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CLEAN COAL TECHNOLOGIES INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements concerning: our plans, strategies and objectives for future operations; new products or developments; future economic conditions, performance or outlook; the outcome of contingencies; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as "believes," "expects," "may," "should," "would," "will," "intends," "plans," "estimates," "anticipates," "projects" and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect our management's opinions only as of the date of the filing of this Quarterly Report on Form 10-Q and are not guarantees of future performance or actual results Overview Clean Coal Technologies, Inc. ("We," "Company" or "Clean Coal") owns a patented technology that we believe will provide cleaner and/or more efficient energy at low cost through the use of the world's most abundant fossil fuel, coal. Our technology is designed to utilize controlled heat to extract and capture pollutants and moisture from low-rank coal, transforming it into a cleaner-burning, more energy-efficient fuel prior to combustion. Our proprietary coal cleaning process is designed to ensure that the carbon in coal maintains its structural integrity during the heating process while the volatile matter (polluting material) within the coal turns into a gaseous state and is removed from the coal. We have trade-marked the name "PRISTINE™" as a means of differentiating our processed product from the negative connotations generally associated with coal, and its traditional use. PRISTINE™ is applicable for a variety of applications, including coal-fired power stations, chemical byproduct extraction, and as a source fuel for coal-to-gas and coal-to-liquid technologies. In September 2011, we filed a provisional application for a patent on a new technology known as Pristine M. The new technology is a moisture substitution technology that, owing to the superior quality of the product and attractive economics, is expected to be highly successful in the moisture removal business globally. Current or Pending Projects. We have dedicated maximum effort to develop a global commercial platform around a series of strategic partnerships. We have signed a 25-year Technology License Agreement ("TLA") with Jindal Steel and Power, Ltd. ("Jindal"). Under the TLA, the Company will receive an on-going royalty fee of one dollar ($1.00) per metric ton on all coal processed from Jindal majority-owned mines in the ASEAN region, up to four million tons or four million dollars ($4,000,000) per annum with a waiver of additional royalty fees on further processed coal up to a total of eight million tons per year. If coal processing increases above eight million tons per year, the royalty will be reinstated and the parties have agreed to review the rate. Jindal will also pay the Company a one-time license fee of seven-hundred and fifty thousand dollars ($750,000). The first installment of the license fee, three-hundred and seventy-five thousand dollars ($375,000), has been paid pursuant to the signing of the pilot plant construction contract. The balance of three-hundred and seventy-five thousand dollars ($375,000) will be due upon the successful testing of the pilot plant which is expected to be completed during the third quarter of fiscal 2013. For our ASEAN region joint venture initiative, we entered into a joint venture with the Archean Group ("AGPL") to develop deploy and market our Pristine M technology throughout the ASEAN region (including Indonesia, the Philippines, Cambodia, Vietnam, Malaysia, Brunei, Thailand, Laos and Myanmar). On December 18, 2012, we sent a notice of termination, effective immediately, to AGPL. On April 20, 2013, we signed a settlement agreement with AGPL ("Settlement Agreement"). The Settlement Agreement includes provisions for mutual release of all claims related to the agreements, dissolution of the Joint Venture Agreement in Respect of Good Coal, Pte. Ltd ("Good Coal"), effective June 5, 2012, between the Company and AGPL (the "JV Agreement") and the Technology License Agreement, effective May 31, 2012, between the Company and Good Coal (the "TLA"). On February 5, 2013, we signed a construction and testing contract ("EPC Agreement") with SAIC Constructors, LLC ("SAIC"). We also remitted the first payment of $2 million to SAIC for the construction of the 2-ton/hour, pilot plant in Oklahoma, as per the terms of the new contract. Total cost of the project, including testing to take place at a designated site in Oklahoma, is estimated at $3.6 million. Commissioning of the pilot plant is expected during the third quarter of 2013. As sole counterparty to the EPC contract, we will own the completed pilot plant outright. We entered into the ECP Agreement to ensure that there is little or no disruption in the pilot plant construction schedule. 9-------------------------------------------------------------------------------- Table of Contents In March 2013, we negotiated an early closing of part of the second tranche of investment with Ventrillion Management Group ("Ventrillion"). Under the amended agreement, Ventrillion purchased 8,000,000 million shares for $400,000. Other projects Pending resolution of legalities surrounding the change in ownership of the interests of the Chinese partner in the Inner Mongolia joint venture company, we are seeking to transition the Company's involvement from full joint venture partner to merely a licensor. Although the proposed project has all permits fully approved, there has been no recent activity to move the project forward. In our continued effort to expand global awareness for our technology and to build a potential pipeline of business for when the 1:15 scale plant is successfully commissioned, we have signed an NDA with a company in Australia that has significant coal assets in Southern Australia. We have also signed NDA's with two major Russian coal companies, one with a company in Serbia and another with a major Indian conglomerate. In each case we are in the early stages of exchanging information and determining how best our technology might be deployed. Factors Affecting Results of Operations Our operating expenses include the following: · Consulting expenses, which consist primarily of amounts paid for technology development and design and engineering services; · General and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees, as well as office and travel expenses; · Research and development expenses, which consist primarily of equipment and materials used in the development and testing of our technology; and · Legal and professional expenses, which consist primarily of amounts paid for patent protections, audit, disclosure, and reporting services. Results of Operations The following information should be read in conjunction with the financial statements and notes appearing elsewhere in this Report. We have generated limited revenues from inception to date. We anticipate that we may not receive any significant revenues from operations until we begin to receive royalty revenues which we estimate will be approximately 12 to 14 months after the successful testing of the plant anticipated in the third quarter of fiscal 2013 and an EPC contract has been signed to build a commercial scale facility. We are also in preliminary discussions with companies, business groups, consortiums in the USA and Asia to license our technology, which, if successful, could realize limited short-term revenue opportunities from the signing of technology licensing agreements. For the Three Months Ended March 31, 2013 and March 31, 2012 Revenues We have generated no revenues for the three months ended March 31, 2013 and the same period in 2012. In the third quarter of fiscal 2012, we received an initial license fee of $375,000 from Jindal paid pursuant to the signing of our pilot plant construction contract. The balance of $375,000 will be due upon the successful testing of the pilot plant, anticipated in the third quarter of fiscal 2013. We do not anticipate additional license revenues until the pilot plant has been successfully tested, and do not expect to receive any royalty fees for approximately 12 to 14 months after an EPC contract has been signed to build a commercial scale facility. Operating Expenses Our operating expenses for the three months ended March 31, 2013 totaled $1,245,202 compared to $1,310,180 for the same period in the prior year. The decrease in operating expenses for the 2013 fiscal period is due mainly to lower costs for bonuses paid to employees and lower general and administrative expenses. We recorded stock-based compensation of $478,542 for the three months ended March 31, 2013, compared to $14,512 for the same period in the prior year. During the three months ended March 31, 2013, we issued an aggregate of 3,150,000 common shares for services and recorded options expense of $323,496. 10-------------------------------------------------------------------------------- Table of Contents In March 2013, we entered into a consulting agreement with ProActive Resources Advisory Group, LLC, a strategic advisory, investor relations and public relations firm. The agreement is for a term of six months and a monthly cash fee of $8,000. In connection with the agreement, we issued ProActive 500,000 restricted shares of our common stock and granted an aggregate of 1,000,000 common stock options which have a term of 3 years and the following exercise prices and vesting terms: 400,000 options are exercisable at $0.15 per share and vest on March 22, 2013, 300,000 options are exercisable at $0.25 per share and vest on July 1, 2013 and 300,000 options are exercisable at $0.35 per share and vest on July 1, 2013. Employees As of March 31, 2013, we had two full-time executives, and one full-time administrative employee. President and CEO Robin Eves, and Chief Operations Officer, Ignacio Ponce de Leon have written employment agreements. Our administrative employee is at-will. Messrs. Eves and Ponce de Leon received no compensation for their participation on the Board of Directors. We have an oral consulting agreement with C.J. Douglas, a shareholder who provides services that support our administrative and accounting functions on a month-to-month basis, at $20,000 per month. Net Income/Loss For the three months ended March 31, 2013 we experienced a net loss of $1,275,327 compared to $1,933,250for the same period for the prior year. For the three months ended March 31, 2013 we incurred losses from operations of $1,245,202 and $1,310,180for the three months ended March 31, 2012. We incurred interest expense of $30,125 for the three months ended March 31, 2013, and $373,342 for the three months ended March 31, 2012. We anticipate losses from operations will increase during the next twelve months due to costs associated with the pilot plant completion and testing, as well as anticipated increased payroll expenses as we add necessary staff and increases in legal and accounting expenses associated with maintaining a reporting company. We expect that we will continue to have net losses from operations for several years until revenues from operating facilities become sufficient to offset operating expenses, unless we are successful in the sale of licenses for our technology once the pilot plant testing is complete. Liquidity and Capital Resources We have generated minimal revenues since inception. We have obtained cash for operating expenses through advances and/or loans from affiliates and stockholders, the sale of common stock, the issuance of loans and convertible debentures subsequently converted to common stock and the receipt of $375,000 in license fees from Jindal as described above. Net Cash Used in Operating Activities. Our primary source of operating cash during the three months ended March 31, 2013, was proceeds from the sale of shares to Ventrillion Management Group, LLC in December 2012. Our primary uses of funds in operations were the payment of professional and consulting fees and general operating expenses. Net cash used in operating activities, was $730,998 for the three months ended March 31, 2013 compared to net cash used of $1,481,065for the same period in 2012. Non-cash items in 2013 included shares issued for services valued at $160,299, options expense of $323,496 and depreciation expense of $51. Non-cash items in 2012 included shares issued for services valued at $14,512, amortization of loan discounts of $324,720, amortization of deferred financing costs of $11,092, loss on derivative liabilities of $249,728 and depreciation expense of $51. During the three months ended March 31, 2013, we experienced a decrease in prepaid expenses of $46,111, an increase in accounts payable of $43,463, a decrease in related party payables of $4,500 and a decrease in accrued liabilities of $24,591. Net Cash Used In Investing Activities. Net cash used in investing activities for the three month ended March 31, 2013 consisted of $2,000,000 paid for the construction of the pilot plant. We did not engage in investing activities for the three months ended March 31, 2012. Net Cash Provided by Financing Activities. Net cash provided by financing activities during the three months ended March 31, 2013 totaled $400,000 consisting of cash received for the sale of common stock. Net cash provided by financing activities for the three months ended March 31, 2012 totaled $1,602,364 consisting of borrowings on debt and convertible debt of $2,805,399, offset by payments on debt and convertible debt of $680,303 and payments on related party debt of $522,732. Cash Position and Outstanding Indebtedness Our total indebtedness at March 31, 2013 was $1,596,386, which consists entirely of current liabilities. Current liabilities consist primarily of accounts payable, accounts payable to related parties, short-term debt and accrued liabilities. At March 31, 2013, we had current assets of $244,089 in cash and $16,418 in prepaid expenses and other current assets. Our working capital deficit at March 31, 2013 was 1,335,879. We had property, plant and equipment (net of accumulated depreciation) of $77 and construction in progress of $2,000,000 at March 31, 2013. 11-------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments The following table summarizes our contractual cash obligations and other commercial commitments at March 31, 2013. Payments due by period Less than Total 1 year 1 to 3 years 3 to 5 years After 5 years Facility lease (1) $ 8,625 $ 8,625 $ - $ - $ - Total contractual cash obligations $ 8,625 $ 8,625 $ - $ - $ - (1) Our New York lease is for six months, beginning August 1, 2012, at a monthly rate of $2,875 per month. It was extended through June 2013 at the same monthly rate. SAIC Energy Environment & Infrastructure (SEE&I), our engineering consultant has tentatively estimated construction costs for each one million short ton coal complete cleaning facility of approximately $120 million (excluding land costs) or costs for a similar size Pristine-M-only facility of approximately $45-50 million (excluding land costs). Under the terms of our consulting agreement with SEE&I, we are obligated to pay to SEE&I a fee representing five percent of all gross revenues received by us from the sale of our technology, the operation of franchised plants utilizing the technology, or revenue received on any other basis that is related to the technology. This fee will remain in effect for a period of 15 years, commencing from the date that we receive our initial revenue stream from operations. All intellectual property rights associated with new art developed by SEE&I remain our property, however SEE&I would have a "right to use" the intellectual property provided it is deployed in non-competitive projects. Construction of the pilot plant in Oklahoma is underway with completion and testing anticipated to be completed in the third quarter of fiscal 2013. We have paid $2,000,000 towards the plant and estimate completion will require an additional $1,600,000. Based on our current operational costs and including the capital requirements for our project deployments, we estimate we will need a total of approximately $3,500,000 to fund the Company for the balance of fiscal year 2013 and an additional $5,000,000 to continue for the following fiscal year (2014) or until an initial commercial plant is up and running. At this filing date, we have a commitment from Ventrillion for $10,600,000 in additional funding contingent on shareholder approval of a reverse split of our common stock and completion and successful testing of the pilot plant. Assuming we receive shareholder approval and succeed in testing, we believe we will have sufficient funding to meet both the additional costs of the pilot plant construction and funding for our operations although we may need some interim funding until the pilot plant is operational. We are also actively pursuing technology license and royalty agreements in order to begin construction of other facilities without incurring the capital costs associated with the construction of future plants. Off-Balance Sheet Arrangements We have not and do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of establishing off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we do not believe we are exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. |