form_10qsb-033104
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to ___________________
Commission file number: 001-31679
TETON PETROLEUM COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-1482290
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
(303)-542-1878
(Registrant's Telephone Number including area code)
1600 Broadway, Suite 2400
Denver, Colorado 80202-4921
(Address of Principal Executive Office)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No __
----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-3 of the Exchange Act).
Yes __No X
--
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes __ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 10, 2004, 9,114,663 shares of the issuer's common stock were
outstanding.
TETON PETROLEUM COMPANY
Table of Contents
------------------
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 2004 (Unaudited) and December 31, 2003
Unaudited Consolidated Statements of Operations and Comprehensive Loss
Three months ended March 31, 2004 and 2003
Unaudited Consolidated Statements of Cash Flows
Three months ended March 31, 2004 and 2003
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and qualitative disclosures about market risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities Use of Proceeds and Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
TETON PETROLEUM COMPANY
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
March 31, December 31,
2004 2003
(Unaudited) (Audited)
------------ ------------
Assets
Current assets
Cash ...................................... $ 7,856,899 $ 7,588,439
Proportionate share of Goloil accounts
receivable .......................... 16,538 15,739
Proportionate share of Goloil VAT and
other accounts receivable ............ 1,756,637 1,078,369
Proportionate share of Goloil inventory ... 622,981 448,812
Prepaid expenses and other assets ......... 72,271 95,693
------------ ------------
Total current assets ................. 10,325,326 9,227,052
------------ ------------
Non-current assets
Oil and gas properties, net
(successful efforts) ..................... 8,564,084 9,339,786
Cogeneration plant construction in
progress ................................ 1,758,620 1,700,696
Fixed assets, net ......................... 484,642 450,841
------------ ------------
Total non-current assets ............ 10,807,346 11,491,323
------------ ------------
Total assets ................................. $ 21,132,672 $ 20,718,375
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities .. $ 732,261 $ 376,429
Proportionate share of Goloil accounts
payable and accrued liabilities 4,059,089 2,590,901
Current portion of proportionate share
of notes payable owed to affiliate
(Note 2) ................................. 8,219,652 7,419,409
------------ ------------
Total current liabilities ........... 13,011,002 10,386,739
------------ ------------
Non-current liabilities
Asset retirement obligation................ 129,500 126,500
------------ ------------
Total non-current liabilities ....... 129,500 126,500
------------ ------------
Total liabilities ................... 13,140,502 10,513,239
------------ ------------
Commitments and contingencies
Stockholders' equity
Series A convertible preferred stock,
$.001 par value, 25,000,000 shares
authorized, 269,970 and 618,231 issued
and outstanding at March 31, 2004 and
December 31, 2004. Liquidation
preference at March 31, 2004 and
December 31, 2003 of $1,197,839 and
$2,689,305.............................. 270 618
Common stock, $0.001 par value,
250,000,000 and 100,000,000 shares
authorized, 9,101,830 and 8,584,068
shares issued and outstanding at
March 31, 2004 and December 31, 2003 ... 9,101 8,584
Additional paid-in capital .............. 37,548,890 37,073,366
Unamortized preferred stock dividends.... -- (118,610)
Accumulated deficit ..................... (30,179,691) (27,657,578)
Foreign currency translation adjustment . 613,600 898,756
------------ ------------
Total stockholders' equity ........ 7,992,170 10,205,136
------------ ------------
Total liabilities and stockholders' equity . $ 21,132,672 $ 20,718,375
============ ============
See notes to unaudited consolidated financial statements
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Three Months Ended
March 31,
--------------------------
2004 2003
----------- -----------
Sales ...................................................... $ 2,962,500 $ 3,408,718
Cost of sales and expenses
Oil and gas production .................................. 622,277 326,305
Transportation and marketing ............................ - - 280,965
Taxes other than income taxes ........................... 1,973,275 1,427,572
Export duties............................................ - - 559,240
Exploration ............................................. 154,776 93,148
General and administrative - Goloil ..................... 184,086 219,557
General and administrative - Teton Petroleum ............ 2,102,638 772,899
Depreciation, depletion and amortization ................ 409,670 332,738
------------ ------------
Total cost of sales and expenses .................. 5,446,722 4,012,424
------------ ------------
Loss from operations ....................................... (2,484,222) (603,706)
------------ ------------
Other income (expense)
Other income ............................................. 17,640 21,688
Interest expense ........................................ (55,531) (94,225)
------------ ------------
Total other income (expense) ...................... (37,891) (72,537)
------------ ------------
Net loss before taxes ...................................... (2,522,113) (676,243)
------------ ------------
Foreign income tax ......................................... -- (104,842)
Net loss ................................................... (2,522,113) (781,085)
Imputed preferred stock dividends for inducements
and beneficial conversion charges (521,482) --
Preferred stock dividend ................................... (31,488) --
Net loss applicable to common stock ........................ (3,075,083) (781,085)
Other comprehensive (loss) income, net of tax
Effect of exchange rates ................................ (285,156) 86,000
------------ ------------
Other comprehensive (loss) income ................. (285,156) 86,000
------------ ------------
Comprehensive loss ......................................... $(3,360,239) $ (695,085)
============ ============
Basic and diluted weighted average common shares outstanding 8,747,165 6,321,218
============ ============
Basic and diluted (loss) income per common share ........... $ (.35) $ (.12)
============ ============
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended
March 31,
---------------------------
2004 2003
------------ ------------
Cash flows from operating activities
Net loss .................................................. $(2,522,113) $ (781,085)
------------ -------------
Adjustments to reconcile net (loss) income to net cash
used in operating activities
Depreciation, depletion, and amortization ............... 409,670 332,738
Stock and warrants issued for services and interest ..... 117,094 --
Debentures issued for services .......................... -- --
Changes in assets and liabilities
Accounts receivable ................................... (679,067) (488,956)
Prepaid expenses and other assets ..................... 23,422 75,446
Inventory ............................................. (174,169) 19,104
Accounts payable and accrued liabilities .............. 1,261,983 1,034,540
------------ ------------
958,933 972,872
------------ ------------
Net cash provided by (used in) operating activities . (1,563,180) 191,787
------------ ------------
Cash flows from investing activities
Repayment of loans from Goloil 1,065,000 --
Oil and gas properties and equipment expenditures ......... (190,444) (2,886,831)
------------ ------------
Net cash provided by (used in)investing activities.... 874,556 (2,886,831)
------------ ------------
Cash flows from financing activities
Net (repayments) proceeds from advances under notes
payable from affiliate 800,243 (103,714)
Proceeds from issuance of stock, net of issue costs
of $50,000 and $98,100 449,997 2,406,510
Payment of dividends (8,000) --
------------ ------------
Net cash provided by financing activities ........... 1,242,240 2,302,796
------------ ------------
Effect of exchange rates ..................................... (285,156) 86,000
------------ ------------
Net (decrease) increase in cash .............................. 268,460 (306,248)
Cash - beginning of year ..................................... 7,588,429 712,013
------------ ------------
Cash - end of period ......................................... $ 7,856,899 $ 405,765
============ ============
See notes to unaudited consolidated financial statements.
Supplemental disclosure of non-cash activity:
During the first quarter of 2004, the Company had the following transactions:
100,000 warrants were issued to a consultant for services valued at $102,094.
13,750 shares of common stock were issued for the settlement of accrued liabilities valued
at $58,700.
The Company issued (i) 1,306,669 non-qualified options to officers and directors valued at
$3,243,406; and (ii) 108,331 incentive stock options valued at $268,899 with no expense
being recorded for accounting purposes.
The Company issued 3,750 shares of common stock for services valued at $15,000.
The Company has accrued a liability for (i) $52,362 related to the obligation to issue
50,000 warrants to consultants; (ii) $32,329 related to the obligation to issue 7,876
common shares to consultants; and (iii) $28,500 related to the obligation to issue 5,955
shares for services rendered by the outside directors.
Approximately $2,383,000 of capital expenditures for oil and gas properties were included
in accounts payable at March 31, 2004 and approximately $1,786,000 of capital expenditures
were in accounts payable at December 31, 2003 for an increase during the three months ended
March 31, 2004 of $597,000.
Conversion of 463,207 shares of preferred stock, plus dividends of 37,057 shares converted
into 500,264 shares of common stock.
We issued 50,000 warrants valued at $22,863 in settlement of accrued liabilities at
December 31, 2003.
During the first quarter of 2003, the Company had the following transactions:
7,408 shares of stock were issued to a consultant for services valued at $20,000 provided
in 2001 and accrued in payables.
73,422 shares of stock and 66,667 warrants exercisable at $6.00 were issued to a consultant
for services provided in 2002 valued at $200,000 and accrued in accounts payable.
$25,000 of stock subscriptions receivable outstanding at March 31, 2003 were collected in
April 2003.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
The March 31, 2004 financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments), which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The unaudited financial
statements as of March 31, 2004, as is customary in the oil and gas industry,
reflect a pro-rata consolidation of the Company's 50% interest in ZAO Goloil, a
Russian closed joint-stock company. However, see note 5 regarding the sale of
Goloil. The unaudited financial statements contained herein should be read in
conjunction with the financial statements and notes thereto contained in the
Company's financial statements for the year ended December 31, 2003, as reported
in the Company's Form 10-KSB filed March 30, 2004. The results of operations for
the period ended March 31, 2004 are not necessarily indicative of the results
for the entire fiscal year.
Certain amounts for March 31, 2003 have been adjusted to include adjustments to
exploration expenses and depreciation, depletion and amortization made during
the fourth quarter of 2003.
Foreign Currency Exchange Rates
The conversion of the functional currency of Goloil (a Russian Company) in
rubles to the reporting currency of U.S. dollars is based upon the exchange
rates in effect. The exchange rates in effect at March 31, 2004 and 2003 were
28.48 and 31.67 rubles to the U.S. dollar, respectively. The average rates in
effect during the three months ended March 31, 2004 and 2003 was 29.00 and 31.67
rubles to the U.S. dollar, respectively.
Earnings Per Share
At the March 19, 2003 meeting, the Company's shareholders approved a reverse 1
for 12 stock split. All share amounts and earnings per share have been adjusted
to reflect the split.
All potential dilutive securities have an antidilutive effect on earnings (loss)
per share and accordingly, basic and dilutive weighted average shares are the
same.
The following table reflects the effects of dilutive securities as of March 31,
2004 which could dilute future earnings:
Dilutive effects of stock options 2,993,037
Dilutive effects of warrants 7,932,553
Dilutive effects of convertible preferred shares 526,441
----------
11,452,031
==========
Note 2 - Proportionate Share of Liabilities
The proportionate share of accounts payable and accrued liabilities of
$4,059,089 at March 31, 2004, are obligations of Goloil and not Teton Petroleum
nor have they been guaranteed by Teton Petroleum.
The Company's 50% pro-rata share of notes payable advances made which are
advances to Goloil by an affiliate are also obligations of Goloil at March 31,
2004 and not Teton Petroleum nor have they been guaranteed by Teton Petroleum.
However, see note 5 regarding the proposed sale of Goloil.
The Company's pro-rata share of Goloil notes payable owed to an affiliate
totaled $8,219,652 at March 31, 2004. The proceeds were used to pay certain
operating expenses and capital expenditures of Goloil. These notes provide for
interest rates of 8%, with quarterly interest payments, maturing through June
2004. These notes are secured by substantially all Goloil assets. The notes
payable will be repaid from cash flow from ZAO Goloil as available, or extended
to future periods. However, see note 5 regarding the proposed sale of Goloil.
Note 3 - Stockholder's Equity
In March 2003, the stockholders approved an increase in the amount of authorized
common shares from 100,000,000 to 250,000,000 and also approved 25,000,000 of
preferred stock authorized for future issuances.
Private Placements of Common Stock
17,500 common shares valued at $73,700 were issued for (i) the settlement of
accrued liabilities of $58,700; and (ii) services provided by consultants of
$15,000.
Private Placements of Series A Convertible Preferred Stock
During the period ending March 31, 2004 the Company received the following
proceeds from the issuance of privately placed preferred stock at a price of
$4.35 per share.
Proceeds of $450,000 (net of cash costs of $50,000) from the issuance of 114,942
shares of 8% convertible preferred stock.
The preferred shares carry an 8% dividend, payable quarterly commencing January
1, 2004 and are convertible into common stock at a price of $4.35 per share. The
preferred stock is entitled to vote on all matters presented to the Company's
common stockholders, with the number of votes being equal to the number of
underlying common shares. The preferred stock also contains a liquidation
preference of $4.35 per share plus accrued unpaid dividends. The preferred
shares can be redeemed by the Company after one year for $4.35 per share upon
proper notice of redemption being provided by the Company.
In connection with the preferred share private placements, certain placements
were entered into when the underlying price of the common stock to which the
preferred shares are convertible into, exceeded $4.35 the stated conversion
rate. As a result of the underlying shares being in-the-money, the Company was
required to compute a beneficial conversion charge, which is calculated as the
difference between the conversion price of $4.35 and the closing stock price on
the effective date each offering, multiplied by the total of the related common
shares to be issued upon conversion of the preferred stock. These charges are
reflected as a dividend to the preferred shareholders and are recognized over
the period in which the preferred stock first becomes convertible. For the
Tranche 1 shares the charge was immediately recognized as the shares were
immediately convertible into common. For Tranche 2 the shares could not be
converted until a shareholder vote on January 27, 2004 took place approving the
issuance of additional common shares. The calculated beneficial conversion
feature on Tranche 2 was therefore amortized from the effective date of each
issuance through January 27, 2004. This resulted in total beneficial conversion
charges of $1,182,452, of which $1,063,842 was recorded during the fourth
quarter of 2003, and $118,610 was amortized and recorded as preferred dividends
in January 2004.
In order to induce convertible preferred shareholders to convert to Common
shares, the Company agreed to issue Common share dividends of 8% for a full
year, totaling $140,815, and agreed to issue, 402,990 warrants, valued at
$262,057, resulting in a total inducement charge of $402,872 to be recognized as
a preferred dividend in the first quarter for those investors which accepted the
inducement offer. As a result, shareholders converted 463,207 of 8% convertible
preferred shares to common stock at a price of $4.35 per share during the first
quarter of 2004. The warrants issued were valued using the Black-Scholes option
pricing model using the following assumptions: volatility of 55.2%, a risk-free
rate of 1.59%, zero dividend payments, and a life of two years.
Note 4 - Stock Options
At the annual meeting on March 19, 2003, the Company's shareholders approved an
employee stock option plan and authorized 2,083,333 shares of Common Stock for
issuance thereunder. Under the plan, incentive and non-qualified options may be
granted.
During the first quarter of 2004, the Company issued 1,306,669 non-qualified
options to employees, officers and directors valued at $3,243,406 using the
Black-Scholes option-pricing model with the following assumptions: volatility of
55.2%, a risk-free rate of 4%, zero dividend payments, and a life of ten years.
The Company also issued 108,331 incentive options to employees, officers and
directors valued at $268,899 using the Black-Scholes option-pricing model under
the same assumptions described above.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for stock options issued
to employees, officers and directors under the stock option plan. Had
compensation cost for the Company's options issued to employees, officers and
directors been determined based on the fair value at the grant date for awards
consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148, the
Company's net loss and basic loss per common share would have been changed to
the pro forma amounts indicated below:
For the Three Months Ended
March 31,
-------------------------
2004 2003
------------ ------------
Net loss applicable to common shareholders
- as reported ($3,075,083) ($781,085)
Add fair value of employee compensation expense (3,512,304) --
------------ ------------
Net loss applicable to common shareholders
- pro forma ($6,587,387) ($781,085)
============ ============
Basic loss per common share - as reported ($ 0.35) ($0.12)
============ ============
Basic loss per common share - pro forma ($ 0.75) ($0.12)
============ ============
Note 5-Proposed Sale of Goloil Shares
During April 2004 the Company entered into a Sale and Purchase Agreement (the
"Agreement") with RussNeft, an Open Joint-Stock Company organized under the laws
of the Russian Federation. RussNeft is the current operator of Goloil. Pursuant
to the terms of the Agreement, RussNeft will pay $8,960,000 for all of the
Company's shares held in Goloil. In connection with the Agreement, the Company
entered into a separate agreement with Goloil for repayment of all of the
outstanding advances owed to the Company. At the date the parties reached
agreement, the Company had advances totaling $6,040,000, of which $1,065,000 and
$3,600,000 had been received as of March 31, 2004 and May 11, 2004,
respectively. The Company will pay an investment banking fee of $750,000 related
to the sale and estimates its expenses in connection with the negotiation of the
agreement to be $135,000.
The Company had recorded the advances as investments in Goloil and accordingly
such amount had been included in the carrying value of oil and gas properties.
The transaction is subject to the customary conditions and is subject to the
approval of the shareholders of the Company.
If approved, the gross proceeds from the two transactions, totaling $15,000,000
less the estimated $885,000 in costs combined with the elimination of
approximately $9,900,000 in liabilities, net of current assets, will result in
the Company recording an estimated gain of $12,601,000 during 2004.
The following unaudited pro forma condensed balance sheet gives effect to the
sale of shares assuming the sale of Goloil shares occurred on March 31, 2004:
Current assets $ 20,685,000
Non-current assets 26,000
------------
Total assets $ 20,711,000
============
Current liabilities $ 710,000
Stockholders' equity 20,001,000
------------
Total liabilities and
stockholders' equity $ 20,711,000
============
The condensed pro forma balance sheet reflects the historical balance sheet
included in this Form 10-Q adjusted for the following:
a. The proceeds of $8,960,000 from the sale of Goloil shares plus the
remaining $4,975,000 advances to be received, subsequent to March 31,
2004, less estimated expenses of $885,000 and alternative minimum
taxes of $181,000.
b. Elimination of Goloil's assets and liabilities which have been
historically consolidated on a pro rata basis.
c. Recording a gain from the disposition of a discontinued operation, net
of tax, of approximately $12,601,000.
Assuming the sale occurred on January 1, 2004 Teton would have had, on a pro
forma basis, an estimated net loss from operations applicable to common shares
of $2,462,000 and as a result of the sale, net income of approximately
$9,703,000. On a pro forma basis, the loss per share from continuing operations
would be $.28 per common share and net income per common share would be $1.11.
Note 6-Proposed Acquisition
On April 5, 2004 the Company entered into an agreement with Samson International
Resources ("Samson") for the purchase of Samson's 52% interest in ZAO
Pechoraneftegas ("PNG") in the Komi region of Siberia. Teton paid Samson a $3.85
million deposit. Since then, Samson's partner in PNG, Vitol Cypress ("Vitol"),
has exercised its preferential right to acquire Samson's interest in the
property. Teton's deposit has been fully refunded, but the contract remains in
effect. In the event that Vitol does not close on Samson's 52% interest, Teton
and Samson may continue with the transaction with closing subject to Teton's due
diligence and other customary conditions.
Teton continues to negotiate the acquisition of new fields in Russia, although
currently no definitive agreements have been reached. We will provide further
information on the above transactions, as well as others, through additional
press releases and the soon-to-be released proxy statement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD LOOKING STATEMENTS
With the exception of historical matters, the matters discussed herein are
forward looking statements that involve risks and uncertainties. Forward looking
statements include, but are not limited to statements concerning anticipated
trends in revenues. Our actual results could differ materially from the results
discussed in such forward-looking statements. There is absolutely no assurance
that we will achieve the results expressed or implied in forward-looking
statements.
Management Discussion & Analysis
Overview
Teton Petroleum Company is an independent oil and gas exploration and production
company whose focus is the Russian Federation, primarily Western Siberia.
During the first quarter, Teton's activities focused first on discussions with
its partner OAO NK RussNeft over the management of its Goloil subsidiary, then
negotiating the proposed sale of Goloil to RussNeft, and on the execution of
Teton's strategy of acquiring other producing oil properties in the Russian
Federation.
Financial highlights for the first quarter include the following:
o Teton's share of production from Goloil increased by 10.5% to 167,162
barrels year over year in the first quarter.
o First quarter production revenues declined year over year by13.1% to
$2,962,500 primarily as a consequence of the low oil prices received
related to new product marketing arrangements put in place for Goloil
by RussNeft starting in the fourth quarter of 2003.
o Teton's net loss for the first quarter widened from $781,085 to
$2,522,113 from the same period in 2003.
Sale of Goloil Interest to RussNeft
In September, OAO NK RussNeft, a newly formed Russian independent oil producer
acquired the shares held by Mediterranean Overseas Trust and InvestPetrol in
Goloil and assumed responsibility for operating Goloil's Eguryak License.
Commencing October 1, RussNeft began selling Goloil's production to an entity
believed by the Company to be an affiliate of RussNeft for a fixed price of
2,400 rubles per ton (roughly $11 per barrel), a price substantially below the
blended market price Goloil formerly received selling its production into the
export, near abroad and domestic markets and significantly below current market
prices. As a consequence, the Company estimates its revenues after taxes for the
quarter were reduced by approximately $1.44 million in fourth quarter of 2003
and by $2.02 million in the first quarter of 2004 from what it would have
received under its previous arrangements. Moreover, since this pricing
arrangement prevailed through the end of the fourth quarter and beyond, the
Company had to significantly reduce the present value of its reserves effective
January 1, 2004, as detailed in its Form 10-KSB/A for the year ended December
31, 2003.
Efforts to resolve these and other issues with RussNeft culminated in a series
of meetings in Russia starting in November 2003 between Teton executives and
representatives of RussNeft, which failed to yield an acceptable resolution.
Shortly thereafter, the Company and RussNeft agreed to disagree on the joint
operating strategy for Goloil and instead began to discuss the terms of an exit
via a sale of Teton's interest in Goloil to RussNeft.
The proposed sale of the Company's interest was announced on April 11, 2004 and
on May 12, 2004 the Company provided additional detail in a press release
including the sales price, which including outstanding loans to be repaid by
Goloil to Teton was $15,000,000. At that time the Company also disclosed that
the transaction would result in the elimination of approximately $9.9 million in
Goloil's net liabilities from Teton's balance sheet and that the sale would
result in a second quarter gain of approximately $12 million.
The sale is subject to shareholder approval and will be discussed in detail in
the Company's definitive proxy statement that will be sent to shareholders in
connection with the sale. Copies of the Proxy Statement will also be available
on both the SEC and Teton websites (www.sec.gov and www.tetonpetroleum.com).
2004 Operational and Financial Objectives - Update
As described in Teton's 2003 10-KSB/A, the Company's original plans called for
it to focus its efforts in two areas: 1) the continued development of the Goloil
License and 2) the acquisition, development and exploitation of similar projects
in the Russian Federation. With the Company's agreement to sell Goloil subject
to share holder approval, the first objective is no longer operative and the
second objective will become paramount.
Teton has been actively seeking to make acquisitions of producing properties in
Russia, but where Teton itself will have the opportunity to jointly or fully
operate the property. Specifically the Company has determined to target
properties with existing production in the range of 3,000 to 6,000 barrels of
oil per day with upside potential from developmental drilling and other
exploitation opportunities. Among the financial criteria for such acquisitions
is that they generate positive cash flow and be accretive to Teton earnings in a
reasonable period of time.
Teton's plans to pursue such acquisitions means that it will incur increased due
diligence and legal expenses, that will be reflected in its G&A expenses. The
company is now devoting significant internal resources to evaluating
acquisitions while also utilizing the services of outside technical, legal and
accounting consultants.
As reported in "Subsequent Events" below, Teton reached an agreement to acquire
a field producing 3,400 BOPD (net) in the Komi region of Siberia from Samson
International Resources ("Samson"), in early April. As part of the agreement,
Teton made a $3.85 million down payment to Samson. Subsequently, Samson's
partner in the field elected to exercise a preferential right of first refusal
with Samson to acquire their interest in the field on the same terms offered by
Teton. Samson subsequently returned Teton's down payment, though the purchase
and sale agreement between Samson and Teton remains in effect. Teton is also
engaged in preliminary negotiations regarding the acquisition of other producing
properties.
Results of Operations
The table below summarizes some of the most important components of our
revenues, operating costs and net loss. Please note that since Teton has been
absorbing 50% of the cost of producing the oil paid under the Goloil production
payment (included in the cost amounts), Teton's per barrel production costs are
effectively doubled.
Operating Highlights for the Quarter ended March 31
(in U.S. Dollars, unless otherwise noted)
2004 2003 Change % Change
--------- ---------- ---------- -------
Sales, Barrels 167,162 151,304 15,858 10.5%
Average Daily Sales, Barrrels 1,837 1,663 174 10.5%
Average Selling Price, $/barrel 17.72 22.53 (4.81) -21.3%
Revenues 2,962,500 3,408,718 (446,218) -13.1%
Costs of Sales and Expenses, excl. DD&A
Production Costs 622,277 326,305 295,972 90.7%
Transportation & Marketing - 280,965 (280,965) -100.0%
Taxes other than Income taxes 1,973,275 1,427,572 545,703 38.2%
Exploration cost (Geology & Geophysics) 154,776 93,148 61,628 66.2%
Export Duties - 559,240 (559,240) -100.0%
--------- ---------- ----------
2,750,328 2,687,230 63,098 2.3%
Results from Goloil Operations, before
DD&A 212,172 721,488 (509,315) -
Less General & Administrative Expense, 184,086 219,557 (35,471) -16.2%
Goloil --------- ---------- ----------
28,086 501,931 (473,844) -
Depreciation, Depletion & Amortization,
Goloil 390,386 332,738 57,648 17.3%
Operating Income (Loss), Goloil (362,300) 169,193 (531,493) -
General & Administrative Expense, Teton 2,102,638 772,899 1,329,739 172.0%
Depreciation, Depletion & Amortization,
Teton 19,284 - - -
Operating Income (Loss), Teton (2,484,222) (603,706) (1,880,516) -
Costs and Expenses during the Quarter ended March 31
(in U.S. $ per barrel)
Controllable Costs 2004 2003 Change % Change
Production Costs 3.72 2.16 1.57 72.7%
G&A - Goloil 1.10 1.45 (0.35) -24.1%
G&A - Teton 12.58 5.11 7.47 146.2%
-------- ---------- ---------- -------
17.40 8.72 8.69 99.5%
Non-Controllable Costs
Transportation & Marketing - 1.86 (1.86) -100.0%
Taxes other than Income Taxes 11.80 9.44 2.37 25.1%
Export Duties - 3.70 (3.70) -100.0%
--------- ---------- ---------- -------
11.80 14.99 (3.18) -21.2%
During the first quarter, Teton's net loss, applicable to Common stock, widened
from $781,085 in the first quarter of 2003 to $3,075,083 or $2,293,998 after
taking into account non-cash inducement charges of $521,482 for beneficial
conversion of the preferred stock and preferred dividends of $31,488 in the
first quarter of 2004. On a per share basis, Teton's loss widened from $0.12 per
share to $0.35. The increased loss was largely due to a shift in its share of
Goloil's operating income from a gain of $169,193 in the first quarter of 2003
to a loss of $362,300 in the first quarter of 2004, along with an increase in
Teton domestic general and administrative ("G&A") expenses from $772,899 to
$2,102,638 during the same periods, both of which are discussed in the
paragraphs below.
Teton's share of Goloil revenues fell year over year from $3,408,718 to
$2,962,500 in the first quarter. The decrease reflected a 21.3% decrease in
average selling price from $22.53 to $17.72 per barrel, partially offset by a
10.5% increase in production volume from 151,304 to 167,162 barrels. Production
costs increased by $295,972, or 90.7%, while taxes other than income taxes
increased by $545,703 or 38.2%. The increase in production costs was tied
increased workover activity and higher diesel fuel expenditures. Taxes other
than income taxes include the Russian Minerals Extraction Tax and Value Added
Tax (VAT) and represent significant expenses for all Russian oil producers. The
Mineral Extraction Tax is a tax on revenues tied to the price of Urals blend
crude, a benchmark for exports. Goloil no longer incurs export tariffs or
transportation charges under the marketing arrangement now in place; all sales
take place at the wellhead. Teton's share of Goloil's depreciation, depletion,
and amortization expenses increased by $57,648.
First quarter domestic G&A expense at Teton increased from $772,899 to
$2,102,638 year over year, an increase of 172.0%. The key factors contributing
to this increase were an increase in compensation costs of $522,723 including
management bonuses paid in January, as well as increases in advertising and
public relations expenses of $307,262, legal and accounting expenses of
$150,248, franchise taxes of $128,000, consulting fees of $97,467, and
geological and engineering expenses of $73,922. In addition to the increase in
compensation relating to additional staffing to meet Company goals and
objectives, many of the other increases in G&A expenses were the result of
Teton's due diligence and financing costs incurred in connection with
preliminary negotiations to acquire and develop new oil and gas properties in
Russia, including with Samson.
Liquidity and Capital Resources
The Company had a cash balance of $7,856,899 on March 31, 2004 and a working
capital deficit of $2,685,676. Excluding the pro rata consolidation of Goloil's
working capital deficit, Teton has a working capital surplus of $7,011,577.
When the sale of Goloil closes, which is expected to take place in the latter
half of July subject to shareholder approval of the transaction, the Company
anticipates it will have approximately $20 million in cash. In addition, its
$9.9 million share of Goloil's net liabilities will be extinguished leaving it
with a working capital position essentially equal to its cash.
In order to complete the acquisitions the Company is currently pursuing, the
Company will invest the cash from the sale of Goloil combined with an estimated
$5 to $10 million in additional financing. The additional $5 to $10 million will
be a combination of debt and equity.
Sources and Uses of Funds
Historically, Teton's primary source of liquidity has been cash provided by
equity offerings. Such offerings will continue to play an important role in
financing Teton's business and the Company anticipates seeking approval to raise
additional equity capital from its shareholders at its annual meeting. In
addition, the Company is working to establish a borrowing facility with one or
more international banks, most likely in the form of a revolving line of credit
that will be used primarily for the acquisition of producing properties and for
developmental drilling and other capital expenditures.
Cash Flows and Capital Expenditures
Cash used in operating activities for the three months ended March 31, 2004 was
$1,563,180 compared to cash provided by operating activities of $191,787 for the
three months ended March 31, 2003. As described above the Company's net loss
increased to $2,522,113 from $781,085 at March 31, 2003.
RussNeft, the operator of Goloil continues to proceed in the development of
Goloil's oil and gas resulting in the Company investing $190,444 in the Goloil
oil and gas properties in the first quarter. Resulting from the Company's first
quarter negotiations with RussNeft, the company received $1,065,000 from Goloil
as repayment of advances made to Goloil prior to December 31, 2003. The Company
received an additional $2,600,000 on April 1, 2004.
During the first quarter of 2004, the Company received $449,997 from the sale of
Preferred stock. The increase in proceeds from advances represents amounts
advanced by RussNeft to Goloil. As discussed above, such advances will be
eliminated upon completion of the Company's proposed sale of its interest in
Goloil.
Income Taxes, Net Operating Losses and Tax Credits
Currently, Goloil pays a profits tax in Russia equal to 24% of net profits as
defined by Russian income tax law. As discussed in our 10-KSB the taxation
system in Russia is evolving as the central government transforms itself from a
command to a market-oriented economy. Based on current tax law and the U.S.
Russian Income Tax Treaty the profits tax paid to Russia will be a creditable
tax when determining the Company's U.S. income taxes payable, if any. At March
31, 2004 the Company has a U.S. net operating loss tax carry forward of
approximately $20,000,000, utilization of which is limited under IRC section
382.
While Teton expects to realize a profit of approximately $12.6 million from the
sale of Goloil, Teton's tax advisors anticipate that it will incur only a
relatively small Alternative Minimum Tax liability of approximately $180,000.
Based on the remaining net operating loss, the Company is unlikely to pay U.S.
income taxes in the near to medium term future.
Subsequent Events
o On April 5, 2004 Teton announced that it has signed a purchase and
sale agreement to acquire a majority (52%) interest in a producing
field in Russia. The agreement provided for the payment of a deposit
of $3.85 million which was made by Teton to the seller, Samson
International Resources during April . At the time, Teton estimated
that the field's production was approximately 3,400 barrels of oil per
day net to the 52% interest being purchased by Teton. The proposed
acquisition also included two additional exploration licenses. The
closing of the acquisition was subject to several conditions,
including a preferential right of first refusal held by Samson's
partner, Vitol Cypress, to acquire Samson's interest in the field on
the same terms offered by Teton. Vitol Cypress elected to exercise
this right in early May and Samson refunded Teton's deposit though the
contract between Samson and Teton remains in effect. In the event that
Vitol does not close on Samson's 52% interest, Teton and Samson may
proceed with the contemplated transaction subject to Teton's due
diligence.
o On April 11, 2004 Teton announced it was selling its 35.3% interest in
the Goloil license to a private Russian independent, subsequently
identified as RussNeft. The sales price of $15,000,000, includes
repayment of all outstanding loans and accrued interest owed to Teton
by Goloil. Sale of the interest in Goloil is subject to shareholder
approval and will be voted on at Teton's upcoming annual shareholder
meeting. See note 5 to financial statements.
Critical Accounting Policies
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. Actual results
could differ significantly from those estimates under different assumptions and
conditions. We believe that the following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of
our financial condition and results of operations and require our most
difficult, subjective, and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Reserve Estimates: The information regarding the Company's share of oil and gas
reserves, the changes thereto and the resulting net cash flows are all dependent
upon assumptions used in preparing the Company's annual reserve study. A
qualified independent petroleum engineer, in accordance with standards of
applicable regulatory agencies and the Securities and Exchange Commission
definitions, prepares the Company's reserve study. Estimates of economically
recoverable oil and natural gas reserves and future net cash flows necessarily
depend upon a number of variable factors and assumptions, such as historical
production from the area compared with production from other producing areas,
the assumed effects of regulations by governmental agencies and assumptions
governing future oil and natural gas prices, the exchange rate between the
Russian ruble and the U.S. dollar, future operating costs, severance, ad
valorem, export, excise and other taxes, development costs and workover and
remedial costs, all of which may, in fact, vary considerably from actual
results. For these reasons, estimates of the economically recoverable quantities
of oil and natural gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery, and estimates of the
future net cash flows expected there from may vary substantially. Any
significant variance in the assumptions could materially affect the estimated
quantity and value of the reserves, which could affect the carrying value of the
Company's oil and gas properties and the rate of depletion of the oil and gas
properties. Management believes that the current assumptions used in preparation
of the reserve study are reasonable. The Company's revised downward its estimate
of oil and gas reserves by 4.4 million barrels in the fourth quarter of 2003
primarily due to the reclassification of certain waterflood reserves and
reserves associated with undrilled locations to probable. Only reserves
associated with two wells planned and budgeted for 2004 have been classified as
proved undeveloped. The Company's estimated proved reserves at December 31, 2003
and 2002 were prepared by independent petroleum engineering consultants
Gustavson and Associates.
Property, Equipment and Depreciation: The Company follows the successful efforts
method of accounting for oil and gas properties. As of March 31, 2004 all of the
Company's oil and gas assets are held in one cost center located in Siberia,
Russia. As the Company makes additional acquisitions it will have additional
cost centers. Under the successful efforts method of accounting the costs of
development wells are capitalized, but exploratory wells are capitalized only if
they are successful. The Company plans to increase its oil and gas reserves by
acquisition and the development of reserves in place. Accordingly, acquisition
and drilling costs on successful wells will be capitalized. Capitalized costs
will be depleted and depreciated using the units of production method based on
estimated proved oil reserves as determined by independent engineers, currently
Gustavson and Associates. If the estimates of oil and gas reserves are changed
materially then the amount of depreciation and depletion recorded by the Company
could increase or decrease materially. In addition the carrying costs of the oil
and gas properties are subject to the requirements of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". The Company is required to
impair the net book value for a cost center when such net book value is greater
than the estimated future cash flows for such cost center. At March 31, 2004 the
Company's estimated cash flow for its Siberian cost center, using the domestic
Russian price of 2,400 rubles per ton ($11 per barrel) exceed the carrying
value.
Pro Rata Consolidation: The Company currently pro rata consolidates its 50%
interest in Goloil, because, as of March 31, 2004, Management believes that to
be the most meaningful presentation. If the Company completes the proposed sale
of its interest in Goloil then the assets and liabilities of Goloil will be
eliminated in recording the gain on sale. See the note 5 to the financial
statements.
Production Payment: During June, 2000 the Company entered into a Master
Agreement that requires, among other things, a seven year production payment to
Energosoyuz equal to 50% of the oil produced from new and existing Goloil wells
in exchange for wells and facilities constructed by Energosoyuz. Because the
production payment was for a specified amount of production and not for a fixed
and determinable dollar amount, the Company did not record such transaction as a
loan. Currently, Goloil is paying Energosoyuz a flat amount of 19,000,000 rubles
per month, which, at current prices, is less than 50% of the oil produced. If
the Company is not successful in its efforts to sell Goloil to RussNeft, we
would continue our interest in Goloil reserves which would continue to be
subject to a production payment through June 2007, which may cause future
impairment of our investment in such properties.
Asset Retirement Obligation: During the fourth quarter of 2004 the Company
applied the provisions of SFAS 143 "Accounting for Asset Retirement Obligations"
and recorded the estimated December 31, 2003 liability for the retirement of its
Russian oil and gas assets along with a corresponding increase in the carrying
value of the related oil and gas properties. The liability was estimated based
on the estimated, discounted future cost to plug the oil and gas wells existing
at December 31, 2003 plus the costs of clean up based on the Company's current
understanding of the standards that will be applied at the time of retirement.
The Company recorded an increase in the asset retirement obligation during the
first quarter of 2004 solely due to the accretion of the discount. If the
Company does not sell Goloil, the Company will continually review the
assumptions it used in making such estimate and revise the liability as
required.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. To the
extent we borrow or finance our activities we will be exposed to interest rate
risk, which is sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political considerations
and other factors that are beyond the Company's control.
The Company is exposed to interest rate risk primarily through any borrowing
activities it may undertake. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's future financing requirements.
The Company has no current borrowings other than it's pro rata share of
Goloil's.
The Company has not and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes.
The Company conducts business primarily in Russia. Therefore, changes in the
value of Russia's currency affect the Company's financial position and cash
flows when translated into U.S. Dollars. The Company has generally accepted the
exposure to exchange rate movements relative to its investment in foreign
operations.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2004, an evaluation was performed by our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, Our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not completely effective as of March 31, 2004.
In connection with the audit of the year ended December 31, 2003, there were no "reportable
events" except that the Company's auditors reported to the Registrant's Audit Committee
that the auditors' considered two matters involving internal controls and their operation
to be material weaknesses. Specifically, in connection with its audit of the consolidated
financial statements of Registrant and its subsidiary for the year ended December 31, 2003,
the auditors reported that a material weakness existed related to the lack of formalized
policies and procedures to permit timely recording and processing of financial information
to permit the timely preparation of financial statements and recommended implementation of
formal policies and procedures and significantly enhancing the accounting staff. Since
December 31, 2003 the Registrant is addressing this concern and has hired additional
accounting staff and restructured certain accounting and reporting responsibilities and is
in the process of preparing formal procedures to permit timely recording and processing of
financial information. The second matter related to oversight of its Russian subsidiary and
reporting of its financial results on a timely basis which impact and represents
substantially all of the company's operating results. As discussed above, the Registrant is
in the process of selling its Russian subsidiary. The Registrant is also in preliminary
negotiations with respect to potential acquisitions. The Registrant intends to pursue
acquisitions where the Registrant will jointly or fully operate which will allow the
Registrant to put in place those procedures and controls necessary to ensure proper and
timely reporting of financial results.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
The securities described below represent our securities sold by us for the
period starting Jan 1, 2004 and ending March 31, 2004 that were not registered
under the Securities Act of 1933, as amended, all of which were issued by us
pursuant to exemptions under the Securities Act. Underwriters were involved in
none of these transactions.
PRIVATE PLACEMENTS OF STOCK AND WARRANTS FOR CASH
None.
SALES OF DEBT AND WARRANTS FOR CASH
None.
OPTION GRANTS
On March 31, 2004, Teton issued 1,415,000 options to officers and directors
pursuant to the 2003 Stock Option Plan. The options have an exercise price of
$3.60 per share and expire on March 31, 2014. This offering and sale was deemed
to be exempt under Rule 701 and Section 4(2) of the Securities Act of 1933. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to an accredited investor and transfer was
restricted in accordance with the requirements of the Securities Act of 1933.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
On January 15, 2004, Teton issued 3,750 shares of common stock in satisfaction
of a December 31, 2003 obligation valued at $17,900. This offering and sale was
deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to an accredited investor and
transfer was restricted in accordance with the requirements of the Securities
Act of 1933.
On February 20, 2004, Teton issued 10,000 shares of common stock in satisfaction
of a December 31, 2003 obligation valued at $40,800. This offering and sale was
deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to an accredited investor and
transfer was restricted in accordance with the requirements of the Securities
Act of 1933.
On March 12, 2004, Teton issued 3,750 shares of common stock to a consultant in
exchange for investor relation services valued at $15,000. This offering and
sale was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to an accredited
investor and transfer was restricted in accordance with the requirements of the
Securities Act of 1933.
On January 22, 2004, Teton issued 100,000 warrants exercisable at $5.00 per
share expiring January 21, 2005. The warrants were issued in connection investor
relation services. This offering and sale was deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to an accredited investor and transfer was restricted in
accordance with the requirements of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A majority of the Company's stockholders approved, pursuant to rules established
by the American Stock Exchange, the issuance of the Company's preferred stock at
a Special Meeting of Stockholders on January 27, 2004.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K:
Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Reports on From 8-K: None
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 17, 2004 By: /s/ Karl F. Arleth
-----------------------------
Karl F. Arleth,
President and CEO
Date: May 17, 2004 By: /s/ Patrick A. Quinn
-----------------------------
Patrick A. Quinn, CFO