Attached files
file | filename |
---|---|
EX-31.1 - KL Energy Corp | v197607_ex31-1.htm |
EX-32.2 - KL Energy Corp | v197607_ex32-2.htm |
EX-32.1 - KL Energy Corp | v197607_ex32-1.htm |
EX-31.2 - KL Energy Corp | v197607_ex31-2.htm |
United
States Securities and Exchange Commission
Washington,
D.C. 20549
Form 10-Q/A
(Amendment No. 1)
x Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended June 30,
2010
or
¨ Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
For the
transition period from ______ to _______
Commission
file number 333-145183
KL ENERGY
CORPORATION
(Name of
registrant as specified in its charter )
Nevada
|
39-2052941
|
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(IRS
Employer Identification
No.)
|
306
East Saint Joseph Street, Suite 200
Rapid City, South Dakota
57701
(Address
of principal executive offices)
(605)
718-0372
(Registrant’s
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x Yes
¨ 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 (§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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company ¨
Yes x No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: We had 48,378,378 shares of common
stock, $0.001 par value per share, outstanding on August 2,
2010.
KL
Energy Corporation
Form
10-Q
For
the Period Ended June 30, 2010
Table
of Contents
Page
|
||
Part
I - Financial Information
|
3
|
|
Item
1. Financial Statements
|
3
|
|
-
Notes to Consolidated Financial Statements
|
7
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
20
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
|
Item
4T. Controls and Procedures
|
29
|
|
Part
II - Other Information
|
30
|
|
Item
1. Legal Proceedings
|
30
|
|
Item
1A. Risk Factors
|
31
|
|
Item
2. Unregistered Sales of Equity Securities
|
31
|
|
Item
3. Defaults Upon Senior
Securities
|
31
|
|
Item
5. Other Information
|
31
|
|
Item 6. Exhibits
|
32
|
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”) amends our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2010, as initially filed with the
Securities and Exchange Commission on August 11, 2010 (“Original Filing”), to
revise certain disclosures in the documents previously filed based on comments
from the Staff of the Securities and Exchange Commission. These
revised disclosures are for clarification purposes only and had no impact on the
consolidated statements of operations, stockholders’ deficit, and cash flows for
the periods presented.
Except
for the aforementioned revised disclosures, this Form 10-Q/A continues to
describe conditions as presented in the Original Filing. This
Amendment does not reflect events occurring after the date of the Original
Filing or modify or update any disclosures that may have been affected by
subsequent events. The Company believes there have been no events since the
Original Filing that would represent a fundamental change in the information
presented in the Original Filing. Except as described above, all
other information included in the Original Filing remains
unchanged.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The
report includes certain forward-looking statements. Forward-looking
statements are statements that estimate the happening of future events and are
not based on historical fact. Forward-looking statements may be
identified by the use of forward-looking terminology such as, “may,” “shall,”
“could,” “expect,” “estimate,” “anticipate,” “predict,” “probable,” “possible,”
“should,” “continue,” or similar terms, variations of those terms or the
negative of those terms. The forward-looking statements specified in
the following information have been compiled by us and are considered by us to
be reasonable. Our future operating results, however, are impossible
to predict; the reader should infer no representation, guaranty or warranty from
those forward-looking statements.
The
assumptions we used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry and
other circumstances. As a result, our identification and
interpretation of data and other information and their use in developing and
selecting assumptions from and among reasonable alternatives require us to
exercise judgment. To the extent that the assumed events do not
occur, the outcome may vary substantially from anticipated or projected
results. We cannot assure that any of the assumptions relating to the
forward-looking statements specified in the following information are accurate,
and we assume no obligation to update any such forward-looking
statements. You should read the following discussion and analysis in
conjunction with our financial statements and the related notes included
elsewhere in this report. The following discussion and analysis is
qualified in its entirety by reference to such financial statements and related
notes.
When used
in this report, the terms the "Company," "KL Energy", "we," "us," "ours," and
similar terms refer to KL Energy Corporation, a Nevada corporation, and its
subsidiaries.
-
2 -
PART
I: FINANCIAL INFORMATION
Item 1. Financial
Statements
KL
Energy Corporation
Consolidated
Balance Sheets
(unaudited)
|
June 30,
|
December
31,
|
||||||
|
2010
|
2009
|
||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
280,951
|
65,049
|
||||||
Trade
receivables, net of allowance for doubtful accounts of $393,840 and
$393,840, respectively
|
39,180
|
35,000
|
||||||
Accounts
receivable - related parties
|
61,034
|
1,034
|
||||||
Inventories
|
14,975
|
14,975
|
||||||
Prepaid
expenses and other assets
|
266,763
|
138,765
|
||||||
Deferred
issuance costs
|
45,000
|
135,000
|
||||||
Total
Current Assets
|
707,903
|
389,823
|
||||||
Non-Current
Assets
|
||||||||
Property,
Plant and Equipment, Net
|
2,643,848
|
3,501,197
|
||||||
Total
Assets
|
$
|
3,351,751
|
$
|
3,891,020
|
||||
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||
Current
Liabilities
|
||||||||
Current
maturities of long-term debt
|
$
|
1,712,566
|
$
|
1,851,389
|
||||
Current
maturities of subordinated debt-related party
|
436,461
|
262,500
|
||||||
Accounts
payable
|
1,647,404
|
1,672,156
|
||||||
Accounts
payable-related parties
|
38,533
|
48,234
|
||||||
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
1,640,588
|
1,640,588
|
||||||
Accrued
payroll
|
127,729
|
203,161
|
||||||
Other
liabilities
|
843,120
|
770,052
|
||||||
Current
liabilities of discontinued operations
|
316,431
|
356,970
|
||||||
Total
Current Liabilities
|
6,762,832
|
6,805,050
|
||||||
Long-term
debt, less current maturities
|
1,847
|
9,121
|
||||||
Subordinated
debt-related party
|
70,000
|
297,500
|
||||||
Total
Long-Term Debt
|
71,847
|
306,621
|
||||||
Stockholders'
Deficit
|
||||||||
Common
stock, $0.001 par value; 150,000,000 shares authorized; 48,378,378 and
45,029,894 shares issued and outstanding as of June 30, 2010 and December
31, 2009, respectively
|
48,378
|
45,029
|
||||||
Additional
paid-in capital
|
10,069,312
|
7,060,161
|
||||||
Accumulated
deficit
|
(11,987,243
|
)
|
(9,267,385
|
)
|
||||
Deficit
attributable to KL Energy Corporation
|
(1,869,553
|
)
|
(2,162,195
|
)
|
||||
Noncontrolling
interest
|
(1,613,375
|
)
|
(1,058,456
|
)
|
||||
Total
Stockholders' Deficit
|
(3,482,928
|
)
|
(3,220,651
|
)
|
||||
Total
Liabilities and Stockholders' Deficit
|
$
|
3,351,751
|
$
|
3,891,020
|
See
accompanying notes to consolidated financial statements.
-
3 -
KL
Energy Corporation
Consolidated
Statements of Operations
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Restated)
|
||||||||||||||||
Revenue
|
||||||||||||||||
Biofuel
income
|
$ | - | $ | - | $ | 120,000 | $ | - | ||||||||
Total
Revenue
|
- | - | 120,000 | - | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Biofuel
costs
|
- | - | 60,000 | - | ||||||||||||
General
and administrative
|
722,058 | 453,950 | 1,636,894 | 2,960,555 | ||||||||||||
Research
and development
|
784,266 | 1,100,849 | 1,665,362 | 1,570,276 | ||||||||||||
Total
Operating Expenses
|
1,506,324 | 1,554,799 | 3,362,256 | 4,530,831 | ||||||||||||
Other
Income (Expense):
|
||||||||||||||||
Other
income
|
39,018 | 28,931 | 17,034 | 11,409 | ||||||||||||
Interest
income
|
29 | 1,743 | 747 | 44,330 | ||||||||||||
Interest
expense
|
( 40,526 | ) | ( 26,813 | ) | ( 80,839 | ) | ( 101,743 | ) | ||||||||
Total
Other Expense, Net
|
( 1,479 | ) | 3,861 | ( 63,058 | ) | ( 46,004 | ) | |||||||||
Loss
from continuing operations, before tax
|
( 1,507,803 | ) | ( 1,550,938 | ) | ( 3,305,314 | ) | ( 4,576,835 | ) | ||||||||
Income
taxes
|
( - | ) | ( - | ) | ( - | ) | ( - | ) | ||||||||
Loss
from continuing operations, net of tax
|
( 1,507,803 | ) | ( 1,550,938 | ) | ( 3,305,314 | ) | ( 4,576,835 | ) | ||||||||
Income
(loss) from discontinued operations, net of tax
|
4,705 | ( 20 | ) | 30,537 | ( 12,000 | ) | ||||||||||
Net
Loss
|
( 1,503,098 | ) | ( 1,550,958 | ) | ( 3,274,777 | ) | ( 4,588,835 | ) | ||||||||
Less:
Net loss attributable to noncontrolling interests
|
260,770 | 379,795 | 554,919 | 670,297 | ||||||||||||
Net
loss attributable to KL Energy Corporation
|
$ | ( 1,242,328 | ) | $ | ( 1,171,163 | ) | $ | ( 2,719,858 | ) | $ | ( 3,918,538 | ) | ||||
Net
(Loss) Income Per Share, basic and diluted:
|
||||||||||||||||
Loss
from continuing operations attributable to KL Energy Corporation common
stockholders
|
$ | ( 0.03 | ) | $ | ( 0.04 | ) | $ | ( 0.07 | ) | $ | ( 0.15 | ) | ||||
Income
(loss) from discontinued operations attributable to KL Energy Corporation
common stockholders
|
- | - | - | - | ||||||||||||
Net
loss attributable to KL Energy Corporation common
stockholders
|
$ | ( 0.03 | ) | $ | ( 0.03 | ) | $ | ( 0.06 | ) | $ | ( 0.13 | ) | ||||
Weighted
Average Common Shares Outstanding
|
46,351,089 | 36,438,158 | 46,879,634 | 30,306,036 | ||||||||||||
Amounts
attributable to KL Energy Corporation common stockholders:
|
||||||||||||||||
Loss
from continuing operations, net of tax
|
$ | ( 1,247,033 | ) | $ | ( 1,171,143 | ) | $ | ( 2,750,395 | ) | $ | ( 3,906,538 | ) | ||||
Income
(loss) from discontinued operations, net of tax
|
4,705 | ( 20 | ) | 30,537 | ( 12,000 | ) | ||||||||||
Net
Loss
|
$ | ( 1,242,328 | ) | $ | ( 1,171,163 | ) | $ | ( 2,719,858 | ) | $ | ( 3,918,538 | ) |
See
accompanying notes to consolidated financial statements.
-
4 -
KL Energy Corporation
Consolidated Statement of Stockholders' Deficit
Common Stock
|
Stockholders'
|
Additional
Paid-In
|
Accumulated
|
Noncontrolling
|
Total
Stockholders'
|
|||||||||||||||||||||||
Shares
|
Amount
|
Contributions
|
Capital
|
Deficit
|
Interest
|
Deficit
|
||||||||||||||||||||||
Balance
- December
31, 2009
|
45,029,894
|
45,029
|
-
|
7,060,161
|
(9,267,385
|
)
|
(1,058,456
|
)
|
(3,220,651
|
)
|
||||||||||||||||||
Issuance
of shares in private placements at $1.10 per share
|
3,045,454
|
3,046
|
-
|
3,346,954
|
-
|
-
|
3,350,000
|
|||||||||||||||||||||
Additional
shares issued at $1.10 per share
|
303,030
|
303
|
-
|
(303
|
)
|
-
|
-
|
|||||||||||||||||||||
Legal,
professional and placement fees
|
-
|
-
|
-
|
(425,000
|
)
|
-
|
-
|
(425,000
|
)
|
|||||||||||||||||||
Stock
based compensation
|
-
|
-
|
-
|
87,500
|
-
|
-
|
87,500
|
|||||||||||||||||||||
Net
loss attributed to noncontrolling interests
|
-
|
-
|
-
|
-
|
-
|
(554,919
|
)
|
(554,919
|
)
|
|||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
(2,719,858
|
)
|
-
|
(2,719,858
|
)
|
|||||||||||||||||||
Balance
- June 30, 2010
|
48,378,378
|
48,378
|
$
|
-
|
$
|
10,069,312
|
$
|
(11,987,243
|
)
|
$
|
(1,613,375
|
)
|
$
|
(3,482,928
|
)
|
See
accompanying notes to consolidated financial statements.
-
5 -
Consolidated
Statements of Cash Flows
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
loss from continuing operations
|
$ | (3,274,778 | ) | $ | (4,588,835 | ) | ||
Adjustments
to reconcile net loss by cash used in operating
activities:
|
||||||||
Depreciation
|
969,890 | 967,118 | ||||||
Allowance for doubtful accounts
|
- | 450,215 | ||||||
Gain on sale of property, plant and equipment
|
(536 | ) | - | |||||
Stock based compensation expense
|
87,500 | - | ||||||
Changes
in current assets and liabilities:
|
||||||||
(Increase) decrease in:
|
||||||||
Trade receivables
|
(64,180 | ) | (16,602 | ) | ||||
Inventories
|
- | 42,663 | ||||||
Prepaid expenses and other assets
|
(47,998 | ) | 384,667 | |||||
Current assets of discontinued operations
|
- | 427 | ||||||
Increase (decrease) in:
|
||||||||
Accounts payable
|
(74,991 | ) | (400,430 | ) | ||||
Accrued payroll and other current liabilities
|
(2,365 | ) | 980,717 | |||||
Net
Cash Used In Operating Activities
|
(2,407,458 | ) | (2,180,060 | ) | ||||
Cash
Flows From Investing Activities
|
||||||||
Purchases
of property, plant and equipment
|
(112,303 | ) | (182,436 | ) | ||||
Proceeds
from the sale of property, plant and equipment
|
300 | 31291 | ||||||
Net
Cash Used in Investing Activities
|
(112,003 | ) | (151,145 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Payments
from lines of credit and short-term borrowings
|
- | (250,000 | ) | |||||
Proceeds
from subordinated debt – related parties, net
|
- | - | ||||||
Payments
on subordinated debt - related parties, net
|
(53,539 | ) | - | |||||
Payments
on long-term debt principal
|
(226,098 | ) | (620,725 | ) | ||||
Issuance
costs
|
(335,000 | ) | (750,000 | ) | ||||
Proceeds
from issuance of common stock
|
3,350,000 | 4,000,000 | ||||||
Net
Cash Provided by Financing Activities
|
2,735,363 | 2,379,275 | ||||||
Net
Increase in Cash and Cash Equivalents
|
215,902 | 48,070 | ||||||
Cash
and cash equivalents at beginning of period
|
65,049 | 698,101 | ||||||
Cash
and cash equivalents at end of period
|
$ | 280,951 | $ | 746,171 | ||||
Supplemental
Disclosures of Cash Flow Information
|
||||||||
Interest
paid
|
$ | 56,610 | $ | 69,571 | ||||
Prepaid
issuance costs netted in equity
|
90,000 | - | ||||||
Insurance
premium financed with debt
|
80,000 | - | ||||||
Conversion
of accounts payable and accrued liabilities to common
stock
|
- | 860,225 | ||||||
Conversion
of debt issuance costs payable to common stock
|
- | 285,000 | ||||||
Settlement
of accounts payable with debt
|
- | 335,000 |
See
accompanying notes to consolidated financial statements.
-
6 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 1 – Nature of Business and Significant
Accounting Policies
Nature of
Business
KL Energy
Corporation (“KL”, formerly known as Revive-it Corp.) was incorporated on
February 26, 2007, in the State of Nevada, to engage in the development of skin
care and cosmetic products. On September 30, 2008, we entered into an Agreement
and Plan of Merger with KL Process Design Group, LLC (“KLPDG”), which provided
for the merger of KLPDG with and into our Company (the “Merger”). As
a result of the Merger, our Company acquired all of the assets and liabilities
of KLPDG.
For
accounting purposes, the Merger was treated as a reverse acquisition with KLPDG
as the acquirer and the Company as the acquired party. As a result, the business
and financial information included in this report is the business and financial
information of KLPDG. KLPDG was a South Dakota limited liability company that
was organized in April 2003, and commenced business operations in January
2006.
While we
have historically provided engineering, construction, operating and ethanol
marketing services, for first generation grain based ethanol (“1st Gen” or
“GBE”) our focus is now on owning and operating cellulose based ethanol ("CBE")
second generation (“2nd Gen”) integrated facilities that utilize our proprietary
technology, and designing these facilities for, and licensing our proprietary
process technology to, third-parties seeking to participate in the renewable
energy and advanced biofuel markets. Initially, we created expansion
and optimization programs for 1st Gen facilities. The experience in the design
and operation of these GBE’s has given our company a significant advantage in
the development and future operations of 2nd Gen facilities. While we are able
to offer design and engineering services to optimize existing GBE facilities,
our emphasis in the future will be on integrated CBE
facilities.
The
Company also distributed ethanol blended fuel, through its majority-owned
Patriot Motor Fuels, LLC. As a result of pricing and competitive
factors, the Patriot business was discontinued in January 2009. In
June 2009, the Company also discontinued two additional businesses in which it
held a majority interest: KL Management LLC, which managed ethanol
facilities for third parties, and KLHC LLC (formerly known as KL Energy LLC)
which sold wholesale ethanol. Both businesses were discontinued as a
result of the severe change in the economics of the first generation ethanol
industry but especially due to the Company’s re-focus on cellulosic second
generation ethanol commercialization.
A key
part of our business model is the design of scalable, custom-designed fully
integrated CBE plants, preferably with integrated Combined Heat and Power
(CHP) and Bio-Lignin production, tailored to a project’s geographic area
and locally available feedstock. Through WBE, we have designed, constructed and
operated what we believe to be one of the first second generation CBE
demonstration plants in the United States. This plant was constructed to both
facilitate research and validate our technology at a demonstration scale.
This allows us to continue to research, and refine our cellulose conversion
technology, while also demonstrating the commercial viability for this type
of technology.
-
7 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 1 – Nature of Business and Significant
Accounting Policies (continued)
Nature of Business
(continued)
The
amounts reported in this Form 10-Q related to the quarter ended June 30, 2009
have been restated to correct a previous error and to be consistent with the
Company’s presentation in its Annual Report on Form 10-K for the year ended
December 31, 2009. The previously filed Form 10-Q, for the quarter ended
June 30, 2009, reflected the entire net loss attributable to noncontrolling
interests for the period from January 1, 2009 through June 30, 2009 in the
quarter ended June 30, 2009. This restatement adjusts the statement
of operations for the quarter ended June 30, 2009 to reflect the net loss
attributable to noncontrolling interests for the period from April 1, 2009
through June 30, 2009. This error did not have an effect on any
balance sheet period presented in this Form 10-Q or the statement of operations
for the six months ended June 30, 2009. The following table presents the
effects of correctly recording the net loss attributable to noncontrolling
interests for the quarter ended June 30, 2009:
As Previously
|
||||||||||||
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Net
loss
|
$ | (1,550,958 | ) | $ | - | $ | (1,550,958 | ) | ||||
Net
loss attributable to noncontrolling interests
|
$ | 670,297 | $ | (290,502 | ) | $ | 379,795 | |||||
Net
loss attributable to KL Energy Corporation
|
$ | (880,661 | ) | $ | (290,502 | ) | $ | (1,171,163 | ) | |||
Net
loss per share, basic and diluted
|
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) |
Significant Accounting
Policies
Use
of Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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. The following estimates are significant to the Company’s
consolidated financial statements: costs to complete long-term contracts, useful
lives of property, plant and equipment, impairment of long-lived
assets, valuation of share based compensation, going concern analysis,
valuation allowance on deferred tax assets and the allowance for doubtful
accounts.
Principles
of Consolidation
The
accompanying consolidated financial statements include the results of operations
and financial position of the Company, KL Energy Services LLC (“KLES”, a
wholly-owned subsidiary, as well as its wholly-owned KLHC LLC (formerly known as
KL Energy LLC, “KLHC”) and majority-owned KL Management, LLC (“KLM”), Patriot
Motor Fuels LLC (“Patriot”) and Western Biomass Energy LLC
(“WBE”). Until September 30, 2008, KLHC and KLM were 53% owned by
KLPDG and the remaining 47% was owned by three other individuals; Patriot was
50% owned by KLPDG and two other owners held the remaining 50% interest. At September 30,
2008, the Company ownership interest increased to 75% for KLHC, KLM and Patriot.
WBE is 64% owned by the Company and 36% owned by various unrelated
investors. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements and related notes have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim
periods should not be considered indicative of results for a full year. These
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair statement of the results for
interim periods have been included.
We have
reclassified certain data in the financial statements of the prior period to
conform to the current period presentation. Specifically, in the
statement of operations, we reclassified approximately $251,000 and $432,000 of
expenses in the three and six months ended June 30, 2009, respectively, that
were previously included in general and administrative expenses but that were
more appropriately includable in research and development
expenses.
-
8 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 1 – Nature of Business and Significant
Accounting Policies (continued)
Significant Accounting
Policies (continued)
Recently
Issued Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board, or FASB, issued guidance
requiring additional fair value disclosures for significant transfers between
levels of the fair value hierarchy and gross presentation of items within the
Level 3 reconciliation. This guidance also clarifies that entities need to
disclose fair value information for each class of asset and liability measured
at fair value and that valuation techniques need to be provided for all
non-market observable measurements. Our adoption of this guidance on
January 1, 2010, did not impact our consolidated financial statements as we
have no items classified as Level 3.
In August
2009, the FASB issued new accounting guidance to provide clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available. This guidance became effective for us on October 1, 2009. The
Company adopted this guidance on October 1, 2009, and it had no material impact
on our consolidated financial statements.
In April
2009, the FASB issued additional guidance regarding fair value measurements and
impairments of securities which makes fair value measurements more consistent
with fair value principles, enhances consistency in financial reporting by
increasing the frequency of fair value disclosures, and provides greater clarity
and consistency in accounting for and presenting impairment losses on
securities. The additional guidance is effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. The Company adopted the
provisions for the period ending March 31, 2009. The adoption did not
have a material impact on our financial position or results of
operations.
In April
2009, the FASB issued new accounting guidance related to interim disclosures
about the fair values of financial instruments. This guidance requires
disclosures about the fair value of financial instruments whenever a public
company issues financial information for interim reporting periods. This
guidance is effective for interim reporting periods ending after June 15, 2009.
The Company adopted this guidance upon its issuance, and it had no material
impact on our consolidated financial statements.
Revenue
and Cost Recognition
Revenue
from fixed price contracts is recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract. This method is used because management considers
expended costs to be the best available measure of progress on these
contracts. Due to uncertainties inherent in the estimation process,
it is at least reasonably possible that the completion costs for contracts in
progress at June 30, 2010 and December 31, 2009 will be revised
significantly in the near term. Contract costs include all direct
material, subcontract and labor costs, and those indirect costs related to
contract performance, such as labor, supply, tool, and depreciation
costs. Operating costs are charged to expense as
incurred. Revenue is reported net of sales tax
collected. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions and final contract settlements, may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
Revenue
from feedstock testing results from agreements with third parties for the
Company to perform extensive tests to determine if the customer’s feedstock is a
viable candidate for use in the production of cellulosic ethanol. The
standard agreement requires that the customer pay 50% of the testing fee upon
signing the feedstock testing agreement and the remaining 50% when the Company
delivers a final report to the customer explaining the test results and
conclusions. Feedstock testing revenues, and related expenses, are
only recognized when this report is delivered.
Pre-contract
costs directly associated with a specific contract are deferred as incurred in
anticipation of that contract if recovery of these costs is determined to be
probable. Conversely, if it appears unlikely that we will
obtain the contract, all previously deferred costs are expensed. Such
costs include consultant expenses for project development, technology
improvements, facility engineering and feedstock evaluation
expenses.
Based on
our percentage-of-completion revenue recognition policy, revenues and costs
associated with approved change orders are adjusted when Company and customer
approvals of the change order are obtained. For unpriced or
unapproved change orders, recovery must be deemed probable, if the future event
or events necessary for recovery are likely to occur, at which time revenues and
costs associated with the unpriced or unapproved change orders are adjusted. If
change orders are in dispute or are unapproved in regard to both scope and
price, they are evaluated as claims.
Claims
are amounts in excess of the agreed contract price (or amounts not included in
the original contract price) that a contractor seeks to collect from customers
or others for customer-caused delays, errors in specifications and designs,
contract terminations, change orders in dispute or unapproved as to both scope
and price, or other causes of unanticipated additional costs.
Recognition
of amounts of additional contract revenue relating to claims is made only if it
is probable that the claim will result in additional contract revenue and if the
amount can be reliably estimated. Those two requirements are satisfied by the
existence of all of the following conditions:
a.) The
contract or other evidence provides a legal basis for the claim; or a legal
opinion has been obtained, stating that under the circumstances there is a
reasonable basis to support the claim.
b.)
Additional costs are caused by circumstances that were unforeseen at the
contract date and are not the result of deficiencies in the contractor's
performance.
c.) Costs
associated with the claim are identifiable or otherwise determinable and are
reasonable in view of the work performed.
d.) The
evidence supporting the claim is objective and verifiable, not based on
management's feel for the situation or on unsupported
representations.
If the
foregoing requirements are met, revenue from a claim is recorded only to the
extent that contract costs relating to the claim have been incurred. Costs
attributable to claims are treated as costs of contract performance as
incurred.
The
asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenue
recognized.
Patriot
provided blended fuel on consignment to service stations. Revenue
related to the sale of blended fuel by Patriot was recorded when the ethanol was
sold by the service station to the end customer. This operation was
discontinued in January 2009.
-
9 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 1 – Nature of Business and Significant
Accounting Policies (continued)
Significant Accounting
Policies (continued)
Long-Lived
Assets
The
Company assesses the realizable value of long-lived assets for potential
impairment at least annually or when events and circumstances warrant such a
review. The net carrying value of a long-lived asset is considered
impaired when the anticipated fair value is less than its carrying
value. Approximately 96% of the Company’s property, plant and
equipment is attributable to the WBE facility in Upton, WY which was
completed in August 2007.
The
Company continually monitors conditions that may indicate a potential impairment
of long-lived assets. These conditions include current-period
operating losses combined with a history of losses and a projection of
continuing losses, and significant negative industry or economic
trends. When these conditions exist, we test for
impairment.
We group
our long-lived assets with other assets and liabilities at the lowest level for
which identifiable cash flows are independent of the cash flows of other assets
and liabilities for the purpose of testing for impairment loss. In
the event of an impairment loss the carrying amount of only the long-lived
assets within the group is reduced. Currently, our long-lived assets
do not have identifiable cash flows that are independent of the cash flows of
other assets and liabilities and, therefore, our long-lived assets are assessed
for impairment as one asset group.
Our
un-discounted cash flows are used to determine if the carrying value of the
Company’s long-lived assets is not recoverable. In this event, we
determine the fair value of our long-lived assets using internal cash flow
projections, outside financing activity, historical financial information,
current market conditions and forecasted future market
conditions. These assessments are used to calculate the present value
of our long-lived assets which we believe is the best estimate of their fair
value. An impairment charge is recognized for the amount by
which the carrying value of the asset group exceeds its estimated fair
value. The assumptions and methodologies used in our 2009 impairment
analysis were substantially the same as we used in our 2008 impairment
analysis.
As of
December 31, 2009, based on these analyses as well as the continuing operational
value of the WBE facility to our research and development efforts, management
concluded that the fair value of these long-lived assets exceeded their $2.4
million net book value and. no impairment charge was
recognized.
Note
2 - Property, Plant, and Equipment
Property,
plant, and equipment consist of the following as of:
|
June 30,
|
December
31,
|
||||||
|
2010
|
2009
|
||||||
Plant
and Plant Equipment
|
$
|
7,410,262
|
$
|
7,402,413
|
||||
Office
Furnishings and Equipment
|
373,156
|
274,103
|
||||||
Vehicles
|
51,698
|
51,698
|
||||||
7,835,116
|
7,728,214
|
|||||||
Less
Accumulated Depreciation
|
(5,191,268
|
)
|
(4,227,017
|
)
|
||||
Total
Property, Plant, and Equipment, Net
|
$
|
2,643,848
|
$
|
3,501,197
|
Construction
costs associated with the WBE demonstration plant are stated at cost (including
direct construction costs, and capitalized interest). The Company has
also capitalized approximately $471,000 of professional engineering and
construction services provided by the Company through June 30,
2010.
Note
3 - Financing
On June
4, 2010, the Company received the final installment of an equity financing
pursuant to Securities Purchase Agreement with an accredited
investor. Pursuant to the terms of the purchase agreement, the
Company issued to this investor 681,818 shares of the Company’s common
stock, at $1.10 per share, for net proceeds to the Company of
$675,000. The shares were issued in reliance on the exemption
provided by Regulation S of the Securities Act of 1933, as
amended.
-
10 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
3 – Financing (continued)
On May 3,
2010, the Company received the final installment of a Securities Purchase
Agreement with an accredited investor. Pursuant to the terms of the
Purchase Agreement, the Company issued to this investor 545,455 shares of the
Company’s common stock, at $1.10 per share, for net proceeds to the
Company of $540,000. The shares will be issued in reliance on the
exemption provided by Regulation S of the Securities Act of 1933, as
amended.
Effective
April 6, 2010, pursuant to the terms of a Securities Purchase Agreement with an
accredited investor executed on January 6, 2010 and which agreement required
pricing of these shares to be reduced to $1.10 per share based on the absence of
an investment by an additional institutional investor within 90 days after the
date of the agreement, the Company issued to this investor an additional 363,636
shares of the Company’s common stock at $1.10 per share. The
shares were issued in reliance on the exemption provided by Regulation S of the
Securities Act of 1933, as amended.
On March
30, 2010, the Company received the final installment of the December 2009
Securities Purchase Agreement with an accredited investor. Pursuant
to the terms of the Purchase Agreement, the Company issued to the investor
454,545 shares of the Company’s common stock, at $1.10 per share, for net
proceeds to the Company of $450,000. The shares will be issued
in reliance on the exemption provided by Regulation S of the Securities Act of
1933, as amended.
On
January 6, 2010, the Company entered into a Securities Purchase Agreement
with an accredited investor. Pursuant to the terms of the Purchase
Agreement, the Company received $1.5 million before expenses on that date,
representing 50% of this investor’s commitment to purchase 2,000,000 shares of
the Company’s common stock, and will pay the remaining $1.5 million within 14
days of receiving a written demand from the Company. The pricing of
these shares may be reduced based on certain subsequent events. (See
Note 13 for additional details.) This Purchase Agreement provides
for: (i) piggyback registration rights allowing the Investor to participate in
registration statements filed by the Company and (ii) participation rights
allowing the Investor to purchase its pro rata share of equity securities issued
by the Company for cash, with certain exceptions including, without limitation,
issuances relating to compensation, commercial credit arrangements, and
strategic transactions involving ongoing business relationships. The shares will
be issued in reliance on the exemption provided by Regulation S of the
Securities Act of 1933, as amended.
Note
4 – Net Loss Per Common Share
Basic EPS
includes no dilution and is computed by dividing income or
(loss) applicable to common stock by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of an entity, similar to fully
diluted EPS. For the three and six months ended June 30, 2010 and
2009, stock warrants for 3,125 shares were not included in the computation of
diluted loss per share because their effect was anti-dilutive. For the
three and six months ended June 30, 2010, stock options for 83,333 shares of
common stock were not included in the computation of diluted loss per share
because their effect was anti-dilutive. There were no other stock
warrants or options issued or outstanding as of June 30, 2010.
Note 5 - Operations
Continuing
Operations
During
the period from its inception to June 30, 2010, the Company has incurred
significant annual net losses and at June 30, 2010 and December 31, 2009, the
Company had negative working capital (i.e. current assets less current
liabilities) of approximately $6.1 million and $6.4 million,
respectively. At June 30, 2010, total liabilities exceeded total
assets by approximately $3.5 million. The first generation ethanol
industry, in which the Company has historically operated, continues to face
significant challenges including increased construction costs, limited
availability of debt and equity financing and a reduction in public and
governmental support.
These
factors, among others, indicate the Company may be unable to meet its current
obligations and may be unable to continue as a going concern unless it raises
additional capital. Management is continuing its efforts to raise
additional capital through various methods and has refocused its business to
cellulosic ethanol.
-
11 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 5 – Operations
(continued)
Discontinued
Operations
In
January 2009, the Company determined that its majority-owned subsidiary, Patriot
Motor Fuels LLC (“Patriot”), should be discontinued as a result of pricing and
other competitive factors. Patriot distributed ethanol blended
fuel. In June 2009, the Company also discontinued two additional
businesses in which it held a majority interest: KL Management LLC
(“KLM”), which managed ethanol facilities for third parties, and KLHC LLC
(formerly known as KL Energy LLC, “KLHC”), which sold wholesale
ethanol. Both businesses were discontinued as a result of the severe change
in the economics of the first generation ethanol industry but especially due to
the Company’s re-focus on cellulosic second generation ethanol
commercialization.
Operating
results from discontinued operations were income (loss) of approximately
$5,000 and ($20) during the three months ended June 30, 2010 and 2009,
respectively, and income (loss) of approximately $31,000 and ($12,000) during
the six months ended June 30, 2010 and 2009, respectively. At
June 30, 2010 and 2009, these businesses had no assets and the only liabilities
were accounts payable of $316,431 and $356,970, respectively.
Note
6 –Debt
Short-Term
Borrowing Arrangements
The
Company had available a $250,000 revolving line of credit with Wells Fargo Bank,
N.A. that was personally guaranteed by certain Company shareholders, and
collateralized by their personal property, with accrued interest payable monthly
at the prime rate plus 0.5% (3.75% at December 31, 2008). This line of credit
matured and was paid off in June 2009.
In
addition, the Company had approximately $39,000 and $44,000 in credit card
liability at June 30, 2010 and December 31, 2009, respectively, which are also
guaranteed by certain shareholders. These credit card liability balances are
included in accounts payable in the accompanying consolidated balance
sheets. These liabilities are being reduced monthly.
Subordinated
Debt – Related Parties
The
Company has a subordinated secured note payable to a Company shareholder
totaling $506,461and $560,000 at June 30, 2010 and December 31, 2009,
respectively. This note includes interest at a variable rate, which
was 5.0% at June 30, 2010 and December 31, 2009, respectively, with interest
paid quarterly. Prior to February 2009, this note was unsecured and
did not have a specified due date. In February 2009, the note was modified to
include principal payments of $10,000 per month, beginning in September 2009,
over a 60-month term. The principal payments are scheduled to be $120,000 in
2010, 2011, 2012, 2013, respectively, and $56,461 in 2014. Payments
of $120,000 are due on this note in the next twelve months and therefore have
been classified as current at June 30, 2010. As security for our
obligations under this note, we granted to the lender a security interest in our
current and future accounts receivable. In addition, if the Company
receives additional equity financing, the Company is obligated to pay 5% of the
proceeds towards principal payments on this note. Based on equity
financing since February 2009, an additional $310,000 has been classified as
currently payable. Total current maturities and the balance on this note as of
June 30, 2010 were $436,461 and $506,461, respectively
-
12 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 6 –Debt
(continued)
Long-Term
Debt
Long-term
debt consists of the following as of:
June 30,
2010
|
December
31,
2010
|
|||||||
Note
payable to bank with interest at 6.5%. The note is payable in twelve
monthly
installments of $17,560 of principal and interest beginning March
2010
with any remaining unpaid principal and interest due March 2011, with
additional
maturity extensions available. This note is secured by substantially
all
assets of WBE and guaranteed by the Company and certain WBE members.
|
$
|
1,332,028
|
$
|
1,394,043
|
||||
Payable
to Hermanson Egge to replace overdue payables for construction services
with unsecured agreement, interest at 0% with payments of $70,000 in July
2009, $15,000 monthly from July 2009 to April 2010, $10,000 monthly from
May 2010 to August 2010, $20,000 monthly for September 2010 to November
2010 and $15,000 in December 2010.
|
85,000
|
160,000
|
||||||
Note
payable to Lansing Securities Corp., interest at 10% and the maturity date
has passed and has been temporarily waived by the note holder until
further notice.
|
250,000
|
250,000
|
||||||
Note
payable to Universal Premium Acceptance Corp. for payment of insurance
premiums, interest at 9.24%, payable in monthly principal and interest
installments of $5,239.
|
–
|
30,605
|
||||||
Note
payable to Avid Solutions for centrifuge equipment of $195,000, payable in
monthly principal and interest installments of $10,000, including interest
at 10% secured by equipment.
|
–
|
6,767
|
||||||
Note
payable to Shimadzu for lab equipment of $32,114, payable in monthly
principal and interest installments of $1,072, including interest at 13.6%
secured by equipment.
|
14,71
4
|
19,095
|
||||||
Note
payable to First Insurance Funding Corporation for payment of direct or
and officer insurance premiums, payable in monthly installments of $3,692,
including interest at 8.4%.
|
32,671
|
–
|
||||||
Subordinated
note payable to Randy Kramer and assigned to First National Bank, interest
at 5.0%, secured by accounts receivable of the Company, payable in monthly
installments of $10,000 per month plus interest beginning September 2009
and 5% of equity financings after February 2009.
|
506,461
|
560,000
|
||||||
Subtotal
|
$
|
2,220,874
|
$
|
2,420,510
|
||||
Less
current maturities of long-term debt
|
(2,149,027
|
)
|
(2,113,889
|
)
|
||||
Total
Long-Term Debt
|
$
|
71,847
|
$
|
306,621
|
-
13 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
7 – Common Stock Activity
Pursuant
to the terms of a Securities Purchase Agreement executed in January 2010, which
agreement required pricing of these shares to be reduced to $1.10 per share
based on the absence of an investment by an additional institutional investor
within 90 days after the date of the agreement, the Company issued to this
investor 363,636 shares of the Company’s common stock at $1.10 per share. The
shares were issued in reliance on the exemption provided by Regulation S of the
Securities Act of 1933, as amended.
Note 8 - Segment
Information
As of
June 30, 2010, the Company manages its business and aggregates its operational
and financial information in accordance with two reportable segments. Its engineering and management
contracts segment provides contracted engineering and project development
to third party customers. Despite the lack of activity in this segment during
the first three months of 2010, during which time the Company focused its
resources on biofuel research and development, management believes this will be
a viable business segment in the near future. The biofuel segment is
focused on developing unique technical and operational capabilities designed to
enable the production and commercialization of biofuel, in particular ethanol
from cellulosic biomass, and is expected to begin operations starting in
2010.
Management
assesses performance and allocates resources based on specific financial
information for the business segments. For the biofuel segment, performance is
assessed based on total operating expenses and capital expenditures. Operating
expenses for each segment include direct costs of that segment. Expenses and
assets shared by the segments require the use of judgments and estimates in
determining the allocation of expenses to the segments. Different assumptions or
allocation methods could result in materially different results by
segment.
-
14 -
KL Energy
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 8 - Segment Information
(continued)
Financial
information for the Company’s business segments was as follows (in
thousands):
As of
|
As of
|
|||||||
June
30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Identifiable
Fixed Assets:
|
||||||||
Engineering
and management contracts
|
$
|
425
|
$
|
326
|
||||
Biofuel
research and development
|
7,410
|
7,402
|
||||||
Total
|
7,835
|
7,728
|
||||||
Accumulated
depreciation
|
(5,191
|
) |
( 4,227
|
)
|
||||
Total
Identifiable Fixed Assets
|
$
|
2,644
|
$
|
3,501
|
For the Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues:
|
||||||||||||||||
Engineering
and management contracts
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Biofuel
|
- | - | 120 | - | ||||||||||||
Total
Revenues
|
$ | - | $ | - | $ | 120 | $ | - | ||||||||
Depreciation:
|
||||||||||||||||
Engineering
and management contracts
|
$ | 14 | $ | 14 | $ | 29 | $ | 30 | ||||||||
Biofuel
|
473 | 467 | 941 | 937 | ||||||||||||
Total
Depreciation
|
$ | 487 | $ | 481 | $ | 970 | $ | 967 | ||||||||
Interest
Expense:
|
||||||||||||||||
Engineering
and management contracts
|
$ | 26 | $ | 20 | $ | 44 | $ | 61 | ||||||||
Biofuel
|
15 | 6 | 37 | 40 | ||||||||||||
Total
Interest Expense
|
$ | 41 | $ | 26 | $ | 81 | $ | 101 | ||||||||
Net
Loss:
|
||||||||||||||||
Engineering
and management contracts
|
$ | (767 | ) | $ | (481 | ) | $ | (1,766 | ) | $ | (2,717 | ) | ||||
Biofuel
|
(475 | ) | (690 | ) | (954 | ) | (1,202 | ) | ||||||||
Net
Loss
|
$ | (1,242 | ) | $ | (1,171 | ) | $ | (2,720 | ) | $ | (3,919 | ) | ||||
Reconciliation to Reported
Amounts
|
||||||||||||||||
Revenue
- Reportable Segments
|
$ | - | $ | - | $ | 120 | $ | - | ||||||||
Eliminations/Other
|
- | - | - | - | ||||||||||||
Total
Consolidated Revenues
|
$ | - | $ | - | $ | 120 | $ | - | ||||||||
Net
Loss - Reportable Segments
|
$ | (1,242 | ) | $ | (1,171 | ) | $ | (2,720 | ) | $ | (3,919 | ) | ||||
Eliminations/Other
|
- | - | - | - | ||||||||||||
Total
Consolidated Net Loss
|
$ | (1,242 | ) | $ | (1,171 | ) | $ | (2,720 | ) | $ | (3,919 | ) |
Note 9
– Noncontrolling Interests
On
January 1, 2009, the Company adopted changes issued by the FASB to
consolidation accounting and reporting. These changes establish accounting and
reporting for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This guidance defines a noncontrolling
interest, previously called a minority interest, as the portion of equity in a
subsidiary not attributable, directly or indirectly, to a parent. These changes
require, among other items, that (a) noncontrolling interests to be included in
the consolidated statement of financial position within equity separate from the
parent’s equity, (b) consolidated net income to be reported at amounts inclusive
of both the parent’s and noncontrolling interest’s shares and, separately, the
amounts of consolidated net income attributable to the parent and noncontrolling
interest all on the consolidated statement of operations, and (c) if a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary should be measured at fair value and a gain or loss be
recognized in net income based on such fair value. Other than the change in
presentation of noncontrolling interests, the adoption of these changes had no
impact on the consolidated financial statements. The presentation and disclosure
requirements of these changes were applied retrospectively.
-
15 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 9
– Noncontrolling Interests (continued)
Components
of noncontrolling interests are as follows:
|
June 30,
|
December
31,
|
||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
Beginning
of period
|
$
|
(1,058,456
|
)
|
$
|
193,399
|
|||
Net
loss attributable to noncontrolling interests
|
(554,919
|
)
|
(1,251,855
|
)
|
||||
End
of period
|
$
|
(1,613,375
|
)
|
$
|
(1,058,456
|
)
|
Note
10 - Contingencies
Litigation
On March
21, 2007 in the District Court of Douglas County, Nebraska, the Company was
named in a personal injury lawsuit as wells as Midwest Renewable Energy, U.S.
Water Services Utility Chemicals (the plaintiffs employer), and a company
employee. The plaintiff claims that the defendants were negligent in not
assuring that the manhole cover to the boiler being serviced by the plaintiff
was depressurized so that the plaintiff could open the manhole cover in a safe
manner. The Company was performing services at Midwest Renewable
Energy. The plaintiff is seeking reimbursement of $64,000 of medical bills, plus
interest, plus punitive damages. Due to the number of defendants and
the difficulty of imputing liability by the plaintiff to the defendant, any
losses incurred by the Company cannot be reasonably
estimated. Accordingly, the Company has not recorded an accrual for
such potential loss but plans to vigorously defend its position. The jury trial,
originally scheduled for March 2010, is now expected to take place in the third
quarter of 2010 or later.
On
November 12, 2008 in Circuit Court, Second Judicial Circuit, South Dakota,
County of Minnehaha, the Company was named in a pending action, which is
captioned Dakota Supply Group, Inc. (“DSG”) v. KL Process Design Group, LLC
(“KL”), and Midwest Renewable Energy, LLC, (“MRE”). The action was
commenced in 2008 for the collection of a debt of approximately $524,000 plus
interest for electrical supplies and materials furnished by DSG to MRE.
DSG alleges that KL and MRE are responsible for the debt because KL executed the
purchase order without clarifying that the debt was the responsibility of MRE
and that credit was extended directly to KL rather than MRE. Depositions
have taken place between all parties. At this time, the Company is unable to
predict the outcome of the case, and accordingly has not recorded an accrual for
such potential loss, but plans to vigorously defend its
position.
-
16 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
10 - Contingencies (continued)
Litigation
(continued)
On June
30, 2009, a lawsuit was brought against the Company, certain subsidiaries, and
certain current and past officers in the District Court of Lincoln County,
Nebraska. The plaintiff is Midwest Renewable Energy, LLC, a Nebraska
limited liability company ("MRE"). MRE previously engaged the Company to
manage its existing ethanol facility, oversee its expansion construction and
market the ethanol produced at its facilities. The plaintiff alleged,
among other things, that the named individuals and entities engaged in
breaches of fiduciary duties owed to MRE, breaches of contract, fraud,
interference with contract, conversion and negligence relating to the management
and expansion of its corn-based ethanol facilities in
Nebraska. In August 2009, Company filed a motion to compel MRE to
arbitrate its claims, and also separately filed three arbitration demands for
claims relating to the three agreements between the Company and its affiliates
and MRE that were at issue in the lawsuit. In November 2009, the
Court ruled for the Company and issued an order to compel arbitration. The
Company has claimed $2.8 million in these proceedings, and MRE has
counterclaimed $42.1 million, which counterclaim we believe has absolutely
no merit and which we intend to defend vigorously. The arbitration
proceedings for two of the three arbitrations have begun and are expected to
conclude in the fourth quarter of 2010. No arbitrator has been selected for
the arbitration of claims and counterclaims arising out of or relating to the
third arbitration. The schedule for this arbitration will be
established when an arbitrator is selected and proceedings will commence
thereafter. Any losses incurred by the Company cannot be reasonably
estimated. Accordingly, the Company has not recorded an accrual for such
potential loss but plans to vigorously defend its position. The Company and
MRE are currently waiting for the third arbitration claim and demand to
begin.
The
Company may be subject to various claims and legal actions arising in the
ordinary course of business from time to time. The Company maintains insurance
to cover certain such actions.
Note 11
– Related Parties
Pursuant
to its agreement with the Company, Pelly Management, Inc. (“Pelly”) received
fees of $135,000 and $335,000 for the three and six months ended June 30, 2010,
respectively and $0 and $400,000 for the three and six months ended June 30,
2009, respectively. These amounts represent fees for financial
advisor services.
In March
2010, the Company entered into a consulting agreement with add blue Consultoria
Ltda., a Brazilian consulting company, for the provision of services by Peter
Gross as CEO and President of the Company and its
subsidiaries. During the three and six months ended June 30, 2010,
fees paid to add blue Consultoria Ltda. were approximately $48,000
and $72,000, respectively.
In February
2009 and April 2009, the Company entered into a consulting contract with Thomas
Schueller, for the position of Executive Chairman of the Board, and Thomas
Bolan, for the position of Chief Financial Officer,
respectively. In July 2009, the Company also entered into
a consulting services contract with Alan Rae, a
Director. During the three months ended June 30, 2010 and 2009, fees
paid to Messrs. Schueller, Bolan and Rae were approximately $37,000 and $36,000,
$ 35,000 and $38,000, and $42,000 and $0, respectively. During the
six months ended June 30, 2010 and 2009, fees paid to Messrs. Schueller, Bolan
and Rae were approximately $73,000 and $56,000, $73,000 and $38,000, and $77,000
and $0, respectively.
As
approved by the Board of Directors on March 2, 2010, a Director’s fee of $18,000
per annum will be awarded to all serving non-executive and non-consulting
directors. However, payment of such fees will be deferred until
approved by the Board. As of the date of this report, Alain Vignon was the only
Non-Executive, Non-Consulting director and $31,500 has been accrued for his
services from his appointment in October 2008 through June
2010.
-
17 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
12 – Share Based Compensation
On March
2, 2010, the Company issued to a former executive an option to purchase 83,333
shares of the Company’s common stock at an exercise price of $1.10 which became
fully vested on April 2, 2010 and is exercisable for three years. The
options were issued to Mr. Corcoran pursuant to Regulation D of the Securities
Act of 1933, as amended. The fair value of this option, based on
volatility of 232%, and dividend and risk-free interest rates of 0% and 1.51%,
respectively, was $87,500 and this amount is included in general and
administrative expense in the consolidated statements of
operations.
The
Company adopted accounting guidance that sets accounting requirements for
share-based compensation to employees and non-employee directors and
consultants, and requires companies to recognize in the statement of operations
the grant-date fair value of stock options and other equity based compensation
expensed over the requisite service and vesting period. For the purpose of
determining the fair value of stock option awards, the Company uses the
Black-Scholes option-pricing model. The estimation of forfeitures is required
when recognizing compensation expense which is then adjusted over the requisite
service period should actual forfeitures differ from such estimates. Changes in
estimated forfeitures are recognized through a cumulative adjustment to
compensation in the period of change. As of June 30, 2010, the
Company has not experienced any forfeitures.
The
prescribed accounting guidance also requires tax benefits relating to excess
stock-based compensation deductions to be prospectively presented in the
statement of cash flows as financing cash inflows. As of June 30, 2010, the
Company does not have any tax expense (benefits) resulting from stock-based
compensation deductions in excess of amounts reported for financial reporting
purposes.
-
18 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
13 – Subsequent Events
On July
2, 2010, a lawsuit was brought against the Company and certain current directors
and a Company investor in the Seventh Judicial District Court of Pennington
County, South Dakota. The plaintiff is Randy Kramer, a former CEO of the
Company. The plaintiff alleges, among other things, that the Company
violated the Severance Agreement signed by the Company and the Kramer. The
plaintiff also alleges that the named individuals engaged in conspiracy to have
him removed as CEO and oppressed him to sign the Severance Agreement. The
plaintiff has not requested specific damages but seeks awards for all
compensatory, consequential, and pecuniary damages allegedly sustained by him
for breach of contract, fraud, and deceit, breach of fiduciary duty, tortuous
interference, and oppression plus interest and punitive damages. At
this time, any losses incurred by the Company cannot be reasonably
estimated. Accordingly, the Company has not recorded an accrual for
such potential loss but plans to vigorously defend its position.
On July
1, 2010, the Company received the final installment of the January 2010
Securities Purchase Agreement with John Buckens. In lieu of issuing
stock pursuant to that Purchase Agreement, the Company agreed to issue a $1.5
million Convertible Promissory Note for such investment which resulted in net
proceeds to the Company of $1.425. This Note is non-interest bearing and is
payable in full on February 11, 2020. Pursuant to that Note, if the
Company raises at least $15.0 million in equity financing prior to February 11,
2020, the outstanding Note principal will automatically convert into the
Company’s common stock at a conversion rate of $1.10 per share (or 1,363,636
shares).
On June
30, 2010, the Board of Directors approved the issuance of awards, effective July
1, 2010, of incentive stock options on 119,518 shares of common stock to
employees and 44,794 shares of restricted common stock to
consultants. These awards were made pursuant to the Company’s 2009
Equity Incentive Plan and are one-third vested on July 1, 2010, July 1, 2011 and
July 1, 2012. The exercise price per share was set at $1.10 per share
on the date of grant. This grant date and exercise price represents
the effective price at which all recent private placement sales have been
transacted since October 2009.
-
19 -
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business
While we
have historically provided engineering, construction, operating and ethanol
marketing services, for first generation grain based ethanol (“1st Gen” or
“GBE”) our focus is now on owning and operating cellulose based ethanol ("CBE")
second generation (“2nd Gen”) integrated facilities that utilize our proprietary
technology, and designing these facilities for, and licensing our proprietary
process technology to, third-parties seeking to participate in the renewable
energy and advanced biofuel markets.
Initially,
we created expansion and optimization programs for 1st Gen facilities. The
experience in the design and operation of these GBE’s has given our company a
significant advantage in the development and future operations of 2nd Gen
facilities. While we are able to offer design and engineering services to
optimize existing GBE facilities, our emphasis in the future will be on
integrated CBE facilities.
The
majority of 1st Gen ethanol is currently produced from sugar cane or grain-based
feedstocks, predominantly corn in the United States, however it can also be
produced from cellulose. The growth of first generation ethanol is limited due
to the widespread opposition to using land and crops that can be used for
food or feed, for the production of fuels. This is especially relevant now that
technology has provided a solution that uses widely available cellulose as a
feedstock for ethanol production. Cellulose is the primary component
of plant cell walls and is one of the most abundant organic compounds available.
Advanced biofuels produced from cellulosic materials draws on non-food related
and waste feedstock sources and has been proven to substantially reduce carbon
dioxide emissions and improve engine efficiency.
Our
scientists and engineers continue to optimize our technology both independently
and in cooperation with the South Dakota School of Mines and Technology in
Rapid City, South Dakota. Based on laboratory data, we have shown our
process is capable of producing up to 90 gallons of ethanol from every dry
metric ton of certain biomass feedstock. Using pretreated sugarcane bagasse
and eucalyptus, we currently are achieving up to 75 gallons per dry metric
ton at our bench scale facility.
A key
part of our business model is the design of scalable, custom-designed fully
integrated CBE plants, preferably with integrated Combined Heat and Power
(CHP) and Bio-Lignin production, tailored to a project’s geographic area
and locally available feedstock. Through Western Biomass Energy,
LLC (“WBE”), a majority-owned subsidiary of ours, we have designed,
constructed and operated what we believe to be one of the first second
generation CBE demonstration plants in the United States. This plant was
constructed to both facilitate research and validate our technology at a
demonstration scale. This allows us to continue to research, and refine our
cellulose conversion technology, while also demonstrating the commercial
viability for this type of technology.
Biomass,
unlike corn, includes all plants and plant-derived materials and is more evenly
distributed among regions of the world. The quantity of biomass
available for a CBE plant can come from many different sources, including fuel
wood harvesting, wood processing residue, urban wood residue, fuel treatment
operations, municipal solid waste, crop residue, and perennial crops. The
extensive biomass distribution facilitates co-locating CBE plants closer to
plant feedstock, reducing transportation costs relating to feedstock. Locating
CBE facilities near blending facilities and retail fuel outlets will reduce
transportation costs related to the sale of ethanol. This has the potential to
create a truly local and commercially viable energy source. We
believe that our CBE facilities provide a commercially viable alternative that
may contribute to solving local communities’ energy and economic
needs.
There is
no assurance that we will operate profitably or will generate positive cash flow
in the future. The
Company has incurred losses since its inception. There is no
assurance that we will operate profitably or will generate positive cash flow in
the future. Such
losses have resulted from engineering and management contracts and fuel sales,
with favorable gross margins, which were more than offset by research,
development and administrative expenses. As the engineering and
management contracts expired, and the wholesale fuel business was discontinued,
losses continued while the business focused on cellulosic research and
development. If we cannot generate positive cash flows in the future,
or raise sufficient financing to continue our normal operations, then we may be
forced to scale down or even close our operations.
-
20 -
Future
Synergistic Projects
Our
design also offers us better access to synergistic opportunities, such as
co-locating CBE
facilities with combined heat and power plants, pulp & paper industries and
first generation ethanol production plants.
As a
natural consequence of converting the fermentable portion of the biomass
feedstock to ethanol, the solid co-product left behind is rich in lignin, a high
energy solid fuel component which is sulfate-free and can be used as a compound
material in the chemicals industry. Using a conventional wood pellet
mill, this co-product can be formed into pellets that are more dense and durable
than the typical wood pellet marketed today. Our process minimizes
chemical biomass pretreatment because the bio-lignin co-product chemistry is
unaltered. This results in a clean-burning, high-energy premium bio-lignin
pellet product.
We have
identified several potential projects and locations for plants using our
technology and are currently conducting multiple pre-feasibility
studies.
Production
Processes
Several
technologies have been developed to produce ethanol from
biomass. Generally speaking, efforts to convert cellulose into
ethanol follow one of two main processes:
|
•
|
Thermochemical conversion of
biomass into synthesis gas or “syngas” (a process often referred to as
“gasification”), followed by catalytic conversion of the syngas into mixed
alcohols that include ethanol and/or alkaline via modified chemistry;
or
|
|
•
|
Biomechanical conversion, which
is the enzymatic or chemical breakdown of biomass into component sugars,
followed by biological fermentation of the sugars into
ethanol.
|
We have
selected the enzymatic breakdown of biomass for producing ethanol from cellulose
alternative because we believe it has distinct advantages over the
thermochemical/gasification methods. Gasification methods present a number of
challenges, including the capital intensity of the process, selectivity of the
syngas conversion to ethanol, and alcohol tolerance of the organisms capable of
converting syngas to ethanol. Furthermore, unlike other cellulosic ethanol
technology, we use insignificant amounts of acid (up to .3%) in our process,
eliminating the environmental hazards that result with acid, and producing
valuable by-products from the resulting lignin. Our process has significantly
reduced process water discharge. Other technologies discharge waste water back
into local streams or municipal waste water systems.
In terms
of reduction of greenhouse gases, cellulosic ethanol represents a significant
advance over grain-based ethanol. According to a report by Argonne
National Laboratory, grain ethanol reduces greenhouse gas by 18% to 29% per
vehicle mile traveled as compared to gasoline, while cellulosic ethanol reduces
greenhouse gas emissions by approximately 85% per vehicle mile traveled. Other
advantages may include additional revenues through the sale of carbon credits,
federal and state tax incentives and other measures that result from
governmental support of cellulosic ethanol.
Business
Strategies
During
the current year, we plan to continue to optimize our technology and to design
our first commercial (and possibly second) CBE facility. In addition, we intend
to license our technology and contract our design engineering to third
parties. We will focus on developing cellulosic ethanol projects
integrated into existing industries like CHP plants, together with partners that
will help us accelerate the commercialization of our cellulosic technology and
expand our global market presence. These strategic partners and
alliances provide an important advantage in realizing success in commercializing
our process technologies. Key elements of our business strategy
are:
-
21 -
· Developing and supplying the
technologies for commercial production of cellulosic ethanol from certain
biomass feedstocks like sugarcane bagasse, eucalyptus and other hard woods, soft
woods and agricultural waste. The design and production
strategy involves developing scalable facilities preferably with integrated
Combined Heat and Power (CHP) and Bio-Lignin production, based on available
feedstock supplies and providing a commercially viable alternative for local
energy and economic needs.
· Owning and operating our own CBE
facilities. We intend to own, or co-own, and operate fully
industrially integrated CBE and CBE/CHP facilities that utilize our proprietary
technology. We intend to co-locate our plants with other industrial
operations such as pulp and paper industries, wood processors, first generation
ethanol and sugar plants that provide synergistic opportunities.
· Improving existing ethanol production
through KL CapacitySM. KL CapacitySM is a service that
provides existing grain-based ethanol plants with specialized engineering
enhancements that improve the efficiency of ethanol production and potential for
increased profitability. KL CapacitySM was developed to respond to rapidly
changing market conditions in grain-based ethanol plants in the US and
sugar-based ethanol plants in Brazil.
We
currently do not sell a material amount of ethanol and/or
bio-lignin. Our WBE facility is currently designed to gather
data for process enhancements, provide input to the design of commercial-scale
projects and validate our technology as part of the feasibility
studies.
Challenges
KL
Energy’s success depends on the ability to develop multiple projects while also
enhancing our process technology. This strategy places increased demand on our
limited human resources and requires us to substantially expand the capabilities
of our operational staff. The ability to attract, train, manage and retain
qualified management, technical, and engineering personnel presents our greatest
challenge. Other significant challenges are:
|
●
|
A significant portion of our
business is in the process of scaling-up to commercial operations, causing
us to rely on outside sources of funding, rather than supporting ourselves
from our own operations.
|
|
●
|
We may be unable to raise debt or
equity funding, upon which we will be highly dependent, in the near
term.
|
|
●
|
Our poor liquidity may deter
existing or potential vendors, suppliers or customers from engaging in
transactions with us.
|
|
●
|
We depend on enzymes, some of
which are in the research and development phase, which currently represent
a significant and volatile expense in the CBE production process. Recent
developments have demonstrated that these costs should continue to drop
rapidly over the next two
years.
|
|
●
|
Our industry continues to develop
both existing and emerging competitors and competitive
technologies.
|
Significant
Developments
Recent
Financing
Our
recent financings are described in Note 3 and Note 13 of the Notes to
Consolidated Financial Statements included in this Report and incorporated by
reference herein.
-
22 -
Subsequent
Events
Information
regarding subsequent events may be found in Note 13 of the Notes to Consolidated
Financial Statements included in this Report and incorporated by reference
herein.
Critical
Accounting Policies and Estimates:
Trade
Receivables
Trade
receivables are carried at original invoice less an estimate made for doubtful
receivables based on a periodic review of all outstanding
amounts. Management of the Company has established an allowance for
doubtful accounts based on their estimate of uncollectible accounts and is
established based on historical performance that is tracked by the Company on an
ongoing basis. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously written off are
recorded when received.
The
Company assesses the realizable value of long-lived assets for potential
impairment at least annually or when events and circumstances warrant such a
review. The net carrying value of a long-lived asset is considered
impaired when the anticipated fair value is less than its carrying
value. Approximately 96% of the Company’s property, plant and
equipment is attributable to the WBE facility in Upton, WY which was
completed in August 2007.
The
Company continually monitors conditions that may indicate a potential impairment
of long-lived assets. These conditions include current-period
operating losses combined with a history of losses and a projection of
continuing losses, and significant negative industry or economic
trends. When these conditions exist, we test for
impairment.
We group
our long-lived assets with other assets and liabilities at the lowest level for
which identifiable cash flows are independent of the cash flows of other assets
and liabilities for the purpose of testing for impairment loss. In
the event of an impairment loss the carrying amount of only the long-lived
assets within the group is reduced. Currently, our long-lived assets
do not have identifiable cash flows that are independent of the cash flows of
other assets and liabilities and, therefore, our long-lived assets are assessed
for impairment as one asset group.
Our
un-discounted cash flows are used to determine if the carrying value of the
Company’s long-lived assets is not recoverable. In this event, we
determine the fair value of our long-lived assets using internal cash flow
projections, outside financing activity, historical financial information,
current market conditions and forecasted future market
conditions. These assessments are used to calculate the present value
of our long-lived assets which we believe is the best estimate of their fair
value. An impairment charge is recognized for the amount by
which the carrying value of the asset group exceeds its estimated fair
value. The assumptions and methodologies used in our 2009 impairment
analysis were substantially the same as we used in our 2008 impairment
analysis.
As of
December 31, 2009, based on these analyses as well as the continuing operational
value of the WBE facility to our research and development efforts, management
concluded that the fair value of these long-lived assets exceeded their $2.4
million net book value and. no impairment charge was
recognized.
Revenue
and Cost Recognition
Revenue
from feedstock testing results from agreements with third parties for the
Company to perform extensive tests to determine if the customer’s feedstock is a
viable candidate for use in the production of cellulosic ethanol. The
standard agreement requires that the customer pay 50% of the testing fee upon
signing the feedstock testing agreement and the remaining 50% when the Company
delivers a final report to the customer explaining the test results and
conclusions. Feedstock testing revenue, and related expenses, are
only recognized when this report is delivered.
Pre-contract
costs directly associated with a specific contract are deferred as incurred in
anticipation of that contract if recovery of these costs is determined to be
probable. Conversely, if it appears unlikely that we will
obtain the contract, all previously deferred costs are expensed. Such
costs include consultant expenses for project development, technology
improvements, facility engineering and feedstock evaluation
expenses.
Based on
our percentage-of-completion revenue recognition policy, revenues and costs
associated with approved change orders are adjusted when Company and customer
approvals of the change order are obtained. For unpriced or
unapproved change orders, recovery must be deemed probable, if the future event
or events necessary for recovery are likely to occur, at which time revenues and
costs associated with the unpriced or unapproved change orders are adjusted. If
change orders are in dispute or are unapproved in regard to both scope and
price, they are evaluated as claims.
Claims
are amounts in excess of the agreed contract price (or amounts not included in
the original contract price) that a contractor seeks to collect from customers
or others for customer-caused delays, errors in specifications and designs,
contract terminations, change orders in dispute or unapproved as to both scope
and price, or other causes of unanticipated additional costs.
Recognition
of amounts of additional contract revenue relating to claims is made only if it
is probable that the claim will result in additional contract revenue and if the
amount can be reliably estimated. Those two requirements are satisfied by the
existence of all of the following conditions:
a.) The
contract or other evidence provides a legal basis for the claim; or a legal
opinion has been obtained, stating that under the circumstances there is a
reasonable basis to support the claim.
b.)
Additional costs are caused by circumstances that were unforeseen at the
contract date and are not the result of deficiencies in the contractor's
performance.
c.) Costs
associated with the claim are identifiable or otherwise determinable and are
reasonable in view of the work performed.
d.) The
evidence supporting the claim is objective and verifiable, not based on
management's feel for the situation or on unsupported
representations.
If the
foregoing requirements are met, revenue from a claim is recorded only to the
extent that contract costs relating to the claim have been incurred. Costs
attributable to claims are treated as costs of contract performance as
incurred.
The
asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenue
recognized.
-
23 -
Patriot
provided blended fuel on consignment to service stations. Revenue
related to the sale of blended fuel by Patriot was recorded when the ethanol was
sold by the service station to the end customer. This operation was
discontinued in January 2009.
Income
Taxes
The
Company uses the asset and liability method to account for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for future tax benefits for
which realization is not considered more likely than not.
Share
Based Compensation
We follow
the guidance in FASB Topic 718 related to share-based payments to recognize all
grants of stock options in our financial statements based upon their respective
grant date fair values. Under this standard, the fair value of each
employee stock option is estimated on the date of grant using an option pricing
model that meets certain requirements. We currently use the Black-Scholes
option pricing model to estimate the fair value of our stock options. The
Black-Scholes model meets the requirements of FASB Topic 718 but the fair values
generated by the model may not be indicative of the actual fair values of our
equity awards as it does not consider certain factors important to those awards
to employees, such as continued employment and periodic vesting
requirements. The determination of the fair value of share-based payment
awards utilizing the Black-Scholes model is affected by our stock price and a
number of assumptions, including expected volatility, expected life and
risk-free interest rate. We use a historical volatility rate on our stock
options. The fair value of our common stock is based on recent private
placement transactions by the Company, as of the date of the grant, which have
been at $1.10 per share. Because its stock is thinly traded, the
Company does not believe that quotations for our common stock, as reported on
the OTC Bulletin Board, particularly at December 31, 2009, are indicative of the
market value of the business. If there are any modifications or
cancellations of the underlying securities, we may be required to accelerate,
increase or cancel any remaining unearned stock-based compensation
expense. To the extent that we grant additional equity securities to
employees, our stock-based compensation expense will be increased by the
additional unearned compensation resulting from those additional
grants.
Liquidity
and Capital Resources
At June
30, 2010, the Company had approximately $708,000 of total current assets which
primarily consisted of $281,000 in cash and cash equivalents, approximately
$267,000 of prepaid insurance, legal and project expenses and $45,000 of
deferred issuance costs. In addition, we had approximately $2.6
million of net property, plant and equipment. Our total assets as of
June 30, 2010 were approximately $3.4 million. With $6.8
million of total current liabilities, the Company had negative working capital
of approximately $6.1 million at June 30, 2010.
We
received additional gross proceeds from private placements of approximately $1.5
million in January 2010, $500,000 in March 2010, $600,000 in May 2010 and
$750,000 in June 2010 fund operating activities and allow long-term borrowing
commitments to remain current. In early July 2010, the Company received
additional capital of approximately $1.5 million in gross
proceeds. These transactions are described in Note 3 and Note 13 of
the Notes to Consolidated Financial Statements. We expect to rely on funds
raised from these recent private placements, as well as future equity and debt
offerings, to implement our growth plan and meet our liquidity needs going
forward. We continue to seek additional financing but are not certain whether
any such financing would be available on terms acceptable to us, if at
all.
Since Q3
2008, when the business became entirely focused on developing and
commercializing our proprietary technology, we have relied on investors’ funds
to support the business. We believe that we will continue to do so
until the revenue derived from licenses and engineering services provided to
third parties and the income from proposed projects reaches a level sufficient
to support the Company.
We have
in the past sought, and been successful in attracting, investment from both
traditional sources and from strategic partnerships and it is part of our
strategy that we will continue to do this irrespective of the success of the
offering. The Company is actively working with professional advisors
that are providing introductions to potential investors in the U.S and
Europe.
Our
ability to generate income from our operations will rely on the ability of
ourselves and our partners to bring existing and future projects to a position
of being fully funded and ready to build. We believe that, in the
current and projected short term economic climate, our smaller, lower-cost
plants will prove to be considerably more financially viable than the competing
alternatives and will continue to attract the support of strategic industry and
financial partners.
In their
report dated March 9, 2010, the Company’s auditors indicated there was
substantial doubt about the Company’s ability to continue as a going concern.
Accordingly, unless we raise additional working capital, obtain project
financing and/or revenues grow to support our business plan, we may be unable to
remain in business.
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24 -
Line
of Credit; Loans
The
Company and certain WBE members are guarantors for, and the Company is
funding payments with respect to, a note payable by WBE to Security
National Bank of $1,332,028 at June 30, 2010. A principal payment of
$500,000 was made in February 2009. Pursuant to amendments executed
during the first quarter of 2009 and 2010, principal and interest payments of
$17,560 were required to be made from March 2009 until the current maturity date
of March 2011. This loan’s maturity may be extended on an annual
basis if the Company is in compliance with the note terms. As of the date of
this report, the Company is in compliance with these terms. This note
bears interest at 6.5% and is secured by substantially all of the assets of
WBE. The Company has no significant debt covenants for any of its
debt.
We had a
line of credit with Wells Fargo for borrowings up to $250,000 and at December
31, 2008 we had borrowed the full amount available. The interest rate
with respect to borrowed amounts was the prime rate used by Wells Fargo plus
0.5%. This line of credit was personally guaranteed by certain persons who
were officers of the Company during 2008. This line of credit has matured and
was paid off in 2009 by a Company payment of $175,000 (plus interest) and by the
proceeds from a line of credit of $75,000 extended to us by a current
shareholder and officer of the Company. This latter amount (plus
interest) was paid off in June 2009.
We had a
subordinated secured note payable to a current shareholder and former officer of
the Company totaling $600,000 at December 31, 2008. This note had a
variable interest rate, which was 5.0% at June 30, 2010 and December 31, 2009,
with interest paid quarterly. Prior to February 2009, this note was
unsecured and did not have a specified due date. In February 2009, the note was
modified to require principal payments of $10,000 per month beginning September
2009 over a 60 month term. The principal payments are scheduled to be $120,000
in each of 2010, 2011, 2012, 2013, and $26,461 in 2014. As security
for our obligations under this note, we granted to the lender a security
interest in our current and future accounts receivable. In addition, if the
Company receives additional equity financing, the Company is obligated to pay 5%
of the proceeds towards principal payments on this note. Based on
equity financing since February 2009, an additional $310,000 has been classified
as currently payable. Total current maturities and the balance on this note as
of June 30, 2010 were $436,461 and $506,461, respectively.
The
Company also has a secured promissory note payable to Lansing Securities Corp.
in the amount of $250,000 at 10% interest. The maturity date of this loan has
passed and has been temporarily waived by Lansing Securities until further
notice.
In June
2009, the Company negotiated a repayment of its overdue payables to
Hermanson Egge, a vendor that supplied construction services to
WBE. The repayment arrangement is unsecured, requires no
interest payments and includes the following schedule of payments: $70,000
in July 2009, $15,000 monthly from July 2009 to April 2010, $10,000 monthly from
May 2010 to August 2010, $20,000 monthly for September 2010 to November 2010 and
$15,000 in December 2010. Up to $75,000 of this payable may be
reduced in exchange for the Company engaging Hermanson Egge to provide
future engineering services with scheduled completion and payment dates not
later than December 1, 2010. The balance of this obligation at June
30, 2010 was $85,000.
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25 -
Long-term
liabilities of approximately $72,000 at June 30, 2010 represent long-term
subordinated indebtedness to a related party ($70,000) and the non-current
portion of the note payable to Shimadzu Financial for financed lab equipment
($1,847). Our total liabilities were approximately $6.8 million as of
June 30, 2010.
In
October 2008, we issued a $250,000 loan to O2Diesel Corporation (“O2D”), a
business partner, and accounted for this transaction by increasing Note
Receivable and decreasing cash for that amount. In early 2009, when it became
apparent that O2D, as a result of its default on this Note and its deteriorating
financial condition, was not going to be able to repay that loan, we effectively
wrote off this receivable with a $250,000 charge to bad debt
expense. This bad debt expense was included in the General and
Administrative expense line in the statement of operations for the year ended
December 31, 2008. In April 2009, the Company sold this Note at face
value to a third party (the "Note Purchaser"). The $250,000 proceeds
from this Note sale was credited to bad debt expense. This bad debt
expense credit was included in the General and Administrative expense line in
the statement of operations for the three and six months ended June 30,
2009.
Subsequently,
O2D declared bankruptcy and the Note Purchaser acquired O2D out of
bankruptcy. The Company acquired the Technology License and Services
Agreement (“License Agreement”), executed with O2D in March 2008, from the Note
Purchaser in exchange for a payment of $150,000 in October 2009 and the
Company's agreement to negotiate a new license for limited territories with the
Note Purchaser. The $150,000 payment was included in the Other
Expense line in the statement of operations for the year ended December 31,
2009.
We have
provided substantial funding for WBE, a 64% owned subsidiary of ours, relating
to the development of our cellulosic technology. As of June 30, 2010
and December 31, 2009, WBE owed us approximately $9.0 million and $8.8 million,
respectively. There is currently no specific repayment schedule for
these debts owed to the Company by WBE.
Net
Cash Flow – Operating Activities
As a
result of the Company’s history of losses, our cash flow from operations has
been negative since the inception of the company. We do not anticipate that we
will have a positive cash flow from operations in 2010. Whether we have positive
cash flow in 2010 depends on whether we are able to realize engineering design
and licensing revenue from new CBE projects (expected to start as early as the
last quarter of 2010) and any facility improvement contracts for GBE plants and
other operational revenue. A significant piece of our business is
still in the research and development phase and we expect to continue to incur
losses until we are able to license our technology for third party projects or
raise financing for our own projects.
We are in
the process of implementing cost control measures that should help us reach our
technology and business goals more efficiently. We have implemented a strict
budgetary and financial control process. We have also re-focused our
human and financial resources towards the goal of being a technology provider
and eliminated positions that are not critical to this business
mission.
During
the six months ended June 30, 2010, our operating activities used a net of
approximately $2.4 million of cash. This reflected a loss of approximately $2.7
million from continuing and discontinued operations, a net loss attributable to
noncontrolling interests of approximately $555,000, increases in trade
receivables ($64,000), prepaid expenses and other current assets ($48,000)
and decreases in accounts payable ($34,000), accrued liabilities ($2,000) and
current liabilities of discontinued operations ($41,000) which were largely
offset by approximately $1.1 million in cash flows provided by depreciation
($970,000) and stock compensation ($88,000).
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26 -
During
the six months ended June 30, 2009, our operating activities used a net of
approximately $2.2 million of cash. This primarily reflected a net loss of
approximately $3.9 million from continuing and discontinued operations, a net
loss attributable to noncontrolling interests of approximately $670,000, an
increase in trade receivables ($17,000) and a decrease in accounts payable
($239,000) which were largely offset by cash flows provided by depreciation
($967,000), increases in the allowance for doubtful accounts ($450,000), accrued
payroll and other liabilities ($981,000 – primarily an estimated $510,000 for
consulting and engineering services provided by Niton Capital, current
liabilities of discontinued operations $161,000, and decreases in prepaid
expenses and other current assets ($385,000 – primarily the reductions in
deferred issuance costs and prepaid insurance) and a decrease in inventories of
approximately $43,000.
Net
Cash Flow - Investing Activities
Net cash
used in investing activities during the six months ended June 30, 2010 of
approximately $112,000 decreased by approximately $39,000 over investing
activities in the six months ended June 30, 2009. This decrease was
the primarily a result of lower purchases of property, plant, and
equipment.
Net
Cash Flow – Financing Activities
Net cash
provided by our financing activities was approximately $2.7 million for the six
months ended June 30, 2010. During this period, we received $3.35 million in
gross proceeds from the private placement of common stock offset by $335,000 in
legal, professional and placement fees and approximately $280,000 of net
reductions in short-term borrowings and long-term debt. Net cash
provided by our financing activities for the six months ended June 30, 2009 was
approximately $2.4 million. During this period, we received $4.0 million in
gross proceeds from the private placement of common stock offset by $750,000 in
legal, professional and placement fees and approximately $871,000 of net
reductions in short-term borrowings and long-term debt.
Results
of Operations for the Three Months Ended June 30, 2010 and 2009
Revenue
In the
three months ended June 30, 2010, the Company did not recognize any biofuel
income due to the timing of several feedstock testing programs. The
Company did not record any revenue for the three months ended June 30, 2009
which was primarily due to the discontinuance and/or work stoppage on
existing contracts in the grain based ethanol business in the latter half of
2008 and it also reflects our focus on research and the enhancement of our CBE
technology.
Operating
Expenses
Operating
expenses of approximately $1.5 million, in the three months ended June 30, 2010,
were approximately $49,000 lower than the comparable period in the prior
year. The primary reason for this decrease was an approximately
$161,000 increase in general and administrative expenses offset by a $210,000
decrease in research and development costs. These decreases were
primarily a result of the reclassification of expenses to conform to
the current period presentation.
Biofuel costs were $0
for the three months ended June 30, 2010 due to the timing of several
feedstock testing programs. These costs were also $0 in the
comparable period in the prior year as there were no feedstock testing programs
completed in 2009.
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27 -
General and Administrative
expense of approximately $722,000 for the three months ended June 30,
2010 was approximately $161,000 higher than the comparable 2009
period. This increase was primarily attributable to $166,000 of
higher administrative expenses (due to higher staffing, advertising, travel and
insurance costs), $31,000 of higher business development expenses (due to an
increase in consulting fees and travel expenses) and $79,000 of higher
legal costs related legacy litigation issues offset by
$115,000 of lower audit and legal fees related to being a public
company.
Research and Development
expense of approximately $784,000 for the three months ended June 30,
2010 was approximately $210,000 lower than the comparable 2009 period primarily
due to reduced operations in 2010 and higher WBE plant maintenance costs in
2009.
Other
Income (Expense)
Other income was
approximately $39,000 and $29,000 for the three months ended June 30, 2010 and
2009, respectively. The 2010 amount primarily includes payables
write-offs ($26k), scrap iron sales and utility credits ($4k) and a favorable
property tax accrual adjustment ($7k). The 2009 amount primarily
includes grant income ($35k) and losses on the disposal of assets
($6k).
Interest expense of
approximately $41,000 for the three months ended June 30, 2010 was approximately
$14,000 higher than the comparable 2009 period primarily as a result of higher
interest on the subordinated debt-related party Note and financed lab equipment
and insurance policies in 2010.
Results
of Operations for the Six Months Ended June 30, 2010 and 2009
Revenue
In the
six months ended June 30, 2010, the Company recognized $120,000 in biofuel
income from several feedstock testing programs. The Company did not
record any revenue for the six months ended June 30, 2009 which was
primarily due to the absence of feedstock testing programs as wells the
discontinuance and/or work stoppage on existing contracts in the grain based
ethanol business in the latter half of 2008. These results also
reflect our focus on research and the enhancement of our CBE
technology.
Operating
Expenses
Operating
expenses of approximately $3.4 million in the six months ended June 30, 2010
were approximately $1.3 million lower than the comparable period in the prior
year. This 28% improvement was attributable to the $1.0 million decrease in
general and administrative expenses and the $230,000 decrease in research and
development costs offset by $60,000 of higher biofuel costs. This
significant decrease in operating expenses was primarily a result of lower
personnel costs due to net staff reductions, lower project costs, a reduction in
WBE research and development activities since January 2010 and reduced public
company related legal and accounting fees offset by higher business development
costs and legal costs related legacy litigation issues.
Biofuel costs of
$60,000 in the six months ended June 30, 2010 compared to $0 costs in the
comparable period in the prior year. This increase is attributable to
several 2010 feedstock testing programs; there were no feedstock testing
programs in the first half of 2009.
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28 -
General and Administrative
expense of $1.6 million for the six months ended June 30, 2010 was $1.0
million, or 38%, lower than the $2.6 million for the comparable period in the
prior year. This significant improvement was primarily attributable
to $0.9 million of lower administrative expenses (due to lower staffing,
advertising, travel and insurance costs), $0.2 million of lower audit and
legal fees related to being a public company and $64,000 in lower project costs
offset by a $96,000 increase in business development costs (due to an increase
in consulting fees and travel expenses) and $109,000 of higher legal costs
related legacy litigation issues.
Research and Development
expense of $1.7 million for the six months ended June 30, 2010 was $0.2
million, or 12%, lower than the $1.9 million for the comparable period in the
prior year. This improvement was largely due to reduced operations in
2010 including a significant reduction in personnel and maintenance costs.
Depreciation expense of approximately $938,000 and $926,000 for the six months
ended June 30, 2010 and 2009, respectively, represents approximately 56% and
46%, respectively, of research and development expenses in these
periods.
Other
Income (Expense)
Other income was
approximately $17,000 and $11,000 for the six months ended June 30, 2010 and
2009, respectively. The 2010 amount primarily includes payables
write-offs ($26k), scrap iron sales and utility credits ($4k) and consulting and
sub-lease income ($6k) offset by property tax accruals ($7k). The
2009 amount primarily includes grant income ($35k) offset by grant expenses
($5k) and losses on the disposal of assets ($3k).
Interest income of
approximately $700 for the six months ended June 30, 2010 was approximately
$44,000 lower than the comparable 2009 period primarily as a result of higher
interest earned on overdue customer balances and higher invested cash balances
in the first half of 2009.
Interest expense of
approximately $81,000 for the six months ended June 30, 2010 was approximately
$21,000 lower than the comparable 2009 period primarily due to the absence of
interest charges from vendors on overdue balances.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
As a
“smaller reporting company” defined in Item 10(f)(1) of Regulation S-K, we are
electing scaled disclosure reporting obligations and therefore are not required
to provide the information requested by this item.
Item 4T. Changes
in Internal Control Over Financial Reporting
(a) Disclosure Controls and
Procedures. We maintain disclosure controls and procedures designed
to provide reasonable assurance that information required to be disclosed in our
reports under the United States Securities and Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure.
Internal
control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
Our
management, with the participation and oversight of our Chief Executive Officer
and our Chief Financial Officer, has reviewed and evaluated the design and
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this quarterly report on Form 10-Q. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of June 30, 2010, our disclosure controls and procedures were not effective
as a result of the continued existence of material weaknesses in internal
controls as identified more fully in “Item 9A (T) Controls and Procedures” in
our Annual Report on Form 10-K for the year ended December 31,
2009. Material weaknesses in our disclosure controls and procedures
were first identified by our independent audit firm during its audit procedures
in mid-2008 as the Company prepared for its reverse merger. These
weaknesses include (a) weak segregation of cash duties (such as expenses did not
have adequate approval, bank reconciliations were not approved, etc.), (b)
journal entries not approved by a non-preparer, (c) documentation, including
signed contracts, (d) inadequately supported various transactions, and (e)
inadequate internal technical expertise related to GAAP and SEC issues and
regulations. As a result of these weaknesses, and the difficulties
encountered in the preparation of financial statements and footnotes, management
determined that the Company’s internal controls were not effective. Many of
these material weaknesses were a result of the Company’s lack of sufficient
resources in its accounting department, a challenge that is likely to continue
until the Company is in a financial position that it believes warrants adding
additional resources. In light of these material weaknesses, we have taken
the actions described below.
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29 -
Because
of these material weaknesses, we have added additional controls and performed
procedures and analyses designed to ensure that our unaudited consolidated
financial statements are presented fairly in all material respects in accordance
with accounting principles generally accepted in the United States. We relied on
increased monitoring and review to compensate for the material weaknesses in our
internal controls. Accordingly, management believes that the unaudited
consolidated financial statements included in this quarterly report fairly
present, in all material respects, our financial position, results of operations
and cash flows for the periods presented.
(b) Internal Controls . In order
to remediate the weaknesses in our disclosure controls and procedures and
internal control over financial reporting identified in our Annual Report on
Form 10-K for the period ended December 31, 2009 we have taken and continue to
take the following actions during the period covered by this
report:
|
·
|
mandated the segregation of
duties regarding cash
transactions;
|
|
·
|
increased the oversight and
review functions over internally developed
documentation;
|
|
·
|
maintained a Disclosure
Committee to review material developments at the Company, as well as the
effectiveness of the Company’s disclosure controls and
procedures;
|
|
·
|
engaged a Chief Financial
Officer and outside securities counsel, both with SEC reporting
experience, and
|
|
·
|
utilized, as needed, a
third-party financial consulting firm to assist management in evaluating
complex accounting issues and implement a system to improve control and
review procedures over all financial statement and account
balances.
|
As a
result of the Company’s actions described above, there were no changes in our
internal controls over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the second quarter of 2010 that materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Management
does not expect that our disclosure controls or our internal control over
financial reporting will prevent or detect all errors and fraud. A control
system cannot provide absolute assurance due to its inherent limitations as it
is a process that involves human diligence and is subject to lapses in judgment
and breakdowns resulting from human failures. However, these inherent
limitations are known features of the financial reporting process; therefore, it
is possible to design into the process safeguards to reduce, though not
eliminate, this risk.
PART
II – OTHER INFORMATION
Item 1. Legal
Proceedings
On July
2, 2010, a lawsuit was brought against the Company and certain current directors
and a Company investor in the Seventh Judicial District Court of Pennington
County, South Dakota. The plaintiff is Randy Kramer, a former CEO of the
Company. The plaintiff alleges, among other things, that the Company
violated the severance agreement signed by the Company and Kramer. The
plaintiff also alleges that the named individuals engaged in conspiracy to have
him removed as CEO and oppressed him to sign the severance agreement. At this
time, the Company is unable to predict the outcome of the case but plans to
vigorously defend its position.
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30 -
Item 1A. Risk
Factors
We are
affected by risks specific to us as well as factors that affect all businesses
operating in a global market. Certain of the significant factors
known to us that could materially adversely affect our business, financial
condition or operating results are described in our Form 10-K filed with the SEC
on March 9, 2010. You should consider such risk factors in addition
to the other information set forth below and elsewhere in this
report. The risks described in our Form 10-K are not the only risks
facing our Company. Additional risks and uncertainties also may
materially adversely affect our business, financial condition, and/or reporting
results.
Item
2. Unregistered Sales of Equity Securities And Use of
Proceeds
Descriptions
of unregistered sales of equity securities are contained in Note 3, Note 7 and
Note 13 in the Notes to Consolidated Financial Statements, which are
incorporated herein by reference.
Item 3. Defaults
Upon Senior Securities
Not
applicable.
Item 5. Other
Information
|
·
|
None.
|
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31 -
(a)
Exhibits
Exhibit
Number
|
|
Description
|
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference to our
Form 10-Q filed on August 11, 2010).
|
|
10.1
|
Convertible
Promissory Note with John Buckens, dated March 9, 2010 (incorporated by
reference to our Form 10-Q filed on August 11,
2010).
|
|
31.1*
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2*
|
Certification
of Acting Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1*
|
Certification
of Chief Executive Officer Pursuant to Section 18 U.S.C. Section
1350
|
|
32.2*
|
|
Certification
of Acting Chief Financial Officer Pursuant to Section 18 U.S.C. Section
1350
|
*
Filed herewith.
Signature
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
September
28, 2010
|
By:
|
/s/ THOMAS J. BOLAN
|
Thomas
J. Bolan, Chief Financial Officer
|
||
(Principal
Financial Officer and duly authorized
signatory)
|
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32 -