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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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Commission file number 0-20760
GREKA ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
COLORADO 84-1091986
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 Fifth Avenue, Suite 1501
New York, New York 10111
(212) 218-4680
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
(Former name, former address andformer fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
----- -----
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 Section 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.
(X) Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 12, 2003, GREKA had
4,951,451 shares of Common Stock, no par value per share, outstanding.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements..................................................3
Condensed Consolidated Balance Sheets as of March 31, 2003
(Unaudited) and December 31, 2002.........................................3
Condensed Consolidated Statements of Operations for the
Three Month Periods Ended March 31, 2003 and 2002 (Unaudited)............4
Condensed Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 2003 and 2002 (Unaudited)............5
Notes to Condensed Consolidated Financial Statements (Unaudited)............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.........................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........19
Item 4. Controls and Procedure ..............................................19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 2. Changes in Securities and Use of Proceeds............................19
Item 3. Defaults Upon Senior Securities......................................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information....................................................19
Item 6. Exhibits and Reports on Form 8-K.....................................19
SIGNATURE ............................................................20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR THE PERIODS ENDED
March 31, December 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 9,369,210 $ 1,361,380
Accounts receivable trade, net
of allowance for doubtful accounts of
$436,258 (2003) and $436,258 (2002) 3,831,928 3,760,613
Inventories 1,518,282 1,363,506
Assets held for Sale -- 460,000
Other current assets 1,447,563 896,621
------------- -------------
Total Current Assets 16,166,983 7,842,120
Property and Equipment
Oil and gas properties (full cost method) 48,143,121 46,361,062
Unproven Oil and Gas Properties 4,621,518 5,014,703
Land 19,135,235 19,135,235
Plant and equipment 23,074,992 22,764,807
============= =============
94,974,866 93,275,807
Less accumulated depletion, depreciation and
Amortization (15,294,381) (14,407,101)
------------- -------------
Property and Equipment, net 79,680,485 78,868,760
Other Assets 11,932,176 10,877,792
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Total Assets $ 107,779,644 $ 97,588,618
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses 13,589,329 $ 13,097,897
Current maturities of long-term notes and notes payable 3,354,248 9,672,914
------------- -------------
Total Current Liabilities 16,943,577 22,770,811
Long-term debt, net of current portion 64,355,636 47,664,622
Other Liabilities 2,588,550
1,101,705
Stockholder's Equity
Common Stock, no par value, 50,000,000 44,404,253 44,404,253
shares authorized and 4,951,451 issued and
outstanding (March 2003 and December 2002)
Additional Paid-in Capital 1,676,604 1,676,604
Accumulated earnings (deficit) (22,188,976) (20,029,377)
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Total Stockholders' Equity 23,891,881 26,021,480
------------- -------------
$ 107,779,644 $ 97,588,618
============= =============
The accompanying notes are an integral part
of these financial statements.
3
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31
(UNAUDITED)
2003 2002
----------- -----------
Revenues $ 7,774,648 $ 4,403,733
Expenses
Production costs 3,307,273 2,259,135
Sales, General and Administrative 2,226,488 2,059,111
Depletion, depreciation and amortization 876,223 1,010,644
----------- -----------
Total Expenses 6,409,984 5,328,890
----------- -----------
Operating Income (loss) 1,364,664 (925,157)
Other Income (Expense)
Other Income, net 62,587 72,179
Interest expense, net (3,553,476) (1,220,684)
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Other Income (Expense), net (3,490,889) (1,148,505)
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Loss before cumulative effect of
change in accounting principle (2,126,225) --
Cumulative effect of change in accounting
principle (33,375) --
Provision for Income Tax -- --
----------- -----------
Net Loss $(2,159,600) $(2,073,662)
=========== ===========
Net Loss per Common Share - Basic:
Income before cumulative effect of a
Change in accounting principle $ (0.43) $ (0.44)
Cumulative effect of change in accounting
principle (0.01) --
Net Loss (0.44) (0.44)
=========== ===========
Basic Shares 4,951,451 4,697,547
Net Loss per Common Share - Diluted:
Income before cumulative effect of a
Change in accounting principle $ (0.43) $ (0.44)
Cumulative effect of change in accounting
principle (0.01) --
Net Loss (0.44) (0.44)
=========== ===========
Diluted Shares 4,951,451 4,697,547
The accompanying notes are an integral part
of these financial statements.
4
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS PERIODS ENDED MARCH 31,
(UNAUDITED)
2003 2002
------------ ------------
Cash flows from Operating Activities
Net Loss $ (2,159,600) $ (2,073,663)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depletion, depreciation and amortization 876,223 1,010,644
Amortization and write off of deferred financing costs 1,282,159 --
Cumulative effect of change in accounting principle 33,375 --
Changes in:
Decrease (increase) accounts receivable (71,314) 1,593,053
(Increase) inventories (154,776) (356,493)
(Increase) other current assets (550,942) (212,045)
Decrease (increase) other assets (209,304) 534,889
Increase (decrease) accounts payable and accrued liabilities 491,432 (57,810)
Increase (decrease) in other liabilities 686,265 --
------------ ------------
Net Cash Provided by Operating Activities 223,519 438,575
------------ ------------
Cash Flows from Investing Activities
Expenditure for property and equipment (1,382,021) (501,165)
Repayment from related party -- 247,776
Proceeds from sale of limestone property 460,000 --
------------ ------------
Net Cash Used in Investing Activities (922,021) (253,389)
------------ ------------
Cash Flows from Financing Activities
Repayments of notes payable -- (278,543)
Net decrease in revolver loan (1,038,093) (107,691)
Proceeds from long-term debt net of financing costs 19,025,000 --
Net repayment of long-term debt (9,280,574) --
Payment of financing charges -- (170,000)
------------ ------------
Net Cash Provided by (Used In) Financing Activities 8,706,333 (556,234)
------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 8,007,830 (371,049)
Cash and Cash Equivalents at Beginning of Period 1,361,380 422,103
------------ ------------
Cash and Cash Equivalents at End of Period $ 9,369,210 $ 51,054
============ ============
The accompanying notes are an integral part
of these financial statements.
5
GREKA ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared on a basis consistent with the accounting principles and policies
reflected in the financial statements for the year ended December 31, 2002, and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 2002 Form 10-K. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (which, except as otherwise disclosed herein,
consist of normal recurring accruals only) necessary to present fairly the
Company's consolidated financial position as of March 31, 2003, and the
consolidated results of operations, and the consolidated cash flows for the
three month periods ended March 31, 2003 and 2002.
Oil and Gas Properties
The Company periodically reviews the carrying value of its oil and gas
properties in accordance with requirements of the full cost method of
accounting. Under these rules, capitalized costs of oil and gas properties may
not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%, plus the lower of cost or fair market value of
unproved properties ("ceiling"). Application of this ceiling test generally
requires pricing future revenue at the prices in effect as of the end of each
reporting period and requires a writedown for accounting purposes if the ceiling
is exceeded.
New Accounting Standards
SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 became effective on January 1, 2003. SFAS No. 143 requires that the fair
value of a liability for an asset's retirement obligation be recorded in the
period in which it is incurred and the corresponding cost capitalized by
increasing the carrying amount of the related long-lived asset. The liability is
accreted to its then present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. If the liability is
settled for an amount other than the recorded amount, a gain or loss is
recognized.
Effective January 1, 2003 the Company adopted SFAS No. 143 which resulted in an
increase to net oil and gas properties of $554,065 and additional liabilities
related to asset retirement obligations of $587,440. These entries reflect the
asset retirement obligation of GREKA had the provisions of SFAS No. 143 been
applied since inception. This resulted in a non-cash cumulative-effect decrease
to earnings of $33,375.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
became effective on January 1, 2002, and addresses accounting and reporting for
the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for the
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board ("ABP")
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 retains the fundamental
provisions of SFAS NO. 121 and expands the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. Adoption of this standard
had no impact on our consolidated financial statements.
6
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds the provisions of SFAS No. 4 that require companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. The provisions of SFAS
No. 145 related to lease modifications are effective for transactions occurring
after May 15, 2002. The Company early adopted the provision of SFAS No. 145, as
permitted, with respect to the classification of gains or losses from debt
extinguishment. In the first quarter of 2003, the company wrote off $200,000 in
deferred financing costs in connection with the early extinguishment of a loan
from International Publishing Holdings. Such write off is included in interest
expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for costs associated with the exit or disposal of an
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. Adoption of this standard
had no impact on our consolidated financial statements.
The FASB has issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has elected to account for stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Had the company accounted for
stock-based employee compensation under the fair value method provided by SFAS
No. 123, there would have been no effect on the consolidated interim financial
statements as of March 31, 2003 and 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees", which elaborates on the disclosures
to be made in interim and annual financial statements of a guarantor about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing a
guarantee. Initial recognition and measurement provisions of the Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. Under
this Interpretation, at the inception of guarantees issued or modified after
December 31, 2002, we will record the fair value of the guarantee as a
liability, with the offsetting entry being recorded based on the circumstances
in which the guarantee was issued. The Company does not have any third party
guarantees outstanding other than certain guarantees issued in connection with
the Company's debt. Such debt is recorded on the Consolidated Balance Sheet at
March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51". This Interpretation
requires that the primary beneficiary in a variable interest entity consolidate
the entity even if the primary beneficiary does not have a majority voting
interest. The consolidation requirements of this Interpretation are required to
7
be implemented for any variable interest entity created on or after January 31,
2003. In addition, the Interpretation requires disclosure of information
regarding guarantees or exposures to loss relating to any variable interest
entity existing prior to January 31, 2003 in financial statements issued after
January 31, 2003. This Interpretation had no effect on our consolidated
financial statements.
NOTE 2 - NET INCOME PER SHARE
- -----------------------------
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
No dilution for any potentially dilutive securities is included. Diluted EPS
assumes the conversion of all potentially dilutive securities and is calculated
by dividing net income, as adjusted, by the weighted average number of shares of
common stock outstanding, plus all potentially dilutive securities.
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Basic Earnings Per Share
Net Loss to Common Shares $(2,159,600) $(2,073,662)
=========== ===========
Weighted Average Shares
Outstanding 4,951,451 4,697,547
Dilutive stock options -- --
Dilutive stock warrants -- --
Fully diluted shares 4,951,451 4,697,547
=========== ===========
Basic EPS $ (0.44) $ (0.44)
=========== ===========
Diluted EPS $ (0.44) $ (0.44)
=========== ===========
The Company's convertible debt and stock options were not dilutive for the
period ending March 31, 2003.
NOTE 3 - INVENTORY
- ------------------
Inventory includes material, labor and manufacturing overhead costs. Due to the
continuous manufacturing process, there is no significant work in process at any
time. Inventory consists of the following at March 31, 2003:
Raw Material .......................$ 690,575
Finished goods...................... 827,707
-----------
Total ...........................$ 1,518,282
===========
NOTE 4 - STATEMENT OF CASH FLOWS
- --------------------------------
Following is certain supplemental information regarding cash flows for the three
month periods ended March 31, 2003 and 2002:
2003 2002
----------- -----------
Interest paid ....... $ 2,215,825 $ 657,793
Income taxes paid.... $ 0 $ 0
8
NOTE 5 - CONTINGENCIES
- ----------------------
In 1995, the Company's predecessor agreed to acquire an oil and gas interest in
California on which the seller had drilled a number of non-producing oil wells.
The acquisition agreement required that the Company's predecessor assume the
obligation to abandon any wells that it did not return to production. A third
party whose consent was required to transfer the property did not consent to the
transfer. The third party is holding the seller responsible for all remediation.
The Company believes it has no financial obligation to remediate this property
because it was never the owner of the property, never produced any oil or gas
from the property and was not associated with the site and the seller did not
give the Company's predecessor any consideration to enter into the contract for
the property. Since May 2000, the Company commenced remediation on the subject
property as directed by a regulatory agency as operator of record.
Notwithstanding its compliance in proceeding with any required remediation on
seller's account, the Company is committed to hold the seller accountable for
the required obligations of the property. Through March 31, 2003, the Company
has remediated 40 of 72 wells and related facilities on the property for a cost
of approximately $2.32 million. This amount is recorded in other assets
(long-term), as the Company believes it is probable that such amount will be
recoverable from the seller. The Company has had informal discussions with the
seller, which to date have not produced positive results. Therefore, the Company
intends to pursue formal litigation for recovery. Based on future developments
with this litigation, it is reasonably possible that the Company's estimate of
recovery and ultimate liability could change in the near term and such change
could be material.
One of GREKA's subsidiaries owns an asphalt refinery in Santa Maria, California,
with which environmental remediation obligations are associated. There could be
additional environmental issues which may require material remediation efforts
in the future.
There can be no assurance that material costs for remediation or other
environmental compliance will not be incurred in the future. The occurrence of
such environmental compliance costs could be materially adverse to the Company.
No assurance can be given that the costs of closure of any of the Company's
subsidiaries' other oil and gas properties would not have a material adverse
effect on the Company.
NOTE 6 - DIVESTITURE ACTIVITIES, NON-CORE ASSETS
- ------------------------------------------------
In January 2003, the Company closed, as planned, the sale of its 355-acre
limestone reserve located in Monroe County, Indiana for a contract price of $0.5
million.
NOTE 7 - EXPLORATION ACTIVITIES
- -------------------------------
In January 2003, GREKA's wholly-owned subsidiary signed at the Great Hall of the
People in China four Production Sharing Contracts (PSCs) with China United
Coalbed Methane Corporation Ltd. (CUCBM) for the exploitation of coalbed methane
(CBM) resources in the Shanxi and Anhui Provinces. Considering the previously
signed PSC for the Fengcheng Block in the Jiangxi Province, GREKA is now party
to and operator under five, 30-year PSC's for CBM exploitation in China within
two development and three exploration blocks. The combined total contract area
is approximately 6,600 square kilometers (1.7 million acres) with average
coalbed thickness of 16.5 feet and potential reserves of 34.5 Tcf, as estimated
by CUCBM. GREKA has a 60% working interest in all PSC's other than the Fengcheng
Block in which it has a 49% working interest. The remaining working interest is
owned by CUCBM. As of March 2003 the company has incurred $1,978,637 in costs
associated with this venture ($1,978,637 at December 31, 2002), which are
9
included in unproven oil and gas properties. Under the production sharing
contract the Company is required to invest an additional $1,000,000 in 2003 and
assume operatorship of the production block in the second quarter of 2003.
NOTE 8 - FINANCING & DEBT RESTRUCTURING ACTIVITIES
- --------------------------------------------------
In March 2003, the Company amended, with certain retrospective effects, the
terms of its loan agreement with Guggenthim Investment Management, LLC as
collateral agent. The company also placed $20 million with an institutional
investor through the same collateral agent a 2-year, secured credit facility.
From these proceeds, the Company paid $4.7 million to Bank of Texas and $4.1
million to International Publishing Holdings to retire their respective loans,
and the balance, in addition to closing costs and working capital, will fund a
portion of the Company's $15 million capital expenditure program for 2003. Of
the $20 million, $13.5 million bears interest at a variable rate of Libor +
6.25% or 8.25%, whichever is greater, while the balance $6.5 million bears
interest at a fixed rate of 9.25%. The Company paid a 4.25% closing fee, and the
placement resulted in an increase of approximately $10 million of the Company's
total debt.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
GREKA's predecessor was formed in 1988 and commenced oil and gas operations in
1992 as Petro Union, Inc. Current management acquired control of Petro Union in
August 1997 and re-directed the company's operations to the present strategy.
Following the acquisition of Saba Petroleum Company in March of 1999, the
company changed its name to GREKA Energy Corporation.
GREKA Energy Corporation is an independent integrated energy company. Our oil
and gas production, exploration and development activities are concentrated in
our properties in California where we also own and operate an asphalt refinery.
We supply our asphalt refinery with equity oil, which is the crude oil we
produce from our surrounding heavy crude oil reserves, and we also utilize crude
oil purchased from third party producers. We believe that our vertically
integrated operations reduce our exposure to material volatile swings in crude
oil prices. Historically we have also engaged in oil and gas exploration,
development and production from our properties in Louisiana, Texas and New
Mexico which operations have substantially been sold as part of our strategic,
internal reorganization. In addition, we have interests in coalbed methane
properties and production sharing contracts in China.
We conduct our operations through two divisions:
o Integrated Operations
o International Operations
Integrated Operations. Our wholly owned and operated consolidated assets in
central California include substantial oil in place, over 1,200 wells, extensive
pipeline and production facilities, and an infrastructure including 3 work-over
rigs, approximately 17,700 mineral acres, approximately 3,300 acres of real
estate, a 1-acre island connected to land by a 2,700' causeway containing the
gas and oil pipelines and facilitating vehicular access, and an asphalt
refinery.
We own and operate an asphalt refinery located in Santa Maria, California.
Crude oil that we produce from our surrounding heavy crude oil reserves supplies
feedstock to the refinery. We supplement our equity oil production with third
party feedstock to achieve efficiencies through lower refinery operating costs
of finished product per unit. Our asphalt refinery produces 65% asphalt and 30%
gas oil, with the remainder produced as naphtha. We sell our asphalt to hot mix
asphalt producers, material supply companies and government agencies for use in
road surfacing applications, and we sell the gas oil and naphtha to end users
and refineries. The relatively stable price of asphalt and the low cost of our
oil compared to third party feedstock reduce our exposure to volatile swings in
crude oil prices and position us to effectively compete in the asphalt market.
International Operations. Other than the Fengcheng Block in which we have a
49% operating working interest, we have a 60% operating working interest in five
coalbed methane ("CBM") exploration and development projects within the
Provinces of Jiangxi, Shanxi and Anhui, China.
Business Strategy
We intend to implement a two-pronged strategy:
Capitalize on Our California Market Position. Our asphalt refinery, prior
to 1992 was owned and operated for approximately fifty years by Conoco and ran
between 9,000 to 11,000 Bbls per day of throughput. We expect that our refinery
can attain its rated capacity of 10,000 Bbls per day of throughput. Our strategy
11
in these vertically integrated assets is to enhance the long-term equity barrel
feedstock supply to the refinery and to cost-efficiently boost production from
the drilling locations identified in California. Our total throughput at the
asphalt refinery at March 31, 2003 was approximately 3,000 Bbls per day or 30%
of the rated capacity. Approximately 90% of the throughput is equity barrels. In
our integrated business on a recurring basis, we are designed to be a relatively
fixed cost operation with an established infrastructure in place. Equity
production and throughput at the refinery increases ought to be realized without
significant infrastructural costs to us. In this division, we are focused on
organic production growth by returning to production the large inventory of
shut-in wells acquired in recent acquisitions.
Major oil companies, such as Union Oil Company, Shell and Texaco, began
drilling in the Santa Maria, California basin in the early 1900's and built a
consolidated infrastructure of pipelines and facilities. Thousands of wells were
drilled discovering several productive oil and gas zones between 2,500 ft. and
8,500 ft. The shallower Sisquoc zone with heavier 6-12 gravity oil was passed
over in favor of the deeper Monterey zone which was generally at a depth below
5,000 ft. and the lightest oil zone carrying the highest margins. Thus, the
majors primarily concentrated on the Monterey zone and largely ignored the
others. It is this enormous proven reserve base that provides a specific road
map for the Company to build a substantial production base. Our objectives are
to exploit through increased production both the gas reservoirs for fuel
self-sufficiency and the oil for asphalt production.
Pursue High Potential International Prospects on a Longer-Term Basis. GREKA
is party to and operator under five, 30-year production sharing contracts
("PSCs") with China United Coalbed Methane Corporation Ltd. ("CUCBM") for CBM
exploitation in China within two development and three exploration blocks. The
combined total contract area within the Jiangxi, Shanxi and Anhui Provinces is
approximately 6,600 square kilometers (1.7 million acres) with average coalbed
thickness of 16.5 feet and potential reserves of 34.5 Tcf, as estimated by
CUCBM. GREKA has a 60% working interest in all PSCs other than the Fengcheng
Block in which it has a 49% working interest. The remaining working interest is
owned by CUCBM.
Empowered by the State Council, CUCBM, a wholly state-owned company, is the
only company responsible for exploration, development, production and sales of
CBM in China. The signing of the four contracts brings the total number of CBM
PSCs signed by CUCBM with foreign companies to 18, five of which are with GREKA.
The total area covered by the 18 PSCs is over 31,000 sq km containing CBM
resources of approximately 3.4 trillion m3 (120 Tcf) of which GREKA's PSCs are
estimated at 30%, as estimated by CUCBM.
Accounting Matters
SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 became effective on January 1, 2003. SFAS No. 143 requires that the fair
value of a liability for an asset's retirement obligation be recorded in the
period in which it is incurred and the corresponding cost capitalized by
increasing the carrying amount of the related long-lived asset. The liability is
accreted to its then present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. If the liability is
settled for an amount other than the recorded amount, a gain or loss is
recognized.
Effective January 1, 2003 the Company adopted SFAS No. 143 which resulted in an
increase to net oil and gas properties of $554,065 and additional liabilities
related to asset retirement obligations of $587,440. These entries reflect the
asset retirement obligation of GREKA had the provisions of SFAS No. 143 been
applied since inception. This resulted in a non-cash cumulative-effect decrease
to earnings of $33,375.
12
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
became effective on January 1, 2002, and addresses accounting and reporting for
the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for the
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board ("ABP")
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 retains the fundamental
provisions of SFAS NO. 121 and expands the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. Adoption of the standard had
no impact on our consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds the provisions of SFAS No. 4 that require companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. The provisions of SFAS
No. 145 related to lease modifications are effective for transactions occurring
after May 15, 2002. The Company early adopted the provision of SFAS No. 145, as
permitted, with respect to the classification of gains or losses from debt
extinguishment. In the first quarter of 2003, the company wrote off $200,000 in
deferred financing costs in connection with the early extinguishment of a loan
from International Publishing Holdings. Such write off is included in interest
expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for costs associated with the exit or disposal of an
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of this
standard had no impact on our consolidated financial statements.
The FASB has issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has elected to account for stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Had the company accounted for
stock-based employee compensation under the fair value method provided by SFAS
No. 123, there would have been no effect on the consolidated interim financial
statements as of March 31, 2003 and 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees", which elaborates on the disclosures
to be made in interim and annual financial statements of a guarantor about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing a
guarantee. Initial recognition and measurement provisions of the Interpretation
13
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. Under
this Interpretation, at the inception of guarantees issued or modified after
December 31, 2002, we will record the fair value of the guarantee as a
liability, with the offsetting entry being recorded based on the circumstances
in which the guarantee was issued. The Company does not have any third party
guarantees outstanding other than certain guarantees issued in connection with
the Company's debt. Such debt is recorded on the Consolidated Balance Sheet at
March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51". This Interpretation
requires that the primary beneficiary in a variable interest entity consolidate
the entity even if the primary beneficiary does not have a majority voting
interest. The consolidation requirements of this Interpretation are required to
be implemented for any variable interest entity created on or after January 31,
2003. In addition, the Interpretation requires disclosure of information
regarding guarantees or exposures to loss relating to any variable interest
entity existing prior to January 31, 2003 in financial statements issued after
January 31, 2003. This Interpretation had no effect on our consolidated
financial statements.
Critical Accounting Policies
Use of Estimates - The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires our management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Our most
significant estimates involves the assessment of the amount of proved natural
gas and oil reserves and the estimate of future development and environmental
liabilities, such as plug and abandonment costs. Actual results could differ
from those estimates.
Full Cost Accounting - The company uses the full cost method of accounting for
oil and natural gas property acquisition, exploration and development
activities. Under full cost accounting, all costs incurred in the acquisition,
exploration and development of oil and natural gas reserves are capitalized into
a "full cost pool". Capitalized costs included costs of all unproved properties,
internal costs directly related to our natural gas and oil activities. The
Company amortizes these costs using the unit-of-production method. Greka
computes the provision for depreciation, depletion and amortization quarterly by
multiplying production for the first quarter by a depletion rate. The depletion
rate is determined by dividing our total unamortized cost base by net equivalent
proved reserves at the beginning of the quarter. Unevaluated properties and
related costs are excluded from our amortization base until a determination is
made as to the existence of proved reserves. The amortization base includes
estimates for future development costs, as well as future abandonment and
dismantlement costs. Estimates of proved reserves are key components of our
depletion rate for natural gas and oil properties and our full cost ceiling test
limitation. Gains or losses are recognized only upon sales or dispositions of
significant amounts of oil and gas reserves. Proceeds from all other sales or
dispositions are treated as reductions to capitalized costs. Because there are
numerous uncertainties inherent in the estimation process, actual results could
differ from the estimates.
Inventories - The company values its inventory on the weighted average cost
method. The weighted average cost method is considered the preferable method
because the primary inventorable cost at the refinery is crude oil for which the
price can fluctuate significantly. The weighted average method balances the
impact of short term fluctuations in crude oil pricing on the Company's refinery
inventory levels.
14
Asset Retirement Obligation - The company has significant obligations to remove
tangible equipment and restore land at the end of oil and gas production
operations. The Company's removal and restoration obligations are primarily
associated with plugging and abandoning wells and removal of significant
facilities. In 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143 (SFAS No. 143), "Accounting
for Asset Retirement Obligations". SFAS No. 143 significantly changed the method
of accruing for costs associated with the retirement of fixed assets an entity
is legally obligated to incur. Primarily, the new statement requires the Company
to record a separate liability for asset retirement obligations that represents
the present value of the costs to be incurred. Estimating the future asset
removal costs is difficult and requires management to make estimates and
judgments because most of the removal obligations are many years in the future
and contracts and regulations often have vague descriptions of what constitutes
removal. Asset removal technologies and costs are constantly changing, as well
as regulatory, political, environmental, safety and public relations
considerations. Revisions to the asset retirement obligation recorded upon
adoption of SFAS No. 143 can potentially result from changes in assumptions used
to estimate the cash flow required to settle the obligations. Potential changes
include adjustments in estimated probabilities, amounts, and timing of the
settlement, as well as changes in the legal requirements of an asset retirement
obligation. Any such changes that result in upward and downward revisions in the
estimated cash flows will adjust the liability and the related capitalized asset
on a prospective basis. The Company adopted this statement effective January 1,
2003, as discussed in Note 1 of Item 1 of the Form 10-Q.
Cautionary Information About Forward-Looking Statements
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements,
other than statements of historical facts, included in or incorporated by
reference into this Form 10-Q which address activities, events or developments
which the Company expects, believes or anticipates will or may occur in the
future are forward-looking statements. The words "believes," "intends,"
"expects," "anticipates," "projects," "estimates," "predicts" and similar
expressions are also intended to identify forward-looking statements. These
forward-looking statements include, among others, statements concerning:
* the benefits expected to result from GREKA's 1999 acquisition of Saba
discussed below, including
* synergies in the form of increased revenues,
* decreased expenses and avoided expenses and expenditures that are expected
to be realized as a result of the Saba acquisition, and
* the complementary nature of GREKA's horizontal drilling technology and
certain oil reserves acquired with the acquisition of Saba, and other
statements of:
* expectations,
* anticipations,
* beliefs,
* estimations,
* projections, and other similar matters that are not historical facts,
including such matters as:
* future capital,
* development and exploration expenditures (including the timing, amount
and nature thereof),
* drilling and reworking of wells, reserve estimates (including
estimates of future net revenues associated with such reserves and the
present value of such future net revenues),
* future production of oil and gas,
* repayment of debt,
* business strategies,
* oil, gas and asphalt prices and demand,
* exploitation and exploration prospects,
* expansion and other development trends of the oil and gas industry,
and
* expansion and growth of business operations.
15
These statements are based on certain assumptions and analyses made by the
management of GREKA in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances.
GREKA cautions the reader that these forward-looking statements are subject to
risks and uncertainties including those associated with:
* our ability to refinance our debt on favorable terms,
* our ability to successfully restructure our operations,
* the financial environment,
* general economic, market and business conditions,
* the regulatory environment,
* business opportunities that may be presented to and pursued by GREKA,
* changes in laws or regulations
* exploitation and exploration successes,
* availability to obtain additional financing on favorable conditions,
* trend projections, and
* other factors, many of which are beyond GREKA's control that could cause
actual events or results to differ materially from those expressed or
implied by the statements. Such risks and uncertainties include those risks
and uncertainties identified in the Description of the Business and
Management's Discussion and Analysis sections of this document and risk
factors discussed from time to time in the Company's filings with the
Securities and Exchange Commission.
Significant factors that could prevent GREKA from achieving its stated goals
include:
* the inability of GREKA to obtain financing for capital expenditures and
acquisitions,
* declines in the market prices for oil, gas and asphalt, and
* adverse changes in the regulatory environment affecting GREKA.
The cautionary statements contained or referred to in this document should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by GREKA or persons acting on its or their behalf.
GREKA undertakes no obligation to release publicly any revisions to any forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
Long-Term Potential
Management believes that the results of operations for the three month period
ended March 31, 2003 and cash flows of GREKA reported herein are indicative of
the expected future quarterly results of operations and cash flows of GREKA for
similar three month periods. Furthermore, the refined product sales are somewhat
seasonal due to seasonal fluctuations in asphalt consumption. Refined product
sales are generally higher in the second and third quarter and lower the first
quarter. Due to these seasonal fluctuations, results of operations for interim
quarterly periods may not be indicative of results, which may be realized on an
annual basis. The results of the Company as reported herein, and which are
demonstrative of the successful implementation of management's business plan,
continue to reflect the long-term potential of the Company.
Comparison of Three Month Periods Ended March 31, 2003 and 2002
Revenues increased from $4,403,733 for the first quarter 2002 to $7,774,648 for
the first quarter 2003. This 76% increase primarily consists of increased crude
oil sales in the first quarter of 2003. Crude oil sales increased 169% from
16
$1,829,195 for the first quarter 2002 to $4,913,437 for the first quarter 2003.
Refined product sales increased 18% from $2,353,022 for the first quarter 2002
to $2,784,436 for the first quarter 2003. Sales volumes decreased 1% from
276,151 barrels in the first quarter 2002 to 272,423 barrels in the first
quarter 2003. This was offset by a 76% increase in the weighted average price
from $16.00 per BOE for the first quarter in 2002 to $28.16 per BOE for the
first quarter 2003.
Production and product costs increased by 46% from $2,259,135 in the first
quarter 2002 to $3,307,273 in the first quarter 2003. The increase is due to a
scheduled refinery turnaround in the first quarter and replacing low operating
cost barrels in Potash and Manilla Village properties sold in the second quarter
2002 with higher operating cost barrels in properties acquired from Vintage
Petroleum Inc. and Rincon Island Limited Partnership in the third and fourth
quarters 2002, respectively, which return a high margin through integration with
the refinery operations.
Sales, general and administration expenses increased by 8% from $2,059,111 for
the first quarter 2002 to $2,226,488 for the first quarter 2003 primarily as a
result of increased professional fees partially offset by cost improvements from
the Company's restructuring plan implemented in the third quarter 2002 which
focused operations on California.
Depreciation, depletion and amortization decreased by 15% from $1,010,644 for
the first quarter 2002 to $876,223 for the first quarter 2003 due to low cost
proved reserves in properties acquired from Vintage Petroleum Inc. and Rincon
Island Limited Partnership and increased proved reserves due to price
improvements, resulting in a lower depletion rate.
The Company's Operating Income (loss) improved by 247% from a loss of $925,157
in the first quarter 2002 to an income of $1,364,664 in the first quarter 2003
primarily as a result of increased revenues and prices discussed above.
Interest expense increased by 191% from $1,220,685 for the first quarter 2002 to
$3,553,476 for the first quarter 2003 due primarily to debt restructuring in
2002, debt related to properties acquired from Vintage Petroleum Inc. and Rincon
Island Limited Partnership and additional funds secured in March 2003 to fund
future capital development programs.
Other Income and Expense reflected a gain of $62,587 in the first quarter 2003.
In the first quarter 2002, the Company recognized $680,323 of income and accrued
interest on settlement of a litigation.
Net Loss was increased by 4% from a loss of $2,073,662 for the first quarter
2002 to a loss of $2,159,600 for the first quarter 2002. The increase is
primarily due to higher interest expense partially offset by increased sales and
improved crude oil and asphalt prices.
Liquidity and Capital Resources
The working capital deficit at March 31, 2003 of $776,594 decreased by
$14,152,097 from a working capital deficit of $14,928,691 at December 31, 2002.
Current assets increased by $8,324,862 from $7,842,120 at December 31, 2002 to
$16,166,983 at March 31, 2003 which includes an increase of $8,007,830 in cash
and cash equivalents from $1,361,380 at December 31, 2002 to $9,369,210 at March
31, 2003. The increase in both cash balance as well as current assets is due
primarily to additional debt incurred to fund capital expenditure program for
2003. Other changes include an increase in inventory and receivables of $154,776
and $71,315, respectively, at December 31, 2002 from $1,363,506 and $3,760,613,
respectively, at March 31, 2003 to $1,518,282 and $3,831,928 reflecting
increased sales of crude oil. Current liabilities decreased from $22,770,811 at
December 31, 2002 to $16,943,577 at March 31, 2003, as the current portion of
long term debt with Bank of Texas was paid in March 2003 as part of the capital
restructuring with the $20 million loan agreement in March 2003. The Company
expects to further reduce its working capital deficit in the next quarters upon
achieving higher volumes of crude and asphalt sales.
17
The Company's continuation as a going concern is dependent upon its ability to
successfully establish the necessary financing arrangements and implement our
strategies consistent with its restructuring plans and successful 2003 capital
expenditure program.
Cash Flows
Cash provided by operating activities decreased from an inflow of $438,575 for
the three months ended March 31, 2002 to an inflow of $223,519 for the three
months ended March 31, 2003. The decrease is primarily attributable to the
combined effect of increased revenues, increased production cost, and increased
financing cost.
The Company's net cash flow used in investing activities increased from a net
outflow of $253,389 for the three months ended March 31, 2002 to a net outflow
of $922,021 for the three months ended March 31, 2003. The change is primarily
due to an intensive capital investment program initiated in 2003 to increase
production.
The Company's net cash used in financing activities was $556,234 for the three
months ended March 31, 2002 compared to net cash provided by financing
activities of $8,706,333 for the three months ended March 31, 2003 as a result
of the $20 million loan agreement concluded in March 2003 and the repayment of
$9.2 million in ling term debt.
Capital Expenditures
GREKA's 2003 discretionary capital expenditure budget for properties is
dependent upon the price for which its products are sold and upon the ability of
GREKA to obtain external financing. Subject to these variables and based on the
current asset base, we expect our cash flow and credit facilities to fund
approximately $15 million in 2003 for capital expenditure. (See "Financing &
Debt Restructuring Activities") The Company's 2003 capital expenditure program
is designed to facilitate organic production increases from the integrated
operations. Capital expenditure projects identified for 2003, namely workovers,
redrills, recompletions, side-tracks, and various facility enhancements, are
scheduled throughout the year which resulted in an expenditure of approximately
$1,382,021 for the three month period ending March 31, 2003.
Inflation
GREKA does not believe that inflation will have a material impact on GREKA's
future operations.
Financing and Debt Restructuring Activities
In March 2003, the Company amended, with certain retrospective effects, the
terms of its loan agreement with Guggenheim Investment Management, LLC as
collateral agent. We also placed $20 million with an institutional investor
through the same collateral agent a 2-year, secured credit facility. From these
proceeds, the Company paid $4.7 million to Bank of Texas and $4.1 million to
International Publishing Holdings to retire their respective loans, and the
balance, in addition to closing costs and working capital, will fund a portion
of the Company's $15 million capital expenditure program for 2003. Of the $20
million, $13.5 million bears interest at a variable rate of Libor + 6.25% or
8.25%, whichever is greater, while the balance $6.5 million bears interest at a
fixed rate of 9.25%. The Company paid a 4.25% closing fee, and the placement
resulted in an increase of approximately $10 million of the Company's total
debt.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
To some extent, at March 31, 2003, the Company's operations were exposed to
market risks primarily as a result of changes in commodity prices and interest
rates. The Company does not use derivative financial instruments for speculative
or trading purposes. (For a more comprehensive discussion related to
Quantitative and Qualitative Disclosures about Market Risk refer to GREKA's 2002
Annual Report on Form 10-K.)
Item 4. Controls and Procedure.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There is no update to the matters previously reported in GREKA's 2002 Annual
Report on Form 10-K. From time to time, the Company and its subsidiaries are a
named party in legal proceedings arising in the ordinary course of business.
While the outcome of such proceedings cannot be predicted with certainty,
management does not expect these matters to have a material adverse effect on
the Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are furnished as part of this report.
(b) During the quarter for which this report is filed, GREKA filed no Reports
on Form 8-K.
19
Signature
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREKA ENERGY CORPORATION
Date: May 14, 2003 By: /s/ Randeep S. Grewal
--------------------------------
Randeep S. Grewal,
Chairman,
Chief Executive Officer
and President
Date: May 14, 2003 By: /s/ Andrew deVegvar
--------------------------------
Andrew deVegvar,
Chief Financial Officer
20
I, Randeep S. Grewal, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Greka Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Randeep S. Grewal
- -----------------------------------------------
Randeep S. Grewal, Chief Executive Officer
May 14, 2003
21
I, Andrew deVegvar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Greka Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Andrew deVegvar
- ---------------------------------------------
Andrew deVegvar, Chief Financial Officer
May 14, 2003
22
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, each undersigned officer of Greka Energy Corporation
(the "Company"), hereby certifies to such officer's knowledge, that the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934 and that the information
contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Randeep S. Grewal
- -----------------------------------------------
Randeep S. Grewal, Chief Executive Officer
May 14, 2003
/s/ Andrew deVegvar
- -----------------------------------------------
Andrew deVegvar, Chief Financial Officer
May 14, 2003
23