Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-K /A
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Amendment No.
2
ýANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2008
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For the
transition period from: _____________ to _____________
000-52770
(Commission
File Number)
PACIFIC
ASIA PETROLEUM, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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30-0349798
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(State
or Other Jurisdiction
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(I.R.S.
Employer
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of
Incorporation or Organization)
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Identification
No.)
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250
East Hartsdale Ave., Suite 47, Hartsdale, New York 10530
(Address
of Principal Executive Office) (Zip Code)
(914) 472-6070
(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.001 par value.
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¨ No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 ý
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer”, “non-accelerated filer” and ”smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o Accelerated
filer ý Non-accelerated
filer o Small
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No ý
The aggregate
market value of the voting and non-voting common equity held by non-affiliates
of the registrant as of the last business day of the registrant’s most recently
completed second fiscal quarter (June 30, 2008) was approximately $605,534,419
(based on $18.75 per share, the average bid price and asked price of the Common
Stock as reported by Pink Sheets LLC on such date). For purposes of the
foregoing calculation only, all directors, executive officers and 10% beneficial
owners have been deemed affiliates. As of April 27, 2009, there were
41,919,785 shares of Common Stock outstanding.
CAUTIONARY
STATEMENT
All
statements, other than statements of historical fact, included in this Form
10-K, including without limitation the statements under “Management’s Discussion
and Analysis of Financial Condition and Results of Operation” and “Description
of Business,” are, or may be deemed to be, forward-looking statements. Such
forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of Pacific Asia Petroleum, Inc. and its subsidiaries and
joint-ventures, (i) Pacific Asia Petroleum, Limited, (ii) Inner Mongolia
Production Company (HK) Limited, (iii) Pacific Asia Petroleum (HK) Limited, and
(iv) Inner Mongolia Sunrise Petroleum JV Company (collectively, the “Company”),
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements contained in this Form
10-K.
In our
capacity as Company management, we may from time to time make written or oral
forward-looking statements with respect to our long-term objectives or
expectations which may be included in our filings with the Securities and
Exchange Commission (the “SEC”), reports to stockholders and information
provided in our web site.
The words
or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,”
“forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar
expressions identify “forward-looking statements.” Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. We wish to caution you not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made. We are calling to your attention important
factors that could affect our financial performance and could cause actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The
following list of important factors may not be all-inclusive, and we
specifically decline to undertake an obligation to publicly revise any
forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Among the factors that could
have an impact on our ability to achieve expected operating results and growth
plan goals and/or affect the market price of our stock are:
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Lack
of operating history, operating revenue or earnings
history.
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Dependence
on key personnel.
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Fluctuation
in quarterly operating results and seasonality in certain of our
markets.
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Possible
significant influence over corporate affairs by significant
shareholders.
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Our
ability to enter into definitive agreements to formalize foreign energy
ventures and secure necessary exploitation
rights.
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Our
ability to raise capital to fund our
operations.
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Our
ability to successfully integrate and operate acquired or newly formed
entities and multiple foreign energy ventures and
subsidiaries.
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The
competition from large petroleum and other energy
interests.
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Changes
in laws and regulations that affect our operations and the energy industry
in general.
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Risks
and uncertainties associated with exploration, development and production
of oil and gas, drilling and production
risks.
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Expropriation
and other risks associated with foreign
operations.
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Risks
associated with anticipated and ongoing third party pipeline construction
and transportation of oil and gas.
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The
lack of availability of oil and gas field goods and
services.
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Environmental
risks, economic conditions, and other risk factors detailed
herein.
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PART
I
ITEM
1. DESCRIPTION OF BUSINESS
General
Pacific
Asia Petroleum, Inc. (“PAP” or the “Company”) is a development stage company
formed to develop new energy ventures, directly and through joint ventures and
other partnerships in which it may participate. Members of the Company’s senior
management team have experience in the fields of petroleum engineering, geology,
field development and production, operations, international business development
and finance. Several members of the Company’s management team have held
management and executive positions with Texaco Inc. and have managed energy
projects in the People’s Republic of China (the “PRC” or “China”) and elsewhere
in Asia and other parts of the world. Members of the Company’s management team
also have experience in oil drilling, operations, geology, engineering and sales
in China’s energy sector. The Company considers itself currently to
be engaged in a single business segment--oil and gas exploration, development
and production.
The
Zijinshan Production Sharing Contract
The
Company is a party to an Agreement for Joint Cooperation entered into in
November 2006 with China United Coalbed Methane Co., Ltd. (“CUCBM”) (the Chinese
Government-designated company holding exclusive rights to negotiate with foreign
companies with respect to coalbed methane (“CBM”) production in China). This
agreement grants the Company the exclusive rights to a large contract area for
CBM production located in the Shanxi Province of China (the “CUCBM Contract
Area”), with an option to convert such arrangement into a production sharing
contract (“PSC”). On October 26, 2007, Pacific Asia Petroleum, Ltd.
(“PAPL”), a wholly-owned subsidiary of the Company, entered into a PSC with
CUCBM for the exploitation of CBM resources in the CUCBM Contract Area (the
"Zijinshan PSC"). The Zijinshan PSC provides, among other things, that PAPL must
drill three (3) exploration wells and carry out 50 km of 2-D seismic data
acquisition (a minimum commitment for the first three (3) years with an
estimated expenditure of $2.8 million) and drill four (4) pilot development
wells during the next two (2) years at an estimated cost of $2 million (in each
case subject to PAPL’s right to terminate the Zijinshan PSC). After the
exploration period but before commencement of the development and production
period, CUCBM will have the right to acquire a 40% participating interest and
work jointly to develop and produce CBM under the Zijinshan PSC. Pursuant to the
Zijinshan PSC, all CBM resources (including all other hydrocarbon resources)
produced from the CUCBM Contract Area are shared as follows: (i) 70%
of production is provided to PAPL and CUCBM for recovery of all costs incurred;
(ii) PAPL has the first right to recover all of its exploration costs from such
70% and then development costs are recovered by PAPL and CUCBM pursuant to their
respective participating interests; and (iii) the remainder of the production is
split by CUCBM and PAPL receiving between 99% and 90% of such remainder
depending on the actual producing rates (a sliding scale) and the balance of the
remainder (between 1% and 10%) is provided to the Government of
China.
The
Zijinshan PSC has a term of thirty (30) years and was approved in 2008 by the
Ministry of Commerce of China. In December 2008, the Company and CUCBM finalized
a mutually agreed work program pursuant to which the Company has now commenced
exploration operations under the Zijinshan PSC. The Zijinshan PSC is in close
proximity to the major West-East and the Ordos-Beijing gas pipelines which link
the gas reserves in China’s western provinces to the markets of Beijing and the
Yangtze River Delta, including Shanghai. The Zijinshan PSC covers an area of
approximately 175,000 acres.
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The
Chifeng Oil Opportunity
Through
Inner Mongolia Sunrise Petroleum JV Company (“IMPCO Sunrise”), the Company
commenced operational activities in China and successfully drilled its first
well in a prospective area in Inner Mongolia in cooperation with Chifeng
Zhongtong Oil and Natural Gas Co. (“Chifeng”) pursuant to a Contract for
Cooperation and Joint Development (the “Chifeng Agreement”) (described in
greater detail under “Principal Business Strategy” of this
section). The Company’s drilling operations in this area have been
suspended pending receipt of a production license from the Chinese
government. The Company is pursuing a combination of strategies to
have such production license awarded, including a possible renegotiation of the
Chifeng Agreement with the goal of increasing the financial incentives to all
the parties involved, and the Company is also pursuing a strategy focused on
entering into negotiations with respect to an opportunity to acquire the
existing production from the 22 sq. km. Kerqing Oilfield. The acquisition of the
Kerqing Oilfield could significantly enhance the Chifeng Agreement in scale and
value.
The
ChevronTexaco Asset Transfer Agreement
In
September 2007, the Company entered into four Asset Transfer Agreements (the
“Chevron Agreements”) with ChevronTexaco China Energy Company (“ChevronTexaco”)
for the purchase by the Company of participating interests held by ChevronTexaco
in production sharing contracts in respect of four CBM and tight gas sand
resource blocks located in the Shanxi Province of China with an aggregate
contract area of approximately 1.5 million acres for an aggregate base purchase
price of $61,000,000, adjusted in April 2008 to $50,000,000. Due to
delays in receipt of required Chinese government approvals of these transfers,
coupled with renewal terms proposed by ChevronTexaco that were not acceptable to
the Company, in December 2008 the Company exercised its right to terminate three
of the four Chevron Agreements and received its full deposit amounts back from
ChevronTexaco with respect to these three terminated Chevron Agreements. The
Company and ChevronTexaco remain parties to that certain Asset Transfer
Agreement – Baode Area, dated September 7, 2007, as amended on April 24, 2008
(the “ChevronTexaco ATA”), which relates to the purchase by the Company of
ChevronTexaco’s 35.7142% participating interest held by ChevronTexaco in a
production sharing contract in respect of a CBM resource block (the “Baode PSC”)
with a total area of approximately 160,000 acres (the “Baode
Block”). The base purchase price under the ChevronTexaco ATA is $2
million, subject to upward adjustment to account for ChevronTexaco’s cash flow
payments and operating costs paid with respect to the interests from June 30,
2007 (the “Effective Date”) through the closing date, and downward adjustment to
account for ChevronTexaco’s receipt of revenues derived from the interests from
the Effective Date through the closing date. The Company paid to
ChevronTexaco a $650,000 deposit toward the purchase price in 2007, which is
refundable if the ChevronTexaco ATA is terminated under certain conditions. The
closing of the asset transfer contemplated pursuant to the ChevronTexaco ATA is
contingent upon a number of conditions precedent, including the approval of
certain related agreements by the PRC Ministry of Land and Natural Resources and
the assignment of ChevronTexaco’s participating interest by the PRC Ministry of
Commerce, which approvals and assignment are currently in the process of being
secured. The aggregate costs and expenses paid by ChevronTexaco in
carrying out work on the assets from July 1, 2007 to October 31, 2008 were
estimated by it to be $1,990,784.
The
BHP Asset Transfer Agreement
On March
29, 2008, the Company entered into an Asset Transfer Agreement (the “BHP ATA”)
with BHP Billiton World Exploration Inc. (“BHP”) for the purchase by the Company
of BHP’s 64.2858% participating interest held by BHP in the Baode PSC (as
defined above) at a purchase price of $2,000,000, subject to upward adjustment
to account for BHP’s cash flow payments and operating costs paid with respect to
BHP’s participating interest from April 1, 2008 through the closing date, and
downward adjustment to account for BHP’s receipt of revenues derived from its
participating interest from that date through the closing date. The Company has
paid to BHP a $500,000 deposit toward the purchase price, which is refundable if
the BHP ATA is terminated under certain conditions. Upon closing, the
Company will assume BHP’s operator obligations related to the Baode
PSC. The aggregate costs and expenses paid by BHP in carrying out
work on the assets from April 1, 2008 to October 31, 2008 were estimated by it
to be $623,365.
Upon
closing of both the ChevronTexaco ATA and the BHP ATA, the Company will acquire
a 100% participating interest in the Baode PSC. Pursuant to the terms
of the Baode PSC, the Chinese government is entitled to acquire up to a 30%
participating interest in the Baode PSC from the then-current parties to the
Baode PSC upon certain conditions and in exchange for certain payments to such
parties. Assuming the Company consummates one or both
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of the
ChevronTexaco ATA and the BHP ATA, such asset acquisitions will not constitute
the acquisition of a business, but the acquisition of title to hydrocarbon
natural resources under the surface of the land. These assets are not
presently capable of independent operation as a business, and no employees,
revenues, or customers will be acquired.
The
Well Lead Agreement on Cooperation
On
September 30, 2008, the Company entered into an Agreement on Cooperation (the
“AOC”) with Well Lead Group Limited (“Well Lead”), pursuant to which the parties
agreed to use reasonable efforts to negotiate and enter into a mutually
acceptable Sale and Purchase Agreement for purchase by the Company of up to 39%
of Well Lead’s interests (the “WL Interest”) in Northeast Oil (China)
Development Company Ltd. (“Northeast Oil”). Northeast Oil owns a 95%
interest in oilfield blocks Fu710 and Meilisi723 in the Fulaerjiqu Oil Field in
Qiqihar City, Heilongjiang Province in the People’s Republic of China (the “WL
Oil Blocks”). The proposed transaction is subject to due diligence
review of the WL Interest, the WL Oil Blocks and other matters. Under
the proposed transaction, the Company would acquire a 25% interest in Northeast
Oil for a purchase price of $9.8 million, comprised of $5.0 million cash
(one-half paid at closing and the remainder in five equal monthly installments
commencing eight months after closing) and the issuance of Company Common Stock
valued at $4.8 million. In addition, at closing, the Company would
have the option to purchase an additional 14% interest in Northeast Oil foran
additional $5.5 million in cash payable at closing. In accordance
with the AOC, the Company paid Well Lead a nonrefundable payment of $50,000 in
cash for the right of exclusive negotiations for the acquisition of the Interest
through November 30, 2008, which exclusive term has expired.
After
completing the initial phase of due diligence on Well Lead, the WL Interest and
the WL Oil Blocks, the Company has commenced additional negotiations with Well
Lead and other related parties to expand the potential acquisition to include
other Well Lead interests and related parties. These additional Well
Lead interests and related parties include additional producing oilfields in
China, a Well Lead-affiliated technology company that has been applying its
intellectual property to successfully enhance production in the WL Oil Blocks
(and other oil fields in China), and certain Well Lead-related venture
companies. The Company now seeks to acquire a 51% participating interest in all
these Well Lead assets and related parties, and the Company and Well Lead have
reached a verbal agreement in principle with respect thereto. The
Company anticipates that the total purchase price for all Well Lead interests to
be acquired by the Company will be less than the amounts originally provided for
in the AOC for the WL Oil Blocks alone. The Company has commenced
phase two of its due diligence review with a goal to conclude such review and
negotiate, sign and consummate a definitive acquisition agreement by April 30,
2009. However, the Company can make no assurances that it will be
able to successfully consummate any transaction with Well Lead on terms and
conditions satisfactory to the Company, or at all.
Handan
Gas Distribution Venture
The
Company entered into a Letter of Intent in November 2008 to possibly acquire a
51% ownership interest in the Handan Changyuan Gas Co., Ltd. (“HCG”) from the
Beijing Tai He Sheng Ye Investment Company Limited. HCG owns and operates gas
distribution assets in and around Handan City, China. HCG was founded in May
2001, and is the primary gas distributer in Handan City, which is located 250
miles south of Beijing, in the Hebei Province of the People’s Republic of China.
HCG has over 300,000 customers and owns 35 miles of a main gas pipeline, and
more than 450 miles of delivery gas pipelines, with a delivery capacity of 300
million cubic meters per day. HCG also owns an 80,000 sq. ft. field
distribution facility. Gas is being supplied by Sinopec and PetroChina from two
separate sources. Revenues for HCG have been increasing at an average
rate of over 40% per year over the last 3 years. The Company will continue its
final legal and financial due diligence, along with identifying a partner to
join the Company with an objective of entering into a mutually agreed final sale
and purchase agreement by the end of the second quarter of 2009.
Financing
In the
third calendar quarter of 2006, the Company closed a private equity financing
that raised approximately $4.6 million, and in May 2007 the Company closed a
private equity financing that raised an additional $17 million from qualified
investors, for an aggregate of approximately $21.6 million raised in equity
financings to date. The
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Company
has not yet generated any meaningful revenue to fund its ongoing working capital
requirements as well as possible acquisition and development
activities.
In order
to fully implement its business strategy, including development and production
required under the Zijinshan PSC, ongoing production under the Chifeng
Agreement, consummation of the asset transfers contemplated pursuant to the
ChevronTexaco ATA and the BHP ATA and development and production under the Baode
PSC, thereafter, as well as other transactions contemplated with Well
Lead, and the Beijing Tai He Sheng Ye Investment Company Limited, the Company
will need to raise significant additional capital. In the event the Company is
unable to raise such capital on satisfactory terms or in a timely manner, the
Company would be required to revise its business plan and possibly cease
operations completely.
Organization
The
Company was incorporated in the State of Delaware in 1979 under the name “Gemini
Marketing Associates, Inc.” In 1994, the Company changed its name
from “Gemini Marketing Associates, Inc.” to “Big Smith Brands, Inc.,” in 2006 it
again changed its name to “Pacific East Advisors, Inc.,” and in 2007 it again
changed its name to “Pacific Asia Petroleum, Inc.” As Big Smith Brands, Inc.,
the Company operated as an apparel company engaged primarily in the manufacture
and sale of work apparel, and was listed on the Nasdaq Stock Market’s Small-Cap
Market from 1995 until December 4, 1997, and the Pacific Stock Exchange from
1995 until April 1, 1999. In 1999, the Company sold all of its assets
related to its workwear business to Walls Industries, Inc., and in 1999 filed
for voluntary bankruptcy under Chapter 11 of the United States Bankruptcy Code.
The final bankruptcy decree was entered on August 8, 2001, and thereafter the
Company existed as a “shell company,” but not a “blank check” company, under
regulations promulgated by the SEC and had no business operations and only
nominal assets until May 2007, when it consummated the mergers of Inner Mongolia
Production Company LLC (“IMPCO”) and Advanced Drilling Services, LLC (“ADS”)
into wholly-owned subsidiaries of the Company. See “The Mergers”
below. In December 2007, the Company merged these wholly-owned
subsidiaries into the parent company, resulting in the cessation of the separate
corporate existence of each of IMPCO and ADS and the assumption by the Company
of the businesses of IMPCO and ADS. In connection with the mergers,
the Company changed its name from “Pacific East Advisors, Inc.” to “Pacific Asia
Petroleum, Inc.” In July 2008, the Company consummated the merger of
Navitas Corporation, a Nevada corporation whose sole assets were comprised of
Company Common Stock and certain deferred tax assets, with and into the Company,
and the separate corporate existence of Navitas Corporation ceased upon
effectiveness of the merger. Unless the context otherwise requires,
the term “Company” as used herein collectively refers to the Company and its
wholly-owned subsidiaries and joint ventures, including (i) Inner Mongolia
Production Company (HK) Limited, (ii) Inner Mongolia Sunrise Petroleum JV
Company, (iii) Pacific Asia Petroleum (HK) Limited, and (iv) Pacific Asia
Petroleum, Limited.
The
Common Stock of PAP is quoted on the OTC Bulletin Board under the symbol
“PFAP.OB.” See, “Part II, Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchasers of Equity
Securities.”
The
Company’s executive offices are located at 250 East Hartsdale Ave., Suite 47,
Hartsdale, New York 10530. The Company also has an office located in Beijing,
China. PAP may be contacted by telephone at (914) 472-6070, and its website
is www.papetroleum.com. The
Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) are available on the Company’s website free of charge as
soon as practicable after such reports are electronically filed or furnished to
the SEC. Investors may register on the site to receive updates about
the company.
Subsidiaries
and Joint Ventures
The following
summarizes the corporate structure of PAP and its subsidiaries (“we,” “our,”
“us,” or the “Company”), and its joint venture partner.
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Inner Mongolia
Production Company (HK) Limited
In
December 2005, the Company formed a Hong Kong corporation, Inner Mongolia
Production Company (HK) Limited, which is a wholly owned subsidiary of the
Company (“IMPCO HK”), for the purpose of entering into certain business
transactions in China. IMPCO HK is a joint venture partner in Inner
Mongolia Sunrise Petroleum JV Company, described in more detail
below.
Inner
Mongolia Sunrise Petroleum JV Company and Beijing Jinrun Hongda Technology Co.,
Limited
In March
2006, the Company formed Inner Mongolia Sunrise Petroleum JV Company (“IMPCO
Sunrise”), a Chinese joint venture company which is owned 97% by IMPCO HK and 3%
by Beijing Jinrun Hongda Technology Co., Ltd. (“BJHTC”), an unaffiliated Chinese
corporation. The Company formed IMPCO Sunrise as an indirect
subsidiary to engage in Chinese energy ventures. Under Chinese law, a
foreign-controlled Chinese joint venture company must have a Chinese partner.
BJHTC is IMPCO HK’s Chinese partner in IMPCO Sunrise. IMPCO Sunrise is governed
and managed by a Board of Directors comprised of three members, two of whom are
appointed by IMPCO HK and one by BJHTC.
IMPCO HK
has advanced a total of $400,507 to BJHTC, which then invested that amount in
IMPCO Sunrise and issued notes to IMPCO HK for that amount. The notes are
repayable in Chinese yuan (“RMB”). As of December 31, 2008, IMPCO
HK recorded an impairment adjustment of $273,618 on these notes to
reduce the carrying amount to $386,415. Based upon the delay in achieving net
income in IMPCO Sunrise, the impact of the significant decline in the
price of oil in the second half of 2008, the amount of uncollected interest on
the note, and the required date for repayment, it was determined in the fourth
quarter of 2008 that the note was impaired. The impairment adjustment included
the write-off of accrued interest included in the principal
balance. BJHTC is obligated to apply any remittances received from
IMPCO Sunrise directly to IMPCO HK. IMPCO Sunrise is authorized to pay these
remittances directly to IMPCO HK on BJHTC’s behalf, until the debt is
satisfied.
IMPCO
Sunrise is a party to the Chifeng Agreement and is pursuing the Chifeng opportunity
as described above.
Pacific
Asia Petroleum, Limited
In
September 2007, the Company formed Pacific Asia Petroleum, Limited (“PAPL”) as a
wholly-owned Hong Kong corporate subsidiary of the Company for the purpose of
entering into certain business transactions in China. The Company is
the sole shareholder of PAPL. PAPL is a party to the Zijinshan PSC,
the ChevronTexaco ATA and the BHP ATA.
Pacific
Asia Petroleum (HK) Limited
In May
2008, the Company formed a Hong Kong corporation, Pacific Asia Petroleum (HK)
Limited, which is a wholly owned subsidiary of the Company (“PAP HK”), for the
purpose of entering into certain business transactions in China. PAP
HK has not entered into any transactions to date.
The
Mergers
On
December 11, 2006 PAP entered into: (i) an Agreement and Plan of Merger and
Reorganization (the “ADS Merger Agreement”) with DrillCo Acquisition, LLC (“ADS
Merger Sub”), a Delaware limited liability company and a wholly-owned subsidiary
of PAP, and ADS, and (ii) an Agreement and Plan of Merger and Reorganization
(the “IMPCO Merger Agreement,” and together with the ADS Merger Agreement, the
“Merger Agreements”) with IMPCO Acquisition, LLC (“IMPCO Merger Sub”), a New
York limited liability company and a wholly-owned subsidiary of PAP, and IMPCO.
Immediately prior to the closing of the Mergers, ADS closed a private equity
financing (the “ADS Offering”) pursuant to which ADS raised $17 million in
exchange for the issuance of 13,600,000 ADS Class B Interests to qualified
investors. Pursuant to the Merger Agreements, as amended and restated on
February 12, 2007, as further amended on April 20, 2007, effective upon the May
7, 2007 closing, (i) ADS merged with and into ADS Merger Sub, and ADS Merger Sub
as the surviving entity changed its name to “Advanced Drilling Services, LLC”
and continued to carry on the business of ADS, (ii) IMPCO merged with and into
IMPCO Merger Sub, and IMPCO Merger Sub as the surviving entity changed its name
to “Inner Mongolia Production Company LLC” and continued to carry on the
business of IMPCO, (iii) each of the 9,850,000 ADS Class A Interests which were
issued and outstanding automatically converted into the right to receive an
aggregate of
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9,850,000
shares of PAP Common Stock, (iv) each of the 13,600,000 ADS Class B Interests
issued in the ADS Offering which were issued and outstanding automatically
converted into the right to receive an aggregate of 13,600,000 shares of PAP
Series A Convertible Preferred Stock, (v) each of the 347,296 IMPCO Class A
Units which were issued and outstanding automatically converted on a 1:17 basis
into the right to receive an aggregate of 5,904,032 shares of PAP Common Stock,
and (vi) each of the 594,644 IMPCO Class B Units which were issued and
outstanding automatically converted on a 1:17 basis into the right to receive an
aggregate of 10,108,952 shares of PAP Series A Convertible Preferred Stock. Upon
closing of the Mergers, PAP also assumed warrants to purchase 1,860,001 ADS
Class B Interests issued to certain ADS placement agents in connection with the
ADS Offering, which warrants became exercisable for 1,860,001 shares of PAP
Series A Convertible Preferred Stock as a result of the Mergers.
The
Mergers were structured so as to constitute part of a single transaction
pursuant to an integrated plan and to qualify as a tax-free transaction. Under
the terms of the Merger Agreements, PAP changed its name to “Pacific Asia
Petroleum, Inc.,” all of the persons serving as directors and officers of PAP
resigned, the number of directors of PAP was set at three, and the following
persons were appointed as the officers and directors of PAP immediately
following the Mergers: (i) Frank C. Ingriselli, Chief Executive Officer,
President, Secretary and Director; (ii) Laird Q. Cagan, Director; (iii)
Elizabeth P. Smith, Director; (iv) Stephen F. Groth, Vice President and Chief
Financial Officer; and (v) Jamie Tseng, Executive Vice
President. Subsequent to the consummation of the Mergers, Robert C.
Stempel was appointed to the Board of Directors of PAP in February 2008, James
F. Link was appointed to the Board of Directors of PAP in July 2008, and Richard
Grigg was appointed as Senior Vice President and Managing Director of PAP in
August 2008.
In
December 2007, PAP consummated the mergers of IMPCO and ADS into PAP, resulting
in the cessation of the separate corporate existence of each of IMPCO and ADS
and the assumption by PAP of the businesses of IMPCO and ADS.
Automatic
Conversion
Pursuant
to the Amended and Restated Certificate of Incorporation of PAP, dated May 2,
2007, as a result of the average closing sales price of PAP’s Common Stock
exceeding $3.125 per share for twenty consecutive trading days, upon the close
of trading on June 5, 2007, all of PAP’s 23,708,952 shares of issued and
outstanding Series A Convertible Preferred Stock were automatically converted on
a 1:1 basis into a total of 23,708,952 shares of Common Stock of PAP (the
“Autoconversion”).
Market
Overview
We
believe that although economic growth in China has slowed recently, it will
continue at a faster pace than in the countries of the Organization of Economic
Cooperation and Development (“OECD”) and most other developing countries, as
will China’s consumption of increasing amounts of energy. Because China’s
economy is still less energy-efficient than the U.S. economy, requiring an
estimated four times as many BTUs per dollar of Gross Domestic Product (“GDP”),
this growth is expected to continue to amplify the country’s increasing energy
demand for some time (U.S. Department of Energy: International Energy Annual
& International
Petroleum Monthly). China’s GDP grew to
$3.38 trillion in 2007 at market exchange rates (China National Bureau of
Statistics), surpassing that of the Federal Republic of Germany, and making
China the 3rd
largest economy in the world. China passed Japan in late 2003 to
become the world’s second largest petroleum consumer. According to data from the
U.S. Department of Energy, between 2000 and 2007, oil use in China grew by an
average of 7% per year. In 2007, Chinese demand reached 7.6 million barrels per
day, more than one-third the level in the United States. At the same time,
domestic crude oil output in China has grown more slowly over the past five
years, forcing imports to expand rapidly to meet demand. Since 2000 China’s oil
imports have more than doubled, growing from 1.4 million barrels per day to 3.7
million barrels per day in 2007, when they accounted for nearly half of Chinese
oil demand.
According
to testimony by Jeffrey Logan, Senior Energy Analyst and China Program Manager
at the International Energy Agency, to the U.S. Senate Committee on Energy and
Natural Resources on February 3, 2005, China has become an economic superpower
and now plays a key role in the supply and demand of many global commodity
markets, including oil. He indicated that while China’s historical growth was
not dependent on energy, its growth was now very dependent on the development
and growth of oil and gas, with every one percent increase in GDP causing energy
demand to grow by over 1.5 percent. Although the Chinese government
has set a goal of reducing per-GDP energy consumption by 20% between 2005 and
2010, the strong linkage between energy and China’s
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economic
growth is reflected in the forecasts of the International Energy Agency
(“IEA”). In its 2008 World Energy Outlook, the IEA projected that
China’s petroleum demand would continue to grow at 3.5% per year through 2030,
increasing by 9 million barrels per day and accounting for 43% of global oil
demand growth over this period. Nor is the energy impact of China’s growth
confined to oil. The IEA expects China and India together to account
for more than half of all incremental global energy demand through
2030.
Natural
gas represents a particularly under-utilized energy source in China, supplying
only 3% of the country’s energy needs, compared with 23% globally and in the
U.S. We believe that its low emissions, combined with the low cost and high
efficiency of gas turbines, make gas an attractive fuel for meeting China’s
future electric power demand. The Chinese government has indicated that it would
like to expand gas use significantly, and the National Development and Reform
Commission has set a goal of increasing gas’s share of the market to 5.3% by
2010 (U.S. Department of Energy: International Energy Annual & International Petroleum
Monthly). China’s
domestic natural gas production increased to 76 billion cubic meters (2.7
trillion cubic feet) in 2008 (China National Bureau of Statistics) and is
planned to double to 160 billion cubic meters (5.7 trillion cubic feet) by 2015
(China Daily, quoting
an official of the Ministry of Land and Resources).
The
government of China has taken a number of steps to encourage the exploitation of
oil and gas within its own borders to meet the growing demand for oil and to try
to reduce its dependency on foreign oil. Notably, the government has reduced
complicated restrictions on foreign ownership of oil exploitation projects and
has passed legislation encouraging foreign investment and exploitation of oil
and gas.
Through
successive “Five Year Plans” China has undertaken a strategic reorganization in
the oil industry by means of market liberalization, internalization,
cost-effectiveness, scientific and technological breakthrough and sustainable
development. Changes were made in the structures of oil reservation and
exploration such as permitting more oil imports into the domestic market and
allocating a greater percentage of oil and gas in non-renewable energy
consumption. The reorganization was aimed at ensuring a smooth and sustainable
oil supply, at low cost and meeting a goal for sound economic growth. The
guiding principles of reform focused on developing the domestic market by
expanding exploration efforts while practicing conservation and building oil
reserves. These efforts focused on building key infrastructure for oil and gas
transportation and storage by targeting the development of oil and gas pipelines
to a target of 14,500 km in total length, and building storage facilities,
including a strategic petroleum reserve of approximately 100 million barrels and
facilities for 1.14 billion cubic meters of gas (40 billion cubic feet). In
order to further technical development and innovation, substantial resources
were devoted to oil and gas exploration.
Chinese
policymakers and state-owned oil companies have embarked on a multi-pronged
approach to improve oil security by diversifying suppliers, building strategic
oil reserves, purchasing equity oil stakes abroad, and enacting new policies to
lower demand. When it became a net oil importer in 1993, almost all of China’s
crude imports came from Indonesia, Oman and Yemen. After diversifying global oil
purchases over the past decade, Chinese crude imports now come from a much wider
range of suppliers. By 2006, Angola was China’s largest supplier, accounting for
15 percent of imports, followed by Saudi Arabia, Iran, Russia, and
Oman. 46% of China’s crude oil imports come from the Middle East, and
32% from Africa (U.S. Department of Energy: China Country Analysis
Brief.) The
three major government-owned oil companies in China are (i) China Petroleum
& Chemical Company, or “Sinopec,” (ii) China National Offshore Oil
Corporation, or “CNOOC,” and (iii) PetroChina Company Limited, or “PetroChina”
(also sometimes referred to as “China National Petroleum Corporation” or “CNPC,”
which is the government company owning the majority of PetroChina). PetroChina
is China’s largest producer of crude oil and natural gas and has operations in
29 other countries. Sinopec is China’s largest refining, storage and
transmission company. CNOOC is China’s largest offshore oil and gas exploration
and development company. Each of these companies has been granted a charter by
the Chinese government to engage in various stages of oil and gas procurement,
transportation and production in China. Substantially all oil and gas
exploration, storage and transportation by foreign entities in China must be
conducted via joint ventures with one of these companies, or with another
Chinese company that has entered into an arrangement with one of these companies
and been authorized by the appropriate government authorities to engage in such
activities in China.
Unlike
the developed petroleum markets of the member countries of the OECD, the oil
market in China still includes important elements of central planning. Each
year, the National Development and Reform Commission publishes the projected
target for the production and sale of crude oil by the three state oil
companies, based on the domestic consumption estimates submitted by domestic
producers, including PetroChina, Sinopec and CNOOC, the
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production
capacity of these companies, and the forecast of international crude oil prices.
The actual production levels are determined by the producers themselves and may
vary from the submitted estimates. PetroChina and Sinopec set their crude oil
median prices each month based on the average Singapore market FOB prices for
crude oil of different grades in the previous month. In addition, PetroChina and
Sinopec negotiate a premium or discount to reflect transportation costs, the
differences in oil quality, and market supply and demand. The National
Development and Reform Commission will mediate if PetroChina and Sinopec cannot
agree on the amount of premium or discount.
Market
Opportunity
While the
barriers to entry for foreign entities to engage in the development of oil and
gas resources in China have recently eased, we believe that many small companies
still face significant hurdles due to their lack of experience in the Chinese
petroleum industry. Development requires specialized grants and permits,
experience with obtaining scarce drilling and exploration equipment in remote
regions and the ability to manage projects efficiently during times of resource
shortages. The Company hopes to take advantage of the energy development
opportunities that exist in China today by leveraging its management team’s
prior exploration experiences in China and existing relationships with oil
industry executives and government officials in China. In addition, we believe
that members of the Company’s production team have the hands-on experience with
projects in Asia that we believe is essential to any successful petroleum
project in China.
While
China’s growth has been affected by the global financial crisis and recession,
declining to a year-on-year rate of 6.8% in the fourth quarter of 2008, its
government has already committed to a fiscal stimulus amounting to 4 trillion
RMB ($586 billion), which includes investment in energy infrastructure (World
Bank: China Quarterly Update,
December 2008). Estimates for growth in 2009 range from 4% to
8% (World Bank website,) accounting for most of the growth in the world this
year. We believe China remains a very attractive investment opportunity in a
difficult global environment.
Principal
Business Strategy
The
Company is a development-stage company formed to develop new energy ventures,
directly and through joint ventures and other partnerships in which it may
participate. In 2006, the Company commenced operations in China and is currently
engaged in the business of oil and gas exploration, development, production and
distribution in China. The Company has entered into a production sharing
contract, an oil development opportunity, letters of intent and agreements for
joint cooperation, pending asset transfer agreements, and other agreements
covering several energy ventures in China.
The
Company has entered into the Zijinshan PSC to explore for CBM and tight gas sand
resources in China.
In
November 2006, the Company entered into an Agreement for Joint Cooperation (the
“Cooperation Agreement”), with CUCBM, the Chinese Government-designated company
holding exclusive rights to negotiate with foreign companies with respect to CBM
production, covering an area in the Shanxi Province of China referred to as the
Zijinshan Block (the “CUCBM Contract Area”). Under the Cooperation Agreement,
CUCBM and the Company agreed to negotiate in good faith the terms of a PSC
covering the CUCBM Contract Area, and CUCBM agreed to keep the CUCBM Contract
Area exclusive for the development by the Company under the PSC. The CUCBM
Contract Area is approximately 175,000 acres, and is in proximity to the major
West-East gas pipeline which links the gas reserves in China’s western provinces
to the markets of the Yangtze River Delta, including Shanghai. As required by
the Cooperation Agreement, the Company conducted feasibility studies over the
CUCBM Contract Area, and concluded that the Area has prospectivity. The Company
elected to convert its interest into a PSC, and on October 26, 2007, PAPL
entered into the Zijinshan PSC with CUCBM for the exploitation of CBM and tight
gas sand resources in the CUCBM Contract Area. The PSC provides, among other
things, that PAPL must drill three (3) exploration wells and carry out 50 km of
2-D seismic data acquisition (a minimum commitment for the first three (3) years
with an estimated expenditure of $2.8 million) and drill four (4) pilot
development wells during the next two (2) years at an estimated cost of $2
million (in each case subject to PAPL’s right to terminate the Zijinshan
PSC). During the development and production period, CUCBM will have
the right to acquire a 40% participating interest and work jointly to develop
and produce CBM under the Zijinshan PSC. Pursuant to the Zijinshan
PSC, all CBM resources (including all other hydrocarbon resources) produced from
the CUCBM Contract Area are to be shared as follows: (i) 70% of
production is provided to PAPL and CUCBM for recovery of all costs incurred;
(ii) PAPL has
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the first
right to recover all of its exploration costs from such 70% and then development
costs are recovered by PAPL and CUCBM pursuant to their respective participating
interests; and (iii) the remainder of the production is split by CUCBM and PAPL
receiving between 99% and 90% of such remainder depending on the actual
producing rates (a sliding scale) and the balance of the remainder (between 1%
and 10%) is provided to the government of China. The Zijinshan PSC
has a term of thirty (30) years and was approved by the Ministry of Commerce of
China in 2008. In December 2008, the Company and CUCBM finalized a
mutually agreed work program pursuant to which the Company may immediately
commence exploration operations under the Zijinshan PSC.
The
Zijinshan PSC is in close proximity to the major West-East and the Ordos-Beijing
gas pipelines which link the gas reserves in China’s western provinces to the
markets of Beijing and the Yangtze River Delta, including Shanghai. The
Zijinshan PSC covers an area of approximately 175,000
acres.
The
Company is pursuing an oil development opportunity in Inner Mongolia with
Chifeng.
Inner
Mongolia, China’s northern border autonomous region, features a long, narrow
strip of land sloping from northeast to southwest. It stretches 2,400 km from
west to east and 1,700 km from north to south. Inner Mongolia traverses between
northeast, north, and northwest China. The third largest among China’s
provinces, municipalities, and autonomous regions, the region covers an area of
1.18 million square km, or 12.3% of the country’s territory. It neighbors eight
provinces and regions in its south, east and west and Mongolia and Russia in the
north, with a borderline of 4,200 km. In 2005 China and the Inner Mongolia
Municipality awarded to Chifeng the exclusive authority to develop and exploit
oil resources in the area known as the “ShaoGen Contract Area,” an area of
approximately 353 square kilometers located in Chifeng, China. In 2005 and 2006,
Chifeng drilled several wells throughout the ShaoGen Contract Area and
discovered oil.
In July
2006, the Company’s management began discussions with Chifeng and hired an
independent Chinese oil consultant to conduct a feasibility study on the
Company’s behalf. This feasibility study concluded that based on “investigation
and research in-depth for oil resources, exploitative environment and
international markets, it is feasible for exploitation of oil and gas . . .” The
report contained the following conclusions:
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There
is a very high potential for oil resources with excellent geological
conditions for petroleum;
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A
very significant oil field (part of the Liahoe oilfield, known as the
Kerqing oilfield) was discovered in the area, which makes drilling in the
ShaoGen Contract Area favorable;
and
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The
petroleum system has been proved as there are existing wells in the area
with tested transmission infrastructure in
place.
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In August
2006, the Company (through IMPCO Sunrise) and Chifeng entered into a Contract
for Cooperation and Joint Development (the “Chifeng Agreement”), setting forth
the terms and conditions for carrying out work and exploiting the development
acreage in the ShaoGen Contract Area owned by Chifeng (the “Development Area”).
Under the Chifeng Agreement:
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Chifeng
is responsible for selecting well locations in consultation with the
Company;
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Chifeng
has overall authority, responsibility and management over the Development
Area and all operations in the
field;
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Chifeng
is responsible for drilling successive wells until there is a completed
successful well (defined as a well having produced at a minimum average
rate of 2-3 tons/day of crude oil over the first 60-day period, with the
Company owning 100% of the oil produced within such 60-day
period);
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The
Company paid Chifeng 50% of the cost to drill the initial well (1,500,000
RMB, or approximately US$200,000 at the time of payment) as a
deposit;
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The
Company is required to pay: : (a) the same amount for the next
two wells after each successful well has been drilled, which at December
31, 2008 was approximately US$220,000; and (b) 1,500,000 RMB
(about
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$220,000)
for each successful well; and (c) a 5% royalty/management fee from the gross
production of crude oil, which shall be paid “in kind” to Chifeng;
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The
balance of oil production will be owned by the Company. The Company is
obligated to provide the balance of the oil produced to Chifeng and
Chifeng is obligated to sell such oil on behalf of the
Company. Chifeng is obligated to pay the Company for
such oil at the same price as the oil is sold by Chifeng to a
third party;
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The
funds paid by the Company to Chifeng under the Chifeng Agreement shall be
the total cost to be paid to Chifeng for carrying out the drilling and
other operations for a period of 20
years;
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All
cost overruns in carrying out the work under the Chifeng Agreement are
required to be borne by Chifeng. This is a turnkey contract with a
guaranteed cost;
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The
Company will continue to receive the revenues from the production of such
wells for a term of 20 years from the date that each well is determined to
be successful; and
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Chifeng
is responsible for all health and safety matters, and for obtaining
insurance covering personnel and
equipment.
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Pursuant
to the Chifeng Agreement, drilling operations commenced in October
2006. The first well drilled by Chifeng discovered oil and has been
completed as a producing well, but production operations were suspended in 2007
pending receipt of a production license from the Chinese government. The Company
is pursuing a combination of strategies to have such production license awarded,
including a possible renegotiation of the Chifeng Agreement with the goal of
increasing the financial incentives to all the parties involved, and the Company
is also pursuing a strategy focused on entering into negotiations with respect
to an opportunity to acquire the existing production from the 22 sq. km. Kerqing
Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance
the Chifeng Agreement in scale and value. If this Production License
is not issued, the opportunities to drill additional long-term production wells
under the contract, including future production from this first well, will be at
risk.
Chifeng
has accounted for the Company’s share of the production revenue from the first
producing well in the form of a credit, which will be allocated to the Company
retroactively when and if the Production License is issued. Operations are
anticipated to resume when and if the Production License is received. To date,
the total production from the well has been approximately 400 tons of crude oil
(all of which has been sold) and total producing revenues credited to the
Company (after costs and royalties) were approximately $135,000. If a Production
License is not received, the Company will seek, but is not contractually
guaranteed, reimbursement from Chifeng for the Company’s outstanding
costs.
The
Company has entered into asset transfer agreements with ChevronTexaco and BHP to
acquire rights to coalbed methane resources in China.
In
September 2007, the Company entered into the Chevron Agreements with
ChevronTexaco for the purchase by the Company of participating interests held by
ChevronTexaco in production sharing contracts in respect of four CBM and tight
gas sand resource blocks located in the Shanxi Province of China with an
aggregate contract area of approximately 1.5 million acres, for an aggregate
base purchase price of $61,000,000, adjusted in April 2008 to
$50,000,000. Due to delays in receipt of required Chinese government
approvals of these transfers, coupled with renewal terms proposed by
ChevronTexaco that were not acceptable to the Company, in December 2008 the
Company exercised its right to terminate three of the four Chevron Agreements
and received its full deposit amounts back from ChevronTexaco with respect to
these three terminated Chevron Agreements. The Company and ChevronTexaco remain
parties to that certain ChevronTexaco ATA, which relates to the purchase by the
Company of ChevronTexaco’s 35.7142% participating interest held by ChevronTexaco
in the Baode PSC relating to a total area of approximately 160,000 acres in the
“Baode Block”. The base purchase price under the ChevronTexaco ATA is
$2,000,000, subject to upward adjustment to account for ChevronTexaco’s cash
flow payments and operating costs paid with respect to the interests from June
30, 2007 (the “Effective Date”) through the closing date, and downward
adjustment to account for ChevronTexaco’s receipt of revenues derived from the
interests from the Effective Date through the closing date. The
Company has paid to ChevronTexaco a $650,000 deposit toward the purchase price
in 2007, which is refundable if the ChevronTexaco ATA is terminated under
certain conditions. Pursuant to the ChevronTexaco ATA and subject to
closing, the Company will be responsible for and will indemnify
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ChevronTexaco
with respect to liabilities associated with the interests and for all
rehabilitation liabilities and obligations arising after the closing date
related thereto, as well as for liability for income tax attributable to the
interests arising after the closing date and any other taxes attributable to the
interests arising following the effective date thereof. ChevronTexaco will be
responsible for and will indemnify the Company for all liabilities associated
with the interests which accrued, or relate to any period, before the closing
date. Each party’s maximum aggregate liability to the other party under the
ChevronTexaco ATA is limited to an amount equal to the base purchase price plus
any interest accrued, and neither party is liable to the other party in an
action initiated by one against the other for special, indirect or consequential
damages resulting from or arising out of the ChevronTexaco ATA.
The
closing of the asset transfer contemplated pursuant to the ChevronTexaco ATA is
contingent upon a number of conditions precedent, including approval of certain
related agreements by the PRC Ministry of Land and Natural Resources and the
assignment of ChevronTexaco’s participating interest by the PRC Ministry of
Commerce.
The
Chinese government approvals and assignments are currently under review by the
Chinese government.
The
following is a summary of the main provisions of the ChevronTexaco
ATA:
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For
a purchase price of $2,000,000, the Company acquires ChevronTexaco’s
35.7142% interest in the Baode PSC.
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The
Company was required to make (and did make) a deposit to ChevronTexaco in
the total amount of $650,000. This deposit is refundable in the event that
certain conditions to closing are not
satisfied.
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The
parties are obligated to use their best efforts to accomplish the
conditions to closing, including the securing of approvals from the
Chinese government, including the Ministry of Commerce, the Ministry of
Land and Natural Resources and the filing of corporate registration
documents. ChevronTexaco and the Company each have the option to cancel
the ChevronTexaco ATA since these approvals were not secured by November
7, 2008 (as amended).
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ChevronTexaco,
until the closing, is obligated to continue to carry out all of its
obligations under the applicable production sharing agreements in the
ordinary course of business and seek the Company’s approval with respect
to proposed work programs and
budgets.
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In
addition to the purchase price of $2,000,000, the Company is obligated to
reimburse ChevronTexaco for all of the costs and expenses ChevronTexaco
pays in carrying out work on each of the assets from July 1, 2007 until
the closing. After the closing, all costs and expenses are
required to be paid by the Company. As of October 31, 2008
these costs were estimated by ChevronTexaco to be $2.0
million.
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The
Company has audit rights on the ChevronTexaco accounting books and
records.
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Title
passes at closing and ChevronTexaco is responsible for all prior
activities and the Company is responsible for all activities post the
closing. Both parties shall indemnify each other with respect to certain
liabilities arising during these respective
periods.
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At
the closing, the Company will acquire all title and land rights to the
assets belonging to ChevronTexaco under the ChevronTexaco ATA. This is not
an acquisition of a business, but an acquisition of title to hydrocarbon
natural resources under the surface of the land. The
transaction does not result in the acquiring of existing employees,
revenues, or customers, and the assets are not presently capable of
independent operations as a
business.
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ChevronTexaco
makes warranties that it has good title and rights to all the assets being
sold and that they are free and clear of all
encumbrances.
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On March
29, 2008, the Company entered into the BHP ATA with BHP for the purchase by the
Company of BHP’s 64.2858% participating interest held by BHP in the Baode PSC at
a purchase price of $2,000,000, subject to upward adjustment to account for
BHP’s cash flow payments and operating costs paid with respect to BHP’s
participating interest from April 1, 2008 through the closing date, and downward
adjustment to account for BHP’s receipt of revenues derived from its
participating interest from that date through the closing date. The Company has
paid to BHP a $500,000 deposit toward the purchase price, which is refundable if
the BHP ATA is terminated under certain
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conditions. Upon
closing, the Company will assume BHP’s operator obligations related to the Baode
PSC. The aggregate costs and expenses paid by BHP in carrying out
work on the assets from April 1, 2008 to October 31, 2008 were estimated by it
to be $623,365.
The
closing of the BHP ATA is contingent upon a number of conditions precedent,
including approval of certain related agreements by the PRC Ministry of Land and
Natural Resources and the assignment of BHP’s participating interest by the PRC
Ministry of Commerce.
Assuming
all conditions precedent to closing of each of the ChevronTexaco ATA and BHP ATA
are satisfied, upon closing of both the ChevronTexaco ATA and the BHP ATA, the
Company will acquire a 100% participating interest in the Baode
PSC. Pursuant to the terms of the Baode PSC, the Chinese government
is entitled to acquire up to a 30% participating interest in the Baode PSC from
the then-current parties to the Baode PSC upon certain conditions and in
exchange for certain payments to such parties. Assuming the Company
consummates one or both of the ChevronTexaco ATA and the BHP ATA, such asset
acquisitions will not constitute the acquisition of a business, but the
acquisition of title to hydrocarbon natural resources under the surface of the
land. These assets are not presently capable of independent operation
as a business, and no employees, revenues, or customers will be
acquired.
The
Company is pursuing other oil exploration, production, development and related
opportunities in China with Well Lead.
On
September 30, 2008, the Company entered into an AOC with Well Lead, pursuant to
which the parties agreed to use reasonable efforts to negotiate and enter into a
mutually acceptable Sale and Purchase Agreement for purchase by the Company of
up to 39% of the WL Interest in Northeast Oil. Northeast Oil owns a
95% interest in the WL Oil Blocks located in the Fulaerjiqu Oilfield in Qiqihar
City, Heilongjiang Province in the People’s Republic of China. The
proposed transaction is subject to due diligence review of the WL Interest, the
WL Oil Blocks and other matters. Under the proposed transaction, the
Company would acquire a 25% interest in Northeast Oil for a purchase price of
$9.8 million, comprised of $5.0 million cash (one-half paid at closing and the
remainder in five equal monthly installments commencing eight months after
closing) and the issuance of Company Common Stock valued at $4.8
million. In addition, at closing, the Company would have the option
to purchase an additional 14% interest in Northeast Oil for an additional $5.5
million in cash payable at closing. In accordance with the AOC, the
Company paid Well Lead a nonrefundable payment of $50,000 in cash for the right
of exclusive negotiations for the acquisition of the Interest through November
30, 2008, which exclusive term has expired.
After
completing the initial phase of due diligence on Well Lead, the WL Interest and
the WL Oil Blocks, the Company has commenced additional negotiations with Well
Lead and other related parties to expand the potential acquisition to include
other Well Lead interests and related parties. These additional Well
Lead interests and related parties include additional producing oilfields in
China, a Well Lead-affiliated technology company that has been applying its
intellectual property to successfully enhance production in the WL Oil Blocks,
(and other oilfields in China) and certain Well Lead-related venture companies.
The Company now seeks to acquire a 51% participating interest in all these Well
Lead assets and related parties, and the Company and Well Lead have reached a
verbal agreement in principle with respect thereto. The Company
anticipates that the total purchase price for all Well Lead interests to be
acquired by the Company will be less than the amounts originally provided for in
the AOC for the WL Oil Blocks alone. The Company has commenced phase
two of its due diligence review with a goal to conclude such review and
negotiate, sign and consummate a definitive acquisition agreement by April 30,
2009. However, the Company can make no assurances that it will be
able to successfully consummate any transaction with Well Lead on terms and
conditions satisfactory to the Company, or at all.
The
Company is pursuing acquisition of ownership in a gas distribution
network.
The
Company entered into a Letter of Intent in November 2008 to possibly acquire a
51% ownership interest in the Handan Changyuan Gas Co., Ltd. (HCG) from the
Beijing Tai He Sheng Ye Investment Company Limited. HCG owns and operates gas
distribution assets in and around Handan City, China. HCG was founded in May
2001, and is the primary gas distributer in Handan City, which is located 250
miles south of Beijing, in the Hebei Province of the People’s Republic of China.
HCG has over 300,000 customers and owns 35 miles of a main gas pipeline, and
more than 450 miles of delivery gas pipelines, with a delivery capacity of 300
million cubic meters per day. HCG also owns an 80,000 sq. ft. field
distribution facility. Gas is being supplied by Sinopec and PetroChina from two
separate
- 13
-
sources. Revenues
for HCG have been increasing at an average rate of over 40% per year over the
last 3 years. The Company will continue its final legal and financial due
diligence, along with identifying a partner to join the Company with an
objective of entering into a mutually agreed final sale and purchase agreement
by the end of the second quarter of 2009.
Geophysical
Services and Development Opportunities
The
Company has signed an Agreement on Joint Cooperation, dated May 31, 2007, with
Sino Geophysical Co., Ltd (“SINOGEO”), the largest private geophysical services
company in China. Under this agreement, SINOGEO and the Company
agreed:
|
|
·
|
To
establish a mutually acceptable procedure to keep each other informed of
projects they are pursuing which they respectively believe would meet the
financial and operational objectives and expectations for the other
party;
|
|
|
·
|
That
the Company would use the services of SINOGEO for its seismic acquisition
and processing operations, provided that SINOGEO’s terms are competitive
with respect to price, technology and quality and that mutually acceptable
terms can be negotiated;
|
|
|
·
|
That
SINOGEO would provide the Company with the opportunity to participate in
oil and gas exploration and development projects that it is pursuing, or
acquires, subject to agreement on mutually acceptable
terms;
|
|
|
·
|
That
in the event the Company receives a proposal along with information and
data from SINOGEO on a particular opportunity which SINOGEO has not
received earlier from another source, then if the Company decides to
participate in such opportunity, the Company shall be required to work
exclusively with SINOGEO to acquire such interest cooperatively with
SINOGEO pursuant to mutually acceptable terms, and specific dividends for
each party shall be apportioned according to each party’s proportionate
interest in such project; and
|
|
|
·
|
For
projects where SINOGEO and the Company jointly cooperate, and where
SINOGEO has devoted considerable effort and research, and such work
reduces the risks in exploration and development and improves the rate of
return on investment, that some form of compensation shall be negotiated
and given to SINOGEO in recognition of such intangible
contributions.
|
Competitive Business Conditions and
the Company’s Competitive Position
The
Company anticipates that it will be competing with numerous large international
oil companies and smaller oil companies that target opportunities in markets
similar to the Company’s, including the CBM, natural gas and petroleum markets.
Many of these companies have far greater economic, political and material
resources at their disposal than the Company. The Company believes
that its management team’s prior experience in the fields of petroleum
engineering, geology, field development and production, operations,
international business development, and finance, together with its prior
experience in management and executive positions with Texaco Inc. and prior
experience managing energy projects in China and elsewhere in Asia, may provide
the Company with a competitive advantage over some of its competitors active in
the region, particularly with respect to relatively small opportunities that
tend to be bypassed by larger companies. Nevertheless, the market in which we
plan to operate is highly competitive and the Company may not be able to compete
successfully against its current and future competitors. See “Part I,
Item 1A. “Risks Related to the Company’s Industry” for risk factors associated
with competition in the oil and gas industry.
- 14
-
Regulation
China’s
oil and gas industry is subject to extensive regulation by the Chinese
government with respect to a number of aspects of exploration, production,
transmission and marketing of crude oil and natural gas as well as production,
transportation and marketing of refined products and chemical products. The
following is a list of the primary Chinese central government authorities that
exercise control over various aspects of China’s oil and gas
industry:
|
|
·
|
The
Ministry of Land and Resources, which has the authority for granting,
examining and approving oil and gas exploration and production licenses,
the administration of registration and the transfer of exploration and
production licenses.
|
|
|
·
|
The
Ministry of Commerce, which was established in March 2003 to consolidate
the authorities and functions of the former State Economic and Trade
Commission and the former Ministry of Foreign Trade and Economic
Cooperation. Its responsibilities
include:
|
|
|
·
|
setting
the import and export volume quotas for crude oil and refined products
according to the overall supply and demand for crude oil and refined
products in China as well as the World Trade Organization requirements for
China;
|
|
|
·
|
issuing
import and export licenses for crude oil and refined products to oil and
gas companies that have obtained import and export quotas;
and
|
|
|
·
|
examining
and approving production sharing contracts and Sino-foreign equity and
cooperative joint venture
contracts.
|
|
|
·
|
The
National Development and Reform Commission, which was established in March
2003 to consolidate the authorities and functions of the former State
Development Planning Commission and the former State Economic and Trade
Commission. Its responsibilities
include:
|
|
|
·
|
excercising
industry administration and policy coordination authority over China’s oil
and gas industry;
|
|
|
·
|
determining
mandatory minimum volumes and applicable prices of natural gas to be
supplied to certain fertilizer
producers;
|
|
|
·
|
publishing
guidance prices for natural gas and retail median guidance prices for
certain refined products, including gasoline and
diesel;
|
|
|
·
|
approving
significant petroleum, natural gas, oil refinery and chemical projects set
forth under the Catalogues of Investment Projects Approved by the Central
Government; and
|
|
|
·
|
approving
Sino-foreign equity and cooperative projects exceeding certain capital
amounts.
|
Environmental
Matters
China has
adopted extensive environmental laws and regulations that affect the operation
of its oil and gas industry. There are national and local standards applicable
to emissions control, discharges to surface and subsurface water, and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
The
environmental regulations require a company to register or file an environmental
impact report with the relevant environmental bureau for approval before it
undertakes any construction of a new production facility or any major expansion
or renovation of an existing production facility. A new, expanded or renovated
facility will not be permitted to operate unless the relevant environmental
bureau has inspected it and is satisfied that all necessary equipment has been
installed as required by applicable environmental protection requirements. A
company that wishes to discharge pollutants, whether it is in the form of
emission, water or materials, must submit a pollutant discharge declaration
statement detailing the amount, type, location and method of treatment. After
reviewing the pollutant discharge declaration, the relevant environmental bureau
will determine the amount of discharge allowable under the law and will issue a
pollutant discharge license for that amount of discharge subject to the payment
of discharge fees. If a company discharges more than is permitted in the
pollutant discharge license, the relevant
- 15
-
environmental
bureau can fine the company up to several times the discharge fees payable by
the offending company for its allowable discharge, or require that the offending
company cease operations until the problem is remediated.
Compliance
and enforcement of environmental laws and regulations may cause the Company to
incur significant expenditures and require resources which it may not
have. The Company cannot currently predict the extent of future
capital expenditures, if any, required for compliance with environmental laws
and regulations, which may include expenditures for environmental control
facilities.
Long-Lived
Assets
The
Company’s long-lived assets (other than financial instruments) by geographic
area were as follows.
|
As
of December 31,
|
2008
|
2007
|
||||||
|
Property, plant
and equipment, net
|
||||||||
|
United
States
|
$ | 94,352 | $ | 33,960 | ||||
|
China
|
474,951 | 251,067 | ||||||
|
Total
|
$ | 569,303 | $ | 285,027 | ||||
Employees
and Contractors
As of
December 31, 2008 the Company had 18 full-time employees and 8 part-time
contractors/employees employed as follows:
|
Employees
|
Part-Time
Contractors/
Employees
|
|||||||
|
Administration
|
16 | 2 | ||||||
|
Research
and Development/Technical Support
|
2 | 6 | ||||||
ITEM
1A. RISK FACTORS
The
Company’s operations and its securities are subject to a number of
risks. The Company has described below all the material risks that
are known to the Company that could materially impact the Company’s financial
results of operations or financial condition. If any of the following risks
actually occur, the business, financial condition or operating results of the
Company and the trading price or value of its securities could be materially
adversely affected.
Risk
Related to the Company’s Business
The Company’s
limited operating history makes it difficult to predict future results
and raises
substantial doubt as to its ability to successfully develop profitable
business
operations.
The
Company’s limited operating history makes it difficult to evaluate its current
business and prospects or to accurately predict its future revenue or results of
operations, and raises substantial doubt as to its ability to successfully
develop profitable business operations. The Company’s revenue and income
potential are unproven. As a result of its early stage of development, and to
keep up with the frequent changes in the energy industry, it is necessary for
the Company to analyze and revise its business strategy on an ongoing basis.
Companies in early stages of development, particularly companies in new and
rapidly evolving energy industry segments, are generally more vulnerable to
risks, uncertainties, expenses and difficulties than more established
companies.
The Company’s
ability to diversify risks by participating in multiple projects and joint
ventures depends upon its ability to raise capital and the availability of
suitable prospects, and any failure to raise needed capital and secure suitable
projects would negatively affect the Company’s ability to operate.
The
Company’s business strategy includes spreading the risk of oil and natural gas
exploration, development and drilling, and ownership of interests in oil and
natural gas properties, by participating in multiple projects and joint
ventures, in particular with major Chinese government-owned oil and gas
companies as joint venture partners. If the Company is unable to secure
sufficient attractive projects as a result of its inability to raise sufficient
capital or otherwise, the average quality of the projects and joint venture
opportunities may decline and the risk of the Company’s overall operations could
increase.
- 16
-
The loss of key
employees could adversely affect the Company’s ability to operate.
The
Company believes that its success depends on the continued service of its key
employees, as well as the Company’s ability to hire additional key employees,
when and as needed. Each of Frank C. Ingriselli, the Company’s President and
Chief Executive Officer, Stephen F. Groth, its Vice President and Chief
Financial Officer, and Richard Grigg, the Company’s Senior Vice President and
Managing Director, has the right to terminate his employment at any time without
penalty under his employment agreement. The unexpected loss of the services of
either Mr. Ingriselli, Mr. Groth, Mr. Grigg, or any other key employee, or the
Company’s failure to find suitable replacements within a reasonable period of
time thereafter, could have a material adverse effect on the Company’s ability
to execute its business plan and therefore, on its financial condition and
results of operations.
The Company may
not be able to raise the additional capital necessary to execute its
business strategy, which could result in the curtailment or cessation of the
Company’s operations.
The
Company will need to raise substantial additional funds to fully fund its
existing operations, consummate all of its current asset transfer and
acquisition opportunities currently contemplated with ChevronTexaco, BHP and
Well Lead, and for the development, production, trading and expansion of its
business. On December 31, 2008, the Company had positive working capital of
approximately $11.2 million (including $10.5 million in cash and cash
equivalents). The Company has no current arrangements with respect to
sources of additional financing and the needed additional financing may not be
available on commercially reasonable terms on a timely basis, or at all. The
inability to obtain additional financing, when needed, would have a negative
effect on the Company, including possibly requiring it to curtail or cease
operations. If any future financing involves the sale of the Company’s equity
securities, the shares of common stock held by its stockholders could be
substantially diluted. If the Company borrows money or issues debt securities,
it will be subject to the risks associated with indebtedness, including the risk
that interest rates may fluctuate and the possibility that it may not be able to
pay principal and interest on the indebtedness when due.
Insufficient
funds will prevent the Company from implementing its business plan and will
require it to delay, scale back, or eliminate certain of its programs or to
license to third parties rights to commercialize rights in fields that it would
otherwise seek to develop itself.
Failure by the
Company to generate sufficient cash flow from operations could eventually result
in the cessation of the Company’s operations and require the Company to seek
outside financing or discontinue operations.
The
Company’s business activities require substantial capital from outside sources
as well as from internally-generated sources. The Company’s ability to finance a
portion of its working capital and capital expenditure requirements with cash
flow from operations will be subject to a number of variables, such
as:
|
|
·
|
the
level of production of existing
wells;
|
|
|
·
|
prices
of oil and natural gas;
|
|
|
·
|
the
success and timing of development of proved undeveloped
reserves;
|
|
|
·
|
cost
overruns;
|
|
|
·
|
remedial
work to improve a well’s producing
capability;
|
|
|
·
|
direct
costs and general and administrative expenses of
operations;
|
|
|
·
|
reserves,
including a reserve for the estimated costs of eventually plugging and
abandoning the wells;
|
|
|
·
|
indemnification
obligations of the Company for losses or liabilities incurred in
connection with the Company’s activities;
and
|
|
|
·
|
general
economic, financial, competitive, legislative, regulatory and other
factors beyond the Company’s
control.
|
- 17
-
The
Company might not generate or sustain cash flow at sufficient levels to finance
its business activities. When and if the Company generates revenues, if such
revenues were to decrease due to lower oil and natural gas prices, decreased
production or other factors, and if the Company were unable to obtain capital
through reasonable financing arrangements, such as a credit line, or otherwise,
its ability to execute its business plan would be limited and it could be
required to discontinue operations.
The Company’s failure to capitalize on its two existing definitive production agreements, to consummate the transactions contemplated by the ChevronTexaco ATA, BHP ATA or AOC with Well Lead, and/or enter into additional agreements, would likely result in its inability to generate sufficient revenues and continue operations.
The
Company’s only definitive production contracts that have been secured to date
are the Contract for Cooperation and Joint Development with Chifeng covering an
oil field in Inner Mongolia and the Zijinshan PSC related to coalbed methane and
tight gas sand production in China. The Company has also entered into asset
transfer agreements with ChevronTexaco and BHP and an AOC with Well Lead, the
consummation of which remains dependent upon a number of closing conditions,
many of which are beyond the Company’s control. The Company has not entered into
definitive agreements with respect to any other ventures that it is currently
pursuing, and the Company’s ability to secure one or more of these additional
ventures is subject to, among other things, (i) the amount of capital the
Company raises in the future; (ii) the availability of land for exploration and
development in the geographical regions in which the Company’s business is
focused; (iii) the nature and number of competitive offers for the same projects
on which the Company is bidding; and (iv) approval by government and industry
officials. The Company may not be successful in executing definitive agreements
in connection with any other ventures, or otherwise be able to secure any
additional ventures it pursues in the future. Failure of the Company to
capitalize on its existing contracts and/or to secure one or more additional
business opportunities would have a material adverse effect on the Company’s
business and results of operations, and would, in all likelihood, result in the
cessation of the Company’s business operations.
The Company’s oil
and gas operations will involve many operating risks that can cause substantial
losses.
The
Company expects to produce, transport and market potentially toxic materials,
and purchase, handle and dispose of other potentially toxic materials in the
course of its business. The Company’s operations will produce byproducts, which
may be considered pollutants. Any of these activities could result in liability,
either as a result of an accidental, unlawful discharge or as a result of new
findings on the effects the Company’s operations on human health or the
environment. Additionally, the Company’s oil and gas operations may also involve
one or more of the following risks:
|
|
·
|
fires;
|
|
|
·
|
explosions;
|
|
|
·
|
blow-outs;
|
|
|
·
|
uncontrollable
flows of oil, gas, formation water, or drilling
fluids;
|
|
|
·
|
natural
disasters;
|
|
|
·
|
pipe
or cement failures;
|
|
|
·
|
casing
collapses;
|
|
|
·
|
embedded
oilfield drilling and service
tools;
|
|
|
·
|
abnormally
pressured formations;
|
|
|
·
|
damages
caused by vandalism and terrorist acts;
and
|
|
|
·
|
environmental
hazards such as oil spills, natural gas leaks, pipeline ruptures and
discharges of toxic gases.
|
In the
event that any of the foregoing events occur, the Company could incur
substantial losses as a result of (i) injury or loss of life; (ii) severe damage
or destruction of property, natural resources or equipment; (iii) pollution and
other environmental damage; (iv) investigatory and clean-up responsibilities;
(v) regulatory investigation and penalties; (vi) suspension of its operations;
or (vii) repairs to resume operations. If the Company experiences any
of
- 18
-
these
problems, its ability to conduct operations could be adversely affected.
Additionally, offshore operations are subject to a variety of operating risks,
such as capsizing, collisions and damage or loss from typhoons or other adverse
weather conditions. These conditions can cause substantial damage to facilities
and interrupt production.
The Company is a
development-stage company and expects to continue to incur losses for a
significant period of time.
The Company is a development-stage company with minimal
revenues to date. As of December 31, 2008, the Company had an
accumulated deficit of approximately $9.0 million. The Company expects to
continue to incur significant expenses relating to its identification of new
ventures and investment costs relating to these ventures. Additionally, fixed
commitments, including salaries and fees for employees and consultants, rent and
other contractual commitments may be substantial and are likely to increase as
additional ventures are entered into and personnel are retained prior to the
generation of significant revenue. Energy ventures, such as oil well drilling
projects, generally require significant periods of time before they produce
resources and in turn generate profits. The Company may not achieve or sustain
profitability on a quarterly or annual basis, or at all.
The Company will
be dependent upon others for the storage and transportation of oil and gas,
which could result in significant operational costs to the COmpany and depletion
of capital.
The
Company does not own storage or transportation facilities and, therefore, will
depend upon third parties to store and transport all of its oil and gas
resources , when and if produced. The Company will
likely be subject to price changes and termination provisions in any contracts
it may enter into with these third-party service providers. The Company may not
be able to identify such third-parties for any particular project. Even if such
sources are initially identified, the Company may not be able to identify
alternative storage and transportation providers in the event of contract price
increases or termination. In the event the Company is unable to find acceptable
third-party service providers, it would be required to contract for its own
storage facilities and employees to transport the Company’s resources. The
Company may not have sufficient capital available to assume these obligations,
and its inability to do so could result in the cessation of its
business.
The Company may
not be able to manage its anticipated growth, which could result in the
disruption
of the Company’s operations and prevent the Company from generating meaningful
revenue.
Subject
to its receipt of additional capital, the Company plans to significantly expand
operations to accommodate additional development projects and other
opportunities. This expansion will likely strain its management, operations,
systems and financial resources. To manage its recent growth and any future
growth of its operations and personnel, the Company must improve and effectively
utilize its existing operational, management and financial systems and
successfully recruit, hire, train and manage personnel and maintain close
coordination among its technical, finance, development and production staffs.
The Company may need to hire additional personnel in certain operational and
other areas during 2009. In addition, the Company may also need to increase the
capacity of its software, hardware and telecommunications systems on short
notice, and will need to manage an increasing number of complex relationships
with strategic partners and other third parties. The failure to manage this
growth could disrupt the Company’s operations and ultimately prevent the Company
from generating meaningful revenue.
An interruption
in the supply of materials, resources and services the Company plans to
obtain from
third party sources could limit the Company's operations and cause
unprofitability.
Once it
has identified, financed, and acquired projects, the Company will need to obtain
other materials, resources and services, including, but not limited to,
specialized chemicals and specialty muds and drilling fluids, pipe,
drill-string, geological and geophysical mapping and interruption services.
There may be only a limited number of manufacturers and suppliers of these
materials, resources and services. These manufacturers and suppliers may
experience difficulty in supplying such materials, resources and services to the
Company sufficient to meet its needs or may terminate or fail to renew contracts
for supplying these materials, resources or services on terms the Company finds
acceptable including, without limitation, acceptable pricing terms. Any
significant interruption in the supply of any of these materials, resources or
services, or significant increases in the amounts the Company is required to pay
for these materials, resources or services, could result in
a lack of profitability, or the cessation of its operations, if it is
unable to replace any material sources in a reasonable period of
time.
- 19
-
The Company does
not have a plan to carry insurance policies in China and will be at risk of incurring
personal injury claims for its employees and subcontractors, and incurring
loss of business due to theft, accidents or natural
disasters.
The
Company does not carry, and does not plan to carry, any policies of insurance to
cover any type of risk to its business in China, including, without limitation,
the risks discussed above. In the event that the Company were to incur
substantial liabilities with respect to one or more incidents, this could
adversely affect its operations and it may not have the necessary capital to pay
its portion of such costs and maintain business operations.
The
Company is exposed to concentration of credit risk, which may result in losses
in the future.
The
Company is exposed to concentration of credit risk with respect to cash, cash
equivalents, short-term investments and long-term advances. As the
Company chooses to maximize investment of its U.S. cash into higher yield
investments rather than keeping the amounts in bank accounts, there is a high
concentration of credit risk on remaining cash balances which are located
principally in China. At December 31, 2008, 78% ($975,681) of the
Company’s total cash was on deposit in China at the Bank of
China. Also at that date, 48.7% ($4,514,167) of the Company’s total
cash equivalents was invested in a single money market fund in the U.S. composed
of securities of numerous issuers. At December 31, 2007, 90%
($1,406,357) of the Company’s total cash was on deposit in China at the Bank of
China. Also at that date, the Company’s cash equivalents were
invested in two money market funds, of which 54% ($348,561) was in a single
fund; 18% ($2,000,000) and 15% ($1,650,000) of the Company’s U.S. short-term
investments were invested in securities of two individual Moody’s Aaa-rated
issuers. At December 31, 2008 and December 31, 2007, 100% of the
Company’s long-term advances ($386,415 in 2008, and $534,530 in 2007) were
receivable as notes from a single borrower, BJHTC, an unaffiliated Chinese
corporation and 3% owner of IMPCO Sunrise, a Chinese joint venture company which
is owned 97% by IMPCO HK. The Company recorded an impairment charge
of $273,618 on these notes in 2008, reflecting principally the write-off of
accrued interest income included in the principal balance of the
notes.
Risks
Related to the Company’s Industry
The Company may
not be successful in finding petroleum resources or developing resources, and if
it fails to do so, the Company will likely cease operations.
The
Company will be operating primarily in the petroleum extractive business;
therefore, if it is not successful in finding crude oil and natural gas sources
with good prospects for future production, and exploiting such sources, its
business will not be profitable and it may be forced to terminate its
operations. Exploring and exploiting oil and gas or other sources of energy
entails significant risks, which risks can only be partially mitigated by
technology and experienced personnel. The Company or any ventures it acquires or
participates in may not be successful in finding petroleum or other energy
sources; or, if it is successful in doing so, the Company may not be successful
in developing such resources and producing quantities that will be sufficient to
permit the Company to conduct profitable operations. The Company’s future
success will depend in large part on the success of its drilling programs and
creating and maintaining an inventory of projects. Creating and maintaining an
inventory of projects depends on many factors, including, among other things,
obtaining rights to explore, develop and produce hydrocarbons in promising
areas, drilling success, ability to bring long lead-time, capital intensive
projects to completion on budget and schedule, and efficient and profitable
operation of mature properties. The Company’s inability to successfully identify
and exploit crude oil and natural gas sources would have a material adverse
effect on its business and results of operations and would, in all likelihood,
result in the cessation of its business operations.
In
addition to the numerous operating risks described in more detail in this
report, exploring and exploitation of energy sources involve the risk that no
commercially productive oil or gas reservoirs will be discovered or, if
discovered, that the cost or timing of drilling, completing and producing wells
will not result in profitable operations. The Company’s drilling operations may
be curtailed, delayed or abandoned as a result of a variety of factors,
including:
|
|
·
|
adverse
weather conditions;
|
|
|
·
|
unexpected
drilling conditions;
|
|
|
·
|
pressure
or irregularities in formations;
|
- 20
-
|
|
·
|
equipment
failures or accidents;
|
|
|
·
|
inability
to comply with governmental
requirements;
|
|
|
·
|
shortages
or delays in the availability of drilling rigs and the delivery of
equipment; and
|
|
|
·
|
shortages
or unavailability of qualified labor to complete the drilling programs
according to the business plan
schedule.
|
The energy market
in which the Company plans to operate is highly competitive and the Company may not
be able to compete successfully against its current and future competitors,
which could seriously harm the Company’s business.
Competition
in the oil and gas industry is intense, particularly with respect to access to
drilling rigs and other services, the acquisition of properties and the hiring
and retention of technical personnel. The Company expects competition in the
market to remain intense because of the increasing global demand for energy, and
that competition will increase significantly as new companies enter the market
and current competitors continue to seek new sources of energy and leverage
existing sources. Recently, higher commodity prices and stiff competition for
acquisitions have significantly increased the cost of available properties. Many
of the Company’s competitors, including large oil companies, have an established
presence in Asia and the Pacific Rim countries and have longer operating
histories, significantly greater financial, technical, marketing, development,
extraction and other resources and greater name recognition than the Company
does. As a result, they may be able to respond more quickly to new or emerging
technologies, changes in regulations affecting the industry, newly discovered
resources and exploration opportunities, as well as to large swings in oil and
natural gas prices. In addition, increased competition could result in lower
energy prices, and reduced margins and loss of market share, any of which could
harm the Company’s business. Furthermore, increased competition may harm the
Company’s ability to secure ventures on terms favorable to it and may lead to
higher costs and reduced profitability, which may seriously harm its
business.
The Company’s
business depends on the level of activity in the oil and gas industry, which
is significantly affected by volatile energy prices, which volatility could
adversely affect its ability to operate profitably.
The
Company’s business depends on the level of activity in the oil and gas
exploration, development and production in markets worldwide. Oil and gas
prices, market expectations of potential changes in these prices and a variety
of political and economic and weather-related factors significantly affect this
level of activity. Oil and gas prices are extremely volatile and are affected by
numerous factors, including:
|
|
·
|
the
domestic and foreign supply of oil and natural
gas;
|
|
|
·
|
the
ability of the Organization of Petroleum Exporting Countries, commonly
called “OPEC,” to set and maintain production levels and
pricing;
|
|
|
·
|
the
price and availability of alternative
fuels;
|
|
|
·
|
weather
conditions;
|
|
|
·
|
the
level of consumer demand;
|
|
|
·
|
global
economic conditions;
|
|
|
·
|
political
conditions in oil and gas producing regions;
and
|
|
|
·
|
government
regulations.
|
Within
the past 12 months, light crude oil futures have ranged from below $40 per
barrel to nearly $150 per barrel, and may continue to fluctuate significantly in
the future. With respect to ventures in China, the prices the Company will
receive for oil and gas, in connection with any of its production ventures, will
likely be regulated and set by the government. As a result, these prices may be
well below the market price established in world markets. Therefore, the Company
may be subject to arbitrary changes in prices that may adversely affect its
ability to operate profitably.
- 21
-
If the
Company does not hedge its exposure to reductions in oil and gas prices,
it may be
subject to the risk of significant reductions in prices; alternatively, use
by the Company of
oil and gas price hedging contracts could limit future revenues from price
increases.
To date,
the Company has not entered into any hedging transactions but may do so in the
future. In the event that the Company chooses not to hedge its
exposure to reductions in oil and gas prices by purchasing futures and by using
other hedging strategies, it could be subject to significant reduction in prices
which could have a material negative impact on its profitability. Alternatively,
the Company may elect to use hedging transactions with respect to a portion of
its oil and gas production to achieve more predictable cash flow and to reduce
its exposure to price fluctuations. The use of hedging transactions could limit
future revenues from price increases and could also expose the Company to
adverse changes in basis risk, the relationship between the price of the
specific oil or gas being hedged and the price of the commodity underlying the
futures contracts or other instruments used in the hedging transaction. Hedging
transactions also involve the risk that the counterparty does not satisfy its
obligations.
The Company may
be required to take non-cash asset write-downs if oil and natural gas
prices decline, which could have a negative impact on the Company’s earnings.
Under
applicable accounting rules, the Company may be required to write down the
carrying value of oil and natural gas properties if oil and natural gas prices
decline or if there are substantial downward adjustments to its estimated proved
reserves, increases in its estimates of development costs or deterioration in
its exploration results. Accounting standard FAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” requires the Company to review its
long-lived assets for possible impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable over
time. In such cases, if the asset’s estimated undiscounted future cash flows are
less than its carrying amount, impairment exists. Any impairment write-down,
which would equal the excess of the carrying amount of the assets being written
down over their fair value, would have a negative impact on the Company’s future earnings , which could be material.
Risks
Related to Chinese and Other International Operations
The Company’s
Chinese and other international operations will subject it to certain
risks inherent in
conducting business operations in China and other foreign countries,
including political
instability and foreign government regulation, which could significantly
impact the Company’s ability to operate in such countries and impact the
Company’s results of operations.
The
Company conducts substantially all of its business in China. The
Company’s Chinese operations and anticipated operations in other foreign
countries are, and will be, subject to risks generally associated with
conducting businesses in foreign countries, such as:
|
|
·
|
foreign
laws and regulations that may be materially different from those of the
United States;
|
|
|
·
|
changes
in applicable laws and regulations;
|
|
|
·
|
challenges
to, or failure of, title;
|
|
|
·
|
labor
and political unrest;
|
|
|
·
|
foreign
currency fluctuations;
|
|
|
·
|
changes
in foreign economic and political
conditions;
|
|
|
·
|
export
and import restrictions;
|
|
|
·
|
tariffs,
customs, duties and other trade
barriers;
|
|
|
·
|
difficulties
in staffing and managing foreign
operations;
|
|
|
·
|
longer
time periods in collecting
revenues;
|
|
|
·
|
difficulties
in collecting accounts receivable and enforcing
agreements;
|
|
|
·
|
possible
loss of properties due to nationalization or expropriation;
and
|
- 22
-
|
|
·
|
limitations
on repatriation of income or
capital.
|
Specifically,
foreign governments may enact and enforce laws and regulations requiring
increased ownership by businesses and/or state agencies in energy producing
businesses and the facilities used by these businesses, which could adversely
affect the Company’s ownership interests in then existing ventures. The
Company’s ownership structure may not be adequate to accomplish the Company’s
business objectives in China or in any other foreign jurisdiction where the
Company may operate. Foreign governments also may impose additional taxes and/or
royalties on the Company’s business, which would adversely affect the Company’s
profitability. In certain locations, governments have imposed restrictions,
controls and taxes, and in others, political conditions have existed that may
threaten the safety of employees and the Company’s continued presence in those
countries. Internal unrest, acts of violence or strained relations between a
foreign government and the Company or other governments may adversely affect its
operations. These developments may, at times, significantly affect the Company’s
results of operations, and must be carefully considered by its management when
evaluating the level of current and future activity in such
countries.
Compliance and
enforcement of environmental laws and regulations may cause the Company to incur
significant expenditures and require resources, which it may not
have.
Extensive
national, regional and local environmental laws and regulations in China and
other Pacific Rim countries are expected to have a significant impact on the
Company’s operations. These laws and regulations set various standards
regulating certain aspects of health and environmental quality, which provide
for user fees, penalties and other liabilities for the violation of these
standards. As new environmental laws and regulations are enacted and existing
laws are repealed, interpretation, application and enforcement of the laws may
become inconsistent. Compliance with applicable local laws in the future could
require significant expenditures, which may adversely effect the Company’s
operations. The enactment of any such laws, rules or regulations in the future
may have a negative impact on the Company’s projected growth, which could in
turn decrease its projected revenues or increase its cost of doing
business.
A foreign
government could change its policies toward private enterprise or even nationalize
or expropriate private enterprises, which could result in the total loss of the
Company’s investment in that country.
The
Company’s business is subject to significant political and economic
uncertainties and may be adversely affected by political, economic and social
developments in China or in any other foreign jurisdiction in which it operates.
Over the past several years, the Chinese government has pursued economic reform
policies including the encouragement of private economic activity, foreign
investment and greater economic decentralization. The Chinese government may not
continue to pursue these policies or may significantly alter them to the
Company’s detriment from time to time with little, if any, prior
notice.
Changes
in policies, laws and regulations or in their interpretation or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to stockholders, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on the Company’s business. Nationalization or
expropriation could even result in the loss of all or substantially all of the
Company’s assets and in the total loss of your investment in the
Company.
Because the
Company plans to conduct substantially all of its business in China,
fluctuations in
exchange rates and restrictions on currency conversions could adversely affect
the Company’s results of operations and financial condition.
The
Company expects that it will conduct substantially all of its business in China,
and its financial performance and condition will be measured in terms of the
RMB. It is difficult to assess whether a devaluation or revaluation
(upwards valuation) of the RMB against the U.S. dollar would have an adverse
effect on the Company’s financial performance and asset values when measured in
terms of U.S. dollars. An increase in the RMB would raise the Company’s costs
incurred in RMB; however, it is not clear whether the underlying cause of the
revaluation would also cause an increase in the Company’s price received for oil
or gas which would have the opposite effect of increasing the
Company’s margins and improving its financial
performance.
- 23
-
The
Company’s financial condition could also be adversely affected as a result of
its inability to obtain the governmental approvals necessary for the conversion
of RMB into U.S. dollars in certain transactions of capital, such as direct
capital investments in Chinese companies by foreign investors.
Currently,
there are few means and/or financial tools available in the open market for the
Company to hedge its exchange risk against any possible revaluation or
devaluation of RMB. Because the Company does not currently intend to engage in
hedging activities to protect against foreign currency risks, future movements
in the exchange rate of the RMB could have an adverse effect on its results of
operations and financial condition.
If relations
between the United States and China were to deteriorate, investors might be
unwilling to hold or buy the Company’s stock and its stock price may
decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political, economic and security issues.
Additional controversies may arise in the future between these two countries.
Any political or trade controversies between these two countries, whether or not
directly related to the Company’s business, could adversely effect
the market price of the Company’s Common Stock.
If the United
States imposes trade sanctions on China due to its current currency
policies, the Company’s operations could be materially and adversely
affected.
Over the
past few years, China has “pegged” its currency to the United States dollar.
This means that each unit of Chinese currency has had a set ratio for which it
may be exchanged for United States currency, as opposed to having a floating
value like many other countries’ currencies. This policy has been under review
by policy makers in the United States. Trade groups in the United States have
blamed the cheap value of the Chinese currency for causing job losses in
American factories, giving exporters an unfair advantage and making its imports
expensive. Congress has been considering the enactment of legislation, with the
view of imposing new tariffs on Chinese imports. Following increasing pressure
for China to change its currency policies, in 2005, the People’s Bank of China
announced its decision to strengthen the exchange rate of the Chinese currency
to the U.S. dollar, revaluing the Chinese currency by 2.1% and to introduce a
“managed floating exchange rate regime.” Since that time, the exchange rate of
the Chinese currency has been allowed to float against a basket of
currencies.
It is
difficult to anticipate the reaction of the United States Congress to this
reform. If Congress deems that China is still gaining a trade advantage from its
exchange currency policy, and an additional tariff is imposed, it is possible
that China-based companies will no longer maintain significant price advantages
over U.S. and other foreign companies on their goods and services, and that the
rapid growth of China’s economy would slow as a result. If the United States or
other countries enact laws to penalize China for its currency policies, the
Company’s business could be materially and adversely affected.
A lack of
adequate remedies and impartiality under the Chinese legal system may
adversely
impact the Company’s ability to do business and to enforce the agreements to
which it is a party.
The
Company anticipates that it will be entering into numerous agreements governed
by Chinese law. The Company’s business would be materially and adversely
affected if these agreements were not enforced. In the event of a dispute,
enforcement of these agreements in China could be extremely difficult. Unlike
the United States, China has a civil law system based on written statutes in
which judicial decisions have little precedential value. The government’s
experience in implementing, interpreting and enforcing certain recently enacted
laws and regulations is limited, and the Company’s ability to enforce commercial
claims or to resolve commercial disputes is uncertain. Furthermore, enforcement
of the laws and regulations may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination. These uncertainties could limit the protections that are
available to the Company.
The Company’s
stockholders may not be able to enforce United States civil liabilities
claims.
Many of
the Company’s assets are expected to be located outside the United States and
held through one or more wholly-owned subsidiaries incorporated under the laws
of foreign jurisdictions, including Hong Kong and China. The Company’s
operations are expected to be conducted in China and other Pacific Rim
countries. In addition, some of the Company’s directors and officers, including
directors and officers of its subsidiaries, may be residents of countries other
than the United States. All or a substantial portion of the assets of these
persons may be located outside the United States. As a result, it may be
difficult for shareholders to effect service of process within the
- 24
-
United
States upon these persons. In addition, there is uncertainty as to whether the
courts of China and other Pacific Rim countries would recognize or enforce
judgments of United States courts obtained against the Company or such persons
predicated upon the civil liability provisions of the securities laws of the
United States or any state thereof, or be competent to hear original actions
brought in these countries against the Company or such persons predicated upon
the securities laws of the United States or any state thereof.
Risks
Related to the Company’s Stock
The market price
of the Company’s stock may be adversely affected by a number of factors
related to
the Company’s performance, the performance of other energy-related companies and the
stock market in general.
The
market prices of securities of energy companies are extremely volatile and
sometimes reach unsustainable levels that bear no relationship to the past or
present operating performance of such companies.
Factors
that may contribute to the volatility of the trading price of the
Company’s Common Stock include, among others:
|
|
·
|
the
Company’s quarterly results of
operations;
|
|
|
·
|
the
variance between the Company’s actual quarterly results of operations and
predictions by stock analysts;
|
|
|
·
|
financial
predictions and recommendations by stock analysts concerning energy
companies and companies competing in the Company’s market in general, and
concerning the Company in
particular;
|
|
|
·
|
public
announcements of regulatory changes or new ventures relating to the
Company’s business, new products or services by the Company or its
competitors, or acquisitions, joint ventures or strategic alliances by the
Company or its competitors;
|
|
|
·
|
public
reports concerning the Company’s services or those of its
competitors;
|
|
|
·
|
the
operating and stock price performance of other companies that investors or
stock analysts may deem comparable to the
Company;
|
|
|
·
|
large
purchases or sales of the Company’s Common
Stock;
|
|
|
·
|
investor
perception of the Company’s business prospects or the oil and gas industry
in general; and
|
|
|
·
|
general
economic and financial conditions.
|
In
addition to the foregoing factors, the trading prices for equity securities in
the stock market in general, and of energy-related companies in particular, have
been subject to wide fluctuations that may be unrelated to the operating
performance of the particular company affected by such fluctuations.
Consequently, broad market fluctuations may have an adverse effect on the
trading price of the Common Stock, regardless of the Company’s results of
operations.
The limited
market for the Company’s Common Stock may adversely affect trading prices
or the ability of a
shareholder to sell the Company’s shares in the public market at or
near ask prices or at
all if a shareholder needs to liquidate its shares.
The
Company’s Common Stock is traded on the OTC Bulletin Board (“OTCBB”) and there
is a very limited market for the Common Stock that may not be maintained or
broadened. The market price for shares of the Company’s Common Stock has been,
and is expected to continue to be, very volatile. Numerous factors
beyond the Company’s control may have a significant effect on the market price
for shares of the Company’s Common Stock, including the fact that the Company is
a small company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume. Even if we came to the attention of such
persons, they tend to be risk-averse and may be reluctant to follow an unproven,
early stage company such as the Company or purchase or recommend the purchase of
its shares until such time as the Company becomes more seasoned and
viable. There may be periods of several days or more when trading activity in
the Company’s shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. Due to these
- 25
-
conditions,
investors may not be able to sell their shares at or near ask prices or at all
if investors need money or otherwise desire to liquidate their
shares.
The
Company’s securities are quoted on the OTC Bulletin Board, which may limit the
liquidity and price of the Company’s securities more that if such securities
were quoted or listed on the Nasdaq Stock Market or a national
exchange.
The
Company’s securities are currently quoted on the OTC Bulletin Board, an
NASD-sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq Stock Market. Quotation of the
Company’s securities on the OTC Bulletin Board may limit the liquidity and price
of its securities more than if its securities were quoted or listed on The
Nasdaq Stock Market or a national exchange. Some investors may
perceive the Company’s securities to be less attractive because they are traded
in the over-the-counter market. In addition, as an OTC Bulletin Board
listed company, the Company does not attract the extensive analyst coverage
companies listed on Nasdaq or other regional or national exchanges often
receive. Further, institutional and other investors may have
investment guidelines that restrict or prohibit investing in securities traded
in the over-the-counter market. These factors may have an adverse impact on the
trading and price of the Company’s securities.
Substantial sales
of the Company’s Common Stock could cause the Company’s stock price to
fall.
As of
February 27, 2009, the Company had outstanding 40,061,785 shares of Common
Stock, substantially all of which are eligible for sale under Rule 144. The
Company has also entered into registration rights agreements with shareholders
covering the resale of 23,678,957 of such shares. These registration
rights agreements provide that if the Company becomes a publicly reporting
company under the Exchange Act and successfully lists its shares for trading on
a national securities exchange (the “Listing Date”), then the Company shall be
required to use commercially reasonable efforts to prepare and file a
registration statement under the Securities Act covering the resale of all the
Registerable Securities (as defined in the registration rights agreements)
within 60 days following the Listing Date and to use commercially reasonable
efforts to cause such registration statement to be declared effective by the SEC
within 210 days after the Listing Date. In addition, the registration rights
agreements entitle the holders to demand two registrations of their securities
after the Company has effected a registered public offering of its Common Stock
and unlimited number of piggy-back registrations. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company’s ability to raise capital through the sale of its equity
securities.
The Company’s
issuance of Preferred Stock could adversely affect the value of the Company’s
Common Stock.
The
Company’s Amended and Restated Certificate of Incorporation authorizes the
issuance of up to 50 million shares of Preferred Stock, which shares constitute
what is commonly referred to as “blank check” Preferred Stock. Approximately 26
million shares of Preferred Stock are currently available for issuance. This
Preferred Stock may be issued by the Board of Directors from time to time on any
number of occasions, without stockholder approval, as one or more separate
series of shares comprised of any number of the authorized but unissued shares
of Preferred Stock, designated by resolution of the Board of Directors, stating
the name and number of shares of each series and setting forth separately for
such series the relative rights, privileges and preferences thereof, including,
if any, the: (i) rate of dividends payable thereon; (ii) price, terms and
conditions of redemption; (iii) voluntary and involuntary liquidation
preferences; (iv) provisions of a sinking fund for redemption or repurchase; (v)
terms of conversion to Common Stock, including conversion price; and (vi) voting
rights. The designation of such shares could be dilutive of the interest of the
holders of our Common Stock. The ability to issue such Preferred Stock could
also give the Company’s Board of Directors the ability to hinder or discourage
any attempt to gain control of the Company by a merger, tender offer at a
control premium price, proxy contest or otherwise.
The Common Stock
may be deemed “penny stock” and therefore subject to special requirements that
could make the trading of the Company’s Common Stock difficult.
The
Company’s Common Stock may be deemed to be a “penny stock” as that term is
defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934.
Penny stocks are stocks (i) with a price of less than five dollars per share;
(ii) that are not traded on a “recognized” national exchange; (iii) whose prices
are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks
must still meet requirement (i) above); or (iv) of issuers with net tangible
assets of less than $2,000,000 (if the issuer has been in continuous operation
for at least
- 26
-
three
years) or $5,000,000 (if in continuous operation for less than three years), or
with average revenues of less than $6,000,000 for the last three
years.
Section
15(g) of the Exchange Act, and Rule 15g-2 promulgated thereunder, require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor’s account. Moreover, Rule 15g-9 promulgated under
the Exchange Act requires broker-dealers in penny stocks to approve the account
of any investor for transactions in such stocks before selling any penny stock
to that investor. This procedure requires the broker-dealer to (i) obtain from
the investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for investors in the Common Stock to resell their shares to third
parties or to otherwise dispose of them.
The Company’s
executive officers, directors and major stockholders hold a substantial
amount of
the Company’s Common Stock and may be able to prevent other stockholders
from influencing
significant corporate decisions.
As of
February 27, 2009, the executive officers, directors and holders of 5% or more
of the outstanding Common Stock together beneficially owned approximately 33.0%
of the outstanding Common Stock. These stockholders, if they were to act
together, would likely be able to significantly influence all matters requiring
approval by stockholders, including the election of Directors and the approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control and may
make some transactions more difficult or impossible to complete without the
support of these stockholders.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable
ITEM
2. PROPERTIES
Part I,
Item 1, Description of Business, contains a description of properties other than
office facilities and is incorporated herein by reference.
The
Company has two primary leased office facilities, one located in Hartsdale, New
York (the “Hartsdale Facility”), and the other located in Beijing, China (the
“Beijing Facility”).
The
Hartsdale Facility is occupied under a lease which commenced on December 1,
2006, and was extended two additional years to November 30, 2010 under an
amendment entered into in September 2008. The rentable square feet of
the Hartsdale Facility at December 31, 2008 were 1,978, and the rental expense
for the Hartsdale Facility is currently $5,095 per month, plus a 7.96% share of
operating expenses of the property.
The
Beijing Facility is approximately 1,900 square feet of office space. The Beijing
Facility is occupied under a tenancy agreement that commenced on August 16,
2007, and ends on August 15, 2009. The Company’s combined rental and
management expense for the Beijing Facility is currently $4,820 per
month.
The
Company believes that its current office facilities have the capacity to meet
its needs for the foreseeable future. It does not foresee significant
difficulty in renewing or replacing the space leased in Beijing, under current
market conditions.
ITEM
3. LEGAL PROCEEDINGS
None.
- 27
-
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to the Company’s shareholders for a vote during the
fourth quarter of the fiscal year covered by this Report.
- 28
-
PART
II
|
|
ITEM
5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
The
information set forth under the “Quarterly Information and Stock Market Data”
portion of Part II, Item 8. “Financial Statements and Supplementary Data”
is incorporated herein by reference.
Recent
Sales of Unregistered Securities
None.
Stock
Repurchases
The
Company did not repurchase any shares of its Common Stock during the quarter
ending December 31, 2008.
Effective
December 31, 2008, the Company rescinded the grants of an aggregate of
20,400 shares of the Company's restricted Common Stock previously issued under
the Company's 2007 Stock Plan to the following individuals: (i) 10,000
shares issued to Elizabeth P. Smith on December 17, 2007; (ii) 400 shares issued
on December 17, 2007 to Louis Ruggio; and (iii) 10,000 shares issued on February
11, 2008 to Robert C. Stempel. These rescissions were each consummated
pursuant to a rescission agreement entered into by and between the Company
and each individual.
- 29
-
ITEM
6. SELECTED FINANCIAL DATA
|
Financial
Summary Data
|
For
the year ended December 31, 2008
|
For
the year ended December 31, 2007
|
For
the year ended December 31, 2006
|
For
the period
from inception
(August
25, 2005)
through
December
31,
2005
|
For
the period
from inception
(August
25, 2005)
through
December
31,
2008
|
|||||||||||||||
|
Net
Loss
|
$ | (5,446,649 | ) | $ | (2,383,684 | ) | $ | (1,086,387 | ) | $ | (51,344 | ) | $ | (8,968,064 | ) | |||||
|
Net
Loss per share of
|
||||||||||||||||||||
|
common
stock-basic and diluted
|
$ | (.14 | ) | $ | (.08 | ) | $ | (.10 | ) | $ | (.03 | ) | ||||||||
|
Cash
Used in Operating Activities
|
$ | 3,208,017 | $ | 2,060,887 | $ | 814,024 | $ | 10,071 | $ | 6,092,999 | ||||||||||
|
Capital
Expenditures
|
$ | 329,782 | $ | 80,689 | $ | 207,833 | $ | - | $ | 618,304 | ||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Selected
Balance Sheet Data
|
||||||||||||||||||||
|
Working
Capital
|
$ | 11,223,902 | $ | 13,316,694 | $ | 3,110,818 | $ | (39,344 | ) | |||||||||||
|
Property,
Plant and Equipment-Net
|
$ | 569,303 | $ | 285,027 | $ | 208,511 | $ | - | ||||||||||||
|
Total
Assets
|
$ | 14,119,089 | $ | 17,456,927 | $ | 3,929,321 | $ | 101,929 | ||||||||||||
See Part
II, Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” and “Part II, Item 8. Financial Statements and
Supplementary Data” for further information regarding the
comparability of the Selected Financial Data.
- 30
-
|
|
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
|
Throughout this Annual Report on
Form 10-K, the terms “we,” “us,” “our,” “the Company,” and “our
Company” refer to Pacific Asia Petroleum, Inc., a Delaware corporation, and its
subsidiaries, including former subsidiaries Inner Mongolia Production
Company LLC (“IMPCO”)
(which merged into Pacific Asia Petroleum, Inc. in December 2007), and Advanced
Drilling Services, LLC (“ADS”) (which merged into Pacific Asia Petroleum, Inc.
in December 2007), and its current subsidiaries and joint ventures (i) Pacific
Asia Petroleum (HK) Limited, (ii) Pacific Asia Petroleum, Limited, (iii) Inner
Mongolia Production Company (HK) Limited, and (iv) Inner Mongolia Sunrise
Petroleum JV Company
(collectively, the “Company”). References to “PAP” refer to Pacific Asia Petroleum, Inc.
prior to the Mergers of IMPCO and ADS into wholly-owned subsidiaries thereof,
effective May 7, 2007.
As
discussed in Note 1 and Note 2 of the consolidated financial statements,
historical financial results presented herein are the results of IMPCO from
inception on August 25, 2005 to May 6, 2007, and the consolidated entity Pacific
Asia Petroleum, Inc. from May 7, 2007 forward, which is considered to be the
continuation of IMPCO as Pacific Asia Petroleum, Inc.
You should read the information in
this Item 7 together with our consolidated financial statements and notes
thereto that appear elsewhere in this Report.
Cautionary
Statement Regarding Forward-Looking Statements
This Annual Report contains
forward-looking statements, which reflect the views of our management with
respect to future events and financial performance. These forward-looking
statements are subject to a number of uncertainties and other factors that
could cause actual results to differ materially from such statements.
Forward-looking statements are identified by words such as “anticipates,”
“believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar
expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which are based on the information available to
management at this time and which speak only as of this date. We undertake no
obligation to update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. For a discussion of some
of the factors that may cause actual results to differ materially from those
suggested by the forward-looking statements, please read carefully the
information under “Risk Factors” included in this Annual Report. The
identification in this Annual Report of factors that may
affect future performance and the accuracy of forward-looking statements is
meant to be illustrative and by no means exhaustive. All forward-looking
statements should be evaluated with the understanding of their inherent
uncertainty.
Our
Business
The
Company is a development stage company formed to develop new energy ventures,
directly and through joint ventures and other partnerships in which it may
participate.
Members
of the Company’s senior management team have experience in the fields of
international business development, and finance, petroleum engineering, geology,
field development and production, and operations. Several members of the
Company’s management team have held management and executive positions with
Texaco Inc. and have managed energy projects in China, elsewhere in Asia and in
other parts of the world. Members of the Company’s management team also have
experience in oil drilling, operations, geological engineering and sales in
China’s energy sector.
Pacific
Asia Petroleum, Inc. is the successor company from a reverse merger involving
the former Pacific East Advisors, Inc. and other entities on May 7, 2007. The
Company was originally incorporated in Delaware on December 12, 1979 as Gemini
Marketing Associates Inc.
Effective
May 7, 2007, IMPCO and ADS merged (the “Mergers”) with and into wholly-owned
subsidiaries of PAP pursuant to (i) an Agreement and Plan of Merger and
Reorganization (the “ADS Merger Agreement”) with DrillCo Acquisition, LLC (“ADS
Merger Sub”), a Delaware limited liability company and a wholly-owned subsidiary
of PAP, and ADS, and (ii) an Agreement and Plan of Merger and Reorganization
(the “IMPCO Merger Agreement,” and together with the ADS Merger Agreement, the
“Merger Agreements”) with IMPCO Acquisition, LLC (“IMPCO Merger Sub”), a New
York limited liability company and a wholly-owned subsidiary of PAP, and IMPCO.
Under applicable accounting standards, IMPCO was defined as the acquiring
company. Accordingly, the reportable results
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of
operations for the Company through the merger date of May 7, 2007 are comprised
only of the historical results of the former IMPCO. Therefore, for purposes of
financial reporting, the inception of the Company is reflected as August 25,
2005, the inception date of IMPCO.
The
cumulative net losses of the Company from inception through December 31, 2008
are $8,968,064. Our losses have resulted primarily from general and
administrative expenditures associated with developing a new enterprise, and
consulting, legal and accounting expenses. From inception through December 31,
2008, we did not generate revenues from operations.
The
Company’s current operations commenced in 2005 through IMPCO, formed as a
limited liability company under New York State law on August 25, 2005. These
operations consist of the drilling of oil wells in recently discovered fields in
Inner Mongolia, China, and exploration and development operations with respect
to CBM opportunities in the Shanxi Province of China. We consider the Company to
be a single line of business.
In the
fourth quarter of 2006, pursuant to a joint development contract with Chifeng, a
company incorporated in Inner Mongolia, China, the Company drilled its first oil
well in Inner Mongolia. This well was producing during part of 2007 under an
exploration and development license issued by the relevant Chinese authorities.
However, no revenue or related depletion expense have been recognized to date
due to uncertainty of realization of the revenue until a permanent production
license is obtained.
The
Company is pursuing a combination of strategies to have such production license
awarded, including a possible renegotiation of the Chifeng Agreement increasing
the financial incentives to all the parties involved and the Company is also
pursuing a strategy focused on entering into negotiations with respect to an
opportunity to acquire the existing production from the 22 sq. km. Kerqing
Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance
the Chifeng Agreement in scale and value. If this Production License
is not issued, the opportunities to drill additional long-term production wells
under the contract, including future production from this first well, will be at
risk.
Chifeng
has accounted for our share of the production revenue in the form of a credit
which will be allocated to the Company retroactively when and if the production
license is issued. Operations from the well were suspended in 2007, and it is
planned to resume operations when and if the production license is received. To
date, the total production from the well has been approximately 400 tons of
crude oil (all of which has been sold), and total producing revenues credited to
the Company (after costs and royalties) were approximately
$135,000.
In
September 2007, the Company entered into the Chevron Agreements with
ChevronTexaco for the purchase by the Company of participating interests held by
ChevronTexaco in production sharing contracts in respect of four CBM and tight
gas sand resource blocks located in the Shanxi Province of China with an
aggregate contract area of approximately 1.5 million acres. The aggregate base
purchase price for all of the participating interests was $61,000,000, adjusted
in April 2008 to $50,000,000, and was subject to certain income and expense
adjustments prior to closing. The Company paid to ChevronTexaco a $3,050,000
deposit toward the purchase price in 2007, which was refundable if the Chevron
Agreements were terminated under certain conditions. The closing of the asset
transfers contemplated pursuant to the Chevron Agreements was contingent upon a
number of conditions precedent, including the approval of certain related
agreements by the PRC Ministry of Land and Natural Resources and the assignment
of ChevronTexaco’s participating interest by the PRC Ministry of
Commerce. On December 5, 2008, the Company exercised its right to
terminate three of the four Chevron Agreements due to delays in receipt of
required Chinese government approvals of the transfers, coupled with renewal
terms proposed by ChevronTexaco that were not acceptable to the
Company. The remaining ChevronTexaco ATA to purchase ChevronTexaco’s
35.7142% interest in the Baode PSC for CBM at a purchase price of $2,000,000 and
a deposit of $650,000 was retained and remains in effect. Following
termination by the Company of the three Chevron Agreements, ChevronTexaco
returned $2,400,000 of prepaid deposits to the Company in December 2008 as
required under the terminated Chevron Agreements.
On March
29, 2008, the Company entered into the BHP ATA with BHP for the purchase by the
Company of BHP’s 64.2858% interest in the Baode PSC for
CBM. The purchase price is $2,000,000, subject to upward adjustment
to account for BHP’s cash flow payments and operating costs paid with respect to
BHP’s interest in the Baode PSC from April 1, 2008 through the closing date, and
downward adjustment to account for BHP’s receipt of revenues derived from BHP’s
interest in the Baode PSC from that date through the closing
date. The Company has paid BHP
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a
$500,000 deposit toward the purchase price, which is refundable if the BHP ATA
is terminated under certain conditions. Upon closing, the Company
will assume BHP’s operating obligations related to the Baode PSC.
Assuming
all conditions precedent to closing of each of the ChevronTexaco ATA and BHP ATA
are satisfied, upon closing of both the ChevronTexaco ATA and the BHP ATA, the
Company will acquire a 100% participating interest in the Baode
PSC. Pursuant to the terms of the Baode PSC, the Chinese government
is entitled to acquire up to a 30% participating interest in the Baode PSC from
the then-current parties to the Baode PSC upon certain conditions and in
exchange for certain payments to such parties. Assuming the Company
consummates one or both of the ChevronTexaco ATA and the BHP ATA, such asset
acquisitions will not constitute the acquisition of a business, but the
acquisition of title to hydrocarbon natural resources under the surface of the
land. These assets are not presently capable of independent operation
as a business, and no employees, revenues, or customers will be
acquired.
On
October 26, 2007, PAPL, a wholly-owned subsidiary of the Company, entered into
the Zijinshan PSC with CUCBM for the exploitation of CBM resources in the
Zijinshan block, which is located in the Shanxi Province in China. The Zijinshan
PSC provides, among other things, that PAPL must drill three (3) exploration
wells and carry out 50 km of 2-D seismic data acquisition (a minimum commitment
for the first three (3) years with an estimated expenditure of $2.8 million) and
drill four (4) pilot development wells during the next two (2) years at an
estimated cost of $2 million (in each case subject to PAPL’s right to
terminate the Zijinshan PSC). During the development and production period,
CUCBM will have the right to acquire a 40% participating interest and work
jointly to develop and produce CBM under the Zijinshan PSC. The Zijinshan PSC
has a term of thirty (30) years. The Zijinshan PSC was approved in 2008 by the
Ministry of Commerce of China. Pursuant to the Zijinshan PSC, all CBM resources
(including all other related hydrocarbon resources) produced from the Zijinshan
block is to be shared as follows: (i) 80% of production is provided to PAPL and
CUCBM for recovery of all costs incurred; (ii) PAPL has the first right to
recover all of its exploration costs from such 80% and then development costs
are recovered by PAPL and CUCBM pursuant to their respective participating
interests; and (iii) the remainder of the production is split by CUCBM and PAPL
receiving between 99% and 90% of such remainder depending on the actual
producing rates (a sliding scale) and the balance of the remainder (between 1%
and 10%) is provided to the Government of China. On December 9, 2008 the Company
and CUCBM finalized a mutually agreed work program pursuant to which the Company
may immediately commence development operations under the PSC.
On
September 30, 2008, the Company entered into an AOC with Well Lead, pursuant to
which the parties agreed to use reasonable efforts to negotiate and enter into a
mutually acceptable Sale and Purchase Agreement for purchase by the Company of
up to 39% of the WL Interest in Northeast Oil. Northeast Oil owns a
95% interest in the WL Oil Blocks located in the Fulaerjiqu Oilfield in Qiqihar
City, Heilongjiang Province in the People’s Republic of China. The
proposed transaction is subject to due diligence review of the WL Interest, the
WL Oil Blocks and other due diligence. Under the proposed
transaction, the Company would acquire a 25% interest in Northeast Oil for a
purchase price of $9.8 million, composed of $5 million cash (one-half paid at
closing and the remainder in five equal monthly installments commencing eight
months after closing) and the issuance of Company Common Stock valued at $4.8
million. In addition, at closing, the Company would have the option
to purchase an additional 14% interest in Northeast Oil for $5.5 million in cash
payable at closing. In accordance with the AOC, the Company paid Well
Lead a nonrefundable payment of $50,000 in cash for the right of exclusive
negotiations for the acquisition of the Interest through November 30, 2008,
which exclusive term has expired.
After
completing the initial phase of due diligence on Well Lead, the WL Interest and
the WL Oil Blocks, the Company has commenced additional negotiations with Well
Lead and other related parties to expand the potential acquisition to include
other Well Lead interests and related parties. These additional Well
Lead interests and related parties include additional producing oilfields in
China, a Well Lead-affiliated technology company that has been applying its
intellectual property to successfully enhance production in the WL Oil Blocks,
and certain Well Lead-related venture companies. The Company now seeks to
acquire a 51% participating interest in all these Well Lead assets and related
parties, and the Company and Well Lead have reached a verbal agreement in
principle with respect thereto. The Company anticipates that the
total purchase price for all Well Lead interests to be acquired by the Company
will be less than the amounts originally provided for in the AOC for the WL Oil
Blocks alone. The Company has commenced phase two of its due
diligence review with a goal to conclude such review and negotiate, sign and
consummate a definitive acquisition agreement by April 30,
2009; however, the Company can make no assurances that it will be
able to successfully consummate any transaction with Well Lead on terms and
conditions satisfactory to the Company, or at all.
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In order
to fully implement its business strategy, including development and production
required under the Zijinshan PSC, ongoing production under the Chifeng
Agreement, consummation of the asset transfers contemplated pursuant to the
ChevronTexaco ATA and the BHP ATA and development and production under the Baode
PSC, thereafter, as well as other transactions contemplated with Well
Lead, and the Beijing Tai He Sheng Ye Investment Company Limited, the Company
will need to raise significant additional capital. In the event the Company is
unable to raise such capital on satisfactory terms or in a timely manner, the
Company would be required to revise its business plan and possibly cease
operations completely.
Plan
of Operation
The
following describes in general terms the Company’s plan of operation and
development strategy for the twelve-month period ending December 31, 2009 (the
“Next Year”). During the Next Year, the Company plans to focus its efforts on
commencing operations under the Zijinshan PSC in the area in the Shanxi Province
of China referred to as the Zijinshan Block (the “CUCBM Contract Area”),
drilling activities under its agreement with Chifeng, and consummating the
purchase of the participating interests under the Baode PSC from ChevronTexaco
and BHP, as well as developing additional enhanced oil production opportunities
in China through potential acquisitions from Well Lead and other parties and
pursuit of the gas distribution venture with Handan Changyuan Gas Co., Ltd.
(“HCG”).
In
addition to these opportunities, the Company plans to continue to identify other
opportunities in the energy sectors in China and the Pacific Rim, particularly
with respect to oil and gas exploration, development, production, refining and
trading. Since we are a development stage company, we are limited in our ability
to grow by the availability of capital for our businesses and each project. The
Company’s ability to successfully consummate any of its projects, including the
projects described above, is contingent upon the making of any required
deposits, obtaining the necessary governmental approvals and executing binding
agreements to obtain the rights we seek within limited timeframes.
The
Company has assembled a management team with experience in the fields of
international business development, petroleum and geologic engineering, geology,
petroleum field development and production, petroleum operations and finance.
Members of the Company’s management team previously held positions in similar
oil and gas development, and screening roles at Texaco Inc., and will seek to
utilize their contacts in Asia to provide us with access to a variety of energy
projects. Among the strategies that we plan to use are:
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Focusing
on projects that play to the expertise of our management
team;
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Leveraging
our productive asset base and capabilities to develop
value;
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·
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Actively
managing our assets and ongoing operations while attempting to limit
capital exposure;
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·
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Enlisting
external resources and talent as necessary to operate/manage our
properties during peak operations;
and
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·
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Implementing
an exit strategy with respect to each project with a view to maximizing
asset values and returns.
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Product
Research and Development
The
Company has not engaged in any product research or development and does not
anticipate engaging in product research or development during the Next
Year.
Liquidity
and Capital Resources
The
Company has sufficient funds to fund all of its current operations for the Next
Year provided, however, that if the conditions precedent to the closing are
satisfied and the Company elects to consummate the purchase of the ChevronTexaco
and BHP participating interests in the Baode PSC, as well as consummate the
transactions currently contemplated with Well Lead, the Company will be required
to raise additional capital to fund ongoing operational expenses
related to the participating interests to be purchased from ChevronTexaco and
BHP, and those operational expenses related to the interests of Well Lead. The
remaining discussion considers the Company’s ability to fund its other
operations and overhead expenses, exclusive of the funding necessary for the
aforementioned purchases, except insofar as that the deposit required for those
agreements has reduced our liquidity.
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As of
December 31, 2008, the Company had net working capital of $11,223,902 and cash,
including cash equivalents of $10,515,657 and short-term investments
of $1,260,000. The Company also has deposited $650,000 with
ChevronTexaco as required under the ChevronTexaco ATA, and $500,000 with BHP as
required under the BHP ATA. For the year ended December 31, 2008, the Company
incurred a net loss of $5,446,649. As a result of our operating losses from our
inception through December 31, 2008, we generated a cash flow deficit of
$6,092,999 from operating activities during this period. Cash flows used in
investing activities - net were $3,128,538 during the period from inception
(August 25, 2005) through December 31, 2008, comprised of net purchases of
$1,260,000 of short-term investments, the acquisition of $618,304 of property
and equipment and an increase of $1,250,234 in deferred charges. We met our cash
requirements during this period through net proceeds of $19,699,092 from the
private placement of the Company’s restricted equity securities.
As of
December 31, 2008, the Company had short-term development commitments (within
the next 12 months) of approximately $1.3 million to fund drilling activities
under our agreement with Chifeng, and approximately $2.9 million to fund
operations under our agreement with CUCBM. In the event the
conditions precedent to the closing of the ChevronTexaco ATA and the BHP ATA are
satisfied, the Company will be required to pay $1.35 million and $1.5 million,
respectively, for the unpaid base purchase prices and other costs detailed in
Part I, Item 1, “Description of Business,” under these agreements, as well as
additional capital to fund ongoing operational expenses related to the
participating interests purchased from ChevronTexaco and BHP under the Baode
PSC, which have been estimated by them to be $2.6 million.
Net cash
used in operating activities was $3,208,017 in 2008 compared to $2,060,887 in
2007 and $814,024 in 2006. The increases in 2008 versus 2007 and in
2007 versus 2006 were principally due to increases in expenses paid, most of
which were also incurred in the same respective years. The cash
effect of net changes in current assets and liabilities was a significant factor
in the 2008 versus 2007 comparative period due to accrued liabilities for
expenses. For the 2007 versus 2006 comparative period it was not a significant
factor.
Net cash
provided by investing activities was $11,511,505 in 2008 compared to net cash
used in investing activities of $13,040,176 in 2007 and $1,599,867 in
2006. The net change in 2008 versus 2007 was principally due
to net sales of $9,940,000 of available-for-sale
short-term securities and a decrease in deferred charges of $1,905,824 from
deposits and other costs related to pending asset purchases under asset purchase
agreements. This was partially offset by an increase in additions to
property, plant and equipment in 2008 versus 2007. The net change in
2007 versus 2006 was principally due to an increase of $9,800,000 in net
purchases of short-term investments.
Net cash
used in financing activities was $2,513 in 2008 compared to net cash provided by
financing activities of $15,421,002 in 2007 and $4,162,526 in 2006. The net
change in 2008 versus 2007 was due to a lack of financing activity in 2008
versus financing activity in 2007 conducted in connection with the
Mergers. The net increase in 2007 versus 2006 was principally due to
the equity financing conducted in connection with the Mergers of May 7, 2007,
which was significantly larger than the equity financing conducted in 2006 as
IMPCO. Also affecting the increase in 2007 versus 2006 was a decrease in notes
payable repaid and an increase in net cash flow from minority interest
investment and advances activity.
Based on
expenditures for development and operations included above (excluding the
closing of the ChevronTexaco ATA and BHP ATA, and the transactions contemplated
with Well Lead) of $4.2 million in total over 12 months, there would be $7.0
million available to fund expenses at $3.5 million per year for 2.0
years.
Our
available working capital and capital requirements will depend upon numerous
factors, including progress of our exploration and development programs,
including under our agreements with Chifeng and CUCBM, closing of the
ChevronTexaco ATA and BHP ATA and purchase of the ChevronTexaco and BHP
participating interests, in the Baode PSC, consummation of the transactions
contemplated with Well Lead and Beijing Tai He Sheng Ye Investment Company
Limited, market developments and the status of our competitors. Our continued
operations will depend on whether we are able to raise additional funds through
various potential sources, such as equity and debt financing and strategic
alliances. Such additional funds may not become available on acceptable terms,
if at all, and any additional funding obtained may not be sufficient to meet our
needs in the long term. Through December 31, 2008, virtually all of our
financing has been raised through private placements of equity
instruments. The Company at December 31, 2008 had no credit lines for
financing and no short-term or long-term debt.
We intend
to continue to fund operations from cash on hand and through the similar sources
of capital previously described for the foreseeable future. Any additional
capital that we are able to obtain may not be sufficient to meet
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our
needs. We believe that we will continue to incur net losses and negative cash
flows from operating activities for the next 1-2 years. Based on the resources
available to us on December 31, 2008, we can sustain operations at the present
“burn rate” for more than one year. We will need additional equity or debt
financing to expand our operations through 2009 and we may need additional
financing thereafter.
By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet our projected cash flow
deficits. However, if during the Next Year or thereafter, we are not successful
in generating sufficient liquidity from operations or in raising sufficient
capital resources, on terms acceptable to us, this could have a material adverse
effect on our business, results of operations, liquidity, and financial
condition.
To the
extent the Company acquires additional CBM, tight gas sand and other
energy-related rights consistent with its business plan, including the
participating interests from ChevronTexaco and BHP, and the consummation of the
transactions contemplated with Well Lead and Beijing Tai He Sheng Ye Investment
Company Limited, the Company will need to raise additional funds for development
of such projects.
Employees
As of
December 31, 2008, we had 18 full-time employees and 8 part-time
employees/contractors. In order for us to attract and retain quality personnel,
we anticipate we will have to offer competitive salaries to future employees.
During the Next Year, the Company may need to hire additional personnel in
certain operational and other areas as required for its expansion efforts, and
to maintain focus on its then-existing and new projects. The number and skill
sets of individual employees will be primarily dependent on the relative rates
of growth of the Company’s different projects, and the extent to which
operations and development are executed internally or contracted to outside
parties. Subject to the availability of sufficient working capital and assuming
initiation of additional projects, the Company currently plans to increase
full-time staffing to over twenty people during the Next Year, although such
hiring may not occur or may be inadequate to execute the Company’s growth plans.
As we continue to expand, we will incur additional cost for
personnel.
Results
of Operations
The
Company is in the development stage and to date has not generated any
significant revenues. During the fiscal year 2006, the Company focused its
efforts on developing onshore development and production opportunities in China
as a means of generating cash flow. Accordingly, the Company signed a contract
for the development of the Shaogen Contract Area in August of 2006 with
Chifeng.
Pursuant
to the Chifeng Agreement, drilling operations commenced in October
2006. The first well drilled by Chifeng discovered oil and has been
completed as a producing well, but production operations were suspended in 2007
pending receipt of a production license from the Chinese government. The Company
is pursuing a combination of strategies to have such production license awarded,
including a possible renegotiation of the Chifeng Agreement with a goal of
increasing the financial incentives to all the parties involved, and the Company
is also pursuing a strategy focused on entering into negotiations with respect
to an opportunity to acquire the existing production from the 22 sq. km. Kerqing
Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance
the Chifeng Agreement in scale and value. If this Production License
is not issued, the opportunities to drill additional long-term production wells
under the contract, including future production from this first well, will be at
risk.
If the
license is issued, the Company expects to spend $1.3 million in 2009 in
connection with drilling activities under the contract.
In
November 2006, the Company signed an Agreement for Joint Cooperation with the
CUCBM covering the CUCBM Contract Area. This was converted to the Zijinshan PSC
on October 26, 2007. This is an opportunity to explore for and develop CBM
resources (including all other related hydrocarbon resources). In 2008 the
Company spent about $0.2 million for this project. Expenditures for
this project to are expected to be approximately $2.7 million in
2009.
In
September 2007, the Company entered into the four Chevron Agreements with
ChevronTexaco for the purchase by the Company of participating interests held by
ChevronTexaco in production sharing contracts in respect of four CBM and tight
gas sand resource blocks located in the Shanxi Province of China with an
aggregate contract area of approximately 1.5 million acres. The aggregate base
purchase price for all of the participating interests was
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$61,000,000,
adjusted in April 2008 to $50,000,000, and was subject to certain income and
expense adjustments prior to closing. The Company paid to ChevronTexaco a
$3,050,000 deposit toward the purchase price, which was refundable if the
Chevron Agreements were terminated under certain conditions. On December 5,
2008, the Company exercised its right to terminate three of the four Chevron
Agreements, retaining the ChevronTexaco ATA related to the Baode PSC for CBM
with a purchase price of $2,000,000 and a deposit retained by ChevronTexaco of
$650,000. The deposit amount of $2,400,000 previously paid by the
Company to ChevronTexaco with respect to the three terminated Chevron Agreements
was returned to the Company in December 2008 as a result of the
terminations.
In March
2008, the Company entered into the BHP ATA with BHP for the purchase of the
remainder of the participating interest in the Baode PSC not held by
ChevronTexaco that the Company plans to acquire under the ChevronTexaco ATA. The
Company paid BHP a deposit of $500,000 toward the $2,000,000 purchase price,
which is refundable if the BHP ATA is terminated under certain
conditions.
The
Company is also actively pursuing other opportunities for which no definitive
agreements are in place, including the Well Lead opportunity and the Handan Gas
Distribution Venture.
In the
year ended December 31, 2007, the Company generated $12,289 in miscellaneous
revenues from services. These revenues, which have been recorded as
“Other Income,” were from a single consulting engagement and are not at this
point expected to be repeated as the Company is not in the consulting business
and has increasing demands placed on its staff in developing its own business
enterprise. Even though the Company has earned these nominal revenues, it still
considers itself a development stage enterprise as it has been since its
inception on August 25, 2005.
As a
development stage company, we have yet to earn revenues from operations. We may
experience fluctuations in operating results in future periods due to a variety
of factors, including our ability to obtain additional financing in a timely
manner and on terms favorable to us, our ability to successfully develop our
business model, the amount and timing of operating costs and capital
expenditures relating to the expansion of our business, operations and
infrastructure and the implementation of marketing programs, key agreements, and
strategic alliances, and general economic conditions specific to our
industry.
As a
result of limited capital resources and no revenues from operations from the
date of inception as IMPCO on August 25, 2005, the Company has relied on the
issuance of equity securities as a means of compensating employees and
non-employees for services. The Company enters into equity compensation
agreements with non-employees if it is in the best interest of the Company and
in accordance with applicable federal and state securities laws. In order to
conserve its limited operating capital resources, the Company anticipates
continuing to compensate employees and non-employees partially with equity
compensation for services during the Next Year. This policy may have a material
effect on the Company’s results of operations during the Next Year.
Revenues
We have
generated no revenues from operations since inception as IMPCO on August 25,
2005. We hope to begin generating revenues from operations in 2009 from actual
operations as the Company transitions from a development stage company to that
of an active growth stage company.
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Expenses
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Years
ended December 31,
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|
Description
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2008
|
2007
|
2006
|
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Salaries
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$ | 1,672,694 | $ | 898,875 | $ | 62,300 | ||||||
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Consulting
|
505,248 | 803,485 | 770,633 | |||||||||
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Legal
and professional fees
|
503,830 | 300,228 | 25,051 | |||||||||
|
Accounting
and audit fees
|
169,368 | 135,305 | 30,624 | |||||||||
|
Other
operating contract work
|
249,440 | - | - | |||||||||
|
Travel
|
295,621 | 194,071 | 138,354 | |||||||||
|
Stock-based
compensation
|
1,355,590 | 195,442 | 29,065 | |||||||||
|
Impairment
of assets
|
273,618 | - | - | |||||||||
|
All
other operating expenses
|
758,411 | 454,841 | 130,986 | |||||||||
|
Total
Operating Expenses
|
$ | 5,783,820 | $ | 2,982,247 | $ | 1,187,013 | ||||||
For the
fiscal year 2008, total operating expenses before income taxes were $5,783,820
as compared to $2,982,247 in 2007 and $1,187,013 in 2006. The increase each year
in operating expenses reflects the increase in financing-related activities, the
expenses associated with the Mergers and increased efforts in identifying,
negotiating for the acquisition of potential oil and gas opportunities and the
start of operations in Zijinshan. The major components of expense
differences are as follows.
Year 2008 versus Year
2007
|
|
·
|
Salaries: The
increase in 2008 over 2007 of $773,819 resulted from an increase in the
number of employees.
|
|
|
·
|
Consulting: The
decrease in 2008 over 2007 of $298,237 was due to a decrease of $197,312
in consulting fees paid as vested equity compensation, an increase of
$124,776 in cash consulting fees related to Sarbanes-Oxley compliance
work, and a decrease of $225,701 in other cash consulting fees. The
decreases were principally due to non-recurring costs in 2007 relative to
merger negotiation assistance and contractual obligations for assistance
in the raising of equity funds prior to the
Mergers.
|
|
|
·
|
Legal and professional
fees: The increase in 2008 over 2007 of $203,602 was due
to the increase in the Company’s activities, the legal requirements to
prepare SEC filings, and assistance in compliance with Sarbanes-Oxley Act
requirements.
|
|
|
·
|
Accounting and audit fees:
The increase in 2008 over 2007 of $34,063 was principally due to
increased auditor involvement as a result of the change to a public
company through the Mergers in May
2007.
|
|
|
·
|
Other operating contract work:
The activity in 2008 versus no prior activity reflects the 2008
start of activity for exploration toward development of operations with
respect to a CBM project in China.
|
|
|
·
|
Travel: The
increase of $101,550 in 2008 over 2007 was due to increased travel related
to possible acquisitions and financing
activities.
|
|
|
·
|
Stock-based
compensation: The increase of $1,160,148 reflects a
larger value of restricted stock and stock option awards subject to
amortization in 2008 versus 2007.
|
|
|
·
|
Impairment of
assets: The activity in 2008 versus no activity in prior
years reflects the 2008 write-down of the notes receivable relative to the
minority interest investment in a China subsidiary company that has had no
revenues to date.
|
- 38
-
Year 2007 versus Year
2006
|
|
·
|
Salaries: The increase
in 2007 over 2006 of $836,575 resulted from the increase in employees from
two at the end of 2006 to nine (including the officers) at the end of 2007
and the change of two Company officers from consultants in 2006 to
salaried employees in late 2006 and early
2007.
|
|
|
·
|
Consulting: The
increase in 2007 over 2006 of $32,852 was due to an increase of $146,732
in non-cash fees paid as equity, principally from increased activity
involving potential oil and gas opportunities; partially offset by a
decrease of $113,880 in cash fees primarily due to change of two Company
officers from consultants to salaried employees in late 2006 and early
2007.
|
|
|
·
|
Legal and professional
fees: The increase in 2007 over 2006 of $275,177 was largely due to
the legal requirements to complete the Mergers, preparation of government
filings and the general increase in the Company’s
activities.
|
|
|
·
|
Accounting and audit fees:
The increase in 2007 over 2006 of $104,681 was due to the increased
requirements for SEC filings subsequent to the Merger in May
2007.
|
|
|
·
|
Travel: The increase in
2007 over 2006 of $55,717 was due to increased travel to China by the
Company’s officers and technical staff to review potential oil and gas
opportunities as well as establishing a permanent Company office in
Beijing in August 2007.
|
|
|
·
|
Stock-based
compensation: The increase in 2007 over 2006 of $166,377 was due to
additional awards in 2007 and a full year’s expense for 2006 awards in
2007 versus three months expense in
2006.
|
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Inflation
It is the
opinion of the Company that inflation has not had a material effect on its
operations.
Tabular
Disclosure of Contractual Obligations
The
following table summarizes the Company’s significant contractual
obligations:
|
Payments
Due By Period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||||||
|
Operating
Lease Obligations
|
$ | 156,584 | $ | 98,284 | $ | 58,300 | $ | - | $ | - | ||||||||||
Critical
Accounting Policies and Estimates
The
discussion and analysis of our plan and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect our reported results of operations and the
amount of reported assets, liabilities and proved oil and gas reserves. Some
accounting policies involve judgments and uncertainties to such an extent that
there is reasonable likelihood that materially different amounts could have been
reported under different conditions, or if different assumptions had been used.
Actual results and timing may differ from the estimates and assumptions used in
the preparation of our consolidated financial statements. Described below are
the most significant policies we apply, or intend to apply, in preparing our
consolidated financial statements, some of which are subject to
alternative
- 39
-
treatments
under accounting principles generally accepted in the United States of America.
We also describe the most significant estimates and assumptions we make in
applying these policies.
Oil
and Gas Activities
Accounting
for oil and gas activities is subject to special, unique rules. Two generally
accepted methods of accounting for oil and gas activities are available —
successful efforts and full cost. The most significant differences between these
two methods are the treatment of exploration costs and the manner in which the
carrying value of oil and gas properties are amortized and evaluated for
impairment. The successful efforts method requires exploration costs to be
expensed as they are incurred while the full cost method provides for the
capitalization of these costs. Both methods generally provide for the periodic
amortization of capitalized costs based on proved reserve quantities. Impairment
of oil and gas properties under the successful efforts method is based on an
evaluation of the carrying value of individual oil and gas properties against
their estimated fair value, while impairment under the full cost method requires
an evaluation of the carrying value of oil and gas properties included in a cost
center against the net present value of future cash flows from the related
proved reserves, using period-end prices and costs and a 10% discount
rate.
The
Company at present reports no proved oil and gas reserves as we are a
development stage company. Management, in making investment decisions
regarding the acquisition and development of oil and gas properties, performs
economic and technical evaluations including assessment of commerciality based
upon estimates and assumptions that it believes are reasonable. In
order to recognize new proved reserves, the positive technical assessment of
producibility, our financial capability for development, and management
commitment for capital expenditures must be demonstrated to ensure that the
reserves will be developed and are producible under existing economic and
operating conditions.
Successful
Efforts Method
We use
the successful efforts method of accounting for our oil and gas activities.
Under this method, costs of drilling successful wells are capitalized. Costs of
drilling exploratory wells not placed into production are charged to expense.
Geological and geophysical costs are charged to expense as
incurred.
Depreciation,
Depletion and Amortization
The
quantities of estimated proved oil and gas reserves are expected to be a
significant component of our calculation of future depreciation and depletion
expense related to oil and gas properties and equipment, and revisions in such
estimates may alter the rate of future expense. Holding all other factors
constant, if reserves are revised upward, earnings would increase due to lower
depletion expense. Likewise, if reserves are revised downward, earnings would
decrease due to higher depletion expense.
Future
Development and Abandonment Costs
Future
development costs include costs incurred to obtain access to proved reserves
such as drilling costs and the installation of production equipment. Future
abandonment costs include costs to dismantle and relocate or dispose of our
production platforms, gathering systems and related structures and restoration
costs of land and seabed. Our operators develop estimates of these costs for
each of our properties based upon their geographic location, type of production
structure, well depth, currently available procedures and ongoing 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 judgments that are subject to future revisions
based upon numerous factors, including changing technology and the political and
regulatory environment. We review our assumptions and estimates of future
development and future abandonment costs on an annual basis.
The
accounting for future abandonment costs is based upon SFAS No. 143, “Accounting
for Asset Retirement Obligations.” This standard requires that a liability for
the discounted fair value of an asset retirement obligation be recorded in the
period in which it is incurred and the corresponding cost capitalized by
increasing the carrying amount of the related long-lived asset. The liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Holding all other factors
constant, if our estimate of future abandonment and development costs is revised
upward, earnings would decrease due to higher depreciation, depletion and
amortization (“DD&A”) expense. Likewise, if these estimates are revised
downward, earnings would increase due to lower DD&A expense.
- 40
-
Consolidation
The
financial statements include Pacific Asia Petroleum, Inc. (successor company to
IMPCO) and its majority owned direct and indirect subsidiaries in the respective
periods. Periods prior to the Merger date of May 7, 2007 included in
the 2007 and prior year financial statements include only the results of IMPCO
and IMPCO’s subsidiaries.
Allocation
of Purchase Price in Business Combinations
As part
of our business strategy, we actively pursue the acquisition of oil and gas
properties. The purchase price in an acquisition is allocated to the assets
acquired and liabilities assumed based on their relative fair values as of the
acquisition date, which may occur many months after the announcement date.
Therefore, while the consideration to be paid may be fixed, the fair value of
the assets acquired and liabilities assumed is subject to change during the
period between the announcement date and the acquisition date. Our most
significant estimates in our allocation typically relate to the value assigned
to future recoverable oil and gas reserves and unproved properties. As the
allocation of the purchase price is subject to significant estimates and
subjective judgments, the accuracy of this assessment is inherently
uncertain.
Revenue
Recognition
We will
recognize revenue when crude oil and natural gas quantities are delivered to or
collected by the respective purchaser. As of December 31, 2008, we did not have
recordable sales. Title to the produced quantities transfers to the purchaser at
the time the purchaser collects or receives the quantities. Prices for such
production will be defined in sales contracts.
Short-Term
Investments
The
Company applies the provisions of SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” Debt and equity
securities are classified into one of three categories: held-to-maturity,
available-for-sale, or trading. Securities may be classified as
held-to-maturity only if the Company has the positive intent and ability to hold
them to maturity. Trading securities are defined as those bought and
held principally for the purpose of selling them in the near
term. All other securities are classified as
available-for-sale. Declines in the fair value of held-to-maturity
and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses. The
Company’s short-term investments are classified as
available-for-sale.
Foreign
Currency Translation
The
Company uses both the U.S. dollar and local currency as functional currencies
based upon the principal currency of operation of each subsidiary. The
functional currency for operations in China (other than Hong Kong) is the local
currency. The Company at present expects that the future revenues
from its operations in China will be in local currency. Balance sheet
translation effects from translating local functional currency into U.S. dollars
(the reporting currency) are recorded directly to other comprehensive income in
accordance with SFAS No.130, “Reporting Comprehensive Income.”
Stock-based
Compensation
The
Company accounts for stock-based compensation in accordance with SFAS No.
123(R), “Share-Based Payment.” The Company made no stock-based
compensation grants before 2006, and therefore the transition provisions of SFAS
No. 123 (R) pertaining to pre-2006 grants do not apply. The Company
values its stock options awarded on or after January 1, 2006 at the fair value
at grant date using the Black-Scholes option pricing
model. Compensation expense for stock options and restricted stock
awards is recorded over the vesting periods on a straight line basis for each
award group. Compensation paid in stock fully vested at award date is valued at
fair value at that date and charged to expense at that time.
- 41
-
Recently
Issued Accounting Standards Not Yet Adopted
Information
on accounting standards not yet adopted is contained in Note 5 to the
consolidated financial statements in this Form 10-K.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company may be exposed to certain market risks related to changes in
foreign currency exchange and interest rates.
Foreign
Currency Exchange Risk
In
addition to the U.S. dollar, the Company conducts its business in RMB and
therefore is subject to foreign currency exchange risk on cash flows related to
expenses and investing transactions. The Company does not expect to generate
meaningful revenue from activities in China prior to 2010. Prior to July 2005,
the exchange rate between the U.S. dollar and the Chinese RMB was fixed, and,
consequently, there were no fluctuations in the value of goods and services we
purchased in China because of currency exchange.
In July
2005, the Chinese government began to permit the RMB to float against the U.S.
dollar. All of our costs to operate our Chinese office and operations are paid
in RMB. Our exploration costs in China may be incurred under contracts
denominated in RMB or U.S. dollars. To date the Company has not
engaged in hedging activities to hedge our foreign currency exposure. In the
future, the Company may enter into hedging instruments to manage its foreign
currency exchange risk or continue to be subject to exchange rate
risk.
The
Company currently holds notes carried at $386,415 as of December 31, 2008 after
impairment adjustment. The notes are denominated and receivable in RMB and are
held by Inner Mongolia Production Company (HK) Limited, which recognizes
appreciation and depreciation of the RMB note. A 20%
appreciation of the RMB would result in a gain of approximately
$77,000. A 20% decline of the RMB would result in a loss of
approximately $77,000.
Interest
Rate Risk
See Note
6 to the financial statements in Part II, Item 8. “Financial Statements and
Supplementary Data” for information regarding our financial
instruments. At December 31, 2008 and 2007 the Company had no
investments in financial instruments subject to interest rate risk affecting
fair value. Changes in interest rates on these short-term securities will result
in less interest income if interest rates decline, but no loss of
principal.
- 42
-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
following index lists the financial statements of Pacific Asia Petroleum, Inc.
that are included in this report:
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm
|
44 | |||
|
Financial
Statements:
|
||||
|
Consolidated
Balance Sheets –
|
||||
|
December
31, 2008 and 2007
|
45 | |||
|
Consolidated
Statements of Operations –
|
||||
|
For
the years ended December 31, 2008, 2007 and 2006, and for the period from
inception (August 25, 2005) through December 31, 2008
|
46 | |||
|
Consolidated
Statement of Stockholders’ Equity (Deficiency) –
|
||||
|
For
the period from inception (August 25, 2005) through December 31,
2008
|
47 | |||
|
Consolidated
Statement of Cash Flows –
|
||||
|
For
the years ended December 31, 2008, 2007 and 2006, and the period from
inception (August 25, 2005) through December 31, 2008
|
48 | |||
|
Notes
to Consolidated Financial Statements
|
49 | |||
|
|
Schedules
other than those listed above have been omitted since they are either not
required, are not applicable or the required information is shown in the
financial statements or the related
notes.
|
- 43
-
|
|
RBSM
LLP
|
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
Board of
Directors
Pacific
Asia Petroleum, Inc.
Hartsdale,
NY
We
have audited the accompanying consolidated balance sheets of Pacific Asia
Petroleum, Inc. and its subsidiaries (the “Company”) (a development stage
company) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 2008 and the period August 25, 2005
(date of inception) through December 31, 2008. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based upon our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Asia Petroleum, Inc.
and its subsidiaries (a development stage company) as of December 31, 2008 and
2007 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2008 and the period August 25, 2005 (date
of inception) through December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated February 27, 2009
expressed an unqualified opinion on the Company’s internal control over
financial reporting.
/s/
RBSM LLP
New
York, New York
February
27, 2009
- 44
-
|
AUDITED
FINANCIAL STATEMENTS
|
Pacific
Asia Petroleum, Inc. and Subsidiaries
|
|||||||
|
(A
Development Stage Company)
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
As
of December 31,
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 10,515,657 | $ | 2,208,969 | ||||
|
Short-term
investments (note 6)
|
1,260,000 | 11,200,000 | ||||||
|
Income
tax refunds receivable
|
8,500 | - | ||||||
|
Prepaid
expenses
|
90,657 | 46,247 | ||||||
|
Deposits
|
37,556 | 22,954 | ||||||
|
Advances
|
383 | 2,758 | ||||||
|
Total
current assets
|
11,912,753 | 13,480,928 | ||||||
|
Non-current
assets
|
||||||||
|
Property,
plant and equipment at cost - (note 7) (net of accumulated
depreciation:
|
||||||||
|
2008-
$88,577: 2007- $20,779)
|
569,303 | 285,027 | ||||||
|
Intangible
assets
|
384 | 384 | ||||||
|
Long-term
advances (note 6)
|
386,415 | 534,530 | ||||||
|
Deferred
charges
|
1,250,234 | 3,156,058 | ||||||
|
Total
Assets
|
$ | 14,119,089 | $ | 17,456,927 | ||||
|
Liabilities and
Stockholders' Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 25,446 | $ | 2,739 | ||||
|
Income
taxes payable
|
5,148 | 38,791 | ||||||
|
Accrued
contracting and development fees
|
294,020 | - | ||||||
|
Accrued
bonuses and vacations
|
158,473 | 31,366 | ||||||
|
Accrued
and other liabilities
|
205,764 | 91,338 | ||||||
|
Total
current liabilities
|
688,851 | 164,234 | ||||||
|
Minority
interest in subsidiaries
|
386,415 | 395,094 | ||||||
|
Stockholders'
equity
|
||||||||
|
Common
stock:
|
||||||||
|
Authorized
- 300,000,000 shares at $.001 par value; Issued and outstanding
-
|
||||||||
|
40,061,785
as of December 31, 2008; 39,931,109 as of December 31,
2007
|
40,062 | 39,931 | ||||||
|
Preferred
stock:
|
||||||||
|
Authorized
- 50,000,000 shares at $.001 par value;
|
||||||||
|
Issued
- 23,708,952 as of December 31, 2008 and December 31, 2007
|
||||||||
|
Outstanding
- none as of December 31, 2008 and December 31, 2007
|
- | - | ||||||
|
Paid-in
capital
|
21,741,965 | 20,251,022 | ||||||
|
Other
comprehensive income - currency translation adjustment
|
229,860 | 128,061 | ||||||
|
Deficit
accumulated during the development stage
|
(8,968,064 | ) | (3,521,415 | ) | ||||
|
Total
stockholders' equity
|
13,043,823 | 16,897,599 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 14,119,089 | $ | 17,456,927 | ||||
|
The
accompanying notes to the consolidated financial statements are an
integral part of this statement.
|
||||||||
- 45
-
| AUDITED FINANCIAL STATEMENTS | Pacific Asia Petroleum, Inc. and Subsidiaries | |||||||||||||||
| (A Development Stage Company) | ||||||||||||||||
| Consolidated Statement of Operations | ||||||||||||||||
| For the years ended December 31, 2008, 2007 and 2006, and for the period from inception (August 25, 2005) to December 31, 2008 | ||||||||||||||||
|
For
the period
|
||||||||||||||||
|
from
inception
|
||||||||||||||||
|
(August
25, 2005)
|
||||||||||||||||
|
through
|
||||||||||||||||
|
2008
|
2007
|
2006
|
December 31, 2008
|
|||||||||||||
|
Operating
Expenses
|
||||||||||||||||
|
Depreciation
|
$ | 66,769 | $ | 18,850 | $ | 1,740 | $ | 87,359 | ||||||||
|
All
other operating expenses
|
5,717,051 | 2,963,397 | 1,185,273 | 9,917,065 | ||||||||||||
|
Total
Operating Expenses
|
(5,783,820 | ) | (2,982,247 | ) | (1,187,013 | ) | (10,004,424 | ) | ||||||||
|
Operating
Loss
|
(5,783,820 | ) | (2,982,247 | ) | (1,187,013 | ) | (10,004,424 | ) | ||||||||
|
Other Income
(Expense)
|
||||||||||||||||
|
Interest
Income
|
323,762 | 618,089 | 99,406 | 1,041,257 | ||||||||||||
|
Other
Income
|
14,695 | 12,937 | - | 27,632 | ||||||||||||
|
Other
Expense
|
(172 | ) | (714 | ) | - | (886 | ) | |||||||||
|
Total
Other Income
|
338,285 | 630,312 | 99,406 | 1,068,003 | ||||||||||||
|
Net
loss before income taxes and
|
||||||||||||||||
|
minority
interest
|
(5,445,535 | ) | (2,351,935 | ) | (1,087,607 | ) | (8,936,421 | ) | ||||||||
|
Income
tax (expense) benefit
|
(13,082 | ) | (38,826 | ) | - | (51,908 | ) | |||||||||
|
Net
loss before minority interest
|
(5,458,617 | ) | (2,390,761 | ) | (1,087,607 | ) | (8,988,329 | ) | ||||||||
|
Minority
interest
|
11,968 | 7,077 | 1,220 | 20,265 | ||||||||||||
|
Net
Loss
|
(5,446,649 | ) | (2,383,684 | ) | (1,086,387 | ) | (8,968,064 | ) | ||||||||
|
Other
Comprehensive Income (Loss),
|
||||||||||||||||
|
Net
of Tax:
|
||||||||||||||||
|
Foreign
currency translation adjustment
|
101,799 | 108,833 | 19,228 | 229,860 | ||||||||||||
|
Comprehensive
income (Loss)
|
$ | (5,344,850 | ) | $ | (2,274,851 | ) | $ | (1,067,159 | ) | $ | (8,738,204 | ) | ||||
|
Net
Loss per Share of Common Stock -
|
||||||||||||||||
|
Basic
and Diluted
|
$ | (0.14 | ) | $ | (0.08 | ) | $ | (0.10 | ) | |||||||
|
Weighted
Average Number of Shares Outstanding
|
39,992,512 | 31,564,121 | 11,248,938 | |||||||||||||
| The accompanying notes to the consolidated financial statements are an integral part of this statement. | ||||||||||||||||
- 46
-
|
AUDITED
FINANCIAL STATEMENTS
|
Pacific
Asia Petroleum, Inc. and Subsidiaries
|
|
(A
Development Stage Company)
|
|
|
Consolidated
Statement of Stockholders' Equity (Deficiency)
|
For
the period from inception (August 25, 2005) to December 31,
2008
|
|
Other
|
||||||||||||||||||||||||||||||||||||
|
Comprehensive
|
Deficit
|
|||||||||||||||||||||||||||||||||||
|
No.
of
|
No.
of
|
Income
(Loss)-
|
Accumulated
|
Total
|
||||||||||||||||||||||||||||||||
|
Common
|
Preferred
|
Foreign
|
During
the
|
Stockholders'
|
||||||||||||||||||||||||||||||||
|
Shares
|
Common
|
Subscriptions
|
Shares
|
Preferred
|
Paid-in
|
Currency
|
Development
|
Equity
|
||||||||||||||||||||||||||||
|
$.001
par value
|
Stock
|
Receivable
|
$.001
par value
|
Stock
|
Capital
|
Translation
|
Stage
|
(Deficiency)
|
||||||||||||||||||||||||||||
|
Balance
- August 25, 2005
|
- | $ | - | $ | - | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
|
Issued
for cash
|
1,852,320 | 1,852 | - | - | - | 10,148 | - | - | 12,000 | |||||||||||||||||||||||||||
|
Subscriptions
|
3,451,680 | 3,452 | (28,000 | ) | - | - | 24,548 | - | - | - | ||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (51,344 | ) | (51,344 | ) | |||||||||||||||||||||||||
|
Balance
- December 31, 2005
|
5,304,000 | 5,304 | (28,000 | ) | - | - | 34,696 | - | (51,344 | ) | (39,344 | ) | ||||||||||||||||||||||||
|
Subscriptions
paid
|
- | - | 28,000 | - | - | - | - | - | 28,000 | |||||||||||||||||||||||||||
|
Issued
for fees and services
|
- | - | - | 1,829,421 | 1,829 | 195,776 | - | - | 197,605 | |||||||||||||||||||||||||||
|
Issued
for cash
|
- | - | - | 8,161,802 | 8,162 | 4,215,262 | - | - | 4,223,424 | |||||||||||||||||||||||||||
|
Amortization
of options fair value
|
- | - | - | - | - | 29,065 | - | - | 29,065 | |||||||||||||||||||||||||||
|
Currency
translation
|
- | - | - | - | - | - | 19,228 | - | 19,228 | |||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (1,086,387 | ) | (1,086,387 | ) | |||||||||||||||||||||||||
|
Balance
- December 31, 2006
|
5,304,000 | 5,304 | - | 9,991,223 | 9,991 | 4,474,799 | 19,228 | (1,137,731 | ) | 3,371,591 | ||||||||||||||||||||||||||
|
Issued
for services - pre-merger
|
600,032 | 600 | - | 117,729 | 118 | 334,594 | - | - | 335,312 | |||||||||||||||||||||||||||
|
Shares
retained by Pacific Asia Petroleum original
|
||||||||||||||||||||||||||||||||||||
|
stockholders
in merger - 5/7/07
|
468,125 | 468 | - | - | - | 83,323 | - | - | 83,791 | |||||||||||||||||||||||||||
|
Shares
issued to ADS members in merger - 5/7/07
|
9,850,000 | 9,850 | - | 13,600,000 | 13,600 | 15,453,957 | - | - | 15,477,407 | |||||||||||||||||||||||||||
|
Post-merger
acquisition costs and adjustments
|
- | - | - | - | - | (291,093 | ) | - | - | (291,093 | ) | |||||||||||||||||||||||||
|
Automatic
conversion of Preferred Shares - 6/5/07
|
23,708,952 | 23,709 | - | (23,708,952 | ) | (23,709 | ) | - | - | - | - | |||||||||||||||||||||||||
|
Issued
for services, compensation cost of stock options
|
||||||||||||||||||||||||||||||||||||
|
and
restricted stock
|
- | - | - | - | - | 195,442 | - | - | 195,442 | |||||||||||||||||||||||||||
|
Currency
translation
|
- | - | - | - | - | - | 108,833 | - | 108,833 | |||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (2,383,684 | ) | (2,383,684 | ) | |||||||||||||||||||||||||
|
Balance
- December 31, 2007
|
39,931,109 | 39,931 | - | - | - | 20,251,022 | 128,061 | (3,521,415 | ) | 16,897,599 | ||||||||||||||||||||||||||
|
Issued
on exercise of warrants
|
79,671 | 80 | - | - | - | (83 | ) | - | - | (3 | ) | |||||||||||||||||||||||||
|
Vesting
of restricted stock
|
76,400 | 76 | - | - | - | (76 | ) | - | - | - | ||||||||||||||||||||||||||
|
Cancellation
of vested restricted stock
|
(10,400 | ) | (10 | ) | - | - | - | 10 | - | - | - | |||||||||||||||||||||||||
|
Compensation
cost of stock options and restricted stock
|
- | - | - | - | - | 1,355,590 | - | - | 1,355,590 | |||||||||||||||||||||||||||
|
Issued
for services
|
15,000 | 15 | - | - | - | 137,985 | - | - | 138,000 | |||||||||||||||||||||||||||
|
Issued
for acquisition of Navitas Corporation
|
450,005 | 450 | - | - | - | 8,176,141 | - | - | 8,176,591 | |||||||||||||||||||||||||||
|
Acquired
on acquisition of Navitas Corporation
|
(480,000 | ) | (480 | ) | - | - | - | (8,178,624 | ) | - | - | (8,179,104 | ) | |||||||||||||||||||||||
|
Currency
translation
|
- | - | - | - | - | - | 101,799 | - | 101,799 | |||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (5,446,649 | ) | (5,446,649 | ) | |||||||||||||||||||||||||
|
Balance
- December 31, 2008
|
40,061,785 | $ | 40,062 | $ | - | - | $ | - | $ | 21,741,965 | $ | 229,860 | $ | (8,968,064 | ) | $ | 13,043,823 | |||||||||||||||||||
|
The
accompanying notes to the consolidated financial statements are an
integral part of this statement.
|
|||||||||
- 47
-
|
AUDITED
FINANCIAL STATEMENTS
|
Pacific
Asia Petroleum, Inc. and Subsidiaries
|
|||||||||||||||
|
(A
Development Stage Company)
|
||||||||||||||||
|
Consolidated
Statement of Cash Flows
|
For
the years ended December 31, 2008, 2007 and 2006,
|
|||||||||||||||
|
and
for the period from inception (August 25, 2005) to December 31,
2008
|
||||||||||||||||
|
For
the period
|
||||||||||||||||
|
from
inception
|
||||||||||||||||
|
(August
25, 2005)
|
||||||||||||||||
|
through
|
||||||||||||||||
|
2008
|
2007
|
2006
|
December 31, 2008
|
|||||||||||||
|
Cash flows from
operating activities
|
||||||||||||||||
|
Net
loss
|
$ | (5,446,649 | ) | $ | (2,383,684 | ) | $ | (1,086,387 | ) | $ | (8,968,064 | ) | ||||
|
Adjustments
to reconcile net loss to cash
|
||||||||||||||||
|
used
in operating activities:
|
||||||||||||||||
|
Interest
income on long-term advances
|
(88,440 | ) | (90,602 | ) | (9,945 | ) | (188,987 | ) | ||||||||
|
Currency
transaction loss
|
41,047 | 43,444 | - | 84,491 | ||||||||||||
|
Stock
and options compensation expense
|
1,493,590 | 530,754 | 226,670 | 2,251,014 | ||||||||||||
|
Minority
interest in net loss
|
(11,969 | ) | (7,077 | ) | (1,220 | ) | (20,266 | ) | ||||||||
|
Depreciation
expense
|
66,769 | 18,850 | 1,740 | 87,359 | ||||||||||||
|
Impairment
of assets adjustment
|
273,618 | - | - | 273,618 | ||||||||||||
|
Changes
in current assets and current
|
||||||||||||||||
|
liabilities:
|
||||||||||||||||
|
(Increase)
in income tax refunds receivable
|
(8,500 | ) | - | - | (8,500 | ) | ||||||||||
|
(Increase)
decrease in advances
|
2,375 | (2,758 | ) | - | (383 | ) | ||||||||||
|
(Increase)
in deposits
|
(14,602 | ) | (11,456 | ) | (11,498 | ) | (37,556 | ) | ||||||||
|
(Increase)
in prepaid expenses
|
(44,410 | ) | (14,761 | ) | (31,486 | ) | (90,657 | ) | ||||||||
|
Increase
(decrease) in accounts payable
|
22,707 | (55,638 | ) | 43,226 | 10,295 | |||||||||||
|
Increase
(decrease) in income tax and accrued liabilities
|
506,447 | (87,959 | ) | 54,876 | 514,637 | |||||||||||
|
Net
cash used in operating activities
|
(3,208,017 | ) | (2,060,887 | ) | (814,024 | ) | (6,092,999 | ) | ||||||||
|
Cash flows from
investing activities
|
||||||||||||||||
|
Net
sales (purchases) of short-term investments
|
9,940,000 | (9,800,000 | ) | (1,400,000 | ) | (1,260,000 | ) | |||||||||
|
(Increase)
decrease in deferred charges
|
1,905,824 | (3,156,058 | ) | - | (1,250,234 | ) | ||||||||||
|
Additions
to property, plant and equipment
|
(334,319 | ) | (84,118 | ) | (199,867 | ) | (618,304 | ) | ||||||||
|
Net
cash provided by (used in) investing activities
|
11,511,505 | (13,040,176 | ) | (1,599,867 | ) | (3,128,538 | ) | |||||||||
|
Cash flows from
financing activities
|
||||||||||||||||
|
Payment
and proceeds of notes payable
|
- | (5,000 | ) | (100,000 | ) | (5,000 | ) | |||||||||
|
Increase
in minority interest investment
|
- | 40,020 | 359,410 | 399,430 | ||||||||||||
|
Increase
in long-term advances to minority shareholder
|
- | - | (400,507 | ) | (400,507 | ) | ||||||||||
|
Decrease
in subscriptions receivable
|
- | - | 28,000 | 28,000 | ||||||||||||
|
Issuance
of common stock net of issuance costs
|
(2,513 | ) | 15,385,982 | 4,275,623 | 19,671,092 | |||||||||||
|
Net
cash provided by (used in) financing activities
|
(2,513 | ) | 15,421,002 | 4,162,526 | 19,693,015 | |||||||||||
|
Effect
of exchange rate changes on cash
|
5,713 | 21,656 | 16,810 | 44,179 | ||||||||||||
|
Net
increase in cash and cash equivalents
|
8,306,688 | 341,595 | 1,765,445 | 10,515,657 | ||||||||||||
|
Cash
and cash equivalents at beginning of period
|
2,208,969 | 1,867,374 | 101,929 | - | ||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 10,515,657 | $ | 2,208,969 | $ | 1,867,374 | $ | 10,515,657 | ||||||||
|
Supplemental
disclosures of cash flow information
|
||||||||||||||||
|
Interest
paid
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Income
taxes paid
|
$ | 48,832 | $ | 35 | $ | - | $ | 48,867 | ||||||||
|
Supplemental
schedule of non-cash investing and financing activities
|
||||||||||||||||
|
Common
and preferred stock issued for services and fees
|
$ | 138,000 | $ | 335,312 | $ | 197,605 | $ | 670,917 | ||||||||
|
Issuance
costs paid as warrants issued
|
$ | - | $ | 868,238 | $ | 61,239 | $ | 929,477 | ||||||||
|
Increase
in fixed assets accrued in liabilities
|
$ | - | $ | 4,537 | $ | 7,966 | $ | - | ||||||||
|
Increase
in issuance costs accrued in liabilities
|
$ | - | $ | - | $ | 52,199 | $ | - | ||||||||
|
Warrants
exercised for common stock
|
$ | (3 | ) | $ | - | $ | - | $ | (3 | ) | ||||||
|
The
accompanying notes to consolidated financial statements are an integral
part of this statement.
|
|||||||||
- 48
-
NOTE
1. --- DESCRIPTION OF BUSINESS
Pacific
Asia Petroleum, Inc. (the “Company”) is the successor company from a reverse
merger involving the former Pacific East Advisors, Inc. and other entities on
May 7, 2007. The details of this merger are discussed in Note 2. –
Merger and Recapitalization.
The
Company’s activities commenced in 2005 through Inner Mongolia Production
Company, LLC (“IMPCO”), a limited liability company formed under New York State
law on August 25, 2005. The Company’s business plan is to engage in
the business of oil and gas exploration, development and production in Asia and
the Pacific Rim countries.
The
Company has entered into a production sharing contract to explore for coalbed
methane resources in China.
In
November 2006, the Company entered into an Agreement for Joint Cooperation
(the “Cooperation Agreement”), with China United Coalbed Methane Co. (“CUCBM”),
with respect to coalbed methane (“CBM”) production covering an area in the
Shanxi Province of China referred to as the Zijinshan Block (the “CUCBM Contract
Area”). On October 26, 2007 Pacific Asia Petroleum, Ltd. (“PAPL”), a
wholly-owned subsidiary of the Company, entered into a production sharing
contract (“PSC”) with CUCBM covering the CUCBM Contract Area. During
the development and production period, CUCBM will have the right to acquire a
40% participating interest and work jointly to develop and produce CBM under the
PSC. The PSC has a term of 30 years and was approved by the Ministry
of Commerce of China in 2008.
The
Company is pursuing an oil development opportunity in Inner
Mongolia.
In 2006 a
subsidiary of the Company entered into a joint development contract with Chifeng
Zhongtong Oil and Natural Gas Co., Ltd., (“Chifeng”), a company incorporated in
Inner Mongolia, China. Pursuant to the Chifeng Agreement, drilling
operations commenced in October 2006. The first well drilled by
Chifeng discovered oil and has been completed as a producing well, but
production operations were suspended in 2007 pending receipt of a production
license from the Chinese government. The Company is pursuing a combination of
strategies to have such production license awarded, including a possible
renegotiation of the Chifeng Agreement with the goal of increasing the financial
incentives to all the parties involved, and the Company is also pursuing a
strategy focused on entering into negotiations with respect to an opportunity to
acquire the existing production from the 22 sq. km. Kerqing Oilfield. The
acquisition of the Kerqing Oilfield could significantly enhance the Chifeng
Agreement in scale and value. If this Production License is not
issued, the opportunities to drill additional long-term production wells under
the contract, including future production from this first well, will be at
risk. No revenue or related depletion expense have been recognized to
date due to uncertainty of realization of the revenue until a permanent
production license is obtained.
The
Company has agreed to purchase exploration, development and production
opportunities involving coalbed methane areas in China.
In
September 2007, the Company entered into four asset transfer agreements
(the “Chevron Agreements”) with ChevronTexaco China Energy Company
(“ChevronTexaco”) for the purchase by the Company of participating interests
held by ChevronTexaco in production sharing contracts in respect of four CBM and
tight gas sand resource blocks located in the Shanxi Province of China with an
aggregate contract area of approximately 1.5 million acres. The aggregate
base purchase price for all of the participating interests was $61,000,000,
subject to certain income and expense adjustments prior to closing, adjusted in
April 2008 to $50,000,000. The Company elected to terminate three of the four
agreements in December 2008. The remaining contract is for the acquisition of
ChevronTexaco’s interest in the Baode production sharing contract area for CBM.
The purchase price of $2 million, which is subject to upward and downward
adjustment based on ChevronTexaco’s net cash flows related to the property from
June 30, 2007. The Company has paid to ChevronTexaco a $650,000 deposit toward
the purchase price of the remaining agreement, which is refundable if the
agreement is terminated under certain conditions. The closing of the
asset
- 49
-
transfer
is contingent upon a number of conditions precedent, including the approval of
certain related agreements by the PRC Ministry of Land and Natural Resources,
and the assignment of ChevronTexaco’s participating interest by the PRC Ministry
of Commerce.
In March
2008, the Company entered into an Asset Transfer Agreement (the “ATA”) with BHP
Billiton World Exploration Inc. (“BHP”) for the purchase by the Company of BHP’s
interest in the Baode production sharing contract area (the “Baode PSC”) in the
Shanxi Province of China with respect with respect to CBM. The purchase price is
$2,000,000, which subject to upward and downward adjustment based on BHP’s net
cash flows related to the property from April 1, 2008. The closing is
contingent upon a number of conditions precedent, including approval of certain
related agreements by the PRC Ministry of Land and Natural Resources, and the
assignment of BHP’s participating interest by the PRC Ministry of Commerce. The
Company has paid BHP a deposit of $500,000 toward the purchase price, which is
refundable under certain conditions. Upon closing of both this contract and the
above-referenced ChevronTexaco contract, the Company will acquire a 100%
interest in the Baode PSC.
The
Company is pursuing other oil exploration, production, development and related
opportunities in China.
The
Company in September 2008 entered into an Agreement on Cooperation (the “AOC”)
with Well Lead Group Limited (“Well Lead”) with regard to negotiating to
purchase indirect participating interests in two oil fields in Heilongjiang
Province in the People’s Republic of China. Since that time, further
negotiations have occurred that expanded the scope of the potential acquisition
to include other interests and other related parties. The parties
have verbally agreed upon a revised purchase transaction that contemplates the
Company obtaining a 51% participating interest in Well Lead and certain of its
related entities, including interests in a number of producing oilfields in
China, a technology company involved with the successful enhancement of
production in these oilfields, and related venture companies. The parties are
now conducting further due diligence with the objective of achieving a closing
in the first quarter of 2009.
The
Company is pursuing a gas distribution opportunity.
The
Company entered into a Letter of Intent in November 2008 to possibly acquire a
51% ownership interest in the Handan Changyuan Gas Co., Ltd. (“HCG”) from the
Beijing Tai He Sheng Ye Investment Company Limited. HCG owns and operates gas
distribution assets in and around Handan City, China. HCG was founded in May
2001, and is the primary gas distributer in Handan City, which is located 250
miles south of Beijing, in the Hebei Province of the People’s Republic of China.
HCG has over 300,000 customers and owns 35 miles of a main gas pipeline, and
more than 450 miles of delivery gas pipelines, with a delivery capacity of 300
million cubic meters per day. HCG also owns an 80,000 sq. ft. field
distribution facility. Gas is being supplied by Sinopec and PetroChina from two
separate sources. Revenues for HCG have been increasing at an average
rate of over 40% per year over the last 3 years. The Company will continue its
final legal and financial due diligence, along with identifying a partner to
join the Company, with an objective of entering into a mutually agreed final
sale and purchase agreement by the end of the second quarter of
2009.
The
Company’s business plan is concentrated in the People’s Republic of
China.
As set
forth above, the Company’s business plan is concentrated in the People’s
Republic of China. The recent history of foreign investment in the
PRC began with oil companies investing in China in the 1980s. This activity has
continued and grown. The Company believes that any restriction on foreign
investment activity in China is unlikely to significantly hamper our plans.
Although the Company presently has significant capital that has not yet
been deployed in China, it is the Company’s intention to deploy almost all of
its capital there.
NOTE
2. --- MERGER AND RECAPITALIZATION
On May 7,
2007, Pacific East Advisors, Inc. (“PEA”), a publicly traded
company, merged with Inner Mongolia Production Company LLC (“IMPCO”)
and Advanced Drilling Services LLC (“ADS”) via merger subsidiaries of PEA
created for this transaction. The transaction has been accounted for
as a reverse merger, with IMPCO being the acquiring company on the basis that
IMPCO’s senior management became the entire senior management of
the
- 50
-
merged
entity and there was a change of control of PEA. In accordance with SFAS No.
141, “Accounting for Business Combinations,” IMPCO was the acquiring entity for
accounting purposes. While the transaction was accounted for using the purchase
method of accounting, in substance the transaction was a recapitalization of
IMPCO’s capital structure.
PEA
changed its name to Pacific Asia Petroleum, Inc. (the “Company”) as of the
merger date and continued the business of IMPCO under the new name following the
merger. The Company did not recognize goodwill in connection with the
transaction. From August 8, 2001 when PEA emerged from bankruptcy until the date
of the transaction, PEA was an inactive corporation with no significant assets
and liabilities.
In
connection with the merger, PEA issued 5,904,032 shares of Common Stock to
holders of IMPCO Class A Units, 10,108,952 shares of Series A Convertible
Preferred Stock to holders of IMPCO Class B Units, 9,850,000 shares of Common
Stock to holders of ADS Class A Interests, and 13,600,000 shares of Series A
Convertible Preferred Stock to holders of ADS Class B Interests in return for
all the equity units of those entities. The Series A Convertible
Preferred Stock was automatically converted into Common Shares on June 5, 2007
on a 1 to 1 basis. When issued, the Series A Convertible Preferred
Stock was entitled to receive dividends when, as and if declared by the Board of
Directors at the dividend rate (8%) in preference and priority to any
declaration or payment of any distribution on Common Stock in such calendar
year. The right to receive dividends was not cumulative and no right
to such dividends accrued. The shares of Common Stock outstanding for the
Company at September 30, 2007 were 39,931,109 including shares held by existing
owners prior to the merger. The value of the stock that was issued to
IMPCO’s equity holders was the historical cost of the Company's net tangible
assets, which did not differ materially from their fair value.
See also
Note 9. – Related Party Transactions, regarding offering costs and
merger-related expenses paid to related parties.
NOTE
3. --- BASIS OF PRESENTATION
The
Company’s financial statements are prepared on a consolidated
basis. All significant intercompany transactions and balances have
been eliminated in consolidation. The financial statements include Pacific Asia
Petroleum, Inc. (successor company to IMPCO) and its majority-owned direct and
indirect subsidiaries in the respective periods. Net income for 2007 excludes
the results of PEA and ADS prior to May 7, 2007. For year 2006 prior
data, the financial statements include only IMPCO and its subsidiaries Inner
Mongolia Production Company (HK) Limited (100% owned) and Inner Mongolia Sunrise
Petroleum JV Company (97% owned).
The
Company’s financial statements are prepared under U.S. Generally Accepted
Accounting Principles as a development stage company. Certain
reclassifications have been made in prior years’ financial statements to conform
to classifications used in the current year with respect to common stock,
preferred stock and paid-in capital.
NOTE 4. --- LIQUIDITY AND
CAPITAL RESOURCES
During
the period from its inception (August 25, 2005) to December 31, 2006, the
Company was able to fund its expenses through member equity contributions and
member loans. In 2006 the Company sold equity units in the private
market in exchange for consideration totaling $4,561,000, and received $28,000
from collection of subscriptions on equity units subscribed for in
2005. Proceeds from the equity offering were used to repay $240,000
of notes payable ($100,000 with an officer) outstanding from loans incurred in
late 2005 and the first quarter of 2006.
In May
2007, immediately prior to the merger, ADS issued equity units for cash of
$17,000,000, of which net proceeds were $15,497,773 after offering costs. The
proceeds were invested in temporary investments and were available for
operations of the Company after the merger date.
To date
the Company has incurred expenses and sustained losses and has not generated any
revenue from operations. Consequently, its operations are subject to all risks
inherent in the establishment of a new business enterprise. The
- 51
-
Company
will require significant financing in excess of its December 31, 2008 available
cash, cash equivalents and short-term investments in order to achieve its
business plan. It is not certain that this amount of financing will be
successfully obtained.
NOTE
5. --- SIGNIFICANT ACCOUNTING POLICIES
Use of
Estimates – Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, disclosures of contingencies, and reported
revenues and expenses. Actual results could vary from those
estimates.
Cash and
Cash Equivalents – Cash and cash equivalents include cash on hand, demand
deposits and short-term investments with initial maturities of three months or
less.
Short-term
Investments – The Company applies the provisions of SFAS No. 115, “Accounting
for Certain Investments in Debt and Equity Securities.” The Company classifies
debt and equity securities into one of three categories: held-to-maturity,
available-for-sale or trading. These security classifications may be modified
after acquisition only under certain specified conditions. Securities may be
classified as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All other
securities must be classified as available-for-sale. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses.
The
securities held as of December 31, 2007 were temporary investments of funds
available for operations in marketable securities with maturities in excess of
three months but having variable interest rates, thus no principal risk due to
interest rate fluctuations. The Company invested in financial
instruments having interest rate reset periods of either seven days or 28
days. If the Company decided not to accept a reset of the rate, the
bond or preferred stock investment was readily marketable for sale at original
purchase cost of par value. These investments are classified as
available-for-sale and are carried at fair value. Fair value
excluding accrued interest is equivalent to cost. In 2008 the Company
discontinued investing in this type of security and liquidated its portfolio of
these items.
Inventories
– The Company had no inventories at the balance sheet dates, and has not decided
the inventory accounting method to be utilized should inventories
occur.
Property,
Plant and Equipment – For oil and gas properties, the successful efforts method
of accounting is used. Costs of drilling successful wells are
capitalized. Costs of drilling exploratory wells not placed into
production are charged to expense. Geological and geophysical costs are charged
to expense as incurred. For depreciable tangible property, the
minimum capitalization threshold is $1,000.
Leaseholds—The
Company initially capitalizes the costs of acquiring leaseholds on productive
and prospective oil and gas properties. Capitalized leasehold costs
for productive properties are amortized as part of the cost of oil and gas
produced. Capitalized leasehold costs on both proven and unproven
properties are periodically assessed for impairment and an impairment loss is
recorded when necessary.
Depreciation,
depletion and amortization for oil and gas related property is recorded on a
unit-of-production basis. For other depreciable property,
depreciation is recorded on a straight line basis based on depreciable lives of
five years for office furniture and three years for computer related equipment.
Repairs and maintenance costs are charged to expense as incurred.
Reserves
for Uncollectible Advances and Loans – The Company reviews its advances and
loans receivable for possible impairment and records reserves for possible
losses on amounts believed to be uncollectible. This includes the
recording of impairment on debt securities classified as held-to-maturity under
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” when impairment is deemed to be other than
temporary.
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Impairment
of Long-Lived Assets – The Company reviews its long-lived assets in property,
plant and equipment for impairment in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.” Review for
impairment of long-lived assets occurs whenever changes in circumstances
indicate that the carrying amount of assets in property, plant and equipment may
not be fully recoverable. An impairment loss is recognized for assets
to be held and used when the estimated undiscounted future cash flows expected
to result from the asset including ultimate disposition are less than its
carrying amount. Impairment is measured by the excess of
carrying amount over the fair value of the assets. As of December 31, 2008, and
2007 no impairment adjustments were required.
Asset
Retirement Obligations – The Company accounts for asset retirement obligations
in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,”
as amended by FIN No. 47, “Accounting for Conditional Asset Retirement
Obligations.” The Company at December 31, 2008, and 2007 had no long-lived
assets subject to significant asset retirement obligations. The
nature or amount of any asset retirement obligations which the Company may
become subject to from its future operations is not determinable at this time
and will be assessed as significant operations and development efforts
begin.
Revenues
– The Company presently has no direct sales revenues from customers. The Company
records revenues for which it deems that collection is reasonably assured and
the earnings process is complete, which is generally when crude oil and natural
gas quantities are delivered to or collected by the respective
purchaser. Title to the produced quantities transfers to the
purchaser at the time the purchaser collects or receives the
quantities. Prices for such production will be defined in sales
contracts.
Income
Taxes – Commencing May 7, 2007, the Company became subject to taxation as a
corporation but at December 31, 2008 was in an operating loss position for U.S.
income tax purposes. Therefore, the Company does not accrue U.S. current income
taxes. Deferred income taxes are provided using the asset and liability method
for financial reporting purposes in accordance with the provisions of SFAS No.
109, “Accounting for Income Taxes.” Under this method, deferred tax assets and
liabilities are recognized for temporary differences between the tax bases of
assets and liabilities and their carrying values for financial reporting
purposes and for operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be removed or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of operations in the period
that includes the enactment date. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that the related tax benefits
will not be realized. For dates prior to May 7, 2007, the Company was an LLC
pass-through entity treated similar to a partnership for income tax purposes in
the United States, and therefore did not accrue or pay income
taxes.
Foreign
Currency Translation – The functional currency of the Hong Kong subsidiary is
the U.S. dollar. The functional currency of the China
subsidiary is the local currency. Balance sheet translation effects
from translating local functional currency into U.S. dollars (the reporting
currency) are recorded directly to other comprehensive income in accordance with
SFAS No. 130, “Reporting Comprehensive Income.”
Stock
Based Compensation – The Company accounts for stock based compensation in
accordance with SFAS No.123(R), “Share-Based Payment,” which specifies the
revised accounting alternative requirements for pre-2006 stock based
compensation grants existing at January 1, 2006 and the required accounting for
new grants starting January 1, 2006.
The
Company made no stock based compensation grants before 2006. Accordingly, the
provisions of SFAS No.123(R) pertaining to pre-2006 grants do not
apply. The Company values its stock options awarded on or after
January 1, 2006 at the fair value at grant date using the Black-Scholes option
pricing model. Compensation expense for stock options is recorded over the
vesting period on a straight line basis. Compensation paid in vested stock is
valued at the fair value at the applicable measurement date and charged to
expense at that date. Compensation paid in restricted stock is valued
at fair value at the award date and is charged to expense over the vesting
period.
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Net
Income (Loss) Per Common Share –The Company computes earnings per share under
SFAS No. 128, “Earnings Per Share.” Net loss per common share is computed by
dividing net loss by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding during the year. Dilutive
common stock equivalents consist of shares issuable upon the exercise of the
Company's stock options, unvested restricted stock, and warrants
(calculated using the treasury stock method).
New
Accounting Pronouncements – As of the balance sheet date, there were no new
accounting pronouncements not yet adopted that are expected to materially affect
the Company in the foreseeable future. However, the following
pronouncements may have some effect on the Company.
SFAS No.
141(R), “Business Combinations” — This statement includes a number of changes in
the accounting and disclosure requirements for new business combinations
occurring after its effective date. The changes in accounting
requirements include: acquisition costs will be expensed as incurred;
noncontrolling (minority) interests will be valued at fair value; acquired
contingent liabilities will be recorded at fair value; acquired research and
development costs will be recorded at fair value as an intangible asset with
indefinite life; restructuring costs will generally be expensed subsequent to
the acquisition date; and changes in deferred tax asset valuation allowances and
changes in income tax uncertainties after the acquisition date will generally
affect income tax expense. The statement is effective for new
business combinations occurring on or after the first reporting period beginning
on or after December 15, 2008.
SFAS No.
160, “Noncontrolling Interests in Consolidated Financial
Statements: An Amendment of ARB No. 51” — This statement
changes the accounting and reporting for noncontrolling (minority) interests in
subsidiaries and for deconsolidation of a subsidiary. Under the
revised basis, the noncontrolling interest will be shown in the balance sheet as
a separate line in equity instead of as a liability. In the income
statement, separate totals will be shown for consolidated net income including
noncontrolling interest, noncontrolling interest as a deduction, and
consolidated net income attributable to the controlling interest. In addition,
changes in ownership interests in a subsidiary that do not result in
deconsolidation are equity transactions if a controlling financial interest is
retained. If a subsidiary is deconsolidated, the parent company will now
recognize gain or loss to net income based on fair value of the noncontrolling
equity at that date. The statement is effective prospectively for fiscal years
and interim periods beginning on or after December 15, 2008, but upon adoption
will require restatement of prior periods to the revised bases of balance sheet
and net income presentation.
SFAS No.
162, “The Hierarchy of Generally Accepted Accounting Principles”
– This statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. This is defined as the GAAP
hierarchy. SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” As SFAS No. 162 does not
result in any specific changes to GAAP, the Company does not expect that its
effectiveness will have any material effect on the Company’s
Financial Statements.
SFAS No.
163, “Accounting for Financial Guarantee Insurance Contracts” – This statement
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deterioration occurred in an insured financial obligation. SFAS No.
163 also clarifies how Statement 60 applies to financial guarantee insurance
contracts. SFAS No. 163 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. As the Company does not engage in the types of
transactions covered by this statement, the effectiveness of this statement will
have no effect on our consolidated financial statements.
In
January 2009, the Securities and Exchange Commission (SEC) approved Release No,
33 – 8895 “Modernization of Oil and Gas Reporting,” which becomes effective
January 1, 2010. The new rules are intended to provide investors with more
meaningful information on which to base their evaluations of the relative values
of oil and gas companies, taking into account the significant technological
advances that have been made since the initial rules were
issued.
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Significantly,
Release 33 – 8895 eliminates the term “proved reserves” and replaces it with the
terms “developed oil and gas reserves” and “undeveloped oil and gas
reserves.” This broadening of disclosure is anticipated to provide
oil and gas companies the opportunity to report additional volumes of resources
that were previously not allowed to be included in filings with the
SEC.
While we
are still in the process of reviewing all the details of Release 33 – 8895, we
expect that the revised rules will prove beneficial to the Company, if and when
we begin reporting reserves.
NOTE 6. --- FINANCIAL
INSTRUMENTS
Fair
Value of Financial Instruments – The carrying amounts of the Company’s financial
instruments, which include cash equivalents, short-term investments, deposits,
long-term advances, accounts payable, accrued expenses, and notes payable,
approximate fair value at December 31, 2008, and 2007. The aggregate fair value
of securities classified as available for sale was $1,260,000 at December 31,
2008 and $11,200,000 at December 31, 2007.
Long-Term
Advances - At December 31, 2008, and December 31, 2007, 100% of the Company’s
long-term advances ($386,415 in 2008, and $534,530 in 2007) were comprised of a
note receivable from a single borrower. In 2006, IMPCO HK advanced $400,507 to
Beijing Jinrun Hongda Technology Co., Ltd. (“BJHTC”), which then invested that
amount in IMPCO Sunrise. The notes are repayable in RMB. As of
December 31, 2008 no repayments have been made. The balance of
$386,415 at December 31, 2008 reflects an impairment loss recorded in 2008, as
described further below. As of December 31, 2007 IMPCO HK had
accrued $100,547 in interest and $33,476 in currency gains on the notes, for a
total balance of $534,530. BJHTC is obligated to apply any
remittances received from IMPCO Sunrise directly to IMPCO HK. IMPCO Sunrise is
authorized to pay these remittances directly to IMPCO HK on BJHTC’s behalf,
until the debt is satisfied. The stated interest rate on the note is
20% compounded daily. The note matures November 14,
2014. BJHTC is only responsible to make payments under the note for
the share of profits it receives from IMPCO Sunrise.
Under the
provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities,” the BJHTC note has been accounted for as “held-to-maturity”
based on an intent and ability to hold to maturity. SFAS No. 115 also provides
that such securities are to be assessed for declines in value that are other
than temporary. In addition, we considered the guidance in FSP FPS
157-3 “Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active.” Based upon the delay in achieving net income in
IMPCO Sunrise, the impact of the significant decline in the price of
oil in the second half of 2008, the amount of uncollected interest on the note,
and the required date for repayment, it was determined in the fourth quarter of
2008 that the note was impaired. Additionally the recording of
interest income on the note was discontinued effective October 1,
2008. An impairment loss of $273,618 was recorded in 2008 operating
expenses to reduce the carrying amount of the note to the recorded amount of the
BJHTC-related minority interest liability in the consolidated balance sheet as
of December 31, 2008. As IMPCO Sunrise presently has no positive cash flows from
operations, projections of future potential positive cash flows at several rates
of return were utilized to determine that the revised carrying amount is
realistic based upon the rate of return inherent in that amount. The difference
between the impairment adjustment and the net change in carrying amount from
December 31, 2007 represents interest income and currency transaction
adjustments recorded during 2008 prior to recording the
impairment. In accordance with SFAS No. 157, “Fair Value
Measurements,” and FSP FAS 157-3, the calculation of impairment was based upon a
“level 3” unobservable input because there are no direct or indirect observable
inputs of fair value available for this note given that it is not
publicly traded and is not comparable to publicly traded
securities. It is not comparable to publicly traded securities
because by its terms the note is repayable only from the minority interest owned
by the debtor in which the debtor has no at risk cash investment and no active
involvement in the management of the entity.
Concentration
of Credit Risk – The Company is exposed to concentration of credit risk with
respect to cash, cash equivalents, short-term investments and long-term
advances. The Company chooses to maximize investment of its U.S. cash
into higher yield investments rather than keeping the amounts in bank accounts.
Early in 2008, the Company liquidated its short-term investments in order to
increase liquidity and reduce exposure to risk of loss given market conditions
at that time. As a result of this action, the total cash and cash
equivalents balances increased significantly in the U.S. during
2008. At December 31, 2008, 78% ($975,681) of the Company’s total
cash was on
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deposit
in China at the Bank of China. Also at that date, 48.7% ($4,514,167)
of the Company’s total cash equivalents was invested in a single money market
fund in the U.S. composed of securities of numerous issuers. At
December 31, 2007, 90% ($1,406,357) of the Company’s total cash was on deposit
in China at the Bank of China. Also at that date, the Company’s cash
equivalents were invested in two money market funds, of which 54% ($348,561) was
in a single fund; 18% ($2,000,000) and 15% ($1,650,000) of the Company’s U.S.
short-term investments were invested in securities of two individual Moody’s
Aaa-rated issuers.
NOTE
7. --- PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment by type of property were as follows at December 31, 2008 and
December 31, 2007:
|
December
31, 2008
|
Gross
|
Accumulated
Depreciation
|
Net
|
|||||||||
|
Oil
and gas wells
|
$ | 371,805 | $ | - | $ | 371,805 | ||||||
|
Office
and computer equipment
|
244,595 | 59,894 | 184,701 | |||||||||
|
Leasehold
improvements
|
41,480 | 28,683 | 12,797 | |||||||||
|
Total
|
$ | 657,880 | $ | 88,577 | $ | 569,303 | ||||||
|
December
31, 2007
|
||||||||||||
|
Oil
and gas wells
|
$ | 205,084 | $ | - | $ | 205,084 | ||||||
|
Office
and computer equipment
|
64,324 | 13,720 | 50,604 | |||||||||
|
Leasehold
improvements
|
36,398 | 7,059 | 29,339 | |||||||||
|
Total
|
$ | 305,806 | $ | 20,779 | $ | 285,027 | ||||||
Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 respectively was
$66,769, $18,850 and $1,740.
No
interest expense has been capitalized through December 31, 2008.
NOTE
8. --- INCOME TAXES
Income
tax expense was as follows for the respective periods:
|
2008
|
2007
|
2006
|
||||||||||
|
Current:
|
||||||||||||
|
U.S.
Federal
|
$ | (19,044 | ) | $ | 19,085 | $ | - | |||||
|
State
|
32,126 | 19,741 | - | |||||||||
|
Total
|
$ | 13,082 | $ | 38,826 | $ | - | ||||||
The
Company’s subsidiaries outside the United States did not have any undistributed
net earnings at December 31, 2008, due to accumulated net
losses.
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Following
is a reconciliation of the expected statutory U.S. Federal income tax provision
to the actual income tax expense for the respective periods:
|
2008
|
2007
|
2006
|
||||||||||
|
Net
(loss) before income tax expense
|
$ | (5,433,567 | ) | $ | (2,344,858 | ) | $ | (1,086,387 | ) | |||
|
Expected
income tax provision at statutory rate of 35%, assuming U.S. Federal
filing as a corporation
|
$ | (1,901,748 | ) | $ | (820,700 | ) | $ | (380,235 | ) | |||
|
Increase (decrease)
due to:
|
||||||||||||
|
Foreign-incorporated
subsidiaries
|
433,577 | 40,011 | 11,886 | |||||||||
|
U.S.
Federal filing as a partnership during LLC periods
|
- | 315,254 | 368,349 | |||||||||
|
State
income tax
|
32,126 | 19,741 | - | |||||||||
|
Net
losses not realizable currently for U.S. tax purposes
|
1,468,171 | 465,435 | - | |||||||||
|
Penalties
and miscellaneous
|
(19,044 | ) | 19,085 | - | ||||||||
|
Total
income tax expense
|
$ | 13,082 | $ | 38,826 | $ | - | ||||||
The
Company records interest and penalties related to income taxes as income tax
expense.
The
Company records zero net deferred income tax assets and liabilities on the
balance sheet on the basis that its overall net deferred income tax asset
position is required to be fully offset by a valuation allowance due to its net
losses since inception for both book basis and tax basis.
Deferred
income tax assets by category are as follows as of December 31:
|
2008
|
2007
|
2006
|
||||||||||
|
Tax
basis operating loss carryovers
|
$ | 1,746,203 | $ | 444,756 | $ | - | ||||||
|
Stock
compensation
|
402,323 | 24,156 | - | |||||||||
|
Depreciation
|
3,712 | - | - | |||||||||
| 2,152,238 | 468,912 | - | ||||||||||
|
Valuation
allowance
|
(2,152,238 | ) | (468,912 | ) | - | |||||||
|
Net
deferred income tax asset
|
$ | - | $ | - | $ | - | ||||||
The
Company’s total tax basis loss carryovers at December 31, 2008 were
$5,150,491. Of this amount, $448,457 has no expiration
date. The remainder expires from 2011 to 2028.
NOTE
9. --- RELATED PARTY TRANSACTIONS
Consulting Agreements and
Employment Contracts
Effective
December 15, 2005 the Company entered into two-year consulting agreements with
three key personnel who were also IMPCO members (shareholders of the Company
following the Mergers). The agreements provided for the performance of specified
services by the personnel in return for a fixed rate per month. The agreements
were subject to termination by either party on 90 days notice. If the agreement
is terminated by the Company, the consultant was entitled to receive the balance
of payments that would have been payable through the original term. The
Company’s commitments under these contracts were $33,350 per month, which
increased to $34,350 per month in July 2006. In September 2006, new executive
employment agreements were entered into between the Company and two IMPCO
members to replace two of the three existing consulting
agreements. The agreements have no expiration date, and either party
may terminate at will. The minimum commitment under these contracts is a total
of $618,000 per year. In the event of termination by the
Company other than for cause or disability, multi-year severance payments are
required. However, the operable effective date for the compensation rates under
these agreements was delayed subject to the Company achieving certain financial
benchmarks. Therefore, payments
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continued
at the rates set forth under the consulting agreements through March 31,
2007. The new agreements became fully effective at the contracted
rates on April 1, 2007. These agreements are with Frank C.
Ingriselli, President and Chief Executive Officer, and Stephen F. Groth, Vice
President and Chief Financial Officer.
On August
1, 2008, the Company entered into an Employment Agreement with Richard Grigg,
the Company’s Senior Vice President and Managing Director (the “Grigg
Agreement”). The Grigg Agreement, which superseded the prior
employment agreement the Company entered into with Mr. Grigg in March 2008, had
a three year term, and provided for a base salary of 1,650,000 RMB
(approximately $241,000) per year and an annual performance-based bonus award
targeted at between 30% and 40% of his then-current annual base salary awardable
in the discretion of the Company’s Board of Directors. Mr. Grigg was
also entitled to reimbursement of certain accommodation expenses in Beijing,
China, medical insurance, annual leave expenses, and certain other
transportation fees and expenses. In addition, in the event the
Company terminated Mr. Grigg’s employment without Cause (as defined in the Grigg
Agreement), the Company would have been required to pay to Mr. Grigg a lump sum
amount equal to 50% of Mr. Grigg’s then-current annual base
salary. However, on January 27, 2009, the Company revised the terms
of its employment relationship with Richard Grigg by entering into an Amended
and Restated Employment Agreement with Mr. Grigg (the “Amended Employment
Agreement”) and a Contract of Engagement (“Contract of Engagement”) with KKSH
Holdings Ltd., a company registered in the British Virgin Islands(“KKSH”). Mr.
Grigg is a minority shareholder and member of the board of directors of
KKSH. The Amended Employment Agreement superseded the Grigg Agreement
and now governs the employment of Mr. Grigg in the capacity of Managing Director
of the Company for a period of three years. The Amended Employment
Agreement provides for a base salary of 990,000 RMB (approximately $144,000) per
year and the reimbursement of certain accommodation expenses in Beijing, China,
annual leave expenses, and certain other transportation and expenses of Mr.
Grigg. In addition, in the event the Company terminates Mr. Grigg’s
employment without Cause (as defined in the Amended Employment Agreement), the
Company must pay to Mr. Grigg a lump sum amount equal to 50% of Mr. Grigg’s
then-current annual base salary. The Contract of Engagement governs
the engagement of KKSH for a period of three years to provide the services of
Mr. Grigg through KKSH as Senior Vice President of the Company strictly with
respect to the development and management of business opportunities for the
Company outside of the People’s Republic of China. The basic fee for
the services provided under the Contract of Engagement is 919,000 (approximately
$134,000) RMB per year, to be prorated and paid monthly and subject to annual
review and increase upon mutual agreement by the Company and
KKSH. Pursuant to the Contract of Engagement, the Company shall also
provide Mr. Grigg with medical benefits and life insurance coverage, and an
annual performance-based bonus award targeted at between 54% and 72% of the
basic fee, awardable in the discretion of the Company’s Board of
Directors. In addition, in the event the Company terminates the
Contract of Engagement without Cause (as defined in the Contract of Engagement),
the Company must pay to KKSH a lump sum amount equal to 215% of the then-current
annual basic fee.
Management Service
Contracts
In
connection with the merger on May 7, 2007, the Company assumed an Advisory
Agreement, dated December 1, 2006, by and between ADS and Cagan McAfee Capital
Partners, LLC (“CMCP”), pursuant to which CMCP agreed to provide certain
financial advisory and management consulting services to the Company. Pursuant
to the Advisory Agreement, CMCP is entitled to receive a monthly advisory fee of
$9,500 for management work commencing on December 11, 2006 and continuing until
December 11, 2009. The Company has been receiving services from CMCP
under this agreement since the Mergers. Laird Q. Cagan, the
Managing Director and 50% owner of CMCP, currently serves as a member of the
Company’s Board of Directors. During 2007, the Company paid $114,000
in fees under this contract, including an amount due for 2006. During
2008, the Company paid $123,500 in fees under this contract, including an amount
due for 2007.
Merger-Related
Transactions
In
connection with the Mergers on May 7, 2007, the Company assumed the obligation
of ADS to pay Chadbourn Securities, Inc., a NASD licensed broker-dealer for
which Mr. Laird Cagan (a director and significant shareholder of the
Company) serves as a registered representative and Managing Director, $1,195,430
in placement fees and expense reimbursements relative to the previous securities
offering of ADS. This amount has been paid in full.
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Immediately
prior to the Mergers, ADS issued to its placement agents 1,860,001 warrants to
purchase Class B membership units of ADS. Included were (i) warrants
to purchase 3,825 Class B membership units of ADS issued to Michael
McTeigue, an executive officer of ADS, (ii) warrants to purchase 83,354
Class B membership units of ADS issued to Chadbourn Securities, Inc., a
NASD licensed broker-dealer for which Laird Q. Cagan serves as a registered
representative and Managing Director, and (iii) warrants to purchase
696,094 Class B membership units of ADS issued to Laird Q. Cagan, a member
of the Company’s Board of Directors and beneficial owner of 7.7% of
the Company’s Common Stock. These warrants were exchanged in the Mergers for
warrants exercisable for 1,860,001 shares of Common Stock of the Company. The
Company has accounted for this as an offering cost applicable to paid-in capital
and therefore will not record any compensation expense on these warrants. At
December 31, 2008, 1,772,147 warrants remained unexercised, at a weighted
average exercise price of $1.28 per share of Common Stock, and expire May 7,
2012.
NOTE
10. --- OTHER COMMITMENTS
Consulting
Agreements
In
September 2006 the Company entered into a consulting agreement with Morningside
Development LLC superseding a prior agreement which was
terminated. The new agreement provided for payments of $12,000 per
month, for which the remaining payments were $96,000 at December 31,
2006. The contract was terminated in February 2007 for a final
payment of $70,000.
Lease
Commitments
At
December 31, 2008 the Company had non-cancelable lease commitments for two
operating leases on office facilities. Future minimum lease rentals by year are
as follows:
2009 - $
98,284
2010 - $
58,300
Rental
expense for the years ended December 31, 2008, 2007 and 2006 was $110,013,
$78,183 and $28,499, respectively.
NOTE
11. --- CAPITALIZATION
The
Company’s equity capital prior to the Mergers in May 2007 was composed of equity
units of IMPCO. At May 7, 2007 there were 347,296 Class A Units (“’A’
Units”) and 594,644 Class B Units (“’B’ Units”) outstanding immediately prior to
the Mergers. At December 31, 2006 there were 312,000 “A” Units
and 587,719 “B” Units outstanding.
In
addition, prior to the Mergers in May 2007, ADS issued 9,850,000 Class A
interests and 13,600,000 Class B interests as equity units. The capitalization
of ADS prior to the Mergers is not included in the Company’s financial
statements for 2006.
The
authorized capital stock of the Company consists of 300,000,000 shares of Common
Stock, $0.001 par value per share, and 50,000,000 shares of Preferred Stock,
$0.001 par value per share, of which 30,000,000 shares have been designated as
“Series A Convertible Preferred Stock.” 6,291,048 shares of
Series A Convertible Preferred Stock remain unissued following the automatic
conversion of 23,708,952 shares of the Company’s Series A Convertible
Preferred Stock into Common Stock of the Company on June 5, 2007.
The
Company’s capitalization at December 31, 2008 was 40,061,785 shares of Common
Stock issued and outstanding, and 23,708,952 shares of Series A Convertible
Preferred Stock issued but none outstanding following the June 5, 2007 automatic
conversion into Common Stock. The Company’s capitalization at
December 31, 2007 was 39,931,109 shares of Common Stock issued and outstanding,
and 23,708,952 shares of Series A Convertible Preferred Stock issued but none
outstanding following the June 5, 2007 automatic conversion into Common
Stock. At December 31, 2006, there were 5,304,000 shares of Common
Stock issued and outstanding, and 9,991,223 shares of Series A Convertible
Preferred Stock issued and outstanding (reflecting 312,000 “A” Units and 587,719
“B” Units issued and outstanding in IMPCO prior to the exchange of such units on
a one-for-seventeen basis into
- 59
-
Common
Stock and Series A Convertible Preferred Stock of the Company, respectively, in
the May 2007 Mergers). At December 31, 2005 there were 5,304,000
shares of Common Stock issued and outstanding (reflecting 312,000 “A” Units
issued and outstanding in IMPCO prior to the exchange of such units on a
one-for-seventeen basis into Common Stock of the Company in the May 2007
Mergers).
In 2006
the Company (as IMPCO) issued 6,453 warrants to underwriters for purchase of “B”
Units at an exercise price of $0.01 per share with a term of 10 years. The
warrants were valued at $61,239 ($9.49 per warrant). This valuation was on the
basis that due to the nominal exercise price of the warrant, the warrants were
in substance equivalent to restricted equity units that vest at any time based
on election of the holder. No expense was recorded on this transaction as this
was considered part of offering costs applied to paid-in
capital. These warrants were exercised in early 2007, and the units
were exchanged for shares of Common Stock of the Company in the May 2007
Mergers.
NOTE
12. --- NAVITAS ACQUISITION
On July
1, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with (i) Navitas Corporation, a Nevada corporation (“Navitas”),
whose primary assets at the time of merger were comprised of 480,000 shares of
Common Stock of the Company and certain deferred tax assets, and (ii) Navitas
LLC, a Nevada limited liability company affiliated with Navitas and whose
members consisted of Navitas shareholders. The shareholders of Navitas received
a total of 450,005 shares of Company Common Stock in return for 100% of the
shares of Navitas. The merger was effective July 2,
2008. At that date, Navitas was merged into the Company, and Navitas
ceased to exist as a separate corporation. The transaction resulted
in a net decrease of 29,995 shares of the Company’s outstanding Common
Stock.
A
majority of interest of Navitas’ and Navitas LLC’s shareholders and members,
respectively, were shareholders of the Company prior to the
merger. In addition, Adam McAfee, the President of Navitas and
Managing Director of Navitas, LLC, is the brother of Eric A. McAfee, beneficial
owner of approximately 5.6% of the Company’s Common Stock and 50% owner of Cagan
McAfee Capital Partners, LLC, a fund owned 50% by Mr. Laird Q. Cagan, a member
of the Company’s Board of Directors and beneficial owner of approximately 7.2%
of the Company’s Common Stock.
The
acquisition was accounted for as a merger involving treasury stock and
immaterial net working capital. No value was assigned to deferred tax
assets acquired. The purchase price paid of 450,005 shares of Common
Stock of the Company was valued at $18.17 per share based on a seven-day
weighted average related to the measurement date. No gain was
recognized on the net reduction of 29,995 shares outstanding of the Company’s
capital stock. The total absolute dollar amounts recorded for shares
issued and shares acquired were the same except for certain transaction costs
recorded as additional cost of shares acquired. No cash consideration
was paid by the Company in the merger.
NOTE
13. --- STOCK-BASED COMPENSATION PLANS
Stock
Options
In 2006
the Company (as IMPCO) issued equity unit options to purchase “B” equity units.
These options were exchanged for Common Stock options of the Company at the
merger date of May 7, 2007.
Under the
Company’s 2007 Stock Plan, the Company may issue stock or options not to exceed
an aggregate of 4,000,000 shares of Common Stock. Options awarded expire 10
years from date of grant. In 2008, the Company issued a total of
1,192,000 stock options on December 9, 2008 with vesting periods from one to
four years. The approximate percentages of the 2008 awards vesting by year is as
follows: at one year – 50%; at two years – 20%; at three years – 20%; at four
years – 10%.
- 60
-
The
following is a table showing options activity:
|
Number
of Shares Underlying
Options
|
Weighted
Average
Exercise
Price per
Share
|
Weighted
Average Remaining Contractual Term(Years)
|
||||
|
Granted
during 2006 and
|
||||||
|
outstanding
at December 31, 2006
|
836,400
|
$ |
0.56
|
9.75
|
||
|
Granted
in 2007
|
180,000
|
$ |
6.00
|
9.96
|
||
|
Outstanding
at December 31, 2007
|
1,016,400
|
$ |
1.52
|
8.96
|
||
|
Granted
in 2008
|
1,192,000
|
$ |
.64
|
9.94
|
||
|
Forfeited
in 2008
|
(71,200
|
)
|
$ |
1.32
|
||
|
Outstanding
at December 31, 2008
|
2,137,200
|
$ |
1.04
|
9.07
|
||
|
Expected
to vest
|
2,137,200
|
$ |
1.04
|
9.07
|
||
|
Exercisable
at December 31, 2008
|
556,442
|
$ |
1.29
|
7.91
|
||
The total
intrinsic values of options at December 31, 2008 were $81,688 for options
outstanding and expected to vest and $43,330 for options that were exercisable
at that date.
The
Company recorded compensation expense relative to stock options in 2008, 2007
and 2006 of $378,025, $167,325 and $29,065 respectively.
During
the year, the Company issued 15,000 shares of common stock for fees and services
valued at $138,000.
The fair
values of stock options used in recording compensation expense are computed
using the Black-Scholes option pricing model. The table below shows
the weighted average amounts for the assumptions used in the model for options
awarded in each year.
|
2008
|
|
2007
|
2006
|
||||||||||
|
Expected
price volatility (basket of comparable public companies)
|
65.60%
|
55.80%
|
64.60%
|
||||||||||
|
Risk-free
interest rate (U.S. Treasury bonds)
|
2.04%
|
4.09%
|
4.58%
|
||||||||||
|
Expected
annual dividend rate
|
0.00%
|
0.00%
|
0.00% | ||||||||||
|
Expected
option term – weighted average
|
5.95
yrs.
|
5.98
yrs.
|
5.95
|
yrs.
|
|||||||||
|
Grant
date fair value per common share-weighted average
|
$
|
.39
|
$
|
3.38
|
$
|
.35
|
|||||||
Stock Options and Restricted
Shares
The total
grant date fair value of shares vested during 2008, 2007 and 2006 were $763,510,
$173,441 and zero, respectively.
The
weighted average grant date fair value of stock options and restricted shares
issued during the years 2008, 2007 and 2006 were $1,478,080, $1,660,800, and
$292,740, respectively.
- 61
-
Restricted
Stock
|
Number
Of Grants
|
Weighted
Average Grant Date Fair Value
|
|||||||
|
Granted
during 2007 and
|
||||||||
|
outstanding at December 31,
2007
|
175,400 | $ | 6.00 | |||||
|
Granted
in 2008
|
745,000 | $ | 1.36 | |||||
|
Vested
in 2008
|
(76,400 | ) | $ | 6.43 | ||||
|
Cancelled
in 2008 prior to vesting
|
(10,000 | ) | $ | 9.25 | ||||
|
Outstanding
at December 31, 2008
|
834,000 | $ | 1.78 | |||||
The
Company recorded compensation expense relative to restricted stock in years 2008
and 2007 of $977,565 and $28,117 respectively. At December 31, 2008,
the remaining future compensation expense to be recorded on unvested stock
options and restricted stock was $1,790,148, to be recognized over a weighted
average period of 1.83 years, assuming that no forfeitures occur.
NOTE
14. --- POTENTIALLY DILUTIVE SECURITIES
Warrants,
options and restricted stock described in the immediately preceding notes are
potentially dilutive in future periods if the Company has net income. They have
been anti-dilutive for all periods to date because the Company has been in a
loss position.
NOTE
15. --- PENSION AND POSTRETIREMENT PLANS
In 2007
the Company adopted a defined contribution 401(k) plan for its
employees. The plan provides for Company matching of 200% on up
to the first 3% of salary contributed by employees. The plan includes the option
for employee contributions to be made from either pre-tax or after-tax basis
income as elected by the employee. Company contributions are immediately vested
to the employee. In 2008, the Company contributions were $50,989
under this plan including third party administration fees.
NOTE
16. --- LITIGATION AND CONTINGENCIES
The
Company at December 31, 2008 had no litigation, actual or potential, of which it
was aware and which could have a material effect on its financial
position.
- 62
-
Quarterly
Information and Stock Market Data (unaudited)
The table
below presents unaudited quarterly data for the years ended December 31, 2008,
December 31, 2007 and December 31, 2006:
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Operating
Loss
|
$ | (1,085,980 | ) | $ | (1,265,498 | ) | $ | (1,250,923 | ) | $ | (2,181,419 | ) | ||||
|
Net
Loss
|
$ | (950,008 | ) | $ | (1,201,002 | ) | $ | (1,157,980 | ) | $ | (2,137,659 | ) | ||||
|
Basic
and diluted net loss per common share
|
$ | (.02 | ) | $ | (.03 | ) | $ | (.03 | ) | $ | (.05 | ) | ||||
|
Common
stock price range
|
||||||||||||||||
|
High
|
$ | 17.00 | $ | 22.00 | $ | 17.05 | $ | 1.93 | ||||||||
|
Low
|
$ | 7.50 | $ | 14.50 | $ | 1.82 | $ | .45 | ||||||||
|
2007
|
||||||||||||||||
|
Operating
Loss
|
$ | (785,744 | ) | $ | (653,914 | ) | $ | (588,735 | ) | $ | (953,854 | ) | ||||
|
Net
Loss
|
$ | (748,241 | ) | $ | (499,731 | ) | $ | (353,024 | ) | $ | (782,688 | ) | ||||
|
Basic
and diluted net loss per common share
|
$ | (0.05 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||
|
Common
stock price range
|
||||||||||||||||
|
High
|
$ | 3.50 | $ | 13.00 | $ | 11.50 | $ | 15.75 | ||||||||
|
Low
|
$ | 2.50 | $ | 2.90 | $ | 5.00 | $ | 5.00 | ||||||||
The 2008
fourth quarter operating loss exceeded the third quarter loss by $930,496, which
mostly consisted of increased salaries resulting from year-end bonuses that
exceeded amounts accrued in prior quarters by $196,191, increased
stock based compensation of $29,887, operating contract work first initiated in
the fourth quarter of $249,940, impairment of assets of $273,618, consulting
costs mostly consisting of the write-off of capitalized consulting costs related
to the three terminated Asset Transfer Agreements and Sarbanes-Oxley fees of
$107,147 and accrued vacation of $21,405.
The 2007
fourth quarter operating loss exceeded the third quarter loss by $365,119, which
mostly consisted of increased salaries resulting from year-end bonuses that
exceeded amounts accrued in prior quarters by $102,519, increased
stock based compensation of $93,334, consulting costs of $87,337 mostly
consisting of the provisional hiring of the managing director in Beijing and
accrued vacation of $31,366.
The
Common Stock is currently quoted for trading on the OTC Bulletin Board under the
symbol “PFAP.OB.” Prior to its commencement of trading on the OTC Bulletin Board
on May 8, 2008, the Common Stock was quoted for trading on the Pink Sheets under
the symbol “PFAP.PK.” The above table sets forth the high and low last bid
prices for the Common Stock for each fiscal quarter during the past two fiscal
years as reported by Pink Sheets LLC and adjusted for the 100:1 reverse split on
January 11, 2007. These prices do not reflect retail mark-ups, markdowns or
commissions and may not represent actual transactions.
The last
bid price on February 26,
2009 reported on the OTC Bulletin Board was
$0.51 per share of Common Stock.
As of
February 27, 2009, the Company had warrants outstanding to purchase (i) an
aggregate of 1,532,147 shares of Common Stock at a price per share of $1.25;
(ii) an aggregate of 120,000 shares of Common Stock at a price per share of
$1.375; and (iii) an aggregate of 120,000 shares of Common Stock at a price per
share of $1.50.
As of
February 27, 2009, an aggregate of 2,137,200 shares of Common Stock were
issuable upon exercise of outstanding stock options.
Holders
As of
February 27, 2009, the Company had 137 shareholders of record of Common
Stock.
- 63
-
Dividends
The
Company has not, to date, paid any cash dividends on its Common Stock. The
Company has no current plans to pay dividends on its Common Stock and intends to
retain earnings, if any, for working capital purposes. Any future determination
as to the payment of dividends on the Common Stock will depend upon the results
of operations, capital requirements, the financial condition of the Company and
other relevant factors.
- 64
-
|
|
|
None.
ITEM
9A. CONTROLS AND PROCEDURES
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to management, including its Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), as appropriate, to allow timely decisions
regarding required disclosure.
Management
of the Company, with the participation of its CEO and CFO, evaluated the
effectiveness of the Company’s disclosure controls and procedures. Based on
their evaluation, as of the end of the period covered by this Form 10-K, the
Company’s CEO and CFO have concluded that the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) were effective.
Management’s
Report On Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act
as a process designed by, or under the supervision of, our principal executive
and principal financial officers and is effected by the Company’s board of
directors, management and other personnel, 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 (“GAAP”) and includes those policies and procedures
that:
|
•
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect our transactions and dispositions of our
assets,
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with GAAP, and that
our receipts and expenditures are being made only in accordance with
authorizations of management and directors of the Company,
and
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008 based on the criteria described in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”).
Based on
this assessment, management, including the Company’s CEO and CFO, concluded that
our internal control over financial reporting was effective as of December 31,
2008.
RBSM LLP,
the independent registered public accounting firm that has audited the financial
statements included in this Report, has issued an attestation report on the
Company’s internal control over financial reporting as of December 31, 2008
which is given below.
- 65
-
|
|
RBSM
LLP
|
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
Board of
Directors
Pacific
Asia Petroleum, Inc.
Hartsdale,
NY
We have
audited Pacific Asia Petroleum, Inc. and its subsidiaries (the "Company")
(a development stage company) internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on assessed
risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed 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. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Pacific Asia Petroleum, Inc. and its subsidiaries maintained, in all
material respects, effective internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balances sheets of Pacific
Asia Petroleum, Inc. and its subsidiaries as of December 31, 2008 and 2007, and
the related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2008 and for
the period August 25, 2005 (date of inception) through December 31, 2008 and our
report dated February 27, 2009 expressed
an unqualified opinion.
/s/
RBSM LLP
New York, New
York
February 27,
2009
- 66
-
Changes
in Internal Control Over Financial Reporting
No change
in the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
None.
- 67
-
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Executive
Officers and Directors
The
directors and executive officers of the Company are as follows:
|
Name
|
Age
|
Position
|
|
Frank
C. Ingriselli
|
55
|
President,
Chief Executive Officer, Secretary and Director
|
|
Stephen
F. Groth
|
56
|
Vice
President and Chief Financial Officer
|
|
Richard
Grigg
|
55
|
Senior
Vice President and Managing Director
|
|
Jamie
Tseng
|
55
|
Executive
Vice President
|
|
Laird
Q. Cagan
|
51
|
Director
|
|
James
F. Link, Jr.
|
64
|
Director
|
|
Elizabeth
P. Smith
|
59
|
Director
|
|
Robert
C. Stempel
|
75
|
Director
|
Directors
are elected at each annual meeting of stockholders, and each executive officer
serves until his resignation, death, or removal by the Board of
Directors.
Frank
C. Ingriselli, Chief Executive Officer, President, Secretary and
Director
Mr.
Ingriselli has served as the President, Chief Executive Officer, Secretary and a
member of the Board of Directors of the Company since May 2007. Mr.
Ingriselli has over 29 years experience in the energy industry. Mr. Ingriselli
began his career at Texaco, Inc. (“Texaco”) in 1979 and held management
positions in Texaco’s Producing-Eastern Hemisphere Department, Middle East/Far
East Division, and Texaco’s International Exploration Company. While at Texaco,
Mr. Ingriselli negotiated a successful foreign oil development investment
contract in China in 1983. In 1992, Mr. Ingriselli was named President of Texaco
International Operations Inc. and over the next several years directed Texaco’s
global initiatives in exploration and development. In 1996, he was appointed
President and CEO of the Timan Pechora Company, a Houston, Texas headquartered
company owned by affiliates of Texaco, Exxon, Amoco and Norsk Hydro, which was
developing a large international investment in Russia. In 1998, Mr. Ingriselli
returned to Texaco’s Executive Department with responsibilities for Texaco’s
power and gas operations, merger and acquisition activities, pipeline operations
and corporate development. In August 2000, Mr. Ingriselli was appointed
President of Texaco Technology Ventures, which was responsible for all of
Texaco’s global technology initiatives and investments. In 2001, Mr. Ingriselli
retired from Texaco after its merger with Chevron, and founded Global Venture
Investments LLC (“GVI”), an energy consulting firm, for which Mr. Ingriselli
served as the President and Chief Executive Officer. Mr. Ingriselli is no longer
active with GVI. In 2005, Mr. Ingriselli co-founded Inner Mongolia Production
Company, LLC (“IMPCO”) with Mr. Tseng and Mr. Groth,
and
served as the President, Chief Executive Officer and a Manager of IMPCO prior to
the May 2007 merger of IMPCO into the Company.
From 2000
to 2006, Mr. Ingriselli sat on the Board of the Electric Drive Transportation
Association (where he was also Treasurer) and the Angelino Group, and was an
officer of several subsidiaries of Energy Conversion Devices Inc., a U.S. public
corporation engaged in the development and commercialization of environmental
energy technologies. From 2001 to 2006, he was a Director and Officer of General
Energy Technologies Inc., a “technology facilitator” to Chinese industry serving
the critical need for advanced energy technology and the growing demand for
low-cost high quality components, and Eletra Ltd, a Brazilian hybrid electric
bus developer. Mr. Ingriselli currently sits on the Advisory Board of
the Eurasia Foundation, a Washington D.C.-based non-profit that funds programs
that build democratic and free market institutions in the new independent states
of the former Soviet
- 68
-
Union.
Since 2006, Mr. Ingriselli has also served on the Board of Directors and as an
executive officer of Brightening Lives Foundation Inc., a New York charitable
foundation headquartered in San Ramon, California.
Mr.
Ingriselli graduated from Boston University in 1975 with a Bachelor of Science
degree in Business Administration. He also earned a Master of Business
Administration degree from New York University in both Finance and International
Finance in 1977 and a Juris Doctor degree from Fordham University School of Law
in 1979.
Stephen
F. Groth, Vice President and Chief Financial Officer
Mr. Groth
has served as the Vice President and Chief Financial Officer of the Company
since May 2007. Mr. Groth brings to the Company more than 30 years experience in
the energy industry providing financial analysis, financial modeling, corporate
reporting and financial reporting system expertise. Mr. Groth joined Texaco in
1979 and held various positions in financial groups at Texaco, and from 1999 to
2001 held a position in the corporate executive group at Texaco with the
responsibility of reviewing all of its investments and divestments (capital
expenditures, acquisitions, and divestitures) greater than $10 million. From
2001 until May 2007, Mr. Groth served as Vice President of GVI. In his roles at
both Texaco and GVI, Mr. Groth reviewed numerous transactions, assuring that
evaluations were done in accordance with appropriate corporate standards and
that the assumptions underlying the economic valuations were valid, and
regularly advised client operating departments on appropriate ways to evaluate
investment alternatives, providing support for the negotiation of major
acquisitions and divestitures. In 2005, Mr. Groth co-founded IMPCO with Mr.
Ingriselli and Mr. Tseng, and served as the Vice President, Chief Financial
Officer and Manager of IMPCO prior to the May 2007 merger of IMPCO into the
Company.
Mr. Groth
received his Bachelor of Arts in Philosophy in 1975 from Fordham University and
his MBA in Accounting from New York University in 1977. Before joining Texaco in
1979, he worked as an auditor for Price Waterhouse, and as an internal auditor
for American Airlines.
Richard
Grigg, Senior Vice President and Managing Director
Richard
Grigg was promoted to the position of Senior Vice President and Managing
Director of the Company, effective August 1, 2008. Mr. Grigg has served as the
Company’s Managing Director of its Beijing office since October 2007, and has 38
years experience in the petroleum and resource industries, with broad experience
in both the operating and service sectors of the petroleum industry as well as
extensive management and operational experience. Prior to joining the
Company, Mr. Grigg
was the Chief Operating Officer for Sino Gas & Energy Limited (“SGE”) based
in Beijing and responsible from 2005 to October 2007 for all activities of the
company within China and in particular for negotiating SGE’s operatorship of,
and farm into, the Chevron owned Linxing, San Jiao Bei and Shenfu production
sharing contracts, and the subsequent exploration and appraisal operations in
those areas. Prior to joining SGE, from 2000 through 2005 Mr. Grigg served as a
consultant to various Australian-based coalbed methane (“CBM”) operators where
he was involved in managing the project development of some of the largest
Australian CBM commercialization projects including the Moranbah Gas Project in
North Central Queensland for CH4 Ltd (now Arrow Energy Limited). In
1987, Mr. Grigg founded Surtron Technologies, taking it to leadership within the
resources industry in Australia and the Asia Pacific region before selling the
company in 1997 to publicly listed Imdex Limited. From 1992 to 1998, Mr. Grigg
was also involved in a technology transfer venture in Vietnam and other
countries in the Asia Pacific region.
Prior to
1987, Mr. Grigg worked with many of the largest multinational oilfield service
companies where he gained broad ranging experience across the areas of drilling,
reservoir engineering, petroleum engineering and production. These companies
included Sperry Sun (now part of the Halliburton Group), Core Laboratories
(NYSE:CLB), Dowell Schlumberger (now Anadrill and part of the Schlumberger
Group), and Eastman Whipstock (now BH/Inteq and part of the Baker Hughes
Group).
Mr. Grigg
started his career in 1970 with West Australian Petroleum (WAPET) – owned at the
time by Texaco Inc. and Chevron Corporation – and worked on the Barrow Island
oilfield development gaining valuable grass roots experience in all aspects of
bringing an oilfield to full commercialization.
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Jamie
Tseng, Executive Vice President
Mr. Tseng
has served as the Company’s Executive Vice President since May 2007. Mr. Tseng
brings to the Company more that 25 years of financial management and operations
experience in the People’s Republic of China, the Republic of China and the
United States. In 2005, Mr. Tseng co-founded IMPCO with Mr. Ingriselli and Mr.
Groth, and served as the Executive Vice President and Manager of IMPCO prior to
the May 2007 Merger of IMPCO into the Company. From February 2000 to
August 2005, Mr. Tseng served as Chief Financial Officer of General Energy
Technologies Inc., a “technology facilitator” to Chinese industry serving the
critical need for advanced energy technology and the growing demand for low cost
high quality components. From 1998 to February 2000, Mr. Tseng served as Chief
Financial Officer of Multa Communications Corporation, a California-based
Internet service provider focusing on China. From 1980 until 1998, he held
management positions with Collins Company, Hilton International, China Airlines
and Tatung Company of America. Mr. Tseng is fluent in Chinese
Mandarin. He has a BD degree in Accounting from Soochow University in
Taiwan.
Laird
Q. Cagan, Director
Mr. Cagan
has served as a Director of the Company since May 2007. Mr. Cagan is a
co-founder and, since 2001, has been Managing Director of Cagan McAfee Capital
Partners, LLC (“CMCP”), a merchant bank based in Cupertino, California. Since
2004, Mr. Cagan has also been a Managing Director of Chadbourn Securities, Inc.,
a FINRA licensed broker-dealer. In 2009 Chadbourn merged into Colorado Financial
Service Corp., a FINRA-licensed broker-dealer, whereupon Chadbourn relinquished
its broker-dealer license. He also continues to serve as President of Cagan
Capital, LLC, a merchant bank he formed in 1990, the operation of which
transitioned into CMCP. Mr. Cagan has served or serves on the Board of Directors
of the following companies: Evolution Petroleum Corporation, a Houston-based
public company involved in the acquisition, exploitation, development, and
production of crude oil and natural gas resources (since 2004, where Mr. Cagan
is also a co-founder and Chairman); AE Biofuels, Inc., a bio-fuels company
headquartered in Cupertino, California (from 2006 to 2008, where Mr. Cagan is
also a co-founder); Real Foundations, Inc., a real estate-focused consulting
firm (from 2000 to 2004); Burstein Technologies, a development stage medical
devices company (from 2005 to 2006); WorldSage, Inc. (recently renamed Career
College Holding Company, Inc.), a California-based public company that purchased
a $4M revenue, for-profit college in Switzerland in October 2007 and
subsequently sold that college in 2008 (since 2006); Fortes Financial
Corporation, an Irvine, California-based mortgage bank (since 2007); and TWL
Corporation, a Carrollton, Texas-based publicly-traded workplace training and
education company (from 2007 to 2008).
Mr. Cagan
has been involved over the past 25 years as a venture capitalist, investment
banker and principal, in a wide variety of financings, mergers, acquisitions and
investments of high growth companies in a wide variety of industries. At
Goldman, Sachs & Co. and Drexel Burnham Lambert, Mr. Cagan was involved in
numerous transactions. Mr. Cagan attended M.I.T. and received his BS and MS
degree in engineering, and his MBA, all from Stanford University. He is a member
of the Stanford University Athletic Board and past Chairman of the SF Bay
Chapter of the Young Presidents’ Organization.
James
F. Link, Jr., Director
Mr. Link
has served on the Company’s Board of Directors since July 2008. Mr. Link
retired from the position of Vice President of Finance and Risk Management of
Texaco Inc. upon its merger with Chevron Inc. in 2001. He earned a
bachelor of Business Administration degree in Accounting in 1966 and a Master of
Business Administration degree in 1968, both from University of Memphis.
Mr. Link served from 1969 to 1971 as a Lieutenant in the U.S. Army Finance
Corps. He joined the Comptroller’s Department of Texaco in New York in
1971. Mr. Link was named Manager of Texaco’s Corporate Financial Reporting
Office in 1979. In 1984 he was named Assistant to the Senior Vice
President and Chief Financial Officer of Texaco. He was named as Texaco’s
Director of Corporate Finance in the Finance Department in 1986. He was
appointed Assistant Treasurer of Texaco in 1989 and was named Senior Assistant
Treasurer in 1991. Mr. Link assumed in 1993 the responsibilities of Fiscal
Director and Comptroller of Texaco U.S.A. headquartered in Houston, Texas.
In 1995, Mr. Link was elected Treasurer of Texaco and, in 1999, he was elected
Vice President of Finance and Risk Management. He served as a Director of
Caltex Corporation, Texaco’s refining, marketing joint venture with Chevron,
which operated throughout Asia, Africa, the Middle East and Australia. He
also served as a Director of Equilon LLC, a refining, marketing joint venture
with Shell Oil, operating primarily in the Western and Mid-Western United
States.
Mr. Link
is a Board Member of Nehemiah Commission, a not-for-profit social services
agency providing services to at-risk
children in Fairfield and New Haven counties in Connecticut. He also is a
Board Member of the Oak Hill School-CT Institute for the Blind Foundation,
headquartered in Hartford, Connecticut which helps people with disabilities in
communities throughout Connecticut.
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Elizabeth
P. Smith, Director
Ms. Smith
has served as a Director of the Company since May 2007. Ms. Smith
retired from Texaco Inc. as Vice President-Investor Relations and Shareholder
Services in late 2001 following the company’s merger with Chevron Corp. Ms.
Smith was also the Corporate Compliance Officer for Texaco and was a member of
the Board of The Texaco Foundation. Ms. Smith joined Texaco’s Legal Department
in 1976. As an attorney in the Legal Department, Ms. Smith handled
administrative law matters and litigation. She served as Chairman of the
American Petroleum Institute’s Subcommittee on Department of Energy Law for the
1983-1985 term. Ms. Smith was appointed Director of Investor
Relations for Texaco, Inc. in 1984, and was named Vice President of the
Corporate Communications division in 1989. In 1992, Ms. Smith was elected a Vice
President of Texaco Inc. and assumed additional responsibilities as head of that
company’s Shareholder Services Group. In 1999, Ms. Smith was named Corporate
Compliance Officer for Texaco.
Ms. Smith
has served on the Board of Finance for Darien, Connecticut, since November
2007. Since May 2007, Ms. Smith has served as a Board Member of the
Community Fund of Darien, Connecticut, and from 1996 through 2006, Ms. Smith has
served on the Board of Directors of INROADS/Fairfield Westchester Counties, Inc.
From 2002 through 2005, she also served as a member of the Boards of Families
With Children From China-Greater New York, and from 2004 through 2005 as a
member of the Board of The Chinese Language School of Connecticut. While at
Texaco, Ms. Smith was an active member in NIRI (National Investor Relations
Institute) and the NIRI Senior Roundtable. She has been a member and past
President of both the Investor Relations Association and the Petroleum Investor
Relations Institute. Ms. Smith was a member of the Board of Trustees of
Marymount College Tarrytown until 2001. She was also a member of the Board of
The Education and Learning Foundation of Westchester and Putnam Counties from
1993 to 2002.
Ms. Smith
graduated from Bucknell University in 1971 with a Bachelor of Arts degree, cum
laude, and received a Doctor of Jurisprudence degree from Georgetown University
Law Center in 1976.
Robert
C. Stempel, Director
Mr.
Stempel has served on the Company’s Board of Directors since February
2008. Mr. Stempel was the former Chairman and CEO of General Motors
Corporation and Energy Conversion Devices, Inc. Mr. Stempel retired
as Chairman and Chief Executive Officer from General Motors Corporation in
November 1992. He was named Chairman and CEO in August
1990. Prior to serving as Chairman, he had been President and Chief
Operating Officer of General Motors Corporation since September 1,
1987. Mr. Stempel retired as Chief Executive Officer and Chairman of
Energy Conversion Devices, Inc. effective, respectively, on August 31, 2007 and
on December 11, 2007. Mr. Stempel became Chairman of Energy Conversion Devices,
Inc. in December of 1995.
Mr.
Stempel is a member of the National Academy of Engineering. He is
also a Fellow of the Society of Automotive Engineers and the Engineering Society
of Detroit, and a Life Fellow of the American Society of Mechanical Engineers.
In October 2001 he was awarded the Golden Omega Award for important
contributions to technical progress in the electrical/electronics
field. In November 2001 he was awarded the Soichiro Honda Medal for
significant engineering contributions in the field of personal
transportation. Mr. Stempel serves as Chairman of the Council of
Great Lakes Industries supporting the industrial and environmental activities of
the Council of Great Lakes Governors.
Committees
At its
July 22, 2008 meeting, the Company’s Board of Directors approved and adopted
charters for the newly formed Audit Committee, Compensation Committee and
Nominating Committee.
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Audit
Committee
On July
22, 2008, the Board of Directors selected James F. Link, Jr., Robert C. Stempel
and Elizabeth P. Smith to serve on its Audit Committee. The Board of
Directors has determined that Mr. Link, Mr. Stempel and Ms. Smith are
independent within the meaning of Rule 4200(a)(15) of the Nasdaq Stock Market,
Inc. and Section 10A(m)(3) of the Securities Exchange Act of 1934 and applicable
rules of the Securities and Exchange Commission. Mr. Link
was named
acting Chairman of the Committee and also named as the “audit committee
financial expert” under applicable Securities and Exchange Commission
rules.
Compensation
Committee
The
Company’s Board of Directors formed a Compensation Committee on July 22, 2008.
Board members Mr. Stempel, Ms. Smith and Mr. Link were named Committee members,
with Ms. Smith named as Committee Chairperson. Each of the Compensation
Committee members has been determined by the Board of Directors to be an
“independent” director under American Stock Exchange listing
standards.
Nominating
Committee
On July
22, 2008, the Company’s Board of Directors appointed Board members Mr. Stempel,
Ms. Smith and Mr. Link to serve on its Nominating Committee. Mr. Stempel was
named acting Committee Chairman. Each of the Nominating Committee members has
been determined by the Board of Directors to be an “independent” director under
American Stock Exchange listing standards.
Code
of Ethics
On August
15, 2007, the Company adopted a Code of Ethics and Business Conduct (the “Code”)
applicable to the Company’s Chief Executive Officer, Chief Financial Officer and
all other employees. Among other provisions, the Code sets forth
standards for honest and ethical conduct, full and fair disclosure in public
filings and shareholder communications, compliance with laws, rules and
regulations, reporting of code violations and accountability for adherence to
the Code. The text of the Code has been posted on the Company’s
website (www.papetroleum.com). A copy of the Code can be obtained
free-of-charge upon written request to:
Corporate
Secretary
Pacific
Asia Petroleum, Inc.
250 East
Hartsdale Ave., Suite 47
Hartsdale,
New York 10530
If the
Company makes any amendment to, or grant any waivers of, a provision of the Code
that applies to our principal executive officer or principal financial officer
and that requires disclosure under applicable SEC rules, we intend to disclose
such amendment or waiver and the reasons for the amendment or waiver on our
website.
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section 16(a) of the Securities Exchange Act of 1934 and rules promulgated
thereunder, the Company’s directors, executive officers, and any person holding
beneficially more than 10% of the Company’s common stock are required to report
their ownership of the Company’s securities and any changes in that ownership to
the Securities and Exchange Commission and to file copies of the reports with
the Company. Specific due dates for these reports have been
established, and the Company is required to report in this Annual Report on Form
10-K/A any failures to file by these dates during the last fiscal
year.
Based
upon a review of filings with the SEC and written representations that no other
reports were required, the Company believes that all of its directors, executive
officers and persons owning more than 10% of the Company’s common stock complied
during the year ended December 31, 2008 with the reporting requirements of
Section 16(a) of the Exchange Act, except that due to an administrative
oversight, reports for each of Messers. Ingriselli, Groth, Grigg and Tseng
covering equity awards granted to such persons on December 9, 2008 were filed on
December 17, 2008.
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Compensation
Committee Interlocks and Insider Participation
On July
22, 2008, the Company’s Board of Directors appointed Board members Robert C.
Stempel, Elizabeth P. Smith and James F. Link, Jr. to serve on its Compensation
Committee. Prior to that date, the Company’s entire Board of Directors,
comprised of Frank C. Ingriselli, Laird Q. Cagan, Ms. Smith, and Mr. Stempel,
served as its
Compensation
Committee. None of the members of the Compensation Committee are or
have ever been officers or employees of the Company except Mr.
Ingriselli. During the time period prior to July 22, 2008, Mr.
Ingriselli was entitled as a Board member to participate in discussions and
determinations related to his compensation. However, Mr. Ingriselli
had recused himself from participating in such discussions and determinations
with respect to bonus and compensation matters involving himself.
None of
our executive officers served as a member of:
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The
compensation committee of another entity in which one of the executive
officers of such entity served on our Compensation
Committee;
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The
board of directors of another entity, one of whose executive officers
served on our Compensation
Committee; or
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The
compensation committee of another entity in which one of the executive
officers of such entity served as a member of our
Board.
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The
Company is a party to an Advisory Agreement, effective December 1, 2006
(“Advisory Agreement”), with Cagan McAfee Capital Partners, LLC (“CMCP”),
pursuant to which CMCP agreed to provide certain financial advisory and
management consulting services to the Company. Pursuant to the Advisory
Agreement, CMCP is entitled to receive a monthly advisory fee of $9,500 for
management work commencing on December 1, 2006 and continuing until December 1,
2009. In addition, the Advisory Agreement obligates the Company to
indemnify CMCP against certain liabilities in connection with the engagement of
CMCP under the Advisory Agreement. Mr. Cagan, the Managing Director
and 50% owner of CMCP, currently serves as a member of the Company’s Board of
Directors.
Compensation
Committee Report
The
Company’s Compensation Committee, formed on July 22, 2008, has reviewed and
discussed the Compensation Discussion and Analysis required by Item 402(b)
of Regulation S-K with management and, based on such review and discussions, the
Company’s Compensation Committee approved the inclusion of the Compensation
Discussion and Analysis in this Annual Report on Form 10-K/A.
The
members of the Company’s Compensation Committee are as follows:
James F.
Link, Jr.
Elizabeth
P. Smith
Robert C.
Stempel
Compensation
Discussion and Analysis
Overview of Compensation
Program. The Company formed a Compensation Committee on July 22, 2008.
The Compensation Committee has responsibility for establishing, implementing and
continually monitoring adherence with the Company’s compensation philosophy. The
Committee strives to ensure that the total compensation paid to the named
executives is fair, reasonable and competitive. Generally, the types of
compensation and benefits provided to the named executives are similar to those
provided to executive officers serving in similar positions and with similar
responsibilities in other U.S. publicly-traded energy companies.
Throughout
this Annual Report on Form 10-K/A, the individuals who served as the Company’s
Chief Executive Officer, Chief Financial Officer, Senior Vice President and
Managing Director and Executive Vice President at the
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close of
fiscal 2008 are referred to as the “named executive officers.”
Compensation Philosophy and
Objectives. In setting overall compensation for executive
officers, the Compensation Committee strives to achieve and balance the
following objectives:
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Hiring
and retaining executive officers with the background and skills to help us
achieve our Company’s objectives;
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Aligning
the goals of executive officers with those of the stockholders of the
Company;
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Motivating
executive officers to achieve the Company’s key short, medium and
long-term goals as determined from time to time by the
Board;
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Conserving
cash by setting cash compensation levels consistent with market conditions
and supplementing it with equity compensation;
and
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Providing
sufficient ongoing cash compensation for our employees to meet their
personal financial obligations.
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The Board
believes that specific executive’s compensation level and structure should be
guided by the above objectives, and driven by the following
principles:
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Compensation
for our executive officers should be strongly linked to performance as
measured by the Board from time to
time;
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A
portion of each executive’s compensation should include compensation that
is at risk, contingent upon the Company’s performance and the success of
the Company over time;
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Compensation
should be fair and competitive in relation to the marketplace and the
compensation offered at the Company’s peer
companies;
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Employment
security should be used to equalize our employment opportunities with
those of more mature companies, if and as
appropriate;
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Sense
of ownership and long-term perspective should be reaffirmed through our
compensation structure; and
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Outstanding
individual achievement should be
recognized.
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Setting Executive
Compensation. Salaries and bonuses are our primary forms of
cash compensation. We strive to review employee compensation packages
on an annual basis, and endeavor to set overall employee compensation
competitively by utilizing benchmarks as reference points, using named executive
officer compensation information gleaned from publicly-available compensation
information for other U.S. publicly-traded energy companies, including Evolution
Petroleum Corporation, Dune Energy, FX Energy Inc., Harken Energy Corporation,
and Far East Energy Corporation. We try to provide a reasonable
amount of cash compensation to our employees to enable them to meet their
personal financial obligations. We provide short-term incentives by
awarding annual cash bonuses determined by the Committee on a discretionary
basis. The bonuses reward achievement of short-term goals and allow
us to recognize individual and team achievements. The cash portion of
our compensation structure consists of a higher percentage of salary as compared
to bonus. Bonuses and equity awards are our two forms of
performance-based compensation. We chose to use a mix of equity
awards and cash awards for performance based compensation. We provide
long-term incentives through equity awards, consisting of stock options that
vest over time and restricted stock subject to a Company repurchase option that
lapses over time. Equity awards are a non-cash form of
compensation. We believe equity awards are an effective way for us to
reward achievement of long-term goals, conserve cash resources and create a
sense of ownership in our executives. Options become valuable only as
long-term goals are achieved and our stock price rises. They provide
our executive officers with a personal stake in the performance of the Company's
equity even before vesting. Restricted stock awards that vest over
time provide similar incentives. A large percentage of the total
compensation paid to our executive officers consists of equity awards because we
believe this is consistent with our philosophy of paying for performance and
requiring more compensation to be at risk for employees at the highest
level.
The
Company is a party to an Executive Employment Agreement, dated September 29,
2006, with each of Frank C. Ingriselli, its President and Chief Executive
Officer, and Mr. Stephen F. Groth, its Vice President and Chief Financial
Officer, each of which were assumed by the Company as a result of the merger of
IMPCO into the Company in May 2007. The Executive Employment
Agreement entered into with Mr. Ingriselli (the “Ingriselli Agreement”) and Mr.
Groth (the “Groth Agreement”) each were originally approved by the Board of
Managers of IMPCO in September 2006. These Executive Employment
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Agreements
each provide for a set base salary, cash bonus ranges, grants
of equity options, and defined termination benefits, which we
believe, in part, compensate for the relatively lower annual salary at our
Company as compared to more mature companies by providing
security. As discussed further below, these Executive Employment
Agreements include severance payment provisions that require the Company to
continue Mr. Ingriselli’s and Mr. Groth’s salaries and benefits, respectively,
for 36 months if employment is terminated without “Cause” or the executive
resigns for “Good Reason,” as such terms are defined in the respective
employment agreements, and to make a lump sum payment equal to 48 months salary
and continue benefits for 48 months if such person is terminated within 12
months of a “Change in Control,” also as such term is defined in their
respective employment agreements.
The
Company is also a party to two agreements pursuant to which Richard Grigg, the
Company’s Senior Vice President and Managing Director, performs services to the
Company: (i) an Amended and Restated Employment Agreement,
dated January 27, 2009 (the “Amended Employment Agreement”), entered into
directly with Richard Grigg that governs the employment of Mr. Grigg in the
capacity of Managing Director of the Company and covers services provided by Mr.
Grigg to the Company within the PRC; and (ii) a Contract of Engagement, dated
January 27, 2009 (“Contract of Engagement”), entered into with KKSH Holdings
Ltd. (“KKSH”), a company registered in the British Virgin Islands in which Mr.
Grigg holds a minority interest and on whose board of directors Mr. Grigg sits,
which agreement governs the provision of services related to the development and
management of business opportunities for the Company outside of the PRC by Mr.
Grigg through KKSH. The Amended Employment Agreement has a term of
three years, and provides for a base salary of 990,000 RMB (approximately
$145,000) per year and the reimbursement of certain accommodation expenses in
Beijing, China, and certain other transportation and expenses of Mr.
Grigg. In addition, in the event the Company terminates Mr. Grigg’s
employment without Cause (as defined in the Amended Employment Agreement), the
Company must pay to Mr. Grigg a lump sum amount equal to 50% of Mr. Grigg’s
then-current annual base salary. The Contract of Engagement also has
a term of three years, and provides for a basic fee for the services of 919,000
RMB (approximately $135,000) per year, to be prorated and paid
monthly and subject to annual review and increase upon mutual agreement by the
Company and KKSH. Pursuant to the Contract of Engagement, the Company
shall also provide Mr. Grigg with medical benefits and life insurance coverage,
and pay KKSH an annual performance-based bonus award targeted at between 54% and
72% of the basic fee, awardable in the discretion of the Company’s Board of
Directors. In addition, in the event the Company terminates the
Contract of Engagement without Cause (as defined in the Contract of Engagement),
the Company must pay to KKSH a lump sum amount equal to 215% of the then-current
annual basic fee.
The
Company is also a party to an Employment Agreement with Jamie Tseng, the
Company’s Executive Vice President (the “Tseng Employment Agreement”), dated
April 22, 2009 and effective January 1, 2009. The Tseng Employment
Agreement governs the employment of Mr. Tseng in the capacity of Executive Vice
President of the Company through December 31, 2011, and provides for a base
salary of $140,000 per year, and provides that, in the event the Company
terminates Mr. Tseng’s employment without Cause (as defined in the Tseng
Employment Agreement), the Company must pay to Mr. Tseng a lump sum amount equal
to 50% of Mr. Tseng’s then-current annual base salary.
We
believe the competitive compensation and the employment agreements entered into
with Messrs. Ingriselli, Groth, Grigg and Tseng, and the contract entered into
with KKSH, foster an environment of relative security within which we believe
our executives will be able to focus on achieving Company goals. For
further discussion of the Company’s payment obligations to its named executive
officers under these agreements, see “Post-Termination Benefits”
below.
Prior to
the consummation of the mergers of ADS and IMPCO into the Company in May 2007,
at which point the Company became an operating entity, the Company (while
operating under is former names “Big Smith Brands, Inc.” and, subsequently,
“Pacific East Advisors, Inc.”) did not provide any significant compensation to
its named executive officers since approximately 2001. In evaluating
the Company’s named executive officers’ performance in year-ended December 31,
2008 for purposes of determining incentive bonus compensation for 2008, and in
evaluating their future compensation for year 2009, the Company’s management
researched named executive officer compensation for the following U.S.
publicly-traded energy companies: Evolution Petroleum Corporation, FX
Energy Inc., Harken Energy Corporation, Dune Energy, and Far East Energy
Corporation. The Company’s management compiled data regarding named
executive officer compensation for these benchmark companies, and the Company’s
Chief Executive Officer compared this data against the Company’s named executive
officers’ then-current salaries, equity incentives and potential cash bonus
payments, and presented the data to the Committee. The Committee
used this information, in part, to evaluate the named executive officers’
current and ongoing compensation packages and elements thereof as discussed
below.
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Performance Objectives and
Results. The Compensation Committee established performance
objectives for each executive officer for 2008 at the beginning of year
2008. At that time, the Chief Executive Officer of the Company
requested that each officer provide detailed quantitative and qualitative
personal and Company objectives they would strive to achieve in 2008, and the
Chief Executive Officer did so as well with respect to
himself.
In
accordance with the Compensation Committee Charter, at the end of 2008 the
Compensation Committee held a series of meetings and discussions regarding the
achievements that each individual officer made with respect to their objectives
provided earlier in the year. The Compensation Committee analyzed
each officer’s performance review prepared by the Company’s Chief Executive
Officer, and independently reviewed the performance of the Chief Executive
Officer and each other executive officer against the officer’s personal
performance objectives for the year without the Chief Executive Officer’s
participation. The Company’s Chief Executive Officer then provided
compensation recommendations for each executive officer to the Compensation
Committee, save for the Chief Executive Officer’s compensation, which was to be
determined in the Compensation Committee’s sole discretion. The
Compensation Committee then determined each executive officer’s salary and bonus
compensation in accordance with the Company’s compensation philosophy and
objectives, and compared each officer’s compensation against compensation levels
of appropriate officers in the benchmark group to determine their fairness and
competiveness, which was confirmed.
Some of
the principal quantitative and qualitative performance objectives and results
evaluated by the Compensation Committee in its review of named executive officer
performance in 2008 were as follows:
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Objective
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Result
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The
Company’s successful implementation of its strategic plan and strategy
through 2008 and meeting all its corporate timelines for governmental
filings and contractual obligations.
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All
corporate obligations for 2008 were met and all government filings were
timely made.
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The
Company’s acquisition of a coal bed methane asset in
China.
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The
Company successfully negotiated the acquisition of a 100% interest in the
Zijinshan production sharing agreement with China United Coal bed Methane
Company (CUCBM). The Company also guided and received Chinese
Government approval of the Zijinshan contract, receiving the Chinese
Government’s recognition that our Company was financially and technically
qualified to be the “Operator” of that block.
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Pursue
the acquisition of certain coal bed methane assets from ChevronTexaco in
China, and negotiate a reduced purchase price.
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The
Company successfully negotiated an extension to the 4 purchase agreements
with ChevronTexaco, including an aggregate $11 million reduction in
price
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Acquire
additional interest in the Baode coal bed methane block in
China.
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The
Company successfully negotiated and signed agreement with BHP Billiton to
acquire its interest in the Baode coal bed methane block and assume
operatorship of the same.
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Sign
an onshore oil-producing contract.
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The
Company entered into an Agreement on Cooperation with Well Lead Group
Limited relating to the possible acquisition of a participating interest
in two onshore producing areas in the People’s Republic of China, and,
further successfully re-negotiated the agreement resulting in several
million dollars of reduced cash and stock consideration payable by the
Company.
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Management
of the Company so that cash is conserved and liquidity is
maintained.
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The
Company was able to survive and focus its strategy on a small group of
prospects and used stock (instead of cash) as
possible
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Acquire
a possible downstream asset.
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Signed
the Handan Gas Distribution Letter of Intent.
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Bring
the Company into complete compliance with Sarbanes Oxley (“SOX”) and
establish a set of controls that will enable the Company to accurately
reflect its compliance above and beyond those required by
SOX
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The
Company engaged a SOX consulting firm and hired an in-house SOX expert,
and achieved SOX compliance within the required timeframe and at a
reasonable cost. The Company received one of the highest audit
integrity scores as rated for Accounting and Governance Risk (AGR) by
Audit Integrity (Forbes Magazine's auditing partner in the "100 Most
Trustworthy Companies," and a leading provider of accounting and
governance risk analysis on public companies).
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Have
all audits conducted successfully and on time and within cost
estimates.
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The
Company successfully completed all audits in a timely manner and was able
to reduce the actual billings by our auditors for certain items. The
Company received one of the highest audit integrity scores as rated for
Accounting and Governance Risk (AGR) by Audit Integrity (Forbes Magazine's
auditing partner in the "100 Most Trustworthy Companies," and a leading
provider of accounting and governance risk analysis on public
companies).
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Begin
the implementation of a new accounting system.
|
The
Company started implementation of the new “Ideas” accounting system, on
target for price and timeliness and potential to save money and time for
the Company.
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|
Implement
an IT solution for linking the Company’s computer servers between the
Company’s offices in China and the United States.
|
The
Company successfully implemented this solution and achieved the desired IT
links.
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|
Review
existing data and develop work program and budget for the Company’s
Zijinshan coal bed methane (CBM) project.
|
The
Company successfully obtained and reviewed existing data for the Zijinshan
CBM project and developed a work program for 2008/09.
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|
Negotiate
a seismic contract for Zijinshan CBM project.
|
The
Company evaluated contractors and negotiated and entered into a seismic
contract for the Zijinshan CBM project work program at a significant
dollar savings.
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Bring
in a potential joint venture partner, or farminee, to the Baode
Block
|
The
Company implemented and finalized a joint study of the Baode Pilot with
Arrow Energy.
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Role of the Chief Executive Officers
in Compensation Decisions. Since its formation on July 22, 2008, the
Committee makes all compensation decisions for the named executive officers and
approves recommendations regarding equity awards to other executives of the
Company. Decisions regarding the non-equity compensation of other executives are
made by the Chief Executive Officer in concert with the
Committee.
The Chief
Executive Officer reviews the performance of various executives. The conclusions
reached and recommendations based on these reviews, including with respect to
salary adjustments and annual award amounts, are presented to the Committee. The
Committee can exercise its discretion in modifying any recommended adjustments
or awards to executives.
Elements of Executive
Compensation. Upon consummation of the mergers of IMPCO and ADS into the
Company in May 2007, the named executive officers of IMPCO became named
executive officers of the Company, and the Company assumed the Executive
Employment Agreements entered into by and between IMPCO and each of Frank C.
Ingriselli and Stephen F. Groth. Accordingly, the Company continued
to pay base salary to each of these named executive officers consistent with the
level of base salary paid to each such officer at the time of the consummation
of the mergers, and the Company continues to be bound by the terms of the
Executive Employment Agreements which include provisions governing base salary,
performance based cash incentive compensation payments, long-term equity
incentive compensation and post-termination benefits described in greater detail
below. Mr. Grigg became a named executive officer of the Company effective
August 1, 2008, and the Company also has entered into an employment agreement
with Mr. Grigg which includes provisions governing base salary, performance
based cash incentive compensation payments, and post-termination benefits
described in greater detail below. Mr. Tseng became a named executive
officer of the Company upon consummation of the mergers of IMPCO and ADS into
the Company in May 2007, and the Company has entered into the Tseng Employment
Agreement with Mr. Tseng which includes provisions governing base salary and
post-termination benefits described in greater detail below. In evaluating
the Company’s named executive officers’ performance in year-ended December 31,
2008 for purposes of determining incentive bonus compensation for 2008, and in
evaluating their future compensation for year 2009, the Committee reviewed a
combination of elements of the Company’s total compensation offering to each
named executive officer as follows:
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·
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Base
salary
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|
·
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performance-based
cash incentive compensation;
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·
|
long-term
equity incentive compensation;
|
|
|
·
|
post-termination
benefits; and
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·
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other
personal benefits.
|
Base
Salary
The
Company provides named executive officers and other employees with base salary
to compensate them for services rendered during the fiscal year. Base salary
ranges for named executive officers are determined for each executive based on
his or her position and responsibility by using data compiled from benchmark
entities, and, as applicable, base salary as set forth in such officer’s
employment agreement. The Company strives to maintain base salary ranges for its
positions at between 75% and 125% of the midpoint of the base salary
established for each range based on benchmark company data compiled by the
Company.
During
its review of base salaries for executives, the Committee primarily
considers:
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·
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data
from benchmark entities;
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|
·
|
internal
review of the executive’s compensation, both individually and relative to
other executive officers within the Company;
and
|
|
|
·
|
individual
performance of the executive.
|
Salary
levels are typically considered annually as part of the Company’s performance
review process as well as upon a promotion or other change in job
responsibility. Merit based increases to salaries of named executives officers
are based on the Committee’s assessment of the individual’s
performance.
In
December 2008, the Committee analyzed the compensation of each of the Company’s
named executive officers. Based
on an analysis of benchmark company data, the Compensation Committee determined
that all the Company’s named executive officers’ salaries fell within the
75%-125% salary range, with each executive in fact falling below the 100%
mark. However, the Compensation Committee determined
that since the Company was a development stage company with limited cash, in
order to conserve cash no salary increases would take place in
2008. The Committee determined the following with respect to each
named executive’s base salary based, in part, on the benchmarks described
herein, each executive’s performance during the fiscal year, and the Company’s
overarching compensation objectives and philosophy, as
follows:
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·
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Chief
Executive Officer: Pursuant to the Ingriselli Agreement, Mr.
Ingriselli’s base salary is $350,000. The Committee’s review of
benchmark companies indicated that his base salary was approximately 10%
below the average base salary of the chief executive officers in the
benchmark group. However, in Company management’s presentation to the
Committee at its December 9, 2008 meeting, Company management recommended
that the Committee not increase Mr. Ingriselli’s salary at that time, in
part because of the economic environment and also to make the Company
stand out from its peers.
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|
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·
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Chief
Financial Officer: Pursuant to the Groth Agreement, Mr. Groth’s
annual base salary is $165,000. The Committee’s review of
benchmark companies indicated that his base salary was approximately 7%
below the average annual base salary level of chief financial officers of
the benchmark companies. Despite Mr. Groth’s performance in
fiscal year 2008 and his continued value to the Company, and after careful
consideration, the Committee deemed it to be in the best interest of the
Company and its stockholders, to not increase Mr. Groth’s base salary at
this time, in part because of the economic environment and also to make
the Company stand out from its
peers.
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·
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Senior
Vice President and Managing Director: Mr. Grigg was promoted to his
present position effective August 1, 2008, at which time he signed a three
year employment agreement that set his initial annual salary at $240,000
and provided for an annual performance-based bonus award targeted at
between 30% and 40% of his then-current annual base salary awardable in
the discretion of the Board. Mr. Grigg’s base salary was
determined by the Committee to be approximately within the range of the
average base salaries of his peers in the benchmark companies, although
none of whom had an overseas assignment like Mr. Grigg,
which assignments typically demand a significant salary premium
which Mr. Grigg does not receive. Accordingly, Mr. Grigg’s
annual base salary is 17% below the salaries
of his peers in the benchmark group due to the lack of an overseas
premium. However, the Committee decided not to increase Mr.
Grigg’s base salary at this time, in part because of the economic
environment and also to make the Company stand out from its
peers.
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·
|
Executive
Vice President: Pursuant to the Tseng Employment Agreement,
Mr. Tseng’s annual base salary is $140,000. The Committee’s
review of benchmark companies indicated that his base salary was
approximately 20% below the average base salary of his peers in the
benchmark group. In December 2008, the Committee decided not to
increase Mr. Tseng’s base salary at that time, in part because of the
economic environment and also to make the Company stand out from its
peers.
|
Performance
– Based Cash Incentive Compensation
In
December 2008, the Committee also reviewed performance-based cash incentive
compensation collected from the benchmark companies in its determination of
whether, and to what extent, to award performance-based cash incentive
compensation to the Company’s named executive officers. The Committee
determined as follows:
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·
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Chief
Executive Officer: Pursuant to the Ingriselli Agreement, Mr.
Ingriselli is entitled to an annual bonus of between 20 percent and 40
percent of his base salary, as determined by the Board, based on his
performance, and the Company’s achievement of financial and other
objectives established by the Board each year, provided, however, that his
annual bonus may be less based on the Board’s assessment of his
performance and the performance of the Company. Based on the
Committee’s assessment of Mr. Ingriselli’s achievements and performance
during the year, bonus awards granted by benchmark companies and taking
into consideration the Company’s bonus policies, philosophy and
objectives, the Committee agreed to award Mr. Ingriselli a cash bonus of
$140,000 in 2008.
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|
|
·
|
Chief
Financial Officer: Pursuant to the Groth Agreement, Mr. Groth
is entitled to an annual bonus of between
20 percent and 30 percent of his base salary, as determined by the Board,
based on his performance, and the Company’s achievement of financial and
other objectives established by the Board each year, provided, however,
that his annual bonus may be less based on the Board’s assessment of his
performance and the performance of the Company. The Committee
agreed to award Mr. Groth a $50,000 cash bonus for 2008, based on his
achievements and performance and taking into account the Company’s bonus
policies, philosophy and objectives, as well as the bonuses awarded to
comparable executives by benchmark
companies.
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- 79
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·
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Senior
Vice President and Managing Director: Pursuant to Mr. Grigg’s Employment
Agreement, he is entitled to an annual performance-based award targeted at
between 30 percent and 40 percent of his then current base salary,
awardable at the discretion of the Board. The Committee awarded
Mr. Grigg a 2008 cash bonus of $96,000 in recognition of his efforts to
advance the Company’s interests in
China.
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·
|
Executive
Vice President: The Company and Jamie Tseng did not have an
employment agreement that entitled Mr. Tseng to any annual cash bonus
awards as of December 31, 2008. However, after considering Mr. Tseng’s
dedication to delivering shareholder value and maintaining transparency in
operations in an ethical way, the Committee awarded Mr. Tseng a 2008 cash
bonus of $20,000.
|
Long-term
Equity Compensation
The
Compensation Committee of the Company periodically reviews the performance of
its executive officers, employees and consultants and grants long-term equity
compensation to qualified individuals under its 2007 Stock Plan. In
December 2008, the Board reviewed long-term equity compensation for the
Company’s named executive officers as follows:
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|
·
|
Chief
Executive Officer: Under the Ingriselli Agreement, Mr. Ingriselli is
eligible for long-term incentive compensation, such as restricted shares
and options to purchase shares of the Company’s capital stock, on such
terms as established by the Board. At its December 9, 2008 meeting, the
Committee granted Mr. Ingriselli 20,000 shares of restricted stock having
a grant date of December 9, 2008. The Committee also granted Mr.
Ingriselli an additional award of 130,000 shares of restricted stock
having a grant date of December 18, 2008. In the case of each grant, the
awards vest 40 percent on the twelve month anniversary of the grant dates,
30 percent on the two year anniversary of the grant dates and the 30
percent balance on the three year anniversary of the grant dates,
respectively. The Committee also awarded Mr. Ingriselli 350,000 stock
options exercisable at $0.64 a share, which was the fair market value of
the Company’s stock on the date of grant as determined by the Committee in
accordance with the 2007 Stock Plan. The options have a ten year term and
vest 50 percent on the twelve month anniversary of the grant date, 20
percent on the two year anniversary of the grant date, 20 percent on the
three year anniversary of the grant date, and 10 percent on the four year
anniversary of the grant date.
|
Furthermore,
the Committee resolved that when and if the Board and Company’s stockholders
approve an amendment to the 2007 Stock Plan to remove or revise the current
restriction that provides that no eligible person shall be granted equity
incentive grants under the 2007 Stock Plan during any 12-month period covering
more than 500,000 shares (the “Annual Award Restriction”), then the Committee
shall consider granting to Mr. Ingriselli an additional 200,000 shares of
restricted stock under the 2007 Stock Plan to complete the grants of Equity
Incentive Compensation as recommended by Company management and intended to be
granted by the Committee to Mr. Ingriselli, but were limited in doing so given
the Annual Award Restriction.
|
|
·
|
Chief
Financial Officer: Under the Groth Agreement, Mr. Groth is eligible for
long-term incentive compensation, such as restricted shares and
options to purchase shares of the Company’s capital stock, on such terms
as established by the Committee At its December 9, 2008
meeting, the Committee granted Mr. Groth 165,000 shares of restricted
stock in consideration for his accomplishments over year 2008, dedication
to delivering shareholder value, maintaining transparency in operations
and ethical standards. The award vests 40 percent on the twelve month
anniversary of the grant date, 30 percent on the two year anniversary of
the grant date and the 30 percent balance on the three year anniversary of
the
grant date. The Committee also awarded Mr. Groth 165,000 stock options
exercisable at $0.64 a share, which was the fair market value of the
Company’s stock on the date of grant as determined by the Committee in
accordance with the 2007 Stock Plan. The options have a ten year term
and
vest 50 percent on the twelve month anniversary of the grant date, 20
percent on the two year anniversary of the grant date, 20 percent on the
three year anniversary of the grant date, and 10 percent on the four year
anniversary of the grant
date.
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- 80
-
|
|
·
|
Senior
Vice President and Managing Director: Pursuant to Mr. Grigg’s
Employment Agreement signed on August 1, 2008, Mr. Grigg is entitled to an
annual performance-based bonus award targeted at between 30 percent and 40
percent of his then current annual base salary, awardable at the
discretion of the Committee. Based on Mr. Grigg’s dedication to delivering
shareholder value, maintaining transparency in and safe and effective
operations of the Company, and his ethical standards, the Committee
awarded Mr. Grigg 150,000 shares of restricted stock having a grant date
of December 9, 2008 and an additional 90,000 shares of
restricted stock having a grant date of December 18, 2008. The awards vest
40 percent on the twelve month anniversary of the grant dates, 30 percent
on the two year anniversary of the grant dates and the 30 percent balance
on the three year anniversary of the grant dates. The Committee
also awarded Mr. Grigg 240,000 stock options exercisable at $0.64 a share,
which was the fair market value of the Company’s stock on the date of
grant as determined by the Committee in accordance with the 2007 Stock
Plan. The options have a ten year term and vest 50 percent on the twelve
month anniversary of the grant date, 20 percent on the two year
anniversary of the grant date, 20 percent on the three year anniversary of
the grant date, and 10 percent on the four year anniversary of the grant
date.
|
|
|
·
|
Executive
Vice President: The Company and Mr. Tseng did not have an employment
agreement that entitled Mr. Tseng to any annual performance-based equity
incentive awards as of December 31, 2008. However, in
recognition of his performance and key role in developing relationships in
China, and his support of Mr. Ingriselli in securing transactions in
China, as well as to heighten Mr. Tseng’s sense of ownership in the
Company and to motivate him to achieve the Company’s medium and long-term
goals, the Committee awarded Mr. Tseng 85,000 shares of restricted stock
with a grant date of December 9, 2008. The award vests 40 percent on the
twelve month anniversary of the grant date, 30 percent on the two year
anniversary of the grant date and the 30 percent balance on the three year
anniversary of the grant date. The Committee also awarded
Mr. Tseng 85,000 stock options exercisable at $0.64 a share, which was the
fair market value of the Company’s stock on the date of grant as
determined by the Committee in accordance with the 2007 Stock Plan. The
options have a ten year term and vest 50 percent on the twelve month
anniversary of the grant date, 20 percent on the two year anniversary of
the grant date, 20 percent on the three year anniversary of the grant
date, and 10 percent on the four year anniversary of the grant
date.
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- 81
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Summary
of Base Salary, Performance-Based Cash Incentive Bonus and Long-Term Equity
Compensation Grants
With
respect to base salary, performance-based cash incentive bonus, and long-term
equity compensation grants to the name executive officers, the Compensation
Committee concluded that the cash and non-cash compensation, including the cash
bonuses and long-term equity compensation grants recommended by the Company’s
Chief Executive Officer, were in all cases below the average of the benchmark
companies as follows:
|
·
|
Chief
Executive Officer: Mr. Ingriselli’s base salary was
approximately 10% below the average base salary of his peers in the
benchmark group, and when combined with the $140,000 cash bonus granted by
the Compensation Committee, was 20% below the average base salary plus
cash bonus of his peers in the benchmark group. A 100% of
salary stock/option bonus amount was approximately 50% below the average
stock/option bonus payment amount awarded to his peers in the benchmark
group.
|
|
·
|
Chief
Financial Officer: Mr. Groth’s base salary was approximately 7%
below the average base salary of his peers in the benchmark group, and
when combined with the $50,000 cash bonus granted by the Compensation
Committee, was 25% below the average base salary plus cash bonus of his
peers in the benchmark group. The recommended stock/option bonus amount
was approximately 15% below the average stock/option bonus payment amount
awarded to his peers in the benchmark
group.
|
|
·
|
Senior
Vice President and Managing Director: Mr. Grigg’s base salary
was approximately equal to the average base salary of his peers in the
benchmark group, however, none of his peers were in an overseas
assignment, so Mr. Grigg’s salary, which already includes an overseas
premium, places his base salary significantly below that of his
peers. Also, when combined with the $96,000 cash bonus granted
by the Compensation Committee, was 17% below the average base salary plus
cash bonus of his peers in the benchmark group. The recommended
stock/option bonus amount was approximately 60% below the average
stock/option bonus payment amount awarded to his peers in the benchmark
group.
|
|
·
|
Executive
Vice President: Mr. Tseng’s base salary was approximately 20%
below the average base salary of his peers in the benchmark group, and
when combined with the $20,000 cash bonus granted by the Compensation
Committee, was 37% below the average base salary plus cash bonus of his
peers in the benchmark group. The recommended stock/option bonus amount
was approximately 30% below the average stock/option bonus payment amount
awarded to his peers in the benchmark
group.
|
Accordingly,
and in consideration of the various quantitative and qualitative performance
factors and accomplishments detailed above and the Company’s compensation
philosophy and objectives, the Compensation Committee determined to grant the
performance-based cash incentive compensation and long-term equity compensation
awards as detailed above.
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Post-Termination
Benefits
The
Company is a party to an Executive Employment Agreement, dated September 29,
2006, with each of Frank C. Ingriselli, its President and Chief Executive
Officer, and Mr. Stephen F. Groth, its Vice President and Chief Financial
Officer, which agreements were assumed by the Company as a result of the merger
of IMPCO into the Company in May 2007. These employment agreements
contain, among other things, severance payment provisions that require the
Company to continue Mr. Ingriselli’s and Mr. Groth’s salaries and benefits,
respectively, for 36 months if employment is terminated without “Cause” or the
executive resigns for “Good Reason,” as such terms are defined in the respective
employment agreements, and to make a lump sum payment equal to 48 months salary
and continue benefits for 48 months if such person is terminated within 12
months of a “Change in Control,” also as such term is defined in their
respective employment agreements. These agreements do not contain a
definitive termination date, but both Mr. Ingriselli and Mr. Groth have the
right to terminate his employment at any time without penalty.
“Cause”
is defined in each of the Executive Employment Agreements to include, but is not
be limited to: (a) the executive’s refusal to follow lawful
directions or the executive’s material failure to perform his duties (other than
by reason of physical or mental illness, injury, or condition), in either case,
after the executive has been given notice of his default and a reasonable
opportunity to cure it; (b) the executive’s willful and continued failure to
substantially comply with any material Company policy; (c) conviction of a
felony or the entering of a plea of nolo contendere to a felony, in either case
having significant adverse effect on the business
and affairs of the Company; or (d) the executive’s acceptance of a position with
another business enterprise or venture without the Company’s written consent at
any time before the executive has resigned from the Company or been
discharged.
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“Good
Reason” is defined in each of the Executive Employment Agreements to mean the
occurrence of one or more of the following events without the executive’s
express written consent: (i) the substantial and adverse diminution
of the executive’s duties or responsibilities from those in effect immediately
before the change in the executive’s position, other than merely as a result of
the Company ceasing to be a public company, a change in the executive’s title,
or the executive’s transfer to an affiliated company that assumes the Executive
Employment Agreement; (ii) the reduction in the executive’s annual base salary,
other than as part of across-the-board salary reductions affecting all
executives of similar status employed by the Company or any entity in control of
the Company; (iii) the Company’s failure to continue, or continue the
executive’s participation in, any compensation plan in which the executive
participated immediately before the event causing the executive’s resignation,
which discontinuance is material to the executive’s total compensation, unless
an equitable substitute arrangement has been adopted or made available on a
basis not materially less favorable to the executive than the plan in
effect immediately before the event causing the executive’s resignation, both as
to the benefits the executive receives and the executive’s level of
participation relative to other participants; (iv) any failure of any Company
successor to assume the Executive Employment Agreement; and (v) any other
material breach of the Executive Employment Agreement by the Company that is
either not committed in good faith or, even if committed in good faith, is not
remedied by the Company promptly after receipt of notice thereof from the
executive.
“Change
in Control” is defined in each of the Executive Employment Agreements to mean
(i) the acquisition of more than 50% of the outstanding voting securities of the
Company by an individual person or an entity or a group of individuals or
entities acting in concert, directly or indirectly, through one transaction or a
series of related transactions; (ii) a merger or consolidation of the Company
with or into another entity after which the stockholders of the Company
immediately prior to such transaction hold less than 50% of the voting
securities of the surviving entities; or (iii) a sale of all or substantially
all of the assets of the Company.
Assuming
that Messrs. Ingriselli and Groth were terminated without “Cause” on December
31, 2008, severance amounts payable would have been $1,050,000 and $495,000 for
Messrs. Ingriselli and Groth, respectively.
Assuming
that Messrs. Ingriselli and Groth were terminated within 12 months of a “Change
in Control” on December 31, 2008, severance amounts payable would have been
$1,400,000 and $660,000 for Messrs. Ingriselli and Groth,
respectively.
In
addition to the above severance amounts payable, all unvested options issued to
each of Messrs. Ingriselli, Groth and Tseng that were granted to such persons on
September 29, 2006, shall become 100% vested upon any termination of employment
of such person without Cause, without Good Reason, or upon death or
disability.
Pursuant
to the Executive Employment Agreements entered into with each of Messrs.
Ingriselli and Groth, each of Mr. Ingriselli and Groth are obligated for a
period of 24 months after their respective agreement’s termination to (i) not
solicit customers, suppliers or employees of the Company, and (ii) not engage in
any employment or activity, without the written consent of the Board, if the
loyal and complete fulfillment of his duties in such employment would inevitably
require him to reveal or utilize confidential information of the Company, as
reasonably determined by the Board. Payment of the above severance
amounts are not conditioned upon Messrs. Ingriselli’s and Groth’s satisfaction
of their respective non-solicitation and non-competition obligations under their
Executive Employment Agreements.
On August
1, 2008, the Company entered into an Employment Agreement with Richard Grigg
under which Mr. Grigg was promoted to the position of Senior Vice President and
Managing Director, which Agreement was amended effective January 27, 2009. The
Agreement terminates on January 27, 2012. Among other stipulations, the
Agreement provides that if Mr. Grigg is terminated by the Company without Cause
on or after 120 days from the date of the Agreement, the Company shall pay Mr.
Grigg a lump sum payment equal to 50 percent of his then current annual base
salary.
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Under
terms of this Agreement, "Cause" means (i) Mr. Grigg's gross and
willful misappropriation or theft of the Company's or its subsidiary's or
affiliate's funds or property, (ii) Mr. Grigg's commission of any fraud,
misappropriation, embezzlement or similar act, whether or not a punishable
criminal offense, or Mr. Grigg's conviction
of or entering of a plea of nolo contendere to a charge of any felony or crime
involving dishonesty or moral turpitude, (iii) Mr. Grigg's engagement in any
willful conduct that is injurious to the Company or its subsidiaries or
affiliates, (iv) Mr. Grigg's material breach of the Agreement or failure to
perform any of his material duties owed to the Company or its subsidiaries or
affiliates, or (v) Mr. Grigg's commission of any act involving willful
malfeasance or gross negligence or Mr. Grigg's failure to act involving material
nonfeasance.
Assuming
Mr. Grigg was terminated without “Cause” on December 31, 2008, under the then
existing contract, Mr. Grigg would be entitled to $131, 940 in salary and bonus
not yet paid as of that date.
The
Company is also a party to a Contract of Engagement (“Contract of Engagement”)
with KKSH Holdings Ltd., a company registered in the British Virgin Islands
(“KKSH”), dated January 27, 2009. Mr. Grigg is a minority shareholder and member
of the board of directors of KKSH. The Contract of Engagement governs
the engagement of KKSH for a period of three years to provide the services of
Mr. Grigg through KKSH as Senior Vice President of the Company strictly with
respect to the development and management of business opportunities for the
Company outside of the People’s Republic of China. Pursuant to the
Contract of Engagement, in the event the Company terminates the Contract of
Engagement without Cause, the Company must pay to KKSH a lump sum amount equal
to 215% of the then-current annual basic fee.
Under
terms of the Contract of Engagement, "Cause" means (i) Mr. Grigg's or KKSH’s
gross and willful misappropriation or theft of the Company's or any of its
subsidiaries’ or affiliates’ funds or property, (ii) Mr. Grigg's or KKSH’s
commission of any fraud, misappropriation, embezzlement or similar act, whether
or not a punishable criminal offense, or Mr. Grigg's or KKSH’s conviction of or
entering of a plea of nolo contendere to a charge of any felony or crime
involving dishonesty or moral turpitude, (iii) Mr. Grigg's or KKSH’s engagement
in any willful conduct that is injurious to the Company or its subsidiaries or
affiliates, (iv) Mr. Grigg's or KKSH’s material breach of the Agreement or
failure to perform any of the material duties owed to the Company or its
subsidiaries or affiliates, or (v) Mr. Grigg's or KKSH’s commission of any act
involving willful malfeasance or gross negligence or Mr. Grigg's or KKSH’s
failure to act involving material nonfeasance.
If this
Contract of Engagement had been effective at the time and was terminated without
“Cause” on December 31, 2008, termination amounts payable would have been
$72,218 to Mr. Grigg and $288,269 to KKSH.
The
Company is also a party to an Employment Agreement with Jamie Tseng, the
Company’s Executive Vice President (the “Tseng Employment Agreement”), dated
April 22, 2009 and effective January 1, 2009. Prior to such time, Mr. Tseng was
not contractually entitled to any post-termination benefits from the Company.
The Tseng Employment Agreement governs the employment of Mr. Tseng in the
capacity of Executive Vice President of the Company through December 31, 2011,
and provides for a base salary of $140,000 per year, and provides that, in the
event the Company terminates Mr. Tseng’s employment without Cause, the Company
must pay to Mr. Tseng a lump sum amount equal to 50% of Mr. Tseng’s then-current
annual base salary.
Under the
terms of the Tseng Employment Agreement, “Cause” means (i) Mr. Tseng’s
gross and willful misappropriation or theft of the Company’s or any of its
subsidiary’s or affiliate’s funds or property, (ii) Mr. Tseng’s commission
of any fraud, misappropriation, embezzlement or similar act, whether or not a
punishable criminal offense, or Mr. Tseng’s conviction of or entering of a plea
of nolo contendere to a charge of any felony or crime involving dishonesty or
moral turpitude, (iii) Mr. Tseng’s engagement in any willful conduct that
is injurious to the Company or any of its subsidiaries or affiliates,
(iv) Mr. Tseng’s material breach of the Agreement or failure to perform any
of his material duties owed to the Company or any of its subsidiaries or
affiliates, or (v) Mr. Tseng’s commission of any act involving willful
malfeasance or gross negligence or Mr. Tseng’s failure to act involving material
nonfeasance.
If the
Tseng Employment Agreement had been effective at the time and was terminated
without “Cause” on December 31, 2008, termination amounts payable would have
been $70,000 to Mr. Tseng.
- 85
-
Other
Personal Benefits
In 2007,
the Company adopted a defined contribution 401(k) plan for its employees. The
plan provides for Company
matching of 200% on up to the first 3% of salary contributed by employees.
Company contributions are immediately vested to the employee. The
named executive officers participate in this plan on the same basis as other
employees. There is no supplemental nonqualified plan of this type
for officers.
Attributed
costs of the personal benefits described above for the named executive officers
for the fiscal year ended December 31, 2008 are included in the “Summary
Compensation Table.”
The
Company has also entered into indemnification agreements with its officers and
directors, including the named executive officers, which provides for limitation
of liability and indemnification of such individuals under certain circumstances
as described under the heading “Limitation of Liability and Indemnification
Matters” below.
Summary
Compensation Table
The
following table sets forth the compensation for the Principal Executive Officers
(“PEO”), the Principal Financial Officer (“PFO”), the Senior Vice President and
Managing Director and the Executive Vice President. No other
executive officer’s total compensation for the fiscal years ended December 31,
2006, 2007 or 2008 exceeded $100,000.
SUMMARY
COMPENSATION TABLE
|
Stock
|
Option
|
All
Other
|
|||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Awards
(18)
|
Awards
(19)
|
Compensation
|
Total
|
||||||||||||||||||
|
Frank
C. Ingriselli
|
2006
|
-0- | $ | 80,000 | (11) | -0- | $ | 11,815 | $ | 208,125 | (20) | $ | 299,940 | ||||||||||||
|
President
and Chief
|
2007
|
$ | 262,500 | (5) | $ | 140,000 | (12) | $ | 7,479 | $ | 87,471 | $ | 63,450 | (21) | $ | 560,900 | |||||||||
|
Executive
Officer
(
PEO)
(1)
|
2008
|
$ | 350,000 | (6) | $ | 140,000 | (12) | $ | 193,109 | $ | 172,617 | $ | 21,000 | (22) | $ | 876,726 | |||||||||
|
Stephen
F. Groth
|
2006
|
$ | 30,800 | (7) | $ | 10,000 | (13) | -0- | $ | 5,345 | $ | 59,450 | (23) | $ | 105,595 | ||||||||||
|
Vice
President and
|
2007
|
$ | 135,600 | (8) | $ | 45,000 | (14) | $ | 2,244 | $ | 32,700 | $ | 11,436 | (24) | $ | 226,980 | |||||||||
|
Chief
Financial Officer (PFO) (2)
|
2008
|
$ | 165,000 | (9) | $ | 50,000 | (15) | $ | 61,444 | $ | 75,171 | $ | 13,080 | (24) | $ | 364,695 | |||||||||
|
Richard
Grigg
|
|||||||||||||||||||||||||
|
Senior
Vice President and Managing
Director
(3)
|
2008
|
$ | 198,001 | (10) | $ | 96,000 | (16) | $ | 386,241 | $ | 22,014 | $ | 107,355 | (25) | $ | 809,611 | |||||||||
|
Jamie
Tseng
|
2006
|
-0- | -0- | -0- | $ | 7,089 | $ | 128,000 | (26) | $ | 135,089 | ||||||||||||||
|
Executive
Vice
|
2007
|
-0- | -0- | -0- | $ | 26,316 | $ | 134,673 | (26) | $ | 160,989 | ||||||||||||||
|
President
(4)
|
2008
|
-0- | $ | 20,000 | (17) | $ | 2,228 | $ | 33,294 | $ | 142,675 | (26) | $ | 198,197 | |||||||||||
|
|
|
|
|
|
- 86
-
|
|
1)
|
Mr.
Ingriselli was elected President and Chief Executive Officer, and
designated a member of the Company’s Board of Directors, on May 7, 2007
upon closing of the mergers of Inner Mongolia Production Company LLC
(“IMPCO”) and Advanced Drilling Services, LLC (“ADS”) into the Company
(the “Mergers”). Prior to that, he served as Manager, Chief Executive
Officer and President of IMPCO.
|
|
|
2)
|
Mr.
Groth was elected Vice President and Chief Financial Officer of the
Company on May 7, 2007 upon closing of the Mergers. Prior to that, he
served as Manager and Chief Financial Officer of
IMPCO.
|
|
|
3)
|
Mr.
Grigg was hired as Managing Director of the Company’s International
operations on March 1, 2008 and promoted to his present position of Senior
Vice President and Managing Director on August 1, 2008. From October 11,
2007 until February 29, 2008, Mr. Grigg provided consulting services to
the Company.
|
|
|
4)
|
Mr.
Tseng was elected Executive Vice President of the Company on May 7, 2007
upon closing of the Mergers. Prior to that, he served as Manager and
Executive Vice President of IMPCO.
|
|
|
5)
|
Represents
employee salary as an officer of IMPCO from April 1, 2007 through May 6,
2007 and employee salary as an officer of Pacific Asia Petroleum, Inc.
from May 7, 2007 to December 31,
2007.
|
|
|
6)
|
Represents
employee salary as an officer of Pacific Asia Petroleum, Inc. for the year
2008.
|
|
|
7)
|
Represents
employee salary as an officer of
IMPCO.
|
|
|
8)
|
Represents
employee salary as an officer of IMPCO through May 6, 2007 and employee
salary as an officer of Pacific Asia Petroleum, Inc. from May 7, 2007 to
December 31, 2007.
|
|
|
9)
|
Represents
employee salary as an officer of Pacific Asia Petroleum, Inc. for the year
2008.
|
|
|
10)
|
Represents
Mr. Grigg’s salary as Managing Director of the Company’s international
operations from March 1, 2008 until July 31, 2008, and in his current
position until December 31, 2008. On August 1, 2008, Mr. Grigg
was promoted to his current position and salary. Under
the terms of Mr. Grigg’s Employment Agreement with the Company, Mr. Grigg
may request payment in the currency of his choice. Salary has been
computed based on the monthly average exchange rates for the applicable
currencies during the year.
|
|
|
11)
|
Represents
$80,000 fiscal year 2006 bonus awarded to Mr. Ingriselli by the Board of
Directors of the Company and paid to Mr. Ingriselli in
2007.
|
|
|
12)
|
Represents
$140,000 fiscal years 2007 and 2008 bonuses awarded to Mr. Ingriselli by
the Board of Directors and Compensation Committee of the Company and paid
to Mr. Ingriselli in 2007 and 2008,
respectively.
|
|
|
13)
|
Represents
$10,000 fiscal year 2006 bonus awarded to Mr. Groth by the Board of
Directors of the Company and paid to Mr. Groth in
2007.
|
|
|
14)
|
Represents
$45,000 fiscal year 2007 bonus awarded to Mr. Groth by the Board of
Directors of the Company and paid to Mr. Groth in
2007.
|
|
|
15)
|
Represents
$50,000 fiscal year 2008 bonus awarded to Mr. Groth by the Compensation
Committee of the Company’s Board of Directors and paid to Mr. Groth in
2008.
|
|
|
16)
|
Represents
$96,000 fiscal year 2008 bonus awarded to Mr. Grigg by the Compensation
Committee of the Company’s Board of Directors but not yet paid to Mr.
Grigg, as of December 31, 2008.
|
|
|
17)
|
Represents
$20,000 fiscal year 2008 bonus awarded to Mr. Tseng by the Compensation
Committee of the Company’s Board of Directors and paid to Mr. Tseng in
2008.
|
|
|
18)
|
Represents
the compensation costs of restricted common stock awards under SFAS No.
123 (R) recorded to expense in the Company’s financial statements in years
2007 and 2008. The assumptions used are found in the Notes to
Consolidated Financial Statements, Note 13 (“Stock-Based Compensation”) in
the Company’s Form 10-K for the year ended December 31,
2008.
|
|
|
19)
|
Represents
the compensation costs of stock options under SFAS No. 123 (R) recorded to
expense in the Company’s financial statements for the respective
years. The assumptions used are found in the Notes to Consolidated
Financial Statements, Note 13 (“Stock-Based Compensation”) in the
Company’s Form 10-K for the year ended December 31,
2008.
|
- 87
-
|
|
20)
|
Represents
fees paid to Mr. Ingriselli for his provision of consulting services to
IMPCO, including business development activities, negotiations and
contract work, legal services, financial advisory services, and
coordination activities pursuant to a consulting agreement entered into
with IMPCO for the term of December 15,
2005 through December 31, 2006, and prior to his employment with the
Company.
|
|
|
21)
|
Represents
fees for consulting services to IMPCO of $49,950 through March 31, 2007
prior to Mr. Ingriselli’s change in status from consultant to employee,
and $13,500 in Company 401(k) plan contributions in 2007 during his
service period as an employee, provided on the same basis as for all
employees.
|
|
|
22)
|
Represents
Company 401(k) plan contributions during 2008 provided on the same basis
as for all employees and $7,200 in rent
reimbursement.
|
|
|
23)
|
Represents
fees paid to Mr. Groth for his provision of consulting services to IMPCO,
including assistance with financial analysis and financial controls,
accounting and other fiscal activities, pursuant to a consulting agreement
entered into with IMPCO for the term of December 15, 2005 through August
31, 2006, and prior to his employment with the
Company.
|
|
|
24)
|
Represents
Company 401(k) plan contributions in 2007 and 2008, provided on the same
basis as for all employees.
|
|
|
25)
|
Includes
$42,000 in consulting fees for the period January 1, 2008 through February
29, 2008 pursuant to terms of Mr. Grigg’s Consulting Agreement with the
Company. Also includes $36,528 in housing allowance, medical
and life insurance benefits, $13,200 in 401(k)-like benefits and $12,957
in travel allowance paid to or reimbursed to Mr. Grigg by the Company as
required pursuant to Mr. Grigg’s Employment Agreement with the Company,
which became effective March 1, 2008 and was amended August 1,
2008.
|
|
|
26)
|
Represents
fees paid to Mr. Tseng for his provision of consulting services to IMPCO
and Pacific Asia Petroleum, Inc., including assistance with Beijing
representative office activities, business development activities,
negotiations, government relations activities and coordination activities,
pursuant to consulting agreements. Also includes $2,671 in medical and
life insurance benefits in 2008 and $3,000 in 2006 and $8,000 in 2007 for
rent paid by IMPCO to Mr. Tseng for office space provided by Mr. Tseng in
Beijing.
|
Tax
and Accounting Considerations
Section 162(m)
of the Internal Revenue Code, as amended, generally disallows a tax deduction to
public companies for compensation in excess of $1 million paid to any executive
officer unless such compensation is paid pursuant to a qualified
performance-based compensation plan. All compensation awarded to our
executive officers in 2008 is expected to be tax deductible. The
Board considers such deductibility and the potential cost to the Company when
granting awards and considering salary changes.
The
Company accounts for equity awards under the provisions of Statement of
Financial Accounting Standard No. 123 (revised 2004) Share-Based
Payment (FAS No. 123(R)). The Company charges the estimated
fair value of option and restricted stock awards to income over the time of
service provided by the employee to earn the award, typically the vesting
period. The fair value of options is measured using the Black-Scholes
option pricing model. The fair value of non-vested stock awards
issued under the Company’s 2007 Stock Plan is measured by the fair market value
of Common Stock of the Company determined in accordance with the 2007 Stock Plan
as the mean between the representative bid and asked prices on the close of
business the day immediately prior to the grant date as reported by Pink Sheets
LLC, with no discount for vesting period or other restrictions. The
compensation expense to the Company under FAS No. 123(R) is one of the factors
the Board considers in determining equity awards to be granted, and also may
influence the vesting period chosen.
- 88
-
Limitation
of Liability and Indemnification Matters
Under
Section 145 of the Delaware General Corporation Law (the “DGCL”), the Company
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the “Securities Act”). The Company’s Bylaws provide
that, to the fullest extent permitted by law, the Company shall indemnify and
hold harmless any person who was or is made or is threatened to be made a party
or is otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that such person, or the person for whom he is the legally
representative, is or was a director or officer of the Company, against all
liabilities, losses, expenses (including attorney’s fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such proceeding.
The
Company’s Restated Certificate of Incorporation provides for the indemnification
of, and advancement of expenses to, such agents of the Company (and any other
persons to which Delaware law permits the Company to provide indemnification)
through Bylaw provisions, agreements with such agents or other persons, vote of
stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted under Section 145 of the
DGCL, subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to the Company, its
stockholders and others. The provision does not affect directors’
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. The Company has entered into
indemnification agreements with certain of its current executive officers and
directors, and intends to enter into agreements with its future directors and
executive officers, that require the Company to indemnify such persons to the
fullest extent permitted by law, against expenses, judgments, fines, settlements
and other amounts incurred (including attorneys’ fees), and advance expenses if
requested by such person, in connection with investigating, defending, being a
witness in, participating, or preparing for any threatened, pending, or
completed action, suit, or proceeding or any alternative dispute resolution
mechanism, or any inquiry, hearing, or investigation (collectively, a
“Proceeding”), relating to any event or occurrence that takes place either prior
to or after the execution of the indemnification agreement, related to the fact
that such person is or was a director or officer of the Company, or while a
director or officer is or was serving at the request of the Company as a
director, officer, employee, trustee, agent, or fiduciary of another foreign or
domestic corporation, partnership, joint venture, employee benefit plan, trust,
or other enterprise, or was a director, officer, employee, or agent of a foreign
or domestic corporation that was a predecessor corporation of the Company or of
another enterprise at the request of such predecessor corporation, or related to
anything done or not done by such person in any such capacity, whether or not
the basis of the Proceeding is alleged action in an official capacity as a
director, officer, employee, or agent or in any other capacity while serving as
a director, officer, employee, or agent of the Company. Indemnification is
prohibited on account of any Proceeding in which judgment is rendered against
such persons for an accounting of profits made from the purchase or sale by such
persons of securities of the Company pursuant to the provisions of Section 16(b)
of the Securities Exchange Act of 1934, as amended, or similar provisions of any
federal, state, or local laws. The indemnification agreements also set forth
certain procedures that will apply in the event of a claim for indemnification
thereunder. The Company has been informed that in the opinion of the
Securities and Exchange Commission, indemnification provisions, such as those
contained in the Company’s Restated Certificate of Incorporation, are
unenforceable with respect to claims arising under federal securities laws and,
therefore, do not eliminate monetary liability of directors.
Insurance. The
Company currently maintains an Executive and Organization Liability Insurance
Policy issued by Illinois National Insurance Company, a member company of
American International Group, Inc. (“AIG”). This policy provides
insurance coverage on behalf of any person who is or was a director, officer or
employee of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise against liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Company would have the power to indemnify him against
liability under the provisions of this section.
Settlement by the Company.
The right of any person to be indemnified is subject always to the right of the
Company by its Board of Directors, in lieu of such indemnity, to settle any such
claim, action, suit or proceeding at the expense of the Company by the payment
of the amount of such settlement and the costs and expenses incurred in
connection therewith.
- 89
-
Grants
of Plan-Based Awards in the Last Fiscal Year
The
following table sets forth information with respect to incentive stock options
and restricted stock granted to the executive officers named in the Summary
Compensation Table during the year ended December 31, 2008 under the Company’s
2007 Stock Plan.
|
Grant
|
Stock
Awards: Number of Shares of
|
Option
Awards: Number of Securities Underlying
|
Exercise
or Base Price of stock and Option Awards
|
Closing
Stock Price on Date of Awards
|
Grant
Date Fair Value of Stock and Option
|
|||
|
Name
|
Date
|
Stock
|
Options
|
($/Sh)
(1)
|
($/Sh)(2)
|
Awards
|
||
|
Frank
C. Ingriselli (PEO)
|
12/9/2008
|
20,000
|
(4)
|
350,000
|
(3)
|
$0.64
|
$0.75
|
$149,300
|
|
12/18/2008
|
130,000
|
(4)
|
$0.68
|
$0.65
|
$87,750
|
|||
|
Stephen
F. Groth (PFO)
|
12/9/2008
|
165,000
|
(4)
|
165,000
|
(3)
|
$0.64
|
$0.75
|
$169,950
|
|
Richard
Grigg
|
12/9/2008
|
150,000
|
(4)
|
240,000
|
(3)
|
$0.64
|
$0.75
|
$189,600
|
|
12/18//2008
|
90,000
|
(4)
|
$0.68
|
$0.65
|
$60,750
|
|||
|
Jamie
Tseng
|
12/9/2008
|
85,000
|
(4)
|
85,000
|
(3)
|
$0.64
|
$0.75
|
$87,550
|
|
|
1)
|
The
exercise price of option awards issued under the Company’s 2007 Stock Plan
is equal to the fair market value of Common Stock of the Company as
determined in accordance with the 2007 Stock Plan as the mean between the
representative bid and asked prices on the close of business the day
immediately prior to the applicable Grant Date as reported by Pink Sheets
LLC.
|
|
|
2)
|
The
closing stock price on the date the option awards were granted (December
9, 2008 and December 18, 2008, as applicable) is different from the
exercise price of the option awards because, in accordance with the
Company’s 2007 Stock Plan under which these option awards were granted,
the exercise price for such option awards is equal to the fair market
value of Common Stock of the Company calculated as the mean between the
representative bid and asked prices on the close of business the day
immediately prior to the date these option awards were granted (December
9, 2008 and December 18, 2008, as applicable) as reported by Pink Sheets
LLC.
|
|
|
3)
|
The
Options will vest and become exercisable as follows: at the rate of
(i) 50% of the shares on the twelve month anniversary of the Grant
Date (ii) 20% of the shares on the two year anniversary of the Grant Date
(iii) 20% of the shares on the three year anniversary of the Grant Date,
and (iv) 10% of the shares on the four year anniversary of the Grant Date,
in each case for so long as the recipient of the Option remains an
employee of or a consultant to the Company, and subject to the terms and
conditions of a stock option agreement entered into by and between the
Company and the Optionee.
|
|
|
4)
|
Grant
of restricted stock subject to forfeiture. 40% of the shares
will become vested and nonforfeitable on the twelve month anniversary of
the Grant Date, 30% of the shares will become vested and nonforfeitable on
the two year anniversary of the Grant Date, and the balance 30% of the
shares will become vested and nonforfeitable on the three year anniversary
of the Grant Date, in each case for so long as the recipient of the stock
remains an employee of or consultant to the Company and subject to the
terms and conditions of the restricted stock purchase agreement entered
into by and between the Company and the
grantee.
|
- 90
-
Narrative
to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment
Agreements with Named Executive Officers
Employment
Agreement with Frank C. Ingriselli. The Company and
Mr. Ingriselli are parties to the Ingriselli Agreement. This employment
agreement contains, among other things, severance payment provisions that
require the Company to continue Mr. Ingriselli’s salary and benefits for 36
months if employment is terminated without “cause,” as such is term defined in
the Ingriselli Agreement, and to make a lump sum payment equal to 48 months
salary and continue benefits for 48 months if terminated within 12 months of a
“change in control,” also as such term is defined in the Ingriselli Agreement.
This agreement does not contain a definitive termination date, but Mr.
Ingriselli does have the right to terminate his employment at any time without
penalty. The Ingriselli Agreement also prohibits Mr. Ingriselli from engaging in
competitive activities during and for a period of 24 months following
termination of his employment that would result in disclosure of the Company’s
confidential information, but does not contain a general restriction on engaging
in competitive activities. Pursuant to the Ingriselli Agreement, Mr.
Ingriselli’s annual base salary is $350,000, and he is entitled to an annual
bonus of between 20% and 40% of his base salary, as determined by the Company’s
Board of Directors based on his performance, the Company’s achievement of
financial performance and other objectives established by the Board of Directors
each year, provided, however, that his annual bonus may be less as approved by
the Board of Directors based on his
performance
and the performance of the Company. Under the agreement, Mr.
Ingriselli is also eligible for long-term incentive compensation, such as
additional options to purchase shares of the Company’s capital stock, on such
terms as established by the Board of Directors. To date, the Board of Directors
has not established any terms, performance metrics or eligibility criteria for
determining when, and to what extent, Mr. Ingriselli may be eligible for such
long-term incentive compensation, or what such long-term incentive compensation
may include.
Employment
Agreement with Stephen F. Groth. The Company and
Mr. Groth are parties to the Groth Agreement. This employment
agreement contains, among other things, severance payment provisions that
require the Company to continue Mr. Groth’s salary and benefits for 36 months if
employment is terminated without “cause,” as such term is defined in the Groth
Agreement, and to make a lump sum payment equal to 48 months salary and continue
benefits for 48 months if terminated within 12 months of a “change in control,”
as such term is defined in the Groth Agreement. This agreement does not contain
a definitive termination date, but Mr. Groth does have the right to terminate
his employment at any time without penalty. The Groth Agreement also prohibits
Mr. Groth from engaging in competitive activities during and for a period of 24
months following termination of his employment that would result in disclosure
of the Company’s confidential information, but does not contain a general
restriction on engaging in competitive activities. Pursuant to the
Groth Agreement, Mr. Groth’s annual base salary is $150,000 (changed to $165,000
effective January 1, 2008), and he is entitled to an annual bonus of between 20%
and 30% of his base salary, as determined by the Company’s Board of Directors
based on his performance, the Company’s achievement of financial performance and
other objectives established by the Board of Directors each year, provided,
however, that annual bonus may be less as approved by the Board of Directors
based on his performance and the performance of the
Company. Under the agreement, Mr. Groth is eligible for
long-term incentive compensation, such as additional options to purchase shares
of the Company’s capital stock, on such terms as established by the Board of
Directors. To date, the Board of Directors has not established any terms,
performance metrics or eligibility criteria for determining when, and to what
extent, Mr. Groth may be eligible for such long-term incentive compensation, or
what such long-term incentive compensation may include.
Compensatory
Agreements with Richard Grigg. The Company is a party
to two agreements pursuant to which Richard Grigg, the Company’s Senior Vice
President and Managing Director, performs services to the
Company: (i) an Amended and Restated Employment Agreement,
dated January 27, 2009 (the “Amended Employment Agreement”), entered into
directly with Richard Grigg that governs the employment of Mr. Grigg in the
capacity of Managing Director of the Company and covers services provided by Mr.
Grigg to the Company within the PRC; and (ii) a Contract of Engagement, dated
January 27, 2009 (“Contract of Engagement”), entered into with KKSH Holdings
Ltd. (“KKSH”), a company registered in the British Virgin Islands in which Mr.
Grigg holds a minority interest and on whose board of directors Mr. Grigg sits,
which agreement governs the provision of services related to the development and
management of business opportunities for the Company outside of the PRC by Mr.
Grigg through KKSH. The Amended Employment Agreement has a term of
three years, and provides for a base salary of 990,000 RMB (approximately
$145,000) per year and the reimbursement of certain accommodation expenses in
Beijing, China, and certain other transportation and expenses of Mr.
Grigg. In addition, in the event the Company terminates Mr. Grigg’s
employment without Cause (as defined in the Amended Employment Agreement), the
Company must pay to Mr. Grigg a lump sum amount equal to 50%
- 91
-
of Mr.
Grigg’s then-current annual base salary. The Contract of Engagement
also has a term of three years, and provides for a basic fee for the services of
919,000 RMB (approximately $135,000) per year, to be prorated and
paid monthly and subject to annual review and increase upon mutual agreement by
the Company and KKSH. Pursuant to the Contract of Engagement, the
Company shall also provide Mr. Grigg with medical benefits and life insurance
coverage, and pay KKSH an annual performance-based bonus award targeted at
between 54% and 72% of the basic fee, awardable in the discretion of the
Company’s Board of Directors. In addition, in the event the Company
terminates the Contract of Engagement without Cause (as defined in the Contract
of Engagement), the Company must pay to KKSH a lump sum amount equal to 215% of
the then-current annual basic fee.
Employment
Agreement with Jamie Tseng. The Company is a party
to an Employment Agreement with Jamie Tseng, the Company’s Executive Vice
President (the “Tseng Employment Agreement”), dated April 22, 2009 and effective
January 1, 2009. The Tseng Employment Agreement governs the employment of Mr.
Tseng in the capacity of Executive Vice President of the Company through
December 31, 2011, and provides for a base salary of $140,000 per year, and
provides that, in the event the Company terminates Mr. Tseng’s employment
without Cause (as defined in the Tseng Employment Agreement), the Company must
pay to Mr. Tseng a lump sum amount equal to 50% of Mr. Tseng’s then-current
annual base salary.
2007
Stock Plan
The
Company’s Board of Directors and stockholders approved and adopted the 2007
Stock Plan on May 7, 2007 (the “2007 Plan”). The 2007 Plan provides
for the grant of restricted stock, incentive and/or non-qualified
options,and stock
appreciation rights (“SARs”) to employees, directors and consultants of the
Company to purchase up to an aggregate of 4,000,000 shares of Common Stock. The
purpose of the 2007 Plan is to provide participants with incentives which will
encourage them to acquire a proprietary interest in, and continue to provide
services to, the Company, and to attract new employees, directors and
consultants with outstanding qualifications. The 2007 Plan is administered by
the Compensation Committee on behalf of the Board of Directors which has
discretion to select optionees and to establish the terms and conditions of each
option, subject to the provisions of the 2007 Plan.
Pursuant
to the 2007 Plan, the Company may from time to time grant its employees,
directors and consultants restricted stock and options to purchase shares of,
and SARs with respect to, the Company’s Common Stock at exercise prices
determined by the Board of Directors. The exercise price of incentive stock
options may not be less than 110% of the fair market value of Common Stock as of
the date of grant. The Internal Revenue Code currently limits to $100,000 the
aggregate value of Common Stock that may be acquired in any one year pursuant to
incentive stock options under the 2007 Plan or any other option plan adopted by
the Company. Nonqualified options may be granted under the 2007 Plan at an
exercise price of not less than 85% of the fair market value of the Common Stock
on the date of grant. Nonqualified options may be granted without regard to any
restriction on the amount of Common Stock that may be acquired pursuant to such
options in any one year. Options may not be exercised more than ten years after
the date of grant. All stock options are non-transferrable by the grantee (other
than upon the grantee’s death) and may be exercised only by the optionee during
his service to the Company as an employee, director or consultant or for a
specified period of time following termination of such service. The aggregate
number of shares of Common Stock issuable under the 2007 Plan, the number of
shares of stock, options and SARs outstanding, and the exercise price thereof
are subject to adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends.
Pursuant
to the 2007 Plan, in the event of a pending or threatened takeover bid, tender
offer or exchange offer for twenty percent (20%) or more of the outstanding
Common Stock or any other class of stock or securities of the Company (other
than a tender offer or exchange offer made by the Company or any of its
subsidiaries), whether or not deemed a tender offer under applicable federal or
state law, or in the event that any person makes any filing under Section 13(d)
or 14(d) of the Exchange Act with respect to the Company, other than a filing on
Form 13G or Form 13D, the Board of Directors may in its sole discretion, without
obtaining stockholder approval, take one or more of the following actions to the
extent not inconsistent with other provisions of the 2007 Plan: (a) accelerate
the exercise dates of any outstanding option or SAR, or make the option or SAR
fully vested and exercisable; (b) pay cash to any or all holders of options or
SARs in exchange for the cancellation of their outstanding options or SARs; or
(c) make any other adjustments or amendments to the 2007 Plan and outstanding
options or SARs and substitute new options or SARs for outstanding options or
SARs.
- 92
-
In
general, upon the termination of service to the Company as an employee, director
or consultant of an optionee or restricted stock or SAR recipient, all options,
shares of restricted stock and SARs granted to such person that have not yet
vested will immediately terminate, and those options and SARs that have vested
as of the date of termination will be exercisable for 90 days after such
termination date (12 months in the case of termination by reason of death or
disability).
As of
December 31, 2008, options to purchase an aggregate of 1,372,000 shares of
Common Stock and restricted stock grants of an aggregate of 900,000 shares of
Common Stock had been issued under the 2007 Plan. The 2007 Plan terminates on
May 7, 2017.
Outstanding
Equity Awards at Fiscal Year End
The
following table shows information concerning unexercised stock options as of
December 31, 2008 for the executive officers named in the Summary Compensation
Table.
Outstanding
Equity Awards at December 31, 2008 (Option Awards)
|
Number
of Securities
|
|||||||||||||||
|
Option
|
Underlying
Unexercised
|
Option
|
Option
|
||||||||||||
|
Grant
|
Options
|
Exercise
|
Expiration
|
||||||||||||
|
Name
|
Date
|
Exercisable
|
Unexercisable
|
Price
($)(12)
|
Date
|
||||||||||
|
Frank
C. Ingriselli (PEO)
|
9/29/2006
|
204,000
|
136,000
|
(1)
|
$
0.56
|
9/29/2016
|
|||||||||
|
12/17/2007
|
30,002
|
49,998
|
(2)
|
6.00
|
12/17/2017
|
||||||||||
|
12/9/2008
|
0
|
350,000
|
(3)
|
0.64
|
12/9/2018
|
||||||||||
|
Stephen
F. Groth (PFO)
|
12/29/2006
|
93,840
|
62,560
|
(4)
|
$
0.56
|
9/29/2016
|
|||||||||
|
12/17/2007
|
20,000
|
20,000
|
(5)
|
6.00
|
12/17/2017
|
||||||||||
|
12/9/2008
|
0
|
165,000
|
(6)
|
0.64
|
12/9/2018
|
||||||||||
|
Richard
Grigg
|
12/17/2007
|
5,000
|
5,000
|
(7)
|
6.00
|
12/17/2017
|
|||||||||
|
12/9/2008
|
0
|
240,000
|
(8)
|
0.64
|
12/9/2018
|
||||||||||
|
Jamie
Tseng
|
9/29/2006
|
122,400
|
81,600
|
(9)
|
$
0.56
|
9/29/2016
|
|||||||||
|
12/17/2007
|
7,500
|
7,500
|
(10)
|
6.00
|
12/17/2017
|
||||||||||
|
12/9/2008
|
0
|
85,000
|
(11)
|
0.64
|
12/9/2018
|
||||||||||
- 93
-
|
|
1)
|
The
Options will vest and become exercisable as follows: (i) 68,000
of the shares on September 29, 2009; and (ii) 68,000 of the shares on
September 29, 2010. Vesting shall terminate upon the date of any
termination of employment for cause or with good reason, and all vesting
shall be accelerated upon any termination of employment without cause,
without good reason, or upon death or disability (as
defined).
|
|
|
2)
|
The
Options will vest and become exercisable as follows: (i) 16,666
of the shares on December 17, 2009; (ii) 16,666 of the shares on December
17, 2010; and (iii) 16,666 of the shares on December 17, 2011, for so long
as Mr. Ingriselli remains an employee of or a consultant to the Company,
and subject to the terms and conditions of a stock option agreement
entered into by and between the Company and Mr.
Ingriselli.
|
|
|
3)
|
The
Options will vest and become exercisable as follows: (i)175,000 of the
shares on December 9, 2009; (ii) 70,000 of the shares on December 9,
2010; (iii) 70,000 of the shares on December 9, 2011; and (iv)
35,000 of the shares on December 9, 2012, for so long as Mr. Ingriselli
remains an employee of or a consultant to the Company, and subject to the
terms and conditions of a stock option agreement entered into by and
between the Company and Mr.
Ingriselli.
|
|
|
4)
|
The
Options will vest and become exercisable as follows: (i) 31,280
of the shares on September 29, 2009; and (ii) 31,280 of the shares on
September 29, 2010. Vesting shall terminate upon the date of any
termination of employment for cause or with good reason, and all vesting
shall be accelerated upon any termination of employment without cause,
without good reason, or upon death or disability (as
defined).
|
|
|
5)
|
The
Options will vest and become exercisable as follows: (i) 8,000
of the shares on December 17, 2009; (ii) 8,000 of the shares on December
17, 2010; and (iii) 4,000 of the shares vest on December 17, 2011, for so
long as Mr. Groth remains an employee of or a consultant to the Company,
and subject to the terms and conditions of a stock option agreement
entered into by and between the Company and Mr.
Groth.
|
|
|
6)
|
The
Options will vest and become exercisable as follows: (i) 82,500 of the
shares on December 9, 2009; (ii) 33,000 of the shares on December 9, 2010;
(iii) 33,000 of the shares on December 2011; and (iv) 16,500 of the shares
on December 9, 2012, for so long as Mr. Groth remains an employee of or a
consultant to the Company, and subject to the terms and conditions of a
stock option agreement entered into by and between the Company and Mr.
Groth.
|
|
|
7)
|
The
Options will vest and become exercisable as follows: (i) 2,000
of the shares on December 17, 2009; (ii) 2,000 of the shares on December
17, 2010; and (iii) 1,000 of the shares on December 17, 2011, for so long
as Mr. Grigg remains an employee of or a consultant to the Company, and
subject to the terms and conditions of a stock option agreement entered
into by and between the Company and Mr.
Grigg.
|
|
|
8)
|
The
Options will vest and become exercisable as follows: (i) 120,000 of the
shares on December 9, 2009; (ii) 48,000 of the shares on December 9, 2010;
(iii) 48,000 of the shares on December 9, 2011; and (iv) 24,000 of the
shares on December 9, 2012, for so long as Mr. Grigg remains an employee
of or a consultant to the Company, and subject to the terms and conditions
of a stock option agreement entered into by and between the Company and
Mr. Grigg.
|
|
|
9)
|
The
Options will vest and become exercisable as follows: (i) 40,800 of the
shares on September 29, 2009; and (ii) 40,800 of the shares on September
29, 2010, for so long as Mr. Tseng remains an employee of or a consultant
to the Company, and subject to the terms and conditions of a stock option
agreement entered into by and between the Company and Mr.
Tseng.
|
|
|
10)
|
The
Options will vest and become exercisable as follows: (i) 3,000 of the
shares on December 17, 2009; (ii) 3,000 of the shares on December 17,
2010; and (iii) 1,500 of the shares on December 17, 2011, for so long as
Mr. Tseng remains an employee of or a consultant to the Company, and
subject to the terms and conditions of a stock option agreement entered
into by and between the Company and Mr.
Tseng.
|
|
|
11)
|
The
Options will vest and become exercisable as follows: (i) 42,500 of the
shares on December 9, 2009; (ii) 17,000 of the shares on December 9, 2010;
(iii) 17,000 of the shares on December 9, 2011; and (iv) 8,500 of the
shares on December 9, 2012, for so long as Mr. Tseng remains an employee
of or a consultant to the Company, and subject to the terms and conditions
of a stock option agreement entered into by and between the Company and
Mr. Tseng.
|
|
|
12)
|
The
fair market value of Common Stock of the Company determined in accordance
with the 2007 Stock Plan as the mean between the representative bid and
asked prices on the close of business the day immediately prior to the
date of grant as reported by Pink Sheets
LLC.
|
- 94
-
The
following table shows information concerning unvested restricted shares as of
December 31, 2008 for the executive officers named in the Summary Compensation
Table and for the directors named in the Director Compensation
Table.
Outstanding
Equity Awards at December 31, 2008 (Stock Awards)
|
Name
|
Grant
Date
|
Number
of Shares That Have
Not Vested |
Closing
Price of Stock on 12/31/2008
|
Market
Value of Shares That Have Not Vested ($) (6)
|
|||||||||||||
|
Officers
|
|||||||||||||||||
|
Frank
C. Ingriselli (PEO)
|
12/17/2007
|
30,000 | (1) | $ | 0.65 | 19,500 | |||||||||||
|
12/9/2008
|
20,000 | (2) | $ | 0.65 | 13,000 | ||||||||||||
|
12/18/2008
|
130,000 | (2) | $ | 0.65 | 84,500 | ||||||||||||
|
Stephen
F. Groth (PFO)
|
12/17/2007
|
9,000 | (1) | $ | 0.65 | 5,850 | |||||||||||
|
12/9/2008
|
165,000 | (2) | $ | 0.65 | 107,250 | ||||||||||||
|
Richard
Grigg
|
12/17/2007
|
60,000 | (1) | $ | 0.65 | 39,000 | |||||||||||
|
12/9/2008
|
150,000 | (2) | $ | 0.65 | 97,500 | ||||||||||||
|
12/18/2008
|
90,000 | (2) | $ | 0.65 | 58,500 | ||||||||||||
|
Jamie
Tseng
|
12/9/2008
|
85,000 | (2) | $ | 0.65 | 55,250 | |||||||||||
|
Directors
|
|||||||||||||||||
|
Laird
Q. Cagan (3)
|
|||||||||||||||||
|
James
F. Link, Jr.
|
7/22/2008
|
30,000 | (4) | $ | 0.65 | 19,500 | |||||||||||
|
Elizabeth
P. Smith
|
7/22/2008
|
10,000 | (5) | $ | 0.65 | 6,500 | |||||||||||
|
Robert
C. Stempel
|
7/22/2008
|
10,000 | (5) | $ | 0.65 | 6,500 | |||||||||||
|
|
1)
|
Of
the remaining unvested shares, 50% will vest and become non-forfeitable on
December 17, 2009 and 50% will vest and become non-forfeitable on December
17, 2010, for so long as the recipient of the stock remains an employee of
or consultant to the Company and subject to the terms and conditions of
the restricted stock purchase agreement entered into by and between
the Company and the grantee.
|
|
|
2)
|
Grant
of restricted stock subject to forfeiture as follows: (i) 40% of the
shares will become vested and non-forfeitable on twelve month anniversary
of the Grant Date; (ii) 30% of the shares will become vested and
non-forfeitable on the two year anniversary of the Grant Date; and (iii)
the balance of 30% of the shares will become vested and non-forfeitable on
the three year anniversary of the Grant Date, for so long as the recipient
of the stock remains an employee of or consultant to the Company and
subject to the terms and conditions of the restricted stock purchase
agreement entered into by and between the Company and the
grantee.
|
|
|
3)
|
Mr.
Cagan was not granted any stock awards in
2008.
|
|
|
4)
|
The
unvested shares will vest and become non-forfeitable as follows: (i) 5,000
shares on the six month anniversary of the Grant Date; (ii) 15,000 shares
on the twelve month anniversary of the Grant Date; and (iii) 10,000 shares
will vest and become non-forfeitable on the two year anniversary of the
Gant Date.
|
- 95
-
|
|
5)
|
The
unvested shares will vest and become non-forfeitable as follows: (i) 5,000
shares on the twelve month anniversary of the Grant Date; and (ii) 5,000
shares will vest and become non-forfeitable on the two year anniversary of
the Gant Date.
|
|
|
6)
|
Based
on $0.65 per
share, the closing price of the Common Stock as reported by Pink Sheets
LLC on December 31, 2008.
|
For a
description of the potential payments to our Named Executive Officers upon
termination or a change in control, see "Narrative to Summary Compensation Table
and Grants of Plan-Based Awards Table – Employment Agreements with Executive
Officers" above. For further discussion of the determination of termination
benefits, see "Compensation Discussion and Analysis – Total Compensation and
Description and Allocation of Its Components – Post-Termination
Compensation."
Quantification of termination
benefits. The following table quantifies the termination benefits due to
our Named Executive Officers, in the event of their termination for various
reasons, including any termination occurring within 12 months following a change
of control. The amounts were computed as if each executive officer's employment
terminated on December 31, 2008.
|
2008 Potential Termination Benefits for Named
Executive Officers
|
||||||||||||
|
Termination
for other than Cause, Death, or Disability
|
||||||||||||
|
Executive
Officer / Element of Compensation
|
Termination
due to Death or Disability
|
or
by Executive for Good Reason
|
within
12 Months following a Change of Control
|
|||||||||
|
Frank
C. Ingriselli
|
||||||||||||
|
Salary
and Bonus (1)
|
$ | 350,000 | $ | 1,050,000 | $ | 1,400,000 | ||||||
|
Equity
Awards(2)
|
132,900 | 132,900 | 132,900 | |||||||||
|
Benefits(3)
|
- | 44,100 | 58,800 | |||||||||
|
Total
Frank C. Ingriselli
|
$ | 482,900 | $ | 1,227,000 | $ | 1,591,700 | ||||||
|
Richard
Grigg
|
||||||||||||
|
Salary
and Bonus (4)
|
$ | 131,940 | $ | 131,940 | $ | 131,940 | ||||||
|
Equity
Awards
|
- | - | - | |||||||||
|
Benefits
|
- | - | - | |||||||||
|
Total
Richard Grigg
|
$ | 131,940 | $ | 131,940 | $ | 131,940 | ||||||
|
Stephen
F. Groth
|
||||||||||||
|
Salary
and Bonus (1)
|
$ | 165,000 | $ | 495,000 | $ | 660,000 | ||||||
|
Equity
Awards(2)
|
120,454 | 120,454 | 120,454 | |||||||||
|
Benefits(3)
|
- | 29,700 | 39,600 | |||||||||
|
Total
Stephen F. Groth
|
$ | 285,454 | $ | 645,154 | $ | 820,054 | ||||||
(1) Year
2008 bonuses were awarded and paid by December 31, 2008. Amounts shown represent
12 months salary in the case of death or disability, 36 months salary in the
case of termination for “Good Reason” and 48 months salary in
the event of termination due to a “Change in Control.”
(2)
Equity awards are quantified at the intrinsic value on December 31, 2008 of all
options and restricted stock that was not fully vested and exercisable, but
would become exercisable, under the terms of the Named Executive Officer's
employment agreement, due to the form of termination specified in the column
heading. The intrinsic value of options is determined by calculating the
difference between the closing market price of our common stock on December 31,
2008, which was $0.65 per share, and the exercise price of the option, and
multiplying that difference by the number of options exercisable at that given
exercise price. The intrinsic values of all the options are then totaled. The
intrinsic value of restricted stock is equal to the number of shares times the
closing price of our common stock on December 31, 2008.
- 96
-
(3)
Terminated employees are entitled to 36 or 48 months of continued participation
in the Company’s 401(k) plan, depending on the circumstances. For purposes of
this disclosure, we have assumed that terminated employees will continue
contributing to the 401(k) plan after their termination, up to Section 415
limits of the Internal Revenue Code.
(4) Represents $35,940 in salary and $96,000 in cash bonus not paid in 2008.
Option
Exercises and Stock Vested in Last Fiscal Year
No
options were exercised by any of the Company’s executive officers who are named
in the Summary Compensation Table during the year ended December 31,
2008. During the fiscal year ended December 31, 2008, the following
number of restricted shares vested for executive officers named in the Summary
Compensation Table: Frank C. Ingriselli (20,000 shares); Richard
Grigg (40,000 shares ); and Stephen F. Groth (6,000 shares). In each
case, the
vested shares represented 40 percent of the restricted stock awarded on December
17, 2007.
Compensation
of Directors
There are
no standard arrangements by which directors of the Company are compensated for
their services as directors, and none of the directors received any cash
compensation for their services as such during the most recently completed
fiscal year. The Company issued 10,000 shares of restricted Common
Stock under its 2007 Stock Plan to Robert C. Stempel on February 11, 2008 upon
his agreement to join the Company’s Board of Directors, and the Company issued
10,000 shares of restricted Common Stock to James F. Link, Jr. on July 22, 2008
upon his agreement to join the Company’s Board of Directors.
Effective
December 31, 2008, the Company rescinded the grants of an aggregate of
20,000 shares of the Company's restricted Common Stock previously issued under
the Company's 2007 Stock Plan to members of the Board of Directors as
follows: (i) 10,000 shares issued to Elizabeth P. Smith on December 17,
2007; and (ii) 10,000 shares issued on February 11, 2008 to Robert C.
Stempel. These rescissions were each consummated pursuant to a rescission
agreement entered into by and between the Company and each
individual.
At its
meeting on July 22, 2008, the Company’s Board of Directors formed three
committees of the Board – the Audit Committee, the Compensation Committee, and
the Nominating Committee -- and appointed Mr. Link and Mr. Stempel to
serve as Chairmen of the Audit and Nominating Committees, respectively. The
Board also appointed Ms. Elizabeth P. Smith to serve as Chairperson of the
Compensation Committee. At the same time, the Company’s Board decided to
establish the “Committee Chairpersons Equity Incentive Policy.” The purpose of
the policy is to incentivize members of the Board to serve as Chairpersons of
its Committees and to adequately and competitively compensate those members who
choose to do so for their time and commitment to serving in such
roles.
Under its
newly adopted “Committee Chairpersons Equity Incentive Policy,” the Company’s
Board of Directors issued 10,000 shares of restricted Common Stock under its
2007 Stock Plan on July 22, 2008 to each of Mr. Stempel and Ms. Elizabeth P.
Smith, for accepting Committee Chairpersonships of the Nominating and
Compensation Committees, respectively. Also on July 22, 2008, the Company’s
Board of Directors issued 20,000 shares of restricted Common Stock under its
2007 Stock Plan to newly appointed Board member James F. Link, Jr. for agreeing
to serve as Chairman of the Board’s newly formed Audit Committee. In each
instance, restricted shares issued under the “Committee Chairpersons Equity
Incentive Policy” vest 50% on the twelve month anniversary of the Grant date and
50% on the two year anniversary of the Grant date, for so long as each of the
named Chairpersons remain in those positions.
Additionally,
in December 2008, the Company issued to current director, Chief Executive
Officer and President, Frank C. Ingriselli, long-term equity compensation as
described under “Long-Term Equity Compensation” above in connection with his
services as the President and Chief Executive Officer of the
Company. The Board determined not to award Mr. Laird Cagan any
additional long-term equity compensation in connection with his role as a member
of the Board.
- 97
-
Directors
are also reimbursed for travel and other reasonable expenses relating to
meetings of the Board.
The
following table sets forth for each director who is not also a named executive
in the Summary Compensation Table, compensation for the year ended December 31,
2008:
Director
Compensation for the Year 2008
|
Name
|
Cash
Fees Earned ($)
|
Stock
Awards ($) (1) (2)
|
All
Other Compensation ($)
|
Total
|
||||||||||||||||
|
Laird
Q. Cagan
|
$ | 0 | $ | 0 | $ | 114,000 | (3 | ) | $ | 114,000 | ||||||||||
|
James
F. Link, Jr.
|
$ | 0 | $ | 48,525 | $ | 0 | $ | 48,525 | ||||||||||||
|
Elizabeth
P. Smith
|
$ | 0 | $ | 72,792 | $ | 0 | $ | 72,792 | ||||||||||||
|
Robert
C. Stempel
|
$ | 0 | $ | 140,975 | $ | 0 | $ | 140,975 | ||||||||||||
|
1)
|
The
Stock Award value is equal to the amount of compensation expense
recognized during 2008 in accordance with the requirements of FAS
123(R).
|
|
2)
|
The
Grant Date fair value of restricted shares awarded during 2008 were as
follows: Mr. Link - $255,000; Ms. Smith - $85,000; and Mr. Stempel -
$210,000. The Stock Award value is calculated by multiplying the number of
shares of Common Stock awarded by the fair market value of Common Stock of
the Company determined in accordance with the 2007 Stock Plan as the mean
between the representative bid and asked prices on the close of business
the day immediately prior to the Grant Date as reported by Pink Sheets
LLC. At December 31, 2008, Board members held 50,000 shares of unvested
stock awards as follows: Ms. Smith and Mr. Stempel each held
10,000 shares, and Mr. Link held 30,000
shares.
|
|
3)
|
Represents
indirect cash payments to Mr. Cagan in fees earned by Cagan McAfee Capital
Partners, LLC (“CMCP”) for services per an Advisory Agreement between the
Company and CMCP dated December 1, 2006. (Mr. Cagan is the Managing
Director and 50% owner of
CMCP).
|
- 98
-
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding the beneficial
ownership of Common Stock as of April 24, 2009, by (i) each person who is known
by the Company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each of the Company’s directors; (iii) each executive officer identified in
the Summary Compensation Table; and (iv) all executive officers and directors of
the Company as a group:
|
Amount
and Nature
|
|||||||||||||
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
of
Beneficial ownership (1)
|
Percent
of Class
|
||||||||||
|
Common
Stock
|
Laird
Q. Cagan
|
3,913,594 | (2 | ) | 9.01 | % | |||||||
|
10600
N. De Anza Blvd.
|
|||||||||||||
|
Suite
250
|
|||||||||||||
|
Cupertino,
CA 95014
|
|||||||||||||
|
Common
Stock
|
Frank
C. Ingriselli
|
3,762,581 | (3 | ) | 8.75 | % | |||||||
|
250
East Hartsdale Ave.
|
|||||||||||||
|
Hartsdale,
NY 10530
|
|||||||||||||
|
Common
Stock
|
Linden
Growth
|
3,393,406 | (4 | ) | 7.94 | % | |||||||
|
Partners
Master Fund, LP
|
|||||||||||||
|
718
South State Street
|
|||||||||||||
|
Suite
101
|
|||||||||||||
|
Clarks
Summit, PA18411
|
|||||||||||||
|
Common
Stock
|
John
Liviakis
|
2,483,200 | (5 | ) | 5.81 | % | |||||||
|
655
Redwood Road
|
|||||||||||||
|
Suite
395
|
|||||||||||||
|
Mill
Valley, CA94941
|
|||||||||||||
|
Common
Stock
|
Richard
Grigg
|
1,275,000 | (6 | ) | 2.98 | % | |||||||
|
250
East Hartsdale Ave.
|
|||||||||||||
|
Hartsdale,
NY 10530
|
|||||||||||||
|
Common
Stock
|
Eric
A. McAfee
|
1,121,251 | (7 | ) | 2.62 | % | |||||||
|
10600
N. De Anza Blvd.
|
|||||||||||||
|
Suite
250
|
|||||||||||||
|
Cupertino,
CA 95014
|
|||||||||||||
|
Common
Stock
|
Jamie
Tseng
|
1,014,795 | (8 | ) | 2.37 | % | |||||||
|
250
East Hartsdale Ave.
|
|||||||||||||
|
Hartsdale,
NY 10530
|
|||||||||||||
|
Common
Stock
|
Stephen
F. Groth
|
966,840 | (9 | ) | 2.26 | % | |||||||
|
250
East Hartsdale Ave.
|
|||||||||||||
|
Hartsdale,
NY 10530
|
|||||||||||||
|
Common
Stock
|
Elizabeth
P. Smith
|
188,947 | 0.44 | % | |||||||||
|
250
East Hartsdale Ave.
|
|||||||||||||
|
Hartsdale,
NY 10530
|
|||||||||||||
|
Common
Stock
|
James
F. Link, Jr.
|
30,000 | 0.07 | % | |||||||||
|
250
East Hartsdale Ave.
|
|||||||||||||
|
Hartsdale,
NY 10530
|
|||||||||||||
|
Common
Stock
|
Robert
C. Stempel
|
10,000 | 0.02 | % | |||||||||
|
250
East Hartsdale Ave.
|
|||||||||||||
|
Hartsdale,
NY 10530
|
|||||||||||||
|
Common
Stock
|
All
Directors and
|
11,161,757 | (10 | ) | 25.41 | % | |||||||
|
Executive
Officers as a Group (8 persons)
|
|||||||||||||
- 99
-
|
|
1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to options, warrants or convertible
securities that are currently exercisable, or exercisable within 60 days
of April 29, 2009, are deemed outstanding for computing the percentage of
the person holding such options, warrants or convertible securities but
are not deemed outstanding for computing the percentage of any other
person. Except as indicated by footnote and subject to community property
laws where applicable, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
|
|
|
2)
|
Includes
(i) 3,017,500 shares of the Company’s Common Stock owned by Cagan Capital,
LLC, a fund owned by Mr. Laird Cagan; (ii) 100,000 shares of the Company’s
Common Stock owned by KRC Trust and 100,000 shares of the Company’s Common
Stock owned by KQC Trust, trusts for Mr. Cagan’s daughters for which Mr.
Cagan is trustee; and (iii) 696,094 shares of the Company’s Common Stock
issuable upon exercise of immediately exercisable warrants issued to Mr.
Cagan.
|
|
|
3)
|
Includes
(i) 3,503,579 shares of the Company’s Common Stock held directly by Mr.
Ingriselli, (ii) options exercisable on September 29, 2008 for 204,000
shares of the Company’s Common Stock pursuant to an option grant
exercisable for an aggregate of 340,000 shares of Common Stock of the
Company that vests with respect to 136,000 shares on September 29, 2007,
and 68,000 shares on September 29 of each year thereafter, (iii) options
exercisable on December 17, 2008 for an aggregate of 30,002 shares of
Common Stock pursuant to an option grant exercisable for an aggregate of
80,000 shares of Common Stock of the Company that vests with respect to
13,336 shares on December 17, 2007, and 16,666 shares on December 17 of
each year thereafter, and (iv) 25,000 shares of the Company’s Common Stock
owned by Mr. Ingriselli’s son.
|
|
|
4)
|
Linden
Growth Partners Master Fund, LP, is a Cayman Islands exempted limited
partnership whose general partner is Linden Capital Management IV, LLC, a
Delaware limited liability company whose President and controlling member
is Paul J. Coviello.
|
|
|
5)
|
Includes
shares of Common Stock held by Liviakis Financial Communications, Inc. and
Mr. Liviakis individually. Liviakis Financial Communications,
Inc. is the Company’s public relations firm, and John Liviakis is its sole
shareholder, President and Chief Executive
Officer.
|
|
|
6)
|
Includes
(i) 1,270,000 shares of the Company’s Common Stock held directly by Mr.
Grigg, and (ii) options exercisable on December 17, 2008 for an aggregate
of 5,000 shares of Common Stock pursuant to an option grant exercisable
for an aggregate of 10,000 shares of Common Stock of the Company that
vests with respect to 5,000 shares on December 17, 2008, 2,000 shares on
December 17, 2009 and 2010, and 1,000 shares on December 17,
2011.
|
|
|
7)
|
Includes
(i) 721,251 shares of the Company’s Common Stock owned by McAfee Capital,
LLC, a fund owned by Mr. Eric McAfee and his wife; and (ii) 400,000 shares
of the Company’s Common Stock owned by P2 Capital, LLC, a fund owned by
Mr. McAfee’s wife and children.
|
|
|
8)
|
Includes
(i) 85,000 shares of the Company' s Common Stock held directly by Mr.
Tseng, (ii) 799,895 shares of the Company’s Common Stock held by Golden
Ring International Consultants, a British Virgin Islands company
wholly-owned by Mr. Tseng, (iii) options exercisable on September 29, 2008
for 122,400 shares of the Company’s Common Stock pursuant to an option
grant exercisable for an aggregate of 204,000 shares of Common Stock of
the Company that vests with respect to 81,600 shares on September 29,
2007, and 40,800 shares on September 29 of each year thereafter, and (iv)
options exercisable on December 17, 2008 for 7,500 shares of the Company’s
Common Stock pursuant to an option grant exercisable for an aggregate of
15,000 shares of Common Stock of the Company that vests with respect to
7,500 shares on December 17, 2008, 3,000 shares on December 17, 2009,
3,000 shares on December 17, 2010, and 1,500 shares on December 17,
2011.
|
|
|
9)
|
Includes
(i) 440,000 shares of the Company’s Common Stock held directly by Mr.
Groth, (ii) options exercisable on September 29, 2008 for 93,840 shares of
the Company’s Common Stock pursuant to an option grant exercisable for an
aggregate of 156,400 shares of Common Stock of the Company that vests with
respect to 62,500 shares on September 29, 2007, and 31,280 shares on
September 29 of each year thereafter,
(iii) options exercisable on December 17, 2008 for an aggregate of 20,000
shares of Common Stock pursuant to an option grant exercisable for an
aggregate of 40,000 shares of Common Stock of the Company that vests with
respect to 3,334 shares on December 17, 2007, 16,666 shares on December
17, 2008, 8,000 shares on December 17, 2009, 8,000 shares on December 17,
2010, and 4,000 shares on December 17, 2011, and (iv) 413,000 shares of
the Company’s Common Stock owned by Mr. Groth’s
spouse.
|
- 100
-
|
|
10)
|
Includes
all shares of the Company’s Common Stock, immediately exercisable warrants
to purchase Company Common Stock, and options to purchase Company Common
Stock exercisable within sixty (60) days of April 24, 2008, beneficially
owned or held by (i) Messrs. Ingriselli who served as Chief Executive
Officer of the Company during the last completed fiscal year, (ii) Messrs.
Cagan and Stempel, Link and Ms. Smith, who currently serve as directors of
the Company, (iii) Mr. Grigg who is presently serves as Senior Vice
President and Managing Director of the Company and did so at the end of
the Company’s last completed fiscal year and (iv) Messrs. Groth
and Tseng, who currently serve as executive officers of the Company and
did so at the end of the Company’s last completed fiscal
year.
|
Equity
Compensation Plan Information
The
following table sets forth all compensation plans previously approved by the
Company’s security holders and all compensation plans not previously approved by
the Company’s security holders as of December 31, 2008, which non-approved
compensation plans were assumed by the Company in connection with the mergers of
ADS and IMPCO into the Company in May 2007:
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuances
under equity compensation plans (excluding securities reflected in
column (a))
|
|||||||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||||||
|
Equity
compensation plans approved by
|
3,968,147 | $ | 1.31 | (4 | ) | 1,728,000 | ||||||||||
|
security
holders (1)(3)
|
$ | 1.27 | (5 | ) | ||||||||||||
|
Equity
compensation plans not approved by security holders (2)
|
775,200 | $ | 0.56 | (6 | ) | - | ||||||||||
|
|
||||||||||||||||
|
Total
|
4,743,347 | |||||||||||||||
_____________________________________________________________________________________________
|
|
1)
|
On
May 7, 2007, the Company and its stockholders approved the Company’s 2007
Stock Plan (see summary description of 2007 Stock Plan under “2007 Stock
Plan” above). During 2007 and 2008, the Board of Directors and the
Compensation Committee of the Company granted options to purchase an
aggregate of 1,372,000 shares of Common Stock and grants of 920,400 shares
of restricted Common Stock under the 2007 Stock Plan to certain employees,
consultants, officers and directors of the Company (of which 20,400 shares
of restricted Common Stock were rescinded in December 2008 and returned
for issuance under the 2007 Stock Plan). As of December 31,
2008, 1,728,000 shares of Company Common Stock remain available for future
issuances under the 2007 Stock
Plan.
|
|
|
2)
|
Includes
individual compensation arrangements entered into by and between the
Company and the following employees and consultants of the Company in
September 2006: (i) an option to purchase an aggregate of 340,000 shares
of Common Stock of the Company at $0.56 per share issued to Frank C.
Ingriselli; (ii) an option to purchase an aggregate of 204,000 shares of
Common Stock of the Company at $0.56 per share issued to
Jamie Tseng; (iii) an option to purchase an aggregate of 156,400 shares of
Common Stock of the Company at $0.56 per share issued to Stephen F. Groth;
(iv) an option to purchase an aggregate of 102,000 shares of Common Stock
of the Company at $0.56 per share issued to Sean Hung; and (v) an option
to purchase an aggregate of 34,000 shares of Common Stock of the Company
at $0.56 per share issued to Douglas E. Hoffmann. All of these options
were issued prior to adoption of the Company’s 2007 Stock Plan. Forty
percent of the options vested on September 29, 2007; 20% vested on
September 29, 2008 and 20% will vest on September 29 of each year
thereafter to 2010 subject to the holder’s continued employment with the
Company, and are subject to 100% acceleration upon termination of the
holder without cause, termination by the holder for
good reason, or upon the holder’s death or disability. Also includes
individual compensation arrangements entered into by and between the
Company and the following employees and consultants of the Company in
February 2007 outside of the Company’s 2007 Stock Plan: (i)
500,004 shares of fully-vested restricted Common Stock of the Company to
JCS Consulting, LLC; (ii) 25,007 shares of fully-vested shares of
restricted Common Stock of the Company to Dr. Y.M. Shum; (iii) 15,011
shares of fully-vested restricted Common Stock of the Company to
Christopher B. Sherwood; (iv) 14,994 shares of fully-vested restricted
Common Stock of the Company to Gregory Rozenfeld; (v) 14,994 shares of
fully-vested restricted Common Stock of the Company to Zhang Suian; (vi)
5,015 shares of fully-vested restricted Common Stock of the Company to
Edward Li; and (vii) 25,007 shares of fully-vested restricted Common Stock
of the Company to Sean
Huang.
|
- 101
-
|
|
3)
|
Includes
warrants exercisable for an aggregate of 1,772,147 shares of Company
Common Stock at a weighted-average exercise price of $1.27 per share,
which warrants were originally issued on May 7, 2007 to placement agents
representing the Company, the original issuance of which was approved by
the stockholders of the Company.
|
|
|
4)
|
The
price reflects the weighted-average exercise price of stock
options.
|
|
|
5)
|
The
price reflects the weighted-average exercise price of stock
warrants.
|
|
|
6)
|
The
price reflects the weighted-average exercise price of the stock
options. The shares of fully-vested restricted Common Stock of
the Company were issued at a fair market value of $0.56 per
share.
|
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
|
Transactions
with Related Persons
Financial
Advisory Agreement
The
Company is a party to an Advisory Agreement, effective December 1, 2006
(“Advisory Agreement”), with Cagan McAfee Capital Partners, LLC (“CMCP”),
pursuant to which CMCP agreed to provide certain financial advisory and
management consulting services to the Company. Pursuant to the Advisory
Agreement, CMCP is entitled to receive a monthly advisory fee of $9,500 for
management work commencing on December 11, 2006 and continuing until December
11, 2009. In addition, the Advisory Agreement obligates the Company
to indemnify CMCP against certain liabilities in connection with the engagement
of CMCP under the Advisory Agreement. Laird Q. Cagan, the Managing
Director and 50% owner of CMCP, currently serves as a member of the Company’s
Board of Directors.
Public
Relations Agreement
In March
2005, the Company engaged Liviakis Financial Communications, Inc. as its public
relations firm pursuant to a Consulting Agreement, as amended on April 22, 2009,
that expires on May 7, 2011 (“Consulting Agreement”), and John Liviakis, a
holder of more than 5 percent of the beneficial ownership of the Company, is the
sole shareholder, President and Chief Executive Officer of Liviakis Financial
Communications, Inc. Pursuant to the Consulting Agreement, as
amended, and as sole compensation thereunder, Liviakis Financial Communications,
Inc. and an employee thereof were issued an aggregate of 2,119,000 shares of the
Company’s Common Stock.
SG&E
Share Exchange
On March
2, 2009, the Company entered into a Subscription Agreement for Shares
(“Subscription Agreement”) with Richard Grigg, the Company’s Senior Vice
President and Managing Director, pursuant to which Mr. Grigg purchased 970,000
shares of the Company’s Common Stock (the “Company Shares”) in exchange for
3,825,000 shares of Ordinary Fully Paid Shares (the “SG&E Shares”) of Sino
Gas & Energy Holdings Limited, a privately-held company incorporated in
Western Australia (“SG&E”) engaged in the exploration and development of
coal bed methane and unconventional gas projects in China. The
SG&E Shares represent approximately a 3.5% ownership interest in SG&E,
and represented full consideration for the issuance of the Company Share to Mr.
Grigg as determined by the Board of Directors as being a fair and equivalent
exchange of economic interests and payment of fair market value for the Company
Shares based on a number of factors. Mr. Grigg was formerly an
employee and founding member of SG&E before joining the Company in October
2007. Given that the Company is considering a number of possible
transactions that may involve SG&E as a partner or party, which transactions
Mr. Grigg may be instrumental in negotiating and overseeing, the Company
believed that it was in the best interests of the Company and its stockholders
to exchange Mr. Grigg’s SG&E Shares for the Company Shares in order to
eliminate potential conflicts of interest on the part of Mr. Grigg and to
further align Mr. Grigg’s interests with those of the Company.
Consulting
Agreement with KKSH
On
January 27, 2009, the Company revised the terms of its employment relationship
with Richard Grigg, the Company’s Senior Vice President and Managing Director,
by entering into two separate agreements pursuant to which Richard Grigg
currently performs services to the Company: (i) an Amended and
Restated Employment Agreement, dated January 27, 2009 (the “Amended Employment
Agreement”), entered into directly with Richard Grigg that governs the
employment of Mr. Grigg in the capacity of Managing Director of the Company and
covers services provided by Mr. Grigg to the Company within the PRC; and (ii) a
Contract of Engagement, dated January 27, 2009 (“Contract of Engagement”),
entered into with KKSH Holdings Ltd. (“KKSH”), a company registered in the
British Virgin Islands in which Mr. Grigg holds a minority interest and on whose
board of directors Mr. Grigg sits, which agreement governs the provision of
services related to the development and management of business opportunities for
the Company outside of the PRC by Mr. Grigg through KKSH. The basic
fee for the services provided under the Contract of Engagement is 919,000 RMB
(approximately $135,000) per year, to be prorated and paid monthly
and subject to annual review and increase upon mutual agreement by the Company
and KKSH. Pursuant to the Contract of Engagement, the Company shall
also provide Mr. Grigg with medical benefits and life insurance coverage, and
pay KKSH an annual performance-based bonus award targeted at between 54% and 72%
of the basic fee, awardable in the discretion of the Company’s Board of
Directors. In addition, in the event the Company terminates the
Contract of Engagement without Cause (as defined in the Contract of Engagement),
the Company must pay to KKSH a lump sum amount equal to 215% of the then-current
annual basic fee.
Consulting
Agreement with Jamie Tseng
The
Company was a party to a consulting agreement, dated November 8, 2005, with
Jamie Tseng, the Company’s Executive Vice President (“Tseng Consulting
Agreement”), which was assigned on September 1, 2006 by Mr. Tseng to Golden Ring
International Consultants Limited, a British Virgin Islands registered company
wholly-owned and controlled by Mr. Tseng, and which was later superseded in its
entirety effective January 1, 2009 by that certain Employment Agreement, dated
April 22, 2009 and effective January 1, 2009, entered into by and between the
Company and Mr. Tseng. Pursuant to the Tseng Consulting Agreement, Mr.
Tseng served in the role of Executive Vice President to the Company from
November 2005 to December 31, 2008, for a monthly fee of $11,667, plus
reasonable expenses incurred in carrying out the services required
thereunder.
- 102
-
Indemnification
Agreements
The
Company has entered into a stockholder-approved Indemnification Agreement with
all of its current officers and directors.
Review,
Approval or Ratification of Transactions with Related Persons
On August
15, 2007, the Company adopted a Code of Ethics and Business Conduct (the “Code”)
applicable to the Company’s Chief Executive Officer, Chief Financial Officer and
all other employees, the text of which has been posted on the Company’s website
(www.papetroleum.com). Among other provisions, the Code provides that
all officers, directors and employees shall avoid all conflicts of interest or
improper or unlawful conduct and even the appearance thereof, and, further, that
only the Board of Directors of the Company may waive a conflict of interest or
any other non-compliance with the Code. Although the Company has not
adopted a formal policy that covers the review and approval of related party
transactions by the Board, in accordance with the Code and Section 144 of the
Delaware General Corporation Law, it is the practice of the Board of Directors
to review each contract or transaction between the Company and its directors,
officers or employees, including the material facts as to the relationship or
interest and as to the contract or transaction, determine in good faith whether
such contract or transaction is fair as to the Company, and to approve or ratify
such contract or transaction if the Board of Directors determines the contract
or transaction to be fair as to the Company and in good faith authorizes the
contract or transaction by affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a
quorum.
Other
than the SG&E Agreement, the Contract of Engagement, the amendment to the
Consulting Agreement entered into with Liviakis Financial Communications, Inc.,
and the Company’s form of Indemnification Agreement, which were each approved by
the Company’s Board of Directors, none of the Advisory Agreement entered into
with CMCP, the original Consulting Agreement entered into with Liviakis
Financial Communications, Inc., the Chadbourn Agreement, or the Golden Ring
Agreement have been directly approved by the Company’s Board of Directors,
although the Company’s Board of Directors did approve the mergers of ADS and
IMPCO into the Company in May 2007 pursuant to which these agreements were
assumed by the Company from ADS and IMPCO. Additionally,
the Board of Managers of ADS approved each of the Advisory Agreement entered
into with CMCP, the original Consulting Agreement entered into with Liviakis
Financial Communications, Inc., and the Chadbourn Agreement prior to the
consummation of the merger of ADS into the Company in May 2007, and the Managers
of IMPCO approved the Golden Ring Agreement prior to the consummation of the
merger of IMPCO into the Company in May 2007.
Director
Independence
The Board
of Directors has determined that of its five members, James F. Link, Jr.,
Elizabeth P. Smith and Robert C. Stempel are “independent” within the meaning of
Rule 4200(a) (15) of the Marketplace Rules of the NASDAQ Stock
Market.
- 103
-
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
RBSM LLP
(“RBSM”) examined, as independent auditors, the financial statements of the
Company for the years ended December 31, 2007 and 2008. The following
table shows the fees billed to us by RBSM for the audit and other services
rendered by RBSM during fiscal 2007 and 2008. The Board of Directors,
serving as the Company’s Audit Committee, has determined that the non-audit
services rendered by RBSM were compatible with maintaining RBSM’s
independence.
|
2007
|
2008
|
|||||||
|
Audit
Fees (1)
|
$ | 106,052 | $ | 139,062 | ||||
|
Audit-Related
Fees (2)
|
800 | 4,100 | ||||||
|
Tax
Fees (3)
|
600 | 9,843 | ||||||
|
All
Other Fees (4)
|
0 | 400 | ||||||
|
Total
|
$ | 107,452 | $ | 153,405 | ||||
|
1)
|
Audit
fees represent fees for professional services provided in connection with
the audit of our financial statements and review of our quarterly
financial statements and audit services provided in connection with other
statutory or regulatory filings.
|
|
2)
|
Audit-related
fees consisted primarily of accounting consultations, and services
rendered in connection with a proposed acquisition and implementation of
Sarbanes-Oxley Act internal control
requirements.
|
|
|
3)
|
Tax
fees principally represent RBSM charges related to preparing the 2007
Federal Tax return and reviewing Navitas’ tax returns in connection with
the Navitas merger.
|
|
4)
|
All
other fees represent reimbursement of courier, printing and out of pocket
expenses
|
All
audit-related and other services rendered by RBSM were pre-approved by the Board
of Directors, serving as the Company’s Audit Committee or with respect to
services rendered after its formation in July, 2008, by the Audit Committee,
before RBSM was engaged to render such services. It is the Audit
Committee’s standard practice to require pre-approval by the Committee of all
audit, audit-related, tax and other services rendered by RBSM. The
Audit Committee is solely responsible for selecting, hiring and replacing
external auditors. The Committee also pre-approves fees for both audit and non
audit services. In reaching decisions on these matters, the Committee confirms
the independence of the external auditors and whether the services to be
provided are permissible under applicable rules and regulations. The Committee
evaluates the competency of the external audit firm and assesses its fee
schedule for reasonableness.
- 104
-
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents
Filed as Part of this Report:
(1,2) Financial
Statements and Schedules.
The
following financial documents of Pacific Asia Petroleum, Inc. are filed as part
of this report under Item 8:
|
|
Consolidated
Balance Sheets – December 31, 2007 and
2008
|
|
|
Consolidated
Statement of Operations – For the years ended December 31, 2008, 2007 and
2006, and for the period from inception (August 25, 2005) through December
31, 2008
|
|
|
Consolidated
Statement of Stockholders’ Equity (Deficiency) – For the period from
inception (August 25, 2005) through December 31,
2008
|
|
|
Consolidated
Statement of Cash Flows – For the years ended December 31, 2008, 2007 and
2006, and the period from inception (August 25, 2005) through December 31,
2008
|
|
|
Notes
to Consolidated Financial
Statements
|
(3) EXHIBITS:
|
Exhibit
Number
|
Description
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of our Form 10-SB (No. 000-52770) filed on August
15, 2007).
|
|
3.2
|
Bylaws
of the Company (incorporated by reference to Exhibit 3.2 of our Form 10-SB
(No. 000-52770) filed on August 15, 2007).
|
|
4.1
|
Specimen
Common Stock Certificate (incorporated by reference to Exhibit 4.1 of our
Form 10-SB (No. 000-52770) filed on August 15, 2007).
|
|
4.2
|
Form
of Common Stock Warrant (incorporated by reference to Exhibit 4.2 of our
Form 10-SB (No. 000-52770) filed on August 15, 2007).
|
|
10.1
|
Company
2007 Stock Plan (incorporated by reference to Exhibit 10.1 of our Form
10-SB (No. 000-52770) filed on August 15, 2007). *
|
|
10.2
|
Company
2007 Stock Plan form of Stock Option Agreement (incorporated by reference
to Exhibit 10.2 of our Form 10-SB (No. 000-52770) filed on August 15,
2007). *
|
|
10.3
|
Company
2007 Stock Plan form of Restricted Stock Agreement (incorporated by
reference to Exhibit 10.3 of our Form 10-SB (No. 000-52770) filed on
August 15, 2007). *
|
|
10.4
|
Company
Form of Indemnification Agreement (incorporated by reference to Exhibit
10.4 of our Form 10-SB (No. 000-52770) filed on August 15,
2007).
|
|
10.5
|
ADS
Registration Rights Agreement, dated May 7, 2007 (incorporated by
reference to Exhibit 10.5 of our Form 10-SB (No. 000-52770) filed on
August 15, 2007).
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10.6
10.7
|
IMPCO
Registration Rights Agreement, dated May 7, 2007 (incorporated by
reference to Exhibit 10.6 of our Form 10-SB (No. 000-52770) filed on
August 15, 2007).
Registration
Rights Agreement, dated July 2, 2008 (incorporated by reference to Exhibit
10.2 our Current Report on Form 8-K (No. 000-52770) filed on July 8,
2008).
|
|
10.8
|
Engagement
Letter, dated October 31, 2007, by and between Chadbourn Securities, Inc.
and the Company (incorporated by reference to Exhibit 10.1 of our Annual
Report on Form 10-K/A (No. 000-52770) filed on April 29,
2008).
|
|
10.9
|
Engagement
Letter, dated February 26, 2007, by and between Sierra Equity Group, Inc.
and ADS (incorporated by reference to Exhibit 10.8 of our Form 10-SB (No.
000-52770) filed on August 15, 2007).
|
|
10.10
|
Consulting
Agreement, dated February 28, 2007, by and between Christopher B. Sherwood
and IMPCO (incorporated by reference to Exhibit 10.9 of our Form 10-SB
(No. 000-52770) filed on August 15, 2007).
|
|
10.11
|
Consulting
Agreement, dated February 28, 2007, by and between Dr. Y.M. Shum and IMPCO
(incorporated by reference to Exhibit 10.10 of our Form 10-SB (No.
000-52770) filed on August 15, 2007).
|
|
10.12
|
Executive
Employment Agreement, dated September 29, 2006, by and between Frank C.
Ingriselli and the Company (incorporated by reference to Exhibit 10.11 of
our Form 10-SB (No. 000-52770) filed on August 15, 2007).
*
|
|
10.13
10.14
10.15
|
Executive
Employment Agreement, dated September 29, 2006, by and between Stephen F.
Groth and the Company (incorporated by reference to Exhibit 10.12 of our
Form 10-SB (No. 000-52770) filed on August 15, 2007). *
Amended
and Restated Employment Agreement, dated January 27, 2009, entered into by
and between the Company and Richard Grigg (incorporated by reference to
Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52270) filed on
February 2, 2009). *
Contract
of Engagement, dated January 27, 2009, entered into by and between the
Company and KKSH Holdings Ltd. (incorporated by reference to Exhibit 10.2
of our Current Report on Form 8-K (No. 000-52270) filed on February 2,
2009). *
|
|
10.16
|
Lease,
dated December 1, 2006, by and between Station Plaza Associates, and IMPCO
(incorporated by reference to Exhibit 10.13 of our Form 10-SB (No.
000-52770) filed on August 15, 2007).
|
|
10.17
10.18
|
First
Amendment to Lease, effective September 10, 2008, entered into by and
between the Company and Station Plaza Associates (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K (No.
000-52770) filed on September 18, 2008).
Tenancy
Agreement, dated June 29, 2007, by and between Jing Hui Tong Real
Estate Management Company and Inner Mongolia Sunrise Petroleum Limited
(incorporated by reference to Exhibit 10.14 of our Form 10-SB (No.
000-52770) filed on August 15, 2007). **
|
|
10.19
|
Amended
and Restated Agreement and Plan of Merger and Reorganization, dated
February 12, 2007, as amended on April 20, 2007, by and among the Company,
ADS and ADS Merger Sub (incorporated by reference to Exhibit 10.15 of our
Form 10-SB (No. 000-52770) filed on August 15, 2007).
|
|
10.20
10.21
|
Amended
and Restated Agreement and Plan of Merger and Reorganization, dated
February 12, 2007, as amended on April 20, 2007, by and among the Company,
IMPCO and IMPCO Merger Sub (incorporated by reference to Exhibit 10.16 of
our Form 10-SB (No. 000-52770) filed on August 15, 2007).
Agreement
and Plan of Merger, dated July 1, 2008, by and among Pacific Asia
Petroleum, Inc., Navitas Corporation and Navitas LLC (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K (No.
000-52770) filed on July 8, 2008).
|
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|
10.22
|
Contract
for Cooperation and Joint Development, dated August 23, 2006, by and
between Chifeng Zhongtong Oil and Natural Gas Co., Ltd. and Inner Mongolia
Production Company (HK) Ltd. (incorporated by reference to Exhibit 10.18
of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
***
|
|
10.23
|
Agreement
for Joint Cooperation, dated November 30, 2006, by and between China
United Coalbed Methane Co., Ltd. and the Company (incorporated by
reference to Exhibit 10.19 of our Form 10-SB (No. 000-52770) filed on
August 15, 2007).
|
|
10.24
|
Agreement
on Joint Cooperation, dated May 31, 2007, by and between Sino Geophysical
Co., Ltd. and the Company (incorporated by reference to Exhibit 10.20 of
our Form 10-SB (No. 000-52770) filed on August 15, 2007).
***
|
|
10.25
10.26
|
Production
Sharing Contract for Exploitation of Coalbed Methane Resources in
Zijinshan Area, Shanxi Province, The People’s Republic of China, dated
October 26, 2007, by and between Pacific Asia Petroleum, Ltd. and China
United Coalbed Methane Corp. Ltd. (incorporated by reference to Exhibit
10.1 of our Current Report on Form 8-K (No. 000-52770) filed on October
31, 2007). ***
The
Articles of Association of the Chinese-foreign Equity Joint Venture Inner
Mongolia Sunrise Petroleum CO.LTD. (incorporated by reference to Exhibit
10.21 of our Form 10-SB/A (No. 000-52770) filed on October 12, 2007).
**
|
|
10.27
|
The
Contract of the Chinese-foreign Equity Joint Venture Inner Mongolia
Sunrise Petroleum CO.LTD. (incorporated by reference to Exhibit 10.22 of
our Form 10-SB/A (No. 000-52770) filed on October 12, 2007).
**
|
|
10.28
|
Asset
Transfer Agreement — Baode Area, dated September 7, 2007, by and among
ChevronTexaco China Energy Company, Pacific Asia Petroleum, Ltd., and
Pacific Asia Petroleum, Inc. (incorporated by reference to Exhibit 10.23
of our Form 10-SB/A (No. 000-52770) filed on October 12,
2007).
|
|
10.28
|
Amendment
Agreement to Asset Transfer Agreement – Baode Area Between ChevronTexaco
China Energy Company, Pacific Asia Petroleum, Ltd. and Pacific Asia
Petroleum, Inc. dated September 7, 2007, Regarding the Sale of
Participating Interest in the Production Sharing Contract in Respect of
the Resources in the Baode Area, dated April 24, 2008 (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K (No.
000-52770) filed on April 25, 2008).
|
|
10.29
|
Asset
Transfer Agreement — Baode Area, dated March 29, 2008, by and among BHP
Billiton World Exploration Inc., Pacific Asia Petroleum (HK), Ltd., and
Pacific Asia Petroleum, Inc. (incorporated by reference to Exhibit 10.1 of
our Current Report on Form 8-K (No. 000-52770) filed on April 3,
2008).
|
|
10.30
|
Agreement
on Cooperation, dated September 27, 2008, entered into by and between the
Company and Well Lead Group Limited (incorporated by reference to Exhibit
10.1 of our Current Report on Form 8-K (No. 000-52770) filed on September
30, 2008).
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
* Indicates
a management contract or compensatory plan or arrangement.
|
**
|
English
translation of executed Chinese original document
included. Document provides that in the event of any
inconsistencies between the Chinese and English versions of these
documents, the Chinese versions shall
govern.
|
|
***
|
Document
provides that inconsistencies between the Chinese and English versions to
be resolved in accordance with Chinese
law.
|
- 107
-
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
January 6, 2010
|
|
Pacific
Asia Petroleum, Inc.
|
|
|
|
||
|
By:
|
/s/
FRANK C. INGRISELLI
|
|
|
Frank
C. Ingriselli
|
||
|
President
and Chief Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
FRANK C. INGRISELLI
|
Director,
President and Chief Executive Officer
|
January
6, 2010
|
||
|
Frank
C. Ingriselli
|
||||
|
/s/
STEPHEN F. GROTH
|
Vice
President and Chief Financial Officer
|
January
6, 2010
|
||
|
Stephen
F. Groth
|
(Principal
Accounting and Financial Officer)
|
|||
|
/s/ JAMES F. LINK
|
Director
|
January
6, 2010
|
||
|
James
F. Link
|
||||
|
/s/ ELIZABETH
P. SMITH
|
Director
|
January
6, 2010
|
||
|
Elizabeth
P. Smith
|
||||
|
/s/ WILLIAM
E. DOZIER
|
Director
|
January
6, 2010
|
||
|
William
E. Dozier
|
||||
|
/s/ ROBERT
C. STEMPEL
|
Director
|
January
6, 2010
|
||
|
Robert
C. Stempel
|
- 108
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