Item 1. Description of Business.
Overview
In this Report, when we use the terms the “Company,”“the Registrant,” “we,” “us,” and “our,” unless otherwise indicated or the context otherwise requires, we are referring to Applied Natural Gas Fuels, Inc., and its consolidated subsidiaries. A substantial portion of the Company’s operations are conducted through subsidiaries controlled by Applied Natural Gas Fuels, Inc.
Organizational History
We were incorporated in the State of Nevada on June 23, 1995, as Telecommunications Technologies, Ltd. (“TTL”) and subsequently changed our name to “PNG Ventures, Inc.” in February 1998. With the exception of certain short-term ventures that were subsequently abandoned, we had little or no material operations from inception through June 30, 2008. During that period, we were a development-stage business seeking to acquire or develop one or more profitable business opportunities.
We entered into the business of the production, distribution, and sale of liquefied natural gas (“LNG”) upon the June 30, 2008 acquisition of New Earth LNG, LLC (“New ELNG”) pursuant to a share exchange transaction (the “Share Exchange”) with Evolution Fuels, Inc., formerly known as “Earth Biofuels, Inc.” (“EBOF”). After giving effect to the Share Exchange, (i) New ELNG became our wholly-owned subsidiary, and (ii) we succeeded to its Arizona-based liquefied natural gas operations. Through its operating subsidiaries, including Applied LNG Technologies USA, LLC and Arizona LNG, LLC, New ELNG was a provider of LNG to transportation, industrial and municipal markets in the western United States and northern Mexico. As a result of the acquisition, we acquired a liquefied natural gas production facility in Topock, Arizona and its related distribution and sales businesses.
In all, the subsidiaries of New ELNG, which are now owned by us as a result of the Share Exchange, include Arizona LNG, LLC, a Nevada limited liability company (“Arizona LNG”), which owns the Topock, Arizona liquefaction plant, Applied LNG Technologies, LLC, a Delaware limited liability company (“Applied LNG”) and, the subsidiaries of Applied LNG, and Fleet Star, Inc., a Delaware corporation (“Fleet Star”).
Completion of Voluntary Reorganization under Chapter 11
Following the Share Exchange, 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 Share Exchange. In the Share Exchange, we also inherited certain litigation claims involving our predecessor, 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 closed on a series of restructuring transactions contemplated by the Amended Plan and emerged from Chapter 11 bankruptcy
proceedings. Through the Bankruptcy process, we were able to successfully accomplish certain strategic restructuring goals, including:
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Secure from Castlerigg PNG Investments, LLC (“Castlerigg”), $8,325,000 of financing (inclusive of $250,000 advanced prior to the Effective Date) to fund implementation of the Amended Plan, for a $5.5 million senior secured four year term loan, a $250,000 senior secured short-term note; and 5,300,000 shares of our newly reorganized Company (representing approximately 26.5% of our outstanding shares);
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Restructure and compromise the $37.5 million pre-petition senior debt facility owed to Medley Capital as agent for Fourth Third, LLC (“Medley”), for: $5.5 million of our plan funding; a new $9.8 million senior secured four year term loan and 13,200,000 shares of our newly reorganized Company (representing approximately 66% of our outstanding shares);
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Compromise approximately $7 million of pre-petition unsecured creditors claims for a $750,000 unsecured creditor trust fund, the recovery of excise tax refunds of up to $450,000 and 1,500,000 shares of our newly reorganized Company (representing approximately 7.5% of our outstanding shares);
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Settle outstanding litigation in consideration for the return of certain equipment and the awarding of certain allowable claims within the unsecured creditor trust fund;
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Eliminate certain onerous and non-economic contracts we inherited as part of the Share Exchange transaction; and
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Changing the name of our Company to “Applied Natural Gas Fuels, Inc.” to more closely align our name to our principal line of business.
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.
Current Business
We are in the business of the production, distribution, and sale of LNG. Through our operating subsidiaries, we process and sell LNG to transportation, industrial and municipal markets in the western United States and northern Mexico.
We process LNG in our liquefaction processing plant (the “Plant”) located in Topock, AZ, approximately one mile east of Arizona’s border with California. Our Plant processes pipeline quality natural gas through various purification applications, 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. In its liquefied state, LNG occupies approximately 1/600th of the volume of natural gas and is easily stored and transported.
We purchase pipeline quality natural gas from one main supplier, who transports the natural gas to our plant site via an El Paso Natural Gas pipeline immediately adjacent to our Plant. Our Plant is capable of producing approximately 100,000 gallons of vehicle-grade LNG per day (approximately 59,000 gallons per day of diesel gallon equivalent). We own a fleet of 24 specialty cryogenic tank trailers, which are used to transport LNG from our plant site to customer sites. Although we produce LNG at our liquefaction plant in Arizona, we also purchase, from time to time, other LNG supplies from third parties, typically on spot contracts.
We believe that both LNG and compressed natural gas (“CNG”) will become more accepted as vehicle fuel alternatives to diesel and gasoline. Natural gas in either form is a cheaper and a substantially cleaner burning fuel compared to gasoline or diesel. In addition, natural gas is an abundant, domestic fuel. Virtually all natural gas currently used in the United States is sourced domestically, and to a lesser extent, from Canada.
While certain specialty equipment, such as pressurized storage tanks and fuel delivery systems, are required on natural gas powered vehicles, almost any vehicle can be manufactured or modified to run on natural gas. CNG is generally used in automobiles and light to medium-duty vehicles and trucks as an alternative to gasoline and diesel. LNG is generally used in trucks and other medium to heavy-duty vehicles as an alternative to diesel, typically where a vehicle must carry a greater volume of fuel. LNG is approximately 2.5 times as dense as CNG, thereby allowing a vehicle to carry a greater volume of fuel in a similar volume of onboard tank storage.
CNG is produced by compressing pipeline quality natural gas to a density of approximately 40% of LNG. As CNG, it remains in a gaseous state, and is stored in high-pressure tanks, usually at operating pressures of 4,000 to 5,000 psi. While we do not typically focus our efforts on manufacturing CNG, we do produce some CNG by vaporizing LNG under controlled pressure processes that allow LNG to be vaporized to CNG, where it is then transferred via fueling apparatus to CNG powered vehicles. We utilize this process at our Fleet Star retail fueling stations, and at certain customer owned refueling sites.
In addition to the Plant and 24 cryogenic tank trailers, we also own one public LNG fueling station from which we sell LNG and CNG at retail to the public. This station, branded as “Fleet Star,” is located near the Ontario Airport in Ontario, California. We also operate one other public fueling station in Barstow, California.
The Company’s principal executive offices are located at 31111 Agoura Road, Suite 208, Westlake Village, California 91361.
Competition
The market for vehicular fuels is highly competitive. The major competition for LNG and other alternative fuels is gasoline and diesel, the production, distribution, and sale of which are dominated by large integrated oil companies. The vast majority of vehicles in the United States and Canada are powered by gasoline or diesel. There is no assurance that we can compete effectively against other fuels, or current competitors, or other significant competitors that may enter markets currently served by the Company.
Presently, the Company’s primary competitor in its current markets is Clean Energy Fuels Corp. Potential entrants to the market for natural gas vehicle fuels include large integrated oil companies, large LNG producers, transporters and service companies, other retail gasoline and diesel marketers, natural gas utility companies, and other companies involved in industrial gases and other cryogenic processes and products. The integrated oil companies produce and sell crude oil and natural gas, and refine crude oil into gasoline and diesel. They and other retail gasoline marketers own and franchise retail stations which sell gasoline and diesel fuel.
It is possible that any of these competitors and/or other competitors who may enter the market in the future, may create product and service offerings that compete directly with us. Many of these companies may have far greater financial and other resources and brand recognition in the marketplace than we have. Entry by these companies into the market for natural gas vehicle fuels may reduce our profit margins, limit our customer base, and restrict our expansion opportunities.
Other alternative fuels compete with natural gas in the retail market and may compete in the fleet market in the future. Suppliers of ethanol, biodiesel, and hydrogen, as well as providers of hybrid or electric vehicles, may compete with us for fleet customers in our target markets. Many of these companies benefit, as we do, from U.S. state and federal government incentives that allow them to provide fuel at significant discounts to gasoline or diesel prices.
LNG currently is supplied to the California, Arizona, Nevada, and northern Mexico markets, primarily by three LNG plants-Applied LNG’s Topock plant, with a maximum capacity of 100,000 gpd, and a plant owned by Clean Energy Fuels Corp. located in Boron, California, with a current maximum capacity believed to be approximately 160,000 gpd, and a plant located in Ehrenberg, AZ with a current daily capacity believed to be in the range of approximately 50,000 gpd. We understand that the production of the Ehrenberg plant is dedicated to Clean Energy under a take or pay contract. In addition to these plants, demand in our market area is also supplied on occasion by third party LNG plants located in Texas, Kansas, Wyoming, and Colorado. The aggregate capacity available from these plants varies and is estimated to be in the range of 200,000 gpd. Because the trucking costs associated with transporting LNG from plants located in the central U.S., to western states is substantial, such sources are used only when absolutely necessary to meet customer demands.
Government Regulation and Environmental Matters
Our business and operations are affected by various federal, state, and local laws, rules, regulations, and authorities. While to date, our compliance with those requirements has not materially adversely affected our business, financial condition, or results of operations, we cannot provide any assurance that new laws and regulations will not materially and/or adversely affect us in the future.
While various federal, state, and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect our business, our financial condition and results of operations have not been materially adversely affected by environmental laws and regulations. We believe we are in material compliance with the environmental laws and regulations to which we are subject. We do not anticipate that we will be required in the near future to make material capital expenditures due to these environmental laws and regulations. However, because environmental laws and regulations are frequently changed and may be expanded, we are unable to provide any assurance that the cost of compliance in the future will not be material to us.
Certain of the regulations that significantly impact our operations are described below.
CNG and LNG stations - To construct a CNG or LNG fueling station, we must obtain a facility permit from the local fire department and either we or a third party contractor must be licensed as a general engineering contractor. The installation of each CNG and LNG fueling station must be in accordance with federal, state, and local regulations pertaining to station design, environmental health, accidental release prevention, above-ground storage tanks, hazardous waste, and hazardous materials. We are also required to register with certain state agencies as a retailer/wholesaler of CNG and LNG.
Transfer of LNG - Federal Safety Standards require each transfer of LNG to be conducted in accordance with specific written safety procedures. These procedures must be in place at each location or place of transfer and must include provisions for personnel to be in constant attendance during all LNG transfer operations.
LNG liquefaction plants - To build and operate LNG liquefaction plants, we must apply for facility permits or licenses to address many factors, including storm water or wastewater discharges, waste handling and air emissions related to production activities or equipment operations. The construction of LNG plants must also be approved by local planning boards and fire departments.
Vehicle Conversion - Vehicles that are converted to run on natural gas are subject to EPA emission requirements and certifications, federal vehicle safety regulations and, in some cases, such as California, state emission requirements and certifications.
Clean Air Regulations - The Federal Clean Air Act provides a comprehensive framework for air quality regulation in the United States. Individual states have also adopted diesel fuel standards intended to reduce emissions. Texas and California have both adopted low-NOx diesel programs. Additionally, many state implementation plans and some air quality management plans include vehicle fleet requirements specifying the use of low emission or alternative fuels in government vehicles.
Limitation on greenhouse emissions -The Global Warming Solutions Act of 2006, which provides for a limitation on greenhouse-gas emissions throughout California. This requires a carbon reduction in gasoline and diesel fuels sold in the State of California by 2020, therefore, encouraging other low carbon transportation fuels to enter the marketplace by allowing them to generate carbon credits that can be sold to noncompliant regulated parties starting January 1, 2011. Under this regulation, CNG, LNG, and biomethane are identified as “compliant fuels” through 2020 as their carbon benefits have been verified to far exceed the regulation's 2020 goal of a 10% reduction.
Low Carbon Fuel Standards - Governors representing the eleven states that make up the Regional Greenhouse Gas Initiative have signed a memorandum of understanding to develop their own Low Carbon Fuel Standard by year 2012. Additional regulations that could stimulate growth in our market include AB 118, which Governor Schwarzenegger signed into law in 2007 in California and that provides approximately $210 million per year for seven years to fund alternative fuel programs, including CNG, LNG and biogas, aimed at reducing greenhouse-gas emissions and improving air quality; and AB 1007, the State Alternative Fuels Plan (that was adopted by the California Energy Commission in 2007) establishes a goal of displacing 26% of California's petroleum fuel use by 2022 with alternative fuels, including natural gas.
Tax Incentives and Grant Programs
U.S. federal and state government tax incentives and grant programs are available to help fleet operators reduce the cost of acquiring and operating a natural gas vehicle fleet. Incentives may be available to offset the cost of acquiring natural gas vehicles or converting vehicles to use natural gas. Incentives are available to offset the cost of constructing natural gas fueling stations and selling CNG or LNG. The vehicle and fuel tax rebates and credits are key incentives designed to enhance the cost-effectiveness of CNG and LNG as vehicle fuels throughout the United States and are described below.
Fuel credits. Under the Volumetric Excise Tax Credit ("VETC" or “fuel tax credit”) for alternative fuels, sellers of CNG or LNG are entitled to receive a credit of $0.50 per gasoline gallon equivalent of CNG and $0.50 per liquid gallon of LNG sold for vehicle fuel use after September 30, 2006 and before January 1, 2012. Based on the service relationship we have with our customers, either we or our customers are able to claim the credit. These tax credits for CNG and LNG lowered the cost of natural gas vehicle fuels to sellers, and the savings could be passed on to the customer if the seller elected to do so. These credits are scheduled to expire on December 31, 2011.
Legislation has been introduced, but not yet enacted, that would reinstate and extend the fuel tax credit, as well as potentially provide other incentives for the purchase of natural gas vehicles.
Raw Materials
The raw material (feedstock supply) for our Topock plant is pipeline quality natural gas, which generally is widely available and easily obtained on the open market. We purchase natural gas from one principal supplier; however, the only means of transporting purchased gas to our plant is via a trunk pipeline adjacent to our plant that is operated by El Paso Natural Gas. Any extended disruption in the operations of this trunk pipeline, or our relationship with its operator, could have a material adverse effect upon our business.
Sales and Marketing
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, who typically own and operate their fueling stations. We also sell 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 Applied LNG’s efforts for over ten years. 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 LNG.
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 generally known in the marketplace as “Applied LNG” or “ALT”, and as “FleetStar”.
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.
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.
The following table presents the contribution to sales by the Company’s largest customers as shown in the respective periods:
All other customers individually contributed less than 10% to total sales for each period. Our contract with the City of Phoenix expired effective July 1, 2009
Employees
As of December 31, 2010, we had 24 full-time employees, respectively. None of our employees are represented by a labor union, and the Company considers its employee relations to be good.
Available Information
Our internet address is www.altlng.com. Currently, reports on Forms 10-K, 10-Q, and 8-K are not available through our website; however, we will email free electronic copies of such reports upon request.
Item 1A.
Item 1A.
Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in addition to other information in this report before purchasing our common stock. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company, our industry, and our stock. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.
Risks Relating to our Business
We have experienced net losses, and we may not be profitable in the future.
We experienced a net loss of $2.8 million for the nine month period ended December 31, 2010 and may not generate profits in the near term, if at all. As of December 31, 2010, we are encumbered by secured, interest bearing debts in the amount of $18.5 million. This was increased to $23.5 million in March 2011. As a result, our operations will continue to be burdened by significant interest expenses, which will reduce our cash flow and make it more difficult for the Company to realize profits. The revenue and operating results of our business may vary significantly from quarter-to-quarter due to a number of factors. In future quarters, operating results could be adversely effected based upon a number of factors including:
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the ability to quickly bring new production capacity on stream or access alternative supplies;
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the fluctuating prices of natural gas;
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differential in prices between natural gas and other fuel alternatives such as diesel and gasoline;
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availability and cost of transportation resources; and
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increases in interest rates
Our Senior Credit Facility Contains Certain Restrictions.
On the Effective Date, we entered into a senior credit facility with Medley, as lender and agent, and Castlerigg, as lender (the “Senior Credit Facility”). As of December 31, 2010, debt outstanding under the Senior Credit Facility was $17.0 million, which matures on March 24, 2014. In March 2011, the Senior Credit Facility was amended (Amendment # 1) which resulted in an increase in the debt of $5.0 million. The additional debt is also due on March 24, 2014 and bears interest at the rate of 13% per annum. See “Liquidity and Capital Resources” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Our Senior Credit Facility contains covenants that will 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 Credit Facility also contains certain mandatory payment provisions, including the application of the proceeds from the sale of any assets or new equity (commencing after the first anniversary thereof), and acceleration of the debt in the event of a change in control.
The Senior Credit Facility contains a variety of events of default, which are typical for transactions of this type, including the following events:
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failure to pay amounts due under the Senior Credit Facility;
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a breach of any representation or warranty contained in the Senior Credit Facility or related documents;
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failure to comply with or perform certain covenants under the Senior Credit Facility;
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the insolvency of us or our subsidiaries;
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a termination or default under our Intercreditor Agreement with Greenfield; or
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any change of control of our outstanding shares.
The Senior Credit Facility also contains certain financial covenants (as amended by Amendment # 1) as summarized as follows:
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fixed charge coverage ratio of 1.0:1 for the quarter ended December 31, 2011, and 1.10:1 for all subsequent quarters;
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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
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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.
The restrictions within our Senior Credit Facility could adversely affect us by limiting our ability to, among other things, raise additional debt or equity financing, requiring prepayment upon certain equity raises, and requiring that we comply with certain financial covenants. While our internal forecasts project that we will be able to comply with the financial covenants, our ability to comply with these covenants may be affected by events beyond our control, and any material deviation from our forecasts could require us to seek waivers or amendments of covenants or to secure alternative sources of financing. If we are unable to comply with the terms of our Senior Credit Facility, or if we fail to generate sufficient cash flow from operations, or if it becomes necessary to obtain such waivers, amendments, or alternative financing sources, it could adversely impact our business, results of operations and financial condition.
We may need to enhance operations or raise additional capital once debt service under our Senior Credit Facility commences.
Our Senior Credit Facility provided for a payment-in-kind interest payment provision during the first annual period following March 24, 2010. This allowed us to accrue and add interest to the loan balance during this period.
However, after the first anniversary date, all interest payments are required to be paid in cash on a quarterly basis in arrears. Our ability to maintain positive cash flow may be challenged commencing with the third quarter of 2011, when we are scheduled to begin making interest payments under the Senior Credit Facility in the approximate amount of $604,000 each quarter. In order to adequately cover our scheduled debt service payments in 2011 and beyond, we will have either to improve operating cash flow or secure proceeds from one or more financing transactions, as to which there can be no assurances.
Our profitability is dependent upon our ability to purchase natural gas supply at prices that are low enough to allow us to convert and sell the liquefied natural gas to our customers for a price in excess of our total costs of production and sale. Natural gas is a commodity subject to significant volatility and uncertainty.
Our business is highly dependent on natural gas prices, which are subject to significant volatility and uncertainty, and on the availability of pipeline quality natural gas as the primary raw material for our plant. In the recent past, the price of natural gas has been volatile, and this volatility may continue. As a result of this volatility, our results could fluctuate substantially. We may experience periods during which the prices of our products decline and the costs of our raw materials increase, which in turn may result in operating losses and adversely affect our financial condition. We may attempt to offset a portion of the effects of such fluctuations by entering into forward contracts to supply natural gas or other items or by engaging in transactions involving exchange-traded futures contracts, but these activities involve substantial costs, substantial risks and may be ineffective to mitigate these fluctuations. If a substantial imbalance in risk management occurs, our results of operations, financial conditions and business outlook could be negatively impacted. Our ability to operate at a profit is largely dependent on market prices for LNG.
If the price of LNG does not remain sufficiently below the prices of gasoline and diesel, potential fleet customers will have less incentive to purchase natural gas vehicles or convert their fleets to LNG, which would decrease demand for LNG and limit our growth.
Market interest in utilizing LNG as a vehicle fuel is driven, in part, by relative prices for oil, gasoline and diesel fuel. As the prices for oil, gasoline and diesel fuel increase, the market interest in utilizing LNG as a vehicle fuel increases. However, the prices for such fuels have fluctuated significantly in the last several years, and continue to fluctuate. Although the current market price of LNG provides an attractive value proposition, a material decrease in the price of oil, gasoline and diesel fuel relative to LNG, could slow the growth of our business and negatively impact our financial results.
Natural gas vehicles cost more than comparable gasoline or diesel powered vehicles because converting or equipping a vehicle to use natural gas adds to its base cost. If the price of LNG does not remain sufficiently below the prices of gasoline or diesel, fleet operators may be unable to recover the additional costs of acquiring or converting to natural gas vehicles in a timely manner, and they may choose not to use natural gas vehicles. Recent volatility in oil and gasoline prices demonstrates that it is difficult to predict future transportation fuel costs. Changes in the price of oil, diesel fuel, and gasoline may reduce the economic advantages that our existing or potential customers may realize by using less expensive LNG fuel as an alternative to gasoline or diesel. Continuing volatility and uncertainty about fuel prices, combined with higher costs for natural gas vehicles, may cause potential customers to delay or reject converting their fleets to run on natural gas. In that event, our growth would be slowed and our business would suffer.
We depend upon one primary source for transportation of our natural gas feedstock supply to our plant.
Pipeline quality, natural gas feedstock for our plant is taken directly from an adjacent, natural gas trunk pipeline operated by El Paso Natural Gas. Any extended disruption in the operations of this pipeline, or our relationship with the operator, could have a material adverse effect on our business. Our plant site is leased from El Paso through December 14, 2020. Failure to maintain this lease agreement in good standing could have a material adverse effect on our business.
Our business is dependent upon the operation of a single natural gas liquefaction plant.
Our ability to supply our customers with LNG is dependent primarily upon the continuing availability of supply of LNG produced by our Topock, AZ facility. Our plant is comprised of numerous, expensive capital components that may fail, require replacement, or substantial and/or extraordinary maintenance. Such occurrences could result in the requirement to spend substantial capital, which could result in a material adverse effect on liquidity and financial performance. These events could remove the plant from service for lengthy periods, which could also have a material adverse effect on our business. In the second quarter of 2010, our cash flow and liquidity were adversely affected by certain unscheduled maintenance and repairs to our plant. Any material interruption in the operation of the plant could limit the supply of LNG that we have available to supply customer contracts, and therefore could have a material adverse affect on our business.
Our ability to supply LNG to new and existing customers is restricted by limited production of LNG and by our ability to source LNG near our target markets, without interruption.
Production of LNG in the United States is fragmented. LNG is produced at a variety of smaller natural gas plants around the United States as well as at larger plants where it is a byproduct of their primary production process. It may become difficult for us to obtain additional LNG from sources other than our plant without interruption and near our current or target markets at competitive prices. If our LNG liquefaction plant, or any of those from which we purchase LNG, are damaged by severe weather, earthquake, terrorist attack, or other natural disaster, or otherwise experiences prolonged downtime, our LNG supply will be restricted. If we are unable to supply enough of our own LNG or purchase it from third parties to meet existing customer demand, we may be liable to our customers for penalties. We may be at a competitive disadvantage with respect to our ability to purchase sufficient supplies of natural gas relative to our competition, which could offer us competition or take advantage of economic bargains from suppliers that may be unavailable to us. An LNG supply interruption would also limit our ability to expand LNG sales to new customers, which would hinder our growth. Furthermore, because transportation of LNG is relatively expensive, if we are required to supply LNG to our customers from distant locations, our operating margins will decrease on those sales.
The inherent risk of certain of our long-term supply contracts.
In several cases, we are committed to sell LNG to customers pursuant to long-term supply contracts that contain substantial penalties for failure to perform. Circumstances which preclude us from meeting our commitments under these contracts could arise, and could result significant unforeseen expenses that could have a material adverse effect on our business.
If we do not have effective futures contracts in place, increases in natural gas prices may result in sales of fuel at a loss.
During the year ended December 31, 2009, we sold and delivered approximately 15.5% of our total LNG under contracts that provided a fixed price or a price cap to our customers, substantially all of which related to a customer contract that expired effective June 30, 2009. While we had no similar arrangements in 2010, we may, in the future, be required by our customers to enter into fixed price contracts. At any given time, the market price of natural gas may rise and our obligations to sell fuel under any such fixed price contracts may be at prices lower than our fuel purchase or production price if we do not have effective futures contracts in place. This circumstance has in the past and may again in the future compel us to sell fuel at a loss, which would adversely affect our results of operations and financial condition. We may in 2011 selectively purchase futures contracts to hedge our exposure to variability related to our short-term index based and fixed price contracts, if any. However, such contracts may not be available or we may not have sufficient financial resources to secure such contacts. If we are not economically hedged with respect to our fixed price contracts, we will lose money in connection with those contracts during periods in which natural gas prices increase above the prices of natural gas included in our customers' contracts.
A decline in the value of our futures contracts may result in margin calls that would adversely impact our liquidity.
While we currently have no future contracts in place, if we secure future contracts at a later date, we will be required to maintain a margin account to cover potential losses caused by natural gas price fluctuations. Futures contracts are valued daily, and if our contracts are in loss positions at the end of a trading day, our broker will transfer the amount of the losses from our margin account to a clearinghouse. If at any time the funds in our margin account drop below a specified maintenance level, our broker will issue a margin call that requires us to restore the balance. Payments we make to satisfy margin calls will reduce our cash reserves, adversely impact our liquidity and may also adversely impact our ability to expand our business. Moreover, if we are unable to satisfy the margin calls related to our futures contracts, our broker may sell these contracts to restore the margin requirement at a substantial loss to us.
Customer concentration risk related to sales.
As discussed under Item 1 - “Description of Business” above, a significant portion of our sales is concentrated among a small number of customers. There is no assurance that any of these customers will continue to do business with the Company, and the loss of any of such customers could have a material adverse affect on our business. In addition, changes in general economic conditions may affect the ability of various governmental agencies to continue to pursue LNG programs, which could also have a material adverse effect on our business. We may encounter difficulties in implementing our business plan, due to the lower or a lack of estimated market growth and demand.
Commitment to Fund Creditors’ Trust.
As part of the Amended Plan, we committed to pay $450,000 to the creditors trust by no later than December 31, 2011. We expect to be able to fund this payment with certain ongoing and expected excise tax refunds that either we or our customers may receive in the future. While we are confident that we will be able to timely satisfy our commitment through our ongoing refund processes, we are obligated to fund this amount regardless of our success in processing refund claims.
We face numerous risks that are inherent in energy operations.
Our operations are subject to the hazards and risks inherent in the handling, transporting and processing of natural gas, as well as the more unique risks associated with LNG. Such risk include the encountering of unexpected pressures, explosions, fires, natural disasters, blowouts, cratering, and pipeline ruptures, as well as more specific risks related to the handling of extremely frigid liquids such as LNG. Energy related operations, such as ours, involve numerous financial, business, regulatory, environmental, operating and legal risks, the hazards of which could result in personal injuries, loss of life, business interruption environmental damage, and damage to our property and the property of others. To the extent that such risks result in incidents that are uninsurable, or exceed our insurance coverage, such incidents could have a material adverse effect upon our business.
Downturns in general economic and market conditions could materially and adversely affect our business.
The U.S. economy is in a significant downturn in general economic and market conditions, and may ultimately affect our specific customers and markets. As an example, we have recently noticed a trend with some of our transit customers of curtailment of routes and reductions of schedules, that may adversely impact our future business as the requirements for LNG fuel are reduced. Moreover, there is increasing uncertainty in the energy and technology markets attributed to many factors, such as international terrorism and strife, global economic conditions and strong competitive forces. Our future results of operations may experience substantial fluctuations from period to period as a consequence of these factors, and such conditions and other factors affecting capital spending may affect the decision of major customers or potential customers regarding procurement of new vehicles designed to use LNG. An economic downturn coupled with a decline in our revenues could adversely affect our ability meet our financial covenants, capital requirements, support our working capital requirements and growth objectives, raise new capital, maintain our existing financing arrangements, or otherwise adversely affect our business, financial condition, and results of operations. As a result, any economic downturns generally or in our markets specifically, would have a material adverse effect on our business, cash flows, financial condition, and results of operations.
The market in which our business competes is intensely competitive and actions by competitors could render our products and services less competitive, causing revenue and income to decline.
Our ability to compete depends on a number of factors outside of our control, including:
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the prices at which others offer competitive products and services, including aggressive price competition and discounting;
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large swings in the price of oil which will affect the price at which the Company can purchase fuel supplies;
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the ability of competitors to undertake more extensive marketing campaigns;
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the extent, if any, to which competitors develop proprietary tools that improve their ability to compete;
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the extent of competitors’ responsiveness to customer needs; and
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the entry of integrated oil companies and natural gas utilities, which have far greater resources and brand awareness than we have, into the natural gas fuel market, could harm our business and prospects.
We must continually evolve and enhance our services to meet the changing needs of our customers or perspective customers, many of which are municipalities with strict bidding guidelines, or face the possibility of losing future business to competitors.
We are dependent on a limited number of key personnel.
We are dependent on a limited number of key personnel, and the loss of these individuals could harm our competitive position and financial performance. Our future success depends, to a significant extent, on the continued services of our key personnel, including our executive management, plant managers, and other technical personnel. Competition for personnel throughout our industry is intense and we may be unable to retain our current management and staff or attract, integrate or retain other highly qualified personnel in the future. If we do not succeed in retaining our current management and our staff or in attracting and motivating new personnel, plant managers, and technical personnel our business could be materially adversely affected.
Our growth depends in part on environmental regulations and programs mandating the use of cleaner burning fuels.
Our business depends in part on environmental regulations and programs in the United States that promote or mandate the use of cleaner burning fuels, including natural gas for vehicles. In particular, the Ports of Los Angeles and Long Beach have adopted the San Pedro Bay Ports Clean Air Action Plan, which, despite recent legal challenges, outlines a Clean Trucks Program that calls for the replacement of drayage trucks with trucks that meet certain clean truck standards. Furthermore, an extended economic recession may result in the delay, amendment, or waiver of environmental regulations related to the Clean Trucks Program due to the perception that they impose increased costs on the transportation industry that cannot be absorbed in a contracting economy. The delay, repeal, or modification of federal or state regulations or programs that encourage the use of cleaner vehicles could have a detrimental effect on the U.S. natural gas vehicle industry, which in turn, could slow our growth and adversely affect our business.
A reduction in tax and related government incentives for clean burning fuels incentives would increase the cost of natural gas fuel and vehicles for our customers and could significantly reduce our revenue.
Our business depends in part on tax credits, rebates, and similar federal, state, and local government incentives that promote the use of natural gas as a vehicle fuel in the United States. Certain Federal tax credits applicable to the purchase of new natural gas vehicles expired effective December 31, 2010. The federal excise tax credit of $0.50 per liquid gallon of LNG sold for vehicle fuel use, which began on October 1, 2006, is currently scheduled to expire on December 31, 2011. This tax credit program may or may not be renewed by Congress. Based on the service relationship we have with our customers, either we or our customers have been able to claim the credit. The failure to extend the federal excise tax credit for natural gas, or to reinstate federal tax credits for purchases of natural gas vehicles, or the repeal of state tax credits for the purchase of natural gas vehicles or Federal and state credits for the purchase of natural gas fueling equipment, could have a detrimental effect on the natural gas vehicle industry, which, in turn, could adversely affect our business and results of operations. In addition, if grant funds were no longer available under existing government programs, the purchase of or conversion to natural gas vehicles and
station construction could slow and our business and results of operations could be adversely affected. Any reduction in tax revenues associated with an economic recession or slow-down could result in a significant reduction in funds available for government grants that support vehicle conversion and station construction which could impair our ability to grow our business.
The use of natural gas as a vehicle fuel may not become sufficiently accepted for us to expand our business.
To expand our business, we must develop new fleet customers and obtain and fulfill LNG fueling contracts from these customers. We cannot guarantee that we will be able to develop these customers or obtain these fueling contracts. Whether we will be able to expand our customer base will depend on a number of factors, including: the level of acceptance and availability of natural gas vehicles, the growth in our target markets of infrastructure that supports LNG sales and our ability to supply LNG at competitive prices. A decline in oil, diesel, and gasoline prices could result in decreased interest in alternative fuels like LNG. In addition, gasoline and diesel fueling stations and service infrastructure are much more widely available in the United States. For natural gas vehicle fuels to achieve more widespread use in the United States and Canada, they will require the development and supply of more natural gas vehicles and fueling stations. This will require significant continued effort by us, and our industry, as well as government and clean air groups, and we may face resistance from oil and other vehicle fuel companies. If our potential customers are unable to access credit to purchase natural gas vehicles it may make it difficult or impossible for them to invest in natural gas vehicle fleets, which would impair our ability to grow our business. Recent disruptions in the capital markets have materially reduced the availability of debt financing to support the purchase of LNG vehicles and investment in LNG infrastructure.
Truck and engine manufacturers produce very few originally manufactured natural gas vehicles and engines for the U.S. markets, which may restrict our sales.
Limited availability of natural gas vehicles restricts their wide scale introduction and narrows our potential customer base. Currently, original equipment manufacturers produce a small number of natural gas engines and vehicles, and they may not make adequate investments to expand their natural gas engine and vehicle product lines. Manufacturers of medium and heavy-duty vehicles produce only a narrow range and number of natural gas vehicles. The technology utilized in some of the heavy-duty vehicles that run on LNG is also relatively new and has not been previously deployed or used in large numbers of vehicles. As result these vehicles may require servicing and further technology refinements to address performance issues that may occur as vehicles are deployed in large numbers and are operated under strenuous conditions. If potential heavy duty LNG truck purchasers are not satisfied with truck performance, it may delay or impair the growth of our LNG fueling business. Further, North American truck manufacturers are facing significant economic challenges that may make it difficult or impossible for them to introduce new natural gas vehicles in the North American market or continue to manufacture and support the limited number of available natural gas vehicles. Due to the limited supply of natural gas vehicles, our ability to promote natural gas vehicles and our sales may be restricted, even if there is demand.
There are a small number of companies that convert vehicles to operate on natural gas, which may restrict our sales.
Conversion of vehicle engines from gasoline or diesel to natural gas is performed by only a small number of vehicle conversion suppliers that must meet stringent safety and engine emissions certification standards. The engine certification process is time consuming and expensive and raises vehicle costs. In addition, conversion of vehicle engines from gasoline or diesel to natural gas may result in vehicle performance issues or increased maintenance costs, which could discourage our potential customers from purchasing converted vehicles that run on natural gas. Without an increase in vehicle conversion options, vehicle choices for fleet use will remain limited and our sales may be restricted, even if there is demand.
If there are advances in other alternative vehicle fuels or technologies, or if there are improvements in gasoline, diesel, electric or hybrid engines, demand for natural gas vehicles may decline and our business may suffer.
Technological advances in the production, delivery and use of alternative fuels that are, or are perceived to be, cleaner, more cost-effective or more readily available than LNG have the potential to slow adoption of natural gas vehicles. Advances in gasoline and diesel engine technology, especially hybrids, may offer a cleaner, more cost
effective option and make fleet customers less likely to convert their fleets to natural gas. Technological advances related to ethanol or biodiesel, which are increasingly used as an additive to, or substitute for, gasoline and diesel fuel, may slow the need to diversify fuels and affect the growth of the natural gas vehicle market. Advances in technology that slow the growth of or conversion to natural gas vehicles or which otherwise reduce demand for natural gas as a vehicle fuel will have an adverse effect on our business. Failure of natural gas vehicle technology to advance at a sufficient pace may also limit its adoption and ability to compete with other alternative fuels.
Our business is heavily concentrated in the western United States, particularly in California and Arizona. Continuing economic downturns in these regions could adversely affect our business.
Our operations to date have been concentrated in California and Arizona. A continuing decline in the economy in these areas could slow the rate of adoption of natural gas vehicles, reduce fuel consumption, or reduce the availability of government grants, any of which could negatively affect our growth.
Our business is highly regulated.
We are subject to various stringent federal, state, and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations, and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations, and/or facility shutdowns. We cannot assure you that we will be at all times in complete compliance with these laws, regulations or permits. In addition, we expect to make significant capital expenditures on an ongoing basis to comply with these stringent environmental laws, regulations and permits.
Arizona is part of the Western Climate Initiative to help combat climate change, that is seeking legislation to regulate and reduce greenhouse gas emissions. Any of these regulations, when and if implemented, may limit the emissions produced by our LNG production plant in Arizona and require that we obtain emissions credits or invest in costly emissions prevention technology. We cannot currently estimate the potential costs associated with federal or state regulation of emissions from our LNG plant and these unknown costs are not contemplated in the financial terms of our customer agreements. These unanticipated costs may have a negative impact on our financial performance and may impair our ability to fulfill customer contracts at an operating profit.
Risks Relating to our Stock
There has been a limited trading market for our common stock and no significant trading market.
There is currently no active trading market for our common stock as a result of our stock being held by a small number of investors. If and when an active market develops for our common stock, any available quotation of our common stock on the OTCBB or otherwise does not assure that a meaningful, consistent and liquid trading market will exist. Of our total issued and outstanding common shares, 1.5 million shares (7.5% of the outstanding shares) are potentially available for free trading; however, most of these shares are currently held in trust by the bankruptcy trustee for the PNG Ventures Creditor Trust, pending distribution upon completion of an accounting reconciliation and preference analysis by the trustee. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using common stock as consideration.
You may have difficulty trading and obtaining quotations for our common stock.
Our Common stock may not be actively traded, and if available, bid and asked prices for our common stock on the OTCBB may fluctuate widely. This may be due, in part, to the fact that only 1.5 million shares of new common stock (7.5% of the outstanding shares) will initially be free trading, and most of these shares are currently held in
trust by the bankruptcy trustee for the PNG Ventures Creditor Trust, pending distribution upon completion of an accounting reconciliation and preference analysis by the trustee. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities. This severely limits the liquidity of the common stock, and would likely reduce the market price of our common stock and hamper our ability to raise additional capital.
A majority of our stock is beneficially owned by Castlerigg and Medley who will be able to exert significant influence over our corporate decisions, including a change of control.
As of the Effective Date, Medley became the beneficial owner of approximately 66% of our outstanding common stock and Castlerigg became the beneficial owner of approximately 26.5% of our outstanding common stock. Consequently, Medley individually or with Castlerigg, as a group, will be able to control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions, or other extraordinary transactions. Medley and/or Castlerigg may also have interests that differ from other shareholders and may vote in a way with which other shareholders disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing, or deterring a change of control of our Company, could deprive our shareholders of an opportunity to receive a premium for their stock as part of a sale of our company, or other business combination and might ultimately affect the market price of our stock. Conversely, this concentration may facilitate a change in control at a time when you and other investors may prefer not to sell.
The Shareholders’ Agreement we entered into with Castlerigg and Medley imposes significant restrictions on us.
On the Effective Date, we entered into a Shareholders’ Agreement with Medley and Castlerigg (the “Shareholders’ Agreement”) that imposes material restrictions on us. Pursuant to the Shareholders’ Agreement, each of Medley and Castlerigg has the right to nominate one director for election to the Company’s Board of Directors and each has agreed to vote its shares for the other’s nominee. We may not change the size of the Board or the number of directors required for a quorum without the consent of Medley and Castlerigg. In addition, we are required to obtain the approval of each of Medley and Castlerigg prior to undertaking certain actions, including, without limitation:
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the hiring or firing of our senior executive officers;
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pledging of any of our assets or creation of any liens;
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making any changes in accounting methods or policies, or causing a change in our auditors;
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amending our charter or bylaws in a manner that could reasonably be expected to be adverse to Medley or Castlerigg;
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creating any committee of the Board of Directors;
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issuance of any preferred stock or other stock with rights senior to the common shares issued to Medley and Castlerigg; and
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any sales, mergers or business combinations involving the Company.
The Shareholders’ Agreement also provides that, if we have not been sold within four years of the Effective Date, then at any time upon the request of Medley or Castlerigg, we must retain a nationally recognized investment bank for the purpose of affecting a sale of the Company.
The Shareholders’ Agreement is to remain in effect until such time as Medley and Castlerigg own less than five (5%) percent of our outstanding shares. Thus, we may be significantly constrained by Medley and Castlerigg until they own less than five (5%) percent of our stock. Despite the ownership of a small minority of our shares, we will be caused to comply with the terms of the Shareholders’ Agreement, which will continue to render effective control of the Company to Medley and Castlerigg, including giving them the right to veto sales to third parties, or require us to implement a sale of our business by Medley or Castlerigg. This could have the effect of disenfranchising the holders of a majority of our shares.
The market price of our common stock may, and is likely to continue to be, highly volatile and subject to wide fluctuations.
If, or at such time as, our common stock commences trading, the market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
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dilution caused by our issuance of additional shares of common stock and other forms of equity securities, which we could issue, if at all, in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic business combinations with other companies, although no such plans are under consideration;
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announcements of new acquisitions, increased capacity or other business initiatives by our competitors;
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our ability to take advantage of new acquisitions or other business initiatives;
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fluctuations in revenue and income from our operations;
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changes in the market for natural gas commodities and/or in the capital markets generally;
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changes in the demand for LNG, including changes resulting from the introduction or expansion of alternative fuels;
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quarterly variations in our revenues and operating expenses;
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changes in the valuation of similarly situated companies, both in our industry and in other industries;
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changes in analysts’ estimates affecting our Company, our competitors and/or our industry;
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changes in the accounting methods used in or otherwise affecting our industry;
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additions and departures of key personnel;
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announcements of technological innovations or new products available to the industry;
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announcements by relevant governments pertaining to incentives for alternative energy development programs;
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fluctuations in interest rates and the availability of capital in the capital markets;
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significant sales of our common stock, including sales by the investors following the future registration of our shares of common stock issued in our bankruptcy restructuring and/or future investors in future offerings we expect to make to raise additional capital; and
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the impact of a greater number of shares becoming freely tradable.
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our common stock and/or our results of operations and financial condition.
Our common stock is subject to the “Penny Stock” rules of the SEC and the trading market in its securities is limited, which makes transactions in its stock cumbersome and may adversely affect trading and liquidity of the common stock and, accordingly, reduce the value of an investment in our common stock.
A stock is considered to be a “penny stock” if it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on The NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a "penny stock" is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.
In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealers’ duties in selling the stock, the customer’s rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience, and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions probably decreases the willingness of broker-dealers to make a market in our common stock, decreases liquidity of our common stock and increases transaction costs for sales and purchases of our common stock as compared to other securities.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
Trading of our common stock on the Over-the-Counter Bulletin Board (the “OTCBB”) may be subject to certain provisions of the Securities Exchange Act of 1934, commonly referred to as the “penny stock” rule. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our stock is deemed to be a penny stock, trading in our stock will be subject to additional sales practice requirements on broker-dealers.
These may require a broker-dealer to:
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make a special suitability determination for purchasers of our shares;
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receive the purchaser's written consent to the transaction prior to the purchase; and
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deliver to a prospective purchaser of our stock, prior to the first transaction, a risk disclosure document relating to the penny stock market.
Consequently, penny stock rules may restrict the ability of broker-dealers to trade and/or maintain a market in our common stock. Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares.
Our operating results may fluctuate significantly, and these fluctuations may cause our stock price to decline.
Our operating results will likely vary in the future primarily as a result of fluctuations in our revenues and operating expenses, including the coming to market of oil and natural gas reserves that we are able to develop, expenses that we incur, the prices of oil and natural gas in the commodities markets and other factors. If our results of operations do not meet the expectations of current or potential investors, the price of our common stock may decline.
We have never paid cash dividends and are not likely to do so in the foreseeable future.
We have never paid cash dividends to our shareholders and we do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and shareholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in the common stock.
Risks Related to Our Emergence from Chapter 11 Bankruptcy Proceedings
Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court, and investors should not rely on such projections.
The projected financial information that we previously filed with the Bankruptcy Court in connection with the bankruptcy proceedings has not been incorporated by reference into this Report. Neither these projections nor our Disclosure Statement should be considered or relied on in connection with the purchase of our capital stock. We were required to prepare 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. This projected financial information was filed with the Bankruptcy Court as part of our Disclosure Statement approved by the Bankruptcy Court. The projections reflect numerous assumptions concerning anticipated future performance and prevailing and anticipated market and economic conditions that were and continue to be beyond our control and that may not materialize. Projections are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks. Our actual results will vary from those contemplated by the projections for a variety of reasons, including our adoption of fresh-start accounting in accordance with the provisions of FASB Accounting Standards Codification tm (“ASC”) 852, “Reorganizations,” upon our emergence from Chapter 11 bankruptcy proceedings. Further, the projections were limited by the information available to us as of the date of the preparation of the projections. Therefore, variations from the projections may be material, and investors should not rely on such projections.
Because of the adoption of fresh-start accounting and the effects of the transactions contemplated by the Plan, financial information subsequent to March 24, 2010 will not be comparable to prior financial information.
Upon our emergence from Chapter 11 bankruptcy proceedings, we will adopt fresh-start accounting in accordance with the provisions of ASC 852, pursuant to which our reorganization value was allocated to our assets in conformity with the procedures specified by ASC 805, “Business Combinations.” Assets have been adjusted to fair market values, effective as of December 31, 2009, with property, plant, and equipment reduced by the amount of approximately $8.1 million. Liabilities, other than deferred taxes, will be recorded at the present value of amounts expected to be paid as of the Effective Date. In addition, under fresh-start accounting, common stock, retained deficit and accumulated other comprehensive loss will be eliminated. Our consolidated financial statements will also reflect all of the transactions contemplated by the Plan. Accordingly, our consolidated statements of financial position and consolidated statements of operations subsequent to March 24, 2010, will not be comparable in many respects to our consolidated statements of financial position and consolidated statements of operations prior to March 24, 2010. Areas where accounts will not be comparable include depreciation, property, plant and equipment, total liabilities and interest expense. The lack of comparable historical financial information may discourage investors from purchasing our capital stock.
Our emergence from Chapter 11 bankruptcy proceedings may limit our ability to offset future U.S. taxable income with tax losses and credits incurred prior to emergence from Chapter 11 bankruptcy proceedings.
In connection with our emergence from Chapter 11 bankruptcy proceedings, we were able to retain a significant portion of our U.S. net operating loss, capital loss and tax credit carryforwards (collectively, the “Tax Attributes”). However, Internal Revenue Code (“IRC”) Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. Our emergence from Chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the corporation as of the emergence date. As a result, our future U.S. taxable income may not be fully offset by the Tax Attributes if such income exceeds our annual limitation, and we may incur a tax liability with respect to such income. In addition, subsequent changes in ownership for purposes of the IRC could further diminish our Tax Attributes.
We are exposed to certain operating Risks related to our emergence from Chapter 11
In light of our recent emergence from bankruptcy, we will be exposed to certain enhanced operational risks for the near-term, including:
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our ability to obtain and maintain normal terms with vendors, service providers, and leaseholders;
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our ability to maintain contracts that are critical to our operations;
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the potential adverse impact of the Chapter 11 case on our liquidity, cost of capital or results of operations;
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our ability to fund and execute our business plan;
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our ability to attract, motivate and/or retain key executives and associates;
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our ability to attract and retain customers; and
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statements of assumption underlying any of the foregoing.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Description of Property.
We own a natural-gas liquefaction plant located in Topock, Arizona. The facility has insulated, above-ground storage tanks and serves metropolitan markets in the western United States and northern Mexico. The facility is physically located on approximately 1.882 acres of land leased from El Paso Natural Gas. The lease expires on December 14, 2020. We also own: (i) a fleet of 24 specialty cryogenic tank trailers, which are used to transport LNG from our plant site to customer sites; and (ii) one public LNG fueling station from which we sell LNG and CNG at retail to the public.
Our principal executive offices are located at 31111 Agoura Rd, Suite 208, Westlake Village, California 91361. This operating lease covers 2,736 sq. ft. of office space and expires in May 2012.
Item 3.
Item 3. Legal Proceedings.
We are not a party to any material legal proceedings. Even though we are not a party to any material legal proceedings, we may be involved in a variety of claims, suits, investigations, proceedings, and legal actions arising in the ordinary course of business.
PART II
Item 5.
Item 5. Market For Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
On March 24, 2010 (the “Effective Date”), in connection with our emergence from Chapter 11 reorganization, all of our all of our existing equity was eliminated, including all options, warrants and other convertible securities that were linked to our existing equity, and we issued 20,000,000 shares of new common stock of the reorganized company. We are listed on the OTCBB under the symbol “AGAS.OB”. However, there is currently no active trading market for our stock, and no trades have occurred in 2010. Prior to the Effective Date, our pre-emergence common stock (all of which was eliminated as a result of confirmation of the Plan) was quoted on the OTCBB under the symbol “PNGXQ.OB”. The following table sets forth, for the fiscal quarters indicated, the high and low bid prices of our common stock. These quotations reflect inter-dealer prices, without mark-up, mark-down or commission, and may not represent actual transactions.
Dividends
We have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the growth of the business. In addition, the Senior Credit Facility between the Company, Medley, and Castlerigg restricts our ability to pay dividends.
We cannot assure you that we will ever pay cash dividends. Whether we pay any cash dividends in the future will depend on the financial condition, results of operations, and other factors that the Board of Directors will consider.
Holders
As of March 21, 2011, there were approximately 30 holders of record of our common stock, consisting of Medley, Castlerigg, and the holders of unsecured and allowed claims who received shares of common stock that were held in the PNG Ventures Creditor Trust.
Issuance of Unregistered Securities.
The issuance of the new common stock to the unsecured creditors pursuant to the Amended Plan is exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 1145 of the Bankruptcy Code.
As of March 21, 2011, 322,141 shares had been distributed to unsecured creditors from the PNG Ventures Creditors Trust, and 1,177,859 shares remained in the trust pending future distribution upon completion of an accounting reconciliation and preference analysis by the trustee.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Cautionary Note Regarding Forward-Looking Statements
This Managements’ Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain, forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption “Risk Factors” of this report. The following should be read in conjunction with our annual financial statements contained elsewhere in this report.
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 acquisition of our LNG business, 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 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 closed on a series of restructuring transactions contemplated by the Amended Plan and emerged from Chapter 11 bankruptcy proceedings. Through the Bankruptcy process, we were able to successfully accomplish certain strategic restructuring goals, including:
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Secure from Castlerigg PNG Investments, LLC (“Castlerigg”) $8,325,000 of financing (inclusive of $250,000 advanced prior to the Effective Date) to fund implementation of the Amended Plan, for a $5.5 million senior secured four year term loan, a $250,000 senior secured short-term note; and 5,300,000 shares of our newly reorganized Company (representing approximately 26.5% of our outstanding shares);
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Restructure and compromise the $37.5 million pre-petition senior debt facility owed to Medley Capital as agent for Fourth Third, LLC (“Medley”), for: $5.5 million of our plan funding; a new $9.8 million senior secured four year term loan and 13,200,000 shares of our newly reorganized Company (representing approximately 66% of our outstanding shares);
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Compromise approximately $7 million of pre-petition unsecured creditors claims for a $750,000 unsecured creditor trust fund, the recovery of excise tax refunds of up to $450,000 and 1,500,000 shares of our newly reorganized Company (representing approximately 7.5% of our outstanding shares);
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Settle outstanding litigation in consideration for the return of certain equipment and the awarding of certain allowable claims within the unsecured creditor trust fund;
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Eliminate certain onerous and non-economic contracts we inherited as part of the Share Exchange transaction; and
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Changing the name of our Company to “Applied Natural Gas Fuels, Inc.” to more closely align our name to our principal line of business.
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.
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 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; likewise, references to “successor entity” refer to the Company on or after March 31, 2010. Due to the different basis of accounting utilized by the predecessor entity and the successor entity, the financial statements of such entities are not necessarily considered comparable.
Results of Operations-Applied Natural Gas Fuels, Inc.
The accompanying financial statements include consolidated balance sheets as of December 31, 2010 (successor entity) and December 31, 2009 (predecessor entity), consolidated statements of operations for the nine month period ended December 31, 2010 (successor entity) and for the year ended December 31, 2009 (predecessor entity) and the three month period ended March 31, 2010 (predecessor entity). The accompanying financial statements also include statements of cash flows for the three months ended March 31, 2010 (predecessor entity), the nine month period ended December 31, 2010 (successor entity), and the year ended December 31, 2009 (predecessor entity).
For purposes of this management’s discussion and analysis, we are not including analysis with respect to the comparative balance sheets since, in management’s view, such comparison is no longer meaningful because of the recent confirmation of the Amended Plan, the Company’s respective emergence from the Chapter 11 proceeding, and the application of Fresh Start reporting. For purposes of comparing financial operating results, the following tables include data for the year ended December 31, 2010 compared to the year ended December 31, 2009 (predecessor entity). Data for the year ended December 31, 2010 is defined as the mathematical addition of the results during the nine months ended December 31, 2010 (successor entity) and the results during the three months ended March 31, 2010 (predecessor entity).
Year Ended December 31, 2010 (as defined) compared to December 31, 2009:
Revenue. Total revenue for 2010 decreased $1.5 million, or 7%, to approximately $20.7 million from approximately $22.2 million in 2009. The decrease in total revenues is principally due to a 10.6% decline in the volume of LNG sold, due almost entirely to the loss of one major customer contract effective June 30, 2009. The decrease in volume was partially offset by a small increase in the average sales price per LNG gallon sold due in part to a modest increase in average price levels for pipeline quality natural gas. The volume of LNG sold during 2010 and 2009 was approximately 20.4 and 22.9 million gallons, respectively.
Production Costs. The types of expenses included in the production costs line item include the cost of natural gas, transportation charges, purchasing and receiving costs, and terminal fees for storage and loading. Our production costs exclude depreciation, amortization, and compensation related to the production of LNG. Cost of sales in 2010 decreased by $1.1 million, or 8%, to approximately $13.5 million from approximately $14.6 million for 2009. Production costs are mainly affected by the cost of natural gas prices, and volumes sold, with the decrease being
attributed to a decline in the volume of LNG sold in 2010, but partially offset by to a modest increase in average price levels for pipeline quality natural gas.
Compensation Expenses. Compensation expenses increased from approximately $2.2 million in 2009 to $3.5 million in 2010, an increase of $1.3 million. This increase is due principally to expenses associated with non-cash stock and stock option expense of $1.0 million, directors’ fees, and the awarding of certain contractual and discretionary year-end performance bonuses.
Other Selling, General and Administrative Expenses. The types of expenses included in other selling, general and administrative expenses include repairs and maintenance, field operating expense, office expenses, insurance, professional services, travel expenses and other miscellaneous expenses. Other operating expenses during 2010 decreased approximately $1.0 million, or 23% lower than the level of 2009. Most of this reduction related to legal fees incurred in 2009 for litigation and other matters that were not relevant to 2010.
Interest Expense. Interest expenses decreased significantly in 2010 compared to 2009 as a result of lower levels of debt resulting from the consummation of the Amended Plan.
Other Income (expense). Other income and expense in 2009 reflects a write-down of $8.0 million to reduce the carrying values of our assets to estimated fair market value as supported by an independent appraisal completed in the fourth quarter of 2009, and partially offset by $1.3 million of income derived from the settlement of certain debts, as more fully described in Note 7 to the consolidated financial statements. There were no comparable transactions in 2010.
Reorganization items. Reorganization items include administrative expenses associated with the Chapter 11 proceeding, and in 2010, also include the recognition of a gain of $19.7 million resulting from debt write-offs and reductions stemming from consummation of the Amended Plan - see Note 2 - Voluntary Reorganization under Chapter 11.
Year Ended December 31, 2009 compared to December 31, 2008 (as defined):
For purposes of the comparisons of operations, operating data for the year ended December 31, 2009 is being compared to data for the full year of 2008. The 2008 data represents the mathematical addition of the previously reported results for the period January 1, 2008 to June 30, 2008 and for the period July 1, 2008 to December 31, 2008, and is presented, in the table below, as “combined” December 31, 2008 data. Although this approach is not consistent with generally accepted accounting principles, we believe it is the most meaningful way to review the statement of operations data for such periods.
Revenue. Total revenue for 2009 decreased $9.7 million, or 30%, to approximately $22.2 million from approximately $31.9 million in 2008. The decrease in total revenues is principally due to a 30% decrease in the average sales price of LNG and a 5% decrease in the volume of LNG sold. The volume of LNG sold during 2009 and 2008 was approximately 22.9 and 24.1 million gallons, respectively. The decline in volume is attributable principally to the loss of a major customer effective July 1, 2009. The Topock plant contributed 90% and 92% of these volumes, respectively. The remaining volumes were provided from third party suppliers located in other areas of the country.
Production Costs. The types of expenses included in the production costs line item include the cost of natural gas, transportation charges, purchasing and receiving costs, terminal fees for storage and loading. Our production costs exclude depreciation, amortization, and compensation related to the production of LNG. Cost of sales in 2009 decreased $11.7 million, or 45%, to approximately $14.6 million from approximately $26.3 million for 2008. Production costs are mainly affected by the cost of natural gas prices, and volumes sold, with the decrease being attributed to both a decline in the volume of LNG sold in 2009 and to generally lower prices for natural gas.
Compensation Expenses. Compensation expenses increased from approximately $1.5 million in 2008 to $2.2 million in 2009. Virtually all of this increase occurred subsequent to the June 30, 2008 Share Exchange, and is associated with increased staffing, related principally to the separation of the LNG Business from the Predecessor Entity.
Other Selling, General and Administrative Expenses. The types of expenses included in other selling, general and administrative expenses include repairs and maintenance, field operating expense, office expenses, insurance, professional services, travel expenses and other miscellaneous expenses. Other operating expenses during 2009 increased approximately $0.9 million, or approximately 25% higher than the level of 2008. Expenses that increased in 2009 include repairs and maintenance and plant operating costs, much of which relates to enhanced repair and maintenance programs directed toward the Plant that have been initiated since the Share Exchange. Other areas of increase include professional services, insurance costs, and other miscellaneous expenses, virtually all of which relate to increased expenditures related to sales and marketing efforts, and expenses incurred to defend and/or prosecute various litigation matters.
Interest Expenses. Interest expenses would have increased by approximately $0.5 million in 2009; however, as required by ASC 852.10, we suspended accrual of interest expense and amortization of loan discounts and related prepaid costs after the Petition Date. The total unaccrued interest expense from that date to December 31, 2009 is approximately $2.4 million. Total interest bearing debt averaged approximately $42.8 million during 2009, compared to $29.5 million during 2008. In addition, interest expense includes non-cash amortization debt discount for the year ended December 31, 2009 and 2008 of $86,713 and $144,294, respectively, which reflected the suspension of amortization on the Petition Date.
Other Income (expense). Other income and expense reflects a write-down of $8.0 million to reduce the carrying values of our assets to estimated fair market value as supported by an independent appraisal completed in the fourth quarter of 2009, and partially offset by $1.3 million of income derived from the settlement of certain debts, as more fully described in Note 7 to the consolidated financial statements.
Restructuring Costs. Restructuring costs incurred in connection with the Bankruptcy proceeding were $429,167 for the year ended December 31, 2009. As required by ASC 852.10, we have expensed these costs as incurred and recorded them as a separate line item in the statement of operations.
Liquidity and Capital Resources
Net cash provided by operating activities during the nine months ended December 31, 2010 was $375,000 compared to net cash used in operating activities of $718,000 during the three months ended March 31, 2010 and net cash provided by operating activities of $1,968,000 during 2009. Management believes that operating activities stabilized shortly after consummation of the Amended Plan and are beginning to trend upward. As a result, management anticipates that future operations should result in positive cash flow provided by operating activities.
Net cash used in investing activities during the nine months ended December 31, 2010 was $428,000, compared to net cash used in investing activities of $19,000 during the three months ended March 31, 2010 and $3,168,000 during 2009. Approximately $2 million of the 2009 amount was for the purchase of new LNG cryogenic transport trailers, with the remainder of the amount spent in 2009, and virtually all of the amount spent in 2010 applied to improvements at the Topock plant. 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 range of $0.5 million to $1.0 million.
Our liquidity and results of operations will, for the foreseeable future, be substantially affected by our level of fixed and variable indebtedness. A summary of our current indebtedness follows:
Senior Credit Facility
On the Effective Date, we entered into a Credit Agreement (our “Senior Credit Facility”) with Medley, as lender and agent, and Castlerigg, as lender. The Senior Credit Facility 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”).
Borrowings under the Senior Credit Facility 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 shall, at our option, be paid-in-kind and added to the principal amount of the Medley Loan and Castlerigg Loan on a monthly basis, in arrears. After the first anniversary of the Effective Date, the accrued interest is payable on a quarterly basis, in arrears. Interest accrued on the Castlerigg Short Term Loan, along with principal installments of $25,000, shall be paid to Castlerigg on a monthly basis from the Effective Date until the maturity of the Castlerigg Short Term Loan.
As of December 31, 2010, total debt outstanding under the Senior Credit Facility was $17.0 million, including $1.270 million of paid in-kind interest accrued through such date, and a remaining balance due on the Castlerigg Short Term Loan in the amount of $75,000.
In March 2011, we entered into Amendment # 1 to the Senior Credit Facility and closed on a new $5.0 million Senior Secured term loan provided by Medley (“the Medley Senior Secured Debt Amendment”). The $4.4 million in net proceeds from this financing will be used to purchase certain LNG trailers and mobilization equipment, LNG mobile fueling equipment, and for working capital. In addition, $500,000 of the proceeds from the Medley Senior Secured Debt Amendment will be set aside to fund, if necessary, future interest payments related to the facility; also, approximately $110,000 of this financing will be used to pay the legal expenses and other direct costs of the transaction. The facility provides for a senior secured lien on all assets of the Company, other than accounts receivable. The liens granted under the Medley Senior Secured Debt Amendment are prior to the liens that secure the original debt under the terms of the Senior Credit Facility as described in “Note 7 - Notes Payable, Convertible Debts, and Line of Credit”. The provisions of the Medley Senior Secured Debt Amendment provide for the payment of interest quarterly in arrears at the rate of 13% per annum. Amendment # 1 also modifies the interest payment terms on the original debt to quarterly in arrears, and makes other minor changes to certain covenants and conditions of the Senior Credit Facility, as more fully described below.
Pursuant to a Guarantee and Collateral Agreement (the “Collateral Agreement”), the obligations under the Senior Credit Facility 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 (subject to the liens provided under Amendment #1), now existing or hereafter acquired (excluding accounts receivable and inventory of certain of our subsidiaries as to which the Senior Credit Facility has a second priority security interest). In addition, the Medley Loan and Castlerigg Loan (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 Credit Facility 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 Credit Facility 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 Credit Facility 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 Credit Facility contains a variety of events of default, which are customary for transactions of this type, including the following events:
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failure to pay amounts due under the Senior Credit Facility;
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a breach of any representation or warranty contained in the Senior Credit Facility or related documents;
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failure to comply with or perform certain covenants under the Senior Credit Facility;
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the insolvency of the Company or any of our subsidiaries;
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a termination or default under our Intercreditor Agreement; or
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any change of control of our outstanding shares.
The Senior Credit Facility also contains certain financial covenants (as amended in Amendment # 1) as summarized as follows:
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fixed charge coverage ratio of 1.0:1 for the quarter ended December 31, 2011, and 1.10:1 for all subsequent quarters;
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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
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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.
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%. Including the interest rate, loan servicing fees and various other fees and charges, the Company’s average annualized effective interest rate during the nine months ended December 31, 2010 associated with this facility was approximately 43%. 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. As of December 31, 2010, the balance outstanding on this note was approximately $836,683.
In February 2011, we 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 our accounts receivable and certain related assets, and matures on February 8, 2013, but is 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 accrues 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. We 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 we avoid the incurrence of cumulative net losses in any three consecutive months that exceed $500,000. Upon closing of the FCF Facility, we 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. Upon each anniversary date, we will also be required to pay to FCF a commitment and funding fee of $12,500. In addition, if an automatic renewal occurs after the 2nd anniversary, we will also be required to pay a renewal fee of $25,000. We 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 of approximately $541,000, payable in 60 equal monthly installments commencing May 2010, with interest at approximately 7% per annum. We also have an agreement with our legal counsel to defer $150,000 of legal fees incurred during the Chapter 11 process, payable in quarterly installments commencing December 31, 2010.
Outlook
We believe that our current liquidity, including our cash and net working capital of $2.1 million as of December 31, 2010, cash flows generated from future operations, borrowing capacity under our new FCF revolving credit facility, and liquidity provided by Amendment #1 to the Senior Credit Facility will be sufficient to meet the near term operational and capital requirements of our operations. However, our cash flow and liquidity will be adversely affected commencing in the 3rd quarter 2011 as we will be required to commence quarterly payments of interest related to the Senior Credit Facility in the quarterly amount of approximately $604,000. In addition, we are obligated to fund an additional $450,000 to 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.
However, on a longer term basis, we will need to secure additional capital if it expands our business operations and in particular our LNG production capacity. Pending whatever consents may be required under our various credit facilities and related agreements, we intend to pursue a growth strategy that will include the securing of additional LNG production capacity, either by the construction of new facilities, or acquisition of existing facilities. Increasing production capacity will require us to secure substantial additional capital, either in the form of equity, debt, or combination thereof. While management believes that such capital to fund growth may be available, there is no assurance that such capital can be secured.
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 new enterprise without a significant demonstrated operating history, our existing financial structure, the location of our natural gas properties 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 Credit Facility 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.
We might not have access to the funding required for the expansion of our business or such funding might not be available to us on acceptable terms. We might finance the expansion of our business with additional indebtedness or by issuing additional equity securities. The amount of any additional indebtedness could be substantial. We could face financial risks associated with incurring additional indebtedness, such as reducing our liquidity and access to financial markets and increasing the amount of cash flow required to service our debt, or associated with issuing additional stock, such as dilution of ownership and earnings. An increase in our debt could decrease the amount of funds available for our growth strategy, thereby making it more challenging to implement our strategy in a timely manner, or at all. If future cash flows and capital resources are insufficient to meet our debt obligations and commitments, we may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or debt financing. In the event that we are unable to do so, we may be left without sufficient liquidity and we may not be able to continue 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 “Note 12 - Significant Accounting Policies” In the notes to our financial statements located at the end of this report.
Off-Balance Sheet Arrangements
As of 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.
Recent Accounting Pronouncements:
In June 2009, the FASB issued ASC 810. ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. We do not believe the adoption of ASC 810 will have a material impact on the Company.
In June 2009, the FASB issued ASC 105, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Standards.” ASC 105 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP. The Codification will supersede all existing non-SEC accounting and reporting standards. ASC 105 is effective in the first interim and annual periods ending after September 15, 2009. ASC 105 will have no effect on our consolidated financial statements upon adoption other than current references to GAAP that will be replaced with references to the applicable codification paragraphs.
In January 2010, the FASB issued new accounting guidance, which intended to improve disclosures about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels, the reasons for the transfers and to present information about purchases, sales, issuances, and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). The Company has applied the new disclosure requirements as of January 1, 2010, and the adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This guidance states that an entity that is an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. As such, an entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements. The guidance has become effective for the interim or annual reporting periods after June 15, 2010. The Company adopted this guidance on its effective date and it did not have an impact on its consolidated results of operations and financial condition.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is set forth on pages through of this report.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2010, the end of the period covered by this report. Based upon management’s evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2010, our disclosure controls and procedures were designed at a reasonable assurance level and were effective at a reasonable assurance level to provide reasonable assurance that information we are required to disclose 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 Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2010. Management reviewed the results of its assessment with our Board of Directors, which collectively serves as our audit committee.
Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated financial statements.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
In our annual report on Form 10-K for the year ended December 31, 2009, we reported the existence of a material weakness in our internal control over financial reporting that stemmed principally from the lack of adequate documentation governing our internal control processes and systems. During the last half of 2010, and in particular the last quarter of 2010, we completed a detailed evaluation of our internal controls, made appropriate changes to
control processes and completed documentation of all major internal control processes. We also designed and completed an appropriate testing program to verify, with reasonable assurance, that our internal control procedures and processes were operating effectively and as designed.
Except as described in the preceding paragraph, there were no other 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 December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
Item 10.
Item 10.
Directors, Executive Officers, Promoters and Control Persons.
Our executive officers and directors and their respective ages and positions are as follows:
Name
Age
Position
W. Phillip Marcum
Director and Chairman of the Board
Cem Hacioglu
President and Chief Executive Officer and Director
Shreyas Gupta
Director (designee of Castlerigg)
Kevin P. Collins
Director
Tom Quimby
Director (designee of Medley)
A. Bradley Gabbard
CFO and Principal Accounting Officer
Directors
We believe that our Board should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe that experience, qualifications, or skills in the following areas are most important: the energy related industry sectors, accounting and finance, strategic planning; public company practices and trading markets, matters of corporate governance, and board practices of other corporations. These areas are in addition to the personal qualifications described in this section. We believe that all of our current Board members possess the professional and personal qualifications necessary for board service, and have highlighted particularly noteworthy attributes for each Board member in the individual biographies below. In addition, length of service on our Board has provided several directors with significant exposure to both our business and our industry in which we compete. The principal occupation and business experience, for at least the past five years, of each current director is as follows:
W. Phillip Marcum, Chairman of the Board
Mr. Marcum has served as the chairman of our board of directors since August 2008. Since 2007, Mr. Marcum has served as a principal of MG Advisors, LLC from 1991 until 2007, Mr. Marcum co-founded and served as Chairman of the Board, President, and Chief Executive Officer of Metretek Technologies, Inc. (now known as PowerSecure International, Inc.), an energy management company. Mr. Marcum holds a B.B.A. from Texas Tech University. Mr. Marcum also currently serves as Chairman of the Board and as a director of ADA-ES, Inc., a publicly traded environmental technology company, and as a director for Key Energy Services, Inc., a well servicing company. As a result of these and other professional experiences, Mr. Marcum possesses particular knowledge and experience in the energy sector, strategic planning, and finance, as well as public company practice and governance, each of which strengthen the Board’s collective qualifications, skills, and experience.
Cem Hacioglu
Mr. Hacioglu joined the Company as President and CEO on February 16, 2009 and has served as a director of the Company since August 2008. From May 2005 to February 2009, Mr. Hacioglu was a co-portfolio manager of the direct investment group of Sandell Asset Management Corp. (“Sandell”), an affiliate of Castlerigg. Prior to May 2005, Mr. Hacioglu worked as a Portfolio Manager at Millennium Partners where he helped manage Millennium’s direct investment portfolio. Prior to joining Millennium Partners, Mr. Hacioglu was a Vice President at Fletcher Asset Management, an associate in the Private Equity Placements Group at Merrill Lynch and an analyst at the
World Bank. Mr. Hacioglu earned his B.S. Degree in Economics from the United States Military Academy, West Point, and his M.B.A. in Financial Management from the MIT Sloan School of Management. As a result of these and other professional experiences, Mr. Hacioglu possesses particular knowledge and experience in matters of corporate finance, public company governance and operations, and the operation of the public securities’ markets, each of which strengthen the Board’s collective qualifications, skills, and experience.
Shreyas Gupta
Mr. Gupta has served as a director of the Company since January 2011. Since 2008, Mr. Gupta has served as a senior analyst at Sandell, an affiliate of Castlerigg. Prior to Sandell, from 2006 to 2007, Mr. Gupta served as an analyst at Barrington Capital Group. From 2003 to 2006, Mr. Gupta was an investment analyst at Third Avenue Management, managing both public and private investments across the capital structure. Prior to Third Avenue Management, Mr. Gupta held other positions within the financial services industry. Mr. Gupta graduated with a B.S. in Economics from the Wharton School of Business, University of Pennsylvania, and a Masters in Business Administration from Columbia University. As a result of these and other professional experiences, Mr. Gupta possesses particular knowledge and experience in matters of corporate finance, management, and the operation of the public securities’ markets, each of which strengthen the Board’s collective qualifications, skills, and experience.
Kevin P. Collins
Mr. Collins has served as a director of the Company since November 2008. Since 1997, Mr. Collins has been Managing Member of The Old Hill Company LLC, a provider of corporate finance and management consulting services primarily to companies that have undergone financial reorganization. Prior to that, Mr. Collins worked with several large financial institutions in lending, investing, and advisory capacities, including New York Life Insurance Company, Chemical Bank, Lloyds Bank International, Samuel Montagu, Inc., and DG Investment Bank. Mr. Collins serves on the boards of Key Energy Services, Inc., an oil service company, PowerSecure International Inc., an energy technology company, and The Antioch Company, a scrapbooking direct sales company. Previously, Mr. Collins served on the board of The Penn Traffic Company, a supermarket chain. Mr. Collins holds B.S. and MBA degrees from the University of Minnesota and is a Chartered Financial Analyst. As a result of these and other professional experiences, Mr. Collins possesses particular knowledge and experience in matters of strategic transactions, board governance, and financial reporting, each of which strengthen the Board’s collective qualifications, skills, and experience.
Tom Quimby
Mr. Quimby has served as a director of the Company since March 2010. Mr. Quimby is a Principal with Medley and is responsible for transaction origination, underwriting, restructuring and special situations for the Medley Opportunity Funds. Prior to joining Medley, from October 2005 to July 2006, Mr. Quimby was a founding team member and Vice President of COVA Capital, leading the sourcing, underwriting and account management of mezzanine transactions in a variety of industries. Prior to COVA Capital, Mr. Quimby worked at several GE Capital businesses including, Global Sponsor Finance, Global Consumer Finance, GE Financial Assurance and GE Capital Corporate. Prior to GE, Mr. Quimby worked as a Bank Examiner for the FDIC in the Risk and Supervision Division. Mr. Quimby is a graduate of the Financial Management Program at GE Capital, and received a B.S. in Business Administration from the Whitemore School of Business at the University of New Hampshire. As a result of these and other professional experiences, Mr. Quimby possesses particular knowledge and experience in matters of finance, banking, and strategic planning, each of which strengthen the Board’s collective qualifications, skills, and experience.
Executive Officers
A. Bradley Gabbard, CFO and Principal Accounting Officer
Mr. Gabbard has served as our CFO and Principal Accounting Officer since May 2010. Prior to this, since September 2009, Mr. Gabbard served as our Vice President in charge of special projects. In June 2007, Mr. Gabbard became a co-managing member of MG Advisors, LLC, an advisory firm providing senior managerial and financial advisory services to energy companies. In this capacity, Mr. Gabbard provided consulting services to the Company
from July 2008 through August 2009. Prior to that, Mr. Gabbard had been a co-founder of Metretek Technologies, Inc., now known as PowerSecure International, Inc., where he served in several positions, including Director, Executive Vice President, and Chief Financial Officer until his retirement from the Company in April 2007. Mr. Gabbard is a Certified Public Accountant and holds a Bachelor of Accountancy degree from the University of Oklahoma.
Board of Directors
Our Directors are elected by the vote of a majority in interest of the holders of our voting stock and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action. Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. Currently, our Board is compensated via cash payments of $5,000 per quarter.
Pursuant to the Shareholders’ Agreement, each of Medley and Castlerigg has the right to nominate one director for election to our Board of Directors and each has agreed to vote its shares for the other’s nominee. We may not change the size of the Board or the number of directors required for a quorum without the consent of Medley and Castlerigg. The Shareholders’ Agreement also provides each of Medley and Castlerigg with the right to appoint one non-voting observer, who will (i) have the right to attend all board and committee meetings, (ii) have access to the same information as directors, (iii) have the right to participate in all discussions with board members, and (iv) have the right to all minutes of meetings and other materials provided to directors.
Committees; Audit Committee Financial Expert
Our Board of Directors has not created a separately-designated standing audit committee or a committee performing similar functions. Accordingly, our full Board of Directors acts as our audit committee. Although we have not yet separately designated one or more individuals as an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act, several of our board members, including Kevin Collins and Phillip Marcum have professional backgrounds and experience sufficient to qualify as an “audit committee financial expert” if so designated.
Section 16 Beneficial Ownership Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of our common stock, to file initial reports of ownership and reports of changes in ownership of our common stock with the SEC. Based solely on our review of the copies of such forms received by us and upon written representations of such reporting persons, we believe that all reporting persons are in compliance with all Section 16(a) filing requirements applicable to such reporting persons, except that: (i) Fourth Third, LLC, failed to timely file a Form 3 upon becoming a 10% beneficial owner of the Company, A. Bradley Gabbard failed to timely file a Form 3 upon becoming an officer of the Company, and Liberatore Iannarone, and Tom Quimby failed to timely file a Form 3 upon becoming a director of the Company, and (ii) Corey Davis, Tom Quimby, and Cem Hacioglu failed to timely file a Form 4.
Code of Ethics
We have adopted a code of ethics that applies to all employees including our principal executive officer, principal financial officer, principal accounting officer, and controller. Our code of ethics is available without charge upon written request directed to Attn: Human Resources at the Company at its principal corporate address of 31111 Agoura Road, Suite 208, Westlake Village, California 91361.
Item 11.
Item 11.
Executive Compensation.
The following table sets forth all compensation we awarded or paid to all individuals serving as our chief executive officer and those individuals who received compensation in excess of $100,000 per year for the fiscal year ended December 31, 2010 and 2009, respectively, (collectively, the “Named Executives”).
SUMMARY COMPENSATION TABLE
___________
(1)
Represents the grant date fair value of the award, calculated in accordance with Financial Accounting Standards Board Accounting Standard Codification Topic 718. All option awards granted prior to December 31, 2009 were cancelled effective March 24, 2010 in connection with our emergence from bankruptcy.
(2)
Mr. Hacioglu was appointed Chief Executive Officer of the Company on February 16, 2009.
(3)
Mr. Markey served in various capacities as an executive officer of the Company from May 22, 2008 until his resignation effective as of April 13, 2010.
(4)
Does not include 218,343 stock options that were earned by Mr. Hacioglu pursuant to his employment agreement, as a result of our 2010 operating performance. As of December 31, 2010, these options were earned, but will not be issued until a later date. The options will vest immediately upon issuance, will have a ten year term, and include a strike price of $.58 per share. These options have been valued at $82,025.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2010
(1)
Does not include 218,343 stock options that were earned by Mr. Hacioglu pursuant to his employment agreement, as a result of the 2010 operating performance of the Company. As of December 31, 2010, these options were earned, but will not be issued until a later date. The options will vest immediately upon issuance, will have a ten year term, and include a strike price of $.58 per share. These options have been valued at $82,025.
We have entered into employment agreements with our key officers, Cem Hacioglu and A. Bradley Gabbard. In addition, we also were a party to a consulting agreement with our director, W. Phillip Marcum, which was terminated effective July 1, 2009.
On February 1, 2009, we entered into an employment agreement with Cem Hacioglu to serve as our Chief Executive Officer effective February 16, 2009. The agreement is for a term of three years. Under the agreement, Mr. Hacioglu is entitled to an annual base salary of $270,000 with annual increases equal to the greater of (i) 10%, or (ii) the percentage increase in the cost of living for the Dallas Metro area over the prior year (but in no event less than the prior year's percentage increase). Mr. Hacioglu is entitled under the agreement to annual bonuses and incentive compensation awards if certain benchmarks are met. Mr. Hacioglu was granted an option to acquire 1,000,000 shares of our common stock, subject to certain adjustments in number and exercise price, based upon certain capital and other restructuring transactions that may occur in the future (the “Adjustments”).
Effective March 24, 2010, in connection with the Amended Plan, we entered into Amendment No. 1 to the Employment Agreement of Mr. Hacioglu (the “Amendment”). Under the Amendment, Mr. Hacioglu’s cash and option bonuses were re-set to 10% and 14%, respectively, in 2010, and 5% and 7%, respectively, in 2011, if EBITDA targets to be established by the Board of Directors are exceeded for years 2010 and 2011. In addition, the Amendment ratified and confirmed the continued effectiveness of the grant and the Adjustment feature associated with Mr. Hacioglu's employment-based options. As adjusted by virtue of the Amended Plan, Mr. Hacioglu’s original option was surrendered. The Company issued new replacement options to purchase 1,997,342 shares of our common stock at an exercise price of $.058 per share (an implied value of 120% of the per share equity value of our shares under the Amended Plan). All stock options awarded under Mr. Hacioglu’s option agreement are subject to standard and customary adjustments under certain conditions, and a term of 10 years, and shall vest ratably over twelve quarters subsequent to each award. All options shall vest immediately in the event of a change in control, or upon Mr. Hacioglu’s termination without cause. Other than as covered by the Amendment, the terms of Mr. Hacioglu's original employment agreement with the Company dated February 1, 2009, remain in full force and effect.
Based upon the EBITDA targets established for 2010, Mr. Hacioglu earned a cash bonus of $155,959, and a stock option award bonus valued at $82,025. The stock option bonus award will result in the issuance of 218,343 that will vest immediately upon issuance, will have a ten year term, and include a strike price of $.58 per share. These options are expected to be issued before the end of the 1st quarter of 2011.
Pursuant to the provisions of the amended employment agreement, Mr. Hacioglu was in June 2010 awarded 200,000 additional options to purchase common stock at an option price of $.58 per share. These options were fully exercisable on the date of the grant.
Upon termination of Mr. Hacioglu without cause, or in the event of Mr. Hacioglu’s death, disability, or if Mr. Hacioglu elects to terminate the contract for “good reason” as defined in the agreement, then we shall be obligated to pay the remainder of the base pay through the term of the contract, plus any bonuses that would have been earned. If Mr. Hacioglu is terminated for cause, or elects to leave the Company in the absence of “good reason,” we are only obligated to pay Mr. Hacioglu’s base pay through the termination date and vested stock options.
Effective May 14, 2010 we entered into an Employment Agreement with Mr. Gabbard. Under the terms of his employment agreement, we have agreed to employ Mr. Gabbard at an annual base salary of $225,000, subject to annual $25,000 bonus upon the achievement of certain EBITDA benchmarks and other discretionary bonuses, plus certain standard and customary fringe benefits. We have also granted to Mr. Gabbard an option to purchase 250,000 shares of our common stock at an exercise price of $0.58 per share, of which 62,500 shares of common stock were fully exercisable upon grant and the remaining 187,500 shares vest in four equal quarterly installments over a one year period. As a result of our performance in 2010, Mr. Gabbard’s bonus in the amount of $25,000 was earned.
DIRECTOR COMPENSATION
(1)
Mr. Hacioglu has been omitted from this table as he is a management member of the Board of Directors and is not separately compensated for his service on the Board of Directors.
(2)
Resigned from the Board in June 2010.
(3)
Mr. Pliskin resigned from the board of directors in November 2010.
(4)
Mr. Iannarone was appointed to the board of directors in November 2010 and subsequently resigned in January 2011.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth securities outstanding under existing equity compensation plans as of December 31, 20010. In accordance with our plan of reorganization, all of our equity compensation plans existing prior to our reorganization were terminated upon the completion of our reorganization on March 24, 2010.
Plan Category
Number of common shares to be issued upon exercise of outstanding options, warrants and rights
(a)
Weighted-average exercise price of outstanding options, warrants and rights
(b)
Number of common shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a))
(c)
Equity compensation plans not approved by security holders:
3,522,342
$ .58
475,000
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table indicates how many shares of our common stock were beneficially owned as of March 20, 2011, by (1) each person known by us to be the owner of more than 5% of our outstanding shares of common stock, (2) our directors, (3) our executive officers, and (4) all our directors and executive officers as a group. In general, “beneficial ownership” includes those shares a director or executive officer has sole or shared power to vote or transfer (whether or not owned directly) and rights to acquire common stock through the exercise of stock options and warrants, which are exercisable currently or become exercisable within 60 days.
Except as indicated otherwise, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. We based our calculation of the percentage owned of 20,000,000 shares outstanding on March 21, 2011, and added shares that may be acquired within 60 days to the number of other shares that the person owns as well as to the number of shares outstanding. The address of each of the directors and executive officers listed below is c/o Applied Natural Gas Fuels, Inc. 31111 Agoura Rd, Suite 208, Westlake Village California 91361, unless otherwise noted.
(1)
This table has been prepared based on 20,000,000 shares of our common stock outstanding as of March 21, 2011.
(2)
Each of (i) Castlerigg PNG Investments LLC, a Delaware limited liability company (“Castlerigg”), (ii) Castlerigg Master Investments Ltd., a British Virgin Islands company (”Castlerigg Master Investments”), (iii) Sandell Asset Management Corp., a Cayman Islands exempted company (“SAMC”), (iv) Castlerigg International Limited, a British Virgin Islands company ("Castlerigg International"), (v) Castlerigg International Holdings Limited, a British Virgin Islands company (“Castlerigg Holdings”), and (vi) Thomas E. Sandell (“Sandell”) may be deemed to beneficially own and have shared voting and dispositive authority with respect to the shares beneficially owned by Castlerigg. Castlerigg Master Investments is the sole member and managing member of Castlerigg. SAMC is the investment manager of Castlerigg Master Investments. Mr. Sandell is the controlling person of SAMC and may be deemed to share beneficial ownership of the shares beneficially owned by Castlerigg. Castlerigg International is the controlling shareholder of Castlerigg Holdings. Castlerigg Holdings is the controlling shareholder of Castlerigg Master Investments. Each of Castlerigg Holdings, Castlerigg Master Investments, and Castlerigg International may be deemed to share beneficial ownership of the shares beneficially owned by Castlerigg. The business address of each of these entities is as follows: c/o Sandell Asset Management Corp. 40 W. 57th Street, 26th Floor, New York, New York 10019. SAMC, Mr. Sandell, Castlerigg Holdings, Castlerigg Master Investments, and Castlerigg International each disclaims beneficial ownership of the securities with respect to which indirect beneficial ownership is described.
(3)
Includes Castlerigg’s estimated 45% pro rata share of the 1,500,000 shares of common stock issuable to holders of allowed unsecured claims on the Effective Date (of which 183,580 have already been issued), subject to verification and distribution upon completion of an accounting reconciliation and preference analysis by the trustee under the PNG Ventures Creditor Trust.
(4)
Consists of 11,880,000 shares of common stock owned by PNG Cayman Holdings, a Cayman Islands exempted company, and 1,320,000 shares of common stock owned by Medley Opportunity Fund, LP, a Delaware limited partnership, both of which are affiliates of Medley.
(5)
Consists of the vested portion of the 2,197,342 shares issuable upon the exercise of options granted pursuant to Mr. Hacioglu’s employment agreement, which have an exercise price of $0.58 per share, which are subject to vesting as identified in Item 11. “Executive Compensation.”
(6)
Mr. Gupta, Castlerigg’s designee to the Company’s board of directors, is an employee of an affiliate of Castlerigg. Mr. Gupta is not deemed a beneficial owner of the shares beneficially owned by Castlerigg since Mr. Gupta does not have any voting or dispositive power over such shares.
(7)
Mr. Quimby, Medley’s designee to the Company’s board of directors, is an employee of an affiliate of Medley. Mr. Quimby is not deemed a beneficial owner of the shares beneficially owned by Medley since Mr. Quimby does not have any voting or dispositive power over such shares.
Agreements among our Principal Shareholders
On the Effective Date, we entered into a Shareholders’ Agreement (the “Shareholders’ Agreement”) and Registration Rights Agreement (the “Registration Rights Agreement”) with Medley and Castlerigg. Pursuant to the Shareholders’ Agreement, each of Medley and Castlerigg has the right to nominate one director for election to our Board of Directors and each has agreed to vote its shares for the other’s nominee. We may not change the size of the Board or the number of directors required for a quorum without the consent of Medley and Castlerigg. In addition, we are required to obtain the approval of each of Medley and Castlerigg prior to undertaking certain actions, including, without limitation:
·
the hiring or firing of our senior executive officers;
·
pledging of any of our assets or creation of any liens;
·
making any changes in accounting methods or policies, or causing a change in our auditors;
·
amending our charter or bylaws in a manner that could reasonably be expected to be adverse to Medley or Castlerigg;
·
creating any committee of the Board of Directors;
·
issuance of any preferred stock or other stock with rights senior to the common shares issued to Medley and Castlerigg; and
·
any sales, mergers, or business combinations involving the Company.
The Shareholders’ Agreement also provides that, if we have not been sold within four years of the Effective Date, then at any time upon the request of Medley or Castlerigg, we must retain a nationally recognized investment bank for the purpose of affecting a sale of the Company. The Shareholders’ Agreement also contains preemptive rights that require us, before issuing any new securities to any person, to offer such securities to Medley and Castlerigg on the same terms and conditions, which offer shall remain open for an irrevocable period of ten days.
The Shareholders’ Agreement is to remain in effect until such time as Medley and Castlerigg own less than five (5%) percent of our outstanding shares.
Under the Registration Rights Agreement, we have agreed to file, within 60 days of demand of either Castlerigg or Medley, a registration statement with the Securities and Exchange Commission (“SEC”) to register for public resale the shares owned by Castlerigg and Medley, which registration statement is required to become effective on the earlier of (i) the 90th day following the filing of such registration statement with the SEC or (ii) the fifth trading day following the date on which the SEC notifies us that the registration statement will not be reviewed or is no longer subject to review and further comments. Within 30 days after becoming eligible to use a registration statement on Form S-3, we must file a shelf registration statement on Form S-3 to cover the shares owned by Castlerigg and Medley, which registration statement must become effective on the 90th day following the date on which we become eligible to utilize Form S-3, subject to certain exceptions. We also granted “piggyback” registration rights to Medley and Castlerigg which are triggered if we propose to file a registration statement for our own account or the account of one or more stockholders until the earlier of the sale of all of the shares owned by Castlerigg and Medley or such shares become eligible for sale under Rule 144 without restriction. Failure to timely satisfy the filing or effectiveness deadlines specified above will subject us to certain monthly financial penalties.
Item 13.
Item 13.
Certain Relationships and Related Transactions.
Employment Agreements
We have entered into an employment agreement with Cem Hacioglu and A. Bradley Gabbard, and have issued options to each person pursuant to their respective employment agreements, as amended. A description of the employment agreements is set forth under “Item 11. Executive Compensation” of this report.
Consulting Agreement-Director
On July 16, 2008, Mr. Marcum entered into a six-month consulting agreement with the Company that provides for a monthly consulting fee of $3,125 per month. This agreement also awarded Mr. Marcum 10,000 stock options at a strike price of $10 per share, and a seven-year term. All options vested six months after the date of the agreement. The agreement also provided for additional consideration and the award of additional stock options under certain conditions, none of which have been satisfied. Mr. Marcum’s consulting agreement was terminated effective July 1, 2009. Under the Plan, effective March 24, 2010, our existing equity was eliminated, including all options, warrants and other derivative instruments that are linked to our existing equity. Accordingly, all such options granted to Mr. Marcum have been cancelled.
Transactions with our Principal Shareholders
On the Effective Date, we entered into Senior Credit Facility with Medley and Castlerigg, which provides for a senior secured term loan facility in the principal amount of $15.55 million, consisting of a $9.8 million four year senior secured term loan from Medley, a $5.5 million four year senior secured term loan from Castlerigg, and a $250,000 ten month senior secured loan from Castlerigg. A description of the Senior Credit Facility is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In connection with the Credit Agreement, we entered into a Shareholders’ Agreement and Registration Rights Agreement with Medley and Castlerigg, each of which are described in more detail in “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters-Agreements Among Our Principal Shareholders” of this report.
In March 2011, we entered into a $5.0 million Senior Secured term loan with Medley (“the Medley Senior Secured Debt”). The $4.4 million in net proceeds from this facility will be used to purchase certain LNG trailers and mobilization equipment, LNG mobile fueling equipment, and for working capital. In addition, $500,000 of the Medley Senior Secured Debt financing will be set aside to fund, if necessary, required payments of interest related to the facility, and approximately $100,000 of the financing will be used to pay the legal expenses and other direct costs of the transaction. The facility provides for a senior secured lien on all assets of the Company, other than those assets pledged to FCF. The liens granted under the Medley Senior Secured Debt are prior to the liens that secure the Senior Credit Facility as described above. The provisions of the Medley Senior Secured Debt provide for the payment of interest monthly at the rate of 13% per annum, and also provide for a due date of March 24, 2014, thereby coinciding with the due date of the Senior Credit Facility. Likewise, the provisions of the Medley Senior Secured Debt include customary covenants and conditions that coincide with the provisions of the Senior Credit Facility.
Director Independence
Upon consideration of the criteria and requirements regarding director independence set forth in Rules 5000(a)(19) and 5605(a)(2) of the rules of the Nasdaq Stock Market, our board of directors has determined that W. Phillip Marcum, and Kevin P. Collins are independent. Our board of directors has not created separately-designated standing committees, but Kevin P. Collins would be considered “independent” for purposes of Rule 5605(c)(2) of the rules of the Nasdaq Stock Market relating to members of audit committees. Officers are elected annually by our board of directors and serve at the discretion of our board of directors.
Item 14.
Item 14.
Principal Accountant Fees and Services
Audit Fees
We have engaged Montgomery Coscia Greilich, LLP for the audit of our financial statements for the years ended December 31, 2010 and 2009 and the reviews of the financial statements included in each of our quarterly reports on Form 10-Q during the years ended December 31, 2010 and 2009.
Audit-Related Fees
The fees billed by our independent accountants for audit-related services during the fiscal years ended December 31, 2010 and 2009 were $112,322 and $104,486 respectively.
Tax Fees
The fees billed by our independent accountants for tax fees for the years ended December 31, 2010 and 2009 were $25,529 and $2,000, respectively.
All Other Fees
The fees billed by our independent accountants for non-audit services during the years ended December 31, 2010 and 2009 were $14,330 and $13,047, respectively.
Audit Committee Pre-Approval Policies and Procedures
Our board of directors serves as our audit committee. It approves the engagement of our independent auditors, and meets with our independent auditors to approve the annual scope of accounting services to be performed and the related fee estimates. It also meets with our independent auditors prior to the completion of our annual audit and reviews the results of their audit and review of our annual and interim consolidated financial statements, respectively. During the course of the year, our chairman has the authority to pre-approve requests for services that were not approved in the annual pre-approval process. The chairman reports any interim pre-approvals at the following quarterly meeting. At each of the meetings, management and our independent auditors update our board of directors regarding material changes to any service engagement and related fee estimates as compared to amounts previously approved. During 2010 and 2009, all audit and non-audit services performed by our independent accountants were pre-approved by our board of directors in accordance with the foregoing procedures.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as a part of this report or incorporated herein by reference:
(1)
Our Consolidated Financial Statements.
(2)
Financial Statement Schedules: None.
(3)
Financial Statement Exhibits: None
INDEX TO EXHIBITS.
_______________
* filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors of Applied Natural Gas Fuels, Inc. hereby constitutes and appoints Cem Hacioglu, his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file any and all amendments to this Form 10-K, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as full to all intents and purposes as he himself might or could do if personally present, thereby ratifying and confirming all that said attorneys-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
FORM 10-K
APPLIED NATURAL GAS FUELS, INC.
The following financial statements of Applied Natural Gas Fuels, Inc. are included in response to Item 8:
Montgomery Coscia Greilich LLP
Certified Public Accountants
2500 Dallas Parkway, Suite 300
Plano, Texas 75093
972.748.0300 p
972.748.0700 f
Thomas A. Montgomery, CPA
Matthew R. Coscia, CPA
Paul E. Greilich, CPA
Jeanette A. Musacchio
James M. Lyngholm
Christopher C. Johnson, CPA
J. Brian Simpson, CPA
Rene E. Balli, CPA
Erica D. Rogers, CPA
Dustin W. Shaffer, CPA
Gary W. Boyd, CPA
Michal L. Gayler, CPA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and stockholders
Applied Natural Gas Fuels, Inc.
Westlake Village, California
We have audited the accompanying consolidated balance sheets of Applied Natural Gas Fuels, Inc. and subsidiaries as of December 31, 2010 (successor entity) and 2009 (predecessor entity) and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the nine months ended December 31, 2010 (successor entity), the three months ended March 31, 2010 (predecessor entity) and the year ended December 31, 2009 (predecessor entity). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 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 financial statements. An audit also includes 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 financial position of Applied Natural Gas Fuels, Inc. and subsidiaries as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the for the nine months ended December 31, 2010, the three months ended March 31, 2010 and the year ended December 31, 2009 in conformity with U.S generally accepted accounting principles.
/s/ Montgomery Coscia Greilich LLP
Montgomery Coscia Greilich LLP
March 29, 2010
Plano, Texas
Applied Natural Gas Fuels, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
See accompanying notes to the consolidated financial statements.
Applied Natural Gas Fuels, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
See accompanying notes to the consolidated financial statements.
Applied Natural Gas Fuels, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
Applied Natural Gas Fuels, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
See accompanying notes to the consolidated financial statements.
Applied Natural Gas Fuels, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
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,” “Successor Entity,” “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. 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.
The acquisition of New ELNG was effected through a Share Exchange Agreement (the “Exchange Agreement”) with Earth Biofuels, Inc., a Delaware corporation (“EBOF”) and its wholly owned subsidiary, Earth LNG, Inc., a Texas corporation (“ELNG”). In the Exchange Agreement, ANGF acquired 100% of the outstanding shares of New ELNG, a newly formed and wholly-owned subsidiary of ELNG, in exchange for the issuance to EBOF of 7,000,000 shares of the common stock of the Company (the “Exchange Shares”) and certain other consideration and share issuances (said transaction being referred to herein as the “Share Exchange”). Principally all of the Exchange Shares were subsequently transferred by EBOF to the holders of EBOF notes upon the exercise of exchange rights granted in conjunction with the Share Exchange. Exercise of the exchange rights resulted in the cancellation of up to $70 million of the EBOF notes and the acquisition of a majority ownership in the outstanding ANGF shares by the former EBOF note holders. Prior to transfer, the Exchange Shares were subject to an irrevocable proxy by EBOF in favor of the largest holder of the EBOF notes as additional consideration in the Share Exchange. The irrevocable proxy granted full majority voting rights to the EBOF note holder and restricted EBOF's ability to transfer or assign the Exchange Shares. Other share issuances related to the acquisition included shares issued to other creditors for amended debt terms on assumed debts totaling 1.1 million shares, plus 1.1 million shares reserved to such creditors for future issuance.
As the Share Exchange resulted in a change of control, ANGF accounted for the Share Exchange under the purchase accounting method.
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).
In accordance with ASC 852.10, all pre-petition liabilities subject to compromise are segregated in the Consolidated Balance Sheet as of December 31, 2009 and classified as liabilities subject to compromise at management’s estimate of allowable claims. Liabilities not subject to compromise are classified as current and non-current in the Consolidated Balance Sheet as of December 31, 2009. Revenues, expenses, realized gains and losses, and provisions for losses that result from the reorganization are reported separately as reorganization items, net, in the Consolidated Statements of Operations for the year ended December 31, 2009 and the three month period ended March 31, 2010. Reorganization items are also disclosed separately in the Consolidated Statement of Cash Flows for the year ended
December 31, 2009 and the three month period ended March 31, 2010. 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.
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, 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”). The Disclosure Statement was attached as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on January 19, 2010. The Confirmation Order, together with a copy of the final and confirmed Amended Plan (which updates and supersedes the Plan included within our Current Reports on Form 8-K filed on January 19, 2010 and March 18, 2010), is incorporated herein by reference.
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 1st quarter of 2010.
On the Effective Date, and in complete settlement of all pre-petition claims: (i) 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, 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 (collectively, the “Unsecured Creditor Fund”).
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.
As of March 31, 2010, the Company’s capital structure consisted of the following:
1.
A new $10.0 million Senior Secured Term Loan in favor of Medley, bearing an interest rate of 10% with a maturity date on the fourth anniversary following the Effective Date. This loan is secured by first lien rights, pari passu with Castlerigg (described below), on all assets except for accounts receivable.
2.
A new $5.650 million Senior Secured Term Loan in favor of Castlerigg, bearing an interest rate of 10% with a maturity date on the fourth anniversary following the Effective Date and secured by first lien rights, pari passu, with Medley (described above), on all assets except for accounts receivable.
3.
A $250,000 Senior Secured Short-Term Loan in favor of Castlerigg, bearing an interest rate of 10%, and payable in ten equal monthly payments of $25,000 commencing with the Effective Date.
4.
A $2 million working capital Line of Credit (“Line of Credit”) in favor of Greenfield Commercial Credit LLC (“Greenfield”) that matures on April 1, 2011, with an interest rate and terms consistent with the credit facility in effect prior to the Chapter 11 filing. This facility is secured by accounts receivable.
5.
Common Stock- 20,000,000 newly issued shares of new Common Stock (“New ANGF Common Stock”) issued as follows:
a.
13,200,000 common shares issued to Medley as consideration for the conversion to equity of the majority of the senior secured note held at the time of the Company’s Chapter 11 filing.
b.
5,300,000 common shares issued to Castlerigg as consideration for its new investment in the Company.
c.
1,500,000 common shares issued to unsecured creditors in partial settlement of unsecured trade and other unsecured debts, as provided by the terms of the Amended Plan.
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. Fresh Start reporting is required because (i) the reorganization value of the assets of the Company immediately before the date of Confirmation of the Amended Plan was less than the sum of all the allowed claims and post-petition liabilities, and (ii) holders of the Company’s common shares immediately prior to Confirmation of the Amended Plan received less than 50% of the common shares issued in conjunction with the Amended Plan. 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 1st 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.
In connection with the Amended Plan, the Company engaged a valuation firm to provide management with an estimate of the fair market value of the Company’s assets. This report was used as the basis for adjusting the carrying values of the Company’s property, plant, and equipment as of December 31, 2009 (see Note 5). Other Fresh Start adjustments effective as of March 31, 2010 are summarized in the table below.
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; likewise, references to “successor entity” refer to the Company on or after March 31, 2010. Due to the different basis of accounting utilized by the predecessor entity and the successor entity, the financial statements of such entities are not necessarily considered comparable.
The following table summarizes the adjustments that have been made by the Company as of March 31, 2010 to reflect application of Fresh Start reporting, as well as recognition of the effects of the Amended Plan (amounts in thousands):
(1) Adjustment to reflect estimated net proceeds held in escrow and due to the Company, related to the March 24, 2010 closing of all transactions contemplated by the Amended Plan. Proceeds to be released from escrow upon final determination and payment of all administrative claims.
(2) Estimated liabilities paid from proceeds of March 24, 2010 closing.
(3) Adjustments to record current and long term portion of all debts of the successor company.
(4) Adjustment to reflect issuance of successor company common stock, and cancellation of predecessor company common stock.
(5) Adjustment to record net effect of all reorganization adjustments and Fresh Start adjustments.
Reorganization items included in the predecessor income statement for the 1st quarter of 2010 are summarized below:
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. Significant estimates included in the financial statements include a valuation allowance relative to fixed assets in the balance sheet dated December 31, 2009 (see subsequent paragraph - Impairment of Long Lived Assets, and Note 5 - Property, Plant and Equipment) and the valuation of certain stock options and derivatives (See Note 9 - Stockholders’ Equity).
Financial Reporting by Entities in Reorganization under the Bankruptcy Code - As a result of our bankruptcy filing (see Note 2), and in accordance with ASC 852.10, all liabilities subject to compromise are segregated in the Consolidated Balance Sheet as of December 31, 2009 and classified as liabilities subject to compromise at management’s estimate of allowable claims. Liabilities not subject to compromise are classified as current and non-current. Revenues, expenses, realized gains and losses, and provisions for losses that result from the reorganization are reported separately as reorganization items, in the Consolidated Statement of Operations for the year ended December 31, 2009 and three month period ended March 31, 2010. Reorganization items are also disclosed separately in Consolidated Statements of Cash Flows for those periods. 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 fair market value of the assets of the Company was estimated to be approximately $29 million. As a result, the carrying values of assets of the Company were adjusted, effective December 31, 2009, to this amount, 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 repair 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. Depreciation provisions for the nine months ended December 31, 2010 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. Total grant proceeds received during the nine months ended December 31, 2010 were $112,000.
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 - see Note 11 “Customer and Supplier Concentrations.” Less than 10% of our sales are derived from customers in Mexico.
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 nine months ended December 31, 2010, three months ended March 31, 2010 and year ended December 31, 2009 were $804,000, $0, and $90,000, 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 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 or 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 2009, all deferred tax assets are fully reserved. For additional information, see Note 8 “Income Taxes.”
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 CURRENT ASSETS
Prepaids and other current assets consist of the following (amounts in thousands):
NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT
As of December 31, 2010 and December 31, 2009, property, plant, and equipment consisted principally of the assets related to the LNG business acquired in the Share Exchange (amounts in thousands):
Depreciation expense for the nine months ended December 31, 2010, three months ended March 31, 2010, and year ended December 31, 2009 were $1.284 million, $0.628 million, and $2.427 million 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 4th quarter of 2009, and estimated that the total fair market value of the assets of the Company was approximately $29.2 million. As a result, effective December 31, 2009, the Company reduced the carrying value of its assets by recording a valuation allowance of $8.052 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. Commencing as of the Effective Date, the Company records depreciation according to its existing policy as described below.
ANGF’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 - CLASSIFICATION OF PREDECESSOR ENTITY LIABILITIES AS OF DECEMBER 31, 2009
Liabilities subject to compromise refers to liabilities of the predecessor entity incurred prior to the Petition Date that were unsecured or otherwise anticipated to be compromised and/or impaired, and were addressed and resolved in various manners at less than face value according to the terms of the Amended Plan. This category of liabilities does not include post-petition debts, administrative claims, or other priority claims that have payment priority under the Bankruptcy Laws and are therefore not subject to compromise, and referred to as “liabilities not subject to compromise.”
Pre-petition liabilities subject to compromise refers to unsecured obligations that will be extinguished under a plan of reorganization. ASC 852.10 requires pre-petition liabilities that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. These liabilities represent the estimated amount expected to be allowed on known or potential claims to be resolved through the Chapter 11 process, and remain subject to future adjustments arising from negotiated settlements, actions of the bankruptcy court, rejection of executory contracts and unexpired leases, the determination as to the value of any potential collateral securing the claims, proofs of claim, or other events. Pre-petition liabilities subject to compromise also include certain items that may be assumed under the plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.
In accordance with ASC 852.10, discounts and prepaid debt issuance costs associated with borrowing classified as pre-petition liabilities subject to compromise should be viewed as valuation adjustments to the related debt. When the debt has become an allowed claim and the allowed claim differs from the net carrying amount of the debt, the recorded amount should be adjusted to the amount of the allowed claim (thereby adjusting existing debt issuance costs to the extent necessary to report the debt at this allowed amount). The Company has classified such debt as “liabilities subject to compromise” on the Consolidated Balance Sheet. The Company has adjusted debt issuance costs, totaling approximately $1.3 million at December 31, 2009, related to the Notes, and has classified these costs as “liabilities subject to compromise.”
As discussed in Note 2, the Amended Plan of Reorganization of the Company was completed and effective as of the Effective Date. As such, the treatment and classification of virtually all liabilities in existence as of December 31, 2009 is known. The following table summarizes “liabilities subject to compromise” as of December 31, 2009 (amounts in thousands):
Under the terms of the Amended Plan, all of “Liabilities Subject to Compromise” were resolved and/or otherwise liquidated as of the Effective Date.
Liabilities that are not subject to compromise as of December 31, 2009 include the following (amounts in thousands):
With the exception of the Post-petition financing provided by Castlerigg, the Greenfield Line of Credit and the priority tax claims, all other liabilities in the above schedule were either paid on the Effective Date, or were otherwise liquidated in the normal course of business pursuant to established trade terms. Under the terms of the Plan, the financing provided by Castlerigg became part of the new Senior Secured Term Loan. Also under the terms of the Plan, virtually all of the priority tax claims will be paid on an installment basis over the course of approximately 54 months, pursuant to the terms of the Amended Plan. As described in Note 7, the Greenfield Line of Credit was renewed through April 1, 2011.
NOTE 7 - NOTES PAYABLE, CONVERTIBLE DEBTSANDLINE OF CREDIT
As described in Note 2, the Company’s Amended Plan was confirmed by the Bankruptcy Court on March 12, 2010. Subsequently, all transactions contemplated by the Amended Plan were completed on March 24, 2010, the Effective Date. As of the Effective Date, and with the sole exceptions of the Greenfield Line of Credit and a post-petition financing of $250,000 provided by Castlerigg, the notes, secured debts, convertible debts and other structured debts (collectively the “structured debts of the predecessor entity”) that were included on the December 31, 2009 balance sheet of the predecessor entity were terminated and/or liquidated in accordance with the terms of the Amended Plan. As such, the disclosures included in this Note 7 that relate to the structured debts of the predecessor entity have been simplified and abbreviated, and are provided for information purposes only.
Structured Debts of the Predecessor Entity:
The following table summarizes the Structured Debts of the Predecessor Entity as of December 31, 2009 (amounts in thousands):
Secured Credit Agreement
In conjunction with the Share Exchange, the Company and its subsidiaries entered into an Amended and Restated Credit Agreement dated June 26, 2008 with Medley, its senior secured lender (the “Secured Credit Agreement”) and became obligated for the repayment of secured debt in the original principal amount of $34 million. In May 2009, this Secured Credit Agreement was increased by $2 million to $36 million, to provide financing for the purchase of certain LNG transport trailers by the Company.
As of the Petition Date, the Company was not in compliance with certain covenants of the Secured Credit Agreement, including the covenant to maintain minimum EBITDA and a minimum fixed charge coverage ratio. In addition, in May 2009, the Company suspended interest payments under the Secured Credit Agreement, pending completion of negotiations to restructure the outstanding debt under the Secured Credit Agreement. Also, the filing by the Company of Chapter 11 proceeding was an event of default under the Secured Credit Agreement. As a result, the entire principal amount of this Secured Credit Agreement was considered subject to acceleration under the terms of the Secured Credit Agreement.
As of December 31, 2009, the principal amount outstanding under the Secured Credit Agreement was $36.4 million, including accrued and unpaid interest, and net of debt discounts, all in accordance with the provisions of ASC 852.10. Based upon management estimates and subsequently confirmed by an independent appraisal, management determined that the value of the collateral that secures the Secured Credit Agreement was not sufficient to allow full recovery of the outstanding balance related to the Secured Credit Agreement. As a result, under the provisions of ASC 852.10, the Company discontinued any further accruals of interest related to this Secured Credit Agreement effective as of the Petition Date. Additionally, the full amount of this debt was classified as “liabilities subject to compromise.” Unpaid and accrued interest as of December 31, 2009 was approximately $1.3 million.
The Secured Credit Agreement was secured by virtually all of the Company’s assets, excluding accounts receivables, and required monthly payments, in advance, of interest at the annualized rate of Libor plus 7.25%, with Libor subject to a floor of 2.5%. As such, the interest rate in effect as of December 31, 2009 was an annualized rate of 9.75%.
In connection with the Share Exchange, the Company also entered into a Master Rights Agreement with Medley (the “Master Rights Agreement”). As part of the Master Rights Agreement, 1,100,000 shares were issued to Medley as additional consideration for the amended Secured Credit Agreement. In addition, up to an additional 1,100,000 shares were to be issued to Medley upon the earlier of July 1, 2009, or the occurrence of certain other defined events, such earlier date being defined as the “price determination date.” Upon the price determination date, an assumed value (as defined) was to be determined. The number of shares to be issued was to be then calculated based upon a formula that divides $11,000,000 by the assumed value of the common stock to determine the maximum number of shares to be issued (including the 1,100,000 shares already issued), subject to a maximum issuance of an additional 1,100,000 shares.
As of the Effective Date, the Secured Credit Agreement was terminated, compromised, liquidated, and settled pursuant to the provisions of the Amended Plan. Likewise, the Shares held by the lender, along with all other rights to receive additional shares, were cancelled as of the Effective Date.
Greenfield Line of Credit
In conjunction with the Share Exchange, the Company became obligated for the repayment of a secured revolving Line of Credit with Greenfield that provided up to $2.5 million of working capital financing against certain eligible accounts receivables. The Share Exchange had the effect of the assumption of the Greenfield Line of Credit by the Company.
The Greenfield Line of Credit is secured with a senior lien on all receivables, and bears interest at an annual rate of Libor plus 7%, with Libor subject to a floor of 2% (9.0% at December 31, 2009), and includes 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%. Including the interest rate, loan servicing fees and various other fees and charges, the Company’s average annualized effective interest rate associated with this facility was approximately 28.4% during 2009. As of December 31, 2009, the outstanding balance of the Greenfield Line of Credit was $741,201.
Immediately following the Chapter 11 petition date, the Company entered into negotiations with Greenfield to provide debtor-in-possession (“DIP”) financing via the secured revolving Line of Credit. These negotiations culminated with Bankruptcy Court approval of a DIP Financing agreement with terms identical to those described above, with the following modifications: (1) the maximum amount of financing was reduced from $2.5 million to $2.0 million; and (2) an additional fee of $20,000 was payable in equal monthly installments over the remaining term of the note (March 1, 2010). The Greenfield Line of Credit is considered fully secured, and has been classified on the balance sheet as “liabilities not subject to compromise.”
Immediately after the Effective Date, this Line of Credit was extended through April 1, 2011, with such extension requiring additional loan modification fees of $21,667.
Convertible Debt
In conjunction with the Share Exchange, the Company became obligated for the repayment of a $626,250 convertible promissory note payable to Black Forest International, LLC (“BFI”). This note (herein “BFI Note”) was convertible at any time into 756,325 shares of the Company stock, at $10 per share for a portion of the note totaling $563,250, and $0.09 per share for $63,000 balance of the BFI Note. Proceeds from a 3rd quarter 2008 private debt financing were used to repay $563,250 of the principal balance on the BFI Note (the portion convertible at $10 per share), leaving a balance outstanding as of December 31, 2009, including accrued interest, of $72,000.
The remaining portion of the BFI Note was convertible into 700,000 common shares at the conversion rate of $0.09 per share, subject to substantial adjustment under certain circumstances as described below. Interest accrued at 12%, and was payable monthly. The BFI Note had no stated maturity date, was payable on demand, and did not provide for prepayment in the absence of consent by the holder. Due to the provisions of the BFI Note, the outstanding balance was considered unimpaired and classified as “liabilities not subject to compromise” as of December 31, 2009. As of the Effective Date, the balance of the BFI Note was fully paid pursuant to the provisions of the Amended Plan, thereby also terminating all embedded rights associated with the BFI Note.
Also, in connection with the Share Exchange, the Company became liable for a Subordinated Convertible Promissory Note in the amount of $171,000. As of December 31, 2009, the remaining balance was $59,785 of which the note is convertible at any time with a conversion price of $0.09 per share, or 664,278 shares. This note was unsecured and was classified as “liabilities subject to compromise” at December 31, 2009. As of the Effective Date, this note, including all of its associated and embedded rights, was terminated, compromised, liquidated and settled pursuant to the provisions of the Amended Plan.
Castlerigg Private Convertible Debt Financing
Effective as of August 19, 2008, the Company entered into a securities purchase agreement (the “Agreement”) with Castlerigg pursuant to which Castlerigg purchased a 15% subordinated convertible note for an aggregate principal amount of $3,188,235 (the “Note”). As of December 31, 2009, Castlerigg also owned a beneficial interest of 60.38% of the outstanding common shares of the Company. The Note bears interest at 15% per annum and such interest is payable in arrears on the first day after the end of each quarterly period, beginning September 30, 2008. Upon the closing of the transactions contemplated by the Agreement, the Company prepaid interest to Castlerigg in the amount of $477,000, representing interest due and payable on the Note through August 19, 2009 (the “Prepaid Interest”). In addition, $1,000,000 was placed into escrow to be used to pay interest accruing on the Secured Credit Agreement.
The Note was scheduled to mature on August 19, 2010 (the “Maturity Date”), subject to extension at the option of Castlerigg through August 19, 2012. This Note also contained cross default provisions that would accelerate maturity upon a default related to the Medley Secured Credit Agreement, and was considered in default as of the Petition Date.
The Note was convertible at the option of Castlerigg at any time into shares of common stock at an initial conversion price equal to $10.00 per share (“Initial Conversion Price”), and included anti-dilution provisions that allowed for future adjustment of the conversion price upon the occurrence of certain future events, including future issuances of common stock and other convertible instruments by the Company.
In connection with the Agreement, Castlerigg received a warrant to purchase 797,059 shares of common stock of the Company (the “Warrant”). The Warrant was exercisable for a period of ten years from the date of issuance at an initial exercise price of $10.00 per share, subject to adjustment as described in the previous paragraph.
Since this Note was unsecured, under the provisions of ASC 852.10, the Company discontinued any further accruals of interest related to this Note effective as of the Petition Date. As of December 31, 2009, the balance of this note, including accrued interest, was $3.188 million, which was classified as “liabilities subject to compromise.” As of the Effective Date, this Note, including all of its associated and embedded rights, and the Warrant were terminated, compromised, liquidated, and settled pursuant to the provisions of the Amended Plan.
In conjunction with the Chapter 11 reorganization, Castlerigg provided $250,000 in additional financing during the 4th quarter of 2009. Under applicable bankruptcy rules, this financing was considered a priority administrative claim; therefore, under ASC 852.10, this amount is classified as “liabilities not subject to compromise” as of December 31, 2009. As of the Effective Date, this liability was converted to a $250,000 senior secured short-term note, payable in 12 equal monthly installments, with interest at 10%, commencing immediately following the Effective Date.
Notes Payable and Other Current Liabilities
The Company entered into an unsecured note agreement dated September 29, 2008 in the amount of $1,802,788 with a vendor. The note was due on September 25, 2009, and required monthly payments of $25,000 per month. The balance of this note as of December 31, 2009 was approximately $1,696,480. This note was unsecured and is classified as “liabilities subject to compromise” as of December 31, 2009. As of the Effective Date, this note was terminated, compromised, liquidated, and settled pursuant to the provisions of the Amended Plan.
In connection with the Share Exchange, the Company assumed liability for certain vendor invoices relating to transportation services provided to EBOF for natural gas feedstock to the plant. The Company agreed to compromise and settle this liability over time by making monthly payments at the rate of $25,000 per month during the period of May through December 2009, with a lump sum payment of $217,000 in December 2009. Also, the Company retained an option to extend the monthly payments through June 2010, with a lump sum payment in June 2010 of $200,000, resulting in slightly higher total payments of $83,000 if the extension period is exercised. In conjunction with the Chapter 11 proceeding, this vendor was identified as a critical vendor for the purposes of the Bankruptcy proceeding (see Note 2); and, the terms of the settlement agreement were amended to allow monthly payments to continue through the Effective Date, with a final payment of the remaining settlement amount to be made immediately following the Effective Date. As of December 31, 2009, the balance owed to the vendor as the remaining settlement was $217,000, and was classified as “liabilities not subject to compromise.” As of the Effective Date, the balance due to the vender under the settlement agreement was fully paid.
Structured Debts of the Successor Entity:
The following table summarizes the Structured Debts of the Successor Entity as of December 31, 2010 (amounts in thousands):
Medley/Castlerigg Credit Agreement
On the Effective Date, we entered into a Credit Agreement (the “Medley/Castlerigg Credit Agreement”) with Medley, as lender and agent, and Castlerigg, as lender. The Medley/Castlerigg 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”).
Borrowings under the Medley/Castlerigg 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 shall, at the Company’s option, be paid-in-kind and added to the principal amount of the Medley/Castlerigg 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. Interest accrued on the Castlerigg Short Term Loan, along with principal installments of $25,000, shall be paid to Castlerigg on a monthly basis from the Effective Date until the maturity of the Castlerigg Short Term Loan.
As of December 31, 2010, the Company has capitalized approximately $1.270 million of paid in-kind interest accrued through such date by increasing the principal amounts of the Medley/Castlerigg Credit Agreement. In addition, the Company had a remaining balance due on the Castlerigg Short Term Loan in the amount of $75,000.
Pursuant to a Guarantee and Collateral Agreement (the “Collateral Agreement”), the obligations under the Medley/Castlerigg 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 “Greenfield Collateral” as to which Greenfield has a senior secured interest), and a second priority security interest in the Greenfield Collateral. In addition, the Medley/Castlerigg 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 Medley/Castlerigg 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 Medley/Castlerigg 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 Medley/Castlerigg 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 Medley/Castlerigg 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 Medley/Castlerigg Credit Agreement;
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a breach of any representation or warranty contained in the Medley/Castlerigg Credit Agreement or related documents;
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failure to comply with or perform certain covenants under the Medley/Castlerigg Credit Agreement;
·
the insolvency of the Company or any of our subsidiaries;
·
a termination or default under our Intercreditor Agreement with Greenfield; or
·
any change of control of our outstanding shares.
The Medley/Castlerigg Credit Agreement also contains certain financial covenants as summarized as follows:
·
fixed charge coverage ratio of 0.6:1.0 for the quarters ended June 30, 2011, September 30, 2011, and December 31, 2011; and 1.2:1.0 for all subsequent quarters;
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EBITDA (earnings before interest, taxes, depreciation and amortization) of $200,000 per quarter for the quarter ended March 31, 2011; $350,000 for the quarters ended June 30, 2011, September 30, 2011, and December 31, 2011; and $600,000 for all subsequent quarters; and
·
Capital expenditures are limited to $750,000 during 2010; and limited to $1,000,000 for years thereafter.
Greenfield 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 is a revolving credit facility in the principal amount of up to $2,000,000 which accrues interest annually at a rate of LIBOR plus 7%, with LIBOR subject to a floor of 2% (9% at December 31, 2010), and includes 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%. Including the interest rate, loan servicing fees and various other fees and charges, the Company’s average annualized effective interest rate during the nine months ended December 31, 2010 associated with this facility was approximately 43%. The Note is secured by a senior secured interest in our accounts receivable and inventory. The Greenfield Note matures on the earlier of demand or April 1, 2011, and is 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. As of December 31, 2010, the balance outstanding on this note was approximately $837,000.
Effective February 8, 2011, the Company replaced the Greenfield Line of Credit with a new facility-see Note 13 “Subsequent Events.”
Other Long Term Liabilities
Other liabilities include certain priority tax payments in the approximate amount of $541,000, payable in 60 equal monthly installments commencing May 2010, with interest at approximately 7% per annum. The Company also has an agreement with its legal counsel to defer $150,000 of legal fees incurred during the Chapter 11 process, payable in quarterly installments commencing December 31, 2010.
Maturities of long-term debts
The following table sets forth our future long-term debt payment obligations as of December 31, 2010 are as follows (amount in thousands):
NOTE 8 - INCOME TAXES
Income Tax Expense:
The Company’s effective tax rate was zero for the nine months ended December 31, 2010, the three month period ended March 31, 2010 and the year ended December 31, 2009. The Company paid no income taxes during the year ended December 31, 2009 and does not anticipate that it will pay any income taxes for the year ended December 31, 2010 due to the utilization of net operating loss carryforwards.
Reconciliation of Provision/Benefits:
A reconciliation of the provision/(benefit) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows (amounts in thousands) :
(1) Represents the mathematical addition of book net loss for the nine months ended December 31, 2010 plus the book net income for the three month period ended March 31, 2010.
Summary of Deferred Tax Assets (amounts in thousands):
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 December 31, 2010 and 2009 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. The Company will, as of January 1, 2011, eliminate all net operating losses of approximately $16.3 million, and all other net deferred tax assets that existed as of December 31, 2010, 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 - an Interpretation of FASB Statement No. 109 Accounting for 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 the nine months ended December 31, 2010, three months ended March 31, 2010 or the year ended December 31, 2009.
NOTE 9-STOCKHOLDERS’ EQUITY
As of the Effective Date, all equity and equity derivatives of the Company that existed prior to the Effective Date were eliminated, including all shares of capital stock, options, warrants, and other similar derivative instruments linked to the Company’s equity.
On the Effective Date, the Company issued 20,000,000 common shares with a par value of $.001. The Company also ratified and confirmed the continued effectiveness of the options granted to Mr. Hacioglu within his Employment Agreement dated February 1, 2009, including the relevant adjustment features contained therein. As adjusted by virtue of the Amended Plan, Mr. Hacioglu's original option was surrendered. In its place and as of the Effective Date, we issued replacement options to purchase 1,997,342 shares of our common stock at an exercise price of $.58 per share (an implied value of 120% of the equity value of our shares under the Amended Plan) and an expiration date of February 1, 2019. As of December 31, 2010, 1,165,116 of these options are vested. The remaining options vest ratably over the next five quarters.
In June 2010, the Company adopted the “Applied Natural Gas Fuels, Inc. 2010 Stock Incentive Plan” (the “Plan”). This Plan reserves up to 2.0 million shares of common stock and/or options to be granted at future dates to employees, officers, directors and consultants, of which 1.6 million options were granted during the nine months ended December 31, 2010, including 1.2 million options granted to Directors of the Company.
Common Stock Purchase Option Activity
The following table summarizes common stock purchase warrants and stock option activity for the nine month period ended December 31, 2010:
The weighted average exercise price of common stock purchase options during the period was $0.58 per share. As of December 31, 2010, total vested options were 2,296,366.
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 December 31, 2010, these options were earned, but will not be issued until a later date. The options will vest immediately upon issuance, will have a ten year term, and include a strike price of $.58 per share. These options have been valued at $82,025, all of which has been 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, the obligation to issues these options has been recorded as a liability.
Stock-based Compensation Expense
Using the "Valuation Assumptions" discussed in the following section, the Company has estimated the value of the stock options granted prior to March 31, 2010 to be approximately $759,000, and the value of stock options granted or scheduled to be granted during the nine months ended December 31, 2010 was $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 nine months ended December 31, 2010 was $958,000, including Mr. Hacioglu’s options that were earned in 2010, but have not yet been issued.
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 December 31, 2010:
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 December 31, 2010, 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 December 31, 2010 (amounts in thousands):
Rent expense, including variable rent, totaled $106,000, $116,000, and $34,000 for the year ended December 31, 2009, nine months ended December 31, 2010, and three months ended March 31, 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
The Company has a contingent obligation to fund an additional $450,000 to 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 December 31, 2010, this obligation has been reduced by approximately $59,000 via the collection of excise taxes that have been forwarded to the Creditors Fund.
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 operators, 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:
All other customers individually contributed less than 10% to total sales for each period. Our contract with the City of Phoenix expired effective July 1, 2009.
NOTE 12-RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued ASC 810. ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. We do not believe the adoption of ASC 810 will have a material impact on the Company.
In June 2009, the FASB issued ASC 105, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Standards.” ASC 105 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP. The Codification will supersede all existing non-SEC accounting and reporting standards. ASC 105 is effective in the first interim and annual periods ending after September 15, 2009. ASC 105 will have no effect on our consolidated financial statements upon adoption other than current references to GAAP that will be replaced with references to the applicable codification paragraphs.
In January 2010, the FASB issued new accounting guidance, which intended to improve disclosures about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels, the reasons for the transfers and to present information about purchases, sales, issuances, and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). The Company has applied the new disclosure requirements as of January 1, 2010, and the adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This guidance states that an entity that is an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. As such, an entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements. The guidance has become effective for the interim or annual reporting periods after June 15, 2010. The Company adopted this guidance on its effective date and it did not have an impact on its consolidated results of operations and financial condition.
NOTE 13-SUBSEQUENT EVENTS
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. 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.
In March 2011, the Company entered into Amendment # 1 to the Medley/Castlerigg Credit Agreement and closed on a new $5.0 million Senior Secured term loan provided by Medley (“the Medley Senior Secured Debt Amendment”). The $4.4 million in net proceeds from this financing will be used to purchase certain LNG trailers and mobilization equipment, LNG mobile fueling equipment, and for working capital. In addition, $500,000 of the proceeds from the Medley Senior Secured Debt Amendment will be set aside to fund, if necessary, future interest payments related to the facility; also, approximately $110,000 of this financing will be used to pay the legal expenses and other direct costs of the transaction. The facility provides for a senior secured lien on all assets of the Company, other than those assets pledged to FCF. The liens granted under the Medley Senior Secured Debt Amendment are prior to the liens that secure the original debt under the terms of the Medley/Castlerigg Credit Agreement as described in “Note 7 - Notes Payable, Convertible Debts, and Line of Credit.” The provisions of the Medley Senior Secured Debt Amendment provide for the payment of interest quarterly in arrears at the rate of 13% per annum. Amendment # 1 also modifies the interest payment terms on the original debt to quarterly in arrears, and amends certain covenants and conditions as follows:
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fixed charge coverage ratio of 1.0:1 for the quarter ended December 31, 2011, and 1.10:1 for all subsequent quarters;
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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
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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.