UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


(Mark One)


x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the fiscal year ended December 31, 2010


or





 ̈
Transition report pursuant to Section 13 or 15(d) of the Exchange Act


For the transition period from __________ to __________





Commission file number: 1-9043





Banyan Rail Services Inc.(Exact name of registrant as specified in its charter)





Delaware

36-3361229(State of incorporation)

(I.R.S. Employer Identification No.)





2255 Glades Road, Suite 342-W, Boca Raton, Florida 33431(Address of principal executive offices)561-997-7775(Registrant’s telephone number)





Securities registered pursuant to Section 12(b) of the Exchange Act:  None





Securities registered pursuant to Section 12(g) of the Exchange Act:  Common stock, $0.01 par value per share





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ̈   No x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  ̈   No x





Indicate by check mark whether the registrant (1) 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  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ̈  No  ̈





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    ̈





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large Accelerated Filer  ̈                                                           Accelerated Filer  ̈





Non-accelerated filer  ̈                                                               Smaller Reporting Company x





Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈   No x





The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2010 was $8,357,969.





Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date: 3,045,856 shares of common stock, $0.01 par value per share, as of March 15, 2011.








Table of Contents





PART I

3Forward Looking Statements
3Item 1.
Business.
3Employees
8Our History Prior to Acquiring Wood Energy
8Item 1A.
Risk Factors.
7Item 2.
Properties.
12Item 3.
Legal Proceedings.
12PART II

13Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
13Item 6.
Selected Financial Data.
14Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
14Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
22Item 8.
Financial Statements and Supplementary Data.
23Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
23Item 9A.
Controls and Procedures.
23Item 9B.
Other Information.
23PART III

24Item 10.
Directors, Executive Officers and Corporate Governance.
24Item 11.
Executive Compensation.
26Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
28Item 13.
Certain Relationships and Related Transactions, and Director Independence.
29Item 14.
Principal Accounting Fees and Services.
29Item 15.
Exhibits, Financial Statement Schedules.
31SIGNATURES
33




2





PART I





As used in this report, all references to “Banyan,” the “Company,” “we,” “our” and “us” for periods prior to the closing of the acquisition of The Wood Energy Group, Inc. (“Wood Energy”) refer to Banyan Rail Services Inc. (formerly B.H.I.T. Inc.), and references to the “Company,” “we,” “our” and “us” for periods subsequent to the closing of the acquisition refer to Banyan Rail Services Inc. and its wholly-owned subsidiary, Wood Energy.





Forward Looking Statements


This Annual Report on Form 10-K contains information about us, some of which includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements about our current condition. You can identify forward-looking statements by the use of terms such as “believes,” “contemplates,” “expects,” “may,” “will,”“could,” “should,” “would,” or “anticipates,” other similar phrases, or the negatives of these terms. We have based the forward-looking statements relating to our operations on our current expectations, estimates and projections about us and the markets we serve. We caution you that these statements are not guarantees of future performance and involve risks and uncertainties. These statements should be considered in conjunction with the discussion in Part I, the information set forth under Item 1A, “Risk Factors” and with the discussion of the business included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:





·
executing our acquisition/expansion plan by identifying and acquiring additional operating companies;


·
obtaining appropriate funding to complete potential acquisitions;


·
generating adequate revenue and cash to service our debt and meet our bank loan financial covenants;


·
complying with SEC regulations and filing requirements applicable to us as a public company;


·
the impact of current or future laws and government regulations affecting the disposal of rail ties and our  operations, including recent EPA actions designating railroad ties as solid waste;


·
renewing or refinancing our line of credit that matures in July 2011;


·
changing external competitive, business, weather or economic conditions;


·
successfully operating Wood Energy;


·
changes in our relationships with employees or with our customers;


·
the market opportunity for our services, including expected demand for our services;


·
maintaining our relationships with Class I railroads; and


·
any of our other plans, objectives, expectations and intentions contained in this report that are not historical facts.





You should not place undue reliance on our forward-looking statements, which reflect our analysis only as of the date of this report. The risks and uncertainties listed above and elsewhere in this report and other documents that we file with the SEC, including this annual report on Form 10-K, quarterly reports on Form 10-Q, and any current reports on Form 8-K, must be carefully considered by any investor or potential investor in the Company.





Item 1.      Business.





On September 4, 2009, we completed the acquisition of all of the issued and outstanding stock of The Wood Energy Group, Inc., a Missouri corporation engaged in the business of railroad tie reclamation and disposal.  The purchase price was $6,169,036, consisting of $5,002,369 in cash and $1,166,667 or 333,334 shares of common stock of Banyan.  Prior to acquiring Wood Energy, Banyan was a shell company without significant operations or sources of revenues other than its investments.




3





Wood Energy, headquartered in St. Louis, Missouri, is one of the nation’s largest railroad tie recovery/energy generation companies.  Founded in 2001, we provide railroad tie pickup, reclamation and disposal services to the Class 1 railroads (defined by the American Association of Railroads as a railway company with annual operating revenue over $378.8 million) and industrial customers.  Prior to 2001, Wood Energy’s founder Greg Smith provided the same services through Wood Waste Energy, Inc., a company he founded in 1991, built into the largest railroad tie recovery business in the U.S., and sold in 1999.  We operate primarily in Texas and Louisiana. Our services include removing scrap railroad ties and grinding the ties to create chipped wood for sale as biomass fuel to the co-generation market, disposing of the ties by selling them to the landscape tie market or disposing them into landfills.  In 2010, we removed and disposed of approximately 1,700,000 railroad ties, 78% of which were used by the co-generation market, 19% for the landscape market and 3% for landfill.





We believe our strengths include:





·
A proven senior management team;


·
Long-term contracts that provide a stable and consistent revenue stream;


·
An efficient and profitable operating methodology;


·
Management personnel with the expertise to grow the alternative fuel segment of the business;


·
The significant opportunity for long-term growth of roll-ups of other North American railroad tie reclamation and disposal companies; and


·
Creating economies of scale through Wood Energy’s regional expansion.





Our management team continues to investigate acquisition opportunities and additional sources of financing. Currently we are focusing our efforts on railroad track construction, repair and maintenance businesses and other railroad tie reclamation and disposal companies, but may explore potential acquisitions in other industries as well.





Revenue Sources





Currently, the Company has four sources of revenue:





·
Railroad Tie Reclamation and Disposal – the Company charges Class I railroads for the removal and disposal of scrap railroad ties from their tracks;


·
Railroad Tie Sales – the Company sells ground ties as a biomass fuel source to the co-generation market;


·
Landscape Ties – the Company sells higher-quality reclaimed railroad ties to wholesale landscape companies; and


·
Wood Products – the Company sells scrap railroad ties to third parties for processing for co-generation markets as biomass fuel.





We have a contract expiring in 2014 with Union Pacific Corporation, a Class I railroad, for the reclamation and disposal of scrap railroad ties in Texas and Louisiana, and dispose of the majority of such railroad ties at an International Paper Company plant in Louisiana. In 2010, Union Pacific and International Paper accounted for approximately 67% and 22% of our revenue, respectively.





The Railroad Tie Reclamation Industry





The Company estimates that there are approximately 15 rail tie recovery companies in North America with total industry revenue in 2010 of approximately $65-75 million.  Each company operates within specific geographic regions and each has Class I railroads as its major customers. Certain barriers to entry in these markets are increased as Class I railroad and co-generation customers require contractors who have experience and proven reliability in disposing non-usable railroad ties through co-generation or other environmentally approved methods.





The U.S. Railroad Industry and Increased Tie Replacement.





U.S. railroads operate over 139,000 miles of track, and generated $49 billion in revenues in 2009.  In the U.S., railroads account for more than 43% of all freight transportation by volume; more than trucks, boats, barges or planes. U.S. freight railroads are the world’s busiest, moving more freight than any rail system in any other country.




4





Due to high levels of railroad traffic and the maximum weight limit of rail cars to 286,000 pounds, Class I railroads, regional railroads and short line railroads continue to maintain and repair their infrastructure to ensure safe operation of their railways.  Demand for outsourcing of railroad maintenance services is expected to increase due to increased union labor costs as well as an aging population of railroad workers. Further, over the past five years, the increase of the maximum weight limit and increased traffic has accelerated wear and tear of railroad infrastructure, increasing the need for tie replacement. The nation’s railroads have struggled to keep pace with the resulting growth of maintenance needs due to the tremendous cost of qualified personnel and equipment.  Track maintenance is capital intensive and requires skilled personnel, therefore many railroads turn to independent contractors to provide tie recovery services. In 2009, Class I railroads replaced over 16 million rail ties.





Railroad Ties as Biomass Fuel Source





Chipped railroad ties are a viable source of biomass fuel for industrial plants and utilities.  Through late 2009 we sold ties to a third party for grinding. In 2009 and 2010 we purchased railroad tie grinding equipment to diversify our operations by allowing us to grind the railroad ties at our Shreveport, Louisiana location. In early 2010 we began to sell chipped ties directly to co-generation plants at a higher price and profit per ton than by selling to third party processors. We believe  there is potential to increase the dollar margins on this business segment although we continue to sell ties to third party processors for the co-generation industry.





The U.S. Environmental Protections Agency (“EPA”) has recently ruled that creosote treated railroad ties are non-hazardous secondary material that are considered solid waste and do not qualify as bio-fuel. Although industrial plants and utilities will still be able to utilize ties as fuel, they will be required to retrofit their wood burning furnaces to comply with the solid waste designation. The EPA has provided for a minimum of three years before these retrofits will be required. The EPA’s designation of ties as solid waste could increase our tie disposal costs and limit higher margin sales of ties as fuel. We are currently exploring alternative solutions for tie disposal and cannot predict the long-term impact of the new rules on the Company’s operations.





Growth Opportunities





·
Adding new business with Class I railroads by expanding our service area (see Recent Events on page 15),


·
Providing ancillary services such as rail car cleaning,


·
Providing tie recovery service to short line railroads in addition to the Class I railroads we already service,


·
Acquiring competitor tie recovery businesses and consolidating management teams,


·
Expanding tie disposal service capabilities of existing companies, particularly with respect to alternative fuel technologies, and


·
Expanding our customer base by increasing the number of services we offer and entering new North American geographic markets.





Project Management





A primary focus of management is to continuously improve the efficiency of its operations. Information flow between on-site employees and management personnel is critical to achieve goals assigned for each project and complete projects efficiently and effectively. Daily information flow provides management an accurate view of productivity of each project so that our costs can be closely monitored, and helps us effectively manage our projects.





Staffing





Railroad professionals are the core of our company. Experienced managers and supervisors are critical to success in our industry, as are skilled equipment operators and laborers. Many of our employees have worked for us for many years. Our personnel are assembled into crews of various sizes depending on the needs of a given project and the crews have performance standards which support our safety, quality, productivity and profitability goals.  As of December 31, 2010, we had 30 full time employees.





Competition





The Company estimates there are approximately 15 rail tie recovery companies in North America with total industry revenue of approximately $65-75 million in 2010.  Generally, each company operates within specific limited geographic regions and each has Class I railroads as its major customers.  Competitors in the tie recovery market include Wood Waste Energy, Shade Railroad Services and Recycle Technologies International, Inc.




5





Government Regulation





Our operations are subject to federal, state and local regulation under transportation and environmental laws. Our operations may be subject to various regulations of the Surface Transportation Board, the Federal Railroad Administration (FRA), the Occupational Safety and Health Administration, Federal Environmental Protection Agency, state departments of transportation, and other state and local regulatory agencies.  Because the FRA regulates railroad safety and equipment standards, its regulations affect certain aspects of our business operations and the services we provide, including worker safety.  For example, the FRA promulgated the Roadway Worker Protection Rules, which apply to rail contractors and establish certain safety criteria that must be complied with on rail projects.  At this time, we believe we are substantially in compliance with the regulations applicable to our business.





Government Initiatives





As previously discussed, the EPA has recently ruled that creosote treated railroad ties shall be deemed non-hazardous secondary material that are solid waste. The EPA has given industrial plants and utilities a minimum of three years to retrofit their wood burning furnaces to comply with the solid waste designation. We are currently exploring alternative solutions for tie disposal and cannot predict the long-term impact of the new rules on the Company’s operations.





Seasonality





Because we generally operate in warm weather states, our business is generally not seasonal.





Employees





As of December 31, 2010, we had 30 full time non-union employees.





Our History Prior to Acquiring Wood Energy





The Company was originally organized under the laws of the Commonwealth of Massachusetts in 1985, for the purpose of investing in mortgage loans.  From 1989 to 1992 the Company experienced severe losses as a result of a decline in real estate values and the resulting defaults on the mortgages it held.  The Company was reorganized as a Delaware corporation in 1987, changed its name to B.H.I.T. Inc. in 1998, and again changed its name to Banyan Rail Services Inc. in 2010.





On January 24, 2007, a group of private investors purchased 41.7% of our outstanding shares held by our largest shareholder at the time. Because members of our new management team have experience with the railroad industry, we began investigating acquisitions of companies in the rail industry.  In the spring of 2009, we entered negotiations with the owners of Wood Energy to acquire the company. As a result of the acquisition of Wood Energy, we are no longer a shell company and are now engaged in the business of railroad tie reclamation and disposal.  On January 4, 2010, we changed our name to Banyan Rail Services Inc. to reflect our new business.




6





Item 1A.     Risk Factors.





The following is a description of what we consider the key challenges and risks relating to our business and investing in our common stock. This discussion should be considered in conjunction with the discussion under the caption “Forward-Looking Information” preceding Part I, the information set forth under Item 1, “Business” and with the discussion of the business included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These risks comprise the material risks of which we are aware. If any of the events or developments described below or elsewhere in this Annual Report on Form 10-K, or in any documents that we subsequently file publicly were to occur, it could have a material adverse effect on our business, financial condition or results of operations.





Risks Relating to Our Business





We depend upon a limited number of customers and contracts to generate revenue, and this concentration of customers and contracts may expose us to heightened financial exposure.





Our business is a service business, and our revenue is generated from a limited number of customers.  For instance, in 2010 and 2009 we derived 67% and 75% of our revenue, respectively, from services performed for Union Pacific, and we anticipate deriving a similar percentage of our revenue from them in 2011.  Although we have long-term agreements and relationships with that customer and certain other customers, the agreements may be terminated on short notice.  Thus, our concentration of customers and contracts exposes us to greater financial risk than businesses with a broader customer base.  A significant reduction in the volume with one of these customers or the loss of a customer could have a material adverse effect on our business, financial condition and results of operations.  In addition, we rely on timely and regular payments from our customers on ordinary course business terms. The failure of our customers to pay on ordinary course business terms may also have a material adverse effect on our business, financial condition and results of operations.





Our business is competitive and, as a service business, is based largely on long-term contracts and personal relationships, which makes it difficult for us to obtain new customers and contracts.





The rail tie reclamation and disposal industry is competitive.  Most companies have long-term contracts and long-standing relationships with their customers, which makes obtaining new business difficult.  If we are unable to obtain new customers and contracts and expand into other geographic markets, growth of revenue and profitability could be slow or non-existent.





We depend heavily upon highly skilled and knowledgeable management personnel.





The railroad construction, rehabilitation and maintenance industry is a highly specialized one; therefore we depend significantly upon key management personnel.  We cannot guarantee that these employees will not choose to terminate their employment.  Similarly, we cannot guarantee that employees with employment agreements can be renegotiated upon expiration or that skilled individuals can be found to replace these employees.  The loss of the services of one or more of these employees before we are able to attract and retain qualified replacement personnel could have a material adverse effect on our business, financial condition and results of operations.





Our business is subject to substantial environmental and other government regulation, and failure to comply with these laws and obtain necessary permits and approvals could adversely affect our operations.





Our operations are subject to federal, state and local regulation under transportation laws and environmental laws, and sometimes require us to obtain permits or other approvals.  Our operations may be significantly affected by regulations of the Federal Railroad Administration (FRA), and may also be affected by regulations of the Surface Transportation Board, the Occupational Safety and Health Administration, state departments of transportation and other federal, state and local regulatory agencies.  Our grinding and disposal operations may also be affected by Federal Environmental Protection Agency, and other state and local regulatory agencies environmental laws and regulations regarding emissions, handling, storage, transportation and disposal of waste and hazardous chemicals, soil contamination and groundwater contamination. Our business operations sometimes necessitate the use of hazardous chemicals.  Liability can arise from the use of these materials, and claims may be asserted from third parties and even our own customers and employees.  We could incur significant costs from such claims as well as ongoing costs associated with mere environmental regulatory compliance for which we have an environmental insurance policy. Although we believe that we materially comply with all of the various regulations applicable to our business and obtain all necessary regulatory permits and approvals, a change in regulations or a failure or delay in obtaining a necessary permit or approval could cause us to incur significant additional costs in excess of our environmental insurance coverage or suffer a decrease in revenue or profitability.




7




The U.S. Environmental Protections Agency (“EPA”) has recently ruled that creosote treated railroad ties are non-hazardous secondary material that are considered solid waste and do not qualify as bio-fuel. Although industrial plants and utilities will still be able to utilize ties as fuel, they will be required to retrofit their wood burning furnaces to comply with the solid waste designation. The EPA has provided for a minimum of three years before these retrofits will be required. The EPA’s designation of ties as solid waste could increase our tie disposal costs and limit higher margin sales of ties as fuel. We are currently exploring alternative solutions for tie disposal and cannot predict the long-term impact of the new rules on the Company’s operations.





Our business is inherently dangerous for our employees, requiring us to consistently incur costs to minimize our potential liability exposure.





We operate a labor-intensive service business where our employees are regularly subjected to dangerous conditions.  We consistently incur costs to mitigate these dangers and risks, including but not limited to safety training and payment of workers’ compensation and employee liability premiums. We cannot guarantee that these measures, or others taken by us, will successfully prevent accidents and the potentially substantial losses that can result from accidents.





Changes in technology may have a material adverse effect on our profitability.





Research and development activities are ongoing to provide alternative and more efficient technologies to dispose of wood waste or produce power.  It is possible that advances in these or other technologies will reduce the cost of wood waste disposal methods to a level below our costs.  Furthermore, increased conservation efforts could reduce the demand for power or reduce the value of our services. Any of these changes could have a material adverse effect on our revenues and profitability.





Risks Relating to Our Company





We financed a substantial portion of the purchase price for the acquisition of Wood Energy, and we have established short term credit lines for working capital and capital expenditure needs. Further we have recently issued additional preferred stock, all of which may decrease both our net income available to common shareholders and cash flow.





We borrowed $3.0 million of the $5.0 million cash portion of the purchase price for Wood Energy, and we obtained credit lines in the aggregate amount of $2.0 million.  For additional capital for the acquisition, we also issued debentures in the amount of $1,525,000 which was subsequently converted into shares of series A preferred stock.  Although investments in leveraged companies offer the opportunity for capital appreciation, leveraged investments also involve a high degree of risk.  The amount of our debt and preferred stock outstanding from time to time could have important consequences for us and our investors.  For example, it could:





·
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt or mandatory preferred stock dividends, thereby reducing funds available for operations, acquisitions, redevelopments and other appropriate business development opportunities that may arise in the future,





·
make it difficult to satisfy our debt service requirements,





·
limit our flexibility in planning for, or reacting to, changes in our business and the factors that affect the profitability of our business, including a downturn in business or the general economy, and




8





·
limit our flexibility in conducting our business, which may place us at a disadvantage compared to competitors with less preferred stock and debt or debt with less restrictive terms.





Our ability to make scheduled payments of the principal of, to pay interest or dividends on, or to refinance our indebtedness will depend primarily on our future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond our control.  There can be no assurance that our business will generate sufficient cash flow from operations to service our debt, pay mandatory preferred stock dividends or meet our other cash needs.  If we are unable to generate this cash flow from our business, we may be required to refinance all or a portion of our existing debt or obtain additional financing from our lender or investors to meet our debt obligations, mandatory preferred stock dividends and other cash needs.





Our ability to comply with financial covenants of our term loans and credit lines could materially and adversely affect our business, earnings, cash flow, liquidity, and financial condition.





Our loan agreements with Fifth Third Bank contain various financial covenants. The loan covenants may adversely affect our ability to respond to adverse changes in economic, business or market conditions. Our debt covenants may also limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities. Our failure to comply with the financial covenants may result in an event of default which, if not cured or waived, could result in the acceleration of the debt under our credit facilities or other agreements that we may enter into from time to time that contain cross-acceleration or cross-default provisions





At December 31, 2010, we were in violation of the fixed charge coverage, the total debt to EBITDA (earnings before interest, taxes, depreciation and amortization) and the minimum EBITDA covenants contained in our loan agreements with Fifth Third Bank. On April 1, 2011, the lender granted a waiver with respect to non-compliance with the financial covenants as of December 31, 2010.





We are currently concluding negotiations for a modification and extension of our term loan and credit lines with the bank. Both the bank and the Company have agreed to the revised terms, including the rates, financial covenants, and other particulars of the credit facilities. We expect to have the executed modification agreement and extension shortly.





The Company expects to meet the financial covenants included in the modification and extension of our term loan and credit lines and has retained the long-term classification of the applicable portions of the debt in the accompanying Consolidated Financial Statements.





Our primary asset is Wood Energy, and our credit facilities include financial covenants that limit our ability to obtain cash distributions from Wood Energy, limiting our operating activities and results of operations.





We are a holding company with no direct operations and our principal asset is our stock of Wood Energy.  Wood Energy is legally distinct from Banyan, and our ability to obtain distributions from Wood Energy by way of dividends, interest or other payments (including intercompany loans) is subject to restrictions imposed by our term loan and credit facilities (under which Wood Energy is the borrower and Banyan is a guarantor), such as:





·
We must ensure that Wood Energy meets certain financial tests on a quarterly basis, including loan covenants that require, among other things, compliance with fixed charge coverage and total debt coverage ratios, as well as minimum levels of EBITDA,





·
If certain equipment is sold in the ordinary course of business, the sale proceeds must be used to reduce debt unless they are used to purchase replacement equipment,





·
We may not cause Wood Energy to invest in, acquire assets of, or merge or consolidate with, other companies, and





·
We may not cause Wood Energy to grant liens, incur additional indebtedness or contingent obligations or obtain additional financing encumbering any of the bank’s existing collateral.




9





These covenants could place constraints on our business and may adversely affect our growth, earnings, cash flow, liquidity and financial condition.  Further, we may be required to comply with additional covenants.  Failure to comply with financial covenants may result in the acceleration of the debt, which would have a material adverse effect on our business, earnings, cash flow, liquidity and financial condition.





If we are unable to hire additional qualified personnel, including members of senior management, our ability to grow our business may be affected.





We currently have a small management team. Our failure to attract competent and qualified personnel would have a material adverse effect on our operations.  We will need to hire qualified personnel with expertise in the railroad industry to implement our business plan and to operate companies we acquire.  Attracting and retaining qualified and competent personnel in a timely manner will be critical to our success.  We compete for qualified individuals with numerous other companies.  Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful.  In addition, the loss of a key member of our management team could negatively impact our Company, and we carry no key-man life insurance for our executive officers or members of senior management.





We may need to raise additional capital, which may not be available to us and may limit our operations or growth.





We may need additional capital to fund the implementation of our business plan. We cannot assure you that any necessary subsequent financing will be successful.  Our future liquidity and capital requirements are difficult to predict as they depend upon many factors, including our ability to identify and complete acquisitions and the success of any business we do acquire.  We may need to raise additional funds in order to meet working capital requirements or additional capital expenditures or to take advantage of other opportunities.  We cannot be certain that we will be able to obtain additional financing on favorable terms or at all.  If we are unable to raise needed capital, our growth and operations may be impeded.  In addition, if we raise capital by selling additional shares of stock, your percentage ownership in Banyan will be diluted.





We may not be able to successfully acquire or integrate new business.





We face a variety of risks associated with acquiring and integrating new business operations, including Wood Energy.  The growth and success of our business will depend to a significant extent on our ability to acquire and operate new assets or businesses.  We may compete with companies that have significantly greater resources than we do for potential acquisition candidates.  We cannot provide assurance that we will be able to:





·
identify suitable acquisition candidates or opportunities,


·
acquire assets or business operations on commercially acceptable terms,


·
obtain financing necessary to complete an acquisition on reasonable terms or at all,


·
manage effectively the operations of Wood Energy or other acquired businesses, or


·
achieve our operating and growth strategies with respect to the acquired assets or businesses.





Our management and operation of Wood Energy and of other businesses that we acquire in the future could involve unforeseen difficulties, which could have a material adverse affect on our business, financial condition, and operating results.





Certain directors and officers own a significant interest in Banyan.





Certain directors and officers, together with Greg Smith and Andy Lewis who serve as president and vice president of our operating subsidiary, control 35.6% of our outstanding shares (52.8% if they exercised their options and converted their shares of preferred stock). Accordingly, they possess a significant vote on all matters submitted to a vote of our shareholders including the election of the members of our board.  This concentration of ownership may have the effect of preventing or discouraging transactions involving an actual or a potential change of control of Banyan, regardless of whether a premium is offered over then-current market prices. In addition, a company affiliated with our President and Chairman has acquired preferred and common stock and may acquire additional shares in the future.




10





If the value of our intangible assets is materially impaired, our financial condition, results of operations and stockholders’ equity could be materially adversely affected.





Due largely to our acquisition of Wood Energy and the nature of our operations as a service business, goodwill and other intangible assets represent a substantial portion of our assets.  If we make additional acquisitions, it is likely that we will record additional intangible assets on our books.  We periodically evaluate our goodwill and other intangible assets to determine whether all or a portion of their financial statement carrying values may no longer be recoverable, in which case a charge to earnings may be necessary.  Any future evaluations requiring an asset impairment of our goodwill and other intangible assets could materially affect our financial condition, results of operations and stockholders’ equity in the period in which the impairment occurs.





The current state of debt markets could have a material adverse impact on our earnings and financial condition.





The cost of commercial debt may increase or may contract as a result of certain factors including the tightening of underwriting standards by lenders and credit rating agencies. Credit spreads for major sources of capital may grow significantly as investors may demand a higher risk premium. Should our borrowing cost increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our business plan.  This may result in our generating lower overall economic returns and potentially reducing cash flow available for business operations and business development.





Risks Relating to Our Shares





Directors’ options and outstanding convertible preferred stock may depress the price of our common stock.





As a result of the private placements including issuances of preferred stock in 2011, there are shares of outstanding preferred stock which can be converted into as many as 1,355,556 shares of our common stock for $2.00 or $2.25 per share.  In addition, as of December 31, 2010 we have issued options to purchase 200,000 shares to our directors as compensation for serving on the board at prices ranging from $2.00 to $3.50 a share.  If the directors’ options are exercised or the shares of preferred stock are converted, your ownership of the Company will be diluted. In addition, the issuance of a significant number of shares upon conversion of shares of preferred stock or the exercise of options could depress the price of our stock if there isn’t enough demand for the shares in the market.  Even if the shares of preferred stock are not converted, the large number of shares issuable upon conversion of the preferred stock could cause an overhang on the market.





If you invest in Banyan, you may experience substantial dilution and the market price of our shares may decrease.





In the event we obtain any additional funding, there may be a dilutive effect on the holders of our securities. In addition, as part of our recruitment process and in connection with our efforts to attract and retain employees and directors, we may offer stock options, restricted stock shares or other types of equity-based incentives to its future employees and directors.  The Company’s issuance of equity-based incentives to new hires, senior management and directors, may cause you significant dilution as a result of such issuances.  Also, we agreed that if we conduct a registered offering of securities, we will register the shares of common stock issued to the sellers of Wood Energy and underlying the preferred stock issued in connection with our acquisition of Wood Energy.   Further, although shares of common stock issued to the sellers and to be issued upon conversion of our preferred stock will be “restricted” securities under the Securities Act of 1933 prior to any registration statement being filed and being declared effective by the SEC, they may nonetheless be sold prior to that time in reliance on registration exemptions contained in Rule 144 of the Securities Act, subject to certain resale restrictions imposed by Rule 144.  Such issuances and sales may also depress the market price of our shares.





Our common stock may be considered a “penny stock.”





The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions.  The market price for our common stock has been below $5.00 per share and so long as our stock trades for less than $5.00 per share, it will be considered a “penny stock” according to SEC rules.  This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.  These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.




11





You may not be able to sell your shares because there is a limited market for our stock.





Although our common stock is traded on the OTC Bulletin Board®, because we have had no significant business operations for several years, currently there is limited trading volume in our stock and there may be very limited demand for it as well. As a result, it may be difficult for you to sell our common stock despite the fact it is traded on the OTC Bulletin Board ®





Our preferred stock could adversely affect the holders of our common stock.





We have issued 28,000 shares of preferred stock through the date of this annual report on Form 10-K filing and, pursuant to our certificate of incorporation, our board of directors has the authority to fix the rights, preferences, privileges and restrictions of unissued preferred stock and to issue those shares without any further action or vote by the common stockholders. The holders of the preferred stock are entitled to receive payment before any of the common stockholders upon liquidation of the Company and we cannot pay a dividend on our common stock unless we first pay dividends required by our preferred stock. In addition, the rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock that may be issued in the future. These adverse effects could include subordination to preferred shareholders in the payment of dividends and upon our liquidation and dissolution, and the use of preferred stock as an anti-takeover measure, which could impede a change in control that is otherwise in the interests of holders of our common stock.





We do not intend to pay any cash dividends on our common stock.





We do not anticipate paying any cash dividends on our common stock in the foreseeable future. The payment of cash dividends depends on our future earnings, financial condition and other business and economic factors that our board of directors may consider relevant. Additionally, our credit facilities prohibit Wood Energy from paying dividends to Banyan without our senior lender’s consent, and limits the amount of management fees Wood Energy may pay to Banyan.  Wood Energy may pay “reasonable amounts” of management fees in future years.  These current restrictions on Wood Energy make the payment of dividends by Banyan to its shareholders unlikely.  Because we do not intend to pay cash dividends, the only return on your investment may be limited to the market price of the shares.





Item 2.
Properties.





We do not own any real property. We lease executive office space from an unrelated third party in St. Louis for $1,250 per month. We also lease fully permitted land and improvements in Louisiana for the storage, grinding and handling of our railroad ties from an unrelated third party on a year-to-year basis for $3,000 per month. In addition, we lease office space and receive office services from Patriot Rail Corp., a company related by certain common management and ownership, for $5,000 per month.





Item 3.
Legal Proceedings.





We are not aware of any pending legal proceedings involving Banyan or Wood Energy other than litigation arising in the ordinary course of business.  We believe the outcome of the litigation will not have a material adverse effect on our financial condition, cash flows or results of operations.




12





PART II





Item 5.      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.





Shares of our common stock are traded over-the-counter and sales are reported on the OTC BulletinBoard® under the symbol “BARA”. The last reported sale price on April 1, 2011 was $3.00 per share. The following table lists the high and low closing sale prices of our stock during 2010 and 2009 as reported on OTC BulletinBoard®.These sale prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.





Fiscal Year Ending2010


2009High


Low


High


LowFourth Quarter

$
4.05


$
3.25


$
3.00


$
2.50Third Quarter

$
4.50


$
3.00


$
4.30


$
2.80Second Quarter

$
4.50


$
3.50


$
4.00


$
2.80First Quarter

$
2.70


$
3.00


$
3.00


$
1.70





There were approximately 1,790 stockholders of record of Banyan’s common stock as of March 15, 2011. There are additional stockholders who own stock in their accounts at brokerage firms and other financial institutions.





Common Stock





As of December 31, 2010, our certificate of incorporation provided that we were authorized to issue 7.5 million shares of common stock, par value $0.01 per share.  On January 4, 2010, we amended our certificate of incorporation with the State of Delaware to authorize 1.0 million shares of blank check preferred stock.  The holders of our common stock are entitled to one vote per share on all matters to be voted upon by our stockholders, including the election of directors.  Our shares of common stock are not convertible into any other security and do not have any preemptive rights, conversion rights, redemption rights or sinking fund provisions.  Stockholders are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and only then at the times and in the amounts that our board of directors may determine. In the event of our liquidation, dissolution, or winding up, our stockholders receive ratably any net assets that remain after the payment of all of our debts preferred stock and other liabilities.





Our certificate of incorporation also limits the number of shares that may be held by any one person or entity.  No person or entity may directly or indirectly acquire shares if it would cause the person or entity to be:





(1)
treated as a 5% shareholder within the meaning of Section 382 of the Internal Revenue Code, which relates to net operating losses (NOLs) and limitations on a company’s ability to utilize them,


(2)
treated as a holder of shares in an amount that could otherwise result in a limitation on our use of, or a loss of, NOLs, or


(3)
the beneficial owner (as defined under Rule 13d-3 of the Securities Exchange Act of 1934) of more than 4.5% of our outstanding shares.





Our board has the authority and has in the past exercised their discretion to exempt shareholders from the foregoing limitations if such shareholders can provide evidence to assure the board that no NOLs will be lost or limited by such exemption or the board determines such exemption is in the best interests of Banyan.





In April 2010, the Company effectuated a 1-for-10 reverse stock split pursuant to which each stockholder received one share of common stock for every ten shares owned prior to the reverse split. All share and per share amounts in this Annual Report on Form 10-K have been adjusted retroactively to reflect this reverse stock split.




13





Dividends





We intend to reinvest our earnings, if any, in the business, and have never declared or paid, and do not intend to declare or pay, any cash dividends on our common stock.  Even if we did not intend to reinvest our earnings, our credit facilities prohibit Wood Energy from paying dividends to Banyan without our senior lender’s consent and limits the amount of management fees Wood Energy may pay to Banyan.  These restrictions on Wood Energy make the payment of dividends by Banyan to its common shareholders unlikely.





Stock Options





In 2009 and 2010, we issued compensatory stock options to certain members of our Board of Directors and management exercisable for 5 years from the date of grant.   During 2009 and 2010, 228,000 stock options were issued.  For further information on stock options issued, see Item 11 “Executive Compensation.”





Item 6.
Selected Financial Data.





Not applicable.





Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.





The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K





Overview





In September 2009, we acquired The Wood Energy Group, Inc., a Missouri corporation engaged in the business of railroad tie reclamation and disposal. Prior to acquiring Wood Energy, Banyan was a shell company without significant operations or sources of revenues other than its investments. Currently our management team is focused on acquisition opportunities and additional sources of funding. We are focusing our efforts on railroad track construction, and railroad repair and maintenance businesses, and may explore potential acquisitions in other industries as well.





Wood Energy





Wood Energy, headquartered in St. Louis, Missouri, is one of the nation’s largest railroad tie reclamation and disposal companies. Founded in 2001, we provide railroad tie pickup, reclamation and disposal services to the Class 1 railroads (defined by the American Association of Railroads as a railway company with annual operating revenue over $378.8 million) and industrial customers. Prior to 2001, Wood Energy’s founder Greg Smith provided the same services through Wood Waste Energy, Inc., a company he founded in 1991, built into the largest railroad tie recovery business in the U.S., and sold in 1999. Wood Energy operates primarily in Texas and Louisiana. Wood Energy’s services include picking up scrap railroad ties for major Class I railroads and disposing of the ties by selling them to the landscape tie market or having the ties ground to create chipped wood for subsequent sale as biomass fuel to the co-generation market. In 2010, we recovered over 1.7 million railroad ties, 78% of which were used by the co-generation market, 19% for the landscape market and 3% went to landfill.





Recent Events





Amendments to Our Certificate of Incorporation





On October 18, 2010, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of our preferred stock as series B preferred stock. The issuance price of the series B preferred stock is $100 per share and it is convertible into shares of common stock by the holder at any time after:





·
The common stock is listed for trading on Nasdaq or any national securities exchange;


·
The bid price of the common stock is equal to or exceeds $5.00 per share for 30 consecutive days, and thereafter so long as the bid price continues to equal or exceed $5.00 per share;




14





·
The trading volume of the common stock is equal to or exceeds 10,000 shares a day for 30 consecutive days, and thereafter so long as the daily trading volume continues to equal or exceed 10,000 shares; or


·
October 15, 2013.





At that time the Company may also elect to convert or redeem the series B preferred stock. The conversion is $2.25 per share of common stock, subject to adjustment for stock dividends, stock splits and reorganizations.  The series B preferred stock ranks senior to the common stock and pari-passu with the series A preferred stock of the Company as to dividends and distribution of assets upon the liquidation, dissolution or winding up of the Company.  The Company has no obligation to redeem the series B preferred stock at any time.





Series B Preferred Stock Issuances





Through December 31, 2010, the Company issued 6,000 shares of its series B preferred stock to Patriot Rail Services, Inc. (“PRS”). Gary O. Marino, the Company’s Chairman and Chief Executive Officer, is the President and a significant stockholder of PRS’s ultimate parent company.  The preferred shares were issued for $100 a share, or $600,000 in the aggregate.  In 2011, the Company issued 2,000 additional shares of its series B preferred stock to PRS for $200,000.





Government Regulatory Change





The U.S. Environmental Protections Agency (“EPA”) has recently ruled that creosote treated railroad ties are non-hazardous secondary material that are considered solid waste and do not qualify as bio-fuel. Although industrial plants and utilities will still be able to utilize ties as fuel, they will be required to retrofit their wood burning furnaces to comply with the solid waste designation. The EPA has provided for a minimum of three years before these retrofits will be required. The EPA’s designation of ties as solid waste could increase our tie disposal costs and limit higher margin sales of ties as fuel. We are currently exploring alternative solutions for tie disposal and cannot predict the long-term impact of the new rules on the Company’s operations.





Amended Tie Reclamation Contracts





The Company has agreed to an amendment to its service agreement with a Class 1 railroad which designates the Company to pick up and remove approximately 500,000 railroad ties per year for the next two years for their railroad system. The original service agreement designated the Company to dispose of the ties once delivered by the railroad to the Company.





The Company has agreed to a change order to its service agreement with its largest customer, a Class 1 railroad, which will reduce the retainage withheld on the progress payments received by the Company from 50% to 25%. The impact of this change will be faster realization of our receivables from that customer.




Violation of Debt Covenants




At December 31, 2010, we were in violation of the fixed charge coverage, the total debt to EBITDA (earnings before interest, taxes, depreciation and amortization) and the minimum EBITDA covenants contained in our loan agreements with Fifth Third Bank. On April 1, 2011, the lender granted a waiver with respect to non-compliance with the financial covenants as of December 31, 2010.


We are currently concluding negotiations for a modification and extension of our term loan and credit lines with the bank. Both the bank and the Company have agreed to the revised terms, including the rates, financial covenants, and other particulars of the credit facilities. We expect to have the executed modification agreement and extension shortly.





The Company expects to meet the financial covenants included in the modification and extension of our term loan and credit lines and has retained the long-term classification of the applicable portions of the debt in the accompanying Consolidated Financial Statements.




15





Critical Accounting Policies and Estimates





The following discussion and analysis of our results of operations and financial condition is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities, if any, at the date of the financial statements. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. If these estimates differ materially from actual results, the impact on our condensed consolidated financial statements may be material.





We review our financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. During the year ended December 31, 2010, there were no significant changes to the critical accounting policies.




Revenue Recognition




The Company utilizes the completed contract method of accounting for the majority of its revenue recognition. The Company recognizes revenue for the removal of used railroad ties upon the completion of the scope of work required under its contracts, which is when the Company considers amounts to be earned (evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured). Accordingly, billings related to the services for which contracts have not been completed have been recorded as deferred revenue. Direct costs, including but not limited to payroll, fuel, equipment rental, transportation expense and strapping cost for incomplete contracts are also deferred until the related revenue recognition process is completed.





The Company also receives revenue from (i) the grinding of railroad ties into saleable biomass fuel and (ii) the sale of certain railroad ties to landscapers and (iii) other railroad tie grinders. These revenues are recorded when the ties or derivative materials are delivered to the customer.





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include; deferred revenue, costs incurred related to deferred revenue, the useful lives of property and equipment, the useful lives of intangible assets and accounting for the business combination.




Cash and Cash Equivalents




The Company considers all cash, bank deposits and highly liquid investments with an original maturity of three months or less to be cash equivalents.




Accounts Receivable




Trade accounts receivable are recorded net of an allowance for expected losses. An allowance is estimated from historical performance and projections of trends. Bad debt expense is charged to operations if write offs are deemed necessary. As of December 31, 2010 and 2009 no allowance is provided as all accounts receivable are deemed collectible.




Property and Equipment




Property and equipment owned and under capital leases are carried at cost. Depreciation of property and equipment is provided using the straight line method for financial reporting purposes at rates based on the following estimated useful lives:


YearsMachinery and equipment
3-7Track on leased properties
4




16





Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.




Valuation of Long-Lived Assets





The Company reviews long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  In evaluating the fair value and future benefits of its assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining amortization period or an appraisal of market value is obtained.





Fair Value of Financial Instruments





Recorded financial instruments consist of cash, accounts receivable, accounts payable, short-term debt obligations, convertible debt and long-term debt obligations.  The related fair values of these financial instruments approximated their carrying values due to either the short-term nature of these instruments or based on the interest rates currently available to the Company.





Earnings per Share





Basic earnings per share are computed based on weighted average shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common stock equivalent shares consist of the dilutive effect of stock options, and preferred stock common stock equivalents.





Goodwill and Indefinite Lived Intangible Assets





Goodwill and intangible assets that have indefinite lives are not amortized but rather are tested at least annually for impairment. The Company assesses impairment by comparing the fair value of an intangible asset or goodwill with its carrying value. The determination of fair value involves significant management judgment. Impairments are expensed when incurred. For intangible assets the impairment test compares the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For goodwill, a two-step impairment model is used. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than the carrying amount, goodwill would be considered impaired. The second step measures the goodwill impairment as the excess of recorded goodwill over the asset’s implied fair value. Intangible assets that have finite useful lives continue to be amortized over their estimated useful lives.





Income Taxes





The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes.  Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws.





Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.





ASC 740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.




17





Inventory





Inventory includes the costs of material, labor and direct overhead and is stated at the lower of cost or market. Inventory is accumulated to service the biomass customer market. Inventory is collateral for the indebtedness described in Note 10to the consolidated financial statements included in this report.





Pro Forma Consolidated Results of Operations - Banyan and Subsidiary





Our actual results of operations for the years ended December 31, 2010 and 2009 do not provide a meaningful basis for comparison and analysis, since we have been an operating company only since we acquired Wood Energy on September 4, 2009. To provide a clear and comprehensive analysis of the combined operating results of Banyan together with those of Wood Energy for the years ended December 31, 2010 and 2009, the following selected pro forma financial information combines Banyan’s audited and Wood Energy’s audited and part year unaudited results, as if Banyan had acquired Wood Energy as of January1, 2009.





Consolidated Results of OperationsFor the years ending December 31,Audited


Pro forma Unaudited


Variance2010


2009 (1)


$


%Revenues

$
5,642,544


$
4,688,215


$
954,329



20
%Cost of goods sold


4,780,910



3,854,337



(926,573
)


-24
%Gross profit


861,634



833,878



27,756



3
%General & administrative expenses


1,852,900



1,378,324



(474,576
)


-34
%Loss from operations before acquisition costs


(991,266
)


(544,446
)


(446,820
)


-82
%Acquisition costs for Wood Energy


-



224,414



224,414Write off of acquisition costs not completed


-



497,200



497,200Interest expense - net


320,167



251,209



(68,958
)


-27
%Gain on extinguishment of debt


(25,092
)


-



(25,092
)


-Loss before income taxes


(1,286,341
)


(1,517,269
)


230,928



15
%Income tax provision (benefit)


(308,490
)


(1,349,462
)


(1,040,972
)


-77
%Net loss

$
(977,851
)

$
(167,807
)

$
(810,044
)


-483
%





(1) 2009 includes the results of operations for Wood Energy for eight months under pre-acquisition ownership and four months under Banyan Rail Services Inc. ownership.





Revenues





Revenue for the year ended December 31, 2010 was $5,642,544, an increase of $954,329 or 20.4% compared to revenue of $4,688,215 in 2009. The principal reason for the increase was that the Company removed approximately 1,700,000 railroad ties from its major customer in 2010 versus approximately 1,000,000 ties in 2009. In addition, the Company commenced its grinding operations in December 2009, and had a full year of revenues from the sale of biomass fuel in 2010 compared to 2009. While the number of ties removed increased by 70%, the percentage increase in revenues was less due to a larger amount of contracts that were incomplete at the 2010 year end. These contracts will be completed in 2011 and the revenue will be recorded when completed.





Gross Profit





Gross profit was 15.3% for the year ended December 31, 2010, compared to a gross profit of 17.8% in 2009. The principal reasons for the decrease in gross profit were (1) a 1% decrease in gross profit due to the use of outside subcontractors to help handle the increase in ties removed, and (2) a 1.5% decrease in gross profit due to inefficiencies in the sale of biomass fuel caused by equipment modifications required by our newly-built wood chipping facility, and unplanned shutdowns and related postponed receipts of biomass fuel by our biomass fuel customer.




18





General and administrative expenses





General and administrative expenses include: compensation, professional fees and costs related to being a public company, amortization of identifiable intangible assets and other costs. The below table summarizes the general and administrative expenses for the years ended December 31, 2010 and 2009:





For the years ending


VariancePro forma Unaudited12/31/2010


12/31/2009(Note 1)


$


%Compensation costs

$
786,074


$
646,587


$
(139,487
)


-22
%Professional fees and public company costs


298,633



232,830



(65,803
)


-28
%Amortization of intangible assets


262,530



87,510



(175,020
)


-200
%Other costs


505,663



411,397



(94,266
)


-23
%Total general and administrative  expenses

$
1,852,900


$
1,378,324


$
(474,576
)


-34
%





(1) 2009 includes the results of Operations for eight months under pre-acquisition ownership and four months under Banyan Rail Services Inc. ownership





General and administrative expenses for the year ended December 31, 2010 increased $474,576 or 34% as compared to the year ended December 31, 2009. This increase is primarily due to:





·
the amortization cost for identifiable intangible assets of $175,020 pertaining to the revaluation of these assets upon the purchase of Wood Energy in September, 2009; amortization costs were incurred for the full 2010 year and just four months from the date of acquisition in 2009;


·
an increase of $65,803 in professional fees and other public company costs due to non-recurring audit and accounting fees in conjunction with work performed to incorporate Wood Energy into our public filings and due to the 12 month period as a public company in 2010 as compared to the 4 months in 2009; and


·
an increase of $139,487 in compensation and office costs incurred for year ended December 31, 2010 over the comparable 2009 period in connection with the transition of Banyan from a shell company to an operating company after the acquisition in September 2009 of Wood Energy; costs included CFO compensation, accounting support and office space and services.





Interest expense





Interest expense increased by $124,876 as we incurred a full year of the following costs in 2010 as compared to four months of the costs in 2009: (i) interest expense related to the senior debt facilities incurred in connection with the acquisition of Wood Energy; (ii) interest expense on the credit line to support Wood Energy’s increased working capital requirements; and (iii) interest expense on capitalized leases and debt for equipment acquired in 2010 for our new grinding facility and to support increased tie pickup volume.





Income tax benefit





An income tax benefit of ($308,490) was recorded for the year ended December 31, 2010 as compared to an income tax benefit of ($1,356,862) in the 2009 period. The computation of income tax benefits and expenses are based on the expected effective tax rate for each full fiscal year, net of any applicable valuation allowance.





The 2009 income tax benefit has been recorded as the Company released its deferred tax valuation allowance due to management’s estimate that the Company’s net operating loss carry forwards will be realized which partially offset the deferred tax liability recorded upon the acquisition of Wood Energy and the beneficial conversion feature on the debentures.





The 2010 additional income tax benefits were recognized as the Company increased its taxable net operating loss carry forwards and reversed the deferred tax liability associated with the beneficial conversion feature on the debentures upon its conversion to preferred stock.




19





Net loss attributable to common stockholders





Net loss attributable to common stockholders was ($1.05) per share for the year ending December 31, 2010 compared to ($0.02) per share for the year ending December 31, 2009. The difference of ($1.03) per common share is primarily due to the non-cash preferred stock dividend resulting from the amortization of the beneficial conversion feature embedded in the series A preferred stock issued in 2010, the effect of which is ($0.66) per common share. Additionally the preferred stock dividends of $205,593 or ($0.07) and the increased net loss of $810,044 or ($0.27) increased the net loss attributable to common stockholders as compared to 2009.





Financial Condition and Liquidity





Cash and cash equivalents consist of cash and short-term investments. Our cash and cash equivalents balance at December 31, 2010 and 2009 were $61,969 and $101,361 respectively. The following is a summary of our cash flow activity for the years ended December 31, 2010 and 2009.





2010


2009Net cash used in operating activities

$
(472,896
)

$
(563,840
)Net cash used in investing activities

$
(889,705
)

$
(5,370,719
)Net cash provided by financing activities

$
1,323,209


$
4,422,747





Net cash used in operating activities





For the year ended December 31, 2010, our net loss of $(977,851) adjusted for non-cash expenses and benefits was approximately $(430,000) and the primary cause for the $(472,896) cash used in operating activities. For the year ended December 31, 2009 our net loss of $(167,807) adjusted for non-cash expenses and benefits was approximately $(610,369) and the primary cause for the $(563,840) cash used in operating activities.





At December 31, 2010, the Company had a net working capital deficiency of $1,620,423 and incurred negative cash flows from operating activities of $472,896 for the year ended 2010. The Company recognizes that the timing of the realization of its receivables from customers and its vendor and debt obligations payments may not allow the Company to generate positive cash flow in the near future.





Deferred revenue as of December 31, 2010, is $758,849, which we will invoice as each of the projects is completed. The deferred costs incurred related to the fulfillment of uncompleted jobs is $977,878. As of December 31, 2009, deferred revenue is $151,925 and the deferred costs related to the fulfillment of uncompleted jobs is $224,176. The increase in the simultaneous number of projects, the increased unit volume and length of time of the projects increased our cash cycle time and thus our operating cash requirements. Due to the impact on the Company, we initiated and agreed to a change order to our service agreement with our largest customer, a Class 1 railroad,  which will reduce the retainage withheld on the progress payments received by the Company from 50% to 25%. The impact of this change will be faster realization of our receivables from that customer.





The Company anticipates the majority of the deferred revenue will be recognized as revenue and the retainage will be collected during the first half of 2011.





Net cash used in investing activities





For the year ended December 31, 2010 Wood Energy invested in equipment primarily to support the growth in biomass fuel production in Shreveport, Louisiana. For the year ended December 31, 2009 the Company utilized approximately $4.9 million for the purchase of Wood Energy. Subsequent to the acquisition in September 2009 we also invested $450,000 in new equipment.




20





Net cash provided by financing activities





To finance the acquisition of Wood Energy, we entered into a five-year senior secured term loan with a bank in the amount of $3.0 million. Wood Energy is the borrower and Banyan guaranteed the loan. Payments of $50,000 of principal and interest are due monthly. As of December 31, 2010, there was $2,250,000 outstanding under this term loan.  Also, in connection with the acquisition of Wood Energy, we obtained two bank credit lines in the amounts of $500,000 and $1.5 million for working capital and capital expenditures respectively. Maximum loan advances on the working capital line are based on specific percentages of eligible working capital amounts, including accounts receivable and inventory. Draws on the capital expenditures line are based on 80% of the cost of such capital expenditures. On May 21, 2010, to better meet the Company’s current financing requirements, the Company and the bank amended the terms of the credit lines whereby the working capital and capital expenditures lines of credit were modified to $1.0 million and $1.0 million each. As of December 31, 2010, $219,670 and $105,672 were available under the capital expenditure line and the revolving credit line, respectively.





To obtain additional funds for the acquisition, Banyan also issued series A convertible debentures bearing interest at the rate of 10%, payable semi-annually. We raised $1,525,000 through the issuance of the debentures. The debentures were due in five years, and were convertible into shares of common stock of Banyan at a conversion price of $2.00 per share. In February 2010, the holders of all of the convertible debentures elected to exchange their debentures for 15,250 shares of series A convertible preferred stock. The terms of the preferred stock are substantially the same as the terms of the convertible debentures, except that Banyan has no obligation to redeem the preferred stock at any time, because the preferred stock has no redemption privileges. This exchange reduces our long-term cash requirements. During the remainder of the year ended December 31, 2010, the Company issued another 4,750 shares of series A convertible preferred stock the proceeds of which were used for working capital purposes.




At December 31, 2010, we were in violation of the fixed charge coverage, the total debt to EBITDA (earnings before interest, taxes, depreciation and amortization) and the minimum EBITDA covenants contained in our loan agreements with Fifth Third Bank. On April 1, 2011, the lender granted a waiver with respect to non-compliance with the financial covenants as of December 31, 2010.





We are currently concluding negotiations for a modification and extension of our term loan and credit lines with the bank. Both the bank and the Company have agreed to the revised terms, including the rates, financial covenants, and other particulars of the credit facilities. We expect to have the executed modification agreement and extension shortly.




The Company expects to meet the financial covenants included in the modification and extension of our term loan and credit lines and has retained the long-term classification of the applicable portions of the debt in the accompanying Consolidated Financial Statements.





Based on our 2011 annual operating plan and the above noted bank credit facility modification and extension, the Company anticipates it will meet future financial covenants and therefore has retained the long-term classification of the debt in the accompanying Consolidated Financial Statements.





On October 18, 2010, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of its preferred stock as series B preferred stock. The issuance price of the series B preferred stock is $100 per share and it is convertible into common stock by the holder at the earlier of:





·
The common stock is listed for trading on Nasdaq or any national securities exchange;


·
The bid price of the common stock is equal to or exceeds $5.00 a share for 30 consecutive days, and thereafter so long as the bid price continues to equal or exceed $5.00 per share;


·
The trading volume of the common stock is equal to or exceeds 10,000 shares a day for 30 consecutive days, and thereafter so long as the daily trading volume continues to equal or exceed 10,000 shares; or


·
October 15, 2013.





At that time the Company may also elect to convert or redeem the series B preferred stock.  The conversion price is $2.25 per share of common stock, subject to adjustment for stock dividends, stock splits and reorganizations.




21





The series B preferred stock ranks senior to the common stock and pari-passu with the series A preferred stock of the Company as to dividends and distribution of assets upon the liquidation, dissolution or winding up of the Company. The Company has no obligation to redeem the series B preferred stock at any time.





During the last four months of 2010, the Company issued 6,000 shares of its series B preferred stock to Patriot Rail Services, Inc. (“PRS”). Gary O. Marino, the Company’s Chairman and Chief Executive Officer, is the President and a significant stockholder of PRS’s ultimate parent company. The preferred shares were issued for $100 per share, or $600,000 in the aggregate.





In December of 2010, the Company developed and began implementation of its 2011 operating plan and it is anticipated the Company will achieve profitability and generate positive cash flows from operating activities into the foreseeable future as a result of increased sales levels and improved gross margins.





We are exploring various additional acquisition opportunities and may incur due diligence, legal and accounting costs in connection with evaluating these opportunities.  We are also exploring additional sources of financing to fund such possible opportunities. However, we cannot guarantee we will be able to obtain adequate financing on acceptable terms.





New Accounting Pronouncements





Disclosure of Supplementary Pro Forma Information for Business Combinations





In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations.” The objective of this ASU is to address diversity in practice about the presentation of pro forma revenue and earnings disclosure requirements for business combinations, and specifies that a public entity that presents comparative financial statements should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU is effective prospectively for business combinations on or after January 1, 2011. As this ASU is limited to supplemental disclosures, its adoption will not have an impact on the Company’s financial condition or results of operations.





Goodwill Impairment Test





In December, 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The objective of this ASU is to address diversity in practice in the application of goodwill impairment testing by entities with reporting units with zero or negative carrying amounts, eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. This ASU is effective for interim periods after January 1, 2010. The Company adopted this ASU as of January 1, 2010. The adoption of this ASU does not have an impact on the financial statements for the year ending 2010 but may in the future impact the timing of the Company’s reporting of goodwill impairment charges.





Off-Balance Sheet Financing Arrangements





We do not have any material off-balance sheet financing arrangements.





Inflation


We do not believe inflation had a material impact on our results of operations for the years ended December 31, 2010 and 2009.





Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.





Not applicable.




22




Item 8.
Financial Statements and Supplementary Data.





Our consolidated financial statements for the years ended December 31, 2010 and 2009 follow this annual report, beginning on page F-1.





Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.





On April 29, 2010, the board of directors approved the dismissal of Grant Thornton LLP as our independent registered public accounting firm and appointed Daszkal Bolton LLP as our new independent registered public accounting firm.  For additional information, see our report on Form 8-K filed with the SEC on May 5, 2010.





Item 9A.
Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





As of December 31, 2010, our management, under the direction of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended.  Based on this evaluation, our chief executive officer and chief financial officer each concluded that our disclosure controls and procedures were effective as of December 31, 2010.





Management’s Report on Internal Control over Financial Reporting





Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Exchange Act Rule 13a-15(f).  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles defined in the Exchange Act.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.





At the end of December 31, 2010 we carried out evaluations under the direction of the Chief Executive Officer and Chief Financial Officer of our effectiveness of internal control over financial reporting.  In making this evaluation, management used the criteria set forth in Internal Control Over Financial Reporting — Guidance for Smaller Public Companies (2006) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. At December 31, 2010, based upon those evaluations, management concluded that our internal control over financial reporting was effective as of December 31, 2010.





Attestation Report of Independent Registered Public Accounting Firm





This annual report does not include an attestation report of our registered public accounting firms regarding internal control over financial reporting.  Management’s report on internal control over financial reporting was not subject to attestation by our registered public accounting firms pursuant to Section 989G of the Dodd Frank Wall Street Reform and Consumer Protection Act and rules of the Securities and Exchange Commission.





Item 9B.
Other Information.





None


23





PART III





Item 10.
Directors, Executive Officers and Corporate Governance.





Directors and Executive Officers





Our directors and executive officers are:





Gary O. Marino, age 66, joined our board in January 2007, was appointed chairman in January 2008 and chief executive officer in November 2008.  Mr. Marino has served as chairman, president and CEO of Patriot Rail Corp., an owner and operator of short line and regional railroads, since 2005, and formerly held the same positions at RailAmerica, Inc. a company he founded in 1985, until his retirement in 2004.  From 1984 until 1993, Mr. Marino served as chairman, president and CEO of Boca Raton Capital Corporation, a publicly owned venture capital investment company.  Prior to that he spent more than fifteen years in commercial banking in New York as a senior loan officer and was also president and CEO of two small business investment companies (SBICs), as well as president of a Florida-based commercial bank.  Mr. Marino received his B.A. degree from Colgate University and his M.B.A. from Fordham University.  From 1966 to 1969, he served as an officer of the United States Army Ordnance Corps.  He has also served on the board of directors of the American Association of Railroads. We believe Mr. Marino is well qualified to serve on the board due to his extensive knowledge of the railroad industry as well as his banking experience.





Paul S. Dennis, age 72, joined the board in January 2007 and was appointed interim chief financial officer in February 2007 and interim chief executive officer in April 2008. Mr. Dennis stepped down as interim CEO and CFO in November 2008. Mr. Dennis has served as president and CEO of Associated Health Care Management Company, Inc. since 1977.  Health Care Management is a Cleveland, Ohio based company that managed eight nursing care facilities and four congregate living facilities.  The company has sold all but one of its facilities. Mr. Dennis has also been a director and officer with various companies and business ventures in the hardware distribution, pharmaceuticals distribution and steel fabrication industries and a real estate developer, general contractor, owner and investor. We believe Mr. Dennis is highly qualified to serve on Banyan’s board due to his broad experience as an entrepreneur and CEO.





Bennett Marks, age 62, joined the board and was appointed vice president and chief financial officer in November 2008. On May 26, 2010, Mr. Marks resigned as chief financial officer due to other business responsibilities.  Mr. Marks remains a director of the Company. Mr. Marks has been executive vice president and CFO of Patriot Rail Corp., an owner and operator of short line and regional railroads, since 2005.  Mr. Marks has served as EVP and CFO of six publicly-held and privately-owned companies in the transportation, healthcare, manufacturing, distribution and telecommunications industries. While CFO at RailAmerica, Inc., he developed and implemented the financial framework of the company as revenues grew from $130 million to $450 million. Mr. Marks has more than twenty years of experience in public accounting, including ten years as an audit/client services partner with KPMG where he was an Associate SEC Reviewing Partner and the Administrative Partner in Charge of the West Palm Beach, Florida office. A licensed CPA in Florida and New York, he has held leadership positions in a variety of community, charitable, and professional organizations. Mr. Marks received his degree in accounting from New York University. We believe Mr. Marks is well qualified to serve on the board due to his extensive finance and accounting knowledge as well as his experience in the railroad industry.





Donald D. Redfearn, age 58, joined the board in January 2010.  Mr. Redfearn also serves as senior vice president for Patriot Rail Corp., an owner and operator of short line and regional railroads.  Mr. Redfearn has been the owner of Redfearn Enterprises, LLC, a real estate holding company, since 2007.  From 2004 to 2007, he served as president of RailAmerica, Inc., a railroad holding company, and from 1989 to 2004 he served as executive vice president of RailAmerica.  He also served as a director of RailAmerica since its inception in 1986 through 2007.  Mr. Redfearn received his B.A. degree in Business Administration from the University of Miami and graduated from the School of Banking of the South at Louisiana State University.  Active in local charities, Mr. Redfearn is a member of the United Way Leadership Circle. We believe Mr. Redfearn is highly qualified to serve as a director due to his experience in the railroad industry.





C. Lawrence Rutstein, age 66, serves as our vice president of administration.  He also serves as the senior vice president, contracts and administration for Patriot Rail Corp.  Mr. Rutstein has over 40 years of legal and business experience.  From 1968 through 1971, Mr. Rutstein practiced corporate, securities and banking law with Blank Rome in Philadelphia.  In 1971-72, he served as Assistant Attorney General and Chief Counsel to the Pennsylvania Department of Banking and later in 1972 became the first in-house counsel for Continental Bank.  In 1982, Mr. Rutstein founded Parker & Rutstein, a corporate law firm in Philadelphia. From 1987 until 2007, when he joined Patriot Rail, Mr. Rutstein has been an entrepreneur and merchant banker serving as CEO of several public companies and has been an advisor to a number of public and private companies. Mr. Rutstein earned his undergraduate degree from the University of Massachusetts and his law degree from Harvard Law School.




24





Larry Forman, age 56, serves as our vice president and CFO and joined the Company in May, 2010. Mr. Forman most recently was vice president and corporate controller of Gulfstream International Group, Inc., a publicly owned regional airline from January 2009 until May of 2010.  From 1985 through 2005 he served in various roles as, CFO, COO and General Manager, for several publicly traded and private manufacturing companies including 10 years in various positions with Altana AG.  Mr. Forman worked in Grant Thornton’s NY audit practice from 1982 – 1985. Mr. Forman, a CPA, is licensed in New York and earned his undergraduate degree from Queens College in New York City.





Greg Smith, age 48, founded Wood Energy in 2001 and has served as its president ever since.  Mr. Smith has been in the business of railroad tie reclamation and disposal since 1991.  He founded Wood Waste Energy and built it into the country’s largest railroad tie recovery service. Wood Waste Energy was the first company to produce railroad tie-derived fuel, with Mr. Smith developing a patented design for processing used ties.  He also developed an efficient system for crews to pick up rail ties behind railroad system gangs. He has worked as a contractor for many large railroads: BNSF (1997-2001); Union Pacific (1991-present); Norfolk Southern (1994-2000); Illinois Central (1997-2001); and Kansas City Southern (1998-2001).  Mr. Smith sold Wood Waste Energy in 1999 and it remains the largest railroad tie recovery company in the U.S.  Mr. Smith is a graduate of the University of Kansas.





Andy C. Lewis, age 42, has served as vice president of Wood Energy since 2001.  Mr. Lewis has been managing railroad tie pick-up crews since 1997, and has extensive experience in managing field crew employees, hi-rail boom trucks, tie-cranes, railcars and semi-tractor trailers.  He has worked with several of the Class I railroads over the past 12 years as a manager of Wood Waste Energy and as vice president of Wood Energy.





Committees of the Board





We are still in the early stages of our business plan and our board currently has only four members. Because of the small size of our board, our directors have not yet designated audit, nominating or other committees. Instead, these responsibilities are handled by the entire board. Without an audit committee, we have not designated a director as an “audit committee financial expert” as defined by SEC rules. Although we are pleased with the diverse skills and level of expertise that our directors possess, we intend to add additional directors as our operations grow. Our board plans to form appropriate committees at that time.





Code of Ethics





In March 2004, our board of directors unanimously adopted a code of conduct and ethics that applies to all of our officers, directors and employees, including our principal executive officer and principal financial and principal accounting officer. We will provide a copy of our code without charge upon written request to Gary O. Marino, 2255 Glades Road, Suite 342-W, Boca Raton, Florida 33431.





Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of our common stock, to make filings with the SEC reporting their ownership of our common stock and to furnish us with copies of these filings.  On February 1, 2010 the Company issued newly-authorized shares of series A preferred stock in exchange for cancellation of all outstanding convertible debentures. The officers and directors of the Company who held debentures participated in the exchange but failed to make timely Form 4 filings reporting the transaction, although the filings were subsequently made. On February 11, 2010 the Company issued stock options to the directors and an officer of the Company. The Form 4 filings reporting the option issuances were filed one day late. On August 26, 2010, the Company issued options to purchase shares of common stock to the Company’s chief financial officer. The Form 4 reporting the issuance was filed late. Based solely on our review of copies of reports furnished to us, we believe that all other Section 16(a) filing requirements were timely met in 2010. Copies of these filings are available on the SEC’s website at www.sec.gov.




25





Director Nominations





Our board of directors does not have a nominating committee.  Instead, the board believes it is in the best interests of the Company to rely on the insight and expertise of all directors in the nominating process.





Our directors will recommend qualified candidates for director to the full board and nominees are subject to approval by a majority of our board members.  Nominees are not required to possess specific skills or qualifications; however, nominees are recommended and approved based on various criteria including relevant skills and experience, personal integrity and ability and willingness to devote their time and efforts to Banyan. Qualified nominees are considered without regard to age, race, color, sex, religion, disability or national origin. We do not use a third party to locate or evaluate potential candidates for director. The board of directors considers nominees recommended by stockholders according to the same criteria. A stockholder desiring to nominate a director for election must deliver a notice to our president at our principal executive office.  The notice must include as to each person whom the stockholder proposes to nominate for election or re-election as director:





•
the name, age, business address and residence address of the person,


•
the principal occupation or employment of the person,


•
the written consent of the person to being named in the proxy as a nominee and to serving as a director,


•
the class and number of our shares of stock beneficially owned by the person, and


•
any other information relating to the person that is required to be disclosed in solicitations for proxies for election of director pursuant to Rule 14a under the Securities Exchange Act of 1934;





and as to the stockholder giving the notice:





•
the name and record address of the stockholder, and


•
the class and number of our shares beneficially owned by the stockholder.





We may require any proposed nominee to furnish additional information reasonably required by us to determine the eligibility of the proposed nominee to serve as our director.





Item 11.     Executive Compensation.





Summary Compensation Table


The following table summarizes the compensation paid by us to our chairman, president and chief executive officer and our other most highly compensated executive officers receiving more than $100,000 annually.





Name and Principal Position
Year

Salary

($)


Bonus

($)


Option

Awards

($)


All Other

Compensation

($)


Total

($)Gary O. Marino
2010


—



—



20,250



—



20,250Chairman, President and Chief Executive Officer(1)
2009


—



—



25,000



—



25,000Greg Smith
2010


150,000



—



—



—



150,000President of Wood Energy Group
2009


194,154



—



—



—



194,154Andy C. Lewis
2010


150,000



—



—



—



150,000Vice President of Wood Energy Group
2009


194,154



—



—



—



194,154





(1)
Mr. Marino does not receive compensation for service as our chairman, president and chief executive officer.  Mr. Marino was appointed our chief executive officer in November 2008.  The fair value of stock options is determined as of the date of grant. We use the Black-Scholes option pricing model to estimate compensation cost for stock option awards. Please see the table regarding the assumptions used in this calculation in Note 13, “Stock-Based Compensation” to our attached consolidated financial statements.




26





Executive Employment Agreements





Andy C. Lewis and Wood Energy entered into an employment agreement, dated September 4, 2009 (the “Employment Agreement”). In consideration of his obligations under his respective Employment Agreement, Mr. Lewis receives a salary of $150,000, employee benefits that are customary for executive officers, is entitled to equity compensation as determined by our board of directors and is eligible for an annual bonus based upon Wood Energy’s EBITDA for the prior year. The Employment Agreement requires Mr. Lewis to refrain from participating in the railroad tie reclamation and disposal businesses for a period of two years following termination of his employment.  The Employment Agreement also imposes prohibitions on soliciting customers and employees of Wood Energy.





Greg Smith and Wood Energy entered into an employment agreement, dated September 4, 2009 (the “Employment Agreement”). In consideration of his obligations under his Employment Agreement, Mr. Smith receives a salary of $150,000, employee benefits that are customary for executive officers, is entitled to equity compensation as determined by our board of directors and is eligible for an annual bonus based upon Wood Energy’s EBITDA for the prior year. The Employment Agreement requires Mr. Smith to refrain from participating in the railroad tie reclamation and disposal businesses for a period of two years following termination of his employment.  The Employment Agreement also imposes prohibitions on soliciting customers and employees of Wood Energy.





Outstanding Equity Awards at December 31, 2010





The following table summarizes information with respect to the stock options held by the executive officers listed in our summary compensation table as of December 31, 2010.





Name

Number of

Underlying

Unexercised

Options

Exercisable


Number of

Underlying

Unexercised

Options

Un-exercisable


Option

Exercise

Price


Option

Expiration

DateGary O. Marino


25,000



—


$
3.50


02/11/2015
(1)25,000



—


$
2.70


06/01/2014
(2)Greg Smith


—



—



—



—Andy C. Lewis


—



—



—



—





(1)
Options vested on February 11, 2011, the date of grant.


(2)
Options vested on June 1, 2009, the date of grant.





Director Compensation


The following table summarizes information with respect to the compensation paid to our directors in 2010.  As an executive officer of Banyan, Gary Marino is included in our summary compensation table and, therefore, is not included in this table.





Name

Fees

Earned or

Paid in

Cash


Option

Awards(1)


All Other

Compensation


TotalPaul S. Dennis


—


$
20,250



—


$
20,250Bennett Marks


—


$
20,250



—


$
20,250Donald D. Redfearn


—


$
20,250


$
3,125


$
23,375





(1)
The fair value of stock options is determined as of the date of grant. We use the Black-Scholes option pricing model to estimate the compensation cost for stock option awards. Please see the table regarding the assumptions used in this calculation in Note13, “Stock-Based Compensation” to our attached consolidated financial statements.




27





Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.


The following table lists the stock ownership of our directors, executive officers listed under executive compensation and significant stockholders as of March 23, 2011.





Name and Address(1)

Common

Stock


Stock

Options(2)


Preferred

stock(3)


Total


Percentage(4)Gary O. Marino(5)

Patriot Equity, LLC

2255 Glades Road, Suite 342-W

Boca Raton, FL 33431


386,783



50,000



505,556



942,339



26.2
%Paul S. Dennis(6)

16330 Vintage Oaks Lane,

Delray Beach, FL 33484


364,792



50,000



200,000



614,792



18.7
%Bennett Marks

Patriot Rail, LLC

2255 Glades Road, Suite 342-W

Boca Raton, FL 33431


—



75,000



—



75,000



2.4
%Donald D. Redfearn

2255 Glades Road, Suite 342-W

Boca Raton, FL 33431


—



25,000



—



25,000



0.8
%Greg Smith(7)

2016 Kingspointe Drive

Chesterfield, MO 63005


166,667



—



100,000



266,667



8.5
%Andy C. Lewis(8)

868 South Allis Rd.

Wilmar, AR 71675


166,667



—



100,000



266,667



8.5
%All directors, and executive officers as a group (8 individuals)


1,084,909



250,000



905,556



2,240,465



53.3
%





(1)
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power over the shares of stock owned.


(2)
Shares of common stock the beneficial owners have the right to acquire through stock options that are or will become exercisable within 60 days.


(3)
Shares of common stock into which shares of series A and series B preferred stock held by the beneficial owner are convertible.


(4)
Assumes the exercise of options, conversion of series A and series B preferred stock into common stock by that beneficial owner, but no others.


(5)
All shares of common stock and preferred stock are held by Patriot Rail Services, Inc. (“PRS”). Gary O. Marino, the Company’s Chairman and Chief Executive Officer, is the President and a significant stockholder of PRS’s ultimate parent company.


(6)
364,792 shares of common stock and all shares of preferred stock are owned by Paul S. Dennis, Trustee under the Paul S. Dennis Trust Agreement dated August 9, 1983, as modified.


(7)
All shares of common stock and preferred stock are held by the Stephanie G. Smith Trust u/a dated December 20, 1995, as amended, Stephanie G. Smith and Greg Smith, Trustees.


(8)
All shares of common stock and preferred stock are held by the Andy C. Lewis and Michelle D. Lewis Revocable Trust.




28





Equity Compensation Plan Information





In 2009, our directors and officers received a total of 87,500 options as compensation for 2009 services.  In 2010, options were issued, 25,000 to each of our four directors and 40,500 to management.  We have not issued any other options,


warrants or rights in 2010 or 2009.  A director exercised 25,000 options in 2010. In 2009, our directors and a former director exercised a total of 75,000 options.  Our equity plans are summarized in the following table.





Plan category

Number of

securities

to be issued

upon

exercise of

outstanding

options


Weighted-average

exercise price of

outstanding

options


Number of

securities

remaining available

for future issuance

under equity

compensation plans

(excluding securities

reflected

in the first column)Equity compensation plans approved by security holders


18,000


$
3.70



272,000Equity compensation plans not approved by security holders


235,000


$
3.04



—Total


253,000


$
3.08



—





Item 13.
Certain Relationships and Related Transactions, and Director Independence.





Transactions with Related Parties





Banyan entered into an agreement with Patriot Rail Corp. (“Patriot Rail”) for office space and administrative services at the Company’s Boca Raton, Florida headquarters.  Our Chairman and CEO, Gary O. Marino, Director, Bennett Marks, and Vice President of Administration, C. Lawrence Rutstein, are officers and significant stockholders of Patriot Rail.  Banyan pays Patriot Rail $5,000 a month for these services and the term of the agreement is month to month.  We believe that Banyan would not be able to obtain these services from an unrelated third party on terms equivalent to those offered by Patriot Rail.  We did not engage in any other transaction with related parties in 2010.





During 2010 the Company issued 6,000 shares of its series B preferred stock to Patriot Rail Services, Inc. (“PRS”). Gary O. Marino, the Company’s chairman and chief executive officer, is the president and a significant stockholder of PRS’s ultimate parent company. The preferred shares were issued for $100 a share, or $600,000 in the aggregate.





Director Independence





Our board has determined that one of our four directors, Paul S. Dennis, is “independent” as defined by NASDAQ Stock Market Listing Rule 5605(a) (2).  Although we are not listed for trading on the NASDAQ stock market, we have selected the NASDAQ rules as an appropriate guideline for determining the independence of our board members.





Item 14.
Principal Accounting Fees and Services.





Grant Thornton LLP served as our independent registered public accounting firm from 2000 until 2009. We paid Grant Thornton $175,000 in 2010 and $282,000 in 2009 for audit fees. Grant Thornton did not render any other services to Banyan during 2010 or 2009.  In 2010, DaszkalBolton LLP became our auditors and during 2010 they were paid $38,000 for their review of our quarterly filings. Additionally, DaszkalBolton LLP has been approved by the audit committee to perform certain tax services for the year ended December 31, 2010.





Because of the small size of our board, the directors have not designated an audit committee.  Instead, these responsibilities are handled by the entire board, which considers and pre-approves any audit or non-audit services to be performed by DaszkalBolton LLP. Our board believes the services provided by DaszkalBolton LLP are compatible with maintaining our auditor’s independence.




29





Item 15.     Exhibits, Financial Statement Schedules.





(b)          Exhibit Index.




2.1

Stock Purchase Agreement, dated May 28, 2009, by and among the Registrant, Stephanie G. Smith and Greg Smith, Trustees of the Stephanie G. Smith Trust U/A dated December 20, 1995, as amended, Andy C. Lewis, and The Wood Energy Group, Inc.  Exhibit 10.1 to the Form 8-K filed July 28, 2009 is incorporated by reference herein.2.2

Amendment to Stock Purchase Agreement, dated August 31, 2009, by and among the Registrant, Stephanie G. Smith and Greg Smith, Trustees of the Stephanie G. Smith Trust U/A dated December 20, 1995, as amended, Andy C. Lewis, and The Wood Energy Group, Inc. Exhibit 2.2 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.2.3

Second Amendment to Stock Purchase Agreement, dated September 3, 2009, by and among the Registrant, Stephanie G. Smith and Greg Smith, Trustees of the Stephanie G. Smith Trust U/A dated December 20, 1995, as amended, Andy C. Lewis, and The Wood Energy Group, Inc. Exhibit 2.3 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.3.1*

Restated Certificate of Incorporation3.2

Certificate of Designation of Series A Preferred Stock. Exhibit 3.1 to the Form 8-K dated February 1, 2010 is incorporated by reference herein.3.3

Certificate of Designation of Series B Preferred Stock. Exhibit 3.1 to the Form 8-K dated October 18, 2010 is incorporated by reference herein.3.4

Amended and Restated Bylaws of the Registrant.  Exhibit D to the Definitive Proxy Statement filed August 9, 2000 is incorporated by reference herein.4.1

Form of Series A Convertible Debenture. Exhibit 4.1 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.10.1

Contract for Work or Services dated as of January 1, 2009 between Union Pacific Railroad Company and Wood Energy Group Inc. Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 is incorporated by reference herein.10.2

Loan and Security Agreement, dated September 4, 2009 by and between The Wood Energy Group, Inc. and Fifth Third Bank. Exhibit 10.1 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.10.3

Term Note, dated September 4, 2009 from The Wood Energy Group, Inc. in favor of Fifth Third Bank. Exhibit 10.2 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.10.4

Revolving Note for Working Capital Credit Line, dated September 4, 2009 from The Wood Energy Group, Inc. in favor of Fifth Third Bank. Exhibit 10.3 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.10.5

Capex Note, dated September 4, 2009 from The Wood Energy Group, Inc. in favor of Fifth Third Bank. Exhibit 10.4 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.10.6

Guaranty, dated September 4, 2009 by the Registrant in favor of Fifth Third Bank. Exhibit 10.5 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.10.7**

Employment Agreement, dated September 4, 2009 by and between The Wood Energy Group, Inc. and Greg Smith. Exhibit 10.6 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.




30




10.8**

Employment Agreement, dated September 4, 2009 by and between The Wood Energy Group, Inc. and Andy C. Lewis. Exhibit 10.7 to the Form 8-K filed September 11, 2009 is incorporated by reference herein.10.9*

Agreement for Use of Office and Administrative Services between Patriot Rail Corp. and The Wood Energy Group, Inc. dated September 4, 2009.10.10*

Lease Agreement, dated January 11, 2010 by and between The Wood Energy Group, Inc. and Bailey Bark Material, Inc.14.1

Code of Ethics.  Exhibit 14 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006 filed on April 16, 2007 is incorporated by reference herein.31.1*

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





* Filed herewith.


** Management contract or compensatory plan or arrangement.





31




SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, Banyan Rail Services Inc. caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Banyan Rail Services Inc.Date: April 1, 2011
/s/ Gary O. MarinoBy Gary O. Marino,Chief Executive Officer and Chairman of the Board(Principal Executive Officer)Date: April 1, 2011
/s/ Larry FormanBy Larry Forman,Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)





In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of Banyan Rail Services Inc. and in the capacities and on the dates indicated.





Date: April 1, 2011
/s/ Gary O. MarinoBy Gary O. Marino,Chief Executive Officer and Chairman of the BoardDate: April 1, 2011
/s/ Bennett MarksBy Bennett Marks, DirectorDate: April 1, 2011
/s/ Paul S. DennisBy Paul S. Dennis, DirectorDate: April 1, 2011
/s/ Donald D. RedfearnBy Donald D. Redfearn, Director




32





Report of Independent Registered Public Accounting Firm
 
 The Board of Directors and Stockholders of
 Banyan Rail Services Inc.
 
 We have audited the accompanying consolidated balance sheet of Banyan Rail Services Inc. (formerly B.H.I.T. Inc.) (a Delaware corporation) and subsidiary as of December 31, 2009, and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banyan Rail Services Inc. and subsidiary as of December 31, 2009, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
 
 
 /s/ Grant Thornton
 Fort Lauderdale, Florida
 April 14, 2010




33





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCCOUNTING FIRM
 
 
 To the Board of Directors and Stockholders
 of Banyan Rail Services Inc.
 
 We have audited the accompanying balance sheet of Banyan Rail Services Inc. (the “Company”) as of December 31, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of December 31, 2009, were audited by other auditors whose report dated April 14, 2010, expressed an unqualified opinion on those statements.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banyan Rail Services Inc. as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
 
 /s/ Daszkal Bolton LLP
 Boca Raton, Florida
 April 1, 2011


34




Banyan Rail Services Inc. and SubsidiaryConsolidated Balance Sheets





As ofDecember 31,

2010


December 31,

2009ASSETSCurrent assetsCash and cash equivalents

$
61,969


$
101,361Accounts receivable - trade


688,134



533,661Due from sellers


-



341,863Cost incurred related to deferred revenue


977,878



224,176Prepaid expenses and other current assets


116,011



5,362Total current assets


1,843,992



1,206,423Property and equipment, net


2,886,275



2,146,086Other assetsDeferred income taxes


569,582



-Identifiable intangible assets, net


1,562,297



1,824,827Goodwill


3,658,364



3,658,364Other assets


171,542



199,993Total other assets


5,961,785



5,683,184Total assets

$
10,692,052


$
9,035,693LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable and accrued expenses

$
934,789


$
906,908Deferred revenue


758,849



151,925Revolving credit line


894,328



275,000Current portion of long-term debt


680,707



619,206Current portion of capital leases


90,179



-Dividends Payable


105,563



-Total current liabilities


3,464,415



1,953,039Deferred income taxes


-



110,088Long-term debt, less current portion


2,349,623



2,567,394Capital Leases, less current portion


155,196



-Convertible debentures, net


-



441,073Total liabilities


5,969,234



5,071,594Commitments and contingencies


-



-Stockholders' equitySeries A Preferred stock, $.01 par value. 20,000 shares authorized and issued at December 31, 2010


200



-Series B Preferred stock, $.01 par value. 10,000 shares authorized. 6,000 shares issued at  December 31, 2010


576,437



-Common stock, $0.01 par value. 7,500,000 shares authorized. 3,045,856 and 3,020,414 shares issued at December 31, 2010 and December 31, 2009, respectively


30,458



30,204Additional paid-in capital


93,045,614



91,885,935Accumulated deficit


(88,859,202
)


(87,881,351
)Treasury stock, at cost, for 28,276 shares


(70,689
)


(70,689
)Total stockholders' equity


4,722,818



3,964,099Total liabilities and stockholders' equity

$
10,692,052


$
9,035,693








35




Banyan Rail Services Inc. and SubsidiaryConsolidated Statements of Operations





Banyan Rail Services

PredecessorYear Ended December 31


Eight Months

Ended2010


2009


August 31, 2009Revenues

$
5,642,544


$
1,142,738


$
3,545,477Cost of sales


4,780,910



876,115



2,978,222Gross profit


861,634



266,623



567,255General & administrative expenses


1,852,900



754,249



624,075Acquisition costs for Wood energy


-



224,414



-Write off of acquisition costs not completed


-



497,200



-Loss from operations


(991,266
)


(1,209,240
)


(56,820
)Other expenses (income)(Gain) on extinguishment of debt


(25,092
)


-



-Interest expense


320,167



195,291



55,918Loss before income taxes


(1,286,341
)


(1,404,531
)


(112,738
)Income tax provision (benefit)


(308,490
)


(1,356,862
)


7,400Net loss

$
(977,851
)

$
(47,669
)

$
(120,138
)Dividends for the benefit of preferred stockholders:Preferred stock dividends


(205,593
)


-



-Amortization of preferred stock beneficial conversion feature


(2,023,363
)


-



-Total dividends for the benefit of preferred stockholders


(2,228,956
)


-



-Net loss attributable to common stockholders

$
(3,206,807
)

$
(47,669
)

$
(120,138
)Weighted average number of common shares outstanding:Basic and diluted


3,043,247



2,507,990Net loss per common share, basic and diluted

$
(0.32
)

$
(0.02
)Net loss attributable to common shareholders per share

$
(1.05
)

$
(0.02
)
    36





Banyan Rail Services Inc. and Subsidiary


Consolidated Statements of Cash Flows





PredecessorYears Ended December 31


Eight Months Ended2010


2009


August 31, 2009Cash flows provided by (used in) operating activities:Net income (loss)

$
(977,851
)

$
(47,669
)

$
52,958Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation


465,652



102,704



225,678Amortization of identifiable intangible assets


262,530



87,510



-Stock compensation expense


91,096



87,500



-Deferred income taxes


(290,795
)


(1,359,637
)


-Acquisition costs written off


-



340,000Amortization of deferred loan costs


28,451



13,860



-Other


(9,823
)


59,823



-Changes in assets and liabilities:Decrease (increase) in accounts receivable


(154,473
)


5,052



(194,105
)Decrease (increase) in costs incurred related to deferred revenue


(753,702
)


(185,855
)


321,625Decrease in due from Sellers


341,863



-



-Decrease (increase) in prepaid expenses and other current assets


(110,649
)


23,398



-Increase in accounts payable and accrued expenses


27,881



224,726



374,096Increase (decrease) in deferred revenue


606,924



84,748



(513,219
)Net cash provided by (used in) operating activities


(472,896
)


(563,840
)


267,033Cash flows from investing activities:Acquisition of property and equipment


(889,705
)


(448,790
)


(205,830
)Purchase of net assets in the acquisition of Wood, net of cash acquired


-



(4,921,929
)


-Net cash used in investing activities


(889,705
)


(5,370,719
)


(205,830
)Cash flows from financing activities:Proceeds from long-term debt


443,730



3,336,600



88,274Deferred loan costs


-



(213,853
)


-Proceeds from line of credit


619,328



275,000



-Preferred dividends paid


(100,030
)


-



-Payment of capital leases


(70,761
)


-



(96,665
)Proceeds from exercise of stock options


37,500



112,500



-Proceeds from sale of preferred stock


993,442



-



-Payments of long-term debt


(600,000
)


(150,000
)


(32,684
)Proceeds from convertible debentures


-



1,125,000



-Purchase of treasury stock


-



(62,500
)


-Net cash provided by (used in) financing activities


1,323,209



4,422,747



(41,075
)Net increase (decrease) in cash and cash equivalents


(39,392
)


(1,511,812
)


20,128Cash and cash equivalents, beginning of period


101,361



1,613,173



2,175Cash and cash equivalents, end of period

$
61,969


$
101,361


$
22,303Supplemental disclosure of cash flow information:Cash paid during the year for:Interest

$
304,942


$
187,024


$
45,971Taxes

$
-


$
-


$
-Non cash financing activities:Issuance of preferred stock for exchange of convertible debentures

$
1,525,000


$
-


$
-Issuance of convertible debentures for purchase of Wood

$
-


$
400,000


$
-Issuance of common stock for purchase of Wood

$
-


$
1,166,667


$
-Preferred stock dividend in excess of payments

$
105,563


$
-


$
-Property acquired under capital leases

$
316,136


$
-


$
-





See Notes to Consolidated Financial Statements.




37





Banyan Rail Services Inc. and Subsidiary


Consolidated Statements of Stockholders’ Equity


Periods Ended December 31, 2009 and December 31, 2010





Common Stock


Preferred Stock








Treasury StockShares Issued


Amount


Shares

Issued


Amount


Additional Paid

in Capital


Accumulated

Deficit


Shares


Amount


TotalStockholders’ equity January 1, 2009


2,612,081


$
26,121



-



-


$
89,768,476


$
(87,833,681
)


3,276


$
(8,189
)

$
1,952,727Proceeds from exercise of stock options


75,000



750



-



-



111,750



-



-



-



112,500Purchase of treasury stock


-



-



-



-



-



-



25,000



(62,500
)


(62,500
)Stock compensation expense


-



-



-



-



87,500



-



-



-



87,500Convertible debentures beneficial conversion feature


-



-



-



-



754,875



-



-



-



754,875Issuance of shares for acquisition of Wood Energy


333,333



3,333



-



-



1,163,335



-



-



-



1,166,668Net loss for the year ended December 31, 2009


-



-



-



-



-



(47,670
)


-



-



(47,670
)Stockholders’ equity December 31, 2009


3,020,414


$
30,204



-



-


$
91,885,936


$
(87,881,351
)


28,276


$
(70,689
)

$
3,964,100Issuance of preferred stock - Series A


-



-



20,000



200



1,201,806



-



-



-



1,202,006Issuance of preferred stock - Series B


-



-



6,000



576,437



23,563



-



-



-



600,000Stock compensation expense


-



-



-



-



91,097



-



-



-



91,097Exercise of stock options


25,000



250



-



-



37,250



-



-



-



37,500Net loss for the year ended December 31, 2010


-



-



-



-



-



(977,851
)


-



-



(977,851
)Preferred stock dividends


-



-



-



-



(194,038
)


-



-



-



(194,038
)Common Stock Adjustment


442



4



-



-



-



-



-



-



4Stockholders’ equity December 31, 2010


3,045,856


$
30,458



26,000


$
576,637


$
93,045,614


$
(88,859,202
)


28,276


$
(70,689
)

$
4,722,818See Notes to Consolidated Financial Statements.










Notes to Consolidated Financial Statements.





Note 1.  Nature of Operations





Banyan Rail Services Inc. (“Banyan,” “we,” “our” or the “Company”) was originally organized under the laws of the Commonwealth of Massachusetts in 1985, under the name VMS Hotel Investment Trust, for the purpose of investing in mortgage loans, principally to entities affiliated with VMS Realty Partners. The Company was subsequently reorganized as a Delaware corporation in 1987 and changed its name to B.H.I.T. Inc. The Company changed its name from B.H.I.T. Inc. to Banyan Rail Services Inc. in 2010.





Banyan was a shell company without significant operations or sources of revenues other than interest on its investments. With a change in management in 2008, it was determined that the Company would seek acquisitions in rail related businesses. On September 4, 2009, the Company purchased 100% of the common stock of The Wood Energy Group, Inc. (“Wood Energy”). Wood Energy engages in the business of railroad tie reclamation and disposal, principally in Texas and Louisiana.





Note 2.  Basis of Presentation





The accompanying consolidated financial statements give effect to all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows of the Company and Wood Energy, its wholly owned subsidiary, for the period during which the Company owned Wood Energy. Pro forma consolidated financial information, reflecting the ownership of Wood Energy as if it had been owned on the first day of the financial periods presented, is included in Note 6. Because Wood Energy is deemed to be a predecessor to the Company, the financial statements of Wood Energy for operations prior to the acquisition are presented. The Company’s results of operations on a consolidated basis subsequent to the acquisition of Wood Energy are not comparative to the stand alone financial statements of the acquired business because the acquired assets and liabilities have been adjusted to fair value pursuant to ASC 805 “Business Combinations”. All significant intercompany transactions and accounts have been eliminated in consolidation.




38




Certain reclassifications have been made to the December 31, 2009 financial statements to conform to the classifications used in 2010.




Note 3.  Summary of Significant Accounting Policies




Revenue Recognition




The Company utilizes the completed contract method of accounting for revenue recognition. The Company recognizes revenue for the pick-up and disposal of used railroad ties upon the completion of the scope of work required under its contracts, which is when the Company considers amounts to be earned (evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured). Accordingly, monies received or invoices for services for which contracts have not been completed have been recorded as deferred revenue. Direct costs, including but not limited to payroll, fuel, equipment rental, transportation expense and strapping costs for contracts which have not been completed are also deferred until the related revenue recognition process is complete.





The Company also receives revenue from the processing of railroad ties into saleable biomass fuel and the sale of certain railroad ties to landscapers and other railroad tie processors. These revenues are recorded when the ties or derivative materials are delivered to the customer.




Use of Estimates




The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include deferred revenue, costs incurred related to deferred revenue, the useful lives of property and equipment, the useful lives of intangible assets and accounting for the business combination.




Cash and Cash Equivalents




The Company considers all cash, bank deposits and highly liquid investments with an original maturity of three months or less to be cash equivalents.





Accounts Receivable




Trade accounts receivable are recorded net of an allowance for expected losses. An allowance is estimated from historical performance and projections of trends. Bad debt expense is charged to operations if write offs are deemed necessary. As of December 31, 2010 and 2009 no allowance is provided as all accounts receivable are deemed collectible.




Trade accounts receivable include $384,275 and $246,142, as of December 31, 2010 and December 31, 2009, respectively for completed contracts retainage.  As noted in the revenue recognition accounting policy described in Note 3 herein, the company does not recognize the sales value of its services for contracts that are incomplete.




Deferred Revenues of $758,849 and $151,925 represent a contractually agreed upon 50% advance as the work progresses.  Amounts that had not been billed and were not billable to customers at the balance sheet dates are $758,849 and $151,925 as of December 31, 2010 and December 31, 2009, respectively. These amounts represent the second 50% due under each contract and are billable and recorded as recognized revenue upon the removal of all of each contract's ties from the customer’s premises.





39





Property and Equipment




Property and equipment owned and under capital leases are carried at cost. Depreciation of property and equipment is provided using the straight line method for financial reporting purposes at rates based on the following estimated useful lives:




YearsMachinery and equipment

3-7Track on leased properties

4




Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.




Valuation of Long-Lived Assets





The Company reviews long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  In evaluating the fair value and future benefits of its assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining amortization period or an appraisal of market value is obtained.





Fair Value of Financial Instruments





Recorded financial instruments consist of cash, accounts receivable, accounts payable, short-term debt obligations, convertible debt and long-term debt obligations.  The related fair values of these financial instruments approximated their carrying values due to either the short-term nature of these instruments or based on the interest rates currently available to the Company.





Earnings Per Share





Basic earnings per share is computed based on weighted average shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common stock equivalent shares consist of the dilutive effect of stock options, preferred stock and debenture common stock equivalents.





Goodwill and Indefinite Lived Intangible Assets





Goodwill and intangible assets that have indefinite lives are not amortized but rather are tested at least annually for impairment. The Company assesses impairment by comparing the fair value of an intangible asset or goodwill with its carrying value. The determination of fair value involves significant management judgment. Impairments are expensed when incurred. For intangible assets the impairment test compares the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For goodwill, a two-step impairment model is used. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than the carrying amount, goodwill would be considered impaired. The second step measures the goodwill impairment as the excess of recorded goodwill over the asset’s implied fair value. Intangible assets that have finite useful lives continue to be amortized over their estimated useful lives. During the years ended December 31, 2010 and 2009, there were no impairments of goodwill and indefinite lived intangibles.





Income Taxes





The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes.  Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws.




40




Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.





ASC 740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.




Inventory




Inventory includes the costs of material, labor and direct overhead and is stated at the lower of cost or market. Inventory is accumulated to service the landscape tie and biomass customer market. Inventory is collateral for the indebtedness described in Note 10.





Retained Earnings distributions





The Company’s preferred stockholders are entitled to receive payment before any of the common stockholders upon a liquidation of the Company and we cannot pay dividends on our common stock unless we first pay dividends required   by our preferred stock.




Note 4.  Recently Issued Accounting Pronouncements




Disclosure of Supplementary Pro Forma Information for Business Combinations





In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations”. The objective of this ASU is to address diversity in practice about the presentation of pro forma revenue and earnings disclosure requirements for business combinations, and specifies that a public entity that presents comparative financial statements should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU is effective prospectively for business combinations on or after January 1, 2011. As this ASU is limited to supplemental disclosures, its adoption will not have an impact on the Company’s financial condition or results of operations.





Goodwill Impairment Test





In December, 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. The objective of this ASU is to address diversity in practice in the application of goodwill impairment testing by entities with reporting units with zero or negative carrying amounts, eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. This ASU is effective for interim periods after January 1, 2010. The Company adopted this ASU as of January 1, 2010. The adoption of this ASU does not have an impact on the financial statements for the year ending 2010 but may in the future impact the timing of the Company’s reporting of goodwill impairment charges.




41




Note 5. Liquidity




At December 31, 2010, the Company had a net working capital deficiency of $1,620,423 and for 2010 incurred negative cash flows from operating activities of $472,896. The Company recognizes that the timing of the realization of its receivables from customers and its vendor and debt obligation payments may not allow the Company to generate positive working capital in the near future. The term loan and lines of credit from the bank (described in Notes 9 and 10) are subject to certain loan covenants that require, among other things, compliance with fixed charge coverage and total debt coverage ratio, as well as minimum levels of EBITDA (earnings before interest, taxes, depreciation and amortization).





The bank has granted a waiver with respect to non-compliance with the financial covenants as of December 31, 2010 (See Note 18).




Operationally the Wood Energy Group management has taken initiatives to improve operating results. In December of 2010, the Company developed and began implementation of its 2011 plan and it is anticipated the Company will achieve profitability and generate positive cash flow from operating activities into the foreseeable future as a result of increased sales levels and improved gross margins.




The Company continued to raise equity capital in 2010 issuing  20,000 shares of Series A convertible preferred stock during the year ended December 31, 2010 for $2.0 million. The proceeds were used for both working capital purposes and for the exchange of its outstanding convertible debentures to shares of this convertible preferred stock. The holders of 100% of the outstanding debentures agreed to the exchange, and 15,250 shares of Series A convertible preferred stock were issued.





On October 18, 2010, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of its preferred stock as Series B Preferred stock. The issuance price of the Series B preferred stock is $100 per share and it is convertible into common stock by the holder at the earlier





(i)
The Common Stock is listed for trading on Nasdaq or any national securities exchange;


(ii)
The bid price of the Common Stock is equal to or exceeds $5.00 a share for 30 consecutive days, and thereafter so long as the bid price continues to equal or exceed $5.00 per share;


(iii)
The trading volume of the Common Stock is equal to or exceeds 10,000 shares a day for 30 consecutive days, and thereafter so long as the daily trading volume continues to equal or exceed 10,000 shares; or


(iv)
October 15, 2013.





At that time the Company may also elect to convert or redeem the series B preferred stock.  The conversion price is $2.25 per share of common stock, subject to adjustment for stock dividends, stock splits and reorganizations.





The series B preferred stock ranks senior to the common stock and pari-passu with the series A preferred stock of the Company as to dividends and distribution of assets upon the liquidation, dissolution or winding up of the Company.





During the last 4 months of 2010, Company issued 6,000 shares of its Series B preferred stock to Patriot Rail Services Inc. (“PRS”) Gary O. Marino, the Company’s chairman and chief executive officer, is the president and a significant stockholder of PRS’s ultimate parent company.  The preferred shares were issued for $100 a share, or $600,000 in the aggregate.




42




Note 6.  Acquisition of the Wood Energy Group, Inc.




On September 4, 2009, the Company purchased all of the issued and outstanding common stock of Wood Energy for a purchase price of $5,002,369 in cash (including $309,989 of “retainage” on uncompleted contracts at the date of closing and deducting approximately $100,000 for working capital) and $1,166,667 in shares of common stock of the Company, or 333,334 shares. The cash portion of the purchase price reflects a reduction of $341,863 as a result of the final determination of the uncompleted contract position of Wood Energy as of the date the transaction closed. This amount is included in due from sellers in the accompanying balance sheet as of December 31, 2009. The number of shares of common stock of the Company was determined by the market value of the shares based on the average closing price of the stock for the five business days prior to June 1, 2009, the date the purchase agreement was signed, and the value of such shares were determined on September 4, 2009, the date the transaction closed.




The $6,169,036 purchase price was allocated pursuant to the following table. The amounts allocated to identifiable intangible assets and property and equipment were based on independent third party appraisals. Goodwill was recorded as a result of this allocation due to the purchase price being based on the Company’s historical cash flow and work force in place.




Purchase price

$
6,169,036Allocated to:Identifiable intangible assets


(1,912,337
)Property and equipment


(1,800,000
)Deferred income taxes


1,080,850Costs related to unbilled accounts receivable


(38,321
)Deferred revenue


67,176Current assets acquired


(579,919
)Current liabilities acquired


671,879Goodwill

$
3,658,364




The following condensed combined statements of income data provide the consolidated revenue, net loss, net loss attributable to common shareholders and earnings per share data for the year ended December 31, 2009 giving effect to the purchase of Wood Energy’s common stock as if it had occurred on January 1, 2009. The unaudited pro forma condensed combined statement of income data is not intended to represent or be indicative of the results of operations of the Company that would have been reported had the acquisition of Wood Energy been completed as of the dates presented, and should not be construed as representative of the future results of operations or financial condition after such acquisition.





Years Ended December 31,Unaudited (1)2010


2009Revenue

$
5,642,544


$
4,688,215Net loss


(977,851
)


(453,434
)Net loss attributable to common shareholders


(3,206,807
)


(453,434
)Basic and diluted net loss per share

$
(0.32
)

$
(0.16
)Net loss attributable to common shareholders per share

$
(1.05
)

$
(0.16
)





(1) 2009 includes the results of operations of Wood energy for eight months under pre-acquisition ownership and four months under Banyan Rail Services Inc. ownership





As defined by ASC 805 “Business Combinations”, acquisition related costs the acquirer incurs to effect a business combination are expensed in the period in which the costs were incurred. Accordingly, costs of $224,414 were expensed for the acquisition of Wood Energy for the year ended December 31, 2009.





As of December 31, 2010, identifiable intangible assets consist of the following:




43




Weighted AverageOriginal


Accumulated


Balance,

AmortizationAmount


Amortization


December 31, 2010

PeriodCustomer contracts

$
1,840,089


$
301,875


$
1,538,214

9.5 yearsEmployee non-compete agreements


72,248



48,165



24,083

1.0 year$
1,912,337


$
350,040


$
1,562,297




The Company estimates the aggregate amortization expense related to the intangible assets as of December 31, 2010, will be as follows for the periods presented:


2011


225,6742012


151,9622013


151,9622014


151,9622015


151,962Thereafter


728,775$
1,562,297




The Company performed its annual goodwill recoverability assessment, resulting in no goodwill impairment during 2009 and 2010.





Neither the identifiable intangible assets nor the goodwill are deductible for income tax purposes.





Note 7.  Property and Equipment




Property and equipment consist of the following:




December 31,2010


2009Machinery and equipment

$
3,393,375


$
2,248,266Track


61,670



-Accumulated depreciation


(568,770
)


(102,180
)$
2,886,275


$
2,146,086





Depreciation expense was $465,652 and $102,704 for the years ended December 31, 2010 and December 31, 2009, respectively and are included in cost of sales in the consolidated statements of operations. The predecessor depreciation expense of $225,678 for the eight months ended August 31, 2009 is also included in cost of sales.




Note 8.  Accounts Payable and Accrued Expenses




Accounts payable and accrued expenses consist of the following:




December 31,2010


2009Accounts payable

$
790,224


$
503,405Accrued expenses


144,565



403,503$
934,789


$
906,908




44




Note 9.  Revolving credit line





The Company has a working capital line of credit from a bank in the amount of $1,000,000 due in July 2011. Borrowings or advances under the line, are $894,328 as of December 31, 2010, and bear interest at the Company’s option equal to either (i) the Prime Rate plus the 5% or (ii) the LIBOR Rate with a 2% floor plus 4.5%. Monthly payments of interest only are due on the credit line. Advance limits are based on specific percentages of eligible working capital amounts, including accounts receivable and inventory. As of December 31, 2010, $105,672 of the line of credit was unutilized. The line of credit is cross-collateralized with the long-term debt described in Note 10. The Company incurs a non-utilization fee equal to one half of one percent (.5%) of the net of the total line of credit less the outstanding line of credit




The weighted average interest rate for the line of credit was 4.97% during the year ended December 31, 2010. The average amount of borrowings was $732,800 for the year ended December 31, 2010. For the year ended December 31, 2009 the weighted average interest rate for short-term borrowings outstanding was 9.0%. The average amount of borrowings was $146,429 during the period ended December 31, 2009.




Note 10.  Long-term Debt





Long-term debt consists of the following:





December 31,2010


2009Senior secured term loan with a bank bearing interest at the prime rate plus 5% or Libor (2.0% floor) plus 4.5% (6.5% as of December 31, 2010). Monthly payments of principal and accrued interest are required throughout the five-year term as well as 75% of any excess cash flow (as defined in the loan agreement). Secured by all of the Company's assets, due September 2014

$
2,250,000


$
2,850,000Capital expenditure line of credit of up to $1,000,000 bearing interest at the prime rate plus 5% or Libor (2.0% floor) plus 4.5% (6.5% as of December 31, 2010). Monthly payments of accrued interest are required through July 2011; thereafter, monthly payments of principal and accrued interest based on a five-year amortization. Secured by all of the Company's assets, due September 2016


780,330



336,6003,030,330



3,186,600Less current portion


(680,707
)


(619,206
)$
2,349,623


$
2,567,394




The following is a summary of principal maturities of long-term debt as of December 31, 2010 during the next five years:





2011

$
680,7072012


756,0602013


756,0602014


606,0602015


156,060Therafter


75,383Total long-term debt

$
3,030,330





45





The credit facilities described above, as well as the line of credit described in Note 9 are subject to certain loan covenants that require, among other things, compliance with fixed charge coverage and total debt coverage ratios, as well as minimum levels of EBITDA or earnings before interest, taxes, depreciation and amortization. On April 1, 2011, the bank granted a waiver with respect to non-compliance with these covenants as of December 31, 2010 (see Note 18).  Also as discussed in Note 18, the Company is concluding negotiations with the bank on revised loan terms.  The Company expects to meet the financial covenants included in the revised terms and has retained the long-term classification of the applicable portion of the debt in accompanying consolidated balance sheet





Capitalized loan costs were $214,027, less accumulated amortization of $54,440 at December 31, 2010. Amortization of loan costs is charged to interest expense. Loan costs are being amortized on the straight-line basis over the five year term of the loans. Amortization expense related to deferred loan costs for the remaining term of the loans is as follows:





2011

$
42,7712012


42,7712013


42,7712014


31,099$
159,412




Note 11.  Leases




The Company leases equipment used in its operations under capital leases that expire over two to three years. Payments under these capital leases were $96,297 for the year ended December 31, 2010. There were no payments in the comparable periods of 2009. Depreciation of the equipment is included in the cost of goods sold section of the statement of operations. At December 31, 2010, the total future minimum rental commitments under all the above operating leases are as follows:




For the years ending December 31,2011

$
114,5052012


114,5052013


54,536Net minimum lease payments


283,546Less amount representing interest


38,171Present value of net minimum lease payments


245,375Amount representing current portion


(90,179
)Capital leases payable, less current portion

$
155,196




The Company also has an operating lease for unimproved land where its processing facility is located, for the two year period ending January 2012. At the end of the initial term, the Company has the right to renew the lease for three consecutive one year terms. Payments under this operating lease were $36,000 for the year ended December 31, 2010.




Note 12.  Convertible Debentures and Preferred Stock





In connection with the purchase of Wood Energy, the Company issued $1,525,000 of convertible debentures bearing interest at 10% per annum and payable in five years. The debentures were convertible into the Company’s common stock at $2.00 per share. In accordance with ASC 470-20 (Debt with Conversion and Other Options), the Company determined that the convertible debentures had beneficial conversion features because the embedded conversion feature was an “in-the-money” issuance. Therefore the embedded beneficial conversion feature was valued separately at issuance. The convertible debentures met the definition of “conventional convertible debt” because the number of shares which may be issued upon the conversion of the debt is fixed. Therefore, the beneficial conversion feature qualifies for equity classification.





The convertible debentures were assigned an initial value of $381,250, based on the estimated intrinsic value of the beneficial conversion feature. The amount allocated as a discount on the convertible debentures for the original value of the conversion option ($1,143,750) is being amortized to interest expense, using the effective interest method, over the five year term of the convertible debentures. A total of $59,823 was amortized as interest expense for the year ended December 31, 2009. A deferred tax liability of $388,875 for the beneficial conversion feature was recorded in connection with the issuance of the convertible debentures.




46




The convertible debenture liability was as follows at December 31, 2009:





Convertible debentures payable

$
1,525,000Less: unamortized discount on debentures


(1,083,927
)Convertible debentures, net

$
441,073





Subsequently in February 2010, the Company completed an exchange of the outstanding convertible debentures for shares of convertible preferred stock. The holders of 100% of the outstanding debentures agreed to the exchange, and 15,250 shares of Series A Convertible preferred stock were issued. Similar to the debentures, holders of the Series A Convertible preferred stock are entitled to an annual cash dividend of 10% payable semi-annually, and each share of preferred stock is convertible into 50 shares of common stock. The holders of the preferred stock are not entitled to redeem their shares for cash. The preferred stock is convertible at the holder’s option into shares of common stock of Banyan. In accordance with ASC 470-20, the Company has determined that the preferred stock includes a beneficial conversion feature and a discount valued at $1,525,000 has been accounted for as a dividend in 2010.





The Company issued 4,750 additional shares of Series A convertible preferred stock during the remainder of 2010. The Company has determined that these issuances also include beneficial conversion features and discounts valued at $475,000 which has been accounted for as dividends for the year ended December 31, 2010. These proceeds were used for working capital purposes.





In October 2010, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of its preferred stock as Series B Preferred stock. The issuance price of the Series B Preferred stock is $100 per share and it is convertible into common stock by the holder at any time after:




(i)
The Common Stock is listed for trading on Nasdaq or any national securities exchange;


(ii)
The bid price of the Common Stock is equal to or exceeds $5.00 a share for 30 consecutive days, and thereafter so long as the bid price continues to equal or exceed $5.00 per share;


(iii)
The trading volume of the Common Stock is equal to or exceeds 10,000 shares a day for 30 consecutive days, and thereafter so long as the daily trading volume continues to equal or exceed 10,000 shares; or


(iv)
October 15, 2013.





At that time the Company may also elect to convert or redeem the series B preferred stock. The conversion price is $2.25 per share of common stock, subject to adjustment for stock dividends, stock splits and reorganizations.





The Series B Preferred stock ranks senior to the common stock and pari-passu with the Series A Preferred stock of the Company as to dividends and distribution of assets upon the liquidation, dissolution or winding up of the Company.





The Company issued 6,000 shares of its Series B preferred stock through December 31, 2010. The total amount was issued to Patriot Rail Services Inc. (‘PRS’). Gary O. Marino, the Company’s chairman and chief executive officer, is also the president and a significant stockholder of PRS’s ultimate parent company. The preferred shares were issued for $100 a share, or $600,000 in the aggregate.





Preferred stock dividends for Series A and Series B are accrued for the semi-annual period ended December 31, 2010 in the amount of $105,563. These dividends were paid in February 2011.





47




Note 13.  Stock-Based Compensation





The Company has stock option agreements with its directors for serving on the Company’s board of directors and with certain officers and employees as part of their compensation. The option activity is as follows for years ending December 31, 2010 and 2009:




Weighted Average


Weighted Average

Weighted AverageNumber


Exercise Price


Fair Value at

Remaining

Intrinsicof Shares


per Share


Grant Date

Contractual Life

ValueBalance January 1, 2009


212,500


$
2.50




Nil

$
160,000Options granted


87,500



3.50


$
87,500

3.5 years


-Options exercised


(75,000
)


1.50








(112,500
)Balance December 31, 2009


225,000



3.20








47,500Options granted


140,500



2.91


$
121,125

4.3 years


33,750Options exercised


(25,000
)


1.50








(37,500
)Options expired


(87,500
)


3.50





-


-Balance, December 31, 2010


253,000


$
3.08





3.7 years

$
43,750





Prior to June 30, 2010 the Company had not adopted a formal stock option plan.  On July 1, 2010 at its annual meeting of stockholders, the 2010 Stock Option and Award Plan was approved.





The number of options issued and the grant dates were determined at the discretion of the Company’s Board. Outstanding options vest at the date of grant or over a period of one or three years. The options are exercisable for periods not exceeding five years from the date of grant.





The fair values of stock options are estimated using the Black-Sholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk free interest rate. The risk free interest rate is the five year treasury rate at the date of grant. The expected life is based on the contractual life of the options at the date of grant. In 2009, the Company was seeking an acquisition in a railroad-related business. Accordingly, the 2010 and 2009 expected volatility rates were estimated using the average volatility rates of seven public companies in the railroad industry. The assumptions used in the option-pricing models during 2010 and 2009 were as follows:





2010


2009Risk free interest rate


1.39-2.37
%


2.55
%Expected life (years)


5



5Expected volatility


29
%


27
%Dividend yield


-



-




The fair value of shares that vested was $91,097 and $87,500 for the years ending December 31, 2010 and ending December 31, 2009, respectively.





As of December 31, 2010 total compensation cost related to non-vested awards not yet recognized was $28,030 to be  recognized over a 7 month on a weighted-average basis





Note 14. Treasury Stock





In March 2009, the Company purchased 25,000 shares of its common stock in a non-market transaction. The Company uses the cost method of accounting for treasury stock purchases. The treasury shares were purchased at a price of $2.50 per share (the market price on the day of the transaction) for a total of $62,500.





48





Note 15. Income Taxes





The provision for income taxes consists of the following components:


Year Ended


PredecessorDecember 31,


Eight Months Ended2010


2009


August 31, 2009Current (benefit) expense

$
(17,695
)

$
2,775


$
7,400Deferred Tax (benefit)


(290,795
)


(1,359,637
)


-$
(308,490
)

$
(1,356,862
)

$
7,400




The current income tax benefit relates to a reduced level of uncertain tax positions indentified in ASC 740 -10 Income Taxes.  The components of deferred income tax assets and liabilities are as follows:




December 31,


December 31,2010


2009Long-term deferred tax assets:Stock compensation benefit

$
206,170


$
169,307Net operating loss carryforward


1,354,768



1,204,142Total long-term deferred tax assets


1,560,938



1,373,449Valuation allowance


-



-1,560,938



1,373,449Long-term deferred tax liabilities:Convertible debenture


-



(368,535
)Intangible assets


(546,804
)


(620,442
)Property and equipment


(464,892
)


(494,560
)Total long-term deferred tax liabilities


(1,011,696
)


(1,483,537
)Net deferred tax assets (liabilities)

$
549,242


$
(110,088
)




The Company’s federal net operating loss (“NOL”) carryforward balance as of December 31, 2010 was $3,960,720, expiring between 2010 and 2030. Management has reviewed the provisions of ASC 740 regarding assessment of their valuation allowance on deferred tax assets and based on that criteria determined that it has sufficient taxable income to offset those assets. Therefore, Management has assessed the realization of the deferred tax assets and has determined that it is more likely than not that they will be realized.





A schedule of the NOLs is as follows:




Tax Year

Net operating

loss


NOL Expiration Year1996

$
111,017



20111997


66,707



20121998


184,360



20181999


187,920



20192000


25,095



20202001


104,154



20212002


15,076



20222003


96,977



20232004


78,293



20242005


70,824



20252006


48,526



20262007


180,521



20272008


534,087



20282009


1,444,831



20292010


812,332



2030$
3,960,720




49




The income tax provision differs from the expense that would result from applying statutory rates to income before income taxes principally because of permanent differences and the release of the valuation allowance on net deferred tax assets for which realization is certain.  The effective tax rates for 2010 and 2009 were computed by applying the federal and state statutory corporate tax rates as follows:




PredecessorYear ended December 31,


Eight Months Ended2010


2009


August 31, 2009Statutory Federal income tax rate


34
%


34
%


34
%State income taxes


1
%


-5
%


7
%Rate Differential


-3
%


0
%


0
%Release of valuation of deferred tax assets


0
%


81
%


0
%Less valuation allowance


0
%


0
%


-34
%Loss of expiring NOLs


-19
%


-13
%


0
%Prior Year NOL Correction


9
%


0
%


0
%Rate differential


2
%


0
%


0
%24
%


97
%


7
%





The Company adopted the provisions of ASC 740, previously FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January 1, 2007. Previously the Company has accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies.





The Company recognizes the financial statement impact of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than–not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date the Company applied ASC 740 to all tax positions for which the statute of limitations remained open. As a result of the implementation of ASC 740, the Company did not recognize a material increase in the liability for uncertain tax positions.





The Company is subject to income taxes in the U.S. federal jurisdiction and a number of state jurisdictions. The tax regulations within each jurisdiction are subject to interpretation of related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for the years before 2007.





In adopting ASC 740-10, the Company elected to classify interest and penalties related to unrecognized tax benefits as income tax expenses. The Company has no accrued interest and penalties as of the years ended December 31, 2010 and 2009, because they are not material.





A reconciliation of beginning and ending amount of unrecognized tax benefits is as follows:




Balance at January 1, 2009

$
25,200Additions based on tax positions related to the current year


10,175Balance at December 31, 2009


35,375Reductions  based on tax positions related to the current year


(23,975
)Balance at December 31, 2010

$
11,400




As of December 31, 2010 and December 31, 2009, the balance in unrecognized tax benefits is $11,400 and $35,375. The increases or decreases in each year are the result of management’s assessment that certain positions taken meet or no longer meet the more likely than not criteria established in ASC 740-10.  If these unrecognized tax benefits were ultimately recognized, they would have reduced the Company’s annual effective tax rate.




50




Note 16. Major Customers and other risk concentrations




In 2010 and 2009 the Company recorded 67% and 75% of its revenues under a contract with one major customer (84% and 69% of the accounts receivable), respectively, and 22% and 11% of its revenues under a contract with another major customer (4% and 19% of the accounts receivable), respectively. With respect to the predecessor company, 61% of its revenue was under a contract with one major customer in 2009 (70% of the accounts receivable) and 6% under a contract with another major customer in 2009 (0% of outstanding accounts receivable - trade), respectively.




The Company operates in a limited geographic region in Texas and a portion of Louisiana which have relatively stable economic and environmental legal conditions. Given the concentrated geographic region, unfavorable economic, environmental or the availability of trained labor may restrict the company’s growth.




Note 17. Related Party Transactions





The Company leases office space and receives office services from Patriot Rail Corp., a company related by certain common management and ownership, for $5,000 per month. These costs are incurred in the General and Administrative section of the statement of operations. The costs for each period were: $60,000 in 2010 and $20,000 in 2009. The predecessor company did not incur these costs.





The Company’s directors and chief executive officer are currently not receiving cash compensation for their services, and no amounts have been recorded in the Company’s financial statements for the cash value of their services. Such persons are compensated solely with stock options. The Company’s board of directors and officers directly or beneficially own $1,600,000 of the Company’s series A and series B preferred stock as of December 31, 2010. As of December 31, 2009, the Company’s officers and directors directly or beneficially own a total of $1,000,000 of the outstanding convertible debentures.





In September 2009, the Company entered into two 5-year employment agreements and one month-to-month consulting agreement with individuals who are shareholders and/or officers. The aggregate expense under these agreements was $351,500 in 2010 and $106,500 in 2009.





Note 18. Subsequent Events





At December 31, 2010, we were in violation of the fixed charge coverage, the total debt to EBITDA (earnings before interest, taxes, depreciation and amortization) and the minimum EBITDA covenants contained in our loan agreements with Fifth Third Bank. On April 1, 2011, the lender granted a waiver with respect to non-compliance with the financial covenants as of December 31, 2010.




The Company is currently concluding negotiations for a modification and extension of our term loan and credit lines with the bank.





The Company issued an additional 2,000 shares of its series B preferred stock to Patriot Rail Services Inc. (“PRS”) for $100 a share. Gary O. Marino, the Company’s chairman and chief executive officer, is the president and a significant stockholder of PRS’s ultimate parent company. Including the shares issued in 2010, we have issued $800,000 in the aggregate.  The proceeds of the money received in 2011 were used to fund working capital requirements.





51