U.S. SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 20549
FORM 10-QSB
(Mark One)
[X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
[ ] 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 Small Business Issuer 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
(Issuer's Telephone Number)
1600 Broadway, Suite 2400
Denver, Colorado 80202-4921
(Address of Principal Executive Office)
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 report), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X____ No_____
Applicable only to corporate issuers:
As of August 12, 2003, 6,807,360 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format: Yes __ No X____
TETON PETROLEUM COMPANY
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at June 30, 2003 (Unaudited) and December 31, 2002 F - 1
Condensed Consolidated Statements of Operations and Comprehensive Loss
Three months ended June 30, 2003 and 2002 (Unaudited) F - 2
Condensed Consolidated Statements of Operations and Comprehensive Loss
Six months ended June 30, 2003 and 2002 (Unaudited) F - 3
Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and 2002 (Unaudited) F - 4
Notes to Consolidated Financial Statements F - 6
Item 2. Management's Discussion and Analysis or Plan of Operation F - 9
Item 3. Controls and Procedures F - 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
CERTIFICATIONS 18
TETON PETROLEUM COMPANY
Consolidated Balance Sheets
June 30, 2003 December 31, 2002
------------------ ------------------
(Unaudited)
Assets
Current assets
Cash $ 375,644 $ 712,013
Proportionate share of Goloil accounts receivable 629,575 642,525
Proportionate share of Goloil VAT and other accounts receivable 1,565,339 913,583
Stock subscriptions receivable - 1,939,610
Proportionate share of Goloil inventory 644,289 502,989
Prepaid expenses and other assets 123,872 91,446
------------------ ------------------
Total current assets 3,338,719 4,802,166
------------------ ------------------
Non-current assets
Oil and gas properties, net (successful efforts) 9,262,922 4,896,308
Fixed assets, net 463,709 313,921
------------------ ------------------
Total non-current assets 9,726,631 5,210,229
------------------ ------------------
Total assets $ 13,065,350 $ 10,012,395
================== ==================
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable and accrued liabilities $ 504,733 $ 650,356
Proportionate share of Goloil accounts payable and accrued liabilities (Note
2) 2,652,641 1,534,344
Current portion of proportionate share of notes payable owed to affiliate
(Note 2) 4,347,453 2,441,424
Notes payable, net of discount of $79,317 399,433 -
------------------ ------------------
Total current liabilities 7,904,260 4,626,124
------------------ ------------------
Non-current liabilities
Proportionate share of notes payable advances owed to affiliate - 507,001
------------------ ------------------
Total non-current liabilities - 507,001
------------------ ------------------
Total liabilities 7,904,260 5,133,125
------------------ ------------------
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value, 250,000,000 and 100,000,000 shares
authorized, 6,807,360 and 6,289,520 shares issued and outstanding at June
30, 2003 and December 31, 2002 6,807 6,290
Additional paid-in capital 27,654,162 26,165,214
Accumulated deficit (23,685,879) (22,022,734)
Foreign currency translation adjustment 1,186,000 730,500
------------------ ------------------
Total stockholders' equity 5,161,090 4,879,270
------------------ ------------------
Total liabilities and stockholders' equity $ 13,065,350 $ 10,012,395
================== ==================
See notes to unaudited consolidated financial statements
F-1
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Three Months Ended
June 30,
------------------------------------------
2003 2002
------------------ ------------------
Sales $ 2,978,554 $ 1,279,661
Cost of sales and expenses
Oil and gas production 512,511 127,504
Transportation and marketing 320,834 130,612
Taxes other than income taxes 1,250,134 707,884
Export duties 598,870 97,047
General and administrative - Goloil 167,928 141,328
General and administrative - Teton Petroleum 981,023 1,012,871
Depreciation, depletion and amortization 217,494 57,387
------------------ ------------------
Total cost of sales and expenses 4,048,794 2,274,633
------------------ ------------------
(Loss) income from operations (1,070,240) (994,972)
------------------ ------------------
Other income (expense)
Other income 291 1,683
Financing charges (347) (3,938,703)
Interest expense (49,337) (234,793)
------------------ ------------------
Total other income (expense) (49,393) (4,171,813)
------------------ ------------------
Net loss before taxes (1,119,633) (5,166,785)
------------------ ------------------
Foreign income tax (17,576) -
Net loss (1,137,209) (5,166,785)
------------------ ------------------
Other comprehensive (loss) income, net of tax
Effect of exchange rates 369,500 (90,273)
------------------ ------------------
Other comprehensive (loss) income 369,500 (90,273)
------------------ ------------------
Comprehensive loss $ (767,709) $ (5,257,058)
================== ==================
Basic and diluted weighted average common shares outstanding 6,674,988 2,392,685
================== ==================
Basic and diluted (loss) income per common share $ (0.17) $ (2.16)
================== ==================
See notes to unaudited consolidated financial statements
F-2
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Six Months Ended
June 30,
-------------------------------------------
2003 2002
------------------- -------------------
Sales $ 6,387,272 $ 2,100,661
Cost of sales and expenses
Oil and gas production 839,316 217,959
Transportation and marketing 601,199 209,275
Taxes other than income taxes 2,677,706 1,076,739
Export Duties 1,158,210 152,983
General and administrative - Goloil 387,485 234,328
General and administrative - Teton Petroleum 1,753,922 1,575,182
Depreciation, depletion and amortization 388,231 81,387
------------------- -------------------
Total cost of sales and expenses 7,806,069 3,547,853
------------------- -------------------
Loss from operations (1,418,797) (1,447,192)
------------------- -------------------
Other income (expense)
Other income 1,869 1,808
Financing charges (347) (4,043,294)
Interest expense (123,452) (311,919)
------------------- -------------------
Total other income (expense) (121,930) (4,353,405)
------------------- -------------------
Net loss before taxes (1,540,727) (5,800,597)
Foreign income tax (122,418) -
Net loss (1,663,145) (5,800,597)
------------------- -------------------
Other comprehensive (loss) income, net of tax
Effect of exchange rates 455,500 (132,273)
------------------- -------------------
Other comprehensive (loss) income 455,500 (132,273)
------------------- -------------------
Comprehensive loss $ (1,207,645) $ (5,932,870)
=================== ===================
Basic and diluted weighted average common shares outstanding 6,518,278 2,392,685
=================== ===================
Basic and diluted (loss) income per common share $ (0.26) $ (2.42)
==================== ===================
See notes to unaudited consolidated financial statements
F-3
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended
June 30,
-------------------------------------------
2003 2002
------------------- -------------------
Cash flows from operating activities
Net loss $ (1,663,145) $ (5,800,597)
------------------- -------------------
Adjustments to reconcile net (loss) income to net cash used in operating
activities
Depreciation, depletion, and amortization 388,231 81,387
Stock and stock options issued for services and interest 97,901 57,238
Debentures issued for services - 140,875
Amortization of note payable discount 347 3,859,801
Changes in assets and liabilities
Accounts receivable (638,806) (560,767)
Prepaid expenses and other assets (32,426) (105,619)
Inventory (141,300) (107,924)
Accounts payable and accrued liabilities (625,326) (1,427,449)
------------------- -------------------
(951,379) 1,937,542
------------------- -------------------
Net cash used in operating activities (2,614,524) (3,863,055)
------------------- -------------------
Cash flows from investing activities
Oil and gas properties and equipment expenditures (3,086,633) (570,917)
------------------- -------------------
Net cash used in investing activities (3,086,633) (570,917)
------------------- -------------------
Cash flows from financing activities
Net (repayments) proceeds from advances under notes payable from affiliate 1,399,028 967,500
Proceeds from stock subscriptions 1,939,610 -
Proceeds from deposits on convertible debentures - 1,071,500
Proceeds from convertible debentures - 3,262,142
Proceeds from issuance of stock, net of issue costs of $98,100 1,091,900 -
Proceeds from notes payable 478,750
Payments on notes payable - (594,210)
------------------- -------------------
Net cash provided by financing activities 4,909,288 4,706,932
------------------- -------------------
Effect of exchange rates 455,500 (35,338)
------------------- -------------------
Net (decrease) increase in cash (336,369) 237,622
Cash - beginning of year 712,013 182,502
------------------- -------------------
Cash - end of period $ 375,644 $ 420,124
=================== ===================
See notes to unaudited consolidated financial statements
F-4
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
Supplemental disclosure of non-cash activity:
During the six months ended June 30, 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 accounts payable.
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.
3,700 warrants issued with debt and valued at $10,592 were initially
recorded as a discount on the note payable. At June 30, 2003, $347 of
the discount had been amortized and recorded as financing costs.
87,500 warrants issued with debt and valued at $69,072 were initially
recorded as a discount on the debentures. At June 30, 2003, none of
the discount had been amortized and recorded as financing costs.
Approximately $1,818,000 of capital expenditures for oil and gas
properties was included in accounts payable at June 30, 2003.
During the six months ended June 30, 2002, the Company had the following
transactions:
In exchange for the extension of principal payments on four notes
payable, the Company modified expiration dates of certain warrants
previously held by the note holders and issued an additional 868 such
warrants. The fair value of the extension of the warrants and of the
issued warrants totaled $46,582 and has been included in financing
costs.
A note payable of $250,000 was converted into a convertible debenture
with 83,333 warrants also being issued under the same terms of the
Company's private placement offering of convertible debentures.
The Company issued $267,500 of convertible debentures with 89,167
warrants valued at $14,250 for a total of $281,750. Prepaid consulting
services valued at $140,875 related to future quarters in 2002 and are
included in prepaid expenses at June 30, 2002.
1,261,211 of warrants issued with convertible debentures valued at
$201,559 were initially recorded as a discount on the debentures. At
June 30, 2002, $120,935 of the discount had been amortized and
recorded as financing costs.
In the money conversion features on convertible debt valued at
$3,715,834 were recognized as financing costs ($3,582,084) and
consulting expenses ($133,750).
The remaining discount on notes payable of $98,772 was amortized and
recorded as financing costs.
$100,000 debenture and accrued interest of $1,178 were converted into
37,279 shares of stock valued at $111,834, which resulted in interest
of $10,656 being recognized as a premium at conversion.
Approximately $800,000 of capital expenditures for oil and gas
properties was included in accounts payable at June 30, 2002.
See notes to unaudited consolidated financial statements
F-5
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
The June 30, 2003 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 June 30, 2003, 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. 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,
2002, as reported in the Company's Form 10-KSB filed March 31, 2003. The results
of operations for the period ended June 30, 2003 are not necessarily indicative
of the results for the entire fiscal year.
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 June 30, 2003 and 2002 were
30.38 and 31.51 rubles to the U.S. dollar, respectively. The average rates in
effect during the three and six-month periods ended June 30, 2003 and 2002, were
30.89 and 31.31, and 31.27 and 31.08 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.
Note 2 - Proportionate Share of Liabilities
The proportionate share of accounts payable and accrued liabilities of
$2,652,641 at June 30, 2003 are obligations of Goloil and not Teton Petroleum
nor have they been guaranteed by Teton Petroleum.
The following notes reflect the Company's 50% pro-rata share of notes payable
advances made of Goloil owed to an affiliate. These advances are also
obligations of Goloil at June 30, 2003 and not Teton Petroleum nor have they
been guaranteed by Teton Petroleum.
F-6
Note 2 - Proportionate Share of Liabilities (continued)
Pro-rata share of Goloil notes payable owed to an affiliate. 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 April 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. $ 4,347,453
---------------
Less current portion (4,347,453)
---------------
$ -
===============
Note 3 - Notes Payable
The Company received proceeds of $478,750 from notes payable to stockholders. In
connection with the notes, 91,200 warrants valued at $79,664 were issued. At
June 30, 2003, $347 of the discount had been amortized and recorded as financing
costs. The Company has recorded the value of these warrants using the
Black-Scholes option-pricing model using the following assumptions: volatility
of 73%, a risk-free rate of 3.5%, zero dividend payments, and a life of one
year.
In July 2003, the Company received proceeds of $150,000 from a stockholder. In
connection with the notes, 37,500 warrants valued at $30,506 were issued. The
Company valued the warrants using the Black-Scholes option-pricing model using
the following assumptions: volatility of $73%, a risk-free rate of 3.5%, zero
dividend payments, and a life of one year.
Note 4 - Stockholder's Equity
In March 2003, the stockholder's 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.
During the six months ended June 30, 2003, the Company received $1,091,900 of
proceeds (net of costs of $98,100) from the issuance of 437,010 shares of common
stock. The Company received $1,939,610 during the six months related to
outstanding stock subscriptions receivable at December 31, 2002.
The Company issued 1,043,204 warrants during the six months ended June 30, 2003
in connection with the private placements to investors. The Company also issued
346,165 warrants to entities for their services directly related to raising
capital under private placements during the quarter.
F-7
Note 5 - 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 second quarter of 2003, the Company issued 30,000
non-qualified options to outside advisory board members which has been recorded
as compensation expense during the three-months ended June 30, 2003 valued at
$94,701 , using the Black-Scholes option-pricing model with the following
assumptions: volatility of $100%, a risk-free rate of 4%, zero dividend
payments, and a life of ten years. The Company also issued 1,448,037 incentive
options to employees, officers and directors valued at $4,571,026 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, offices 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 Six Months Ended
June 30,
--------------------------------------------
2003 2002
--------------------------------------------
Net loss - as reported $ (1,663,145) $ (5,800,597)
Less previously recorded compensation expense - -
Add fair value of employee compensation expense (4,571,026) -
--------------------------------------------
Net loss per common share - pro forma $ (6,234,171) $ (5,800,597)
============================================
Basic loss per common share - as reported $ (0.26) $ (2.42)
============================================
Basic loss per common share - pro forma $ (0.96) $ (2.42)
============================================
For the Three Months Ended
June 30,
--------------------------------------------
2003 2002
--------------------------------------------
Net loss - as reported $ (1,137,209) $ (5,166,785)
Less previously recorded compensation expense - -
Add fair value of employee compensation expense (4,571,026) -
--------------------------------------------
Net loss per common share - pro forma $ (5,708,235) $ (5,166,785)
============================================
Basic loss per common share - as reported $ (0.17) $ (2.16)
============================================
Basic loss per common share - pro forma $ (0.86) $ (2.16)
============================================
F-8
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.
To the extent that financial information and management's discussion and
analysis or plan of operation contain forward looking statements, such
statements involve risks and uncertainties which could cause Teton's actual
result to differ materially from the anticipated results discussed herein.
Factors that might cause such a difference are set forth in the "Significant
Factors in Company Operations" section of Teton's Registration Statement on Form
10-SB/A filed with the Securities and Exchange Commission ("SEC") on July 11,
2001 (SEC File Number: 000-31170), in Teton's Annual Report on Form 10-KSB filed
with the SEC on March 31, 2003, and in Teton's Registration Statement on form
SB-2 filed, as amended, on July 25, 2003. You are cautioned not to place undue
reliance on the forward-looking statements made herein.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results.
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.
Pro-Rata Consolidation.
The financial statements as is customary in the oil and gas industry, reflect a
pro-rata consolidation of the Company's interest in ZAO Goloil (a Russian
Company) through its wholly owned subsidiary Goltech. Management believes this
to be the most meaningful presentation as the Company's only significant asset
is its investment in ZAO Goloil.
Teton and MOT's agreement with Goloil is that they will receive all of their
investment back plus interest from the profits of Goloil before the other
shareholder, Invest Petrol, can receive any distributions. The Company is
required to provide 50% of the capital expenditure requirements and is entitled
to a 50% operating interest until repayment of its investment occurs. Under the
pro-rata
F-9
consolidation method the Company includes its pro-rata share of the assets
(50%), liabilities (50%), revenues (50%) and expenses (50%) of the accounts of
Goloil until repayment (payout) of our current and any future loans to Goloil
occurs. Invest Petrol will have no interest in Goloil's losses or profits for
the foreseeable future.
Under the pro-rata consolidation method we include our share of the assets,
liabilities, revenues and expenses of the consolidated accounts of Goltech. The
intercompany balances of Goloil, Goltech and Teton do not fully eliminate under
the pro-rata consolidation method, and the remaining receivable on Teton's
accounts has been included as a component of oil and gas properties, as this
balance will only be repaid through net cash flow generated from oil and gas
properties.
Recoverability of Oil and Gas Properties.
The recoverability of our investment in oil and gas properties is reviewed
quarterly and based on the net discounted cash flows to be obtained from our
share of the production of oil and gas by Goloil using assumptions similar to
those in the reserve study prepared by an independent petroleum engineer. The
reserve study is subject to inherent limitations and uncertainties and is
prepared using economics for the Company's 100% interest in Goltech, LLC, which
includes the Company's share of a 35.295% interest in Goloil. If the average
cost of oil production sold, the costs to produce and transport the oil for sale
or further development capital expenditures change adversely to the Company,
such changes could cause a material write down of our investment in such
properties or abandonment altogether of our continued efforts to develop and
produce those oil and gas reserves. Management believes that the economic
conditions will remain favorable to the Company for the oil and gas prices it
receives from production and the costs we incur for producing, transporting and
continued license development capital expenditures, and it will recover all such
investments in its oil and gas properties.
Asset Retirement Obligations
Effective January 1, 2003, the Company adopted the provisions of Financial
Accounting Standard No. 143 (SFAS 143) "Accounting for Asset Retirement
Obligations". SFAS 143 requires record the fair value of a liability for an
asset retirement obligation to be recorded in the period in which it is
incurred. Overtime this liability is accreted to its expected future value with
accretion being recorded as a charge to operations. The majority of the
Company's asset retirement obligations relate to the projected costs to plug and
abandon oil and gas wells, and closure of access roads on the license area in
Russia.
The Company currently cannot make an assessment of the fair value for it's
proportionate share of asset retirement obligations, and accordingly no
liability for the fair value of these costs has been recorded in the
accompanying financial statements. Currently the fair value of these costs is
not able to be determined as a final plan of abandonment and closure for these
future obligations has not been finalized with the applicable governmental
bodies of the Russian government, and therefore the specific actions required to
satisfy the obligations under the license are not known with a degree of
certainty to enable reasonable estimation, although management believes that any
ultimate liability to plug and abandon wells and close access roads will not be
material to the financial condition or results of operations of the Company.
Oil and Gas Reserves and Supplemental Information.
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
F-10
regulatory agencies and the Securities and Exchange Commission definitions,
prepares the Company's reserve study. That reserve study is prepared using
economics for the Company's 100% interest in Goltech, LLC, which includes the
Company's 35.295% interest in Goloil. Such reserves and resultant net cash flows
are subject to the inherent limitations in those estimates that include the cost
of oil and gas production, costs related to future capital expenditures, the
price per barrel of oil sales, the Company's share of those reserves, the taxing
structure of the Russian Federation and other factors. Changes in one or all of
these items could cause a material change in the reserve estimates and the net
cash flows from the sale of production generated from those reserves. Management
believes that the current assumptions used in preparation of the reserve study
are reasonable.
Results of Operations
Below is a brief analysis of the most important components of our revenues and
operating costs. Please note that since Teton absorbs its share of the cost of
producing the oil paid under the production payment (included in the cost
amounts), the impact of changes is doubled in the "net to Teton" per barrel
costs.
Three Months Ended June 30, 2003 compared to June 30, 2002
The Company had revenues from oil and gas production of $2,978,554 for the three
months ended June 30, 2003 as compared to $1,279,661 for the three months ended
June 30, 2002. The change in revenues is related to the increase in sales from
93,629 barrels to 164,273 barrels, net to Teton after a 50% production payment
and an increase in the average price per barrel received from $13.67 to $18.13
from 2002 to 2003.
The cost of oil production increased to $512,511 for the three months ended June
30, 2003 from $127,504 for the three months ended June 30, 2002 due to the
Company's increased production. The average cost per barrel of production,
excluding taxes, increased from $1.36 to $3.12. The increase was mainly due to
an increase in well maintenance expenses, an increase in payroll, along with the
costs of an insurance policy for the Goloil oil pipeline that was initiated in
the first quarter of this year. A fourth factor contributing to the increase in
production cost was fuel consumption. Goloil currently uses diesel generators to
provide electricity for its field operations and as the number of wells has
increased, this cost has grown increasingly important. Once the new
co-generation plant is installed, fuel costs are expected to be substantially
reduced.
Export duties rose sharply, from $97,047 to $598,870 as a consequence of both
the increased volumes sold for export, which more than doubled, and increases in
the export tariff rate, from an average of $1.04 per barrel to $3.65 per barrel,
year over year. The export tariff rate is based on a complex formula that
results in high tariff rates whenever the price of exported crude rises above
$25/barrel.
Transportation and marketing expenses rose from $130,612 for the three months
ended June 30, 2002 to $320,834 in the current quarter. The increase was due
mainly to the increased sales volume as well as increased transportation rates,
which rose from $1.40 per barrel to $1.95 per barrel, year over year.
Taxes other than income, which include the Russian mining (extraction) tax,
value added tax (VAT), and property and other miscellaneous taxes rose from
$707,884 in the quarter ended June 30, 2002 to $1,250,134 during quarter ended
June 30, 2003. The increase reflected both increased sales volumes and, to a
lesser extent, an increase in the average tax paid per barrel of Russian taxes
other than income increased from $7.56 per barrel to $7.61 per barrel.
F-11
Teton's pro-rata share of Goloil's general and administrative expense ("G&A")
showed little change year over year, rising from $141,328 in the quarter ended
June 30, 2002 to $167,928 in the quarter just ended.
General and administrative expenses for Teton itself of $981,023 were incurred
for the three months ended June 30, 2003 as compared to $1,012,871 for the three
months ended June 30, 2002. The decrease in G&A of $31,848 reflects mainly a
decrease in consulting costs of $332,986, offset by increased expenses for legal
and accounting ($42,201), and fees incurred to list the Company's shares on the
American Stock Exchange ($83,025), engineering due diligence associated with
potential acquisitions ($48,017), and its filing to register shares with the SEC
during the quarter. The Company also incurred a non-cash charge for $97,901 for
the issuance of Teton share options to the members of the Company's Advisory
Committee.
Interest expense for the three months ended June 30, 2003 was $49,337 as
compared to $234,793 for the three months ended June 30, 2002. This interest
expense is principally from the pro-rata consolidation of Teton's ownership
portion of Goloil's loans in which the interest rate declined from 15% to 8% and
included approximately $75,769 of interest on convertible debentures outstanding
during the same period last year. Financing charges in 2002 of $3,938,703 arose
from the issuance of Convertible Debt and warrants, with in the money conversion
features associated with convertible debt in 2002. The Company did not issue any
convertible debt in 2003.
Six Months Ended June 30, 2003 compared to June 30, 2002
The Company had revenues from oil and gas production of $6,387,272 for the six
months ended June 30, 2003 as compared to $2,100,661 for the six months ended
June 30, 2002, an increase of 204%. The change in revenues is related to the
increase in sales from 153,225 barrels to 315,577 barrels, net to Teton after a
50% production payment and an increase in the average price per barrel received
from $13.77 to $20.24 from 2002 to 2003.
The cost of oil production increased to $839,316 for the six months ended June
30, 2003 from $217,959, for the six months ended June 30, 2002 due to the
Company's increased production. The average cost per barrel of production,
excluding taxes, increased from $1.43 to $2.66. As discussed in the section
above, the increase was due in large part to increases in four items: well
maintenance expenses, labor, pipeline insurance, and fuel consumption.
Export duties rose sharply, from $152,983 to $1,158,210 as a consequence of both
the increased volumes sold for export and increases in the export tariff rate,
from an average of $1.00 per barrel to $3.67 per barrel, year over year. As
discussed in the section above, the per barrel tariff charge increases sharply
when export prices exceed $25 per barrel as they did most of this period.
Transportation and marketing expenses rose from $209,275 for the six months
ended June 30, 2002 to $601,199 in the current six months. The increase was due
mainly to the increased sales volume as well as increased transportation rates,
which rose from $1.37 per barrel to $1.91 per barrel, year over year.
Taxes other than income, which include the Russian mining (extraction) tax,
value added tax (VAT), and property and other miscellaneous taxes rose from
$1,076,739 in the six months ended June 30, 2002 to $2,677,706 during six months
ended June 30, 2003. The increase reflected both increased sales volumes and an
increase in the average tax paid per barrel of Russian taxes other than income
F-12
increased from $7.06 per barrel to $8.49 per barrel This higher average was due
principally to an increase in the Russian mining (extraction) tax, which is
indexed to the world price of Urals Blend crude and applied to all production,
regardless of where sold.
Teton's pro-rata share of Goloil's general and administrative expense ("G&A")
rose from $234,328 in the six months ended June 30, 2002 to $387,485 in the six
months just ended.
General and administrative expenses for Teton itself of $1,753,922 were incurred
for the six months ended June 30, 2003 as compared to $1,575,182 for the six
months ended June 30, 2002. Most of the increase was due to the aforementioned
second quarter expenses for the Company's AMEX listing, due diligence
activities, and registration application partially offset by reduced
expenditures on consultants plus an increase in travel and entertainment of
$124,555.
As discussed in Teton's 10-Q filing for the previous quarter, it is now
anticipated Teton's General and Administrative expenses will exceed the
$2,000,000 budget disclosed in our previously filed 10-KSB for the year ended
December 31, 2002. The Company currently estimates that its 2003 G&A expense
will be $3,250,000.
Interest expense for the six months ended June 30, 2003 was $123,452 as compared
to $311,919 for the six months ended June 30, 2002. This interest expense is
principally from the pro-rata consolidation of Teton's ownership portion of
Goloil's loans, in which the interest rate declined from 15% to 8%, and also
included approximately $100,000 of interest on convertible debentures of Teton
that were outstanding in 2002. Financing charges of $4,043,294 in 2002 arose
from the issuance of Convertible Debt and warrants, which were recorded at "fair
value" which did not take place in 2003.
Liquidity and Capital Resources
The Company has cash balances of $375,644 at June 30, 2003, with a working
capital deficit of $4,565,541. Approximately $474,000 of the working capital
deficit is in Teton, with the remainder arising from the pro-rata consolidation
of Goloil. Teton is not liable for Goloil's debts. Cash flow used from
operations totaled $2,614,524, with non-cash adjustments to cash flow from
operations for depreciation and depletion of $388,231.
The Company used $3,086,633 of cash in investing activities, which was all
associated with oil and gas property and equipment expenditures. In particular,
the Company financed its half of a new gas-powered electrical generating plant
in the amount of $1,500,000 which will be operational in the third quarter of
this year. The plant will provide substantial increases in electrical capacity
as compared to the diesel generators that will be replaced and at a lower cost.
The plant will be fueled by natural gas from our wells, reducing or eliminating
the need to "flare" the gas. The Company financed the expenditures with existing
cash and sale of Common Stock. The Company continues to expect significant
additional investments to be made in the future to drill and develop additional
producing wells.
The Company had cash provided by financing activities of $4,909,288, which
consisted of 1,939,610 from stock subscriptions received, $1,091,900 from the
sale of Common Stock, net $1,399,028 from advances under notes payable from an
affiliate, and $478,750 in proceeds from promissory notes.
The Company anticipates future operations and significant oil and gas property
expenditures will be able to be funded through a combination of note payable
advances from an affiliate, cash raised from raising debt and equity financing
and production of oil and gas reserves.
F-13
Although the Company has a $4,565,541 working capital deficit, $4,347,453 of
that deficit relates to our proportionate share of notes payable from
affiliates, which are expected to be extended if current cash flow does not
permit repayment. Additionally, we are in the process of raising $5,000,000
through a private placement, which will be used to fund the remaining working
capital deficit, and future working capital as discussed below. The Company
anticipates it share of capital expenditures through the end of the year will be
approximately $4.4 million, and will be also be funded through the private
placement proceeds along with expected cash flow from Goloil's operations.
Other Matters:
The Company developed a plan of action to list its stock on the American Stock
Exchange (AMEX) and began implementation in the first quarter of 2003. The plan
included the implementation of a reverse 1 for 12 stock split as well as a
listing. This program was successfully completed May 6, 2003.
The Company is currently exploring possibilities to acquire additional petroleum
licenses in Russia. On May 28, the company signed a purchase and sale agreement
to acquire the Anderman/Smith Overseas, Inc. interests in the LLC Chernogorskoye
located in Western Siberia, near its existing operations. The selling price was
not disclosed and the company is pursuing its due diligence for the acquisition.
If consummated this acquisition could potentially increase average daily
production by approximately 4,000 barrels. The company is pursuing raising
additional equity and debt financing to fund the acquisition.
Subsequent Events:
On July 3, 2003 the Company announced the addition of John T. Connor to its
Board of Directors. Mr. Connor, who will chair the Board's audit committee, is
the Founder and Portfolio Manager of the Third Millennium Russia Fund, a US
based mutual fund specializing in the equities of Russian public companies. A
former attorney at Cravath, Swaine & Moore in New York City, he has been a
partner in leading law firms in New York, Washington and New Jersey. Mr. Connor
is a member of the Council on Foreign Relations and the American Law Institute.
In July 2003, Teton received proceeds of $150,000 for a promissory note issued
to a shareholder. The note has a maturity of six months and carries an interest
rate of 10%.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including the chief executive officer, or CEO, and chief
financial officer, or CFO, of the effectiveness of the design and operation of
our disclosure procedures. Based on that evaluation, our management, including
the CEO and CFO, concluded that our disclosure controls and procedures were
effective as of June 30, 2003. There have been no significant changes in our
internal control over financial reporting in the second quarter of 2003 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
F-14
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The securities described below represent our securities sold by us for the
period starting April 1, 2003 and ending June 30, 2003 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 COMMON STOCK AND WARRANTS FOR CASH
Not applicable.
SALES OF DEBT AND WARRANTS FOR CASH
On June 19, 2003, we issued a $350,000 six month 10% promissory note to a
shareholder along with 87,500 warrants exercisable at $6.00.
On June 24, 2003, we issued a $128,750 promissory note to a director along with
3,700 options exercisable at $3.48.
On July 1, 2003, we issued a $150,000 six month 10% promissory note to a
shareholder along with 37,500 warrants exercisable at $6.00.
OPTION GRANTS
On April 9, 2003, Teton issued an aggregate of 1,448,037 options to seven
officers and directors pursuant to the 2003 Stock Option Plan. The options have
an exercise price of $3.48 per share and expire on April 8, 2013.
On April 9, 2003, Teton issued 30,000 options to members of its Advisory
Committee in consideration for serving on the Advisory Committee. The options
have an exercise price of $3.48 per share and expire on April 8, 2013.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
On April 9, 2003 we issued 291,667 warrants exercisable at $3.48 to a consultant
for its involvement in assisting the Company in raising equity capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
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.
15
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
On May 15, 2003, we filed an 8-K containing a copy of a press release
announcing 2003 first quarter revenues.
16
SIGNATURES
In accordance with the requirements of the Exchange Act of 1933, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TETON PETROLEUM COMPANY
Date: August 14, 2003 By: /s/ Karl F. Arleth
---------------------------------
Karl F. Arleth, President and CEO
Date: August 14, 2003 By: /s/ John Mahar
---------------------------------
John Mahar, CFO
17