<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, 1998
[_] 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 13, 1998 there were 23,931,040 shares of the Registrant's common stock
outstanding.
<PAGE>
KFX INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets - June 30, 1998 (Unaudited) and December 31, 1997............ 3
Consolidated Statements of Operations - Three Months Ended
June 30, 1998 and 1997 (Unaudited).................................................... 4
Consolidated Statements of Operations - Six Months Ended
June 30, 1998 and 1997 (Unaudited).................................................... 5
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 (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.................................................................... 15
Signatures.................................................................................... 16
</TABLE>
2
<PAGE>
KFX INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1998 DECEMBER 31,
(Unaudited) 1997
-------------------------------
<S> <C> <C>
ASSETS
------
Current:
Cash and cash equivalents............................................ $ 9,475,029 $ 14,078,773
Accounts receivable.................................................. 439,358 220,729
Accounts receivable from unconsolidated affiliates................... 573,389 -
Accrued interest income.............................................. 31,290 52,000
Prepaid expenses..................................................... 191,060 109,696
Supplies inventory.............................................. 148,995 -
------------ ------------
Total current assets.............................................. 10,859,121 14,461,198
------------ ------------
Property, plant and equipment, net of accumulated depreciation......... 4,092,506 4,458,305
Patents, net of accumulated amortization............................... 2,931,217 3,087,853
Investment in KFX Fuel Partners, L.P................................... 3,647,281 3,787,138
Investment in K-Fuel, LLC.............................................. 168,601 224,016
Investment in Charco Redondo, LLC...................................... 540,000 -
Goodwill, net of accumulated amortization.............................. 2,315,843 -
Debt issue costs, net of accumulated amortization...................... 1,984,565 2,230,565
Prepaid royalty........................................................ 500,000 500,000
Other assets........................................................... 256,520 308,631
------------ ------------
$ 27,295,654 $ 29,057,706
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
Current:
Accounts payable..................................................... $ 286,078 $ 363,881
Accrued expenses..................................................... 107,665 190,001
Deferred revenue..................................................... 260,000 -
Due to related parties............................................... 526,573 557,522
Interest payable..................................................... 469,685 504,421
Current maturities of long-term debt................................. 980,000 280,000
------------ ------------
Total current liabilities......................................... 2,630,001 1,895,825
------------ ------------
Long-term debt, less current maturities................................ 610,000 500,000
Convertible debentures................................................. 17,000,000 17,000,000
Mine reclamation liability............................................. 1,166,000 1,166,000
------------ ------------
Total liabilities................................................. 21,406,001 20,561,825
------------ ------------
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;
23,931,040 and 23,926,040 shares issued and outstanding........... 23,931 23,926
Additional paid-in capital........................................... 48,227,338 47,758,843
Accumulated deficit.................................................. (42,361,617) (39,286,888)
------------ ------------
Total stockholders' equity........................................ 5,889,653 8,495,881
------------ ------------
$ 27,295,654 $ 29,057,706
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED JUNE 30,
1998 1997
------------------------------------
<S> <C> <C>
Software licenses and services......................................... $ 395,859 $ -
Contract revenue....................................................... 290,043 190,862
Interest and other income.............................................. 203,968 24,122
----------- -----------
Total revenue and other income....................................... 889,870 214,984
----------- -----------
Cost of software licenses and services................................. 404,513 -
Marketing, general and administrative expenses......................... 737,010 635,788
Research and development............................................... 54,500 109,945
Demonstration plant and laboratory operations.......................... 178,676 213,601
Equity in loss of unconsolidated affiliates............................ 107,144 48,839
Depreciation and amortization.......................................... 695,073 441,059
Interest expense....................................................... 291,282 32,511
----------- -----------
Total costs and expenses............................................. 2,468,198 1,481,743
----------- -----------
Net loss............................................................... $(1,578,328) $(1,266,759)
=========== ===========
Basic and diluted net loss per common share............................ $ (.07) $ (.05)
=========== ===========
Weighted average shares outstanding.................................... 23,928,000 23,926,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1998 1997
------------------------------------
<S> <C> <C>
Software licenses and services......................................... $ 395,859 $ -
Contract revenue....................................................... 534,738 408,756
Interest and other income.............................................. 358,739 84,862
----------- -----------
Total revenue and other income....................................... 1,289,336 493,618
----------- -----------
Costs of software licenses and services................................ 404,513 -
Marketing, general and administrative expenses......................... 1,516,380 1,320,485
Research and development............................................... 103,638 236,958
Demonstration plant and laboratory operations.......................... 331,035 390,245
Equity in loss of unconsolidated affiliates............................ 124,762 103,691
Depreciation and amortization.......................................... 1,308,397 884,799
Interest expense....................................................... 575,340 66,171
----------- -----------
Total costs and expenses............................................. 4,364,065 3,002,349
----------- -----------
Net loss............................................................... $(3,074,729) $(2,508,731)
=========== ===========
Basic and diluted net loss per common share............................ $(.13) $(.11)
=========== ===========
Weighted average shares outstanding.................................... 23,927,000 23,712,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1998 1997
-------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss.......................................................... $(3,074,729) $(2,508,731)
Adjustments to reconcile net loss to cash
Used in operating activities:
Depreciation and amortization................................ 1,308,397 884,799
Common stock and warrants issued for services................ 214,750 -
Equity in loss of unconsolidated affiliates................ 124,762 103,692
Other income............................................... (39,310) -
Changes in operating assets and liabilities, net of assets and
liabilities
acquired:
Accounts receivable.......................................... (451,550) (74,031)
Accrued interest income...................................... 20,710 -
Supplies inventory........................................... (148,995) -
Accounts payable............................................. 31,029 (227,200)
Accrued expenses............................................. (85,836) (38,843)
Due to related parties....................................... 8,361 (68,256)
Interest payable............................................. (38,184) (56,117)
Deferred revenue............................................. 260,000 -
Prepaids expenses and other.................................. (127,398) 450
----------- -----------
Cash used in operating activities...................................... (1,997,993) (1,984,237)
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment............................................ (133,270) (50,795)
Pending patent applications....................................... (160,764) (18,194)
Investments in KFX Fuel Partners, L.P............................. (189,683) (256,006)
Investments in K-Fuel, LLC........................................ (9,690) (200,971)
Investments in Charco Redondo, LLC................................ (537,000) -
Purchase of controlling interest in Pegasus Technologies, LLC, -
net of (1,610,657)
cash acquired...............................................
Other.............................................................. (4,687) (30,532)
----------- -----------
Cash used in investing activities...................................... (2,645,751) (556,498)
----------- -----------
FINANCING ACTIVITIES:
Debt placement costs.............................................. - (29,239)
Proceeds from sale of common stock................................ - 2,500,000
Proceeds from issuance of notes payable........................... 50,000
Payments on notes payable......................................... (10,000) (198,000)
----------- -----------
Cash used in financing activities...................................... 40,000 2,272,761
----------- -----------
Increase (decrease) in cash and cash equivalents....................... (4,603,744) (267,974)
Cash and cash equivalents, beginning of period......................... 14,078,773 1,403,625
----------- -----------
Cash and cash equivalents, end of period............................... $ 9,475,029 $ 1,135,651
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................ $ 99,708 $ 121,848
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
KFX INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Six Months Ended June 30, 1998
- ------------------------------
In January 1998, the Company reclassed $28,956 of other assets at
December 31, 1997 relating to the Charco Redondo, LLC investment to Investment
in Charco Redondo, LLC ($3,000) and accounts receivable ($25,956) . See Note 4.
In January 1998, the Company converted $170,000 of current accounts
payable at December 31, 1997 related to general corporate legal services into a
promissory note. See Note 6.
On March 23, 1998, the Company issued $600,000 in promissory notes and
granted purchase options for 75,000 shares of the Company's common stock under
the Company's 1996 Stock Option and Incentive Plan in connection with the
Company's acquisition of a 60 percent interest of Pegasus Technologies, LLC.
Using the Black-Scholes option-pricing model, the stock options were valued at
$144,750; this amount is included in goodwill and acquisition costs related to
the acquisition of Pegasus Technologies, LLC. See Note 5.
Also in connection with the Pegasus Technologies, LLC acquisition, the
Company granted purchase options for 100,000 shares of the Company's common
stock under the Company's 1996 Stock Option and Incentive Plan to a consultant
relating to certain acquisition activities. Using the Black-Scholes option-
pricing model, the stock options were valued at $109,000; this amount is
included in goodwill and acquisition costs related to the acquisition of Pegasus
Technologies, LLC. See Note 5.
In April 1998, the company reclassed $269,883 from its investments in
KFx Fuel Partners, L.P. ("KFP") to accounts receivable from affiliates for
certain prior year capitalized contract services which were reimbursed by KFP in
July 1998. See Note 3.
Six months Ended June 30, 1997
- -------------------------------
None.
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
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"), Heartland Fuels Corporation ("HFC") and Pegasus
Technologies, LLC ("Pegasus"). The Company's 67 percent interest in KSA
Partnership ("KSA"), its 51 percent interest in K-Fuel, L.L.C. ("K-Fuel, LLC"),
its 12.6% interest in Charco Redondo, LLC ("Charco") 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, 1998, and for the
six months ended June 30, 1998 and 1997 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 reclassifications have been made to the 1997
financial statements to conform to the current year presentation.
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, 1997 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, 1998 are not necessarily indicative of the results of
operations expected for the year ended December 31, 1998.
Net loss per common share for the six months ended June, 1998 and 1997
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.
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 removed
to the United States District Court for the District of Wyoming. The Company's
lawsuit requests that the court enter a 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. Because the work done by Fru-Con was
for a limited partnership in which the Company's predecessor entity was not a
partner, and because payment for the work performed by Fru-Con was contingent
upon successful project financing which never materialized, as well as for other
legal and factual reasons, the Company believes that Fru-Con has no valid rights
or claims against the Company. On May 20, 1997, the Court granted the Company's
Motion for Summary Judgment on all claims. Fru-Con has appealed to the 10th
Circuit Court of Appeals. The Company believes that the ultimate resolution of
this action will not have a material impact on the Company's financial position
or results of operations.
8
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(CONTINUED)
On March 9, 1998, Fidelity and Deposit of Maryland, as subrogee of Walsh
Construction Company, a division of Guy F. Atkinson Company, filed a
construction lien against KFP (as defined below) with respect to the
construction of the KFP Facility (as defined below) in the amount of
approximately $5.9 million. It is not possible at this time to evaluate the
merits of the claim or the range of potential loss. However, the Company
believes that the ultimate resolution of this action will not have a material
impact on the Company's financial position for results of operation.
NOTE 3. KFX FUEL PARTNERS, L.P.
In August 1995, the Company and Thermo Ecotek Corporation ("TCK"), acting
through wholly-owned subsidiaries KFX Wyoming, Inc. ("KFX Wyoming", 100 percent
owned by the Company) and Eco Fuels, Inc. (100 percent owned by TCK), formed KFX
Fuel Partners, L.P. ("KFP"), a Delaware limited partnership, and began
construction of a 500,000 TPY K-Fuel coal production facility (the "KFP
Facility") near Gillette, Wyoming using the Company's Series "C" K-Fuel
Technology. The Company has a 5 percent interest in KFP, with the remaining 95
percent held by TCK. TCK is the managing general partner for KFP and makes all
day-to-day operating decisions.
The KFP Facility was substantially completed in December 1996. TCK has
continued to refine and optimize operations at the KFP Facility, conducting
extensive testing and producing commercially salable K-Fuel product. Although
the KFP Facility has operated and produced commercially salable product, certain
difficulties have been encountered in attempting to achieve optimal and
sustained operations. Certain problems previously encountered, including a
December 1996 industrial fire at the facility and certain construction problems,
including issues relating to the flow of materials within the KFP Facility and
the design and operation of certain pressure-release equipment, have been
resolved. Currently, certain operational problems relating to tar residue
build-up within the system during production are being experienced. TCK is
actively exploring solutions to this problem. Because the technology being
developed at the KFP Facility is new and untested, no assurance can be given
that other difficulties will not arise or that these problems can be corrected
and optimal and sustained performance can be achieved. The Company does not
believe its share of such additional costs to bring the KFP Facility to optimal
operating performance, if incurred, will be material.
In connection with the commencement of operations of the KFP Facility in
April 1998, the company reclassed $269,883 to accounts receivable from
affiliates for certain prior year capitalized contract services which were
reimbursed by KFP in July 1998.
NOTE 4. CHARCO REDONDO, LLC
In December 1997, the Company purchased a 12.6 percent interest in Charco
Redondo, LLC, a Texas limited liability company ("Charco") in consideration for
its commitment to contribute $540,000 to Charco as working capital. Funding
under this commitment began in January 1998 and at June 30, 1998, the Company
has contributed $540,000 to Charco of which $3,000 was in other assets at
December 31, 1997. In addition, the Company paid $25,956 in certain legal costs
related to the formation of Charco, which were included in the Investment in
Charco at December 31, 1997. In June 1998, the Company reclassed these legal
expenses to accounts receivable since they are to be reimbursed by Charco.
9
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(CONTINUED)
NOTE 5. PEGASUS TECHNOLOGIES, LLC
On March 23, 1998, the Company acquired a 60 percent interest in Pegasus
Technologies, LLC ("Pegasus"), an Ohio limited liability company that sells a
computer software product that enhances combustion optimization in coal-fired
electric utility power plants. The acquisition consisted of a cash payment of
$1,100,000, $600,000 in four-year promissory notes, the issuance of 75,000 non-
qualified stock options under the Company's 1996 Stock Option and Incentive Plan
and the agreement to provide an immediate capital contribution of $500,000. The
terms of the promissory notes include annual principal payments of $150,000 each
anniversary date of the notes until fully paid in March 2002, and interest at
5.0 percent per annum. The stock options were granted at an exercise price of
$3.75 per share, vesting 20 percent each one-year anniversary from the date of
grant, and expiring in March, 2005. Using the Black-Scholes option-pricing
model, the stock options were valued at $144,750; this amount is included in
goodwill and acquisition costs related to the acquisition of Pegasus. In
addition, the Company agreed to provide Pegasus $1,400,000 in working capital
guarantees secured through lines of credit or other financing sources mutually
acceptable to the Company and Pegasus.
In connection with the acquisition of Pegasus, the Company issued 100,000
fully vested non-qualified stock options under the Company's 1996 Stock Option
and Incentive Plan to a consultant relating to certain acquisition activities.
The stock options were granted at an exercise price of $3.75 per share, expiring
in May, 2001. Using the Black-Scholes option-pricing model, the options were
valued at $109,000; this amount is included in goodwill and acquisition costs
related to the acquisition of Pegasus.
The financial condition of Pegasus at June 30, 1998 and its results of
operations for the period March 23, 1998 to June 30, 1998 are included in the
consolidated financial statements of the Company. The proforma impact as if the
acquisition of Pegasus had been as of January 1, 1997 is not material.
NOTE 6. PROMISSORY NOTE
In January 1998, the Company converted $170,000 of current accounts
payables at December 31, 1997 related to general corporate legal services into a
promissory note. Interest accrues at six percent per annum with quarterly
principal and interest payments beginning on March 31, 1999. Any unpaid
principal and interest is due on December 31, 2001.
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,
1997. Actual results may differ materially from those anticipated in the
forward-looking information.
Excluding a joint venture fee of $1 million in 1996, to date the Company
has not generated any other material revenues from the licensing of the K-Fuel
Technology to third party licensees or the direct manufacturing of K-Fuel. All
revenues other than the joint venture fee in 1996 or revenues of subsidiaries
acquired in 1998 have been derived from ancillary sources or products not
directly related to the Company's efforts to commercialize the K-Fuel
Technology. The KFP Facility is the only commercial-scale K-Fuel production
facility constructed to date. Until the Company successfully negotiates
additional third-party licensing and royalty agreements, independently
constructs and operates additional commercial-scale K-Fuel production
facilities, or successfully enters into other lines of environmental and/or
energy technology businesses, net operating losses attributable to the Company's
clean fuel lines of business will continue. The royalties and profit interests
to be derived from the Company's 5 percent ownership interest in the KFP
Facility will not be sufficient to meet all of the operating and debt service
needs of the Company based on current and future anticipated operating plans and
budgets and current results of operations. Until such time as the Company has in
place sufficient additional commercial-scale K-Fuel production facilities
(either owned independently or through joint venture entities similar to the KFP
Facility) or has successfully entered into other lines of environmental and/or
energy technology businesses to generate positive cash flow from operations, the
Company will be dependent on additional debt and/or equity financing.
The Company has recently made investments in environmental and energy
technologies not directly related to the K-Fuel Technology that may provide a
more rapid economic return than the K-Fuel Technology. The Company's majority-
owned subsidiary Pegasus Technologies (acquired on March 23, 1998) is
contributing revenues significant to the Company's results of operations but is
not yet profitable. Pegasus is striving to increase implementation efficiencies
to reduce costs and increase revenues through increased marketing efforts to
become profitable. It is not known when the operations of Pegasus will turn
profitable. Additionally, the Company's investment in the Charco Redondo crude
oil recovery project is at this stage a pilot phase only and is not expected to
contribute significant operating cash flows in the near term. The Company is
also investigating making investments in various activated carbon lines of
business, but to date has not committed to any such investments. There are no
assurances that any of these investments will produce an acceptable economic
return, if at all.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED
JUNE 30, 1997
The increase in software licenses and services revenue is attributable to
the acquisition of Pegasus on March 23, 1998.
Contract revenues increased in the 1998 period primarily as a result of
continued technical subcontract work the Company is performing for KFP in
relation to the start-up activities of the KFP Facility. The Company will
perform additional subcontract work for KFP through the third quarter of 1998.
Interest income increased in the 1998 period as a result of overall higher
cash balances resulting from the proceeds of the July 1997 debenture offering
(net proceeds of approximately $15 million).
11
<PAGE>
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The increase in software licenses and services costs is attributable to the
acquisition of Pegasus on March 23, 1998.
The increase in marketing, general and administrative expenses in the 1998
period is primarily attributed to the consolidation of operations of Pegasus,
and increased travel expenses for the period related to K-Fuel and activated
carbon project development activities. This increase was partially offset by
the costs savings from the Company implementing a personnel reduction program in
which the total number of employees were reduced from 17 in 1997 to 12 for the
same period in 1998 (reduction of 3 executive positions and 2 administrative
positions).
Research and development expenses decreased in the 1998 period primarily as
a result of the cost savings on consulting fees that were paid in 1997 only to
the late Edward Koppelman, the inventor of the K-Fuel process, who passed away
in October 1997.
Demonstration plant and laboratory expenses decreased in the 1998 period
primarily as a result of temporary cost sharing arrangements made with the KFP
Facility which were not in place until the fourth quarter of 1997.
Equity in loss of unconsolidated affiliates increased in the 1998 period
primarily as a result of increased marketing and project development costs
incurred by K-Fuel, LLC and the start of commercial operations of KFP on April
1, 1998, which to date has operated at a loss.
Depreciation and amortization expense increased in the 1998 period due to
the amortization of debenture offering costs which did not begin until August
1997, the goodwill amortization resulting from the Pegasus acquisition
(beginning in April 1998), and the goodwill amortization resulting from the
revaluation of the Company's investment in KFP, which did not begin until April
1998.
Interest expense increased in the 1998 period primarily as a result of the
debenture offering completed in July, 1997 which has resulted in monthly
interest of $85,000 beginning in August 1997.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE
30, 1997
The increase in software licenses and services, contract revenue and
interest and other income are for similar reasons as discussed above for the
three months ended June 30, 1998 vs. June 30, 1997.
The increases in marketing, general and administrative expenses, equity in
loss of unconsolidated affiliates, depreciation and amortization expense, and
interest expense are for similar reasons as discussed above for the three months
ended June 30, 1998 vs. June 30, 1997.
The decreases in research and development expenses and demonstration plant
and laboratory expenses are for similar reasons as discussed above for the three
months ended June 30, 1998 vs. June 30, 1997.
12
<PAGE>
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The current near-term (to year-end 1998) funding sources available to the
Company are (1) cash on hand, which as of August 12, 1998 was approximately $8.6
million; (2) certain technical subcontract revenues to be performed for KFP; (3)
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) operating cash flows from the operations of Pegasus (although material cash
flows attributable to Pegasus are not expected to materialize until 1999 or
later).
The Company expects no additional stock purchases by TCK in 1998 or 1999.
Under the terms of the Stock Purchase Agreement, the next possible investment by
TCK is not until a period of time beginning in January 2000 and expiring in July
2001. There are no assurances that TCK will make any investments in the Company
at that time. Additionally, the Stock Purchase Agreement prohibits the Company
from issuing shares of Common Stock to other investors unless at least 90
percent of the proceeds from such stock issuances are used to invest in K-Fuel
production facilities. Furthermore, in the event of any stock issuances by the
Company, TCK's Warrant "A" may be subject to certain adjustments that increase
the number of shares available to TCK under Warrant "A".
The Company may be required to seek additional debt and / or equity
financing as early as the first or second quarter of 2001 for general operating
purposes. However, if capital investments are made in this time period, the need
to seek additional debt and / or equity financing may be accelerated. Among the
factors that may reduce or eliminate the need for additional financing in this
time period are: (1) license fees from proposed K-Fuel projects in Indonesia and
Turkey; and (2) cash flow distributions from the Company's 60 percent ownership
of Pegasus.
The Company expects no material net operating revenues from its ownership
interest in KFP in the foreseeable future. Additionally, the Company's net
production royalties (after fulfilling related royalty obligations) once the KFP
Facility reaches full production is projected to be less than $200,000 per year.
The Section 29 tax credit for the KFP production of K-Fuel at full capacity
could result in an opportunity to sell the Company's interest to TCK or other
third parties; the Company intends to try to retain its production royalty
following any such sale. The value, amount or possibility of any such sale will
not be determinable until KFP reaches its full productive capacity, currently
expected to be in 1999.
Should the Company be required to seek any additional debt or equity
financing, the ability of the Company to do so may be affected by an existing
agreement with TCK and by the terms of the Convertible Debentures. With respect
to TCK, the Company must obtain TCK's consent to sell any Common Stock or to
incur any indebtedness other than indebtedness that is secured only by the
assets of a particular project and is non-recourse to the Company and its
subsidiaries. With respect to the Convertible Debentures, the Company may only
incur unsecured indebtedness of up to $8.0 million (of which approximately $1.6
million was outstanding as of August 12, 1998 and indebtedness secured only by
the assets of a particular project and is non-recourse to the Company and its
subsidiaries.
13
<PAGE>
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 on terms and
conditions that may not be favorable to the Company, if available at all.
YEAR 2000 COMPLIANCE
Like many other companies, the Company is aware of the problems associated
with "The Year 2000 Issue." This issue centers on certain computer systems being
unable to recognize the year 2000 as a valid date or may interpret a date in the
format of "00" as the year 1900 rather than the year 2000. This system issue
creates risk for the Company from unforeseen problems in its own computer
systems and from third parties with which the Company deals. Such failures of
the Company and/or third parties' computer systems could potentially have a
material impact on the Company's ability to conduct its business. Based on
interviews with and publications from those vendors supplying the Company's
current business information systems, management believes those systems to be
date compliant such that they will not pose a significant risk to the Company's
future business operations. Future version upgrades to these systems and/or new
acquisitions will be subjected to Year 2000 date compliance as selection,
acceptance, and installation criteria.
During 1998, the Company will assess any impact the Year 2000 issue may
have on other systems that support the Company's operation. These can include,
but are not limited to, supplier systems, shipper systems, environmental control
systems, manufacturing equipment, building security systems, etc. The Company
will evaluate appropriate courses of corrective action if any are needed outside
of routine maintenance or currently planned projects.
The Company has made an initial assessment of the Year 2000 issue and
related potential effects on the Company's operations, and has determined that
it will not have a material effect on its financial position or results of
operations.
14
<PAGE>
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 18,
1998 for the purposes of (i) electing one director to the Board of Directors;
and (ii) ratifying the selection of Price Waterhouse Coopers LLP as the
Company's independent accountants for the year ended December 31, 1998.
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:
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED
---------------- -------------------- ----------------
<S> <C> <C> <C>
Mr. Brian D. Holt 21,074,540 1,000 57,660
</TABLE>
The following votes were cast by shareholders with respect to the selection
of Price Waterhouse Coopers LLP as the Company's independent accountants for the
year ended December 31, 1998:
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED
---------------- -------------------- ----------------
<S> <C> <C> <C>
Price Waterhouse 21,095,410 15,090 22,700
Coopers, LLP
</TABLE>
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, 1998.
15
<PAGE>
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 13, 1998
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,475,029
<SECURITIES> 0
<RECEIVABLES> 1,012,747
<ALLOWANCES> 0
<INVENTORY> 148,995
<CURRENT-ASSETS> 10,859,121
<PP&E> 11,877,776
<DEPRECIATION> (7,785,270)
<TOTAL-ASSETS> 27,295,654
<CURRENT-LIABILITIES> 2,630,001
<BONDS> 17,610,000
23,931
0
<COMMON> 0
<OTHER-SE> 5,865,722
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,289,336
<TOTAL-REVENUES> 1,289,336
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,788,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 575,340
<INCOME-PRETAX> (3,074,729)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,074,729)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
