Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
Commission File Number: 001-33480
CLEAN
ENERGY FUELS CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation)
|
|
33-0968580
(IRS Employer
Identification No.)
|
3020 Old Ranch Parkway, Suite 400, Seal Beach CA
90740
(Address of principal executive offices, including zip code)
(562) 493-2804
(Registrants 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405
of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Act). Yes
o
No
x
As
of November 2, 2010, there were 64,943,601 shares of the registrants
common stock, par value $0.0001 per share, issued and outstanding.
Table of Contents
PART I.FINANCIAL
INFORMATION
Item 1.Financial Statements (Unaudited)
Clean Energy Fuels Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2009 and September 30, 2010
(Unaudited)
|
|
December 31,
2009
|
|
September 30,
2010
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
67,086,965
|
|
$
|
32,178,575
|
|
Restricted
cash
|
|
2,500,000
|
|
2,500,000
|
|
Accounts
receivable, net of allowance for doubtful accounts of $898,423 and
$576,882 as of December 31, 2009 and September 30, 2010,
respectively
|
|
16,339,730
|
|
32,339,929
|
|
Other
receivables
|
|
8,862,213
|
|
11,061,428
|
|
Inventory,
net
|
|
6,217,133
|
|
18,044,725
|
|
Prepaid
expenses and other current assets
|
|
7,393,892
|
|
11,265,530
|
|
Total
current assets
|
|
108,399,933
|
|
107,390,187
|
|
Land,
property and equipment, net
|
|
172,182,436
|
|
199,968,904
|
|
Capital
lease receivables
|
|
1,311,054
|
|
1,107,041
|
|
Notes
receivable and other long-term assets
|
|
6,875,364
|
|
10,660,592
|
|
Investments
in other entities
|
|
10,536,405
|
|
11,171,714
|
|
Goodwill
|
|
21,572,020
|
|
65,821,347
|
|
Intangible
assets, net of accumulated amortization
|
|
34,921,361
|
|
112,926,564
|
|
Total
assets
|
|
$
|
355,798,573
|
|
$
|
509,046,349
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
portion of long-term debt and capital lease obligations
|
|
$
|
2,439,263
|
|
$
|
29,328,727
|
|
Accounts
payable
|
|
14,775,406
|
|
34,627,089
|
|
Accrued
liabilities
|
|
9,695,443
|
|
20,390,637
|
|
Deferred
revenue
|
|
2,691,007
|
|
12,006,967
|
|
Total
current liabilities
|
|
29,601,119
|
|
96,353,420
|
|
Long-term
debt and capital lease obligations, less current portion
|
|
9,781,425
|
|
33,175,323
|
|
Other
long-term liabilities
|
|
36,039,864
|
|
38,203,504
|
|
Total
liabilities
|
|
75,422,408
|
|
167,732,247
|
|
Commitments
and contingencies
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Preferred
stock, $0.0001 par value. Authorized 1,000,000 shares; issued and outstanding no
shares
|
|
|
|
|
|
Common
stock, $0.0001 par value. Authorized 149,000,000 shares; issued and
outstanding 59,840,151 shares and 64,931,101 shares at December 31, 2009
and September 30, 2010, respectively
|
|
5,984
|
|
6,493
|
|
Additional
paid-in capital
|
|
424,580,895
|
|
506,775,337
|
|
Accumulated
deficit
|
|
(149,410,111
|
)
|
(165,711,509
|
)
|
Accumulated
other comprehensive income (loss)
|
|
2,012,573
|
|
(2,915,569
|
)
|
Total
stockholders equity of Clean Energy Fuels Corp.
|
|
277,189,341
|
|
338,154,752
|
|
Noncontrolling
interest in subsidiary
|
|
3,186,824
|
|
3,159,350
|
|
Total
equity
|
|
280,376,165
|
|
341,314,102
|
|
Total
liabilities and equity
|
|
$
|
355,798,573
|
|
$
|
509,046,349
|
|
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
Clean Energy Fuels Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended
September 30, 2009 and 2010
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Product
revenues
|
|
$
|
26,290,638
|
|
$
|
40,974,478
|
|
$
|
79,500,495
|
|
$
|
114,680,989
|
|
Service
revenues
|
|
4,891,188
|
|
4,679,229
|
|
9,799,506
|
|
13,996,136
|
|
Total
revenues
|
|
31,181,826
|
|
45,653,707
|
|
89,300,001
|
|
128,677,125
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
Product
cost of sales
|
|
16,369,247
|
|
31,189,766
|
|
52,785,705
|
|
85,378,128
|
|
Service
cost of sales
|
|
2,388,458
|
|
2,319,064
|
|
3,820,740
|
|
6,305,141
|
|
Selling,
general and administrative
|
|
10,491,987
|
|
15,854,920
|
|
33,649,427
|
|
44,382,202
|
|
Depreciation
and amortization
|
|
4,516,513
|
|
5,507,032
|
|
12,256,603
|
|
15,567,523
|
|
Derivative
(gain) loss on Series I warrant valuation
|
|
15,422,310
|
|
(7,866,162
|
)
|
17,808,673
|
|
(5,876,855
|
)
|
Total
operating expenses
|
|
49,188,515
|
|
47,004,620
|
|
120,321,148
|
|
145,756,139
|
|
Operating
loss
|
|
(18,006,689
|
)
|
(1,350,913
|
)
|
(31,021,147
|
)
|
(17,079,014
|
)
|
Interest
income (expense), net
|
|
(276,110
|
)
|
(70,126
|
)
|
(368,186
|
)
|
16,379
|
|
Other
expense, net
|
|
(107,468
|
)
|
(308,346
|
)
|
(293,995
|
)
|
(303,769
|
)
|
Income
from equity method investments
|
|
77,744
|
|
95,509
|
|
130,162
|
|
200,919
|
|
Loss
before income taxes
|
|
(18,312,523
|
)
|
(1,633,876
|
)
|
(31,553,166
|
)
|
(17,165,485
|
)
|
Income
tax benefit (expense)
|
|
(68,352
|
)
|
(290,121
|
)
|
(209,202
|
)
|
836,613
|
|
Net
loss
|
|
(18,380,875
|
)
|
(1,923,997
|
)
|
(31,762,368
|
)
|
(16,328,872
|
)
|
Loss
(income) attributable to noncontrolling interest
|
|
(79,708
|
)
|
94,123
|
|
430,972
|
|
27,474
|
|
Net
loss attributable to Clean Energy Fuels Corp.
|
|
$
|
(18,460,583
|
)
|
$
|
(1,829,874
|
)
|
$
|
(31,331,396
|
)
|
$
|
(16,301,398
|
)
|
Loss
per share attributable to Clean Energy Fuels Corp.
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.31
|
)
|
$
|
(0.03
|
)
|
$
|
(0.59
|
)
|
$
|
(0.27
|
)
|
Diluted
|
|
$
|
(0.31
|
)
|
$
|
(0.03
|
)
|
$
|
(0.59
|
)
|
$
|
(0.27
|
)
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
59,695,666
|
|
63,992,763
|
|
53,428,391
|
|
60,970,130
|
|
Diluted
|
|
59,695,666
|
|
63,992,763
|
|
53,428,391
|
|
60,970,130
|
|
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
Clean Energy Fuels Corp.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and
2010
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(31,762,368
|
)
|
$
|
(16,328,872
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
12,256,603
|
|
15,567,523
|
|
Provision
for doubtful accounts
|
|
(1,074,005
|
)
|
138,777
|
|
Loss
on disposal of assets
|
|
404,948
|
|
175,223
|
|
Stock
option expense
|
|
10,572,136
|
|
9,221,647
|
|
Derivative
(gain) loss on Series I warrant valuation
|
|
17,808,673
|
|
(5,876,855
|
)
|
Contingent
consideration
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of assets and liabilities acquired:
|
|
|
|
|
|
Accounts
and other receivables
|
|
(1,966,808
|
)
|
(6,073,435
|
)
|
Inventory
|
|
508,425
|
|
(3,433,927
|
)
|
Return
of deposits on LNG trucks
|
|
5,672,424
|
|
255,124
|
|
Margin
deposits on futures contracts
|
|
(3,155,771
|
)
|
(2,987,224
|
)
|
Capital
lease receivables
|
|
790,442
|
|
1,142,835
|
|
Prepaid
expenses and other assets
|
|
(1,199,224
|
)
|
(982,031
|
)
|
Accounts
payable
|
|
1,095,378
|
|
13,588,186
|
|
Accrued
expenses and other
|
|
444,996
|
|
7,388,381
|
|
Net
cash provided by operating activities
|
|
10,395,849
|
|
11,795,352
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases
of property and equipment
|
|
(25,419,519
|
)
|
(41,437,375
|
)
|
Proceeds
from sale of property and equipment
|
|
51,140
|
|
280,556
|
|
Acquisition,
net of cash acquired
|
|
(5,645,250
|
)
|
(15,585,377
|
)
|
Proceeds
from sale of loans receivable
|
|
3,026,073
|
|
324,576
|
|
Investments
in other entities
|
|
(4,203,758
|
)
|
(635,309
|
)
|
Net
cash used in investing activities
|
|
(32,191,314
|
)
|
(57,052,929
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
7,159,570
|
|
|
|
Repayment
of capital lease obligations and long-term debt
|
|
(2,724,257
|
)
|
(434,641
|
)
|
Proceeds
from issuance of common stock and exercise of stock options
|
|
73,369,650
|
|
10,783,828
|
|
Net
cash provided by financing activities
|
|
77,804,963
|
|
10,349,187
|
|
Net
increase (decrease) in cash
|
|
56,009,498
|
|
(34,908,390
|
)
|
Cash,
beginning of period
|
|
36,284,431
|
|
67,086,965
|
|
Cash,
end of period
|
|
$
|
92,293,929
|
|
$
|
32,178,575
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
59,227
|
|
$
|
219,144
|
|
Interest
paid, net of approximately $509,363 and $295,000 capitalized, respectively
|
|
$
|
704,331
|
|
$
|
804,363
|
|
See accompanying notes to condensed consolidated financial statements.
5
Table of
Contents
CLEAN ENERGY FUELS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1General
Nature of Business:
Clean Energy Fuels Corp. (the Company) is
engaged in the business of selling natural gas fueling solutions to its
customers primarily in the United States and Canada. The Company has a broad
customer base in a variety of markets including public transit, refuse, airports
and regional trucking. The Company operates, maintains or supplies
approximately 211 natural gas fueling locations in Arizona, California,
Colorado, District of Columbia, Florida, Georgia, Idaho, Maryland,
Massachusetts, Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Rhode
Island, Texas, Virginia, Washington and Wyoming within the United States, and
in British Columbia and Ontario within Canada. The Company also generates
revenue through subsidiaries that are dedicated to manufacturing and servicing
advanced natural gas fueling compressors and related equipment, processing and
selling renewable biomethane and providing natural gas vehicle conversions. All
of the Companys revenues are presented net of taxes collected.
Basis of Presentation:
The accompanying interim unaudited condensed
consolidated financial statements include the accounts of the Company and its
subsidiaries, and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to state fairly the
Companys financial position, results of operations and cash flows for the
three and nine months ended September 30, 2009 and 2010. All intercompany
accounts and transactions have been eliminated in consolidation. The three and
nine month periods ended September 30, 2009 and 2010 are not necessarily
indicative of the results to be expected for the year ending December 31,
2010 or for any other interim period or for any future year.
Certain
information and disclosures normally included in the notes to consolidated
financial statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the SEC), but the
resultant disclosures contained herein are in accordance with accounting
principles generally accepted in the United States of America as they apply to
interim reporting. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements as of and for
the year ended December 31, 2009 that are included in the Companys Annual
Report on Form 10-K filed with the SEC on March 10, 2010.
Note 2Acquisitions
Operating and Maintenance Contracts
In
May and June 2009, the Company acquired four compressed natural gas operations
and maintenance services contracts for $5.6 million in cash. The Company
recorded $0.5 million to tangible assets and $5.1 million of
intangible assets related to customer relationships, which are being amortized
over their expected lives of eight years. The results of operations of the
acquired contracts are included in the Companys consolidated financial
statements from their acquisition dates forward, which are May 2009 for
two of the contracts and June 2009 for the remaining two contracts. In
addition, as part of the acquisition, the Company became the custodian of
certain customer-owned inventories that it is required to replenish when the
contracts expire. The customer-owned inventory was valued on the Companys
books at $986,000 with a corresponding balance of $986,000 recorded as a
liability on the acquisition dates of the contracts.
Vehicle Conversion
On
October 1, 2009, the Company purchased all the outstanding shares of BAF
Technologies, Inc. (BAF), under a stock purchase agreement. The Company paid
an aggregate of $8.5 million to acquire BAF. Pursuant to the terms of the
agreement, the purchase price was reduced by the amount of BAFs outstanding
debt, which was repaid in full at closing. Due to the fact that approximately
$3.8 million of BAFs outstanding debt, including interest, was held by a
subsidiary of the Company, the Company paid a net amount of approximately
$4.7 million in cash to acquire BAF at the closing. BAF shareholders will
be able to earn additional consideration if BAF achieves certain gross profit
targets in fiscal 2010 and 2011. The additional consideration will be
determined as a percentage of gross profit based on a sliding scale that
increases at certain gross profit levels, subject to achieving a minimum gross
profit target and capped by a maximum additional payment amount. For 2010, the
shareholders of BAF will receive between one and twenty-six percent of the
gross profit of BAF as additional consideration if BAF achieves $8 million
or more in gross profit, up to a maximum of $11 million in additional
consideration (which maximum amount would be payable if BAF achieved
approximately $42.3 million in gross profit in 2010).
6
Table of Contents
For
2011, the shareholders of BAF will receive between one and twenty-one percent
of the gross profit of BAF as additional consideration if BAF achieves
$8.5 million or more in gross profit, up to a maximum of $11 million
in additional consideration (which maximum amount would be payable if BAF
achieved approximately $52.4 million in gross profit in 2011). The Company
accounted for this acquisition in accordance with authoritative guidance for
business combinations, which requires the Company to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date
of acquisition. The following table summarizes the allocation of the aggregate
purchase price to the fair value of the assets acquired and liabilities
assumed:
Current
assets
|
|
$
|
4,820,188
|
|
Property,
plant and equipment
|
|
157,624
|
|
Identifiable
intangible assets
|
|
10,660,000
|
|
Goodwill
|
|
774,142
|
|
Total
assets acquired
|
|
16,411,954
|
|
Current
liabilities assumed
|
|
(4,844,672
|
)
|
Total
purchase price
|
|
$
|
11,567,282
|
|
Management
allocated approximately $10.7 million of the purchase price to the
identifiable intangible assets related to customer relationships, engine
certifications and trademarks that were acquired with the acquisition. The fair
value of the identifiable intangible assets will be amortized on a
straight-line basis over their estimated useful lives of 1.5 to 8 years.
In addition, management allocated $0.8 million to goodwill as part of the
acquisition and recorded a contingent liability of $3.1 million related to
the possible consideration owed to BAF shareholders if BAF achieves certain
gross profit targets in 2010 and 2011. Under the accounting guidance the
Company must follow for this acquisition, the Company is required to adjust the
value of the contingent consideration for this acquisition in the statement of
operations as the value of the obligation changes each reporting period. The
Company recorded a charge of $0.3 million and $0.2 million during the quarters
ended March 31, 2010 and June 30, 2010, respectively, and a gain of $0.5
million during the quarter ended September 30, 2010 related to this obligation.
These amounts are recorded in selling, general and administrative expenses in
the accompanying condensed consolidated statement of operations. The value of
the obligation will increase or decrease in relation to any increase or
decrease in the anticipated gross profit of BAF.
The
results of BAFs operations have been included in the Companys consolidated
financial statements since October 1, 2009.
Natural
Gas Fueling Compressors
On
September 7, 2010, the Company, acting through certain of its
subsidiaries, completed its purchase of the advanced natural gas fueling
compressor and related equipment manufacturing and servicing business (the IMW
Acquired Business) of I.M.W. Industries Ltd., a British Columbia corporation
(IMW). The IMW Acquired Business manufactures and services advanced,
non-lubricated natural gas fueling compressors and related equipment for the
global natural gas fueling market. The IMW Acquired Business is headquartered
near Vancouver, British Columbia, has a second manufacturing facility near
Shanghai, China and has sales and service offices in Bangladesh, Colombia and
the United States.
In
connection with the closing of the Companys acquisition of the IMW Acquired
Business, a subsidiary of the Company (the Acquisition Subsidiary) paid an
upfront cash payment of approximately $15.6 million (subject to a final working
capital adjustment) and issued 4,017,408 shares of the Companys common stock
at closing to IMWs shareholder. The issued shares were registered and
available for immediate resale by the IMW shareholder. An additional $288,000
will be paid by the Acquisition Subsidiary once the Chinese regulatory
authorities approve the transfer of IMW Compressors (Shanghai) Co. Ltd. to the
Acquisition Subsidiary, which is anticipated within the next thirty days. The
Acquisition Subsidiary also issued the following promissory notes to IMW
(collectively, the IMW Notes): (i) a promissory note with a principal
amount of $12,500,000 that is due and payable on January 31, 2011, (ii) a
promissory note with a principal amount of $12,500,000 that is due and payable
on January 31, 2012, (iii) a promissory note with a principal amount
of $12,500,000 that is due and payable on January 31, 2013, and (iv) a
promissory note with a principal amount of $12,500,000 that is due and payable
on January 31, 2014. Each payment under the IMW Notes will consist of $5.0
million in cash and $7.5 million in cash and/or shares of the Companys common
stock (the exact combination of cash and/or stock to be determined at the
Acquisition Subsidiarys option). In addition, pursuant to a security agreement
executed at closing, the IMW Notes are secured by a subordinate security
interest in the IMW Acquired Business.
IMWs
shareholder may also receive additional consideration based on future gross
profits earned by the IMW Acquired Business over the next four years. The
additional consideration is subject to achieving minimum gross profit targets
and will be determined based on a sliding scale that increases at certain gross
profit levels. During the four-year period during which these earn-out payments
may be made, the shareholder of IMW will receive between 0 and 23 percent of
the gross profit of the IMW Acquired Business as additional consideration, up
to a maximum of $40.0 million in the aggregate (which maximum would be payable
if the IMW Acquired Business achieves approximately $174.0 million in gross
profit over the four-year period during which these earn-out payments may be
made).
7
Table of Contents
The
Company accounted for this acquisition in accordance with authoritative
guidance for business combinations, which requires the Company to recognize the
assets acquired and the liabilities assumed, measured at their fair values as
of the date of acquisition. The following table summarizes the allocation of
the aggregate purchase price to the fair value of the assets acquired and
liabilities assumed:
Current
assets
|
|
$
|
25,948,510
|
|
Property,
plant and equipment
|
|
2,558,791
|
|
Identifiable
intangible assets
|
|
81,400,000
|
|
Goodwill
|
|
44,249,327
|
|
Total
assets acquired
|
|
154,156,628
|
|
Liabilities
assumed
|
|
(23,985,870
|
)
|
Total
purchase price
|
|
$
|
130,170,758
|
|
Management
allocated approximately $81.4 million of the purchase price to the
identifiable intangible assets related to technology, customer relationships,
non-compete agreements, and trademarks that were acquired with the acquisition.
The fair value of the identifiable intangible assets will be amortized on a
straight-line basis over their estimated useful lives ranging from three to
twenty years. In addition, management
allocated $44.2 million to goodwill as part of the acquisition and recorded a
contingent liability of $9.3 million related to the additional
consideration described above. As of November 8, 2010, the purchase price
allocation is preliminary and could change materially in subsequent periods.
Any subsequent changes to the purchase price allocation that result in material
changes to the Companys consolidated financial results will be adjusted
retrospectively. The final purchase price allocation is pending the receipt of
valuation work, the Companys internal review of such work, as well as the
consideration of income tax related matters.
Under
the accounting guidance the Company must follow for this acquisition, the
Company is required to adjust the value of the contingent consideration for
this acquisition in the statement of operations as the value of the obligation
changes each reporting period. The value
of the obligation will increase or decrease in relation to any increase or
decrease in the anticipated gross profit of the IMW Acquired Business. The Company determined that no adjustment was
necessary to the original amount recorded at September 30, 2010. Any future adjustments will be included in
selling, general and administrative expenses in the accompanying condensed
consolidated statement of operations.
The
difference between the fair value and the face value of the future payments will
be accreted to interest expense using the effective interest method over the
life of the payments.
The
results of operations of the IMW Acquired Business have been included in the
Companys consolidated financial statements since September 7, 2010.
The
following table presents the Companys unaudited pro forma results of
operations for the three and nine months ended September 30, 2009 and 2010
as if the acquisition had occurred at the beginning of the respective periods.
The pro forma financial data for all periods presented include adjustments for
the following: (i) elimination of intercompany transactions
(ii) recording the additional amortization expense from the identifiable
intangible assets (iii) adjusting the estimated tax provision of the pro
forma combined results; (iv) United States Generally Accepted Accounting Principles
conversion adjustments and (v) the issuance of the Companys common stock as
part of the acquisition. The Company prepared the pro forma financial
information for the combined entities for comparative purposes only, and it is
not indicative of what actual results would have been if the acquisition had
taken place at the beginning of the respective periods, or of future results.
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
(in thousands,
except per share data)
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
40,705
|
|
$
|
58,372
|
|
$
|
113,988
|
|
$
|
166,192
|
|
Net loss
|
|
(20,818
|
)
|
(3,515
|
)
|
(38,176
|
)
|
(23,115
|
)
|
Loss per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
(0.33
|
)
|
(0.05
|
)
|
(0.66
|
)
|
(0.38
|
)
|
Diluted
|
|
(0.33
|
)
|
(0.05
|
)
|
(0.66
|
)
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the period from September 7, 2010 through September 30, 2010, the IMW Acquired
Business contributed approximately $3.3 million and $(0.3) million,
respectively, to the Companys revenues and net loss for the period.
Note 3Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of three months
or less on the date of acquisition to be cash equivalents.
Note 4Natural Gas Derivative Financial Instruments
The
Company, in an effort to manage its natural gas commodity price risk exposures
related to certain contracts, utilizes derivative financial instruments. The
Company, from time to time, enters into natural gas futures contracts that are
over-the-counter swap transactions that convert its index-based gas supply
arrangements to fixed-price arrangements. The Company accounts for its
derivative instruments in accordance with authoritative guidance for derivative
instruments and hedging activities, which requires the recognition of all
derivatives as either assets or liabilities in the condensed consolidated
balance sheet and the measurement of those instruments at fair value.
Historically, through September 30, 2008, the Companys derivative
instruments have not qualified for hedge accounting under the authoritative
guidance. On and after July 1, 2008, the Company entered into futures
contracts that did qualify for hedge accounting. The Companys futures
contracts at September 30, 2009 and 2010 are being accounted for as cash
flow hedges under the authoritative guidance and are being used to mitigate the
Companys exposure to changes in the price of natural gas and not for
speculative purposes. At September 30, 2009 and 2010, all of the Companys
futures contracts qualified for hedge accounting.
8
Table of Contents
The
counter-party to the Companys derivative transactions is a high credit quality
counterparty; however, the Company is subject to counterparty credit risk to
the extent the counterparty to the derivatives is unable to meet its settlement
commitments. The Company manages this credit risk by minimizing the number and
size of its derivative contracts. The Company actively monitors the
creditworthiness of its counterparties and records valuation adjustments
against the derivative assets to reflect counterparty risk, if necessary. The
counter-party is also exposed to credit risk of the Company, which requires the
Company to provide cash deposits as collateral.
The
Company marks to market its open futures positions at the end of each period
and records the net unrealized gain or loss during the period in derivative
(gains) losses in the condensed consolidated statements of operations or in
accumulated other comprehensive income in the condensed consolidated balance
sheets in accordance with the guidance. The Company recorded an unrealized
gains of approximately $1.5 million, and an unrealized loss of
approximately $5.1 million, in accumulated other comprehensive income
related to its futures contracts for the nine month periods ended
September 30, 2009 and 2010, respectively. Of the approximately
$5.0 million liability for the Companys futures contracts at
September 30, 2010, approximately $3.3 million is included in accrued
liabilities for the short-term amount, and approximately $1.7 million is
included in other long-term liabilities for the long-term amount in the Companys
condensed consolidated balance sheet at September 30, 2010. Of the asset
for the Companys futures contracts of approximately $0.8 million at
September 30, 2009, approximately $0.5 million is included in prepaid
expenses and other current assets for the short-term amount, and approximately
$0.3 million is included in other long-term assets for the long-term amount in
the Companys condensed consolidated balance sheet at September 30, 2009.
The Companys ineffectiveness related to its futures contracts during the nine
month periods ended September 30, 2009 and 2010, respectively, was
insignificant. For the nine month periods ended September 30, 2009 and
2010, the Company recognized a loss of approximately $1.7 million and a
loss of approximately $0.9 million, respectively, in cost of sales in the
accompanying condensed consolidated statements of operations related to its
futures contracts that were settled during the respective nine-month periods.
The
Company is required to make certain deposits on its futures contracts, should
any exist. At September 30, 2009, the Company had $3.9 million of
margin deposits related to its futures contracts covering approximately
31.8 million gasoline gallon equivalents of natural gas fuel, of which
$2.6 million related to contracts that expired during the following
twelve months and were classified as current at September 30, 2009.
At September 30, 2010, the Company had $5.9 million of margin deposits
related to its futures contracts covering approximately 19.9 million gasoline
gallon equivalents of fuel, of which $3.8 million were current at
September 30, 2010. The current portion of the deposits are recorded in
prepaid expenses and other current assets, and the long-term portion of the
deposits are recorded in notes receivable and other long-term assets in the
Companys condensed consolidated balance sheets.
The
following table presents the notional amounts and weighted average fixed prices
per gasoline gallon equivalent of the Companys natural gas futures contracts
as of September 30, 2010:
|
|
Gallons
|
|
Weighted
Average Price
Per Gasoline
Gallon
Equivalent
|
|
October to
December, 2010
|
|
2,880,000
|
|
$
|
0.77
|
|
2011
|
|
11,600,000
|
|
0.82
|
|
2012
|
|
5,160,000
|
|
0.81
|
|
January to
May, 2013
|
|
300,000
|
|
0.81
|
|
|
|
|
|
|
|
|
9
Table of Contents
Note 5Other Receivables
Other
receivables at December 31, 2009 and September 30, 2010 consisted of
the following:
|
|
December 31,
2009
|
|
September 30,
2010
|
|
Loans
to customers to finance vehicle purchases
|
|
$
|
1,179,356
|
|
$
|
1,421,327
|
|
Capital
lease receivables
|
|
1,209,819
|
|
270,997
|
|
Accrued
customer billings
|
|
|
|
4,548,657
|
|
Advances
to vehicle manufacturers
|
|
2,413,066
|
|
1,943,696
|
|
Fuel
tax credits
|
|
2,626,551
|
|
660,034
|
|
Other
|
|
1,433,421
|
|
2,216,717
|
|
|
|
$
|
8,862,213
|
|
$
|
11,061,428
|
|
Note 6Inventories:
Inventories
at December 31, 2009 and September 30, 2010 consisted of the
following:
|
|
December 31,
2009
|
|
September 30,
2010
|
|
Raw
materials and spare parts
|
|
$
|
6,217,133
|
|
$
|
15,266,724
|
|
Work
in progress
|
|
|
|
845,514
|
|
Finished
goods
|
|
|
|
1,932,487
|
|
|
|
$
|
6,217,133
|
|
$
|
18,044,725
|
|
Raw
materials and spare parts are stated at the lower of cost, which is direct
material and freight, and net realizable value, on a first-in, first-out basis.
Work in progress and finished goods inventory is recorded at the lower of cost,
which includes the direct cost of materials plus freight, labor and overhead,
and net realizable value.
Note 7Land, Property and Equipment
Land,
property and equipment at December 31, 2009 and September 30, 2010
are summarized as follows:
|
|
December 31,
2009
|
|
September 30,
2010
|
|
Land
|
|
$
|
472,616
|
|
$
|
472,616
|
|
LNG
liquefaction plants
|
|
91,830,640
|
|
92,399,792
|
|
Station
equipment
|
|
83,935,092
|
|
90,752,634
|
|
LNG
tanker trailers
|
|
11,887,326
|
|
11,904,446
|
|
Biomethane
plant
|
|
6,502,854
|
|
15,991,918
|
|
Other
equipment
|
|
9,241,630
|
|
13,454,432
|
|
Construction
in progress
|
|
14,190,917
|
|
31,898,892
|
|
|
|
218,061,075
|
|
256,874,730
|
|
Less
accumulated depreciation
|
|
(45,878,639
|
)
|
(56,905,826
|
)
|
|
|
$
|
172,182,436
|
|
$
|
199,968,904
|
|
Note 8Investments in Other Entities
Through
September 30, 2010, the Company invested approximately $10.4 million
in The Vehicle Production Group LLC (VPG), a company that is developing
a natural gas vehicle made in the United States for taxi and paratransit use.
The Company has now met its investment commitment to VPG and will not be
required to invest additional funds under its original investment commitment.
The Company accounts for its investment in VPG under the cost method of
accounting as the Company does not have the ability to exercise significant
influence over VPGs operations.
Note 9Accrued Liabilities
Accrued
liabilities at December 31, 2009 and September 30, 2010 consisted of
the following:
|
|
December 31,
2009
|
|
September 30,
2010
|
|
Salaries
and wages
|
|
$
|
2,555,849
|
|
$
|
3,616,035
|
|
Accrued
gas purchases
|
|
627,710
|
|
1,207,235
|
|
Obligation
under derivative liability
|
|
|
|
3,263,041
|
|
Contingent
obligations
|
|
|
|
3,762,000
|
|
Accrued
property and other taxes
|
|
2,383,707
|
|
2,448,350
|
|
Accrued
professional fees
|
|
577,470
|
|
798,765
|
|
Accrued
employee benefits
|
|
777,058
|
|
1,577,280
|
|
Accrued
warranty liability
|
|
1,135,846
|
|
1,992,667
|
|
Other
|
|
1,637,803
|
|
1,725,264
|
|
|
|
$
|
9,695,443
|
|
$
|
20,390,637
|
|
10
Table of
Contents
Note 10 Warranty Liability
The Company records warranty
liabilities at the time of sale for the estimated costs that may be incurred
under its standard warranty. Changes in
the warranty liability, which are included in current liabilities for the
short-term portion, and in other long-term liabilities for the long-term
portion on the Companys condensed consolidated balance sheets, are presented
in the following tables:
|
|
December 31,
2009
|
|
September 30,
2010
|
|
Warranty
liability at beginning of year
|
|
$
|
|
|
$
|
1,135,846
|
|
Acquired
liability
|
|
989,112
|
|
741,299
|
|
Costs
accrued for new warranty contracts and changes in estimates for pre-existing
warranties
|
|
221,410
|
|
478,219
|
|
Service
obligations honored
|
|
(74,676
|
)
|
(362,697
|
)
|
Warranty
liability at end of year
|
|
$
|
1,135,846
|
|
$
|
1,992,667
|
|
Current
portion
|
|
726,356
|
|
927,930
|
|
Non-current
portion
|
|
409,490
|
|
1,064,737
|
|
Warranty
liability at end of period
|
|
$
|
1,135,846
|
|
$
|
1,992,667
|
|
Note 11Debt
|
|
December 31,
2009
|
|
September 30,
2010
|
|
Facility
B loan
|
|
$
|
10,047,492
|
|
$
|
9,908,978
|
|
IMW
promissory notes
|
|
|
|
43,500,000
|
|
IMW
assumed debt
|
|
|
|
7,064,774
|
|
Capital
lease obligations
|
|
2,173,196
|
|
2,030,298
|
|
Total
debt & capital lease obligations
|
|
12,220,688
|
|
62,504,050
|
|
Less
amounts due within one year and short-term borrowings
|
|
(2,439,263
|
)
|
(29,328,727
|
)
|
Total
long-term debt & capital lease obligations
|
|
$
|
9,781,425
|
|
$
|
33,175,323
|
|
In
conjunction with the Companys acquisition of its 70% interest in Dallas Clean
Energy, LLC (DCE), on August 15, 2008, the Company entered into a
Credit Agreement with PlainsCapital Bank (PCB). The Company borrowed
$18.0 million (the Facility A Loan) to finance the acquisition of its
membership interests in DCE. The Company also obtained a $12.0 million
line of credit from PCB to finance capital improvements of the DCE processing
facility and to pay certain costs and expenses related to the acquisition and
the PCB loans (the Facility B Loan).
On
October 7, 2009, the Facility A Loan was repaid in full and converted into
a $20.0 million line of credit (the A Line of Credit) pursuant to an
amendment to the Credit Agreement. On August 13,
2010, the Credit Agreement was amended to extend the maturity date of the A
Line of Credit to August 14, 2011.
The amendment also provides for a 1-year option to extend the maturity
date to August 14, 2012, subject to the addition of an unused facility
fee, as well as the Company not being in default on the A Line of Credit. The unused facility fees are to be paid
quarterly, in an amount equal to one-tenth of one percent (0.10%) times the
unused portion. As of September 30,
2010, the Company did not have any amounts outstanding under the A Line of
Credit.
The
principal amount of the Facility B Loan became due and payable in annual
payments commencing on August 1, 2009, and continuing each anniversary
date thereafter, with each such payment being in an amount equal to the lesser
of twenty percent of the aggregate principal amount of the Facility B Loan then
outstanding or $2,800,000. Pursuant to
an amendment to the Facility B loan between the Company and PCB dated November 1,
2010, for a nominal fee, PCB agreed to forgo the scheduled payment due from the
Company in the amount of $2.0 million until January 31, 2011. As of September 30, 2010, the Company
had an outstanding balance of $9.9 million under the Facility B Loan. Any amount of unpaid principal and interest
outstanding on the Facility B Loan is due and payable on August 15, 2013.
Interest
accrues daily on the amounts outstanding under the Credit Agreement at the
greater of the prime rate of interest for the United States plus 0.50% per
annum, or 5.50% per annum. The Company
paid a facility fee of $300,000 in connection with the Credit Agreement. As of September 30, 2010, the
unamortized balance of the facility fee was $172,500. Amortization of the facility fee is recorded
as additional interest expense in the consolidated statements of operations.
11
Table of Contents
The
Credit Agreement requires the Company to comply with certain covenants. The
Company may not incur indebtedness or liens except as permitted by the Credit
Agreement, or declare or pay dividends. The Company must maintain, on a
quarterly basis, minimum liquidity of not less than $6.0 million, accounts
receivable balances, as defined, of not less than $8.0 million,
consolidated net worth, as defined, of not less than $150.0 million, and a
debt to equity ratio, as defined, of not more than 0.3 to 1. Beginning in the
quarter ended June 30, 2009, the Company must also maintain a specific
minimum debt service ratio at each quarter end. Effective in the fourth quarter
of 2008, the Company established a lock-box arrangement with PCB subject to the
Credit Agreement. Funds from the Companys customers are remitted to the
lock-box and then deposited to a PCB bank account. The remitted funds are not
used to pay-down the balance of the Credit Agreement. However, if the Company
defaults on the Credit Agreement, all of the obligations under the Credit
Agreement will become immediately due and payable and all funds received in the
Companys lock-box held by PCB will be applied to the balance due on the A Line
of Credit and the Facility B Loan. One of the events of default is the
occurrence of a material adverse change, which is a subjective acceleration
clause. Based on the authoritative guidance for balance sheet classification of
borrowings outstanding under revolving credit agreements that include both a
subjective acceleration clause and a lock-box arrangement, the Company has
classified its debt pursuant to the Credit Agreement as short-term or
long-term, as appropriate, and believes that the likelihood of an event of
default is more than remote, but not more likely than not.
One
of the Companys bank covenants is a requirement to maintain accounts
receivable balances from certain subsidiaries above $8.0 million at each
quarter end during the term. Because the Companys revenues are dependent on
the price of natural gas and the volume of natural gas the Company delivers, to
the extent natural gas prices fall or the Companys volumes decline, the
Company could violate this covenant in the future. Beginning with the quarter
ended June 30, 2009, the Company is required to maintain a debt service
ratio, as defined, of not less than 1.5 to 1. For the quarter ended September 30,
2010, the Company was not in compliance with this covenant; however, PCB agreed
by letter dated November 1, 2010 to waive compliance with the covenant
until the next quarterly calculation at December 31, 2010. The entire amount of the Facility B Loan is
shown as current in the accompanying condensed consolidated balance sheets
based on the prevailing
accounting
guidance.
To the extent the Companys operating results do not materialize as
anticipated, the Company could violate this covenant again in the future. In
the event the Company violates any of the covenants in the future it would seek
another waiver from PCB. The Credit
Agreement is secured by the Companys interest in, and note receivable from,
DCE (described below), certain of the Companys accounts receivable and
inventory balances and 45 of the Companys LNG tanker trailers. The net book
value of the collateral securing the PCB loans was approximately $57.4 million
at September 30, 2010. The Company maintains $2.5 million in a
payment reserve account at PCB. PCB may, in the event of a default, withdraw
funds from the account to apply to the principal and interest payments due on
the A Line of Credit or the Facility B Loan. Such amount is included as
restricted cash in the Companys condensed consolidated balance sheet at
September 30, 2010.
In
conjunction with the DCE acquisition mentioned above, the Company also entered
into a Loan Agreement with DCE (the DCE Loan) to provide secured financing of
up to $14.0 million to DCE for future capital expenditures or other uses
as agreed to by the Company, in its sole discretion. As of September 30,
2010, the Company is owed approximately $10.6 million under the DCE Loan.
Interest on the unpaid balance accrues at a rate of 12% per annum and became
payable quarterly beginning on September 30, 2008. The principal amount of
the loan is due and payable in annual payments commencing on August 1,
2009, and continuing each anniversary date thereafter, with each such payment
being in an amount equal to the lesser of the aggregate principal amount of the
DCE Loan then outstanding or $2,800,000.
As referenced above, PCB agreed to forgo the Companys next Facility B Loan
payment in the amount of $2.0 million until January 31, 2011. The Company granted the same extension to DCE
for its next payment on the DCE Loan. On
August 1, 2013, the entire amount of unpaid principal and interest under
the DCE Loan is due and payable.
The
principal and accrued interest balances, as well as any interest income related
to the DCE Loan, are eliminated in the consolidated financial statements of the
Company. Any event of default by DCE on the DCE Loan results in a cross-default
of the Companys Credit Agreement with PCB. Events of default include failure
to make payments when due, DCEs failure to perform under the provisions of its
landfill lease with the City of Dallas, DCEs violation of a covenant under its
operating agreement and other standard events of default.
12
Table of Contents
In
connection with the closing of the Companys acquisition of the IMW Acquired
Business, the Acquisition Subsidiary issued the IMW Notes (as described in note
2 herein) to IMW.
Also
in connection with the closing of the Companys acquisition of the IMW Acquired
Business, the Acquisition Subsidiary entered into an Assumption Agreement (the
Assumption Agreement) with HSBC Bank Canada (HSBC) pursuant to which the
Acquisition Subsidiary assumed the obligations and liabilities of IMW under the
following arrangements with HSBC (collectively, the IMW Lines of Credit):
(i)
An
operating line of credit with a limit of $7,750,000 in Canadian dollars (CAD)
bearing interest at prime plus 1.25%, to assist in financing the day-to-day
working capital needs of the Acquisition Subsidiary.
(ii)
A
bank guarantee line with a limit of CAD$3,000,000, which allows the Acquisition
Subsidiary to provide guarantees and/or standby letters of credit to overseas
suppliers or bid/performance deposits on contracts.
(iii)
A
forward exchange contract line with a limit of CAD$13,750,000. The forward
exchange contract line allows the Acquisition Subsidiary to enter into foreign
exchange forward contracts up to the notional limit of CAD$13,750,000 (no
forward exchange contracts were outstanding at September 30, 2010).
(iv)
A
MasterCard limit with a maximum amount of CAD$150,000.
(v)
An
operating line of credit with a limit of 4,000,000 Renminbi (RMB)
(CAD$593,000) bearing interest at the 6 month Peoples Bank of China rate plus
2.5%.
(vi)
A
bank guarantee line with a limit of 1,000,000 RMB (CAD$148,000).
(vii)
A
16,750,000 Bengali Taka (CAD$239,000) operating line of credit bearing interest
at 14%.
(viii)
A
320,000,000 Columbian Peso (CAD$166,000) operating line of credit bearing
interest at the Colombia benchmark rate plus 7 to 9%.
The
IMW Lines of Credit are secured by a general security agreement providing a
first priority security interest in all present and after acquired personal
property of the Acquisition Subsidiary, including specific charges on all
serial numbered goods, inventory and other assets and assignment of risk
insurance (the Security). The IMW Lines of Credit contain no fixed repayment
terms or mandatory principal payments and are due on demand. Based on the
relevant accounting guidance, we have classified this debt pursuant to the
credit agreement as short-term given that it is due on demand.
The
Assumption Agreement with HSBC also includes certain financial covenants. Among
these financial covenants are that the Acquisition Subsidiary shall not permit:
1) its ratio of debt to tangible net worth to be greater than 3.25 to 1 until
December 31, 2010 and greater than 3.00 to 1 from January 1, 2011
onward, 2) its tangible net worth to at anytime be below CAD$3,000,000 and 3)
its ratio of current assets to current liabilities to be less than 1.15 to 1
until December 31, 2010 and less than 1.25 to 1 from January 1, 2011
onward. IMW is in compliance with the financial covenants as of September 30,
2010. Further, (i) 0884808 B.C. Ltd., a British Columbia corporation and a
subsidiary of the Company (Canadian AcqCo), guaranteed the Acquisition
Subsidiarys obligations under the IMW Lines of Credit, (ii) Canadian
AcqCo entered into a general security agreement with HSBC pursuant to which
Canadian AcqCo agreed that the IMW Lines of Credit are secured by a first
priority security interest in all of its present and after acquired personal
property, and (iii) Clean Energy, a California corporation and a
subsidiary of the Company (CE), agreed to inject not less than USD$2,000,000
of additional working capital into the Acquisition Subsidiary at the closing of
the Companys acquisition of the IMW Acquired Business.
In
addition, CE and Canadian AcqCo agreed that should the making of any scheduled
payment by the Acquisition Subsidiary to IMW under the IMW Notes result in the
Acquisition Subsidiary being in breach of the Assumption Agreement, the IMW
Lines of Credit or the Security, CE and Canadian AcqCo shall furnish the
Acquisition Subsidiary with the funds needed to remain in compliance with the
Assumption Agreement, the IMW Lines of Credit and the Security. Further, CE and
Canadian AcqCo agreed that should the Acquisition Subsidiary make any future
earn-out payments to the IMW shareholder in connection with the acquisition of
the IMW Acquired Business, and should the making of such earn-out payments
result in the Acquisition Subsidiary being in breach of the Assumption
Agreement, the IMW Lines of Credit or the Security, then CE and Canadian AcqCo
shall furnish the Acquisition Subsidiary with the funds needed to make such
earn-out payments and remain in compliance with the Assumption Agreement, the
IMW Lines of Credit and the Security.
13
Table of Contents
Note 12Earnings Per Share
Basic
earnings per share is based upon the weighted average number of shares
outstanding during each period. Diluted earnings per share reflects the impact
of assumed exercise of dilutive stock options and warrants. The information
required to compute basic and diluted earnings per share is as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
59,695,666
|
|
63,992,763
|
|
53,428,391
|
|
60,970,130
|
|
Certain
securities were excluded from the diluted earnings per share calculations at
September 30, 2009 and 2010, respectively, as the inclusion of the
securities would be anti-dilutive to the calculations. The amounts outstanding
as of September 30, 2009 and 2010 for these instruments are as follows:
|
|
September 30,
|
|
|
|
2009
|
|
2010
|
|
Options
|
|
9,186,614
|
|
9,563,055
|
|
Warrants
|
|
18,314,394
|
|
18,314,394
|
|
Note 13Comprehensive Loss
The
following table presents the Companys comprehensive loss for the nine months
ended September 30, 2009 and 2010:
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Net
loss attributable to Clean Energy Fuels Corp.
|
|
$
|
(31,331,396
|
)
|
$
|
(16,301,398
|
)
|
Derivative
unrealized gains (losses)
|
|
1,490,825
|
|
(5,129,379
|
)
|
Foreign
currency translation adjustments
|
|
289,887
|
|
201,237
|
|
Comprehensive
loss
|
|
$
|
(29,550,684
|
)
|
$
|
(21,229,540
|
)
|
Note 14Stock-Based Compensation
The
following table summarizes the compensation expense and related income tax
benefit related to the stock-based compensation expense recognized during the
periods:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Stock
options:
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$
|
3,551,992
|
|
$
|
3,259,927
|
|
$
|
10,572,136
|
|
$
|
9,221,647
|
|
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense, net of tax
|
|
$
|
3,551,992
|
|
$
|
3,259,927
|
|
$
|
10,572,136
|
|
$
|
9,221,647
|
|
Stock Options
The
following table summarizes the Companys stock option activity during the nine
months ended September 30, 2010:
|
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
at December 31, 2009
|
|
10,348,188
|
|
$
|
9.57
|
|
Granted
|
|
446,750
|
|
16.70
|
|
Exercised
|
|
(1,073,542
|
)
|
10.05
|
|
Cancelled/Forfeited
|
|
(158,341
|
)
|
13.37
|
|
Outstanding
at September 30, 2010
|
|
9,563,055
|
|
9.79
|
|
Exercisable
at September 30, 2010
|
|
5,879,328
|
|
8.97
|
|
|
|
|
|
|
|
|
14
Table of Contents
The
fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2010:
|
|
Nine Months Ended
September 30, 2010
|
|
Dividend
yield
|
|
0.00
|
%
|
Expected
volatility
|
|
87.69
|
%
|
Risk-free
interest rate
|
|
2.08
|
%
|
Expected
life in years
|
|
6.00
|
|
Based
on these assumptions, the weighted average grant date fair value of options
granted during the nine months ended September 30, 2010 was $15.66.
Note 15Use of Estimates
The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates. Current
economic conditions may require the use of additional estimates and these
estimates may be subject to a greater degree of uncertainty as a result of the
uncertain economy.
Note 16Environmental Matters, Litigation, Claims,
Commitments and Contingencies
The
Company is subject to federal, state, local, and foreign environmental laws and
regulations. The Company does not anticipate any expenditures to comply with
such laws and regulations that would have a material impact on the Companys
consolidated financial position, results of operations, or liquidity. The
Company believes that its operations comply, in all material respects, with
applicable federal, state, local and foreign environmental laws and
regulations.
The
Company may become party to various legal actions that arise in the ordinary
course of its business. During the course of its operations, the Company is
also subject to audit by tax authorities for varying periods in various
federal, state, local, and foreign tax jurisdictions. Disputes have and may
continue to arise during the course of such audits as to facts and matters of
law. On July 15, 2010, the Internal Revenue Service (IRS) sent the
Company a letter disallowing approximately $5.1 million related to certain
claims it made from October 1, 2006 to June 30, 2008 under the
Volumetric Excise Tax Credit program. The Company believes its claims were
properly made and has appealed the IRSs request for payment. It is impossible
at this time to determine the ultimate liabilities that the Company may incur
resulting from any lawsuits, claims and proceedings, audits, commitments,
contingencies and related matters or the timing of these liabilities, if any.
If these matters were to be ultimately resolved unfavorably, an outcome not
currently anticipated, it is possible that such outcome could have a material
adverse effect upon the Companys consolidated financial position or results of
operations. However, the Company believes that the ultimate resolution of such
actions will not have a material adverse affect on the Companys consolidated
financial position, results of operations, or liquidity.
Note 17Income Taxes
The
Company is required to recognize the impact of a tax position in its financial
statements if the position is more likely than not of being sustained by the
taxing authority upon examination, based on the technical merits of the
position. The Company accrues interest based on the difference between a tax
position recognized in the financial statements and the amount claimed on its
returns at statutory interest rates. The net interest incurred was immaterial
for the nine months ended September 30, 2009 and 2010. Further, the
Company accrues penalties if the tax position does not meet the minimum
statutory threshold to avoid penalties. No penalties have been accrued by the
Company. The Companys unrecognized tax benefits as of September 30, 2010
are unchanged from December 31, 2009.
15
Table of Contents
The
Company is subject to taxation in the United States and various states and
foreign jurisdictions. The Companys tax years for 2005 through 2009 are
subject to examination by various tax authorities. The Company is no longer
subject to U.S. or state examination for years before 2005. The Company is
currently under audit by the IRS for tax years 2006 through 2008. On
July 15, 2010, the IRS sent the Company a letter disallowing approximately
$5.1 million related to certain claims the Company made from
October 1, 2006 to June 30, 2008 under the Volumetric Excise Tax
Credit program. The Company believes its claims were properly made and has appealed
the IRSs request for payment.
The
Companys tax benefit for the period ended September 30, 2010 includes a
refund of approximately $1.3 million of alternative minimum taxes previously
paid attributable to the Companys election of the extended net operating loss
five-year carryback provision under the Worker, Homeownership, and Business
Assistance Act of 2009.
Note 18Fair Value Measurements
On
January 1, 2008, the Company adopted the authoritative guidance for fair value
measurements which defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measurements related to
financial instruments. In December 2007, the Financial Accounting Standard
Board (FASB) provided a one-year deferral of this guidance for non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis, at least annually. Accordingly,
the Company adopted this guidance for non-financial assets and non-financial
liabilities on January 1, 2009.
During
the nine months ended September 30, 2010, the Companys financial
instruments consisted of natural gas futures contracts, debt instruments,
Series I warrants, and the contingent consideration related to both its
BAF acquisition and its acquisition of the IMW Acquired Business. The Company
remeasures its contingent consideration based on the discounted future cash
flows of BAF and the IMW Acquired Business during the contingency periods,
which expire December 31, 2011 and March 31, 2014, respectively. The
Company records any change in its contingency obligation in selling, general
and administrative expenses in its condensed consolidated statements of
operations. The Company uses quoted forward price curves, discounted to reflect
the time value of money, to value its natural gas futures contracts. The
Company uses a Monte Carlo simulation model to value the Series I
warrants, which requires the Company to make certain estimates including
risk-free interest rates and the volatility of its stock price, among others.
The Companys futures contracts and contingent consideration obligation are
recorded in accrued liabilities for the short-term liability amount, and long-term
liabilities for the long-term liability amount, and the Series I warrants
are recorded in other long-term liabilities in the accompanying condensed
consolidated balance sheet at September 30, 2010. The fair market value of
the Companys debt instruments approximated their carrying values at
September 30, 2010.
The
following table reflects the fair value as defined by the authoritative
guidance of the Companys natural gas futures contracts and Series I
warrants at September 30, 2009:
|
|
Balance at
September 30,
2009
|
|
Quoted Prices
In Active Markets
for Identical Items
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Natural
gas futures contracts obligation
|
|
$
|
(836,342
|
)
|
$
|
|
|
$
|
(836,342
|
)
|
$
|
|
|
Series I
warrants
|
|
$
|
(30,182,411
|
)
|
$
|
|
|
$
|
|
|
$
|
(30,182,411
|
)
|
The
Company recorded a charge of $17,808,673 for the nine month period ended
September 30, 2009 in the statement of operations associated with the
Series I warrants.
16
Table of Contents
The
following table provides a reconciliation of the beginning and ending balances
for the Series I warrants at fair value using significant other
unobservable inputs (Level 3) for the nine months ended September 30,
2009:
|
|
Series I Warrants
|
|
Beginning
Balance, January 1, 2009
|
|
$
|
(12,373,738
|
)
|
Total
charges included in earnings for the period
|
|
(17,808,673
|
)
|
Purchases
|
|
|
|
Sales
|
|
|
|
Transfers
In/Out
|
|
|
|
Ending
Balance, September 30, 2009
|
|
$
|
(30,182,411
|
)
|
The
following table reflects the fair value as defined by the authoritative
guidance of the Companys natural gas futures contracts, Series I warrants
and contingent consideration at September 30, 2010:
|
|
Balance at
September 30,
2010
|
|
Quoted Prices
In Active Markets
for Identical Items
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Natural
gas futures contracts obligation
|
|
$
|
(4,970,244
|
)
|
$
|
|
|
$
|
(4,970,224
|
)
|
$
|
|
|
Series I
warrants
|
|
$
|
(23,863,637
|
)
|
$
|
|
|
$
|
|
|
$
|
(23,863,637
|
)
|
Contingent
consideration
|
|
$
|
(12,400,000
|
)
|
$
|
|
|
$
|
|
|
$
|
(12,400,000
|
)
|
The
Company recorded a gain of $5,876,854 for the nine month period ended
September 30, 2010 in the statement of operations associated with the
Series I warrants.
The
following table provides a reconciliation of the beginning and ending balances
for the contingent consideration and the Series I warrants at fair value
using significant unobservable inputs (Level 3) for the nine months ended
September 30, 2010:
|
|
Contingent
Consideration
|
|
Series I Warrants
|
|
Beginning
Balance, January 1, 2010
|
|
$
|
(3,100,000
|
)
|
$
|
(29,740,491
|
)
|
Total
gain included in earnings for the period
|
|
|
|
5,876,854
|
|
IMW
Purchased obligations
|
|
(9,300,000
|
)
|
|
|
Sales
|
|
|
|
|
|
Transfers
In/Out
|
|
|
|
|
|
Ending
Balance, September 30, 2010
|
|
$
|
(12,400,000
|
)
|
$
|
(23,863,637
|
)
|
Note 19Recently Adopted Accounting Changes and Recently
Issued Accounting Standards
In
June 2008, the FASB reached a consensus on determining whether an
instrument (or embedded feature) is indexed to an entitys own stock. The FASB
concluded, among other things, that contingent and other adjustment features in
equity-linked financial instruments are consistent with equity indexation if
they are based on variables that would be inputs to a plain vanilla option or
forward pricing model and they do not increase the contracts exposure to those
variables. The Companys Series I warrants issued on October 28, 2008
are linked to the Companys own equity shares; however, the investor has
protective pricing features commonly referred to as
down-round
protection, whereby the conversion price
potentially resets if the common stock price of the Company declines after issuance
or shares are issued by the Company at prices below the exercise price of the
warrants. As a result of this guidance, effective January 1, 2009, the
Company accounts for the Series I warrants as a derivative. The Company
recorded a cumulative-effect adjustment of approximately $2.6 million to
opening retained earnings and reclassed approximately $9.8 million from
additional paid-in capital to long-term liabilities on the date of adopting
this guidance, January 1, 2009. During 2009 and during the nine month
period ended September 30, 2010, the Company recorded a charge of
$17.4 million and a gain of $5.9 million, respectively, related to
valuing the Series I warrants.
In
October 2009, the FASB issued new authoritative guidance on
multi-deliverable revenue arrangements. This guidance establishes requirements
that must be met for an entity to recognize revenue from the sale of a
delivered item that is part of a multiple-element arrangement when other items
have not yet been delivered. One of those current requirements is that there be
objective and reliable evidence of the standalone selling price of the
undelivered items, which must be supported by either vendor-specific objective
evidence (VSOE) or third party evidence (TPE). This guidance amends previous
17
Table of Contents
guidance by eliminating the
requirement that all undelivered elements have VSOE or TPE before an entity can
recognize the portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE or TPE of the
standalone selling price for one or more delivered or undelivered elements in a
multiple-element arrangement, entities will be required to estimate the selling
prices of those elements. The overall arrangement fee will be allocated to each
element (both delivered and undelivered items) based on their relative selling
prices, regardless of whether those selling prices are evidenced by VSOE or TPE
or are based on the entitys estimated selling price. Application of the residual
method of allocating an overall arrangement fee between delivered and
undelivered elements will no longer be permitted under this new guidance.
Additionally, the new guidance will require entities to disclose more
information about their multiple-element revenue arrangements. The revised
guidance is effective for fiscal periods beginning on or after June 15,
2010. The adoption of this guidance did not have a material impact on the
Companys consolidated financial statements.
In
January 2010, the FASB issued new accounting guidance which intended to
improve disclosures about fair value measurements. The guidance requires
entities to disclose significant transfers in and out of fair value hierarchy
levels, the reasons for the transfers and to present information about
purchases, sales, issuances and settlements separately in the reconciliation of
fair value measurements using significant unobservable inputs (Level 3).
Additionally, the guidance clarifies that a reporting entity should provide
fair value measurements for each class of assets and liabilities and disclose
the inputs and valuation techniques used for fair value measurements using
significant other observable inputs (Level 2) and significant unobservable
inputs (Level 3). The Company has applied the new disclosure requirements
as of January 1, 2010, and the adoption of this guidance did not have a
material impact on the Companys consolidated financial statements.
Note 20Volumetric Excise Tax Credit (VETC)
The
Company recorded its VETC credits as revenue in its condensed consolidated
statements of operations as the credits were refundable and did not need to
offset income tax liabilities to be received. VETC revenues for the nine month
periods ended September 30, 2009 and 2010 were approximately
$11.8 million and $0.0 million, respectively. The legislation
providing for VETC expired on December 31, 2009.
Item 2.
Managements Discussion and Analysis of Financial Condition and Results
of Operations.
The
following Managements Discussion and Analysis of Financial Condition and
Results of Operations (this MD&A) should be read together with the
unaudited condensed consolidated financial statements and the related notes
included elsewhere in this report. For additional context with which to
understand our financial condition and results of operations, refer to the
MD&A for the fiscal year ended December 31, 2009 contained in our 2009
Annual Report on Form 10-K filed with the SEC on March 10, 2010, as
well as the consolidated financial statements and notes contained therein.
Cautionary Statement Regarding Forward Looking Statements
This MD&A and other sections of this report contain
forward looking statements. We make forward-looking statements, as defined by
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, and in some cases, you can identify these statements by forward-looking
words such as if, shall, may, might, will likely result, should, expect,
plan, anticipate, believe, estimate, project, intend, goal, objective,
predict, potential or continue, or the negative of these terms and other
comparable terminology. These forward-looking statements, which are based on
various underlying assumptions and expectations and are subject to risks,
uncertainties and other unknown factors, may include projections of our future
financial performance based on our growth strategies and anticipated trends in
our business. These statements are only predictions based on our current
expectations and projections about future events that we believe to be
reasonable. There are important factors that could cause our actual results,
level of activity, performance or achievements to differ materially from the
historical or future results, level of activity, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, those discussed under the caption Risk Factors in
this report and in our 2009 Annual Report on Form 10-K. In preparing this
MD&A, we presume that readers have access to and have read the MD&A in
our 2009 Annual Report on Form 10-K pursuant to Instruction 2 to
paragraph (b) of Item 303 of Regulation S-K. We undertake
no duty to update any of these forward-looking statements after the date of
filing of this report to conform such forward-looking statements to actual
results or revised expectations, except as otherwise required by law.
18
Table of Contents
Overview
We
provide natural gas solutions for vehicle fleets primarily in the United States
and Canada. Our primary business activity is selling compressed natural gas (CNG)
and liquefied natural gas (LNG) vehicle fuel to our customers. We also build,
operate and maintain fueling stations, manufacture and service advanced natural
gas fueling compressors, and related equipment, process and sell renewable
biomethane and provide natural gas vehicle conversions. Our customers include fleet operators in a
variety of markets, such as public transit, refuse hauling, airports, taxis and
regional trucking. In April 2008, we opened our first compressed natural
gas station in Lima, Peru, through our joint venture, Clean Energy del Peru. In
August 2008, we acquired 70% of the outstanding membership interest of
Dallas Clean Energy, LLC (DCE). DCE owns a facility that collects,
processes and sells renewable biomethane collected from a landfill in Dallas,
Texas. On October 1, 2009, we acquired 100% of BAF Technologies, Inc.
(BAF), a company that provides natural gas conversions, alternative fuel
systems, application engineering, service and warranty support and research and
development for natural gas vehicles.
On September 7, 2010, the Company, acting through
certain of its subsidiaries, completed its purchase of the advanced, non-lubricated
natural gas fueling compressor and related equipment manufacturing and
servicing business (the IMW Acquired Business) of I.M.W. Industries Ltd., a
British Columbia corporation (IMW).
The
following overview discusses matters on which our management primarily focuses
in evaluating our financial condition and operating performance as well as
recent and anticipated business trends.
Sources of revenue.
We generate the majority of our revenue from
selling CNG and LNG and providing operations and maintenance services to our
customers. The balance of our revenue is provided by designing and constructing
natural gas fueling stations, financing our customers natural gas vehicle
purchases, sales of pipeline quality biomethane produced by our DCE joint
venture, sales of natural gas vehicles through our wholly owned subsidiary BAF,
and commencing on September 7, 2010, sales of advanced natural gas fueling
compressors and related equipment and maintenance services through the IMW Acquired
Business.
Key operating data.
In evaluating our operating performance, our
management focuses primarily on: (1) the amount of CNG and LNG gasoline
gallon equivalents delivered (which we define as (i) the volume of
gasoline gallon equivalents we sell to our customers, plus (ii) the volume
of gasoline gallon equivalents dispensed to our customers at stations where we
provide operating and maintenance (O&M) services but do not directly sell
the CNG or LNG, plus (iii) our proportionate share of the gasoline gallon
equivalents sold as CNG by our joint venture in Peru, plus (iv) our
proportionate share of the gasoline gallon equivalents of biomethane produced
and sold as pipeline quality natural gas by DCE, (2) our gross margin
(which we define as revenue minus cost of sales), and (3) net income
(loss). The following table, which you should read in conjunction with our
condensed consolidated financial statements and notes contained elsewhere in
this report, presents our key operating data for the years ended
December 31, 2007, 2008 and 2009 and for the three and nine months ended
September 30, 2009 and 2010:
Gasoline gallon
equivalents
delivered (in millions)
|
|
Year Ended
December 31,
2007
|
|
Year Ended
December 31,
2008
|
|
Year Ended
December 31,
2009
|
|
Three Months
Ended
September 30,
2009
|
|
Three Months
Ended
September 30,
2010
|
|
Nine Months
Ended
September 30,
2009
|
|
Nine Months
Ended
September 30,
2010
|
|
CNG
|
|
48.0
|
|
47.6
|
|
67.9
|
|
19.9
|
|
20.2
|
|
48.3
|
|
60.0
|
|
Biomethane
|
|
|
|
2.0
|
|
6.4
|
|
1.9
|
|
1.8
|
|
4.3
|
|
5.6
|
|
LNG
|
|
27.3
|
|
23.9
|
|
26.7
|
|
7.7
|
|
9.3
|
|
18.9
|
|
25.4
|
|
Total
|
|
75.3
|
|
73.5
|
|
101.0
|
|
29.5
|
|
31.3
|
|
71.5
|
|
91.0
|
|
Operating
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
32,055,904
|
|
$
|
27,098,948
|
|
$
|
48,582,410
|
|
$
|
12,424,121
|
|
$
|
12,144,877
|
|
$
|
32,693,556
|
|
$
|
36,993,856
|
|
Net income (loss)
|
|
(8,894,362
|
)
|
(44,462,674
|
)
|
(33,248,701
|
)
|
(18,460,583
|
)
|
(1,829,874
|
)
|
(31,331,396
|
)
|
(16,301,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key trends in 2007, 2008, and 2009 and the first nine months
of 2010.
According to
the U.S. Energy Information Administration, demand for natural gas fuels in the
United States increased by approximately 29% during the period January 1,
2007 through December 31, 2009. We believe this growth in demand was
attributable primarily to the rising prices of gasoline and diesel relative to
CNG and LNG during these periods and increasingly stringent environmental
regulations affecting vehicle fleets.
The
number of fueling stations we served grew from 147 at December 31, 2004 to
211 at September 30, 2010 (a 43.5% increase). Included in this number are
all of the CNG and LNG fueling stations we own, maintain or with which we have
a fueling supply contract. The amount of CNG and LNG gasoline gallon
equivalents we delivered from 2005 to 2009 increased by 77.8%. The increase in
gasoline gallon equivalents delivered was the primary contributor to increased
revenues during these periods. Our cost of sales also increased during these
periods, which was attributable primarily to increased costs related to
delivering more CNG and LNG to our customers.
During
the last half of 2009 and the first nine months of 2010, we also experienced
reduced margins in certain markets, particularly in the municipal transit and
refuse sector. The reduction in margins is primarily a result of increased
competition and sales agreements with larger entities that have greater pricing
leverage. Also, in many cases, our agreements with our customers, including
governmental agencies, are subject to a competitive bidding process and we may
be required to reduce our prices to maintain our contracts as they come up for
bid. We also have significant contracts with government entities that are
experiencing large budget deficits and these customers have and may continue to
demand price reductions for
19
Table of Contents
our services. In addition,
in May and June of 2009, we acquired four compressed natural gas
operations and maintenance services contracts with municipal transit agencies
that have significant volume but smaller margins than we typically generate on
our fuel sales. As a result, the overall average margin on our fuel sales
across our business decreased during these periods. We believe that our margins
on fuel sales will improve in the future to the extent we are successful in
growing our retail CNG and LNG fueling operations, which is where we earn our
highest margin, relative to our lower margin operations, such as municipal
transit. If we are unsuccessful in growing our retail CNG and LNG fueling
operations, we may experience reduced margins. We may also lose contracts with
governmental customers if we are unwilling or unable to reduce our prices or
lose in the competitive bidding process, which would reduce our volumes. For
example, MTS of San Diego, which represented approximately six million
gasoline gallon equivalents of our CNG volume in 2009, recently conducted a
competitive bidding procurement and awarded the contract to a competitor
beginning July 27, 2010. We will need to grow our business with
non-government entities to replace volumes lost in competitive bid procurements
when we are not successful in retaining the contracts.
Recent developments.
On
September 7, 2010, the Company, acting through certain of its
subsidiaries, completed its purchase of the IMW Acquired Business. The IMW Acquired Business manufactures and
services advanced natural gas fueling compressors and related equipment for the
global natural gas fueling market. The
IMW Acquired Business is headquartered near Vancouver, British Columbia, has a
second manufacturing facility near Shanghai, China and has sales and service
offices in Bangladesh, Columbia and the United States.
We believe the acquisition of the IMW
Acquired Business will enable us to participate in the growth of natural gas
vehicle fueling overseas, as well as in North America, and enable us to offer
our customers a wider variety of natural gas vehicle fueling solutions.
On
August 30, 2010, we executed a non-binding Letter of Intent (the LOI) to
acquire all of the outstanding interests or substantially all of the assets of
Wyoming Northstar Incorporated and its affiliates (collectively, Northstar).
Northstar is primarily engaged in manufacturing, constructing and servicing LNG
and LCNG fueling facilities. Subject to the completion of our due diligence
investigation of Northstar and the execution of a definitive purchase
agreement, we agreed to purchase the Northstar business for consideration of up
to $16 million, with $6.5 million payable at closing and a portion of the
consideration to be allocated to employee retention programs. The remaining
consideration will be payable in equal payments over the five years following
the acquisition. The acquisition is subject to the final approval of a
Committee of our Board of Directors and Northstars Board of Directors. We plan
to complete due diligence and negotiation of the definitive agreement as soon
as possible, but there is no guarantee that we will be successful in completing
the acquisition.
Anticipated future trends.
We anticipate that, over the long term, the
prices for gasoline and diesel will continue to be higher than the price of
natural gas as a vehicle fuel, and more stringent emissions requirements will
continue to make natural gas vehicles an attractive alternative to traditional
gasoline and diesel powered vehicles. Our belief that natural gas will continue,
over the long term, to be a cheaper vehicle fuel than gasoline or diesel is
based in part on the growth in U.S. natural gas production. A 2008 Navigant
Consulting, Inc. study indicates that as a result of new unconventional
gas shale discoveries from 22 basins in the U.S., maximum estimates of total
recoverable domestic reserves from producers have increased to equal
118 years of U.S. production at 2007 production levels. The study
indicated a mean level of reserves equal to 88 years of supply at 2007 production
levels. According to the report, shale gas production growth from only the
major six shale resources in the U.S., plus the Marcellus shale, could become
27 billion cubic feet per day and as high as 39 billion cubic feet
per day by 2015. Navigant has also indicated that development of the shale
resources base has resulted in a substantial surplus of natural gas compared to
demand of as much as 11 billion cubic feet per day. These current surplus
levels are 18% of annual average historical U.S. consumption levels of
approximately 20 Tcf per year; providing sufficient gas supply to meet the
requirements of all existing markets and to meet new market requirements. Based
on analyst reports, we believe that there is a significant worldwide supply of
natural gas relative to crude oil as well. According to the 2009 BP Statistical
Review of World Energy, on a global basis, the ratio of proven natural gas
reserves to 2008 natural gas production was 44% greater than the ratio of
proven crude oil reserves to 2008 crude oil production. This analysis suggests
significantly greater longer term availability of natural gas than crude oil
based on current consumption.
We
believe there will be significant growth in the consumption of natural gas as a
vehicle fuel among vehicle fleets, and our goal is to capitalize on this trend
and enhance our leadership position as this market expands. With our recent
acquisition of the IMW Acquired Business, we are now a fully integrated
provider of advanced compression technology, station-building and fueling. We have built natural gas fueling stations,
and plan to build additional natural gas fueling stations, that will provide
LNG to fleet vehicles at the Ports of Los Angeles and Long Beach and for other
regional corridors throughout the United States. We also anticipate expanding
our sales of CNG and LNG in the other markets in which we operate, including
public transit, regional trucking, refuse hauling and airports. Consistent with
the anticipated growth of our business, we also expect that our operating costs
and capital expenditures will increase, primarily from the anticipated
expansion of our station network or LNG production capacity, as well as the
logistics of delivering more CNG and LNG to our customers. We also anticipate
that we will continue to seek to acquire assets and/or businesses that are in
the natural gas fueling infrastructure or biomethane production business that
may require us to raise additional capital. Additionally, we have and will
continue to increase our sales and marketing team and other necessary personnel
as we seek to expand our existing markets and enter new markets, which will
also result in increased costs.
Continuing
high unemployment rates and reduced economic activity may reduce our
opportunities to attract new fleet customers. Many governmental entities, which
represented approximately 37% of our revenues for the nine months ended
September 30, 2010, are experiencing significant budget deficits as a
result of the economic recession and have been, and may continue to be, unable
to invest in new natural gas vehicles for their transit or refuse fleets or may
be compelled to reduce public transportation and services, or the prices they
pay for these services, which would negatively affect our business.
20
Table of Contents
Sources of liquidity and anticipated capital expenditures.
Liquidity is the ability to meet present and
future financial obligations either through operating cash flows, the sale or
maturity of existing assets, or by the acquisition of additional funds through
capital management. Historically, our principal sources of liquidity have
consisted of cash provided by operations and financing activities.
We
anticipate that we will need to raise capital in order to continue to fund the
growth of our business. Our current business plan calls for approximately $17.1
million in capital expenditures from October 1, 2010 through
December 31, 2010, primarily related to construction of new fueling
stations. We may also elect to invest additional amounts in expansion of our
California LNG plant, expansion of our DCE landfill gas processing plant, or
for other acquisitions or investments in companies or assets in the natural gas
fueling infrastructure, services and production industries, including
biomethane production. We will need to raise additional capital as necessary to
fund any expansion of our California LNG plant or DCE landfill gas plant,
acquisitions or other capital expenditures or investments that we cannot fund
through available cash, our line of credit from PCB, or cash generated by
operations. The timing and necessity of any future capital raise will depend on
our rate of new station construction, which may be affected by any federal
legislation that provides incentives for natural gas vehicle purchases and fuel
use, any decision to expand our California LNG plant or DCE gas processing
plant and potential merger or acquisition activity. For more information, see Liquidity
and Capital Resources below. We may not be able to raise capital on terms that
are favorable to existing stockholders or at all. Any inability to raise
capital may impair our ability to invest in new stations, expand our California
LNG plant or DCE gas processing plant, develop natural gas fueling
infrastructure and invest in strategic transactions or acquisitions and reduce
our ability to grow our business and generate increased revenues.
Volatility in operating results related to Series I
warrants.
Beginning
January 1, 2009, under recent accounting guidance, we are required to
record the change in the fair market value of our Series I warrants in our
financial statements until the Series I warrants are exercised or expire.
If the price of our common stock increases during future periods when our
Series I warrants are outstanding, we may be required to recognize
material losses based on the valuation of the outstanding Series I
warrants. We recognized a (gain) loss of $0.2 million, $2.2 million,
$15.4 million, ($0.4) million, $18.6 million, ($16.6) million, and ($7.9)
million, related to recording the fair market value changes of our
Series I warrants in the quarters ended March 31, 2009, June 30,
2009, September 30, 2009, December 31, 2009, March 31, 2010,
June 30, 2010, and September 30, 2010, respectively. Our earnings or
loss per share have been and will likely continue to be materially impacted by
future gains or losses we are required to take as a result of valuing our
Series I warrants.
Volatility in operating results related to BAF &
IMW contingent consideration.
Under recent business combination accounting
guidance, we are required to record the change in the value of the contingent
consideration related to our acquisitions of both BAF and the IMW Acquired
Business, in our financial statements through the contingency period, which
expires December 31, 2011 for BAF, and on March 31, 2014 for the IMW
Acquired Business.
If
the anticipated results of BAF or the IMW Acquired Business increase or
decrease during future periods, we may be required to recognize material losses
or gains based on the valuation of the increased or decreased consideration due
to the former BAF and IMW shareholders.
To record the change in value of the BAF contingent consideration, we
recognized losses of $0.3 million and $0.2 million during the
quarters ended March 31, 2010 and June 30, 2010, respectfully, and we
recognized a gain of $0.5 million during the quarter ended September 30,
2010. Subsequent to September 7,
2010, the closing date of the acquisition of the IMW Acquired Business, we
determined that no adjustment is required to the value of the contingent
consideration owed to the former IMW shareholder during the quarter ended September 30,
2010. Our earnings or loss per share may
be materially impacted by future gains or losses we are required to take as a
result of changes in the contingent consideration amount.
Business risks and uncertainties.
Our business and prospects are exposed to
numerous risks and uncertainties. For more information, see Risk Factors in
Part II, Item 1A of this report.
Operations
We
generate revenues principally by selling CNG and LNG and providing O&M
services to our vehicle fleet customers. For the nine months ended
September 30, 2010, CNG and biomethane (together) represented 72% and LNG
represented 28% of our natural gas sales (on a gasoline gallon equivalent
basis). To a lesser extent, we generate revenues by designing and constructing
fueling stations and selling or leasing those stations to our customers. We
also generate material revenues through sales of biomethane produced by our
joint venture subsidiary DCE, sales of natural gas vehicles by our wholly owned
subsidiary BAF, and commencing on September 7, 2010, sales of advanced
natural gas fueling compressors and related equipment and maintenance services
through the IMW Acquired Business. Substantially all of our operating and
maintenance revenues are generated from CNG stations, as owners of LNG stations
tend to operate and maintain their own stations. Substantially all of our
station sale and leasing revenues have been generated from CNG stations.
21
Table of Contents
CNG Sales
We
sell CNG through fueling stations located on our customers properties and
through our network of public access fueling stations. At these CNG fueling
stations, we procure natural gas from local utilities or brokers under
standard, floating-rate arrangements and then compress and dispense it into our
customers vehicles. Our CNG sales are made primarily through contracts with
our fleet customers. Under these contracts, pricing is determined primarily on
an index-plus basis, which is calculated by adding a margin to the local index
or utility price for natural gas. CNG sales revenues based on an index-plus
methodology increase or decrease as a result of an increase or decrease in the
price of natural gas. We also sell a small amount of CNG under fixed-price
contracts. We will continue to offer fixed price contracts, as appropriate, and
consistent with our natural gas hedging policy that was revised in May 2008.
Our fleet customers typically are billed monthly based on the volume of CNG
sold at a station. The remainder of our CNG sales are on a per fill-up basis at
prices we set at the pump based on prevailing market conditions. These
customers typically pay using a credit card at the station.
LNG Sales
We
sell substantially all of our LNG to fleet customers, who typically own and
operate their fueling stations. We also sell LNG to customers at our two public
LNG stations and for non-vehicle use. For the first nine months of 2010, we
procured 24.8% of our LNG from third-party producers, and we produced the
remainder of the LNG at our liquefaction plants in Texas and California. For
LNG that we purchase from third-parties, we may enter into take or pay
contracts that require us to purchase minimum volumes of LNG at index-based
rates. We deliver LNG via our fleet of 58 tanker trailers to fueling stations,
where it is stored and dispensed in liquid form into vehicles. We sell LNG
principally through supply contracts that are priced on either a fixed-price or
index-plus basis. LNG sales revenues based on an index-plus methodology
increase or decrease as a result of an increase or decrease in the price of
natural gas. We also provided price caps to certain customers on the index
component of their index-plus pricing arrangement for certain contracts we
entered into on or prior to December 31, 2006. Effective January 1,
2007, we ceased offering price-cap contracts to our customers, but we will
continue to perform our obligations under price-cap contracts we entered into
before January 1, 2007. We will continue to offer fixed price contracts as
appropriate and consistent with our natural gas hedging policy adopted in May 2008.
Our LNG contracts provide that we charge our customers periodically based on
the volume of LNG supplied.
Government Incentives
From
October 1, 2006 through December 31, 2009, we received a volumetric
excise tax credit (VETC) of $0.50 per gasoline gallon equivalent of CNG and
$0.50 per liquid gallon of LNG that we sold as vehicle fuel to certain
customers. The tax credit was responsible for a significant amount of our
historical revenues. Based on the service relationship we had with our
customers, either we or our customers were able to claim the credit. We
recorded these tax credits as revenues in our condensed consolidated statements
of operations as the credits were fully refundable and did not need to offset
tax liabilities to be received. As such, the credits were not deemed income tax
credits under the accounting guidance applicable to income taxes. In addition,
we believe the credits were properly recorded as revenue because we often
incorporated the tax credits into our pricing with our customers, thereby
lowering the actual price per gallon we charged them. The tax credit expired on
December 31, 2009. If the tax credit is not reinstated, our revenue in
future periods will be materially less than it would have been with the tax
credit and our ability to attract new customers, or retain old customers, may
also be reduced.
Operation and Maintenance
We
generate a portion of our revenue from operation and maintenance agreements for
CNG fueling stations where we do not supply the fuel. We refer to this portion
of our business as O&M. At these fueling stations, the customer contracts
directly with a local broker or utility to purchase natural gas. For O&M
services, we do not sell the fuel itself, but generally charge a per-gallon fee
based on the volume of fuel dispensed at the station. We include the volume of
fuel dispensed at the stations at which we provide O&M services in our
calculation of aggregate gasoline gallon equivalents sold.
Station Construction
We
generate a small portion of our revenue from designing and constructing fueling
stations and selling or leasing the stations to our customers. For these
projects, we act as general contractor or supervise qualified third-party
contractors. We charge construction fees or lease rates based on the size and
complexity of the project.
Vehicle Acquisition and Finance
In
2006, we commenced offering vehicle finance services for some of our customers
purchases of natural gas vehicles or the conversion of their existing gasoline
or diesel powered vehicles to operate on natural gas. We loan to certain
qualifying customers a portion of, and on occasion up to 100%, of the purchase
price of their natural gas vehicles. We may
22
Table of Contents
also lease vehicles in the
future. Where appropriate, we apply for and receive state and federal
incentives associated with natural gas vehicle purchases and pass these
benefits through to our customers. We may also secure vehicles to place with
customers or pay deposits with respect to such vehicles prior to receiving a
firm order from our customers, which we may be required to purchase if our
customer fails to purchase the vehicle as anticipated. Through
September 30, 2010, we have not generated significant revenue from vehicle
finance activities.
Landfill Gas
In
August 2008, we acquired 70% of the outstanding membership interests of
DCE for a purchase price of $19.6 million including transaction costs. DCE
owns a facility that collects, processes and sells biomethane from the McCommas
Bluff landfill located in Dallas, Texas. From the acquisition date through
December 31, 2008, for the year ended December 31, 2009 and for the
nine months ended September 30, 2010, DCE generated approximately
$1.8 million, $7.9 million and $8.5 million, respectively, in revenue
from sales of biomethane, all of which is included in our condensed
consolidated statements of operations.
On
April 3, 2009, DCE entered into a fifteen year gas sale agreement with
Shell Energy North America (US), L.P. (Shell) for the sale by DCE to
Shell of biomethane produced by DCEs landfill gas processing facility.
DCE
retains the right to reserve from the gas sale agreement up to 500 MMBtus per
day of biomethane for sale as a vehicle fuel. To the extent that DCE produces
volumes of biomethane in excess of the volumes sold under the agreement with
Shell, DCE will either attempt to sell such volumes at then-prevailing market
prices or seek to enter into another gas sale agreement in the future. There is
no guarantee that DCE will produce or be able to sell up to the maximum volumes
called for under the agreement, and DCEs ability to produce such volumes of
biomethane is dependent on a number of factors beyond DCEs control including,
but not limited to, the availability and composition of the landfill gas that
is collected, the impact on DCEs operations of the operation of the landfill
by the City of Dallas and the reliability of the processing plants critical
equipment. The processing equipment is currently being expanded and upgraded,
which may result in significant down time to complete the work, which
consequently may reduce DCEs sales of biomethane during the expansion and
upgrade work. The expansion and upgrade work is anticipated to continue into
the fourth quarter of 2011.
The
sale price for the gas under the agreement with Shell is fixed and increases in
2011. The sale price for the gas represents a substantial premium to the
current prevailing prices for natural gas at November 9, 2010.
Under
the terms of the agreement, DCE has retained the rights to any available
greenhouse gas emission reduction credits that may be generated through the
operation of the landfill gas collection and processing facility, provided that
DCE must supply Shell with a sufficient number of such credits to enable the
end-user of the gas to meet applicable net-zero emissions requirements under
the relevant renewable portfolio standard with respect to use of the biomethane
in power generation. Given the complex and changing standards and requirements
in the market for greenhouse gas emission reduction credits, there can be no
guarantee that any greenhouse gas emission credits will be generated or sold as
a result of DCEs landfill gas operations.
The
gas sale agreement is terminable by either party on thirty days written
notice if the California Energy Commission makes a written determination or
adopts a ruling or regulation after the date of the agreement that the
biomethane sold under the agreement will, from the date of such ruling or
regulation, no longer qualify as a California Renewable Portfolio Standard
eligible fuel. In addition, Shell has the right to terminate the agreement upon
thirty days written notice if the volumes of biomethane produced and
delivered, calculated monthly on a rolling two-year average, are less than an
annual average of 630,720 MMBtu per year (or 2,083 MMBtu per day).
Vehicle Conversion
On
October 1, 2009, we purchased all of the outstanding shares of BAF.
Founded in 1992, BAF provides natural gas vehicle conversions, alternative fuel
systems, application engineering, service and warranty support and research and
development. BAFs vehicle conversions include taxis, limousines, vans, pick-up
trucks and shuttle buses. BAF utilizes advanced natural gas system integration
technology and has certified NGVs under both EPA and CARB standards achieving
Super Ultra Low Emission Vehicle emissions. We generate revenues through the
sale of natural gas vehicles that have been converted to run on natural gas by
BAF. The majority of BAFs revenue during 2009 was derived from sales of
converted natural gas service vans to AT&T. During the fourth quarter of
2009 and for the nine months ended September 30, 2010, BAF contributed
approximately $6.9 million and $29.3 million, respectively, to our
revenue.
23
Table of Contents
Natural
Gas Fueling Compressors
On September 7, 2010, the
Company, acting through certain of its subsidiaries, completed its purchase of
the IMW Acquired Business. The IMW
Acquired Business manufactures and services advanced, non-lubricated natural
gas fueling compressors and related equipment for the global natural gas fueling
market. The IMW Acquired Business is
headquartered near Vancouver, British Columbia, has a second manufacturing
facility near Shanghai, China and has sales and service offices in Bangladesh,
Columbia and the United States.
Since the September 7,
2010 acquisition date, the IMW Acquired Business contributed approximately
$3.3 million to our revenue, excluding intercompany sales to us.
Volatility of Earnings and Cash Flows
Our
earnings and cash flows historically have fluctuated significantly from period
to period based on our futures activities, as all but a few of our futures
contracts have historically not qualified for hedge accounting under the
relevant derivative accounting guidance. We have therefore recorded any changes
in the fair market value of these contracts that did not qualify for hedge
accounting directly in our statements of operations in the line item derivative
(gains) losses along with any realized gains or losses generated during the
period. For example, we experienced derivative gains of $5.7 million for
the three months ended June 30, 2008, and derivative losses of
$6.0 million and $0.3 million for the three months ended September 30,
2008 and December 31, 2008, respectively. We had no derivative gains or
losses for the three months ended March 31, 2007, June 30, 2007,
September 30, 2007, December 31, 2007, March 31, 2008,
March 31, 2009, June 30, 2009, September 30, 2009,
December 31, 2009, March 31, 2010, June 30, 2010 and September 30,
2010 related to our futures contracts. In accordance with our natural gas
hedging policy, we plan to structure all subsequent futures contracts as cash
flow hedges under the applicable derivative accounting guidance, but we cannot
be certain that they will qualify. See Risk Management Activities below. If
the futures contracts do not qualify for hedge accounting, we could incur
significant increases or decreases in our earnings based on fluctuations in the
market value of the contracts from period to period.
Additionally,
we are required to maintain a margin account to cover losses related to our
natural gas futures contracts. Futures contracts are valued daily, and if our
contracts are in loss positions at the end of a trading day, our broker will
transfer the amount of the losses from our margin account to a clearinghouse.
If at any time the funds in our margin account drop below a specified
maintenance level, our broker will issue a margin call that requires us to
restore the balance. Consequently, these payments could significantly impact
our cash balances. At September 30, 2010, we had $5.9 million on deposit
in margin accounts, which are included in prepaid expenses and other current
assets and notes receivable and other long-term assets on the balance sheet.
The
decrease in the value of our futures positions and any required margin deposits
on our futures contracts that are in a loss position could significantly impact
our financial condition in the future.
Beginning
January 1, 2009, under recent accounting guidance, we are required to
record the change in the fair market value of our Series I warrants in our
financial statements. If the price of our common stock increases during future
periods when our Series I warrants are outstanding, we may be required to
recognize material losses based on the valuation of the outstanding
Series I warrants. We recognized a (gain) loss of $0.2 million,
$2.2 million, $15.4 million, ($0.4) million, $18.6 million,
($16.6) million, and ($7.9) million related to recording the fair market value
changes of our Series I warrants in the quarters ended March 31,
2009, June 30, 2009, September 30, 2009, December 31, 2009,
March 31, 2010, June 30, 2010, and September 30, 2010,
respectively (see note 19 to our condensed consolidated financial
statements contained elsewhere herein). Our earnings or loss per share have
been and likely will continue to be materially impacted by future gains or
losses we are required to take as a result of valuing our Series I
warrants.
Under
recent business combination accounting guidance, we are required to record the
change in the value of the contingent consideration related to our acquisitions
of both BAF and the IMW Acquired Business in our financial statements through
the contingency period, which expires on December 31, 2011 for BAF, and on
March 31, 2014 for the IMW Acquired Business. If the anticipated results of BAF or the IMW
Acquired Business increase or decrease during future periods, we may be
required to recognize material losses or gains based on the valuation of the
increased or decreased consideration due to the former BAF and IMW
shareholders. To record the change in
value of the BAF contingent consideration, we recognized losses of
$0.3 million and $0.2 million during the quarters ended March 31,
2010 and June 30, 2010, respectfully, and we recognized a gain of $0.5
million during the quarter ended September 30, 2010. Subsequent to September 7, 2010, the
closing date of the acquisition of the IMW Acquired Business, we determined
that no adjustment is required to the value of the contingent consideration owed
to the former IMW shareholder during the quarter ended September 30, 2010.
24
Table of Contents
Debt Compliance
Our
credit agreement with PCB (Credit Agreement) requires us to comply with
certain covenants. We may not incur indebtedness or liens except as permitted
by the Credit Agreement, or declare or pay dividends. We must maintain, on a
quarterly basis, minimum liquidity of not less than $6.0 million, accounts
receivable balances, as defined, of not less than $8.0 million,
consolidated net worth, as defined, of not less than $150.0 million, and a
debt to equity ratio, as defined, of not more than 0.3 to 1. Beginning in the
quarter ended June 30, 2009, we must also maintain a specific minimum debt
service ratio at each quarter end. Effective in the fourth quarter of 2008, we
established a lock-box arrangement with PCB subject to the Credit Agreement.
Funds received from our customers are remitted to the lock-box and then deposited
to a PCB bank account. The remitted funds are not used to pay-down the balance
of the Credit Agreement unless there is an event of default on the Credit
Agreement. One of the events of default is the occurrence of a material
adverse change, which is a subjective acceleration clause. Based on the
relevant accounting guidance, we have classified our debt pursuant to the
Credit Agreement as short-term or long-term, as appropriate, and we believe the
likelihood of an event of default is more than remote but not more likely than
not. If we default on the Credit Agreement, all of the obligations under the
Credit Agreement will become immediately due and payable and all funds received
in our lockbox held by PCB, plus $2.5 million we have deposited with PCB
in a payment reserve account, will be applied to the balance due on the Credit
Agreement. One of our bank covenants is a requirement to maintain accounts
receivable balances from certain subsidiaries above $8.0 million at each
quarter-end. To the extent natural gas prices continue to fall, or our volumes
decline, we could violate this covenant in the future. Beginning with the
quarter ended June 30, 2009, we are required to maintain a debt service
ratio, as defined, of not less than 1.5 to 1. We were not in compliance with
this covenant as of the quarter ended September 30, 2010 and received a
waiver from the bank. The entire amount
of the Facility B Loan is shown as current in the accompanying condensed
consolidated balance sheets based on prevailing accounting guidance. To the extent our operating results do not
materialize as planned, we could violate this covenant again in the future. In
the event we violate any of the covenants under the Credit Agreement, we would
seek another waiver from the bank.
Pursuant to the recent acquisition
of the IMW Acquired Business, our credit agreement with HSBC also requires that
a subsidiary of the Company (the Acquisition Subsidiary) comply with certain
financial covenants as detailed in note 11 of our condensed consolidated
financial statements contained elsewhere herein. Among those financial
covenants are that the Acquisition Subsidiary shall not permit 1) its ratio of
debt to tangible net worth to be greater than 3.25 to 1 until December 31,
2010 and greater than 3.00 to 1 from January 1, 2011 onward, 2) its
tangible net worth to at anytime be below CAD$3,000,000 and 3) its ratio of
current assets to current liabilities to be less than 1.15 to 1 until December 31,
2010 and less than 1.25 to 1 from January 1, 2011 onward. Should the
Acquisition Subsidiarys operating results not materialize as planned, it could
violate these covenants. If it were to violate a covenant, it would seek
a waiver from the bank, which the bank is not obligated to grant. If the
bank does not grant a waiver, all of the obligations under the credit agreement
would be due and payable. The Acquisition Subsidiary was in compliance
with these covenants as of September 30, 2010.
Risk Management Activities
Our
risk management activities, including the revised natural gas hedging policy
adopted by our board of directors in February 2007 and revised by our
board of directors on May 29, 2008, are discussed in Part II, Item 7
(Managements Discussion and Analysis of Financial Condition and Results of
Operation) of our 2009 Annual Report on Form 10-K.
Critical Accounting Policies
For
the first nine months of 2010, there were no material changes to the Critical
Accounting Policies discussed in Part II, Item 7 (Managements
Discussion and Analysis of Financial Condition and Results of Operations) of
our 2009 Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
For
a description of recently issued accounting pronouncements, see note 19 to
our condensed consolidated financial statements contained elsewhere herein.
25
Table of Contents
Results of Operations
The
following is a more detailed discussion of our financial condition and results
of operations for the periods presented:
|
|
Three Months
Ended
September 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Product
revenues
|
|
84.3
|
%
|
89.8
|
%
|
89.0
|
%
|
89.1
|
%
|
Service
revenues
|
|
15.7
|
|
10.2
|
|
11.0
|
|
10.9
|
|
Total
revenues
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
Product
cost of sales
|
|
52.5
|
|
68.3
|
|
59.1
|
|
66.4
|
|
Service
cost of sales
|
|
7.7
|
|
5.1
|
|
4.3
|
|
4.9
|
|
Selling,
general and administrative
|
|
33.6
|
|
34.7
|
|
37.7
|
|
34.5
|
|
Depreciation
and amortization
|
|
14.5
|
|
12.1
|
|
13.7
|
|
12.1
|
|
Derivative
loss (gain) on Series I warrant valuation
|
|
49.4
|
|
(17.2
|
)
|
19.9
|
|
(4.6
|
)
|
Total
operating expenses
|
|
157.7
|
|
103.0
|
|
134.7
|
|
113.3
|
|
Operating
loss
|
|
(57.7
|
)
|
(3.0
|
)
|
(34.7
|
)
|
(13.3
|
)
|
Interest
expense, net
|
|
(0.9
|
)
|
(0.2
|
)
|
(0.4
|
)
|
0.0
|
|
Other
income (expense), net
|
|
(0.3
|
)
|
(0.7
|
)
|
(0.3
|
)
|
(0.3
|
)
|
Income
from equity method investments
|
|
0.2
|
|
0.2
|
|
0.1
|
|
0.2
|
|
Loss
before income taxes
|
|
(58.7
|
)
|
(3.7
|
)
|
(35.3
|
)
|
(13.4
|
)
|
Income
tax benefit (expense)
|
|
(0.2
|
)
|
(0.6
|
)
|
(0.3
|
)
|
0.7
|
|
Net
loss
|
|
(58.9
|
)
|
(4.3
|
)
|
(35.6
|
)
|
(12.7
|
)
|
Loss
(income) attributable to noncontrolling interest
|
|
(0.3
|
)
|
0.2
|
|
0.5
|
|
0.0
|
|
Net
loss attributable to Clean Energy Fuels Corp.
|
|
(59.2
|
)
|
(4.1
|
)
|
(35.1
|
)
|
(12.7
|
)
|
Three Months Ended September 30, 2010 Compared to Three
Months Ended September 30, 2009
Revenue.
Revenue increased by $14.5 million to
$45.7 million in the three months ended September 30, 2010, from
$31.2 million in the three months ended September 30, 2009. A portion
of this increase was the result of an increase in the number of gallons delivered
from 29.5 million gasoline gallon equivalents to 31.3 million
gasoline gallon equivalents. The increase in volume was primarily due to an
increase in LNG sales of 1.6 million gallons, of which 1.1 million gallons was
from our port trucking customers and 0.4 million gallons was from our new
refuse customers (Republic Waste Services of Southern California and
Consolidated Disposal Services). We also experienced an increase of 0.3 million
gallons in CNG volume between periods, which was due to a combination of a 0.9
million gallon increase from our existing airport and refuse customers, volume
growth from our share of our joint venture in Peru, and a 0.5 million gallon
increase from new refuse and regional trucking customers. These volume
increases were offset by the 1.1 million gallons decrease in transit volumes as
a result of a competitive bidding procurement that was awarded to a competitor.
Revenue also increased by $9.3 million between periods from sales of
natural gas vehicle equipment by BAF, which we acquired on October 1,
2009. We also experienced a $1.6 million increase in station construction
revenues between periods. Our effective price per gallon was $1.00 in the three
months ended September 30, 2010, which represents a $0.07 per gallon increase
from $0.93 in the three months ended September 30, 2009. The increase was
primarily due to an increase in natural gas prices between periods and an increase
in the price we are charging for our biomethane. Our acquisition of the IMW
Acquired Business on September 7, 2010 contributed $3.3 million to our increased
revenue between periods. These increases were offset by the decrease in our
fuel tax revenue between periods as the fuel tax credits expired on
December 31, 2009. We did not record any fuel tax revenues in the third
quarter of 2010 and we recorded $3.7 million of revenue related to fuel
tax credits in the third quarter of 2009.
Cost of sales.
Cost of sales increased by $14.7 million
to $33.5 million in the three months ended September 30, 2010, from
$18.8 million in the three months ended September 30, 2009. Our cost
of sales primarily increased between periods as a result of delivering more
volume to our customers together with $6.7 million of increased costs
related to BAFs vehicle equipment sales, which we began to recognize on
October 1, 2009 when we acquired the company. We also experienced a
$1.6 million increase in station construction costs between periods. We
also recognized $2.4 million in costs related to sales of compressor equipment
and services by the IMW Acquired Business, which we began to recognize on September 7,
2010 when we acquired the IMW Acquired Business. Our effective cost per gallon increased by
$0.09 per gallon during the period to $0.73 per gallon. This increase was primarily the result of an increase
in natural gas prices between periods.
26
Table of Contents
Selling, general and administrative.
Selling, general and administrative expenses
increased by $5.4 million to $15.9 million in the three months ended
September 30, 2010, from $10.5 million in the three months ended
September 30, 2009. The increase was primarily the result of our salaries
and benefits amount increasing by $2.0 million between periods as we
increased our employee headcount from 158 at September 30, 2009 to 622
(including the addition of 351 and 80 IMW and BAF employees,
respectively) at September 30, 2010. Our professional fees increased
$0.8 million between periods primarily for legal, audit and consulting
services related to our acquisition of the IMW Acquired Business. In addition,
our travel and entertainment expenses increased $0.4 million between
periods, primarily due to increased travel of our sales team. Our marketing
expenses increased $0.4 million between periods due to certain advertising
we conducted related to the Ports of Los Angeles and Long Beach. We also
experienced a $0.8 million increase in business insurance, contract labor,
software/hardware maintenance, training/seminars and office supplies related to
our continued business growth. Our bad debt expense increased $1.4 million due
to a reversal of our BAF loan provision in the third quarter of 2009.
Offsetting these increases was a decrease of $0.5 million during the third
quarter of 2010 related to a decrease in the BAF contingent consideration
liability and a decrease of $0.3 million between periods related to our
stock-based compensation expense.
Depreciation and amortization.
Depreciation and amortization increased by
$1.0 million to $5.5 million in the three months ended
September 30, 2010, from $4.5 million in the three months ended
September 30, 2009. This increase was primarily due to additional
depreciation expense in the three months ended September 30, 2010 related
to increased property and equipment balances between periods, including our
expanded station network. Our September 30, 2010 amortization expense
includes increased amortization of the intangible assets we obtained in
connection with our BAF acquisition in the fourth quarter of 2009 and the acquisition
of the IMW Acquired Business on September 7, 2010.
Derivative (gain) loss on Series I warrant valuation.
Derivative (gain) loss decreased by
$23.3 million to a gain of $7.9 million in the three months ended
September 30, 2010, from a loss of $15.4 million in the three months
ended September 30, 2009. The decrease represents the decreased fair
market value of our outstanding Series I warrants based on our
mark-to-market accounting on our Series I warrants (see notes 18 and
19 to our condensed consolidated financial statements contained elsewhere
herein) during the three month period ended September 30, 2010.
Interest income (expense), net.
Interest income (expense), net, decreased by
$0.2 million from $0.3 million in the three months ended September 30,
2009, to $0.1 million in the three months ended September 30, 2010. This
decrease was primarily the result of a decrease in interest expense, net of
amounts capitalized, in the three months ended September 30, 2010 as we
repaid in full our Facility A Loan on October 7, 2009 (see note 11 to our
condensed consolidated financial statements contained elsewhere herein).
Other income (expense), net.
Other income (expense), net, increased by
$0.2 million to $0.3 million of expense for three months ended
September 30, 2010. This increase was primarily related to foreign
currency exchange losses of the IMW Acquired Business in the three months ended
September 30, 2010 that did not occur in the three months ended September 30,
2009.
Income from equity method investments.
There was no significant change in income
from equity method investments between the three months ended
September 30, 2010 and the three months ended September 30, 2009.
Loss (income) attributable to noncontrolling interest.
Loss (income) attributable to noncontrolling
interest was $80,000 for the noncontrolling interest in the net income of DCE
in the three months ended September 30, 2009, as compared to $94,000 for
the noncontrolling interest in the net loss of DCE in the three months ended
September 30, 2010. The noncontrolling interest represents the 30%
interest of our joint venture partner.
Nine Months Ended September 30, 2010 Compared to Nine Months
Ended September 30, 2009
Revenue.
Revenue increased by $39.4 million to
$128.7 million in the nine months ended September 30, 2010, from
$89.3 million in the nine months ended September 30, 2009. A portion
of this increase was the result of an increase in the number of gallons
delivered from 71.5 million gasoline gallon equivalents to 91.0 million
gasoline gallon equivalents. The increase in volume was partly from an increase
in CNG sales of 11.7 million gallons and an increase in biomethane sales
(our 70% share of the biomethane sales of DCE) of 1.3 million gallons. The
acquisition of four compressed natural gas operations and maintenance services
contracts in May and June of 2009, four new refuse customers, and one
new regional trucking customer together accounted for 9.6 million gallons
of the CNG volume increase. The volume growth from our existing public and
refuse customers, combined with the volume growth from our share of our joint
venture in Peru, contributed to the remaining CNG volume increase. We also
experienced an increase of 6.5 million gallons in LNG volume between periods,
which was primarily due to the volume growth of 2.5 million gallons from
our existing transit and refuse customers, combined with a 3.1 million
gallon increase from our port trucking customers. We also had LNG volume
increases of 0.9 million gallons from two new refuse customers and one new
regional trucking customer. Revenue also increased by $29.3 million
between periods from sales of natural gas vehicle equipment by BAF, which we acquired
on October 1, 2009. Our acquisition of the IMW Acquired Business on September 7,
2010 contributed $3.3 million to our increased revenue between periods. Our
effective price per gallon was consistent between periods at $1.01. Offsetting our revenue increases was a
decrease in our fuel tax revenues between periods as the fuel tax credits
expired on December 31, 2009. We did not record any fuel tax revenues in
the first nine months of 2010, and we recorded $11.8 million of revenue
related to fuel tax credits in the first nine months of 2009. We also
experienced a $1.1 million decrease in station construction revenues
between periods.
27
Table of Contents
Cost of sales.
Cost of sales increased by $35.1 million
to $91.7 million in the nine months ended September 30, 2010, from
$56.6 million in the nine months ended September 30, 2009. Our cost
of sales primarily increased between periods as a result of delivering more
volume to our customers together with $21.0 million of increased costs
related to BAFs vehicle equipment sales, which we began to recognize on
October 1, 2009 when we acquired the company. We also recognized $2.4
million of costs from sales of compressor equipments and services by the IMW
Acquired Business, which we began to recognize on September 7, 2010 when
we acquired the IMW Acquired Business. These increases were offset by the
decrease in our effective cost per gallon of $0.02 per gallon, to $0.71 per
gallon, in the nine months ended September 30, 2010. We also experienced a
$0.9 million decrease in station construction costs between periods.
Selling, general and administrative.
Selling, general and administrative expenses
increased by $10.8 million to $44.4 million in the nine months ended
September 30, 2010, from $33.6 million in the nine months ended
September 30, 2009. A significant portion of this increase was the result
of our salaries and benefits amount increasing by $5.0 million between
periods as we increased our employee headcount from 158 at September 30,
2009 to 622 (including the addition of 351 and 80 IMW and BAF employees, respectively)
at September 30, 2010. We also experienced a $2.4 million increase in
business insurance, contract labor, software/hardware maintenance,
training/seminars and office supplies related to our continued business growth.
Our travel and entertainment expenses increased $1.1 million between
periods, primarily due to increased travel of our sales team. In addition, our
professional fees increased $1.5 million between periods, primarily for
legal, audit and consulting services related to the acquisition of the IMW
Acquired Business. Our bad debt expense increased $1.4 million due to a
reversal of our BAF loan provision in the third quarter of 2009. Our marketing
expenses increased $0.6 million between periods due to certain advertising
we conducted related to the Ports of Los Angeles and Long Beach.
Depreciation and amortization.
Depreciation and amortization increased by
$3.3 million to $15.6 million in the nine months ended
September 30, 2010, from $12.3 million in the nine months ended
September 30, 2009. This increase was due to additional depreciation
expense in the nine months ended September 30, 2010 related to increased
property and equipment balances between periods, primarily related to our expanded
station network. Our September 30, 2010 amortization expense includes
increased amortization of the intangible assets we obtained in connection with
our acquisition of the operation and maintenance contracts we acquired during
the second quarter of 2009, BAF in the fourth quarter of 2009 and the acquisition
of the IMW Acquired Business on September 7, 2010.
Derivative gain (loss) on Series I warrant valuation.
Derivative (gain) loss decreased by $23.7
million to a gain of $5.9 million in the nine months ended
September 30, 2010, from a loss of $17.8 million in the nine months
ended September 30, 2009. The decrease represents the decreased non-cash
charge we took with respect to valuing our outstanding Series I warrants
based on our mark-to-market accounting for the warrants (see notes 18 and
19 to our condensed consolidated financial statements contained elsewhere
herein) during the nine month period ended September 30, 2010.
Interest income (expense), net.
Interest income (expense), net, increased by
$384,000 from $368,000 of expense for the nine months ended September 30,
2009, to $16,000 of income for the nine months ended September 30, 2010.
This increase was primarily the result of a decrease in interest expense, net
of amounts capitalized, in the first nine months of 2010 as we repaid in full
our Facility A Loan on October 7, 2009 (see note 11 to our condensed
consolidated financial statements contained elsewhere herein).
Other income (expense), net.
There was no significant change in other
income (expense), net between the nine months ended September 30, 2010 and the nine
months ended September 30, 2009.
Income from equity method investments.
Income from equity method investments
increased $71,000 to $201,000 of income
for the nine months ended September 30, 2010 related to our share of our
joint venture in Peru.
Loss (income) attributable to noncontrolling interest.
During the nine months ended
September 30, 2010, we recorded $27,000 for the noncontrolling interest in
the net loss of DCE, compared to $431,000 for the noncontrolling interest
in the net loss of DCE in the nine months ended September 30, 2009. The
noncontrolling interest represents the 30% interest of our joint venture
partner.
28
Table of Contents
Seasonality and Inflation
To
some extent, we experience seasonality in our results of operations. Natural
gas vehicle fuel amounts consumed by some of our customers tends to be higher
in summer months when buses and other fleet vehicles use more fuel to power
their air conditioning systems. Natural gas commodity prices tend to be higher
in the fall and winter months due to increased overall demand for natural gas
for heating during these periods.
Since
our inception, inflation has not significantly affected our operating results.
However, costs for construction, repairs, maintenance, electricity and
insurance are all subject to inflationary pressures and could affect our ability
to maintain our stations adequately, build new stations, build new LNG plants
and expand our existing facilities or materially increase our operating costs.
Liquidity and Capital Resources
Historically,
our principal sources of liquidity have consisted of cash provided by
operations and financing activities. In May 2007, we completed our initial
public offering of 10,000,000 shares of common stock at a public offering price
of $12.00 per share. Net cash proceeds from the initial public offering were
approximately $108.5 million, after deducting underwriting discounts,
commissions and offering expenses. On August 15, 2008, in connection with
our acquisition of 70% of the membership interests of DCE, we entered into a
credit agreement with PCB pursuant to which we borrowed $18.0 million
under a term loan and an additional $12.0 million under a line of credit
(see note 10 to the accompanying condensed consolidated financial
statements). On September 24, 2008, we sold 319,488 shares of our common
stock at a price of $15.65 per share to Boone Pickens Interests, Ltd. for
proceeds of approximately $5.0 million. On November 3, 2008, we sold
4,419,192 units of common stock and warrants for $7.92 per unit and we raised
net proceeds of approximately $32.5 million after deducting offering
costs. On July 1, 2009, we sold 9,430,000 shares of our common stock to
third party investors and received net proceeds of $73.2 million. On
October 7, 2009, we repaid the $18.0 million term loan with PCB and
simultaneously amended the Credit Agreement to obtain a $20 million line
of credit (LOC) from PCB. The $20 million LOC expires August 14,
2011, but we have a one year renewal option we can exercise as long as we are
not in default on the PCB debt facilities.
As of September 30, 2010, we have not drawn any loan amounts under
the new LOC and we had an outstanding balance of $9.9 million on our
Facility B Loan. As of September 30,
2010, the Acquisition Subsidiary had an outstanding balance of $6.8 million
under the IMW Lines of Credit. The Acquisition Subsidiary
also issued the following promissory notes to IMW
(collectively, the IMW Notes): (i) a promissory note with a principal
amount of $12,500,000 that is due and payable on January 31, 2011, (ii) a
promissory note with a principal amount of $12,500,000 that is due and payable
on January 31, 2012, (iii) a promissory note with a principal amount
of $12,500,000 that is due and payable on January 31, 2013, and (iv) a
promissory note with a principal amount of $12,500,000 that is due and payable
on January 31, 2014. Each payment
under the IMW Notes will consist of $5.0 million in cash and $7.5 million in
cash and/or shares of the Companys common stock (the exact combination of cash
and/or common stock to be determined at the Acquisition Subsidiarys option).
We also issued 4,017,408 shares of our common
stock to IMWs shareholder.
In
addition to funding operations, our principal uses of cash have been, and are
expected to be, the construction of new fueling stations, construction of LNG
production facilities, the purchase of new LNG tanker trailers, investment in
biomethane production, mergers and acquisitions, the financing of natural gas
vehicles for our customers and general corporate purposes, including making
deposits to support our derivative activities, geographic expansion
(domestically and internationally), expanding our sales and marketing
activities, support of legislative initiatives and for working capital for our
expansion. We have also acquired and may continue to seek to acquire and invest
in companies or assets in the natural gas and biomethane fueling
infrastructure, services and production industries. On August 31, 2010, we executed
a non-binding letter of intent to acquire all of the outstanding interests or substantially
all of the assets of Northstar for consideration of up to $16 million, with
$6.5 million payable at closing, and a portion of the consideration to be
allocated to employee retention programs. The remaining consideration will be
paid in equal installments over the five years following the closing. This
acquisition is subject to board approval, completion of due diligence, and
execution of a definitive purchase agreement. We financed our operations in the
first nine months of 2010 primarily through cash on hand and cash provided by
financing activities.
At
September 30, 2010, we had total cash and cash equivalents of
$32.2 million, compared to $67.1 million at December 31, 2009.
Cash
provided by operating activities was $11.8 million for the nine months
ended September 30, 2010, compared to $10.4 million for the nine months
ended September 30, 2009. The increase in operating cash flow resulted
primarily from changes in working capital balances due to timing differences
related to various cash flows between periods. Our operating cash flow, before
working capital changes, decreased between periods, mostly due to the loss of
fuel tax revenues in the first nine months of 2010 as the legislation providing
for the tax rebates expired December 31, 2009. We recorded
$11.8 million of fuel tax revenues in the first nine months of 2009.
Cash
used in investing activities was $57.1 million for the nine months ended
September 30, 2010, compared to $32.2 million for the nine months
ended September 30, 2009. Our purchases of property and equipment were $41.4 million
during the first nine months of 2010, compared to $25.4 million for the
same period in 2009. In May and June 2009, we acquired four compressed
natural gas operations and maintenance service contracts for $5.6 million.
We made an additional investment in the Vehicle Production Group, LLC (VPG),
a company developing a CNG taxi and a paratransit vehicle, during the first
nine months of 2009 of $4.2 million, compared to $0.4 million for the
same period in 2010. In September 2010, we invested $15.6 million in
initial payments related to the acquisition of the IMW Acquired Business.
29
Table of Contents
Cash
provided by financing activities for the nine months ended September 30,
2010 was $10.3 million, compared to $77.8 million for the nine months
ended September 30, 2009. The decrease was primarily related to the July 2009
common stock offering from which we received net proceeds of $73.2 million and
additional bank borrowings in the first nine months of 2009 of $7.2 million
from PCB to fund capital expenditures related to DCEs landfill plant upgrade.
Offsetting the decrease was current year stock option exercises, from which we
received net proceeds of approximately $10.8 million.
Our
financial position and liquidity are, and will be, influenced by a variety of
factors, including our ability to generate cash flows from operations, deposits
and margin calls on our futures positions, the level of any outstanding
indebtedness and the interest we are obligated to pay on this indebtedness, our
capital expenditure requirements (which consist primarily of station
construction, LNG plant construction costs, DCE plant construction costs and the
purchase of LNG tanker trailers and equipment) and any merger or acquisition
activity.
Capital Expenditures
Our
current business plan, calls for approximately $17.1 million in additional
capital expenditures from October 1, 2010 through the end of 2010, primarily
related to construction of new fueling stations. We may also require $6.5
million to fund the closing of our acquisition of Northstar if we are
successful in completing the acquisition in 2010. We anticipate that we will
need to raise capital to continue to fund the growth of our business. If we
have significant unanticipated capital expenditures, investments, acquisitions
or operating expenses, we may also seek to raise capital to fund such capital
expenditures, investments, acquisitions or expenses. We may not be able to
raise capital on terms that are favorable to existing stockholders or at all.
Any inability to raise capital may impair our ability to invest in new
stations, develop natural gas fueling infrastructure, invest in our biomethane
business, and invest in strategic transactions or acquisitions and reduce our
ability to generate increased revenues.
Contractual Obligations
The
following represents the scheduled maturities of our contractual obligations as
of September 30, 2010:
|
|
Payments Due by Period
|
|
Contractual Obligations:
|
|
Total
|
|
Remainder of
2010
|
|
2011 and 2012
|
|
2013 through 2015
|
|
2016 and beyond
|
|
Debt
and capital lease obligations(a)
|
|
$
|
69,362,439
|
|
$
|
7,365,134
|
|
$
|
32,760,521
|
|
$
|
29,236,784
|
|
$
|
0
|
|
Operating
lease commitments(b)
|
|
23,658,220
|
|
857,510
|
|
6,148,529
|
|
9,135,393
|
|
7,516,788
|
|
Take
or pay LNG purchase contracts(c)
|
|
23,160,094
|
|
1,263,356
|
|
7,114,350
|
|
9,175,275
|
|
5,607,113
|
|
Construction
contracts(d)
|
|
17,246,326
|
|
12,888,778
|
|
4,357,548
|
|
0
|
|
0
|
|
Total
|
|
$
|
133,427,079
|
|
$
|
22,374,778
|
|
$
|
50,380,948
|
|
$
|
47,547,452
|
|
$
|
13,123,901
|
|
(a)
Consists of debt
(including the IMW Notes) and capital lease obligations to finance equipment
purchases, including implied interest.
(b)
Consists of
various space and ground leases for our California LNG plant, offices and
fueling stations as well as leases for equipment.
(c)
The amounts in
the table represent our estimates for our fixed LNG purchase commitments under
two take or pay contracts.
(d)
Consists of our
obligations to fund various fueling station construction projects, net of
amounts funded through September 30, 2010, and excluding contractual
commitments related to station sales contracts.
Off-Balance Sheet Arrangements
At
September 30, 2010, we had the following off-balance sheet arrangements
that had, or are reasonably likely to have, a material effect on our financial
condition.
·
outstanding
surety bonds for construction contracts and general corporate purposes totaling
$21.7 million,
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·
two take-or-pay
contract for the purchase of LNG,
·
operating
leases where we are the lessee,
·
operating
leases where we are the lessor and owner of the equipment, and
·
firm
commitments to sell CNG and LNG at fixed prices.
We
provide surety bonds primarily for construction contracts in the ordinary
course of business, as a form of guarantee. No liability has been recorded in
connection with our surety bonds as we do not believe, based on historical
experience and information currently available, that it is probable that any
amounts will be required to be paid under these arrangements for which we will
not be reimbursed.
We
have entered into two contracts that require us to purchase minimum volumes of
LNG. One contract expires in June 2011, and the other contract expires in October 2017.
We
have entered into operating lease arrangements for certain equipment and for
our office and field operating locations in the ordinary course of business.
The terms of our leases expire at various dates through 2016. Additionally, in November 2006,
we entered into a ground lease for 36 acres in California on which we built our
California LNG liquefaction plant. The lease is for an initial term of thirty
years and requires payments of $230,000 per year, plus up to $130,000 per year
for each 30 million gallons of production capacity utilized, subject to
future adjustment based on consumer price index changes. We must also pay a
royalty to the landlord for each gallon of LNG produced at the facility, as
well as for certain other services that the landlord will provide. Commercial
operations began December 1, 2008, and the payments for this lease are
included in Operating lease commitments in the Contractual Obligations
table set forth above.
We
are also the lessor in various leases with our customers, whereby our customers
lease from us certain stations and equipment that we own.
Item 3.Quantitative and Qualitative Disclosures
about Market Risk
Commodity Risk.
We are subject to market risk with respect to
our sales of natural gas, which has historically been subject to volatile
market conditions. Our exposure to market risk is heightened when we have a
fixed price or price cap sales contract with a customer that is not covered by
a futures contract, or when we are otherwise unable to pass through natural gas
price increases to customers. Natural gas prices and availability are affected
by many factors, including weather conditions, overall economic conditions and
foreign and domestic governmental regulation and relations.
Natural
gas costs represented 42% (or 44 % excluding BAF) of our cost of sales for
fiscal year ending 2009 and 35% (or 47% excluding BAF and the IMW Acquired
Business) of our cost of sales for the nine month ended September 30,
2010. Prices for natural gas over the ten-year and nine-month period from
December 31, 1999 through September 30, 2010, based on the NYMEX
daily futures data, have ranged from a low of $1.65 per Mcf to a high of $19.38
per Mcf. At September 30, 2010, the NYMEX index price of natural gas was
$3.64 per Mcf.
To
reduce price risk caused by market fluctuations in natural gas, we may enter
into exchange traded natural gas futures contracts. These arrangements also
expose us to the risk of financial loss in situations where the other party to
the contract defaults on its contract or there is a change in the expected
differential between the underlying price in the contract and the actual price
of natural gas we pay at the delivery point.
We
account for these futures contracts in accordance with the accounting guidance
on derivatives. The accounting under this guidance for changes in the fair
value of a derivative depends upon whether it has been specified in a hedging
relationship and, further, on the type of hedging relationship. To qualify for
designation in a hedging relationship, specific criteria must be met and
appropriate documentation maintained. Our futures contracts did not qualify for
hedge accounting under this guidance for the years ended December 31, 2005
and 2006, and we did not have any derivative activity in 2007. Consequently,
any changes in the fair value of the derivatives during 2005 and 2006 were
recorded directly to our consolidated statements of operations. In 2008, we had
certain contracts that did not qualify for hedge accounting and we had two
derivative contracts to hedge two fixed supply contracts that did qualify for
hedge accounting. During 2009 and the nine month period ended
September 30, 2010, we had five futures contracts that did qualify for
hedge accounting.
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Table of Contents
The
fair value of the futures contracts we use is based on quoted prices in active
exchange traded or over the counter markets which are then discounted to
reflect the time value of money for contracts applicable to future periods. The
fair value of these futures contracts is continually subject to change due to
market conditions. In an effort to mitigate the volatility in our earnings
related to futures activities, in February 2007, our board of directors
adopted a revised natural gas hedging policy which restricts our ability to
purchase natural gas futures contracts and offer fixed price sales contracts to
our customers. This policy was further revised by our board of directors in May 2008.
We plan to structure prospective futures contracts so that they will be
accounted for as cash flow hedges under this guidance, but we cannot be certain
they will qualify. For more information, please read Risk Management
Activities above.
We
have prepared a sensitivity analysis to estimate our exposure to market risk
with respect to the futures contracts we hold as of September 30, 2010 to
hedge the fixed price component of certain supply contracts. If the price of
natural gas were to fluctuate (increase or decrease) by 10% from the price
quoted on NYMEX on September 30, 2010 ($3.64 per Mcf), we could expect a
corresponding fluctuation in the value of the contracts of approximately $0.9
million.
Item 4.Controls and Procedures
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and that such information
is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. We carried out an evaluation, under
the supervision of and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
Changes in Internal Control over Financial Reporting
On
September 7, 2010, the Company purchased the IMW Acquired Business. In the
third quarter, the Company began to integrate the acquisition into its internal
control over financial reporting structure. As such, there have been changes
during the quarter associated with the establishment of internal control over
financial reporting with respect to the IMW Acquired Business. There were no
other changes in our internal control over financial reporting that occurred
during the period covered by this Quarterly Report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II.OTHER
INFORMATION
Item 1.Legal Proceedings
We
may become party to various legal actions that arise in the ordinary course of
our business. During the course of our operations, we are also subject to audit
by tax authorities for varying periods in various federal, state, local, and
foreign tax jurisdictions. Disputes have and may continue to arise during the
course of such audits as to facts and matters of law. On July 15, 2010, we
received a letter from the IRS disallowing approximately $5.1 million
related to certain claims we filed from October 1, 2006 through
June 30, 2008 under the Volumetric Excise Tax Credit program. We believe
our claims were properly made and has appealed the IRSs request for payment.
It is impossible at this time to determine the ultimate liabilities that we may
incur resulting from any lawsuits, claims and proceedings, audits, commitments,
contingencies and related matters or the timing if these liabilities, if any.
If these matters were to be ultimately resolved unfavorably, an outcome not
currently anticipated, it is possible that such outcome could have a material
adverse effect upon our consolidated financial position or results of
operations. However, we believe that the ultimate resolution of such actions
will not have a material adverse affect on our consolidated financial position,
results of operations, or liquidity.
Item 1A.Risk Factors
An investment in our Company involves a high degree of risk
of loss. You should carefully consider the risk factors discussed below
together with the risk factors in Part I, Item 1A of our 2009
Annual Report on Form 10-K and all of the other information included in
this report before you decide to purchase shares of our common stock. We
believe the risks and uncertainties described below are the most significant we
face. The occurrence of any of the following risks could harm our business. In
that case, the trading price of our common stock could decline. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our operations.
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Table of Contents
We have a history of losses and may incur
additional losses in the future.
For
the nine month period ended September 30, 2010, we incurred pre-tax losses
of $17.2 million, which included a derivative gain of $5.9 million related
to marking to market the value of our Series I warrants. In 2007, 2008 and
2009 we incurred pre-tax losses of $7.7 million, $44.3 million, and
$33.4 million, respectively. Our loss for 2008 includes $18.6 million
in expenses associated with our support for Proposition 10, the California
Alternative Fuel Vehicles and Renewable Energy ballot initiative and our loss
for 2009 includes $17.4 million of derivative losses related to marking to
market the value of our Series I warrants. During 2007, 2008 and 2009, our
losses were substantially decreased by our receipt of approximately
$17.0 million, $17.2 million and $15.5 million of revenue from
federal fuel tax credits; however, the law providing for the fuel tax credits
expired on December 31, 2009. In order to execute our strategy and improve
our financial performance, we must continue to invest in developing the natural
gas vehicle fuel market and offer our customers compelling natural gas fuel
prices. If we do not achieve or maintain profitability that can be sustained in
the absence of federal fuel tax credits, our business will suffer and the price
of our common stock may drop. In addition, if the price of our common stock
increases during future periods when our Series I warrants are outstanding,
we may be required to recognize material losses based on the valuation of the
outstanding Series I warrants.
A material portion of our historical
revenues are associated with a federal fuel excise tax credit that expired on
December 31, 2009.
The
federal excise tax credit of $0.50 per gasoline gallon equivalent of CNG and
liquid gallon of LNG sold for vehicle fuel use, which began on October 1,
2006, expired December 31, 2009. Based on the service relationship we had
with our customers, either we or our customers were able to claim the credit.
In 2007, 2008 and 2009, we recorded approximately $17.0 million,
$17.2 million and $15.5 million of revenue, respectively, related to
fuel tax credits, representing approximately 14.5%, 13.7% and 11.8%, respectively,
of our total revenue during the periods. If the fuel tax credit is not
reinstated during 2010 or extended to future periods, our revenue during 2010
and any such future periods will be materially reduced and our financial
performance will suffer. Analysts that write research on our company may also
reduce their ratings or make negative adjustments to their future expectations
of our financial performance if the fuel excise tax credit is not reinstated or
extended to future periods, which may also result in a decrease in the price of
our common stock. In addition, on July 15, 2010, the IRS sent us a letter
disallowing approximately $5.1 million related to certain excise tax credit
claims we made from October 1, 2006 to June 30, 2008. If we are
unsuccessful in appealing the IRS disallowance of these claims, we may be
required to refund some or all of the $5.1 million in contested claims and we
may have to revise or restate our historical financial statements for some or
all of the time period from October 1, 2006 through June 30, 2008 to
account for the reduction in revenue.
We will need to raise debt or equity
capital to continue to fund the growth of our business.
We will be required to raise
debt or equity capital to fund the growth of our business. Our business plan
calls for approximately $17.1 million in capital expenditures from
October 1, 2010 through December 31, 2010. We may also require capital for unanticipated
expenses, mergers and acquisitions and strategic investments. In addition, we have committed to significant
future payments that will be required to make in connection with our
acquisition of the IMW Acquired Business.
On
September 7, 2010, the Company, acting through certain of its subsidiaries,
completed its purchase of the advanced, non-lubricated natural gas fueling
compressor and related equipment manufacturing and servicing business (the IMW
Acquired Business) of I.M.W. Industries Ltd., a British Columbia corporation
(IMW). A subsidiary of the Company (the Acquisition Subsidiary) paid an
upfront cash payment of approximately $15.6 million (subject to a final working
capital adjustment) and issued 4,017,408 shares of the Companys common stock
at closing to IMWs shareholder. In connection with the closing of the
Companys acquisition of the IMW Acquired Business, the Acquisition Subsidiary
also issued the following promissory notes to IMW (collectively, the IMW
Notes): (i) a promissory note with a principal amount of $12,500,000 that is
due and payable on January 31, 2011, (ii) a promissory note with a principal
amount of $12,500,000 that is due and payable on January 31, 2012, (iii) a
promissory note with a principal amount of $12,500,000 that is due and payable
on January 31, 2013, and (iv) a promissory note with a principal amount of
$12,500,000 that is due and payable on January 31, 2014. Each payment under the
IMW Notes will consist of $5.0 million in cash and $7.5 million in cash and/or
shares of the Companys common stock (the exact combination of cash and/or
stock to be determined at the Acquisition Subsidiarys option). In addition,
pursuant to a security agreement executed at closing, the IMW Notes are secured
by a subordinate security interest in the IMW Acquired Business.
On August 31, 2010, we
executed a non-binding letter of intent to acquire all the outstanding
interests or substantially all the assets of Northstar for consideration of up
to $16 million, with $6.5 million payable at closing, and a portion of the
consideration to be allocated to employee retention programs. The remaining
consideration will be paid in equal installments over the five years following
the closing. This acquisition is subject to Board approval, completion of due
diligence, and execution of a definitive purchase agreement.
Equity
or debt financing options may not be available on terms favorable to us or at
all, particularly if there are no effective federal incentives supporting the
growth of the natural gas fueling business. Additional sales of our common
stock or securities convertible into our common stock will dilute existing
stockholders and may result in a decline in our stock price. We may also pursue
debt financing options including, but not limited to, equipment financing, the
sale of convertible promissory notes or commercial bank financing. Recent
economic turmoil and severe lack of liquidity in the debt capital markets and
volatility and rapidly falling prices in the equity capital markets have
severely and adversely affected capital raising opportunities. If we are unable
to obtain debt or equity financing in amounts sufficient to fund any
unanticipated expenses, capital expenditures, mergers, acquisitions or
strategic investments, we will be forced to suspend or curtail these capital
expenditures or postpone or delay potential acquisitions or other strategic
transactions, which could harm our business, results of operations, and future prospects.
33
Table of Contents
Our growth depends in part on tax and
related government incentives for clean burning fuels and alternative fuel
vehicles. A reduction in these incentives or the failure to pass new
legislation with new incentive programs will increase the cost of natural gas
fuel and vehicles for our customers and will significantly reduce our revenue.
Our
business depends in part on tax credits, rebates and similar federal, state and
local government incentives that promote the use of natural gas as a vehicle
fuel in the United States. The federal fuel excise tax credit for the sale of
natural gas fuel expired on December 31, 2009. The federal income tax
credit that is available to offset 50% to 80% of the incremental cost of
purchasing new or converted natural gas vehicles is scheduled to expire on
December 31, 2010, and if these tax credits are not extended, it will have
a detrimental effect on the natural gas vehicle and fueling industry, including
sales at our wholly owned subsidiaries, BAF and the IMW Acquired Business, and
adversely affect our results of operations and financial performance. Our
business plan and the ability of our business to successfully grow depends in
part on the reinstatement and extension of the federal fuel excise tax credit
for natural gas vehicle fuel, the extension of the federal income tax credit
for the purchase of natural gas vehicles and the passage of legislation
providing for additional incentives for the sale and use of natural gas
vehicles. If existing federal incentives are not reinstated or extended and if
new incentives are not passed, fewer natural gas vehicles will be sold and used
and our revenue and financial performance will be adversely affected.
Furthermore, the failure of certain federal, state and local government
incentives which promote the use of natural gas as a vehicle fuel to pass into
law could result in a negative perception by the market generally and a
decline in the market price of our common stock. In addition, if grant funds
are no longer available under existing government programs for the purchase and
construction of natural gas vehicles and stations, the purchase of natural gas
vehicles and station construction could slow and our business and results of
operations will be adversely affected. Continued reduction in tax revenues
associated with high unemployment rates, economic recession or slow-down could
result in a significant reduction in funds available for government grants that
support vehicle conversion and station construction, which could impair our
ability to grow our business.
Automobile and engine manufacturers produce
very few originally manufactured natural gas vehicles and engines for the
United States and Canadian markets, which may restrict our sales.
Limited
availability of natural gas vehicles restricts their wide scale introduction
and narrows our potential customer base. Original equipment manufacturers
produce a small number of natural gas engines and vehicles, and they may not
make adequate investments to expand their natural gas engine and vehicle
product lines. For the North American market, there is only one major
automobile manufacturer that makes natural gas powered passenger vehicles, and
major manufacturers of medium and heavy duty vehicles produce only a narrow
range and number of natural gas vehicles. The technology utilized in some of
the heavy duty vehicles that run on LNG is also relatively new and has not been
previously deployed or used in large numbers of vehicles. As a result, these
vehicles may require servicing and further technology refinements to address
performance issues that may occur as vehicles are deployed in large numbers and
are operated under strenuous conditions. If potential heavy duty LNG truck
purchasers are not satisfied with truck performance, or additional heavy-duty
truck engine manufacturers do not enter the market for LNG engines, it may
delay, impair, or eliminate the growth of our LNG fueling business, which would
impair our financial performance. Further, North American car and truck
manufacturers are facing significant economic challenges that may make it
difficult or impossible for them to introduce new natural gas vehicles in the
North American market or continue to manufacture and support the limited number
of available natural gas vehicles. Due to the limited supply of natural gas
vehicles, our ability to promote natural gas vehicles and our natural gas fuel
sales may be restricted, even if there is demand.
Decreases in the price of oil, gasoline and
diesel fuel without similar decreases in the price of natural gas may slow the
growth of our business and negatively impact our financial results.
Prices
for oil, gasoline and diesel fuel have declined substantially from the recent
high prices reached in the summer of 2008. The price of a barrel of crude oil
has declined from a high of $148.35 per barrel reached on July 11, 2008 to
a price of $79.97 per barrel on September 30, 2010. Average retail prices
for ultra low sulfur diesel fuel in California have declined from a high of
$5.03 in May and June 2008 to $3.14 per gallon at September 30,
2010, and average retail prices for gasoline in California have declined from a
high of $4.59 per gallon in June 2008 to $3.04 per gallon at
September 30, 2010. The decrease in the price of diesel and gasoline, in
particular, has resulted in reduced interest in alternative fuels such as LNG
and CNG. Decreased interest in alternative fuels will slow the growth of our
business. In addition, to the extent that we price our CNG and LNG fuel at a
discount to these reduced diesel or gasoline prices in an effort to attract new
and retain existing customers, our profit margin on fuel sales may be harmed
and our financial results negatively impacted. Our retail prices for LNG fuel
in California decreased from $3.70 per diesel gallon equivalent in June and
July of 2008 to $2.20 per diesel gallon equivalent at September 30,
2010, and our retail prices for CNG fuel sold in the Los Angeles basin
decreased from a high of $3.30 per gasoline gallon equivalent in July of
2008 to $2.50 per gasoline gallon equivalent at September 30, 2010. Lower
fuel prices for CNG and LNG as a result of lower natural gas commodity prices
also will reduce our revenues.
34
Table of Contents
If the prices of CNG and LNG do not remain
sufficiently below the prices of gasoline and diesel, potential fleet customers
will have less incentive to purchase natural gas vehicles, which would decrease
demand for CNG and LNG and limit our growth.
Natural
gas vehicles cost more than comparable gasoline or diesel powered vehicles
because converting a vehicle to use natural gas adds to its base cost. If the
prices of CNG and LNG do not remain sufficiently below the prices of gasoline
or diesel, fleet operators may be unable to recover the additional costs of
acquiring or converting to natural gas vehicles in a timely manner, and they
may choose not to use natural gas vehicles. Our ability to offer CNG and LNG
fuel to our customers at lower prices than gasoline and diesel depends in part
on natural gas prices remaining lower, on an energy equivalent basis, than oil
prices. If the price of oil declines and the price of natural gas increases, it
will make it more difficult for us to offer our customers discounted prices for
CNG and LNG as compared to gasoline and diesel prices and maintain an
acceptable margin on our sales. Recent and significant volatility in oil and
gasoline prices demonstrate that it is difficult to predict future
transportation fuel costs. In addition, any new regulations imposed on natural
gas extraction in the United States, particularly on extraction of natural gas
from shale formations, could increase the costs of domestic gas production or
make it more costly to produce natural gas in the United States, which could
lead to substantial increases in the price of natural gas. Reduced prices for
gasoline and diesel fuel and continuing uncertainty about fuel prices, combined
with higher costs for natural gas and natural gas vehicles, may cause potential
customers to delay or reject converting their fleets to run on natural gas. In
that event, our sales of natural gas fuel and vehicles would be slowed and our
business would suffer.
The volatility of natural gas prices could
adversely impact the adoption of CNG and LNG vehicle fuel and our business.
In
the recent past, the price of natural gas has been volatile, and this
volatility may continue. From the end of 1999 through September 30, 2010,
the price for natural gas, based on the NYMEX daily futures data, ranged from a
low of $1.65 per Mcf to a high of $19.38 per Mcf. As of September 30,
2010, the NYMEX index price for natural gas was $3.64 per Mcf. Increased
natural gas prices affect the cost to us of natural gas and will adversely
impact our operating margins in cases where we have committed to sell natural
gas at a fixed price without an effective futures contract in place that fully
mitigates the price risk or where we otherwise cannot pass on the increased
costs to our customers. In addition, higher natural gas prices may cause CNG
and LNG to cost as much as or more than gasoline and diesel generally, which
would adversely impact the adoption of CNG and LNG as a vehicle fuel.
Conversely, lower natural gas prices reduce our revenues due to the fact that
in a significant amount of our customer agreements the commodity cost is passed
through to the customer. Among the factors that can cause price fluctuations in
natural gas prices are changes in domestic and foreign supplies of natural gas,
domestic storage levels, crude oil prices, the price difference between crude
oil and natural gas, price and availability of alternative fuels, weather
conditions, level of consumer demand, economic conditions, price of foreign
natural gas imports, and domestic and foreign governmental regulations and
political conditions. In particular, there have been recent legislative efforts
to place new regulatory requirements on the production of natural gas by
hydraulic fracturing of shale gas reservoirs. Hydraulic fracturing of shale gas
reservoirs has resulted in a substantial increase in the proven natural gas
reserves in the United States, and any change in regulations that makes it
substantially more expensive or unprofitable to produce natural gas through
hydraulic fracturing could lead to increased natural gas prices. The recent
economic recession and increased domestic natural gas supplies have contributed
to significant declines in the price of natural gas since the summer of 2008.
Our growth depends in part on environmental
regulations and programs mandating the use of cleaner burning fuels, and
modification or repeal of these regulations may adversely impact our business.
Our
business depends in part on environmental regulations and programs in the
United States that promote or mandate the use of cleaner burning fuels,
including natural gas for vehicles. In particular, the Ports of Los Angeles and
Long Beach have adopted the San Pedro Bay Ports Clean Air Action Plan, which
outlines a Clean Trucks Program that calls for the replacement of drayage trucks
with trucks that meet certain clean truck standards. Industry participants with
a vested interest in gasoline and diesel, many of which have substantially
greater resources than we do, invest significant time and money in an effort to
influence environmental regulations in ways that delay or repeal requirements
for cleaner vehicle emissions. Further, an economic recession may result in the
delay, amendment or waiver of environmental regulations or the Clean Trucks
Program due to the perception that they impose increased costs on the
transportation industry that cannot be absorbed in a contracting economy. For
example, the Clean Trucks Program formerly called for the replacement of a set
number of drayage trucks with clean trucks, but due to economic conditions
and other factors, the Clean Trucks Program no longer calls for any specific
number of clean truck replacements. In addition, many of the clean trucks
that have been deployed have been clean diesel trucks which are generally less
expensive than LNG trucks. There have also been recent ballot initiatives
commenced in the State of California and political support for postponing or
delaying Californias implementation of AB 32, also known as the Global Warming
Solutions Act of 2006, which is intended to reduce greenhouse gas emissions.
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Table of Contents
CNG, LNG and biomethane
vehicle fuel all produce fewer greenhouse gases than gasoline or diesel fuel
and the delay or repeal of AB 32, and in particular Californias low-carbon
fuel standard, could reduce the appeal of natural gas fuel for our customers
and reduce our revenue. The delay, repeal or modification of federal or state
regulations or programs that encourage the use of cleaner vehicles, and in
particular the Clean Trucks Program outlined in the San Pedro Bay Ports Clean
Air Action Plan or Californias AB 32, could also have a detrimental effect on
the United States natural gas vehicle industry, which, in turn, could slow our
growth and adversely affect our business.
The use of natural gas as a vehicle fuel
may not become sufficiently accepted for us to expand our business.
To
expand our business, we must develop new fleet customers and obtain and fulfill
CNG and LNG fueling contracts from these customers. We cannot guarantee that we
will be able to develop these customers or obtain these fueling contracts.
Whether we will be able to expand our customer base will depend on a number of
factors, including the level of acceptance and availability of natural gas
vehicles, the growth in our target markets of fueling station infrastructure
that supports CNG and LNG sales and our ability to supply CNG and LNG at
competitive prices. The decline in oil, diesel and gasoline prices from the
levels they reached during the summer of 2008 has resulted in decreased interest
in alternative fuels like CNG and LNG. In addition, the disruption in the
capital markets that began in 2008 has reduced the availability of debt
financing to support the purchase of CNG and LNG vehicles and investment in CNG
and LNG infrastructure. If our potential customers are unable to access credit
to purchase natural gas vehicles, it may make it difficult or impossible for
them to invest in natural gas vehicle fleets, which would impair the ability of
our business to grow.
We cannot be certain that we will be
successful in managing or integrating our recently acquired subsidiary, BAF,
with our existing operations.
On
October 1, 2009, we closed our acquisition of 100% of the equity interests
of BAF, which is now our wholly owned subsidiary. BAF provides natural gas
vehicle conversions, alternative fuel systems, application engineering, service
and warranty support and research and development services. Historically, BAF
has suffered net operating losses and required outside financing to support its
ongoing business. Our ability to realize benefits from the acquisition depends
on our ability to improve BAFs financial performance in comparison to its
historical financial results. Our management team has limited experience
managing a vehicle conversion company, and BAF represents a new product
offering for our company. The successful management and integration of BAFs
operations will present significant challenges, including realizing economies
of scale and integrating internal financial and operational systems. We cannot
provide any assurances that we will realize any anticipated benefits or will
successfully integrate any of the acquired operations with our existing
operations. In addition, the BAF operations do not have the disclosure controls
and procedures or internal controls over financial reporting that are as
thorough or effective as those required for public companies. Although we
intend to implement appropriate controls and procedures as we integrate the BAF
operations, we cannot provide assurance as to the effectiveness of BAFs
disclosure controls and procedures or internal controls over financial
reporting until we have fully integrated them.
A significant portion of the purchase price
of the IMW Acquired Business was allocated to goodwill and a write-off of all
or part of this goodwill could adversely affect our operating results.
Under business combination
accounting standards, we allocated the total purchase price of the IMW Acquired
Business to its net tangible assets and intangible assets based on their fair
values as of the date of the acquisition and recorded the excess of the
purchase price over those values as goodwill. Managements estimates of the
fair value of the assets and liabilities of the IMW Acquired Business were
based upon certain assumptions, including assumptions about and anticipated
attainment of new business, believed to be reasonable, but which are inherently
uncertain. Pursuant to the applicable accounting standards, we
allocated $44.2 million of the purchase price for the IMW Acquired Business to
goodwill. Our goodwill could be impaired if developments affecting the
acquired compressor manufacturing operations or the markets in which the IMW
Acquired Business produces and/or sells compressors lead us to conclude that
the cash flows we expect to derive from its manufacturing operations will be
substantially reduced. An impairment of all or part of our goodwill could
adversely affect our results of operations and financial condition.
We cannot be certain that we will be
successful in managing or integrating the acquired business of IMW into our
business, which could prevent us from realizing the expected benefits of the
acquisition and could adversely affect our future results.
The
integration of the IMW Acquired Business into our business presents significant
challenges and risks to our business, including (i) the distraction of
management from other business concerns, (ii) the retention of customers
of IMW, (iii) expansion into foreign markets, (iv) the introduction
of IMWs compressor and related equipment manufacturing and servicing business,
which is a new product line for us, (v) achievement of appropriate
internal controls over financial reporting and (vi) the monitoring of
compliance with all laws and regulations. The vast majority of IMWs revenue is
derived
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from sales in emerging
markets, and IMW has not previously been required to comply with the U.S.
Foreign Corruption Practices Act or any of the requirements of Sarbanes-Oxley.
If we do not successfully integrate the IMW Acquired Business into our business
and maintain regulatory compliance, we may not realize the benefits expected
from the acquisition and our results of operations could be materially
adversely affected. If the revenue of
the IMW Acquired Business declines or grows more slowly than we anticipate, or
if its operating expenses are higher than we expect, we may not be able to
achieve, sustain or increase the growth of our business, in which case our
financial condition will suffer and our stock price could decline. In addition, the operations of the IMW
Acquired Business do not have the disclosure controls and procedures or
internal controls over financial reporting that are as thorough or effective as
those required for a public company.
Although we intend to implement appropriate controls and procedures as
we integrate the operations of the IMW Acquired Business, we cannot provide
assurance as to the effectiveness of the disclosure controls and procedures or
internal controls over financial reporting of the IMW Acquired Business until
we have fully integrated them.
Failure to comply with the terms of our
Credit Agreement with PlainsCapital Bank could impair our rights in DCE and
other secured property.
In
August 2008, we acquired a 70% interest in DCE, which manages a biomethane
production facility at the McCommas Bluff landfill in Dallas, Texas, and holds
a lease to the associated landfill gas development rights. We borrowed
$18 million from PCB to fund the acquisition and obtained a
$12 million line of credit from PCB to pay certain costs and expenses of
the acquisition and finance capital improvements of the gas processing plant
through a loan made by us to DCE. We have used $12.0 million of the line
of credit from PCB, and the outstanding balance was $9.9 million as of
September 30, 2010. In October 2009, we repaid the $18 million
loan that we used to fund the acquisition of DCE and amended the Credit
Agreement to obtain a $20 million line of credit from PCB to finance
capital expenditures and working capital for our operations, and for other
general business purposes. During the nine months ended September 30,
2010, we did not borrow any money under the $20 million line of credit. To
secure our obligations under the Credit Agreement, we granted PCB a security
interest in 45 of our LNG tanker trailers, certain accounts receivable and
inventory, and our note receivable from, and our membership interests in, DCE.
Our Credit Agreement with PCB requires that we comply with certain covenants.
One of the covenants requires that we maintain accounts receivable balances
from certain subsidiaries above $8 million at each quarter-end during the
term. To the extent natural gas prices fall, which would result in decreased
revenues, or our volumes sold decline, we could violate this covenant. Also,
beginning with the quarter ended June 30, 2009, we have been required to
maintain a specific minimum debt service ratio. Should our operating results
not materialize as planned, we could violate this covenant. If we were to
violate a covenant, we would seek a waiver from the bank, which the bank is not
obligated to grant. If the bank does not grant a waiver, all of the obligations
under the Credit Agreement will become immediately due and payable and
$2.5 million of our funds held by PCB would be applied to the balance due
on the PCB loans. We also would be unable to use the $20 million PCB line
of credit if this were to occur.
For
the quarter ended September 30, 2010, we were not in compliance with our debt
service ratio covenant under the Credit Agreement, however, PCB agreed to waive
compliance with this covenant until the next quarterly calculation at December
31, 2010.
The infrastructure to support gasoline and
diesel consumption is vastly more developed than the infrastructure for natural
gas vehicle fuels.
Gasoline
and diesel fueling stations and service infrastructure are widely available in
the United States. For natural gas vehicle fuels to achieve more widespread use
in the United States and Canada, they will require a promotional and
educational effort and the development and supply of more natural gas vehicles
and fueling stations. This will require significant continued effort by us, as
well as government and clean air groups, and we may face resistance from oil
companies and other vehicle fuel companies. A prolonged economic recession and
continued disruption in the capital markets may make it difficult or impossible
to obtain financing to expand the natural gas vehicle fueling infrastructure
and impair our ability to grow our business. There is no assurance natural gas
will ever achieve the level of acceptance as a vehicle fuel necessary for us to
expand our business significantly.
We have significant contracts with federal,
state and local government entities that are subject to unique risks.
We
have existing, and will continue to seek, long-term LNG and CNG station
construction, maintenance and fuel sales contracts with various federal, state
and local governmental bodies, which accounted for approximately 64% of our
yearly revenues from 2006 through 2009. In May 2009, we spent
$5.6 million to acquire four new CNG operation and maintenance contracts
with government agencies. In addition to our normal business risks, our
contracts with these government entities are often subject to unique risks,
some of which are beyond our control. Long-term government contracts and
related orders are subject to cancellation if appropriations for subsequent
performance periods are not made. The termination of funding for a government
program supporting any of our CNG or LNG operations could result in a loss of
anticipated future revenues attributable to that program, which could have a
negative impact on our operations. In addition, government entities with whom
we contract are often able to modify, curtail or terminate contracts with us
without prior notice at their convenience, and are only liable for payment for
work done and commitments made at the time of termination. Modification,
curtailment or termination of significant contracts could have a material
adverse effect on our results of operations and financial condition. In
particular, if any of the contracts we recently acquired are terminated, we may
be unable to recover our investment in acquiring the contracts.
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The budget deficits being experienced by
many governmental entities may reduce the available funding for certain natural
gas programs and services and the purchase of CNG or LNG fuel, which could
reduce our revenue and impair our financial performance.
Many
governmental entities are experiencing significant budget deficits as a result
of the economic recession, which has and may continue to reduce or curtail
their ability to fund natural gas fuel programs, purchase natural gas vehicles
or provide public transportation and services, which would harm our business.
Our contracts with governmental entities constituted approximately 64% of our
revenues from 2006 to 2009. Furthermore, in response to budget deficits, such
governmental entities have and may continue to request or demand that we lower
our price for CNG or LNG fuel. Since we compete for several of our contracts
with government entities through a competitive bidding process, in order to be
awarded new contracts or for the renewal of an expired contract, we may have to
agree to lower prices for CNG fuel, LNG fuel and our operations and maintenance
services. For example, the Metropolitan Transit System of San Diego, which
represented approximately 6 million gallons of CNG in 2009, recently conducted
a competitive bidding procurement and awarded the contract to a competitor as
of July 27, 2010. Government deficits, spending reductions and competitive
bidding procurement processes could reduce our margins on fuel sales, lower our
revenue and impair our financial performance.
Conversion of vehicles to run on natural
gas is time-consuming and expensive and may limit the growth of our sales.
Conversion
of vehicle engines from gasoline or diesel to natural gas is performed by only
a small number of vehicle conversion suppliers (including our wholly owned
subsidiary, BAF) that must meet stringent safety and engine emissions
certification standards. The engine certification process is time consuming and
expensive and raises vehicle costs. In addition, conversion of vehicle engines
from gasoline or diesel to natural gas may result in vehicle performance issues
or increased maintenance costs that could discourage our potential customers
from purchasing converted vehicles that run on natural gas and impair the
financial performance of our recently acquired subsidiary, BAF. Without an increase
in vehicle conversion options, reduced vehicle conversion costs and improved
vehicle conversion performance, our sales of natural gas vehicle fuel and
converted natural gas vehicles, through BAF, may be restricted and our revenue
will be reduced both by less demand for natural gas vehicle fuel and less
demand for converted natural gas vehicles.
A majority of our sales of CNG vehicles are
to one customer. If this customer does not continue to purchase CNG vehicles,
then revenue at our wholly owned subsidiary, BAF, will decline and our
financial results will be impaired.
During
2009, BAF derived approximately 63% of its revenue from AT&T. During 2010,
BAF anticipates that a similar percentage of its revenue will also be derived
from sales to AT&T. AT&T is not required to purchase any CNG vehicle
conversion kits under its agreement with BAF and the agreement and all purchase
orders submitted by AT&T under the agreement may be cancelled by AT&T
at any time for any reason. If AT&T does not continue to order and pay for
CNG vehicle conversion kits produced by BAF, then BAFs sales revenue will
substantially decline and our financial performance may suffer. AT&T has indicated
that they may reduce or delay conversion of additional vehicles during 2011 in
order to allow for build out of infrastructure to support fueling the vehicles.
In the absence of continued sales to AT&T, BAF may experience materially
reduced revenues and may require significant capital investment to continue as
a going concern, which could drain our capital resources.
If there are advances in other alternative
vehicle fuels or technologies, or if there are improvements in gasoline, diesel
or hybrid engines, demand for natural gas vehicles may decline and our business
may suffer.
Technological
advances in the production, delivery and use of alternative fuels that are, or
are perceived to be, cleaner, more cost-effective or more readily available
than CNG or LNG have the potential to slow adoption of natural gas vehicles.
Advances in gasoline and diesel engine technology, especially hybrids, may
offer a cleaner, more cost-effective option and make fleet customers less
likely to convert their fleets to natural gas. Technological advances related
to ethanol or biodiesel, which are increasingly used as an additive to, or
substitute for, gasoline and diesel fuel, may slow the need to diversify fuels
and affect the growth of the natural gas vehicle market. In addition, a
prototype heavy duty electric truck model was recently introduced at the ports
of Los Angeles and Long Beach. Use of electric heavy duty trucks or the
perception that electric heavy duty trucks may soon be widely available and
provide satisfactory performance in heavy duty applications may reduce demand
for heavy duty LNG trucks. In addition, hydrogen and other alternative fuels in
experimental or developmental stages may eventually offer a cleaner, more
cost-effective alternative to gasoline and diesel than natural gas. Advances in
technology that slow the growth of or conversion to natural gas vehicles, or
which otherwise reduce demand for natural gas as a vehicle fuel, will have an
adverse effect on our business. Failure of natural gas vehicle technology to
advance at a sufficient pace may also limit its adoption and our ability to
compete with other alternative fuels and alternative fuel vehicles.
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Our ability to supply LNG to new and
existing customers is restricted by limited production of LNG and by our
ability to source LNG without interruption and near our target markets.
Production
of LNG in the United States is fragmented. LNG is produced at a variety of
smaller natural gas plants around the United States, as well as at larger
plants. It may become difficult for us to obtain additional LNG without
interruption and near our current or target markets at competitive prices. If
our LNG liquefaction plants, or any of those from which we purchase LNG, are
damaged by severe weather, earthquake or other natural disaster, or otherwise
experience prolonged downtime, our LNG supply will be restricted. Currently,
one of the suppliers from whom we obtain LNG has experienced unscheduled plant
shut downs and has been unable to maintain minimum production levels, which has
caused us to incur additional costs to obtain LNG from other sources. If we are
unable to supply enough of our own LNG or purchase it from third parties to
meet existing customer demand, we may be liable to our customers for penalties.
Our growth plans, if successful, will require substantial growth in the
available LNG supply across the United States, and if this supply is
unavailable, it will constrain our ability to grow the market for LNG fuel
including supplying LNG fuel to heavy duty truck customers. An LNG supply interruption or LNG demand that
exceeds available supply will also limit our ability to expand LNG sales to new
customers and could disrupt our relationship with existing customers, which
would hinder our growth. Furthermore, because transportation of LNG is
relatively expensive, if we are required to supply LNG to our customers from
distant locations and cannot pass these costs through to our customers, our
operating margins will decrease on those sales due to our increased
transportation costs.
LNG supply purchase commitments may exceed
demand causing our costs to increase and impact LNG sales margins.
Two
of our LNG supply agreements have a take or pay commitment and our California
LNG liquefaction plant has a land lease and other fixed operating costs
regardless of production and sales levels. The take or pay commitments require
us to pay for the LNG that we have agreed to purchase irrespective of whether
we can sell the LNG to our own customers. For example, the LNG Sales Agreement
that we entered into with Desert Gas Services, LLC (DGS) on
October 17, 2007 has a ten year term and, provided that Plant Capacity (as
defined in the LNG Sales Agreement) is available to be taken by us, the plant
is not shut down by DGS and no event beyond our reasonable control prevents us
from taking delivery of LNG, we are committed to purchasing at least 45,000
gallons of LNG per day. Should the market demand for LNG decline or if we lose
significant LNG customers or if demand under any existing or any future LNG
supply contract does not maintain its volume levels or grow, overall operating
and supply costs may increase as a percentage of revenue and negatively impact
our margins.
One of our third-party LNG suppliers may
cancel its supply contract with us on short notice or increase its LNG prices,
which would hinder our ability to meet customer demand and increase our costs.
Under
certain circumstances, Williams Gas Processing Company (Williams) may
terminate our LNG supply contract with them on short notice. Williams may also
significantly increase the price of LNG we purchase upon 24 hours notice
if their costs to produce LNG increases, and we may be required to reimburse
them for certain other expenses. Our contract with Williams, which supplied 29%
of the LNG we sold for the year ended December 31, 2008, 14% for the year
ended December 31, 2009, and 13.2% for the first nine months of 2010,
expires on June 30, 2011. Furthermore, there are a limited number of LNG
suppliers in or near the areas where our LNG customers are located. It may be
difficult to replace an LNG supplier, and we may be unable to obtain alternate
suppliers at acceptable prices, in a timely manner, or at all. If significant
supply interruptions occur, our ability to meet customer demand will be
impaired, customers may cancel orders and we may be subject to supply
interruption penalties. If we are subject to LNG price increases, our operating
margins may be impaired and we may be forced to sell LNG at a loss under our
LNG supply contracts.
If we are unable to obtain natural gas in
the amounts needed on a timely basis or at reasonable prices, we could
experience an interruption of CNG or LNG deliveries or increases in CNG or LNG
costs, either of which could have an adverse effect on our business.
Some
regions of the United States and Canada depend heavily on natural gas supplies
coming from particular fields or pipelines. Interruptions in field production
or in pipeline capacity could reduce the availability of natural gas or
possibly create a supply imbalance that increases natural gas prices. We have
in the past experienced LNG supply disruptions due to severe weather in the
Gulf of Mexico and plant outages. If there are interruptions in field
production, insufficient pipeline capacity, equipment failure on liquefaction
production or delivery delays, we may experience supply stoppages which
could result in our inability to fulfill delivery commitments. This could
result in our being liable for contractual damages and daily penalties or
otherwise adversely affect our business.
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Oil companies and natural gas utilities,
which have far greater resources and brand awareness than we have, may expand
into the natural gas fuel market, which could harm our business and prospects.
There
are numerous potential competitors who could enter the market for CNG and LNG
vehicle fuels. Many of these potential entrants, such as integrated oil
companies and natural gas utilities, have far greater resources and brand
awareness than we have. Natural gas utilities, particularly in California,
continue to own and operate natural gas fueling stations that compete with our
stations. If the use of natural gas vehicles and demand for natural gas vehicle
fuel increases, these companies may find it more attractive to enter or expand
their operations in the market for natural gas vehicle fuels and we may
experience increased pricing pressure, reduced operating margins and fewer
expansion opportunities.
If we do not have effective futures
contracts in place, increases in natural gas prices may cause us to lose money.
From
2005 to 2008, we sold and delivered approximately 30% of our total gasoline
gallon equivalents of CNG and LNG under contracts that provided a fixed price
or a price cap to our customers over terms typically ranging from one to three
years, and in some cases up to five years. At any given time, however, the
market price of natural gas may rise and our obligations to sell fuel under
fixed price contracts may be at prices lower than our fuel purchase price if we
do not have effective futures contracts in place. This circumstance has in the
past and may again in the future compel us to sell fuel at a loss, which would
adversely affect our results of operations and financial condition. Commencing
with the adoption of our revised natural gas hedging policy in February 2007,
our policy has been to purchase futures contracts to hedge our exposure to
natural gas price variability related to our fixed price contracts. Such
contracts, however, may not be available or we may not have sufficient
financial resources to secure such contracts. In addition, under our hedging
policy, we may reduce or remove futures contracts we have in place related to
these contracts if such disposition is approved in advance by our board of
directors and derivative committee. If we are not economically hedged with
respect to our fixed price contracts, we will lose money in connection with
those contracts during periods in which natural gas prices increase above the
prices of natural gas included in our customers contracts. As of
September 30, 2010, we were economically hedged with respect to all four
of our fixed price contracts with our customers.
Our futures contracts may not be as
effective as we intend.
Our
purchase of futures contracts can result in substantial losses under various
circumstances, including if we do not accurately estimate the volume
requirements under our fixed price customer contracts when determining the
volumes included in the futures contracts we purchase, or we elect to purchase
a futures contract in connection with a bid proposal and ultimately we are not
awarded the entire contract or our customer does not fully perform its
obligations under the awarded contract. We also could incur significant losses
if a counterparty does not perform its obligations under the applicable futures
arrangement, the futures arrangement is economically imperfect or ineffective,
or our futures policies and procedures are not properly followed or do not work
as planned. Furthermore, we cannot assure that the steps we take to monitor our
futures activities will detect and prevent violations of our risk management
policies and procedures.
A decline in the value of our futures
contracts may result in margin calls that would adversely impact our liquidity.
We
are required to maintain a margin account to cover losses related to our
natural gas futures contracts. Futures contracts are valued daily, and if our
contracts are in loss positions at the end of a trading day, our broker will
transfer the amount of the losses from our margin account to a clearinghouse.
If at any time the funds in our margin account drop below a specified
maintenance level, our broker will issue a margin call that requires us to
restore the balance. Payments we make to satisfy margin calls will reduce our
cash reserves, adversely impact our liquidity and may also adversely impact our
ability to expand our business. Moreover, if we are unable to satisfy the
margin calls related to our futures contracts, our broker may sell these
contracts to restore the margin requirement at a substantial loss to us. As of
September 30, 2010, we had $5.9 million on deposit related to our futures
contracts.
If our futures contracts do not qualify for
hedge accounting, our net income and stockholders equity will fluctuate more
significantly from quarter to quarter based on fluctuations in the market value
of our futures contracts.
We
account for our futures activities under the relevant derivative accounting
guidance, which requires us to value our futures contracts at fair market value
in our financial statements. Prior to June 2008, our futures contracts did
not qualify for hedge accounting, and therefore we have recorded any changes in
the fair market value of these contracts directly in our consolidated statements
of operations in the line item derivative (gains) losses along with any
realized gains or losses during the period. Currently, we attempt to qualify
all of our futures contracts for hedge accounting under the relevant derivative
accounting guidance, but there can be no assurances that we will be successful
in doing so. At September 30, 2010, all of our futures contracts qualified
for hedge accounting. To the extent that all or some of our futures contracts
do not qualify for hedge accounting, we could incur significant increases and
decreases in our net income and stockholders equity in the future based on
fluctuations in the market value of our futures contracts from quarter to
quarter. We had no derivative gains or losses related to our natural gas
futures contracts for the year ended December 31, 2009 and for the nine
months ended September 30, 2010. Any negative fluctuations may cause our
stock price to decline due to our failure to meet or exceed the expectations of
securities analysts or investors.
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Compliance with potential greenhouse gas
regulations affecting our LNG plants or fueling stations may prove costly and
negatively affect our financial performance.
California
has adopted legislation, AB 32, which calls for a cap on greenhouse gas
emissions throughout California and a statewide reduction to 1990 levels by
2020, and an additional 80% reduction below 1990 levels by 2050. Seven western
U.S. states (Arizona, California, Montana, New Mexico, Oregon, Utah and
Washington) and four Canadian provinces (British Columbia, Manitoba, Ontario
and Quebec) formed the Western Climate Initiative to help combat climate
change. Other states and the federal government are considering passing
measures to regulate and reduce greenhouse gas emissions. Any of these
regulations, when and if implemented, may regulate the greenhouse gas emissions
produced by our LNG production plants in California and Texas or our LNG and
CNG fueling stations and require that we obtain emissions credits or invest in
costly emissions prevention technology. We cannot currently estimate the
potential costs associated with federal or state regulation of greenhouse gas
emissions from our LNG plants or LNG and CNG stations, and these unknown costs
are not contemplated in the financial terms of our customer agreements. These
unanticipated costs may have a negative impact on our financial performance and
may impair our ability to fulfill customer contracts at an operating profit.
Natural gas fueling operations and vehicle
conversions entail inherent safety and environmental risks that may result in
substantial liability to us.
Natural
gas fueling operations and vehicle conversions entail inherent risks, including
equipment defects, malfunctions and failures and natural disasters, which could
result in uncontrollable flows of natural gas, fires, explosions and other
damages. For example, operation of LNG pumps requires special training and
protective equipment because of the extreme low temperatures of LNG. LNG tanker
trailers have also in the past been, and may in the future be, involved in
accidents that result in explosions, fires and other damage. Improper refueling
of LNG vehicles can result in venting of methane gas, which is a potent
greenhouse gas, and LNG related methane emissions may in the future be
regulated by the EPA or by state regulations. Additionally, CNG fuel tanks, if
damaged or improperly maintained, may rupture and the contents of the tank may
rapidly decompress and result in death or injury. In 2007, a driver of a CNG
van in Los Angeles was killed when the previously damaged tank he was fueling
ruptured. These risks may expose us to liability for personal injury, wrongful
death, property damage, pollution and other environmental damage. We may incur
substantial liability and cost if damages are not covered by insurance or are
in excess of policy limits. If CNG or LNG vehicles are perceived to be unsafe,
it will harm our growth and negatively affect BAFs ability to sell converted
CNG vehicles, which would impair our financial performance.
Our business is heavily concentrated in the
western United States, particularly in California and Arizona. Continuing
economic downturns in these regions could adversely affect our business.
Our
operations to date have been concentrated in California and Arizona. For the
years ended December 31, 2007, 2008 and 2009, sales in California
accounted for 40%, 45% and 49% respectively, and sales in Arizona accounted for
20%, 14% and 10%, respectively, of the total amount of gallons we delivered.
For the nine month period ended September 30, 2010, sales in California
and Arizona accounted for 49% and 9%, respectively, of the total amount of
gallons we delivered. A decline in the economy in these areas could slow the
rate of adoption of natural gas vehicles, reduce fuel consumption or reduce the
availability of government grants, any of which could negatively affect our
growth.
We provide financing to fleet customers for
natural gas vehicles, which exposes our business to credit risks.
We
loan to certain qualifying customers a portion of, and occasionally up to 100%,
of the purchase price of natural gas vehicles. We may also lease vehicles to
customers in the future. There are risks associated with providing financing or
leasing that could cause us to lose money. Some of these risks include: most of
the equipment financed consists of vehicles, which are mobile and easily
damaged, lost or stolen, there is a risk the borrower may default on payments,
we may not be able to bill properly or track payments in adequate fashion to
sustain growth of this service, and the amount of capital available to us is
limited and may not allow us to make loans required by customers. Some of our
customers, such as taxi owners, may depend on the CNG vehicles that we finance
or lease to them as their sole source of income, which may make it difficult
for us to recover the collateral in a bankruptcy proceeding. The continued
disruption in the credit markets may further reduce the amount of capital
available to us and an economic recession or continued high unemployment rates
may increase the rate of default by borrowers, leading to an increase in losses
on our loan portfolio. As of September 30, 2010, we had $5.9 million
outstanding in loans provided to customers to finance natural gas vehicle
purchases.
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Our business is subject to a variety of
governmental regulations that may restrict our business and may result in costs
and penalties.
We
are subject to a variety of federal, state and local laws and regulations
relating to the environment, health and safety, labor and employment and
taxation, among others. These laws and regulations are complex, change
frequently and have tended to become more stringent over time. Failure to
comply with these laws and regulations may result in a variety of administrative,
civil and criminal enforcement measures, including assessment of monetary
penalties and the imposition of remedial requirements. From time to time, as
part of the regular overall evaluation of our operations, including newly
acquired operations, we may be subject to compliance audits by regulatory
authorities. In addition, any failure to comply with regulations related to the
government procurement process at the federal, state or local level or
restrictions on political activities and lobbying may result in administrative
or financial penalties including being barred from providing services to
governmental entities, which accounted for approximately 64% of our yearly
revenues from 2006 through 2009.
In
connection with our LNG liquefaction activities and the landfill gas processing
facility operated by DCE, we need or may need to apply for additional facility
permits or licenses to address storm water or wastewater discharges, waste
handling, and air emissions related to production activities or equipment
operations. This may subject us to permitting conditions that may be onerous or
costly. Compliance with laws and regulations and enforcement policies by
regulatory agencies could require us to make material expenditures and may
distract our officers, directors and employees from the operation of our
business.
Operational issues, permitting and other
factors at DCEs landfill gas processing facility may adversely affect both DCEs
ability to supply biomethane and our operating results.
In
August 2008, we acquired our 70% interest in DCE. In April 2009, DCE
entered into a 15-year gas sale agreement with Shell for the sale to Shell of
specified levels of biomethane produced by DCEs landfill gas processing
facility. There is, however, no guarantee that DCE will be able to produce or
sell up to the maximum volumes called for under the agreement. DCEs ability to
produce such volumes of biomethane depends on a number of factors beyond DCEs
control, including, but not limited to, the availability and composition of the
landfill gas that is collected, successful permitting, the operation of the
landfill by the City of Dallas and the reliability of the processing facilitys
critical equipment. The DCE facility is subject to periods of reduced production
or non-production due to upgrades, maintenance, repairs and other factors. For
example, as part of an operational upgrade in March 2009, the facility was
shut down for approximately one month. More recently, on June 12, 2009,
the facility was taken offline for repairs that were completed on July 2,
2009 and the facility was taken offline for upgrades from September 20,
2010 until September 25, 2010. We anticipate that the facility will incur
additional downtime for one to two weeks or more during the fall of 2010
related to replacing the plants gas driven compression with electric driven
compression. Future operational upgrades, including planned expansion of the
plant, or complications in the operations of the facility could require
additional shutdowns during 2010 and 2011, and accordingly, DCEs revenues may
fluctuate from quarter to quarter.
Our quarterly results of operations have
not been predictable in the past and have fluctuated significantly and may not
be predictable and may fluctuate in the future.
Our
quarterly results of operations have historically experienced significant
fluctuations. Our net losses (gains) were approximately $0.9 million,
$3.6 million, $1.5 million, $2.9 million, $5.4 million,
$3.2 million, $12.1 million, $23.7 million, $6.5 million,
$6.4 million, $18.5 million, $1.9 million, $24.4 million,
$(9.9) million, and $1.8 million for the three months ended March 31,
2007, June 30, 2007, September 30, 2007, December 31, 2007,
March 31, 2008, June 30, 2008, September 30, 2008, December 31,
2008, March 31, 2009, June 30, 2009, September 30, 2009,
December 31, 2009, March 31, 2010, June 30, 2010, and September 30,
2010, respectively. Our quarterly results may fluctuate significantly as a
result of a variety of factors, many of which are beyond our control. In
particular, if our stock price increases or decreases in future periods during
which our Series I warrants are outstanding, we will be required to
recognize corresponding losses or gains related to the valuation of the Series I
warrants that could materially impact our results of operations. If our
quarterly results of operations fall below the expectations of securities
analysts or investors, the price of our common stock could decline
substantially. Fluctuations in our quarterly results of operations may be due
to a number of factors, including, but not limited to, our ability to increase
sales to existing customers and attract new customers, the addition or loss of
large customers, construction cost overruns, downtime at our facilities
(including the recent shutdowns in March and June 2009 and September 2010
of DCEs landfill gas processing facility), the amount and timing of operating
costs, unanticipated expenses, capital expenditures related to the maintenance
and expansion of our business, operations and infrastructure, changes in the
price of natural gas, changes in the prices of CNG and LNG relative to gasoline
and diesel, changes in our pricing policies or those of our competitors,
fluctuation in the value of our outstanding Series I warrants or natural
gas futures contracts, the costs related to the acquisition of assets or
businesses, regulatory changes, and geopolitical events such as war, threat of
war or terrorist actions. Investors in our stock should not rely on the results
of one quarter as an indication of future performance as our quarterly revenues
and results of operations may vary significantly in the future. Therefore,
period-to-period comparisons of our operating results may not be meaningful.
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Table of Contents
The future price of our common stock or the
offering price of our common stock in future offerings could result in a
reduction of the exercise price of our Series I warrants and result in
dilution of our common stock.
We
issued Series I warrants to purchase up to 3,314,394 shares of our common
stock in connection with our registered direct offering completed in November 2008.
These warrants contain provisions that require an adjustment in the exercise
price of the Series I warrants in the event that we price any offering of
common stock at a price below the current exercise price, which is $12.68 per
share.
Sales of outstanding shares of our stock
into the market in the future could cause the market price of our stock to drop
significantly, even if our business is doing well.
If
our stockholders sell, or indicate an intention to sell, substantial amounts of
our common stock in the public market, the trading price of our common stock
could decline. As of September 30, 2010, 64,931,101 shares of our common
stock were outstanding. The 11,500,000 shares sold in our initial public
offering, the 4,419,192 shares of common stock and the 3,314,394 shares of
common stock subject to outstanding warrants sold in our registered direct
offering that closed on November 3, 2008, and the 9,430,000 shares of our
common stock sold in our common stock offering that closed July 1, 2009
are freely tradable without restriction or further registration under federal
securities laws unless purchased by our affiliates.
In
addition, upon the closing of our acquisition of the IMW Acquired Business, we
issued 4,017,408 shares of our common stock, which are registered for immediate
resale. Of such shares, IMWs shareholder has sold 972,400 shares of our Common
Stock as of September 30, 2010.
Shares
held by non-affiliates for more than six months may generally be sold without
restriction, other than a current public information requirement, and may be
sold freely without any restrictions after one year. All other outstanding
shares of common stock may be sold under Rule 144 under the Securities
Act, subject to applicable restrictions.
In
addition, as of September 30, 2010, there were 9,563,055 shares underlying
outstanding options and 18,314,394 shares underlying outstanding warrants
(including the 3,314,394 Series I warrant shares sold in our registered
direct offering which closed on November 3, 2008). All shares subject to
outstanding options and warrants are eligible for sale in the public market to
the extent permitted by the provisions of various option and warrant agreements
and Rule 144. If these additional shares are sold, or if it is perceived
that they will be sold in the public market, the trading price of our stock
could decline.
Further,
as of September 30, 2010, 16,539,720 shares of our stock held by our
co-founder and board member T. Boone Pickens are subject to pledge agreements
with banks. Should one or more of the banks be forced to sell the shares
subject to the pledge, the trading price of our stock could also decline. In
addition, a number of our directors and executive officers have entered into
Rule 10b5-1 Sales Plans with a broker to sell shares of our common stock
that they hold or that may be acquired upon the exercise of stock options.
Sales under these plans will occur automatically without further action by the
director or officer once the price and/or date parameters of the selling plan
are achieved. As of September 30, 2010, 1,803,765 shares in the aggregate
were subject to future sale by our named executive officers and directors under
these selling plans. All sales of common stock under the plans will be reported
through appropriate filings with the SEC.
A significant portion of our stock is
beneficially owned by a single stockholder whose interests may differ from
yours and who will be able to exert significant influence over our corporate
decisions, including a change of control.
As
of September 30, 2010, Boone Pickens and affiliates (including Madeleine
Pickens, his wife) owned in the aggregate 30% of our outstanding shares of common
stock and beneficially owned in the aggregate approximately 43% of the
outstanding shares of our common stock, inclusive of the 15,000,000 shares
underlying a warrant held by Mr. Pickens. As a result, Mr. Pickens
will be able to influence or control matters requiring approval by our
stockholders, including the election of directors and the approval of mergers,
acquisitions or other extraordinary transactions. Mr. Pickens may have
interests that differ from yours and may vote in a way with which you disagree
and which may be adverse to your interests. This concentration of ownership may
have the effect of delaying, preventing or deterring a change of control of our
company, could deprive our stockholders of an opportunity to receive a premium
for their stock as part of a sale of our company, and might ultimately affect
the market price of our stock. Conversely, this concentration may facilitate a
change in control at a time when you and other investors may prefer not to
sell.
43
Table of Contents
Item 2.Unregistered Sales of Equity Securities
and Use of Proceeds
None.
Item 3.Defaults upon Senior Securities
None.
Item 4.(Removed and Reserved)
Item 5.Other Information
None.
Item 6.Exhibits
(a) Exhibits
2.5
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Asset Purchase Agreement, dated
July 1, 2010, among Clean Energy, a California corporation, 0884808 B.C.
Ltd., a British Columbia corporation, and 0884810 B.C. Ltd., a British
Columbia corporation, on the one hand, and I.M.W. Industries Ltd., a British
Columbia corporation, 652322 B.C. Ltd., a British Columbia corporation,
Miller Family Trust and Bradley N. Miller, on the other hand. (Filed as
Exhibit 2.5 to Form 8-K, as filed with the Securities and Exchange
Commission on July 1, 2010, and incorporated herein by reference.)
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2.6
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Amendment to Asset Purchase
Agreement, dated as of September 7, 2010, by and among Clean Energy, a
California corporation, 0884808 B.C. Ltd., a British Columbia corporation and
a wholly-owned subsidiary of Clean Energy CA, and Clean Energy Compression
Corp, a British Columbia corporation formerly known as 0884810 B.C. Ltd and a
wholly-owned subsidiary of Canadian AcqCo, on the one hand, and I.M.W.
Industries Ltd., a British Columbia Corporation, B&M Miller Equity
Holdings Inc., a successor by amalgamation to 652322 B.C. Ltd., a British
Columbia corporation, Bradley N. Miller, Marion G. Miller and Miller Family
Trust, on the other hand. (Filed as Exhibit 2.6 to Form 8-K, as
filed with the Securities and Exchange Commission on September 7, 2010,
and incorporated herein by reference.)
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10.57
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Form
of Year 1 Note, issued by Clean Energy Compression Corp. to I.M.W. Industries
Ltd. *
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10.58
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Form
of Future Payment Note, issued by Clean Energy Compression Corp. to I.M.W.
Industries Ltd. *
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10.59
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Form
of Security Agreement between Clean Energy Compression Corp. and I.M.W.
Industries Ltd. *
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10.60
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Form
of Commitment to Provide Funds, between Clean Energy Compression Corp.,
0884808 B.C. Ltd., and HSBC Bank Canada.*
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10.61
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Form
of Commitment to Provide Funds, between Clean Energy Compression Corp.,
0884808 B.C. Ltd., and HSBC Bank Canada.*
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10.62
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Form
of Assumption Agreement, between I.M.W. Industries Ltd., IMW CNG Bangladesh
Ltd., IMW Compressor Group (Shanghai) Co. Ltd., IMW Colombia Ltda., Bradley
Norman Miller, Marion Miller, B&M Miller Equity Holdings Inc., Clean
Energy Compression Corp., Clean Energy, 0884808 B.C. Ltd., and HSBC Bank
Canada.*
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10.63
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Form
of General Security Agreement, between 0884808 B.C. Ltd. and HSBC Bank
Canada.*
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10.64
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Form
of Guarantee, executed by 0884808 B.C. Ltd.*
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10.65
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Fifth Amendment to Credit
Agreement among the registrant, Clean Energy and PlainsCapital Bank.*
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10.66
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Seventh Amendment to Lease
Agreement, dated September 23, 2010, between Clean Energy and BixbyBIT -
Bixby Office Park, LLC.*
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10.67
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Limited Waiver and Consent, dated
October 29, 2010, among the registrant, Clean Energy and PlainsCapital
Bank.*
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31.1
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Certification of Andrew J.
Littlefair, President and Chief Executive Officer, pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
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31.2
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Certification of Richard R.
Wheeler, Chief Financial Officer, pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
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32.1
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Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Andrew J. Littlefair, President and
Chief Executive Officer, and Richard R. Wheeler, Chief Financial Officer.*
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* Filed herewith.
44
Table of Contents
SIGNATURE
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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CLEAN ENERGY FUELS CORP.
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Date: November 8,
2010
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By:
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/s/
RICHARD R. WHEELER
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Richard
R. Wheeler
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Chief Financial Officer
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(Principal financial officer and duly authorized
to sign on behalf of the registrant)
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45
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