ITEM 1. DESCRIPTION OF BUSINESS
Our History
We, Next Fuel, Inc. (NXFI), were organized in the State of Nevada in August 2007 under the name Clinical Trials of the Americas, Inc. Our stock began trading on the Over-the-Counter Bulletin Board ("OTCBB") on June 11, 2008 under the trading symbol "CLLL". We were not successful in raising sufficient capital to support a clinical trials business. On May 21, 2009, we changed our name to Next Fuel, Inc.
On March 31, 2011, we purchased certain technology and intellectual property, which we used as the first step toward building a business that provides a range of technology and services to the oil and gas industry.
Our principal office and mailing address is located at 122 North Main Street, Sheridan, Wyoming 82801 and our telephone number is (307) 674-2145.
Description of Business and Plan of Operation
We are a technology provider and service company that assists owners of natural gas production resources to increase the efficiency of their operations by providing technology and technical support services. We do not plan to own or develop natural gas production projects, but our revenue stream relies on such owners and developers utilizing our technology to successfully produce and sell natural gas.
Our technology and services are all in various stages of development or are being investigated by us as targets for acquisition. None has generated substantial revenue for us to date and we face substantial challenges in completing development or acquisition of these technologies and services businesses. These technology and services include:
●
Technology for extracting natural gas from coal (the "Coal-to-Gas Technology" or "CTG Technology").
●
Low Energy Input Pervaporation (LPV) Technology to clean up water used in oil and natural gas production, including Frack drilling.
●
Carbon Dioxide to Product (CTP) Technology that targets the emerging market of carbon footprint elimination.
●
Disk filtration technology to remove suspended solids in the range of 200 microns to as small as 5 microns in size. We are currently testing this technology prior to making a decision whether to purchase it.
We are investigating opportunities to develop or acquire advanced technologies with a focus on clean renewable energy. We will focus on identifying and acquiring or developing a portfolio of growth opportunities with compelling market values and clean energy and environment stewardship, including collaborations with leading research institutes in the United States and other countries.
Coal-to-Gas Technology Description
"Natural gas" is a byproduct of microorganisms interacting with dissolved bioamenable carbon compounds in coal beds. Our Coal-to-Gas Technology (CTG Technology) maximizes these natural processes to enable owners of carbonaceous deposits, like coal and lignite, to enhance natural gas production from declining and/or depleted coal bed natural gas (CBNG) wells and/or initiate and sustain biogenic methane production in coal and other carbon formations in which native microorganisms are active
Our CTG Technology can be implemented by using existing infrastructure. This can significantly reduce overall capital costs. In addition, our CTG Technology is an in situ process that biologically transforms coal into clean burning natural gas in the ground. Our CTG Technology does not require us to extract coal from the ground to produce gas like some other coal utilization technologies, such as integrated gasification combined cycle (IGCC), underground coal gasification, and coal liquefaction (to diesel) and conversion. We assist operators to effectively utilize our technology in underground carbon seams.
Methane gas is a naturally occurring product that generally is produced by indigenous microorganisms metabolizing water-soluble and biologically-amenable compounds trapped in many coal and other carbonaceous structures. Methane producing processes can stop or substantially decline when nutrients and/or trace elements that are key to sustaining microbial metabolisms and reproduction decline. In other cases, when suitable substrates (e.g., bioavailable carbonaceous compounds) can no longer be accessed by microorganisms, the gas production ceases. Our Coal-to-Gas process re-introduces amendments we have designed and tested to the wide range of microorganisms that exist in the seams of coal and other carbonaceous deposits that originally formed the methane gas extracted from CBNG.
Our proprietary amendments consist of constituents with depolymerizing and structure-altering functions to “condition” coal to release bioavailable constituents, especially from the volatile fractions of coal, for the follow-up pathways for gas production. Our amendments recipe also contains key nutrients, trace vitamins, oxygen scavengers, carbon dioxide, pH adjusters, and other ingredients.
In effect, our CTG technology opens the door to the microorganisms' natural sources of substrates. Our CTG Technology then stimulates microorganisms' activity with amendments, which we proactively circulate throughout the carbon deposits. When the stimulated microorganisms convert the dissolved and bioamenable carbon compounds, our CTG Technology helps to release methane gas from the coal beds as a major byproduct produced by the diverse but interactive microbial pathways involved. In this process, our CTG Technology helps naturally occurring microorganisms through their life cycle. In return, these microorganisms “breath” methane gas as a commercial product. Therefore, implementing our Coal-to-Gas Technology actually enhances a natural process.
We circulate our amendments via a low pressure pumping network. We pump relatively low volumes of liquids at relatively low pressure. In contrast, other gas production methods such as "fracking" pumps much higher volumes of water using much higher pressure. We believe that utilizing lower volumes of water will provide us with a competitive advantage in dry geographic areas. The in-situ, biogenic nutrient circulation method maximizes the delivery of the injected nutrients to the coal seam. Next Fuel's pending patent applications regarding this technique are described in this Item under the caption "Intellectual Property Protection."
Customers and License Agreements
We currently have three license and test agreements under which three partners are testing and demonstrating our CTG Technology in China, Indonesia and India. Our licensees do not own large tracts of carbon deposits that would justify broad geographic territories. If any of our licensees want to expand their operations, they will have to acquire gas rights from third parties or sub-license to third parties.
China and Mongolia. We entered into a License Agreement effective March 31, 2012 (as amended by Amendment No. 1 effective April 1, 2012) with Future Fuel Limited, a British Virgin Islands limited liability company ("Licensee"), which is affiliated with Mr. Guangwei Guo, a member of our Board of Directors and a shareholder who has purchased a substantial number of shares of our Common Stock. This License Agreement and subsequent amendments are is described in detail in Item 13 of this Report "Certain Relationships and Related Transactions, and Director Independence."
The drilling site is currently producing gas that can be flared, but has not produced commercial volumes of gas. Since April 2013 we have been working with the Licensee to deal with drilling and/or completion problems that have interfered with the circulation of our proprietary amendments in the carbon seam. Flow meters are to be installed to measure the amount of gas produced. If we and our Licensee do not agree by December 31, 2013 that we have produced commercial volumes of gas at the drill sites, we both have the right to terminate this License Agreement. This demo site is not expected to become a commercial unit to generate revenue in the foreseeable future. We currently plan to exercise our right to terminate the license agreement with the Licensee, unless after the first of the year, we and the Licensee are able to negotiate a new agreement that would include a new payment schedule in which we will have a clearer path to revenue with respect to our China operations.
Non-Exclusive License - Indonesia. We entered into a License Agreement effective April 2, 2012 with PT Enviro Energy, an Indonesian limited liability company ("South Sumatra Licensee").
We entered into this Agreement following completion of a pilot test on fields in southern Sumatra, Indonesia, that showed positive results from use of our Coal to Gas Technology. 13 of the 16 wells included in the field test have produced new biogenic methane gas at a measurable rate from a lignite deposit that had no prior gas production or known reserves. We have not yet earned revenue from our Indonesian licensee.
It is impossible for us to predict our future revenues, if any, from this Agreement. The South Sumatra Licensee must acquire gas rights from third parties. Although the Licensee has committed to use commercially reasonable efforts to commercialize our technology in the Licensed Territory, the South Sumatra Licensee has made no commitment to us about the size of the gas fields it will acquire or the pace of acquisition and deployment of our technology. In October 2013, the licensee used this test site to try to generate interest in our technology among other owners of carbon rich seams. We have not been informed whether our licensee is making progress in obtaining new drill sites.
Field Test Agreement - India. On November 8, 2012, we entered into a field test agreement with a gas development company in India. In the field test agreement, which expired on October 1, 2013. Amendments were mixed and injected from July-September 2013. The wells have been shut to allow time for gas pressure to build. Water quality and gas pressure are being monitored by our Indian partner. We do not expect to receive test results until the spring of 2014.
CTG Technology Competitors
A few companies, including Luca Technologies in Golden, Colorado, utilize amendments and/or microbes to stimulate production of natural gas by microorganisms in the ground. We explain above in "Coal-to-Gas Technology Description" how we believe our CTG technology works compared to other competitors.
Beyond this small number of potential competitors who utilize similar technology is the huge natural gas marketplace that consists of thousands of companies worldwide, many of which are much larger and have greater capital and other resources than we have.
See Item 1A
ITEM 1A RISK FACTORS
The description of our business in Item 1 and in other parts of this Report contain forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those described below.
You should carefully consider the risk factors listed below, together with all of the other information included in this Report, before investing in our common stock. The risks and uncertainties described below encompass many of the risks that could affect our business and the value of our stock. Not all risks and uncertainties are described below. Risks that we do not know about could arise and issues we now view as minor could become more important. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline and you may lose all or part of your investment.
We have organized these risk factors into the following categories below.
●
our financial condition;
●
our technology and services;
●
our market, customers and partners;
●
our shareholders, officers, directors and employees;
●
regulatory matters that affect our business; and
●
our securities.
I. Risks associated with our financial condition.
We do not expect our cash and cash equivalents will be sufficient to fund operations for the next twelve (12) months. We expect we will need to obtain funds from additional financings or other sources for our business activities. If we do not receive these funds, we would need to reduce, delay or eliminate some of our expenditures.
As of September 30, 2013, we had approximately $1,021,982 in cash and cash equivalents and approximately $68,407 of liabilities. We do not expect our cash resources will be sufficient to fund operations for the next twelve months, and we will continue to seek capital raising opportunities during that year to fund operations.
We do not expect to increase our revenue from licensing our CTG Technology during the next year. Consequently, we expect we will need to raise additional capital to accomplish our business plan through debt or equity financing, joint ventures, sale of assets, as well as various other financing arrangements.
If we obtain additional funds by issuing equity securities, dilution to stockholders may occur. In addition, preferred stock could be issued without stockholder approval and the terms could include dividend, liquidation, conversion, voting and other rights more favorable than the rights of the holders of our common stock. If we obtain funds through debt financing, it may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends.
There can be no assurance that we will be able to raise the additional capital from third parties on terms acceptable to us or to fund the additional capital requirements internally.
If adequate funds are not available, we may be required to reduce, delay or eliminate expenditures for our marketing and R&D development and other activities, or seek to enter into a business combination transaction with or sell assets to another company. We could also be forced to license to third parties the rights to commercialize additional products or technologies that we would otherwise seek to develop ourselves. The transactions outlined above may not be available to us when needed or on terms acceptable or favorable to us.
We have only limited operating history that can be used to evaluate an investment in us, and the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays that we may encounter because we are a small company. As a result, we may not be profitable and we may not be able to generate sufficient revenue to develop as we have planned.
We began to conduct our business operations in April 2011 and have only a limited number of license agreements, which have not yet generated enough revenue to fully fund our operations. If we cannot generate more revenue, we may have to alter or delay implementing our plan of operations.
Our license agreements require us to pay expenses before we will generate revenue.
Our license agreements require us to pay expenses before we will generate revenue. Although we have started to generate a small amount of revenue from our licensees, we will depend totally on capital raising to fund our operations until licensees increase commercial operations.
We may not be successful in enforcing the long-term payment obligations we seek.
Our revenue generation model is to enter into agreements that provide for long-term revenues from the gas fields in which customers deploy our technology. Customers may employ a variety of strategies to eliminate or reduce the revenue we generate. We cannot limit the benefits of our technology to legal boundaries of land owned by licensees who enter into contracts with us, because we cannot control the flow of the ground water into which our materials flow. These payment avoidance strategies may include deploying our technology in areas that benefit nearby property owners, or selling property to persons who are not under a contractual obligation to pay us. Since initially most of our operations are likely to be outside the United States, we may not be able to enforce our rights against people who benefit from our technology.
We expect to utilize intermediaries and partners in the countries in which we operate, which may require us to grant exclusive rights and share substantial revenue with such intermediaries and partners.
We expect the intermediaries and partners we intend to use in different countries will demand exclusivity and other rights which will limit our ability to do business without them and that we will have to share substantial revenue opportunities with such intermediaries and partners.
II. Risks associated with our technology and services.
Our CTG Technology test sites have not yet produced commercial volumes of gas and our license agreements have resulted in less revenue than we anticipated. We do not expect our CTG Technology to produce substantial revenue during 2014.
Our CTG Technology test sites have not yet produced commercial volumes of gas and our license agreements have resulted in less revenue than we anticipated. We do not expect our CTG Technology to produce substantial revenue during 2014. This may have a material adverse effect on our business and our ability to raise capital.
Delays in generating revenue from our CTG Technology is making it more difficult to implement the development and acquisition of other technologies, products and services.
Our plan to develop ad acquire other technologies, products and services has been delayed by delays in generating revenue from our CTG Technology. Acquisitions of products and businesses are at risk because we currently lack financial resources to implement our acquisition plan and development of other technologies has been impaired by budget cutbacks. These delays may have a material adverse effect on our business.
We expect that commercial development and operations of projects of our clients will be subject to risks of delay and cost overruns, which will delay and decrease our revenue.
We anticipate our revenue will be primarily derived from a percentage of sales of gas from the resource projects we assist clients to develop. Many factors beyond our control affect the development and operation of projects by our clients. Development and operations of projects will be subject to substantial risks of delay or cost overruns. Delays in development or operation of the projects could directly adversely impact both the timing and amount of revenue we generate.
Our technology has been tested in only a limited number of small commercial projects. We might not successfully develop and implement our technology in wider scale commercial-scale operations.
Most of our testing has occurred in the laboratory with field testing at only three sites. Wider-scale commercial operations may involve factors of which we are not aware that impede implementation of our technology and that result in lower gas production than we expect based on our limited testing. Such impediments in the field have delayed commercial production in China and may do so at other drilling sites in the future. We may never successfully develop and implement our technology in bigger commercial-scale operations, and as a result, our business, financial condition and results of operations would be materially adversely affected.
Our licensees have and may continue to operate their projects in ways that adversely affect the amount of gas generated utilizing our technology which would adversely affect the amount of revenue we generate, as well as our ability to attract new clients.
We will not manage or implement overall operations in the projects in which our licensees utilize our technology. Actions or omissions by our clients have resulted and may result in lower gas production than we expect, which would adversely affect the amount of revenue we generate, as well as our ability it attract new licensees. It is imperative that initial projects produce targeted gas generation results if we are to build our reputation in the industry. Consequently, we are particularly vulnerable to mistakes by our licensees in the first several projects we undertake.
We may not have enough insurance to cover all of the risks we face.
We cannot insure fully against pollution, environmental and intellectual property infringement risks. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations.
We may not be able to develop a market for our technology, which will most likely cause our stock price to decline.
The demand and price for our technology will be based upon the existence of markets for their utilization. The extent to which we may gain a share of our intended markets will depend, in part, upon the cost effectiveness and performance of our technology when compared to alternative products and services, which may be conventional or heretofore unknown. If the products and services of other companies provide more cost-effective alternatives or otherwise outperform our technology, the demand for our technology may be reduced resulting in lower revenue than we expect. Our success will depend upon market acceptance of our technology. Failure of our technology to achieve and maintain meaningful levels of market acceptance would materially and adversely affect our business, financial condition, results of operations and market penetration. This would likely cause our stock price to decline.
Our business, including results of operations and reputation, could be adversely affected by process safety and product stewardship issues.
Failure to appropriately manage safety, human health and environmental risks associated with our CTG Technology and processes could adversely impact employees, communities, stakeholders, our reputation and results of operations. Public perception of the risks associated with our CTG Technology could impact its acceptance and influence the regulatory environment in which we operate. Issues could be created by events outside of our control, including natural disasters, severe weather events and acts of sabotage.
The development projects our clients operate utilizing our technology may result in short to mid-term accumulations in coal seam formation water, which might deteriorate ground water quality. Public and regulatory reaction might adversely impact our business, whether or not there is any scientific basis for environmental or health concerns.
We implement our technology by injecting into in ground carbonaceous deposits and circulating mineral salts as amendments for the stimulation of microbial pathways to make methane. If the injection dosage is excessive and the post-production abatement is inadequate, unconsumed amendments may accumulate and diffuse in the coal seam formation water. Similarly, some unmetabolized coal constituents may be released into the formation water, increasing its level of total dissolved solids. Ground water purity is an increasing public and regulatory concern. Our technology may become confused with other more harmful techniques utilized by competitors. Public perception and regulatory reaction might adversely impact our business, whether or not there is any scientific basis for environmental or health concerns.
Gas produced in projects that utilize our technology may consist of both methane and a minor fraction of carbon dioxide, which may need further scrubbing to reach market gas quality, which would increase the project's operating expenses thereby making our technology less attractive to project operators.
We expect small amounts of carbon dioxide will be generated in the microbial pathways involved in methane generation. Although coal seams have preferential sorption for carbon dioxide (which can also be reduced back to methane by specific groups of microbes), residual CO2 may still exist in the product gas. If its concentration exceeds the market standard, additional processing such as scrubbing will need to be done, increasing the gas production cost. Such additional expense would make our technology less attractive to project operators.
Our lack of diversification will increase the risk of an investment in us.
Our current business focus is on the licensing of technology to accelerate the production of coalbed methane gas. Larger companies have the ability to manage their risks by diversification. However, we currently lack significant diversification, in terms of both the nature and geographic scope of our business. As a result, we will likely be impacted more acutely by factors affecting our industry than we would if our business was more diversified, increasing our risk profile. Such factors include fluctuations in prices of natural gas, natural disasters, restrictive governmental regulations, transportation capacity constraints, weather, curtailment of production or interruption of transportation.
Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.
We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We have entered into employment and other agreements with several key employees, which include non-competition and confidentiality obligations. Such obligations may be difficult or impossible to enforce under applicable laws, or we may not have adequate remedies for any resulting losses. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
III. Risks associated with our market, customers and partners.
Many of our competitors have significantly more resources than we do, and technologies developed by competitors could become more commercially successful than ours or render our technologies obsolete.
Development and commercialization of coal to gas and related production techniques is highly competitive. Other technologies could become more commercially successful than ours. Our technology is a refinement of basic science that has been used by other companies in gas development projects over the past 60 years. Our competitors include major integrated energy companies, as well as independent technology providers that have developed or are developing competing technologies. These companies typically have significantly more resources than we do.
As our competitors continue to develop competing technologies, one or more of our current technologies could become obsolete. Our ability to create and maintain technological advantages is critical to our future success. As new technologies develop, we may be placed at a competitive disadvantage forcing us to implement new technologies at a substantial cost. We may not be able to successfully develop or expend the financial resources necessary to acquire or develop new technology.
If prices for coal, biomass, nuclear, wind, solar and other energy sources that compete with natural gas decrease, projects that utilize our technology may not be economical.
Because the gas produced by projects utilizing our technology are expected to compete in markets with other energy products, decreases in prices for competing energy products could adversely affect the operating results of projects that utilize our technology. Factors that could cause changes in the prices and availability of competing energy sources include: government subsidies and regulation, weather patterns, increases in drilling, political conditions, foreign exchange rates, pipeline availability and prices and general economic conditions.
We will depend on strategic relationships with site owners, engineering companies, and other industry participants. If we are not successful in entering into and achieving the benefits of these relationships, this could negatively impact our business.
We believe that the establishment of strategic partnerships will greatly benefit the growth of our business, and we intend to seek out and enter into strategic alliances. We may not be able to enter into these strategic partnerships on commercially reasonable terms, or at all. Even if we enter into strategic alliances, our partners may not fulfill their obligations or otherwise prove advantageous to our business. Our inability to enter into new relationships or strategic alliances could have a material and adverse effect on our business.
Industry experts predict substantial growth in natural gas production in the United State and other countries, which has already substantially decreased the price of natural gas in many geographic markets. Natural gas prices are highly volatile and lower prices will negatively affect our financial condition, planned capital expenditures and results of operations.
Our revenues, operating results, profitability and future rate of growth depend primarily upon the payments we expect to receive from licensees for the natural gas they produce using our Coal-to-Gas Technology. Prices also affect the amount of cash flow available for operating expenses and our ability to borrow money or raise additional capital. Industry experts predict substantial growth in natural gas production in the United States and other countries, which has already substantially decreased the price of natural gas in many geographic markets. Continued low prices for natural gas or a further significant decline in the prices of natural gas could adversely affect our financial position, financial results, cash flows, access to capital and ability to grow.
Historically, the markets for natural gas have been volatile. These markets will likely continue to be volatile in the future. The payments we expect to receive from licensees are likely to depend on numerous factors beyond our control. These factors include the following:
●
changes in global supply and demand for oil and natural gas;
●
the actions of the Organization of Petroleum Exporting Countries, or OPEC;
●
the price and quantity of imports of foreign oil and natural gas;
●
acts of war or terrorism;
●
political conditions and events, including embargoes, affecting oil-producing activity;
●
the level of global oil and natural gas exploration and production activity;
●
the level of global oil and natural gas inventories;
●
the availability of resources to deliver natural gas to market;
●
weather conditions;
●
technological advances affecting energy consumption;
●
the price and availability of alternative fuels; and market concerns about global warming or changes in governmental policies and regulations due to climate change initiatives.
We cannot predict future natural gas prices and such prices may decline further.
Our licensees must acquire gas rights from third parties. It is impossible for us to predict our future revenues, if any, from our license agreements.
Our licensees must acquire gas rights from third parties. There is no assurance our licensees will be successful in acquiring gas rights from third parties or the amount of gas rights they are able to acquire. It is, therefore, impossible for us to predict our future revenues, if any, from our license agreements.
We have granted exclusive licenses for China and Mongolia that will preclude us from working with other licensees who may gave greater ability to commercialize our technology in the licensed territories and generate greater revenue for us.
We have granted exclusive licenses for China and Mongolia that will preclude us from working with other licensees who may gave greater ability to commercialize our technology in the licensed territories and generate greater revenue for us.
As the initial gas fields where our technology is used over time cease to be capable of producing gas, our annual license fee will be reduced.
As the initial gas fields where our technology is used over time cease to be capable of producing gas, our annual license fee from these fields will be reduced over time. Therefore, our aggregate revenue may decrease over time, if our licensees fail to continue to acquire new gas fields on which to utilize our technology.
Our revenue from licensees will depend on the price of natural gas over the term of our agreements, which we are unable to predict.
Our revenue from licensees will depend on the price of natural gas over the term of our agreements where our royalties are calculated as a percentage of gas sales, as is the case with our licensee in Indonesia. We are unable to predict the future price of natural gas. The government of Indonesia currently regulates the price of natural gas. Therefore, natural gas prices for purposes of our revenue may be lower than world market prices. Our agreement with our licensee for China and Mongolia does not directly tie our revenue to the price of natural gas, but if natural gas prices fall over the term of this agreement, which we are unable to predict, the licensee is likely to reduce the number of Gas Generating Units, which would decrease the license fees we earn.
Although our agreements with licensees gives us audit rights, we also anticipate difficulty tracking the amount of revenue we may be owed by licensee, because they operate in remote locations to which we may not have access.
Although our agreements with licensees gives us audit rights, we also anticipate difficulty tracking the amount of revenue we may be owed by licensees, because they operate in remote locations to which we may not have access. We expect that it will be difficult to identify all the coal and other deposits where use of our technology may be creating natural gas. Further, the laws of the licensed territories (initially China, Mongolia and Indonesia) may limit our legal rights. Therefore, we may find it difficult to enforce our legal rights to revenue.
IV. Risks associated with our shareholders, officers, directors and employees
Our success depends on the performance of our executive officers and key personnel, the loss of who would disrupt our business operations.
We depend to a large extent on the performance of our executive officers, Robert H. Craig, our Chief Executive Officer, Mr. Song Jin, our President and Chief Operating Officer, and certain key personnel. Our ability to implement our business strategy may be constrained and the timing of implementation may be impacted if we are unable to attract and retain sufficient personnel. At December 1, 2013, we had seven full-time employees. We do not maintain “key person” life insurance policies on any of our employees. We have entered into employment and other agreements with all full-time employees, which include non-competition, confidentiality and inventions assignments obligations. Such obligations may be difficult or impossible to enforce under applicable laws.
We have limited management and staff and will be dependent upon partnering arrangements.
We had seven full-time employees as of December 1, 2013. We intend to use the services of independent consultants and contractors to perform various professional services, including legal, environmental, book keeping, accounting and tax services. We will also pursue alliances with partners to conduct field operations. Our dependence on third party consultants and service providers and partners creates a number of risks, including but not limited to:
●
the possibility that such third parties may not be available to us as and when needed; and
●
the risk that we may not be able to properly control the timing and quality of work conducted with respect to our projects.
If we experience significant delays in obtaining the services of such third parties or poor performance by such parties, our results of operations and stock price could be materially adversely affected.
We will need additional specialized personnel to implement our business plan. As energy demand grows, these personnel may become more difficult to recruit and retain.
We will need to add the specialized key personnel to assist us to execute our business plan. As energy demand grows, these personnel may become more difficult to recruit and retain. It is possible that we will not be able to hire and retain such specialized personnel on acceptable terms. We will make every effort to recruit executives with proven experience and expertise as needed to achieve our plan.
Insiders have substantial control over the company and could delay or prevent a change in corporate control, including a transaction in which the company’s stockholders could sell or exchange their shares for a premium.
At December 1, 2013, Directors and executive officers beneficially owned, in the aggregate, 6,312,564 shares (including vested stock options and unvested stock options that become exercisable when they vest within sixty (60) days after December 1, 2013), but does not include 333,000 shares owned by investors who are business associates of one of the members of our Board of Directors or were otherwise introduced to the Company by that Director or 100,000 shares owned by that Director's adult daughter. At December 1, 2013, the Company had 11,172,500 issued shares of Common Stock. In addition, the Company's officers and directors have stock options to purchase 1,875,000 shares of Common Stock, of which 409,580 options have been vested or will vest within sixty (60) days after December 1, 2013 and 1,465,420 options are subject to vesting over time more than sixty (60) days after December 1, 2013 or that vest upon the occurrence of certain events defined in the Company's 2012 Performance Bonus Equity Plan and 2012 Acquisition Plan. See Item 11 "Executive Compensation" of this Report for information about option plans and vesting terms.
As a result, our directors and executive officers, together with their affiliates, if acting together, have the ability to affect the outcome of matters submitted to stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, acting together, will have the ability to control our management and affairs. Accordingly, this concentration of ownership may harm the value of our common stock by: delaying, deferring or preventing a change in control; impeding a merger, consolidation, takeover or other business combination; or discouraging a potential acquirer from making an acquisition proposal or otherwise attempting to obtain control.
We have entered into a license agreement with the affiliate of an investor, Mr. Guangwei Guo, who is also a member of our Board of Directors. During April 2013, we amended this license agreement to waive payment requirements due to delays in producing commercial volumes of gas. Our business may suffer because of inherent conflicts of interest with our investors.
We have entered into a license agreement with the affiliate of an investor, who is also a member of our Board of Directors. This agreement grants the affiliate of our investor exclusive rights in the People's Republic of China and Mongolia, which we expect will be a primary market for our technology. During April 2013, we amended this license agreement to waive payment requirements due to delays in producing commercial volumes of gas. Our business may suffer because of inherent conflicts of interest with our investors. This License Agreement and subsequent amendments are is described in detail in Item 13 of this Report "Certain Relationships and Related Transactions, and Director Independence."
V. Risks associated with Regulatory Matters that affect our business.
We and our prospective Coal-to-Gas licensees are subject to extensive laws relating to the protecting the environment. These laws may increase the cost of operating projects that utilize our technology or affect demand for the gas these projects will produce.
If we, or our licensees, violate any of the laws and regulations relating to the protection of the environment, we may be subject to substantial fines, criminal sanctions or third party lawsuits and may be required to incur substantial expenses or, in some extreme cases, curtail operations. Compliance with environmental laws and regulations, as well as with any requisite environmental permits, may cause delays and otherwise increase the costs of our licensees operating gas development projects, and as a result, our business, financial condition and results of operations could be materially adversely affected.
Changes in environmental laws and regulations occur frequently. Any changes may have a material adverse effect on our results of operations, competitive position, or financial condition. For instance, in response to studies suggesting that emissions of certain gases, commonly referred to as greenhouse gases and including carbon dioxide and methane, may be contributing to warming of the Earth’s atmosphere, the U.S. Congress is actively considering legislation, the U. S. Environmental Protection Agency is considering proposed regulations, and more than a dozen states have already taken legal measures to reduce emission of these gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Other countries already have enacted such legislation or regulations or are considering such legislation or regulations. New legislation or regulatory programs that restrict emissions of greenhouse gases could have an adverse affect on our operations depending on the extent to which they favor other energy sources over gas generated from coal.
Terrorist threats and U.S. military actions could result in a material adverse effect on our business.
Further acts of terrorism in the United States or elsewhere could occur. These developments and similar future events may cause instability in the world’s financial and insurance markets and could significantly increase political and economic instability in the geographic areas in which we may wish to operate. These developments could also lead to increased volatility in prices for crude oil, natural gas and the cost and availability of insurance. In addition, these developments could adversely affect our ability to access capital and to successfully implement projects currently under development.
United States government regulations effectively preclude us from actively engaging in business activities in certain countries. These regulations could be expanded to cover countries where we may wish to operate in the future. These developments could subject the operations of our company to increased risks and, depending on their magnitude, could have a material adverse effect on our business.
If we are unable to obtain and maintain protection for the intellectual property relating to our technology and services, the value of our technology and services will be adversely affected.
Our success will depend in part on our ability to obtain and maintain protection for the intellectual property covering or incorporated into our technology and services. We may not be able to obtain patent rights relating to our technology or services. Even if issued, patents issued to us or licensed to us in the future may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar services or limit the length of term of patent protection we may have for our technology and services. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.
Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a U.S. patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our U.S. patent position. In addition, patents generally expire, regardless of the date of issue, 20 years from the earliest claimed non-provisional filing date.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and services could be adversely affected.
In addition to technology for which we have applied for patent protection, we rely upon unpatented proprietary technology, processes and know-how. We plan to produce the amendments we use in the Peoples Republic of China at a facility we will rent there utilizing our employees. We seek to protect our unpatented proprietary information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop technologies that compete with our technology, which could adversely impact our business.
If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business.
Our development and commercialization activities, as well as any technology candidates or services resulting from these activities, may infringe or be claimed to infringe one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may be subsequently issued and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay providing services or using the technology that is the subject of the suit.
As a result of patent infringement or other similar claims or to avoid potential claims, we or our potential future collaborators may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing our technology, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the energy industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.
Many of our employees were previously employed at other energy companies, including our competitors or potential competitors. We try to ensure that our employees do not use the proprietary information or know-how of others in their work for us. However, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.
We could have potential indemnification liabilities to licensees relating to the operation of projects gas generation that utilize our technology or intellectual property disputes.
Our indemnification obligations could result in substantial expenses and liabilities to us if intellectual property rights claims were to be made against us or our licensees, or if our technology fails to operate as we represent to others. Generally we expect our commercial agreements will require us to indemnify the project operators, subject to certain limitations against specified losses relating to, among other things: use of any patent rights and technical information, environmental and other damage and such contractual performance guarantees as we may make.
Changes in government policies and laws could adversely affect our financial results.
We expect that sales outside the U.S. may constitute a large portion of our revenue. Our financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country’s or region’s economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced sales and profitability.
Legislative and regulatory initiatives related to global warming and climate change could have an adverse effect on our operations and the demand for oil and natural gas.
In December 2009, the EPA determined that emissions of carbon dioxide, methane and other ‘‘greenhouse gases’’ present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has begun adopting and implementing regulations to restrict emissions of greenhouse gases under existing provisions of the Clean Air Act, or CAA. The EPA recently adopted two sets of rules regulating greenhouse gas emissions under the CAA, one of which requires a reduction in emissions of greenhouse gases from motor vehicles and the other of which regulates emissions of greenhouse gases from certain large stationary sources, effective January 2, 2011. The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States, including petroleum refineries, on an annual basis, beginning in 2011 for emissions occurring after January 1, 2010, as well as certain onshore oil and natural gas production facilities, on an annual basis, beginning in 2012 for emissions occurring in 2011.
In addition, the United States Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal.
The adoption of legislation or regulatory programs to reduce emissions of greenhouse gases could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil, NGLs, and natural gas we produce. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition and results of operations. Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our financial condition and results of operations.
We are subject to numerous laws and regulations that can adversely affect the cost, manner or feasibility of doing business.
Our operations, and operations of licensees on which we expect our revenues will depend, are subject to extensive federal, state and local laws and regulations relating to the exploration, production and sale of oil and natural gas, and operating safety. Future laws or regulations, any adverse change in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may result in substantial penalties and harm to our business, results of operations and financial condition. We or our licensees may be required to make large and unanticipated capital expenditures to comply with governmental regulations, such as:
●
land use restrictions;
●
lease permit restrictions;
●
drilling bonds and other financial responsibility requirements, such as plugging and abandonment bonds;
●
spacing of wells;
●
unitization and pooling of properties;
●
safety precautions;
●
operational reporting; and
●
taxation.
Under these laws and regulations, we could be liable for:
●
personal injuries;
●
property and natural resource damages;
●
well reclamation cost; and
●
governmental sanctions, such as fines and penalties.
Our operations could be significantly delayed or curtailed and our cost of operations could significantly increase as a result of regulatory requirements or restrictions. We are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. It is also possible that a portion of our oil and gas properties could be subject to eminent domain proceedings or other government takings for which we may not be adequately compensated.
Our operations may incur substantial expenses and resulting liabilities from compliance with environmental laws and regulations.
Natural gas operations are subject to stringent federal, state and local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations:
●
require the acquisition of a permit before drilling commences;
●
restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities;
●
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
●
impose substantial liabilities for pollution resulting from our operations.
Our failure or our licensees' failure to comply with these laws and regulations may result in:
●
the assessment of administrative, civil and criminal penalties;
●
incurrence of investigatory or remedial obligations; and
●
the imposition of injunctive relief.
Changes in environmental laws and regulations occur frequently and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to reach and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive position or financial condition. Under these environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination or if our operations met previous standards in the industry at the time they were performed. Our permits require that we report any incidents that cause or could cause environmental damages.
VI. Risks associated with our securities.
Compliance with regulations governing public company corporate governance and reporting is uncertain and expensive. Recent changes in our business are likely to increase our compliance costs and the amount of management time required.
As a public company, we are required to file with the Securities and Exchange Commission, or SEC, annual and quarterly information and other reports that are specified in Section 13 of the Securities Exchange Act of 1934, as amended, (or the Exchange Act). We have incurred and will continue to incur significant legal, accounting, and other expenses that private companies do not incur. We incur costs associated with our public company reporting requirements and with corporate governance and disclosure requirements, including requirements under the Sarbanes-Oxley Act of 2002 (or Sarbanes-Oxley) and rules implemented by the SEC and the Financial Industry Regulatory Authority, or FINRA. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time consuming and costly.
As a result of being a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting and are subject to other requirements that will be burdensome and costly. We may not timely complete our analysis of our internal control over financial reporting, or these internal controls may not be determined to be effective, which could adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required to file with the Securities and Exchange Commission, or SEC, annual and quarterly reports and other information that are specified in Section 13 of the Securities Exchange Act of 1934, as amended, ("the Exchange Act"). We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we are subject to other reporting and corporate governance requirements, including the requirements of listing on the OTCBB, and if listed for continuing to remain listed on the OTCBB, and certain provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated there under, which impose significant compliance obligations upon us. As a public company, we will be required to:
●
Prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and OTCBB rules;
●
create or expand the roles and duties of our board of directors and committees of the board;
●
maintain a more comprehensive financial reporting and disclosure compliance functions;
●
maintain an accounting and financial reporting department, including personnel with expertise in accounting and reporting for a public company;
●
enhance and formalize closing procedures at the end of our accounting periods;
●
maintain an internal audit function;
●
enhance our investor relations function;
●
establish and maintain new internal policies, including those relating to disclosure controls and procedures; and
●
involve and retain to a greater degree outside counsel and accountants in the activities listed above.
These requirements entail a significant commitment of additional resources. We may not be successful in implementing these requirements and implementing them could adversely affect our business or results of operations. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired.
We expect to incur substantially greater expenses and diversion of management’s time and attention from the daily operations of the business, which is likely to increase our operating expenses and impair our ability to achieve profitability.
During 2011, we received comments from the staff of the Securities and Exchange Commission about prior year disclosures regarding internal controls over financial reporting. We have resolved the comments of the staff. We also restated our financial statements for the three months and six months ended March 31, 2012, because our controls did not operate effectively to ensure bonus compensation was accrued in the proper period. We remediated this control by taking steps to ensure compensation other than salary is accrued when the compensation is approved or earned if it is earned or approved prior to actual payment.
Our Chief Executive Officer and Chief Financial Officer also determined that our presentation of net loss per share and the weighted average number of shares outstanding in previously issued financial statements was not correctly reported for the financial periods ended December 31, 2010, March 31, 2011, June 2011, September 30, 2011, December 31, 2011, March 31, 2012, and June 30, 2012, which we have corrected.
To comply with these requirements, we have evaluated and tested and intend to continue to evaluate and test our internal controls. Where necessary, we have taken and will continue taking remedial actions, to allow management to report on (and when and as required, our independent auditors to attest to), our internal control over financial reporting.
As our business continues to change, our principal executive officer and principal financial officer will continue to reassess our internal control over financial reporting and make additional changes to allow management to report on our internal control over financial reporting.
Any failure to develop or maintain effective internal control over financial reporting or difficulties encountered in implementing or improving our internal control over financial reporting could harm our operating results and prevent us from meeting our reporting obligations. Ineffective internal controls also could cause our stockholders and potential investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common stock. In addition, investors relying upon this misinformation could make an uninformed investment decision, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, or to stockholder class action securities litigation.
Any issuance of shares of our common stock or senior securities in the future could have a dilutive effect on the value of our existing stockholders’ shares.
If we raise additional funds through the issuance of equity securities or debt convertible into equity securities, the percentage of stock ownership by our existing stockholders would be reduced. In addition, such securities could have rights, preferences, and privileges senior to those of our current stockholders, which could substantially decrease the value of our securities owned by them. Depending on the share price we are able to obtain, we may have to sell a significant number of shares in order to raise the necessary amount of capital. Our stockholders may experience dilution in the value of their shares as a result.
Future sales of restricted shares could decrease the price a willing buyer would pay for shares of our common stock and impair our ability to raise capital.
Our stock historically has been very thinly traded. Future sales of substantial amounts of our shares in the public market, or the appearance that a large number of our shares are available for sale, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our securities.
At December 1, 2013, 11,172,500 shares of our common stock were issued and outstanding, and an additional 5,350,000 shares are reserved for issuance pursuant three compensation plans of which a total of 2,540,000 shares are subject to outstanding options and 2,810,000 reserved shares are available for future grants. Addition information about stock options can be found in the Item 11 "Executive Compensation" of this Report.
All contractual restrictions on re-sales of our outstanding shares of Common Stock terminated earlier this year other than requirements that re-sales occur in compliance with securities laws.
We have contractual obligations to register for re-sale 2,380,000 shares of our Common Stock which shares are registered for re-sale under existing registration statements. We expect other investors will require registration rights as well.
Some of our outstanding shares are "restricted securities" (as defined in Rule 144) that can only be re-sold under an applicable exemption from registration (including Rule 144), or pursuant to a registration statement.
Rule 144 provides, in essence, that a non-affiliated person holding restricted securities for a period of six months in a reporting company may sell those securities in unsolicited brokerage transactions or in transactions with a market maker, in an amount equal to not less than one percent of our outstanding common stock every three months if the company has been reporting at least ninety days. Sales of unrestricted shares by our affiliates are also subject to the same limitation upon the number of shares that may be sold in any three-month period.
Additionally, Rule 144 requires that an issuer of securities make available adequate current public information with respect to the issuer. Such information is deemed available if the issuer satisfies the reporting requirements of sections 13 or 15(d) of the Securities and Exchange Act of 1934 (the “Securities Exchange Act”) or of Rule 15c2-11 there under. Rule 144 also permits the termination of certain restrictions on sales of restricted securities by persons who were not affiliates of our company at the time of the sale and have not been affiliates in the preceding three (3) months. Such persons must satisfy a one (1) year holding period. There is no limitation on such sales and there is no requirement regarding adequate current public information. Investors should be aware that sales under Rule 144, or pursuant to a Registration Statement filed under the Act, may have a depressive effect on the market price of our securities in any market that may develop for such shares.
We could be required to pay damages to stockholders who have registration rights if we fail to maintain the effectiveness of any registration statement that covers resale of their shares.
We have not maintained the effectiveness of our registration statement covering 2,380,000 shares of our common stock owned by stockholders who have entered into registration rights agreement. The investors executed a waiver agreement that expires in February 2014, forty-five (45) days after we file this Report. If we fail to maintain the effectiveness of the registration statements that cover re-sales of their shares as required in their registration rights agreements. After that waiver expires, we would be required to pay damages as specified in the registration rights agreements.
State securities laws may limit secondary trading, which may restrict the states in which and conditions under which you can sell your shares.
Secondary trading in common stock registered for re-sale will not be possible in any state until the common stock is qualified for sale under the applicable securities laws of the state or there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading in the state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, the common stock in any particular state, the common stock could not be offered or sold to, or purchased by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common stock, the liquidity for the common stock could be significantly impacted thus causing you to realize a loss on your investment.
Our common stock is a “penny stock,” and compliance with requirements for dealing in penny stocks may make it difficult for holders of our common stock to resell their shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quotation systems).
Penny stocks are also stocks which are issued by companies with: net tangible assets of less than $2.0 million (if the issuer has been in continuous operation for at least three years); or $5.0 million (if in continuous operation for less than three years); or average revenue of less than $6.0 million for the last three years.
Currently and at least for the foreseeable future, our common stock will be deemed to be a “penny stock” as that term is defined in Rule 3a51-1 under the Securities Exchange Act of 1934. Rule 15g-2 under the Exchange Act requires a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prescribed by the SEC and certain other information related to the penny stock, the broker-dealer’s compensation in the transaction, and the other penny stocks in the customer’s account.
In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement related to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements could have the effect of reducing the trading activity in the secondary market for our stock, because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.
Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third Parties or otherwise, which could have a material adverse effect on the liquidity and market price of our common stock.
If the estimates that we make, or the assumptions upon which we rely, in preparing our financial statements prove inaccurate, our future financial results may vary from expectations. Failure to meet expectations may decrease the market price of our securities
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, stockholders’ equity, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual performance may be higher or lower than our estimates for a variety of reasons, including unanticipated competition, regulatory actions or changes in one or more of our contractual relationships. We cannot assure you, therefore, that any of our estimates, or the assumptions underlying them, will be correct.
If significant business or product announcements by us or our competitors cause fluctuations in our stock price, an investment in our stock may suffer a decline in value.
The market price of our common stock may be subject to substantial volatility as a result of announcements by us or other companies in our industry, including our collaborators and competitors. Announcements that may subject the price of our common stock to substantial volatility include announcements regarding:
●
our operating results, including the amount and timing of revenue generation;
●
entering into licensing and collaboration agreements and the gas development projects that are the subject of those agreements;
●
the amount of gas development projects that utilize our technology produce compared to projects of our competitors;
●
the acquisition of technologies or gas development projects by us or our competitors;
●
regulatory actions with respect to our technology or gas generation projects or those of our competitors; and
●
significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.
As a result, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as any indication of future performance. Due to all of the foregoing factors, it may be that in some future year or quarter our operating results will be below the expectations of public market analysts and investors. In that event, the price of our common stock would likely be materially adversely affected.
There is a low trading volume of our common stock in the public market for our shares and we cannot assure you that an active trading market or a specific share price will be established or maintained.
Our common stock trades on the OTC BB trading system. The OTC BB tends to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of market volatility for securities that trade on the OTC BB as opposed to a national exchange or quotation system. This volatility may be caused by a variety of factors including:
●
the lack of readily available price quotations;
●
the absence of consistent administrative supervision of “bid” and “ask” quotations;
●
lower trading volume; and
●
market conditions.
In addition, the value of our common stock could be affected by:
●
actual or anticipated variations in our operating results;
●
changes in the market valuations of other oil and gas companies;
●
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
●
adoption of new accounting standards affecting our industry;
●
additions or departures of key personnel;
●
sales of our common stock or other securities in the open market;
●
changes in financial estimates by securities analysts;
●
conditions or trends in the market in which we operate;
●
changes in earnings estimates and recommendations by financial analysts;
●
our failure to meet financial analysts’ performance expectations; and
●
other events or factors, many of which are beyond our control.
In a volatile market, you may experience wide fluctuations in the market price of our securities. These fluctuations may have an extremely negative effect on the market price of our securities and may prevent you from obtaining a market price equal to your purchase price when you attempt to sell our securities in the open market. In these situations, you may be required either to sell our securities at a market price which is lower than your purchase price, or to hold our securities for a longer period of time than you planned. 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 oil and gas properties by using common stock as consideration.
Securities analysts may not initiate coverage of our shares or may issue negative reports, which may adversely affect the trading price of the shares.
We cannot assure you that securities analysts will cover our company. If securities analysts do not cover our company, this lack of coverage may adversely affect the trading price of our shares. The trading market for our shares will rely in part on the research and reports that securities analysts publish about us and our business. If one or more of the analysts who cover our company downgrades our shares, the trading price of our shares may decline. If one or more of these analysts ceases to cover our company, we could lose visibility in the market, which, in turn, could also cause the trading price of our shares to decline. Further, because of our small market capitalization, it may be difficult for us to attract securities analysts to cover our company, which could significantly and adversely affect the trading price of our shares.
Because our stock is thinly traded and out market capitalization is low, we may not be able to attract the attention of major brokerage firms or institutional investors.
Additional risks to our investors may exist because security analysts of major brokerage firms generally do not provide coverage for thinly traded securities or companies that have low market caps. Likewise, institutional investors generally do not invest in companies with low market capitalization. In addition, because of past abuses and fraud concerns stemming primarily from a lack of public information about new public businesses, there are many people in the securities industry and business in general who view companies that have been public shells with suspicion. Without brokerage firm and analyst coverage and institutional investor interest, there may be fewer people aware of our stock and our business, resulting in fewer potential buyers of our securities, less liquidity, and depressed stock prices for our investors.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We have not declared or paid cash dividends on its capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
FORWARD-LOOKING STATEMENTS
Some of the information in this Report constitutes forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in this Report, particularly in Item 1A “Risk Factors.” You can identify these statements by forward-looking words such as “might,” “expect,” "plan," “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully, because they:
●
discuss future expectations;
●
contain projections of future results of operations or financial condition; or
●
state other “forward-looking” information.
We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors and cautionary language discussed in this Report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in our in our forward-looking statements.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report.
All forward-looking statements included herein attributable to us, or any person acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws, rules and regulations, we undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2.
PROPERTIES
We incorporate by reference the information included in Item 1 "Business - Leased Property" of this Report.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
None. See Item 1A "Risk Factors" of this Report for a description of issues that we have identified as having the highest risks for our becoming involved in litigation or regulatory proceedings.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our stock began trading on the Over-the-Counter Bulletin Board ("OTCBB") on June 11, 2008 under the trading symbol "CLLL." On May 21, 2009, we changed our name to Next Fuel, Inc. We then changed our trading symbol to "NXFI."
The following table shows the high and low reported closing prices of our common stock for the periods indicated. Because our stock trades infrequently, we do not believe that these prices are an accurate reflection of the value of our stock.
________________
On December 1, 2013, there were approximately 93 owners of record of our common stock.
We have not paid any cash dividends since our inception and do not contemplate paying dividends in the foreseeable future. It is anticipated that earnings, if any, will be retained for the operation of our business.
We have reserved 5,350,000 shares of Common Stock pursuant to three compensation plans of which options to purchase 2,540,000 shares were outstanding at December 1, 2013 and 2,810,000 reserved shares are available for future grants. Additional information about stock options can be found in the Item 11 "Executive Compensation" of this Report, which is incorporated herein.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this discussion. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report. Factors that might cause such a difference include, but are not limited to, those set forth in Item 1A "Risk Factors" of this Report and elsewhere in this report.
Recent Events
Recent events you should be aware of about our business include the following events:
●
China and Inner Mongolia Exclusive License
The site is currently producing gas that can be flared. Flow meters are to be installed to measure the amount of gas produced. This demo site is not expected to become a commercial unit to generate revenue in the foreseeable future.
Since April 2013 we have been working with the Licensee to deal with drilling and/or completion problems that have interfered with the circulation of our proprietary amendments in the carbon seam.
On May 12, 2013 we amended our March 31, 2012 License Agreement. This amendment delayed the Licensee’s obligation to pay us a $1,500,000 minimum until the end of the first year that our technology produces commercial volumes of gas. If we and our Licensee do not agree that our technology has produced commercial volumes of gas by December 31, 2013, either we or our Licensee can terminate the License Agreement. Commercial volumes of gas means 2 million cubic meters of gas per year for a Gas Generating Unit (a GGU equals approximately 40,000 square meters of gas producing material of a specified thickness). We currently plan to exercise our right to terminate the license agreement with the Licensee, unless after the first of the year, we and the Licensee are able to negotiate a new agreement that would include a new payment schedule in which we will have a clearer path to revenue with respect to our China operations.
●
Indonesia Non-Exclusive License
Following completion of a pilot test on fields in southern Sumatra, Indonesia, that showed positive results from use of our Coal to Gas technology, 13 of the 16 wells included in the field test have produced new biogenic methane gas at a measurable rate from a lignite deposit that had no prior gas production or known reserves. We have not yet earned revenue from our Indonesian licensee.
It is impossible for us to predict our future revenues, if any, from this Agreement. For additional information, see Item 1 "Business - Customers and License Agreements" of this Report.
●
India Field Test Agreement
On November 8, 2012, we entered into a field test agreement with a gas development company in India. The field test agreement expired on October 1, 2013. Amendments were mixed and injected from July-September 2013. The wells have been shut to allow time for gas pressure to build. Water quality and gas pressure are being monitored by our Indian partner. We do not expect to receive test results until the spring of 2014. For additional information, see Item 1 "-Business - Customers and License Agreements" of this Report.
●
Letter of Intent to Acquire Elite Construction
On September 3, 2013 we signed a term sheet to acquire the assets of Elite Construction and Fabrication, LLC (“Elite”). Elite is an oil and gas service company headquartered in Dallas. We were not able to raise the capital required to complete this acquisition and the term sheet expired on November 15, 2013.
See Item 1A "Risk Factors" in this Report, for factors that could cause actual results to differ from the forward looking statements we have made about our agreements and possible future agreements and revenue.
Plan of Operation
We are a technology provider and service company that assists owners of natural gas production resources to increase the efficiency of their operations by providing technology and technical support services. We do not plan to own or develop natural gas production projects, but our revenue stream relies on such owners and developers utilizing our technology to successfully produce and sell natural gas.
Our technology and services are all in various stages of development or are being investigated by us as targets for acquisition. None has generated substantial revenue for us to date and we face substantial challenges in completing development or acquisition of these technologies and services businesses. These technology and services include:
●
Certain technology and intellectual property useful in extracting natural gas from coal (the "Coal-to-Gas Technology" or "CTG Technology").
●
Low Energy Input Pervaporation (LPV) Technology to clean up water used in oil and natural gas production, including Frack drilling.
●
Carbon Dioxide to Product (CTP) Technology we acquired targets the emerging market of carbon footprint elimination.
●
Disk filtration technology to remove suspended solids in the range of 200 microns to as small as 5 microns in size. We are currently testing this technology prior to making a decision whether to purchase it.
During the period from inception to the period ended March 31, 2011 we did not conduct an active business and devoted out efforts to capital raising activities and acquisition activity, including the capital raising and Coal-to Gas Technology described elsewhere in this Report. Most of the expense we incurred during this period related to acquisition activities. Since March 31, 2011, we have focused our operations on the businesses related to agreements with natural gas developers in China, Inner Mongolia, Indonesia and India described above under "Recent Developments."
During the past year we have developed a greater understanding of the volumes of gas being produced in underground carbon deposits at our test site in Indonesia. For the remainder of calendar year 2013 we will focus on better understanding why gas being produced in the ground has not yet resulted in matching production in the test wells. Because our test sites with licensees for China, India and Indonesia already give us access to large project sites and very big markets, we expect to deemphasize signing transactions with new licensees until we achieve commercial production at existing drilling sites. During 2014, we expect to complete development and commercial launch of our LPV technology for cleaning waste water from oil and gas drilling operations. Bench scale tests have been completed in the lab and testing of a larger scale prototype began recently. After we obtain the results generated from the larger test, we will commence negotiating with a potential licensee that would have the capability to bring this technology to a commercial level.
In 2011, our financial statements were presented as a development stage company. However, in 2012, we entered into an exclusive license agreement in China and Mongolia for the right to use our CTG technology, which resulted in the generation of revenue. Under the terms of the license agreement, the Licensee agreed to pay us for at least fifty Gas Generating Units for the year ended March 31, 2013, whether or not the Licensee achieved that number of Gas Generating Units, which meant the Licensee was obligated to pay us an additional $1,380,000 for the year ended March 31, 2013. Accordingly, at that time we believed that we transitioned from a development stage company to an operating stage company during the fourth quarter of 2012.
On May 12, 2013 we amended our March 31, 2012 License Agreement. This amendment delayed the Licensee’s obligation to pay us a $1,500,000 minimum until the end of the first year that our technology produces commercial volumes of gas. If we and our Licensee do not agree that our technology has produced commercial volumes of gas by December 31, 2013, either we or our Licensee can terminate the License Agreement. Commercial volumes of gas means 2 million cubic meters of gas per year for a Gas Generating Unit (a GGU equals approximately 40,000 square meters of gas producing material of a specified thickness). We currently plan to exercise our right to terminate the license agreement, unless after the first of the year, we and the Licensee are able to negotiate a new agreement that would include a new payment schedule in which we will have a clearer path to revenue with respect to our China operations. If we are not able to achieve that goal or otherwise generate substantial revenue, we will likely become a development stage company for financial reporting purposes.
Raising capital to implement our planned development and acquisition of new products and services will be a primary focus for us during 2014.
Results of Operations
Year ended September 30, 2013
For the year ended September 30, 2013, we had $115,557 in revenue. Operating expenses for the year ended September 30, 2013 totaled $2,608,537. During the year ended September 30, 2013, net interest income totaled $3,057. This resulted in a net loss of $2,757,619 during the year ended September 30, 2013. Operating expenses for the year ended September 30, 2013 included $51,187 for research and development costs, $425,290 for professional fees and $937,062 for general and administrative expenses. Most of these fees and expenses related to financing activities and securities disclosure compliance. Travel to our field test sites also constituted a substantial expense.
Year ended September 30, 2012
For the year ended September 30, 2012, we had $343,229 in revenue. Operating expenses for the year ended September 30, 2012 totaled $2,488,886. During the year ended September 30, 2012, net interest income totaled $4,481. This resulted in a net loss of $2,347,563 during the year ended September 30, 2012. Operating expenses for the year ended September 30, 2012 included $68,844 for research and development costs, $592,505 for professional fees and $842,694 for general and administrative expenses. Most of these fees and expenses related to financing activities and securities disclosure compliance. Travel to our field test sites also constituted a substantial expense.
Capital Resources and Liquidity
As of September 30, 2013, we had $1,021,942 in cash and cash equivalents and $68,407 of liabilities. Cash and cash equivalents from inception to date have been sufficient to cover expenses involved in starting our business. However, because of the business activities described elsewhere in this Report we will require substantially more funds to implement our new business during the next twelve months than we previously required.
We do not have enough cash to satisfy our expected minimum cash requirements to operate our business for the next twelve months and will be required to generate revenue through the sale of stock or debt financing. We also expect our operating expenses to increase before our revenues increase. Therefore, we will continue to depend on sales of capital stock or debt financing until we generate sufficient revenue.
Cash flows for Years Ended September 30, 2013 and 2012
Net cash used in operating activities during the year ended September 30, 2013 was $2,063,750, compared to $2,064,577 used in the year ended September 30, 2012. Net cash flow used in investing activities during the year ended September 30, 2013 was $77,214, attributable to the purchase of fixed assets, compared to $19,944 for the year ended September 30, 2012. Financing activities during the year ended September 30, 2013 provided $55,500 to us, compared to $3,074,000 during the year ended September 30, 2012. The cash provided by financing activities was primarily attributable to the proceeds from issuances of our common stock. The following table summarizes our cash flows for the most two recent fiscal years:
Critical Accounting Policies
Revenue Recognition
The Company recognizes revenue on arrangements only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
The Company recognizes revenue from royalty agreements as the royalties are earned. The Company recognizes revenue from the sale of additives at the time the products are delivered. The price is fixed and collection is reasonably assured. The Company recognizes revenue under service agreements when the services are complete and the Company has no remaining obligations under the agreements.
Our license agreements provide for the following different types of payments: (1) upfront license fees; (2) annual fixed payments for each Gas Generating Unit in which the licensee deploys our technology; (3) royalties calculated as a percentage of the sale price of the gas our licensee produces, (4) payments for technical support or other services; and (5) payments for amendments we supply to licensees. Each license provides for one or more of these types of payments. Not every license we enter into includes all these forms of payments.
We recognize each type of revenue as follows:
(1) Upfront license fees - These payments will be recognized in accordance with the License Agreement and may be deferred over the term of the agreement or the period of the estimated benefit to the customer.
(2) Annual fixed payments for each Gas Generating Unit in which the licensee deploys our technology - These payments will be recognized in accordance with the License Agreement and portions may be deferred until all work is complete.
(3) Royalties calculated as a percentage of the sale price of the gas our licensee produces - These payments will be recognized in accordance with the License Agreement and should be recognized when paid as the payment will come after the sale of produced gas.
(4) Payments for technical support or other services - These payments will be recognized in accordance with the License Agreement and could be deferred until all work is complete.
(5) Payments for amendments we supply to licensees - These payments will be recognized in accordance with the License Agreement and should be recognized when we deliver the nutrients.
Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At September 30, 2013 and September 30, 2012, the Company had no cash equivalents.
Loss Per Share
Basic and diluted net loss per common share is computed based upon the weighted average common shares outstanding.
Diluted income per share includes the dilutive effects of stock options, warrants, and stock equivalents. To the extent stock options, stock equivalents and warrants are anti-dilutive, they are excluded from the calculation of diluted income per share. For the years ended September 30, 2013 and 2012, respectively, 2,540,000 and 3,220,000 shares issuable upon the exercise of stock options were not included in the computation of income per share because their inclusion is anti-dilutive.
Stock-Based Compensation
The Company measures the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognizes the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
Equity instruments (“instruments”) issued to persons other than employees are recorded on the basis of the fair value of the instruments. In general, the measurement date for shares issued to non-employees is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the ASC 505.
Income Taxes
Deferred assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Recent Accounting Pronouncements
There are no current pronouncements that affect the Company
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NEXT FUEL, INC.
FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Next Fuel, Inc.
We have audited the accompanying balance sheets of Next Fuel, Inc. as of September 30, 2013 and 2012, and the related statements of operations, stockholders’ equity and cash flows for the years then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Next Fuel, Inc. as of September 30, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring net losses from operations and recognized minimal revenues since inception. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Hein & Associates LLP
Denver, Colorado
December 20, 2013
See accompanying notes to financial statements
See accompanying notes to financial statements
See accompanying notes to financial statements
See accompanying notes to financial statements
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) Basis of Presentation
Next Fuel, Inc. (the "Company") was incorporated under the laws of the State of Nevada on August 14, 2007. Next Fuel, Inc. is a service-based firm that has developed and will continue to develop and commercialize innovative technologies associated with renewable energy, such as unconventional natural gas production from lower grade coal, lignite, oil shale and other carbonaceous deposits. We refer to this generally as CTG Technology.
We are also investigating opportunities to develop or acquire other advanced technologies with focus on clean renewable energy, such as novel systems for energy-related water treatment, and processes for carbon dioxide conversion and carbon loop closure, and biological fuel cells. Collaborations with leading research institutes, such as University of Colorado, University of Wyoming, and Peking University will allow the Company to focus on identifying and acquiring or developing a portfolio of growth opportunities with compelling market values and clean energy and environmental stewardship.
We are a technology provider and service company that assist owners of natural gas production resources to increase the efficiency of their operations by providing CTG technology and technical support services utilizing our CTG technology. We do not plan to own or develop natural gas production projects.
(B) Liquidity and Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has incurred recurring net losses from operations and recognized minimal revenues since inception. The Company has a net loss of $2,757,619, and net cash used in operations of $2,063,750 for the year ended September 30, 2013. Additionally, as of September 30, 2013, the Company had $1,021,942 in cash and cash equivalents and $68,407 in liabilities. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Due to the nature of current operations, and new license agreements and business activities (as described throughout the annual report and financial statements), the Company will require substantial funding to implement its new business operations, and it will need more financing than was previously required. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be different should the Company be unable to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the ability to obtain additional operating capital through equity or debt financing, and attain profitability. There can be no assurances that the Company will be able to obtain financing or achieve profitability.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
(C) Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period, as well as assumptions used in our multiple element revenue arrangements. Significant estimates include the allowance for doubtful accounts, valuation of inventory, valuation of equity based compensation and valuation of deferred tax assets. Actual results could differ from those estimates.
(D) Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At September 30, 2013 and 2012, respectively, the Company had no cash equivalents.
(E) Loss Per Share
Basic earnings (loss) per share is calculated by dividing the income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share reflects the potential dilutive effects of stock options, warrants, and stock equivalents. To the extent stock options, stock equivalents and warrants are anti-dilutive; they are excluded from the calculation of diluted loss per share. For the years ended September 30, 2013 and 2012 respectively, 0 and 575,000, shares issuable upon the exercise of warrants were not included in the computation of loss per share because their inclusion is anti-dilutive. For the years ended September 30, 2013 and 2012 respectively, 2,540,000 and 3,220,000 shares issuable upon the exercise of stock options were not included in the computation of loss per share because their inclusion is anti-dilutive.
(F) Equipment
The Company values property and equipment at cost and depreciates these assets using the straight-line method over their expected useful life. The Company uses a five year life for furniture and equipment.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
(G) Intangible Assets
The Company amortizes intangible assets with a finite life over their life and reviews goodwill and intangible assets for impairment annually or more frequently if impairment indicators arise. Any other intangible assets deemed to have indefinite lives are not subject to amortization (See Note 2(B)).
(H) Inventory
Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.
(I) Stock-Based Compensation
The Company measures the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognizes the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.
Equity instruments (“instruments”) issued to persons other than employees are recorded on the basis of the fair value of the instruments. In general, the measurement date for shares issued to non-employees is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant.
(J) Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates as of the date of enactment.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
The Company has no significant uncertain tax positions as of any date in the years ended September 30, 2013 or 2012, respectively. The Company’s policy is to recognize accrued interest related to uncertain tax positions in interest expense, and to recognize tax penalties in operating expense. The Company made no provision for interest or penalties related to uncertain tax positions as of September 30, 2013. The Company files income tax returns in the U.S. federal jurisdiction. There are currently no federal or state income tax examinations underway, including all open tax years (2010 - 2013) for these jurisdictions.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
As of September 30, 2013 and 2012 the Company has a net operating loss carry forward of $8,369,000 and $5,056,000, respectively, available to offset future taxable income through 2033. The valuation allowance at September 30, 2013 was $7,927,957. The valuation allowance at September 30, 2012 was $7,194,371. The net change in the valuation allowance for the years ended September 30, 2013 and 2012 was an increase of $733,585 and $680,771, respectively.
(K) Revenue Recognition
Revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
The Company's revenue transactions include the following: additives, consulting services, royalties, and intellectual property licensing. The Company recognizes revenue when it is realized or realizable and earned. The timing and the amount of revenue recognized from the licensing of intellectual property depend upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. For the sale of multiple-element arrangements, including whereby additives, consulting or intellectual property is combined in a revenue generating transaction with other elements, the Company allocates to, and recognizes revenue from, the various elements based on their relative selling price. The Company allocates to, and recognizes revenue from, the various elements of multiple-element arrangements based on relative selling price of a deliverable, using: vendor-specific objective evidence, third-party evidence, and best estimated selling price in accordance with the selling price hierarchy.
.
(L) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for prepaid expenses and accounts payable approximate fair value based on the short-term maturity of these instruments as of September 30, 2013 and 2012.
(M) Concentration of Credit Risk
Although all of the Company’s assets are in the United States of America, substantially all of the revenue for the years ended September 30, 2013 and 2012 was from one related party licensee in the People’s Republic of China and two unrelated parties in Indonesia and India.
(N) Recent Accounting Pronouncements
There are no current pronouncements that affect the Company.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
NOTE 2 EQUIPMENT, INTANGIBLES AND OTHER ASSETS
(A)
Equipment
At September 30, 2013 and 2012, equipment is as follows:
Depreciation and amortization expense for the years ended September 30, 2013 and 2012 was $5,947 and $3,210 respectively.
(B)
Intangibles
On April 20, 2012, Next Fuel acquired the rights to certain intellectual property, as further described below. These rights were acquired with cash (see Note 7). The intellectual property rights that were acquired were in the form of rights to new technologies and assignment of U.S. Provisional Patent Application No. 61624313 entitled “Transition Metals Enhancement of Biogenic Natural Gas Production”, filed on April 15, 2012. Due to early stage and requirement for further development of these technologies, the fact that Next Fuel was a development stage company at the time of acquisition, and the significant uncertainty of recoverability in the future; the Company has expensed the costs of these transactions to research and development at the time of the acquisitions.
On February 12, 2012 and March 28, 2011, Next Fuel acquired the rights to certain intellectual property, as further described below. These rights were acquired through the issuance of stock options and minimal cash consideration in February 2012 (see Note 4) and the issuance of shares of the Company’s common stock and stock warrants in March 2011. The intellectual property rights that were acquired were in the form of the rights to new technologies. Provisional patent applications were filed for each. Due to early stage and requirement for further development of these technologies, the fact that Next Fuel was a development stage company at the time of acquisition, and the significant uncertainty of recoverability in the future; the Company has expensed the costs of these transactions to research and development at the time of the acquisitions.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
Although the company has expensed these technologies, the company believes that this intellectual property and associated patent applications were instrumental in the company’s ability to raise $1,525,000 in April 2012. The company believes there is a large market for new green technology associated with clean coal initiatives and the acquired technology will position the company to take advantage and participate in this market if this market grows and we develop this technology.
In February 2012, Next Fuel acquired the rights to two new technologies from individual inventors (LPV Technology and CTP Technology described below). Both technologies are early stage and will require further development before we understand their full commercial potential. Provisional U. S. patent applications were filed for each.
Coal-to-Gas (CTG) Technology
Next Fuel, Inc. is a technology provider and service company that assists owners of natural gas and oil production resources to increase the efficiency of their operations. The Company continues the process of commercializing its Coal-to-Gas (CTG) technology with strategic international partners in China, India and Indonesia as it expands the range of technologies and services it offers both in the U.S. and in international markets.
Low Energy-input Pervaporation (LPV) Technology
The Company expects to launch its LPV water treatment technology after completing tests later this calendar year. This LPV technology will provide the oil and gas industry with a new cost-effective method for treating waste water that contains the most challenging, high-salt and total dissolved solids used or produced in U.S. oil & gas operations to help the industry deal with environmental restrictions on operations.
Although the company has expensed the costs of these technologies, it is the company’s belief that this intellectual property and associated patent applications may provide growth opportunities for the company in the highly competitive markets associated with oil & gas produced water and carbon dioxide sequestration. Given the early stage of the two technologies acquired, the company believes they will not make significant contributions to the company's business for several years.
(C)
Other Assets
On November 6, 2012, the Company purchased a two-year Certificate of Deposit in the amount of $75,000 to be held as security for the issuance of Company credit cards. The Certificate of Deposit bears a current interest rate of .2% and a maturity date of November 6, 2014. Interest earned and accumulated for the year ended September 30, 2013 was $69. As of September 30, 2013, the balance owed on the Company credit cards secured by the Certificate of Deposit was $12,023.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
NOTE 3 STOCKHOLDERS’ EQUITY
(A) Common Stock Issued for Cash
On March 31, 2013, the Company issued 185,000 shares of common stock for $55,500 ($.30/share) for exercise of stock warrants.
On May 28, 2012, the Company issued 480,000 shares of common stock for $1,464,000 ($3.05/share).
On March 30, 2012, the Company issued 425,000 shares of common stock for $85,000 ($.20/share) for exercise of stock warrants.
On March 26, 2012, the Company entered into a stock subscription agreement for the sale of up to 500,000 shares of common stock in two installments. On March 27, 2012, the Company sold 100,000 shares of common stock for $305,000 ($3.05/share) as the first installment of the subscription agreement. On March 30, 2012, the Company sold 400,000 shares of common stock for $1,220,000 ($3.05/share) as the second installment of the subscription agreement. These transactions closed in April, 2012 and the funds were released at that time.
The March 26, 2012 stock subscription agreement included a registration rights agreement. The registration rights agreement stipulated a clause that the Company use commercially reasonable efforts to prepare and file a registration statement with the SEC within sixty (60) days after the agreement was signed on March 26, 2012. The Company has filed such registration statement in accordance with the agreement.
(B) Stock Issued for Services and Intellectual Property
On December 19, 2012, the Company agreed to issue 15,000 restricted shares of the Company’s common stock, having a fair value of $44,850 ($2.99/share) on the grant date (See Note 5).
On August 1, 2012, the Company issued 7,000 shares of the Company’s common stock, having a fair value of $23,730 ($3.39/share) on the grant date (See Note 5).
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
On May 13, 2012, the Company issued 7,000 shares of the Company’s common stock, having a fair value of $28,000 ($4.00/share) on the grant date (See Note 5).
On October 15, 2011, the Company issued 1,000 shares of the Company's common stock, having a fair value of $5,500 ($5.50 per share) on the grant date (See Note 5).
(C) Treasury Shares
During the year ended September 30, 2012, the total of 2,500,000 shares of common stock held in treasury were cancelled.
(D) Stock Warrants Issued for Intellectual Property
On March 28, 2011, the Company granted 1,000,000 two year warrants having an exercise price of $0.20 per share within the first year and $.30 per share within the second year. The warrants vest immediately. The Company has valued these warrants at their fair value using the Black-Scholes option pricing method. The assumptions used were as follows:
Expected life:
1 year
Expected volatility:
29.1%
Risk free interest rate:
0.25%
Expected dividends:
0%
The following table summarizes all warrant grants as of September 30, 2013, and the related changes during the year then ended:
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
NOTE 4 STOCK OPTIONS
On January 23, 2013, the Company granted options to employees to purchase 475,000 shares of common stock at an exercise price of $1.71 per share. 237,500 shares were vested immediately, 118,750 shares will be vested after one year of employment, and 118,750 shares will be vested after two years of employment.
On January 23, 2013, the Company granted options to non-employees to purchase 45,000 shares of common stock at an exercise price of $1.71 per share. 22,500 shares were vested immediately, 11,250 shares will be vested after one year of service, and 11,250 shares will be vested after two years of service.
On February 12, 2012, the Company granted options to employees to purchase 2,900,000 shares of common stock at an exercise price of $4.09 per share. 500,000 shares will be vested if the Company raises an aggregate of Five Million ($5,000,000) in gross proceeds from the sales of securities after the grant date and on or before September 30, 2012. 1,200,000 shares will be vested if the Company has either (a) achieved greater than thirty (30) thousand cubic feet per day gas production from at least twenty production pumps on or before March 31, 2013, or (b) collected at least $1 million (USD) from licensees and other customers after the grant date and on or before March 31, 2013. 1,200,000 shares will be vested if the Company has both (a) achieved for any period consisting of four consecutive fiscal quarters aggregate gross revenue per share of at least Twenty ($.20) Cents, and (b) the Company’s shares shall have been listed/quoted for trading on NASDAQ’s Capital market on or before March 31, 2014. As of September 30, 2013, the first and second performance conditions were not achieved and those options have been canceled. The Company has determined that none of the remaining performance conditions are probable of achievement as of the date of these financial statements and, therefore, no value has been recognized on these options.
On February 12, 2012, the Company granted options to employees to purchase 300,000 shares of common stock at an exercise price of $4.09 per share in connection with the purchase of technology and intellectual property (See Notes 2(B) and 7). The options will be vested if, on or before January 9, 2014, the acquired technology described in U.S. Provisional Patent Application No. 61/583,531 entitled “A Pervaporation system for treating industrial produced water”, filed on January 9, 2012 and any and all foreign counterpart patent applications currently existing or filed in the future will be commercialized by the Company. The Company has determined that none of the performance conditions are probable of achievement as of the date of these financial statements and, therefore, no value has been recognized on these options.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
On February 12, 2012, the Company granted options to a non-employee to purchase 50,000 shares of common stock at an exercise price of $4.09 per share. 16,666 shares were vested immediately, 16,666 shares will be vested when the Company files a Definitive Patent Application and it is determined that the non-employee has fulfilled his obligation to assist the Company in such endeavor. 16,667 shares will be vested when the Company has determined that the non-employee has fulfilled his obligation to assist the Company in obtaining patent protection for the acquired technology described in U.S. Provisional Patent Application No. 61/583,531 entitled “A Pervaporation system for treating industrial produced water”, filed on January 9, 2012 and any and all foreign counterpart patent applications currently existing or filed in the future. Vesting is not conditioned upon the Company’s patent application resulting in the issuance of the patent.
On December 22, 2011, the Company granted an option to a non-employee to purchase 10,000 shares of common stock at an exercise price of $4.20 per share. 3,333 shares will be vested after one year of service, 3,333 shares will be vested after two years of service, and 3,334 shares will be vested after three years of service.
On November 17, 2011, the Company granted options to employees to purchase 375,000 shares of common stock at an exercise price of $4.25 per share, and 75,000 to an employee at an exercise price of $4.68 per share. 100,000 shares were vested immediately, 116,664 shares will be vested after one year of employment, 116,668 shares will be vested after two years of employment, and 116,668 shares will be vested after three years of employment.
On November 17, 2011, the Company granted an option to a non-employee to purchase 10,000 shares of common stock at an exercise price of $4.25 per share. 3,333 shares will be vested after one year of service, 3,333 shares will be vested after two years of service, and 3,334 shares will be vested after three years of service.
The Company has valued the above options at their fair value using the Black-Scholes option pricing method. In addition to the exercise and grant date prices of the options, certain assumptions that were used to estimate the fair value of the stock option grants are listed in the following tables:
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
During years ended September 30, 2013 and 2012, the Company recognized compensation expense related to stock options of $570,073 and $415,752, respectively.
For the years ended September 30, 2013 and 2012, the Company recorded stock-based compensation expense of $281,267 and $173,000, respectively, related to vested employee stock options, $198,253 and $156,369, respectively, related to unvested employee stock options, $36,669 and $52,165, respectively, related to vested non-employee stock options, and $53,884 and $34,218, respectively, related to unvested non-employee stock options.
Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable. The related expense is recognized when the performance commitment is reached.
A summary of the Company’s stock option plans as of September 30, 2013 and 2012, and changes during the years then ended is presented below:
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
Changes in the Company’s unvested options for the year ended September 30, 2013 are summarized as follows:
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
NOTE 5 COMMITMENTS
On September 20, 2013, the Company entered into an agreement for outside financial consulting services. The agreement calls for compensation at the rate of $150 per hour or, if the consultant is working for the Company at a location other than his office, at a rate of $1,000 per day plus reimbursement of travel, lodging and meal expense. The agreement will terminate at the completion of the specified services or either party may terminate the agreement at any time, with or without cause, upon thirty (30) days’ notice to the other party.
On March 1, 2013, the Company entered into a 48 month operating lease agreement for office equipment beginning on April 1, 2013. The agreement calls for a monthly rental fee of $234. Lease expense related to this operating lease for the year ended September 30, 2013 was $1,403. Future minimum lease payments as of September 30, 2013 are as follows:
On December 19, 2012, the Company entered into a nine-month agreement to receive financial advisory and investment banking services. The Company agreed to pay a non-refundable retainer fee in the form of 15,000 restricted shares of common stock of the Company (See Note 3(B)). In addition, the Company agreed to pay a financing fee of eight percent (8%) of the gross proceeds upon the closing of any financing with any one or more of the advisors investors. The financing fee shall be four percent (4%) in the case of non-convertible debt financing. Furthermore, upon the first closing, a transaction fee of four percent (4%) of the aggregate consideration of each transaction shall be payable in the same form as the aggregate consideration in such transaction. The agreement may be terminated by either party upon thirty days written notice. As of September 30, 2013, no finance or transactions fees have been incurred in connection with this agreement. The retainer fee was expensed in full during the quarter ended December 31, 2012. This agreement has terminated.
On December 10, 2012, the Company entered into a one year consulting agreement for part-time lab work. The agreement calls for compensation at the rate of $12.50 per hour or a fixed rate of $120 per day depending on the nature of the project. This agreement has been terminated without any further obligation to the Company.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
On August 29, 2012, the Company entered into a six-month consulting agreement to receive investor relations services effective September 1, 2012. The Company is required to pay $10,000 a month. On March 1, 2013, if the agreement has not been terminated, the contract for services will continue on a month-to-month basis. After February 28, 2013, either party may terminate the contract with or without cause without penalty upon 30 days’ written notice. This agreement was terminated effective March 31, 2013.
On April 13, 2012, the Company entered into an employment agreement with an employee, with the initial term expiring on October 31, 2012. The employment agreement provides the employee with monthly compensation of $4,170 per month, with bonus and salary increases to be determined by the Company. The employee is also entitled to participate in any employee benefit plans in which the employee is eligible to participate. If the Company terminates employment before the initial term expires, whether for cause or without cause, the Company is required to pay the employee the base salary for the one-week period following termination. Benefits are payable during the one-week period following termination if the benefit plans permit. This agreement expired and a new one year employment agreement was entered into effective November 1, 2012 with the same terms as the initial agreement.
On March 30, 2012, the Company entered into a one-year lease agreement with an unrelated party for lease of office space beginning on May 1, 2012. The agreement calls for a monthly rental fee of $1,750. This lease agreement has expired and the office space continues to be rented on a month to month basis.
On October 31, 2011, the Company entered into an initial twelve month agreement with an outside party to assist the Company in financial advisory services. The agreement required a payment of $10,000 upon execution, a payment of $6,000 upon the Company’s stock being quoted on OTCQX, and thereafter a quarterly fee of $6,000 until such time as the agreement is terminated. This agreement has been terminated.
On June 1, 2011, the Company entered into a one-year employment agreement with an employee, with the initial term expiring on May 31, 2012. The employment agreement provides the employee with annual compensation of $70,000 per year, with annual bonus and salary increases determined by the Company. The agreement also calls for the employee to receive health benefits. If the Company terminates employment before the initial term expires, whether for cause or without cause, the Company is required to pay the employee the base salary for the two-week period following termination. Benefits are payable during the two-week period following termination if the benefit plans permit. This agreement expired and was renewed on July 1, 2012, providing for annual compensation of $72,450 per year, with annual bonus and salary increases determined by the Company. All other terms remained unchanged.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
On May 1, 2011, the Company entered into a one-year employment agreement with an employee, with the initial term expiring on May 31, 2012. The employment agreement provides the employee with annual compensation of $50,000 per year, with annual bonus and salary increases determined by the Company. The agreement also calls for the employee to receive health benefits. If the Company terminates employment before the initial term expires, whether for cause or without cause, the Company is required to pay the employee the base salary for the two-week period following termination. Benefits are payable during the two-week period following termination if the benefit plans permit. The annual compensation was subsequently increased to $54,000 per year. This agreement expired and a new two year employment agreement was entered into effective May 1, 2012 which provides for annual compensation of $65,000 per year, with annual bonus and salary increases determined by the Company. All other terms remained unchanged and this new agreement expires on April 30, 2014.
NOTE 6 REVENUE AND LICENSE AGREEMENTS
The Company entered into a License Agreement effective March 31, 2012 (as amended by Amendment No. 1 effective April 1, 2012 and Amendment No. 2 effective May 12, 2013) with Future Fuel Limited, a British Virgin Islands limited liability company (“Licensee”), which is affiliated with Mr. Guangwei Guo, a member of our Board of Directors and a shareholder who has purchased a substantial number of shares of our Common Stock.
The Agreement grants the Licensee an exclusive right to use our Coal to Gas technology in the People’s Republic of China and the Republic of Mongolia (the “Licensed Territory”). We did not grant the Licensee any rights outside the Licensed Territory.
The Licensee agreed to pay a license fee of Five Hundred Thousand ($500,000) Dollars (USD), within three months, but the Licensee received a credit for Four Hundred Thousand ($400,000) Dollars the Licensee previously invested in field tests, which resulted in a net upfront payment to us of One Hundred Thousand ($100,000) Dollars which was paid to us in June 2012.
In addition, the Licensee agreed to pay an annual fee of a minimum of Thirty Thousand ($30,000) Dollars (USD) per Gas Generating Unit (or GGU) for each year the GGU is capable of producing gas. Each Gas Generating Unit is approximately 40,000 square meters of coal, lignite or other carbonaceous gas producing material of specified thickness in a field where our technology is used. A field could have multiple Gas Generating Units.
One half (50%) of the first payment is due within (20) days after the first production or injection well is drilled on a Gas Generating Unit and one half (50%) is due upon the presence of biogenic methane gas from that Gas Generating Unit. We received a $60,000 payment for four GGU’s in June 2012 and $60,000 for an additional four GGU’s in December 2012.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
On May 12, 2013 we amended our March 31, 2012 License Agreement. Under the terms of that license agreement, the Licensee agreed to pay us for at least fifty Gas Generating Units for the year ended March 31, 2013, whether or not the Licensee achieved that number of Gas Generating Units. Under the terms of the license agreement before this amendment, the Licensee was obligated to pay us an additional $1,380,000 for the year ended March 31, 2013. This amendment delayed the Licensee’s obligation to pay us a $1,500,000 minimum until the end of the first year that our technology produces commercial volumes of gas. If we and our Licensee do not agree that our technology has produced commercial volumes of gas by December 31, 2013, either we or our Licensee can terminate the License Agreement. Commercial volumes of gas means 2 million cubic meters of gas per year for a Gas Generating Unit (a GGU equals approximately 40,000 square meters of gas producing material of a specified thickness). We currently plan to exercise our right to terminate the license agreement with Future Fuel, unless after the first of the year, we and Future Fuel are able to negotiate a new agreement that would include a new payment schedule in which we will have a clearer path to revenue with respect to our China operations. If we are not able to achieve that goal or otherwise generate substantial revenue, we will likely become a development stage company for financial reporting purposes.
NOTE 7 RELATED PARTY TRANSACTIONS
On May 1, 2012, the Company paid $13,500 for outside consulting services to a company owned by one of its employee/shareholders.
On April 20, 2012, the Company purchased technology and intellectual property from officers/employees in the amount of $10,000 (See Note 2B).
On March 31, 2012, the Company entered into a license agreement with another company which is owned by one of its director/shareholders. During the year ended September 30, 2013, the Company received contract fees of $60,000 in connection with that license agreement (See Note 6).
On March 28, 2012, the Company entered into a one year lease agreement with a director for the lease of office space. The lease calls for a monthly rental fee in the amount of $1,160 beginning on April 1, 2012. Since termination at the end of March 2013, the Company has continued to lease this space on the same terms on a month to month basis. The total paid under this agreement during the year ended September 30, 2013 was $13,920.
On February 13, 2012, the Company purchased technology and intellectual property from officers/employees in the amount of $15,000.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
On February 8, 2012, the Company purchased technology and intellectual property from officers/employees in the amount of $15,000. In addition, as part of the agreement, the Company granted stock options to the employees for 300,000 shares of common stock at an exercise price of $4.09 (See Note 4).
Starting in June 2011, the Company rented office space on a month to month basis for approximately $1,118 per month from a related party. The total amount of rent paid to the related party for the years ended September 30, 2013 and 2012 was $4,472 and $13,416, respectively. This rental agreement was terminated effective February 15, 2013.
NOTE 8 RETIREMENT PLANS
In January, 2012, the Company established the Next Fuel, Inc. 401(k) Plan. On January 23, 2013, the Company approved a one time Company contribution to the 401(k) Plan totaling $100,000 for the calendar year 2012.
NOTE 9 LETTER OF INTENT
On August 30, 2013, the Company entered into a non-binding letter of intent for the purchase of Elite Construction and Fabrication, LLC for a total consideration of $5,500,000. This Letter of Intent expired on November 15, 2013.
NOTE 10 SUBSEQUENT EVENTS
On November 1, 2013, the Company entered into an agreement with a related party for consulting services. The agreement calls for a monthly retainer fee to be paid to the consultant of $5,000 and a monthly expense allowance of $500. The agreement shall terminate upon the completion of the services of the consultant or by either party upon 30 days notice.
On November 1, 2013, the Company entered into a month to month rental agreement with a director/shareholder for the use of a 5th Wheel Trailer by an employee for temporary lodging during field work. The rental agreement calls for a monthly rental of $1,200.
On October 30, 2013, the Company entered into a non-binding letter of intent for the purchase of Integra Water Filtration Units and Technology from Layne Christensen Company for a total consideration of $900,000. The Company paid an initial deposit of $100,000 on November 14, 2013, in connection with this technology purchase.
NEXT FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2013
On October 15, 2013, the Company entered into an agreement for environmental services in China. The agreement calls for a fixed monthly fee of $7,500 and shall terminate on December 31, 2013, unless extended upon mutual written agreement of the parties.
On October 7, 2013, the Company entered into an agreement for underwriting/brokerage services related to a proposed public offering. An initial, non-refundable, advisory fee was paid upon the signing of the engagement letter. The agreement calls for an underwriting fee of six percent (6%) of the amount raised in the public offering as well as warrants to purchase the aggregate number of shares as would be equal to three percent (3%) of the total number of shares sold pursuant to the public offering. The agreement also calls for payment of a success-based non-accountable expense allowance in the amount of two percent (2%) of the gross proceeds of the offering and reimbursement for incurred expenses.
On October 1, 2013, the Company entered into an agreement for exclusive financial advisory services related to potential acquisitions. The agreement calls for a placement success fee of eight percent (8%) of the gross proceeds of the placement as well as issuance of stock equal to three percent (3%) of the fully diluted shares outstanding, post-merger, including the shares from the capital raise. The agreement expires on December 31, 2013, and will continue thereafter on a month to month basis unless cancelled by 30 days written notice.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A:
ITEM 9A:
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of September 30, 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer determined that our controls to ensure that the accounting department has adequate training and experience for public company external reporting was not adequate. On April 23, 2013, the Company formed an Audit Committee to oversee the financial reporting process, but the Audit Committee does not have a charter and not all members meet regulatory standards for independence and financial expert experience. Accordingly, based on these material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report, September 30, 2013, to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules.
The Company's management is addressing these weaknesses by starting the process of seeking to recruit independent Directors so that the Company's Audit Committee that meets regulatory requirements for independence and financial expert experience. The Company also started the process of retaining additional staff to assist its internal staff with compliance issues. However, budgetary constraints make it unlikely that we will increase our internal staff until after we raise additional capital.
(b) Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. 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 United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance 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 United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations 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 the financial statements.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework at September 30, 2013. Based on its evaluation, our management concluded that, as of September 30, 2013, our internal control over financial reporting was not effective for the reasons described under "Evaluation of Disclosure Controls and Procedures.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
(c) Changes in internal control over financial reporting. We made no modifications in our internal control over financial reporting during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting as additional staffing has been added,
As our business continues to change, our principal executive officer and principal financial officer will continue to reassess our internal control over financial reporting and make additional changes to allow management to report on our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Our officers and directors are listed below. Our directors are generally elected at our annual shareholders' meeting and hold office until the next annual stockholders' meeting or until their successors are elected and qualified.
Directors and Executive Officers
The executive officers and members of the Board of Directors of the Company are as follows:
(1) Mr. Kostecki is the Chairman of the Audit Committee and is a member of the Compensation Committee.
(2) Mr. Williams is the Chairman of the Compensation Committee and is a member of the Audit Committee.
Mr. Robert H. Craig (51 years old) became the CEO of the Company and Chairman of the Company's Board of Directors on March 28, 2011. From January 2003 until December 2010, he was a founder and owner of WYTEX Ventures, LLC, a coal bed methane exploration and production company based in Wyoming. From May 1998 until December 2002, Mr. Craig was the Vice President of JP Morgan Chase, a commercial banking firm in which Mr. Craig managed a commercial banking sales force of seven bankers. Mr. Craig was awarded a BBA in 1998 and an MBA in 2001 from the University of Houston.
Mr. Song Jin (44 years old) became the President, Chief Operating Officer and Chief Technology Officer of the Company and a member of the Company's Board of Directors on April 1, 2011. From August 2009 until February 2011, he was the Research Director of Ciris Energy Inc. (a natural gas company). From June 2008 until July 2009, he was the Principal Scientist of MWH Americas (a multi-national full-service environmental engineering company). From July 2006 until May 2008, he was the Principal Scientist of Western Research Institute (a non-profit research and development company with focus on development and commercialization of energy and environmental technologies). Since January 2005, Song Jin has been an Adjunct Professor at the University of Wyoming. Mr. Jin received a B.S. degree in Biochemistry from Anhui University (China). He received a M.S. degree in Plant Physiology (plant molecular biology) from the University of Wyoming. He received a Ph.D. degree in Zoology and Physiology (environmental microbiology) from the University of Wyoming.
Mr. Robin Kindle (60 years old) became Vice President and Chief Financial Officer of the Company on March 28, 2011. From January 2003 until December 2010 he was an owner of WYTEX Ventures, LLC and Loral Operating, LLC, both coalbed methane exploration and production companies. Mr. Kindle was the Director of Investor Relations for U.S. Energy Corp. from April 1998 until December 2003. U.S. Energy Corp. is a public company that engages in both oil and gas operations and various other mineral developments. Mr. Kindle was awarded a Bachelor of Science Degree in Biology from the University of Wyoming.
Mr. Jon Larsen (59 years old) became the Vice President of Operations of the Company on March 28, 2011. From March 2005 until March 2011 he was the President of Loral Operating, LLC., a coal bed methane exploration and production company based in Wyoming. From July 2003 until March 2005 Mr. Larsen was the Senior Land Surveyor of P.E. Grosh Construction, Inc. a civil engineering design and construction company. Mr. Larsen has extensive field experience in all aspects of the coal bed methane industry and has several years experience specifically in field operations that utilize coal-to-gas technology.
Mr. Guangwei Guo (52 years old) is the Managing Director of San Ding Jiu Yuan (Beijing) Venture Capital Co. Ltd. (an investment company) since January 2011. He was the General Manager of Ordos Huigu Industrial Design Park Co. Ltd. (an organization with a mission to attract companies with advanced technologies to the city of Ordos) between November 2008 and May 2011. From May 2006 to October 2008, he was the General Manager of Inner Mongolia Lepuweiye Energy Saving Co. Ltd. (a company that focuses on commercialization of technologies with energy-saving benefits in industrial applications). From September 2005 to April 2006, he was the General Manager of Qinghai Soda Industry Co. Ltd. (a manufacturer of various chemicals such as sodium carbonate). Mr. Guo graduated from Inner Mongolia Industrial University (China) with a Bachelor's degree in engineering.
Mr. Paul Kostecki (64 years old) has over thirty years of experience in the assessment and remediation of environmental contamination in the academic and private sectors. He has worked at the University of Massachusetts Amherst since 1980 where he has served as Professor; Associate Director for the Northeast Regional Environmental and Public Health Center (1996 - present); Vice Chancellor for Research and Engagement (VCRE) (2003 - 2009); and Special Assistant to the Vice President of Academic Affairs and Internal Relations (2009 -2011). Working in the University’s President’s office he led the Clean Energy China initiative which sought Chinese investment funds for University intellectual property development. Dr. Kostecki has authored/co-authored over 150 journal articles, book chapters and reports as well as co-authored two books and co-edited over 30 books. Dr. Kostecki has created three companies, two for profit, the Association for the Environmental Health and Sciences (AEHS) (1990 -present) and Amherst Scientific Publishers (1995 - present), and one non-profit, AEHS Foundation (2008 - present). In addition to the international organization AEHS, he created the International Society for Environmental Forensics (ISEF) (2000 - present). Dr. Kostecki serves as President of the AEHS Foundation. He received his Ph.D. in Natural Resources from the University of Michigan
R. Scott Williams (62 years old) and since August 2001 is a partner in Penntex Petroleum, and Nestex Energy which are Oil and Gas production companies with oil and gas wells located outside of Austin, Texas. Mr. Williams and his partner formed Penntex Petroleum in September 2001 to acquire oil and gas production in Lee and Burleson Counties, Texas. Subsequently, they acquired additional acreage in the same field and formed Nestex Energy to drill additional wells in 2007. Since 2005, Mr. Williams has been a partner and portfolio manager of Hawk Opportunity Fund LP, a distressed public and private debt and equity fund. The fund currently has over $35,000,000 in assets under management. In addition, Mr. Williams and his partner in the Fund, were instrumental in the formation and funding of Next Fuel, Inc. (NXFI). Mr. Williams holds a B.A. from the University of Oklahoma in Political Science with a minor in economics.
Board of Directors
Director Independence
See Item 13 "Certain Relationships and Related Transactions, Director Independence," of this Report.
Committees of the Board
On April 23,2013, our Board of Directors established an Audit Committee and a Compensation Committee. R. Scott Williams and Paul Kostecki are the members of both committees. Mr. Williams is Chairman of the Compensation Committee. Mr, Kostecki is Chairman of the Audit Committee. Neither committee has a charter.
Our Board of Directors has not established a nominating committee or other permanent committee, because the Board believes that it is unnecessary in light of the Board’s small size.
Meetings
Our Board of Directors held two (2) meetings in the year ended September 30, 2013, and the Board acted by unanimous written consent two (2) times during that period. Our policy regarding directors’ attendance at the annual meetings of stockholders is that all directors are expected to attend, absent extenuating circumstances.
The Audit Committee did not hold any meetings or act by written consent in the year ended September 30, 2013.
The Compensation Committee did not hold any meetings or act by written consent in the year ended September 30, 2013.
Our Board of Directors has not established a nominating committee or other permanent committee because the Board believes that it is unnecessary in light of the Board’s small size.
Communications with the Board of Directors
Stockholders may communicate with our Board of Directors or any of the directors by sending written communications addressed to the Board of Directors or any individual director at:
Next Fuel, Inc.
Attention: Corporate Secretary
122 North Main Street
Sheridan, WY 82801.
All communications are compiled by the corporate secretary and forwarded to the Board or the individual director(s) accordingly.
Nomination of directors
Three (3) of our incumbent directors were appointed pursuant to agreements in which stockholders acquired shares of our stock. We have not received any other director nominations from shareholders.
On December 7, 2012, our Board evaluated two additional candidates to become Board members, which were elected at the Annual Meeting of Shareholders held February 27, 2013. Both candidates were recommended by then current Board members and were nominated by unanimous approval of our three then current Board members. Mr. R. Scott Williams is the beneficial owner of more than five percent (5%) of our outstanding shares. See Item 12 "Security Ownership of Certain Beneficial Owners and Management" of this Report. Mr. Paul T. Kostnecki does not own any shares of this Company and has had no prior business relationships or transactions with the Company.
In the event that vacancies on our Board of Directors arise, the Board considers potential candidates for director, which may come to the attention of the Board through current directors, professional executive search firms, stockholders or other persons. The Board will consider candidates recommended by stockholders if the names and qualifications of such candidates are submitted in writing in accordance with the notice provisions for stockholder proposals set forth below to our corporate secretary, Next Fuel, Inc., 122 North Main Street, Sheridan, WY 82801 Attention: Corporate Secretary.
Our fiscal year end was September 30, 2013. We held our last meeting of stockholders in February of 2013. We expect we will hold our next annual meeting of stockholders in the first half of 2014. We have not considered nominees for the Annual Meeting of Shareholders we will hold in 2014. We believe that the size of our Board is appropriate for the size and complexity of our business.
The Board will consider properly submitted stockholder nominations received on or before January 15, 2014 for candidates for the Board of Directors for the Annual Meeting to be held in 2014 in the same manner as it evaluates other nominees. Following verification of the stockholder status of persons proposing candidates, recommendations will be aggregated and considered by the Board and the material provided by a stockholder to the corporate secretary for consideration of a nominee for director will be forwarded to the Board. All candidates will be evaluated at meetings of the Board. In evaluating such nominations, the Board will seek to achieve the appropriate balance of industry and business knowledge and experience in light of the function and needs of the Board of Directors. The Board will consider candidates with excellent decision-making ability, business experience, personal integrity and reputation. The Board does not have a policy regarding diversity of directors.
Code of conduct
Our Board of Directors has adopted a code of conduct that applies to all of our officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our code of conduct codifies the business and ethical principles that govern all aspects of our business. The code of conduct was previously filed as an exhibit to the Form 10K/A filed with the SEC on August 21, 2009. We undertake to provide a copy of our code of conduct to any person, at no charge, upon a written request. All written requests should be directed to Next Fuel, Inc., 122 North Main Street, Sheridan, WY 82801 Attention: Corporate Secretary.
Board leadership structure
The Board’s current leadership structure does not separate the positions of chairman and chief executive officer. The Board has determined our leadership structure based on factors such as the experience of the applicable individuals, the current business and financial environment we face, particularly in view of its financial condition and industry conditions generally and other relevant factors. After considering these factors, we determined that not separating the positions of chairman of the Board and chief executive officer is the appropriate leadership structure at this time. The Board, through the chairman and the chief executive officer, are currently responsible for the strategic direction of our company. The chairman and the chief executive officer is currently responsible for the day to day operation and performance of our company. The Board feels that this provides an appropriate balance of strategic direction, operational focus, flexibility and oversight.
The Board’s role in risk oversight
It is management’s responsibility to manage risk and bring to the Board's attention any material risks to the company. The Board has oversight responsibility for our risk policies and processes relating to the financial statements and financial reporting processes and the guidelines, policies and processes for mitigating those risks.
Compliance with Section 16(a) of the Exchange Act
During fiscal year 2013, we filed reports with the SEC pursuant to Section 15(d) of the Securities Exchange Act of 1934. Therefore, our officers and directors were not subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Executive compensation is reported pursuant to rules applicable to "smaller reporting companies" as provided in Rule 402 (l) of Regulation S-K.
The following table summarizes the compensation paid to certain of our executive officers for the years ended September 30 2013 and September 30, 2012:
Summary Compensation Table
________________
(1)
Pursuant to SEC rules, the values reported in the Option Award Value Column of the table reflect the aggregate grant date fair value of stock options for each listed officer and director. We calculate grant date fair value of stock options using the Black-Scholes option pricing model. The assumptions used to calculate the aggregate grant date fair value of options are described in Note 4 of Notes to Financial Statements for the year ended September 30, 2013 which are included in Item 8 of this Report. We ascribed an Award Value for options granted under the 2011 Equity Compensation Plan, because these options have vesting provisions that are based on the passage of time. Options granted under the 2012 Technology Acquisition Plan and options granted under the 2012 Equity Performance Bonus Plan, however, vest only upon the occurrence of specified events. It is not yet probable that these performance based options will vest. Accordingly, we have not yet ascribed an Award Value to these performance based options granted under the 2012 Technology Acquisition Plan and the 2012 Equity Performance Bonus Plan. No value will ever be ascribed to 350,000 of the options granted to the officers named in the Table under the 2012 Equity Performance Bonus Plan that terminated on September 30, 2012 without having vested or been exercised or to the 900,000 options granted to the officers named in the Table under the 2012 Equity Performance Bonus Plan that terminated on September 30, 2013. We will continue to evaluate when it becomes appropriate to ascribe value to the remaining unexpired options based on when it becomes probable that these options will vest. For information about the vesting provisions of these performance based options, see "Executive Compensation - 2012 Technology Acquisition Equity Plan" and "Executive Compensation - Next Fuel Three year Goals and 2012 Performance Bonus Equity Plan."
(2)
Other Compensation for each named officer consists of group health insurance premiums paid by the Company for each officer under a plan that is available to all full-time employees of the Company; a $50,000 life insurance policy that is paid for all employees; and an accident insurance policy that is paid for all employees. The Company did not make any stock awards during 2012 or 2013. Stock option awards for each named officer are reported in another table. Additionally, a one-time contribution to the officer’s 401K plan was made on February 27, 2013. For each of Mr. Craig and Jin Other Compensation for 2013 includes $3,000 paid for serving on our Board of Directors.
Except as described below, we have not paid any bonuses and we did not grant any stock options or shares of common stock to any officer, director or employee as compensation for services during either of the two years ended September 30, 2013.
Employment Agreements
The Company entered into Employment Agreements, effective Apri1 1, 2011, with the following officers: Messrs. Craig, Jin, Kindle and Larsen. These agreements all expired on March 31, 2013. Employment continues on an at-will basis since the agreement expired.
Except for salary differences, the Employment Agreements for all officers are the same.
The Employment Agreements had an initial annual salary of $120,000 for Messrs. Craig, Jin and Kindle and $70,000 for Mr. Larsen. Effective May 1, 2011, our Board of Directors approved $30,000 salary increases to $150,000 for Robert Craig and Song Jin. Effective January 1, 2013 our Board approved salary increases to the following annual levels: $159,907 for Mr. Craig, $159,907 for Mr. Jin, $127,906 for Mr. Kindle, and $74,664 for Mr. Larsen: Such salary levels have continued in effect following expiration of the employment agreements.
The principal terms of the Employment Agreements include the following terms: The officers are entitled to participate in bonus plans and benefit plans to the extent the Company from time to time initiates such plans. Benefits are payable during the severance period (one year), if the terms of the benefit plans permit.
The Technology Purchase Agreement, which is described under the caption "Certain Relationships and Related Transactions," contains non-competition provisions for each of the above named officers. The non-competition restrictions last until the later of March 31, 2015 or one year after termination of employment.
We have not paid any bonuses and we did not grant any stock options or shares of common stock to any officer, director or employee as compensation for services during the two-year period ended September 30, 2013 or thereafter except as described herein.
2011 Equity Compensation Plan
On November 17, 2011, we granted stock options pursuant to our 2011 Equity Compensation Plan (the "2011 Plan") to the officers in the table as follows: (1) Mr. Robert Craig - five-year options for 75,000 shares of Common Stock with an exercise price of $4.68 per share that vest in three equal annual installments on November 17 of 2012, 2013 and 2014; (2) Mr. Song Jin - ten-year options for 75,000 shares of Common Stock with an exercise price of $4.25 per share that vest in three equal annual installments on November 17th of 2012, 2013 and 2014; and (3) Mr. Robin Kindle - ten-year options for 50,000 shares of Common Stock with an exercise price of $4.25 per share that vest in three equal annual installments on November 17 of 2012, 2013 and 2014.
On January 23, 2013 we granted a total of 520,000 ten-year options under the 2011 Plan, of which 315,000 options were granted to executive officers and directors listed in the Table below. All the options have an exercise price of $1.71 per share. Half the options were vested on the grant date. 25% will vest on January 23, 2014 and 25% will vest on January 23, 2015.
The 2011 Plan was approved by our Board of Directors on November 17, 2011 and by our shareholders on February 15, 2012. The 2011 plan includes rights of the Company to cause participants to forfeit the benefits of grants made under the 2011 Plan in the event the participants commit any breaches of specified duties to the Company. These provisions are commonly referred to as "claw-back" provisions. "claw-back" triggers specified in the 2011 Plan include: misappropriate or unauthorized disclosure of the Company’s intellectual property; material breaches of contracts; certain willful or reckless failure to comply with Company policies or lawful directives of the Board of Directors of Company officers in material respects; certain willful or reckless falsification of financial information the participant is aware could mislead the Board or potential investors or certain failures to report the same after discovery; certain violations of fiduciary duties, certain unlawful trading in securities of the Company; felony convictions; willful or reckless misconduct that adversely affect the Company; dishonesty, fraud, embezzlement, deceit or other unlawful acts, violations of no-competition, non-solicitation or other covenants.
The 2011 Plan provides that any participant who accepts an award agrees to comply with any plan, policy or other document of the Company approved from time to time by the Board of Directors of the Company to ensure compliance with securities laws, rules and regulations both during the term of employment of participant and for one (1) year thereafter. The Company is authorized to impose stop transfer restrictions to enforce this provision
Next Fuel Three Year Goals and 2012 Performance Bonus Equity Plan
On February 12, 2012, our Board of Directors approved a comprehensive 2012 Performance Bonus Equity Plan (the "2012 Performance Bonus Plan") which reserves options to purchase 4 million shares of our Common Stock, of which the Board granted awards of 2,900,000 options to four executive officers and two key employees having an exercise price of $4.09 per share. The options cannot be exercised unless the Company achieves key value milestones each year for fiscal years 2012, 2013 and 2014. The options all expire if these value milestones are not achieved within the stated time periods. If the value milestones are achieved within the stated time periods, the option terms will be extended to February 12, 2022, subject to earlier termination upon termination of service by the officer or employee. Options that are associated with a value milestone that is achieved are then subject to vesting in three equal annual installments on the anniversary date of the value milestone being achieved while the officer or employee remains employed. Vesting can be accelerated using a double trigger for acceleration that requires both sale of the Company and termination of employment without cause within six months of the sale. The value milestones that are required to be achieved each fiscal year to prevent termination of the options are based on key strategic objectives our Board of Directors has determined are important to building shareholder value:
(1) for up to 500,000 option shares, on or before September 30, 2012, the Company shall have raised after February 12, 2012, an aggregate of $5 million gross proceeds from sales of securities (the "2012 Value Milestone");
(2) for up to 1,200,000 option shares, on or before March 31, 2013, the Company shall have either (a) achieved greater than thirty (30) million cubic feet per day gas production from at least twenty production pumps or (b) after the date hereof, the Company shall have collected at least $1 million (USD) from licensees and other customers (the "2013 Value Milestone"); and
(3) for up to 1,200,000 option shares, on or before March 31, 2014, the Company shall have both (a) achieved for any period consisting of four consecutive fiscal quarters aggregate gross revenue per share of at least Twenty ($0.20) Cents, or (b) the Company's shares shall have been listed /quoted for trading on NASDAQ's Capital market (the "2014 Value Milestone").
The value milestones described above are objectives. There is no assurance these objectives will be achieved. Our actual results could differ materially from these objectives. Factors that could cause or contribute to these differences include those discussed in this Report, particularly in “Risk Factors” and "Forward Looking Statements."
Of these grants under the Performance Bonus Plan, (i) Mr. Robert Craig, or Chief Executive Officer received a total of 900,000 options, of which 100,000 were associated with the 2012 Value Milestone, 400,000 were associated with the 2013 Value Milestone and 400,000 were associated with the 2014 Value Milestone; (2) Mr. Song Jin, our President received a total of 900,000 options, of which 100,000 were associated with the 2012 Value Milestone, 400,000 were associated with the 2013 Value Milestone and 400,000 were associated with the 2014 Value Milestone; and (3) Mr. Robin Kindle, our Chief Financial Officer received a total of 275,000 options, of which 75,000 were associated with the 2012 Value Milestone, 100,000 were associated with the 2013 Value Milestone and 100,000 were associated with the 2014 Value Milestone.
The Company did not achieve the 2012 Value Milestone by the September 30, 2012 target date and all 500,000 stock options of the officers and other employees related to the 2012 Value Milestone terminated on September 30, 2012. The terminated options were returned to the Plan and are available to be re-granted in the future. Likewise, the Company did not achieve the 2013 Value Milestone by the March 31, 2013 target date and all 1,200,000 stock options of the officers and other employees related to the 2013 Value Milestone terminated on March 31, 2013. The terminated options were returned to the Plan and are available to be re-granted in the future.
2012 Technology Acquisition Equity Plan
On February 12, 2012 our Board of Directors approved a 2012 Technology Acquisition Equity Performance Plan (the "2012 Acquisition Plan") which reserves options to purchase 350,000 shares of our Common Stock, of which the Board granted awards of all 350,000 options to two executive officers and a consultant. The options, plus $42,500 of cash, were consideration to inventors to compensate them for services related to assisting the Company to secure patent protection for Company's Low Energy- input Pervaporation Technology (LPV Technology) and Carbon Dioxide to Product (CPV) Technology they assigned to the Company. These nonqualified stock options have an exercise price of $4.09 per share and a term of ten years. 150,000 of these options were granted to our Chief Executive Officer, Mr. Robert Craig and 150,000 of these options were granted to our President, Mr. Song Jin for contributions to the CPV Technology. The options for Messrs. Craig and Jin do not vest unless a majority of the members of the Board of Directors of the Company who are not officers or employees of the Company determines by any reasonable means that the acquired CPV technology will be commercialized by the Company. The remaining 50,000 stock options were granted to an unrelated inventor who contributed to the LPV Technology. One third of these 50,000 options vested by reason of filing a provisional U. S. patent application for the LPV Technology on January 3, 2012. Another one third of these stock options vested upon filing when the Company filed a Definitive Patent Application and the Chief Executive Officer of the Company determined the inventor fulfilled his obligation to assist the Company in such endeavor. One third of the 50,000 stock options will vest when the Chief Executive Officer of the Company determines the inventor fulfilled his obligation to assist the Company obtain patent protection for the acquired LPV Technology.
Options Vested or Exercised since September 30, 2012
One third of the 2011 Equity Compensation Plan options that were granted on November 17, 2011, became vested on November 17, 2012 and another one third vested on November 17, 2013. Half of the options granted on January 23, 2013 were vested on the date the options were granted. Our officers and directors did not exercise any options during this period.
Value of Award Grants under the Plans since September 30, 2012
The following tables provide information regarding the grants of stock options that has been authorized for executive officers and directors since the end of the fiscal year ended September 30, 2012 under the three plans described above. All such option grants were made pursuant to the 2011 Equity Compensation Plan of the Company.
Option Awards Under Plans - Year Ended September 30, 2013
________________
(1)
Exercise Price is equal to the fair market value of the Common stock of the Company on the grant date.
(2)
Pursuant to SEC rules, the values reported in the Option Award Value Column of the tables reflect the aggregate grant date fair value of stock options for each listed officer and director. We calculate grant date fair value of stock options using the Black-Scholes option pricing model. The assumptions used to calculate the aggregate grant date fair value of options are described in Note 4 of Notes to Financial Statements included in this Report. We ascribed an Award Value for options granted under the 2011 Equity Compensation Plan, because these options have vesting provisions that are based on the passage of time. Half of the options granted were fully vested on the grant date. 25% of the options granted will vest on January 23, 2014 and 25% will vest on January 23, 2015.
Outstanding Option Grants under the Plans
The following table provides information regarding grants of stock options that remain outstanding at the end of the fiscal year ended September 30, 2013. No compensation related stock grants were outstanding at that time. All the grants reported in the table were authorized during the fiscal years ended September 30, 2013 and September 30, 2012 pursuant to Plans described in this Report.
________________
(1)
Options were granted pursuant to 2011 Equity Compensation Plan (described in the narrative description of our Plans) and are subject to time based vesting on November 12, 2012, 2013 and 2014. Options become exercisable when the options vest. Options that are shown as vested did not vest until November 17, 2012.
(2)
Options were granted pursuant to 2012 Technology Acquisition Equity Plan (described in the narrative description of our Plans). These options vest only if a majority of the members of the Board of Directors of the Company who are not officers or employees of the Company determines by any reasonable means that the acquired CPV technology will be commercialized by the Company. Options become exercisable when the options vest. See Item 1 "Business - Other Technologies" of this Report for additional information about our CPV Technology.
(3)
Options were granted pursuant to 2012 Equity Performance Bonus Plan (described in the narrative description of our Plans) with reported options vesting September 30, 2014, if on or before that date the Company shall have both (a) achieved for any period consisting of four consecutive fiscal quarters aggregate gross revenue per share of at least Twenty ($0.20) Cents, or (b) the Company's shares shall have been listed /quoted for trading on NASDAQ's Capital market (the "2014 Value Milestone"). Options become exercisable when the options vest. Shares reported in the Table do not include options that terminated because the 2012 Value Milestone and the 2013 Value Milestone were not achieved for: Mr. Craig 500,000 options, Mr. Song Jin 500,000 options, Mr. Kindle 175,000 options and Mr. Larsen 175,000 options.
(4)
Options were granted pursuant to 2011 Equity Compensation Plan (described in the narrative description of our Plans) and are subject to time based vesting on January 23, 2013 and January 23, 2014. Options become exercisable when the options vest. Options that are shown as vested became vested on the January 23, 2013 grant date.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of December 1, 2013.
Narrative Disclosure of Compensation Policies and Practices as They Relate to Risk Management
We believe our compensation policies and practices for our employees do not create risks that are reasonably likely to have a material adverse effect on the company. We intend to review our compensation policies from time to time to reflect changes in our risk profile. The three equity compensation plans described above include "clawback" provisions that can cause an employee to forfeit option or stock grants even after the grant has vested. The types of actions that can trigger clawbacks include: misappropriate or unauthorized disclosure of the company’s intellectual property; material breaches of contracts; certain willful or reckless failure to comply with company policies or lawful directives of the Board of Directors of company officers in material respects; certain willful or reckless falsification of financial information the participant is aware could mislead the Board or potential investors or certain failures to report the same after discovery; certain violations of fiduciary duties, certain unlawful trading in securities of the company; felony convictions; willful or reckless misconduct that adversely affect the company; dishonesty, fraud, embezzlement, deceit or other unlawful acts, violations of no-competition, non-solicitation or other covenants.
Golden Parachute Compensation
We do not have any type of compensation, whether present, deferred or contingent that is based on or otherwise relates to an acquisition, merger, consolidation, sale or other disposition of all or substantially all our assets. Our stock option award grants described above do not include accelerated vesting on account of a sale transaction, except for grants pursuant to the 2012 Performance Equity Plan. We have not reported the value of such options here, because the market price of our shares on September 30, 2013 was less than the $4.09 exercise price of these options. See "Executive Compensation - Next Fuel Three Year Goals and 2012 Performance Equity Plan". We have severance provisions in employment agreements with certain officers as described above, which are triggered by termination of employment, whether in connection with a sale transaction or otherwise. See "Executive Compensation - Employment Agreements."
Director Compensation
Our directors currently received no cash compensation or other benefits for their service as directors during the year ended September 30, 2013 except for stock options described in the Table below. We changed our Board compensation policy on October 3, 2013. This change, which was made retroactive to January 1, 2013, compensates our Board members $1,500 for each Board or committee meeting they attend in person and $500 for each Board or committee meeting that attend via telephone conference call.,
The following table summarizes the compensation paid to members of our Board of Directors who are not also executive officers of the Company for the year ended September 30 2013 after giving retroactive effect to fees paid after September 30, 2013 for meetings between January 1, 2013 and September 30, 2013.
Summary Compensation Table For Members of Board of Directors
________________
(1) Mr. Robert Craig, our Chief Executive Officer, and Mr. Song Jin, our President and Chief Operating Officer, were also paid $3,000 each for their service on our Board of Directors. These payments are included in "Other Compensation" on the Summary Compensation Table.
(2)
Options awarded January 23, 2013 for an exercise price of $1.71 per share, which was the fair market value of shares of the Common Stock of the Company on the grant date. Half of the options granted were fully vested on the grant date. 25% of the options granted will vest on January 23, 2014and 25% will vest on January 23, 2015. All such option grants were made pursuant to the 2011 Equity Compensation Plan of the Company.
(3)
Includes for Mr. Kostecki compensation for service as the Chairman of the Audit Committee and as a member of the Compensation Committee.
(4)
Includes for Mr. Williams compensation for service as the Chairman of the Compensation Committee and as a member of the Audit Committee.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to beneficial ownership of our common stock as of December 1, 2013 by each of our executive officers and directors and each person known to be the beneficial owner of 5% or more of the outstanding common stock. Unless otherwise indicated, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder’s name, subject to community property laws, where applicable. Unless otherwise indicated, the address of each stockholder listed in the table is c/o Next Fuel, Inc., 122 North Main Street, Sheridan, WY 82801.
Security Ownership of Certain Beneficial Owners and Management.
The following table describes, as of December 1, 2013, the beneficial ownership of our Common Stock by each person (other than officers and directors of the Company) known by the Company to beneficially own five (5%) percent or more of our outstanding shares of Common Stock.
________________
(1)
Shares are reported in the table as currently beneficially owned if the person currently has the right to acquire the shares or the right to acquire the shares within sixty (60) days. Shares are also reported as beneficially owned if the person has sole power, or shares the power, to vote or sell the shares.
(2)
Based on 11,172,500 shares of our Common Stock outstanding at December 1, 2013. Any securities not currently outstanding which are subject to options, warrants, rights to purchase or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class by any other person.
(3)
David Callan and Scott Williams (a member of our Board of Directors) are the sole managing members of HWC, LLC. They each beneficially own all securities that HWC, LLC beneficially owns. HWC, LLC is the sole general partner of Hawk Management, L. P. HWC, LLC beneficially owns all securities that Hawk Management, L. P. beneficially owns. Hawk Management L. P. is the sole general partner of Hawk Opportunity Fund, L. P. Hawk Management, L. P. beneficially owns all securities that Hawk Opportunity Fund, L. P. beneficially owns. Collectively, Callan and Williams and these three entities beneficially own 1,798,484 shares of our Common Stock, which constitutes approximately 16% of the Company's outstanding shares of Common Stock.
(4)
Includes for Mr. Callan: (i) 362, 500 shares personally owned by Mr. Callan; (ii) 125,000 shares Mr. Callan has the right to acquire from John Cline, a former chief executive officer of the Company; and (iii) 773,280 shares Mr. Callan indirectly beneficially owns by reason of Mr. Callan being a managing member of HWC, LLC.
(5)
Includes for HWC, LLC (i) 100,000 shares directly owned by HWC, LLC and (ii) 673,280 shares HWC LLC beneficially owns by reason of being the sole general partner of Hawk Management, L.P.
(6)
All shares reported as beneficially owned by Hawk Management, L. P. are owned by reason of Hawk Management, L. P. being the sole general partner of Hawk Opportunity Fund, L.P.
(7)
Includes for Hawk Opportunity Fund, L. P. 673,280 shares directly owned by Hawk Opportunity Fund, L. P.
The following table describes, as of December 1, 2013, the beneficial ownership of our Common Stock by (i) each of our current directors, (ii) each of our executive officers and (iii) all of our current directors and executive officers as a group.
________________
(1)
Shares are reported in the table as currently beneficially owned, if the person currently has the right to acquire the shares or the right to acquire the shares within sixty (60) days. Shares are also reported as beneficially owned, if the person has sole power, or shares the power, to vote or sell the shares.
(2)
Based on 11,172,500 shares of our Common Stock outstanding at December 1, 2013. Any securities not currently outstanding which are subject to options, warrants, rights to purchase or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class by any other person.
(3)
Includes 110,000 shares Mr. Craig has the right to acquire at any time pursuant to outstanding vested options. Does not include 595,000 shares subject to outstanding unvested options of Mr. Craig which cannot be exercised within sixty (60) days after December 1, 2013.
(4)
Includes 110,000 shares Mr. Song Jin has the right to acquire at any time pursuant to outstanding vested options. Does not include 595,000 shares subject to outstanding unvested options of Mr. Song Jin which cannot be exercised within sixty (60) days after December 1, 2013.
(5)
Also includes 89,582 shares Mr. Kindle has the right to acquire at any time pursuant to outstanding vested options. Does not include 135,418 shares subject to outstanding unvested options of Mr. Kindle which cannot be exercised within sixty (60) days after December 1, 2013.
(6)
Includes 78,332 shares Mr. Larsen has the right to acquire at any time pursuant to outstanding vested options. Does not include 131,668 shares subject to outstanding unvested options of Mr. Larsen which cannot be exercised within sixty (60) days after December 1, 2013.
(7)
Does not include 813,000 shares of Common Stock owned by business associates of Mr. Guo or 100,000 shares owned by an adult daughter of Mr. Guo, to which Mr. Guo disclaims beneficial ownership. Does not include 8,334 shares subject to outstanding unvested stock options of Mr. Guo which cannot be exercised within sixty (60) days after December 1, 2013. Includes 21,666 shares Mr. Guo has the right to acquire at any time pursuant to outstanding vested options.
(8)
Includes for Mr. Williams: (i) 402,704 shares personally owned by Mr. Williams (including shares in an IRA account); (ii) 125,000 shares Mr. Williams has the right to acquire from John Cline, a former chief executive officer of the Company; (iii) 773,280 shares Mr. Williams indirectly beneficially owns by reason of Mr. Williams being a managing member of HWC, LLC and (iv) 10,000 shares owned by Mr. Williams' wife.
Acquisitions of Shares and Agreements Related to Shares
Mr. Guo and his Affiliates, the officers of the Company, Hawk Opportunity Fund, L. P. and its partners (Callan and William) acquired their shares as described in Item 13
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
Except for Paul Kostecki, all the current members of our Board of Directors are either officers or major shareholders of the Company or both. Our Board of Directors follows the standards of independence established under the NASDAQ rules. Mr. Kostecki is the only current Member of our Board of Directors that is independent. There were no transactions, relationships or arrangements not otherwise disclosed that were considered by the Board of Directors in determining whether any directors are independent.
Lease of Office from Director.
The Company also leases approximately 1,000 square feet of office space in Fort Collins, Colorado from Mr. Guangwei Guo one of our directors on a one year lease starting on April 1, 2012, which expired on March 31, 2013 for $1,160.00 per month. We currently lease this space on a month to month basis.
License Agreement.
In April 2012, the Company has entered into a License Agreement with an affiliate of Guangwei Guo, a member of the Board of Directors of the Company. The License Agreement was amended in April 2013. The terms of the License Agreement and the Amendment are as follows:
Exclusive License - China and Mongolia.
We entered into a License Agreement effective March 31, 2012 (as amended by Amendment No. 1 effective April 1, 2012) with Future Fuel Limited, a British Virgin Islands limited liability company ("Licensee"), which is affiliated with Mr. Guangwei Guo, a member of our Board of Directors and a shareholder who has purchased a substantial number of shares of our Common Stock.
The License Agreement grants the Licensee an exclusive right to use our Coal to Gas technology in the People's Republic of China and the Republic of Mongolia (the "Licensed Territory"). We did not grant the Licensee any rights outside the Licensed Territory.
The Licensee agreed to pay a license fee of Five Hundred Thousand ($500,000) Dollars (USD), within three months, but the Licensee receives a credit for Four Hundred Thousand ($400,000) Dollars the Licensee previously invested in field tests, which results in a net upfront payment to us of One Hundred Thousand ($100,000) Dollars which was paid to us in June 2012.
In addition, the Licensee agreed to pay an annual fee of a minimum of Thirty Thousand ($30,000) Dollars (USD) per Gas Generating Unit (or GGU) for each year the GGU is capable of producing gas. Each Gas Generating Unit is approximately 40,000 square meters of coal, lignite or other carbonaceous gas producing material of specified thickness in a field where our technology is used. A field could have multiple Gas Generating Units.
One half (50%) of the first payment is due within (20) days after the first production or injection well is drilled on a Gas Generating Unit and one half (50%) is due upon the presence of biogenic methane gas from that Gas Generating Unit. We received a $60,000 payment for four GGUs in June 2012. Thereafter annual Thirty Thousand ($30,000) Dollar (USD) payments are due for the gas producing life of the Gas Generating Unit. We cease to earn payments for a GGU when the GGU ceases being capable of producing gas. Beginning April 1, 2013, the Licensee was required to pay Fifty Thousand ($50,000) Dollars (USD) for technical support for each new Gas Generating Unit the Licensee opens.
This annual fee for each Gas Generating Unit is fixed for the life of the agreement, which may be perpetual if the Licensee meets certain minimum performance criteria described below and otherwise complies with the Agreement. The Agreement contains no inflation, currency or other adjustment provision and remains a fixed annual fee in US Dollars for each Gas Generating Unit.
Our Licensee had 4 Gas Generating Units at September 30, 2012 at 2 locations in the China/Mongolia licensed territory. This increased to 8 Gas Generating Units at December 1, 2012.
The Licensee originally had a contractual commitment to add at least fifty (50) new Gas Generating Units in the People's Republic of China during the first year of the Agreement, which would result in a minimum of $1,500,000 of license fees for the first year. Except for this first year commitment, the Licensee's only obligation in later years is to use commercially reasonable efforts to commercialize the technology. The Agreement originally had a one year guaranteed term, which ended on March 31, 2013. To continue to extend the term of the license each year after that date, the Licensee was required to add fifty (50) new Gas Generating Unit (GGUs) in China and twenty-five (25) new GGUs in Mongolia. Amendment No. 2 to the License Agreement changed these first year terms as described below.
When the Licensee achieves on a cumulative basis since inception of the agreement one thousand (1,000) GGUs in China or five hundred (500) GGUs in Mongolia the license for that geographic territory becomes perpetual, unless the Licensee fails to use commercially reasonable efforts to commercialize the technology or otherwise breaches the Agreement.
On May 12, 2013 we amended our March 31, 2012 License Agreement with Future Fuel Limited, a British Virgin Island limited liability company (Licensee") which gave that Licensee certain exclusive rights to our technology in the People's Republic of China and Inner Mongolia.
Under the terms of the license agreement, the Licensee agreed to pay us for at least fifty Gas Generating Units for the year ended March 31. 2013, whether or not the Licensee achieved that number of Gas Generating Units. Fifty Gas Generating Units equals $1,500,000 under the terms of the license agreement. Our Licensee actually drilled 8 Gas Generating Units for which it paid us $120,000. Under the terms of the license agreement before this amendment, the Licensee was obligated to pay us an additional $1,380,000 for the year ended March 31, 2013.
On May 12, 2013 we amended our March 31, 2012 License Agreement. This amendment delayed the Licensee’s obligation to pay us a $1,500,000 minimum until the end of the first year that our technology produces commercial volumes of gas. If we and our Licensee do not agree that our technology has produced commercial volumes of gas by December 31, 2013, either we or our Licensee can terminate the License Agreement. Commercial volumes of gas means 2 million cubic meters of gas per year for a Gas Generating Unit (a GGU equals approximately 40,000 square meters of gas producing material of a specified thickness). We currently plan to exercise our right to terminate the license agreement with Future Fuel, unless after the first of the year, we and Future Fuel are able to negotiate a new agreement that would include a new payment schedule in which we will have a clearer path to revenue with respect to our China operations. If we are not able to achieve that goal or otherwise generate substantial revenue, we will likely become a development stage company for financial reporting purposes.
Issuances of Securities to Acquire Technology and Intellectual Property. In transactions on March 28, 2011, the Company issued Three Million Ten Thousand (3,010,000) shares of Common Stock and a Warrant to purchase an additional One Million shares of Common Stock to five persons (the "Technology Sellers") in connection with the acquisition of certain technology (the "Acquired Technology").
The Technology Sellers executed and delivered to the Company a Lock-up and Installment Re-Sale Restriction Agreement dated as of March 28, 2011 (the "Acquisition Lock-up Agreement"). Pursuant to this Acquisition Lock-up Agreement, the Technology Sellers agreed to restrictions on sales, short sales, pledges, loans, assignments or other transfers any of the shares and warrants they acquired. These transactions are called "Restricted Transactions." Certain private sales are exempt from the Restricted Transactions restrictions, provided the buyer agrees to comply with the restrictions on Restricted Transactions to the same extent as the Technology Sellers have agreed in the Acquisition Lock-up Agreement.
All contractual restrictions on re-sales of our outstanding shares of Common Stock terminated earlier this year other than requirements that re-sales occur in compliance with securities laws.
Exercises of Warrants.
On March 31, 2013, the Company received the exercise price of $0.30 per warrant for 185,000 warrants. All shares issued and issuable upon exercise of the warrant are subject to Lock-up and Installment Re-Sales Agreements.
Spring 2011 Sales of Securities
Pursuant to Subscription Agreements dated March 28, 2011 and May 13, 2011, three individuals affiliated with San Ding Jiu Yuan Beijing Venture Investment Company (collectively, "San Ding") purchased One Million shares of Common Stock from the Company for Two ($2.00) Dollars (U.S.) per share for an aggregate amount of Two Million ($2,000,000) Dollars (US). Mr. Guangwei Guo, who purchased a majority of such shares, became a member of the Company's Board of Directors at that time.
In June 2011, Mr. Guangwei Guo purchased an additional Four Hundred Thousand (400,000) shares of Common Stock of the Company for a purchase price of Three ($3.00) Dollars (US) per share in a transaction in which the Company raised One Million Two Hundred Thousand ($1,200,000) Dollars (US).
As a result of these transactions three individuals affiliated with San Ding purchased 1,400,000 shares of our Common Stock. The offer and sales to San Ding and its affiliates were exempt from registration pursuant to Regulation S of the Securities and Exchange Commission.
San Ding Jiu Yuan Beijing Venture Investment Company and its affiliates (collectively, "San Ding") executed and delivered to the Company Lock-up and Installment Re-Sale Restriction Agreements dated as of March 28, 2011 and as of May 13, 2011 (collectively, the "San Ding Lock-up Agreement"). Pursuant to this Agreement, San Ding agreed to restrictions on selling, short sales, pledges, loans, assignments or otherwise transferring any shares purchased. These transactions are called "Restricted Transactions."
All contractual restrictions on re-sales of our outstanding shares of Common Stock terminated earlier this year other than requirements that re-sales occur in compliance with securities laws.
The Company also entered into a Registration Rights Agreement dated May 13, 2011 with San Ding (the "Registration Rights Agreement"). The Registration Rights Agreement requires the Company to use reasonable commercial efforts to file by July 11, 2011 a registration statement to register for re-sale the shares purchased by San Ding and to use reasonable commercial efforts to cause the registration to become effective within six months after the registration statement is filed. The Registration Rights Agreement includes liquidated damages, if the Company fails to achieve the target dates, because the Company fails to use commercially reasonable efforts. The Registration Rights Agreement contains other provisions common to agreements of this nature. Because the registration statement became effective on October 28, 2011, the Company is no longer subject to this liquidated damages provision.
Spring 2012 Sales of Securities
Pursuant to a Subscription Agreements dated March 26, 2012 and May 25,2012, on April 12, 2012 and May 28, 2012, the Company sold Nine Hundred Eighty Thousand shares of Common Stock for Three Dollars and Five Cents ($3.05) (U.S.) per share for an aggregate amount of Two Million Nine Hundred Eighty-Nine Thousand ($2,989,000) Dollars (US). Mr. Guangwei Guo purchased 500,000 of these shares and seven other individual introduced by Mr. Guo purchased 480,000 of these shares (the "2012 Investors"), all of whom are residents of the People's Republic of China. Mr. Guo is a member of the Company's Board of Directors. In connection with the sale of these 980,000 shares, the Company and the 2012 Investors entered into a Registration Rights Agreement and a Lock-up and Installment Re-Sale Agreement having terms substantially the same as those described in connection with the Spring 2011 Sales of Securities to Mr. Guo and his Affiliates. All contractual restrictions on re-sales of our outstanding shares of Common Stock terminated earlier this year other than requirements that re-sales occur in compliance with securities laws.
Transactions with Hawk Opportunity Fund, L.P. and its General Partners
R. Scott Williams, who became a member of our Board of Directors in February 2013, is a Manager of the General Partner Hawk Opportunity Fund, L.P. ("Hawk"). On February 22, 2011, Hawk loaned us Fifty Thousand ($50,000) Dollars to facilitate us negotiating the acquisition of the Acquired Technology described above. On March 28, 2011, when we acquired the Acquired Technology, the $50,000 loan was converted into shares of our Common Stock at a rate of Ten Cents ($0.10) per share for a total of 500,000 shares of Common Stock.
On February 22, 2011 Hawk purchased for Five Thousand ($5,000) Dollars indebtedness we owe to Next Fuel, Inc., a Delaware corporation ("Next Fuel Delaware"), in the amount of Two Hundred Eighty Five Thousand Seven Hundred Fifty ($285,750) Dollars (the "Advance") which was advanced to the Registrant by Next Fuel Delaware in anticipation that Next Fuel Delaware would acquire control of us. On February 22, 2011, we, Hawk and Next Fuel Delaware entered into an agreement whereby we and Next Fuel Delaware terminated our prior agreements and released one another from liabilities other than the Advance purchased by Hawk. The $285,750 Advance purchased by Hawk did not bear interest and was payable upon demand by the holder of the Advance. The $285,750 Advance was repaid in full on June 29, 2011.
In addition, certain shares and options to purchase shares were transferred by to Hawk and Hawk's affiliates by John Cline, who was then our Chief Executive Officer. Such transactions were reported in Current Reports on Form 8-K filed with the Securities and Exchange Commission on February 22, 2011 and February 28, 2011 and April 1, 2011.
John Cline, our former President, Chief Executive Officer and member of the Board of Directors, entered into a Stock Resale and Option Agreement dated as of February 22, 2011 (the "Cline Transfer Agreement") pursuant to which he agreed to transfer to David S. Callan ("Callan") and R. Scott Williams ("Williams") and Hawk Opportunity Fund, L.P., a Delaware limited partnership (Callan, Williams and Hawk are referred to collectively as the "Hawk Buyers") all 2,500,000 shares of our Common Stock he owns. Williams and Callan are the sole general partners of Hawk and share control over Hawk’s decisions, including whether to Exercise the Option, resell shares and vote shares Hawk owns.
The terms of the transfer to the Hawk Buyers by Mr. Cline included (i) the immediate sale to Williams of Six Hundred Twenty-Five Thousand (625,000) shares for One ($0.01) Cent per share for a total of Twelve Thousand Five Hundred ($6,250) Dollars, which has been paid; (i) the immediate sale to Callan of Six Hundred Twenty-Five Thousand (625,000) shares for One ($0.01) Cent per share for a total of Twelve Thousand Five Hundred ($6,250) Dollars, which has been paid; and (iii) grant to Hawk of a two-year option (the "Option") to purchase an additional One Million Two Hundred Fifty Thousand (1,250,000) shares of Common Stock from Mr. Cline. The exercise price of the Option is (i) Twenty ($0.20) Cents per share, if the Option is exercised before March 1, 2012 and (ii) Thirty ($0.30) Cents per share, if the Option is exercised on or after March 1, 2012 and before March 1, 2013. The Option terminated on the last day of February 2013.
We are a party to the Cline Transfer Agreement only for the purpose of confirming that the Hawk Buyers understand the shares they acquire can be transferred only in compliance with an exemption from registration or a registration statement. We have not agreed to register re-sales of shares by the Hawk Buyers. We will not receive any payments from the Hawk Buyers or Mr. Cline in connection with the transactions contemplated by the Cline Transfer Agreement.
In separate transactions officers and employees of the Company entered into agreements in August of 2012 to sell an aggregate of 500,000 shares of the Company's Common Stock to Mr. Guo or his designees for $2.25 per share. In August of 2012 there was a closing for initial purchases of 50,000 of these shares. The original agreement requires Mr. Guo to purchase the remaining 450,000 shares at the same price by November 30, 2012. Mr. Guo has not purchased the remaining 450,000 shares covered by this agreement with the four officers, but the parties agreed to amend the purchase agreement to change the purchase price to $1.90 per share. In light of the reduced price, the officers decided to reduce the number of shares they would sell to 100,000 shares. These sales occurred on or before December 31, 2012. Officers participated in these re-sales as follows:
The Company did not receive any of the proceeds of re-sales of these shares and did not agree to register for re-sale any of the shares Mr. Guo acquires from our officers
Mr. Guo agreed to comply with the existing Lock-up Agreement and Installment Re-Sale Agreements the officers executed when they acquired the shares from the Company in April 2012. Terms of these agreements are reported in Item 1A "Risk Factors" of this Report. The officers also agreed not to re-sell additional shares into public markets until July 30, 2013. All contractual restrictions on re-sales of our outstanding shares of Common Stock terminated earlier this year other than requirements that re-sales occur in compliance with securities laws.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
For the Company’s fiscal year ended September 30, 2013 and 2012, audit fees were approximately $61,449 and $68,715, respectively, for professional services rendered for the audit and review of our financial statements.
Audit Related Fees
There were no fees for audit related services for the year ended September 30, 2012 and 2011.
Tax Fees
For the Company’s fiscal year ended September 30, 2013, we paid approximately $3,950 to the Company's auditors for preparation and review of the Company's tax returns. For the Company's fiscal year ended September 30, 2012, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended September 30, 2013 and 2012.
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
·
approved by our audit committee; or
·
entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.
We did not have an audit committee until April 23, 2013. Prior to that date, our entire Board of Directors pre-approved all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the entire Board of Directors or the audit committee after it was formed. No services were performed before or without approval.
See Item 10 "Directors, Executive Officers, and Governance" of this Report for a description of our Audit Committee.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
a) Documents filed as part of this Annual Report
1. Financial Statements
2. Financial Statement Schedules
3. Exhibits
An Exhibit Index listing exhibits that are being filed or furnished with, or incorporated by reference into, this Annual Report on Form 10-K appears immediately following the signature page.
Supplemental Information to be furnished with Reports filed pursuant to Section 15(d) of the Act by Registrant which have not registered securities pursuant to Section 12 of the Act.
The registrant has not sent to securities holders any annual report with respect to its last fiscal year or proxy materials with respect to any annual or other meeting of securities holders. The registrant intends to furnish such proxy statement and furnish such annual report to the Commission subsequent to the filing of the annual report on this form.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
NEXT FUEL, INC.
/s/ Robert Craig
Robert H. Craig
Chief Executive Officer
Dated: December 20, 2013
/s/ Robin Kindle
Robin Kindle
Chief Financial Officer
Dated: December 20, 2013
EXHIBITS INDEX
________________
* This information is furnished in extensible Business Reporting Language (XBRL) and is not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities and Exchange Act of 1934, and is not subject to liability under those sections.
** Filed with as an Exhibit this Report.