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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, 2000
[ ] 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 preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On May 12, 2000 there were 24,934,289 shares of the Registrant's common stock,
$.001 par value, outstanding.
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KFX INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets - March 31, 2000 (Unaudited) and December 31, 1999........... 3
Consolidated Statements of Operations - Three Months Ended
March 31, 2000 and 1999 (Unaudited).................................................. 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2000 and 1999 (Unaudited) ................................................. 5
Notes to Consolidated Financial Statements (Unaudited)................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................ 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................... 15
SIGNATURES.................................................................................... 16
</TABLE>
2
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KFX INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents .......................................... $ 398,172 $ 654,429
Accounts receivable and unbilled revenue............................ 688,072 697,572
Prepaid expenses ................................................... 37,696 69,715
Deferred job costs ............................................... 191,954 183,750
------------ ------------
Total current assets ........................................... 1,315,894 1,605,466
Property, plant and equipment, net of accumulated depreciation .......... 2,002,730 2,258,426
Patents, net of accumulated amortization ................................ 2,198,545 2,297,708
Investment in and advances to KFX Fuel Partners, LP ..................... 1,517,391 1,527,048
Investment in K-Fuel, LLC ............................................... 1,171,585 1,171,585
Investment in Charco Redondo, LLC ....................................... 629,238 629,238
Goodwill, net of accumulated amortization ............................... 2,136,626 2,298,250
Debt issue costs, net of accumulated amortization ....................... 1,024,433 1,246,565
Prepaid royalty ......................................................... 498,000 498,000
Other assets ............................................................ 741,651 735,709
------------ ------------
$ 13,236,093 $ 14,267,995
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current
Accounts payable ................................................... $ 786,539 $ 551,193
Accrued expenses ................................................... 239,096 308,102
Interest payable ................................................... 286,178 543,068
Liability to issue warrants......................................... 2,200,000 2,200,000
Contingent sale of subsidiary stock................................. 1,000,000 -
Deferred revenue ................................................... 1,132,445 985,858
Current maturity of long-term debt ................................. 908,476 891,167
------------ ------------
Total current liabilities ...................................... 6,552,734 5,479,388
Deferred income.......................................................... 981,000 1,000,000
Long-term debt, less current maturities ................................. 321,150 484,625
Convertible debentures .................................................. 15,500,000 17,000,000
------------ ------------
Total liabilities .............................................. 23,354,884 23,964,013
------------ ------------
Commitments and contingencies
Minority interest ....................................................... 500,000 -
Stockholders' equity (deficit)
Preferred stock, $.001 par value, 20,000,000 shares authorized;
none issued ................................................... - -
Common stock, $.001 par value, 80,000,000 shares authorized;
and 24,893,194 and 24,482,240 shares issued and
outstanding .................................................... 24,893 24,482
Additional paid-in capital ......................................... 50,480,204 49,080,632
Accumulated deficit ................................................ (61,123,888) (58,801,132)
------------ ------------
Total stockholders' equity (deficit)............................ (10,618,791) (9,696,018)
------------ ------------
$ 13,236,093 $ 14,267,995
============ ============
</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,
2000 1999
----------------- ----------------
<S> <C> <C>
OPERATING REVENUES
Pegasus software licenses and services................................... $ 465,638 $ 377,132
K-Fuel contract revenue..................................................
- 179,025
----------- -----------
Total operating revenues............................................ 465,638 556,157
----------- -----------
OPERATING COSTS & EXPENSES
Costs of Pegasus software licenses and services ......................... 373,250 240,335
Marketing, general and administrative expenses........................... 1,197,581 1,214,638
Pegasus software research and development................................ 121,243 22,804
K-Fuel demonstration plant and laboratory operations..................... 86,107 119,597
Depreciation and amortization............................................ 716,072 692,892
----------- -----------
Total operating costs and expenses.................................. 2,494,253 2,290,266
----------- -----------
OPERATING INCOME (LOSS).................................................. (2,028,615) (1,734,109)
Interest and other income................................................ 1,653 57,281
Interest expense......................................................... (286,137) (291,261)
Equity in loss of unconsolidated affiliates.............................. (9,657) (278,035)
----------- -----------
Loss before income taxes................................................. (2,322,756) (2,246,124)
Income tax benefit....................................................... - -
----------- -----------
NET INCOME (LOSS) ....................................................... $(2,322,756) $(2,246,124)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE.............................. $ (0.09) $ (.09)
=========== ===========
Weighted average common shares outstanding............................... 24,553,000 23,952,000
=========== ===========
</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,
2000 1999
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................................... $ (2,322,756) $ (2,246,124)
Adjustments to reconcile net loss to cash
used in operating activities
Depreciation and amortization .................................. 716,072 692,892
Equity in loss of unconsolidated affiliates ................. 9,657 278,035
Other ...................................................... - (100,000)
Changes in operating assets and liabilities
Accounts receivable, unbilled revenue and deferred job costs.... 1,296 490,047
Deferred revenue................................................ 127,587 (249,898)
Accounts payable and accrued expenses .......................... 235,345 10,845
Interest payable ............................................... (325,895) (335,733)
Other assets.................................................... 26,077 21,907
------------ ------------
Cash used in operating activities ....................................... (1,532,617) (1,438,029)
------------ ------------
INVESTING ACTIVITIES
Purchases of equipment ............................................. (20,727) (44,030)
Pending patent applications ........................................ (56,730) (34,097)
Contingent sale of subsidiary stock................................. 1,000,000 -
Other............................................................... - (26,959)
------------ ------------
Cash provided by (used in) investing activities ......................... 922,543 (105,086)
------------ ------------
FINANCING ACTIVITIES
Issuance of preferred stock in subsidiary ......................... 500,000 -
Payments on notes payable .......................................... (146,183) (209,207)
------------ ------------
Cash provided by (used in) financing activities ......................... 353,817 (209,207)
------------ ------------
Increase (decrease) in cash and cash equivalents ........................ (256,257) (1,752,322)
Cash and cash equivalents, beginning of period .......................... 654,429 5,649,992
------------ ------------
Cash and cash equivalents, end of period ................................ $ 398,172 $ 3,897,670
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ............................................. $ 543,027 $ 626,994
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Three Months Ended March 31, 2000:
Convertible Debentures with a face value of $1,500,000 were converted,
under the contractual terms of $3.65 per share, into 410,954 share of the
company's common stock resulting in an addition to stockholders' equity
approximating $1,000,000, net of a prorata portion of unamortized debt issue
costs.
Three Months Ended March 31, 1999:
None
The accompanying notes are an integral part
of these consolidated financial statements.
5
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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), its wholly-owned subsidiary, KFX
Wyoming Inc. (KFXW), and its majority-owned subsidiaries, Pegasus Technologies,
Inc. (Pegasus), KFX Technology, Inc. (KFXT), and Heartland Fuels Corporation
(HFC). The Company's 51% interest in K-Fuel, L.L.C. (K-Fuel, LLC) and its 5%
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. See Note 3 related to the
Company's investment in KFP.
The consolidated financial statements at March 31, 2000 and for the
three months ended March 31, 2000 and 1999 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 1999
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, 1999 included in the Company's Form
10-K/A. 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. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results of operations expected for the year ended December 31,
2000.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred losses
of $12,730,000, $6,784,000 and $5,095,000 in 1999, 1998 and 1997, respectively,
incurred an additional loss of $2,323,000 in the three months ended March 31,
2000, and had an accumulated deficit of $61,124,000 as of March 31, 2000. These
factors coupled with the need for additional financing to fund planned growth in
the business raise doubt about whether the Company can continue as a going
concern.
The Company's transaction with Kennecott Energy resulting in a sale of
an interest of Pegasus (Note 2), the signing of additional contracts and
reseller agreements, and the expected proceeds from the sale of the KFP facility
(Note 3) mitigate this risk. In order to further mitigate this risk, the Company
intends to reduce expenditures as necessary and to seek further capital through
various means which may include the sale of a portion of its interest in
Pegasus, additional sales of debt or equity securities, a business combination,
or other means. Management believes that its cash balances as of March 31, 2000,
coupled with payments expected as noted above, the reduction in expenses, funds
expected from current revenue contracts and potential sources of capital will be
sufficient to fund the Company's operations through at least March 31, 2001.
Net loss per common share for the three months ended March 31, 2000 and
1999 are based on the weighted average number of shares of common stock
outstanding during the period, and excludes approximately 8,493,000 of
potentially issuable common shares from common stock options, warrants and
convertible debt as the effect would be anti-dilutive.
NOTE 2. CONTINGENT SALE OF INTEREST IN PEGASUS AND ISSUANCE OF PREFERRED STOCK
OF PEGASUS
On March 3, 2000, KFx and Pegasus closed a transaction with Kennecott
Energy Company ("Kennecott Energy") resulting in (a) the sale of 4% of the
common stock of Pegasus held by KFx ("Pegasus Common Stock") to Kennecott Energy
for $1,000,000, (b) the issuance by Pegasus to Kennecott Energy, in exchange for
$500,000, of newly authorized 6% cumulative convertible preferred stock
("Pegasus Preferred Stock") equivalent to an additional 2% interest in Pegasus,
on an as converted basis, (c) the joint development by KFx, Pegasus and
Kennecott Energy of a work plan for enhancements to NeuSIGHT, new product
development and the completion of other tasks designed to improve the
performance of Pegasus and trigger additional purchases of Pegasus Preferred
Stock by Kennecott Energy at its discretion of up to $3,500,000, for an
additional interest in Pegasus up to 14%, on an as converted basis, by December
31, 2004 or earlier and (d) the conversion of secured debt owed by Pegasus to
KFx, totaling $3,630,000, into Pegasus Preferred Stock, at the same price as
provided to Kennecott Energy. Pursuant to these agreements, on May 4, 2000
Kennecott purchased additional Pegasus Preferred Stock equivalent to an
additional 2% interest in Pegasus, on an as converted basis, for $500,000. As a
result of these transactions, at May 12, 2000, the ownership of Pegasus, on an
as converted basis, is approximately as follows: KFx--72%, Pegasus
management--20% and Kennecott Energy--8%. Kennecott Energy has the right to
require KFx to repurchase the Pegasus Common Stock, or find another buyer, at
any time before March 3, 2001, at a price equal to the greater of $1,000,000 or
fair market value. Included in the agreements among KFx, Kennecott Energy and
Pegasus are provisions governing the terms of investments from any new
investors in Pegasus, limiting the borrowing of Pegasus, and limiting the
payment of dividends by Pegasus.
6
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KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) (CONTINUED)
NOTE 3. INVESTMENT IN KFP
As of May 9, 2000, the Company closed a series of agreements with
various parties intended to initiate the redevelopment of the KFP Facility.
Pursuant to the agreements (a) a subsidiary of Black Hills Corporation (BKH)
purchased the KFP Facility and received 2 million shares of KFx common stock
previously held by TCK in exchange for the assumption of the reclamation
liability associated with the KFP Facility, (b) BKH was given the right to one
seat on KFx's board of directors (which, as of May 12, 2000, BKH has declined to
exercise), and KFx granted BKH a warrant to purchase 1.3 million shares of KFx
common stock at $3.65 per share, subject to certain adjustments, (c) KFx
relinquished its 5% interest in KFP to TCK and provided certain releases to TCK
in exchange for $100,000, as a minimum purchase price, $150,000 in proceeds of
an unsecured note payable to TCK on June 10, 2000, and future cash payments
estimated at $1.4 million expected to be received over the next 30-45 days, (d)
KFx retained its 5% royalty right related to the operations of the KFP Facility,
received certain real and personal property from TCK and has negotiated a
revenue-based service fee with BKH, (e) TCK is selling the remaining 2.25
million common shares of KFx it owns to private investors (of which
approximately 1.1 million shares have been sold as of May 12, 2000) and has
canceled the warrants it holds to purchase a control position in KFx's common
stock. KFx and BKH are proceeding to finalize plans and secure the necessary
capital to rectify certain design flaws in the balance-of-plant systems,
including the addition of an incinerator to eliminate certain process waste
streams, and to modify the plant to replace natural gas with waste coal as the
facility's energy source. The cost to implement these plans is preliminarily
estimated at $10 million to $12 million. If efforts to finalize plant
modification plans and secure related capital are not successful by August 2000,
BKH has the option to salvage the equipment and reclaim the site. The carrying
value of the Company's investment in KFP was written down effective December 31,
1999 by $1.8 million, to the $1.5 million near term expected cash proceeds to
KFx. In addition, the estimated $2.2 million value of the warrants issued to BKH
was charged to expense effective December 31, 1999.
NOTE 4. NOTES PAYABLE TO THE STATE OF WYOMING
Principal and interest under a promissory note ("Note") to the State of
Wyoming ("Wyoming") in the amount of $500,000 was due February 29, 2000, but not
paid. The Company initiated discussions with Wyoming in advance of the maturity
date and paid the interest due under the Note on April 10, 2000. On April 12,
2000, Wyoming granted the Company an extension until May 5, 2000, and on April
28, 2000, Wyoming granted a further extension to May 31, 2000, to renegotiate
definitive repayment terms.
Circumstances substantially identical to those in the preceding
paragraph arose relative to a promissory note for $819,000 due to Wyoming by
KFx's Chairman and one of his affiliates. The Company agreed in 1994 to
indemnify its Chairman and his affiliate for any payments due under such note.
On April 14, 2000, the Company's Chairman and his affiliate agreed that if any
principal payments are required before April 30, 2001, that they will waive
their rights under the indemnity until after April 30, 2001.
NOTE 5. SEGMENT INFORMATION
Consistent with its determination for the year ended December 31, 1999,
KFx's reportable segments are based on its principal products and services,
which are optimization software and related services, through its Pegasus
subsidiary ("Pegasus" segment), and clean fuels technology, through certain
activities of KFx and certain of its subsidiaries ("K-Fuel" segment). KFx
evaluates the performance of its segments and allocates resources to them
primarily based on net income (loss) and operating cash flow. There are no
intersegment revenues; however, KFx's corporate office charges management and
related fees to the Pegasus segment.
The tables below present information about revenues, net income (loss),
cash used in operating activities, and segment assets used by KFx's Chairman and
CEO, its chief operating decision maker, as of March 31, 2000 and 1999 and for
the three-month periods then ended:
<TABLE>
<CAPTION>
RECONCILING
QUARTER ENDED PEGASUS K-FUEL ITEMS(a) CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
MARCH 31, 2000
--------------
<S> <C> <C> <C> <C>
Operating Revenues.................. $ 465,638 -- -- $ 465,538
Net Loss................................... $ (958,794) $ (500,471) $ (863,491) $(2,322,756)
Cash Used in Operating Activities......... $ (394,554) $ (12,608) $(1,125,489) $(1,532,617)
Total Assets.............................. $3,302,483 $ 8,681,532 $ 1,252,154 $13,236,093
MARCH 31, 1999
--------------
Operating Revenues........................ $ 377,132 $ 179,025 -- $ 556,157
Net Loss.................................. $ (742,754) $ (632,341) $ (871,029) $(2,246,124)
Cash Used in Operating Activities..... $ (139,112) $ (243,876) $(1,055,041) $(1,438,029)
Total Assets.......................... $2,634,094 $11,403,235 $ 5,622,446 $19,659,775
</TABLE>
(a) Consists primarily of KFx corporate office activities and consolidating
entries.
NOTE 6. CONTINGENCIES
On November 4, 1999, Link Resources, Inc., a Georgia corporation,
("Link") and its two shareholders, Linda E. Kobel ("Kobel") and Gary A. Sanden
("Sanden"), filed a complaint against the Company in US District Court for the
District of Colorado. The complaint alleges that KFX, Link, Kobel and Sanden had
entered into an agreement requiring KFX to acquire Link and that KFX breached
such agreement. The complaint seeks damages in excess of $5.3 million. Although
this matter is still in discovery and its ultimate resolution cannot be
predicted with certainty, based on a preliminary review of
7
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KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) (CONTINUED)
the underlying facts and discussion with counsel, management believes that this
complaint is without merit. KFX intends to contest this complaint vigorously.
Accordingly, management does not believe that this matter will have a material
impact on the results of operation or financial position of the Company.
As part of the restructured bond agreement with the State of Wyoming
(Wyoming) in 1994, Energy Brothers Holding, Inc., an affiliate of the Company,
and an officer and director of the Company executed a promissory note to Wyoming
for $819,000, with annual interest at 6 percent. The Company has agreed to
indemnify both Energy Brothers Holding, Inc. and the officer and director of the
Company to the extent that payments are made to Wyoming under the agreement. In
addition, the Company entered into a royalty agreement with Wyoming, which
requires the Company to pay Wyoming 12 percent of its domestic K-Fuel license
and royalty revenue. The rate decreases to 6 percent when cumulative payments
under the royalty agreement total $5 million.
In 1996, the Company entered into a royalty amendment agreement with Edward
Koppelman, the inventor of the K-Fuel Technology. As a result of the agreement,
Mr. Koppelman's royalty is now 25 percent of the Company's worldwide royalty and
license fee revenue, computed after a State of Wyoming royalty. The royalty to
Mr. Koppelman will cease when the cumulative payments to him reach the sum of
approximately $75,222,000. Mr. Koppelman is now deceased and his estate holds
all royalty rights.
The Company is contingently liable to Ohio Valley Electric Corporation
("OVEC") for an overriding royalty of 0.5 percent to OVEC on the gross revenues
generated by the sale of fuel produced from any production plant (other than the
current facility owned by KFP) located in the United States in which the
feedstock is coal and which uses the Company's proprietary Series "C" K-Fuel
technology to produce fuel. The Company is contingently liable to Fort Union for
20 percent of the Company's North American royalty proceeds.
Pegasus is contingently liable to certain of its founding stockholders for
a royalty equivalent to 2% of the license fee revenues derived from the sale its
NeuSIGHT product through November 30, 2004. This obligation is limited to the
extent of pretax income without regard to such royalty, subject to a maximum of
$2.5 million and subject to certain other limitations.
8
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KFX INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q filing contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that include risks and uncertainties. This Form 10-Q should be read
in conjunction with the Company's Form 10-K/A for the year ended December 31,
1999 and Management's Discussion and Analysis of Financial Condition and Results
of Operations included therein. The Company's actual results may differ
materially from those anticipated in these forward-looking statements.
The forward-looking statements contained in this filing include, among
others, statements regarding expected proceeds from the sale of the KFP
facility, expected investments in Pegasus Preferred Stock by Kennecott Energy,
negotiations with Wyoming to extend the due date of certain notes, resumption of
certain K-Fuel related contract revenue, potential expansions of product and
service offerings and related potential sources of capital; expected K-Fuel
technology licenses; other potential sources of funding; expected future
operating results and financial condition; future recognition as revenue of
NPS/Pegasus order backlog; benefits to customers of installing its NeuSIGHT
combustion optimization software; benefits to potential customers of using
K-Fuel; and anticipated markets for the Company's products and services.
Important factors that could cause actual results to differ materially from
those anticipated include, but are not limited to, adverse market and various
other conditions that could inhibit the Company's ability to obtain capital and
other funding; competition and technological developments by competitors; lack
of market interest in the Company's existing and any new products and services;
changes in environmental, electric utility and other governmental regulations;
actions of the Company's strategic partners; breadth or degree of protection
available to the Company's intellectual property; availability of key management
and skilled personnel; unanticipated problems that arise from research and
development activities; cost overruns, delays and damage that may occur in
developing, permitting, financing and constructing K-Fuel production facilities;
and domestic and international economic and political conditions. The Company
does not undertake to update, revise or correct any of the forward-looking
statements.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED
MARCH 31, 1999
On a per share basis, the net loss for the first quarter of 2000 was
$.09, the same as for the first quarter of 1999. The net loss for the first
quarter of 2000 of $2,322,756 was $76,632 (3%) higher than for the first
quarter of 1999 primarily due to the net effect of (a) an increase in operating
losses at Pegasus approximating $234,000 (32%) resulting from the continuing
ramp up of this operation, (b) an increase in operating losses in the K-Fuel
segment approximating $136,000 (39%) caused by the lack of revenue producing
activity, and (c) a reduction of $268,378 in K-Fuel related losses from
unconsolidated affiliates to $9,657, resulting from the suspension of operations
at the Gillette K-Fuel commercial plant owned by KFP in mid 1999. The 2000
net loss includes $725,729 of non-cash charges.
Consolidated revenues in the first quarter of 2000 declined as compared
to the first quarter of 1999 by $90,519 (16%) due to the lack of K-Fuel contract
revenues in 2000 compared to $179,025 in 1999, partially offset by an increase
in Pegasus revenues of $88,506 (23%). The increase in Pegasus revenues results
from an increase in the level of software installation activity as backlog is
worked off. During the first quarter of 2000, fourteen jobs were in progress,
compared to eleven during the first quarter of 1999. At May 12, 2000, Pegasus
backlog of software license and installation contracts approximated $2.3
million, which is expected to be recognized as revenue during the next 12-18
months. The lack of K-Fuel contract revenue stems from TCK's suspension of
operations at the KFP Facility in mid 1999 and certain administrative changes in
1999 at the third party research and development contracting agency, from which
9
<PAGE> 10
KFx INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
the company has historically derived K-Fuel-related research and development
revenues. The U.S. Department of Energy has approved a $370,000 research
proposal jointly sponsored by KFx and the third party contracting agency for the
twelve months beginning March 1, 2000. Accordingly, these revenues are expected
to resume in the second quarter of 2000.
Consolidated operating costs and expenses in the first quarter of 2000
increased as compared to the first quarter of 1999 by $203,987 (9%) due to cost
increases approximating $266,000 offset by costs reductions approximating
$62,000. Cost increases included (a) an increase in Pegasus software
installation costs of $132,915 (55%) resulting from higher activity levels and a
greater use of subcontract installation services, and (b) a five-fold increase
in Pegasus research and development costs to $121,243 caused by more focus on
product improvements and new products. Offsetting these increases were (a)
reductions in consolidated marketing, general and administrative costs of
$17,057 (1%) due to approximately $64,000 (12%) of reductions in KFx costs
partially offset by approximately $47,000 (7%) of increases in Pegasus costs and
(b) lower K-Fuel demonstration plant and laboratory operating costs of $33,490
(28%) due to the lack of revenue producing activity.
Interest and other income declined by $55,628 primarily due to lower
available cash balances for temporary investments.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000 the Company used $1,532,617 of cash
for its operating activities, compared to $1,438,029 in the first quarter of
1999. Included in the 2000 amount are (a) $543,027 of interest payments, (b)
approximately $395,000 for Pegasus' operations, (c) approximately $13,000 for
the operations of the K-Fuel segment, and (d) $582,000 for KFx's corporate
activities.
During the first quarter of 2000, the Company announced its desire to
restructure its Debentures, which are convertible into KFx common stock at a
conversion price of $3.65. As of May 12, 2000, Debentures with a face value of
$1,650,000 have been converted into 452,049 shares of the Company's common stock
at the contract conversion price of $3.65. Accordingly long-term debt has been
reduced by $1,650,000, offset by a corresponding increase to stockholder's
equity, less approximately $100,000 of related deferred debt issue costs.
The Company is continuing to evaluate alternatives to strengthen
its balance sheet including ways to induce conversion of all or substantially
all of the Debentures.
On March 3, 2000, KFx and Pegasus closed a transaction with Kennecott
Energy Company ("Kennecott Energy"), as described in Note 2 to the Consolidated
Financial Statements, which has generated a total of $2,000,000 in cash
investments by Kennecott Energy related to Pegasus and is expected to generate
an additional $3,000,000 in cash investments in Pegasus through 2004, or
earlier.
10
<PAGE> 11
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Included in the agreements among KFx, Kennecott Energy and Pegasus are
provisions governing the terms of investments from any new investors in Pegasus,
limiting the borrowings of Pegasus, and limiting the payment of dividends by
Pegasus. KFx is actively seeking additional strategic investors to further
expand the capital base of Pegasus.
As of May 9, 2000, the Company closed a series of agreements with
various parties intended to initiate the redevelopment of the KFP Facility, as
described in Note 3 to the Consolidated Financial Statements. Pursuant to the
agreements, the Company expects to receive cash payments estimated at $1.4
million over the next 30-45 days.
As discussed in Note 4 to the Consolidated Financial Statements,
Principal under a promissory note ("Note") to the State of Wyoming ("Wyoming")
in the amount of $500,000 is due May 31, 2000. The Company is in discussions
with Wyoming and is seeking an extension of principal payments on the Note
through April 30, 2001 or later. There can be no assurance that such an
extension will be granted by Wyoming. Circumstances substantially identical to
those related to the Note arose relative to a promissory note for $819,000 due
to Wyoming by KFx's Chairman and one of his affiliates. The Company agreed in
1994 to indemnify its Chairman and his affiliate for any payments due under such
note. On April 14, 2000, the Company's Chairman and his affiliate agreed that if
any principal payments are required before April 30, 2001, that they will waive
their rights under the indemnity until after April 30, 2001.
11
<PAGE> 12
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company expects its cash requirements over the remainder of 2000
with respect to day-to-day operations and debt service requirements to be
satisfied by (a) cash on hand, which as of May 12, 2000 approximated $615,000;
(b) expected additional cash proceeds approximating $1.4 million from the KFP
Sale, (c) approximately $1.0 million of Kennecott Energy's discretionary
investments in Pegasus in connection with the achievement of milestones under
the work plan, pursuant to provisions of the agreements executed in March 2000;
(d) potential investments in Pegasus from interested participants in the power
generation industry; (e) potential debt and/or equity offerings of the Company;
(f) potential fees from licensing new K-Fuel facilities; (g) potential partners
in connection with opportunities to expand the Company's product and service
offerings to the power industry; (g) certain contract revenues relating to the
K-Fuel demonstration plant and laboratory; and (h) unsecured borrowings from one
or more of its directors and/or other parties.
The Company has contacted and has been contacted by several large
suppliers to the power generation industry about the potential of making an
investment in Pegasus. In addition, the Company has contacted several prominent
investment banking firms about the potential for debt and/or equity offerings of
the Company and/or Pegasus. At this stage, discussions with all of these parties
are preliminary, but the Company intends to continue such discussions and
negotiate definitive agreements if acceptable terms can be reached.
The Company and Kennecott Energy are continuing to work diligently on
an optimal design for a 3 million ton-per-year K-Fuel plant and toward the
objective of licensing such a plant within approximately the next 12 months.
Such a license, if agreed to, would a generate gross initial license fee at the
granting of the license approximating $4 million, or approximately $2.6 million
in cash, net of related royalty obligations.
The Company has had discussions with various parties about potential
transactions to add product and/or service offerings relevant to the power
generation industry. Such discussions have included consideration of
acquisitions and related transactions to raise equity capital for the Company
and/or Pegasus. The Company will continue to evaluate the merits of pursuing
such a strategy, in view of the Company's evolving financial condition.
In addition, from time to time, directors of the Company have provided
to the Company short term unsecured financing and the Company expects that such
financing, on at least a short-term basis, will continue to be available if
needed.
Depending on the outcome of various uncertainties, including those
discussed herein, the Company may be required to seek additional debt and/or
equity financing for general operating purposes and/or to meet debt service
requirements. The timing of collection of accounts receivable and payment of
accounts payable could significantly alter the Company's need for at least
temporary financing. Should the Company be required to seek any additional debt
and/or equity financing, its ability to do so will be affected by the terms of
the Debentures, under which the Company may only incur unsecured indebtedness of
up to $8.0 million (of which approximately $911,000 was outstanding as of May
12, 2000) and indebtedness that is secured only by the assets of a particular
project and is non-recourse to the Company and its subsidiaries.
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 the overall outcome of the various
uncertainties affecting the Company is not favorable, the Company may be forced
to seek debt and/or equity financing on terms and conditions that may be
unfavorable to the Company, if available
12
<PAGE> 13
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
at all. If the Company requires additional financing and cannot obtain it when
needed or if Kennecott Energy elects to sell the Pegasus common stock that it
purchased from the Company back to the Company, the Company may default on
payments when due.
YEAR 2000 COMPLIANCE
Prior to December 31, 1999, the Company completed various analyses and
remediation procedures, as it considered necessary and prudent, to identify and
remediate potential Year 2000 issues that could create significant disruptions
or other difficulties related to the Company's business. Such analyses and
remediation procedures covered all internal systems of the Company and the
Pegasus products and also included surveys and other procedures, as considered
appropriate, related to the Company's suppliers and customers. These analyses
and remediation procedures were completed at a nominal cost to the Company. To
date the Company has not experienced any disruptions or other difficulties
related to the Year 2000 issue. Based on the results of analyses and remediation
procedures completed prior to December 31, 1999 and the absence of Year 2000
disruptions or other difficulties to date, management believes that its systems
and products are substantially Year 2000 compliant and the systems of its
suppliers and vendors are at least sufficiently Year 2000 compliant so as to
avoid any significant disruptions or other difficulties to the Company's
business.
13
<PAGE> 14
KFX INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is not currently subject to a significant level of direct
market risk related to interest rates, foreign currency exchange rates,
commodity prices or equity prices. The Company has no derivative instruments or
any floating rate debt and does not expect to derive a material amount of its
revenues from interest bearing securities. Currently the Company has no
significant foreign operations. To the extent that the Company establishes
significant foreign operations in the future, it will attempt to mitigate risks
associated with foreign currency exchange rates contractually and through the
use of hedging activities and other means considered appropriate. The Company is
indirectly exposed to fluctuations in fuel commodity prices. To the extent that
fuel prices rise, there may be a tendency for greater demand for certain of the
Company's products and services, since K-Fuel and NeuSIGHT have been shown to
result in lower usage of coal and coal beneficiated fuel products when used to
generate electric power. The Company's fuel-related products provide various
environmental benefits that management believes significantly mitigate the fuel
commodity risk associated with the Company's business. The Company holds no
equity market securities, but does face equity market risk relative to its own
equity securities. This risk is most likely to be manifested by influencing the
Company's ability to raise debt or equity financing, if needed.
14
<PAGE> 15
KFX INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 4, 1999, Link Resources, Inc., a Georgia corporation,
("Link") and its two shareholders, Linda E. Kobel ("Kobel") and Gary A.
Sanden ("Sanden"), filed a complaint against the Company in US District Court
for the District of Colorado. The complaint alleges that KFX, Link, Kobel and
Sanden had entered into an agreement requiring KFX to acquire Link and that KFX
breached such agreement. The complaint seeks damages in excess of $5.3 million.
Although this matter is still in discovery and its ultimate resolution cannot be
predicted with certainty, based on a preliminary review of the underlying facts
and discussion with counsel, management believes that this complaint is without
merit. KFX intends to contest this complaint vigorously. Accordingly, management
does not believe that this matter will have a material impact on the results of
operation or financial position of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
For electronic filing purposes only, this report contains Exhibit 27,
Financial Data Schedule.
(B) REPORTS ON FORM 8-K
During the quarter ended March 31, 2000, the Company filed a Current
Report on Form 8-K dated March 7, 2000, under Item 5, Other Events, and Item 7,
Financial Statements and Exhibits.
15
<PAGE> 16
KFX INC.
OTHER INFORMATION (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KFX INC.
/s/ SETH L. PATTERSON
-----------------------------------
SETH L. PATTERSON
EXECUTIVE VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
DATE: MAY 19, 2000
16
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 398,172
<SECURITIES> 0
<RECEIVABLES> 688,072
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,315,894
<PP&E> 2,002,730
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,236,093
<CURRENT-LIABILITIES> 6,552,634
<BONDS> 15,500,000
0
0
<COMMON> 24,893
<OTHER-SE> (10,643,684)
<TOTAL-LIABILITY-AND-EQUITY> 13,236,093
<SALES> 465,638
<TOTAL-REVENUES> 465,638
<CGS> 373,250
<TOTAL-COSTS> 2,494,253
<OTHER-EXPENSES> 8,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286,137
<INCOME-PRETAX> (2,322,756)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,322,756)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
