| KFX INC ITEM 1A RISK FACTORS In addition to risk and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry and our company could materially impact our future performance and results |
| These are not all the risks we face, and other factors currently considered immaterial or unknown to us may impact our future operations |
| 7 ______________________________________________________________________ Business Risks We have a history of losses, deficits, and negative operating cash flows and will likely continue to incur losses in the future |
| We expect to incur operating losses and continued negative cash flows from operations for the foreseeable future |
| We have made, and will continue to make, substantial capital and other expenditures before we will have sufficient operating income and cash flow to recover our investments |
| We are not able to accurately estimate when, if ever, our operating income will increase sufficiently to cover these investments |
| Further, we may not achieve or maintain profitability or generate cash from operations in future periods |
| Our working capital (the amount our current assets exceed our current liabilities), accumulated deficit, net loss and cash (used in) provided by operating activities are as follows: December 31, 2005 2004 2003 (in thousands) Working capital $ 19cmam910 $ 73cmam603 $ 21cmam204 Accumulated deficit (151cmam870) (128cmam557) (118cmam002) Net loss 23cmam313 10cmam555 8cmam283 Cash (used in) provided by operating activities $ (12cmam071) $ 2cmam042 $ (8cmam220) We have substantial capital requirements and, as a result, we have been and continue to be dependent on sales of our equity securities to fund our operating costs |
| As a result of negative cash flows from operations, we have been and continue to be dependent on sales of our equity securities to fund the operating and substantial capital costs associated with our business |
| Our business strategy may further increase our needs for additional capital |
| Our success is dependent on our ability to utilize existing resources and to generate sufficient cash flows to meet our obligations on a timely basis, to obtain financing or refinancing as may be required, to attain profitability, or a combination thereof |
| Depending on our future operations and the conditions of the equity capital markets, we may not be able to continue to raise additional equity capital on terms acceptable to us or at all |
| A lack of adequate financing may adversely affect our ability to pursue our business strategy, respond to changing business and economic conditions and competitive pressures, absorb negative operating results and fund our continuing operations, capital expenditures or increased working capital requirements |
| We have a limited operating history as an energy solutions company, and our business and prospects should be considered in light of the risks and difficulties typically encountered by a company with a limited operating history |
| You should consider our business and prospects in light of the risks and difficulties typically encountered by a company with a limited operating history |
| The specific risks include whether we will be able to: • enter into agreements for the purpose of licensing our K-Fuel technology or building K-Fuel plants; • enter into or maintain strategic partnerships with vendors and other parties to maximize our K-Fuel process; • raise additional capital; • accurately assess potential markets and effectively respond to competitive developments; • attract and retain customers for product sales; • attract and retain credit‑worthy customers; • effectively manage expanding operations; • successfully market our products; • execute our business strategy; and • attract and retain key personnel |
| 8 ______________________________________________________________________ We may not be successful in addressing these and other risks |
| As a result, our financial condition and results of operations may be adversely affected |
| Technical and operational problems may adversely impact our ability to operate or develop K-Fuel facilities, resulting in delays in the production of our K-Fuel products |
| Problems we may encounter in current and future plants include: • construction problems including cost overruns, delays, damage, technical issues, availability of raw material, availability of workers or contractors and weather; • unforeseen problems in the commissioning or operation of our current or future plants; and • products produced may not meet our specifications or customer requirements |
| Our ability to effectively operate and develop K-Fuel facilities may be harmed to the extent these and other technical or operational problems materialize |
| Any negative results from the continuing evaluation of K-Fuel produced at our 750cmam000- tons per year plant site or future plant sites by us or third parties could have a material adverse effect on the marketability of K-Fuel and our future prospects |
| We and certain third parties are continuing to evaluate K-Fuel produced at test runs conducted at our 750cmam000-tons per year plant site |
| There can be no assurance that this evaluation will result in positive findings concerning the moisture content, heat value, emission‑levels, burn qualities or other aspects of our K-Fuel product |
| Furthermore, even should this initial evaluation indicate that our K-Fuel product performs to design specifications, there can be no assurance that later tests will confirm these preliminary results or that our K-Fuel product will be readily accepted by the market |
| The process of introducing K-Fuel into the market may be further delayed if these test results are negative or if potential customers conduct their own tests of the K-Fuel product to determine whether it meets their individual requirements |
| If this continuing process of evaluation and market introduction results in negative findings concerning the K-Fuel process, this could have a material adverse effect on the marketability of K-Fuel and on our financial condition, results of operations and future prospects |
| Due to the uncertain market for, and commercial acceptance of, our K‑Fuel products, we may not be able to realize significant revenues from the sale of K-Fuel products |
| While we believe that a commercial market will develop both domestically and internationally for cleaner coal products such as K-Fuel, we will face the following risks due to the developing market for our cleaner coal technology: • limited pricing information; • changes in the price differential between low- and high-Btu coal; • unknown costs and methods of transportation for bringing K-Fuel to the market; • alternative fuel supplies available at a lower price; • available emissions reducing equipment and other technologies; • the market viability of K-Fuel; and • sufficient market interest for us to continue in business |
| If we are unable to develop markets for our K-Fuel products, our ability to generate revenues and profits may be negatively impacted |
| If we are unable to construct and operate commercial K-Fuel production plants profitably, our ability to generate revenue from this process will be impaired |
| The commercial production of our K-Fuel product is relatively new and untested |
| Our future success depends on our ability to successfully operate our existing commercial K-Fuel production plant at a profit, as well as to locate, develop and construct future commercial K-Fuel production plants at a profit |
| A number of different variables, risks and uncertainties affect our successful construction of future K-Fuel production plants and our ability to operate such plants at a profit including: 9 ______________________________________________________________________ • the complex, lengthy and costly regulatory permit and approval process; • local opposition to development of projects, which can increase cost and delay timelines; • increases in construction costs such as contractors, workers and raw materials; • high transportation costs and availability of transportation; • the possible future price increase of low-Btu coal, which could make the production of K-Fuel unprofitable; and • expenditures related to researching and investigating future K-Fuel production sites, which we may not be able to recover |
| If we are unable to successfully address these risks, our results from operations and financial condition may be adversely affected |
| Competition from other companies in the clean coal and alternative fuel technology industries could adversely affect our market share |
| Competition in the clean coal, alternative fuel and emission‑reducing equipment industries could impact our ability to generate revenue from our K-Fuel process |
| Many of these companies in the clean coal, alternative fuel technology and emission‑reducing equipment industries have financial resources greater than ours |
| Due to these competitive advantages, our competition may be able to offer products more competitively priced and more widely available than ours |
| These companies may also have the resources to create new technologies and products that could make our process and products obsolete |
| KFxapstas future revenues may depend on our ability to address competition in these industries |
| Deregulation in the United States power generating industry may result in increased competition, which could result in lower margins for our products |
| We expect that deregulation in the United States power generating industry will result in utilities and other power generating facilities placing a high emphasis on reducing costs in their operations |
| This situation may, in turn, result in increased competition from other producers of energy‑efficient coal products, other clean fuel sources, and other products, services and technologies designed to provide environmental and operating cost benefits similar to those which we believe are available from our K-Fuel products |
| Regulation of the K-Fuel process and K-Fuel products may adversely affect our financial condition and results of operations |
| Our products will be subject to federal, local, and foreign laws and regulations |
| In addition, as products are introduced into the market commercially, governments may impose new regulations |
| Any regulation of our products, whether at the federal, state, local or foreign level, including any regulations relating to the development or sale of our products, may increase our costs and the price of our products |
| If the cost of compliance with applicable laws and regulations increases past that forecasted, our ability to profitably market and sell K-Fuel products may be jeopardized |
| Compliance with environmental laws and regulations may increase our costs and reduce our revenues |
| Our operations are subject to stringent and complex federal, state and local environmental laws and regulations |
| Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations |
| Certain environmental statutes impose strict, joint and several liabilities for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released |
| Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of substances or other waste products into the environment |
| As we have acquired and may continue to acquire businesses with active or inactive coal mining operations, such as Landrica Development Company and our pending purchase of Buckeye Industrial Mining Co, we have become and will become increasingly affected by federal, state and local laws and regulations affecting the coal mining industry, including laws and regulations pertaining to employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and 10 ______________________________________________________________________ availability |
| The costs, liabilities and requirements associated with these regulations can be costly and time‑consuming, and could potentially affect our cash flow and profitability |
| Future changes in the law may adversely affect our ability to sell our products and services |
| A significant factor in expanding the potential US market for K-Fuel is the numerous federal and state environmental regulations, which provide various air emission requirements for power generating facilities and industrial coal users |
| We believe that the use of clean‑burning fuel technologies, like K-Fuel, helps utility companies comply with the air emission regulations and limitations |
| We are unable to predict future regulatory changes and their impact on the demand for our products |
| While more stringent laws and regulations, including mercury emission standards, limits on sulfur dioxide emissions and nitrogen oxide emissions, may increase demand for our products, such regulations may result in reduced coal use and reliance on alternative fuel sources |
| Similarly, amendments to the numerous federal and state environmental regulations that relax emission limitations would have a material adverse effect on our prospects |
| Our inability to adequately protect and defend our proprietary process could harm our business, increase our costs and decrease the sales volume of our products and services |
| Our success depends upon our proprietary process |
| We rely on a combination of patent trademark and trade secret rights to establish and protect our proprietary rights |
| We currently have a series of patents and patent applications on our K-Fuel process |
| However, competitors may successfully challenge the validity or scope of one or more of our patents, or any future patents |
| These patents alone may not provide us with any significant competitive advantage |
| Further, our current issued patent protection does not cover what we believe are certain unique aspects of our K-Fuel process, as it is currently conducted |
| One of our pending United States patent applications include claims covering these unique aspects has been rejected |
| While this application currently stands rejected by the United States patent and trademark office as filed, they have indicated that many of the claims presented in the application are most likely allowable |
| The application has been refiled to conform to the examiner’s comments and we expect the patent to be granted as refiled |
| However, there can be no assurance that we will be able to obtain patent protection in the United States or abroad to protect these or any other aspects of our intellectual property, or that, in the absence of any such patent protection, that the combination of additional methods that we currently employ to maintain the confidentiality of our processes will adequately safeguard our proprietary processes and information |
| If our intellectual property is not adequately protected, this may have a material adverse impact on our financial condition, results of operations and future prospects |
| Third parties could copy or otherwise obtain and use our technology without authorization or develop similar technology independently |
| The protection of our proprietary rights may be inadequate and our competitors could independently develop similar technology, duplicate our solutions, or design around any patents or other intellectual property rights we hold |
| Any actions taken by us to enforce our patents or other property rights could result in significant expense as well as the diversion of management time and resources |
| In addition, detecting infringement and misappropriation of patents or intellectual property can be difficult, and there can be no assurance that we would detect any infringement or misappropriation of our proprietary rights |
| Even if we are able to detect infringement or misappropriation of our proprietary rights, litigation to enforce our rights could cause us to divert significant financial and human resources from our business operations, and may not ultimately be successful |
| If we are required to divert significant resources and time to the enforcement of our proprietary rights, even if the enforcement is successful, our business could be materially adversely affected |
| Our success will depend on our ability to operate without infringing on or misappropriating the proprietary rights of others |
| We may be sued for infringing or misappropriating the proprietary rights of others |
| Intellectual property litigation is costly, and, even if we prevail, the cost of such litigation could adversely affect our business |
| In addition, litigation is time consuming and could divert management attention and resources away from our business |
| If we do not prevail in any litigation, we could be required to stop the infringing activity and/or pay substantial damages |
| Under some circumstances, these damages could be triple the actual damages the patent holder incurs |
| If we have supplied infringing products to third parties for marketing or licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses the third parties may sustain themselves as the result of lost sales or damages paid to the patent holder |
| If a third party holding rights under a patent successfully asserts an infringement claim with respect to any of our products or processes, we may be prevented from manufacturing or marketing our infringing product in the country or countries covered by the patent we infringe, unless we can obtain a license from the patent holder |
| Any required license might not be available to us on acceptable terms, or at all |
| Some licenses may be non-exclusive, and therefore, our competitors may have access to the same 11 ______________________________________________________________________ technology licensed to us |
| If we fail to obtain a required license or are unable to design around a patent, we may be unable to market some of our anticipated products, which could have a material adverse effect on our business |
| We rely on key personnel and if we are unable to retain or attract qualified personnel, we may not be able to execute our business plan |
| Our success is currently dependent on the performance of a small group of senior managers and key technical personnel |
| In addition, our business strategy will require us to attract and retain a substantially greater number of qualified personnel |
| The inability to retain key managerial and technical personnel or attract and retain additional highly qualified managerial or technical personnel in the future could harm our business or financial condition |
| Any overseas development of our business is subject to international risks, which could adversely affect our ability to license, construct or operate profitable overseas plants |
| We believe a portion of the growth opportunity for our business lies outside the United States |
| Doing business in foreign countries may expose us to many risks that are not present in the US We lack significant experience dealing with such risks, including political, military, privatization, technology piracy, currency exchange and repatriation risks, and higher credit risks associated with customers |
| In addition, it may be more difficult for us to enforce legal obligations in foreign countries, and we may be at a disadvantage in any legal proceeding within the local jurisdiction |
| Local laws may also limit our ability to hold a majority interest in the projects that we develop |
| Our acquisition activities may not be successful |
| As part of our business strategy, we may make acquisitions of businesses and properties |
| However, suitable acquisition candidates may not be available on terms and conditions we find acceptable |
| Further, acquisitions pose substantial risks to our financial condition and results of operations |
| In pursuing acquisitions, we compete with other companies, many of which have greater financial and other resources to acquire attractive companies and properties |
| Even if future acquisitions are completed, the following are some of the risks associated with acquisitions: • the acquired businesses or properties may not produce revenues, earnings or cash flow at anticipated levels; • we may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner; • acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures; • we may finance future acquisitions by issuing common stock for some or all of the purchase price, which could dilute the ownership interests of our stockholders; and • we may incur additional debt related to future acquisitions |
| Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes‑Oxley Act of 2002 could have a material adverse effect on the marketapstas perception of our business and our ability to raise capital |
| We have documented and tested our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes‑Oxley Act |
| The Sarbanes‑Oxley Act requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments |
| If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented, or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes‑Oxley Act |
| Further, this assessment maybe complicated by any acquisitions we may complete |
| While we continue to dedicate resources and management time to ensuring that we have effective controls over financial reporting, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the marketapstas perception of our business and our ability to raise capital |
| Risks Relating To Our Common Stock Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders |
| The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities |
| The market price of our common stock could change in ways that may or may not be related to our 12 ______________________________________________________________________ business, our industry or our operating performance and financial condition |
| In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur |
| For example, since the beginning of the fourth quarter of 2004, our stock price has appreciated approximately 175prca |
| Our current market price and valuation may not be sustainable |
| If the market price of our common stock declines significantly, you may be unable to resell your common stock at or above its purchase price |
| We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future |
| In addition, the stock markets in general can experience considerable price and volume fluctuations |
| Provisions in our articles of incorporation, bylaws and Delaware law may make it more difficult to effect a change in control, which could adversely affect the price of our common stock |
| Provisions of our articles of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine |
| Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock and potentially prevent the payment of a premium to stockholders in an acquisition |
| Our articles of incorporation and bylaws contain provisions that could delay, defer or prevent a change in control |
| These provisions include: • giving the board the exclusive right to fill all board vacancies; • providing that special meetings of stockholders may be called by the president, chairman of the board or by the board, and shall be called by the president, chairman or secretary after receipt of a written request signed by holders of at least 10prca of the outstanding shares; • a classified board of directors; and • permitting removal of directors only for cause and with a majority vote of the stockholders |
| These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions |
| As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, and may limit the price that investors are willing to pay in the future for shares of our common stock |
| We are also subject to provisions of the Delaware General Corporation Law that prohibit business combinations with persons owning 15prca or more of the voting shares of a corporationapstas outstanding stock for three years following the date that person became an interested stockholder, unless the combination is approved by the board of directors prior to the person owning 15prca or more of the stock, after which the business combination would be subject to special stockholder approval requirements |
| This provision could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or may otherwise discourage a potential acquirer from attempting to obtain control from us, which in turn could have a material adverse effect on the market price of our common stock |
| A substantial number of shares we have issued in exempt transactions are, or are being made, available for sale on the open market, and the resale of these securities might adversely affect our stock price |
| We have on file with the SEC effective registration statements for a substantial number of shares for resale |
| The selling stockholders under our effective registration statements will be permitted to sell their registered shares in the open market from time to time without advance notice to us or to the market and without limitations on volume |
| The sale of a substantial number of shares of our common stock under our registration statements, or the anticipation of such sales, could make it more difficult for us to sell equity or equity‑related securities in the future at a time and at a price that we might otherwise wish to effect sales |
| We have not paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future |
| We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business |
| Accordingly, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future |
| Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial conditions, current and anticipated cash needs and plans for expansion |