Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
1. Nature of Operations, Risks, and Uncertainties
American Power Group Corporation (together with its subsidiaries “we”, “us” or “our”) was originally founded in 1992 and has operated as a Delaware corporation since 1995.
Recent Developments
On October 21, 2015, our Subordinated Contingent Convertible Promissory Notes in the aggregate principal amount
$2,475,000
, together with all accrued but unpaid interest thereon, automatically converted into approximately
257
shares of our Series C Convertible Preferred Stock at a conversion price of
$10,000
per share. Each share of Series C Preferred Stock is convertible, at any time at the option of any holder, into
50,000
shares of Common Stock; at an initial conversion price of
$0.20
per share. (See Note 11)
On January 8, 2016, we sold
22
shares of Series D Convertible Preferred Stock for gross proceeds of
$2.2 million
to several existing shareholders and entities affiliated with several members of our Board of Directors and issued warrants to purchase up to
44,000,000
shares of our Common Stock at an exercise price of
$.10
per share. (See Note 15).
On April 15, 2016, Iowa State Bank agreed to extend the maturity of our
$500,000
Revolving Line of Credit to April 15, 2017.
As of April 30, 2016, we have an industry-leading
497
overall approvals from the Environmental Protection Agency ("EPA") including
41
approvals for engine families with SCR (selective catalytic reduction) technology. We believe that of the approximately
3 million
Class 8 trucks operating in North America, an estimated
600,000
to
700,000
Class 8 trucks fall into the Inside Useful Life ("IUL") designation. We received State of California Air Resources Board ("CARB") Executive Order (“E.O.”) Certifications for specific Volvo/Mack D-13/MP8 and Cummins ISX engine models within the 2010-2012 model years for the heavy-duty diesel engine family ranging from 375HP to 600HP.
On May 13, 2016, our shareholders approved the 2016 Stock Option Plan and approved an amendment to the Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from
200,000,000
to
350,000,000
. (See Note 17)
Nature of Operations, Risks, and Uncertainties
Dual Fuel Technology Subsidiary - American Power Group, Inc.
Our patented dual fuel conversion system is a unique external fuel delivery enhancement system that converts existing diesel engines into more efficient and environmentally friendly engines that have the flexibility, depending on the circumstances, to run on:
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•
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Diesel fuel and compressed natural gas (CNG) or liquefied natural gas (LNG);
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|
•
|
Diesel fuel and pipeline gas, well-head gas or approved bio-methane; or
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Our proprietary technology seamlessly displaces up to
75%
(average displacement ranges from
40%
to
65%
) of the normal diesel fuel consumption with various forms of natural gas. Installation requires no engine modification, unlike the more expensive fuel injected alternative fuel systems in the market.
By displacing highly polluting and expensive diesel fuel with inexpensive, abundant and cleaner burning natural gas, a user can:
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|
|
•
|
Reduce fuel and operating costs by
5%
to
15%
;
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|
|
•
|
Reduce toxic emissions such as nitrogen oxide (NOX), carbon monoxide (CO) and fine particulate emissions; and
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|
|
•
|
Enhance the engine’s operating life, since natural gas is a cleaner burning fuel source.
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Primary end market applications include both primary and back-up diesel generators as well as heavy-duty vehicular diesel engines.
Wellhead Gas Flare Capture and Recovery Services Division - Trident NGL Services, a division of American Power Group, Inc.
When oil is extracted from shale, a mixture of hydrocarbon gases (methane, ethane, propane, butane, pentane and other heavy gases) reach the surface at each well site. These gases are either gathered in low-pressure pipelines for downstream natural gas liquids ("NGL") and methane extraction by large mid-stream processing companies or flared into the atmosphere when the gas-gathering infrastructure is too far away (remote well sites) or the pipeline is insufficient to accommodate the volumes of associated gas (stranded well sites). Many areas in North America are facing significant state imposed penalties and restrictions associated with the elimination of flared well head gas by oil and gas production companies.
In August 2015, we entered the flare gas capture and recovery business under an exclusive license of a proprietary next generation NGL compression/refrigeration process from Trident Resources, LLC. The proprietary Trident NGL capture and recovery process captures and converts a higher percent of the gases at these remote and stranded well sites, with its mobile and modular design, when compared to other competitive capture technologies. NGL’s can be sold to a variety of end markets for heating, emulsifiers, or as a combined NGL liquid called Y Grade that can be sold to midstream companies that separate the liquids into their final commodities.
The majority of the remaining associated gas is comprised of methane which is currently not sold but, if further processed, can produce pipeline grade natural gas for use in stationary and vehicular engines utilizing APG’s Fueled By Flare™ dual fuel solution. This process is designed to capture and separate the methane flare in order to produce a premium quality natural gas capable of being compressed and used for many natural gas applications including both stationary and vehicular APG dual fuel conversions.
Recent low oil prices have impacted both the number of potential well sites as well as the price we are paid for the resulting NGLs, prompting us to idle our flare recovery systems pending improvement in both metrics. As a result, operations from our Natural Gas Liquids Division were not significant during the
six months ended March 31, 2016
. We have restructured and reduced our near term Trident obligations in anticipation of this potential idling of the units to conserve resources. We have seen an increase in requests for service quotes in the past thirty days as oil prices have improved, with some of the NGL component pricing up 50% from their January 2016 lows.
Liquidity and Management's Plans
As of
March 31, 2016
, we had
$659,674
in cash, cash equivalents and restricted certificates of deposit and a working capital deficit of
$825,202
. The accompanying financial statements have been prepared on a basis that assumes we will continue as a going concern and that contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We continue to incur recurring losses from operations, which raises substantial doubt about our ability to continue as a going concern unless we secure additional capital to fund our operations as well as implement initiatives to reduce our cash burn in light of lower diesel/natural gas price spreads and the impact it has had on our business as well as the slower than anticipated ramp of our flare capture and recovery business. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainty.
Management understands that our continued existence is dependent on our ability to generate positive operating cash flow, achieve profitability on a sustained basis and generate improved performance. Based on the information discussed below, our fiscal 2016 operating plan, the cash saving initiatives that have been implemented below and anticipated cash flows from operations, we believe we will have sufficient resources to satisfy our cash requirements into the fourth quarter of fiscal 2016. In order to ensure the future viability of American Power Group beyond that point, management has implemented or is in the process of implementing the following actions:
A.
Series D Convertible Preferred Stock Private Placement
On January 8, 2016, we completed a
$2.2 million
private placement of Series D Convertible Preferred Stock with accredited investors affiliated with several members of our Board of Directors and shareholders. In addition, we issued warrants to purchase
44 million
shares of Common Stock at
$.10
which do not contain a cashless exercise provision. Pursuant to the terms of the offering, the investors are required to exercise all Series D warrants before exercising any other warrants they or their affiliates own (all containing cashless provisions). In addition, all minority Series D investors are required to match on a pro-rata basis the exercise of any warrants by the majority investor or lose those warrants to the majority investor.
We are currently in advanced discussions with the Series D investors regarding a potential infusion of additional capital into the Company, the form and terms of which has not yet been determined. There can be no assurance that such funding will ultimately be available to us on favorable terms or at all.
B.
Deferment of WPU Leasing Payments and Cash Dividend Payments
In January 2016, we reached an agreement pursuant to which WPU Leasing agreed to defer cash payments on approximately
70%
of the
$1.9 million
of debt outstanding through December 1, 2016, which reduces our cash outflow commitments by approximately
$500,000
during fiscal 2016. WPU Leasing also has the option after June 30, 2016 of taking these payments in shares of our Common Stock which would again positively impact our cash flow position going forward.
Our Board of Directors has determined that our cash resources are not currently sufficient to permit the payment of cash dividends in respect of the 10% Convertible Preferred Stock and the Series B 10% Convertible Preferred Stock. The Board of Directors has therefore determined to suspend the payment of cash dividends, commencing with the dividend payable on September 30, 2015, until such time as the Board of Directors determines that we possess funds legally available for the payment of dividends. Holders of approximately
69%
of the 10% Convertible Preferred Stock and
100%
of the Series B 10% Convertible Preferred Stock have agreed to defer cash payments indefinitely. During the six months ended March 31, 2016, Preferred Stock holders agreed to accept
4,471,191
shares of our Common Stock valued at
$565,246
in lieu of cash for dividends representing approximately
86%
of dividends due and payable during the period.
C.
Amendment of Trident Promissory Note
In December 2015, we amended the terms of the
$1.716 million
of secured notes payable to Trident Resources pursuant to which we consolidated the
two
notes into one and are not required to make any payments under the note until such time as the
two
purchased NGL processing systems are producing a minimum of
200,000
gallons of saleable product on a monthly basis. The original notes would have required cumulative payments through September 2016 of approximately
$900,000
which based on our fiscal 2016 operating plan has been reduced to
$240,000
.
D.
Iowa State Bank Working Capital Line of Credit
Iowa State Bank has agreed to extend our working capital line of credit from April 15, 2016 to April 15, 2017. In addition, we have had preliminary discussions regarding the increase of our
$500,000
limits later in fiscal 2016 as collateral levels and performance dictate. However, there can be no assurance that the Bank will increase the line of credit.
We are currently in advanced discussions with the Series D investors as well as Iowa State Bank regarding a potential restructuring of certain obligations due the bank which could positively impact our financial condition and cash flows on a go forward basis. There can be no assurance that such restructuring will ultimately happen or if it does, on favorable terms.
2. Basis of Presentation
The consolidated financial statements include the accounts of American Power Group Corporation and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim financial statements at
March 31, 2016
are unaudited and should be read in conjunction with the financial statements and notes thereto for the fiscal year ended
September 30, 2015
included in our Annual Report on Form 10-K. The balance sheet at
September 30, 2015
has been derived from the audited financial statements as of that date; certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations, although we believe the disclosures which have been made herein are adequate to ensure that the information presented is not misleading. The results of operations for the interim periods reported are not necessarily indicative of those that may be reported for a full year. In our opinion, all adjustments which are necessary for a fair statement of our financial position as of
March 31, 2016
and the operating results for the interim periods ended
March 31, 2016
and
2015
have been included.
3. Recently Issued Accounting Pronouncements
Leases.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which requires, among other things, a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee will be required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon adoption, a reporting entity should apply the provisions of ASU 2016-02 at the beginning of the earliest period presented using a modified retrospective approach, which includes certain optional practical expedients that an entity may elect to apply. We are currently evaluating the impact that the adoption of this new accounting guidance will have on our results of operations, cash flows and financial position.
Revenue Standard’s Principal-Versus-Agent Guidance.
In March 2016, the FASB issued ASU No. 2016-08, Revenue Recognition: Clarifying the new Revenue Standard’s Principal-Versus-Agent Guidance (“ASU 2016-18”). The standard amends the principal-versus-agent implementation guidance and illustrations in the FASB’s new revenue standard (ASU 2014-09). ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. As defined in the ASU, a specified good or service is “a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer”. Therefore, for contracts involving more than one specified good or service, the Company may be the principal in one or more specified goods or services and the agent for others. The new standard has the same effective date as ASU 2014-09, as amended by the one-year deferral and early adoption provisions in ASU 2015-14. In addition, entities are required to adopt ASU 2016-08 by using the same transition method they used to adopt the new revenue standard. We are currently evaluating the impact that the adoption of this new accounting guidance will have on our results of operations, cash flows and financial position.
Share-Based Compensation
. In April 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The Amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. We are currently evaluating the impact that the adoption of this new accounting guidance will have on our results of operations, cash flows and financial position.
4. Certificates of Deposit
All certificate of deposit investments have an original maturity of more than three months but less than three years and are stated at original purchase price which approximates fair value. As of
March 31, 2016
and
September 30, 2015
, respectively, we have pledged a
$310,120
and $
309,984
certificate of deposit as collateral for outstanding loans with Iowa State Bank.
5. Receivables
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating past due individual customer receivables and considering a customer’s financial condition, credit history, and the current economic conditions. Individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.
Note Receivable, Related Party
On June 30, 2015, we entered into a Loan and Security Agreement with Trident Resources LLC, pursuant to which we loaned Trident
$737,190
under the terms of a
6%
senior secured demand promissory note due September 30, 2015. The note is secured by a first priority security interest in all of Trident’s assets and has been guaranteed on a secured basis by Trident’s sole owner.
On December 1, 2015, we amended and restated the note to extend the maturity until December 31, 2015 and provide for certain additional penalties in the event of any default under such note, including a
5%
penalty for late payment. In October 2015, Trident repaid
$240,000
, of the outstanding principal balance including
$50,000
in cash and equipment valued at
$190,000
. As of
March 31, 2016
, the outstanding unpaid principal balance was
$497,190
and accrued but unpaid interest and late fees were approximately
$67,700
. As of May 16, 2016 Trident has made no additional payments. We are evaluating our alternatives but believe the value of the collateral pledged by Trident equals or exceeds the balance due and therefore believe no reserve for uncollectiblity is necessary as of March 31, 2016.
Seller’s Note Receivable, Related Party
In conjunction with the July 2009 acquisition of substantially all the American Power Group operating assets we acquired a promissory note from the previous owners of American Power Group (renamed M&R Development, Inc.), payable to us, in the principal amount of
$797,387
. The note bears interest at the rate of
5.5%
per annum and was based on the difference between the assets acquired and the consideration given.
M&R is not required to make any payments under the note until such time as we begin to make royalty payments under our technology license (see Note 7) and at that time, the aggregate principal amount due under the note is to be paid in eight equal quarterly payments plus interest. Those payments will be limited to a maximum of
50%
of any royalty payment due M&R on a quarterly basis. No payments have been made under the amended note as of
March 31, 2016
. We have classified
100%
of the balance as long term. We consider this a related party note as one of the former owners of American Power Group is now an employee of ours.
6. Inventory
Raw material inventory primarily consists of dual fuel conversion components. Work in progress includes materials, labor and direct overhead associated with incomplete dual fuel conversion projects. As of
March 31, 2016
and
September 30, 2015
, we recorded an inventory valuation allowance of
$195,983
and
$193,637
.
All inventory is valued at the lower of cost or market on the first-in first-out (FIFO) method. Inventory consists of the following:
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|
March 31,
2016
|
|
September 30,
2015
|
|
Raw materials
|
$
|
466,362
|
|
|
$
|
514,041
|
|
|
Work in progress
|
35,041
|
|
|
25,784
|
|
|
Finished goods
|
77,475
|
|
|
1,169
|
|
|
Total inventory
|
$
|
578,878
|
|
|
$
|
540,994
|
|
7. Intangible Assets
Intangible assets consist of the following:
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|
|
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|
|
|
|
|
|
March 31,
2016
|
|
September 30,
2015
|
|
Long term contracts, net
|
$
|
446,667
|
|
|
$
|
486,667
|
|
|
Purchased technology, net
|
166,667
|
|
|
191,667
|
|
|
Software development costs, net
|
2,789,731
|
|
|
2,998,076
|
|
|
Total intangible assets
|
$
|
3,403,065
|
|
|
$
|
3,676,410
|
|
We review intangibles for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of our intangible assets below their carrying value.
In conjunction with the exclusive license agreement from Trident, we recognized
$300,000
associated with the execution of the agreement. The value is being amortized on a straight line basis over an estimated useful life of
120
months. Amortization expense associated with the long term technology license agreement for the
three months and six months ended
March 31, 2016
and March 31, 2015, respectively was
$15,000
and
$0
. Accumulated amortization was
$20,000
at March 31, 2016 and
$5,000
at
September 30, 2015
.
In conjunction with the American Power Group acquisition and license agreement, we recorded intangible assets of
$500,000
associated with the execution of a long term technology license agreement and
$500,000
associated with the purchase of the dual fuel conversion technology. Both values are being amortized on a straight line basis over an estimated useful life of
120
months. Amortization expenses associated with the long term technology license agreement and the purchased dual fuel conversion technology amounted to
$25,000
and
$50,000
for the
three months and six months ended
March 31, 2016
and
2015
, respectively. Accumulated amortization was
$666,667
at
March 31, 2016
and
$616,667
at
September 30, 2015
.
The monthly royalty due under the technology license agreement is the lesser of
10%
of net sales or
30%
of pre-royalty EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). No royalties will be earned or due until such time as our cumulative EBITDA commencing April 1, 2012 is positive on a cumulative basis. During the
three months and six months ended
March 31, 2016
and
2015
, we incurred
$0
royalties to M&R.
A critical component of our dual fuel aftermarket conversion solution is the internally developed software component of our electronic control unit. The software allows us to seamlessly and constantly monitor and control the various gaseous fuels to maximize performance and emission reduction while remaining within all original OEM diesel engine performance parameters. We have developed a base software application and EPA testing protocol for both our Outside Useful Life ("OUL") and Intermediate Useful Life ("IUL") engine applications, which will be customized for each engine family approved in order to maximize the performance of the respective engine family.
As of
March 31, 2016
, we have capitalized
$4,528,203
of software development costs associated with our OUL (
$1,801,506
) and IUL ($
2,726,697
) applications, which will be amortized on a straight line basis over an estimated useful life of
60
months for OUL applications and
84
months for IUL applications. Amortization costs for the
three months and six months ended
March 31, 2016
and
2015
were
$180,888
and
$361,300
, and
$152,229
and
$282,214
, respectively. Accumulated amortization was
$1,738,472
at March 31, 2016 and
$1,377,172
at
September 30, 2015
.
Amortization expense associated with intangibles during the next five years is anticipated to be:
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NGL Services
|
|
Dual Fuel
|
|
|
|
Twelve months ending March 31:
|
Contracts
|
|
Contracts
|
|
Technology
|
|
Software
Development
|
|
Total
|
|
2017
|
$
|
30,000
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
740,781
|
|
|
$
|
870,781
|
|
|
2018
|
30,000
|
|
|
50,000
|
|
|
50,000
|
|
|
659,162
|
|
|
789,162
|
|
|
2019
|
30,000
|
|
|
50,000
|
|
|
50,000
|
|
|
439,749
|
|
|
569,749
|
|
|
2020
|
30,000
|
|
|
16,667
|
|
|
16,667
|
|
|
336,667
|
|
|
400,001
|
|
|
2021
|
30,000
|
|
|
—
|
|
|
—
|
|
|
303,601
|
|
|
333,601
|
|
|
2022 and thereafter
|
130,000
|
|
|
—
|
|
|
—
|
|
|
309,771
|
|
|
439,771
|
|
|
|
$
|
280,000
|
|
|
$
|
166,667
|
|
|
$
|
166,667
|
|
|
$
|
2,789,731
|
|
|
$
|
3,403,065
|
|
8. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
September 30,
2015
|
|
Estimated
Useful Lives
|
|
Leasehold improvements
|
$
|
127,087
|
|
|
$
|
127,087
|
|
|
5 years
|
|
Machinery and equipment
|
3,267,489
|
|
|
3,342,202
|
|
|
3 - 10 years
|
|
Construction in progress
|
1,872,569
|
|
|
1,436,908
|
|
|
|
|
Less accumulated depreciation
|
(1,334,680
|
)
|
|
(1,167,144
|
)
|
|
|
|
|
$
|
3,932,465
|
|
|
$
|
3,739,053
|
|
|
|
9. Product Warranty Costs
We provide for the estimated cost of product warranties for our dual fuel products at the time product revenue is recognized. Factors that affect our warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs, and the cost per repair. We assess the adequacy of the warranty provision and we may adjust this provision if necessary. Our warranty reserve remained approximately the same during the
six months ended March 31, 2016
. Warranty accrual is included in accrued expenses.
The following table provides the detail of the change in our product warranty accrual relating to dual fuel products as of:
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|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Twelve Months Ended
|
|
|
March 31, 2016
|
|
September 30, 2015
|
|
Warranty accrual at the beginning of the period
|
$
|
167,180
|
|
|
$
|
221,562
|
|
|
Charged to costs and expenses relating to new sales
|
17,821
|
|
|
70,426
|
|
|
Costs of product warranty claims
|
(24,608
|
)
|
|
(124,808
|
)
|
|
Warranty accrual at the end of period
|
$
|
160,393
|
|
|
$
|
167,180
|
|
10. Notes Payable/Credit Facilities
The following summarizes our notes payable as of
March 31, 2016
and
September 30, 2015
.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
September 30,
2015
|
|
Due Date
|
|
Interest Rate
|
|
Iowa State Bank, line of credit
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
April 15, 2017
|
|
8%
|
|
Iowa State Bank, notes payable
|
2,381,510
|
|
|
2,541,414
|
|
|
October 15, 2021
|
|
8%
|
|
Other unsecured term notes payable
|
29,083
|
|
|
44,315
|
|
|
June 12, 2016
|
|
3.85%
|
|
|
2,910,593
|
|
|
3,085,729
|
|
|
|
|
|
|
Less current portion
|
(379,306
|
)
|
|
(880,698
|
)
|
|
|
|
|
|
Notes payable, non-current portion
|
$
|
2,531,287
|
|
|
$
|
2,205,031
|
|
|
|
|
|
Credit Facilities
In
October 2014
, we entered into a loan agreement and new working capital line of credit with Iowa State Bank in which we refinanced approximately
$2,567,000
due to the bank under an existing loan agreement,
$30,000
for transaction fees and
$150,000
due one of our officers. Under the terms of the new term loan, we are required to make
82
monthly payments of
$44,223
including principal and interest commencing
January 15, 2015
, with the final payment of all principal and accrued interest not yet paid, due on
October 15, 2021
. The credit facility requires us to meet certain monthly loan covenants. As of
March 31, 2016
, we were not in compliance with our working capital covenant but Iowa State Bank agreed to waive the default.
Iowa State Bank has provided a
$500,000
working capital line of credit which was renewed on April 15, 2016 for an additional year.
All borrowings under the term loan and the line of credit bear interest at a rate equal to the base rate on corporate loans posted by at least 70% of the 10 largest U.S. banks (known as The
Wall Street Journal U.S. Prime Rate
) plus
4.0%
, with a minimum interest rate of
8.0%
per annum. Our obligations due Iowa State Bank continue to be secured by the grant of a first priority security interest in all of our assets including a
$310,120
certificate of deposit. In addition, under the terms of a stock transfer agreement, should we fail to make any payment when due, we have agreed to issue Iowa State Bank that number of shares of common stock which is equal in value to the past due amount. For purposes of determining the number of shares of common stock to be issued under the stock transfer agreement, the value of our common stock will be deemed to be the closing price of the common stock on the date of such default. In no event, however, will we be obligated to issue more than
2,000,000
shares of the common stock under the stock transfer agreement. In addition,
one
director and
two
officers have each pledged
500,000
shares of our common stock owned by them in the aggregate, as additional collateral to Iowa State Bank.
11. Notes Payable, Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
September 30,
2015
|
|
Due Date
|
|
Interest Rate
|
|
Term Note Payable, Trident Resources, LLC
|
$
|
1,716,500
|
|
|
$
|
1,716,500
|
|
|
Varying maturity dates
|
|
6%
|
|
Term Note Payable, WPU Leasing, LLC
|
1,837,537
|
|
|
1,385,843
|
|
|
Varying maturity dates
|
|
22.2%
|
|
Officer's Promissory Note
|
50,000
|
|
|
50,000
|
|
|
September 30, 2016
|
|
8%
|
|
Contingent Convertible Notes Payable
|
—
|
|
|
2,475,000
|
|
|
October 21, 2015
|
|
10%
|
|
|
3,604,037
|
|
|
5,627,343
|
|
|
|
|
|
|
Less current portion
|
(762,238
|
)
|
|
(2,861,083
|
)
|
|
|
|
|
|
Notes payable, non-current portion
|
$
|
2,841,799
|
|
|
$
|
2,766,260
|
|
|
|
|
|
Notes Payable-Related Party-Trident Resources, LLC
On August 12, 2015, we purchased
two
processing systems from Trident for
$1,716,500
and in return we issued Trident a promissory note for
$832,000
, which was payable in
12
equal monthly installments of principal and interest at
6.75%
commencing September 20, 2015 and a second secured promissory note for
$884,500
, which was payable in
36
equal monthly installments of principal and interest at
6%
commencing September 20, 2016. These notes are secured by liens on the purchased equipment.
As of December 1, 2015, we amended and restated these
two
secured promissory notes and combined the obligations of the original notes into a new note for
$1,716,500
which bears interest at
6%
per year with
48
monthly payments of principal and interest estimated to initially begin on August 31, 2016 assuming the Trident NGL Services division meets specified production goals in the preceding month. If these productions goals are not met, the new note provides that we may defer payments otherwise due in any month following a month in which the production goals are not met to the maturity date, without incurring any additional interest. The amended and restated note also permits us to offset against amounts otherwise due under such note in the event of any default by Trident under their promissory note to the Company.
Financing Agreement -WPU Leasing, LLC
On August 24, 2015, we entered into a Secured Financing Agreement with WPU Leasing LLC, an accredited institutional investor, the members of which are affiliated with certain members of our Board of Directors. Pursuant to this agreement, WPU Leasing committed to loan us up to
$3,250,000
to fund our purchase of
two
additional wellhead gas processing systems. Our initial note of
$1,400,000
under the financing agreement was issued on August 24, 2015 and the second note of
$500,000
was issued on October 9, 2015. The notes bear interest at the rate of
22.2%
per annum, and are secured by a security interest in the purchased equipment and are guaranteed by the Company.
In January 2016, we reached an agreement pursuant to which WPU Leasing agreed to defer cash payments on approximately
70%
of the
$1.9 million
of debt outstanding. The deferral of payments reduces our cash outflow commitments by approximately
$500,000
during fiscal 2016. WPU Leasing also has the option of taking these payments in shares of our Common Stock which would again positively impact our cash flow position going forward.
In consideration of WPU Leasing's commitment under the financing agreement, we issued to WPU Leasing's members warrants to purchase up to the lesser of (i) an aggregate of
3,250,000
shares of our Common Stock or (ii)
one
share of Common Stock for each dollar borrowed by the us under the related Loan Agreement. The initial exercise price of the warrants is
$0.20
per share and are exercisable for a period of
four
years from the date of issue and may be exercised on a cashless basis. We determined the value of these warrants using the Black Scholes option pricing model and recorded deferred financing costs of
$86,293
, which will be amortized over the term of the finance agreement.
Note Payable-Related Party- Other
In 2010, an officer loaned us
$50,000
under an unsecured promissory note, the maturity of which has been extended several times. In May 2016, the officer agreed to extend the maturity of the outstanding
$50,000
balance to September 30, 2016.
Contingent Convertible Promissory Notes - Related Parties
On June 2, 2015, we completed a private placement of
$2.475 million
of Contingent Convertible Promissory Notes with several existing shareholders and investors affiliated with members of our Board of Directors.
The unsecured notes bear simple interest at the rate of
10%
per annum and were automatically convertible into shares of Series C Convertible Preferred Stock at a conversion price of
$10,000
per share upon the effectiveness of the filing of a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock with the Secretary of State of Delaware. On October 21, 2015 the outstanding principal amount
$2,475,000
, together with approximately
$96,000
of accrued but unpaid interest, automatically was converted into approximately
257
shares of our Series C Convertible Preferred Stock .
Each share of Series C Convertible Preferred Stock is convertible into shares of our common stock at a conversion price of
$0.20
per share. Upon the conversion of the notes into shares of Series C Convertible Preferred Stock, we issued to the investors
five
year warrants to purchase 12,853,053 shares of common stock at an exercise price of
$0.20
per share. (See Note 15). In addition, one of the investors, Arrow LLC, was granted the right under certain conditions to designate
two
members of our Board of Directors.
We determined the discount on the contingent convertible promissory note to be
$1,556,687
of which
$906,874
was allocable to the warrants and
$649,813
was allocable to the intrinsic value of the conversion feature. The discount was recorded as paid-in-capital and as non-cash financing expense on the date of the conversion and is included in the results for the
six months ended March 31, 2016
.
In connection with this private placement, our securities purchase agreements dated April 30, 2012 and November 26, 2014 were amended to provide that the issuance of the Series C Convertible Preferred Stock would not trigger adjustments to the exercise price of the warrants issued in connection with those agreements (the “Prior Warrants”). We also amended the Prior Warrants to extend the term of any Prior Warrant held by the purchasers of the Notes (and their affiliates, members of their families and certain related trusts) as of the issuance of the Notes or subsequently acquired by such persons. The maximum period by which any Prior Warrant was extended is the difference between
60
months and the remaining term of the respective Prior Warrant as of the initial issuance of the Notes. The fair value of the warrants before and after the modification was determined using Black-Scholes and recorded on the balance sheet, and the difference between fair value of the extended terms and of the existing terms
of
$454,253
was recognized in the income statement as non-cash warrant extension expense during the fiscal year ended September 30, 2015.
Each share of Series C Preferred Stock is convertible, at any time at the option of any holder, into
50,000
shares of the Company’s Common Stock, at a conversion price of
$0.20
per share. The conversion ratio of the Series C Preferred Stock is subject to adjustment in the event that, with certain exceptions, we issue shares of Common Stock or other securities convertible into or exchangeable for Common Stock at a price per share that is less than the then applicable conversion price of the Series C Preferred Stock. The Series C Preferred Stock does not bear dividends.
The holders of the Series C Preferred Stock vote with the holders of the Common Stock and the holders of the Company’s 10% Convertible Preferred Stock (the “Series A Preferred Stock”) and Series B 10% Convertible Preferred Stock on all matters presented to the holders of the Preferred Stock, on a Common Stock-equivalent basis. In addition to certain approval rights of the holders of the Series A Preferred Stock and/or the Series B Preferred Stock, the approval of the holders of at least
67%
of the outstanding shares of Series C Preferred Stock will be required before we may take certain actions as described in the Certificate of Designation.
The holders of the Series C Preferred Stock have priority in the event of a liquidation of the Company over the outstanding shares of Common Stock. Upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution or payment is made to the holders of the Common Stock, the holders of the Preferred Stock will be entitled to be paid out of the assets of the Company an amount equal to the stated value of the Preferred Stock, which is initially
$10,000
per share, plus (in the case of the Series A Preferred Stock and the Series B Preferred Stock) any accrued, but unpaid, dividends.
The Preferred Stock may be required to convert into shares of Common Stock at our election if the trading price of the Common Stock meets certain thresholds as set forth in the Certificate of Designation. If we fail to meet certain obligations affecting the Preferred Stock, the holders of Preferred Stock may require the Company to redeem the Preferred Stock.
The Series C Preferred Stock is subject to the rights and privileges of our Series D Convertible Preferred Stock, our Series D-2 Convertible Preferred Stock and our Series D-3 Convertible Preferred Stock. (See Note 15)
12. Commitments and Contingencies
Lease Settlement Obligations:
We are currently renting property located in Georgia relating to a former discontinued business. We have the right to terminate the Georgia lease with
6 months
notice but are obligated to continue to pay rent until the earlier to occur of (1) the sale by the landlord of the premises; (2) the date on which a new long term tenant takes over; or (3)
3 years
from the date on which we vacate the property. As a result, we have recorded a lease settlement obligation of
$574,058
representing the net present value of the
36 months
maximum obligation due under the new amended agreement. We currently sublease two portions of the property to an entity which is paying
$8,000
per month starting in September 2015 up from
$7,500
per month on a tenant-at-will basis.
In March 2016, we notified the landlord of our intent to terminate the lease and are working with the landlord and our tenant towards a goal of our tenant leasing the entire facility from the landlord. In addition, we amended the existing lease with the landlord to reduce the monthly rental amount by
$2,500
per month to
$15,152
starting April 1,2016.
13. Warrants to Purchase Common Stock
In conjunction with the private placement of our
10%
Convertible Preferred stock in April 2012 and November 2014, we issued warrants which contained a "down-round" provision that provides for a reduction in the warrant exercise price if there are subsequent issuances of additional shares of common stock for consideration per share less than the per share warrant exercise prices. In October 2012, the Financial Accounting Standards Board (FASB), issued ASU 2012-04,
Technical Corrections and Improvement ("ASU 2012-04"),
which contained technical corrections to guidance on which we had previously relied upon in forming our initial conclusions regarding the accounting for warrants containing these reset provisions. Pursuant to this guidance and effective commencing October 1, 2013, we have recognized the fair value of these warrants as a liability and have re-measured the fair value of these warrants on a quarterly basis with any increase or decrease in the estimated fair value being recorded in other income or expense for the respective quarterly reporting period.
We have historically used the Black-Scholes option pricing model to determine the fair value of options and warrants. We have considered the facts and circumstances in choosing the Black-Scholes model to calculate the fair value of the warrants with a down-round price protection feature as well as the likelihood of triggering the down-round price protection feature, which, as described below, we have concluded is remote.
In determining the initial fair value of the warrants associated with the April 2012 Convertible Preferred Stock private placement as of October 1, 2013, we prepared a valuation simulation using the Black Scholes option pricing model as well as additional models using a modified Black Scholes option pricing model and a Binomial Tree option pricing model. We determined the initial fair value of the warrants associated with the November 2014 Convertible Preferred Stock private placement to be
$694,631
based on a valuation simulation using the Black Scholes option pricing model. Both additional simulations included various reset scenarios, different exercise prices, and other assumptions, such as price volatility and interest rates, that were kept consistent with our original Black-Scholes model. The resulting warrant values as determined under the modified Black-Scholes model and the Binomial Tree option model were not materially different from the values generated using the Black-Scholes model. We have therefore determined to use the Black-Scholes model as we believe it provides a reasonable basis for valuation and takes into consideration the relevant factors of the warrants, including the down round provision.
During the three and six months ended
March 31, 2016
and
March 31, 2015
, we recorded warrant valuation income of
$7,060
and
$201,321
, and
$1,315,235
and $
5,802,241
, respectively, associated with the change in the estimated fair value of all warrants containing the down round provision outstanding. Our warrant liability was
$22,287
and
$223,608
as of
March 31, 2016
and
September 30, 2015
, respectively.
The warrant liabilities were valued at
March 31, 2016
, using the Black-Scholes option-pricing model with the following assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Convertible Preferred Stock Financing
|
|
Warrants
|
|
Private Placement 1
|
|
Private Placement 2
|
|
Private Placement 3
|
|
|
|
March 31
2016
|
|
September 30
2015
|
|
March 31
2016
|
|
September 30
2015
|
|
March 31
2016
|
|
September 30
2015
|
|
Closing price per share of common stock
|
|
$
|
0.12
|
|
|
$
|
0.29
|
|
|
$
|
0.12
|
|
|
$
|
0.29
|
|
|
$
|
0.12
|
|
|
$
|
0.29
|
|
|
Exercise price per share
|
|
0.50
|
|
|
0.50
|
|
|
0.50
|
|
|
$
|
0.50
|
|
|
0.50
|
|
|
0.50
|
|
|
Expected volatility
|
|
71.0
|
%
|
|
64.0
|
%
|
|
71.0
|
%
|
|
64.0
|
%
|
|
71.0
|
%
|
|
64.0
|
%
|
|
Risk-free interest rate
|
|
0.7
|
%
|
|
0.6
|
%
|
|
0.8
|
%
|
|
.01
|
%
|
|
1.0
|
%
|
|
1.6
|
%
|
|
Dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Remaining expected term of underlying securities (years)
|
|
1.5
|
|
2
|
|
2.5
|
|
3
|
|
4.1
|
|
4.6
|
|
Warrants outstanding
|
|
17,623,387
|
|
|
17,623,387
|
|
|
6,032,787
|
|
|
6,032,787
|
|
|
5,000,000
|
|
|
5,000,000
|
|
|
Warrants outstanding with down-round provision
|
|
2,742,763
|
|
|
2,742,763
|
|
|
905,917
|
|
|
905,917
|
|
|
—
|
|
|
—
|
|
Private Placement 1
- April 30, 2012, sale of
821.6
units of
10%
Convertible Preferred Stock
Private Placement 2
- March 31, 2013, additional investment right from Private Placement 1, sale of approximately
274
units of
10%
Convertible Preferred Stock.
Private Placement 3
- November 28, 2014, sale of
200
shares of Series B
10%
Convertible Preferred Stock
14. Fair Value Measurements
The carrying amount of our receivables and payables approximate their fair value due to their short maturities.
Accounting principles provide guidance for using fair value to measure assets and liabilities. The guidance includes a three level hierarchy of valuation techniques used to measure fair value, defined as follows:
|
|
|
|
•
|
Level 1 - Unadjusted Quoted Prices. The fair value of an asset or liability is based on unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 - Pricing Models with Significant Observable Inputs. The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction.
|
|
|
|
|
•
|
Level 3 - Pricing Models with Significant Unobservable Inputs. The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument. Therefore, these assumptions are unobservable in either an active or inactive market.
|
We consider an active market as one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions of the asset or liability, the prices are not current, or price quotations vary substantially either over time or amount market makers. When appropriate, non-performance risk, or that of a counterparty, is considered in determining the fair values of liabilities and assets, respectively.
We have classified certain warrants related to the
10%
Convertible Preferred Stock private placements noted in Note 11 as a Level 3 Liability. Assumptions used in the calculation require significant judgment. The unobservable inputs in our valuation model includes the probability of additional equity financing and whether the additional equity financing would trigger a reset on the down-round protection.
The following table summarizes the financial liabilities measured a fair value on a recurring basis as of
September 30, 2015
and
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
223,608
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
223,608
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
22,287
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,287
|
|
Level 3 Valuation
The following table provides a summary of the changes in fair value of our financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six month period ended
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
Warrant
Liability
|
|
Level 3
|
|
|
|
Balance at September 30, 2015
|
|
$
|
223,608
|
|
|
Revaluation of warrants recognized in earnings
|
|
(201,321
|
)
|
|
Balance at March 31, 2016
|
|
$
|
22,287
|
|
15. Stockholders’ Equity
Authorized Shares
On October 21, 2015, our shareholders approved an amendment to our Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from
150 million
to
200 million
shares and on May 13, 2016 approved an additional increase to
350 million
shares.
Common Shares
During the three months ended March 31, 2016, an officer agreed to accept
100,012
shares of our Common Stock valued at
$11,000
in lieu of vacation pay due him.
Issuance of Series D Convertible Preferred Stock
On January 8, 2016, we sold
22
shares of Series D Convertible Preferred Stock for gross proceeds of
$2.2 million
to several existing shareholders and entities affiliated with several members of our Board of Directors and issued warrants to purchase up to
44,000,000
shares of our Common Stock at an exercise price of
$.10
per share. Each share of the Series D Convertible Preferred Stock, which has a stated value of
$100,000
, is convertible, at any time at the option of the holder, into
1 million
shares of Common Stock at a conversion price of
$0.10
per share. The Series D Preferred Stock has a
10%
annual dividend, payable quarterly in cash or in shares of Common Stock at our Board of Director’s discretion.
The holders of the Series D Preferred Stock will receive certain liquidation preferences over the holders of our other convertible preferred stock and common stock, and have been provided similar preferential treatment with respect to all other shares of convertible preferred stock held by them.
The warrants are subject to certain exercise restrictions, do not contain cashless exercise provisions and do not contain anti-dilution protections. The warrants may be exercised at any time with respect to not more than
22,000,000
shares of Common Stock until such time as the Company has filed a certificate of amendment to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware increasing the number of authorized shares of Common Stock from
200,000,000
to
350,000,000
shares. On May 13, 2016, our shareholders approved the increase in authorized shares and we intend to file the amendment shortly thereafter. If the holders of a majority of the Series D Convertible Preferred Stock (measured with reference to the number of shares of Common Stock issuable from time to time upon the exercise of all New Warrants) exercise their respective Series D warrants in whole or part, the holders of all Series D warrants are required to exercise a
pro rata
portion of their Series D warrants. All of the warrants previously issued to each investor in this financing were amended to provide that the investor may not exercise those warrants until the investor exercises the new warrants for cash.
Each Series D investor (and their affiliates, members of their families and certain related trusts) agreed to exchange their existing 10% Convertible Preferred Stock (
197
shares) and/or Series B 10% Convertible Preferred Stock (
200
shares) for an equal number of shares of our new Series D-2 Convertible Preferred Stock and exchanged their Series C Convertible Preferred Stock (
205
shares) for an equal number of shares of a new Series D-3 Convertible Preferred Stock. Except for the liquidation preferences described below, the terms and conditions of the Series D-2 Preferred Stock are substantially equivalent to the terms and conditions of the Series A Preferred Stock and of the Series B Preferred Stock, and the terms and conditions of the Series D-3 Preferred Stock are substantially equivalent to the terms and conditions of the Series C Preferred Stock.
In connection with this private placement, our securities purchase agreements dated April 30, 2012, November 26, 2014 and June 2, 2015 were amended to reduce the exercise price on approximately
21 million
warrants previously issued to the Purchasers (and their affiliates, members of their families and certain related trusts) in conjunction with these agreements to the Series D Preferred Stock conversion price noted above.
We determined the relative fair value of the Series D Convertible Preferred Stock to be
$894,925
, the relative fair value of the investor warrants to be
$1,087,333
and the relative fair value of change in exercise price of the approximate
21 million
previously issued warrants to be
$217,742
. The fair value of the investor warrants and the repriced warrants before and after the modification was determined using Black-Scholes and recorded on the balance sheet as part of stockholder’s equity. We determined a beneficial conversion feature of
$1,550,924
based on the intrinsic value of the shares of common stock to be issued pursuant to these rights. The value of the beneficial conversion feature is considered a “deemed dividend” with
$1,257,178
recorded as a charge to retained earnings during the three months ended March 31, 2016 and the balance of
$293,746
will be recorded as a charge to retained earnings upon shareholder approval of the increase in authorized shares at the May 13, 2016 Annual Meeting.
The April 30, 2014 Voting Agreement between us and the 10% Convertible Preferred Stock holders was amended and restated to allow the holders of a majority of the Series D Convertible Preferred Stock to designate (i) three persons to be appointed or elected to our Board of Directors and (ii) nominate
three
candidates for election to the Board of Directors by the holders of Common Stock voting together as a single class.
10% Convertible Preferred Stock Dividends
Our Board of Directors has determined that our cash resources are not currently sufficient to permit the payment of cash dividends in respect of the 10% Convertible Preferred Stock and the Series B 10% Convertible Preferred Stock. The Board of Directors has therefore determined to suspend the payment of cash dividends, commencing with the dividend payable on September 30, 2015, until such time as the Board of Directors determines that the Company possesses funds legally available for the payment of dividends. Holders of approximately
69%
of the 10% Convertible Preferred Stock and 100% of the Series B 10% Convertible Preferred Stock have agreed to defer cash payments indefinitely.
During the
six months ended March 31, 2016
, we recorded Preferred Stock dividends of
$619,528
, of which
$92,381
remains in accrued dividends. Certain stockholders agreed to accept
4,471,291
shares of Common Stock (valued at
$565,247
) in lieu of cash dividend payments of
$295,815
due for the current quarter and
$269,431
due for previous quarters.
During the
six months ended March 31, 2015
, we recorded Preferred Stock dividends of
$550,686
, of which
$285,805
was paid in cash. Certain stockholders agreed to accept
964,883
shares of Common Stock (valued at
$264,881
) in lieu of cash dividend payments.
Stock Options
In October 2015, we granted options to a new director to purchase
250,000
shares of our Common Stock at an exercise price of
$0.25
per share, which represented the closing price of our stock on the date of the grant. The options were granted under the 2005 Stock Option Plan, have a
five
-year term and vest equally over a period of
fifteen
months from date of grant. The fair value of the options at the date of grant in aggregate was
$35,394
, which was determined on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions; dividend yield of
0%
; risk-free interest rates of approximately
1.4%
; expected volatility based on historical trading information of
68%
and expected term of
5 years
.
In March 2016, we granted options under the 2016 Stock Option Plan to employees to purchase
1,320,000
shares of our Common Stock at an exercise price of
$0.15
per share, which represented the closing price of our stock on the date of the grant. The options have a
five
-year term and vest equally over a period of
60
months from date of grant. The fair value of the options at the date of grant in aggregate was
$117,416
, which was determined on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions; dividend yield of
0%
; risk-free interest rates of approximately
1.5%
; expected volatility based on historical trading information of
72%
and expected term of
5 years
. The options were granted subject to shareholder approval of the 2016 Stock Option Plan which was received May 13, 2016.
Amortization of stock compensation expense was
$13,175
and
$40,311
, and
$5,444
and
$14,605
for the
three and six months ended
March 31, 2016
and 2015, respectively. Our Board of Directors agreed to extend the exercise period from
3
months to
18
months on options to purchase
340,000
shares of our Common Stock owned by a former director who resigned on October 1, 2015. The fair value of the options before and after the modification was determined using Black-Scholes and the difference between fair value of the extended terms and of the existing terms of
$15,793
is included in the stock compensation expense for the
six months ended March 31, 2016
.
The unamortized compensation expense at
March 31, 2016
was
$169,057
and will be amortized over a weighted average remaining life of approximately
3.8 years
.
16. Segment Information
We have
two
reportable operating segments: (1) dual fuel conversion operations and (2) natural gas liquids operations. Each operating segment has its respective management team.
Our Chief Executive Officer has been identified as the chief operating decision maker (CODM) as he is responsible for assessing the performance of the segments and decides how to allocate resources to the segments. Income (loss) from operations is the measure of profit and loss that our CODM uses to assess performance and make decisions. Assets are a measure used to assess the performance of the company by the CODM; therefore we will report assets by segment in our disclosures. Income (loss) from operations represents the net sales less the cost of sales and direct operating expenses incurred within the operating segments as well as the allocation of some but not all corporate operating expenses. These unallocated costs include certain corporate functions (certain legal, accounting, wage, public relations and interest expense) and are included in the results below under Corporate in the reconciliation of operating results. Management does not consider unallocated Corporate in its management of segment reporting. There were no sales between segments for the three months and six months ending
March 31, 2016
and
March 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dual Fuel Conversions
|
|
NGL Services
|
|
Corporate
|
|
Consolidated
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
608,526
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
608,526
|
|
|
Amortization
|
|
205,888
|
|
|
7,500
|
|
|
14,669
|
|
|
228,057
|
|
|
Depreciation
|
|
54,565
|
|
|
43,325
|
|
|
—
|
|
|
97,890
|
|
|
Operating loss from continuing operations
|
|
(786,952
|
)
|
|
(202,594
|
)
|
|
(312,843
|
)
|
|
(1,302,389
|
)
|
|
Interest and financing costs
|
|
65,653
|
|
|
121,988
|
|
|
(5,935
|
)
|
|
181,706
|
|
|
Total assets
|
|
6,010,715
|
|
|
3,428,352
|
|
|
1,340,502
|
|
|
10,779,569
|
|
|
Capital expenditures
|
|
1,568
|
|
|
40,023
|
|
|
—
|
|
|
41,591
|
|
|
Software development
|
|
105,359
|
|
|
—
|
|
|
—
|
|
|
105,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dual Fuel Conversions
|
|
NGL Services
|
|
Corporate
|
|
Consolidated
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
474,399
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
474,399
|
|
|
Amortization
|
|
177,229
|
|
|
—
|
|
|
5,444
|
|
|
182,673
|
|
|
Depreciation
|
|
71,130
|
|
|
—
|
|
|
—
|
|
|
71,130
|
|
|
Operating loss from continuing operations
|
|
(817,194
|
)
|
|
—
|
|
|
(286,134
|
)
|
|
(1,103,328
|
)
|
|
Interest and financing costs
|
|
74,584
|
|
|
—
|
|
|
(6,184
|
)
|
|
68,400
|
|
|
Total assets
|
|
6,641,618
|
|
|
—
|
|
|
1,127,107
|
|
|
7,768,725
|
|
|
Capital expenditures
|
|
141,768
|
|
|
—
|
|
|
—
|
|
|
141,768
|
|
|
Software development
|
|
146,342
|
|
|
—
|
|
|
—
|
|
|
146,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dual Fuel Conversions
|
|
NGL Services
|
|
Corporate
|
|
Consolidated
|
|
Six Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,073,193
|
|
|
$
|
29,983
|
|
|
$
|
—
|
|
|
$
|
1,103,176
|
|
|
Amortization
|
|
411,300
|
|
|
15,000
|
|
|
42,303
|
|
|
468,603
|
|
|
Depreciation
|
|
114,916
|
|
|
86,650
|
|
|
—
|
|
|
201,566
|
|
|
Operating loss from continuing operations
|
|
(1,449,433
|
)
|
|
(438,510
|
)
|
|
(710,698
|
)
|
|
(2,598,641
|
)
|
|
Interest and financing costs
|
|
146,925
|
|
|
236,233
|
|
|
1,601
|
|
|
384,759
|
|
|
Total assets
|
|
6,010,715
|
|
|
3,428,352
|
|
|
1,340,502
|
|
|
10,779,569
|
|
|
Capital expenditures
|
|
4,561
|
|
|
435,661
|
|
|
—
|
|
|
440,222
|
|
|
Software development
|
|
152,955
|
|
|
—
|
|
|
—
|
|
|
152,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dual Fuel Conversions
|
|
NGL Services
|
|
Corporate
|
|
Consolidated
|
|
Six Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,530,365
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,530,365
|
|
|
Amortization
|
|
332,214
|
|
|
—
|
|
|
14,605
|
|
|
346,819
|
|
|
Depreciation
|
|
146,849
|
|
|
—
|
|
|
—
|
|
|
146,849
|
|
|
Operating loss from continuing operations
|
|
(1,220,432
|
)
|
|
—
|
|
|
(648,946
|
)
|
|
(1,869,378
|
)
|
|
Interest and financing costs
|
|
145,295
|
|
|
—
|
|
|
(12,090
|
)
|
|
133,205
|
|
|
Total assets
|
|
6,641,618
|
|
|
—
|
|
|
1,127,107
|
|
|
7,768,725
|
|
|
Capital expenditures
|
|
80,712
|
|
|
—
|
|
|
—
|
|
|
80,712
|
|
|
Software development
|
|
297,653
|
|
|
—
|
|
|
—
|
|
|
297,653
|
|
17. Subsequent Event
Executive Officer Employment Agreements
On April 1, 2016, we gave notice of non-renewal of our Chairman’s employment agreement. Upon the termination of that agreement on April 1, 2017, he will become an employee at will. In an effort to conserve cash, our Chairman agreed to reduce his cash salary by
50%
commencing April 1, 2016 and accepted
355,258
unregistered shares of our Common Stock for the remaining balance of his salary, net of taxes. In addition, all previously granted stock options were terminated and he was granted the following stock options under the 2016 Stock Option Plan, which plan is subject to shareholder approval: (i) immediately exercisable options to purchase up to
250,000
shares of the our Common Stock and (ii) options to purchase up to
600,000
shares of our Common Stock which vest in equal annual installments on October 1
st
commencing with October 1, 2016. The options have an exercise price equal to the fair market value of the common stock as of the date of grant and have a term of
10 years
from date of grant.
On April 25, 2016, we entered into new employment agreements with our CEO and CFO with an initial term ending October 1, 2017 and no changes to their current base salary or benefits. The employment agreements may be renewed by the Company for additional
one year
terms.
Under the terms of the new agreements all outstanding grants of stock options have been terminated and each has been granted stock options under our 2016 Stock Option Plan which plan is subject to shareholder approval. Our CEO was granted the following stock options: (i) immediately exercisable options to purchase up to
900,000
shares of our Common Stock, (ii) options to purchase up to
2,100,000
shares of our Common Stock which vest in equal annual installments over a period of
five years
from date of grant and (iii) options to purchase up to
3,000,000
shares of our Common Stock which shall vest in
four
annual installments starting in 2017 based upon achieving certain annual performance milestones as determined annually by the Company’s Board of Directors. All options were granted with an exercise price equal to the fair market value of the common stock as of the date of grant and have a term of
10 years
from date of grant.
Our CFO was granted the following stock options: (i) immediately exercisable options to purchase up to
700,000
shares of the our Common Stock, (ii) options to purchase up to
500,000
shares of our Common Stock which vest in equal annual installments over a period of
five years
from date of grant and (iii) options to purchase up to
800,000
shares of our Common Stock which shall vest in
four
annual installments starting in 2017 based upon achieving certain annual performance milestones as determined annually by the Company’s Board of Directors. All options were granted with an exercise price equal to the fair market value of the common stock as of the date of grant and have a term of
10 years
from date of grant.
Annual Shareholders Meeting Results
On May 13, 2016, our shareholders (1) renewed the term for the
four
directors up for re-election; (2) approved an increase to our authorized shares of Common Stock from
200 million
to
350 million
and (3) approved the 2016 Stock Option Plan.
