United
States Securities and Exchange Commission
 Washington,
D.C. 20549
  Form 10-Q
  [X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the
quarterly period ended September 30, 2008
 
 or
 
 [
] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act
 For the
transition period from ______ to _______
 
 Commission
file number 333-145183
  KL ENERGY
CORPORATION
 (Name of registrant as specified in its
charter)
  Nevada
              39-2052941(State
      or other jurisdiction of incorporation or organization)
              (IRS
      Employer Identification No.)
 Revive-It
Corp.
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 306
East Saint Joseph Street, Suite 200
 Rapid
City, South Dakota 57701
 (Address
of principal executive offices)
 
 (605) 718-0372
 (Registrant’s
telephone number)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 [x]
Yes   [ ] No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
  
  Large accelerated filer [ ]
              Accelerated filer [ ]Non-accelerated filer [ ] (Do not check if a smaller reporting
      company)
              Smaller reporting company [X]
 Indicate
by check mark whether the registrant is a shell company [ ]
Yes      [x] No
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
 
 We had15,612,348 shares of common
stock, 0.001 par value, outstanding on November 10, 2008.
  
  
 Table
of Contents
  PagePart
      I - Financial Information
              3Item
      1. Financial Statements
              3Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
              13Item
      4T. Controls and Procedures
              22Part
      II - Other Information
              24Item
      1. Legal Proceedings
              24Item
      1A.  Risk Factors
              24Item
      2.  Unregistered Sales of Equity Securities
              24Item
      6. Exhibits
              25
  
 -
2 -
  Part
I
 
 Financial
Information
 
 Item 1.
Financial Statements
 KL Energy
      CorporationConsolidated
      Balance Sheet(unaudited)September
      30,
              
              
              December
      31,2008
              
              
              2007AssetsCurrent
      AssetsCash
      and cash equivalents
              
              $
              56,701
              
              
              $
              191,726Trade
      receivable, net of allowance for doubtful accounts – September 30, 2008 -
      $345,045 (unaudited) and December 31, 2007 - $ 234,510
              
              
              450,566
              
              
              
              1,512,800Escrow
      Receivable
              
              
              2,567,443Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              
              ---
              
              
              
              168,890Inventories
              
              
              68,222
              
              
              
              192,911Note
      receivable, current portion
              
              
              13,914
              
              
              
              ---Prepaid
      expenses and other assets
              
              
              63,860
              
              
              
              172,310Total
      Current Assets
              
              
              3,220,707
              
              
              
              2,238,637Non-current
      AssetsNote
      receivable, less current portion
              
              
              312,086
              
              
              
              ---Property,
      Plant and equipment, net
              
              
              5,582,359
              
              
              
              6,874,191Total
      non-current assets
              
              
              5,894,445
              
              
              
              6,874,191Total
      Assets
              
              $
              9,115,152
              
              
              $
              9,112,828
 
 See Notes
to financial statements
 
 -
3 -
   KL
      Energy CorporationConsolidated
      Balance Sheet (continued)
                (unaudited)
  Liabilities
      and Stockholder's Equity (deficit)September
      30,
                
                
                December
      31,2008
                
                
                2007Current
      LiabilitiesLines
      of credit and short-term borrowings
                
                $
                500,000
                
                
                $
                380,000Current
      maturities of long-term debt
                
                
                582,793
                
                
                
                722,873Subordinated
      debt – related party
                
                
                600,000
                
                
                
                600,000Accounts
      payable
                
                
                2,585,626
                
                
                
                3,845,893Accounts
      payable – related parties
                
                
                51,280Billings
      in excess of costs and estimated earning on uncompleted
      contracts
                
                
                2,042,999
                
                
                
                2,850,223Accrued
      payroll
                
                
                314,851
                
                
                
                236,871Other
      liabilities
                
                
                146,207
                
                
                
                26,248Total
      Current Liabilities
                
                
                6,823,756
                
                
                
                8,662,108Long–term
      debt, less current maturities
                
                
                2,061,751
                
                
                
                2,064,949Commitments
      and ContingenciesMinority
      interest in subsidiaries
                
                
                191,471
                
                
                
                292,990Stockholder's
      Equity (deficit)Common
      stock,
      (15,612,348 shares of commons stock outstanding, 150,000,000 shares
      authorized)$0.001 par value
                
                
                15,613
                
                
                
                ---Stockholder's contribution
                
                
                ---
                
                
                
                9,000Additional
      paid-in-capital
                
                
                22,563
                
                
                
                ---Accumulated
      deficit
                
                
                ---
                
                
                
                (1,916,219
                )Total
      Stockholders’ Equity (Deficit)
                
                
                38,175
                
                
                
                (1,907,219
                )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
                
                $
                9,115,152
                
                
                $
                9,112,828
 See Notes
to financial statements
 
 -
4 -
   KL
      Energy CorporationConsolidated
      Statement of Operations(unaudited)
   Three
      Months Ended
                  September
      30,
                
                
                Nine
      Months Ended
                  September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007RevenueEngineering
      and Management Contract
                
                $
                452,568
                
                
                $
                1,457,748
                
                
                $
                4,005,207
                
                
                $
                4,548,291Fuel
      Sales
                
                
                294,240
                
                
                
                925,287
                
                
                
                2,024,716
                
                
                
                1,986,765Total
      Revenue
                
                
                746,808
                
                
                
                2,383,035
                
                
                
                6,029,923
                
                
                
                6,535,056Operating
      ExpensesCost
      of Engineering and Management Contract
                
                
                263,578
                
                
                
                521,878
                
                
                
                2,071,467
                
                
                
                2,333,583Cost
      of Fuel Sales
                
                
                484,613
                
                
                
                798,164
                
                
                
                2,037,059
                
                
                
                2,106,717General
      and Administrative
                
                
                816,680
                
                
                
                968,152
                
                
                
                3,315,908
                
                
                
                2,749,473Research
      and Development
                
                
                585,047
                
                
                
                303,839
                
                
                
                2,009,681
                
                
                
                557,163Total
      Operating Expenses
                
                
                2,149,918
                
                
                
                2,592,033
                
                
                
                9,434,115
                
                
                
                7,746,936Loss
      from Operations
                
                
                (1,403,110
                )
                
                
                (208,998
                )
                
                
                (3,404,192
                )
                
                
                (1,211,880
                )Non-Operating
      Income (Expense)Other
      Income (Expense)
                
                
                38,116
                
                
                
                (48,373
                )
                
                
                47,948
                
                
                
                44,111Interest
      Income
                
                
                25,731
                
                
                
                5,324
                
                
                
                25,740
                
                
                
                5,324Interest
      Expense
                
                
                (1,622,645
                )
                
                
                (90,878
                )
                
                
                (1,836,269
                )
                
                
                (210,698
                )Total
      Non-Operating Expense, Net
                
                $
                (1,558,797
                )
                
                $
                (133,927
                )
                
                $
                (1,762,581
                )
                
                $
                (161,263
                )Loss
      Before Minority Interest In Net Loss
                
                
                (2,961,907
                )
                
                
                (342,925
                )
                
                
                (5,166,773
                )
                
                
                (1,373,143
                )of
      SubsidiariesMinority
      Interest in Net Loss of Subsidiaries
                
                $
                (3,543
                )
                
                $
                252,925
                
                
                $
                101,519
                
                
                $
                334,481Net
      Loss
                
                $
                (2,965,450
                )
                
                $
                (90,000
                )
                
                $
                (5,065,254
                )
                
                $
                (1,038,662
                )Net
      loss per shareBasic
      and diluted
                
                $
                (0.19
                )
                
                $
                (0.01
                )
                
                $
                (0.32
                )
                
                $
                (0.15
                )Shares
      used in computing netLoss
      per share
                
                $
                15,612,348
                
                
                $
                9,900,765
                
                
                $
                15,612,348
                
                
                $
                9,900,765
  See Notes
to financial statements
  -
5 -
  
 KL
      Energy Corporation
                Consolidated
      Statements of Cash Flows
                (unaudited)Nine
      Months EndedSeptember
      30, 2008
              
              
              September
      30, 2007Cash
      Flows From Operating ActivitiesNet
      loss
              
              $
              (5,065,288
              )
              
              $
              (1,038,662
              )Adjustments
      to reconcile net loss by (used in) operating activities:Depreciation
              
              
              1,334,969
              
              
              
              287,513Allowance
      for doubtful accounts
              
              
              110,536
              
              
              
              (22,711
              )Minority
      interest in net loss of subsidiaries
              
              
              (101,519
              )
              
              
              (334,481
              )Gain
      on sale of airplane
              
              
              (3,365
              )
              
              
              ---Amortization of
      debt issuance cost
              
              
              305,000
              
              
              
              ---Amortization of
      debt discount
              
              
              1,150,000
              
              
              
              ---Changes
      in current assets and liabilities:(Increase)
      decrease in:Trade
      receivables
              
              
              951,698
              
              
              
              (755,210
              )Costs
      and estimated earnings in excess of billings onuncompleted contracts
              
              
              168,890
              
              
              
              (66,272
              )Inventories
              
              
              124,689
              
              
              
              (182,029
              )Prepaid
      expenses and other assets
              
              
              130,450
              
              
              
              3,450Increase
      (decrease) in:Accounts
      payable
              
              
              (1,104,298
              )
              
              
              2,492,296Billings
      in excess of costs and estimated earnings onuncompleted contracts
              
              
              (807,224
              )
              
              
              879,128Accrued
      payroll and other liabilities
              
              
              197,939
              
              
              
              175,273Net
      Cash Provided by (Used In) Operating Activities
              
              
              (2,607,523
              )
              
              
              1,438,295Cash
      Flows From Investing ActivitiesPurchases
      of property, plant and equipment
              
              
              (520,571
              )
              
              
              (4,240,579
              )Proceeds
      from the sale of assets
              
              
              48,905
              
              
              
              ---Net
      Cash Provided by (Used in) Investing Activities
              
              
              (471,666
              )
              
              
              (4,240,579
              )Cash
      Flows From Financing ActivitiesNet
      proceeds from lines of credit and short-term borrowings
              
              
              120,000
              
              
              
              250,000Proceeds
      from subordinated debt – related parties, net
              
              
              148,148
              
              
              
              597,410Payment
      on subordinated debt – related parties, net
              
              
              (148,148
              )
              
              
              ---Proceeds
      from long-term debt
              
              
              ---
              
              
              
              2,673,902Principal
      payments on long-term debt
              
              
              (143,279
              )
              
              
              (800,000
              )Cash
      distributions paid
              
              
              ---
              
              
              
              (20,000
              )Proceeds
      from convertible debt
              
              
              3,100,000
              
              
              
              ---Debt
      issuance costs
              
              
              (155,000
              )
              
              
              ---Net
      proceeds from issuance of common stock
              
              
              22,443
              
              
              
              ---Net
      Cash Provided by (Used in)  Financing Activities
              
              
              2,944,164
              
              
              
              2,701,312Net
      Increase (Decrease) in Cash and Cash Equivalents
              
              $
              (135,025
              )
              
              $
              (100,972
              )Cash
      and cash equivalents:Beginning
      of Period
              
              
              191,726
              
              
              
              231,192End
      of Period
              
              $
              56,701
              
              
              $
              130,220Supplemental
      Disclosures of Cash Flow InformationInterest
      paid
              
              $
              356,056
              
              
              $
              130,716Contribution
      of inventory by minority interest holders
              
              
              ---
              
              
              
              ---Prepaid
      insurance financed with note payable
              
              
              ---
              
              
              
              ---Assets
      Financed with a Note Payable
              
              
              ---
              
              
              
              ---Sale
      of Assets for Note Receivable
              
              
              326,000
              
              
              
              ---Return
      of Asset for Reduction in Accounts Payable
              
              
              104,689
              
              
              
              ---Debt
      converted to equity
              
              
              6,100,000
              
              
              
              ---Debt
      proceeds in escrow net of debt issuance costs
              
              
              2,567,443
              
              
              
              ---Accrued
      interest converted to equity
              
              
              102,500
              
              
              
              ---Reclassification of
      derivative liability to stockholder's equity
              
              
              3,050,000
              
              
              
              ---Unamortized
      debt discount to stockholder's equity
              
              
              1,900,000
              
              
              
              ---Debt
      issuance costs for convertible debt
              
              
              305,000
              
              
              
              ---
    -
6 -
  KL
Energy Corporation
 Notes
to Financial Statements
   Note
1 - Nature
of Business and Significant Accounting Policies
  Nature of
Business
  KL Energy
Corporation (“KLE”), a Nevada corporation, was incorporated on February 26,
2007.  On September 30, 2008, KL Energy Corporation entered into an
Agreement and Plan of Merger (the “Merger”) with KL Process Design Group, LLC
(“KLPDG”), a South Dakota LLC, which provided for the merger of KLPDG with and
into the Company, and accordingly, the Company and KLPDG filed the Articles of
Merger with the State of Nevada effecting the merger.  All of the
outstanding membership interests of KLPDG were converted into an aggregate of
9,900,765 newly issued shares of common stock of the Company, which were issued
to the former members of KLPDG.
  As a
result of the merger, KLPDG merged with and into the Company, with the Company
as the surviving corporation.  As a result of the merger, the Company
succeeded to, acquired all of, the assets and liabilities of KLPDG, including
all of the contractual rights and interests of KLPDG.  For accounting
purposes, the merger was treated as a reverse acquisition with KLPDG as the
acquirer and the Company as the acquired party.  As a result, the
business and financial information included in this report is the business and
financial information of KLPDG.  In accordance with Staff Accounting
Bulletin 1 Topic 4 KLPDG’s accumulated deficit as of September 30, 2008, has
been included in additional paid in capital.
  The
summary of the KLE’s significant accounting policies are incorporated by
reference to the Company’s Form 8K, at September 30, 2008, and are supplemented
throughout the notes to this quarterly report on Form 10Q.
  The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles for interim financial information and with
the instructions to Form 10-Q and reflect all adjustments which, in the opinion
of management, are necessary for a fair presentation of the results of
operations, financial position, and cash flows.  The interim
consolidated financials statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 2007,
included in Form 8K filed with the SEC.  The results of the interim
period (s) are not necessarily indicative of the results for the full
year.
  Basis of
Presentation
  The
accompanying interim consolidated financial statements include the accounts of
KLE and its wholly owned subsidiary.  We have eliminated all
significant intercompany balances and transactions in
consolidation.
  Reclassifications
  We have
reclassified certain data in the financial statements of the prior period to
conform to the current period presentation.
  Note
2 - Financing
  In July
2008, the Company received financing from Niton Capital (formerly PPM Holdings
LTD) asister
company of Fair Energy S.A. totaling $3,100,000 at 10% per annum interest. In
connection with the Merger, the notes were converted into an aggregate of
1,162,500 shares of our common stock at $4 per share.  At the time of
the Merger these notes had accrued interest of approximately $77,500 which was
converted into approximately 20,667 shares of common stock.  The
Company paid $155,000 to a placement agency for this financing.  This
fee was recorded as debt issuance costs and amortized to interest expense to the
conversion date.  Upon the conversion of the notes the Company
incurred an additional $155,000 of placement fees which were recorded as a
reduction of equity.
   -
7 -
  KL
Energy Corporation
 Notes
to Financial Statements
   On
September 5, 2008, the Company received a financing commitment in the form of
redeemable convertible promissory notes from The GreenFund,a
divisionof
Pluris Sustainable of $3,000,000at
10% per annum interest. In connection with the merger, the notes were
converted into an aggregate of 1,125,000 shares of our common
stock.  At the time of the Merger these notes had accrued interest of
approximately $25,000 which was converted into approximately 6,667 shares of
common stock.  The Company paid $150,000 to a placement agent for this
financing.  This fee was recorded as debt issuance costs and amortized
to interest expense to the conversion date.  Upon conversion of the
notes the Company incurred an additional $150,000 of placement fees which were
recorded as a reduction to equity.
  The total
fees paid for the transactions to the placement agency (Pelly Management) was
$610,000.
   Note
3 – Fair Value of Financial Instruments
  Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157
for all financial instruments. The valuation techniques required by SFAS
No. 157 are based upon observable and unobservable inputs. Observable
inputs reflect market data obtained from independent resources, while
unobservable inputs reflect the Company’s market assumptions. The standard
established the following fair value hierarchy:
  Level 1 —
Quoted prices for identical assets or liabilities in active
markets.
  Level 2 —
Quoted prices for similar assets or liabilities in active markets; quoted prices
for identical or similar assets or liabilities in markets that are not active;
and model-derived valuations whose inputs or significant value drivers are
observable.
  Level 3 —
Significant inputs to the valuation model are unobservable.
  The
following describes the valuation methodologies we use to measure financial
instruments at fair value.
  Derivative
Instruments
  The
Company also uses various types of financing arrangements to fund its business
capital requirements, including convertible debt indexed to the price per share
in the private placement (Note 7) of the Company’s common stock. The
Company evaluates these contracts to determine whether derivative features
embedded in host contracts require bifurcation and fair value measurement or, in
the case of free-standing derivatives (principally warrants), whether certain
conditions for equity classification have been achieved. In instances where
derivative financial instruments require liability classification, the Company
initially and subsequently measures such instruments at estimated fair value
using Level 2 inputs. Accordingly, the Company adjusts the estimated fair value
of these derivative components at each reporting period through earnings until
such time as the instruments are exercised, expired or permitted to be
classified in stockholders’ equity.
  As of
September 30, 2008, the fair value of a conversion option included as a
component of current liabilities that do not achieve all of the requisite
conditions for equity classification in accordance with SFAS No. 133 and EITF
00-19. These free-standing derivative financial instruments arose in connection
with the Company’s financing transactions described in Note 2 which consisted of
the $6.1 million convertible notes.  The fair value of the
conversion liability was determined to be $3,050,000 and recorded as additional
debt discount.  Effective September 30, 2008 the convertible
notes were converted into shares of the Company’s common stock upon closing of
the Merger.   The debt discount was amortized over the life of
the notes resulting in additional interest expense of $1,150,000.  The
remaining unamortized debt discount at the time of the merger was recorded to
equity with the conversion.
  Note
4 – Net Loss Per Common Share
  SFAS
No. 128, “Earnings Per Share” provides for the calculation of “Basic” and
“Diluted” earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income or (loss) applicable to common stock by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of securities that could share
in the earnings of an entity, similar to fully diluted earnings per
share.
  -
8 -
 
 KL
Energy Corporation
 Notes
to Financial Statements
   For the
nine months ended September 30, 2008 and 2007, stock warrants for 3,125 and 0
shares were not included in the computation of diluted loss per share because
their effect was anti-dilutive.
   Note
5 - Costs and Estimated Earnings on Uncompleted Contracts
  Costs and
estimated earnings on uncompleted long-term contracts consist of the
following for the nine months ending September 30, 2008 and
2007 (unaudited) and year ended December 31:
  September
      30,
              
              
              September
      30,2008
      (unaudited)
              
              
              2007(unaudited)Costs
      Incurred on Uncompleted Contracts
              
              $
              5,105,164
              
              
              $
              3,083,185Estimated
      Earnings
              
              
              2,019,508
              
              
              
              1,080,0437,124,672
              
              
              
              4,163,229Less
      Billings to Date
              
              
              (9,167,671
              )
              
              
              (5,459,865
              )$
              (2,042,999
              )
              
              $
              (1,296,637
              )September
      30,2008
                (unaudited)
              
              
              December
      31,2007Included
      in the Balance Sheet Under theFollowing
      Captions:Costs
      and Estimated Earnings in ExcessBillings
      on Uncompleted Contracts
              
              $
              ---
              
              
              $
              168,890Billings
      in Excess of Costs and EstimatedEarnings
      on Uncompleted Contracts
              
              
              (2,042,999
              )
              
              
              (2,850,223
              )$
              (2,042,999
              )
              
              $
              (2,681,333
              )
  An
officer of the Company was a member of the board of directors for and held an
ownership interest in Customer A during this period.  The Company was
providing construction management and engineering services for the construction
of an addition to Customer A’s existing facility for a total estimated cost to
the customer of $5,600,000.  Due to Customer A’s inability to meet
contractual obligations, KLPDG issued a stop work order on the construction
project in March 2008 and has not committed to completing the construction
project.  If the contract is terminated prior to completion, the
Company may be liable to return excess billings.
  The
percentage of contract revenue generated from contracts with one customer
(Customer B) was 64% (unaudited) and 2% (unaudited) for the nine months ended
September 30, 2008 and 2007, respectively, and 11.0% for the year ended December
31, 2007.  The Company provided construction management and
engineering services for the construction of a new biofuels production facility
for a total estimated cost to the customer of $5,980,000. Billings on this
contract exceed costs and estimated earnings by approximately $402,000
(unaudited) at September 30, 2008 and $970,000 at December 31,
2007.  The contract was 52.9% (unaudited) and 10.1% complete at
September 30, 2008 and December 31, 2007, respectively, based on costs incurred
to date compared to total estimated costs.  Subsequent to year end,
Customer B has proposed a change order to revise the scope of the work to
include only engineering services and to reduce the total contract to
$4,660,000.  As of the date of this report, the change order has not
been signed; however, it is likely that the scope of services will be reduced in
the near term.  If the change order were to take effect, revenue would
be increased by approximately $170,000 (unaudited) and billings in excess of
revenue would be reduced by approximately $170,000 (unaudited) at September 30,
2008 and December 31, 2007.
  -
9 -
  KL
Energy Corporation
 Notes
to Financial Statements
  Note
6 - Continuing
Operations
  During
the period from its inception to December 31, 2007, the Company has incurred
significant annual net losses and at September 30, 2008 and December 31, 2007,
the Company has negative working capital (i.e. current assets less current
liabilities) of approximately $3,600,000 (unaudited) and $6,400,000,
respectively, and its total liabilities exceeds its total assets by
approximately $1,600,000 at December 31, 2007.  At September 30, 2008,
total assets exceeded total liabilities by approximately
$230,000.  The grain based ethanol industry, the industry in which the
Company has historically operated, has also begun to face new challenges
including the rising cost of raw materials (corn), increased construction costs,
and a reduction in public and governmental support.  Engineering and
construction management represents a substantial amount of the Company’s
business and the grain based ethanol industry challenges may be an impediment to
new grain based ethanol construction.  Furthermore, the Company has
used cash flows generated by KLPDG contracts to fund the construction of a
demonstration cellulose based ethanol plant which management considers to be
KLPDG’s future within the ethanol industry.  Certain contractual
payments that have been paid to the engineering and construction management
business may have to be returned to two customers.  Furthermore, there
is a risk that the product produced at the demonstration cellulose based ethanol
plant may not be immediately commercially viable, or the Company may not be able
to produce sufficient saleable ethanol at this facility to cover the costs of
plant operations or to repay its loans from outside debtors and affiliated
companies.  In addition, the pending negotiations on the land lease at
the cellulose based ethanol plant (Note 9) may play a part in the future
operations of the plant.
  These
factors, among others, indicate the Company may be unable to meet its current
obligations and may be unable to continue as a going
concern.  Management is attempting to raise additional capital through
various methods and is refocusing its business to cellulose based
ethanol.  During July, 2008 the Company received $3,100,000 in debt
financing and in September 2008, the Company received $3,000,000 in debt
financing held in escrow at September 30, 2008.  The funds held in escrow
were released to the Company in October 2008.   This debt was
converted to Company common stock on September 30, 2008 (Note 2).The Company
incurred $610,000 in placement fees to Pelly Management relating to these
financings.
  Note
7 – Private Placement
  Contemporaneously
with the closing of the merger transaction, the Company issued an aggregate of
3,125 units of its securities in a private placement, with each unit comprised
of two shares of common stock and a warrant to purchase one share of common
stock pursuant to the terms of the Securities Purchase Agreement dated September
30, 2008 among the Company and certain investors.  The purchase price
per unit was $8.00 per unit for an aggregate purchase price of $
25,000.
  Note
8 – Income taxes
  The
Company accounts for income taxes under the liability method, which requires an
entity to recognize deferred tax assets and liabilities.  Temporary
differences are differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements that will result in taxable
or deductible amounts in future years. An income tax valuation allowance has
been established to reduce the Company’s deferred tax asset to the amount that
is expected to be realized in the future.  For each of the three and
nine months ended September 30, 2008 and 2007, the current and deferred
provision for income taxes was $0.
  Note
9 – Escrow Shares
  On
September 30, 2008, four management stockholders entered into a Performance
Escrow Agreement (“Agreement”) in conjunction with the Reverse Merger and
Securities Purchase Agreement.  The Agreement calls for 9,900,765 of
certain stockholders common stock to be placed in escrow.  The stock
is maintained in escrow until certain operational benchmarks are met and
following aggregate funding of $23,000,000 (the “Funding”).  The
operational benchmarks require certain performance measures within twelve (12)
months following the Funding and twenty-four (24) months following the
Funding.  In both of those measurement periods 10% of the total
escrowed shares shall be cancelled and will no longer be outstanding if the
performance measures are not met.
  -
10 -
 
 KL
Energy Corporation
 Notes
to Financial Statements
   Note10
-Segment Information
  The
Company consisted of three segments, as defined by SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information,” identified as
contract revenue, fuel sales, and biofuel.  The biofuel segment is
expected to begin operations starting in 2009.  The Company manages
its business and aggregates it operational and financial information in
accordance with three reportable segments. The biofuel segment is focused on
developing unique technical and operational capabilities designed to enable the
production and commercialization of biofuel, in particular ethanol from
cellulosic biomass.  Its engineering and management contract segment
provides contracted engineering and project development to third party
customers.  Its fuel sales segment provides ethanol fuel blends to
retail users.  Management assesses performance and allocates resources
based on discrete financial information for the biofuel and business
segments.  For the biofuel segment, performance is assessed based on
total operating expenses and capital expenditures.  Operating expenses
for each segment include direct costs of that segment.  Expenses and
assets shared by the segments require the use of judgments and estimates in
determining the allocation of expenses to the segments.  Different
assumptions or allocation methods could result in materially different results
by segment.
  Financial
information for the Company’s business segments was as follows (in
thousands):
  For
      the Three Months EndedSeptember
      30, 2008
              
              
              September
      30, 2007(unaudited)
              
              
              (unaudited)RevenueEngineering
      and Management Contract
              
              $
              453
              
              
              $
              1,458Fuel
      Sales
              
              
              294
              
              
              
              925Total
      Revenue
              
              $
              747
              
              
              $
              2,383Operating
    ExpensesCost
      of Engineering and Management Contract
              
              $
              263
              
              
              $
              522Cost
      of Fuel Sales
              
              
              485
              
              
              
              798General
      and Administrative
              
              
              817
              
              
              
              968Research
      and Development
              
              
              585
              
              
              
              304Total
      Operating Expenses
              
              $
              2,150
              
              
              $
              2,592(Loss)
      from Operations:
              
              $
              (1,403
              )
              
              $
              (209
              )Identifiable
      Fixed Assets:Engineering
      and Management Contract
              
              $
              659
              
              
              $
              1,121Fuel
      Sales
              
              
              ---
              
              
              
              ---Research
      and Development
              
              
              6,846
              
              
              
              5,545Total
              
              
              7,505
              
              
              
              6,666Accumulated
      Depreciation
              
              
              (1,923
              )
              
              
              (390
              )Total
      Identifiable Fixed Assets
              
              $
              5,582
              
              
              $
              6,276Depreciation
      Expense:Engineering
      and Management Contract
              
              $
              16
              
              
              $
              37Fuel
      Sales
              
              
              ---
              
              
              
              ---Research
      and Development
              
              
              423
              
              
              
              123Total
      Depreciation Expense
              
              $
              439
              
              
              $
              160
   -
11 -
  KL
Energy Corporation
 Notes
to Financial Statements
   Note
11 – Subsequent Event
  On
October 9, 2008, KL Energy Corporation (the “Company” or “KLE”) entered into a
term loan agreement (the “Agreement”) with O2Diesel Corporation (“O2D”) to
provide up to $1.0 million in funding for working capital. In addition, the
Company signed a Supply and Distribution Agreement (the “Supply Agreement”) with
O2D to develop the commercial market in the United States and Canada for
O2DieselTM’s cleaner burning ethanol diesel fuel blend.
  The
Agreement provides an initial loan of $250,000 in the form of a secured
promissory note (the “Note”) at an annual interest rate of 10%, with the
interest rate increasing to 12% in any period in which there is a default.
Pursuant to the terms of the Agreement, the O2D may make additional draws upon
the delivery of written requests to KLE specifying the amount and use of the
funds. The Agreement matures on March 31, 2009 (“Maturity Date”). Interest
accruing on the loan will be paid on the Maturity Date. On the Maturity Date,
KLE has the option of converting the outstanding loan obligation into shares of
common stock of the Company at a conversion rate equal to the price of the O2D’s
stock on the Maturity Date. If O2D fails to pay the loan on the Maturity Date,
O2D will pay KLE an indemnification fee equal to 20% of the maximum principal
amount outstanding during the term of the Agreement. As security for the loan,
O2D has provided a senior security interest to O2D’s intellectual property. The
Agreement and Note also contain customary events of default. There are no
financial covenants related to this loan.
  The
parties also entered into a Supply Agreement, in which KLE and O2D will jointly
develop the market for O2DieselTM in the United States and Canada during a three
year period. As part of the Supply Agreement, KLE will be the exclusive
distributor of O2DieselTM within the territory.
  -
12 -
  Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
 The
following information includes certain forward-looking statements. 
Forward-looking statements are statements that estimate the happening of future
events and are not based on historical fact.  Forward-looking statements
may be identified by the use of forward-looking terminology such as, “may,”
“shall,” “could,” “expect,” “estimate,” “anticipate,” “predict,” “probable,”
“possible,” “should,” “continue,” or similar terms, variations of those terms or
the negative of those terms.  The forward-looking statements specified
in the following information have been compiled by us and considered by us to be
reasonable.  Our future operating results, however, are impossible to
predict; the reader should infer no representation, guaranty or warranty from
those forward-looking statements.
 
 The
assumptions we used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry and
other circumstances.  As a result, our identification and interpretation of
data and other information and their use in developing and selecting assumptions
from and among reasonable alternatives require us to exercise judgment.  To
the extent that the assumed events do not occur, the outcome may vary
substantially from anticipated or projected results.  We cannot assure that
any of the assumptions relating to the forward-looking statements specified in
the following information are accurate, and we assume no obligation to update
any such forward-looking statements.  You should read the following
discussion and analysis in conjunction with our financial statements and the
related notes included elsewhere in this report.  The following
discussion and analysis is qualified in its entirety by reference to such
unaudited financial statements and related notes.
 
 Merger
 
 KL Energy
Corporation (formerly known as Revive-it Corp.) was incorporated on February 26,
2007, in the State of Nevada, to engage in the development of skin care and
cosmetic products. On September 30, 2008, we entered into an Agreement and Plan
of Merger with KLPDG, which provided for the merger of KLPDG with and into our
Company. As a result of the merger, our Company acquired all of the assets and
liabilities of KLPDG, including all of the contractual rights and interests of
KLPDG.
 
 For
accounting purposes, the merger was treated as a reverse acquisition with KLPDG
as the acquirer and the Company as the acquired party. As a result, the business
and financial information included in this report is the business and financial
information of KLPDG. KLPDG was a South Dakota limited liability company that
was organized in April 2003, and commenced business operations in January
2006.
 
 In
connection with the merger, all of the outstanding membership interests of KLPDG
were converted into an aggregate of 9,900,765 newly issued shares of our common
stock.  These shares are held by Randy Kramer, our President, Chief
Executive Officer and Chief Financial Officer, David Litzen, our Vice President
of Engineering and Chief Technical Officer, Steve Corcoran, our Vice President
of Corporate Operations, and Dennis Harstad, our Vice President of Plant
Operations. In connection with the sale of securities to certain investors on
September 30, 2008, our directors and officers listed above agreed to have all
of these shares placed into escrow.  The Performance Escrow Agreement
covering these shares provides that up to 20% of the escrowed shares are subject
to cancellation if certain performance milestones by the Company are not
achieved. Following
the receipt of financing in the amount of $23,000,000, 10% of the escrowed
shares will be cancelled in the event a second CBE plant with a certain capacity
is not operational within 1 year of such financing, and another 10% of the
escrowed shares will be cancelled in the event a third CBE plant with a certain
capacity is not operational within 2 years of such
financing.
  -
13 -
  Prior to
the merger, we implemented a forward stock split (on an 3-for-1 basis) of our
authorized issued and outstanding shares of common stock. The stock split
became effective on September 8, 2008. Upon implementation of the stock split,
our authorized common stock increased from 50,000,000 shares to 150,000,000
shares and our issued and outstanding common stock increased from 5,130,000
shares to 15,390,000 shares.  We also cancelled 12,000,000 outstanding
shares of common stock.  Following the merger, we had 15,612,348 issued and
outstanding shares of common stock. Our common stock now trades on the
Over-the-Counter Bulletin Board under the trading symbol
“KLEG.”
 
 Business
 
 Our
current focus is on designing, constructing and operating commercially viable
cellulosic ethanol facilities and marketing the resulting ethanol. We intend to
do this as an owner and operator, as well as for third-party purchasers of our
services.
 
 Initially,
KLPDG created expansion programs for grain-based ethanol (“GBE”)
facilities.  KLPDG also participated in the construction of a new GBE
plant in eastern Iowa from August 2007 to April 2008. While we will
continue to provide design and engineering services to build new, or optimize
existing, GBE facilities and marketing services for ethanol produced at such
facilities, our emphasis in the future will be on cellulose based ethanol
("CBE") facilities and sales.
 
 We have
designed, constructed and currently operate what we believe to be the first
commercial, modern-era, 2nd
generation CBE plant in Upton, Wyoming.  This plant, which we
refer to as “CBE 1,” was designed to both facilitate research and operate
commercially. This flexible design concept allows us to continue to research and
refine our conversion technology while also demonstrating the commercial
potential for this type of facility.
 
 While the
majority of ethanol is produced from grain-based feedstock, predominantly corn
in the United States, it can also be produced from cellulose. Cellulose is the
primary component of plant cell walls and is one of the most abundant organic
compounds available. Renewable fuel produced from cellulosic materials draws on
non-food related feedstock sources and has been proven to reduce carbon dioxide
emissions and improve motor efficiency.
 
 In order
to produce ‘cellulosic’ ethanol, the cellulose in the plant walls must first be
broken down into sugars which can then be converted via a fermentation process
into alcohols, similar to the grain-based process.  Historically,
breaking down the cellulose has proven more difficult, and thus more costly,
than converting grains to ethanol. However, with the potential of utilizing more
abundant, lower cost waste and renewable energy resources as feedstock for
energy, capital and technology are being focused on improving the
efficiency of this conversion. Utilizing cellulose opens energy feedstock
possibilities to include corn stalks, wood chips and waste, as well as fast
growing trees and grasses, instead of resources used as sources of
food.  The diversity of feedstock options will also more evenly
distribute production opportunities throughout the country.
 
 Several
technologies are used to extract ethanol.  Generally speaking, efforts
to convert cellulose into ethanol follow one of three main
processes:
 
 •
                thermochemical
      conversion of biomass into synthesis gas or “syngas” (a process often
      referred to as “gasification”), followed by catalytic conversion of the
      syngas into mixed alcohols that include ethanol and/or alkaline via
      modified chemistry;
 •
                thermochemical
      conversion of biomass into syngas, followed by biological conversion of
      the syngas into ethanol; or
 •
                enzymatic
      or chemical breakdown of biomass into component sugars, followed by
      biological fermentation of the sugars into
  ethanol.
   -
14 -
  We have
selected enzymatic breakdown of biomass for producing ethanol from cellulose
because we believe it has distinct advantages over the
thermochemical/gasification methods. Gasification methods present a number of
challenges, including the capital intensity of the process, selectivity of the
syngas conversion to ethanol, and alcohol tolerance of the organisms capable of
converting syngas to ethanol. Furthermore, unlike other cellulosic ethanol
technology, we use insignificant amounts of acid (less than 0.1 %) in our
process, eliminating the environmental hazards that result with acid, and
producing valuable by-products from the resulting lignin. Our process has no
process water discharge. Other technologies discharge waste water back into
local streams or municipal waste water systems.
 
 Our
engineers continue to develop our technology both independently and in
collaboration with the South Dakota School of Mines and Technology, in Rapid
City, South Dakota. We established an objective of achieving a predicted
conversion rate of 45 gallons per dry ton in the lab-scale research before
constructing CBE 1. Once this objective was achieved, we led the effort to plan,
develop and fund CBE 1.  Based on modeling from laboratory data, we
believe our process is capable of producing 80 gallons/dry ton, with
predicted yields as high as 80 gallons/dry ton.  We will continue to
develop and refine our process, while also commercially producing and selling
ethanol.
 
 A key
part of our business model is the development of scalable, tailorable cellulosic
ethanol plants. We intend to develop a modular, portable design that can be
efficiently constructed and tailored to the geographic area and particular
feedstock. Our approach includes cost effective construction consisting of
prefabricated process equipment and systems, as well as skid-mounted equipment,
stand-alone process units, and multi-unit complete process systems.
 
 We intend
to locate such CBE plants in strategic areas that offer both sufficient biomass
feedstock and close proximity to wholesale blending facilities and retail fuel
outlets. GBE facilities are concentrated in the Midwest and Great Plains where
the majority of U.S. cropland exists. Corn is transported many miles for
processing at these facilities. Biomass, unlike corn, includes all plants and
plant-derived materials and is more evenly distributed among regions of the
U.S.  The two largest potential biomass sources are forest and
agriculturally derived non-food feedstocks. The quantity of biomass available
for a CBE plant can come from many different sources, including fuel wood
harvesting, wood processing residue, urban wood residue, fuel treatment
operations, municipal solid waste, crop residue, and perennial crops. The
extensive biomass distribution allows for co-locating CBE plants closer to plant
feedstock, reducing transportation costs relating to feedstock. Locating CBE
facilities near blending facilities and retail fuel outlets will reduce
transportation costs relating to the sale of ethanol. This has the potential to
create a truly local, and commercially viable energy source.
 
 Opportunities
 
 For the
coming year, we plan to continue to develop our technology and to design and
construct our second CBE facility. In addition, we intend to offer our process
engineering, design engineering, operational management and ethanol marketing
expertise to third parties.  We are in discussions with several third
parties to provide these services.
  -
15 -
  Ethanol’s
role in the United States is gradually shifting from that of an
oxygenate/gasoline additive to a true gasoline complement/replacement. Most
ethanol currently produced in the United States is a fuel blend of 10% ethanol
and 90% gasoline called E10, which is used as an oxygenate/fuel additive.
Automakers in the United States have been accelerating their work with flex fuel
vehicles (“FFV”) programs, according to the National Ethanol Vehicle Coalition
(“NEVC”), resulting in an expanded fleet of vehicles capable of using a fuel
blend of 85% ethanol and 15% gasoline, or E85. Future widespread adoption of
FFVs could significantly increase ethanol demand and reduce the consumption of
gasoline; however, widespread use of E85 in the United States is currently
constrained by the lack of a broad distribution infrastructure and limited
availability of FFVs. While, according to the NEVC, approximately 6.0 million
United States vehicles are equipped to run on E85, there are only approximately
1,400 service stations of the approximately 170,000 nationwide which are capable
of dispensing E85. However, according to the DOE (EIA) Annual Energy Outlook
2007, sales of FFVs capable of using E85 are expected to reach 2 million per
year in 2030, or 10% of total sales of new light-duty vehicles, as federal fuel
economy incentives are expected to continue to support the industry’s
development. If more vehicles and service stations become E85 capable, this
could increase ethanol consumption in the United States
significantly.
  In terms
of reduction of greenhouse gases, cellulosic ethanol represents a significant
advance over grain-based ethanol.  According to a report by Argonne
National Laboratory, corn ethanol reduces greenhouse gas by 18% to 29% per
vehicle mile traveled as compared to gasoline, while cellulosic ethanol reduces
greenhouse gas emissions by approximately 85% per vehicle mile traveled. Other
advantages may include additional revenues through the sale of carbon credits,
federal and state tax incentives and other measures that result from
governmental support of cellulosic ethanol.
  We expect
to continue to invest heavily in our ethanol commercialization efforts, and to
expand our investment in biofuels technology development.  We believe
this investment will not only benefit our efforts to advance the
commercialization of cellulosic ethanol, but will also enable us to create
additional third party contracts for CBE plants.
  Key
elements of our corporate strategy are:
  ·
              Developing
      and supplying the technologies for commercial application to produce
      cellulosic ethanol from wood waste or other
      feedstocks.  The design and production strategy involves
      developing small regional facilities, located at or near the source of
      waste biomass, making ethanol cheaper and more abundant using nonfood
      sources.
  ·
              Developing
      national and international strategic partnerships and strategic alliances
      that accelerate the commercialization of our cellulosic technology, while
      gaining a competitive advantage in the marketplace.  Given
      current economic conditions, we believe oil companies, forest products
      manufacturers and biomass energy producers, such as wood pellet
      manufacturers, are attractive targets for joint ventures. We can mutually
      benefit from such targeted partnerships that can result in, among other
      things, reduced feedstock costs and increased quality of both biofuel and
      lignin co-products.
  ·
              Improving
      existing ethanol production through KL CapacitySM.  KL
      CapacitySM
      is a service that provides existing grain-based ethanol plants with
      specialized engineering enhancements that improve the efficiency of
      ethanol production and potential for increased profitability. KL
      CapacitySM has
      been developed to respond to rapidly changing market conditions in
      grain-based ethanol plants in the US and sugar-based ethanol plants in
      Brazil.
  ·
              Developing
      an ethanol marketing planthat takes
      advantage of strategicethanol
      blending opportunities. We plan to strategically market biofuels we
      or other third parties produce. We intend to locate facilities near
      ethanol blending sites to enhance our marketing efforts.  We
      will also attempt to capitalize on marketing opportunities presented by
      our licensing agreement with O2 Diesel that gives us access to their
      proprietary blending agent for ethanol and diesel blends throughout the
      United States and Canada.  This arrangement is described in
      greater detail under “Significant Developments”
  below.
  -
16 -
  Federal
Incentives
  Energy
Independence and Security Act of 2007
  The
Energy Independence and Security Act became law in December
2007.  This law, among other things, creates incentives to increase
use of advanced biofuels and cellulosic ethanol.  The 2007 Act directs
a minimum of 9 billion gallons of ethanol be used in 2008.  Other
targets for ethanol use are 20.5 billion gallons by 2015, and 36 billion gallons
by 2022.
  The 2007
Act’s long-term plan for ethanol use fosters growth that will spur
commercialization of cellulosic feedstocks to include forest waste, native
grasses, crop residues, and many other biological sources apart from
corn.  The 2007 Act uses the combination of corn and cellulosic-based
ethanol to meet its goals of reducing dependence on fossil fuel-based
gasoline.  The 2007 Act used three categories of ethanol feedstock: 1)
renewable biofuel (exclusively derived from corn); 2) advanced biofuel (derived
from other-than-corn, that includes cellulosic ethanol, and which achieves a 50%
green house gas emission reduction); 3) cellulosic biofuels (derived from
cellulose, hemicellulose or lignin and achieves a 60% reduction in green house
gases).
  The
desired result is that ethanol will contribute to greater than 10 percent of the
U.S. fuel supply.  Additionally, the 2007 Act increases the likelihood
that higher ethanol blends will be more commonly marketed – blends such as E20,
E30, and E85.
  The 2007
Act provides incentives for retailers to transition existing fueling equipment,
or to purchase and install new equipment to dispense alternative
blends.  Furthermore the law authorized a program to install blender
pumps during 2008 to 2014 and committed $200 million for the
effort.
  Food,
Conservation, and Energy Act of 2008 (2008 Farm Bill)
  The Food,
Conservation, and Energy Act, also know as the 2008 Farm Bill, became law in May
2008.  Provisions in the five-year farm bill package for the
development of biofuels include: $320 million in mandatory funding for loan
guarantees for commercial scale biorefineries; $35 million in mandatory funding
for grants to support repowering existing biorefineries with biomass energy
systems; $300 million in mandatory funding for payments to support the
production of advanced biofuels, including biodiesel and cellulosic biofuels;
and $1 million/yr for competitive grants to educate the public about effective
biodiesel use and the benefits of the biofuel.
  KL Energy
will pursue incentives offered by federal, state and local authorities, but its
business plan is intended to stand on its own, without the need to rely on such
grants, subsidies or tax rebates.
  -
17 -
 
 Significant
Developments
 
 Recent
Financing
 
 In July
2008, KLPDG issued notes to Niton Capital (formerly PPM Holdings LTD), an
affiliate of Fair Energy S.A., totaling $3,100,000 in principal amount. The
notes accrued interest at a rate of 10% per annum.  In connection with
the merger, the notes were converted into an aggregate
of  1,183,166shares of our common
stock at a conversion rate of 66.66% of the price paid by investors under the
September 30, 2008 Stock Purchase Agreement.
 In
September 2008, KLPDG issued notes to The Green Fund,an affiliate  of
Pluris Sustainable Investments S.A., totaling $3,000,000 in
principal.  The notes accrued interest at a rate of 10% per
annum.  In connection with the merger, the notes were converted into
an aggregate of 1,131,167 shares of our common stock at a conversion rate of
66.66% of the price paid by investors under the September 30, 2008 Stock
Purchase Agreement.
 
 In
addition, Niton and the Green Fund were granted the same registration rights
with respect to their conversion shares as the investors under the September 30,
2008 Stock Purchase Agreement, which are described in greater detail in
“Unregistered Sales of Equity Securities” below.
 
 We
engaged Pelly Management Inc. on March 18, 2008 to serve as our financial
advisor.  In connection with placement of the two notes described
above, our reverse merger and the shares purchased under Stock Purchase
Agreements in connection with the reverse merger, Pelly Management received an
aggregate of approximately $610,000in fees.Pelly Management has
also executed a Voting Agreement with us pursuant to which it may nominate two
of our five directors and has approval rights with respect to the nomination of
a third director.
  Subsequent Developments
  O2D
Loan
 
 On
October 9, 2008, we entered into a term loan agreement (“O2D Loan”) with
O2Diesel Corporation (“O2D”), a publically traded company (AMEX: OTD), pursuant
to which we agreed to provide O2D with up to $1,000,000 for O2D’s working
capital purposes.  O2D is a commercial developer of cleaner-burning
diesel fuel alternatives, including O2DieselTM, an ethanol-diesel
additive.  The O2D Loan provides an initial loan of $250,000 in the
form of a secured promissory note (the “Note”) with an annual interest rate of
10%.  The interest rate will increase to 12% in any period in which
there is a continuing default.  O2D may make additional draws upon the
delivery of written requests to us specifying the amount and use of the funds,
which requests we may accept or deny in our discretion. The O2D Loan matures on
March 31, 2009 (“Maturity Date”). Interest accruing on the loan will be paid on
the Maturity Date. On the Maturity Date, we have the option of converting the
outstanding loan obligation into shares of common stock of O2Dat a conversion rate
equal to the price of the O2D’s stock on the Maturity Date. If O2D fails to pay
the loan on the Maturity Date, O2D will pay us an indemnification fee equal to
20% of the maximum principal amount outstanding during the term of the O2D Loan.
As security for the loan, O2D has provided us with a security interest in its
intellectual property relating to the oxygenating of diesel fuel, including its
proprietary fuel additive, O2DieselTM.  The O2D Loan and related note
also contain customary events of default. There are no financial covenants
related to this loan.
  -
18 -
 
 In
connection with the O2D Loan, in October 2008 the parties also entered into a
Supply and Distribution Agreement, pursuant to which we will jointly develop the
market for O2DieselTM in the United States and Canada during a three year period.
As part of the Supply Agreement, we will be the exclusive distributor of
O2DieselTM within this designated territory.  Within this
territory, O2D is prohibited from distributing its own or any third party diesel
additive and we are prohibited from purchasing any product competitive with
O2DieselTM.  We are required to purchase a minimum volume of O2DieselTM
as specified in this agreement.  In the event that we do not purchase
the required amount in any given year, we must pay O2D 75% of the applicable
price for the number of gallons below the annual target.  Any late
payments will accrue a 2% interest charge.
 
 We
already have an exclusive Technology License and Services Agreement with O2D,
dated March 11, 2008, pursuant to which O2D has an exclusive license to use our
intellectual property, know-how and proprietary processes relating to the
manufacture of ethanol from feedstocks other than simple sugar or
starch.  The license is limited to certain parts of Europe, India,
Russia and Brazil.  In return, O2D is required to identify opportunities
for ethanol plant construction and must commence construction on a plant within
five years of the date of the agreement.  In connection with such
construction projects, the agreement sets forth the terms of our provision of
services to O2D relating to the design and construction of ethanol
facilities.   In consideration for this license, we have rights
to certain royalty payments and design services fees and we will receive
1,000,000 shares of O2D common stock upon the earlier of 18 months
following the effective date of the agreement or the commencement of KL’s
services with respect to a construction project initiated by
O2D.
  Critical
Accounting Policies and Estimates:
 
 Our
critical accounting policies and estimates are described in Note 1 to the
Consolidated Unaudited Financial Statements included in this
Report.
  Liquidity
and Capital Resources
 
 We had
$56,701 of cash and cash equivalents at September 30, 2008.  Our total
current assets at September 30, 2008 were $3,220,707. We also had non-current
assets of $5,894,445, including $312,000 in notes receivable.  Our
total assets as of September 30, 2008 were $9,115,152.
 
 We expect
that our cash, projected cash flows from operating activities and borrowing
availability under our line of credit will fund our cash requirements for the
next nine months.  There is no assurance that our operations and
available borrowing will provide enough cash for operating
requirements.  For this reason, we will seek to raise additional
capital through debt or equity financings.  We have no specific
arrangements for any additional external financing of debt or equity, and we are
not certain whether any such financing would be available on acceptable
terms.
 
 Lines
of Credit; Loans
 
 We have a
line of credit with Wells Fargo for borrowings up to $250,000 and we have
borrowed the full amount available.  The interest rate with respect to
borrowed amounts is the Prime Rate used by Wells Fargo plus .5%.  We
must make interest only payments on a monthly basis with respect to borrowed
amounts.  The line of credit must be repaid in full on April 5, 2008,
unless we are able to renegotiate the line of credit
arrangement.  David Litzen and Randy Kramer are individual
guarantors with respect to this line of credit.
  We also
have issued a Promissoy Note in favor of Lansing Securities Corp. in the amount
of $250,000, which bears 0% interest per annum. The maturity date of this loan
has passed and has been temporarily waived by Lansing Securities.
 Our total
current liabilities were $6,823,755 at September 30, 2008, which included a line
of credit and short-term borrowings of $500,000, current maturities of long-term
debt of $583,000, subordinated debt to related parties of $600,000, billings in
excess of costs and estimated earnings on uncompleted contracts of $2,043,000,
accounts payable of $2,637,000, accrued payroll of $315,000, and other accrued
liabilities of $146,000.
 
 Net
Cash from Continuing Operations – Operating Activity
 
 Our cash
flow from operations has been negative since the inception of the company. We do
not anticipate that we will have a positive cash flow from operations in 2008.
Whether we have positive cash flow in 2009 depends on whether we are able to
sign contracts for new CBE plants, GBE plants, O2D products or other operational
revenue.
 -
19 -
  The
grain-based sector of our industry has also begun to face new challenges
including the rising cost of raw materials (corn), increased construction costs,
and a reduction in public and governmental support.  Engineering and
construction management represents a substantial amount of our business and the
grain based ethanol industry challenges may be an impediment to new grain based
ethanol construction.  Furthermore, we have used cash flows generated
by our contracts to fund the construction of a demonstration cellulose based
ethanol plant which management considers to be critical to our future in the
ethanol industry. There is a risk that the product produced at the demonstration
cellulose based ethanol plant may not be immediately commercially viable, or we
may not be able to produce sufficient saleable ethanol at this facility to cover
the costs of plant operations or to repay our loans from outside debtors and
affiliated companies.  In addition, the pending negotiations on the
land lease at the cellulose based ethanol plant may play a part in the future
operations of the plant.
  As
described in Note 5 above, certain contractual payments that have been paid to
the engineering and construction management business may have to be returned to
two customers.
  During
the period from our inception to September 30, 2008, we have incurred
significant net losses. At September 30, 2008 and December 31, 2007, we had
negative working capital (i.e. current assets less current liabilities) of
approximately $3,603,000 (unaudited) and $6,423,000, respectively. Total assets
exceeded total liabilities by $230,000 at September 30, 2008 (unaudited), and
our total liabilities exceeded our total assets by approximately $1,614,000 at
December 31, 2007.
  During
the nine months ended September 30, 2008, our operating activities used a net of
$2,608,000 of cash. This reflected a loss of $5,065,288, which included a source
of cash of $1,335,000 of depreciation, a decrease in trade receivables of
$952,000, an increase in accrued payroll and other liabilities of $198,000, a
decrease in costs and estimated earnings in excess of billings on uncompleted
contracts of $169,000, and a decrease in inventories of $125,000, minority
interest of $102,000, and other activities that netted to a source of $3,000,
offset by a decrease in accounts payable of $1,104,000, a decrease in billings
in excess of costs and estimated earnings of $ 807,000, and an increase in
prepaid expenses and other assets of $130,000.
  During
the nine months ended September 30, 2007, our operating activities provide
$1,438,000 of cash. This reflected a loss of $1,039,000, which
included $288,000 of depreciation, an increase in accounts payable of
$2,493,000, an increase in billings in excess of costs and estimated earnings on
uncompleted contracts of $879,000,  an increase in accrued payroll and
other liabilities of $175,000, and a decrease in prepaid expenses and other
assets of $3,000, offset by an increase in trade receivables of $755,000, a
negative minority interest of $334,000, an increase in costs and estimated
earnings in excess of billings on uncompleted contracts of $182,029, and an
increase in prepaid expenses and other assets of $3,000.
  For the
nine months ended September 30, 2007, net cash provided by our financing
activities was $2,701,000.  During this period, the Company received
$2,674,000 from proceeds from long-term debt, $597,000 in proceeds from
subordinated debt of related parties, $250,000 in net proceeds from lines of
credit and short-term borrowings, offset by $800,000 of principal payments on
long-term debt, and $20,000 cash distribution to members.
  Net
Cash from Continuing Operations – Financing Activity
  During
July 2008 we received $3,100,000 in convertible debt financing and in September
2008, we received a commitment for $3,000,000 in convertible debt financing. On
September 30, 2008, in connection with the reverse merger, the combined total of
$6,100,000 was converted into our common stock.
  The above
factors, among others, indicate that we may be unable to meet our current
obligations and may be unable to continue as a going concern.
  -
20 -
  Results
of Operations
 
 Revenue
 
 Revenue
decreased from approximately $6,535,000 to $6,030,000 from the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2008, a
decrease of $505,000, or 8%.  This decrease was due to a decrease in
the recognition of contract revenue billed in prior periods and an overall
decrease in contract revenue of $543,000, or 12%, offset by an increase in fuel
sold of $38,000, or 2%.
 
 Revenue
decreased from approximately $2,383,000 to $747,000 from the three months ended
September 30, 2007 compared to the three months ended September 30, 2008, a
decrease of $1,636,000, or 69%.  This decrease was due to a decrease
in the recognition of contract revenue billed in prior periods and an overall
decrease in contract revenue of $1,005,000, or 69%, and a decrease in fuel sold
of $631,000, or 68%.
 
 Operating
Expenses
 
 Operating
expenses increased from $7,747,000 to $9,434,000 for the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2008, an
increase of $1,687,000, or 22%.  The increase is due primarily to an
increase in research and development of $1,453,000, or 261%, and an increase in
general and administrative expenses of $566,000, or 21%, offset by a decrease in
engineering and management contract expenses of $262,000, or 11%.  The
increase in research and development is primarily related to efforts to
bring CBE 1 into operation in August, 2007.
 
 Operating
expenses decreased from $2,592,000 to $2,150,000 from the three months ended
September 30, 2007 compared to the three months ended September 30, 2008, a
decrease of $442,000, or 17%.  The decrease is due primarily to a
decrease in engineering and management contract expenses of $258,000, or 50%, a
decrease in fuel cost of $314,000, or 39%, and a decrease in general and
administrative expenses of $151,000, or 16%, offset by an increase in research
and development of $281,000, or 93%.  The increase in research and
development is primarily related to efforts to bring CBE 1 into operation in
August, 2007.
 Investment
Expense
  Investment
expense increased approximately $610,000 from the nine months ended September
30, 2007 compared to the nine months ended September 30, 2008, an increase of
100%.  The primary element of this expense is related to payment
of Pelly Management fees associated with raising $6,100,000, which fees totaled
approximately $610,000 in the first nine months of 2008.
  Legal
and Accounting Expense
  Legal and
Accounting expense increased $371,592 for the nine months ended September 30,
2007 compared to the nine months ended September 30, 2008, an increase of
538%.  The reason for the increase was largely related to increased
legal and accounting costs associated with our reverse merger transaction and
being a newly public company.
  -
21 -
 
 Research
and Development Expense
  Research
and Development expense increased $1,453,000 for the nine months ended September
30, 2007 compared to the nine months ended September 30, 2008, an increase of
261%.  The reason for the increase is due to bringing the CBE 1 plant
into production and process improvements.
  Research
and Development expense increased $281,000 from the three months ended September
30, 2007 compared to the three months ended September 30, 2008, an increase of
93%.  The primary reasons for increase are related to
bringing the plant online in August 2007.
  We expect
our research and development expense to decrease in the future as we transition
away from research and development towards commercial production operations at
CBE 1.
  Interest
Expense
  Interest
expense increased $1,626,000 for the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007, an increase of
772%.  The reason for the increase was due to an increase in
borrowing, amortization
of debt issuance costs and amortization of debt discounts.
  Interest
expense increased $1,532,000 from the three months ended September 30, 2008
compared to the three months ended September 30, 2007 a increase of
1685%.  The reason for the increase was due to an increase in
borrowing, , amortization
of debt issuance costs and amortization of debt discounts.
 
 Item
4T.  Controls and Procedures
 
 (a) Disclosure Controls and
Procedures. Our Company’s management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our Company’s “disclosure controls and procedures”
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of September 30, 2008, the Company’s disclosure controls and procedures
were not effective.
 
 The
Company’s process for internally reporting material information in a systematic
manner to allow for timely filing of material information is flawed and there
exist material weaknesses in internal control over financial reporting that
contribute to the weaknesses in our disclosure controls and
procedures.  These weaknesses include the lack of:
  -
22 -
  
 ·
              a
      system for reviewing material developments at the company for reporting
      purposes;
 ·
              outside
      counsel familiar with federal securities
laws;
 ·
              a
      separate Chief Financial Officer or
controller;
 ·
              public
      accounting experience within the internal accounting department, including
      with respect to complex accounting for certain transactions and derivative
      securities; and
 ·
              preparation
      by internal accountants for review by independent
  auditors.
 
 To
remediate these weaknesses, the Company intends to:
 
 ·
              form
      a disclosure committee that will meet no less than on a quarterly basis to
      review material developments at the Company, as well as the effectiveness
      of the Company’s disclosure controls and
  procedures;
 ·
              hire
      a Chief Financial Officer or controller and outside securities
      counsel;
 ·
              hire
      additional internal accounting personnel as necessary;
  and
 ·
              as
      needed, engage a third-party financial consulting firm to assist
      management in evaluating complex accounting issues and implement a system
      to improve control and review procedures over all financial statement and
      account balances.
 
 (b) Internal Controls. There were
no changes in our internal control over financial reporting that occurred during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
   -
23 -
  Part
II
 
 Other
Information
 
 Part
II – Other Information
 
 Item
1.  Legal Proceedings
 
 The
Company is named in a personal injury claim relating to an individual working
for a subcontractor who was injured while working on the construction of a
grain-based ethanol plant. The Company was hired for the plant construction. The
individual claims that an employee of the Company gave him direction to open the
boiler when it was not yet cooled and, as a result, he suffered second and third
degree burns. The employer of this individual is seeking to subrogate its
workers compensation claim. At this time, the Company is unable to predict the
outcome of the case. The amount of liability, if any, is not
determinable.
  In the
normal course of business, the Company is party to litigation from time to time.
The Company maintains insurance to cover certain actions and believes resolution
of such litigation will not have a material adverse effect on the
Company.
 
 Item
1A.  Risk Factors
 
 We are
affected by risks specific to us as well as factors that affect all businesses
operating in a global market.  Certain of the significant factors
known to us that could materially adversely affect our business, financial
condition or operating results are described in our Current Report on Form 8-K
filed on September 30, 2008.  You should consider such risk factors,
in addition to the other information set forth below and elsewhere in this
report.  The risks described in our September 30, 2008 Form 8-K are
not the only risks facing our Company.  Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition, and/or reporting results.
  The
global financial crisis may have impacts on our business and financial condition
that we currently cannot predict.
 
 The
continued credit crisis and related turmoil in the global financial system has
had, and may continue to have, an impact on our business and our financial
condition. We may face significant challenges if conditions in the financial
markets do not improve.  Our ability to access the capital markets may
be severely restricted at a time when we would like, or need, to raise capital,
which could have an adverse impact on our ability to meet our capital
commitments and flexibility to react to changing economic and business
conditions.  The credit crisis could have a negative impact on our
lenders or our customers, causing them to fail to meet their obligations to
us.  Additionally, demand for our services and products depends on
activity and expenditure levels in the ethanol industry, which are negatively
impacted by reduced availability of credit and private or public financing
alternatives, lack of consumer confidence and falling oil and gas
prices.
 
 Item
2.  Unregistered Sales of Equity Securities
 
 The
description of the merger transaction and related issuance of shares of our
common stock to the former members of KLPDG above is incorporated herein by
reference. The shares of common stock were issued pursuant to an exemption under
Section 4(2) of the Securities Act of 1933.
  -
24 -
 
 
 Contemporaneously
with the closing of the merger transaction, we issued an aggregate of 3,125
units in a private placement.  Each unit was comprised of two shares
of our common stock and a warrant to purchase one share of common stock pursuant
to the terms of the Securities Purchase Agreement, dated September 30, 2008,
among the Company and certain investors. The purchase price per unit was $8.00
for an aggregate purchase price of $25,000. The Securities Purchase Agreement
also granted to the investors registration rights, which rights obligate us to
file a registration statement on Form S-1 within 60 days of the closing to
register for resale the shares of common stock issued, as well as shares of
common stock underlying the warrants. We also agreed to use our best efforts to
cause the registration statement to be declared effective within 90 days of the
filing of the registration statement. If we are late in filing the registration
statement, we will incur penalties equal to 1.5% of the investment amount for
the first 30 days and 1.0% of the investment amount for each 30 day period
thereafter.  The same penalties apply if the registration statement is
not declared effective within 90 days of the filing date. The securities issued
in the private placement were issued pursuant to an exemption under Section 4(2)
of the Securities Act of 1933 and pursuant to Regulation S there
under.
 
 As part
of the transactions contemplated by the Securities Purchase Agreement, the
Company also entered into a Performance Escrow Agreement with the Company and a
Voting Agreement with Pelly Management, the financial adviser engaged with
respect to the sale of shares. The agreement provides that the 9,900,765 shares
of common stock issued to such investors in connection with the merger be
deposited into escrow, with up to 20% of the escrowed shares subject to
cancellation if certain performance milestones by the Company are not
achieved.  The Voting Agreement requires that the principal
shareholders (Mr. Kramer, Mr. Litzen, Mr. Harstad and Mr. Corcoran) agree to
vote in favor of maintaining a five-member Board of Directors, 2 of which
directors will be designated by Pelly Management, 2 of which will be nominated
generally by the Board and 1 of which shall be nominated upon mutual agreement
of Pelly Management and the Board.  The Voting Agreement will
terminate upon, among other reasons, certain investors introduced to us by Pelly
Management holding collectively less than 25% of our outstanding common stock
held by non-affiliates.
 
 In
addition, the Company issued an aggregate of 2,314,834 shares of common stock to
holders of convertible promissory notes issued by KLPDG to Niton Capital and The
Green Fund in connection with the merger. The shares were issuable at the
closing of the merger transaction upon the conversion of the notes, as described
above under the “Significant Developments” section. The convertible promissory
notes issued by KLPDG represented an aggregate principal amount of $6,100,000.
The shares issued upon conversion of the notes were issued pursuant to an
exemption under Section 4(2) of the Securities Act of 1933.
  Item 6.
Exhibits
 
 (a)
Exhibits
 
 Number
              Description2.1
              Agreement
      of Merger, dated September 30, 2008, between the registrant and KL Process
      Design Group, LLC, incorporated by reference to our current report on Form
      8-K, filed on October 7, 20083.1
              Articles
      of Incorporation, incorporated by reference to our registration statement
      on Form SB-2 (333-145183), filed on August 7, 20073.2
              Bylaws,
      incorporated by reference to our registration statement on Form SB-2
      (333-145183), filed on August 7, 200710.1
              Securities
      Purchase Agreement dated September 30, 2008 between the registrant and
      certain investors, incorporated by reference to our current report on Form
      8-K, filed on October 7, 200810.2
              Performance
      Escrow Agreement dated September 30, 2008 between the registrant and
      certain shareholders, incorporated by reference to our current report on
      Form 8-K, filed on October 7, 200810.3
              Voting
      Agreement, dated September 30, 2008, between the registrant and Pelly
      Management10.4
              Employment
      Agreement dated September 30, 2008 between the registrant and Randy
      Kramer, incorporated by reference to our current report on Form 8-K, filed
      on October 7, 200810.5
              Employment
      Agreement dated September 30, 2008 between the registrant and David
      Litzen, incorporated by reference to our current report on Form 8-K, filed
      on October 7, 200810.6
              Employment
      Agreement dated September 30, 2008 between the registrant and Dennis
      Harstad, incorporated by reference to our current report on Form 8-K,
      filed on October 7, 200810.7
              Employment
      Agreement dated September 30, 2008 between the registrant and Steve
      Corcoran, incorporated by reference to our current report on Form 8-K,
      filed on October 7, 200831
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      302 of the Sarbanes-Oxley Act of 200232
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      18 U.S.C. Section 1350
  -
25 -
  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.
   November
      20, 2008
              By:
              /s/ Randy
      KramerRandy
      Kramer
                CEO,
      President, CFO
 
   -
26 -