U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2005 Commission File Number 1-13776
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GreenMan Technologies, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 71-0724248
-------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Kimball Lane, Building A, Lynnfield, MA 01940
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (781) 224-2411
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-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Number of shares outstanding as of May 16, 2005
Common Stock, $.01 par value: 19,225,352 shares
1
GreenMan Technologies, Inc.
Form 10-QSB
Quarterly Report
March 31, 2005
Table of Contents
PART I - FINANCIAL INFORMATION
Page
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Item 1. Financial Statements (*)
Unaudited Consolidated Balance Sheets as of March 31, 2005
and September 30, 2004 3
Unaudited Consolidated Statements of Operations for the
three and six months ended March 31, 2005 and 2004 4
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the six months ended March 31, 2005 5
Unaudited Consolidated Statements of Cash Flows for the six
months ended March 31, 2005 and 2004 6
Notes to Unaudited Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis or Plan of Operation 16-28
Item 3. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
* The financial information at September 30, 2004 has been taken from
audited financial statements at that date and should be read in
conjunction therewith. All other financial statements are unaudited.
2
GreenMan Technologies, Inc.
Consolidated Balance Sheets
March 31, September 30,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 393,662 $ 509,787
Accounts receivable, trade, less allowance for doubtful accounts
of $218,423 and $187,559 as of March 31, 2005 and September 30, 2004 .... 3,597,457 4,383,935
Product inventory ......................................................... 944,905 667,839
Other current assets ...................................................... 1,266,945 1,365,594
------------ ------------
Total current assets ................................................ 6,202,969 6,927,155
------------ ------------
Property, plant and equipment, net .......................................... 11,473,378 11,516,253
------------ ------------
Other assets:
Deferred loan costs ....................................................... 540,281 626,233
Goodwill, net ............................................................. 3,533,894 3,533,894
Customer relationship intangibles, net .................................... 241,508 253,725
Deferred tax asset ........................................................ -- 270,000
Other ..................................................................... 340,932 494,496
------------ ------------
Total other assets .................................................. 4,656,615 5,178,348
------------ ------------
$ 22,332,962 $ 23,621,756
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current .................................................... $ 1,304,405 $ 1,177,390
Notes payable, line of credit ............................................. 694,950 500,000
Convertible notes payable, current ........................................ 510,243 1,270,929
Convertible notes payable, line of credit ................................. 2,458,263 1,814,042
Accounts payable .......................................................... 4,822,583 4,158,492
Accrued expenses, other ................................................... 1,667,656 1,225,455
Obligations under capital leases, current ................................. 285,053 302,977
------------ ------------
Total current liabilities ........................................... 11,743,153 10,449,285
Notes payable, related parties, non-current portion ....................... 699,320 699,320
Notes payable, non-current portion ........................................ 2,634,455 3,358,147
Convertible notes payable, non-current portion ............................ 2,119,366 2,434,205
Obligations under capital leases, non-current portion ..................... 2,760,349 2,874,885
Deferred gain on sale leaseback transaction ............................... 397,856 419,115
------------ ------------
Total liabilities ................................................... 20,354,499 20,234,957
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Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized,
none outstanding ........................................................ -- --
Common stock, $.01 par value, 30,000,000 shares authorized,
19,200,352 shares and 19,072,963 shares issued and outstanding
at March 31, 2005 and September 30, 2004 ................................ 192,003 190,729
Additional paid-in capital ................................................ 34,038,422 31,755,384
Accumulated deficit ....................................................... (32,251,962) (28,559,314)
------------ ------------
Total stockholders' equity .......................................... 1,978,463 3,386,799
------------ ------------
$ 22,332,962 $ 23,621,756
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
GreenMan Technologies, Inc.
Unaudited Consolidated Statements of Operations
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales ...................................................... $ 7,645,550 $ 5,912,265 $ 15,690,907 $ 13,711,015
Cost of sales .................................................. 7,533,342 5,564,247 15,477,575 12,224,188
------------ ------------ ------------ ------------
Gross profit ................................................... 112,208 348,018 213,332 1,486,827
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative ........................ 1,315,746 1,167,595 2,531,282 2,235,836
------------ ------------ ------------ ------------
Operating profit (loss) ........................................ (1,203,538) (819,577) (2,317,950) (749,009)
------------ ------------ ------------ ------------
Other income (expense):
Interest and financing costs ............................... (584,703) (551,112) (990,604) (905,908)
Casualty income, net ....................................... -- 90,047 -- 202,813
Other, net ................................................. (99,569) (17,266) (114,094) (23,386)
------------ ------------ ------------ ------------
Other income (expense), net ............................ (684,272) (478,331) (1,104,698) (726,481)
------------ ------------ ------------ ------------
Net loss before income taxes ................................... (1,887,810) (1,297,908) (3,422,648) (1,475,491)
Income tax provision ........................................... -- -- 270,000 --
------------ ------------ ------------ ------------
Net loss ....................................................... $ (1,887,810) $ (1,297,908) $ (3,692,648) $ (1,475,491)
============ ============ ============ ============
Net loss per share - basic and diluted ......................... $ (0.10) $ (0.08) $ (0.19) $ (0.09)
============ ============ ============ ============
Weighted average shares outstanding - basic and diluted ........ 19,200,352 16,474,145 19,152,756 16,265,777
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
4
GreenMan Technologies, Inc.
Unaudited Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended March 31, 2005
Additional
Common Stock Paid In Accumulated
Shares Amount Capital Deficit Total
---------- -------- ----------- ------------ -----------
Balance, September 30, 2004 .............................. 19,072,963 $190,729 $31,755,384 $(28,559,314) $ 3,386,799
Common stock issued in connection with potential
business acquisition ................................... 127,389 1,274 198,726 -- 200,000
Beneficial conversion discount on convertible
notes payable .......................................... -- -- 2,084,312 -- 2,084,312
Net loss for the six months ended March 31, 2005 ......... -- -- -- (3,692,648) (3,692,648)
---------- -------- ----------- ------------ -----------
Balance, March 31, 2005 .................................. 19,200,352 $192,003 $34,038,422 $(32,251,962) $ 1,978,463
========== ======== =========== ============ ===========
See accompanying notes to unaudited consolidated financial statements.
5
GreenMan Technologies, Inc.
Unaudited Consolidated Statements of Cash Flow
Six Months Ended March 31,
2004 2005
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Cash flows from operating activities:
Net loss ..................................................................... $(3,692,648) $(1,475,491)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation ................................................................. 1,176,360 1,097,982
Deferred income tax writeoff ................................................. 270,000 --
Loss on disposal of property, plant and equipment ............................ 20,214 23,891
Amortization ................................................................. 337,049 110,763
Decrease (increase) in assets:
Accounts receivable ...................................................... 786,478 722,721
Insurance claim receivable ............................................... -- 634,172
Product inventory ........................................................ (277,066) (701,479)
Other current assets ..................................................... 98,649 (134,671)
(Decrease) increase in liabilities:
Accounts payable ......................................................... 664,090 (151,799)
Accrued expenses ......................................................... 442,201 (212,702)
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Net cash provided by (used for) operating activities .................. (174,673) (86,613)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ........................................... (1,137,878) (553,076)
Proceeds from sale of property and equipment ................................. 125,380 1,400,000
(Increase) in notes receivable, officers ..................................... -- (7,077)
Decrease (increase) in other assets .......................................... 147,136 (189,315)
----------- -----------
Net cash (used for) provided by investing activities .................... (865,362) 650,532
----------- -----------
Cash flows from financing activities:
Decrease (increase) in deferred financing costs .............................. (23,452) 128,692
Net advances under line of credit ............................................ 1,740,403 (290,817)
Repayment of notes payable ................................................... (688,039) (1,921,425)
Proceeds from notes payable .................................................. 51,190 256,497
Proceeds from notes payable, related parties ................................. 0 575,000
Proceeds from convertible notes payable ...................................... 0 375,000
Principal payments on obligations under capital leases ....................... (156,192) (212,121)
Cash received from exercise of stock options ................................. 0 7,800
----------- -----------
Net cash provided by financing activities ............................... 923,910 (1,081,374)
----------- -----------
Net increase (decrease) in cash .................................................. (116,125) (517,455)
Cash and cash equivalents at beginning of period ................................. 509,787 990,745
----------- -----------
Cash and cash equivalents at end of period ....................................... 393,662 $ 473,290
=========== ===========
Supplemental cash flow information:
Common stock issued in connection with potential business acquisition .......... 200,000 --
Property, plant and equipment acquired under capital leases .................... 23,732 1,400,000
Equipment accrued through transfer from deposits ............................... 247,874 --
Common stock issued upon conversion of notes payable and accrued interest ...... -- 543,210
Interest paid .................................................................. 587,349 887,573
Taxes paid ..................................................................... 4,227 550
See accompanying notes to unaudited consolidated financial statements
6
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
1. Business
GreenMan Technologies, Inc. (together with its subsidiaries, "we", "us" or
"our") was originally founded in 1992 and has been operated as a Delaware
corporation since 1995. Today, we comprise six operating locations that collect,
process and market scrap tires in whole, shredded or granular form. We are
headquartered in Lynnfield, Massachusetts and currently operate tire processing
operations in California, Georgia, Iowa, Minnesota, Tennessee and Wisconsin and
operate under exclusive agreements to supply whole tires used as alternative
fuel to cement kilns located in Alabama, Florida, Georgia, Illinois, Missouri,
and Tennessee.
2. Basis of Presentation
The consolidated financial statements include the accounts of GreenMan
Technologies, Inc. and our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements are unaudited and should be read in conjunction
with the financial statements and notes thereto for the year ended September 30,
2004 included in our Annual Report on Form 10-KSB. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the Securities and Exchange Commission rules and
regulations, although we believe the disclosures which have been made are
adequate to make the information presented not misleading. The results of
operations for the periods reported are not necessarily indicative of those that
may be expected for a full year. In our opinion, all adjustments which are
necessary for a fair statement of operating results for the interim periods
presented have been made.
The financial statements have been prepared assuming we will continue as a
going concern. We have incurred substantial losses from operations, and have a
working capital deficiency of $5,540,184 at March 31, 2005. These factors raise
substantial doubt about our ability to continue as a going concern. Our
liquidity had been significantly and adversely affected since our primary source
of working capital financing and long term debt, Southern Pacific Bank and its
wholly owned subsidiary Coast Business Credit, were closed by the Commissioner
of Financial Institutions of the State of California in February 2003. In
particular, we have had to significantly slow down or delay the implementation
of several growth initiatives, including establishing a new high volume tire
processing facility in Tennessee, shredding and screening upgrades in Georgia
and Minnesota, and the installation of our waste wire processing equipment in
Minnesota. In addition we estimate that during the year ended September 30,
2004, reduced end product revenue and excess waste disposal costs of over $1
million were associated with the impact of a March 31, 2003 fire in Georgia.
These and other conditions have caused us to incur significant expenses in the
short-term and have limitedour ability to grow in the longer-term.
Despite these challenges during the past two years, we invested over $3
million in new equipment to increase processing capacity at our Iowa, Minnesota
and Georgia locations which will allow us to increase our overall revenue with
limited capital investment. We have identified, and are currently selling
product into several new, higher-value markets as evidenced by a 13% increase in
end product revenue during fiscal 2004 and 16% year to date increase for the six
months ended March 31, 2005, despite the fact that our Georgia waste wire
processing equipment has been inoperable until November 2004. We continue to
experience strong demand for our end products and remain confident in our
ability to continue to grow our revenue base. In addition, we have reconfigured
our Wisconsin location to substantially reduce operating costs and maximize our
return on assets. The reconfiguration was completed during the quarter ended
December 31, 2004. Additionally, management continues to attempt to negotiate
more favorable tipping fees with kiln relationships in several markets with the
ultimate goal of substantially reducing these fees from current levels.
We understand that our continued existence is dependent on our ability to
achieve profitable status on a sustained basis and have implemented and/or are
in the processing of implementing the following actions:
7
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
2. Basis of Presentation - (Continued)
A. Credit Facility Refinancing
On June 30, 2004, we entered into a three-year, $9 million credit facility
with Laurus Master Fund, Ltd., consisting of a $5 million convertible, revolving
working capital line of credit and a $4 million convertible term loan. On March
22, 2005, the credit facility was amended to permit us to maintain overadvances
of up to $2,000,000 under the line of credit through December 31, 2005. In
addition, the price at which the minimum borrowing note and term loan are
convertible into our common stock were adjusted. (see Note 9)
B. Private Placement of Investment Units
On April 9, 2004, we commenced a private offering of investment units.
Each unit consists of one share of our common stock and a warrant to purchase
0.5 shares of our common stock. As of June 30, 2004, when the offering was
terminated, we had sold 1,594,211 units (1,594,211 shares of our common stock
and warrants to purchase 797,105 additional shares of our common stock at prices
ranging from $1.56 to $2.06 per share) to investors, including our directors and
existing shareholders, for gross proceeds of $1,547,000.
C. Related Party Notes Payable
See the discussion of certain notes payable to related parties at Note 10
-"Notes Payable - Related Parties".
D. Convertible Note Payable
In December 2003, we entered into a note purchase agreement with an
accredited investor and, pursuant thereto, we issued a convertible note in the
aggregate principal amount of $375,000 and bearing interest at 10%, due December
22, 2004. The note and accrued interest of $11,854 was converted on June 24,
2004 into 369,331 shares of common stock and we issued warrants to purchase
553,997 shares of our common stock.
E. Sale and Leaseback of Real Estate
During March 2004, our Minnesota subsidiary sold all of its land and
buildings to an entity co-owned by an employee for $1,400,000, realizing a gain
of $437,337 which has been recorded as unearned income and will be recognized as
income ratably over the term of the lease. Simultaneous with the sale, we
entered into an agreement to lease the property back. We used $875,000 of the
proceeds to repay an existing obligation to Bremer Business Finance.
F. Tennessee Facility
We initially allocated approximately $1 million of proceeds from the
Laurus credit facility to purchase necessary shredding equipment for our
Tennessee facility. In August 2004, we used $350,000 of the proceeds as a "good
faith deposit" with a third party towards the acquisition of certain processing
equipment that would be required in Tennessee. In December 2004, we executed a
Letter of Intent with the same third party, providing among other things our
agreement to lease certain pieces of tire processing equipment which was
initially intended to be utilized in Tennessee (see Note 8) and agreed to apply
a portion of the $350,000 to preparation and moving of the equipment to be
leased. Due to delays in identifying the appropriate remaining equipment for
Tennessee, we reallocated approximately $650,000 of the proceeds to be used to
re-establish our Georgia waste wire processing equipment line in November 2004
as well as support the limited Tennessee operation during this period. During
February 2005, we determined that based on increasing inbound tire volumes in
the Southeast and reduced existing processing capacity as well as equipment
reliability issues, we would install a majority of the new leased equipment in
Georgia in order to increase our plant processing capacity and reduce disposal
expense. Based on existing capital constraints, we have reduced our Tennessee
staff and are currently evaluating several alternatives to shredding which will
allow us to reduce operating losses in Tennessee during the third quarter of
fiscal 2005. If we are successful in reducing the need to transport Tennessee
tires to Georgia, we estimate the cost savings realized could exceed $80,000 per
month. No assurance can be given, however, that we will be able accomplish this
in a timely manner or at all.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
8
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
3. Net Loss Per Share
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if potentially dilutive common shares had been
issued, as well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by us relate to
outstanding stock options and warrants (determined using the treasury stock
method) and convertible debt. Basic and diluted net loss per share are the same
for the three and six months ended March 31, 2005and 2004, since the effect of
the inclusion of all outstanding options, warrants and convertible debt would be
anti-dilutive.
4. Insurance Claim
On March 31, 2003, a portion of our Georgia facility and several pieces of
waste wire processing equipment were damaged by a fire.
In December 2003, we reached a settlement agreement with our insurance
carrier amounting to $1,029,885 of which $821,172 was applicable to losses
incurred during fiscal 2003. The settlement amount, net of direct costs
incurred, resulted in net casualty income of $431,594 during the fiscal year
ended September 30, 2003 and $112,766 during the quarter ended December 31,
2003, which is classified as other income in the accompanying statement of
operations. In December 2003 all remaining amounts associated with this
settlement were received.
5. Annual Assessment of Goodwill
We have elected to perform the required annual impairment test of our
goodwill on the last day of our fiscal third quarter. As of June 30, 2004, we
have concluded that goodwill is not impaired.
6. Notes Receivable, Officers
In January 1998 we advanced $104,000 to an officer under an 8.5% secured
promissory note with both principal and interest due January 2001. This note was
amended on September 30, 2000 to extend the maturity until April 15, 2002
(subsequently extended to April 15, 2004) and increase the interest rate to
9.5%. On April 30, 2004 the remaining balance of $163,000, including interest,
was applied to offset obligations under our $400,000 September 30, 2003 note
payable due to the officer. (See Note 10)
In January 1999, we advanced two officers $55,000, in aggregate, under
8.5% secured promissory notes with both principal and interest due January 2002
(subsequently extended to January 2004). The proceeds were used to participate
in a private placement of our common stock and the loans were secured by 191,637
shares of common stock owned by the two officers. In June 2002, the two officers
repaid $5,000 each toward their respective then outstanding balances. On March
31, 2004, one officer agreed to apply his then outstanding balance of $24,000
against obligations under our $400,000 September 30, 2003 note payable due to
the officer. (See Note 10). On May 11, 2004 the other officer sold 36,717 shares
of common stock valued at $44,248 back to us in full settlement of all amounts
due under his note. We subsequently cancelled these shares, which reduced our
total shares issued and outstanding.
9
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
7. Property, Plant and Equipment
Property, plant and equipment consists of the following:
March 31, September 30, Estimated Useful
2005 2004 Lives
------------ ------------ ----------------
Land $ 167,981 $ 167,981
Buildings and improvements 3,732,321 3,595,104 10-20 years
Machinery,equipment and improvements 10,921,788 9,716,896 5-10 years
Furniture and fixtures 452,848 277,146 3-5 years
Motor vehicles 6,096,597 6,087,959 3-10 years
Construction in process 174,063 891,267
------------ ------------
21,545,598 20,736,353
Less accumulated deprecation and
amortization (10,072,220) (9,220,100)
------------ ------------
Property, plant and equipment, net $ 11,473,378 $ 11,516,253
============ ============
8. Acquisition Deposit
In August 2004, we executed a non-binding letter of intent and escrow
agreement with Tires Into Recycled Energy and Supplies, Inc. ("TIRES"), a
leading crumb rubber processor in the United States. Pursuant to the escrow
agreement, we made a "good faith" payment amounting to $350,000, which was to be
applied toward the purchase price upon completion of the transaction. On
December 8, 2004, we executed a new letter of intent which superceded the August
letter of intent in which we will lease, with an option to buy, certain pieces
of tire processing equipment owned by TIRES. These operating leases were
executed in January 2005 but became effective in February and March 2005 and
provide for aggregate monthly payments of $25,300 over terms ranging from 48 to
60 months. In addition, we were granted an exclusive purchase option to acquire
additional operating assets of TIRES if predetermined financial performance
criteria are met by them during the subsequent fifteen to twenty four month
period after December 8, 2004. The ultimate purchase price cannot be determined
at this time. In return for the exclusive purchase option, we issued 127,389
shares of our common stock (valued at $200,000) to TIRES. If we exercise our
exclusive purchase option and close a transaction, the value of the shares will
be applied against the purchase price of the assets. If the exclusive purchase
option expires or we decide not to exercise the option, they shall retain a
sufficient number of our shares to equal $200,000 (as of the date that the
purchase option expires) and return the balance of such shares of common stock
to us. If at the time the purchase option expires, the value of the shares is
less than $200,000, we will issue a sufficient number of additional shares to
equal $200,000.If at the time the purchase option expires, TIRES has not
achieved the predetermined financial performance criteria, they will return to
us a sufficient number of our shares to equal $200,000 at the time. In
connection with this agreement and based on the fair market value of our stock
at each quarter end, we may be required to record an asset or liability based
upon the sufficient number of shares required to meet the requirements of the
agreement, as required under Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities". At March 31, 2005, we have not recorded a related
liability as the amount is immaterial and would be offset by a corresponding
increase in the related deposit.
We have also agreed to allow TIRES to retain $101,378 of the "good faith"
payment to upgrade their existing crumb rubber production capacity and use the
remaining $248,622 to prepare and move the leased equipment for our use.
Accordingly, during the quarter ended March 31, 2005, the $101,378 was expensed
when it was released from escrow and approximately $243,597 has been capitalized
and is being amortized over the lease terms which range from 48 to 60 months.
10
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
9. Notes Payable/Credit Facilities
Republic Services of Georgia
On February 14, 2002, we repurchased and retired all of the Class B
convertible Preferred Stock held by Republic Services of Georgia, Limited
Partnership ("RSLP") (as successor to United Waste Services, Inc.) for a
$1,500,000 promissory note bearing interest at 10% and due in February 2007 and
100,000 shares of common stock valued at $1.60 per share on the date of
issuance. The difference between the liquidation value of the preferred stock
and the consideration given was credited to paid-in-capital.
On May 6, 2002, RSLP converted $750,000 of the principal amount of the
February 14, 2002 promissory note into 300,000 unregistered shares of our common
stock valued at $750,000. We issued RSLP a promissory note for the remaining
balance on the February 14, 2002 promissory note in the principal amount of
$743,750 bearing interest at 10% and due in March 2007. As of March 31, 2005, 6
payments totaling $51,229 were past due. RSLP has agreed to defer all payments
due through June 30, 2005 until July 31, 2005 and has agreed to waive any and
all defaults that may exist.
First American Credit Facility
On April 4, 2002, our Iowa subsidiary executed a five-year, $1,185,000
secured term note and a one year $300,000 working capital line of credit
(secured with all Iowa assets) with First American Bank ("First American"). The
proceeds of this term note were used in connection with the acquisition of UT
Tire Recyclers, Inc in April 2002.
On February 13, 2003, our Iowa subsidiary amended its existing term debt
with First American under the terms of a five-year, $1,760,857 secured term
note. The note is payable in sixty monthly installments of $34,660 and is
secured with all Iowa assets. They also renewed their working capital line of
credit which was increased to $500,000. The line of credit was subsequently
extended to January 20, 2005 and First American temporarily increased the
maximum availability under the line of credit to $650,000 through September 30,
2004. The term note bears interest at 7.5% and the line of credit bears interest
at the prime rate plus 1% (6.75% as of March 31, 2005).
On November 15, 2004, First American reduced the availability under our
working capital line of credit and issued a $100,050 Irrevocable Letter of
Credit as collateral for a performance bond associated with the initial phase of
a significant scrap tire cleanup project in Iowa. The Letter of Credit will
remain in force until the sooner of the projects completion (April 2005) or
November 15, 2005 unless we are successful in being awarded the next phase of
the cleanup project at which time we will seek to extend the maturity of the
Letter of Credit accordingly.
On February 10, 2005, First American renewed our working capital line
until February 10, 2006 and increased our maximum availability under the line of
credit to $800,000. In addition, First American agreed to increase our overall
maximum availability by an additional $350,000 to $1,150,000 through June 10,
2005 to coincide with the performance of a significant scrap tire cleanup
project which was completed in April 2005.
Laurus Credit Facility
On June 30, 2004, we entered into a $9 million credit facility with Laurus
Master Fund, Ltd., ("Laurus") consisting of a $5 million convertible, revolving
working capital line of credit and a $4 million convertible term note loan. At
closing, we borrowed $4 million under the term loan and $2 million under the
line of credit, and used approximately $1,860,000 of the proceeds to repay the
outstanding indebtedness under our prior credit facility and approximately
$1,070,000 to repay in full the indebtedness due Cryopolymers Leasing.
Additional proceeds of the financing were used to increase working capital and
to pay certain costs and fees associated with this transaction including a
$425,000 placement fee paid to our investment bank. On March 22, 2005, the
credit facility was amended to permit us to maintain overadvances of up to
$2,000,000 under the line of credit through December 31, 2005. In addition, the
price at which the minimum borrowing note and term loan are convertible into our
common stock were adjusted as noted below.
11
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
9. Notes Payable/Credit Facility - (Continued)
The line of credit has a three-year term. Borrowings generally bear
interest at the prime rate published in The Wall Street Journal from time to
time plus 1.0% (6.75% at March 31, 2005), and are convertible into shares of our
common stock at the option of Laurus. Except for downward adjustments provided
in the credit facility terms described below, the interest rate shall not be
below 5%. The amount we may borrow at any time under the line of credit is
generally limited to 90% of eligible accounts receivable (90 days or less) and
50% of eligible finished goods inventory, subject to certain limitations. Until
December 31, 2005, however, we will be permitted to maintain overadvances of up
to $2,000,000 under the line of credit. All overadvances outstanding from time
to time will bear interest, in addition to the interest otherwise required, at a
rate equal to 2% per annum on the amount of the overadvance. In the event that
at any time we have outstanding overadvances of more than $2,000,000, or if any
overadvance remains outstanding on or after January 1, 2006, the excess or
overdue overadvance will bear interest, in addition to that otherwise required,
at a rate equal to 2% per month for all times such amounts are outstanding. The
line of credit requires us to maintain a minimum borrowing of $1,000,000. As of
March 31, 2005, our overadvance was $1,456,787.
Subject to certain limitations, Laurus will have the right, but not the
obligation, to convert the first $1,000,000 of borrowings under the line of
credit into our common stock at a revised price of $.79 (85% of the average
closing price of our common stock for the five days immediately prior to the
March 22, 2005 amendment to the credit facility which was $.93) as compared to
the original conversion price of $1.31 as determined on June 30, 2004. The
conversion price for each subsequent $1,000,000 of borrowings will be adjusted
to the higher of $.93 or a 10% premium over the 22-day trailing average closing
price computed on each $1,000,000 increment and we will also determine at that
time if any new beneficial conversion factor exists
In connection with the line of credit, we issued Laurus a warrant to
purchase up to 990,000 shares of our common stock at prices ranging from $1.63
to $2.29. The warrant, valued at $82,731, is immediately exercisable, has a term
of ten years and allows for cashless exercise at the option of Laurus, and does
not contain any "put" provisions.
Net proceeds received from advances made under the line at closing were
allocated to the line of credit and the warrant based on their relative fair
values resulting in a discount on the line of credit amounting to $186,700 which
will be amortized to interest expense over the three-year term of the borrowing
or immediately upon conversion. As a result of the change in conversion price
pursuant to the terms of the March 22, 2005 amendment, we have determined the
minimum borrowing note contains a beneficial conversion feature of $598,717. The
beneficial conversion amount was recorded as paid-in-capital and will be
amortized to interest expense at $59,872 per month through December 31, 2005 or
ratably upon any partial conversion.
The term note also has a three-year term and bears interest at the prime
rate published in The Wall Street Journal from time to time plus 1.0% (6.75% at
March 31, 2005), with interest payable monthly. Except for downward adjustments
provided in the credit facility terms described below, the interest rate shall
not be below 5%. Principal will be amortized over the term of the loan,
commencing on November 1, 2004, with minimum monthly principal payments of
$125,000. Pursuant to the terms of the March 22, 2005 amendment, however
principal payments otherwise due from December 1, 2004 through June 30, 2005
have been deferred and are payable in full on the maturity date of the of the
term note, together with all other amounts due and payable on that date.
Laurus has the option to convert some or all of the principal and interest
payments into common stock at a revised fixed conversion price of $.93 (the
average closing price of our common stock for the five days immediately prior
the March 22, 2005 amendment), provided, that the first $1,000,000 of borrowings
under the term note is convertible into common stock at a price of $.79 (85% of
the average closing price of our common stock for the five days immediately
prior to the amendment. The original conversion price of the term note
determined at June 30, 2004 was $1.31. Subject to certain limitations, regular
payments of principal and interest will be automatically payable in common stock
if the 5-day average closing price of the common stock immediately preceding a
payment date is greater than or equal to 110% of such fixed conversion price.
12
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
9. Notes Payable/Credit Facility - (Continued)
In connection with the term note, we issued Laurus a warrant to purchase
up to 390,000 shares of our common stock at prices ranging from $1.56 to $2.18.
The warrant, valued at $37,161, is immediately exercisable, has a term of ten
years and allows for cashless exercise at the option of Laurus, and does not
contain any "put" provisions.
Net proceeds received from issuance of the term note amounted to
$3,788,950 and were allocated to the term note and the warrant based on their
relative fair values. The note contained a beneficial conversion feature of
$64,000 at issuance based on the intrinsic value of the shares into which the
note is convertible, and a debt issue discount amounting to $248,200. The
original beneficial conversion amount was recorded as paid in capital and will
be amortized to interest expense along with the debt discount over the three
year term of the note or ratably upon any partial conversion. As a result of the
change in conversion price pursuant to the terms of the March 22, 2005
amendment, we have determined the term note's beneficial conversion feature
increased $1,485,594 to $1,549,594. The additional beneficial conversion amount
was recorded as paid-in-capital with $567,429 (the portion associated with the
first $1,000,000 of borrowings) being amortized to interest expense at $56,743
per month through December 31, 2005 or ratably upon any partial conversion with
the remaining balance of $918,165 amortized at $32,792 per month over the
remaining term of the note or ratably upon any partial conversion.
We will be required to pay a premium of 2% of the amount of each principal
payment made in cash under the line of credit and/or the term note. In addition,
we will be required to pay a penalty of 20% of the then-outstanding balance of
the term note if we prepay that note.
The interest rate under each of the notes is subject to downward
adjustment on a monthly basis (but not to less than 0%). The downward adjustment
will be in the amount of 200 basis points (2.0%) for each incremental 25%
increase in the average closing price of our common stock over the then
applicable conversion price of the note for the five-day period preceding such
monthly determination date if we have at that time registered for resale all of
the shares of our common stock underlying the notes and warrants we are issuing
to Laurus in this transaction, or 100 basis points (1.0%) for each incremental
25% increase in the average closing price of our common stock over the then
applicable conversion price of the note for the five-day period preceding such
monthly determination date if we have not at that time registered for resale all
of such shares.
The credit facility is secured by a first-priority security interest in
substantially all of our assets, including the capital stock of our active
subsidiaries. Our active subsidiaries have guaranteed our obligations to Laurus
and have granted Laurus a security interest in their assets to secure this
guarantee.
We incurred investment banking costs amounting to $559,000, including
$455,000 in cash and $103,840 in the form of 57,252 shares of our unregistered
common stock valued at $75,000 and warrants to purchase up to 270,000 shares of
our common stock valued at $28,840. The warrants are immediately exercisable,
have a term of five years and have exercise prices ranging from $1.64 to $2.29.
Total debt issuance costs incurred in connection with securing the credit
facility amounted to approximately $674,000 of deferred financing costs which
will be amortized to interest expense over the three year term. Additionally, a
management fee amounting to $315,000 was paid to Laurus from the closing
proceeds, and was recorded as a debt discount to be amortized to interest
expense over the three year term.
13
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
9. Notes Payable/Credit Facility - (Continued)
We have agreed to register for resale under the Securities Act the shares
of common stock issuable to Laurus upon conversion of borrowings under the
credit facility and upon exercise of the warrants. To date, we have registered
3,801,237 shares of common stock for resale by Laurus. That number represents
the largest number of shares we are permitted to list on the American Stock
Exchange without first obtaining the approval of our stockholders. We are
required to file an additional registration statement with respect to the resale
of the balance of the 5,600,000 shares that we currently expect to be required
to issue to Laurus in connection with the credit facility. That registration
statement cannot be declared effective unless and until our stockholders approve
the issuance of such shares. The amount of our common stock Laurus may hold at
any given time is limited to no more than 4.99% of our outstanding capital stock
and no more than 25% of our aggregate daily trading volume determined over the
five-day period prior to the date of determination. These limitations may be
waived by Laurus on 90 days' prior notice, or without notice if we are in
default.
The conversion price applicable to each of the notes and the exercise
price of each of the warrants is subject to downward adjustment if we issue
shares of our common stock (or common stock equivalents) at a price per share
less than the applicable conversion or exercise price. There are exceptions for
issuances of stock and options to our employees and for certain other ordinary
course stock issuances.
Subject to applicable cure periods, amounts borrowed from Laurus are
subject to acceleration upon certain events of default, including: (i) any
failure to pay when due any amount we owe to Laurus; (ii) any material breach by
us of any other covenant made to Laurus; (iii) any misrepresentation made by us
to Laurus in the documents governing the credit facility; (iv) the institution
of certain bankruptcy and insolvency proceedings by or against us; (v) the entry
of certain monetary judgments against us that are not paid or vacated for a
period of 30 business days; (vi) suspensions of trading of our common stock;
(vii) any failure to deliver shares of common stock upon conversions under the
credit facility; (viii) certain defaults under agreements related to any of our
other indebtedness; and (ix) changes of control of our company. Substantial fees
and penalties are payable to Laurus in the event of default.
10. Notes Payable - Related Party
Convertible Notes Payable - Related Party
One of our directors was owed $300,000 under the terms of an October 1999
private offering of 10% convertible notes and warrants and $75,000 under the
terms of a February 2000 offering of 11% convertible notes and warrants. The
convertible notes originally matured twelve months after issuance and were
payable in cash or unregistered shares of our common stock at a conversion price
of $1.00 per share. In September 2000 and June 2001, the director agreed to
extend the maturity date of each note for an additional twelve months from their
original maturity. In return for the June 2001 extension, we agreed to reduce
the conversion price to $.75 per share. In September 2002, the director again
agreed to extend the maturity of each note for an additional twenty-four months
from their extended maturity dates which range from October 2004 to February
2005.
On February 16, 2004, the director converted both notes, including
$375,000 of principal and $168,210 of accrued interest into 724,281 shares of
our unregistered common stock pursuant to the amended terms noted above.
In November 2000, we borrowed $200,000 from the same director who held the
convertible notes referred to above. This unsecured note payable bears interest
at 12% per annum with interest due monthly and the principal due originally in
November 2001. In June 2001, the director agreed to extend the maturity date of
the note for an additional twelve months from its original maturity. In
September 2002, the director agreed to extend the maturity of the note for an
additional twenty-four months or until November 2004. In June 2004, the director
agreed to extend the maturity of this note until the earlier of when all amounts
due under the Laurus credit facility (see Note 9) have been repaid or June 30,
2007.
14
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
10. Notes Payable - Related Party - (Continued)
During the period of June to August 2003, two immediate family members of
an officer loaned us a total of $400,000 under the terms of two-year, unsecured
promissory notes which bear interest at 12% per annum with interest due
quarterly and the principal due upon maturity. In March 2004, these same
individuals loaned us an additional $200,000 in aggregate, under similar terms
with the principal due upon maturity March 2006. These individuals each agreed
to invest the entire $100,000 principal balance of their June 2003 notes
($200,000 in aggregate) into the April 2004 private placement of investment
units and each received 113,636 units in these transactions. At March 31, 2005,
the remaining balance due on these advances amounted to $400,000. In addition,
the two individuals agreed to extend the maturity of the remaining balance of
these notes until the earlier of when all amounts due under the Laurus credit
facility (see Note 9) have been repaid or June 30, 2007.
In September 2003, an officer loaned us $400,000 under the terms of a
September 30, 2003 unsecured promissory note which bears interest at 12% per
annum with interest due quarterly and the principal due March 31, 2004
(subsequently extended to September 30, 2004). In 2004, the officer applied
approximately $114,000 of the balance due him and accrued interest of
approximately $21,000 to exercise options to purchase 185,000 shares of common
stock . In addition, he agreed to extend the maturity of the remaining balance
of this note until the earlier of when all amounts due under the Laurus credit
facility (see Note 9) have been repaid or June 30, 2007. At March 31, 2005, the
remaining balance due on this note amounted to $99,320.
On September 30, 2003, our Georgia subsidiary's landlord, loaned us
$100,000 under the terms of a September 30, 2003 unsecured promissory note which
bears interest at 12% per annum with interest due quarterly and the principal
due September 30, 2004. In June 2004, the landlord agreed to invest the entire
$100,000 principal balance of the unsecured promissory note plus accrued
interest of $7,300 into the April 2004 private placement of investment units and
received 121,932 units in this transaction.
In October 2003, one of our officers loaned us $75,000 under the terms of
an October 22, 2003 unsecured promissory note payable which bears interest at
12% per annum with interest due quarterly and the principal due June 30, 2004.
During January and February 2004, the same officer advanced us an additional
$250,000 under substantially similar notes that are also due in June 2004. This
officer agreed to invest all unpaid principal and interest under these advances
amounting to approximately $350,000 into the April 2004 private placement of
units and received 339,806 units in this transaction.
15
GreenMan Technologies, Inc.
Notes To Unaudited Consolidated Financial Statements
March 31, 2005
11. Stock Options
We apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock options issued to our employees and
directors. Had the compensation cost for the stock options issued to our
employees and directors been determined based on the fair value at the grant
dates consistent with Statement of Financial Accounting Standards No. 123, the
net loss and net loss per share would have been adjusted to the proforma amounts
indicated below:
Three Months Ended Six Months Ended
March 31, 2005 March 31, 2004 March 31, 2005 March 31, 2004
-------------- -------------- -------------- --------------
Net loss as reported ............................. $ (1,887,810) $ (1,297,908) $ (3,692,648) $ (1,475,491)
Add: Compensation recognized under APB No.25 ..... -- -- -- --
Less: Compensation recognized under FAS 123 ...... (11,978) (19,845) (35,035) (39,691)
-------------- -------------- -------------- --------------
Pro forma net loss ............................... $ (1,899,788) $ (1,317,753) $ (3,727,683) $ (1,515,182)
============== ============== ============== ==============
Net loss per share:
Basic and diluted - as reported .............. $ (0.10) $ (0.08) $ (0.19) $ (0.09)
============== ============== ============== ==============
Basic and diluted - pro forma ................ $ (0.10) $ (0.08) $ (0.19) $ (0.09)
============== ============== ============== ==============
2005 Stock Option Plan
On March 18, 2005, our Board of Directors adopted the 2005 Stock Option
Plan (the "2005 Plan"), subject to approval by our stockholders. The 2005 Plan
is intended to replace our 1993 Stock Option Plan, which expired on June 10,
2004. In April 2004, our Board adopted a replacement stock option plan but did
not submit it for ratification by our stockholders. That plan was terminated by
our Board on March 18, 2005, and all options granted under that plan have been
terminated.
12. Income Taxes
Previously, we had recorded a full valuation allowance on the net
operating loss carry forwards and other components of the deferred tax assets
based on our expected ability to realize the benefit of those assets. In the
year ending September 30, 2002, we reduced the valuation allowance by $270,000
based on our net income before taxes in the year then ending as well as expected
net income before income taxes for the next fiscal year.
Based on the unforeseen magnitude of the our quarterly and year to date
losses, we determined the near-term realizability of the $270,000 non-cash
deferred tax asset to be questionable and therefore provided a valuation
allowance on the entire amount and wrote if off during the quarter ended
December 31, 2004. We will evaluate the realizability of these deferred tax
assets each quarter.
16
Item 2. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in Item 1 of
the Quarterly Report, and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in our Form 10-KSB filed for the year ended
September 30, 2004.
Results of Operations
Three Months ended March 31, 2005 Compared to the Three Months ended
March 31, 2004
Net sales for the three months ended March 31, 2005 increased $1,733,285
or 29% to $7,645,550 as compared to last year's net sales of $5,912,265. We
processed approximately 7.5 million passenger tire equivalents during the three
months ended March 31, 2005, compared to approximately 6.2 million passenger
tire equivalents during the quarter ended March 31, 2004. The increase in
revenue was attributable to a 19% increase in inbound scrap tires volume, a 4%
increase in overall tipping fees per passenger tire and a 28% increase in
overall product revenues. Included in the results for the quarter ended March
31, 2005 was approximately $745,000 of revenue and 788,000 passenger tire
equivalents associated with an Iowa scrap tire cleanup project which was
completed during the quarter.
Overall end product sales increased $446,546 to $2,040,546 during the
quarter ended March 31, 2005, compared to $1,594,000 for the same period last
year. The increase in end product sales is attributable to re-installation of
our Georgia waste wire processing equipment in November 2004 and stronger crumb
rubber, steel and tire derived fuel sales during the quarter ended March 31,
2005.
Gross profit for the quarter ended March 31, 2005 was $112,208 or 1% of
net sales, compared to $348,018 or 6% of net sales for the quarter ended March
31, 2004. Our cost of sales increased approximately $1,969,000 or 35% primarily
due to reduced processing capacity and equipment reliability issues at our
Southeast and Western operations increased collection costs, continued operating
inefficiencies necessitated by processing a majority of our Tennessee-sourced
tires at our Georgia facility as well as unforeseen decreases in inbound tire
volumes during the quarter in the West due to severe weather conditions during
the quarter. In addition, a change in the specifications of our alternative fuel
customers requiring a smaller tire chip has contributed to our reduced
processing capacity and higher operating costs. During March 2005, we installed
equipment which has positively impacted the reduced processing capacity issues
in the Southeast and have recently completed a corporate-wide review of all tire
collection accounts and will be evaluating which accounts can be served in a
profitable manner on a go forward basis.
Selling, general and administrative expenses for the quarter ended March
31, 2005 increased $148,151 to $1,315,746 or 17% of net sales, compared to
$1,167,595 or 20% of net sales for the quarter ended March 31, 2004. The
increase was primarily attributable to increased outside professional expenses
and headcount.
As a result of the foregoing, we had an operating loss of $1,203,538 for
the quarter ended March 31, 2005 as compared to an operating loss of $819,577
for the quarter ended March 31, 2004.
Interest and financing costs for the quarter ended March 31, 2005
increased $33,591 to $584,703, compared to $551,112 for the quarter ended March
31, 2004 which included approximately $130,000 of deferred financing costs
associated with an unsuccessful financing effort. Included in other expenses for
the quarter ended March 31, 2005 is $101,378 relating to a portion of an
acquisition deposit which was written off. In addition, during the quarter ended
March 31, 2004, we recorded other income of approximately $90,000 relating to a
settlement received for end product which was damaged.
As a result of the foregoing, our net loss for the quarter ended March 31,
2005 increased $589,902 to $1,887,810 or $.10 per basic share, compared to a net
loss of $1,297,908 or $.08 per basic share for quarter ended March 31, 2004.
Six Months ended March 31, 2005 Compared to the Six Months ended March 31, 2004
Net sales for the six months ended March 31, 2005 increased $1,979,892 or
14% to $15,690,907 as compared to last year's net sales of $13,711,015. We
processed over 15 million passenger tire equivalents during the six months ended
March 31, 2005, compared to approximately 14.4 million passenger tire
equivalents during the six months ended March 31, 2004. The increase in revenue
was attributable to a 4% increase in inbound scrap tires volume, a 4% increase
in overall tipping fees per passenger tire and a 16% increase in overall product
revenues. Included in the results for the six months ended March 31, 2005 was
approximately $827,000 of revenue and 875,000 passenger tire equivalents
associated with an Iowa scrap tire cleanup project which was completed during
the period.
17
Overall end product sales increased $571,204 to $4,126,124 during the six
months ended March 31, 2005, compared to $3,554,920 for the same period last
year. The increase in end product sales is attributable to re-installation of
our Georgia waste wire processing equipment in November 2004 and stronger crumb
rubber, steel and tire derived fuel sales during the six months ended March 31,
2005.
Gross profit for the six months ended March 31, 2005 was $213,332 or 1% of
net sales, compared to $1,486,827 or 11% of net sales for the six months ended
March 31, 2004. Our cost of sales increased approximately $3,253,387or 27%
primarily due to reduced processing capacity and equipment reliability issues at
our Southeast and Western operations, increased collection costs continued
operating inefficiencies necessitated by processing a majority of our
Tennessee-sourced tires at our Georgia facility as well as unforeseen decreases
in inbound tire volumes in the West due to severe weather conditions during the
six months. In addition, a change in the specifications of our alternative fuel
customers requiring a smaller tire chip has contributed to our reduced
processing capacity and higher operating costs. During March 2005, we installed
equipment which has positively impacted the reduced processing capacity issues
in the Southeast and have recently completed a corporate-wide review of all tire
collection accounts and will be evaluating which accounts can be served in a
profitable manner on a go forward basis.
Selling, general and administrative expenses for the six months ended
March 31, 2005 increased $295,446 to $2,531,282 or 16% of net sales, compared to
$2,235,836 or 16% of net sales for the six months ended March 31, 2004. The
increase was primarily attributable to increased outside professional expenses
and headcount.
As a result of the foregoing, we had an operating loss of $2,317,950 for
the six months ended March 31, 2005 as compared to an operating loss of $749,009
for the six months ended March 31, 2004.
Interest and financing costs for the six months ended March 31, 2005
increased $84,696 to $990,604, compared to $905,908 for the six months ended
March 31, 2004 which included approximately $130,000 of deferred financing costs
associated with an unsuccessful financing effort.
Included in other expenses for the six months ended March 31, 2005 is
$101,378 relating to a portion of an acquisition deposit which was written off.
In addition to the lost product revenues caused by the March 2003 fire at our
Georgia facility, we also incurred additional direct costs relating to excess
disposal costs totaling approximately $95,000, which were offset by an insurance
recovery of $207,873 received during the six months ended March 31, 2004. In
addition, we also recorded other income of approximately $90,000 relating to a
settlement for damaged product during the six months ended March 31, 2004.
Based on the unforeseen magnitude of our quarterly and year to date
losses, we determined the near-term realizability of a $270,000 non-cash
deferred tax asset to be questionable and therefore have provided a valuation
allowance on the entire amount and accordingly wrote it off during the quarter
ended December 31, 2004.
As a result of the foregoing, our net loss for the six months ended March
31, 2005 increased $2,217,157 to $3,692,648 or $.19 per basic share, compared to
a net loss of $1,475,491 or $.09 per basic share for the six months ended March
31, 2004.
Liquidity and Capital Resources
As of March 31, 2005, we had $393,662 in cash and cash equivalents and a
working capital deficiency of $5,540,184. We understand that the continued,
successful sales and marketing of our services and products, the introduction of
new products and/or the more efficient production of current products, and
re-establishing continued profitability from operations will be critical to our
future liquidity.
The Consolidated Statements of Cash Flows reflect events in 2005 and 2004
as they affect our liquidity. During the six months ended March 31, 2005, net
cash used by operating activities was $174,673 which reflects a net loss of
$3,692,648 and a $277,066 increase in product inventory, which is typical as we
end our seasonally slower fiscal second quarter. Positively impacting cash flows
for the six months ended March 31, 2005 was depreciation and amortization of
$1,513,409,a $270,000 non-cash deferred tax asset write-off, a $786,478 decrease
in accounts receivable and a $1,106,291 increase to accounts payable and accrued
expenses. During the six months ended March 31, 2004, net cash used by operating
activities was $86,613 reflecting a net loss of $1,475,491; a decrease in
accounts payable and accrued expenses of $364,501 and an increase in product
inventory of $701,479. These amounts were positively impacted by depreciation
and amortization, a reduction of accounts receivable and the receipt of $634,172
in insurance proceeds.
Net cash used for investing activities was $865,362 for the six months
ended March 31, 2005 reflecting the purchase of $1,137,878 of machinery and
equipment with a majority associated with the completion of our Georgia waste
wire processing equipment and new shredding capacity. Net cash provided by
investing activities was $650,532 for the six months ended March 31, 2004
reflecting the $1,400,000 of proceeds received from the sale of our Minnesota
real estate which offset the purchase of $553,076 of property and equipment.
18
Net cash provided by financing activities was $923,910 during the six
months ended March 31, 2005 and was positively impacted by availability under
our new Laurus credit facility as well as increased availability under our First
American credit facility. This increase was offset by repayment of notes payable
of $688,039 and capital leases of $156,192. Net cash used by financing
activities during the six months ended March 31, 2004 was $1,081,374 which
reflected the repayment of notes payable of $1,921,425, including approximately
$875,000 associated with payoff of the loan outstanding on our Minnesota real
estate. Positively affecting cash flows from financing activities during the six
months ended March 31, 2004 were proceeds from the issuance of notes payable to
unrelated and related parties.
The financial statements have been prepared assuming we will continue as a
going concern. We have incurred substantial losses from operations, and have a
working capital deficiency of $5,540,184 at March 31, 2005. These factors raise
substantial doubt about our ability to continue as a going concern. Our
liquidity had been significantly and adversely affected since our primary source
of working capital financing and long term debt, Southern Pacific Bank and its
wholly owned subsidiary Coast Business Credit, were closed by the Commissioner
of Financial Institutions of the State of California in February 2003. In
particular, we have had to significantly slow down or delay the implementation
of several growth initiatives, including establishing a new high volume tire
processing facility in Tennessee and shredding and screening upgrades in Georgia
and Minnesota. In addition, we estimate that during the year ended September 30,
2004, reduced end product revenue and excess waste disposal costs of over $1
million were associated with the impact of a March 31, 2003 fire in Georgia.
These conditions have caused us to incursignificant expenses in the short-term
and have limited our ability to grow in the longer-term.
Despite these challenges, during the past two years, we invested over $3
million in new equipment to increase processing capacity at our Iowa, Minnesota
and Georgia locations. We have identified, and are currently selling product
into several new, higher-value markets as evidenced by a 13% increase in end
product revenue during fiscal 2004 and 16% year to date increase for the six
months ended March 31, 2005, despite the fact that our Georgia waste wire
processing equipment was inoperable until November 2004. We continue to
experience strong demand for our end products and remain confident in our
ability to continue to grow our producte revenue base. In addition, we have
reconfigured our Wisconsin location to substantially reduce operating costs. The
reconfiguration was completed during the quarter ended December 31, 2004.
Additionally, management continues to attempt to negotiate more favorable
tipping fees with kiln relationships in several markets with the ultimate goal
of substantially reducing these fees from current levels.
We understand that our continued existence is dependent on our ability to
achieve profitable status on a sustainable basis and have implemented and/or are
in the process of implementing the following actions:
Credit Facility Refinancing
Our liquidity had been significantly and adversely affected since our
primary source of working capital financing and long term debt, Southern Pacific
Bank and its wholly owned subsidiary Coast Business Credit, were closed by the
Commissioner of Financial Institutions of the State of California in February
2003. In particular, we have had to significantly slow down or delay the
implementation of several growth initiatives, including establishing a new high
volume tire processing facility in Tennessee, shredding and screening upgrades
in Georgia and Minnesota. These conditions have caused us to incur significant
expenses in the short-term and have limitedour ability to grow in the
longer-term.
On June 30, 2004, we entered into a $9 million credit facility with Laurus
Master Fund, Ltd., ("Laurus") consisting of a $5 million convertible, revolving
working capital line of credit and a $4 million convertible term note loan. At
closing, we borrowed $4 million under the term loan and $2 million under the
line of credit, and used approximately $1,860,000 of the proceeds to repay the
outstanding indebtedness under our prior credit facility and approximately
$1,070,000 to repay in full the indebtedness due Cryopolymers Leasing.
Additional proceeds of the financing were used to increase working capital and
to pay certain costs and fees associated with this transaction including a
$425,000 placement fee paid to our investment bank. On March 22, 2005, the
credit facility was amended to permit us to maintain overadvances of up to
$2,000,000 under the line of credit through December 31, 2005. In addition, the
price at which the minimum borrowing note and term loan are convertible into our
common stock were adjusted (see Note 9). As of March 31, 2005, our overadvance
was $1,456,787
19
On February 10, 2005, First American Bank renewed our Iowa subsidiary's
working capital line until February 10, 2006 and increased our maximum
availability to under the line of credit to $800,000. In addition, First
American agreed to increase our overall maximum availability by an additional
$350,000 to $1,150,000 through June 10, 2005 to coincide with the performance of
a significant scrap tire cleanup project which was completed in April 2005 (see
Note 9).
Additional Steps to Increase Liquidity
Over the last several years, we have funded portions of our operating cash
flow and growth from sales of equity securities and loans from officers and
related parties.
In December 2003, we issued a 10% convertible note due December 2004 in
the aggregate principal amount of $375,000 to an investor. The note was
convertible at the option of the holder at any time prior to maturity into
investment units at a price equal to $1.07 per unit with each unit consisting of
one share of common stock and a warrant to purchase 1.5 shares of common stock
at an exercise price of $1.07 per share, exercisable six months after issuance
for a period of five years from date of issuance. The note was converted on June
24, 2004 into 369,331 shares of common stock and we issued warrants to purchase
553,997 shares of our common stock. When originally issued, this note reflected
a beneficial conversion feature amounting to $154,226 and, upon conversion, the
remaining unamortized beneficial conversion discount of approximately $77,000
was charged to interest expense.
In April 2004, we commenced a private offering of investment units to
accredited investors, each unit consisting of one share of our common stock and
a warrant to purchase 0.5 shares of our common stock. As of June 30, 2004, when
the offering terminated, we had sold 1,594,211 units (1,594,211 shares of our
common stock and warrants to purchase 797,105 additional shares of our common
stock at prices ranging from $1.56 to $2.06 per share) to investors, including
our directors and existing shareholders, for gross proceeds of $1,547,800. We
used the net proceeds of this offering to re-establish our Georgia waste wire
processing capacity and for general working capital purposes during the
seasonally slower portion of our fiscal year.
From June 2003 through March 2004, several of our officers and members of
their families loaned us an aggregate of $1,345,000. These advances bear
interest at 12% and mature at various times through March 2006. In April 2004,
several of these individuals agreed to invest approximately $550,000 of the
amounts due them under the terms of their loans into the private placement
described above. In April 2004, one of our officers applied approximately
$187,000 of amounts due him to pay off notes receivable due our company and in
June 2004 applied approximately $114,000 of amounts due him, plus $21,000 of
accrued interest to exercise options to purchase 185,000 shares of our common
stock. AtMarch 31, 2005, the remaining balance on these advances amounted to
$699,320.
Operating Performance Enhancements
During the past five years, we have terminated under-performing operations
and initiatives and eliminated the use of non-conventional financing methods
that had contributed over $18.7 million to our accumulated deficit. In order to
position our company to be stronger, more profitable and to enhance shareholder
value in the future, we began initiatives during fiscal 2003 to upgrade existing
operations, expand into new geographic locations to maximize existing
transportation and marketing infrastructures, and continue to identify better
and more profitable uses for existing and new products.
Historically, our tire shredding operations were able to recover and sell
approximately 60% of a processed tire with the balance disposed of as waste wire
residual (cross-contaminated rubber and steel) at an annual cost exceeding
$1,000,000 in prior years. We have previously purchased secondary equipment for
our Georgia (damaged in the March 2003 fire; reestablished in November 2004),
Iowa and Minnesota facilities to further process the waste wire residual into
saleable components of rubber and steel that not only provide new sources of
revenue but also significantly reduced our residual disposal costs.
During the fourth quarter of fiscal 2002, we initiated a $1.5 million
equipment upgrade to our Des Moines, Iowa tire processing facility. We
completely replaced all tire shredders with more efficient, higher volume
equipment and installed a waste wire processing equipment line that reduced
waste wire disposal costs while increasing our production capacity to over 20
20
million pounds of rubber feedstock per year for our internal crumb rubber
operations. From July through December 2002, we experienced inevitable one-time
operational disruptions during the equipment installation. Additionally, we
incurred increased transportation costs because a significant portion of Iowa
tires were diverted to our Minnesota plant for processing during the upgrade.
These disruptive factors negatively impacted earnings in the first quarter of
fiscal 2003 by approximately $150,000. The capital investment in Iowa was funded
by a combination of internal cash flow and long-term debt provided by First
American Bank of Des Moines, Iowa and the State of Iowa.
On March 31, 2003, a portion of our Georgia facility and several pieces of
waste wire processing equipment were damaged by a fire. As of September 30,
2003, damaged equipment and parts with a net book value of approximately
$179,000 have been written off and we have incurred $225,000 of expenses
associated with the fire, including $211,000 of excess waste wire disposal. In
December 2003 we reached a $1.03 million settlement with our insurance carrier
in connection with the claims associated with the fire and have received all
remaining amounts due under this insurance claim. During the quarter ended
December 31, 2003, we recognized $207,873 of casualty income associated with the
insurance settlement before related costs of approximately the quarter. We
estimate that during the year ended September 30, 2004, reduced end product
revenue and excess waste disposal costs of over $1 million were associated with
the impact of the March 31, 2003 fire. In November 2004, all previously damaged
equipment was re-installed and became operational.
Other Matters That Have Impacted Our Liquidity
New Market Development Initiatives.
The July 2002 acquisition of a scrap tire business in Azusa, California
marked our first location in the western portion of the United States. We have
devoted significant resources during the past three years to expand and enhance
our California market position in order to provide a solid foundation for future
growth and sustainable profitability.
On July 1, 2004, we acquired certain assets of American Tire Disposal,
Inc. a southern California based company in the business of collecting and
marketing approximately 1 million scrap tires for approximately $172,000 in
assumed liabilities, forgiveness of trade payables due to us and cash. We have
consolidated American Tire Disposal's business into our existing California
operations
In February 2003, we announced our intent to open a new high-volume tire
processing facility in LaVergne, Tennessee as a result of experiencing
significant market share growth during the last two years. Historically, we
transported all Tennessee-sourced tires to our Georgia facility to be processed.
We anticipated that a majority of the funding to implement this initiative would
come from our principal lender, which unfortunately was closed by the
Commissioner of Financial Institutions of the State of California in February
2003, shortly after we received verbal approval to move forward. In July 2003,
our Tennessee facility began processing local tires on a limited basis using
excess and idle equipment from various other locations. We initially earmarked
approximately $1 million of proceeds from the Laurus credit facility to purchase
equipment necessary for our Tennessee facility.
Due to delays in identifying the appropriate remaining equipment for
Tennessee, we reallocated approximately $650,000 of the proceeds to be used to
re-establish our Georgia waste wire processing equipment line in November 2004
as well as support the limited Tennessee operation during this period. During
February 2005, we determined that based on increasing inbound tire volumes in
the Southeast and reduced existing processing capacity as well as equipment
reliability issues, we would install a majority of the new leased equipment in
Georgia in order to increase our plant processing capacity and reduce disposal
expense. Based on existing capital constraints, we have reduced our Tennessee
staff and are currently evaluating several alternatives other than shredding
which will allow us to reduce operating losses in Tennessee during the third
quarter of fiscal 2005. We are successful in reducing the need to transport
Tennessee tires to Georgia, we estimate the cost savings realized could exceed
$80,000 per month. No assurance can be given, however, that we will be able
accomplish this in a timely manner.
Also in February 2003, we decided to reconfigure the operations of our
Wisconsin facility from an unprofitable low-volume size reduction facility to a
whole tire transfer station supplying compliant tires to a cement kiln. The
decision was made because the cement kiln is anticipated to continue consuming a
majority of the scrap tires collected by our Wisconsin facility. The
reconfiguration was completed during the first quarter of fiscal 2005.
21
In August 2004, we executed a non-binding letter of intent and escrow
agreement with Tires Into Recycled Energy and Supplies, Inc. ("TIRES"), a
leading crumb rubber processor in the United States. Pursuant to the escrow
agreement, made a "good faith" payment amounting to $350,000, which was intended
to be applied toward the purchase price upon completion of the transaction. On
December 8, 2004, we executed a new letter of intent which superceded the August
letter of intent in which we will lease, with an option to buy, certain pieces
of tire processing equipment owned by TIRES. These operating leases were
executed in January 2005 but became effective in February and March 2005 and
provide for aggregate monthly payments of $25,300 over terms ranging from 48 to
60 months. In addition, we were granted an exclusive purchase option to acquire
additional operating assets of TIRES if predetermined financial performance
criteria are met by them during the subsequent fifteen to twenty four month
period after December 8, 2004. The ultimate purchase price cannot be determined
at this time. In return for the exclusive purchase option, we issued 127,389
shares of our common stock (valued at $200,000) to TIRES as a deposit. If at the
time the purchase option expires, TIRES has not achieved the predetermined
financial performance criteria, they will return to us a sufficient number of
our shares to equal $200,000 at the time. If we exercise our exclusive purchase
option and close a transaction, the value of the shares will be applied against
the purchase price of the assets. If the exclusive purchase option expires or we
decide not to exercise the option, they shall retain a sufficient number of our
shares to equal $200,000 (as of the date that the purchase option expires) and
return the balance of such shares of common stock to us. If at the time the
purchase option expires, the value of the shares is less than $200,000, we will
issue a sufficient number of additional shares to equal $200,000. In connection
with this agreement and based on the fair market value of our stock at each
quarter end, we may be required to record an asset or liability based upon the
sufficient number of shares required to meet the requirements of the agreement,
as required under Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities". At March 31, 2005, we have not recorded a related
liability as the amount is immaterial and would be offset by a corresponding
increase in the related deposit.
We also agreed to allow TIRES to use $101,378 of the "good faith" payment
to upgrade their existing crumb rubber production capacity and use the remaining
$248,622 to prepare and move the leased equipment for our use. Accordingly,
during the quarter ended March 31, 2005, the $101,378 was expensed when it was
released from escrow and approximately $243,597 has been capitalized and is
being amortized over the lease terms which range from 48 to 60 months.
Effects of Inflation and Changing Prices
Generally, we are exposed to the effects of inflation and changing prices.
Primarily because the largest component of our collection and disposal costs is
transportation, we are adversely affected by significant increases in the cost
of fuel. Additionally, because we rely on floating-rate debt for certain
financing arrangements, rising interest rates would have a negative effect on
our performance.
Based on our fiscal 2005 operating plan, we believe that available working
capital together with revenues from operations, loans from affiliated and
unaffiliated lenders including additional funding from Laurus will be necessary
to satisfy our cash requirements for the foreseeable future.
Off-Balance Sheet Arrangements
We lease various facilities and equipment under cancelable and
non-cancelable short and long term operating leases which are described in
Footnote 11 to the Audited Consolidated Financial Statements contained in our
annual report on Form 10-KSB.
Cautionary Statement
Information contained or incorporated by reference in this document
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which statements can be identified by
the use of forward-looking terminology such as "may," "will," "would," "can,"
"could," "intend," "plan," "expect," "anticipate," "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to differ materially from those in
such forward-looking statements.
22
Factors That May Affect Future Results
Risks Related to our Business
We have lost money in the past ten consecutive quarters and may need additional
working capital, which if not received, may force us to curtail operations.
We have experienced ten consecutive quarters of net losses. While
management has identified several significant non-recurring charges which have
contributed to these losses, the continued, successful sales and marketing of
our services and products, the introduction of new products and the
re-establishment of profitable operations will be critical to our future
liquidity. If we are unable to return to profitability before our cash is
depleted, we will need to seek additional capital. There can be no assurance
that we will be profitable in the future or, if we are not, that we will be able
to obtain additional capital on terms and conditions acceptable to us or at all.
We have substantial indebtedness to Laurus Master Fund secured by substantially
all of our assets. If an event of default occurs under the secured notes issued
to Laurus, Laurus may foreclose on our assets and we may be forced to curtail
our operations or sell some of our assets to repay the notes.
On June 30, 2004, we entered into a $9 million credit facility with Laurus
pursuant to secured promissory notes and related agreements which were amended
on March 22, 2005. Subject to certain grace periods, the notes and agreements
provide for the following events of default (among others):
o failure to pay interest and principal when due;
o an uncured breach by us of any material covenant, term or condition
in any of the notes or related agreements;
o a breach by us of any material representation or warranty made in
any of the notes or in any related agreement;
o any money judgment or similar final process is filed against us for
more than $50,000;
o any form of bankruptcy or insolvency proceeding is instituted by or
against us; and
o suspension of our common stock from our principal trading market for
five consecutive days or five days during any ten consecutive days.
In the event of a future default under our agreements with Laurus, Laurus
may enforce its rights as a secured party and we may lose all or a portion of
our assets, be forced to materially reduce our business activities or cease
operations.
We may require additional funding to sustain and grow our business, which
funding may not be available to us on favorable terms or at all. If we do not
obtain funding when we need it, our business may be adversely affected. In
addition, if we have to sell securities in order to obtain financing, the rights
of our current holders may be adversely affected.
We may have to seek additional outside funding sources to satisfy our
future financing demands if our operations do not produce the level of revenue
we require to maintain and grow our business. We will also need funding to
pursue acquisitions. We cannot assure you that outside funding will be available
to us at the time that we need it and in the amount necessary to satisfy our
needs, or, that if such funds are available, they will be available on terms
that are favorable to us. If we are unable to secure financing when we need it,
our business may be adversely affected. If we have to issue additional shares of
common stock or securities convertible into common stock in order to secure
additional funding, our current stockholders may experience dilution of their
ownership of our shares. In the event that we issue securities or instruments
other than common stock, we may be required to issue such instruments with
greater rights than those currently possessed by holders of our common stock.
23
We may not realize the anticipated benefits associated with the establishment of
our Tennessee operations.
In February 2003, as a result of experiencing significant market share
growth during the last two years, we announced our intent to open a new
high-volume tire processing facility in LaVergne, Tennessee. Historically, we
have transported all Tennessee-sourced tires to our Georgia facility for
processing. In July 2003, we began processing tires on a limited basis in
Tennessee utilizing excess and idle equipment from various GreenMan
subsidiaries. Until we are successful in purchasing the appropriate high-volume
shredding and ancillary equipment for our Tennessee facility or implement an
alternative strategy to ecomomically manage Tennesss sourced tires, we will
continue to incur excess transportation costs necessitated by transporting
Tennessee-sourced tires to Georgia instead of processing them locally.
We initially allocated approximately $1 million of proceeds from the
Laurus credit facility to purchase necessary shredding equipment for our
Tennessee facility. In August 2004, we used $350,000 of the proceeds as a "good
faith" deposit with a third party towards the acquisition of certain processing
equipment that would be required in Tennessee. In December 2004, we executed a
Letter of Intent with the same third party, providing among other things our
agreement to lease certain pieces of tire processing equipment which was
initially intended to be utilized in Tennessee (see Note 8) and agreed to apply
the $350,000 to preparation and moving of the equipment to be leased and other
for other uses. Due to delays in identifying the appropriate remaining equipment
for Tennessee, we reallocated approximately $650,000 of the proceeds to be used
to re-establish our Georgia waste wire processing equipment line in November
2004 as well as support the limited Tennessee operation during this period.
During February 2005, we determined that based on increasing inbound tire
volumes in the Southeast and reduced existing processing capacity as well as
equipment reliability issues, we would install a majority of the new leased
equipment in Georgia in order to increase our plant processing capacity and
reduce our disposal expense. We are currently evaluating several alternatives to
shredding which will allow us to reduce our current operating losses in
Tennessee during the third quarter of fiscal 2005. If we are successful in
reducing the need to transport Tennessee tires to Georgia, we estimate the cost
savings realized could exceed $80,00\per month. No assurance can be given,
however, that we will be able to open this facility in a timely manner or at
all.
Improvement in our business depends on our ability to increase demand for our
products and services.
Adverse events or economic or other conditions affecting markets for our
products and services, potential delays in product development, product and
service flaws, changes in technology, changes in the regulatory environment and
the availability of competitive products and services are among a number of
factors that could limit demand for our products and services.
Our business is subject to extensive and rigorous government regulation; failure
to comply with applicable regulatory requirements could substantially harm our
business.
Our tire recycling activities are subject to extensive and rigorous
government regulation designed to protect the environment. The establishment and
operation of plants for tire recycling are subject to obtaining numerous permits
and compliance with environmental and other government regulations. The process
of obtaining required regulatory approvals can be lengthy and expensive. The
Environmental Protection Agency and comparable state and local regulatory
agencies actively enforce environmental regulations and conduct periodic
inspections to determine compliance with government regulations. Failure to
comply with applicable regulatory requirements can result in, among other
things, fines, suspensions of approvals, seizure or recall of products,
operating restrictions, and criminal prosecutions. Furthermore, changes in
existing regulations or adoption of new regulations could impose costly new
procedures for compliance, or prevent us from obtaining, or affect the timing
of, regulatory approvals.
The market in which we operate is highly competitive, fragmented and
decentralized and our competitors may have greater technical and financial
resources.
The market for our services is highly competitive, fragmented and
decentralized. Many of our competitors are small regional or local businesses.
Some of our larger competitors may have greater financial and technical
resources than we do. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sale of their services. Competition could
increase if new companies enter the markets in which we operate or our existing
competitors expand their service lines. These factors may limit or prevent any
further development of our business.
24
Our success depends on the retention of our senior management and other key
personnel.
Our success depends largely on the skills, experience and performance of
our senior management, particularly, Robert H. Davis, our Chief Executive
Officer; Charles E. Coppa, our Chief Financial Officer; Mark T. Maust, our
Midwest Regional Vice President; Thomas A. Carter, our Southeastern RegionalVice
President; and James C. Dodenhoff, our Western Regional Vice President. The loss
of any of these personnel could have a material adverse effect on our business,
financial condition and results of operations.
Seasonal factors may affect our quarterly operating results.
Seasonality may cause our total revenues to fluctuate. We typically
process fewer tires during the winter and experience a more pronounced volume
reduction in severe weather conditions. In addition, a majority of our crumb
rubber is used for playground and athletic surfaces, running tracks and
landscaping/groundcover applications which are typically installed during the
warmer portions of the year. Similar seasonal or other patterns may develop in
our business.
Inflation and Changing Prices may hurt our business.
Generally, we are exposed to the effects of inflation and changing prices.
Primarily because the largest component of our collection and disposal costs is
transportation, we are adversely affected by significant increases in the cost
of fuel. Additionally, because we rely on floating-rate debt for certain
financing arrangements, rising interest rates would have a negative effect on
our financial performance.
If we acquire other companies or businesses, we will be subject to risks that
could hurt our business.
A significant part of our business strategy entails future acquisitions,
or significant investments in, businesses that offer complementary products and
services. Promising acquisitions are difficult to identify and complete for a
number of reasons. Any acquisitions completed by our company may be made at
substantial premiums over the fair value of the net assets of the acquired
companies, and competition may cause us to pay more for an acquired business
than its long-term fair market value. There can be no assurance that we will be
able to complete future acquisitions on terms favorable to us or at all. In
addition, we may not be able to integrate future acquired businesses, at all or
without significant distraction of management from our ongoing business. In
order to finance acquisitions, it may be necessary for us to issue shares of our
capital stock to the sellers of the acquired businesses and/or to seek
additional funds through public or private financings. Any equity or debt
financing, if available at all, may be on terms which are not favorable to us
and, in the case of an equity financing or the use of our stock to pay for an
acquisition, may result in dilution to our existing stockholders.
As we grow, we are subject to growth related risks.
We are subject to growth-related risks, including capacity constraints and
pressure on our internal systems and personnel. In order to manage current
operations and any future growth effectively, we will need to continue to
implement and improve our operational, financial and management information
systems and to hire, train, motivate, manage and retain employees. We may be
unable to manage such growth effectively. Our management, personnel or systems
may be inadequate to support our operations, and we may be unable to achieve the
increased levels of revenue commensurate with the increased levels of operating
expenses associated with this growth. Any such failure could have a material
adverse impact on our business, operations and prospects. In addition, the cost
of opening new facilities and the hiring of new personnel for those facilities
could significantly decrease our profitability, if the new facilities do not
generate sufficient additional revenue.
25
Risks Related to the Securities Market
Our stock price may be volatile, which could result in substantial losses for
our shareholders.
Our common stock is thinly traded and an active public market for our
stock may not develop. Consequently, the market price of our common stock may be
highly volatile. Additionally, the market price of our common stock could
fluctuate significantly in response to the following factors, some of which are
beyond our control:
o changes in market valuations of similar companies;
o announcements by us or by our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or capital
commitments;
o regulatory developments;
o additions or departures of senior management and other key
personnel;
o deviations in our results of operations from the estimates of
securities analysts; and
o future issuances of our common stock or other securities.
We have options, warrants and convertible promissory notes currently
outstanding. Exercise of these options and warrants, and conversions of these
promissory notes will cause dilution to existing and new shareholders. Future
sales of common stock by Laurus and our existing stockholders could result in a
decline in the market price of our stock.
As of March 31, 2005, we have options and warrants to purchase
approximately 6,448,359 shares of common stock outstanding in addition to
$7,405,619 of convertible promissory notes. The principal and interest amounts
of these notes are convertible into approximately 8,000,000 shares of common
stock. The exercise of our options and warrants, and the conversion of these
promissory notes, will cause additional shares of common stock to be issued,
resulting in dilution to investors and our existing stockholders. As of March
31, 2005, approximately 11,500,000 shares of our common stock were eligible for
sale in the public market. This represents approximately 60 percent of our
outstanding shares of common stock. After the effective date of the additional
registration statementwe are required to file with respect to the Laurus credit
facility (see Note 9), approximately 19,500,000 shares of our common stock will
be eligible for resale in the public market. Sales of a significant number of
shares of our common stock in the public market could result in a decline in the
market price of our common stock, particularly in light of the illiquidity and
low trading volume in our common stock.
Our directors, executive officers and principal stockholders own a significant
percentage of our shares, which will limit your ability to influence corporate
matters.
Our directors, executive officers and other principal stockholders owned
approximately 39 percent of our outstanding common stock as of March 31, 2005.
Accordingly, these stockholders could have a significant influence over the
outcome of any corporate transaction or other matter submitted to our
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets and also could prevent or cause a change in
control. The interests of these stockholders may differ from the interests of
our other stockholders. In addition, limited number of shares held in public
float effect the liquidity of our common stock. Third parties may be discouraged
from making a tender offer or bid to acquire us because of this concentration of
ownership.
26
We have never paid dividends on our capital stock, and we do not anticipate
paying any cash dividends in the foreseeable future.
We have paid no cash dividends on our capital stock to date and we
currently intend to retain our future earnings, if any, to fund the development
and growth of our businesses. As a result, capital appreciation, if any, of our
common stock will be shareholders' sole source of gain for the foreseeable
future.
Anti-takeover provisions in our charter documents and Delaware law could
discourage potential acquisition proposals and could prevent, deter or delay a
change in control of our company.
Certain provisions of our Restated Certificate of Incorporation and
By-Laws could have the effect, either alone or in combination with each other,
of preventing, deterring or delaying a change in control of our company, even if
a change in control would be beneficial to our stockholders. Delaware law may
also discourage, delay or prevent someone from acquiring or merging with us.
Environmental Liability
There are no known material environmental violations or assessments.
Item 3. Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of March 31, 2005. In designing and evaluating our
disclosure controls and procedures, we recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applied its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on this evaluation, our chief executive officer
and chief financial officer concluded that as of March 31, 2005, our disclosure
controls and procedures were (1) designed to ensure that material information
relating to the company, including our consolidated subsidiaries, is made known
to our chief executive officer and chief financial officer by others within
those entities, particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
27
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 6. Exhibits
(a) Exhibits
4.1(1) Amendment No. 1 and Waiver Agreement dated as of March 22,
2005 among GreenMan Technologies, Inc., certain of its
subsidiaries and Laurus Master Fund, Ltd.
31.1(2) Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a)
31.2(2) Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a)
32.1(2) Certification of Chief Executive Officer under 18 U.S.C
Section 1350
32.2(2) Certification of Chief Financial Officer under 18 U.S.C
Section 1350
(1) Filed as an Exhibit to GreenMan Technology's Current Report
on Form 8-K dated March 22, 2005 and incorporate herein by
reference.
(2) Filed herewith
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K on January 19,
2005 (dated January 18, 2005) covering items 2. 02 and 9.01 of Form
8-K.
The registrant filed a Current Report on Form 8-K on March 28, 2005
(dated March 22, 2005) covering items 2. 03 and 9.01 of Form 8-K.
28
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
certifies that it has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: GreenMan Technologies, Inc.
/s/ Robert H. Davis
-------------------
Robert H. Davis
Chief Executive Officer
By: GreenMan Technologies, Inc.
/s/ Charles E. Coppa
--------------------
Chief Financial Officer,
Treasurer, Secretary
29