UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 2004.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ____________________ to
___________________.
Commission file number: 0-32455
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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
Incorporation or Organization) Identification Number)
400 N. Sam Houston Parkway East, Suite 205, Houston, Texas 77060
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(Address of Principal Executive Offices) (Zip Code)
(832) 598-0470
---------------
(Registrant's Telephone Number, Including Area Code)
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 [ ]
The number of shares outstanding of registrant's common stock, par value
$0.001, as of August 3, 2004 was 61,094,035.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION................................................3
Item 1. Financial Statements..........................................3
Item 2. Management's Plan of Operation and Discussion and Analysis
of Financial Condition and Plan of Operation..................4
Item 3. Quantitative and Qualitative Disclosures About Market Risk...12
Item 4. Controls and Procedures......................................12
PART II - OTHER INFORMATION..................................................13
Item 1. Legal Proceedings............................................13
Item 2. Changes in Securities and Use of Proceeds....................13
Item 5. Other Information............................................13
Item 6. Exhibits and Reports on Form 8-K.............................14
INDEX TO EXHIBITS............................................................15
2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
3
FAR EAST ENERGY CORPORATION AND SUBSIDIARIES
(formerly EZfoodstop.com)
(A Development Stage Company)
Consolidated Balance Sheets
June 30, December 31,
2003
2004 (Restated)
(unaudited) (audited)
-------------- ----------------
ASSETS
- -------
Current:
Cash and cash equivalents $ 5,873,000 $ 2,326,000
Prepaids and other current assets 135,000 4,000
--------------- ----------------
Total current assets 6,008,000 2,330,000
--------------- ----------------
Property and equipment, net 4,046,000 3,243,000
--------------- ----------------
$ 10,054,000 $ 5,573,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Accounts payable $ 1,251,000 $ 664,000
Other liabilities 1,000 106,000
Note payable -- 100,000
--------------- ----------------
Total current liabilities 1,252,000 870,000
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.001 par value, 500,000,000
shares authorized, 61,094,035 and
56,379,153 issued and outstanding at June
30, 2004 and December 31, 2003, respectively 61,000 57,000
Additional paid in capital 18,254,000 12,132,000
Additional paid in capital - outstanding
stock options 1,363,000 930,000
Deficit accumulated during the development
stage (10,874,000) (8,414,000)
Accumulated other comprehensive loss (2,000) (2,000)
--------------- ----------------
Total stockholders' equity 8,802,000 4,703,000
--------------- ----------------
$ 10,054,000 $ 5,573,000
============== ================
See accompanying notes to consolidated financial statements.
F-1
FAR EAST ENERGY CORPORATION AND SUBSIDIARIES
(formerly EZfoodstop.com)
(A Development Stage Company)
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2004 and 2003
(unaudited)
Cumulative Six Months Three Months
During Ended Ended
Development June 30, June 30,
Stage 2003 2003
(Restated) 2004 (Restated) 2004 (Restated)
------------- ----------- ------------- -------------- --------------
Revenues $ -- $ -- $ -- $ -- $ --
------------- ------------ ------------- -------------- --------------
Expenses:
Geologic and engineering
services 715,000 156,000 265,000 53,000 193,000
Other consulting and
professional services 746,000 215,000 124,000 132,000 37,000
Compensation 1,864,000 439,000 503,000 238,000 261,000
Stock compensation 1,363,000 433,000 -- 226,000 --
Travel 1,100,000 191,000 181,000 107,000 89,000
Legal and accounting 959,000 477,000 121,000 269,000 53,000
Mineral lease rent 144,000 84,000 -- 65,000 --
Loss on investment in joint
venture 22,000 -- 22,000 -- --
Amortization of contract
rights 81,000 23,000 29,000 -- 14,000
General and administrative 1,366,000 447,000 102,000 106,000 28,000
Impairment loss 2,369,000 -- -- -- --
------------- --------------- ------------- ---------------- -------------
Total expenses 10,729,000 2,465,000 1,347,000 1,196,000 675,000
------------- --------------- ------------- ---------------- -------------
Other Expense (Income):
Interest expense 168,000 -- 42,000 -- 42,000
Interest income (24,000) (5,000) (1,000) (4,000) (1,000)
Foreign currency exchange loss 1,000 -- -- -- --
------------- --------------- ------------- ---------------- -------------
Total other expense (income) 145,000 (5,000) 41,000 (4,000) 41,000
------------- --------------- ------------- ---------------- -------------
Loss before income taxes (10,874,000) (2,460,000) (1,388,000) (1,192,000) (716,000)
Income taxes -- -- -- -- --
------------- --------------- ------------- ---------------- -------------
Net loss (10,874,000) (2,460,000) (1,388,000) (1,192,000) (716,000)
Accumulated deficit-beginning
of period -- (8,414,000) (2,156,000) (9,682,000) (2,828,000)
------------- --------------- ------------- ---------------- -------------
Accumulated deficit-end of
period $ (10,874,000) $ (10,874,000) $ (3,544,000) $ (10,874,000) $ (3,544,000)
============== =============== ============= ================= =============
Earnings per share-Basic $ (0.04) $ (0.03) $ (0.02) $ (0.02)
Earnings per share-Diluted $ (0.04) $ (0.03) $ (0.02) $ (0.02)
Weighted average number of
shares-basic 58,163,426 45,985,835 60,019,451 46,183,639
=============== ============== ================ =============
Weighted average number of
shares-diluted 67,430,375 45,985,835 68,251,280 46,183,639
=============== ============== ================ ==============
See accompanying notes to consolidated financial statements.
F-2
FAR EAST ENERGY CORPORATION AND SUBSIDIARIES
(formerly Ezfoodstop.com)
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and 2003
(unaudited)
Cumulative
During
Development
Stage 2004
(Restated) (Restated) 2003
Cash flows used in operating activities: ----------------- ---------------- -----------------
Net loss $ (10,874,000) $ (2,460,000) $ (1,388,000)
Adjustments to reconcile net loss to cash used in
operations:
Depreciation and amortization 119,000 35,000 43,000
Interest expense - beneficial conversion feature 168,000 -- 42,000
Stock compensation 1,393,000 463,000 --
Loss on investment in joint venture 22,000 -- --
Impairment loss 2,369,000 -- --
(Increase) decrease in prepaids and other current assets (135,000) (131,000) 1,000
Increase in accounts payable 1,250,000 586,000 187,000
Increase (decrease) in other liabilities 1,000 (105,000) --
---------------- -------------- ---------------
Net cash used in operations (5,687,000) (1,612,000) (1,115,000)
---------------- -------------- ---------------
Cash flows used in investing activities:
Net acquisitions of mineral rights (275,000) -- (259,000)
Loss on investment in joint venture (22,000) -- 22,000
Investments in unproved oil and gas properties (2,508,000) (833,000) --
Investments in property and equipment (151,000) (5,000) --
---------------- --------------- ---------------
Net cash used in investing activities (2,956,000) (838,000) (237,000)
---------------- --------------- ---------------
Cash flows from financing activities:
Net proceeds from the issuance of notes payable 300,000 -- --
Net proceeds from the sale of common stock 11,471,000 3,283,000 656,000
Decrease in long term liabilities -- -- (250,000)
Net proceeds from the exercise of warrants 2,747,000 2,714,000 --
Increase in notes payable -- -- 125,000
---------------- -------------- ----------------
Net cash provided from financing activities 14,518,000 5,997,000 531,000
---------------- -------------- ---------------
Effect of exchange rate changes on cash (2,000) -- --
---------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents 5,873,000 3,547,000 (821,000)
Cash and cash equivalents - beginning of period -- 2,326,000 1,008,000
---------------- -------------- ---------------
Cash and cash equivalents - end of period $ 5,873,000 $ 5,873,000 $ 187,000
================ ============== ===============
See accompanying notes to consolidated financial statements.
F-3
FAR EAST ENERGY CORPORATION AND SUBSIDIARIES
(formerly Ezfoodstop.com)
(A Development Stage Company)
Notes to Consolidated Financial Statements
For the Six Months Ended June 30, 2004 (unaudited)
1. The Corporation and its Business
The financial statements include the accounts of Far East Energy
Corporation and its wholly owned subsidiaries Newark Valley Oil & Gas, Inc.
(Newark), and Yunnan Huayi Eco-Tech Consulting Co. Ltd. (Eco Tech), and its
Chinese joint venture entity, Guihzou Far East Panjiang Chemical Co. Ltd.
(GFEPC)). Far East and Newark are organized under the laws of the State of
Nevada. Eco Tech is a Chinese company. GFEPC is a Chinese joint venture. All
significant intercompany balances and transactions have been eliminated in
consolidation.
We were incorporated as Egoonline.com in the State of Nevada, United
States of America on February 4, 2000 under the Nevada Revised Statutes, Chapter
78, Private Companies, and changed our name to EZfoodstop.com on April 26, 2000.
Our name was changed to Far East Energy Corporation on January 10, 2002.
We are in our development stage and to date our activities have been
limited to initial organization, capital formation, acquisition of assets
(assets being defined as mineral leases and/or production sharing contracts
(PSC) giving us the right to explore for, develop, produce and sell oil and gas
or coalbed methane (CBM)). We drilled our first three exploratory wells in the
fourth quarter of 2003 and the first half of 2004. Our current activities are
principally focused on developing our CBM projects located in the Shanxi and
Yunnan Provinces of China.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates our
continuation as a going concern. We have been in the development stage since our
formation on February 4, 2000. We have incurred net losses since our inception
and have not established a source of revenue. In view of these matters,
realization of a major portion of the assets in the accompanying consolidated
balance sheets depends upon our continued operations, which in turn is dependent
upon our ability to meet our financing requirements, and the success of our
future operations. Management believes that our current operations and funding
plans provide the opportunity to continue as a going concern. However, these
factors raise substantial doubt about our ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. Basis of Presentation
The accompanying consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosure normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. The accompanying financial statements should be read in conjunction
with our annual financial statements and notes thereto included in our 2003 Form
10-KSB/A.
In the opinion of management, the consolidated financial statements
reflect all adjustments (consisting of only normal and recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for those periods presented. Operating results for the six months
ended June 30, 2004 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004.
New Accounting Pronouncement
At the March 17-18, 2004 Financial Accounting Standards Board Emerging
Issues Task Force (EITF) meeting, the EITF reached a consensus on Issue No.
04-02, "Whether Mineral Rights Are Tangible or Intangible Assets." The consensus
reached was that all mineral rights, as defined in the Issue, are tangible
F-4
assets. The EITF is to be applied in the first reporting period after April 29,
2004, and we have applied it in the accompanying financial statements. As a
result, we reclassified our intangible assets to property and equipment on the
balance sheets and discontinued amortizing the balance. Subsequently, we will
periodically review individual mineral rights to determine whether an impairment
has occurred, and whether loss should be recognized.
Stock Options
We apply Accounting Principles Board Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our various
stock option agreements and have adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) as amended by Statement of Financial Accounting
Standards No. 148 "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123" (SFAS No.148).
Had compensation cost for these agreements been determined consistent with
the provisions of SFAS No. 123, our stock-based compensation expense, net loss
and loss per share would have been adjusted to the following pro forma amounts:
Six Months Ended Three Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
----------------------------------------------------------
Net loss as reported $ (2,460,000) $(1,388,000) $ (1,192,000) $ (716,000)
Add: Stock-based employee
compensation costs included
in net loss 433,000 -- 226,000 --
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net
of related tax effects (1,772,000) (252,000) (560,000) --
--------------- ------------- ------------- ---------------
Pro forma net loss $ (3,799,000) $ (1,640,000) $(1,526,000) $ (716,000)
=============== ============= ============== ===============
Basic loss per share:
As reported $ (0.04) $ (0.03) $ (0.02) $ (0.02)
Pro forma $ (0.07) $ (0.04) $ (0.03) $ (0.02)
Diluted loss per share:
As reported $ (0.04) $ (0.03) $ (0.02) $ (0.02)
Pro forma $ (0.06) $ (0.04) $ (0.02) $ (0.02)
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 six months ended June 30, 2004, a noncash transaction occurred,
converting a $100,000 note payable into shares of common.
F-5
3. Going Concern
Our consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business. We currently have no source of revenue.
We intend to continue financing efforts to support the current and
proposed business operations in China and Montana. Our ability to continue as a
going concern depends upon our ability to raise substantial funds for use in our
development activities and upon the success of our planned exploration and
development activities. There can be no guarantee of future fundraising success.
The success of exploratory drilling is uncertain. However, management believes
that we will continue to be successful in raising the funds necessary to explore
for gas and, assuming success in those exploratory efforts, raising the funds
necessary for production and development.
We have raised net proceeds of $6.0 million from the sale of investment
units and exercise of warrants during the six months ended June 30, 2004.
Management believes that we will be able to raise funds sufficient to assure
satisfaction of our operating capital needs/plans and financial obligations
through December 31, 2004. If management is not successful in raising the
required monies for operations thereafter, we may not be able to continue as a
going concern.
Because our primary asset is an undeveloped natural resource that will
require substantial exploration and development, management does not expect to
generate meaningful revenues until at least 2006. Expenses for the second half
of 2004 will have to be financed through cash on hand or through future
financings of equity and/or debt, as necessary.
4. Property and Equipment
Property and equipment includes the following:
June 30, December 31,
2004 2003
Unproved oil and gas properties $3,739,000 $ 2,906,000
Mineral rights 275,000 275,000
Furniture and equipment 151,000 146,000
----------- -------------
4,165,000 3,327,000
Accumulated depreciation and (119,000) (84,000)
amortization
----------- --------------
$ 4,046,000 $ 3,243,000
============ ==============
Depreciation and amortization expense for the three months ended June 30,
2004 and 2003 was approximately $6,000 and $20,000, respectively. Depreciation
and amortization expense for the six months ended June 30, 2004 and 2003 was
approximately $35,000 and $43,000, respectively.
On January 25, 2002, we entered into a PSC with CUCBM, which has exclusive
legal authority over all CBM gas in the People's Republic of China (PRC).
Pursuant to the PSC, we received the authority from CUCBM to jointly explore,
develop, produce and sell CBM gas in and from a total area of 1,072 unevaluated
square kilometers in the Enhong and Laochang areas of Yunnan Province, PRC. The
production sharing contract was subject to formal ratification by PRC's Ministry
of Foreign Trade and Economic Cooperation (MOFTEC). On December 31, 2002, MOFTEC
ratified this production sharing contract. The contract required we pay $150,000
to CUCBM upon ratification and an annual payment of $100,000 on the anniversary
date for two subsequent years.
We have the right to earn a minimum of 60% interest in the joint venture,
with CUCBM retaining the remaining 40%. In the event CUCBM elects to participate
at a level less than 40%, their interest will be reduced proportionately,
increasing our participating interest.
As a result of MOFTEC's ratification and approval of the PSC concerning
F-6
the Enhong and Laochang areas, we have commenced our exploration program, which
initially involves the drilling of five exploratory wells, three of which have
been completed, and eight pilot development wells. The CUCBM has agreed in the
frecent Joint Management Committee meeting to revise these terms to allow us to
racture and test two of the wells we have drilled and then drill one horizontal
well with at least two laterals to satisfy Phase 1 requirements. We will then be
allowed to drill one horizontal well with at least two laterals to satisfy the
pilot development well requirement of Phase 2.
We have another production sharing contract of the same date with CUCBM in
the Zhaotong area of Yunnan Province, which has not yet been ratified.
Through our wholly owned subsidiary, Newark Valley Oil & Gas, Inc., we
acquired undeveloped oil, gas and mineral rights and interest in approximately
147,535.10 net acres located in eastern Montana. Of the total net acres,
approximately 134,530.16 acres constitute federal leases, approximately 5,141.80
acres constitute state of Montana leases, and approximately 7,863.14 acres
constitute freehold leases.
5. Notes Payable
In June 2003, we entered into a loan agreement with Professional Trading
Services in the amount of $100,000. The loan had a conversion privilege, at the
exclusive option of the lender. The conversion rate of the debt was below fair
value at issuance. Accordingly, interest expense to reflect the beneficial
conversion feature of approximately $42,000 has been recognized in the
accompanying consolidated financial statements for the six months ended June 30,
2003. The lender exercised the conversion option in October 2003. The lender
received 153,846 restricted shares of common stock at $0.65 per share and
warrants to purchase 153,846 shares of common stock, exercisable at $1.00. The
lender also converted warrants exercisable in February 2004 into 39,231
restricted shares of common stock. The stock received in the conversions is
restricted and may only be sold in compliance with U.S. Securities laws, which
require, among other conditions, that the shares be owned for at least one year.
In July 2003, we entered into a loan agreement with Clarion Finanz AG in
the amount of $200,000. The loan had a conversion privilege, at the exclusive
option of the lender. The conversion rate of the debt was below fair value, and
interest expense was recorded to reflect the beneficial conversion feature in
the third quarter of 2003. The lender exercised the conversion feature in
October 2003 with regard to $100,000 of the outstanding balance of the loan and
in February 2004 with regard to the remaining $100,000 of the outstanding
balance of the loan. The lender received 153,846 restricted shares of common
stock at $0.65 per share and warrants to purchase 153,846 shares of common stock
exercisable at $1.00, for each conversion. The lender also converted warrants
exercisable in February 2004 into 76,923 restricted shares of common stock. The
stock received in the conversions is restricted and may only be sold in
compliance with U.S. Securities laws, which require, among other conditions,
that the shares be owned for at least one year.
6. Commitments and Contingencies
We are periodically named in legal actions arising in the ordinary course
of business activities. We evaluate the merits of these actions and, if we
determine that an unfavorable outcome is probable and can be estimated, we will
establish the necessary accruals. We do not anticipate any material losses as a
result of commitments and contingent liabilities. We are involved in no material
legal proceedings.
Rent expense for the three and six months ended June 30, 2004 was
approximately $6,000 and $11,000, respectively. There are no noncancelable
leases with remaining terms in excess of one year.
CUCBM Minimum Exploration Work Commitment Agreement
In conjunction with the production sharing agreements, we entered into a
Minimum Exploration Work Commitment agreement with CUCBM that requires we drill
five exploratory wells on the Enhong and Laochang fields. With the three
vertical wells drilled already, we will be allowed under the revised terms to
drill one horizontal well with at least two laterals to satisfy this exploration
requirement of Phase 1. We will also be required to drill two exploratory wells
on the Zhaotong field if ratification of that PSC occurs. When we complete the
exploratory wells (Phase I of the Minimum Exploration Work Commitment agreement)
management may elect to begin Phase 2 wherein we will be required to drill one
F-7
horizontal well to satisfy the original requirement of eight pilot development
wells on the Enhong and Laochang fields. If the PSC is ratified and if we elect
to begin Phase 2 for the Zhaotong field, we will drill four pilot development
wells. We have drilled three exploratory wells in the Enhong and Laochang fields
combined.
Conoco Phillips Memorandum of Understanding
On March 19, 2003, we entered into a memorandum of understanding (MOU)
with a Conoco Phillips subsidiary, Phillips China, Inc. (Phillips), which sets
forth the terms and conditions of an agreement for us to acquire a net undivided
interest of 40% from Phillips in both the Shouyang PSC (near Taiyuan City) and
the Qinnan PSC (near Jincheng and Qinshui). On July 17, 2003, we entered into
two farmout agreements on the Qinnan and Shouyang CBM blocks in Shanxi Province,
PRC and an assignment agreement with Phillips on the two blocks. These
agreements formalized our acquisition of an undivided 40% working interest from
Phillips' 70% interest. As currently structured, we have a 40% interest,
Phillips has retained a 30% interest and CUCBM has a 30% interest in the
projects. The assignment agreement and appropriate amendments to the PSCs
substituting us for Phillips as the principal party and operator was approved by
CUCBM on March 15, 2004, and ratified by the PRC Ministry of Commerce on March
22, 2004.
The farmout agreements, as revised in a recent Joint Management Committee,
obligate us to fracture stimulate and production test two exploration wells that
were drilled by Phillips. We will pay 100% of the cost for these tests. Upon the
satisfactory completion of the testing, we will have the option to extend into
the second phase of exploration by drilling one horizontal well with at least
two laterals instead of the originally required three additional wells. We will
be responsible for 100% of the costs of the second phase of exploration and the
drilling of the horizontal well. Upon our successful completion of the second
phase, Phillips will have the option to either retain its net undivided 30%
participating interest, or take a 5% overriding royalty interest (ORRI) on the
contractor's overall participating interest share under the PSCs. The ORRI will
be capped at 5% of the current contractor's 70% participating interest, or a
3.5% ORRI on a 100% participating interest basis. Under the terms of the farmout
agreements, on May 14, 2004 we posted a $1 million bank escrow account to act as
a work performance guarantee covering all aspects of the evaluation and work
program to test two of the existing wells. In the second half of 2004,
approximately $1 million is expected to be utilized to fracture and test the gas
flows from two of the wells drilled by Phillips, cover costs related to CUCBM
Joint Management Committee salary fees, training fees, exploration fees and
assistance fees as outlined in the production sharing contract, and the payment
made to Phillips of $76,052 for CBM equipment and materials associated with the
project.
Threatened legal actions
We have received notification that one of our directors is contemplating
initiating legal action against us for non-payment of certain expenses,
compensation claims and claims of being owed a note payable. The total claim is
approximately $230,000. Management does not believe the compensation and note
payable claims are valid and therefore, are not probable. The expenses claimed
and unpaid are approximately $42,000 at June 30, 2004 and are recorded in the
accompanying consolidated financial statements.
U.S. Securities and Exchange Commission Trading Investigation
In December 2003, we learned that we are the subject of an investigation
by the SEC. We understand that the SEC is investigating whether anyone has
issued false or misleading statements in an attempt to manipulate the price of
our common stock, whether anyone has profited from selling stock at artificially
high prices due to the manipulative statements, and whether any individual or
group has failed to file ownership reports with the SEC as required for 10% or
more stockholders under Section 16 of the Securities Exchange Act of 1934 or
failed to file ownership reports with the SEC as required for 5% or more
stockholders under Section 13 of the Securities Exchange Act of 1934. Management
does not know of any acquisitions in excess of 5% of our outstanding shares,
except for those described in previous 13D filings with the SEC. We have
supplied information to the SEC in response to their information requests and
intend to cooperate with their investigation. Management does not know what the
outcome of the SEC's investigation may be.
F-8
The Securities Exchange Act of 1934 and SEC rules require that a person or
group of persons who acquires more than 5% of a class of equity securities that
are registered under the Securities Exchange Act of 1934 must report their
holdings in a Schedule 13D filing with the SEC within 10 days after they become
5% shareholders, and must thereafter report changes in their ownership of the
securities. In addition, Section 16(a) of the Securities Exchange Act of 1934
generally requires that owners of more than 10% of a class of stock that is
registered under the Securities Exchange Act of 1934 must report changes in
their holdings within 48 hours of an acquisition or disposition of the
securities.
If a person or group owns a large block of stock of a publicly traded
company, particularly if that stock is not subject to restrictions on its
purchase and sale on the open market, there is a risk that the person or group
could sufficiently control the market for the stock to drive the stock's trading
price up or down, and thereby the undisclosed control group could reap trading
profits at the expense of other public investors. In addition, Schedule 13D
requires owners of a control group of stock to disclose their intentions with
respect to management or control of the company. We are making this announcement
to alert the public that an undisclosed control group might exist.
Employment Agreement
On October 13, 2003, we entered into a five-year employment agreement with
Michael R. McElwrath, which was approved by the Board of Directors. Under the
terms of the agreement, Mr. McElwrath's annual base salary shall be no less than
$225,000. Mr. McElwrath is also eligible to receive performance bonuses
semi-annually in the amount of not less than $20,000 subject to determination of
specific performance criteria. Mr. McElwrath received a $56,250 signing bonus
and is entitled to participate in all benefit plans we offer. In addition, Mr.
McElwrath received 1,200,000 stock options that vest over four years, 240,000 of
which vested upon the effective date of the employment agreement. The stock
options have an exercise price of $0.65, which was $0.65 below fair market value
on the effective date of the contract. Accordingly, additional compensation
expense of $78,000 has been recognized in the accompanying consolidated
financial statements for the six months ended June 30, 2004. The employment
agreement provides for a separation or severance payment of $100,000 if
terminated by us without cause as defined by the agreement. Either party may
provide thirty-day written notice to terminate this contract. Should we
terminate this agreement without cause, Mr. McElwrath is entitled to any shares,
which have not yet vested but are scheduled to vest within thirty days of the
written notice of termination.
7. Stockholders' Equity
Common Stock Issuable
In February 2004, we entered into an investor relations and consultant
contract whereby the consultant will receive each month $2,500 in cash and 3,000
shares of our common stock. As of June 30, 2004, 6,000 shares were issuable to
the consultant for services rendered. These shares are included in the total
shares outstanding in the accompanying consolidated financial statements.
Private Placement Offering of Common Stock
During the first half of 2004, we initiated a private placement sale of
investment units. As of June 30, 2004, we had sold 128 units for net proceeds of
$2,227,000. Each investment unit consists of 10,000 shares of common stock and a
warrant to purchase 10,000 shares of common stock at $2.50 per share. The
warrants may be exercised immediately after issuance until the earlier of (i)
two years from the date of the warrant agreement, or (ii) the date upon which
the warrants are redeemed by us (which may occur at $0.01 per share in the event
we provide at least forty days prior written notice, the average closing price
of our common stock for the fifteen days prior to such written notice exceeds
$3.50, and we limit our redemption to 25% of the warrant holder's total
purchasable shares per month). This private placement is being made pursuant to
exemptions from registration under Regulation S of the Securities Act of 1933
and requires that the purchaser hold the stock for one year from the date of
purchase. This private placement contains price protection rights that cease 90
days after the offering, or on August 14, 2004.
Private Placement of Common Stock
During the second quarter of 2004, we raised an additional $1,056,000 of
net proceeds from a private placement of common stock to qualified investors.
This transaction included the issuance of 550,000 shares of our restricted
F-9
common stock at a price of $2.00 per share and 550,000 warrants to purchase
shares of our restricted common stock at an exercise price of $2.50 per share.
This private placement contains price protection rights that apply if we sell
securities at a lower price before January 1, 2005.
Resale Restrictions
36,773,774 shares of our securities are currently restricted; however,
under Rule 144, a portion of these shares will become eligible for resale in the
next six months.
Registration Requirements
In July 2004, we filed a Form S-2 registration statement with the SEC to
fulfill our contractual agreement to register outstanding shares that were sold
under Regulation S and Regulation D between February 2004 and May 2004. The
registration statement includes no new shares to be issued by us. The
registration statement has not yet been made effective but remains pending with
the SEC.
Exercise of Warrants To Purchase Common Stock
During the first half of 2004, we initiated redemption of 25% of warrants
issued in the offering that closed October 7, 2003 pursuant to the warrant
agreement. Warrant holders had to exercise these warrants by April 10, 2004 or
these warrants would have been redeemed. During the first half of 2004, certain
shareholders exercised 2,716,036 warrants at an exercise price of $1.00 for
2,716,036 shares of common stock. We also redeemed 246,355 warrants during the
first half of 2004 at $0.01 per share.
In October 2003, Professional Trading Services and Clarion Finanz AG
exercised their conversion features for $100,000 each and received 153,846
restricted shares of common stock at $0.65 per share and one full warrant for
each share of common stock, exercisable at $1.00. In February 2004 Clarion
Finanz AG exercised the remaining $100,000 of the outstanding balance of the
loan. The lender received 153,846 restricted shares of common stock at $0.65 per
share and one full warrant for each share of common stock, exercisable at $1.00.
The lenders also converted warrants exercisable in February 2004 into 116,154
restricted shares of common stock. The stock received in the conversions is
restricted for two years from the date of conversion.
Authorized
On March 4, 2003, a special meeting of our shareholders approved an
amendment to our articles of incorporation to increase the number of shares of
common stock authorized for issuance from 100,000,000 to 500,000,000 at par
value of $0.001. The shareholders also approved an amendment to our articles of
incorporation to authorize a class of 500,000,000 shares of preferred stock, par
value $0.001.
8. Restatement of Financial Statements
Our previously issued consolidated balance sheet as of December 31, 2003
and consolidated statement of operations for the six and three months ended June
30, 2003 have been restated for the items 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 $2,409,000.
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 $2,369,000 to reduce the acquired assets to their
estimated realizable value of $2,409,000. Accordingly, an impairment loss of
$2,369,000 is recorded in the accompanying consolidated financial statements
with a resulting increase in the loss and a corresponding increase in additional
paid in capital.
Beneficial Conversion Feature
During 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 and $42,000 for the six and three
months ended June 30, 2003 should have been recognized for the beneficial
conversion feature inherent in the debt instruments. Accordingly, interest
expense has been recognized in the accompanying consolidated financial
statements with a resulting increase in the loss and a corresponding increase in
additional paid in capital.
F-10
Stock Options
During the third quarter of 2003, we granted options to employees at an
exercise price below the market price at the date of grant. We recorded the
stock compensation expense and a current liability. We have determined that the
amount recorded as a liability should be recognized as additional paid in
capital-outstanding stock options. This restatement had no effect on net income
and related earnings per share.
The cumulative impact of all restatements described above on our deficit
accumulated during the development stage as of December 31, 2003 is an increase
in the deficit of $2,537,000. The aggregate impact of these restatements on the
consolidated balance sheet as of December 31, 2003 is as follows:
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity At December 31, 2003
As Previously As
Reported Restated
- --------------------------------------------------------------------------------
Outstanding stock options $ 930,000 $ --
Additional paid in capital 9,595,000 12,132,000
Additional paid in capital - outstanding stock options -- 930,000
Deficit accumulated during the development stage (5,877,000) (8,414,000)
- --------------------------------------------------------------------------------
F-11
ITEM 2 MANAGEMENT'S PLAN OF OPERATION AND DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND PLAN OF OPERATION
As used herein, the terms "Company", "we", "our" or "us" refer to Far East
Energy Corporation, a Nevada corporation, and its subsidiaries and predecessors,
unless the context indicates otherwise. Our United States office is located in
Houston, Texas, and we have offices in Beijing and in Kunming, Yunnan Province
of the People's Republic of China (PRC).
Forward-looking Information
This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or to our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. There are a number of factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date they are published to conform such statements to actual results.
The foregoing management's discussion and analysis should be read in conjunction
with our financial statements and the notes herein.
2004 Plan of Operation
Yunnan Province, China
We drilled out first three wells on the Enhong-Laochang coalbed methane
block in Yunnan Province between October 2003 and April 2004. The drilling
results to date for each well are:
o FCY-LC01 - total depth 825 meters (2,722 feet).
A total of 15 mineable coal seams were penetrated during the drilling of
the well, with a total thickness of 29.4 meters (97 feet), which we consider to
be excellent. The coring of the coal samples showed a recovery rate of 94.8%. In
addition, the drilling revealed four targeted major coal seams with a total
thickness of 16.3 meters (54 feet), all within an interval of about 110 meters
(363 feet), which we believe are favorable for fracturing and production of
coalbed methane (CBM). Testing of 18 desorption samples from the well resulted
in gas content estimates of approximately 18 cubic meters per ton of coal or
about 650 cubic feet per ton of coal.
o FCY-EH02 - total depth 420 meters (1,344 feet).
The well penetrated 15 coal seams with a thickness of 16.7 meters (53
feet). The total thickness of the coal seams targeted for potential production
was 6.6 meters with a recovery rate of 70%. Estimated gas content, based on
preliminary desorption results is approximately 10 cubic meters per ton of coal,
or about 350 cubic feet per ton of coal.
o FCY-EH01 - total depth 435 meters (1,436 feet).
The well penetrated 42 coal seams with a thickness of 42.8 meters (141
feet). The total thickness of the four coal seams targeted for potential
production was 17.2 meters (57 feet). Estimated gas content, based on
preliminary desorption results, is approximately 8-10 cubic meters per ton of
coal, or approximately 280-350 cubic feet per ton of coal.
Despite the strong results from these first three wells we cannot provide
assurance that commercial viability will be achieved. Profitable production from
these wells is subject to the following risks, among others:
4
o Three conventional CBM wells cannot produce enough gas to achieve
commercially viability. We must complete multiple CBM wells in near
proximity to each other in order to make it feasible to begin
production from any of them.
o No gas pipeline, liquefied natural gas (LNG) plant, or other offtake
candidate currently exists to take gas from these wells, and it is
not likely that any such facilities will be built until favorable
results are obtained from multiple wells.
o Actual production may vary materially from preliminary test results.
Actual production from the well may be at recovery rates and gas
quality materially worse than our first indications.
We have determined to use horizontal drilling techniques to evaluate the
Enhong-Laochang project. Under that production sharing contract (PSC), we were
originally required to drill two additional conventional wells to satisfy
requirements of Phase I. The China United Coal Bed Methane Corporation (CUCBM)
has agreed to revise these terms to allow us to fracture and test two of the
wells we have drilled and then drill one horizontal well with at least two
laterals to satisfy requirements of Phase I. Drilling operations for the first
horizontal well may commence late in 2004 or early in 2005, provided weather
would permit the rig movement to the location. We have incurred costs of
approximately $1 million in the first six months of 2004 and expect to incur
additional costs of approximately $1.9 million in the remaining six months of
2004 in the Enhong-Laochang project. We expect to fund these activities with our
existing capital at June 30, 2004 and from funds to be raised in the remainder
of 2004.
We and our partner, CUCBM, are evaluating utilizing coiled tubing drilling
(CTD) instead of traditional fracturing to test the previously drilled wells.
Using a coiled tubing rig, we would reenter the existing holes and then drill
laterally through the targeted coal seam some 1,000 to 1,500 feet instead of
utilizing traditional fracturing to stimulate gas flow. Utilization of coiled
tubing technology could prove to be more efficient at stimulating gas flow than
conventional fracturing, and it may be more economical in South China where the
rugged terrain presents obstacles to the large fracturing trucks. Provided the
equipment can be secured and that weather does not prevent the movement of
equipment to the drilling locations, we may opt to use CTD in lieu of fracturing
tests. Once we explore all the details of using CTD in the Yunnan Province, we
will determine whether we will use hydraulic fracturing or CTD as the method to
initially test these wells during 2004.
Shanxi Province, China
We have entered into farmout agreements and an assignment agreement with
Phillips China, Inc., a subsidiary of Conoco Phillips, Inc., (Phillips) under
which we agreed to acquire a net undivided interest of 40% from Phillips in two
production-sharing contracts in Shanxi Province. As currently structured, we
have a 40% interest in the projects, Phillips has retained a 30% interest and
CUCBM has a 30% interest. The assignment agreement and appropriate amendments to
the PSCs substituting us for Phillips as the principal party and operator was
approved by CUCBM on March 15, 2004, and ratified by the PRC Ministry of
Commerce on March 22, 2004.
The agreements obligate us, at our expense, to fracture stimulate and
production test three exploration wells that were drilled by Phillips. The other
parties have agreed to revise that requirement to allow us to only test two of
those wells to satisfy the Phase I requirement. We anticipate the cost of these
efforts to be approximately $200,000 per well. We expect to begin fracturing and
testing during the late third quarter or fourth quarter of 2004; however, we are
currently evaluating the use of CTD as an alternative to conventional fracturing
in this project also. Regardless of the method used, if testing proves
satisfactory, we have the option to extend into the second phase of exploration
at our own expense. The other parties to the PSC have agreed to revise the terms
of the second phase of exploration to require one horizontal well with at least
two laterals instead of the originally required three additional wells. If we
successfully complete the second phase, Phillips will have the option to elect
to either retain its net undivided 30% participating interest, or take an
overriding royalty interest, which will be capped at 3.5% of the total
participating interest.
In the first six months of 2004, we incurred costs of approximately
5
$150,000 and expect to incur additional costs of approximately $1.1 million in
the remaining six months of 2004 to perform the required tests, cover costs
related to CUCBM salary fees, training fees, exploration fees and assistance
fees required by the production sharing contracts for these projects, and the
payment made to Phillips of $76,052 for CBM equipment and materials associated
with the project.
Our agreements with Phillips required that we post a $1 million bank
guarantee or surety bond by May 14, 2004 to guarantee performance of the
evaluation and work program to test the two existing wells. On May 14, 2004, we
placed $1 million into escrow to satisfy this bond. An additional $900,000 bond
or escrow account will be required if we enter the second exploration phase. We
have the option to escrow the full amount of each required guarantee in lieu of
a bond. Required funding for these activities is expected to come from a
combination of existing capital and funds to be raised during 2004.
China Pipeline Access
In the Qinnan block of our Shanxi Province project, the West-East pipeline
has the capacity of 1,000 MMcfpd. The Shanjing II pipeline is a 40" line, which
would also have a 1,000 MMcfpd capacity and will run just north of our Shouyang
block, in Shanxi Province. In the Qinnan and Shouyang areas we estimate that we
will eventually expend approximately $63 million for two short connecting
pipelines with 850 MMcfpd of capacity to the Shanjing II and West-East pipelines
(about 30 miles in total for the two connecting pipelines).
In the Yunnan area we have estimated a cost in excess of $50 million for a
50-mile pipeline with a capacity of 350 MMcfpd. At the present time there are no
pipelines to move gas for any great distance in the Yunnan Province, and gas
will have to be sold to the local communities.
Gas sales in these China blocks can also be achieved through development
of a LNG plant. A 100-ton per day LNG plant will cost about $10 million to
develop and take about two years for planning and construction. A 1,000-ton per
day LNG plant would cost about $75 million with construction time close to two
years. These costs may be carried by an LNG company that would build the plants
for the gas. It is very possible that first gas sales from our China property
will be through the development of LNG plants close to our property.
Eastern Montana
Through our wholly owned subsidiary Newark Valley Oil & Gas, Inc., we have
acquired undeveloped acreage on our Montana leases, which we hope will
demonstrate the existence of gas in commercial quantities. However, our first
priority is to complete our exploration obligations in China because we believe
our properties in China represent our greatest potential return on investment.
We expect to expend approximately $45,000 in the second half of 2004 to pay
lease rentals in Montana and to conduct the necessary evaluations and planning
for a drilling program.
We do not expect that we will have funds available in the foreseeable
future for our Montana property, and we are evaluating whether to pursue a
farmout agreement or other alternatives with outside third parties. However,
should funds become available for our Montana project, we would expend between
$1.5 and $2 million to drill ten shallow wells as well as stimulate and
construct a gathering system. Assuming good results for the first ten well
program, we would then proceed to drill an additional 20 to 30 wells thereafter
to evaluate the potential of constructing a pipeline to gain greater access to
gas markets on the Northern Border pipeline. The cost of constructing a pipeline
is estimated at $5 to $6 million. Continued development of this property could
accelerate once a pipeline is constructed and reach a pace of 50 to 75 wells per
year for a period of four to five years, at a cost of $8.5 to $12.7 million per
year.
Montana Pipeline Access
We can access the Bitter Creek Gathering System, which has a current
capacity of about 2,000 Mcfpd. If development were to continue and the Bitter
Creek Gathering System was unable to move all the available gas it is possible
to lay a 8" to 10" line to the Northern Border pipeline which is
6
approximately 25 to 30 miles north of our acreage, at a cost of approximately $4
to $6 million.
Results of Operation and Analysis of Financial Condition
The following discussion should be read in conjunction with the audited
financial statements and notes thereto included in our annual report on Form
10-KSB/A for the fiscal year ended December 31, 2003; and should further be read
in conjunction with the financial statements included in this report.
Comparisons made between reporting periods herein are for the three and six
months ended June 30, 2004 as compared to the three and six months ended June
30, 2003.
We had no operating revenue for the six and three months ended June 30,
2004 and no revenue for the same periods in 2003. Our operating expenses for the
six months ended June 30, 2004 increased by 83% to $2,465,000 as compared to
$1,347,000 for the same period in 2003. Our operating expenses for the three
months ended June 30, 2004 increased 77% to $1,196,000 as compared to $675,000.
The expenses we incurred in 2004 as compared to 2003 are set forth in the table
below.
- ----------------------------------------------------------------------------------------------------------
Six Months Ended June 30 Three Months Ended June 30
Percentage Percentage
Expenses* 2004 2003 Increase (+) 2004 2003 Increase (+)
or decrease or decrease
(-) (-)
- ----------------------------------------------------------------------------------------------------------
Geologic & engineering services $ 156,000 $ 265,000 (-) 41% $53,000 $193,000 (-) 73%
Other consulting and professional 215,000 124,000 (+) 73% 132,000 37,000 (+) 257%
services
Compensation 439,000 503,000 (-) 13% 238,000 261,000 (-) 9%
Stock compensation 433,000 - - 226,000 - -
Travel 191,000 181,000 (+) 5% 107,000 89,000 (+) 20%
Legal and accounting 477,000 121,000 (+) 294% 269,000 53,000 (+) 407%
Mineral lease rent 84,000 - - 65,000 - -
Loss on investment in joint - 22,000 (-) 100% - - -
venture
Amortization of contract rights 23,000 29,000 (-) 21% - 14,000 (-) 100%
General and administrative 447,000 102,000 (+) 338% 106,000 28,000 (+) 279%
Total $2,465,000 $1,347,000 (+) 83% $1,196,000 $675,000 (+) 77%
- ----------------------------------------------------------------------------------------------------------
* Note that these expenses may not represent all actual expenditures in the
above categories as a result of our ability to capitalize certain expenditures.
Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003
Geologic and engineering services decreased by approximately $109,000 or
41% from $265,000 during the six months ended June 30, 2003 to $156,000 during
the six months ended June 30, 2004. Our geologic expenditures have decreased as
we have focused our efforts on drilling and testing exploration wells.
7
Other consulting and professional services increased approximately $91,000
or 73% from $124,000 during the six months ended June 30, 2003 to $215,000
during the six months ended June 30, 2004. The primary reason for this increased
expense was monies expended for capital raising efforts.
Compensation decreased by approximately $64,000 or 13% due to streamlining
management responsibilities.
Stock compensation expense increased approximately $433,000 during the six
months ended June 30, 2004. This increase was due to granting options at
exercise prices below the market at the date of grant. We are recognizing
compensation expense for the difference between the exercise price and the
market value at the date of grant over the period the compensation is earned.
Legal and accounting expenses increased approximately $356,000 or 294%
from $121,000 during the six months ended June 30, 2003 to $477,000 during the
six months ended June 30, 2004. The primary reasons for this increased expense
were our response to the Securities and Exchange Commission's (SEC)
investigation regarding ownership of our stock, costs associated with amending a
previously filed Form 10-KSB and certain quarterly reports related to our
various current and previous financing activities.
General and administrative expense increased approximately $345,000 or
338% from $102,000 during the six months ended June 30, 2003 to $447,000 during
the six months ended June 30, 2004. Included in this increase are overhead
expenditures from expanded operating activities in China including professional
fees for CUCBM and contract labor.
Interest expense decreased $42,000 or 100% from the six months ended June
30, 2003. The $42,000 reflects interest expense related to the beneficial
conversion factor for the $100,000 Professional Trading Services note payable
executed in the second quarter 2003.
These increased expenses resulted in our loss before income taxes
increasing to $2,460,000 for the six months ended June 30, 2004, as compared to
$1,388,000 for the same period of 2003. As is the case with our increased
expenses, our increased operating loss is also attributable to our increased
efforts to explore, develop, extract and sell coalbed methane gas in China, as
well as our financing efforts.
Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30,
2003
Geologic and engineering services decreased by approximately $140,000 or
73% from $193,000 during the three months ended June 30, 2003 to $53,000 during
the three months ended June 30, 2004. Our geologic expenditures have decreased
as we have focused our efforts on drilling and testing exploration wells.
Other consulting and professional services increased approximately $95,000
or 257% from $37,000 during the three months ended June 30, 2003 to $132,000
during the three months ended June 30, 2004. The primary reason for this
increased expense was monies expended for capital raising efforts.
Stock compensation expense increased approximately $226,000. This increase
was due to granting options at exercise prices below the market at the date of
grant. We are recognizing compensation expense for the difference between the
exercise price and the market value at the date of grant over the period the
compensation is earned.
Travel costs increased approximately $18,000 or 20% from $89,000 during
the three months ended June 30, 2003 to $107,000 during the three months ended
June 30, 2004. This increase was due to increased travel for capital raising
purposes.
Legal and accounting expenses increased approximately $216,000 or 407%
from $53,000 during the three months ended June 30, 2003 to $269,000 during the
three months ended June 30, 2004. The primary reasons for this increased expense
were our response to the SEC's investigation regarding ownership of our stock,
costs associated with amending a previously filed Form 10-KSB and certain
8
quarterly reports and costs related to our various current and previous
financing activities.
General and administrative expense increased approximately $78,000 or 279%
from $28,000 during the three months ended June 30, 2003 to $106,000 during the
three months ended June 30, 2004. Included in this increase are overhead
expenditures from expanded operating activities in China including professional
fees for CUCBM and contract labor.
Interest expense decreased $42,000 or 100% from the three months ended
June 30, 2003. The $42,000 reflects interest expense related to the beneficial
conversion factor for the $100,000 Professional Trading Services note payable
executed in the second quarter 2003.
These increased expenses resulted in our loss before income taxes
increasing to $1,192,000 for the three months ended June 30, 2004, as compared
to $716,000 for the same period of 2003. As is the case with our increased
expenses, our increased operating loss is also attributable to our increased
efforts to explore, develop, extract and sell coalbed methane gas in China, as
well as our financing efforts.
Liquidity and Capital Resources
As of June 30, 2004, our cash and cash equivalents were $5,873,000, as
compared to $2,326,000 as of December 31, 2003.
Cash used in operating activities for the six months ended June 30, 2004
was $1,612,000 as compared to cash used in operating activities for the same
period of 2003 of $1,115,000. This change is mainly attributable to our
increased cash operating expenses, including compensation, legal and accounting
and general and administrative expenses.
Cash used in investing activities increased to $838,000 for the six months
ended June 30, 2004 as compared to $237,000 for the same period in 2003. This
increase is primarily attributable to our drilling of three wells in Yunnan
Province in China.
Cash provided by financing activities increased to $5,997,000 for the six
months ended June 30, 2004 as compared to $531,000 for 2003. The increase in
cash provided by financing activities reflects proceeds from the exercise of
warrants and sales of investment units in 2004.
We believe that we have sufficient cash or can raise additional cash as
necessary to fund operating needs and financial obligations through the end of
2004. We anticipate incurring approximately $5.2 million in exploration and
development expenses in the full year of 2004, including $1 million, which has
already been placed in escrow. This figure could be as high as $6.1 million if
we elect to post additional cash reserves in lieu of performance bonds as
required by Phase 2 of the Phillips agreements in Shanxi (See, 2004 Plan of
Operation - Shanxi Province, China).
To develop our projects in China over the long term, we need to obtain
funding to satisfy significant expenditures for exploration and development of
those projects, if they are successful. We anticipate obtaining such significant
funds by various methods, which might include the issuance of equity securities,
obtaining farm-out partners and the potential sale of property interests among
other alternatives.
During the six months ended June 30, 2004, we have raised net proceeds of
approximately $2.227 million in an equity offering involving the sale of 128
investment units, each of which consist of 10,000 shares of our common stock and
a warrant to purchase 10,000 shares of our common stock at $2.50 per share.
Additionally, we notified investors in our October 7, 2003 offering of our
intention to redeem 25% of the warrants received. As of August 3, 2004, we
received a total of $2,748,730 upon the exercise of 2,748,730 warrants to
purchase 2,748,730 shares of our common stock.
We also have raised net proceeds of $1.056 million in a private placement
of equity to accredited investors in the second quarter of 2004 which included
the issuance of 550,000 shares of our restricted common stock at $2.00 per share
9
and 550,000 warrants to purchase shares of our restricted common stock at $2.50
per share.
Our ability to continue as a going concern depends upon our ability to
raise additional, substantial funds for use in our planned development
activities, and upon the success of our planned exploration and development
activities. 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. 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, to raise the funds necessary for production and
development. Management believes that, in the near term, we will be able to
raise funds sufficient to assure satisfaction of our operating capital needs and
financial obligations. We expect to raise these funds through a combination of
the continued exercise of warrants issued to investors in conjunction with the
recently completed private offerings and future equity and/or debt offerings.
We do not expect to receive significant revenues from operations in China
until at least late 2006. We do not anticipate receiving revenue from our
Montana properties for the foreseeable future as we do not currently expect to
have adequate financing to pursue a drilling program in Montana during 2004. We
are evaluating whether to pursue a farmout agreement or other alternatives with
outside third parties for our Montana properties. To generate revenue in China
prior to the point at which production reaches pipeline quantities, we may elect
to construct LNG facilities on our properties. However, we believe an LNG
company may decide to construct such facilities at their own cost. This would
allow gas to be produced and sold in the period before we achieve production in
sufficient quantities to justify constructing short connecting pipelines to the
Shangjing II and West-East pipelines in the Shanxi Province, or before a
pipeline or other offtake facility is operational in the Yunnan Province. A
100-ton per day LNG facility, which would absorb approximately five million
cubic feet of gas per day, would cost $10-$15 million to construct. A 1,000-ton
per day facility capable of absorbing 50 million cubic feet of gas per day would
cost approximately $75 million. Again, while we may opt to construct LNG
facilities, it is quite possible that an LNG concern may decide to construct
such facilities near our properties at their own cost. We may construct
pipelines to move gas from our fields to either municipalities or other
pipelines. We estimate the cost to construct a pipeline in the Enhong and
Laochang areas to be approximately $50 million. Our farmout agreement from
Phillips provides us with rights to two separate blocks; the Shouyang block,
approximately 40 km south of the Shangjing II pipeline to Beijing, and the
Qinnan block, approximately 10 km north of the West-East pipeline to Shanghai.
We estimate the cost to construct pipeline connections from the Shouyang and
Qinnan blocks to the Shangjing II and West-East pipelines, respectively, to be
approximately $63 million. We are delaying any decisions regarding the
construction of LNG facilities or pipelines until such time as significant gas
volumes are achieved. We believe this delay may allow us to avoid construction
costs to the extent other entities (attracted by our gas), have constructed, are
constructing or are planning to construct, such facilities.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
(GAAP) in the United States. GAAP represents a comprehensive set of accounting
and disclosure rules and requirements, the application of which requires
management's judgment and estimates including, in certain circumstances, choices
between acceptable GAAP alternatives. The preparation of these consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, if any, at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. We base our estimates on historical experience and various
other assumptions that are believed to be reasonable under the circumstances.
Actual results could differ from these estimates under different assumptions or
conditions. Note 1 to our consolidated financial statements included in our Form
10-KSB/A for the year ended December 31, 2003 contains a comprehensive summary
of our significant accounting policies. The following is a discussion of our
most critical accounting policies, judgments and uncertainties that are inherent
in our application of GAAP:
10
Accounting for Oil and Gas Properties. Under the successful efforts method
of accounting, we capitalize all costs related to property acquisitions and
successful exploratory wells, all development costs and the costs of support
equipment and facilities. Certain costs of exploratory wells are capitalized
pending determination that proved reserves have been found. Such determination
is dependent upon the results of planned additional wells and the cost of
required capital expenditures to produce the reserves found. All costs related
to unsuccessful exploratory wells are expensed when such wells are determined to
be non-productive; other exploration costs, including geological and geophysical
costs, are expensed as incurred. We recognize gains or losses on the sale of
properties on a field basis.
The application of the successful efforts method of accounting requires
management's judgment to determine the proper designation of wells as either
developmental or exploratory, which will ultimately determine the proper
accounting treatment of the costs incurred. The results from a drilling
operation can take considerable time to analyze, and the determination that
commercial reserves have been discovered requires both judgment and application
of industry experience. Wells may be completed that are assumed to be productive
and actually deliver oil and gas in quantities insufficient to be economic,
which may result in the abandonment of the wells at a later date. Seismic costs
incurred to select development locations within a productive oil and gas field
are typically treated as development costs and capitalized. Judgment is required
to determine when the seismic programs are not within proved reserve areas and
therefore would be charged to expense as exploratory. The evaluation of oil and
gas leasehold acquisition costs requires management's judgment to estimate the
fair value of exploratory costs related to drilling activity in a given area.
Drilling activities in an area by other companies may also effectively condemn
leasehold positions.
The successful efforts method of accounting can have a significant impact
on the operational results reported when we enter a new exploratory area in
hopes of finding oil and gas reserves. Seismic costs can be substantial which
will result in additional exploration expenses when incurred. The initial
exploratory wells may be unsuccessful and the associated costs will then be
expensed as dry hole costs and any associated leasehold costs may be impaired.
Impairment of unproved oil and gas properties. Unproved leasehold costs
and exploratory drilling in progress are capitalized and are reviewed
periodically for impairment. Costs related to impaired prospects or unsuccessful
exploratory drilling are charged to expense. Our assessment of the results of
exploration activities, commodity price outlooks, planned future sales or
expiration of all or a portion of such leaseholds impacts the amount and timing
of impairment provisions. An impairment expense could result if oil and gas
prices decline in the future, as it may not be economical to develop some of
these unproved properties. As of June 30, 2004, we had total unproved oil and
gas property costs of approximately $3.7 million consisting of undeveloped
leasehold costs of $2.4 million in Montana and unevaluated exploratory drilling
costs of $1.3 million incurred in China, compared to $2.9 million consisting of
undeveloped leasehold costs of $2.4 million in Montana and unevaluated
exploratory drilling costs of $497,000 incurred in China as of December 31,
2003.
Estimates of future dismantlement, restoration, and abandonment costs. The
accounting for future development and abandonment costs changed on January 1,
2003, with the adoption of Statement of Financial Accounting Standards (SFAS)
No. 143 (SFAS No. 143). SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The accrual is based on estimates of these costs for each of
our properties based upon the type of production structure, reservoir
characteristics, depth of the reservoir, market demand for equipment, currently
available procedures and consultations with construction and engineering
consultants. Because these costs typically extend many years into the future,
estimating these future costs is difficult and requires management to make
estimates and judgments that are subject to future revisions based on numerous
factors, including changing technology, the political and regulatory environment
and, beginning in 2003, estimates as to the proper discount rate to use and
timing of abandonment. We have not acquired any assets that result in a material
future abandonment cost. Therefore, there is no provision in the accompanying
consolidated financial statements.
11
Assessments of functional currencies. Our Chinese operations use the
Chinese yuan as their functional currency. Management determines the functional
currencies of our subsidiaries based on an assessment of the currency of the
economic environment in which a subsidiary primarily realizes and expends its
operating revenues, costs and expenses. The assessment of functional currencies
can have a significant impact on periodic results of operations and financial
position.
We have also adopted SFAS No. 52, "Foreign Currency Translation", which
requires that the translation of the applicable foreign currency into U.S.
dollars be performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains or losses resulting
from such translation are included in the consolidated statements of
stockholders' equity and comprehensive income.
Earnings per share. We apply SFAS No. 128, "Earnings Per Share", for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in our earnings.
Stock options. We also apply Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for our various stock option agreements and have adopted the
disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation". Compensation cost for stock options
granted 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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in hedging activities and do not use commodity futures or
forward contracts in our cash management functions. We do not hedge our exposure
to currency rate changes. Instead, we are at risk for changes in currency
exchange rates between the United States and the People's Republic of China. In
general, we hold cash reserves in U.S. dollars and transfer funds to China as
needed to operate our Chinese offices and conduct exploration operations. For
the near term, we do not expect to generate any operating income from activities
in China.
Because we frequently send money to China to fund operations, we are
exposed to foreign currency risk. If the value of U.S. dollars falls in relation
to the Chinese yuan, the cost to us of funding our Chinese operations would rise
because more dollars would be required to fund the same expenditures in yuan.
Conversely, if the value of U.S. dollars rises in relation to the Chinese yuan,
the change in exchange rates would decrease our dollar cost to fund operations
in China.
In recent years, the Chinese government has fixed the exchange rate
between U.S. dollars and Chinese yuan. Because the exchange rate has been fixed,
instead of variable, we have experienced no fluctuations in the value of goods
and services we purchase in China because of currency exchange. However, the
United States and other foreign governments have repeatedly sought to establish
a floating exchange rate between the Chinese yuan and other foreign currencies.
If, in the future, China accedes to requests to let its currency float against
the dollar, we must either adopt cash management strategies to hedge U.S.
dollars against the yuan or be subject to the exchange rate risks described
above.
ITEM 4 CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
the end of the period covered by this report, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of our management, including our Chief Financial Officer, who
concluded that our disclosure controls and procedures are effective. There have
been no significant changes in our internal controls or in other factors, which
could significantly affect internal controls subsequent to the date we
12
carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our Chief Financial
Officer, to allow timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Jawaharlal Gondi, one of our Directors, has notified us that he intends to
file a claim against us for unpaid compensation and expenses and an unpaid
promissory note incurred during 2003. The claim totals approximately $230,000.
However, we have written to Mr. Gondi's lawyer denying his claims for
compensation in excess of what he has already been paid and denying the note
claim. We have acknowledged some of the expense claims and paid them in part. At
June 30, 2004, the unpaid expense claims amounted to approximately $42,000,
which amount we acknowledged and recorded as a liability on our financial
statements. As of the date of this report, we do not believe any legal action
has been filed against us regarding these claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2004, we initiated a private placement
sale of investment units. As of June 30, 2004, we had sold 128 units. Each
investment unit consists of 10,000 shares of common stock and a warrant to
purchase 10,000 shares of common stock at $2.50 per share, over the next two
years. The warrants may be exercised immediately after issuance until the
earlier of (i) two years from the date of the warrant agreement, or (ii) the
date upon which we redeem the warrants (which may occur at $0.01 per share in
the event we provide at least forty days prior written notice, the average
closing price of our common stock for the fifteen days prior to such written
notice exceeds $3.50, and we limit our redemption to 25% of the warrant holder's
total purchasable shares per month). Net proceeds of approximately $2,227,000
were received. A cash commission of 10% was paid, as was a 3% expense allowance
and also a 10% warrant commission. This private placement was made pursuant to
exemptions from registration under Regulation S under the Securities Act of 1933
and requires the purchaser hold the stock for one year from the date of
purchase. This private placement contains price protection rights that cease 90
days after the offering, or on August 14, 2004.
Also during the second quarter ended June 30, 2004, we raised net proceeds
of $1,056,000 in a private placement of equity to qualified investors. This
placement included the issuance of 550,000 shares of our restricted common stock
at $2.00 per share and 550,000 warrants to purchase shares of our restricted
common stock at $2.50 per share over the next two years. This private placement
contains price protection rights that apply if we sell securities at a lower
price before January 1, 2005. A cash commission of 4% was paid on these sales,
which were made in reliance on Rule 506 of Regulation D under SEC Act of 1933.
The three persons in this placement all qualified as accredited investors.
ITEM 5. OTHER INFORMATION
U.S. Securities and Exchange Commission Trading Investigation
In December 2003, we learned that we are the subject of an investigation
by the SEC. We understand that the SEC is investigating whether anyone has
issued false or misleading statements in an attempt to manipulate the price of
our common stock, whether anyone has profited from selling stock at artificially
high prices due to the manipulative statements, and whether any individual or
group has failed to file ownership reports with the SEC as required for 10% or
more stockholders under Section 16 of the Securities Exchange Act of 1934 or
failed to file ownership reports with the SEC as required for 5% or more
13
stockholders under Section 13 of the Securities Exchange Act of 1934. Management
does not know of any acquisitions in excess of 5% of our outstanding shares,
except for those described in previous 13D filings with the SEC. We have
supplied information to the SEC in response to their information requests and
intend to cooperate with their investigation. We do not know what the outcome of
their investigation may be.
The Securities Exchange Act of 1934 and SEC rules require that a person or
group of persons who acquire more than 5% of a class of equity securities that
are registered under the Securities Exchange Act of 1934 must report their
holdings in a Schedule 13D filing with the SEC within 10 days after they become
5% shareholders, and must thereafter report changes in their ownership of the
securities. In addition, Section 16(a) of the Securities Exchange Act of 1934
generally requires that owners of more than 10% of a class of stock that is
registered under the Securities Exchange Act of 1934 must report changes in
their holdings within 48 hours of an acquisition or disposition of the
securities.
If a person or group owns a large block of stock of a publicly traded
company, particularly if that stock is not subject to restrictions on its
purchase and sale on the open market, there is a risk that the person or group
could sufficiently control the market for the stock to drive the stock's trading
price up or down, and thereby the undisclosed control group could reap trading
profits at the expense of other public investors. In addition, Schedule 13D
requires owners of a control group of stock to disclose their intentions with
respect to management or control of the company. We are making this announcement
to alert the public that an undisclosed control group might exist.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(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.
(b) Reports on Form 8-K. We filed a Form 8-K on May 19, 2004 regarding
$1,000,000 that was put in an escrow account as security to guarantee
performance of our initial obligations under our assignment and farmout
agreement from ConocoPhillips covering the 1,058,000-acre coalbed methane
Dragon Project in Shanxi Province, China.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned; thereunto duly
authorized this 3rd day of August 2004.
Far East Energy Corporation
/s/ Michael R. McElwrath
---------------------------
Michael R. McElwrath
Chief Executive Officer, President and
Chairman of the Board (Principal Executive
Officer)
/s/ Bruce N. Huff
--------------------
Bruce N. Huff
Chief Financial Officer (Principal
Financial Officer)
14
INDEX TO EXHIBITS
Exhibits marked with an asterisk have been filed previously with the Securities
and Exchange Commission and are incorporated herein by reference.
EXHIBIT NO. PAGE NO. DESCRIPTION
3.1 * Articles of Incorporation of the Company
3.2 * Bylaws of the Company
10.1 + McElwrath Employment Agreement
10.2 + Memo of Understanding with Phillips China, Inc.
10.3 + Farmout Agreement-Qinnan (Phillips China)
10.4 + Farmout Agreement-Shouyang (Phillips China)
10.5 + Assignment Agreements on the Qinnan CMB blocks
(Phillips China)
10.6 + Assignment Agreements on the Shouyang CMB blocks
(Phillips China)
10.7 # Bruce N. Huff Employment Agreement
10.8 # Escrow Agreement
31.1 16 302 Certification of Chief Executive Officer
31.2 17 302 Certification of Chief Financial Officer
32.1 18 906 Certification of Chief Executive Officer
32.2 19 906 Certification of Chief Financial Officer
* Previously filed and incorporated herein by reference from the Company's Form
10-KSB, file number 000-32455, filed on March 16, 2001. +Previously filed and
incorporated herein by reference from the Company's Form 10-KSB file number
000-32455, filed on April 14, 2004.
#Previously filed and incorporated herein by reference from the Company's Form
S-2, file number 000-32455, filed on July 23, 2004.
15
EXHIBIT 31.1
CERTIFICATION
I, Michael R. McElwrath, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Far East Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to myself by others within those
entities, particularly during the period in which this report is being
prepared;
(b) designed such internal controls over financial reporting, or caused
such internal controls over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially effect, the registrant's internal controls over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal controls over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing equivalent functions);
(a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonable likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: August 3, 2004
/s/ Michael R. McElwrath
- --------------------------
Michael R. McElwrath
Chief Executive Officer
16
EXHIBIT 31.2
CERTIFICATION
I, Bruce Huff, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Far East Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to myself by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) designed such internal controls over financial reporting, or caused
such internal controls over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the registrant's
most recent quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially effect, the small business issuer's internal controls over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal controls over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing equivalent functions);
(a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonable likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: August 3, 2004
/s/ Bruce N. Huff
- ----------------------------
Bruce N. Huff
Chief Financial Officer
17
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Far East Energy
Corporation (the Company) for the period ended June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the Report), the
undersigned, Michael R. McElwrath, the Chief Executive Officer of the Company,
hereby certifies, pursuant to 18 U.S.C. section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: August 3, 2004
/s/ Michael R. McElwrath
- ---------------------------
Michael R. McElwrath
Chief Executive Officer
18
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Far East Energy
Corporation (the Company) for the period ended June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the Report), the
undersigned, Bruce N. Huff, Chief Financial Officer of the Company, hereby
certifies, pursuant to 18 U.S.C. section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: August 3, 2004
/s/ Bruce N.Huff
- ------------------------
Bruce N. Huff
Chief Financial Officer
19