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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 September 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 November 12, 1999, there were 29,198,351 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........................... 6
Notes to Consolidated Financial Statements..................... 7
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...................... 12
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURES...................................................................... 16
2
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
ASSETS 1999 1998
----------------- -----------------
Cash $ 325,784 $ 143,868
Accounts Receivable 449,731 97,837
Subscriptions Receivable 110,000 500,000
Prepaid Expenses and Other Current Assets 1,357,975 8,833
----------- -----------
Total current assets 2,243,490 750,538
OIL AND GAS PROPERTIES, full cost method, net 29,410,901 20,000,425
FIXED ASSETS, net 520,863 89,511
----------- -----------
Total Assets $32,175,254 $20,840,474
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 3,523,985 $ 523,144
Notes Payable 3,930,060 1,974,980
----------- -----------
Total current liabilities 7,454,045 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: 29,198,351 shares at September 30, 1999;
18,973,749 at December 31, 1998 87,595 56,922
Preferred Stock, $.0001 par value
Authorized: 5,000,000 shares
Issued and Outstanding: none - -
Additional Paid-in-Capital 29,476,123 20,084,928
Deficit Accumulated During the Development Stage (4,842,509) (3,824,520)
----------- -----------
Total Stockholders' Equity 24,721,209 16,317,330
----------- -----------
Total Liabilities and Stockholders' Equity $32,175,254 $20,840,474
============ ===========
The accompanying notes are an integral part of the financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- ---------- ------------ ------------
Oil and Gas Revenues $ 421,268 $ - $ 421,268 $ -
---------- ---------- ----------- -----------
Production Costs 33,088 - 33,088 -
Depreciation, Depletion and Amortization 254,033 13,455 275,359 31,676
General and Administrative Expenses 481,669 518,817 1,154,525 1,132,423
---------- ---------- ----------- -----------
Total Operating Costs and Expenses 768,790 532,272 1,462,972 1,164,099
---------- ---------- ----------- -----------
Loss from Operations Before Interest Income
and Income Taxes (347,522) (532,272) (1,041,704) (1,164,099)
Interest Income 13,523 4,157 23,715 16,670
---------- ---------- ----------- -----------
Loss From Operations Before Income Taxes (333,999) (528,115) (1,017,989) (1,147,429)
Provision for Income Taxes - - - -
---------- ---------- ------------ -----------
Net Loss $ (333,999) $ (528,115) $(1,017,989) $(1,147,429)
========== ========== =========== ===========
Net Loss Per Share (basic and diluted) $ (0.01) $ (0.03) $ (0.04) $ (0.07)
========== ========== =========== ===========
Weighted Average Number of Shares
Outstanding 28,105,458 16,507,625 23,728,372 15,436,103
========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Total
----------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Deficit Equity
--------------- ----------- ---------------- --------------- ----------------
Issuances of Stock 9,931,767 $ 29,795 $ 5,192,008 $ - $ 5,221,803
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
Issuances of Stock 4,124,099 12,373 11,128,052 - 11,140,425
Conversion of Notes Payable 105,000 315 209,685 - 210,000
Issuance of Warrants - - 6,450 - 6,450
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
Issuances of Stock 297,000 891 827,609 - 828,500
Issuance of Warrants - - 101,000 - 101,000
Expenses Related to Offerings - - (74,532) - (74,532)
Net Loss - - - (388,361) (388,361)
---------- -------- ----------- ----------- -----------
Balance - December 31, 1997 14,457,866 43,374 15,563,330 (2,186,676) 13,420,028
Issuances of Stock 4,515,883 13,548 4,370,104 - 4,383,652
Issuance of Warrants - - 319,494 - 319,494
Expenses Related to Offerings - - (168,000) - (168,000)
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
Issuances of Stock 6,683,465 20,051 7,152,160 - 7,172,211
Conversion of Notes Payable 2,956,662 8,869 2,174,698 - 2,183,567
Repricing of Warrants to Extend Bridge Notes - - 35,702 - 35,702
Conversion of Production Payment 584,475 1,753 398,247 - 400,000
Expenses Related to Offerings - - (369,612) - (369,612)
Net Loss - - - (1,017,989) (1,017,989)
---------- -------- ----------- ----------- -----------
Balance - September 30, 1999 29,198,351 $ 87,595 $ 29,476,123 $(4,842,509) $24,721,209
========== ======== ============ =========== ===========
The accompanying notes are an integral part of the financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,017,989) $(1,147,429)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation, Depletion and Amortization 275,359 31,676
Increase in Accounts Receivable (351,894) 7,297
Decrease in Subscriptions Receivable 390,000 -
Increase in Prepaid Expenses and Other Current Assets (195,052) (24,880)
Increase in Accounts Payable and Accrued Liabilities 3,000,840 53,526
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ 2,101,264 (1,079,810)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (498,219) (81,810)
Oil and Gas Property Additions (7,909,495) (2,462,648)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (8,407,714) (2,544,458)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes with Detachable Warrants - 180,000
Proceeds from Issuance of Notes Payable or Advances 3,100,000 592,000
Repayment of Notes Payable or Advances (987,490) (772,000)
Sale of Common Stock 4,745,468 3,050,152
Offering Costs (369,612) (138,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,488,366 2,912,152
----------- -----------
NET INCREASE (DECREASE) IN CASH 181,916 (712,116)
CASH - BEGINNING OF PERIOD 143,868 787,523
----------- -----------
CASH - END OF PERIOD $ 325,784 $ 75,407
=========== ===========
The accompanying notes are an integral part of the financial statements.
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 intends to adopt Statement of Financial Accounting Standard
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective with its fiscal year beginning January 1, 2001 as required by the
Statement, as amended by SFAS 137. 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 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
7
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, the maturity date for the remainder was extended
to October 15, 1999 and the interest rate was increased by 2% to LIBOR plus 6%.
In September 1999, certain noteholders exchanged notes payable and accrued
interest totaling $158,548 for units of common stock and warrants to purchase
common stock at a price of $1.10 per unit. In October 1999, the maturity date
of the remaining notes was extended to December 15, 1999. (See Note 8 -
Subsequent Events.)
On September 1, 1999, Cheniere established a $3.1 million financing
facility to fund a production platform and other exploration and development
costs in the West Cameron Block 49 area. Borrowings under the facility are to
be repaid from 75% of Cheniere's share of net cash flow from production through
the West Cameron Block 49. The notes have a two-year term. Financing costs
include interest at 12% per annum and a 5% net profit interest in the two wells
currently producing through the platform.
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
8
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
On July 1, 1999, Cheniere issued 116,240 shares of common stock in exchange
for $174,360 of drilling services and equipment. In addition, on August 1,
1999, Cheniere issued 800,000 shares of common stock in exchange for $1,200,000
of prepaid drilling services. These issuance were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In September 1999, the Company sold 824,134 units to nine investors at a
price of $1.10 per unit pursuant to Section 506 of Regulation D adopted by the
Securities and Exchange Commission. Each unit was comprised of one share of
common stock and one half warrant to purchase one share of common stock, adding
up to 824,134 shares of common stock and warrants to purchase 412,067 shares of
common stock. Included among the participants in the private placement of units
were holders of the Company's notes payable who exchanged notes and accrued
interest totaling $158,548. Net proceeds were $1,364,148, including the effect
of the exchange of notes and $64,900 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 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.
Effective July 1, 1999, the Company issued an option to purchase 600,000
shares of common stock on or before May 31, 2004 at an exercise price of $1.50
per share. Such option vests fully for 300,000 shares as of the date of grant
and for 75,000 shares at each of the first four anniversaries of the grant date.
On July 1, 1999, the Company issued additional options to purchase 425,000
shares of common stock on or before June 30, 2004 at an exercise price of $1.50
per share. Such options vest annually in quarterly increments beginning on July
1, 2000.
On September 1, 1999 the Company issued to an employee an option to
purchase 30,000 shares of common stock on or before August 31, 2004 at an
exercise price of $1.50 per share. Such options vest annually in quarterly
increments beginning on September 1, 2000. Effective September 1, 1999 options
to purchase 15,000 shares of common stock were terminated. In
9
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
addition, effective September 30, 1999, the term of all stock options issued and
outstanding to employees was extended to September 30, 2004. On October 1, 1999
the Company issued to a consultant an option to purchase on or before September
30, 2004, 200,000 shares of common stock at an exercise price of $1.50 per
share, vesting on 50,000 shares one year after the date of grant, 50,000 shares
two years after the date of grant and on 100,000 shares at the earlier of the
date of employment or 3 years after the date of 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.
Effective in July 1999, the Company issued 50,000 warrants exercisable at
$1.50 per share on or before June 30, 2002 as consideration for assistance in
the private placement of securities. Cheniere also issued 150,000 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.
In September 1999, the Company sold 824,134 units to nine investors at a
price of $1.10 per unit. Each unit was comprised of one share of common stock
and one half warrant to purchase one share of common stock, adding up to 824,134
shares of common stock and warrants to purchase 412,067 shares of common stock.
Warrants issued in connection with these sales of units are exercisable on or
before the third anniversary date of the date the units were sold at an exercise
price of $1.50 per share. Also in September 1999, the Company issued to a
consultant warrants to purchase 200,000 shares of common stock on or before
September 27, 2004 at exercise prices per share of $1.375 for 50,000 shares,
$1.875 for 50,000 shares, $2.375 for 50,000 shares and $2.875 for 50,000 shares.
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
10
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
in which the brother of Cheniere's Chairman is a principal. Placement fees
totaling $288,900 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 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 from December 1999 through December 2001.
NOTE 8 - SUBSEQUENT EVENTS
In October 1999, the Company extended the maturity dates on its $830,060
short-term notes payable from October 15, 1999 to December 15, 1999. As
consideration for these extensions, the Company issued 69,167 shares of common
stock, valued at $1.20 per share, to the noteholders.
In October and November 1999, the Company privately placed 250,000 units at
a price of $1.10 per unit, each unit representing one share of common stock and
one half warrant to purchase a share of common stock at an exercise price of
$1.50 per share. Net proceeds to the Company were $247,500.
Subsequent to September 30, 1999, the Company reached total depth on the
drilling of two wells, both of which were it determined to be nonproductive and
has plugged and abandoned.
The Company is currently in breach of two financial covenants with respect
to its $3,100,000 financing facility: (1) it has not completed the "September
1999 Issuance" to raise $2,000,000 through the sale of equity by September 30,
1999 as initially required nor by October 29, 1999 as previously amended (it has
raised only $1,181,548 toward that commitment) and (2) it has not repaid short-
term notes payable of $830,000 by their maturity date of October 15, 1999 (it
has extended the maturity dates of the notes). Although the Company is in
discussion with the lenders to obtain waivers, there can be no assurance such
waivers will be received. If such waivers are not obtained, the lender could
accelerate the maturity of the note and exercise its rights under the related
mortgage instruments.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL - The Company's unaudited consolidated financial statements and
notes thereto relate to the three-month and nine-month periods ended September
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 SEPTEMBER 30, 1999 AND 1998 -
The Company's operating results for the three months ended September 30, 1999
reflect a loss of $333,999, or $0.01 per share, compared to a loss of $528,115
or $0.03 per share a year earlier. The Company began producing oil and gas on
September 9, 1999. Oil and gas revenues of $421,268 and related operating
expenses of $33,088 represent the results of Cheniere's first partial month of
production. Depreciation, depletion and amortization of oil and gas property
costs commenced in September 1999 and totaled $208,491.
General and administrative expenses of $481,669 in the three months
ended September 30, 1999 were lower than the $518,817 reported for the
comparable period a year earlier. The net decrease in expenses results
principally from the inclusion in 1998 of legal expenses related to arbitration
proceedings. Partially 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 and expanding the
management and exploration teams beginning in June 1999.
COMPARISON OF NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 -The
Company's operating results for the nine months ended September 30, 1999 reflect
a loss of $1,017,989, or $0.04 per share, compared to a loss of $1,147,429 or
$0.07 per share a year earlier. The Company began producing oil and gas on
September 9, 1999. Oil and gas revenues of $421,268 and related operating
expenses of $33,088 represent the results of its first partial month of
production. Depreciation, depletion and amortization of oil and gas property
costs totaled $208,491.
General and administrative expenses of $1,154,525 in the nine months
ended September 30, 1999 were about the same as the $1,132,423 reported for the
comparable period a year earlier.
LIQUIDITY AND CAPITAL RESOURCES
Since Cheniere's inception in February 1996, the business plan of the
Company included a lengthy start-up period before revenues would begin.
Throughout 1996 and 1997 the Company acquired and processed proprietary 3-D
seismic data over a 228-square-mile area in the Louisiana Transition Zone. In
1998 and 1999, the Company interpreted the data, generated prospects and
acquired leases. Beginning in February 1999, Cheniere commenced the drilling
phase of its exploration program. Through September 1999, the Company had
drilled four prospects and had made two discoveries. Subsequent to September
30, 1999 the Company has drilled two additional nonproductive wells. Beginning
on September 9, 1999 Cheniere commenced producing oil and gas from its two
discoveries at West Cameron Block 49. Revenues from the first three weeks of
12
production, though September 30, 1999, are estimated at $421,268.
Prior to the commencement of revenues in September 1999, Cheniere
funded all its activities through private placements of its equity securities
and through the issuance of 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 $830,000 in short-term notes payable maturing on December 15, 1999,
payment of trade accounts payable of approximately $3,360,000 as of September
30, 1999, obligations of approximately $200,000 per month under the Company's
seismic reprocessing agreement, 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 oil and gas prospects. At this time, no assurance
can be given that such further sales of equity, future borrowings, or sales of
portions of its interest in oil and gas prospects will be accomplished.
The Company is currently in breach of two financial covenants with
respect to its $3,100,000 financing facility: (1) it has not completed the
"September 1999 Issuance" to raise $2,000,000 through the sale of equity by
September 30, 1999 as initially required nor by October 29, 1999 as previously
amended (it has raised only $1,181,548 toward that commitment) and (2) it has
not repaid short-term notes payable of $830,000 by their maturity date of
October 15, 1999 (it has extended the maturity dates of the notes). Although the
Company is in discussion with the lenders to obtain waivers, there can be no
assurance such waivers will be received. If such waivers are not obtained, the
lender could accelerate the maturity of the note and exercise its rights under
the related mortgage instruments.
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. 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.
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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 prospects.
-- 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.
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-- 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.
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") (incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
for the three months ended June 30, 1999)
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Cheniere Energy, Inc.
(incorporated by reference to Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the three months ended
June 30, 1999)
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))
10.30 Credit Agreement between Cheniere Energy, Inc. as Borrower
and EnCap Energy Capital Fund III, L.P. as Lender for
$3,100,000 dated as of September 1, 1999
10.31 Conveyance of Net Profits Overriding Royalty Interest from
and by Cheniere Energy, Inc. to and in favor of EnCap Energy
Capital Fund III, L.P. dated as of September 1, 1999
10.32 Mortgage, Assignment, Security Agreement, Fixture Filing and
Financing Statement from Cheniere Energy, Inc. to EnCap
Energy Capital Fund III, L.P.
27.1 Financial Data Schedule
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(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: November 12, 1999
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