<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 MARCH 31, 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 May 12, 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 MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31,1997
(Unaudited) and December 31, 1996......................... 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996
(Unaudited)............................................... 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1996 (Unaudited)....................... 5
Notes to Consolidated Financial Statements (Unaudited)..... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 9
PART II. OTHER INFORMATION..................................... 11
Signatures...................................................... 12
</TABLE>
2
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KFX INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
-----------------------------
<S> <C> <C>
ASSETS
------
Current:
Cash and cash equivalents................ $ 2,509,240 $ 1,403,625
Accounts receivable...................... 480,881 447,230
Prepaid expenses......................... 102,504 106,150
------------ ------------
Total current assets................. 3,092,625 1,957,005
------------ ------------
Property, plant and equipment, net of
accumulated depreciation.................. 5,208,028 5,458,801
Patents, net of accumulated
amortization.............................. 3,515,051 3,662,894
Investment in KFX Fuel Partners, L.P. ..... 2,792,304 2,792,304
Investment in K-Fuel, LLC ................. 126,428 157,180
Prepaid royalty............................ 500,000 500,000
Other assets............................... 377,873 395,383
------------ ------------
$ 15,612,309 $ 14,923,567
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current:
Accounts payable......................... $ 809,826 $ 1,041,800
Accrued expenses......................... 108,013 166,651
Due to related parties................... 600,642 707,756
Interest payable......................... 25,758 92,319
Current maturities of long-term debt..... 665,000 115,000
------------ ------------
Total current liabilities............ 2,209,239 2,123,526
------------ ------------
Long-term debt, less current maturities.... 455,000 1,110,000
Mine reclamation liability................. 1,166,000 1,166,000
------------ ------------
Total liabilities.......................... 3,830,239 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........................ (35,433,699) (34,191,728)
------------ ------------
Total stockholders' equity................. 11,782,070 10,524,041
------------ ------------
$ 15,612,309 $ 14,923,567
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED MARCH 31,
1997 1996
-----------------------------
<S> <C> <C>
Contract revenue........................ $ 217,894 $ 8,410
Interest and other income............... 60,740 57,044
----------- -----------
Total revenue and other income..... 278,634 65,454
----------- -----------
Marketing, general and administrative
expenses............................... 739,550 775,616
Research and development................ 127,012 80,000
Demonstration plant and laboratory
operations............................. 176,645 154,518
Depreciation and amortization........... 443,739 434,122
Interest expense........................ 33,660 27,765
----------- -----------
Total expenses..................... 1,520,606 1,472,021
----------- -----------
Net loss................................ $(1,241,972) $(1,406,567)
----------- -----------
Net loss per common share............... $(.05) $(.06)
=========== ===========
Weighted average shares outstanding..... 23,509,000 22,291,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED MARCH 31,
1997 1996
-----------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss)....................... $(1,241,972) $(1,406,567)
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Depreciation and amortization......... 443,739 434,122
Other................................. - (28,941)
Equity in net loss of K-Fuel, LLC..... 54,853 -
Changes in operating assets and
liabilities:
Increase in accounts receivables...... (33,651) (99,107)
Decrease in prepaid expenses.......... - (21,309)
Decrease in accounts payable.......... (231,974) (119,657)
Decrease in accrued expenses.......... (58,638) (204,503)
Decrease in due to related parties.... (107,114) (61,638)
Decrease in interest payable.......... (66,561) (73,911)
----------- -----------
Cash used in operating activities............ (1,241,318) (1,581,511)
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment.................. (4,530) (5,720)
Pending patent applications............. (10,356) -
Investments in K-Fuel, LLC.............. (24,101) -
Other................................... (9,080) -
----------- -----------
Cash used in investing activities............ (48,067) (5,720)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from sale of common stock...... 2,500,000 -
Payments on notes payable............... (105,000) (153,716)
----------- -----------
Cash provided by (used in) financing
activities.................................. 2,395,000 (153,716)
----------- -----------
Increase (decrease) in cash and cash
equivalents................................ 1,105,615 (1,740,947)
Cash and cash equivalents, beginning of
period...................................... 1,403,625 2,870,039
----------- -----------
Cash and cash equivalents, end of
period...................................... $ 2,509,240 $ 1,129,092
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.................. $ 100,196 $ 101,650
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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KFX INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Three Months Ended March 31, 1997
- ---------------------------------
None.
Three months Ended March 31, 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.
The accompanying notes are an integral part of these consolidated financial
statements.
6
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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 March 31, 1997, and for the
three months ended March 31, 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 three
months ended March 31, 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 three months ended March 31, 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.
7
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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 is unrelated to the facility's four
coal processors. 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
start-up problems, including issues relating to the flow of materials within the
facility. KFP expects to complete repairs caused by the fire and resolve these
start-up problems in time to begin commercial operations of the facility during
the third 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.
NOTE 4. EVENTS SUBSEQUENT TO MARCH 31, 1997
In May 1997, KFP notified Yanke Energy, Inc. of its desire to proceed
with pre-engineering and other certain activities related to the construction of
a fifth processing vessel at the KFP facility, which would increase the
facility's annual capacity from 500,000 TPY to 625,000 TPY (the "Expansion
Unit"). The construction costs of the Expansion Unit, currently estimated to be
approximately $12 million, are expected to be funded by the Company and other
investors. However, there can be no assurance that such financing will be
available on terms acceptable to the Company, if at all. The Company has
retained an investment banking firm to assist with the financing efforts.
The Company and KFP are currently negotiating the terms pursuant to
which the Company will fund the construction of the Expansion Unit, and the
terms of an increased interest in KFP in return for the Company providing such
funding.
8
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KFX INC.
MANAGEMENT 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 MARCH 31, 1997 VS. THREE MONTHS ENDED
MARCH 31, 1996
Revenues 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 amounts for the first quarter in 1996.
The Company will continue to perform additional technical subcontract work for
K-Fuel LLC in 1997.
The decrease in marketing, general and administrative expenses is primarily
attributable to the payment of a $50,000 listing fee with the American Stock
Exchange which incurred only in 1996. This reduction was partially offset by an
increase in salaries expense due to the hiring of two executive employees in the
second quarter of 1996.
The 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.
LIQUIDITY AND CAPITAL RESOURCES
The current near term funding sources available to the Company are (1) cash
on hand, which as of May 12, 1997 was approximately $1.9 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 the anticipated Expansion Unit construction.
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 first quarter of 1998 based
on current operating plans and budgets. The Company does not expect to realize
any significant net revenues from its
9
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KFX INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTSOF OPERATIONS
(CONTINUED)
ownership interest in KFP during 1997. The Company will need to realize
additional revenue sources and reduce certain operating expenses to sustain
operations into 1998 and beyond. 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 5 percent interest in KFP; (2) license fees to be derived from the
proposed construction of an Indonesia K-Fuel production facility in late 1997 or
early 1998; and (3) certain development and license fees to be derived from the
proposed Expansion Unit construction. 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 must also obtain financing for the Expansion
Unit, which may not be available on terms acceptable to the Company, if at all.
The Company does not currently have any commitments with respect to any debt or
equity financing.
10
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KFX INC.
PART II - OTHER INFORMATION
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
March 31, 1997.
11
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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
Controller and Principal
Accounting Officer
Date: May 12, 1997
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,509,240
<SECURITIES> 0
<RECEIVABLES> 480,881
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,092,625
<PP&E> 11,645,482
<DEPRECIATION> (6,437,454)
<TOTAL-ASSETS> 15,612,309
<CURRENT-LIABILITIES> 2,209,239
<BONDS> 455,000
0
0
<COMMON> 23,926
<OTHER-SE> 11,758,144
<TOTAL-LIABILITY-AND-EQUITY> 15,612,309
<SALES> 217,894
<TOTAL-REVENUES> 278,634
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,486,946
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,660
<INCOME-PRETAX> (1,241,972)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,241,972)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
