Clean Energy Fuels Corp. - Quarter Report: 2013 September (Form 10-Q)

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 September 30, 2013

 

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 October 31, 2013, there were 89,358,397 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		24
Item 3.—Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.—Controls and Procedures		37
PART II.—OTHER INFORMATION
Item 1.—Legal Proceedings		37
Item 1A.—Risk Factors		37
Item 2.—Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 3.—Defaults upon Senior Securities		49
Item 4.—Mine Safety Disclosures		49
Item 5.—Other Information		49
Item 6.—Exhibits		50

 

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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, 2012 and September 30, 2013

 

(Unaudited)

 

(In thousands, except share data)

 

		December 31, 2012			September 30, 2013
Assets
Current assets:
Cash and cash equivalents		$	108,522		$	352,136
Restricted cash		8,445			10,632
Short-term investments		38,175			54,307
Accounts receivable, net of allowance for doubtful accounts of $905 and $768 as of December 31, 2012 and September 30, 2013, respectively		57,594			56,259
Other receivables		17,808			27,685
Inventory, net		38,152			39,720
Prepaid expenses and other current assets		16,002			17,402
Total current assets		284,698			558,141
Land, property and equipment, net		428,177			468,224
Restricted cash		13,208			564
Notes receivable and other long-term assets		71,389			75,918
Investments in other entities		2,581			—
Goodwill		75,865			90,031
Intangible assets, net		99,282			83,706
Total assets		$	975,200		$	1,276,584
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations		$	30,389		$	25,797
Accounts payable		39,216			30,861
Accrued liabilities		30,794			49,957
Deferred revenue		13,521			13,501
Total current liabilities		113,920			120,116
Long-term debt and capital lease obligations, less current portion		300,636			529,424
Long-term debt, related party		—			65,000
Other long-term liabilities		14,014			14,061
Total liabilities		428,570			728,601
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 149,000,000 shares; issued and outstanding 87,634,478 shares and 89,355,397 shares at December 31, 2012 and September 30, 2013, respectively		9			9
Additional paid-in capital		837,367			877,351
Accumulated deficit		(300,814		)	(335,464		)
Accumulated other comprehensive income		6,151			2,158
Total Clean Energy Fuels Corp. stockholders’ equity		542,713			544,054
Noncontrolling interest in subsidiary		3,917			3,929
Total stockholders’ equity		546,630			547,983
Total liabilities and stockholders’ equity		$	975,200		$	1,276,584

 

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 Nine Months Ended September 30, 2012 and 2013

 

(Unaudited)

 

(In thousands, except share and per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2013			2012			2013
Revenue:
Product revenues		$	82,720		$	75,389		$	206,201		$	237,247
Service revenues		8,739			10,932			28,734			30,233
Total revenues		91,459			86,321			234,935			267,480
Operating expenses:
Cost of sales:
Product cost of sales		67,392			51,941			162,985			157,680
Service cost of sales		3,839			2,866			12,662			9,809
Derivative gains:
Series I warrant valuation		(5,692		)	(1,366		)	(1,085		)	(861		)
Selling, general and administrative		30,557			33,511			83,323			101,574
Depreciation and amortization		9,047			10,924			26,098			31,859
Total operating expenses		105,143			97,876			283,983			300,061
Operating loss		(13,684		)	(11,555		)	(49,048		)	(32,581		)
Interest expense, net		(4,314		)	(7,418		)	(11,337		)	(18,771		)
Other income (expense), net		1,914			736			1,578			(757		)
Income (loss) from equity method investment		152			—			315			(76		)
Gain from sale of equity method investment		—			—			—			4,705
Gain from sale of subsidiary		—			—			—			15,498
Loss before income taxes		(15,932		)	(18,237		)	(58,492		)	(31,982		)
Income tax expense		(277		)	(558		)	(695		)	(2,656		)
Net loss		(16,209		)	(18,795		)	(59,187		)	(34,638		)
Income of noncontrolling interest		(112		)	(41		)	(333		)	(12		)
Net loss attributable to Clean Energy Fuels Corp.		$	(16,321	)	$	(18,836	)	$	(59,520	)	$	(34,650	)
Loss per share attributable to Clean Energy Fuels Corp.:
Basic		$	(0.19	)	$	(0.20	)	$	(0.69	)	$	(0.37	)
Diluted		$	(0.19	)	$	(0.20	)	$	(0.69	)	$	(0.37	)
Weighted-average common shares outstanding:
Basic		87,006,024			94,338,525			86,441,196			93,823,223
Diluted		87,006,024			94,338,525			86,441,196			93,823,223

 

See accompanying notes to condensed consolidated financial statements.

 

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Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

For the Three Months and Nine Months Ended September 30, 2012 and 2013

 

(Unaudited)

 

(In thousands)

 

		Clean Energy Fuels Corp.						Noncontrolling Interest						Total
		Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
		2012			2013			2012			2013			2012			2013
Net income (loss)		$	(16,321	)	$	(18,836	)	$	112		$	41		$	(16,209	)	$	(18,795	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(4,217		)	428			—			—			(4,217		)	428
Foreign currency adjustments on intra-entity long-term investments		2,276			1,853			—			—			2,276			1,853
Unrealized gains (losses) on available-for-sale securities		38			(123		)	—			—			38			(123		)
Unrecognized gains on derivatives		157			—			—			—			157			—
Total other comprehensive income (loss), net of tax		(1,746		)	2,158			—			—			(1,746		)	2,158
Comprehensive income (loss)		$	(18,067	)	$	(16,678	)	$	112		$	41		$	(17,955	)	$	(16,637	)

 

		Clean Energy Fuels Corp.						Noncontrolling Interest						Total
		Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
		2012			2013			2012			2013			2012			2013
Net income (loss)		$	(59,520	)	$	(34,650	)	$	333		$	12		$	(59,187	)	$	(34,638	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(4,301		)	(935		)	—			—			(4,301		)	(935		)
Foreign currency adjustments on intra-entity long-term investments		2,051			(3,041		)	—			—			2,051			(3,041		)
Unrealized losses on available-for-sale securities		(178		)	(125		)	—			—			(178		)	(125		)
Unrecognized gains on derivatives		2,123			108			—			—			2,123			108
Total other comprehensive income (loss), net of tax		(305		)	(3,993		)	—			—			(305		)	(3,993		)
Comprehensive income (loss)		$	(59,825	)	$	(38,643	)	$	333		$	12		$	(59,492	)	$	(38,631	)

 

See accompanying notes to condensed consolidated financial statements.

 

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Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

 

For the Nine Months Ended September 30, 2012 and 2013

 

(Unaudited)

 

(In thousands)

 

		Nine Months Ended September 30,
		2012			2013
Cash flows from operating activities:
Net loss		$	(59,187	)	$	(34,638	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		26,098			31,859
Provision for doubtful accounts, notes and inventory		469			654
Derivative gains		(1,085		)	(861		)
Stock-based compensation expense		16,492			17,347
Amortization of debt issuance cost		352			910
Accretion of notes payable		1,523			895
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 on contingent consideration for acquisition		(3,994		)	(1,124		)
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts and other receivables		(10,123		)	(1,565		)
Inventory		(1,498		)	(6,535		)
Margin deposits on future contracts		3,000			—
Prepaid expenses and other assets		(14,375		)	(180		)
Accounts payable		(2,409		)	(7,910		)
Accrued expenses and other		25,817			17,835
Net cash used in operating activities		(18,920		)	(2,425		)
Cash flows from investing activities:
Purchases of short-term investments		(24,015		)	(68,051		)
Maturities and sales of short-term investments		27,506			74,918
Purchases of property and equipment		(132,840		)	(60,040		)
Loans made to customers		(7,657		)	(2,167		)
Payments on and proceeds from sales of loans receivable		7,220			3,141
Restricted cash		4,297			10,457
Acquisition, net of cash acquired		—			(9,000		)
Cash transferred with sale of subsidiary		—			(1,178		)
Investments in other entities		(1,024		)	—
Proceeds from sale of equity method investment		—			6,119
Net cash used in investing activities		(126,513		)	(45,801		)
Cash flows from financing activities:
Proceeds from issuance of common stock and exercise of stock options		8,373			650
Proceeds from debt instruments		50,559			295,213
Proceeds from debt, related party		—			15,000
Payment of debt issuance costs		—			(7,500		)
Contingent consideration paid relating to business acquisitions		(350		)	—
Proceeds from revolving line of credit		31,701			20,169
Repayment of borrowing under revolving line of credit		(27,819		)	(23,703		)
Repayment of capital lease obligations and debt instruments		(6,774		)	(7,811		)
Net cash provided by financing activities		55,690			292,018
Effect of exchange rates on cash and cash equivalents		686			(178		)
Net (decrease) increase in cash		(89,057		)	243,614
Cash, beginning of period		238,125			108,522
Cash, end of period		$	149,068		$	352,136
Supplemental disclosure of cash flow information:
Income taxes paid		$	753		$	2,128
Interest paid, net of approximately $4,821 and $1,835 capitalized, respectively		9,224			12,651

 

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 (hereinafter collectively referred to as 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, and public transit. The Company owns, operates, maintains and/or supplies over 440 natural gas fueling stations within the United States, and in British Columbia and Ontario within 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 solutions designed to provide operators with code-compliant maintenance facilities to service their 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 for power generation or as a vehicle fuel, including credits (“LCFS Credits”) under the California low carbon fuel standard 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 (see note 2).

 

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 for the three and nine months ended September 30, 2012 and 2013. All intercompany accounts and transactions have been eliminated in consolidation. The three or nine month periods ended September 30, 2012 and 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 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, 2012 that are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2013.

 

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

 

ServoTech

 

On February 25, 2011, the Company paid $1,200 for a 19.9% interest in ServoTech Engineering, Inc. (“ServoTech”), a company that provides, among other services, design and engineering services for natural gas engine systems. In connection with the investment, the Company was granted an option to purchase the remaining 80.1% of ServoTech for $2,800 (the “Exercise Price”) during the 15 month period following February 25, 2011 (the “Purchase Option”). On April 30, 2012, the Company exercised the Purchase Option, paid 50% of the Exercise Price, or $1,400, in cash on that date, and paid the remaining $1,400 of the Exercise Price in cash on October 31, 2012. The Company held its interest in ServoTech through its wholly owned subsidiary BAF Technologies, Inc. (“BAF”).  Through April 30, 2012, the Company accounted for its interest in ServoTech using the equity method of accounting as the Company had the ability to exercise significant influence over ServoTech’s operations.

 

The Company accounted for this acquisition in accordance with the authoritative guidance for business combinations in stages. The Company re-measured its previously held equity interest in ServoTech at fair value as of April 30, 2012 (the acquisition date) resulting in no gain or loss, and recognized the assets acquired and the liabilities assumed, measured at their fair values, as of the date of acquisition.

 

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The results of ServoTech’s operations have been included in the Company’s condensed consolidated financial statements from April 30, 2012 through June 28, 2013, the date on which the Company sold BAF (see the following paragraph). The historical results of ServoTech’s operations were not material to the Company’s financial position or historical results of operations.

 

BAF

 

On June 28, 2013, the Company, entered into and closed a stock purchase 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 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, for 816,460 shares of Westport’s common stock.  Pursuant to the agreement, the Company was issued 718,485 shares of Westport’s common stock on June 28, 2013 and shall be issued 97,975 shares of Westport’s common stock (the “Holdback Shares”) on the one year anniversary of such date (subject to potential offset for the Company’s indemnification obligations under the agreement).  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 stock purchase agreement. The fair value of the 816,460 shares of Westport’s common stock on June 28, 2013 was $27,221, and the Company recognized a gain of $15,498 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 terms of the stock purchase 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 will pay the Company $5,000 in cash on or before March 1, 2014.  Under the marketing agreement, the Company and the Westport Affiliates will collaborate during a two year period to encourage sales of all BAF products and certain vehicle products offered by the Westport Affiliates.  As part of the marketing agreement, the Company agreed to provide 750,000 complimentary gasoline gallon equivalents of CNG to be used by the Westport Affiliates as marketing incentives.

 

The Company and Westport also entered a registration rights agreement, dated as of June 28, 2013, pursuant to which Westport agreed to register the shares it issued to the Company for resale. The Company sold the 718,485 shares it initially received for net proceeds of $23,722 in July 2013.

 

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, which, subject to certain limitations, requires Mansfield to indemnify the Company for damages and losses incurred or suffered by the Company as a result of, among other things, breaches of Mansfield’s or MGES’s representations, warranties or covenants contained in the stock purchase agreement. On the first anniversary of the closing date, the Company shall deliver the retained amount of $1,000, after any applicable adjustments, 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.

 

Mansfield further agreed that, for a period beginning on the date of acquisition and ending on October 16, 2013, it would not sell, transfer or make any other disposition of all or any portion of the Company’s common shares issued to it pursuant to the stock purchase agreement. The Company filed with the SEC a registration statement covering the resale of the shares, and the registration statement was declared effective by the SEC in August 2013.

 

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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 their estimated useful lives ranging from one to six years. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill.

 

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.

 

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, 2012 and September 30, 2013:

 

		December 31, 2012			September 30, 2013
Short-term restricted cash
Standby letters of credit		$	669		$	1,837
DCEMB bonds — current operating costs		7,776			8,795
Total short-term restricted cash		8,445			10,632
7.5% Notes		12,256			564
DCEMB bonds — long-term plant expansion		952			—
Total restricted cash		$	21,653		$	11,196

 

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.

 

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 September 30, 2013, the Company believes its cost bases for its available-for-sale investments are properly recorded.

 

Short-term investments as of December 31, 2012 are summarized as follows:

 

		Amortized Cost			Gross Unrealized Losses			Estimated Fair Value
Municipal bonds & notes		$	23,755		$	(105	)	$	23,650
Corporate bonds		4,557			(53		)	4,504
Total available-for-sale securities		28,312			(158		)	28,154
Certificate of deposits		10,021			—			10,021
Total short-term investments		$	38,333		$	(158	)	$	38,175

 

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Short-term investments as of September 30, 2013 are summarized as follows:

 

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Municipal bonds & notes		$	26,357		$	1		$	(184	)	$	26,174
Corporate bonds		17,803			—			(93		)	17,710
Total available-for-sale securities		44,160			1			(277		)	43,884
Certificate of deposits		10,430			—			(7		)	10,423
Total short-term investments		$	54,590		$	1		$	(284	)	$	54,307

 

Note 6—Derivative Transactions

 

The Company, in an effort to manage its natural gas commodity price risk exposures related to certain contracts, utilizes derivative financial instruments.  From time to time, the Company enters into natural gas future contracts that are over-the-counter swap transactions that convert its index-based gas supply arrangements to fixed price arrangements.  As of September 30, 2013, all of the Company’s previous future contracts had expired. The Company marked to market its open futures positions at the end of each period and recorded the net unrealized gain or loss during the period in derivative (gains) losses in the condensed consolidated statements of operations or in accumulated other comprehensive income in the condensed consolidated balance sheets in accordance with the FASB’s authoritative guidance. For the three month periods ended September 30, 2012, the Company recorded unrealized gains of $157 in other comprehensive income (loss) related to its futures contracts. For the nine month periods ended September 30, 2012 and 2013, the Company recorded unrealized gains of $2,123 and $108, respectively, in other comprehensive income (loss) related to its futures contracts. Of the Company’s net futures contracts liability of $107 at December 31, 2012, $5 was recorded as an asset in prepaid expenses and other current assets and $112 was recorded as an accrued liability in the Company’s condensed consolidated balance sheet. The Company’s ineffectiveness related to its futures contracts during the three and nine month periods ended September 30, 2012 and 2013 was insignificant. For the three months ended September 30, 2012, the Company recognized a loss of approximately $100 in cost of sales in the accompanying condensed consolidated statement of operations related to its futures contracts that were settled during the period. For the nine months ended September 30, 2012 and 2013, the Company recognized a loss of approximately $2,403 and $65, respectively, in cost of sales in the accompanying condensed consolidated statement of operations related to its futures contracts that were settled during the respective periods.

 

Note 7—Other Receivables

 

Other receivables at December 31, 2012 and September 30, 2013 consisted of the following:

 

		December 31, 2012			September 30, 2013
Loans to customers to finance vehicle purchases		$	4,151		$	4,821
Capital lease receivables		308			319
Accrued customer billings		6,934			8,146
Fuel tax and carbon credits		2,780			6,443
Other		3,635			7,956
		$	17,808		$	27,685

 

Note 8—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, 2012 and September 30, 2013:

 

		December 31, 2012			September 30, 2013
Raw materials and spare parts		$	30,137		$	30,740
Work in process		5,835			3,209
Finished goods		2,180			5,771
Total		$	38,152		$	39,720

 

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Note 9—Land, Property and Equipment

 

Land, property and equipment at December 31, 2012 and September 30, 2013 are summarized as follows:

 

		December 31, 2012			September 30, 2013
Land		$	1,476		$	1,198
LNG liquefaction plants		93,384			93,703
RNG plants		23,582			47,340
Station equipment		158,447			183,600
LNG trailers		13,566			21,421
Other equipment		47,143			55,529
Construction in progress		198,916			196,409
		536,514			599,200
Less: accumulated depreciation		(108,337		)	(130,976		)
		$	428,177		$	468,224

 

As of December 31, 2012 and September 30, 2013, $12,087 and $12,199 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 10—Investments in Other Entities

 

The Company invested in Clean Energy del Peru (“Peru JV”), a joint venture in Peru that operates CNG stations. The Company accounted for its investment in Peru JV under the equity method of accounting as the Company had the ability to exercise significant influence over Peru JV’s operations. 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 11—Accrued Liabilities

 

Accrued liabilities at December 31, 2012 and September 30, 2013 consisted of the following:

 

		December 31, 2012			September 30, 2013
Salaries and wages		$	4,558		$	10,364
Accrued gas and equipment purchases		10,091			12,613
Derivative liability		112			—
Contingent consideration obligations		70			392
Accrued property and other taxes		4,483			6,011
Accrued professional fees		1,310			1,133
Accrued employee benefits		2,607			3,701
Accrued warranty liability		2,665			2,392
Other		4,898			13,351
		$	30,794		$	49,957

 

Note 12—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 tables:

 

		September 30, 2012			September 30, 2013
Warranty liability at beginning of year		$	3,130		$	2,665
Acquired liabilities		—			71
Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties		2,836			2,757
Service obligations honored		(3,379		)	(2,519		)
Sale of subsidiary		—			(582		)
Warranty liability at end of period		$	2,587		$	2,392

 

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Note 13—Long-term Debt

 

Revenue Bonds

 

On March 25, 2011, the Company’s 70% owned subsidiary, Dallas Clean Energy McCommas Bluff, LLC, a Delaware limited liability company (“DCEMB”), arranged for 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 6.60%. The bond issuance closed March 31, 2011.  The bond proceeds were 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.

 

All payments received by DCEMB are placed into various accounts in accordance with the requirements of the loan documents.  The funds are used to service required debt payments, finance further improvements and expansion of the landfill gas processing facility owned by DCEMB, finance the operations and maintenance of DCEMB, finance certain expenses associated with setting up and maintaining the accounts, and other uses as prescribed in the loan documents.  At the end of each month after all required account fundings have been fulfilled, all remaining excess funds are delivered to DCEMB so long as (i) DCEMB’s Debt Service Coverage Ratio (as defined) for the most recent four calendar quarters then ended equals or exceeds 1.25:1, (ii) DCEMB’s Debt Service Coverage Ratio (as defined) is reasonably projected to equal or exceed 1.25:1 for the next four calendar quarters, (iii) no events of default have occurred as defined in the loan documents, and (iv) after giving effect to the transfer, DCEMB’s Minimum Days Cash on Hand (as defined) shall be, or shall at any time be projected to be, more than the lesser of thirty-five Days Cash on Hand (as defined) or $1,300. Due to these restrictions on this cash, the Company has classified all of this cash as restricted cash on the balance sheet. The Company records the restricted cash that is expected to be received and used within the next 12 months for working capital and operating purposes as current in its balance sheet, and presents the remaining balance as non-current in the line item notes receivable and other long term assets. At September 30, 2013, $8,795 was recorded as short term restricted cash in the accompanying condensed consolidated balance sheet.

 

The indenture, which governs the Revenue Bonds, and the loan agreement, pursuant to which the Revenue Bonds were issued, have certain non-financial debt covenants with which DCEMB must comply. As of September 30, 2013, DCEMB was in compliance with all its debt covenants.

 

Purchase Notes

 

In connection with the closing of the Company’s acquisition of IMW Industries, Ltd. (“IMW”), the Company agreed to make future payments consisting of four annual payments in the amount of $12,500 which were subsequently amended to be CAD$5,000 and $7,500 (collectively, the “IMW Notes”). Each payment under the IMW Notes will consist of 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 to be determined at the Company’s option). In addition, pursuant to a security agreement executed at closing, the IMW Notes are secured by a subordinate security interest in IMW. In January 2011, the Company paid $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. 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.

 

In connection with the closing of the Company’s acquisition of Wyoming Northstar Incorporated and its affiliated companies (“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 two payments of $700 was paid in December 2011 and 2012, 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.

 

In connection with the closing of the Company’s acquisition of ServoTech in April 2012, the Company paid $1,400 in cash at closing and paid an additional $1,400 in cash on October 31, 2012. See note 2.

 

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.

 

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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 $13,000 in Canadian dollars (“CAD”) to assist in financing the day-to-day working capital needs of IMW. The interest on amounts outstanding shall be 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 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 (no forward exchange contracts were outstanding at September 30, 2013).

 

(vii)                           An operating line of credit with a limit of 5,000 Renminbi (“RMB”) (CAD$837) 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.

 

(viii)                        A 16,750 Bangladeshi Taka (CAD$219) operating line of credit bearing interest at 14%.

 

(ix)                              A 170,000 Colombian Peso (CAD$92) 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 “Security”). 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 credit agreement as short-term given that 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$7,000 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 September 30, 2013.

 

In addition, the Company and IMW agreed that should the making of any scheduled payment by IMW to the seller of IMW under the IMW Notes result in IMW being in breach of the Assumption Agreement, the IMW Lines of Credit or the Security, the Company shall furnish IMW with the funds needed to remain in compliance with the Assumption Agreement, the IMW Lines of Credit and the Security. Further, the Company and IMW agreed that should IMW make any future earn-out payments to the seller of IMW in connection with the acquisition of IMW, and should the making of such earn-out payments result in IMW being in breach of the Assumption Agreement, the IMW Lines of Credit or the Security, then the Company shall furnish IMW with the funds needed to make such earn-out payments and remain in compliance with the Assumption Agreement, the IMW Lines of Credit and the Security.

 

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.

 

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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 (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 4.1 million 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 5.1 million Shares.

 

At September 30, 2013, approximately $564 of these funds were included in long term restricted cash as the Company anticipates using the funds primarily to build LNG fueling stations. As of September 30, 2013, the Company has met its obligations under the Amended Registration Rights Agreement.

 

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 of the Company’s common stock at a conversion price of $15.00 per share (the “SLG Conversion Price”). Upon written notice to the Company,

 

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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 September 30, 2013, the Company has met its obligations under 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, which the Company is building along major transportation corridors in the United States.

 

The Borrowers’ ability to obtain loans under the GE Credit Agreement (collectively, “Loans” and, with respect to each Project “Tranche A Loans” and “Tranche B Loans”) for the Projects 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 7.00%, provided that for purposes of the GE Credit Agreement, the then-current LIBOR rate will always be at least 1.00%. The GE Credit Agreement includes various customary covenants, including debt service coverage ratios, 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 September 30, 2013, the Company has not drawn any money under the GE Credit Agreement and was in compliance with the financial covenants.

 

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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 14), and entered into a registration rights agreement with GE pursuant to which the Company agreed to file one or more registration statements with the SEC relating to the resale of the shares issuable upon exercise of the GE Warrant.  As of September 30, 2013, the Company met its obligations under such 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 2013, the Mavrix Note Purchaser funded an additional advance of $5,000, and therefore an aggregate of $10,000 was outstanding under the Mavrix Note at September 30, 2013.  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 will use the proceeds from the sale of the Mavrix Note and any advances thereunder 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 plan to use such distributions 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, assets sales or extraordinary transactions.  In addition, Mavrix may not voluntarily repay the Mavrix Note until the third anniversary of the Mavrix Issuance Date and, subject to the foregoing restriction, Mavrix must pay a prepayment premium if it prepays the Mavrix Note prior to the ninth anniversary of the Mavrix Issuance Date.

 

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.

 

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”).

 

The net proceeds from the sale of the 5.25% Notes after the payment of certain debt issuance costs of $7,500 were approximately $242,500. The Company also accrued $350 for additional debt issuance costs as of September 30, 2013.  The Company intends 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.

 

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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 such events have occurred as of September 30, 2013.

 

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.

 

Long-term debt at December 31, 2012 and September 30, 2013 consisted of the following:

 

		December 31, 2012			September 30, 2013
IMW Notes		$	23,983		$	12,041
Northstar future payments		1,848			1,944
DCEMB notes		585			585
DCEMB Revenue Bonds (non-recourse to the Company)		38,700			37,600
7.5% Notes		100,000			150,000
SLG Notes		149,000			145,000
5.25% Notes		—			250,000
Weaver future payments		680			708
IMW assumed debt		12,661			8,721
Mavrix Note (non-recourse to the Company)		—			10,020
Capital lease obligations		3,568			3,602
Total debt and capital lease obligations		331,025			620,221
Less amounts due within one year		(30,389		)	(25,797		)
Total long-term debt and capital lease obligations		$	300,636		$	594,424

 

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Note 14—Earnings Per Share

 

Basic earnings per share is based upon the weighted-average number of shares outstanding during each period. Diluted earnings per share reflects the impact of assumed exercise of dilutive stock options and warrants. In the three and nine months ended September 30, 2013, 5,000,000 shares of common stock related to the GE Warrant were included in the basic and dilutive net loss per share calculation.  The information required to compute basic and diluted earnings per share is as follows:

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2012		2013		2012		2013
Basic and diluted:
Weighted average number of common shares outstanding		87,006,024		94,338,525		86,441,196		93,823,223

 

Certain securities were excluded from the diluted earnings per share calculations for the three and nine months ended September 30, 2012 and 2013, respectively, as the inclusion of the securities would be anti-dilutive to the calculation. The amounts outstanding as of September 30, 2012 and 2013 for these instruments are as follows:

 

		September 30,
		2012		2013
Options		10,468,648		11,564,680
Warrants		2,130,682		2,130,682
Convertible notes		16,262,226		35,185,979
Restricted Stock Units		1,545,000		1,590,836

 

Note 15—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 September 30,						Nine Months Ended September 30,
		2012			2013			2012			2013
Stock-based compensation expense		$	6,044		$	5,684		$	16,492		$	17,347
Stock-based compensation expense, net of tax		$	6,044		$	5,684		$	16,492		$	17,347

 

Stock Options

 

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2013:

 

		Number of Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding, December 31, 2012		12,083,677		$	11.75
Options granted		98,500		13.47
Options exercised		(110,349	)	5.89
Options forfeited		(507,148	)	12.54
Outstanding, September 30, 2013		11,564,680		$	11.79		5.77		$	11,333
Exercisable, September 30, 2013		8,561,659		$	11.13		4.81		$	14,041

 

As of September 30, 2013, there was $14,665 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted average period of 1.3 years. The total fair value of shares vested during the nine months ended September 30, 2013 was $9,702.

 

The Company plans to issue new shares to its employees upon the employees’ exercise of their options. The intrinsic value of all options exercised during the nine months ended September 30, 2012 and 2013 was $17,971 and $850, respectively.

 

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The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2013:

 

		Nine Months Ended September 30, 2013
Dividend yield		0.00%
Expected volatility		51.0% to 55.6%
Risk-free interest rate		1.0% to 1.9%
Expected life in years		6.0

 

The weighted-average grant date fair values of options granted during the nine months ended September 30, 2012 and 2013 were $8.94, and $6.86, respectively. The volatility amounts used during the period were estimated based on a certain peer group of the Company’s historical volatility for a period commensurate with the expected life of the options granted, the Company’s historical volatility, and the Company’s implied volatility of its traded options. 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 year were based on the U.S. Treasury yield curve for the expected life of the options at the time of grant. The Company recorded $10,809 and $10,681 of stock option expense during the nine months ended September 30, 2012 and 2013, 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 market-based restricted stock units (“market-based RSUs”) to certain key employees during 2012.  A holder of market-based RSUs will receive one share of the Company’s common stock for each market-based RSU he holds if (x) 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 (y) 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.

 

The following table summarizes the Company’s market-based RSU activity during the nine months ended September 30, 2013:

 

		Number of Shares		Weighted Average Fair Value at Grant Date			Weighted Average Remaining Contractual Term (in years)
Outstanding, December 31, 2012		1,545,000		$	11.42
RSU granted		—		—
Outstanding and non-vested, September 30, 2013		1,545,000		$	11.42		2.34

 

As of September 30, 2013, there was $3,138 of total unrecognized compensation cost related to non-vested units. That cost is expected to be recognized over a weighted average period of 0.4 years.

 

The Company recorded $5,683 and $6,616 of expense during the nine months ended September 30, 2012 and 2013, respectively, related to the market-based RSUs. The Company has not recorded any tax benefit related to its market-based RSU expense.

 

Service-Based Restricted Stock Units

 

During September 2013, the Company issued service-based restricted stock units (“Serviced-Based RSUs”) to a key employee which vest 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 granted during the nine months ended September 30, 2013 is estimated using the closing stock price of the Company’s common stock on the date of grant.

 

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