Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

Commission File Number: 001-33480

 

CLEAN ENERGY FUELS CORP.

(Exact name of registrant as specified in its charter)

 

 

4675 MacArthur Court, Suite 800, Newport Beach, CA 92660

(Address of principal executive offices, including zip code)

 

(949) 437-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o No x

 

As of July 31, 2014, there were 89,884,250 shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding.

 

 

Table of Contents

 

CLEAN ENERGY FUELS CORP. AND SUBSIDIARIES

 

INDEX

 

Table of Contents

 

PART I.—FINANCIAL INFORMATION
Item 1.—Financial Statements (Unaudited)	3
Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.—Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.—Controls and Procedures	35
PART II.—OTHER INFORMATION
Item 1.—Legal Proceedings	36
Item 1A.—Risk Factors	36
Item 2.—Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.—Defaults upon Senior Securities	47
Item 4.—Mine Safety Disclosures	47
Item 5.—Other Information	47
Item 6.—Exhibits	48

 

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PART I.—FINANCIAL INFORMATION

 

Item 1.—Financial Statements (Unaudited)

 

Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

December 31, 2013 and June 30, 2014

 

(Unaudited)

 

(In thousands, except share data)

 

		December 31, 2013			June 30, 2014
Assets
Current assets:
Cash and cash equivalents		$	240,033		$	124,700
Restricted cash		8,403			12,249
Short-term investments		138,240			152,113
Accounts receivable, net of allowance for doubtful accounts of $832 and $908 as of December 31, 2013 and June 30, 2014, respectively		53,473			70,245
Other receivables		26,285			17,876
Inventory, net		33,822			39,204
Prepaid expenses and other current assets		20,840			20,918
Total current assets		521,096			437,305
Land, property and equipment, net		487,854			532,574
Notes receivable and other long-term assets		73,697			71,260
Goodwill		88,548			88,406
Intangible assets, net		79,770			75,934
Total assets		$	1,250,965		$	1,205,479
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations		$	23,401		$	17,724
Accounts payable		33,541			34,256
Accrued liabilities		46,745			48,348
Deferred revenue		16,419			15,997
Total current liabilities		120,106			116,325
Long-term debt and capital lease obligations, less current portion		532,017			543,416
Long-term debt, related party		65,000			65,000
Other long-term liabilities		15,304			13,093
Total liabilities		732,427			737,834
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value. Authorized 1,000,000 shares; issued and outstanding no shares		—			—
Common stock, $0.0001 par value. Authorized 224,000,000 shares; issued and outstanding 89,364,397 shares and 89,863,439 shares at December 31, 2013 and June 30, 2014, respectively		9			9
Additional paid-in capital		883,045			893,876
Accumulated deficit		(367,782		)	(428,681		)
Accumulated other comprehensive loss		(700		)	(1,188		)
Total Clean Energy Fuels Corp. stockholders’ equity		514,572			464,016
Noncontrolling interest in subsidiary		3,966			3,629
Total stockholders’ equity		518,538			467,645
Total liabilities and stockholders’ equity		$	1,250,965		$	1,205,479

 

See accompanying notes to condensed consolidated financial statements.

 

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Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Statements of Operations

 

For the Three Months and Six Months Ended June 30, 2013 and 2014

 

(Unaudited)

 

(In thousands, except share and per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2013			2014			2013			2014
Revenue:
Product revenues		$	78,375		$	86,473		$	161,858		$	172,262
Service revenues		9,741			11,660			19,301			21,146
Total revenues		88,116			98,133			181,159			193,408
Operating expenses:
Cost of sales (exclusive of depreciation and amortization shown separately below):
Product cost of sales		58,925			69,175			105,739			137,042
Service cost of sales		3,016			4,080			6,943			7,844
Derivative (gains) losses:
Series I warrant valuation		39			2,286			505			(2,169		)
Selling, general and administrative		35,187			34,400			68,063			67,890
Depreciation and amortization		10,777			11,608			20,935			23,123
Total operating expenses		107,944			121,549			202,185			233,730
Operating loss		(19,828		)	(23,416		)	(21,026		)	(40,322		)
Interest expense, net		(6,282		)	(10,130		)	(11,353		)	(19,640		)
Other income (expense), net		(1,103		)	1,121			(1,493		)	(165		)
Loss from equity method investment		—			—			(76		)	—
Gain from sale of equity method investment		—			—			4,705			—
Gain from sale of subsidiary		15,498			—			15,498			—
Loss before income taxes		(11,715		)	(32,425		)	(13,745		)	(60,127		)
Income tax expense		(293		)	(147		)	(2,098		)	(1,109		)
Net loss		(12,008		)	(32,572		)	(15,843		)	(61,236		)
Loss of noncontrolling interest		65			266			29			337
Net loss attributable to Clean Energy Fuels Corp.		$	(11,943	)	$	(32,306	)	$	(15,814	)	$	(60,899	)
Loss per share attributable to Clean Energy Fuels Corp.:
Basic		$	(0.13	)	$	(0.34	)	$	(0.17	)	$	(0.64	)
Diluted		$	(0.13	)	$	(0.34	)	$	(0.17	)	$	(0.64	)
Weighted-average common shares outstanding:
Basic		93,985,438			94,859,587			93,561,302			94,768,462
Diluted		93,985,438			94,859,587			93,561,302			94,768,462

 

See accompanying notes to condensed consolidated financial statements.

 

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Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Loss

 

For the Three Months and Six Months Ended June 30, 2013 and 2014

 

(Unaudited)

 

(In thousands)

 

		Clean Energy Fuels Corp.						Noncontrolling Interest						Total
		Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
		2013			2014			2013			2014			2013			2014
Net loss		$	(11,943	)	$	(32,306	)	$	(65	)	$	(266	)	$	(12,008	)	$	(32,572	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(708		)	(442		)	—			—			(708		)	(442		)
Foreign currency adjustments on intra-entity long-term investments		(3,076		)	3,495			—			—			(3,076		)	3,495
Unrealized gains (losses) on available-for-sale securities		35			(81		)	—			—			35			(81		)
Unrecognized gains on derivatives		2			—			—			—			2			—
Total other comprehensive income (loss), net of tax		(3,747		)	2,972			—			—			(3,747		)	2,972
Comprehensive loss		$	(15,690	)	$	(29,334	)	$	(65	)	$	(266	)	$	(15,755	)	$	(29,600	)

 

		Clean Energy Fuels Corp.						Noncontrolling Interest						Total
		Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
		2013			2014			2013			2014			2013			2014
Net loss		$	(15,814	)	$	(60,899	)	$	(29	)	$	(337	)	$	(15,843	)	$	(61,236	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(1,363		)	(246		)	—			—			(1,363		)	(246		)
Foreign currency adjustments on intra-entity long-term investments		(4,894		)	157			—			—			(4,894		)	157
Unrealized losses on available-for-sale securities		(2		)	(399		)	—			—			(2		)	(399		)
Unrecognized gains on derivatives		108			—			—			—			108			—
Total other comprehensive loss, net of tax		(6,151		)	(488		)	—			—			(6,151		)	(488		)
Comprehensive loss		$	(21,965	)	$	(61,387	)	$	(29	)	$	(337	)	$	(21,994	)	$	(61,724	)

 

See accompanying notes to condensed consolidated financial statements.

 

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Clean Energy Fuels Corp.

 

Condensed Consolidated Statements of Cash Flows

 

For the Six Months Ended June 30, 2013 and 2014

 

(Unaudited)

 

(In thousands)

 

		Six Months Ended June 30,
		2013			2014
Cash flows from operating activities:
Net loss		$	(15,843	)	$	(61,236	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		20,935			23,123
Provision for doubtful accounts		77			112
Derivative loss (gain)		505			(2,169		)
Stock-based compensation expense		11,663			6,398
Amortization of debt issuance cost		510			1,527
Accretion of notes payable		609			138
Gain on sale of equity method investment		(4,705		)	—
Dividend received on equity method investment		1,091			—
Gain on sale of subsidiary		(15,498		)	—
(Gain) loss on contingent consideration for acquisition		(671		)	101
Changes in operating assets and liabilities, net of assets and liabilities acquired and disposed:
Accounts and other receivables		413			(7,209		)
Inventory		(2,765		)	(5,382		)
Prepaid expenses and other assets		188			1,891
Accounts payable		(17,260		)	(1,715		)
Accrued expenses and other		13,769			1,134
Net cash used in operating activities		(6,982		)	(43,287		)
Cash flows from investing activities:
Purchases of short-term investments		(36,259		)	(70,868		)
Maturities of short-term investments		35,856			55,144
Purchases of property and equipment		(40,274		)	(61,840		)
Loans made to customers		(698		)	(2,295		)
Payments on and proceeds from sales of loans receivable		2,895			2,240
Restricted cash		(20,293		)	(3,846		)
Acquisition, net of cash acquired		(9,000		)	—
Cash transferred with sale of subsidiary		(1,178		)	—
Proceeds from sale of equity method investment		6,119			—
Net cash used in investing activities		(62,832		)	(81,465		)
Cash flows from financing activities:
Proceeds from issuance of common stock and exercise of stock options		419			684
Proceeds from debt instruments		55,213			12,720
Proceeds from revolving line of credit		14,501			23,621
Repayment of borrowing under revolving line of credit		(15,027		)	(17,645		)
Repayment of capital lease obligations and debt instruments		(7,245		)	(9,338		)
Payments for debt issuance costs		—			(914		)
Net cash provided by financing activities		47,861			9,128
Effect of exchange rates on cash and cash equivalents		(549		)	291
Net decrease in cash		(22,502		)	(115,333		)
Cash, beginning of period		108,522			240,033
Cash, end of period		$	86,020		$	124,700
Supplemental disclosure of cash flow information:
Income taxes paid		$	2,004		$	690
Interest paid, net of approximately $1,233 and $1,992 capitalized, respectively		9,884			18,668

 

See accompanying notes to condensed consolidated financial statements.

 

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Clean Energy Fuels Corp. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

(Unaudited)

 

(In thousands, except share and per share data)

 

Note 1—General

 

Nature of Business:  Clean Energy Fuels Corp. (together with its majority and wholly owned subsidiaries, unless the context indicates or otherwise requires, the “Company”) is engaged in the business of selling natural gas fueling solutions to its customers, primarily in the United States and Canada.

 

The Company has a broad customer base in a variety of markets, including trucking, airports, taxis, refuse, ready mix and public transit. The Company owns, operates, maintains and/or supplies over 500 natural gas fueling stations within the United States and Canada. The Company generates revenue through selling compressed natural gas (“CNG”) and liquefied natural gas (“LNG”), providing operation and maintenance services (“O&M”) to customers, building and selling natural gas fueling stations to customers, manufacturing and servicing natural gas fueling compressors and other equipment for CNG and LNG fueling stations, offering assessment, design and modification solutions designed to provide operators with code-compliant service and maintenance facilities for natural gas vehicle fleets, processing and selling renewable natural gas (“RNG”), financing customers’ vehicle purchases and selling tradable credits the Company generates by selling natural gas and RNG as a vehicle fuel, including credits under the California low carbon fuel standard (“LCFS Credits”) and Renewable Identification Numbers (“RIN Credits”) under the federal Renewable Fuel Standard Phase 2. In addition, through June 28, 2013, the Company provided natural gas vehicle conversions and design and engineering services for natural gas engine systems.

 

Basis of Presentation:  The accompanying interim unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations and cash flows as of and for the three and six months ended June 30, 2013 and 2014. All intercompany accounts and transactions have been eliminated in consolidation. The three or six month periods ended June 30, 2013 and 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other interim period or for any future year.

 

Certain information and disclosures normally included in the notes to the financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), but the resultant disclosures contained herein are in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) as they apply to interim reporting. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2013 that are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2014.

 

Use of Estimates:  The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses recorded during the reporting period. Actual results could differ from those estimates.

 

Note 2— Acquisitions and Divestitures

 

BAF

 

On June 28, 2013, the Company, entered into and closed a stock purchase agreement (the “BAF Sale Agreement”) with Westport Innovations Inc. (“Westport”) and Westport Innovations (U.S.) Holdings Inc., a wholly owned subsidiary of Westport (together with Westport, the “Westport Parties”).  Under the terms of the BAF Sale Agreement, on June 28, 2013, the Westport Parties purchased all of the outstanding capital stock of BAF, including BAF’s 100% ownership interest of ServoTech Engineering, Inc., for 816,460 shares of Westport’s common stock.  Pursuant to the BAF Sale Agreement, the Company was issued 718,485 shares of Westport’s common stock on June 28, 2013 and 97,975 shares of Westport’s common stock (the “Holdback Shares”) were retained by Westport for one year as security for the Company’s indemnification obligations under the BAF Sale Agreement.  At the end of June 2014, the Company was issued 94,914 of the Holdback Shares, with the remaining 3,061 Holdback Shares remaining unissued as a result of, and in full satisfaction of, an indemnity claim under the BAF Sale Agreement. In July 2013, the Company sold the 718,485 shares it initially received for net proceeds of $23,722.  In July 2014, the Company sold all of the Holdback Shares it received for net proceeds of $1,727.  Further, during August 2013, the Westport Parties repaid $2,478 of certain intercompany indebtedness of BAF to the Company following the conclusion of applicable post-closing adjustment procedures contemplated in the BAF Sale Agreement.

 

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The fair value of the 816,460 shares of Westport’s common stock on June 28, 2013 was $27,221, and the Company recognized an initial gain of $15,498 on June 28, 2013. In December 2013, the Company wrote down the value of the Holdback Shares by $1,383, which resulted in an adjusted gain of $14,115 on the transaction. For the six month period ended June 30, 2014, the Company wrote down the value of the Holdback Shares by $122, which resulted in an adjusted gain of $13,993 on the transaction. The value of the shares received has been excluded from the Company’s condensed consolidated statements of cash flows as it is a non-cash investing activity. The gain was recorded in the line item gain from sale of subsidiary in the Company’s condensed consolidated statements of operations.

 

In addition, pursuant to the BAF Sale Agreement, the Company, Westport Power Inc. and Westport Fuel Systems Inc. (Westport Power, Inc. and Westport Fuel Systems, Inc. are collectively referred to as the “Westport Affiliates”) entered into a marketing agreement, dated June 28, 2013, whereby the Westport Parties agreed to pay the Company $5,000 in cash, which was received on February 27, 2014. Under the marketing agreement, the Company and the Westport Affiliates agreed to collaborate during a two year period to encourage sales of all BAF products and certain vehicle products offered by the Westport Affiliates, and the Company agreed to provide 750,000 complimentary gasoline gallon equivalents of CNG to be used by the Westport Affiliates as marketing incentives.  Additionally, the marketing agreement provides for the Company’s appointment of a product line manager for BAF, and at least one member of a newly established operating committee formed to create sales and marketing strategies for BAF and assist in BAF’s performance of these strategies.

 

MGES

 

On May 6, 2013, the Company entered into and closed a stock purchase agreement with Mansfield Energy Corp. (“Mansfield”) and its wholly owned subsidiary Mansfield Gas Equipment Systems Corporation (“MGES”). MGES is primarily engaged in the business of providing CNG station design and construction and CNG equipment repair and maintenance services. Under the terms of the stock purchase agreement, the Company purchased from Mansfield all of the outstanding capital stock of MGES for $20,000, payable 50% in cash and 50% in shares of the Company’s common stock. Upon closing, the Company delivered $9,000 in cash and 761,545 shares of the Company’s common stock, and retained $1,000 as security for Mansfield’s indemnification obligations under the stock purchase agreement. On the first anniversary of the closing date, the Company delivered the retained amount of $1,000 to Mansfield. In addition, in August 2013, the Company paid Mansfield an additional $563 following the conclusion of applicable post-closing adjustment procedures contemplated by the stock purchase agreement. The fair value of the Company’s common stock delivered to Mansfield is excluded from the Company’s condensed consolidated statements of cash flows as it is a non-cash investing activity.

 

The Company accounted for this acquisition in accordance with Financial Accounting Standards Board’s (“FASB”) authoritative guidance for business combinations, which requires the Company to recognize the assets acquired and the liabilities assumed, measured at their fair values, as of the date of acquisition. The following table summarizes the allocation of the aggregate purchase price to the fair value of the assets acquired and liabilities assumed:

 

Current assets		$	4,475
Property, plant and equipment		1,369
Identifiable intangible assets		600
Goodwill		16,555
Total assets acquired		22,999
Current liabilities assumed		(1,984		)
Total purchase price		$	21,015

 

Management allocated approximately $600 of the purchase price to the identifiable intangible assets related to customer relationships and project backorders that were acquired with the acquisition. The fair value of the identifiable intangible assets will be amortized on a straight-line basis over the estimated useful lives of such assets ranging from one to six years. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill, which primarily represents additional market share available to the Company as a result of the acquisition, and is fully deductible for income tax purposes.

 

The results of operations of MGES have been included in the Company’s condensed consolidated financial statements since May 6, 2013. The historical results of MGES’s operations were not material to the Company’s financial position or historical results of operations.

 

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Note 3—Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less on the date of acquisition to be cash equivalents.

 

Note 4—Restricted Cash

 

The Company classifies restricted cash as a current asset if the cash is expected to be used in operations within a year or to acquire a current asset. Otherwise, the restricted cash is classified as long-term. Restricted cash consisted of the following as of December 31, 2013 and June 30, 2014:

 

		December 31, 2013			June 30, 2014
Short-term restricted cash
Standby letters of credit		$	1,822		$	1,822
DCEMB bonds — current operating costs		6,581			7,486
Canton bonds — current operating costs		—			2,941
Total short-term restricted cash		$	8,403		$	12,249

 

Note 5—Investments

 

Available-for-sale investments are carried at fair value, inclusive of unrealized gains and losses. Net unrealized gains and losses are included in other comprehensive income (loss) net of applicable income taxes. Gains or losses on sales of available-for-sale investments are recognized on the specific identification basis. All of the Company’s short-term investments are classified as available-for-sale securities.

 

The Company reviews available-for-sale investments for other-than-temporary declines in fair value below their cost basis each quarter, and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below its cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security. As of June 30, 2014, the Company believes its carrying values for its available-for-sale investments are properly recorded.

 

Short-term investments as of December 31, 2013 are summarized as follows:

 

		Amortized Cost			Gross Unrealized Losses			Estimated Fair Value
Municipal bonds & notes		$	60,047		$	(252	)	$	59,795
Corporate bonds		43,166			(342		)	42,824
Certificate of deposits		35,630			(9		)	35,621
		$	138,843		$	(603	)	$	138,240

 

Short-term investments as of June 30, 2014 are summarized as follows:

 

		Amortized Cost			Gross Unrealized Losses			Estimated Fair Value
Municipal bonds & notes		$	59,496		$	(425	)	$	59,071
Corporate bonds		58,131			(572		)	57,559
Certificate of deposits		35,488			(5		)	35,483
		$	153,115		$	(1,002	)	$	152,113

 

Note 6—Other Receivables

 

Other receivables at December 31, 2013 and June 30, 2014 consisted of the following:

 

		December 31, 2013			June 30, 2014
Loans to customers to finance vehicle purchases		$	5,919		$	5,244
Accrued customer billings		6,327			6,040
Fuel tax and carbon credits		6,740			167
Other		7,299			6,425
		$	26,285		$	17,876

 

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Note 7—Inventories

 

Inventories are stated at the lower of cost or market value on a first-in, first-out basis. Management’s estimate of market value includes a provision for slow-moving or obsolete inventory based upon inventory on hand and forecasted demand.

 

Inventories consisted of the following as of December 31, 2013 and June 30, 2014:

 

		December 31, 2013			June 30, 2014
Raw materials and spare parts		$	30,521		$	34,105
Work in process		3,011			2,852
Finished goods		290			2,247
		$	33,822		$	39,204

 

Note 8—Land, Property and Equipment

 

Land, property and equipment at December 31, 2013 and June 30, 2014 are summarized as follows:

 

		December 31, 2013			June 30, 2014
Land		$	1,707		$	2,289
LNG liquefaction plants		93,685			93,810
RNG plants		47,932			73,909
Station equipment		194,240			220,541
LNG trailers		22,667			22,667
Other equipment		62,127			64,297
Construction in progress		204,548			211,343
		626,906			688,856
Less: accumulated depreciation		(139,052		)	(156,282		)
		$	487,854		$	532,574

 

Included in land, property and equipment are capitalized software costs of $18,214 and $18,930 as of December 31, 2013 and June 30, 2014, respectively. The accumulated amortization on the capitalized software costs is $7,747 and $9,358 as of December 31, 2013 and June 30, 2014, respectively. The Company recorded $690 and $843 of amortization expense related to the capitalized software costs during the three months ended June 30, 2013 and June 30, 2014, respectively. For the six month periods ended June 30, 2013 and 2014, the Company recorded $1,488 and $1,611 of amortization expense related to the capitalized software costs respectively.

 

As of December 31, 2013 and June 30, 2014, $13,930 and $16,360 are included in accounts payable balances, respectively, which are related to purchases of property and equipment. These amounts are excluded from the condensed consolidated statements of cash flows as they are non-cash investing activities.

 

Note 9—Investments in Other Entities

 

The Company had invested in Clean Energy del Peru (the “Peru JV”), a former joint venture of the Company in Lima, Peru that operates CNG stations. The Company accounted for its investment in the Peru JV under the equity method of accounting as the Company had the ability to exercise significant influence over Peru JV’s operations while the Company maintained its ownership interest in the joint venture. In March 2013, the Company completed the sale of its entire ownership interest in Peru JV for $6,119 after receiving a dividend distribution of $1,091, and recognized a gain of $4,705.

 

Note 10—Accrued Liabilities

 

Accrued liabilities at December 31, 2013 and June 30, 2014 consisted of the following:

 

		December 31, 2013			June 30, 2014
Salaries and wages		$	6,768		$	8,020
Accrued gas and equipment purchases		8,035			14,511
Accrued property and other taxes		5,448			4,432
Accrued employee benefits		2,898			4,112
Accrued warranty liability		2,545			3,315
Accrued interest		4,216			3,890
Other		16,835			10,068
		$	46,745		$	48,348

 

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Note 11—Warranty Liability

 

The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its standard warranty. Changes in the warranty liability are presented in the following table:

 

		June 30, 2013			June 30, 2014
Warranty liability at beginning of year		$	2,665		$	2,545
Acquired liabilities		71			—
Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties		2,034			2,455
Service obligations honored		(1,833		)	(1,685		)
Sale of subsidiary		(582		)	—
Warranty liability at end of period		$	2,355		$	3,315

 

Note 12—Long-term Debt

 

DCEMB Bonds

 

In March 2011, the Company’s 70% owned subsidiary, Dallas Clean Energy McCommas Bluff, LLC, a Delaware limited liability company (“DCEMB”), completed a $40,200 tax-exempt bond issuance (the “Revenue Bonds”). The Revenue Bonds will be repaid from the revenue generated by DCEMB from the sale of RNG. The Revenue Bonds are secured by the revenue and assets of DCEMB and are non-recourse to DCEMB’s direct and indirect parent companies, including the Company. The bond repayments are amortized through December 2024 and the average coupon interest rate on the bonds is 6.6%. The bond proceeds were primarily used to finance further improvements and expansion of the landfill gas processing facility owned by DCEMB at the McCommas Bluff landfill outside of Dallas, Texas and to retire certain other indebtedness.

 

The Revenue Bonds were issued by the Mission Economic Development Corporation (the “Issuer”) and the proceeds of such issuance were loaned by the Issuer to DCEMB pursuant to a loan agreement dated January 1, 2011 (the “DCEMB Loan Agreement”).  The DCEMB Loan Agreement contains customary events of default, with customary cure periods, including without limitation failure to make required payments when due under the DCEMB Loan Agreement, failure to comply with certain covenants under the DCEMB Loan Agreement, certain events of bankruptcy and insolvency of DCEMB, and the existence of an event of default under the indenture governing the Revenue Bonds that was entered between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee. The occurrence of an event of default under the DCEMB Loan Agreement will allow the Issuer or the trustee to accelerate all amounts due under the DCEMB Loan Agreement.  As of June 30, 2014, DCEMB was in compliance with all its debt covenants under the DCEMB Loan Agreement.

 

Purchase Notes

 

In connection with the closing of the Company’s acquisition of the business of IMW Industries, Ltd. (“IMW”) in 2010 from a seller (the “IMW Seller”), the Company agreed to make future payments consisting of four annual payments in the amount of $12,500, all of which have been paid as of February 2014 (each an “IMW Note” and collectively, the “IMW Notes”). Each payment under the IMW Notes consisted of Canadian dollars (“CAD”) $5,000 in cash and $7,500 in cash and/or shares of the Company’s common stock (the exact combination of cash and/or stock was determined by the Company in its discretion). In addition, pursuant to a security agreement executed at closing, the IMW Notes were secured by a subordinate security interest in IMW. In January 2011, the Company paid CAD$5,000 in cash and $7,500 in shares of its common stock. The Company paid CAD$5,000 in cash in January 2012 and $3,750 in shares of its common stock in each of August 2012 and October 2012. The Company paid CAD$5,000 in cash and $7,500 in shares of its common stock in February 2013. In February 2014, the Company paid the final payment of CAD$5,000 in cash, $3,750 in cash and $3,750 in shares of its common stock. The IMW Notes that were settled with shares of the Company’s common stock are not included in the condensed consolidated statements of cash flows as they are non-cash financing activities.

 

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In connection with the closing of the Company’s acquisition of Northstar in December 2010, the Company agreed to make future payments consisting of five annual payments in the amount of $700 each with the first payment due December 15, 2011. Each of the first three payments of $700 was paid in December 2011, 2012 and 2013, respectively.

 

In connection with the closing of the Company’s acquisition of the natural gas fuel infrastructure construction business of Weaver Electric, Inc. in October 2011, the Company paid $1,000 in cash and agreed to make four additional annual payments in the amount of $250 each with the first payment due October 3, 2012 (the “Weaver Notes”), subject to retention and/or offset by the Company for Weaver Electric’s indemnity obligations. In May 2012, the Company prepaid $125 of the October 2012 payment, and the remaining amount of such payment was paid in October 2012.  The Company has retained the payment otherwise due in October 2013 to offset an indemnity claim against the former owners of Weaver Electric.

 

The difference between the carrying amount and the face amount of these obligations is being accreted to interest expense over the remaining term of the obligations.

 

HSBC Lines of Credit

 

In connection with the closing of the Company’s acquisition of IMW, the Company entered into an Assumption Agreement (the “Assumption Agreement”) with HSBC Bank Canada (“HSBC”) pursuant to which the Company assumed the obligations and liabilities of IMW under the following arrangements with HSBC (collectively, the “IMW Lines of Credit”):

 

(i)                                     An operating line of credit with a limit of CAD$13,000 to assist in financing the day-to-day working capital needs of IMW. The interest on amounts outstanding is payable at IMW’s option at (a) HSBC’s Prime Rate plus 1.00% per annum, (b) HSBC’s U.S. Base Rate plus 1.00% per annum, or (c) LIBOR plus 2.25% per annum, subject to availability.

 

(ii)                                  A demand revolving line of credit with a limit of CAD$2,000 bearing interest at the same rate as that of the operating line of credit discussed above, to assist in financing IMW’s import requirements.

 

(iii)          A demand revolving bank guarantee and standby letter of credit line with a limit of CAD$1,115.

 

(iv)          A bank guarantee line with a limit of CAD$3,000, which allows IMW to provide guarantees and/or standby letters of credit to overseas suppliers or bid/performance deposits on contracts.

 

(v)                                 A forward exchange contract line with a limit of CAD$13,750 that allows IMW to enter into foreign exchange forward contracts up to the notional limit of CAD$13,750.

 

(vi)                              An operating line of credit with a limit of 5,000 Renminbi (“RMB”) (CAD$866) bearing interest at the 6 month People’s Bank of China rate plus 2.5% and a sub-limit bank guarantee line of 5,000 RMB. The aggregate of the balances in the lines cannot exceed 5,000 RMB.

 

(vii)         A 16,750 Bangladeshi Taka (CAD$226) operating line of credit bearing interest at 14%.

 

(viii)        A 170,000 Colombian Peso (CAD$102) operating line of credit bearing interest at the Colombia benchmark rate plus 7 to 12%.

 

The IMW Lines of Credit are secured by a general security agreement providing a first priority security interest in all present and after acquired personal property of IMW. The IMW Lines of Credit contain no fixed repayment terms or mandatory principal payments and are due on demand. Based on the relevant accounting guidance, the Company has classified this debt pursuant to the IMW Lines of Credit as short-term because it is due on demand.

 

The Assumption Agreement with HSBC sets forth certain financial covenants with which IMW must comply, including: 1) its ratio of debt to tangible net worth must be no greater than 3.0 to 1.0, 2) it must maintain a tangible net worth of at least CAD$9,100 and 3) its ratio of current assets to current liabilities may not be less than 1.25 to 1.0. IMW was in compliance with the financial covenants as of June 30, 2014.

 

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Chesapeake Notes (7.5% Notes)

 

On July 11, 2011, the Company entered into a Loan Agreement (the “CHK Agreement”) with Chesapeake NG Ventures Corporation (“Chesapeake”), an indirect wholly owned subsidiary of Chesapeake Energy Corporation, whereby Chesapeake agreed to purchase from the Company up to $150,000 of debt securities (the “CHK Financing”) pursuant to the issuance of three convertible promissory notes, each having a principal amount of $50,000 (each a “CHK Note” and collectively the “CHK Notes”). The first CHK Note was issued on July 11, 2011 and the second CHK Note was issued on July 10, 2012. The Company and Chesapeake also entered a registration rights agreement (the “CHK Registration Rights Agreement” and collectively with the CHK Notes and the CHK Agreement, the “CHK Loan Documents”) pursuant to which the Company agreed, subject to the terms and conditions of the CHK Registration Rights Agreement, to (i) file with the Securities and Exchange Commission one or more registration statements relating to the resale of shares of the Company’s common stock (“Shares”) issuable upon conversion of the CHK Notes and (ii) at the request of Chesapeake, participate in one or more underwritten offerings of Shares issuable upon conversion of the CHK Notes. Pursuant to the terms of the CHK Registration Rights Agreement, if the Company does not meet certain of its obligations thereunder with respect to the registration of the Shares issuable upon conversion of the CHK Notes, it will be required to pay monthly liquidated damages of 0.75% of the principal amount of the CHK Note represented by the Shares included (or to be included, as the case may be) in the applicable registration statement until the related obligation is met, not to exceed 4% of the aggregate principal amount of the CHK Notes per annum.

 

On June 14, 2013 (the “Transfer Date”), Chesapeake, Boone Pickens and Green Energy Investment Holdings, LLC, an affiliate of Leonard Green & Partners, L.P. (collectively, the “Buyers”), entered into a note purchase agreement (“Note Purchase Agreement”) pursuant to which Chesapeake sold the outstanding CHK Notes (the “Sale”) to the Buyers. Chesapeake assigned to the Buyers all of its right, title and interest under the CHK Loan Documents (the “Assignment”), and each Buyer severally assumed all of the obligations of Chesapeake under the CHK Loan Documents arising after the Sale and the Assignment including, without limitation, the obligation to advance an additional $50,000 to the Company in June 2013 (the “Assumption”). The Company also entered into the Note Purchase Agreement for the purpose of consenting to the Sale, the Assignment and the Assumption.

 

Contemporaneously with the execution of the Note Purchase Agreement, the Company entered into a loan agreement with each Buyer (collectively, the “Amended Agreements”). The Amended Agreements have the same terms as the CHK Agreement, other than changes to reflect the change in ownership of the CHK Notes. In addition, the Company and the Buyers entered a registration rights agreement (the “Amended Registration Rights Agreement”) with the same terms as the CHK Registration Rights Agreement, including the liquidated damages provisions therein, other than changes to reflect the change in ownership of the CHK Notes. Immediately following execution of the Amended Agreements, the Buyers delivered $50,000 to the Company in satisfaction of the funding requirement they had assumed from Chesapeake (the “June Advance”). In addition, the Company cancelled the existing CHK Notes and re-issued replacement notes, and the Company also issued notes to the Buyers in exchange for the June Advance (the re-issued replacement notes and the notes issued in exchange for the June Advance are referred to herein as the “7.5% Notes”).

 

The 7.5% Notes have the same terms as the original CHK Notes, other than the changes to reflect their different holders. They bear interest at the rate of 7.5% per annum and are convertible at the option of the holder into Shares at a conversion price of $15.80 per Share (the “7.5% Notes Conversion Price”). Upon written notice to the Company, the holders of the 7.5% Notes have the right to exchange all, or a portion of, the principal and accrued and unpaid interest under each such note for Shares at the 7.5% Notes Conversion Price. Additionally, subject to certain restrictions, the Company can force conversion of each 7.5% Note into Shares if, following the second anniversary of the issuance of a 7.5% Note, the Shares trade at a 40% premium to the 7.5% Notes Conversion Price for at least 20 trading days in any consecutive 30 trading day period. The entire principal balance of each 7.5% Note is due and payable seven years following its issuance, and the Company may repay each 7.5% Note in Shares or cash. The Amended Agreements restrict the use of the proceeds of the 7.5% Notes to financing the development, construction and operation of liquefied natural gas stations and payment of certain related expenses. The Amended Agreements also provide for customary events of default which, if any of them occurs, would permit or require the principal of, and accrued interest on, the 7.5% Notes to become, or to be declared, due and payable.

 

On August 27, 2013, Green Energy Investment Holdings, LLC transferred $5,000 in principal amount of the 7.5% Notes to certain third parties.

 

As a result of the foregoing transactions, (i) Mr. Pickens holds 7.5% Notes in the aggregate principal amount of $65,000, which 7.5% Notes are convertible into approximately 4,113,924 Shares, and (ii) Green Energy Investment Holdings, LLC holds 7.5% Notes in the aggregate principal amount of $80,000, which 7.5% Notes are convertible into approximately 5,063,291 Shares.

 

At June 30, 2014, none of the proceeds from the 7.5% Notes were included in restricted cash as the Company had used the funds primarily to build LNG fueling stations. As of June 30, 2014, the Company had met its obligations under the Amended Agreements and the Amended Registration Rights Agreement.

 

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SLG Notes

 

On August 24, 2011, the Company entered into Convertible Note Purchase Agreements (each, an “SLG Agreement” and collectively the “SLG Agreements”) with each of Springleaf Investments Pte. Ltd., a wholly-owned subsidiary of Temasek Holdings Pte. Ltd., Lionfish Investments Pte. Ltd., an investment vehicle managed by Seatown Holdings International Pte. Ltd., and Greenwich Asset Holding Ltd., a wholly-owned subsidiary of RRJ Capital Master Fund I, L.P. (each, a “Purchaser” and collectively, the “Purchasers”), whereby the Purchasers agreed to purchase from the Company $150,000 of 7.5% convertible notes due in August 2016 (each a “SLG Note” and collectively the “SLG Notes”). The transaction closed and the SLG Notes were issued on August 30, 2011. On March 1, 2012, Springleaf Investments Pte. LTD transferred $24,000 principal amount of the SLG Notes to Baytree Investments (Mauritius) Pte Ltd.

 

The SLG Notes bear interest at the rate of 7.5% per annum (payable quarterly, in arrears, on March 31, June 30, September 30 and December 31 of each year) and are convertible at each Purchaser’s option into Shares at a conversion price of $15.00 per share (the “SLG Conversion Price”). Upon written notice to the Company, the holders of the SLG Notes have the right to exchange all or any portion of the principal and accrued and unpaid interest under each such note for Shares at the SLG Conversion Price. Additionally, subject to certain restrictions, the Company can force conversion of each SLG Note into Shares if, following the second anniversary of the issuance of the SLG Notes, the Company’s Shares trade at a 40% premium to the SLG Conversion Price for at least 20 trading days in any consecutive 30 trading day period. The entire principal balance of each SLG Note is due and payable five years following its issuance and the Company may repay the principal balance of each SLG Note in Shares or cash. The SLG Agreements also provide for customary events of default which, if any of them occurs, would permit or require the principal of, and accrued interest on, the SLG Notes to become, or to be declared, due and payable. In April 2012, $1,003 of principal and accrued interest under an SLG Note was converted by the holder thereof into 66,888 Shares. In January and February 2013, $4,030 of principal and accrued interest under an SLG Note was converted by the holder thereof into 268,664 Shares. Such conversions were not included in the condensed consolidated statements of cash flows as they are a non-cash financing activity.

 

In connection with the SLG Agreements, the Company also entered into a Registration Rights Agreement, dated August 30, 2011, with each of the Purchasers (the “SLG Registration Rights Agreements”) pursuant to which the Company agreed, subject to the terms and conditions of the SLG Registration Rights Agreements, to (i) file with the Securities and Exchange Commission one or more registration statements relating to the resale of the Shares issuable upon conversion of the SLG Notes, and (ii) at the request of the Purchasers, participate in one or more underwritten offerings of the Shares issuable upon conversion of the SLG Notes. If the Company does not meet certain of its obligations under the SLG Registration Rights Agreements with respect to the registration of the Shares issuable upon conversion of the SLG Notes, it will be required to pay monthly liquidated damages of 0.75% of the principal amount of the SLG Note represented by the Shares included (or to be included, as the case may be) in the applicable registration statement until the related obligation is met, not to exceed 4% of the aggregate principal amount of the SLG Notes per annum. As of June 30, 2014, the Company had met its obligations under the SLG Agreements and the SLG Registration Rights Agreement.

 

GE Loans

 

On November 7, 2012, the Company, through two wholly owned subsidiaries (the “Borrowers”), entered into a financing arrangement with General Electric Capital Corporation (“GE,” and the agreement governing such arrangement, the “GE Credit Agreement”). Pursuant to the GE Credit Agreement, GE agreed to loan to the Borrowers up to an aggregate of $200,000 to finance the development, construction and operation of two LNG production facilities (individually a “Project” and together the “Projects”), each with an expected production capacity of approximately 250,000 LNG gallons per day. The Company expects to sell the LNG produced by the Projects through America’s Natural Gas Highway (“ANGH”), a nationwide network of natural gas truck fueling stations.

 

The Borrowers’ ability to obtain loans under the GE Credit Agreement for the Projects (collectively, “Loans” and, with respect to each Project “Tranche A Loans” and “Tranche B Loans”) is subject to the satisfaction of certain conditions, including each of the (i) acquisition of title to, or leasehold interests in, the sites upon which the Projects will be constructed, (ii) receipt of all governmental approvals necessary in connection with the design, development, ownership, construction, installation, operation and maintenance of the Projects, (iii) commitment of all utility services necessary for the construction and operation of the Projects, and (iv) execution of an engineering, procurement and construction contract for each Project by the Company and GE Oil & Gas, Inc.

 

The GE Credit Agreement further provides that (i) if initial Loans are not made prior to December 31, 2014, the GE Credit Agreement will automatically terminate, (ii) each Project must be completed by the earlier of (a) the date thirty months after the funding of the initial Loans with respect to such Project and (b) December 31, 2016 (with respect to each Project, the “Date Certain”), (iii) the then existing Loans with respect to each Project must be converted into term loans with eight year amortization schedules (“Term Loans”) on or before the Date Certain with respect to such Project (the date of such conversion with respect to each Project, the “Conversion Date”), provided that if such Loans are not converted into Term Loans by the applicable Date Certain, such Loans must be repaid by the applicable Date Certain, (iv) each Term Loan will be due and payable on the eighth anniversary of the Conversion Date with respect to such Term Loan, and (v) at any time prior to the applicable Conversion Date, the Loans may be prepaid in whole, and at any time after the applicable Conversion Date, the Loans may be prepaid in whole or in part. The Company expects the Loans to bear interest at an annual rate equal to the then-current LIBOR rate plus 7%, provided that for purposes of the GE Credit Agreement, the then-current LIBOR rate will always be at least 1%. The GE Credit Agreement includes various customary

 

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covenants, including debt service coverage ratios, a commitment fee on the unutilized loan amounts of 0.5% per annum, and also provides for customary events of default which, if such events occur, would permit or require the Loans to become or to be declared due and payable. As of June 30, 2014, the Company has not drawn any money under the GE Credit Agreement and was in compliance with the financial covenants. The commitment fee, which is charged to interest expense in the condensed consolidated statements of operation, was $253 for each of the three months ended June 30, 2013 and 2014. For the six month periods ended June 30, 2013 and 2014, the Company recorded $497 and $503 of interest expense related to the commitment fee respectively.

 

The Loans are secured by (i) a first priority security interest in all of the Borrowers’ assets, including the Projects, and (ii) a pledge of the Borrowers’ outstanding ownership interests. In addition, the Company has executed a guaranty in favor of GE (“Guaranty”), pursuant to which the Company has guaranteed all of the Borrowers’ obligations under the GE Credit Agreement, including repayment of all Loans.

 

The Company and GE also entered an equity contribution agreement (the “EC Agreement”) pursuant to which the Company agreed to pay at least 25% of the budgeted cost of the Projects and all additional costs that exceed such expected budgeted costs, in each case, in the form of equity contributions to the Borrowers (“Equity Contributions”). The EC Agreement also requires the Company to provide, concurrent with GE’s extension of the initial Loans under the GE Credit Agreement, letter(s) of credit in an amount equal to the Company’s then-current unfunded Equity Contributions.

 

Concurrently with the execution of the GE Credit Agreement, the Company issued to GE a warrant (“GE Warrant”) to purchase up to 5,000,000 shares of the Company’s common stock (see note 13), and entered into the GE Registration Rights Agreement.

 

Mavrix Note

 

On April 25, 2013, Mavrix, LLC (“Mavrix”), a newly-formed special purpose vehicle subsidiary of Clean Energy Renewable Fuels, LLC (“CERF”), a wholly owned subsidiary of the Company, entered into a note purchase agreement (“NPA”) with Massachusetts Mutual Life Insurance Company (the “Mavrix Note Purchaser”). Mavrix owns all of the equity interests in Canton Renewables, LLC (“Canton”) and 70% of the equity interests in Dallas Clean Energy, LLC, which owns all of the equity interests in DCEMB (together with Canton, the “Project Companies”). Canton owns a RNG extraction and processing project at the Sauk Trail Hills Landfill in Canton, Michigan and DCEMB owns the RNG extraction and processing project at the McCommas Bluff Landfill in Dallas, Texas.

 

Pursuant to the NPA, on April 25, 2013 (the “Mavrix Issuance Date”), the Mavrix Note Purchaser (i) purchased a secured multi-draw promissory note (the “Mavrix Note”) from Mavrix in the maximum aggregate principal amount of $30,000 (the “Maximum Principal Amount”), and (ii) funded an initial advance of $5,000. In addition, in September and December 2013, the Mavrix Note Purchaser funded an additional advance of $5,000 each, and therefore an aggregate of $15,249, which includes interest paid in kind, was outstanding under the Mavrix Note at June 30, 2014. Subject to Mavrix and the Project Companies satisfying certain conditions described in the NPA, the Mavrix Note Purchaser will make additional advances under the Mavrix Note, up to the Maximum Principal Amount. Mavrix has used, and will continue to use, the proceeds from the advances under the Mavrix Note to (x) pay any transaction costs and fees related to the NPA and the issuance of the Mavrix Note and (y) make distributions to its direct and indirect parent companies. Mavrix’s direct and indirect parent companies have used such distributions to date to finance construction of additional RNG extraction and processing projects and for working capital purposes.

 

The Mavrix Note matures 12 years from the Mavrix Issuance Date and bears cash interest at the rate of 12% per annum and paid in kind interest at the rate of 2.0% per annum. The principal amount of the Mavrix Note will be repaid in 28 quarterly installments commencing on June 30, 2018, provided that the NPA requires mandatory prepayment of such principal amount upon certain casualty or condemnation events, asset sales or extraordinary transactions. In addition, Mavrix may not voluntarily repay the Mavrix Note until January 25, 2017 and, subject to the foregoing restriction, Mavrix must pay a prepayment premium if it prepays the Mavrix Note prior to July 30, 2021.

 

The Mavrix Note is secured by (i) a first priority security interest in all of Mavrix’s assets and (ii) a pledge of Mavrix’s outstanding equity interests. In addition, the NPA includes various customary affirmative and negative covenants and also provides for customary events of default which, if such events occur, would permit or require the Mavrix Note to become, or to be declared, due and payable. The Mavrix Note is non-recourse to the Company.  As of June 30, 2014, the Company had met its obligations under the NPA.

 

5.25% Notes

 

In September 2013, the Company completed a private offering of 5.25% Convertible Senior Notes due 2018 (the “5.25% Notes”) and entered into an indenture governing the 5.25% Notes (the “Indenture”).

 

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The net proceeds from the sale of the 5.25% Notes after the payment of certain debt issuance costs of $7,805 were approximately $242,195. The Company has used, and intends to continue to use, the net proceeds from the sale of the 5.25% Notes to fund capital expenditures and for general corporate purposes.

 

The 5.25% Notes bear interest at a rate of 5.25% per annum, payable semi-annually in arrears on October 1 and April 1 of each year, beginning on April 1, 2014. The 5.25% Notes will mature on October 1, 2018, unless earlier purchased, redeemed or converted prior to such date in accordance with their terms and the terms of the Indenture.

 

Holders may convert their 5.25% Notes, at their option, at any time prior to the close of business on the business day immediately preceding the maturity date of the 5.25% Notes. Upon conversion, the Company will deliver a number of shares of its common stock, per $1 principal amount of 5.25% Notes, equal to the conversion rate then in effect (together with a cash payment in lieu of any fractional shares). The initial conversion rate for the 5.25% Notes is 64.1026 shares of the Company’s common stock per $1 principal amount of Notes (which is equivalent to an initial conversion price of approximately $15.60 per share of the Company’s common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events as described in the Indenture.

 

Upon the occurrence of certain corporate events prior to the maturity date of the 5.25% Notes, the Company will, in certain circumstances, in addition to delivering the number of shares of the Company’s common stock deliverable upon conversion of the 5.25% Notes based on the conversion rate then in effect (together with a cash payment in lieu of any fractional shares), pay holders that convert their 5.25% Notes a cash make-whole payment in an amount as described in the Indenture. The Company may, at its option, irrevocably elect to settle its obligation to pay any such make-whole payment in shares of its common stock instead of in cash. The amount of any make-whole payment, whether it is settled in cash or in shares of the Company’s common stock upon the Company’s election, will be determined based on the date on which the corporate event occurs or becomes effective and the stock price paid (or deemed to be paid) per share of the Company’s common stock in the corporate event, as described in the Indenture.

 

The Company may not redeem the 5.25% Notes prior to October 5, 2016. On or after October 5, 2016, the Company may, at its option, redeem for cash all or any portion of the 5.25% Notes if the closing sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which notice of redemption is provided, exceeds 160% of the conversion price on each applicable trading day. In the event of the Company’s redemption of the 5.25% Notes, the redemption price will equal 100% of the principal amount of the 5.25% Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for in the 5.25% Notes.

 

If the Company undergoes a fundamental change (as defined in the Indenture) prior to the maturity date of the 5.25% Notes, subject to certain conditions as described in the Indenture, holders may require the Company to purchase, for cash, all or any portion of their 5.25% Notes at a repurchase price equal to 100% of the principal amount of the 5.25% Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.

 

The Indenture contains customary events of default with customary cure periods, including, without limitation, failure to make required payments or deliveries of shares of its common stock when due under the Indenture, failure to comply with certain covenants under the Indenture, failure to pay when due or acceleration of certain other indebtedness of the Company or certain of its subsidiaries, and certain events of bankruptcy and insolvency of the Company or certain of its subsidiaries. The occurrence of an event of default under the Indenture will allow either the trustee or the holders of at least 25% in principal amount of the then-outstanding 5.25% Notes to accelerate, or upon an event of default arising from certain events of bankruptcy or insolvency of the Company, will automatically cause the acceleration of, all amounts due under the 5.25% Notes. No events of default have occurred as of June 30, 2014.

 

The 5.25% Notes are senior unsecured obligations of the Company and rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 5.25% Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness (including trade payables) of the Company’s subsidiaries.

 

Canton Bonds

 

On March 19, 2014, Canton completed the issuance of Solid Waste Facility Limited Obligation Revenue Bonds (Canton Renewables, LLC — Sauk Trail Hills Project) Series 2014 in the aggregate principal amount of $12,400 (the “Bonds”).

 

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The Bonds were issued by the Michigan Strategic Fund (the “Issuer”) and the proceeds of such issuance were loaned by the Issuer to Canton pursuant to a loan agreement that became effective on March 19, 2014 (the “Loan Agreement”). The Bonds are expected to be repaid from revenue generated by Canton from the sale of RNG and are secured by the revenue and assets of Canton. The Bond repayments will be amortized through July 1, 2022, the average coupon interest rate on the Bonds is 6.6%, and all but $1,000 of the principal amount of the Bonds is non-recourse to Canton’s parent companies, including the Company.

 

Canton used the Bond proceeds primarily to (i) refinance the cost of constructing and equipping its RNG extraction and production project in Canton, Michigan and (ii) pay a portion of the costs associated with the issuance of the Bonds. The refinancing described in the prior sentence was accomplished through distributions to the Borrower’s direct and indirect parent companies who provided the financing for the RNG production facility, and such companies have used such distributions to finance construction of additional RNG extraction and processing projects and for working capital purposes.

 

The Loan Agreement contains customary events of default, with customary cure periods, including without limitation, failure to make required payments when due under the Loan Agreement, failure to comply with certain covenants under the Loan Agreement, certain events of bankruptcy and insolvency of Canton, and the existence of an event of default under the indenture governing the Bonds that was entered between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee. The occurrence of an event of default under the Loan Agreement will allow the Issuer or the trustee to accelerate all amounts due under the Loan Agreement.  As of June 30, 2014, Canton had met its obligations under the Loan Agreement.

 

Long-term debt and capital lease obligations at December 31, 2013 and June 30, 2014 consisted of the following:

 

		December 31, 2013			June 30, 2014
IMW Purchase Notes		$	12,121		$	—
Northstar future payments		1,274			1,318
DCEMB Notes		585			585
DCEMB Revenue Bonds (non-recourse to the Company)		36,500			36,500
7.5% Notes		150,000			150,000
SLG Notes		145,000			145,000
5.25% Notes		250,000			250,000
Weaver Notes		714			485
IMW Lines of Credit		6,036			12,084
Mavrix Note (non-recourse to the Company)		15,097			15,249
Canton Bonds ($11,400 non-recourse to the Company)		—			12,400
Capital lease obligations		3,091			2,519
Total debt and capital lease obligations		620,418			626,140
Less amounts due within one year and short-term borrowings		(23,401		)	(17,724		)
Total long-term debt and capital lease obligations		$	597,017		$	608,416

 

Note 13—Earnings Per Share

 

Basic earnings per share is based upon the weighted-average number of shares outstanding and shares issuable for little or no cash consideration during each period. Diluted earnings per share reflects the impact of assumed exercise of dilutive stock options and warrants. In the three and six months ended June 30, 2014, 5,000,000 shares of common stock related to the GE Warrant were included in the basic and dilutive earnings per share calculations. The information required to compute basic and diluted earnings per share is as follows:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2014		2013		2014
Basic and diluted:
Weighted average number of common shares outstanding		93,985,438		94,859,587		93,561,302		94,768,462

 

Certain securities were excluded from the diluted earnings per share calculations for the three and six months ended June 30, 2013 and 2014, respectively, as the inclusion of the securities would be anti-dilutive to the calculation. The amounts outstanding as of June 30, 2013 and 2014 for these instruments are as follows:

 

		June 30,
		2013		2014
Options		11,679,877		11,858,681
Warrants		2,130,682		2,130,682
Convertible notes		19,160,338		35,185,979
Restricted Stock Units		1,545,000		2,080,336

 

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Note 14—Stock-Based Compensation

 

The following table summarizes the compensation expense and related income tax benefit related to the stock-based compensation expense recognized during the periods:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2013			2014			2013			2014
Stock-based compensation expense		$	5,451		$	2,978		$	11,663		$	6,398
Stock-based compensation expense, net of tax		$	5,451		$	2,978		$	11,663		$	6,398

 

Stock Options

 

The following table summarizes the Company’s stock option activity during the six months ended June 30, 2014:

 

		Number of Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding, December 31, 2013		11,526,998		$	11.79
Options granted		702,000		11.83
Options exercised		(164,769	)	3.16
Options forfeited		(205,548	)	13.31
Outstanding, June 30, 2014		11,858,681		$	11.89		4.80		$	—
Exercisable, June 30, 2014		9,866,856		$	11.68		4.12		$	395

 

As of June 30, 2014, there was $10,754 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted average period of one year. The total fair value of shares vested during the six months ended June 30, 2014 was $4,798.

 

The Company is obligated to issue shares of its common stock upon the exercise of stock options. The intrinsic value of all options exercised during the six months ended June 30, 2013 and 2014 was $622 and $1,419, respectively.

 

The fair value of each stock option is estimated as of the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions for grants in 2014:

 

		Six Months Ended June 30, 2014
Dividend yield		0.00%
Expected volatility		52.3% to 54.0%
Risk-free interest rate		1.1% to 1.8%
Expected life in years		6.0

 

The weighted-average grant date fair values of options granted during the six months ended June 30, 2013 and 2014 was $7.20 and $5.99, respectively. The volatility amounts used during these periods were estimated based on the Company’s historical volatility and the Company’s implied volatility of its traded options for such periods. The expected lives used during the periods were based on historical exercise periods and the Company’s anticipated exercise periods for its outstanding options. The risk free rates used during the periods were based on the U.S. Treasury yield curve for the expected life of the options at the time of grant. The Company recorded $7,253 and $3,819 of stock option expense during the six months ended June 30, 2013 and 2014, respectively. The Company has not recorded any tax benefit related to its stock option expense.

 

Market-Based Restricted Stock Units

 

The Company issued 1,545,000 and 489,500 market-based restricted stock units (“Market-Based RSUs”) to certain key employees during 2012 and for the six months ended June 30, 2014, respectively.  A holder of Market-Based RSUs will receive one share of the Company’s common stock for each Market-Based RSU held if (i) between two years and four years from the date of grant of the Market-Based RSU, the closing price of the Company’s common stock equals or exceeds, for twenty consecutive trading days, 135% of the closing price of the Company’s common stock on the Market-Based RSU grant date (the “Stock Price Condition”) and (ii) the holder is employed by the Company at the time the Stock Price Condition is satisfied. If the Stock Price Condition is not satisfied prior to four years from the date of grant, the Market-Based RSUs will be automatically forfeited. The Market-Based RSUs are subject to the terms and conditions of the Company’s Amended and Restated 2006 Equity Incentive Plan and a Notice of Grant of Restricted Stock Unit and Restricted Stock Unit Agreement.

 

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The following table summarizes the Company’s Market-Based RSU activity during the six months ended June 30, 2014:

 

		Number of Shares		Weighted Average Fair Value at Grant Date			Weighted Average Remaining Contractual Term (in years)
Outstanding, December 31, 2013		1,545,000		$	11.42
RSUs granted		489,500		8.26
Outstanding and non-vested, June 30, 2014		2,034,500		$	10.66		2.08

 

As of June 30, 2014, there was $3,202 of total unrecognized compensation cost related to non-vested Market-Based RSUs. That cost is expected to be recognized over a weighted average period of 1.6 years.

 

The Company recorded $4,410 and $1,775 of expense during the six months ended June 30, 2013 and 2014, respectively, related to the Market-Based RSUs. The Company has not recorded any tax benefit related to its Market-Based RSU expense.

 

The fair value of the Market-Based RSUs granted during the six month period ended June 30, 2014 was estimated on the date of grant using the Monte Carlo Method with the following assumptions:

 

		February 2, 2014
Dividend yield		0.00	%
Expected volatility		47.0	%
Risk-free interest rate		1.1	%
Expected life in years		2.0

 

Service-Based Restricted Stock Units

 

During September 2013, the Company issued service-based restricted stock units (“Service-Based RSUs”) to a key employee which vest annually over three years from the date of issuance at a rate of 34%, 33% and 33%, respectively, if the holder is then in service to the Company. The fair value of each Service-Based RSU is estimated using the closing stock price of the Company’s common stock on the date of grant.

 

The following table summarizes the Company’s Serviced-Based RSU activity during the six months ended June 30, 2014:

 

		Number of Shares		Weighted Average Fair Value at Grant Date			Weighted Average Remaining Contractual Term (in years)
Nonvested at December 31, 2013		45,836		$	13.09
RSUs granted		—		—
Nonvested at June 30, 2014		45,836		$	13.09		2.2

 

As of June 30, 2014, there was $447 of total unrecognized compensation cost related to non-vested Service-Based RSUs. That cost is expected to be recognized evenly over a period of 2.2 years.

 

The Company recorded $153 of expense during the six months ended June 30, 2014 related to the Service-Based RSUs. The Company has not recorded any tax benefit related to its Service-Based RSU expense.

 

Employee Stock Purchase Plan

 

On May 7, 2013, the Company adopted an employee stock purchase plan (the “ESPP”), pursuant to which eligible employees may purchase shares of the Company’s common stock at 85% of the fair market value of the common stock on the last trading day of two consecutive, non-concurrent offering periods each year. The Company has reserved 2,500,000 shares of its common stock for issuance under the ESPP.

 

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The Company recorded $37 of expense during the six months ended June 30, 2014 related to the ESPP. The Company has not recorded any tax benefits related to its ESPP expense. At June 30, 2014, the Company had sold an aggregate of 14,934 shares pursuant to the ESPP.

 

Non-qualified Non-public Subsidiary Unit Options

 

In September 2013, the Company’s wholly owned subsidiary, CERF, adopted the Clean Energy Renewable Fuels, LLC 2013 Unit Option Plan (the “CERF Plan”). 150,000 Class B units representing membership interests in CERF were initially reserved for issuance under the CERF Plan.

 

The following table summarizes CERF’s unit option activity during the six months ended June 30, 2014:

 

		Number of Units		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding, December 31, 2013		115,000		$	40.80
Options granted		—		—
Outstanding and non-vested, June 30, 2014		115,000		$	40.80		9.22		$	0

 

As of June 30, 2014, there was $2,696 of total unrecognized compensation cost related to non-vested unit options issued pursuant to the CERF Plan. That cost is expected to be recognized over a weighted average period of 1.5 years.

 

CERF recorded $614 of unit option expense during the six months ended June 30, 2014. CERF has not recorded any tax benefit related to its unit option expense.

 

Note 15—Environmental Matters, Litigation, Claims, Commitments and Contingencies

 

The Company is subject to federal, state, local, and foreign environmental laws and regulations. The Company does not anticipate any expenditures to comply with such laws and regulations which would have a material impact on the Company’s condensed consolidated financial position, results of operations, or liquidity. The Company believes that its operations comply, in all material respects, with applicable federal, state, local and foreign environmental laws and regulations.

 

The Company may become party to various legal actions that arise in the ordinary course of its business. During the course of its operations, the Company is also subject to audit by tax authorities for varying periods in various federal, state, local and foreign tax jurisdictions. Disputes may arise during the course of such audits as to facts and matters of law. It is impossible to determine the ultimate liabilities that the Company may incur resulting from any such lawsuits, claims and proceedings, audits, commitments, contingencies and related matters or the timing of these liabilities, if any. If these matters were to be ultimately resolved unfavorably, an outcome not currently anticipated, it is possible that such outcome could have a material adverse effect upon the Company’s condensed consolidated financial position, results of operations or liquidity. However, the Company believes that the ultimate resolution of such actions will not have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, or liquidity.

 

Note 16—Income Taxes

 

The Company’s income tax provision for the three months and six months ended June 30, 2014 was $147 and $1,109, respectively.  The tax expense for the three and six months ended June 30, 2013 was $293 and $2,098, respectively.  Tax expense for all periods was comprised of taxes due on the Company’s U.S. and foreign operations.  The decrease in the Company’s income tax provision for the six months ended June 30, 2014 as compared to the tax provision for the six months ended June 30, 2013 was primarily attributed to taxes paid on the sale of Clean Energy del Peru in the first six months of 2013.  The effective tax rate for the three months and six months ended June 30, 2013 and 2014 are different from the federal statutory tax rate primarily as a result of losses for which no tax benefit has been recognized.

 

The Company did not record a change in its liability for unrecognized tax benefits or penalties in the three months and six months ended June 30, 2013 or June 30, 2014, and the net interest incurred was immaterial for such periods.

 

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