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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 June 30, 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 August 12, 2004, 9,121,806 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 June 30, 2004 (Unaudited)
and December 31, 2003
Unaudited Consolidated Statements of Operations and Comprehensive Loss
Three months ended June 30, 2004 and 2003
Unaudited Consolidated Statements of Operation and Comprehensive Loss
Six months ended June 30, 2004 and 2003
Unaudited Consolidated Statements of Cash Flows
Three months ended June 30, 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
June 30, December 31,
2004 2003
(Unaudited) (Audited)
----------- ------------
Assets
Current assets
Cash .......................................................... $ 8,577,869 $ 7,588,439
Proportionate share of Goloil accounts receivable ............. 10,971 15,739
Proportionate share of Goloil VAT and other accounts
receivable ................................................... 1,765,612 1,078,369
Proportionate share of Goloil inventory ....................... 529,556 448,812
Prepaid expenses and other assets ............................. 157,705 95,693
------------ ------------
Total current assets ..................................... 11,041,713 9,227,052
------------ ------------
Non-current assets
Oil and gas properties, net (successful efforts) .............. 7,375,761 9,339,786
Cogeneration plant construction in progress ................... 1,725,301 1,700,696
Fixed assets, net ............................................. 522,280 450,841
------------ ------------
Total non-current assets ................................ 9,623,342 11,491,323
------------ ------------
Total assets ..................................................... $ 20,665,055 $ 20,718,375
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities ...................... $ 439,218 $ 376,429
Proportionate share of Goloil accounts payable and
accrued liabilities .......................................... 3,274,658 2,590,901
Current portion of proportionate share of notes payable
owed to affiliate (Note 2) ................................... 10,677,787 7,419,409
------------ ------------
Total current liabilities ............................... 14,391,663 10,386,739
------------ ------------
Non-current liabilities
Asset retirement obligation.................................... 131,000 126,500
------------ ------------
Total non-current liabilities ........................... 131,000 126,500
------------ ------------
Total liabilities ....................................... 14,522,663 10,513,239
------------ ------------
Commitments and contingencies
Stockholders' equity
Series A convertible preferred stock, $.001 par value,
25,000,000 shares authorized, 281,460 and 618,231 issued
and outstanding at June 30, 2004 and December 31, 2003.
Liquidation preference at June 30, 2004 and
December 31, 2003 of $1,249,838 and $2,689,305, respectively.. 281 618
Common stock, $0.001 par value, 250,000,000 shares
authorized, 9,114,663 and 8,584,068 shares issued and
outstanding at June 30, 2004 and December 31, 2003,
respectively ................................................. 9,115 8,584
Additional paid-in capital .................................... 37,677,175 37,073,366
Unamortized preferred stock dividends.......................... -- (118,610)
Accumulated deficit ........................................... (32,160,079) (27,657,578)
Foreign currency translation adjustment ....................... 615,900 898,756
------------ ------------
Total stockholders' equity .............................. 6,142,392 10,205,136
------------ ------------
Total liabilities and stockholders' equity ....................... $ 20,665,055 $ 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
June 30,
--------------------------
2004 2003
----------- -----------
Sales ...................................................... $ 3,589,638 $ 2,978,554
Cost of sales and expenses
Oil and gas production .................................. 708,996 513,011
Transportation and marketing ............................ - - 320,234
Taxes other than income taxes ........................... 2,312,750 1,250,134
Export duties............................................ - - 598,970
Exploration ............................................. 172,988 103,665
General and administrative - Goloil ..................... 195,643 167,928
General and administrative - Teton Petroleum ............ 1,726,816 981,023
Depreciation, depletion and amortization ................ 341,645 423,860
----------- -----------
Total cost of sales and expenses .................. 5,458,838 4,358,825
----------- -----------
Loss from operations ....................................... (1,869,200) (1,380,271)
----------- -----------
Other income (expense)
Other income ............................................. 16,325 291
Interest expense ........................................ (110,685) (49,684)
----------- -----------
Total other income (expense) ...................... (94,360) (49,393)
----------- -----------
Net loss before taxes ...................................... (1,963,560) (1,429,664)
----------- -----------
Foreign income tax ......................................... (16,829) (17,576)
Net loss ................................................... (1,980,389) (1,447,240)
Imputed preferred stock dividends for inducements
and beneficial conversion charges -- --
Preferred stock dividends ................................... (25,487) --
Net loss applicable to common stock ........................ (2,005,876) (1,447,240)
Other comprehensive (loss) income, net of tax
Effect of exchange rates ................................ 2,300 369,500
----------- -----------
Other comprehensive (loss) income ................. 2,300 369,500
----------- -----------
Comprehensive loss ......................................... $(2,003,576) $(1,077,740)
=========== ===========
Basic and diluted weighted average common shares outstanding 9,112,009 6,674,988
=========== ===========
Basic and diluted (loss) income per common share ........... $ (.22) $ (.22)
=========== ===========
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Six Months Ended
June 30,
--------------------------
2004 2003
----------- -----------
Sales ...................................................... $ 6,552,138 $ 6,387,272
Cost of sales and expenses
Oil and gas production .................................. 1,331,273 839,316
Transportation and marketing ............................ - - 601,199
Taxes other than income taxes ........................... 4,286,025 2,677,706
Export duties............................................ - - 1,158,210
Exploration ............................................. 327,764 196,813
General and administrative - Goloil ..................... 379,729 387,485
General and administrative - Teton Petroleum ............ 3,829,454 1,753,922
Depreciation, depletion and amortization ................ 751,315 756,598
----------- -----------
Total cost of sales and expenses .................. 10,905,560 8,371,249
----------- -----------
Loss from operations ....................................... (4,353,422) (1,983,977)
----------- -----------
Other income (expense)
Other income ............................................. 33,965 1,869
Interest expense ........................................ (166,216) (123,799)
----------- -----------
Total other income (expense) ...................... (132,251) (121,930)
----------- -----------
Net loss before taxes ...................................... (4,485,673) (2,105,907)
----------- -----------
Foreign income tax ......................................... (16,829) (122,418)
Net loss ................................................... (4,502,502) (2,228,325)
Imputed preferred stock dividends for inducements
and beneficial conversion charges (521,482) --
Preferred stock dividends................................... (56,975) --
Net loss applicable to common stock ........................ (5,080,959) (2,228,325)
Other comprehensive (loss) income, net of tax
Effect of exchange rates ................................ (282,856) 455,500
----------- -----------
Other comprehensive (loss) income ................. (282,856) 455,500
----------- -----------
Comprehensive loss ......................................... $(5,363,815) $(1,772,825)
=========== ===========
Basic and diluted weighted average common shares outstanding 8,927,699 6,518,278
=========== ===========
Basic and diluted (loss) income per common share ........... $ (.57) $ (.34)
=========== ===========
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended
June 30,
---------------------------
2004 2003
----------- -----------
Cash flows from operating activities
Net loss ............................................... $(4,502,502) $(2,228,325)
----------- -----------
Adjustments to reconcile net (loss) income to net
cash used in operating activities
Depreciation, depletion, and amortization ............ 751,315 756,598
Stock and warrants issued for services and interest .. 150,594 97,901
Amortization of note payable discount................... -- 347
Changes in assets and liabilities
Accounts receivable ................................ (682,475) (638,806)
Prepaid expenses and other assets .................. (62,012) (32,426)
Inventory .......................................... (80,744) (141,300)
Accounts payable and accrued liabilities ........... 1,317,601 (625,326)
----------- -----------
1,394,279 (583,012)
----------- -----------
Net cash (used in) operating activities .......... (3,108,223) (2,811,337)
----------- -----------
Cash flows from investing activities
Repayment of loans from Goloil.......................... 3,658,252 --
Oil and gas properties and equipment expenditures ...... (3,004,632) (2,889,820)
----------- -----------
Net cash provided by (used in)investing activities.. 653,620 (2,889,820)
----------- -----------
Cash flows from financing activities
Net (repayments) proceeds from advances under notes
payable from affiliate.................................. 3,258,378 1,399,028
Proceeds from stock subscriptions........................ -- 1,939,610
Proceeds from issuance of stock, net of issue costs
of $50,000 and $98,100.................................. 499,999 1,091,900
Proceeds from notes payable.............................. -- 478,750
Payment of dividends..................................... (31,488) --
----------- -----------
Net cash provided by financing activities ......... 3,726,889 4,909,288
----------- -----------
Effect of exchange rates ................................... (282,856) 455,500
----------- -----------
Net increase (decrease) in cash ............................ 989,430 (336,369)
Cash - beginning of year ................................... 7,588,439 712,013
----------- -----------
Cash - end of period ....................................... $ 8,577,869 $ 375,644
=========== ===========
Supplemental disclosure of non-cash activity:
During the six months ended June 30, 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 at December 31, 2003 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 5,000 shares of common stock for services valued at
$20,000.
The Company has (i) issued warrants valued at $48,697 to consultants; (ii)
issued 5,626 share of common stock valued at $23,329 to consultants; and
(iii) issued 5,955 shares of common stock valued at $28,500 for services
rendered by the outside directors.
Approximately $1,317,000 of capital expenditures for oil and gas properties
were included in accounts payable at June 30, 2004 and approximately
$1,786,000 of capital expenditures were in accounts payable at December 31,
2003 for a decrease during the six months ended June 30, 2004 of $469,000.
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.
We accrued dividends to preferred stockholders of $25,487 at June 30, 2004.
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.
See notes to unaudited consolidated financial statements.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
The June 30, 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 June 30, 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/A. The results of operations for the period ended
June 30, 2004 are not necessarily indicative of the results for the entire
fiscal year.
Certain amounts for June 30, 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 June 30, 2004 and 2003 were
29.03 and 30.38 rubles to the U.S. dollar, respectively. The average rates in
effect during the six months ended June 30, 2004 and 2003 were 28.76 and 30.89
rubles to the U.S. dollar, respectively.
Earnings Per Share
At the March 19, 2003 shareholders' 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
$3,274,658 at June 30, 2004, are obligations of Goloil and not the Company nor
have they been guaranteed by the Company.
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 June 30,
2004 and not the Company nor have they been guaranteed by the Company. However,
see note 5 regarding the sale of Goloil.
The Company's pro-rata share of Goloil notes payable owed to an affiliate
totaled $10,677,787 at June 30, 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
December 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 sale of Goloil.
Note 3 - Stockholder's Equity
Private Placements of Common Stock
During the six months ended June 30, 2004, 30,331 common shares valued at
$130,529 were issued for (i) the settlement of accrued liabilities of $82,029;
and (ii) services provided by consultants of $20,000 and (iii) services provided
by the advisory board of $28,500.
50,000 warrants were issued to settle a liability at December 31, 2003 valued at
$46,967. We also issued 100,000 warrants to a consultant valued at $102,094 for
services.
Private Placements of Series A Convertible Preferred Stock
During the six-month period ending June 30, 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 $499,999 (net of cash costs of $50,000) from the issuance of 126,436
shares of 8% convertible preferred stock.
The preferred stock carries an 8% dividend, payable quarterly commencing January
1, 2004 and is 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 stock
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 private placements of the Company's preferred stock,
certain sales were entered into when the underlying price of the common stock to
which the preferred shares are convertible into, exceeded the $4.35 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 completion of a shareholder vote, which occurred on
January 27, 2004, 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 dividends of 8% for a full year, totaling
$140,815, payable in common shares, 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.
At the annual meeting on July 16, 2004 the Company's shareholders approved a
stock compensation plan for non-employees. The maximum number of shares of
Common Stock with respect to which awards can be granted is 1,000,000 shares. As
of August 12, 2004 no grants have been authorized.
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 Six Months Ended
June 30,
---------------------------
2004 2003
------------ ------------
Net loss - as reported $(5,080,959) $(2,228,325)
Add fair value of employee compensation expense (3,512,305) (4,571,026)
----------- -----------
Net loss per common share - pro forma $(8,593,264) $(6,799,351)
Basic loss per common share - as reported $ (0.57) $ (0.34)
=========== ===========
Basic loss per common share - pro forma $ (0.96) $ (1.04)
=========== ===========
For the Three Months Ended
June 30,
-------------------------
2004 2003
------------ ------------
Net loss - as reported $(2,005,876) $(1,447,240)
Add fair value of employee compensation expense -- $(4,571,026)
----------- -----------
Net loss per common share - pro forma $(2,005,876) $(6,018,266)
=========== ===========
Basic loss per common share - as reported $ (0.22) $ (0.22)
=========== ===========
Basic loss per common share - pro forma $ (0.22) $ (0.90)
=========== ===========
Note 5-Proposed Sale of Goloil Shares
On August 3, 2004 the Company finalized its sale of Goloil to RussNeft, an Open
Joint-Stock Company organized under the laws of the Russian Federation. Pursuant
to the terms of the Sale and Purchase Agreement (the "Agreement"), RussNeft paid
$8,960,000 for all of the Company's shares of 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 in April, the Company had advances totaling
$6,040,000, of which $3,658,000 had been received as of June 30, 2004. During
August 2004 the Company paid the remaining amounts owed for an investment
banking fee totaling $750,000 in connection with the Agreement and estimates its
expenses, incurred after June 30, 2004 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 amounts have been included in the carrying value of oil and gas properties.
The effective date of the transaction will be July 1, 2004 and accordingly, the
Company will record a gain of approximately $13,000,000 during the third
quarter.
The following unaudited pro forma condensed balance sheet gives effect to the
sale of Goloil shares assuming the sale of Goloil shares occurred on June 30,
2004:
Current assets $ 19,012,000
Non-current assets 30,000
------------
Total assets $ 19,042,000
============
Current liabilities $ 439,000
Stockholders' equity 18,603,000
------------
Total liabilities and
stockholders' equity $ 19,042,000
============
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 $2,382,000 advances to be received, subsequent to June 30, 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 $13,000,000.
Assuming the sale occurred on June 30, 2004 Teton would have had, on a pro forma
basis, an estimated net loss from continuing operations applicable to common
shares for the six months ended June 30, 2004 of $4,380,000 and as a result of
the sale, net income of approximately $7,995,000. On a pro forma basis, the loss
per share from continuing operations would be $.49 per common share and net
income per common share would be $.90.
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, and may include words or phrases such as "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"projected," "intends to," or similar expressions, which are intended to
identify "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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. Among other factors discussed elsewhere in this
Report, our ability to successfully implement our strategy to acquire additional
oil and gas properties and our ability to successfully manage and operate any
oil and gas properties acquired by us will affect our future results.
Management Discussion & Analysis
Overview
Teton Petroleum Company is an independent oil and gas exploration and production
company whose primary focus, until July 1, 2004 was the Russian Federation and
former Commonwealth of Independent States ("CIS"). However, see "Sale of Goloil
Interest" below. The Company, through its wholly owned subsidiary, Goltech,
owned a 35.30% equity interest in Goloil. RussNeft owned, until the sale, the
remaining 64.70% of Goloil through two subsidiaries, McGrady and InvestPetrol.
McGrady held 35.29% and InvestPetrol held 29.41% of the equity interests in
Goloil. However, until Goltech and McGrady received the return of 100% of their
capital investment in Goloil, they were each entitled to a 50% net profit in
Goloil. Goloil is managed by a seven-person management board on which we had two
representatives. Pursuant to the existing agreements among Goloil's
shareholders, Goltech and McGrady shared equally in capital expenditures, gross
revenues, costs and expenses, until they received 100% return of their
investments in Goloil. Limited Liability Company Energosoyuz-A ("EUA"), a wholly
owned subsidiary of RussNeft, is the lessor of certain oil field facilities to
Goloil pursuant to a Lease Agreement No. EST 160/000630 (the "EUA Lease
Agreement") among EUA as lessor and Goloil as lessee dated as June 2000. EUA was
also the recipient of a production payment ("Production Payment") consisting of
50% of Goloil's production (or at EUA's option, cash in lieu of such
production). Since October 2003 through the effective date of the sale EUA took
cash instead of oil under the Production Payment in the amount of approximately
$650,000 per month. In addition, Goloil has been selling its oil at a fixed
price of 2,400 rubles per ton or $11.50 per barrel and starting May 2004, 2,700
rubles per ton or $12.74 per barrel. It is possible that a significant portion
of such sales have been made to or through one or more affiliates of RussNeft.
RussNeft, which was founded in the fall of 2002, is one of Russia's largest
independent oil producers. In September 2003, RussNeft acquired a 64.70% equity
interest in Goloil in a private transaction in which it purchased all of the
ownership interests in McGrady and InvestPetrol, the other shareholders of
Goloil. At that time, RussNeft also acquired EUA, the lessor of various wells
and facilities to Goloil under the EUA Lease Agreement. In acquiring such
interests, RussNeft became entitled to appoint a majority of the management
board of Goloil and acceded to EUA's interest in the Production Payment.
Goloil holds a twenty-five year renewable license to produce oil and gas in a
portion of Western Siberia. The license was issued by the Russian Federation and
expires in 2022, but may be extended if Goloil complies with certain specified
conditions and undertakes additional operations at the end of the term of the
license. The Goloil license encompasses 187 square kilometers (78 square miles)
in the south central portion of the west Siberian basin. The license area is
located approximately 50 miles north of Nizhnevartovsk in western Siberia. Three
oil producing fields are located within the license area: Golevaya, Eguryak, and
South Eguryak.
Financial highlights from the quarter ended June 30, 2004 include the following:
o Teton's share of production from Goloil increased by 8.4% to 178,022
barrels year over year in the second quarter.
o Second quarter production revenues increased year over year by 20.5% to
$3,589,638 primarily as a consequence of the higher oil prices.
o Teton's net loss applicable to shareholders for the second quarter widened
from $1,447,240 to $2,005,876 from the same period in 2003.
During 2004 Teton's activities have been focused in three areas:
1) Discussions with its partner RussNeft over the management of its Goloil
subsidiary;
2) Negotiating and finalizing the sale of Goloil to RussNeft; and
3) Evaluating potential acquisitions of other producing oil properties in
Russia, the CIS and the United States.
Sale of Goloil Interest to RussNeft
In September 2003, RussNeft, a newly formed Russian independent oil producer
acquired the 64.70% of Goloil shares held by McGrady and InvestPetrol and
assumed responsibility for operating Goloil's Eguryak License.
Commencing October 1 2003, 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 ($11.50 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 Company executives and
representatives of RussNeft, which failed to yield an acceptable resolution.
Shortly thereafter, the Company and RussNeft began to discuss the terms of an
exit via a sale of the Company's interest in Goloil to RussNeft.
The sale of the Company's interest in Goloil, pending shareholder approval, was
announced on April 12, 2004 and on May 12, 2004 the Company provided additional
detail concerning the sale, including, among other things, the sales price, in a
press release. The purchase price for our 35.30% interest in Goloil is
$8,960,229 in cash. Goloil also repaid advances made by the Company to Goloil
totaling $6,039,771, of which $3,569,051 of the principal and $131,452 of the
accrued interest had been repaid as of June 30, 2004. The advances were made to
Goloil by the Company to finance our 50% share of Goloil's capital expenditures
and currently bear interest at the rate of 8% per annum. The gross proceeds of
the two transactions to the Company total $15,000,000. The Company shareholders
approved the sale at our annual meeting held July 16, 2004, and the sale closed
during August 2004. See note 5 to financial statements, which include pro forma
information assuming the sale had occurred as of June 30, 2004.
2004 Operational and Financial Objectives - Update
As described in the Company'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 Russia, FSU and North America. With the sale of Goloil, the first
objective is no longer operative and the second objective will become paramount.
In addition, as the Company no longer has an operating asset, the Company will
be significantly reducing its general and administrative costs.
The Company has been actively seeking to make acquisitions of producing
properties in Russia, FSU and North America, where the Company 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 4,000 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 the Company earnings in a reasonable period of time. To date, the
Company has evaluated 300 projects, rejected 291 projects, submitted 4 offers (2
of which are outstanding), with 5 projects remaining open, pending further
review.
The Company's plans to pursue such acquisitions means that it will incur due
diligence and legal expenses, that will be reflected in its general and
administrative expenses. The company is now devoting significant internal
resources to evaluating acquisitions while also utilizing the services of
outside technical, legal and accounting consultants.
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), the Company's per barrel production
costs are effectively doubled.
Operating Highlights for the Quarter ended June 30
(in U.S. Dollars, unless otherwise noted)
2004 2003 Change % Change
Sales, Barrels 178,022 164,273 13,749 8.4%
Average Daily Sales, Barrels 1,956 1,805 151 8.4%
Average Selling Price, $/barrel 20.16 18.13 2.03 11.2%
Revenues
3,589,638 2,978,554 611,084 20.5%
Costs of Sales and Expenses,
excl. DD&A
Production Costs 708,996 513,011 195,985 38.2%
Transportation & Marketing - 320,234 (320,234) -100%
Taxes other than Income taxes
2,312,750 1,250,134 1,062,616 85%
Exploration cost (Geology &
Geophysics) 172,988 103,665 69,323 -66.9%
Export Duties - 598,970 (598,970) -100.0%
--------- --------- --------- -------
3,194,734 2,786,014 408,720 14.7%
Results from Goloil Operations,
before DD&A 394,904 192,540 202,364 -
Less General & Administrative
Expense, Goloil 195,643 167,928 27,715 16.5%
--------- --------- --------- ------
199,261 24,612 174,649 -
Depreciation, Depletion &
Amortization, Goloil 341,645 423,860 (82,215) -19.4%
Operating Income (Loss), Goloil (142,384) (399,248) 256,864 -
General & Administrative Expense,
Teton 1,726,816 981,023 745,793 76%
Operating Loss, Teton (1,869,200) (1,380,271) (488,929) -
Costs and Expenses during the Quarter ended June 30
(in U.S. $ per barrel)
2004 2003 Change % Change
Controllable Costs
Production Costs 3.72 3.12 .60 19.2%
G&A - Goloil 1.10 1.45 (0.35) -24.1%
G&A - Teton 12.58 5.11 7.47 146.2%
-------- ------- ------- ------
17.40 9.68 7.72 79.8%
Non-Controllable Costs
Transportation & Marketing - 1.95 (1.95) -100.0%
Taxes other than Income Taxes 11.80 9.44 2.36 25.1%
Export Duties - 3.65 (3.65) -100.0%
-------- -------- ------- ------
11.80 15.04 (3.24) -21.5%
During the second quarter, the Company's net loss, applicable to common stock,
widened from $1,447,240 in the second quarter of 2003 to $2,005,876 or $558,636
after taking into account preferred dividends of $25,487 in 2004. On a per share
basis, the Company's loss remained $0.22. The increased loss was largely due to
an increase in the Company's domestic general and administrative ("G&A")
expenses from $981,023 to $1,726,816.
The Company's share of Goloil revenues increased year over year from $2,978,554
to $3,589,638 in the second quarter. The increase reflected a 11.2% increase in
average selling price from $18.13 to $20.16 per barrel and a 8.4% increase in
production volume from 164,273 to 178,022 barrels. Please note that the $650,000
paid for the production payment, which is recorded as a reduction of revenues,
is less than one half of the Company's production at the set price. However,
sales quantities above assume that 50% of the volumes have been paid out for the
production payment. Accordingly, the average selling price received is greater
than the $12.74 per barrel discussed previously. Production costs increased by
$195,985, or 38.2%, while taxes other than income taxes increased by $1,062,616
or 85%. The increase in production costs was tied to 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
decreased by $82,215.
Second quarter domestic G&A expense at the Company increased from $981,023 to
$1,726,816 year over year, an increase of 76.0%. The key factors contributing to
this increase were an increase in compensation costs of $266,550, as well as
increases in advertising and public relations expenses of $51,677, legal and
accounting expenses of $279,121 and public company compliance expenses of
$192,606. 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 its due diligence and financing costs incurred
in connection with preliminary negotiations to acquire and develop new oil and
gas properties in Russia.
Operating Highlights for the Six months ended June 30
(in U.S. Dollars, unless otherwise noted)
2004 2003 Change % Change
Sales, Barrels 345,183 315,577 29,606 9.4%
Average Daily Sales, Barrrels 3,793 3,468 325 9.4%
Average Selling Price, $/barrel 18.98 20.24 (1.26) -6.2%
Revenues 6,552,138 6,387,272 164,866 2.6%
Costs of Sales and Expenses, excl.
DD&A
Production Costs 1,331,273 839,316 491,957 58.6%
Transportation & Marketing - 601,199 (601,199) -100.0%
Taxes other than Income taxes 4,286,025 2,677,706 1,608,319 60.1%
Exploration cost 327,764 196,813 130,951
Export Duties - 1,158,210 (1,158,210) -100.0%
--------- ----------- ----------
5,945,062 5,473,244 471,818 8.6%
Results from Goloil Operations,
before DD&A 607,076 914,028 (306,952) -
Less General & Administrative
Expense, Goloil 379,729 387,485 7,756 -2.0%
--------- ---------- ---------- -------
227,347 526,543 (299,196) -
Depreciation, Depletion &
Amortization, Goloil 751,315 756,598 (5,283) -.6%
Operating Loss, Goloil (523,968) (230,055) (293,913) -
General & Administrative Expense,
Teton 3,829,454 1,753,922 2,075,532 118.3%
Operating Loss, Teton
(4,353,422) (1,983,977) (2,369,445) -
Costs and Expenses during the Six months ended June 30
(in U.S. $ per barrel)
2004 2003 Change% Change
Controllable Costs
Production Costs 3.86 2.66 1.20 45.1%
G&A - Goloil 1.10 1.23 (0.13) -10.6%
G&A - Teton 11.09 5.57 5.52 99.1%
------ ----- ----- ------
16.05 9.46 6.59 69.7%
Non-Controllable Costs
Transportation & Marketing - 1.91 (1.91) -100.0%
Taxes other than Income Taxes 12.42 8.49 3.93 46.3%
Export Duties - 3.67 (3.67) 100.0%
------ ------ ----- ------
12.42 14.07 (1.65) -11.7%
During the six months ended June 30, 2004, the Company's net loss, applicable to
common stock, widened from $2,228,325 in 2003 to $4,502,502 or $2,274,177. On a
per share basis, the Company's loss widened from $0.34 per share to $0.57. The
increased loss was largely due to an increase in the Company's domestic general
and administrative ("G&A") expenses from $1,753,922 to $3,829,454 in addition to
an increased loss from Goloil activities.
The Company's share of Goloil revenues increased year over year from $6,387,272
to $6,552,138 during the six-month period. The increase reflected a 6.2%
decrease in average selling price from $20.24 to $18.98 per barrel and a 9.9%
increase in production volume from 316,957 to 348,404 barrels. Production costs
increased by $491,957, or 58.6%, while taxes other than income taxes increased
by $1,608,320 or 60.1%. The increase in production costs was tied to 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. the Company's share of Goloil's depreciation, depletion, and
amortization expenses decreased by $5,283.
Six months domestic G&A expense at the Company increased from $1,753,922 to
$3,829,454 year over year, an increase of 118.3%. The key factors contributing
to this increase were an increase in compensation costs of $742,775 including
addition of management and 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 the Company's due diligence and financing costs
incurred in connection with preliminary negotiations to acquire and develop new
oil and gas properties in Russia.
Liquidity and Capital Resources
The Company had a cash balance of $8,577,869 on June 30, 2004 and a working
capital deficit of $3,349,950. Excluding the pro rata consolidation of Goloil's
working capital deficit, Teton has a working capital surplus of $8,147,458.
As of August 12, 2004 the Company has approximately $18 million in cash, due to
the closing of the sale of Goloil. In addition, its $10.7 million share of
Goloil's net liabilities will be extinguished leaving it with a working capital
position essentially equal to its cash.
The Company expects that it will invest in its acquisition program, the cash
from the sale of Goloil combined with an estimated $10 to $20 million in
additional financing. The additional $10 to $20 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. On July 16, 2004 the shareholders approved the
issuance of common stock, which could result in an increase in outstanding
shares of common stock of 20% or more. 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 six months ended June 30, 2004 was
$3,108,223 compared to $2,811,337 for the six months ended June 30, 2003. As
described above the Company's net loss increased to $4,502,502 from $2,228,325
at June 30, 2003. This was partially offset by an increase in Goloil's accounts
payable for the second quarter.
During 2004, the Company received the reimbursement of advances totaling
$3,658,252 pursuant to its agreement with RussNeft.
During 2004, the Company received $499,999 from the sale of preferred stock. The
increase in proceeds from advances from notes payable to affiliates represents
amounts advanced by RussNeft to Goloil. As discussed above, such advances will
be eliminated now that the sale of Goloil has been completed.
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 June
30, 2004 the Company has a U.S. net operating loss tax carry forward of
approximately $24,000,000, utilization of which is limited under IRC section
382.
While the Company expects to realize a profit of approximately $13.0 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
On August 3, 2004 the Company closed and completed the sale of its interest in
Goloil pursuant to the terms discussed above.
At the annual meeting on July 16, 2004 the Company's shareholders approved a
stock compensation plan for non-employees. The maximum number of shares of
Common Stock with respect to which awards can be granted is 1,000,000 shares. As
of August 12, 2004 no grants have been authorized.
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 June 30, 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.
Pro Rata Consolidation: The Company currently pro rata consolidates its 50%
interest in Goloil, because, as of June 30, 2004, Management believes that to be
the most meaningful presentation. When 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 (U.S. $650,000), which, at current prices, is less than 50% of the oil
produced. Had the Company not been successful in its efforts to sell Goloil to
RussNeft, we would have continued our interest in Goloil reserves, which would
have continued to be subject to a production payment through June 2007.
Asset Retirement Obligation: During the fourth quarter of 2003 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
interim periods of 2004 solely due to the accretion of the discount.
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 its pro rata share of Goloil's
borrowings, which no longer exist at August 12, 2004.
The Company has not and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes.
Prior to August 12, 2004, the Company conducted 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 June 30, 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 June 30, 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 Company'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 the
Company 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 Company 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 Company completed the sale of its Russian subsidiary in
August 2004. The Company is also in preliminary negotiations with respect to
potential acquisitions. The Company intends to pursue acquisitions where the
Company will jointly or fully operate which will allow the Company 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 April 1, 2004 and ending June 30, 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 FOR CASH
On June 30, 2004 the Company issued 11,494 shares of Series A Convertible
Preferred Stock in exchange for $50,000. The $50,000 had been received during
the first quarter of 2004 and was recorded as a current liability at the time of
receipt. The Preferred Stock is convertible into Common Stock on a 1-for-1
basis. Dividends accrue quarterly on the Preferred Stock at the annual rate of
8%. The Company has certain rights to redeem the Preferred Stock and the stock
automatically converts into Common Stock upon the happening of certain specified
events.
The offer and sale of the Preferred Stock was made in reliance on the exemptions
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
offer and sale were made to an accredited investor and transfer of the stock was
restricted in accordance with the requirements of the Securities Act of 1933.
SALES OF DEBT AND WARRANTS FOR CASH
None.
OPTION GRANTS
None.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
On April 6, 2004, Teton issued 1,250 shares of Common Stock to a consultant in
exchange for investor relations services valued at $5,000. This offer and sale
was deemed to be exempt under Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The investor
due to the investor's relationship with the Company had access to information
concerning the Company. Transfer of the Common Stock was restricted in
accordance with the requirements of the Securities Act of 1933.
On April 16, 2004 Teton issued a total of 5,955 shares of Common Stock valued at
$28,500 to three of its directors for service on its Board of Directors. These
offers and sales were made in reliance on the exemption under Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. As directors, the investors had access to information
concerning the Company. The offers and sales were made to accredited investors
and transfer of the Common Stock was restricted in accordance with the
requirements of the Securities Act of 1933.
During the second quarter, Teton issued 5,626 shares of Common Stock to
consultants in exchange for investor relation services valued at $23,329. This
offer and sale was deemed to be exempt under Section 4(2) of the Securities Act.
No advertising or general solicitation was employed in offering the securities.
The consultants due to their relationship with the Company had access to
information concerning the Company. Transfer of the Common Stock 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
None.
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 Form 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: August 16, 2004 By: /s/ Karl F. Arleth
-----------------------------
Karl F. Arleth,
President and CEO
Date: August 16, 2004 By: /s/ Patrick A. Quinn
-----------------------------
Patrick A. Quinn,
CFO