Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
The number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2010, is as follows:
CAMAC Energy Inc.
All statements, other than statements of historical fact, included in this Form 10-Q, including without limitation the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are, or may be deemed to be, forward-looking statements. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of CAMAC Energy Inc. (formerly Pacific Asia Petroleum, Inc.) and its subsidiaries and joint-ventures, (i) Pacific Asia Petroleum, Limited, (ii) Inner Mongolia Production Company (HK) Limited, (iii) Pacific Asia Petroleum (HK) Limited, (iv) Inner Mongolia Sunrise Petroleum Co. Ltd., (v) Pacific Asia Petroleum Energy Limited, (vi) Beijing Dong Fang Ya Zh ou Petroleum Technology Service Company Limited, and (vii) CAMAC Petroleum Limited (collectively, the “Company”), to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this Form 10-Q. In our capacity as Company management, we may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations which may be included in our filings with the Securities and Exchange Commission (the “SEC”), reports to stockholders and information provided in our web site.
The words or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,” “forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar expressions identify “forward-looking statements.” Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We are calling to your attention important factors that could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
CAMAC Energy Inc. and Subsidiaries
(Formerly Pacific Asia Petroleum, Inc. and Subsidiaries)
NOTE 1. INTERIM FINANCIAL STATEMENTS; DISCONTINUANCE OF DEVELOPMENT STAGE COMPANY REPORTING BASIS
With the exception of the condensed consolidated balance sheet as of December 31, 2009, which has been derived from audited financial statements, the accompanying condensed consolidated financial statements of CAMAC Energy Inc. and Subsidiaries (formerly Pacific Asia Petroleum, Inc. and Subsidiaries) (the “Company”) are unaudited. Management believes this interim data includes all adjustments necessary for a fair presentation of the results for the interim periods reported. All adjustments were of a recurring nature.
For the period from inception of the Company through March 31, 2010, the Company’s financial statements were prepared on the basis for a development stage company. In the three months ended June 30, 2010 the Company commenced the recognition of significant revenues from operating assets and therefore is no longer reporting as a development stage company. Prior year data has been presented to conform to the current year reporting basis. In addition, certain amounts for cumulative effects from inception of the Company and other disclosures required for a development stage company in the financial statements are no longer included. The Company has also commenced reporting current and prior year amounts on the face of the financial statements in thousands, except where otherwise indicated.
Certain notes and other information have been condensed or omitted from the interim financial statements present in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K, as amended, in which the financial statements were prepared on a development stage company basis. The results for the three-month period ended June 30, 2010 are not necessarily indicative of future results.
Refer to Notes 1 and 2 to the consolidated financial statements in our year 2009 Form 10-K, as amended, for a description of the Company’s business, and the merger and recapitalization of the Company that occurred in 2007.
While the Company has commenced the generation of significant revenues from new interests in Nigeria (see Note 6), it expects to continue incurring significant expenses over the next year or more in its China operations which are still in the development stage. The Company may still require significant additional financing in excess of its June 30, 2010 available cash, cash equivalents and short-term investments in order to achieve its business plan. It is not certain that this financing will be fully obtainable on terms and conditions acceptable to the Company. The acquisition of the Nigeria production sharing contract interest described in Note 6 is expected to positively affect the Company’s future liquidity.
The Company’s interim financial statements are prepared on a consolidated basis under U.S. Generally Accepted Accounting Principles. Management uses estimates and assumptions in preparing these financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, disclosures of contingencies, and reported revenues and expenses. Actual results could vary from those estimates.
NOTE 4. SIGNIFICANT ACCOUNTING POLICIES
Refer to Note 4 to the consolidated financial statements in year 2009 Form 10-K, as amended, for a description of the Company’s significant accounting policies. Amendments to those existing accounting policies since December 31, 2009 are indicated below.
Inventories - Crude oil inventories are recorded at cost using the first-in, first-out (FIFO) method of accounting.
Currency Translation - The functional currency of the Company’s Nigeria interests is the U.S. dollar.
In July 2009, The Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (“Codification”) or (“ASC”) which became the source of authoritative accounting principles effective with financial statements of interim and annual periods ending after September 15, 2009. Sources of accounting principles referred to in this report refer to Topics, Subtopics and Sections of the Codification.
Commencing with the interim period ending June 30, 2009, the Company adopted new requirements for quarterly disclosures related to fair values of financial instruments whether or not currently reflected on the balance sheet at fair value. Previously, qualitative and quantitative information about fair value estimates for financial instruments not measured on the balance sheet at fair value were disclosed only annually. Quarterly disclosures were required under an update to ASC Topic 825 (Financial Instruments) effective for interim periods ending after June 15, 2009. The adoption of this update did not have a material impact on the Company’s results of operations or financial condition.
Effective January 1, 2009, the Company adopted an update to ASC Topic 810 (Consolidation) that changes the accounting and reporting for noncontrolling interests (formerly known as minority interests) in subsidiaries and for the deconsolidation of a subsidiary. The presentation of noncontrolling interests in the balance sheet and income statement has been revised to report noncontrolling interests as a separate component of total consolidated equity and total consolidated net income, rather than as reduction adjustments. In addition, if a subsidiary is deconsolidated, the parent company will now recognize a gain or loss to net income based upon the fair value of the noncontrolling equity at that date.
The update is applied prospectively except for the provisions involving financial statement line detail presentation. All of the Company’s financial statements contain changes as a result of the update. Under the update, the amount formerly titled “Net Loss” in the income statement is now referred to as “Net Loss – CAMAC Energy Inc. and Subsidiaries,” to designate the portion of total net loss attributable to the controlling stockholder interest of the parent company.
Effective with the six months ended June 30, 2009, the Company adopted an update to ASC Topic 855 (Subsequent Events). Subsequent events are events or transactions about which information becomes available after the balance sheet date but before the financial statements are issued or are available to be issued. In the case of a company defined as an “SEC filer” (as per an amendment issued in February 2010), the applicable cutoff date is the date the financial statements are issued, whereas previously the cutoff date could be the date the financial statements were available for issuance.
The update requires that certain subsequent events (“recognized subsequent events”) be recorded in the financial statements of the latest preceding period currently being issued. These items provide evidence about conditions that existed at the date of that balance sheet, including estimates inherent in preparing the financial statements for that period. Other subsequent events (“nonrecognized subsequent events”) are not recorded in the balance sheet for the latest preceding period currently being issued. Those items relate to conditions that arose after the balance sheet date. Disclosure is required for nonrecognized subsequent events if necessary to prevent those financial statements from being misleading.
ASU No. 2009-17 (amendment of ASC Topic 810 – Consolidations)
Effective January 1, 2010, the Company applied ASU No. 2009-17, which requires consolidation of certain special purpose entities that were previously exempted from consolidation. The revised criteria define a controlling financial interest for requiring consolidation as: the power to direct the activities that most significantly affect the entity’s performance, and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The initial adoption had no effect on the Company’s financial statements.
NOTE 6. ACQUISITION OF OYO FIELD PRODUCTION SHARING CONTRACT INTEREST
On April 7, 2010, the Company consummated the acquisition of all of the interests held by CAMAC Energy Holdings Limited (“CEHL”) and certain of its affiliates (collectively,“CAMAC”) in a Production Sharing Contract (the “PSC”) with respect to an oilfield asset known as the Oyo Field located offshore Nigeria (the “Contract Rights”). The Oyo Field was under development through 2009, and oil production commenced in December 2009. As consideration for the Contract Rights, the Company paid CEHL $32 million in cash consideration (the “Cash Consideration”) and issued to CEHL 89,467,120 shares of Company Common Stock, par value $0.001, representing approximately 62.74% of the Company’s issued and outstanding Common Stock at closing (the “Consideration Sh ares”). In addition, if certain issued and outstanding warrants and options exercisable for an aggregate of 7,991,948 shares of Company Common Stock are exercised following the closing, then the Company is obligated to issue up to an additional 13,457,188 Consideration Shares to CEHL to maintain CEHL’s approximately 62.74% interest in the Company. As additional Cash Consideration, the Company agreed to pay CEHL $6.84 million on the earlier of sufficient receipt of oil proceeds from the Oyo Field or six months from the closing date. This amount was paid in July 2010. In connection with the closing on April 7, 2010, the Company, CAMAC and certain of their respective affiliates entered into a number of ancillary documents to consummate the transaction.
As a result of this transaction, a change in control of the Company has occurred and CAMAC is now a related party. As a result of its controlling interest in the Company, CAMAC has the ability to approve any matter submitted to the Company’s stockholders where a simple majority vote is required to obtain stockholder approval, whether such action is sought through a special or annual meeting or through written consent. Additionally, CAMAC currently owns and controls enough shares to elect the Company’s directors at annual meetings.
Upon closing of the transaction, the Company changed its name to CAMAC Energy Inc., but continues as a publicly-traded entity, separate from CAMAC.
On April 7, 2010, the Company and CAMAC entered into a Registration Rights Agreement, pursuant to which the Company was required to prepare and file with the SEC a registration statement on Form S-3 covering the resale of the Consideration Shares, in addition to providing unlimited “piggyback” registration rights to CAMAC with respect to the Consideration Shares, in each case, subject to certain limitations and conditions. If any Consideration Shares were not covered by a registration statement within 18 months following the closing date, the Company would be required to pay liquidated damages to CAMAC. As required, the Company filed a related Form S-3 with the SEC on May 21, 2010, which became effective on June 4, 2010.
The original purchase cost for the acquisition of CAMAC’s interests in the PSC with respect to the Oyo Field was allocated as follows. The measurement date was the closing date, April 7, 2010. The fair value of the consideration paid was not fixed and determinable prior to closing. The transaction has been accounted for as an acquisition of an asset and does not represent the acquisition of a business.
Following is an analysis of the components for revenues and cost of sales related to crude oil and products for the six months ended June 30, 2010.
As shown in Note 6, one of the assets acquired as part of the Oyo Field interest was inventory. This was for crude oil which had been produced but not yet sold as of the acquisition date. As disclosed in the table of revenues and cost of sales above, virtually all of the crude oil revenues in the six months ended June 30, 2010 arose from the sale of this acquired inventory. At the date of acquisition this inventory had been recorded at fair value as required under applicable accounting principles. Accordingly, the related portion of cost of sales for six months 2010 reflects the liquidation of this inventory based on that recorded cost. For the remainder of crude oil sold in the period (and for future periods), cost rather than fair value is the basis for cost of sales.
NOTE 8. OPERATING SEGMENT DATA
The Company manages its operations on a geographical basis. Commencing with the three months ended June 30, 2010, the Company’s two operating segments are Africa and Asia. Previously the Company did not report by segments as there was only one operating segment.
The Company has no intersegment revenues.
Segment performance is measured on an after-tax operating basis. Corporate income and expense items for interest income and expense, corporate administrative costs, stock-related compensation and noncontrolling interests are not allocated to segments.
Segment assets below exclude intercompany receivables, intercompany investments, cash and cash equivalents, cash investments and marketable securities.
In March 2009, the Company issued 970,000 shares of Company Common Stock, to Richard Grigg, the Company’s Senior Vice President and Managing Director, in exchange for 3,825,000 Ordinary fully paid shares of Sino Gas & Energy Holdings Limited (SG&E) owned by Mr. Grigg. This represented approximately 3.26% of the outstanding shares of SG&E as of March 9, 2009. The acquired shares were originally accounted for by the Company as a non-current investment carried at cost. Commencing with the interim period ending September 30, 2009 the carrying amount was recorded at fair value, due to SG&E trading publicly on the Australian Stock Exchange beginning September 15, 2009. Mr. Grigg is a former executive of SG&E who joined the Company in October 2007. The SG&E shares were acquired in or der to eliminate possible conflicts of interest involving Mr. Grigg regarding possible future transactions that may occur between the Company and SG&E, as both companies’ business plans involve developing operations in China.
Relationships with Li Xiangdong
During the third quarter of 2009, the Company conducted its enhanced oil recovery and production business prior to incorporation of its Chinese joint venture company, Beijing Dong Fang Ya Zhou Petroleum Technology Service Company Limited (Dong Fang), through an arrangement with Tongsheng, a subsidiary of the family owned business of Mr. Li Xiangdong (LXD). Upon the incorporation of Dong Fang in China on September 24, 2009, LXD became a 24.5% interest owner in Dong Fang. The patent application rights and related technology for the specialty chemicals and processes in this business have been contributed to Dong Fang by LXD. The original arrangement with Tongsheng was necessary because, pending the incorporation of Dong Fang, the Company was not licensed in China to purchase, blend or sell chemicals. Dong Fang does not presently have a licen se to manufacture finished chemicals. Under the most current arrangement with Tongsheng for finished product sales, Tongsheng purchases raw chemicals from Dong Fang, manufactures specialty blends of chemicals using technology developed by LXD, and sells the finished product to the Company’s customers. Tongsheng remits to the Company revenues it collects in advance of delivering finished product to customers and bills the Company for the related costs.
Employment Agreement with Jamie Tseng
The Company was a party to an Employment Agreement with Jamie Tseng, the Company’s former Executive Vice President (the “Tseng Employment Agreement”), dated April 22, 2009 and effective January 1, 2009. The Tseng Employment Agreement governed the employment of Mr. Tseng in the capacity of Executive Vice President of the Company until Mr. Tseng’s retirement effective January 15, 2010, and provided for a base salary of $140,000 per year, and provided that, in the event the Company terminated Mr. Tseng’s employment without Cause (as defined in the Tseng Employment Agreement), the Company would have been required to pay to Mr. Tseng a lump sum amount equal to 50% of Mr. Tseng’s then-current annual base salary. Mr. Tseng retired from his employment with the Company effective Januar y 15, 2010, and in connection with Mr. Tseng’s retirement, the Company and Mr. Tseng entered into a Separation and Release Agreement pursuant to which Mr. Tseng provided a general release of all claims against the Company in exchange for the release by the Company of repurchase rights with respect to an aggregate of 61,572 shares of unvested restricted Company Common Stock held by Mr. Tseng, the acceleration of vesting with respect to options to purchase 40,800 shares of the Company’s Common Stock held by Mr. Tseng, the award of 20,000 shares of restricted Company Common Stock to Mr. Tseng, a lump sum payment of $50,000 to Mr. Tseng, and the continued payment by the Company of the Beijing office lease through February 2010 that was used by Mr. Tseng.
Employment Agreement with Stephen F. Groth
The Company and Stephen F. Groth, its former Chief Financial Officer, were parties to an employment agreement (the “Groth Agreement”) through the date of Mr. Groth’s voluntary retirement on May 17, 2010. The Groth Agreement contained, among other things, severance payment provisions that required the Company to continue Mr. Groth’s salary for 36 months and his benefits for 24 months if employment was terminated without “cause,” as such term is defined in the Groth Agreement, and to make a lump sum payment equal to 48 months salary and continue benefits for 36 months if terminated within 12 months of a “change in control,” as such term is defined in the Groth Agreement. Pursuant to this agreement, Mr. Groth’s annual base salary was $150,000 (c hanged to $165,000 effective January 1, 2008), and he was entitled to an annual bonus of between 20% and 30% of his base salary, as determined by the Company’s Board of Directors based on his performance, the Company’s achievement of financial performance and other objectives established by the Board of Directors each year, provided, however, that annual bonus may be less as approved by the Board of Directors based on his performance and the performance of the Company. Under the agreement, Mr. Groth was eligible for long-term incentive compensation, such as additional options to purchase shares of the Company’s capital stock, on such terms as established by the Board of Directors. Mr. Groth voluntarily retired from his employment with the Company effective May 17, 2010, and in connection with Mr. Groth’s retirement, the Company and Mr. Groth entered into a separately negotiated Separation and Mutual Release Agreement pursuant to which Mr. Groth provided a general rele ase of all claims against the Company in exchange for the Company’s release of all claims against Mr. Groth, the release by the Company of repurchase rights with respect to an aggregate of 64,261 shares of unvested restricted Company Common Stock held by Mr. Groth, the acceleration of vesting with respect to options to purchase an aggregate of 92,332 shares of the Company’s Common Stock held by Mr. Groth, and a lump sum payment of $40,000 to Mr. Groth.
Employment Agreement and Consulting Agreement with Frank C. Ingriselli
The Company and Frank C. Ingriselli, its former President, Chief Executive Officer and member of the Board of Directors, were parties to an employment agreement (the “Ingriselli Agreement”) through the date of Mr. Ingriselli’s voluntary retirement effective August 1, 2010. The Ingriselli Agreement contained, among other things, severance payment provisions that required the Company to continue Mr. Ingriselli’s salary for 36 months and his benefits for 36 months if employment was terminated without “cause,” as such term is defined in the Ingriselli Agreement, and to make a lump sum payment equal to 48 months salary and continue benefits for 48 months if terminated within 12 months of a “change in control,” as such term is defined in the Ingriselli Agreement. Pursuant to th is agreement, Mr. Ingriselli’s annual base salary was $350,000, and he was entitled to an annual bonus of between 20% and 40% of his base salary, as determined by the Company’s Board of Directors, based on his performance, the Company’s achievement of financial performance and other objectives established by the Board of Directors each year, provided, however, that annual bonus may be less as approved by the Board of Directors based on his performance and the performance of the Company. Under the agreement, Mr. Ingriselli was eligible for long-term incentive compensation, such as additional options to purchase shares of the Company’s capital stock, on such terms as established by the Board of Directors. Mr. Ingriselli voluntarily retired from his employment and all positions with the Company effective August 1, 2010, and in connection with Mr. Ingriselli’s retirement, the Company and Mr. Ingriselli entered into a separately negotiated Separation and Mutual Release Agreement pursuant to which Mr. Ingriselli provided a general release of all claims against the Company in exchange for the Company’s release of all claims against Mr. Ingriselli, the release by the Company of repurchase rights with respect to an aggregate of 60,000 shares of unvested restricted Company Common Stock held by Mr. Ingriselli, the acceleration of vesting with respect to options to purchase an aggregate of 154,666 shares of the Company’s Common Stock held by Mr. Ingriselli, and a lump sum payment of $169,166.66 to Mr. Ingriselli.
The Company and Mr. Ingriselli are parties to a consulting agreement, dated August 1, 2010, pursuant to which Mr. Ingriselli serves as an independent consultant to the Company to assist in the transition of his management roles and responsibilities to a successor to be selected by the Company. As compensation, Mr. Ingriselli receives a fee of $40,000 per month. Mr. Ingriselli’s consulting engagement continues through September 30, 2010, but is terminable by the Company prior to such date upon five days’ notice.
Consulting Agreement with William E. Dozier
The Company and William E. Dozier, its Interim Chief Executive Officer and member of the Board of Directors, are parties to a consulting agreement, dated August 1, 2010, pursuant to which Mr. Dozier serves as an independent consultant to the Company. The consulting agreement is terminable by either the Company or Mr. Dozier upon thirty days’ notice. As compensation, Mr. Dozier receives a fee of $30,000 per month, and has been granted 100,000 shares of the Company’s Common Stock pursuant to the Company’s 2009 Equity Compensation Plan, all of which shares shall vest upon the effective date of the Company’s appointment of a new Chief Executive Officer.
Agreements with CAMAC Energy Holdings Limited
See Note 6 regarding the Oyo Field transaction in April, 2010, which resulted in a change in control of the Company and began a related party relationship with the new majority owner and additional parties. Refer to Form 8-K, filed with the SEC on April 13, 2010, and Item 13 of Form 10-K/A for the year ended December 31, 2009, filed with the SEC on April 30, 2010, for information regarding transactions involving the Company and CAMAC Energy Holdings Limited and its affiliates. These related party agreements include the Technical Services Agreement, the Right of First Refusal Agreement, the Oyo Field Agreement, and the Registration Rights Agreement.
Secondment Agreement for Abiola L. Lawal
Abiola L. Lawal, the Company's Executive Vice President and Chief Financial Officer effective August 1, 2010, is under contract in that capacity from May 17, 2010 to September 1, 2010 pursuant to a secondment agreement from CAMAC International Corporation ("CIC"), Mr. Lawal's employer (the "Secondment"). During this time Mr. Abiola Lawal remains an employee of CIC, which is contracting his services to the Company pursuant to the Secondment on a month-to-month basis to serve the Company on a full-time basis, reporting directly to the Company’s Chief Executive Officer. During the term of the Secondment, the Company pays directly to CIC on a monthly basis the pro rata portion of Mr. Lawal’s currently existing $315,000 salary, CIC’s cost of providing employee benefits to Mr. Lawal, the pro rata portion of any cash bonus paid to Mr. Lawal and approved by the Company’s Board of Directors or Compensation Committee, CIC’s share of any employment-related taxes and fees with respect to Mr. Lawal’s employment, and any expenses incurred by CIC at the request of the Company, or otherwise required of CIC in connection with the Secondment.
The Company's Chairman and Director, Dr. Kase Lawal, is also a minority shareholder and director of CIC, as well as an indirect shareholder and control person of CEHL. In addition to being a shareholder of CIC, Dr. Kase Lawal is the Chairman and CEO of that company, and is also a director of CAMAC International Ltd. (“CIL”) and CEHL. Mr. Abiola Lawal and Dr. Kase Lawal have no familial relationship. CIC represents the interests of CEHL and other entities affiliated with CIL (collectively, “CAMAC Entities”), providing technical, administrative, and other assistance to the CAMAC Entities in the United States and overseas. Although some of the shareholders of CIC, including Dr. Kase Lawal, also o wn shares of the CAMAC Entities, the majority ownership of CIC and CIL are different. During the term of Mr. Abiola Lawal's service to the Company pursuant to the Secondment, which is scheduled to end September 1, 2010, he no longer serves as an executive officer of CIC or any party related to CIC or any of the CAMAC Entities.
NOTE 11. REGISTERED DIRECT OFFERINGS OF SECURITIES
On February 16, 2010, the Company consummated the offer and sale (the “February 2010 Offering”) of 5,000,000 shares (the "Shares") of its common stock, par value $0.001 per share ("Common Stock"), for an aggregate purchase price of $20 million, or $4.00 per share (the "Purchase Price"), pursuant to a Securities Purchase Agreement, dated February 10, 2010, among the Company and certain purchasers signatory thereto (the “Purchasers”). In addition, the Company issued to the Purchasers: (1) warrants to purchase up to an additional 2,000,000 shares of Common Stock of the Company, in the aggregate, at an exercise price of $4.50 per share (subject to customary adjustments), exercisable commencing 6 months following the closing for a period of 36 months after such commencement date (the 220;Series A Warrants”); and (2) warrants to purchase up to an additional 2,000,000 shares of Common Stock of the Company, in the aggregate, at an exercise price $4.00 per share (subject to customary adjustments), exercisable immediately at the closing until November 1, 2010 (the “Series B Warrants”, together with the Series A Warrants, the “Warrants”). If all the Warrants are exercised, the Company would receive additional gross proceeds of $17 million. The Shares and the Warrant Shares were sold pursuant to a shelf registration statement on Form S-3 declared effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by the prospectus supplement filed with the SEC on February 12, 2010 and delivered to the Purchasers.
Rodman & Renshaw, LLC (“Rodman”) served as the Company’s exclusive placement agent in connection with the February 2010 Offering. As consideration for its services as placement agent, Rodman received a cash fee equal to 6.0% of the gross proceeds of the February 2010 Offering ($1,200,000), as well as a five year warrant to purchase shares of Common Stock of the Company equal to 3.0% of the aggregate number of shares sold in the February 2010 Offering (150,000 shares of Common Stock). Rodman’s warrant is not exercisable until the six month anniversary of the closing and the exercise price is 125% of the per share purchase price of the shares issued in the offering ($5.00 per share). In addition, subject to compliance with Financial Industry Regulatory Authority ("FINRA") Rule 5110(f)( 2)(D), the Company reimbursed Rodman’s out-of-pocket accountable expenses actually incurred in the amount of $25,000.
On March 5, 2010, the Company consummated the offer and sale (the “March 2010 Offering”) of 4,146,922 shares (the “March 2010 Offering Shares”) of its Common Stock, par value $0.001 per share, for an aggregate purchase price of $17.5 million, or $4.22 per share (the "March 2010 Offering Purchase Price"), pursuant to a Securities Purchase Agreement, dated March 2, 2010, among the Company and certain purchasers signatory thereto (the “March 2010 Offering Purchasers”). In addition, the Company issued to the March 2010 Offering Purchasers: (1) warrants to purchase up to an additional 1,658,769 shares of Common Stock of the Company, in the aggregate, at an exercise price of $4.50 per share (subject to customary adjustments), immediately exercisable following the closing for a period of 42 months (the “Series C Warrants”); and (2) warrants to purchase up to an additional 1,658,769 shares of Common Stock of the Company, in the aggregate, at an exercise price $4.12 per share (subject to customary adjustments), exercisable immediately at the closing until December 5, 2010 (the “Series D Warrants”, together with the Series C Warrants, the “March 2010 Offering Warrants”). If all the March 2010 Offering Warrants are exercised, the Company would receive additional gross proceeds of approximately $14.3 million. The March 2010 Offering Shares and the March 2010 Offering Warrant Shares were sold pursuant to a shelf registration statement on Form S-3 declared effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by the prospectus supplement filed with the SEC on March 3, 2010 and delivered to the March 2010 Offering Purchasers.
Rodman served as the Company’s exclusive placement agent in connection with the March 2010 Offering. As consideration for its services as placement agent, Rodman received a cash fee equal to 6.0% of the gross proceeds of the March 2010 Offering ($1,050,000), as well as a five year warrant to purchase shares of Common Stock of the Company equal to 3.0% of the aggregate number of shares sold in the March 2010 Offering (124,408 shares of Common Stock). Rodman’s warrant is not exercisable until the six month anniversary of the closing and the exercise price is 125% of the per share purchase price of the shares issued in the March 2010 Offering ($5.275 per share). In addition, subject to compliance with FINRA Rule 5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable expense s actually incurred in the amount of $25,000.
Net proceeds from the above two offerings have been used by the Company for working capital and to fund the Company’s acquisition from CAMAC of the Contract Rights with respect to the Oyo Field, which began production in December 2009. See Note 6.
NOTE 12. FINANCIAL INSTRUMENTS FAIR VALUES AND FAIR VALUE ADJUSTMENTS
The June 30, 2010, balance sheet includes an available-for-sale equity investment in a nonsubsidiary company carried at a fair value of $98,000. The fair value was determined using “Level 1” inputs as defined in ASC Topic 820 (Fair Value Measurements and Disclosures). Level 1 inputs represent inputs observable in an active market, which in this case is a public active stock market.
At June 30, 2010, the carrying amounts of the Company’s other financial instruments, which include cash equivalents, short- and long-term investments, trade receivables, deposits, long-term advances, accounts payable and accrued expenses approximate their fair values, due to the short-term nature and maturities of many of the above listed items.
NOTE 13. RIGHTS OFFERINGS OF SINO GAS & ENERGY HOLDINGS LIMITED
As disclosed in Note 10 – Related Party Transactions, the Company in 2009 acquired a noncontrolling interest in Sino Gas & Energy Holdings Limited (SGE), which is accounted for as an investment carried at fair value based on the public market price. In April and May 2010, SGE offered to sell additional common equity through a rights offering that was terminated in May 2010 due to a decline in volume weighted average market price of SGE’s shares to below the price per share in the offering. In June 2010, SGE completed a new rights offering at a lower price per share than the original offering. The Company did not exercise its purchase rights under the offering. As a result, our equity percentage ownership in SGE has been diluted. As of June 30, 2010, our financial state ments reported the unrealized loss on SGE shares as a temporary impairment based on conditions existing at that date. The Company will monitor future developments in SGE as they may affect the accounting for this investment.
NOTE 14. LITIGATION AND CONTINGENCIES
At June 30, 2010, the Company was not aware of any litigation, actual or potential, which could have a material effect on its financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
In the interim period ended June 30, 2010, the Company has ceased reporting as a development stage company and now reports as an operating company with significant revenues. The Company’s focus continues to be the development of new energy ventures, directly and through joint ventures and other partnerships in which it may participate that will provide value to its stockholders.
Members of the Company’s senior management team have experience in the fields of international business development, strategy, finance, petroleum engineering, geology, field development and production, and operations. Several members of the Company’s management team have held management and executive positions with international energy companies and have managed energy projects in Africa, China, elsewhere in Asia and in other parts of the world. Members of the Company’s management team also have experience in oil drilling, operations, geological engineering and government relations in Africa’s and China’s energy sectors.
The Company was originally incorporated in Delaware on December 12, 1979 as Gemini Marketing Associates Inc., subsequently changed its name to Pacific East Advisors, Inc., and on May 7, 2007 consummated a reverse merger involving predecessor company IMPCO and ADS (the “Mergers”), in connection with which the Company changed its name to Pacific Asia Petroleum, Inc. Under applicable accounting standards, IMPCO was defined as the acquiring company in the Mergers. The reportable results of operations for the Company through the date of the Mergers of May 7, 2007 are comprised only of the historical results of the former IMPCO. For purposes of financial reporting, the inception of the Company is reflected as August 25, 2005, the inception date of IMPCO. The Company’s name was changed to CAMAC Energy Inc. effective April 7, 2010.
On April 7, 2010, the Company closed its previously announced acquisition of all of the interests held by CAMAC Energy Holdings Limited (“CEHL”) and certain of its affiliates ( collectively, “CAMAC”) in a Production Sharing Contract with respect to an oilfield asset known as the Oyo Field. This major milestone results in the recognition of significant revenue and cash flow from operations for the first time in the history of the Company. The Production Sharing Contract governing the Oyo Field is by and among Allied Energy Plc (formerly, Allied Energy Resources Nigeria Limited, and an affiliate of CEHL), CAMAC International (Nigeria) Limited (an affiliate of CEHL), and Nigerian Agip Exploration Limited. The allocation of the total purchase cost is set forth in Note 6 of the Company's Con densed Consolidated Financial Statements (unaudited) as of June 30, 2010 included in this Report.
OYO FIELD PRODUCTION SHARING CONTRACT INTEREST
On November 18, 2009, the Company entered into the Purchase and Sale Agreement with CAMAC Energy Holdings Limited and certain of its affiliates (“CAMAC”) pursuant to which the Company agreed to acquire all of CAMAC’s interest in production sharing contract rights with respect to the oilfield asset known as the Oyo Field (the “Contract Rights”) and agreed to the related transactions contemplated thereby, including the election of directors of the Company.
As consideration for the Contract Rights, on April 7, 2010 the Company paid CAMAC Energy Holdings Limited (“CEHL“) $32 million in cash consideration (the “Cash Consideration”) and issued to CEHL 89,467,120 shares of Company Common Stock, par value $0.001, representing approximately 62.74% of the Company’s issued and outstanding Common Stock at closing (the “Consideration Shares”). In addition, if certain issued and outstanding warrants and options exercisable for an aggregate of 7,991,948 shares of Company Common Stock are exercised following the closing, then the Company is obligated to issue up to an additional 13,457,188 Consideration Shares to CEHL to maintain CEHL’s approximately 62.74% interest in the Company. As additional Cash Consideration, the Company agreed to pay CEHL $6.84 million on the earlier of sufficient receipt of oil proceeds from the Oyo Field or six months from the closing date. This amount was paid in July 2010.
The Company raised $37.5 million in two registered direct offerings (described below), $32 million of which proceeds were used by the Company to satisfy the cash purchase price requirement under the Purchase and Sale Agreement, as amended.
ZIJINSHAN BLOCK CBM OPERATIONS
On April 2, 2008, the Company received written confirmation that the Ministry of Commerce of The People’s Republic of China approved the entry by the Company’s subsidiary, PAPL, into that certain Production Sharing Contract entered into on October 26, 2007 with China United Coalbed Methane Corp. Ltd. for the exploitation of coalbed methane (“CBM”) resources in the Zijinshan block, which is a 175,000 acre area located in the Shanxi Province of China (the “Zijinshan Block”).
During 2009, the Company completed seismic data acquisition operations on the Zijinshan Block, including spending approximately $1.5 million to shoot 162 kilometers of seismic under the work program. This seismic data has since been processed and interpreted by the Company. Based on the seismic interpretation, four potential well locations have been identified. A regional environmental impact assessment study (“EIA”) was also completed by the Company. Following completion of a site specific EIA study, the Company spudded well ZJS-01. This well was targeted at the 4/5 coal seams in the Shanxi formation and 8/9 coal seams in the Taiyuan formation. The well was completed in November 2009. Based on the results of this well, the Company plans to drill two additional exploratory wells in the Zi jinshan Block as part of the 2010 approved work program at a total cost for the work program of approximately $2.8 million, subject to availability of funding. Drilling of the two additional exploratory wells is expected to commence during the second half of year 2010.
HANDAN GAS DISTRIBUTION VENTURE INTEREST
On July 7, 2009 the Company announced that its China affiliate, Inner Mongolia Sunrise Petroleum Co. Ltd., had entered into a Letter of Intent with Handan Hua Ying Company Limited (“Handan”), relating to the acquisition of a 49% ownership interest in the Handan Chang Yuan Natural Gas Company, Ltd. (“HGC”) held by Handan. HGC owns and operates gas distribution assets in and around Handan City in the Hebei Province of the People’s Republic of China. This Letter of Intent has expired, and the Company is considering its options on whether to continue to pursue this opportunity.
ENHANCED OIL RECOVERY AND PRODUCTION (EORP)
In May and June 2009, the Company and its wholly-owned Hong Kong subsidiary, PAPE, entered into certain agreements with Mr. Li Xiangdong (“LXD”) and Mr. Ho Chi Kong (“HCK”), pursuant to which the parties in September 2009 formed a Chinese joint venture company, Beijing Dong Fang Ya Zhou Petroleum Technology Service Company Limited (“Dong Fang”). Dong Fang is 75.5% owned by PAPE and 24.5% owned by LXD, and LXD agreed to assign certain pending patent rights related to chemical enhanced oil recovery thereto. To date, LXD and HCK have each been paid $250,000 as required under the respective agreements. HCK has also received a 30% ownership interest in PAPE, with the Company retaining 70% ownership. In addition, the Company has issued to HCK 100,000 shares of Common Stock of the Company and unvested options to purchase up to 400,000 additional shares of Common Stock of the Company at an exercise price of $4.62 per share. The Company has agreed to issue 300,000 more shares of Company Common Stock to HCK upon the signing of certain contracts by Dong Fang with respect to the Fulaerjiqu oilfield. The options’ vesting is contingent upon the achievement of certain milestones related to the entry by Dong Fang into certain EORP-related development contracts pertaining to oilfield projects in the Fulaerjiqu Oilfield. These contracts are anticipated to each provide to Dong Fang a significant percentage of the oil produced and/or fixed fees per ton for the incremental production achieved. In addition, LXD has been engaged as a consultant by Dong Fang to provide research and development services, training, and assistance in promoting certain other opportunities developed by him that target the application of the technology embodied in the patent rights, including assistance with entering into a contract with respect to the Liaohe Oilfield (the “Liaohe Contract”), and helping to develop projects in both the Shandong Province and the Xinjiang autonomous region of The People’s Republic of China for the provision and application of technology and chemicals developed by LXD.
In 2009, the Company agreed to loan up to $5 million to PAPE, which may then invest up to RMB 30,000,000 (approximately $ 4.4 million) into Dong Fang, including a requirement to invest RMB 22,650,000 as PAPE’s share of the registered capital of Dong Fang when and to the extent required under applicable law, to be used by Dong Fang to carry out work projects, fund operations, and to make aggregate payments of up to $1.5 million in cash to LXD and HCK, which includes amounts already paid to date. The payments to LXD and HCK are subject to the achievement of certain milestones, which include the formation of Dong Fang, the transfer of the patent rights to Dong Fang, the signing of the contracts with respect to the Fularjiqu Oilfield and the Liaohe Contract by Dong Fang, and certain production - -based milestones resulting from the implementation of these contracts. The loans from the Company to PAPE are to be repaid from funds distributed to PAPE by way of dividends or other appropriate payments from Dong Fang.
In late 2009, the Company commenced limited EORP operations in the Liaoning Province through the treatment of three pilot test wells in the Liaohe Oilfield utilizing the chemical treatment technology acquired by Dong Fang. Results of these efforts, which resulted in incremental production, are still being evaluated by the Company. Dong Fang has realized minimal revenues to date from these EORP activities as they continue in the test phase.
Dong Fang continues to generate revenues from the sale of raw chemicals to Tongsheng, a related party owned by the family of LXD, for the blending and sale of finished chemicals to third parties.
REGISTERED DIRECT OFFERINGS OF SECURITIES
On February 16, 2010, the Company consummated the offer and sale (the “February 2010 Offering”) of 5,000,000 shares (the "Shares") of its common stock, par value $0.001 per share ("Common Stock"), for an aggregate purchase price of $20 million, or $4.00 per share (the "Purchase Price"), pursuant to a Securities Purchase Agreement, dated February 10, 2010, among the Company and certain purchasers signatory thereto (the “Purchasers”). In addition, the Company issued to the Purchasers: (1) warrants to purchase up to an additional 2,000,000 shares of Common Stock of the Company, in the aggregate, at an exercise price of $4.50 per share (subject to customary adjustments), exercisable commencing 6 months following the closing for a period of 36 months after such commencement date (the 220;Series A Warrants”); and (2) warrants to purchase up to an additional 2,000,000 shares of Common Stock of the Company, in the aggregate, at an exercise price $4.00 per share (subject to customary adjustments), exercisable immediately at the closing until November 1, 2010 (the “Series B Warrants”, together with the Series A Warrants, the “Warrants”). If all the Warrants are exercised, the Company would receive additional gross proceeds of $17 million. The Shares and the Warrant Shares are to be sold pursuant to a shelf registration statement on Form S-3 declared effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by the prospectus supplement filed with the SEC on February 12, 2010 and delivered to the Purchasers.
Rodman & Renshaw, LLC (“Rodman”) served as the Company’s exclusive placement agent in connection with the February 2010 Offering. As consideration for its services as placement agent, Rodman received a cash fee equal to 6.0% of the gross proceeds of the offering ($1,200,000), as well as a five year warrant to purchase shares of Common Stock of the Company equal to 3.0% of the aggregate number of shares sold in the offering (150,000 shares of Common Stock). Rodman’s warrant is not exercisable until the six month anniversary of the closing and the exercise price is 125% of the per share purchase price of the shares issued in the offering ($5.00 per share). In addition, subject to compliance with Financial Industry Regulatory Authority ("FINRA") Rule 511 0(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable expenses actually incurred in the amount of $25,000.
On March 5, 2010, the Company consummated the offer and sale (the “March 2010 Offering”) of 4,146,922 shares (the “March 2010 Offering Shares”) of its Common Stock, for an aggregate purchase price of $17.5 million, or $4.22 per share (the "March 2010 Offering Purchase Price"), pursuant to a Securities Purchase Agreement, dated March 2, 2010, among the Company and certain purchasers signatory thereto (the “March 2010 Offering Purchasers”). In addition, the Company issued to the March 2010 Offering Purchasers: (1) warrants to purchase up to an additional 1,658,769 shares of Common Stock of the Company, in the aggregate, at an exercise price of $4.50 per share (subject to customary adjustments), immediately exercisable following the closing for a period of 42 months (the “Series C Warrants”); and (2) warrants to purchase up to an additional 1,658,769 shares of Common Stock of the Company, in the aggregate, at an exercise price $4.12 per share (subject to customary adjustments), exercisable immediately at the closing until December 5, 2010 (the “Series D Warrants”, together with the Series C Warrants, the “March 2010 Offering Warrants”). If all the March 2010 Offering Warrants are exercised, the Company would receive additional gross proceeds of approximately $14.3 million. The March 2010 Offering Shares and the March 2010 Offering Warrant Shares were sold pursuant to a shelf registration statement on Form S-3 declared effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by the prospectus supplement filed with the SEC on March 3, 2010 and delivered to the March 2010 Offering Purchasers.
Rodman served as the Company’s exclusive placement agent in connection with the March 2010 Offering. As consideration for its services as placement agent, Rodman received a cash fee equal to 6.0% of the gross proceeds of the March 2010 Offering ($1,050,000), as well as a five year warrant to purchase shares of Common Stock of the Company equal to 3.0% of the aggregate number of shares sold in the March 2010 Offering (124,408 shares of Common Stock). Rodman’s warrant is not exercisable until the six month anniversary of the closing and the exercise price is 125% of the per share purchase price of the shares issued in the March 2010 Offering ($5.275 per share). In addition, subject to compliance with FINRA Rule 5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable expense s actually incurred in the amount of $25,000.
Net proceeds from the above two offerings have been used by the Company for working capital purposes, and to fund the Company’s acquisition from CAMAC of the Contract Rights with respect to the Oyo Field, which was in production at the date of acquisition in April 2010.
FUNDING
To date the Company has raised approximately $59.1 million, gross, in equity financings to fund its ongoing working capital requirements, as well as actual and possible acquisition and development activities. In order to fully implement its business strategy, it is possible that the Company will need to raise additional capital, including debt to lower the overall cost of capital. In the event the Company is unable to raise such capital on satisfactory terms or in a timely manner, the Company would be required to significantly revise its business plan.
In the three months ended June 30, 2010, the Company, after paying $32 million cash as part of the purchase price, commenced realizing positive cash flow from its economic interest in the Production Sharing Contract (“PSC”) with respect to the Oyo Field in Nigeria acquired from CAMAC in April 2010. However, the amount of cash realized in the initial period included a non-recurring amount of $13.8 million due to collection of receivables recorded in April 2010 as part of assets acquired in the Oyo Field interest acquisition. In July 2010, $6.8 million of this amount was used to liquidate the existing deferred cash purchase price obligation to CAMAC existing at the acquisition date. The amount of cash realized in future periods from the Oyo Field economic interest will be affected by our share of net production volumes and the price per barrel realized on sale of the production. This provides a source of cash from operations and a basis for future growth.
You should read the information in this Item 2 together with our unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this Report.
Plan of Operation
The following describes in general terms the Company’s plan of operation and development strategy for the twelve-month period ending June 30, 2011 (the “Next Year”). The April 2010 acquisition of CAMAC’s economic interest in the PSC with respect to the Oyo Field in Nigeria may or may not result in future participation of the Company in funding of additional development in this field, depending on the Company’s assessment of the expected economic returns and availability of funds. However, the Company is not contractually obligated to provide a portion of that funding. During the Next Year, the Company plans to continue operations in its 100% owned and operated Zijinshan Block. These operations are expected to include the drilling of two additional wells in 2010, as well as und ertaking appropriate laboratory testing and other activities. The Company also plans to continue putting into commercial use the new EORP technology to produce incremental oil in oilfields located in the Heilongjiang, Liaoning, Shandong, Henan and Xinjiang Provinces in China through the operations of Dong Fang. The Company will also assess the applicability of the new EORP technology to the Company’s August 2006 Contract for Cooperation and Joint Development with Chifeng Zhongtong Oil and Natural Gas Co. (“Chifeng”), pursuant to which drilling operations commenced in October 2006 and were subsequently suspended in 2007 pending receipt of a production license from the Chinese government. The Company’s revised strategy with regards to Chifeng is to seek to enhance all the relevant parties’ economic positions and use these benefits to acquire the necessary production licenses in order to carry out the plans under that agreement.
In addition to these opportunities, the Company is continuing to seek to identify other opportunities in the global energy sector that may enhance its production and cash flow, particularly with respect to oil and gas exploration, development, production, refining and distribution. During the time we were a development stage company, we were limited in our ability to grow by the availability of capital for our businesses and each project. The Company’s ability to successfully consummate any of its projects, including the projects described above, is contingent upon the payment of any required deposits, obtaining the necessary governmental approvals and executing binding agreements to obtain the rights we seek within limited timeframes.
The Company has assembled a management team with experience in the fields of international business development, petroleum and geologic engineering, geology, petroleum field development and production, petroleum operations, strategy, government relations and finance. Members of the Company’s management team previously held positions in similar oil and gas development, and screening roles with international energy companies and will seek to utilize their contacts in Africa, Asia and with CAMAC in the U.S. to provide us with access to a variety of energy projects. Among the strategies that we plan to use are:
| | ● | Focusing on projects that play to the expertise of our management team; |
| | ● | Leveraging our productive asset base and capabilities to develop additional value; |
| | ● | Actively managing our assets and ongoing operations while attempting to limit capital exposure; |
| | ● | Enlisting external resources and talent as necessary to operate/manage our properties during peak operations; |
| | ● | Implementing an exit strategy with respect to each project with a view to maximizing asset values and returns; and | |
| ● | Leverage our rights of first refusal on CAMAC projects to preview and negotiate additional value-added projects from the CAMAC project pipeline. | |
Product Research and Development
The Company to date has not engaged in any product research or development, however, it does anticipate that Dong Fang will engage in research and development related to its new EORP technology during the Next Year.
Liquidity and Capital Resources
The Company has sufficient funds to fund all of its currently committed operations for the Next Year. The discussion below considers the Company’s ability to fund its operations and overhead expenses.
As of June 30, 2010, the Company had net working capital of $14,502,000, which included cash, cash equivalents and short-term investments of $22,177,000. However, $6,840,000 of this amount was utilized in July 2010 to satisfy the deferred cash portion of the purchase price for an economic interest in the PSC with respect to the Oyo Field in Nigeria. For the six months ended June 30, 2010, the Company incurred a net loss attributable to common stockholders of $6,346,000.
Net cash provided by operating activities for the first six months of 2010 was $13,236,000 compared to net cash used in operating activities of $3,572,000 for the first six months of 2009. Year 2010 was affected by positive post-acquisition effects of the Oyo Field interest. Cash provided by operations for the first six months of 2010 includes approximately $19,400,000 from the collection of receivables and liquidation of the profit oil portion of inventories acquired in the Oyo asset purchase. This benefit was partly offset by cash expenses incurred in the normal course of business and a reduction in accrued liabilities.
Net cash used in investing activities was $30,650,000 for the first six months of 2010, as compared to net cash provided by investing activities of $1,622,000 for the first six months of 2009. The net change of $32,272,000 was principally due to the $32,000,000 cash payment in April 2010 as partial consideration for the Oyo Field interest. Net cash provided by financing activities in the first six months of 2010 was $35,736,000 versus zero in the first six months of 2009. The 2010 amount was due principally to two registered direct offerings of equity securities in 2010.
Our working capital requirements will depend upon numerous factors, including possible capital demands related to the Oyo Field, progress of our exploration and development programs, progress of our EORP efforts, market developments and the status of our competitors. Our available working capital and continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing, strategic alliances, and cash provided by future operations of our newly acquired economic interest in the PSC with respect to the Oyo Field. Such additional funds may not always become available on acceptable terms, if at all, and any additional funding obtained may not be sufficient to meet our needs in the long-term. Through June 30, 2010 virtually all of our financing has been raised throu gh private placements and registered direct offerings of equity securities. The Company at June 30, 2010 had no credit lines for financing and no short-term or long-term debt other than $6.8 million related to the Oyo Field acquisition which was paid in July 2010. Our currrent position of zero debt as of July 2010 provides opportunities to optimize capital for future projects.
We intend to continue to fund operations from cash on hand, cash provided by our economic interest in the PSC with respect to the Oyo Field and through the above other previously described sources of capital for the foreseeable future. Any additional capital that we are able to obtain may not be sufficient to meet our needs. We believe we will continue to require cash for China operating activities for the next 1-2 years. The extent to which we will need additional equity or debt financing to expand our operations in the future will depend upon the rate of spending in our development plans and the amount of cash provided from our share of sales of oil production from the Oyo Field.
By adjusting our operations and rate of development to available cash resources, we believe we can have sufficient cash resources to meet projected cash flow deficits for operations other than the Oyo Field. However, if during the Next Year or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
To the extent the Company acquires additional oil & gas assets and other energy- related investments and rights, consistent with its business plan, the Company may also need to raise additional funds for such projects.
As a result of limited capital resources, the Company has relied on the issuance of equity securities as a significant means of compensating employees and non-employees for services. The Company enters into equity compensation agreements with non-employees if it is in the best interest of the Company and in accordance with applicable federal and state securities laws. In order to conserve its operating capital resources, the Company may continue to compensate employees and non-employees partially with equity compensation for services.
Results of Operations
In the three months ended June 30, 2010, the Company commenced recording significant revenues from operations. We may experience fluctuations in operating results in future periods due to a variety of factors, including changes in daily crude oil production volumetric rates, changes in crude oil sales prices per barrel, our ability to obtain additional financing in a timely manner and on terms satisfactory to us, our ability to successfully develop our business model, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements, and strategic alliances, and general economic conditions specific to our industry.
Africa Operations
Our Africa operations are comprised of an economic interest in the PSC for the Oyo Field in offshore Nigeria. The Oyo Field commenced crude oil production in December 2009, and the Company acquired its economic interest on April 7, 2010 from CAMAC Energy Holdings Limited and certain of that company’s affiliates. Under the structure of the PSC, crude oil produced is allocated among royalty oil (for royalties payable to the Nigerian government), cost oil (for recovery of capital and operating costs), tax oil (for income taxes payable to the Nigerian government), and profit oil which is allocated 100% to the operating interest owners. Past expenditures for capital and operating costs of this field since the commencement of the PSC with the current partner have been funded entirely by the othe r partner. There are also certain pre-PSC costs incurred which may ultimately qualify for inclusion in the cost base for recovery as cost oil upon approval by the applicable Nigerian authorities. A portion of these costs would be allocable to the Company’s interest. To date, two oil producing wells have been drilled and are in production. The development plan provides for at least two additional oil producing wells, which if successful would result in increased production rates for the field and additional revenues and cash flows.
The Company reports its share of net production barrels in the period physically produced and reports sales revenue for the related barrels only when a lifting (sale) occurs. Production for the entire field is stored in an offshore FPSO vessel until sufficient tanker-size quantity is available for lifting. At present, liftings occur once every two to three months. The exact timing of liftings is affected by the rate of daily production. The Company’s share of net production (excludes royalties and share of other partner) for the period April 7 to June 30, 2010 (85 days) averaged 846 barrels per day from two oil producing wells. Inventory barrels included in the assets acquired at April 7, 2010 are excluded from the Company’s production volumetric statistics as this amount const itutes physical production prior to the acquisition date. Revenue per barrel on crude oil sold in the six month and three month interim periods ended June 30, 2010 was $87.37.
The net operating income for the Africa operations shown below for the six month and three month interim periods ended June 30, 2010 should not be viewed as predictive of results for future periods. This is because virtually all of the crude oil revenue in the six month and three month periods ending June 30, 2010 arose from the sale of crude oil inventory included in the Oyo Field assets acquired on April 7, 2010 and recorded at fair value at that date under applicable accounting principles. This fair value per barrel approximated the ultimate sales price per barrel realized in the subsequent April 2010 third party lifting (sale) of Oyo Field crude oil. The initial inventory amount was fully charged to cost of sales against the April 2010 sale under the Company’s first in, first out accounting metho d for valuing inventories. Thus the Company recorded only a small profit margin on the initial inventory that was liquidated in April 2010 although significant sales revenues were recorded. The April 2010 sale constituted the only Oyo Field sales revenue recorded in the six month and three month interim periods ending June 30, 2010.
Asia Operations
Our Asia active operations in China comprise two principal areas of focus at present --- coalbed methane (CBM) development and enhanced oil recovery and production (EORP) development.
In the Zijinshan Block located in Shanxi province, the Company performed seismic work in 2009 and drilled its first exploratory well in late 2009. Later in 2010 the Company plans to drill two additional exploratory wells with an expected drilling cost totaling $2 million included in total expected expenditures of $4 million for the year. Under the production sharing contract covering this area, the Company is obligated to drill an additional four wells in future periods, estimated to cost $1 million each, for a total of seven wells in the exploratory phase before commencement of formal development. Therefore, no revenues are expected from this area in 2010 and 2011.
The EORP activities involve two aspects. First, revenue is currently realized through sales of our proprietary formula mixed EORP chemicals by a third party company to customers for EORP treatment of their oil wells. Our intention is to expand the amount of this activity. Second, we are evaluating prospective projects for application of our EORP technology in China involving our proprietary formula mixed EORP chemicals in which the Company would perform the well treatment either as contractor or as part interest holder in a production sharing contract. In late 2009 and early 2010, a total of three pilot test wells were treated in the Liaohe oilfield. Pending the signing and further evaluation of agreements on prospective projects, we are not able to project when signi ficant revenues from this aspect of EORP activities may be realized, if at all.
Segment Analysis
Our segment analysis that follows is segmented on a geographic basis between our active operations in Africa (Nigeria) and Asia (China) for revenues and among Africa, Asia and Corporate for net income/loss. This is based upon the current management structure of our Company.
| (In thousands) | | Six months | | | Three months | |
| | | ended June 30, | | | ended June 30, | |
| Revenues | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Africa | | $ | 12,248 | | | $ | - | | | $ | 12,248 | | | $ | - | |
| Asia | | | 172 | | | | - | | | | 95 | | | | - | |
| Total | | $ | 12,420 | | | $ | - | | | $ | 12,343 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Six months | | | Three months | |
| | | ended June 30, | | | ended June 30, | |
| Net Income (Loss) | | | 2010 | | | | 2009 | | | | 2010 | | | | 2009 | |
| Africa | | $ | 203 | | | $ | - | | | $ | 203 | | | $ | - | |
| Asia | | | (1,241 | ) | | | (2,345 | ) | | | (637 | ) | | | (480 | ) |
| Corporate and other | | | (5,308 | ) | | | (2,736 | ) | | | (2,738 | ) | | | (1,679 | ) |
| Net income (loss) - CAMAC Energy Inc. | | | | | | | | | | | | | | | | |
| and Subsidiaries | | $ | (6,346 | ) | | $ | (5,081 | ) | | $ | (3,172 | ) | | $ | (2,159 | ) |
Revenues and net income for Africa in the six months and three months ended June 30, 2010 reflected initial crude oil sales revenues since the acquisition in April 2010 of the Oyo Field production sharing contract interest.
Revenues in Asia for the six months and three months ended June 30, 2010 related to sales of EORP chemicals. There were no revenues of this type in the comparable 2009 periods. Net losses in Asia decreased in the six months ended June 30, 2010 versus the comparable period in 2009 due to decreased exploratory expenses. For the three months ended June 30, 2010, net operating losses increased versus the comparable period in 2009 principally due to increased salaries and bonus expenses, increased EORP-related expenses, and increased consulting expenses, partially offset by decreased exploratory expenses. There was a temporary decline in exploratory activity in the Zijinshan Block in both 2010 periods during further review and planning for the drilling of additional wells later in 2010.
Net operating losses for Corporate and other items increased in the six months ended June 30, 2010 versus the comparable 2009 periods principally due to increased salaries and bonus expense of $316,000 and increased stock-based employee compensation expense of $1,690,000. The latter included $981,000 for the effects of accelerating the vesting dates of certain awards previously granted to two former executive officers who retired in January 2010 and May 2010, net of reversal of expense on their forfeited awards. Also impacting this period were increases in NYSE Amex listing fees and corporate insurance expense.
Net operating losses for Corporate and other items increased in the three months ended June 30, 2010 versus the comparable 2009 periods principally due to increased salaries and bonus expense of $195,000 and increased stock-based employee compensation expense of $721,000. The latter included $604,000 for the effects of accelerating the vesting dates of certain awards previously granted to a former executive officer who retired in May 2010, net of reversal of expense on his forfeited awards. Also impacting this period was an increase in corporate insurance expense.
Condensed Consolidated Statements of Income – Operating loss detail
Six months ended June 30, 2010 versus six months ended June 30, 2009
● | Revenues from sales and services: The total revenues of $12,420,000 are due to sales of crude oil from the Oyo Field, sales of finished chemicals from China EORP operations, and services revenues from China EORP operations, as compared to zero revenues for all items in the comparable prior period. |
● | Crude oil and products cost of sales: The total of $12,078,000 is due to the respective items affecting revenues above, as compared to zero in the comparable prior period. |
| Other operating costs and expenses: The increase of $301,000 is principally due to an increase of $410,000 from EORP operations in 2010 which had not yet begun in the comparable prior period. |
| Selling, general and administrative expenses: The increase of $2,673,000 is principally due to increased salaries and bonus expense of $316,000 and increased stock-based employee compensation expense of $1,690,000. Other items with significant increases for the period were payroll taxes, travel, NYSE Amex listing fees, and insurance. |
● | Exploratory expenses: The decrease of $1,337,000 is related to China CBM operations where an exploratory well was drilled in 2009. |
| Depreciation, depletion and amortization: The increase of $118,000 is principally due to depletion expense on the Oyo Field interest acquired in April 2010. |
Three months ended June 30, 2010 versus three months ended June 30, 2009
● | Revenues from sales and services: The total revenues of $12,343,000 are due to sales of crude oil from the Oyo Field, sales of finished chemicals from China EORP operations, and services revenues from China EORP operations, as compared to zero for all items in the comparable prior period. |
● | Crude oil and products cost of sales: The total of $12,020,000 is due to the respective items affecting revenues above, as compared to zero in the comparable prior period. |
● | Other operating costs and expenses: The increase of $382,000 is principally due to an increase of $232,000 from EORP operations in 2010 which had not yet begun in the comparable prior period. |
● | Selling, general and administrative expenses: The increase of $1,081,000 is principally due to increased salaries and bonus expense of $195,000 and increased stock-based employee compensation expense of $721,000. Other items with significant increases for the period were payroll taxes, travel, NYSE Amex listing fees, and insurance, partially offset by a decrease in consulting expense. |
● | Exploratory expenses: The decrease of $202,000 is related to China CBM operations. |
● | Depreciation, depletion and amortization: The increase of $95,000 is principally due to depletion expense on the Oyo Field interest acquired in April 2010. |
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Inflation
It is the opinion of the Company that inflation has not had a material effect on its operations.
Tabular Disclosure of Contractual Obligations
Refer to Part II, Item 7 of the Company’s year 2009 Annual Report on Form 10-K, as amended, for a table summarizing the Company’s significant contractual obligations as of December 31, 2009.
Recently Issued Accounting Standards Not Yet Adopted
As of June 30, 2010 there were no new accounting standards not yet adopted that were expected to have a material effect on the Company in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks relative to foreign currency denominated financial instruments owned for the six months ended June 30, 2010, is not materially different from that provided in Part II, Item 7A of the Company’s 2009 Annual Report on Form 10-K, as amended.
At June 30, 2010, the Company’s exposure to a decrease in income on its short-term investments if interest rates decline was not materially different as compared to December 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including Mr. William E. Dozier, our Interim Chief Executive Officer, and Mr. Abiola L. Lawal, our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010. Based on that evaluation, Mr. Dozier and Mr. Lawal concluded that as of June 30, 2010, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended June 30, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and related discussion in Part I, "Item 1A. Risk Factors" in our 2009 Annual Report, as amended, and in our March 19, 2010 proxy regarding the Oyo Field transaction.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales to United States Persons
On June 16, 2010, the Company issued an aggregate of 3,374 shares of Common Stock to two individuals upon the cashless "net" exercise by such individuals of placement agent warrants held by them exercisable for an aggregate of 4,833 shares of the Company's Common Stock at a price of $1.25 per share. The aggregate number of shares of Common Stock issued upon exercise of the warrants was reduced from 4,833 to 3,374 shares of Common Stock to effect the cashless "net" exercise of the warrants in accordance with their terms, assuming a deemed fair market value of $4.14 per share as calculated under the warrants as the closing price quoted for one share of the Company's Common Stock as reported on the NYSE Amex on the last trading day prior to the exercise date. The warrants were originally issued to Garden State Sec urities, Inc. in its role as a placement agent for the Company on May 7, 2007, and subsequently assigned to the individual warrant holders in August 2007.
On June 22, 2010, the Company issued an aggregate of 4,097 shares of Common Stock to one individual upon the cashless "net" exercise by such individual of placement agent warrants held by her exercisable for an aggregate of 5,833 shares of the Company's Common Stock at a price of $1.25 per share. The aggregate number of shares of Common Stock issued upon exercise of the warrants was reduced from 5,833 to 4,097 shares of Common Stock to effect the cashless "net" exercise of the warrants in accordance with their terms, assuming a deemed fair market value of $4.20 per share as calculated under the warrants as the closing price quoted for one share of the Company's Common Stock as reported on the NYSE Amex on the last trading day prior to the exercise date. The warrants were originally issued to Garden State Securities, Inc. in its role as a placement agent for the Company on May 7, 2007, and subsequently assigned to the individual warrant holders in August 2007.
No underwriters were involved in the transactions described above. All of the securities issued in the foregoing transactions were issued by the Company in reliance upon the exemption from registration available under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder, in that the transactions involved the issuance and sale of the Company’s securities to financially sophisticated individuals or entities that were aware of the Company’s activities and business and financial condition and took the securities for investment purposes and understood the ramifications of their actions. The Company did not engage in any form of general solicitation or general advertising in connection with the transactions. All certificates representing the securities issued h ave a legend imprinted on them stating that the shares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or an exemption applies.
Unregistered Sales to Non-United States Persons
Refer to Item 3.02 of Form 8-K filed with the SEC on April 13, 2010 regarding issuance of 89,467,120 unregistered shares of Common Stock on April 7, 2010 in connection with acquisition of an economic interest in the PSC with respect to the Oyo Field and representations of the Company with regard to the issuance of such shares. The shares were subsequently registered under a Form S-3 which became effective on June 4, 2010.
Stock Repurchases
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this Report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. EXHIBITS
| Exhibit Number | | Description |
| | Certification of the Registrant’s Principal Executive Officer under Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of the Registrant’s Principal Financial Officer under Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of the Registrant’s Principal Executive Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of the Registrant’s Principal Financial Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | CAMAC ENERGY INC. | |
| | | | |
| Dated: August 9, 2010 | By: | /s/ William E. Dozier | |
| | | William E. Dozier | |
| | | Interim Chief Executive Officer | |
