GREENSHIFT CORPORATION
One Penn Plaza - Suite 1612
New York, NY 10119
212-994-5374
April 20, 2009
Via EDGAR
Mr. Rufus Decker
Accounting Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: Form 10-KSB for the fiscal year ended December 31, 2007 Form
10-Q for the period ended September 30, 2008 File No.0-50469
Dear Mr. Decker:
Below please find the responses to your letter dated February 26, 2009.
If you have any questions, please feel free to call me.
Sincerely,
/s/ Edward Carroll
--------------------------------
Edward Carroll
Chief Financial Officer
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2007
General
1. Where a comment below requests additional disclosures or other revisions to
be made, please show us in your supplemental response what the revisions
will look like. With the exception of the comments below that specifically
request an amendment, all other revisions may be included in your future
filings.
Management's Discussion and Analysis or Plan of Operations
Non-GAAP Financial Measures, page 40
2. We note your response to comment 2 from our letter dated November 25, 2008.
It appears that you intended to reconcile net income (loss) from operations
to adjusted EBITDA. However, the starting pint of your reconciliation is
net income (loss) attributable to common shareholders. Please revise your
reconciliation as necessary so that the starting point of the
reconciliation is consistent with the nature of items being reconciled.
Response: This change has been reflected in our recent 2008 10-K filed. The
income statement on the 2007 10-K will be revised to reflect this change as
follows:
Year Ended
2007 2006
-----------------------------
Net income .......................................... $(24,458,938) $(13,847,519)
Adjustments to net income (loss) from operations:
Interest expense ................................. 5,082,069 1,902,700
Amortization of debt discount & deferred financing 4,689,896 5,283,960
Depreciation ..................................... 712,173 713,629
Amortization of intangibles ...................... 2,100,000 --
EBITDA ........................................... $(11,874,800) $ (5,947,230)
============ ============
Consolidated Financial Statements
Consolidated Statements of Operations, page 48
3. We note your response to comment 3 from our letter dated November 25, 2008
which indicated that your will amend your form 10-K for the year ended
December 31, 2007 to reclassify various items from non-operating expenses
into operation expenses. We remind you that when you file your restated
Form 10-KSB you should appropriately address the following:
o an explanatory paragraph in the reissued audit opinion as well as
consideration of whether the audit opinion should be dual dated
o full compliance with SFAS 154, paragraph 26;
o fully update all affected portions of the document, including MD&A,
selected financial data, and quarterly financial data;
o updated Item 8A. disclosures should include the following:
o a discussion of the restatement and the facts and circumstances
surrounding it,
o how the restatement impacted the CEO and CFO's original
conclusions regarding the effectiveness of their disclosure
controls and procedures,
o changes in internal controls over financial reporting, and
o anticipated changes to disclosure controls and procedures and/or
internal controls over financial reporting to prevent future
misstatements of a similar nature.
Refer to items 307 and 308Ic) of Regulation S-B;
o include all updated certifications.
We also remind you to consider the filing requirements of Item 4.02 of Form
10-K.
Response: We will comply to this request when we refile our 2007 10-K
Note 9 - Goodwill and Intangible Assets, page 64
4. We note your response to comment 6 from letter dated November 25, 2008.
Please clarify what is meant by your reference to testing assets under SFAS
121 since that guidance has been superseded by SFAS 144. We also note that
you have identified three subsidiaries as your reporting units for purposes
of your goodwill and intangible asset impairment testing. However, your
reporting units are not the same as your reportable operating segments
under SFAS 131. Since SFAS 142 defines reporting units as operating
segments or one level below an operating segment, please clarify for us how
your SFAS 142 reporting units correlate to your SFAS 131 reportable
operating segments.
Response:
We have complied with this requirement in our recently issued 2008 10-K and
will revise our previous filing to reflect this.
The Company tests goodwill and intangible assets annually for impairment at
the reporting level using a two step process. The Company's reporting units
are:
>> Equipment & Technology Sales
>> Culinary Oil Production & Sales
>> Biofuel Production & Sales
The first step includes the following review criteria: (a) compare fair
value of reporting unit with its carrying amount (accounting value); (b) if
fair value of reporting unit is greater than its carrying amount (including
recorded goodwill), then no impairment and therefore there is no need to
perform Step II; and (c), if the reporting unit carrying amount (including
recorded goodwill) is greater than its fair value, then must complete Step
II to measure the amount of impairment, if any.
The second step includes the following review criteria: (a) measuring the
amount of impairment loss; (b) the implied fair market value of goodwill
shall be determined in the same manner as the amount of goodwill recognized
in a business combination is determined; (c) in order to determine the
implied fair value of the goodwill, we value all assets; (d) assets subject
to testing under SFAS 144 must be tested before goodwill can be tested
under SFAS 142; and (e) if the carrying amount of a reporting unit goodwill
exceed the implied fair value of that goodwill, then an impairment loss is
recognized for an amount equal to that excess.
Segment information is presented in accordance with SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information." This standard is
based on a management approach that designates the internal organization
that is used by management for making operating decisions and assessing
performance as the sources of the Company's reportable segments. Operating
segments are defined as components of an enterprise about which financial
information is available that is evaluated on a regular basis by the chief
operating decision-maker, or decision-making groups, in deciding how to
allocate resources to an individual segment and in assessing performance of
the segment.
5. Your response and proposed disclosure primarily relates to Sustainable
Systems and NextGen Fuel for which you recorded goodwill impairment losses
during the year ended December 31, 2007. Please expand your disclosures to
address the goodwill and intangible assets which have not been impaired as
well. Specifically, please address the following:
o The methods you use to determine the fair value of each reporting
unit. Please expand your disclosures to include sufficient information
to enable a reader to understand how each of the methods used differ,
the assumed benefits of a valuation prepared under each method, and
why management selected these methods as being the most meaningful in
preparing the goodwill impairment analyses;
o How you weigh each of the methods, if applicable, used including the
basis for that weighting;
o A qualitative and quantitative description of the material assumptions
used and a sensitivity analysis of those assumptions based upon
reasonable likely changes;
o If applicable, how the assumptions and methodologies used for valuing
goodwill in the current year have changed since the prior year
highlighting the impact of any changes; and
o Your segment information provided indicates that you have had
recurring losses in each segment.
Please clearly disclose your consideration of these actual recurring losses
in your impairment tests.
Response:
The Company used three methods of valuation to determine impairment. The
first method used is book value, the second methodology is Discounted Cash
Flow analysis and the third method is a combination of Discounted Cash Flow
analysis and Market Multiples.
The Company relied heavily on the Discounted Cash Flow Analysis and the
Market Multiple Approach. In the prior years the Company used the same
methodology, with heavy reliance on the Discounted Cash Flow analysis and
the Market Multiple Approach. The historical losses in our reporting units
heavily influenced our analysis and are what triggered Step I. Given the
development stage nature of our operations during the reporting period, we
relied heavily on future sales rather than historical sales to forecast our
sales growth. Management recast its projections in subsequent periods
which, in turn, caused impairment.
The Company's weighting of valuation methods was similar for both
Sustainable and NextGen. Sustainable Systems' cash flow projections used to
determine the purchase price relied on the representation by the sellers
that Sustainable Systems held clear title to its Culbertson, Montana based
oilseed crushing facility, and the ability to obtain expansion capital that
would have expanded capacity to 600 tons per day from 100 tons per day. The
Company learned in early 2008 that Sustainable Systems did not hold clear
title to its crushing facility, but rather merely the right to acquire the
facility upon the payment of additional capital. The Company was
consequently not able to obtain that financing on the time frame initially
projected and subsequently initiated suit against the selling shareholders
in this regard. This affected our cash flow projections and, since the
asset and book value did not change, our analysis was weighted towards a
Discounted Cash Flow Approach as well as a Market Multiple Approach.
NextGen's original purchase price was determined by assuming that NextGen
would be able to sell biodiesel equipment to a then-rapidly growing
biodiesel market. This market had increased dramatically in size during the
3 years prior to the completion of the acquisition. About 6 months after
the acquisition, commodity prices increased to the point where making
biodiesel for many potential clients was no longer as profitable as it once
was. This led to a significant reduction in biodiesel plant construction
activities. Therefore, our valuation analysis put additional weight towards
the Discounted Cash Flow Analysis and the Market Multiple Approach since
both were used in the original purchase price. Book Value was felt to have
little bearing on the impairment at the time.
The material assumptions used for Sustainable Systems assumed that the
expansion would not be completed we then forecast sales using the 2008
financials as a base year and then increased sales by 6.5% per year
thereafter and expenses by 3%. We assumed an operating margin and a net
margin between 8 and 13%. throughout the forecast period. For NextGen Fuel
we assumed the sale of only one 10 million gallon per year system per year
(versus three systems per year) for the same projection period of 2009 to
2014, and we assumed the same sales increase of 6.5% and the same 3% per
year increase in expenses.
As a result of our annual assessment of goodwill and intangibles in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," the Company concludes that an
impairment of its energy technology intangibles existed. The Company's
results for the year ended December 31, 2008 includes a non-cash pre-tax
write-down of intangible assets impairment charge of $10,143,288. This
impairment results from the Company's year-end analysis of its energy
technology intangibles for its Equipment and Technology Reporting Unit.
As a result of our annual assessment of goodwill in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," the Company concluded that an impairment of its
goodwill existed. The Company's results for the year ended December 31,
2008 included a non-cash pre-tax goodwill impairment charge of $8,786,183.
This impairment results from the Company's year-end analysis of goodwill
for its Culinary Oil Production and Sales and Equipment and Technology
Sales Reporting Units, which demonstrated goodwill impairment of $7,458,877
and $1,327,306, respectively.
As a result of our 2007 annual assessment of goodwill in accordance As a
result of our 2007 annual assessment of goodwill in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," the Company concluded that an impairment of its
goodwill existed. The Company's results for the year ended December 31,
2007 included a non-cash pre-tax goodwill impairment charge of $11,153,816.
This impairment results from the Company's year-end analysis of goodwill
for its Culinary Oil Production and Sales and Equipment and Technology
Sales Reporting Units, which demonstrated goodwill impairment of $5,453,816
and $5,700,000, respectively.
8. We note your response to comment 7 and 8 from our letter dated November 25,
2008. Please tell us which of your reportable business segments includes
the NextGen Fuel energy technology intangible asset. Please also tell us,
in detail; how you analyze this intangible asset for potential impairment,
including what consideration you gave as of December 31, 2008.
Response: The reportable business segments which includes our NextGen Fuel
energy technology intangible asset is in the Equipment and Technology Sales
segment. An impairment testing and adjustment has been completed in our
annual audit filed with our 2008 10-K.
The Company reviews its goodwill annually for possible impairment and more
frequently if events or changes in circumstances indicate goodwill might be
impaired. The fair value of the Company's reporting units is analyzed using
a discounted cash flow valuation approach. The discounted cash flow
calculation is made utilizing various assumptions and estimates regarding
future revenues and expenses, cash flow and discount rates. The assumptions
used are sometimes significantly different than historical results due to
the Company's current business initiatives. If the Company fails to achieve
results in line with the assumptions used, intangible assets may be
impaired. Possible impairment may exist if the fair value computed using
the discounted cash flow valuation approach is lower than the carrying
amount of the reporting unit (including goodwill). Further analysis would
be required if possible impairment exists by comparing the implied fair
value of the reporting unit, which is the excess of the fair value of the
reporting unit over amounts assigned to the reporting unit's assets and
liabilities, to the carrying amount of goodwill. If the carrying amount of
the reporting unit's goodwill is greater than the implied fair value, an
impairment loss equal to the difference would be recorded and goodwill
would be written down.
The Company tests goodwill and intangible assets annually for impairment at
the reporting level using a two step process. The Company's reporting units
are:
>> Equipment & Technology Sales
>> Culinary Oil Production & Sales
>> Biofuel Production & Sales
The first step includes the following review criteria: (a) compare fair
value of reporting unit with its carrying amount (accounting value); (b) if
fair value of reporting unit is greater than its carrying amount (including
recorded goodwill), then no impairment and therefore there is no need to
perform Step II; and (c), if the reporting unit carrying amount (including
recorded goodwill) is greater than its fair value, then must complete Step
II to measure the amount of impairment, if any.
The second step includes the following review criteria: (a) measuring the
amount of impairment loss; (b) the implied fair market value of goodwill
shall be determined in the same manner as the amount of goodwill recognized
in a business combination is determined; (c) in order to determine the
implied fair value of the goodwill, we value all assets; (d) assets subject
to testing under SFAS 144 must be tested before goodwill can be tested
under SFAS 142; and (e) if the carrying amount of a reporting unit goodwill
exceed the implied fair value of that goodwill, then an impairment loss is
recognized for an amount equal to that excess.
9. Please tell us how you considered your current market capitalization as
well as recurring losses in determining whether your goodwill and
intangible assets were impaired as of December 31, 2008.
Response: Goodwill and intangible asset impairment testing has been
completed in our annual audit filed with our 2008 10-K.
Note 11 - Lines of Credit, Note 12 - Financing Arrangements, Note 13 - Notes
Payable, Note 14 - Vehicle Loans, Note 16 - Note Payable, Note 17 - Convertible
Debentures, page 66
10. We note your response to comment 10 from our letter dated November 25,
2008. It is unclear from your response which covenants you've complied with
as of each period end. As previously requested, please disclose your actual
rations in addition to you required ratios. Please consider showing the
specific computations used to arrive at the actual ratios with
corresponding reconciliations to US GAAP amounts, if necessary. It is also
unclear which covenants you are close to violating or have violated and the
extent to which you have received any waivers.
Response: We have not complied with our covenant reporting with Citizens
bank. We are currently in default on this loan. The required calculation is
disclosed below for Q3 2008:
Required Calculated
EBITDA ................................ 1.25 (2.45) (2,172,778)
Interest .............................. 135,048
Current portion of LTD ................ 745,235
Current portion of Capitalized
Lease obligations ............... 5,026
---------- ---- ----------
Total ................................. 1.00 885,309
========== ==== ==========
Note 23 - Segment Information, page 78
11. Please provide the disclosures required by paragraph 45(c) of SFAS 142,
including total goodwill by segment as of each balance sheet date. Please
also consider disclosing other intangible assets by segment assets by
segment as well as of each balance sheet date.
Response: Please see the revised schedule below:
The changes in the carrying amount of goodwill during the twelve months
ended December 31, 2007 & December 31, 2008 are as follows:
Equipment and Culinary Oil Biofuel
Technology Sales Production Production Total
-------------------------------------------------------------------
Balance at January 1, 2007 $ 905,579 $ -- $ -- $ 905,579
Goodwill Acquisition 5,453,816 13,158,877 -- 18,612,693
Impairment/Loss (5,453,816) (5,700,000) -- (11,153,816)
--------------- ---------------- --------------- ---------------
Balance at December 31, 2007 905,579 7,458,877 -- 8,364,456
Goodwill Acquisition 421,727 -- 7,281,993 7,703,720
Impairment/Loss (1,327,306) (7,458,877) -- (8,786,183)
--------------- ---------------- --------------- ---------------
Balance at December 31, 2008 $ -- $ -- $ 7,281,993 $ 7,281,993
=============== ================ =============== ===============
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2008
General
12. Please address the above comments in your interim filings as well.
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets, page 5
13. Your response to comment 13 from our letter dated November 25, 2008
indicates that you paid an excess purchase price over net assets acquired
of $6.5 million but that you recorded $13 million in your financial
statements. Please clarify the difference between these two amounts. You
should allocate this amounts between goodwill and then defaulting to this
line item called excess purchase price of net assets acquired. Since the
allocation is preliminary, it naturally is subject to change, but an effort
should be made even in the preliminary allocations to identify and record
acquired intangible assets in accordance with SFAS 142. Please tell us what
the impact is on amortization expense if you had accounted for these
amounts separately since the date of acquisition.
Response: During the year ended December 31, 2008, $7,281,993 in goodwill
was recorded in relation to the acquisition of Biofuel Industries Group,
LLC. This goodwill allocation was completed in our annual 2008 10-K . There
was no impact to our amortization expense. We plan to have a third party
valuation completed prior to the twelve month anniversary of the
acquisition.
Note 6 - Discontinued Operations, page 13
14. We note your response to comment 16 from our letter dated November 25,
2008. Please revise your filing to disclose the following as required by
paragraph 47 of SFAS 144; o The caption in the income statement that
includes losses related to the sale of GS EnviroServices;
o The amount of revenue and pretax profit or loss reporting in
discontinued operations, if applicable, and
o The segment in which the GS EnviroServices asset disposal group was
reported.
Response: We will comply to this request when we re-file our Q3 2008 10-Q.
We have included the following in our recently filed annual 2008 10-K:
During January 2008, GS EnviroServices, the Company's environmental
services segment, redeemed the majority of the Company's stock holdings in
GS EnviroServices in return for the reduction of certain Company
convertible debts due to YA Global Investments, L.P. ("YAGI"). As of
January 25, 2008, the Company held only a minority stake in GS
EnviroServices (6,266,667 shares, or about 19%) and ceased consolidating
the revenue and earnings of GS EnviroServices effective January 1, 2008.
These shares were subsequently liquidated in June 2008. Prior to this
transaction, Kevin Kreisler, the Company's chairman and chief executive
officer resigned from the position of chairman of the GS EnviroServices
board of directors. Additional information on these and other subsequent
events relevant to GS EnviroServices are provided here:
The components of discontinued operations are as follows:
2008 2007
------------ -----------
Net revenues ............................................ $ -- $ 15,286,064
Cost of revenues ........................................ -- 10,962,181
------------ ------------
Gross profit ....................................... -- 4,323,883
------------ ------------
Selling, general and administrative expense ............. -- 4,200,810
------------ ------------
(Loss) income from operations ...................... -- (4,200,810)
------------ ------------
Other income and expenses, net .......................... -- (76,395)
------------ ------------
Total other income and expense ..................... -- (76,395)
------------ ------------
(Loss) income before provision for income taxes .... -- 46,678
Total provision for tax ................................. -- 4,940
------------ ------------
Net income (loss) from discontinued operations ..... -- 51,618
Gain (loss) on disposal of discontinued operations (2,739,735) 2,481,691
------------ ------------
Total income (loss) - discontinued operations ...... $ (2,739,735) $ 2,533,309
============ ============
15. As a related matter, you identify GS EnviroServices as a discontinued
operation in Footnote 6; however, it appears you have classified all losses
associated with this discontinued operation within other income (expense),
net on the face of your statement of operations. We note your disclosure on
page 13 that you liquidated your minority interest in GS EnviroServices in
June 2008. Please tell us how you considered paragraphs 41 through 44 of
SFAS 144 in determining the classification of losses related to the
disposal of GS EnviroServices as of and for the period ended September 30,
2008.
Response:
We have read paragraphs 41 through 44 of SFAS 144. The company has filed
its 2008 10-K in accordance of SFAS 144 paragraph 43 below and will we
amend our Q3 2008 Financials to reflect this change.
SFAS 144 paragraph 43
In a period in which a component of an entity either has been disposed of
or is classified as held for sale, the income statement of a business
enterprise (or statement of activities of a not-for-profit organization)
for current and prior periods shall report the results of operations of the
component, including any gain or loss recognized in accordance with
paragraph 37, in discontinued operations. The results of operations of a
component classified as held for sale shall be reported in discontinued
operations in the period(s) in which they occur.
Liquidity and Capital Resources, page 35
16. We note your response to comment 21 from our letter dated November 25,
2008. We note that you disclose amounts outstanding under your debt
agreements. Please revise your proposed disclosures to address the amount
of capital available for future borrowing under your revolving credit
agreements and all other debt agreements. Please also disclose the extent
to which current credit market conditions have affected you ability to
obtain capital when needed. Please revise your disclosures to also address
the implications to your business if you are not able to obtain additional
financing on terms that are acceptable to you.
Response:
We have no availability under any of our lines of credit or any debt
arrangements. The Company's liquidity plans during 2008 were frustrated by
the inability of previously committed sources of capital to provide
funding. This occurred during the third and fourth quarters of 2008 and
again in the first quarter of 2009. Management believes that the failure of
these financings to close was attributable to the globally stressed capital
markets.
At the present time, the Company has no committed source of capital
sufficient to meet all of the Company's operating and construction needs.
We are currently investigating the availability of both equity and debt
financing to provide sufficient working capital financing for our
currently-idled refining operations and to complete the balance of the
Company's construction projects. We are also evaluating various
opportunities to restructure our convertible debt. We do not know at this
time if the necessary funds can be obtained or on what terms they may be
available.
Our financial position and liquidity are, and will be, influenced by a
variety of factors, including our ability to generate cash flows from
operations; the level of our outstanding indebtedness and the interest we
are obligated to pay on this indebtedness; and, our capital expenditure
requirements, which consist primarily of facility construction and the
purchase of equipment.
We intend to fund our principal liquidity and capital resource requirements
through new financing activities. The Company has no committed source of
capital that is sufficient to meet all of its operational and other regular
cash needs during 2009 and beyond. Obtaining this capital is currently
Management's top priority.