio-diesel production by the end of the year. If we just finish the 10M gallon line at Next Diesel we will have met our goal for the year! Better yet - by adding a third 10M gallon line at NextDiesel (or at another COES? or even better at the Montana Seed Crushing Plant! - more on that next week) and finishing the 10M gallon bio-diesel facilities planned for Lakota, IA and Fulton, NY that would would secure our 50M gallon goal for the end of 2009. All of a sudden what seemed like a fantasy goal of 50M gallon bio-diesel capacity by the end of 2009 looks like it could really happen!

Second
Inter-company balances and transactions From page 10 of the Quarterly:

"All significant inter-company balances and transactions were eliminated in consolidation"

A constant worry of shareholders of layered, related companies is the effect of inter-company billing. Sales Company "A" sells a widget to Service Company "B" for two dollars. Company "B" takes that and installs it in Manufacturing Company "C's" facility for a two dollar installation fee and two dollars for the part. Say Company "C" is in the business of making widgets. They then make 5 new widgets and sell it back to Company "A" for a dollar apiece. It appears to be a booming business with everyone making money. ABC Consolidated Corporation - who owns A, B, and C - then files for combined revenues of 10 dollars. (Whoops - thats $11 - See how confusing it can get?)

Now that GERS is a single entity after consolidation - there will be no significant inter-company balances or transactions. The revenues we see will have been generated with outside sources. One less worry to take off your GERS "worry board."

Third
Board of Directors

When I first started to read the GERS message boards some time back, a common theme was that Mr Kreisler acted capriciously and without limits. Some posts said that what we needed was an Independent Board of Directors to reign him in and ensure his decisions were made on what was best for the Company as a whole (more likely to include minority shareholder concerns).
The addition of Mr Terry Nosan, BIG's chief executive officer and one of its founding shareholders, takes us one step closer to a real board. As it has been pointed out on the message boards, it presently takes three members to get to a 60% super majority. I suspect the new "BIG" Deal will decrease each members voting power - but will have to wait for future filings to find out.

The BAD news:

First
No new COES since late Feb. We need 3 more (for a total of five) prior to 30 June 2008 to remain in compliance with the YAGI debt agreement. (par 5.14). (We also need 3 more after that before 30 Sept). All of these sites are published and in construction. The quarterly (p. 38) only says:

. . . our new corn oil extraction facility in Marion, Indiana (which is targeted for commissioning in June 2008), . .

What YAGI can do if we are in noncompliance is - well just about anything they want. What they will do is up for debate. If you have spent anytime reading the YAGI agreement - they have so many fail-safes and lock-boxes and monitored accounts and deadlines and reports - I would be entirely surprised if GERS was in strict compliance for even the first 24 hours of the agreement. If YAGI closed us down and took over the COES - what are they going to do with them? They surely cannot get back their money back by selling them off without the knowledge base to run and maintain them. I suspect they have us right where they want us - working around the clock to pay their exorbitant interest rates and fees. I also suspect we have over 8M expended on purchased equipment from the 10M revolving credit line as our insurance YAGI will not pull the plug. I may be wrong, but the Skunk would be more worried if we only had a couple million on the line of credit. In this high stakes poker game - us shareholders will have to make sure nobody gets behind us.

The next two on the list are Riga, Michigan and Lakota IA. The Lakota IA facility is set to receive a stage II COES whose nameplate is at 3.0 million gallons. It is also scheduled to receive a 10M gallon bio-diesel plant to convert its - and other western COES's corn oil to bio-diesel.

Second
Cash Flow/Financing

"Accounts payable and accrued expenses totaled $6,614,003." Quarterly P. 35

That is a lot of money to have out in accounts payable. We got 8M+ already spent on our 10M revolving credit. At March 31, 2008, accounts receivable, net of allowance for doubtful accounts, totaled $2,650,855 and inventories totaled $3,896,902. I suspect much of that inventory is not for customers that would generate a quick turn around for us - rather it is in COES equipment that needs to get slapped together and start earning there keep.

Here is the unchanged GERS word on the status of financing:

"We are currently investigating the availability of both equity and debt financing necessary to complete the balance of the Company's contracted corn oil extraction, bio-diesel production and oilseed crush projects. 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."

With a third COES in June and NextDiesel the Company claims that

". . . these four facilities alone are expected to generate over $45 million in annualized sales and produce about $10 million in cash flows from operating activities. This degree of cash flow alone is expected to be sufficient to cover all of our debt service and operational cash needs for the foreseeable future."

AGAIN - this is why the COES must produce - and soon.

Lastly, I have seen a couple of personal loans by the directors to the company listed in the filings. (That were paid back.) A friend of mine said that shows the directors believe in the company and are not just in it to take money out. That's a fair point - but it also means we are having cash flow problems. Things are tight when a member of the board has to write out a check to the company he works for - my first guess was the loans were to cover a payroll. You start losing your good people if the Corporate paychecks ever bounce. These same loans were mentioned in the annual and are not new news - but we need to watch this.

Third
COES Production
Covered above - but important enough to say it again.

Forecasts

Grade for Short Term Prediction for 19 - 23 May 2008

Best Buys .10-.11 ACTUAL = .9 - .10 I should of quit right here - not bad = c+

Weekly range .10-.16 ACTUAL = .9 - .11 half a dime off the high side = F

Closes at or above .15 (One) ACTUAL = NONE Not even close = F

Friday's Close .15 ACTUAL = .9 Off by a couple planets = F

Overall grade for the week = F+ Skunk obviously stunk it up this week - but he gets a plus for enthusiasm.

FORECAST for May 27th - 30th

The Skunk is anxious to beat his head against the wall again - after all can he do any worse? We will find out:

We saw three days with a 9 cent close on the 7th, 8th and 9th of May. We have had two closes at nine on the 22nd and 23rd but unlike before - so far no trades below nine cents. We may get one more nine cent close on Monday - but I see an attempt by the stock to stay above a dime and reestablish that as the bottom. Skunk seems to see NITE backing off sales below a dime - although recently I have seen it asking between nine cents and a dime. Its monthly selling volume supports the general hypothises that it is the chief seller for YAGI. Like I said above we may see the stock drifting up and down in a narrow range until we get production#/COES on line/financing.

DETAILED FORECAST FOR May 27-30th

Best Buys 8.5 -9.5 cents

Weekly range 8.5 - 11.5

Closes above .15 NONE this week

Friday's close 10.5

Long Term Prediction FEB 2010

As promised, the Skunk will adjust his forecast as his assumptions change based on the best information available . We stand with most of the details in the blog from weeks ago. However, reflecting his concerns about COES production not addressed in the Quarterly combined with the failure to systematically bring one COES online during either March, April and most of May, the Skunk has this week reduced his PE factor to 55. The ratio did not fall further since bringing NEXTDiesel aboard made the possibility of seeing increased margins with the corn oil we are producing - a real time possibility. The Skunk will be quick to move this factor up or down depending on information provided or not provided by the company in the following days. The Skunk sees 280M Shares Outstanding - some 4.2 times the present levels. However, In order to have that number of OS shares - the EBITDA will be over 37 times its present amount - and that difference will be reflected in the share price. Using a factor of one-third to project net income from EBITDA, we can see: 28.97M/280M Shares = (net income)/TotalOS) = .1035(PE) X (Diluted EPS) = (est. PPS) 55 x .1035 =$5.69 Share Price in FEB 2010**

countdown2run = "in 2 market days."

Provided a few snickers on the Raging Bull for the past couple weeks as they provided us a countdown to apparently the three day Memorial Weekend. (Unless the Mayan Calender points to a GERS run starting Tuesday - (Ah . . . ADM buyout . . .or Verasun Buy in . . . . or T. Boone Pickens and Kevin K vacationing together?) If nothing else he/she was consistent. Not missing a single market day, for 15 days. Posting between 8am and 5pm, they simply stated the number of days left in the countdown once a day. Only once were they baited to reply - and then with a single "yes" response to a non yes or no question. Not sure they generated additional interest in GERS stock - but they did generate some chatter. Seems somebody has been to marketing school? Since only one "countdown2run" exists - we will have to wait for them to come clean - are they up to it? Or is that Verasun knocking on the door? LOL