PNG VENTURES INC - FORM 10-Q

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EX-32.2 - CERTIFICATION - PNG VENTURES INC	ex32-2.htm
EX-31.1 - CERTIFICATION - PNG VENTURES INC	ex31-1.htm
EX-32.1 - CERTIFICATION - PNG VENTURES INC	ex32-1.htm
EX-31.2 - CERTIFICATION - PNG VENTURES INC	ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
		OR
[ ]		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

APPLIED NATURAL GAS FUELS, INC.

(Exact name of Registrant as specified in its charter)

Nevada	000-29735	88-0350286
(State or other Jurisdiction of Incorporation or Organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

31111 Agoura Road, Suite 208

Westlake Village, CA 91361

(Address of principal executive offices)

818-450-3650

(Issuer’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.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes[X] No [ ]

As of May 13, 2011, there were 20,000,000 shares of common stock of the registrant outstanding.

APPLIED NATURAL GAS FUELS, INC.

Index to Form 10-Q

		Page No.
	PART I FINANCIAL INFORMATION
Item 1.	Financial Statements		2
	Unaudited Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010		2
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and Three Months Ended March 31, 2010 (Predecessor)		3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and Three Months Ended March 31, 2010 (Predecessor)		4
	Notes to Unaudited Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 4.	Controls and Procedures		23
	PART II OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 6.	Exhibits		24
Signatures			25

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

APPLIED NATURAL GAS FUELS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands except per share amounts)

ASSETS	March 31, 2011			December 31, 2010
Current Assets
Cash and cash equivalents	$	5,801		$	717
Trade accounts receivable, net of allowances of $26 for each year		2,574			2,349
Prepaid expenses and other current assets		1,708			2,306
Total Current Assets		10,083			5,372

Property, plant, and equipment, net		24,329			24,693
Deposits and other long term assets, net		252			15
Restricted cash		500			—
Total Assets	$	35,164		$	30,080

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	2,009		$	2,327
Line of credit		1,173			837
Current portion of long term debt		77			239
Total Current Liabilities		3,259			3,403

Long Term Debt
Long-term debt		22,785			17,447
Total Long Term Debt		22,785			17,447

Total Liabilities		26,044			20,850

Stockholders’ Equity
Preferred stock, 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2011 and December 31, 2010		—			—
Common stock, $.001 par value, 45,000,000 shares authorized, 20,000,000 shares issued and outstanding as of March 31, 2011 and December 31, 2010		20			20
Additional paid-in capital		12,147			12,025
Accumulated deficit		(3,047	)		(2,815	)
Total Stockholders’ Equity		9,120			9,230
Total Liabilities and Stockholders’ Equity	$	35,164		$	30,080

See accompanying notes to unaudited condensed consolidated financial statements

APPLIED NATURAL GAS FUELS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands except per share amounts)

				Predecessor Entity
	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010

Revenue	$	5,880		$	5,709

Operating Expenses
Production costs		3,629			4,094
Compensation		665			453
Other selling, general, and administrative		838			695
Depreciation		429			628

Income (loss) from operations		319			(161	)

Other expense
Interest expense		(599	)		(96	)
Total other expense		(599	)		(96	)

Loss Before Reorganization Items		(280	)		(257	)

Reorganization items:
Gains on debt restructuring		48			19,666
Administrative expenses		—			(1,310	)
Total reorganization items		48			18,356

Net Income (loss)	$	(232	)	$	18,099

Income (loss) per share -basic and diluted	$	(0.01	)	$	1.79

Weighted average number of common shares outstanding - basic and diluted		20,000,000			10,084,738

See accompanying notes to unaudited condensed consolidated financial statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

				Predecessor Entity
	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
Cash Flows from Operating Activities:
Net Income (loss)	$	(232	)	$	18,099
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Gain on debt restructuring		(48	)		(19,666	)
Interest paid by increase in debt		427			—
Depreciation		429			628
Non-cash stock expense		114			—
Amortization of debt discounts and deferred finance costs		12			—
Decrease (increase) in:
Trade accounts receivable		(225	)		138
Prepaid expenses and other current assets		357			257
Accounts payable and accrued expenses		(318	)		(174	)
Net cash provided by (used in) operating activities		516			(718	)

Net cash used in reorganization activities		—			(1,573	)

Cash Flows From Investing Activities:
Purchases of equipment		(65	)		(19	)
Cash restricted by terms of debt issuance		(500	)		—
Net cash used in investing activities		(565	)		(19	)

Cash Flows From Financing Activities:
Repayment of notes		(203	)		(97	)
Proceeds from debt issuance		5,000			350
Net changes in Line of Credit		336			(392	)
Proceeds from the sale of stock		—			2,575
Net cash provided by financing activities		5,133			2,436

Net increase in cash		5,084			126
Beginning of period		717			401
End of period	$	5,801		$	527

Supplemental Cash Flow Disclosures:
Cash paid for interest	$	599		$	96
Cash paid for taxes	$	—		$	—

Non cash investing and financing activities:
Debt issued to settle liabilities subject to compromise	$	—		$	15,300
Debt issued to settle notes and other current liabilities	$	—		$	930
Stock issued in settlement of liabilities subject to compromise	$	—		$	7,041
Par value of common stock issued in reorganization	$	—		$	20

See accompanying notes to unaudited condensed consolidated financial statements

Applied Natural Gas Fuels, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 — BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of Applied Natural Gas Fuels, Inc., and its subsidiaries, which are collectively referred to as “ANGF,” the “Company,” “we,” “our,” or “us,” unless the context requires otherwise. All significant intercompany transactions have been eliminated in consolidation. Effective March 24, 2010, the Company formally changed its name from PNG Ventures, Inc. to Applied Natural Gas Fuels, Inc.

The Company was incorporated in the state of Nevada on September 23, 1995 as “Telecommunications Technologies, Ltd.” and subsequently changed its name to “PNG Ventures, Inc.” in February 1998. With the exception of certain short-term ventures that were subsequently abandoned, the Company had little or no material operations from inception through June 2008. During that period, the Company had been a development-stage business seeking to acquire or develop one or more profitable business opportunities.

On June 30, 2008, the Company entered into the business of the production, distribution and sale of liquefied natural gas (“LNG”) by completing the acquisition of New Earth LNG, LLC, a Delaware limited liability company (“New ELNG”), and its operating subsidiaries, including Applied LNG Technologies, LLC, Fleet Star, Inc., and Arizona LNG, LLC (the “LNG Acquisition”). With this acquisition, the Company changed its primary business focus to liquefied natural gas production and distribution and became a provider of LNG to transportation, industrial, and municipal markets in the western United States and portions of Mexico. As a result of the acquisition, the Company acquired a liquefied natural gas production facility in Topock, Arizona along with its related sales and distribution businesses.

On September 9, 2009, the Company entered voluntary reorganization under Chapter 11 (see Note 2—Voluntary Reorganization Under Chapter 11). Accordingly, the Company has applied the provisions of Accounting Standards Codification (ASC) 852.10, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, in preparing the consolidated financial statements subsequent to the bankruptcy filing date (see Note 2).

As discussed in more detail below in Note 2—“Voluntary Reorganization Under Chapter 11,” the Company emerged from the Chapter 11 proceedings on March 24, 2010 and adopted Fresh Start reporting effective March 31, 2010. Under the provisions of ASC 852.10, the Company is considered a new reporting entity effective on and after application of Fresh Start reporting. As such, references in the financial statements to the “predecessor entity” refer to the Company prior to March 31, 2010. Due to the different basis of accounting utilized by the predecessor entity, the financial statements of such entity are not necessarily considered comparable.

NOTE 2 — VOLUNTARY REORGANIZATION UNDER CHAPTER 11

During 2009, the Company completed a comprehensive evaluation of its strategic and financial options and concluded that voluntarily filing for bankruptcy protection under Chapter 11 was necessary in order to (i) mitigate the impact of certain onerous debt instruments and contractual obligations assumed as part of the LNG Acquisition, and (ii) restructure its balance sheet to enable the Company to sustain its operations as a going concern. On September 9, 2009, the Company and its subsidiaries filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”), in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”) (Case No. 09-13162).

On March 12, 2010, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming our First Amended Plan of Reorganization (including all supplements and modifications thereto) (the “Amended Plan”). As discussed in more detail below in “Accounting for Consummation of the Plan,” the Company, on March 24, 2010 (the “Effective Date”), satisfied all material conditions precedent to the effectiveness of the Amended Plan, thereby allowing the Amended Plan to become effective. The Company elected to use March 31, 2010 as the date for adopting Fresh Start reporting in order to coincide with the Company’s normal financial closing for the first quarter of 2010.

All of our existing equity was eliminated on the Effective Date, including all options, warrants and other convertible securities that were linked to our existing equity. Further, on the Effective Date, we changed our name to Applied Natural Gas Fuels, Inc.

In conjunction with the Amended Plan, the Company’s capital structure as of March 31, 2010 consisted of the following:

1.		$15.65 million in Senior Secured Term Loans, bearing an interest rate of 10% with a maturity date on the fourth anniversary following the Effective Date. These loans are secured by first lien rights on all assets except for accounts receivable.
2.		A $0.25 million Senior Secured Short-Term Loan, bearing an interest rate of 10%, and payable in ten equal monthly payments of $25,000 commencing with the Effective Date. This loan was retired as of March 31, 2011.
3.		A $2 million working capital Line of Credit (“Line of Credit”) that was scheduled to mature on April 1, 2011. This facility was secured by accounts receivable, and was replaced in February 2011.
4.		Common Stock— 20,000,000 newly issued shares of new Common Stock (“New ANGF Common Stock”).

Accounting for Consummation of the Amended Plan

In connection with the consummation of the Amended Plan, the Company adopted the Fresh Start reporting provisions of ASC 852.10, with respect to its financial reports, which requires the Company to restate its assets and liabilities to their fair values based upon the provisions of the Amended Plan and/or other valuation data secured by the Company in conjunction therewith

Under the provisions of ASC 852.10, Fresh Start reporting is not applied until all material conditions of the reorganization plan are satisfied. All material conditions of the Amended Plan were satisfied on the Effective Date. Due to the proximity of the Effective Date to the end of the Company’s first quarter of 2010, and the relative immateriality of operations during the intervening period, the Company applied Fresh Start reporting effective as of March 31, 2010. All Fresh Start adjustments and reorganization adjustments, gains and losses are reflected in the Company’s financial statement on and after March 31, 2010.

Under the provisions of ASC 852.10, the Company is considered a new reporting entity effective on and after application of Fresh Start reporting. As such, references in the financial statements to the “predecessor entity” refer to the Company prior to March 31, 2010. Due to the different basis of accounting utilized by the predecessor entity, the financial statements of such entity are not necessarily considered comparable.

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — Our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows include the accounts of ANGF, New ELNG and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates — The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Adoption of ASC 852.10, Financial Reporting by Entities in Reorganization under the Bankruptcy Code – Effective March 31, 2010, the Company adopted the Fresh Start reporting provisions of ASC 852.10.

Fair Market Value of Financial Instruments— The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other liabilities approximate their carrying amounts in the financial statements. The Company’s financial instruments include trading securities and notes payable. The carrying value of notes payable approximates market value because the borrowing rate is similar to other financial instruments with similar terms, except as proscribed under ASC 852.10. The trading securities are carried at fair value with changes in fair value recognized in earnings each period. Valuations are based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

The Company follows a framework for consistently measuring fair value under generally accepted accounting principles, and the disclosures of fair value measurements. The framework provides a fair value hierarchy to classify the source of the information.

The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value and include the following:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash, the only Level 1 input applicable to the Company (there are no Level 2 or 3 inputs), is stated on the Condensed Consolidated Balance Sheets at fair value.

Impairment of Long-Lived Assets — In accordance with ASC 360, the Company reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of its assets, on a going concern basis, by estimating the undiscounted future net cash flows expected to result from the asset over its expected useful life, including eventual disposition. If the future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value. In conjunction with our Chapter 11 filing, the Company engaged a valuation firm to prepare an estimate of the fair market value of the assets of the Company. Based upon the report of this firm, the carrying values of assets of the Company were adjusted, effective December 31, 2009, by writing down the carrying value of certain long-lived assets (see Note 5).

Property, Plant and Equipment — Other than as discussed in the immediately preceding paragraph, property, plant and equipment are carried at cost. Depreciation of property, plant, and equipment is provided using the straight-line method at rates based on the estimated useful lives. The cost of asset additions and improvements that extend the useful lives of property and equipment are capitalized. Routine maintenance and repairs items are charged to current operations. The original cost and accumulated depreciation of asset dispositions are removed from the accounts and any gain or loss is reflected in the statement of operations in the period of disposition. Effective March 31, 2010, in conjunction with the application of Fresh Start reporting, all accumulated depreciation and allowance for impairments were netted against the carrying cost of property. Prospective depreciation provisions are based upon the new carrying value of property in accordance with the depreciation policies as described in Note 5.

Periodically, the Company receives grant funding to assist in the financing of natural gas fueling station construction. The Company records the grant proceeds as a reduction of the cost of the respective asset. No grants were received in the periods covered by this report.

Cash and Cash Equivalents — The Company considers all highly liquid investments with an original maturity of three-months or less to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. We hold cash and cash equivalents at financial institutions, which, at times, may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. Historically, we have not experienced any losses due to such concentration of credit risk.

Accounts Receivable — Accounts receivable are recorded at net realizable value, which includes an allowance for estimated uncollectable accounts to reflect any loss anticipated on the collection of accounts receivable balances. The Company uses the allowance method of accounting for doubtful accounts. The year-end balance is based on historical collections and management’s review of the current status of existing receivables, and estimates as to their collectability. We calculate the allowance based on our history of write-offs, level of past due accounts and economic status of the customers.

Revenue — Revenues are derived primarily from the sale of liquefied natural gas, which is sold to end users and is recognized based on actual volumes of LNG sold. Revenue is recognized in accordance with ASC 605, when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectability is probable, delivery of a product has occurred and title and risk of loss has transferred or services have been rendered. Revenues include shipping and handling costs billed to the customers.

From time to time, we derive a material portion of our revenues from one or more significant customers. Less than 10% of our annual sales are derived from customers in Mexico (see Note 11).

Volumetric Excise Tax Credits ("VETC")--The Company records its VETC credits as revenue in its consolidated statements of operations as the credits are fully refundable and do not need to offset income tax liabilities to be received. VETC revenues for the three months ended March 31, 2011 and three months ended March 31, 2010 were $258,000, and $0 respectively. The legislation providing for VETC was reinstated in the fourth quarter of 2010, made retroactive to January 1, 2010 and extended to December 31, 2011.

Production Cost — Production costs consists primarily of raw materials and other direct production costs incurred to produce LNG. Shipping and handling costs are included as a component of production costs in our consolidated statements of operations because we include in revenue the related costs that we bill our customers.

Income Taxes — The Company files consolidated federal tax returns. Income taxes are allocated to each member in the consolidated group based on the taxable temporary differences of each member using the asset and liability method of accounting. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities, and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry-forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization. As of December 31, 2010 and March 31, 2011, all deferred tax assets are fully reserved.

Net Loss Per Common Share — Basic and diluted net loss per common share are presented in conformity with the ASC 260, “Earnings Per Share.” Basic net loss per share is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of common shares outstanding during the year (denominator). Diluted net income per share is computed, if applicable, using the weighted average number of common shares and dilutive potential common shares outstanding during the year.

Significant Concentrations — Financial instruments that potentially subject us to a concentration of credit risk consist principally of trade accounts receivable. We perform ongoing credit evaluations of our customers and generally do not require collateral on accounts receivable, as the majority of our customers are either government or other credit-worthy entities. We maintain reserves for potential credit losses, but historically have not experienced any significant losses related to any particular geographic area.

Reclassifications — Certain prior year reported amounts have been reclassified to conform with the 2010 presentation. We reclassified certain expense items within operating activities in the consolidated statements of operations.

NOTE 4 — PREPAIDS AND OTHER ASSETS

Prepaids and other assets consist of the following (amounts in thousands):

Description	March 31, 2011		December 31, 2010
Prepaid expenses	$	674	$	908
VETC credits receivable		765		1,213
Deposits		169		109
Inventory		35		54
Other assets		65		22
Total prepaid expenses and other current assets	$	1,708	$	2,306

NOTE 5 — PROPERTY, PLANT, AND EQUIPMENT

As of March 31, 2011 and December 31, 2010 , property, plant, and equipment consisted principally of the assets related to the LNG business acquired in the LNG Acquisition (amounts in thousands):

Description	March 31, 2011		December 31, 2010
LNG production facilities	$	26,007	$	25,971
Fixtures and equipment		23		6
Office equipment, CIP		11		—
Total cost		26,041		25,977
Accumulated depreciation and valuation allowance		(1,712)		(1,284)
Net property, plant and equipment	$	24,329	$	24,693

Depreciation expense for the quarters ended March 31, 2011 and March 31, 2010 were approximately $429 and $628, respectively.

In conjunction with the Company’s voluntary reorganization under Chapter 11 (see Note 2), the Company commissioned an appraisal firm to perform a study of the estimated fair market value of its assets. This study was completed in the fourth quarter of 2009 and estimated that the total fair market value of the assets of the Company was approximately $29 million. As a result, effective December 31, 2009, the Company reduced the carrying value of its assets by recording a valuation allowance of $8.1 million. This charge was allocated entirely to the carrying values of Property, Plant, and Equipment, since all other assets of the Company were already adjusted to readily estimable fair market values. Effective March 31, 2010, the Company adopted Fresh Start reporting and eliminated all accumulated depreciation and valuation allowances by netting such amounts against the carrying values of property, plant, and equipment, resulting in an adjusted cost basis for such assets. Since March 31, 2010, depreciation is calculated in accordance with the depreciation policies described below, based upon such adjusted cost basis.

The Company’s accounting policy is to record depreciation on a straight-line basis over the estimated useful lives of the various assets as follows:

Furniture and fixtures	5-7 Years
Machinery and equipment	5-10 Years
LNG production facilities	15 Years

NOTE 6 — NOTES PAYABLE, CONVERTIBLE DEBTSANDLINE OF CREDIT

The following table summarizes the debts of the Company as of March 31, 2011 and December 31, 2010 (amounts in thousands):

	March 31, 2011			December 31, 2010
Senior secured credit agreement	$	17,349		$	16,995
Senior secured credit agreement Amendment #1		5,000			—
Accounts receivable line of Credit		1,173			837
Other		513			691
Long term debt		24,035			18,523
Current portion of long term debt		(1,250	)		(1,076	)
Non-current portion	$	22,785		$	17,447

Senior Secured Term Loans

On the Effective Date, we entered into a Senior Secured Credit Agreement with Medley Capital as agent for Fourth Third, LLC (“Medley” or “Lender”), as lender and agent, and Castlerigg PNG Investments, LLC (“Castlerigg”) as lender. Medley and Castlerigg are also the primary shareholders of the Company, controlling over 90% of the common shares outstanding.

The Senior Secured Credit Agreement provides for a senior secured term loan facility in the principal amount of $15.9 million, consisting of a $10.0 million four year senior secured term loan from Medley (the “Medley Loan”), a $5.65 million four year senior secured term loan from Castlerigg (the “Castlerigg Loan”), and a $250,000 ten month senior secured loan from Castlerigg (the “Castlerigg Short Term Loan”). As of December 31, 2010, the Castlerigg Short Term Loan had a remaining principal balance of $75,000. This loan was retired as of March 31, 2011.

Borrowings under the Senior Secured Credit Agreement accrue interest at 10% per annum. Interest accrued on the Medley Loan and the Castlerigg Loan from the Effective Date through the first anniversary of the Effective Date were, at the Company’s option, paid-in-kind and added to the principal amount of the Senior Secured Credit Agreement on a monthly basis, in arrears. After the first anniversary of the Effective Date, the accrued interest is payable on a quarterly basis.

As of March 31, 2011 and December 31, 2010, the Company has capitalized approximately $1.7 and $1.27 million, respectively of paid in-kind interest accrued through each such date by increasing the principal amounts of the Senior Secured Credit Agreement.

Pursuant to a Guarantee and Collateral Agreement (the “Collateral Agreement”), the obligations under the Senior Secured Credit Agreement are guaranteed by all of our subsidiaries (the “Guarantors”) and are secured by a first priority security interest in substantially all of our assets and the assets of the Guarantors, now existing or hereafter acquired (excluding accounts receivable and inventory of certain of our subsidiaries--collectively, the “Accounts Receivable Line of Credit Collateral” as to which the Lender of such credit has a senior secured interest), and a second priority security interest in the Accounts Receivable Line of Credit Collateral. In addition, the Senior Secured Credit Agreement (including the Castlerigg Short Term Loan) are secured by a first priority security interest and a second priority security interest, respectively, in our existing fleet of twenty-four (24) cryogenic trailers. The obligations under the Senior Secured Credit Agreement are also secured by a pledge of the equity interests of the subsidiaries of the Company and each Guarantor, subject to certain exceptions, including exceptions for equity interests in foreign subsidiaries.

The Senior Secured Credit Agreement contains covenants that limit our ability to, among other things, incur or guarantee additional indebtedness, incur liens, pay dividends on or repurchase stock, make certain types of investments, enter into transactions with affiliates, sell assets or merge with other companies, or change lines of business.

The Senior Secured Credit Agreement also contains certain mandatory payment provisions, including the application of the proceeds from the sale of any assets, and acceleration of the debt in the event of a change in control.

The Senior Secured Credit Agreement contains a variety of events of default, which are customary for transactions of this type, including the following events:

failure to pay amounts due under the Senior Secured Credit Agreement;

a breach of any representation or warranty contained in the Senior Secured Credit Agreement or related documents;

failure to comply with or perform certain covenants under the Senior Secured Credit Agreement;

the insolvency of the Company or any of our subsidiaries;

a termination or default under our Intercreditor Agreement with the Lender of the Accounts Receivable Line of Credit; or

any change of control of our outstanding shares.

In March 2011, the Company entered into Amendment # 1 to the Senior Secured Credit Agreement and closed on additional financing in the amount of $5.0 million provided by Medley (the “Senior Secured Debt Amendment”). The $4.4 million in net proceeds from this financing will be used principally to purchase certain LNG equipment and for working capital. $0.5 million of the proceeds from the Senior Secured Debt Amendment were set aside as restricted cash to fund, if necessary, future interest payments related to the facility; also, approximately $0.1 million of this financing was used to pay the legal expenses and other direct costs of the transaction.

The Senior Secured Debt Amendment provides for a senior secured lien on all assets of the Company, other than those assets pledged under the Accounts Receivable Line of Credit. The liens granted under the Senior Secured Debt Amendment are prior to the liens that secure the original debt under the terms of the Senior Secured Credit Agreement. The provisions of the Senior Secured Debt Amendment provide for the payment of interest quarterly in arrears at the rate of 13% per annum. This amendment also modifies the interest payment terms on the Senior Secured Credit Agreement to quarterly in arrears, and amends certain covenants and conditions as follows:

fixed charge coverage ratio of 1.0:1 for the quarter ended December 31, 2011, and 1.10:1 for all subsequent quarters;

EBITDA (earnings before interest, taxes, depreciation and amortization) of $200,000 per quarter for the quarter ended March 31, 2011; $300,000 for the quarter ended June 30, 2011, $500,000 per quarter for the quarter ended September 30, 2011, $600,000 per quarter for the quarter ended December 31, 2011; and $750,000 for all subsequent quarters; and

Capital expenditures are limited to $750,000 during 2010; and limited to $1,000,000 for years thereafter, except that any capital assets that are contemplated to be acquired using the proceeds derived from the additional debt provided by Amendment # 1 are to be excluded from the calculation.

Accounts Receivable Line of Credit

On the Effective Date, we entered into the Fifth Amended and Restated Revolving Credit Loan Note (and related Loan and Security Agreement) with Greenfield Commercial Credit, LLC (the “Greenfield Note”) effective as of April 1, 2010. The Greenfield Note was a revolving credit facility in the principal amount of up to $2,000,000 which accrued interest annually at a rate of LIBOR plus 7%, with LIBOR subject to a floor of 2% (9% at December 31, 2010), and included provisions for other monthly fees for services provided under the agreement, including a monthly service fee, that results in additional annualized charges of 9.0%. The Note was secured by a senior secured interest in our accounts receivable and inventory. The Greenfield Note was scheduled to mature on the earlier of demand or April 1, 2011, and was subject to a prepayment penalty of $20,000 of the maximum loan amount in the event of a Company repayment prior to the maturity date.

In February 2011, the Company terminated the Greenfield line of credit and replaced it with a revolving credit facility provided by First Community Financial (“FCF”) pursuant to an Accounts Receivable Security Agreement dated February 8, 2011, and certain related agreements (collectively the “FCF Facility”). The FCF Facility provides up to $2.5 million of financing secured by a first lien on the Company’s accounts receivable and certain related assets, and matures on February 8, 2013, but subject to automatic extension in the event that neither party provides written notice of termination at least 30 days prior to February 13, 2013. The FCF Facility bears interest at the annualized rate of prime plus 4.75%, subject to an interest rate floor of 8%, and a monthly interest rate minimum of $8,750, and payable monthly in arrears. The Company may request advances from time to time of up to 85% of eligible accounts receivable as defined by the terms of the FCF Facility.

The terms of the FCF Facility provide for certain customary covenants and conditions, including provisions that the Company maintain a minimum net worth of $8 million, and that the Company avoids the incurrence of cumulative net losses in any three consecutive months that exceed $500,000. Upon closing of the FCF Facility, the Company paid the legal fees of FCF along with a commitment and funding fee to FCF of $27,500, a termination fee related to terminating the Greenfield line of credit of $20,000 and a broker fee of $75,000 to the broker that secured the FCF Facility. The Company also issued certain warrants to the broker as described in Note 9. As of March 31, 2011, the balance outstanding on this note was approximately $ 1.173 million.

Upon each anniversary date, the Company will also be required to pay to FCF a commitment and funding fee of $12,500; additionally, if an automatic renewal occurs after the 2nd anniversary, the Company will also be required to pay a renewal fee of $25,000. The Company may terminate the FCF facility at any time but will remain obligated to pay the minimum monthly interest through expiration of the two year primary term.

Other Long Term Liabilities

Other liabilities include certain priority tax payments in the approximate amount of $513,000 payable in 60 equal monthly installments commencing May 2010, with interest at approximately 7% per annum.

Maturities of long-term debts

The following table sets forth our future long-term debt payment obligations as of March 31, 2011 (amount in thousands):

Fiscal Years:

2011	$	1,250
2012		121
2013		129
2014		22,487
2015		48
Total future payments	$	24,035

NOTE 8 — INCOME TAXES

Income Tax Expense:

The Company’s effective tax rate was zero for the three months periods ended March 31, 2011 and March 31, 2010. The Company paid no income taxes during the year ended December 31, 2010 and does not anticipate that it will pay any income taxes for the year ended December 31, 2011 due to anticipated net operating losses.

Deferred tax assets:

Realization of the deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain. Accordingly, a valuation allowance in an amount equal to the net deferred tax assets as of March 31, 2011 and 2010 has been established to reflect these uncertainties.

During the three months ended March 31, 2010, and as a result of confirmation of the Amended Plan (see Note 2), the Company realized income from the settlement of liabilities subject to compromise in the amount of $19.7 million. The Internal Revenue Code of 1986, as amended, provides that a debtor in a bankruptcy case may exclude such income from taxable income, but must reduce certain of its tax attributes, including operating loss carryforwards. As of January 1, 2011, the Company eliminated all net operating losses of approximately $16.3 million including applicable valuation allowances. The Company will also reduce its tax basis in fixed assets by $3.3 million.

Change in Control:

As of the Effective Date, the Company experienced a change in ownership, as defined by the Internal Revenue Service Code Section 382. As a result, the annual usage of beneficial tax attributes that were generated prior to the change in ownership, if any, could be substantially limited.

Uncertain Income Tax Positions:

The Company adopted ASC 740 Accounting for Uncertainty in Income Taxes. The current Company policy classifies any interest recognized on an underpayment of income taxes as interest expense and classifies any statutory penalties recognized on a tax position taken as other general and administrative expense. The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements or the effective tax rate during 2010 or the three months ended March 31, 2011.

NOTE 9—STOCKHOLDERS’ EQUITY

Common Stock Purchase Option Activity

The following table summarizes common stock purchase warrants and stock option activity for the three month period ended March 31, 2011:

	Shares
Options outstanding at December 31, 2010		3,522,342
Stock options and warrants granted (1)		137,500
Exercised		—
Forfeited/ expired/ cancelled		—
Options outstanding at March 31, 2011		3,659,842

(1) Inclusive of 37,500 stock purchase warrants granted to the investment banking firm that assisted in the arrangement of the FCF facility. The value of these warrants, are estimated at $8,000, are included in capitalized loan costs and are being amortized as interest expense over the life of the loan.

The weighted average exercise price of common stock purchase options granted during the period range from $0.58 to $1.00 per share. As of March 31, 2011, total vested options were 2,604,895. Pursuant to his employment agreement, Mr. Hacioglu also earned an additional 218,343 stock options as a result of the 2010 operating performance of the Company. As of March 31, 2011 these options were earned. These options have been included in the above presentation. The options vest immediately upon issuance, have a ten (10) year term, and include a strike price of $0.58 per share. These options have been valued at $82,025, all of which was included in Stock-based compensation expense during the nine months ended December 31, 2010. Since the options were not issued as of December 31, 2010 and March 31, 2011, the obligation to issues these options was recorded as a liability for each period.

Stock-based Compensation Expense

Using the "Valuation Assumptions" discussed in the following section, the Company has estimated the value of stock options granted during the three months ended March 31, 2011 to be approximately $685,000. The value of these options is being amortized to Stock-Based Compensation Expense over the vesting periods applicable to each option grant. Total Stock-Based Compensation Expense recorded during the three months ended March 31, 2011 and March 31, 2010 was $114,000 and $0, respectively.

Valuation Assumptions

We calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for stock options granted since the Effective Date through March 31, 2011:

	Valuation Assumptions
Risk- free rates		3.650	%
Expected lives (in years)		10
Dividend yield		―
Expected volatility		76	%

Since the Company currently does not have an active trading market for its shares, our computation of expected volatility is based on factors used by comparable companies. We used the 10-year term of the options as the expected life of the options. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury 10-year yield curve in effect at the time of grant.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Litigation

In conjunction with the voluntary reorganization under Chapter 11, all litigation against the Company was stayed and, as of the Effective Date, all litigation was settled according to the terms of the Amended Plan.

Other Matters. Although we were not a party to any material legal proceedings as of March 31, 2011, from time to time, we may become involved in a variety of claims, suits, investigations, proceedings, and legal actions arising in the ordinary course of our business. Although the ultimate outcome of these matters, if and when they arise, cannot be accurately predicted due to the inherent uncertainty of litigation, in the opinion of management, based upon current information, no currently pending or overtly threatened claim is expected to have a material adverse effect on our business, financial condition, or results of operations. However, even if we are successful on the merits, any pending or future lawsuits, claims or proceedings could be time-consuming and expensive to defend or settle and could result in the diversion of significant management time and operational resources, which could materially and adversely affect us. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect our financial position, results of operations or cash flows.

Operating Leases

The Company leases facilities, including the land for its LNG production plant in Topock, Arizona, under non-cancelable operating leases expiring at various dates through 2020. The following schedule represents the future minimum lease obligations for all non-cancelable operating leases as of March 31, 2011 (amounts in thousands):

Fiscal Years:
2011	$	145
2012		163
2013		147
2014		57
Thereafter		49
Total future minimum lease payments	$	561

Rent expense, including variable rent, totaled $25,218 and $9,777 for the three months ended March 31, 2011 and 2010, respectively.

Environmental Matters

The Company is subject to federal, state, local, and foreign environmental laws and regulations. The Company does not anticipate any expenditures to comply with such laws and regulations, which would have a material impact on the Company's consolidated financial position, results of operations, or liquidity. The Company believes that its operations comply, in all material respects, with applicable federal, state, local, and foreign environmental laws and regulations.

Other Long Term Commitments and Contingencies

In conjunction with the Amended Plan, the Company has a contingent obligation to fund an additional $450,000 to the fund established for the benefit of certain Unsecured Creditors (the “Creditors Fund”) on December 31, 2011 in the event that certain excise tax refunds are not collected and remitted to the Creditors Fund prior to such date. The obligation is limited to $450,000 less the actual amount of excise tax refunds collected and remitted to the Creditors Fund. As of March 31, 2011, the contingent obligation had been reduced to $391,000 via the collection of part of the expected excise tax refunds. The Company does not anticipate that it will be required to fund from its own working capital any material amount of this contingent obligation.

NOTE 11 — CUSTOMER AND SUPPLIER CONCENTRATIONS

Our business is dependent upon the operation of a single natural gas liquefaction plant that processes natural gas feedstock taken directly from an adjacent natural gas pipeline. While the pipeline is operated as a common carrier, and subject to applicable common carrier rules and regulations, any extended disruption in the operations of this pipeline, or in our relationship with the operator of the pipeline, could have a material adverse effect upon our business.

Our sales are derived from various governmental agencies and authorities and from private fleet operations, and the number of companies and actual or potential customers that own and operate LNG fueled vehicles is relatively small. Consequently, the Company operates in a highly competitive environment and has sales concentrations with certain major customers.

Major Customers

The following table presents the contribution to sales by the Company’s largest customers as shown in the respective periods:

Customer	Three months ended March 31, 2011			Three months ended March 31, 2010
Waste Management, Inc.		23	%		21	%
Orange County Transportation Authority		15	%		16	%

All other customers individually contribute less than 10% to total sales.

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS

On January 1, 2011, the Company adopted changes issued by the FASB to disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). In addition, the changes require a reporting entity to separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. These changes were applied to the disclosures in note 3 to the Company’s condensed consolidated financial statements contained elsewhere herein.

On January 1, 2011, the Company adopted changes issued by the FASB to the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing requirements for supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The adoption of this pronouncement did not have any impact on the Company’s condensed consolidated financial statements.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Cautionary Note Regarding Forward-Looking Statements

This report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In this context, forward-looking statements may address our expected future business and financial performance, and often contain words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “seeks,” “will,” and other terms with similar meaning. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from results proposed in such statements. Although we believe that the assumptions upon which any forward-looking statements are based are reasonable, we can provide no assurances that these assumptions will prove to be correct. We believe that the statements in this Quarterly Report on Form 10-Q that we make regarding the following matters, by their nature, are forward-looking. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: our ability to capture a meaningful share of the market for natural gas as a vehicle fuel and to enhance our competitive position as that market expands; the outcome of any plans to expand business with existing customers, retain existing customer accounts and to win business with new customers; the outcome of any plan to expand our sales in the regional trucking, ports, public transit, refuse hauling and airport markets; the success of our plans to expand our sales and marketing team and to hire experienced sales personnel to focus on targeted metropolitan areas; the outcome of any plans to build natural gas fueling stations or the expansion of our Topock, Arizona facility; increased costs and production delays associated with unexpected facility maintenance and repairs; developments and trends in the natural gas and fleet vehicle markets, including increased transition from diesel and gasoline powered vehicles to natural gas vehicles; estimated increases in costs for diesel engine and natural gas vehicles to meet federal 2010 emission standards; more stringent emissions requirements; anticipated federal and state certification of additional natural gas vehicle models; expanded use of natural gas vehicles at and sales of LNG to trucks operating at the Los Angeles and Long Beach seaports; future supply, demand, use and prices of fossil and alternative fuels, including crude oil, gasoline, diesel, natural gas, biodiesel, ethanol, electricity, and hydrogen; impact of environmental regulations on the cost of crude oil, gasoline, diesel

and diesel engines; impact of environmental regulations on the use of natural gas as a vehicle fuel; the availability of tax incentives and grant programs that provide incentives for using natural gas as a vehicle fuel; our continued receipt of the Volumetric Excise Tax Credit; projected capital expenditures, project development costs and related funding requirements; any plans to retain all future earnings to finance future growth and general corporate purposes; any plans to purchase futures contracts and to continue offering fixed-price sales requirement contracts; costs associated with remaining in compliance with government regulations and laws; access to equity capital and debt financing options, including, but not limited to, equipment financing, sale of convertible promissory notes or commercial bank financing; and statements of assumption underlying any of the foregoing; all of such objectives, estimates, intentions and plans being subject to our ability to execute on our plans in light of our recent emergence from Bankruptcy, and subject to the substantial limitations we are subject to under our Senior Secured Term Loans and the Shareholders’ Agreement with Medley and Castlerigg. Other factors include our ability to fund and execute our business plan; our ability to attract, motivate and/or retain key executives and associates; our ability to attract and retain customers; and statements of assumption underlying any of the foregoing, as well as other factors or statements set forth herein in this Quarterly Report on Form 10-Q, and in other filings with the SEC, including specifically our most recent filing of our Annual Report on Form 10-K. Any or all of such factors could cause our actual results to differ materially from these forward-looking statements. Similarly, these and other factors can affect the value of our assets and common stock and/or other equity securities. Accordingly, we urge that the appropriate caution be exercised with respect to existing and future investments in our securities. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this report. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates, expectations, or otherwise or to reflect events or circumstances after the date hereof.

Our forward-looking statement qualifications also apply to certain information provided in connection with the Chapter 11 bankruptcy proceedings and emergence therefrom. We were required to prepare and file with the Bankruptcy Court (as a matter of public record), projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Amended Plan and our ability to continue operations upon emergence from Chapter 11 bankruptcy proceedings. Neither these projections nor our Disclosure Statement should be considered or relied after the Effective Date as our actual results have and will continue to vary from those contemplated by the projections filed with the Bankruptcy Court. See our most recent Annual Report on Form 10-K, Item 1A, “Risk Factors — Risks Related to Our Emergence from Chapter 11 Bankruptcy Proceedings.” Furthermore, any information contained within this Report as it discusses the Amended Plan and our Disclosure Statement or any aspect related thereto, is for informational purposes only and is not a solicitation of any type, nor an offer to sell or a solicitation of an offer to purchase any of our securities.

The following discussion and analysis should be read in conjunction with our most recent filing on our Annual Report on Form 10-K, and with our unaudited financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best, present assessment of our management.

Company Overview

On June 30, 2008, we entered into the business of the production, distribution and sale of liquefied natural gas (“LNG”) by completing the acquisition of New Earth LNG, LLC, a Delaware limited liability company (“New ELNG”), and its operating subsidiaries, including Applied LNG Technologies, LLC, Fleet Star, Inc., and Arizona LNG, LLC (the “LNG Acquisition”). Following the LNG Acquisition, we changed our primary business focus to liquefied natural gas production and distribution and became a provider of LNG to transportation, industrial, and municipal markets in the western United States and portions of Mexico. We offer turnkey fuel solutions to our customers, including delivery of clean LNG fuel (99% methane gas), equipment storage, fuel dispensing equipment and fuel loading facilities. We are one of the two primary vehicle-grade LNG producers in the western United States.

One of the principal assets we acquired in the LNG Acquisition was a liquefied natural gas production facility in Topock, Arizona (the “Plant”), along with its related sales and distribution businesses. The Plant processes pipeline quality natural gas through various purification applications (to a purity of up to 99% methane gas), and through refrigeration cycles that cool the gas to a temperature of approximately -260 degrees F, at which point the natural gas product condenses to a liquid. After processing, LNG is stored in above ground cryogenic storage tanks at the Plant, until shipped via tractor trailers to customer sites, where it is also stored in above ground storage tanks until transferred directly to vehicles. In its liquefied state, LNG occupies approximately 1/600th of the volume of natural gas and is easily stored and transported. We believe that our Plant is one of the few operating natural gas production facilities in the western United States with capacity sufficient to service retail, wholesale and industrial end users. As it would take an extended period and require substantial capital expenditures to develop a similar production facility, and to develop the experienced staff required to provide a turn-key solution to potential LNG customers, we believe the barrier to entry is high in our business.

At some customer sites, we also offer a pure form of compressed natural gas (“CNG”). CNG is normally produced by compressing pipeline quality natural gas to a density that is approximately 40% of LNG. We produce CNG at certain sites by vaporizing LNG at high pressures, and typically refer to this product as LCNG. As LCNG, it remains in a gaseous state, and is stored in high pressure tanks, usually at operating pressures of 4,000 to 5,000 psi, to be eventually dispensed into vehicles in gaseous form. We utilize this process at our retail fueling station, and at certain customer owned refueling sites. The Company also provides LNG and LCNG storage, fueling and delivery systems, and executes turnkey fuel solutions that include equipment leasing, station installations, safety and training, temporary fueling stations, and LNG and CNG consulting services.

We purchase pipeline quality natural gas from one main supplier, who transports the natural gas to the plant site via a pipeline immediately adjacent to the Plant. The Plant has an annual production capacity of 35.6 mm gallons of LNG, with a maximum production capacity of 100,000 gallons of vehicle grade LNG per day (approximately 60,000 gallons per day of diesel gallon equivalent). In addition, we own a fleet of 24 specialty cryogenic tank trailers which are used to transport LNG from the plant site to customer sites. Although we produce LNG at our Plant in Arizona, we also purchase, from time to time, other LNG supplies from third parties, typically on spot contracts. In addition to the Plant and 24 cryogenic tank trailers, we also own a public LNG fueling station from which we sell LNG and LCNG at retail to the public. This station is located near a popular airport in Southern California.

Our sales and marketing efforts are conducted through a small staff of direct sales people. We sell substantially all of our LNG to municipal, other governmental agency, and commercial fleet customers (e.g. refuse companies, major ports, large municipal fleets, and other commercial trucking fleets), who typically own and operate their LNG powered vehicle fleets and fueling stations. We also sell a small volume of LNG to industrial customers for non-vehicle use. Our customers are located in the western United States and northern Mexico. Typical customer fleet applications include city and regional buses, garbage collection and hauling trucks, heavy-duty tractors, port drayage trucks, and industrial manufacturing applications.

Currently, one of the largest markets in the U.S. for clean, vehicle-grade LNG is Southern California and surrounding areas. This market has been the focus of our marketing efforts. In recent years, various governmental agencies in California, Arizona, and surrounding areas have enacted environmental and clean air regulations that have served to encourage fleet operators to convert portions of their vehicle fleets to cleaner fuel alternatives such a LNG.

Los Angeles (including urban portions of the city), Orange County, Riverside, and San Bernardino counties collectively are designated the South Coast Air Quality Management District (SCAQMD). This area of 10,743 square miles is home to over 16 million people (the second most populated urban area in the United States) and has the most polluted air in the United States. California encourages and provides millions of grant dollars to assist individual and fleet owners to acquire vehicles that are powered by cleaner alternatives to diesel and gasoline, such as LNG and CNG.

Our sales are based on supply contracts that are normally on a commodity “index-plus” basis, although we also occasionally may enter into fixed-price contracts. The “index-plus” contracts typically contain contract pricing provisions that reset periodically (typically each month) according to the applicable natural gas monthly pricing index. While revenues per GGE may fluctuate based on the price of natural gas, our gross profit / per GGE for any given customer contract remains generally stable over the life of the contract.

Our business strategy is to capitalize on the anticipated growth in the consumption of natural gas, principally LNG, as a vehicle fuel and to build our competitive position as that market expands. Subject to the availability of adequate capital, we intend to execute on our business strategy by expanding the geographic and operational scope of our business operations, establishing additional retail fueling stations, increasing our LNG storage and production capacity, and expanding our sales and marketing efforts.

Voluntary Reorganization under Chapter 11

Following the June 30, 2008 LNG Acquisition, our liquidity and results of operations were adversely affected by, among other things, the loss of a major customer, continuing losses from pre-existing customer relationships and the substantial indebtedness assumed as part of the LNG Acquisition. In the LNG Acquisition, we also inherited certain predecessor litigation claims, as well as certain non-economic contracts, which collectively created an insurmountable barrier to our restructuring efforts. For these and other reasons, on September 9, 2009 (the “Petition Date”), we voluntarily filed petitions (including each of our subsidiaries) for relief under Chapter 11 of the Federal Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court, District of Delaware (the “Bankruptcy Court”), which cases were jointly administered as Case No. 09-13162. From the Petition Date until our emergence from bankruptcy, we operated our business as debtors-in-possession in accordance with the Bankruptcy Code.

On March 12, 2010, the Bankruptcy Court entered an order confirming our First Amended Joint Plan of Reorganization (the “Amended Plan”) and on March 24, 2010 (the “Effective Date”), we successfully closed on a series of restructuring transactions contemplated by the Amended Plan, and we emerged from Chapter 11 bankruptcy proceedings.

On the Effective Date, and in complete satisfaction of all pre-petition claims: (i) Medley Capital, as agent for Fourth Third, LLC (“Medley”), the holder of approximately $37.5 million of pre-petition senior secured indebtedness, received $5.5 million in cash, a new $9.8 million senior secured four-year term note accruing interest at 10% per annum (adjusted at the effective date to $10.0 million to include legal fees advanced by Medley), and 13,200,000 shares of common stock representing approximately 66% of the common stock of the newly reorganized Company; (ii) Castlerigg PNG Investments, LLC (“Castlerigg”), the holder of approximately $3.2 million of unsecured convertible debt, and the former beneficial owner of approximately sixty (60%) percent of our pre-petition shares, provided $8.325 million to fund the implementation of the Amended Plan (inclusive of $250,000 advanced prior to confirmation), in return for which it received a $5.5 million senior secured four year term note accruing interest at 10% per annum (adjusted at the effective date to $5.65 million to include legal fees advanced by Castlerigg), a $250,000 senior secured short-term note (also included within our Senior Secured Term Loans), and 5,300,000 shares of common stock representing approximately 26.5% of the common stock of the newly reorganized Company; (iii) the holder of a senior secured note of the Company received approximately $72,000 in cash; (iv) former litigants who asserted contract claims against us received certain allowable claims as unsecured creditors and the return of certain equipment which was the subject matter of the litigation; and (v) the holders of approximately $7 million of pre-petition unsecured indebtedness received a pro rata share of a $750,000 creditor fund (based on the percentage of each individual creditor’s allowed general unsecured claim to the total amount of all unsecured allowable claims), a potential recovery of an excise tax refund of up to $450,000 and 1,500,000 shares of stock representing approximately 7.5% of the common stock of the newly reorganized Company.

Results of Operations—Applied Natural Gas Fuels, Inc.

The accompanying financial statements include unaudited consolidated balance sheets as of March 31, 2011 and December 31, 2010, unaudited consolidated statements of operations for the quarter ended March 31, 2011, and predecessor entity unaudited consolidated statements of operations for the quarter ended March 31, 2010. The accompanying financial statements also include unaudited statements of cash flows for the three months ended March 31, 2011 and March 31, 2010 (predecessor entity).

Accounting for Consummation of the Amended Plan

In connection with the consummation of the Amended Plan, we adopted the Fresh Start reporting provisions of ASC 852.10, with respect to our financial reports, which requires us to restate our assets and liabilities to their fair values based upon the provisions of the Amended Plan and/or other valuation data secured by us in conjunction therewith. Under the provisions of ASC 852.10, Fresh Start reporting is not applied until all material conditions of the reorganization plan are satisfied. All material conditions of the Amended Plan were satisfied on the Effective Date. Due to the proximity of the Effective Date to the end of our 1st quarter of 2010, and the relative immateriality of operations during the intervening period, we applied Fresh Start reporting effective as of March 31, 2010. All Fresh Start adjustments and reorganization adjustments and gains and losses are reflected in our financial statements as of and for the quarter ended as of March 31, 2010.

In connection with the Amended Plan, we engaged a valuation firm to provide management with an estimate of the fair market value of our assets. This report was used as the basis for adjusting the carrying values of our property, plant, and equipment as of December 31, 2009 (see Note 5 to the unaudited consolidated financial statements). Other Fresh Start adjustments were made effective as of March 31, 2010 (see Note 2 to the unaudited consolidated financial statements).

Under the provisions of ASC 852.10, we are considered a different reporting entity effective on and after application of Fresh Start reporting. As such, references in the financial statements to the “predecessor entity” refer to the Company prior to March 31, 2010. Due to the different basis of accounting utilized by the predecessor entity, the financial statements of such predecessor entity are not necessarily considered comparable.

Three Months Ended March 31, 2011 compared to Predecessor Entity Three Months Ended March 31, 2010 (amounts in thousands):

				Predecessor Entity
	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
Statement of Operations Data
Revenue	$	5,880		$	5,709
Production costs		3,629			4,094
Compensation		665			453
Other selling, general, and administrative		838			695
Depreciation		429			628
Income (loss) from operations		319			(161	)
Interest expense, net		(599	)		(96	)
Reorganization items		48			18,356
Net Income (loss)	$	(232	)	$	18,099

Revenue. Total revenue for the three months ended March 31, 2011 reflected an increase of $171,000, or approximately 3%, from $5.7 million in the three months ended March 31, 2010. This increase is attributable to an increase in the volume of LNG gallons sold, but offset slightly by a decrease in the average price of LNG sold. The volume of LNG gallons sold to customers was 5.9 million gallons in the three months ended March 31, 2011 compared to 5.1 million gallons in the three months ended March 31, 2010, an increase of 16%. The average price per gallon of LNG sold declined by 10% in the period ended March 31, 2011 compared to the comparable period of 2010 due primarily to a general decline in the average price of natural gas. Average natural gas prices declined approximately 27%. Virtually all of our customer contracts re-price on a monthly basis in conjunction with certain natural gas price indexes. Declines in the average price of LNG sold were partially offset by the receipt in the first quarter 2011 of certain Federal excise tax credits, and by contractual price increases.

Production Costs. Production costs include the cost of natural gas, transportation charges, purchasing and receiving costs, and terminal fees for storage and loading. Production costs exclude depreciation, amortization, and compensation related to the production of LNG. Production costs in the three months ended March 31, 2011 reflected a decrease of $465,000, or 11%, as compared to the three months ended March 31, 2010. This decrease is attributable primarily to the 27% decrease in the cost of natural gas, but offset by an increase in the volume of LNG sold.

Compensation Expenses. Compensation expense for the three months ended March 31, 2011 reflected an increase of $212,000 from the amount incurred for the three months ended March 31, 2010, which reflects non-cash stock compensation expenses of $114,000, and slightly higher employee costs and head count.

Other Selling, General, & Administrative Expenses. Other selling, general, and administrative expenses include repairs and maintenance, field operating expenses, office expenses, insurance, professional services, travel expenses, and other miscellaneous expenses. Other selling, general, and administrative expenses for the three months ended March 31, 2011 reflected an increase of approximately $143,000 from the amount incurred for the three months ended March 31, 2010, primarily related to increased professional fees.

Interest Expenses. As of the Effective Date, the Company commenced paying interest expense on all structured debt that survived the reorganization. Prior to that date, the Company paid interest expense only on it working capital facility.

Liquidity and Capital Resources

Net cash provided by operating activities during the three months ended March 31, 2011 was approximately $516,000, compared to net cash used by operating activities of $718,000 during the three months ended March 31, 2010. Cash items provided by operating activities during the three months ended March 31, 2011 were generally stronger than the comparable period of the prior year primarily as a result of an improvement in operating results due to an increase in LNG gallons sold and the margins related to such sales. One item that contributed to cash provided by operations included $427,000 of interest expense that was paid in kind, and therefore capitalized as part of our long term debt.

Effective with the second quarter of 2011, we will be required to pay interest that accrues on all of our long term debt in cash. Two operating items that consumed cash included an increase in accounts receivable, due primarily to sales growth, and a decrease in accounts payable. These two items were offset by a decrease in prepaid and other assets of $357,000. Much of the cash consumed in operations during the three months ended March 31, 2010 related to the funding of the reorganization plan and expenses. Management believes that operating activities have stabilized and that future operations should result in positive cash flow provided by operating activities.

Net cash used in investing activities during the three months ended March 31, 2011 was $565,000, including a $500,000 restricted cash balance required by the terms of the Amendment #1 financing and repairs and modifications at the Company’s Topock LNG production facility and one of Fleet Star’s refueling facilities. The nature of the LNG Plant is such that continued annual capital investments will be required in order to maintain the plant at peak operating performance. Management estimates that such annual expenditures will continue to fall in the annual range of $500,000 to $1,000,000.

Cash flow from financing activities during the three months ended March 31, 2011 related to increases in the Company’s debt instruments, and in particular proceeds derived from Amendment #1 to the Company’s Senior Secured Credit Agreement, and the replacement of the Company’s Accounts Receivable line of credit.

Henceforth, the Company's primary sources of liquidity are expected to include cash flows from operations, existing cash and cash equivalents, and borrowings on its line of credit. Our liquidity and results of operations will, for the foreseeable future, be affected by our operations, our level of fixed and variable indebtedness, and future payment commitments under our Amended Plan. Our cash flow will also be adversely affected commencing in April 2011 as the Company will be required in the 2nd quarter of 2011 to start paying cash interest payments on its Senior Secured Term Loans (see below). The payments will be approximately $605,000 per quarter.

The Company currently expects that increased cash flow derived from anticipated growth in revenues over the course of the next few months will be sufficient to allow the Company to meet its interest obligations. However, there is no assurance that such growth in revenues will actually materialize or be sustainable, and therefore no assurance that the Company will have sufficient cash resources to meet these interest payment requirements.

The Company’s cash flow and liquidity may also be adversely affected by certain unscheduled maintenance and repairs to its Plant. Plant maintenance and repairs are generally scheduled and anticipated as part of the Company’s business model. However, to the extent such repairs and maintenance occur on an unscheduled basis, such expenditures can adversely affect our cash flow to the extent of the actual out-of-pocket repair costs incurred, and to the extent of lost customer revenue, and in some limited instances, through penalty features incorporated within our customer contracts. Furthermore, our margins may be affected during these brief periods if we are required to supply our customers with higher-cost LNG acquired from other sources. Unexpected and unscheduled maintenance and repair issues could result in an extended plant shutdown that could have a material adverse effect on our business operations and liquidity.

Current Debt Obligations

Senior Secured Term Loans

Pursuant to a Guarantee and Collateral Agreement (the “Collateral Agreement”), the obligations under the Senior Secured Credit Agreement are guaranteed by all of our subsidiaries (the “Guarantors”) and are secured by a first priority security interest in substantially all of our assets and the assets of the Guarantors, now existing or hereafter acquired (excluding accounts receivable and inventory of certain of our subsidiaries - collectively, the “Accounts Receivable Line of Credit Collateral” as to which the Lender of such credit has a senior secured interest), and a second priority security interest in the Accounts Receivable Line of Credit Collateral. In addition, the Senior Secured Credit Agreement (including the Castlerigg Short Term Loan) are secured by a first priority security interest and a second priority security interest, respectively, in our existing fleet of twenty-four (24) cryogenic trailers. The obligations under the Senior Secured Credit Agreement are also secured by a pledge of the equity interests of the subsidiaries of the Company and each Guarantor, subject to certain exceptions, including exceptions for equity interests in foreign subsidiaries.

The Senior Secured Credit Agreement contains a variety of events of default, which are customary for transactions of this type, including the following events:

failure to pay amounts due under the Senior Secured Credit Agreement;

a breach of any representation or warranty contained in the Senior Secured Credit Agreement or related documents;

failure to comply with or perform certain covenants under the Senior Secured Credit Agreement;

the insolvency of the Company or any of our subsidiaries;

a termination or default under our Intercreditor Agreement with the Lender of the Accounts Receivable Line of Credit; or

any change of control of our outstanding shares.

fixed charge coverage ratio of 1.0:1 for the quarter ended December 31, 2011, and 1.10:1 for all subsequent quarters;

Capital expenditures are limited to $750,000 during 2010; and limited to $1.0 million for years thereafter, except that any capital assets that are contemplated to be acquired using the proceeds derived from the additional debt provided by Amendment # 1 are to be excluded from the calculation.

Accounts Receivable Line of Credit

Other Long Term Liabilities

Other liabilities include certain priority tax payments in the approximate amount of $513,000, payable in 60 equal monthly installments commencing May 2010, with interest at approximately 7% per annum.

Outlook

Our plan of operation for the next twelve months is to pursue a growth strategy intended to take advantage of the increasing demand for alternative fuel sources, and in particular LNG and LCNG. We intend to execute on our planned growth strategy by expanding the geographic and operational scope of our business operations, establishing additional retail fueling stations, increasing our LNG storage and production capacity, and expanding our sales and marketing efforts. Based upon existing revenues and net operating margins, we believe that cash flows generated from operations, existing cash, and cash equivalents and borrowing capacity under our revolving credit facility, should be sufficient to meet the expected requirements of our operations, as presently constituted. However, in the absence of an organic increase in our business, our current resources may not be sufficient to finance our intended growth strategy or cover, among others, unexpected increases in operating expenses, or unscheduled plant maintenance and repairs. As a result, subject to certain consents that may be required under our Senior Secured Term Loans and our Shareholders Agreement, we will need to raise additional capital in the near term as we attempt to supplement our working capital, cover unanticipated expenses, invest in capital equipment, acquire increased LNG production capacity and finance the overall growth of our business. This may take the form of either debt-based financing, or the sale of equity securities, although there is no assurances that such capital can be secured. If we cannot obtain funds on terms favorable to us, we may need to delay, scale back, or eliminate plans for expansion.

Our ability to obtain needed financing may be impaired by such factors as the capital markets (both generally and in the natural gas industry in particular), our status as a newly reorganized enterprise without a significant demonstrated operating history, the location of our primary assets and prices of natural gas on the commodities markets (which could impact the amount of financing available to us), the loss of key management and our need to obtain consents from Medley and Castlerigg under the Senior Secured Term Loans and Shareholders’ Agreement. Further, if oil and/or natural gas prices on the commodities markets decrease, then our revenues will likely decrease, and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we may be required to cease our operations.

We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely impact our financial condition.

Critical Accounting Policies and Estimates

For information regarding our critical accounting policies, please refer to the discussion provided in Item 1 of Part 1 of this report under the caption “Note 3 – Significant Accounting Policies.”

Off-Balance Sheet Arrangements

As of March 31, 2011 and December 31, 2010, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities that had been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Principal Accounting Officer evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2011, the end of the period covered by this report, as required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon management’s evaluation, our current Chief Executive Officer and the Principal Accounting Officer concluded that, as of March 31, 2011, our disclosure controls and procedures were designed at the reasonable assurance level and were effective at the reasonable assurance level to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our current Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

This conclusion was based, in part, upon the nature of our business, which is characterized by a relatively low volume of routine and non-complex transactions. The design of our disclosure controls and procedures includes the scrutiny by the Chief Executive Officer, Principal Accounting Officer and other key employees throughout the reporting period, of operating results in the context of their comprehensive knowledge of operations, contracts, involvement in the management of the business and understanding of the impact of disclosures. Such controls and procedures are supplemented and enhanced by internal review and closing procedures that were implemented as part of the year-end financial statement preparation process. We believe that the scrutiny of management and other key personnel provides an adequate compensating control for deficiencies in internal controls, if any, elsewhere in the process of financial reporting.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations in Control Systems

Our controls and procedures were designed at the reasonable assurance level. However, because of inherent limitations, any system of controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired objectives of the control system. In addition, the design of a control system must reflect the fact that there are resource constraints, and management must apply its judgment in evaluating the benefits of controls relative to their costs. Further, no evaluation of controls and procedures can provide absolute assurance that all errors, control issues and instances of fraud will be prevented or detected. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls and procedures is also based in part on certain assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended March 31, 2011, we issued options and warrants to purchase 137,500 shares of common stock as follows:

On February 1, 2011, we issued to an employee, an option to purchase 100,000 shares of common stock. The options have an exercise price of $0.58 per share and terminate ten (10) years from the date of grant. The options vest in equal quarterly installments over a period of five (5) years.

On February 8, 2011, we issued to an investment banking firm, a warrant to purchase 37,500 shares of common stock. These warrants were issued in consideration for services provided in connection with a revolving credit facility we secured during February 2011. The warrants have an exercise price of $1.00 per share, terminate five (5) years from the date of grant, and carry certain piggyback registration rights.

The foregoing securities were issued in a private placement transaction pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.

Item 6. Exhibits

The following documents are filed as part of this report:

Exhibit No.		Document Description
	31.1	Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification by Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification by Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		APPLIED NATURAL GAS FUELS, INC.


Dated: May 13, 2011	By:	/s/ Cem Hacioglu
		Cem Hacioglu
		Chief Executive Officer

		APPLIED NATURAL GAS FUELS, INC.


Dated: May 13, 2011	By:	/s/ A. Bradley Gabbard
		A. Bradley Gabbard
		Chief Financial Officer and Principal Accounting Officer

PNG VENTURES INC - FORM 10-Q - May 13, 2011

Attached files

PNG VENTURES INC Reports