GREENSHIFT CORPORATION
One Penn Plaza - Suite 1612
New York, NY 10119
212-994-5374
June 12, 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-K for the fiscal year ended December 31, 2008
Form 10-KSB for the period ended December 31, 2007
File No.0-50469
Dear Mr. Decker:
Below please find the responses to your letter dated May 5, 2009. If you
have any questions, please feel free to call me.
Sincerely,
/s/ Edward Carroll
----------------------------
Edward Carroll
Chief Financial Officer
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008
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.
2. We continue to await the filing of your amended Form 10-K for the year
ended December 31, 2007 to reclassify various items from non-operating
expenses into operating expenses. When you file your restated Form 10-K,
please address each of the items noted in comment 3 from our letter dated
February 26, 2009.
Response:
The Company plans to file an amended 2007 Form 10-K promptly after
confirming that the Staff has no further comments. The amended 2007 Form
10-K will contain the reclassification itemized in our prior response.
Consolidated Financial Statements
Note 3, Significant Accounting Policies
Net Loss Per Common Share
3. Potential future dilutive securities include 996,279 of outstanding options
and warrants, 407,115,928 of shares issuable for the conversion of
convertible debentures, and 62,800,925 of shares issuable after the
conversion of the Series B Preferred stock under the employee pool. The
amount of potential future dilutive securities appears to exceed the number
of available authorized shares. Please tell us what consideration you gave
to paragraph 19 of EITF 00-19 in accounting for these contracts.
Response:
Although the Company would be required to obtain shareholder approval to
increase the authorized shares to cover all potentially issuable shares,
such approval has been under the control of the Company as the Chairman
beneficially owns the majority of the Company's outstanding voting shares.
Therefore, and with respect to EITF 00-19, there is effectively no control
or contingencies to control outside of management.
This week, the Company plans to file an information statement on Form 14C
with respect to amending its certificate of incorporation to authorize
additional shares of common stock sufficient to allow conversion of the
Company's various convertible securities.
Note 9, Goodwill and Intangible Assets
4. Please disclose your consideration of the recurring losses in the Biofuel
Production & Sales segment in testing this reporting unit's goodwill for
impairment in your annual assessment of goodwill as of December 31, 2008.
We also remind you that paragraph 28 of SFAS 142 requires you to test
goodwill of a reporting unit for impairment between annual tests if an
event occurs or circumstance change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount.
Response:
The goodwill of the Company's Biofuel Production & Sales segment was tested
for impairment as of December 31, 2008. At that time, the Company was party
to a Membership Interest Purchase and Equity Capital Contribution Agreement
(the "ECCA Agreement") with CleanBioenergy Partners, LLC, a special purpose
company owned by a subsidiary of GE Energy Financial Services, a unit of
General Electric Company, and by a subsidiary of YA Global Investments,
L.P., a private investment firm managed by Yorkville Advisors, LLC. The
ECCA Agreement provided for the investment by CleanBioenergy of $38 million
in equity financing to support the construction of facilities based on the
Company's corn oil extraction technologies and the expansion of what was
then the Company's Adrian, Michigan-based biodiesel refinery. As of
December 31, 2008, the completion of this financing was expected in early
2009.
The ECCA Agreement was amended effective January 31, 2009 to extend the
time for closing under the ECCA Agreement to March 2, 2009. The ECCA
Agreement was the subject of a Current Report on 8-K filed by the Company
on December 16, 2008, and the amendment to the ECCA Agreement was the
subject of a Current Report on 8-K filed by the Company on February 3,
2009. The ECCA Agreement was terminated in March 2009, which event was the
subject of a Current Report on 8-K filed by the Company on March 6, 2009.
While the ECCA Agreement was terminated in March 2009, the ECCA Agreement
was in effect as of the December 31, 2008 balance sheet date. The Company's
Biofuel Production & Sales would not have been impaired as of said date had
the ECCA Agreement closed as anticipated.
Please note, however, that the Company wrote-off all goodwill associated
with the Company's Biofuel Production & Sales segment during the three
months ended March 31, 2009. As disclosed in Note 17, Subsequent Events, in
the Company's 10-Q for the three months ended March 31, 2009:
"Effective May 15, 2008, the Company and Biofuel Industries Group, LLC
(d/b/a NextDiesel(TM)) ("BIG") entered into an Exchange Agreement
pursuant to which the Company exchanged 20,000,000 common shares and
20,000 preferred shares in return for 100% of the equity of BIG
subject to the redemption by BIG of BIG's "Class A Membership Units"
for a total of $9 million preferred equity interest with a 12% coupon
commencing January 30, 2009 at a rate equal to 30% of BIG's net cash
flows (after all operating costs and regular debt payments have been
paid) (the"Class A Redemption"). The Company's ownership of BIG is
subject to rescission in the event that: (a) the BIG Loans are not
timely serviced and kept in good standing, (b) the Guaranty Payments,
to the extent due, are not timely made, and (c) if the Class A
Redemption payments are not made to the extent that they are due. In
addition, BIG's agreements with its senior creditor, Citizens Bank,
require Citizens Bank to provide its written consent to change of
control transactions. Citizens Bank had previously consented to the
change of control of BIG on the condition that the Company closed on
its prior financing agreements with CleanBioenergy Partners, LLC (see
Note 12, Commitments and Contingencies). This financing failed to
close as expected in March 2009 despite the Company's compliance with
the relevant agreements, and Citizens Bank consequently withdrew its
consent to the change of control of BIG. The Company subsequently
entered into negotiations in April 2009 to restructure the terms of
the BIG acquisition, however, a notice of default of the Exchange
Agreement was declared on May 14, 2009 in order to maintain compliance
with BIG's loan agreements with Citizens Bank. While the Company is
actively pursuing debt and equity capital to subsidize the expansion
of the Adrian refinery, the Company does not intend to restructure the
original acquisition transaction at this time. Instead, the Company
intends to facilitate rescission of the original acquisition
transaction and the divestiture of BIG during the quarter ended June
30, 2009 due to changed market circumstances. The Company may consider
acquiring an equity stake in BIG in the future if it successfully
raises sufficient capital to expand the Adrian refinery. The
divestiture of BIG has not been completed as of the filing date of
this report, however, the financial results of this subsidiary have
been presented as discontinued operations as and for the quarter ended
March 31, 2009 (see Note 6, Discontinued Operations). The Company
wrote-off $7,281,993 in goodwill previously booked in connection with
the acquisition of BIG. The Company's divestiture of BIG can be
expected to result in the disposal of $13,054,855 and $23,554,858 in
assets and liabilities, respectively."
Note 16, Debt and Purchase Obligations: Citizens Bank
5. We note your response to comment 8 from our letter dated February 26, 2009.
As previously requested, please revise your filing to disclose your actual
debt covenant ratios in addition to your required debt covenant ratios,
with corresponding reconciliations to US GAAP amounts, if necessary. This
will help investors understand the extent to which you are out of
compliance with your debt covenants or how close you are to potentially
violating your debt covenants. Given that you are in default, please
disclose how these debt amounts are classified on your balance sheet. Refer
to EITF 86-30.
Response:
The Company plans to file an amended 2008 Form 10-K promptly after
confirming that the Staff has no further comments. The amended 2008
Form 10-K will contain the following disclosure:
Biofuel Industries Group, LLC ("BIG") and Citizens Bank entered into a
Loan Agreement on January 11, 2007, which provides for the following
financial covenants:
Debt Service Coverage - BIG shall maintain a debt service coverage
ratio of not less than 1.25 to 1.00, which ratio shall be tested
quarterly.
Leverage - BIG shall maintain a ratio of liabilities to tangible net
worth of not more than 3.00 to 1.00.
Liquidity - the personal guarantors of the Loan Agreement shall
maintain at all times cash and marketable securities totaling
$3,750,000.
As of December 31, 2008, BIG was not in compliance with the Debt
Service Coverage and Leverage covenants. A schedule with the actual
and required ratios, with a corresponding reconciliation to US GAAP
amounts, is provided here:
Debt Service Coverage 12/31/08
--------------------------------------------------------------
EBITDA $ (1,835,680)
Interest 327,536
Current portion of long-term debt 745,235
Current portion of capitalized lease obligations 5,026
============
Total $ 1,077,797
Actual debt service coverage ratio (1.70)
Required debt service coverage ratio 1.25
Leverage 12/31/08
--------------------------------------------------------------
Total liabilities $ 26,947,429
Shareholders' equity $(11,799,600)
Actual tangible net worth ratio (2.28)
Required tangible net worth ratio 3.00
The following table reconciles BIG's net loss for the year ended
December 31, 2008 on an unconsolidated basis with EBITDA (a non-GAAP
measure of performance):
12/31/08
--------------------------------------------------------------
Net income $(2,767,013)
Adjustments to net income (loss) from operations:
Interest expense 327,536
Depreciation 563,625
Amortization 40,172
============
EBITDA $(1,835,680)
Non-GAAP Financial Measures
It should be noted, in connection with review of the preceding table,
that EBITDA is not a financial measure employed in the application of
generally accepted accounting principles. Nevertheless, we believe
that earnings before interest expense, income tax provision (benefit),
depreciation and amortization, or EBITDA is useful to investors and
management in evaluating our operating performance in relation to
other companies in our industry. the calculation of EBITDA generally
eliminates the effects of financings and income taxes, which items may
vary for different companies for reasons unrelated to overall
operating performance. In addition, we have calculated the effect of
eliminating non-recurring items, so as to enable meaningful comparison
between years. EBITDA is a non-GAAP financial measure and has
limitations as an analytical tool, and should not be considered in
isolation or as a substitute for net income or any other measure of
performance under GAAP, or to cash flows from operating, investing or
financing activities as a measure of liquidity. We compensate for
these limitations by relying on our GAAP results, as well as on our
EBITDA.
In accordance with EITF 86-30, the portions of the debt that do not meet
the covenant requirements have been classified as current on the balance
sheet.
Note 16, Debt and Purchase Obligations: Sustainable Selling Shareholders
6. You disclose that you recognized a gain of $4.5 million during the year
ended December 31, 2008 as a result of the forgiveness of debt by Paul
Miller, a former shareholder of Sustainable and the current President of
Sustainable. Please tell us how you considered the guidance provided in
footnote 1 of paragraph 20 of APB 26 in determining the appropriateness of
your accounting treatment.
Response:
The Company's debt to Paul Miller was incurred in payment for his interest
in Sustainable Systems. That purchase was made at arm's length from 23
selling shareholders. Prior to the purchase Mr. Miller had no relationship
with the Company. The debt was forgiven by Mr. Miller in consideration of a
release by the Company of its claims against Mr. Miller, arising out of the
failure by Mr. Miller to disclose material facts at the time of the
acquisition. At the time of the forgiveness, Mr. Miller was a member of the
management of Sustainable Systems, but had no role in management of the
parent Company. The forgiveness was a settlement negotiated at arm's
length. In these circumstances, the guidance in footnote 1 of paragraph 20
of APB 26 does not appear applicable, as the transaction has far more
characteristics of an arm's length transaction than of a related party
transaction. Accordingly, the transaction was recorded as forgiveness of
non-related party debt.
Note 17, Embedded Derivatives
7. It appears that the $1,386,851 of convertible debentures issued to MIF also
contain variable conversion features. Please clarify your disclosure to
address what consideration you gave to the conversion terms of these
debentures pursuant to EITF 00-19.
Response:
FASB 150 paragraph 12a states that a financial instrument that embodies an
unconditional obligation, or a financial instrument other than an
outstanding share that embodies a conditional obligation, that the issuer
must or may settle by issuing a variable number of its equity shares shall
be classified as a liability. The Company will amend its disclosures
relative to the treatment of the conversion terms of the debentures to be
consistent with FASB 150 paragraph 12a. The Company plans to file an
amended 2008 Form 10-K promptly, after confirming that the Staff has no
further comments.
Item 9A, Controls and Procedures
8. Your current disclosures do not provide management's evaluation of
disclosure controls and procedures nor internal controls over financial
reporting as of December 31, 2008. Please amend your filing to include all
of the disclosures required by Items 307 and 308T of Regulation S-K.
Response:
The Company plans to file an amended 2008 Form 10-K promptly after
confirming that the Staff has no further comments. The amended 2008 Form
10-K will contain the following disclosure under Item 9A:
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" (defined in SEC Rule
13a-15(e)) refers to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed
by a company in the reports that it files under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported, within time periods specified in the rules
and forms of the Securities and Exchange Commission. "Disclosure
controls and procedures" include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
The Company's management, with the participation of the Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures as
of the end of the period covered by this annual report (the
"Evaluation Date"). Management determined that, at the Evaluation
Date, the Company had a material weakness because it did not have a
sufficient number of personnel with an appropriate level of knowledge
of and experience in generally accepted accounting principles in the
United States of America (U.S. GAAP) that are appropriate to the
Company's financial reporting requirements. Based on that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, such controls and
procedures were not effective.
(b) Changes in internal controls
The term "internal control over financial reporting" (defined in SEC
Rule 13a-15(f)) refers to the process of a company that is designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
The Company's management, with the participation of the Chief
Executive Officer and Chief Financial Officer, has evaluated any
changes in the Company's internal control over financial reporting
that occurred during the fourth quarter of the year covered by this
annual report, and they have concluded that there was no change to the
Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
(c) Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
We have assessed the effectiveness of those internal controls as of
December 31, 2008, using the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO") Internal Control - Integrated
Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. 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 the policies and procedures may
deteriorate. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in
internal control, or combination of control deficiencies, that
adversely affects the Company's ability to initiate, authorize,
record, process, or report external financial data reliably in
accordance with accounting principles generally accepted in the United
States of America such that there is more than a remote likelihood
that a material misstatement of the Company's annual or interim
financial statements that is more than inconsequential will not be
prevented or detected. In the course of making our assessment of the
effectiveness of internal controls over financial reporting, we
identified one material weakness related to the Company's control
environment, in that the Company did not have a sufficient number of
personnel with an appropriate level of U.S. GAAP knowledge and
experience appropriate to its financial reporting requirements.
Accordingly, management's assessment is that the Company's internal
controls over financial reporting were not effective as of December
31, 2008.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to
attestation by the Company's registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission
that permit the Company to provide only management's report in this
annual report.