EVERGREEN ENERGY 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended September 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 November 10, 2010 there were 18,888,491 shares of the registrant’s common stock, $.001 par value, outstanding.
EVERGREEN ENERGY INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
NINE MONTHS ENDED SEPTEMBER 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 Bimco (previously known as Buckeye Industrial Mining Co.) and referred to as “Buckeye” herein. 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 technologies and patented processes 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. We are comprised of two discrete business units within the clean energy technology sector, which utilize two proprietary and potentially transformative green technologies: K-Fuel and the GreenCert suite of software and services. The K-Fuel process, our patented clean coal technology, significantly improves the performance of low-rank coals yielding higher efficiency and lower emissions, by applying heat and pressure to low-rank coals. The increase is variable depending on the type of coal we process. Our GreenCert software suite focuses on providing business intelligence for the power generation industry and enables power generators to leverage their assets, whether they are coal, gas, solar, or wind, based on business metrics that are important to them. GreenCert works across an enterprise, so an organization can effectively manage their power generation operations balanced between economics, risk and environmental factors. The GreenCert software platform is substantially developed. Further, GreenCert EMIT, a product in the GreenCert suite that provides comparative analysis of plant efficiencies and GHG emission and helps reduce operational and regulatory risks is generally available to the market place. The K-Fuel and GreenCert technologies are both business and environmental solutions for energy production and generation industries and processes. Target markets overlap and provide unique cross-selling opportunities especially in a changing regulatory landscape and increasing competitive market place.
In spite of the political challenges facing legislative initiatives to curtail carbon emissions under a cap and trade scheme, both the K-Fuel and GreenCert technologies could gain standing as potential technological solutions for regulatory demand to report carbon emissions and employ technologies that reduce both GHG emissions and hazardous materials from power generation activities. Most industry experts continue to expect significant environmental regulations from the Environmental Protection Agency (“EPA”) in the years ahead. As a result, we see opportunities for both our technologies as transformative and potentially “best of breed applications.”
During 2010, we have executed on two of our strategic positioning plans by completing the sale of Buckeye and signing a definitive agreement to sell our Fort Union assets. We believe these sales have allowed us to focus our resources on core business activities, including our K-Fuel and GreenCert 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 13 – Discontinued Operations. On August 20, 2010, we entered into an agreement to sell certain property and operations in Campbell County, Wyoming, including the Ft. Union plant, to Synthetic Fuels LLC for a cash purchase price of $2.0 million of which $500,000 will be paid at closing with the remaining $1.5 million to be paid pursuant to a secured two year note. Also, the buyer will pay additional amounts in connection with the release of all of the reclamation bonds pertaining to the sold property pursuant to a secured one year note. The due diligence period has ended and the transaction is expected to close in early 2011; such closing is subject to customary closing conditions. Proceeds of the sale will be used for general working capital purposes.
We still retain the rights to certain equipment at the Fort Union site, including our laboratory in which we can conduct coal upgrading using the K-Fuel process, as needed, on a limited basis. We also have rights to certain equipment related to the K-Fuel process that we can remove as needed. In addition, on November 2, 2010, we received $1.2 million from the Wyoming Department of Environmental Quality (“DEQ”) related to the reduction of our cash collateral securing our reclamation obligations at the Fort Union site. The cash collateral is reflected in restricted cash in our condensed consolidated balance sheets as of September 30, 2010 and December 31, 2009.
The results of operations for the mining segment and plant segment are shown as discontinued operations and prior year comparative information are also restated and reflected in discontinued operations. Further, the assets and liabilities of the mining segment and plant segment have been reclassified to assets of discontinued mining and plant operations, and liabilities of discontinued mining and plant operations, respectively. See Note 13—Discontinued Operations for further details.
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 5—Financing Arrangements for further description of the financings. However, we continue to require additional capital to fully fund the anticipated development of our K-Fuel process and GreenCert technology, we expect to investigate available sources of capital. Because of the need for additional capital to fund operations and costs to develop the K-Fuel process and 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 nine months ended September 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 nine months ended September 30, 2010 and 2009 and financial position for the periods ended September 30, 2010 and December 31, 2009. The condensed consolidated results of operations and the condensed consolidated statements of cash flows for the nine month period ended September 30, 2010 are not necessarily indicative of the operating results or cash flows expected for the full year. The financial information as of September 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. See Note 15—Subsequent Events for further details.
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 September 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 September 30, 2010 and 2009 were 4.7 million and 2.1 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.
We have restated prior year outstanding common stock, weighted average shares outstanding and prior stock and warrant issuances to reflect our 1 for 12 reverse stock-split consummated on August 20, 2010. In addition, all exercise prices for stock options and warrants have also been adjusted to reflect this reverse stock-split. These restatements reflect balances as if the reverse stock split occurred on those applicable dates unless otherwise stated. See Note 8—Equity for further details.
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.
We are required to test our GreenCert capitalized software development costs for recoverability at each reporting period. Due to the unlikelihood that GHG legislation will be passed in the United States in the foreseeable future that would establish a cap and trade market for Carbon off-sets, management believes that there is uncertainty as to whether we can generate revenue by selling carbon credits for the agricultural sector in the near future. Therefore, due to the uncertain market for carbon credit selling for the agricultural sector, we have not projected sufficient revenue for this sector to recover our
costs. As a result of this recoverability test, we impaired capitalized costs related to our GreenCert agricultural software module by $3.5 million, of which $2.7 million was previously reflected in construction in progress and $735,000 in property plant and equipment in our condensed consolidated balance sheet. However, we believe that the impact of the legislative uncertainty does not apply to the energy sector where we have concentrated most of our work since early 2010. GreenCert Energy is independent of any regulatory or legislative compliance requirements. As a result our cash flow projections related to our GreenCert Energy module are sufficient to cover costs already incurred and future anticipated costs.
(4) Supplemental Cash Flow Information
(5) 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 1,041,667 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 $4.47. 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 would be paid to the holders, upon conversion, in 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 $3.72 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. In March 2010, 9,311.5 shares of the preferred stock were converted into common shares, and as of September 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 $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 $72,000 of other expense and $837,000 of other income during the three and nine months ended September 30, 2010, respectively.
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 2,436,389 shares of our common stock and warrants to purchase 1,218,194 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 $3.60. 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 $4.63. 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 liabilities at each reporting period and, as a result, we recorded $86,000 of other expense and $2.2 million of other income during the three and nine months ended September 30, 2010, respectively
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 18,250 warrants to purchase our common stock at an exercise price of $15.60. In connection with the second tranche, we prepaid $351,000 of interest and issued 18,250 warrants to purchase our common stock at an exercise price of $15.60. In connection with the third tranche we prepaid $225,000 of interest and issued 18,250 warrants to purchase our common stock at an exercise price of $15.60.
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 discontinued mining operations for the periods ended September 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 $0 and $680,000 of other income for the three and nine months ended September 30, 2010, respectively, by decreasing the fair value of the derivative liability.
2007 Notes due 2012
During the three months ended September 30, 2010, we entered into two individually negotiated agreements with certain existing noteholders to exchange $5.8 million in aggregate principal amount of the 2007 Notes, for an aggregate of 2.0 million shares of our common stock. After the exchange agreements our principal balance was $21.6 million as of September 30, 2010. As a result of this exchange transaction we recorded a gain of $3.1 million.
Our segments include the GreenCert segment and Technology segment. The GreenCert segment software suite that focuses on providing business intelligence for the power generation industry and enables power generators to leverage their assets, whether they are coal, gas, solar, or wind, based on business metrics that are important to them. GreenCert works across an enterprise, so an organization can effectively manage their power generation operations balanced between economics, risk and environmental factors. 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 segment, 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 and the signing of a definitive agreement for the sale of our Fort Union assets, the Mining and the Plant segments were 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.
Effective August 20, 2010, following the approval of the proposed reverse stock split at the Annual meeting of the Shareholders, our Board of Directors approved a 1 for 12 reverse stock split of our common stock. As a result of the reverse stock split, every 12 shares of our common stock issued and outstanding on August 20, 2010 were combined into one share of common stock. The reverse stock split did not change the authorized number of shares or the par value of our common stock. No fractional shares were issued in connection with the reverse stock split. If, as a result of the reverse stock split, a stockholder would otherwise hold a fractional share, the number of shares received by such stockholder has been rounded up to the next whole number.
We measure and recognize compensation expense for all stock grants and options granted to employees, members of our board of directors and others, 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 is 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 nine months ended September 30, 2010, we granted 16,000 stock options to our board of directors which immediately vested on date of grant and expire three years from grant date. We also granted 97,000 share grants to our board of directors which immediately vested, for service rendered for the nine months ended September 30, 2010. We granted 813,000 restricted stock grants to certain executive officers that vest upon the achievement of certain market milestones related to our stock price and positive cash forecast and expire four years from grant date. We granted 186,000 of restricted stock to employees that had rendered services for more than one year of which 62,000 immediately vested and the remaining vest over the next 19 months if they are still employed and if certain performance goals are achieved. In addition, we granted 105,000 restricted share grants to employees that have not rendered service for more than one year that vest over 31 months if they are still employed and have achieved certain performance goals.
During the nine months ended September 30, 2009, we granted 81,000 stock options to our employees which had an immediate vest of 33% and the remaining portion equally vesting over the next two years from the grant date, with an expiration seven years from anniversary date. We also granted 6,000 options to our Board of Directors that immediately vested and expire three years from grant date. Additionally, we granted 41,667 options to our Chief Executive Officer that immediately vested on the date of grant and expire five years from the anniversary date and 250,000 restricted stock grants that vest if certain market conditions are met related to our common stock price and expire four years from anniversary date.
In 2005, we issued restricted shares to our former Chief Executive Officer and recognized non-cash expense ratably over the requisite service period until his retirement in June 2009. Since the restricted shares never vested and were forfeited upon his retirement, the cumulative non-cash compensation expense recorded since 2005 was reversed in the second quarter of 2009. This reversal of non-cash compensation totaled $2.9 million for the nine months ended September 30, 2009.
As we do not pay dividends, the dividend rate variable in the Black-Scholes model is zero. The following table summarizes the assumptions used to value stock options granted during the nine months ended September 30, 2010 and 2009:
In July 1, 2009, we entered into a transition agreement with a former Executive Officer. Pursuant to the terms of the transition agreement 50,000 shares of our common stock that were granted in connection with his employment agreement were fully vested in March 2010. We recognized $1.6 million of non-cash compensation related to the accelerated vesting of the 50,000 share grant for both of the nine months periods ended September 30, 2010 and 2009.
(10) Related Parties
In February 2007, we entered into an exclusive patent sub-license agreement with the C-Lock Inc., developer of a proprietary technology for the measurement of carbon emissions and formed a subsidiary, C-Lock Technology, Inc. The developer was controlled by an employee of ours 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 $544,000 and $2.4 million during the three and nine months ended September 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 September 30, 2010 represent an 8% ownership interest in C-Lock Technology, Inc and a 23% ownership interest as of September 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.
(11) Commitments and Contingencies
2007 Notes Litigation
Subsequent to the closing of the sale of certain assets of our Buckeye and certain assets of Evergreen, and payment of the 2009 Notes, on April 1, 2010, certain holders of our outstanding 2007 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). We have subsequently been 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, we 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 our ability to utilize, for working capital or other purposes, the portion of the proceeds which we 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 our 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 us, the remaining claims have not been fully resolved, and the litigation is continuing. On August 31, 2010, US Bank, N.A., in its capacity as Trustee for the 2007 Notes, intervened in the action citing, among other things, its interest in a legal determination of whether the 2007 Notes are in default.
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 Court held a case management conference on August 30, 2010, at which conference the Court ordered a period of expedited discovery and a further status conference on December 1, 2010. To reduce future legal costs we have offered New Coal Holdings $250,000 to settle this case. However, the offer was later rejected by New Coal Holdings. In connection with the settlement offer, we have recorded $250,000 of litigation expense in our condensed consolidated statements of operations for the three and nine months ended September 30, 2010.
We are not engaged in any additional material legal proceedings which involve us, any of our subsidiaries or any of our properties.
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.
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.
The following table presents information about our net liabilities measured at fair value on a recurring basis as of September 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 nine months ended September 30, 2010.
The following table presents information about our net assets measured at fair value on a recurring basis as of September 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 nine months ended September 30, 2009
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. As of September 30, 2010, we were required to test our agricultural module, related to our GreenCert suite, for recoverability based on future cash flows. As a result of this recoverability test, we reduced the net book value of this module to zero by recording an impairment charge of $3.5 million. We estimated the fair value of the agricultural module based on a cash flow approach using significant unobservable inputs (Level 3).
(13) 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 nine months ended September 30, 2010, respectively, and $8.9 million and $40.5 million for the three and nine months ended September 30, 2009, respectively. Net loss from discontinued mining operations was $102,000 and $5.0 million for the three and nine months ended September 30, 2010, respectively, and $3.1 million and $4.3 million for the three and nine months ended September 30, 2009, respectively.
Income from discontinued mining operations primarily consists of coal and ash revenues and direct expenses of coal mining. Interest from the 2009 Notes (more fully described in Note 6 – Debt), that is required to be repaid as a result of the sale, was fully allocated to discontinued mining 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. As of September 30, 2010, we had recognized $3.0 million in exit costs, which include selling fees related to the sale. We recorded a net gain of $1.0 million from our sale of Buckeye and Evergreen assets and is included in our operating loss for the three and nine months ended September 30, 2010.
Fort Union site
On August 24, 2010, we entered into a definitive agreement with Synthetic Fuels LLC for the sale of the assets of our subsidiary Landrica Development Company, including the Fort Union plant and associated property located near Gillette, Wyoming. The sale will provide approximately $7.1 million of available cash to the Company, comprised of: (i) cash payments of $2.0 million, payable $500,000 at closing, an additional $500,000 on the first anniversary of closing and $1.0 million on the second anniversary of closing; and (ii) the release of approximately $5.1 million of reclamation bonds upon the replacement of such bonds by Synthetic Fuels (after reducing for the $1.2 million we received on November 2, 2010 related to these bonds). Synthetic Fuels LLC is required to assume these environmental liabilities at the one year anniversary at which time the cash collateral will be released to us. The sale is anticipated to close in early 2011 and is subject to customary closing conditions. Proceeds of the sale will be used for general working capital purposes.
As a result of the signing of the definitive agreement, we have accounted for our plant segment as assets held for sale on our condensed consolidated balance sheets and restated prior years balance to reflect this classification. In addition, we have accounted for revenues and expenditures related to our plant segment as discontinued plant operations for all period presented.
The assets and liabilities classified as assets held for sale included in the assets and liabilities of our plant segment in the accompanying condensed consolidated balance sheets are as follows:
(14) Financial Statements of Guarantors
The following information sets forth our consolidating statements of operations for the three and nine months ended September 30, 2010 and 2009, our consolidating balance sheets as of September 30, 2010 and December 31, 2009, and our consolidating statements of cash flows for the nine months ended September 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. 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. In addition, as a result of our signing of a definitive agreement to sell our Fort Union assets, our plant segment that primarily represents revenue and costs related to our Fort Union plant in Gillette has been reclassified to assets of discontinued plant operations and liabilities of discontinued plant operations for our condensed consolidated financial statements. We did not re-allocate our corporate costs nor restate our operating segments results in the comparative period ended September 30, 2009 as a result of the presentation of the mining operations and plant operations as discontinued operations.
EVERGREEN ENERGY INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2010
EVERGREEN ENERGY INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2009