NUCLEAR SOLUTIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Unaudited)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Nuclear Solutions, Inc. ("the "Company") was organized February 27, 1997 under the laws of the State of Nevada, as Stock Watch Man, Inc. On September 12, 2001, the Company amended its articles of incorporation to change its name to Nuclear Solutions, Inc.
On September 2, 2005 the Company formed a wholly owned subsidiary, Fuel Frontiers Inc.(“FFI”), formally, Future Fuels, Inc., which had minimal operations through June 30, 2008.
On July 31, 2006 the company formed a wholly owned subsidiary, Liquidyne Fuels, which has had no activity through March 31, 2009.
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in the unaudited condensed consolidated financial statement.
Business
Nuclear Solutions, Inc. is engaged in the research, development, and commercialization of innovative product technologies, which are generally early-stage, theoretical or commercially unproven. We operate a highly technical business and our primary mission is to develop advanced product technologies to address emerging market opportunities in the fields of homeland security, nanotechnology, and nuclear remediation. Our wholly owned subsidiary Fuel Frontiers, Inc. concentrates on developing fuel production facilities to produce ultra-clean synthetic diesel from feedstocks such as coal.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Regulation S-X promulgated by the Securities and Exchange Commission and do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, these interim financial statements include all adjustments, which include only normal recurring adjustments, necessary in order to make the financial statements not misleading. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company and management's discussion and analysis of financial condition and results of operations included in the Company's Annual Report for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on Form 10-K.
NOTE 2 - ACCOUNTING POLICIES AND PROCEDURES
Revenue Recognition
Revenues are recognized in the period that services are provided. For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” ("SAB104"), which superseded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Payments received in advance are deferred.
SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), “Multiple-Deliverable Revenue Arrangements”. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company's consolidated financial position and results of operations was not significant.
Licensing fee income generally is being recognized ratably over the term of the license. The Company's management has determined that the collectibility and length of time to collect the remaining contracted price due from its licensee can not be reasonably assured. Accordingly, revenues will be recognized as collected.
Collaborative Arrangement
The Company, through its subsidiary FFI, has entered into a collaborative arrangement with Kentucky Fuel Associates, Inc. (“KFA”) for the development of coal-based gas-to-liquid (CTL) fuel production facilities in the State of Kentucky. KFA has agreed to provide an initial funding of $2,000,000 per site to be applied by FFI towards any and all costs and expenses incurred in the ordinary course of business for the development, construction and arranging of financing to closure including without limitation the following costs: engineering, procurement, administrative, development management, financing, legal, operations and maintenance costs for each said fuel production facility. In consideration for KFA’s initial minimum funding contribution, KFA will receive 7% of the annual net pre-tax income of each jointly developed CTL diesel fuel facility and 2.5% equity interest in the first CTL diesel fuel facility developed by FFI and KFA. Additionally, KFA will have the exclusive right to develop CTL diesel fuel facilities with FFI in the state of Kentucky and a conditional first right of refusal to develop CTL diesel fuel facilities in the remainder of the United States.
We are accounting for this agreement pursuant to EITF 07-01, “Accounting for Collaborative Arrangements”. During the three months ended March 31, 2009 we expended $125,625 towards the development of the initial CTL facility. We have reported this amount as payments received pursuant to collaborative agreements. The unexpended balance of payments received of $28,489 and $154,114 at March 31, 2009 and December 31, 2008, respectively, is reported as a current liability as advance payments received.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Loss Per Share
Basic and diluted loss per common share for all periods presented is computed based on the weighted average number of common shares outstanding during the year as defined by SFAS No. 128, "Earnings Per Share". The assumed exercise of common stock equivalents was not utilized since the effect would be anti-dilutive. At March 31, 2009 and 2008, the Company had 1,019,557 and 1,047,645 potentially dilutive securities, respectively.
Liquidity
As shown in the accompanying unaudited condensed consolidated financial statements, the Company has incurred net losses of $742,790 and $1,257,579 during the three month periods ended March 31, 2009 and 2008, respectively. The Company's current liabilities exceeded its current assets by $6,097,372 as of March 31, 2009. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.
Fair Value Accounting
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 were adopted January 1, 2008. In February 2008, the FASB staff issued Staff Position No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are effective for the Company’s fiscal year beginning January 1, 2009.
FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are described below:
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
The following table sets forth the Company’s financial liabilities measured at fair value by level within the fair value hierarchy. As required by FAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company designates cash equivalents as Level 1. As of March 31, 2009 and December 31, 2008, the Company did not have any cash equivalents, therefore there were no assets measured at fair value.
| | | Fair Value at March 31, 2009 | |
| | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| Liabilities: | | | | | | | | | | | | |
| Conversion option liability | | $ | 5,101 | | | $ | - | | | $ | - | | | $ | 5,101 | |
The Company’s conversion option liability is valued using pricing models and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs. These financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (detachable warrants and conversion option liabilities) for the three months ended March 31, 2009.
| Balance at beginning of period | | $ | 1,660 | |
| Change in fair value of conversion option | | | 3,441 | |
| | | | | |
| Balance at end of period | | $ | 5,101 | |
The total amount of the changes in fair value for the period was included in net loss as a result of changes in the Company’s stock price from December 31, 2008.
In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 were adopted January 1, 2008. The Company did not elect the Fair Value Option for any of its financial assets or liabilities, and therefore, the adoption of FAS 159 had no impact on the Company’s unaudited condensed consolidated financial position, results of operations or cash flows.
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 also establishes guidelines for accounting or changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 15, 2008 and interim periods within those years. The adoption of SFAS 160 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of SFAS 161 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will not have an impact on the Company’s financial statements.
In June 2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5), Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. EITF 07-5 requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), and should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings. The adoption of this pronouncement will not have a significant impact on the Company’s consolidated financial position and results of operations.
In January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue No. EITF No. 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF No. 99-20-1”). FSP EITF No. 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The Company adopted FSP EITF No. 99-20-1 and it did not have a material impact on the consolidated financial statements.
Effective January 1, 2009, the Company adopted the Financial Accounting Standards Board's Staff Position (FSP) on the Emerging Issues Task Force (EITF) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” The FSP required that all unvested share-based payment awards that contain non-forfeitable rights to dividends should be included in the basic Earnings Per Share (EPS) calculation. This standard did not affect the unaudited condensed consolidated financial position or results of operations.
In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS No. 115-2”). FSP FAS No. 115-2 provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments. This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company plans to adopt the provisions of this Staff Position during the second quarter of 2009, but does not believe this guidance will have a significant impact on its unaudited condensed consolidated financial statements.
In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”). FSP FAS No. 157-4 provides additional guidance in determining whether the market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS No. 157, “Fair Value Measurements.” FSP FAS No. 157-4 is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company will apply the provisions of this statement prospectively beginning with the second quarter 2009, and does not expect its adoption to have a material effect on its unaudited condensed consolidated financial statements.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB 28-1”). This FSP amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. APB 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This standard is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company plans to adopt FSP FAS No. 107-1 and APB 28-1 and provide the additional disclosure requirements beginning in second quarter 2009.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future unaudited condensed consolidated financial statements.
NOTE 3 - GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited condensed consolidated financial statements, the Company has a net loss of $742,790 for the three months ended March 31, 2009, and a working capital deficiency of $6,097,372 and a stockholders' deficiency of $6,094,306 at March 31, 2009. These factors raise substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional funds and implement its business plan. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company is actively pursuing additional equity financing through discussions with investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts, management believes that the Company can continue to operate. However, no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems.
The Company's existence is dependent upon management's ability to develop profitable operations and resolve its liquidity problems. Management anticipates the Company will attain profitable status and improve its liquidity through the continued developing, marketing and selling of its services and additional equity investment in the Company.
NOTE 4 - CONVERTIBLE DEBT
Notes payable at March 31, 2009 and December 31, 2008:
| | | March 31, | | | December 31, | |
| | | 2009
(unaudited) | | | 2008 | |
| Global Atomic Inc. demand note payable to related party at 10% per year, convertible into common stock at $1.00 per share | | $ | 4,000 | | | $ | 4,000 | |
| International Fission demand note payable to related party at 10% per year, convertible into common stock at $1.00 per share | | | 15,000 | | | | 15,000 | |
| Jackie Brown, demand note payable to related party, non -interest bearing, convertible into common stock at $1.00 per share | | | 20,000 | | | | 20,000 | |
| John Powers note payable to related party, convertible into common stock At a 50% discount to market; interest rate 14%; maturity June 4, 2009 | | | 13,444 | | | | 13,444 | |
| John Powers note payable to related party, convertible into common stock At a 50% discount to market; interest rate 14%; maturity June 4, 2009 | | | 8,000 | | | | 8,000 | |
| Total notes payable | | | 60,444 | | | | 60,444 | |
| Less: current portion | | | (60,444 | ) | | | (60,444 | ) |
| Balance notes payable (long term portion) | | $ | — | | | $ | — | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
When used in this Form 10-Q and in our future filings with the Securities and Exchange Commission, the words or phrases will likely result, management expects, or we expect, will continue, is anticipated, estimated or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. These statements are subject to risks and uncertainties, some of which are described below. Actual results may differ materially from historical earnings and those presently anticipated or projected. We have no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect anticipated events or circumstances occurring after the date of such statements.
Business Overview
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains many forward-looking statements, which involve risks and uncertainties, such as our plans, objective, expectations and intentions. You can identify these statements by our use of words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," "continue," "plans," or other similar words or phrases. Some of these statements include discussions regarding our future business strategy and our ability to generate revenue, income, and cash flow. We wish to caution the reader that all forward-looking statements contained in this Form 10-Q are only estimates and predictions. Our actual results could differ materially from those anticipated as a result of risk facing us or actual events differing from the assumptions underlying such forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this quarterly report on Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to update any of these factors or to publicly announce any change to our forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise.
Note: There have been no material changes from our description of business disclosed in our annual report on Form 10-K for the year ended December 31, 2008. The information that follows is condensed and adapted from the information contained in our annual report on form 10-K for the year ended December 31, 2008.
Our Corporate History:
The Company was organized February 27, 1997 under the laws of the State of Nevada, as Stock Watch Man, Inc. an internet e-commerce company. On September 12, 2001, the Company amended its articles of incorporation to change its name to Nuclear Solutions, Inc. At that time, our primary business was the development of a new type of nuclear reactor technology. As of the date of this report, our business is now focused on the production of synthetic diesel fuel from coal concentrating its efforts exclusively on coal-to-diesel projects already underway in the state of Kentucky.
Our Business:
Nuclear Solutions, Inc. and its wholly owned subsidiary, Fuel Frontiers, Inc. is engaged in the research, development, and commercialization of innovative technologies and processes, which are generally early-stage, theoretical or commercially unproven. We operate a highly technical business and our primary mission is to develop facilities to produce ultra-clean synthetic diesel from coal and other materials using a plasma-based gasification system and a conventional synthesis gas-to-fuel reforming system based upon Fisher-Tropsch technology.
In 2008, The Board of Directors elected to focus the company exclusively on the production of synthetic fuels through the FFI subsidiary. Prior to that, the company was developing nuclear technologies in the areas of shielded nuclear material detection and nuclear micro-batteries in addition to the production of synthetic fuels. Due to the difficulties encountered in raising capital in a declining economic climate coupled with the limited resources of the company, management made the decision to place all nuclear technology development programs into a dormant state. The company will continue to maintain the intellectual property associated with the shielded nuclear detection technology program and will seek a buyer or a master licensee for the patents. The company is discontinuing all further business development associated with nuclear micro battery technology and other nuclear legacy technologies.
Production of Ultra-Clean Synthetic Fuels through our subsidiary Fuel Frontiers, Inc.
In 2005, the company entered the ultra-clean synthetic fuels business through a new subsidiary called Fuel Frontiers, Inc. (formerly known as Future Fuels, Inc.). The primary business of Fuel Frontiers, Inc. (FFI) is to plan, design, finance, construct, and operate multiple gas-to-liquid synthetic fuel synthesis facilities worldwide to transform virtually cost-free waste materials such as used tires, waste coal, solid and liquid municipal wastes, biomass, and other similar low-value societal refuse into high-value gas-to-liquid fuels such as ultra-clean diesel.
Fuel Frontiers, Inc. (FFI) is focused on the production of ultra-clean GTL Diesel fuel.
Management made a decision to concentrate on the market for ultra-clean GTL Diesel fuel due to the maturity and stability of the diesel market place and the greater certainties associated with distribution, integration, production costs and profit margins.
Originally, our approach to the production of ultra-clean synthetic fuel was highly focused on the utilization of virtually cost free waste materials as feedstock for our process.
We believe our approach to the production of ultra-clean synthetic fuels is differentiated by our business model and technical approach. Our business model focuses on the flexibility to use virtually cost free waste materials, some of which are renewable, in combination with conventional feed stocks such as coal or petroleum coke, as opposed to other approaches which must lock in a certain type of homogeneous feedstock. Our technical approach involves the use of a low-emission plasma processing (gasification) system to convert the waste materials into synthesis gas which is then converted into ultra-clean synthetic diesel.
System Overview
The FFI approach for the production of ultra-clean diesel occurs in two stages. In the first stage the feedstock material is fed into a plasma processing system such as the Westinghouse Plasma Gasifier (WPG) which transforms the feedstock material into synthesis gas, which is composed of carbon, hydrogen and oxygen. The heart of Westinghouse’s Plasma Gasifier contains a plasma field that reaches temperatures up to 30,000 degrees Centigrade. The plasma breaks down feedstock materials--such as coal, used tires, wood wastes as well as petroleum coke and other materials--to their core elements in a clean and efficient manner which generates significant amounts of synthesis gas. Excess heat energy is removed from the resulting synthesis gas and recovered to generate electricity on-site which can be used to provide power to the system. The cooled synthesis gas is then refined for purity and passed to the second stage. In the second stage, the refined synthesis gas, which is composed primarily of carbon, hydrogen and oxygen, is converted into ultra-clean diesel though a modified Fischer-Tropsch gas-to-liquids synthesis process for diesel fuels. The process applies a metallic catalyst to chemically transform the synthesis gas into a liquid fuel which is then refined to fuel-grade standards. This approach is not entirely new, as early as 1936 in Germany similar technology was used with coal-produced synthesis gas to produce diesel and alcohols on a commercial scale. The FFI approach to ultra-clean synthetic fuel production differs from other approaches mainly because our system can utilize multiple feedstock materials that are normally difficult to utilize in a conventional gasifier. The ability to use heterogeneous materials is a benefit of a plasma processing system. The Westinghouse Plasma Gasifier has the proven capability to transform a wide variety of waste materials into the synthesis gas in an efficient and environmentally friendly manner.
Currently, we are focusing our efforts in the state of Kentucky, Muhlenberg County for our first coal to ultra-clean diesel production facility. The projected output of a typical project can range from approximately 50,000,000 gallons per year to 200,000,000 gallons per year. We currently estimate that the inside battery limits cost of an ultra-clean synthetic diesel waste-to-fuel facility producing approximately 50,000,000 gallons per year could range from $300,000,000 to $400,000,000. This estimate range is qualified by the fact that the actual cost of any facility can be significantly affected by factors such as the exact nature and terms of the project, the market price for engineering, labor and raw construction materials and any environmental or regulatory costs which are highly project dependent. We will require additional capital to develop these projects. Over the next twelve months, we anticipate raising additional capital through debt, grants or equity financing. The financing requirements for each project can be substantially different from one another and may or may not result in significant dilution and or increased indebtedness of the company.
We intend to build our facilities with modular expansion capability to allow for increased future production and/or gasification of additional or diverse feedstock (waste materials). As of the date of this report, we have retained Stone and Webster, LTD. Of Milton Keynes, England, a subsidiary of the Shaw Group for design engineering, procurement, construction, and production operations for our renewable fuel projects currently in the planning stages. As a matter of policy and our business model, we intend to outsource engineering, procurement, construction as well as daily facility management and operations of any future facilities to qualified and experienced providers.
Over the next twelve months, we anticipate that FFI's development efforts will continue to focus on engineering plant designs as well as project development and financing. These elements will play critical roles in the establishment of FFI's waste-to-fuel projects. While we believe that the appropriate technologies for waste-to-synthetic fuels such as ultra-clean diesel are commercially available, there is, however, no guarantee that commercially available technologies will be appropriate in every instance for the production of fuels and any of FFI's proposed facilities. Moreover, there could be unexpected problems or delays in the funding, construction and operation of the facility. There is no guarantee that FFI will be successful in raising the capital required for this project. Over the next twelve months we anticipate that FFI will require a minimum of approximately $500,000 to sustain operations. We anticipate raising this money through debt and/or equity financing which may result in substantial dilution, and/or increase the company's indebtedness.
Plan for the next 12 months
Over the next 12 months, we plan on raising working capital to fund development of these technological areas through private placements of debt or equity, using our common stock in lieu of cash, and applying for government grants, where appropriate. The implementation of Company's business development phases outlined above will be dependent on successful financing. Financing options may include a combination of debt and equity financing. Equity financing may result in a substantial equity dilution to existing shareholders.
Within the next six months and subject to available resources, the company anticipates holding one or more special shareholder meetings to refer certain matters to the shareholders for approval and resolution.
Progress
Progress in the development of our technologies have been slower than expected due to the lack of personnel and lack of working capital. We anticipate increasing staffing levels over the next 12 months. We estimate a working capital requirement of at least $500,000 dollars over the next 12 months to maintain operations at a minimum level.
We believe that the success of our business will depend, in part, on our ability to attract, retain, and motivate highly qualified sales, technical and management personnel, and upon the continued service of our senior management and key sales and technical personnel. We cannot assure you that we will be able to successfully attract, retain, and motivate a sufficient number of qualified personnel to conduct our business in the future.
Results of Operations
REVENUES: The Company reported revenues of $0 for the three months ended March 31, 2008 as compared with revenues from continuing operations of $0 for the three months ended March 31, 2009.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations decreased from $1,002,815 for the three months ended March 31, 2008 to $736,458 for the three months ended March 31, 2009. The principal reason for this decrease was due to a reduction in consulting fees.
OPERATING EXPENSES: Operating expenses from continuing operations decreased from $1,002,815 for the three months ended March 31, 2008 to $736,458 for the three months ended March 31, 2009. This decrease was primarily due to a decrease in consulting fees. Depreciation expense decreased for the first three months of 2009 versus the first three months of 2008, from $1,229 for the three months ended March 31, 2008 to $371, for the three months ended March 31, 2009. This decrease was due to writing off certain assets.
GENERAL AND ADMINISTRATIVE: General & Administrative expenses increased by $116,717 during the three months ended March 31, 2009 to a total amount of $192,502 as compared to $75,785 for the three months ended March 31, 2008. The increase was due to project development costs associated with Fuel Frontiers, Inc.
INTEREST EXPENSE: Interest expense decreased from $252,599 for the three months ended March 31, 2008 to $2,891 for the three months ended March 31, 2009. This decrease is due primarily to the company’s prior repayment of outstanding debt.
NET LOSS: The Company incurred a net loss of ($742,790) for the three months ended March 31, 2009, compared with a net loss of ($1,257,579) for the three months ended March 31, 2008, which reflects a year-to-year decrease in the amount of loss for the period of $514,789. The principal reason for this decrease was due to a decrease in consulting expenses.
LIQUIDITY AND CAPITAL RESOURCES:
As of March 31, 2009, we had a working capital deficit of $6,097,372 which compares to a working capital deficit of $5,557,940 as of December 31, 2008. As a result of our operating losses for the three month period ended March 31, 2009, we generated a cash flow deficit of $169,227 from operating activities. Cash flows used in investing activities was $0 during the period. Cash flows provided by financing activities were $9,950 on proceeds from an advance payable.
Additional financing will be required in order to meet our current and projected cash flow deficits from operations and development. We are seeking financing in the form of equity capital in order to provide the necessary working capital. There is no guarantee that we will be successful in raising the funds required. We intend to use the proceeds derived from revenues or financing to pay salaries, and general and administrative expenses to maintain the core operations of the company.
If we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 also establishes guidelines for accounting or changes in ownership percentages and for de-consolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 15, 2008 and interim periods within those years. The adoption of SFAS 160 did not have a material impact on our financial position, results of operations or cash flows.
Effective January 1, 2009, the Company adopted the Financial Accounting Standards Board's Staff Position (FSP) on the Emerging Issues Task Force (EITF) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” The FSP required that all unvested share-based payment awards that contain non-forfeitable rights to dividends should be included in the basic Earnings Per Share (EPS) calculation. This standard did not affect the unaudited condensed consolidated financial position or results of operations.
In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS No. 115-2”). FSP FAS No. 115-2 provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments. This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company plans to adopt the provisions of this Staff Position during the second quarter of 2009, but does not believe this guidance will have a significant impact on its unaudited condensed consolidated financial statements.
In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”). FSP FAS No. 157-4 provides additional guidance in determining whether the market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS No. 157, “Fair Value Measurements.” FSP FAS No. 157-4 is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company will apply the provisions of this statement prospectively beginning with the second quarter 2009, and does not expect its adoption to have a material effect on its unaudited condensed consolidated financial statements.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB 28-1”). This FSP amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. APB 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This standard is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company plans to adopt FSP FAS No. 107-1 and APB 28-1 and provide the additional disclosure requirements beginning in second quarter 2009.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will not have an impact on the Company’s financial statements.
In June 2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5), Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. EITF 07-5 requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), and should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings. The adoption of this pronouncement will not have a significant impact on the Company’s consolidated financial position and results of operations.
In January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue No. EITF No. 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF No. 99-20-1”). FSP EITF No. 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The Company adopted FSP EITF No. 99-20-1 and it did not have a material impact on the consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future unaudited condensed consolidated financial statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Cash and Cash Equivalents
We have historically invested our cash and cash equivalents in short-term, fixed rate, highly rated and highly liquid instruments which are reinvested when they mature throughout the year. Although our existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, our rate of return on short-term investments could be affected at the time of reinvestment as a result of intervening events. As of March 31, 2009, we had cash and cash equivalents aggregated $17,002.
The Company does not issue or invest in financial instruments or their derivatives for trading or speculative purposes. The operations of the Company are conducted primarily in the United States, and, are not subject to material foreign currency exchange risk. Although the Company has outstanding debt and related interest expense, market risk of interest rate exposure in the United States is currently not material.
Debt
The interest rate on our outstanding debt obligations are fixed and are not subject to market fluctuations. Some of our convertible debt may have its interest costs increased if the debt is converted into common stock because the conversion price is a function of the market price of our common stock.
| Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “ SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, management concluded that our disclosure controls and procedures are effective as of March 31, 2009 to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of and Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of March 31, 2009 based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that, as of March 31, 2009, our internal control over financial reporting were effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting identified in connection with the requisite evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations.
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II-OTHER INFORMATION
| Item 1. | Legal Proceedings. |
The Company is not a party to any pending material legal proceedings.
There have been no material changes from risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2008.
| Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds. None. |
| Item 3. | Defaults upon Senior Securities. None. |
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matter was submitted to a vote of the security holders, through the solicitation of proxies or otherwise, during the quarter of the fiscal year covered by this report.
| Item 5. | Other Information. None. |
(a) Exhibits
| | |
| Exhibit No. | Description |
| | |
| 31.1 | Chief Executive Officer-Section 302 Certification pursuant to Sarbanes-Oxley Act. |
| 31.2 | Chief Financial Officer-Section 302 Certification pursuant to Sarbanes-Oxley Act. |
| 32.1 | Chief Executive Officer-Section 906 Certification pursuant to Sarbanes-Oxley Act. |
| 32.2 | Chief Financial Officer-Section 906 Certification pursuant to Sarbanes-Oxley Act. |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NUCLEAR SOLUTIONS, INC.
By: /s/Patrick Herda By: /s/Kenneth Faith
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Patrick Herda Kenneth Faith
Title: President, CEO Title: CFO
