<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
COMMISSION FILE NUMBER 0-23634
KFX INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1079971
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1999 BROADWAY, SUITE 3200, DENVER, COLORADO USA 80202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(303) 293-2992
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
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 proceeding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
On August 11, 1997 there were 23,926,040 shares of the Registrant's common stock
outstanding.
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KFX INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1997 (Unaudited)
and December 31, 1996........................................... 3
Consolidated Statements of Operations - Three Months Ended
June 30, 1997 and 1996 (Unaudited).............................. 4
Consolidated Statements of Operations - Six Months Ended
June 30, 1997 and 1996 (Unaudited).............................. 5
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1997 and 1996 (Unaudited).............................. 6,7
Notes to Consolidated Financial Statements (Unaudited).............. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
PART II. OTHER INFORMATION............................................... 13
Signatures............................................................... 14
2
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KFX INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
--------------------------
ASSETS
------
Current:
Cash and cash equivalents.............. $ 1,135,651 $ 1,403,625
Accounts receivable.................... 521,261 447,230
Prepaid expenses....................... 102,496 106,150
----------- -----------
Total current assets................. 1,759,408 1,957,005
----------- -----------
Property, plant and equipment, net of
accumulated depreciation................. 4,998,519 5,458,801
Patents, net of accumulated amortization.. 3,364,188 3,662,894
Investment in KFX Fuel Partners, L.P...... 3,048,310 2,792,304
Investment in K-Fuel, L.L.C............... 254,460 157,180
Prepaid royalty........................... 500,000 500,000
Other assets.............................. 401,536 395,383
----------- -----------
$14,326,421 $14,923,567
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current:
Accounts payable....................... $ 814,600 $ 1,041,800
Accrued expenses....................... 127,808 166,651
Due to related parties................. 639,500 707,756
Interest payable....................... 36,202 92,319
Current maturities of long-term debt... 757,000 115,000
----------- -----------
Total current liabilities............ 2,375,110 2,123,526
----------- -----------
Long-term debt, less current maturities... 270,000 1,110,000
Mine reclamation liability................ 1,166,000 1,166,000
----------- -----------
Total liabilities.................... 3,811,110 4,399,526
----------- -----------
Commitments and contingencies (Note 2)
Stockholders' equity:
Preferred stock, $.001 par value,
20,000,000 shares authorized;
none issued.......................... - -
Common stock, $.001 par value,
80,000,000 shares authorized;
23,926,040 and 22,676,040 shares
issued and outstanding.............. 23,926 22,676
Additional paid-in capital............. 47,191,843 44,693,093
Accumulated deficit.................... (36,700,458) (34,191,728)
----------- -----------
Total stockholders' equity........... 10,515,311 10,524,041
----------- -----------
$14,326,421 $14,923,567
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED JUNE 30,
1997 1996
-------------------------
Contract revenue......................... $ 190,862 $ -
K-Fuel, LLC joint venture fee............ - 1,000,000
Interest and other income................ 24,122 71,194
----------- -----------
Total revenue and other income........ 214,984 1,071,194
----------- -----------
Marketing, general and administrative
expenses................................ 684,627 1,149,180
Research and development................. 109,945 120,000
Demonstration plant and laboratory
operations.............................. 213,601 183,005
Depreciation and amortization............ 441,059 496,243
Interest expense......................... 32,511 58,376
----------- -----------
Total expenses........................ 1,481,743 2,006,804
----------- -----------
Net loss................................. $(1,266,759) $ (935,610)
=========== ===========
Net loss per common share................ $(.05) $(.04)
=========== ===========
Weighted average shares outstanding...... 23,926,000 22,486,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
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KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1997 1996
--------------------------
Contract revenue......................... $ 408,756 $ 8,410
K-Fuel, LLC joint venture fee............ - 1,000,000
Interest and other income................ 84,862 128,238
----------- -----------
Total revenue and other income........ 493,618 1,136,648
----------- -----------
Marketing, general and administrative
expenses................................ 1,424,176 1,924,796
Research and development................. 236,958 200,000
Demonstration plant and laboratory
operations.............................. 390,245 337,523
Depreciation and amortization............ 884,799 930,365
Interest expense......................... 66,171 86,141
----------- -----------
Total expenses........................ 3,002,349 3,478,825
----------- -----------
Net loss................................. $(2,508,731) $(2,342,177)
=========== ===========
Net loss per common share................ $(.11) $(.10)
=========== ===========
Weighted average shares outstanding...... 23,712,000 22,374,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1997 1996
--------------------------
OPERATING ACTIVITIES:
Net income (loss)...................... $(2,508,731) $(2,342,177)
Adjustments to reconcile net income
(loss) to cash used in operating
activities:
Depreciation and amortization....... 884,799 930,365
Other............................... - (32,942)
Equity in net loss of K-Fuel,
L.L.C.............................. 103,692 -
Changes in operating assets and
liabilities:
Increase in accounts receivable..... (74,031) (111,414)
Decrease in prepaid expenses........ - (227,149)
Decrease in reclamation deposit..... - 1,503,032
Decrease in accounts payable........ (227,200) 279,905
Decrease in accrued expenses........ (38,843) (120,515)
Decrease in due to related parties.. (68,256) (50,438)
Decrease in interest payable........ (56,117) (53,072)
Decrease in other................... 450 -
----------- -----------
Cash used in operating activities......... (1,984,237) (224,405)
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment.................. (50,795) (69,404)
Advance royalty payment................. - (300,000)
Pending patent applications............. (18,194) -
Investments in KFX Fuel Partners, L.P... (256,006)
Investments in K-Fuel, L.L.C............ (200,971) -
Other................................... (30,532) (1,000)
----------- -----------
Cash used in investing activities......... (556,498) (370,404)
----------- -----------
FINANCING ACTIVITIES:
Debt placement costs.................... (29,239) -
Proceeds from sale of common
stock, net of placement fees........... 2,500,000 852,380
Payments on notes payable............... (198,000) (542,851)
----------- -----------
Cash provided by (used in) financing
activities............................... 2,272,761 309,529
----------- -----------
Increase (decrease) in cash and cash
equivalents.............................. (267,974) ( 285,280)
Cash and cash equivalents, beginning of
period................................... 1,403,625 2,870,039
----------- -----------
Cash and cash equivalents, end of period.. $ 1,135,651 $ 2,584,759
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.................. $ 121,848 $ 139,187
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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KFX INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Six Months Ended June 30, 1997
- ------------------------------
None.
Six months Ended June 30, 1996
- -------------------------------
During January 1996, the Company issued 41,426 shares of common stock
under its Restricted Stock Plan in payment of 1995 board of director fees
totaling $209,780 that were included in amounts due to related parties at
December 31, 1995.
During January 1996, the Company issued 93,240 shares of common stock,
and issued a common stock purchase warrant for 100,000 shares of common stock
for $4.00 per share, in exchange for professional service fee obligations
totaling $477,894 that were included in accrued expenses at December 31, 1995.
In June 1996, the Company entered into a royalty amendment agreement
whereby the Company issued a promissory note in the amount of $200,000, payable
in June 1998.
The accompanying notes are an integral part of these consolidated financial
statements.
7
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KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of KFX Inc. ("KFX" or the "Company") and its wholly-owned
subsidiary, KFX Wyoming Inc. ("KFXW"), and its majority-owned subsidiaries, KFX
Technology Inc. ("KFXT", formerly Energy Brothers Technology, Inc.), Atlantic
Partners Ltd. ("APL"), and Heartland Fuels Corporation ("HFC"). The Company's
67 percent interest in KSA Partnership ("KSA"), its 51 percent interest in K-
Fuel, L.L.C. ("K-Fuel, LLC"), and its 5 percent interest in KFX Fuel Partners,
L.P. ("KFP") are accounted for as equity investments as the Company does not
have the authority or ability to independently control or manage these entities.
All significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements at June 30, 1997, and for the
six months ended June 30, 1997 and 1996 are unaudited. In the opinion of the
Company's management, all adjustments, consisting of only normal recurring
adjustments necessary for a fair statement of the results for the interim
periods, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the audited financial statements and notes to financial
statements for the year ended December 31, 1996 included in the Company's Form
10-K. The accounting policies used in the preparation of these unaudited
quarterly financial statements are the same as those policies used in the
preparation of the audited annual financial statements except as modified for
appropriate interim accounting policies. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results of
operations expected for the year ended December 31, 1997.
Net loss per common share for the six months ended June 30, 1997 and
1996 are based on the weighted average number of shares of common stock
outstanding during the period, and excludes common equivalent shares (common
stock options and warrants) as the effect would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share," which simplified and added certain
earnings per share calculations and disclosures to be included in financial
statements prepared in accordance with generally accepted accounting principles.
The Company will adopt Statement No. 128 in the fourth quarter of 1997 and,
based on current circumstances, does not believe the effect of adoption will be
material.
8
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KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(CONTINUED)
NOTE 2. COMMITMENTS AND CONTINGENT LIABILITIES
In November 1995, the Company filed a lawsuit against Fru-Con
Construction Corporation and Fru-Con Engineering, Inc. (collectively, "Fru-Con")
in the Wyoming State Court, 6th Judicial District. The action has been moved to
the United States District Court for the District of Wyoming. The Company's
lawsuit requests that the court enter a declaratory judgment that Fru-Con has no
interest or claim in or against the Company or any of the Company's property or
interests, or that Fru-Con is barred from such claims. Fru-Con had asserted
claims for approximately $1.8 million for engineering services and an interest
in K-Fuel plants built in North America by virtue of contractual arrangements
with a limited partnership sponsored by corporations in which a predecessor
entity to the Company had a partnership interest. The Company believes that the
ultimate resolution of this action will not have a material adverse impact on
the Company's financial position or results of operations.
NOTE 3. KFX FUEL PARTNERS, L.P.
In August 1995, the Company acquired a 5 percent general and limited
partnership interest in KFX Fuel Partners, L. P. ("KFP"). The remaining 95
percent general and limited partnership interest in KFP is held by Thermo Ecotek
Corporation ("TCK"). In September 1995, KFP began construction of a 500,000
tons-per-year ("TPY") K-Fuel facility near Gillette, Wyoming. Towards the
completion of the construction of the facility in the fourth quarter of 1996, a
fire occurred at the facility. Damage from the fire was restricted to an oil
heater and auxiliary oil storage tank and was unrelated to the facility's four
coal processors and the K-Fuel Technology. Substantially all fire damage
repairs have been completed and substantially all repair costs are expected to
be covered by insurance proceeds.
The fire has caused certain delays with the commencement of commercial
operations of the facility. In addition, KFP is currently experiencing certain
construction completion problems, including issues relating to the design and
operation of certain venting equipment which will further delay the facility's
start-up operations, which had been underway when the venting problems were
identified. KFP expects to complete repairs and resolve these construction
completion items in time to continue operations of the facility during the
fourth quarter of 1997. However, because the technology being developed at the
facility is new and untested, no assurance can be given regarding specific
timing and production levels, or that KFP will be able to correct these
construction problems and be in full commercial operations in the fourth quarter
of 1997, if at all.
NOTE 4. EVENTS SUBSEQUENT TO JUNE 30, 1997
On July 31, 1997, the Company sold a private placement of convertible
debentures (the "Debentures") totaling $17.0 million. The Debentures mature in
July 2002, and have an annual interest rate of 6.0 percent, payable semi-
annually on January 31 and July 31, commencing on January 31, 1998. The
Debentures are initially convertible into shares of the Company's common stock
at a conversion price of $3.75 per share, beginning on October 30, 1997. On
November 1, 1999, the conversion price will change to be 90 percent of the
average closing price of the Company's common stock (on the American Stock
Exchange or other exchange, if applicable) for the 15 days immediately preceding
November 1, 1999. The conversion price on November 1, 1999 cannot be less than
$3.65 per share, subject to certain adjustments.
9
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KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(CONTINUED)
The Debentures were offered, sold and delivered only to non-United
States persons outside of the United States. Application has been made to list
the Debentures on the Luxembourg Stock Exchange.
In connection with the sale of the Debentures, the Company issued to
placement agents warrants to purchase 453,333 shares of common stock at an
exercise price of $5.00 per share, expiring in July 2002.
The net proceeds from the sale of the Debentures (approximately $15.3
million) will be used for additional investments in the KFx Fuel Partners
facility, continued project development efforts for proposed K-Fuel projects in
Indonesia and Turkey, continued project development efforts for a proposed
activated carbon production facility, and for general corporate purposes.
10
<PAGE>
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion to follow is based on forward-looking statements that
include risks and uncertainties, and should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" at Item 7 of the Company's Form 10-K for the year ended December 31,
1996. Actual results may differ materially from those anticipated in the
forward-looking information.
Excluding a $1 million joint venture fee from K-Fuel LLC in 1996, to
date the Company has not generated any material revenues from the licensing of
the K-Fuel Technology to third party licensees or the direct manufacturing of
beneficiated fuel products. Substantially all revenues have been derived from
ancillary sources not directly related to the Company's efforts to commercialize
the K-Fuel Technology. Until the Company successfully negotiates additional
third-party licensing and royalty agreements and/or independently constructs and
operates its own production facilities, net operating losses will continue. As
such, the Company may be dependent on non-operating funding sources to sustain
its operations in the near term (twelve to eighteen months).
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 VS. THREE MONTHS ENDED
JUNE 30, 1996
Contract revenue increased primarily as a result of technical
subcontract work the Company performed for K-Fuel, LLC. As the K-Fuel, LLC
joint venture commenced in June of 1996, there was no comparable amount for the
second quarter in 1996. The Company will continue to perform additional
technical subcontract work for K-Fuel LLC in 1997. The K-Fuel LLC joint venture
fee was a one-time payment in April 1996. Interest and other income decreased
in the 1997 period as a result of overall lower cash balances.
The decrease in marketing, general and administrative expenses is
primarily attributable to certain professional fees incurred in the 1996 period
relating to the K-Fuel LLC agreement entered into in the second quarter of 1996.
Additionally, the Company is continuing its efforts to reduce certain
controllable administrative expenses.
The overall increase in research and development and demonstration
plant and laboratory operations is attributable to increased efforts associated
with overall project development activities, with particular emphasis on the K-
Fuel, LLC research program, proposed projects in Indonesia and Turkey, and the
KFP project currently under construction/start-up adjacent to the demonstration
plant and laboratory facility.
The decrease in interest expense is attributable to the overall
lower debt balances outstanding in the 1997 period.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED
JUNE 30, 1996
The increase in contract revenue, decrease in K-Fuel LLC joint venture
fee, and decrease in interest and other income are for similar reasons as
discussed above for the three months ended June 30, 1997 vs. June 30, 1996.
The decrease in marketing, general and administrative expenses, the
overall increase in research and development and demonstration plant expenses,
and the decrease in interest expense are for similar reasons as discussed above
for the three months ended June 30, 1997 v. June 30, 1996.
11
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KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTSOF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The current near term funding sources available to the Company are (1)
cash on hand, which as of August 11, 1997 was approximately $16.2 million; (2)
the expected start-up of the KFP production facility in the second half of 1997,
resulting in certain royalty payments; (3) certain cost reimbursements from K-
Fuel, LLC, relating to a collective research and development program conducted
by the Company in conjunction with Kennecott Alternative Fuels, Inc., the
Company's joint venture partner in K-Fuel, LLC, and (4) certain development and
license fees to be derived from anticipated K-Fuel projects in Indonesia and
Turkey. In January 1997, TCK invested $2.5 million for 1.25 million shares of
the Company's common stock.
The Company's current cash balances, the royalty income to be derived
from the commencement of operations of KFP in the second half of 1997, and the
expected revenues to be derived from the Company's research and development
subcontract agreements with K-Fuel, LLC are expected to fund the Company's
operations and debt service requirements until the third or fourth quarter of
1998 based on current operating plans and budgets. The Company does not expect
to realize any significant net revenues from its ownership interest in KFP
during 1997. The Company will need to realize additional revenue sources and
reduce certain operating expenses to sustain operations beyond 1998. Such
potential sources of funding may include, but are not limited to (1) the
proposed sale of all or a portion of the Company's ownership interest in KFP;
(2) license fees to be derived from the proposed construction of Indonesia and
Turkey K-Fuel production facilities in 1998; and (3) certain development and
license fees to be derived from a proposed activated carbon project. There are
no assurances that any of these potential funding sources will materialize, and
the Company does not currently have any commitments with respect to any such
funding sources. If such events do not materialize, the Company may be forced
to seek debt and/or equity financing which may not be available on terms and
conditions favorable to the Company, if at all. The Company does not currently
have any commitments with respect to any debt or equity financing.
12
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KFX INC.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on June
19, 1997 for the purposes of (i) electing three directors to the Board of
Directors; and (ii) ratifying the selection of Price Waterhouse LLP as the
Company's independent accountants for the year ended December 31, 1997.
The following votes were cast by shareholders with respect to the
election of directors named in the Company's proxy statement for the Annual
Meeting:
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED
---------------- -------------------- ----------------
Mr. Vincent N. Cook 20,706,289 46,300 -0-
Mr. Peter G. Martin 20,706,289 46,300 -0-
Mr. Stanley G. Tate 19,584,745 1,167,844 -0-
The following votes were cast by shareholders with respect to the
selection of Price Waterhouse LLP as the Company's independent accountants for
the year ended December 31, 1997:
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED
---------------- -------------------- ----------------
20,733,739 2,200 16,650
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27. Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarterly period ended
June 30, 1997.
13
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KFX Inc.
/s/ Jeffrey A. Hansen
-----------------------
Jeffrey A. Hansen
Chief Financial Officer
Date: August 11, 1997
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-01-1997
<CASH> 1,135,651
<SECURITIES> 0
<RECEIVABLES> 521,261
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,759,408
<PP&E> 11,691,746
<DEPRECIATION> (6,693,227)
<TOTAL-ASSETS> 14,326,421
<CURRENT-LIABILITIES> 2,375,110
<BONDS> 270,000
0
0
<COMMON> 23,926
<OTHER-SE> 10,491,385
<TOTAL-LIABILITY-AND-EQUITY> 14,326,421
<SALES> 408,756
<TOTAL-REVENUES> 493,618
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,936,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,171
<INCOME-PRETAX> (2,508,731)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,508,731)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
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