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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________ TO _______________
COMMISSION FILE NUMBER 0001-32145
CANARGO ENERGY CORPORATION
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 91-0881481
- ------------------------------------ --------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
CanArgo Energy Corporation
P.O. Box 291, St. Peter Port, Guernsey, British Isles GY1 3RR
- ----------------------------------------------------- ---------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(44) 1481 729 980
- -------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER)
- -------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check 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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). [ ]
The number of shares of registrant's common stock outstanding on May 1, 2004 was
113,613,505.
CANARGO ENERGY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Cash flows 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 31
PART 2. OTHER INFORMATION:
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 32
Item 4. Submission of Matters to a Vote of Security Holders. 32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index 32
(b) Reports on Form 8-K 35
Signatures 36
FORWARD-LOOKING STATEMENTS
The United States Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. Such forward-looking
statements are based upon the current expectations of CanArgo and speak only as
of the date made. These forward-looking statements involve risks, uncertainties
and other factors. The factors discussed elsewhere in this Quarterly Report on
Form 10-Q are among those factors that in some cases have affected CanArgo's
historic results and could cause actual results in the future to differ
significantly from the results anticipated in forward-looking statements made in
this Quarterly Report on Form 10-Q, future filings by CanArgo with the
Securities and Exchange Commission, in CanArgo's press releases and in oral
statements made by authorized officers of CanArgo. When used in this Quarterly
Report on Form 10-Q, the words "estimate," "project," "anticipate," "expect,"
"intend," "believe," "hope," "may" and similar expressions, as well as "will,"
"shall" and other indications of future tense, are intended to identify
forward-looking statements. Few of the forward-looking statements in this Report
deal with matters that are within our unilateral control. Acquisition, financing
and other agreements and arrangements must be negotiated with independent third
parties and, in some cases, must be approved by governmental agencies. These
third parties generally have interests that do not coincide with ours and may
conflict with our interests. Unless the third parties and we are able to
compromise their various objectives in a mutually acceptable manner, agreements
and arrangements will not be consummated.
2
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, December 31,
2004 2003
------------- --------------
(UNAUDITED) (Audited)
Cash and cash equivalents $ 3,521,718 $ 3,472,252
Accounts receivable 217,094 161,772
Inventory 173,528 468,793
Prepayments 628,381 961,588
Assets held for sale 11,399,681 10,346,077
Other current assets 163,064 206,532
------------- -------------
Total current assets $ 16,103,466 $ 15,617,014
Capital assets, net (including unevaluated amounts of $26,431,702 and
$26,336,213 respectively) 58,248,076 57,668,233
Investments in and advances to oil and gas and other ventures - net 75,000 75,000
------------- -------------
TOTAL ASSETS $ 74,426,542 $ 73,360,247
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - trade $ 673,923 $ 483,282
Advance from joint venture partner 427,699 773,146
Loans payable -- 102,179
Other liabilities 4,714,576 5,473,823
Income taxes payable 55,500 97,500
Accrued liabilities 237,415 349,487
Liabilities held for sale 4,723,567 4,447,706
------------- -------------
Total current liabilities $ 10,832,680 $ 11,727,123
Provision for future site restoration 159,500 152,000
Minority interest in subsidiaries 4,241,889 4,772,683
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.10; authorized - 300,000,000 shares;
shares issued and outstanding - 109,627,089 at 2004 and 105,617,988
at 2003 10,962,708 10,561,798
Capital in excess of par value 146,500,410 146,401,804
Accumulated other comprehensive income (deficit) 315,673 (146,463)
Accumulated deficit (98,586,318) (100,108,698)
------------- -------------
Total stockholders' equity $ 59,192,473 $ 56,708,441
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,426,542 $ 73,360,247
============= =============
See accompanying notes to unaudited consolidated condensed
financial statements.
3
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH, 31
2004 2003
------------- -------------
(UNAUDITED) (Unaudited)
Operating Revenues from Continuing Operations:
Oil and gas sales $ 3,360,471 $ 1,141,458
------------- -------------
Operating Expenses:
Field operating
expenses 668,337 342,800
Direct project costs 280,467 166,586
Selling, general and administrative 911,602 730,054
Non cash stock compensation expense -- 276,507
Depreciation, depletion and amortization 880,821 578,638
Gain on disposition of subsidiary (354,951) --
------------- -------------
2,386,276 2,094,585
------------- -------------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS 974,195 (953,127)
------------- -------------
Other Income (Expense):
Interest, net (7,473) (2,304)
Other 64,410 (7,406)
Equity income from investments -- 21,515
------------- -------------
TOTAL OTHER INCOME (EXPENSE) 56,937 11,805
------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND TAXES 1,031,132 (941,322)
Minority interest in loss of consolidated subsidiaries 884 --
------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,032,016 (941,322)
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES AND MINORITY
INTEREST 490,364 (7,038)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- 41,290
------------- -------------
NET INCOME (LOSS) $ 1,522,380 $ (907,070)
============= =============
Weighted average number of common shares outstanding
- Basic 106,468,985 97,356,206
------------- -------------
- Diluted 109,281,654 97,356,206
------------- -------------
BASIC NET INCOME (LOSS) PER COMMON SHARE - BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE
- from continuing operations $ 0.01 $ (0.01)
- from discontinued operations $ 0.00 $ (0.00)
- cumulative effect of change in accounting principle, net of Income tax $ 0.00 $ (0.00)
------------- -------------
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.01 $ (0.01)
------------- -------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE - BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE
- from continuing operations $ 0.01 $ (0.01)
- from discontinued operations $ 0.00 $ (0.00)
- cumulative effect of change in accounting principle, net of Income tax $ 0.00 $ (0.00)
------------- -------------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.01 $ (0.01)
------------- -------------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation 462,136 30,165
------------- -------------
COMPREHENSIVE INCOME (LOSS) $ 1,984,516 $ (876,905)
============= =============
See accompanying notes to unaudited consolidated condensed
financial statements.
4
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH, 31
2004 2003
------------ -----------
(UNAUDITED) (Unaudited)
Operating activities:
Income (Loss) from continued operations 1,032,016 (941,322)
Non-cash stock compensation expense -- 276,507
Non-cash interest expense 6,000 --
Depreciation, depletion and amortization 880,821 578,638
Equity income from investments -- (21,515)
Gain on disposition of subsidiary (354,951) --
Minority interest in loss of consolidated subsidiaries (884) --
Changes in assets and liabilities:
Accounts receivable (55,322) (79,284)
Inventory 295,265 32,398
Prepayments (119,139) (47,071)
Other current assets 43,468 2,121
Accounts payable 204,557 418,303
Deferred revenue (929,247) --
Income taxes payable (42,000) --
Accrued liabilities (112,072) 64,122
----------- -----------
NET CASH GENERATED BY OPERATING ACTIVITIES 848,512 282,897
----------- -----------
Investing activities:
Capital expenditures (1,459,164) (1,015,999)
Proceeds from disposition of subsidiary 1 --
Repayments from oil and gas and other ventures -- 124,928
Advance proceeds from the sale of CanArgo Standard Oil
Products 170,000 500,000
Change in non cash working capital items 452,346 (35,087)
----------- -----------
NET CASH GENERATED (USED) IN INVESTING ACTIVITIES (836,817) (426,158)
----------- -----------
Financing activities:
Proceeds from sale of common stock 499,516 --
Repayment of minority interest -- (17,292)
Advances from joint venture partner 290,000 --
Payments of joint venture obligations (635,447) --
Repayment of loans (102,179) --
Proceeds from loans -- 380,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 51,890 362,708
NET CASH FLOWS FROM ASSETS AND LIABILITIES HELD FOR SALE (14,119) 74,701
NET INCREASE IN CASH AND CASH EQUIVALENTS 49,466 294,148
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,472,252 1,585,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,521,718 $ 1,879,148
=========== ===========
See accompanying notes to unaudited consolidated condensed
financial statements.
5
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated condensed financial statements and notes
thereto of CanArgo Energy Corporation and its subsidiaries
(collectively, "CanArgo", "we" and "our") have been prepared by
management without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated condensed financial statements include all adjustments,
consisting of normal recurring adjustments, in addition to recognising
stock compensation expense, necessary for a fair statement of the
results for the interim period. Although management believes that the
disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures, including a
description of significant accounting policies normally included in the
financial statements prepared in accordance with accounting principles
generally accepted in the U.S., have been condensed or omitted pursuant
to such rules and regulations. The accompanying consolidated condensed
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in
CanArgo's Annual Report on Form 10-K, as amended, for the year ended
December 31, 2003 filed with the Securities and Exchange Commission.
All amounts are in U.S. dollars. The results of operations for interim
periods are not necessarily indicative of the results for any
subsequent quarter or the entire fiscal year ending December 31, 2004.
Certain items in the consolidated financial statements have been
reclassified to conform to the current year presentation. There was no
effect on reported net loss as a result of these reclassifications.
Effective January 1, 2003, we adopted SFAS No. 123 Accounting For
Stock-Based Compensation ("SFAS 123"), as amended by SFAS No. 148
Accounting for Stock-Based Compensation--Transition and Disclosure--
an amendment of FASB Statement No. 123. We elected to utilize the
"prospective" method of transitioning from the intrinsic value to the
fair value method of accounting for stock-based compensation as allowed
by SFAS No. 148. Stock based awards in existence prior to 2003 will
continue to be accounted for under APB Opinion No. 25 Accounting for
Stock Issued to Employees, unless they are re-priced or modified.
Prior to 2003, we applied APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for
stock-based compensation. Under Opinion No. 25, stock-based employee
compensation cost was not recognized in net income when stock options
granted had an exercise price equal, or greater, to the market value of
the underlying common stock on the date of grant.
6
The following table illustrates the effect on net income and net income
per share if the fair value based method had been applied to all
outstanding and unvested awards for the three month period ended March
31, 2004 and March 31, 2003:
March 31, March 31,
2004 2003
------------ -------------
(UNAUDITED) (Unaudited)
Net Income (Loss) as reported $ 1,522,380 $ (907,070)
Add: Stock-based compensation cost, net of related tax
effects, included in the determination of net income
Reported -- 276,507
Less: Stock-based compensation cost, net of related
tax effects, that would have been included in the
determination of net income reported if the fair value
based method had been applied to all awards -- 404,476
----------- ------------
Pro forma net Income (Loss) $ 1,522,380 $(1,035,039)
=========== ===========
Loss per share
Basic and diluted - as reported 0.01 (0.01)
Basic and diluted - pro forma 0.01 (0.01)
2. Need for Significant Additional Capital, Possible Impairment of Assets
Development of the oil and gas properties and ventures in which we have
an interest involves multi-year efforts and substantial cash
expenditures. Full development of these properties will require the
availability of substantial funds from external sources. We believe
that we will be able to generate funds from external sources including
quasi-governmental financing agencies, conventional lenders, equity
investors and other oil and gas companies that may desire to
participate in our oil and gas projects. Although funds are not yet
available, in February 2004, we announced that we had signed a Standby
Equity Distribution Agreement that allows us, at our option, to issue
shares to US-based investment fund Cornell Capital Partners LP up to a
maximum value of $20 million over a period of up to two years (the
"Cornell Facility"). The Cornell Facility cannot be exercised until the
SEC has declared the Form S-3 Registration Statement filed by us on May
6, 2004 effective (See "Item 2- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" for a more detailed discussion). Further funding may be
required and there can be no assurance that any such funding will be
obtained, or, if obtained, will be on commercially acceptable terms.
Ultimate realization of the carrying value of our oil and gas
properties will require production of oil and gas in sufficient
quantities and marketing such oil and gas at sufficient prices to
provide positive cash flow to us. This is dependent upon, among other
factors, achieving significant production at costs that provide
acceptable margins, reasonable levels of taxation from local
authorities, the ability to transport production at acceptable costs
and the ability to market the oil and gas produced at or near world
prices. In addition, we must mobilize drilling equipment and personnel
to initiate drilling, completion and production activities. If one or
more of the above factors, or other factors, are different than
anticipated, we may not recover the carrying value of our oil and gas
properties.
We generally have the principal responsibility for arranging financing
for the oil and gas properties and ventures in which we have an
interest. There can be no assurance, however, that we or the entities
that are developing the oil and gas properties and ventures will be
able to arrange the financing necessary to develop the projects being
undertaken or to support our corporate and other activities or that
such financing if available will be on terms that are acceptable to or
are deemed to be in our best interest, such entities or their
respective stockholders or participants.
Our consolidated financial statements do not give effect to any
additional impairment in the value of our oil and gas properties and
ventures or other adjustments that would be necessary if financing
cannot be
7
arranged for the development of such properties and ventures or if they
are unable to achieve profitable operations. Failure to arrange such
financing on reasonable terms or failure of such properties and
ventures to achieve profitability would have a material adverse effect
on the financial position, including realization of assets, results of
operations, cash flows and prospects of CanArgo.
There is no assurance that additional external funds or financing will
be available, and if available, will be offered on attractive or
acceptable terms. Should such financing not be forthcoming and we
should be unable to maintain our current positive cash flow, unable to
exercise the Cornell Facility or unable to sell some or all of our
non-core assets, changes to our planned development program, further
cost reductions and additional funding will be required.
3. Recent Accounting Developments
In March 2004, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 04-2, "Whether Mineral Rights are Tangible
or Intangible Assets and Related Issues" (previously addressed as Issue
03-O), that mineral rights should be considered tangible assets for
accounting purposes and should be separately disclosed in the financial
statements or footnotes. The EITF acknowledged that this consensus
requires an amendment to Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations," to remove mineral rights as an
example of an intangible asset. The Financial Accounting Standards
Board (FASB) has issued FASB Staff Position Nos. FAS 141-1 and FAS
142-1, that amend SFAS Nos. 141 and 142, respectively, to characterize
mineral rights as tangible assets. The EITF is still considering
whether oil and gas drilling rights are subject to the classification
and disclosure provisions of SFAS No. 142 if they are determined to be
intangible assets. There has been no resolution of this issue as
described in EITF Issue No. 03-S, "Application of SFAS No. 142,
Goodwill and Other Intangible Assets, to Oil and Gas Companies."
The Company classifies the cost of oil and gas mineral rights as
properties and equipment and believes this is consistent with oil and
gas accounting and industry practice. Although it appears unlikely
based on the consensus reached in EITF Issue No. 04-2, if the EITF were
to determine that under EITF Issue No. 03-S oil and gas mineral rights
are intangible assets and are subject to the applicable classification
and disclosure provisions of SFAS No. 142, certain costs would need to
be reclassified from properties and equipment to intangible assets on
its consolidated balance sheets. These amounts would represent oil and
gas mineral rights. In addition, the disclosures required by SFAS Nos.
141 and 142 would be made in the notes to the consolidated financial
statements. There would be no effect on the consolidated statements of
income or cash flows as the intangible assets related to oil and gas
mineral rights would continue to be amortized under the full cost
method of accounting.
4. Asset Retirement Obligations
On January 1, 2003 we adopted FASB Statement No. 143 Accounting for
Asset Retirement Obligations ("SFAS 143"). SFAS 143 requires companies
to record the discounted fair value of a liability for an asset
retirement obligation in the period in which the liability is incurred
concurrent with an increase in the long-lived assets carrying value.
The increase and subsequent adjustments in the related long-lived
assets carrying value is amortised over its useful life. Upon
settlement of the liability a gain or loss is recorded for the
difference between the settled liability and the recorded amount. The
discount associated with the liability is accreted into income over the
related asset's useful life. Upon adoption of this standard an entity
is required to record the fair value of its existing asset retirement
obligations as if the liabilities had been initially accounted for in
accordance with SFAS 143 using assumptions present at the date of
adoption. The income statement effect of the treatment is recorded as a
cumulative effect in accounting principle in the period of adoption, no
retroactive restatement is permitted. During 2003, we recorded a credit
to income for the cumulative effect of change in accounting principle
of $41,290, increased long-term liabilities to recognise its total
obligation and increased net capital assets in accordance with the
provisions of SFAS No. 143 to the amount of $82,000. No deferred tax
expense has been recognised on the SFAS 143 credit as the group is in a
net deferred tax asset position against which full allowance has been
made as it is considered more likely than not that the deferred tax
asset will not be realised. There was no impact on our cash flows as a
result of adopting SFAS No. 143. The asset retirement obligation, which
is included on the consolidated balance sheet in provision for future
site restoration, was $159,500 at March 31, 2004. The pro-forma amounts
assuming the new method of determination under SFAS 143 were not
materially different to the amounts shown in the income statement and
the balance sheet for the prior year.
8
5. Foreign Operations
Our current and future operations and earnings depend upon the results
of our operations primarily in the Republic of Georgia and to a lesser
extent in the Caspian Sea area. There can be no assurance that we will
be able to successfully conduct such operations, and a failure to do so
would have a material adverse effect on our financial position, results
of operations and cash flows. Also, the success of our operations
generally will be subject to numerous contingencies, some of which are
beyond management control. These contingencies include general and
regional economic conditions, prices for crude oil and natural gas,
competition and changes in regulation. Since we are dependent on
international operations, we will be subject to various additional
political, economic and other uncertainties. Among other risks, our
operations may be subject to the risks and restrictions on transfer of
funds, import and export duties, quotas and embargoes, domestic and
international customs and tariffs, and changing taxation policies,
foreign exchange restrictions, political conditions and restrictive
regulations.
6. Accounts Receivable
Accounts receivable at March 31, 2004 and December 31, 2003 consisted
of the following:
MARCH 31, December 31,
2004 2003
(UNAUDITED) (Audited)
----------- -------------
Accounts Receivable before allowance for doubtful debts $ 1,039,015 $ 983,693
Allowance for doubtful debts (821,921) (821,921)
----------- ----------
$ 217,094 $ 161,772
=========== ==========
Bad debt expense for both the three month period ended March 31, 2004
and 2003 was $0.
7. Inventory
Inventory at March 31, 2004 and December 31, 2003 consisted of the
following:
MARCH 31, December 31,
2004 2003
(UNAUDITED) (Audited)
----------- -------------
Crude oil $ 173,528 $ 468,793
========== =========
8. Capital Assets
Capital assets, net of accumulated depreciation and impairment, include
the following at March 31, 2004 (Unaudited):
Accumulated Net
Depreciation Capital
Cost And Impairment Assets
------------ --------------- ------------
Oil and Gas Properties
Proved properties $ 44,771,187 $ (21,796,852) $ 22,974,335
Unproved properties 26,431,702 -- 26,431,702
------------ --------------- ------------
71,202,889 (21,796,852) 49,406,037
------------ --------------- ------------
Property and Equipment
Oil and gas related equipment 12,842,207 (4,353,865) 8,488,342
Office furniture, fixtures and
equipment and other 1,243,350 (889,653) 353,697
------------ --------------- ------------
14,085,557 (5,243,518) 8,842,039
------------ --------------- ------------
$ 85,288,446 $ (27,040,370) $ 58,248,076
============ =============== ============
9
Capital assets, net of accumulated depreciation and impairment, include
the following at December 31, 2003 (Audited):
Accumulated Net
Depreciation Capital
Cost And Impairment Assets
------------ --------------- -------------
Oil and Gas Properties
Proved properties $ 44,327,133 $ (21,084,230) $ 23,242,903
Unproved properties 26,336,213 -- 26,336,213
------------ --------------- --------------
70,663,346 (21,084,230) 49,579,116
------------ --------------- --------------
Property and Equipment
Oil and gas related equipment 11,952,421 (4,240,698) 7,711,723
Office furniture, fixtures and
equipment and other 1,235,876 (858,482) 377,394
------------ --------------- --------------
13,188,297 (5,099,180) 8,089,117
------------ --------------- --------------
$ 83,851,643 $ (26,183,410) $ 57,668,233
============ =============== ==============
Unproved property additions relate to our exploration activity in the
period. Oil and gas related equipment includes new or refurbished
drilling rigs and related equipment, all of which are located in the
Republic of Georgia.
Property and Equipment, Oil and gas related equipment includes drilling
rigs and related equipment currently in use by us in the development of
the Ninotsminda Field.
9. Investments in and Advances to Oil and Gas and Other Ventures
Investments in and Advances to Oil and Gas and Other Ventures represent
our 10% interest in a Caspian Sea exploration project.
10. Advance from Joint Venture Partner
In 2004, we received $290,000 and in 2003 $1,427,612 from Georgian Oil
in accordance with the Norio farm-in agreement. In 2003, CanArgo Norio
signed a farm-in agreement relating to the Norio Production Sharing
Agreement ("Norio PSA") with a wholly owned subsidiary of Georgian Oil,
the Georgian State Oil Company. The farm-in agreement obligates
Georgian Oil to pay up to $2,000,000 to deepen, to a planned depth of
16,400 feet (5,000 metres) the MK-72 well in return for a 15% interest
in the contractor share of the Norio PSA. Georgian Oil also has an
option, exercisable for a limited period after completion of the well,
to increase its interest to 50% of the contractor share of the Norio
PSA on payment to CanArgo Norio of US$ 6,500,000. If Georgian Oil
exercises this option under the farm-in agreement, it loses its rights
to exercise the option Georgian Oil is entitled to under the Norio PSA
itself. Of the $1,717,612 advanced at March 31, 2004 from Georgian Oil,
expenditure incurred on the MK-72 well has reduced the amount due to
the Joint Venture Partner to $427,699 at March 31, 2004.
11. Loans Payable
Loans payable of $102,179 at December 31, 2003 related to a short-term
secured loan facility that matured on February 27, 2004. The loan was
entered into by a subsidiary of CanArgo, locally in Georgia, at an
annual interest rate of 20% in order to fund the drilling of the N4H
horizontal well at the Ninotsminda Field in Georgia. No parent company
guarantee had been provided by us with respect to this loan. The loan
matured and was paid off in full in February 2004.
10
12. Other Liabilities
Other liabilities consisted of the following at March 31, 2004 and
December 31, 2003:
MARCH 31, December 31,
2004 2003
---------- -----------
(UNAUDITED) (Audited)
Prepaid sales $ 2,299,652 $ 3,228,899
Advanced proceeds, less costs of the sale of subsidiary 2,113,729 1,943,729
Advanced proceeds from the sale of other assets 301,195 301,195
----------- -----------
$ 4,714,576 $ 5,473,823
=========== ===========
See Note 19 for details of the sale of the subsidiary classified as
discontinued operation.
13. Accrued Liabilities
Accrued liabilities consisted of the following at March 31, 2004 and
December 31, 2003:
MARCH 31, December 31,
2004 2003
----------- -----------
(UNAUDITED) (Audited)
Professional fees $ 86,250 $ 231,396
Other 151,165 118,091
--------- ----------
$ 237,415 $ 349,487
========= =========
14. Minority Interest
In September 2003, CanArgo Norio signed a Farm-In agreement (the
"Agreement") relating to the Norio PSA with a wholly owned subsidiary
of Georgian Oil, the Georgian State Oil Company ("Georgian Oil").
Georgian Oil is already a party to the Norio PSA as the commercial
representative of the State. The Agreement obligates Georgian Oil to
pay up to $2,000,000 to complete the MK-72 well on the Norio prospect
in return for a 15% interest in the contractor share of the Norio PSA.
Georgian Oil will also have an option (the "Option") exercisable for a
limited period after completion of the well, to increase its interest
to 50% of the contractor share of the Norio PSA on payment to CanArgo
Norio of US$6,500,000.
Co-incident with the Georgian Oil farm-in, we concluded a deal to
purchase some of the minority interests in CanArgo Norio by a share
swap for shares in CanArgo. Through this we acquired an additional
10.8% interest in CanArgo Norio, giving us a 75% interest in CanArgo
Norio at present. This approximately maintains our effective interest
in the Norio PSA after Georgian Oil has completed the first stage of
the farm-in at 63.7%. The purchase was achieved by issuing 6,000,000
restricted CanArgo shares to the minority interest holders in CanArgo
Norio. Of the interests in CanArgo Norio, 4% were owned by Provincial
Securities Limited, a company which Mr. Russell Hammond, a
non-executive director of CanArgo, is an investor advisor. Provincial
Securities Limited received 2,273,523 shares of common stock in return
for their interest. In the event that Georgian Oil exercises the Option
and pays the required $6,500,000, we would receive approximately
$6,000,000 and we would issue a further 3,000,000 restricted shares to
the minority interest holders.
In November 2000, we completed the acquisition of a 51% interest in the
Georgian American Oil Refinery ("GAOR"), a company which owns a small
refinery located at Sartichala, Georgia. From that date, GAOR became a
subsidiary of CanArgo and its results have been included in our
consolidated financial
11
statements. However, due to operational difficulties and changes to the
fiscal system in Georgia, GAOR ceased to operate during 2001.
As a result of the uncertainty as to the ultimate recoverability of the
carrying value of the refinery, we recorded in 2001 a write-down of the
refinery's property, plant and equipment of approximately $3,500,000.
During 2003, a debit balance of $1,274,895 in minority interest was
written-off due to a change in the intentions of our minority interest
owner and a plan to dispose of the asset. In 2004, we came to an
agreement to sell our interest in the refinery. Our interest in the
refinery was sold in February 2004.
15. Stockholders' Equity
COMMON STOCK
--------------------------
NUMBER OF
SHARES ADDITIONAL FOREIGN TOTAL
ISSUED AND PAID-IN CURRENCY ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL TRANSLATION DEFICIT EQUITY
----------- ------------ ------------- ----------- --------------- -------------
TOTAL, DECEMBER 31, 2003 105,617,988 $ 10,561,798 $ 146,401,804 $(146,463) $ (100,108,698) $ 56,708,441
Current year adjustment 462,136 462,136
Exercise of stock options 3,815,084 381,508 118,008 499,516
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell) 163,218 16,322 (16,322) --
Shares Issued pursuant to Standby Equity
Distribution agreement (Newbridge) 30,799 3,080 (3,080) --
Net Income -- -- -- -- 1,522,380 1,522,380
----------- ------------ ------------- --------- -------------- ------------
TOTAL, MARCH 31, 2004 109,627,089 $ 10,962,708 $ 146,500,410 $ 315,673 $ (98,586,318) $ 59,192,473
=========== ============ ============= ========= ============== ============
16. Net Income (Loss) Per Common Share
Earnings (loss) per share is calculated in accordance with SFAS No.
128, "Earnings Per Share." Basic and diluted earnings per share is
provided for continuing operations, discontinued operations, cumulative
effect of change of accounting principle and net income (loss). Basic
earnings (loss) per share is computed based upon the weighted average
number of shares of common stock outstanding for the period and
excludes any potential dilution. Diluted earnings per share reflects
potential dilution from the exercise of securities (warrants or
options) into common stock. Outstanding options and warrants to
purchase common stock are not included in the computation of diluted
loss per share because the effect of these instruments would be
anti-dilutive for the loss periods presented.
Options to purchase CanArgo's common stock were outstanding at March
31, 2003 but were not included in the computation of diluted net loss
per common share because the effect of such inclusion would have been
anti-dilutive. The total numbers of such shares excluded from diluted
net loss per common share were 7,986,167, for the three months ended
March 31, 2003.
MARCH 31, March 31,
2004 2003
----------- ----------
Weighted average number of basic shares outstanding 106,468,985 97,356,206
Effect of:
Employee and director stock options 2,812,699
----------- ----------
Weighted average number of dilutive shares outstanding 109,281,654 97,356,206
=========== ==========
12
17. Commitments and Contingencies
We have contingent obligations and may incur additional obligations,
absolute and contingent, with respect to the acquisition and
development of oil and gas properties and ventures in which we have
interests that require or may require us to expend funds and to issue
shares of our Common Stock.
At March 31, 2004, we had the contingent obligation to issue an
aggregate of 187,500 shares of its Common Stock to Fielden Management
Services PTY, Ltd (a third party management services company), subject
to the satisfaction of conditions related to the achievement of
specified performance standards by the Stynawske Field project, an oil
field in Ukraine in which we had a previous interest.
Under the Norio Production Sharing Agreement (the "Norio PSA"), the
shareholders agreement with the other shareholder of CanArgo Norio
calls for a bonus payment of $800,000 to be paid by CanArgo should
commercial production be obtained from the Middle Eocene or older
strata and a second bonus payment of $800,000 should production exceed
250 tonnes (approximately 1,900 barrels) of oil per day over any 90 day
period.
If Georgian Oil exercises an option available to it under the terms of
the Norio farm-in agreement signed in September 2003, we would issue a
further three million restricted shares to the minority interest
holders from whom we acquired an additional 10.8% interest in CanArgo
Norio.
Under the Production Sharing Contract for Blocks XI(G) and XI(H) (the
"Tbilisi PSC") in the Republic of Georgia our subsidiary CanArgo Norio
will evaluate existing seismic and geological data during the first
year and acquire additional seismic data within four years of the
effective date of the Agreement which is September 29, 2003. The total
commitment over the next four years is $350,000.
In 2002, the Participation Agreement for the three well exploration
program on the Ninotsminda area with AES was terminated without AES
earning any rights to any of the Ninotsminda area reservoirs. The
Company therefore has no present obligations in respect of AES.
However, under a separate Letter of Agreement, if gas from the Sub
Middle Eocene is discovered and produced from the exploration area
covered by the Participation Agreement, AES with be entitled to recover
at the rate of 15% of future gas sales from the Sub Middle Eocene, net
of operating costs, approximately $7,500,000, representing their prior
funding under the Participation Agreement.
Ninotsminda Oil Company has a commitment to repay $2,300,000 arising
from security deposit payments under oil sales agreements signed in May
2004. The security will be paid in oil at the end of the contract
period commencing in March 2005.
In April 2004, we announced that we had completed our acquisition of a
50% interest in the Samgori (Block XI(B)) Production Sharing Contract
("Samgori PSC") in Georgia. This interest was acquired from Georgian
Oil Samgori Limited ("GOSL"), a company wholly owned by Georgian Oil.
Under the terms of the agreement, up to 10 horizontal wells will be
drilled on the Samgori Field. We are obliged to fund 100% of the cost
of the first well at an anticipated cost of $ 2,000,000 and thereafter
drilling will be funded jointly by CanArgo and GOSL pro rata their
interest in the Samgori PSC. The total cost to us of participating in
the whole program, which is due to be completed within 36 months, is
anticipated to be up to $16,000,000 million.
The original Contractor party to the Samgori PSC, National Petroleum
Limited ("NPL"), has an option to reacquire its Contractor's interest
in the Samgori PSC and its 50% interest in the operating company in the
event that the agreed work program is not completed by December 2006.
Furthermore, NPL has outstanding costs and expenses estimated at up to
$37,000,000 in relation to the Samgori PSC which are recoverable by NPL
receiving 30% of annual net profit from the Field until such costs have
been fully repaid. After these costs are repaid from either Field
production or other production in the Samgori PSC, NPL shall continue
to receive 5% of annual net profit.
Upon completion of the acquisition of an interest in the Samgori PSC we
had a contractual obligation to issue 4,000,000 shares of CanArgo
Common Stock to Europa Oil Services Limited ("Europa"), an unaffiliated
company in connection with a consultancy agreement with Europa in
relation to this acquisition. On April 16, 2004 Europa was issued with
4,000,000 restricted shares of CanArgo Common Stock in an arms length
transaction. A further 12,000,000 shares of CanArgo Common
13
Stock are issuable upon certain production targets being met from
future developments under the Samgori PSC.
We have not filed any of our required 2002 or 2003 income tax or
information returns required by various governmental authorities.
Failure to file these returns timely may carry significant penalties
and interest which may have a material impact on our financial
condition. We are taking steps to rectify the matter. We have not
accrued for any penalties or interest which we may be required to pay
in either our Form 10-K for the fiscal year ended December 31, 2003 or
our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2004 as the amounts could not be reasonably estimated.
18. Segment Information
Operating revenues from continued operations for the three month
periods ended March 31, 2004 and 2003 by geographical area were as
follows:
MARCH 31, March 31,
2004 2003
---------- ----------
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Republic of Georgia $3,360,471 $1,114,458
---------- ----------
TOTAL $3,360,471 $1,114,458
========== ==========
Operating (loss) income from continued operations for the three month
periods ended March 31, 2004 and 2003 by geographical area was as
follows:
MARCH 31, March 31,
2004 2003
---------- ----------
(UNAUDITED) (Unaudited)
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Republic of Georgia $ 1,930,842 $ 332,718
REFINING
Republic of Georgia 354,952 --
CORPORATE AND OTHER EXPENSES (1,311,599) (1,285,845)
----------- -----------
TOTAL OPERATING (LOSS) INCOME $ 974,195 $ (953,127)
=========== ===========
Net (loss) income before minority interest from continuing operations
for the three month periods ended March 31, 2004 and 2003 by geographic
area was as follows:
MARCH 31, March 31,
2004 2003
---------- ----------
(UNAUDITED) (Unaudited)
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
Republic of Georgia $ 1,930,842 $ 332,718
GAIN ON SALE OF REFINERY
Republic of Georgia 354,952 --
CORPORATE AND OTHER EXPENSES (1,254,662) (1,274,040)
----------- -----------
NET (LOSS) INCOME BEFORE MINORITY INTEREST $ 1,031,132 $ (941,322)
=========== ===========
14
Identifiable assets of continuing and discontinued operations as of
March 31, 2004 and December 31, 2003 by business segment and
geographical area were as follows:
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED) (AUDITED)
CORPORATE
Former Soviet Union $ 2,364,951 $ 5,185,020
Western Europe (principally cash) 2,692,530 463,312
----------- -----------
TOTAL CORPORATE 5,057,481 5,648,332
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Former Soviet Union 57,894,380 57,290,838
ASSETS HELD FOR SALE
Former Soviet Union 10,812,390 9,758,156
Western Europe 587,291 587,921
----------- -----------
TOTAL ASSETS HELD FOR SALE 11,399,681 10,346,077
OTHER ENERGY PROJECTS
Former Soviet Union 75,000 75,000
----------- -----------
TOTAL IDENTIFIABLE ASSETS $74,426,542 $73,360,247
=========== ===========
19. Discontinued Operations
CanArgo Standard Oil Products
In September 2002, we approved a plan to sell CanArgo Standard Oil
Products to finance Georgian and Ukrainian development projects and in
October 2002, we agreed to sell our 50% holding to an unaffiliated
company for $4,000,000 in an arms-length transaction, with legal
ownership being transferred upon receipt of final payment due
originally in August 2003 and subsequently extended to June 2004. The
agreed consideration to be exchanged does not result in an impairment
of the carrying value of assets held for sale. The assets and
liabilities of CanArgo Standard Oil Products have been classified as
"Assets held for sale" and "Liabilities held for sale" for all periods
presented. The results of operations of CanArgo Standard Oil Products
have been classified as discontinued for all periods presented. The
minority interest related to CanArgo Standard Oil Products has not been
reclassified for any of the periods presented, however net income from
discontinued operations is disclosed net of taxes and minority
interest.
The results of discontinued operations at March 31, 2004 and March 31,
2003 consisted of the following:
MARCH 31, March 31,
2004 2003
------------ ------------
(UNAUDITED) (Unaudited)
Operating Revenues 2,525,763 2,070,440
Loss Before Income taxes and Minority Interest 38,972 18,284
Income Taxes -- --
Minority Interest in Loss (19,486) (9,142)
----------- -----------
Net Loss from Discontinued Operation $ 19,486 $ 9,142
=========== ===========
15
Gross consolidated assets and liabilities of subsidiary held for sale
that are included in "assets and liabilities held for sale" at March
31, 2004 and December 31, 2003 consisted of the following:
MARCH 31, December 31,
2004 2003
----------- -----------
(UNAUDITED) (Audited)
Assets held for sale:
Cash and cash equivalents 63,699 30,236
Accounts receivable 1,909,258 1,675,317
Inventory 940,820 247,758
Other current assets 83,574 174,049
Capital assets, net 6,970,555 6,629,450
Investment in other ventures, net 594,484 594,484
------------ -----------
$ 10,562,390 $ 9,351,294
============ ===========
Liabilities held for sale:
Accounts payable 385,802 174,506
Current portion of long term debt 1,673,700 958,346
Income taxes payable 281 261
Accrued liabilities 16,459 --
Long term debt 2,647,325 2,816,065
------------ -----------
$ 4,723,567 $ 3,949,178
============ ===========
Investments in other ventures include three petrol station sites in
Tbilisi, Georgia in which CanArgo has a 50% non-controlling interest.
CanArgo accounts for its interest in the three petrol station sites
using the equity method and consolidates the remaining sites in which
it has controlling interest. In 2002, CanArgo purchased the remaining
50% of Petro-Invest, a petrol station site in which CanArgo previously
held a 50% non-controlling interest. This site is now consolidated in
the results of CanArgo Standard Oil Products, above.
Cash consideration received as of March 31, 2004 in respect of this
transaction was $2,170,000 and has been recorded in other liabilities
(see Note 12). The sale will be reflected on payment of the
consideration in full plus any interest due which is now expected to be
in June 2004. In any event, ownership in the asset will only transfer
to Westrade Alliance on payment of the consideration in full.
From November 2002 through March 2004, CanArgo Standard Oil Products
Limited entered into ten credit facility agreements totalling
$4,510,995 with commercial lenders in Georgia and Greece to fund
expansion of its petrol station network. As of March 31, 2004, CanArgo
had outstanding balances of $4,321,025 related to these credit
facilities. The loans bear interest between 13% and 18% per annum and
are secured by the assets of the petrol stations. The full amounts of
the loans are to be repaid by August 2008. CanArgo has provided no
guarantees with respect to these loans.
Standard Oil Products of Georgia and an individual, Mr. Levan
Pkhakazde, who is one of the founders of Standard Oil Products and the
General Director of CanArgo Standard Oil Products, hold the remaining
50% interest in CanArgo Standard Oil Products.
Lateral Vector Resources Inc
Lateral Vector Resources Inc. ("LVR"), a wholly-owned subsidiary of
CanArgo, negotiated and concluded with Ukrnafta, the Ukrainian State
Oil Company, a Joint Investment Production Activity ("JIPA") agreement
in 1998 to develop the Bugruvativske Field located in Eastern Ukraine.
In 2003, due to the lack of progress with the implementation of the
JIPA, and failure to reach a negotiated agreement with Ukrnafta,
management reached the decision to dispose of its interest in the
Bugruvativske project and withdraw from Ukraine. The company is
currently in negotiations with a potential buyer for the disposal of
its 100% interest in LVR. Consequently, we recorded in 2003 a
write-down in respect to the LVR deal and the acquisition of the
Bugruvativske Field of approximately $4,790,727.
16
The assets and liabilities of LVR have been classified as "Assets held
for sale" and "Liabilities held for sale" for all periods presented.
The results of operations of LVR have been classified as discontinued
for all periods presented.
The results of discontinued operations in respect of LVR consisted of
the following at March 31, 2004 and March 31, 2003:
MARCH 31, March 31,
2004 2003
------------ ------------
(UNAUDITED) (Unaudited)
Loss (Income) Before Income taxes and Minority Interest 14,118 (8,541)
---------- ---------
Net Loss (Income) from Discontinued Operation $ 14,118 $ (8,541)
========== =========
Gross consolidated assets in respect of LVR that are included in
"assets held for sale" consisted of the following at March 31, 2004 and
December 31, 2003:
MARCH 31, December 31,
2004 2003
------------ ------------
(UNAUDITED) (Audited)
Assets held for sale:
Capital assets, net 250,000 250,000
--------- ---------
$ 250,000 $ 250,000
========= =========
There were no Gross consolidated liabilities in respect of LVR included
in "liabilities held for sale" at March 31, 2004 and December 31, 2003.
Georgian American Oil Refinery
In 2003, we approved a plan to dispose of our interest in the Georgian
American Oil Refinery ("GAOR") as the refinery had remained closed
since 2001 and neither our partners nor we could find a commercially
viable option to putting the refinery back into operation. In February
2004, management reached an agreement with a local Georgian company to
sell our 51% interest in GAOR for a nominal price of one US dollar and
the assumption of all the obligations and debts of GAOR to the State of
Georgia including deferred tax liabilities of approximately $380,000.
The assets and liabilities of GAOR have been classified as "Assets held
for sale" and "Liabilities held for sale" for all periods presented.
The results of operations of GAOR have been classified as discontinued
for all periods presented. The minority interest related to GAOR has
not been reclassified for any of the periods presented; however net
income from discontinued operations is disclosed net of taxes and
minority interest. During 2003, a debit balance of $1,274,895 in
minority interest was written-off due to a change in the intentions of
our minority interest owner and a plan to dispose of the asset. The
plan to dispose of the asset also led to the write-off of an
inter-company payable relating to oil sales purchased from Ninotsminda
Oil Company. These items have been respectively recorded in impairment
of other assets and other income (expense) components of continuing
operations.
The results of discontinued operations in respect of GAOR consisted of
the following at March 31, 2004 and March 31, 2003:
MARCH 31, March 31,
2004 2003
------------ ------------
(UNAUDITED) (Unaudited)
Operating Revenues -- --
Loss (Income) Before Income taxes and Minority Interest -- 12,621
Minority Interest in Loss (523,968) (6,184)
---------- --------
Net Loss (Income) from Discontinued Operation $ (523,968) $ 6,437
========== ========
17
Gross consolidated assets and liabilities in respect of GAOR that are
included in "assets and liabilities held for sale" consisted of the
following at March 31, 2004 and December 31, 2003:
MARCH 31, December 31,
2004 2003
------------ ------------
(UNAUDITED) (Audited)
Assets held for sale:
Cash and cash equivalents -- 14,905
Inventory -- 29,482
Other current assets -- 13,915
Capital assets, net -- 100,000
--------- ---------
$ -- $ 157,492
========= =========
Liabilities held for sale:
Accounts payable -- 498,529
--------- ---------
$ -- $ 498,529
========= =========
Power Generator
In 2003, we signed a sales agreement disposing of a 3-megawatt duel
fuel power generator for $600,000. Following receipt of a
non-refundable deposit of $300,000 the generator was shipped to the US
for testing on completion of which we will be paid the balance.
Gross consolidated assets in respect of the generator included in
"assets held for sale" consisted of the following at March 31, 2004 and
December 31, 2003:
MARCH 31, December 31,
2004 2003
------------ ------------
(UNAUDITED) (Audited)
Assets held for sale:
Cash and cash equivalents 587,291 587,291
--------- ---------
$ 587,291 $ 587,291
========= =========
20. Subsequent Events
On April 26, 2004, we entered into a loan and warrant agreement with an
unaffiliated party, Salahi Ozturk in an arms length transaction.
Subsequent to execution of the agreement, Mr Ozturk advanced to us a
loan of $1,000,000, for the purpose of funding our short-term working
capital requirements including the acquisition of long lead equipment.
Interest is payable on the loan at the rate of 7.5% per annum. The term
of the loan is 6 months from the date of draw down. However, in the
event that we raise in excess of $10,000,000 by way of any equity
offering then the loan is repayable within 7 days of receipt by us of
the proceeds of the offering. In consideration for Mr Ozturk advancing
the loan, we have a contractual obligation to issue to Mr Ozturk a
warrant to subscribe for 1,000,000 shares of CanArgo common stock at an
exercise price of $1.05 per share. Mr Ozturk, can exercise the warrant
at any time, for the period of 5 years from the date of the agreement.
As at May 11, 2004, the warrants have been issued but remain
unexercised.
On April 29, 2004, we entered into a further loan and warrant agreement
with CA Fiduciary Services Limited, as Settlement Trustees of The
SP525A Settlement ("CA Fiduciary"), an unaffiliated party in an arms
length transaction. Subsequent to execution of the agreement, CA
Fiduciary advanced to us a loan of Pound Sterling 170,000
(approximately $300,900 USD), for the purpose of funding our short-term
working capital requirements including the acquisition of long lead
equipment. Interest is payable on the loan at a rate of 7.5% per annum.
The term of the loan is 6 months from the date of draw down. However,
in the event that we raise in excess of $10,000,000 by way of any
equity offering then the loan is repayable within 7 days of receipt by
us of the proceeds of the offering. In consideration for CA Fiduciary
advancing the loan, we have a contractual obligation to issue to CA
Fiduciary a warrant to subscribe for 300,000 shares of CanArgo common
stock at an exercise price of
18
$1.05 per share. CA Fiduciary, can exercise the warrant at any time,
for the period of 5 years from the date of the agreement. As at May 11,
2004, the warrants have been issued but remain unexercised.
On April 1, 2004 one of our subsidiaries, Ninotsminda Oil Company
Limited ("NOC") entered into a new 12-month crude oil sales agreement
with an existing buyer, Sveti Limited, for the sale of up to 7,500
metric tonnes (approximately 57,000 barrels) of oil per month ("Sveti
Agreement"). The Sveti Agreement replaces two existing crude oil sales
agreements pursuant to which Sveti Limited had provided $2,300,000
security for the right to lift oil under such agreements (the "Security
Payment"). The Security Payment is extended to the new Sveti Agreement
where it remains at NOC's disposal for the contract period. At the end
of the 12 months, the Security Payment will be repaid through the
delivery of additional crude oil equal to the value of the security.
On May 5, 2004, the Sveti Agreement was terminated and a new agreement
was concluded with another party, Primrose Financial Group, on the same
terms and conditions with the exception that the monthly quantity was
increased to 8,400 metric tonnes (approximately 64,000 barrels) of oil
per month (the "PFG Agreement"). In accordance with the termination
agreement, the Security Payment shall be deemed to be a deposit payment
made in favour of NOC under the terms of the PFG Agreement and shall be
repaid in oil at the end of the contract period which will be March
2005.
We announced April 29, 2004 that we had appointed ABG Sundal Collier as
our Financial Advisor to advise the company in relation to a planned
equity financing for up to 75,000,000 of the company's shares of Common
Stock to be priced at or near market (on the date of issue) (the
"Issue").
We will seek shareholder approval for the Issue at a Special Meeting of
Stockholders on May 28, 2004 in Oslo, Norway. It is anticipated that
the stock to be issued pursuant to the Issue will be placed with new
investors in CanArgo, the company having been advised that there is
institutional interest in our stock.
We will pre-clear the stock subject to the Issue by filing an Universal
Shelf Registration Statement on Form S-3, and a specific supplement for
this issue with the Securities and Exchange Commission.
The proceeds of the Issue will be utilised primarily in developing our
Georgian assets, including the appraisal of the recent Manavi oil
discovery, where further testing of the M11 discovery well is planned,
together with two appraisal wells to assess the size of the discovery
and move forward with an early production scheme. In addition,
following the recent acquisition of the Samgori Field, a horizontal
development program of up to ten wells is planned which will be
implemented in conjunction with the ongoing development program on our
Ninotsminda Field. This program is likely to commence with a new well
on Samgori in the second quarter of this year. The balance of the Issue
proceeds may be used to develop other new opportunities obtained as a
result of the Samgori acquisition and in the Kura Basin. Several high
potential exploration/appraisal targets have already been identified in
our license areas
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUALIFYING STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS. SEE
"FORWARD-LOOKING STATEMENTS" BELOW AND ELSEWHERE IN THIS REPORT.
In addition to the historical information included in this report, you are
cautioned that this Form 10-Q contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. When the words
"believes," "plans," "anticipates," "will likely result," "will continue,"
"projects," "expects," and similar expressions are used in this Form 10-Q, they
are intended to identify "forward-looking statements," and such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. Furthermore, our plans, strategies,
objectives, expectations and intentions are subject to change at any time at the
discretion of management and the Board.
These forward-looking statements speak only as of the date this report is filed.
The Company does not intend to update the forward-looking statements contained
in this report, so as to reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events, except as may occur as
part of our ongoing periodic reports filed with the SEC.
The following is a discussion of our financial condition, results of operations,
liquidity and capital resources. This discussion should be read in conjunction
with our consolidated annual financial statements and the notes thereto,
included in our Annual Report on Form 10-K filed for the year ended December 31,
2003 in addition to our condensed consolidated quarterly financial statements
and the notes thereto, included in Item 1 of this report.
OVERVIEW OF OPERATIONS
In February 2004, we announced that there would be a temporary delay to our
horizontal development drilling program in Georgia while we mobilized specialist
Under Balanced Coiled Tubing Drilling (UBCTD) equipment in order to optimally
drill future development wells. UBCTD is used internationally, but has so far
not been applied in Georgia. It involves drilling the wells using coiled tubing
rather than conventional drill string and drilling with lower pressure in the
well than formation pressure, thereby potentially producing the wells while
drilling. This approach will minimise formation damage, increase the potential
length of the horizontal section, and reduce the risk of fracturing the
reservoir down to the water zone when drilling. Consequently, this technique
should result in optimal production levels for the horizontal wells on the
Ninotsminda and Samgori Fields. Negotiations are well advanced with an
internationally renowned oilfield service company which specialises in such
work. However, the coil and spool for the UBCTD operation will first need to be
specially manufactured for our program. As such, it is unlikely that the unit
will be ready to commence the program before September, but once work begins
each well should take no longer than three weeks to complete, once we have
carried out the preparation work using our existing equipment. In the interim
period, we will work (using our conventional rigs) on preparing the target wells
for the UBCTD program. This will involve milling a suitable window to drill the
horizontal section, in some instances sidetracking the well to the top of the
Middle Eocene reservoir, and in some cases drilling new vertical wells to the
Middle Eocene reservoir.
Coiled tubing is also planned to be used on the Manavi M11 well which almost
certainly will require a sidetrack due to collapse of the production tubing
during the initial testing of the Cretaceous oil discovery. We are currently
preparing to side track this well in preparation for the arrival of the UBCTD
unit.
In order to minimise mobilisation and other costs per well, in addition to
Manavi, a program of up to 15 well bores is planned for the UBCTD unit. Five of
these are planned on the Ninotsminda Field and the remainder on our newly
acquired Samgori Field (detailed below). The Samgori Field (which has produced
over 180 million barrels ("MMbbl") of oil to date at rates up to 70,000 bopd) is
a continuation of the Ninotsminda structure with the primary reservoir being the
same fractured Middle Eocene sequence as Ninotsminda, but in Samgori it is
thicker and better quality with wells being generally much more productive. From
our geotechnical analysis, we believe that the remaining reserves may be best
exploited through the implementation of a horizontal development drilling
program. The remaining recoverable reserves for Samgori have not yet been
independently assessed, but estimates made by Georgian Oil indicate that there
may be significant remaining potential in the Field. A new vertical well (S302)
is
20
planned to commence on the Samgori Field within the next two months. This well
is planned to initially be produced conventionally, but designed to be
horizontally side tracked utilising the UBCTD unit.
In addition to the planned Manavi M11 sidetrack, at least one appraisal well
(M12) is planned on the Manavi oil discovery this year. A location has been
chosen approximately 5 km from the M11 site and negotiations are underway with
an international drilling contractor to supply a high technology drilling rig
equipped with a 'Top Drive' drilling system to drill this well. Utilising this
equipment for what is planned to be a 5,000 metre well should result in faster
drilling times than utilising our existing equipment which will be focused on
preparation work for the UBCTD program. The M12 well is expected to spud in
June/July.
Average gross oil production from the Ninotsminda Field for the first three
months of 2004 was 1,665 barrels of oil per day ("bopd"). A testing program
implemented to ascertain the optimal production level for individual wells
resulted in the temporary shut-in of certain wells during the period thus
negatively affecting production. On the basis of the tests and the
recommendations of independent petroleum engineering specialists, the horizontal
wells completed in 2003 were choked back to less than 500 bopd. At the same
time, it was recommended that future horizontal wells should be drilled
under-balanced in order to optimise production.
Due to the nature of the reservoir rocks in the Ninotsminda Field, both vertical
and horizontal wells need to be worked over on a regular basis in order to
maintain production. A build up of sediment in the producing section of the
wells causes a progressive blocking off of some fractures while increasing
drawn-down (and water cut) on the unblocked fractures. This results in a
progressive decline in production if the well is not cleaned. Such workovers of
horizontal wellbores using conventional equipment are difficult, however, we now
have mobilized a Slim Line Workover Coiled Tubing ("SLWCT") unit to Georgia for
this purpose following some delays due to logistical problems. This equipment,
which is smaller and more mobile than the UBCTD unit, will provide a more
efficient and cost effective solution than using conventional techniques. The
SLWCT unit is currently being assembled and we expect to commence workover
operations within the next month and thus increase daily production rates at the
Field. In the meantime, current production from the Ninotsminda Field as of May
15, 2004 was approximately 1,300 bopd.
In April 2004, we announced that we had completed our acquisition of a 50%
interest in the Samgori (Block XIB) Production Sharing Contract ("Samgori PSC")
in Georgia. All conditions pursuant to CanArgo obtaining a 50% share of the
contractor's interest in the Samgori PSC and a 50% controlling interest in the
licence holder and operating company for Block XIB have been satisfied and our
participation in the Samgori PSC became effective. This interest was acquired
from Georgian Oil Samgori Limited ("GOSL"), a company wholly owned by Georgian
Oil. Under the terms of the agreement, up to 10 horizontal wells will be drilled
on the Samgori Field. We will be obliged to fund 100% of the cost of the first
well and thereafter drilling will be funded jointly by CanArgo and GOSL pro rata
their interest in the Samgori PSC.
The original Contractor party to the Samgori PSC, National Petroleum Limited
("NPL"), has an option to reacquire its Contractor's interest in the Samgori PSC
and its 50% interest in the operating company in the event that the agreed work
program is not completed by December 2006. Furthermore, NPL has outstanding
costs and expenses of up to $37,000,000 in relation to the Samgori PSC which are
recoverable by NPL receiving 30% of annual net profit from the Field until such
costs have been fully repaid. After these costs are repaid from either Field
production or other production in the PSC, NPL shall continue to receive 5% of
annual net profit.
The Samgori Field complex which includes the Samgori, Patardzeuli and South Dome
Fields was discovered in 1974 and produces from the same Middle Eocene sequence
as the Ninotsminda Field. It is the largest oilfield discovered to date in
Georgia and lies adjacent to our Ninotsminda Field and infrastructure. We have
been advised that Samgori has produced over 180 MMbbl of oil to date at rates up
to 70,000 bopd. Recent studies by Georgian Oil (which have not been
independently assessed), based on new seismic data acquired in 2001, indicate
that additional significant quantities of oil could be recovered from the
Samgori complex utilising horizontal drilling techniques. The first of ten new
UBCTD wellbores on the Samgori Field is expected to be drilled towards the end
of the third quarter of this year. In addition, Block XI(B) which covers an area
of approximately 169,514 acres (634 km(2)) contains several identified prospects
and discoveries in other horizons, notably the Upper Eocene and Cretaceous.
On completion of the Samgori acquisition we became entitled to receive our share
of the 700 bopd gross currently being produced from the Samgori Field. Under the
terms of the acquisition agreement, we will receive 50% of the Contractor's
share of the production under the Samgori PSC.
21
Our exploration program in Georgia continues to be progressed primarily through
third party financing. Drilling recommenced on the MK-72 well on the Norio
prospect in December 2003 and is currently drilling ahead at approximately 4,500
metres. Intermediate electric logs have been run following the penetration of
several sands with oil shows. The electric logs indicate over 100 meters of net
pay sands with porosities in the range of 15 - 25% and from the oil shows and
electric logs these sands appear to be oil bearing. These sands are probably of
Oligocene age which was one of the secondary targets for the well. The primary
Middle Eocene target is anticipated within the next 300 meters. However, very
high mud weights are currently being required to drill the Oligocene sands and,
as such, drilling progress is currently slow. We plan to test the Oligocene
sands once the well has reached total depth, which is planned at 5,000 metres.
The well is being funded by a wholly owned subsidiary of Georgian Oil under a
farm-in agreement relating to the Norio Production Sharing Agreement ("Norio
PSA") signed in September 2003. Georgian Oil is already a party to the PSA as
the commercial representative of the State. The agreement obligates Georgian Oil
to pay up to $ 2,000,000 to complete the MK-72 well in return for a 15% interest
in the contractor share of the Norio PSA. Georgian Oil will also have an option
exercisable for a limited period after completion of the well, to increase its
interest to 50% of the contractor share of the Norio PSA on payment to CanArgo
Norio of $6,500,000.
In 2003, CanArgo approved a plan to dispose of its interest in the Georgian
American Oil Refinery ("GAOR") as the refinery had remained closed since 2001
and neither CanArgo nor its partners could find a commercially viable option to
putting the refinery back into operation. In February 2004, we reach agreement
with a local Georgian company to sell our 51% interest in GAOR for a nominal
price of one US dollar and the assumption of all the obligations and debts of
GAOR to the State of Georgia including deferred tax liabilities of approximately
$380,000.
In February 2004, we announced that we had signed a Standby Equity Distribution
Agreement that allows us, at our option, to issue shares to US-based investment
fund Cornell Capital Partners LP up to a maximum value of $20,000,000 over a
period of up to two years (the "Cornell Facility"). This facility cannot be
exercised until the SEC has declared the Form S-3 Registration Statement filed
by us on May 6, 2004 effective (See "Liquidity and Capital Resources" below for
a more detailed discussion).
On March 23, 2004, the Company held a special meeting of stockholders at which
stockholders approved an increase in the number of shares of common stock that
the Company is authorized to issue from 150,000,000 to 300,000,000 shares.
On April 21, 2004, the Company's Common Stock began trading on the American
Stock Exchange under the symbol "CNR".
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had working capital of $5,271,000 compared to working
capital of $3,890,000 as of December 31, 2003. The $1,381,000 increase in
working capital from December 31, 2003 to March 31, 2004 is principally due to a
reduction in other liabilities relating to prepaid oil sales recorded in 2003
and subsequently delivered in the current period, and an increase in net assets
held for sale mainly relating to activity at CanArgo Standard Oil Products.
The success of the horizontal development drilling program on the Ninotsminda
Field in 2003 resulting in increased cash flows from our Georgian operations,
the receipt in 2004 of a further $1,000,000 payment from the agreed sale of our
interest in our retail operation CanArgo Standard Oil Products with a further
$1,000,000 to be paid, the planned selective sale of certain non-core assets
including our generator for which a further $300,000 is due, together with
access to the $20,000,000 Equity Line of Credit being provided by Cornell
Capital (detailed below) subject to our registration statement filed May 6, 2004
with the SEC becoming effective means we should secure the working capital
necessary to cover our immediate and near term funding requirements with respect
to our currently planned development activities in the Republic of Georgia on
our Ninotsminda Field and our newly acquired Samgori Field.
In December 2003, we announced that we had signed a Standby Equity Distribution
Agreement that allowed us, at our option, to issue shares to US-based investment
fund Cornell Capital Partners LP ("Cornell Capital") up to a maximum value of
$6,000,000. Under the terms of the Agreement, we could, at our discretion, issue
shares to Cornell Capital at any time over the next two years. The maximum
aggregate amount of the equity placements pursuant to the Agreement was
$6,000,000. Subject to this limitation, we could draw down up to $200,000 in any
seven-day period (a "Put"). The facility could be used in whole or in part
entirely at our discretion, subject to
22
effective registration of the shares under the Securities Act of 1933, as
amended ("Securities Act"). Shares issued to Cornell Capital would be priced at
a 3% discount to the lowest daily Volume Weighted Average Price ('VWAP') of
CanArgo common shares traded on each of the five days following a drawdown
notice by CanArgo. A commission of 5% would apply to each issue of CanArgo
shares under the Agreement and would be payable to Cornell Capital at the time
of issue. The net effect of the 5% commission and the 3% discount is that
Cornell Capital would pay 92.% of the applicable lowest weighted price for each
share of the company's common stock. The shares to be issued to Cornell Capital,
as additional consideration for services, would be "restricted securities" as
defined in rule 144 under the Securities Act. We agreed to prepare and file a
registration statement under the Securities Act registering the shares to be
issued under the facility for resale under such Act. This facility was
terminated on February 11, 2004 when we entered into a further standby equity
distribution agreement with Cornell Capital ("New Cornell Facility"). No funds
had been drawn down under the original facility when it was terminated.
Under the terms of the New Cornell Facility, Cornell Capital will provide us
with an equity line of credit for 24 months. The New Cornell Facility allows us
at our discretion to periodically issue and sell to Cornell Capital up to $20
million of shares of our common stock. The terms of the New Cornell Facility are
materially the same as those for the original facility, with the exception that
the New Cornell Facility has been increased to $20 million and the maximum
amount of each advance is set at $600,000. No exercise of a Put will be made
until the SEC has declared effective a registration statement registering the
issuable shares under the Securities Act for resale. By way of fees and
expenses, we shall issue Cornell Capital a restricted stock certificate
evidencing restricted shares of common stock in an amount equal to 2.07% of the
Commitment Amount ($20,000,000) based upon the Market Price (as defined in the
Agreement) for the common stock. The total amount of shares to be issued to
Cornell Capital was 850,000 shares of which an aggregate of 425,000 shares were
issued upon execution of the original and New Cornell Facility. Cornell Capital
will earn the remaining 425,000 restricted shares of common stock once the SEC
declares the Registration Statement effective or 120 calendar days from the date
of signing of the New Cornell Facility. We filed a Form S-3 registration
statement in respect of the issuable shares under New Cornell Facility on May 6,
2004.
On April 1, 2004 one of our subsidiaries, Ninotsminda Oil Company Limited
("NOC") entered into a new 12-month crude oil sales agreement with an existing
buyer, Sveti Limited, for the sale of up to 7,500 metric tonnes (approximately
57,000 barrels) of oil per month ("Sveti Agreement"). The Sveti Agreement
replaces two existing crude oil sales agreements pursuant to which Sveti Limited
had provided $2,300,000 security for the right to lift oil under such agreements
(the "Security Payment"). The Security Payment is extended to the new Sveti
Agreement where it remains at NOC's disposal for the contract period. At the end
of the 12 months, the Security Payment will be repaid through the delivery of
additional crude oil equal to the value of the security.
On May 5, 2004, the Sveti Agreement was terminated and a new agreement was
concluded with another party, Primrose Financial Group, on the same terms and
conditions with the exception that the monthly quantity was increased to 8,400
metric tonnes (approximately 64,000 barrels) of oil per month (the "PFG
Agreement"). In accordance with the termination agreement, the Security Payment
shall be deemed to be a deposit payment made in favour of NOC under the terms of
the PFG Agreement and shall be repaid in oil at the end of the contract period
which will be March 2005.
In April 2004, we secured two warrant backed short-term loans, one for
$1,000,000 and the other for Pound Sterling170,000, both with unaffiliated
parties in arms length transactions for the purpose of funding our short-term
working capital requirements including the acquisition of long lead equipment.
These loans are for six months, bear a 7.5% per annum interest rate, and are to
be repaid immediately once the Company is able to draw on the New Cornell
Facility or other new capital becomes available. These loans have a dollar for
dollar warrant attached at an exercise price of $1.05 per warrant which was 18 -
20% above market at the time of signing the loan agreement. The warrants have a
five-year term and the funds have already been transferred to our account.
Our exploration program in Georgia continues to be progressed primarily through
third party financing. The MK-72 well on the Norio prospect is being funded by a
wholly owned subsidiary of Georgian Oil under a farm-in agreement relating to
the Norio Production Sharing Agreement ("Norio PSA") signed in September 2003.
Georgian Oil is already a party to the PSA as the commercial representative of
the State. The agreement obligates Georgian Oil to pay up to $2,000,000 to
complete the MK-72 well in return for a 15% interest in the contractor share of
the Norio PSA. Georgian Oil will also have an option exercisable for a limited
period after completion of the well, to increase its interest to 50% of the
contractor share of the Norio PSA on payment to CanArgo Norio of $6,500,000.
In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products
to finance Georgian and Ukrainian development projects and in October 2002, we
agreed to sell our 50% holding for $4,000,000 with legal ownership being
transferred upon receipt of the final payment originally due in August 2003. We
agreed
23
subsequently to re-schedule this payment in return for, the purchaser, Westrade
Alliance LLC, paying some of the funds early and paying interest on the
outstanding balance at a an annual rate of 16% payable monthly. To date a total
of $3,100,000 has been received excluding interest payments with a further
$900,000 to be paid by end of June 2004.
Through the acquisition in 2001 of 100% of the share capital of Lateral Vector
Resources Inc. ("LVR") CanArgo gained certain rights in a Joint Investment
Production Activity (JIPA) agreement for the incremental development of the
Bugruvativske Field in Eastern Ukraine. However, due to the lack of progress
with the implementation of the JIPA in 2003, and failure to reach a negotiated
agreement with Ukrnafta, our partner in the project, management reached the
decision to dispose of its interest in the Bugruvativske project and withdraw
from Ukraine. We are currently in negotiations with a potential buyer for the
disposal of our 100% interest in LVR. As a result of this decision, we recorded
in 2003 a write-down in respect to the LVR deal and the acquisition of the
Bugruvativske Field of approximately $4,790,727. We have now effectively
withdrawn from Ukraine and this will allow us to focus our capital resources on
our Georgian activities.
While a considerable amount of infrastructure for the Ninotsminda and Samgori
Fields has already been put in place, we cannot provide assurance that:
o funding of a field development plan will be timely;
o that our development plan will be successfully completed or will
increase production; or
o that field operating revenues after completion of the development plan
will exceed operating costs.
To pursue existing projects beyond our immediate development plan and to pursue
new opportunities, we will require additional capital. While expected to be
substantial, without further exploration work and evaluation the exact amount of
funds needed to fully develop all of our oil and gas properties cannot at
present, be quantified. Potential sources of funds include additional sales of
equity securities, project financing, debt financing and the participation of
other oil and gas entities in our projects. Based on our past history of raising
capital and continuing discussions, we believe that such required funds may be
available. However, there is no assurance that such funds will be available, and
if available, will be offered on attractive or acceptable terms. Should such
funding not be forthcoming and we should be unable to maintain our current
positive cash flow or unable to sell some or all of our non-core assets, further
cost reductions and additional funding will be required in order for CanArgo to
remain a going concern.
Development of the oil and gas properties and ventures in which we have
interests involves multi-year efforts and substantial cash expenditures. Full
development of our oil and gas properties and ventures will require the
availability of substantial additional financing from external sources. We may
also, where opportunities exist, seek to transfer portions of our interests in
oil and gas properties and ventures to entities in exchange for such financing.
We generally have the principal responsibility for arranging financing for the
oil and gas properties and ventures in which we have an interest. There can be
no assurance, however, that we or the entities that are developing the oil and
gas properties and ventures will be able to arrange the financing necessary to
develop the projects being undertaken or to support the corporate and other
activities of CanArgo. There can also be no assurance that such financing will
be available on terms that are attractive or acceptable to or are deemed to be
in the best interest of CanArgo, such entities and their respective stockholders
or participants.
Ultimate realization of the carrying value of our oil and gas properties and
ventures will require production of oil and gas in sufficient quantities and
marketing such oil and gas at sufficient prices to provide positive cash flow to
CanArgo. Establishment of successful oil and gas operations is dependent upon,
among other factors, the following:
o mobilization of equipment and personnel to implement effectively drilling,
completion and production activities;
o raising of additional capital;
o achieving significant production at costs that provide acceptable margins;
o reasonable levels of taxation, or economic arrangements in lieu of taxation
in host countries; and
o the ability to market the oil and gas produced at or near world prices.
Subject to our ability to raise additional capital, above, we have plans to
mobilize resources and achieve levels of production and profits sufficient to
recover the carrying value of our oil and gas properties and ventures. However,
if one or more of the above factors, or other factors, are different than
anticipated, these plans may not be realized, and we may not recover the
carrying value of our oil and gas properties and ventures.
24
BALANCE SHEET CHANGES
All balances represent results from continuing operations, unless disclosed
otherwise.
Cash and cash equivalents increased $50,000 to $3,522,000 at March 31, 2004 from
$3,472,000 at December 31, 2003. The increase was primarily due to additional
cash generated from operating activities, advanced proceeds from the sale of
subsidiaries and advanced funds from the joint venture partner in respect of the
Norio farm-in agreement. These funds were offset by expenditure in the period
provided to fund the cost of preparing wells for our horizontal development
program at the Ninotsminda Field in Georgia and further drilling of the Norio
exploration well.
Accounts receivable increased to $217,000 at March 31, 2004 from $162,000 at
December 31, 2003.
Inventory decreased to $174,000 at March 31, 2004 from $469,000 at December 31,
2003 primarily as result of increased sales from storage in the period.
Ninotsminda Oil Company held approximately 36,000 barrels of oil in storage at
March 31, 2004 for sale to the Georgian domestic, regional or international
market.
Prepayments decreased to $628,000 at March 31, 2004 from $962,000 at December
31, 2003 as a result of prepayment for materials and services related to our
exploration activities transferred to capital assets upon receipt. This decrease
is included in the statement of cash flows as an investing activity.
Assets held for sale, consisting of assets of CanArgo Standard Oil Products
operations, a 3-megawatt duel fuel power generator, and the capital assets of
the Bugruvativske Field project, increased by $1,054,000 to $11,400,000 at March
31, 2004 from $10,346,000 at December 31, 2003 primarily due to activity at
CanArgo Standard Oil Products relating to the addition of new petrol stations in
Georgia.
Other currents assets decreased from $207,000 at December 31, 2003 to $163,000at
March 31, 2004.
Capital assets, net increased from $57,668,000 at December 31, 2003 to
$58,248,000 at March 31, 2004, primarily as a result of $580,000 invested in
capital assets including oil and gas properties and equipment, principally
related to the Ninotsminda Production Sharing Contract.
Investments in and advances to oil and gas and other ventures, net of $75,000 at
both March 31, 2004 and December 31, 2003 reflect our 10% interest in a Caspian
Sea exploration project.
Accounts payable increased to $674,000 at March 31, 2004 from $483,000 at
December 31, 2003 primarily due to an increase in trade payables in respect of
drilling activity related to the Ninotsminda Production Sharing Contract.
Advance from joint venture partner decreased from $773,000 at December 31, 2003
to $428,000 at March 31, 2004 due to capital expenditures incurred on the MK-72
Norio well reducing the amount due to the joint venture partner, partially
offset by a further receipt from Georgian Oil in accordance with the Norio
farm-in agreement. Of the $1,717,612 advanced at March 31, 2004 from Georgian
Oil, expenditures incurred on the MK-72 well have reduced the amount due to the
joint venture partner by $1,289,915 at March 31, 2004.
Loans payable of $102,179 at December 31, 2003 related to a short-term secured
loan facility that matured on February 27, 2004. The loan was entered into by a
subsidiary of CanArgo, locally in Georgia, at an annual interest rate of 20% in
order to fund the drilling of the N4H horizontal well at the Ninotsminda Field
in Georgia. We had provided no parent company guarantee with respect to this
loan. The loan matured and was paid off in full in February 2004.
Other Liabilities decreased from $5,474,000 at December 31, 2003 to $4,715,000
at March 31, 2004 due to a reduction in deferred revenue in respect of a prepaid
sales at December 31, 2003, delivered in the period offset partially by advance
proceeds received for the sale of CanArgo Standard Oil Products in the period.
Income taxes payable decreased from $97,000 at December 31, 2003 to $56,000 at
December 31, 2003 due to the partial payment of income tax for Ninotsminda Oil
Company Ltd, a CanArgo subsidiary.
Accrued liabilities decreased to $237,000 at March 31, 2004 from $349,000 at
December 31, 2003 primarily due to a decrease in accrued professional fees.
25
Liabilities held for sale increased by $276,000 from $4,448,000 at December 31,
2003 to $4,724,000 at March 31, 2004 due to liabilities held for sale, in
respect of discontinued operations, primarily due to additional bank loans drawn
by CanArgo Standard Oil Products in Tbilisi at an effective interest rate of 18%
per annum, in order to fund the construction of new petrol stations in Georgia.
Minority interest in continuing and discontinued subsidiaries decreased by
$531,000 to $4,242,000 at March 31, 2004 from $4,773,000 at December 31, 2003
due principally to a decrease of $524,000 of the minority interest share of
income relating to GAOR resulting from the disposal of the refinery in the
period.
The foreign currency translation relates to the financial statements of CanArgo
Standard Oil Products being translated into US dollars using the self-sustaining
method. Exchange gains and losses on translation are reflected as a separate
component of shareholders' equity.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL TERMS
Our principal business and assets are derived from production sharing contracts
in the Republic of Georgia. The legislative and procedural regimes governing
production sharing contracts and mineral use licenses in Georgia have undergone
a series of changes in recent years resulting in certain legal uncertainties.
Our production sharing contracts and mineral use licenses, entered into prior to
the introduction in 1999 of a new Petroleum Law governing such agreements have
not, as yet, been amended to reflect or ensure compliance with current
legislation. As a result, despite references in the current legislation
grandfathering the terms and conditions of our production sharing contracts,
conflicts between the interpretation of our production sharing contracts and
mineral use licenses and current legislation could arise. Such conflicts, if
they arose, could cause an adverse effect on our rights under the production
sharing contracts. However the Norio PSA, the Tbilisi PSC and the Samgori PSC
were concluded after enactment of the Petroleum Law, and under the terms and
conditions of this legislation.
To confirm that the Ninotsminda Production Sharing Contract and the mineral
usage license issued prior to the introduction in 1999 of the Petroleum Law were
validly issued, in connection with its preparation of the Convertible Loan
Agreement with us, the International Finance Corporation, an affiliate of the
World Bank received in November 1998 confirmation from the State of Georgia,
that among other things:
o The State of Georgia recognizes and confirms the validity and
enforceability of the production sharing contract and the license and all
undertakings the State has covenanted with NOC thereunder;
o the license was duly authorized and executed by the State at the time of
its issuance and remained in full force and effect throughout its term; and
o the license constitutes a valid and duly authorized grant by the State,
being and remaining in full force and effect as of the signing of this
confirmation and the benefits of the license fully extend to NOC by virtue
of its interest in the license holder and the contractual rights under the
production sharing contract.
Despite this confirmation and the grandfathering of the terms of existing
production sharing contracts in the Petroleum Law, subsequent legislative or
other governmental changes could conflict with, challenge our rights or
otherwise change current operations under the production sharing contract. No
challenge has been made to date.
In 2002, the Participation Agreement for the three well exploration program on
the Ninotsminda area with a subsidiary of the US power company AES was
terminated without AES earning any rights to any of the Ninotsminda area
reservoirs. The Company therefore has no present obligations in respect of AES.
However, under a separate Letter of Agreement, if gas from the sub Middle Eocene
is discovered and produced from the area covered by the Participation Agreement,
AES with be entitled to recover at the rate of 15% of future gas sales from the
Sub Middle Eocene, net of operating costs, approximately $7,500,000,
representing their prior funding under the Participation Agreement.
Under the Production Sharing Contract for Blocks XI(G) and XI(H) (the "Tbilisi
PSC") in the Republic of Georgia our subsidiary CanArgo Norio will evaluate
existing seismic and geological data during the first year and acquire
additional seismic data within four years of the effective date of the Agreement
which is September 29, 2003. The total commitment over the next four years is
$350,000.
In April 2004, we announced that we had completed our acquisition of a 50%
interest in the Samgori (Block XI(B)) Production Sharing Contract ("Samgori
PSC") in Georgia. This interest was acquired from Georgian Oil Samgori Limited
("GOSL"), a company wholly owned by Georgian Oil. Under the terms of the
agreement, up to 10
26
horizontal wells will be drilled on the Samgori Field. We are be obliged to fund
100% of the cost of the first well at an anticipated cost of $2,000,000 million
and thereafter drilling will be funded jointly by CanArgo and GOSL pro rata
their interest in the Samgori PSC. The total cost to us of participating in the
whole program, which is due to be completed within 36 months, is anticipated to
be up to $16,000,000.
The original Contractor party to the Samgori PSC, National Petroleum Limited
("NPL"), has an option to reacquire its Contractor's interest in the Samgori PSC
and its 50% interest in the operating company in the event that the agreed work
program is not completed by December 2006. Furthermore, NPL has outstanding
costs and expenses of up to $37,000,000 in relation to the Samgori PSC which are
recoverable by NPL receiving 30% of annual net profit from the Field until such
costs have been fully repaid. After these costs are repaid from either Field
production or other production in the PSC, NPL shall continue to receive 5% of
annual net profit.
We have contingent obligations and may incur additional obligations, absolute or
contingent, with respect to the acquisition and development of oil and gas
properties and ventures in which we have interests that require or may require
us to expend funds and to issue shares of our Common Stock.
Upon completion of the acquisition of an interest in the Samgori PSC we had a
contractual obligation to issue four million shares of CanArgo Common Stock to
Europa Oil Services Limited ("Europa"), an unaffiliated company in connection
with a consultancy agreement with Europa in relation to this acquisition. On
April 16, 2004 Europa was issued with four million restricted shares of CanArgo
Common Stock in an arms length transaction. A further 12 million shares of
CanArgo Common Stock are issuable upon certain production targets being met from
future developments under the Samgori PSC.
At March 31, 2004, we had a contingent obligation to issue 187,500 shares of
common stock to Fielden Management Services PTY, Ltd (a third party management
services company) upon satisfaction of conditions relating to the achievement of
specified Stynawske Field project performance standards, an oil field in Ukraine
in which we had a previous interest.
Under the Norio PSA the shareholders agreement with the other shareholder of
CanArgo Norio calls for a bonus payment of $800,000 to be paid by CanArgo should
Commercial Production (as defined in the PSA) be obtained from the Middle Eocene
or older strata and a second bonus payment of $800,000 should Commercial
Production from the Norio PSA from the Middle Eocene or older strata exceed 250
tonnes (approximately 1,900 barrels) of oil per day over any 90 day period.
These bonuses maybe paid in restricted CanArgo shares at the discretion of
CanArgo.
In May 2004, NOC entered into a 10-month crude oil sales agreement to sell its
monthly share of oil produced under the Ninotsminda PSC. As security for payment
and having the right to lift up to 8,400 metric tonnes (approximately 64,000
barrels) of oil per month, the buyer paid to NOC $2,300,000 to be repaid at the
end of the contract period through the delivery of additional crude oil equal to
the value of the security.
If Georgian Oil exercises the option available to it under the terms of the
Norio farm-in agreement signed in September 2003, we would issue a further 3
million restricted shares to the minority interest holders from whom we acquired
an additional 10.8% interest in CanArgo Norio.
We have not filed any of our required 2002 or 2003 income tax or information
returns required by various governmental authorities. Failure to file these
returns timely may carry significant penalties and interest which may have a
material impact on our financial condition. We are taking steps to rectify the
matter. We have not accrued for any penalties or interest which we may be
required to pay in either our Form 10-K for the fiscal year ended December 31,
2003 or our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2004 as the amounts could not be reasonably estimated.
RESULTS OF CONTINUING OPERATIONS
Three Month Period Ended March 31, 2004 Compared to Three Month Period Ended
March 31, 2003
We recorded operating revenue from continuing operations of $3,360,000 during
the three month period ended March 31, 2004 compared with $1,141,000 for the
three month period ended March 31, 2003. The increase is attributable to higher
oil and gas revenues being recorded in the three month period ended March 31,
2004.
Ninotsminda Oil Company generated $3,360,000 of oil and gas revenue in the three
month period ended March 31, 2004 compared with $1,141,000 for the three month
period ended March 31, 2003 due principally to higher volume of sales resulting
from increased oil production from the Ninotsminda Field and a quantity of oil
taken from storage in the three month period ended March 31, 2004 compared to
the three month period ended March 31, 2003, partially offset by a lower average
net sales price achieved in the period. Its net share of the 148,672 barrels of
gross oil production for sale from the Ninotsminda Field in the period amounted
to 96,636 barrels. In the period, 52,115 barrels of oil were removed from
storage and sold. A further 9,000 barrels were removed from storage and returned
to Georgian Oil in recognition of agreed losses since the inception of the
Production Sharing Contract. For the three
27
month period ended March 31, 2003, Ninotsminda Oil Company's net share of the
65,779 barrels (731 barrels per day) of gross oil production was 42,756 barrels.
The increase in production is due to the successful horizontal development wells
completed at the Ninotsminda Field in 2003.
Ninotsminda Oil Company's entire share of production was sold locally in Georgia
under both national and international contracts. Net sale prices for Ninotsminda
oil sold during the first quarter of 2004 averaged $22.32 per barrel as compared
with an average of $22.59 per barrel in the first quarter of 2003. Its net share
of the 50,553 thousand cubic feet (mcf) of gas delivered was 33,691 mcf at an
average net sale price of $1.23 per mcf of gas. For the three month period ended
March 31, 2003, Ninotsminda Oil Company's net share of the 29,184 mcf of gas
delivered was 18,970 mcf at an average net sales price of $1.27 per mcf of gas.
The operating income from continuing operations for the three month period ended
March 31, 2004 amounted to $974,000 compared with an operating loss of $953,000
for the three month period ended March 31, 2003. The increase in operating
income is attributable primarily to increased oil and gas revenue and a gain
generated from the disposal of GAOR, partially offset by increased field
operating costs, increased direct project costs, increased selling, general and
administration costs, and increased depreciation, depletion and amortization in
the period.
Field operating expenses increased to $668,000 for the three month period ended
March 31, 2004 as compared to $343,000 for the three month period ended March
31, 2003. The increase is primarily a result of increased activity at the
Ninotsminda Field.
Direct project costs increased to $280,000 for the three month period ended
March 31, 2004, from $167,000 for the three month period ended March 31, 2003,
primarily due to costs directly associated with activity at the Ninotsminda
Field.
Selling, general and administrative costs increased to $912,000 for the three
month period ended March 31, 2004, from $730,000 for the three month period
ended March 31, 2003. The increase is primarily as a result of increased
corporate activity.
Non cash stock compensation of $277,000 for the three month period ended March
31, 2003 relates to the Company, effective January 1, 2003, adopting in August
2003, the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," prospectively to all employee awards granted,
modified, or settled after December 31, 2002.
The increase in depreciation, depletion and amortization expense to $881,000 for
the three month period ended March 31, 2004 from $579,000 for the three month
period ended March 31, 2003 is attributable principally to higher production and
sales in the period.
We recorded net other income of $57,000 for the for the three month period ended
March 31, 2004, as compared to net other income of $12,000 for the three month
period ended March 31, 2003. This is primarily due to interest income received
from the purchaser of CanArgo Standard Oil Products resulting from delayed
purchase payments, partially offset by equity income in the period in 2003
received from an investment subsequently disposed in the fourth quarter of 2003.
Equity income from investments for the three month period ended March 31, 2003
of $22,000 related to equity income from production and sales of crude oil by
Boryslaw Oil Company, subsequently disposed in the fourth quarter of 2003.
The cumulative effect of the change in accounting principle of $41,000 for the
three month period ended March 31, 2003 was a result of the adoption of
accounting standard FAS 143 relating to the treatment of asset retirement
obligations.
The net income from continuing operations of $1,031,000 or $0.01 per share for
the three month period ended March 31, 2004 compares to net loss from continuing
operations of $941,000 or $0.01 per share for the three month period ended March
31, 2003. The weighted average number of common shares outstanding was higher
during the three month period ended March 31, 2004 than during the three month
period ended March 31, 2003, principally due to share issues in respect of Norio
and Manavi agreements in the third and fourth quarters of 2003 and the exercise
of share options in 2004.
28
RESULTS OF DISCONTINUED OPERATIONS
Three Month Period Ended March 31, 2004 Compared to Three Month Period Ended
March 31, 2003
The net income from discontinued operations, net of taxes and minority interest
for the three month period ended March 31, 2003 amounted to $490,000 compared
with net loss of $7,000 for the corresponding period in 2003. The increase in
net income from discontinued operations, net of taxes and minority interest
relates principally income relating to the refinery resulting from the disposal
of the refinery in the period, partially offset by the activities of CanArgo
Standard Oil Products, mainly due to interest on additional bank loans drawn by
CanArgo Standard Oil Products in Tbilisi at an effective interest rate of 18%
per annum, in order to fund the construction of new petrol stations in Georgia,
partially offset by improved operating margins for the three month period ended
March 31, 2004 compared with the corresponding period in 2003.
NEW ACCOUNTING DEVELOPMENTS
In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF
Issue No. 04-2, "Whether Mineral Rights are Tangible or Intangible Assets and
Related Issues" (previously addressed as Issue 03-O), that mineral rights should
be considered tangible assets for accounting purposes and should be separately
disclosed in the financial statements or footnotes. The EITF acknowledged that
this consensus requires an amendment to Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," to remove mineral rights as
an example of an intangible asset. The Financial Accounting Standards Board
(FASB) has issued FASB Staff Position Nos. FAS 141-1 and FAS 142-1, that amend
SFAS Nos. 141 and 142, respectively, to characterize mineral rights as tangible
assets. The EITF is still considering whether oil and gas drilling rights are
subject to the classification and disclosure provisions of SFAS No. 142 if they
are determined to be intangible assets. There has been no resolution of this
issue as described in EITF Issue No. 03-S, "Application of SFAS No. 142,
Goodwill and Other Intangible Assets, to Oil and Gas Companies."
The Company classifies the cost of oil and gas mineral rights as properties and
equipment and believes this is consistent with oil and gas accounting and
industry practice. Although it appears unlikely based on the consensus reached
in EITF Issue No. 04-2, if the EITF were to determine that under EITF Issue No.
03-S oil and gas mineral rights are intangible assets and are subject to the
applicable classification and disclosure provisions of SFAS No. 142, certain
costs would need to be reclassified from properties and equipment to intangible
assets on its consolidated balance sheets. These amounts would represent oil and
gas mineral rights. In addition, the disclosures required by SFAS Nos. 141 and
142 would be made in the notes to the consolidated financial statements. There
would be no effect on the consolidated statements of income or cash flows as the
intangible assets related to oil and gas mineral rights would continue to be
amortized under the full cost method of accounting.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this Item 2 and elsewhere in this
Form 10-Q are subject to various risks, uncertainties and other factors that
could cause actual results to differ materially from the results anticipated in
such forward-looking statements. Included among the important risks,
uncertainties and other factors are those hereinafter discussed.
Operating entities in various foreign jurisdictions must be registered by
governmental agencies, and production licenses for development of oil and gas
fields in various foreign jurisdictions must be granted by governmental
agencies. These governmental agencies generally have broad discretion in
determining whether to take or approve various actions and matters. In addition,
the policies and practices of governmental agencies may be affected or altered
by political, economic and other events occurring either within their own
countries or in a broader international context.
We may not have a majority of the equity that is the licence developer of some
projects that we may pursue in countries that were a part of the former Soviet
Union, even though we may be the designated operator of the oil or gas field. In
such circumstances, the concurrence of co-venturers may be required for various
actions. Other parties influencing the timing of events may have priorities that
differ from ours, even if they generally share our objectives. Demands by or
expectations of governments, co-venturers, customers and others may affect our
strategy regarding the various projects. Failure to meet such demands or
expectations could adversely affect our participation in such projects or our
ability to obtain or maintain necessary licenses and other approvals.
Our ability to finance all of our present oil and gas projects and other
ventures according to present plans is dependent upon obtaining additional
funding. An inability to obtain financing could require us to scale back or
29
abandon part or all of our project development, capital expenditure, production
and other plans. The availability of equity or debt financing to us or to the
entities that are developing projects in which we have interests is affected by
many factors, including:
o world economic conditions;
o the state of international relations;
o the stability and policies of various governments located in areas in
which we currently operate or intend to operate;
o fluctuations in the price of oil and gas, the outlook for the oil and
gas industry and competition for available funds; and
o an evaluation of us and specific projects in which we have an interest.
Rising interest rates might affect the feasibility of debt financing that is
offered. Potential investors and lenders will be influenced by their evaluations
of us and our projects and comparisons with alternative investment
opportunities.
The development of oil and gas properties is subject to substantial risks.
Expectations regarding production, even if estimated by independent petroleum
engineers, may prove to be unrealized. There are many uncertainties inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive. Accordingly,
estimates related to our properties are subject to change as additional
information becomes available.
Most of our interests in oil and gas properties and ventures are located in
former Soviet Union countries. Operations in those countries are subject to
certain additional risks including the following:
o uncertainty as to the enforceability of contracts;
o currency convertibility and transferability;
o unexpected changes in fiscal and tax policies;
o sudden or unexpected changes in demand for crude oil and or natural gas;
o the lack of trained personnel; and
o the lack of equipment and services and other factors that could
significantly change the economics of production.
Production estimates are subject to revision as prices and costs change.
Production, even if present, may not be recoverable in the amount and at the
rate anticipated and may not be recoverable in commercial quantities or on an
economically feasible basis. World and local prices for oil and gas can
fluctuate significantly, and a reduction in the revenue realizable from the sale
of production can affect the economic feasibility of an oil and gas project.
World and local political, economic and other conditions could affect our
ability to proceed with or to effectively operate projects in various foreign
countries.
Demands by, or expectations of governments, co-venturers, customers and others
may affect our strategy regarding the various projects. Failure to meet such
demands or expectations could adversely affect our participation in such
projects or our ability to obtain or maintain necessary licenses and other
approvals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk is due to changes in oil and gas prices
and currency fluctuations. As indicated elsewhere in this Report, as a producer
of oil and gas we are exposed to changes in oil and gas prices as well as
changes in supply and demand which could affect its revenues. We do not engage
in any commodity hedging activities. Due to the ready market for our production
in the Republic of Georgia, we do not believe that any current exposures from
this risk will materially affect our financial position at this time, but there
can be no assurance that changes in such market will not affect CanArgo
adversely in the future.
Also as indicated elsewhere in this Report, because all of our operations are
being conducted in countries that were a part of the former Soviet Union, we are
potentially exposed to the market risk of fluctuations in the relative values of
the currencies in areas in which we operates. At present we do not engage in any
currency hedging operations since, to the extent we receive payments for our
production in local currencies, we are utilizing such currencies to pay for our
local operations. In addition, we frequently sell our production from the
Ninotsminda Field in the Republic of Georgia under export contracts which
provide for payment in US dollars.
30
While CanArgo Standard Oil Products' marketing revenue is denominated in Lari,
the local Georgian currency, and is used to pay Lari denominated operating
costs, its long-term debt is denominated in US dollars. As a result, changes in
the exchange rate could have a material adverse effect on its ability to pay off
non-Lari denominated indebtedness such as its existing credit facility. The
sensitivity to changes in exchange rates for CanArgo Standard Oil Products was
determined using current market pricing models. We estimate that a 10%
appreciation or devaluation in the foreign exchange rate of the Lari against the
dollar in 2003 would not have had a significant impact on operations.
CanArgo had no material interest in investments subject to market risk during
the period covered by this report.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
We maintain a system of controls and procedures designed to provide
reasonable assurance on the reliability of our financial statements and
other disclosures included in this report, as well as to safeguard
assets from unauthorized use or disposition. The system is supported by
formal policies and procedures. Appropriate actions are taken to
address significant control deficiencies and other opportunities for
improving the system as they are identified. However, no cost-effective
internal control system will preclude all errors and irregularities,
and management is necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
Based on their evaluation within the 90 days prior to the filing date
of this Quarterly Report on Form 10-Q, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") are
effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or
in other factors over financial reporting or in other factors during
our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
31
PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On February 11, 2004, 163,218 shares of our common stock were issued to Cornell
Capital Partners, L.P. as part payment of the commitment fee payable pursuant to
the Standby Equity Distribution Agreement between Cornell and the Company
("Equity Line of Credit").
On February 11, 2004, 30,799 shares of our common stock were issued to Newbridge
Securities Corporation pursuant to the Placement Agent Agreement among
CanArgo Energy Corporation, Newbridge Securities Corporation and Cornell Capital
Partners in terms of which Newbridge advised the Company and acted as our
exclusive placement agent in respect of the Equity Line of Credit.
All of such shares were issued in transactions intended to qualify for an
exemption from registration under the Securities Act afforded by Section 4(2).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 23, 2004, the Company held a special meeting of stockholders at which
stockholders approved an increase in the number of shares of common stock that
the Company is authorized to issue from 150,000,000 to 300,000,000 shares. At
the meeting 55,324,646 shares voted in favour of the resolution, 763,184 shares
voted against the resolution and 94,296 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*) Documents filed herewith
are identified by a cross (+).
1(6) Engagement Agreement with Sundal Collier & Co ASA dated
August 13, 2001. (Incorporated herein by reference from
Post-Effective Amendment No. 2 to Form S-1 Registration
Statement, File No. 333-85116 filed on September 10, 2002)).
1(7) Standby Equity Distribution Agreement between Cornell
Capital Partners, L.P. and CanArgo Energy Corporation dated
February 11, 2004 (Incorporated herein by reference from
Form S-3 filed May 6, 2003 (Reg. No. 333-115261)).
1(8) Placement Agent Agreement between CanArgo Energy
Corporation, Newbridge Securities Corporation and Cornell
Capital Partners, L.P. dated February 11, 2004 (Incorporated
herein by reference from Form S-3 filed May 6, 2003 (Reg.
No. 333-115261)).
2(4) Memorandum of Agreement between Fielden Management Services
Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated
dated May 16, 1995 (Incorporated herein by reference from
December 31, 1997 Form 10-K/A).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated by reference from the Company's Proxy
Statements filed May 10, 1999 and May 9, 2000 and Form 8-K
filed July 24, 1998).
+3(2) Certificate of Amendment to Certificate of Incorporation
3(2) Registrant's Bylaws (Incorporated herein by reference from
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
*10(2) Amended and Restated 1995 Long-Term Incentive Plan
(Incorporated herein by reference
32
from Post-Effective Amendment No. 1 to Form S-1 Registration
Statement, File No. 333-72295 filed on July 29, 1999).
*10(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998
Form 10-Q).
10(6) Production Sharing Contract between (1) Georgia and (2)
Georgian Oil and JKX Ninotsminda Ltd. dated February 12,
1996 (Incorporated herein by reference from Form S-1
Registration Statement, File No. 333-72295 filed on
September 7, 1999).
*10(14) Management Services Agreement between CanArgo Energy
Corporation and Vazon Energy Limited relating to the
provisions of the services of Dr. David Robson dated June
29, 2000 (Incorporated herein by reference from September
30, 2000 Form 10-Q).
10(15) Tenancy Agreement between CanArgo Energy Corporation and
Grosvenor West End Properties dated September 8, 2000
(Incorporated herein by reference from September 30, 2000
Form 10-Q).
10(19) Production Sharing Contract between (1) Georgia and (2)
Georgian Oil and CanArgo Norio Limited dated December 12,
2000 (Incorporated herein by reference from December 31,
2000 Form 10-K).
*10(22) Employment Agreements between CanArgo Energy Corporation and
Vincent McDonnell dated December 1, 2000 (Incorporated
herein by reference from December 31, 2001 Form 10-K).
10(23) Agreement Number 1 dated March 20, 1998 on Joint Investment
Production Activity for further development and further
exploration of Bugruvativske Field (Incorporated herein by
reference from September 30, 2001 Form 10-Q).
10(25) Covenant on terms and conditions of participation in
investment activity under the Joint Investment Production
Activity agreement dated of March 20, 1998, dated July 23,
2002. (Incorporated herein by reference from September 30,
2002 Form 10-Q)
10(26) Stock sale purchase contract of IPEC between Lateral Vector
Resources and Northern Industrial Development dated July 25,
2002. (Incorporated herein by reference from September 30,
2002 Form 10-Q)
10(27) Amendments of and Additions to Joint Investment Production
Activity agreement of March 20, 1998, dated August 8, 2002.
(Incorporated herein by reference from September 30, 2002
Form 10-Q)
10(28) Amendment of Clause 9.3.1 of Amendments of and Additions to
the Joint Investment Production Activity agreement of March
20, 1998, dated September 17, 2002. (Incorporated herein by
reference from September 30, 2002 Form 10-Q)
10(29) Stock sale purchase contract of IPEC between Lateral Vector
Resources Inc. and Lystopad dated September 24, 2002.
(Incorporated herein by reference from September 30, 2002
Form 10-Q)
10(30) Stock sale purchase contract of IPEC between Lateral Vector
Resources Inc. and Lyutyi dated September 24, 2002.
(Incorporated herein by reference from September 30, 2002
Form 10-Q)
10(31) Sale agreement of CanArgo Petroleum Products Limited between
CanArgo Limited and Westrade Alliance LLC dated October 14,
2002. (Incorporated herein by reference from September 30,
2002 Form 10-Q)
33
10(33) Farm-in Agreement dated September 4, 2003 relating to the
Norio (Block XI(C)) and North Kumisi Production Sharing
Agreement in the Republic of Georgia with a wholly owned
subsidiary of Georgian Oil, the Georgian State Oil Company
(Incorporated herein by reference from September 30, 2003
Form 10-Q)
10(34) Farm-in Agreement dated September 7, 2003 relating to the
M11 well on the Manavi Cretaceous prospect within the
Ninotsminda PSC area between Ninotsminda Oil Company Limited
and Georgian British Oil Services Company Limited
(Incorporated herein by reference from September 30, 2003
Form 10-Q)
10(35) Stock Purchase Agreement dated September 24, 2003 regarding
the sale of all of the issued and outstanding stock of
Fountain Oil Boryslaw (Incorporated herein by reference from
September 30, 2003 Form 10-Q)
10(36) Manavi Termination Agreement dated December 5, 2003
(Incorporated herein by reference from December 31, 2003
Form 10-K)
10(37) Registration Rights Agreement between CanArgo Energy
Corporation and Cornell Capital Partners, L.P. dated
February 11, 2004 (Incorporated herein by reference from
Form S-3 filed May 6, 2003 (Reg. No. 333-115261).
10(38) Escrow Agreement among CanArgo Energy Corporation, Cornell
Capital Partners, L.P. and Butler Gonzalez LLP dated
February 11, 2004 (Incorporated herein by reference from
Form S-3 filed May 6, 2003 (Reg. No. 333-115261)).
10(39) Termination Agreement between CanArgo Energy Corporation and
Cornell Capital Partners, L.P. dated February 11, 2004
(Incorporated herein by reference from Form S-3 filed May 6,
2003 (Reg. No. 333-115261)).
10(40) Agreement between CanArgo Samgori Limited and Georgian Oil
Samgori Limited dated January 8, 2004 (Incorporated herein
by reference from Form S-3 filed May 6, 2003 (Reg. No.
333-115261)).
10(41) Consultancy Agreement between CanArgo Energy Corporation and
Europa Oil Services Limited dated January 8, 2004
(Incorporated herein by reference from Form S-3 filed May 6,
2003 (Reg. No. 333-115261)).
+10(42) Loan Agreement between CanArgo Energy Corporation and Salahi
Ozturk dated April 26, 2004.
+10(43) Loan Agreement between CanArgo Energy Corporation and C A
Fiduciary Services Limited AS dated April 29, 2004.
+10(44) Oil Sales Agreement between CanArgo Energy Corporation and
Primrose Financial Group dated May 05, 2004
+10(45) Oil Sales Agreement between CanArgo Energy Corporation and
Sveti Limited dated April 01, 2004
34
+10(46) Agreement dated April 25, 2004 between Ninotsminda Oil
Company Limited, Sveti Limited and Primrose Financial Group
on the termination of the Crude Oil Sales Agreement dated
April 1, 2004 between Ninotsminda oil Company Limited and
Sveti Limited and the terms for the conclusion of a new
crude oil sales agreement between Ninotsminda Oil Company
Limited and Primrose Financial Group.
21 List of Subsidiaries (Incorporated herein by reference from
September 30, 2001 Form 10-Q)
+33(1) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer of CanArgo Energy Corporation.
+31(2) Rule 13a-14(c)/15d-14(a) Certification of Chief Financial
Officer of CanArgo Energy Corporation.
+32 Section 1350 Certifications.
(B) Reports on Form 8 K:
Current Report on Form 8-K was filed on March 26, 2004 which
included the following matters:
A press release setting forth CanArgo's preliminary financial results
for the year ended December 31, 2003. A copy of CanArgo's press
release was attached as Exhibit 99.1.
A press release announcing the appointment of a new independent
director. A copy of CanArgo's press release was attached as Exhibit
99.2.
A press release announcing that approval had been received at a
Special Meeting of Stockholders to amend the Company's Certificate of
Incorporation to increase in the number of shares of common stock
that the Company is authorized to issue from 150,000,000 shares to
300,000,000 shares. A copy of the press release was attached as
Exhibit 99.3.
35
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANARGO ENERGY CORPORATION
Date: May 17, 2004 By: /s/ Vincent McDonnell
---------------------
Vincent McDonnell
Chief Financial Officer
36