NOTES
TO UNAUDITED CONSOLIDATED
FINANCIAL
STATEMENTS
1.
NATURE
OF OPERATIONS AND GOING CONCERN
a)
Organization and Change of Name
Kal
Energy, Inc. (formerly, Patriarch, Inc.) (“the Company” or “We”) was
incorporated on February 21, 2001 in the State of Delaware. On November 14,
2006
the majority of shareholders voted to amend the Company’s Articles of
incorporation to change the Company’s name to KAL Energy, Inc. This amendment
took effect on December 20, 2006. The Company was formed for the purpose of
acquiring exploration and exploration stage natural resource properties and
is
in the pre-exploration stage. The Company’s operations are performed by its
wholly owned subsidiary, Thatcher Mining Pte. Ltd, a corporation under the
laws
of the Republic of Singapore on formed June 8, 2006 (“Thatcher”) and acquired by
the Company on February 9, 2007. PT Kubar Resources (Kubar), a limited liability
foreign investment (PMA) company corporation under the laws of the Republic
of
Indonesia was formed on April 12, 2007, and completed its registration on June
6, 2007. Kubar is owned 99% by Thatcher and 1% by the Company, making it a
wholly owned subsidiary of the Company.
b)
Exploration Activities
The
Company has been in the exploration stage since its formation and has not yet
realized any revenues from its planned operations. The Company is
currently seeking opportunities for profitable operations. Costs related to
locating coal deposits and determining the extractive feasibility of such
deposits are expensed as incurred.
c)
Going
Concern
The
Company’s interim financial statements have been prepared on a going concern
basis, which contemplate the realization of assets and satisfaction of
liabilities in the normal course of business.
As
shown
in the accompanying financial statements, the Company has incurred a net loss
of
$7,297,724 for the period from February 21, 2001 (inception) to August 31,
2007,
its current liabilities exceed its cash balance by $1,636,629, of which $788,750
are non cash stock based liabilities, and has no revenue. The Company's
ability to continue as a going concern is dependent upon the continued financial
support of its shareholders, its ability to generate sufficient cash flow to
meet its obligations on a timely basis and, ultimately, to attain cash flow
from
profitable operations.
Recurring
losses from operations and operating cash constraints are potential factors,
which, among others, may indicate that the Company will be unable to continue
as
a going concern for a reasonable period of time. These factors, among
others, raise substantial doubt about the Company's ability to continue as
a
going concern.
The
interim financial statements do not include adjustments relating to
recoverability and classification of recorded assets amounts, or the amounts
and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management
has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with
the
ability to continue as a going concern. Management devoted considerable effort
from inception through the quarter ended August 31, 2007, towards (i) obtaining
additional equity (ii) management of accrued expenses and accounts payable
(iii)
searching for a suitable strategic partner. Management believes that the above
actions will allow the Company to continue operations through the next fiscal
year.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of
presentation
The
accompanying interim condensed consolidated financial statements are prepared
in
accordance with rules set forth in Regulation SB of the Securities and Exchange
Commission. Accordingly, these statements do not include all disclosures
required under generally accepted principles and should be read in conjunction
with the audited financial statements included in the Company's Form 10-KSB
for
the year ended May 31, 2007. In the opinion of management, all adjustments
consisting of normal reccurring accruals have been made to the financial
statements. The results of operation for the three months ended August 31,
2007
are not necessarily indicative of the results to be expected for the fiscal
year
ending May 31, 2008.
Principles
of consolidation
The
accompanying condensed consolidated financial statements include the accounts
of
Kal Energy, Inc. the accounts of its wholly owned subsidiaries, Thatcher and
PT
Kubar, and the accounts of the variable interest entities, PT. Bunyut Bara
Mandiri and PT. Graha Panca Karsa (Note 8), collectively “the Company”. All
significant inter-company transactions and accounts have been eliminated in
consolidation.
Use
of
estimates
The
preparation of financial statements is in conformity with generally accepted
accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
Basic
and
diluted net loss per share
Net
loss
per share is calculated in accordance with the Statement of financial accounting
standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128 superseded
Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for
all
periods presented has been restated to reflect the adoption of SFAS No. 128.
Basic net loss per share is based upon the weighted average number of common
shares outstanding. Diluted net loss per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
Intangible
Assets
The
Company evaluates intangible assets, goodwill and other long-lived assets for
impairment, at least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable from
its
estimated future cash flows. Recoverability of intangible assets, other
long-lived assets and, goodwill is measured by comparing their net book value
to
the related projected undiscounted cash flows from these assets, considering
a
number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book
value
of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss. Potential impairment of goodwill after July 1, 2002 is being
evaluated in accordance with SFAS No. 142. The SFAS No. 142 is applicable to
the
financial statements of the Company beginning July 1, 2002.
Recent
pronouncements
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject
to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
The
new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. The management is currently evaluating the effect of this
pronouncement on financial statements.
In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
a.
A
brief description of the provisions of this Statement
b.
The
date that adoption is required
c.
The
date the employer plans to adopt the recognition provisions of this Statement,
if earlier.
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on financial
statements.
In
September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial
statements.
In
March
2006 FASB issued SFAS 156 'Accounting for Servicing of Financial Assets' this
Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
This Statement:
1.
Requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into
a
servicing contract.
2.
Requires all separately recognized servicing assets and servicing liabilities
to
be initially measured at fair value, if practicable.
3.
Permits an entity to choose 'Amortization method' or 'Fair value measurement
method' for each class of separately recognized servicing assets and servicing
liabilities.
4.
At its
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights,
without calling into question the treatment of other available-for-sale
securities under Statement 115, provided that the available-for-sale securities
are identified in some manner as offsetting the entity's exposure to changes
in
fair value of servicing assets or servicing liabilities that a servicer elects
to subsequently measure at fair value.
5.
Requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position
and
additional disclosures for all separately recognized servicing assets and
servicing liabilities.
This
Statement is effective as of the beginning of the Company's first fiscal year
that begins after September 15, 2006. Management believes that this statement
will not have a significant impact on the consolidated financial
statements.
In
February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006. The Company has not evaluated the impact of this
pronouncement in its financial statements.
3.
NOTES
RECEIVABLE
As
of
August 31, 2007, the Company has two note receivables of $150,000 and $175,000
from two unrelated parties. The note receivables are both pledged by the shares
to be purchased by the notes, with an interest rate of twelve month LIBOR plus
5%, and due on demand. The Company has recorded $16,070 of interest receivable
against this loan. (Refer to note 8).
4.
PREPAID
EXPENSES AND DEPOSITS
|
Prepaid
expenses and deposits at August 31, 2007
are as follows:
|
|
|
|
Prepaid
expenses
|
|
$
|
75,091
|
|
|
|
|
|
|
Deposits
|
|
|
25,536
|
|
|
|
|
|
|
Total
Prepaid expenses
|
|
$
|
100,627
|
Prepaid
expenses include $30,484 prepayments for insurance policies, $14,826 prepayments
for advertisement, $21,281 prepayments for services and $8,500 is employee
advances of other prepayments.
Deposits
include $15,746 rent deposit and $9,790 security deposits.
5.
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|
Accounts
payable and accrued expenses at August 31,
2007 are as follows:
|
|
|
|
Accounts
payable
|
|
$
|
341,886
|
|
|
|
|
|
|
Accrued
exploration expenses
|
|
|
861,135
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
131,668
|
|
|
|
|
|
|
Total
Accounts payable and accrued expenses
|
|
$
|
1,203,021
|
6.
INTANGIBLE
ASSETS
The
Company entered into two Investment and Cooperation agreements with PT Graha
Panca Karsa (“PT GPK”) and PT Bunyut Bara Mandiri (“PT BBM”). The Company will
provide mining services in exchange for a share of revenues derived from any
coal sales. The Company shall be entitled to all net proceeds from sale of
minerals arising out of the Project, save for a 1% net smelter royalty. The
Company has recorded this asset at its fair value of $7,085,706 and is
amortizing it over 20 years.
|
|
|
|
|
|
Gross
Value of Agreements
|
|
$
|
7,085,706
|
|
Amortization
|
|
|
(206,666)
|
|
Net
Intangible assets
|
|
$
|
6,879,040
|
7.
RELATED
PARTY TRANSACTIONS
The
company uses the services of Mining House Ltd. for IT and administrative
services. Three of our directors and our chief executive officer, who is also
the sole shareholder of Mining House Ltd., are directors in the service company.
Payments for such services during the three month period ended August 31, 2007
amounted to $47,371.
The
Company has a rental agreement with PB Commodities (“PBC”) for office space in
Singapore. “PBC” is owned by Concord International, a shareholder of KAL. Rental
payments made under this agreement totaled $14,410 for the three month period
ended August 31, 2007.
The
Company uses Asia Consultancy Group Pte Ltd. (“ACG”) for exploration consulting
services. ACG is through Concord International, a shareholder of KAL. Total
payments made for the three month period ended August 31, 2007 totaled
$259,202.
8.
SHAREHOLDER’S
EQUITY
During
the quarter ended August 31, 2007, the Company raised $750,000 at a price of
$0.80 shares, representing 937,500 voting common shares to be issued. As part
of
this private placement, the Company also issued 937,500 warrants at a price
of
$1.42.
During
the quarter ended August 31, 2007, the company issued 80,000 shares against
exercise of options at an exercise price of $0.5 per share. The company has
not
received the exercise price as of date. As of August 31, 2007, $40,000 has
been
recorded as subscription receivable on the accompanying financials.
During
the year ended May 31, 2007 the Company issued 17,615,000 voting common shares
for total of $3,523,000. The issuance is recorded net of the expenses and
payments of the fund raising expenses. The direct costs related to this stock
sale, including legal and professional fees, were deducted from the related
proceeds and the net amount in excess of par value was recorded as additional
paid-in capital. In conjunction with completion of the Private Placement
offering, the Company paid legal expenses of $20,000 in cash The Company also
issued 1,112,500 shares of restricted stock valued at $222,500 as consulting
fees.
The
Company also affected a 4 for 1 stock split on December 20, 2006. The stock
split resulted in an additional 35,341,454 voting common shares, resulting
in
47,375,272 post-split shares outstanding (11,843,818 pre-split shares). All
the
shares have been retroactively restated.
On
January 18, 2007, the board of directors approved an amendment to the Company’s
Certificate of Incorporation increasing the number of authorized shares for
common stock from 100,000,000 to 500,000,000. On January 19, 2007, shareholders
of record holding a majority of the currently issued and outstanding common
stock approved the amendment. The amendment is effective from March 2,
2007.
On
April
12, 2007, the board of directors approved a stock compensation plan for
employees and outside contractors. The Company authorized 12,000,000 shares
for
use in such plan. As of May 31, 2007, 250,000 shares and 750,000 options had
vested under such plan. See note 9.
9.
BUSINESS
COMBINATION
On
December 29, 2006, the Company entered into an Agreement and Plan of
Reorganization (the “Reorganization Agreement”) with Thatcher Mining Pte., Ltd.,
a privately held Singapore corporation (“Thatcher”). Upon
the
closing
under the Reorganization Agreement on February 9, 2007, the shareholders of
Thatcher delivered all of their equity
interests
in
Thatcher to the Company in exchange for shares of common stock in the Company,
as
a
result
of which
Thatcher
became
a
wholly-owned subsidiary of the Company (the “Reorganization”).
Pursuant
to the Reorganization Agreement, at the closing, shareholders of Thatcher
received 4,000,000 shares of the Company’s common stock for each issued and
outstanding common share of Thatcher. As a result, at
the
closing
,
the
Company issued 32,000,000 shares of its common stock to the former shareholders
of Thatcher.
In
addition, simultaneously with closing under the Reorganization Agreement, the
Company completed a private placement offering of a total of 17,615,000 shares
of the Company’s common stock for aggregate proceeds to the Company of
$3,523,000 (the “Private Placement”). As of February 28, 2007, 17,115,000 shares
was issued and $3,423,000 cash was received. In conjunction with completion
of
the Private Placement offering, the Company paid consulting fees of $68,000
and
legal expenses of $20,000 in cash, and also issued a total of 1,112,500 shares
of restricted stock as compensation for certain legal services and as payment
of
consulting fees.
The
acquisition was accounted under the Purchase method of accounting. The results
of the Company include the results of Thatcher as of February 9, 2007, through
the closing of the Reorganization Agreement.
The
cost
of the acquisition was $6,400,000, plus $625,000 of intercompany loans and
the
resulting intangibles assets were recorded (see note 7).
The
following table presents the allocation of the acquisition cost to the assets
acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
201,054
|
|
|
Notes
receivable
|
|
|
187,424
|
|
|
Prepaid
expenses and other current assets
|
|
|
19,907
|
|
|
Intangible
assets
|
|
|
12,718,168
|
|
|
Total
Assets
|
|
$
|
13,126,553
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
271,091
|
|
|
Notes
payable
|
|
|
198,000
|
|
|
Total
liabilities
|
|
$
|
469,091
|
|
|
|
|
|
|
|
|
Net
asset acquired
|
|
$
|
12,657,462
|
|
|
|
|
|
|
|
|
Consideration
paid:
|
|
|
|
|
|
Total
cost of investment
|
|
$
|
7,025,000
|
|
|
Total
Acquisition cost
|
|
$
|
12,657,462
|
|
|
Negative
goodwill
|
|
$
|
(5,632,562
|
)
|
|
|
|
|
|
|
The
Company has reduced the recorded value of the non-current assets acquired,
by
the negative goodwill of $5,632,462. The purchase price allocation for Thatcher
acquisition is based on the fair value of assets acquired and liabilities
assumed. Immediately after the execution of the definitive agreement, the
Company obtained effective control over Thatcher. Accordingly, the operating
results of Thatcher have been consolidated with those of the Company starting
February 9, 2007.
In
accordance with paragraph 44 of SFAS 142, any excess of cost over net assets
acquired shall be allocated as a pro rata reduction of the amounts that
otherwise would have been assigned to all of the acquired assets except
financial assets other then investments accounted for by the equity method,
assets to be disposed of by sale, deferred tax assets, prepaid assets relating
to pension or other postretirement benefit plans and any other current assets.
The
value
of the shares issued by the Company in connection with this acquisition exceeded
the fair market value of the net assets acquired. Thus, “negative goodwill”
generated was allocated to reduce the cost of the non-current assets
acquired.
The
pro
forma information below shows the impact of Thatcher’s operations on the
Company’s results as if it had been combined at the beginning of the three month
period ended August 31, 2006 and period from inception to August 31, 2007,
respectively.
|
Statement
of Operations
|
|
Three
Months Ended August 31, 2006
|
|
Cumulative
Period From Inception February 21, 2001 to August 31,
2007
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Exploration
expenditures
|
|
|
81,551
|
|
|
3,176,817
|
|
|
Stock
based compensation expense
|
|
|
|
|
|
2,828,768
|
|
|
Professional
and consulting fees
|
|
|
12,369
|
|
|
993,566
|
|
|
General
and administrative expenditures
|
|
|
70
|
|
|
862,880
|
|
|
Total
Expenses
|
|
|
(93,990
|
)
|
|
(7,861,915
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
-
|
|
|
46,374
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(93,990
|
)
|
$
|
(7,815,541
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
|
|
10.
VARIABLE
INTEREST ENTITY
The
Company has adopted FASB Interpretation No. 46R "Consolidation of Variable
Interest Entities" ("FIN 46R"), an Interpretation of Accounting Research
Bulletin No. 51. FIN 46R requires a Variable Interest Entity (VIE) to be
consolidated by a company if that company is subject to a majority of the risk
of loss for the VIE or is entitled to receive a majority of the VIE's residual
returns. VIEs are those entities in which the Company, through contractual
arrangements, bears the risks of, and enjoys the rewards normally associated
with ownership of the entities, and therefore the company is the primary
beneficiary of these entities. Acquisitions of subsidiaries or variable interest
entities are accounted for using the purchase method of accounting. The results
of subsidiaries or variable interest entities acquired during the year are
included in the consolidated income statements from the effective date of
acquisition.
ACCOUNTING
AFTER INITIAL MEASUREMENT OF VIE - Subsequent accounting for the assets,
liabilities, and non-controlling interest of a consolidated variable interest
entity are accounted for as if the entity were consolidated based on voting
interests and the usual accounting rules for which the VIE operates are applied
as they would to a consolidated subsidiary as follows:
·
carrying amounts of the VIE are consolidated into the financial statements
of
the Company as the primary beneficiary (referred as "Primary Beneficiary" or
"PB");
·
inter-company transactions and balances, such as revenues and costs, receivables
and payables between or among the Primary Beneficiary and the VIE(s) are
eliminated in their entirety; and
·
because
there is no direct ownership interest by the Primary Beneficiary in the VIE,
equity of the VIE is eliminated with an offsetting credit to minority
interest.
INITIAL
MEASUREMENT OF VIE- The Company initially measures the assets, liabilities,
and
non-controlling interests of the VIEs at their fair values at the date of the
acquisitions.
At
February 28, 2007, the company provided funds to two individuals for their
purchase of 1,000,000 or 100% of the 1,000,000 outstanding shares of PT Graha
Panca Karsa (“PT GPK”) and 1,000,000 or 100% of the 1,000,000 outstanding shares
of PT Bunyut Bara Mandiri (“PT BBM”), exploration stage companies involved in
the exploration of coal concessions in East Kalimantan, Indonesia.
The Company has been the sole source of funding to the shareholders of PT GPK
since 2006 to acquire the shares in PT GPK through advances made under a loan
agreement. Such advances totaled $125,000 for the shareholders of PT GPK
and $100,000 for the shareholders of PT BBM, at February 28, 2007. The Company
is considered the primary beneficiary as it stands to it stands to absorb the
majority of the VIE’s expected losses.
As
of
August 31, 2007, the Company has consolidated PT GPK and PT BBM’s financial
statements for the three month period then ended in the accompanying financial
statements. PT GPK and PT BBM did not have any operations through August 31,
2007.
11
.
EXPLORATION
EXPENDITURES
In
2006,
Thatcher commenced exploration in properties in Kalimantan, Indonesia.
Exploration expenses were performed by outside contractors, who billed all
resources used individually between manpower, travel, equipment rentals, phone
and other expenses. The bulk of all expenditures was manpower, including the
chief geologist, operations manager, site manager and site personnel from
various contractors, and were utilized to make preliminary assessments of the
properties providing mining services for initial property assessment and
preparing for the phase I drilling program. The initial measurements of the
quantity and quality of coal seams were made on two properties in East
Kalimantan, Indonesia as well as study the logistics for processing the coal
in
site and delivering it to customers.
|
Manpower
|
|
$
|
535,240
|
|
|
Site
Expenses
|
|
|
458,881
|
|
|
Equipment
|
|
|
314,501
|
|
|
Travel
|
|
|
117,125
|
|
|
|
|
$
|
1,425,746
|
|
12.
STOCK
BASED COMPENSATION EXPENSE
Description
of Stock-Based Compensation Plan
Stock
Incentive Plan (SIP) Effective April 27, 2007, we adopted the SIP. Under the
provisions of the SIP, the company may grant stock options, stock appreciation
rights, restricted stock, restricted stock units and stock awards to our
officers, directors and key employees, as well as to consultants and other
persons who provide services to us. The SIP has a maximum contractual term
of
ten years. As of August 31, 2007, securities authorized and available for
issuance in connection with our SIP were 10,775,000. Under the terms of the
SIP,
in no event shall the number of shares authorized for issuance in connection
with the SIP exceed 12 million shares.
Valuation
Assumptions
For
all
periods presented, the fair value of stock-based compensation made under the
SIP
was estimated using the Black-Scholes option pricing model.
The
weighted average assumptions used for options granted, ESPP purchases and the
LTPP in 2007 was as follows:
|
|
|
|
2007
|
|
|
Stock
Option Plan
|
|
|
|
|
|
Risk-free
interest rate
|
|
4.72
|
%
|
|
|
Dividend
yield
|
|
0
|
%
|
|
|
Volatility
|
|
91
|
%
|
|
|
Expected
life
|
|
10
years
|
|
|
|
|
|
|
|
We
used a
historical volatility assumption to derive our expected volatility assumption.
We also considered that this is an exploration phase enterprise and as such,
the
expected volatility should be higher than that of established mining companies.
The same applies to our assumption regarding the expected life of our options.
The early stage of our Company makes us assume a conservative position that
it
will take longer for the options to achieve their value.
Stock-Based
Payment Award Activity
The
following table summarizes equity share-based payment award activity in
2007:
|
|
|
|
|
Available
For
Grant
|
|
|
|
Shares
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding
at May 31, 2006
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
Plan
|
|
|
|
|
|
12,000,000
|
|
|
|
|
|
-
|
|
|
|
|
$
|
0.94
|
|
|
Granted
|
|
|
|
|
|
(10,775,000
|
)
|
|
|
|
|
10,775,000
|
|
|
|
|
$
|
1.19
|
|
|
Exercised
|
|
|
|
|
|
-
|
|
|
|
|
|
(125,000
|
)
|
|
|
|
$
|
1.37
|
|
|
Cancelled
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Plan
Shares Expired
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Outstanding
at May 31, 2007
|
|
|
1,225,000
|
|
|
|
|
|
10,650,000
|
|
|
|
|
$
|
1.44
|
|
|
|
|
|
Plan
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
$
|
0.94
|
|
|
Granted
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
$
|
1.19
|
|
|
Exercised
|
|
|
|
|
|
-
|
|
|
|
|
|
(205,000
|
)
|
|
|
|
$
|
1.37
|
|
|
Cancelled
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Plan
Shares Expired
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Outstanding
at August 31, 2007
|
|
|
1,225,000
|
|
|
|
|
|
10,570,000
|
|
|
|
|
$
|
1.44
|
|
|
|
|
No
stock
or options were forfeited, cancelled or expired during the three month period
ended August 31, 2007.
|
|
Options
Outstanding
|
Options
Exercisable
|
|
Range
of
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Number
Exercisable
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
$0.50
|
8,150,000
|
9.9
|
$
|
0.50
|
$
|
7,661
|
750,000
|
9.9
|
$
|
0.50
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value, based on the company's closing stock price of $1.44 on May
31,
2007, which would have been received by award holders had all award holders
exercised their awards that were in-the-money as of that date. The total number
of in-the-money stock option awards exercisable on August 31, 2007 was 670,000.
The Company has not received any cash under the plan.
13.
COMMITMENTS AND CONTINGENCIES
Office
space is rented under a non-cancelable operating lease agreements expiring
through September 2008. Rent expense was $4,512 for the three month periods
ended August 31, 2008, and from inception (February 21, 2001) to August 31,
2007.
Future
minimum rental payments are as follows:
|
|
Years
Ending August 31,
|
|
|
|
|
2008
|
$55,055
|
|
|
|
2009
|
4,588
|
|
|
|
|
$59,643
|
|
The
Company is subject to legal proceedings, claims, and litigation arising in
the
normal course of business. While the outcome of these matters is currently
not
determinable, the Company does not expect the resolutions of any such matters
to
have a material impact on the Company’s financial position, results of
operations, or cash flows. As of August 31, 2007, there are no pending
litigations.
