|• FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 101.INS • EXHIBIT 101.SCH • EXHIBIT 101.CAL • EXHIBIT 101.DEF • EXHIBIT 101.LAB • EXHIBIT 101.PRE|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2012.
For the Transition Period From ___ to ___.
Commission file number 000-54044
USA Synthetic Fuel Corporation
(Exact name of registrant as specified in its charter)
312 Walnut Street, Suite 1600, Cincinnati, Ohio 45202
(Address of Principal Executive Offices, Including Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), Yes x No o
and (2) has been subject to such filing requirements for the past 90 days. Yes x No
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There were 76,425,248 shares of the Registrant’s Common Stock issued and outstanding on March 31, 2012.
USA Synthetic Fuel Corporation
Index to Form 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a complete presentation of our financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
NOTE 1 – BASIS OF PRESENTATION
The interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-K as promulgated by the Securities and Exchange Commission. Accordingly, these consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. These interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the period ended December 31, 2011. In the opinion of management, the interim unaudited consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.
The consolidated statements of operations and cash flows reflect the results of operations and the changes in cash flows of the Company for the three month period ended March 31, 2012. Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis of accounting which contemplates continuity of operations, realization of assets, liabilities, and commitments in the normal course of business. As of March 31, 2012 and December 31, 2011, the Company has a working capital deficit, deficit accumulated during the development stage and has incurred significant losses since inception. Further losses are anticipated in the development stage raising substantial doubt as to the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company plans to acquire sufficient capital from its investors with which to pursue its business plan. There can be no assurance that the future operations will be significant and profitable, or that the Company will have sufficient resources to meet its objectives. There is no assurance that the Company will be successful in raising additional funds.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements concerning: our plans, strategies and objectives for future operations; new products or developments; future economic conditions, performance or outlook; the outcome of contingencies; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this Quarterly Report on Form 10-Q and are not guarantees of future performance or actual results. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Reform Act of 1995.
References to “we”, “us”, “USASF”, “USFC”, “the Company”, and “our Company” all refer to USA Synthetic Fuel Corporation and its subsidiaries unless the context otherwise requires.
USA Synthetic Fuel Corporation (“USASF” or the “Company”) is an environmentally focused alternative energy company pursuing clean energy solutions based on gasification and other proven Btu conversion technologies. USASF is a development stage company and, as of March 31, 2012 had $356 of cash on hand, no inception to date revenues, and there are substantial doubts about the Company’s ability to continue as a going concern. We intend to develop, finance, construct, own and operate gasification, synthetic natural gas, and Fisher Tropsch liquid production facilities, to convert lower value, solid hydrocarbons such as coal, petroleum coke and biomass into higher value, environmentally cleaner energy sources. These lower value, solid hydrocarbons are one class of feedstock that may be used in gasification processes in order to produce synthetic gas. Other classes of feedstock that may be used as feedstock to produce synthetic gas include petroleum liquids, petroleum byproducts, asphaltenes, natural gas and other similar gases. For the purposes of this quarterly statement, hereinafter the terms “solid hydrocarbon(s)”, “feedstock(s)”, and “solid hydrocarbon feedstock(s)” are used interchangeably in the remainder of this quarterly statement. For this discussion, the terms “lower value” and “higher value” refer to the approximate market cost of the sources on a barrel of oil equivalent basis, which equals an equivalent energy content basis of 5.8 million British thermal units. The produced energy sources such as synthetic natural gas and liquid transportation fuels are considered to be “environmentally cleaner” because they produce significantly reduced emissions of materials of concern such as sulfur oxides, nitrogen oxides, and particulates when burned compared with coal or petroleum coke.
USASF plans to launch its integrated business strategy to control its solid hydrocarbon feed supply and costs, with flexibility in sourcing, to ensure continued low-cost production to satisfy sales commitments and create acceptable margins from its operations with the following major assets:
GEI acquired the leases from this third party who indicated, at that time,its belief that a maximum of 694.9 million gross tons, and most likely 521.0 million potentially recoverable tons, of Powder River Basin coal could be expected to be to produce from the total acreage. After Global Energy, Inc. acquired the leases from the third party, it commissioned Weir International, Inc. to prepare an updated, more definitive, report of the holdings and recoverable resources. GEI made the drilling records available to Weir International, Inc. who prepared maps of each seam, depicting drill-hole location, depth, and seam thickness. Drill hole density, used to delineate these seams and construct the isopach maps, was approximately 24.6 acres for Healy, 29 acres for Cameron and 49 acres for UCross. Weir International, Inc. utilized all of the drill logs for the holes and topographical maps with approximate locations of the drill holes for the study area provided by GEI. In addition, they also reviewed public information on the general geology of the area, and acquired topographic maps in appropriate computer format for use in locating outcrops of the seams and to create offset boundaries for streams and highways. The available data for all of the drill holes was compiled into a database suitable for modeling using detailed computer software typically utilized by Weir International, Ltd. The database was analyzed by the computer software and used to develop a geological model of the Healy, Cameron and Ucross seams. They then prepared seam structure and coal thickness maps based on the geological model, and from that, determined the average thickness and coal quality for the Healy, Cameron and Ucross seams. Weir International, Ltd. determined that the Healy, Cameron and Ucross seams had average thicknesses of 25.2 feet, 7.6 feet, and 27.6 feet, respectively. We believe the computer generated isopach maps are more precise than those produced in the 1980’s. From these data, Weir maps depict gross and net isopleths across the property for each seam. These maps are typical of those used by mining companies to assess deposits. Weir International, Inc. used the U.S. Geologic Survey Circular 891 (1983) to classify the estimated resources, conservatively considered areas that most likely would not be mined, such as proximity to public roads and property boundaries, and utilized a 92 percent recovery factor to estimate the potentially recoverable resources. Weir International, Inc. report concludes that there are actually over 711 million tons in place, but that 402 million tons should be taken as the conservative potentially recoverable resource amount. Ownership of the coal leases was subsequently transferred from GEI to Interfuel E&P Ltd. The Weir International, Inc. report formed one basis of the Barrel of Oil Equivalent Energy Purchase & Sale Agreement between Interfuel E&P Ltd and Cleantech Energy Company.
Weir International, Inc. is a mining, geology and energy consulting firm founded in 1936. The firm is comprised of 25 technical and administrative personnel with expertise in specialized engineering and management disciplines within the mining, geology and energy arenas. A review of the firm’s web site, http://www.weirintl.com, shows a broad and diverse client base across the country. Their expertise includes geological and geotechnical engineering, geology and geologic mine modeling, mining engineering and planning, environmental engineering, coal and mineral processing, economic and financial analysis, reserve audits, economic analysis, asset appraisals, reserve valuations and feasibility studies.
Based upon these data, we believe this solid hydrocarbon energy asset consists of over 711 million tons of in place resources of which 402 million tons of PRB coal are potentially recoverable resources. While it remains to be seen how much more coal can be produced above the 402 million net tons, we and Interfuel are in agreement that, based on the Weir International report, the 402 million net ton basis represents a conservative value and is the correct one to use. The 1.02 billion BOE described elsewhere in this registration statement equals the energy content of the net tons of PRB referred to here. We have acquired the energy asset from Interfuel E&P as described in Item 1. Business: Project Descriptions: Cleantech Energy Project. This approximately 1.02 billion BOE of solid hydrocarbons represents a 25 year, low cost feedstock supply for the Cleantech Energy Project. Additionally, because the Cleantech Energy Project is adjacent to the solid hydrocarbon energy asset, transportation expenses would be minimized for this project, resulting in an additional economic advantage for the project.
In the event Cleantech Energy Company does not commence construction of the Cleantech Energy Project for any reason other than willful misconduct by June 18, 2012 (or, if extended for one year, by June 18, 2013), Interfuel E&P Ltd. may terminate the contract resulting in an unwinding of the transaction pursuant to the Barrel of Oil Equivalent Energy Purchase & Sale Agreement whereby Cleantech Energy Company would re-convey the energy asset to Interfuel E&P Ltd., which then would return the preferred shares to Cleantech Energy Company. While we believe the parties intend to mutually extend the agreement if necessary, we can give no assurances of that or that the construction of the Cleantech Energy Project will commence by this deadline and, as a result, we may not be able to receive commercially feasible quantities of the solid hydrocarbon which may have a negative impact on this project as discussed below.
We do not own proven or probable reserves in connection with any of our projects nor do we know if it is commercially feasible to receive a sufficient quantity of BOE from our solid hydrocarbon energy asset to support the development and operation of our Cleantech Energy Project. Construction of the Cleantech Energy Project will depend, in part, upon our confirmation that it is economically feasible to extract a sufficient quantity of BOE from the solid hydrocarbon energy asset and upon future delivery of the solid hydrocarbon energy asset to support the development and operation of that project. If we determine that we will be unable to extract a sufficient quantity of BOE from the energy asset or if we are unable to receive a sufficient quantity of solid hydrocarbons from this energy asset to justify the construction of the Cleantech Energy Project, we may decide to redesign, relocate, develop alternate feedstock supplies, delay, or elect not to proceed on the development of this, or another, project. Furthermore, if we determine that it is not commercially feasible to receive our solid hydrocarbon energy asset, we may be required to write off the value of the asset or to record an impairment or other charge on our consolidated financial statements that could have a material adverse effect on our business, financial condition and results of operations. For purposes of serving as collateral for the planned $350 million bond transaction, a leading consulting firm was commissioned to value the BOE energy asset (1.02 billion BOE in solid hydrocarbons). At December 30, 2011, the consulting firm indicated a value for this asset of $1.045 billion.
Cleantech Energy Company plans to engage a contract production company to permit, finance, own and operate a facility to extract the solid hydrocarbon and deliver it to Cleantech Energy Company. The third party solid hydrocarbon production operation, once permitted by the State of Wyoming, will essentially be a surface mining operation. There are three seams of solid hydrocarbon, each overlain by overburden soil of varying depths – ranging from zero to over 100 feet. The method and sequencing of overburden removal and stockpiling will be developed by the production company and will be described in detail in its application to the State of Wyoming. While the initial operation of the facility will utilize the shallowest seam of coal, the production plan will seek to avoid or minimize repeated handling of overburden, and to optimize production of all seams in a given area methodically and optimally across the over 8600 acre leasehold. As the facility currently is planned to be located at a suitable location within the leasehold site area, transport of solid hydrocarbon to the facility will most likely be by conveyor, backed up by large capacity truck, as appropriate. Our current plan calls for feedstock to be delivered into covered structures in accordance with state requirements, for weather protection and to facilitate blending for optimum feedstock composition. We have not yet identified or engaged a contract production company to permit, finance, own and operate a facility to extract the solid hydrocarbon and deliver it to the Cleantech Energy Project.
Our goal is to develop and construct ultra clean Btu Conversion, SNG and synthetic crude production facilities in the United States. Over the next four years we will require substantial capital resources to fund construction and financing costs relating to the development of our principal projects. Project costs for full construction of Gas 1, Gas 2 and Combined Cycle Gas Turbine are expected to be approximately $497.0 million, $1.02 billion, and $627.3 million, respectively. Additional project costs for the full construction of Cleantech Energy Project are expected to be approximately $2.3 billion. We have not yet entered into fixed price engineering, procurement and construction (“EPC”) arrangements with respect to our Cleantech Energy Project, but have considered the possibility of entering into general services agreements with a third party to provide EPC services with respect to such project. As stated elsewhere in this quarterly report on Form 10-Q, our basic strategy is to have our projects contract with Gasification Engineering Corporation (“GEC”), a related party, to provide EPC services. In turn, GEC will contract with a third-party general contractor to provide Design-Build EPC services, as defined by the Design-Build Institute of America which include engineering as part of their team services. We believe this approach should allow us more directly to control and manage the EPC services ourselves, thereby giving us greater control over the expenditures associated with a project. We believe this approach will result in lower project costs and shorter schedules. We believe this type of contracting approach will provide mechanisms to manage cost, schedule and performance, and to provide appropriate guarantees and a pool of funds to cover liquidated damage requirements. When warranted, GEC may structure the Design-Build contract as a “fast track” contract instead of a fixed price agreement. While a fixed price structure establishes a guaranteed price at the outset, the fast-track approach begins on a time and material basis. When an agreed amount of progress has been made and the project cost is better known, it can be converted to a fixed price basis for the remainder of work. Cost escalation risk shifts from the owner during the early portion to the contractor in the later portion. The project company, as the project owner, will generally have its own rationale and justification for the fast-track approach. Neither we nor GEC are currently negotiating a "fast-track" EPC contract for any project currently in development; nor have we concluded definitively that we will enter into such a contract. As a result, project costs for the Cleantech Energy Project are based upon our internal estimates. Note that project costs include capital, engineering, procurement and construction (“EPC”) and other owner costs incurred up to commencement of operations (such as interest during construction and development fees), but do not include annual fixed or variable facility operations and maintenance costs, including the cost of purchasing solid hydrocarbon feedstock which itself reflects the cost of extraction and delivery of the solid hydrocarbon. We intend to finance a significant amount of the funds necessary for the construction of our projects through a mix of equity and debt, which will consist primarily of project-specific non-recourse debt using the assets of each project to secure such debt. As a result, we will be highly leveraged and our assets will be subject to forfeiture upon any default on project-specific debt.
Factors Affecting Results of Operations
The following information should be read in conjunction with the financial statements and notes appearing elsewhere in this Form 10-Q. We are a development stage company and have had no revenues for the year ended December 31, 2010 and 2011 and no revenues for the three months ended March 31, 2012. We anticipate that we may not receive any significant revenues from operations until we begin to receive some revenues from operations at our Lima Energy Project which we estimate will be at a minimum approximately twenty-four to thirty-seven months from the closing of funding for our projects.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Form 10-Q, particularly in the section entitled "Item 1A - Risk Factors" discussed elsewhere in this Form 10-Q.
The following discussion of the financial condition, results of operations, cash flows and changes in financial position of our Company should be read in conjunction with our audited consolidated financial statements and notes filed with the SEC on Form 10-K.
Results of Operations for the three months ended March 31, 2012 and 2011
We had no revenues for the three months ended March 31, 2012 and no revenues for the three months ended March 31, 2011, and do not anticipate any significant revenues for twenty-four to thirty-seven months, following the closing of the funding of our anticipated projects, as stated herein.
Our operating expenses include the following:
General and Administrative Expenses
Our general and administrative expenses for the three months ended March 31, 2012 totaled $324,532 and for the three months ended March 31, 2011 totaled $282,535. The primary components of our expenses for the three month periods ended March 31, 2012 and 2011 were salary expenses, professional fees, and SEC compliance activities.
The Company recorded an expense of $2,003 for interest on three promissory notes from an unrelated third party for the three months ended March 31, 2012. For the three months ended March 31, 2011 the Company recorded an expense of $112,690 related to the senior secured note for the Lima Energy acquisition. At September 30, 2011, the Note balance of principal and interest was paid by the issuance of 1,004,356 shares of common stock.
For the three months ended March 31, 2012 and the three months ended March 31, 2011, there was no provision for income taxes recorded.
The Company uses the liability method in accounting for income taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The potential benefit of net operating loss carry forwards has not been recognized in the accompanying financial statements since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years.
The net operating loss carryforwards for income tax purposes are approximately $3.2 million and will begin to expire in 2029. However, pursuant to Section 382 of the Internal Revenue Code, use of the Company’s net operating loss carryforwards may be limited if the Company experiences a cumulative change in ownership of greater than 50% in a moving three year period. Ownership changes could impact the Company’s ability to utilize net operating losses and credit carryforwards remaining at the ownership change date. The limitation will be determined by the fair market value of common stock outstanding prior to the ownership change, multiplied by the applicable federal rate.
For the three months ended March 31, 2012, we experienced a net loss of $326,535, and for the three months ended March 31, 2011 we experienced a loss of $395,225.
We anticipate losses from operations will increase during the next twelve months due to anticipated increases in payroll expenses as we add necessary staff, and project development expenses. We expect that we will continue to have net losses from operations for several years until revenues from operating facilities become sufficient to offset operating expenses.
Basic and Diluted Net Loss per Share
Basic earnings per share (“EPS”) is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. Our net loss for the three months ended March 31, 2012 was $0.00 per share and $0.01 per share for the three months ended March 31, 2011.
Net Cash Used by Operating Activities
Our primary uses of funds in operations were payments related to salary expenses, professional fees (including legal and accounting fees), and SEC compliance activities for the three months ended March 31, 2012 and payments related to salary expenses, professional fees, interest and SEC compliance activities for the three months ended March 31, 2011.
Net Cash Used In Investing Activities
We did not engage in investing activities for the three months ended March 31, 2012 or for the three months ended March 31, 2011.
Net Cash Provided by Financing Activities
We received cash from financing activities through advances from related parties of $14,157 for the three months ended March 31, 2012 and $89,193 for the three months ended March 31, 2011.
The Company did not make any major acquisitions during the three months ended March 31, 2012.
Cash Position and Outstanding Indebtedness
Our total indebtedness at March 31, 2012 was $2,281,395, consisting of current liabilities due within the year. Current liabilities consist of accounts payable, advances from related parties and accrued expenses. At March 31, 2012, we had current assets of $356 in cash. We had long term assets of $1 at March 31, 2012.
During the first quarter 2012, the company issued two convertible promissory notes to an unrelated third party for $32,500 and $20,000, respectively. The principal and interest are due October 19, 2012 and December 14, 2012, respectively. Interest for both notes is accrued at a rate of 8.00% per annum, computed on the basis of a 365-day year and the actual number of days elapsed. The Holder of the notes has the right to convert the outstanding principal amount of the note into shares of common stock at a specified discount to market conversion price at a date at least 180 days from the date of the note and no later than the maturity date of the note. Upon reaching the conversion right, the conversion feature of the convertible note payable will be accounted for as an imbedded derivative and valued on the report date using the Black-Scholes pricing model.
Future Capital Requirements
We have focused our efforts to date on obtaining large amounts of capital to fund our project development activity. Our current business plan calls for new investment capital to fund our operations for the next twelve to twenty four months or until commercial operations at Lima Energy commence. Accordingly, we need to raise capital to provide working capital for the next two years in order to meet our funding commitments and business plan objectives. We intend to accomplish this primarily through long and short-term borrowings, together with equity capital, as described below. In the event the Company raises additional funds due to investment demand and various financing options, the additional funds will further advance the Lima Energy Gas 1 project and add to corporate working capital to accelerate the business plan.
Our cash requirements depend on many factors, including the pace of our project development activities and the employee team build-up to drive our future growth. Over the next four years, we expect to make significant expenditures to expand our projects currently under development and construction to bring them into commercial operation. We estimate that total project costs to bring each project into commercial operation will be approximately $497.0 million for full construction of Gas 1, approximately $1.02 billion for full construction of Gas 2, approximately $627.3 million for full construction of CCGT, and approximately $2.3 billion for full construction of Cleantech Energy Project. Project costs include capital, EPC and other owner costs incurred up to commencement of operations (such as interest during construction and development fees), but do not include annual fixed or variable facility operations and maintenance costs, including the cost of purchasing solid hydrocarbon feedstock which itself reflects the cost of extraction and delivery of the solid hydrocarbon.
As of the date of this filing of this report on Form 10-Q for the quarter ended March 31, 2012, we have commitments for a total of $70 million in reserve equity to assist in both our project capital requirements and working capital requirements. This total of $70 million in reserve equity funding is comprised of up to $20 million from Kodiak Capital Group LLC (“Kodiak”) and up to $50 million from AGS Capital Group LLC (“AGS”), as described more fully elsewhere in this annual report on Form 10-K. We plan to utilize the reserve equity as follows: $2 million for the Lima land purchase, $2 million for the Technology Innovation Center, $10 million to advance the Lima Energy project site, engineering and permit work, $10 million to advance the Cleantech Energy site, engineering, licensing and permit work, and the balance of $46 million for general corporate purposes.
Our ability to obtain up to $20 million in equity funding from Kodiak and up to $50 million in equity funding from AGS is contingent on the Company filing registration statements for the resale of all registrable securities called for by the Investment Agreement between Kodiak and USASF dated April 6, 2011 and the Reserve Equity Financing Agreement between AGS and USASF dated May 16, 2011. According to current SEC requirements, the Company’s common stock must be listed on a national securities exchange or quoted on the OTC Bulletin Board prior to the filing of any resale registration statements related to this type of agreement The registration statement must be declared effective and remain effective for the Company to access the reserve equity. We can give no assurances that the Company’s stock will be listed on a national securities exchange or quoted on the OTC Bulletin Board, or that the registration statements, if filed, will be declared effective or remain effective. As a result, we can give no assurances that the Company will be able to access the funds committed by either Kodiak or AGS.
On October 21, 2011, we signed an engagement letter with an unrelated third party to act as an advisor and provide investment banking services including arranging a bond or note financing based on the BOE energy asset in the amount of $350 million, which will be used to advance USASF projects and provide general growth capital for the Company.
On January 12, 2011, we entered into a non-binding term sheet with Socius CG II, a subsidiary of Socius Capital Group, for a commitment of up to $10 million in equity capital contingent upon our listing on the NASDAQ stock exchange for which we intend to apply.
We intend to finance a significant amount of the costs of these projects through a mix of equity and debt. The debt is expected to consist primarily of project-specific non-recourse debt using the assets of each project to secure such debt. We will require substantial capital resources to fund the project costs related to our development and construction plan. Our ability to obtain adequate funding for our development and construction plan as well as for our working capital needs will depend on a variety of factors and cannot be guaranteed. We intend to focus on the $100 million equity raise filed with the SEC in early 2012 to begin the financing for the Lima Energy Gas 1 phase as well as the $70 million reserve equity capital, then turn to the $470 million of Ohio Air Quality Development Authority bonds. While we have substantially completed the draft documentation for the Oho Air Quality Bonds, including the Offering Memorandum, Trust Agreement, Mortgage Security Agreement, and Deposit Account Pledge and Control Agreement, we have shifted the timing for the placement of the bonds due to our plan to utilize equity capital first. We believe that this strategy will make the placement of the debt a more efficient process. While under the auspices of Ohio Air Quality Development Authority, the bond proceeds will be used by Lima Energy to complete construction of Lima Energy Gas 1 which is a cleantech facility being designed to deliver low cost SNG to Procter & Gamble Paper Products Company (“P&G”) under a long term contract and other customers. We anticipate that the equity capital will be available in the second quarter 2012, although we can give no assurances that this will occur.
As the economy improves, we anticipate that the market for low cost clean energy and cleantech facilities such as Lima Energy Gas 1, will also improve. In addition to the long term agreement for the sale of approximately half of the SNG to be produced from Gas 1 to P&G, the extension of which will be finalized once major funding is received, we are focused on putting in place other long term off-take contracts for transportation fuels, highlighting a shift in our product slate. We believe this shift will improve returns and enable a 10-year term for bonds rather than the previous plan for a 20 year term.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4T. CONTROLS AND PROCEDURES
As of March 31, 2012, we carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012 to ensure that the information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our principal executive and principal financial officer as appropriate to allow timely decisions regarding required disclosure. Our controls and procedures provide for full flow of information to Company management, especially to the Chief Executive Officer and Chief Financial Officer, and our evaluation shows we are able to meet our reporting obligations under the Exchange Act Rules stated above. While our disclosure controls and procedures are effective, we recognize that continued improvement is desired in the areas of management oversight, control of documentation being produced, and review of such control documentation when it is produced. A policy and procedure directive has been established to seek improvement in this area.
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 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 are not presently involved in any legal proceedings that we believe would have a material adverse effect on our consolidated financial statements. However, we are, from time to time, threatened with, or may become a party to, legal actions and other proceedings, including the matter discussed as follows. The Company was named as a defendant in a complaint filed by John B. Walker and Reynold Nebel, Jr. in the Court of Common Pleas, Hamilton County, Ohio, on October 20, 2011. The basis of the complaint is failure to pay salaries and other employment-related expenses during their respective employment. Relief sought is approximately $555,000 plus interest. Earlier in the year, the Company, believing it had reached verbal agreement with the plaintiffs on payment of outstanding amounts of $227,000, plus return to the Company of 61,290 shares of common stock previously issued, collectively, drafted written release agreements which were presented to plaintiffs for signature. The Company believes that adequate accruals exist on its financial statements for amounts owed, such amounts having been confirmed by each plaintiff during the recent audit. It is the Company’s belief that any other claims are spurious and totally without merit, and the Company intends to defend itself against the allegations vigorously and to the fullest extent.
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of unregistered securities during the period indicated are disclosed below.
During the three months ended March 31, 2012, we did not issue any unregistered shares of our common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.