form_10qsb-093002
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________
Commission file number: 000-31170
TETON PETROLEUM COMPANY
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 84-1482290
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
(970) 870-1417
(Issuer's Telephone Number)
P.O. Box 774327
Steamboat Springs, Colorado 80477
(Address of Principal Executive Offices)
March 31
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Applicable only to corporate issuers:
As of November 15, 2002, 58,550,302 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format: Yes ___ No X
______
TETON PETROLEUM COMPANY
PART I. FINANCIAL INFORMATION
Table of Contents
-----------------
Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets September 30, 2002 and December 31, 2001
Unaudited Consolidated Statements of Operations and Comprehensive Loss Nine Months Ended September 30, 2002 and 2001
Unaudited Consolidated Statements of Operations and Comprehensive Loss Three Months Ended September 30, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements
TETON PETROLEUM COMPANY
Unaudited Consolidated Balance Sheets
September 30, December 31,
2002 2001
------------ ------------
Assets
Current assets
Cash ............................................................ $ 421,566 $ 182,502
Accounts receivable ............................................. 590,016 55,000
Accounts receivable - affiliate ................................. 131,280 387,000
Accounts receivable - other ..................................... 574,060 65,500
Inventory ....................................................... 377,346 189,500
Prepaid expenses and other assets ............................... 443,743 34,000
------------ ------------
Total current assets ........................................ 2,538,011 913,502
------------ ------------
Non-current assets
Oil and gas properties, net (successful efforts) ................ 3,953,793 1,169,100
Fixed assets, net ............................................... 302,418 128,710
------------ ------------
Total non-current assets .................................... 4,256,211 1,297,810
------------ ------------
Total assets ...................................................... $ 6,794,222 $ 2,211,312
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued liabilities ........................ $ 1,388,897 $ 979,644
Current portion of Goloil notes payable advances from
affiliate ..................................................... 1,770,055 769,900
Current portion of stockholders notes payable, net of
discount of $50,005 (2002) .................................... 249,995 500,000
Current portion of officer note payable ....................... -- 94,210
------------ ------------
Total current liabilities ................................... 3,408,947 2,343,754
------------ ------------
Non-current liabilities
Stockholders notes payable, less current portion ................ -- 250,000
Goloil notes payable advances from affiliate, less
current portion ............................................... 740,000 --
------------ ------------
Total non-current liabilities ............................... 740,000 250,000
------------ ------------
Total liabilities ........................................... 4,148,947 2,593,754
------------ ------------
Commitments and contingencies
Minority interest
Stockholders' equity (deficit)
Common stock, .001 par value, 100,000,000 shares
authorized, 52,661,171 and 28,488,557 shares issued
and outstanding at September 30, 2002 and December
31, 2001 ...................................................... 52,661 28,488
Additional paid-in capital ...................................... 20,809,934 9,766,608
Accumulated deficit ............................................. (18,976,593) (11,048,811)
Foreign currency translation adjustment ......................... 759,273 871,273
------------ ------------
Total stockholders' equity (deficit) ........................ 2,645,275 (382,442)
------------ ------------
Total liabilities and stockholders' equity (deficit) .............. $ 6,794,222 $ 2,211,312
============ ============
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Nine Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Sales ................................................. $ 4,305,274 $ 1,071,556
Cost of sales and expenses
Oil and gas production ............................. 3,978,242 515,531
General and administrative ......................... 2,333,677 1,170,899
Depreciation, depletion and amortization ........... 149,806 61,029
------------ ------------
Total cost of sales and expenses ................. 6,461,725 1,747,459
------------ ------------
(Loss) income from operations ......................... (2,156,451) (675,903)
------------ ------------
Other income (expense)
Other income ....................................... 2,508 53,985
Financing charges (principally amortization of
discount related to Convertible Bonds - See Note 4) (5,444,901) --
Interest expense ................................... (328,938) (135,381)
------------ ------------
(5,771,331) (81,396)
------------ ------------
Net (loss) income ..................................... (7,927,782) (757,299)
Other comprehensive (loss) income, net of tax
Effect of exchange rates ........................... (112,000) (40,598)
------------ ------------
Other comprehensive (loss) income ..................... (112,000) (40,598)
------------ ------------
Comprehensive (loss) income ........................... $ (8,039,782) $ (797,897)
============ ============
Basic and diluted weighted average common shares
outstanding ....................................... 30,000,691 25,467,261
============ ============
Basic and diluted (loss) income per common share ...... $ (.26) $ (.03)
============ ============
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Sales ................................................. $ 2,204,613 $ 401,790
Cost of sales and expenses
Oil and gas production ............................. 2,321,285 225,302
General and administrative ......................... 588,152 393,394
Depreciation, depletion and amortization ........... 68,419 10,075
------------ ------------
Total cost of sales and expenses ................. 2,977,856 628,771
------------ ------------
(Loss) income from operations ......................... (773,243) (226,981)
------------ ------------
Other income (expense)
Other income ....................................... 700 4,853
Financing charges (principally amortization of
discount related to Convertible Bonds - See Note 4) (1,390,951) --
Interest expense ................................... (52,675) (36,231)
------------ ------------
(1,442,926) (31,378)
------------ ------------
Net (loss) income ..................................... (2,216,169) (258,359)
Other comprehensive (loss) income, net of tax
Effect of exchange rates ........................... 20,000 (20,696)
------------ ------------
Other comprehensive (loss) income ..................... 20,000 (20,696)
------------ ------------
Comprehensive (loss) income ........................... $ (2,196,169) $ (279,055)
============ ============
Basic and diluted weighted average common shares
outstanding ....................................... 32,647,203 25,681,033
============ ============
Basic and diluted (loss) income per common share ...... $ (.07) $ (.01)
============ ============
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities
Net (loss) income ................................... $(7,927,782) $ (757,299)
----------- -----------
Adjustments to reconcile net (loss) income to net
cash used in operating activities
Depreciation, depletion, and amortization .......... 149,806 61,029
Warrants issued for notes payable extensions ....... 46,582 --
Warrants subject to variable plan accounting ....... -- (30,000)
Warrants issued for services ....................... 4,227 --
Stock issued for services .......................... 10,000 16,500
Debentures issued for services ..................... 211,313 --
Amortization of Debenture and note payable discounts
(See Note - 4) .................................... 5,281,407 --
Changes in assets and liabilities
Accounts receivable .............................. (787,856) 4,831
Prepaid expenses and other assets ................ (259,001) 446
Inventory ........................................ (187,846) 1,546
Accounts payable and accrued liabilities ......... 121,328 86,311
----------- -----------
4,589,960 140,663
----------- -----------
Net cash used in operating activities ........... (3,337,822) (616,636)
----------- -----------
Cash flows from investing activities
Oil and gas properties and equipment expenditures ... (2,593,207) (746,665)
----------- -----------
Net cash used in investing activities ........... (2,593,207) (746,665)
----------- -----------
Cash flows from financing activities
Net proceeds from advances under notes payable from
affiliate ........................................... 1,740,155 702,500
Proceeds from convertible debentures ................ 4,143,643 --
Payments on notes payable ........................... (594,210) (650,000)
Proceeds from notes payable ......................... 300,000 --
Issuance of common stock (net of issue costs of
$2,600 (2001)) ........................................ 692,505 1,298,440
----------- -----------
Net cash provided by financing activities ....... 6,282,093 1,350,940
----------- -----------
Effect of exchange rates .............................. (112,000) (40,598)
----------- -----------
Net (decrease) increase in cash ....................... 239,064 (52,959)
Cash - beginning of period ............................ 182,502 471,883
----------- -----------
Cash - end of period .................................. $ 421,566 $ 418,924
=========== ===========
Continued on the following page.
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
Continued from the previous page.
Supplemental disclosure of non-cash investing and financing activity:
During the nine months ended September 30, 2002, the Company had the
following transactions:
In exchange for the extension of principal payments on four notes payable,
the Company modified expiration dates of certain warrants previously held
by the note holders and issued an additional 125,000 such warrants. The
fair value of the modification of the warrants totaled $46,582 and has been
recorded as financing costs.
A note payable of $250,000 was converted into a convertible debenture with
1,000,000 warrants also being issued under the same terms of the Company's
private placement offering of convertible debentures.
19,774,572 of warrants issued with convertible debentures valued at
$811,559 were initially recorded as a discount on the debentures. At
September 30, 2002, the full amount of the discount had been amortized and
recorded as financing costs.
In-the money conversion features on convertible debt valued at $3,880,035
were recognized as financing costs ($3,746,285) and consulting expenses
($133,750).
The Company issued warrants in connection with related party notes payable
of $450,000 and $50,000. The warrants were valued at $156,781 and recorded
as financing costs.
The Company issued $267,500 of convertible debentures with 1,070,000
warrants valued at $14,250 for a total amount of $281,750. Prepaid
consulting services of $70,437 remained at September 30, 2002.
400,000 warrants were issued to a consultant for services valued at
$84,532. Prepaid consulting of $80,305 related to future quarters in 2003
and 2004.
20,000 shares of stock were issued to a consultant for services valued at
$10,000.
500,000 warrants issued with a note payable valued at $150,616 were
initially recorded as a discount on the debentures. At September 30, 2002,
$100,011 of the discount had been amortized and recorded as financing
costs.
$4,661,143 of debentures and accrued interest of $227,075 were converted
into 21,101,929 shares of stock with $466,771 being paid as a premium at
conversion and recorded as financing costs.
Approximately $515,000 of capital expenditures for oil and gas properties
was included in accounts payable at September 30, 2002.
During the nine months ended September 30, 2001, the Company had the
following transactions:
44,000 shares of common stock valued at $16,500 were issued for consulting
services.
A $1,050,000 note payable to was assigned from Teton Petroleum to its
subsidiary Goltech. Goltech paid off the note from the repayment of
intercompany notes payable by Goloil, which received the funds through
advances under notes payable from affiliate. The Company recorded the net
reduction of debt of $525,000 ($1,050,000 note payable less 50% share of
the $1,050,000 advances from affiliate) as a reduction to oil and gas
properties.
See notes to unaudited consolidated financial statements.
TETON PETROLEUM COMPANY
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
The September 30, 2002 financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments), which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The unaudited financial
statements as of September 30, 2002, as is customary in the oil and gas
industry, reflect a pro rata consolidation of the Company's 50% interest in
Goltech Petroleum, LLC. The unaudited financial statements contained herein
should be read in conjunction with the financial statements and notes thereto
contained in the Company's financial statements for the year ended March 31,
2002. The results of operations for the period ended September 30, 2002 are not
necessarily indicative of the results for the entire fiscal year.
Change in Year-End
As reported in the Company's Form 8-K dated October 22, 2002, after considering
the difficulties of consolidating and reporting results with a foreign
subsidiary with a legally mandated December 31 fiscal year, the Company has
decided to change Teton Petroleum's fiscal year-end back to December 31 for
consistency and in the interests of best reporting practices.
Foreign Currency Exchange Rates
The consolidated financial statements reflect the Company's pro-rata share of
its subsidiary Goltech Petroleum that is consolidated with Goloil. The
conversion of the functional currency of Goloil (a Russian Company) in rubles to
the reporting currency of U.S. dollars is based upon the exchange rates in
effect. The exchange rates in effect at September 30, 2002 and 2001 were 31.71
and 29.44 rubles to the U.S. dollar, respectively. The average rates in effect
during the three-month periods ended September 30, 2002 and 2001, were 31.60 and
29.35 rubles to the U.S. dollar, respectively.
Earnings Per Share
All potential dilutive securities have an antidilutive effect on earnings (loss)
per share and accordingly, basic and dilutive weighted average shares are the
same.
Note 2 - Goloil Notes Payable Advances from Affiliate
Advances from affiliates are advances under notes payable to Goloil from another
memberholder of Goltech. Teton has not guaranteed any of these notes. Amounts
recorded are Teton's proportionate share of Goloil's liability under pro-rata
consolidation accounting procedures.
The Company's share of advances on notes payable from an affiliate, which were
made to Goloil during the nine months ended September 30, 2002 were $1,740,155.
The Company's share of Goloil's outstanding borrowings at September 30, 2002
under notes payable from an affiliate consist of $2,510,055, under twelve
separate notes with interest rates of 8.0%, maturities of December 2002 to
December 2003, all notes being secured by substantially all Goloil assets.
Note 3 - Notes Payable
The Company paid-off notes payable during the nine months ended September 30,
2002, consisting of a note payable to an officer and stockholder for $94,210 and
a related party notes payable to stockholders totaling $500,000.
The Company also received proceeds of $300,000 on a note payable from a
stockholder. In connection with the note, 500,000 warrants valued at $150,016
were issued. At September 30, 2002, $100,011 of the discount had been amortized
and recorded as financing costs. The Company paid off this note in November
2002. The Company has recorded the value of these warrants using the Black
Scholes option-pricing model using the following assumptions: volatility of
138%, a risk-free rate of 4.5%, zero dividend payments, and a life of 2 years.
The note was paid-off by the Company in November of 2002.
Note 4 - Convertible Debentures
During the nine months ended September 30, 2002, the Company received proceeds
of $4,163,143 from the private placement of convertible debentures. The
debentures have a term of three years from April 1, 2002 and provide for
interest at 10% per annum payable annually. The debentures provide that the
holder may convert the debenture and accrued interest into shares of common
stock (a $.25 conversion rate).
The debentures also include warrants to purchase common stock and have an
exercise price of $.50 and a term of two years. Each debenture holder received
one warrant for each $.25 of investment made in the debentures.
On September 1, 2002, the Company redeemed all debentures outstanding for shares
of its common stock. The Debentures were redeemed at 110% of their face value by
issuing one share of common stock for each $.25 of redemption value, which also
incorporates any accrued interest through September 1, 2002. Financing charges
were recorded during the nine months ended September 30, 2002 for the difference
between the cumulative 10% contractual interest accrued through September 1,
2002 and the 10% premium paid upon redemption, which totaled $466,771.
As a result of the warrants issued with the debentures and in-the money
conversion features present at issuance, non-cash financing charges of
$4,714,625 were recorded. While the stock to which the conversion rights and
warrants apply is restricted stock, the valuation with respect to this stock in
calculating the discount was "as if" the stock was immediately salable. The
effect of this is to make the amount of discount and its related amortization
higher than it would otherwise have been. Management believes these costs are
non-recurring and will manage future capital raising programs to minimize or
eliminate these costs.
Note 5 - Stockholders' Equity
During the three months ended September 30, 2002, the Company issued 3,050,685
shares of common stock under private placement offerings receiving proceeds of
approximately $692,505. In connection with the private placement offerings, the
Company also issued a warrant for each $0.25 stock investment. The warrants have
a term of two years and an exercise price of $0.50.
Additional funds from private placement offerings after September 30, 2002 were
also received.
FORWARD LOOKING STATEMENTS
To the extent that financial information and management's discussion and
analysis or plan of operation contain forward looking statements, such
statements involve risks and uncertainties which could cause Teton's actual
result to differ materially from the anticipated results discussed herein.
Factors that might cause such a difference are set forth in the "Significant
Factors in Company Operations" section of Teton's Registration Statement on Form
10-SB/A filed with the Securities and Exchange Commission ("SEC") on July 11,
2001 (SEC File Number: 000-31170) and in Teton's Annual Report on Form 10-KSB
filed with the SEC on April 15, 2002. You are cautioned not to place undue
reliance on the forward-looking statements made herein.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Three Months Ended September 30, 2002 compared to September 30, 2001
The Company had revenues from oil and gas production of $2,204,613 for the three
months ended September 30, 2002 as compared to $401,790 for the three months
ended September 30, 2001. The change in sales is related to the increase in
production from 32,800 bbls to 137,500 bbls, net to Teton. The increase in
production is due primarily to greater production, and to a lesser extent, the
fact that our pipeline was operational in 2002 and not in 2001, which restricted
shipments in 2001. The increase in production is due primarily to greater
production from additional wells. The number of producing wells increased from 4
to 12 as a result of our more aggressive drilling program and an increase in our
and our partner's capital investments in the field. Average price per bbl.
increased from $12.36 to $16.03 from 2001 to 2002, as a result of an average
increase in oil prices compared to the same period in the prior year.
Cost of oil and gas production increased to $2,321,285 for the three months
ended September 30, 2002 from $225,302 for the three months ended September 30,
2001 due to the Company's increased production capacities. The average cost per
bbl. increased from an average of $6.86 per bbl. to $16.88 per bbl. due to the
Company bearing all of the lifting costs including those on the Company's share
of approximately 137,500 bbls which were sold by Goloil, with the proceeds
transmitted as a production payment to an affiliate of our Russian partner, who
drilled four wells and completed the pipeline in 2001 at no cost to Teton in
exchange for the production payment.
On a per bbl basis the Company costs per bbl. increased due to additional
infrastructure costs to support the additional production, an increase in the
Russian extraction tax, which is indexed to the world price of URALS blend oil
and is charged on both domestic and export sales where the domestic oil price
did not increase proportionately, and the restructuring of the production
payment from a payment in kind to a payment as a percentage of revenues from
both domestic and export sales, effective April 1, 2002. The production payment
restructuring can result in a positive or negative impact to the payment amount,
depending on the relative values of the prices of domestic and export oil. The
impact for the three months ended September 30, 2002 was an increase in Teton's
cost of approximately $496,000. This restructuring change has yet to be approved
by Teton, and discussions with Goloil management and the Russian partner
regarding the change have been initiated in conjunction with all of the contract
renegotiations discussed in the last paragraph below.
General and administrative expenses of $588,152 were incurred for the three
months ended September 30, 2002 as compared to $393,394 for the three months
ended September 30, 2001. The increase of general and administrative expenses of
$194,758 reflects an increase in consulting costs of approximately $150,000 as a
result of additional oil and gas consultants used to assist with Company's
Russian operations and financial consultants involved in creating additional
market awareness of the Company as well as identifying additional sources for
future capital raising. Of the consulting costs incurred $74,000 were non-cash
compared to $0 for the prior period. Increases in travel and entertainment of
approximately $100,000 due to increased travel and international trips, offset
by a decrease in legal and accounting costs of approximately $74,000.
Interest expense for the three months ended September 30, 2002 was $52,675 as
compared to $36,231 for the three months ended September 30, 2001. This increase
is due to the increase in loans from affiliate to finance further oil field
development in Russia which was partially offset be a decrease in interest rates
on the affiliate debt of Goloil of approximately 2%. Additional interest was
also incurred on convertible debentures which were outstanding for part of the
period in 2002 compared to no debentures outstanding during 2001.
The Company also incurred financing costs of $1,390,951 during the three months
ended September 30, 2002 for the amortization of discount related to warrants
issued in connection with certain related party notes payable of approximately
$100,000 (non-cash), amortization of the discount on warrants issued with the
convertible debentures of approximately $81,000 (non-cash) and in-the-money
conversion feature discounts of approximately $754,000 (non-cash) immediately
recognized, and $456,000 of expenses paid related to the 10% premium paid in
common stock upon the conversion of the debentures on September 1, 2002. While
the stock to which the conversion rights and warrants apply is restricted stock,
the valuation with respect to this stock in calculating the discount was "as if"
the stock was immediately salable. The effect of this is to make the amount of
discount and its related amortization higher than it would otherwise have been.
Management believes these costs are non-recurring and will manage future capital
raising programs to minimize or eliminate these costs.
The company reported a loss of $2,216,169 or $(0.07) per share, however,
excluding non-cash financing charges of approximately $1,391,000, the Company's
loss would be adjusted to approximately $825,000 or $(.03) per share.
Nine Months Ended September 30, 2002 compared to September 30, 2001
The Company had revenues from oil and gas production of $4,305,274 for the nine
months ended September 30, 2002 as compared to $1,116,664 for the nine months
ended September 30, 2001. The change in sales is related to the increase in
production from 58,500 bbls to 298,000 bbls, net to Teton. The increase in
production is due primarily to greater production, and to a lesser extent, the
fact that our pipeline was operational in 2002 and not in 2001, which restricted
shipments in 2001. Average price per bbl. decreased from $19.11 to $14.45 from
2001 to 2002, as a result of the mix in oil sales, which in 2002 included export
sales of approximately 37% with a higher average price per bbl. compared to 56%
export sales in 2001.
Cost of oil and gas production increased to $3,978,242 for the nine months ended
September 30, 2002 from $515,531 for the nine months ended September 30, 2001
due to the Company's increased production capacities.
The average cost per bbl. increased from an average of $8.82 per bbl. to $13.35
per bbl. due to the Company bearing all of the lifting costs including those on
the Company's share of approximately 282,000 bbls in 2002 compared to 32,800
bbls in 2001, which were sold by Goloil, with the proceeds transmitted as a
production payment to an affiliate of our Russian partner, who drilled four
wells and completed the pipeline in 2001 at no cost to Teton in exchange for the
production payment.
On a per bbl basis the Company costs per bbl. increased due to additional
infrastructure costs to support the additional production, an increase in the
Russian extraction tax, which is indexed to the world price of URALS blend oil
and is charged on both domestic and export sales where the domestic oil price
did not increase proportionately and the restructuring of the production payment
from a payment in kind to a payment as a percentage of revenues from both
domestic and export sales, effective April 1, 2002. The production payment
restructuring can result in a positive or negative impact to the payment amount,
depending on the relative values of the prices of domestic and export oil. The
impact for the nine months ended September 30, 2002 was an increase in Teton's
cost of approximately $789,000. This restructuring change has yet to be -
approved by Teton, and discussions with Goloil management and the Russian
partner regarding the change have been initiated in conjunction with all of the
contract renegotiations discussed in the last paragraph below.
General and administrative expenses of $2,333,677 were incurred for the nine
months ended September 30, 2002 as compared to $1,170,899 for the nine months
ended September 30, 2001. The increase of general and administrative expenses of
$1,162,778 reflects an increase in consulting costs of approximately $738,000 as
a result of additional oil and gas consultants used to assist with Company's
Russian operations and financial consultants involved in creating additional
market awareness of the Company as well as identifying additional sources for
future capital raising. Of the consulting costs incurred $226,000 were non-cash
compared to $16,500 for the prior period. Increases in legal and accounting
costs of approximately $60,000 related to increased general corporate activity
and the private placement of convertible debentures, marketing costs of
approximately $200,000 due to increased public relations, travel and
entertainment of approximately $150,000 due to increased travel and
international trips, and increased overhead of Goloil of approximately $200,000
due to the increase in operations and production volume. These increases were
offset by a decrease in officer compensation of approximately $75,000.
Interest expense for the nine months ended September 30, 2002 was $386,176 as
compared to $135,381 for the nine months ended September 30, 2001. This increase
is due to the increase in loans from affiliate to finance further oil field
development in Russia which was partially offset be an average decrease in rates
on these advances of 2%, additional interest on higher balances of notes payable
outstanding in 2002 and convertible debentures outstanding in 2002 which were
not present in 2001.
Other income decreased due to approximately $50,000 being received for oil
processing reimbursement in 2001, which did not occur in 2002.
The Company also incurred financing costs of $5,444,901 during the nine months
ended September 30, 2002 for the amortization of discount related to warrants
issued in connection with certain related party notes payable of $304,000
(non-cash), amortization of the discount on warrants issued with the convertible
debentures and in-the-money conversion feature discounts of $4,558,000
(non-cash) immediately recognized, and $467,000 of expenses paid related to the
10% premium paid in common stock upon the conversion of the debentures on
September 1, 2002. The remainder of these costs were expenses paid related to a
debenture purchase agreement with a potential investor that was not consummated.
While the stock to which the conversion rights and warrants apply is restricted
stock, the valuation with respect to this stock in calculating the discount was
"as if" the stock was immediately salable. The effect of this is to make the
amount of discount and its related amortization higher than it would otherwise
have been. Management believes these costs are non-recurring and will manage
future capital raising programs to minimize or eliminate these costs.
The company reported a loss of $7,927,782 or $(.26) per share, however,
excluding non-cash financing charges of approximately $5,328,000, the Company's
loss would be adjusted to approximately $2,600,000 or $(.09) per share.
Liquidity and Capital Resources
The Company has cash balances of $ 421,566 at September 30, 2002, with a working
capital deficit of $870,936. Cash used from operations totaled $3,337,822, with
non-cash adjustments to cash used in operations including depreciation and
depletion of $149,806, $225,540 of stock issued for services and debentures and
warrants issued for services recognized in the current period, and amortization
of discounts on notes payable and debentures and other financing charges of
$5,327,989.
The Company used $2,593,207 of cash in investing activities, which was all
associated with oil and gas property and equipment expenditures. The Company
also financed capital expenditures on oil and gas properties of approximately
$515,000 through accounts payable. The Company financed the cash portion of
capital expenditures through advances from affiliates and proceeds from
convertible debentures. The Company continues to expect significant additional
investments to be made in the future to drill and develop additional producing
wells.
The Company had cash provided by financing activities of $6,280,093, which
consisted of proceeds received from debentures, stock issuances and notes
payable from shareholders of $5,136,148 and note payable advances from
affiliates of $1,740,155, which were partially offset by payment on notes
payable of $594,210. The cash received through financing activities allowed the
Company to pay down accounts payable existing accounts payable balances in both
the U.S. and Russia.
The Company anticipates future operations and significant oil and gas property
expenditures will be able to be funded through a combination of note payable
advances from an affiliate, cash raised from raising debt and equity financing
and production of oil and gas reserves. There can be no assurance the Company
will be able to fund its share of cash calls for capital expenditures to further
develop the Goloil license area as well as potential development of other
license areas. Should the Company be unable to remain current on its share of
capital expenditure cash calls, Teton's portion of future revenues could be
reduced.
The Company anticipates obtaining 100% control over its subsidiary Goltech
Petroleum, with the other owner exchanging its interest for direct ownership in
Goloil. Contract renegotiations and restructuring are not complete. The Company
does not anticipate that this change in ownership structure will impact Goloil's
operations in the immediate future.
Item 3. CONTROLS AND PROCEDURES
Within 90 days of filing this report, Teton's principal executive officer and
principal financial officer reviewed the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act"). Based on their evaluation,
we have implemented a new disclosure procedure commencing with the preparation
of this report. Under this new procedure, Teton, in connection with the
preparation of reports under the Exchange Act, will make a written inquiry
directed to management of its operating subsidiary, Goloil, a Russian closed
joint stock company. Such inquiry will request that Goloil disclose in writing
any reportable events, which have occurred at the Goloil level during the period
covered by the report, which have not been previously reported to Teton's
management. In addition, in November 2002, Teton intends to meet with Goloil's
management. One of the topics for discussion is the timely disclosure by Goloil
of any events which might trigger Teton's reporting obligations under the
Exchange Act. This meeting may result in our adoption of additional disclosure
controls and procedures.
Except as set forth above, there have been no significant changes in our
internal controls and procedures or in other factors that could significantly
affect these controls subsequent to the date of the principal executive
officer's and principal financial officer's evaluation of our disclosure
controls and procedures.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
Teton raised $1,302,505 through the sale of its securities during the quarter
ended September 30, 2002. Of that amount, $610,000 was from the sale of our
subordinated convertible debentures and $692,505 was from the sale of 3,050,685
shares of our common stock. Such sales were not registered under the Securities
Act of 1933, as amended (the "Act"). These sales were part of our private
offering, which began during the quarter ended March 31, 2002.
Additionally, purchasers in the offering received a stock purchase warrant to
purchase four additional shares of common stock of Teton for each dollar of
principal amount of debentures purchased or each dollar of common stock
purchased. The exercise price of the warrants is $.50 per share. The warrants
expire two years from the date of issuance. The debentures, common stock, and
warrants sold in the offering are referred to in this report as the
"securities."
During the quarter ended September 30, 2002, all outstanding debentures issued
in the offering were redeemed. As provided in the debentures, the redemption
price for the debentures was equal to 110% of the principal amount of the
debentures, plus accrued interest. The redemption price was paid in shares of
common stock of Teton, valued at $.25 per share. A total of 21,101,929 shares of
our common stock were issued in connection with the redemption of debentures
issued in the offering and to consultants for services rendered to Teton.
In September 2002, the offering was restructured to sell shares of common stock
in lieu of debentures. The purchase price per share was $.227 per share.
The total amount of securities sold in the offering since the offering began
through September 30, 2002, was $5,086,148. Of that amount, $2,428,331 was sold
to US persons, as such term is defined in Rule 902 of the Act ("US Investors")
and $2,657,817 was sold to non-US Investors. Such amounts include the issuance
of a $250,000 debenture in consideration of the purchaser's cancellation of
Teton's $250,000 promissory note.
The securities were sold to current shareholders of Teton, officers of Teton,
other persons known to our management through prior business transactions or
personal relationships, and to certain institutional purchasers. We did not use
any public solicitation or advertisements in connection with the sale of the
securities. Furthermore, we did not use the services of an underwriter in
connection with the sale of the securities.
In connection with sales of securities made to US Investors, Teton relied on
exemptions from registration set forth in Section 4(2) of the Act and Regulation
D, Rule 505 of the Act. Teton and each US Investor entered into a purchase
agreement with respect to the acquisition of the securities. The agreement
included representations concerning the investor's intent to acquire the
securities for investment only and not with a view towards distribution. The
agreement also disclosed that the securities being acquired have not been
registered under the Act. The purchase agreement, debenture, stock certificate,
and warrant provide that future disposition of the securities is restricted
except in compliance with the Act and state securities laws.
In connection with sales made to non-US Investors, Teton relied on an exemption
from registration provided under Regulation S promulgated under the Act. Teton
and each non-US Investor entered into a purchase agreement with respect to the
purchase of the securities. The agreement included representations concerning
the investor's intent to acquire the securities for investment only and not with
a view towards distribution. Transfers of the securities held by non-US
Investors are also restricted in accordance with Regulation S.
During the quarter ended September 30, 2002, we also issued 20,000 shares of our
common stock to a former consultant. The shares were issued in connection with
the consultant's release of any claims against Teton, its president, and Teton
Oil (USA) Limited. Teton issued such shares in reliance on the exemption from
registration set forth in Section 4(2) of the Act. Teton also issued stop
transfer instructions to its transfer agent with respect to such shares to
ensure that any transfer of the shares complies with federal and state
securities laws.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350.
(b) Reports on Form 8-K: NONE
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 19, 2002 TETON PETROLEUM COMPANY
By: /s/ H. Howard Cooper
H. Howard Cooper,
Chief Executive Officer
Date: November 19, 2002 By: /s/ Thomas F. Conroy
Thomas F. Conroy,
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS
I, H. Howard Cooper, certify that:
1.I have reviewed this quarterly report on Form 10-QSB of Teton Petroleum
Company;
2.Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3.Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4.The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 19, 2002 /s/ H. Howard Cooper
H. Howard Cooper,
Chief Executive Officer
I, Thomas F. Conroy, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Teton Petroleum
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 19, 2002 /s/ Thomas F. Conroy
Thomas F. Conroy,
Chief (Principal) Financial Officer