Item 1. and Item 2. Business and Properties
General
New Frontier Energy, Inc. (“NFEI” or the “Company” or “we” or “us”) is currently an independent energy company engaged in the exploration, development, acquisition, and production of natural gas and crude oil. The Company’s current operations are conducted entirely in the continental United States, principally in the Denver Julesberg Basin (“DJ Basin”) in Colorado and the Amazon Prospect (“Amazon”) in the Calcasieu and Jefferson Parishes in Louisiana. We are actively seeking opportunities both within and outside the oil and gas industry to generate growth and shareholder value.
Previously, the Company had operations in the Green River Basin (“GRB”) in Colorado and Wyoming. These assets were sold in April 2011 (see “Recent Developments and Related Transactions” below).
We were originally organized under the laws of the State of Colorado as Storage Finders.com, Inc. on January 7, 2000. In March 2001, we changed our name to New Frontier Energy, Inc. and commenced operations in the oil and gas industry through the acquisition of all of the outstanding shares of Skyline Resources, Inc. Skyline was operated as our subsidiary through the close of business on February 28, 2005, at which time it was merged into the Company.
Our principal office is located at 1801 Broadway, Suite 920, Denver, Colorado 80202, and our telephone number is (303) 730-9994.
Strategy
Our strategy is to deliver net asset value per share growth to our investors via attractive oil and gas investments. Our focus in meeting the goal of building shareholder value is on the successful execution of exploration for and development of onshore plays in the United States through strategic partnerships. We believe that we will be able to create long-term value for our shareholders by targeting low to medium risk projects that offer repeatable success allowing for meaningful production and reserve growth. We may seek opportunities outside the oil and gas industry if such an opportunity is expected to provide meaningful value to our shareholders.
Properties
As of February 28, 2011, we owned interests in DJ Basin and Amazon, all of which is classified as undeveloped acreage. There are no proved reserves as of February 28, 2011 and 2010.
Previously, we owned undeveloped acreage in GRB and a gas gathering pipeline. These assets were sold on April 30, 2011, and qualified as discontinued operations under current accounting guidance.
Recent Developments and Related Transactions
Greater Green River Basin (Discontinued operations - Please see “Our Oil and Gas Operations” below for more details about GRB)
On February 16, 2011, our board of directors approved a plan to sell certain assets we own in GRB, which represented a significant portion of our oil and gas exploration assets and includes our gas gathering pipeline company, SDG (defined below). The board of directors adopted this plan in conjunction with us entering into a Memorandum of Understanding (“MoU”) with Emerald GRB, LLC (“EMR”), a wholly-owned subsidiary of Emerald Oil and Gas NL (“Emerald Australia”), a publicly traded company whose shares trade on the Australian stock exchange. On April 30, 2011 (“Closing Date”), we executed a Purchase and Sale Agreement (“PSA”) with EMR with an effective date of April 1, 2011. The following are the significant terms of the purchase and sell agreement; we will sell our leasehold interests located within Routt and Moffat counties, Colorado, and Carbon and Sweetwater Counties, Wyoming, any equipment or property used in connection with any oil and gas operations related to the assigned leases, our rights and claims under that certain Participation Agreement (as amended) between us and Entek GRB, LLC (“Entek”) dated on or about August 10, 2009, all claims against Slater Dome Gas, Inc. pursuant to case file number 2010 CV 65 filed in the District Court in Moffat County Colorado, and all claims against Slater Dome Gas, Inc. pursuant to case file number 2010 CV 65 filed in the District Court in Moffat County Colorado, and our limited partnership and general partnership interest in Slater Dome Gathering, LLLP (“SDG”). In addition, EMR will assume all liabilities associated with the Assets, except for environmental liabilities arising from the period prior to April 1, 2011.
The consideration was USD 9,565,000 and 125,000,000 free trading EMR ordinary shares. Further, NFEI received certain undertakings relative to liquidity and value with respect to the shares of EMR as part of the purchase price.
Denver Julesberg Basin
On June 4, 2010, the Company entered into a Purchase and Sale Agreement with Carrizo Oil & Gas, Inc. (“Carrizo”) to sell its interest in certain oil and gas leases (the “Leases”) in the DJ Basin in Weld and Morgan Counties, Colorado. The Company received proceeds of approximately $5.0 million (net of related deal expenses) from the sale of the interest in the Leases.
Amazon Prospect
On September 1, 2010 (effective date of April 1, 2010), we entered into a Joint Exploration Agreement (the “Agreement”) with Yuma Exploration and Production Company, Inc. (“Yuma”), whereby we will participate as a ten-percent (10%) working interest owner in the shooting, processing and interpretation of a 70 square mile 3-D seismic survey, the generation of prospects, the acquisition of leases, and the exploration, development and production of oil and gas prospects generated from the 3-D seismic in the Amazon Prospect in the Calcasieu and Jefferson Davis Parishes in Louisiana.
Series C Convertible Preferred Stock
Effective December 1, 2009, the 216,000 outstanding shares of Series C Preferred Stock converted into an aggregate 34,099,265 shares of common stock pursuant to the automatic conversion provisions of the Series C Preferred Stock.
Our Oil and Gas Operations
Denver Julesberg Basin
Commencing in the fall of 2007 through the fall of 2008 we acquired leases for approximately $578,000 in the DJ Basin located in Northeast Colorado from approximately 35 interest owners. On June 4, 2010, we entered into a Purchase and Sale Agreement with Carrizo. The significant terms are as follows;
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Carrizo must drill not less than three Carry Wells (as defined in the Purchase and Sale Agreement) in the 18 months following the closing (the “Drilling Period”) on the sale of the interest in the Leases and carry the Company for a 33 1/3% working interest in each of these wells (subject to adjustment as provided in the Purchase and Sale Agreement). In the event that Carrizo fails to commence the drilling of the three Carry Wells during the Drilling Period, the Leases (except for 640 acre tract associated with any wells that have been drilled) shall be reassigned back to the Company,
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if Carrizo commences drilling three Carry Wells before the end of the Drilling Period, the Company has the option to re-acquire an undivided 1/3 working interest in the Leases. To reacquire the 1/3 working interest in the Leases, the Company shall pay 1/3 of to the total amount Carrizo paid to the Company to acquire the interest in the Leases plus 1/3 of any amount Carrizo has paid to renew, extend or replace the Leases during the Drilling Period.
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the Company and Carrizo entered into an AMI Agreement whereby the Company and Carrizo agreed to create an area of mutual interest in all governmental sections within which the Company owns Leases as of June 4, 2010 (subject to certain exclusions) (the “AMI Territory”). Pursuant to the AMI Agreement, the Company and Carrizo granted the other party the option acquire its proportionate interest, (33 1/3 in the case of the Company and 66 2/3 in the case of Carrizo) in any oil and gas leases and other interests in the AMI Territory.
The Company received an initial advance from the sale of the interest in the Leases of approximately $5.5 million and received an additional $50,307 upon verification of certain Leases. The Company treated this transaction as a sale of a partial interest in an unproved property. When a transaction in which an entity sells oil and gas properties and agrees to repurchase the properties with a repurchase price equal to the original sales price, a financing arrangement exists. Therefore, the Company recorded a gain on sale to the extent that two-thirds of the proceeds ($3.7 million) are recognized as proceeds received and treated the remaining one-third ($1.8 million) as a financing arrangement, resulting in $1.8 million being reflected as a deferred gain on the consolidated balance sheet and as a financing activity in the consolidated statement of cash flows at February 28, 2011.
If this option is exercised, the Company will tender $1.8 million, plus 1/3 of any amount Carrizo has paid to renew, extend or replace the Leases during the Drilling Period to Carrizo in exchange for a 33 1/3 interest assignment in the Leases, which will satisfy the contingent liability. However, if the option expires unexercised, the Company will recognize an additional $1.8 million as a gain on sale of unproved property. The Company recorded a gain of in the consolidated statement of operations of $2.7 million related to this sale.
As of February 28, 2011 and 2010, there were no wells drilled within this area and there are no proved reserves.
On May 2, 2011, Carrizo commenced drilling the Orlando Hill 26-44-8-1 well. This well is a horizontal well targeting the Niobrara formation with an estimated total depth of approximately 7,000 feet and an estimated lateral length of approximately 3,500 feet. The estimated capital cost of this well through completion is approximately $4.4 million.
Amazon Prospect
During fiscal year ended February 28, 2011, the majority of activity in the Amazon Prospect consisted of title research, obtaining seismic permits, executing lease options, drilling seismic shot holes and shooting and recording. The recording of the data will continue until the final source points are acquired. Once the final source point is acquired then the processing of the data can be processed and made available for interpretation. We estimate that the interpretation will occur throughout fiscal year ended February 28, 2012.
There have been no wells drilled on this acreage as of February 28, 2011.
Greater Green River Basin (Discontinued operations)
Prior to April 1, 2011, the acreage in the Greater Green River Basin that we held was primarily made up of the Slater Dome Field and the Focus Ranch Unit. The Slater Dome Field is comprised of approximately 33,000 gross acres (approximately 18,000 net acres) and the Focus Ranch Unit consists of approximately 33,000 gross acres (approximately 25,000 net acres) adjacent to and southeast of the Slater Dome Field in northwest Colorado. We had an approximately 53% working interest in the Slater Dome Field and an approximately 80% working interest in the Focus Ranch Unit.
On August 10, 2009, we entered into a Participation Agreement (the “Participation Agreement”) with Entek GRB LLC (“Entek”) under which Entek agreed to purchase certain assets for $1.0 million and spend up to an additional $11.5 million over three years on exploration and development within this approximately 66,000 gross acres (the “Underlying Leases”) to earn up to 55% of our interest in the Underlying Leases and certain of our other assets, including the partnership interests in SDG (collectively the “Assets”). We also created an area of mutual interest (the “Area of Mutual Interest”) in all lands located in Routt County, Colorado, Moffat County, Colorado, Sweetwater County, Wyoming, and Carbon County, Wyoming. Pursuant to the Area of Mutual Interest, Entek shall be entitled to participate for up to 55% in any additional interest acquired within the Area of Mutual Interest by us and we shall be entitled to participate for up to 45% in any additional interest acquired within the Area of Mutual Interest by Entek.
Entek has the right to participate in the exploration and development of the Underlying Leases, and the right to earn assignments of interests in the Assets in three phases. On August 10, 2009, Entek irrevocably committed to expend $3.0 million (the “Phase 1 Funds”) to earn 16.25% (the “Phase 1 Interests”) of the Company’s interest in the Assets. Between the first anniversary date and the second anniversary date of the Participation Agreement, Entek has the right but not the obligation to expend $4.0 million (the “Phase 2 Funds”) and earn an additional 16.25% (the “Phase 2 Interests”) of the Company’s interest in the Assets. Between the second anniversary date and the third anniversary date of the Participation Agreement, Entek has the right but not the obligation to expend approximately $4.5 million (the “Phase 3 Funds”) and earn an additional 18.4375% (the “Phase 3 Interests”) interest in the Assets. If during any Phase, Entek fails to expend an amount equal to or greater than the threshold amount for the respective Phase period, then Entek shall have the right, but not the obligation, within 10 days after the end of the Phase period to deposit the difference between the Phase threshold amount and the amount expended into a segregated account in order to earn the full interest in the Phase. The amounts deposited into the segregated account shall be expended in the following work program.
All of our rights and obligations under this Participation Agreement were assigned to EMR on April 30, 2011, effective April 1, 2011, as part of the Purchase and Sale Agreement between NFEI and EMR.
Our Other Properties
On or about January 30, 2010, we moved our corporate office from Littleton, Colorado and entered into a three year lease for approximately 2,192 square feet of office space located at 1801 Broadway, Suite 920, Denver, Colorado 80202. The lease payments for the Denver office is approximately $1,222 per month for months 1-12 under the Lease, $1,313 per month for months 13-24 under the Lease and $1,404 per month for months 25-36 under the Lease in addition to our share of the building’s operating costs and expenses.
On June 15, 2007, we acquired real property in Steamboat Springs, CO (the “Steamboat Property”). The purchase price for the Steamboat Property was $1,175,000. In connection with the purchase of the Steamboat Property, we entered into a five-year mortgage in the principal amount of $881,250 (the “Steamboat Mortgage”), which had an interest rate of 7.56% per annum. The Steamboat Mortgage required equal monthly payments during the term of the mortgage in the amount of $8,256, with the balance of $698,604 due on June 14, 2012. The Steamboat Mortgage terms were modified on February 26, 2009, whereby the maturity date was changed to September 1, 2009.
Effective July 7, 2009, we transferred legal title to the Steamboat Property to our former President and CEO, as nominee, to facilitate the refinancing of the Steamboat Property. On July 7, 2009, the former President and CEO, as nominee for the Company, entered into a new mortgage in the amount of $635,000 (the “New Steamboat Mortgage”). The New Steamboat Mortgage had a one year term, due July 6, 2010, and accrued interest at the rate of prime plus 400 basis points with a floor of 10% and was collateralized by the Steamboat Property. As a condition of the New Steamboat Mortgage, interest in the amount of $63,500 was prepaid. We retained equitable ownership of the Steamboat Property and the accompanying consolidated financial statements reflect the rights and responsibilities of ownership, including the obligation under the New Steamboat Mortgage.
In June 2010, we executed a Quit Claim Deed with the former President and CEO to transfer the legal title to the Steamboat Property back to us and paid off the remaining outstanding balance on the Steamboat Mortgage of $633,962 ($1,058 of prepaid interest was refunded and credited against the principal balance of $635,000). We are actively seeking to sell the Steamboat Property and have engaged a real estate broker to find a buyer. This asset is classified as held for sale in our consolidated financial statements and is recorded at fair market value less estimated selling costs.
Oil and Gas Data
Proved Reserves
At February 28, 2011 and 2010, we had no proved reserves.
Productive Wells
Productive wells are wells that are currently producing or are found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes, including gas wells awaiting pipeline connections to commence deliveries.
As of February 28, 2011 and 2010, we had no productive wells.
Drilling Activity
There were no wells drilled during fiscal years ended February 28, 2011 and 2010.
Leases
The following table sets forth information as of February 28, 2010 relating to our leasehold acreage.
(1)
Developed acres are acres spaced to and assigned to productive wells within proved acreage. We had no proved reserves at February 28, 2010 and 2009.
(2)
Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or natural gas, regardless of whether such acres contains proved reserves.
(3)
If we exercise our option to reacquire an undivided 1/3 working interest in the Leases, our net acres will be approximately 3,800 acres.
Operations
Carrizo is the operator of the DJ Basin in Colorado and Yuma is the operator of the Amazon Prospect in Louisiana. Carrizo and Yuma, as the operators of these properties, have control over the management of operations and make decisions regarding expenditures on these properties. Decisions made by these operators may affect our capital requirements and subject us to financial penalties for failure to comply.
Market for Oil and Gas and Major Customers
The availability of a ready market for our oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the capacity of the gas transportation systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels.
We currently do not have any production of oil or natural gas hydrocarbons from any of our properties. However, based on the areas where our operations are conducted we believe that we would not be dependent upon any one customer based on the current demand for oil and natural gas, and the availability of other purchasers.
Seasonality
Generally, but not always, the demand for natural gas decreases during the summer months and increases during the winter months. Pipelines, utilities, local distribution companies and industrial users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can lessen seasonal demand fluctuations.
Seasonal weather conditions limit our drilling and producing activities and other oil and natural gas operations. These seasonal anomalies can limit our ability to conduct our proposed operations and can increase competition for equipment, supplies and personnel during the spring and summer months, which could lead to shortages and increase costs or delay our operations.
Competition
The oil and natural gas industry is intensely competitive. Our competition includes major natural resource companies that operate globally, as well as independent operators located throughout the world, including North America. Most of these companies have greater financial resources than we do. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger or integrated competitors may be able to absorb the burden of existing, and any changes to, federal, state, and local regulations more easily than we can, which would adversely affect our competitive position. We also face intense competition in obtaining capital for drilling and acquisitions and are at a competitive disadvantage compared with larger companies, which may have a material adverse effect upon the results of operations of the Company. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties.
Government Regulation
The production and sale of oil and gas are subject to various federal, state and local governmental regulations, which may be changed from time to time in response to economic or political conditions and can have a significant impact upon overall operations. Matters subject to regulation include drilling permits, discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties, taxation, abandonment and restoration and environmental protection. These laws and regulations are under constant review for amendment or expansion. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. Changes in these regulations could require us to expend significant resources to comply with new laws or regulations or changes to current requirements and could have a material adverse effect on the company. The regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability. We are also subject to changing and extensive tax laws, the effects of which cannot be predicted.
Oil & Gas Regulation
The governmental laws and regulations which could have a material impact on the oil and gas exploration and production industry are as follows.
Drilling and Production
Our operations are subject to various types of regulation at federal, state and local levels. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. Most states, and some counties and municipalities in which we operate, also regulate one or more of the following:
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The location of wells;
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The method of drilling and casing wells;
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The rates of production or “allowables”;
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The surface use and restoration of properties upon which wells are drilled;
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The plugging and abandoning of wells; and
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Notice to surface owners and other third parties.
State laws regulate the size and shape of drilling and spacing units, or proration units, governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of natural gas and oil we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.
Natural Gas Sales Transportation
Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. The Federal Energy Regulatory Commission (“FERC”) has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978.
FERC also regulates interstate natural gas transportation rates and service conditions, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas. Commencing in 1985, FERC promulgated a series of orders, regulations and rule-makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. Under FERC's current regulatory regime, transmission services must be provided on an open-access, non-discriminatory, basis at cost-based rates or at market-based rates if the transportation market at issue is sufficiently competitive.
Mineral Act
The Mineral Leasing Act of 1920 (“Mineral Act”) prohibits direct or indirect ownership of any interest in federal onshore oil and gas leases by a foreign citizen of a country that denies “similar or like privileges” to citizens of the United States. Such restrictions on citizens of a “non-reciprocal” country include ownership or holding or controlling stock in a corporation that holds a federal onshore oil and gas lease. If this restriction is violated, the corporation's lease can be canceled in a proceeding instituted by the United States Attorney General. Although the regulations of the Bureau of Land Management (which administers the Mineral Act) provide for agency designations of non-reciprocal countries, there are presently no such designations in effect.
Environmental Regulation
Our activities are subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. Our operations are also subject to stringent environmental regulation by state and federal authorities, including the Environmental Protection Agency (“EPA”). Such regulation can increase the cost of such activities. In most instances, the regulatory requirements relate to water and air pollution control measures.
Waste Disposal
The Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes affect oil and gas exploration and production activities by imposing regulations on the generation, transportation, treatment, storage, disposal and cleanup of “hazardous wastes” and on the disposal of non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent, requirements. Drilling fluids, produced waters and most of the other wastes associated with the exploration, development and production of crude oil, natural gas or geothermal energy constitute “solid wastes,” which are regulated under the less-stringent non-hazardous waste provisions, but there is no guarantee that the EPA or the individual states will not adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation.
CERCLA
The federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) imposes joint and several liability for costs of investigation and remediation and for natural resource damages, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release into the environment of substances designated under CERCLA as hazardous substances (“Hazardous Substances”). These classes of persons or potentially responsible parties include the current and certain past owners and operators of a facility or property where there is or has been a release or threat of release of a Hazardous Substance and persons who disposed of or arranged for the disposal of the Hazardous Substances found at such a facility. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover the costs of such action. Although CERCLA generally exempts petroleum from the definition of Hazardous Substances in the course of operations, we may in the future generate wastes that fall within CERCLA's definition of Hazardous Substances. We may also in the future become an owner of facilities or properties on which Hazardous Substances have been released by previous owners or operators. We may in the future be responsible under CERCLA for all or part of the costs to clean up facilities or property at which such substances have been released and for natural resource damages.
Air Emissions
Our operations are subject to the Federal Clean Air Act, and associated state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. In addition, EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified sources. Major sources of air pollutants are subject to more stringent, federally imposed permitting requirements. Administrative enforcement actions for failure to comply strictly with air pollution regulations or permits are generally resolved by payment of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could require us to forego construction, modification or operation of certain air emission sources.
Clean Water Act
The Clean Water Act (“CWA”) imposes restrictions and strict controls regarding the discharge of wastes, including produced waters and other oil and natural gas wastes, into waters of the United States, a term broadly defined. Permits must be obtained to discharge pollutants into federal waters. The CWA provides for civil, criminal and administrative penalties for unauthorized discharges of oil, hazardous substances and other pollutants. It imposes substantial potential liability for the costs of removal or remediation associated with discharges of oil or hazardous substances. State laws governing discharges to water also provide varying civil, criminal and administrative penalties and impose liabilities in the case of a discharge of petroleum or its derivatives, or other hazardous substances, into state waters. In addition, the EPA has promulgated regulations that may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge of wastes, we may be liable for penalties and costs.
We believe that we are in substantial compliance with current applicable environmental laws and regulations.
Research and Development Activities
No research and development expenditures have been incurred, either on our account or sponsored by customers, during the past two years.
Employees
We currently have three employees. Our executive officers devote such time, as each officer deems necessary to perform his duties to the Company and are subject to conflicts of interest. None of our employees are subject to a collective bargaining agreement, and we consider our relations with our employees to be excellent.
From time to time, we use the services of clerical and accounting personnel on a part-time basis and the services of executives, geologists, engineers, landmen and other professionals on a contract basis as may be necessary for our oil and gas operations.
Available Information
We do not have a website. We make available, free of charge, all filings with the SEC and all press releases. Requests should be sent by mail to our corporate secretary at our principal office at 1801 Broadway, Suite 920, Denver, Colorado 80202. This Annual Report on Form 10-K contains information provided by other sources that we believe are reliable. We cannot assure you that the information obtained from other sources is accurate or complete.
Item 1A.
Item 1A. Risk Factors
Investing in our securities involves risk. In evaluating the Company, careful consideration should be given to the following risk factors, in addition to the other information included or incorporated by reference in this annual report. Each of these risk factors could materially adversely affect our business, operating results or financial condition, as well as adversely affect the value of an investment in our common or preferred stock. In addition, the “Forward-Looking Statements’’ located in this Form 10-K, and the forward-looking statements included or incorporated by reference herein describe additional uncertainties associated with our business.
Risks Related To Our Business
We have a limited operating history.
We were formally organized in January 2000 and did not commence operation in the oil and gas industry until February 2001. We began producing gas in June 2005 but have had a limited history of producing oil and gas. As a result, there is a limited history of production or generating revenue against which to compare our revenues during the fiscal year ended February 28, 2011.
We have recently been relying on the sale of assets in order to raise cash
Since approximately August of 2009, a principal activity has been to farm out our oil and gas assets for cash, or most recently, the outright sale of all of our GRB assets for cash and other reasonably liquid assets. At the present time we do not act as the operator with respect to any of our oil and gas assets. As a result of this activity, our balance sheet has improved dramatically, however we have only a limited oil and gas asset base from which to generate revenues from operations in the near term. Management expects to utilize our cash to acquire and/or develop additional oil and gas assets in the near to medium term or to invest in opportunities outside the oil and gas industry. Even if we are successful in identifying one or more additional properties for acquisition, there is no assurance that we can obtain such properties at reasonable prices or that we will have sufficient capital to finance the further development of these properties. As a result of our dependence on a limited number of properties, we may be disproportionately exposed to the impact of delays or interruptions of production or increased expenses caused by significant governmental regulation, curtailment of production or interruption of transportation for the hydrocarbons we hope to produce. Our substantial dependence on a limited number of properties for cash flow increases the risk of our future success.
We cannot control the activities on properties we do not operate.
We do not operate any of the properties in which we have an interest. As a result, we have limited ability to exercise influence over, and control the risks associated with, operations of these properties. The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interests could reduce our production and revenues or could create a liability for us for the operator’s failure to properly maintain the well and facilities and to adhere to applicable safety and environmental standards. With respect to properties that we do not operate:
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the operator could refuse to initiate exploration or development projects;
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if we proceed with any of those projects the operator has refused to initiate, we may not receive any funding from the operator with respect to that project;
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the operator may initiate exploration or development projects on a different schedule than we would prefer;
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the operator may propose greater capital expenditures than we wish, including expenditures to drill more wells or build more facilities on a project than we have funds for, which may mean that we cannot participate in those projects or participate in a substantial amount of the revenues from those projects; and
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the operator may not have sufficient expertise or resources.
Any of these events could significantly and adversely affect our anticipated exploration and development activities.
We have incurred losses from operations and negative cash flow that is likely to continue until we can economically produce oil or natural gas.
We have a history of losses from operations and negative cash flow that is likely to continue until we economically produce oil or natural gas. A significant portion of our cash flow since inception has come from equity and debt investments. Unless we economically produce oil and gas in the future, these losses will continue. If we continue to experience losses from operations and negative cash flow as we have in the past, there can be no assurance that we will be able to continue operations as anticipated, if at all. Further, the price of our common stock may be adversely affected.
We have not obtained an independent reserve report of oil and gas reserves for the fiscal years ended February 28, 2011 and 2010.
We internally analyzed our reserves and based upon the existing price of natural gas and the costs required to drill new wells or conduct operations, we determined that at February 28, 2011 and 2010, there were no recoverable reserves. We did not obtain an independent reserve report at February 28, 2011 or 2010. As such, there is no way to determine the financial viability of our properties or the amount of oil and gas that may be recoverable. Investors in the Company’s securities must be willing to accept the risk that the Company does not have available for review a reserve report that may provide an indication of the amount of oil and gas that may be recoverable from our properties.
Continued poor economic conditions could negatively impact our business.
Our operations are affected by local, national and worldwide economic conditions. The consequences of a potential or prolonged recession may include a lower level of economic activity, reduced demand for oil and gas products and uncertainty regarding energy prices and the capital and commodity markets. A lower level of economic activity might result in a decline in energy consumption, which may adversely affect our revenues and future growth. Instability in the financial markets, as a result of recession, poor economic conditions or otherwise, also may affect the cost of capital and our ability to raise capital.
Prospects that we acquire may not yield natural gas or oil in commercially viable quantities.
We describe some of our current prospects and our plans to explore those prospects in this Annual Report. See “Business.” Further, we intend to be active in the acquisition of additional prospects and properties in the future. A prospect is a property on which we have identified what we believe, based on available seismic and geological or other information, to contain natural gas or oil. However, the use of seismic data and other technologies will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present or, if present, whether natural gas or oil will be present in sufficient quantities to recover drilling or completion costs or to be economically viable. If we drill wells that we identify as dry holes in our current and future prospects, our drilling success rate may decline and materially harm our business. In sum, the cost of drilling, completing and operating any well is often uncertain and new wells may not be productive or contain sufficient quantities of natural gas or oil to be economic.
We are dependent upon transportation and storage services provided by third parties.
We will be dependent on the transportation and storage services offered by various interstate and intrastate pipeline companies for the marketing of, delivery and sale of our gas supplies. Both the performance of transportation and storage services by interstate pipelines and the rates charged for such services are subject to the jurisdiction of FERC or state regulatory agencies. An inability to obtain transportation and/or storage services at competitive rates can hinder our processing and marketing operations and/or affect our sales margins, which would have a material adverse effect upon our results from operations.
We may be required to take write-downs of the carrying values of our oil and natural gas properties.
During the fiscal years ended February 28, 2011 and 2010, we incurred impairment of our oil and gas properties in the amount of $0 and $7.0 million, respectively. Accounting rules require that we review periodically the carrying value of our oil and natural gas for possible impairment. Based on specific market factors and circumstances at the time of the prospective impairment reviews, and the continuing evaluation of development plans, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties. A write-down constitutes a non-cash charge to earnings. We may incur further impairment charges in the future, which could have a material adverse effect on our results of operations in the periods taken.
Drilling for and producing crude oil and natural gas is governed by a number of federal, state and local laws and regulations, including environmental regulations, which are beyond our control.
Many aspects of gathering, processing, marketing and transportation of crude oil and natural gas are subject to federal, state and local laws and regulations, which can have a significant impact upon overall operations. Both transportation and storage of natural gas by interstate pipelines and the rates charged for such services are subject to the jurisdiction of FERC or state regulatory agencies. The construction and operation of gathering lines, plants and other facilities are subject to environmental laws and regulations that could affect the financial position or results of operations and may be subject to FERC.
Hydraulic fracturing is an important and commonly used process in the completion of oil and gas wells, particularly in unconventional resource plays like the Niobrara. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate production. The U.S. Congress is currently considering legislation to amend the federal Safe Drinking Water Act to subject hydraulic fracturing operations to regulation under that Act and to require the disclosure of chemicals used by us and others in the oil and gas industry in the hydraulic fracturing process. Sponsors of bills currently pending before the U.S. Senate and House of Representatives have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. Proposed legislation would require, among other things, the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings against producers and service providers. In addition, these bills, if adopted, could establish an additional level of regulation and permitting of hydraulic fracturing operations at the federal level, which could lead to operational delays, increased operating and compliance costs and additional regulatory burdens that could make it more difficult or commercially impracticable to perform hydraulic fracturing, delaying the development of unconventional oil and gas resources from unconventional resource plays which are not commercial without the use of hydraulic fracturing. Additionally, the EPA has commenced a comprehensive research study to investigate the potential adverse environmental impacts of hydraulic fracturing, including on water quality and public health, and a committee of the U.S. House of Representatives is also conducting an investigation of hydraulic fracturing practices. The initial EPA study results are expected to be available in late 2012.
President Obama’s 2011 Fiscal Year Budget includes proposals that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could defer or eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial position and results of operations.
Recent Colorado regulatory changes could limit our Colorado operations and adversely affect our cost of doing business.
Our future operations and cost of doing business in Colorado may be affected by changes in regulations and the ability to obtain drilling permits. Our properties located in Colorado are subject to the authority of the Colorado Oil and Gas Conservation Commission (“COGCC”). The COGCC recently approved new rules governing oil and gas activity. The costs of these and the other proposed rules could add substantial increases in incremental well costs in our Colorado operations. The rules could also impact the ability and extend the time necessary to obtain drilling permits, which creates substantial uncertainty about our ability to meet future drilling plans and thus production and capital expenditure targets, which may have a material adverse effect upon the Company and its results of operations.
Properties that we buy may not produce as projected and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them.
One of our growth strategies is to capitalize on opportunistic acquisitions of oil and natural gas properties. However, our reviews of acquired properties are inherently incomplete, because it generally is not feasible to review in depth every individual property involved in each acquisition. However, even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well or property, and environmental problems, such as ground water contamination are not necessarily observable even when an inspection is undertaken. Even when problems are identified, we often assume certain environmental and other risks and liabilities in connection with acquired properties. Any losses incurred as a result could have a material adverse effect upon the Company and its results of operations.
Our drilling activities and prices we will receive from the sale of oil and gas products may be impacted adversely by new taxes.
The federal, state and local governments in which we operate impose taxes on the oil and gas products we will sell and may impose taxes on our drilling activities. Recently, there has been a significant amount of discussion by legislators concerning a variety of energy tax proposals. In addition, many states have raised state taxes on energy sources and additional increases may occur. Any significant increase in taxes on our oil and gas products or operations may have a material adverse effect upon our drilling activities, oil and natural gas prices and our results from operations.
Our results of operations will be dependent upon market prices for oil and natural gas, which fluctuate widely and are beyond our control.
Our operations will be affected by future oil and natural gas prices that fluctuate widely, and low prices could have a material adverse effect on our operations. Our success is dependent largely on the prices received for natural gas and oil production. Prices received also affect the amount of future cash flow available for capital expenditures and may affect the ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either discovered or acquired. Further, it could affect the amount of natural gas that is transported through the Gas Gathering Pipeline owned by SDG. Further, prices for natural gas and oil fluctuate widely.
Factors that can cause price fluctuations include, but are not limited to:
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The level of consumer product demand;
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Weather conditions;
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Domestic and foreign governmental regulations;
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The price and availability of alternative fuels;
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Political conditions in natural gas and oil-producing regions;
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The domestic and foreign supply of natural gas and oil;
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The price of foreign imports; and
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Overall economic conditions.
The availability of a ready market for our oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the capacity of gas transportation systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels, each of which could have a material adverse effect upon our results of operations.
The oil and gas industry involves many operating risks that can cause substantial losses.
Drilling and production of oil and natural gas involves a variety of operating risks, including but not limited to:
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Fires;
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Explosions;
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Blow-outs and surface cratering;
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Uncontrollable flows of underground natural gas, oil or formation water;
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Natural disasters;
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Pipe and cement failures;
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Casing collapses;
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Embedded oilfield drilling and service tools;
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Abnormal pressure and geological formations;
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Environmental hazards such as natural gas leaks, oil spills, pipeline ruptures; and
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discharges of toxic gases.
If any of these events occur, we could incur substantial losses as a result of:
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Injury or loss of life;
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Severe damage to and destruction of property, natural resources or equipment;
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Pollution and other environmental damage;
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Clean-up responsibilities;
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Regulatory investigation and penalties;
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Suspension of our operations; and
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Repairs necessary to resume operations.
Further, the occurrence of any of these events may impact third parties, including our employees or employees of our contractors, and lead to injury or death or property damage. We may be affected by any of these events more than larger companies, since we have limited working capital. Further, for some risks, we may not be able to obtain insurance or may choose not to if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect operations. Moreover, we cannot provide assurance that we will be able to maintain adequate insurance in the future at rates considered reasonable.
Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties.
Most of our competitors have greater resources than we have, and we may not have the resources necessary to successfully compete with them.
Competition in the oil and gas industry is intense. Our competitors include major oil companies and other independent operators, most of which have financial resources, staffs and facilities substantially greater than ours. We also face intense competition in obtaining capital for drilling and acquisitions and are at a competitive disadvantage compared with larger companies, which may have a material adverse effect upon the results of operations of the Company.
Compliance costs with recently enacted changes in the securities laws and regulations pursuant to the Sarbanes-Oxley Act of 2002 will increase our costs.
The Sarbanes-Oxley Act of 2002 that became law in July 2002 has required changes in some of our corporate governance, securities disclosure, accounting and compliance practices. In response to the requirements of that act, the Securities and Exchange Commission has promulgated rules on a variety of subjects. Compliance with these rules as well as the Sarbanes-Oxley Act of 2002 has increased our legal, financial and accounting costs, and we expect the cost of compliance with these new rules to continue to increase and to be permanent. Further, the new rules may increase the expenses associated with our director and officer liability insurance.
We have identified Material Weaknesses in our Internal Controls over Financial Reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires us to include management's assessment of the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K. A material weakness is defined as a significant deficiency or combination of significant deficiencies that results in a reasonable possibility that a material misstatement of our financial statements will not be prevented by our internal control over financial reporting. In connection with the preparation of this Annual Report, management of the Company identified material weaknesses in the Company's internal controls over financial reporting. Because of these material weaknesses, there is heightened risk that a material misstatement of our financial statements will not be prevented or detected. We intend to take steps to remediate our material weaknesses, including hiring additional accounting and finance personnel and engaging consultants, but we cannot assure you that our efforts to remediate these internal control weaknesses will be successful, that similar material weaknesses will not recur or that we will not identify new material weaknesses. In the event that we do not adequately remedied these material weaknesses, and if we fail to maintain proper and effective internal controls in future periods, we could become subject to potential review by the Securities and Exchange Commission or other regulatory authorities, which could require additional financial and management resources and could compromise our ability to run our business effectively, could cause investors to lose confidence in our financial reporting and could have a material adverse effect upon the Company and could result in a reduction in the price of our common stock.
We may be unable to retain key employees or recruit additional qualified personnel.
Due to the current demand for employees in the oil and gas industry, our extremely limited number of employees means that we could be required to spend significant sums of money to locate and train new employees if we require additional employees in the future or if any of our existing employees resign or depart for any reason. Due to our limited operating history, financial resources and familiarity with our operations, we have a significant dependence on the continued service of our existing officers, Samyak Veera and Tristan Farel. We do not carry key man life insurance on either Messrs. Veera or Farel. We may not have the financial resources to hire a replacement if one or both of our officers were unavailable for any reason. The loss of service of either of these individuals could, therefore, significantly and adversely affect our operations.
Samyak Veera, our CEO and President may become subject to conflicts of interest.
Samyak Veera, the Company’s Chief Executive Officer and President, devotes such time as he deems necessary to perform his duties to the Company and is subject to various conflicts of interest. Mr. Veera devotes other time to other business endeavors and has responsibilities to other entities. Because of these relationships, Mr. Veera may become subject to conflicts of interest.
Colorado law and our Articles of Incorporation may protect our officers and directors from certain types of lawsuits.
Colorado law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Articles of Incorporation permit us to indemnify our officers and directors against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment or other circumstances.
Sales of a substantial number of shares of our common stock into the public market may result in significant downward pressure on the price of our common stock and could affect the ability of our stockholders to realize the current trading price of our common stock.
We have a large number of shares eligible for future sale. Sales of a substantial number of shares of our common stock in the public market could cause a reduction in the market price of our common stock. As of May 13, 2011, there were 68,674,121 shares of our common stock outstanding and 17,860 shares of our $0.001 par value Series B 12% Cumulative Convertible Preferred Stock (“Series B preferred stock”) issued and outstanding. If all of the Series B preferred stock, warrants and options to acquire shares of our common stock we currently have outstanding were converted into shares of common stock or were exercised, we would have to issue an additional 13,187,820 shares of our common stock for a then total of 81,861,941 shares of our common stock issued and outstanding. Further, as of May 13, 2011, our officers and directors or their affiliates own 37,845,381 shares of our common stock, or 55% of our currently outstanding shares of common stock that may be sold pursuant to Rule 144. Further, we may issue up to 10,000,000 shares of our common stock under the 2007 Omnibus Long Term Incentive Plan. As a result, a substantial number of our shares of common stock may be issued and may be available for immediate resale, which could have an adverse effect on the price of our common stock.
The trading price of our Common Stock on has fluctuated, and will likely continue to fluctuate significantly.
Since June 4, 2004, our common stock has traded as low as $0.06 and as high as $3.25. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. In addition to the volatility associated with pink sheet securities in general, the value of your investment could decline due to the impact of any of the following factors, or other factors not set forth herein, upon the market price of our Common Stock:
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Changes in the world wide price for oil or natural gas;
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Disappointing results from our discovery or development efforts;
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Failure to meet our revenue or profit goals or operating budget;
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Decline in demand for our Common Stock;
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Changes in general market conditions;
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Lack of funding for continued operations;
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Investor perception of our industry or our prospects; or
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General economic trends.
In addition, stock markets have experienced extreme price and volume fluctuations, and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our Common Stock.
We will require additional capital and we may be unable to obtain needed capital or financing on satisfactory terms, if at all.
The oil and natural gas industry is capital intensive. To date, we have financed capital expenditures primarily with sales of our equity securities and debt financing or by the sale of existing assets. To accomplish our plan of operations, we may be required to seek additional financing. There can be no assurance as to the availability or terms of any additional financing. The failure to obtain additional financing could result in a curtailment of our operations, which in turn could lead to a possible loss of properties.
Issuances of additional shares of our stock in the future could dilute existing shareholders' holdings and may adversely affect the market price of our Common Stock. We have the authority to issue, without stockholder approval, up to 500,000,000, shares of Common Stock. Because our Common Stock is traded on the Pink Sheets and is not listed on an exchange, we are not required to solicit shareholder approval prior to issuing large blocks of our stock. Any such future issuances could be at values substantially below the price paid for our Common Stock by our current shareholders. In addition, we could issue large blocks of our Common Stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval. The issuance of our stock may have a disproportionately large impact on its price compared to larger companies.
Our Common Stock is classified as a “penny stock” under SEC rules which limits the market for our Common Stock.
Since inception of trading in June 2004, our Common Stock has not traded at $5 or more per share. Because our stock is not traded on a stock exchange or on the NASDAQ National Market or the NASDAQ Small Cap Market, if the market price of the Common Stock is less than $5 per share, the Common Stock is classified as a “penny stock.” SEC Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an “established customer” or an “accredited investor.” This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customers concerning the risk of penny stocks. Many broker-dealers decline to participate in penny-stock transactions because of the extra requirements imposed on those transactions. Application of the penny-stock rules to our Common Stock reduces the market liquidity of our shares, which in turn affects the ability of holders of our Common Stock to resell the shares they purchase, and they may not be able to resell at prices at or above the prices they paid.
The Series B Convertible Preferred Stock that we have issued adversely affects the right of the Common Stockholders.
Our Series B Preferred Stock pays cumulative preferred dividends equal to 12% per year, provides a preference in payment of dividends, redemption and liquidation over the Common Stock and Series B Preferred Stock will, upon conversion, have all of the rights of our Common Stock. As of February 28, 2011, we had an aggregate of accrued and unpaid dividends totaling $1,178,893. Our Board of Directors has the authority to issue additional preferred stock, which could discourage potential takeover attempts or could delay or prevent a change in control through a merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.
Control by Management.
As of April 4, 2011, Iris Energy Holdings, Limited (“Iris Energy”) owns approximately 55% of our issued and outstanding shares of common stock.
Mr. Escher, a director, is the sole director of Iris Energy and exercises voting and dispositive power of the securities owned by Iris Energy, therefore Iris Energy and Mr. Escher are able to influence the outcome of all matters submitted to our shareholders for approval, regardless of the preferences of the minority shareholders. Further, the interests of Iris Energy may or may not be different than the interests of the other shareholders.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable to smaller reporting companies.
Item 3.
Item 3. Legal Proceedings
Standard Investment Corp. Litigation
On August 11, 2010, Standard Investment Corp. (“Standard”) served the Company with a complaint in the District Court, City and County of Denver, Colorado (Case No. 2010CV6233) alleging breach of contract, tortuous interference and unjust enrichment for failure to pay certain commissions Standard alleges due to it pursuant to an agreement (the “Standard Agreement”). Standard is seeking damages in the amount of $64,000 plus 4% of all additional capital invested by Entec Energy Limited (sic) with the Company plus interest, costs and attorney fees. On October 4, 2010, the Company filed an answer and counterclaim against Standard. The Company denies that it breached the Standard Agreement. Further, the Company alleges breach of contract, breach of the covenant of good faith and fair dealing and unjust enrichment against Standard. The Company is seeking compensatory damages, plus interest, costs and attorney fees in the counterclaim. As of the date of this Annual Report, the outcome of this matter cannot be determined.
Item 4.
Item 4. (Removed and Reserved).
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities.
In the period from June 4, 2004, until February 20, 2010, shares of our Common Stock were traded on the Over-the-Counter Bulletin Board under the symbol “NFEI.OB.” As of February 21, 2010, our common stock became subject to quotation on the pink sheets under the symbol “NFEI.PK”.
The market for our Common Stock is limited, volatile and sporadic. The following table sets forth the high and low sales prices relating to our Common Stock for the last two fiscal years on a quarterly basis, as quoted by yahoo finance. These quotations reflect inter-dealer prices without retail mark-up, markdown or commissions and may not reflect actual transactions.
Holders
On April 4, 2011 the closing price of our Common Stock was $0.17, and we had approximately 1,721 shareholders of record.
Dividend Policy
We have not declared or paid cash dividends on our Common Stock in the preceding two fiscal years. We currently intend to retain all future earnings, if any, to fund the operation of our business, and, therefore, do not anticipate paying dividends in the foreseeable future. Future cash dividends, if any, will be determined by our board of directors.
Securities Authorized For Issuance Under Compensation Plans
The table set forth below presents the securities authorized for issuance with respect to the 2003 Plan and the 2007 Plan under which equity securities are authorized for issuance as of February 28, 2011.
Recent Sales of Unregistered Securities
The Company has no recent sales of unregistered securities that have not been previously disclosed.
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the financial statements and related notes thereto appearing elsewhere in this Form 10-K. The selected financial data as of February 28, 2011 and February 28, 2010, and for each of the fiscal years then ended and have been derived from our financial statements which have been audited by our independent auditors included elsewhere in this Form 10-K. The selected financial data provided below is not necessarily indicative of our future results of operations or financial performance.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The discussion in this item, as well as in other items in this report, contains forward-looking statements within the meaning of and made under the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical facts, including statements that refer to plans, intentions, objectives, goals, strategies, hopes, beliefs, projections and expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. Forward-looking statements are not guarantees of future performance or events, but are subject to and qualified by known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, anticipated or implied by such forward-looking statements, including those risks, uncertainties and other factors described above in “Item 1A. Risk Factors,” as well as other risks, uncertainties and factors discussed elsewhere in this report, in documents that we include as exhibits to or incorporate by reference in this report, and in other reports and documents that we from time to time file with or furnish to the SEC. You are cautioned not to place undue reliance on any forward-looking statements, any of which could turn out to be materially wrong. Any forward-looking statements made in this report speak only as of the date of this report. We undertake no duty or obligation to update or revise any forward-looking statement or to publicly disclose any update or revision for any reason, whether as a result of changes in our expectations or the underlying assumptions, the receipt of new information, the occurrence of future or unanticipated events, circumstances or conditions or otherwise.
Business Overview
Currently, we are a Colorado based independent energy company engaged in the exploration, development, acquisition, and production of natural gas and crude oil. Our operations are conducted entirely in the continental United States, where we hold non-operated interests in DJ Basin in Colorado and Amazon Prospect in Louisiana. Our strategy is to deliver net asset value per share growth to our investors via attractive investments within or outside the oil and gas industry. Our focus in meeting the goal of building shareholder value in the oil and gas industry is on the successful execution of exploration for and development of onshore plays in the United States through strategic partnerships. We believe that we will be able to create long-term value for our shareholders by targeting low to medium risk projects that offer repeatable success allowing for meaningful production and reserve growth. We do not and do not intend to operate any of the properties in which we have an interest. As a result, we have limited ability to exercise influence over, and control the risks associated with operations of these properties. The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interests could reduce our ability to be successful in finding reserves and could create a liability for us for the operator’s failure to properly operate the project and adhere to applicable safety and environmental standards.
Previously, we had operations in the Green River Basin. However on February 16, 2011, our board of directors approved a plan to sell these assets, which represented a significant portion of our oil and gas exploration assets, including our gas gathering pipeline company. The board of directors adopted this plan in conjunction with the Company entering into a Memorandum of Understanding (“MoU”) with Emerald GRB, LLC (“EMR”), a wholly-owned subsidiary of Emerald Oil and Gas NL (“Emerald Australia”), a publicly traded company whose shares trade on the Australian stock exchange. We completed and closed this transaction with EMR on April 30, 2011 (“Closing Date”). The consideration was USD 9,565,000 and 125,000,000 free trading EMR ordinary shares. Further, we received certain undertakings relative to liquidity and value with respect to the shares of EMR as part of the purchase price.
The significant terms under the Purchase and Sale Agreement are as follows; we assigned all of our leasehold interests located within Routt and Moffat counties, Colorado, and Carbon and Sweetwater Counties, Wyoming, we sold any equipment or property used in connection with any oil and gas operations related to the assigned leases, we assigned our rights and claims under that certain Participation Agreement (as amended) between NFEI and Entek GRB, LLC (“Entek”) dated on or about August 10, 2009, all claims against Slater Dome Gas, Inc. pursuant to case file number 2010 CV 65 filed in the District Court in Moffat County Colorado, and all claims against Slater Dome Gas, Inc. pursuant to case file number 2010 CV 65 filed in the District Court in Moffat County Colorado, and our limited partnership and general partnership interest in SDG. In addition, EMR assumed all liabilities associated with the assets, except for environmental liabilities arising from the period prior to April 1, 2011.
This transaction had a significant effect on our consolidated financial statements. All of our oil and natural gas production revenues and gas gathering revenues have historically been generated from these assets, and due to this transaction our results of operations related to these assets have been reclassified for all periods presented to reflect the operating results as discontinued operations. In addition, a significant portion of our oil and gas assets and certain liabilities have been reclassed as held for sale.
Results of discontinued operations for the years ended February 28, 2011 and 2010 were as follows:
During fiscal years ended February 28, 2011 and 2010, there was a net loss from discontinued operations of $125,415 and $7.4 million. In the current year the net loss is primarily attributed to lower production volumes related to the GRB oil and gas producing assets and the primary result for the net loss in the previous year can be attributed to a $7.0 million impairment recorded against the oil and gas properties in GRB.
The following assets and liabilities have been segregated and classified as held for sale in the accompanying consolidated balance sheet at February 28, 2011 and 2010:
Results of Operation
Year Ended February 28, 2011, Compared to the Year Ended February 28, 2010:
Due to the recent sale of the Green River Basin assets, our oil and gas activity is related to our non-operated interests in the Amazon Prospect in Louisiana and DJ Basin in Colorado. In September 2010, we entered into a Joint Exploration Agreement with Yuma Production Company, Inc. (“Yuma”) as a ten-percent (10%) working interest owner in the shooting, processing and interpretation of a 70 square mile 3-D seismic survey. In June 2010, we entered into a Purchase and Sale Agreement with Carrizo Oil and Gas, Inc. (“Carrizo”), whereby Carrizo must drill not less than three Carry Wells (as defined in the Purchase and Sale Agreement) in the 18 months following the closing on the sale of the interest in the Leases and carry us for a 33 1/3 percent (33.3%) working interest in each of these wells (subject to adjustment as provided in the Purchase and Sale Agreement). Drilling of the first carry well commenced in May 2011.
Our oil and gas revenues during fiscal years ended February 28, 2011 and 2010 were derived from royalty interests that we own in certain wells located in Wyoming. These revenues increased during 2011 by $3,409 or 28% compared to the prior year due to increased pricing.
Our operating expenses are made up of exploration costs, general and administrative costs, depreciation and amortization, and impairment and abandonment costs. The following table presents our operating expenses as of February 28, 2011 and 2010:
Exploration costs were $1,061,794 during the fiscal year ended February 28, 2011, as compared to $0 during the fiscal year ended February 28, 2010. In 2011, we incurred $1,038,594 of costs related to the Amazon 3-D seismic project, which was primarily related to permitting, surveying and drilling shot locations. We incurred $23,200 of costs related to the DJ Basin, which were attributed to our share of delay rentals. All of the exploration costs incurred in the previous year were related to our Green River Basin assets that are now categorized as discontinued operations as explained above.
Our general and administrative expenses decreased approximately $2.8 million or 53% to $2.6 million in fiscal year ended February 28, 2011, compared to $5.4 million during the fiscal year ended February 28, 2010. Our general and administrative expenses include both cash and non-cash charges. The decrease can be primarily attributed to non-cash charges, which decreased $4.0 million offset by an increase in cash charges of $1.2 million compared to the prior year. The major components of the non-cash and cash charges are as follows.
Our non-cash charges included in general and administrative expense are comprised of stock-based compensation. We recorded $0.2 million of stock-based compensation during fiscal year ended 2011, compared to $4.2 million during fiscal year ended 2010, a decrease of $4.0 million or 96%. The major components of our cash general and administrative expenses include professional fees, consulting fees, employee compensation and general office expense. Our cash general and administrative costs increased $1.2 million to $2.4 million during fiscal year ended 2011, compared to $1.2 million during fiscal year ended 2010. This increase can be primarily attributed to a bonus awarded to our President and CEO of $1.6 million offset by a decrease in professional fees, consulting fees and employee compensation (excluding bonuses) of $0.4 million.
Depreciation and amortization expense decreased $$42,959 or 54% to $36,108 during the fiscal year ended February 28, 2011, compared to $79,067 during the fiscal year ended February 28, 2010. The primary reason for this decrease is related to our Steamboat Property, which we stopped depreciating at the end of the fourth quarter of fiscal year ended February 28, 2010 due to this asset being held for sale. Depreciation expense remained flat year over year if we remove the expense related to the Steamboat Property from the prior year.
We recorded impairment and abandonment expense of $97,243 and $308,399 during the fiscal years ended February 28, 2011 and 2010, respectively. This represented a decrease of $211,156 or 68.5%, comparing the current year to the prior year. During the current year we disposed of certain corporate assets, which we recorded as abandonment expense of approximately $46,000 and the remaining $51,000 was recorded as impairment expense related to the Steamboat Property (asset held for sale), which is recorded at the lower of cost or market less selling expenses. During the same period in the previous year, we recorded impairment expense of $260,000 related to the Steamboat Property (asset held for sale), which is recorded at lower of cost or market value less selling expense and we recorded an additional $48,399 related to our inventory on hand, which is recorded at the lower of cost or market.
Our other income (expense) includes the change in fair value of financial derivative instruments, gains on sales of assets and other. The following table represents the components of other income (expense):
*** The percentage (%) change is not meaningful
The change in fair value of derivative instruments is based on our Series B and Series C Preferred stock, which contain an anti-dilution provision which provides for conversion price adjustments (“down round protection”) requiring the embedded conversion feature to be bifurcated and presented separately as a derivative liability on the consolidated balance sheets. During fiscal years ended February 28, 2011 and 2010, the fair value of the derivative liability decreased resulting in a gain being recorded in the consolidated statement of operations of $90,000 and $3.2 million, respectively. The primary reason for the change in valuation from the comparative periods is due to the conversion of the Series C Preferred stock on December 1, 2009, and the fluctuation in the closing price of our common stock.
During fiscal years ended February 28, 2011 and 2010, we recognized gains from the sales of assets of $2.7 million and $18,342, respectively. During the current year we received proceeds of $5.0 million from Carrizo, net of transaction costs related to the termination of a 2-D seismic licensing agreement with a third party, which required a one-time termination payment of $500,000, for the sale of our interest in the leases located within the DJ Basin in June 2010. Pursuant to the agreement we have the option to re-acquire an undivided 1/3 working interest in the leases, whereby, we shall pay 1/3 of to the total amount Carrizo paid to acquire the interest in the leases plus 1/3 of any amount Carrizo has paid to renew, extend or replace the Leases during the Drilling Period.
In accordance with accounting standards generally accepted in the United States, we treated this option as a financing arrangement and recorded a gain on sale to the extent that two-thirds of the proceeds ($3.7 million) are recognized as proceeds received. The remaining one-third was treated as a financing arrangement, resulting in $1.8 million being reflected as a deferred gain on the consolidated balance sheet and as a financing activity in the consolidated statement of cash flows.
If this option is exercised, we will tender $1.8 million, plus 1/3 of any amount Carrizo has paid to renew, extend or replace the leases to Carrizo in exchange for a 33 1/3 interest assignment in the leases, and if the option expires unexercised, we will recognize an additional $1.8 million gain on sale of unproved property.
Other income was consistent with the prior year, decreasing only $2,703 or 19%. Other income includes interest income, interest expense and miscellaneous items.
We charged dividends on the Series B Convertible Preferred Stock of approximately $224,000 and $213,000 during fiscal years ended 2011 and 2010, respectively to the loss attributable to common shares. We charged dividends on the Series C Preferred Stock of $0 and $411,000, respectively to the loss attributable to common shares during the fiscal years ended February 28, 2011 and 2010. The decrease in dividends on the Series C Preferred Stock is due to the automatic conversion of the Series C Preferred Stock during the fiscal year ended February 28, 2010.
Liquidity and Capital Resources
In order to meet our goals and objectives, we will have to effectively invest capital into our existing projects and into new projects and acquisitions that are low to medium risk. We will need to seek additional capital, likely through asset sales and debt or equity financings, to continue our proposed operations. We can give no assurance that we will be able to raise such capital on such terms and conditions we deem reasonable, if at all. We will have limited financial resources until such time that we are able to generate such additional financing or additional cash flow from operations. Our ability to achieve profitability and positive cash flow is dependent upon our ability to exploit our oil and gas properties, generate revenue from our business operations and control our costs. Should we be unable to raise adequate capital or to meet the other above objectives, it is likely that we would have to substantially curtail our business activity or cease operating, and that our investors would incur substantial losses of their investment.
On June 4, 2010, we completed a Purchase and Sale Agreement with Carrizo to sell our interest in certain leases in the DJ Basin. We received proceeds of approximately $5.0 million (net of related transaction costs) from the sale of the interest in the Leases.
On April 30, 2011, we completed a Purchase and Sell Agreement with Emerald GRB, LLC (“EMR”), whereas we will sell certain of our assets within the Green River Basin, including the gas gathering pipeline company. We received consideration of USD 9,565,000 and 125,000,000 free trading EMR ordinary shares (valued at AUD 0.052 at closing).
Our working capital improved $1.8 million to $0.3 million during fiscal year ended 2011, as compared to negative working capital of $1.5 million in the prior year. We expect that working capital requirements will be funded through a combination of our existing funds, cash flow from operations and issuance of equity and debt securities. Management believes that current cash balances plus cash flow from operations will be sufficient to fund our capital and liquidity needs until at least February 28, 2012.
The following table summarizes the Company’s cash flows from operating, investing and financing activities and the amounts and percentage changes between years. The following analysis should be read in conjunction with our consolidated financial statement of cash flows.
Cash Flow from Operating Activities
Cash used in operating activities from continuing operations decreased $0.6 million to $1.8 million during fiscal year ended February 28, 2011, compared to $1.2 million used during fiscal year ended February 28, 2010. This is the result of increased exploration activities, which were $1.1 million in the current year compared to $0 in the previous year, and paying down our accounts payables and accrued expenses.
Net cash used in discontinued operations increased $0.7 million in the current year, compared to the prior year. This increase is primarily attributed to the collection of outstanding receivables and increased gas gathering income from the pipeline company that we previously operated.
Investing Activities
During fiscal years ended February 28, 2011, investing activities from continuing operations provided cash of $3.2 million compared to $0.8 million of net cash used in investing activities from continuing operations during fiscal year ended February 28, 2010. The increase can be primarily attributed to the sale of the DJ Basin in June 2010, which provided proceeds of $5.0 million, net of related transaction costs, of which $1.8 million of these proceeds received have been deferred and reflected as a financing activity in the statement of cash flows (See ”Our Oil and Gas Operations” above).
Net cash provided by investing activities - discontinued operations during fiscal years ended February 28, 2011 and 2010 were $11,260 and $1.2 million. During the current fiscal year, we acquired approximately $194,000 of leasehold costs in the Slater Dome Field, which was offset by proceeds received from Entek related to the Participation Agreement. In the previous year net cash provided by investing activities - discontinued operations was primarily attributable to the initial asset purchase payment of $1.0 million related to the Participation Agreement that we entered into with Entek (See discussion in “Our Oil and Gas Operations” above for further details).
Financing Activities
During fiscal years ended February 28, 2011 and 2010, financing activities provided cash of $0.9 million and $1.4 million, respectively representing an increase of $0.4 million. During fiscal year ended February 28, 2011, we made principal payments on our then outstanding notes payables of $0.8 million, which was offset by $1.9 million of proceeds received from the sale of the DJ Basin assets (See Note 2 - Acquisitions, Divestitures, and Assets Held for Sale).
During fiscal year ended February 28, 2010, we made a principal payment of $0.2 million on the NRGG note payable and a principal payment of $0.2 million on the Steamboat Mortgage. These cash outflows were offset with the sale of 18,000,000 shares of common stock, including 14,500,000 to affiliates of one of our directors, realizing gross proceeds from the sale of $1.8 million.
During fiscal years ended February 28, 2011 and 2010, we made dividend payments on certain Series B Preferred shares of $76,000 and $5,000 upon notification of conversion from the holders.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements or special purpose entities as of February 28, 2011. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise from these transactions if we had engaged in such financing arrangements.
Contractual Obligations
For fiscal years ended February 28, 2011 and 2010, month-to-month office facilities rental payments charged to expense were approximately $39,975 and $30,600, respectively. Future rental payments for office facilities under the terms of noncancelable operating leases are approximately $31,300 as of fiscal year ended February 28, 2011.
As of February 28, 2011, the Company does not have any office facility leases in effect for 2012 and beyond.
Critical Accounting Policies and Estimates.
The discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The application of accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate estimates and assumptions on a regular basis. We base estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ, perhaps materially, from these estimates and assumptions used in preparation of our financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Reserve Estimates.
Estimates of oil and natural gas reserves, by necessity, are projections based on geological and engineering data, and there are uncertainties inherent in the interpretation of such data, as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and work-over and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of our oil and gas properties and/or the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.
Many factors will affect actual net cash flows, including:
·
The amount and timing of actual production;
·
Supply and demand for natural gas;
·
Curtailments or increases in consumptions by natural gas purchasers; and
·
Changes in governmental regulation or taxation.
We currently do not have any reserves, but we believe the estimate will be critical in the future periods.
Revenue Recognition
We derive our revenue from the sale of produced natural gas and crude oil. Revenue is recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title transferred and if the collectability of the revenue is probable. Gas revenue is recorded using the sales method. Under this method revenue is recognized based on actual volumes of gas sold to purchasers. We may sell more or less than our entitlement share of the volumes produced, in which case a liability is recorded and the revenue is deferred if aggregate sales from the property exceed our share of total reserves in place. We had no significant gas imbalances at February 28, 2011.
Oil and Gas Producing Activities.
We follow the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well found proved reserves. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense. The costs of development wells are capitalized whether those wells are successful or unsuccessful. Geological and geophysical costs and the costs of carrying and retaining unproved properties are expensed as incurred. Depletion, depreciation and amortization (“DD&A”) of capitalized costs related to proved oil and gas properties is calculated on a well-by-well basis using the units-of-production method based upon proved reserves. Oil and gas facilities, which include compressors, gathering lines and water transfer and discharge equipment, and the natural gas gathering pipeline are depreciated straight-line over the estimated useful lives of the assets which range from seven to twenty years. The computation of DD&A takes into consideration restoration, dismantlement, and abandonment costs as well as the anticipated proceeds from salvaging equipment.
Impairment of Proved and Unproved Properties.
Proved producing oil and gas property costs will be evaluated for impairment and reduced to fair value if the sum of expected undiscounted future cash flows is less than net book value. Expected future cash flows are calculated on all proved reserves using a discount rate and price forecasts selected by our management. The discount rate is a rate that management believes is representative of current market conditions. The price forecast is based on NYMEX strip pricing for the first five years, adjusted for basis differentials and at the end of the first five years a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates. We had no proved oil and gas reserves or proved oil and gas property costs at February 28, 2011 and 2010, therefore no provision for impairment was recorded for proved oil and gas properties.
An impairment write down is recorded on unproved property when we determine that either the property will not be developed or the carrying value is not realizable. For fiscal years ended February 28, 2011 and 2010, we recorded a provision for impairment for its unproved property of $0 and $7.0 million, respectively, which is included in discontinued operations.
Share Based Compensation.
We estimate the fair value of share-based payment awards made to employees and directors on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. We estimate the fair value of each share-based award using the Black-Scholes option pricing model. The Black-Scholes model is complex and dependent on key estimates by management. The estimates with the greatest degree of subjective judgment are the estimated lives of the stock-based awards and the estimated volatility of our stock price.
Asset Retirement Obligations.
We recognize an estimated liability for future costs associated with the abandonment of oil and gas properties. A liability for the fair value of an asset retirement obligation and corresponding increase to the carrying value of the related long-lived asset are recorded at the time a well is completed or acquired. The increase in carrying value is included in oil and gas properties in the accompanying consolidated balance sheets. We deplete the amount added to proved oil and gas property costs and recognize expense in connection with the accretion of the discounted liability over the remaining estimated economic lives of the respective oil and gas properties.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Oil and Gas Price Risk
Our primary market risk exposure is in the pricing applicable to our natural gas and oil production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices applicable to our U.S. natural gas production. Pricing for natural gas and oil production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control including volatility in the differences between product prices at sales points and the applicable index price. These factors include, but are not limited to: changes in market demands, the general state of the economy, weather, pipeline activity and capacity and inventory storage levels. We are not currently using derivatives at this time to mitigate the risk of adverse changes in commodity prices, however, we may consider using them in the future.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included in Item 15, “Exhibits.”
Item 9.
Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure
On April 9, 2010, New Frontier Energy, Inc. (the “Company”) dismissed Stark Winter & Co., LLP (“Stark Winters”) as its independent registered public accounting firm.
The change in auditor was recommended and approved by the Company’s Board of Directors.
During the Company’s two most recent fiscal years and subsequent interim periods preceding this change of independent auditors, the Company is not aware of any disagreements with Stark Winters on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
During the Company’s two most recent fiscal years and subsequent interim periods preceding the dismissal of Stark Winters, the Company was not advised by Stark Winters of any of the “reportable events” described in Item 304(a)(1)(v) of Regulation S-K.
On April 9, 2010, the Company engaged Hein & Associates, LLP as its new independent registered public accounting firm. During the two most recent fiscal years and subsequent interim periods preceding the appointment of Hein & Associates, LLP, the Company has not consulted with Hein & Associates, LLP regarding any matter. The Company provided Hein & Associates, LLP the opportunity to clarify any past involvement. Hein & Associates, LLP had no further comments.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s evaluation of the effectiveness of the design and operation of our disclosure controls and procedures determined that, because of the material weaknesses in our internal control over financial reporting (“ICFR”) described below, our disclosure controls and procedures were not effective as of February 28, 2011.
Management’s report on Internal Control Over Financial Reporting
Our management is responsible for establishing ICFR as defined in Rules 13a-15(f) and 15(d)-15(f) under the 1934 Act. Our ICFR are intended to be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our ICFR are expected to include those policies and procedures that management believes are necessary that:
·
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and our directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect of financial statement preparation and may not prevent or detect misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.
As of February 28, 2011, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective ICFR established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments by smaller reporting companies and non-accelerated filers.
Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of February 28, 2011, and that a material weaknesses in ICFR existed as more fully described below.
As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency or combination of deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of February 28, 2011:
Inadequate Staffing And Supervision Within Our Accounting Operations
The relatively small number of accountants who are responsible for bookkeeping functions prevents us from segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. During the fiscal year ended February 28, 2011, we had only one person, an executive officer, that performed nearly all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. This provides for a lack of review over the financial reporting process that may result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC. As we had only one full time employee, we also do not have a sufficient compliment of personnel with appropriate training and experience in generally accepted accounting principles (GAAP) and SEC reporting to fully address complex financial reporting matters.
Inadequate Physical Security Of Certain Information Technology Assets And Data
Due to space limitations, certain network equipment is stored in common areas, which are accessible by unauthorized personnel. In addition, offsite backup of data is sporadic. These factors may result in the loss of financial data, which could adversely affect the reliability of information used to compile the financial statements and related disclosures as filed with the SEC.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting or disclosure controls and procedures. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Our directors and executive officers, their ages, positions held are as follows:
Name
Age
Position with the Company
Samyak Veera
Chief Executive Officer, President Chairman and Director
Michel Escher
Director
Tristan R. Farel
Treasurer and Chief Financial Officer
All of our directors hold office until the next general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
The following information summarizes the business experience of our officers and directors:
Samyak Veera was elected as Chairman of the Board in March of 2009, has been a director since January 2009 and has served as the Chief Executive Officer and President since November 2009. Since 2004, Mr. Veera has provided investment consultancy services, with a specialty in non-traditional asset classes, to select high net worth individuals and family offices. Since 2006, Mr. Veera has provided investment consultancy services for a family office that invests in a wide range of non-traditional investment, including private equity, venture capital, and real estate. From 2004 to 2006, Mr. Veera was a consultant to a family owned boutique investment firm that specialized in the acquisition of privately held companies. Mr. Veera previously worked at Morgan Stanley & Co. Inc in the fixed income group and at Goldman Sachs and Co. Inc., in the equity division. Mr. Veera is currently a director of Roselabs Finance Ltd., a publicly traded Non-Banking Finance Company in India. Mr. Veera is a summa cum laude graduate of Harvard college with a concentration in Applied Mathematics.
Tristan R. Farel has served as the Company’s Chief Financial Officer since February 12, 2010. Previously, Mr. Farel served as a financial consultant to various entities since December 2009. From June 2007 to December 2009, Mr. Farel served as the financial reporting manager for Resolute Energy Corporation, an oil and gas exploration and development company. From January 2002 to June 2007, Mr. Farel was an auditor for Hein & Associates, a public accounting firm. Mr. Farel has a Bachelor of Science in Business Administration with an emphasis in accounting from the University of Colorado.
R. Michel B. Escher, has served as the Director and Chief Operating Officer of Fidesco Trust Corporation, a company that manages the assets of the trusts and foundations in St. Kitts and Nevis since 2003. Mr. Escher has also served as the founder and director of Swissrealty Pro Limited, a real estate development, sales and property management company in St. Kitts and Nevis since 2003. From 2001 to 2003, Mr. Escher was the vice president and senior manager of the Investment Advisory Desk of Banque Pasche, an investment advisor located in Geneva, Switzerland. Mr. Escher previously served as a director of the company from October through December 2008 Pursuant to an Agreement to Appoint Directors which was terminated in December 2008.
There are no family relationships among directors or executive officers.
There are no arrangements or understandings between any director and any other person pursuant to which any director was elected as such. The present term of office of each director will expire at the next annual meeting of stockholders.
Our executive officers are elected annually at the first meeting of our Board of Directors held after each annual meeting of stockholders. Each executive officer holds office until his successor is duly elected and qualified, until his resignation or until removed in the manner provided by our bylaws.
Website and Code of Business Conduct and Ethics
We do not currently have a website. You may obtain copies of the reports that we file with the SEC at www.sec.gov. Upon written request, we will make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
On May 17, 2007, the Board of Directors adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. A copy of the code of ethics applicable to our principal executive officer, principal financial officer and principal accounting officer is attached to our Annual Report on Form 10-KSB as exhibit 14.1 filed on May 23, 2007 and is incorporated herein by this reference. Additionally, our Code of Ethics is available in print free of charge to any stockholder who requests it. Requests should be sent by mail to our corporate secretary at our principal office at 1801 Broadway, Suite 920, Denver, Colorado 80202.
Involvement in Certain Legal Proceedings
During the past five years, none of our directors, executive officers or persons that may be deemed promoters is or has been involved in any legal proceeding concerning (i) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction permanently or temporarily enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity; or (iv) been found by a court, the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law (and the judgment has not been reversed, suspended or vacated).
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act generally requires the Company's directors and executive officers and persons who own more than 10% of a registered class of the Company's equity securities (“10% owners”) to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Directors and executive officers and 10% owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of copies of such reports furnished to us and verbal representations that no other reports were required to be filed during the fiscal year ended February 28, 2010, all Section 16(a) filing requirements were met except that (i) Samyak Veera failed to timely file three Form 4s disclosing four transactions, (ii) Lazer G. Schafran failed to timely file one Form 4 disclosing one transaction and (iii) Robert Bensh failed to timely file a Form 3. Each of the directors subsequently filed their respective forms disclosing each of these transactions.
Corporate Governance
Committees
The Company does not have an audit committee, compensation committee, nominating committee, or other committee of the board that performs similar functions. Consequently the Company has not designated an audit committee financial expert. The board of directors of the Company perform the roles of these committees.
Item 11.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Our executive compensation program for the named executive officers (NEO’s) is administered by the Company’s Board of Directors. We do not have a compensation committee.
Compensation Objectives
We believe that the compensation programs for our NEO’s should reflect our performance and the value created for the Company's stockholders. In addition, the compensation programs should support the short-term and long-term strategic goals and values of the Company, and should reward individual contributions to the Company's success. We believe that the structure of the compensation programs for our executives reflects these objectives. Our compensation programs consist of three basic components: base salary, short-term compensation and long-term compensation.
Elements of Compensation
The elements of our compensation program include: (1) base salary, (2) short term compensation, and (3) long term compensation.
Base Salary.
Base salaries for the NEO’s are established based on the scope of their performance, responsibilities, professional qualifications and the other elements of the executive's compensation. The Company’s NEO’s base salary is subject to review and amendment at any time by the board of directors, in its sole and absolute discretion. Not all of the Company’s NEO’s receive a base salary.
Short-term Compensation.
Short-term compensation consists primarily of cash bonuses. The Company does not have a formal plan for the determination of short-term compensation. The short-term components are designed to reward the contributions of the NEO’s toward the Company’s annual financial, operational and strategic goals and reward individual performance.
Long-term Compensation.
Long-term compensation is comprised of various forms of equity compensation, including stock grants and stock options. The long-term elements are designed to assist the Company in long-term retention of key personnel and further align the interests of our NEO’s with our shareholders.
The determination of each element of compensation to the NEO’s are entirely in the discretion of the Board. We do not currently use any specific benchmarks or performance goals in determining the elements of and the size of awards and compensation.
Equity Award Practices
All equity awards are approved before or on the date of grant. The exercise price of at-the-money stock options and the grant price of all full-value awards is the closing price on the date of grant.
Our equity award approval process specifies the individual receiving the grant, the number of units or the value of the award, the exercise price or formula for determining the exercise price and the date of grant. The Company has no program, plan or practice to the timing of its option grants and such grants are determined by the Board of Directors.
Summary Compensation Table
The following table summarizes the compensation of Samyak Veera, our current chief executive officer and Tristan R. Farel, our current chief financial officer for the fiscal years ended February 28, 2011 and February 29, 2010.
(1)
Mr. Veera was appointed the Chief Executive Officer and President effective November 16, 2009. Does not include certain cash compensation, grant of common stock or options to acquire common stock granted to Mr. Veera or his affiliates for services rendered as a consultant to the Company prior to his appointment as an officer of the Company. For a discussion of this compensation, see “Item 13. Certain Relationships and Related Party Transactions” below.
(2)
For a discussion of the assumptions and methodologies used to value the awards in this column, please see the discussion of stock awards and option awards contained in Part II, Item 8, “Financial Statements” in Notes to Consolidated Financial Statements at Note 6, “Shareholders’ Equity.”
(3)
Mr. Farel was appointed the Principal Accounting and Financial Officer on February 11, 2010.
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Individual Arrangements and Employment Agreements
The following is a description of the individual arrangements that we have made with Mr. Veera and Mr. Farel with respect to their compensation.
Samyak Veera - Chief Executive Officer and President
The Company does not pay Mr. Veera any cash compensation for services rendered as the Chief Executive Officer and President.
On March 1, 2011, the Board of Directors approved the payment of a cash award of $1,581,000 to Mr. Veera. The award provided for a clawback of up to $500,000 within a six-month period following the grant should a majority of the independent members of the Board of Directors determine that either the CEO has not performed in his role as CEO to the expectations of the voting board members or the Company requires such funds in order to maintain a prudent cash reserve level. The return of such funds will be payable within 10 business days from the date of the request.
On January 12, 2010, the Company's Board of Directors approved the issuance to Mr. Veera of 750,000 shares of the Company's common stock as compensation for Mr. Veera's services for the period from December 1, 2009 to December 1, 2010. The shares were issued in two tranches, with 375,000 in shares of the Company's common stock issued on or about January 12, 2010 and 375,000 in shares of the Company's common stock issued on or about May 12, 2010.
Tristan Farel - Chief Financial Officer
Mr. Farel receives a salary of $150,000 per annum for services rendered as the Chief Financial Officer of the Company.
On May 11, 2010, Mr. Farel was granted 500,000 options to acquire shares of the Company’s common stock. These options fully vest on December 1, 2010 and expire on December 31, 2011.
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information concerning options awards to Veera and Farel at February 28, 2011.
(1)
Does not include any grant of common stock or options to acquire common stock granted to Mr. Veera or his affiliates for services rendered as a consultant to the Company prior to his appointment as an officer of the Company. For a discussion of this compensation, see “Item 13. Certain Relationships and Related Party Transactions” below.
Option Exercises During Fiscal Year
There were no options exercised by the NEO’s during the year ended February 28, 2011.
Potential Payments Upon Termination
None.
Effects of Termination Events or Change in Control on Unvested Equity Awards
None.
Director Compensation.
The following table summarizes the compensation of our directors for the fiscal year ended February 28, 2011.
Mr. Veera, an officer and director of the Company did not receive any compensation relating solely to services performed as a director. Mr. Veera did receive compensation in connection with his services as an officer of the Company and for certain consulting services provided to the Company. See “Summary Compensation Table” above and “Item 13. Related Party Transactions” below.
Liability Insurance.
The Company has provided liability insurance for its directors and officers since April 13, 2005. The annual cost of this coverage is approximately $25,000. Do we need to disclose it has lapsed?]
Stock Option and Stock Grant Plan
On June 6, 2003, we adopted the New Frontier Energy, Inc. Stock Option and Stock Grant Plan (the “2003 Plan”). The 2003 Plan allows for the issuance of incentive (qualified) options, non-qualified options and the grant of stock or other equity incentives to our employees, consultants, directors and others providing service of special significance to our company. The 2003 Plan is administered by a committee to be appointed by our Board of Directors, or in the absence of that appointment, by the Board of Directors itself. The 2003 Plan provides for the issuance of up to 625,000 shares or options.
Incentive stock options may be granted only to statutory employees. Non-qualified options and stock grants may be made to employees, consultants, directors and other individuals or entities determined by the committee. Incentive and non-qualified options may be granted to the same individual, in the discretion of the committee. The terms of the options or the grants, including the number of shares covered by the option or award, the exercise price, vesting schedule, and term, are determined in the sole discretion of the committee, except that incentive options must satisfy the requirements of the Internal Revenue Code applicable to incentive options. No option may be exercised more than ten years from the date of grant. The 2003 Plan expires in 2013.
As of October 19, 2010, we had previously granted 625,000 options to acquire shares of our common stock pursuant to the 2003 Plan, of which all have been forfeited and are available for grant under the 2003 Plan.
2007 Omnibus Long Term Incentive Plan
On June 11, 2007, the shareholders of the Company approved and ratified the Company’s 2007 Omnibus Long Term Incentive Plan (the “2007 Plan”), which authorizes the issuance of up to 10,000,000 shares of the Company’s Common Stock that may be issued under the 2007 Plan.
The purposes of the 2007 Plan are to provide those who are selected for participation in the 2007 Plan with added incentives to continue in the long-term service of the Company and to create in such persons a more direct interest in the future success of the operations of the Company by providing such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. The 2007 Plan is also designed to provide a financial incentive that will help the Company attract, retain and motivate the most qualified employees, consultants and advisors. The 2007 Plan is administered by a committee of the members of the board of directors, or in the absence of appointment of a committee, by the entire Board of Directors.
Pursuant to the terms of the 2007 Plan, the committee may grant incentive stock options (“Incentive Options”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), non-qualified stock options (“Non-Qualified Options”), restricted stock awards, stock grants and stock appreciation rights (collectively the “Awards”) to Eligible Employees and Eligible Consultants, each as defined in the 2007 Plan. Eligible Consultants are those consultants and advisors to the Company who are determined, by the committee, to be individuals whose services are important to the Company and who are eligible to receive Awards, other than Incentive Options, under the Plan. The number of Eligible Consultants will vary from time to time.
Stock options granted under the 2007 Plan may be either Incentive Options or Non-Qualified Options. The exercise price of a stock option granted under the 2007 Plan will be determined by the committee at the time the option is granted, the exercise price may or may not be the fair market value of our Common Stock. Stock options are exercisable at the times and upon the conditions that the committee may determine, as reflected in the applicable option agreement. The committee will also determine the maximum duration of the period in which the option may be exercised, which may not exceed ten years from the date of grant. All of the shares available for issuance under the Plan may be made subject to Incentive Options.
The option exercise price must be paid in full at the time of exercise, and is payable (in the discretion of the committee) by any one of the following methods or a combination thereof:
•
in cash or cash equivalents,
•
the surrender of previously acquired shares of our Common Stock,
•
authorization for us to withhold a number of shares otherwise payable pursuant to the exercise of an option, or
•
to the extent permitted by applicable law, through any other procedure acceptable to the committee.
The 2007 Plan provides for awards of our Common Stock that are subject to restrictions on transferability imposed under the 2007 Plan and other restrictions that may be determined by the committee in its discretion. Such restrictions will lapse on terms established by the committee. Except as may be otherwise provided under the award agreement relating to the restricted stock, a participant granted restricted stock will have all the rights of a stockholder.
The 2007 Plan provides that the committee, in its discretion, may award Stock Appreciation Rights (“SARs”), either in tandem with stock options or freestanding and unrelated to options. From time to time during the duration of the 2007 Plan, the committee may, in its sole discretion, adopt one or more incentive compensation arrangements for Participants pursuant to which the Participants may acquire shares of Stock, whether by purchase, outright grant, or otherwise.
The maximum number of shares of Common Stock that are authorized for issuance under the 2007 Plan is 10,000,000.
The Board of Directors may modify or terminate the 2007 Plan or any portion of the 2007 Plan at any time (subject to participant consent where such change would adversely affect an award previously granted to the participant), except that an amendment that requires stockholder approval in order for the 2007 Plan to continue to comply with any law, regulation or stock exchange requirement will not be effective unless approved by the requisite vote of our stockholders. In addition, the 2007 Plan or any outstanding option may not be amended to effectively decrease the exercise price of any outstanding option unless first approved by the stockholders. No awards may be granted under the 2007 Plan after the day prior to the tenth anniversary of its adoption date, but awards granted prior to that time can continue after such time in accordance with their terms.
Royalty and Working Interest Plan
On May 17, 2007, the Board of Directors adopted the Company’s Royalty and Working Interest Plan effective as of October 31, 2006. Pursuant to the Royalty and Working Interest Plan, a committee consisting of members of the board of directors shall administer the Plan and may select an overriding royalty or similar interest of an exploratory or development property or property for distribution to the participants of the Plan. The selection of properties is to be determined by the Board of Directors or a committee thereof, and it will be based upon all relevant factors such as sound corporate management and existing royalty burdens on the properties. The participants in the plan and the total overriding royalty or similar interest set aside for distribution to the participants in a property shall be determined by the Committee.
Effective December 1, 2010, the Board of Directors granted an aggregate of 2% and 7.5% in overriding royalty interests in certain acreage located in Routt County, Colorado and in Carbon County, Wyoming, respectively, to New World Trading Company, an affiliate of Samyak Veera and OENEX Partners, LLC, an affiliate of Tristan Farel.
Item 12:
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of April 4, 2011, certain information with respect to the beneficial ownership of our Common Stock by each stockholder known by us to be the beneficial owner of more than 5% of our Common Stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of Common Stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of Common Stock, except as otherwise indicated.
(1)
Represents (i) 1,250,000 shares of the Company’s Common Stock at a price of $0.20 per share granted to Mr. Veera on August 17, 2009 that expires on August 17, 2011,and options to acquire 500,000 of common stock at a price of $0.30 per share granted to Mr. Veera on January 12, 2010 that expire on January 11, 2015.
(2)
Represents 500,000 stock options granted to Mr. Farel on June 1, 2010 that vest on December 1, 2011.
(3)
Represents 37,845,380 shares of Common Stock owned in the name of Iris Energy Holdings Ltd. Mr. Escher is Iris Energy Holdings Ltd. sole director and as such, exercises voting and dispositive power over its shares.
(4)
Vision Opportunity Master Fund, Ltd. (the “Fund”) is the direct owner of 6,387,267 shares of common stock and Vision Capital Advantage Fund, L.P. (“VCAF”) is the owner of 1,887,891 shares of common stock. Vision Capital Advisors, LLC (the “Investment Manager”) serves as investment manager to the Fund. Adam Benowitz is the Managing Member of the Investment Manager. The Investment Manager also serves as investment manager to Vision Capital Advantage Fund, L.P. (“VCAF”). VCAF GP, LLC (the “General Partner”) serves as general partner of VCAF. Mr. Benowitz and the Investment Manager (and VCAF GP, with respect to the shares owned by VCAF) may be deemed to share with the Fund and VCAF voting and dispositive power with respect to such shares. Each of the parties in this footnote disclaims beneficial ownership with respect to any shares other than those beneficially owned directly by such other party. Based upon the information included in a Schedule 13D/A filed with the Commission on June 23, 2010.
(5)
Vision Opportunity Master Fund, Ltd. (the "Fund") is the direct owner of 6,387,267 shares of common stock and Vision Capital Advantage Fund, L.P. ("VCAF") is the owner of 1,887,891 shares of common stock. Vision Capital Advisors, LLC (the "Investment Manager") serves as investment manager to the Fund. Adam Benowitz is the Managing Member of the Investment Manager. The Investment Manager also serves as investment manager to Vision Capital Advantage Fund, L.P. ("VCAF"). VCAF GP, LLC (the "General Partner") serves as general partner of VCAF. Mr. Benowitz and the Investment Manager (and VCAF GP, with respect to the shares owned by VCAF) may be deemed to share with the Fund and VCAF voting and dispositive power with respect to such shares. Each of the parties in this footnote disclaims beneficial ownership with respect to any shares other than those beneficially owned directly by such other party. Based upon the information included in a Schedule 13D/A filed with the Commission on June 23, 2010.
(6)
Consists of 581,393 shares of common stock, $.001 par value per share, and 89,862 shares of common stock that may be acquired upon conversion of Series B Convertible Preferred Stock owned by Brian E. Peierls and 2,850,824 shares of common stock, $.001 par value per share, owned by The Peierls Foundation, Inc., and 478,169 shares of common stock, $.001 par value per share, that may be acquired upon conversion of Series B Convertible Preferred Stock owned by The Peierls Foundation, Inc. E. Jeffrey Peierls is the President and a Director of The Peierls Foundation, Inc. and Brian E. Peierls, the Vice President and a Director of the Peierls Foundation, Inc. Based upon the information included in a Schedule 13D/A filed with the Commission on February 11, 2010.
Changes In Control
We know of no arrangements, including the pledge of our securities by any person that might result in a change in control.
Item 13.
Item 13. Certain Relationships and Related Party Transactions
The Company paid $0 and $24,000 during the fiscal years ended February 28, 2011 and 2010, respectively, in connection with an office lease for office space in Littleton, Colorado with Spotswood Properties, LLC, (“Spotswood”), a Colorado limited liability company and an affiliate of the Company’s former President and CEO. This lease was terminated in December 2009 and the Company has entered into a new lease with an unaffiliated company.
The Company paid a corporation controlled by one of the former directors and a shareholder $0 and $15,625 for geological consulting during the fiscal years ended February 28, 2011 and 2010, respectively.
The Board of Directors approved the payment of a cash award of $1,581,000 to the Chairman and CEO. The award provided for a clawback of up to $500,000 within a six-month period following the grant should a majority of the independent members of the Board of Directors determine that either the CEO has not performed in his role as CEO to the expectations of the voting board members or the Company requires such funds in order to maintain a prudent cash reserve level. The return of such funds will be payable within 10 business days from the date of the request. The Company allocated $831,000 of this award to continuing operations and the remaining $750,000 to discontinued operations.
Effective August 17, 2009, Mr. Veera was granted 2,056,500 shares of the Company’s $0.001 par value common stock, valued at $637,515 and a two year option to acquire 1,250,000 shares of the Company’s Common Stock at a price of $0.20 per share, valued at $231,647 for certain consulting services previously rendered and as a structuring fee relating to the deposit of $500,000 into a segregated account in connection with the Participation Agreement.
In November 2009, and February 2010, the Company sold 6,500,000 and 8,000,000 shares, respectively of its Common Stock at a price of $0.10 per share to Iris Energy Holdings Limited, an affiliate of the Company whose sole director is Michel Escher, a director of the Company. In connection with these sales of common stock to Iris Energy at $0.10 per share, the Company recorded share-based compensation expense of $1.9 million in general and administrative expense, representing the difference between the market price of the stock on the date of the sale and the sales price of $0.10 per share of common stock.
On December 22, 2009, the Company’s Board of Directors approved the payment of $100,000 to Altius Business Services Pte. Ltd., an affiliate of Samyak Veera, for services rendered to the Company in connection with the Entek Participation Agreement the Company entered into in August 2009.
Item 14.
Item 14. Principal Accountant Fees and Services
The Company currently has no audit committee of the Board of Directors and is not required to maintain such a committee since its stock is not quoted on NASDAQ or traded on any national securities exchange. Accordingly, all material decisions affecting the Company’s audited financial statements, periodic disclosure with the SEC and its relationship with its auditors are addressed by the entire Board. The Board currently has no policies and procedures relating to the pre-approval of audit and audit related services.
Audit Fees
The Company estimates that it will pay Hein & Associates, LLP $50,000 in connection with the audit of its fiscal year ended February 28, 2011 financial statements. During the fiscal year ended February 28, 2010, Hein & Associates, LLP billed the Company an aggregate of $105,000 for audit services of its 2010 consolidated financial statements.
Audit-Related Fees
Hein & Associates, LLP did not bill any audit-related fees during the fiscal years ended February 28, 2011 and 2010. During the fiscal years ended February 28, 2011 and 2010, Stark Winter Schenkein & Co., LLP billed the Company an aggregate of $0 and $13,600 for audit related fees.
All Other Fees
The Company did not pay Hein & Associates, LLP any other fees during the fiscal years ended February 28, 2011 or 2010. During the fiscal years ended February 28, 2011 and 2010, Stark Winter Schenkein & Co., LLP billed the Company an aggregate of $0 and $4,500. The fees billed during fiscal year 2010 were in connection with an exchange offering prospectus.
Item 15.
Item 15. Exhibits
(a)
Financial Statements
Audit Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statement of Cash Flows
Notes to Financial Statements
(b)
Exhibits
The following is a list of exhibits filed or incorporated by reference into this Report:
Exhibit No.
Description
31.1
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
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.
In accordance with the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: May 16, 2011
By:
/s/ Samyak Veera
Samyak Veera, President, CEO & Director
Date: May 16, 2011
By:
/s/ Tristan R. Farel
Tristan R. Farel, Secretary/Treasurer,
Principal Accounting and Financial Officer
Date: May 16, 2011
By:
/s/ R. Michel Escher
R. Michel Escher, Director
NEW FRONTIER ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 2011 AND 2010
Page
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
New Frontier Energy, Inc.
We have audited the accompanying consolidated balance sheets of New Frontier Energy, Inc. and subsidiary as of February 28, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Frontier Energy, Inc. and subsidiary as of February 28, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ HEIN & ASSOCIATES LLP
Denver, Colorado
May 16, 2011
NEW FRONTIER ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 2011 and 2010
See accompanying notes to the consolidated financial statements.
NEW FRONTIER ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28, 2011 and 2010
See accompanying notes to the consolidated financial statements.
NEW FRONTIER ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 2011 and 2010
See accompanying notes to the consolidated financial statements.
NEW FRONTIER ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 2011 and 2010
See accompanying notes to the consolidated financial statements.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Note 1 - Summary of Significant Accounting Policies
The Company and Business
New Frontier Energy, Inc. (“NFEI” or the “Company”) is an independent energy company engaged in the exploration, development, acquisition, and production of natural gas and crude oil. The Company’s operations are conducted entirely in the continental United States, principally in the Denver Julesberg Basin (“DJ Basin”) in Colorado and the Amazon Prospect (“Amazon”) in the Calcasieu and Jefferson Parishes in Louisiana.
Previously, the Company had operations in the Green River Basin (“GRB”) in Colorado and Wyoming. These assets were sold in 2011 (see Note 4 for details).
Basis of Presentation
The accompanying consolidated financial statements include the accounts of NFEI and Slater Dome Gathering, LLLP (“SDG”), as discontinued operations (see Note 4) and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the instructions to Form 10-K and Regulation S-X. All significant intercompany accounts and transactions have been eliminated.
Principles of Consolidation
The February 28, 2011, consolidated financial statements include the accounts of NFEI as of and for the reporting periods ended February 28, and include the accounts of SDG (discontinued operations) as of and for the reporting periods ended December 31. SDG has a calendar fiscal year end, December 31, which is consolidated with the Company effective February 28. The creditors of SDG do not have recourse to the general credit of the Company.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of oil and gas reserves, assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates of proved oil and gas reserve quantities will provide the basis for the calculation of depletion, depreciation, and amortization (“DD&A”) and impairment of proved properties. The Company had no proved oil and gas reserves at February 28, 2011 and 2010. Actual results could differ from those estimates.
Industry Segment and Geographic Information
NFEI conducts operations in one industry segment, the crude oil and natural gas exploration and production industry. All of NFEI’s operations and assets are located in the United States, and all of its revenue is attributable to domestic customers. NFEI considers gathering, processing and marketing functions as ancillary to its oil and gas producing activities, and therefore are not reported as a separate segment.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these instruments.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Accounts Receivable
The Company’s accounts receivables consist mainly of receivables from partners with interests in common properties and assets operated by the Company. Collectability is dependent upon the financial wherewithal of each individual company and is influenced by the general economic conditions of the industry. The Company records an allowance for doubtful accounts on a case by case basis once there is evidence that collection is not probable. Receivables are not collateralized. As of February 28, 2011 and 2010, the Company had recorded an allowance for doubtful accounts of $819,331 and $835,132, respectively, which are included in discontinued operations.
Concentration of Credit Risk
Financial instruments that potentially subject NFEI to concentrations of credit risk consist primarily of cash equivalents and joint interest receivables. The Company periodically maintains cash balances at a commercial bank in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000. At February 28, 2011, the Company’s uninsured cash balance was $3,021,254. The company’s joint interest receivables are due from two partners at February 28, 2011 and 2010. NFEI received all of its oil and gas production revenue from one purchaser in fiscal year ended February 28, 2011, and received 91% of its production revenue from one purchaser in fiscal year ended February 28, 2010. In May 2010 the Company ceased being the operator of its oil and gas properties and assigned the responsibilities of operator to Entek GRB, LLC (“Entek”) in accordance with the Participation Agreement between Entek and NFEI. In April 2011 the Company sold all of its interests in the properties operated by Entek (see Note 4). Entek markets the Company’s portion of natural gas under a sales agreement between Entek and a third party, however NFEI believes that it is not dependent upon any of these customers or Entek due to the nature of its product. The terms of the sales agreement between Entek and the purchaser provide that the contract may terminate by giving written notice thirty days prior to the anniversary date of the agreement and there is no agreement in place between Entek and NFEI.
The concentration of credit risk in the oil and gas industry affects the overall exposure to credit risk because customers may be similarly affected by changes in economic or other conditions. The creditworthiness of customers and other counterparties is subject to continuing review, including the use of master netting agreements, where appropriate.
Oil and Gas Producing Activities
The Company follows the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well found proved reserves. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense. The costs of development wells are capitalized whether those wells are successful or unsuccessful. Geological and geophysical costs and the costs of carrying and retaining unproved properties are expensed as incurred. Depletion, depreciation and amortization (“DD&A”) of capitalized costs related to proved oil and gas properties is calculated on a well-by-well basis using the units-of-production method based upon proved reserves. Oil and gas facilities, which include compressors, gathering lines and water transfer and discharge equipment, and the natural gas gathering pipeline are depreciated straight-line over the estimated useful lives of the assets which range from seven to twenty years. The computation of DD&A takes into consideration restoration, dismantlement, and abandonment costs as well as the anticipated proceeds from salvaging equipment.
Impairment of Proved and Unproved Properties
Proved producing oil and gas property costs will be evaluated for impairment and reduced to fair value if the sum of expected undiscounted future cash flows is less than net book value. Expected future cash flows are calculated on all proved reserves using a discount rate and price forecasts selected by the Company’s management. The discount rate is a rate that management believes is representative of current market conditions. The price forecast is based on NYMEX strip pricing for the first five years, adjusted for basis differentials and at the end of the first five years a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates. The Company had no proved oil and gas reserves or proved oil and gas property costs at February 28, 2011 and 2010, therefore no provision for impairment was recorded for proved oil and gas properties.
An impairment write down is recorded on unproved property when the Company determines that either the property will not be developed or the carrying value is not realizable. For fiscal years ended February 28, 2011 and 2010, the Company recorded a provision for impairment for its unproved property of $0 and $7.0 million, respectively, which is included in discontinued operations.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Sales of Proved and Unproved Properties
The sale of a partial interest in a proved oil and gas property or of an entire proved property constituting a part of an amortization base is accounted for as normal retirement, and no gain or loss is recognized as long as the treatment does not significantly affect the units-of-production depletion rate. If the units-of-production rate is significantly affected, then the sale shall be accounted for as the sale of an asset, and a gain or loss shall be recognized. The unamortized cost of the property or group of properties shall be apportioned to the interest sold and the interest retained on the basis of the fair values of those interests. A gain or loss is recognized for all other sales of producing properties. The sale of a partial interest in an unproved property is accounted for as a recovery of cost when substantial uncertainty exists as to the ultimate recovery of the cost applicable to the interest retained. A gain on the sale is recognized to the extent that the sales price exceeds the carrying amount of the unproved property. A gain or loss is recognized for all other sales of nonproducing properties.
Other Property and Equipment
Other property and equipment such as office furniture and equipment, buildings, and computer hardware and software are recorded at cost. Costs of renewals and improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repair costs are expensed when incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets which range from three to thirty years. When other property and equipment is sold or retired, the capitalized costs and related accumulated depreciation are removed from the accounts. Other property and equipment is valued at the lower of cost or market value.
Assets Held for Sale
Assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty that the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted and a measurement for impairment is performed to expense any excess of carrying value over fair value less costs to sell. Subsequent changes to estimated fair value less the cost to sell will impact the measurement of assets held for sale for assets for which fair value is determined to be less than the carrying value of the assets.
As of February 28, 2011 and 2010, the accompanying consolidated balance sheets include approximately $5.4 million and $7.1 million, respectively in book value of assets held for sale and approximately $0.4 million and $1.3 million, respectively in book value of liabilities held for sale. The assets held for sale during fiscal years ended February 28, 2011 and 2010, include the Steamboat Property, unproved acreage located in the Green River Basin and SDG. The assets held for sale during fiscal year ended February 28, 2010, included unproved acreage located in the DJ Basin (sold in June 2010 - see Note 2), in addition to the assets previously described above.
The Company recorded an impairment related to its Steamboat Property of $51,000 and $260,000 during fiscal years ended February 28, 2011 and 2010, respectively.
The Company reclassed $37,000 previously classified as held for sale to unproved acreage held and used during fiscal years ended February 28, 2011 and 2010. This amount related to certain leases that were not conveyed in the Carrizo transaction. This reclass had no effect on the Company’s statement of operations for fiscal years ended February 28, 2011 and 2010.
The Company determined that the Green River Basin assets and SDG qualify for discontinued operations (see Note 4).
Materials Inventory
The Company’s materials inventory is primarily comprised of tubular goods to be used in future drilling or repair operations. Materials inventory is valued at the lower of cost or market and totaled $142,425 and $149,615 at February 28, 2011 and 2010, respectively. The Company incurred net materials inventory impairments of $0 and $48,400 for fiscal years ended February 28, 2011 and 2010, respectively.
Income Taxes
Deferred income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Tax positions meeting the more-likely-than-not recognition threshold are measured when appropriate.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Revenue Recognition
The Company derives its revenue from the sale of produced natural gas and crude oil. Revenue is recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title transferred and if the collectability of the revenue is probable. Gas revenue is recorded using the sales method. Under this method revenue is recognized based on actual volumes of gas sold to purchasers. The Company may sell more or less than their entitlement share of the volumes produced. A liability is recorded and the revenue is deferred if aggregate sales from the property exceed its share of total reserves in place. NFEI had no gas imbalances at February 28, 2011 and 2010.
Share Based compensation
The Company estimates the fair value of share-based payment awards made to employees and directors on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. We estimate the fair value of each share-based award using the Black-Scholes option pricing model. The Black-Scholes model is complex and dependent on key estimates by management. The estimates with the greatest degree of subjective judgment are the estimated lives of the stock-based awards and the estimated volatility of our stock price.
Asset Retirement Obligations
The Company recognizes an estimated liability for future costs associated with the abandonment of its oil and gas properties. A liability for the fair value of an asset retirement obligation and corresponding increase to the carrying value of the related long-lived asset are recorded at the time a well is completed or acquired. The increase in carrying value is included in oil and gas properties in the accompanying consolidated balance sheets. The Company depletes the amount added to proved oil and gas property costs and recognizes expense in connection with the accretion of the discounted liability over the remaining estimated economic lives of the respective oil and gas properties.
Earnings per Common Share
Basic net earnings per common share is calculated by dividing net earnings available to common stockholders by the weighted-average basic common shares outstanding for the respective period.
Diluted net earnings per common share of stock is calculated by dividing adjusted net earnings by the weighted-average diluted common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for the diluted earnings per share calculation consist of outstanding in-the-money stock options and warrants to purchase the Company’s common stock and the Series B Preferred Stock.
The treasury stock method is used to measure the dilutive impact of stock options, warrants and Series B and C Preferred Stock. When there is a loss from continuing operations, all potentially dilutive shares will be anti-dilutive.
The following table sets forth the calculation of basic and diluted earnings per share attributable to common shareholders:
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Reclassifications
Certain amounts reported in the Company’s financial statements for the year ended February 28, 2010, have been reclassified to conform to the current year presentation. Such reclassification had no impact on net loss.
Note 2 - Accounts Receivable and Accounts Payable and Accrued Expenses
Accounts Receivable
All of the Company’s accounts receivable are classified as held for sale at February 28, 2011 and 2010 (See Note 4).
Accounts Payable and Accrued Expenses
The Company’s accounts payable and accrued expense balance was made up of the following at February 28, 2011 and 2010:
Note 3 - Acquisitions and Divestitures
Acquisitions
There were no significant acquisitions during the fiscal year ended February 28, 2010.
On September 1, 2010 (effective date of April 1, 2010), NFEI entered into a Joint Exploration Agreement (the “Agreement”) with Yuma Exploration and Production Company, Inc. (“Yuma”), whereby NFEI will participate as a ten-percent working interest owner in the shooting, processing and interpretation of a 70 square mile 3-D seismic survey, the generation of prospects, the acquisition of leases, and the exploration, development and production of oil and gas prospects generated from the 3-D seismic in the Amazon Prospect in the Calcasieu and Jefferson Davis Parishes in Louisiana.
Divestitures
Denver Julesberg Basin
On June 4, 2010, NFEI entered into a Purchase and Sale Agreement with Carrizo Oil & Gas, Inc. (“Carrizo”) to sell its interest in certain oil and gas leases (the “Leases”) in the DJ Basin in Weld and Morgan Counties, Colorado.
Pursuant to the Purchase and Sale Agreement, Carrizo must drill not less than three Carry Wells (as defined in the Purchase and Sale Agreement) in the 18 months following the closing (the “Drilling Period”) on the sale of the interest in the Leases and carry the Company for a 33 1/3 percent working interest in each of these wells (subject to adjustment as provided in the Purchase and Sale Agreement). In the event that Carrizo fails to commence the drilling of the three Carry Wells during the Drilling Period, the Leases (except for 640 acre tracts) shall be reassigned back to the Company.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Pursuant to the Purchase and Sale Agreement, if Carrizo commences drilling three Carry Wells before the end of the Drilling Period, the Company has the option to repurchase an undivided one-third working interest in the Leases. To repurchase the one-third working interest in the Leases, the Company shall pay one-third of the total amount Carrizo paid to the Company, plus one-third of any amount Carrizo has paid to renew, extend or replace the Leases during the Drilling Period.
In connection with the Purchase and Sale Agreement, the Company and Carrizo also entered into an AMI Agreement whereby the Company and Carrizo agreed to create an area of mutual interest in all governmental sections within which the Company owns Leases as of June 4, 2010 (subject to certain exclusions)(the “AMI Territory”). Pursuant to the AMI Agreement, the Company and Carrizo granted the other party the option acquire its proportionate interest, (33 1/3% in the case of the Company and 66 2/3% in the case of Carrizo) in any oil and gas leases and other interests in the AMI Territory.
The Company received an initial advance from the sale of the interest in the Leases of $5,5 million and received an additional $50,307 upon verification of certain Leases. The Company treated this transaction as a sale of a partial interest in an unproved property. When a transaction in which an entity sells oil and gas properties and agrees to repurchase the property with a repurchase price equal to the original sales price, a financing arrangement exists. Therefore, the Company recorded a gain on sale to the extent that two-thirds of the proceeds ($3.7 million) are recognized as proceeds received and treated the remaining one-third ($1.8 million) as a financing arrangement, resulting in $1.8 million being reflected as a deferred gain on the consolidated balance sheet and as a financing activity in the consolidated statement of cash flows at February 28, 2011.
If this option is exercised, the Company will tender $1,856,766, plus 1/3 of any amount Carrizo has paid to renew, extend or replace the Leases during the Drilling Period to Carrizo in exchange for a 33 1/3 interest assignment in the Leases, which will satisfy the contingent liability. However, if the option expires unexercised, the Company will recognize an additional $1,856,766 as a gain on sale of unproved property. The Company recorded a gain of in the consolidated statement of operations of $2.7 million related to this sale.
Note 4 - Discontinued Operations
On February 16, 2011, our board of directors approved a plan to sell certain assets of NFEI, which represented a significant portion of our oil and gas exploration assets and our gas gathering pipeline company. The board of directors adopted this plan in conjunction with the Company entering into a Memorandum of Understanding (“MoU”) with Emerald GRB, LLC (“EMR”), a wholly-owned subsidiary of Emerald Oil and Gas NL (“Emerald Australia”), a publicly traded company whose shares trade on the Australian stock exchange. Under the terms of the MoU, NFEI will sell its leasehold interests located within Routt and Moffat counties, Colorado, and Carbon and Sweetwater Counties, Wyoming, any equipment or property used in connection with any oil and gas operations related to the assigned leases, its rights and claims under that certain Participation Agreement (as amended) between NFEI and Entek GRB, LLC (“Entek”) dated on or about August 10, 2009, all claims against Slaterdome Gas, Inc. pursuant to case file number 2010 CV 65 filed in the District Court in Moffat County Colorado, and all claims against Slaterdome Gas, Inc. pursuant to case file number 2010 CV 65 filed in the District Court in Moffat County Colorado, and its limited partnership and general partnership interest in SDG. In addition, EMR will assume all liabilities associated with the Assets, except for environmental liabilities arising from the period prior to Closing Date (effective April 30, 2011).
On April 30, 2011, the Company completed and closed this transaction with EMR. The consideration was USD 9,565,000 and 125,000,000 free trading EMR ordinary shares (valued at AUD 0.052 at closing). Further, NFEI received certain undertakings relative to liquidity and value with respect to the shares of EMR as part of the purchase price. NFEI estimates that it will record an after-tax gain on disposal of its discontinued operations of approximately $11.5 million.
The accompanying consolidated financial statements have been reclassified for all periods presented to reflect the operating results of the discontinued operations. Results of discontinued operations for the years ended February 28, 2011 and 2010 were as follows:
F - 12
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
The following assets and liabilities have been segregated and classified as held for sale in the accompanying consolidated balance sheet at February 28, 2011 and 2010.
Net cash flows of our discontinued operations from the categories of investing and financing activities were not significant for 2011 and 2010.
Note 5 - Notes payable
Natural Resource Group Gathering Note Payable
Effective December 31, 2007, the Company entered into a Purchase and Sale Agreement with Natural Resource Group Gathering, LLC (“NRGG”), whereby the Company increased its investment in Slater Dome Gathering, LLLP (“SDG”) by acquiring the general partner’s interest for $1,075,000 consisting of $268,750 in cash and executing a promissory note (the “Note”) in the amount of $806,250. The Note accrues interest at a rate of 2.5% per annum and is payable in quarterly installments of $201,562 plus interest. The terms of this note were modified on December 24, 2008, and subsequently on July 29, 2009, which extended the date and payment terms, whereby the then outstanding principal balance together with all accrued and unpaid interest will be due December 31, 2010. The Note may be prepaid at any time without penalty. At the option of the Company, quarterly payments may be deferred until the maturity date. The balance of this note payable at August 31, 2010, was $201,563. On December 31, 2010, Entek made a payment for the full amount on behalf of NFEI satisfying this debt as part of the Participation Agreement.
Paul G. Laird, the Company’s former President and CEO is a manager and owns 50% of the membership interest of NRGG.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Steamboat Property Note Payable
On June 15, 2007, the Company acquired real property in Steamboat Springs, CO (the “Steamboat Property”). The purchase price for the Steamboat Property was $1,175,000. In connection with the purchase of the Steamboat Property, the Company entered into a five-year mortgage in the principal amount of $881,250 (the “Steamboat Mortgage”). On July 7, 2009, the former President and CEO, as nominee for the Company, entered into a new mortgage in the amount of $635,000 (the “New Steamboat Mortgage”). The New Steamboat Mortgage had a one year term due July 6, 2010, and accrued interest at the rate of prime plus 400 basis points with a floor of 10% and collateralized by the Steamboat Property. As a condition of the New Steamboat Mortgage, interest in the amount of $63,500 was prepaid. The Company had the option to prepay the New Steamboat Mortgage in full, or in part, without penalty with any the unamortized prepaid interest being returned to the Company.
In June 2010, the former President and CEO executed a Quit Claim Deed assigning title for the Steamboat Property back to the Company. Concurrently with the execution of the Quit Claim Deed, NFEI made a payment in full satisfaction of the Steamboat Mortgage.
Note Payable - affiliates
On December 31, 2010, one of the Company’s directors elected to exchange his stock options for a $50,000 note payable, with an interest rate equal to the 1-month London Interbank Offered Rate (“LIBOR”), with such accrued and unpaid interest along with the principal to be paid on the maturity date of December 31, 2012. On February 28, 2011, the terms of this note were modified and provided for a reduction in principal of $10,000, with the full amount of $40,000 due and payable immediately.
On March 3, 2011, the Company made a payment of $40,000, in full satisfaction of this note payable. The Company recorded a $10,000 gain at February 28, 2011, in other income recognizing the reduction of this note payable.
Note 6 - Asset Retirement obligations
The Company recognizes an estimated liability for future costs associated with the abandonment of its oil and gas properties. A liability for the fair value of an asset retirement obligation and a corresponding increase to the carrying value of the related long-lived asset are recorded at the time a well is completed or acquired. The increase in carrying value is included in proved oil and gas properties in the accompanying consolidated balance sheets. The Company depletes the amount added to proved oil and gas property costs and recognizes expense in connection with the accretion of the discounted liability over the remaining estimated economic lives of the respective oil and gas properties. Cash paid to settle asset retirement obligations is included in the operating section of the Company’s accompanying consolidated statements of cash flows.
The Company’s estimated asset retirement obligation liability is included with discontinued operations and is based on historical experience in abandoning wells, estimated economic lives, estimates as to the cost to abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised. The credit-adjusted risk-free rate used to discount the Company’s abandonment liabilities is 8.0 percent. Revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
A reconciliation of the Company’s asset retirement obligation liability as of February 28, 2011 and 2010 is as follows:
[1] - Includes the revision of expected cash flows necessary for the cost to plug and abandon the Company’s wells and related equipment and reclamation of the land based on current market conditions and the reduction in the liability related to the farm-in interest earned by Entek in conjunction with the Participation Agreement.
Note 7 - Income Taxes
The provision (benefit) for income taxes consists of the following components:
The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
A reconciliation of the statutory U.S. federal rate and effective rates is as follows for the fiscal years ended February 28, 2011 and 2010:
The Company’s provision for income taxes differs from applying the statutory United States federal income tax rate to income before income taxes. The primary differences result from the valuation allowance and net operating losses.
The Company has a consolidated tax loss carry forward of $23,200,000, which expires through 2030. However, because of the Section 382 limitation, the portion of the Company’s total net operating loss carry forward which may be utilized through expiration is not currently known. The principle difference between the operating loss for income tax purposes and book purposes results from oil and gas property and share based compensation.
Note 8 - Stockholders’ Equity
Series A Convertible Preferred Stock
There were no shares of Series A convertible Preferred Stock, par value $0.001 issued or outstanding as of February 28, 2011 and 2010. Such shares may be issued with such preferences and in such series as determined by the Board of Directors.
Series B Convertible Preferred Stock
The Company is authorized to issue up to 36,036 shares of Series B 12% Cumulative Convertible Preferred Stock (“Series B Preferred Stock”) par value $0.001. During the year ended February 28, 2005, the Company issued 32,175 shares of Series B Preferred Stock in connection with a private placement, realizing gross proceeds of $3,217,500 offset by offering expenses in the amount of $456,524 resulting in proceeds to the Company of $2,760,976. The stated value and issue price of the Series B Preferred Stock is $100.00 per share and each share is convertible, at the option of the holder, into that number of shares of common stock determined by dividing the issue price of the aggregate number of shares of Series B Preferred Stock being converted plus any accrued and unpaid dividends by $0.39 per share, unless otherwise adjusted. The Series B Preferred Stock pays a cumulative, preferential cash dividend equal to 12% of the $100 issue price per year and is payable quarterly in arrears. The dividend is payable out of funds legally available for that purpose and will accumulate during any period when it is not paid.
Except as otherwise provided in the Series B Preferred Stock Certificate of Designation with respect to matters that adversely affect the rights of the holders of the Series B Preferred Stock, and as otherwise required by law, the Series B Preferred Stock has no voting rights.
Upon any liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary, the holders of the Series B Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series B Preferred Stock an amount equal to the stated value ($100.00) of the Series B Preferred Stock per share plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing. If the assets of the Company are insufficient to pay such amounts in full, then the entire assets to be distributed to the holders of the Series B Preferred Stock shall be distributed among the holders of the Series B Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
In the event the closing bid price of the Company’s common stock has closed for 20 consecutive trading days at a price not less than $0.78 (subject to adjustment), the Company may deliver notice to holders of the Series B Preferred Stock of the Company’s irrevocable election to redeem all or part of the Series B Preferred Stock. The redemption price is to be an amount equal to the stated value ($100.00) of the Series B Preferred Stock per share plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing. The Company must provide 30 days’ written notice to the holders of the Series B Preferred Stock.
The Series B Preferred Stock contain an anti-dilution provision which provides for conversion price adjustments (“down round protection”), which requires the fair value of these conversion features to be bifurcated and presented separately as a derivative liability on the consolidated balance sheets. The fair value of these financial instruments is remeasured each quarter with the change being reflected in the consolidated statements of operations as a “Change in fair value of derivative financial instruments” (see Note 8 - Fair Value Measurements).
During fiscal years ended February 28, 2011 and 2010, the company issued an aggregate of 279,229 and 18,013 shares of common stock, respectively, pursuant to the conversion of 1,089 and 91 shares of Series B Preferred Stock, respectively.
As of February 28, 2011 and 2010, there were 17,860 and 18,949 shares of Series B Preferred Stock, respectively, issued and outstanding. During the fiscal years ended February 28, 2011 and 2010, dividends of $224,454 and $212,894, respectively, were accrued and $76,126 and $4,897, respectively, were paid. Aggregate accrued and unpaid dividends as of February 28, 2011 and 2010, totaled $1,178,893 and $1,030,565, respectively.
Series C Convertible Preferred Stock
The Company was authorized to issue up to 230,000 shares of Series C 2.5% Cumulative Convertible Preferred Stock par value $0.001 (the “Series C Preferred Stock”). During fiscal year ended February 28, 2007, the Company issued 222,250 shares of Series C Preferred Stock realizing gross proceeds of $22,225,000, of which $600,000 was received in advance on a note payable that was subsequently converted to Series C Preferred Stock, offset by offering expenses in the amount of $401,326 resulting in proceeds to the Company of $21,823,674. The stated value and issue price of the Series C Preferred Stock was $100.00 per share and holders were entitled to receive cumulative dividends at the rate of 2.5% per annum, payable quarterly, beginning January 31, 2007. Effective December 1, 2009, pursuant to the automatic conversion provision, the then outstanding 216,000 shares of Series C preferred stock and the associated accumulated dividends were converted into an aggregate 34,099,265 shares of common stock. There are no Series C Preferred Stock outstanding at February 28, 2011 and 2010.
The Series C Preferred Stock contained an anti-dilution provision which provided for conversion price adjustments (“down round protection”), which required the fair value of the conversion features to be bifurcated and presented separately as a derivative liability on the consolidated balance sheets. The fair value of these financial instruments was remeasured each quarter with the change being reflected in the consolidated statements of operations as a “Change in fair value of derivative financial instruments” (see Note 8 - Fair Value Measurements).
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Common Stock
The authorized common stock of the Company consists of 500,000,000 common shares with a par value of $0.001. The holders of the common shares are entitled to one vote for each share of common stock. As of February 28, 2011 and 2010, there were 68,644,891 shares and 67,990,662 shares outstanding, respectively.
Effective August 17, 2009, the Company granted to its chairman and current President and CEO 2,056,500 shares of the Company’s $0.001 par value common stock, valued at $637,515, and a two year option to acquire 1,250,000 shares of the Company’s Common Stock at a price of $0.20 per share, valued at $231,647, for certain consulting services previously rendered and as a structuring fee relating to the deposit of $500,000 into a segregated account in connection with the Participation Agreement.
On or about November 11, 2009, the Company held a closing on the sale (the “Offering”) to accredited investors of an aggregate of 3,500,000 shares of the Company’s $0.001 par value Common Stock sold at a price of $0.10 per share (the “Common Stock”), effective as of November 9, 2009. The Company received a subscription for 6,500,000 shares of its Common Stock at a price of $0.10 per share that was accepted on or about November 19, 2009 from Iris Energy Holdings Limited (“Iris Energy”), an affiliate of the Company whose sole director is also a director and the current President and CEO of the Company. The Company received an aggregate of $1,000,000 in gross proceeds from the sale of the Common Stock.
On January 12, 2010, the Company’s Board of Directors approved the issuance of 750,000 shares of the Company’s common stock to the President and CEO as compensation for services for the period from December 1, 2009 to December 1, 2010. The shares are to be issued in two tranches, with 375,000 in shares of the Company’s common stock at a price of $0.24, valued at $90,000 issued on or about January 12, 2010 and 375,000 in shares of the Company’s common stock at a price of $0.24, valued at $45,000 issued on or about May 12, 2010.
On February 16, 2010, the Company held a closing on the sale (the “Offering”) to Iris Energy of an aggregate of 8,000,000 shares of the Company’s $0.001 par value Common Stock sold a price of $0.10 per share (The “Common Stock”) for gross proceeds of $800,000.
In connection with the sale of common stock to Iris Energy at $0.10 per share, the Company recorded share-based compensation expense of $1.9 million in general and administrative expense, representing the difference between the market price of the stock on the date of the sale and the sales price of $0.10 per share of common stock.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Stock Options and Warrants
Stock based compensation is the measurement and recording of the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, recognized over the period during which an employee is required to provide services in exchange for such award. The Company recognized share based compensation expense related to stock options and warrants of $116,707 and $1,586,030 during fiscal years ended February 28, 2011 and 2010, respectively.
In October 2006, the Board of Directors adopted an incentive stock option plan reserving 10,000,000 shares of the Company’s $0.001 par value common stock for issuance pursuant to the plan. The plan was adopted by shareholders on June 11, 2007. As of February 28, 2011 and 2010, no options have been granted under the plan.
Effective August 17, 2009, the Company granted to its chairman a two year option to acquire 1,250,000 shares of the Company’s Common Stock at a price of $0.20 per share and a fair value of $0.19, for certain consulting services previously rendered and as a structuring fee relating to the deposit of $500,000 into a segregated account in connection with the Participation Agreement. These options vested immediately and the fair value of $231,647 was included in share based compensation expense at fiscal year-end February 28, 2010.
On November 13, 2009, the Company granted a director of the Company 2,000,000 options to acquire shares of the Company’s Common Stock. Of the options granted, 1,000,000 were exercisable at a price of $0.25 with an expiration of December 31, 2010 and 1,000,000 were exercisable at a price of $0.50 per share with an expiration of December 31, 2011. The fair value of these options was $0.22 and $0.20 per share, respectively. On or before December 31, 2010, the director had the right, but not the obligation, to cancel these stock options in exchange for a payment of $50,000. At the Company’s election, this payment may be made either in cash or a 2-year unsecured promissory note issued by the Company in the principal amount of $50,000 (the “Note”). If the Company elects to issue the Note to the director, the Note will accrue interest on a monthly basis at a rate equal to the 1-month London Interbank Offered Rate, with such accrued and unpaid interest to be paid on the maturity date of the Note. On December 31, 2010, the director elected to exchange his options for a payment in the form of a note of $50,000. On February 28, 2011, the director and the Company entered into an agreement to accelerate the maturity date of the note and decrease the principle amount to $40,000 (see Note 4 - Notes Payable for details). This note was fully satisfied by the Company on March 3, 2011.
On January 12, 2010, the Company’s Board of Directors approved the issuance of 500,000 options to acquire shares of the Company’s common stock exercisable at a price of $0.30 per share and a fair value of $0.19 with an expiration date of January 25, 2015, as compensation for the President and CEO for services for the period from December 1, 2009 to December 1, 2010. These shares vested immediately and the fair value of $96,672 is included in share based compensation expense at fiscal year-end February 28, 2010.
Effective May 11, 2010, the Company’s Board of Directors approved the issuance of 500,000 options to acquire shares of the Company’s common stock exercisable at a price of $0.50 per share and a fair value of $0.06 per share with an expiration date of December 31, 2011, to the Company’s Chief Financial Officer. These shares vest on December 1, 2011 and the fair value of $30,600 is being realized over the requisite service period and is included in general and administrative expense.
The following assumptions were used for the options granted during fiscal years ended February 28, 2011 and 2010:
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
The activity for options and warrants during the fiscal year ended February 28, 2011 is summarized in the following tables:
Non-Incentive Stock Options February 28, 2011:
Non-Incentive Stock Options February 28, 2010:
Incentive Stock Option Shares February 28, 2011:
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Incentive Stock Option Shares February 28, 2010:
Fixed-Price Stock Options and Warrants, February 28, 2011:
Fixed-Price Stock Options and Warrants, February 28, 2010:
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
The following table summarizes the options and warrants outstanding at February 28, 2011:
The total estimated unrecognized compensation cost from unvested stock options as of February 28, 2011 was approximately $25,000, which is expected to be recognized over a weighted average period of approximately 10 months.
Note 9 - Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The guidance establishes a hierarchy for determining the fair values of assets and liabilities, based on the significance level of the following inputs:
●
Level 1 - Quoted prices in active markets for identical assets or liabilities
●
Level 2 - Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable
●
Level 3 - Significant inputs to the valuation model are unobservable.
An asset or liability subject to the fair value requirements is categorized within the hierarchy based on the lowest level of input that is significant to the fair value measurement. NFEI’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Both financial and non-financial assets and liabilities are categorized within the hierarchy based on the lowest level of input that is significant to the fair value measurement.
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
The following is a listing of the Company’s financial liabilities measured on a recurring basis and where it is classified within the hierarchy as of February 28, 2011:
There were no nonfinancial assets and liabilities measured at fair value on a nonrecurring basis at February 28, 2011.
The following is a listing of the Company’s assets and liabilities that are measured at fair value and where they are classified within the hierarchy as of February 28, 2010:
_____________________________
(a)
This represents a nonfinancial asset that is measured at fair value on a nonrecurring basis and is categorized as held for sale and included in discontinued operations.
(b)
This represents a nonfinancial asset that is measured at fair value on a nonrecurring basis.
(c)
This represents a financial liability that is measured at fair value on a recurring basis.
Proved Oil and Gas Properties
Proved oil and gas property costs will be evaluated for impairment and reduced to fair value if the sum of the expected undiscounted future cash flows is less than net book value. The Company will use Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts selected by the Company’s management based on current market conditions which includes the following factors: estimate of future cash payments, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The Company currently has no proved oil and gas property at February 28, 2011 and 2010.
Unproved oil and gas property will be evaluated for impairment when the Company determines that either the property will not be developed or the carrying value will not be realized. The Company will use Level 3 inputs based on management’s internal assessment of the valuation based on current market conditions, which include observable and unobservable inputs. Of the $5,422,461 (including $5,148,751 held for sale) of unproved property, $1,206,366 (all held for sale) was measured at fair value using Level 3 inputs at February 28, 2010. There were no unproved properties measured at fair value at February 28, 2011.
Materials Inventory
Materials inventory is valued at the lower of cost or market. The Company uses Level 2 inputs to measure the fair value of materials inventory, which is primarily comprised of tubular goods. The Company uses third party market quotes and compares the quotes to the book value of the materials inventory. If the book value exceeds the quoted market price, the Company reduces the book value to the market price. The considered factors result in an estimated exit-price that management believes provides a reasonable and consistent methodology for valuing materials inventory. The Company’s entire materials inventory was measured at fair value using Level 2 inputs at February 28, 2010. There were no materials inventory measured at fair value at February 28, 2011.
Asset Retirement Obligations
The Company estimates asset retirement obligations using the income valuation technique. It is utilized by the Company to determine the fair value of the liability at the point of inception by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. There were no asset retirement obligations measured at fair value at February 28, 2011.
Conversion Feature Embedded in the Series B Preferred Stock
The estimated fair values of the derivative liabilities embedded within the Series B preferred shares were determined at each reporting period using a monte carlo option pricing model with Level 3 inputs.
The Company had no Level 1 or Level 2 financial assets or liabilities that were measured at fair value on a recurring basis as of February 28, 2011. The following table reflects the Level 3 activity for the conversion feature measured at fair value on a recurring basis for the nine and three month periods ended November 30, 2010 and 2009:
The fair values of the embedded derivative liabilities for the Series B preferred shares were determined using the following key assumptions:
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Note 10 - Commitments and Contingencies
Operating Leases
For fiscal years ended February 28, 2011 and 2010, month-to-month office facilities rental payments charged to expense were approximately $39,975 and $30,600, respectively. Future rental payments for office facilities under the terms of noncancelable operating leases are approximately $31,300 as of fiscal year ended February 28, 2011.
As of February 28, 2011, the Company does not have any office facility leases in effect for 2012 and beyond.
Litigation
Standard Investment Corp. Litigation - On August 11, 2010, Standard Investment Corp. (“Standard”) served the Company with a complaint in the District Court, City and County of Denver, Colorado (Case No. 2010CV6233) alleging breach of contract, tortuous interference and unjust enrichment for failure to pay certain commissions Standard alleges due to it pursuant to an agreement (the “Standard Agreement”). Standard is seeking damages in the amount of $64,000 plus 4% of all additional capital invested by Entec Energy Limited (sic) with the Company plus interest, costs and attorney fees. On October 4, 2010, the Company filed an answer and counterclaim against Standard. The Company denies that it breached the Standard Agreement. Further, the Company alleges breach of contract, breach of the covenant of good faith and fair dealing and unjust enrichment against Standard. The Company is seeking compensatory damages, plus interest, costs and attorney fees in the counterclaim. As of the date of this Annual Report, the outcome of this matter cannot be determined.
Note 11 - Related Parties
The Company paid $0 and $24,000 during the fiscal years ended February 28, 2011 and 2010, respectively, in connection with an office lease for office space in Littleton, Colorado with Spotswood Properties, LLC, (“Spotswood”), a Colorado limited liability company and an affiliate of the Company’s former President and CEO. This lease was terminated in December 2009 and the Company has entered into a new lease with an unaffiliated company.
The Company paid a corporation controlled by one of the former directors and a shareholder $0 and $15,625 for geological consulting during the fiscal years ended February 28, 2011 and 2010, respectively.
The Board of Directors approved the payment of a cash award of $1,581,000 to the Chairman and CEO. The award provided for a clawback of up to $500,000 within a six-month period following the grant should a majority of the independent members of the Board of Directors determine that either the CEO has not performed in his role as CEO to the expectations of the voting board members or the Company requires such funds in order to maintain a prudent cash reserve level. The return of such funds will be payable within 10 business days from the date of the request. This entire amount is classified as Accounts payable - affiliates on the consolidated balance sheet at February 28, 2011.
See also Note 5 - Notes payable, Note 8 - Stockholders’ equity
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Note 12 - Subsequent Events
On May 2, 2011 (effective April 30, 2011), NFEI completed and closed the purchase and sale agreement with EMR, which included but was not limited to the following:
·
NFE’s leasehold interests located within Routt and Moffat counties, Colorado and Carbon and Sweetwater Counties, Wyoming,
·
any equipment or property used in connection with any oil and gas operations related to the assigned leases,
·
NFE’s limited partnership and general partnership interest in Slater Dome Gathering, LLLP,
·
NFE’s rights and claims under that certain Participation Agreement (as amended) between NFE and Entek GRB, LLC (Entek) dated on or about August 10, 2009,
·
NFE’s claims against Slaterdome Gas, Inc. pursuant to case file number 2010 CV 65 filed in the District Court in Moffat County Colorado, and
·
NFE’s claims against Slaterdome Gas, Inc. pursuant to case file number CV-10-202 filed in the District Court in Carbon County, Wyoming.
In addition, EMR assumed all liabilities associated with the Assets except for environmental liabilities arising from the period prior to Closing Date.
The consideration was USD 9,565,000 and 125,000,000 free trading EMR ordinary shares (valued at AUD 0.052 at closing). Further, NFEI received certain undertakings relative to liquidity and value with respect to the shares of EMR as part of the purchase price.
Note 13 - Disclosures about Oil and Gas Producing Activities
The Company has incurred the following costs, both capitalized and expensed, in respect to its oil and gas property acquisition. Exploration and development activities are summarized as follows (all in the United States):
NEW FRONTIER ENERGY, INC.
Notes to Consolidated Financial Statements
February 28, 2011
Note 14 - Supplementary Oil and Gas Information (Unaudited)
Estimated Oil and Gas Reserve Quantities
Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible - from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations - prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined, and the price to be used is the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. With respect to reserves as of dates prior to February 28, 2010, the applicable SEC definition of proved reserves was the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, meaning prices and costs as of the date the estimate is made.
At February 28, 2011 and 2010, there were no recoverable reserves from the Company’s wells at the existing economic and operating conditions.
Estimated quantities of proved reserves are presented in the following tables:
Standardized Measure of Discounted Future Net Cash Flow
Future cash inflows and future production and development costs are determined by applying prices and costs, including transportation, quality, and basis differentials, to the year-end estimated quantities of oil and gas to be produced in the future. Each property the Company operates is also charged with field-level overhead in the estimated reserve calculation. Estimated future income taxes are computed using the current statutory income tax rates, including consideration for estimated future statutory depletion. The resulting future net cash flows are reduced to present value amounts by applying a ten percent annual discount factor.
Future operating costs are determined based on estimates of expenditures to be incurred in developing and producing the proved oil and gas reserves in place at the end of the period using year-end costs and assuming continuation of existing economic conditions, plus Company overhead incurred by the central administrative office attributable to operating activities. The Company had no proved reserves at February 28, 2011 and 2010.
Standardized measure of cash flows:
Principal changes in the Standardized Measure for the years ended February 28, 2011 and 2010, are summarized as follows: