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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

 

(Amendment No. 1)

 

 

(Mark one)

 

x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2011

 

o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                 

 

Commission File Number: 001-14176

 

 

EVERGREEN ENERGY INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Registrant’s Telephone Number, Including Area Code: (303) 293-2992

 

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, 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 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.

 

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

On August 1, 2011 there were 26,475,258 shares of the registrant’s common stock, $.001 par value, outstanding.

 

 

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EVERGREEN ENERGY INC.

FORM 10-Q QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

 

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			Page No.
PART I. FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS (UNAUDITED)
		Condensed Consolidated Balance Sheets — June  30, 2011 and December 31, 2010	4
		Condensed Consolidated Statements of Operations - Three Months Ended and Six Months Ended June 30, 2011 and 2010	5
		Condensed Consolidated Statement of Stockholders’ Equity (Deficit) — Six Months Ended June 30, 2011	6
		Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2011 and 2010	7
		Notes to Condensed Consolidated Financial Statements — Six Months Ended June 30, 2011	8
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32

 

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Explanatory Note

 

We are filing this Amendment No. 1 to this Quarterly Report on 10-Q/A, or this Amendment, to amend our Quarterly Report on Form 10-Q for the three and six months ended, June 30, 2011, or the 10-Q, as filed with the Securities and Exchange Commission, or the SEC.  The sole purpose of this Amendment is to properly account for the abandonment of certain patents and to adjust for  items restated in the March 31, 2011Form 10-Q/A.  See Note 14— Restatement of Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated stockholder’s equity for further details.

 

Pursuant to applicable Securities Exchange Act of 1934 regulations, we are herein refiling Item 1, “Financial Statements,”  Item 4 “Control and Procedures,” and  Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its entirety.

 

This Amendment contains only the section and exhibits to the original filing which are being amended and those unaffected parts or exhibits are not included herein. This Amendment continues to speak as of the date of the Original Filing and we have not updated the disclosure contained herein to reflect events that have occurred since the filing of the Original Filing.

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

EVERGREEN ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		June 30, 2011			December 31, 2010
		(in thousands)
		(restated)
Assets
Current:
Cash and cash equivalents		$	4,416		$	2,974
Notes receivable		5,693			—
Prepaid and other assets		1,932			1,664
Assets of discontinued plant operations		—			7,210
Assets of discontinued mining operations		27			2,820
Total current assets		12,068			14,668
Property, plant and equipment, net of accumulated depreciation		418			1,734
Construction in progress		7,635			9,860
Other assets		3,404			3,296
		$	23,525		$	29,558
Liabilities, Temporary Capital and Stockholders’ Deficit
Current liabilities:
Accounts payable		$	1,315		$	2,698
Accrued liabilities		2,781			2,367
Short-term debt		1,239			—
Other current liabilities		592			682
Liabilities of discontinued plant operations		544			4,823
Liabilities of discontinued mining operations		37			609
Total current liabilities		6,508			11,179
Long-term debt		2,851			21,821
Deferred revenue		7,815			7,865
Derivative liability		3,344			972
Other liabilities, less current portion		1,373			1,213
Total liabilities		21,891			43,050
Commitments and contingencies
Temporary Capital:
Preferred stock, $.001 par value, $1,000 stated value, 7 shares authorized; .002 and .003 outstanding, respectively		2			3
Stockholders’ deficit:
Preferred stock, $.001 par value, shares authorized 19,999; none outstanding		—			—
Common stock, $.001 par value, shares authorized 280,000; 26,451 and 18,888 shares issued and outstanding, respectively		26			19
Additional paid-in capital		560,846			539,348
Accumulated deficit		(556,164		)	(550,285		)
Equity (deficit) attributable to Evergreen Energy Inc. stockholders’		4,708			(10,918		)
Deficit attributable to noncontrolling interest		(3,076		)	(2,577		)
Total stockholders’ equity (deficit)		1,632			(13,495		)
		$	23,525		$	29,558

 

See accompanying notes to the condensed consolidated financial statements.

 

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EVERGREEN ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
		(in thousands, except for per share amounts)
		(restated)						(restated)
Operating revenues:
GreenCert licensing		$	100		$	103		$	200		$	203
Total operating revenue		100			103			200			203
Operating expenses:
General and administrative		4,330			3,174			8,802			8,672
Depreciation and amortization		255			485			1,007			979
Research and development		199			195			645			194
Impairment expense		2,536			—			3,018			—
Total operating expenses		7,320			3,854			13,472			9,845
Operating loss		(7,220		)	(3,751		)	(13,272		)	(9,642		)
Other income (expense):
Interest income		70			4			75			6
Interest expense		(46		)	(459		)	(224		)	(1,532		)
Gain (loss) on fair value derivatives		3,067			2,347			(2,450		)	4,910
Loss on warrant modification and exercise		—			—			(1,021		)	—
Gain on debt-for-equity exchange transaction		—			—			435			—
Gain (loss) on early extinguishment of debt		10,193			(2,267		)	6,710			(2,267		)
Other income (expense), net		213			193			(354		)	(50		)
Total other income (expense)		13,497			(182		)	3,171			1,067
Income (loss) from continuing operations		6,277			(3,933		)	(10,101		)	(8,575		)
Income (loss) from discontinued plant operations		15			(56		)	3,723			435
Loss from discontinued mining operations		—			(798		)	—			(4,879		)
Net income (loss)		6,292			(4,787		)	(6,378		)	(13,019		)
Less: net (loss) income attributable to noncontrolling interest		(346		)	84			499			170
Net income (loss) attributable to Evergreen Energy Inc.		5,946			(4,703		)	(5,879		)	(12,849		)
Dividends on preferred stock		—			—			—			(4,312		)
Net income (loss) attributable to common shareholders		$	5,946		$	(4,703	)	$	(5,879	)	$	(17,161	)
Basic net income (loss) per common share from continuing operations		$	0.24		$	(0.28	)	$	(0.41	)	$	(0.51	)
Diluted net income per common share from continuing operations		$	0.22		$	—		$	—		$	—
Basic net income (loss) per common share from discontinued mining and plant operations		$	0.00		$	(0.06	)	$	0.15		$	(0.27	)
Dilutive net income (loss) per common share from discontinued mining and plant operations		$	0.00		$	—		$	—		$	—
Basic net loss attributable to common shareholders per share		$	0. 23		$	(0.33	)	$	(0. 24	)	$	(1.03	)
Dilutive net income attributable to common shareholders per share		$	0.21		$	—		$	—		$	—
Basic weighted-average common shares outstanding		26,420			14,144			24,896			16,681
Dilutive weighted-average common shares outstanding		28,437			—			—			—

 

See accompanying notes to the condensed consolidated financial statements.

 

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EVERGREEN ENERGY INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT)

(UNAUDITED)

 

		Evergreen			Noncontrolling			Total
		Energy Inc.			interest			Equity
		(in thousands)
		(restated)
Balance at January 1, 2011		$	(10,918	)	$	(2,577	)	$	(13,495	)
Sale of common stock		14,546			—			14,546
Preferred stock converted to common		2,128			—			2,128
Debt-for-equity exchange		968			—			968
Warrants issued in early extinguishment of debt		2,059			—			2,059
Share-based compensation expense related to employees, directors and other		1,649			—			1,649
Other		155			—			155
Net loss		(5,879		)	(499		)	(6,378		)
Balance at June 30, 2011		$	4,708		$	(3,076	)	$	1,632

 

See accompanying notes to the condensed consolidated financial statements.

 

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EVERGREEN ENERGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended June 30,
		2011			2010
		(in thousands)
		(restated)
Operating activities:
Net loss from continuing operations		$	(10,101	)	$	(8,575	)
Adjustments to reconcile net loss from continuing operations to cash used in operating activities:
Share-based compensation expense to employees and others		1,649			2,324
Gain on early extinguishment of debt		(8,427		)	—
Loss from exercise of warrants		1,021			—
Depreciation and amortization		1,007			979
Derivative fair value adjustment		2,450			(3,232		)
Amortization of debt issuance costs		116			2,259
Amortization of initial fair value of derivative		(46		)	(92		)
Impairment of assets		3,018			—
Gain on debt-for-equity exchange		(435		)	—
Other		120			109
Changes in operating assets and liabilities:
Accounts receivable		—			567
Prepaid expenses and other assets		(64		)	(669		)
Deferred revenue and other obligations		(262		)	(390		)
Accounts payable and accrued expenses		(907		)	(1,817		)
Cash used in operating activities of continuing operations		(10,861		)	(8,537		)
Cash provided by (used in) operating activities of discontinued mining and plant operations		(676		)	(4,644		)
Cash used in operating activities		(11,537		)	(13,181		)
Investing activities:
Purchases of construction in progress, property, plant, and equipment		(190		)	(1,324		)
Proceeds from sale of assets		381			—
Cash provided by (used in) investing activities of continuing operations		191			(1,324		)
Cash provided by investing activities of discontinued mining and plant operations		2,785			23,537
Cash provided by investing activities		2,976			22,213
Financing Activities:
Proceeds from the 2011 common stock sale, net of offering costs		14,546			—
Proceeds from the 2010 common stock sale, net of offering costs		—			8,043
Proceeds from the issuance of 2010 convertible preferred stock, net of closing costs		—			8,746
Proceeds from exercise of warrants		1,029			—
Payment of dividends on convertible preferred stock		—			(4,312		)
Payment of note principal related to 2007 Notes		(5,310		)	—
Payment of note principal related to 2009 Notes		—			(17,250		)
Payment of debt issue costs		(262		)	(1,999		)
Other		—			(6		)
Cash provided by (used in) financing activities of continuing operations		10,003			(6,778		)
Cash used in financing activities of discontinued mining operations		—			—
Cash provided by (used in) financing activities		10,003			(6,778		)
Increase in cash and cash equivalents		1,442			2,254
Cash and cash equivalents, beginning of period		2,974			2,207
Cash and cash equivalents, end of period		$	4,416		$	4,461

 

See accompanying notes to the condensed consolidated financial statements.

 

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EVERGREEN ENERGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2011 (UNAUDITED)

 

In this Form 10-Q, we use the terms “Evergreen Energy,” ‘Evergreen,” “we,” “our,” “us” and Company to refer to Evergreen Energy Inc. and its subsidiaries. C-Lock refers to our subsidiary C-Lock Technology, Inc. Buckeye refers to our subsidiary Bimco Inc. (previously known as Buckeye Industrial Mining Co.) and referred to as “Buckeye” herein. All references to K-Fuel, K-Fuel®, K-Fuel process, K-Fuel refined coal, K-Fuel refineries, K-Direct®, K-Fuel Plants, K-Fuel facilities, K-Direct facilities, K-Direct® plants, C-Lock®, and GreenCert™, refer to our technologies and patented processes explained in detail in this Form 10-Q or in our Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 14, 2011. As further described in Note 5 — Temporary Capital and Stockholders’ Equity, effective August 20, 2010, we effected a 1 for 12 reverse stock split and all shares and per share amounts have been restated as if the reverse stock split occurred in the applicable periods.

 

(1)   Business

 

We were founded in 1984 and are a cleaner coal technology company that offers environmental solutions for the energy production and generation industries, primarily through our patented clean coal process and technology, K-Fuel.  K-Fuel significantly improves the performance of low-rank sub-bituminous and brown coals and lignite. The process yields higher efficiency levels, which are variable depending on the type of coal processed, by applying heat and pressure to low-rank coals to reduce moisture.  Our GreenCert software suite focuses on providing power generators with operational intelligence and analytics to identify operational efficiencies.  Through August 2011, we have executed on a number of our strategic objectives as follows:

 

·                  On June 9, 2011, we completed the formation of our venture with WPG Resources, an Australian listed mineral resources company, to jointly develop and produce K-Fuel, using our coal upgrading technology, throughout Australia. The venture, Southern Coal Holdings (SCH) is 50% owned by WPG Resources and 50% by us, and was incorporated in Australia in 2010 as a private limited liability company.  See Managements’ Discussion and Analysis contained in this Form 10-Q for further details about our business and current events.

 

·                  On May 17, 2011, we satisfied all conditions under the previously announced Forbearance and Settlement Agreement (the “Settlement Agreement”).  On February 1, 2011, we entered into the Settlement Agreement with certain holders of the 2007 Notes and holders of the 2009 Notes which  provided for : (i) the purchase by the 2009 Noteholders of $3.2 million of 2007 Notes from the Settling 2007 Noteholders for a price of $1.6 million; (ii) the ongoing direct redemption of $14.1 million in aggregate face value of 2007 Notes previously held by the Settling 2007 Noteholders; (iii) the issuance of warrants to the 2009 Noteholders for the purchase of up to 200,000 shares of our company’s common stock at $1.89 per share; (iv) the issuance of  warrants to the Settling 2007 Noteholders for the purchase of up to 531,250 shares of our stock at an exercise price of $7.20 per share; and (v) the issuance to the 2009 Noteholders of a one-year $1.55 million convertible note, bearing interest at 7% per annum and convertible into shares of our common stock at a conversion price equal to $1.89 per share. See further discussion in Note 10—Commitments and Contingencies.

 

·                  During the first quarter of 2011, we re-opened our testing facility in Gillette, Wyoming and have successfully completed coal upgrading tests using our K-Fuel process. See Management’s Discussion and Analysis contained in this Form 10-Q for further details about our business and current events.

 

·                  On March 29, 2011, we closed the sale of the assets of our subsidiary, Landrica Development Company, including the Fort Union plant and associated property located near Gillette, Wyoming for total consideration of $2.0 million in addition to the replacement of $5.2 million of reclamation bonds.  See further discussion in Note 12 — Discontinued Operations.

 

·                  On February 1, 2011, we completed a private placement to sell 6.2 million shares of our common stock and 12.0 million warrants to purchase our common stock, resulting in $14.5 million of net proceeds, after offering costs.  See further discussion in Note 5 — Temporary Capital and Stockholders’ Equity.

 

We continue to require additional capital to fully fund our operations, principally the development of our K-Fuel process and our SCH investment. Further, as opportunities arise to accelerate the expansion of our K-Fuel technology, or our anticipated operating cash outflows are greater than expected due to, among other things, unexpected costs in the development of our K-Fuel process and business opportunities, we may need to obtain further funding. We have a history of losses, deficits, and negative operating cash flows and may continue to incur losses in the future. For the period starting from the year of incorporation in 1988 through June 30, 2011, we have incurred a cumulative net loss of $554.8 million. We continue to evaluate our cash position and cash utilization, and have and will make additional adjustments to capital or certain operating expenditures. However, because of the need for additional capital, there is substantial doubt as to our ability to continue to operate as a going concern for the foreseeable future.

 

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These financial statements and related notes thereto contain unaudited information as of and for the three and six months ended June 30, 2011 and 2010.  In the opinion of management, the statements include all the adjustments necessary, principally of a normal and recurring nature, to fairly present our condensed consolidated results of operations  and cash flows as of and for the  six months ended June 30, 2011 and 2010 and financial position for the periods ended June 30, 2011 and December 31, 2010.  The condensed consolidated results of operations and the condensed consolidated statements of cash flows for the six month period ended June 30, 2011 are not necessarily indicative of the operating results or cash flows expected for the full year.  The financial information as of June 30, 2011 should be read in conjunction with the financial statements for the year ended December 31, 2010 contained in our Form 10-K filed on March 14, 2011.

 

(2)   Significant Accounting Policies

 

Basis of Presentation.  The consolidated financial statements include our accounts and the accounts of our wholly and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. We do not consolidate our SCH investment, the 50% owned company in Australia, nor do we consolidate Evergreen-China Energy Technology Co., Ltd, our 30% owned company in China (Evergreen-China); but record their activities using the equity method of investment.  The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

 

The financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The factors described above raise substantial doubt regarding our ability to continue as a going concern. We plan to obtain additional equity capital to finance our K-Fuel development and marketing initiatives, and our future operations. However, there is no assurance that we will be successful in accomplishing these objectives. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

 

Net income (loss) Per Common Share.   Basic net loss per common share is based on the weighted-average number of common shares actually outstanding during each respective period ended June 30, 2011 and 2010.  The calculation of diluted net earnings per common share adds the weighted-average number of potential common shares outstanding to the weighted-average common shares outstanding, as calculated for basic loss per share, except for instances in which there is a net loss.  Our total incremental potential common shares outstanding for the periods ended June 30, 2011 and 2010 were  17.9 million and 5.0 million, respectively, and are comprised of outstanding stock options, restricted stock grants, warrants to purchase our common stock and potential conversion of our convertible debt into common stock. All potential common shares outstanding have been excluded from diluted net loss per common share for the three months ended June 30, 2010 and the six months ended June 30, 2011 and 2010 because the impact of such inclusion would be anti-dilutive.  However, during the three months ended June 30, 2011, we had net income and have calculated the dilutive earnings per share.  Diluted earnings per common share reflects the potential dilution that could occur if certain outstanding stock options and warrants are exercised, convertible debt was converted and share grants are vested.

 

The following is a reconciliation of the number of shares used in the basic and diluted earnings per common share computations for the three months ended June 30, 2011:

 

		Three months ended June 30, 2011
		(in thousands)
Basic weighted average shares outstanding		26,420
Dilutive effect of options with strike prices equal to or less than the average price of our common stock during the period, calculated using the treasury stock method		130
Dilutive effect of share grants		50
Dilutive effect of warrants with strike prices equal to or less than the average price of our common stock during the period, calculated using the treasury stock method		750
Dilutive effect of convertible debt		1,087
Dilutive weighted average shares outstanding		28,437

 

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Recent accounting pronouncements.  Recently issued Financial Accounting Standards Board Accounting Standards Codification guidance has either been implemented or is not significant to us.

 

(3)   Supplemental Cash Flow Information

 

		June 30, 2011			June 30, 2010
		(in thousands)
Cash paid for interest		$	862		$	4,527
Interest capitalized		147			222
Accounts payable and accrued expenses included in construction in progress, property, plant and equipment		—			89
Transfers from construction in progress to property, plant and equipment		—			81

 

(4) Property Plant and Equipment and Construction in Progress

 

We are required to test our GreenCert capitalized software development costs for recoverability at each reporting period.  Due to the unlikelihood that Green House Gas legislation will be passed in the United States in the near-term for energy-related companies, we believe there is uncertainty regarding our ability to generate revenue from the GreenCert Energy System and to recover our costs from the creation and sale of carbon credits.  As a result of this recoverability test, we impaired capitalized costs related to our GreenCert energy software module by $2.5 million, during the three and six months ended June 30, 2011, of which $2.4 million was previously reflected in construction in progress and $100,000 in property plant and equipment in our condensed consolidated balance sheet.

 

On April 12, 2011,we entered into a Asset Purchase Agreement with MR&E Ltd. (“MR&E”) as an agent for a third party for the sale of the Company’s 700,000 pound per hour Circulating Fluidized Bed boiler island, (the “Boiler Island”), for $2.9 million.  The cash payments due from the third party were as follows: i) $100,000 upon the signing of the asset purchase agreement; ii) $300,000 on or before May 23, 2011; and iii) $2.5 million on or before July 9, 2011.   We received the first $100,000 payment upon the signing of the agreement.  However, the purchaser of the Boiler Island did not make the final two payments as described above and as a result, is in default of the Asset Purchase Agreement as of July 11, 2011.  We are considering our remedies against the purchaser. We also initiated a fresh process for selling the Boiler Island.

 

Impairment

 

During the six months ended June 30, 2011, we recorded an impairment charge of $1.0 million related to the write off of certain patents that were  abandoned and the write off of certain furniture and fixtures at our corporate location that are not being utilized.

 

(5)   Temporary Capital and Stockholders’ Equity

 

Effective August 20, 2010, following the approval of the proposed reverse stock split at the annual meeting of the Shareholders, our Board of Directors approved a 1 for 12 reverse stock split of our common stock. As a result of the reverse stock split, every 12 shares of our common stock issued and outstanding on August 20, 2010 were combined into one share of common stock. The reverse stock split did not change the authorized number of shares or the par value of our common stock. No fractional shares were issued in connection with the reverse stock split. All share and per share amounts in the accompanying financial statements have been restated to give effect to the reverse stock split.

 

2011 Private Placement

 

On February 1, 2011, we completed a private placement to sell 6,150,003 shares of common stock and 12,000,003 warrants to purchase common stock pursuant to the terms of a securities purchase agreement, resulting in approximately $15.99 million in gross proceeds to us, and $14.5 million in net proceeds after the offering expenses, which we refer to as the “2011 Private Placement.”

 

The sale resulted in an aggregate of $15,990,000 of proceeds from the sale of common stock. The offering price of the common stock was $2.60 per share. Each of the investors has entered into a registration rights agreement which required us to prepare and file a registration statement with the Securities and Exchange Commission (“SEC”) registering for resale by the investors the shares of common stock acquired pursuant to the securities purchase agreement.  We filed the registration statement on March 14, 2011 and such registration statement was declared effective by the SEC on April 15, 2011.

 

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The warrants are exercisable for an aggregate of 12,000,003 shares of common stock, with 50% of the warrants at an exercise price of $2.60 per share, 25% of the warrants at an exercise price of $2.73 per share, and the remaining 25% of the warrants at an exercise price of $2.80 per share, all subject to certain adjustments. The warrants are exercisable commencing August 1, 2011 and have a term of exercise equal to three years. The warrants are not redeemable by us.

 

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2010 Convertible Preferred Stock

 

On March 16, 2010, we and certain institutional investors entered into a securities purchase agreement, pursuant to which we sold an aggregate of 9,312.5 shares of our Series C Preferred Stock, or “2010 Preferred Stock” and warrants to purchase 1,041,667 shares of common stock to such investors for gross proceeds of approximately $9.3 million. The net proceeds from the sale of the preferred stock, after deducting placement agent fees, offering expenses and amounts placed in escrow, and excluding the proceeds, if any, from the future exercise of the warrants issued in the offering, were $4.5 million.   Simultaneously, 9,311.5 shares of the 2010 Preferred Stock were converted into common shares, and as of June 30, 2011 and December 31, 2010, one share of 2010 Preferred Stock was outstanding.

 

The warrant agreements contain certain provisions, such as a contingent cash redemption feature or adjustments to the exercise price of the warrant upon the occurrence of a change of control. These features were concluded to result in the warrants being recorded as liabilities. We used a fair value modeling technique to initially value this put warrant liability and recorded $1.9 million of long-term liability in our consolidated balance sheet at the date of the transaction. Furthermore, we are required to determine the fair value of this put warrant liability at each reporting period and, as a result, we recorded $1.1 million of other expense and $909,000 of other income during the six months ended June 30, 2011 and 2010, respectively.  During the three months ended June 30, 2011 and 2010 we recorded $1.3 million of other income and $1.0 million of other income, respectively.

 

2010 Common Stock Offering

 

On January 26, 2010, we consummated a registered direct public offering of common stock and raised gross proceeds of approximately $8.8 million. The net proceeds to us from this offering, after deducting placement agent fees and our offering expenses, and excluding the proceeds, if any, from the future exercise of the warrants issued in the offering, were $8.0 million.

 

The warrant agreements contain certain provisions, such as a contingent cash redemption feature or adjustments to the exercise price of the warrant upon the occurrence of a change of control, which result in the warrants being recorded as liabilities. We used a fair value modeling technique to initially value this put warrant liability and recorded $3.4 million of long-term liability in our consolidated balance sheet at the date of the transaction. Furthermore, we are required to determine the fair value of the put warrant liability at each reporting period and, as a result, we recorded $1.5 million of other income and $1.2 million of other income during the three months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011 and 2010, we recorded $1.2 million of other expense and $2.3 million of other income, respectively.

 

2009 Convertible Preferred Stock

 

On October 21, 2009, we completed the sale of an aggregate offering price of $6,973,380 of Series B Convertible preferred stock, or “2009 Preferred Stock” and detachable warrants.  All but two shares of the 2009 Preferred Stock were converted to common stock in the fourth quarter of 2009, and substantially all of the escrow deposit was paid to the holders as a dividend.

 

The warrant agreements contain certain provisions, such as a contingent cash redemption feature or adjustments to the exercise price of the warrant upon the occurrence of a change of control, which result in the warrants being recorded as liabilities. We used a fair value modeling technique to value this put warrant liability and recorded $2.3 million of long-term liability in our consolidated balance sheet at the date of the transaction. Furthermore, we are required to determine the fair value of this put warrant liability at each reporting period and, as a result, we recorded $180,000 of other income and $302,000 of other expense during the three and six months ended June 30, 2011, respectively.  During the three months and six months ended June 30, 2010 we recorded $591,000 and $948,000 of other income, respectively.

 

On February 14, 2011, one share of the 2009 Preferred Stock was converted into 139 shares of our common stock.  Additionally, we entered into an amendment to the original warrant agreement with the holder, in which we gave cash consideration of $1.5 million paid contemporaneously with the exercise of 321,502 warrants. Upon the exercise of the warrants we received $1.0 million net of the cash consideration paid to us.  We recorded $1.0 million of other expense during the six month period ended June 30, 2011 related to this transaction.  As of June 30, 2011, one share of the 2009 Preferred Stock remains outstanding.

 

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(6)   Debt

 

2011 Notes

 

On May 17, 2011, in connection with the settlement of the 2007 Notes Litigation, we entered into a convertible note agreement with the holders of the 2009 Notes, with the following terms: (i) principal amount of $1.55 million; (ii) maturity date of May 17, 2012; (iii) stated interest rate of 7% per annum, payable upon maturity; and (iv) convertible (in whole or in part), at any time after the May 17, 2011 until payment of the note in full, at the holder’s option, into shares of our common stock at a conversion price equal to $1.89 per share (the “2012 Notes”).  We also issued warrants to purchase up to 200,000 shares of our common stock at an exercise price per share of $1.89. We fair valued the warrants using the Black-Scholes option pricing model and recorded $199,000 of debt issuance costs for these warrants.  The fair value calculation for these warrants will be amortized over the life of the note.  See further discussion in Note 10—Commitments and Contingencies.

 

2009 Notes

 

On March 20, 2009, we executed a Senior Secured Convertible Note Agreement which provides for the issuance of up to $15 million in aggregate principal amount of 10% Senior Secured Promissory Notes (“2009 Notes”), in three $5 million tranches.  On April 1, 2010, we closed the sale of Buckeye and repaid the outstanding notes, including accrued interest and fees, totaling $19.2 million. We recorded a loss on the early extinguishment of these notes totaling $3.7 million primarily related to the acceleration of debt issuances costs, the acceleration of exit fees and the write-off of our derivatives described below.  In addition, pursuant to discontinued operations guidance, the interest expense for the 2009 Notes has been reflected in discontinued mining operations for the period ended June 30, 2010.

 

We were required to adjust the conversion price upon the occurrence of a future issuance of stock or warrants at a price less than the 2009 Notes conversion price. We used a fair value modeling technique to value this derivative and were required to fair value the derivative at each reporting period and, as a result, we recorded $680,000 of other income for both of the three and six months ended June 30, 2010, by decreasing the fair value of the derivative liability.

 

2007 Notes

 

On July 30, 2007, we completed the sale of our Convertible Secured Notes due 2012 (“2007 Notes”).   Over the last several years and through December 31, 2010, we completed a series of transactions which reduced our debt by $78.2 million.  On February 1, 2011, we executed an agreement to settle an aggregate of $17.3 million of our 2007 Notes and the associated litigation.  See further discussion in Note 10—Commitments and Contingencies.

 

During the period ended June 30, 2011, we entered into an individually negotiated agreement with certain existing noteholders to exchange $1.4 million in aggregate principal amount for an aggregate of 237,500 shares of our common stock.  Prior to each exchange of 2007 Notes for common stock, each of the converting noteholders agreed to release each guarantee issued pursuant to the indenture with respect to such 2007 Notes being exchanged such that, at the time of each exchange, such 2007 Notes being exchanged were not guaranteed securities and were solely securities of Evergreen Energy. We recognized a $435,000 gain, after reduction for transaction costs and the non-cash write off of debt issue costs and related embedded derivatives associated with this exchange transaction for the six months ended June 30, 2011.

 

(7)   Segments

 

Our business lines include the Technology segment and the GreenCert segment. The Technology segment is comprised of all operations that use, apply, own or otherwise advance our proprietary, patented K-Fuel process, including our headquarters and related operations, our testing facility in Gillette, Wyoming, activities of our SCH investment, and activities of Evergreen Energy Asia Pacific Corp. and KFx Technology, LLC, which holds the licenses to our technology. Corporate costs within our Technology segment are allocated to our GreenCert segment, generally on a percentage based on the number of employees, total segment operating expenses, or segment operating expenses plus segment capital expenditures. Our GreenCert software suite focuses on providing the owners and operators of the power generation companies’ collaborative tools and business analytics to improve profitability and efficiencies throughout their energy fleets. Our operations are principally conducted in the United States. Data through segment operating (loss)/ income is what is provided to our Chief Operating Decision Maker.  As a result of the sale of Buckeye and the signing of a definitive agreement for the sale of our Fort Union assets, the Mining and the Plant segments were reclassified to discontinued operations for our condensed consolidated financial statements.

 

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We will continue to evaluate how we manage our business and, as necessary, adjust our segment reporting accordingly.

 

		Three Months Ended June 30, 2011									Three Months Ended June 30, 2010
		GreenCert			Technology			Total			GreenCert			Technology			Total
Operating revenues:
GreenCert licensing		$	100		$	—		$	100		$	103		$	—		$	103
Total segment revenue		100			—			100			103			—			103
Operating expenses:
General and administrative		1,838			2,492			4,330			948			2,226			3,174
Total segment operating expense:		1,838			2,492			4,330			948			2,226			3,174
Segment operating loss		$	(1,738	)	$	(2,492	)	$	(4,230	)	$	(845	)	$	(2,226	)	$	(3,071	)
Reconciliation to net loss:
Total segment operating (loss)								$	(4,230	)							$	(3,071	)
Depreciation and Amortization								(255		)							(485		)
Research and development								(199		)							(195		)
Impairment expense								(2,536		)							—
Other income (expense), net								13,497									(182		)
Income (loss) from discontinued operations								15									(854		)
Net income(loss) attributable to noncontrolling interest								(346		)							84
Net income (loss) attributable to Evergreen Energy Inc.								$	5,946								$	(4,703	)

 

		Six Months Ended June 30, 2011									Six Months Ended June 30, 2010
		GreenCert			Technology			Total			GreenCert			Technology			Total
Operating revenues:
GreenCert licensing		$	200		$	—		$	200		$	203		$	—		$	203
Total segment revenue		200			—			200			203			—			203
Operating expenses:
General and administrative		3,597			5,205			8,802			1,936			6,736			8,672
Total segment operating expense:		3,597			5,205			8,802			1,936			6,736			8,672
Segment operating loss		$	(3,397	)	$	(5,205	)	$	(8,602	)	$	(1,733	)	$	(6,736	)	$	(8,469	)
Total assets		$	257		$	23,241		$	23,498
Reconciliation to net loss:
Total segment operating (loss)								$	(8,602	)							$	(8,469	)
Depreciation and Amortization								(1,007		)							(979		)
Research and development								(645		)							(194		)
Impairment expense								(3,018		)							—
Other expense, net								3,171									1,067
Income (loss)from discontinued operations								3,723									(4,444		)
Net loss attributable to noncontrolling interest								499									170
Net loss attributable to Evergreen Energy Inc.								$	(5,879	)							$	(12,849	)

 

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(8) Stock Grants and Options

 

We measure and recognize compensation expense for all stock grants and options granted to employees, members of our board of directors and consultants, based on estimated fair values. We estimate the fair value of share-based payment awards on the grant date. We generally use the Black-Scholes option pricing model to calculate the fair value of stock options. Restricted stock grants are valued based upon the closing price of our common stock on the date of grant unless there are market vesting conditions. The fair value is recognized as expense and additional paid-in capital over the requisite service period, which is usually the vesting period, if applicable, in our consolidated financial statements. We are required to make estimates of the fair value of the related instruments and the period benefited.

 

Stock options

 

During the six months ended June 30, 2011, we granted 943,000 options to executives and employees which immediately vested with 40% at an exercise price of $0.65, 30% at an exercise price of $0.98, 15% at an exercise price of $1.14 and 15% at an exercise price of $1.46. During the six months ended June 30, 2010, we granted 191,000 stock options to our board of directors which immediately vested on the date of grant and expire three years from the grant date. The following table summarizes the assumptions used to value stock options granted during the six months ended June 30, 2011 and 2010:

 

		Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
Weighted-average:
Risk free interest rate		2.02	%	1.61	%
Expected option life (years)		5		3
Expected volatility		103	%	114	%
Expected dividends		None		None

 

Restricted Stock

 

Restricted stock awards to employees under our equity plans contain time and performance or market vesting criteria. These grants usually vest over a three to five year period with 20% to 33% vesting each year, if the agreed upon performance criteria have been achieved, if applicable.  Restricted stock awards granted to our directors immediately vest on grant date.  We granted 85,000 and 0 shares of restricted stock awards to our employees and directors during the six months ended June 30, 2011 and 2010, respectively.

 

(9)   Related Parties

 

Consulting

 

On January 2, 2011, our Board of Directors, upon the recommendation of the Corporate Governance and Nominating Committee, appointed Ilyas Khan to the Board of Directors as Executive Chairman. In connection with Mr. Khan’s election, we became party to a Professional Services Agreement (‘‘PSA’’) with Stanhill Special Situations Fund, formerly known as Crosby Special Situations Fund, (‘‘SSSF’’) effective December 31, 2010, pursuant to which SSSF will assist us with business development and financing services. Mr. Khan is designated as the lead consultant under the PSA and was elected as Executive Chairman of the Board pursuant thereto. Mr. Khan is an indirect owner and a strategic advisor to SSSF. We have compensated SSSF as follows: the issuance of warrants to purchase an aggregate of 1,238,150 shares of common stock, with the following exercise prices: 495,260 shares at $0.65 per share; 371,445 shares at $0.98 per share; 185,723 shares at $1.14 per share; and 185,722 shares at $1.46 per share; and a monthly fee, payable in arrears, totaling £250,000 per year. SSSF also receives reimbursement for out of pocket expenses, not to exceed £150,000 per year. In March 2011, the Board approved the issuance of 75,376 shares of common stock to be issued in lieu of $233,664 cash compensation due to SSSF for the period March 2011 through September 2011, determined using the closing price of our stock on March 31, 2011 and such shares were issued on April 21, 2011.  Effective July 1, 2011, the compensation we pay to SSSF was amended so that the monthly fee, payable in arrears, totals £300,000 per year, and is payable in the amount of £4,167 per month for the period July 2011 through September 2011, and in the amount of  £25,000 per month thereafter.  The total annual compensation to SSSF related to the PSA is approximately $490,000 per year, based upon current exchange rates.

 

In connection with the 2011 Private Placement, we became party to a Professional Services Agreement with Crosby (Hong Kong) Limited (‘‘CHKL’’) effective January 20, 2011. We compensated CHKL by (i) a cash fee payment of $663,750 in the first quarter of 2011, and (ii) issuance of warrants to purchase 283,654 shares of our common stock with an exercise price of $2.60 per share. The warrants were issued effective February 1, 2011 and have a five year term.

 

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GreenCert

 

In February 2007, we entered into an exclusive patent sub-license agreement with the developer of a proprietary technology for the measurement of carbon emissions and formed a subsidiary, C-Lock Technology, Inc. See Note 10—Commitments and Contingencies for further details.

 

We granted shares from our majority owned subsidiary C-Lock Technology, Inc. to certain executive officers of Evergreen Energy, certain employees of C-Lock Technology, Inc. and others. In the aggregate, these share grants as of June 30, 2011 and June 30, 2010 represent an 8% ownership interest in C-Lock Technology, Inc.

 

K-Fuel Royalties

 

In 1996, we amended our agreement with Koppelman Ventures, LLC (successor to Edward Koppelman), which we refer to as Koppelman Ventures, to pay Koppelman Ventures 25% of worldwide licensing and royalty revenue received by us until reaching an aggregate amount of $75.2 million. Mr. Koppelman provided us an indemnification against potential claims made by certain parties if we licensed the technology. In addition, it is our understanding that Mr. Theodore Venners, our founder, is entitled to a 20% share of amounts paid to Koppelman Ventures.

 

(10)   Commitments and Contingencies

 

Litigation

 

2007 Notes Litigation

 

Subsequent to the closing of the sale to Rosebud Mining Company (under the Asset Purchase Agreement dated March 12, 2010, the “Rosebud Agreement”) of certain assets of our Buckeye Industrial Mining Co. subsidiary (“Buckeye”) and certain assets of Evergreen Energy Inc. and payment of the 2009 Notes, on April 1, 2010, certain holders of our outstanding 2007 Convertible Notes commenced litigation initially against Buckeye and the holders of the 2009 Notes (the “2009 Noteholders”), in a case denominated: AQR Absolute Return Master Account L.P., et al. v. Centurion Credit Funding LLC, Level 3 Capital Fund, LP, Buckeye Industrial Mining Company, et al., Case No. 10CV340 (Ct. Com. Pl. Columbiana County, OH) (the “Litigation”). Evergreen was subsequently added as a defendant in the action. In the Litigation, plaintiffs sought: (i) to void all obligations of Buckeye with respect to the 2009 Notes, including the security interests granted in connection therewith, (ii) to enjoin the further transfer of or recover “for Buckeye’s benefit” certain proceeds from the asset sale (particularly in satisfaction of the obligations owed to the holders of the 2009 Notes) and (iii) to appoint a receiver to take control of Buckeye’s assets.

 

In response to certain defenses raised in the litigation, certain of the plaintiffs made further claims that the assertion of such defenses constituted an Event of Default under the 2007 Note Indenture. In response, we filed a counterclaim in the Litigation naming those plaintiffs as counterclaim defendants. The counterclaim asserted lender liability and other tort claims in connection with the counterclaim defendants’ conduct. The counterclaim also sought a declaratory judgment that the defenses raised do not constitute an Event of Default under the 2007 Note Indenture and the recovery of monetary damages related to the counterclaim defendants’ wrongful conduct in asserting the Event of Default.

 

The Court initially issued an ex parte temporary restraining order limiting our ability to utilize, for working capital or other purposes, the portion of the proceeds which we received at the time of the closing (i.e., the net proceeds following the payment of the 2009 Notes and closing fees and expenses). However, on June 8, 2010, the Court issued a ruling in our favor lifting the temporary restraining order and rejecting the plaintiff’s request for a further injunction on the use of these funds as well as the use, upon release by the State of Ohio Department of Environmental Quality, of $5.0 million collateralizing certain environmental reclamation bonds.  Although the Court issued a ruling in our favor with respect to the portion of the Complaint requesting a preliminary injunction, the remaining claims were not fully resolved, and the Litigation continuance. On August 31, 2010, US Bank National Association, in its capacity as Trustee for the 2007 Notes, moved to intervene in the Litigation citing, among other things, its interest in a legal determination of whether the 2007 Notes were in default.

 

On February 1, 2011, Evergreen and Buckeye entered into a Forbearance and Settlement Agreement (the “Settlement Agreement”) with certain holders of the 2007 Notes (the “Settling 2007 Noteholders”) and the 2009 Noteholders. The Settlement Agreement provided for the direct redemption by us of approximately $14.1 million in aggregate face value of 2007 Notes held by the Settling 2007 Noteholders, in exchange for the following: (i) the payment of approximately $6.76 million in cash to the Settling 2007 Noteholders; and (ii) the issuance of warrants to the Settling 2007 Noteholders for the purchase of up to 531,250 shares of our common stock at an exercise price of $7.20 per share. The Settlement Agreement also provided for the 2009 Noteholders to purchase $3.2 million of 2007 Notes from the Settling 2007 Noteholders for $1.6 million, which we redeemed as further described below.

 

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The Settlement Agreement provided for the initial transfer of consideration by us starting with the signature date and running through the final transfer of consideration among the parties (the “Final Settlement Date”) which occurred on May 17, 2011.  If, prior to the Final Settlement Date (i) an Event of Default (as defined in the 2007 Indenture) occurred for which a notice of acceleration has not been previously transmitted to the 2007 Trustee other than the delisting of Evergreen from the NYSE Arca Exchange, (ii) a bankruptcy petition was filed by or against Evergreen or any of the subsidiary guarantors of the 2007 Notes was not cured within specified time limits, or (iii) we defaulted on any of our obligations set forth in the Settlement Agreement or certain other agreements underlying the Settlement Agreement, then the Settling 2007 Noteholders would have had the option of retaining the property which had been transferred to them by us, up to the complete consideration we were obligated to transfer under the Settlement Agreement, without further obligation to transfer their 2007 Notes. Exercising such an option would have relieved the 2009 Noteholders of their obligations under the Settlement Agreement and would have prevented us from redeeming the 2007 Notes held by Settling 2007 Noteholders according to the terms set forth in the Settlement Agreement. Should this have occurred, whatever property we had transferred to the Settling 2007 Noteholders as a part of the Settlement Agreement would have been retained by them and set off against the obligations owed to them by Evergreen, except that the initial payment of $1.45 million would have been treated as a forbearance fee.

 

The Settlement Agreement included the exchange of releases among and between the various parties as well as the dismissal of the Litigation.

 

Pursuant to the Settlement Agreement, during February 2011, we paid the $1.45 million forbearance fee and made the initial settlement payment of $3.3 million to the Settling 2007 Noteholders.  Pending the Final Settlement Date, we have accounted for the $3.3 million payment as a reduction to our obligations owed to the 2007 Noteholders pursuant to the terms discussed in the preceding paragraph.  Further, on or about April 4, 2011, $2.0 million of the escrow proceeds (available under the escrow established in connection with the Rosebud Agreement) were released directly to the Settling 2007 Noteholders.  This $2.0 million was also treated as a reduction in the obligations owed to the 2007 Noteholders pending the Final Settlement Date.

 

As described above, the 2009 Noteholders were to purchase $3.2 million of 2007 Notes on the Final Settlement Date from the Settling 2007 Noteholders. Contemporaneously with execution of the Settlement Agreement, we entered into an agreement with the 2009 Noteholders to replace the $3.2 million of 2007 Notes on the Final Settlement Date with a new convertible note with the following terms: (i) a principal amount of $1.55 million; (ii) one year term commencing on the Final Settlement Date; (iii) a stated interest rate of 7% per annum; and (iv) a convertibility feature under which the note is convertible at any time after the Final Settlement Date until payment in full at the holder’s option into our common stock at a conversion price equal to the market value of the shares on the Final Settlement Date. At the same time we were also to issue warrants for the purchase of up to 200,000 shares of our common stock at an exercise price equal to the market value of the shares issued on the Final Settlement Date. The date of issuance of the convertible note and warrants to the 2009 Noteholders was be the Final Settlement Date and the issuance of the convertible note is contingent upon the occurrence of a Final Settlement Date.

 

On May 17, 2011, as a result of our satisfaction of all conditions under the Settlement Agreement, the Final Settlement Date occurred.  Pursuant to the terms of the Settlement Agreement: (i) the Notices of Acceleration transmitted to the 2007 Note Indenture Trustee on May 18, 2010 were rescinded; (ii) the 2009 Noteholders purchased $3.2 million of 2007 Notes from the Settling 2007 Noteholders for $1.6 million; and (iii) the we received, and subsequently redeemed, all of the 2007 Notes previously held by the Settling 2007 Noteholders, including the 2007 Notes purchased by the 2009 Noteholders.    The parties filed and the Court approved a stipulated entry dismissing the litigation.

 

C-Lock Inc. Arbitration and C-Lock Technology, Inc./Evergreen Energy Inc. v. C-Lock Inc. et al.

 

On June 11, 2010, C-Lock Inc. filed a Demand for Arbitration and Complaint captioned C-Lock Inc. v. C-Lock Technology Inc. (JAMS Arbitration No. 11931). Our subsidiary, C-Lock Technology, Inc. previously entered into an Exclusive Patent Sublicense Agreement with C-Lock Inc. whereby C-Lock Inc. granted to C-Lock Technology an exclusive sublicense of certain patent rights in order to develop and commercialize such rights. The complaint alleges claims for breach of contract and breach of the covenant of good faith and fair dealing and seeks an unspecified amount of money damages and termination of the Sublicense Agreement. C-Lock Technology filed counterclaims against C-Lock Inc. alleging fraud, breach of the covenant of good faith and fair dealing and unjust enrichment. The counterclaims are based on C-Lock Inc.’s acceptance of a $500,000 royalty payment (called for by the Sublicense) under false pretenses.

 

On December 14, 2010, the we filed suit against C-Lock Inc. and two of our former employees, Dr. Patrick Zimmerman and Scott Zimmerman, in Evergreen Energy Inc. and C-Lock Technology, Inc. v. Dr. Patrick Zimmerman, Scott Zimmerman and C-Lock Inc., Case No. 10CV9640 (District Court for the City and County of Denver, Colorado). Dr. Patrick Zimmerman and his son Scott Zimmerman were former executives of our subsidiary, C-Lock Technology, Inc. we alleged that the Zimmermans (and their company, C-Lock Inc.) breached their fiduciary duty to us. Additionally, the Complaint alleges that they misappropriated trade secrets and corporate assets to include filing a patent that was incomplete as to proper inventorship.

 

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The Complaint states claims for: (i) declaratory judgment (relating to the improperly filed patent); (ii) breach of fiduciary duty; (iii) misappropriation of trade secrets; (iv) misappropriation of corporate assets; (v) breach of contract; (vi) aiding and abetting breach of fiduciary duty and duty of loyalty; (vii) civil conspiracy; and (viii) unjust enrichment.

 

On March 30, 2011, we entered into a Binding Termsheet with C-Lock Inc. v. C-Lock Technology Inc. (JAMS Arbitration No. 11931) and Evergreen Energy Inc. and C-Lock Technology, Inc. v. Dr. Patrick Zimmerman, Scott Zimmerman and C-Lock, Inc., Case No. 10CV9640 (District Court for the City and County of Denver, Colorado) to settle all claims.  All parties agreed to the immediate dismissal of the Arbitration and the suit with prejudice and each party to bear its own fees and costs.  Additionally, all parties executed broad mutual releases of all claims known and unknown.

 

Pursuant to the Binding Termsheet, the parties entered into a Second Amended and Restated Non-Exclusive Sublicense Agreement (“Second Sublicense”) replacing the existing Amended and Restated Exclusive Sublicense Agreement.  The Second Sublicense provides the Company and C-Lock Technology Inc. (“CLT”) non-exclusive rights to use certain licensed technology in the energy field for an annual fee of $100,000.

 

The parties also entered into an option agreement giving us and CLT the option to enter into a Third Amended and Restated Exclusive Sublicense (“Third Sublicense”), provided such option is exercised by December 31, 2011.  The Third Sublicense would provide the Company and CLT with exclusive rights to certain licensed technology in the energy field for an annual license fee of $250,000, plus a royalty equal to the greater of a) 1% of net sales of the entire GreenCert suit, or b) 3% of net sales of the Greenhouse Gas Calculator alone, to the extent such royalty exceeds $250,000.

 

C-Lock Technology, Inc. Employee Litigation

 

On March 25, 2010, as amended on October 15, 2010, litigation was commenced against us by two former employees, Vince Cook and Jim Bitonti. Vincent Cook and James V. Bitonti v. C-Lock Technology, Inc., Evergreen Energy Inc., Thomas H. Stoner, Robert S. Kaplan, M. Richard Smith and Manual H. Johnson, Case No. 10CV2417 (District Court for the City and County of Denver, Colorado).   Messrs. Cook and Bitonti received shares of stock of C-Lock Technology, Inc. as part of their compensation pursuant to the C-Lock Technology, Inc. 2007 Restricted Stock Plan.  In accordance with the terms of their individual stock award agreements and the plan, upon termination of their employment, we notified them that we intended to repurchase their shares at fair market value.  In the litigation, Messrs. Cook and Bitonti seek damages alleging breach of contract, breach of fiduciary duty and other theories based on their belief that we failed to pay them fair market value for their shares.

 

On April 26, 2011, after a one-week trial, the Court issued oral findings of fact and conclusion of law in favor of Messrs. Cook and Bitonti.  A written final judgment was entered on July 8, 2011.  The plaintiffs have filed a form of judgment seeking $1.7 million in damages, plus interest which is accruing through the date of the final payment which totaled $1.9 million.   We disagree with the Court’s ruling and filed a motion to alter or amend the judgment, or, in the alternative, for a new trial.  There is no assurance that our motion will be granted.  If our motion is not granted, we will consider appealing the judgment.  Alternatively, we have entered into negotiations with Messrs. Cook and Bitonti to reach a final settlement related to the case.  As a result, we have reserved $1.8 million related to anticipated losses related to this case. The Directors and Officers insurance carrier has denied coverage in this matter and we have filed a suit entitled Evergreen Energy Inc., C-Lock Technology, Inc. and Thomas H. Stoner, Jr. v. American Insurance Company in United States District Court for the District of Colorado, Case No. 1:11CV01700, against the carrier in an attempt to secure coverage.

 

Koppelman Ventures LLC

 

On June 14, 2011, Koppelman Ventures LLC (“Koppelman”) filed a Complaint in the United States District Court for the District of Colorado entitled Koppelman Ventures LLC V. Evergreen Energy Inc., formerly known as KFx Inc. and K-Fuel®, Inc. and KFx Technology, formerly known as K-Fuel®, LLC, Thomas J. Stoner, Jr., Diana Kubik, Willliam G. Laughlin and Ilyas Khan, Case No. 11-CV-01550.  Koppelman’s predecessor in interest sold its interest in various patents and property relating to a technology which is intended to upgrade low quality coal and lignites.  The sale required certain payments to be made to Koppelman from certain revenues received from the production and sale of the upgraded coal.  Plaintiff’s causes of action include breach of contract, breach of implied covenant of good faith and fair dealing, specific performance, rescission and restitution and intentional interference with contractual obligations by the individual defendants.  We feel that Evergreen and the individual defendants have meritorious defenses and we will vigorously dispute the plaintiff’s claims.

 

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Other Contingencies

 

While our former investment banking firm may claim that we owe them up to $1.0 million upon the sale of Buckeye, we do not believe that this fee is payable due to the lack of the counterparty meeting certain performance criteria, in addition to certain verbal understandings reached related thereto. If a claim is made for this contingent payment, we intend to vigorously dispute this claim.

 

We are not engaged in any additional material legal proceedings which involve us, any of our subsidiaries or any of our properties.

 

(11) Assets and Liabilities Measured at Fair Value

 

Fair Value Measurements and Disclosures establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

·                  Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

·                  Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

·                  Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to that asset or liability.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2011

 

The following table presents information about our net liabilities measured at fair value on a recurring basis as of June 30, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value.

 

		Fair Value Measurements Using
		Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(in thousands)
Recurring:
2007 Notes embedded derivatives		$	7		$	—		$	—		$	7
Put Warrant liability—October 2009 preferred stock transaction		162			—			—			162
Put Warrant liability—March 2010 preferred stock transaction		1,483			—			—			1,483
Put Warrant liability—January 2010 common stock offering		$	1,700		—			—			$	1,700

 

The following table represents the change in fair value for the six months ended June 30, 2011

 

		Balance at December 31, 2010			Issuance			Unrealized Loss			Realized gain			Balance at June 30, 2011
		(in thousands)
2007 Notes embedded derivatives(1)		$	7		$	—		$	—		$	—		$	7
Put Warrant liability — October 2009 preferred stock transaction (1)		118			—			122			(78		)	162
Put Warrant liability —March 2010 preferred stock transaction (1)		395			—			1,088			—			1,483
Put Warrant liability —January 2010 common stock offering(1)		$	459		$	—		$	1,241		$	—		1,700