Business

9 Months Ended

Sep. 30, 2011

Business

Business

(1)   Business

We were founded in 1984 and are a cleaner coal technology company that offers environmental solutions for the energy production and generation industries primarily through our patented clean coal process and technology, K-Fuel.  K-Fuel significantly improves the performance of low-rank sub-bituminous and brown coals and lignite. This process yields higher efficiency levels, which varies depending on the type of coal processed, by applying heat and pressure to low-rank coals to reduce moisture.  Our GreenCert software suite focuses on providing power generators with operational intelligence and analytics to identify operational efficiencies.  Through November 2011, we have executed on a number of our strategic objectives as follows:

· On August 24, 2011, we entered into a Sales Agency Agreement with Lazard Capital Markets LLC (“Lazard”), under which Lazard, as our exclusive agent, may, at our discretion, from time to time sell up to a maximum of $10.0 million of our shares of common stock through an “at-the-market” program.  As of September 30, 2011 we had sold 622,000 shares of our common stock and received $412,000 in proceeds, net of commission and financing costs. See further discussion in Note 5 — Temporary Capital and Stockholders’ Equity.

· On June 9, 2011, we completed the formation of our venture with WPG Resources, an Australian listed mineral resources company, to jointly own coal deposits and to develop and produce K-Fuel, using our coal upgrading technology throughout Australia. The venture, Southern Coal Holdings (SCH), is 50% owned by WPG Resources and 50% by us, and was incorporated in Australia in 2010 as a private limited liability company.  See Managements’ Discussion and Analysis contained in this Form 10-Q for further details about our business and current events.

· On May 17, 2011, we satisfied all conditions under the previously announced Forbearance and Settlement Agreement (the “Settlement Agreement”).  On February 1, 2011, we entered into the Settlement Agreement with certain holders of the 2007 Notes and holders of the 2009 Notes which provided for : (i) the purchase by the 2009 Noteholders of $3.2 million of 2007 Notes from the Settling 2007 Noteholders for a price of $1.6 million; (ii) the ongoing direct redemption of $14.1 million in aggregate face value of 2007 Notes previously held by the Settling 2007 Noteholders; (iii) the issuance of warrants to the 2009 Noteholders for the purchase of up to 200,000 shares of our company’s common stock at $1.89 per share; (iv) the issuance of warrants to the Settling 2007 Noteholders for the purchase of up to 531,250 shares of our stock at an exercise price of $7.20 per share; and (v) the issuance to the 2009 Noteholders of a one-year $1.55 million convertible note, bearing interest at 7% per annum and convertible into shares of our common stock at a conversion price equal to $1.89 per share. See further discussion in Note 10—Commitments and Contingencies.

· During the first quarter of 2011, we re-opened our testing facility in Gillette, Wyoming and have successfully completed coal upgrading tests using our K-Fuel process. See Management’s Discussion and Analysis contained in this Form 10-Q for further details about our business and current events.

· On March 29, 2011, we closed the sale of the assets of our subsidiary, Landrica Development Company, including the Fort Union plant and associated property located near Gillette, Wyoming for total consideration of $2.0 million in addition to the replacement of $5.2 million of reclamation bonds.  See further discussion in Note 12 — Discontinued Operations.

· On February 1, 2011, we completed a private placement to sell 6.2 million shares of our common stock and 12.0 million warrants to purchase our common stock, resulting in $14.5 million of net proceeds, after offering costs.  See further discussion in Note 5 — Temporary Capital and Stockholders’ Equity.

We continue to require additional capital to fully fund our operations, principally the development of our K-Fuel process and our ownership in SCH and the China joint venture. Further, as opportunities arise to accelerate the expansion of our K-Fuel technology, or our anticipated operating cash outflows are greater than expected due to, among other things, unexpected costs in the development of our K-Fuel process and business opportunities, we may need to obtain further funding. We have a history of losses, deficits, and negative operating cash flows and may continue to incur losses in the future. For the period starting from the year of incorporation in 1988 through September 30, 2011, we have incurred a cumulative deficit of $556.2 million. We continue to evaluate our cash position and cash utilization, and have and will make additional adjustments to capital or certain operating expenditures. However, because of the need for additional capital, there is substantial doubt as to our ability to continue to operate as a going concern for the foreseeable future.

On September 26, 2011, we received an unsolicited offer from Stanhill Capital Partners (“Stanhill”) to purchase our K-Fuel process and technology business for $30 million. Among other things, the offer is expressly conditioned upon completion of due diligence, negotiation of definitive documents, the approval of our stockholders and final approval of Stanhill’s investment committee. We have formed a special committee of the Board of Directors to consider the Stanhill offer and other strategic alternatives. The members of the special committee are disinterested in the transaction. The special committee has retained Cooley LLP to serve as its independent legal counsel and retained Dahlman Rose & Company, LLC to act as its independent financial adviser.

Ilyas Khan, a member of our Board of Directors and our Executive Chairman and Acting Chief Executive Officer, is a substantial shareholder of Stanhill. There can be no assurance that any agreement on terms satisfactory to the special committee will result from the Stanhill offer or that any transaction whatsoever will be completed.

These financial statements and related notes thereto contain unaudited information as of and for the three and nine months ended September 30, 2011 and 2010.  In the opinion of management, the statements include all the adjustments necessary, principally of a normal and recurring nature, to fairly present our condensed consolidated results of operations and cash flows as of and for the nine months ended September 30, 2011 and 2010 and financial position for the periods ended September 30, 2011 and December 31, 2010.  The condensed consolidated results of operations and the condensed consolidated statements of cash flows for the nine month period ended September 30, 2011 are not necessarily indicative of the operating results or cash flows expected for the full year.  The financial information as of September 30, 2011 should be read in conjunction with the financial statements for the year ended December 31, 2010 contained in our Form 10-K filed on March 14, 2011.