UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number      0001-32145

CANARGO ENERGY CORPORATION

(44) 1481 729 980

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 þ               No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). o

The number of shares of registrant’s common stock outstanding on August 10, 2004 was 114,118,505.

Table of Contents

CANARGO ENERGY CORPORATION
FORM 10-Q
TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CANARGO ENERGY CORPORATION AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CANARGO ENERGY CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Operations

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

4

CANARGO ENERGY CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CANARGO ENERGY CORPORATION AND SUBSIDIARIES

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”) 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 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.

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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 six month period ended June 30, 2004 and June 30, 2003:

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 June 30, 2004 and June 30, 2003:

Significant Estimates

We have estimated the reserves attributable to us under the Samgori Production Sharing Contract (“PSC”). These estimates are based on a reserves study prepared for National Petroleum Ltd, the previous contractor party to the PSC. These reserve estimates are several years old. We believe that as of the year end, when we will obtain a new reserve audit for the Samgori Field prepared by an independent third party consultant

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in accordance with the guidelines established by the Securities and Exchange Commission, the reserve estimate currently in use could change materially, this could have a material impact on the depletion expense recorded in the fourth quarter of 2004.

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 (apart from the short-term facilities described below), 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”). The Cornell Facility cannot be exercised until the SEC has declared the Form S-3 Registration Statement filed by us with the SEC on May 6, 2004 (Reg. No. 333-115261) 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. Also, we hope to raise significant funds from a global public offering of up to 75,000,000 of our common shares, which was announced on April 29, 2004 . We filed a Registration Statement on Form S-3 relating to this offering with the SEC on May 19, 2004 (Reg. No. 333-115645 ). These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.
		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 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 cash flow, unable to exercise the Cornell Facility, unable to raise funds under our current global public offering 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

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		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 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.

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.

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6.

Accounts Receivable

Accounts receivable at June 30, 2004 and December 31, 2003 consisted of the following:

Bad debt expense for both the six month period ended June 30, 2004 and 2003 was $0.

7.

Inventory

Inventory at June 30, 2004 and December 31, 2003 consisted of the following:

8.

Capital Assets

Capital assets, net of accumulated depreciation and impairment, include the following at June 30, 2004 (Unaudited):

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Capital assets, net of accumulated depreciation and impairment, include the following at December 31, 2003 (Audited):

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.

Other intangible assets

Other intangible assets represent the external costs incurred as at June 30, 2004 in respect of raising future capital fund in respect of a global public offering and a Registration Statement on Form S-3 filed with the SEC on May 19, 2004 (Reg. No. 333-115645). Should these offerings be successful then these costs will be netted against the proceeds as a cost of the offering. Should the registration statements not be declared effective or the offering prove unsuccessful, these costs would be expensed to the income statement immediately.

10.

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.

11.

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 which was recorded as advance from joint venture. 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 as of June 30, 2004 from Georgian Oil, expenditures incurred on the MK-72 well has reduced the amount due to the Joint Venture Partner to $0 at June 30, 2004.

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12.

Loans Payable

Loans payable at June 30, 2004 and December 31, 2003 consisted of the following:

Loans payable of $102,179 at December 31, 2003 related to a short-term secured loan facility that matured and was paid off on February 27, 2004. The loan was entered into by our subsidiary, CanArgo Limited 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.

On April 26, 2004, we entered into a loan and warrant agreement with an unaffiliated party, Salahi Ozturk in an arms length transaction. Under 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 million by way of an 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 issued 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 August 16, 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. Under the agreement, CA Fiduciary advanced to us a loan of £170,000 (approximately $306,000) 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 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 million by way of an 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 issued to CA Fiduciary a warrant to subscribe for 300,000 shares of CanArgo common stock at an exercise price of $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 August 16, 2004, the warrants have been issued but remain unexercised.

Under Accounting Principles Board (APB) 14: “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” we allocated the proceeds from the issuances of the promissory note and warrants based on a fair value basis of each item. The fair value of the warrants was determined to be $754,000 for the 1,000,000 warrants issued with the loan issued to Mr. Ozturk and $197,040 for the 300,000 warrants issued with the loan issued to CA Fiduciary Services Limited. The value of the warrants was recorded as a debt discount on the date of issuance and will be amortized over the life of the loan based

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on the effective interest method. As of June 30, 2004 we amortized $230,692 and $60,060, respectively of the discount related to the value of the warrants as interest expense.

On May 19, 2004, we signed a promissory note with Cornell Capital Partners, L.P. (“Cornell Capital”) whereby Cornell Capital agreed to advance us the sum of $1,500,000. This amount shall be payable on the earlier of 180 days from the date of the promissory note or within 60 days from the date that the Registration Statement on Form S-3 filed with the SEC on May 6, 2004 (Reg. No. 333-115261) is declared 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). If the promissory note is not repaid in full when due, interest shall accrue on the outstanding principal owing at the rate of twelve percent (12%) per annum. At Cornell Capital’s option, any such interest due shall be paid either in shares of our common stock or in cash. We paid to Cornell Capital a commitment fee of five percent (5%) of the principal amount of the promissory note which shall be set-off against the first $75,000 of fees payable by us to Cornell Capital under the Standby Equity Distribution Agreement dated February 11, 2004 (See “Liquidity and Capital Resources” below for a more detailed discussion). The $75,000 commitment fee was initially recorded as a prepaid loan cost and is being amortized over the life of the loan. The promissory note will become immediately due and payable upon the occurrence of any of the following: (i) failure to pay the amount of any principal or interest when due under the promissory note; (ii) any proceedings under any bankruptcy laws of the United States of America or under any insolvency, reorganization, receivership, readjustment of debt, dissolution, liquidation or any similar law or statute of any jurisdiction is filed by or against us for all or any part of our property. The proceeds of the advance from Cornell Capital will be used by us to order long lead items for our drilling program in Georgia and for working capital purposes. In the event the Registration Statement is declared effective, we will repay the promissory note by making a series of takedowns under the Standby Equity Distribution Agreement. However, the Company does additionally have the option at any time during the term of the promissory note to repay it in cash.

13.

Other Liabilities

Other liabilities consisted of the following at June 30, 2004 and December 31, 2003:

See Note 20 for details of the sale of the subsidiary classified as discontinued operation.

14.

Accrued Liabilities

Accrued liabilities consisted of the following at June 30, 2004 and December 31, 2003:

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15.

Minority Interest

In September 2003, CanArgo Norio Limited 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 Limited 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 of additional interests was achieved by issuing 6,100,000 restricted CanArgo shares to the minority interest holders in CanArgo Norio. Of the additional interests acquired 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.

Since November 2000, the results of our 51% interest in the Georgian American Oil Refinery (“GAOR”), a company which owns an inactive small refinery located at Sartichala, Georgia have been included in our consolidated financial statements. 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. We sold our interest in the refinery in February 2004.

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16.

Stockholders’ Equity

In May 2004, the Company entered into an agreement with CEOCast, Inc. (“CEOCast”) to provide investor relations services to the Company for a period of six months. The agreement requires us to pay CEOCast $5,000 per month plus all expenses. In addition, we were required to issue to CEOCast 80,000 shares of our common stock. We also granted piggyback registration rights, in which we are required to include the shares issued to CEOCast in any future registration statement. On the date of the agreement, the shares were valued at $57,600 and included in prepaid expenses and deposits and will be amortized rateably to consulting expense over the term of the agreement.

17.

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

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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 June 30, 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 options and warrants excluded from diluted net income (loss) per common share were 1,300,000 and 8,935,667 for the six months ended June 30, 2004 and 2003, respectively.

Basic and diluted net loss per common share for the three months ended June 30, 2004 and three months ended June 30, 2003 were based on the weighted average number of common shares outstanding during those periods. Options and warrants to purchase CanArgo’s Common Stock outstanding during the three months ended June 30, 2004 and three months ended June 30, 2003 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 options and warrants excluded from diluted net loss per common share were 4,586,083 and 8,935,667, for the three months ended June 30, 2004 and 2003, respectively.

18.

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 June 30, 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 Limited 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.

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		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 Limited.
		Under the Production Sharing Contract for Blocks XIG and XIH (the “Tbilisi PSC”) in the Republic of Georgia our subsidiary CanArgo Norio Limited will evaluate existing seismic and geological data during the first year and acquire additional seismic data within three 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 will 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 an oil sales agreement with Primrose Financial Group dated May 5, 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 XIB) Production Sharing Contract (“Samgori PSC”) in Georgia. This interest was acquired from Georgian Oil Samgori Limited (“GOSL”), a company wholly owned by Georgian Oil by one of our subsidiaries CanArgo Samgori Limited (“CSL”). Under the terms of the agreement dated January 8, 2004, up to 10 horizontal wells will be drilled on the Samgori Field. We are be obliged to fund 100% of the cost of drilling the first well at an anticipated cost of $2,000,000 and thereafter drilling will be funded jointly by CSL and GOSL, the Contractor parties, pro rata their interest in the Samgori PSC. On August 2, 2004, we commenced drilling of a new vertical well on the Samgori Field, S302, on what we believe to be an undrained area of the Field. Completion of this well will satisfy our commitment to GOSL under the agreement. The total cost to us of participating in the whole program, which is due to be completed within 36 months, is anticipated to be approximately $13,500,000.
		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 approximately $37,000,000 (of which $33,936,279 is currently approved by Georgian Oil, the remainder is subject to audit) 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. Under the Samgori PSC, up to 50% of petroleum produced under the contract is allocated to the Contractor parties for the recovery of the cumulative allowable capital, operating and other project costs associated with the Samgori Field and exploration in Block XIB (“Cost Recovery Oil”). The cost recovery pool includes the $37,000,000 (of which $33,936,279 is currently approved by Georgian Oil, the remainder is subject to audit) costs previously incurred by NPL. The balance of production (“Profit Oil”) is allocated on a 50/50 basis between the State and the Contractor parties respectively. While GOSL and CSL continue to have unrecovered costs, they will receive 75% of total production (net 37.5% to us). After recovery of their cumulative capital, operating and other allowable project costs including the NPL costs, the Contractor parties will receive 30% of Profit Oil (net 15% to us). The allocation of a share of production to the State, however, relieves the Contractor parties of all obligations they would otherwise have to pay the Republic of Georgia for taxes, duties and levies related to activities covered by the Samgori PSC. After NPL’s costs are repaid from either Field production or other production in the PSC (in the event that new fields are developed in areas identified using seismic surveys originally performed by NPL), NPL shall continue to receive 5% of annual net profit.
		Under the Samgori PSC, Georgian Oil as the State representative in the contract is entitled to receive up to 250,000 tons (approximately 1.6 million barrels) of oil (“Base Level Oil”) from a maximum of 50% per calendar quarter of production when the value of the cumulative Cost Recovery Petroleum, cumulative Profit Oil and cumulative Profit Natural Gas delivered to the Contractor parties exceeds the cumulative allowable capital, operating and other project costs including finance costs associated with the Samgori

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		Field and exploration in Block XIB and the NPL costs. While Base Level Oil is being delivered to Georgian Oil, the Contractor parties will continue to be entitled to a maximum of 50% of the remaining Profit Oil. The Base Level Oil is an estimate of the amount of oil that Georgian Oil would have expected to produce from the contract area had the State not come to a contractual arrangement with the previous Contractor party in 1996.
		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 Stock are issuable upon certain production targets being met from future developments under the Samgori PSC. The Company capitalized $3,880,000 into oil and gas properties for the value of the 4,000,000 shares issued.

19.

Segment Information

Operating revenues from continued operations for the six month periods ended June 30, 2004 and 2003 by geographical area were as follows:

Operating revenues from continued operations for the three month periods ended June 30, 2004 and 2003 by geographical area were as follows:

Operating (loss) income from continued operations for the six month periods ended June 30, 2004 and 2003 by geographical area was as follows:

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		Operating (loss) income from continued operations for the three month periods ended June 30, 2004 and 2003 by geographical area was as follows:

Net (loss) income before minority interest from continuing operations for the six month periods ended June 30, 2004 and 2003 by geographic area was as follows:

Net (loss) income before minority interest from continuing operations for the three month periods ended June 30, 2004 and 2003 by geographic area was as follows:

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Identifiable assets of continuing and discontinued operations as of June 30, 2004 and December 31, 2003 by business segment and geographical area were as follows:

20.

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. 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 Limited 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 Limited have been classified as discontinued for all periods presented. The minority interest related to CanArgo Standard Oil Products Limited 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 for the six month period ended June 30, 2004 and June 30, 2003 consisted of the following:

The results of discontinued operations for the three month period ended June 30, 2004 and June 30, 2003 consisted of the following:

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Gross consolidated assets and liabilities of subsidiary held for sale that are included in “assets and liabilities held for sale” at June 30, 2004 and December 31, 2003 consisted of the following:

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 Limited, above.

Cash consideration received as of June 30, 2004 in respect of this transaction was $3,570,000 and has been recorded in other liabilities (see Note 13). The sale will be reflected on payment of the consideration in full plus any interest due which is now expected to be during the second half of 2004. In any event, ownership in the asset will only transfer to Westrade Alliance LLC on payment of the consideration in full.

From November 2002 through June 2004, CanArgo Standard Oil Products Limited entered into thirteen credit facility agreements totalling $5,577,513 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 $4,657,077 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.

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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 Limited, hold the remaining 50% interest in CanArgo Standard Oil Products Limited.

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. 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.

On May 28, 2004, we announced that pursuant to a signed agreement between CanArgo Acquisition Corporation, our wholly owned subsidiary, and Stanhope Solutions Ltd., we had completed a transaction to sell our interest in the Bugruvativske Field through the disposal of LVR for $2,000,000. We received $250,000 as an initial payment and will receive the remaining $1,750,000 if certain production targets are achieved on the project by the purchaser.

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 for the six month period ended June 30, 2004 and June 30, 2003:

The results of discontinued operations in respect of LVR consisted of the following for the three month period ended June 30, 2004 and June 30, 2003:

Gross consolidated assets in respect of LVR that are included in “assets held for sale” consisted of the following at June 30, 2004 and December 31, 2003:

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There were no Gross consolidated liabilities in respect of LVR included in “liabilities held for sale” at June 30, 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 Limited. 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 for the six months ended June 30, 2004 and June 30, 2003:

The results of discontinued operations in respect of GAOR consisted of the following for the three months ended June 30, 2004 and June 30, 2003: