Dilution and Cash as a Strategic Weapon - 3Q

Cash Reserve - Now $1.5M
These expenses may delay or otherwise adversely affect our ability to achieve our profitability and debt reduction goals. We hope to eventually eliminate our litigation expense, but we must and will take all necessary steps to bring infringement of our patents to an end. We have reserved cash for this purpose.

Expand Litigation - Soon?
Operating expenses for the three months ended September 30, 2011 and 2010 were about $1.1 million and $1.0 million, respectively. Our operating expenses include significant professional fees which can be expected to increase moving forward as we defend against infringement and expand our patent litigation.

These expenses have increased in the latter half of 2011 and are expected to continue to increase into 2012 in advance of trial, and as we expand our litigation to protect the competitive advantage of our licensees by prosecuting additional producers and other parties infringing our patents. Consequently, litigation expenses may delay or otherwise adversely affect our ability to achieve our profitability and debt reduction goals. We hope to eventually eliminate our litigation expense, but we must and will take all necessary steps to bring infringement of our patents to an end. Despite these expected increases, our operating expenses can be expected to decrease overall as a percentage of revenue in future periods as we continue to realize increased economies of scale from our existing and new licensing activities.

Litigation AND Financing Directly Related to Building Cash Reserves
Our liquidity and capital resources were improved during the third quarter of 2011 as compared to prior periods. During the nine months ended September 30, 2011, we produced about $0.5 million in net cash from operating activities and about $3.3 million in net cash from investing activities, and used about $2.3 million in net cash in financing activities. The shift in early 2011 from relying on cash from financing activities to producing and using surplus cash from operating and investing activities was an important milestone for GreenShift and its shareholders. That said, the output of our licensees, the price for corn oil are variable and litigation costs can be expected to continue to increase. Thus, until we build up a meaningful cash reserve, we cannot rule out the possibility that we may seek financing to cover operating needs in the future. Our cash positions at September 30, 2011 and December 31, 2010 were about $1.5 million and $18,000, respectively.

License Agreements More than Cover Sales, Operating Expense, Professional Fees
Income from operations during the nine months ended September 30, 2011 was about $7.1 million, or about $2.1 million net of the $5.0 million in performance bonuses earned from YA Corn Oil during the nine month period. We anticipate improving on this result in future quarters in connection with the commencement and realization of full production by existing and new licensees. Our costs of sales and operating expenses moving forward will be primarily comprised of (1) technology royalties; (2) employee costs; (3) travel, materials and other expenses incidental to execution of our license support services; (4) general and administrative costs relating to our offices, utilities and insurance; and (5), professional fees relating to accounting, corporate and litigation activities. As discussed above, we expect that the license agreements we have executed to date will provide sufficient revenue to more than cover all of these costs on an ongoing basis.

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If you follow my summary logic as outlined in blue (above each quote from the 3Q) you might agree that:

1.  The Cash Reserve is for litigation
2.  The Litigation is about to expand.
3.  The Cash Reserve will also expand - until it becomes "meaningful"
4.  The license agreements already executed will more than cover Sales and Operating Expense.

Up till now I am trying to basically restate what I think is already said in the 3Q.  Now this next step takes a step further - deduced from above:

5.  Present financing activities (IF ANY, stock sales/dilution) are being used to service the debt and add to the cash reserve.

SkunK? SO WHAT! 

Well, as a shareholder, I am not here to argue in favor of dilution - lets get that out of the way right away.  No one has to give me a history lesson here - I lived it :~).  Can we learn the lessons of the past without living in the past?  We do need to recognize where we are now and what has changed - luckily we are now profitable - with net income.  May I be so bold to state that dilution, if it is done in a limited fashion, [less than the percentage growth in net income], and the gained assets are moved to cash and the elimination of debt - then it directly adds to book value - tangible equity that will at some point directly affect the pps. 

How can we now sit with more cash than market cap?  How can we set at this pps with a small but valid earnings per share?   Two main reasons at this point:

1.  Lack of a (profitable) track record.  Pennyland is full of stocks that manipulate their books to show a quarter of profit.    In the 3Q GreenShift made a small but significant profit due to revenues from corn oil royalties.  As investors, we know that these royalties are not one time sales or asset manipulation,  but rather dependable, recurring, expanding royalties.  It may take a quarter or two for new money to notice the trend line and catch on.

2.  Debt.  Cash on hand does not pay off debt.  Yet cash on hand can balance debt.  If we held 20 million in cash and 20 million in debt would the debt still be scary?  Of course the plan is to pay off debt AND raise cash on hand, however I think you see my point.  As the debt is lowered and the cash is increased our real book value increases - and that will directly affect share price - and directly benefit shareholders.  Yes it would be different if it was being used to fund operating costs - like in the past - then we were literally only "buying time".  Since we only have inventory - and own few other physical assets - cash is even more important to demonstrate our substance.

Strategic Weapon
With Prevost no longer mentioned after the Markman, and with the defendants sanctioned for their tactics and clinging to the one year rule, one might guess that through their eyes the best option left is to simply outlast GreenShift.   IF this is the case - then cash-on-hand becomes GreenShift's strongest strategic weapon.  Cash-on-hand is the biggest club one has to beat down the morale of the "we can out last 'em, lets wait them out" pool of defendants.  Nothing says "we got all the time in the world" like a huge cash reserve.  In my opinion, nothing will move the defendants to settlement faster than an increasing, meaningful cash reserve.   

Conclusion 
If dilution is happening at a limited rate [less than the rate of increase of earnings per share], and if the assets gained are used to increase the intrinsic book value by directly decreasing debt and increasing cash on hand - then I would argue that it may very well benefit shareholders in the mid to long term.  If, as a strategic weapon in the litigation; an increasing, meaningful cash reserve begins to precipitate significant settlements, then it may benefit shareholders immediately.

SkunK