Attached files
| file | filename |
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| EX-23.1 - KL Energy Corp | v198023_ex23-1.htm |
Registration
No. 333-167627
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
D.C. 20549
Amendment
No. 1
To
FORM
S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
KL Energy
Corporation
(Name of
registrant as specified in its charter)
|
NEVADA
|
8700
|
39-2052941
|
|
(State
of Incorporation)
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
|
Classification
Code Number)
|
Identification
No.)
|
306 East
Saint Joseph Street, Suite 200
Rapid
City, South Dakota 57701
(605)
718-0372
(Address
and telephone number of principal executive offices and principal place
of business)
Thomas
Schueller
306 East
Saint Joseph Street, Suite 200
Rapid
City, South Dakota 57701
(605)
718-0372
(Name,
address and telephone number of agent for service)
Copies
to:
Raymond
A. Lee, Esq.
Greenberg
Traurig, LLP
3161
Michelson Drive, Suite 1000
Irvine,
California 92612
(949)
732-6500
Approximate
Date of Proposed Sale to the Public: As soon as practicable after the
effective date of this Registration Statement.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. ¨
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act of 1933, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company þ
CALCULATION
OF REGISTRATION FEE
|
Title of Each Class of Securities
|
Amount to be
|
Offering Price per
|
Aggregate
|
Amount of
|
||||||||
|
to be Registered
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Registered(1)(2)
|
Share (2)
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Offering Price
|
Registration Fee
|
||||||||
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common
stock, $0.001 par value
|
|
|
$
|
30,000,000
|
$
|
2,139
|
||||||
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(1)
|
Includes
_____________ shares that the underwriter has the option to purchase to
cover over-allotments, if any. Includes common stock underlying
warrants to purchase _____________ shares issued to the underwriter.
Unless otherwise indicated, all share amounts and prices assume the
consummation of a reverse stock split, at a ratio of 1-to-___ to be
effected prior to the effectiveness of the registration statement, with
the exact timing of the reverse stock split to be determined by the
Registrant’s Board of Directors.
|
|
(2)
|
Estimated solely for purposes of
calculating the registration fee pursuant to Rule 457(o) under the
Securities Act of 1933, as
amended.
|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold until the
registration statement is effective. This prospectus is not an offer to sell
these securities and does not solicit an offer to buy these securities in any
state or other jurisdiction where the offer or sale is not
permitted.
|
PRELIMINARY
PROSPECTUS
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SUBJECT
TO COMPLETION, DATED OCTOBER
5, 2010
|
________
shares of common stock
This
is a firm commitment public offering of ____________ shares of common stock,
$.001 par value per share. Our common stock is currently quoted on the OTC
Bulletin Board under the symbol “KLEG”. Prior to the effectiveness of the
registration statement of which this prospectus is a part, we will effect a
reverse stock split anticipated to be on a 1-for- ___ basis.
Unless otherwise noted, the share amounts and prices set forth on the cover page
of this prospectus assume consummation of the reverse split. On September 27,
2010, the closing bid price of our common stock was $2.50 ($_____ giving effect
to the contemplated 1-for- ___ reverse
stock split). On March 26, 2010, our stock was automatically deleted from
the OTCBB’s Daily List and moved to the Pink Sheets. This action was
caused by the lack of market makers’ quotes which is a reflection of the absence
of a current market for our securities. Based on the limited trading in
our stock, we currently estimate the price range for this offering to be $____
to $_____ (or $___ and $___, respectively, after the 1-for___reverse stock
split).
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Per
Share
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Total
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|||||||
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Public
offering price
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$ | $ | ||||||
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Underwriting
discount and commission
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$ | $ | ||||||
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Proceeds
to us, before expenses
|
$ | $ | ||||||
We
have granted the underwriter a ___ day option to purchase up to ________
additional shares of common stock at the same price, and on the same terms,
solely to cover over-allotments, if any. If the underwriter exercises its
right to purchase shares to cover the over-allotment, we estimate that we will
receive gross proceeds of $___________ and net proceeds of
$___________.
In
connection with this offering, we have agreed to issue to the underwriter a
warrant to purchase up to ____% of the shares sold pursuant to the offering
(excluding the over-allotment) at $_______ per share, commencing one year from
the date of this prospectus and expiring four years thereafter.
INVESTING
IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS.
SEE
"RISK FACTORS" BEGINNING ON PAGE 8.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense. The underwriter expects to deliver the common stock to purchasers
against payment on or about [________] , 2010, subject to customary closing
conditions.
The
date of this prospectus is October
5, 2010.
i
Table
of Contents
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Page
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PROSPECTUS
SUMMARY
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3
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RISK
FACTORS
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8
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USE
OF PROCEEDS
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19
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MARKET
FOR COMMON EQUITY SECURITIES AND DIVIDENDS
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19
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DETERMINATION
OF OFFERING PRICE
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20
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CAPITALIZATION
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21
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DILUTION
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22
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DESCRIPTION
OF BUSINESS
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23
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LEGAL
PROCEEDINGS
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36
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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37
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DIRECTORS,
EXECUTIVE OFFICERS AND CONTROL PERSONS
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44
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EXECUTIVE
COMPENSATION
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48
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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53
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TRANSACTIONS
WITH RELATED PERSONS
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55
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DESCRIPTION
OF SECURITIES
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58
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PLAN
OF DISTRIBUTION
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61
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LEGAL
MATTERS
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65
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EXPERTS
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65
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AVAILABLE
INFORMATION
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65
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INDEX
TO JUNE 30, 2010 FINANCIAL STATEMENTS
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E-1
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INDEX
TO DECEMBER 31, 2009 FINANCIAL STATEMENTS
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F-1
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EXHIBITS
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II-5
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EXPLANATORY
NOTE
This
Amendment No. 1 on Form S-1/A (“Form S-1/A”) amends our Registration Statement
on Form S-1, as initially filed with the Securities and Exchange Commission on
June 18, 2010 (“Original Filing”), to revise certain disclosures therein based
on comments provided by the Staff of the Securities and Exchange Commission and
to provide updates to our disclosures.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This registration
statement 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, including without
limitation matters identified in the “Risk Factors” described below. 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 registration statement.
When used
in this registration statement, the terms the "Company," "KL Energy", "we,"
"us," "ours," and similar terms refer to KL Energy Corporation, a Nevada
corporation, and its subsidiaries.
ii
PROSPECTUS
SUMMARY
This
summary highlights selected information elsewhere or incorporated by reference
in this prospectus and may not contain all the information that you need to
consider in making your investment decision. You should carefully read this
entire prospectus, as well as the information to which we refer you and the
information incorporated by reference herein, before deciding whether to invest
in the common stock. You should pay special attention to the "Risk Factors"
section of this prospectus beginning on page 7 to determine whether an
investment in the common stock is appropriate for you.
Unless
otherwise indicated, all share amounts and prices assume the consummation of the
Reverse Stock Split to be effected prior to the effectiveness of the
registration statement of which this prospectus is a part, with the exact timing
of the Reverse Stock Split and the ratio to be determined by our Board of
Directors.
Our
Business
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 85 gallons per dry metric
ton at lab bench scale.
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.
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.
Due to
the nature of our business and the early stage of our development, our
securities must be considered highly speculative. Our future business will
include licensing technology and designing facilities relating to the production
of ethanol from cellulosic feedstock and there is no assurance that we will
realize any profits in the short or medium term. Any profitability our
cellulosic ethanol production business does realize will also be dependent upon
the successful commercialization or licensing of our core technology, which
itself is subject to numerous risk factors as set forth
herein.
3
Business
Strategies
During
the current year, we plan to continue to optimize our technology and to design
our first, 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
to 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:
·
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 (co-)own and operate fully
integrated CHP/CBE facilities that utilize our proprietary technology. When
feasible, we intend to co-locate plants with other industrial operations
such as pulp and paper industries, first generation ethanol and sugar
plants that provide synergistic opportunities.
·
Developing national and
international strategic partnerships and strategic alliances .
We intend to develop our projects together with partners that will
help accelerate the commercialization of our cellulosic technology and expand
our global market presence. These strategic partners and alliances will be
important in accelerating the commercialization of our process
technologies.
·
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
plant currently does not run on a full time basis. 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:
|
|
●
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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.
|
|
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●
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Our poor liquidity may deter
existing or potential vendors, suppliers or customers from engaging in
transactions with us.
|
|
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●
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We depend on enzymes some of
which are in the research and development phase and 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.
|
Corporate
Information
Our
principal offices are located at 306 East Saint Joseph Street, Suite 200 Rapid
City, South Dakota 57701 and our telephone number is (605) 718-0372. Our
website address is www.klenergycorp.com. Information contained on our
website is not incorporated by reference into this prospectus, and you should
not consider information contained on our website to be part of this
prospectus.
4
The
Offering
|
Common
stock offered by us
|
______________
shares, $.001 par value (or ______________ shares if the underwriter
exercises its over-allotment option to purchase additional
shares).
|
|
|
Common
stock to be outstanding after the offering
|
______________
shares (or ______________ shares if the underwriter exercises its
over-allotment option to purchase additional shares).
|
|
|
Over-allotment
option
|
We
granted the underwriter an option to purchase up to an additional
_____________ shares of common stock, within 45 days after the date
of this prospectus, in order to cover over-allotments, if
any.
|
|
|
Purchase
option
|
We
granted the underwriter an option to purchase, for its own account, up to
an additional _____________ shares of common stock which are
exercisable, in whole or in part commencing on a date which is one year
after the date of this prospectus and expiring on the five-year
anniversary of this prospectus, at an initial exercise price per Share of
$[__________], which is equal to [____]% of the initial public offering
price of the shares.
|
|
|
Offering
price
|
$________
per share.
|
|
|
Net
proceeds
|
The
net proceeds, after underwriting discounts and estimated expenses, to us
from the sale of the common stock offered hereby will be approximately
$_______ million. (If the underwriter exercises its over-allotment
option in full, we estimate that our net proceeds will be approximately
$_______ million.)
|
|
|
Use
of proceeds
|
It
is our intention that the net proceeds of this offering will be used to
finance the further development and commercialization of our technology,
sales and marketing activities, additional capital expenditures to expand
demonstration facilities and working capital and other general
corporate purposes including the following (specific amounts will be
provided after determining the offering price and number of
shares):
-
$_____ (or __%) to continue the development of existing commercial
opportunities including $____ (or __%) for the completion of basic
engineering and feasibility studies into two industrially integrated
plants in the U.S.
-
- $_____ (or __%) for continuing Research and Development into our 5th
generation technology enhancements
-
- $______ (or __%) to expand sales and marketing activities in key
markets
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|
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Risk
Factors
|
See
“Risk Factors” starting on page 8 of this prospectus for a discussion
of factors you should carefully consider before deciding to invest in our
common stock.
|
|
|
Market
|
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“KLEG”
|
The
above information is based on 48,378,378 shares of common stock outstanding
as of August 11, 2010.
5
Summary
Consolidated Financial Data
The
following table sets forth a summary of our historical consolidated financial
data for the periods ended or as of the dates indicated. We have derived the
consolidated statements of operations data for the years ended December 31,
2007, 2008 and 2009 from our audited consolidated financial statements appearing
elsewhere in this prospectus. You should read this table together with our
consolidated financial statements and the accompanying notes, “Selected
Consolidated Financial Data” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” appearing elsewhere in this
prospectus. The summary consolidated financial data in this section is not
intended to replace our consolidated financial statements and the accompanying
notes. Our historical results are not necessarily indicative of our future
results.
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Six Months Ended
|
||||||||||||||||||||
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Year Ended December 31,
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June 30,
|
|||||||||||||||||||
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2007
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2008
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2009
|
2009
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2010
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||||||||||||||||
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Revenue
|
||||||||||||||||||||
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Engineering
and management contracts
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$ | 4,310,615 | $ | 4,009,825 | $ | - | $ | - | $ | - | ||||||||||
|
Biofuel
income
|
- | 120,000 | ||||||||||||||||||
|
Total
Revenue
|
4,310,615 | 4,009,825 | - | - | 120,000 | |||||||||||||||
|
Operating
Expenses
|
||||||||||||||||||||
|
Cost
of engineering and management contracts
|
2,904,619 | 1,959,202 | - | - | - | |||||||||||||||
|
Biofuel
costs
|
- | - | - | - | 60,000 | |||||||||||||||
|
General
and administrative
|
2,261,198 | 4,344,651 | 4,647,240 | 2,635,746 | 1,636,894 | |||||||||||||||
|
Research
and development
|
1,706,293 | 2,704,717 | 3,324,980 | 1,895,085 | 1,665,362 | |||||||||||||||
|
Total
Operating Expenses
|
6,872,110 | 9,008,570 | 7,972,220 | 4,530,831 | 3,362,256 | |||||||||||||||
|
Loss
from Operations
|
(2,561,495 | ) | (4,998,745 | ) | (7,972,220 | ) | (4,530,831 | ) | (3,242,256 | ) | ||||||||||
|
Other
Income (Expense):
|
||||||||||||||||||||
|
Other
income (expense)
|
3,428 | (165,723 | ) | (116,289 | ) | 11,409 | 17,034 | |||||||||||||
|
Interest
income
|
- | (6,954 | ) | 48,522 | 44,330 | 747 | ||||||||||||||
|
Interest
expense
|
(298,497 | ) | (1,914,187 | ) | (194,679 | ) | (101,743 | ) | (80,839 | ) | ||||||||||
|
Total
Other Expense, Net
|
(295,069 | ) | (2,086,864 | ) | (262,446 | ) | (46,004 | ) | (63,058 | ) | ||||||||||
|
Loss
From Continuing Operations Before Tax
|
(2,856,564 | ) | (7,085,609 | ) | (8,234,666 | ) | (4,576,835 | ) | (3,305,314 | ) | ||||||||||
|
Income
Taxes
|
- | - | - | - | - | |||||||||||||||
|
Loss
From Continuing Operations After Tax
|
(2,856,564 | ) | (7,085,608 | ) | (8,234,666 | ) | (4,576,835 | ) | (3,305,314 | ) | ||||||||||
|
Income
(loss) from discontinued operations
|
825,966 | (406,815 | ) | (12,000 | ) | (12,000 | ) | 30,537 | ||||||||||||
|
Net
Loss
|
(2,030,598 | ) | (7,492,424 | ) | (8,246,666 | ) | (4,588,835 | ) | (3,274,777 | ) | ||||||||||
|
Net
loss attributable to noncontrolling interests
|
638,770 | 99,591 | 1,251,855 | 670,297 | 554,919 | |||||||||||||||
|
Net
Loss Attributable to KL Energy Corporation
|
$ | (1,391,828 | ) | $ | (7,392,833 | ) | $ | (6,994,811 | ) | $ | (3,918,538 | ) | $ | (2,719,858 | ) | |||||
|
Net
(Loss) Income Per Share, basic and diluted:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (0.22 | ) | $ | (0.62 | ) | $ | (0.19 | ) | $ | (0.13 | ) | $ | (0.06 | ) | |||||
|
Discontinued
operations
|
0.08 | (0.03 | ) | (0.00 | ) | (0.00 | ) | 0.00 | ||||||||||||
|
Net
Loss Attributable to KL Energy Corporation
|
$ | (0.14 | ) | $ | (0.65 | ) | $ | (0.19 | ) | $ | (0.13 | ) | $ | (0.06 | ) | |||||
|
Weighted
Average Common Shares Outstanding-Basic and Diluted
|
9,900,266 | 11,342,967 | 36,618,280 | 30,306,036 | 46,879,634 | |||||||||||||||
6
The
following table sets forth summary unaudited pro forma and pro forma as adjusted
consolidated financial data, which gives effect to the transactions described in
the footnotes to the table. The unaudited pro forma and pro forma as adjusted
consolidated financial data is presented for informational purposes only and
does not purport to represent what our consolidated results of operations or
financial position actually would have been had the transactions reflected
occurred on the dates indicated or to project our financial condition as of any
future date or results of operations for any future period.
|
As of June 30, 2010
|
|||||||||
|
Actual
|
Pro-Forma
(1)
|
Pro-Forma
As
Adjusted
(2) (3)
|
|||||||
|
Cash
and cash equivalents
|
$ | 280,951 | $ | 280,951 | |||||
|
Current
assets
|
707,903 | 707,903 | |||||||
|
Total
assets
|
3,351,751 | 3,351,751 | |||||||
|
Current
debt obligations
|
2,149,027 | 2,149,027 | |||||||
|
Other
current liabilities
|
4,613,806 | 4,613,806 | |||||||
|
Long-term
debt
|
71,847 | 71,847 | |||||||
|
Common
stock
|
48,378 | 48,378 | |||||||
|
Additional
paid-in capital
|
10,069,312 | 10,069,312 | |||||||
|
Total
stockholders' (deficit) equity
|
(3,482,929 | ) | (3,482,929 | ) | |||||
(1)
The pro forma consolidated balance sheet data gives effect to the conversion of
all of our warrants into common stock.
(2) The
pro forma as adjusted consolidated balance sheet data gives effect to the sale
of ___________ shares of common stock in this offering at an assumed initial
public offering price of $_____ per share (the midpoint of the price range set
forth on the cover page of this prospectus), after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
(3) Each
$1.00 increase or decrease in the assumed initial public offering price of
$_____ per share (the midpoint of the price range set forth on the cover page of
this prospectus) would increase or decrease, as applicable, our pro forma as
adjusted cash and cash equivalents, working capital, total assets and
stockholders’ equity by approximately $_____ million, assuming that the number
of shares offered by us, as set forth on the cover page of this prospectus,
remains the same and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
7
RISK
FACTORS
An
investment in our common stock involves a number of very significant risks. You
should carefully consider the following risks and uncertainties in addition to
other information in this report in evaluating our company and its business. Our
business, operating results and financial condition could be seriously harmed
due to any of the following risks. The risks described below are the material
risks that we are currently aware of that are facing our company. You could lose
all or part of your investment due to any of these risks.
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. Such losses have resulted from
engineering and management contracts and fuel sales, with favorable gross
margins, which were 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. In particular, additional capital may be required in the event
that:
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-
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The
US federal government reduces nationwide fuel standards
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|
|
-
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The
price of ethanol and co-products drop below that necessary to have
profitable operations
|
|
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-
|
We
are unable to obtain contracts from third parties for our technology and
services
|
The
occurrence of any of these events could adversely affect our ability to meet our
business plans.
We will
depend almost exclusively on outside capital to pay for the continued
development of our company. Such outside capital may include the sale of
additional stock and/or commercial borrowing. The issuance of additional equity
securities by us would result in dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash
commitments.
If we are
unable to obtain financing in the amounts and on terms deemed acceptable to us,
we may be unable to continue our business and as a result may be required to
scale back or cease operations for our business, the result of which would be
that our stockholders would lose some or all of their investment.
A
decline in the price of our common stock could affect our ability to raise
further working capital and adversely impact our operations.
A
prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. A decline in the price of our common stock could be especially
detrimental to our liquidity and our continued operations. Any reduction in our
ability to raise equity capital in the future would force us to reallocate funds
from other planned uses and would have a significant negative effect on our
business plans and operations, including our ability to develop new projects and
continue our current operations. If our stock price declines, we may not be able
to raise additional capital or generate funds from operations sufficient to meet
our obligations.
Concentration
of ownership among our existing officers, directors and principal stockholders
may prevent other stockholders from influencing significant corporate decisions
and depress our stock price.
As of
September 15, 2010, there were 9 individuals and entities, representing our
officers, directors and existing stockholders who hold at least 5% of our stock,
that together control approximately 83% of our outstanding common stock. Current
KL management owns approximately 10% of outstanding common stock. Since
the merger with KL Process Design Group, LLC (“KLPDG”), a South Dakota limited
liability company and our predecessor company (the “Merger”), less than 600 (out
of over 47 million outstanding) shares have been traded which makes KL a very
thinly traded stock. If these officers, directors, and principal
stockholders or a group of our principal stockholders act together, they will be
able to exert a significant degree of influence over our management and affairs
and control matters requiring stockholder approval, including the election of
directors and approval of mergers or other business combination transactions.
The interests of this concentration of ownership may not always coincide with
our interests or the interests of other stockholders. For instance, officers,
directors, and principal stockholders, acting together, could cause us to enter
into transactions or agreements that we would not otherwise consider. Similarly,
this concentration of ownership may have the effect of delaying or preventing a
change in control of our company otherwise favored by our other stockholders.
This concentration of ownership could depress our stock
price.
8
We
have a limited operating history and if we are not successful in continuing to
grow our business, then we may have to scale back or even cease our ongoing
business operations.
Our
company has a limited operating history and must be considered in the
development stage. The success of the company is significantly dependent on
successful implementation of our business plan. Our company’s operations will be
subject to all of the risks inherent in the establishment of a developing
enterprise and the uncertainties arising from the absence of a significant
operating history. We may be unable to operate on a profitable basis. A
significant portion of our business efforts are focused on technology
development and potential investors should be aware of the difficulties normally
encountered by this type of enterprise. If our business plan is not successful,
and we are not able to operate profitably, investors may lose some or all of
their investment in our company.
Because
of the early stage of development and the nature of our business, our securities
are considered highly speculative.
Due to
the nature of our business and the early stage of our development, our
securities must be considered highly speculative. Our future business will
include licensing technology and designing facilities relating to the production
of ethanol from cellulosic feedstock and there is no assurance that we will
realize any profits in the short or medium term. Any profitability our
cellulosic ethanol production business does realize will also be dependent upon
the successful commercialization or licensing of our core technology, which
itself is subject to numerous risk factors as set forth herein.
Need for ongoing
financing.
We will
need additional capital to continue operations and will endeavor to raise funds
through the sale of equity shares and revenues from operations. There can be no
assurance that our company will generate revenues from operations or obtain
sufficient capital on acceptable terms, if at all. Failure to obtain such
capital or generate such operating revenues would have an adverse impact on
financial position and results of operations and ability to continue as a going
concern. Operating and capital requirements during the next fiscal year and
thereafter will vary based on a number of factors, including the level of sales
and marketing activities for our services and products. There can be no
assurance that additional private or public financing, including debt or equity
financing, will be available as needed, or, if available, on terms favorable to
us. Any additional equity financing may be dilutive to stockholders and such
additional equity securities may have rights, preferences, or privileges that
are senior to those of our outstanding common stock.
Furthermore,
debt financing, if available, will require payment of interest and may involve
restrictive covenants that could impose limitations on operating flexibility.
Our company’s failure to successfully obtain additional future funding may
jeopardize the ability to continue our business and operations. If we can raise
additional funds by issuing equity securities, existing stockholders may
experience a dilution in their ownership. In addition, as a condition to giving
additional funds, future investors may demand, and may be granted, rights
superior to those of existing stockholders.
Specifically,
we will need to raise additional funds to:
|
|
•
|
Build cellulosic based ethanol
plants
|
|
|
•
|
Support our anticipated growth
and carry out our business
plan
|
|
|
•
|
Continue our research and
development programs
|
|
|
•
|
Protect our intellectual
property
|
|
|
•
|
Hire top quality personnel for
all areas of our business
|
|
|
•
|
Address and take advantage of
competing technological and market
developments
|
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•
|
Establish additional
collaborative relationships
|
|
|
•
|
Successfully obtain federal
grants and loan guarantees
|
|
|
•
|
Take advantage of subsidies and
federal tax credits
|
9
The
global financial crisis may have impacts on our business and financial condition
that we currently cannot predict.
The
continued credit crisis and related turmoil in the global financial system has
had, and may continue to have, an impact on our business and our financial
condition. We may face significant challenges if conditions in the financial
markets do not improve. Our ability to access the capital markets may be
severely restricted at a time when we would like, or need, to raise capital,
which could have an adverse impact on our ability to meet our capital
commitments and flexibility to react to changing economic and business
conditions. The credit crisis could have a negative impact on our lenders
or our customers, causing them to fail to meet their obligations to us.
Additionally, demand for our services and products depends on activity and
expenditure levels in the ethanol industry, which are negatively impacted by
reduced availability of credit and private or public financing alternatives,
lack of consumer confidence and falling oil and gas prices.
We
face risks associated with our international business.
Our
business plan calls for significant portions of our future operations to be
conducted outside of the United States. International business operations
are subject to a variety of risks, including:
|
|
•
|
changes in or interpretations of
foreign regulations that may adversely affect our ability to sell our
products or repatriate profits to the United
States;
|
|
|
•
|
the imposition of
tariffs;
|
|
|
•
|
the imposition of limitations on,
or increase of, withholding and other taxes on remittances and other
payments by foreign subsidiaries or joint
ventures;
|
|
|
•
|
the imposition of limitations on
genetically-engineered products or processes and the production or sale of
those products or processes in foreign
countries;
|
|
|
•
|
currency exchange rate
fluctuations;
|
|
|
•
|
uncertainties relating to foreign
laws and legal proceedings including tax and exchange control
laws;
|
|
|
•
|
the availability of government
subsidies or other incentives that benefit competitors in their local
markets that are not available to
us;
|
|
|
•
|
economic or political instability
in foreign countries;
|
|
|
•
|
difficulties in staffing and
managing foreign operations;
and
|
|
|
•
|
the need to comply with a variety
of U.S. laws applicable to the conduct of overseas operations, including
export control laws and the Foreign Corrupt Practices
Act.
|
Our
cellulose-to-ethanol technologies, although tested at our WBE demonstration
plant, are unproven on a fully scaled-up commercial basis and performance could
fail to meet projections which could have a detrimental effect on the long-term
capital appreciation of our stock.
While
production of ethanol from corn, sugars, and starches is a mature technology,
newer technologies for production of ethanol from cellulose biomass have not
been built at large commercial scales. The technologies being utilized by us for
ethanol production from biomass have not been demonstrated on a large commercial
scale. All of the tests conducted to date by us with respect to our enzymatic
hydrolysis have been performed on limited quantities of feedstocks, and we
cannot assure you that the same or similar results could be obtained at
competitive costs on a large-scale commercial basis. We have never utilized
these technologies under the conditions or in the volumes that will be required
to be profitable and cannot predict all of the difficulties that may arise. It
is possible that the technologies, when used, may require further research,
development, design and testing prior to larger-scale commercialization.
Accordingly, we cannot assure you that these technologies will perform
successfully on a large-scale commercial basis or at all.
10
Our
business employs technology which may be difficult to protect and may infringe
on the intellectual property rights of third parties.
We may
lose our competitiveness if we are not able to protect our proprietary
technology and intellectual property rights against infringement, and any
related litigation may be time-consuming and costly. Our success and
ability to compete depends to a significant degree on our proprietary
technology. If any of our competitors copy or otherwise gain access to our
proprietary technology or develop similar technologies independently, we may not
be able to compete as effectively. The measures we have implemented to protect
our proprietary technology and other intellectual property rights are primarily
based upon trade secrets. These measures, however, may not be adequate to
prevent the unauthorized use of our proprietary technology and our other
intellectual property rights. Further, the laws of foreign countries may provide
inadequate protection of such intellectual property rights. We may need to bring
legal claims to enforce or protect such intellectual property rights. Any
litigation, whether successful or unsuccessful, may result in substantial costs
and a diversion of our company's resources. In addition, notwithstanding our
rights to our intellectual property, other persons may bring claims against us
alleging that we have infringed on their intellectual property rights or claims
that our intellectual property rights are not valid. Any claims against us, with
or without merit, could be time consuming and costly to defend or litigate,
divert our attention and resources, result in the loss of goodwill associated
with our business or require us to make changes to our technology.
Confidentiality
agreements with employees and others may not adequately prevent disclosures of
trade secrets and other proprietary information.
We rely
in part on trade secret protection to protect our confidential and proprietary
information and processes. However, trade secrets are difficult to protect. We
have taken measures to protect our trade secrets and proprietary information,
but these measures may not be effective. We require new employees and
consultants to execute confidentiality agreements upon the commencement of an
employment or consulting arrangement with us. These agreements generally require
that all confidential information developed by the individual or made known to
the individual by us during the course of the individual’s relationship with us
be kept confidential and not disclosed to third parties. These agreements also
generally provide that inventions conceived by the individual in the course of
rendering services to us shall be our exclusive property. Nevertheless, our
proprietary information may be disclosed, third parties could reverse engineer
our biocatalysts and others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets. Costly and time-consuming litigation could be necessary to enforce and
determine the scope of our proprietary rights, and failure to obtain or maintain
trade secret protection could adversely affect our competitive business
position.
Our
business prospects will be impacted by corn supply and the corn based ethanol
industry.
Our
ethanol will be produced from cellulose. However globally, currently most
ethanol is produced from sugar cane, sugar beet, corn, or other grain crops
which are affected by weather, governmental policy, disease and other
conditions. A significant increase in the availability of these feedstocks, and
resulting reduction in their price, may decrease the price of ethanol and harm
our business.
If
ethanol and gasoline prices drop significantly, we will also be forced to reduce
our prices, which potentially may lead to further losses.
Usually
following oil prices, prices for ethanol products can vary significantly over
time and decreases in price levels could adversely affect our profitability and
viability. The price of ethanol has some correlation to the price of gasoline.
The price of ethanol tends to increase as the price of gasoline increases, and
the price of ethanol tends to decrease as the price of gasoline decreases. Any
lowering of gasoline prices will likely also lead to lower prices for ethanol
and adversely affect our operating results. We cannot assure you that we will be
able to sell our ethanol profitably, or at all. Third parties will be less
likely to license our technology if there are prolonged periods of low ethanol
prices.
11
Increased
ethanol production from cellulose could increase the demand and price of
feedstocks, reducing our profitability.
New
ethanol plants that utilize cellulose as their feedstock may be under
construction or in the planning stages in our key markets. This increased
ethanol production could increase cellulose demand and prices, resulting in
higher production costs and lower profits.
Price
increases or interruptions in needed energy supplies could cause loss of
customers and impair our profitability.
Ethanol
production requires a constant and consistent supply of energy. If there is any
interruption in our supply of energy for whatever reason, such as availability,
delivery or mechanical problems, we may be required to halt production. If we
halt production for any extended period of time, it will have a material adverse
effect on our business. Natural gas and electricity prices have historically
fluctuated significantly. We purchase significant amounts of these resources as
part of our ethanol production. Increases in the price of natural gas or
electricity would harm our business and financial results by increasing our
energy costs.
Our
business plan calls for extensive amounts of funding to construct and operate
our biorefinery/energy center projects and we may not be able to obtain such
funding which could adversely affect our business, operations, and financial
condition.
Our
business plan depends on the completion of our proposed projects. Although each
facility will have specific funding requirements, our proposed non integrated
cellulosic based ethanol facilities will require approximately $35-$50 million
each to fund. This figure will increase if the projects include Combined Heat
& Power (“CHP”) as a 15MW CHP plant will cost approximately an
additional $20-$40 million. We will be relying on additional financing, and
would benefit from funding from such sources as The Energy Policy Act grants and
loan guarantee programs. We are currently in discussions with potential sources
of financing but no definitive agreements are in place. If we cannot achieve the
requisite financing or complete the projects as anticipated, this could
adversely affect our business, the results of our operations, prospects and
financial condition.
Because
we are smaller and currently have fewer financial resources than many larger
ethanol producers, we may not be able to successfully compete in the very
competitive ethanol industry.
There is
significant competition among ethanol producers. Our business faces competition
from larger 1st Gen ethanol plants, and from other companies proposing plants
using cellulose. Our ethanol plants will be in direct competition with other
ethanol producers, many of which have greater resources than we currently have.
While our competitive position will come from our projected lower production
costs because we are using cheaper feedstock and lower transportation costs
because our production facilities will be located closer to the urban markets
for ethanol, the large ethanol producers are capable of producing a
significantly greater amount of ethanol than we can and expect to produce
initially.
12
Our
inability to complete our technology development activities may severely limit
our ability to operate and finance operations.
Commercial
scale-up of any new process technology carries significant risk and ours is no
different. We may not be able to effectively scale-up the technology to produce
the yields experienced at the laboratory, pilot and demonstration level, or
successfully market it in a timely and cost effective manner. We, and any of our
potential collaborators, may encounter problems and delays relating to research
and development, regulatory approval and intellectual property rights relating
to our technology. Any delays in the commercialization could potentially
adversely affect our financial condition.
If
we fail to effectively manage the growth of our company and the
commercialization or licensing of our technology, our future business results
could be harmed and our managerial and operational resources may be
strained.
As we
proceed with the development of our technology and the expansion of our
marketing and commercialization potential business, and fail to manage growth
effectively, this could have a material adverse effect on our business and
financial condition. We expect to experience significant growth in the scope and
complexity of our business. We will need to add staff to market our services,
manage operations, handle sales and marketing efforts, and perform finance and
accounting functions. We anticipate that we will be required to hire a broad
range of additional personnel in order to successfully advance our operations.
This growth is likely to place a strain on our management and operational
resources. The failure to develop and implement effective systems, or to hire
and retain sufficient personnel for the performance of all of the functions
necessary to effectively service and manage our operations could have a
detrimental effect.
Our
quarterly operating results are subject to fluctuation.
Our
company’s quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, most of which are outside its control,
including the demand for services, seasonal trends in purchasing, the amount and
timing of capital expenditures, price competition or pricing changes in the
industry, technical difficulties or system downtime, general economic
conditions, and economic conditions specific to the industry. The quarterly
results may also be significantly impacted by the impact of the accounting
treatment of acquisitions, financing transactions or other matters. Due to the
foregoing factors, among others, it is likely that the operating results will
fall below expectations or those of investors in some future
quarter.
Our
ability to use our net operating loss carryforwards to offset future taxable
income may be subject to certain limitations.
In
general, under Section 382 of the Internal Revenue Code, a corporation that
undergoes an “ownership change” is subject to limitations on its ability to
utilize its pre-change net operating loss carryforwards, or NOLs, to offset
future taxable income. If the Internal Revenue Service challenges our analysis
that our existing NOLs are not subject to limitations arising from previous
ownership changes, or if we undergo an ownership change in connection with or
after this public offering, our ability to utilize NOLs could be limited by
Section 382 of the Internal Revenue Code. Future changes in our stock
ownership, some of which are outside of our control, could result in an
ownership change under Section 382 of the Internal Revenue Code.
Furthermore, our ability to utilize NOLs of companies that we may acquire in the
future may be subject to limitations. For these reasons, we may not be able to
utilize a material portion of our NOLs even if we attain
profitability.
13
We
rely heavily on key personnel and loss of the services of one or more of its key
executives or a significant portion of any prospective local management
personnel could weaken the management team adversely affecting the
operations.
Our
success depends on the skills, experience, and efforts of our senior management
and engineering staff. Operations will also be dependent on the efforts,
ability, and experience of key members of the prospective local project and
plant management staff. The loss of services of one or more members of the
senior management or of a significant portion of any of local management staff
could significantly weaken management expertise. We do not maintain key man life
insurance policies for all of our officers.
We
are subject to contractual payment disputes and refund requests.
As
described in Note 7 to the Financial Statements, certain contractual payments
made to us may have to be returned to one customer. Billings for this
customer are estimated to exceed costs and estimated earnings by
approximately $1,640,588. Although vigorously defending this claim, the
Company may be liable to return any excess billings.
Any
change to government regulation or administrative practices may have a negative
impact on our ability to operate and our profitability.
The laws,
regulations, policies, or current administrative practices of any government
body, organization or regulatory agency in the United States or any other
jurisdiction, may be changed, applied or interpreted in a manner which will
fundamentally alter the ability of our company to carry on our business. The
actions, policies or regulations, or changes thereto, of any government body or
regulatory agency, or other special interest groups, may have a detrimental
effect on us. Any or all of these situations may have a negative impact on our
ability to operate, and/or on our profitability.
Costs
of compliance with burdensome or changing environmental and operational safety
regulations could cause our focus to be diverted away from our business and our
results of operations to suffer.
Ethanol
production involves the emission of various airborne pollutants, including
particulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatile
organic compounds and sulfur dioxide. The production facilities that we will
build may discharge water into the environment. As a result, we are subject to
complicated environmental regulations of the U.S. Environmental Protection
Agency and regulations and permitting requirements of the states where our
plants may be located. These regulations are subject to change and such changes
may require additional capital expenditures or increased operating costs.
Consequently, considerable resources may be required to comply with future
environmental regulations. In addition, our ethanol plants could be subject to
environmental nuisance or related claims by employees, property owners or
residents near the ethanol plants arising from air or water discharges. Ethanol
production has been known to produce an odor to which surrounding residents
could object. Environmental and public nuisance claims, or tort claims based on
emissions, or increased environmental compliance costs could significantly
increase our operating costs.
14
Our
proposed new ethanol plants will also be subject to federal and state laws
regarding occupational safety.
Risks of
substantial compliance costs and liabilities are inherent in ethanol production.
We may be subject to costs and liabilities related to worker safety and job
related injuries, some of which may be significant. Possible future
developments, including stricter safety laws for workers and other individuals,
regulations and enforcement policies and claims for personal or property damages
resulting from operation of the ethanol plants could reduce the amount of cash
that would otherwise be available to further enhance our business.
Implementation
of Carbon Dioxide Emissions Reduction Strategy
In an
effort to respond to concerns over climate change, the U.S. Congress is
considering various proposals to reduce emissions of greenhouse gases, including
carbon dioxide. Several bills have been introduced in Congress that would
mandate greenhouse gas emission reductions and presently there are no federal
mandatory greenhouse gas requirements. While it is possible that Congress will
adopt some form of mandatory greenhouse gas emission reductions legislation in
the future, the timing and specific requirements of any such legislation are
uncertain. The United States Environmental Protection Agency (”EPA”) found that
greenhouse gases are harmful pollutants, and therefore are subject to regulation
under the Clean Air Act. The EPA has stated that it therefore intends to issue
regulations governing the emission of greenhouse gases.
The
greenhouse gas policy of the United States currently favors voluntary actions to
reduce emissions and continued research and technology development over
near-term mandatory greenhouse gas emission reduction requirements. In line with
this policy, we are focused on initiatives to reduce greenhouse gas emissions,
particularly carbon dioxide.
In the
event that these legislative or regulatory initiatives increase the economic
cost of emitting greenhouse gases, our businesses could be materially affected.
Our existing and future plants are emitters of greenhouse gases. The net effect
on any plant from such initiatives would depend on the baseline level of allowed
emissions in any new carbon regulation regime, and their impact could result in
significant costs for our plants. Our biomass energy projects are designed to
produce low-carbon fuels and power, and they may benefit from carbon regulation.
We expect that our projects will have lifecycle carbon footprints better than
those of petroleum-based fuels. Therefore, we expect that the impact of carbon
regulation on our projects may be neutral to positive.
Our
charter documents contain provisions indemnifying our officers and directors
against all costs, charges and expenses incurred by them.
Our
charter documents provide for indemnification of our directors and certain
officers for liabilities and expenses that they may incur in such capacities. In
general, our directors and certain officers are indemnified with respect to
actions taken in good faith and in a manner such person believed to be in our
best interests, and with respect to any criminal action or proceedings, actions
that such person has no reasonable cause to believe were unlawful. In the event
that an officer or director seeks indemnification under such provisions, the
Company may incur significant legal and other costs.
Our
charter documents do not contain anti-takeover provisions, which could result in
a change of our management and directors if there is a take-over of our
company.
We do not
currently have a shareholder rights plan or any anti-takeover provisions in our
charter documents. The lack of specific anti-takeover provisions makes a change
in control of our Company easier to accomplish.
15
Trading of our
stock may be restricted by the SEC's "Penny Stock" regulations which may limit a
stockholder's ability to buy and sell our stock .
The U.S.
Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. These rules impose additional sales
practice requirements on broker-dealers who sell to persons other than
established customers and "accredited investors." The term "accredited investor"
refers generally to institutions with assets in excess of $5,000,000 or
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of, our common stock.
FINRA
sales practice requirements may also limit a stockholder’s ability to buy and
sell our stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives and other information. Interpretations of these rules suggest that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. These requirements make it more difficult
for broker-dealers to recommend that their customers buy our common stock, which
may limit your ability to buy and sell our stock and have an adverse effect on
the market for our shares.
Trading
in our common shares is limited and sporadic making it difficult for our
stockholders to sell their shares or liquidate their
investments.
Our
common stock was quoted for trading on the OTC Bulletin Board under the symbol
"KLEG,” and on March 26, 2010 our stock was deleted from the OTCBB and moved to
the Pink Sheets, due to the absence of market maker quotes for our common stock
for four consecutive days. We are in the process of engaging
one or more market makers to submit quotes for our stock to the OTCBB for
trading. Historically, the trading price of our common shares has
been subject to wide fluctuations. Trading prices of our common shares may
fluctuate in response to a number of factors, many of which will be beyond our
control. The stock market has generally experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies with no current business operation. There can be no
assurance that trading prices and price earnings ratios previously experienced
by our common shares will be matched or maintained. These broad market and
industry factors may adversely affect the market price of our common shares,
regardless of our operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted. Such litigation, if
instituted, could result in substantial costs for us and a diversion of
management's attention and resources.
16
There
is no guarantee that our shares will be listed on the Nasdaq Capital
Market.
We have
applied to have our common stock listed on the Nasdaq Capital Market. After the
consummation of this offering, we believe that we satisfy the listing
requirements and expect that our common stock will be listed on Nasdaq. Such
listing, however, is not guaranteed. If our listing application is not approved,
the shares of our common stock will continue to be quoted on the OTC Bulletin
Board. Our underwriter is not obligated to make a market in our securities and,
even after making a market, can discontinue market making at any time without
notice. We cannot provide any assurance that an active and liquid trading market
in our securities will develop or, if developed, that the market will
continue.
Our
common stock may be delisted from the Nasdaq Capital Market which could
negatively impact the price of our common stock and our ability to access the
capital markets.
The
listing standards of the Nasdaq Capital Market provide that a company, in order
to qualify for continued listing, must maintain a minimum stock price of $1.00
and satisfy standards relative to minimum shareholders’ equity, minimum market
value of publicly held shares and various additional requirements. If we fail to
comply with all listing standards, our common stock may be delisted. If our
common stock is delisted, it could reduce the price of our common stock and the
levels of liquidity available to our shareholders. In addition, the delisting of
our common stock could materially adversely affect our access to the capital
markets and any limitation on liquidity or reduction in the price of our common
stock could materially adversely affect our ability to raise capital. Delisting
from Nasdaq could also result in other negative consequences, including the
potential loss of confidence by suppliers, customers and employees, the loss of
institutional investor interest and fewer business development
opportunities.
If
we effect a reverse stock split, the liquidity of our common stock and market
capitalization could be adversely affected.
Our
amended articles of incorporation give the board of directors authorization to
effect a reverse stock split at a ratio ranging from 1-for-2 to 1-for-20 A
reverse stock split is often viewed negatively by the market and, consequently,
can lead to a decrease in our price per share and overall market
capitalization. If the per share market price does not increase
proportionately as a result of the reverse split, then our value as measured by
our market capitalization will be reduced, perhaps significantly.
Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on
our business and operating results.
It may be
time consuming, difficult, and costly for us to develop and implement the
additional internal controls, processes, and reporting procedures required by
the Sarbanes-Oxley Act. If we are unable to comply with these requirements of
the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant
certifications that the Sarbanes-Oxley Act requires of publicly traded
companies.
17
You
could be diluted from the issuance of additional common stock and/or preferred
stock.
As of
September 15, 2010, we had 48,378,378 shares of common stock outstanding
and no shares of preferred stock outstanding. We are currently authorized
to issue up to 180,000,000 shares of common stock, par value $.001 and
20,000,000 shares of preferred stock, par value $.001. Our Board of
Directors has the ability, without seeking stockholder approval, to issue
additional shares of common stock in the future for such consideration as
the Board of Directors may consider sufficient. The issuance of
additional common stock in the future may reduce your proportionate
ownership. Further, such issuance may result in a change of control of our
corporation.
The
Company received a going concern paragraph in the report from its
auditors.
In their
report dated March 8, 2010, the Company’s auditors indicated there was
substantial doubt about the Company’s ability to continue as a going concern
without additional fund-raising. Accordingly, unless we raise additional working
capital, project financing and/or revenues grow to support our business plan we
may be unable to remain in business.
18
USE
OF PROCEEDS
It is our
intention that the net proceeds of this offering will be used to finance the
further development and commercialization of our technology, sales and marketing
activities, additional capital expenditures to expand demonstration facilities
and working capital and other general corporate purposes including the
following (specific amounts will be provided after determining the offering
price and number of shares):
|
-
|
$_____
(or __%) to continue the development of existing commercial opportunities
including $____ (or __%) for the completion of basic engineering and
feasibility studies into two industrially integrated plants in the
U.S.
|
|
-
|
- $_____ (or __%) for continuing Research and Development into our 5th
generation technology enhancements
|
|
-
|
-
$______ (or __%) to expand sales and marketing activities in key
markets
|
We
currently have three potential industrially integrated project opportunities
under consideration. Part of the proceeds of the offering will be used to
complete the feasibility reports for projects under consideration and provide
the Company’s equity contribution to the selected projects. The development of
any commercial industrial process includes continuing research and development
with the objective of optimizing the process yields and economics. The Company’s
5th
generation technology enhancements represent a number of incremental
improvements and changes to various stages of the process in order to meet these
objectives.
MARKET
FOR COMMON EQUITY SECURITIES AND DIVIDENDS
Common
Stock
Our
common stock was previously quoted for trading on the OTC
Bulletin Board under the symbol "KLEG". Our company was automatically deleted by
the OTCBB on March 26, 2010, and moved to the Pink Sheets, due to the absence of
market maker quotes for our common stock for four consecutive days. This
reflects the history, since inception, of limited or very infrequent trading
activity in the absence of an established public trading market for our common
stock. We are in the process of engaging one or more market makers to
submit quotes for our stock to the OTCBB.
The
following table sets forth the range of high and low bid quotations for our
common stock, as reported on the OTC Bulletin Board at the end of each calendar
quarter since September 30, 2008, the date of the Merger.
|
High
|
Low
|
|||||||
|
September
30, 2008
|
$ | 0.43 | $ | 0.43 | ||||
|
December
31, 2008
|
$ | 4.52 | $ | 4.52 | ||||
|
March
31, 2009
|
$ | 1.60 | $ | 1.60 | ||||
|
June
30, 2009
|
$ | 1.60 | $ | 1.60 | ||||
|
September
30, 2009
|
$ | 1.60 | $ | 1.60 | ||||
|
December
31, 2009
|
$ | 20.00 | $ | 20.00 | ||||
|
March
31, 2010
|
$ | 20.00 | $ | 20.00 | ||||
|
June
30, 2010
|
$ | 20.00 | $ | 20.00 | ||||
|
September
30, 2010
|
$ | 2.50 | $ | 2.50 | ||||
As of the
date of this report, approximately 83% ownership of KLEG stock is concentrated
in 9 individuals and entities (including approximately 10% of outstanding
common stock owned by current KLE management.) Since the Merger, less than
600 shares (out of over 47 million shares outstanding) have been traded.
Because its stock is thinly traded, the Company does not believe that these
quotations, particularly at December 31, 2009, are indicative of the market
value of the business. Recent private placement transactions by the
Company have been at $1.10 per share.
Nonetheless,
on May 31, 2010, the closing sale price for our common shares, as reported by
the OTC Bulletin Board, was $20.00 per share which reflected the last public
transaction that occurred in December 2009. As of that date, there were
47,151,106 shares of common stock outstanding and there were approximately 59
holders of record of our common stock.
Reverse
Stock Split
On May
10, 2010, prior to the filing of our registration statement on Form S-1, the
majority of shareholders voted through action by written consent to approve
the effectuation of a reverse stock split and to give the board the
discretionary authority to determine the appropriate reverse stock split at any
whole number ratio between a 1-for-2 and 1-for-20 within twelve months of the
effective date of the written consent. The stockholder action was
effective as of June 9, 2010. The same written consent approved the
amendment of the Amended and Restated Articles of Incorporation. We intend
to file an amended registration statement, containing the stock split
information, as soon as practicable after completing negotiations with our
currently selected underwriter. To determine the appropriate stock split ratio,
the Board will consider factors which include, but are not limited by, market
responsiveness to biofuel stock offerings, recent stock offering pricing by
competitors, etc.
The
Reverse Stock Split will be effected simultaneously, and the exchange ratio will
be the same for all of our then-existing issued and outstanding common stock.
The Reverse Stock Split will affect all of our stockholders uniformly and will
not affect any stockholder’s percentage ownership interests in us, except to the
extent that the Reverse Stock Split results in any of our stockholders owning a
fractional share. If this occurs, we will pay a cash payment in lieu of issuing
fractional shares. Shares of common stock issued pursuant to the Reverse Stock
Split will remain fully paid and nonassessable. The information in the
following table is based on 48,378,378 shares of common stock issued and
outstanding as of September 15, 2010.
19
|
Reverse Stock Split Ratio
|
||||||||||||||||||||||||
|
Pre-Split
|
1:2
|
1:5
|
1:10
|
1:15
|
1:20
|
|||||||||||||||||||
|
Issued
and outstanding shares
|
48,378,378 | 24,189,189 | 9,675,676 | 4,837,838 | 3,225,225 | 2,418,919 | ||||||||||||||||||
|
Reserved
shares (1)
|
5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | ||||||||||||||||||
|
Authorized,
unissued and unreserved shares
|
146,621,622 | 170,810,811 | 185,324,324 | 190,162,162 | 191,774,775 | 192,581,081 | ||||||||||||||||||
|
Total
authorized shares (2)
|
200,000,000 | 200,000,000 | 200,000,000 | 200,000,000 | 200,000,000 | 200,000,000 | ||||||||||||||||||
(1)
Reserved shares represent shares available to the KL Energy Corporation 2009
Equity Incentive Plan.
Dividend
Policy
The
Company has never paid any cash dividends on our capital stock and does not
anticipate paying any cash dividends on the common shares in the foreseeable
future. The Company intends to retain future earnings to fund ongoing operations
and future capital requirements of our business. Any future determination to pay
cash dividends will be at the discretion of the Board and will be dependent upon
our financial condition, results of operations, capital requirements and such
other factors as the Board deems relevant.
DETERMINATION
OF OFFERING PRICE
The
public offering price will be based on the negotiations with our underwriter
immediately prior to the closing date of the offering, adjusted for the
anticipated Reverse Stock Split, prior to the effectiveness of the registration
statement of which this prospectus is a part. We intend to apply for listing of
our common stock on the Nasdaq Capital Market. No assurance can be given
that our application will be approved. If the application is not approved, the
shares of our common stock will continue to be traded on the OTC Bulletin
Board.
The
principal factors considered in determining the public offering price of the
shares include:
|
●
|
the
information in this prospectus and otherwise available to the
underwriters;
|
|
●
|
the
history and the prospects for the industry in which we will
compete;
|
|
●
|
the
current stock price;
|
|
●
|
the
stock price in the recent private placements of the
Company;
|
|
●
|
our
current financial condition and the prospects for our future cash flows
and earnings;
|
|
●
|
the
general condition of the economy and the securities markets at the time of
this offering;
|
|
●
|
the
recent market prices of, and the demand for, publicly-traded securities of
generally comparable companies; and
|
|
●
|
the
public demand for our securities in this
offering.
|
We cannot
be sure that the public offering price will correspond to the price at which our
shares will trade in the public market following this offering or that an active
trading market for our shares will develop and continue after this
offering.
20
CAPITALIZATION
The
following table sets forth our cash and cash equivalents, bank debt, third-party
loans and capitalization as of June 30, 2010 on an actual (without
giving effect to the Reverse Stock Split) and on a pro forma as adjusted basis
to give effect to the Reverse Stock Split and the sale and issuance of the
common stock by us in this offering at an assumed public offering price of
$[____] per share (the pro forma adjusted closing share price on May 31, 2010,
giving effect to the Reverse Stock Split), after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us and the application of the estimated net proceeds of this offering as
described under “Use of Proceeds.”
This
table should be read in conjunction with our consolidated financial statements
and related notes and the sections entitled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,”
and “Description of Capital Stock” appearing elsewhere in this
prospectus.
|
As of June 30, 2010
|
||||||||||||
|
Actual
|
Pro-Forma
(1)
|
Pro-Forma
As Adjusted
(2) (3)
|
||||||||||
|
Cash
and cash equivalents
|
$ | 280,951 | $ | 280,951 | ||||||||
|
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 | 1,332,028 | ||||||||||
|
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 | 85,000 | ||||||||||
|
Note
payable to Lansing Securities Corp., interest at 10%. The maturity
date has passed and has been temporarily waived by the note holder until
further notice.
|
250,000 | 250,000 | ||||||||||
|
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.
|
14,714 | 14,714 | ||||||||||
|
Note
payable to First Insurance Funding Corporation for payment of director and
officer insurance premiums, payable in monthly installments of $3,692,
including interest at 8.4%.
|
32,671 | 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 | 506,461 | ||||||||||
|
Stockholders'
Deficit
|
||||||||||||
|
Common
stock, $0.001 par value; 150,000,000 actual shares authorized,
46,787,469 actual shares issued and outstanding; __________
pro-forma shares issued and outstanding, ___________ pro forma as adjusted
shares issued and outstanding
|
48,378 | 48,378 | ||||||||||
|
Additional
paid-in capital
|
10,069,312 | 10,069,312 | ||||||||||
|
Accumulated
deficit
|
(11,987,243 | ) | (11,987,243 | ) | ||||||||
|
Deficit
attributable to KL Energy Corporation
|
(1,869,553 | ) | (1,869,553 | ) | ||||||||
|
Noncontrolling
interests
|
(1,613,375 | ) | (1,613,375 | ) | ||||||||
|
Total
Stockholders' (Deficit) Equity
|
(3,482,928 | ) | - | (3,482,928 | ) | |||||||
|
Total
Capitalization
|
$ | (981,103 | ) | $ | - | $ | (981,103 | ) | ||||
(1) The
pro forma consolidated balance sheet data gives effect to the conversion of all
of our warrants for redeemable common stock
(2) The
pro forma as adjusted consolidated balance sheet data gives effect to the sale
of ___________ shares of common stock in this offering at an assumed initial
public offering price of $_____ per share (the midpoint of the price range set
forth on the cover page of this prospectus), after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
(3) Each
$1.00 increase or decrease in the assumed initial public offering price of
$_____ per share (the midpoint of the price range set forth on the cover page of
this prospectus) would increase or decrease, as applicable, our pro forma as
adjusted cash and cash equivalents, working capital, total assets and
stockholders’ equity by approximately $_____ million, assuming that the number
of shares offered by us, as set forth on the cover page of this prospectus,
remains the same and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
21
DILUTION
If you
invest in our common stock, your interest will be diluted to the extent of the
difference between the public offering price per share of common stock you pay
and the as adjusted net tangible book value per share of our common stock after
this offering. Our net tangible book value as of June 30, 2010 was ($3,482,928)
or ($0.07) per share of common stock (giving effect to the anticipated Reverse
Stock Split). We calculate net tangible book value per share by calculating the
total assets less goodwill and other intangible assets and total liabilities,
and dividing by the number of shares of common stock
outstanding.
Net
tangible book value dilution per share represents the difference between the
amount per share paid by new investors who purchase shares in this offering and
the pro forma net tangible book value per share of common stock immediately
after the completion of this offering. As of _______________, after giving
effect to
|
·
|
the
sale by us of shares in this offering at an assumed public offering price
of $_____ per share and the application of the estimated net proceeds to
us in this offering as described under “Use of Proceeds”;
and
|
|
|
·
|
the
estimated underwriting discounts and commissions and offering expenses
payable by us,
|
our pro
forma net tangible book value would have been $___________, or $_____ per share.
The assumed public offering price of $______ per share exceeds $_____ per share,
which is the per share pro forma value of total tangible assets less total
liabilities after this offering. This represents an immediate increase in net
tangible book value of $_____ per share to existing stockholders, and an
immediate dilution in net tangible book value of $______ per share to new
investors in the offering. The following table summarizes as of _______________,
on a pro forma basis to reflect the same adjustments described above, the number
of shares of common stock purchased from us, the total consideration paid and
the average price per share paid by existing stockholders and new investors. The
calculations are based upon total consideration given by new and existing
stockholders, before any deduction of estimated underwriting discounts and
commissions and offering expenses.
|
Shares Purchased
|
Percent
|
Total Consideration
|
Percent
|
Average Price Per Share
|
||||||
|
Existing
Stockholders
|
||||||||||
|
New
Investors
|
||||||||||
|
Total
|
|
|
|
|
|
The above
table excludes an aggregate of up to ____________ additional shares of common
stock reserved and available for future issuance upon the exercise of all
outstanding warrants to purchase common stock.
22
BUSINESS
Background
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 corporation that was organized in
April 2003, and commenced business operations in January 2006.
The
Company, through its majority-owned Western Biomass Energy, LLC (“WBE”), has
designed, built, and operated a cellulose-based ethanol (“CBE”) plant based on
KL’s proprietary technology. The purpose of the work performed in our
demonstration plant is to prove our proprietary concept validating yields,
energy consumption and other process conditions achieved in the lab pilot plant.
In addition, we use this plant to test new equipment, process setups and raw
materials as well as to gain industrial operating know-how and train customer
startup and production teams.
This
plant is located in Upton, Wyoming, commissioned in 2008, and was designed and
engineered by KL. Its production modus is continuous campaign runs, has a
capacity of approximately 1.0 BDMT/hour and operates with natural gas. It
primarily uses soft, hardwood and herbaceous biomass as its feedstock input and
produces 200-proof ethanol as well as bio-lignin.
In 2008
and 2009, KLE has performed a variety of feedstock test programs in its demo
plant processing predominantly ponderosa pine wood chips. We have successfully
validated the process and yields debuted at our lab pilot facility in Rapid
City. We have also tested various equipment and process setups. This experience
has been fed back into the R&D and lab work resulting into KLE's 4th
generation process design.
The WBE
plant will be run as an industrial validation facility for approximately the
next 18 months. The Company employs a multi stage project feasibility procedure,
as part of the later stages of this procedure the WBE plant will be used to
undertake multiple campaigns using the feedstock and process criteria developed
for the specific project being studied. This ability to adapt WBE to undertake
these validation runs is a substantial advantage in ensuring the final
engineering design is as accurate as possible given the individual
characteristics of each new plant and feedstock. Thereafter, and following a
full feasibility study, we will determine the amount of additional investment
required to operate this as a commercial plant. However, in light of difficult
debt and equity markets, as well as the Company’s current operating cash flow
challenges, we do not expect to be able to finance this significant improvement
before the end of 2011.
The
Company also distributed ethanol blended fuel, through its majority-owned
Patriot Motor Fuels, LLC (Patriot). 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 ethanol industry but especially due to the Company’s
re-focus on cellulosic ethanol commercialization efforts.
Our
principal offices are located at 306 East Saint Joseph Street, Suite 200 Rapid
City, South Dakota 57701 and our telephone number is (605) 718-0372. Our website
address is www.klenergycorp.com. Information
contained on our website is not incorporated by reference into this prospectus
and you should not consider that information to be part of this
prospectus.
Business
While we
have historically provided engineering, construction, operating and ethanol
marketing services, for first generation grain based ethanol (“1 St Gen” or
“GBE”) our focus is now on owning and operating cellulose based ethanol ("CBE")
second generation (“2 nd Gen”)
facilities that utilize our proprietary technology, and designing CBE facilities
for, and licensing our proprietary CBE technology to, third-party participants
in the CBE industry.
Initially,
we created expansion and optimization programs for GBE 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 CBE
facilities. While we are able to offer design and engineering services to
optimize existing GBE facilities, our emphasis in the future will be on CBE
facilities.
The
majority of 1 St 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 1 St Gen
ethanol is limited due 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. Renewable fuel 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.
23
Industry
Challenges
There are
currently several hurdles for the CBE industry to overcome in order to compete
economically with GBE and other renewable fuels. In order to produce
‘cellulosic’ ethanol, the cellulose in the plant walls must first be broken down
into sugars which can then be converted via fermentation into alcohols, in a
process similar to that of grain-based ethanol. Historically, breaking down the
cellulose has proven more difficult, and thus more costly, than the mature and
optimized processes used to convert starches to ethanol. The commercial supply
of enzymes and yeasts used in biomass conversion has historically been very
limited, but recent advances have seen substantial improvements in both
performance and economics with further advances predicted in the next two to
three years. In essence, enzyme and yeast suppliers although still in the early
stages of the commercialization curve are already producing next stage
commercial products. We are currently working with, developing, and testing the
products of several enzyme and yeast providers who are at various stages of
their development, including several different types of technologies that we
could integrate into our process.
While the
collective CBE industry, including KL Energy, believes the economic breakthrough
is close, recent announcements from the developers of enzymes and yeasts have
seen the cost per gallon drop dramatically but more is needed. If these expected
gains are not achieved in the next few years, then our process design may have
to be modified. Other developers of cellulosic technology have struggled to
achieve yields that would allow CBE to compete economically in the fuel sector.
Additionally, many industry participants appear to be focused on large volume
production facilities that are highly dependent on significant quantities of
biomass feedstock gathered from long distances. Transporting feedstock over
great distances further reduces the cost-effectiveness of CBE
production.
KL
Energy’s Solutions
We
believe we have developed solutions to certain of these problems facing our
industry. Our core process technology is based on an environmentally friendly,
thermal-mechanical, enzymatic or biochemical pathway to biomass conversion. We
believe this approach offers the best long-term promise in overall energy
efficiency, reduced carbon footprint, and the potential for achieving the lowest
long-term capital and operating costs. Our basic technology platform is designed
around the conversion of most available sugars – both five-carbon and six-carbon
sugars found in cellulose and hemicellulose, further increasing yields and
enhancing the energy and carbon balance of production. Finally, our technology
takes full advantage of the remaining lignin. The enriched bio-lignin co-product
is relatively pure and therefore a good raw material for many applications. It
is also an excellent fuel, since bio-lignin yields more energy (higher BTU) when
burned than wood pellets or raw wood. The value added provides opportunities for
complementary businesses and flexibility to adapt to changing market conditions
to mitigate risk. This is a substantial advantage for KLE, as it allows
commercial viability at today’s raw material costs and product values in certain
locations. KLE is presently developing three major applications for its
bio-lignin: a) Premium pellets with higher energy density and superior
clean-burning characteristics, b) Substitution of phenol in certain
applications, and c) Compounds with certain fiber materials as natural wood
substitutes all of which can be sold as by-products..
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/dry metric ton of certain biomass
feedstock. Using pretreated sugarcane bagasse and eucalyptus we currently are
achieving up to 75 gallons of ethanol per dry metric ton at our pilot facility.
We expect that sugarcane bagasse and eucalyptus represent two typical and
outstanding feedstocks for CBE production. KLE achieves ethanol yields between
270 and 330 liters per bone dry metric ton of eucalyptus feedstock. We expect to
replicate these yields under similar conditions in our Upton, Wyoming
demonstration plant facilities. Laboratory yields will differ depending on the
feedstock. For example, Ponderosa pine typically provides lower ethanol yields.
We have recently achieved a laboratory yield of slightly over 80 gallons per dry
metric ton using sugarcane bagasse, one of the feedstocks we plan to use in our
pilot plant. The Company expects to confirm these yields, in validation tests
during 2011, at our WBE facility.
At this
time, we have one patent application pending related to the proprietary
technology we have developed. It is our intention to license this technology to
third parties, as evidenced in our Joint Development Agreement with Petrobras
America, Inc. which is more fully described under Business Strategies. We have
no near-term plans of licensing technology owned by others.
24
A key
part of our business model is the smaller but scalable and profitable,
custom-designed CBE plants. Engineered to meet the requirements of a project’s
geographic area and locally available feedstock, we believe KLE plants can
demonstrate profitability from a processing capacity of 100,000 dry metric tons
per year and up. We designed, constructed and operated WBE which we believe to
be one of the first demonstration plants built in the United States. Our
flexible design concept permits the use of our proprietary pre-treatment
technology to demonstrate the commercial viability of various feedstocks. KLE’s
pre-treatment technology is composed of a thermal step and a mechanical step.
This allows the fine-tuning of the pre-treatment conditions to each single
feedstock “opening” cell structures for enzyme access and minimizing the
formation of fermentation inhibitors. As a result, KLE can maximize the yields
in the subsequent process steps (enzymatic hydrolysis and fermentation). KLE has
validated its technology and achieved high yields across several feedstocks
including sugarcane bagasse (herbaceous), ponderosa pine (soft wood), eucalyptus
and hybrid poplar (hard wood). KLE will determine the commercial viability of
the various feedstocks by applying the following multiple stage feasibility
study methodology for each feedstock: 1) Economic feasibility including lab
scale feedstock testing, 2) Technical feasibility including bench scale testing,
3) Industrial validation program (tests with feedstock in our demonstration
plant), and 4) Basic Engineering including software based process
simulations.
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, like corn stalk or sugar cane bagasse 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.
Future
Synergistic Projects
Our
design also offers us better access to synergistic opportunities, such as
co-locating CBE facilities with pulp and paper industries, CHP plants, first
generation ethanol and sugar plants wishing to increase their capacity using
waste biomass streams from their own process or from other local
sources.
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. 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 lignin co-product chemistry is unaltered. This results
in a clean-burning, high-energy premium bio-lignin wood pellet
product.
We have
identified several potential projects and locations for plants using our
technology and they 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:
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•
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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
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•
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Biomechanical conversion, which
is the enzymatic or chemical breakdown of biomass into component sugars,
followed by biological fermentation of the sugars into
ethanol.
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25
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 only very small amounts of acid (up to 0. 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, and possibly second, CBE facility. In addition, we intend to license
our technology, and contract our design engineering, to third parties. We will
also pursue developing cellulosic ethanol projects integrated to 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.
On
August 23, 2010, we entered into a Joint Development Agreement with Petrobras
America, Inc., a wholly-owned affiliate of the largest company in Brazil,
Petroleo Brasileiro S.A. (“Petrobras”). The Company entered into the Agreement
with Petrobras to jointly optimize the Company’s proprietary cellulosic ethanol
process technology for sugarcane bagasse feedstock (“Bagasse”). Pursuant to the
terms of the Agreement, Petrobras will provide capital to the Company for the
joint development of the project in accordance to the work plan and budget set
out in the Agreement, and the Company will be responsible for the operational
management and completion of all tests related to the project. In addition, the
Company and Petrobras will jointly develop an industrial scale Bagasse-based
cellulosic ethanol plant to be fully integrated into a sugarcane mill of
Petrobras and its affiliates in Brazil. The Agreement also provides for mutual
exclusivity in the area of developing cellulosic ethanol from Bagasse. Any and
all intellectual property rights derived from the joint development project will
be jointly owned by the parties, in equal proportions. In the event that certain
performance criteria are achieved, the Company will grant to Petrobras, or an
affiliate of its parent company, a license to the Company’s pre-existing
intellectual property rights for use in Brazil in exchange for a licensing fee.
The Agreement has an initial term of 18 months, and Petrobras has the option to
extend the Agreement for an additional 12 months on terms to be agreed by the
parties, by providing the Company at least 90-days written notice prior to the
expiration of the initial term. The Agreement may be terminated by the parties
by mutual consent at any time and for any reason. KLE is presently working on
certain other cooperation agreements with large industrial players targeting
joint R&D programs and the construction of commercial
plants.
Key
elements of our business strategy are:
· Developing and supplying the
technologies for commercial application to produce cellulosic ethanol from wood
waste or other feedstocks . 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 (co-)own and operate fully integrated CHP/CBE
facilities that utilize our proprietary technology. When feasible, we intend to
co-locate plants with other industrial operations such as pulp and paper
industries and first generation ethanol and sugar plants that provide
synergistic opportunities.
· Developing national and international
strategic partnerships and strategic alliances . We intend to develop our
projects together with partners that will help accelerate the commercialization
of our cellulosic technology and expand our global market presence. These
strategic partners and alliances will be important in accelerating the
commercialization of our process technologies.
· 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.
26
We
currently do not sell a material amount of ethanol. Our WBE plant currently does
not run on a full time basis. All operations currently are meant to gather data
for process enhancements and provide input to the design of current
commercial-scale projects.
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:
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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.
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We may be unable to raise debt or
equity funding, upon which we will be highly dependent, in the near
term.
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Our poor liquidity may deter
existing or potential vendors, suppliers or customers from engaging in
transactions with us.
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We depend on enzymes some of
which are in the research and development phase and 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.
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Our industry continues to develop
both existing and emerging competitors and competitive
technologies.
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Certain
Federal Incentives
Industry
and Plants
Energy
Independence and Security Act of 2007
The
Energy Independence and Security Act (“EISA”) became law in December 2007. This
law, among other things, creates incentives to increase use of advanced biofuels
(liquid fuels derived from agricultural and other natural or renewable sources),
including cellulosic ethanol. The EISA modified an earlier Renewable Portfolio
Standard (RPS) mandating that a minimum of 9 billion gallons of ethanol be used
in 2008. Other targets for renewable fuels use are 20.5 billion gallons by 2015,
and 36 billion gallons by 2022 of which 21 billion gallons has to be from
cellulosic ethanol. Through the RFS2, the U.S. Environmental Protection Agency
revised the National Renewable Fuel Standard program implementing the
requirements of the Energy Independence and Security Act of 2007 (EISA). EISA
made significant changes to both the structure and the magnitude of the
renewable fuel program created by the Energy Policy Act of 2005.
The
EISA’s long-term plan for ethanol use fosters growth that will spur
commercialization of cellulosic feedstocks to include forest waste, native
grasses, crop residues, and many other biological sources apart from corn. The
EISA uses the combination of corn and cellulosic-based ethanol to meet its goals
of reducing dependence on fossil fuel-based gasoline. The EISA used four
separate categories of ethanol feedstock: 1) Renewable fuel - fuel that is
produced from renewable biomass to include derived from corn; 2) Advanced
biofuel - renewable fuel, other than ethanol derived from cornstarch that has
lifecycle greenhouse gas emissions that are at least 50 percent less than
baseline lifecycle greenhouse gas emissions; 3) Cellulosic biofuels – fuel
derived from cellulose, hemicellulose or lignin that achieves a 60% reduction in
green house gases; 4) Biomass-based diesel - renewable fuel that has lifecycle
greenhouse gas emissions that are at least 50 percent less than baseline
lifecycle greenhouse gas emissions; is a transportation fuel, transportation
fuel additive, heating oil, or jet fuel; and meets the definition of either
biodiesel or non-ester renewable diesel. The desired result is that ethanol will
contribute to greater than 10 percent of the U.S. fuel supply. Additionally, the
EISA increases the likelihood that higher ethanol blends will be more commonly
marketed – blends such as E20, E30, and E85.
27
The EISA
provides incentives for retailers to transition existing fueling equipment, or
to purchase and install new equipment to dispense alternative blends.
Furthermore the law authorized a program to install blender pumps during 2008 to
2014 and committed $200 million for this effort.
The US
exceeded its 2008 RPS goal of using 9 billion gallons of ethanol. The goal and
use was essentially all ethanol derived from corn. The 2009 goal called for the
first contributions from advanced biofuel. This presents a significant
opportunity for the competitive, advanced biofuel companies.
In
February 2010, the EPA revised the EISA biofuels regulations. These new
renewable fuel standards, referred to as “RFS2” made several noteworthy changes
to the cellulosic ethanol provisions of the EISA law. Some of the meaningful
changes, identified in the Renewable Fuels Association’s 2010 Ethanol Industry Outlook
, are discussed below:
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2010
Standard : Based on
the Energy Information Administration (EIA) projections and industry
information, the EPA set the 2010 renewable volume obligation for
cellulosic ethanol at 0.004%. This percentage is based on expected
available supply of 5.04 million gallons. Because EPA expects 2.09 million
of these gallons to come from cellulosic diesel and bio-crude with higher
relative energy content, the agency often refers to the 5.04 million
gallons as “6.5 million ethanol equivalent
gallons.”
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¨
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Cellulosic
Waiver Credits :
Cellulosic waiver credits (no longer called “allowances”) will only be
available for the current compliance year for which the EPA has waived
some portion of the cellulosic biofuel standard, they will only be
available to obligated parties, and they will be nontransferable and
nonrefundable. Further, obligated parties may only purchase waiver credits
up to the level of their cellulosic biofuel RVO less the number of
cellulosic biofuel Renewable Identification Numbers (“RINs”) that they
own. A company ownin g cellulosic biofuel RINs and
cellulosic waiver credits may use both types of credits if desired to meet
their Renewable Volume Obligation (RVOs), but unlike RINs obligated
parties will not be able to carry waiver credits over to the next calendar
year. For the 2010 compliance period, since the cellulosic standard is
lower than the level otherwise required by EISA, the EPA is making
cellulosic waiver credits available to obligated parties for end-of-year
compliance should they need them at a price of $1.56 per
gallon-RIN.
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28
The
figure below details the RFS2 mandated United States consumption of biofuels as
provided for by the EISA.
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Figure 1: EISA Renewable Fuel Volume Requirements (billion gallons)
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Year
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Cellulosic
biofuel
requirement
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Biomass-based
diesel
requirement
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Advanced
biofuel
requirement
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Total
renewable
fuel
requirement
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||||||||||||
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2008
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n/a | n/a | n/a | 9.00 | ||||||||||||
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2009
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n/a | 0.50 | 0.60 | 11.10 | ||||||||||||
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2010
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0.10 | 0.65 | 0.95 | 12.95 | ||||||||||||
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2011
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0.25 | 0.80 | 1.35 | 13.95 | ||||||||||||
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2012
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0.50 | 1.00 | 2.00 | 15.20 | ||||||||||||
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2013
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1.00 | a | 2.75 | 16.55 | ||||||||||||
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2014
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1.75 | a | 3.75 | 18.15 | ||||||||||||
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2015
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3.00 | a | 5.50 | 20.50 | ||||||||||||
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2016
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4.25 | a | 7.25 | 22.25 | ||||||||||||
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2017
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5.50 | a | 9.00 | 24.00 | ||||||||||||
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2018
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7.00 | a | 11.00 | 26.00 | ||||||||||||
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2019
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8.50 | a | 13.00 | 28.00 | ||||||||||||
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2020
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10.50 | a | 15.00 | 30.00 | ||||||||||||
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2021
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13.50 | a | 18.00 | 33.00 | ||||||||||||
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2022
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16.00 | a | 21.00 | 36.00 | ||||||||||||
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2023+
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b | b | b | b | ||||||||||||
a To be
determined by EPA through a future rulemaking, but no less than 1.0 billion
gallons.
b To be
determined by EPA through a future rulemaking.
SOURCE:
EPA web site
(http://www.epa.gov/otaq/renewablefuels/420f10007.htm#2)
Food,
Conservation, and Energy Act of 2008 (2008 Farm Bill)
The Food,
Conservation, and Energy Act, also known as the 2008 Farm Bill, became law in
May 2008. Provisions in the five-year farm bill package for the development of
biofuels include: $320 million in mandatory funding for loan guarantees for
commercial scale biorefineries; $35 million in mandatory funding for grants to
support repowering existing biorefineries with biomass energy systems; $300
million in mandatory funding for payments to support the production of advanced
biofuels, including biodiesel and cellulosic biofuels; and $1 million/yr for
competitive grants to educate the public about effective biodiesel use and the
benefits of the biofuel.
Agency
Actions
In
addition to the previously described acts, agencies periodically exercise
authority to extend grants and loan guarantees to incentivize cellulose ethanol
projects. These agencies include without limitation the Department of Energy,
the National Science Foundation, the Department of Agriculture, and the
Department of Interior.
Tax
Relief and Health Care Act of 2006
A new
cellulosic biomass ethanol depreciation allowance of 50% depreciation on
cellulosic ethanol property was established in 2006. This depreciation window
applies to cellulosic ethanol plant property put in service after December 20,
2006 and before January 1, 2013. The law allows an additional first year
depreciation deduction equal to 50% of the adjusted basis of the qualified
property. The 50% allowance, when coupled with other depreciation techniques
could lead to 60% of a facility being depreciated in year one. This provision
may significantly improve a plant’s cash position during its first two years of
operation.
Sales
Incentives
Volumetric
Ethanol Excise Tax Credit (VEETC) – The Blender’s Credit
This tax
credit originated in the 2005 American Jobs Creation Act of 2004, Section 301 of
Public Law 108-357, and was amended by the 2008 Farm Bill. The credit is now
$0.45 per gallon of ethanol , until December 31, 2010 when this credit is
currently scheduled to expire, and is available to suppliers and marketers who
blend ethanol with gasoline.
29
Volumetric
Ethanol Excise Tax Credit for Cellulosic Ethanol
This tax
credit is found in the 2008 Farm Bill and is an approximate $1.01 per gallon of
cellulosic ethanol produced. This credit is offset from the VEETC ($0.45). It is
an income tax credit and is offset against the producers’ income tax liability.
Unused credits may be carried forward. The credit is estimated since it is
currently unclear how the statutory language will be applied.
Less
Than Minimum Renewable Portfolio Standard (RPS) Volume Waiver Cellulosic
Biofuels Credit
The 2007
Energy Bill created this credit to incentivize early cellulosic ethanol plants.
The credit is valued at an estimated $0.25 per gallon of cellulosic ethanol. The
EPA Administrator has discretion to use this credit beginning in 2010 when and
if volumes of cellulosic ethanol do not meet volumes mandated by the RFS. The
credit is computed using a formula. The credit has an estimated value since it
remains to be seen exactly how the EPA Administrator will apply the statutory
language.
Small
Ethanol Producer Tax Credit
This
credit began in the Omnibus Budget Reconciliation Act of 1990. It was extended
by the American Jobs Creation Act of 2004 and expanded by the Energy Policy Act
of 2005. Cellulose production plants receive the full $0.10 per gallon credit
for all of their production. This credit expires at the end of
2010.
American
Recovery and Reinvestment Act of 2009
The
“stimulus” act made $18.8 billion available for renewable energy and energy
efficiency. The stimulus also extended some production tax credits through 2013.
The stimulus allocated over $800 million for projects related to biomass as part
of a $2.5 billion allocation for research and development; $150 million for
rural business loans and grants which support the larger $3.01 billion rural
business loan and grant program; a $6 billion Innovative Technology Loan
Guarantee Program; and $515 million for hazardous fuel reduction projects on
federal lands.
Biomass
Crop Assistance Program (BCAP)
BCAP is a
United States Department of Agriculture (USDA) program, created under the 2008
Farm Bill, which provides reimbursement of up to $45/dry ton of
biomass.
KL Energy
will pursue incentives offered by federal, state and local authorities, but its
business plan is intended to achieve success without the need to rely on such
grants, subsidies or tax rebates.
Renewable
Fuel Overview
Renewable
fuels are liquid fuels derived from agricultural and other natural or renewable
biomass. These fuels are used to complement the world’s supply of petroleum and
other fossil fuels. A variety of factors contributes to an increasing awareness
of, and demand for, renewable fuels including, but not limited to, the
following:
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Macroeconomic factors affecting
the global supply of, and demand for and price of oil, including
significantly increased demand for oil from developing countries whose
economies are growing at high rates, such as China and India, coupled with
uncertain supplies of oil from sources throughout the
world;
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•
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Policies and initiatives
developed across the world aimed at reducing dependence on imported
sources of oil, particularly from countries and regions that have
exhibited the greatest level of
instability;
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•
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Increasing awareness and
incorporation of Flexible Fuel Vehicles (“FFVs”), into the world auto
supply that are capable of operating on various blends of gasoline and
ethanol;
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30
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•
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Broadening development of the
required infrastructure to support FFVs, including expansion of
distribution channels and retrofitting wholesale and retail points of
distribution.
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Of all of
the renewable fuels, or biofuels, that are sold or are being developed, the most
significant market is for fuel ethanol due to the fact that all gasoline engines
can run on at least 10% ethanol. Within the fuel ethanol market, the most
attractive current or future business opportunities are for fuel ethanol derived
from cellulosic biomass.
Fuel
Ethanol
The
market for ethanol, or ethyl alcohol, for use as a motor fuel is both large and
well-established in the United States. According to the Renewable Fuels
Association, or RFA, the national trade association for the United States
ethanol industry, as of January 1, 2009, there were 170 ethanol plants in the
United States having a combined production capacity of more than 10.5 billion
gallons of ethanol per year. In addition, there were 24 ethanol plants and 7
plant expansions under construction that are anticipated to add more than 2.1
billion gallons of new annual production capacity, of which more than 1.5
billion gallons in annual production capacity is expected to come on line by the
end of 2008. In 2008, the United States ethanol industry produced 9.0 billion
gallons of fuel ethanol, representing an increase of more than 38% since
2007.
We
believe ethanol’s role in the United States is gradually shifting from that of
an oxygenate/gasoline additive to a true gasoline complement/alternative. Most
fuel ethanol currently produced in the United States is blended with gasoline to
at a 10/90 ration and marketed as E10. In this role ethanol is an octane
boosting oxygenate aiding the fuel to burn better and cleaner. Automakers in the
United States have been accelerating their work with flex fuel vehicles (“FFV”)
programs, according to the National Ethanol Vehicle Coalition (“NEVC”),
resulting in an expanded fleet of vehicles capable of using a fuel blend of 85%
ethanol and 15% gasoline, or E85. Future widespread adoption of FFVs could
significantly increase ethanol demand and reduce the consumption of gasoline as
it has in Brazil; however, widespread use of E85 in the United States is
currently constrained by the lack of a broad distribution infrastructure and
limited availability of FFVs. While, according to the NEVC, approximately 7.0
million United States vehicles are equipped to run on E85, there are only
approximately 2,000 service stations of the approximately 170,000 nationwide
which are capable of dispensing E85. However, according to the DOE (EIA) Annual
Energy Outlook 2008, sales of FFVs capable of using E85 are expected to reach
2.7 million per year in 2030, or 10% of total sales of new light-duty vehicles,
as federal fuel economy incentives are expected to continue to support the
industry’s development. If more vehicles and service stations become E85
capable, this could increase ethanol consumption in the United States
significantly.
The
pricing model for ethanol hinges largely on the commodity market for gasoline.
The price of ethanol is tracked by various information service providers in the
petroleum industry such as Axis Petroleum, the NYMEX, or the Chicago Board of
Trade. Marketing managers negotiate the spot sale of ethanol using rack rates
published by information services such as Axis Petroleum. Longer term contracts
are normally negotiated using a combination of fixed prices or basis contracts
depending on the profit margins at that time. Contract pricing can be negotiated
as a flat rate per gallon or a price computed off a basis such as one of these
information services. The government provides an incentive to blenders
(Volumetric Ethanol Excise Tax Credit, VEETC) in the form of a waiver of $0.45
in excise taxes per blended gallon of renewable fuels such as ethanol. Because
blending 10% ethanol in gasoline enables the blender to save $0.45 per ethanol
blended gallon, it has the effect of adding $0.45 of value to each gallon of
fuel ethanol.
31
We
currently do not sell a material amount of ethanol. We expect our future sales
of ethanol, if any, to be pursuant to long term off-take contracts versus spot
sales.
The graph
below shows historic United States fuel ethanol production from 1984 to
2008.
Many
industry experts, including the RFA, believe corn-based ethanol production
growth will not exceed 12 to 15 billion gallons in annual production. As a
result, alternative fuel mandates must be met with non-corn ethanol. United
States-based demand for ethanol is expected to meet, if not exceed, this
production supply for reasons that include the following:
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•
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Strong
legislative and government policy support —the EISA mandates minimum
annual usage renewable fuel of 36 billion gallons per year by
2022.
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32
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•
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Expansion of
gasoline supply —By
blending ethanol into gasoline, refiners can expand the volume of fuel
available for sale especially when refinery capacity and octane sources
are limited. According to the Department of Energy, or DOE, between 1985
and 2005, petroleum refining capacity in the United States increased only
9.7%, while domestic petroleum demand increased by 32% during the same
period. We believe that increased pressure on domestic fuel refining
capacity will result in greater demand for
ethanol.
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•
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Favorable tax
treatment —There are
several tax incentives for ethanol production and distribution, especially
for those cellulosic ethanol plants using the enzymatic hydrolysis
method.
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•
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Environmental
benefits —Ethanol,
as an oxygenate, reduces tailpipe emissions when added to gasoline. The
additional oxygen in the ethanol results in a more complete combustion of
the fuel in engine cylinders, resulting in reduced carbon monoxide and
nitrogen oxide emissions. Prior federal programs that mandated the use of
oxygenated gasoline in areas with high levels of air pollution spurred
widespread use of ethanol in the United
States.
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•
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Geopolitical
concerns —The United
States currently imports approximately 60% of its oil needs, a dependency
that is expected to continue to increase. Political unrest and attacks on
oil infrastructure in the major oil-producing nations, particularly in the
Middle East, have periodically disrupted the flow of oil, which has added
a “risk premium” to world oil prices. At the same time, developing nations
such as China and India have substantially increased their demand for oil.
Oil prices currently exceed $70 per barrel and exceeded $140 per barrel in
2008. As a domestic, renewable source of energy, ethanol can help to
reduce American dependence on foreign
oil.
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•
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Ethanol as a
gasoline substitute
—Ethanol’s role in the United States is gradually shifting from that of an
oxygenate/gasoline additive to a true gasoline complement/replacement.
Most ethanol currently produced in the United States is a fuel blend of
10% ethanol and 90% gasoline called E10, which is used as an
oxygenate/fuel additive. Automakers in the United States have been
accelerating their work with FFV programs, according to the NEVC,
resulting in an expanded fleet of vehicles capable of using a fuel blend
of 85% ethanol and 15% gasoline, or E85. Future widespread adoption of
FFV’s could significantly increase ethanol demand and reduce the
consumption of gasoline.
|
Fuel
ethanol has historically been produced commercially in the United States by
processing sugars derived from the starch within a grain source, such as corn
kernels, and then fermenting these sugars into ethanol. While the growth in the
production of ethanol from corn is expected to grow substantially from its
current levels, recent studies suggest that, even if all United States corn
production were dedicated to ethanol production, this would meet less than 20%
of total gasoline demand. Other studies and news articles suggest that, well
before this level of production could be achieved; the price of corn would begin
to negatively impact the costs of animal feed and food based on corn. This has
led to an active, public debate of the relative merits of additional corn-based
production of fuel ethanol. We believe that this debate will encourage
production of ethanol from alternative sources, including cellulosic
biomass.
Cellulosic
Ethanol
An
alternative that seeks to meet the need for additional sources of liquid fuels
while addressing many of the challenges presented by corn-based ethanol involves
the production of fuel ethanol from cellulosic biomass, or cellulosic ethanol.
Cellulosic biomass, either agricultural waste or crop residues, such as plant
stalks, stems, or leaves, or crops grown specifically for their energy content
rather than for their use as food or feed sources, presents an abundant
alternative source of sugars that can be converted into ethanol. The production
of ethanol from cellulosic biomass offers expected advantages over corn-based
ethanol production including :
33
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•
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Low-cost,
abundant sources of feedstocks that have no competitive food
use —According to a
joint report of the DOE and the United States Department of Agriculture,
or USDA, issued in 2005, land resources in the United States are capable
of producing a sustainable supply of 1.3 billion tons per year of
cellulosic biomass. The same report concluded that 1 billion tons of
cellulosic biomass would be sufficient to displace 30% or more of the
present petroleum consumption in the United States. In addition, according
to an analysis by the Natural Resources Defense Council published in 2004,
cellulosic biofuels could supply more than half of current transportation
fuel needs in the United States by 2050, without decreasing the production
of food and animal feed.
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•
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Reduced
susceptibility to volatile commodity price risks —We believe that most biomass
feedstocks can be obtained at lower cost and on more favorable contractual
terms compared to the cost of corn feedstock. In addition, many cellulosic
feedstocks contain lignin (the high energy component of plant biomass)
which could be used to reduce operating costs by eliminating or reducing
the use of natural gas and other external fuel sources. With our enzymatic
hydrolysis technology, the lignin by-product is an additional revenue
source. This is unlike cellulosic technology firms that use acid in their
technology process or use gasification. We also expect that cellulosic
ethanol production will have much less exposure to market and commodity
volatility than corn, natural gas, transportation, and corn
by-products.
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•
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Superior
carbon emissions profile that benefits the environment —Cellulosic ethanol is expected
to produce less harmful greenhouse gas emissions than corn ethanol and
gasoline. According to a report by Argonne National Laboratory, corn
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.
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•
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Proximity to
end-user markets —
Unlike grain-based ethanol facilities, cellulosic ethanol production
facilities will be located closer to end-user markets, potentially
reducing transportation
costs.
|
Competitors
The
ethanol industry is highly competitive. We compete with numerous individuals and
companies, including many other energy companies, which have substantially
greater technical, financial and operational resources and staffs. Many
companies compete with us in various steps throughout our technology process.
These companies may develop technologies that are better alternatives to our
process technologies. Our competitors may also be more effective at implementing
their technologies. Not only do we compete operationally, but there is a high
degree of competition for third-party funds necessary for development companies
to become profitable.
The
United States ethanol market is highly competitive, as well as highly
fragmented. According to the Renewable Fuels Association, the United States
ethanol industry trade association, world ethanol production was 17.3 billion
gallons in 2008, of which approximately 52% was produced in the United States.
The United States and Brazil are the world’s largest producers of ethanol. The
ethanol industry in the United States consists of more than 170 production
facilities and is primarily corn-based, while Brazilian ethanol production is
primarily from sugar cane.
In
addition to grain based ethanol producers, we expect to compete with other
cellulosic ethanol producers using different technology platforms, as well as
other providers of alternative and renewable fuels.
34
Several
competitors, as well as academic, research and government institutions, are
developing or may develop technologies for, and are competing or may compete
with us in, the production of ethanol from cellulosic biomass or other
feedstocks, such as algae, municipal waste, production of cellulosic ethanol or
other fuels using alternative steps of production, such as acid hydrolysis
and/or gasification, and/or the production of alternative fuels or biofuels,
such as biobutanol that would displace ethanol.
Our
ability to successfully compete depends on our ability to continue developing
proprietary process technologies that rapidly reach the market and are
technologically superior (greater yield, more efficient and at less cost per
volume) than other products offered on the market. Several competitors may
develop process technologies that are more effective than ours. Our process
technologies may be surpassed as obsolete or uneconomical by the technological
advances or better approaches developed by anyone of our competitors. Our
competitors existing approaches or new approaches or technology developed by our
competitors may be more effective than those we developed and are
developing.
Governmental
Regulations
Our
cellulosic based ethanol plants are subject to various United States federal,
state, and local governmental regulations relating to the protection of human
health and the environment. To date, expenditures related to complying with
these laws, and for remediation of existing environmental contamination or
emissions, have not been significant in relation to the results of operations of
our company. The requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and we are unable to predict
the ultimate cost of compliance with these requirements or their effect on our
operations.
Research
and Development
Our
business plan is focused on a strategy for maximizing the medium-term
development and utilization of our technology, process and design engineering,
and plant operation experience for both company owned cellulosic based ethanol
plants and third party plants. To date, execution of our business plan has
largely focused on developing our technology and providing process and design
engineering services to third parties. Our future will focus increasingly on
being a technology provider to third party cellulosic projects and developing
our own plants. In developing our CBE technology, we will maximize the potential
for market penetration of our technology by license agreements, using the
business network of our investor partners to license technology on a worldwide
basis. We have re-focused our human and financial resources towards the goal of
becoming a leading technology provider in the cellulosic ethanol industry as
well as developing our projects. We intend to continue this focus to optimize
the efficiency of our operations and become more efficient in the process.
Research and development expenses, for the fiscal years ended December 31, 2009
and 2008, were $3.3 million and $2.7 million, respectively..
Employees
As of
September 15, 2010, we employed 20 full-time employees (including 5 WBE
employees), 1 part-time employees and 6 full-time consultants (including three
officers). We also outsource some of our engineering services as needed. We
believe our relations with all of our employees and independent consultants are
good. We are subject to the minimum wage and hour laws and provide usual and
customary employee benefits such as vacation, sick leave and health and dental
insurance.
Intellectual
Property
At
this time, we have one patent application pending related to the proprietary
biomass thermal-mechanical pre-treatment technology we have developed. It is our
intention to license this technology to third parties which is more fully
described under Business
Strategies. We have no near-term plans of licensing technology owned by
others. Additionally, we protect the intellectual property we have developed as
a trade secret. We have in place procedures requiring, among other things,
confidentiality agreements with potential partners, customers, and employees to
protect our valuable trade secrets.
On
September 24, 2010, we entered into a Termination Agreement (the “Termination
Agreement”) with Greenext Energy Europe S.A, a foreign corporation organized
under the laws of Luxembourg (“Greenext”). The Company entered into this
Agreement in order to repurchase the technology it licensed in March 2008 to
O2Diesel Europe, PLC (“O2D). These rights were subsequently sub-licensed by O2D
to Greenext. As part of the O2D bankruptcy proceedings, Energenics Holdings Pte.
Ltd. (“Energenics”) acquired the aforementioned license and sub-license rights
which were then repurchased by the Company in late 2009. With the signing of
this Termination Agreement, and the payment of a termination fee of €40,000, the
Sublicense shall be terminated by the parties and all rights and licenses
granted under the Sublicense will immediately terminate. In addition, any other
rights obtained by Greenext from Energenics will immediately be transferred from
Greenext to the Company.
35
Real
Property
We
lease our office space and the total rent expense under our office lease
obligation was approximately $16,500 and $15,000, and $33,000 and $30,000 for
the three and six months ended June 30, 2010 and 2009, respectively. We
have office lease obligations, that expire September 30, 2011, of approximately
$67,000 for 2010 and $52,000 for 2011. The Company also has various, primarily
small equipment, leases which aggregated $6,294 and $7,532, and $14,087 and
$15,065 in rent expense for the three and six months ended June 30, 2010 and
2009, respectively. Future commitments under these leases are
approximately $8,900 for 2010, $3,300 for 2011, $3,300 for 2012, $2,500 for
2013.
WBE
leases approximately 30 acres of land in Upton, WY. On March 4, 2009,
WBE signed a lease for the same property with a 2 year term and an option to
extend the lease to 2013. The lease requires payments of $30,000 per
year. Total rent expense under this agreement was approximately $7,500 and
$31,030 and $15,000 and $38,000 for the three and six months ended June 30, 2010
and 2009, respectively.
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 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
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. The Company and MRE recently received the third
arbitration claim and demand to begin. 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
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.
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.
In the
normal course of business, the Company is party to litigation from time to time.
The Company maintains insurance to cover certain actions and believes resolution
of such general litigation matters will not have a material adverse effect on
the Company.
36
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
discussion should be reviewed in conjunction with our unaudited quarterly
financial statements and accompanying notes included in this report for the
period ended June 30, 2010 and our audited financial statements and accompanying
notes included in this report for the years ended December 31, 2009 and
2008.
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.
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.
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.
37
Income
Taxes
The
Company accounts for income taxes under the liability method, which requires an
entity to recognize deferred tax assets and liabilities. Temporary differences
are differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years. An income tax valuation allowance has been
established to reduce the Company’s deferred tax asset to the amount that is
expected to be realized in the future. KL Energy, LLC (KLHC), KL Management, LLC
(KLM), Western Biomass Energy, LLC (WBE), and Patriot Motor Fuels, LLC (Patriot)
are Limited Liability Companies for income tax purposes. Accordingly, taxable
income or losses of these companies are reported on the income tax returns of
the members.
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.
Derivative
Instruments
The
Company also uses various types of financing arrangements to fund its business
capital requirements, including convertible debt indexed to the price per share
in the private placement (Note 8) of the Company’s common stock. The Company
evaluates these contracts to determine whether derivative features embedded in
host contracts require bifurcation and fair value measurement or, in the case of
free-standing derivatives (principally warrants), whether certain conditions for
equity classification have been achieved. In instances where derivative
financial instruments require liability classification, the Company initially
and subsequently measures such instruments at estimated fair value. Accordingly,
the Company adjusts the estimated fair value of these derivative components at
each reporting period through earnings until such time as the instruments are
exercised, expired or permitted to be classified in stockholders’
equity.
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 and legal 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 approximately $1.5 million, $500,000, $600,000 and $1.5 million in
gross proceeds in January 2010, March 2010, May 2010 and July 2010,
respectively, to fund operating activities and allow long-term borrowing
commitments to remain current. These transactions are described in Note 3 and
Note 13 of the Notes to June 30, 2010 Consolidated Financial Statements.
At
December 31, 2009, we had approximately $65,000 of cash and cash equivalents,
$139,000 of prepaid expenses and $135,000 of deferred issuance costs. Our total
current assets at December 31, 2009 were approximately $390,000. As of that
date, we also had non-current assets, consisting of net property, plant and
equipment, of approximately $3,501,000. Our total assets as of December 31, 2009
were approximately $3,891,000. During 2009, we received additional capital of
approximately $6.85 million before expenses to fund operating activities and
allow long-term borrowing commitments to remain current.
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.
We
estimate that our average monthly operating expenses will be approximately
$450,000 per month or $5.4 million over the next twelve months. Such costs
primarily consist of approximately 50% in personnel wages and benefits,
approximately 35% in legal, audit, fund-raising, pubic relations, etc.
consulting fees and travel expenses, approximately 10% in debt payments and the
remainder, net of feedstock testing income, is primarily for WBE plant
operations and laboratory expenses.
Based on
continuing discussions with potential investors, we are reasonably confident
that we will be able to raise the necessary funds to meet this requirement. A
significant recent event, the August 23, 2010 signing of a Joint Development
Agreement with Petrobras America Inc., a wholly owned subsidiary of Petroleo
Brasileiro S.A. (the largest company in Brazil, “Petrobras”), is expected to
provide our technology with credibility and substantial interest from potential
investors. The Company entered into the Agreement with Petrobras to jointly
optimize the Company’s proprietary cellulosic ethanol process technology for
sugarcane bagasse feedstock (“Bagasse”). As part of this agreement, Petrobras
will provide $11 million to adapt our demonstration facility to the use of
Bagasse, validate the optimized process by producing cellulosic ethanol and
bio-lignin from Bagasse in multiple campaigns and license the technology. In
parallel, Petrobras and the Company will jointly work on an industrial scale
Bagasse based cellulosic ethanol plant project that shall be fully integrated
into a sugarcane mill, belonging to the Petrobras Group in Brazil, and is slated
to go on stream in 2013 and capable of producing 15 million liters per year. The
Agreement also provides for mutual exclusivity in the area of developing
cellulosic ethanol from Bagasse. Any and all intellectual property rights
derived from the joint development project will be jointly owned by the parties,
in equal proportions. In the event that certain performance criteria are
achieved, the Company will grant to Petrobras or an affiliate of its parent
company a license to the Company’s pre-existing intellectual property rights for
use in Brazil in exchange for a licensing fee.
KLE is
presently working on certain other cooperation agreements with large industrial
players targeting joint R&D programs and the construction of commercial
plants.
In
their report dated March 8, 2010,
the Company’s auditors indicated there was substantial doubt about the Company’s
ability to continue as a going concern without any adequate fund-raising.
Accordingly, unless we raise additional working capital, project financing
and/or revenues grow to support our business plan, we may be unable to remain in
business.
38
Line
of Credit; Loans
We are
a guarantor for and making payments with respect to a note payable by WBE to
Security National Bank of $1,394,044 at December 31, 2009. A principal payment
of $500,000 was made in February 2009. Pursuant to an amendment executed during
the first quarter of 2009, principal and interest payments of $17,560 are due to
be made from March 2009 until the maturity date of March 2010, which may be
extended on an annual basis if the Company is in compliance with the note terms.
A 12 month extension was granted on March 27 th , 2010.
This note bears interest at 6.5% and is secured by substantially all of the
assets of WBE and guaranteed by certain WBE members and the Company. The Company
is subject to certain debt covenants with which, as of June 30, 2010, the
Company was in compliance.
We had a
line of credit with Wells Fargo for borrowings up to $250,000 with an interest
rate of the prime rate used by Wells Fargo plus 0.5%. This line of credit was
personally guaranteed by certain officers of the Company. At December 31, 2009
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 stockholder and officer of the Company, which was
paid in full in June 2009. 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 officers of the Company.
We had a
subordinated unsecured note payable to a current stockholder and former officer
of the Company totaling $560,000 and $600,000 at December 31, 2009 and 2008,
respectively. This note has a variable interest rate, which was 5% at December
31, 2009 and 2008, respectively, with interest paid quarterly. 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 $80,000 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, we are obligated to pay 5% of such proceeds towards
principal payments on this note. As of December 31, 2009, this obligation
amounted to $142,500 and is included in current maturities of subordinated
debt-related party in the consolidated balance sheets.
We also
have 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. The Company
has no significant debt covenants for any of its debt.
We had
total current liabilities of approximately $6,805,000 at December 31, 2009,
which included short-term borrowings of $250,000, current maturities of
long-term debt of approximately $1,601,000 and current maturities of
subordinated debt – related party of $262,000, billings in excess of costs and
estimated earnings on uncompleted contracts of $1,641,000, accounts payable of
$1,672,000, accrued payroll of approximately $203,000, other liabilities of
$770,000 (primarily professional fees payable to Niton Capital of an estimated
$420,000 and legal and audit fees of $97,000) as well as current liabilities of
discontinued operations of approximately $357,000.
We had
total long-term liabilities of approximately $307,000 at December 31, 2009,
which included long-term debt of approximately $9,000 and long-term subordinated
debt - related party of $298,000. Our total liabilities were approximately
$7,112,000 as of December 31, 2009.
On
October 9, 2008, we entered into a term loan agreement (“O2D Loan”) with
O2Diesel Corporation (“O2D”), formerly a publically traded company, pursuant to
which we agreed to provide O2D with up to $1,000,000 for O2D’s working capital
purposes. O2D is a commercial developer of cleaner-burning diesel fuel
alternatives, including O2Diesel™, an ethanol-diesel additive. We previously
licensed certain technology to O2D under a Technology License and Services
Agreement, dated March 6, 2008 (the "License Agreement"). The O2D Loan provided
an initial loan of $250,000 in the form of a secured promissory note (the
“Note”) with an annual interest rate of 10%. As of March 31, 2009, O2D defaulted
on this Note and, due to O2Diesel’s financial condition, the Company determined
it would not make any additional loans to O2D and reserved for the entire amount
of the Note. The Company sold this Note at face value to a third party (the
"Note Purchaser") in April 2009. Subsequently, O2D declared bankruptcy and the
Note Purchaser acquired O2D out of bankruptcy. The Company acquired the License
Agreement 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.
39
We have
provided substantial funding for WBE, a 64% owned subsidiary of ours, relating
to the demonstration of our cellulosic technology. As of December 31, 2009, WBE
owed us approximately $8,821,000, with such debt being represented by a senior
secured note which includes the Company’s payments on the Security National Bank
loan of $1,984,949 to WBE (with a balance of $1,394,043 as of December 31,
2009). There is currently no specific repayment schedule for these debts owed to
the Company by WBE.
Contractual
Obligations
The
following table lists our continuing operations' significant contractual
obligations and their future payments at June 30, 2010:
|
Contractual
|
Less
than
|
More than
|
||||||||||||||||||
|
Obligations
|
Total
|
1 Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
|||||||||||||||
|
Note
payable to bank (1)
|
$ | 1,332,028 | $ | 1,332,038 | $ | - | $ | - | $ | - | ||||||||||
|
Payable
to supplier (2)
|
85,000 | 85,000 | - | - | - | |||||||||||||||
|
Note
payable to third party (3)
|
250,000 | 250,000 | - | - | - | |||||||||||||||
|
Equipment
and insurance financings (4)
|
47,385 | 47,385 | - | - | - | |||||||||||||||
|
Subordinated
note payable (5)
|
506,461 | 506,461 | - | - | - | |||||||||||||||
|
Operating
leases
|
30,816 | 21,708 | 3,312 | 5,796 | - | |||||||||||||||
|
Total
|
$ | 2,251,690 | $ | 2,242,592 | $ | 3,312 | $ | 5,796 | $ | - | ||||||||||
(1) 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.
(2)
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.
(3) Note
payable to Lansing Securities Corp., interest at 10%. The maturity date has
passed and has been temporarily waived by the note holder until further
notice.
(4)
Note payable to Shimadzu of $14,714 for lab equipment, payable in monthly
principal and interest installments of $1,072, including interest at 13.6%
secured by equipment; Note payable to First Insurance Funding Corporation of
$32,671 for payment of director and officer insurance premiums, payable in
monthly installments of $3,692, including interest at 8.4%.
(5)
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.
Net
Cash from Continuing Operations – 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.
For the Six Months Ended
June 30, 2010 and 2009
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 $3.3
million from continuing and discontinued operations, increases in trade
receivables ($64,000), prepaid expenses and other current assets ($48,000) and
decreases in accounts payable ($75,000) and accrued liabilities ($2,000) which
were largely offset by approximately $1.1 million in cash flows provided by
depreciation ($970,000) and stock compensation ($88,000).
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 $4.6 million from continuing and discontinued operations, an
increase in trade receivables ($17,000) and a decrease in accounts payable
($400,000) 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, 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.
For the Twelve Months Ended
December 31, 2009 and 2008
At
December 31, 2009 and December 31, 2008, we had negative working capital (i.e.
current assets less current liabilities) of approximately $6.4 million and $5.3
million, respectively. Total liabilities exceeded total assets by approximately
$3.2 million and $2.0 million at December 31, 2009 and 2008,
respectively.
During
the year ended December 31, 2009, our operating activities used a net of
approximately $5.5 million of cash. This reflected a loss of approximately $7.0
million from continuing and discontinued operations and decreases in
noncontrolling interests of $1.3 million (primarily attributable to WBE
operating), accounts payable of $390,000 (due to reduced purchases and increased
payments to suppliers) and current liabilities of discontinued operations
($13,000). These results were largely offset by depreciation of approximately
$2.0 million (primarily attributable to the WBE facility), allowances for
doubtful accounts of approximately $12,000 (primarily related to the Willmark
receivables), a decrease of approximately $21,000 in prepaid expenses and other
current assets and an increase of approximately $1.1 million in accrued payroll
and other liabilities (of which an estimated $420,000 was attributable to Niton
Capital consulting fees).
During
the year ended December 31, 2008, our operating activities used a net of
$4,114,000 of cash. This reflected a loss of $7,493,000 before noncontrolling
interests, which was increased by a decrease in accounts payable of $932,000, a
decrease in billings in excess of costs and estimated earnings on uncompleted
contracts of $811,000, offset by depreciation of $1,792,000, amortization of
derivative liability of $1,150,000, amortization of debt issuance costs of
$305,000, a decrease in net trade receivables of $1,042,000 (largely due to
increase uncollectible accounts), an increase in accrued payroll and other
liabilities of $369,000, a decrease in costs and estimated earnings in excess of
billings on uncompleted contracts of $169,000, a decrease in inventories of
$104,000 (due to limited purchases and consumption of existing material), and a
decrease in prepaid expenses and other assets of $150,000 as well as a loss on
the sale of fixed assets of $40,000.
40
Net
Cash from Continuing Operations - Investing Activities
For the Six Months Ended
June 30, 2010 and 2009
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.
For the Twelve Months Ended
December 31, 2009 and 2008
Net
cash used in investing activities of approximately $165,000 for the year ended
December 31, 2009. These funds were primarily used for the purchase of property,
plant, and equipment for the WBE facility. For the year ended December 31, 2008,
net cash used in investing activities was $156,000. These funds were used
primarily for approximately $944,000 in WBE plant improvements offset by the
sale of our airplane and other equipment that netted $689,000.
Net
Cash from Continuing Operations – Financing Activities
For the Six Months Ended
June 30, 2010 and 2009
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.
For the Twelve Months Ended
December 31, 2009 and 2008
Net
cash provided by our financing activities was approximately $5.0 million for the
year ended December 31, 2009. During this period, we received approximately $6.3
million in net proceeds from the private placement of common stock offset by
approximately $1.3 million of reductions in short-term borrowings and long-term
debt.
Net cash
provided by our financing activities was $4,777,000 for the year ended December
31, 2008. During this period, we received $6,100,000 in convertible debt that
was converted into common stock in connection with the Merger. In addition, we
received $250,000 in notes payable and $25,000 in proceeds of a common stock
private placement. These amounts were reduced by debt issuance costs
for convertible debt of $612,000, payments on long-term debt principle of
$856,000 and net payments on lines of credit and short-term borrowings of
$130,000.
Results
of Operations
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
$268,000 increase in general and administrative expenses offset by a $317,000
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.
41
General and Administrative
expense of approximately $722,000 for the three months ended June 30,
2010 was approximately $268,000 higher than the comparable 2009 period. This
increase was primarily attributable to $135,000 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 $317,000 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 income of
approximately $29 for the three months ended June 30, 2010 was approximately
$2,000 lower than the comparable 2009 period primarily as a result of lower
invested cash balances.
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 $2.1 million lower than the comparable period in the prior
year. This 28% improvement was attributable to the approximately $1.2 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.
42
General and Administrative
expense of $1.6 million for the six months ended June 30, 2010 was $1.4
million, or 38%, lower than the $3.0 million for the comparable period in the
prior year. This significant improvement was primarily attributable to
$0.8 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 $93,000 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 $1.6 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 $970,000 and $967,000 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.
For the Twelve Months Ended
December 31, 2009 and 2008
Revenue
There was
no revenue recorded for the year ended December 31, 2009 compared to $4.0
million of revenue from engineering and management contracts in the prior
year. This decrease in revenue is attributable to the completion of all
contracts in 2008 and our focus on research and enhancement of our CBE
technology.
43
There was
no engineering and contract management expense recorded for the year ended
December 31, 2009 compared to approximately $2.0 million in the prior
year. This decrease in revenue is attributable to the completion of all
contracts in 2008 and our focus on research and enhancement of our CBE
technology.
General
and Administrative Expenses
General
and administrative expenses increased from $4.3 million to $5.0 million for the
year ended December 31, 2009 compared to the year ended December 31, 2008, an
increase 16%. This increase was primarily attributable to approximately
$1.8 million increase in professional, consulting, accounting, auditing and
legal fees (of which approximately $930,000 was attributable to Niton Capital),
$80,000 in travel and fund raising costs compared to nominal expenses in 2008, a
$211,000 decrease in bad debts reserve, a $24,000 increase in laboratory
research costs, and a $7,000 increase in advertising and promotion costs, offset
by a decrease of $927,000 in wages and salaries, and an absence of aircraft and
its operating costs amounting to approximately $205,000.
Research
and Development Expenses
Research
and development expense increased approximately $620,000 to $3.3 million for the
year ended December 31, 2009 compared to the year ended December 31, 2008, an
increase of 23%. The increase is primarily related to our efforts at
enhancing technology and process improvements at the WBE plant and includes
increases in equipment repairs ($91,000), utilities ($60,000), enzymes and other
feedstocks ($137,000), depreciation ($156,000), rental equipment ($101,000) and
employee benefits ($28,000).
Other
Income and Expense
Other
income was approximately $136,000 for the year ended December 31, 2009 compared
to approximately $2.1 million in other expense for the year ended December 31,
2008. This $2.2 million improvement was primarily due to the absence of
approximately $1.9 million in amortization of debt issuance costs and debt
discounts in 2009. In addition, the Company recorded approximately
$433,000 of other income in 2009 resulting from the settlement of the Willmark
arbitration.
DIRECTORS,
EXECUTIVE OFFICERS AND CONTROL PERSONS
Our Board
currently has five (5) member positions. The Directors’ terms continue until the
next annual meeting of stockholders or until their successors are duly elected
and qualified. Nominations to our Board are governed by our bylaws and a
Voting Agreement, dated September 30, 2008 (the “Voting Agreement”), by and
among Pelly Management and certain significant stockholders of the Company at
that time (Mr. Corcoran, Mr. Litzen, Mr. Harstad and Mr. Kramer). The
Voting Agreement provides that the significant stockholders must vote in favor
of a Board consisting of five (5) directors, with two (2) nominated by the
Board, two (2) nominated by Pelly Management and one (1) nominated by
agreement.
The
initial Board, in September 2008, consisted of Alain Vignon and Alan Rae (both
nominated by Pelly), Thomas Schueller (designated by agreement of the Board and
Pelly) and Randy Kramer and David Litzen (both nominated by the Board).
The current Board, approved by written consent of the majority of stockholders
in June 2010) consists of Alain Vignon and Alan Rae (both nominated by Pelly),
Thomas Schueller (designated by agreement of the Board and Pelly) and Pedro de
Boeck and Alain Poncelet (both nominated by the Board)
There are
no members of the Board that are believed by the Board to be an independent
director as defined in the listing standards for the Nasdaq Global Market
(“Nasdaq Listing Standards”). As a smaller reporting company traded on the
Over-the-Counter-Bulletin-Board, our directors are not required to be
independent. There are no family relationships among our directors and executive
officers.
The
Company is managed by a Chief Executive Officer that is separate from the
Chairman of the Company’s Board. The Company’s Board is actively involved
in overseeing all material risks that face the Company. The Board
administers its oversight functions by regularly reviewing the operations of the
Company and the executive officers’ management of the
Company.
The
following table describes: (1) our current directors; (2) information regarding
their principal occupations and directorships with other public companies during
at least the last five years; and (3) a summary of the experience,
qualifications, attributes or skills that led the Board to conclude that such
person should serve as a director as of the date of the filing of this
prospectus.
44
Directors
|
Name
|
Age
|
Position
and Experience
|
||
|
Thomas
Schueller
|
57
|
Mr.
Schueller has extensive business experience, including 10 years as a CPA
with Arthur Andersen. Mr. Schueller was a financial officer of RPM Pizza,
Inc. and developed and owned several businesses in Europe and the US. He
was also the national President of Pizza World GmbH, and has 17 years of
ownership of real estate development and financial companies in the United
States. From 1992 until 2008, Mr. Schueller owned and operated
Equimax Properties LLC and Buyer’s Resource Realty. Mr. Schueller received
his MBA in Finance from Michigan State University. Mr. Schueller
currently provides management consulting services to the Company pursuant
to a consulting agreement described below. Mr. Schueller has been a
Director since October 1, 2008. During his career, Mr. Schueller
acquired managerial and financial experience relevant to his service as
the financial expert on the Company's Audit Committee.
|
||
|
Alan
Rae
|
51
|
Mr.
Rae has over twenty-five years of diverse experience in the automotive,
financial and service industries as a consultant, business owner, and
manager. Mr. Rae was a founder and served as CEO of O2Diesel Corp. and its
preceding companies since 1997. O2Diesel Corp. filed for Chapter 11
bankruptcy and was sold out of bankruptcy in 2009. Mr. Rae had also
been CEO of World Class Driving until it was sold in 2010. Mr.
Rae is currently a paid consultant to Pelly Management and the
Company. Mr. Rae has also been a Director of Reostar Energy since
2007. Mr. Rae studied Mechanical Engineering at Paisley College of
Technology (now the University of the West of Scotland), Scotland and has
been a Director since October 1, 2008. Mr. Rae brings to the Board
his significant managerial, financial, corporate governance and
international business experience.
|
||
|
Alain
Vignon
|
40
|
Mr.
Vignon is a managing partner of Niton Capital Partners SA, a corporate
finance and investment company active mostly in the Energy and
Infrastructure industries. Prior to joining the group in 2007, Mr. Vignon
headed the Corporate Finance division at LCF Rothschild in Geneva from
2002 to 2007. He advised several large companies (private or public) and
private equity firms in sectors such infrastructure, energy, industrial
and telecommunication mainly in Europe and Africa. Before joining LCF
Rothschild, Mr. Vignon worked at JPMorgan and UBS Warburg in the
Investment Banking division, in London and Zurich, in structured and
acquisition finance from 1994 to 2001. Mr. Vignon has been a Director
since October 1, 2008. Mr. Vignon brings to the Board his
significant financial and investment banking
experience.
|
45
|
Pedro
de Boeck
|
46
|
Mr.
de Boeck has dedicated 20 years of his career in the management consulting
business. Until the end of 2007, Mr. de Boeck was a partner of McKinsey
& Company, an international consulting firm. During his 15 years at
McKinsey, he has advised Senior Executives around the world, with a
special focus on telecom and postal companies. He also was the worldwide
leader of the postal practice of McKinsey & Company. From 1986 to 1990
he worked for Strategic Planning Associates, and was based in London and
in Singapore. Mr. de Boeck is now an active investor, and currently sits
on the Board of Directors of Briarde SA, Warcoing Sucre SA and Pajelima
bvba. During 2007 and 2008, Mr. de Boeck sat on the Board of
Directors of McKinsey & Company, Iscal Sugar SA and Cospaia
SA . Mr. de Boeck graduated in 1986 from the Solvay business school
of the Free University of Brussels (Magna Cum Laude) and holds an MBA
degree from INSEAD (1991). Mr. de Boeck has has been a Director
since June 30, 2010. Mr. de Boeck brings to the Board his
significant consulting and investment advisor
experience.
|
||
|
Alain
P. Poncelet
|
41
|
Mr.
Poncelet is a founding partner of Pluris Sustainable Investments SA, an
Investment Management company focused on investing in sectors and
opportunities at the forefront of the green and/or sustainable
development. Mr. Poncelet started his career in Brussels in agricultural
products trading. He moved to Mexico in 1993, where he specialized in
coffee trading, ultimately taking responsibility for the Mexican coffee
operation of a multinational group. He then joined the Starbucks Coffee
Company, Switzerland in 2003 where, as Managing Director and Vice
President, Coffee & Tea, he was responsible for the global coffee and
tea procurement worldwide and the management of the company's Farmer
Support Centers in Central America and Africa. Mr. Poncelet has been a
Director since June 30, 2010. Mr. Poncelet brings to the Board his
significant investment advisor and international operations
experience.
|
||
Executive
Officers
|
Name
|
Age
|
Position
and Experience
|
||
|
Thomas
Schueller
|
57
|
Executive
Chairman of the Board
See
biographical information in “Directors” above.
|
||
|
Peter
Gross
|
41
|
Chief
Executive Officer, President and Treasurer
Mr.
Gross has 15 years of international experience in the specialty chemical
and biofuels industry as a project, business and marketing manager,
consultant, business owner and investor. Mr. Gross founded, and
since 2004 has served as managing partner of, add blue Consultoria Ltda.,
a consulting company established to develop business opportunities in the
renewable energy and biofuels markets. From 2007 through 2008, he
was involved in the sourcing, developing and managing of greenfield
sugarcane projects for Alterna Agri-Energy Ltda. From 2006 through
2007, he engaged in general management and business development relating
to renewable energies including biofuels for Conergy Group and from
2004 through 2007 he provided general management and business development
services to 02Diesel Ltda. Mr. Gross speaks Portuguese, German,
English and French and holds a degree in Business Administration from
Bayreuth University in
Germany.
|
46
|
David
Litzen
|
50
|
Vice
President of Engineering & Chief Technology Officer
Mr.
Litzen has served in his current position since January 2006. From
2004 to 2006, Mr. Litzen served as a consultant to the biofuels and
petrochemical industries under the company name of Virtual Ideality,
Inc. On January 1st, 2006 he became employed by KL Process Design
Group, a company which he also co-founded, as Vice President of
Engineering. He has 28 years experience in the petrochemical industry,
including 20 years as a Shell Oil senior process engineer and consultant.
He has extensive background and experience in process simulation, plant
process design, and process de-bottlenecking. Mr. Litzen is a registered
Professional Engineer and holds a B.S. degree in chemical
engineering.
Effective
March 2, 2010, David Litzen
resigned as a Director of the Company. Mr. Litzen served as a
Director of the Company October 1, 2008 to March 2, 2010 and was a member
of the Nominating Committee.
|
||
|
Dennis
Harstad
|
50
|
Vice
President of Plant Operations and Secretary
Mr.
Harstad has served in his current position since January 2006. He
was the Plant Manager and Construction Manager for Midwest Renewable
Energy from 2004 to 2006 and member of the board of directors from 2004 to
2007. He also served as a manager of WBE since 2006. Mr. Harstad has
over 28 years experience in agricultural and renewable energy
business.
|
||
|
Thomas
Bolan
|
59
|
Chief
Financial Officer
Mr.
Bolan has served in his current position since April 2009. From
October 2007 through December 2008, he was the Corporate Controller for
O2Diesel Corporation. Prior to that, from 2002 through 2007, he was a
consultant with Resources Connection, a publicly-traded international
professional services firm. Mr. Bolan earned his CPA certificate in
1978 and holds a Masters Degree in Finance/Economics from the University
of Connecticut.
|
Code
of Ethics
The
Company has adopted a Code of Ethics applicable to all employees, including the
Company’s principal executive officer, principal financial officer and to
directors. The Code concerns, among other things, compliance with
applicable law, the avoidance of conflicts of interest, no trading by a person
if the person is aware of information that may be considered material, a
prohibition on taking corporate opportunities, competing fairly and honestly,
the Company’s efforts to provide a safe and healthful work environment,
recordkeeping, confidentiality, proper use of Company assets and payments to
government personnel. A stockholder can request a free copy of the Code of
Ethics by writing to the Secretary, at the corporate office of KL Energy at 306
East Saint Joseph Street, Suite 200, Rapid City, South Dakota, 57701, or obtain
a copy of this document from our website http://www.klenergycorp.com/investors.htm
.
47
EXECUTIVE
COMPENSATION
Overview
and Objectives of the Compensation Program
The
Company’s compensation packages to its executive officers, as determined by the
Compensation Committee, are designed to enable the Company to recruit, retain
and motivate a talented and diverse group of people who contribute to our
success. The packages are also intended to synchronize executive
compensation with the Company’s performance, motivate executive officers to
achieve our business objectives and provide strong performance incentives.
The Company’s Chief Executive Officer provides input on determining and
recommending compensation packages to executive officers other than for himself.
The goal of the Compensation Committee is to ensure that the packages are fair,
reasonable and competitive with other companies in our industry similar in size
to the Company.
In
addressing compensation, the Compensation Committee attempts to balance the
short term and long term components, to properly encourage and reward retention
as well as to align executive pay with that of executives at comparable
companies in the industry. The Compensation Committee also focuses on
aligning individual incentives with the Company's strategic and financial goals.
Key incentive-based components in executive compensation packages are the annual
individual performance-based incentive bonuses.
Elements
of Executive Compensation Packages
Compensation
packages awarded to the Company’s executive officers are comprised of base
salary and annual cash bonus awards. The Board and stockholders have
approved an equity compensation plan. No awards were made under such plan
during 2009.
Salary
ranges for the Chief Executive Officer and other executives are based on an
individual’s experience and prior performance, as well as the Company’s
operating performance and the attainment of planned financial and strategic
goals. In addition, the Compensation Committee reviews compensation levels
of similarly situated executives at companies in our industry similar in size to
the Company when determining the target range of salary payable to the executive
officers. In determining their salaries and salaries for other officers,
the Compensation Committee subjectively evaluates the experience, performance
and attainment of initiatives, and no particular weight is given to any
particular factor. Annual salaries for the named executive officers are
subject to the provisions of their respective employment agreements described
below under the heading “Compensation of Executive Officers
and Directors - Summary of Executive Employment Agreements”.
Bonus
Determination
The
Company may pay annual incentive bonuses. Employment agreements contain
maximum percentages of base salary that may be paid as annual bonuses.
Based on the Company’s performance in 2009 and the general state of the
industry, the Compensation Committee determined there would be no 2009 bonus
payments to executive officers.
48
Perquisites
and Other Benefits
All
Company executives are also entitled, subject to meeting certain eligibility
requirements, to participate in the Company’s benefit programs, including the
Company’s SIMPLE IRA plan and its medical, dental and other benefits
plans.
Chief
Executive Officer Compensation
The
provisions of our Chief Executive Officer (“CEO”) employment agreement and
related agreements, which have been approved by the Board, determined the salary
paid to him during fiscal year 2009. In approving the compensation levels
contained in the CEO’s employment agreements, the Board reviewed and considered
the expected value of the leadership that he would bring to the Company.
The Board then set his compensation during the term of his employment agreement
in levels that reflected his potential achievements and quality of the Company
under his leadership.
Until
February 11, 2009, our CEO was Mr. Kramer. On February 11, 2009, Mr.
Corcoran became our CEO and replaced Mr. Kramer. Effective March 2, 2010, Mr.
Corcoran resigned as President and CEO. He was replaced, effective March 9,
2010, by Mr. Gross.
Tax
Deductibility of Executive Compensation
Under
Section 162(m) of the Internal Revenue Code and IRS Notice 2007-49, the Company
may not be able to deduct certain forms of compensation in excess of $1,000,000
paid per year to its chief executive officer and its three most highly
compensated officers (other than its CEO and CFO) who are employed by the
Company at year-end. The Committee believes that it is generally in the
Company’s best interest to satisfy the requirements for deductibility under
Internal Revenue Code Section 162(m). Accordingly, the Committee has taken
appropriate actions, to the extent it believes feasible, to preserve the
deductibility of annual incentive and long-term performance awards.
However, notwithstanding this general policy, the Committee also believes that
there may be circumstances in which the Company’s interests are best served by
maintaining flexibility in the way compensation is provided, whether or not
compensation is fully deductible under Internal Revenue Code Section
162(m).
The
Internal Revenue Code exempts qualifying performance-based compensation from the
deduction limit if certain conditions are met. One of the conditions is
stockholder approval of the performance-based compensation
provisions.
49
Summary
Compensation Table
The
following table summarizes the cash and non-cash compensation earned in 2009 and
awarded to or earned by individuals who served as our Chief Executive Officer
and two other most highly compensated executive officers serving during and/or
at the end of 2009 (each, a “named executive officer, collectively, the “named
executive officers”). The Company’s Executive Chairman and Chief Financial
Officer are not employees but have been serving in those capacities, under
consulting agreements, since February 2009 and April 2009,
respectively.
|
Name and
Principal Position
|
Year
|
Salary
($)
(2)
|
Bonus
($)
(3)
|
Stock
Awards
($)
(3)
|
Option
Awards
($)
(3)
|
Non-Equity
Incentive
Plan
Compensa-
tion ($)
(3)
|
Changes in
Pension
Value and
Nonqualified
Deferred
Compensa-
tion Earnings
($)
(3)
|
All Other
Compensa-
tion($)
(4)
|
Total ($)
|
|||||||||||||||||||||||||
|
(a)
|
(b)
|
(c
)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||||||||
|
Steven
Corcoran (1)
|
2009
|
$
|
134,546
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,329
|
$
|
136,875
|
|||||||||||||||||
|
President
and CEO
|
2008
|
$
|
115,136
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,861
|
$
|
117,997
|
|||||||||||||||||
|
David
Litzen
|
2009
|
$
|
135,426
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
9,161
|
$
|
144,587
|
|||||||||||||||||
|
Vice
President of Engineering
|
2008
|
$
|
129,246
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
3,184
|
$
|
132,430
|
|||||||||||||||||
|
Dennis
Harstad
|
2009
|
$
|
126,485
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
7,328
|
$
|
133,813
|
|||||||||||||||||
|
Vice
President of Operations
|
2008
|
$
|
118,997
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,941
|
$
|
121,938
|
|||||||||||||||||
|
Randy
Kramer (1)
|
2009
|
$
|
144,794
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
557
|
$
|
145,351
|
|||||||||||||||||
|
President
and CEO
|
2008
|
$
|
127,723
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
3,160
|
$
|
130,883
|
|||||||||||||||||
(1) Mr.
Corcoran became President and Chief Executive Officer on February 11, 2009,
which was the same date as Mr. Kramer’s departure, and resigned on March 2,
2010.
(2) Employment
agreements effective February 15, 2010 called for annual salaries of $147,019,
$139,725 and $130,500 for Messrs. Corcoran, Litzen and Harstad,
respectively. However, the Company implemented a broad-based 10% reduction
in salary which may be lifted in the Board’s discretion.
(3) There
were no bonuses, stock awards, option awards, non-equity plan compensation
payments or changes in pension value and non-qualified deferred compensation
earnings for any Company employee in 2009.
(4) Represents
the Company's 2009 contributions to a SIMPLE IRA, as well as payments of health,
dental and life insurance premiums, on behalf of the named
executive.
Summary
of Employment Agreements with Named Executive Officers
Each
named executive officer’s employment agreement includes an annual base as noted
in the table above and has a term of 3 years. The annual salaries of Mr.
Litzen and Mr. Harstad may be increased by approximately 10%, to the salary
level prior to the Company-wide 10% pay adjustment in November 2008, in the
event of the Company signing a service contract for the pending feedstock
testing for an international company. In addition, each person is
eligible to receive a cash bonus of 100% of their base salary each year, in the
Board’s discretion. The named executive officers are entitled to receive
reimbursement for reasonable expenses and are eligible to receive benefits
generally available to employees.
If the
executive is terminated for cause, the Company must pay salary earned up to the
termination date and reimburse the executive for reasonable expenses and unused
vacation. If terminated without cause or if the executive terminates his
employment for good reason, the Company must continue to pay the base salary and
reimburse medical and dental premiums for a severance period of 4 months, pay
the executive a prorated portion of any bonus the executive would otherwise be
entitled to, reimburse the executive for reasonable expenses and cause any
unvested options to vest and be exercisable.
If,
during the term, the executive dies or the executive’s employment is terminated
because the executive has become disabled, the executive will be eligible to
receive (1) six (6) months of severance and (2), at the sole discretion of the
Board of Directors (as to both amount of and payment date for), a bonus for the
calendar year in which the termination date occurs, pro-rated to reflect the
portion of the calendar year for which the executive was employed by the
Company.
Under the
employment agreements, executives must maintain the confidentiality of the
Company’s confidential information and assign any rights to inventions or other
intellectual property developed while the executive was employed by the
Company. The employment agreements contain provisions preventing an
executive whose employment is terminated from competing with the Company or
soliciting the Company’s employees for a period of 12 months following the
employment termination.
50
Consulting
Agreements
Messrs.
Schueller, Gross and Bolan serve on a full-time basis as the Company’s Chairman,
President and CEO and Chief Financial Officer, respectively, under
Board-approved consulting agreements. In 2009, the Company entered into a
consulting contract with each of Thomas Schueller, for the full-time position of
Executive Chairman, and Thomas Bolan, for the full-time position of Chief
Financial Officer. Mr. Schueller’s contract calls for an unspecified term
and monthly payments of $12,102 plus travel costs. This contract may be
terminated at any time by the Board or upon 10 days notice by Mr.
Schueller. Mr. Schueller temporarily has the position of Chairman and it
is intended that he will take a non-executive role on the Board, following the
current offering, making way for a new independent Chairman. Mr. Bolan’s
contract is on a month-to-month basis for an unspecified term and monthly
payments of $12,500 plus travel costs. This contract may be terminated at
any time upon 30 days notice by the Board or Mr. Bolan. Mr. Bolan was
initially hired on a temporary contractor basis until a permanent CFO could be
found. However, attracting a qualified permanent replacement has proven
more difficult than originally anticipated, largely due to the size and
capitalization of the Company, and its location in Rapid City, South
Dakota.
Effective
March 9, 2010, the Company entered into a consulting agreement with add blue
Consultoria Ltda., a Brazilian consulting company, for the provision of certain
executive services. Pursuant to this agreement, the full-time services of
CEO and President of the Company and its subsidiaries have
been performed by Peter Gross. The Company’s Brazilian subsidiary,
KLE Brazil Ltda., when formed, will fund the payment obligations under the
consulting agreement. An initial payment of $24,000 U.S. was paid to add
blue Consultoria Ltda. in March 2010, and thereafter the monthly fee will be
$16,000 U.S. Effective September 1, 2010, based on the Master
Collaboration Agreement, this fee was $20,000 U.S. per month. The
consulting agreement may be terminated upon 90 days notice by either
party. Mr. Gross's consultancy agreement is in place due to his residency
in Brazil. An H1B visa has been granted for Mr. Gross from October 2010
and any move to the U.S. would result in a change to the current
arrangement.
Effective
March 2, 2010, Mr. Corcoran resigned his position as the Company’s CEO and
President and terminated his employment agreement with the Company. As of
the same date, Mr. Corcoran entered into a consulting agreement with the Company
which provided that “the Board shall authorize the specific projects and the
related tasks to be performed”. Those tasks were essentially related to
providing transition assistance for the new CEO as well as being available, as
needed, to provide input regarding customer and vendor histories and
relationships, project details, particularly as it pertains to litigation
issues, etc. During the first four months of service under his consulting
agreement, Mr. Corcoran received $12,251 per month. Thereafter, unless
terminated with 10 days notice by the Company after the first four months of
consulting services, the agreement called for Mr. Corcoran to receive a base of
$3,000 per month and reimbursement of reasonable expenses. The Company
terminated this agreement effective July 1, 2010. The Company also: (i)
issued to Mr. Corcoran an option to purchase 83,333 shares of the Company’s
common stock at an exercise price of $1.10, exercisable for three years; and
(ii) agreed to release 594,046 shares of common stock from the lock-up agreement
between Mr. Corcoran and the Company dated September 30, 2008.
Mr. Rae
received consulting fees of $95,000 and $120,000 in 2009 and 2008, respectively,
from Pelly Management for services he performed from time to time for that firm.
He also has a consulting contract with the Company. In February 2010, the
Company amended its consulting contract with Mr. Rae, pursuant to which Mr. Rae
provides general management and financial advisory consulting services to
the Company. Mr. Rae’s contract calls for an unspecified term and monthly
payments of $14,000 plus travel costs and a $25 per diem expense
reimbursement. This contract may be terminated at any time by the Board or upon
10 days notice by Mr. Rae.
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 $400,000 for the three and six months ended June 30,
2009, respectively. These amounts represent fees for financial advisor
services.
Summary
of Potential Termination or Change-in-Control Payments
The table
below reflects the dollar amount of compensation to each named executive officer
in the event of termination of such individual’s employment prior to the
expiration of the employment agreements. The amounts shown assume that the
termination was effective December 31, 2009.
51
|
Benefits
and Payments
Upon
Termination
|
Voluntary
Termination
On
12/31/09($)
(1)
|
Termination
for
Cause on
12/31/09($)
|
Involuntary
Termination
without
Cause
on
12/31/09($)
(1)
|
Retirement
at
“Normal
Retirement
Age”
on
12/31/09($)
|
Disability
on
12/31/09($)
(2)
|
Death
on
12/31/09($)
(2)
|
||||||||||||||||||
|
Steven
Corcoran
|
||||||||||||||||||||||||
|
Compensation
- Salary
|
$
|
-
|
$
|
-
|
$
|
49,006
|
$
|
-
|
$
|
30,000
|
$
|
30,000
|
||||||||||||
|
Compensation
- Bonus
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Incentives
and Benefits
|
$
|
-
|
$
|
-
|
$
|
1,218
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
David
Litzen
|
||||||||||||||||||||||||
|
Compensation
- Salary
|
$
|
-
|
$
|
-
|
$
|
46,575
|
$
|
-
|
$
|
30,000
|
$
|
30,000
|
||||||||||||
|
Compensation
- Bonus
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Incentives
and Benefits
|
$
|
-
|
$
|
-
|
$
|
3,788
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Dennis
Harstad
|
||||||||||||||||||||||||
|
Compensation
- Salary
|
$
|
-
|
$
|
-
|
$
|
43,500
|
$
|
-
|
$
|
30,000
|
$
|
30,000
|
||||||||||||
|
Compensation
- Bonus
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Incentives
and Benefits
|
$
|
-
|
$
|
-
|
$
|
1,730
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Randy
Kramer
|
||||||||||||||||||||||||
|
Compensation
- Salary
|
$
|
-
|
$
|
-
|
$
|
225,000
|
$
|
-
|
$
|
30,000
|
$
|
30,000
|
||||||||||||
|
Compensation
- Bonus
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Incentives
and Benefits
|
$
|
-
|
$
|
-
|
$
|
1,518
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
(1)
|
Effective
February 15, 2010, each named executive had a 3-year employment agreement
commencing January 1, 2010. Each agreement called for the executive's
annual salary and medical and dental premiums to be paid for 4 months in
the event of employment termination for other than cause and 6 months in
the event of death or
disability.
|
|
(2)
|
Each
named executive was covered by a $30,000 AD&D insurance
policy.
|
In
connection with his departure as the President, Chief Executive Officer, and
Chief Financial Officer of the Company on February 11, 2009, Mr. Kramer entered
into a settlement agreement with the Company which, among other things, provided
for compensation as set forth in his separation agreement with the Company, a
broad release of the Company, a release of Mr. Kramer’s shares of the Company
from an escrow agreement, repayment by the Company of a loan from Mr. Kramer,
and an indemnification by the Company up to the amount of Mr. Kramer’s
liabilities for certain personal loan guarantees with respect to Company
debt. Mr. Kramer’s departure resulted from a difference of vision between
Mr. Kramer and the Company’s Board.
52
Director
Compensation
Other
than as described below, we generally do not compensate Directors for their
services as directors. All directors receive reimbursement of expenses
incurred in connection with participation in Board meetings. There were no
fees, bonuses, equity awards or other compensation paid to directors in 2009 for
their services as a director on the Board.
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 $30,000 has been accrued for his
services from his appointment in October 2008 through May
2010.
Bonus
Plan
The Board
of Directors adopted a cash bonus plan for the executive officers in the event
that the Company consummates a transaction with a certain potential licensor of
the Company’s technology. Up to $125,000 of cash may be allocated among
the officers and employees of the Company, at the Compensation Committee of the
Board of Directors’ discretion.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of August 11,
2010 with respect to beneficial ownership of our common stock by each of
the named executive officer (defined above), each director, each holder of more
than 5% of our common stock, and all current directors and executive officers as
a group.
Except
as indicated in the footnotes to this table, the persons named each have sole
voting and investment power over the shares shown as owned by them. The
percentage of beneficial ownership is based on 48,378,378 shares of our common
stock outstanding as of August 11, 2010.
53
Amount
and Nature of Beneficial Ownership
|
Name and Address of Beneficial Owner
(1)
|
Common Stock
|
% of Class
|
||||||
|
5%
Stockholders:
|
||||||||
|
Niton
(2)
|
9,695,568 | 20.0 | % | |||||
|
Green
Fund (3)
|
9,590,341 | 19.8 | % | |||||
|
Pedro
deBoeck (4)
|
5,227,272 | 10.8 | % | |||||
|
Randy
Kramer (5)
|
4,356,337 | 9.0 | % | |||||
|
Sucre
SA (4)
|
2,954,545 | 6.1 | % | |||||
|
Pelly
Management (6)
|
2,886,364 | 6.0 | % | |||||
| 34,710,427 | 71.7 | % | ||||||
|
Directors and Named Executive
Officers (defined above):
|
||||||||
|
David
Litzen
|
4,356,337 | 9.0 | % | |||||
|
Steven
Corcoran (7) (8)
|
594,046 | 1.2 | % | |||||
|
Dennis
Harstad
|
594,046 | 1.2 | % | |||||
|
Peter
Gross (7)
|
- | 0.0 | % | |||||
|
Thomas
Schueller
|
- | 0.0 | % | |||||
|
Thomas
Bolan
|
- | 0.0 | % | |||||
|
Alain
Vignon
|
- | 0.0 | % | |||||
|
Alan
Rae
|
- | 0.0 | % | |||||
|
All
directors and executive officers as a group (8 persons)
|
5,544,429 | 11.5 | % | |||||
(1)
Pursuant to Rule 13d-3 under the Securities and Exchange Act of 1934, as
amended, a person has beneficial ownership of any securities as to which such
person, directly or indirectly, through any contract, arrangement, undertaking,
relationship, or otherwise has or shares voting power and/or investment power or
as to which such person has the right to acquire such voting and/or investment
power within 60 days from September 30, 2010. Percentage of beneficial ownership
as to any person as of a particular date is calculated by dividing the number of
shares beneficially owned by such person by the sum of the number of shares
outstanding as of such date and the number of unissued shares as to which the
person has the right to acquire voting and/or investment power within 60 days.
The number of shares shown includes outstanding shares of common stock owned as
of September 30, 2010 by the person indicated.
(2)
Niton Capital Investment Ltd, BVI and Niton Capital Advisors ltd. BVI, 7 rue du
Mont-Blanc, 1201 Geneva, Switzerland; beneficial owner is [to be provided in the
final amended registration statement]
(3)
Green Fund, c/o Deutsche Bank Nominees Limited, Box 727, St.’ Paul’s Gate New
Street, St. Helier, New Jersey JE4 8ZB Channel Island; beneficial owner –
None
(4)
Mr. de Boeck is also Managing Director of Warcoing Sucre SA, Slue Gachard 88,
Baite 14, 105 Brussels, Belgium; beneficial owner is [to be provided in the
final amended registration statement]
(5)
Randy Kramer, 4037 Valley West Drive, Rapid City, SD 57702; beneficial owner [to
be provided in the final amended registration statement]
(6)
Pelly Management,3 rue Francois Bellot, 1206 Geneva, Switzerland; beneficial
owner [to be provided in the final amended registration
statement]
(7) Mr.
Corcoran resigned as President and CEO on March 2, 2010 and Mr. Gross was named
President and CEO effective March 9, 2010.
(8) Mr.
Corcoran was issued 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.
On
February 24, 2009, the company sold approximately 18,181,818 shares of its
voting securities, or approximately 54% of its outstanding shares, to certain
purchasers under the Purchase Agreement, described in the “Certain Relationships
and Related Transactions” section below. Certain of the purchasers (Niton
Capital and Green Fund) were existing shareholders of the Company immediately
prior to the transaction, and Pedro de Boeck became a new shareholder upon
closing of the Purchase Agreement. The current ownership of these parties
is reflected in the Table of Beneficial Ownership above.
54
TRANSACTIONS
WITH RELATED PERSONS
In
general, the Company does not have a formal policy or procedures for the review,
approval or ratification of related party transactions. The Audit
Committee, under its charter, has been delegated by the Board the authority to
review and approve related party transactions. Management generally seeks
approval of related party transactions from the Audit Committee.
Western
Biomass Energy
The
Company enters into numerous transactions with WBE throughout the year.
Mr. Gross, Mr. Bolan and Mr. Harstad serve as managers of WBE, and the Company
holds an approximate 64% ownership interest in WBE. (Mr. Corcoran also
served as a manager of WBE until his resignation on March 2, 2010.) WBE owns our
main cellulose-based ethanol facility. The most common type of
transaction we enter into with WBE is to provide engineering services as well as
funding for operating and capital expenditures. As of December 31, 2009,
WBE owed us approximately $8.8 million. Although a Promissory Note,
bearing an interest rate of 7.5%, has been created to memorialize this related
party indebtedness, there is currently no specific repayment schedule for these
debts owed to the Company by WBE.
Other
Subsidiaries
The
Company has informal, unwritten agreements with its subsidiaries, Western
Biomass Energy LLC, KL Management LLC, KLHC LLC (formerly known as KL Energy
LLC) and Patriot Motor Fuels LLC regarding the funding of their operations.
Effective in June 2009, KL Management LLC and KLHC LLC were effectively
discontinued as a result of the severe change in the economics of the ethanol
industry but especially due to the Company’s re-focus on cellulosic ethanol
commercialization efforts
Midwest
Renewable Energy (“MRE”)
A
stockholder and former officer of the Company was also a member of the board of
directors for, and held an ownership interest in, MRE. The Company
provided construction management and engineering services for the construction
of an addition to MRE’s existing facility for a total estimated cost to the
customer of $5,600,000. Due to MRE’s inability to meet contractual
obligations, the Company issued a stop work order on the construction project in
March, 2008. MRE has not committed to completing the project and has taken no
action to cure the stop work order. This matter, among others, is subject to the
arbitrations described in “Legal Proceedings” above.
Security
National Bank Loan
On March
27, 2009, Security National Bank of Omaha loaned $1,480,047 to WBE. We are
a guarantor with respect to this loan and are providing funds for WBE to
make payments on this loan. The terms of this loan are described in
“Liquidity and Capital Resources” above.
O2Diesel
Corporation
Mr. Rae
served as Chief Executive Officer of O2Diesel Corporation (“O2D”) until October
2009, when O2D was purchased out of Chapter 11 by a third-party. O2D was a
commercial developer of cleaner-burning diesel fuel alternatives, including
O2Diesel™, an ethanol-diesel additive. The Company had several agreements with
O2D: a Technology License and Services Agreement (dated March 2008,
“License Agreement”), a Term Loan Agreement (dated October 2008, “Loan
Agreement”) and a Supply and Distribution Agreement (dated October 2008,
“Supply Agreement”). The Supply Agreement was for the joint development of
the market for O2Diesel™ in the United
States and Canada during a three year period. The Loan Agreement
was to provide O2D with up to $1.0 million, at an annual interest rate of 10%,
for its working capital purposes. In March 2009, O2D defaulted on its loan
of $250,000 and this loan was sold at face value in April 2009 to a third party
(“Note Purchaser”). The Note Purchaser acquired O2D out of bankruptcy in
late 2009. The License Agreement provided O2D with the Company’s
technology for several non-U.S. countries. Subsequent to the O2D
bankruptcy, the Company acquired the License Agreement 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. All of these agreements have been cancelled by mutual consent
of both parties in February 2009 and there are no remaining agreements between
the Company and O2D.
55
Escrow
Agreement
In
connection with the Merger, the Company entered into a Performance Escrow
Agreement with certain of its officers (Mr. Kramer, Mr. Litzen, Mr. Corcoran and
Mr. Harstad). The agreement provides that the 9,900,765 shares of common stock
issued to such officers in connection with the Merger be deposited into escrow,
with up to 20% of the escrowed shares subject to cancellation if certain
performance milestones by the Company are not achieved. In connection with their
departure, the Company agreed to release shares, belonging to Mr. Kramer and Mr.
Corcoran, from this Escrow Agreement. As a result, only the 4,950,383 shares
held by Mr. Litzen and Mr. Harstad remain subject to the Escrow
Agreement.
Loan
from Executive Officer
We had a
subordinated unsecured note payable to Mr. Kramer totaling $600,000 at March 31,
2009. This note has a variable interest rate, which was 5.0% at March 31, 2009,
with interest paid quarterly. 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 $40,000 in 2009, $120,000 in each of
2010, 2011, 2012, 2013, and $80,000 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, when we receive future equity
financing, we are obligated to pay 5% of the proceeds towards principal payments
on this note.
56
Voting
Agreement
Certain
of our stockholders entered into a Voting Agreement with Pelly Management, the
financial adviser engaged by us with respect to private placement financing and
investor relations services. The Voting Agreement required that the principal
stockholders at that time (Mr. Kramer, Mr. Litzen, Mr. Harstad and Mr. Corcoran)
agree to vote in favor of maintaining a five-member Board of Directors, of which
two directors will be designated by Pelly Management and one will be nominated
upon mutual agreement of Pelly Management and these stockholders. At the
time when the Voting Agreement was executed, such stockholders were our
principal stockholders, collectively holding approximately 63% of our
outstanding voting securities, and their collective holdings have been reduced
to 21% as of the date of this registration statement. The Voting Agreement
will terminate upon, among other reasons, certain investors introduced to us by
Pelly Management holding collectively less than 25% of our outstanding common
stock held by non-affiliates.
Consulting
Agreements
Mr.
Rae received consulting fees of $95,000 and $120,000 in 2009 and 2008,
respectively, from Pelly Management for services he performed from time to
time for that firm. He also has a consulting contract with the Company described
above under “Executive Compensation - Consulting Agreements”. Mr. Rae, is
a board Director, and due to his experience is currently retained to assist the
company with its global business development and corporate finance strategy both
in the US and abroad. He also represents the company at public industry and
investment conferences. For these services, Mr. Rae is paid up to $14,000
per month at rate $125 per hour. Pelly Management (“PM”) provides
third-party financial advisory services to the Company. Such services,
pursuant to the agreement dated March 18, 2008 with the Company’s predecessor
company, includes exclusive representative and financial advisor for the Merger
and initial listing, subsequent private placements, investment banking services
related to mergers and acquisitions or introductions to strategic partners,
equity and debt financings, and other commercial transactions. On May 13,
2009, the Company approved the issuance of 2,886,364 shares of its common stock
to PM in consideration of an aggregate of $635,000 in fees incurred by the
Company for certain financial advisory services provided by PM since October
2008. Pursuant to the arrangement between the Company and PM, the Company was
obligated to pay cash for the fees. However, in light of the Company’s
cash flow demands, the Company and PM agreed that the common shares would be
issued in lieu of cash.
In 2009,
Niton Capital (“NC”) provided financial reviews, competitor and engineering
analyses, representation at ethanol conferences, development of a financial
model and other technical and financial services. On May 13, 2009, the
Company approved the issuance of 2,319,205 shares of its common stock to NC in
consideration of an aggregate of $510,225 in fees incurred by the Company for
certain consulting and engineering services provided by NC from July 2008 to
March 2009. None of these services have been provided to date in
2010.
add blue Consultoria Ltda.
Agreements
On
September 1, 2010, the Company entered into a Master Collaboration Agreement
(the “Collaboration Agreement”) with add blue Consultoria Ltda., a foreign
company organized under the laws of Brazil (“Add Blue”). The
Collaboration Agreement amends and restates and supersedes all prior agreements
between the two parties are replaced. Pursuant to the Collaboration
Agreement, Add Blue expressly waived any and all rights throughout the world
that it may have in respect to any and all of the Company’s intellectual
property, whether obtained through the prior agreements or
otherwise. In addition, the Collaboration Agreement provides for the
cancellation and termination of an option previously granted by Add Blue to the
Company to purchase 20% of its equity. The Collaboration Agreement
also provides for payments by the Company to Add Blue, aggregating up to
$2,583,000, between September 2010 and August 2011, based on the achievements of
certain milestones in respect of customer payments to the
Company.
The
Company also agreed to issue to Add Blue 1,500,000 shares of the Company’s
common stock by September 30, 2010, subject to the satisfaction of any and all
applicable securities laws and other regulations in respect of the stock
issuance. In addition, in the event that the required conditions for
the payment of funds by a customer have been satisfied, the Company agreed to
issue to Add Blue an additional 500,000 shares of the Company’s common
stock.
The
Company and Add Blue also agreed to form a Brazilian subsidiary (“Newco”) by
November 30, 2010, which Newco would be formed to commercialize certain of the
Company’s intellectual property. Newco shall be owned 60% by the
Company and 40% by Add Blue (the “Add Blue Equity Interest”). The
Company will have an option to acquire the Add Blue Equity Interest, exercisable
at its sole discretion, by issuing to Add Blue 1,000,000 shares of the Company’s
common stock.
In
addition, the parties agreed to amend the arrangement setting forth the
executive management services provided by Peter Gross to the Company, pursuant
to an existing consulting agreement between the Company and Add Blue, such that
the compensation terms for Mr. Gross will be a monthly payment of US$ 20,000
payable beginning on September 1, 2010 and that the Company will reimburse all
service-related and approved expenses. The other terms of the
amendment agreement shall be commensurate with the terms and conditions as
currently set forth in the consulting agreement, and the parties hereto agree to
negotiate in good faith in the consummation of this amendment
agreement.
The
Collaboration Agreement will remain in force for a period of 540 days, and upon
the expiration of such term, it will automatically renew for an additional
period of 360 days, unless either party gives no less than 30 days prior written
notice of its intention to terminate the
agreement..
57
DESCRIPTION
OF SECURITIES
The
following description of our capital stock is a summary and is qualified in its
entirety by the provisions of our articles of incorporation, with amendments,
all of which have been filed as exhibits to our registration statement of which
this prospectus is a part.
Common
Shares
We are
currently authorized to issue up to 180,000,000 shares of common stock,
par value $.001. Our Board of Directors has the ability, without
seeking stockholder approval, to issue additional shares of common stock in the
future for such consideration as the Board of Directors may consider
sufficient. As of August 11, 2010, there were 48,378,378 shares
of common stock issued and outstanding. Holders of common stock are entitled to
one vote for each share held of record on all matters to be voted on by the
stockholders. The holders of common stock are entitled to receive dividends
ratably, when, as and if declared by the board of directors, out of funds
legally available. In the event of our liquidation, dissolution or winding-up
the holders of common stock are entitled to share equally and ratably in all
assets remaining available for distribution after payment of liabilities and
after provision is made for each class of stock, if any, having preference over
the common stock. The holders of shares of common stock, as such, have no
conversion, preemptive, or other subscription rights and there are no redemption
provisions applicable to the common stock.
Preferred
Shares
We are
currently authorized to issue up to 20,000,000 shares of preferred stock, par
value $.001. The preferred stock may be divided into such number of series as
the Board of Directors may determine. The Board of Directors would be authorized
to determine and alter the rights, preferences, privileges and restrictions
granted to and imposed upon any wholly unissued series of preferred stock, and
to fix the number of shares of any series of preferred stock and the designation
of any such series of preferred stock. The Board of Directors, within the limits
and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, is
able to increase or decrease (but not below the number of shares of such series
then outstanding) the number of shares of any series subsequent to the issue of
shares of that series.
Warrants
Contemporaneously
with the closing of the Merger, the Company issued an aggregate of 3,125 units
of its securities in a private placement, with each unit comprised of two shares
of common stock, for a total of 6,250 shares, and a warrant to purchase one
share of common stock pursuant to the terms of the Securities Purchase Agreement
dated September 30, 2008 among the Company and certain investors. The purchase
price per unit was $8.00 per unit for an aggregate price of $25,000. The
exercise of the purchase rights represented by each warrant may be made, in
whole or in part, at any time or times within three years after the September
2008 date of issuance for $6.00 per warrant.
58
Nevada
Corporate Law
The
Nevada Business Corporation Law contains a provision governing “acquisition of
controlling interest.” This law provides generally that any person or entity
that acquires 20% or more of the outstanding voting shares of a publicly-held
Nevada corporation in the secondary public or private market may be denied
voting rights with respect to the acquired shares, unless a majority of the
disinterested stockholders of the corporation elects to restore such voting
rights in whole or in part. The control share acquisition act provides that a
person or entity acquires “control shares” whenever it acquires shares that, but
for the operation of the control share acquisition act, would bring its voting
power within any of the following three ranges:
• 20
to 33 1/3%;
• 33
1/3 to 50%; or
• more
than 50%.
A
“control share acquisition” is generally defined as the direct or indirect
acquisition of either ownership or voting power associated with issued and
outstanding control shares. The stockholders or board of directors of a
corporation may elect to exempt the stock of the corporation from the provisions
of the control share acquisition act through adoption of a provision to that
effect in the articles of incorporation or bylaws of the corporation. Our
articles of incorporation and bylaws do not exempt our common stock from the
control share acquisition act.
The
control share acquisition act is applicable only to shares of “Issuing
Corporations” as defined by the Nevada law. An Issuing Corporation is a Nevada
corporation, which:
• has
200 or more stockholders, with at least 100 of such stockholders being both
stockholders of record and residents of Nevada; and
• does
business in Nevada directly or through an affiliated corporation.
At this
time, we do not have 100 stockholders of record resident of Nevada. Therefore,
the provisions of the control share acquisition act do not apply to acquisitions
of our shares and will not until such time as these requirements have been met.
At such time as they may apply, the provisions of the control share acquisition
act may discourage companies or persons interested in acquiring a significant
interest in or control of us, regardless of whether such acquisition may be in
the interest of our stockholders.
The
Nevada “Combination with Interested Stockholders Statute” may also have an
effect of delaying or making it more difficult to effect a change in control of
us. This statute prevents an “interested stockholder” and a resident domestic
Nevada corporation from entering into a “combination,” unless certain conditions
are met. The statute defines “combination” to include any merger or
consolidation with an “interested stockholder,” or any sale, lease, exchange,
mortgage, pledge, transfer or other disposition, in one transaction or a series
of transactions with an “interested stockholder” having:
• an
aggregate market value equal to 5 percent or more of the aggregate market value
of the assets of the corporation;
• an
aggregate market value equal to 5 percent or more of the aggregate market value
of all outstanding shares of the corporation; or
• representing
10 percent or more of the earning power or net income of the
corporation.
59
An
“interested stockholder” means the beneficial owner of 10 percent or more of the
voting shares of a resident domestic corporation, or an affiliate or associate
thereof. A corporation affected by the statute may not engage in a “combination”
within three years after the interested stockholder acquires its shares unless
the combination or purchase is approved by the board of directors before the
interested stockholder acquired such shares. If approval is not obtained, then
after the expiration of the three-year period, the business combination may be
consummated with the approval of the board of directors or a majority of the
voting power held by disinterested stockholders, or if the consideration to be
paid by the interested stockholder is at least equal to the highest
of:
• the
highest price per share paid by the interested stockholder within the three
years immediately preceding the date of the announcement of the combination or
in the transaction in which he became an interested stockholder, whichever is
higher;
• the
market value per common share on the date of announcement of the combination or
the date the interested stockholder acquired the shares, whichever is higher;
or
• if
higher for the holders of preferred stock, the highest liquidation value of the
preferred stock.
Transfer
Agent
Routh
Stock Transfer, Inc. is the transfer agent and registrar for our
securities.
60
PLAN
OF DISTRIBUTION
Subject
to the terms and conditions of an underwriting agreement, dated ___________,
2010, we have agreed to sell to the underwriter, and the underwriter has agreed
to purchase, on a firm commitment basis the number of common shares offered in
this offering, at the public offering price, less the underwriting discount set
forth on the cover page of this prospectus.
Nature
of Underwriting Commitment
The
underwriting agreement provides that the underwriter is committed to purchase
all shares offered in this offering, other than those covered by the
over-allotment option described below, if the underwriters purchase any of these
securities. The underwriting agreement provides that the obligations of the
underwriter to purchase the shares offered hereby are conditional and may be
terminated at their discretion based on their assessment of the state of the
financial markets. The obligations of the underwriters may also be terminated
upon the occurrence of other events specified in the underwriting agreement.
Furthermore, pursuant to the underwriting agreement, the underwriters’
obligations are subject to the authorization and the validity of the common
stock being registered and to various other customary conditions,
representations and warranties contained in the underwriting agreement, such as
receipt by the underwriters of officers’ certificates and legal opinions of our
counsel. The shares referred to in this paragraph are the same shares
referred to in the Registration Fee table.
State
Blue Sky Information
We intend
to offer and sell the shares offered hereby to retail customers and
institutional investors in all 50 states. However, we will not make any offer of
these securities in any jurisdiction where the offer is not
permitted.
Pricing
of Securities
The
underwriters have advised us that they propose to offer the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers that are members of the Financial Industry
Regulatory Authority (“FINRA”), at such price less a concession not in excess of
$[ ___] per share. The underwriters may allow, and the selected dealers may
re-allow, a concession not in excess of $[___] per share to certain brokers and
dealers. After this offering, the offering price and concessions and discounts
to brokers and dealers and other selling terms may from time to time be changed
by the underwriters. These prices should not be considered an indication of the
actual value of the shares and are subject to change as a result of market
conditions and other factors. No variation in those terms will change the amount
of proceeds to be received by us as set forth on the cover page of this
prospectus.
The
public offering price will be based on negotiations with our underwriter
immediately prior to the closing date of the offering, adjusted for the
anticipated Reverse Stock Split, prior to the effectiveness of the registration
statement of which this prospectus is a part. We intend to apply for listing of
our common stock on the Nasdaq Capital Market. No assurance can be given that
our application will be approved. If the application is not approved, the shares
of our common stock will continue to be traded on the OTC Bulletin
Board.
The
principal factors considered in determining the public offering price of the
shares included:
● the
information in this prospectus and otherwise available to the
underwriters;
● the
history and the prospects for the industry in which we will
compete;
61
● the
current stock price;
● the
stock price in the recent private placements of the Company;
● our
current financial condition and the prospects for our future cash flows and
earnings;
● the
general condition of the economy and the securities markets at the time of this
offering;
● the
recent market prices of, and the demand for, publicly-traded securities of
generally comparable companies; and
● the
public demand for our securities in this offering.
We cannot
be sure that the public offering price will correspond to the price at which our
shares will trade in the public market following this offering or that an active
trading market for our shares will develop and continue after this
offering.
Commissions
and Discounts
The
following table summarizes the compensation to be paid to the underwriters by us
and the proceeds, before expenses, payable to us, assuming a [$____] offering
price. The information assumes either no exercise or full exercise by the
underwriters of the over-allotment option.
|
Per Share
|
Total (without over-
allotment)
|
Total (with over-
allotment)
|
||||||||||
|
Price
to public
|
||||||||||||
|
Underwriting
discount (1)
|
||||||||||||
|
Proceeds
to us, before expenses (2)
|
||||||||||||
(1)
Underwriting discount is [$0.___ ] per share ([___]% of the price of the shares
sold in the offering).
(2) We
estimate that the total expenses of this offering, excluding the underwriters’
discount and the non-accountable expense allowance, are approximately
$_________.
We agreed
that, in addition to the filing fees and other general offering expenses, we
will pay to the underwriter a non-accountable expense allowance equal to [___]
percent (____%) of the gross proceeds received by the Company from the sale of
the shares by deduction from the proceeds of the offering.
Over-allotment
Option
We have
granted a 45-day option to the underwriters to purchase [_________] additional
shares of common stock solely to cover over-allotments, if any, at the same
price as the initial shares. If the underwriters fully exercise the
over-allotment option, the total public offering price, underwriting fees and
expenses and net proceeds (before expenses) to us will be $[______________],
$[____________], and $[___________] respectively.
Lock-ups
All of
our officers, directors and stockholders beneficially owning [__]% or more of
our outstanding common stock have agreed that, for a period of 6 months from the
effective date of the registration statement of which this prospectus forms a
part, they will not sell, contract to sell, grant any option for the sale or
otherwise dispose of any of our equity securities, or any securities convertible
into or exercisable or exchangeable for our equity securities, without the
consent of the underwriter except for exercise or conversion of currently
outstanding warrants, options and convertible debentures, as applicable; and
exercise of options under an acceptable stock incentive plan.
62
We have
also agreed that, without the prior written consent of the underwriter, we
will not, for a period of 90 days from the effective date of this registration
statement, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of capital stock of the Company or any
securities convertible into or exercisable or exchangeable for shares of capital
stock of the Company; (ii) file or caused to be filed any registration statement
with the SEC relating to the offering of any shares of capital stock of the
Company or any securities convertible into or exercisable or exchangeable for
shares of capital stock of the Company or (iii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of capital stock of the Company, whether any such
transaction described in clause (i), (ii) or (iii) above is to be settled by
delivery of shares of capital stock of the Company or such other securities, in
cash or otherwise.
The
restrictions contained above shall not apply to (i) the common stock to be sold
hereunder, (ii) the issuance by the Company of shares of common stock upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof of which the Underwriter has been advised in writing or (iii)
the issuance by the Company of option or shares of capital stock of the Company
under any stock compensation plan of the Company.
The
underwriters may consent to an early release from the lock-up periods if, in
their opinion, the market for the common stock would not be adversely impacted
by sales and in cases of a financial emergency of an officer, director or other
stockholder. We are unaware of any officer or director who intends to ask for
consent to dispose of any of our equity securities during the relevant lock-up
periods.
Purchase
Option
We have
agreed to issue and sell to the underwriter (and/or its designees) an option for
the purchase of an aggregate of [ ________ ] common shares [ [ ___ ] % of the total shares
offered to the public] for an aggregate purchase price of $ [ __________ ] . This purchase option shall
be exercisable, in whole or in part, commencing on a date which is one year from
the transaction closing date and expiring on the five-year anniversary of the
transaction closing date at an initial exercise price per share of $ [ __________ ] , which is equal to [ ____ ] % of the initial public
offering price of the shares.
The
purchase option and the [______] shares of common stock underlying the option
have been deemed compensation by FINRA and are therefore subject to a 180-day
lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriters (or permitted
assignees under the Rule) will not sell, transfer, assign, pledge, or
hypothecate this purchase option or the securities underlying this purchase
option, nor will they engage in any hedging, short sale, derivative, put or call
transaction that would result in the effective economic disposition of this
warrant or the underlying securities for a period of 180 days from the date of
this prospectus. Additionally, the purchase option may not be sold transferred,
assigned, pledged or hypothecated for a one year period (including the foregoing
180 day period) following the effective date of the registration statement
except to selected dealers participating in the offering and their bona fide
officers or partners.
63
Registration
Rights
Upon
written demand of the holders of at least 51% of the purchase options and/or the
underlying shares, we agreed to register, on one occasion and within 60 days of
such demand, all or any portion of the shares underlying the purchase options.
In addition to the demand right of registration, holders shall have the
“piggy-back” right, for a period of [____] (__) years commencing ____ (___) year
from the transaction closing date, to include the securities as part of any
other registration of securities filed by the Company (other than in connection
with a transaction contemplated by Rule 145 (a) promulgated under the Act or
pursuant to Form S-8 or any equivalent form); provided, however, that if, solely
in connection with any primary underwritten public offering for the account of
the Company, the managing underwriter(s) thereof shall, in its reasonable
discretion, impose a limitation on the number of shares of common stock which
may be included in the registration statement because, in such underwriter(s)'
judgment, marketing or other factors dictate such limitation is necessary to
facilitate public distribution, then the Company shall be obligated to include
in such registration statement only such limited portion of the securities with
respect to which the holders requested inclusion hereunder as the underwriter
shall reasonably permit.
These
rights apply to all of the securities directly and indirectly issuable upon
exercise of the purchase option. We will bear all fees and expenses attendant
with registering the securities issuable on exercise of the purchase option,
other than underwriting commissions incurred and payable by the holders. The
exercise price and number of shares issuable upon exercise of the purchase
option may be adjusted in certain circumstances including in the event of a
stock dividend, extraordinary cash dividend or our recapitalization,
reorganization, merger or consolidation. However, the purchase option exercise
price will not be adjusted for issuances of common stock at prices below the
warrant exercise price.
Stabilization
Until the
distribution of the shares offered by this prospectus is completed, rules of the
SEC may limit the ability of the underwriters to bid for and to purchase our
securities. As an exception to these rules, the underwriters may engage in
transactions effected in accordance with Regulation M under the Securities
Exchange Act of 1934 that are intended to stabilize, maintain or otherwise
affect the price of our common stock. The underwriters may engage in
over-allotment sales, syndicate covering transactions, stabilizing transactions
and penalty bids in accordance with Regulation M.
●
Stabilizing transactions permit bids or purchases for the purpose of pegging,
fixing or maintaining the price of the common stock, so long as stabilizing bids
do not exceed a specified maximum.
●
Over-allotment involves sales by the underwriters of shares in excess of the
number of shares the underwriters are obligated to purchase, which creates a
short position. The short position may be either a covered short position or a
naked short position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number of shares that
they may purchase in the over-allotment option. In a naked short position, the
number of shares involved is greater than the number of shares in the
over-allotment option. The underwriters may close out any covered short position
by either exercising their over-allotment option or purchasing shares in the
open market.
●
Covering transactions involve the purchase of securities in the open market
after the distribution has been completed in order to cover short positions. In
determining the source of securities to close out the short position, the
underwriters will consider, among other things, the price of securities
available for purchase in the open market as compared to the price at which they
may purchase securities through the over-allotment option. If the underwriters
sell more shares of common stock than could be covered by the over-allotment
option, creating a naked short position, the position can only be closed out by
buying securities in the open market. A naked short position is more likely to
be created if the underwriters are concerned that there could be downward
pressure on the price of the securities in the open market after pricing that
could adversely affect investors who purchase in this offering.
64
● Penalty
bids permit the underwriters to reclaim a selling concession from a selected
dealer when the shares of common stock originally sold by the selected dealer
are purchased in a stabilizing or syndicate covering transaction.
These
stabilizing transactions, covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of our common stock. As a
result, the price of our common stock may be higher than the price that might
otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of our securities.
These transactions may occur on the OTC Bulletin Board or on any other trading
market. If any of these transactions are commenced, they may be discontinued
without notice at any time.
Indemnification
The
underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the SEC, indemnification for liabilities under
the Securities Act is against public policy as expressed in the Securities Act,
and is therefore, unenforceable.
LEGAL
MATTERS
The
validity of the shares of common stock being offered hereby was passed upon for
us by Greenberg Traurig, LLP.
EXPERTS
Our
audited financial statements included in the Registration Statement of which
this prospectus is a part have been audited by Ehrhardt, Keefe, Steiner, &
Hottman PC , an independent registered public accounting firm, for the periods
and to the extent set forth in their report appearing in the Registration
Statement of which this prospectus is a part. Such financial statements have
been so included in reliance upon the report of such firm given upon the firm’s
authority as an expert in auditing and accounting.
AVAILABLE
INFORMATION
We have
filed a registration statement on Form S-1 under the Securities Act of 1933, as
amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of KL Energy Corporation, filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange
Commission.
We are
subject to the informational requirements of the Securities Exchange Act of
1934, which requires us to file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information may be inspected at public reference facilities of the SEC at
100 F Street N.E., Washington D.C. 20549. Copies of such material can be
obtained from the Public Reference Section of the SEC at 100 F Street N.E.,
Washington, D.C. 20549 at prescribed rates. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov.
Until _________,
2010 (25 days after the commencement of this offering), all dealers that buy,
sell or trade shares of our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
You
should rely only on the information contained or incorporated by reference to
this prospectus in deciding whether to purchase our common stock. We have not
authorized anyone to provide you with information different from that contained
or incorporated by reference to this prospectus. Under no circumstances should
the delivery to you of this prospectus or any sale made pursuant to this
prospectus create any implication that the information contained in this
prospectus is correct as of any time after the date of this prospectus. To the
extent that any facts or events arising after the date of this prospectus,
individually or in the aggregate, represent a fundamental change in the
information presented in this prospectus, this prospectus will be updated to the
extent required by law.
65
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.
-
E-1 -
KL
Energy Corporation
Form
10-Q
For
the Period Ended June 30, 2010
Table
of Contents
|
Page
|
||
|
Part
I - Financial Information
|
E-3
|
|
|
Item
1. Financial Statements
|
E-3
|
|
|
-
Notes to Consolidated Financial Statements
|
E-7
|
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
|
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
|
Item
4T. Controls and Procedures
|
|
|
|
Part
II - Other Information
|
|
|
|
Item
1. Legal Proceedings
|
|
|
|
Item
1A. Risk Factors
|
|
|
|
Item
2. Unregistered Sales of Equity Securities
|
|
|
|
Item
3. Defaults Upon Senior
Securities
|
|
|
|
Item
5. Other Information
|
|
|
|
Item 6. Exhibits
|
|
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.
-
E-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.
-
E-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 | ) | $ | ( 0.03 | ) | $ | ( 0.06 | ) | $ | ( 0.13 | ) | ||||
|
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 attributable to KL Energy Corporation
|
$ | ( 1,242,328 | ) | $ | ( 1,171,163 | ) | $ | ( 2,719,858 | ) | $ | ( 3,918,538 | ) | ||||
See
accompanying notes to consolidated financial statements.
-
E-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.
-
E-5 -
Consolidated
Statements of Cash Flows
|
Six Months Ended
|
||||||||
|
June 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
Flows From Operating Activities
|
||||||||
|
Net
loss
|
$ | (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.
-
E-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.
-
E-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.
-
E-8 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 1 – Nature of Business and Significant
Accounting Policies (continued)
Significant Accounting
Policies (continued)
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.
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 btain 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.
-
E-9 -
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(unaudited)
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.
-
E-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.
-
E-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
-
E-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,
2009
|
|||||||
|
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
|
||||
-
E-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.
-
E-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 Attributable to KL Energy Corporation:
|
||||||||||||||||
|
Engineering
and management contracts
|
$ | (767 | ) | $ | (481 | ) | $ | (1,766 | ) | $ | (2,717 | ) | ||||
|
Biofuel
|
(475 | ) | (690 | ) | (954 | ) | (1,202 | ) | ||||||||
|
Net
Loss Attributable to KL Energy Corporation
|
$ | (1,242 | ) | $ | (1,171 | ) | $ | (2,720 | ) | $ | (3,919 | ) | ||||
|
Reconciliations to Reported
Amounts
|
||||||||||||||||
|
Revenue
- Reportable Segments
|
$ | - | $ | - | $ | 120 | $ | - | ||||||||
|
Eliminations/Other
|
- | - | - | - | ||||||||||||
|
Total
Consolidated Revenue
|
$ | - | $ | - | $ | 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.
-
E-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.
-
E-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.
-
E-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.
-
E-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.
-
E-19 -
KL
Energy Corporation
FINANCIAL
STATEMENTS
with
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
December
31, 2009 and 2008
F-1
KL
Energy Corporation
Financial
Statements and Notes
Table
of Contents
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
Balance
Sheets at December 31, 2009 and 2008
|
F-4
|
|
|
Statements
of Operations for the years ended December 31, 2009 and
2008
|
F-5
|
|
|
Statement
of Changes in Shareholders’ Deficit
|
F-6
|
|
|
Statements
of Cash Flows for the years ended December 31, 2009 and
2008
|
F-7
|
|
|
Notes
to Financial Statements
|
F-8 to F-29
|
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
KL Energy
Corporation and Subsidiaries
Rapid
City, South Dakota
We have
audited the accompanying consolidated balance sheets of KL Energy Corporation
and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ deficit, and cash flows for the years
then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over consolidated financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of KL Energy
Corporation and Subsidiaries as of December 31, 2009 and 2008, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 18
to the consolidated financial statements, the Company has suffered recurring
losses and has an accumulated deficit, which raises substantial doubt about its
ability to continue as a going concern. Management’s plans regarding
those matters are also described in Note 18 to the consolidated financial
statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Ehrhardt Keefe Steiner & Hottman PC
March 8,
2010
Denver,
Colorado
F-3
KL
Energy Corporation
Consolidated
Balance Sheets
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 65,049 | $ | 698,101 | ||||
|
Trade
receivables, net of allowance for doubtful accounts of $393,840 and
$381,681, respectively
|
35,000 | 470,322 | ||||||
|
Accounts
receivable - related parties
|
1,034 | - | ||||||
|
Inventories
|
14,975 | 88,255 | ||||||
|
Prepaid
expenses and other assets
|
138,765 | 101,180 | ||||||
|
Deferred
issuance costs
|
135,000 | 320,000 | ||||||
|
Current
assets of discontinued operations
|
- | 427 | ||||||
|
Total
Current Assets
|
389,822 | 1,678,285 | ||||||
|
Non-Current
Assets
|
||||||||
|
Property,
Plant and Equipment, Net
|
3,501,197 | 5,253,916 | ||||||
|
Total
Assets
|
$ | 3,891,020 | $ | 6,932,201 | ||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
|
Current
Liabilities
|
||||||||
|
Lines
of credit & short-term borrowings
|
$ | - | $ | 250,000 | ||||
|
Current
maturities of long-term debt
|
1,851,389 | 1,015,482 | ||||||
|
Current
maturities of subordinated debt-related party
|
262,500 | 40,000 | ||||||
|
Accounts
payable
|
1,672,156 | 2,256,893 | ||||||
|
Accounts
payable-related parties
|
48,234 | 186,270 | ||||||
|
Billings
in excess of costs and estimated earnings
|
- | |||||||
|
on
uncompleted contracts
|
1,640,588 | 2,039,496 | ||||||
|
Accrued
payroll
|
203,161 | 222,361 | ||||||
|
Other
liabilities
|
770,052 | 307,314 | ||||||
|
Accrued
issuance costs
|
- | 320,000 | ||||||
|
Current
liabilities of discontinued operations
|
356,970 | 369,812 | ||||||
|
Total
Current Liabilities
|
6,805,050 |
7,007,628
|
||||||
|
Long-term
debt, less current maturities
|
9,121 | 1,401,283 | ||||||
|
Long-term
debt-subordinated-related party
|
297,500 | 560,000 | ||||||
|
Total
Long-Term Debt
|
306,621 | 1,961,283 | ||||||
|
Stockholders'
Deficit
|
||||||||
|
Common
stock, $0.001 par value; 150,000,000 shares authorized; 45,029,894
and 15,622,953 shares issued and outstanding as of December 31, 2009
and 2008, respectively
|
45,029 | 15,623 | ||||||
|
Additional
paid-in capital
|
7,060,161 | 26,842 | ||||||
|
Accumulated
deficit
|
(9,267,385 | ) | (2,272,574 | ) | ||||
|
Deficit
attributable to KL Energy Corporation
|
(2,162,195 | ) | (2,230,109 | ) | ||||
|
Noncontrolling
interests
|
(1,058,456 | ) | 193,399 | |||||
|
Total
Stockholders' Deficit
|
(3,220,651 | ) | (2,036,710 | ) | ||||
|
Total
Liabilities and Stockholders' Deficit
|
$ | 3,891,020 | $ | 6,932,201 | ||||
See
accompanying notes to consolidated financial statements.
F-4
KL
Energy Corporation
Consolidated
Statements of Operations
|
Years
Ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenue
|
||||||||
|
Engineering
and management contract
|
$ | - | $ | 4,009,825 | ||||
|
Total
Revenue
|
- | 4,009,825 | ||||||
|
Operating
Expenses
|
||||||||
|
Cost of
engineering and management contract
|
- | 1,959,202 | ||||||
|
General
and administrative
|
4,647,240 | 4,344,651 | ||||||
|
Research
and development
|
3,324,980 | 2,704,717 | ||||||
|
Total
Operating Expenses
|
7,972,220 | 9,008,570 | ||||||
|
Loss
from Operations
|
(7,972,220 | ) |
(4,998,745
|
) | ||||
|
Other
Income (Expense):
|
||||||||
|
Other
income (expense)
|
(116,289 | ) | (165,723 | ) | ||||
|
Interest
income
|
48,522 | (6,954 | ) | |||||
|
Interest
expense
|
(194,679 | ) | (1,914,187 | ) | ||||
|
Total
Other Expense, Net
|
(262,446 | ) | (2,086,864 | ) | ||||
|
Loss
From Continuing Operations, net of tax
|
(8,234,665 | ) | (7,085,608 | ) | ||||
|
Loss
from Discontinued Operations, net of tax
|
(12,000 | ) | (4 06,815 | ) | ||||
|
Net
Loss
|
(8,246,666 | ) | (7,492,423 | ) | ||||
|
Net
loss attributable to non controlling interests
|
1,251,855 | 99,591 | ||||||
|
Net
Loss Attributable to KL Energy Corporation
|
$ | (6,994,811 | ) | $ | (7,392,832 | ) | ||
|
Net
Loss Per Share, basic and diluted:
|
||||||||
|
Continuing
operations
|
$ | (0.19 | ) | $ | (0.62 | ) | ||
|
Discontinued
operations
|
(0.00 | ) | (0.03 | ) | ||||
|
Net
Loss Attributable to KL Energy Corporation
|
$ | (0.19 | ) | $ | (0.65 | ) | ||
|
Weighted
Average Common Shares Outstanding
|
36,618,280 | 11,342,697 | ||||||
|
Amounts
attributable to KL Energy Corporation common
stockholders:
|
||||||||
|
Loss
from continuing operations, net of tax
|
$ | (6,982,811 | ) | $ | (6,986,017 | ) | ||
|
Income
(loss) from discontinued operations, net of tax
|
(12,000 | ) | (406,815 | ) | ||||
|
Net
loss attributable to KL Energy Corporation
|
$ | (6,994,811 | ) | $ | (7,392,832 | ) | ||
See
accompanying notes to consolidated financial statements.
F-5
KL
Energy Corporation
Consolidated Statement of
Stockholders' Deficit
|
Additional
|
Total
|
|||||||||||||||||||||||||||
|
Common Stock
|
Stockholders'
|
Paid-In
|
Accumulated
|
Noncontrolling
|
Stockholders'
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Contributions
|
Capital
|
Deficit
|
Interest
|
Deficit
|
||||||||||||||||||||||
|
Balance
- December 31, 2007
|
-
|
$
|
-
|
$
|
9,000
|
$
|
-
|
$
|
(1,916,219
|
)
|
$
|
292,990
|
$
|
(1,614,229
|
)
|
|||||||||||||
|
KL
Process Design Group - post merger net loss – September 30,
2008
|
-
|
-
|
-
|
-
|
(5,120,258
|
)
|
(5,120,258
|
)
|
||||||||||||||||||||
|
Consideration
for pre-Merger shareholders
|
3,390,000
|
3,390
|
3,390
|
|||||||||||||||||||||||||
|
Conversion
of equity in reverse merger acquisition
|
9,900,266
|
9,901
|
(9,000
|
)
|
(7,040,768
|
)
|
7,036,477
|
(3,390
|
)
|
|||||||||||||||||||
|
Conversion
of debt to equity, net of unamortized debt discount
|
2,288,000
|
2,288
|
-
|
4,197,712
|
-
|
4,200,000
|
||||||||||||||||||||||
|
Equity
payment to placement agent upon conversion of debt to
equity
|
-
|
-
|
-
|
(305,000
|
)
|
-
|
(305,000
|
)
|
||||||||||||||||||||
|
Conversion
of derivative liability to equity
|
-
|
-
|
-
|
3,050,000
|
-
|
3,050,000
|
||||||||||||||||||||||
|
Shares
issued for accrued interest on convertible debt
|
38,437
|
38
|
-
|
102,462
|
-
|
102,500
|
||||||||||||||||||||||
|
Issuance
of shares in private placement (net of issuance costs of
$2,557)
|
6,250
|
6
|
-
|
22,436
|
-
|
22,442
|
||||||||||||||||||||||
|
Net
loss attributed to noncontrolling interests
|
-
|
-
|
-
|
-
|
-
|
(99,591
|
)
|
(99,591
|
)
|
|||||||||||||||||||
|
KL
Energy Corporation - net loss - 4th quarter 2008
|
-
|
-
|
-
|
-
|
(2,272,574
|
)
|
(2,272,574
|
)
|
||||||||||||||||||||
|
Balance
- December 31, 2008
|
15,622,953
|
$
|
15,623
|
$
|
-
|
$
|
26,842
|
$
|
(2,272,574
|
)
|
$
|
193,399
|
$
|
(2,036,710
|
)
|
|||||||||||||
|
Issuance
of shares in private placement
|
18,181,818
|
18,182
|
-
|
3,981,818
|
-
|
-
|
4,000,000
|
|||||||||||||||||||||
|
Issuance
of shares in settlement of payables
|
5,205,569
|
5,206
|
-
|
1,140,019
|
-
|
-
|
1,145,225
|
|||||||||||||||||||||
|
Issuance
of shares in private placement
|
4,545,454
|
4,545
|
-
|
995,455
|
1,000,000
|
|||||||||||||||||||||||
|
Issuance
of shares in settlement of accrued liabilities
|
95,312
|
95
|
152,405
|
152,500
|
||||||||||||||||||||||||
|
Issuance
of shares in private placement at $1.50 per share
|
1,233,333
|
1,233
|
-
|
1,848,767
|
1,850,000
|
|||||||||||||||||||||||
|
Additional
shares issued at $1.10 per share
|
145,455
|
145
|
(145
|
)
|
-
|
|||||||||||||||||||||||
|
Legal,
professional and placement fees
|
-
|
-
|
-
|
(1,085,000
|
)
|
(1,085,000
|
)
|
|||||||||||||||||||||
|
Net
loss attributed to noncontrolling interests
|
-
|
-
|
-
|
-
|
(1,251,855
|
)
|
(1,251,855
|
)
|
||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(6,994,811
|
)
|
-
|
(6,994,811
|
)
|
|||||||||||||||||||
|
Balance
- December 31, 2009
|
45,029,894
|
$
|
45,029
|
$
|
-
|
$
|
7,060,161
|
$
|
(9,267,385
|
)
|
$
|
(1,058,456
|
)
|
$
|
(3,220,651
|
)
|
||||||||||||
See
accompanying notes to consolidated financial statements.
F-6
KL
Energy Corporation
Consolidated
Statements of Cash Flows
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
Flows From Operating Activities
|
||||||||
|
Net
loss
|
$ | (8,246,666 | ) | $ | (7,492,423 | ) | ||
|
Adjustments
to reconcile net loss by cash used in operating
activities:
|
||||||||
|
Depreciation
|
1,900,843 | 1,791,768 | ||||||
|
Allowance
for doubtful accounts
|
12,159 | 147,171 | ||||||
|
Loss
on sale of assets
|
48,821 | 39,644 | ||||||
|
Amortization
of debt issuance cost
|
- | 305,000 | ||||||
|
Amortization
of debt discount
|
- | 1,150,000 | ||||||
|
Changes
in current assets and liabilities:
|
||||||||
|
(Increase)
decrease in:
|
||||||||
|
Trade
receivables
|
422,129 | 853,533 | ||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
- | 168,890 | ||||||
|
Inventories
|
73,280 | 104,656 | ||||||
|
Prepaid
expenses and other assets
|
21,150 | 149,626 | ||||||
|
Current
assets of discontinued operations
|
427 | 41,774 | ||||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(400,615 | ) | (931,827 | ) | ||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
(398,908 | ) | (810,727 | ) | ||||
|
Accrued
payroll and other liabilities
|
1,106,263 | 369,057 | ||||||
|
Net
Cash Provided by (Used In) Operating Activities
|
(5,461,117 | ) | (4,113,858 | ) | ||||
|
Cash
Flows From Investing Activities
|
||||||||
|
Purchases
of property, plant and equipment
|
(164,056 | ) | (845,310 | ) | ||||
|
Proceeds
from the sale of fixed assets
|
(775 | ) | 689,080 | |||||
|
Net
Cash Provided by (Used in) Investing Activities
|
(164,831 | ) | (156,230 | ) | ||||
|
Cash
Flows From Financing Activities
|
||||||||
|
Proceeds
(payments) from lines of credit and short-term
borrowings
|
(250,000 | ) | (130,000 | ) | ||||
|
Proceeds
from subordinated debt – related parties, net
|
- | 250,000 | ||||||
|
Payments
on subordinated debt - related parties, net
|
(40,000 | ) | - | |||||
|
Payments
on long-term debt principal
|
(982,104 | ) | (855,553 | ) | ||||
|
Proceeds
from convertible debt
|
- | 6,100,000 | ||||||
|
Issuance
costs
|
(585,000 | ) | (612,557 | ) | ||||
|
Proceeds
from issuance of common stock
|
6,850,000 | 25,000 | ||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
4,992,896 | 4,776,890 | ||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(633,052 | ) | 506,802 | |||||
|
Cash
and cash equivalents at beginning of period
|
698,101 | 191,299 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 65,049 | $ | 698,101 | ||||
|
Supplemental
Disclosures of Cash Flow Information
|
||||||||
|
Interest
paid
|
$ | 116,878 | $ | 463,673 | ||||
|
Conversion
of accounts payable and accrued liabilities to common
stock
|
937,725 | - | ||||||
|
Conversion
of deferred issuance costs liability to common stock
|
45,000 | - | ||||||
|
Deferred
issuance costs netted in equity
|
185,000 | - | ||||||
|
Deferred
issuance costs paid in common stock
|
315,000 | |||||||
|
Settlement
of accounts payable with debt
|
335,000 | - | ||||||
|
Insurance
premium financed with debt
|
58,735 | 78,496 | ||||||
|
Purchase
of equipment with note payable
|
32,114 | 156,000 | ||||||
|
Return
of asset for reduction in accounts payable
|
- | 101,093 | ||||||
|
Debt
converted to equity
|
- | 6,100,000 | ||||||
|
Accrued
interest converted to equity
|
- | 102,500 | ||||||
See
accompanying notes to consolidated financial statements.
F-7
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(1)
Nature of Business and Significant Accounting Policies
Nature
of Business
KL Energy
Corporation (“KLE” or the “Company”), a Nevada corporation, was incorporated on
February 26, 2007. On September 30, 2008, KL Energy Corporation entered into an
Agreement and Plan of Merger (the “Merger”) with KL Process Design Group, Inc.
(“KLPDG”), a South Dakota S corporation, which provided for the merger of KLPDG
with and into the Company, and accordingly, the Company and KLPDG filed the
Articles of Merger with the State of Nevada effecting the merger.
As a
result of the merger, KLPDG merged with and into the Company, with the Company
as the surviving corporation and the Company succeeded to and acquired all of
the assets and liabilities of KLPDG, including all of the contractual rights and
interests 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. In accordance with Staff
Accounting Bulletin 1 Topic 4, the accumulated deficit of KLPDG as of December
31, 2008, has been included in additional paid in capital. Pro-forma
information was not presented as the financial statements of KLE were
insignificant.
The
Company, through its majority-owned Western Biomass Energy, LLC (“WBE”), has
designed, built, and operated a cellulose-based ethanol (“CBE”) plant based
on KL’s proprietary technology. The purpose of the work performed in our
demonstration plant is to prove our proprietary concept validating yields,
energy consumption and other process conditions achieved in the lab pilot
plant. In addition, we use this plant to test new equipment, process
setups and raw materials as well as to gain industrial operating know-how and
train customer startup and production teams.
This
plant is located in Upton, Wyoming, commissioned in 2008, and was designed and
engineered by KL. Its production modus is continuous campaign runs,
has a capacity of approximately 1.0 BDMT/hour and operates with natural
gas. It primarily uses soft, hardwood and herbaceous biomass as its
feedstock input and produces 200-proof ethanol as well as
bio-lignin.
In
2008 and 2009, KLE has performed a variety of feedstock test programs in its
demo plant processing predominantly ponderosa pine wood chips. We have
successfully validated the process and yields debuted at our lab pilot facility
in Rapid City. We have also tested various equipment and process setups. This
experience has been fed back into the R&D and lab work resulting into KLE's
4th generation process design.
The
Company also distributed ethanol blended fuel, through its majority-owned
Patriot Motor Fuels, LLC (Patriot) to two service stations located in South
Dakota and Nebraska. 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 grain-based ethanol industry
but especially due to the Company’s re-focus on cellulosic ethanol
commercialization efforts.
F-8
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(1)
Nature of Business and Significant Accounting Policies (continued)
Significant
Accounting Policies
Financial
Accounting Standards Board Issues Accounting Standards Codification
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles — A Replacement of FASB Statement No. 162,” (FASB
Accounting Standards Codification (“FASB ASC” or the “Codification”) 105-10)
which will become the source of authoritative United States generally accepted
accounting principles (“US GAAP”) to be applied by nongovernmental entities
superseding all pre-existing accounting and reporting standards other than the
rules of the SEC. Updates to FASB ASC are being issued as Accounting Standards
Updates. FASB ASC 105-10 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. FASB ASC 105-10
is effective for the Company’s fiscal year ended September 30, 2009. In
accordance with the Codification, citations to accounting literature in these
financial statements are to the relevant Topic of the Codification or are
presented in plain English. The adoption of FASB ASC 105-10 did not have a
material impact on the Company’s consolidated financial position, results of
operations or disclosures.
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, 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.
Cash
and Cash Equivalents
For
financial statement purposes, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. The Company maintains its cash in bank deposit accounts,
which at times exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash. The Company held cash in excess of federally
insured limits of approximately $0 and $419,000 as of December 31, 2009 and
2008, respectively.
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.
Concentration of Credit Risk
In
calendar 2009, the Company did not record any sales. The Company had
three customers who accounted for approximately 69% of revenues for the year
ended December 31, 2008. At December 31, 2008, one customer accounted
for approximately 79% of accounts receivable.
F-9
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(1)
Nature of Business and Significant Accounting Policies (continued)
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or
market.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred. Depreciation on property, plant and equipment
is computed using the straight-line method based on the following estimated
useful lives:
|
Years
|
|
|
Plant
and Plant Equipment
|
5
|
|
Office
Furnishings and Equipment
|
3-7
|
|
Vehicles
|
5-10
|
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 research and development 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.
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 approximated their $2.4
million net book value and. no impairment charge was
recognized.
Deferred
Issuance Costs
Deferred
issuance costs represent placement agency fees and other direct expenses of
raising financing. Upon a successful financing, these costs are
netted against the proceeds in equity. If the offering is not probable or
aborted, any remaining capitalized costs are expensed.
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 December 31, 2009 and 2008 will be revised significantly in the near
term.
F-10
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(1)
Nature of Business and Significant Accounting Policies (continued)
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 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 amounts billed 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. As a result of
pricing and competitive factors, the Patriot business was discontinued in
January 2009.
The
Company had other long-term contracts whereby it is paid monthly for services
provided. The Company recognized revenue when persuasive evidence of an
arrangement existed, services have been provided, the price was fixed and
determinable, and collectability was reasonably assured.
Research
and Development Costs
Research
and development costs include direct labor, depreciation, and other direct
expenses including those incurred in the operations of the CBE plant in Upton,
Wyoming and are expensed as incurred.
Advertising
Costs
The
Company follows the policy of charging the costs of advertising to expense as
incurred. Included in operating expenses are advertising and
promotion expenses of approximately $38,000 and $60,000 for the years ended
December 31, 2009 and 2008, respectively.
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 .
The
Company recognizes in its consolidated financial statements only those tax
positions that are “more-likely-than-not” of being sustained based on the
technical merits of the position. A comprehensive review of its
material tax positions, in accordance with the applicable guidance, was
performed by the Company.
F-11
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(1)
Nature of Business and Significant Accounting Policies (continued)
Fair
Value of Financial Instruments
The
carrying amount of financial instruments including cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximated fair
value as of December 31, 2009 and 2008 due to the relatively short maturity of
these instruments.
The
carrying amount of subordinated debt and other debt outstanding also approximate
their fair values as of December 31, 2009 and 2008 because interest rates on
these instruments approximate the interest rate on debt with similar terms
available to the Company.
Derivative
Instruments
The
Company also uses various types of financing arrangements to fund its business
capital requirements, including convertible debt indexed to the price per share
in the private placement (Note 8) of the Company’s common stock. The
Company evaluates these contracts to determine whether derivative features
embedded in host contracts require bifurcation and fair value measurement or, in
the case of free-standing derivatives (principally warrants), whether certain
conditions for equity classification have been achieved. In instances where
derivative financial instruments require liability classification, the Company
initially and subsequently measures such instruments at estimated fair value.
Accordingly, the Company adjusts the estimated fair value of these derivative
components at each reporting period through earnings until such time as the
instruments are exercised, expired or permitted to be classified in
stockholders’ equity. As of December 31, 2009 and 2008, the Company
had no derivative liabilities.
Warranty
Costs
The
Company provides warranties on the engineering and construction management
services it provides. The Company has not had to provide warranty
services in the past, and management does not anticipate significant warranty
liability for work performed through December 31, 2009. Therefore, no
allowance for warranty costs has been recorded.
Net
Loss Per Common Share
SFAS
No. 128, “Earnings Per Share” provides for the calculation of “Basic” and
“Diluted” earnings per share. Basic earnings per share 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
earnings per share reflect the potential dilution of securities that could share
in the earnings of an entity, similar to fully diluted earnings per
share.
For the
years ended December 31, 2009 and 2008, stock warrants for 3,125 shares were not
included in the computation of diluted loss per share because their effect was
anti-dilutive .
Reclassifications
Certain
amounts in the 2008 financial statements have been reclassified to conform to
the 2009 presentation.
F-12
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(1)
Nature of Business and Significant Accounting Policies (continued)
Segment
Information
The
Company follows established standards on the way that public companies report
financial information about operating segments in annual financial statements
and requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers. These standards define
operating segments as components of a company about which discrete financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in accessing
performance. Reference should be made to Note 21 for a further discussion of the
Company’s business segments.
(2)
Recently Issued Accounting Pronouncements
In
December 2007, the FASB issued new accounting guidance related to the accounting
for noncontrolling interests in consolidated financial statements. This guidance
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This guidance
requires that noncontrolling interests in subsidiaries be reported in the equity
section of the controlling company’s balance sheet. It also changes the manner
in which the net income of the subsidiary is reported and disclosed in the
controlling company’s income statement. This guidance is effective for fiscal
years beginning after December 15, 2008. We adopted this guidance on January 1,
2009, and have reflected the required disclosures herein.
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.
In
June 2009, the FASB issued new accounting guidance related to the accounting and
disclosures of subsequent events. This guidance incorporates the subsequent
events guidance contained in the auditing standards literature into
authoritative accounting literature. It also requires entities to disclose the
date through which they have evaluated subsequent events and whether the date
corresponds with the release of their financial statements. This guidance is
effective for all interim and annual periods ending after June 15, 2009. The
Company adopted this guidance upon its issuance and it had no material impact on
its consolidated financial statements.
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.
F-13
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(2)
Recently Issued Accounting Pronouncements (continued)
In
January 2010, the FASB issued new accounting guidance to require additional
disclosures related to a reporting entity’s fair value measurements. This
guidance will become effective in the first quarter of 2010. The Company expects
to adopt this guidance effective January 1, 2010 but does not expect it to have
a material impact on our consolidated financial statements.
(3)
Inventories
Inventories
consisted of raw materials of $14,975 and $88,225 at December 31, 2009 and 2008,
respectively.
(4) Note
Receivable – Related Party
On
October 9, 2008, we entered into a term loan agreement (“O2D Loan”) with
O2Diesel Corporation (“O2D”), formerly a publically traded company, pursuant to
which we agreed to provide O2D with up to $1,000,000 for O2D’s working capital
purposes. O2D is a commercial developer of cleaner-burning diesel
fuel alternatives, including O2Diesel™, an ethanol-diesel additive. We
previously licensed certain technology to O2D under a Technology License
and Services Agreement, dated March 6, 2008 (the "License
Agreement"). The O2D Loan provided an initial loan of $250,000 in the form
of a secured promissory note (the “Note”) with an annual interest rate of
10%. As of March 31, 2009, O2D defaulted on this Note and, due to
O2Diesel’s financial condition, the Company determined it would not make any
additional loans to O2D and reserved for the entire amount of
the Note. The Company sold this Note at face value to a third
party (the "Note Purchaser") in April 2009. Subsequently, O2D
declared bankruptcy and the Note Purchaser acquired O2D out of
bankruptcy. The Company acquired the License Agreement 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.
(5) Property, Plant, and
Equipment
Property,
plant, and equipment consist of the following as of:
|
|
December 31,
|
|||||||
|
|
2009
|
2008
|
||||||
|
Plant
and Plant Equipment
|
$
|
7,402,413
|
$
|
7,348,028
|
||||
|
Office
Furnishings and Equipment
|
274,103
|
187,801
|
||||||
|
Vehicles
|
51,698
|
51,698
|
||||||
|
7,728,214
|
7,587,527
|
|||||||
|
Less
Accumulated Depreciation
|
(4,227,017
|
)
|
(2,333,611
|
)
|
||||
|
Total
Property, Plant, and Equipment, Net
|
$
|
3,501,197
|
$
|
5,253,916
|
||||
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 December 31,
2009. Depreciation expense, excluding depreciation expenses charged
to research and development, was approximately $43,000 and $74,000 for the years
ended December 31, 2009 and 2008, respectively. Included in research
and development expense is depreciation expense of approximately $1,858,000 and
$1,718,000 for the years ended December 31, 2009 and 2008,
respectively.
F-14
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(6)
Derivative Financial Instruments
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157
for all financial instruments. The valuation techniques required by SFAS
No. 157 are based upon observable and unobservable inputs. Observable
inputs reflect market data obtained from independent resources, while
unobservable inputs reflect the Company’s market assumptions. The standard
established the following fair value hierarchy:
Level 1 —
Quoted prices for identical assets or liabilities in active
markets.
Level 2 —
Quoted prices for similar assets or liabilities in active markets; quoted prices
for identical or similar assets or liabilities in markets that are not active;
and model-derived valuations whose inputs or significant value drivers are
observable.
Level 3 —
Significant inputs to the valuation model are unobservable.
The
Company also uses various types of financing arrangements to fund its business
capital requirements, including convertible debt indexed to the price per share
in the private placement (Note 8) of the Company’s common stock. The
Company evaluates these contracts to determine whether derivative features
embedded in host contracts require bifurcation and fair value measurement or, in
the case of free-standing derivatives (principally warrants), whether certain
conditions for equity classification have been achieved. In instances where
derivative financial instruments require liability classification, the Company
initially and subsequently measures such instruments at estimated fair value
using Level 3 inputs. Accordingly, the Company adjusts the estimated fair value
of these derivative components at each reporting period through earnings until
such time as the instruments are exercised, expired or permitted to be
classified in stockholders’ equity.
As
of September 30, 2008, the fair value of a conversion option that was included
as a component of current liabilities, did not achieve all of the requisite
conditions for equity classification in accordance with SFAS No. 133 and EITF
00-19. These free-standing derivative financial instruments arose in connection
with the Company’s financing transactions described in Note 8 which consisted of
the $6.1 million convertible notes. The fair value of the
conversion liability was determined to be $3,050,000 and recorded as additional
debt discount. Effective September 30, 2008, the convertible
notes were converted into shares of the Company’s common stock upon closing of
the Merger. The debt discount was amortized over the life of
the notes resulting in additional interest expense of $1,150,000. The
remaining unamortized debt discount of $1,900,000 at the time of the Merger was
recorded to equity with the conversion. The Company had no derivative
financial instruments as of December 31, 2009 and 2008.
F-15
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(7)
Costs and Estimated Earnings on Uncompleted Contracts
Costs and
estimated earnings on uncompleted long-term contracts as of:
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Costs
Incurred on Uncompleted Contracts
|
$
|
5,112,225
|
$
|
5,112,225
|
||||
|
Estimated
Earnings
|
2,421,920
|
2,023,012
|
||||||
|
7,534,145
|
7,135,237
|
|||||||
|
Less
Billings to Date
|
(9,174,733
|
)
|
(9,174,733
|
)
|
||||
|
$
|
(1,640,588
|
)
|
$
|
(2,039,496
|
)
|
|||
|
Included
in the Balance Sheet Under the Following Captions:
|
||||||||
|
Costs
and Estimated Earnings in Excess of Billings on Uncompleted
Contracts
|
$
|
—
|
$
|
—
|
||||
|
Billings
in Excess of Costs and Estimated Earnings on Uncompleted
Contracts
|
(1,640,588
|
)
|
(2,039,496
|
)
|
||||
|
$
|
(1,640,588
|
)
|
$
|
(2,039,496
|
)
|
|||
A
shareholder and former officer of the Company was also a member of the board of
directors for and held an ownership interest in Midwest Renewable Energy, LLC
(“MRE”) during this period. The Company provided construction
management and engineering services for the construction of an addition to MRE’s
existing facility for a total estimated cost to the customer of
$5,600,000. Due to MRE’s inability to meet contractual obligations,
the Company issued a stop work order on the construction project in March, 2008.
MRE has not committed to completing the project and has taken no action to cure
the stop work order. If the project is terminated prior to completion, the
Company may be liable to return excess billings.
The
Company provided construction management and engineering services for the
construction of a new biofuels production facility for a total estimated cost to
Willmark Energy, Inc. (“Willmark”) of $5,980,000. Billings on
this contract exceed costs and estimated earnings by approximately $399,000 at
December 31, 2008. During 2008, Willmark proposed a change order to revise
the scope of the work to include only engineering services and to reduce the
total contract to $4,660,000. As further described in Note 20,
Willmark requested arbitration to settle this dispute. In February
2010, this dispute was settled with a requirement that Willmark pay $35,000 to
KL and this amount is included in other income in the 2009 consolidated
statement of operations. This settlement also resulted in the
reversal of billings in excess of costs on uncompleted contracts of
approximately $399,000 which is reflected as a reduction in previously recorded
bad debt expense in 2009 in general and administrative expenses in the 2009
consolidated statement of operations.
(8)
Financing
In July
2008, the Company received financing from Niton Capital (formerly PPM Holdings
LTD) a sister
company of Fair Energy S.A. totaling $3,100,000 at 10% per annum interest. In
connection with the Merger, the notes were converted into an aggregate of
1,162,500 shares of our common stock. At the time of the Merger these
notes had accrued interest of approximately $77,500 which was converted into
approximately 29,062 shares of common stock. The Company paid
$155,000 in issuance costs for this financing. This fee was recorded
as debt issuance costs and amortized to interest expense over the life of the
notes with any remaining unamortized debt issuance costs being recorded as
interest expense upon conversion of the notes to equity. Upon the
conversion of the notes to equity the Company incurred an additional $155,000 of
issuance costs, which were recorded as a reduction in equity.
F-16
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(8)
Financing (continued)
In
September, 2008, the Company received financing in the form of redeemable
convertible promissory notes from The Green Fund, a division of Pluris Sustainable
of $3,000,000 at 10% per annum interest. In connection with the Merger, the
notes were converted into an aggregate of 1,125,000 shares of our common
stock. At the time of the Merger these notes had accrued interest of
approximately $25,000 which was converted into approximately 9,375 shares of
common stock. The Company paid $150,000 in issuance costs for this
financing. This fee was recorded as debt issuance costs and amortized
to interest expense over the life of the notes with any remaining unamortized
debt issuance costs being recorded as interest expense upon conversion of the
notes to equity. Upon conversion of the notes to equity the Company
incurred an additional $150,000 of issuance costs which were recorded as a
reduction to equity.
Contemporaneously
with the closing of the Merger, the Company issued an aggregate of 3,125 units
of its securities in a private placement, with each unit comprised of two shares
of common stock, for a total of 6,250 shares, and a warrant to purchase one
share of common stock pursuant to the terms of the Securities Purchase Agreement
dated September 30, 2008 among the Company and certain investors. The
purchase price per unit was $8.00 per unit for an aggregate price of
$25,000.
The
Security Purchase Agreement related to the above financings required a
registration statement be filed by the Company within 60 days of the financing.
This agreement provided for a 1.5% penalty of the proceeds received for the
first 30 days delinquent and an additional 1% of the proceeds received for each
30 days delinquent thereafter. As of February 11, 2009, the Company
received a waiver of any further penalties from this financing. The
total penalty amount of $152,000 is included in other expense and other
liabilities at December 31, 2008 and was settled in 2009 with the issuance of
95,312 shares of the Company’s common stock.
(9)
Short-Term Borrowing Arrangements
The
Company had available a $250,000 revolving line of credit with Wells Fargo Bank,
N.A. The line of credit accrued interest payable monthly at the prime
rate plus 0.5% (3.75% at December 31, 2009 and 2008). The outstanding borrowing
under this agreement was $250,000 at December 31, 2008. The note was
personally guaranteed by certain Company shareholders and collateralized by
their personal property. This line of credit has matured and was paid off in
2009 by a Company payment of $175,000 plus interest and the proceeds from a
management shareholder line of credit of $75,000. This shareholder
line of credit was paid in full in June 2009. In addition, the
Company had approximately $44,000 and $95,000 in credit card liability at
December 31, 2009 and 2008, respectively, that were guaranteed by certain
shareholders. These credit card liability balances are included in
accounts payable in the accompanying consolidated balance sheets.
At
December 31, 2007, the Company had an additional unsecured line of credit with
Wells Fargo Bank, N.A. The line accrued interest at the prime rate
plus 5.0% (12.25% at December 31, 2007) and was paid in full in February
2008. There were no outstanding borrowings under this agreement at
December 31, 2009 and 2008. The note was personally guaranteed by
certain shareholders.
F-17
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(10)
Subordinated Debt – Related Party
The
Company has a subordinated unsecured note payable to a Company shareholder
totaling $560,000 at December 31, 2009 and 2008, respectively. This
note includes interest at a variable rate, which was 5.0% at December 31, 2009
and 2008, respectively, with interest paid quarterly. The original
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
September 2009 over a 60 month term. The principal payments are scheduled to be
$120,000 in 2010, 2011, 2012, 2013, respectively, and $80,000 in
2014. In addition, when the Company receives additional financing,
the Company is obligated to pay 5% of the gross proceeds towards principal
payments on this note. As of December 31, 2009, this obligation
amounted to $142,500 and is included in current maturities of subordinated
debt-related party in the consolidated balance sheets.
(11)
Long-Term Debt
The
following is a summary of long-term debt as of:
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
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 2009 with any remaining unpaid principal and
|
||||||||
|
interest due March 2010, secured by substantially all assets of
|
||||||||
|
WBE and guaranteed by the Company and certain WBE members.
|
$
|
1,394,043
|
$
|
1,984,949
|
||||
|
Payable to Hermanson Egge to replace over due 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.
|
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
|
33,816
|
||||||
|
$195,000, payable in monthly principal and interest installments
|
||||||||
|
of $10,000, including interest at 10% secured by equipment.
|
6,767
|
116,000
|
||||||
|
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.
|
19,095
|
|||||||
|
Note payable to First Insurance Funding Corporation for payment
|
||||||||
|
of director and officer insurance premiums, payable in monthly
|
||||||||
|
installments of $3,692, including interest at 9.1%.
|
-
|
32,000
|
||||||
|
Subordinated note (Note 10) 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.
|
560,000
|
600,000
|
||||||
|
Sub total
|
$
|
2,420,510
|
$
|
3,016,765
|
||||
|
Less current maturities of long-term debt
|
(2,113,889
|
)
|
(1,055,482
|
)
|
||||
|
Total Long-Term Debt
|
$
|
306,621
|
$
|
1,961,283
|
||||
F-18
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(11)
Long-Term Debt (continued)
The
following are the future maturities of long-term debt for the years ending
December 31:
|
|
Unrelated
|
Related
|
||||||||||
|
Year
|
Total
|
Party
|
Party
|
|||||||||
|
2010
|
$
|
2,113,889
|
$
|
1,851,389
|
$
|
262,500
|
||||||
|
2011
|
129,121
|
9,121
|
120,000
|
|||||||||
|
2012
|
120,000
|
-
|
120,000
|
|||||||||
|
2013
|
57,500
|
-
|
57,500
|
|||||||||
|
2014
|
-
|
-
|
-
|
|||||||||
|
$
|
2,420,510
|
$
|
1,860,510
|
$
|
560,000
|
|||||||
(12)
Net Loss Per Common Share
The FASB
Codification Section 260 provides for the calculation of “Basic” and “Diluted”
earnings per share (“EPS”). 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 years ended December
31, 2009 and 2008, stock warrants for 3,125 shares 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 for the years ended December 31, 2009 and 2008.
Revision
of Earnings Per Share
Upon
review of our earnings per share calculations for previously reported periods,
we concluded that several calculations were incorrect. Shares
outstanding of the accounting acquirer in connection with the reverse merger on
September 30, 2008 were not reflected as if outstanding for the entire reporting
period. These corrections have no effect on previously reported net
losses or cash flows.
Effects
of Revisions
The
following table sets forth the previously reported earnings per share and
corrected earnings per share for previously filed financial
statements:
|
|
Year
Ended
|
Year
Ended
|
||||||||||||||||||||||||||
|
|
December
31,
|
March 31,
2008
|
June 30, 2008
|
September 30, 2008
|
December
31,
|
|||||||||||||||||||||||
|
|
2007
|
3 Months
|
3 Months
|
6 Months
|
3 Months
|
9 Months
|
2008
|
|||||||||||||||||||||
|
NET
LOSS
|
$
|
(1,391,828
|
)
|
$
|
(1,361,374
|
)
|
$
|
(738,340
|
)
|
$
|
(2,099,714
|
)
|
$
|
(2,965,450
|
)
|
$
|
(5,065,254
|
)
|
$
|
(7,392,832
|
)
|
|||||||
|
EPS
AS REPORTED:
|
||||||||||||||||||||||||||||
|
Weighted
Avg Shares Outstanding
|
15,623,452
|
24,107,801
|
36,436,158
|
30,306,036
|
15,612,348
|
15,612,348
|
15,623,452
|
|||||||||||||||||||||
|
Earnings
per share reported *
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
$
|
(0.32
|
)
|
$
|
(0.47
|
)
|
|||||||
|
EPS
AS CORRECTED:
|
||||||||||||||||||||||||||||
|
Weighted
Avg Shares Outstanding
|
9,900,266
|
9,900,266
|
9,900,266
|
9,900,266
|
9,900,266
|
9,900,266
|
11,342,697
|
|||||||||||||||||||||
|
Earnings
per share corrected *
|
$
|
(0.14
|
)
|
$
|
(0.14
|
)
|
$
|
(0.07
|
)
|
$
|
(0.21
|
)
|
$
|
(0.30
|
)
|
$
|
(0.51
|
)
|
$
|
(0.65
|
)
|
|||||||
* Basic
and diluted
F-19
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(13) Escrow
Shares
On
September 30, 2008, four management shareholders entered into a Performance
Escrow Agreement (“Agreement”) in conjunction with the Reverse Merger and
Securities Purchase Agreement. The Agreement calls for 9,900,765 of
certain stockholders’ common stock to be placed in escrow until certain
benchmarks are reached. The agreement covering these shares provides
that up to 20% of the escrowed shares are subject to cancellation if certain
performance milestones by the Company are not met .
In
connection with his removal on February 11, 2009, a former President and Chief
Executive Officer of the Company entered into a settlement agreement with the
Company which, among other things, provided for a release of his 4,356,337
shares of Company common stock from an escrow agreement.
In
connection with his resignation as President and Chief Executive Officer, the
Company agreed to release or cause the release of Mr. Corcoran’s 594,046 shares
of the Company’s common stock, held by him that are subject to that certain
lock-up agreement dated September 30, 2008, from the contractual restrictions
and covenants set forth in that agreement.
(14)
Common Stock Activity
On
February 24, 2009, the Company consummated a Securities Purchase Agreement (the
“Purchase Agreement”) with certain accredited investors . Pursuant to
the terms of the Purchase Agreement, the Company issued to the investors
18,181,818 shares of the Company’s common stock (the “Shares”) for a purchase
price of $4,000,000 before expenses.
On
August 11, 2009, the Company consummated a Securities Purchase Agreement with
certain accredited investors. Pursuant to the terms of the
Purchase Agreement, the Company will issue to the investors 4,545,454 shares for
a purchase price of $1,000,000. The shares were issued in October
2009 in reliance on the exemption provided by Regulation S of the Securities Act
of 1933, as amended.
Effective
August 14, 2009, the Company approved the issuance of 48,437 and 46,875 shares
of its common stock to Niton Capital and Green Fund, respectively,
in settlement of an aggregate of $77,500 and $75,000, respectively, in
interest penalties incurred by the Company for not filing a timely registration
statement within sixty days after the Merger. In light of
the Company’s cash flow demands, all parties agreed that common shares
would be issued to settle these obligations. The shares were issued
in reliance on the exemption provided by Regulation S of the Securities Act of
1933, as amended .
On May
13, 2009, the Company approved the issuance of 2,886,364 shares of its common
stock to Pelly Management (“PM”) in consideration of an aggregate of
$635,000 in fees incurred by the Company for certain financial advisory services
provided by PM since October 2008. Pursuant to the arrangement between the
Company and PM, the Company was obligated to pay cash for the
fees. However, in light of the Company’s cash flow demands, the
Company and PM agreed that the common shares would be issued in lieu of cash.
The shares were issued in reliance on the exemption provided by Regulation S of
the Securities Act of 1933, as amended.
On May
13, 2009, the Company approved the issuance of 2,319,205 shares of its common
stock to Niton Capital (“NC”) in consideration of an aggregate of $510,225 in
fees incurred by the Company for certain consulting and engineering services
provided by NC from July 2008 to March 2009. However, in light of
the Company’s cash flow demands, the Company and NC agreed that the common
shares would be issued in lieu of cash. The shares were issued in reliance on
the exemption provided by Regulation S of the Securities Act of 1933, as amended
.
F-20
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(14)
Common Stock Activity (continued)
On
October 2, 2009, the Company entered into a Securities Purchase Agreement
with an accredited investor. Pursuant to the terms of the Purchase
Agreement, the Company received $600,000 before expenses on that date,
representing 50% of the investor’s commitment to purchase 800,000 shares of the
Company’s common stock, and will either pay the remaining $600,000 within 14
days of receiving a written demand from the Company or, if the investor elects
not to complete the investment commitment, all previously authorized shares will
be cancelled. As required by this agreement, the pricing of these
shares was 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, and the related 145,455 additional shares were deemed to be issued on
December 31, 2009. 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.
On
November 17, 2009, the Company entered into a Securities Purchase Agreement
with an accredited investor. Pursuant to the terms of the Purchase
Agreement, the Company received $750,000 before expenses on that date,
representing 50% of the investor’s commitment to purchase 1,000,000 shares of
the Company’s common stock, and will either pay the remaining $750,000 within 14
days of receiving a written demand from the Company or, if the investor elects
not to complete the investment commitment, all previously authorized shares will
be cancelled. As required by this agreement, the pricing of these
shares was 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, and the related 181,818 additional shares were deemed to be issued on
February 14, 2010. 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.
On
December 16, 2009, the Company entered into a Securities Purchase Agreement
with an accredited investor. Pursuant to the terms of the Purchase
Agreement, the Company received $500,000 before expenses on that date,
representing 50% of the investor’s commitment to purchase 666,667 shares of the
Company’s common stock, and will pay the remaining $500,000 within 14 days of
receiving a written demand from the Company. The pricing of these
shares may be reduced based on certain subsequent events. 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.
(15)
Income Tax
The
Company has not recorded a provision for federal or state income taxes related
to continuing operations for the years ended December 31, 2009 and 2008, due to
the operating losses in those years. The Company has recorded a full
valuation allowance against the deferred tax assets due to the uncertainty of
realizing these benefits. As of December 31, 2009 the Company had net
operating loss carry forwards of $7,003,915. Significant components
related to permanent differences include losses incurred prior to the Merger and
non-deductible registration statement penalties.
F-21
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(15)
Income Tax (continued)
On
January 1, 2007, the Company adopted the provisions of FASB Accounting Standards
Codification 740 – Income Taxes (“ASC 740”), formerly referenced as FASB
Interpretation 48 – Accounting for Uncertainty in Income Taxes. ASC
740prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC 740 requires that the
Company recognize in its consolidated financial statements only those tax
positions that are “more-likely-than-not” of being sustained as of the adoption
date, based on technical merits of the position. As a result of the
implementation of ASC 740, the Company performed a comprehensive review of its
material tax positions in accordance with recognition and measurement standards
established by ASC 740. No unrecognized tax positions were recorded
as of the date of adoption.
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.
The
following is a summary of the Company's deferred tax assets and liabilities at
December 31:
|
2009
|
2008
|
|||||||
|
Deferred
Tax Assets
|
||||||||
|
Investment
in Flow-Through Entities
|
$ | 1,071,516 | $ | 185,202 | ||||
|
Allowance
for Doubtful Accounts
|
216,075 | 152,213 | ||||||
|
Accrued
professional fees
|
151,598 | - | ||||||
|
Accrued
Vacation
|
14,973 | 14,899 | ||||||
|
R&D
Credit
|
24,995 | 6,312 | ||||||
|
Net
Operating Loss
|
2,165,118 | 372,660 | ||||||
|
Total
Deferred Tax Asset
|
3,644,275 | 731,286 | ||||||
|
Deferred
Tax Liabilities
|
||||||||
|
Prepaid
Expense
|
14,467 | 28,270 | ||||||
|
Property
and Equipment
|
11,356 | 10,144 | ||||||
|
Total
Deferred Tax Liabilities
|
25,823 | 38,414 | ||||||
|
Net
Deferred Tax Asset
|
3,618,452 | 692,872 | ||||||
|
Less
Valuation Allowance
|
(3,618,452 | ) | (692,872 | ) | ||||
|
Net
Deferred Taxes
|
$ | - | $ | - | ||||
A
valuation allowance for the full amount of the deferred tax asset of $3,618,452
and $692,872 was recognized for the years ended December 31, 2009 and 2008,
respectively, as realization of the deferred tax asset is not considered more
likely than not.
F-22
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(15)
Income Tax (continued)
The
income tax provision differs from the amount of income tax determined by
applying the federal tax rate of 34% to pretax income due to the following at
December 31:
|
2009
|
2008
|
|||||||
|
Computed
"Expected" Tax Expense (Benefit)
|
$
|
(2,803,867
|
)
|
$
|
(2,548,883
|
)
|
||
|
Loss
Prior to Merger not Subject to Income Taxes
|
-
|
1,756,703
|
||||||
|
R&D
Credits
|
(24,995
|
)
|
-
|
|||||
|
Nondeductible
Expenses
|
3,139
|
52,625
|
||||||
|
Change
in valuation allowance
|
2,925,580
|
692,872
|
||||||
|
Other,
net
|
(99,857
|
)
|
46,683
|
|||||
|
Income
Tax Benefit
|
$
|
-
|
$
|
-
|
||||
(16) 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.
Components
of noncontrolling interests are as follows as of December 31:
|
2009
|
2008
|
|||||||
|
Beginning
of year
|
$
|
193,399
|
$
|
292,990
|
||||
|
Estimated
losses
|
(1,251,855
|
)
|
(99,591
|
)
|
||||
|
End
of year
|
$
|
(1,058,456
|
)
|
$
|
193,399
|
|||
F-23
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(17)
Retirement Plan
In 2006,
the Company established a SIMPLE IRA salary deferral plan under Section 401(k)
of the Internal Revenue Code for full-time employees who meet certain
eligibility requirements. Under the provisions of the plan, employees
may elect to contribute a percentage of their compensation to the plan subject
to the limitations prescribed by law. The plan provides for matching
contributions by the Company of 1% and 2% of eligible compensation in 2009 and
2008, respectively. The Company made contributions of approximately
$61,000 and $51,300 related to this plan for the years ended December 31, 2009
and 2008, respectively. This plan is renewable annually at the
discretion of the Company.
(18)
Continuing Operations
During
the period from its inception to December 31, 2009, the Company has incurred
significant annual net losses. At December 31, 2009 and 2008, the Company has
negative working capital (i.e. current assets less current liabilities) of
approximately $6.4 million and $5.3 million, respectively, and its total
liabilities exceed its total assets by approximately $3.2 million and $2.0
million, respectively. The grain based ethanol industry, the industry
in which the Company has historically operated, is facing challenges including
the rising cost of raw materials (primarily corn), increased construction costs,
and a reduction in public and governmental support. Engineering and
construction management represented a substantial amount of the Company’s
business and the grain based ethanol industry challenges are an impediment to
new grain based ethanol construction. Furthermore, the Company has
used cash flows generated by Company contracts to fund the construction of a
demonstration cellulose based ethanol plant which management considers to be a
significant part of the Company’s future within the ethanol
industry. Certain contractual payments that have been paid to the
engineering and construction management business may have to be returned to one
customer (Note 7). Furthermore, there is a risk that the product
produced at the demonstration cellulose based ethanol plant may not be
immediately commercially viable, or the Company may not be able to produce
sufficient saleable ethanol at this facility to cover the costs of plant
operations or to repay its loans from outside debtors and affiliated
companies.
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. Management has raised capital during 2008 and 2009 and
continues to raise additional capital through various methods. It is
refocusing its business to cellulose based ethanol and the sale of cellulose
based ethanol technology. During 2009 and 2008, the Company received
approximately $6.8 million (before expenses) and $6.1 million (before expenses)
in equity and debt financing (Notes 8 and 14), respectively. In
January 2010, the Company received an additional $1.5 million (before expenses)
in equity financing from an investor (Note 22).
(19)
Commitments and Contingencies
Leases
We lease
our office space and the total rent expense under our office lease obligation
was approximately $63,300 and $65,000 for the years ended December 31, 2009 and
2008, respectively. We have office lease obligations, that expire September
30, 2011, of approximately $67,000 for 2010 and $52,000 for 2011. The Company
also has various, primarily small equipment, leases which aggregated $32,640 and
$31,062 in rent expense for the years ended December 31, 2009 and 2008,
respectively. Future commitments under these leases are approximately
$21,000 for 2010, $9,300 for 2011, $9,300 for 2012, $8,400 for 2013, and $6,000
for 2014.
F-24
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(
19) Commitments and Contingencies (continued)
WBE
leases approximately 30 acres of land in Upton, WY. As of December
31, 2008, the lease was a month-to-month lease. Total rent expense under this
agreement was approximately $54,510 and $15,700 for the years ended December 31,
2009 and 2008, respectively. On March 4, 2009, WBE signed a lease for
the same property with a 2 year term and an option to extend the lease to
2013. The lease requires payments of $30,000 per year.
WBE
Ownership
WBE has
an agreement with a wood residue supplier to supply its demonstration plant with
raw materials in exchange for an ownership interest in WBE. The
agreement between the two entities allows the supplier to receive a
1% ownership interest in WBE for every 625 tons of wood feedstock delivered each
year, up to 4% and 2,500 tons. As of December 31, 2008,
approximately 835 tons had been delivered since the inception of the agreement
and the supplier was granted a 1% cumulative ownership interest in WBE in
2008. The contribution of wood feedstock for ownership was valued at
the fair market value of $10,500 at December 31, 2008. No additional
WBE ownership interest was granted in 2009 as no wood feedstock was provided by
this supplier during the year.
Licensing
Agreement
The
Company had an agreement with the South Dakota School of Mines and Technology
(“SDSM&T”) whereby SDSM&T granted the Company all intellectual property
rights associated with joint discovery and development of any CBE technology in
exchange for potential royalty payments. No licenses have been sold
to date and no amounts have been recorded in the consolidated financial
statements related to this agreement. In September 2009, the Company
received confirmation from SDSM&T that the Company has no related current or
future financial obligations and that this agreement has been terminated with
the Company retaining all rights on the intellectual
properties. However, the Company and SDSM&T continue to
collaborate on various technology projects.
Company
Profit Share Agreement
The
Company entered into a contract in 2007 whereby the Company would provide
management and process improvement services to two biofuels production
facilities in exchange for a standard monthly fee and a share of the customer’s
profits at the end of the one-year contract term. The Company
received quarterly estimated payments of profit share amounts from one of its
customers totaling approximately $157,000. During 2008, the Company
received notice from this customer that the customer would not meet profit
projections and the customer requested a return of the profit share payments
made. The Company is disputing the revised profit share calculation,
but has recorded a reserve against revenue and a liability for the profit share
payments previously received and recognized during the year. During
2007, one of the shareholders of the Company was a member of the Board of
Managers for this customer and the Company had several other long-term
agreements with this customer. The agreement was terminated in March,
2008.
F-25
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(20)
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.
The
Company provided construction management and engineering services for the
construction of a new biofuels production facility in Iowa in 2007 for Willmark
Energy, Inc. (“Willmark”). The Company believes that it would have provided
services of approximately $800,000, including approximately $350,000 of services
actually performed, for which it was not paid and filed a lien on the Willmark
property. Willmark refused to pay the Company for the unpaid services
and subsequently filed a request for arbitration, counter-claiming that the
Company failed to perform its design and project management duties under the
construction contract and was seeking approximately $1.5 million in damages and
the release of liens the Company has placed on Willmark assets. In
February 2010, in view of legal costs and especially management time, the
Company accepted a settlement offer which required that Willmark pay $35,000 to
the Company and the Company release its lien on the Willmark
property.
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.
In the
normal course of business, the Company is party to litigation from time to time.
The Company maintains insurance to cover certain actions and believes resolution
of such general litigation matters will not have a material adverse effect on
the Company.
F-26
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(21)
Segment Information
As of
December 31, 2008 the Company consisted of three segments, as defined by the
Accounting Standards Codification, identified as engineering and management
contracts, fuel, and biofuel. The fuel segment , which
provided ethanol fuel blends to retail users, was discontinued in January 2009
as a result of competition and pricing factors. As of December 31,
2009, the Company manages its business and aggregates its operational and
financial information in accordance with two reportable segments. Its engineering and management
contract segment provides contracted engineering and project development
to third party customers. Despite the lack of activity in this
segment in 2009, 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. Starting in 2010, the Company expects to
have the following business segments: cellulosic ethanol revenue
(from owned CBE facilities), lignin revenue (from CBE by-products), technology
licensing fees (related to Company patents and/or proprietary technology),
royalties (from third party CBE facilities utilizing the Company’s
technology), and engineering consulting fees (on third party CBE
facilities).
Management
assesses performance and allocates resources based on specific financial
information for the business segments. For each segment, performance
is generally 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.
Identifiable
assets, depreciation and interest expense for the Company’s business segments
were as follows (in thousands)
|
As of December
31, 2009
|
As of December
31, 2008
|
|||||||
|
Identifiable
Fixed Assets:
|
||||||||
|
Engineering
and management contract
|
$ | 326 | $ | 239 | ||||
|
Biofuel
research and development
|
7,402 | 7,348 | ||||||
|
Total
|
7,728 | 7,588 | ||||||
|
Accumulated
Depreciation
|
( 4,227 | ) | ( 2,334 | ) | ||||
|
Total
Identifiable Fixed Assets
|
$ | 3,501 | $ | 5,254 | ||||
|
For the Year Ended December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues:
|
||||||||
|
Engineering
and management contract
|
$ | - | $ | 4,010 | ||||
|
Biofuel
research and development
|
- | - | ||||||
|
Total
Depreciation
|
$ | - | $ | 4,010 | ||||
|
Depreciation:
|
||||||||
|
Engineering
and management contract
|
$ | 43 | $ | 74 | ||||
|
Biofuel
research and development
|
1,858 | 1,718 | ||||||
|
Total
Depreciation
|
$ | 1,901 | $ | 1,792 | ||||
|
Interest
Expense:
|
||||||||
|
Engineering
and management contract
|
$ | 96 | $ | 1,720 | ||||
|
Biofuel
research and development
|
99 | 194 | ||||||
|
Total
Interest Expense
|
$ | 195 | $ | 1,914 | ||||
|
Net
Loss Attributable to KL Energy Corporation
|
||||||||
|
Engineering
and management contract
|
$ | (4,334 | ) | $ | (4,436 | ) | ||
|
Biofuel
research and development
|
(2,661 | ) | (2,957 | ) | ||||
|
Net
Loss Attributable to KL Energy Corporation
|
$ | (6,995 | ) | $ | (7,393 | ) | ||
|
Reconciliations to Reported
Amounts:
|
||||||||
|
Revenue
- Reportable Segments
|
$ | - | $ | 4,010 | ||||
|
Eliminations/Other
|
- | - | ||||||
|
Total
Consolidated Revenue
|
$ | - | $ | 4,010 | ||||
|
Net
Loss - Reportable Segments
|
$ | (6,995 | ) | $ | (7,393 | ) | ||
|
Eliminations/Other
|
- | - | ||||||
|
Total
Consolidated Net Loss
|
$ | (6,995 | ) | $ | (7,393 | ) | ||
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(22) Related
Party Transactions
In
addition to the related party transactions discussed in Notes 4, 7, 10, and 13,
the Company had the following related party transactions and account balances as
of and for the years ended December 31, 2009 and 2008:
During
2009, Niton Capital (“NC”, a significant shareholder) provided the Company with
certain consulting and engineering services. As of December 31, 2009,
the Company incurred approximately $930,000 in such services of which NC has not
been paid for $420,000 as of December 31, 2009 and this amount is included in
accrued liabilities in the 2009 consolidated balance sheets.
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 year ended December 31, 2009, fees paid to
Messrs. Schueller, Bolan and Rae were $129,088 $109,588 and $38,500,
respectively.
In
calendar year 2008, up to March, 2008, three officers of KLPDG and affiliates
(KLPDG was merged into KL Energy as of September 30, 2008), were board members
of Midwest Renewable Energy (MRE), an ethanol plant located in Sutherland, NE.
One of these board members was also an officer of MRE up to January, 2008 and
all three former board members remain shareholders of MRE up to now. During the
time period of 2007 and 2008 there was business transacted between the two
companies wherein KLPDG, LLC, KLE, LLC and KLM, LLC, collectively contracted
work for MRE on the original plant and for MRE on the expansion project-MREX
(for the original plant) and had billings in 2008 of $613,719 , and had
collections in 2008 of $555,985. The Company (and/or affiliates) listed accounts
payable with MRE of $327,612 and accounts receivable with MRE of
$228,806. Both payable and receivable amounts are presently in
dispute (by both parties) as of December 31, 2009. Also, two officers
of KLPDG and affiliates were shareholders (and/or family members were
shareholders) of North Country Ethanol (NCE), an ethanol plant located in
Rosholt, SD. During the time period of 2008, there was business transacted
between the two companies wherein the LLC’s (aforementioned above) collectively
contracted work for NCE on their ethanol plant and had billings in 2008 of
$232,070 and had collections in 2008 of $144,475.
(23)
Subsequent Events
Effective
March 2, 2010, Mr. Corcoran resigned his position as the Company’s CEO and
President and terminated his employment agreement with the
Company. As of the same date, Mr. Corcoran entered into a consulting
agreement with the Company, pursuant to which he will continue to provide
certain services relating to the Company’s general U.S.
operations. During the first four months of service under his
consulting agreement, Mr. Corcoran will receive $12,251 per
month. Thereafter, he will receive a base of $3,000 per month and
reimbursement of reasonable expenses. The Company also: (i) issued to
Mr. Corcoran an option to purchase 83,333 shares of the Company’s common stock
at an exercise price of $1.10, exercisable for three years; and (ii) released
594,046 shares of common stock from the lock-up agreement between Mr. Corcoran
and the Company dated September 30, 2008. The consulting agreement may be
terminated by the Company at any time following the expiration of the first four
months of the agreement and by Mr. Corcoran upon 10 days
notice.
F-28
KL
Energy Corporation
Notes
to Consolidated Financial Statements
(23)
Subsequent Events (continued)
The
Company has entered into a consulting agreement with add blue Consultoria Ltda.,
a Brazilian consulting company, for the provision of certain executive
services. Pursuant to this agreement, the services of CEO and
President of the Company and its subsidiaries will be performed by Peter Gross
beginning March 8, 2010. The Company’s Brazilian subsidiary, KLE
Brazil Ltda., when formed, will fund the payment obligations under the
consulting agreement. An initial payment of $24,000 U.S. will be paid
to add blue Consultoria Ltda. on March 31, 2010, and thereafter the monthly fee
will be $16,000 U.S. The consulting agreement may be terminated upon
90 days notice by either party. It is anticipated that initially,
until his appropriate immigration benefits have been secured, substantially all
of Mr. Gross services will be performed at the Company’s Brazilian
offices.
On
January 6, 2010, the Company entered into a Securities Purchase Agreement
with an accredited investor (“Investor”).. Pursuant to the terms of
the Purchase Agreement, the Investor paid $1.5 million on that date,
representing 50% of the 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. 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, and deferred
issuance costs will be charged against this transaction.
On
November 17, 2009, the Company entered into a Securities Purchase Agreement
with an accredited investor (“Investor”). Pursuant to the
terms of the Purchase Agreement, the Company received $750,000 (before expenses)
on that date, representing 50% of the Investor’s commitment to purchase
1,000,000 shares of the Company’s common stock, and will either pay the
remaining $750,000 within 14 days of receiving a written demand from the Company
or, if the investor elects not to complete the investment commitment, all
previously authorized shares will be cancelled. As required by this
agreement, the pricing of these shares was reduced by approximately 27% based on
the absence of an investment by an additional institutional investor within 90
days after the date of the agreement and the related 181,818 additional shares
were deemed to be issued on February 14, 2010.
F-29
PART
II INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered :
|
NATURE OF EXPENSE
|
AMOUNT *
|
|||
|
SEC
Registration fee
|
$ | 2,139 | ||
|
Accounting
fees and expenses
|
10,000 | |||
|
Legal
fees and expenses
|
40,000 | |||
|
Printing
and related expenses
|
3,000 | |||
|
TOTAL
|
$ | 55,139 | ||
_________________________________
* Estimated.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
We
provide for indemnification of our directors and certain officers for
liabilities and expenses that they may incur in such capacities. In general, our
directors and certain officers are indemnified with respect to actions taken in
good faith and in a manner such person believed to be in our best interests, and
with respect to any criminal action or proceedings, actions that such person has
no reasonable cause to believe were unlawful. Furthermore, the personal
liability of our directors is limited as provided in our Articles of
Incorporation.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-1
RECENT
SALES OF UNREGISTERED SECURITIES
Except as
set forth below, there were no sales of unregistered securities by KL Energy
Corporation, during the past three years
In July
2008, KLPDG issued notes to Niton Capital (formerly PPM Holdings LTD), an
affiliate of Fair Energy S.A., totaling $3,100,000 in principal amount. The
notes accrued interest at a rate of 10% per annum. In connection with
the Merger, the notes were converted into an aggregate of 1,191,562 shares of our common
stock at a conversion rate of 66.66% of the price paid by investors under the a
securities purchase agreement.
In
September 2008, KLPDG issued notes to The Green Fund, an affiliate of Pluris
Sustainable Investments S.A., totaling $3,000,000 in principal. The
notes accrued interest at a rate of 10% per annum. In connection with
the Merger, the notes were converted into an aggregate of 1,134,375 shares of
our common stock at a conversion rate of 66.66% of the price paid by investors
under the a securities purchase agreement.
On
September 30, 2008, the Company issued an aggregate of 3,125 units to accredited
investors, each unit comprised of two shares of our common stock and a warrant
to purchase one share of common stock pursuant to the terms of a securities
purchase agreement. The purchase price per unit was $8.00 for an aggregate
purchase price of $25,000. The shares were issued in November 2008 in
reliance on the exemption provided by Regulation S of the Securities Act of
1933, as amended.
On
February 24, 2009, the Company executed a Securities Purchase Agreement, for the
purchase of the Company’s common stock at a price of $0.22 per share, with Niton
Capital ($1.35 million), Green Fund ($1.35 million), Pedro de Boeck ($650,000)
and Sucre SA (of which Pedro de Boeck is Managing Director, $650,000). Pursuant
to the terms of such Purchase Agreements, the Company issued to the investors
18,181,818 shares of the Company’s common stock for a purchase price of
$4,000,000 before expenses. The shares were issued in March 2009 in reliance on
the exemption provided by Regulation S of the Securities Act of 1933, as
amended.
On August
11, 2009, the Company executed a Securities Purchase Agreement, for the purchase
of the Company’s common stock at a price of $0.22 per share, with Green Fund
($500,000) and Pedro de Boeck ($500,000). Pursuant to the terms of such Purchase
Agreements, the Company will issue to the investors 4,545,454 shares for a
purchase price of $1,000,000 before expenses. The shares were issued in October
2009 in reliance on the exemption provided by Regulation S of the Securities Act
of 1933, as amended.
On
October 2, 2009, the Company entered into a Securities Purchase Agreement with
an accredited investor (“Investor”). Pursuant to the terms of such Purchase
Agreement, the Company received $600,000 on October 2, 2009, representing the
first tranche of the investment, and $600,000 on May 3, 2010, representing the
final tranche of the investment. The Investor received an aggregate of 1,090,909
shares of our common stock. 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 in future equity financings. The shares were issued in reliance on the
exemption provided by Regulation S of the Securities Act of 1933, as
amended.
On
November 17, 2009, the Company entered into a Securities Purchase Agreement with
an accredited investor (“Investor”). Pursuant to the terms of such Purchase
Agreement, the Company received $750,000 on November 17, 2009, representing the
first tranche of the investment, and $750,000 on June 3, 2010, representing the
final tranche of the investment. The Investor received an aggregate of 1,363,636
shares of our common stock. 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 in future equity financings. The shares were issued in reliance on the
exemption provided by Regulation S of the Securities Act of 1933, as
amended.
II-2
On
December 16, 2009, the Company entered into a Securities Purchase Agreement with
an accredited investor (“Investor”). Pursuant to the terms of such Purchase
Agreement, the Company received $500,000 on December 6, 2009, representing the
first tranche of the investment, and $500,000 on June 3, 2010, representing the
final tranche of the investment. The Investor received an aggregate of 909,091
shares of our common stock. 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 in future equity financings. The shares were 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 (“Investor”). Pursuant to the terms of
such Purchase Agreement, the Investor paid $1.5 million (for proceeds to the
Company of $1.35 million) on that date, representing 50% of the Investor’s
commitment to purchase 2,000,000 shares of the Company’s common stock, and
agreed to either pay the remaining $1.5 million within 14 days of
receiving a written demand from the Company or, if the investor elects not to
complete the investment commitment, all previously authorized shares will be
cancelled. As required by this agreement, the pricing of these shares
were 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. 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 in future equity financings. Effective April 6, 2010,
pursuant to the terms of Mr. Buckens’ Purchase Agreement, 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 Mr. Buckens
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 July
1, 2010, the Company received the final installment of this Purchase
Agreement. 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
$1.35 million. 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).
In the
above issuances, the Company made no general solicitation and the Company
believes that purchasers of the securities were both accredited investors and
not U.S. persons (as defined under Regulation S). The Company relied
upon exemptions from securities registration for non-public offerings and
offerings pursuant to Regulation S in issuing the shares described
above.
On March
2, 2010, the Company agreed to issue to Mr. Corcoran an option to purchase
83,333 shares of the Company’s common stock at a purchase price of $1.10 per
share. This option will become fully vested on April 1, 2010, and
will be exercisable for a period of three years. The option was
issued to Mr. Corcoran pursuant to exemptions from the registration
requirements for private offerings.
II-3
The
following exhibits are included as part of this Form S-1.
|
Exhibit
Number
|
Description
|
|
|
1.1
**
|
Form
of Underwriting Agreement
|
|
|
2.1
|
Agreement
and Plan of Merger dated September 30, 2008 between the registrant and KL
Process Design Group, LLC (filed on October 7, 2008 as Exhibit 2.1 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
2.2
|
Agreement
of Merger dated September 30, 2008 between the registrant and KL Process
Design Group, LLC (filed on October 7, 2008 as Exhibit 2.2 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
2.3
|
Articles
of Merger dated September 30, 2008 between the registrant and KL Process
Design Group, LLC (filed on October 7, 2008 as Exhibit 2.3 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
2.4
|
Securities
Purchase Agreement dated September 30, 2008 between the registrant and
accredited investors (filed on October 7, 2008 as Exhibit 2.4 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation, incorporated by reference to our
Quarterly Report on Form 10-Q for the period ended June 30,
2010, filed August 11, 2010
|
|
|
3.2
|
Amended
and Restated Bylaws of the Company, incorporated by reference to our
Annual Report on Form 10-K for the year ended December 31,
2009, filed March 9, 2010
|
|
|
5.1
**
|
Greenberg
Traurig, LLP Legal Opinion
|
|
|
10.1
|
Securities
Purchase Agreement dated September 30, 2008 between the registrant and
accredited investors (filed on October 7, 2008 as Exhibit 10.1 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
10.2
|
Form
of Common Stock Purchase Warrant (filed on October 7, 2008 as Exhibit 10.2
to the registrant’s Report on Form 8-K (File No. 000-52773) and
incorporated herein by reference).
|
|
|
10.3
|
Performance
Escrow Agreement dated September 30, 2008 between the registrant and
certain shareholders (filed on October 7, 2008 as Exhibit 10.3 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
10.4
|
Employment
Agreement dated September 30, 2008 between the registrant and Randy Kramer
(filed on October 7, 2008 as Exhibit 10.4 to the registrant’s Report on
Form 8-K (File No. 000-52773) and incorporated herein by
reference).
|
|
|
10.5
|
Employment
Agreement dated January 1, 2010 between the registrant and David Litzen,
incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010.
|
|
|
10.6
|
Employment
Agreement dated January 1, 2010 between the registrant and Dennis Harstad,
incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010.
|
|
|
10.7
|
Employment
Agreement dated January 1, 2010 between the registrant and Steve Corcoran,
incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9,
2010.
|
|
10.8
|
Term
Loan Agreement, dated October 9, 2008, between the registrant and O2Diesel
Corporation.
|
|
|
10.9
|
|
Secured
Promissory Note, dated October 9, 2008, from O2Diesel Corporation in favor
of the registrant.
|
|
10.10
|
Supply
and Distribution Agreement, dated October 9, 2008, between the registrant
and O2Diesel Corporation.
|
|
|
10.11
|
Securities
Purchase Agreement, dated February 24, 2009, between the registrant and
accredited investors
|
II-4
|
10.12
|
Amendment
to Loan Agreement, dated March 27, 2009 between Western Biomass Energy,
LLC and Security National Bank of Omaha, and related Guaranty by
registrant.
|
|
|
10.13
|
Securities
Purchase Agreement, dated October 2, 2009, between the registrant and an
accredited investor, incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.14
|
Securities
Purchase Agreement, dated November 17, 2009, between the registrant and an
accredited investor, incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.15
|
Securities
Purchase Agreement, dated December 16, 2009, between the registrant and an
accredited investor, incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.16
|
Securities
Purchase Agreement, dated January 6, 2010, between the registrant and an
accredited investor, incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.17
|
Consulting
agreement between the registrant and CMN, Inc./Alan Rae, incorporated
by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010
|
|
|
10.18
|
Consulting
agreement between the registrant and Steven Corcoran, incorporated by
reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010
|
|
|
10.19
|
Promissory
Note between registrant and Randy Kramer, incorporated by reference to our
Annual Report on Form 10-K for the year ended December 31,
2009, filed March 9, 2010
|
|
|
10.20
|
Promissory
Note between registrant and John Buckens, incorporated by reference to our
Quarterly Report on Form 10-Q for the period ended June 30,
2010, filed August 11, 2010
|
|
|
10.21
|
Consulting
agreement between the registrant and Thomas Schueller, incorporated by
reference to our Quarterly Report on Form 10-Q for the period
ended September 30, 2009, filed November 16,
2009
|
|
|
10.22
|
Consulting
agreement between the registrant and Thomas Bolan, incorporated by
reference to our Quarterly Report on Form 10-Q for the period
ended September 30, 2009, filed November 16,
2009
|
|
|
10.23
|
Amended
consulting agreement with add blue Consultoria Ltda., incorporated by
reference to our Quarterly Report on Form 10-Q for the period
ended March 31, 2010, filed May 14, 2010
|
|
|
10.24
|
Voting
Agreement, dated September 30, 2008, between the registrant and Pelly
Management, incorporated by reference to our Quarterly Report on Form 10-Q
for the period ended September 30, 2008, filed November 20,
2008
|
|
|
10.25
|
Termination
Agreement between KL Energy Corporation and Greenext Energy Europe S.A.,
dated September 24, 2010 (Incorporated by reference to our
Current Report on Form 8-K filed on October 5,
2010).
|
|
|
10.26 |
Master
Collaboration Agreement between KL Energy Corporation and add blue
Consultoria Ltda., dated September 1, 2010 (Incorporated by reference to
our Current Report on Form 8-K filed on October 5,
2010).
|
|
|
16.1
|
Letter
from Moore & Associates, Chartered (filed on October 7, 2008 as
Exhibit 16.1 to the registrant’s Report on Form 8-K (File No. 000-52773)
and incorporated herein by reference).
|
|
|
21
|
|
List
of Subsidiaries.
|
|
23.1*
|
Consent
of Ehrhardt, Keefe, Steiner & Hottman PC
|
|
|
23.2
**
|
Consent
of Greenberg & Traurig LLP contained in their opinion filed as Exhibit
5.1
hereto
|
* Filed
herewith.
** To be
filed with an amendment to this registration statement
II-5
The
undersigned Registrant undertakes:
(l) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(A) Each
prospectus filed by the Registrant pursuant to Rule 424(b)(3) shall be deemed to
be part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(B) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose of
providing the information required by Section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of first
use.
II-6
(5) That,
for purposes of determining any liability under the Securities Act of 1933 each
filing of the Registrant’s annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
In
accordance with the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, in Rapid City, South Dakota, on October 5,
2010.
|
KL
Energy Corporation
|
||
|
By:
|
/s/ Peter Gross
|
|
|
Peter
Gross, President,
and
Chief Executive
Officer
|
||
|
KL
Energy Corporation
|
||
|
By:
|
/s/
Thomas J. Bolan
|
|
|
Thomas
J. Bolan, Chief Financial
Officer
|
||
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/ Thomas Schueller
|
Director
|
October
5, 2010
|
||
|
Thomas
Schueller
|
||||
|
/s/ Alan Rae
|
Director
|
October
5, 2010
|
||
|
Alan
Rae
|
||||
|
/s/ Alain
Vignon
|
Director
|
October
5, 2010
|
||
|
Alain
Vignon
|
|
|
||
|
/s/ Alain Poncelet
|
Director
|
October
5, 2010
|
||
|
Alain
Poncelet
|
|
|
||
|
/s/ Pedro de Boeck
|
Director
|
October
5, 2010
|
||
|
Pedro
de Boeck
|
|
|
II-8
EXHIBIT
INDEX
The
following exhibits are included as part of this Form S-1.
|
Exhibit
Number
|
Description
|
|
|
1.1
**
|
Form
of Underwriting Agreement
|
|
|
2.1
|
Agreement
and Plan of Merger dated September 30, 2008 between the registrant and KL
Process Design Group, LLC (filed on October 7, 2008 as Exhibit 2.1 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
2.2
|
Agreement
of Merger dated September 30, 2008 between the registrant and KL Process
Design Group, LLC (filed on October 7, 2008 as Exhibit 2.2 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
2.3
|
Articles
of Merger dated September 30, 2008 between the registrant and KL Process
Design Group, LLC (filed on October 7, 2008 as Exhibit 2.3 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
2.4
|
Securities
Purchase Agreement dated September 30, 2008 between the registrant and
accredited investors (filed on October 7, 2008 as Exhibit 2.4 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation, incorporated by reference to our
Quarterly Report on Form 10-Q for the period ended June 30,
2010, filed August 11, 2010
|
|
|
3.2
|
Amended
and Restated Bylaws of the Company, incorporated by reference to our
Annual Report on Form 10-K for the year ended December 31,
2009, filed March 9, 2010
|
|
|
5.1
**
|
Greenberg
Traurig, LLP Legal Opinion
|
|
|
10.1
|
Securities
Purchase Agreement dated September 30, 2008 between the registrant and
accredited investors (filed on October 7, 2008 as Exhibit 10.1 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
10.2
|
Form
of Common Stock Purchase Warrant (filed on October 7, 2008 as Exhibit 10.2
to the registrant’s Report on Form 8-K (File No. 000-52773) and
incorporated herein by reference).
|
|
|
10.3
|
Performance
Escrow Agreement dated September 30, 2008 between the registrant and
certain shareholders (filed on October 7, 2008 as Exhibit 10.3 to the
registrant’s Report on Form 8-K (File No. 000-52773) and incorporated
herein by reference).
|
|
|
10.4
|
Employment
Agreement dated September 30, 2008 between the registrant and Randy Kramer
(filed on October 7, 2008 as Exhibit 10.4 to the registrant’s Report on
Form 8-K (File No. 000-52773) and incorporated herein by
reference).
|
|
|
10.5
|
Employment
Agreement dated January 1, 2010 between the registrant and David Litzen,
incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010.
|
|
|
10.6
|
Employment
Agreement dated January 1, 2010 between the registrant and Dennis Harstad,
incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010.
|
|
|
10.7
|
Employment
Agreement dated January 1, 2010 between the registrant and Steve Corcoran,
incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9,
2010.
|
|
10.8
|
Term
Loan Agreement, dated October 9, 2008, between the registrant and O2Diesel
Corporation.
|
|
|
10.9
|
|
Secured
Promissory Note, dated October 9, 2008, from O2Diesel Corporation in favor
of the registrant.
|
|
10.10
|
Supply
and Distribution Agreement, dated October 9, 2008, between the registrant
and O2Diesel Corporation.
|
|
|
10.11
|
Securities
Purchase Agreement, dated February 24, 2009, between the registrant and
accredited investors.
|
|
Amendment
to Loan Agreement, dated March 27, 2009 between Western Biomass Energy,
LLC and Security National Bank of Omaha, and related Guaranty by
registrant.
|
||
|
10.13
|
Securities
Purchase Agreement, dated October 2, 2009, between the registrant and an
accredited investor, incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.14
|
Securities
Purchase Agreement, dated November 17, 2009, between the registrant and an
accredited investor, incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.15
|
Securities
Purchase Agreement, dated December 16, 2009, between the registrant and an
accredited investor, incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.16
|
Securities
Purchase Agreement, dated January 6, 2010, between the registrant and John
Buckens, incorporated by reference to our Annual Report on Form 10-K for
the year ended December 31, 2009, filed March 9,
2010.
|
|
|
10.17
|
Consulting
agreement between the registrant and CMN, Inc./Alan Rae, incorporated
by reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010
|
|
|
10.18
|
Consulting
agreement between the registrant and Steven Corcoran, incorporated by
reference to our Annual Report on Form 10-K for the year
ended December 31, 2009, filed March 9, 2010
|
|
|
10.19
|
Promissory
Note between registrant and Randy Kramer, incorporated by reference to our
Annual Report on Form 10-K for the year ended December 31,
2009, filed March 9, 2010
|
|
|
10.20
|
Promissory
Note between registrant and John Buckens, incorporated by reference to our
Quarterly Report on Form 10-Q for the period ended June 30,
2010, filed August 11, 2010
|
|
|
10.21
|
Consulting
agreement between the registrant and Thomas Schueller, incorporated by
reference to our Quarterly Report on Form 10-Q for the period
ended September 30, 2009, filed November 16,
2009
|
|
|
10.22
|
Consulting
agreement between the registrant and Thomas Bolan, incorporated by
reference to our Quarterly Report on Form 10-Q for the period
ended September 30, 2009, filed November 16,
2009
|
|
|
10.23
|
Amended
consulting agreement with add blue Consultoria Ltda., incorporated by
reference to our Quarterly Report on Form 10-Q for the period
ended March 31, 2010, filed May 14, 2010
|
|
|
10.24
|
Voting
Agreement, dated September 30, 2008, between the registrant and Pelly
Management, incorporated by reference to our Quarterly Report on Form 10-Q
for the period ended September 30, 2008, filed November 20,
2008
|
|
|
10.25
|
Termination
Agreement between KL Energy Corporation and Greenext Energy Europe S.A.,
dated September 24, 2010 (Incorporated by reference to our
Current Report on Form 8-K filed on October
5,2010).
|
|
|
10.26
|
Master
Collaboration Agreement between KL Energy Corporation and add blue
Consultoria Ltda., dated September 1, 2010 (Incorporated by reference to
our Current Report on Form 8-K filed on October 5,
2010).
|
|
|
16.1
|
Letter
from Moore & Associates, Chartered (filed on October 7, 2008 as
Exhibit 16.1 to the registrant’s Report on Form 8-K (File No. 000-52773)
and incorporated herein by reference).
|
|
|
21
|
|
List
of Subsidiaries.
|
|
23.1*
|
Consent
of Ehrhardt, Keefe, Steiner & Hottman PC
|
|
|
23.2
**
|
Consent
of Greenberg & Traurig LLP contained in their opinion filed as Exhibit
5.1
hereto
|
* Filed
herewith.
** To be
filed with an amendment to this registration statement