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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, 1999
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Commission File No. 0-20975
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Tengasco, Inc.
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(Exact name of small business issuer as specified in its charter)
Tennessee 87-0267438
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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 |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,452,127 common shares at September
30, 1999.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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TENGASCO, INC.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
* Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998............................................ 3
* Consolidated Statements of Loss for the three and nine
months ended September 30, 1999 and 1998..................... 5
* Consolidated Statements of Stockholders Equity for the
nine months ended September 30, 1999......................... 6
* Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998............................ 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
* Submission of Matters to a Vote of Security Holders.......... 13
* Signature.................................................... 14
2
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
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Current Assets:
Cash and cash equivalents $ 601,959 $ 913,194
Accounts Receivable 124,227 147,050
Other current assets 100,298 100,298
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Total current assets 826,484 1,160,542
Oil and gas properties, net ( on the basis
of full cost accounting) 8,549,253 7,747,655
Pipeline facilities, at cost 4,077,433 4,019,209
Property and equipment, net 602,325 461,009
Other 122,942 137,362
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$14,178,437 $13,525,777
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See accompanying notes to consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
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<S> <C> <C>
Current liabilities
Notes payable $ 750,000 $ 1,000,000
Loans payable to affiliates 163,800 413,800
Due to AFG Energy, Inc. (Note 3) 859,833 953,895
Current maturities of long-term debt 78,350 89,135
Accounts payable-trade 287,986 351,567
Accrued liabilities 138,750 281,360
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Total current liabilities 2,278,719 3,089,757
Due to AFG Energy, Inc. (Note 3) 1,005,245 976,207
Long term debt, less current maturities 2,324,895 2,214,723
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Total liabilities 5,608,859 6,280,687
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Stockholders' equity
Convertible redeemable preferred; redemption
value $1,988,900; 19,889 shares outstanding 1,988,900 800,000
Common stock, $.001 per value, 50,000,000
shares authorized 8,358 7,644
Common stock to be issued 0 700,000
Additional paid-in capital 19,835,756 16,796,038
Unamortized stock award (162,500) (162,500)
Accumulated Deficit (13,100,936) (10,496,092)
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8,569,578 7,645,090
Due from stockholder 0 (400,000)
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Total stockholders' equity 8,569,578 7,245,090
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$ 14,178,437 $ 13,525,777
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</TABLE>
See accompanying notes to consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
September 30 September 30
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Oil and gas revenues $ 695,211 $ 472,389 $ 1,715,747 $ 1,563,449
Costs and other deductions
Productions Costs and Taxes 516,306 323,267 1,396,295 1,119,114
Depletion, depreciation and amortization 97,340 120,736 251,540 361,779
Interest expense 69,231 73,331 370,685 242,783
General and administrative costs 704,072 280,803 1,918,363 1,384,703
Legal and Accounting 6,064 0 383,708 207,431
Realized loss on sale of investments 0 (13,956) 0 (32,136)
----------- --------- ----------- -----------
Total costs and other deductions 1,393,013 784,181 4,320,591 3,283,674
----------- --------- ----------- -----------
Net loss $ (697,802) $(311,792) $(2,604,844) $(1,720,225)
----------- --------- ----------- -----------
Basic and diluted loss per common share $ (0.08) $ (0.05) $ (0.31) $ (0.23)
=========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Convertible Unamortized
Redeemable Common Stock Common Additional Stock
Preferred ----------------------- Stock Paid In Option Accumulated
Stock Shares Amount Issuable Capital Awards Deficit
----------- --------- -------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 800,000 7,644,212 $ 7,644 $ 700,000 $16,796,038 $ (162,500) $(10,496,092)
Common stock issued in
private placements 807,915 714 (700,000) 3,039,718 0 0
Convertible preferred stock
issued in private placements 1,188,900 0 0 0 0 0 0
Amortization of stock
option awards 0 0 0 0 0
Common stock options granted to
non employees 0
Placement fees paid in well
working interests 0
Net loss for the nine months
ended September 30, 1999 0 0 0 0 0 0 (2,604,844)
---------- --------- --------- ---------- ----------- ---------- ------------
Balance, September 30, 1999 $1,988,900 8,452,127 $ 8,358 $ 0 $19,835,756 $ (162,500) $(13,100,936)
========== ========= ========= ========== =========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1999 1998
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<S> <C> <C>
Operating activities
Net loss $(2,604,844) $(1,720,225)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 251,540 361,779
Compensation paid in stock options 0 91,742
Issuance of common stock for services 0 19,141
Changes in assets and liabilities
Accounts receivable 22,823 (265,981)
Other assets 14,420 109,960
Accounts payable (63,581) 251,631
Accrued liabilities (142,610) (136,752)
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Net cash used in operating activities (2,522,252) (1,288,705)
Investing activities
Changes to property and equipment (141,316) (113,935)
Changes to oil and gas properties (801,598) (939,851)
Changes to pipeline facilities ( 58,224) (1,600,652)
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Net cash used in investing activities (1,001,138) (2,654,438)
Financing activities
Proceeds from borrowings 243,551 1,050,000
Repayments of borrowings (560,728) (4,269,520)
Proceeds from issuance of stock 0 2,712,105
Proceeds from sale of oil and gas properties 0 0
Proceeds from private placements of common stock 2,340,432 0
Proceeds from Private Placement of Preferred stock 1,188,900 0
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Net cash provided by financing activities 3,212,155 (507,415)
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Net decrease in cash and cash
equivalents (311,235) (4,450,558)
Cash and cash equivalents, beginning of period 913,194 4,451,274
Cash and cash equivalents, end of period $ 601,959 $ 716
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</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, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999. For further information, refer to the company's consolidated
financial statements and footnotes thereto for the year ended December 31,
1998, included in Form 10-KSB.
2. The Company has issued fully paid 25% working interests in six wells in
the Swan Creek Field to Shigemi Morita, one of the Directors of the
Company, which were paid for in part by crediting Mr. Morita $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. Mr. Morita was given an option that if it was
determined that a well (s) at the time of completion of the drilling was
not economically feasible and as such was subsequently plugged and
abandoned, he had 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. However,
all six of the wells in which Mr. Morita has a participation interest are
producing, therefore his options for these wells are not exercisable.
3. On December 18, 1997, the Company entered into an asset purchase agreement
in which certain producing oil and gas properties and inventory located in
the state of Kansas ("the Kansas Properties") were acquired from AFG
Energy, Inc. ("AFG"). The agreement, which was effective as of December
31, 1997, closed on March 5, 1998, whereby 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 accrued interest at the rate of 9.5% per annum for
the period December 1998 to May 1999. After May 1999, the interest rate
became 9.0% per annum. At the present time the Company is attempting to
refinance this note, and monthly interest only payments are being made.
There is a balloon payment of $1,865,078 due in January 2000. The
acquisition has been accounted for as a purchase and, accordingly, the
purchase price of $5,490,253 has been allocated to the assets acquired
based on the estimated fair values at the date of acquisition.
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4. In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted
loss per share are based on 7,873,735 weighted average shares outstanding
for the quarter ended September 30, 1999 and 7,532,312 weighted average
shares outstanding for the quarter ended September 30, 1998. There were
475,827 and 497,969 potential weighted common shares outstanding at
September 30, 1999 and September 30, 1998 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. SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" is effective for all fiscal years beginning after June 15,
2000. This statement requires recognition of all derivative contracts as
either assets or liabilities in the balance sheet and the measurement of
them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of any gains or losses on the hedge 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, the gain or loss is recognized in income in the period of
change. It is not anticipated that this pronouncement will have any impact
on the Company since the Company does not have any open derivative
contracts and it does not enter into any hedging transactions.
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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 transporting oil
and natural gas in Tennessee and Kansas and marketing gas for others in
Tennessee. The Company has 208 producing oil and gas wells in Kansas and has
fourteen producing natural gas and four oil wells in Tennessee.
Liquidity and Capital Resources
The Company's primary cash requirements are for capital expenditures and
operating expenses. The primary source of cash thru the third quarter of 1999
has been from loan transactions, private placements of the Company's common
stock and revenues from its Kansas Properties.
Investing activities for the first nine months of 1999 include additions of
$801,598 to oil and gas properties, $206,897 additions to property and
equipment, and $41,695 for TVA right of ways and reclamation of the Company's
pipeline in Tennessee. 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, 1999 decreased $311,235 from the
December 31, 1998 balance of $913,194 due primarily to the following:
o Costs noted above for oil and gas properties totaled $801,598.
o Net cash used in Operating Activities was $2,270,712 which is shown in
detail on the Statement of Cash Flows.
Proceeds from private placement of 807,915 shares of the Company's common stock
totaled $2,340,432 and $1,188,900 from 11,889 shares of the Company's Series A
8% cumulative convertible preferred stock during the first nine months of 1999.
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The Company's plan of operations for the next two years calls for the drilling
of 50 additional wells on the Swan Creek Field at a cost of approximately
$250,000 per well. The Company is currently engineering and designing Phase II
of its pipeline, an additional 28 miles of 12 inch pipeline, at a cost of
approximately $6,000,000 which will extend from the terminus of the Company's
existing pipeline into Kingsport, Tennessee and serve large industrial
customers. The Tennessee Department of Transportation has verbally granted the
Company the right to lay Phase II of its pipeline along state highway 11 to
Kingsport, Tennessee. At the present time, the Company is capable of producing
substantially more gas than it is able to sell. Completion of Phase II of the
pipeline will allow the Company to sell substantially more of its natural gas
production from the Swan Creek Field. The Company estimates that its ultimate
deliverability will reach 80 to 100 Mmcf per day or 2.5 to 3.1 Bcf per month
once Phase II of its pipeline is completed. The Company expects to reach this
capacity on or about December 31, 2002. The estimated time from start to finish
of construction of Phase II of the Pipeline is six to eight months. The Company
anticipates receiving a contract from a major user, in the near future, for the
purchase of 10 MCF of gas per day, to take effect upon completion of Phase II of
its pipeline.
The Company does not presently have the funds needed to enable it to complete
its drilling program and the extension of the pipeline. The Company intends to
use the proceeds from a private placement to finance construction of Phase II of
the Pipeline. If these funds are not sufficient, the Company will seek
additional financing by other means. Although there can be no assurances that
such financing will be available, the Company believes that it will be able to
procure such financing by means of a bank loan, equity investment or a joint
venture with another company.
Results of Operations
The company recognized $695,211 in revenues from the Kansas oil and gas field
and Swan Creek during the third quarter 1999 compared to $472,389 in the third
quarter 1998. This increased revenue resulted from the significant increase in
oil and gas prices during the third quarter of 1999. Production Costs and Taxes
for the first nine months of 1999 of $1,396,295, was higher compared to
$1,119,114 in the third quarter of 1998 and increased $193,039 during the third
quarter. This was due to some well work overs in Kansas in order to increase
production. Depreciation, Depletion and Amortization expense for the first nine
months of 1999 was $251,540, compared to $361,779 for the first nine months of
1998 and decreased $23,396 during the third quarter. This difference was due to
the 1998 depletion estimate being overstated.
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Interest Expense for the first nine months of 1999 was $370,685, as compared to
$242,783 in 1998, this difference is due to interest on new loans and an 8%
dividend paid on the Company's Series A cumulative convertible preferred stock.
General and Administrative Expenses for the first nine months of 1999 increased,
$533,660 from the first nine months of 1998 amount of $1,384,703 and increased
$423,269 for the third quarter. This increase was due to the fact that a large
portion of expenses which have been treated as general and administrative
expense in 1999, were capitalized in 1998 because they related to capital
improvements.
Legal and accounting fees increased $176,277 for the first nine months of 1999.
The majority of this increase was for services provided in connection with
obtaining distribution rights, to transport gas, for the Company's wholly owned
subsidiary Tengasco Pipeline Corporation.
In the first nine months of 1999 notes payable was reduced $250,000 due to the
pay off of a note in that amount which was part of the settlement reached in an
action pending against the Company in New York State Supreme Court entitled
Hocker v. Tengasco, Inc., Index No. 601385/97.
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
year. The Year 2000 issue arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. The Company believes it has fully achieved Year 2000 compliance for
all internal information systems. As such, management believes that Year 2000
transition of the Company's internal information systems will not have a
material adverse effect on future results. Costs associated with compliance were
immaterial and have been fully incurred.
The Company is in the process of examining key third party relationships to
determine, to the extent practical, the degree of such parties' Year 2000
compliance. The Company faces risks if key business suppliers, banks, utilities,
transportation providers, communications providers or government services are
not compliant for the Year 2000. In order to mitigate this risk, the Company is
reviewing its options to continue operations using alternative suppliers, banks,
utilities and providers of transportation and communication services. There can
be no guarantee that the measures taken by the Company will solve the Year 2000
issue of such third parties. If such problems are not solved by such third
parties and the Company cannot locate alternative sources as outlined, this may
have a significant adverse impact on the Company.
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PART II OTHER INFORMATION
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held on
August 31, 1999.
(b) The first item voted on was a proposal to authorize an amendment
to the Company's By-Laws to increase the maximum number of Directors of the
Company from seven (7) to ten (10). The results of the voting were as follows:
5,472,595 votes for the resolution
676,093 votes against and
41,992 votes abstained.
A majority of the votes cast at the meeting having voted for the
resolution, the resolution was duly passed.
(c) The next item of business was the election of Directors. Joseph
E. Armstrong, Benton L. Becker, John A. Clendening, Neal F. Harding, John L.
Kidde, Shigemi Morita, Malcolm E. Ratliff and Allen H. Sweeney were elected as
Directors of the Company for a term of one year or until their successors were
elected and qualified. The results of voting were as follows: 6,204,285 votes
for Joseph E. Armstrong and 58,565 withheld; 5,635,466 votes for Benton L.
Becker and 627,384 withheld; 6,199,434 votes for John A. Clendening and 63,416
withheld;6,202,535 votes for Neal F. Harding and 60,315 withheld; 6,204,125
votes for John L. Kidde and 58,725 withheld; 6,206,975 votes for Shigemi Morita
and 55,875 withheld; 6,206,335 votes for Malcolm E. Ratliff and 56,515 withheld;
and 6,208,435 votes of Allen H. Sweeney and 54,415 withheld.
(d) The next item of business was the proposal to ratify the
appointment of BDO Seidman, LLP, the independent certified public accountants of
the Company, for fiscal 1999. The results of the voting were as follows:
6,216,522 votes for the resolution,
4,050 votes against and
42,278 votes abstained.
A majority of the votes cast at the meeting having voted for the
resolution was duly passed.
No other matters were voted on at the meeting.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Dated: November 10, 1999 TENGASCO, INC.
By: /s/ Terry W. Piesker
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Terry W. Piesker, President
By: /s/ Mark A. Ruth
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Mark A. Ruth, Chief Financial Officer
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