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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 September 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 October 22, 2004, 9,130,257 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 September 30, 2004 (Unaudited) and December 31, 2003
Unaudited Consolidated Statements of Operations and Comprehensive Loss Three months ended September 30, 2004 and 2003
Unaudited Consolidated Statements of Operation and Comprehensive Loss Nine months ended September 30, 2004 and 2003
Unaudited Consolidated Statements of Cash Flows Three months ended September 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
September 30, December 31,
2004 2003
(Unaudited) (Audited)
Assets ------------ ------------
Current assets
Cash ....................................................................... $ 18,137,375 $ 7,515,994
Current assets of discontinued operations................................... -- 1,615,365
Prepaid expenses and other assets .......................................... 192,080 95,693
------------ ------------
Total current assets .................................................. 18,329,455 9,227,052
------------ ------------
Non-current assets
Non-current assets of discontinued operations............................... -- 11,473,139
Fixed assets, net .......................................................... 39,290 18,184
------------ ------------
Total non-current assets ............................................. 39,290 11,491,323
------------ ------------
Total assets .................................................................. $ 18,368,745 $20,718,375
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities ................................... $ 431,605 $ 376,429
Current liabilities of discontinued operations.............................. -- 10,010,310
------------ ------------
Total current liabilities ............................................ 431,605 10,386,739
------------ ------------
Non-current liabilities
Discontinued operations..................................................... -- 126,500
------------ ------------
Total non-current liabilities ........................................ -- 126,500
------------ ------------
Total liabilities .................................................... 431,605 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 September 30, 2004
and December 31, 2003. Liquidation preference at September 30, 2004 and
December 31, 2003 of $1,248,838 and $2,689,305, respectively............. 281 618
Common stock, $0.001 par value, 250,000,000 shares
authorized, 9,121,806 and 8,584,068 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively................... 9,122 8,584
Additional paid-in capital ................................................. 37,670,181 37,073,366
Unamortized preferred stock dividends....................................... -- (118,610)
Accumulated deficit ........................................................ (19,742,444) (27,657,578)
Foreign currency translation adjustment .................................... -- 898,756
------------ ------------
Total stockholders' equity ........................................... 17,937,140 10,205,136
------------ ------------
Total liabilities and stockholders' equity .................................... $18,368,745 $ 20,718,375
============ ============
See notes to unaudited consolidated financial statements
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended
September 30,
----------------------------
2004 2003
------------ ------------ ----------- ----------
Cost and expenses:
General and administrative$ ................... 521,140 $ 921,761
Depreciation ................................. 3,481 750
------------ ------------
Total cost and expenses ............... 524,621 922,511
------------ ------------
Loss from operations ............................ (524,621) (922,511)
------------ ------------
Other income (expense)
Other income .................................. 36,495 --
Finance charges ............................... -- (61,569)
------------ ------------
Total other income (expense) ............... 36,495 (61,569)
------------ ------------
Loss from continuing operations ................. (488,126) (984,080)
Discontinued operations, net of tax ............. 13,804,517 (768,087)
------------ ------------
Net income (loss) ............................... 13,316,391 (1,752,167)
Preferred stock dividend ........................ (24,487) (18,556)
------------ ------------
Net income (loss) applicable to common shares . 13,291,904 (1,770,723)
Other comprehensive income, net of tax
effect of exchange rates (net of
reclassification adjustments of $615,900 and $0) (615,900) (80,590)
------------ ------------
Comprehensive income (loss) ..................... $ 12,676,004 $ (1,851,313)
============ ============
Basic and diluted weighted average common
shares outstanding ............................ 9,121,094 6,807,360
============ ============
Basic and diluted income (loss) per common share
for continuing operations ..................... $ (.06) $ (0.15)
============ ============
Basic and diluted income (loss) per common share
for discontinued operations ................... $ 1.51 $ (0.11)
============ ============
Basic and diluted income (loss) per common share $ 1.46 $ (0.26)
============ ============
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Nine Months Ended
September 30,
----------------------------
2004 2003
------------ ------------
Cost and expenses:
General and administrative ......... $ 4,350,594 $ 2,675,683
Depreciation ...................... 7,315 2,500
------------ ------------
Total cost of sales and expenses 4,357,909 2,678,183
------------ ------------
Loss from operations ................. (4,357,909) (2,678,183)
------------ ------------
Other income (expense)
Other income ....................... 70,460 --
Finance charges .................... -- (61,916)
------------ ------------
Total other income (expense) .... 70,460 (61,916
------------ ------------
Loss from continuing operations ...... (4,287,449) (2,740,099)
Discontinued operations, net of tax .. 13,101,338 (1,240,393)
------------ ------------
Net income (loss) .................... 8,813,889 (3,980,492)
Imputed preferred stock dividends
for inducements and beneficial
conversion charges .................. (521,482) --
Preferred stock dividend ............. (81,462) (18,556)
------------ ------------
Net income (loss) applicable
to common shares .................... 8,210,945 (3,999,048)
Other comprehensive income, net of tax
effect of exchange rates (net of
reclassification adjustments of
$615,900 and $0) ................... (898,756) 375,000
============ ============
Comprehensive income (loss) .......... $ 7,312,189 $ (3,624,048)
============ ============
Basic and diluted weighted
average common shares outstanding ... 8,996,498 6,614,638
============ ============
Basic and diluted income (loss)
per common share for continuing
operations .......................... $ (0.54) $ (0.42)
============ ============
Basic and diluted income (loss)
per common share for
discontinued operations ............. $ 1.46 $ (0.19)
============ ============
Basic and diluted income
(loss) per common share ............. $ 0.91 $ (0.61)
============ ============
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30,
----------------------------
2004 2003
------------ ------------
Cash flows from operating activities
Net income (loss) ......................... 8,813,889 $ (3,980,492)
------------ ------------
Adjustments to reconcile net (loss)
income to net cash used in operating
activities
Depreciation .............................. 7,315 2,500
Gain on sale of discontinued operations ... (13,804,517) --
Stock and warrants issued for services and
interest ................................. 162,594 97,901
Amortization of note payable discount ..... -- 62,257
Changes in assets and liabilities
From discontinued operations ............. 1,740,268 (924,014)
Prepaid expenses ......................... (96,387) 454
Accounts payable and accrued liabilities . 55,176 --
------------ ------------
(11,935,551) 1,087,126
------------ ------------
Net cash (used in) operating activities (3,121,662) (2,893,366)
------------ ------------
Cash flows from investing activities
Proceeds from sale of discontinued
operations net of taxes ............... 7,933,450 --
Repayment of loans from discontinued
operating entity ...................... 6,040,000 --
Increase in fixed assets ............... (28,421) --
Increase in non-current of discontinued
operating entity ...................... (3,004,632) (4,210,578)
------------ ------------
Net cash provided by (used in)
investing activities ................. 10,940,397 (4,210,578)
------------ ------------
Cash flows from financing activities
From discontinued operations ........... 3,258,378 2,159,380
Proceeds from stock subscriptions ...... -- 1,939,610
Proceeds from issuance of stock, net
of issue costs of $50,000 and $98,100 . 499,999 3,619,444
Proceeds from notes payable ............ -- 628,750
Payment of dividends ................... (56,975) --
------------ ------------
Net cash provided by financing
activities .......................... 3,701,402 8,347,184
------------ ------------
Effect of exchange rates on cash .......... (898,756) 375,000
------------ ------------
Net increase (decrease) in cash ........... 10,621,381 1,243,240
Cash - beginning of year .................. 7,515,994 712,013
------------ ------------
Cash - end of period ...................... $ 18,137,375 $ 1,955,253
============ ============
See notes to unaudited consolidated financial statements.
Supplemental disclosure of non-cash activity:
During the nine months ended September 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 13,098 shares of common stock valued at $46,000 for services
rendered by the outside directors.
Approximately $1,317,000 of capital expenditures for discontinued
operations 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.
The Company issued 50,000 warrants valued at $22,863 in settlement of
accrued liabilities at December 31, 2003.
The Company accrued dividends to preferred stockholders of $24,487 at
September 30, 2004.
Supplemental disclosure of non-cash activity:
During the nine months ended September 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 September 30, 2003, $5,672
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 September 30, 2003, $39,254 of
the discount had been amortized and recorded as financing costs.
37,500 warrants issued with debt and valued at $30,500 were initially
recorded as a discount on the debentures. At September 30, 2003, $17,337 of
the discount had been amortized and recorded as financing costs
Approximately $1,888,000 of capital expenditures for oil and gas properties
was included in current liabilities from discontinued operations at
September 30, 2003.
Dividends of $18,556 were accrued on preferred stock.
TETON PETROLEUM COMPANY
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
The September 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. Prior to July 1, 2004
the unaudited financial statements include a pro-rata consolidation of the
Company's 50% interest in ZAO Goloil, a Russian closed joint-stock company
(`Goloil"). The Company sold all of its interest in Goloil effective July 1,
2004 (See note 5). At the time of sale, Goloil's activities represented all of
the oil and gas operating activities of the Company. As a result, the activities
of Goloil have been reported as "discontinued operations" for all periods
presented. 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
September 30, 2004 are not necessarily indicative of the results for the entire
fiscal year.
Certain amounts for September 30, 2003 have been adjusted to include adjustments
to exploration expenses and depreciation, depletion and amortization made during
the fourth quarter of 2003.
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.
Basic and diluted loss per common share from continuing operations includes the
effects of preferred stock dividends.
Note 3 - Stockholder's Equity
Private Placements of Common Stock
During the nine months ended September 30, 2004, 37,474 common shares valued at
$148,029 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 $46,000.
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 nine-month period ending September 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 of 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 income (loss) and basic income (loss) per common share would have
been changed to the pro forma amounts indicated below:
For the Three Months Ended
September 30,
-------------------------
2004 2003
------------ ------------
Net income (loss) - as reported $13,291,904 ($1,770,723)
Add fair value of employee compensation expense -- ( 308,414)
------------ ------------
Net income (loss) per common share - pro forma 13,291,904 ($2,079,137)
============ ============
Basic income (loss) per common share - as reported $ 1.46 ($0.26)
============ ============
Basic income (loss) per common share - pro forma $ 1.46 ($0.31)
============ ============
For the Nine Months Ended
September 30,
-------------------------
2004 2003
------------ ----------
Net income (loss) - as reported $ 8,210,945 $(3,999,048)
Add fair value of employee compensation expense (3,512,305) (4,879,440)
------------ ----------
Net income (loss) per common share - pro forma $ 4,698,640 $(8,878,488)
Basic income (loss) per common share - as reported $ .91 $ (0.61)
============ ==========
Basic loss per common share - pro forma $ .52 $ (1.34)
============ ==========
Note 5-Sale of Goloil Shares
Effective July 1, 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
totaling $6,040,000, all of which had been repaid.
The Company's income (loss) from discontinued operations for the three months
ended September 30, 2004 and 2003 are summarized as follows:
For the Three Months Ended
September 30,
-------------------------
2004 2003
------------ ------------
Sales $ -- $ 2,718,066
Cost of sales and expenses -- 3,448,467
------------ ------------
Loss from operations -- (730,401)
Other income (expense):
Interest expense --
(56,556)
------------ ------------
Net loss from discontinued operations,
before tax -- (786,957)
Income tax benefit (expense) -- 18,870
------------ ------------
Net loss from discontinued operations, before
Gain on disposal -- (768,087)
Gain on sale of Goloil stock, net of tax of $181,000 13,804,517 --
------------ ------------
Income (loss) from discontinued operations $ 13,804,217 $ (768,087)
============ ============
The Company's income (loss) from discontinued operations for the nine months
ended September 30, 2004 and 2003 are summarized below:
For the Nine Months Ended
September 30,
-------------------------
2004 2003
------------ ------------
Sales $ 6,552,138 $ 9,105,338
Cost of sales and expenses 7,072,272 10,064,044
------------ ------------
Loss from operations (520,134) (958,706)
Other income (expense):
Interest expense (166,216)
(178,139)
------------ ------------
Net loss from discontinued operations,
before tax (686,350) (1,136,845)
Income tax (16,829) (103,548)
------------ ------------
Net loss from discontinued operations, before
Gain on disposal (703,179) (1,240,393)
Gain on sale of Goloil stock, net of tax of $181,000 13,804,517 --
------------ ------------
Income (loss) from discontinued operations $ 13,101,338 $ (1,240,393)
============ ============
The gain on sale of Goloil stock is calculated as follows:
Sale price for Goloil shares $ 8,960,229
Less direct transaction expenses:
Investment banking fee (750,000)
Net fees and expenses (276,779)
------------
Net proceeds 7,933,450
Net deficit of Goloil at date of sale 5,436,167
-------------
Gain on disposal of subsidiary 13,369,617
Plus reclassifications of translation gain on disposal 615,900
--------------
Gain on disposal before income taxes 13,985,517
Estimated alternative minimum taxes due (181,000)
-------------
Gain on disposal of ZAO Goloil, net of taxes $ 13,804,517
============
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.
Financial highlights from the quarter ended September 30, 2004 include the following:
o Teton has sold its share in Goloil and recorded a gain of $13,804,517
during third quarter.
o Teton's net loss from continuing operations for the third quarter narrowed
to $488,126 from $984,080 for the same period in 2003.
During 2004 Teton's activities have been focused in two areas:
o Negotiating and finalizing the sale of Goloil to RussNeft; and
o Evaluating potential acquisitions of other producing oil properties in the
United States, Russia and the CIS.
Sale of Goloil Interest to RussNeft
The sale of the Company's interest in Goloil received shareholder approval, at
our annual meeting held July 16, 2004, and the sale closed on August 3, 2004,
effective July 1, 2004 for accounting purposes. The purchase price for our
35.30% interest in Goloil was $8,960,000 in cash. Goloil also repaid advances
made by the Company to Goloil totaling $6,040,000. The advances were made to
Goloil by the Company to finance our 50% share of Goloil's capital expenditures
and currently bore interest at the rate of 8% per annum. The gross proceeds of
the two transactions to the Company totaled $15,000,000.
2004 Operational and Financial Objectives - Update
During 2004, the Company has been actively seeking to make acquisitions of
producing properties in the United States, Russia and the CIS, where the Company
itself will have the opportunity to jointly or fully operate the property.
Specifically the Company has determined to target properties in North America
with existing production in the range of 400 to 600 barrels of oil equivalent
per day and 2,000 barrels of oil equivalent per day in the former Soviet Union
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 over 300 projects,
rejected 291, submitted 4 offers, with approximately 10 projects remaining open,
pending further review.
Prior to August 2004 the Company emphasized acquisitions in Russia and the CIS.
Recent developments in Russia have caused the Company to expand the focus of its
efforts, most recently, on opportunities in North America.
The Company's plans to pursue acquisitions means that it will incur due
diligence and legal expenses, which will be included 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 Company has a net loss from continuing operations for the three months ended
September 30, 2004 of $488,126 which is $495,954 less than the net loss from
continuing operations for the same period in 2003. Third quarter domestic
general and administrative expense at the Company decreased from $921,761 for
2003 to $521,140 in 2004, a decrease of 43%. The key factors contributing to
this decrease were a decrease in consulting fees of $197,820, as well as
decreases in advertising and public relations expenses of $142,787, legal and
accounting expenses of $183,300 and public company compliance expenses of
$47,338. Since the agreement to sell Goloil was signed in the second quarter of
2004, the Company has reduced its ongoing general and administrative expenses
by, among other things, significantly reducing its investor relations-related
costs and corporate personnel associated with its discontinued operations. Other
income in 2004 includes interest income from the cash balances maintained. The
Company expects to continue to streamline its costs in the future.
The Company has a net loss from continuing operations for the nine months ended
September 30, 2004 of $4,287,449 which is $1,547,350 less than the $2,740,099
net loss for the same period in 2004. General and administrative expenses for
Teton increased to $4,350,594 from $2,675,683, a 63% increase. Such increase was
primarily incurred prior to June 30, 2004 and was related to increases in
compensation of $899,289, increase in advertising and public relations of
$216,152 and increases due to costs associated with the Company's pursuit of new
acquisitions of oil and gas properties in Russia, including $102,598 in
consulting fees and $246,069 in legal and accounting fees. Other increases
include $145,260 in public company compliance costs. The Company also incurred
increased costs associated with the sale of Goloil, primarily in the second
quarter.
Discontinued Operations
See note 5 for a summary of the income (loss) from discontinued operations. The
Company considered the sale of Goloil to be effective July 1, 2004. Accordingly
the operating activities of Goloil for the six months ended June 30, 2004 have
been included in the Company's September 30, 2004 unaudited statement of
operations as a net loss from discontinued operations. Goloil's operating
revenues and expenses for six months of 2004 are less than 2003 because Teton
has recorded a full nine months of operations for 2003. Goloil sold its
production in 2004 at an average price of $18.98 per barrel which approximates
the price sold in 2003, however 2004 production was sold exclusively to the
domestic and near abroad markets and not the export market which during 2004
were selling oil at a price substantially above the price received. Prior to
September 30, 2003, Goloil had sold its oil for a blended oil price which
included sales to the export market.
The $13,722,317 gain includes the $8,960,000 proceeds from the sale of Goloil
stock, net of $829,734 in expenses and $181,000 in current U.S. income taxes
plus the elimination of approximately $5.8 million in net liabilities included
in the pro rata consolidation of Goloil as of June 30, 2004
Liquidity and Capital Resources
The Company had a cash balance of $18,137,375 on September 30, 2004 and a
working capital surplus of $17,897,850.
The Company expects that it will invest in its acquisition program, all but $3
million of its cash combined with an estimated $10 to $20 million in additional
financing. The additional $10 to $20 million is anticipated to be composed of 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
During the nine months ended September 30, 2004 the Company used $4,137,100 in
its operating activities primarily to finance its efforts in respect of
potential acquisitions and in respect of personnel costs. This amount compares
to $2,893,366 used in operating activities in 2003.
During 2004, the Company received the reimbursement of advances totaling
$6,040,000 pursuant to its agreement with RussNeft and, net of expenses and
taxes, $7,949,266 from the sale of Goloil.
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
While the Company expects to realize a U.S. tax gain from sale of discontinued
operations of approximately $12.0 million, After utilization of NOL and current
year operating losses, Teton anticipates that it will incur only a relatively
small Alternative Minimum Tax liability of approximately $181,000. At September
30, 2004, after the gain on sale, the Company has a remaining net operating loss
for U.S. income tax purposes of $14,000,000. Such net operating loss is subject
to U.S. Internal Revenue Code Section 382 limitations. As of November 1, 2004
utilization of the NOL is limited to approximately $900,000 per annum.
Subsequent Events
There are no subsequent events to report.
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.
The Company has not and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes.
Prior to July 1, 2004, the Company conducted business primarily in Russia.
Therefore, changes in the value of Russia's currency affected 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 September 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 September
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 July 1, 2004 and ending September 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.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
On July 7, 2004 Teton issued a total of 7,143 shares of Common Stock valued at
$17,500 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on July 16, 2004. The
matters voted on at the meeting and the results of the stockholder voting are as
follows:
Proposal Voting Results
- -------- --------------
Votes Percent
----- -------
Item No. 1.
Election of Directors
H. Howard Cooper For 6,449,613 85.80%
Withheld 1,067,702 14.20%
Karl F. Arleth For 6,655,626 88.54%
Withheld 861,689 11.46%
Thomas F. Conroy For 6,694,978 89.06%
Withheld 822,337 10.94%
James J. Woodcock For 6,695,095 89.06%
Withheld 822,220 10.94%
John T. O'Conner For 6,702,667 89.16%
Withheld 814,648 10.84%
Item No. 2.
A proposal to ratify the board's For 6,920,031 92.05%
selection of Ehrhardt Keefe Steiner Against 574,965 7.65%
& Hottman PC as the Company's Abstain 22,319 .30%
independent auditor's for the fiscal
year ending December 31, 2004
Item No. 3
A proposal to approve the sale of the For 5,457,075 72.59%
Company's indirect equity interest in Against 123,370 1.64%
The Siberian-Texan Joint Stock Company Abstain 24,085 .32%
Goloil to the Open-Joint Stock Oil and
Gas Company Russneft, all as set forth
in the Share Sale and Purchase Contract
dated April 20, 2004, between Goltech
Petroleum LLC, our wholly-owned
Subsidiary, and Russneft
Item No. 4
A proposal to approve the issuance of For 4,097,520 54.51%
common stock or securities convertible Against 1,474,786 19.62%
into or exercisable for common stock Abstain 32,224 .43%
(which may be issuable, exercisable or
convertible below the then current market
value of the common stock) which could
result in an increase in outstanding
shares of common stock of 20% or more
Item No. 5
A proposal to approve the 2004 For 3,702,890 49.26%
Non-Employee Stock Against 1,829,638 24.34%
Compensation Plan Abstain 72,002 .96%
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K:
Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Reports on From 8-K: None
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 1, 2004 By: /s/ Karl F. Arleth
-----------------------------
Karl F. Arleth,
President and
Chief Executive
Officer
Date: November 1, 2004 By: /s/ Patrick A. Quinn
-----------------------------
Patrick A. Quinn,
Chief Financial
Officer
(Principal
Financial
and Accounting
Officer)