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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO _______________________
COMMISSION FILE NUMBER 0-32455
FAR EAST ENERGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 88-0459590
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 N. SAM HOUSTON PARKWAY EAST, SUITE 205, HOUSTON, TEXAS 77060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (832) 598-0470
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes[X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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.
Common Stock, par value $.001 per share. Shares outstanding on November
12, 2004: 61,117,285
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FAR EAST ENERGY CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Financial Statements
Consolidated Balance Sheets......................................... 3
Consolidated Statements of Operations............................... 4
Consolidated Statements of Cash Flows............................... 5
Notes to the Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 23
Item 4. Controls and Procedures................................................ 23
PART II
Item 1. Legal Proceedings...................................................... 24
Item 2. Unregistered Shares of Equity and Use of Proceeds...................... 24
Item 3. Defaults Upon Senior Securities........................................ 24
Item 4. Submission of Matters to a Vote of Security-Holders.................... 24
Item 5. Other Information...................................................... 24
Item 6. Exhibits............................................................... 25
Signatures............................................................. 25
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAR EAST ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
(unaudited) (Restated)
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 2,144,000 $ 2,326,000
Prepaids and other current assets 136,000 4,000
------------- -------------
Total current assets 2,280,000 2,330,000
------------- -------------
Restricted cash 1,000,000 -
Property and equipment, net 3,198,000 2,284,000
------------- -------------
Total assets $ 6,478,000 $ 4,614,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 279,000 $ 664,000
Other liabilities 1,000 106,000
Note payable - 100,000
------------- -------------
Total current liabilities 280,000 870,000
------------- -------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock, $.001 par value, 500,000,000 shares authorized, none
outstanding - -
Common stock, $0.001 par value, 500,000,000 shares authorized,
61,114,285 and 56,379,153 issued and outstanding, respectively 61,000 57,000
Additional paid in capital 18,278,000 12,132,000
Additional paid in capital-outstanding stock options 1,707,000 930,000
Deficit accumulated during the development stage (13,846,000) (9,373,000)
Accumulated other comprehensive loss (2,000) (2,000)
------------- -------------
Total stockholders' equity 6,198,000 3,744,000
------------- -------------
Total liabilities and stockholders' equity $ 6,478,000 $ 4,614,000
============= ============
See accompanying notes to condensed consolidated financial statements.
3
FAR EAST ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Cumulative Nine Months Ended Three Months Ended
During September 30, September 30,
Development ------------------------------ ------------------------------
Stage 2003 2003
(Restated) 2004 (Restated) 2004 (Restated)
------------- ------------- ------------- ------------- -------------
Revenues $ - $ - $ - $ - $ -
------------- ------------- ------------- ------------- -------------
Expenses:
Geologic and engineering
services 1,112,000 493,000 295,000 253,000 30,000
Impairment loss 3,328,000 - 2,369,000 - 2,369,000
Other consulting and
professional services 1,190,000 659,000 661,000 444,000 536,000
Compensation 2,240,000 815,000 646,000 376,000 143,000
Stock compensation 1,377,000 447,000 - 14,000 -
Travel 1,264,000 355,000 226,000 164,000 45,000
Legal and accounting 1,468,000 986,000 139,000 509,000 18,000
Loss on investment in joint
venture 22,000 - 22,000 - -
Amortization of contract rights 81,000 23,000 44,000 - 15,000
General and administrative 1,625,000 706,000 310,000 259,000 209,000
------------- ------------- ------------- ------------- -------------
Total expenses 13,707,000 4,484,000 4,712,000 2,019,000 3,365,000
------------- ------------- ------------- ------------- -------------
Other Expenses (Income):
Interest expense 168,000 - 168,000 - 126,000
Interest income (30,000) (11,000) (1,000) (6,000) -
Foreign currency exchange loss 1,000 - - - -
------------- ------------- ------------- ------------- -------------
Total other expense (income) 139,000 (11,000) 167,000 (6,000) 126,000
------------- ------------- ------------- ------------- -------------
Loss before income taxes (13,846,000) (4,473,000) (4,879,000) (2,013,000) (3,491,000)
Income taxes - - - - -
------------- ------------- ------------- ------------- -------------
Net loss (13,846,000) (4,473,000) (4,879,000) (2,013,000) (3,491,000)
Accumulated deficit-beginning of
period - (9,373,000) (2,156,000) (11,833,000) (3,544,000)
------------- ------------- ------------- ------------- -------------
Accumulated deficit-end of period $ (13,846,000) $ (13,846,000) $ (7,035,000) $ (13,846,000) $ (7,035,000)
============= ============= ============= ============= =============
Earnings per share:
Basic and diluted $ (0.08) $ (0.10) $ (0.03) $ (0.07)
============= ============= ============= =============
Weighted average shares outstanding:
Basic and diluted 59,150,681 47,870,256 61,103,728 49,198,125
============= ============= ============= =============
See the accompanying notes to condensed consolidated financial statements.
4
FAR EAST ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Cumulative
During
Development
Stage 2003
(Restated) 2004 (Restated)
------------- ------------- -------------
Cash flows from operating activities
Net loss $ (13,846,000) $ (4,473,000) $ (4,879,000)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 125,000 41,000 58,000
Stock issued to pay expense 42,000 42,000 -
Stock compensation 1,707,000 777,000 -
Loss on investment in joint venture 22,000 - -
Impairment expense 3,328,000 - 2,369,000
Interest expense--beneficial conversion feature 168,000 - 168,000
Decrease in other receivables - - 2,000
Increase in prepaids and other current assets (136,000) (132,000) -
Increase (decrease) in accounts payable 279,000 (385,000) 484,000
Increase (decrease) in other liabilities 1,000 (105,000) -
------------- ------------- -------------
Net cash used in operating activities (8,310,000) (4,235,000) (1,798,000)
------------- ------------- -------------
Cash flows used in investing activities
Acquisition of mineral rights (275,000) - (175,000)
Loss on investment in joint venture (22,000) - 22,000
Additions to unproved oil and gas properties (2,623,000) (948,000) (376,000)
Additions to other property (153,000) (7,000) -
Increase in restricted cash (1,000,000) (1,000,000) -
------------- ------------- -------------
Net cash used in investing activities (4,073,000) (1,955,000) (529,000)
------------- ------------- -------------
Cash flows from financing activities
Net proceeds from the issuance of notes payable 300,000 - 295,000
Net proceeds from the sale of common stock 11,471,000 3,283,000 5,137,000
Decrease in long term liabilities - - (250,000)
Net proceeds from the exercise of warrants 2,758,000 2,725,000 -
------------- ------------- -------------
Net cash provided by financing activities 14,529,000 6,008,000 5,182,000
------------- ------------- -------------
Effect of exchange rate changes on cash (2,000) - -
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 2,144,000 (182,000) 2,855,000
Cash and cash equivalents--beginning of period - 2,326,000 1,008,000
------------- ------------- -------------
Cash and cash equivalents--end of period $ 2,144,000 $ 2,144,000 $ 3,863,000
============= ============= =============
See the accompanying notes to condensed consolidated financial statements.
5
FAR EAST ENERGY CORPORATION
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. THE CORPORATION AND ITS BUSINESS
The financial statements include the accounts of Far East Energy
Corporation and its wholly owned subsidiaries Newark Valley Oil & Gas, Inc.
(Newark), and Yunnan Huayi Eco-Tech Consulting Co. Ltd. (Eco Tech), and its
Chinese joint venture entity, Guihzou Far East Panjiang Chemical Co. Ltd.
(GFEPC)). Far East and Newark are organized under the laws of the State of
Nevada. Eco Tech is a Chinese company. GFEPC is a Chinese joint venture. All
significant intercompany balances and transactions have been eliminated in
consolidation.
We were incorporated as Egoonline.com in the State of Nevada, United
States of America on February 4, 2000 under the Nevada Revised Statutes, Chapter
78, Private Companies, and changed our name to EZfoodstop.com on April 26, 2000.
Our name was changed to Far East Energy Corporation on January 10, 2002.
We are in our development stage and to date our activities have been
limited to initial organization, capital formation, acquisition of assets
(assets being defined as mineral leases and/or production sharing contracts
(PSC) giving us the right to explore for, develop, produce and sell oil and gas
or coalbed methane (CBM)). We drilled our first three exploratory wells in the
fourth quarter of 2003 and the first half of 2004. Our current activities are
principally focused on developing our CBM projects located in the Shanxi and
Yunnan Provinces of China.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate our
continuation as a going concern. We have been in the development stage since our
formation on February 4, 2000. We have incurred net losses since our inception
and have not established a source of revenue. In view of these matters,
realization of a major portion of the assets in the accompanying consolidated
balance sheets depends upon our continued operations, which in turn is dependent
upon our ability to meet our financing requirements, and the success of our
future operations. Management believes that our current operations and funding
plans provide the opportunity to continue as a going concern. However, these
factors raise substantial doubt about our ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosure normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. The accompanying financial statements should be read in conjunction
with our annual financial statements and notes thereto included in our 2003 Form
10-KSB/A.
In the opinion of management, the consolidated financial statements
reflect all adjustments (consisting of only normal and recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for those periods presented. Operating results for the nine months
ended September 30, 2004 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2004. In addition, prior period
information presented in these financial statements includes reclassifications
which were made to conform to the current period presentation. These
reclassifications had no effect on our previously reported net loss or
stockholders' equity.
6
New Accounting Pronouncement
On September 2, 2004, the Financial Accounting Standards Board Staff
issued FASB Staff Position No. 142-2, which addressed the classification and
disclosure for drilling and mineral rights of oil- and gas-producing entities
that are within the scope of Statement of Financial Accounting Standards No. 19,
Financial Accounting and Reporting by Oil and Gas Producing Entities (SFAS 19).
FASB Staff Position 142-2 states that the scope exception in paragraph 8(b) of
Statement of Financial Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142) includes the balance sheet classification and disclosures for
drilling and mineral rights of oil- and gas-producing entities that are within
the scope of SFAS 19. The drilling and mineral rights are not intangible assets
under SFAS 142. As a result, we reclassified our intangible asset to property
and equipment on the balance sheets and discontinued amortizing the balance in
the first quarter of 2004 when the Emerging Issues Task Force (EITF) first
addressed whether mineral rights were intangible assets. Subsequently, we will
periodically review individual mineral rights to determine whether an impairment
has occurred, and whether loss should be recognized.
The EITF added Issue No. 04-9, "Accounting for Suspended Well Costs" to
its agenda at its June 30-July 1, 2004 meeting. SFAS 19 requires costs of
drilling exploratory wells to be capitalized pending determination of whether
the well has found proved reserves. The Issue is whether there are circumstances
that would permit the continued capitalization of exploratory well costs beyond
one-year other than when additional exploration wells are necessary to justify
major capital expenditures and those wells are underway or firmly planned for
the near future. At its meeting on September 29-30, 2004, the EITF removed this
Issue from the EITF agenda and requested that the Financial Accounting Standards
Board consider an amendment to SFAS 19 to address this issue.
Stock Options
We apply Accounting Principles Board Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our stock
option agreements with employees and members of the board of directors and have
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) as
amended by Statement of Financial Accounting Standards No. 148 "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123" (SFAS No.148).
Had compensation cost for these agreements been determined consistent with
the provisions of SFAS No. 123, our stock-based compensation expense, net loss
and loss per share would have been adjusted to the following pro forma amounts:
7
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss as reported $ (4,473,000) $ (4,879,000) $ (2,013,000) $ (3,491,000)
Add:
Stock-based employee compensation
costs included in net loss 447,000 - 14,000 -
Deduct:
Stock-based employee compensation
expense determined under fair value
method for all awards, net of related
tax effects (1,846,000) (252,000) (74,000) -
------------- ------------- ------------- -------------
Pro forma net loss $ (5,872,000) $ (5,131,000) $ (2,073,000) $ (3,491,000)
============= ============= ============= =============
Basic and diluted loss per share:
As reported $ (0.08) $ (0.10) $ (0.03) $ (0.07)
============= ============= ============= =============
Pro forma $ (0.10) $ (0.11) $ (0.03) $ (0.07)
============= ============= ============= =============
We estimated the fair value of each stock award at the grant date by using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield at 0%; expected volatility of approximately 50%;
risk-free interest rate of 0.9% to 3.6% and expected lives of five to ten years
for the options.
Earnings per Share
We have reported net losses for the nine and three months ended September
30, 2004 and 2003; therefore, we have excluded our warrants and options from our
diluted earnings per share calculation as they would be antidilutive.
Restricted Cash
On May 14, 2004, we deposited $1,000,000 under the terms of the Shanxi
farmout agreement, in an escrow account to act as a work performance guarantee
covering all aspects of the evaluation and work program to test existing wells
on the Shanxi block. This cash may become available to us once we have completed
our Phase I work commitment.
Noncash transactions
During the nine months ended September 30, 2004, a $100,000 note payable
was converted into shares of common stock. During the nine months ended
September, 30, 2004, 27,000 shares of common stock were issued as payment of
consulting fees, valued at approximately $42,000.
3. GOING CONCERN
Our consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business. We currently have no source of revenue.
We intend to continue financing efforts to support the current and
proposed business operations in China and Montana. Our ability to continue as a
going concern depends upon our ability to raise substantial funds for use in our
development activities and upon the success of our planned exploration and
development activities. There can be no guarantee of future fundraising success.
The success of exploratory drilling is uncertain. However, management believes
that we will continue to be successful in raising the funds necessary to explore
for gas and, assuming success in those exploratory efforts, raising the funds
necessary for production and development.
8
We have raised net proceeds of $6.0 million from the sale of investment
units and exercise of warrants during the nine months ended September 30, 2004.
Management believes that we will be able to raise funds sufficient to assure
satisfaction of our operating capital needs/plans and financial obligations
through December 31, 2004. If management is not successful in raising the
required monies for operations thereafter, we may not be able to continue as a
going concern.
Because our primary asset is an undeveloped natural resource that will
require substantial exploration and development, management does not expect to
generate meaningful revenues until at least 2006. Expenses for the fourth
quarter of 2004 will have to be financed through cash on hand or through future
financings of equity and/or debt, as necessary.
4. RESTATEMENTS OF FINANCIAL STATEMENTS
Our previously issued consolidated balance sheet as of December 31, 2003
and consolidated statement of operations for the nine and three months ended
September 30, 2003 have been restated for the items described below:
Nine months and three months ended September 30, 2003:
Acquisition
For the nine months ended September 30, 2003 we recorded a stock and cash
for stock acquisition at the estimated realizable value of the assets of
$2,409,000. We have determined that the assets should have been valued using the
value of the stock as quoted in the OTC Bulletin Board exchange at the date of
the consummation of the agreement (August 21, 2003) thereby resulting in an
acquisition value of the assets of $4,778,000. Simultaneous to the consummation
of the agreement, we recorded an impairment loss of $2,369,000 to reduce the
acquired assets to their estimated realizable value of $2,409,000. Accordingly,
an impairment loss of $2,369,000 is recorded in the accompanying consolidated
financial statements with a resulting increase in the loss and a corresponding
increase in additional paid in capital.
Beneficial Conversion Feature
During the nine months ended September 30, 2003, we issued convertible
debt with a conversion rate below fair value at issuance. We have determined
that interest expense of approximately $168,000 for the nine months ended
September 30, 2003 and $126,000 for the three months ended September 30, 2003
should have been recognized for the beneficial conversion feature inherent in
the debt instruments. Accordingly, interest expense has been recognized in the
accompanying consolidated financial statements with a resulting increase in the
loss and a corresponding increase in additional paid in capital.
Stock Options
During the third quarter of 2003, we granted options to employees at an
exercise price below the market price at the date of grant. We recorded the
stock compensation expense and a current liability. We have determined that the
amount recorded as a liability should be recognized as additional paid in
capital-outstanding stock options. This restatement had no effect on net income
and related earnings per share.
The aggregate impact of all restatement items resulted in an increase in
net loss of approximately $2,537,000 to a restated loss available to common
stockholders of $4,879,000 compared to a previously reported amount of
$2,342,000 for the nine months ended and an increase in net loss of
approximately $2,495,000 to a restated loss available to common stockholders of
$3,491,000 compared to previously reported amount of $996,000 for the three
months ended September 30, 2003. The effects of the restatement items described
above on the Company's net loss available to common stockholders and earnings
per share are as follows:
9
Nine Months Ended Three Months Ended
September 30, 2003 September 30, 2003
--------------------------- -------------------------
Basic Basic
and and
Diluted Diluted
---------- ----------
As previously reported: $ (2,342,000) $ (0.05) $ (996,000) $ (0.02)
Impact of adjustment for:
Impairment loss (2,369,000) (0.05) (2,369,000) (0.05)
Interest expense (168,000) - (126,000) -
------------- ---------- ------------ ----------
As restated $ (4,879,000) $ (0.10) $ (3,491,000) $ (0.07)
============= ========== ============ ==========
Balance sheet as of December 31, 2003:
Acquisition
In the fourth quarter 2003, we recorded an additional impairment of the
Montana assets acquired of $959,000. Accordingly, an additional impairment loss
of $959,000, resulting in total impairment loss for the year of $3,328,000 is
recorded in the accompanying consolidated financial statements with a resulting
increase in the loss, an increase in additional paid in capital of $2,369,000
and a decrease in property and equipment of $959,000.
Beneficial Conversion Feature
For the year ended December 31, 2003, we issued convertible debt with a
conversion rate below fair value at issuance. We have determined that interest
expense of approximately $168,000 for the year ended December 31, 2003 should
have been recognized for the beneficial conversion feature inherent in the debt
instruments. Accordingly, interest expense has been recognized in the
accompanying consolidated financial statements with a resulting increase in the
loss and a corresponding increase in additional paid in capital.
Stock Options
During the third quarter of 2003, we granted options to employees at an
exercise price below the market price at the date of grant. We recorded the
stock compensation expense and a current liability. We have determined that the
amount recorded as a liability should be recognized as additional paid in
capital-outstanding stock options. This restatement had no effect on net income
and related earnings per share.
The cumulative impact of all restatements described above on our deficit
accumulated during the development stage as of December 31, 2003 is an increase
in the deficit of $3,496,000. The aggregate impact of these restatements on the
consolidated balance sheet as of December 31, 2003 is as follows:
December 31, 2003
------------------------------------------
As Previously
Reported As Restated
-------------- ---------------
Property and equipment, net $ 3,026,000 $ 2,067,000
Outstanding stock options 930,000 -
Additional paid in capital 9,595,000 12,132,000
Additional paid in capital-outstanding stock options - 930,000
Deficit accumulated during the development stage (5,877,000) (9,373,000)
10
5. PROPERTY AND EQUIPMENT
Property and equipment includes the following:
September 30, December 31,
2004 2003
--------------- -------------
Unproved leasehold costs $ 1,725,000 $ 1,725,000
Unevaluated wells costs 1,445,000 497,000
Furniture and equipment 153,000 146,000
--------------- -------------
3,323,000 2,368,000
Accumulated depreciation and amortization (125,000) (84,000)
--------------- -------------
$ 3,198,000 $ 2,284,000
=============== =============
Depreciation and amortization expense for the nine months ended September
30, 2004 and 2003 was approximately $41,000 and $58,000, respectively.
Depreciation and amortization expense for the three months ended September 30,
2004 and 2003 was approximately $6,000 and $15,000, respectively.
6. COMMITMENTS AND CONTINGENCIES
Mineral Exploration Rights
Under the production sharing agreement for the Enhong and Laochang areas
of the Yunnan Province, we will pay $100,000 to CUCBM in December of 2004 as the
final of payment of mineral exploration rights.
CUCBM Minimum Exploration Work Commitment Agreement
In conjunction with the production sharing agreements, we entered into a
Minimum Exploration Work Commitment agreement with CUCBM that requires we drill
five exploratory wells on the Enhong and Laochang fields. With the three
vertical wells drilled already, we will be allowed under the revised terms to
stimulate one of these vertical wells and drill two slim hole vertical wells to
satisfy this exploration requirement of Phase I by March 31, 2005. When we
complete the exploratory wells in Phase I, we may commit to begin Phase II
wherein we will be required to begin one horizontal well by December 31, 2005 to
satisfy the original requirement of eight pilot development wells on the Enhong
and Laochang fields.
We also have another production sharing contract (Zhaotong) dated January
25, 2002, which has not been ratified by MOFTEC. We have informed CUCBM that we
do not anticipate pursuing this contract.
Conoco Phillips Memorandum of Understanding
On March 19, 2003, we entered into a memorandum of understanding (MOU)
with a Conoco Phillips subsidiary, Phillips China, Inc. (Phillips), which sets
forth the terms and conditions of an agreement for us to acquire a net undivided
interest of 40% from Phillips in both the Shouyang PSC (near Taiyuan City) and
the Qinnan PSC (near Jincheng and Qinshui). On July 17, 2003, we entered into
two farmout agreements on the Qinnan and Shouyang CBM blocks in Shanxi Province,
PRC and an assignment agreement with Phillips on the two blocks. These
agreements formalized our acquisition of an undivided 40% working interest from
Phillips' 70% interest. As currently structured, we have a 40% interest,
Phillips has retained a 30% interest and CUCBM has a 30% interest in the
projects. The assignment agreement and appropriate amendments to the PSCs
substituting us for Phillips as the principal party and operator were approved
by CUCBM on March 15, 2004, and ratified by the PRC Ministry of Commerce on
March 22, 2004.
As revised verbally in a recent Joint Management Committee meeting, we are
obligated to fracture stimulate and production test one of the exploration wells
that was drilled by Phillips. We will pay 100% of the cost for this test. Upon
the satisfactory completion of the testing by January 31, 2005, we will have the
option to extend into Phase II of exploration by drilling two horizontal wells
with at least two laterals within the Shouyang block instead of the originally
required three additional vertical wells. We will be responsible for
11
100% of the costs of Phase II of exploration and the drilling of the horizontal
wells. Upon our successful completion of Phase II by December 31, 2005, Phillips
will have the option to either retain its net undivided 30% participating
interest, or take a 5% overriding royalty interest (ORRI) on the contractor's
overall participating interest share under the PSCs. The ORRI will be capped at
5% of the current contractor's 70% participating interest, or a 3.5% ORRI on a
100% participating interest basis. Under the terms of the farmout agreements, on
May 14, 2004 we posted a $1 million bank escrow account to act as a work
performance guarantee covering all aspects of the evaluation and work program to
test existing wells. In the fourth quarter of 2004, approximately $500,000 is
expected to be utilized to fracture and test the gas flows from one of the wells
drilled by Phillips and cover costs related to CUCBM Joint Management Committee
salary fees, training fees, exploration fees and assistance fees as outlined in
the production sharing contract. An additional $900,000 bond or escrow account
will be required if we elect to enter Phase II.
Legal actions
We have received notification that one of our directors is contemplating
initiating legal action against us for non-payment of certain expenses,
compensation claims and claims of being owed a note payable. The total claim is
approximately $230,000. Management does not believe the compensation and note
payable claims are valid and therefore, are not probable. The expenses claimed
and unpaid are approximately $42,000 at September 30, 2004 and are recorded in
the accompanying consolidated financial statements.
We are periodically named in legal actions arising in the ordinary course
of business activities. We evaluate the merits of these actions and, if we
determine that an unfavorable outcome is probable and can be estimated, we will
establish the necessary accruals. We do not anticipate any material losses as a
result of commitments and contingent liabilities. We are involved in no material
legal proceedings.
U.S. Securities and Exchange Commission Trading Investigation
In December 2003, we learned that we are the subject of an investigation
by the SEC. We understand that the SEC is investigating whether anyone has
issued false or misleading statements in an attempt to manipulate the price of
our common stock, whether anyone has profited from selling stock at artificially
high prices due to the manipulative statements, and whether any individual or
group has failed to file ownership reports with the SEC as required for 10% or
more stockholders under Section 16 of the Securities Exchange Act of 1934 or
failed to file ownership reports with the SEC as required for 5% or more
stockholders under Section 13 of the Securities Exchange Act of 1934. Management
does not know of any acquisitions in excess of 5% of our outstanding shares,
except for those described in previous 13D filings with the SEC. We have
supplied information to the SEC in response to their information requests and
intend to cooperate with their investigation. Management does not know what the
outcome of the SEC's investigation may be.
The Securities Exchange Act of 1934 and SEC rules require that a person or
group of persons who acquires more than 5% of a class of equity securities that
are registered under the Securities Exchange Act of 1934 must report their
holdings in a Schedule 13D filing with the SEC within 10 days after they become
5% shareholders, and must thereafter report changes in their ownership of the
securities. In addition, Section 16(a) of the Securities Exchange Act of 1934
generally requires that owners of more than 10% of a class of stock that is
registered under the Securities Exchange Act of 1934 must report changes in
their holdings within 48 hours of an acquisition or disposition of the
securities.
If a person or group owns a large block of stock of a publicly traded
company, particularly if that stock is not subject to restrictions on its
purchase and sale on the open market, there is a risk that the person or group
could sufficiently control the market for the stock to drive the stock's trading
price up or down, and thereby the undisclosed control group could reap trading
profits at the expense of other public investors. In addition, Schedule 13D
requires owners of a control group of stock to disclose their intentions with
respect to management or control of the company. We are making this announcement
to alert the public that an undisclosed control group might exist.
12
Insurance Contract
Under our contract to purchase directors and officers insurance, which we
entered into on November 3, 2004, we will pay approximately $14,500 per month
commencing in December 2004 and ending June 2005.
Employment Agreement
On October 13, 2003, we entered into a five-year employment agreement with
Michael R. McElwrath, which was approved by the Board of Directors. Under the
terms of the agreement, Mr. McElwrath's annual base salary shall be no less than
$225,000. Mr. McElwrath is also eligible to receive performance bonuses
semi-annually in the amount of not less than $20,000 subject to determination of
specific performance criteria. The employment agreement provides for a
separation or severance payment of $100,000 if terminated by us without cause as
defined by the agreement. Either party may provide thirty-day written notice to
terminate this contract. Should we terminate this agreement without cause, Mr.
McElwrath is entitled to any shares, for which the stock options have not yet
vested but are scheduled to vest within thirty days of the written notice of
termination.
7. STOCKHOLDERS' EQUITY
Common Stock Issuable
In February 2004, we entered into an investor relations and consultant
contract whereby the consultant will receive each month $2,500 in cash and 3,000
shares of our common stock. As of September 30, 2004, 15,000 shares were
issuable to the consultant for services rendered, and these shares were issued
in October 2004. These shares are included in the total shares outstanding in
the accompanying consolidated financial statements as of September 30, 2004.
Resale Restrictions
37,011,257 shares of our securities are currently restricted; however,
under Rule 144, a portion of these shares will become eligible for resale in the
next six months.
Registration Requirements
In July 2004, we filed a Form S-2 registration statement with the SEC to
fulfill our contractual agreement to register outstanding shares that were sold
under Regulation S and Regulation D between February 2004 and May 2004. The
registration statement includes no new shares to be issued by us. The
registration statement has not yet been made effective but remains pending with
the SEC.
Exercise of Warrants To Purchase Common Stock
In August 2004, we issued 11,250 shares of common stock upon the exercise
of warrants granted in our private placement offering that closed on October 7,
2003. We received an aggregate exercise price of $11,250, and no commission was
paid on the exercise of these warrants. All of the shares were issued pursuant
to exemptions from registration under Sections 3(b) and 4(2) of the Securities
Act of 1933.
Authorized
On March 4, 2003, a special meeting of our shareholders approved an
amendment to our articles of incorporation to increase the number of shares of
common stock authorized for issuance from 100,000,000 to 500,000,000 at par
value of $0.001. The shareholders also approved an amendment to our articles of
incorporation to authorize a class of 500,000,000 shares of preferred stock, par
value $0.001.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used herein, the terms "Company", "we", "our" or "us" refer to Far East
Energy Corporation, a Nevada corporation, and its subsidiaries and predecessors,
unless the context indicates otherwise. Our United States office is located in
Houston, Texas, and we have offices in Beijing and in Kunming, Yunnan Province
of the People's Republic of China (PRC).
FORWARD-LOOKING INFORMATION
This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or to our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. There are a number of factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date they are published to conform such statements to actual results.
The foregoing management's discussion and analysis should be read in conjunction
with our financial statements and the notes herein.
OVERVIEW
YUNNAN PROVINCE, CHINA
We drilled our first three wells on the Enhong-Laochang coalbed methane
block in Yunnan Province between October 2003 and April 2004. The drilling
results to date for each well are:
- FCY-LC01 - total depth 825 meters (2,722 feet).
A total of 15 mineable coal seams were penetrated during the drilling of
the well, with a total thickness of 29.4 meters (97 feet), which we consider to
be excellent. The coring of the coal samples showed a recovery rate of 94.8%. In
addition, the drilling revealed four targeted major coal seams with a total
thickness of 16.3 meters (54 feet), all within an interval of about 110 meters
(363 feet), which we believe are favorable for fracturing and production of
coalbed methane (CBM). Testing of 18 desorption samples from the well resulted
in gas content estimates of approximately 18 cubic meters per ton of coal or
about 650 cubic feet per ton of coal.
- FCY-EH02 - total depth 420 meters (1,344 feet).
The well penetrated 15 coal seams with a thickness of 16.7 meters (53
feet). The total thickness of the coal seams targeted for potential production
was 6.6 meters with a recovery rate of 70%. Estimated gas content, based on
preliminary desorption results is approximately 10 cubic meters per ton of coal,
or about 350 cubic feet per ton of coal.
- FCY-EH01 - total depth 435 meters (1,436 feet).
The well penetrated 42 coal seams with a thickness of 42.8 meters (141
feet). The total thickness of the four coal seams targeted for potential
production was 17.2 meters (57 feet). Estimated gas content, based on
preliminary desorption results, is approximately 8-10 cubic meters per ton of
coal, or approximately 280-
14
350 cubic feet per ton of coal.
Despite the strong results from these first three wells we cannot provide
assurance that commercial viability will be achieved. Profitable production from
these wells is subject to the following risks, among others:
- Three conventional CBM wells cannot produce enough gas to achieve
commercial viability. We must complete multiple CBM wells in near
proximity to each other in order to make it feasible to begin
production from any of them.
- No gas pipeline, liquefied natural gas (LNG) plant, or other offtake
candidate currently exists to take gas from these wells, and it is
not likely that any such facilities will be built until favorable
results are obtained from multiple wells.
- Actual production may vary materially from preliminary test results.
Actual production from the well may be at recovery rates and gas
quality materially worse than our first indications.
We have determined to use horizontal drilling techniques to evaluate the
Enhong-Laochang project. Under that production sharing contract (PSC), we were
originally required to drill two additional conventional wells to satisfy
requirements of Phase I. The China United Coal Bed Methane Corporation (CUCBM)
has agreed to revise these terms to allow us to fracture and test one of the
wells we have drilled and then drill two slim hole vertical wells to satisfy the
requirements of Phase I by March 31, 2005. We would drill the first horizontal
well in 2005 if we elect to begin Phase II. We have incurred costs of
approximately $1 million in the first nine months of 2004 and expect to incur
additional costs of approximately $600,000 in the remaining three months of 2004
in the Enhong-Laochang project, including $100,000 to be paid to CUCBM for
mineral exploration rights. We expect to fund these activities with our existing
capital at September 30, 2004 and from funds to be raised in the remainder of
2004.
We are obligated to perform a hydraulic fracture on one of three vertical
wells we drilled in the Yunnan Province for Phase I. We also are obligated to
drill and test two slim hole vertical wells and gather additional seismic data
by March 31, 2005 to satisfy the Phase I obligation. Additionally, we are
obligated to drill one horizontal well by December 31, 2005 to satisfy our Phase
II obligation if we elect to begin Phase II.
SHANXI PROVINCE, CHINA
We have entered into farmout agreements and an assignment agreement with
Phillips China, Inc., a subsidiary of Conoco Phillips, Inc., (Phillips) under
which we agreed to acquire a net undivided interest of 40% from Phillips in two
production-sharing contracts in Shanxi Province. As currently structured, we
have a 40% interest in the projects, Phillips has retained a 30% interest and
CUCBM has a 30% interest. The assignment agreement and appropriate amendments to
the PSCs substituting us for Phillips as the principal party and operator were
approved by CUCBM on March 15, 2004, and ratified by the PRC Ministry of
Commerce on March 22, 2004.
The agreements obligate us, at our expense, to fracture stimulate and
production test three exploration wells that were drilled by Phillips. During
the third quarter of 2004, CUCBM has agreed to revise that requirement to allow
us to perform a hydraulic fracture of one of those wells to satisfy the Phase I
requirement by January 31, 2005. We anticipate the cost of this effort to be
approximately $300,000. We began fracturing and testing the QN-002 well during
the third quarter of 2004. In September 2004, the hydraulic fracture stimulation
test was successfully completed on the QN-002 well drilled previously by
Phillips on its acreage in the Qinnan Block located in the Shanxi Province of
China. The test was performed on the #3 coal seam at a depth of 550 meters
(1,880 feet). The well is in the process of being dewatered.
If testing proves satisfactory, we have the option to extend into Phase II
of exploration at our own expense. CUCBM has agreed to revise the terms of Phase
II of exploration to require two horizontal wells in the Shouyang block by
December 31, 2005 instead of the previously required three additional vertical
wells. If we successfully complete the Phase II, Phillips will have the option
to elect to either retain its net undivided 30% participating interest, or take
an overriding royalty interest, which will be capped at 3.5% of the total
participating interest.
15
If we elect to commit to Phase III in the Shanxi province, we would be
required to drill one horizontal well, which is a revision from two horizontal
wells previously required. Phase III would terminate on July 1, 2007.
In the first nine months of 2004, we incurred costs of approximately
$550,000 and expect to incur additional costs of approximately $500,000 in the
remaining three months of 2004 to perform the required tests and cover costs
related to CUCBM salary fees, training fees, exploration fees and assistance
fees required by the production sharing contracts for these projects.
Our agreements with Phillips required that we post a $1 million bank
guarantee or surety bond by May 14, 2004 to guarantee performance of the
evaluation and work program to test existing wells. On May 14, 2004, we placed
$1 million into escrow to satisfy this bond. An additional $900,000 bond or
escrow account will be required if we elect to enter Phase II. We have the
option to escrow the full amount of each required guarantee in lieu of a bond.
Required funding for these activities is expected to come from a combination of
existing capital and funds to be raised during the remainder of 2004.
CHINA PIPELINE ACCESS
In the Qinnan block of our Shanxi Province project, the West-East pipeline
has the capacity of 1,000 MMcfpd. The Shanjing II pipeline is a 40" line, which
would also have a 1,000 MMcfpd capacity and will run just north of our Shouyang
block, in Shanxi Province. In the Qinnan and Shouyang areas we estimate that we
will eventually expend approximately $63 million for two short connecting
pipelines with 850 MMcfpd of capacity to the Shanjing II and West-East pipelines
(about 30 miles in total for the two connecting pipelines).
In the Yunnan area we have estimated a cost in excess of $50 million for a
50-mile pipeline with a capacity of 350 MMcfpd. At the present time there are no
pipelines to move gas for any great distance in the Yunnan Province, and gas
will have to be sold to the local communities.
Costs to construct the pipelines for our China properties would exceed
$113 million. We do not currently have the funds to build these pipelines. We
would be required to raise additional funds or to find a partner to complete
these facilities; however, we cannot provide assurance that we will be able to
do so.
Gas sales in these China blocks can also be achieved through development
of a LNG plant. A 100-ton per day LNG plant will cost about $10 million to
develop and take about two years for planning and construction. A 1,000-ton per
day LNG plant would cost about $75 million with construction time close to two
years. These costs may be carried by an LNG company that would build the plants
for the gas.
EASTERN MONTANA
Through our wholly owned subsidiary Newark Valley Oil & Gas, Inc., we have
acquired undeveloped acreage on our Montana leases, which we hope will
demonstrate the existence of gas in commercial quantities. However, our first
priority is to complete our exploration obligations in China because we believe
our properties in China represent our greatest potential return on investment.
We expect to expend approximately $1,000 in the fourth quarter of 2004 to pay
lease rentals in Montana.
We do not expect that we will have funds available in the foreseeable
future for our Montana property, and we are evaluating whether to pursue a
farmout agreement or possible sale to outside third parties. However, should
funds become available for our Montana project, we would expend between $1.5 and
$2 million to drill ten shallow wells as well as stimulate and construct a
gathering system. Assuming good results for the first ten well program, we would
then proceed to drill an additional 20 to 30 wells thereafter to evaluate the
potential of constructing a pipeline to gain greater access to gas markets on
the Northern Border pipeline. The cost of constructing a pipeline is estimated
at $5 to $6 million. Continued
16
development of this property could accelerate once a pipeline is constructed and
reach a pace of 50 to 75 wells per year for a period of four to five years, at a
cost of $8.5 to $12.7 million per year.
MONTANA PIPELINE ACCESS
We can access the Bitter Creek Gathering System, which has a current
capacity of about 2,000 Mcfpd. If development were to continue and the Bitter
Creek Gathering System was unable to move all the available gas it is possible
to lay a 8" to 10" line to the Northern Border pipeline which is approximately
25 to 30 miles north of our acreage, at a cost of approximately $4 to $6
million.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
financial statements and notes thereto included in our annual report on Form
10-KSB/A for the fiscal year ended December 31, 2003; and should further be read
in conjunction with the financial statements included in this report.
Comparisons made between reporting periods herein are for the three and nine
months ended September 30, 2004 as compared to the three and nine months ended
September 30, 2003.
We had no operating revenue for the nine and three months ended September
30, 2004 and no revenue for the same periods in 2003. Our operating expenses for
the nine months ended September 30, 2004 decreased by 5% to $4,484,000 as
compared to $4,712,000 for the same period in 2003. Our operating expenses for
the three months ended September 30, 2004 decreased 40% to $2,019,000 as
compared to $3,365,000. The expenses we incurred in 2004 as compared to 2003 are
set forth in the table below.
Nine Months Ended Three Months Ended
September 30, 2004 September 30, 2003
---------------------------------------- ------------------------------------------
Percent Percent
2004 2003 Change 2004 2003 change
---------- ------------ --------- ------------ ------------- ---------
Geologic and engineering services $ 493,000 $ 295,000 67% $ 253,000 $ 30,000 743%
Impairment loss - 2,369,000 -100% - 2,369,000 -100%
Other consulting and professional
services 659,000 661,000 - 444,000 536,000 -17%
Compensation 815,000 646,000 26% 376,000 143,000 163%
Stock compensation 447,000 - - 14,000 - -
Travel 355,000 226,000 57% 164,000 45,000 264%
Legal and accounting 986,000 139,000 609% 509,000 18,000 2728%
Loss on investment in joint venture - 22,000 -100% - - -
Amortization 23,000 44,000 -48% - 15,000 -100%
General and administrative 706,000 310,000 128% 259,000 209,000 24%
---------- ----------- ---------- -----------
Total $4,484,000 $ 4,712,000 -5% $2,019,000 $ 3,365,000 -40%
========== =========== ========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2003
Geologic and engineering services increased by approximately $198,000 or
67% from $295,000 during the nine months ended September 30, 2003 to $493,000
during the nine months ended September 30, 2004. The increase is a result of
leasehold rentals of $178,000 and additional costs incurred in the Shanxi block
in China. Our first well in the Enhong-Laochang block in Yunnan Province was
completed on November 30, 2003, and the costs to drill this well are currently
capitalized in unevaluated wells in property and equipment, pending whether
proved reserves are located. Statement of Financial Accounting Standards No. 19,
(SFAS 19) requires that well costs which do not locate proved reserves within
one year after completion be expensed. We do not anticipate locating proved
reserves within the one year allowed, and expect to expense the cost of this
well in the fourth quarter of 2004. The capitalized costs for this well as of
September 30, 2004 are approximately $500,000. Additionally, the remaining two
wells in the Enhong-
17
Laochang block were completed in February 2004 and April 2004, and we anticipate
that we may not locate proved reserves within the one year allowed and may
expense the capitalized costs related to these wells in the first quarter and
second quarter, respectively. The costs capitalized related to these two wells
at September 30, 2004 were approximately $350,000 and approximately $375,000.
We incurred no impairment expense during the nine months ended September
30, 2004. The carrying value of our Montana properties was reduced to the
discounted net cash flows estimated at December 31, 2003. A reduction in natural
gas prices, increase in exploration or development costs or increase in
production costs could result in an additional impairment loss recorded in
subsequent periods.
Compensation increased by approximately $169,000 or 26% from $646,000
during the nine months ended September 30, 2003 to $815,000 during the nine
months ended September 30, 2004 due to hiring in China and Houston for increased
operations and financial personnel.
Stock compensation expense increased approximately $447,000 during the
nine months ended September 30, 2004. This increase was due to granting options
at exercise prices below the market at the date of grant. We are recognizing
compensation expense for the difference between the exercise price and the
market value at the date of grant over the period the compensation is earned. No
additional grants have been made at exercise prices below the market, and we
expect that the expense will approximate $95,000 per quarter through the end of
2005.
Travel expense increased approximately $129,000 or 57% from $226,000
during the nine months ended September 30, 2003 to $355,000 during the nine
months ended September 30, 2004 due to additional travel by corporate personnel
in Houston to China as the operations have increased in China.
Legal and accounting expenses increased approximately $847,000 or 609%
from $139,000 during the nine months ended September 30, 2003 to $986,000 during
the nine months ended September 30, 2004. The primary reasons for this increased
expense were the registration statement prepared in the third quarter, our
response to the SEC's investigation regarding ownership of our stock, costs
associated with amending a previously filed Form 10-KSB and quarterly reports
and Sarbanes Oxley 404 reporting required at year end.
General and administrative expense increased approximately $396,000 or
128% from $310,000 during the nine months ended September 30, 2003 to $706,000
during the nine months ended September 30, 2004. Included in this increase are
overhead expenditures from expanded operating activities in China including
professional fees for CUCBM and contract labor and expense for the granting of
options to advisory board members who are not elected by our stockholders.
Interest expense decreased $168,000 or 100% from the nine months ended
September 30, 2003. The $168,000 reflects interest expense related to the
beneficial conversion feature for the $300,000 notes payable executed in the
second and third quarters 2003.
Our loss before income taxes decreased to $4,473,000 for the nine months
ended September 30, 2004, as compared to $4,879,000 for the same period of 2003.
During the nine months ended September 30, 2003, we recorded an impairment loss
on our Montana properties of $2,369,000 and recorded no impairment loss in the
nine months ended September 30, 2004. The decrease in impairment loss was offset
by increases in compensation expense, stock compensation, legal and accounting
expense and general and administrative expense.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Geologic and engineering services increased by approximately $223,000 or
743% from $30,000 during the three months ended September 30, 2003 to $253,000
during the three months ended September 30, 2004. The increase is the result of
$93,000 of leasehold rentals paid on the Montana properties and additional costs
incurred in China as operations have increased. Our first well in the
Enhong-Laochang block in Yunnan Province was completed on November 30, 2003, and
the costs to drill this well are currently capitalized in unevaluated wells in
property and equipment, pending whether proved reserves are located. Statement
of
18
Financial Accounting Standards No. 19, (SFAS 19) requires that well costs which
do not locate proved reserves within one year after completion be expensed. We
do not anticipate locating proved reserves within the one year allowed, and
expect to expense the cost of this well in the fourth quarter of 2004. The
capitalized costs for this well as of September 30, 2004 are approximately
$500,000. Additionally, the remaining two wells in the Enhong-Laochang block
were completed in February 2004 and April 2004, we anticipate that we may not
locate proved reserves within the one year allowed and may expense the
capitalized costs related to these wells in the first quarter and second
quarter, respectively. The costs capitalized related to these two wells at
September 30, 2004 were $350,000 and $375,000.
We incurred no impairment expense during the three months ended September
30, 2004. The carrying value of our Montana properties was reduced to the
discounted net cash flows estimated at December 31, 2003. A reduction in natural
gas prices, increase in exploration or development costs or increase in
production costs could result in an additional impairment loss recorded in
subsequent periods.
Other consulting and professional services decreased approximately $92,000
or 17% from $536,000 during the three months ended September 30, 2003 to
$444,000 during the three months ended September 30, 2004. The primary reason
for this decrease is the reduction in contract personnel during the quarter.
Compensation increased by approximately $233,000 or 163% from $143,000
during the nine months ended September 30, 2003 to $376,000 during the nine
months ended September 30, 2004 due to hiring in China and Houston for increased
operations and financial personnel.
Travel costs increased approximately $119,000 or 264% from $45,000 during
the three months ended September 30, 2003 to $164,000 during the three months
ended September 30, 2004 due to additional travel by corporate personnel in
Houston to China as the operations have increased in China.
Legal and accounting expenses increased approximately $491,000 or 2,728%
from $18,000 during the three months ended September 30, 2003 to $509,000 during
the three months ended September 30, 2004. The primary reasons for this
increased expense were our registration statement prepared during the quarter,
response to the SEC's investigation regarding ownership of our stock, costs
associated with amending a previously filed Form 10-KSB and quarterly reports
and costs related to Sarbanes Oxley Section 404 reporting required at year end.
General and administrative expense increased approximately $50,000 or 24%
from $209,000 during the three months ended September 30, 2003 to $259,000
during the three months ended September 30, 2004. Included in this increase are
overhead expenditures from expanded operating activities in China including
professional fees for CUCBM and contract labor and expense for the granting of
options to advisory board members who are not elected by our stockholders.
Interest expense decreased $126,000 or 100% from the three months ended
September 30, 2003. The $126,000 reflects interest expense related to the
beneficial conversion feature for the $300,000 notes payable executed in the
second and third quarters 2003.
These increased expenses resulted in our loss before income taxes
decreasing to $2,013,000 for the three months ended September 30, 2004, as
compared to $3,491,000 for the same period of 2003. During the three months
ended September 30, 2003, we recorded an impairment loss on our Montana
properties of $2,369,000 and recorded no impairment loss in the three months
ended September 30, 2004. The decrease in impairment loss was offset by
increases in compensation expense, travel expense, legal and accounting expense
and general and administrative expense.
19
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, our cash and cash equivalents were $2,144,000,
as compared to $2,326,000 as of December 31, 2003.
Cash used in operating activities for the nine months ended September 30,
2004 was $4,235,000 as compared to cash used in operating activities for the
same period of 2003 of $1,798,000. This change is mainly attributable to our
increased cash operating expenses, including compensation, legal and accounting
and general and administrative expenses and the reduction of accounts payable
balances.
Cash used in investing activities increased to $1,955,000 for the nine
months ended September 30, 2004 as compared to $529,000 for the same period in
2003. This increase is primarily attributable to placing $1 million in escrow
for a performance guarantee and our drilling of three wells in Yunnan Province
in China and initiating fracturing of a well in the Shanxi Province in China.
Cash provided by financing activities increased to $6,008,000 for the nine
months ended September 30, 2004 as compared to $5,182,000 for 2003. The increase
in cash provided by financing activities reflects proceeds from the exercise of
warrants and sales of investment units in 2004. During the nine months ended
September 30, 2004, we have raised net proceeds of approximately $2.227 million
in an equity offering involving the sale of 128 investment units. Each unit
consisted of 10,000 shares of our common stock and a warrant to purchase 10,000
shares of our common stock at $2.50 per share. We also have raised net proceeds
of $1.056 million in a private placement of equity to accredited investors in
the second quarter of 2004 which included the issuance of 550,000 shares of our
restricted common stock at $2.00 per share and 550,000 warrants to purchase
shares of our restricted common stock at $2.50 per share. Further during the
period beginning January 1, 2004 through November 9, 2004, we have received a
total of $2,759,980 upon the exercise of warrants to purchase 2,759,980 shares
of our common stock.
We anticipate incurring approximately $3.9 million in exploration and
development expenses in the full year of 2004, including $1 million already
placed in escrow that acts as a work performance guarantee on the Shanxi block.
This is a decrease of $1.3 million from amounts projected in the second quarter
of 2004 as we have delayed certain capital expenditures. In addition to these
anticipated costs, if we elect to enter into Phase II of the Phillips agreements
in Shanxi and post additional cash reserves in lieu of performance bonds, we
would be required to place $900,000 in escrow. For further discussion concerning
our Phillips agreements in Shanxi, see "2004 Plan of Operation - Shanxi
Province, China" above. During the nine months ended September 30, 2004, we have
incurred approximately $1.8 million for exploration and development expenses.
We anticipate that cash expenditures for 2005 exploration and development
expenses would include:
- Yunnan Province Phase I. Drill two slim hole vertical wells
($250,000), complete the fracture and test of one well
($200,000) and field costs $(100,000) to be completed by March
31, 2005;
- Yunnan Province Phase II. Drill one horizontal well ($1.3
million) by December 31, 2005, if we commit to Phase II; and
- Shanxi Province Phase II. Drill and test two horizontal wells
($2.6 million) in Shouyang block to be completed by December
31, 2005, if we commit to Phase II.
We do not expect to receive significant revenues from operations in China
until at least late 2006. We do not anticipate receiving revenue from our
Montana properties for the foreseeable future as we do not currently expect to
have adequate financing to pursue a drilling program in Montana during 2004. We
are evaluating whether to pursue a farmout agreement or other alternatives with
outside third parties for our Montana properties. To generate revenue in China
prior to the point at which production reaches pipeline quantities, we may elect
to construct LNG facilities on our properties. However, we believe an LNG
company may decide to construct such facilities at their own cost. This would
allow gas to be produced and sold in the period before we achieve production in
sufficient quantities to justify constructing short connecting pipelines to the
Shangjing II and West-East pipelines in the Shanxi Province, or before a
pipeline or other offtake facility is operational in the Yunnan Province. A
100-ton per day LNG facility, which would absorb approximately
20
five million cubic feet of gas per day, would cost $10-$15 million to construct.
A 1,000-ton per day facility capable of absorbing 50 million cubic feet of gas
per day would cost approximately $75 million. Again, while we may opt to
construct LNG facilities, it is quite possible that an LNG concern may decide to
construct such facilities near our properties at their own cost. We may
construct pipelines to move gas from our fields to either municipalities or
other pipelines. We estimate the cost to construct a pipeline in the Enhong and
Laochang areas to be approximately $50 million. Our farmout agreement from
Phillips provides us with rights to two separate blocks; the Shouyang block,
approximately 40 km south of the Shangjing II pipeline to Beijing, and the
Qinnan block, approximately 10 km north of the West-East pipeline to Shanghai.
We estimate the cost to construct pipeline connections from the Shouyang and
Qinnan blocks to the Shangjing II and West-East pipelines, respectively, to be
approximately $63 million. We are delaying any decisions regarding the
construction of LNG facilities or pipelines until such time as significant gas
volumes are achieved. We believe this delay may allow us to avoid construction
costs to the extent other entities (attracted by our gas), have constructed, are
constructing or are planning to construct, such facilities.
We do not currently have the funds to complete our current and proposed
business operation in China and Montana or sustain our operating losses.
Therefore, our ability to continue as a going concern depends upon our ability
to raise additional, substantial funds for use in our planned development
activities, and upon the success of our planned exploration and development
activities. To develop our projects in China over the long term, we need to
obtain funding to satisfy significant expenditures for exploration and
development of those projects, if they are successful.
We intend to obtain these funds by various methods, which might include
the issuance of equity securities, continued exercise of warrants issued to
investors in conjunction with the recently completed private offerings,
obtaining farm-out partners and the potential sale of property interests among
other alternatives. Therefore, we intend to continue to seek to raise equity or
debt financing. No assurance can be given that we will be able to obtain any
additional financing on favorable terms, if at all. If our operating
requirements vary materially from those currently planned, we may require more
financing than currently anticipated. Borrowing money may involve pledging some
or all or our assets. Raising additional funds by issuing common stock or other
types of equity securities would further dilute our existing stockholders. If we
cannot obtain additional financing in a timely manner, we will not be able to
continue our operations. Since there can be no guarantee of future fundraising
success, and since the success of exploratory drilling can never, by definition
be guaranteed, there is substantial doubt about our ability to continue as a
going concern. The reports we received from our independent auditors covering
our fiscal years ended December 31, 2003 and 2002 financial statements contain
an explanatory paragraph that states that our net losses since our inception and
no established source of revenues raise substantial doubt about our ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
Although there can be no assurances, management believes that we will continue
to be successful in raising the funds necessary to explore for gas, and,
assuming success in those exploratory efforts, to raise the funds necessary for
production and development.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
(GAAP) in the United States. GAAP represents a comprehensive set of accounting
and disclosure rules and requirements, the application of which requires
management's judgment and estimates including, in certain circumstances, choices
between acceptable GAAP alternatives. The preparation of these consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, if any, at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. We base our estimates on historical experience and various
other assumptions that are believed to be reasonable under the circumstances.
Actual results could differ from these estimates under different assumptions or
conditions. Note 1 to our consolidated financial statements included in our Form
10-KSB/A for the year ended December 31, 2003 contains a comprehensive summary
of our significant accounting policies. The following is a discussion of our
most critical accounting policies, judgments and uncertainties that are inherent
in our application of GAAP:
21
Accounting for Oil and Gas Properties. Under the successful efforts method
of accounting, we capitalize all costs related to property acquisitions and
successful exploratory wells, all development costs and the costs of support
equipment and facilities. Certain costs of exploratory wells are capitalized
pending determination that proved reserves have been found. Such determination
is dependent upon the results of planned additional wells and the cost of
required capital expenditures to produce the reserves found. All costs related
to unsuccessful exploratory wells are expensed when such wells are determined to
be non-productive; other exploration costs, including geological and geophysical
costs, are expensed as incurred. We recognize gains or losses on the sale of
properties on a field basis.
The application of the successful efforts method of accounting requires
management's judgment to determine the proper designation of wells as either
developmental or exploratory, which will ultimately determine the proper
accounting treatment of the costs incurred. The results from a drilling
operation can take considerable time to analyze, and the determination that
commercial reserves have been discovered requires both judgment and application
of industry experience. Wells may be completed that are assumed to be productive
and actually deliver oil and gas in quantities insufficient to be economic,
which may result in the abandonment of the wells at a later date. Seismic costs
incurred to select development locations within a productive oil and gas field
are typically treated as development costs and capitalized. Judgment is required
to determine when the seismic programs are not within proved reserve areas and
therefore would be charged to expense as exploratory. The evaluation of oil and
gas leasehold acquisition costs requires management's judgment to estimate the
fair value of exploratory costs related to drilling activity in a given area.
Drilling activities in an area by other companies may also effectively condemn
leasehold positions.
The successful efforts method of accounting can have a significant impact
on the operational results reported when we enter a new exploratory area in
hopes of finding oil and gas reserves. Seismic costs can be substantial which
will result in additional exploration expenses when incurred. The initial
exploratory wells may be unsuccessful and the associated costs will then be
expensed as dry hole costs and any associated leasehold costs may be impaired.
Impairment of unproved oil and gas properties. Unproved leasehold costs
and exploratory drilling in progress are capitalized and are reviewed
periodically for impairment. Costs related to impaired prospects or unsuccessful
exploratory drilling are charged to expense. The estimated fair value of
unproved leasehold costs includes the present value of probable reserves
discounted at rates commensurate with the risks involved in each classification
of reserve. Our assessment of the results of exploration activities, commodity
price outlooks, planned future sales or expiration of all or a portion of such
leaseholds impacts the amount and timing of impairment provisions. An impairment
expense could result if oil and gas prices decline in the future, as it may not
be economical to develop some of these unproved properties. As of September 30,
2004, we had total unproved oil and gas property costs of approximately $3.1
million consisting of undeveloped leasehold costs of $1.5 million in Montana,
$0.2 million in China and unevaluated exploratory drilling costs of $1.4 million
incurred in China.
Estimates of future dismantlement, restoration, and abandonment costs. The
accounting for future development and abandonment costs changed on January 1,
2003, with the adoption of Statement of Financial Accounting Standards (SFAS)
No. 143 (SFAS No. 143). SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The accrual is based on estimates of these costs for each of
our properties based upon the type of production structure, reservoir
characteristics, depth of the reservoir, market demand for equipment, currently
available procedures and consultations with construction and engineering
consultants. Because these costs typically extend many years into the future,
estimating these future costs is difficult and requires management to make
estimates and judgments that are subject to future revisions based on numerous
factors, including changing technology, the political and regulatory environment
and, beginning in 2003, estimates as to the proper discount rate to use and
timing of abandonment. We have not acquired any assets that result in a material
future abandonment cost. Therefore, there is no provision in the accompanying
consolidated financial statements.
22
Assessments of functional currencies. Our Chinese operations use the
Chinese yuan as their functional currency. Management determines the functional
currencies of our subsidiaries based on an assessment of the currency of the
economic environment in which a subsidiary primarily realizes and expends its
operating revenues, costs and expenses. The assessment of functional currencies
can have a significant impact on periodic results of operations and financial
position.
We have also adopted SFAS No. 52, "Foreign Currency Translation", which
requires that the translation of the applicable foreign currency into U.S.
dollars be performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains or losses resulting
from such translation are included in the consolidated statements of
stockholders' equity and comprehensive income.
Earnings per share. We apply SFAS No. 128, "Earnings Per Share", for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in our earnings.
Stock options. We apply Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for our stock option agreements with employees and the board of
directors and have adopted the disclosure-only provisions of SFAS No. 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation". Compensation
cost for stock options granted to employees and the board of directors has been
recognized for certain options granted at an exercise price below market value.
We apply SFAS No. 123 to the options granted to non-employees and members of our
board of advisors, recording compensation expense at the fair value of the
options.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in hedging activities and do not use commodity futures or
forward contracts in our cash management functions. We do not hedge our exposure
to currency rate changes. Instead, we are at risk for changes in currency
exchange rates between the United States and the People's Republic of China. In
general, we hold cash reserves in U.S. dollars and transfer funds to China as
needed to operate our Chinese offices and conduct exploration operations. For
the near term, we do not expect to generate any operating income from activities
in China.
Because we frequently send money to China to fund operations, we are
exposed to foreign currency risk. If the value of U.S. dollars falls in relation
to the Chinese yuan, the cost to us of funding our Chinese operations would rise
because more dollars would be required to fund the same expenditures in yuan.
Conversely, if the value of U.S. dollars rises in relation to the Chinese yuan,
the change in exchange rates would decrease our dollar cost to fund operations
in China.
In recent years, the Chinese government has fixed the exchange rate
between U.S. dollars and Chinese yuan. Because the exchange rate has been fixed,
instead of variable, we have experienced no fluctuations in the value of goods
and services we purchase in China because of currency exchange. However, the
United States and other foreign governments have repeatedly sought to establish
a floating exchange rate between the Chinese yuan and other foreign currencies.
If, in the future, China accedes to requests to let its currency float against
the dollar, we must either adopt cash management strategies to hedge U.S.
dollars against the yuan or be subject to the exchange rate risks described
above.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended, as of the end of the period covered by this quarterly report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to
23
ensure the information required to be disclosed by the Company in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There were no changes in our internal control over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Jawaharlal Gondi, one of our Directors, has notified us that he
intends to file a claim against us for unpaid compensation and expenses and an
unpaid promissory note incurred during 2003. The claim totals approximately
$230,000. However, we have written to Mr. Gondi's lawyer denying his claims for
compensation in excess of what he has already been paid and denying the note
claim. We have acknowledged some of the expense claims and paid them in part. At
September 30, 2004, the unpaid expense claims amounted to approximately $42,000,
which amount we acknowledged and recorded as a liability on our financial
statements. As of the date of this report, we do not believe any legal action
has been filed against us regarding these claims.
ITEM 2. UNREGISTERED SHARES OF EQUITY AND USE OF PROCEEDS
In August 2004, we issued 11,250 shares of common stock upon the
exercise of warrants granted in our private placement offering that closed on
October 7, 2003. We received an aggregate exercise price of $11,250, and no
commission was paid on the exercise of these warrants. All of the shares were
issued pursuant to exemptions from registration under Sections 3(b) and 4(2) of
the Securities Act of 1933. The proceeds were used for exploration activities.
During the quarter ended September 30, 2004, we issued 9,000
restricted shares of common stock as payment of advisory fees.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
U.S. Securities and Exchange Commission Trading Investigation
In December 2003, we learned that we are the subject of an
investigation by the SEC. We understand that the SEC is investigating whether
anyone has issued false or misleading statements in an attempt to manipulate the
price of our common stock, whether anyone has profited from selling stock at
artificially high prices due to the manipulative statements, and whether any
individual or group has failed to file ownership reports with the SEC as
required for 10% or more stockholders under Section 16 of the Securities
Exchange Act of 1934 or failed to file ownership reports with the SEC as
required for 5% or more stockholders under Section 13 of the Securities Exchange
Act of 1934. Management does not know of any acquisitions in excess of 5% of our
outstanding shares, except for those described in previous 13D filings with the
SEC. We have supplied information to the SEC in response to their information
requests and intend to cooperate with their investigation. We do not know what
the outcome of their investigation may be.
24
The Securities Exchange Act of 1934 and SEC rules require that a
person or group of persons who acquire more than 5% of a class of equity
securities that are registered under the Securities Exchange Act of 1934 must
report their holdings in a Schedule 13D filing with the SEC within 10 days after
they become 5% shareholders, and must thereafter report changes in their
ownership of the securities. In addition, Section 16(a) of the Securities
Exchange Act of 1934 generally requires that owners of more than 10% of a class
of stock that is registered under the Securities Exchange Act of 1934 must
report changes in their holdings within 48 hours of an acquisition or
disposition of the securities.
If a person or group owns a large block of stock of a publicly
traded company, particularly if that stock is not subject to restrictions on its
purchase and sale on the open market, there is a risk that the person or group
could sufficiently control the market for the stock to drive the stock's trading
price up or down, and thereby the undisclosed control group could reap trading
profits at the expense of other public investors. In addition, Schedule 13D
requires owners of a control group of stock to disclose their intentions with
respect to management or control of the company. We are making this announcement
to alert the public that an undisclosed control group might exist.
ITEM 6. EXHIBITS
(a) Exhibits. Exhibits required to be attached by Item 601 of
Regulation S-K are listed in the Index to Exhibits of this Form
10-Q, which is incorporated herein by reference.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Far East Energy Corporation
/s/ Michael R. McElwrath
------------------------------------------
Michael R. McElwrath
Chief Executive Officer, President and
Chairman of the Board (Principal
Executive Officer)
/s/ Bruce N. Huff
------------------------------------------
Bruce N. Huff
Chief Financial Officer (Principal
Financial Officer)
Date: November 15, 2004
25
INDEX TO EXHIBITS
Exhibits marked with an asterisk have been filed previously with the Securities
and Exchange Commission and are incorporated herein by reference.
EXHIBIT NO. PAGE NO. DESCRIPTION
- ----------- -------- -----------
3(i) * Articles of Incorporation of the Company. (Incorporated by reference from the Company's
Form 10-SB12G filed on March 16, 2001.)
3(ii) * Amendment to Articles of Incorporation of the Company dated January 10, 2002. (Incorporated
by reference from the Company's Form 10-KSB/A filed on November 9, 2004.)
3(iii) * Amendment to Articles of Incorporation of the Company dated February 6, 2003. (Incorporated
by reference from the Company's Form 10-KSB/A filed on November 9, 2004.
3(iv) * Bylaws of the Company. (Incorporated by reference from the Company's Form 10SB12G filed on
March 16, 2001.)
3(v) * Amendment to the Bylaws of the Company dated March 3, 2003. (Incorporated by reference from
the Company's Form 10-KSB/A filed on November 9, 2004.)
3(vi) * Amendment to the Bylaws of the Company dated May 23, 2004. (Incorporated by reference from
the Company's form 10-QSB/A filed on May 13, 2004.)
10(i) * McElwrath Employment Agreement (Incorporated by reference from the Company's Form 10-KSB,
filed on April 14, 2004.)
10(ii) * Montana Merger Agreement. (Incorporated by reference from the Company's form 8-K filed
January 15, 2003.)
10(iii) * Production Sharing Contract for Exploitation of Coalbed Methane Resources in Enhong and
Laochang, Yunnan Province, the People's Republic of China, by and between china United
Coalbed Methane Corp. Ltd. and the Company, dated January 25, 2002. (Incorporated by
reference from the Company's Form 8-K filed February 11, 2002.)
10(iv) * Production Sharing Contract for Exploitation of Coalbed Methane Resources in Zhoutong,
Yunnan Province, the People's Republic of china, by and between china United Coalbed
Methance Corp. Ltd. and the Company, dated January 25, 2002. (Incorporated by reference
from the Company's Form 8-K filed February 11, 2002.)
10(v) * Sino-Foreign Cooperative Joint Venture Contract (Incorporated by reference from the
Company's Form 8-K, filed June 6, 2002.)
10(vi) * Approval Certificate from the Ministry of Foreign Trade and Economic Cooperation dated
December 30, 2002. (Incorporated by reference from the Company's Form 8-K filed March 13,
2003.)
10(vii) * Memo of Understanding with Phillips China, Inc. (Incorporated by reference from the
Company's Form 8-K filed March 13, 2003.)
10(viii) * Farmout Agreement-Qinnan. (Incorporated by reference from the Company's Form 10-QSB/A filed
December 23, 2003.)
10(ix) * Farmout Agreement-Shouyang. (Incorporated by reference from the Company's Form 10-QSB/A
filed December 23, 2003.)
10(x) * Assignment Agreements on the Qinnan CMB blocks. (Incorporated by reference from the
Company's Form 10-QSB/A filed December 23, 2003.)
10(xi) * Assignment Agreements on the Shouyang CMB blocks.
26
(Incorporated by reference from the Company's Form 10-QSB/A filed December 23, 2003.)
10(xii) * Bruce N. Huff Employment Agreement. (Incorporated by reference from the Company's Form S-2
registration statement filed on July 23, 2004.)
10(xiii) * Escrow Agreement. (Incorporated by reference from the Company's Form S-2 registration
statement filed on July 23, 2004.)
31.1 28 302 Certification of Chief Executive Officer
31.2 29 302 Certification of Chief Financial Officer
32.1 30 906 Certification of Chief Executive Officer
32.2 31 906 Certification of Chief Financial Officer
27