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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NO. 0-9092
CHENIERE ENERGY, INC.
(Exact name as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
95-4352386
(I. R. S. Identification No.)
1200 Smith Street, Suite 1740
Houston, Texas
(Address or principal place of business)
77002-4312
(Zip Code)
(713) 659-1361
(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 [ ].
As of August 13, 1998, there were 27,574,217 shares of Cheniere Energy, Inc.
Common Stock, $.003 par value, issued and outstanding.
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CHENIERE ENERGY, INC.
INDEX TO FORM 10-Q
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet......................................... 3
Consolidated Statement of Operations............................... 4
Consolidated Statement of Stockholders' Equity..................... 5
Consolidated Statement of Cash Flows............................... 7
Notes to Consolidated Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
SIGNATURES................................................................... 15
2
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 1,393,269 $ 143,868
Accounts Receivable 653,705 95,837
Subscriptions Receivable - 500,000
Prepaid Expenses and Other Current Assets 540,968 8,833
------------ ------------
Total current assets 2,587,942 748,538
OIL AND GAS PROPERTIES, full cost method
Unevaluated 24,777,673 20,000,425
FIXED ASSETS, net 90,285 89,511
------------ ------------
Total Assets $ 27,455,900 $ 20,838,474
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 2,625,307 $ 523,144
Notes Payable 1,974,980 1,974,980
------------ ------------
Total current liabilities 4,600,287 2,498,124
------------ ------------
LONG-TERM NOTES PAYABLE
Related Party - 2,000,000
Other - 25,020
------------ ------------
Total long-term liabilities - 2,025,020
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.003 par value
Authorized: 60,000,000 and 40,000,000 shares, respectively
Issued and Outstanding: 27,307,977 shares at June 30, 1999;
18,973,749 at December 31, 1998 81,924 56,922
Preferred Stock, $.0001 par value
Authorized: 5,000,000 shares
Issued and Outstanding: none - -
Additional Paid-in-Capital 27,282,199 20,084,928
Deficit Accumulated During the Development Stage (4,508,510) (3,824,520)
------------ ------------
Total Stockholders' Equity 22,855,613 16,317,330
------------ ------------
Total Liabilities and Stockholders' Equity $ 27,455,900 $ 20,840,474
============ ============
The accompanying notes are an integral part of the financial statements.
3
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30, Cumulative
-------------------------- -------------------------- from the Date
1999 1998 1999 1998 of Inception
---------- ---------- ---------- ---------- ------------
Revenue $ - $ - $ - $ - $ -
---------- ---------- ---------- ---------- ------------
General and Administrative Expenses 360,182 436,435 694,182 631,829 4,616,958
---------- ---------- ---------- ---------- ------------
Loss from Operations Before Other Income
and Income Taxes (360,182) (436,435) (694,182) (631,829) (4,616,958)
Interest Income 5,298 6,619 10,192 12,513 147,449
Interest Expense - - - - (39,001)
---------- ---------- ---------- ---------- ------------
Loss From Operations Before Income Taxes (354,884) (429,816) (683,990) (619,316) (4,508,510)
Provision for Income Taxes - - - - -
---------- ---------- ---------- ---------- ------------
Net Loss $ (354,884) $ (429,816) $ (683,990) $ (619,316) $ (4,508,510)
========== ========== ========== ========== ============
Net Loss Per Share (basic and diluted) $ (0.02) $ (0.03) $ (0.03) $ (0.04) $ (0.31)
========== ========== ========== ========== ============
Weighted Average Number of Shares
Outstanding 23,464,488 15,865,084 21,503,556 14,891,462 14,533,332
========== ========== ========== ========== ============
The accompanying notes are an integral part of the financial statements.
4
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Total
---------------------- Paid-In Retained Stockholders'
Per Share Shares Amount Capital Deficit Equity
--------- ---------- ------- ----------- ----------- -----------
Sale of Shares on April 9, 1996 $0.012 6,242,422 $ 18,727 $ 56,276 $ - $ 75,003
Sale of Shares on May 5, 1996 1.50 2,000,000 6,000 2,994,000 - 3,000,000
Issuance of Shares to an Employee
on July 1, 1996 1.00 30,000 90 29,910 - 30,000
Issuance of Shares in Reorganization to
Former Bexy Shareholders - 600,945 1,803 (1,803) - -
Sale of Shares on July 30, 1996 2.00 50,000 150 99,850 - 100,000
Sale of Shares on August 1, 1996 2.00 508,400 1,525 1,015,275 - 1,016,800
Sale of Shares on August 30, 1996 2.00 500,000 1,500 998,500 - 1,000,000
Expenses Related to Offerings - - - (686,251) - (686,251)
Issuance of Warrants - - - 12,750 - 12,750
Net Loss - - - - (121,847) (121,847)
---------- ------- ----------- ----------- -----------
Balance - August 31, 1996 9,931,767 29,795 4,518,507 (121,847) 4,426,455
Sale of Shares on September 12, 1996 2.00 50,000 150 99,850 - 100,000
Sale of Shares on September 16, 1996 2.00 80,250 241 160,259 - 160,500
Conversion of Debt 2.00 105,000 315 209,685 - 210,000
Sale of Shares on October 30, 1996 2.25 457,777 1,373 1,028,627 - 1,030,000
Issuance of Warrants - - - 6,450 - 6,450
Sale of Shares on December 6, 1996 2.25 475,499 1,426 1,068,448 - 1,069,874
Sale of Shares on December 9, 1996 2.50 400,000 1,200 998,800 - 1,000,000
Sale of Shares on December 11, 1996 2.25 22,222 67 49,933 - 50,000
Sale of Shares on December 19, 1996 2.50 200,000 600 499,400 - 500,000
Sale of Shares on December 20, 1996 2.50 220,000 660 549,340 - 550,000
Sale of Shares on February 28, 1997 4.25 352,947 1,059 1,498,967 - 1,500,026
Sale of Shares on March 4, 1997 4.25 352,947 1,059 1,498,966 - 1,500,025
Sale of Shares on May 22, 1997 3.00 535,000 1,605 1,603,395 - 1,605,000
Issuance of Shares to Adjust Prices of
Shares Sold on February 28 and March 4 - 294,124 883 (883) - -
Sale of Shares on June 26, 1997 3.00 33,333 100 99,900 - 100,000
Sale of Shares on July 24, 1997 3.00 250,000 750 749,250 - 750,000
Issuance of Shares in Connection with
Financial Advisory Services 3.125 200,000 600 624,400 - 625,000
Sale of Shares on July 30, 1997 3.00 100,000 300 299,700 - 300,000
Sale of Shares on August 19, 1997 3.00 100,000 300 299,700 - 300,000
Expenses Related to Offerings - - - (1,153,441) - (1,153,441)
Net Loss - - - - (1,676,468) (1,676,468)
---------- ------- ----------- ----------- -----------
Balance - August 31, 1997 14,160,866 42,483 14,709,253 (1,798,315) 12,953,421
The accompanying notes are an integral part of the financial statements.
5
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Total
---------------------- Paid-In Retained Stockholders'
Per Share Shares Amount Capital Deficit Equity
--------- ---------- ------- ----------- ----------- -----------
Sale of Shares on September 15, 1997 3.00 67,000 201 200,799 - 201,000
Sale of Shares on September 16, 1997 3.00 130,000 390 389,610 - 390,000
Expenses Related to Offerings - (74,532) (74,532)
Issuance of Warrants and Shares with
Bridge Notes on December 15, 1997 2.375 100,000 300 338,200 338,500
Net Loss - - - - (388,361) (388,361)
---------- ------- ----------- ----------- -----------
Balance - December 31, 1997 14,457,866 43,374 15,563,330 (2,186,676) 13,420,028
Sale of Shares on April 8, 1998 2.00 530,000 1,590 1,058,410 - 1,060,000
Issuance of Shares in Settlement of
Charges for Previous Legal Services 1.40 70,000 210 97,790 - 98,000
Sale of Shares on May 29, 1998 2.00 22,000 66 43,934 - 44,000
Sale of Shares on June 4, 1998 1.40 890,644 2,672 1,244,230 - 1,246,902
Expenses Related to Offerings - - - (168,000) - (168,000)
Issuance of Shares to Adjust Prices of
Shares Sold on April 8 and May 29** - 236,572 710 (710) - -
Issuance of Warrants with
Bridge Notes on June 4, 1998 - - - 3,661 - 3,661
Issuance of Shares on August 26, 1998
Pursuant to Exercise of Warrants 1.00 100,000 300 99,700 - 100,000
Sale of Shares on August 31, 1998 0.67 750,000 2,250 499,000 - 501,250
Issuance of Warrants and Shares to
Extend Bridge Notes on March 15 and
September 15, 1998 0.67 50,000 150 349,183 - 349,333
Sale of Shares on November 15, 1998 0.67 1,200,000 3,600 796,400 - 800,000
Sale of Shares on December 30, 1998 0.75 666,667 2,000 498,000 - 500,000
Net Loss - - - - (1,637,844) (1,637,844)
---------- ------- ----------- ----------- -----------
Balance - December 31, 1998 18,973,749 56,922 20,084,928 (3,824,520) 16,317,330
Issuance of Shares in Exchange for Notes
on February 2 and March 15, 1999 0.72 2,812,528 8,437 2,016,583 - 2,025,020
Repricing of Warrants to Extend Bridge
Notes on March 15, 1999 - 35,702 35,702
Issuance of shares in Exchange for Production
Payment on April 8, 1999 0.68 584,475 1,753 398,247 - 400,000
Sale of Shares on April 12, 1999 1.00 300,000 900 299,100 - 300,000
Sale of Shares on May 12, 1999 1.50 600,000 1,800 898,200 - 900,000
Sale of Shares on May 25, 1999 1.31 41,225 124 53,726 - 53,850
Sale of Shares on June 2, 1999 0.83 1,200,000 3,600 996,400 - 1,000,000
Sale of Shares on June 9, 1999 1.00 500,000 1,500 498,500 - 500,000
Sale of Shares on June 30, 1999 1.00 2,296,000 6,888 2,289,112 - 2,296,000
Expenses Related to Offerings - - - (288,299) - (288,299)
Net Loss - - - - (683,990) (683,990)
---------- ------- ----------- ----------- -----------
Balance - June 30, 1999 27,307,977 81,924 27,282,199 (4,508,510) 22,855,613
========== ======= =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
6
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30, Cumulative
-------------------------- from the Date
1998 1997 of Inception
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (683,990) $ (619,316) $(4,508,510)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation and Amortization 21,326 18,225 75,304
Compensation Paid in Common Stock - - 654,400
Increase in Accounts Receivable (555,868) (23,394) (653,705)
Decrease in Subscriptions Receivable 500,000 - -
Increase in Prepaid Expenses and Other Current Assets (532,135) (79,763) (540,968)
Increase (Decrease) in Accounts Payable and Accrued Liabilities 2,102,163 (74,655) 2,723,307
Non-Cash Interest Expense (Issuance of Warrants) - - 19,200
---------- ---------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ 851,496 (778,903) (2,230,972)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (22,099) (82,320) (165,587)
Proceeds from Sales of Oil and Gas Seismic Data - - 46,000
Oil and Gas Property Additions (4,741,545) (1,390,319) (24,216,065)
---------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,763,645) (1,472,639) (24,216,065)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes with Detachable Warrants - 180,000 4,605,000
Proceeds from Issuance of Notes Payable or Advances 240,000 - 1,437,000
Repayment of Notes Payable or Advances (240,000) - (1,832,000)
Sale of Common Stock 5,449,848 2,448,902 26,000,828
Offering Costs (288,299) (113,000) (2,370,523)
---------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,161,549 2,515,902 27,840,305
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH 1,249,401 264,360 1,393,269
CASH - BEGINNING OF PERIOD 143,868 787,523 -
---------- ---------- -----------
CASH - END OF PERIOD $1,393,269 $1,051,883 $ 1,393,269
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest (net of amounts capitalized) $ - $ - $ 22,353
========= ========= =========
Cash Paid for Income Taxes $ - $ - $ -
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The Company issued 105,000 shares of common stock upon the conversion of
$210,000 of notes payable in September 1996. In conjunction with its December
1997 Bridge Financing, the Company issued at closing 100,000 shares of common
stock (valued at $237,500), and upon extension of the maturity date 50,000
shares (valued at $33,500), which were recorded as debt issuance costs. In the
same financing, the Company issued 1,333,334 warrants (valued at $101,000) and
1,987,500 warrants (valued at $315,833) related to extensions of the maturity
dates. In conjunction with a short-term bridge financing in June 1998, the
Company issued 83,334 warrants (valued at $3,661). In conjunction with a short-
term bridge financing in June 1998, the Company issued 83,334 warrants (valued
at $3,661). In conjunction with a 1999 extension of the maturity dates of the
December 1997 notes, the exercise price was reduced by $0.25 per share for
warrants related to the extended notes. This repricing of warrants was valued at
$35,702. The amortization of such warrant costs was included in interest expense
which was capitalized as a cost of oil and gas properties.
In 1998, the Company issued 70,000 shares of common stock (valued at $98,000)
in settlement of invoices for previously rendered legal services.
In 1999, the Company repriced certain warrants (valued at $35,702) in
connection with an extension of its short-term notes payable and issued
2,812,528 shares of common stock in exchange for the cancellation of long-term
notes payable totaling $2,025,000.
The accompanying notes are an integral part of the financial statements.
7
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Cheniere Energy, Inc.
("Cheniere" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation, have been included.
For further information, refer to the financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. Interim results are not necessarily indicative of results to be
expected for the full fiscal year ended December 31, 1999.
The Company is currently a development stage enterprise and reports as such
under the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 7, "Accounting and Reporting by Development Stage Enterprises." The
Company's future business will be in the field of oil and gas exploration and
exploitation.
The Company intends to adopt SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," issued in June 1998 effective with its
fiscal year beginning January 1, 2000 as required by the Statement. Due to the
Company's current and anticipated limited use of derivative instruments,
management anticipates that adoption of SFAS 133 will not have any significant
impact on the Company's financial position or results of operations.
NOTE 2 - NOTES PAYABLE
In December 1997, Cheniere completed the private placement of a $4,000,000
bridge financing (the "December 1997 Bridge Financing"). The notes payable
issued by Cheniere had an initial maturity date of March 15, 1998, which was
extended to September 15, 1998 and further extended to January 15, 1999. In
December 1998, Cheniere received commitments from certain noteholders to
exchange notes payable for an aggregate of 2,812,528 shares of Cheniere common
stock at a price of $0.72 per share. Accordingly, the $2,025,020 face amount of
the exchanged notes was classified as a long-term obligation as of December 31,
1998. For those notes which were not exchanged for common stock, the maturity
date was extended. The notes bear interest at a rate of LIBOR plus 4%. The
securities purchase agreements which govern such bridge financing specify that,
during the term of the notes, capital raised by the Company in excess of
$12,000,000 must be directed to repayment of the notes.
In connection with the December 1997 Bridge Financing, Cheniere issued
100,000 shares of common stock and four-year warrants to purchase 1,333,334
shares of common stock at $2-3/8 per share. Additional warrants to purchase
1,600,000 shares of Cheniere common stock were issued on September 15, 1998 in
consideration for the extension to that date. In connection with the extension
to January 15, 1999, the Company offered two alternatives of consideration.
Holders of $3,000,000 of the notes elected to reduce the exercise price of their
warrants to $1.50
8
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
per share. The holder of $1,000,000 of the notes elected to reduce the exercise
price of its warrants to $2.00 per share, to extend the term of such warrants to
five years from the latter of September 15, 1998 or the date of issue, to
receive additional warrants to purchase 387,500 shares of common stock and to
receive 50,000 shares of common stock. In January 1999, the maturity date was
extended to March 15, 1999. In March 1999, the maturity date was extended to
April 15, 1999. As consideration for the extension to April 15, 1999, the
Company reduced the exercise price by $0.25 per share for all warrants issued in
connection with the issuance or extensions of the notes. In April 1999, the
maturity date was extended to July 15, 1999, at which time 50% of the
outstanding balance was repaid and the maturity date for the remainder was
extended to October 15, 1999. (See Note 8 - Subsequent Events.)
NOTE 3 - COMMON STOCK ISSUANCES
In April 1999, the Company completed the private placement of 300,000
units, each unit representing one share of Cheniere common stock and a warrant
to purchase one share of common stock at a share price equal to the lesser of
$1.00 or an amount calculated as 65% times the lowest trading price of Cheniere
common stock during the 30-day period ending June 12, 1999. Net proceeds were
$270,000 after payment of $30,000 in selling commissions. In July 1999, Cheniere
issued an additional 150,000 units pursuant to the price adjustment provision of
the original April 1999 private placement, reducing the average price to $0.67
per unit. These issuances were made in reliance on the exemption from
registration provided by Section 506 of Regulation D.
Also in April 1999, the Company issued 584,475 shares of common stock at
$0.68 per share in exchange for the cancellation of a production payment which
it had sold in March 1999. The terms of the production payment and stock option
agreement provided for the per share price of the exchange to be an amount equal
to 75% times the average closing bid price for the five-day period preceding
notice of the exchange. The balance of the production payment at the time of the
exchange was $400,000. These issuances were made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
In May 1999, Cheniere issued 600,000 shares of common stock in exchange for
$900,000 of prepaid drilling services. In addition, the Company issued 41,225
shares as partial payment of drilling services previously provided at a cost of
$53,850. These issuances were made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
In June 1999, the Company completed three private placements of common
stock. On June 2, 1999, Cheniere issued 1,200,000 shares of common stock at a
price of $0.83 per share for proceeds of $1,000,000. These issuances were made
in reliance on the exemption from registration provided by Section 506 of
Regulation D. On June 9, 1999, Cheniere issued 500,000 shares of common stock to
acquire a license to use 3-D seismic data covering 8,700 square miles in the
shallow waters of the Gulf of Mexico. These issuances were made in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. On June 30, 1999, Cheniere issued 2,296,000 shares of common stock at a
price of $1.00 per share resulting in net proceeds of $2,082,000 after payment
of $214,000 in selling commissions. These issuances were made in reliance on the
exemption from registration provided by Section 506 of Regulation D.
NOTE 4 - STOCK OPTIONS
On March 18, 1999, the Company granted options to certain employees under
the Cheniere Energy, Inc. 1997 Stock Option Plan. Options covering a total of
218,500 shares of common stock were granted to employees, exercisable at $1.50
per share, which is above the quoted market price of the stock at the time of
the grant. The options vest 25% at each of the first four anniversaries of the
date of grant and expire on the fifth anniversary date of the grants.
Also on March 18, 1999, the Company's Board of Directors elected a new
director. This
9
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
director was granted options to purchase 35,000 shares of the Company's common
stock at an exercise price of $3.00 per share, which is above the quoted market
price at the time of the grant. These options vest on 22,500 shares on March 18,
2000, and on 12,500 shares on March 18, 2001, and will expire on March 17, 2004.
On June 1, 1999, the Company granted options to an employee to purchase
300,000 shares of common stock. The options are exercisable at $1.50 per share,
which is above the quoted market price of the stock at the time of the grant.
Options on 150,000 of the shares are fully vested, options on 150,000 of the
shares vest 25% at each of the first four anniversaries of the date of grant and
expire on the fifth anniversary date of the grant.
NOTE 5 - WARRANTS
In April 1999, Cheniere sold 300,000 units to three investors at a price of
$1.00 per share, resulting in net proceeds of $270,000 after payment of $30,000
in selling commissions. Each unit was comprised of one share of common stock and
one warrant to purchase one share of common stock, adding up to 300,000 shares
of common stock and warrants to purchase 300,000 shares of common stock.
Warrants issued in connection with these sales of units are exercisable on or
before the second anniversary date of the date the units were sold at an
exercise price of $1.00 per share. These issuances were made in reliance on the
exemption from registration provided by Section 506 of Regulation D.
In June 1999, the Company issued 1,000,000 warrants to its president and
chief executive officer and 200,000 warrants to another member of its board of
directors, both of whom were instrumental in negotiating the Company's license
of 8,700 square miles of 3-D seismic data in the Gulf of Mexico. Warrants
issued in connection with this transaction are exercisable on or before the
fifth anniversary of the date the transaction closed at an exercise price of
$1.50 per share. These issuances were made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
NOTE 6 - RELATED PARTY TRANSACTIONS
In conjunction with certain of the Company's private placements of equity
securities, placement fees have been paid to Investors Administration Services,
Limited ("IAS"), a company in which the brother of Cheniere's Chairman is a
principal. Placement fees totaling $235,000 were paid to IAS related to
Cheniere's 1999 private placements of equity securities.
During May 1999, the Company received and repaid $240,000 in short-term
advances from a major stockholder, BSR Investments, Ltd., whose president is the
mother of Cheniere's Chairman. Interest totaling $584 was paid on the advances
at a rate of LIBOR plus 4%, the same rate then payable on the Company's notes
payable.
NOTE 7 - CONTINGENT LIABILITIES
On June 9, 1999 Cheniere entered into a master license agreement covering
the license of approximately 8,700 square miles of 3-D seismic data in the Gulf
of Mexico. In connection with the license agreement, the Company has made a
commitment to reprocess certain of the seismic data and to pay a fee for such
reprocessing as the reprocessed data is delivered. If
10
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
reprocessed seismic data are delivered to Cheniere on the schedule specified in
the agreement, Cheniere will be obligated to make processing payments of
approximately $200,000 per month for the period from December 1999 through
December 2001.
NOTE 8 - SUBSEQUENT EVENTS
On July 15, 1999, the Company repaid one half of the then-outstanding
balance of its notes payable. For the remaining balance, totaling $987,490,
the maturity date was extended to October 15, 1999 and the interest rate was
increased by 2% to LIBOR plus 6%.
In July 1999, Cheniere issued 50,000 warrants exercisable at $1.50 per
share on or before June 30, 2004 as consideration for the use of a prospect lead
database.
The Company also issued 150,000 additional warrants exercisable at $1.00
per share on or before July 5, 2004 in connection with a pricing adjustment to
the number of units sold in April 1999.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL - Cheniere Energy, Inc. is currently a development stage company,
which has not yet begun generating revenues, and reports as such under the
provisions of SFAS No. 7. The Company's unaudited consolidated financial
statements and notes thereto relate to the three-month and six-month periods
ended June 30, 1999 and 1998. These statements, the notes thereto and the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 contain detailed information that
should be referred to in conjunction with the following discussion.
RESULTS OF OPERATIONS
COMPARISON OF THREE-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 - The
Company's operating results for the three months ended June 30, 1999 reflect a
loss of $354,884, or $0.02 per share, compared to a loss of $429,816 or $0.03
per share a year earlier. The Company is in the development stage; accordingly,
there continue to be no operating revenues. General and administrative expenses
of $360,182 in the three months ended June 30, 1999 were lower than the $436,435
reported for the comparable period a year earlier. The decrease in expenses
results principally from the inclusion in 1998 results of legal expenses related
to arbitration proceedings which began in April 1998. Legal expenses for the
1999 quarter were $43,000 compared to $207,000 a year earlier. Offsetting the
decrease in legal expenses is an increase in personnel and office costs
resulting from the Company's increased level of activity since commencing
drilling operations in February 1999.
COMPARISON OF SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 - The
Company's operating results for the six months ended June 30, 1999 reflect a
loss of $683,990, or $0.03 per share, compared to a loss of $619,316 or $0.04
per share a year earlier. General and administrative expenses of $694,182 in the
six months ended June 30, 1999 were higher than the $631,829 reported for the
comparable period a year earlier. The increase in expenses results from the
hiring of additional management and technical personnel and the expansion of the
Company's offices in 1999. Offsetting these increases is the decline in legal
expenses of approximately $90,000 between periods due to the arbitration
proceedings which were initiated in April 1998 and concluded in December 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since Cheniere's inception in February 1996, the business plan of the
Company has included a lengthy start-up period before revenues would begin.
Some of the prerequisite activities to be accomplished before the commencement
of operating revenues were: the acquisition of 3-D seismic data, the processing
of that seismic data, the interpretation of that seismic data to identify
prospects, the leasing of those prospects, and the drilling of those prospects
to prove up oil and gas reserves for production and sale to generate operating
revenues. Cheniere has completed the acquisition of proprietary data over a 230-
square-mile 3-D seismic survey in Cameron Parish, Louisiana, and the adjacent
offshore area. It has processed and is interpreting the seismic data. It has
identified 15 prospects to date and has acquired leases over the majority of
those prospects. Cheniere has just begun the drilling phase of its exploration
project in 1999.
Drilling operations commenced in February 1999. A completion attempt was
made on
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the Company's initial well, at the Cobra Prospect, but the well was not deemed
to be productive in commercial quantities. Cheniere then commenced drilling a
test well on its second prospect, Redfish, which has been completed and tested
and where production is expected to commence in September 1999. The Company
drilled a well on its third prospect, Shark, and determined that the indicated
reserves found present were not adequate to justify a completion in an offshore
environment. Cheniere has drilled a well on its fourth prospect, Stingray, which
has been completed and tested and where production is expected to commence in
September 1999 after the installation of a platform which will be used for both
Redfish and Stingray production. Cheniere is presently preparing the location
for the drilling of its fifth prospect, Heron, on which drilling is expected to
commence in August 1999.
To fund its activities to date, Cheniere has raised $25,855,000 through
private placements of its equity securities and $1,974,980 (net) through the
issuance of bridge notes payable. The Company has raised these funds through a
series of private placements of moderate amounts of its securities. The Company
has consistently issued its common stock in amounts necessary to meet financial
needs when required. It has not been the strategy of the Company to raise a
significant amount of capital in excess of its current needs, but rather, to
sell stock as funds are required.
The Company anticipates that future liquidity requirements, including
repayment of $987,490 in short-term notes payable maturing on October 15, 1999,
payment of $1,603,000 in production platform costs due on September 2, 1999,
other oil and gas exploration and development activities, and general corporate
requirements will be met by a combination of: cash balances, the sale of equity,
further borrowings, and/or the sale of portions of its interest in the 3-D
Exploration Program or in the prospects generated thereunder. At this time, no
assurance can be given that such further sales of equity, future borrowings, or
sales of portions of its interest in the 3-D Exploration Program or in the
prospects generated thereunder will be accomplished.
During 1999, Cheniere has raised funds from the following sources: $913,000
through the sale of interests in five prospects, $275,000 through the sale of a
seismic option on three additional prospects, $2,025,020 through the issuance of
common stock in exchange for the cancellation of notes payable, $400,000 through
the sale of a production payment, $300,000 through the issuance of units
comprised of common stock and warrants, $3,296,000 through the issuance of
common stock for cash and $1,128,000 through the issuance of common stock in
exchange for drilling services and well equipment.
YEAR 2000
The Year 2000 presents significant issues for many computer systems. Much
of the software in use today may not be able to accurately process data beyond
the year 1999. The vast majority of computer systems process transactions using
two digits for the year of the transaction, rather than the full four digits,
making such systems unable to distinguish January 1, 2000 from January 1, 1900.
Such systems may encounter significant processing inaccuracies or become
inoperable when Year 2000 transactions are processed. Such matters could impact
not only the Company in its day-to-day operations but also the Company's
financial institutions, customers and vendors as well as state, provincial and
federal governments with jurisdictions where the Company maintains operations.
The Company is currently addressing Year 2000 issues and is presently
focussing on its internal business systems and processes. To the extent
considered necessary, the Company is
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assessing the readiness of any key business partners (financial institutions,
customers, vendors, oil and gas operators, etc.).
It has been the Company's strategy to use, wherever possible, industry
prevalent products and processes with minimal customization. As a result, the
Company does not expect any extensive in-house hardware, software or process
conversions in an effort to be Year 2000 compliant nor does the Company expect
its Year 2000 compliance related costs to be material to its operations.
While it is the Company's goal to be Year 2000 compliant, there can be no
assurance that there will not be a material adverse effect on the Company as a
result of a Year 2000 related issue. The Company's business partners may present
the area of greatest risk to the Company, in part because of the Company's
limited ability to influence actions of third parties, and in part because of
the Company's inability to estimate the level and impact of noncompliance of
third parties. Additionally, there are many variables and uncertainties
associated with judgments regarding any contingency plans developed by the
Company.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this report and
other filings with the Securities and Exchange Commission and in reports to its
stockholders.
All statements, other than statements of historical facts so included in
this report that address activities, events or developments that the Company
intends, expects, projects, believes, or anticipates will or may occur in the
future are forward-looking statements within the meaning of the Act, including,
without limitation: statements regarding the Company's business strategy, plans
and objectives; statements expressing beliefs and expectations regarding the
ability of the Company to successfully raise the additional capital necessary to
meet its obligations under the Exploration Agreement, the ability of the Company
to secure the leases necessary to facilitate anticipated drilling activities and
the ability of the Company to attract additional working interest owners to
participate in the exploration and development within the Survey AMI; and
statements about non-historical Year 2000 information. These forward-looking
statements are, and will be, based on management's then current views and
assumptions regarding future events.
FACTORS THAT MAY IMPACT FORWARD-LOOKING STATEMENTS OR FINANCIAL PERFORMANCE
The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements.
-- The Company's ability to generate sufficient cash flows to support
capital expansion plans, obligations to repay debt and general
operating activities.
-- The Company's ability to obtain additional financing from lenders,
through debt or equity offerings, or through sales of a portion of its
interest in the 3-D Exploration Program.
-- The Company's ability to discover hydrocarbons in sufficient
quantities to be economically viable, and its ability to overcome the
operating hazards that are inherent in the oil and gas industry.
-- Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax
laws and revised tax law interpretations) and environmental laws in
domestic or foreign jurisdictions.
-- The uncertainties of litigation as well as other risks and
uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings.
-- The Company's ability to replace, modify or upgrade computer programs
in ways that adequately address the Year 2000 issue.
The foregoing list of important factors is not exclusive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information contained in Notes 2, 3, 4 and 5 to the Consolidated Financial
Statements is incorporated herein by reference.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Each of the following exhibits is incorporated by reference or filed
herewith:
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere")
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Cheniere Energy, Inc.
3.3 By-laws of Cheniere as amended through April 7, 1997
(Incorporated by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K filed on March 29, 1999 (File No.
0-9092))
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10.28 Master License Agreement dated June 9, 1999 between Fairfield
Industries Incorporated and Cheniere. Certain information in
this exhibit has been omitted and filed separately with the
Commission. Confidential treatment has been requested with
respect to the omitted portions.
10.29 Supplement Agreement No. 1 to Master License Agreement dated
June 9, 1999 between Fairfield Industries Incorporated and
Cheniere. Certain information in this exhibit has been omitted
and filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHENIERE ENERGY, INC.
/s/ Don A. Turkleson
--------------------------------
Don A. Turkleson
Chief Financial Officer (on behalf of the
registrant and as principal accounting
officer)
Date: August 13, 1999
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