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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON,Washington, D.C. 20549

                               ----------------

                                   FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                 For the quarterly period ended September 30, 1998

                                      OR

                                        
[ ]March 31, 1999

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

              For the transition period from _______ to ________


                          COMMISSION FILE NO.Commission File No. 0-9092

                             CHENIERE ENERGY, INC.
                   (Exact name as specified in its charter)

                                   DELAWAREDelaware
        (State or other jurisdiction of incorporation or organization)

                                  95-4352386
                         (I. R. S. Identification No.)

                         1200 SMITH STREET, SUITESmith Street, Suite 1740
                                HOUSTON, TEXASHouston, 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 13, 1998,May 14, 1999, there were 18,007,08222,670,752 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 ---- PART Part I. FINANCIAL INFORMATIONFinancial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheet...........................................Sheet................................................. 3 Consolidated Statement of Operations.................................Operations....................................... 4 Consolidated Statement of Stockholders' Equity.......................Equity............................. 5 Consolidated Statement of Cash Flows................................. 6Flows....................................... 7 Notes to Consolidated Financial Statements........................... 7Statements................................. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 10 PARTOperations...................................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 13 Part II. OTHER INFORMATION Item 1. Legal Proceedings.................................................... 12Other Information Item 2. Changes in Securities and Use of Proceeds............................ 12Securities...................................................... 13 Item 5. Other Information.................................................... 12Information.......................................................... 13 Item 6. Exhibits and Reports on Form 8-K..................................... 13 SIGNATURES.............................................................................8-K........................................... 14 Signatures.................................................................................. 15
2 CHENIERE ENERGY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEET (Unaudited)
September 30,March 31, December 31, 1999 1998 1997 ------------- ------------------------- ------------ ASSETS ------ CURRENT ASSETS Cash $ 75,40783,732 $ 787,523143,868 Accounts Receivable 95,033 102,330 Debt Issuance Costs, net 27,978 224,306288,012 97,837 Subscriptions Receivable - 500,000 Prepaid Expenses and Other Current Assets 35,423 10,543 ----------- -----------151,670 8,833 ------------ ------------ TOTAL CURRENT ASSETS 233,841 1,124,702523,414 750,538 OIL AND GAS PROPERTIES, full cost method Unevaluated 19,542,690 16,534,05420,737,609 20,000,425 FIXED ASSETS, net 97,006 46,871 ----------- -----------79,167 89,511 ------------ ------------ TOTAL ASSETS $19,873,537 $17,705,627 =========== ===========$ 21,340,190 $ 20,840,474 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accounts Payable and Accrued Liabilities $ 423,292916,263 $ 369,766523,144 Notes Payable 2,000,000 2,000,000 Note Payable -1,974,980 1,974,980 ------------ ------------ Total Current Liabilities 2,891,243 2,498,124 ------------ ------------ LONG-TERM NOTES PAYABLE Related Party - 2,000,000 2,000,000 Less: Cost of Detachable Warrants (87,500) (84,167) ----------- ----------- TOTAL LIABILITIES 4,335,792 4,285,599 ----------- -----------Other - 25,020 ------------ ------------ - 2,025,020 ------------ ------------ PRODUCTION PAYMENT 400,000 - ------------ ------------ STOCKHOLDERS' EQUITY Common Stock, $.003 par value Authorized: 45,000,000 shares Issued and Outstanding: 17,107,08221,786,277 and 14,457,86618,973,749 shares at September 30, 1998March 31, 1999 and December 31, 1997,1998, respectively 51,322 43,37465,359 56,922 Preferred Stock, $.0001 par value Authorized: 5,000,000 shares Issued and Outstanding: none - - Additional Paid-in-Capital 18,820,528 15,563,33022,137,213 20,084,928 Deficit Accumulated During the Development Stage (3,334,105) (2,186,676) ----------- -----------(4,153,625) (3,824,520) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 15,537,745 13,420,028 ----------- -----------18,048,947 16,317,330 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,873,537 $17,705,627 =========== ===========$ 21,340,190 $ 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 Nine Months Ended September 30, Ended September 30,March 31, Cumulative --------------------------- ------------------------------------------------------------ from the Date 1999 1998 1997 1998 1997 of Inception ---------- ---------- ----------- ----------- ------------------------- Revenue $ - $ - $ - $ - $ - ---------- ---------- ----------- ----------- ----------- General and Administrative Expenses 532,272 872,197 1,164,099 1,626,539 3,428,397 ---------- ----------334,043 195,394 4,256,819 ----------- ----------- ----------- Loss from Operations Before Other Income and Income Taxes (532,272) (872,197) (1,164,099) (1,626,539) (3,428,397)(334,043) (195,394) (4,256,819) Interest Income 4,157 3,067 16,670 50,045 133,2934,938 5,894 142,195 Interest Expense - (6,718) - (6,718) (39,001) ---------- ---------- ----------- ----------- ----------- Loss From Operations Before Income Taxes (528,115) (875,848) (1,147,429) (1,583,212) (3,334,105)(329,105) (189,500) (4,153,625) Provision for Income Taxes - - - - - ---------- ---------- ----------- ----------- ----------- Net Loss $ (528,115)(329,105) $ (875,848) $(1,147,429) $(1,583,212) $(3,334,105) ========== ==========(189,500) $(4,153,625) =========== =========== =========== Net Loss Per Share (basic and diluted) $ (0.03)(0.02) $ (0.06)(0.01) $ (0.07) $ (0.12) $ (0.26) ========== ==========(0.30) =========== =========== =========== Weighted Average Number of Shares Outstanding 16,507,625 13,798,062 15,436,103 13,065,977 12,813,853 ========== ==========19,508,942 14,457,866 13,785,646 =========== =========== ===========
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 44* - 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 * Additional shares were issued to the purchasers of shares sold on February 28, 1997 and March 4, 1997 pursuant to the terms of those sales. All of the sales of shares indicated above were made pursuant to private placement transactions. 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, CONTINUED (Unaudited)
Common Stock Additional Total ---------------------- Paid-In Retained Stockholders' Per Share Shares Amount Capital Deficit Equity ----------- ------------ --------- ----------- ------------ ----------- Balance - August 31, 1997 14,160,866 42,483 14,709,253 (1,798,315) 12,953,421 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 - - - (138,000)(168,000) - (168,000) Issuance of Shares to Adjust Prices of Shares Sold on April 8 and May 2929** - 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 exerciseExercise of warrantsWarrants 1.00 100,000 300 99,700 - 100,000 Sale of Shares on August 31, 1998 0.67 750,000 2,250 499,000 Issuance of Warrants and Shares to Extend Bridge Notes on September 15, 1998 0.67 50,000 150 349,183 Net Loss - - - - ---------- --------- ----------- Balance - September 30, 1998 17,107,082 51,322 18,820,528 ========== ========= ===========
Total Retained Stockholders' Deficit Equity --------------- ----------------- Sale of Shares on April 9, 1996 $ - $ 75,003 Sale of Shares on May 5, 1996 - 3,000,000 Issuance of Shares to an Employee on July 1, 1996 - 30,000 Issuance of Shares in Reorganization to Former Bexy Shareholders - - Sale of Shares on July 30, 1996 - 100,000 Sale of Shares on August 1, 1996 - 1,016,800 Sale of Shares on August 30, 1996 - 1,000,000 Expenses Related to Offerings - (686,251) Issuance of Warrants - 12,750 Net Loss (121,847) (121,847) ----------- ----------- Balance - August 31, 1996 (121,847) 4,426,455 Sale of Shares on September 12, 1996 - 100,000 Sale of Shares on September 16, 1996 - 160,500 Conversion of Debt - 210,000 Sale of Shares on October 30, 1996 - 1,030,000 Issuance of Warrants - 6,450 Sale of Shares on December 6, 1996 - 1,069,874 Sale of Shares on December 9, 1996 - 1,000,000 Sale of Shares on December 11, 1996 - 50,000 Sale of Shares on December 19, 1996 - 500,000 Sale of Shares on December 20, 1996 - 550,000 Sale of Shares on February 28, 1997 - 1,500,026 Sale of Shares on March 4, 1997 - 1,500,025 Sale of Shares on May 22, 1997 - 1,605,000 Issuance of Shares to Adjust Prices of Shares Sold on February 28 and March 4 - - Sale of Shares on June 26, 1997 - 100,000 Sale of Shares on July 24, 1997 - 750,000 Issuance of Shares in Connection with Financial Advisory Services - 625,000 Sale of Shares on July 30, 1997 - 300,000 Sale of Shares on August 19, 1997 - 300,000 Expenses Related to Offerings - (1,153,441) Net Loss (1,676,468) (1,676,468) ----------- ----------- Balance - August 31, 1997 (1,798,315) 12,953,421 Sale of Shares on September 15, 1997 - 201,000 Sale of Shares on September 16, 1997 - 390,000 Expenses Related to Offerings (74,532) Issuance of Warrants and Shares with Bridge Notes on December 15, 1997 338,500 Net Loss (388,361) (388,361) ----------- ----------- Balance - December 31, 1997 (2,186,676) 13,420,028 Sale of Shares on April 8, 1998 - 1,060,000 Issuance of Shares in Settlement of Charges for Previous Legal Services - 98,000 Sale of Shares on May 29, 1998 - 44,000 Sale of Shares on June 4, 1998 - 1,246,902 Expenses Related to Offerings - (138,000) Issuance of Shares to Adjust Prices of Shares Sold on April 8 and May 29 - - Issuance of Warrants with Bridge Notes on June 4, 1998 - 3,661 Issuance of Shares on August 26, 1998 Pursuant to exercise of warrants - 100,000 Sale of Shares on August 31, 1998 - 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 (1,147,429) (1,147,429)- - - - (1,637,844) (1,637,844) ----------- ----------------- ---------- ---------- ---------- Balance - September 30,December 31, 1998 (3,334,105) 15,537,74518,973,749 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 January 15, 1999 - 35,702 35,702 Net Loss - - - - (329,105) (329,105) ----------- ------ ---------- ---------- ---------- Balance - March 31, 1999 21,786,277 65,359 22,137,213 (4,153,625) 18,048,947 =========== ===========
====== ========== ========== ========== ** Additional shares were issued to the purchasers of shares sold on April 8, 1998 and May 29, 1998 at $2.00 per share in order to adjust the purchase price to the $1.40 per share price offered and received on June 4, 1998. All of the sales of shares indicated above were made pursuant to private placement transactions. The accompanying notes are an integral part of the financial statements. 5 6 CHENIERE ENERGY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
NineThree Months Ended September 30,March 31, Cumulative --------------------------------- from the Date 1999 1998 1997 of Inception ---------------- --------------- --------------- ----------------------------- CASH FLOWS FROM OPERATING ACTIVITIESACTIVITIES: Net Loss $ (1,147,429)(329,105) $ (1,583,212)(189,500) $ (3,334,105)(4,153,625) Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities: Depreciation and Amortization 31,676 6,309 46,48310,344 7,772 64,322 Compensation Paid in Common Stock - - 654,400 (Increase) Decrease in Accounts Receivable 7,297(190,175) 6,891 (288,012) (Increase) Decrease in Subscriptions Receivable 500,000 - (95,033)- Increase in Prepaid Expenses and Other Current Assets (24,880) (35,649) (35,423)(142,837) (73,372) (151,670) Increase (Decrease) in Accounts Payable and Accrued Liabilities 53,526 168,275 423,292 Decrease in Advances from Officers (961) -393,119 (85,014) 1,014,263 Non-Cash Interest Expense (Issuance of Warrants) - - 19,200 ------------ ---------------------- ---------- ------------ NET CASH USED IN OPERATING ACTIVITIES $ (1,079,810) (1,445,238) (2,321,186) ------------ ------------241,346 (333,223) (2,841,122) ---------- ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Fixed Assets (81,810) (10,048)- (70,279) (143,488) Proceeds from Sales of Oil and Gas Seismic Data - - 46,000 Oil and Gas Property Additions (2,462,648) (7,498,919) (19,012,675) ------------ ------------(701,482) (427,903) (20,056,412) ---------- ---------- ------------ NET CASH USED IN INVESTING ACTIVITIES (2,544,458) (7,508,967) (19,110,163) ------------ ------------(701,482) (498,182) (20,153,900) ---------- ---------- ------------ 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 592,000 - 1,092,000- 1,197,000 Repayment of Notes Payable or Advances (772,000) - (1,487,000)- (1,592,000) Sale of Production Payment 400,000 400,000 Issuance of Common Stock 3,050,152 7,271,066 19,348,980- 720,000 20,550,980 Offering Costs (138,000) (531,000) (2,052,224) ------------ ------------- - (2,082,224) ---------- ---------- ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 2,912,152 6,740,066 21,506,756 ------------ ------------400,000 720,000 23,078,756 ---------- ---------- ------------ NET INCREASE (DECREASE) IN CASH (712,116) (2,214,139) 75,407(60,136) (111,405) 83,732 CASH - BEGINNING OF PERIOD 143,868 787,523 2,419,264 - ------------ ---------------------- ---------- ------------ CASH - END OF PERIOD $ 75,40783,732 $ 205,125676,118 $ 75,407 ============ ============83,732 ========== ========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid for Interest $ 286,977- $ 6,718- $ 309,330 ============ ============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 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 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. 67 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 TransitionAnnual Report on Form 10-K for the four monthsyear ended December 31, 1997.1998. Interim results are not necessarily indicative of results to be expected for the full fiscal year ended December 31, 1998.1999. 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 adopted SFAS 130, "Reporting Comprehensive Income", effective January 1, 1998. However, the Company had no items of other comprehensive income in any period presented and, as a result, is not required to report comprehensive income. The Company intends to adopt SFAS 133, "Accounting for Derivative Instruments and Hedging Activities",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 has been extended to July 15, 1999. The notes bear interest payable quarterly at a rate of LIBOR plus 4% (ranging from 9.5% to 9.9%). 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 $5,000,000 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. The notes were extended again in September 1998 to a maturity date of December 15, 1998, which date may be further extended to January 15, 1999 at the option of the Company. In connection with the extension to DecemberJanuary 15, 1998,1999, the Company offered two alternatives of consideration. 8 CHENIERE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Holders of $3,000,000 of the notes elected to reduce the exercise price of their warrants to $1.50.$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 7 CHENIERE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) the date of issue, to receive additional warrants to purchase as many as 387,500 shares of common stock and to receive 50,000 shares of common stock. In June 1998,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 $180,000 in short-term notesconnection with detachable warrantsthe issuance or extensions of the notes. In April 1999, the maturity date was extended to purchase 83,334July 15, 1999. NOTE 3 - PRODUCTION PAYMENT In March 1999, the Company sold a production payment and stock option for $400,000. Under the terms of the production payment and stock option agreement, the production payment could be exchanged for common stock at the election of the holder. In April 1999, the production payment was exchanged for 584,475 shares of common stock at an exercise price of $2.00 per share on or before June 4, 2002. Such notes bore interest at LIBOR plus 4% (9.7%) and matured on August 14, 1998. After extensions to dates on or about August 31, 1998, the notes were repaid in full. NOTE 3 - COMMON STOCK ISSUANCE During the nine months ended September 30, 1998, the Company completed six private placements. Net proceeds from these offerings totaled $2,912,152. In April 1998, Cheniere issued 530,000 shares, generating net proceeds of $1,018,000. In May 1998, the Company issued 22,000 shares with proceeds of $44,000 and an additional 70,000 shares in partial payment of legal charges related principally to previous offerings of the Company's common stock. In June 1998, Cheniere issued 890,644 shares of common stock, generating net proceeds of $1,175,902. Because the June private placement was issued at a price of $1.40 per share at a time soon after the Company had completed offerings at $2.00 per share, the Company also issued in June 236,572 additional shares to the stockholders who had purchased shares in April and May at $2.00 per share to give them the benefit of the lower price. In August, the Company issued 100,000 shares pursuant to the exercise of outstanding warrants, for which the exercise price was adjusted from $3.125 per share to $1.00 per share, resulting in proceeds of $100,000. Also in August, the Company sold 750,000 units, each unit representing one share of common stock and one half warrant to purchase one share of common stock at $2.00. The units were offered at $0.67 per unit and resulted in net proceeds of $476,250. In September, the Company issued 50,000 shares of common stock in connection with an extension of the maturity date of its notes payable. NOTE 4 - STOCK OPTIONS On January 1, 1998,March 18, 1999, the Company granted options to certain employees under the Cheniere Energy, Inc. 1997 Stock Option Plan. Options covering a total of 100,000218,500 shares of common stock were granted to employees, exercisable at $3.00$1.50 per share, vestingwhich 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 datesdate of grant and expiringexpire on the fifth anniversary datesdate of the grants. On April 7, 1998,Also on March 18, 1999, the Company's Board of Directors elected a new outside 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 onat the datetime of the grant. These options vest on 22,500 shares on April 7, 1999,March 18, 2000, and on 12,500 shares on April 7, 2000,March 18, 2001, and will expire on April 7, 2002.March 17, 2004. NOTE 5 - RELATED PARTY TRANSACTIONS In conjunction with certain of the Company's private placements of equity, placement fees have been paid to Investors Administration Services, Limited ("IAS"), a company in which the brother of the Company's Co-Chairman, Charif Souki, is a principal. Placement fees totaling $30,000 were paid to IAS totaled $138,000related to the April 1999 private placement of units described in Note 6. NOTE 6 - SUBSEQUENT EVENTS 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. Also in April 1999, the Company issued 584,475 shares of common stock in exchange for the nine months ended September 30, 1998. On June 4, 1998, short-term advances totaling $592,000 were received from the Company's Co-Chairman, William Forster, and from family memberscancellation of Mr. Forster who are also shareholdersa production payment which it had sold in March 1999. The terms of the Company. Such advances bore interest at LIBOR plus 4% (9.7%)production payment and were repaid during June 1998. 8stock option agreement provided for the per share price of the exchange 9 CHENIERE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 - SUBSEQUENT EVENTS Subsequent to September 30, 1998,be an amount equal to 75% times the Company received short-term advances totaling $60,000 from Mr. Forster and from BSR Inverstments, Ltd., a company controlled byaverage closing bid price for the mother of Charif Souki. In addition, the Company sold 900,000 additional units of stock and warrants, resulting in net proceeds of $540,000. During October 1998, a hearing was conducted before a panel of independent arbitrators pursuant to arbitration proceedings which were initiated in April 1998 concerning rights, duties and obligationsfive- day period preceding notice of the parties to a certain exploration agreement.exchange. The hearing has been completed,balance of the production payment at the time of the exchange was $400,000. 10 Item 2. Management's Discussion and decisions are expected to be forthcoming from the panel shortly after the completionAnalysis of an auditFinancial Condition and Results of expenditures made pursuant to the exploration agreement. Such audit has begun and is expected to be completed during November 1998. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERALOperations 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 nine-month periods ended September 30, 1998March 31, 1999 and 1997.1998. These statements, the notes thereto and the consolidated financial statements included in the Company's TransitionAnnual Report on Form 10-K for the four-month transition periodyear ended December 31, 19971998 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,Results of Operations Comparison of Three-Month Periods Ended March 31, 1999 and 1998 AND 1997 - The Company's operating results for the three months ended September 30, 1998March 31, 1999 reflect a loss of $528,115,$329,105, or $0.03$0.02 per share, compared to a loss of $875,848$189,500 or $0.06$0.01 per share a year earlier. The Company has not yet begun to generate operating revenues; it is in the development stage.revenues. General and administrative expenses of $532,272$334,043 in the three months ended September 30, 1998March 31, 1999 were lowerhigher than the $872,197$195,394 reported for the comparable period a year earlier. Both periodsThe 1999 quarter included significant non-recurring expenses. The decrease in expenses results principally from the inclusion in 1997an increased level of $624,400activity related to financial advisory services, offset by approximately $425,000 inthe commencement of the Company's drilling operations. This activity included additional personnel and office costs as well as legal and other expenses related to arbitration proceedings which were initiatedoil and gas contract matters. Expenses in April 1998. COMPARISON OF NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 - The Company's operating resultsthe first quarter of 1999 also included legal and professional fees related to year-end financial reporting for the ninefiscal year ended December 31, 1998. The comparable three months of 1998 did not include such expenses. At that time, the Company's fiscal year ended September 30, 1998 reflecton August 31 rather than December 31. Liquidity and Capital Resources Since Cheniere's inception in February 1996, the business plan of the Company has included a losslengthy start-up period before revenues would begin. Some of $1,147,429 or $0.07 per share, comparedthe 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 loss230-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 $1,583,212 or $0.12 per sharethose prospects. Cheniere has just begun the drilling phase of its exploration project. Drilling operations commenced in February 1999. A completion attempt was made on the Company's initial well (at the Cobra Prospect) but the well was not productive in commercial quantities. Cheniere then commenced drilling a year earlier. Generaltest well on its second prospect, Redfish, where completion operations and administrative expenses of $1,164,099testing are presently underway. The Company has drilled a well on its third prospect, Shark, and determined that the indicated reserves found present were not adequate to justify a completion in the nine months ended September 30, 1998 were lower than the $1,626,539 reportedan offshore environment. Cheniere is presently making plans for the comparable period a year earlier. Both periods included significant non-recurring expenses. The decrease in expenses results principally from the inclusion in 1997drilling of $624,400 related to financial advisory services. The resulting decrease is offset partially by an increase in legal expenses in 1998 related to the arbitration proceedings which began in April. Cheniere reported interest income of $16,670 in the current yearits fourth and fifth prospects. To fund its activities to date, comparedCheniere has raised $22,125,000 through private placements of its equity securities and $1,974,980 (net) through the issuance of bridge notes payable. The 11 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 $50,045 a year ago, varying as a functionmeet financial needs when required. It has not been the strategy of funds available for the Company to invest. LIQUIDITY AND CAPITAL RESOURCESraise 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 outstanding$1,974,980 in short-term notes payable future commitments tomaturing on July 15, 1999, exploration and development activities within the 3-D Exploration Program, and other oil and gas 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. Historically, the Company has funded its capital expenditures and working capital requirements through private placements of equity securities and short- term debt issuances. Since its inception in February 1996 through September 30,Subsequent to December 31, 1998, however, Cheniere has raised $17.5 millionfunds from the following sources: $658,000 through the sale of its common stock and another $4.0 million (net of repayments)interests in private debt placements. 10 The Company's $4,000,000 in notes payable are scheduled to mature on December 15, 1998 and may be extended at the option of the Company to January 15, 1999. At present, the Company is considering alternatives for satisfying this debt obligation. Such alternatives include a conversion of notes payable into common stock, the sale of additional equity securities andthree wells, $275,000 through the sale of a partial interest in the 3-D Exploration Program or in theseismic option on three additional prospects, generated thereunder. Although its timetable has been delayed by the arbitration proceedings in 1998, the Company presently expects drilling operations to commence on one or more prospects during the first quarter of 1999. The related capital needs of the Company will depend upon the level of participation it chooses to retain in the drilling projects. The Company expects to finance such activities$2,025,020 through the additional placementissuance of its equity securities, short-term debt issuances and/orcommon stock in exchange for the partial salecancellation of its interest in the 3-D Exploration Program or in the prospects generated thereunder, but can offer no assurance that it will be able to successfully obtain such financing. At September 30, 1998, total assets had increased to $19,873,537 from $17,705,627 at December 31, 1997 due primarily to Cheniere's continued investment in oil and gas properties, funded principally by net proceeds fromnotes payable, $400,000 through the sale of a production payment and $300,000 through the Company'sissuance of units comprised of common stock.stock and warrants. 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 necessary, the Company will assess 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. The Company's goal is to be Year 2000 compliant by June 30, 1999 wherever possible and to have contingency plans in place where compliance is not possible in a timely manner. 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. 1112 Item 3. Quantitative and Qualitative Disclosures About Market Risk None. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information containedOther Information Item 2. Changes in the second paragraphSecurities and Use of Note 6 to the Consolidated Financial Statements is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDSProceeds The information contained in Notes 2, 3 and 4 to the Consolidated Financial Statements is incorporated herein by reference. ITEMItem 5. OTHER INFORMATION FORWARD LOOKING STATEMENTSOther Information 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, 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, are forward-looking statements within the meaning of the Act. 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 PERFORMANCEFactors 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. 1213 -- The Company's ability to encounterdiscover 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 including but not limited to the Company's ongoing arbitration proceedings, 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. ITEMItem 6. EXHIBITS AND REPORTS ON FORMExhibits 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 Registration Statement on Form S-1 filed on August 27, 1996 (File No. 333-10905)) 3.2 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)) 27.1 Financial Data Schedule (b) None. 1314 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 13, 1998May 14, 1999 15