EVERGREEN ENERGY 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2010
For the transition period from to
Commission File Number: 001-14176
EVERGREEN ENERGY INC.
(Exact name of registrant as specified in its charter)
Registrant’s Telephone Number, Including Area Code: (303) 293-2992
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
On August 3, 2010 there were 201,555,767 shares of the registrant’s common stock, $.001 par value, outstanding.
EVERGREEN ENERGY INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT)
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
In this Form 10-Q, we use the terms “Evergreen Energy,” “we,” “our,” and “us” to refer to Evergreen Energy Inc. and its subsidiaries. C-Lock refers to our subsidiary C-Lock Technology, Inc. Buckeye refers to our subsidiary Buckeye Industrial Mining Co. All references to C-Lock®, GreenCert™, K-Fuel, K-Fuel®, K-Fuel process, K-Fuel refined coal, K-Fuel refineries, K-Direct®, K-Fuel Plants, K-Fuel facilities, K-Direct facilities and K-Direct® plants, refer to our patented processes and technologies explained in detail in this Form 10-Q or in our Annual Report on Form 10-K for the year ended December 31, 2009 filed on March 31, 2010.
We were founded in 1984 as a cleaner coal technology, energy production and environmental solutions company focused on developing our proprietary technologies. In the last two years, we have sharpened our focus as a carbon technology company. We have developed two proprietary, patented, and potentially transformative green technologies: the GreenCert suite of software and services, and K-Fuel. Our GreenCert technology is a scientifically accurate and scalable environment intelligence solution that measures greenhouse gases and other environmental costs enabling customers to manage and report their environmental assets and liabilities. GreenCert, built on IBM’s Service-Oriented Architecture (or SOA), is the environment intelligence solution that provides customers the end-to-end visibility and traceability necessary to measure their complete environmental footprint. K-Fuel, our clean coal technology significantly improves the performance of low-rank coals yielding higher efficiency and lower emissions.
We executed on one of our strategic positioning plans by completing the sale of Buckeye. We believe the sale will allow us to focus our resources on core business activities, including our GreenCert and K-Fuel technologies. On March 12, 2010, we signed a definitive agreement with Rosebud Mining Company (“Rosebud”), for the sale of certain assets of both Buckeye and Evergreen, which we refer to as the “sale of Buckeye” and reflects all of the assets and operations of the Mining Segment for a purchase price of $27.9 million in cash payable at the closing of the transaction. We closed this transaction on April 1, 2010. See further discussion below in Note 11 – Discontinued Operations. Accordingly, the results of operations for the Mining Segment are shown as discontinued operations and prior year comparative information is also restated and reflected in discontinued operations. Further, the assets and liabilities of the Mining Segment have been reclassified to Assets of Discontinued Mining Operations, and Liabilities of Discontinued Mining Operations, respectively.
Actual 2009 cash flows from Buckeye’s operations were less than anticipated and combined with the on-going costs associated with GreenCert, we were required to raise additional capital in 2010. As a result, we completed two financing deals: (i) On March 16, 2010, we entered into a securities purchase agreement, and received gross proceeds of approximately $9.3 million; and (ii) On January 26, 2010, we consummated a registered direct public offering and raised gross proceeds of approximately $8.7 million. See Note 4—Financing Arrangements for further description of the financings. However, we continue to require additional capital to fully fund the anticipated development of our GreenCert technology and expect to investigate available sources of capital. Because of the need for additional capital to fund operations and costs to develop GreenCert, there is substantial doubt as to our ability to continue to operate as a going concern for the foreseeable future.
We have a history of losses, deficits and negative operating cash flows and may continue to incur losses in the future. We have reduced our cash utilization principally by reducing general and administrative costs. A portion of these savings have been offset by further investment in our GreenCert business. We continue to evaluate our cash position and cash utilization and have and may make additional adjustments to capital expenditures or certain operating expenditures, as necessary.
These financial statements and related notes thereto contain unaudited information as of and for the three and six months ended June 30, 2010 and 2009. In the opinion of management, the statements include all the adjustments necessary, principally of a normal and recurring nature, to fairly present our condensed consolidated results of operations and cash flows as of and for the six months ended June 30, 2010 and 2009 and financial position for the periods ended June 30, 2010 and December 31, 2009. The condensed consolidated results of operations and the condensed consolidated statements of cash flows for the six month period ended June 30, 2010 are not necessarily indicative of the operating results or cash flows expected for the full year. The financial information as of June 30, 2010 should be read in conjunction with the financial statements for the year ended December 31, 2009 contained in our Form 10-K filed on March 31, 2010.
(2) Significant Accounting Policies
Basis of Presentation.> The consolidated financial statements include our accounts and the accounts of our wholly and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. We do not consolidate
Evergreen-China Energy Technology Co., Ltd our 50% owned company in China, (Evergreen-China); but record the activity using the equity method of investment. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
The financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Due to our history of losses, our deficit, our substantial leverage and liquidity constraints, the satisfaction of our liabilities depends on the success of our business plan, the continued support of our shareholders, lenders, suppliers and customers, and our ability to restructure debt obligations and obtain access to additional liquidity from debt financing and/or to raise additional capital.
There is no assurance that our initiatives to improve our liquidity and financial position will be successful. Accordingly, without this assurance, these material uncertainties are such that there exists substantial risk regarding our ability to continue as a going concern.
Net loss Per Common Share. > Basic net loss per common share is based on the weighted-average number of common shares actually outstanding during each respective period ended June 30, 2010 and 2009. The calculation of diluted net earnings per common share adds the weighted-average number of potential common shares outstanding to the weighted-average common shares outstanding, as calculated for basic loss per share, except for instances in which there is a net loss. Our total incremental potential common shares outstanding for the periods ended June 30, 2010 and 2009 were 59.5 million and 23.9 million, respectively, and are comprised of outstanding stock options, restricted stock grants, warrants to purchase our common stock and potential conversion of our convertible debt into common stock. All potential common shares outstanding have been excluded from diluted net loss per common share because the impact of such inclusion would be anti-dilutive.
Recently Adopted Accounting Pronouncements.> In June 2009, the FASB issued authoritative guidance included in ASC 860 “Transfers and Servicing” which is effective for interim and annual fiscal periods beginning after November 15, 2009. This standard removes the concept of a qualifying special-purpose entity and removes the exception from applying ASC 810 “Consolidation”. This standard modifies the financial-components approach used in ASC 860 “Transfers and Servicing” and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized. This standard also requires enhanced disclosure regarding transfers of financial interests and a transferor’s continuing involvement with transferred assets. The adoption of this pronouncement in 2010 did not have a material impact on our financial statements.
In December 2009, the FASB issued ASU 2009-17, “Amendments to FASB Interpretation 46(R),” (“ASU 2009-17”) revising authoritative guidance associated with the consolidation of variable interest entities. This revised guidance replaces the current quantitative-based assessment for determining which enterprise has a controlling interest in a variable interest entity with an approach that is now primarily qualitative. This qualitative approach focuses on identifying the enterprise that has (i) the power to direct the activities of the variable interest entity that can most significantly impact the entity’s performance; and (ii) the obligation to absorb losses and the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This revised guidance also requires an ongoing assessment of whether an enterprise is the primary beneficiary of a variable interest entity rather than a reassessment only upon the occurrence of specific events. ASU 2009-17 was effective for us on January 1, 2010. The adoption of this pronouncement in 2010 did not have a material impact on our financial statements.
Recently Issued Accounting Pronouncements>. In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures,” requiring new disclosures of significant transfers in and out of Levels 1 and 2, the reasons for the transfers, and separate reporting of purchases, sales, issuances and settlements in the roll forward of Level 3 activity. The new ASU also clarifies that fair value measurement disclosures should be provided for each class of assets and liabilities and disclosures also should be provided about valuation techniques and inputs used to measure fair value for recurring and nonrecurring fair value measurements. The disclosures are required for either Level 2 or Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). We are currently evaluating the impact, if any, on our financial statements.
In October 2009, the FASB issued Accounting Standards Update 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the EITF,” (“ASU 2009-13”) which amends ASC 605 (Topic 605, “Revenue Recognition”). This amended guidance addresses the determination of when individual deliverables within an arrangement may be treated as
separate units of accounting and modifies the manner in which transaction consideration is allocated across the separately identifiable deliverables. The guidance is effective for fiscal years beginning on or after June 15, 2010, and early adoption is permitted. We are currently evaluating the impact, if any, on our financial statements.
In October 2009, the FASB amended the accounting standards for revenue arrangements with software elements. The amended guidance modifies the scope of the software revenue recognition guidance to exclude tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010, and early adoption is permitted. This guidance must be adopted in the same period an entity adopts the amended revenue arrangements with multiple elements guidance described above.
(3) Supplemental Cash Flow Information
(4) Financing Arrangements
2010 Convertible Preferred Stock
On March 16, 2010, we and certain institutional investors entered into a securities purchase agreement, pursuant to which we agreed to sell an aggregate of 9,312.5 shares of our preferred stock and warrants to purchase 12,500,000 shares of common stock to such investors for gross proceeds of approximately $9.3 million.
Each share of preferred stock has a stated value of $1,000 per share. The preferred stock is convertible into the number of shares of common stock, $.001 par value determined by dividing the stated value of the preferred stock by the conversion price per share of $.3725. The conversion price is subject to certain adjustments for stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The preferred stock accrues dividends at the rate of 9.261% per annum, payable semi-annually on June 30 and December 31, commencing on June 30, 2010 and on each conversion date until March 16, 2015. The Certificate of Designation includes a provision under which we have deposited with an escrow agent $4,312,500 of the gross proceeds of the offering. If the preferred stock is converted prior to March 16, 2015, the escrow amount was to be used to pay to the holder, upon conversion, an amount equal to $463.09 per $1,000 of stated value converted, less the amount of dividends paid prior to the conversion date. Subject to certain ownership limitations, the warrants are immediately exercisable for a five year period thereafter after closing at an exercise price of $.31 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. During March 2010, 9,311.5 shares of the preferred stock were converted into common shares, and as of June 30, 2010, one share of 2010 Convertible Preferred Stock was outstanding. The net proceeds from the above registered direct public offering, after deducting placement agent fees and our estimated offering expenses and amounts placed in escrow, and excluding the proceeds, if any, from the future exercise of the warrants issued in the offering, were approximately $4.5 million.
The detachable warrants issued in the convertible preferred stock agreement contain certain provisions, such as a contingent cash redemption feature or adjustments to the exercise price of the warrant upon the occurrence of a change of control. These features were concluded to result in the warrants being recorded as liabilities. We used a fair value modeling technique to initially value this put warrant liability and recorded $1.9 million of long-term liability in our condensed consolidated balance sheet at the date of the transaction. Furthermore, we are required to fair value this put warrant liability at each reporting period and, as a result, we recorded $1.0 million and $909,000 of other income during the three and six months ended June 30, 2010, respectively, by decreasing the fair value of this put warrant liability.
2010 Common Stock Offering
On January 26, 2010, we consummated a registered direct public offering of common stock and raised gross proceeds of approximately $8.8 million. The `securities were offered pursuant to a shelf registration statement on Form S-3 that was previously declared effective by the Securities and Exchange Commission (SEC) on January 19, 2010. In total, we sold an aggregate of 29,236,664 shares of our common stock and warrants to purchase 14,618,331 shares of our common stock. The common stock and warrants were sold in units, with each unit consisting of one share of common stock and a warrant to purchase 0.50 of a share of common stock. The purchase price per unit is $.30. Subject to certain ownership limitations, the warrants are exercisable commencing six months following the closing date of the offering and for a five year period thereafter at an exercise price of $0.3859. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The net proceeds to us from this registered direct public offering, after deducting placement agent fees and our estimated offering expenses, and excluding the proceeds, if any, from the future exercise of the warrants issued in the offering, are approximately $8.0 million.
The detachable warrants issued in the common stock offering contain certain provisions, such as a contingent cash redemption feature or adjustments to the exercise price of the warrant upon the occurrence of a change of control. These features were concluded to result in the warrants being recorded as liabilities. We used a fair value modeling technique to initially value this put warrant liability and recorded $3.4 million of long-term liability in our consolidated balance sheet at the date of the transaction. Furthermore, we are required to fair value this put warrant liability at each reporting period and, as a result, we recorded $1.2 million and $2.3 million of other income during the three and six months ended June 30, 2010 by decreasing the fair value of this put warrant liability.
On March 20, 2009, we executed a Senior Secured Convertible Note Agreement which provided for the issuance of up to $15 million in aggregate principal amount of 10% Senior Secured Promissory Notes (“2009 Notes”), in three $5 million tranches. The first $5 million tranche was funded in March 2009, the second $5 million tranche was funded in April 2009 and the third tranche was funded in July 2009. These 2009 Notes bore interest at a rate of 10% per annum beginning on the funding date of each tranche, which was required to be prepaid at the time the 2009 Notes were issued and is non-refundable. We prepaid $375,000 of interest related to the closing of the first tranche and issued 219,000 warrants to purchase our common stock at an exercise price of $1.30. In connection with the second tranche, we prepaid $351,000 of interest and issued 219,000 warrants to purchase our common stock at an exercise price of $1.30. In connection with the third tranche we prepaid $225,000 of interest and issued 219,000 warrants to purchase our common stock at an exercise price of $1.30.
On December 18, 2009, we entered into a binding term sheet to restructure and extend the terms of our 2009 Notes extending the maturity date to the earlier of June 30, 2010 or upon the sale of Buckeye. Per the terms of the restructured agreement, we were required to pay a $1.8 million cash extension fee on our first raise of additional common equity offering. We paid this fee in connection with proceeds from our common equity raise on January 26, 2010. Pursuant to the terms of the extension’s the lenders were to receive 30% of the proceeds of any subsequent common equity offering by us to be used to reduce the outstanding balance of the 2009 Notes. As a result of the 2010 Convertible Preferred stock issuance, we repaid $1.3 million of the outstanding principal balance of the 2009 Notes. Upon maturity, the repayment amount will be equal to 115% of the principal amount outstanding, plus accrued and unpaid interest. We incurred an additional fee of $350,000 due at maturity because our equity raise was consummated after the January 15, 2010 deadline. See further discussion in Note 7—Debt in Notes to Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2009.
On April 1, 2010, we closed the sale of Buckeye and repaid the outstanding notes, including accrued interest and fees, totaling $19.2 million. We recorded a loss on the early extinguishment of these notes totaling $3.7 million primarily related to the acceleration of debt issuances costs, the acceleration of exit fees described above and the write-off of our derivatives described below. In addition, pursuant to discontinued operations guidance, the interest expense for the 2009 Notes have been reflected in discounted mining operations for the periods ended June 30, 2010 and 2009.
We were required to adjust the conversion price upon the occurrence of a future issuance of stock or warrants at a price less than the 2009 Notes conversion price. This potential adjustment to the conversion price was concluded to be an embedded derivative that needed to be bifurcated for valuation purposes. We used a fair value modeling technique to value this derivative and are required to fair value the derivative at each reporting period and, as a result, we recorded $680,000 of other income for both of the three and six months ended June 30, 2010, by decreasing the fair value of the derivative liability.
Our segments include the GreenCert segment, Plant segment and Technology segment. The GreenCert segment reflects activities related to the measurement of green house gases and certification of environmental improvements as carbon credits. The Plant segment primarily represents revenue and costs related to our Fort Union plant in Gillette, Wyoming, at which we suspended operations in March 2008. The Technology segment is comprised of all other operations that use, apply, own or otherwise advance our proprietary, patented K-Fuel process, including our headquarters and related operations, activities of Evergreen Energy Asia Pacific Corp. and KFx Technology, LLC, which holds the licenses to our technology. Corporate costs within our Technology segment are allocated to our other segments, generally on a percentage based on the number of employees, total segment operating expenses, or segment operating expenses plus segment capital expenditures. Our operations are principally conducted in the United States. Data through segment operating (loss)/ income is what is provided to our Chief Operating Decision Maker. As a result of the sale of Buckeye, the Mining segment, which previously primarily represented the mining operations of our subsidiary Buckeye, was reclassified to discontinued operations for our condensed consolidated financial statements, but for purposes of our segment reporting disclosures, prior year amounts of corporate allocations were not restated. We will continue to evaluate how we manage our business and, as necessary, adjust our segment reporting accordingly.
We measure and recognize compensation expense for all stock grants and options granted to employees, members of our board of directors and consultants, based on estimated fair values. We estimate the fair value of share-based payment awards on the grant date. We generally use the Black-Scholes option pricing model to calculate the fair value of stock options. Restricted stock are valued based upon the closing price of our common stock on the date of grant unless there are market vesting conditions. The fair value is recognized as expense and additional paid-in capital over the requisite service period, which is usually the vesting period, if applicable, in our consolidated financial statements. We are required to make estimates of the fair value of the related instruments and the period benefited.
During the six months ended June 30, 2010, we granted 191,000 stock options to our board of directors which immediately vested on date of grant and expire three years from grant date. During the six months ended June 30, 2009, we granted 973,000 stock options to our employees which had an immediate vest of 33% and the remaining portion will equally vest over the next two years from the grant date and expire seven years from anniversary date. We also granted 70,000 options to our Board of Directors that immediately vested and expire three years from grant date. Additionally, we granted 500,000 options to our new Chief Executive Officer that immediately vested on the date of grant and expire five years from the anniversary date and 3,000,000 restricted stock grants that vest in portions if our stock price reaches certain predetermined prices and expire four years from anniversary date. The following table summarizes the assumptions used to value stock options granted during the six months ended June 30, 2010 and 2009:
(8) Related Parties
In February 2007, we entered into an exclusive patent sub-license agreement with the developer of a proprietary technology for the measurement of carbon emissions and formed a subsidiary, C-Lock Technology, Inc. The developer was an employee from August 2007 through February 2010. The agreement provides us with an exclusive worldwide sub-license to a technology to standardize the measurement of carbon emissions in energy and agricultural-related activities. The agreement was amended and restated to expand the energy and agricultural activities to all applications of the technology and eliminates other operating requirements. In order to maintain this licensing arrangement, we are required to make minimum annual royalty payments of $500,000 to a company controlled by the developer of the proprietary technology, with each payment extending the arrangement for one year if the parties are in material compliance with the contract.
We utilized Enterprise Information Management, Inc. (EIM) to help assist us in the development of our GreenCert software. One of our former non-executive employees serves on the board of directors of EIM. We believe the terms and contracted amounts would have been similar if we had entered into this agreement with a third party. We incurred costs of $1.5 million and $1.8 million during the three and six months ended June 30, 2009, respectively. As the former employee ceased employment with us in July 2009, EIM is no longer considered a related party and thus payments to EIM during 2010 are no longer disclosed.
We granted shares from our majority owned subsidiary C-Lock Technology, Inc. to certain executive officers of Evergreen Energy, certain employees of C-Lock Technology, Inc. and others. In the aggregate, these share grants as of June 30, 2010 represent an 8% ownership interest in C-Lock Technology, Inc and a 23% ownership interest as of June 30, 2009.
In 1996, we entered into a royalty amendment agreement with Mr. Edward Koppelman, the inventor of the K-Fuel technology. Pursuant to the agreement, we owe Mr. Koppelman’s estate 25% of our worldwide royalty and license fee revenue, as defined in the agreement, subject to a $75.2 million cap. Through March 31, 2009, we have made cumulative royalty and license payments totaling $2.2 million, pursuant to the $75.2 million cap, reducing the maximum potentially owed under the cap to $73.0 million. Mr. Theodore Venners, our founder, is entitled to 50% of net distributable royalties disbursed to the Koppelman estate.
In December 2004, we entered into a licensing agreement with Cook Inlet Coal, an affiliate of Kanturk Partners LLC, under which we agreed to license to Cook Inlet Coal our proprietary coal processing technology for use at a coal processing plant to be operated by Cook Inlet Coal. Kanturk Partners owns approximately a 12% interest in Cook Inlet Coal. Mr. John Venners, brother of our founder, Mr. Theodore Venners, has an approximately 4.5% interest in Kanturk Partners. Pursuant to a transition agreement, Mr. Venners is no longer an employee of Evergreen.
(9) Commitments and Contingencies
2007 Notes Litigation
Subsequent to the closing of the sale of certain assets of our Buckeye Industrial Mining subsidiary (“Buckeye”) and certain assets of Evergreen, and payment of the 2009 Notes, on April 1, 2010, certain holders of our outstanding 2007 Convertible Notes commenced litigation initially against Buckeye and the holders of the 2009 Notes, AQR Absolute Return Master Account L.P., et al., v. Centurion Credit Funding LLC, Level 3 Capital Fund, LP, Buckeye Industrial Mining Company, et al., Case No. 10CV340 (Ct. Com. Pl. Columbiana County, OH). The Company was subsequently added as a defendant in the action. In the litigation, plaintiffs seek: (i) to void all obligations of Buckeye with respect to the 2009 Notes, including the security interests granted in connection therewith, (ii) to enjoin the further transfer of or recover “for Buckeye’s benefit” certain proceeds from the asset sale (particularly in satisfaction of the obligations owed to the holders of the 2009 Notes); and (iii) to appoint a receiver to take control of Buckeye’s assets.
In response to certain defenses raised in the litigation, certain of the plaintiffs made further claims that the 2007 Notes are in default. In response, the Company filed a counterclaim in the litigation naming those plaintiffs as counterclaim defendants. The counterclaim asserts lender liability and other tort claims in connection with the counterclaim defendants’ conduct. The counterclaim also seeks a declaratory judgment that the defenses raised do not constitute an event of default
under the 2007 Notes and the recovery of monetary damages related to the counterclaim defendants’ wrongful conduct in asserting the default and in connection with the 2007 Notes.
The Court initially issued a temporary restraining order limiting the Company’s ability to utilize, for working capital or other purposes, the portion of the proceeds which Evergreen received at the time of the closing (i.e., the net proceeds following the payment of the 2009 Notes and closing fees and expenses). However, on June 8, 2010, the Court issued a ruling in favor of the Company lifting the temporary restraining order and rejecting the Plaintiff’s request for a further injunction on the use of these funds as well as the use of $5.0 million collateralizing certain environmental reclamation bonds. In its ruling, the Court stated, “The notes have never been in default, the interest has been paid on time and the principal is not due until 2012.”
Although the Court has issued a ruling in favor of the Company, the remaining claims have not been fully resolved, and the litigation is continuing. We believe that we have meritorious defenses to the claims made and intend to defend ourselves vigorously in the action.
New Coal Holdings Litigation
On April 2, 2010, Evergreen Energy Inc and Buckeye filed suit in the United States District Court for the Northern District of Ohio naming as defendants New Coal Holdings LLC and New Coal Holdings Inc. The action is captioned, Buckeye Industrial Mining Co. et al., v. New Coal Holdings LLC, et al., Case No. 4:10-cv-00699-JRA (N.D. Ohio). The action arises out of an agreement between the parties concerning the possible acquisition of Buckeye or its assets.
Defendants claim that, as a result of the recent sale of Buckeye assets, they are owed $650,000 under the agreement. The complaint seeks both a declaratory judgment that the defendants breached the agreement such that nothing more is owed to them and the recovery of $350,000 previously paid to them under the agreement. The action is in the very earliest stages and no case management dates have been set.
While our former investment banking firm may claim that we owe them up to $1.0 million upon the sale of Buckeye, we do not believe that this fee is payable due to the lack of the counterparty meeting certain performance criteria, in addition to certain verbal understandings reached related thereto. If a claim is made for this contingent payment, we intend to vigorously dispute this claim.
We are not engaged in any additional material legal proceedings which involve us, any of our subsidiaries or any of our properties.
(10) Assets and Liabilities Measured at Fair Value
Fair Value Measurements and Disclosures establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to that asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2010
The following table presents information about our net liabilities measured at fair value on a recurring basis as of June 30, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value.
The following table represents the change in fair value for the six months ended June 30, 2010
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2009
The following table presents information about our net assets measured at fair value on a recurring basis as of June 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value.
The following table represents the change in fair value for the six months ended June 30, 2009
(11) Discontinued Operations
We executed on one of our strategic positioning plans by completing the sale of Buckeye. We believe the sale of Buckeye has allowed us to focus our resources on core business activities, including the GreenCert and K-Fuel technologies. On March 12, 2010, we signed a definitive agreement with Rosebud Mining Company for the sale of certain net assets of both Buckeye and Evergreen for $27.9 million, in addition to the release of $5.0 million of cash reclamation bonds. Further, $2.8 million of the purchase price will be deposited into escrow for a period of twelve months to cover amounts payable to Rosebud pursuant to the indemnification provision of the sales agreement. The sale closed on April 1, 2010, however, we are still subject to some post-closing obligations, including incurring costs related to the transfer of certain assets and providing support for such transfers. Accordingly, the results of operations for the Mining Segment are shown as discontinued operations and prior year comparative information is also restated and reflected in discontinued operations. Further, the assets and liabilities of the Mining Segment have been reclassified to Assets of Discontinued Mining Operations and Liabilities of Discontinued Mining Operations, respectively.
The discontinued mining operations generated $0 and $12.6 million in revenues for the three and six months ended June 30, 2010, respectively, and $13.8 million and $31.6 million for the three and six months ended June 30, 2009, respectively. Net loss from discontinued operations was $798,000 and $4.9 million for the three and six months ended June 30, 2010, respectively, and $2.2 million and $1.4 million for the three and six months ended June 30, 2009, respectively.
Income from discontinued operations primarily consists of coal and ash revenues and direct expenses of coal mining. Interest from the 2009 Notes (more fully described in Note 5 – Debt), that is required to be repaid as a result of the
sale, was fully allocated to discontinued operations. General corporate overhead costs were not allocated to discontinued operations.
The assets and liabilities classified as assets held for sale included in the assets and liabilities of discontinued mining operations in the accompanying condensed consolidated balance sheets are as follows:
Pursuant to the sale agreement, inventory, property, plant, equipment, mineral rights, Evergreen’s dock facilities and the assumption of asset retirement obligations and obligations related to the 47-year dock lease were transferred to Rosebud. Evergreen retains the rights to accounts receivable and obligations related to accounts payable and accrued liabilities that existed on the sale date April 1, 2010. We anticipate exit costs to be approximately $3.0 million. As of June 30, 2010, we had recognized $3.0 million in exit costs, of which include selling fees related to the sale. We recorded a net gain of $1.0 million from our sale of Buckeye and Evergreen mining assets and is included in our operating loss for the three and six months ended June 30, 2010.
(12) Financial Statements of Guarantors
The following information sets forth our consolidating statements of operations for the three and six months ended June 30, 2010 and 2009, our consolidating balance sheets as of June 30, 2010 and December 31, 2009, and our consolidating statements of cash flows for the six months ended June 30, 2010 and 2009. Pursuant to SEC regulations, we have presented in columnar format the financial information for Evergreen Energy Inc., the issuer of the 2007 Notes, Evergreen Operations, LLC, the guarantor, and all non-guarantor subsidiaries on a combined basis. The 2007 Notes are fully and unconditionally guaranteed, on a senior, unsecured basis by, Evergreen Operations, LLC. The 2009 Notes are not guaranteed by any subsidiaries and are reflected in the Evergreen Energy Inc. column. The 2009 Notes were co-issued by Evergreen Energy Inc., our wholly owned subsidiary Evergreen Operations, LLC and its wholly owned subsidiary, Buckeye Industrial Mining Co. The co-issuers are jointly and severally liable for the debt, and the debt is secured by all of Buckeye’s assets and Evergreen Operations LLC’s equity interest in Buckeye. As a result of the sale of Buckeye on April 1, 2010 the results of operations for the Mining Segment are shown as discontinued operations and prior year comparative information is also restated and reflected in discontinued operations. Further, the assets and liabilities of the Mining Segment have been reclassified to Assets of Discontinued Mining Operations, and Liabilities of Discontinued Mining Operations, respectively. We did not re-allocate our corporate costs nor restate our operating segments results in the comparative period ended June 30, 2009 as a result of the presentation of the mining operations as discontinued operations.
EVERGREEN ENERGY INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2010