10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 |
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM
TO |
Commission
File Number 0001-32145
CANARGO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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91-0881481 |
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(State or other jurisdiction of
Incorporation or organization)
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(I.R.S. Employer Identification No.) |
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CanArgo Energy Corporation
P.O. Box 291, St. Peter Port, Guernsey, British Isles
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GY1 3RR |
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(Address of principal executive offices)
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(Zip Code) |
(44) 1481 729 980
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange Act) during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No þ
The number of shares of registrants common stock, par value $0.10 per share, outstanding on November 1, 2005 was
222,573,283.
CANARGO ENERGY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Below is a list of terms that are common to our industry and used throughout this document:
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/d
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= per day |
Bbl
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= barrels |
BBtu
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= billion British thermal units |
Bcf
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= billion cubic feet |
Bcfe
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= billion cubic feet of natural gas equivalents |
MBbls
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= thousand barrels |
Mcf
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= thousand cubic feet |
Mcfe
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= thousand cubic feet of natural gas equivalents |
MMBtu
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|
= million British thermal units |
MMcf
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= million cubic feet |
MMcfe
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= million cubic feet of natural gas equivalents |
MW
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= megawatt |
N GL
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= natural gas liquids |
T Btu
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= trillion British thermal units |
When we refer to natural gas and oil in equivalents, we are doing so to compare quantities
of oil with quantities of natural gas or to express these different commodities in a common unit.
In calculating equivalents, we use a generally recognized standard in which one Bbl of oil is equal
to six Mcf of natural gas. Also, when we refer to cubic feet measurements, all measurements are at
a pressure of 14.73 pounds per square inch.
When we refer to us, we, our, ours, the Company, or CanArgo, we are describing CanArgo
Energy Corporation and/or our subsidiaries.
2
FORWARD-LOOKING STATEMENTS
The United States Private Securities Litigation Reform Act of 1995 provides a safe harbor for
certain forward-looking statements. Such forward-looking statements are based upon the current
expectations of CanArgo and speak only as of the date made. These forward-looking statements
involve risks, uncertainties and other factors. The factors discussed elsewhere in this Quarterly
Report on Form 10-Q are among those factors that in some cases have affected CanArgos historic
results and could cause actual results in the future to differ significantly from the results
anticipated in forward-looking statements made in this Quarterly Report on Form 10-Q, future
filings by CanArgo with the Securities and Exchange Commission, in CanArgos press releases and in
oral statements made by authorized officers of CanArgo. When used in this Quarterly Report on Form
10-Q, the words estimate, project, anticipate, expect, intend, believe, hope, may
and similar expressions, as well as will, shall and other indications of future tense, are
intended to identify forward-looking statements. Few of the forward-looking statements in this
Report deal with matters that are within our unilateral control. Acquisition, financing and other
agreements and arrangements must be negotiated with independent third parties and, in some cases,
must be approved by governmental agencies. These third parties generally have interests that do not
coincide with ours and may conflict with our interests. Unless the third parties and we are able to
compromise their various objectives in a mutually acceptable manner, agreements and arrangements
will not be consummated.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
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September 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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|
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|
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Cash and cash equivalents |
|
$ |
27,020,001 |
|
|
$ |
24,617,047 |
|
Restricted cash |
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|
3,155,269 |
|
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|
1,400,000 |
|
Accounts receivable |
|
|
2,162,635 |
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|
2,526,442 |
|
Crude oil inventory |
|
|
611,693 |
|
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|
253,858 |
|
Prepayments |
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|
3,856,708 |
|
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|
1,517,836 |
|
Assets held for sale |
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|
600,000 |
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|
600,000 |
|
Other current assets |
|
|
129,415 |
|
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|
121,610 |
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Total current assets |
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$ |
37,535,721 |
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$ |
31,036,793 |
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Capital assets, net (including unevaluated amounts of $42,383,952 and
$25,102,945 respectively) |
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109,118,307 |
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72,995,666 |
|
Prepaid financing fees |
|
|
300,082 |
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|
648,507 |
|
Investments in and advances to oil and gas and other
ventures net |
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|
478,632 |
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|
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|
|
|
|
|
|
|
|
|
|
|
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Total Assets |
|
$ |
146,954,110 |
|
|
$ |
105,159,598 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable trade |
|
$ |
1,931,035 |
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$ |
2,331,945 |
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Loans payable |
|
|
930,943 |
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|
1,500,000 |
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Other liabilities |
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|
37,043 |
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|
3,080,839 |
|
Accrued liabilities |
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|
6,015,933 |
|
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|
172,117 |
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|
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|
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|
Total current liabilities |
|
$ |
8,914,954 |
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|
$ |
7,084,901 |
|
|
|
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|
|
|
|
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Long term debt |
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|
25,000,000 |
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|
832,165 |
|
Other non current liabilities |
|
|
439,156 |
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|
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Provision for future site restoration |
|
|
699,650 |
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|
422,000 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Liabilities |
|
$ |
35,053,760 |
|
|
$ |
8,339,066 |
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|
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|
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Commitments and contingencies |
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Stockholders equity: |
|
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Common stock, par value $0.10; authorized - 300,000,000 shares;
shares issued, issuable and outstanding - 222,586,867 at September
30, 2005 and 195,212,089 at December 31, 2004 |
|
|
22,258,685 |
|
|
|
19,521,208 |
|
Capital in excess of par value |
|
|
204,595,666 |
|
|
|
184,141,618 |
|
Deferred compensation expense |
|
|
(2,415,920 |
) |
|
|
(1,976,102 |
) |
Accumulated deficit |
|
|
(112,538,081 |
) |
|
|
(104,866,192 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
111,900,350 |
|
|
$ |
96,820,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
146,954,110 |
|
|
$ |
105,159,598 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Condensed Financial Statements.
4
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
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Unaudited |
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Unaudited |
|
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|
Three Months Ended |
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Nine Months Ended |
|
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|
September 30, |
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September 30, |
|
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September 30, |
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September 30, |
|
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2005 |
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2004 |
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2005 |
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2004 |
|
Operating Revenues from Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales |
|
$ |
2,580,847 |
|
|
$ |
2,007,838 |
|
|
$ |
5,147,056 |
|
|
$ |
7,446,862 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
2,580,847 |
|
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|
2,007,838 |
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|
5,147,056 |
|
|
|
7,446,862 |
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|
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|
Operating Expenses: |
|
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|
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|
|
|
|
|
|
|
|
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|
Field operating expenses |
|
|
778,242 |
|
|
|
457,663 |
|
|
|
1,747,472 |
|
|
|
1,690,623 |
|
Direct project costs |
|
|
349,646 |
|
|
|
591,454 |
|
|
|
1,130,842 |
|
|
|
1,218,589 |
|
Selling, general and administrative |
|
|
2,354,045 |
|
|
|
1,602,983 |
|
|
|
5,712,782 |
|
|
|
3,728,290 |
|
Non-cash stock compensation expense |
|
|
920,720 |
|
|
|
158,446 |
|
|
|
1,762,890 |
|
|
|
158,446 |
|
Depreciation, depletion and amortization |
|
|
769,909 |
|
|
|
458,833 |
|
|
|
1,800,947 |
|
|
|
2,265,878 |
|
Impairment of oil and gas ventures and other assets |
|
|
|
|
|
|
139,552 |
|
|
|
|
|
|
|
139,552 |
|
Income on dispositions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(335,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,172,562 |
|
|
|
3,408,931 |
|
|
|
12,154,933 |
|
|
|
8,866,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss from Continuing Operations |
|
|
(2,591,715 |
) |
|
|
(1,401,093 |
) |
|
|
(7,007,877 |
) |
|
|
(1,419,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
(458,084 |
) |
|
|
(408,259 |
) |
|
|
(435,264 |
) |
|
|
(664,645 |
) |
Other |
|
|
107,869 |
|
|
|
(834,521 |
) |
|
|
(73,732 |
) |
|
|
(933,241 |
) |
Equity Loss from investments |
|
|
|
|
|
|
|
|
|
|
(155,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expense |
|
|
(350,215 |
) |
|
|
(1,242,780 |
) |
|
|
(664,012 |
) |
|
|
(1,597,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations Before Minority Interest
and Taxes |
|
|
(2,941,930 |
) |
|
|
(2,643,873 |
) |
|
|
(7,671,889 |
) |
|
|
(3,017,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Minority interest in loss (income) of consolidated subsidiaries |
|
|
|
|
|
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations |
|
|
(2,941,930 |
) |
|
|
(2,644,174 |
) |
|
|
(7,671,889 |
) |
|
|
(3,017,388 |
) |
Net Income from Discontinued Operations, net of taxes and
minority interest |
|
|
|
|
|
|
95,384 |
|
|
|
|
|
|
|
542,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(2,941,930 |
) |
|
$ |
(2,548,790 |
) |
|
$ |
(7,671,889 |
) |
|
$ |
(2,475,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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|
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|
Weighted average number of
common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic |
|
|
221,485,695 |
|
|
|
120,589,698 |
|
|
|
207,880,022 |
|
|
|
113,468,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Diluted |
|
|
221,485,695 |
|
|
|
120,589,698 |
|
|
|
207,880,022 |
|
|
|
113,468,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Loss Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
- from discontinued operations |
|
$ |
|
|
|
$ |
0.00 |
|
|
$ |
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Loss Per Common |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Loss Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
- from discontinued operations |
|
$ |
|
|
|
$ |
0.00 |
|
|
$ |
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Loss Per Common |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
90,708 |
|
|
|
|
|
|
|
310,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
$ |
(2,941,930 |
) |
|
$ |
(2,458,082 |
) |
|
$ |
(7,671,889 |
) |
|
$ |
(2,164,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Condensed Financial Statements.
5
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September, 30 |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(7,671,889 |
) |
|
|
(3,017,388 |
) |
Adjustments to reconcile net loss from continuing operations to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Non-cash stock compensation expense |
|
|
1,762,890 |
|
|
|
158,446 |
|
Non-cash interest expense and amortization of debt discount |
|
|
608,132 |
|
|
|
619,781 |
|
Non-cash debt extinguishment expense |
|
|
|
|
|
|
349,923 |
|
Common stock issued for services |
|
|
53,600 |
|
|
|
17,280 |
|
Non-cash miscellaneous expenses |
|
|
32,890 |
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
1,800,947 |
|
|
|
2,265,878 |
|
Impairment of oil and gas ventures and other assets |
|
|
|
|
|
|
139,552 |
|
Equity loss from investments |
|
|
155,016 |
|
|
|
|
|
Gain on dispositions |
|
|
|
|
|
|
(335,014 |
) |
Allowance for doubtful accounts |
|
|
155,686 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
(1,755,269 |
) |
|
|
|
|
Accounts receivable |
|
|
208,121 |
|
|
|
129,751 |
|
Inventory |
|
|
(357,835 |
) |
|
|
302,414 |
|
Prepayments |
|
|
(158,656 |
) |
|
|
27,245 |
|
Other current assets |
|
|
(7,805 |
) |
|
|
(695,807 |
) |
Accounts payable |
|
|
(698,072 |
) |
|
|
341,006 |
|
Deferred revenue |
|
|
(3,043,796 |
) |
|
|
(899,247 |
) |
Income taxes payable |
|
|
|
|
|
|
(87,000 |
) |
Accrued liabilities |
|
|
696,477 |
|
|
|
271,108 |
|
|
|
|
|
|
|
|
Net cash used by operating activities |
|
|
(8,219,563 |
) |
|
|
(412,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(25,853,318 |
) |
|
|
(7,387,430 |
) |
Proceeds from disposition of subsidiary |
|
|
|
|
|
|
250,001 |
|
Acquisitions, net of cash acquired |
|
|
609,553 |
|
|
|
|
|
Investments in oil and gas and other ventures |
|
|
|
|
|
|
(15,610 |
) |
Advance proceeds from the sale of CanArgo Standard Oil Products |
|
|
|
|
|
|
1,670,000 |
|
Change in non-cash working capital items |
|
|
(395,514 |
) |
|
|
363,469 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(25,639,279 |
) |
|
|
(5,119,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock |
|
|
4,429,303 |
|
|
|
37,999,516 |
|
Share issue costs |
|
|
(581,877 |
) |
|
|
(2,817,179 |
) |
Deferred offering costs |
|
|
|
|
|
|
(433,376 |
) |
Advances from joint venture partner |
|
|
|
|
|
|
290,000 |
|
Payments of joint venture obligations |
|
|
|
|
|
|
(1,063,146 |
) |
Proceeds from loans |
|
|
40,000,000 |
|
|
|
3,806,000 |
|
Repayment of loans |
|
|
(7,200,000 |
) |
|
|
(1,408,179 |
) |
Deferred loan costs |
|
|
(385,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
36,261,796 |
|
|
|
36,373,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from assets and liabilities held for sale |
|
|
|
|
|
|
(7,301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,402,954 |
|
|
|
30,834,693 |
|
Cash and cash equivalents, beginning of period |
|
|
24,617,047 |
|
|
|
3,472,252 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
27,020,001 |
|
|
$ |
34,306,945 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Condensed Financial Statements.
6
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
1. |
|
Basis of Presentation |
|
|
|
The interim consolidated condensed financial statements and notes thereto of CanArgo Energy
Corporation and its subsidiaries (collectively, we, our, CanArgo or the Company)
have been prepared by management without audit pursuant to the rules and regulations of the
U.S. Securities and Exchange Commission. In the opinion of management, the consolidated
condensed financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair statement of the results for the interim period. Although
management believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures, including a description of
significant accounting policies normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the U.S., have been condensed or
omitted pursuant to such rules and regulations. The accompanying consolidated condensed
financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in CanArgos Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the Securities and Exchange Commission. All amounts are
in U.S. dollars. The results of operations for interim periods are not necessarily
indicative of the results for any subsequent quarter or the entire fiscal year ending
December 31, 2005. |
|
|
|
Use of Estimates in the Preparation of Financial Statements |
|
|
|
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. |
2. |
|
Business Combination |
|
|
|
On June 7, 2005, CanArgo made an offer to acquire 55% of the ordinary share capital of
Tethys Petroleum Investments Limited (Tethys) which was held by Provincial Securities
Limited (Provincial) and Vando International Finance Limited (Vando) for consideration
of 11,000,000 CanArgo common shares. On June 9, 2005 CanArgo issued 5,500,000 shares to
Provincial, of which Russ Hammond (one of our non-executive directors) is Investment Advisor
and 5,500,000 shares to Vando in connection with this transaction. At June 7, 2005, the
closing price of CanArgo total common stock was $0.76 giving the common stock consideration
a market value of $8,360,000 for the 11 million shares. On completion of the acquisition,
CanArgo held 100% of the ordinary share capital of Tethys through its subsidiary CanArgo
Limited and Tethys became a wholly-owned subsidiary of the Company. We have recorded our
interest as if the acquisition occurred on June 30, 2005. Tethys primary asset was its 70%
interest in BN Munai, a Kazakhstan limited partnership. |
|
|
|
The purchase price was allocated to the net assets of Tethys as follows: |
|
|
|
|
|
Cash |
|
$ |
609,553 |
|
Oil and Gas Properties |
|
|
6,599,315 |
|
Other Current Assets |
|
|
1,688,294 |
|
Current Liabilities |
|
|
(297,162 |
) |
Provision for future site restoration |
|
|
(240,000 |
) |
|
|
|
|
|
|
$ |
8,360,000 |
|
|
|
|
|
7
|
|
The following pro forma presentation assumes the Companys acquisition of Tethys took place
on January 1, 2004. The historical column presents the unaudited financial information of
the Company for the periods indicated. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma (Unaudited) |
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
Historical |
|
|
Tethys |
|
|
Adjustments |
|
|
Combined |
|
Revenue |
|
$ |
5,147,056 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,147,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations |
|
|
($7,007,877 |
) |
|
|
($215,649 |
) |
|
$ |
155,016 |
(1) |
|
|
($7,068,510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
($7,671,889 |
) |
|
|
($215,649 |
) |
|
$ |
155,016 |
|
|
|
($7,732,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,286,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
To add back the equity loss on investment recorded during the first six months
of 2005 for the Companys share of losses prior to acquisition of its
majority interest. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma (Unaudited) |
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
Historical |
|
|
Tethys |
|
|
Adjustments |
|
|
Combined |
|
Revenue |
|
$ |
2,580,847 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,580,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations |
|
|
($2,591,715 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
($2,591,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
($2,941,930 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
($2,941,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted
average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,485,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma (Unaudited) |
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
Historical |
|
|
Tethys |
|
|
Adjustments |
|
|
Combined |
|
Revenue |
|
$ |
7,446,862 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,446,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations |
|
|
($1,419,502 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
($1,419,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
($2,475,178 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
($2,475,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted
average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,468,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma (Unaudited) |
|
|
|
Three Months Ended September 30, 2004 |
|
|
|
Historical |
|
|
Tethys |
|
|
Adjustments |
|
|
Combined |
|
Revenue |
|
$ |
2,007,838 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,007,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations |
|
|
($1,401,093 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
($1,401,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
($2,548,790 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
($2,548,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,589,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
3 |
|
Dismantlement, Restoration and Environmental Costs |
|
|
|
Effective January 1, 2003, we recognize liabilities for asset retirement obligations
associated with tangible long-lived assets, such as producing well sites, with a
corresponding increase in the related long-lived asset. The asset retirement cost is
depreciated along with the property and equipment in the full cost pool. The asset
retirement obligation is recorded at fair value and accretion expense, recognized over the
life of the property, increases the liability to its expected settlement value. If the fair
value of the estimated asset retirement obligation changes, an adjustment is recorded for
both the asset retirement obligation and the asset retirement cost. As at September 30, 2005
the asset retirement obligation, which is included on the consolidated balance sheet in
provision for future site restoration, was $699,650 , which includes $246,000 for retirement
obligations related to our acquired Tethys operations. |
|
4 |
|
Foreign Operations |
|
|
|
Our current and future operations and earnings depend upon the results of our operations
primarily in the Republic of Georgia (Georgia) and to a lesser degree in the Republic of
Kazakhstan (Kazakhstan). There can be no assurance that we will be able to successfully
conduct such operations, and a failure to do so would have a material adverse effect on our
financial position, results of operations and cash flows. Also, the success of our
operations generally will be subject to numerous contingencies, some of which are beyond
management control. These contingencies include general and regional economic conditions,
prices for crude oil and natural gas, competition and changes in regulation. Since we are
dependent on international operations, we will be subject to various additional political,
economic and other uncertainties. Among other risks, our operations may be subject to the
risks and restrictions on transfer of funds, import and export duties, quotas and embargoes,
domestic and international customs and tariffs, and changing taxation policies, foreign
exchange restrictions, political conditions and restrictive regulations. |
|
5 |
|
New Accounting Standards |
|
|
|
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations, which clarifies that an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the fair value can be
reasonably estimated even though uncertainty exists about the timing and (or) method of
settlement. The Company is required to adopt Interpretation No. 47 prior to the end of
2006. The Company is currently assessing the impact of Interpretation No. 47 on its results
of operations and financial condition. |
|
|
|
In November 2004, the FASB issued SFAS No. 151 Accounting for Inventory Costs that amends
Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal and
requires that allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. The Company is required to adopt SFAS
No. 151 in the beginning of 2006 and its adoption is not expected to have a significant
effect on the Companys results of operations or financial condition. |
|
|
|
In December 2004, the FASB issued SFAS No. 153 Exchanges of Nonmonetary Assets that amends
Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions
and Amends FAS 19 Financial Accounting and Reporting by Oil and Gas Producing Companies,
paragraphs 44 and 47(e). ARB No. 29 is based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged and SFAS 153
amended ABP 29 to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaced it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. The Company is required to adopt SFAS No. 153 for nonmonetary
asset exchanges occurring in the first quarter of 2006 and its adoption is not expected to
have a significant effect on the Companys results of operations or financial condition. |
9
|
|
In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections to
replace ABP No. 20 Accounting Changes and SFAS No. 3 Reporting Accounting Changes in
Interim Financial Statements. Opinion 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS 154 requires
retrospective application to prior periods financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior periods presented, SFAS 154
requires that the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective application
is practicable and that a corresponding adjustment be made to the opening balance of
retained earnings (or other appropriate components of equity or net assets in the statement
of financial position) for that period rather than being reported in an income statement.
When it is impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, SFAS 154 requires that the new accounting
principle be applied as if it were adopted prospectively from the earliest date practicable.
SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The implementation of FAS 154 is not expected to have a
significant effect on the Companys results of operations or financial condition. |
|
6 |
|
Restricted Cash |
|
|
|
Restricted cash consisted of the following at September 30, 2005 and December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
Restricted Cash Escrow |
|
$ |
|
|
|
$ |
1,400,000 |
|
|
|
|
|
|
|
|
|
|
Restricted Cash Secured deposits |
|
|
3,155,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,155,269 |
|
|
$ |
1,400,000 |
|
|
|
|
|
|
|
|
|
|
Restricted cash of $1,400,000 at December 31, 2004 related to money placed in a
third party escrow account in October 2004, to fund part of the horizontal
development program, of which WEUS Holding Inc., a subsidiary of Weatherford
International Limited (Weatherford) was the primary contractor, at the Ninotsminda and Samgori Fields in Georgia These funds
were disbursed to the contractor in July 2005 in accordance with the terms of the
escrow agreement. |
|
|
|
In the first quarter of 2005 we funded a certificate of deposit in the amount of
$3,900,000 to secure the issuance of a letter of credit as required under the rig
rental and drilling contract we entered into with Saipem, S.p.A. Under the terms of
the letter of credit $1,100,000 was released and became unrestricted cash in July
2005. The remaining deposit is due to become unrestricted in January 2006. |
10
|
|
In the third quarter of 2005, we deposited approximately $300,000 to secure the
issuance of a letter of credit as required under the drilling contract we entered
into with Baker Hughes International. |
|
7 |
|
Accounts Receivable |
|
|
|
Accounts receivable at September 30, 2005 and December 31, 2004 consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
|
|
|
|
|
|
|
|
|
Trade receivables before allowance for doubtful debts |
|
$ |
1,047,700 |
|
|
$ |
1,081,055 |
|
Allowance for doubtful debts |
|
|
(1,021,925 |
) |
|
|
(866,239 |
) |
Due from Samgori PSC partner |
|
|
1,050,398 |
|
|
|
1,057,534 |
|
Insurance receivable |
|
|
549,793 |
|
|
|
1,047,359 |
|
Other receivables |
|
|
536,669 |
|
|
|
206,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,162,635 |
|
|
$ |
2,526,442 |
|
|
|
|
|
|
|
|
|
|
Bad debt expense for the nine month period ended September 30, 2005 and September 30, 2004
was $155,686 and $0 respectively. |
|
|
|
In September 2004, a blow-out occurred at the N100 well on the Ninotsminda Field.
Our insurers will cover 80% of the costs associated with the blow out up to a
maximum cover of $2,500,000. We received $800,000 from our insurers in the second
quarter of 2005 in respect of costs incurred to date. As of September 30, 2005 and
December 31, 2004, $549,793 and $1,047,359 was recorded as a receivable,
respectively. |
|
|
|
Included in receivables as of September 30, 2005 and December 31, 2004 was
$1,050,398 and $1,057,534, respectively, due from Georgian Oil Samgori Limited
(GOSL) for its share of capital expenditure, on the planned horizontal well
drilling program on the Samgori Field. We have funded 100% of the costs so far and
should GOSL not be in a position to or elect not to fund its share of the program
costs, we are entitled to continue the project at our sole risk at which time the
receivable would be transferred to oil and gas properties. We would be entitled to
100% of the contractors share of any incremental production resulting from the sole
risk operations where we were the party undertaking the sole risk. |
|
8 |
|
Inventory |
|
|
|
Inventory of crude oil at September 30, 2005 and December 31, 2004 consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
|
|
|
|
|
|
|
|
|
Crude oil |
|
$ |
611,693 |
|
|
$ |
253,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
611,693 |
|
|
$ |
253,858 |
|
|
|
|
|
|
|
|
11
9 |
|
Capital Assets |
|
|
|
Capital assets, net of accumulated depreciation and impairment, include the following at
September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Net |
|
|
|
|
|
|
|
Depreciation |
|
|
Capital |
|
|
|
Cost |
|
|
And Impairment |
|
|
Assets |
|
Oil and Gas Properties |
|
|
|
|
|
|
|
|
|
|
|
|
Proved properties |
|
$ |
77,831,054 |
|
|
$ |
(24,826,329 |
) |
|
$ |
53,004725 |
|
Unproved properties |
|
|
44,475,011 |
|
|
|
|
|
|
|
44,475,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,306,065 |
|
|
|
(24,826,329 |
) |
|
|
97,479,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas related
equipment |
|
|
16,085,242 |
|
|
|
(5,032,872 |
) |
|
|
11,052,370 |
|
Office furniture,
fixtures and
equipment and other |
|
|
875,340 |
|
|
|
(289,139 |
) |
|
|
586,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,960,582 |
|
|
|
(5,322,011 |
) |
|
|
11,638,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
139,266,647 |
|
|
$ |
(30,148,340 |
) |
|
$ |
109,118,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital assets, net of accumulated depreciation and impairment, include the following at
December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Net |
|
|
|
|
|
|
|
Depreciation |
|
|
Capital |
|
|
|
Cost |
|
|
And Impairment |
|
|
Assets |
|
Oil and Gas Properties |
|
|
|
|
|
|
|
|
|
|
|
|
Proved properties |
|
$ |
61,458,503 |
|
|
$ |
(23,382,448 |
) |
|
$ |
38,076,055 |
|
Unproved properties |
|
|
25,102,945 |
|
|
|
|
|
|
|
25,102,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,561,448 |
|
|
|
(23,382,448 |
) |
|
|
63,179,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas related
equipment |
|
|
14,119,443 |
|
|
|
(4,693,368 |
) |
|
|
9,426,075 |
|
Office furniture,
fixtures and
equipment and other |
|
|
689,439 |
|
|
|
(298,848 |
) |
|
|
390,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,808,882 |
|
|
|
(4,992,216 |
) |
|
|
9,816,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
101,370,330 |
|
|
$ |
(28,374,664 |
) |
|
$ |
72,995,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas Properties |
|
|
|
Unproved property additions relate to our exploration activity in the period. |
|
|
|
Property and Equipment |
|
|
|
Oil and gas related equipment includes materials, drilling rigs and related equipment
currently in use by us in the development of the Ninotsminda, Norio and Samgori Fields. |
12
10 |
|
Prepaid financing fees |
|
|
|
Prepaid financing fees at September 30, 2005 and December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
|
|
|
|
|
|
|
|
|
Commission and Professional fees |
|
$ |
300,082 |
|
|
$ |
648,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
300,082 |
|
|
$ |
648,507 |
|
|
|
|
|
|
|
|
|
|
Prepaid financing fees as at September 30, 2005 are corporate finance fees incurred in
respect of the private placement of a $25,000,000 issue of Senior Convertible Secured Loan
Notes due July 25, 2009 (Senior Secured Notes) with a group of investors and the
additional Ozturk Long Term Loan with Detachable Warrants, both discussed in Note 12. |
|
|
|
As at December 31, 2004, commissions and professional fees related to the additional Ozturk
Long Term Loan with Detachable Warrants and the Standby Equity Distribution Agreement
(SEDA) dated February 11, 2004 between CanArgo and Cornell Capital Partners LP (Cornell
Capital) were included in Prepaid financing fees. |
11 |
|
Investments in and Advances to Oil and Gas and Other Ventures |
|
|
|
As discussed in Note 2, on June 9, 2005 we acquired 100% ownership of Tethys Petroleum
Investments Limited and this entity is now consolidated in our financial statements. A
summary of our net investment in and advances to oil and gas and other ventures consisted of
the following at September 30, 2005 and December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
|
|
|
|
|
|
|
|
|
Kazakhstan Through 45% ownership of Tethys
Petroleum Investments Limited |
|
$ |
|
|
|
$ |
683,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in and Advances to Oil and Gas
and Other Ventures |
|
$ |
|
|
|
$ |
683,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Profit (Loss) of Oil and Gas and Other Ventures |
|
|
|
|
|
|
|
|
Kazakhstan |
|
|
|
|
|
|
(205,230 |
) |
|
|
|
|
|
|
|
Cumulative Equity in Profit (Loss) of Oil and Gas and
other ventures |
|
|
|
|
|
|
(205,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in and Advances to Oil and Gas and Other
Ventures, Net of Equity Loss |
|
$ |
|
|
|
$ |
478,632 |
|
|
|
|
|
|
|
|
13
12 |
|
Loans Payable and Long Term Debt |
|
|
|
Loans payable at September 30, 2005 and December 31, 2004 consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
Short term loans payable |
|
|
|
|
|
|
|
|
Promissory Notes |
|
$ |
|
|
|
$ |
1,500,000 |
|
Loan with detachable warrants |
|
$ |
1,050,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Unamortized debt discount |
|
|
(119,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans payable |
|
$ |
930,943 |
|
|
$ |
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt |
|
|
|
|
|
|
|
|
Senior Convertible Secured Loan Notes |
|
$ |
25,000,000 |
|
|
$ |
|
|
Long term loans with detachable warrants |
|
$ |
|
|
|
$ |
1,050,000 |
|
Unamortized debt discount |
|
$ |
|
|
|
$ |
(217,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt |
|
$ |
25,000,000 |
|
|
$ |
832,165 |
|
|
|
|
|
|
|
|
|
|
On April 26, 2005 we signed a promissory note with Cornell Capital whereby Cornell Capital
agreed to advance us the sum of $15 million (Promissory Note) under the following terms: |
|
|
|
This $15 million and interest at a rate of 7.5% per annum was payable either in cash or
using the net proceeds of drawdowns under the SEDA, within 270 calendar days from the date
of the Promissory Note. Pursuant to the terms of the Promissory Note, we escrowed 25
requests for advances under the SEDA each in an amount not less than $600,000 and one
advance of $289,726.03 (representing estimated interest) together with 16,938,558 shares of
CanArgo common stock. The escrow agent released requests every 7 calendar days from May 2,
2005 provided we had not previously made a payment to Cornell Capital in cash. We had the
ability at our sole discretion upon 24 hours prior written notice to Cornell Capital to
repay all and any amounts due under the Promissory Note in immediately available funds and
withdraw any advance notices yet to be effected. |
|
|
|
The Promissory Note was repaid in full in cash on August 1, 2005, all escrowed advances
cancelled and 7,260,647 shares of CanArgo common stock were returned from escrow and duly
cancelled on October 5, 2005. On July 25, 2005 notice was given to Cornell Capital to
terminate the SEDA with effect as of August 24, 2005. |
|
|
|
In order to ensure timely procurement of long lead items for our drilling program in Georgia
and for working capital purposes during 2004, we entered into a number of loan agreements of
which those outstanding during the third quarter 2005 are described below. |
|
|
|
Long Term Loan with Detachable Warrants: This loan from Salahi Ozturk advanced pursuant to
the amended and restated loan and warrant agreement dated August 27, 2004 (Amended
Agreement) matures in August 2006 unless it has previously been converted. Corporate
finance fees of $50,000 were paid in respect of the loan. Interest is payable quarterly at
a rate of 7.5% per annum. The loan is convertible into shares of CanArgo Common Stock at
15% above a market price of $0.60 in effect when the agreement was reached in August 2004,
subject to customary anti-dilution adjustments. We have the option to force conversion of
the loan if our share price exceeds 160% of $0.60 (or $0.96 per share) for a period of 20
consecutive trading days. No conversion was possible until August 28, 2005. |
|
|
|
The Companys closing stock price on the American Stock Exchange at the time of the
agreement was $0.51; consequently, pursuant to EITF 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
and EITF 00-27 Application of Issue |
14
|
|
No. 98-5 to Certain Convertible Instruments, the issuance of the loan and detachable
warrants resulted in a discount being recorded in the amount of $263,786, which resulted
from the relative fair value of the warrants, as determined using the Black-Scholes model. |
|
|
We used the following assumptions to determine the fair value of the debt and warrants: |
|
|
|
|
|
|
|
Additional Loan |
|
Stock price on date of grant |
|
$ |
0.51 |
|
Risk free rate of interest |
|
|
2.51 |
% |
Expected life of warrant months |
|
|
48 |
|
Dividend rate |
|
|
|
|
Historical volatility |
|
|
108 |
% |
|
|
The discounts are being amortized to expense interest over the life of the loan using the
effective interest method. The effective interest rate was 18.9%. As of September 30,
2005 we had amortized $144,729 of the debt discount as interest expense. |
|
|
|
Promissory Note: On May 19, 2004, we signed a promissory note with Cornell Capital whereby
Cornell Capital agreed to advance us the sum of $1,500,000. We have repaid the promissory
note in full by making a series of takedowns in February and March 2005 under the SEDA. |
|
|
|
Senior Secured Convertible Loan Notes: On July 25, 2005, CanArgo completed a private
placement of $25,000,000 in aggregate principal amount of our Senior Secured Convertible
Loan Notes due July 25, 2009 (the Senior Secured Notes) with a group of private investors
arranged through Ingalls & Snyder LLC of New York City, as Placement Agent, pursuant to a
Note Purchase Agreement of even date (the Note Purchase Agreement). The Company paid
approximately $100,000 of legal fees for the Purchasers and a $250,000 arrangement fee to Orion Securities
in connection with the Senior Secured Notes. |
|
|
|
The unpaid principal balance under the Senior Secured Note bears interest (computed on the
basis of a 360-day year of twelve 30-day months) (a) at increasing rates ranging from 3%
from the date of issuance to December 31,2005; 10% from January 1, 2006 until December 31,
2006; and 15% from January 1, 2007 until final payment, payable semi-annually, on June 30 &
December 30, commencing December 30, 2005, until the principal shall have become due and
payable, and (b) at 3% above the applicable rate on any overdue payments of principal and
interest, |
|
|
|
Pursuant to the provisions of Emerging Issue Task Force 86-15: Increasing-Rate Debt), the
Company recognizes interest expense using the effective interest rate method, which results
in the use of a constant interest rate for the life of the Senior Secured Notes. The
effective interest rate is approximately 12.3% per annum. The difference between the
interest computed using the actual interest rate in effect (3% per annum) and the effective
interest rate (12.3% per annum) which totalled $439,156 as of September 30, 2005 has been
accrued as a non-current liability. |
|
|
|
The Company is amortising the professional fees incurred in relation to the Senior Secured
Notes over the term of the Senior Secured Notes. |
|
|
|
The Senior Secured Notes are convertible any time, in whole or in part, at the option of the
Note holder, into shares of CanArgo common stock (the Conversion Stock) at a conversion
price per share of $0.90 (the Conversion Price), which is subject to customary
anti-dilution adjustments. |
|
|
|
We may, at our option, upon at least not less than 90 days and not more than 120 days prior
written notice, prepay at any time and from time to time after July 31, 2006, all or any
part of the Senior Secured Notes, in a principal amount of not less than $100,000 at the
following Redemption Prices (expressed as percentages of the principal amount so prepaid):
105% after July 31, 2006; 104% after January 1, 2007; 103% after July 1, 2007; 102% after
January 1, 2008; 101% after July 1, 2008, and 100% after January 1, 2009, together with all
accrued and unpaid interest. |
15
|
|
The Senior Secured Notes are subject to mandatory prepayment due to a change in control of
the Company, as defined by the Note Purchase Agreement. |
|
|
|
In connection with the execution and delivery of the Note Purchase Agreement, CanArgo
entered into a Registration Rights Agreement with the Purchasers pursuant to which it agreed
to register the Conversion Stock for resale under the Securities Act and indemnify the
purchasers in connection with the registration. |
|
|
|
The Senior Secured Notes are secured by substantially all of the assets of the Company and
its subsidiaries and contain certain negative and affirmative covenants and also restricts
the ability of the Company to pay dividends to its common stockholders until the loan and
all accrued interest have been paid or the noteholders elect to convert their loans to
common stock. (See page 30 Liquidity and Capital Resources section of Item 2 below for a
more detailed discussion of covenants). |
|
13 |
|
Other Liabilities |
|
|
|
Other liabilities consisted of the following at September 30, 2005 and December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
|
|
|
|
|
|
|
|
|
Prepaid sales and oil sales security deposit |
|
$ |
17,043 |
|
|
$ |
2,699,644 |
|
Prepaid licence fees |
|
|
20,000 |
|
|
|
80,000 |
|
Advanced proceeds from the sale of other assets |
|
|
|
|
|
|
301,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,043 |
|
|
$ |
3,080,839 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 prepaid sales and oil sales security deposit included $2,300,000
arising from security deposit payments under an oil sales agreement with Primrose Financial
Group (Primrose) dated May 5, 2004. In February 2005, we cancelled the May 2004 oil sales
agreement with Primrose, repaid the security deposit in full and concluded a new oil sales
agreement with Primrose. |
|
|
|
As of December 31, 2004 advanced proceeds from the sale of other assets referred to the sale
of a generator for which the proposed buyer had paid a non-refundable deposit of $301,195.
The proposed buyer failed to meet the sale contract terms resulting in the loss of its
deposit in the third quarter, 2005. The $301,195 has been credited to Other Income. |
|
14 |
|
Accrued Liabilities |
|
|
|
Accrued liabilities consisted of the following at September 30, 2005 and December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
Drilling contractors |
|
$ |
5,143,111 |
|
|
$ |
|
|
Professional fees |
|
|
704,984 |
|
|
|
93,001 |
|
Other |
|
|
167,838 |
|
|
|
79,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,015,933 |
|
|
$ |
172,117 |
|
|
|
|
|
|
|
|
16
|
|
Included in the amounts due to drilling contractors at September 30, 2005 are amounts
invoiced by Weatherford totalling $5,004,846. We have formally notified Weatherford that we
dispute the validity of certain billings to the Company for work Weatherford performed in
the first and second quarter of 2005. The amount under dispute is approximately $4.9
million. We have recorded all amounts billed by Weatherford as of September 30, 2005 pending
the outcome of the dispute resolution which may require referral to the London Court of
International Arbitration for resolution in accordance with the provisions of the contract. |
|
15 |
|
Minority Interest |
|
|
|
Through our acquisition of 100% of Tethys Petroleum Investments Limited on June 9, 2005 we
acquired a 70% ownership interest in the Kazakhstan based limited liability partnership, BN
Munai LLP (BN Munai). BN Munai has only suffered losses from inception and currently the
Company is the only partner funding the current operating losses, therefore, no minority
interest is recorded at September 30, 2005 for the 30% ownership not under our control. The
Company does not expect the minority partners in BN Munai to contribute funds to the
partnership. |
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Additional |
|
|
Deferred |
|
|
|
|
|
|
Total |
|
|
|
Issued and |
|
|
|
|
|
|
Paid-In |
|
|
Compensation |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Issuable |
|
|
Par Value |
|
|
Capital |
|
|
Expense |
|
|
Deficit |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, December 31, 2004 |
|
|
195,212,089 |
|
|
$ |
19,521,208 |
|
|
$ |
184,141,618 |
|
|
$ |
(1,976,102 |
) |
|
$ |
(104,866,192 |
) |
|
$ |
96,820,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
380,836 |
|
|
|
38,084 |
|
|
|
469,514 |
|
|
|
|
|
|
|
|
|
|
|
507,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
335,653 |
|
|
|
33,565 |
|
|
|
458,837 |
|
|
|
|
|
|
|
|
|
|
|
492,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,067,833 |
|
|
|
106,783 |
|
|
|
255,850 |
|
|
|
|
|
|
|
|
|
|
|
362,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
344,758 |
|
|
|
34,476 |
|
|
|
498,072 |
|
|
|
|
|
|
|
|
|
|
|
532,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
370,599 |
|
|
|
37,060 |
|
|
|
562,940 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
381,170 |
|
|
|
38,117 |
|
|
|
561,883 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
495,745 |
|
|
|
49,574 |
|
|
|
550,426 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,570,000 |
|
|
|
157,000 |
|
|
|
11,000 |
|
|
|
|
|
|
|
|
|
|
|
168,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
552,639 |
|
|
|
55,264 |
|
|
|
544,736 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
473,634 |
|
|
|
47,363 |
|
|
|
552,637 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
837,054 |
|
|
|
83,705 |
|
|
|
516,295 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
813,670 |
|
|
|
81,367 |
|
|
|
518,633 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
872,854 |
|
|
|
87,285 |
|
|
|
512,715 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
847,458 |
|
|
|
84,746 |
|
|
|
515,254 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issueable pursuant to consultancy
agreement (CEOCast) |
|
|
80,000 |
|
|
|
8,000 |
|
|
|
45,600 |
|
|
|
|
|
|
|
|
|
|
|
53,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
801,068 |
|
|
|
80,107 |
|
|
|
519,893 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
812,348 |
|
|
|
81,235 |
|
|
|
518,765 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Tethys buy-out |
|
|
11,000,000 |
|
|
|
1,100,000 |
|
|
|
7,260,000 |
|
|
|
|
|
|
|
|
|
|
|
8,360,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
639,591 |
|
|
|
63,959 |
|
|
|
536,041 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
596,421 |
|
|
|
59,642 |
|
|
|
540,358 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
613,246 |
|
|
|
61,325 |
|
|
|
538,675 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
630,120 |
|
|
|
63,012 |
|
|
|
536,988 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
669,568 |
|
|
|
66,957 |
|
|
|
533,043 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
761,325 |
|
|
|
76,133 |
|
|
|
523,867 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued pursuant to Standby Equity
Distribution agreement (Cornell Capital) |
|
|
783,188 |
|
|
|
78,319 |
|
|
|
521,681 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
360,000 |
|
|
|
36,000 |
|
|
|
481,320 |
|
|
|
|
|
|
|
|
|
|
|
517,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
284,000 |
|
|
|
28,400 |
|
|
|
352,950 |
|
|
|
|
|
|
|
|
|
|
|
381,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation under SFAS 148 |
|
|
|
|
|
|
|
|
|
|
2,202,708 |
|
|
|
(439,818 |
) |
|
|
|
|
|
|
1,762,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share issue costs |
|
|
|
|
|
|
|
|
|
|
(1,186,633 |
) |
|
|
|
|
|
|
|
|
|
|
(1,186,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,671,889 |
) |
|
|
(7,671,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, September 30, 2005 |
|
|
222,586,867 |
|
|
$ |
22,258,685 |
|
|
$ |
204,595,666 |
|
|
$ |
(2,415,920 |
) |
|
$ |
(112,538,081 |
) |
|
$ |
111,900,350 |
|
|
|
|
18
|
|
On February 11, 2004, we entered into a Standby Equity Distribution Agreement (SEDA)
that allowed us, at our option, periodically to issue shares of our common stock to US-based
investment fund Cornell Capital. On February 03, 2005, the SEC declared effective the
registration statement on Form S-3 (Reg. No. 333-115261) originally filed by us on May 6,
2004 in respect of the shares issuable under the SEDA. Under the terms of the SEDA, Cornell
Capital provided us with an equity line of credit for 24 months from the date the
registration statement became effective. The maximum aggregate amount of the equity
placements pursuant to the SEDA was $20,000,000. Subject to this limitation, we could draw
down up to $600,000 in any seven trading-day period (a Put). The SEDA could be used in
whole or in part entirely at our discretion. Shares issued to Cornell Capital would be
priced at a 3% discount to the lowest daily Volume Weighted Closing Bid Price (VWAP) of
CanArgo common shares traded on the Oslo Stock Exchange (OSE) for each of the five
consecutive trading days immediately following a draw down notice by CanArgo. For each
share of common stock purchased under the SEDA, Cornell Capital received a substantial
discount to the current market price of CanArgo common stock. The level of the total
discount varied depending on the market price of our stock and the amount drawn down under
the SEDA. Such discount comprised (1) 3% discount to, the lowest volume weighted average
price of our common stock; (2) 5% of the proceeds that we receive for each advance under the
SEDA; and (3) a commitment fee. The commitment fee, which has been paid, consisted of
$10,000 in cash and 850,000 shares of our common stock. On July 25, 2005, we issued to
Cornell Capital a notice to terminate the SEDA with effect as of August 24, 2005. |
|
|
|
We received $12,332,548 proceeds net of $285,749 of discounts (excluding the commitment fee
of $10,000 and 850,000 shares of common stock previously paid to Cornell Capital) pursuant
to twenty one takedowns under the SEDA in which we issued a total of 13,012,945 shares of
our common stock to Cornell Capital at an average price of $0.9477 per share. From these
proceeds, $1,532,548 was used to repay the promissory note of $1,500,000 plus accrued
interest on the note of $32,548 to Cornell Capital and partially repay the promissory note
of $15,000,000, referred to below. |
|
|
|
On April 26, 2005 we signed a promissory note with Cornell Capital whereby Cornell Capital
agreed to advance us the sum of $15,000,000. This amount and interest at a rate of 7.5% per
annum was payable either in cash or using the net proceeds of drawdowns under the SEDA,
within 270 days from the date of the Promissory Note. The Promissory Note was repaid in
full in cash on August 1, 2005. |
|
|
|
On June 9, 2005 we issued 11,000,000 shares of CanArgo Common Stock by way of exchange for
55% of the share capital of Tethys Petroleum Investments Limited, (Tethys), thereby making
Tethys a wholly owned subsidiary of CanArgo. (See Notes to Unaudited Consolidated Condensed
Financial Statements, Item 2 Business Combination above for a more detailed discussion). |
|
|
|
On October 5, 2005, we passed a resolution to cancel the 7,260,647 shares of CanArgo common
stock returned from escrow following the termination of the SEDA on August 24, 2005. |
19
17 |
|
Net Income (Loss) Per Common Share |
|
|
|
Earnings (loss) per share is calculated in accordance with SFAS No. 128, Earnings Per
Share. Basic and diluted earnings per share are provided for continuing operations,
discontinued operations and net income (loss). Basic earnings (loss) per share is computed
based upon the weighted average number of shares of common stock outstanding for the period
and excludes any potential dilution. Diluted earnings per share reflects potential dilution
from the exercise of securities (warrants, options and convertible debt) into common stock. |
|
|
|
Basic and diluted net loss per common share for the nine month and three month periods ended
September 30, 2005 and September 30, 2004 were based on the weighted average number of
common shares outstanding during those periods. Options and warrants to purchase CanArgos
Common Stock were outstanding during the nine months ended September 30, 2005 were not
included in the computation of diluted net loss per common share because the effect of such
inclusion would have been anti-dilutive. The total number of such shares excluded from
diluted net loss per common share were 41,255,621 for the nine months ended September 30,
2005. |
|
18 |
|
Commitments and Contingencies |
|
|
|
We have contingent obligations and may incur additional obligations, absolute and
contingent, with respect to the acquisition and development of oil and gas properties and
ventures in which we have interests that require or may require us to expend funds and to
issue shares of our Common Stock. |
|
|
|
At September 30, 2005, we had the contingent obligation to issue an aggregate of 187,500
shares of our Common Stock to Fielden Management Services PTY, Ltd (a third party management
services company), subject to the satisfaction of conditions related to the achievement of
specified performance standards by the Stynawske Field project, an oil field in Ukraine in
which we had a previous interest. |
|
|
|
Under the Production Sharing Contract for Blocks XIG and XIH (the
Tbilisi PSC) in the Republic of Georgia our subsidiary CanArgo Norio Limited will acquire
additional seismic data within three years of the effective date of the contract which is
September 29, 2003. The total commitment over the next ten months is $350,000. |
|
|
|
In 2002, the Participation Agreement for the three well exploration program on the
Ninotsminda /Manavi area with AES Gardabani (a subsidiary of AES Corporation) (AES) was
terminated without AES earning any rights to any of the Ninotsminda / Manavi area
reservoirs. We therefore have no present obligations in respect of AES. However, under a
separate Letter of Agreement, if gas from the Sub Middle Eocene is discovered and produced
from the exploration area covered by the Participation Agreement, AES will be entitled to
recover at the rate of 15% of future gas sales from the Sub Middle Eocene, net of operating
costs, approximately $7,500,000, representing their prior funding under the Participation
Agreement. |
|
|
|
In April 2004, we acquired a 50% interest in the Samgori (Block XIB) Production
Sharing Contract (Samgori PSC) in Georgia. This interest was acquired from Georgian Oil
Samgori Limited (GOSL), a company wholly owned by Georgian Oil, by one of our
subsidiaries, CanArgo Samgori Limited (CSL). Under the terms of the agreement dated
January 8, 2004, up to 10 horizontal wells will be drilled on the Samgori Field. Completion
of well S302, which was funded 100% by us, satisfied our commitment to GOSL under the
acquisition agreement. It is planned that the remainder of the drilling program will be
funded jointly by CSL and GOSL, the Contractor parties, pro rata to their interest in the
Samgori PSC. The total cost to us of participating in the whole program, which is due to be
completed by June 2008, is anticipated to be up to $13,500,000. |
|
|
|
The original Contractor party to the Samgori PSC, National Petroleum Limited (NPL), has an
option to reacquire its Contractors interest in the Samgori PSC and its 50% interest in the
operating company in the event that the agreed work program is not completed in part by
December 2006 and in full by December 2008. Furthermore, NPL has outstanding costs and
expenses of $37,528,964 in relation to the |
20
|
|
Samgori PSC which are recoverable by NPL receiving 30% of annual net profit from the Field
until such costs have been fully repaid. Under the Samgori PSC, up to 50% of petroleum
produced under the contract is allocated to the Contractor parties for the recovery of the
cumulative allowable capital, operating and other project costs associated with the Samgori
Field and exploration in Block XIB (Cost Recovery Oil). The cost recovery pool
includes the $37,528,964 costs previously incurred by NPL. The balance of production
(Profit Oil) is allocated on a 50/50 basis between the State and the Contractor parties
respectively. While GOSL and CSL continue to have unrecovered costs, they will receive 75%
of total production (net 37.5% to us). After recovery of their cumulative capital,
operating and other allowable project costs including the NPL costs, the Contractor parties
will receive 30% of Profit Oil (net 15% to us). The allocation of a share of production to
the State, however, relieves the Contractor parties of all obligations they would otherwise
have to pay the Republic of Georgia for taxes, duties and levies related to activities
covered by the Samgori PSC. After NPLs costs are repaid from either Field production or
other production in the PSC (in the event that new fields are developed in areas identified
using seismic surveys originally performed by NPL), NPL shall continue to receive 5% of
annual net profit. |
|
|
|
Under the Samgori PSC, Georgian Oil as the State representative in the contract is entitled
to receive up to 250,000 tons (approximately 1.6 million barrels) of oil (Base Level Oil)
from a maximum of 50% per calendar quarter of production when the value of the cumulative
Cost Recovery Oil, cumulative Cost Recovery Natural Gas, cumulative Profit Oil and
cumulative Profit Natural Gas delivered to the Contractor parties exceeds the cumulative
allowable capital, operating and other project costs including finance costs associated with
the Samgori Field and exploration in Block XIB and the NPL costs. While Base
Level Oil is being delivered to Georgian Oil, the Contractor parties will continue to be
entitled to a maximum of 50% of the remaining Profit Oil. The Base Level Oil is an estimate
of the amount of oil that Georgian Oil would have expected to produce from the contract area
had the State not come to a contractual arrangement with the previous Contractor party in
1996. |
|
|
|
Upon completion of the acquisition of an interest in the Samgori PSC we had a contractual
obligation to issue 4,000,000 shares of CanArgo Common Stock to Europa Oil Services Limited
(Europa), an unaffiliated company in connection with a consultancy agreement with Europa
in relation to this acquisition. On April 16, 2004 Europa was issued with 4,000,000
restricted shares of CanArgo Common Stock in an arms length transaction. A further
12,000,000 shares of CanArgo Common Stock are issuable upon certain production targets being
met from future developments under the Samgori PSC. |
|
|
|
In September 2004, a blow-out occurred at the N100 well on the Ninotsminda Field. The
Company currently estimates that the total costs attributable to the blow-out, including
compensation and cleaning of the environment will be $2,000,000. The Companys insurance
policies cover 80% of these costs up to a maximum of $2,500,000 and the remaining 20%
insurance retention being payable by the Company. On June 3, 2005 we received $800,000, as
a first instalment, from our insurance company. |
|
19 |
|
Discontinued Operations |
|
|
|
CanArgo Standard Oil Products Limited |
|
|
|
In September 2002, we approved a plan to sell our interest in CanArgo Standard Oil Products
Limited (CSOP), a petroleum product retail business in Georgia, to finance our exploration
and production activities. In October 2002, we reached agreement with Westrade Alliance
LLC, an unaffiliated company, to sell our wholly owned subsidiary, CanArgo Petroleum
Products Limited (CPPL), which held our 50% interest in CSOP for $4,000,000 in an
arms-length transaction, with legal ownership being transferred upon receipt of final
payment due originally in August 2003 and subsequently extended. The total payment received
in 2004 was $1,857,000 with the final payment of the consideration received by us in
December 2004 at which time we transferred our ownership in CPPL to Westrade Alliance LLC. |
21
|
|
The results of discontinued operations in respect of CSOP consisted of the following for the
nine month period ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
$ |
|
|
|
$ |
11,537,284 |
|
|
|
|
|
|
|
|
|
|
Loss Before Income taxes and Minority Interest |
|
|
|
|
|
|
(36,484 |
) |
Income Taxes |
|
|
|
|
|
|
|
|
Minority Interest in Loss |
|
|
|
|
|
|
18,242 |
|
|
|
|
|
|
|
|
Net Loss from Discontinued Operation |
|
$ |
|
|
|
$ |
(18,242 |
) |
|
|
|
|
|
|
|
|
|
The results of discontinued operations in respect of CSOP consisted of the following for the
three month period ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
$ |
|
|
|
$ |
5,801,742 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
|
|
|
|
(146,465 |
) |
Income tax benefit |
|
|
|
|
|
|
(41,278 |
) |
Minority interest in loss |
|
|
|
|
|
|
92,359 |
|
|
|
|
|
|
|
|
Net income from discontinued operation |
|
$ |
|
|
|
$ |
95,384 |
|
|
|
|
|
|
|
|
|
|
Lateral Vector Resources Inc |
|
|
|
Lateral Vector Resources Inc. (LVR), a wholly-owned subsidiary of CanArgo, negotiated and
concluded with Ukrnafta, the Ukrainian State Oil Company, a Joint Investment Production
Activity (JIPA) agreement in 1998 to develop the Bugruvativske Field located in Eastern
Ukraine. |
|
|
|
In 2003, due to the lack of progress with the implementation of the JIPA, and failure to
reach a negotiated agreement with Ukrnafta, management reached the decision to dispose of
its interest in the Bugruvativske project and withdraw from Ukraine. Consequently, we
recorded in 2003 a write-down in respect to the LVR deal and the acquisition of the
Bugruvativske Field of approximately $4,790,727. |
|
|
|
On May 28, 2004, we announced that pursuant to a signed agreement between CanArgo
Acquisition Corporation, our wholly owned subsidiary, and Stanhope Solutions Ltd., we had
completed a transaction to sell our interest in the Bugruvativske Field through the disposal
of LVR for $2,000,000. We received $250,000 as an initial payment and will receive the
remaining $1,750,000 if certain production targets are achieved on the project. |
22
|
|
The results of discontinued operations in respect of LVR consisted of the following for the
nine month period ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Loss (Income) Before Income taxes and
Minority Interest |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss (Income) from Discontinued Operation |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
The results of discontinued operations in respect of LVR consisted of the following for the
three month period ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Loss (Income) Before Income taxes and
Minority Interest |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss (Income) from Discontinued Operation |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Georgian American Oil Refinery |
|
|
|
In 2003, we approved a plan to dispose of our interest in the Georgian American Oil Refinery
Limited (GAOR) as the refinery had remained closed since 2001 and neither we nor our
partners could find a commercially viable option to putting the refinery back into
operation. In February 2004, we reached agreement with a local Georgian company to sell our
51% interest in GAOR for a nominal price of one US dollar and the assumption of all the
obligations and debts of GAOR to the State of Georgia including deferred tax liabilities of
approximately $380,000. The gain recorded on disposition of GAOR was $330,923. |
|
|
|
The results of operations of GAOR have been classified as discontinued for all periods
presented. Net income from discontinued operations is disclosed net of taxes and minority
interest. The plan to dispose of the asset led to the write-off of an inter-company payable
relating to oil sales purchased from Ninotsminda Oil Company Limited. These items have been
respectively recorded in impairment of other assets and other income (expense) components of
continuing operations. |
|
|
|
The results of discontinued operations in respect of GAOR consisted of the following for the
nine months ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Operating Revenues |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Loss (Income) Before Income taxes and
Minority Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest in Loss |
|
|
|
|
|
|
(523,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Discontinued Operation |
|
$ |
|
|
|
$ |
(523,968 |
) |
|
|
|
|
|
|
|
23
|
|
The results of discontinued operations in respect of GAOR consisted of the following for the
three months ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Operating Revenues |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Loss (Income) Before Income taxes and
Minority Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest in Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss (Income) from Discontinued Operation |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
3-megawatt duel fuel power generator |
|
|
|
In 2003, we signed a sales agreement disposing of a 3-megawatt duel fuel power generator for
$600,000. Following receipt of a non-refundable deposit of $300,000, the unit was shipped
to the US for testing. The test was completed at the beginning of 2005, however, the
proposed buyer failed to meet the sale contract terms resulting in
the loss of its deposit
in the third quarter, 2005. |
|
|
|
The generator has been classified as Assets held for sale for all periods presented and we
expect to agree a sale with a different buyer in the near future. |
|
|
|
Gross consolidated assets in respect of the generator included in assets held for sale
consisted of the following at September 30, 2005 and December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
|
(Unaudited) |
|
|
(Audited) |
|
Assets held for sale: |
|
|
|
|
|
|
|
|
Capital assets, net |
|
$ |
600,000 |
|
|
$ |
600,000 |
|
|
|
|
|
|
|
|
|
|
$ |
600,000 |
|
|
$ |
600,000 |
|
|
|
|
|
|
|
|
20 |
|
Segment and Geographical Data |
|
|
|
The segment and geographical data below is presented for the nine and three month periods
ended September 30, 2005. For the nine and three month periods ended September 30, 2004 the
Republic of Georgia represented the only geographical segment. |
24
Operating revenues from continuing operations for the nine month period ended September 30,
2005 by geographical area were as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Oil and Gas Exploration, Development And Production |
|
|
|
|
Republic of Georgia |
|
$ |
5,147,056 |
|
Republic of Kazakhstan |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,147,056 |
|
|
|
|
|
Operating revenues from continuing operations for the three month period ended September
30, 2005 by geographical area were as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Oil and Gas Exploration, Development And Production |
|
|
|
|
Republic of Georgia |
|
$ |
2,580,847 |
|
Republic of Kazakhstan |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,580,847 |
|
|
|
|
|
Operating (loss) income from continuing operations for the nine month period ended
September 30, 2005 by geographical area was as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Oil and Gas Exploration, Development And Production |
|
|
|
|
Republic of Georgia |
|
$ |
1,119,974 |
|
Republic of Kazakhstan |
|
|
(486,492 |
) |
|
|
|
|
|
Corporate and Other Expenses |
|
|
(7,641,359 |
) |
|
|
|
|
|
|
|
|
|
Total Operating Loss |
|
$ |
(7,007,877 |
) |
|
|
|
|
25
Operating income (loss) income from continuing operations for the three month period ended
September 30, 2005 by geographical area was as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Oil and Gas Exploration, Development And Production |
|
|
|
|
Republic of Georgia |
|
$ |
1,172,162 |
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Republic of Kazakhstan |
|
|
(486,492 |
) |
|
|
|
|
|
Corporate and Other Expenses |
|
|
(3,277,385 |
) |
|
|
|
|
|
|
|
|
|
Total Operating Loss |
|
$ |
(2,591,715 |
) |
|
|
|
|
Net (loss) income before minority interest from continuing operations for the nine month
period ended September 30, 2005 by geographical area was as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Oil and Gas Exploration, Development And Production |
|
|
|
|
Republic of Georgia |
|
$ |
1,119,974 |
|
Republic of Kazakhstan |
|
|
(486,492 |
) |
|
|
|
|
|
Corporate and Other Expenses |
|
|
(8,305,371 |
) |
|
|
|
|
|
|
|
|
|
Net (Loss) Income Before Minority Interest |
|
$ |
(7,671,889 |
) |
|
|
|
|
Net (loss) income before minority interest from continuing operations for the three month
period ended September 30, 2005 by geographical area was as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Oil and Gas Exploration, Development And Production |
|
|
|
|
Republic of Georgia |
|
$ |
1,172,162 |
|
Republic of Kazakhstan |
|
|
(486,492 |
) |
|
|
|
|
|
Corporate and Other Expenses |
|
|
(3,627,600 |
) |
|
|
|
|
|
|
|
|
|
Net (Loss) Income Before Minority Interest |
|
$ |
(2,941,930 |
) |
|
|
|
|
The segment and geographical data below is presented as of September 30, 2005. As of
December 31, 2004 the Republic of Georgia represented the only geographical segment.
26
Identifiable assets of continuing and discontinued operations as of September 30, 2005 by
business segment and geographical area were as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
|
|
(Unaudited) |
|
Corporate |
|
|
|
|
Republic of Georgia |
|
$ |
511,050 |
|
Republic of Kazakhstan |
|
|
|
|
Western Europe (principally cash) |
|
|
37,344,287 |
|
|
|
|
|
Total Corporate |
|
|
37,855,337 |
|
|
|
|
|
|
|
|
|
|
Oil and Gas Exploration,
Development and Production |
|
|
|
|
Republic of Georgia |
|
|
97,948,276 |
|
Republic of Kazakhstan |
|
|
10,550,497 |
|
|
|
|
|
|
Assets Held for Sale |
|
|
|
|
Western Europe |
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Identifiable Assets |
|
$ |
146,954,110 |
|
|
|
|
|
27
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Qualifying Statement With Respect To Forward-Looking Information
THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS. SEE FORWARD-LOOKING
STATEMENTS BELOW AND ELSEWHERE IN THIS REPORT.
In addition to the historical information included in this report, you are cautioned that this
Form 10-Q contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When the words believes, plans, anticipates, will likely
result, will continue, projects, expects, and similar expressions are used in this Form
10-Q, they are intended to identify forward-looking statements, and such statements are subject
to certain risks and uncertainties which could cause actual results to differ materially from those
projected. Furthermore, our plans, strategies, objectives, expectations and intentions are subject
to change at any time at the discretion of management and the Board.
These forward-looking statements speak only as of the date this report is filed. The Company does
not intend to update the forward-looking statements contained in this report, so as to reflect
events or circumstances after the date hereof or to reflect the occurrence of unanticipated events,
except as may occur as part of our ongoing periodic reports filed with the SEC.
The following is a discussion of our financial condition, results of operations, liquidity and
capital resources. This discussion should be read in conjunction with our consolidated annual
financial statements and the notes thereto, included in our Annual Report on Form 10-K filed for
the year ended December 31, 2004 and subsequent amendments thereof filed on Forms 10-K/A in
addition to our condensed consolidated quarterly financial statements and the notes thereto,
included in Item 1 of this report.
Overview
Operationally, during the quarter, we continued to progress our exploration, appraisal and
development plans both in our core area of Georgia and on our more recently acquired assets in
Kazakhstan.
Georgia
Following the failure of Weatherford International Ltd, (Weatherford) to successfully complete
any horizontal sidetrack development wells on the Ninotsminda Field using Under-Balanced Coiled
Tubing Drilling (UBCTD) technology, Weatherford demobilised its equipment and left Georgia in
July. Despite this lack of success, which we attribute mainly to multiple equipment failures, we
still believe that underbalanced technology is the best technology with which to develop both the
Ninotsminda and Samgori Fields. In this respect, we continue our negotiations with other UBCTD
equipment and service suppliers and hope to be in a position to return to under-balanced drilling
operations in 2006.
In the meantime, we have continued with our jointed pipe drilling operations using our own rigs and
equipment and the directional drilling services of Baker Hughes International (Baker Hughes) to
drill horizontal sidetrack wells on the Ninotsminda Field. On October 27, 2005 we reached total
depth (TD) on the first sidetrack, the N100H2 well. The well was completed in the Middle Eocene
reservoir having drilled a horizontal section of 1,667 feet (508 metres). A pre-perforated liner
has been run over a 1,421 foot (433 metres) interval in the horizontal section and the well is
currently being tested
On August 26, 2005 we announced that the Manavi M11Z well had reached a TD of 14,994 feet (4,570
metres) measured depth (MD) in the Cretaceous. This well was drilled to appraise the Manavi M11
oil discovery which was made in 2003 but not fully tested due to the collapse of the production
tubing due to pressure during testing. The M11Z well has been deviated to a location some 0.37
miles (0.6 kilometres) away from the original hole. It was sidetracked using a Saipem S.p.A.
(Saipem) Ideco E-2100Az drilling rig and a Baker-Hughes oil-based mud
system to drill through the over-pressured swelling clays that had proven challenging in the past.
The well was completed in the Cretaceous using slim-hole drilling technology.
28
In the M11Z well, the primary Cretaceous limestone target was encountered at 14,032 feet (4,277
metres) MD some 230 feet (70 metres) MD higher than in the original M11 well while the secondary
Middle Eocene target zone was penetrated at 13,009 feet (3,965 metres) MD again significantly
higher than in the M11 well. Drilling data and slim hole wireline logs indicate the presence of
hydrocarbons in both the Cretaceous and Middle Eocene target zones.
On October 6, 2005 we announced that we had commenced testing operations on M11Z. A pre-perforated
27/8 inch (73 mm) liner was run in the slim hole, and the Saipem drilling rig removed
from the site while CanArgo Rig #1 was mobilised to the location for testing operations. During
initial testing operations it emerged that the section of the liner adjacent to the Cretaceous
limestone interval had become differentially stuck probably due to a build up of filter cake on and
in the formation during drilling which is in itself indicative of a permeable zone. Although small
amounts of oil and gas have been recovered from the well, no significant flow was achieved during
the initial testing. Despite efforts to wash the mixture of drilling fluid and carbonate from the
well bore using coiled tubing, it was not possible to clean out the formation and it appears that
the Cretaceous limestone formation has been blocked and is not in communication with the wellbore
at this time.
We are continuing to consult with Schlumberger, our well completions experts, to advise on the best
technique in which to re-establish communication with the formation in M11Z by removing
near-wellbore damage. A number of proposals are being considered including matrix acidizing
performed below fracturing rate and pressure with the acid conveyed to the area of interest by
coiled tubing, and slickline conveyed perforating. However, neither option excludes the other and
we are making preparations to recommence the testing operations within the next two weeks.
We have identified further appraisal locations on the Manavi structure. The next well, M12, will
be drilled approximately 2.5 miles (4 kilometres) to the west of the M11 location along the crest
of the structure. The drilling site is already prepared and a CanArgo rig is being mobilised to the
site to drill out and set the surface casing in advance of Saipem being mobilised from the Norio
exploration well.
Following the success of drilling through over-pressured clays on the M11Z well with the Saipem rig
and the Baker-Hughes oil based mud system, the Saipem drilling rig was mobilised to the Norio MK72
exploration well where drilling operations are ongoing.
The well, located within the Norio Production Sharing Agreement area is targeting a potentially
large prospect mapped at Middle Eocene level just to the north of the
Samgori Field. The well is currently at a depth of 15,853 feet (4,832
metres), is drilling ahead and is near to the prognosed target zone. Oil has already been encountered in the well which
penetrated approximately 985 feet (300 metres) of net sandstones in the Oligocene secondary target,
with oil being indicated by electric logs and with good oil and gas shows while drilling.
Negotiations are continuing with the Georgian Government on the principles of a long-term gas
offtake agreement and subject to concluding the agreement, we plan to
drill an appraisal well on the Kumisi gas prospect to the west of the Rustavi R16 well, which flowed gas from the Cretaceous sequence at a depth of 12,792 feet
(3,900 metres), close to the interpreted gas-water contact. Given our current level of operations
in the country, it is unlike any well would now commence before the second half of 2006.
Kazakhstan
In Kazakhstan, our Kyzyloi Gas Field development project and further exploration in the surrounding
area is progressing well. The Kyzyloi Gas Field is located within the Akkulka exploration block, a
411,749 acres (1,667 km2) area located in the North Ustyurt basin in western Kazakhstan,
just to the west of the Aral Sea.
On the Kyzyloi Field three wells have been tested to date, namely the KYZ105, KYZ104 and KYZ102
wells. Well KYZ105 was perforated and flowed gas at a rates of up to 1.77 million cubic feet
(50,000 cubic metres) per day on an 20/64 inch (8 mm) choke. The KYZ104 well flowed gas at a rate
of 3.39 million cubic feet (96,000 cubic metres) per day on a 40/64 inch (16 mm) choke while well
KYZ102 flowed gas at a rate in excess of 4.24 million cubic feet
(120,000 cubic metres) per day on a 60/64 inch (20 mm) choke. All three wells are now shut in
waiting for the installation of field development equipment. Three further wells are to be tested
for the initial field development in
29
which a 37.3 mile (60 km) pipeline is planned to tie the field
to the main Bukhara-Urals gas trunkline. A long-term gas offtake agreement is currently under
negotiation, with first gas expected in Q2 2006, with an initial plateau rate of 17.7 million cubic
feet (500,000 cubic metres) per day.
On October 6, 2005 we announced the execution of a Memorandum of Understanding covering
co-operation in the gas sector in Kazakhstan with Gaz Impex S.A., one of the leading Kazakh based
companies involved in gas marketing.
The Akkulka Block exploration program is continuing, with a further two year extension having now
been agreed by the Expert Commission. Currently three of the five planned exploration wells have
reached Total Depth (TD) (AKK03 TD 2,461 feet (750 metres),
AKK05 TD 2,215 feet (675 metres)
and AKK04 TD 1,969 feet (600 metres)). These well are being drilled on seismic anomalies which we
have identified on modern seismic data in our acreage surrounding the Kyzyloi Field and are
analogous to the Kyzyloi structure. In all three wells gas shows have been observed while
drilling and wireline logs indicate the presence of gas bearing sands in the wells. The AKK03 and
AKK05 wells are cased and casing is being run in the AKK04 well. Testing has commenced but is not
yet completed on any well as such testing is being undertaken as part of a co-ordinated testing
programme including the Kyzyloi Field development wells. This co-ordinated approach is both
cost-effective and assists in logistics operating in this area.
On October 6, 2005 we announced that our Kazakh subsidiary BN Munai LLP had signed with the
Minister of Energy and Mineral Resources of Kazakhstan, the Parliament of Kazakhstan, and in
conjunction with the major operating companies in Kazakhstan, a Memorandum of Understanding on
Extractive Industries Transparency Initiative.
The seismic reprocessing and interpretation project on the Akkulka contract area is on schedule.
The existing seismic data is being reprocessed with the objective of improving the resolution at
depth in an attempt to firm up deeper prospects. A number of potential structures have already
been identified. We believe that these prospects have potential to be similar to the reported large
gas condensate fields just to the south in Uzbekistan which lie along the same structural trend.
Based on the results of the interpretation of the reprocessed date, we may include a deep
exploration well in our plans for 2006.
Work is continuing to finalise the acquisition of the exploration contract for the Greater Akkulka
area, an area of approximately 10,000 km2 (10.9 million acres) surrounding the Akkulka
Block where we are currently conducting our exploration drilling program. We believe that this
area has substantial exploration potential. We have also submitted an application for two further
areas in the recent Kazakh licensing round and expect that the winners will be announced in the
early part of 2006.
Liquidity and Capital Resources
As of September 30, 2005 we had working capital of $28,621,000 compared to working capital of
$23,952,000 as of December 31, 2004.
On July 25, 2005, we announced that we had closed the private placement of a $25,000,000 issue of
Senior Secured Notes due July 25, 2009 with a group of investors arranged through Ingalls & Snyder
LLC of New York City.
The proceeds of this financing, after the payment of all professional and placing expenses and fees
estimated at $550,000, have been used to redeem short term debt and accrued interest in the amount
of approximately $7,400,000 under the Promissory Note with Cornell Capital, to fund the appraisal
of a new gas project in Georgia, to fund the development of the Kyzyloy Gas Field in Kazakhstan and
adjacent exploration areas, and for additional working capital for our development, appraisal and
exploration activities in Georgia. In addition, we terminated the SEDA which we had with Cornell
Capital with effect as of August 24, 2005.
30
In connection with the placement of the Senior Secured Notes we entered into a Note Purchase
Agreement with a group of private investors (the Purchasers), all of whom represented that they
qualified as accredited investors
under Rule 501(a) promulgated under the Securities Act of 1933, as amended (the Securities Act).
Pursuant to the Note Purchase Agreement, we issued a note due July 25, 2009 in the aggregate
principal amount of $25,000,000 to Ingalls & Snyder LLC, as nominee for the Purchasers, in a
transaction intended to qualify for an exemption from registration under the Securities Act
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder. For purposes hereof each
of the Purchasers is deemed a beneficial holder of the Note and such Purchasers may each be
assigned their own Note as provided in the Note Purchase Agreement and, accordingly, all such Notes
are referred to herein collectively as the Note and any such Purchaser or its assignee is
referred to herein as a holder of the Note.
The terms of the Note Purchase Agreement and related agreements include the following:
Interest
. The unpaid principal balance under the Note bears interest (computed on the basis of a
360-day year of twelve 30-day months) (a) at increasing rates ranging from 3% per annum from the
date of issuance to December 31, 2005; 10% per annum from January 1, 2006 until December 31, 2006;
and 15% per annum from January 1, 2007 until final payment, payable semi-annually, on June 30 and
December 30 , commencing December 30, 2005, until the principal shall have become due and payable
and (b) at 3% per annum above the applicable rate on any overdue payments of principal and
interest.
Optional
Prepayments. CanArgo may, at its option, upon at least not less than 90 days and not more
than 120 days prior written notice, prepay at any time and from time to time after July 31, 2006,
all or any part of the Note, in a principal amount of not less than $100,000 at the following
Redemption Prices (expressed as percentages of the principal amount so prepaid): 105% after July
31, 2006; 104% after January 1, 2007; 103% after July 1, 2007; 102% after January 1, 2008; 101%
after July 1, 2008, and 100% after January 1, 2009, together with all accrued and unpaid interest.
Mandatory Prepayment. CanArgo shall offer to prepay all, but not less than all, of the Note, on
not less than 15 business days prior written notice, in the event of an occurrence of a Change of
Control or Control Event. Change in Control is defined to mean (a) if CanArgo shall at any time
cease to be a publicly held company or cease to have its capital stock traded on an exchange or (b)
a transaction or series of related transactions pursuant to which (i) at least fifty-one percent
(51%) of the outstanding shares of CanArgos common stock or, on a fully diluted basis, shall
subsequent to July 25, 2005 be owned by any person which is not related to or affiliated with
CanArgo, (ii) if CanArgo merges into or with, consolidates with or effects any plan of share
exchange or other combination with any person which is not related to or affiliated with CanArgo,
or (iii) if CanArgo disposes of all or substantially all of its assets other than in the ordinary
course of business and Control Event is defined to mean (i) the execution by CanArgo or any
material subsidiary of CanArgo which has guaranteed the indebtedness evidenced by the Note (a
CanArgo Group Member) of any agreement or letter of intent with respect to any proposed
transaction or event or series of transactions or events which, individually or in the aggregate,
may reasonably be expected to result in a Change in Control, or (ii) the execution of any written
agreement which, when fully performed by the parties thereto, would result in a Change in Control.
Conversion. The Note is convertible, at the option of holders, into shares of CanArgo common stock
(Conversion Stock) at a conversion price per share of $0.90 (the Conversion Price), which is
subject to adjustment: (a) if CanArgo issues any equity securities (other than pursuant to the
granting of employee stock options pursuant to shareholder approved employee stock option plans or
existing outstanding options, warrants and convertible securities) at a price per share of less
than $0.90 per share net of all fees, costs and expenses in which case the Conversion Price will be
reset to such lower price and (b) in connection with any stock split, stock dividend, reverse
stock split, reclassification, recapitalization, combination, merger, consolidation or any similar
transaction, in which case the Conversion Price and number of shares of Conversion Stock will be
appropriately adjusted to reflect any such event, such that the holders of the Note will receive
upon conversion the identical number of shares of common stock or other consideration or property
to be received by the holders of the common stock as if the holders had converted the Note
immediately prior to any such event as such amount would then be adjusted by reason of such stock
split, stock dividend, reverse stock split, reclassification, recapitalization, combination,
merger, consolidation or other similar transaction. No fractional shares of common stock shall be
issued upon any conversion; instead the Conversion Price shall be appropriately adjusted so that
holders shall receive the nearest whole number of shares upon any conversion.
In connection with the execution and delivery of the Note Purchase Agreement, CanArgo entered into
a Registration Rights Agreement with the Purchasers pursuant to which it agreed to register the
Conversion Stock for resale under the Securities Act.
31
Security. Payment of all amounts due and payable under the Note Purchase Agreement, the Note and
all related agreements (collectively, the Loan Documents) is secured by a security interest in
all of CanArgos assets, including its principal Guernsey bank account, as well as, guarantees from
each other CanArgo Group Member and pledges of all of the outstanding capital stock of Ninotsminda
Oil Company Limited, a limited liability company incorporated under the laws of the Republic of
Cyprus; CanArgo Limited, a company incorporated under the laws of the Island of Guernsey; and
Tethys Petroleum Investments Limited, a company incorporated under the laws of the Island of
Guernsey, each of which is an indirect subsidiary of CanArgo. If CanArgo forms or acquires a
Material Subsidiary (as defined in the Note Purchase Agreement) it shall cause such Subsidiary to
execute a Subsidiary Guaranty (other than for certain excepted companies and legal entities) and
thereby become a CanArgo Group Member subject to the provisions of the Note Purchase Agreement.
Covenants. Under the terms of the Note Purchase Agreement CanArgo is subject to certain
affirmative and negative covenants, which can be waived by the beneficial holders of at least 51%
of the outstanding principal amount of the Note (the Required Holders), including the following
affirmative and negative covenants, respectively: (a) providing current information regarding
CanArgo and rights of inspection; compliance with laws; maintenance of corporate existence,
insurance and properties; payment of taxes; providing additional security; payment of counsel fees
for the Purchasers (not in excess of $100,000) and a placement fee of $250,000; and termination of
the SEDA, and (b) restrictions on: transactions with affiliates; mergers, consolidations and sales
of all of CanArgos assets; liens (except for certain permitted liens); the issuance of additional
senior or pari passu indebtedness; changes in CanArgos line of business; certain types of
payments; sale-and leasebacks; sales of assets other than in the ordinary course of business;
future Indebtedness, as defined in the Note Purchase Agreement (other than certain permitted
indebtedness); canceling, terminating, waiving or amending provisions of, or selling any interests
in (other than under certain circumstances) any of the Basic Agreements (as defined in the Note
Purchase Agreement); and adopting any anti-take-over defenses except as permitted by the Note
Purchase Agreement. CanArgo is not subject to any financial covenants, such as the maintenance of
minimum net worth or coverage ratios, other than the restriction on its ability to incur additional
Indebtedness.
Events of Default. An Event of Default shall exist if one or more of the following occurs and is
continuing: (i) failure to pay when due any principal and, after 5 days, any interest, payable
under the Note or any Security Document; (ii) default in the performance of certain enumerated
covenants; (iii) default in the performance or compliance with any other terms which remains
unremedied for 30 days after the earlier of a Responsible Officer first obtaining actual and not
constructive knowledge of the default or the receipt of notice; (iv) any representation or warranty
made in writing on behalf of CanArgo or any other CanArgo Group Member proves to have been false or
incorrect in any material respect; (v) customary events involving bankruptcy, insolvency or
reorganization; (vi) the entry of a final judgment or judgments in excess of $2,500,000 (uncovered
by insurance), which is not discharged or settled; (vii) violations of ERISA or the Internal
Revenue Code of 1986, as amended, under funding of accrued benefit liabilities and other matters
relating to employee benefit plans subject to ERISA or Foreign Pension Plans; (viii) any Loan
Document ceases to be in full force and effect (except in accordance with its terms) or its
validity is challenged by CanArgo or any affiliate; (ix) CanArgo or any other CanArgo Group Member
modifies its Charter Document which results in a Default or Event of Default or will adversely
affect the rights of Noteholders; or (x) a change occurs in the consolidated financial condition of
CanArgo or in the physical, operational or financial status of the Properties (as defined in the
Note Purchase Agreement), which change has a Material Adverse Effect (as defined in the Note
Purchase Agreement).
Other than for certain Events of Default that will result in an automatic acceleration without
notice, such as bankruptcy, if an Event of Default occurs and is continuing, the Required Holders
may at any time at its or their option, by notice to CanArgo, declare all outstanding Notes to be
immediately due and payable and holders of the Note may proceed to enforce their rights under the
Loan Documents at law or in equity. CanArgo is responsible for the payment of all costs of
collection, including all reasonable legal fees actually incurred in connection therewith.
Miscellaneous. The Note Purchase Agreement, the Note, the Security Agreement, the Subsidiary
Guaranty and the Registration Rights Agreement are all governed by New York Law and the CanArgo
Group Members party thereto subject themselves to the jurisdiction of New York Courts and waive the
right to jury trial. The Pledge Agreements
and the Security Interest Agreement relating to CanArgos bank account are governed by the laws of
the Bailiwick of Guernsey and the Republic of Cyprus, as provided therein. The Company incurred
fees and commissions in connection with the placement of the Senior Secured Notes in the aggregate
amount of $385,000.
32
On August 1, 2005, we made a payment of $7,422,410.96 being the outstanding principal and accrued
interest amount payable by CanArgo to Cornell Capital under the terms of both the Promissory Note
and the SEDA. In accordance with Section 6 of the Promissory Note, upon receipt of such
outstanding sums the Promissory Note is deemed cancelled.
We received $12,332,548 proceeds net of $285,749 of discounts (excluding the commitment fee of
$10,000 and 850,000 shares of common stock previously paid to Cornell Capital) pursuant to twenty
one takedowns under the SEDA in which we issued a total of 13,012,945 shares of our common stock to
Cornell Capital at an average price of $0.9477 per share. From these proceeds, $1,532,548 was used
to repay the promissory note of $1,500,000 plus accrued interest on the note of $32,548 to Cornell
Capital and partially repay the promissory note of $15,000,000.
Cash flows from our Georgian operations together with the proceeds of the private placement of a
$25,000,000 issue of Senior Secured Notes (detailed above) means we have the working capital
necessary to cover our immediate and near term funding requirements with respect to our currently
planned development activities in the Republic of Georgia on our Ninotsminda and Samgori Fields and
the appraisal of our Manavi oil discovery, and our exploration and development plans in the
Republic of Kazakhstan, absent any unforeseen circumstances.
While a considerable amount of infrastructure for the Ninotsminda and Samgori Fields has already
been put in place, we cannot provide assurance that:
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funding of a field development plan will be timely; |
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that our development plan will be successfully completed or will increase production; or |
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that field operating revenues after completion of the development plan will exceed operating costs. |
Under the terms of the Senior Secured Notes we are restricted from incurring future indebtedness
and from issuing additional senior or pari passu indebtedness, except with the prior consent of the
Required Holders or in limited permitted circumstances. The definition of indebtedness encompasses
all customary forms of indebtedness including, without limitation, liabilities for the deferred
consideration, liabilities for borrowed money secured by any lien or other specified security
interest, liabilities in respect of letters of credit or similar instruments (excluding letters of
credit which are 100% cash collateralised) and guarantees in relation to such forms of indebtedness
(excluding parent company guarantees provided by the Company in respect of the indebtedness or
obligations of any of the Companys subsidiaries under its Basic Documents (as defined in the Note
Purchase Agreement)). Pursuant to the terms of the Note Purchase Agreement, permitted future
indebtedness is (a) indebtedness outstanding under the Senior Secured Notes; (b) any additional
unsecured indebtedness, the aggregate amount outstanding thereunder at any time not exceeding
$1,250,000 and; (c) certain unsecured intra-group indebtedness (in the case of indebtedness of a
CanArgo Group Member (as defined in the Note Purchase Agreement) to a direct or indirect subsidiary
of the Company which is not deemed to be a Material Subsidiary under the Note Purchase Agreement
the aggregate amount outstanding under the particular indebtedness shall not exceed $1,000,000 at
any time).
To pursue existing projects beyond our immediate appraisal and development plans and to pursue new
opportunities, we may require additional capital. While expected to be substantial, without
further exploration work and evaluation the exact amount of funds needed to fully develop all of
our oil and gas properties cannot at present, be quantified. Potential sources of funds include
additional sales of equity securities, project financing, debt financing and the participation of
other oil and gas entities in our projects. Based on our past history of raising capital and
continuing discussions, we believe that such required funds may be available. However, there is no
assurance that such funds will be available, and if available, will be offered on attractive or
acceptable terms. Should such funding not be forthcoming, we may not be able to pursue projects
beyond our current appraisal and development plans or to pursue new opportunities. As discussed
above, under the terms of the Senior Secured Notes we are restricted from incurring additional
Indebtedness.
33
Development of the oil and gas properties and ventures in which we have interests involves
multi-year efforts and substantial cash expenditures. While funding is available to us to pursue
our current appraisal and development
plans, full development of our oil and gas properties and ventures may require the availability of
substantial additional financing from external sources. We may also, where opportunities exist,
seek to transfer portions of our interests in oil and gas properties and ventures to entities in
exchange for such financing. We generally have the principal responsibility for arranging
financing for the oil and gas properties and ventures in which we have an interest. There can be
no assurance, however, that we or the entities that are developing the oil and gas properties and
ventures will be able to arrange the financing necessary to develop the projects being undertaken
or to support the corporate and other activities of CanArgo. There can also be no assurance that
such financing will be available on terms that are attractive or acceptable to or are deemed to be
in the best interest of CanArgo, such entities and their respective stockholders or participants.
Ultimate realization of the carrying value of our oil and gas properties and ventures will require
production of oil and gas in sufficient quantities and marketing such oil and gas at sufficient
prices to provide positive cash flow to CanArgo. Establishment of successful oil and gas
operations is dependent upon, among other factors, the following:
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mobilization of equipment and personnel to implement effectively drilling, completion and production activities; |
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raising of additional capital; |
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achieving significant production at costs that provide acceptable margins; |
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reasonable levels of taxation, or economic arrangements in lieu of taxation in host countries; and |
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the ability to market the oil and gas produced at or near world prices. |
Subject to our ability to raise additional capital, above, we have plans to mobilize resources and
achieve levels of production and profits sufficient to recover the carrying value of our oil and
gas properties and ventures. However, if one or more of the above factors, or other factors, are
different than anticipated, these plans may not be realized, and we may not recover the carrying
value of our oil and gas properties and ventures.
Balance Sheet Changes
Cash and cash equivalents increased $2,403,000 from $24,617,000 at December 31, 2004 to
$27,020,000 at September 30, 2005. The increase was primarily due to cash received
pursuant to the takedowns under the SEDA and the Senior Secured Notes. This has been
partially offset by expenditures in the period to fund the cost of preparing wells for our
horizontal development program at the Ninotsminda and Samgori Fields, the appraisal of our
Manavi oil discovery in Georgia, activities in Kazakhstan and net cash used by operating
activities.
Restricted cash increased to $3,155,000 at September 30, 2005 from $1,400,000 at December
31, 2004 due to the funding of a certificate of deposit to secure the issuance of letters
of credit as required under the rig rental and drilling contracts we entered into with
Saipem, S.p.A. and Baker Hughes International.
Accounts receivable decreased from $2,526,000 at December 31, 2004 to $2,163,000 at September 30,
2005 primarily due to the receipt of $800,000 from our insurers in relation to N100 blow out costs,
partially offset by further refundable blow out costs incurred, and timing issues related to sales
of crude oil at month end.
Inventory increased from $254,000 at December 31, 2004 to $612,000 at September 30, 2005 due to the
accumulation of larger batches of oil for export sales.
Prepayments increased from $1,518,000 at December 31, 2004 to $3,857,000 at September 30,
2005 as a result of an increase in prepayments for materials and services related to our
appraisal activities at the Manavi oil discovery, our horizontal well development program
at the Ninotsminda and Samgori Fields and our Kazakhstan activities. Upon receipt of the
materials and services, those amounts will be transferred to capital assets. This increase
is included in the statement of cash flows as an investing activity.
Assets held for sale of $600,000 at September 30, 2005 and December 31, 2004 consist of a
3-megawatt duel fuel power generator.
Other current assets increased from $122,000 at December 31, 2004 to $129,000 at September 30,
2005.
34
Capital assets net, increased to $109,118,000 at September 30, 2005 from $72,996,000 at December
31, 2004, due to investing in capital assets including oil and gas properties and equipment,
principally related to the Ninotsminda Production Sharing Contract, the acquisition of Tethys
Petroleum Investments Limited and its 70% interest in the Kazakhstan based company BN Munai LLP.
Prepaid financing fees decreased to $300,000 at September 30, 2005 from $649,000 at December 31,
2004 due to the offset of commissions and professional fees, relating to the SEDA with Cornell
Capital, against capital proceeds in excess of par value, partially offset by the fees charged by
Cornell Capital in connection with the $15,000,000 Promissory Note and fees and commissions
incurred in connection with the $25,000,000 Senior Secured Notes in the aggregate amount of
$385,000.
Investments in and advances to oil and gas and other ventures of $479,000 at December 31, 2004
represented advances to our oil and gas interests in Kazakhstan partially offset by the impairment
of our investment in the project as a result of losses incurred. We now own 70% of the Kazakhstan
project, through our ownership of Tethys Petroleum Investments Limited, and our investment is
reflected in capital assets as at September 30, 2005.
Accounts payable decreased to $1,931,000 at September 30, 2005 from $2,332,000 at December 31, 2004
primarily due to timing differences in respect of payments to
suppliers in connection with our
appraisal activities at the Manavi oil discovery, our horizontal well development program at the
Ninotsminda and Samgori Fields and our Kazakhstan activities.
Loans payable decreased to $931,000 at September 30, 2005 from $1,500,000 at December 31, 2004 due
to the repayment of the $1,500,000 loan at December 31, 2004 by a series of takedowns in February
and March 2005 under the SEDA. The $931,000 loan payable at September 30, 2005 relates to the
$1,050,000 convertible loan facility dated August 27, 2004 convertible into common stock with
detachable warrants to purchase 2,000,000 common shares. In accordance with EITF 00-27
Application of Issue No. 98-5 to Certain Convertible Instruments, a portion of the proceeds of
debt is accounted for as a discount to the face amount of the notes and is based on the relative
fair value of the loans and the warrant securities and conversion stock at the time of issuance.
At September 30, 2005 the unamortized discount amounted to $119,000.
Other liabilities decreased to $37,000 at September 30, 2005 from $3,081,000 at December 31, 2004
primarily due to the repayment in full of an oil sales security deposit in the amount of $2,300,000
and the recording of the $301,000 non-refundable deposit lost by the proposed buyer of the
generator, due to failing to meet the sale contract terms, as other income.
Accrued liabilities increased from $172,000 at December 31, 2004 to $6,016,000 at September 30,
2005 due primarily to accrued contractor invoices in connection with our Georgian operations of
which approximately $4,931,000 relates to the disputed Weatherford invoices referred to in Note 13
of these financial statements.
Long term
debt represents the issue of the $25,000,000 Senior Secured Notes in July, 2005. The long-term debt at
December 31, 2004 of $832,000 related to the $1,050,000 convertible loan facility convertible into
common stock with detachable warrants to purchase 2,000,000 common shares, now recorded in loans
payable.
Other non current liabilities of $439,000 at September 30, 2005 represents the difference between
the interest computed using the actual interest rate in effect and the effective interest rate due
on the $25,000,000 Senior Convertible Secured Loan Notes.
Provision
for future site restoration increased to $700,000 at September 30, 2005 from $422,000 at
December 31, 2004 primarily due to provisions for future site restoration in Kazakhstan as a result
of the acquisition of new oil and gas properties.
Deferred compensation expense increased to $2,415,000 at September 30, 2005 from $1,976,102 at
December 31, 2004 due to share options issue expensed during the period.
35
Contractual Obligations and Commercial Terms
Our principal business and assets are derived from production sharing contracts and agreements
(PSCs) in the Republic of Georgia and to a lesser extent, in the Republic of Kazakhstan. The
legislative and procedural regimes governing PSCs and mineral use licenses in Georgia have
undergone a series of changes in recent years resulting in certain legal uncertainties.
Our PSCs and mineral use licenses, entered into prior to the introduction in 1999 of a new
Petroleum Law governing such agreements have not, as yet, been amended to reflect or ensure
compliance with current legislation. As a result, despite references in the current legislation
grandfathering the terms and conditions of our PSCs, conflicts between the interpretation of our
PSCs and mineral use licenses and current legislation could arise. Such conflicts, if they arose,
could cause an adverse effect on our rights under the PSCs. However the Norio PSA, the Tbilisi PSC
and the Samgori PSC were concluded after enactment of the Petroleum Law, and under the terms and
conditions of this legislation.
To confirm that the Ninotsminda Production Sharing Contract (the Ninotsminda PSC) and the mineral
usage license issued prior to the introduction in 1999 of the Petroleum Law were validly issued, in
connection with its preparation of the Convertible Loan Agreement with us, the International
Finance Corporation, an affiliate of the World Bank received in November 1998 confirmation from the
State of Georgia, that among other things:
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The State of Georgia recognizes and confirms the validity and
enforceability of the Ninotsminda PSC and the license and all
undertakings the State has covenanted with Ninotsminda Oil Company
Limited (NOC) thereunder; |
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the license was duly authorized and executed by the State at the
time of its issuance and remained in full force and effect
throughout its term; and |
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the license constitutes a valid and duly authorized grant by the
State, being and remaining in full force and effect as of the
signing of this confirmation and the benefits of the license fully
extend to NOC by virtue of its interest in the license holder and
the contractual rights under the Ninotsminda PSC. |
Despite this confirmation and the grandfathering of the terms of existing PSCs in the Petroleum
Law, subsequent legislative or other governmental changes could conflict with, challenge our rights
or otherwise change current operations under the Ninotsminda PSC. No challenge has been made to
date.
In 2002, the Participation Agreement for the three well exploration program on the Ninotsminda /
Manavi area with a subsidiary of the US power company AES was terminated without AES earning any
rights to any of the Ninotsminda / Manavi area reservoirs. The Company therefore has no present
obligations in respect of AES. However, under a separate Letter of Agreement, if gas from the sub
Middle Eocene is discovered and produced from the area covered by the Participation Agreement, AES
will be entitled to recover at the rate of 15% of future gas sales from the Sub Middle Eocene, net
of operating costs, approximately $7,500,000, representing their prior funding under the
Participation Agreement.
Under the Production Sharing Contract for Blocks XIG and XIH (the Tbilisi
PSC) in the Republic of Georgia our subsidiary CanArgo Norio Limited will evaluate existing
seismic and geological data during the first year and acquire additional seismic data within three
years of the effective date of the Agreement which is September 29, 2003. The total commitment
over the next ten months is $350,000.
In April 2004, we acquired a 50% interest in the Samgori (Block XIB) Production Sharing
Contract (Samgori PSC) in Georgia. This interest was acquired from Georgian Oil Samgori Limited
(GOSL), a company wholly owned by Georgian Oil, by one of our subsidiaries, CanArgo Samgori
Limited (CSL). Under the terms of the agreement dated January 8, 2004, it is planned that up to
10 horizontal wells will be drilled on the Samgori Field. Completion of well S302, which was
funded 100% by us, satisfied our commitment to GOSL under the acquisition agreement. It is planned
that the remainder of the drilling program will be funded jointly by CSL and GOSL, the Contractor
parties, pro rata to their interest in the Samgori PSC. The total cost to us of participating in
the whole program, which is due to be completed by June 2008, is anticipated to be up to
$13,500,000.
36
The original Contractor party to the Samgori PSC, National Petroleum Limited (NPL), has an option
to reacquire its Contractors interest in the Samgori PSC and its 50% interest in the operating
company in the event that the
agreed work program is not completed in part by September 2006 and in full by June 2008.
Furthermore, NPL has outstanding costs and expenses of $37,528,964 in relation to the Samgori PSC
which are recoverable by NPL receiving 30% of annual net profit from the Field until such costs
have been fully repaid. Under the Samgori PSC, up to 50% of petroleum produced under the contract
is allocated to the Contractor parties for the recovery of the cumulative allowable capital,
operating and other project costs associated with the Samgori Field and exploration in Block
XIB (Cost Recovery Oil). The cost recovery pool includes the $37,528,964 costs
previously incurred by NPL. The balance of production (Profit Oil) is allocated on a 50/50 basis
between the State and the Contractor parties respectively. While GOSL and CSL continue to have
unrecovered costs, they will receive 75% of total production (net 37.5% to us). After recovery of
their cumulative capital, operating and other allowable project costs including the NPL costs, the
Contractor parties will receive 30% of Profit Oil (net 15% to us). The allocation of a share of
production to the State, however, relieves the Contractor parties of all obligations they would
otherwise have to pay the Republic of Georgia for taxes, duties and levies related to activities
covered by the Samgori PSC. After NPLs costs are repaid from either Field production or other
production in the PSC (in the event that new fields are developed in areas identified using seismic
surveys originally performed by NPL), NPL shall continue to receive 5% of annual net profit.
Under the Samgori PSC, Georgian Oil as the State representative in the contract is entitled to
receive up to 250,000 tons (approximately 1.6 million barrels) of oil (Base Level Oil) from a
maximum of 50% per calendar quarter of production when the value of the cumulative Cost Recovery
Oil, cumulative Cost Recovery Natural Gas, cumulative Profit Oil and cumulative Profit Natural Gas
delivered to the Contractor parties exceeds the cumulative allowable capital, operating and other
project costs including finance costs associated with the Samgori Field and exploration in Block
XIB and the NPL costs. While Base Level Oil is being delivered to Georgian Oil, the
Contractor parties will continue to be entitled to a maximum of 50% of the remaining Profit Oil.
The Base Level Oil is an estimate of the amount of oil that Georgian Oil would have expected to
produce from the contract area had the State not come to a contractual arrangement with the
previous Contractor party in 1996.
We have contingent obligations and may incur additional obligations, absolute or contingent, with
respect to the acquisition and development of oil and gas properties and ventures in which we have
interests that require or may require us to expend funds and to issue shares of our Common Stock.
Upon completion of the acquisition of an interest in the Samgori PSC we had a contractual
obligation to issue four million shares of CanArgo Common Stock to Europa Oil Services Limited
(Europa), an unaffiliated company in connection with a consultancy agreement with Europa in
relation to this acquisition. On April 16, 2004 Europa was issued with four million restricted
shares of CanArgo Common Stock in an arms length transaction. A further 12 million shares of
CanArgo Common Stock are issuable upon certain production targets being met from future
developments under the Samgori PSC.
At September 30, 2005, we had a contingent obligation to issue 187,500 shares of common stock to
Fielden Management Services PTY, Ltd (a third party management services company) upon satisfaction
of conditions relating to the achievement of specified Stynawske Field project performance
standards, an oil field in Ukraine in which we had a previous interest.
In September 2004, a blow-out occurred at the N100 well on the Ninotsminda Field. The Company
currently estimates that the total costs attributable to the blow out, including compensation and
cleaning of the environment will be approximately $2,000,000.
37
Results of Continuing Operations
Nine Month Period Ended September 30, 2005 Compared to Nine Month Period Ended September 30, 2004
We recorded operating revenue from continuing operations of $5,147,000 during the nine month period
ended September 30, 2005 compared with $7,447,000 for the nine month period ended September 30,
2004. The decrease is attributable to lower oil and gas revenues being recorded in the nine month
period ended September 30, 2005 due to lower production levels relating to a delay in the UBCTD
program on both the Ninotsminda and Samgori Fields.
Ninotsminda Oil Company Limited (NOC) and CanArgo Samgori Limited (CSL) sold 117,933 barrels of
oil for the nine month period ended September 30, 2005 compared to 297,876 barrels of oil for the
nine month period ended September 30, 2004.
NOC generated $3,931,000 of oil and gas revenue in the nine month period ended September 30, 2005
compared with $6,407,000 for the nine month period ended September 30, 2004 primarily due to a
lower production achieved in the nine month period ended September 30, 2005 compared to the nine
month period ended September 30, 2004 offset partially by a higher average net sales price achieved
in the nine month period ended September 30, 2005 compared to the nine month period ended September
30, 2004. Its net share of the 138,319 barrels (507 barrels per day) of gross oil production for
sale from the Ninotsminda Field in the period amounted to 89,907 barrels. For the nine month
period ended September 30, 2004, NOCs net share of the 314,972 barrels (1,150 barrels per day) of
gross oil production was 245,209 barrels.
CSL generated $1,216,000 of oil and gas revenue for the nine month period ended September 30, 2005
compared to $1,040,000 from the April 2004 purchase date to September 30, 2004. Its net share of
127,122 barrels (695 barrels per day) of gross oil production for sale from the Samgori Field in
the period amounted to 46,671 barrels. As at September 30, 2005, 24,957 barrels of oil remained in
storage.
NOC and CSLs entire share of production was either sold locally in Georgia under both national and
international contracts or added to storage. Net sale prices for Ninotsminda and Samgori oil sold
during the first nine months of 2005 averaged $43.79 per barrel as compared with an average of
$24.82 per barrel in the first nine months of 2004. Its net share of the 89,300 thousand cubic
feet (mcf) of gas delivered was 46,307 mcf at an average net sale price of $0.53 per mcf of gas.
For the nine month period ended September 30, 2004, NOCs net share of the 57,453 mcf of gas
delivered was 37,416 mcf at an average net sales price of $1.41 per mcf of gas.
The operating loss from continuing operations for the nine month period ended September 30, 2005
amounted to $7,008,000 compared with an operating loss of $1,420,000 for the nine month period
ended September 30, 2004. The increase in operating loss is attributable to increased field
operating expenses, increased selling, general and administration costs, increased non cash stock
compensation expense, reduced oil and gas revenue and a gain generated from the disposal of GAOR in
the nine month period ended September 30, 2004, partially offset by a reduced depreciation,
depletion and amortization in the period.
Field operating expenses increased to $1,747,000 for the nine month period ended September 30, 2005
as compared to $1,690,000 for the nine month period ended September 30, 2004. The increase is
primarily a result of increased oil processing fees in relation to the Samgori field during the
period partially offset by a decrease in production at the Ninotsminda Field . The reduction in
production at the Ninotsminda Field was a result of the Company continuing to focus on the
long-term development of its producing assets in Georgia through the preparation of wells for the
Under Balanced Coiled Tubing Drilling (UBCTD) technology program together with a delay in
implementing the program itself due to mechanical difficulties with the equipment. The preparation
work for the UBCTD program necessitated the shut in of producing wells during the period thus
resulting in a lower average production for the period. We have not had a corresponding decrease in
our operating cost as the majority of our operating costs are fixed.
Direct project costs decreased to $1,131,000 for the nine month period ended September 30, 2005,
from $1,219,000 for the nine month period ended September 30, 2004, primarily due to decreased
costs directly associated with non operating activity at the Ninotsminda Field partially offset by
the inclusion of Samgori project cost expenditures resulting from the acquisition of the Samgori
(Block XIB) Production Sharing Contract in Georgia.
Selling, general and administrative costs increased to $5,713,000 for the nine month period ended
September 30, 2005 from $3,728,000 for the nine month period ended September 30, 2004. The
increase is a result of additional costs incurred in respect of compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, increased audit fees, legal fees, higher insurance premiums and a
general increase in corporate activity.
Non cash stock compensation expense increased to $1,763,000 for the nine month period ended
September 30, 2005 from $158,000 for the nine month period ended September 30, 2004 due to share
options issue expensed during the period. The Company, effective January 1, 2003, adopted in August
2003, the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, prospectively to all employee awards
granted, modified, or settled after December 31, 2002.
The decrease in depreciation, depletion and amortization expense to $1,801,000 for the nine month
period ended September 30, 2005 from $2,266,000 for the nine month period ended September 30, 2004
is attributable principally to lower production and sales from the Ninotsminda Field for the nine
month period ended September 30, 2005 compared to the nine month period ended September 30, 2004.
The gain on disposal of subsidiaries of $335,000 recorded for the nine month period ended September
30, 2004 reflects a gain from the disposal of our interest in the Georgian American Oil Refinery,
partially offset by a loss from the disposal of our interest in the Bugruvativske Field through the
disposal of Lateral Vector Resources Inc.
The decrease in other expense to $664,000 for the nine month period ended September 30, 2005, from
$1,598,000 for the nine month period ended September 30, 2004 is primarily a result of higher
interest income as a result placing surplus cash on term deposits until needed, realization of the
advanced proceeds on the sale of the generator that was abandoned, partially offset by increased
levels of bad debts and foreign exchange losses.
Equity loss from investments for the nine month period ended September 30, 2005 of $155,000 relates
to the loss incurred on the project in Kazakhstan to the date of the acquisition of 100% ownership
in Tethys Petroleum Investments Limited.
The loss from continuing operations of $7,672,000 or $0.04 per share for the nine month period
ended September 30, 2005 compares to a net loss from continuing operations of $3,017,000 or $0.02
per share for the nine month period ended September 30, 2004. The weighted average number of
common shares outstanding was higher during the nine month period ended September 30, 2005 than
during the nine month period ended September 30, 2004, principally due to the issue of shares in
respect of the Samgori purchase in April 2004, the issue of shares in respect of a global offering
in September 2004, the issue of shares in respect of the Norio minority interest buyout in
September 2004, the issue of shares under the terms of the SEDA in 2005 to repay the Cornell
Capital promissory notes and in connection with additional takedowns under the SEDA, the exercise
of share options in 2005 and the issue of shares in respect of the Tethys Petroleum Investments
Limited buyout.
Three Month Period Ended September 30, 2005 Compared to Three Month Period Ended September 30, 2004
We recorded operating revenue from continuing operations of $2,581,000 during the three month
period ended September 30, 2005 compared with $2,008,000 for the three month period ended September
30, 2004. The increase is attributable to higher price per barrel realized by the company in 2005,
partially offset by lower production levels relating to a delay in the UBCTD program on both the
Ninotsminda and Samgori Fields. Ninotsminda Oil Company Limited (NOC) sold 51,507 barrels of oil
and CanArgo Samgori Limited (CSL) sold no barrels of oil for the three month period ended
September 30, 2005 compared to 54,719 barrels of oil for NOC for the three month period ended
September 30, 2004 and CSL.
NOC generated $2,581,000 of oil and gas revenue in the three month period ended September 30, 2005
compared with $1,253,000 for the three month period ended September 30, 2004 primarily due to the
accumulation of larger batches of oil for export sales, partially offset by a lower production
achieved in the three month period ended September 30, 2005 compared to the three month period
ended September 30, 2004 offset partially by a higher average net sales price achieved in the three
month period ended September 30, 2005 compared to the three month period ended September 30, 2004.
Its net share of the 43,292 barrels (471 barrels per day) of gross oil production for sale from the
Ninotsminda Field in the period amounted to 28,140 barrels. In the period, 23,368 barrels of oil
were sold from storage. For the three month period ended September 30, 2004, NOCs net share of
the 71,093 barrels (773 barrels per day) of gross oil production was 46,727 barrels.
CSL generated nil oil and gas revenue for the three month period ended September 30, 2005 compared
to $738,000 from the April 2004 purchase date to September 30, 2004 due to the accumulation of
larger batches of oil for export sales. Its net share of 37,274 barrels (405 barrels per day) of
gross oil production for sale from the Samgori Field in the period amounted to 13,978 barrels. As
at September 30, 2005, 24,957 barrels of oil remained in storage. From
the purchase date to September 30, 2004, CSLs net share of the 54,502 barrels (588 barrels per
day) of gross oil production was 20,270 barrels.
39
NOC and CSLs entire share of production was either sold locally in Georgia under both national and
international contracts or added to storage. Net sale prices for Ninotsminda and Samgori oil sold
during the third quarter of 2005 averaged $50.11 per barrel as compared with an average of $30.68
per barrel in the third quarter of 2004. No gas sales were delivered for the three month period
ended September 30, 2005. For the three month period ended September 30, 2004, NOCs net share of
the 18,924 mcf of gas delivered was 12,300 mcf at an average net sales price of $1.41 per mcf of
gas.
The operating loss from continuing operations for the three month period ended September 30, 2005
amounted to $2,592,000 compared with an operating loss of $1,401,000 for the three month period
ended September 30, 2004. The increase in operating loss is attributable to increased field
operating expenses, increased selling, general and administration costs, increased non cash stock
compensation expense, partially offset by increased oil and gas revenue and reduced direct project
costs,and increased depreciation, depletion and amortization in the period.
Field operating expenses increased to $778,000 for the three month period ended September 30, 2005
as compared to $458,000 for the three month period ended September 30, 2004. The increase is
primarily a result of increased oil processing fees in relation to the Samgori field during the
period partially offset by a decrease in production at the Ninotsminda Field. The reduction in
production at the Ninotsminda Field was a result of the Company continuing to focus on the
long-term development of its producing assets in Georgia through the preparation of wells for the
Under Balanced Coiled Tubing Drilling (UBCTD) technology program together with a delay in
implementing the program itself due to mechanical difficulties with the equipment. The preparation
work for the UBCTD program necessitated the shut in of producing wells during the period thus
resulting in a lower average production for the period. We have not had a corresponding decrease in
our operating cost as the majority of our operating costs are fixed.
Direct project costs decreased to $350,000 for the three month period ended September 30, 2005,
from $591,000 for the three month period ended September 30, 2004, primarily due to decreased costs
directly associated with non operating activity at the Ninotsminda Field.
Selling, general and administrative costs increased to $2,354,000 for the three month period ended
September 30, 2005 from $1,602,000 for the three month period ended September 30, 2004. The
increase is a result of additional costs incurred in respect of compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, increased audit fees, legal fees, higher insurance premiums and a
general increase in corporate activity.
Non cash stock compensation expense increased to $921,000 for the three month period ended
September 30, 2005 from $158,000 for the three month period ended September 30, 2004 due to share
options issue expensed during the period. The Company, effective January 1, 2003, adopted in August
2003, the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, prospectively to all employee awards granted, modified, or settled after December
31, 2002.
The increase in depreciation, depletion and amortization expense to $770,000 for the three month
period ended September 30, 2005 from $459,000 for the three month period ended September 30, 2004
is attributable principally to the increased amount of our oil and gas cost pool for the three
month period ended September 30, 2005 compared to the three month period ended September 30, 2004.
The decrease in other expense to $350,000 for the three month period ended September 30, 2005, from
$1,243,000 for the three month period ended September 30, 2004 is primarily a result of higher
interest income as a result placing surplus cash on term deposits until needed, realization of the
advanced proceeds from the sale of the generator that was abandoned, partially offset by increased
levels of bad debts and foreign exchange losses.
40
The loss from continuing operations of $2,942,000 or $0.01 per share for the three month period
ended September 30, 2005 compares to a net loss from continuing operations of $2,644,000 or $0.01
per share for the three month period ended September 30, 2004. The weighted average number of
common shares outstanding was higher during the three month period ended September 30, 2005 than
during the three month period ended September 30, 2004, principally due to the issue of shares in
respect of a global offering in September 2004, the issue of shares in respect
of the Norio minority interest buyout in September 2004, the issue of shares under the terms of the
SEDA in 2005 to repay the Cornell Capital promissory notes and in connection with additional
takedowns under the SEDA, the exercise of share options in 2005 and the issue of shares in respect
of the Tethys Petroleum Investments Limited buyout.
Results of Discontinued Operations
Nine Month Period Ended September 30, 2005 Compared to Nine Month Period Ended September 30, 2004
The net income from discontinued operations, net of taxes and minority interest for the nine month
period ended September 30, 2004 amounted to $542,000 related principally to income relating to the
refinery resulting from the disposal of the refinery in the period, partially offset by the
activities of CanArgo Standard Oil Products Limited (CSOP), mainly due to interest on additional
bank loans drawn by CSOP in Tbilisi, Georgia. All discontinued operations had been disposed by
December 31, 2004.
Three Month Period Ended September 30, 2005 Compared to Three Month Period Ended September 30, 2004
The net income from discontinued operations, net of taxes and minority interest for the three month
period ended September 30, 2004 amounted to $95,000 related principally to the activities of CSOP.
All discontinued operations had been disposed by December 31, 2004.
Commitments and Contingencies
See Item 1, Financial Statements, Note 18, which is incorporated herein by reference.
Forward-Looking Statements
The forward-looking statements contained in this Item 2 and elsewhere in this Form 10-Q are subject
to various risks, uncertainties and other factors that could cause actual results to differ
materially from the results anticipated in such forward-looking statements. Included among the
important risks, uncertainties and other factors are those hereinafter discussed.
Operating entities in various foreign jurisdictions must be registered by governmental agencies,
and production licenses for development of oil and gas fields in various foreign jurisdictions must
be granted by governmental agencies. These governmental agencies generally have broad discretion
in determining whether to take or approve various actions and matters. In addition, the policies
and practices of governmental agencies may be affected or altered by political, economic and other
events occurring either within their own countries or in a broader international context.
We may not have a majority of the equity that is the licence developer of some projects that we may
pursue in countries that were a part of the former Soviet Union, even though we may be the
designated operator of the oil or gas field. In such circumstances, the concurrence of co-venturers
may be required for various actions. Other parties influencing the timing of events may have
priorities that differ from ours, even if they generally share our objectives. Demands by or
expectations of governments, co-venturers, customers and others may affect our strategy regarding
the various projects. Failure to meet such demands or expectations could adversely affect our
participation in such projects or our ability to obtain or maintain necessary licenses and other
approvals.
Our ability to finance all of our present oil and gas projects and other ventures according to
present plans is dependent upon obtaining additional funding. An inability to obtain financing
could require us to scale back or abandon part or all of our project development, capital
expenditure, production and other plans. The availability of equity or debt financing to us or to
the entities that are developing projects in which we have interests is affected by many factors,
including:
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world economic conditions; |
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the state of international relations; |
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the stability and policies of various governments located in areas in which we
currently operate or intend to operate; |
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fluctuations in the price of oil and gas, the outlook for the oil and gas industry
and competition for available funds; and |
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an evaluation of us and specific projects in which we have an interest. |
Rising interest rates might affect the feasibility of debt financing that is offered. Potential
investors and lenders will be influenced by their evaluations of us and our projects and
comparisons with alternative investment opportunities.
The development of oil and gas properties is subject to substantial risks. Expectations regarding
production, even if estimated by independent petroleum engineers, may prove to be unrealized.
There are many uncertainties in estimating production quantities and in projecting future
production rates and the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for new discoveries and
other properties that are not fully productive. Accordingly, estimates related to our properties
are subject to change as additional information becomes available.
Most of our interests in oil and gas properties and ventures are located in former Soviet Union
countries. Operations in those countries are subject to certain additional risks including the
following:
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uncertainty as to the enforceability of contracts; |
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currency convertibility and transferability; |
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unexpected changes in fiscal and tax policies; |
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sudden or unexpected changes in demand for crude oil and or natural gas; |
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the lack of trained personnel; and |
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the lack of equipment and services and other factors that could significantly change
the economics of production. |
Production estimates are subject to revision as prices and costs change. Production, even if
present, may not be recoverable in the amount and at the rate anticipated and may not be
recoverable in commercial quantities or on an economically feasible basis. World and local prices
for oil and gas can fluctuate significantly, and a reduction in the revenue realizable from the
sale of production can affect the economic feasibility of an oil and gas project. World and local
political, economic and other conditions could affect our ability to proceed with or to effectively
operate projects in various foreign countries.
Demands by, or expectations of governments, co-venturers, customers and others may affect our
strategy regarding the various projects. Failure to meet such demands or expectations could
adversely affect our participation in such projects or our ability to obtain or maintain necessary
licenses and other approvals.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our principal exposure to market risk is due to changes in oil and gas prices and currency
fluctuations. As indicated elsewhere in this Report, as a producer of oil and gas we are exposed
to changes in oil and gas prices as well as changes in supply and demand which could affect its
revenues. We do not engage in any commodity hedging activities. Due to the ready market for our
production in the Republic of Georgia, we do not believe that any current exposures from this risk
will materially affect our financial position at this time, but there can be no assurance that
changes in such market will not affect CanArgo adversely in the future.
Also, as indicated elsewhere in this Report, because all of our operations are being conducted in
countries that were a part of the former Soviet Union, we are potentially exposed to the market
risk of fluctuations in the relative values of the currencies in areas in which we operates. At
present we do not engage in any currency hedging operations since, to the extent we receive
payments for our production in local currencies, we are utilizing such currencies to pay for our
local operations. In addition, we frequently sell our production from the Ninotsminda Field and
more recently from the Samgori Field in the Republic of Georgia under export contracts which provide
for payment in US dollars.
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CanArgo had no material interest in investments subject to market risk during the period covered by
this report.
Item 4. Controls and Procedures
Managements Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in
this Quarterly Report. The consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America and include amounts based
on managements best estimates and judgments. Management believes the consolidated financial
statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Companys financial position
and results of operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors,
meets regularly with the independent auditors, L J Soldinger Associates LLC and representatives of
management to review accounting, financial reporting, internal control and audit matters, as well
as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement
of the independent auditors. The independent auditors have free access to the Audit Committee.
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating
to the Company, including its consolidated subsidiaries, is made known to the officers who certify
the Companys financial reports and to other members of senior management and the Board of
Directors. Based on their evaluation as of September 30, 2005, our Chairman of the Board of
Directors, President and Chief Executive Officer, Dr. David Robson (principal executive officer),
and Richard Battey, our Chief Financial Officer (principal financial officer) have concluded that,
as of the end of the period covered by this report, the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the Exchange Act)) are effective to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act with the Securities and
Exchange Commission (SEC) (1) is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and (2) is accumulated and communicated to the
Companys management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in the rules promulgated under the Exchange Act. Under
the supervision and with the participation of our management, including our principal executive,
financial and accounting officers, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As a result of our efforts in 2004 to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404) and
the rules issued thereunder, we reported in our Form 10-K, as amended, for the fiscal year ended
December 31, 2004 and our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
2005 and June 30, 2005 that we had identified material weaknesses listed below in the design or
operation of internal control over financial reporting that required remediation and, if left
unremedied, were reasonably likely to affect our ability to record, process, summarize and report
financial data in a timely and accurate manner.
In the course of our evaluation, we identified the following material weaknesses in internal
control over financial reporting under the standards adopted by the Public Company Accounting
Oversight Board:
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A number of deficiencies that were symptomatic of and contributed
to the overall material weakness relating to the financial
statement close process were identified by management and the
independent registered accountants during the SOX 404 evaluation
of the effectiveness of our internal control over financial
reporting as of December 31, 2004. Each deficiency identified
fell within one of the following categories: |
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the lack of adequate review and supervision over the financial statement close process (which is
primarily related to the lack of segregation of duties as a result of the Companys limited
number of personnel); |
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the lack of documentation of standard processes and policies to insure a consistent and accurate
closing process; |
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too much dependence on the use of spreadsheets that are not properly protected from unauthorized access
and/or errors in formulas used; and |
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4. |
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the number of audit adjustments required to be recorded after being identified by the independent
registered accountants. |
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A material weakness relating to lack of sufficient controls being in place
to ensure adequate review of the application of generally accepted
accounting principles relating to non-routine transactions, estimates and
financial statement disclosures was identified by management and the
independent registered accountants during the SOX 404 evaluation of the
effectiveness of our internal control over financial reporting as of
December 31, 2004. |
Although as of September 30, 2005 the material weaknesses identified above have not been
remediated, we have taken a number of appropriate actions to insure that the assessment process for
2005 is properly completed and the material weaknesses noted from 2004 are addressed. Management
has implemented the following actions in the period since it issued its assessment report (some of
which are described in greater detail below in Changes in internal control over financial
reporting):
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Improvement in accounting and reporting processes and related controls. |
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In order to address the lack of adequate review and supervision over the
financial statement close process the Company enhanced its management
resources through the appointment of a new Chief Financial Officer in May
2005. Furthermore, the number of designated accounting staff employed by the
Company was increased in both its head office in Guernsey and in its offices
in the Republic of Georgia. |
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Discussed with the Companys audit committee the assessment and a timetable
to address the material weaknesses. Various personnel have been assigned
responsibilities in connection with this timetable. |
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Management has scheduled discussions among management, the Companys SOX 404
consultant and the Companys independent registered accountants to commence
prior to the start of the assessment process this year to review open items
and to map out the steps necessary to correct outstanding deficiencies in a
timely manner. |
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Management is performing its 2005 ongoing assessment in a more timely fashion. |
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We are in the process of appointing a firm of accountants to provide us with
advice on the application of generally accepted accounting principles
relating to non-routine transactions, estimates and financial statement
disclosures. |
Management anticipates that as a result of the remediation that has taken place and is currently
ongoing, we will have appropriately addressed the open issues and will be able to conclude that our
internal control over financial reporting is effective as of the end of the fiscal year ended
December 31, 2005.
Changes in internal control over financial reporting
As a result of the remediation efforts described above there have been the following changes in our
internal control over financial reporting in the third quarter:
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We have introduced more comprehensive formal preparation and review checklists and
sign-off procedures at both group and subsidiary level on key reconciliations and
accounting schedules. |
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We have increased the level of review of the preparation of the quarterly
financial statements which has significantly reduced the number of adjustments
required in the post closing process. |
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We have improved the documentation of procedures for closing the books and
preparing financial statements. |
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We have improved access controls over key spreadsheets |
45
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On September 12, 2005, WEUS Holding Inc (WEUS) a subsidiary of Weatherford International Limited
lodged a formal Request for Arbitration with the London Court of International Arbitration against
CanArgo Energy Corporation in respect of unpaid invoices for work performed under the Master
Service Contract dated June 1, 2004 between the Company and WEUS for the supply of underbalanced
coil tubing drilling equipment and services during the first and second quarter of 2005. Pursuant
to the Request for Arbitration, WEUS demand for relief is $4,931,332.55.
On July 27, 2005, GBOC Ninotsminda, an indirect subsidiary of the Company, received a claim raised by
certain of the Ninotsminda villagers (listed on pages 1 to 76 of the claim) in the Tbilisi Regional
Court in respect of damage caused by the blowout of the N100 well on the Nintosminda Field in the
Republic of Georgia on September 11, 2004. The relief sought pursuant to the claim is payment of
the sum of 28.925 million GEL.
The
Company believes that it has meritorious defenses to both claims and
intends to defend them vigorously.
Other than
the foregoing, as at September 30,
2005 there were no legal proceedings pending involving the Company, which, if adversely decided,
would have a material adverse effect on the Companys financial position on business. From time to
time we are subject to various legal proceedings in the ordinary course of our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 25, 2005, we closed the private placement of $25,000,000 issue of Senior Secured Notes with
a group of private investors, all of whom represented that they qualified as accredited investors
under Rule 501(a) promulgated under the Securities Act of 1933 as amended (Purchasers). In
connection with the placement we entered into a Note Purchase Agreement with the Purchasers,
pursuant to which we issued a note due July 25, 2009 (Note) in the aggregate principal amount of
$25,000,000 to Ingalls & Snyder LLC, as nominee for the Purchasers, in a transaction intended to
qualify for an exemption from registration under the Securities Act pursuant to Section 4(2)
thereof and Regulation D promulgated thereunder. The Note is convertible, at the option of the
holders, into shares of CanArgo common stock (Conversion Stock) at a price per share of $0.90
(Conversion Price), subject to adjustment (i) if CanArgo issues certain specified securities at a
price per share of less than $0.90 per share in which case the Conversion Price shall be reset to
such lower amount; and (ii) subject to customary anti-dilution adjustments. A Registration
Statement on Form S-3 (File No 333-127841) in respect of the Conversion Stock was filed with the
SEC on August 25, 2005 pursuant to which the Company intend to register the Conversion Stock for
resale under the Securities Act. As at November 8, 2005, the Registration Statement has not yet
been declared effective.
Item 6. Exhibits
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Management Contracts, Compensation Plans and Arrangements are identified by an
asterisk (*) Documents filed herewith are identified by a cross (). |
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1 |
(1) |
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Engagement Agreement with Sundal Collier & Co ASA dated August 13, 2001. |
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46
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(Incorporated herein by reference from Post-Effective Amendment No. 2 to Form S-1
Registration Statement, File No. 333-85116 filed on September 10, 2002)). |
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1(2) |
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Standby Equity Distribution Agreement between Cornell Capital Partners, L.P. and
CanArgo Energy Corporation dated February 11, 2004 (Incorporated herein by reference
from Form S-3 filed May 6, 2003 (Reg. No. 333-115261)). |
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1(3) |
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Placement Agent Agreement between CanArgo Energy Corporation, Newbridge Securities
Corporation and Cornell Capital Partners, L.P. dated February 11, 2004 (Incorporated
herein by reference from Form S-3 filed May 6, 2003 (Reg. No. 333-115261)). |
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1(4) |
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Placement Agent Agreement dated September 22, 2004 by and between ABG Sundal
Collier, Norge ASA and CanArgo Energy Corporation (Incorporated herein by reference
from Amendment No 2 to Registration Statement on Form S-3 filed August 31, 2004
(Reg. No. 333-115645)). |
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1(5) |
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Placement Agent Agreement dated September 22, 2004 by and between ABG Sundal Collier
Inc. and CanArgo Energy Corporation (Incorporated herein by reference from Amendment
No 1 to Registration Statement on Form S-3 filed July 1, 2004 (Reg. No. 333-115645)). |
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1(6) |
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Engagement letter between ABG Sundal Collier Norge ASA and CanArgo Energy
Corporation dated March 23, 2004 (Incorporated herein by reference from March 31,
2004 Form 10-Q). |
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2(4) |
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Memorandum of Agreement between Fielden Management Services Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated dated May 16, 1995 (Incorporated herein by
reference from December 31, 1997 Form 10-K/A). |
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3(1) |
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Registrants Certificate of Incorporation and amendments thereto (Incorporated by
reference from the Companys Proxy Statements filed May 10, 1999 and May 9, 2000 and
Form 8-K filed July 24, 1998). |
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3(2) |
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Registrants Bylaws (Incorporated herein by reference from Post-Effective Amendment
No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29,
1999). |
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*4(1) |
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Amended and Restated 1995 Long-Term Incentive Plan (Incorporated herein by reference
from Post-Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 333-72295 filed on July 29, 1999). |
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*4(2) |
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Amended and Restated CanArgo Energy Inc. Stock Option Plan (Incorporated herein by
reference from March 31, 1998 Form 10-Q). |
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4(3) |
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Registration Rights Agreement between CanArgo Energy Corporation and Cornell Capital
Partners, LP dated February 11, 2004 (Incorporated herein by reference from Form S-3
filed May 6, 2003 (Reg. No. 333-115261)). |
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4(4) |
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Escrow Agreement among CanArgo Energy Corporation, Cornell Capital Partners, LP and
Butler Gonzalez LLP dated February 11, 2004 (Incorporated herein by reference from
Form S-3 filed May 6, 2003 (Reg. No. 333-115261)). |
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*4(5) |
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CanArgo Energy Corporation 2004 Long Term Incentive Plan (Incorporated herein by
reference from Form 8-K dated May 19, 2004). |
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4(6) |
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Amended and Restated Loan and Warrant Agreement between CanArgo Energy |
47
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Corporation
and Salahi Ozturk dated August 27, 2004 (Incorporated herein by reference from Form 8-K dated August 27, 2004). |
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4(6) |
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Note Purchase Agreement dated July 25, 2005 among CanArgo Energy Corporation and
Ingalls & Snyder Value Partners, L.P. together with the other Purchasers
(Incorporated herein by reference from Form 8-K/A dated July 28, 2005). |
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4(7) |
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Registration Rights Agreement dated July 25, 2005 among CanArgo Energy Corporation
and Ingalls & Snyder Value Partners, L.P. together with the other Purchasers
(Incorporated herein by reference from Form 8-K dated July 27, 2005). |
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10(1) |
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Production Sharing Contract between (1) Georgia and (2) Georgian Oil and JKX
Ninotsminda Ltd. dated February 12, 1996 (Incorporated herein by reference from Form S-1 Registration Statement, File No. 333-72295 filed on September 7, 1999). |
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*10(2) |
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Management Services Agreement between CanArgo Energy Corporation and Vazon Energy
Limited relating to the provisions of the services of Dr. David Robson dated June 29, 2000 (Incorporated herein by reference from
March 31, 2000 Form 10-Q). As
amended by Deed of Variation of Management Services Agreement between CanArgo Energy
Corporation and Vazon Energy Limited dated May 2, 2003 (Incorporated herein by
reference to Form 8-K dated May 13, 2003). |
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10(3) |
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Tenancy Agreement between CanArgo Energy Corporation and Grosvenor West End
Properties dated September 8, 2000 (Incorporated herein by reference from March 31,
2000 Form 10-Q). |
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10(4) |
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Production Sharing Contract between (1) Georgia and (2) Georgian Oil and CanArgo
Norio Limited dated December 12, 2000 (Incorporated herein by reference from
December 31, 2000 Form 10-K). |
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*10(5) |
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Service Agreement between CanArgo Energy Corporation and Vincent McDonnell dated
December 1, 2000 (Incorporated herein by reference from December 31, 2001 Form 10-K). |
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10(6) |
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Sale agreement of CanArgo Petroleum Products Limited between CanArgo Limited and
Westrade Alliance LLC dated October 14, 2002. (Incorporated herein by reference from
March 31, 2002
Form 10-Q). |
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10(7) |
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Farm-in Agreement dated September 4, 2003 relating to the Norio (Block
XIC) and North Kumisi Production Sharing Agreement in the Republic of
Georgia with a wholly owned subsidiary of Georgian Oil, the Georgian State Oil
Company (Incorporated herein by reference from March 31, 2003
Form 10-Q). |
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10(8) |
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Stock Purchase Agreement dated September 24, 2003 regarding the sale of all of the
issued and outstanding stock of Fountain Oil Boryslaw (Incorporated herein by
reference from March 31, 2003
Form 10-Q). |
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10(9) |
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Manavi Termination Agreement dated December 5, 2003 (Incorporated herein by
reference from December 31, 2004
Form 10-K). |
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10(10) |
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Termination Agreement between CanArgo Energy Corporation and Cornell Capital
Partners, L.P. dated February 11, 2004 (Incorporated herein by reference from Form S-3
filed May 6, 2003 (Reg. No. 333-115261)). |
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10(11) |
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Agreement between CanArgo Samgori Limited and Georgian Oil Samgori Limited dated
January 8, 2004 (Incorporated herein by reference from Form S-3 filed May 6, 2003
(Reg. No. 333-115261)). |
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10 |
(12) |
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Consultancy Agreement between CanArgo Energy Corporation and Europa Oil Services
Limited dated January 8, 2004 (Incorporated herein by reference from Form S-3 filed
May 6, 2003 (Reg. No. 333-115261)). |
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10 |
(13) |
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Loan Agreement between CanArgo Energy Corporation and Salahi Ozturk dated April 26,
2004 (Incorporated herein by reference from March 31, 2004 Form 10-Q). |
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10 |
(14) |
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Loan Agreement between CanArgo Energy Corporation and C A Fiduciary Services Limited
AS dated April 29, 2004 (Incorporated herein by reference from March 31, 2004 Form 10-Q). |
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10 |
(15) |
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Oil Sales Agreement between CanArgo Energy Corporation and Primrose Financial Group
dated May 5, 2004 (Incorporated herein by reference from March 31, 2004 Form 10-Q). |
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10 |
(16) |
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Oil Sales Agreement between CanArgo Energy Corporation and Sveti Limited dated April
1, 2004 (Incorporated herein by reference from March 31, 2004 Form 10-Q). |
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10 |
(17) |
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Agreement dated April 25, 2004 between Ninotsminda Oil Company Limited, Sveti
Limited and Primrose Financial Group on the termination of the Crude Oil Sales
Agreement dated April 1, 2004 between Ninotsminda Oil Company Limited and Sveti
Limited and the terms for the conclusion of a new crude oil sales agreement between
Ninotsminda Oil Company Limited and Primrose Financial Group (Incorporated herein by
reference from March 31, 2004 Form 10-Q). |
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10 |
(18) |
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Promissory Note dated May 19, 2004 between CanArgo Energy Corporation and Cornell
Capital Partners, LP (Incorporated herein by reference from Form 8-K dated May 19,
2004) as amended by Letter of Amendment between Cornell Capital Partners, LP and
CanArgo Energy Corporation dated December 21, 2004 (Incorporated herein by reference
from Form 8-K dated December 21, 2004). |
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10 |
(19) |
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Agreement dated March 17, 2004 between CanArgo Acquisition Corporation and Stanhope
Solutions Ltd for the sale of Lateral Vector Resources Ltd. (Incorporated herein by
reference from Form 8-K dated May 19, 2004). |
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10 |
(20) |
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Master Service Contract dated June 1, 2004 between CanArgo Energy Corporation and
WEUS Holding Inc. (Incorporated herein by reference from Form 8-K dated June 1,
2004). |
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10 |
(21) |
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Agreement number GN-070/RIG/NOC dated 21 June, 2004 between Ninotsminda Oil Company
Limited and Great Wall Drilling Company Limited (Incorporated herein by reference
from Form 8-K dated June 21, 2004). |
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10 |
(22) |
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Agreement between Ninotsminda Oil Company Limited and Saipem S.p.A. dated January
27, 2005 (Incorporated herein by reference from Form 8-K dated January 27, 2005). |
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10 |
(23) |
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Agreement between Ninotsminda Oil Company Limited and Primrose Financial Group dated
February 4, 2005 (Incorporated herein by reference from Form 8-K dated February 4,
2005). |
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10 |
(24) |
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Termination Agreement between Ninotsminda Oil Company Limited and Primrose Financial
Group dated February 4, 2005 (Incorporated herein by reference from Form 8-K dated
February 4, 2005). |
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10(25) |
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Promissory Note dated April 26, 2005 between CanArgo Energy Corporation and Cornell
Capital Partners, LP (Incorporated herein by reference from Form 8-K dated April 26,
2005). |
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10(26) |
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Subsidiary Guaranty dated July 25, 2005 by and among Ninotsminda Oil Company
Limited, CanArgo (Nazvreri) Limited, CanArgo Norio Limited, CanArgo Limited, CanArgo
Samgori Limited, Tethys Petroleum Investments Limited and CanArgo Ltd for the
benefit of the holders of the Notes 10(2& |
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10(27) |
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Security Agreement dated July 25, 2005 among Ingalls & Snyder Value Partners, L.P.
together with the other Purchasers (Incorporated herein by reference from Form 8-K
dated July 27, 2005). |
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10(28) |
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Form of Management Services Agreement for Richard J. Battey, Chief Financial Officer. |
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10(29) |
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Agreement dated July 25, 2005 among CanArgo Limited and Ingalls & Snyder Value
Partners, L.P. together with the other Purchasers (Incorporated herein by reference
from Form 8-K dated July 27, 2005). |
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10(30) |
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Security Interest Agreement (Securities) dated July 25, 205 among CanArgo Ltd,
CanArgo Limited, Ingalls & Snyder LLC as Security Agent for the Secured Parties
(Incorporated herein by reference from Form 8-K dated July 27, 2005). |
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10(31) |
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Security Interest Agreement (Securities) dated July 25, 2005 among Tethys Petroleum
Investments Limited, CanArgo Limited, Ingalls & Snyder LLC, as Security Agent for
the Secured Parties and the Secured Parties (Incorporated herein by reference from
Form 8-K dated July 27, 2005). |
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10(32) |
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Security Interest Agreement (Bank Account) dated July 25, 2005 by and among CanArgo
Energy Corporation, Ingalls & Snyder LLC, as Security Agent for the Secured Parties
and the Secured Parties (Incorporated herein by reference from Form 8-K dated July
27, 2005). |
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14 |
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Code of Ethics (Incorporated herein by reference from December 31, 2004 Form 10-K). |
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21 |
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List of Subsidiaries (Incorporated herein by reference from June 30, 2005 Form 10-Q). |
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33(1) |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of CanArgo Energy
Corporation. |
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31(2) |
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Rule 13a-14(c)/15d-14(a) Certification of Chief Financial Officer of CanArgo Energy
Corporation. |
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32 |
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Section 1350 Certifications. |
50
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.
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CANARGO ENERGY CORPORATION
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Date: November 9, 2005 |
By: |
/s/Richard J. Battey
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Richard J. Battey |
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Chief Financial Officer |
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51