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EX-31.2 - EXHIBIT 31.2 - FAR EAST ENERGY CORPv344065_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - FAR EAST ENERGY CORPv344065_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - FAR EAST ENERGY CORPv344065_ex32-2.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)      
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
       
    For the quarterly period ended March 31, 2013  
       
    OR  
       
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

Commission File Number 0-32455

 

Far East Energy Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   88-0459590
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

363 N. Sam Houston Parkway East, Suite 380, Houston, Texas 77060

(Address of principal executive offices)(Zip Code)

 

832-598-0470

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x  No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x   No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨    Accelerated filer x    Non-accelerated filer ¨   Smaller 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  x

 

Number of shares outstanding of the issuer’s common stock as of April 26, 2013.

 

Title of each class Number of shares
Common Stock, par value $0.001 per share 346,371,843

 

 
 

 

FAR EAST ENERGY CORPORATION

 

TABLE OF CONTENTS

 

    Page No.
PART I. FINANCIAL INFORMATION  
     
  ITEM 1. Financial Statements (Unaudited)  
       
    Consolidated Balance Sheets – March 31, 2013 and December 31, 2012 3
       
    Consolidated Statements of Operations – Three Months Ended March 31, 2013 and 2012 4
       
    Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2013 and 2012 5
       
    Consolidated Statements of Cash Flows – Three months Ended March 31, 2013 and 2012 6
       
    Notes to Consolidated Financial Statements 7
       
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
       
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 31
       
  ITEM 4. Controls and Procedures 31
       
PART II. OTHER INFORMATION  
     
  ITEM1A. Risk Factors 32
       
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
       
  ITEM 6. Exhibits 34
       
SIGNATURES   35
     
EXHIBIT INDEX   36

 

2
 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

FAR EAST ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(Unaudited)

 

   March 31,   December 31, 
   2013   2012 
ASSETS          
Current assets          
Cash and cash equivalents  $40,221   $1,340 
Accounts receivable   133    163 
Inventory   454    423 
Prepaid expenses   549    369 
Deposits   122    677 
Other current assets   12    16 
Total current assets   41,491    2,988 
           
Property and equipment          
Oil and gas properties, successful efforts method:          
Proved properties   72,577    71,875 
Unproved properties   275    275 
Other property and equipment   2,330    2,313 
Total property and equipment   75,182    74,463 
Less accumulated depreciation, depletion and amortization   (3,915)   (3,398)
Total property and equipment, net   71,267    71,065 
           
Deferred financing costs   3,174    371 
Other long-term assets   782    658 
Total assets  $116,714   $75,082 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable  $9,430   $14,814 
Accrued liabilities   6,939    7,571 
Short-term debt   21,000    25,730 
Total current liabilities   37,369    48,115 
           
Secured notes payable   60,000    - 
Discount on secured notes payable   (2,170)   - 
Long-term debt   57,830    - 
           
Asset retirement and environmental obligations   875    840 
           
Commitments and contingencies (Note 8)          
           
Stockholders' equity          
Preferred stock, $0.001 par value, 500,000,000 shares authorized, none outstanding   -    - 
Common stock, $0.001 par value, 500,000,000 shares authorized, 346,392,279 and 344,785,689 issued and outstanding at March 31, 2013 and December 31, 2012, respectively   346    345 
Additional paid-in capital   178,193    175,554 
Unearned compensation   (947)   (987)
Accumulated deficit   (156,952)   (148,785)
Total stockholders' equity   20,640    26,127 
Total liabilities and stockholders' equity  $116,714   $75,082 

 

See the accompanying notes to consolidated financial statements.

 

3
 

 

FAR EAST ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In Thousands, Except Per Share Data)

(Unaudited)

 

   Three Months Ended March 31, 
   2013   2012 
Operating revenues:          
Gas sales  $316   $226 
Other, net   117    71 
    433    297 
Operating expenses:          
Lease operating expense   1,239    1,668 
Exploration costs   1,211    1,409 
General and administrative   2,870    2,779 
Depreciation, depletion and amortization   543    358 
Total operating expenses   5,863    6,214 
Operating loss   (5,430)   (5,917)
Other income (expense):          
Interest expense   (2,630)   (1,076)
Interest income   1    1 
Gain (loss) on sales of other fixed assets   -    - 
Foreign currency transaction gain (loss)   (108)   (46)
Total other income   (2,737)   (1,121)
Loss before income taxes   (8,167)   (7,038)
Income taxes   -    - 
Net loss  $(8,167)  $(7,038)
           
Comprehensive loss  $(8,167)  $(7,038)
           
Net loss per share:          
Basic and diluted  $(0.02)  $(0.02)
           
Weighted average shares outstanding:          
Basic and diluted   345,835    343,972 

 

See the accompanying notes to the consolidated financial statements.

 

4
 

 

FAR EAST ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In Thousands Except Share Data)

(Unaudited)

 

                   Deficit     
                   Accumulated     
   Common Stock   Additional       During the   Total 
   Number of   Par   Paid-In   Unearned   Development   Stockholders' 
   Shares   Value   Capital   Compensation   Stage   Equity 
For the Three Months Ended March 31, 2013                              
Balance at December 31, 2012   344,785,689   $345   $175,554   $(987)  $(148,785)  $26,127 
Net loss   -    -    -    -    (8,167)   (8,167)
Nonvested shares issued   1,679,000    1    166    40    -    207 
Nonvested shares withheld for taxes   (72,410)   -    (7)   -    -    (7)
Stock options exercised   -    -    -    -    -    - 
Stock options issued   -    -    164    -    -    164 
Warrants issued   -    -    2,316    -    -    2,316 
Balance at March 31, 2013   346,392,279   $346   $178,193   $(947)  $(156,952)  $20,640 
                               
For the Three Months Ended March 31, 2012                              
Balance at December 31, 2011   342,103,218   $342   $174,317   $(792)  $(121,625)  $52,242 
Net loss   -    -    -    -    (7,038)   (7,038)
Nonvested shares issued   2,552,500    3    840    (663)   -    180 
Nonvested shares withheld for taxes   (15,162)   -    (5)   -    -    (5)
Stock options issued   -    -    105    -    -    105 
Balance at March 31, 2012   344,640,556   $345   $175,257   $(1,455)  $(128,663)  $45,484 

 

See the accompanying notes to consolidated financial statements.

 

5
 

 

FAR EAST ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

   Three months Ended March 31, 
   2013   2012 
         
Cash flows from operating activities:          
Net loss  $(8,167)  $(7,038)
Adjustments to reconcile net loss to cash used in operating activities:          
Depletion, depreciation and amortization   543    358 
Amortization of deferred financing costs   277    540 
Amortization of warrants   145    - 
Share-based compensation   371    285 
Changes in components of working capital:          
Accounts receivable   (90)   4 
Inventory   (31)   44 
Prepaid expenses   (180)   6 
Deposits   555    (93)
Accounts payable and accrued liabilities   (644)   (1,975)
(Gain) loss on sale of assets   -    - 
Other, net   (6)   (5)
Net cash used in operating activities   (7,227)   (7,874)
           
Cash flows from investing activities:          
Additions to oil and gas properties   (6,065)   (3,654)
Additions to other properties   (17)   (91)
Net cash used in investing activities   (6,082)   (3,745)
           
Cash flows from financing activities:          
Net proceeds from credit facility   125    2,130 
Net proceeds from secured note payable   58,500    - 
Repayment of credit facility   (4,855)   - 
Debt issue costs   (1,580)   - 
Net cash provided by financing activities   52,190    2,130 
           
Net increase (decrease)  in cash and cash equivalents   38,881    (9,489)
Cash and cash equivalents—beginning of period   1,340    23,263 
Cash and cash equivalents—end of period  $40,221   $13,774 

 

See the accompanying notes to consolidated financial statements.

 

6
 

 

FAR EAST ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Business, Basis of Presentation and Significant Accounting Policies

 

Business. We were incorporated in Nevada on February 4, 2000. In January 2002, we renamed our company Far East Energy Corporation and changed our focus to exploring, developing, producing and selling coalbed methane gas ("CBM"). Throughout this Quarterly Report on Form 10-Q, the terms "Far East Energy," "Far East," "we," "the Company," "us," "our" and "our company" refer to Far East Energy Corporation and its subsidiaries. References to “FEEB” refer to Far East Energy (Bermuda), Ltd., our principal operating subsidiary. References to "China" and "PRC" are references to the People's Republic of China. References to the “MofCom” are references to the Chinese Ministry of Commerce, the principal regulatory authority with oversight responsibility for our production sharing contracts. References to the “MLR” are references to the Chinese Ministry of Land and Resources, the principal regulatory authority for the exploration, development and production of oil and gas resources in China. References to “CUCBM” are references to China United Coalbed Methane Company, Ltd, and references to “CNPC” are references to China National Petroleum Company. Throughout this Quarterly Report on Form 10-Q, we use the term “our Chinese partner company” when referring to CUCBM and CNPC/PetroChina, as applicable.

 

The information, as furnished herein, reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.

 

Basis of Presentation. The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to those rules and regulations. The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires the Company’s management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the information and disclosures provided herein are adequate to present fairly the consolidated financial position, results of operations and cash flows of the Company. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report").

 

Recently Issued Accounting Standards and Developments. There were no recent accounting pronouncements at March 31, 2013 that materially affected our company.

 

2. Liquidity and Realization of Assets

 

All of our reserves are located in Shanxi Province, China. At December 31, 2012, our estimated net proved and net probable reserves were 51.3 billion cubic feet (“Bcf”) and 392.4 Bcf of CBM, respectively. At December 31, 2012, the standardized measure of our future net cash flows, discounted at 10 percent per annum, relating to our proved natural gas reserves was $40.4 million.

 

On June 12, 2010, China United Coalbed Methane Corporation, Ltd. ("CUCBM"), our Chinese partner for the Shouyang production sharing contract ("PSC"), and SPG executed a gas sales agreement (the "Gas Sales Agreement"), to which we are an express beneficiary, to sell CBM produced in the CBM field governed by the Shouyang PSC. Gas sales under the gas sales agreement with SPG commenced in the first quarter of 2011. As of March 31, 2013, gas sales proceeds to be collected were approximately $0.1 million, and were recorded in Accounts Receivable. We have funded our exploration and development activities primarily through the sale and issuance of common stock and proceeds received from the Notes (as defined below), the closing of the Facility Agreement (as defined below) and sales of CBM.

 

On November 28, 2011, FEEB entered into a Facility Agreement, as borrower, with Standard Chartered Bank (“SCB”), as lender, and the Company, as guarantor (the “Facility Agreement”). The Facility Agreement provides for a $25 million credit facility, the proceeds of which were currently used for project costs with respect to the Shouyang Area in Shanxi Province, China, as well as for finance costs and for general corporate purposes approved by SCB. The Facility Agreement is fully drawn and no amounts remain for borrowing. See Note 3 - Facility Agreement.

 

7
 

 

On January 14, 2013, the Company sold senior secured notes of FEEB (the “Notes”) and warrants to purchase common stock of FEEC (the “Warrants”) to certain institutional investors for $60.0 million of gross proceeds in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) thereof and Regulation S thereunder (the “Private Placement”). The Private Placement closed on January 15, 2013. See Note 4 – Senior Secured Notes.

 

On January 15, 2013, FEEC and FEEB entered into the Fifth Amendment to the Facility Agreement, dated November 28, 2011 (as amended, the “SCB Credit Facility”), among FEEC, FEEB and SCB, to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which includes $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement.

 

Our current work programs will satisfy the minimum exploration expenditures for our Shouyang and Yunnan PSCs for 2013. With respect to the PSC governing CBM production activities on the approximately 573,000 acres in the Qinnan block of the Shanxi Province, we have halted activities on the Qinnan Block pending resolution of whether or not its exploration period will be extended as a result of certain force majeure claims.

 

Management may seek to secure additional capital by exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets, by obtaining additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through additional debt, reserve based project or equity-related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any project or reserve based financing are uncertain, and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. There can be no guarantee of future capital acquisition, fundraising or exploration success.

 

3. Facility Agreement

 

On November 28, 2011, FEEB entered into the Facility Agreement, as borrower, with SCB, as lender, and the Company, as guarantor. The Facility Agreement provides for a $25 million credit facility, the proceeds of which were used for project costs with respect to the Shouyang Area in Shanxi Province, China, as well as for finance costs and for general corporate purposes approved by SCB. The Agreement had an initial 9-month term ending August 28, 2012. Loans under the Facility Agreement may be made in such amounts as may be specified from time to time in one or more utilisation requests according to an agreed expenditure schedule. Loans under the Facility Agreement will bear interest at LIBOR plus an applicable margin rate of 9.5% during the initial period and 10.0% thereafter, and mandatory costs, if any, to compensate SCB for certain Hong Kong regulatory compliance costs. In connection with and as security for the Facility Agreement, FEEB and/or the Company entered into certain other ancillary agreements dated November 28, 2011, including a Share Pledge Agreement, an Account Charge Agreement, an Assignment of Shareholder Loans and a Subordination Agreement (the “Ancillary Agreements”). Under the Ancillary Agreements, the Company pledged its shares in FEEB and granted a security interest in certain intercompany debt to SCB, and FEEB granted a security interest in certain bank accounts to SCB.

 

During 2012, the Company entered into several amendments to the Facility Agreement with SCB which effectively extended the termination date of the Credit Facility Agreement and the due date for payment of all accrued interest to January 15, 2013. On January 15, 2013, FEEC and FEEB entered into the Fifth Amendment to the Facility Agreement (the “Fifth Amendment”), to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which includes $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. See Note 4 – Senior Secured Notes for discussion of the Private Placement.

 

8
 

 

At March 31, 2013, the total amount drawn under the Facility Agreement was $21.0 million. The related accrued interest was $0.6 and $0.2 million for March 31, 2013 and 2012, respectively. The effective interest rate for the Facility Agreement is 12.3% per annum.

 

At March 31, 2013 and 2012, total financing costs in connection with the Facility Agreement were approximately $0.4 and $1.6 million, respectively. The costs related to the Facility Agreement were capitalized as deferred financing costs and amortized over the term of the Facility Agreement. Amortization expense for the quarters ended March 31, 2013 and 2012 was $0.1 million and $0.5 million, respectively.

 

4. Senior Secured Notes

 

On January 14, 2013, FEEC and FEEB entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain purchasers (the “Purchasers”) under which FEEC and FEEB agreed to sell, and the Purchasers agreed to purchase the Notes and Warrants for $60.0 million of gross proceeds in the Private Placement. The Warrants provide the holders the right to purchase up to 56,086,439 shares of FEEC common stock at an exercise price of $0.085 per share. The Warrants will expire on December 31, 2017. The Private Placement closed on January 15, 2013.

 

The Notes are senior secured obligations of FEEB and are fully and unconditionally guaranteed by FEEC. The Notes were sold at an issue price of 100% of par for an aggregate principal amount of $60.0 million. The Notes accrue cash interest at a rate of 13.0% per year, which is paid semi-annually in arrears on June 30 and December 30 of each year, commencing on June 30, 2013. FEEB may, at its option, elect to pay interest “in kind” at a rate of 14.5% per year by issuing additional Notes with the first interest payment required to be paid in kind. The Notes will mature on January 15, 2016. Accrued interest was $1.6 million at March 31, 2013.

 

The Notes and related guarantees rank equal in right of payment with the Credit Facility. Except as specifically permitted by the Indenture, any new indebtedness of FEEC, FEEB or any restricted subsidiary of FEEC will require the consent of SCB and the “Required Noteholders,” which means holders of 75% of aggregate principal amount at maturity of the Notes. The Notes and related guarantees are secured by substantially all of the assets of FEEC and FEEB, other than assets located in the People’s Republic of China, assets the grant, creation or perfection of any lien on which would require the consent, authorization or approval of, or filing with, any governmental authority in the People’s Republic of China and certain other excluded assets. Such collateral continues to secure the Credit Facility with the administration of such collateral subject to a collateral agency and intercreditor agreement between SCB and Wells Fargo Bank, National Association, as indenture trustee of the Notes and as collateral agent.

 

In certain circumstances specified in the Indenture and as summarized below, FEEB may or will be required to redeem or offer to repurchase the Notes at the relevant prices set forth below times the principal amount being redeemed or repurchased:

 

Closing Date to February 28, 2014   100%
March 1, 2014 to December 31, 2014   104%
January 1, 2015 and thereafter   108%

 

plus accrued and unpaid interest thereof, if any, on the Notes to the applicable date of redemption or repurchase, as applicable.

 

We applied ASC 470 in the recording of the valuation of the Warrants. We determined the fair value of the Warrants using the Black Scholes Option Pricing Model (“BSOPM”).

 

9
 

 

The significant assumptions used in the valuation were as follows:

 

   Black Scholes 
   Option Pricing Model 
Volatility   70.81%
Risk free interest rate   0.75%
Expected dividend yield   - 
Expected term   5 year 

 

Based on the utilization of BSOPM valuation technique, the Warrants were valued at approximately $2.5 million at time of issuance. The amount was recorded as a debt discount to the Notes in the liabilities section and as additional paid-in capital in the equity section of the balance sheet. The debt discount is accreted as interest expense periodically over the term of the Notes. We have recorded an accretion amount of $0.1 million from the issuance date to March 31, 2013.

 

The Company incurred approximately $3.0 million financing costs in connection with the Notes. These costs were allocated between the Notes and the Warrants in proportion to their respective fair values at time of issuance. The costs related to the Warrants were recorded as an offset to the value of the Warrants in additional paid-in capital. The costs related to the Notes were capitalized as deferred financing costs and amortized based on the effective interest method over the term of the Notes. The objective of that method is to arrive at a periodic interest cost which represents a level effective rate over the term of the Notes on its face amount reduced by the unamortized discount and expense at the beginning of the period. The effective interest rate for the Notes as calculated is 16.3% per annum. We have recorded an amortization amount of $0.2 million for the period from the issuance date to March 31, 2013.

 

5. Oil and Gas Properties

 

The costs associated with our oil and gas properties include the following (in thousands):

 

   At March 31, 2013   At December 31, 2012 
Proved oil and gas properties  $72,577   $71,875 
           
Unproved leasehold costs   275    275 
Unproved oil and gas properties   -    - 
Total unproved oil and gas properties   275    275 
Accumulated depreciation, depletion and amortization   (2,665)   (2,221)
           
Total oil and gas properties, net  $70,187   $69,929 

 

Unproved Leasehold Costs. Unproved leasehold costs are composed of amounts we paid to MofCom and CUCBM pursuant to a PSC we entered into in 2002 with CUCBM to acquire the mineral rights in the Enhong and Laochang areas in the Yunnan Province.

 

Unproved Oil and Gas Properties. Unproved oil and gas property costs include only suspended well costs which are direct exploratory well costs pending determination of whether proved reserves have been discovered. Accounting guidance regarding capitalization of suspended well costs is provided by FASB ASC Topic 932. FASB ASC Topic 932 addresses whether there are circumstances under the successful efforts method of accounting for oil and gas producing activities that would permit the continued capitalization of exploratory well costs beyond one year, other than when additional exploration wells are necessary to justify major capital expenditures and those wells are under way or firmly planned for the near future. Capitalization of costs should be continued beyond one year in cases where reserves for the project are not yet proven, but the Company demonstrates sufficient continuing progress toward assessing those reserves. For the capitalized costs at March 31, 2013, our assessment indicated that our current work programs demonstrated our efforts in making sufficient continuing progress toward assessing the reserves in the areas for which the costs were incurred. Therefore, we have continued to capitalize these costs.

 

10
 

 

At March 31, 2013, the Company had no costs capitalized for exploratory wells for a period of greater than one year after the completion of drilling.

 

6. Asset Retirement and Environmental Obligations

 

The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of short-term and long-term legal obligations associated with the retirement of property, plant and equipment at March 31, 2013 (in thousands):

 

   At March 31, 2013 
Carrying amount at beginning of period  $840 
Liabilities incurred   10 
Liabilities settled   - 
Accretion expense   25 
Settlement of obligation   - 
Revisions   - 
Carrying amount at end of period  $875 
      
Current portion  $- 
Noncurrent portion  $875 

 

7. Other Fixed Assets

 

Other fixed assets, net include the following (in thousands):

 

   At March 31, 2013   At December 31, 2012 
Other fixed assets  $2,330   $2,313 
Accumulated depreciation   (1,250)   (1,176)
Other fixed assets, net  $1,080   $1,137 

 

Other fixed assets include leasehold improvements, equipment and furniture. Depreciation expense for the three-month periods ended March 31, 2013 and 2012 were approximately $73,000 and $78,000, respectively.

 

11
 

 

8. Commitments and Contingencies

 

Legal Proceedings. We are periodically named in legal actions arising from normal business activities. We evaluate the merits of these actions and, if we determine that an unfavorable outcome is probable and can be estimated, we will establish the necessary accruals. We do not anticipate any material losses as a result of commitments and contingent liabilities. We are involved in no material legal proceedings.

 

Shouyang Production Sharing Contract. We are the operator under the Shouyang PSC to develop the Shouyang Block in Shanxi Province. The term of the Shouyang PSC consists of an exploration period, a development period and a production period. During the exploration period, we hold a 100% participating interest in the properties, and we must bear all exploration costs for discovering and evaluating CBM-bearing areas. We have negotiated and signed multiple amendments with our Chinese partner companies to extend the exploration period under our PSCs. The exploration period for approximately 288,570 acres (approximately 1,167.8 square kilometers) of the Shouyang Block expires on June 30, 2015, and the exploration period for approximately 121,255 acres (approximately 490.7 square kilometers) expires on June 30, 2013. The Shouyang PSC expires on July 1, 2032 unless extended.

 

We operate approximately 409,824 acres (1,658.5 square kilometers) of the Shouyang Block. There is an approximately 15,988 acre (approximately 64.7 square kilometer) portion of the block that has recently been certified by the Chinese Ministry of Land Resources (the “MLR”), which is a step that is a necessary regulatory requirement to obtain a permanent development license. This portion of the block covers our pilot development wells located in the northern portion of the Shouyang Block (the “1H Pilot Area”) and a westward extension thereof. We have a 100% participating interest (subject to a net 3.5% revenue interest held by Phillips China, Inc., a subsidiary of Conoco Phillips (“Phillips”)) in this portion of the block, which contains all of the wells in the 1H Pilot Area (the area of our current CBM sales) and the planned expansion thereof. With respect to the remaining 393,837 acres (1,593.8 square kilometers), CUCBM maintains the right to elect up to a 30% participating interest upon completion of certain milestones, and we retain the remaining participating interest in the contract area, subject to the 3.5% revenue interest.

 

During the exploration period, FEEB must complete at least the minimum work program and seek commercial deposits of CBM that can be developed in commercially paying quantities. In order to shift from the exploration period to the development period, an overall development plan is prepared and submitted for governmental approval for a long-term development license for a particular CBM field. The preparation of an overall development plan to submit as part of the application for a long-term development license will require certification in accordance with MLR standards, as well as technical, commercial, environmental, health and safety plans demonstrating how the CBM field will be developed for the exploitation of CBM located therein. Currently, we and CUCBM are in the process of jointly preparing an overall development plan for approximately 24,661 acres (99.8 square kilometer) located in the northern portion of the Shouyang Block.

 

Following expiration of the exploration periods, we may elect to continue the process of trying to convert portions of the Shouyang Block into MLR certified areas in order to transition these areas into the process for a long-term development license. Any acreage that is not at or past the stage of submittal of a technical report that reasonably meets the criteria for MLR certification will be relinquished unless the parties agree otherwise.

 

The development period as to any portion of the Shouyang Block will begin after the date of commencement of production of commercial grade quantities of CBM with respect to that area. Any CBM produced and sold prior to the approval of an overall development plan is deemed to occur during the development period, and production is to be distributed in accordance with the parties participating interests in such CBM field. Provided we remain in compliance with the requirements under the Shouyang PSC, the Shouyang PSC allows production to continue on a CBM field until the earlier of the end of the useful life of that area or June 30, 2032, unless extended or otherwise amended.

 

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Under the PSCs, we have committed to satisfy certain annual minimum exploration expenditure requirements for each PSC. Our minimum exploration expenditure requirement for each block is based on the minimum exploration expenditure requirements of CUCBM established by the MLR, subject to such additional commitments as we deem reasonably necessary and appropriate in light of negotiations to extend the underlying exploration periods of the PSCs. The MLR sets its requirements by applying a minimum expenditure per acre to the total acreage encompassed by each PSC. As a result, the annual minimum exploration expenditure requirement is approximately $2.7 million for the Shouyang PSC, based on the currency exchange rate between the U.S. Dollar to the Chinese Renminbi (“RMB”) as of March 31, 2013. Any portion of the exploration expenditures that exceeds the current year’s minimum exploration expenditure requirement cannot be carried forward for the satisfaction of the subsequent year’s minimum requirement. Under the Shouyang PSC, we are required to pay certain fees totaling $0.5 million for the year of 2013. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. We have completed the minimum work obligations under the Shouyang PSC. We are required to drill 25 additional wells in the non-MLR certified area by June 30, 2013, and drill additional 13 wells during the period from July 1, 2013 to June 30, 2015, spending at least $16.0 million based on the currency exchange rate between the U.S. Dollar and the RMB as of March 31, 2013.

 

Qinnan Production Sharing Contract. FEEB is the operator under the Qinnan PSC to develop the Qinnan block in Shanxi Province. CUCBM is in the process of assigning the Qinnan PSC to China National Petroleum Company (“CNPC”). The term of the Qinnan PSC consists of an exploration period, a development period and a production period. During the exploration period, we hold a 100% participating interest in the properties, and we must bear all exploration costs for discovering and evaluating CBM-bearing areas. If any CBM field is discovered, the development costs for that CBM field will be borne by us and CUCBM or CNPC (following the assignment of the Qinnan PSC) in proportion to the respective participating interests. At that time, we will recover that share of the up-front exploration costs allocable to our Chinese partner company through a gradual cost recovery mechanism. The exploration period is divided into three phases called Phase I, Phase II and Phase III. We have completed our Phase I, Phase II and Phase III work program obligations under the Qinnan PSC, and intend to continue pilot development and exploration activities in Phase III until we transition into the development period.

 

The exploration period of the Qinnan PSC in Shanxi Province expired on June 30, 2009, and we cannot continue our exploration activities in the Qinnan block without an extension of the exploration period or a new PSC. We are continuing to pursue an extension of the exploration period of the Qinnan PSC, but we cannot be optimistic at this time. We believe that the underlying exploration period should be extended due to events beyond our reasonable control, namely the lengthy transfer of rights taking place from CUCBM to CNPC. At our Chinese partner company’s request, we have provided certain operational and financial information to assist them in the decision making process as to whether to recognize an extension of the exploration period in Qinnan. PetroChina has completed an accounting audit pursuant to the Qinnan PSC of our expenditures for 2007 and 2008. We have also provided to PetroChina, at their request, our work plan for 2010 for Qinnan. In January 2011, we received a formal notice from CNPC that it has purportedly received all Chinese approvals with respect to the transfer of CUCBM’s interest to it, and subsequently to its wholly owned affiliate PetroChina. CNPC also requested we execute a modification agreement to confirm PetroChina as our Chinese partner company for the Qinnan PSC. In negotiations with CUCBM and PetroChina related to this request, we have endeavored to negotiate an assignment agreement that would reflect the transfer of interest to CNPC while CNPC and PetroChina would acknowledge delays that were incurred by virtue of us not having, for an extended period of time, an official Chinese partner company that had the capacity or authority under the Qinnan PSC to work with us. Because of the inability to hold a formal joint management committee (“JMC”) meeting or to have the effective involvement of our Chinese partner company, we believe that our efforts to continue CBM operations in the Qinnan block have been materially hindered. Technically, the exploration period under the Qinnan PSC expired on June 30, 2009; however, we have maintained the position that the doctrine of force majeure under the Qinnan PSC entitled us to an extension of the exploration period. We continue to discuss this situation with CUCBM and PetroChina, and as recently as January 2012, have submitted a notice of force majeure in accordance with the Qinnan PSC. There can be no assurance that we will be successful in extending the exploration period of the Qinnan PSC or that a new PSC will be granted. Additionally, in connection with obtaining this extension or a new PSC, we may be required to commit to certain expenditures or to modify the terms or respective ownership interests and/or acreage in the applicable PSC.

 

Under the Qinnan PSC, we have committed to satisfy certain annual minimum exploration expenditure requirements. As with the Shouyang PSC, our minimum exploration expenditure requirement is based on the minimum exploration expenditure requirements of CNPC established by the MLR. The MLR sets its requirements by applying a minimum expenditure per square kilometer to the total acreage encompassed by each PSC. The annual minimum exploration expenditure requirement under the Qinnan PSC is approximately $3.7 million in the aggregate based on the currency exchange rate between the U.S. Dollar and the RMB as of March 31, 2013. These expenditure requirements are denominated in the RMB and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the RMB. Because the stated expiration date for the exploration period for the Qinnan PSC occurred on June 30, 2009, and we have not yet received an extension, we have halted activities associated with the Qinnan block pending receipt of an extension, should one ultimately be granted.

 

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Yunnan Production Sharing Contract. On January 25, 2002, we entered into a PSC to develop two areas in Yunnan Province: (1) the Enhong area, which covers approximately 145,198 acres (587.6 square kilometers), and (2) the Laochang area, which covers approximately 119,327 acres (482.9 square kilometers) ( the “Yunnan PSC”). FEEB is the operator under the Yunnan PSC. The term of the Yunnan PSC consists of an exploration period, a development period and a production period. The exploration period is divided into two phases, Phase I and Phase II. We have completed Phase I and are operating in Phase II. During the fourth quarter of 2011, we signed a modification agreement to the Yunnan PSC, which was approved by MofCom on June 15, 2012 and extended the exploration period until December 31, 2013, in exchange for allowing CUCBM to proceed at its sole risk with a 100% participating interest in the 145,198 acres (587.6 square kilometers) in the Enhong part of the Yunnan PSC contract area (hence, our interest in the Yunnan PSC now comprises the Laochang area only, and is called the Laochang Block). We may elect to continue the process of trying to transition CBM fields into the process for a long-term development license for certain areas. Any acreage that is not at or past the stage of submittal of a technical report to CUCBM that reasonably meets the criteria for MLR certification will be relinquished unless the parties otherwise agree. Our operations will focus on obtaining MLR certification in the portion of the Laochang area and preparing for compilation of an overall development plan to submit for approval. The development period of any CBM field in the Yunnan PSC area will begin after the approval of an long-term development license pursuant to an overall development plan. An overall development plan would be developed and filed jointly by us and CUCBM, seeking approval from Chinese governmental authorities, for any CBM field that we and CUCBM elect to develop. The production period of any CBM field in the Yunnan PSC area will begin after the date of commencement of production of commercial grade quantities of CBM with respect to that CBM field. Provided that we remain in compliance with the requirements under the Yunnan PSC, production will be allowed to continue on a CBM field until the earlier of the end of the useful life of the field and January 1, 2033, unless extended or otherwise amended. We are responsible for all exploration costs related to the Yunnan PSC, including all exploration costs for discovering and evaluating CBM-producing areas. If any CBM field is discovered within the contract area, CUCBM will be deemed to hold a 40% participating interest in such field and we will be deemed to have a 60% participating interest, unless CUCBM elects to participate at a lower level, in which case we will retain all participating interests not taken by CUCBM and shall be responsible for development costs in proportion to our participating interest.

 

We anticipate continuing the dewatering/test-production and we anticipate the production of more gas as the dewatering process moves forward and the interference between wells can be established, together with a reduction in the fluid-level, creating a funnel effect covering a relatively larger area of the reservoir. Long-term production testing and monitoring and resultant data has significantly enhanced our understanding of the reservoir and provides the foundation, not only for further in-depth analysis, but also suggests that the application of certain technologies may enhance future drilling and production. For example, it appears that the application of electric pulsing may enhance production rates, and this will likely be tested in a few wells in Yunnan and/or Shouyang. Furthermore, in order to apply for a long-term development license to enter the development period, it is under consideration that more parameter wells and pre-production wells may be planned for drilling, especially in the Yuwang subblock of the Yunnan PSC project.

 

Under the Yunnan PSC, we have committed to satisfy certain annual minimum exploration expenditure requirements. Our minimum exploration expenditure requirements for the blocks subject to the Yunnan PSC are based our negotiated agreement to extend the Yunnan PSC exploration period. We are currently obligated to drill a total of eight wells during the entire exploration period, as extended, spending at least $0.8 million (4,850,000 RMB) per year based on the current exchange rate between the U.S. Dollar and the RMB as of March 31, 2013 as the minimum exploration expenditure. Under applicable MLR rules for minimum expenditure requirements, the annual minimum exploration expenditure requirement for the Yunnan PSC was approximately $1.7 million (10,720,000 RMB) before the modification but reduced to $0.8 million with relinquishment of acreage, based on the currency exchange rate between the U.S. Dollar and the RMB as of March 31, 2013. As we have already drilled five wells in the Laochang area during Phase II of the Yunnan exploration period, we are only obligated to drill an additional three wells before December 31, 2013 to satisfy the minimum work commitment.

 

These requirements are denominated in RMB and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the RMB. The MLR minimum expenditure requirements are a significant factor that influences our exploration work program. Under the Yunnan PSC, we were required to pay certain fees totaling $0.4 million for the year of 2013. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. Based on the Yunnan PSC, the unfulfilled exploration work commitment will be added to the minimum exploration work commitment for the following year. If we terminate the Yunnan PSC and there exists an unfulfilled balance of the minimum exploration work commitment, we will be required to pay the balance to CUCBM.

 

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9. Common Stock

 

Shares Withheld for Taxes. During the first quarter of 2013, we withheld 72,410 shares of our common stock from the vesting of nonvested shares (also commonly referred to as "restricted stock") granted to employees to satisfy tax withholding obligations of $7,000. Once withheld, the shares were canceled and removed from the number of outstanding shares. Accordingly, we reduced our common stock and our additional paid in capital on our consolidated balance sheet by an amount which equaled the fair market value of the withheld shares on the date of withholding and cancellation. We subsequently remitted the amount withheld to the tax authority.

 

Outstanding Warrants. A summary of warrants outstanding as of March 31, 2013 is as follows (in thousands, except exercise price):

 

    Warrants   Expiration Date In 
Exercise Price   Outstanding   2013   2014   2015   2017 
$0.09    56,086    -    -    -    56,086(1)
$0.54    290    -    290    -    - 
$0.80    4,662    -    -    4,662    - 
$1.00    8,400    8,400    -    -    - 
$1.25    4,623    -    4,623    -    - 
                            
 Total    74,061    8,400    4,913    4,662    56,086 

 

(1)   During the first quarter of 2013, these warrants were issued in conjunction with the a private placement of senior secured notes.

 

10. Share-Based Compensation

 

We grant nonvested shares of common stock and options to purchase common stock to employees, members of the board of directors and consultants under our shareholder-approved 2005 Stock Incentive Plan (the "2005 Plan"). Grants prior to the adoption of the 2005 Plan and inducement grants associated with hiring of new employees and appointment of new directors were generally issued outside of the 2005 Plan. During the first three months of 2013, we awarded options to purchase up to 3,610,000 shares of our common stock and 1,604,000 nonvested shares under the 2005 Plan to employees and members of the board of directors; and options to purchase up to 200,000 shares of our common stock and 75,000 nonvested shares outside the 2005 Plan to a consultant. During the first quarter of 2012, we awarded options to purchase up to 970,000 shares of our common stock and 2,447,500 nonvested shares under the 2005 Plan to employees and members of the board of directors; and options to purchase up to 150,000 shares of our common stock and 105,000 nonvested shares outside the 2005 Plan to a consultant. As of March 31, 2013, we had 8,157,699 shares available for awards under the 2005 Plan, of which 199 shares could be issued as nonvested shares or other full-valued stock-based awards.

 

We account for share-based compensation expense under FASB ASC Topic 718, Compensation – Stock Compensation ("ASC 718"). We measure the cost of employee and non-employee services received in exchange for stock options and other equity awards based on the grant date fair value of those awards. We use the Black-Scholes-Merton option pricing model to determine the grant date fair value of options and the closing share price on date of grant to determine the grant date fair value of nonvested shares. We recognize the compensation expense over the period during which the grantee is required to provide service in exchange for the award.

 

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The compensation expense is included in the Consolidated Statements of Operations as follows (in thousands):

 

   Three Months Ended 
   March 31, 
   2013   2012 
Exploration Costs  $73   $41 
General and Administrative   299    244 
   $372   $285 

 

The following table summarizes stock option transactions during the three months ended March 31, 2013 (in thousands, except grant price):

 

   Options   Weighted Average Grant Price 
Outstanding at January 1, 2013   11,149   $0.95 
Granted   3,810    0.10 
Forfeited   -    - 
Cancelled   -    - 
Expired   -    - 
Outstanding at March 31, 2013   14,959   $0.73 
           
Exercisable at March 31, 2013   10,735   $0.94 

 

At March 31, 2013, the weighted average remaining contractual life for the stock options outstanding and exercisable was 5.90 years and 4.54 years, respectively.

 

The following table summarizes shares of nonvested stock transactions during the three months ended March 31, 2013 (in thousands, except per share data):

 

   Nonvested Shares   Weighted
Average
Fair Value
Per Share
   Vest Date Fair Value 
Outstanding at January 1, 2013   3,949   $0.40      
Granted   1,679    0.10      
Vested   (1,780)   0.36   $190 
Withheld for Taxes   (72)   0.33      
Outstanding at March 31, 2013   3,776   $0.29      

 

As of March 31, 2013, we had approximately $1.5 million in total unrecognized compensation cost related to share-based compensation, of which $0.9 million was related to shares of nonvested stock grants and was recorded in unearned compensation on our consolidated balance sheets. This cost is expected to be recognized over a weighted average period of 1.8 years at March 31, 2013. This expected cost does not include the impact of any future share-based compensation awards.

 

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11. Supplemental Disclosures of Cash Flow Information

 

We use the indirect method to present cash flows from operating activities. Cash paid for interest expense and income taxes for the three-month period ended March 31, 2013 was $0.9 million and zero, respectively. Other supplemental cash flow information for the three-month period ended March 31, 2013 and 2012 is presented as follows (in thousands):

 

   Three Months Ended March 31, 
   2013   2012 
Non-cash transactions:          
Amortization of deferred financing costs  $277   $540 
Non-cash share-based compensation  $371   $285 
Asset retirement and environmental obligation  $10   $- 

 

12. Subsequent Events

 

Subsequent events have been evaluated through the date financial statements were filed with the SEC. There were no items that would have a material impact to the consolidated financial statements presented in this Form 10-Q.

 

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PART 1. FINANCIAL INFORMATION

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report"),our unaudited consolidated financial statements and related notes included in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2013, the risk factors contained herein and in our 2012 Annual Report, and all of the other information contained elsewhere in this report. The terms "we," "us," "our," “the Company” and "our company" refer to Far East Energy Corporation and its subsidiaries, unless the context suggests otherwise. The term "FEEB" refers to Far East Energy (Bermuda), Ltd., a wholly-owned subsidiary, which conducts substantially all of our operations in China.

 

Overview. We are a party to the Shouyang production sharing contract as revised which covers the 409,824 acre (1,658.5 square kilometers) Shouyang Block in Shanxi Province (the “Shouyang PSC”). As of December 31, 2012, we had estimated net proved gas reserves of 51.3 Bcf with an associated standardized measure of our future net cash flows of proved reserves, discounted at 10 percent per annum of $40.4 million. As of December 31, 2012, total net probable reserves were estimated to be 392.4 Bcf.

 

The proved reserves are attributable to approximately 13,360 gross acres (approximately 54.1 square kilometers). The probable and possible reserves are attributable to approximately 85,502 gross acres (approximately 346.0 square kilometers), which includes the Shouyang Block proved reserve locations. This total acreage with proved, probable and possible reserves represents only approximately 21% and 29%, respectively, of our total gross acreage of the Shouyang Block.

 

During the first quarter of 2013, we continued our efforts to explore and develop CBM pursuant to our Shouyang PSC. Gas sales volume, net to the Company, was 66.9 MMcf compared to 48.0 MMcf in the first quarter of 2012.

 

We continued to employ numerous safety precautions to ensure the safety of our employees and independent contractors. We also seek to conduct our operations in accordance with various laws and regulations concerning the environment, occupational safety and health.

 

We believe that good environmental, social, health and safety performance is an integral part of our business success. We conduct our business with respect and care for our employees, contractors, communities, and the environments in which we operate. Our vision is zero harm to people and the environment while creating value for our shareholders as well as for China, including the regions and communities within which we operate. Our commitment to these principles is demonstrated by the fact that we have had no lost-time accidents in over seven years and no major environmental incidents. We have a commitment to being good corporate citizens of China, striving to emphasize and utilize very high levels of Chinese content in personnel, services, and equipment; and we have achieved very high percentages of Chinese content in each category.

 

On November 28, 2011, FEEB and the Company entered into a facility agreement with SCB (the “Facility Agreement”). The Facility Agreement provided for a $25 million credit facility to be used for project costs with respect to the Shouyang Block, finance costs and other general corporate purposes approved by SCB. The Facility Agreement had an initial 9-month term and was subsequently extended. At March 31, 2013, the total amount drawn under the Facility Agreement was $21.0 million. In addition the related accrued interest as of March 31, 2013 was $0.6 million.

 

On January 14, 2013, the Company sold senior secured notes of FEEB (the “Notes”) and warrants to purchase common stock of FEEC (the “Warrants”) to certain institutional investors for $60.0 million of gross proceeds in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) thereof and Regulation S thereunder (the “Private Placement”). The Private Placement closed on January 15, 2013.

 

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On January 15, 2013, the Company entered into the Fifth Amendment to the Facility Agreement (the “Fifth Amendment”), to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which includes $125,000 borrowed on January 11, 2013). In addition accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. After taking into account the amounts paid pursuant to the Fifth Amendment and transaction fees and expenses incurred in connection with the Fifth Amendment and the Private Placement, the net proceeds to the Company of the Private Placement were $52.0 million.

 

Management may seek to secure capital by exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets, by obtaining additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through additional debt, reserve based, project or equity-related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any reserve based or project financing are uncertain, and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. There can be no guarantee of future capital acquisition, fundraising or exploration success.

 

Although we believe the results of our exploration activities in Shanxi and Yunnan Provinces to date have been favorable, we will need to complete more wells to achieve commercial viability in these provinces, which will require additional capital expenditures. Our current and future work programs for our PSCs will depend on our ability to raise additional capital to fund our exploration activities. Our current work programs are described below.

 

Shouyang Block, Shanxi Province. We are a party of the Shouyang PSC with CUCBM, which provides for an operating interest in approximately 409,824 acres (1,658.5 square kilometers) in the Shanxi Province, which includes approximately 15,988 acres (64.7 square kilometers) in the 1H Pilot Area for which the CBM resources have been certified by the MLR to support the request for a long-term development license and for which we hold at 100% participation interest, subject to the Phillips 3.5% revenue interest.

 

In exchange for CUCBM’s election to forego its participation rights, we elected to forgo our rights to approximately 8,673 acres (35.1 square kilometers) of the original Shouyang PSC, which had also been certified by the MLR, allowing CUCBM to proceed independently at its sole risk to develop this area. We believe that this is an advantageous arrangement for us because it provides us with a 100% participating interest (subject to a net 3.5% revenue interest held by Phillips) in the approximately 15,988 acre (approximately 64.7 square kilometer) area, which contains all of the wells in the 1H Pilot Area (the area of our current CBM sales) and the planned expansion thereof. With respect to the remaining approximately 393,837 acres (1,593.8 square kilometers), CUCBM maintains the right to elect up to a 30% participating interest upon completion of certain milestones, and we retain the remaining participating interest in the contract area, subject to the 3.5% revenue interest held by Phillips.

 

The P8 well, drilled on the portion of the Shouyang Block in which we elected to forgo our rights, will be replaced by CUCBM pursuant to an agreement whereby CUCBM has agreed to drill an appraisal well on our behalf in the Shouyang Block outside of the area for which an overall development plan will be submitted as part of the application for a long-term development license to the same coal seam as the P8 well, which shall include the expenses associated with coring, fracturing and other testing.

 

During the exploration period, FEEB, as operator, must complete at least the minimum work program and seek commercial deposits of CBM that can be developed in commercially paying quantities. Under the Shouyang PSC, as modified to date, we are required to conduct pilot testing to obtain information necessary to prepare an application for an overall development plan to submit as part of the application for a long-term development license for a particular CBM field or area within the Shouyang Block.

 

The preparation of an overall development plan to be submitted jointly with CUCBM as part of the application for a long-term development license will require adequate CBM resources certified to the applicable standard by the MLR, as well as technical, commercial, environmental, health and safety plans demonstrating how the CBM field will be developed for the exploitation of CBM resources located therein.

 

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The key certification is that the identified development area contains verifiable/recoverable CBM resources that can be extracted in a commercially economic manner to the standards and guidelines set forth in the Specifications for Coalbed Methane Resources/Reserves (DZ/T0216-2010) (the “CBM Specifications”) promulgated by the MLR.

 

The first step in this process is to engage a Chinese company licensed by the MLR to compile reports as to CBM resources in accordance with MLR requirements. The licensed Chinese vendor will estimate CBM resources subject to certain conditions and assumptions specified in the CBM Specifications with respect to well spacing, the types of wells emphasized in the estimation of resources, the level of output of individual wells and the method of determining such output. The estimation of CBM resources at the necessary level is conducted only on blocks containing wells achieving a minimum standard of production for the CBM resources claimed for a time period of at least three months.

 

Upon completion of a preliminary draft of the report, an independent CBM expert reviews the report and provides comments to the licensed Chinese vendor. Once we are satisfied with the report, our Chinese partner company submits the report to the Petroleum Reserve Office of the MLR. After review and resolution of any questions or comments, the report is approved by the Petroleum Reserve Office of the MLR and submitted to the Reserve Review and Exam Office of the MLR for further review and certification. After review and resolution of any questions or comments, the CBM resources are then certified by the Reserve Review and Exam Office of the MLR to the requisite levels under the CBM Specifications, at which point work can commence on the application process for a long-term development license for the identified development area.

 

In our case, in October 2010, we engaged the Technology Department of CUCBM to compile our first report. Subsequently, we obtained our first certification from the MLR in June 2012 as to the area described above and are in the process of preparing an application for a long-term development license for the area. We are also evaluating additional acreage for future MLR certification.

 

The development period as to any CBM field covered by the Shouyang PSC will begin after the approval of the overall development plan for any such CBM field. As discussed above, CUCBM has agreed to waive its right to any participating interest share in approximately 15,988 acres (64.7 square kilometers) of the 24,661 acres (99.8 square kilometers) of the Shouyang Block with MLR certification, and it has not currently elected to exercise its option to receive a 30% participating interest in any other CBM field that is developed in the Shouyang Block. Thus, Far East will be entitled to a 100% participating interest share in the entirety of its 1H Pilot Area (subject to Phillips 3.5% revenue interest).

 

In September 2011, SPG completed the construction of additional gathering lines in the 1H Pilot Area. Currently, we have 54 wells connected to the gathering lines in the 1H Pilot Area.

 

The price received from SPG for CBM under the Gas Sales Agreement was 1.20 RMB per cubic meter (or $5.41 per Mcf, inclusive of $0.62 for VAT and $0.08 for provincial taxes, based on the March 31, 2013 exchange rate, excluding the effect of any applicable subsidies) until June 12, 2011 and thereafter the price was subject to change based on the parties’ agreement in accordance with market economic principles. The 1.20 RMB per cubic meter price continues to apply at this time. The VAT portion of the sales price is refundable to the Company.

 

Additionally, enacted Chinese government and Shanxi provincial subsidies equal 0.20 RMB and 0.05 RMB per cubic meter, respectively, for a total of 0.25 RMB per cubic meter. The price received by CUCBM and FEEB, including subsidies for gas sales is 1.45 RMB per cubic meter. This equates to approximately $6.54 per Mcf at exchange rates as of March 31, 2013. The Gas Sales Agreement also provides for price adjustments in accordance with changes to the published Chinese national natural gas price and annual price adjustments based on the parties’ mutual agreement. If the parties do not agree on a new price, the then-current price shall continue in effect and either party may seek to resolve any pricing dispute pursuant to arbitration.

 

Work programs are being carried out to achieve three primary goals: (i) to expand the area in the 1H Pilot Area to increase gas production, (ii) to determine the optimal approach to minimize costs and maximize CBM recovery and (iii) to add appraisal wells, spaced at intervals of several kilometers across the entire Shouyang Block to help delineate the geographic extent of the high permeability and high gas content located in the area. We refer to an “appraisal well” as a CBM well drilled outside of the 1H Pilot Area to determine the physical extent of commercially attractive parameters of the coal (such as high gas content, high permeability and good coal thickness), as well as to contribute to the identification of reserves.

 

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We believe that the addition of production wells in the 1H Pilot Area and the addition of appraisal wells throughout the Shouyang Block could add substantially to proved and probable reserves. The following discussion regarding our drilling activity involves the drilling of wells that constitute “exploratory wells,” as such term is defined in Rule 4-10(a)(13) of Regulation S-X.

 

The $60 million Notes placed in the first quarter of 2013 provide full funding for 2013 drilling program, and the Company has now completed its review of requested technical analyses commissioned from third party engineering firms to ascertain both optimal drilling locations for the 2013 drilling program, as well as optimal frac designs. Results are being incorporated into the drilling and completion program. With 10 rigs operating as of May 5, 2013, the Company has accelerated its operations activities.

 

During the first quarter of 2013, two deviated production wells in the 1H Pilot Area and one vertical appraisal well were spudded, and one of the three reached total depth. Subsequent to first quarter of 2013, an additional ten wells were spudded as of May 5, 2013. Additionally, from inception through May 5, 2013, one well has been abandoned in the Shouyang Block.

 

No wells were fractured during the first quarter of 2013; however, ten wells are currently ready to be fraced as of May 5, 2013, and, as additional wells are drilled, they will be steadily added to the frac program.

 

The gross and net number of wells completed as of May 5, 2013 in the Shouyang Block, after giving effect to CUCBM’s right to make participating elections in the Shouyang Block as if made on such date, was 75 and 72.6. Of these 75 wells, 66 are wells drilled in the initial 1H Pilot Area to expand the field to the west and 9 are appraisal wells. In addition to these wells, there are wells in various stages of drilling and fracing operations as noted above.

 

A number of appraisal wells have been drilled at approximately 4 to 5 kilometer intervals to the west and south of the 1H Pilot Area, which is adjacent to the northern boundary of the Shouyang Block, with the goal of providing data to support the full extent of the northern portion of the Shouyang Block that contains high gas content as well as good permeability characteristics. We have begun to drill appraisal wells to the east and southeast of the 1H Pilot Area.

 

Through the drilling of the appraisal wells we seek to determine what portion of the Shouyang Block shares the same rare combination of high permeability and high gas content as discovered in the 1H Pilot Area. The wells drilled to the west and south of the 1H Pilot Area have revealed both high gas content and high permeability. Additionally, the drilling and production testing of the P12, P18 and SYS05 wells in the east and southeast portion of the Shouyang Block respectively each demonstrate that permeability and the potential for significant gas production extend into these portions of the block. Most significantly, the SYS05 well in the southeastern portion of the block was successfully production tested at a rate exceeding MLR certification requirements.

 

Provided we remain in compliance with the requirements under the Shouyang PSC, the Shouyang PSC allows production to continue on a CBM field until the earlier of the end of the useful life of the field or June 30, 2032, unless extended or otherwise amended.

 

The following table reflects the permeability determined in the Shouyang Block (area amended by the Shouyang Modification Agreement):

 

    Permeability Range   Number of Wells
Well Area   (Millidarcies - mD)   In this Range
1H Pilot Area   80-100   1H Pilot Area Wells
Appraisal/Exploration Wells   200-300   1
Appraisal/Exploration Wells   100-199   3
Appraisal/Exploration Wells   50-99   3
Appraisal/Exploration Wells   10-49   6

 

With permeabilities ranging from 10 millidarcies to 300 millidarcies, we believe that the No. 15 coal seam in the expanded areas tested appears to contain areas of high permeability coupled with high gas content.

 

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Qinnan Block, Shanxi Province. The exploration period of the Qinnan PSC in Shanxi Province expired on June 30, 2009, and we cannot continue our exploration activities in the Qinnan Block without an extension or a new PSC. We are continuing to pursue an extension of the exploration period of the Qinnan PSC, but we cannot be optimistic at this time. The Company believes the underlying exploration period should be extended due to events beyond its reasonable control, namely the lengthy transfer of rights taking place from CUCBM to CNPC. At our Chinese partner’s request, we have provided certain operational and financial information about our company to assist them in the decision making process as to whether to recognize an extension of the exploration period in Qinnan. PetroChina has completed an accounting audit pursuant to the Qinnan PSC of our expenditures for 2007 and 2008. We have also provided to PetroChina at their request our work plan for 2010 for Qinnan. In January 2011, we received a formal notice from CNPC that it has purportedly received all Chinese approvals with respect to the transfer of CUCBM’s interest to it, and subsequently to its wholly owned affiliate PetroChina. CNPC also requested we execute a modification agreement to confirm PetroChina as our Chinese partner company for the Qinnan PSC. In negotiations with CUCBM and PetroChina related to this request, we have endeavored to negotiate an assignment agreement that would reflect the transfer of interest to CNPC while CNPC and PetroChina would acknowledge delays that were incurred by virtue of FEEB not having, for an extended period of time, an official Chinese partner that had the capacity or authority under the Qinnan PSC to work with us.

 

Because of the inability to hold a formal JMC meeting or to have the effective involvement of our Chinese partner, we believe that our efforts to continue CBM operations in the Qinnan block have been materially hindered. Technically, the exploration period under the Qinnan PSC expired on June 30, 2009; however, we have maintained the position that the doctrine of force majeure under the Qinnan PSC entitled us to an extension. We continue to discuss this situation with CUCBM and PetroChina, and as recently as January 2012 have submitted a notice of force majeure in accordance with the Qinnan PSC. There can be no assurance that we will be successful in extending the exploration period of the Qinnan PSC or that a new PSC will be granted. Additionally, in connection with obtaining this extension or a new PSC, we may be required to commit to certain expenditures or to modify the terms or respective ownership interests and/or acreage in the applicable PSC.

 

Laochang Area, Yunnan Province. We are a party to the Yunnan PSC with CUCBM, which provides for an operating interest in approximately 119,327 acres (482.9 square kilometers) in the Laochang Area. CUCBM has the right to accept up to a 40% participating interest within thirty (30) days of receipt of notice of Chinese certifications of CBM resources in a particular CBM field. Unless extended or amended, the exploration period will expire December 31, 2013. As modified to date, following expiration of the extended exploration period, we may elect to continue the process of trying to convert portions of the Laochang Area into MLR certified areas in order to transition these areas into the process for a long-term development license and the development period for certain areas. Any acreage that is not at or past the stage of submittal of a technical report to CUCBM that reasonably meets the criteria for MLR certification will be relinquished unless the parties otherwise agree.

 

The development period as to any portion of the Laochang Area will not begin until after the approval of an application for an overall development plan. An overall development plan would be developed and filed jointly by us and CUCBM, seeking approval from Chinese governmental authorities, for any portion of the Laochang Area that we and CUCBM elect to develop. The production period as to any portion of the Laochang Area will begin after the date of commencement of commercial production of CBM with respect to that area. Provided that we remain in compliance with the requirements under the Yunnan PSC, production will be allowed to continue on the respective producing portion of the Laochang Area until the earlier of the end of the useful life of that area or January 1, 2033, unless extended or otherwise amended.

 

We are responsible for all exploration costs related to the Yunnan PSC, including all exploration costs for discovering and evaluating CBM-producing areas. If any portion of the Laochang Area is discovered to be a CBM-producing area, as noted above, CUCBM will be deemed to hold a 40% participating interest in such area and we will be deemed to hold a 60% participating interest, unless CUCBM elects to participate at a lower level, in which case we will retain all participating interests not taken by CUCBM and will be responsible for development costs in proportion to our participating interest. If CUCBM elects a 40% participation interest in our Yunnan Province projects, our costs would be reduced accordingly.

 

Because there are no pipelines currently in the immediate vicinity of the Yunnan Province projects, our ability to sell CBM produced on these projects to communities outside the general area will be contingent upon a gas pipeline, compressed natural gas facility or other offtake vehicle being built within close proximity to our project area. CNPC has undertaken a pipeline construction project, with support from the Yunnan provincial government, to extend the Myanmar-China natural gas pipeline to pass through the city of Kunming, then move eastward through the city of Qujing, and finally go to Guizhou Province in the east. We believe that the construction, which would lay pipelines closer to our projects in the Yunnan Block, would help reduce the costs for CBM offtake from our projects and increase our ability to eventually deliver gas to consumers. The diameter of the pipeline is 1016 mm, and the designed capacity for natural gas is 12 billon m3 per year. It is estimated that the pipeline will be completed, and commissioned in 2013. The pipeline will run about 20 kilometers north of the northern boundary of the Enhong sub-block and some 60 kilometers north of the northern boundary of the Laochang sub-block.

 

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Further exploration and development will be the subject of our internal strategic review of our remaining Yunnan Block holdings to determine whether they fit within our risk profile, given our other opportunities, such as our ability to potentially move into the development phase in Shouyang Block.

 

We take into consideration, among other factors, our overall corporate strategy, the prospective costs and benefits of the acreage, our relationship with our Chinese partner companies and our current cash position in order to formulate an optimal strategy. The strategy may include, without limitation: (i) minimal capital expenditures to continue holding the acreage, (ii) the sale, farmout or partial farmout of the acreage, (iii) full or partial relinquishment of the acreage, or (iv) continue staged exploration of the acreage. We have not yet concluded this review and cannot make any projection as to the likely outcome of this review. Moreover, CUCBM will have its own view and certain outcomes will be subject to CUCBM and MofCom approval.

 

We anticipate continuing the dewatering/test-production and we anticipate the production of more gas as the dewatering process moves forward and the interference between wells can be established, together with a reduction in the fluid-level, creating a funnel effect covering a relatively larger area of the reservoir. Long-term production testing and monitoring and resultant data has significantly enhanced our understanding of the reservoir and provides the foundation, not only for further in-depth analysis, but also suggests that the application of certain technologies may enhance future drilling and production. For example, it appears that the application of electric pulsing may enhance production rates, and this will likely be tested in a few wells in Yunnan and/or Shouyang. Furthermore, in order to apply for a long-term development license to enter the development period, it is under consideration that more parameter wells and pre-production wells may be planned for drilling, especially in the Yuwang subblock of the Laochang PSC project.

 

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Results of Operations

 

Three Month Ended March 31, 2013 vs. Three Months Ended March 31, 2012:

 

The following table sets forth the natural gas sales data for the three-month periods ended March 31, 2013 and 2012:

 

   Three Months Ended March 31, 
   2013   2012 
Natural Gas          
Sale Volumes, net to Far East (Mcf)   66,948    47,990 
           
Per Day Volumes, net to Far East (Mcf per day)   744    527 
           
Average Gas Sales Price, net of taxes ($ per Mcf)  $4.72   $4.71 
PRC National Subsidy and Provincial Subsidies ($ per Mcf)  $1.13   $1.12 
VAT Refund ($ per Mcf)  $0.62   $0.62 
Total Gas Sales and Other Revenues ($ per Mcf)  $6.47   $6.45 
           
Natural Gas Sales, net to Far East ($000's)  $316   $226 

 

Sale volumes for the three months ended March 31, 2013, net to Far East, increased 19MMcf, or 40%, as compared to the same period a year ago due primarily to the increase in the number of producing wells connected to the gathering system.

 

The table below sets out major components of our expenditures (in thousands):

 

   Three Months Ended March 31, 
   2013   2012 
Additions to Oil and Gas Properties (capitalized)          
- Shouyang Block, Shanxi Province (1)  $702   $940 
Exploration Expenditures (expensed)          
- Shouyang Block, Shanxi Province   842    999 
- Qinnan Block, Shanxi Province   116    115 
- Laochang Block, Yunnan Province   253    295 
- Total   1,211    1,409 
Lease Operating Expenditures (expensed)          
- Shouyang Block, Shanxi Province   1,239    1,666 
- Qinnan Block, Shanxi Province   -    2 
- Total   1,239    1,668 
           
Total Capital and Operating Expenditures  $3,152   $4,017 
           
General and Administrative Expenses  $2,870   $2,779 
 

 

(1)Capitalized in the Consolidated Balance Sheets.

 

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The table below sets out the operating expenses in the Consolidated Statements of Operations for the three-month periods ended March 31, 2013 and 2012 (in thousands):

 

   Three Months Ended March 31, 
   2013   2012 
Exploration costs  $1,211   $1,409 
Lease operating expense   1,239    1,668 
General and administrative   2,870    2,779 
Depreciation, depletion and amortization   543    358 
Total  $5,863   $6,214 

 

The table below sets out components of exploration costs for the three months ended March 31, 2013 and 2012 (in thousands):

 

   Three Months Ended March 31, 
   2013   2012 
Technical personnel compensation  $106   $95 
PSC related payments   263    263 
Contract drilling & related expenses   842    1,051 
Total  $1,211   $1,409 

 

Exploration costs for the three months ended March 31, 2013 were materially unchanged compared to the same period in 2012.

 

The table below sets out components of lease operating expense ("LOE") for the three-month periods ended March 31, 2013 and 2012 (in thousands):

 

   Three Months Ended March 31, 
   2013   2012 
Pumping Related Costs  $908   $1,338 
Workovers   80    167 
Supervision   251    163 
Total  $1,239   $1,668 

 

LOE for the three months ended March 31, 2013 was comprised of costs pertaining to the production and dewatering efforts in the Shouyang Blocks in Shanxi Province. LOE for the three months ended March 31, 2013 decreased $0.4 million compared to the same period in 2012 due primarily to a decrease in pumping related costs, which resulted from decreases in land lease costs, production monitoring costs, and equipment and transportation costs. Additionally, there was $0.1 million decrease in workovers offset by a $0.1 million increase in supervision costs.

 

General and administrative ("G&A") expenses for the three months ended March 31, 2013 were materially unchanged compared to the same period in 2012.

 

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Capital Resources and Liquidity. Although gas sales under the Gas Sales Agreement commenced in the first quarter of 2011, our primary source of cash flow has been cash proceeds from public offerings and private placements of our common stock and warrants to purchase our common stock, the exercise of warrants and options to purchase our common stock, and proceeds received from the closing of the Facility Agreement and the issuance of the Notes.

 

On January 14, 2013, the Company sold the Notes and the Warrants to certain institutional investors for $60.0 million of gross proceeds in the Private Placement, which was exempt from the Securities Act. The Private Placement closed on January 15, 2013.

 

On January 15, 2013, the Company entered into the Fifth Amendment to the Facility Agreement (the “Fifth Amendment”), among FEEC, FEEB and SCB Bank, to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which includes $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. As of January 15, 2013 the amount remaining owed under the Facility Agreement was $21.0 million. After taking into account the amounts paid pursuant to the Fifth Amendment and transaction fees and expenses incurred in connection with the Fifth Amendment and the Private Placement, the net proceeds to the Company of the Private Placement were $52.0 million. At March 31, 2013, the total amount drawn under the Facility Agreement was $21.0 million and the related accrued interest was $0.6 million.

 

In addition to payment of the above amounts to SCB, FEEB and FEEC intend to use the net proceeds of the Private Placement for (i) drilling and development expenses for the Shouyang CBM project in the Shanxi Province in China, including drilling and completion expenses of appraisal wells, drilling and completion expenses of production wells, construction and installation of gathering and compression facilities and submission of an overall development plan for the project, (ii) general corporate purposes, including exploration costs for such project, operating costs on the Shouyang PSC and general and administrative expenses and (iii) transaction expenses. Under the securities purchase agreement for the Private Placement and the indenture governing the Notes (the “Indenture”), FEEB and FEEC are obligated to apply the net proceeds according to the estimated amounts of each category set forth therein within an agreed range, provided that FEEC and FEEB shall apply not less than $21.6 million for the drilling and completion of production wells.

 

Summary of Material Terms of the Notes.

 

The Notes are senior secured obligations of FEEB and are fully and unconditionally guaranteed by FEEC. The Notes were sold at an issue price of 100% of par for an aggregate principal amount of $60.0 million. The Notes accrue cash interest at a rate of 13.000% per year, which is paid semi-annually in arrears on June 30 and December 30 of each year, commencing on June 30, 2013. FEEB may, at its option, elect to pay interest “in kind” at a rate of 14.500% per year by issuing additional Notes with the first interest payment required to be paid in kind. The Notes will mature on January 15, 2016.

 

The Notes and related guarantees rank equal in right of payment with the Facility Agreement. Except as specifically permitted by the Indenture, any new indebtedness of FEEC, FEEB or any restricted subsidiary of FEEC will require the consent of SCB and the “Required Noteholders,” which means holders of 75% of aggregate principal amount at maturity of the Notes. The Notes and related guarantees are secured by substantially all of the assets of FEEC and FEEB, other than assets located in the People’s Republic of China, assets the grant, creation or perfection of any lien on which would require the consent, authorization or approval of, or filing with, any governmental authority in the People’s Republic of China and certain other excluded assets. Such collateral continues to secure the Facility Agreement with the administration of such collateral subject to a collateral agency and intercreditor agreement between SCB and Wells Fargo Bank, National Association, as indenture trustee of the Notes and as collateral agent.

 

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In certain circumstances specified in the Indenture and as summarized below, FEEB may or will be required to redeem or offer to repurchase the Notes at the relevant prices set forth below times the principal amount being redeemed or repurchased:

 

Closing Date to February 28, 2014   100%
March 1, 2014 to December 31, 2014   104%
January 1, 2015 and thereafter   108%

 

plus accrued and unpaid interest thereof, if any, on the Notes to the applicable date of redemption or repurchase, as applicable.

 

FEEB has the option to redeem the Notes, in whole or in part, at any time after all obligations under the Facility Agreement have been repaid in full at the relevant redemption prices set forth above.

 

In the event that FEEC and FEEB obtain financing pursuant to a credit facility, agreement or indenture with one or more banks or other institutional lenders or a trustee or investors (a “Future Financing”), which in certain circumstances would require the consent of the Required Noteholders and SCB, or if FEEC sells capital stock at a time when the aggregate principal amount of the Notes outstanding exceeds $10.0 million, the net proceeds of such Future Financing and the net proceeds of such capital stock offering in excess of $5.0 million, as applicable, shall first be used to repay obligations under the Facility Agreement and thereafter to redeem the Notes at the redemption prices set forth above to the extent of such amounts.

 

In the event that (i) FEEC and FEEB generate “excess cash flow” as defined in the Indenture, (ii) FEEC or FEEB sell assets in circumstances described in the Indenture or (iii) a casualty loss of property or assets of FEEC or FEEB occurs and the insurance proceeds with respect to such loss exceed $30.0 million, then FEEB will be required to apply the “excess cash flow amount” (as defined in the Indenture), the net proceeds of such asset sale or such insurance proceeds, as applicable, to first repay obligations under the Facility Agreement and thereafter to offer to repurchase the Notes at the purchase prices set forth above. The “excess cash flow amount” means, with respect to any period, 50% of the excess cash flow for such period minus $5.0 million of cash and cash equivalents for such period minus the principal amount of the Facility Agreement repaid with such excess cash flow during such period.

 

In the event of a change of control of FEEC, FEEB will be required to repay all obligations outstanding under the Facility Agreement and to offer to repurchase the Notes at the purchase prices set forth above.

 

The Indenture contains covenants that, among other restrictions, limit FEEC’s and FEEB’s ability and the ability of certain of their subsidiaries to:

 

•               amend our constitutional documents;

 

•               incur or guarantee additional indebtedness other than up to $15.0 million of aggregate principal amount of additional Notes and additional warrants on terms identical to or more favorable to FEEC than the Warrants;

 

•               issue certain preferred stock;

 

•               create or incur liens other than liens permitted by the Indenture;

 

•               pay dividends, repurchase equity securities, redeem subordinated debt, repay certain intercompany indebtedness up to a specified amount or make investments or other restricted payments;

 

•               transfer or sell assets;

 

•               incur dividend or other payment restrictions;

 

•               enter into certain transactions with affiliates;

 

•               change FEEC’s or FEEB’s line of business;

 

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•               form subsidiaries;

 

•               sell capital stock of restricted subsidiaries; and

 

•               merge, consolidate or transfer all or substantially all of FEEC’s and FEEB’s assets.

 

In addition, the Indenture contains covenants that, among other obligations, require FEEC and FEEB to:

 

•               be in compliance with all relevant laws and regulations;

 

•               provide specified financial reports to holders of Notes;

 

•               maintain customary insurance policies;

 

•               maintain FEEB’s foreign exchange registration certificate;

 

•               use the net proceeds of the Private Placement as set forth in the Indenture; and

 

•               use their commercially reasonable efforts to list the Notes on the Cayman Islands Stock Exchange within six months of the issue date and maintain such listing.

 

The Indenture contains customary events of default that could, subject to certain conditions, cause the Notes to become immediately due and payable, including but not limited to:

 

•               the failure to make principal (at maturity, upon redemption or otherwise) or interest payments when due;

 

•               the failure to make, and to accept and pay the purchase price for Notes tendered pursuant to, the offers to purchase required by the Indenture;

 

•               the failure to comply with certain covenants in the Indenture or any of the collateral documents;

 

•               the failure to comply with the reporting obligations in the Indenture for ten days after notice by the trustee or the holders of at least 25% of the aggregate principal amount of the Notes;

 

•               the default by FEEC or any of its restricted subsidiaries under any mortgage, indenture or other indebtedness in the aggregate of $1 million or more if caused by the failure to pay principal or interest when due or if such default entitles the creditor to declare such indebtedness due and payable prior to its stated maturity;

 

•               the failure to satisfy certain final, non-appealable judgments of any court of competent jurisdiction in excess of $1.0 million;

 

•               if any Note guarantee is held to be unenforceable or is repudiated by the guarantor thereof;

 

•               certain events of bankruptcy or insolvency;

 

•               the liens securing the Notes cease to be in full force in effect or cease to have priority over certain other lienholders with respect to collateral with a fair market value in excess of $1.0 million or are contested by FEEB or any guarantor in circumstances specified by the Indenture;

 

•               any representation or warranty made by FEEC or FEEB in the securities purchase agreement for the Private Placement proves to be incorrect in any material respect;

 

•               the validity of the Notes, the guarantees of the Notes or the Indenture is contested by FEEB or any guarantor;

 

•               the Shouyang project is abandoned in whole or in part, the Shouyang PSC is terminated, revoked or ceases to be in full force and effect or an event of loss occurs with respect to any of the property or assets of FEEC or FEEB in excess of $10 million net of any insurance proceeds; and

 

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•               certain acts of governmental expropriation or nationalization or certain governmental restrictions on foreign currency exchange or that prevents FEEC or FEEB from paying its obligations in U.S. dollars.

 

Summary of Material Terms of the Warrants.

 

The Warrants provide the holders the right to purchase up to 56,086,439 shares of FEEC common stock at an exercise price of $0.085 per share, subject to adjustments described below. The Warrants are exercisable at any time after issuance and will expire at 5:00 p.m., New York City time, on December 31, 2017. The Warrants have anti-dilution provisions specified in the Warrant Agreement, dated January 15, 2013 (the “Warrant Agreement”), between FEEC and Continental Stock Transfer & Trust Company, as warrant agent, including, but not limited to, adjustments for (i) stock splits, reverse stock splits and stock dividends, (ii) the issuance of rights, options, warrants or convertible or exchangeable securities at a price per share less than the current market value of FEEC common stock at the record date therefor, (iii) certain distributions of cash, evidence of indebtedness or other property or assets to holders of any class of common stock, (iv) certain reclassifications, consolidations, mergers or sales of assets of FEEC and (v) certain issuances or sales, or deemed issuances or sales, of shares of common stock for an effective price below the then-effective exercise price of the Warrants or for an effective price greater than the then-effective exercise price but less than or equal to $0.425 per share, subject to adjustment, or for an effective price greater than $0.425, subject to adjustment, but less than the current market price per share at the time of such issuance or sale.

 

The holders of the Warrants are entitled to certain registration rights set forth in the Registration Rights Agreement, dated January 15, 2013 (the “Registration Rights Agreement”), between FEEC and the purchasers of the Warrants. Under the Registration Rights Agreement, FEEC will file a registration statement (the "Primary Registration Statement") on the appropriate form with the Securities and Exchange Commission (“SEC”) to register under the Securities Act the resale of the shares of common stock issuable upon exercise of the Warrants within 210 days after the closing date and will use its best efforts to cause the Primary Registration Statement to be declared effective by the SEC under the Securities Act within 360 days after the closing date (or within 390 days after the closing date if FEEC receives comments on the Primary Registration Statement from the SEC). In addition, the holders of common stock underlying the Warrants will have "piggyback" registration rights for the resale of such shares of common stock.

 

Our board of directors has the authority, without further action by the stockholders but subject to restrictions in the Warrant Agreement and Indenture, to issue up to 500 million shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each series. We also have 500 million shares of Common Stock authorized under our charter documents, of which approximately 346.4 million shares were issued and outstanding as of March 31, 2013.

 

The issuance of preferred stock could have the effect of restricting dividends on the common stock or delaying or preventing our change in control without further action by the stockholders. While we have no present plans to issue any shares of preferred stock, we may need to do so in the future in connection with capital raising transactions. In addition, we may issue additional shares of common stock in connection with capital raising activities. The issuance of additional common stock would also have a dilutive impact on our stockholders' ownership interest in our company.

 

Work Program Funding. Our current work programs would satisfy the minimum exploration expenditures for our Shouyang and Yunnan PSCs for 2013. With respect to the Qinnan PSC, we have halted activities on the Qinnan block pending regulatory approval or denial of our force majeure claims. Management may seek to secure capital by exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets, by obtaining additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through debt, reserve based, project or equity- related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based project or equity-related financing are uncertain and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. In particular, any transfer of our rights under the PSCs will require the approval of our Chinese partner company and the MofCom. There can be no assurance that the Chinese authorities will provide the approvals necessary for the consummation of a transaction or transfer. There can be no guarantee of future success in capital acquisition, fundraising or exploration success.

 

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Our capital resources and planning can be impacted by fluctuations in the U.S. Dollar and RMB exchange rate as well as inflation in these countries. For further discussion of these risks, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk."

 

Cash Flows. As of March 31, 2013, our balance in cash and cash equivalents was $40.2 million, an increase of $38.9 million from the balance of $1.3 million as of December 31, 2012. The increase was due primarily to $58.5 million net cash proceeds from a private placement offering offset by $7.2 million used by operating activities, $6.1 million used by investing activities and $4.9 million used to repay certain amounts under the Facility Agreement.

 

Cash used in operating activities for the three months ended March 31, 2013 was $7.2 million as compared to cash used in operating activities for the same period in 2012 of $7.9 million. The decrease in cash used in operating activities was due primarily to a decrease in LOE pumping related costs of $0.4 million and decrease in exploration costs of $0.2 million.

 

Cash used in investing activities for the three months ended March 31, 2013 was $6.1 million as compared to $3.7 million for the same period in 2012. The increase was primarily due to an increase in additions to oil and gas properties of $2.4 million.

 

Cash provided by financing activities for the three months ended March 31, 2013 was $52.2 million as a result of net proceeds from the Private Placement during the first quarter of 2013. Cash provided by financing activities for the three months ended March 31, 2012 was $2.1 million as a result of a draw on the Facility Agreement in January 2012.

 

Forward-Looking Statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "will," "plan," "estimate," "continue," "anticipate," "intend," "expect," "project," and similar expressions, as they relate to us, are intended to identify forward-looking statements.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that the actual results or developments we anticipate will be realized or, even if substantially realized, that they will have the expected effects on our business or operations. Actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those projected in such forward-looking statements include: the preliminary nature of well data, including permeability and gas content; there can be no assurance as to the volume of gas that is ultimately produced or sold from our wells; the fracture stimulation program may not be successful in increasing gas volumes; due to limitations under Chinese law, we may have only limited rights to enforce the Gas Sales Agreement, to which we are an express beneficiary; additional wells may not be drilled, or if drilled may not be timely; additional pipelines and gathering systems needed to transport our gas may not be constructed, or if constructed may not be timely, or their routes may differ from those anticipated; the pipeline and local distribution/compressed natural gas companies may decline to purchase or take our gas (although the Gas Sales Agreement with the pipeline is a “take or pay” contract), or we may not be able to enforce our rights under definitive agreements with pipelines; conflicts with coal mining operations or coordination of our exploration and production activities with mining activities could adversely impact or add significant costs to our operations; the MofCom may not approve on a timely basis or at all, the extension of the Qinnan PSC or, if so, on commercially advantageous terms; our Chinese partner companies or the MofCom may require certain changes to the terms and conditions of the Shouyang or Yunnan PSCs in conjunction with their approval of any extension of the exploration period, including reductions in acreage or a reduction in the term of the extension for the exploration period; our lack of operating history; limited and potentially inadequate management of our cash resources; risk and uncertainties associated with exploration, development and production of CBM; our inability to extract or sell all or a substantial portion of our estimated CBM resources; we may not satisfy requirements for listing our securities on a securities exchange; expropriation and other risks associated with foreign operations; disruptions in capital markets affecting fundraising; matters affecting the energy industry generally; lack of availability of oil and gas field goods and services; environmental risks; drilling and production risks; changes in laws or regulations affecting our operations, as well as other risks described in our filings with the SEC.

 

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When you consider these forward-looking statements, you should keep in mind these factors, the risk factors set forth in our 2012 Annual Report and this Quarterly Report on Form 10-Q under "Item 1A. Risk Factors" and in other filings with the SEC and the other cautionary statements in this Quarterly Report on Form 10-Q. Our forward-looking statements speak only as of the date made. All subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We assume no obligation to update any of these statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

In addition to the U.S. Dollar, we conduct our business in RMB and, therefore, are subject to foreign currency exchange risk on cash flows related to expenses and investing transactions. In June 2010, China announced that it would gradually allow the RMB to float against the U.S. Dollar and, as a result, the Chinese currency is expected to slowly appreciate with respect to the U.S. Dollar. All of our costs to operate our Chinese offices are paid in RMB. Our exploration costs in China may be incurred under contracts denominated in RMB or U.S. Dollars. As of March 31, 2013, the U.S. Dollar ($) to RMB (¥) appreciated slightly at an exchange rate of about $1 to ¥6.27, compared to an exchange rate of $1 to ¥6.30 at March 31, 2012. If the RMB appreciates with respect to the U.S. Dollar, our costs in China may increase. To date we have not engaged in hedging activities to hedge our foreign currency exposure. In the future, we may enter into hedging instruments to manage our foreign currency exchange risk or continue to be subject to exchange rate risk. If the exchange rate increased by 10%, it is estimated that our costs would be approximately $0.9 million lower in the first quarter of 2013. If the exchange rate were 10% lower during the first quarter of 2013, our costs would increase by approximately $1.0 million.

 

Although inflation has not materially impacted our operations in the recent past, increased inflation in China or the U.S. could have a negative impact on our operating and general and administrative expenses, as these costs could increase. In the last couple of years, we have increased our use of Chinese suppliers, including drilling contractors, that are paid in RMB. Since 2008, China experienced inflationary pressures, which increased our costs associated with our operations in China. In the future, inflation in China may result in higher minimum expenditure requirements under our PSCs if our Chinese partner companies adjust these requirements for inflation. The actual inflationary impact on the Company may also be exacerbated by the increasing demand for goods and services in the oil and gas industry. A material increase in these costs could adversely affect our operations and, if there are material changes in our costs, we may seek to secure additional capital earlier than anticipated.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

FAR EAST ENERGY CORPORATION

 

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - "Risk Factors" in our 2012 Annual Report, which could materially affect our business, financial condition, or future results. The risks described in our 2012 Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Risks Relating to Our Business

 

We have a limited source of revenue.

 

We will not generate material revenues from our existing properties until we have successfully completed exploration and development, and started meaningful production of CBM. Although we have had some sales under the Gas Sales Agreement since the early first quarter of 2011, we are not able to predict exactly when we will recognize significant revenues. Although SPG has completed its pipeline, which runs within 2 kilometers of our 1H Pilot Area and is being used to transport CBM sold pursuant to the Gas Sales Agreement and in-field gathering system and compression equipment were connected to the pipeline in early January 2011, we have not yet achieved significant production in the Shouyang Block. Additionally, no facilities exist to transport or process CBM near our Yunnan Province projects. Our ability to realize revenues from any producing wells may be impaired until these pipelines or facilities are built out or arrangements are made to deliver our production to market.

 

We must obtain additional capital in order to continue our operations.

 

As discussed above, we are not able to predict exactly when we will recognize significant revenues. Further, we experienced a 12% decline in gas sales in the first quarter of 2013 due to power outages in the Shanxi Province. We expect to experience operating losses and negative cash flow until production levels in the Shouyang Block increase sufficiently, which will require the drilling and completion of a significant number of productive wells.

 

Management will continue to seek to secure additional capital to continue operations and to meet future expenditure requirements necessary to retain our rights under our “PSCs. In addition to the Notes issued in the Private Placement and subject to the Indenture, management may seek to secure capital by exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or by obtaining debt, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through debt, project or equity-related financing. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult or impossible. In particular, any transfer of our rights under any PSC will require the approval of our Chinese partner company. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. The ongoing global financial crisis has created liquidity problems for many companies and financial institutions, and international capital markets have stagnated, especially in the United States and Europe. A continuing downturn in these markets could impair our ability to obtain, or may increase our costs associated with obtaining, additional funds through the sale of our securities or otherwise. The ongoing crisis has created a difficult environment in which to negotiate and consummate a transaction. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt or equity related financing are uncertain and we cannot predict the timing, structure or other terms and conditions of any such arrangements or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price.

 

If our operating requirements or drilling obligations materially change from those currently planned, we may require more capital than currently anticipated or may be required to secure capital earlier than anticipated. For example, it is possible that the MLR or one of our Chinese partner companies could seek to, among other things, force us to relinquish acreage, increase our capital expenditures or accelerate our drilling program. If we are unable to commit to the expenditures or accelerate our drilling and dewatering efforts, it may adversely affect our ability to extend the terms of our PSCs. If we fail to obtain the necessary funds to complete our exploration activities under our PSCs, and we cannot obtain extensions to the requirements under our PSCs, we would not be able to successfully complete our exploration and development activities and we may lose rights under our PSCs or we may have to limit the acreage used in the Shouyang Block.

 

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Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations.

 

As of January 15, 2013, on a consolidated basis, we had total senior secured indebtedness outstanding of approximately $81.0 million, consisting of $60.0 million aggregate principal amount of the Notes due 2016 and approximately $21.0 million aggregate principal amount under Facility Agreement with SCB. Subject to the restrictions in the Indenture governing the Notes and in the Facility Agreement, we may incur additional indebtedness. In addition, the Notes provide for PIK interest, which will add to the aggregate principal amount outstanding on each interest payment date in which we are required or elect to pay PIK interest. Our high level of indebtedness could have important consequences for an investment in us and significant effects on our business. For example, our level of indebtedness and the terms of our debt agreements may:

 

·make it more difficult for us to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments and increase the risk that we may default on our debt obligations;

 

·prevent us from raising the funds necessary to repurchase Notes tendered to us if there is a change of control or in connection with an excess cash flow offer, asset sale offer or insurance proceeds offer, which would constitute a default under the Indenture governing the Notes;

 

·require us to use a substantial portion of our cash flow from operations or from additional indebtedness or equity capital raises to pay interest and principal on the Facility Agreement and the Notes, which would reduce the funds available for working capital, capital expenditures and other general corporate purposes;

 

·limit our ability to obtain additional financing for additional drilling, working capital, capital expenditures, acquisitions and other investments, or general corporate purposes, which may limit our ability to execute our business strategy;

 

·heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;

 

·place us at a competitive disadvantage compared to those of our competitors that may have proportionately less debt;

 

·limit management’s discretion in operating our business; and

 

·limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy.

 

Each of these factors may have a material and adverse effect on our financial condition and viability. Our ability to satisfy our other debt obligations will depend on our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors affecting our company and industry, many of which are beyond our control.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Withholdings and Subsequent Cancellations of Equity Securities

 

Column (a) in the tabulation below indicates shares which were withheld by us to satisfy tax withholding obligations that arose upon the vesting of shares of nonvested stock (also commonly referred to as restricted stock) during the first quarter of 2013.  Once withheld, these shares were cancelled and removed from the number of outstanding shares.  Currently, the Company does not have a share repurchase plan.

 

Period  (a)
Total Number of
Shares Purchased
   (b)
Average Price Paid
Per Share
   (c)
Total Number of Shares
Purchased as Part of Publicly
Announced Plan or Programs
   (d)
Maximum Number of Shares
that May Yet Be Purchased
Under The Plans or Programs
 
January 2013   64,077   $0.29    -    - 
February 2013   8,333    0.58    -    - 
March 2013   -    -    -    - 
Total   72,410   $0.33    -    - 

 

ITEM 6.          EXHIBITS

 

Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits beginning on page 36 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Far East Energy Corporation
   
  /s/ Michael R. McElwrath
  Michael R. McElwrath
  Chief Executive Officer and President
  (Principal Executive Officer)
   
  /s/ Jennifer D. Whitley
  Jennifer D. Whitley
  Interim Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

Date: May 10, 2013

 

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INDEX OF EXHIBITS

 

Exhibit Number Description
3.1 Articles of Incorporation of the Company, as amended (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, which was filed on March 15, 2005, and incorporated herein by reference).

3.2

 

Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 17, 2005, and incorporated herein by reference).
31.1 † Certification of Chief Executive Officer of the Company under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 † Certification of Chief Financial Officer of the Company under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Chief Executive Officer of the Company Pursuant to 18 U.S.C. Sec. 1350.
32.2** Certification of Chief Financial Officer of the Company Pursuant to 18 U.S.C. Sec. 1350.
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation Linkbase
101.DEF** XBRL Taxonomy Extension Definition Linkbase
101.LAB** XBRL Taxonomy Extension Label Linkbase
101.PRE** XBRL Taxonomy Extension Presentation Linkbase

 

 

**Furnished herewith
Filed herewith

 

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