form10-qsb.htm
United States
Securities And Exchange
Commission
Washington,
D.C. 20549
Form 10-QSB
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2008
Commission
File Number: 000-33321
Fellows Energy
Ltd.
(Exact Name of Small Business
Issuer as Specified in its Charter)
|
Nevada
|
|
33-0967648
|
|
(State or other jurisdiction
of
incorporation or
organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
|
1369 Forest
Park Cir. Suite #202
Lafayette, CO
80026
(Address of
Principal Executive Offices)
|
(303)
926-4415
(Registrant’s
Telephone Number, Including Area Code)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes x No
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: As of May 13, 2008 there were
100,000,000 shares of the issuer’s $.001 par value common stock issued and
outstanding.
Transitional
Small Business Disclosure Format:
¨ Yes x No
Quarterly
Report on Form 10-QSB for the
Quarterly
Period Ending March 31, 2008
Table of
Contents
PART I.
FINANCIAL INFORMATION
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
March
31, 2008 (Unaudited) and December 31, 2007
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2008 and 2007
(Unaudited)
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2008 and 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 1. Financial
Statements
Fellows
Energy Ltd.
Balance
Sheets
|
|
|
Three
Months Ended
|
|
|
Year
Ended
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
423 |
|
|
$ |
3,654 |
|
|
Accounts
receivable
|
|
|
202,220 |
|
|
|
202,220 |
|
|
Settlement
receivable
|
|
|
150,000 |
|
|
|
243,104 |
|
|
Total
current assets
|
|
|
352,643 |
|
|
|
448,978 |
|
|
|
|
|
|
|
|
|
|
|
|
Unproved
oil & gas property
|
|
|
951,140 |
|
|
|
951,140 |
|
|
Equipment,
net of $49,112 and $44,387 accumulated depreciation
respectively
|
|
|
38,147 |
|
|
|
42,871 |
|
|
Restricted
cash
|
|
|
160,000 |
|
|
|
160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,501,930 |
|
|
$ |
1,602,989 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
And Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
395,065 |
|
|
$ |
395,147 |
|
|
Other
accrued liabilities
|
|
|
297,517 |
|
|
|
230,838 |
|
|
Taxes
payable
|
|
|
— |
|
|
|
3,564 |
|
|
Interest
payable
|
|
|
309,025 |
|
|
|
291,100 |
|
|
Notes
payable
|
|
|
282,556 |
|
|
|
393,381 |
|
|
Convertible
debenture
|
|
|
2,053,139 |
|
|
|
2,253,139 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,337,302 |
|
|
|
3,567,169 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
payable – related party
|
|
|
454,861 |
|
|
|
358,234 |
|
|
Notes
payable – related party
|
|
|
3,085,376 |
|
|
|
2,753,573 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 25,000,000 shares authorized; none
outstanding
|
|
|
— |
|
|
|
— |
|
|
Common
stock, $.001 par value; 100,000,000 shares authorized; 100,000,000 and
100,000,000 shares issued and outstanding
|
|
|
100,000 |
|
|
|
100,000 |
|
|
Additional
paid-in capital
|
|
|
20,328,962 |
|
|
|
20,328,962 |
|
|
Stock
pledged as collateral
|
|
|
(53,053 |
) |
|
|
(53,053 |
) |
|
Accumulated
deficit
|
|
|
(25,751,518 |
) |
|
|
(25,451,896 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
(5,375,609 |
) |
|
|
(5,075,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,501,930 |
|
|
$ |
1,602,989 |
|
See
accompanying notes to unaudited financial statements
Statements
of Operations
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
172,248 |
|
|
|
1,557,573 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
(172,248 |
) |
|
|
(1,557,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(127,374 |
) |
|
|
(662,995 |
) |
|
Miscellaneous
income
|
|
|
— |
|
|
|
12,691 |
|
|
Total
other expense
|
|
|
(127,374 |
) |
|
|
(650,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income tax
|
|
|
(299,622 |
) |
|
|
(2,207,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
— |
|
|
|
— |
|
|
Deferred
tax benefit
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(299,622 |
) |
|
$ |
(2,207,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
Revenue
from discontinued operations
|
|
|
— |
|
|
|
111,410 |
|
|
Expenses
from discontinued operations
|
|
|
— |
|
|
|
94,547 |
|
|
|
|
|
|
|
|
|
|
|
|
Gain from
discontinued operations
|
|
|
— |
|
|
|
16,863 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(299,622 |
) |
|
$ |
(2,191,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
— |
|
|
$ |
(0.02 |
) |
|
Basic
and diluted weighted average shares outstanding
|
|
|
100,000,000 |
|
|
|
88,250,100 |
|
See
accompanying notes to unaudited financial statements
Statements
of Cash Flows
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(299,622 |
) |
|
$ |
(565,937 |
) |
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Gain on
sale of marketable securities
|
|
|
— |
|
|
|
20,496 |
|
|
Debt
issue costs and discount amortization
|
|
|
— |
|
|
|
511,368 |
|
|
Depreciation
|
|
|
4,724 |
|
|
|
7,277 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
93,103 |
|
|
|
(201,829 |
) |
|
Interest
payable
|
|
|
114,552 |
|
|
|
145,700 |
|
|
Accounts
payable & other liabilities
|
|
|
63,034 |
|
|
|
112,456 |
|
|
Net
cash provided by (used in) operating activities
|
|
|
(24,209 |
) |
|
|
29,531 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
— |
|
|
|
85,411 |
|
|
Deposits
|
|
|
— |
|
|
|
554,000 |
|
|
Unproved
oil and gas property additions
|
|
|
— |
|
|
|
(445,000 |
) |
|
Restricted
Cash
|
|
|
— |
|
|
|
(25,000 |
) |
|
Purchase
of equipment
|
|
|
— |
|
|
|
(1,148,607 |
) |
|
Net
cash used in investing activities
|
|
|
— |
|
|
|
(979,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments
on convertible debenture
|
|
|
(200,000 |
) |
|
|
(260,499 |
) |
|
Borrowings
on note payable
|
|
|
331,803 |
|
|
|
1,070,119 |
|
|
Payments
on notes payable
|
|
|
(110,825 |
) |
|
|
(134,000 |
) |
|
Net
cash provided by financing activities:
|
|
|
20,978 |
|
|
|
675,620 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and equivalents
|
|
|
(3,231 |
) |
|
|
(274,045 |
) |
|
Cash
and equivalents at beginning of period
|
|
|
3,654 |
|
|
|
347,558 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents at end of period
|
|
$ |
423 |
|
|
$ |
73,513 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow and Non-cash Investing and Financing
Activity:
|
|
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$ |
— |
|
|
$ |
— |
|
|
Interest
paid
|
|
$ |
14,175 |
|
|
$ |
— |
|
|
Non
cash:
|
|
|
|
|
|
|
|
|
|
Convertible
debenture paid with stock issuance
|
|
$ |
— |
|
|
$ |
740,231 |
|
See
accompanying notes to unaudited financial statements
Fellows Energy Ltd.
Notes to Unaudited Financial
Statements
March 31, 2008
Note 1—Basis of Presentation and Nature of
Operations
We have prepared the accompanying
unaudited condensed financial statements in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-QSB and item 310(b) of
Regulation S-B. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements. You
should read these financial statements with our Annual Report on Form 10-KSB for
the year ended December 31, 2007, as well as the 10-QSB for the quarters
ended September 30, 2007, June 30, 2007, and March 31, 2007. In our
opinion, we have included all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. Operating results for
the quarters presented are not necessarily indicative of the results that you
may expect for the full year.
We are engaged in the
exploration, extraction, processing and reclamation of coal bed methane, natural
gas, and oil projects in the western United States. We were incorporated in the
state of Nevada on April 9, 2001 as Fuel Centers, Inc. On November 12, 2003, we
changed our name to Fellows Energy Ltd. Our principal offices are located in
Lafayette, Colorado.
Cash
and Cash Equivalents
We consider all highly liquid
debt instruments purchased with maturity of three months or less to be cash
equivalents. At March 31, 2008 and December 31, 2007, we had approximately
$423 and $3,654 in cash equivalents respectively.
Property
and Equipment
Property and equipment is
recorded at cost. Depreciation is provided for on the straight-line method over
the estimated useful lives of the related assets as follows:
Furniture and fixtures: 5
years
Software: 3 to 10 years
(depending on software)
Computer and office equipment: 3
to 5 years (depending on equipment)
Field equipment: 1 to 30 years
(depending on equipment)
The cost of maintenance and
repairs is charged to expense in the period incurred. Expenditures that increase
the useful lives of assets are capitalized and depreciated over the remaining
useful lives of the assets. When items are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in income.
Investment
in Oil and Gas Properties
We follow the successful-efforts
method of accounting for oil and gas property as defined under Statement of
Financial Accounting Standards No. 19, Financial Accounting and Reporting by Oil
and Gas Producing Companies (“FAS 19”). Under this method of accounting, we
capitalize all property acquisition cost and cost of exploratory and development
wells when incurred, pending determination of whether the well has found proved
reserves. If an exploratory well does not find proved reserves, we charge to
expense the cost of drilling the well. We include exploratory dry hole cost in
cash flow from investing activities within the cash flow statement. We
capitalize the cost of development wells whether productive or nonproductive. We
had no exploratory well cost that had been suspended for one year or more as
of March 31, 2008.
We expense as incurred geological
and geophysical cost and the cost of carrying and retaining unproved property.
We will provide depletion, depreciation and amortization (DD&A) of
capitalized cost of proved oil and gas property on a field-by-field basis using
the units-of-production method based upon proved reserves. In computing DD&A
we take into consideration restoration, dismantlement and abandonment cost and
the anticipated proceeds from equipment salvage. When applicable, we will apply
the provisions of Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations, which provides guidance on
accounting for dismantlement and abandonment cost.
We review our long-lived assets
for impairment when events or changes in circumstances indicate that an
impairment may have occurred. In the impairment test we compare the expected
undiscounted future net revenue on a field-by-field basis with the related net
capitalized cost at the end of each period. Should the net capitalized cost
exceed the undiscounted future net revenue of a property, we will write down the
cost of the property to fair value, which we will determine using discounted
future net revenue. We will provide an impairment allowance on a
property-by-property basis when we determine that the unproved property will not
be developed.
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
Impairment
of Unproved (Non-Producing) Property
Unproved properties will be
assessed periodically, to determine whether or not they have been impaired. We
will provide an impairment allowance on unproved property at any time we
determine that a property will not be developed. At March 31, 2008, we
consider our current property to be economically and operationally viable, in
accordance with FAS 19. In determining that there was no impairment of the
unproved property, we considered such factors as our commitment to bring the
project into production, the cost being incurred to develop the project, and
others.
Sales
of Producing and Non-producing Property
We account for the sale of a
partial interest in a proved property as normal retirement. We recognize no gain
or loss as long as this treatment does not significantly affect the
unit-of-production depletion rate. We recognize a gain or loss for all other
sales of producing properties and include the gain or loss in the results of
operations. We account for the sale of a partial interest in an unproved
property as a recovery of cost when substantial uncertainty exists as to
recovery of the cost applicable to the interest retained. We recognize a gain on
the sale to the extent that the sales price exceeds the carrying amount of the
unproved property. We recognize a gain or loss for all other sales of
non-producing properties and include the gain or loss in the results of
operations.
Asset
Retirement Obligation
We follow the Statement of
Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset
Retirement Obligations”, which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The carrying value of a property associated with the
capitalization of an asset retirement cost are included in proved oil and gas
property in the balance sheets. Our asset retirement obligation consists of
costs related to the plugging of wells and removal of facilities and equipment
on its oil and gas properties. The asset retirement liability is allocated to
operating expenses using a systematic and rational method.
Use
of Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires us to make certain estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on the knowledge of
current events and actions that we may undertake in the future, they may
ultimately differ from actual results. Included in these estimates are
assumptions about allowances for valuation of deferred tax assets. Accounts
receivable are stated after evaluation as to their collectability and an
appropriate allowance for doubtful accounts is provided where considered
necessary. The provision for asset retirement obligation, depletion, as well as
our impairment assessment on our oil and gas properties and other long lived
assets are based on estimates and by their nature, these estimates are subject
to measurement uncertainty and the effect on the financial statements of changes
in these estimates, in future periods, could be significant.
Revenue
Recognition
We use the sales method of
accounting for oil and gas revenues. Under this method, revenues are recognized
based on the actual volumes of gas and oil sold to purchasers. The volume sold
may differ from the volumes we are entitled to, based on our individual interest
in the property. Periodically, imbalances between production and nomination
volumes can occur for various reasons. In cases where imbalances have occurred,
a production imbalance receivable or liability will be recorded. Costs
associated with production are expensed in the period in which they are
incurred.
Income
Tax
Income taxes are determined using
the liability method in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. In addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
Net
Loss per Common Share
We have adopted Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128
requires the reporting of basic and diluted earnings/loss per share. We
calculate basic loss per share by dividing net loss by the weighted average
number of outstanding common shares during the period. We calculate diluted loss
per share by dividing net loss by the weighted average number of outstanding
common shares including all potentially dilutive securities during the period.
For the period ended March 31, 2008, all weighted average shares
outstanding have been included in the calculation, and all of our warrants
have an anti-dilutive effect on per common share amounts.
Accumulated
Other Comprehensive Income (Loss)
Accumulated other comprehensive
income reflects changes in equity that result from transactions and economic
events from non-operating sources.
New
Accounting Pronouncements
Accounting
for Uncertainty in Income Taxes – In June 2006, the FASB issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),
an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation requires that the
Company recognize in the financial statements, the impact of a tax position, if
that position is more likely than not of being sustained on audit, based on the
technical merits of the position. FIN 48 also provides guidance on recognition,
classification, interest and penalties, accounting in interim periods and
disclosure. FIN 48 is effective for fiscal years beginning after December 15,
2006, and is required as of the beginning of fiscal 2008, with the cumulative
effect of the change in accounting principle recorded as an adjustment to the
opening balance of deficit. We have evaluated the impact of FIN 48 on our
financial statements, and have concluded that the Company has not taken any tax
positions that would be less than likely of being sustained upon
audit.
Fair Value Measurements – In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS
157”), which defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, and is
applicable beginning in the first quarter of 2008. We have evaluated FAS
157, and do not consider it to have an impact on our financial
statements.
The Fair Value Option for
Financial Assets and Financial Liabilities – In February 2007, the FASB issued
FAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities – Including an amendment of FASB Statement No. 115”, (“FAS 159”)
which permits entities to choose to measure many financial instruments and
certain other items at fair value at specified election dates. A business entity
is required to report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
This statement is expected to expand the use of fair value measurement. FAS 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, and is
applicable beginning in the first quarter of 2008. We have evaluated FAS
159, and do not consider it to have an impact on our financial
statements.
Stock
Options
On October 9, 2003, we adopted an
incentive stock option plan, pursuant to which shares of our common stock are
reserved for issuance to satisfy the exercise of options. The plan authorizes up
to 2,000,000 shares of authorized common stock to be purchased pursuant to the
exercise of options. Our stockholders approved the plan on November 10, 2003. On
September 15, 2004, we granted an option for 200,000 shares to our CEO, 150,000
shares to our vice president and 125,000 shares to an employee. These options
are exercisable at $0.80 per share, the price of our stock on the grant date.
The options vested 50% on the grant date and vest 50% on September 15, 2005. On
October 3, 2005, we granted an option for 100,000 shares to our CEO, 150,000 to
our Vice President and 175,000 and 200,000 shares to two employees respectively.
On November 1, 2006, we granted an option for 300,000 shares to our Vice
President of Business Development.
Effective the date of the
debenture conversion price, February 15, 2007, amendment and corresponding share
issuance having issued all authorized common stock as described in Note 9, the
Board of Directors of the Company elected to cancel all outstanding stock
options, as they had been significantly "out of the money" and worthless as
valued under the black-scholes option value pricing model since December 2005.
Therefore all the options in the plan have been returned to the treasury of the
option plan.
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
Note
2—Asset Retirement Obligation
The Company follows Statement of
Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement
Obligations”, which requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The increase in carrying value of a property associated
with the capitalization of an asset retirement cost is included in proved oil
and gas properties in the consolidated balance sheets.
The Company depletes the amount
added to proved oil and gas property costs. The future cash outflows for
oil and gas properties associated with settling the asset retirement obligations
that have been accrued in the accompanying balance sheets are excluded from the
ceiling test calculations. The Company’s asset retirement obligation
consists of costs related to the plugging of wells and removal of facilities and
equipment on its oil and gas properties. The asset retirement liability is
allocated to operating expenses using a systematic and rational method.
At March 31, 2008, the asset retirement obligation and accretion expense
were zero.
Note
3—Going Concern
As shown in the accompanying
financial statements, we have incurred significant operating losses since
inception and previously incurred a loss on our discontinued automotive fuel
business. As of March 31, 2008, we have limited financial resources until such
time that we are able to generate positive cash flow from operations. These
factors raise substantial doubt about our ability to continue as a going
concern. Our ability to achieve and maintain profitability and positive cash
flow is dependent upon our ability to locate profitable mineral properties,
generate revenue from our planned business operations, and control exploration
cost. Management plans to fund its future operation by joint venturing,
obtaining additional financing, and attaining additional commercial production.
However, there is no assurance that we will be able to obtain additional
financing from investors or private lenders, or that additional commercial
production can be attained.
Note
4—Settlement Receivable
In August and September 2005 as
part of our earn-in arrangement, we agreed to advance Mountain Oil and Gas a
total of $66,000 for purposes of working capital in exchange for oilfield and
rig services. Originally this balance was classified as a deposit,
and has since been reclassified as a note receivable. As indicated in
the agreement, in the event that sufficient services were not performed, the
amount would convert to a loan, 12% per annum, commencing February,
2006. The amount is secured with field equipment including a pumping
unit, engine, treater, and rods.
In addition to the foregoing, and in
October 2005, we entered into an agreement to obtain up to a 75% working
interest in certain well bores owned by Mountain Oil and Gas. In
connection with this, we agreed to advance Mountain Oil and Gas a total of
$100,000 for the purpose of well bonding and working capital. This
was due and payable back to the Company on December 30, 2005. Upon
default, and pursuant to the Master Wellbore Agreement dated, October 19, 2005,
the Company became entitled to $160,000 of the net revenues from the 1-16A1E
well effective January 1, 2006. Repayment is secured by a pumping
unit located on the Dye-Hall well for the value of the working capital and well
bonding.
On October 15, 2007,
we entered into a settlement agreement with Creston Resources Ltd (successor in
interest to Mountain Oil and Gas, Inc.) to settle the notes receivable owed to
us, as mentioned above. The settlement agreement releases all claims by
either party except; $31,169 as consideration for oil sales on the 1-34B well
payable to us, and a promissory note for the amount of $300,000 payable to us
without interest (except in case of default) in twelve equal monthly
installments of $25,000. The first payment was due and payable on October
15, 2007, and payable on the 15th of each month thereafter until paid in
full. As of March 31, 2008, we have received $150,000 on the note.
Note
5—Notes Payable
At March 31, 2008, we owed
two unsecured demand notes of $2,485,376 and $600,000. The notes
accrue interest at a rate of 10% and 18% per annum compounded daily to an entity
controlled by our CEO. These notes include $454,861 due in
interest.
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
In 2006, we
obtained $1.25 million in industry partner financing to carry the Creston
project forward. The repayment of the $1.25 million in financing is
secured with 1.6 million shares of restricted stock held in escrow and is
personally guaranteed by George S. Young, our CEO, and by his private company,
Diamond Oil and Gas Corporation. On May 31, 2007, we refinanced this note
to lower the monthly payments from $90,000 to $45,000 and extend the due date
until June 1, 2008. In exchange for this, we agreed
to relinquish a 4% working interest in the Bacaroo project and
issued 3,600,000 warrants upon an increase in the authorized common stock
of the Company. The terms of the warrants remained unformalized, and as
such, we could not place a value on such warrants. Furthermore, the Company has
issued all of its authorized shares and that such warrants would not be
exercisable unless and until an increase in the authorized shares occurs. The
interest rate on this note is 18% per annum. As of March 31, 2008, we owed
$282,556 on the note.
Note 6—Settlement
Payable
On
October 19, 2007, we entered into a settlement agreement with Alpha Capital in
connection with the May 2005 equity financing. Pursuant to the terms of the
settlement, the Company owes Alpha Capital $200,000 due and payable no later
than February 15, 2008 or upon the Company’s merger with a third party as
contemplated by the Dolar transaction. As such
amount not has not been paid, Alpha Capital now possesses the the
right to convert the outstanding amount owed into equity at a 15% discount of
the last 30 day average trading price, or into an promissory note at the rate of
18% per annum. Alpha Capital has expressed it is their intent to collect
the obligation as a promissory note at this
time.
Note
7—Related Party Transactions
At March 31,
2008, we owed two unsecured demand notes of $2,485,376 and
$600,000. The notes accrue interest at a rate of 10% and 18% per
annum compounded daily to an entity controlled by our CEO. These
notes include $454,861 due in interest.
In 2006, we obtained $1.25 million in
industry partner financing to carry the Creston project forward. The
repayment of the $1.25 million in financing is secured with 1.6 million shares
of restricted stock held in escrow and is personally guaranteed by George S.
Young, our CEO, and by his private company, Diamond Oil and Gas
Corporation. On May 31, 2007, we refinanced this note to lower the monthly
payments from $90,000 to $45,000 and extend the due date until June 1,
2008. In exchange for this, we agreed to relinquish a 4%
working interest in the Bacaroo project and issue 3,600,000 warrants
upon an increase in the authorized common stock of the Company. The terms
of the warrants remained unformalized, and as such, we could not place a value
on such warrants. Furthermore, the Company has issued all of its authorized
shares and that such warrants would not be exercisable unless and until an
increase in the authorized shares occurs. The interest rate on this note is 18%
per annum. As of March 31, 2008, we owed $282,556 on the
note.
Note 8—Common
Stock
We issued no
stock during the first quarter of 2008, as all authorized stock is issued and
outstanding.
Note
9—Convertible Debentures
On June
4, 2004, we entered into a financing arrangement whereby we issued a convertible
debenture with a conversion price of $1.25 per share of common stock, subject to
anti-dilution adjustments. The offering resulted in gross proceeds prior to the
deduction of fees and costs, of approximately $1,000,000, with 8% simple
interest. In connection with the placement, we also issued warrants to purchase
an aggregate amount of up to 400,000 shares at $1.50 per share, which have
expired. The net proceeds from the offering were used for working capital needs
and other general corporate purposes. As of March 31, 2008, the
debentures and accrued interest due was $1,305,700.
On February 15, 2007, we entered
into a series of transactions to restructure securities issued pursuant to
securities purchase agreements dated June 17, 2005 and September 21,
2005.
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
Background
June 2005
Financing
On June 17, 2005, we closed a
financing pursuant to a securities purchase agreement with three accredited
investors, Palisades Master Fund, L.P. (“Palisades”), Crescent International
Ltd. (“Crescent”) and JGB Capital L.P. (“JGB”) for the issuance of
$5,501,200 in face amount of debentures maturing September 17, 2007 (the
“June Debentures”). The June Debentures were unsecured and we were obligated to
pay 1/24th of the face amount of the debenture on the first of every month,
starting October 1, 2005. Payment could be made either in the form of cash or in
stock at the lower of $0.60 per share or 80% of the volume weighted average
price of our stock for the five trading days prior to the repayment date. In the
event that we made the payment in cash, we paid 110% of the monthly redemption
amount.
In addition, we issued warrants
to the investors, expiring June 17, 2007, to purchase 4,584,334 shares of
restricted common stock, exercisable at a per share of $0.649 (the “June
Warrants”). In addition, the exercise price of the June Warrants would be
adjusted in the event we issued common stock at a price below the exercise
price, with the exception of any securities issued pursuant to a stock or option
plan adopted by our board of directors, issued in connection with the debentures
issued pursuant to the securities purchase agreement, or securities issued in
connection with acquisitions or strategic transactions.
If in any period of 20
consecutive trading days our stock price exceeds 250% of the June Warrants’
exercise price, all of the June Warrants shall expire on the 30th trading day
after we send a call notice to the June Warrant holders. If at any time after
one year from the date of issuance of the June Warrants there is not an
effective registration statement registering, or no current prospectus available
for, the resale of the shares underlying the June Warrants, then the holder may
exercise the June Warrant at such time by means of a cashless
exercise.
September 2005
Financing
On September 21, 2005, we closed
a financing pursuant to a securities purchase agreement with two accredited
investors, Palisades and Crescent for the issuance of $3,108,000 in face amount
of debentures maturing December 20, 2007 (the “September
Debentures”).
The September debentures were
unsecured and we were obligated to pay 1/24th of the face amount of the
debenture on the first of every month, starting January 1, 2006. Payment could
be made either in the form of cash or in stock at the lower of $0.75 per share
or 80% of the volume weighted average price of our stock for the five trading
days prior to the repayment date. In the event that we made the payment in cash,
we paid 110% of the monthly redemption amount.
In addition, we issued warrants
to the investors, expiring September 21, 2008, to purchase 2,072,000 shares of
restricted common stock, exercisable at a per share of $0.80. In addition, the
exercise price of the September Warrants would be adjusted in the event we
issued common stock at a price below the exercise price, with the exception of
any securities issued pursuant to a stock or option plan adopted by our board of
directors, issued in connection with the debentures issued pursuant to the
securities purchase agreement, or securities issued in connection with
acquisitions or strategic transactions.
If in any period of 20
consecutive trading days our stock price exceeds 250% of the September Warrants’
exercise price, all of the September Warrants shall expire on the 30th trading
day after we send a call notice to the September Warrant holders. If at any time
after one year from the date of issuance of the September Warrants there is not
an effective registration statement registering, or no current prospectus
available for, the resale of the shares underlying the September Warrants, then
the holder may exercise the September Warrant at such time by means of a
cashless exercise.
Restructuring
On February 15, 2007, the
following transactions took place with regards to the June Debentures and the
September Debentures (“Old Debentures”) and the warrants issued under the June
Debentures and the September Debentures (“ Old Warrants”):
1) JGB entered into an assignment
agreement with Crescent, pursuant to which Crescent purchased from JGB the June
Debentures issued to JGB. The face value of the June Debentures issued to JGB at
the time of the transaction was $333,333 and Crescent paid $250,000 to JGB for
the assignment;
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
2) We entered into a settlement
agreement with JGB for the sum of $83,333. We amended the terms of the Old
Warrants held by JGB to remove the ratchet and call provisions and JGB agreed to
release any shares reserved for issuance of the Old Warrants and to not exercise
such Old Warrants until we obtain an increase in the authorized shares of common
stock. Upon obtaining the increase in authorized shares, we agreed to issue JGB
500,000 shares of restricted common stock;
3) We entered into a first
amendment and waiver agreement with Palisades for the amendment of the Old
Debentures issued to Palisades (the “Palisades Amendment Agreement”);
and
4) We entered into a first
amendment and waiver agreement with Crescent for the amendment of the Old
Debentures issued to JGB (and purchased by Crescent) and Crescent (the “Crescent
Amendment Agreement” and together with the Palisades Amendment Agreement, the
“Restructuring Amendments”).
Palisades and Crescent agreed to
amend the Old Debentures to remove the mandatory monthly liquidation provision
and to amend the fixed conversion price of the Old Debentures to $0.1375 (the
“Fixed Conversion Price”). As a result, the principal amount
remaining on the Old Debentures is now due and payable at maturity, unless
sooner converted into shares of common stock by the investors, at the Fixed
Conversion Price. Palisades and Crescent further agreed to waive any
and all existing defaults under the Old Debentures.
Pursuant to the Palisades
Amendment Agreement, we agreed to issue 7,025,789 shares of common stock (the
“Monthly Redemption Shares”) to Palisades upon conversion of $608,433 in
principal amount of the Old Debentures. Such Monthly Redemption
Shares were issued as payment for the previously delinquent monthly redemptions
owed to Palisades for the periods from December 1, 2006 through February 1, 2007
pursuant to the Old Debentures. These Monthly Redemption Shares were
not issued while we negotiated the terms of a potential buy-out or restructuring
of the Old Debentures. The Monthly Redemption Shares were previously
registered for resale pursuant to resale registration statements filed with the
Securities and Exchange Commission and represent the remaining shares of common
stock registered thereunder for Palisades pursuant to the Old
Debentures. In addition, the exercise price of the Old Warrants was
reduced to $0.0866, which Palisades exercised on a cashless basis and received
an additional 2,970,758 shares of common stock which were previously registered
for resale pursuant to resale registration statements filed with the Securities
and Exchange Commission.
We agreed to pay Palisades a
forbearance fee of $150,000 a month, for six months. The fee, however, was
immediately settled upon the issuance of 5,454,546 shares of restricted common
stock. We also issued Palisades 1,449,825 shares of common stock in
the form of a commitment fee for the restructuring of the Old
Debentures.
In connection
with the restructuring, we executed a security agreement (the “Security
Agreement”) in favor of Palisades and JGB granting them a first priority
security interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property, except for our Carbon County prospect, which Palisades
and JGB took a second priority interest and for our Carter Creek and Weston
County prospects, which the investors were not granted any security
interest. The Security Agreements state that if an event of default
occurs under the Old Debentures or Security Agreement, the Investors have the
right to take possession of the collateral, to operate our business using the
collateral, and have the right to assign, sell, lease or otherwise dispose of
and deliver all or any part of the collateral, at public or private sale or
otherwise to satisfy our obligations under these agreements.
February,
2007 Financing
On February 15, 2007, we
closed a financing pursuant to a securities purchase agreement with Palisades
for the issuance of a $714,500 face amount debenture maturing September 15, 2007
(the “New Debenture”). The New Debenture does not accrue interest and the
investors paid $500,000 for the New Debenture. We paid a commission of $100,000
to HPC Capital Management (a registered broker-dealer) in connection with the
transaction, resulting in net proceeds to us of $400,000 before our legal fees.
We used the net proceeds to pay our settlement agreement payment to JGB,
repayment of a bridge loan to Petro Capital Securities, LLC and the remainder
for general working capital purposes. We also issued HPC Capital Management
6,458,063 shares of restricted common stock and agreed to issue an additional
1,041,937 shares of restricted common stock upon obtaining an increase in our
authorized shares of common stock, which shares are additional compensation for
its services in connection with the transaction with the investors.
The convertible
debentures are secured and are convertible into our common stock, at Palisades’
option, at a fixed conversion price of $0.1375. Based on this conversion price,
the $714,500 secured convertible debenture is convertible into 5,196,364 shares
of our common stock.
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
In the event of default, the
investors may require payment, which shall be the greater of: (A) 130% of the
principal amount of the face amount of the debenture to be prepaid, or (B) the
principal amount of the debenture to be prepaid, divided by the conversion price
on (x) the date the default amount is demanded or otherwise due or (y) the date
the default amount is paid in full, whichever is less, multiplied by the closing
price on (x) the date the default amount is demanded or otherwise due or (y) the
date the default amount is paid in full, whichever is greater.
The conversion price of the
debenture may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the investor’s position.
The Company has agreed to file a
registration statement with the Securities and Exchange Commission to cover the
future sale by the investors of the shares issuable upon conversion of the Old
and New Debentures. If the registration statement is not filed by the filing
deadline or if the registration statement is not declared effective by the
effective deadline, we would be required to pay liquidated damages to the
investors.
Note
10—Proved and Unproved Oil and Gas Property
Carbon
County Project, Utah
On September 12, 2005, we entered
into an option agreement to purchase a gas field in Carbon County, Utah which
was producing approximately 30 million cubic feet of natural gas per month. The
field comprises 5,953 gross acres (2,440 net acres) with three gas wells
currently producing and has an additional five wells drilled that are presently
shut-in. Production is derived from the Ferron Sandstone formation, and the gas
is marketed into the adjacent gas pipeline operated by Questar Gas Resources.
The acquisition included an associated gas gathering system and a 6 mile
pipeline and compression facility servicing the project and adjacent production.
The field has potential for 20 additional well sites on 160 acre spacing on the
undeveloped acreage. The property is adjacent to our Gordon Creek project and to
the very successful Drunkards Wash field originally developed by River Gas
Corp.
On March 13,
2006, we closed the acquisition of this project for a total of $1.5
million. After several months of production and workover efforts, as
of June 2007, we decided it was in the best interest of the Company to sell
our ownership in the Carbon County project. The decision was made to
sell this project after considering our required outstanding debenture
obligations, the prospect of paying off a significant portion of our
debt, as well as record a gain on the sale. Subsequently, on August 6,
2007, we entered into a purchase and sale agreement pursuant to
which we sold our interests in the Carbon County project for total
consideration of $3.0 million The purchase was consummated via the assumption of
and payment on various debts owed by the Company amounting to $2,763,000, with
the remainder held as a note receivable in the amount of
$237,000. The major classes of assets and liabilities pertaining to
the discontinued operations were as follows:
| |
|
6/30/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Field
& office equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uintah
Basin Workover Project, Uintah Basin, Utah (formerly known as the Creston
Project)
On October
25, 2005, we entered into a participation agreement with Mountain Oil and Gas,
Inc., Creston Resources Ltd, and Homeland Gas and Oil Ltd. (collectively
“Creston”), and began negotiations with private investors, to supply operating
expertise and program supervision to earn working interests in up to 45
producing oil wells in the Uintah Basin of Utah. Thereafter, we immediately
commenced a rework operation on the first well chosen for the program to
re-complete previously-completed zones and extend behind pipe reserves. This
well is located in the prolific Altamont-Bluebell Field, which has produced over
350 million barrels of oil equivalent. Creston will retain the current or
historical production in this well, while we and the private investors will earn
a variable percentage of the production increase resulting from the reworking
operations. We completed work on the first well and commenced production in the
first quarter of 2006. Although we plan to continue our interest in this well
and generate revenue from it, we are seeking new opportunities from parties
other than Creston in order to pursue our reworking efforts, since, due to
Creston’s own financial difficulties, we have not been able to maintain our
interests in the other wells and properties as previously contemplated with
Creston. As a result, our efforts will now focus on wells of other
parties.
Fellows Energy
Ltd.
Notes to
Unaudited Financial Statements
March 31,
2008
In many areas
of the Altamont-Bluebell field and other areas of the Uintah Basin, due to the
over-pressured, fractured nature of the reservoirs and the heavy nature of the
oil, as well as the large vertical extent of potential pay zones, many of the
wells have formation damage resulting from high drilling mud weights and
cementing operations. These conditions have left many zones unable to produce to
their potential. We will employ a variety of conventional and innovative
proprietary techniques to reduce the effects of formation damage and increase
oil and gas recovery.
Weston
County, Wyoming
The Weston County project is
a 19,290-acre project on the east flank of the Powder River Basin. The
prospect is a potential extension of an existing producing field. We are
continuing our work and evaluation with JMG Exploration on permitting and other
pre-drilling activities. In addition, we are targeting nearby locations with
potential in the Minnelusa sandstone and Dakota channel sandstone
formations.
During the second quarter of
2007, we entered into an agreement with Thunderbird Energy Corp, whereby they
committed to expend $3.5 million, over the next 24 months, in connection with
the drilling and completion of three wells located on the Dakota
formation. In exchange, Thunderbird will receive an additional 25%
working interest in the Weston County project. We reserve the option to
commence drilling under the previous joint venture structure if Thunderbird does
not commence drilling by May 31, 2008.
Gordon
Creek, Utah
JMG Exploration will also drill
on the 5,242-acre Gordon Creek project, which we acquired from The Houston
Exploration Company for $288,000. The Gordon Creek project is in an area of
known coal resources in Carbon County in eastern Utah near other operating
coal bed methane projects, such as the Drunkard’s Wash Project, which our
project personnel successfully drilled previously for River Gas
Corporation.
Based on exploration results, JMG
Exploration has indicated its intent to sell a portion of its working interest
to Enterra Energy Trust in an arrangement under which JED Oil, Inc. under a
development agreement with Enterra, will complete any development programs on
the projects. The Company now anticipates that Thunderbird Energy
Corp. (its former joint venture partner on the adjacent Carbon County
project) will acquire the interests of JMG Exploration and proceed with
development jointly with the Company on the Gordon Creek project in response to
favorable results on the Carbon County project.
Bacaroo,
Colorado
In 2004 we optioned an interest
in the Bacaroo project in Colorado through our affiliation with Thomasson
Partner Associates, Inc. We believe the project is an opportunity to establish
conventional oil and gas production with comparatively inexpensive drilling in
areas of established production, while other projects being reviewed offer
longer term, larger potential exploration opportunities. We are acquiring
acreage in the prospect prior to commencing drilling operations.
Leasing and seismic evaluation
activities continue. One entire target area is now under lease, and two
additional areas are now undergoing leasing. We will perform additional geologic
evaluation and permitting work in preparation for drilling.
On October 30th, 2007, we entered
into an agreement to provide for (1) the earn-in on the Divide, Pinedale and
Wilkens Ridge projects; (2) the hiring of Mark S. Dolar and Ken Allen into the
management, and their appointment as directors; and (3) to provide for the
potential growth of the Company through a joint venture or other financing
arrangement, or a potential business combination whereby we would merge
with a new company, through a reverse merger with the new company. It is
expected that we would continue to conduct the business of Fellows and of Dolar
and would raise capital through a joint venture, or other financing, or in
connection with a merger with the new company and to acquire and/or develop
the assets (“Dolar
Transaction”).
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking
Statements
This
report includes certain forward-looking statements. Forward-looking statements
are statements that predict the occurrence of future events and are not based on
historical fact. Forward-looking statements may be identified by the use of
forward-looking terminology, such as “may”, “shall”, “will”, “could”, “expect”,
“estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”,
“continue”, or similar terms, variations of those terms or the negative of those
terms. We have written the forward-looking statements specified in the following
information on the basis of assumptions we consider to be reasonable. However,
we cannot predict our future operating results. Any representation, guarantee,
or warranty should not be inferred from those forward-looking
statements.
The
assumptions we used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty in economic, legislative, industry, and other circumstances. As a
result, judgment must be exercised in the identification and interpretation of
data and other information and in their use in developing and selecting
assumptions from and among reasonable alternatives. To the extent that the
assumed events do not occur, the outcome may vary substantially from anticipated
or projected results. Accordingly we express no opinion on the achievability of
those forward-looking statements. We cannot guarantee that any of the
assumptions relating to the forward-looking statements specified in the
following information are accurate. We assume no obligation to update any such
forward-looking statements.
Overview
On
January 5, 2004, we began operations as an oil and gas exploration company. We
acquired interests in certain assets owned by Diamond Oil & Gas Corporation,
in exchange for 3,500,000 shares of common stock. The transaction was deemed to
have a value of $6,405,000. The assets included certain oil and gas projects, as
well as the right to enter into the Exploration Services Funding Agreement with
Thomasson Partner Associates, Inc. of Denver, Colorado. Diamond is controlled by
our CEO, George S. Young. Our goal is to discover substantial commercial
quantities of oil and gas, including coalbed methane, on the properties as well
as to acquire and explore additional property.
Projects
acquired from Thomasson Partner Associates, Inc. under the Exploration Services
Funding Agreement (as Amended) include the Weston County project in Wyoming, the
Gordon Creek project in Utah, the Carter Creek project in Wyoming, the Circus
project in Montana, the Bacaroo project in Colorado, the Platte project in
Nebraska, and the Badger project in South Dakota. During the
year ended December 31, 2006, we abandoned the Platte and Badger
projects. As of December 31, 2006, we terminated our formal agreement
with Thomasson Partner Associates, Inc. and will continue accessing
projects informally, without having any first right to any project.
On
October 30th, 2007, we entered into an agreement to provide for (1) the earn-in
on the Divide, Pinedale and Wilkens Ridge projects; (2) the hiring of Mark S.
Dolar and Ken Allen into the management, and their appointment as directors; and
(3) to provide for the potential growth of the Company through a joint venture
or other financing arrangement, or a potential business combination
whereby we would merge with a new company through a reverse merger with the
new company. It is expected that we would continue to conduct the business of
Fellows and of Dolar and would raise capital through a joint venture, or other
financing, or in connection with a merger with the new company and to
acquire and/or develop the assets.
Plan
of Operations
During
the next twelve months, we expect to pursue oil and gas operations on some or
all of our property, including the acquisition of additional acreage through
leasing, farm-out or option and participation in the drilling of oil and gas
wells. We intend to pursue the Dolar transactions until completion,
including the possible merger or acquisition as contemplated in the Dolar
transaction. We also intend to continue to evaluate additional opportunities in
areas where we feel there is potential for oil and gas reserves and production,
and may participate in areas other than those already identified, although we
cannot assure that additional opportunities will be available, or if we
participate in additional opportunities, that those opportunities will be
successful.
Our
current cash position is not sufficient to fund our cash requirements during the
next twelve months, including operations and capital expenditures. We intend to
continue joint venture or equity and/or debt financing efforts to support our
current and proposed oil and gas operations and capital expenditures. We may
sell interests in our properties. We cannot assure that continued funding will
be available.
We have
not entered into commodity swap arrangements or hedging transactions. Although
we have no current plans to do so, we may enter into commodity swap and/or
hedging transactions in the future in conjunction with oil and gas production.
We have no off-balance sheet arrangements.
Our
future financial results continue to depend primarily on (1) our ability to
discover or purchase commercial quantities of oil and gas; (2) the market price
for oil and gas; (3) our ability to continue to source and screen potential
projects and finance them through joint ventures and potential business
combinations; and (4) our ability to fully implement our exploration and
development program with respect to these and other matters. We cannot assure
that we will be successful in any of these activities or that the prices of oil
and gas prevailing at the time of production will be at a level allowing for
profitable production.
Results
of Operations
For the three months
ended March 31, 2008 as compared to the three months ended March
31, 2007.
Revenue.
For the three months ended March 31, 2008 and 2007, we earned no
revenue, except for revenue from discontinued operations related to our Carbon
County project, which was sold effective June 2007.
Operating
expense. For the three months ended March 31, 2008, our operating
expense was approximately $172,000, compared to $1,558,000 for the three months
ended March 31, 2007. The expenses came from oil and gas exploration and
production, salaries, business advisory services, legal and professional fees,
travel, and investor relations expense. Primarily the difference between
the two periods relates to lower exploration and production costs, legal,
business advisory, and stock issuance costs associated with the convertible
debentures for the three months ended March 31,
2007. Expenses for the three months ended March 31, 2008
consisted of $119,000 in legal, consulting, and audit services, $14,000 in
payroll, $6,000 in insurance costs, and $33,000 in other costs including
rent, bank fees, travel, depreciation, and telephone expenses.
Interest
expense. We incurred interest expense of approximately $127,000 for the
three months ended March 31, 2008, compared to $663,000 for the three
months ended March 31, 2007.
Liquidity
and Capital Resources
For the
quarter ended March 31, 2008, we had net loss of approximately
$300,000, which was primarily due general and administrative expenses and
interest expense. For the quarter ended March 31, 2007, we incurred a
net loss of approximately $2,191,000. At March 31, 2008, we had $423 of
cash and cash equivalents, total current assets of $353,000, and current
liabilities of $3,337,000 for a working capital deficit of
$2,984,000.
Based
upon our significant operating losses from inception, there is substantial doubt
as to our ability to continue as a going concern. Our audited and unaudited
financial statements have been prepared on a basis that contemplates our
continuation as a going concern and the realization of assets and liquidation of
liabilities in the ordinary course of business. Our audited and unaudited
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern.
At this
point, we have not generated sufficient oil and gas sales to sustain our
operations. To fully carry out our business plans we need to increase production
revenues, raise a substantial amount of additional capital, sell project assets,
or obtain industry joint venture financing, which we are currently seeking. We
can give no assurance that we will be able to increase production or raise such
capital. We 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 obtain profitability and positive cash flow is dependent upon our
ability to exploit our mineral holdings, generate revenue from our planned
business operations and control our exploration cost. To fully carry out our
business plans we need to raise a substantial amount of additional capital,
which we are currently seeking. We can give no assurance that we will be able to
raise such capital. We have limited financial resources until such time that we
are able to generate positive cash flow from operations. Our ability to maintain
profitability and positive cash flow is dependent upon our ability to locate
profitable natural gas or oil properties, generate revenue from our planned
business operations, and control exploration cost. 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, and that our
investors would incur substantial losses of their investment.
Cash
Flow
For
the nine months ended March 31, 2008, we used approximately
$24,200 in our operating activities, obtained zero in investing activity
for property and interest disposition, and obtained approximately
$21,000 in financing activity. We decreased our December 31, 2007 cash balance
of approximately $3,700 to approximately $400 at March 31,
2008.
Critical
Accounting Policies and Estimates
Our
Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our 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 and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. On an on-going basis, we
evaluate our estimates and judgments, including those related to revenue
recognition, accrued expense, financing operations, contingencies and
litigation. We base our estimates and judgments on historical experience and on
various other factors that we believe to be reasonable under the circumstances.
Our estimates and judgments form the basis for determining the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. These carrying values are some of the most significant accounting
estimates inherent in the preparation of our financial statements. These
accounting policies are described in relevant sections in this discussion and in
the notes to the financial statements included in our December 31, 2007 Form
10-KSB Annual Report.
(a) Evaluation of disclosure
controls and procedures.
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as
of March 31, 2008. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their
costs.
Based on our evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are designed at a reasonable assurance level and are
effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
(b) Changes in internal control over
financial reporting.
We
regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more
efficient systems, consolidating activities, and migrating
processes.
There
were no changes in our internal control over financial reporting that occurred
during the period covered by this Quarterly Report on Form 10-QSB that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 1. Legal Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as described in our
annual report on Form 10-KSB, filed with the Commission on April 15, 2008, we
are currently not aware of any such legal proceedings or claims that we believe
will have, individually or in the aggregate, a material adverse affect on our
business, financial condition or operating results.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior
Securities
As previously
reported on the Company's Form 8-K filed on November 16, 2007, we have
categorized the entire balance of the Convertible Debentures due September
2007 and December 2007 held by Palisades Master Fund, Ltd. and PEF Advisors, LLC
(collectively "Palisades") as immediately due and payable and such amounts
appear in the Company's balance sheets as current liabilities. On January 22,
the Company received a demand letter from Palisades with respect to the
debentures, demanding immediate payment of the amounts claimed by Palisades to
be due and advising that Palisades will pursue legal remedies in the event of
non-payment. Prior to that time, the Company has been in ongoing discussions
with Palisades concerning renegotiation or restructuring of those debentures in
connection with its ongoing efforts to pursue the completion of its purchase of
the Dolar Energy, LLC interests (as previously disclosed), joint venture
financings, or other business combinations. The Company will continue in these
efforts and attempt to satisfy any valid obligations under such Convertible
Debentures and pursue the Dolar Energy, LLC transactions and other financing or
acquisition transactions that it may be able to identify.
Item 4. Submission of Matters to a Vote of
Securities Holders
Our
annual meeting, scheduled for June 27, 2007, was adjourned for lack of a
quorum. No new meeting date, time or place has been
established.
Item 5. Other Information
None.
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended
|
|
|
|
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
|
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FELLOWS ENERGY
LTD.
|
Date: May
13, 2008
|
By:
/s/ GEORGE S. YOUNG
|
|
|
Name:
George S. Young
|
|
|
Title: Chief Executive Officer ( Principal Executive
Officer)
|
|
Date:
May 13, 2008
|
By: /s/ BROOKE E.
HORSPOOL
|
|
|
Name:
Brooke E. Horspool
|
|
|
Title: Chief Financial Officer (Principal
Accounting Officer and Principal Financial
Officer)
|