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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 March 31, 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
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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: 7,797,328 common shares at March 31,
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1999.
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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 March 31, 1999 and
December 31, 1998.......................................... 3
* Consolidated Statements of Loss for the three months
ended March 31, 1999 and 1998.............................. 5
* Consolidated Statements of Stockholders Equity for the
three months ended March 31, 1999.......................... 6
* Consolidated Statements of Cash Flows for the three months
ended March 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
* Signature.................................................. 13
2
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
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<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 152,047 $ 913,194
Accounts Receivable 105,738 147,050
Other current assets 100,298 100,298
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Total Current Assets 358,083 1,160,542
Oil and gas properties, net (on the basis of full cost
accounting) 8,108,676 7,747,655
Pipeline facilities, at cost 4,052,752 4,019,209
Property and equipment, net 414,050 461,009
Other 138,362 137,362
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$ 13,071,923 $ 13,525,777
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</TABLE>
See accompanying notes to consolidated financial statements
3
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 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 413,800 413,800
Due to AFG Energy, Inc. (Note 3) 859,833 953,895
Current maturities of long-term debt 54,138 89,135
Accounts payable-trade 403,081 351,567
Accrued liabilities 207,966 281,360
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Total current liabilities 2,688,818 3,089,757
Due to AFG Energy, Inc. (Note 3) 976,207 976,207
Long term debt, less current maturities 2,214,723 2,214,723
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Total liabilities 5,879,748 6,280,687
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Stockholders' equity
Convertible redeemable preferred; redemption value
$800,000; 8,000 shares outstanding 800,000 800,000
Common stock, $.001 per value, 50,000,000 shares
authorized 7,788 7,644
Common stock to be issued 700,000 700,000
Additional paid-in capital 17,286,242 16,796,038
Unamortized stock award (162,500) (162,500)
Accumulated Deficit (11,439,355) (10,496,092)
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7,192,175 7,645,090
Due from stockholder 0 (400,000)
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Total stockholders' equity 7,192,175 7,245,090
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$ 13,071,923 $ 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 For the Three
Months Ended Months Ended
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
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<S> <C> <C>
Oil and gas revenues $ 295,648 $ 610,509
Costs and other deductions
Production Costs and Taxes 237,101 265,487
Depletion, depreciation and amortization 27,100 122,714
Interest expense 44,209 72,716
General and administrative costs 747,050 225,574
Legal and Accounting 183,451 0
Realized loss on sale of investments 0 14,828
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Total costs and other deductions 1,238,911 701,319
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Net loss $ (943,263) $ (90,810)
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BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.12) $ (0.01)
- -------------------------------------------------- ====================== ====================
</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 153,116 144 490,204 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 three months
ended March 31, 1999 0 0 0 0 0 0 (943,263)
----------- ---------- ---------- --------- ------------ ------------- -------------
Balance, March 31, 1999 $ 800,000 7,797,328 $ 7,788 $ 700,000 $ 17,286,242 $ (162,500) $ (11,439,355)
=========== ========== ========== ========= ============ ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31 1999 1998
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<S> <C> <C>
Operating activities
Net loss $ (943,263) $ ( 90,810)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 27,100 122,714
Compensation paid in stock options 0 45,921
Changes in assets and liabilities
Accounts receivable 41,312 (226,870)
Other current assets (1,000) 60,410
Accounts payable 51,514 ( 1,888)
Accrued liabilities (73,394) 39,560
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Net cash used in operating activities (897,731) (50,963)
Investing activities
Changes to property and equipment 19,859 (40,819)
Changes to oil and gas properties (361,021) (397,795)
Changes to pipeline facilities ( 33,543) (1,081,946)
Net cash used in investing activities (374,705) (1,520,560)
Financing activities
Proceeds from borrowings 400,000 35,485
Repayments of borrowings (379,059) (3,506,357)
Proceeds from issuance of common stock 490,348 973,562
Proceeds from sale of oil and gas properties 0 80,000
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Net cash provided by financing activities 511,289 (2,417,310)
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Net decrease in cash and cash
equivalents (761,147) (3,988,833)
Cash and cash equivalents, beginning of period 913,194 4,451,274
Cash and cash equivalents, end of period $ 152,047 $ 462,441
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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 three months ended March 31, 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 will accrue interest at 9.5% per annum for the period
December 1998 to May 1999. After May 1999, the interest rate becomes 9.0%
per annum. Monthly interest-only payments are due from December 1998 to May
1999. Monthly installments of principal and interest of $138,349 are due
from June 1999 to December 1999. There is a balloon payment of $983,773 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 7,684,512 weighted average shares
outstanding for the quarter ended March 31, 1999 and 7,181,062 weighted
average shares outstanding for the quarter ended March 31, 1998. There were
475,827 and 497,969 potential weighted common shares outstanding at March
31, 1999 and March 31,1998 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, 1999. 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
thirteen producing natural gas and three 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 prior to the first 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 three months of 1999 include additions of
$361,021 to oil and gas properties and $33,543 for completion of the first phase
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 March 31, 1999 decreased $761,147 from the December
31, 1998 balance of $913,194 due primarily to the following:
o Costs noted above for oil and gas properties and the pipeline completion
totaled $394,564.
o Net cash used in Operating Activities was $897,731 which is shown in detail
on the Statement of Cash Flows.
Proceeds from private placements of 153,116 shares of the Company's common stock
totaled $490,348 during the first three months of 1999.
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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 loan bore interest at 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 advanced to the lenders and broker on behalf of the Company by
Malcolm E. Ratliff. Approximately $520,000 of this loan was repaid by the
Company out of proceeds received by the Company in October 1998 from a
Convertible Note it issued in the amount of $1,500,000. 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. In connection with the loan proceeds
received by the Company evidenced by the Convertible Note, the Company issued
25,000 shares of its common stock to the lender as a loan fee. The balance of
the $800,000 loans were satisfied by the issuance to the lenders of 2,800 shares
of Series A 8% Cumulative Convertible Preferred Stock convertible at a price of
$5.75 per share.
The Company's plan of operations for the next twelve months call for drilling
two wells per month in the Swan Creek Field in Tennessee at a cost of $250,000
per well. The Company also plans to complete phase two of its pipeline to extend
its recently completed pipeline in Tennessee 30 miles at a cost of $5,000,000 to
connect with the main gas transmission line of East Tennessee Natural Gas. This
will allow the Company to sell natural gas throughout the southeastern and
northeastern United States.
The Company does not presently have the funds needed to enable it to complete
its drilling program and the extension of the pipeline. There can be no
assurances when or if the funding necessary for the continuation of the drilling
program and the completion of the second phase of the pipeline will become
available. Moreover, no assurance can be given that the Company will be able to
obtain the required rights of way to construct the second phase of its pipeline,
and the completed first phase of the pipeline will only serve production from a
portion of the Swan Creek Field.
Results of Operations
The company recognized $295,648 in revenues from the Kansas oil and gas field
and Swan Creek during the first quarter 1999 compared to $610,509 in the first
quarter 1998. This reduced revenue results from the significant decrease in oil
and gas prices during the first three months of 1999. Production Costs and Taxes
for the first quarter of 1999 were $237,101. Depreciation, Depletion and
Amortization expense for the three months of 1999 show $27,100 due to depletion
of oil and gas properties associated with the Kansas production.
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Interest Expense for the first three months of 1999 was $44,209. General and
Administrative Expenses for the first quarter of 1999 increased $747,050 from
the first quarter of 1998 amount of $225,574. Part of this was due to expenses
related to the Kansas Properties that were not incurred until March 5, 1998.
Legal and accounting fees increased $183,451 from the first quarter of 1998.
This increase was due primarily to increase costs for litigation fees, the
preparation and filing of documents with the Securities and Exchange Commission
and Audit fees.
In the first quarter 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 can not locate alternative sources as outlined, this may
have a significant adverse impact on the Company.
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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: May 11, 1999 TENGASCO, INC.
By: /s/ Robert M. Carter
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Robert M. Carter, President
By: /s/ Mark A. Ruth
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Mark A. Ruth, Chief Financial Officer
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