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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 MARCH 31, 2005
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 April 29,
2005: 77,449,910
FAR EAST ENERGY CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 22
Signatures 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAR EAST ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
March 31,
2005 December 31,
(unaudited) 2004
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 10,504,000 $ 11,418,000
Stock subscriptions receivable - 250,000
Prepaids and other current assets 79,000 98,000
------------ ------------
Total current assets 10,583,000 11,766,000
------------ ------------
Restricted cash 1,000,000 1,000,000
Property and equipment, net 2,395,000 2,647,000
------------ ------------
Total assets $ 13,978,000 $ 15,413,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,408,000 $ 940,000
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,
77,444,910 and 76,542,410 issued and outstanding, respectively 78,000 77,000
Additional paid in capital 29,908,000 29,716,000
Additional paid in capital-outstanding stock options 2,213,000 2,061,000
Deficit accumulated during the development stage (19,625,000) (17,377,000)
Accumulated other comprehensive loss (4,000) (4,000)
------------ ------------
Total stockholders' equity 12,570,000 14,473,000
------------ ------------
Total liabilities and stockholders' equity $ 13,978,000 $ 15,413,000
============ ============
See accompanying notes to consolidated financial statements.
3
FAR EAST ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended
Cumulative March 31,
During ----------------------------
Development 2004
Stage 2005 (restated)
------------ ------------- ------------
Revenues $ - $ - $ -
------------ ------------ ------------
Expenses:
Geologic and engineering services 1,200,000 6,000 122,000
Exploration costs 1,254,000 704,000 -
Impairment loss 3,778,000 - -
Other consulting and professional services 1,602,000 283,000 83,000
Compensation 3,200,000 335,000 201,000
Stock compensation 1,610,000 97,000 207,000
Travel 1,621,000 104,000 84,000
Legal and accounting 2,527,000 537,000 208,000
Loss on investment in joint venture 22,000 - -
Amortization of contract rights 81,000 - 23,000
General and administrative 2,617,000 211,000 341,000
------------ ------------ ------------
Total expenses 19,512,000 2,277,000 1,269,000
------------ ------------ ------------
Other Expenses (Income):
Interest expense 178,000 1,000 -
Interest income (66,000) (30,000) (1,000)
Foreign currency exchange loss 1,000 - -
------------ ------------ ------------
Total other expense (income) 113,000 (29,000) (1,000)
------------ ------------ ------------
Loss before income taxes (19,625,000) (2,248,000) (1,268,000)
Income taxes - - -
------------ ------------ ------------
Net loss (19,625,000) (2,248,000) (1,268,000)
Accumulated deficit-beginning of period (17,377,000) (9,373,000)
------------ ------------ ------------
Accumulated deficit-end of period $(19,625,000) $(19,625,000) $(10,641,000)
============ ============ ============
Earnings per share:
Basic and diluted $ (0.03) $ (0.02)
============ ============
Weighted average shares outstanding:
Basic and diluted 77,306,716 56,307,401
============ ============
See the accompanying notes to consolidated financial statements.
4
FAR EAST ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Cumulative For the Three Months Ended
During March 31,
Development ---------------------------
Stage 2005 2004
------------- ------------- ------------
Cash flows from operating activities
Net loss $(19,625,000) $ (2,248,000) $(1,268,000)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 138,000 6,000 29,000
Stock issued to pay expense 75,000 17,000 14,000
Stock compensation 2,213,000 152,000 207,000
Loss on investment in joint venture 22,000 - -
Unsuccessful exploratory well cost 1,226,000 676,000 -
Impairment expense 3,778,000 - -
Interest expense--beneficial conversion feature 168,000 - -
Decrease (increase) in prepaids and other
current assets (79,000) 19,000 (180,000)
Increase in accounts payable 1,564,000 644,000 556,000
Decrease in other liabilities - - (105,000)
------------ ------------ -----------
Net cash used in operating activities (10,520,000) (734,000) (747,000)
------------ ------------ -----------
Cash flows used in investing activities
Loss on investment in joint venture (22,000) - -
Additions to unproved oil and gas properties (4,837,000) (1,483,000) (600,000)
Additions to other property (200,000) (47,000) (2,000)
Sale of oil and gas property 1,100,000 1,100,000 -
Increase in restricted cash (1,000,000) - -
------------ ------------ -----------
Net cash used in investing activities (4,959,000) (430,000) (602,000)
------------ ------------ -----------
Cash flows from financing activities
Net proceeds from the issuance of notes payable 300,000 - -
Net proceeds from the sale of common stock 22,579,000 - 20,000
Net proceeds from the exercise of warrants 2,858,000 - 259,000
Decrease in subscription receivable 250,000 250,000 -
------------ ------------ -----------
Net cash provided by financing activities 25,987,000 250,000 279,000
------------ ------------ -----------
Effect of exchange rate changes on cash (4,000) - -
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents 10,504,000 (914,000) (1,070,000)
Cash and cash equivalents--beginning of period - 11,418,000 2,326,000
------------ ------------ -----------
Cash and cash equivalents--end of period $ 10,504,000 $ 10,504,000 $ 1,256,000
============ ============ ===========
See the accompanying notes to consolidated financial statements.
5
FAR EAST ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We were incorporated in the State of Nevada on February 4, 2000, and on
January 10, 2002 we changed our name to Far East Energy Corporation. We are an
independent energy company engaged in the acquisition, exploration and
development of coalbed methane properties in the People's Republic of China
(PRC) and, prior to the sale of our properties in Montana in February 2005,
natural gas in Montana. We are a development stage company, and our activities
have been limited to organizational activities, including developing a strategic
operating plan, capital funding, hiring personnel, entering into contracts
acquiring rights to explore for, develop, produce and sell oil and gas or
coalbed methane (CBM), and drilling, testing and completion of exploratory
wells.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate our
continuation as a going concern. Note 2, "Going Concern," describes the factors
which raise substantial doubt about our ability to continue as a going concern,
and management's plan. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
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 2004 Form
10-K.
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 three months
ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005. 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.
Stock-based Compensation
We account for our stock-based compensation to employees and directors
under Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees,(APB 25) and related interpretations, and we 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:
Three Months Ended March 31,
----------------------------
2005 2004
------------ -------------
Net loss as reported $(2,248,000) $(1,268,000)
Add:
Stock-based employee compensation costs included in net loss 97,000 207,000
Deduct:
Stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects (401,000) (1,212,000)
----------- -----------
Pro forma net loss $(2,552,000) $(2,273,000)
=========== ===========
Basic and diluted loss per share:
As reported $ (0.03) $ (0.02)
=========== ===========
Pro forma $ (0.03) $ (0.04)
=========== ===========
6
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.
Noncash transactions
During the three months ended March 31, 2005, 15,000 shares of common
stock were issued as payment of consulting fees, valued at approximately
$17,000. Additionally, we issued warrants valued at approximately $176,000 to an
investor claiming antidilution protection provisions under an earlier private
placement. We recorded a liability for the estimated claim at December 31, 2004,
and settled it with warrants on January 10, 2005. During the three months ended
March 31, 2004, 6,000 shares of common stock were issued as payment of
consulting fees, valued at approximately $14,000.
Recent Accounting Pronouncement
Stock-based Compensation
On December 16, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)), which is a revision of Statement of Financial Accounting
Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123), SFAS
123(R) supersedes APB 25 and amends Statement of Financial Accounting Standards
No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. However, SFAS123(R) will require
all share-based payments to employees, including grants of stock options to
employees and members of the board of directors, to be recognized in our
consolidated statements of operations based on their fair values. Pro forma
disclosure is no longer an alternative.
SFAS 123(R) permits public companies to adopt its requirements using one
of two methods:
- A "modified prospective" method in which compensation cost is
recognized beginning with the effective date based on the
requirements of SFAS 123(R) for all share-based payments granted
after the effective date and based on the requirements of SFAS 123
for all awards granted to employees and members of the board of
directors prior to the adoption of SFAS 123(R) that remains unvested
on the adoption date.
- A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate either all prior periods presented or prior
interim periods of the year of adoption based on the amounts
previously recognized under SFAS 123 for purposes of pro forma
disclosures.
On April 21, 2005, the SEC announced the adoption of a new rule that
amends the compliance date for SFAS 123(R) so that each registrant that is not a
small business issuer will be required to prepare financial statements in
accordance with SFAS 123(R) beginning with the first interim or annual reporting
period of the registrant's first fiscal year beginning on or after June 15,
2005. We have elected to adopt the provisions of SFAS 123(R) on January 1, 2006
using the modified prospective method.
As permitted by SFAS 123, we currently account for share-based payments to
employees and members of the board of directors using the intrinsic value method
prescribed by APB 25 and related interpretations. As such, we recognize
compensation expense to the extent that the exercise price of the options is
below the market price on the date of grant for employee and director stock
options. Accordingly, we anticipate that the adoption of SFAS 123(R)'s fair
value method will have a significant impact on our future results of operations.
If we had adopted SFAS 123(R) in prior periods, the impact would have
approximated the impact of SFAS 123 as described in the pro forma net loss and
loss per share disclosures above. We have recorded options granted to our
technical advisors and consultants at fair value on the date of grant, and there
will be no effect on our results of operations for those options.
Accounting for Suspended Well Costs
On April 4, 2005, the Financial Accounting Standards Board Staff issued
FASB Staff Position FAS 19-1, Accounting for Suspended Well Costs, which
addresses whether there are circumstances under the successful efforts method of
accounting for oil- and gas-producing activities 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 under way or are firmly planned for the near
future. The FASB Staff Position states that the staff believes that exploratory
well costs should continue to be capitalized when the well has found a
sufficient quantity of reserves to justify its completion as a producing well,
and the enterprise is making sufficient progress assessing the reserves and the
economic and operating viability of the project. The Staff Position provides a
list of indicators that an enterprise is making sufficient progress and provides
for new disclosures concerning the capitalized exploratory well costs that are
pending the determination of proved reserves. The Staff Position will be applied
prospectively to existing and newly capitalized exploratory well costs in the
first reporting period after April 4, 2005. Early application of this guidance
is permitted in periods for which the financial statements have not been issued.
We will implement the Staff Position in the second quarter of 2005.
7
2. GOING CONCERN
Our consolidated financial statements have been prepared in conformity
with 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 have been in the development stage since
our formation on February 4, 2000. We have incurred net losses since our
inception, and we have not established a source of revenue. We have acquired an
undeveloped natural resource that will require substantial exploration and
development, management does not expect to generate meaningful revenues until at
least 2006. These factors raise substantial doubt about our ability to continue
as a going concern. Accordingly, realization of a major portion of the assets in
the accompanying consolidated balance sheet is dependent upon our continued
operations, which in turn is dependent upon our ability to meet our financing
requirements, and the success of our future operations.
Based on funds currently available to us and escrowed funds that we expect
will become available to us during 2005, management believes that we have
adequate cash resources to fund our operations and exploration and development
operations in China through late 2005. However, to continue to operate and
explore and develop our projects in China, we will need to raise additional
funds before the end of 2005. Management expects to raise additional funds
through equity offerings or debt. 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. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
3. RESTATEMENT OF FINANCIAL STATEMENTS
Our previously issued consolidated statement of operations for the three
months ended March 31, 2004 has been restated to reflect the change in the
beginning accumulated deficit as described below:
Acquisition
For the year ended December 31, 2003, we recorded a stock and cash for
stock acquisition at the estimated realizable value of the assets of $1,450,000.
We have determined that the assets should have been valued using the value of
the stock as quoted in the OTC 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 $3,328,000 to reduce the acquired assets to their
estimated realizable value of $1,450,000. Accordingly, the beginning balance of
the deficit accumulated during the development stage was increased by
$3,328,000.
Beneficial Conversion Feature
During 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,
the beginning balance of the deficit accumulated during the development state
was increased by $168,000.
The cumulative impact of all restatements described above on our deficit
accumulated during the development stage as follows:
As Previously Reported As Restated
---------------------- -----------
Balance of deficit accumulated during the development stage
January 1, 2004 $(5,877,000) $ (9,373,000)
March 31, 2004 (7,145,000) (10,641,000)
4. DISPOSITION OF MONTANA PROPERTIES
On February 2, 2005, Newark Valley Oil & Gas, Inc. entered into a purchase
and sale agreement with Zier & Associates, Ltd. for the sale of our oil and gas
leasehold interests and other property interests in Montana. As a condition to
the sale of our Montana properties, we acquired certain overriding royalty
interests in adjoining acreage for $100,000, which were also sold to Zier &
Associates, Ltd. under the terms of the purchase agreement. The transaction
closed on February 2, 2005. At the closing, we received gross proceeds of
$1,135,000 from the sale of the Montana properties (including the overriding
royalty interests) described above. Proceeds net of the cost of selling the
Montana properties were $1,100,000. We recorded an impairment loss of $450,000
in the fourth quarter of 2004 as a result of comparing the net proceeds, which
we believe to be a measure of the value of properties, to the carrying value. We
will remain responsible for the payment of expenses and related accounts payable
attributable to the Montana properties to the extent that they relate to the
time prior to February 2, 2005. We recorded no gain or loss on the sale of the
Montana properties.
8
Our consolidated balance sheet as of March 31, 2005 includes the sale of
our Montana properties. The following selected unaudited pro forma financial
information presents our consolidated operating results for the three months
ended March 31, 2005 and the year ended December 2004 as if we sold the Montana
properties on January 1, 2004:
Three Months Ended Year Ended
March 31, 2005 December 31, 2004
------------------ -----------------
Revenues $ - $ -
Loss before income taxes (2,247,000) (7,494,000)
Basic and diluted net loss per share $ (0.03) $ (0.12)
The unaudited pro forma financial information presented above is not
necessarily indicative of the results of operations we might have realized had
the transaction been completed at the beginning of the earliest period
presented, nor do they necessarily indicate our consolidated operating results
for any future period.
5. PROPERTY AND EQUIPMENT
Property and equipment includes the following:
March 31, December 31,
2005 2004
------------ ------------
Unproved leasehold costs $ 375,000 $ 1,375,000
Unevaluated wells costs 1,958,000 1,251,000
Furniture and equipment 194,000 147,000
----------- -----------
2,527,000 2,773,000
Accumulated depreciation and amortization (132,000) (126,000)
----------- -----------
$ 2,395,000 $ 2,647,000
=========== ===========
Depreciation expense for the three months ended March 31, 2005 and 2004
was approximately $6,000.
During the first quarter of 2004, we completed drilling a well in the
Yunnan Province and capitalized it pending whether proved reserves were
attributed. A one year evaluation period is provided under Statement of
Financial Accounting Standards No. 19. If significant capital expenditures are
required to classify the reserves discovered as proved, such as additional
exploratory wells to be drilled or construction of transportation equipment,
this one year period my be extended if the well has found a commercially
producible quantity of reserves and drilling in the area is firmly planned or
underway. During the first quarter of 2005, we expensed approximately $394,000
of unevaluated well costs to exploration costs related to this well as proved
reserves were not located within the one year period following its completion,
and the well did not qualify for continued capitalization.
6. COMMITMENTS AND CONTINGENCIES
We are periodically named in legal actions arising from normal 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.
Production Sharing Contract for Yunnan Province
We serve as operator under the production sharing contract to develop the
Enhong and Laochang areas in the Yunnan Province. The term of the production
sharing contract with CUCBM consists of a two-phase exploration period, a
development period and a production period. Under our Phase I requirements of
the exploration period, we completed the drilling of two slim hole vertical
wells during the first quarter. On February 25, 2005, we committed to begin
Phase II, which requires that we begin drilling one horizontal well with a
minimum of two laterals by December 31, 2005. During the exploration period, we
hold a 100% participating interest in the properties, and we must bear all
exploration costs for discovering and evaluating CBM-bearing areas. Prior to the
beginning of the development period of any CBM field in the Enhong-Laochang
project, CUCBM may elect to participate in the development of that CBM field at
a level of between zero and 40%. If any CBM field is discovered, the development
costs for that CBM field will also be borne by CUCBM and us in proportion to the
respective participating interests.
9
Following completion of Phase II of the exploration period, we may elect
to continue the production sharing contract and conduct development and
production operations on any CBM discoveries. The development period as to any
CBM field in the Enhong-Laochang project will begin after the approval of a
development plan submitted by us with respect to that field by the State Council
of the PRC and confirmed by CUCBM. The production period as to any CBM field in
the Enhong-Laochang project will begin after the date of commencement of
commercial production of that CBM field. Our agreement with CUCBM expires 20
years from the start date of the production period of the Enhong-Laochang
project.
In addition to the wells we must drill, we are required to make other
expenditures over the term of the production sharing contract, including, (1)
CUCBM assistance fees and training fees for Chinese personnel costs $45,000 each
per year during the exploration phase and $80,000 each per year during the
development and production phase; (2) reimbursement of CUCBM for
government-imposed fees for CBM exploration rights ($8,000 for the year ended
December 31, 2004 and in proportion to our participating interest in the
development and production periods); and (3) salary and benefits paid to CUCBM
professionals, which are currently $15,800 per month. The allocation of salary
and benefits for CUCBM professionals during the development and production
periods shall be determined by CUCBM and us through consultation.
Shanxi Province Agreements
We serve as operator under the production sharing contracts to develop the
Shouyang Block and Qinnan Block in the Shanxi Province. The term of the
production sharing contract with CUCBM consists of a three-phase exploration
period, a development period and a production period. We committed to begin
Phase II, which requires that we drill two horizontal wells in the Shouyang
block by December 31, 2005. We have agreed to use our best commercial efforts to
drill each of the horizontal wells to 4,000 meters in coal seam with a minimum
requirement under our farmout agreements of 2,000 meters drilled in coal seam
per well. If we elect to commit to Phase III we will be required to drill one
horizontal well, under which we will attempt to drill to 4,000 meters in coal
seam. We are required to complete Phase III by July 1, 2007. Our total work
commitment in Phases II and III, if we elect to commit to Phase III, will
consist of a total of 12,000 meters of horizontal drilling in coal seam for the
three wells completed during the exploration period.
We must bear all exploration costs for discovering and evaluating
CBM-bearing areas during Phase II. If we successfully complete Phase II,
Phillips China Inc. (Phillips) will have the option to elect to retain a net
undivided 30% participating interest or an overriding royalty interest up to
3.5% of the total participating interest. Additionally, prior to the beginning
of the development period of any CBM field in the Shanxi project, CUCBM may
elect to participate in the development of that CBM field at a level of between
zero and 30%. Therefore, depending upon whether Phillips and CUCBM elect to
participate in the project, our interest will range from 40% (assuming full
participation by Phillips and CUCBM) to 96.5% (assuming both CUCBM and Phillips
choose not to participate).
Following completion of Phase III of the exploration period, we may elect
to continue the production sharing contracts and conduct development and
production operations on any CBM discoveries. The development period as to any
CBM field in the Shanxi Province will begin after the approval of a development
plan submitted by us with respect to that field by the State Council of the PRC
and confirmed by CUCBM. The production period as to any CBM field in the Shanxi
Province project will begin after the date of commencement of commercial
production of that CBM field. Our agreement with CUCBM expires on April 1, 2034.
In addition to the wells we must drill, we are required to make other
expenditures over the term of the production sharing contracts, including, (1)
CUCBM assistance fees totaling $100,000 each per year during the exploration
period and $240,000 per year during the development and production periods; (2)
training fees for Chinese personnel working on the projects for $120,000 per
year during the development and production periods; (3) signature fees totaling
$300,000 which will be due within 30 days after first approval of the overall
development plan following the exploration period; (4) reimbursement of CUCBM
for government-imposed fees for CBM exploration rights ($240,000 for the twelve
months ending February 2006 and in proportion to our participating interest in
the development and production periods); and (5) salary and benefits paid to
CUCBM professionals, which are expected to be $13,500 per month through June
2005. The allocation of salary and benefits for CUCBM professionals during the
development and production periods shall be determined by CUCBM and us through
consultation.
We placed $1 million into escrow in May 2004 to guarantee performance of
the evaluation and work program to test existing wells under our agreement with
Phillips. In the event that we have not completed the drilling of the first
horizontal well in Phase II by June 30, 2005, we will be required to increase
the escrow account to $2.6 million. Notwithstanding the requirement to increase
the amount of the escrow account to $2.6 million on June 30, 2005, subject to
certain events described above, we shall have the right, each time subject to
the prior written consent of Phillips, to drawdown amounts from this escrow
account required to fund operations in Phase II after June 30, 2005. Each
drawdown shall not exceed $250,000. Required funding for these activities is
expected to come from existing capital.
10
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 may be investigating whether anyone has
issued false or misleading statements in connection with purchases and sales 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 beneficial owners under Section 16 of the Securities Exchange Act of 1934
(the Exchange Act) or failed to file ownership reports with the SEC as required
for 5% or more beneficial owners under Section 13 of the Exchange Act.
Management does not know of any acquisitions in excess of 5% of our outstanding
shares, except for those described in previous filings with the SEC under
Section 13 and Section 16 of the Exchange Act. We have supplied information to
the SEC in response to their information requests, including, but not limited
to, information on record ownership, stock transfers, sales of our securities
and board of director and committee meetings, and we intend to cooperate with
their investigation. We do not know what the outcome of their investigation may
be.
The Exchange Act and SEC rules require that a person or group of persons
who acquire beneficial ownership of more than 5% of a class of equity securities
that are registered under the Exchange Act must report their holdings in a
Schedule 13D. The Schedule 13D filing with the SEC within 10 days after they
become 5% stockholders, and must thereafter report changes in their beneficial
ownership of their securities. In addition, Section 16(a) of the Exchange Act
generally requires that beneficial owners of more than 10% of a class of stock
that is registered under the Exchange Act 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. If an undisclosed group owns or
obtains control of a block of our stock sufficient to control our company, they
could change the management and direction of our company in ways we cannot
predict.
Insurance Contract
Under our contract to purchase control of well and other related
insurance, which we entered into on March 4, 2005, we will pay one-half of the
premium in April 2005, approximately $80,000, and the remaining balance in four
quarterly installments of approximately $20,000 each.
7. STOCKHOLDERS' EQUITY
Common Stock
---------------------- Additional Number of Number of
Number of Paid in Warrants Options
Shares Par Value Capital Outstanding Outstanding
---------- --------- ------------- ----------- -----------
Balance, January 1, 2005 76,542,410 $77,000 $ 29,716,000 16,800,689 10,218,000
Shares issued to compensate
consultant 15,000 - 17,000 - -
Shares issued to fulfill antidilution
provisions of previous issuances 887,500 1,000 (1,000) 750,000 -
Issuance of warrants - - 176,000 375,000
Warrants surrendered - - - (550,000) -
Issuance of options - - - - 80,000
Forfeiture of options - - - - (212,000)
---------- ------- ------------ ---------- ----------
Balance, March 31, 2005 77,444,910 $78,000 $ 29,908,000 17,375,689 10,086,000
---------- ------- ------------ ---------- ----------
Issuances of Common Stock
As a result of our private placements completed in December 2004, we
issued a total of 887,500 shares of our common stock to two investors with
antidilution protection provisions granted in previously completed private
placements. The shares of our common stock were issued on January 13, 2005. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
upon the exemption provided in Section 4(2) of the Securities Act.
11
We issued 5,000 shares of our common stock each month under a contract for
investor relations and consulting services for a total of 15,000 shares for the
first quarter of 2005. We value the services at the price of the stock on the
last trading day of the month they were awarded. The securities, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act.
Resale Restrictions
On March 31, 2005, we had 77,444,910 shares of common stock outstanding,
of which 41,950,026, or 54%, were subject to resale restrictions. Of the
41,950,026 restricted shares, 17,170,000 shares have been held in the name of
the holder of record for more than two years and, presuming all other Rule 144
requirements have been met, are currently eligible to have resale restrictions
lifted without limitation. Of the 41,950,026 restricted shares 6,359,269 shares
have been held for over one year and are eligible to have resale restrictions
lifted with limitation. Of the 41,950,026 restricted shares, 2,813,825 will
become eligible to have resale restrictions lifted with limitation within the
next six months by virtue of having been outstanding for more than one year. We
have also registered 2,425,000 shares on a registration statement and during its
effectiveness these shares will not be subject to resale restrictions.
Issuance of Warrants to Purchase Our Common Stock
On January 10, 2005, we issued a warrant to an accredited investor to
purchase 375,000 shares of our common stock at an exercise price of $1.25 per
share in settlement of claimed antidilution protection provisions granted in a
previously completed private placement. The warrant expires on December 16,
2007. The securities which were subject to appropriate transfer restrictions
were issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act. An accrual of the loss
was recorded at December 31, 2004.
As a result of our private placements completed in December 2004, we
issued warrants to two investors with antidilution protection provisions granted
in previously completed private placements. On January 13, 2005, we (1) issued
warrants to purchase 687,500 shares of our common stock at $2.50 per share for a
three year term in exchange for warrants surrendered to purchase 550,000 shares
of our common stock at $2.50 and (2) issued warrants to purchase 62,500 shares
of our common stock at $1.50 per share. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act upon the exemption provided in
Section 4(2) of the Securities Act.
Granting of Options
On January 19, 2005, we granted an option to a gas marketing consultant to
purchase 80,000 shares of common stock at an exercise price of $2.00 per share
in consideration for consulting services to be rendered by the consultant. The
option expires on January 19, 2010. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
On January 20, 2005, we entered into two options agreements whereby an
investor relations consulting firm, in consideration for certain investor
relations services, received an option to purchase 50,000 shares of common stock
at an exercise price of $4.40 per share and received an option to purchase
50,000 shares of common stock at an exercise price of $3.30 per share. The
options expire on the second anniversary of the date on which the Securities and
Exchange Commission declares a Registration Statement (as defined in the option
agreement) filed by us effective. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our audited
consolidated financial statements and related notes included in our annual
report of Form 10-K for the year ended December 31, 2004 and the financial
statements and related notes in this report.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21B of the Exchange Act.
All statements other than statements of historical facts contained in this
report, including statements regarding our future financial position, business
strategy and plans and objectives of management for future operations, are
forward-looking statements. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect," and similar expressions, as they
relate to us, are intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements are subject to a number of known and
unknown risks, uncertainties and assumptions described in this report.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable, there can be no assurance that the
actual results or developments we anticipate will be realized or, even if
substantially realized, that they will have the expected effects on our business
or operations. Actual results could differ materially from those projected in
such forward-looking statements. Factors that could cause actual results to
differ materially from those projected in such forward-looking statements
include: our lack of operating history; limited and potentially inadequate
management of our cash resources; risk and uncertainties associated with
exploration; development and production of coalbed methane; expropriation and
other risks associated with foreign operations; matters affecting the energy
industry generally; lack of availability of oil and gas field goods and
services; environmental risks; drilling and production risks; changes in laws or
regulations affecting our operations, as well as other risks described in our
annual report on Form 10-K and subsequent filings with the SEC.
When you consider these forward-looking statements, you should keep in
mind these risk factors and the other cautionary statements in this report. Our
forward-looking statements speak only as of the date made. All subsequent oral
and written forward looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by these factors. We assume
no obligation to update any of these statements.
OVERVIEW
We are a development stage company, and our objective is to become a
recognized leader in coalbed methane gas property acquisition, exploration,
development and production. Our activities to date have been principally limited
to organizational activities, including developing a strategic operating plan,
capital funding, hiring personnel, entering into contracts, acquiring rights to
explore, develop, produce and sell oil and gas or coalbed methane (CBM), and
beginning in 2003, the drilling, testing and completion of exploratory wells.
Our operations concentrate on CBM exploration and development in the
Yunnan Province in Southern China and in the Shanxi Province in Northern China.
During the first quarter of 2005, we completed our obligation to drill two slim
hole vertical wells in the Yunnan Province. We incurred exploration and
development costs of approximately $950,000 in the Yunnan Province and
approximately $600,000 in the Shanxi Province during the quarter ended March 31,
2005. Although we believe the results of our exploration activities in the
Yunnan and Shanxi Provinces have been favorable, we will need to complete
several more wells to achieve commercial viability in these provinces, which
will require significant capital expenditures. No gas pipeline, liquefied
natural gas plant, or other off-take candidate currently exists to transport CBM
from our properties in the Yunnan Province, and it is not likely that any such
facilities will be built until favorable results are obtained from several more
wells. No liquefied natural gas plant, or other offtake candidate currently
exists near our Shanxi Province projects, and pipelines must also be built on
those projects to connect to larger existing pipelines in the area of our
projects to transport any CBM that may be produced from those projects. Actual
production may vary materially from preliminary test results. Actual sustainable
production from the wells may be at recovery rates and gas quality materially
worse than our first indications.
Until recently, we also owned undeveloped oil, gas and mineral rights and
interests in approximately 149,000 net acres located in the eastern portion of
Montana. On February 2, 2005, our wholly owned subsidiary, Newark Valley Oil &
Gas, Inc., entered into a purchase and sale agreement with Zier & Associates,
Ltd. for the sale of our oil and gas leasehold interests and other property
interests in Montana. As a condition to the sale of our Montana properties, we
acquired certain overriding royalty interests in adjoining acreage for $100,000,
which were also sold under the terms of the purchase and sale agreement. The
transaction closed on February 2,
13
2005. At the closing, we received gross proceeds of $1,135,000 and net proceeds
after selling costs of $1,100,000 from the sale of our Montana properties
(including the overriding royalty interests described above). We consider our
Montana properties to be non-core assets of our company. We sold these assets in
order to focus our efforts on the exploration and development of our coalbed
methane holdings located in China.
We have not recognized any revenues from our operations and do not
anticipate recognizing significant revenues prior to late 2006. We incurred a
net loss of approximately $2.2 million for the quarter ended March 31, 2005, and
we expect to incur losses and negative cash flows for the foreseeable future. As
we are a development stage company concentrating on exploration and development
of CBM, our expenditures primarily consist of geological and engineering
services, exploration costs and travel expenses between our headquarters and
China. Our expenses also consist of consulting and professional services
(including fund raising expenses), compensation, legal and accounting and
general and administrative expenses which we incurred in order to address
necessary organizational activities.
Based on funds currently available to us and escrowed funds that we expect
will become available to us during 2005, management believes that we have
adequate cash resources to fund our operations and exploration and development
operations in China through late 2005. During 2005, we estimate total capital
expenditures in China will be approximately $7.3 million and our total operating
expenditures will be $7.5 million. We will also require resources to fund
significant capital expenditures for exploration and development activities and
to fund operating expenses in future periods. As we do not have a source of
revenue, we will require additional financing in order to continue our
exploration and development in China and sustain our operating losses. We intend
to finance our operations by various methods, which might include issuing equity
securities, the continued exercise of warrants issued to investors in
conjunction with the previously completed private offerings, and entering into
farmout agreements and other arrangements with strategic partners, among other
alternatives. If we fail to raise the necessary funds to complete our
exploration activities, and we cannot obtain extensions to the requirements
under our production sharing contracts, we would not be able to successfully
complete our exploration activities, and we may lose rights under our production
sharing contracts.
On March 15, 2005, our board of directors, upon the recommendation of
management, approved the adoption of a restructuring plan (Restructuring Plan),
authorizing us (upon satisfaction of certain conditions) to transfer to Far East
Energy (Bermuda), Ltd., a newly formed wholly-owned subsidiary organized under
the laws of Bermuda (FEEB), all or substantially all of our assets relating to
our operations in the PRC. After the consummation of the Restructuring Plan, we
are not expected to own a significant amount of assets other than the
outstanding capital stock of our subsidiaries, including FEEB, and cash and cash
equivalents. The implementation of the Restructuring Plan will have no effect on
the presentation of our consolidated financial statements. In addition to being
subject to stockholder approval at the 2005 Annual Meeting of Stockholders
scheduled to be held on May 24, 2005, the implementation of the Restructuring
Plan is subject to a number of conditions, including the receipt of all material
consents and approvals of governmental authorities and other third parties.
There can be no assurances that the conditions to the Restructuring Plan will be
satisfied and that the board of directors will determine to transfer the assets
pursuant to the Restructuring Plan. The board of directors may, in its
discretion, terminate the Restructuring Plan at any time prior to its
consummation.
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-K for the fiscal year ended December 31, 2004 and with the financial
statements and notes thereto included in this report. Comparisons made between
reporting periods herein are for the three months ended March 31, 2005 as
compared to the three months ended March 31, 2004.
Three Months Ended
March 31,
---------------------------------
Percent
2005 2004 change
---------- ---------- -------
Geologic and engineering services $ 6,000 $ 122,000 -95%
Exploration costs 704,000 - n/a
Other consulting and professional services 283,000 83,000 241%
Compensation 335,000 201,000 67%
Stock compensation 97,000 207,000 -53%
Travel 104,000 84,000 24%
Legal and accounting 537,000 208,000 158%
Amortization - 23,000 -100%
General and administrative 211,000 341,000 -38%
---------- ----------
Total $2,277,000 $1,269,000 79%
========== ==========
14
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2004
Geologic and engineering services decreased due to the sale of our Montana
properties and resulting reduction in leasehold rental expenses.
Exploration costs for the three month period ended March 31, 2005 consist
of the expense to drill the second well in the Enhong-Laochang block in the
Yunnan Province and two slim hole wells drilled in the Yunnan Province. The
second well in the Enhong-Laochang block in the Yunnan Province was completed on
February 18, 2004. Costs related to the second well were recorded as unevaluated
well costs in property and equipment pending determination of whether proved
reserves would be attributed to the well. Statement of Financial Accounting
Standards No. 19, (SFAS 19) requires that the costs of wells which do not locate
proved reserves be expensed. SFAS 19 provides for a one year evaluation period
from the completion of drilling the well. If significant capital expenditures
are required to classify the reserves discovered as proved, such as additional
exploratory wells to be drilled or construction of transportation equipment,
this one year period may be extended if the well has found a commercially
producible quantity of reserves and drilling in the area is firmly planned or
underway. The second well has not located reserves within the one year period,
and approximately $394,000 was expensed in the first quarter of 2005.
Additionally, we expensed approximately $282,000 related to the two slim hole
wells drilled in the Yunnan Province as there are no plans to further test these
wells. An additional well was completed in the Enhong-Laochang block in April
2004, EH-01, which was the third well that we drilled in the Yunnan Province. We
anticipate that we may not locate proved reserves within the one year and do not
have additional wells in progress or firmly planned that would allow us to
continue to capitalize the costs related to the well under SFAS 19 and FASB
Staff Position 19-1 which we will adopt in the second quarter. The costs
capitalized related to this well at March 31, 2005 were approximately $907,000.
We incurred no impairment expense during the three months ended March 31,
2005. The carrying value of our Montana properties was reduced to the estimated
proceeds from the sale of the properties estimated at December 31, 2004. This
property was sold in February 2005.
The increase in our other consulting and professional services in the
first quarter of 2005 compared to the first quarter of 2004 is primarily
attributed to expenses incurred in connection with our investor relations
activities. The increase, to a lesser extent is the result of consulting expense
related to our China operations.
Compensation increased primarily due to the increase in permanent
employees, including hiring permanent employees in finance and field operations.
Additionally, approximately 5% was due to salary increases, which became
effective on January 1, 2005.
We record stock compensation under Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees (APB 25), which requires that we
recognize compensation expense for the amount by which the market price exceeds
the grant price on the grant date. Stock compensation expense decreased from
2004 to 2005 primarily because no options were granted at a price below the
market price on the date of grant during the first three months of 2005.
Travel costs increased in the first quarter of 2005 compared to the first
quarter of 2004 due primarily to travel to China as a result of increased
operations. This was offset by a decrease in the travel for fund raising efforts
due to completion of private placements at the end of 2004.
Legal and accounting expenses have increased in the first quarter of 2005
compared to the first quarter of 2004 as a result of our registration statement
filed with the SEC in July 2004 and declared effective in February 2005,
preparation of our proxy statement for our 2005 Annual Meeting of Stockholders
and planning the restructuring as described under Overview above.
General and administrative expense decreased due to a reduction in
contract labor as a result of hiring permanent employees in finance and the
reduction in stock compensation expense for technical advisors as no additional
options have been awarded to them.
Interest income increased as a result of the increased cash balances
bearing interest
CAPITAL RESOURCES AND LIQUIDITY
We have no source of revenue or cash flow from operations, and our primary
source of cash flow has been cash proceeds from the sale of our Montana
properties during the first quarter of 2005 and private placements of our common
stock and warrants to purchase our common stock in the last quarter of 2004.
Based on funds currently available to us and escrowed funds that we expect will
become available to us during 2005, we believe that we have adequate cash
resources to fund our operations and exploration and development operations in
China through late 2005. However, to continue to operate and explore and develop
our projects in China, we will need to raise additional funds before the end of
2005.
15
Cash flow
As of March 31, 2005, our cash and cash equivalents were $10,504,000,
excluding the $1,000,000 of restricted cash held in escrow pursuant to our
Shanxi Province farmout agreements. Cash and cash equivalents excluding the
$1,000,000 of restricted cash was $11,418,000 as of December 31, 2004.
Cash used in operating activities for the three months ended March 31,
2005 was $734,000 as compared to cash used in operating activities for the same
period of 2004 of $747,000. This reduction is primarily due to our ability to
obtain more favorable payment terms on payables as a result of our increased
cash resources.
Cash used in investing activities decreased to $430,000 for the three
months ended March 31, 2005 as compared to $602,000 for the same period in 2004.
This decrease is primarily attributable to the receipt of $1.1 million for the
sale of our Montana oil and gas properties during the quarter ended March 31,
2005, which was offset by approximately $1.5 million of cash used for additions
to our unproved oil and gas properties compared to $600,000 used for the three
months ended March 31, 2004. The increase in cash used for additions to our
unproved oil and gas properties was a result of the fracturing of a well and
drilling of two slim hole wells in the Yunnan Province and continued testing of
a well in the Shanxi Province in China.
Cash provided by financing transactions was $250,000 for the three months
ended March 31, 2005 as compared to $279,000 for the same period in 2004. The
cash provided in 2005 is a result of collecting the subscriptions receivable and
the amount in 2004 resulted primarily from the exercise of warrants.
CAPITAL RESOURCES AND REQUIREMENTS
In February 2005, our wholly owned subsidiary, Newark Valley Oil & Gas,
Inc. entered into a purchase and sale agreement with Zier & Associates, Ltd. for
the sale of our oil and gas interests and other property interests in Montana.
As a condition of the sale, we acquired certain overriding royalty interests in
adjoining acreage for $100,000, which were also sold under the terms of the
purchase and sale agreement. At the closing, we received gross proceeds of
$1,135,000 and net proceeds after selling costs of $1,100,000 from the sale of
our Montana properties.
The Shanxi agreements required that we post a $1.0 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 $1.0 million
into escrow to satisfy this bond. The $1.0 million escrow account will continue
to be held until December 31, 2005. In the event that we have not completed
drilling of the first horizontal well in Phase II by June 30, 2005, we will be
required to increase the escrow account to $2.6 million. We believe that we can
satisfy this requirement, if necessary with our current cash resources.
Notwithstanding the requirement to increase the amount of the escrow account to
$2.6 million on June 30, 2005, subject to the prior written consent of Phillips,
we will be able to drawdown amounts from this escrow account required to fund
operations in Phase II after June 30, 2005. Each drawdown may not exceed
$250,000. We anticipate that we will be able to draw down the total amount of
the escrow during 2005.
Our board of directors has the authority, without further action by the
stockholders, to issue up to 500.0 million shares of preferred stock in one or
more series and to designate the rights, preferences, privileges and
restrictions of each series. We also have 500.0 million shares of common stock
authorized under our charter documents, of which 77.4 million shares was issued
and outstanding as of March 31, 2005. The issuance of preferred stock could have
the effect of restricting dividends on the common stock or delaying or
preventing our change in control without further action by the stockholders.
While we have no present plans to issue any shares of preferred stock, we may
need to do so in the future in connection with capital raising transactions. In
addition, we may issue additional shares of common stock in connection with
fundraising activities. The issuance of additional common stock would also have
a dilutive impact on our stockholders' ownership interest in our company.
The exploration and development of coalbed methane gas reserves requires
substantial capital expenditures. In order to reduce our investment in a
particular project, we may form joint ventures and seek joint venture partners
to share the costs. We incurred $1.5 million of costs related to the exploration
and development during the quarter ended March 31, 2005. We anticipate that cash
expenditures for the remaining nine months of 2005 and first quarter of 2006
would include:
- YUNNAN PROVINCE PHASE II. We elected to continue to Phase II, and
our obligations will require us to drill at least one additional
horizontal well with a minimum of two laterals. Our Phase II
obligations are required to be completed by December 31, 2005. We
expect to incur capital expenditures associated with these Phase II
obligations of approximately $2.1 million.
- SHANXI PROVINCE PHASE II. We have completed our Phase I obligations,
and we have elected to enter into Phase II under the Shanxi
Agreements. Our Phase II obligations require us to drill two
horizontal wells in the Shouyang block by December 31, 2005. We
expect to incur capital expenditures associated with these Phase II
obligations of approximately $4.6 million.
16
- CONSULTING EXPENDITURES FOR PHASE II FOR SHANXI AND YUNNAN
PROVINCES. We have engaged consultants to assist with the two
horizontal wells to be drilled in the Shanxi Province and one well
in the Yunnan Province. We estimate that we will incur approximately
$800,000 of these consulting costs related to the drilling of these
three wells.
If our operating requirements differ materially from those currently planned, we
may require more financing than currently anticipated.
We will also require resources to fund significant capital expenditures
for exploration and development activities and to fund operating expenses in
future periods. We do not anticipate recognizing significant revenues prior to
late 2006. CBM projects traditionally require multiple wells to properly dewater
the coal and generate predictable volumes of gas. It is not yet possible to
predict volumes so decisions about marketing the CBM cannot yet be made. To
generate revenue in China prior to the point at which production reaches
pipeline quantities, we may elect to install compressors and produce compressed
natural gas (CNG), which could be sold to local communities. This alternative
would cost approximately $220,000 for each compressor. Installation of the
compressor could be completed in approximately 90 days, and could be funded from
existing cash resources. We could also elect to construct LNG facilities on our
properties. We estimate that a 100-ton per day LNG facility, which would liquefy
approximately five million cubic feet of gas per day, would cost approximately
$10 to $15 million to construct. We estimate that a 1,000-ton per day facility
capable of liquefying 50 million cubic feet of gas per day would cost
approximately $75 million. However, we believe it is possible that an LNG
concern attracted by our CBM production or prospects, may decide to construct
such facilities near our properties at their own cost. We may construct
pipelines to move CBM from our fields to either municipalities or other
pipelines. We estimate the cost to construct a pipeline in the Enhong and
Laochang areas of the Yunnan Province to be approximately $50 million. Our
farmout agreement from Phillips provides us with rights to two separate blocks,
including 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 CBM volumes are achieved. We believe this delay
may allow us to avoid construction costs to the extent other strategic partners
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 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 exploration and development
activities, and upon the success of these activities. To develop our projects in
China over the long term, we need to obtain project funding to satisfy
significant expenditures for exploration and development of those projects, if
they are successful. If we fail to raise the necessary funds to complete our
exploration activities, and we cannot obtain extensions to the requirements
under our production sharing contracts, we would not be able to successfully
complete our exploration activities, and we may lose rights under our production
sharing contracts.
We intend to obtain the funds for our planned exploration and development
activities 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 farmout 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 for our years ended December 31, 2004,
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 CBM, and, assuming success in those
exploratory efforts, to raise the funds necessary for production and
development.
17
CONTRACTUAL OBLIGATIONS
Our contractual obligations under non-cancelable agreements at March 31,
2005, increased approximately $180,000 due to the increase in the amount to be
reimbursed to CUCBM for government-imposed fees for CBM exploration rights in
the Shanxi Province. During the year ended December 31, 2004 this amount was
approximately $56,000; however in February 2005, the fee was increased to
approximately $240,000. Additionally, we entered into a contract to purchase
control of well and related insurance for approximately $160,000. The following
table updates our contractual obligations presented in our annual report on Form
10-K for the year ended December 31, 2004, including the increase in the fees:
Payments Due by Period
Less than More Than
Total One Year 1-3 Years 3-5 Years 5 Years
---------- ---------- --------- --------- -------
Long-Term Debt Obligations $ - $ - $ - $ - $ -
Capital Lease Obligations - - - - -
Operating Lease Obligations(1) 152,000 52,000 100,000 - -
Purchase Obligations(2) 1,290,000 1,262,000 28,000
Other Long-Term Liabilities Reflected on the
Registrant's Balance Sheet Under GAAP - - - - -
---------- ---------- -------- ------- -------
Totals $1,442,000 $1,314,000 $128,000 $ - $ -
========== ========== ======== ======= =======
(1) We enter into operating leases in the normal course of business primarily
for our office space and equipment.
(2) We include in purchase obligations contractual agreements to purchase
goods and services that are legally enforceable and that specify all
significant terms, including fixed or minimum quantities, fixed, minimum
for variable price provisions and the approximate timing of the
transaction. We have included our obligations under the production sharing
contracts for the Yunnan Province and Shanxi Province projects for which
the amounts were specified in the contracts. We have committed to Phase II
for each of these projects and have included contractual expenses through
Phase II, both of which are required to be completed by December 31, 2005.
We did not include the drilling and completion costs required under the
production sharing contract as those amounts are not specified in the
contract, but are performance requirements. We have disclosed our estimate
of the costs to perform those required actions as described under Capital
Resources and Requirements above.
CRITICAL ACCOUNTING POLICIES
Our 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 accounting principles generally accepted in the
United States ("GAAP"). The preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. We consider an accounting
estimate to be critical if (1) it requires assumptions to be made that were
uncertain at the time the estimate was made; and (2) changes in the estimate or
different estimates that could have been selected could have a material impact
on our results of operations or financial condition.
We believe the following critical accounting policies reflect our
significant estimates and judgments used in the preparation of our financial
statements:
Accounting for Oil and Gas Properties. We use the successful efforts
method of accounting for our oil and gas properties. Under this method, oil and
gas lease acquisition costs and intangible drilling costs associated with
exploration efforts that result in the discovery of proved reserves and costs
associated with development drilling, whether or not successful, are capitalized
when incurred. Certain costs of exploratory wells are capitalized pending
determination that proved reserves have been found. If the determination is
dependent upon the results of planned additional wells and required capital
expenditures to produce the reserves found, the drilling costs will be
capitalized as long as sufficient reserves have been found to justify completion
of the exploratory well and additional wells are underway or firmly planned to
complete the evaluation of the well. All costs related to unsuccessful
exploratory wells are expensed when such wells are determined to be
non-productive or at the one year anniversary of completion of the well if
proved reserves have not been attributed and capital expenditures as described
in the preceding sentence are not required. We assess our capitalized
exploratory wells pending evaluation each quarter to determine whether costs
should remain capitalized or should be charged to earnings. 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
18
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.
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.
Coalbed methane wells require a period of time to dewater the wells prior to
testing and determining whether proved reserves can be attributed to the well.
If this period exceeds one year, and we anticipate that it will for our initial
wells in the Yunnan and Shanxi Provinces, we will be required to charge the
costs of these wells to exploration expense. As of March 31, 2005, we had
unevaluated exploratory drilling costs of $2.0 million incurred in China.
Impairment of unproved leasehold costs. Unproved leasehold costs are
capitalized and are reviewed periodically for impairment. Costs related to
impaired prospects 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 economic to develop some of these unproved properties. As of March 31, 2005,
we had total unproved leasehold costs of approximately $0.4 million consisting
of undeveloped leasehold costs 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 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 estimates as to the
proper discount rate to use and timing of abandonment.
We have drilled three wells and two slim hole vertical wells in the Yunnan
Province, and Phillips drilled three wells in the Shanxi Province, which we
acquired through our farmout agreements with Phillips. We will be required to
plug and abandon those wells and restore the well site upon completion of their
production. Sufficient testing on the wells has not been completed to determine
the lives of these wells and therefore we have insufficient information to
determine the timing of the obligations related to plugging, abandoning and
restoring the site and cannot determine the present value of the obligation. Due
to the small number of wells, we do not believe the obligation is material, and
we will recognize the liability when a reasonable estimate of fair value can be
made. Therefore, there is no provision in the accompanying consolidated
financial statements.
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.
Stock Based Compensation. We apply Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for our stock option grants to employees and members of our board
of directors. Compensation cost for stock options granted has been recognized
for certain options granted at an exercise price below market value. Other
options granted had an exercise price equal to or greater than the market value
of the underlying common stock on the day of grant. We apply Statement of
Accounting Standards No. 123 as amended by SFAS No. 148, Accounting for
Stock-Based Compensation, for our technical advisors and consultants who are
granted options. Compensation cost for stock options granted to technical
advisors and consultants has been recognized as the fair value of the options
granted on the grant date.
19
NEW ACCOUNTING PRONOUNCEMENTS
STOCK BASED COMPENSATION
On December 16, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)"), which is a revision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123(R) supersedes APB 25 and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows". Generally, the approach
in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS
123(R) will require all share-based payments to employees, including grants of
stock options to employees and members of the board of directors, to be
recognized in our consolidated statements of operations based on their fair
values. Pro forma disclosure is no longer an alternative.
SFAS 123(R) permits public companies to adopt its requirements using one
of two methods:
- A "modified prospective" method in which compensation cost is
recognized beginning with the effective date based on the
requirements of SFAS 123(R) for all share-based payments granted
after the effective date and based on the requirements of SFAS 123
for all awards granted to employees and members of the board of
directors prior to the adoption date of SFAS 123(R) that remain
unvested on the adoption date.
- A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate either all prior periods presented or prior
interim periods of the year of adoption based on the amounts
previously recognized under SFAS 123 for purposes of pro forma
disclosures.
On April 21, 2005, the SEC announced the adoption of a new rule that
amends the compliance date for SFAS 123(R) so that each registrant that is not a
small business issuer will be required to prepare financial statements in
accordance with SFAS 123(R) beginning with the first interim or annual reporting
period of the registrant's first fiscal year beginning on or after June 15,
2005. We have elected to adopt the provisions of SFAS 123(R) on January 1, 2006
using the modified prospective method.
As permitted by SFAS 123, we currently account for share-based payments to
employees and members of the board of directors using the intrinsic value method
prescribed by APB 25 and related interpretations. As such, we recognize
compensation expense to the extent that the exercise price of the options is
below the market price on the date of grant for employee and director stock
options. Accordingly, we anticipate that the adoption of SFAS 123(R)'s fair
value method will have a significant impact on our future result of operations.
If we had adopted SFAS 123(R) in prior periods, the impact would have
approximated the impact of SFAS 123 as described in the pro forma net income and
earnings per share disclosures in Note 1 of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements". We have recorded options
granted to our technical advisors and consultants at fair value on the date of
grant, and there will be no effect on our results of operations for those
options.
ACCOUNTING FOR SUSPENDED WELL COSTS
On April 4, 2005, the Financial Accounting Standards Board Staff issued
FASB Staff Position FAS 19-1, Accounting for Suspended Well Costs, which
addresses whether there are circumstances under the successful efforts method of
accounting for oil- and gas-producing activities 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 under way or are firmly planned for the near
future. The FASB Staff Position states that the staff believes that exploratory
well costs should continue to be capitalized when the well has found a
sufficient quantity of reserves to justify its completion as a producing well,
and the enterprise is making sufficient progress assessing the reserves and the
economic and operating viability of the project. The Staff Position provides a
list of indicators that an enterprise is making sufficient progress and provides
for new disclosures concerning the capitalized exploratory well costs that are
pending the determination of proved reserves. The Staff Position will be applied
prospectively to existing and newly capitalized exploratory well costs in the
first reporting period after April 4, 2005. Early application of this guidance
is permitted in periods for which the financial statements have not been issued.
We will implement the Staff Position in the second quarter of 2005.
20
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 currently hedge
our exposure to currency rate changes. 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 these requests
and permits currency float against the U.S. dollar, we must either adopt cash
management strategies to hedge U.S. dollars against the Yuan or be subject to
the exchange rate risks. 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. We do not expect to generate significant revenues from
activities in China prior to late 2006.
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 Exchange Act, 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 were effective as of the end of the period
covered by this report to provide reasonable assurance that information required
to be disclosed by the Company in the reports that the Company files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC'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
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As a result of our private placements completed in December 2004, we
issued a total of 887,500 shares of our common stock to two investors with
antidilution protection provisions granted in previously completed private
placements. The shares of our common stock were issued on January 13, 2005.
Additionally, in connection with the antidilution protection provisions we
issued warrants to the two investors. On January 13, 2005, we (1) issued
warrants to purchase 687,500 shares of our common stock at $2.50 per share for a
three year term in exchange for warrants surrendered to purchase 550,000 shares
of our common stock at $2.50 and (2) issued warrants to purchase 62,500 shares
of our common stock at $1.50 per share. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act upon the exemption provided in
Section 4(2) of the Securities Act.
On January 31, 2005, February 28, 2005 and March 31, 2005, we issued 5,000
shares of our common stock, a total of 15,000 shares during the first quarter,
to a consultant in consideration for investor relations and consulting services.
We value the services at the price of the stock on the last trading day of the
month they were awarded. The securities, which were taken for investment and
were subject to appropriate transfer restrictions, were issued without
registration under the Securities Act upon the exemption provided in Section
4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
21
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 and President
(Principal Executive Officer)
/s/ Bruce N. Huff
-----------------------------------------
Bruce N. Huff
Chief Financial Officer (Principal Financial and
Accounting Officer)
Date: May 9, 2005
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- ------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company's Annual Report on Form 10K for the year ended
December 31, 2004, which was filed on March 15, 2005, and incorporated
herein by reference).
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K filed on March 17, 2005, and
incorporated herein by reference).
4.1 Articles of Incorporation of the Company, as amended (included as
Exhibit 3.1).
4.2 Amended and Restated Bylaws of the Company (included as Exhibit 3.2).
4.3 Specimen stock certificate (filed as Exhibit 4.5 to the Company's Annual
Report on Form 10K for the year ended December 31, 2004, which was filed
on March 15, 2005, and incorporated herein by reference).
10.1* Amended and Restated Employment Agreement, dated December 23, 2004, by
and between the Company and Michael R. McElwrath (filed as Exhibit 10.1
to the Company's Current Report on Form 8-K filed on December 28, 2004,
and incorporated herein by reference).
10.2* Amended and Restated Employment Agreement, dated December 23, 2004, by
and between the Company and Bruce N. Huff (filed as Exhibit 10.2 to the
Company's Current Report on form 8-K filed on December 23, 2004, and
incorporated herein by reference).
10.3* Employment Agreement, dated February 1, 2004, by and between the Company
and Garry R. Ward (filed as Exhibit 10.3 to the Company's Annual Report
on Form 10K for the year ended December 31, 2004, which was filed on
March 15, 2005, and incorporated herein by reference).
10.4* Employment Agreement, dated November 1, 2003, by and between the Company
and Zhendong "Alex" Yang (filed as Exhibit 10.4 to the Company's Annual
Report on Form 10K for the year ended December 31, 2004, which was filed
on March 15, 2005, and incorporated herein by reference).
10.5* Amended and Restated Nonqualified Stock Option Agreement, dated December
23, 2004, by and between the Company and Michael R. McElwrath (filed as
Exhibit 10.3 to the Company's Current Report on Form 8-K filed on
December 28, 2004, and incorporated herein by reference).
10.6* Amended and Restated Nonqualified Stock Option Agreement, dated December
23, 2004, by and between the Company and Michael R. MeElwrath (filed as
Exhibit 10.4 to the Company's Current Report on Form 8-K filed on
December 28, 2004, and incorporated herein by reference).
10.7* Amended and Restated Nonqualified Stock Option Agreement, dated December
23, 2004, by and between the Company and Bruce N. Huff (filed as Exhibit
10.5 to the Company's Current Report on Form 8-K filed on December 28,
2004, and incorporated herein by reference).
10.8* Nonqualified Stock Option Agreement, dated December 23, 2004, by and
between the Company and Michael R. McElwrath (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K filed on December 28, 2004, and
incorporated herein by reference).
10.9* Nonqualified Stock Option Agreement, dated December 23, 2004, by and
between the Company and Bruce N. Huff (filed as Exhibit 10.7 to the
Company's Current Report on Form 8-K filed on December 28, 2004, and
incorporated herein by reference).
10.10* Nonqualified Stock Option Agreement, dated December 23, 2004, by and
between the Company and Tun Aye Sai (filed as Exhibit 10.8 to the
Company's Current Report on Form 8-K filed on December 28, 2004, and
incorporated herein by reference).
10.11* Nonqualified Stock Option Agreement, dated December 23, 2004, by and
between the Company and Garry Ward (filed as Exhibit 10.9 to the
Company's Current Report on Form 8-K filed on December 28, 2004, and
incorporated herein by reference).
10.12* Stock Option Agreement, dated May 18, 2004 by and between the Company
and Thomas Cavanagh (filed as Exhibit 10.12 to the Company's Annual
Report on Form 10K for the year ended December 31, 2004, which was filed
on March 15, 2005, and incorporated herein by reference).
23
Exhibit
Number Description
- ------- ------------------------------------------------------------------------
10.13* Stock Option Agreement, dated May 18, 2004 by and between the Company
and Donald Juckett (filed as Exhibit 10.13 to the Company's Annual
Report on Form 10K for the year ended December 31, 2004, which was filed
on March 15, 2005, and incorporated herein by reference).
10.14* Stock Option Agreement, dated June 18, 2004 by and between the Company
and Randall D. Keys (filed as Exhibit 10.14 to the Company's Annual
Report on Form 10K for the year ended December 31, 2004, which was filed
on March 15, 2005, and incorporated herein by reference).
10.15* Stock Option Agreement, dated May 24, 2004 by and between the Company
and John C. Mihm. (filed as Exhibit 10.15 to the Company's Annual Report
on Form 10K for the year ended December 31, 2004, which was filed on
March 15, 2005, and incorporated herein by reference).
10.16* Stock Option Agreement, dated February 24, 2004 by and between the
Company and Thomas Williams (filed as Exhibit 10.16 to the Company's
Annual Report on Form 10K for the year ended December 31, 2004, which
was filed on March 15, 2005, and incorporated herein by reference).
10.17* Stock Option Agreement, dated February 1, 2004 by and between the
Company and Garry Ward (filed as Exhibit 10.17 to the Company's Annual
Report on Form 10K for the year ended December 31, 2004, which was filed
on March 15, 2005, and incorporated herein by reference).
10.18* Stock Option Agreement, dated January 29, 2002 by and between the
Company and Tun Aye Sai (filed as Exhibit 10.18 to the Company's Annual
Report on Form 10K for the year ended December 31, 2004, which was filed
on March 15, 2005, and incorporated herein by reference).
10.19* Stock Option Agreement, dated December 1, 2003 by and between the
Company and Zhendong "Alex" Yang (filed as Exhibit 10.19 to the
Company's Annual Report on Form 10K for the year ended December 31,
2004, which was filed on March 15, 2005, and incorporated herein by
reference).
10.20 Production Sharing Contract for Exploitation of Coalbed Methane
Resources in Enhong and Laochang, Yunnan Province, the People's Republic
of China, dated January 25, 2002, by and between China United Coalbed
Methane Corp. Ltd. and the Company (filed as Exhibit 2(i) to the
Company's Current Report on Form 8-K filed on February 11, 2002, and
incorporated herein by reference).
10.21 Production Sharing Contract for Exploitation of Coalbed Methane
Resources for the Quinnan Area in Shanxi Province, Qinshui Basin, the
People's Republic of China, dated April 16, 2002, by and between China
United Coalbed Methane Corp. Ltd. and Phillips China Inc. (filed as
Exhibit 10.21 to the Company's Annual Report on Form 10K for the year
ended December 31, 2004, which was filed on March 15, 2005, and
incorporated herein by reference).
10.22 Approval Certificate from the Ministry of Foreign Trade and Economic
Cooperation dated December 30, 2002 (filed as Exhibit 2(i) to the
Company's Current Report on Form 8-K filed on January 13, 2003, and
incorporated herein by reference).
10.23 Memorandum of Understanding, dated March 18, 2003, by and between
Phillips China Inc., a Delaware corporation, and the Company (filed as
Exhibit 10.1 to the Company's Amendment No. 1 to its Quarterly Report on
Form 10QSB/A for the quarter ended June 30, 2003, which was filed on
December 24, 2003, and incorporated herein by reference).
10.24 Farmout Agreement--Qinnan PSC, dated June 17, 2003, by and between
Phillips China Inc., a Delaware corporation, and the Company (filed as
Exhibit 10.2 to the Company's Amendment No. 1 to its Quarterly Report on
Form 10QSB/A for the quarter ended June 30, 2003, which was filed on
December 24, 2003, and incorporated herein by reference).
10.25 Assignment Agreement--Qinnan PSC, dated June 17, 2003, by and between
Phillips China Inc., a Delaware corporation, and the Company (filed as
Exhibit 10.4 to the Company's Amendment No. 1 to its Quarterly Report on
Form 10QSB/A for the quarter ended June 30, 2003, which was filed on
December 24, 2003, and incorporated herein by reference).
10.26 First Amendment to Farmout Agreement--Qinnan PSC, dated December 15,
2003, by and between Phillips China Inc., a Delaware corporation, and
the Company (filed as Exhibit 10.26 to the Company's Annual Report on
Form 10K for the year ended December 31, 2004, which was filed on March
15, 2005, and incorporated herein by reference).
10.27 Second Amendment to Farmout Agreement--Qinnan PSC, dated December 17,
2004, by and between Phillips China Inc., a Delaware corporation, and
the Company (filed as Exhibit 10.01 to the Company's Current Report on
Form 8-K filed on December 23, 2004, and incorporated herein by
reference).
10.28 Farmout Agreement--Shouyang PSC, dated June 17, 2003, by and between
Phillips China Inc., a Delaware corporation, and the Company (filed as
Exhibit 10.3 to the Company's Amendment No. 1 to its Quarterly Report on
Form 10QSB/A for the quarter ended June 30, 2003, which was filed on
December 24, 2003, and incorporated herein by reference).
10.29 Assignment Agreement--Shouyang PSC, dated June 17, 2003, by and between
Phillips China Inc., a Delaware corporation, and the Company (filed as
Exhibit 10.5 to the Company's Amendment No. 1 to its Quarterly Report on
Form 10QSB/A for the quarter ended June 30, 2003, which was filed on
December 24, 2003, and incorporated herein by reference).
24
Exhibit
Number Description
- ------- ------------------------------------------------------------------------
10.30 First Amendment to Farmout Agreement--Shouyang PSC, dated December 15,
2003, by and between Phillips China Inc., a Delaware corporation, and
the Company (filed as Exhibit 10.30 to the Company's Annual Report on
Form 10K for the year ended December 31, 2004, which was filed on March
15, 2005, and incorporated herein by reference).
10.31 Second Amendment to Farmout Agreement--Shouyang PSC, dated December 17,
2004, by and between Phillips China Inc., a Delaware corporation, and
the Company (filed as Exhibit 10.02 to the Company's Current Report on
Form 8-K filed on December 23, 2004, and incorporated herein by
reference).
10.32 Amended and Restated Escrow Agreement, dated January 19, 2005, by and
among the Company, Phillips China, Inc. and J.P. Morgan Trust Company,
N.A. (filed as Exhibit 10.01 to the Company's Current Report on Form 8-K
filed on January 21, 2005, and incorporated herein by reference).
10.33 Settlement Agreement, dated December 31, 2004, by and between Jawaharlal
Gondi, The Arthi Trust and the Company (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on January 4, 2005, and
incorporated herein by reference).
10.34 Stock Subscription Agreement, dated December 21, 2004, by and between
Sofaer Capital Global Fund, Sofaer Capital Asian Fund, Restructuring
Investors Limited, Persistency, and Passlake Limited, Tim Whyte and the
Company (filed as Exhibit 10.34 to the Company's Annual Report on Form
10-K for the year ended December 31, 2004, which was filed on March 15,
2005, and incorporated herein by reference).
10.35 Registration Rights Agreement, dated December 21, 2004, by and among
Sofaer Capital Global Fund, Sofaer Capital Asian Fund, Restructuring
Investors Limited, Persistency, Passlake Limited and the Company (filed
as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2004, which was filed on March 15, 2005, and
incorporated herein by reference).
10.36 Registration Rights Agreement, dated December 31, 2004, by and among
Bathgate Capital Partners LLC and the Company(filed as Exhibit 10.36 to
the Company's Annual Report on Form 10-K for the year ended December 31,
2004, which was filed on March 15, 2005, and incorporated herein by
reference).
10.37 Registration Rights Agreement, dated December 1, 2004, by and among RAB
Europe Fund Ltd., RAB Special Situations, L.P., Royter & Co., James
Palmer and the Company (filed as Exhibit 10.37 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004, which was
filed on March 15, 2005, and incorporated herein by reference).
10.38 Purchase and Sale Agreement, dated February 2, 2005, by and between
Newark Valley Oil & Gas, Inc., a wholly-owned subsidiary of the Company,
and Zier & Associates, Ltd. (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on February 7, 2005, and incorporated
herein by reference).
10.39 Production Sharing Contract for Exploitation of Coalbed Methane
Resources for the Shouyang Area in Shanxi Province, Qinshui Basin, the
People's Republic of China, dated April 16, 2002, by and between China
United Coalbed Methane Corporation Ltd. and Phillips China Inc. (filed
as Exhibit 10.39 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2004, which was filed on March 15, 2005, and
incorporated herein by reference).
31.1 Certification of Chief Executive Officer of the Company under Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of the Company under Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of the Company Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer of the Company Pursuant to 18
U.S.C. Section 1350.
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* Management contract or compensatory plan arrangement.
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