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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1998
Commission File No. 0-20975
Tengasco, Inc.
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(Exact name of small business issuer as specified in its charter)
Tennessee 87-0267438
- ------------------------------ ---------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
603 Main Avenue, Suite 500, Knoxville, TN 37902
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(Address of principal executive offices)
(423) 523-1124
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(Issuer's telephone number, including area code)
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 reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,728,757 common shares at October
31, 1998.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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TENGASCO, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
* Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997.......................................... 3
* Consolidated Statements of Loss for the three and
nine months ended September 30, 1998 and 1997.............. 5
* Consolidated Statements of Stockholders Equity for the
nine months ended September 30, 1998....................... 6
* Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997.......................... 7
* Notes to Consolidated Financial Statements................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................. 10
PART II. OTHER INFORMATION
* Signatures................................................ 13
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited) (Audited)
------------------ -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 3) $ 716 $ 4,451,274
Accounts Receivable 265,981 0
Other current assets 301,232 411,192
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Total current assets 567,929 4,862,466
Oil and gas properties, net (on the basis of full
cost accounting) 7,524,624 6,872,571
Pipeline facilities, at cost 4,197,619 2,596,967
Property and equipment, net 342,929 302,146
Other 9,832 10,661
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$12,642,933 $14,644,811
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,1998 December 31, 1997
(Unaudited) (Audited)
----------------- -----------------
<S> <C> <C>
Current liabilities
Notes payable $ 2,550,000 $ 2,007,486
Loans payable to affiliates 252,398 252,398
Due to AFG Energy, Inc. (Note 3) 799,170 3,552,005
Current maturities of long-term debt 54,645 41,161
Accounts payable-trade 779,029 527,398
Accrued liabilities 69,624 256,589
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Total current liabilities 4,504,866 6,637,037
Due to AFG Energy, Inc. (Note 3) 1,259,041 1,865,078
Long term debt, less current maturities 134,782 141,215
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Total liabilities 5,898,689 8,643,330
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Stockholders' equity
Common stock, $.001 per value, 50,000,000 shares
authorized 7,578 7,029
Additional paid-in capital 15,897,899 13,470,446
Unamortized stock award (28,554) (63,540)
Accumulated Deficit (9,132,679) (7,412,454)
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Total stockholders' equity 6,744,244 6,001,481
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$ 12,642,933 $ 14,644,811
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended For The Nine Months Ended
September 30 September 30
---------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Oil and gas revenues $ 472,389 $ 0 $ 1,563,449 $ 0
Costs and other deductions
Production Costs and Taxes 323,267 25,557 1,119,114 67,276
Depletion, depreciation and amortization 120,736 24,457 361,779 57,753
Interest expense 73,331 463,602 242,783 1,207,207
General and administrative costs 280,803 365,312 1,592,134 1,347,751
Realized Gain on sale of investments (13,956) 0 (32,136) 0
----------- ----------- ----------- -----------
Total costs and other deductions 784,181 878,928 3,283,674 2,679,987
----------- ----------- ----------- -----------
Net loss $ (311,792) (878,928) (1,720,225) (2,679,987)
----------- ----------- ----------- -----------
Basic and diluted loss per common share $ (0.05) $ (0.13) $ (0.23) $ (0.39)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Unamortized
Additional Stock
Common Stock Paid In Option Accumulated
Shares Amount Capital Awards Deficit
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 7,029,835 $ 7,029 $13,470,446 $ (63,540) $(7,412,454)
Common stock issued in private placements 545,917 546 2,711,559 0 0
Common stock issued for services 2,805 3 19,138 0 0
Amortization of stock option awards 0 0 0 34,986 0
Common stock options granted to
non employees 56,756
Placement fees paid in well working interests (360,000)
Net loss for the nine months
ended September 30, 1998 0 0 0 0 (1,720,225)
--------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 7,578,557 $ 7,578 $15,897,899 $ (28,554) $(9,132,679)
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net loss $(1,720,225) $(2,679,987)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 361,779 57,753
Amortization of deferred loan costs 0 845,623
Amortization of imputed value of stock warrants issued 0 220,000
Compensation paid in stock options 91,742 241,041
Issuance of common stock for services 19,141
Changes in assets and liabilities
Accounts receivable (265,981) 2,653
Other current assets 109,960 (2,070)
Accounts payable 251,631 42,375
Accrued liabilities (136,752) 75,846
Stockholder advances payable 0 7,939
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Net cash used in operating activities (1,288,705) (1,188,827)
Investing activities
Additions to property and equipment (113,935) (176,869)
Additions to oil and gas properties (939,851) (273,965)
Additions to pipeline facilities (1,600,652) (756,669)
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Net cash used in investing activities (2,654,438) (1,207,503)
Financing activities
Proceeds from borrowings 1,050,000 1,144,061
Repayments of borrowings (4,269,520) (6,571)
Proceeds from issuance of common stock 2,712,105 1,370,504
Proceeds from sale of oil and gas properties 0 250,000
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Net cash (used in) provided by financing activities (507,415) 2,757,994
----------- -----------
Net increase (decrease) in cash and cash
equivalents (4,450,558) 361,664
Cash and cash equivalents, beginning of period 4,451,274 146,554
Cash and cash equivalents, end of period $ 716 $ 508,218
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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Tengasco, Inc.
Notes to Consolidated Financial Statements
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 (b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31,1998. For further information, refer to the company's
consolidated financial statements and footnotes thereto for the year ended
December 31, 1997, included in Form 10-KSB.
2. The Company has issued fully paid 25% working interests in five wells in the
Swan Creek Field to a Director which were paid for in part by crediting the
Director $360,000 for placement fees in connection with private placements of
the Company's common stock which occurred during the fourth quarter of 1997 and
the first quarter of 1998. If, however, it is determined that a well(s) at the
time of completion of the drilling is not economically feasible and as such is
subsequently plugged and abandoned, the Director has 30 days, after written
notice from the Company, to convert amounts paid for that well(s) to restricted
shares of the Company's common stock at 70% of its then current market value. To
date, four of the five wells in which the Director has a participation interest
are producing, therefore his options for these wells are not exercisable. If the
option to convert the fifth well interest to the Company's common stock should
become exercisable, the Company will recognize a charge to compensation expense
for the difference between the market value of the stock on the date the option
is exercisable and the amount paid by the Director for the working interest in
that well.
3. On December 18, 1997, the Company entered into an asset purchase agreement in
which certain producing oil and gas properties located in the state of Kansas
were acquired from A.F.G. Energy, Inc. ("AFG"). The agreement, which was
effective as of December 31, 1997, closed on March 5, 1998. The Company paid
$2,990,253 in cash and entered into a note payable agreement with AFG in the
amount of $2,500,000. The note will accrue interest at 9% per annum and is due
in 23 monthly installments of principal and interest of $79,500 with balloon
payment of $983,773 due in February, 2000. The total note balance due at
September 30, 1998 is $2,058,211 with a current portion payable of $799,170 and
a long term amount of $1,259,041.
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4. In accordance with ("SFAS") No. 128, "Earnings Per Share", basic and diluted
loss per share are based on 7,532,312 weighted average shares outstanding for
the quarter ended September 30, 1998 and 6,944,392 weighted average shares
outstanding for the quarter ended September 30, 1997. There were 497,969 and
880,056 potential weighted common shares outstanding at September 30, 1998 and
September 30, 1997 respectively related to common stock options and warrants.
These shares were not included in the computation of the diluted loss per share
amount because the Company was in a net loss position and, thus, any potential
common shares were anti-dilutive.
5. In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge of the: (i) exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment ("fair value hedges"), (ii)
exposure to variable cash flows of a forecasted transaction ("cash flow
hedges"), or (iii) foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign- currency-denominated forecasted transaction ("foreign currency
hedges"). The objective of hedge accounting is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument (e.g.,
derivative contracts entered into for speculative purposes), the gain or loss is
recognized in the period of change.
SFAS 133 is effective for all fiscal quarters or fiscal years beginning after
June 15, 1999. The Company currently plans to adopt SFAS 133 on January 1, 2000.
On that date, any hedging relationships will be designated anew and documented.
The Company periodically enters into derivative contracts for speculative
purposes. The Company expects to continue entering into derivative contracts in
the future: however, it has not yet evaluated the financial impact of adopting
SFAS 133.
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Tengasco, Inc.
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The Company is in the business of exploring for, producing and marketing oil and
gas in the states of Tennessee and Kansas. The Company has 208 producing oil and
gas wells in Kansas and 12 natural gas wells, one oil well and one oil and gas
well in Tennessee.
Liquidity and Capital Resources
The Company's primary cash requirements are for capital expenditures and
operating expenses. The primary source of cash prior to the first quarter of
1998 has been from loan transactions and private placements of the Company's
common stock.
Investing activities for the first nine months of 1998 include additions of
$939,851 to oil and gas properties and $1,600,652 for completion of the
Company's pipeline in Tennessee which has been under construction since 1996.
The costs for oil and gas properties were primarily for drilling and completion
of natural gas and oil wells in the Swan Creek Field in northeastern Tennessee.
Cash and cash equivalents at September 30, 1998 decreased $4,450,558 from the
December 31, 1997 balance of $4,451.274 due primarily to the following:
During the first quarter of 1998 the company consummated the purchase
of 208 producing oil and gas wells in Kansas from AFG Energy, Inc.
(AFG) effective as of December 31, 1997. The Company paid $2,990,253 in
cash and issued a note payable to AFG for $2,500,000 for the balance of
the purchase price.
As noted above, the Company expended $2,540,503 for oil and gas
properties and completion of the pipeline.
The Company paid $507,486 in partial satisfaction of a note payable to
an individual.
$1,307,846 was expended for Operating Activities. (See, Statement of
Cash Flows.)
Proceeds from private placements of 545,917 shares of the Company's common stock
totaled $2,712,105 during the first nine months of 1998. Placement fees for
private placements occurring during the fourth quarter of 1997 and first quarter
of 1998 totaling $360,000 were paid to a director in the form of 25% working
interests in five wells.
10
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On July 16, 1998, the Company entered into a loan agreement with five individual
investors totaling $800,000. The loans were secured by a pledge of 118,200
shares of the Company's Common Stock owned by Malcolm E. Ratliff, the Company's
Chief Executive Officer and a Director. The loans bore interest at the rate of
8% per annum and matured on October 14, 1998. Loan origination fees consisted of
$64,000 in cash to the broker who arranged the loan and 16,800 shares of the
Company's common stock given to the lenders. One half of this loan has been
repaid by the Company out of proceeds from a Convertible Note in the amount of
$1,500,000 received during October, 1998. The Convertible Note matures in five
years and is convertible into shares of the Company's common stock at a price of
$6.25 per share. The balance of the loans have been satisfied by the issuance to
the lenders of Convertible Preferred Stock convertible at a price of $5.75 per
share.
The Company's plan of operation for the next twelve months calls for drilling
two oil wells per month in the Swan Creek Field at a cost of approximately
$250,000 per well. In addition, the Company plans to extend its recently
completed pipeline in Tennessee a distance of 14 miles at a cost of appoximately
$4,000,000 to connect with the main gas transmission line of East Tennessee
Natural Gas. This will allow the Company to sell all of the natural gas it can
produce throughout the southeastern and northeastern United States. At the
present time, the Company is cabable of producing substantially more gas than it
is able to sell. The Company does not presently have the funds needed to enable
it to complete its drilling program and extension of the pipeline.
Results of Operations
The Company recognized $472,389 in revenues during the third quarter of 1998
compared to $480,551 in the second quarter 1998. Although the Company commenced
to receive revenues from the Tennessee wells in August, 1998, a reduction
revenue resulted from a decrease in oil and gas prices.
Production Costs and Taxes for the third quarter of 1998 decreased $207,093 from
the second quarter of 1998 due to significant decreases in well repairs, utility
costs and ad valorem taxes for the Kansas operation. Increases in production
costs for the three months ended September 30, 1998 over production costs for
the same quarter of 1997 were due to the addition of the Kansas Oil and Gas
Properties and the new wells in Tennessee.
Depreciation, Depletion and Amortization expense for the nine months of 1998
shows an increase of $361,780 over the same period in 1997 since it includes
expenses related to the the Kansas Oil & Gas Properties which were not owned by
the Company in 1997.
Interest Expense for the third quarter of 1998 decreased $390,271 from the same
period of 1997 because the 1997 expense included a $220,000 charge for the
imputed value of common stock warrants issued and a $193,694 cost for imputed
interest in connection with the conversion of debt to equity for the Company's
majority stockholder and its affiliates. The 1998 expense does not include a
charge for either of these items as they were fully amortized
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during 1997.
General and Administrative Expenses for the third quarter of 1998 decreased
$546,425 from second quarter of 1998 amount of $827,228. A majority of these
decreases were attributable to three areas:
Legal and Accounting expenses decreased from $205,600 to $100,590.
Public Relations costs decreased from $125,300 to $1,541.00
Travel & Entertainment expenses decreased from $74,200 to $6,946.
Similar factors accounted for the decrease in interest expense from the same
quarter last year.
The Company anticipates a profit in the fourth quarter 1998 as a result of the
income from the Kansas properties and increased sales of natural gas and oil
from the Swan Creek Field in Northeastern Tennessee. Sales from the Swan Creek
wells did not commence until August, 1998. The Company's pipeline was recently
completed and connected to a natural gas utility with gas sales commencing in
August, 1998. However, this is a forward looking statement and there is no
assurance the Company will earn a profit in the last quarter of 1998 due to many
variables over which the Company has no control, such as the price of oil and
gas, competition, natural disasters, etc.
Year 2000 Risks
As in the case with other companies using computers in their
operations, the Company is faced with the task of addressing the year 2000 issue
during the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit codes to perform computations or
decision-making functions. The Company has not yet performed a comprehensive
review of its computer programs to identify any systems that might be affected
by the Year 2000 issue nor has it yet reviewed the Company's Year 2000 exposure
to customers, distributors, suppliers and banking institutions. Management is
presently unable to estimate the costs associated with modification or
replacement of systems affected by the Year 2000 issue, however, these costs
should not be significant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1943, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereto duly authorized.
Dated: November 18, 1998
TENGASCO, INC.
By: /s/Robert M. Carter
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Robert M. Carter,
President
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